10-Q 1 d225893d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

Or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition period from              to             

Commission File Number 000-53813

 

 

FLORIDA BANK GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

FLORIDA   20-8732828

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

201 N. Franklin Street, Suite 100, Tampa, Florida 33602

(Address of principal executive offices) (Zip Code)

(813) 367-5270

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    X¨    Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Number of shares of Common Stock, $0.01 Par Value as of October 31, 2011:16,636,815.

 

 

 


Table of Contents

FLORIDA BANK GROUP, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED SEPTEMBER 30, 2011

TABLE OF CONTENTS

 

     Page  

PART I – Financial Information

  

Item 1.

  

Financial Statements

  
  

Condensed Consolidated Financial Statements

  
  

Condensed Consolidated Balance Sheets – September 30, 2011 (Unaudited) and December 31, 2010

     1   
  

Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss) (Unaudited) – Three and Nine months Ended September 30, 2011 and 2010

     2   
  

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Nine months Ended September 30, 2011 and 2010

     3   
  

Condensed Consolidated Statements of Cash Flows (Unaudited) – Nine months Ended September 30, 2011 and 2010

     4   
  

Notes to Condensed Consolidated Financial Statements (Unaudited)

     6   
  

Review by Independent Registered Public Accounting Firm

     22   
  

Report of Independent Registered Public Accounting Firm

     23   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     24   

Item 3.

  

Quantitative and Qualitative Disclosure About Market Risk

     41   

Item 4.

  

Controls and Procedures

     41   

PART II – Other Information

  

Item 1.

  

Legal Proceedings

     41   

Item 1A.

  

Risk Factors

     41   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     41   

Item 3.

  

Defaults Upon Senior Securities

     42   

Item 4.

  

(Removed and Reserved)

     42   

Item 5.

  

Other Information

     42   

Item 6.

  

Exhibits

     42   

Signatures

     43   

Certifications

  

 

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Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

FLORIDA BANK GROUP, INC.

Condensed Consolidated Balance Sheets

($ in thousands, except share amounts)

 

     September 30,
2011
    December 31,
2010
 
     (unaudited)        
Assets     

Cash and due from banks

   $ 7,643      $ 4,618   

Interest-bearing Deposits and Federal Funds Sold

     47,372        35,683   
  

 

 

   

 

 

 

Cash and cash equivalents

     55,015        40,301   

Securities available for sale

     156,349        177,451   

Loans, net of allowance for loan losses of $22,333 in 2011 and $20,830 in 2010

     490,226        572,045   

Federal Reserve Bank stock, at cost

     1,428        2,781   

Federal Home Loan Bank stock, at cost

     4,775        5,032   

Accrued interest receivable

     1,741        2,475   

Premises and equipment, net

     25,027        25,815   

Foreclosed real estate

     5,521        7,018   

Prepaid expenses and other assets

     4,191        5,490   
  

 

 

   

 

 

 

Total assets

   $ 744,273      $ 838,408   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Liabilities:

    

Deposits:

    

Noninterest-bearing demand

   $ 79,618      $ 68,168   

Interest-bearing demand

     60,098        72,247   

Savings

     9,734        10,043   

Money market

     148,237        201,718   

Time

     326,498        360,158   
  

 

 

   

 

 

 

Total deposits

     624,185        712,334   

Accrued expenses and other liabilities

     4,491        4,768   

Federal Home Loan Bank advances

     67,700        67,700   
  

 

 

   

 

 

 

Total liabilities

     696,376        784,802   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Preferred Stock Series A, $.01 par value; $1,000 liquidation value; 20,471 shares outstanding in 2011 and 2010

     20,471        20,471   

Preferred Stock Series B, $.01 par value; $1,000 liquidation value; 1,024 shares outstanding in 2011 and 2010

     1,024        1,024   

Preferred Stock Series C, $.01 par value; $1,000 liquidation value; 5,257 shares outstanding in 2011

     5,257        —     

Preferred Stock - Discount

     (576     (730

Common stock, $.01 par value, 250,000,000 and 50,000,000 shares authorized in 2011 and 2010, respectively, 16,649,398 and 14,341,898 shares issued in 2011 and 2010, respectively

     166        143   

Additional paid-in capital

     152,099        150,817   

Treasury stock (12,583 shares in 2011 and 2010), at cost

     (164     (164

Accumulated deficit

     (132,417     (113,848

Accumulated other comprehensive income (loss)

     2,037        (4,107
  

 

 

   

 

 

 

Total stockholders’ equity

     47,897        53,606   
  

 

 

   

 

 

 
   $ 744,273      $ 838,408   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

FLORIDA BANK GROUP, INC.

Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss) (Unaudited)

($ in thousands, except per share amounts)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Interest income:

        

Loans

   $ 7,055      $ 8,453      $ 21,827      $ 25,681   

Securities available for sale

     950        1,075        3,154        3,148   

Other interest-earning assets

     61        71        194        196   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     8,066        9,599        25,175        29,025   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits:

        

Demand

     87        137        276        458   

Savings

     9        15        29        56   

Money market

     399        598        1,317        1,688   

Time

     1,688        2,327        5,604        7,501   

Federal Home Loan Bank advances

     724        771        2,169        2,394   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     2,907        3,848        9,395        12,097   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income before provision for loan losses

     5,159        5,751        15,780        16,928   

Provision for loan losses

     2,157        2,961        15,651        14,902   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     3,002        2,790        129        2,026   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income (expense):

        

Service charges on deposit accounts

     225        241        663        706   

Other service charges and fees

     166        181        447        424   

Gain on sale of securities available for sale

     43        3,226        85        3,188   

Other-than-temporary impairment of securities available for sale

     —          —          —          (549

Other

     245        161        609        588   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     679        3,809        1,804        4,357   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest expenses:

        

Salaries and employee benefits

     2,635        3,324        8,060        10,819   

Occupancy

     1,160        1,428        3,494        4,164   

Data processing

     347        291        1,004        890   

Stationary, printing and supplies

     59        67        201        226   

Business development

     44        114        139        316   

Insurance, including deposit insurance premium

     532        545        1,826        1,549   

Professional fees

     224        426        845        1,339   

Marketing

     9        14        40        51   

Federal Home Loan Bank advance prepayment penalties

     —          —          2        41   

Loss on sale of foreclosed real estate

     50        127        55        262   

Write-down of foreclosed real estate

     1,764        150        2,178        792   

Foreclosed real estate expense

     156        142        359        327   

Other

     222        292        831        875   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     7,202        6,920        19,034        21,651   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax benefit

     (3,521     (321     (17,101     (15,268

Income tax benefit (expense)

     —          (114     25        (5,715
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (3,521     (207     (17,126     (9,553

Preferred stock dividend requirements and discount accretion

     (367     (330     (2,279     (990
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss available to common stockholders

     (3,888     (537     (19,405     (10,543

Other comprehensive income (loss):

        

Change in unrealized holding losses on securities available for sale

     2,536        (994     6,144        (704
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (1,352   $ (1,531   $ (13,261   $ (11,247
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss per common share:

        

Basic and Diluted

   $ (0.25   $ (0.04   $ (1.32   $ (0.74
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends paid

   $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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FLORIDA BANK GROUP, INC.

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

For the Nine Months Ended September 30, 2011 and 2010

($ in thousands, except share amounts)

 

    Preferred Stock     Common Stock                 Accumulated        
    Series A     Series B     Series C                 Additional
Paid-in
    Treasury     Accumulated     Other
Comprehensive
    Total
Stockholders’
 
    Shares     Amount     Shares     Amount     Discount     Shares     Amount     Discount     Shares     Amount     Capital     Stock     Deficit     Income (Loss)     Equity  

Balance, December 31, 2010

    20,471      $ 20,471        1,024      $ 1,024      $ (730     —        $ —        $ —          14,341,898      $ 143      $ 150,817      $ (164   $ (113,848   $ (4,107   $ 53,606   

Net loss

    —          —          —          —          —          —          —          —          —          —          —          —          (17,126     —          (17,126

Net Change in Unrealized Loss On Available-for-Sale Securities

    —          —          —          —          —          —          —          —          —          —          —          —          —          6,144        6,144   

Proceeds from issuance of 5,257 shares of Series C preferred stock

    —          —          —          —          —          5,257        5,257        (1,289     —          —          1,289        —          —          —          5,257   

Preferred stock warrants exercised

    —          —          —          —          —          —          —          —          2,307,500        23        —          —          —          —          23   

Preferred stock discount accretion

    —          —          —          —          154        —          —          1,289        —          —          —          —          (1,443     —          —     

Preferred stock issuance costs

    —          —          —          —          —          —          —          —          —          —          (7     —          —          —          (7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2011

    20,471      $ 20,471        1,024      $ 1,024      $ (576     5,257      $ 5,257      $ —          16,649,398      $ 166      $ 152,099      $ (164   $ (132,417   $ 2,037      $ 47,897   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2009

    20,471      $ 20,471        1,024      $ 1,024      $ (935     —          —        $ —          14,341,898      $ 143      $ 150,817      $ (164   $ (58,415   $ 418      $ 113,359   

Net loss

    —          —          —          —          —          —          —          —          —          —          —          —          (9,553     —          (9,553

Net Change in Unrealized Gain On Available-for-Sale Securities, net of income taxes

    —          —          —          —          —          —          —          —          —          —          —          —          —          (704     (704

Preferred stock dividend requirements and discount accretion

    —          —          —          —          154        —          —          —          —          —          —          —          (990     —          (836
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2010

    20,471      $ 20,471        1,024      $ 1,024      $ (781     —        $ —        $ —          14,341,898      $ 143      $ 150,817      $ (164   $ (68,958   $ (286   $ 102,266   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

FLORIDA BANK GROUP, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

     Nine months ended September 30,  
     2011     2010  

Cash flows from operating activities:

    

Net loss

   $ (17,126   $ (9,553

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Depreciation and amortization

     1,012        1,139   

Amortization of deferred loan fees, net

     (96     (100

Amortization of premium and discounts on securities, net

     1,114        525   

Provision for loan losses

     15,651        14,902   

Deferred income taxes

     —          (5,715

Gain on sale of securities available for sale

     (85     (3,188

Loss on sale of foreclosed real estate

     55        262   

Write-down of foreclosed real estate

     2,178        792   

Other-than-temporary impairment of securities available for sale

     —          549   

Decrease (increase) in accrued interest receivable

     734        (15

Decrease in prepaid expenses and other assets

     1,299        989   

(Decrease) increase in accrued expenses and other liabilities

     (218     580   

Decrease in official checks

     (59     (260
  

 

 

   

 

 

 

Net cash provided by operating activities

     4,459        907   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Net decrease in loans

     64,694        8,110   

Proceeds from sales, maturities, calls and repayments of securities available for sale

     26,217        153,597   

Purchase of securities available for sale

     —          (203,147

Proceeds from sale of foreclosed real estate

     834        7,770   

Redemption of Federal Reserve Bank stock

     1,353        449   

Redemption of Federal Home Loan Bank stock

     257        385   

Net acquisition of premises and equipment

     (224     (985
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     93,131        (33,821
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net (decrease) increase in deposits

     (88,149     52,288   

Net decrease in Federal Home Loan Bank advances

     —          (4,000

Proceeds from exercise of stock purchase warrants

     23        —     

Preferred Stock Issued, net of issuance costs

     5,250        —     

Preferred stock dividend requirements

     —          (836
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (82,876     47,452   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     14,714        14,538   

Cash and cash equivalents at beginning of period

     40,301        29,361   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 55,015      $ 43,899   
  

 

 

   

 

 

 

 

(Continued)

 

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FLORIDA BANK GROUP, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited), Continued

(In thousands)

 

     Nine months ended September 30,  
     2011      2010  

Supplemental cash flow information:

     

Cash paid during the period for -

     

Interest

   $ 9,706       $ 12,524   
  

 

 

    

 

 

 

Noncash transactions:

     

Accumulated other comprehensive income (loss), change in unrealized gains (losses) on securities available for sale, net of income taxes in 2010

   $ 6,144       $ (704
  

 

 

    

 

 

 

Transfer of loans to foreclosed real estate

   $ 1,570       $ 7,261   
  

 

 

    

 

 

 

Transfer of foreclosed real estate to loans

   $ —         $ 2,880   
  

 

 

    

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

FLORIDA BANK GROUP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars in thousands except per share data)

Note 1 – Significant Accounting Policies

Basis of Presentation

Florida Bank Group, Inc. (the “Holding Company”) owns 100% of the outstanding common stock of Florida Bank (the “Bank”), (collectively, the “Company”). The Holding Company’s only significant business activity is the operation of the Bank. The Bank is a Florida state-chartered Federal Reserve member commercial bank. The Bank was acquired in January 2002.

The Bank offers a wide range of commercial and retail banking services to businesses and individuals. In addition to traditional products and services, the Bank offers other products and services, such as debit cards, internet banking, and electronic bill payment services. Consumer loan products offered by the Bank include residential loans, home equity lines of credit, second mortgages, new and used auto loans, overdraft protection, and unsecured personal credit lines. Commercial and small business loan products include SBA loans, commercial real estate construction and term loans; working capital loans and lines of credit; demand, term and time loans; and equipment, inventory and accounts receivable financing.

The unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. The Company follows GAAP and reporting practices applicable to the banking industry, which are described in Note 1 to the Consolidated Financial Statements included in the Company’s 2010 Form 10-K.

In preparation of the condensed consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the condensed consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the value of foreclosed real estate and the value of the deferred tax asset.

In the opinion of management, the condensed consolidated financial statements contain all adjustments, which are those of a recurring nature, and disclosures necessary to present fairly the financial position of the Company as of September 30, 2011 and the results of operations and cash flows for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for the entire year or any other interim period.

Note 2 – Securities Available for Sale.

The amortized cost and related market value of investment securities available-for-sale were as follows:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

At September 30, 2011

          

Mortgage-backed securities

   $ 153,795       $ 2,067       $ (35   $ 155,827   

Mutual funds

     517         5         —          522   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 154,312       $ 2,072       $ (35   $ 156,349   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

At December 31, 2010

          

Mortgage-backed securities

   $ 181,053       $ 134       $ (4,228   $ 176,959   

Mutual funds

     505         —           (13     492   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 181,558       $ 134       $ (4,241   $ 177,451   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

Gross proceeds from the sale of securities classified as available for sale were $13.4 million for the nine months ended September 30, 2011 and resulted in gross gains of $85 and no losses. Gross proceeds from the sale of securities classified as available for sale was approximately $132.7 million for the nine months ended September 30, 2010 and resulted in gains of $3.3 million and gross losses of $0.1 million.

 

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Table of Contents

The following tables classify those securities in an unrealized loss position at September 30, 2011 and December 31, 2010, based upon length of time in a continuous loss position. The tables show the current fair value of the securities and the amount of unrealized loss for each category of investment:

 

     As of September 30, 2011  
     Less Than Twelve Months      Over Twelve Months  
     Gross
Unrealized
Losses
     Fair Value      Gross
Unrealized
Losses
     Fair Value  

Mortgage-backed securities

   $ 18       $ 6,569       $ 17       $ 6,051   

Mutual funds

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 18       $ 6,569       $ 17       $ 6,051   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     As of December 31, 2010  
     Less Than Twelve Months      Over Twelve Months  
     Gross
Unrealized
Losses
     Fair Value      Gross
Unrealized
Losses
     Fair Value  

Mortgage-backed securities

   $ 4,228       $ 167,130       $ —         $ —     

Mutual funds

     13         492         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 4,241       $ 167,622       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The unrealized losses on investment securities available for sale were caused by market conditions. The Company plans to hold the securities for a period of time sufficient for the fair value of the securities to recover and it is not more likely than not that it will be required to sell the securities before recovery of their amortized cost basis. The losses are therefore not considered other-than-temporary at September 30, 2011.

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the Company’s intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

For investment securities with unrealized losses greater than 12 months, management utilizes various resources, including input from independent third party firms to perform an analysis of expected future cash flows. Investment securities classified as available-for-sale or held-to-maturity are generally evaluated for OTTI under the provisions of ASC 320-10, Investments — Debt and Equity Securities. In determining OTTI, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

If a security has a decline in fair value that is other than temporary, the security will be written down to its fair value by recording an OTTI loss in the condensed consolidated statement of operations. For a debt security that the Company does not intend to sell and it is not more likely than not that the Company will be required to sell before recovery of its amortized cost, only the credit loss component of the impairment is recorded in the condensed consolidated statement of operations, while the impairment related to all other factors is recorded in other comprehensive income (loss).

 

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Table of Contents

The table below provides a cumulative roll forward of credit losses through the nine months ended September 30, 2011, relating to the Company’s available for sale debt securities:

 

Balance at, January 1, 2011

   $ 540   

Additions for credit losses on securities not previously impaired

     —     

Reductions for securities sold during the period

     —     
  

 

 

 

Balance at, September 30, 2011

   $ 540   
  

 

 

 

Note 3 – Loans

The components of loans were as follows:

 

     As of  
     September 30,
2011
    December 31,
2010
 

Commercial

   $ 34,992      $ 47,475   

Commercial Real Estate

     293,254        329,487   

Residential Real Estate

     176,514        203,488   

Consumer Loans

     8,050        12,879   
  

 

 

   

 

 

 
     512,810        593,329   

Less:

    

Net deferred fees

     (251     (454

Allowance for loan losses

     (22,333     (20,830
  

 

 

   

 

 

 

Loans, Net

   $ 490,226      $ 572,045   
  

 

 

   

 

 

 

Allowance for Loan Losses.

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to operations. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on at least a quarterly basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired. For such loans that are collateral dependent, an allowance is established when the fair value of the loan’s collateral is less than the recorded value of the loan. For impaired loans that are not collateral dependent, an allowance is established when the discounted cash flows of such loans are lower than their carrying values. A loan is considered impaired when, based on current information and events, it is probable the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. It should be noted that substantially all of our impaired loans are collateral dependent and thus impairment is usually measured by the fair value of the collateral method.

The general component covers all other loans and is based on historical loss experience adjusted for qualitative factors. This is supplemented by the risks for each portfolio segment. Risk factors impacting loans in each of the portfolio segments include: consideration of the reliability of the bank’s loan grading system, the volume of criticized loans, concentrations of credit, the current level of past due and non performing loans, past loan experience, evaluation of probable losses in the Bank’s loan portfolio, including adversely classified loans, and the impact of market conditions on loan and collateral valuations and collectability. Large groups of smaller homogeneous loans are collectively evaluated for impairment.

 

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Table of Contents

Credit Exposure and Quality Indicators

The Company has divided the loan portfolio into four portfolio segments, each with different risk characteristics and methodologies for assessing risk. The portfolio segments identified by the Company are Commercial, Commercial Real estate, Residential Real Estate and Consumer Loans. The risk characteristics of each loan portfolio segment are as follows:

Commercial. Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable, inventory, or equipment, and may include a personal guarantee of the owners. Some short-term loans may be made on an unsecured basis.

Commercial Real Estate. Commercial real estate loans are underwritten based upon standards set forth in policies approved by the company’s board of directors (the “Board”). These loans consist of loans to finance construction, real estate purchases, expansion and improvements to commercial properties. These loans are secured by first liens on office buildings, churches, apartments, warehouses, manufacturing facilities, retail and mixed use properties located within the market area. The Company’s underwriting analysis includes credit verification, independent appraisals, a review of the borrower’s financial condition, and an analysis of the borrower’s underlying cash flows. Commercial real estate loans are usually larger than residential loans and involve greater credit risk. The Company monitors construction loans with third-party inspections and requires the receipt of lien waivers on funds advanced. The repayment of commercial real estate loans largely depends on the results of operations and management of these properties.

Residential Real Estate. Residential real estate loans are underwritten in accordance with policies set forth and approved by the Board, including repayment capacity and source, value of the underlying property, credit history and stability. Residential real estate loans include 1-4 family primary, secondary and investment properties, 1-4 family single family construction loans (owner occupied) and multi-family housing. These loans are approved based on an analysis of the borrower and guarantor, the viability of the project and on an acceptable percentage of the appraised value of the property. The Company monitors the construction loans with on-site third-party inspections and requires the receipt of lien waivers on funds advanced.

Consumer Loans. Consumer loans are those loans for personal, family, household purposes or personal investment purposes rather than business, commercial, or agriculture purposes. Consumer credits are to be evaluated on the basis of the borrower’s job, stability, income, capital, and collateral. They include loans extended for various purposes, including automobile purchases, home improvements, lines of credit, personal loans, and home equity loans. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Loans to consumers are extended after a credit evaluation, including the creditworthiness of the borrower(s), the purpose of the credit, and the source of repayment. Consumer loans are made at fixed and variable interest rates. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

An analysis of the changes in the allowance for loan losses for the three and nine month periods ended September 30, 2011 and 2010 is as follows:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2011     2010     2011     2010  

Balance At Beginning Of Period

   $ 21,399      $ 25,545      $ 20,830      $ 21,342   

Charge-Offs

     (2,719     (7,164     (16,611     (15,354

Recoveries

     1,496        11        2,463        463   

Provision For Loan Losses

     2,157        2,961        15,651        14,902   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance At End Of Period

   $ 22,333      $ 21,353      $ 22,333      $ 21,353   
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table sets forth the changes in the allowance and an allocation of the allowance by loan category as of September 30, 2011. The allocation 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. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current economic factors described above.

 

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Table of Contents
     At September 30, 2011  
     Commercial     Commercial
Real Estate
    Residential
Real Estate
    Consumer
Loans
    Total  

Allowance for credit losses:

          

Three Months Ending September 30, 2011

          

Balance at beginning of period

   $ 1,859      $ 14,730      $ 4,539      $ 271      $ 21,399   

Charge-offs

     (96     (1,612     (935     (76     (2,719

Recoveries

     182        145        151        1,018        1,496   

Provision for loan losses

     (329     (241     3,745        (1,018     2,157   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 1,616      $ 13,022      $ 7,500      $ 195      $ 22,333   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ending September 30, 2011

          

Balance at beginning of period

   $ 868      $ 15,518      $ 4,232      $ 212        20,830   

Charge-offs

     (1,881     (7,910     (5,457     (1,363     (16,611

Recoveries

     294        542        601        1,026        2,463   

Provision for loan losses

     2,335        4,872        8,124        320        15,651   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 1,616      $ 13,022      $ 7,500      $ 195      $ 22,333   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 993      $ 7,519      $ 3,802      $ 55      $ 12,369   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 623      $ 5,503      $ 3,698      $ 140      $ 9,964   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

          

Ending balance

   $ 34,992      $ 293,254      $ 176,514      $ 8,050      $ 512,810   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 2,509      $ 42,937      $ 20,963      $ 136      $ 66,545   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 32,483      $ 250,317      $ 155,551      $ 7,914      $ 446,265   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     At December 31, 2010  
     Commercial     Commercial
Real Estate
    Residential
Real Estate
    Consumer
Loans
    Total  

Allowance for credit losses:

          

Balance at beginning of year

   $ 2,136      $ 13,081      $ 5,393      $ 732      $ 21,342   

Charge-offs

     (4,563     (16,420     (6,965     (1,258     (29,206

Recoveries

     365        6        133        —          504   

Provision for loan losses

     2,930        18,851        5,671        738        28,190   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of year

   $ 868      $ 15,518      $ 4,232      $ 212      $ 20,830   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 225      $ 7,870      $ 1,692      $ 103      $ 9,890   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 643      $ 7,648      $ 2,540      $ 109      $ 10,940   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

          

Ending balance

   $ 47,475      $ 329,487      $ 203,488      $ 12,879      $ 593,329   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 1,573      $ 36,468      $ 18,784      $ 3,258      $ 60,083   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 45,902      $ 293,019      $ 184,704      $ 9,621      $ 533,246   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Loan Impairment and Credit Losses.

The following is an analysis of impaired loans:

 

     At September 30, 2011      Three Months Ended
September 30, 2011
    Nine Months Ended
September 30, 2011
 
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
    Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded: (1)

                   

Commercial

   $ 1,284       $ 8,152       $ —         $ 1,262       $ 80      $ 1,250       $ 220   

Commercial Real Estate

     18,444         28,731         —           17,415         591        17,956         965   

Residential Real Estate

     9,352         15,580         —           9,692         159        9,105         451   

Consumer Loans

     59         101         —           1,114         (126     58         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 29,139       $ 52,564       $ —         $ 29,483       $ 704      $ 28,369       $ 1,637   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

With an allowance recorded:

                   

Commercial

   $ 1,226       $ 1,282       $ 993       $ 869       $ —        $ 1,193       $ 18   

Commercial Real Estate

     24,493         26,216         7,519         23,763         53        23,845         367   

Residential Real Estate

     11,610         12,288         3,802         8,662         294        11,303         416   

Consumer Loans

     77         82         55         88         —          75         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 37,406       $ 39,868       $ 12,369       $ 33,382       $ 347      $ 36,416       $ 801   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 66,545       $ 92,432       $ 12,369       $ 62,865       $ 1,051      $ 64,785       $ 2,438   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

Includes loans with partial charge-offs of $19,394 with net carrying values of $24,297 at September 30, 2011.

 

     At December 31, 2010      Full Year 2010  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:(2)

              

Commercial

   $ 1,212       $ 5,068       $ —         $ 1,090       $ 282   

Commercial Real Estate

     16,278         26,612         —           14,650         1,138   

Residential Real Estate

     13,506         19,185         —           12,155         584   

Consumer Loans

     3,032         4,032         —           2,729         156   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 34,028       $ 54,897       $ —         $ 30,624       $ 2,160   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

              

Commercial

   $ 362       $ 368       $ 225       $ 326       $ 17   

Commercial Real Estate

     20,190         23,502         7,870         18,171         359   

Residential Real Estate

     5,277         5,571         1,692         4,749         139   

Consumer Loans

     226         226         103         203         14   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 26,055       $ 29,667       $ 9,890       $ 23,449       $ 529   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 60,083       $ 84,564       $ 9,890       $ 54,073       $ 2,689   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) 

Includes loans with partial charge-offs of $20,459 with net carrying values of $29,647 at December 31, 2010.

All loans are considered collateral dependent as of September 30, 2011 and December 31, 2010.

 

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Table of Contents

Nonaccrual Loans

The following is an analysis of nonaccrual loans as of September 30, 2011:

 

     Recorded
Investment
     Unpaid Principal
Balance
 

Commercial

   $ 2,510       $ 9,434   

Commercial Real Estate

     32,605         44,615   

Residential Real Estate

     13,197         20,102   

Consumer Loans

     136         184   
  

 

 

    

 

 

 

Total

   $ 48,448       $ 74,335   
  

 

 

    

 

 

 

The following is an analysis of nonaccrual loans as of December 31, 2010:

 

     Recorded
Investment
     Unpaid Principal
Balance
 

Commercial

   $ 1,573       $ 5,436   

Commercial Real Estate

     33,907         47,552   

Residential Real Estate

     18,506         24,478   

Consumer Loans

     3,071         4,071   
  

 

 

    

 

 

 

Total

   $ 57,057       $ 81,537   
  

 

 

    

 

 

 

 

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Table of Contents

The tables below summarize the payment status of loans in our total loan portfolio, including an aging of delinquent loans and loans 90 days or more past due and the credit quality of the Company’s loan portfolio. The delinquency aging includes all past due loans, both performing and nonperforming, as of September 30, 2011 and December 31, 2010:

As of September 30, 2011

 

     30-59 Days      60-89 Days      Greater
Than 90
Days
     Total Past
Due
     Current      Total Loans      Recorded
Investment >
90 Days and
Accruing
 

Commercial

   $ —         $ —         $ 2,510       $ 2,510       $ 32,482       $ 34,992       $ —     

Commercial Real Estate

     282         —           32,605         32,887         260,367         293,254         —     

Residential Real Estate

     596         —           13,197         13,793         162,721         176,514         —     

Consumer Loans

     91         —           136         227         7,823         8,050         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 969       $ —         $ 48,448       $ 49,417       $ 463,393       $ 512,810       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2010

 

     30-59 Days      60-89 Days      Greater
Than 90
Days
     Total Past
Due
     Current      Total Loans      Recorded
Investment >
90 Days and
Accruing
 

Commercial

   $ 907       $ 861       $ 1,573       $ 3,341       $ 44,134       $ 47,475       $ —     

Commercial Real Estate

     7,156         2,205         33,907         43,268         286,219         329,487         —     

Residential Real Estate

     3,294         662         18,506         22,462         181,026         203,488         —     

Consumer Loans

     455         210         3,071         3,736         9,143         12,879         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11,812       $ 3,938       $ 57,057       $ 72,807       $ 520,522       $ 593,329       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The credit quality of the loan portfolio at September 30, 2011 based on internally assigned grades follows:

 

Risk Rating

   Commercial      Commercial
Real Estate
     Residential
Real Estate
     Consumer
Loans
     Total      % of Total  

Pass

   $ 26,101       $ 220,465       $ 142,487       $ 6,725       $ 395,778         77.2

Special mention

     1,153         19,197         2,717         2         23,069         4.5

Substandard

     5,229         20,987         18,112         1,187         45,515         8.9

Substandard Non-Accrual

     2,509         32,605         13,198         136         48,448         9.4

Doubtful/Loss

     —           —           —           —           —           0.0
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 34,992       $ 293,254       $ 176,514       $ 8,050       $ 512,810         100.0
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The credit quality of the loan portfolio at December 31, 2010 based on internally assigned grades follows:

 

Risk Rating

   Commercial      Commercial
Real Estate
     Residential
Real Estate
     Consumer
Loans
     Total      % of Total  

Pass

     38,983         240,427         158,525         8,276         446,211         75.2

Special mention

     653         18,224         6,433         234         25,544         4.3

Substandard

     6,266         36,929         20,024         1,298         64,517         10.9

Substandard Non-Accrual

     1,393         33,907         18,481         3,071         56,852         9.6

Doubtful/Loss

     180         —           25         —           205         0.0
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 47,475       $ 329,487       $ 203,488       $ 12,879       $ 593,329         100.0
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Internally assigned loan grades are defined as follows:

 

   

Pass—Loan’s primary source of repayment is satisfactory, with secondary sources very likely to be realized if necessary.

 

   

Special Mention—Loan has potential weaknesses which may, if not reversed or corrected, weaken the credit or inadequately protect our credit position. These loans are generally paying on a timely basis. The maximum period in this risk grade is generally limited to six months.

 

   

Substandard—Loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. Such loans have a well-defined weakness or weaknesses that jeopardize the full repayment of the loan. They are characterized by the distinct possibility that the Company will sustain some loss in the future if the deficiencies or weaknesses are not corrected.

 

   

Substandard—Nonaccrual—Loan has all the characteristics of a substandard credit with payments having ceased or collection of payments in question. There is probability of loss.

 

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Doubtful—Loan has all the weaknesses inherent in one classified substandard with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

   

Loss—Loan is considered uncollectible and of such little value that continuance as an asset is not warranted.

Modifications

The Company’s loan portfolio includes certain loans that have been modified in a troubled debt restructuring (TDR). A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company offers various types of concessions when modifying a loan, which could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. However, forgiveness of principal is granted on an infrequent basis. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments or term extensions. Additional collateral, a co-borrower, or a guarantor is often requested. Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk. Construction loans modified in a TDR may also involve extending the interest-only payment period. Residential mortgage loans modified in a TDR are primarily comprised of loans where monthly payments are lowered to accommodate the borrowers’ financial needs for a period of time. During that time, the borrower’s entire monthly payment may be applied to principal. After the lowered monthly payment period ends, the borrower may revert back to paying principal and interest per the original terms with the maturity date adjusted accordingly if payment history is satisfactory.

Loans modified in a TDR may already be on non-accrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a result, loans modified in a TDR for the Company may have the financial effect of increasing the specific allowance associated with the loan. An allowance for impaired loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent.

The following presents by class, information related to loans modified in a TDR during the three and nine months ended September 30, 2011:

 

     Three Months Ended September 30, 2011      Nine Months Ended September 30, 2011  

Trouble Debt Restructuring (1)

(Dollars in thousands)

   Number of
Modifications
Resulting in

TDRs
     Recorded
TDR

Investment
     Allowance at
end of Period
     Number of
Modifications
Resulting in

TDRs
     Recorded
TDR
Investment
     Allowance at
end of Period
 

Commercial

     —         $ —         $ —           1       $ 125       $ 125   

Commercial real estate

     1         711         204         8         5,575         1,532   

Residential real estate

     2         131         —           13         2,203         13   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3       $ 842       $ 204         22       $ 7,903       $ 1,670   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The period end balances are inclusive of all partial paydowns and charge-offs since the modification date. Loans modified in a TDR that were fully paid down, charged off, or foreclosed upon by period end are not reported.

 

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Table of Contents

The following presents by class, loans modified in a TDR from October 1, 2010 through September 30, 2011 that subsequently defaulted (i.e., 30 days or more past due following a modification) during the three and nine months ended September 30, 2011:

 

     Three Months Ended
September 30, 2011
     Nine Months Ended
September 30, 2011
 

Trouble Debt Restructuring (1)

(Dollars in thousands)

   Number of
Defaults
     Recorded
TDR
Investment
     Number of
Defaults
     Recorded
TDR
Investment
 

Commercial real estate

     2       $ 1,819         3         2,060   

Residential real estate

     4         754         4         754   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     6       $ 2,573         7       $ 2,814   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The period end balances are inclusive of all partial paydowns and charge-offs since the modification date. Loans modified in a TDR that were fully paid down, charged off, or foreclosed upon by period end are not reported.

As of September 30, 2011, we had $8.5 million of performing loans classified as TDRs.

Note 4 – Financial Instruments with Off-Balance-Sheet Risk

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include unfunded loan commitments, unused lines of credit and standby letters of credit and may involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the condensed consolidated balance sheets. The contract amounts of these instruments reflect the extent of involvement the Company has in these financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for unfunded loan commitments, standby letters of credit and unused lines of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments.

Unfunded loan commitments and unused lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on management’s credit evaluation of the counterparty.

Standby letters-of-credit are conditional lending commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters-of-credit is essentially the same as that involved in extending loan facilities to customers. The Company generally holds collateral supporting these commitments.

A summary of the notional amounts of the Company’s financial instruments at September 30, 2011, with off-balance-sheet risk was as follows:

 

     Contract
Amount
 

Unfunded loan commitments

   $ 1,590   
  

 

 

 

Unused lines of credit

   $ 55,447   
  

 

 

 

Standby letters of credit

   $ 350   
  

 

 

 

To help meet the funding needs noted above, the Company has available borrowing capacity from various sources including lines of credit with the FHLB. As of September 30, 2011, the Company had $32.6 million of letters of credit with the FHLB.

Note 5 – Stock-Based Compensation Plan

Certain key employees and directors of the Company have options to purchase shares of the Company’s common stock under its 2005 Stock Option Plan (the “Plan”) as amended. Under the plan, the total number of shares which may be issued shall not exceed 1,700,000. Stock options are issued at the fair value of the common stock on the date of grant and expire ten years from grant date.

 

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Table of Contents

Stock options vest over a three year period. In 2008, the Company accelerated the vesting of all stock options and at December 31, 2008 all stock options became fully vested and no stock options have been granted since 2008. There were no options exercised during the nine months ended September 30, 2011 and 2010. At September 30, 2011, 1,065,083 shares remain available for grant under the plan. A summary of stock option transactions follows:

 

     Number of
Options
    Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term
     Intrinsic
Value
 

Outstanding at December 31, 2010

     539,250      $ 15.57         

Options forfeited

     (79,000   $ 14.61         
  

 

 

         

Outstanding and exercisable at September 30, 2011

     460,250      $ 15.74         5.28         —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Note 6 – Restricted Stock Plan

During 2010, the Company adopted a 2010 Restricted Stock Plan (the “Plan”). Under the Plan, the Company may issue a maximum 750,000 with a maximum of 75,000 that can be granted to independent directors and a maximum of 350,000 shares to be granted in any one calendar year. No shares have been issued under the Plan.

Note 7 – Unregistered Sale of Equity Securities

On June 30, 2011 the Company closed a private placement offering resulting in the issuance of 5,107 shares of its Non-Cumulative Perpetual Series C Preferred Stock (“Series C Preferred Stock”) to accredited investors for an aggregate purchase price of $5.1 million in cash consideration, or $1,000 per share. In addition, during the three months ended September 30, 2011, the Company sold an additional 150 shares of its Series C preferred Stock to accredited investors for an aggregate purchase price of $150 in cash considerations.

The holders of Series C Preferred Stock are entitled to receive for each share of Series C Preferred Stock such non-cumulative dividends if, as, and when declared by the Board of Directors out of funds legally available for such dividends. However, the payment of any dividend on the Series C Preferred Stock is subject to the prior approval of the Federal Reserve Bank of Atlanta and the Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System. The shares of Series C Preferred Stock have no stated dividend rates.

The Series C Preferred Stock may be converted at the election of a holder at any time and from time to time, into shares of Common Stock after December 31, 2011. The Series C Preferred Stock shall be automatically converted into shares of Common Stock upon the earlier of (i) the closing of a Qualified Private Offering, or (ii) the closing of a Qualified Public Offering. A "Qualified Private Offering" means the closing of a private placement of shares of Common Stock with minimum proceeds of $50,000,000 by December 31, 2011. A "Qualified Public Offering" means the closing of an offering of shares of Common Stock registered in accordance with the provisions of the Securities Act of 1933, as amended. The conversion price for the shares of Preferred Stock will be equal to the price per share at which shares of common stock are sold in a Qualified Private Offering. If the Company does not close a Qualified Private Offering on or before December 31, 2011, then the Conversion Price thereafter will be equal to 50% of the tangible common stock book value per share as of the end of the calendar quarter prior to conversion, subject to a 10% annualized reduction from the date of issuance to the date of conversion.

The purchasers of the shares of Series C Preferred Stock also received a non-transferable stock purchase warrant (the “Warrant”) that is immediately exercisable for 1,250 shares of Company common stock at $0.01 per share for each share of Series C Preferred Stock purchased. The Warrant may be exercised at any time, and from time to time, in whole or in part before March 31, 2012. The Warrant also is mandatorily exercisable upon the occurrence of any one of the following events (which event must occur before March 31, 2012): (a) the closing of (i) a Qualified Private Offering, (ii) a Qualified Public Offering, or (iii) a Change in Control, (b) the complete redemption of the shares of Series C Preferred Stock held by a holder, or (c) liquidation or dissolution of the Company. Any unexercised portion of the warrant will expire on March 31, 2012.

The $5.3 million proceeds from the sale of the Series C Preferred Stock were allocated between the Series C Preferred Stock and the Warrants based on the ratio of the estimated fair value of the Warrants to the aggregate estimated fair value of both the Series C Preferred Stock and the Warrants. The value of the Warrants was computed to be $1.7 million using the Black-Scholes model with the following inputs: current stock price of $0.27; expected dividend yield of 0.00%; expected stock volatility of 16.5%; risk-free interest rate of .10% and expected life of 0.5 years. The allocation of the $5.3 million of proceeds to the Warrants was recorded as a “preferred stock discount” against the Preferred Shares, with a corresponding and equal entry to additional paid in capital in the amount of $1.3 million computed as follows ($1.7 million divided by the sum of ($5.3 million plus $1.7 million) multiplied by the transaction proceeds of $5.3 million). This discount was fully amortized as of September 30, 2011 and increased the net loss available to common stockholders. Management estimated a common stock price for the sole and limited purpose of allocating the fair value of the

 

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Table of Contents

Warrants and Preferred Shares. Since our common stock is not actively traded, management estimated the stock price by applying the median quoted price to book value multiples of a population of publicly traded, Florida based banks which had the following characteristics: assets between $200 million and $2 billion; nonperforming assets divided by tangible equity capital and loan loss reserves between 50% and 200%; not involved in a pending merger or recapitalization transaction. There can be no assurance that this stock price would represent the price at which the shares trade in the marketplace and there is no assurance that shares of our common stock could be bought or sold at that price.

Note 8 – Fair Value of Financial Instruments

The estimated fair values of the Company’s financial instruments were as follows:

 

     At September 30, 2011      At December 31, 2010  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Financial assets:

           

Cash and cash equivalents

   $ 55,015       $ 55,015       $ 40,301       $ 40,301   

Available-for-sale securities

     156,349         156,349         177,451         177,451   

Loans, net

     490,226         504,621         572,045         585,278   

Federal Home Loan Bank Stock

     4,775         4,775         5,032         5,032   

Federal Reserve Bank Stock

     1,428         1,428         2,781         2,781   

Accrued interest receivable

     1,741         1,741         2,475         2,475   

Financial liabilities:

           

Deposits

   $ 624,185       $ 628,935       $ 712,334       $ 717,942   

Federal Home Loan Bank Advances

     67,700         77,068         67,700         75,782   

Accrued interest payable

     590         590         901         901   

 

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Table of Contents

Financial assets subject to fair value measurements on a recurring basis are as follows:

 

     Fair Value Measurements at September 30, 2011 Using  
     Fair Value      Quoted Prices
in Active
Markets for
Identical

Assets
(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

As of September. 30, 2011:

           

Available for sale securities

   $ 156,349       $ —         $ 156,349       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value Measurements at December 31, 2010 Using  
     Fair Value      Quoted Prices
in Active
Markets for
Identical

Assets
(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

As of December 31, 2010:

           

Available for sale securities

   $ 177,451       $ —         $ 177,451       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

No securities were transferred in or out of level 1, 2, or 3 during the first nine months of 2011 or during the year end 2010.

Impaired collateral-dependent loans are carried at fair value when the current collateral value is lower than the carrying value of the loan. Foreclosed real estate is carried at fair value less estimated selling costs. Those impaired collateral-dependent loans and foreclosed real estate at September 30, 2011, which are measured at fair value on a nonrecurring basis are as follows:

 

     Fair Value      Level 1      Level 2      Level 3      Total
Losses
     Losses Recorded in
Operations For the
Nine Months Ended
September 30, 2011
 

As of September 30, 2011:

                 

Impaired loans (1)

                                         

Commercial

   $ 1,391       $ —         $ —         $ 1,391       $ 4,657       $ 1,167   

Commercial Real Estate

     31,792         —           —           31,792         21,851         7,811   

Residential Real Estate

     16,088         —           —           16,088         10,248         6,639   

Consumer Loans

     64         —           —           64         125         63   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 49,335       $ —         $ —         $ 49,335       $ 36,881       $ 15,680   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Foreclosed real estate

   $ 5,521       $ —         $ —         $ 5,521       $ 2,613       $ 2,164   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Loans with a total carrying value of $4.8 million were measured for impairment using Level 3 inputs and had fair values in excess of carrying values.

 

     Fair Value      Level 1      Level 2      Level 3      Total
Losses
     Losses Recorded in
Operations For the
Year Ended
December 31, 2010
 

As of December 31, 2010:

                 

Impaired loans (1)

                                         

Commercial

   $ 504       $ —         $ —         $ 504       $ 4,029       $ 3,960   

Commercial Real Estate

     27,530         —           —           27,530         22,004         14,956   

Residential Real Estate

     14,623         —           —           14,623         7,179         5,896   

Consumer Loans

     3,155         —           —           3,155         1,138         959   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 45,812       $ —         $ —         $ 45,812       $ 34,350       $ 25,771   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Foreclosed assets

   $ 7,018       $ —         $ —         $ 7,018       $ 499       $ 499   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Loans with a total carrying value of $4.4 million were measured for impairment using Level 3 inputs and had fair values in excess of carrying values.

Note 9 – Regulatory Matters

Banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Holding Company. The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by

 

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Table of Contents

regulatory banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and percentages (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of September 30, 2011, that the Company and the Bank met all capital adequacy requirements to which they were subject.

As of September 30, 2011, the most recent notification from the regulatory authorities categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized an institution must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage percentages as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category. The Company’s and the Bank’s actual capital amounts and percentages are also presented in the following table:

 

      Actual     For Capital Adequacy
Purposes
    For Well
Capitalized Purposes
 
As of September 30, 2011:    Amount      %     Amount      %     Amount      %  

Total Capital to Risk-Weighted Assets:

               

Consolidated

   $ 52,367         10.38   $ 40,377         8.00     N/A         N/A   

Bank

     52,098         10.33     40,365         8.00   $ 50,456         10.00

Tier One Capital to Risk-Weighted Assets

               

Consolidated

   $ 40,603         8.04   $ 20,189         4.00     N/A         N/A   

Bank

     45,593         9.04     20,182         4.00   $ 30,274         6.00

Tier One Capital to Average Assets

               

Consolidated

   $ 40,603         5.32   $ 30,544         4.00     N/A         N/A   

Bank

     45,593         5.97     30,537         4.00   $ 38,172         5.00
      Actual     For Capital Adequacy
Purposes
    For Well
Capitalized Purposes
 
As of December 31, 2010:    Amount      %     Amount      %     Amount      %  

Total Capital to Risk-Weighted Assets:

               

Consolidated

   $ 65,242         11.06   $ 47,204         8.00     N/A         N/A   

Bank

     64,854         10.98     47,265         8.00   $ 59,082         10.00

Tier One Capital to Risk-Weighted Assets

               

Consolidated

   $ 57,700         9.78   $ 23,602         4.00     N/A         N/A   

Bank

     57,303         9.70     23,633         4.00   $ 35,449         6.00

Tier One Capital to Average Assets

               

Consolidated

   $ 57,700         6.46   $ 35,702         4.00     N/A         N/A   

Bank

     57,303         6.48     35,387         4.00   $ 44,234         5.00

 

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Table of Contents

Note 10 – Loss Per Common Share

Basic and diluted loss per share of common stock has been computed based on the weighted-average number of shares of common stock outstanding as follows:

 

     For the Three Months Ended      For the Nine Months Ended  
     September 30,
2011
     September 30,
2010
     September 30,
2011
     September 30,
2010
 

Weighted average number of shares outstanding

     15,654,831         14,329,315         14,663,418         14,329,315   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic and diluted loss per share is the same for these interim periods because of the Company’s net loss position.

Note 11 – Recent Accounting Standards Update

In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08, “Intangibles — Goodwill and Other (Topic 350) — Testing Goodwill for Impairment.” ASU 2011-08 allows an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of the reporting unit. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company does not expect ASU 2011-08 to have an impact on its financial statements and disclosures.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income,” which eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Under ASU 2011-05, an entity can elect to present items of net income and other comprehensive income in one continuous statement — referred to as the statement of comprehensive income — or in two separate, but consecutive, statements. Each component of net income and each component of other comprehensive income, together with totals for comprehensive income and its two parts — net income and other comprehensive income, would need to be displayed under either alternative. The statement(s) would need to be presented with equal prominence as the other primary financial statements. ASU 2011-05 is effective as of the beginning of a fiscal year that begins after December 15, 2011 and interim and annual periods thereafter. The Company is currently assessing the impact of ASU 2011-03 on its financial statements and disclosures.

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” to substantially converge the guidance in U.S. GAAP and IFRS on fair value measurements and disclosures. The amended guidance changes several aspects of the fair value measurement guidance in FASB Accounting Standards Codification™ (ASC) 820, Fair Value Measurement, including the following provisions:

 

 

Application of the concepts of highest and best use and valuation premise

 

 

Introduction of an option to measure groups of offsetting assets and liabilities on a net basis

 

 

Incorporation of certain premiums and discounts in fair value measurements

 

 

Measurement of the fair value of certain instruments classified in shareholders’ equity

In addition, the amended guidance includes several new fair value disclosure requirements, including, among other things, information about valuation techniques and unobservable inputs used in Level 3 fair value measurements and a narrative description of Level 3 measurements’ sensitivity to changes in unobservable inputs. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The Company is currently assessing the impact of ASU 2011-03 on its financial statements and disclosures.

In April 2011, the FASB issued ASU No. 2011-03, “Reconsideration of Effective Control for Repurchase Agreements” (“ASU 2011-03”), which revises the criteria for assessing effective control for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The determination of whether the transfer of a financial asset subject to a repurchase agreement is a sale is based, in part, on whether the entity maintains effective control over the financial asset. ASU 2011-03 removes from the assessment of effective control: the criterion requiring the transferor to have the ability to repurchase or redeem the financial asset on substantially the agreed terms, even in the event of default by the transferee, and the related requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. The amendments in ASU 2011-03 will be effective for interim and annual reporting periods beginning on or after December 15, 2011, early adoption is prohibited, and the amendments will be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. The Company is currently assessing the impact of ASU 2011-03 on its financial statements and disclosures.

 

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In April 2011, the FASB issued ASU No. 2011-02 “Receivables (Topic 310) — A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.” ASU 2011-02 clarifies whether loan modifications constitute troubled debt restructuring. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. ASU 2011-02 was effective for the first interim and annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The impact of ASU 2011-02 on the Company’s financial statements and disclosures is reflected in Note 3 - Loans.

In December 2010, the FASB issued ASU No. 2010-29 “Business Combinations (Topic 805) — Disclosure of Supplementary Pro Forma Information for Business Combinations. If a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. ASU 2010-29 also expands the supplementary pro forma disclosures. ASU 2010-29 was effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. ASU 2010-29 will only affect the Company if there are future business combinations.

Note 12 – Regulatory Agreement

In March 2011, as a result of a periodic examination of the Bank during 2010 by the Federal Reserve Bank of Atlanta (the “FRB”), the Company and the FRB entered into a Written Agreement (the “Regulatory Agreement”). The Regulatory Agreement, among other requirements, provides that the Company’s Board of Directors will take steps to ensure that the Bank complies with the agreement and will strengthen its oversight of the management and operations of the Bank. In addition, the Regulatory Agreement provides that the Bank:

 

   

Will within 60 days of the Regulatory Agreement, submit to the FRB a written plan to strengthen Board oversight and also credit risk management practices;

 

   

Will revise its lending and credit administration policies and procedures;

 

   

Will submit to the FRB an acceptable written program to ensure the accurate grading of loans and to ensure independent loan portfolio reviews;

 

   

Will not extend or renew credit to borrowers with criticized loans without the prior approval of the majority of the board of directors or a designated committee thereof;

 

   

Will submit a revised business plan for 2011 to improve its earnings and overall condition;

 

   

Will not declare or pay any dividends or take any other form of payment representing a reduction in capital from the Bank without prior regulatory approval;

 

   

Will not incur, increase or guarantee any debt or redeem any shares without prior regulatory approval;

 

   

Will not appoint any new directors or senior executive officers without prior regulatory approval;

 

   

Will review and revise its ALLL methodology consistent with relevant supervisory guidance, and

 

   

Will submit an acceptable enhanced written internal audit program that addresses a variety of internal risk assessment and audit program activities.

The Company and the Bank have agreed to submit an acceptable plan to maintain sufficient capital at the Bank as a separate legal entity on a stand-alone basis, not declare or pay any dividends without the prior approval of the Federal Reserve, comply with restrictions on indemnification and severance payments under applicable law, and seek the approval of the Federal Reserve before the appointment of any new director or executive officer. In addition, the Company has agreed that it:

 

   

Will submit to the Federal Reserve an acceptable plan to maintain sufficient capital at the Company on a consolidated basis; and

 

   

Will not incur or increase any debt, or purchase or redeem any of its shares without the prior approval of the Federal Reserve.

The Company took all the necessary actions to promptly address and comply with all the provisions of the Regulatory Agreement.

Prior to the payment of dividends on the Company’s preferred stock issued under the U.S. Treasury Department’s Capital Purchase Program (CPP Dividends), it must request and be granted approval by the FRB. The Company has not paid dividends on its preferred stock for the last four quarters as a result of its agreement with the FRB that the Company will not pay any cash dividends without prior approval from the FRB. At September 30, 2011, the Company had $1.3 million in unpaid dividends owing on its preferred stock. To date, the Company has deferred four quarterly dividend payments. If the Company misses six quarterly dividend payments, whether or not consecutive, the U.S. Treasury will have the right to appoint two directors and/or observers to the Company’s Board of Directors until all accrued and unpaid dividends have been paid.

 

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Florida Bank Group, Inc.

Review by Independent Registered Public Accounting Firm

Hacker, Johnson & Smith PA, the Company’s independent registered public accounting firm, has made a limited review of the financial data as of September 30, 2011, and for the three and nine month periods ended September 30, 2011 and 2010 presented in this document, in accordance with standards established by the Public Company Accounting Oversight Board.

The report of Hacker, Johnson & Smith PA, furnished pursuant to Article 10 of Regulation S-X, is included on the following page herein.

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Florida Bank Group, Inc.

Tampa, Florida:

We have reviewed the accompanying condensed consolidated balance sheet of Florida Bank Group, Inc. (the “Company”) as of September 30, 2011 and the related condensed consolidated statements of operations and other comprehensive income (loss) for the three and nine month periods ended September 30, 2011 and 2010, and the related condensed consolidated statements of changes in stockholders’ equity and cash flows for the nine month periods ended September 30, 2011 and 2010. These interim condensed consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board, the consolidated balance sheet of the Company as of December 31, 2010, and the related consolidated statements of operations and other comprehensive income (loss), changes in stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated March 25, 2011, we, based on our audit expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2010, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Hacker, Johnson & Smith PA

HACKER, JOHNSON & SMITH PA

Tampa, Florida

November 10, 2011

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including this MD&A section, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among others, statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “target,” “goal,” and similar expressions are intended to identify forward-looking statements.

All forward-looking statements, by their nature, are subject to risks and uncertainties. Our actual future results may differ materially from those set forth in our forward-looking statements. Please see Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2010 and in this Quarterly Report on Form 10-Q.

However, other factors besides those listed in our Quarterly Report or in our Annual Report also could adversely affect our results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Any forward-looking statements made by us or on our behalf speak only as of the date they are made. We do not undertake to update any forward-looking statement, except as required by applicable law.

In this Quarterly Report on Form 10-Q, we may refer to Florida Bank Group, Inc. as the “Holding Company,” and to Florida Bank as the “Bank”. Collectively, we may refer to the Holding Company and the Bank as “we,” “us,” or “our”.

Business Overview

We are a bank holding company under the Bank Holding Company Act of 1956, as amended, headquartered in Tampa, Florida. We were incorporated on January 12, 2007, under the laws of the State of Florida. We are the sole shareholder of Florida Bank, a Florida chartered commercial bank that provides a wide range of business and consumer financial services in its target marketplace. The Bank currently operates 14 banking offices located in Hillsborough, Pinellas, Duval, St. Johns, Manatee and Leon counties, Florida. As of September 30, 2011, we had $744.3 million in total assets, including $490.2 million in net loans, and $624.2 million in deposits.

Business Strategy

Our business strategy is to operate as a profitable banking organization, with an emphasis on relationship banking. Our lending strategy includes commercial business loans to small and medium-sized businesses, consumer lending, and select real estate loans. We emphasize comprehensive business products and responsiveness that reflect our knowledge of our local markets and customers. We offer a wide range of commercial and retail banking and financial services to businesses and individuals.

Our marketing strategy is targeted to:

 

   

Capitalize on our personal relationship approach, which we believe differentiates us from our larger competitors;

 

   

Provide customers with access to our local executives who make key credit and other decisions;

 

   

Pursue commercial lending opportunities with small to mid-sized businesses that are underserved by our larger competitors;

 

   

Cross-sell our products and services to our existing customers to leverage our relationships, grow fee income and enhance profitability; and

 

   

Adhere to safe and sound credit standards.

Our long-term business strategy is geared toward building a preeminent community bank in the state of Florida. The business strategy includes having a significant market share (as defined by deposits), among community banks, in each of the markets in which we currently operate.

We focus on increasing the number of customer relationships and, ultimately, deposits, loans and profitability. Organic strategies include taking advantage of customer dislocation in the market place created by other banks’ operating limitations and customer dissatisfaction. We are also placing increased focus on our retail operations. We have retail strategies in place to drive more

 

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business through our branch infrastructure. More specifically, we have invested in new technology that will enable us to streamline our processing of consumer loans which should result in the offering of a more competitive product. We have also initiated new programs to increase low cost deposits. We believe these initiatives in the retail area will result in overall loan and deposit growth over the next few quarters.

QUARTERLY PERFORMANCE OVERVIEW AND HIGHLIGHTS

 

   

Our net interest income after provision for loan loss was up $3.5 million compared to the second quarter of 2011 and up $0.2 million compared to the three month period ended September 30, 2010. This increase is mostly the result of lower interest expense and lower loan loss provisions.

 

   

Our provision for loss continued the downward trend as the provision for the third quarter of 2011 was down $3.6 from the prior quarter ended June 30, 2011, down $5.6 million from the quarter ended March 31, 2011 and down $0.8 million compared to the three month period ended September 30, 2010. The provision was $2.2 million, $5.7 million, $7.8 million and $3.0 million for the quarters ended September 30, 2011, June 30, 2011, March 30, 2011 and September 30, 2010, respectively.

 

   

Our noninterest income for the third quarter of 2011 reflects an unfavorable change of $3.1 million over the same period in 2010, primarily as a result of a $3.2 million net gain on the sale of securities available for sale recorded in the third quarter of 2010 not repeated in 2011.

 

   

Our noninterest expenses at September 30, 2011 were up $0.3 million compared to the same period in 2010, primarily due to a $1.6 million increase in the write-down of foreclosed real estate. However, as a partial offset to this increase, we had decreases in salaries and employee benefits expenses of $0.7 million, decreases in occupancy of $0.3 million and decreases in professional fees of $0.2 million.

 

   

Our recorded investment in non-performing assets at September 30, 2011(comprised of nonaccrual loans and foreclosed real estate), reflects a continued downward trend as total non-performing assets were down 8.3% compared to the June 30, 2011 balance, down 17.0% compared to the March 31, 2011 balance and down 15.1% compared to December 31, 2010 balance.

 

   

Total past due loans continued the positive downward trend as total past due loans as a percentage of total loans were 9.6% at September 30, 2011, 10.9% at June 30, 2011, 11.7% at March 31, 2011 and 12.3% at December 31, 2010.

 

   

As of September 30, 2011, total assets were $744.3 million compared to $838.4 million at December 31, 2010, a decrease of $94.1 million or 11.2%. The notable decreases in assets reflect decreases of $81.8 million in net loans and $21.1 million in investment securities offset in part by a $14.7 million increase in cash and cash equivalents. The reduction in the net loan balance reflects a combination of decreased loan demand, loan payoffs and loan charge offs and the decrease in investment securities is attributable to sales and repayments.

 

   

As of September 30, 2011, the allowance for loan losses was 4.4% of total loans and represented 46.1% of non-performing loans compared to 3.5% of total loans and representing 36.5% of non-performing loans at December 31, 2010.

 

   

We had an $11.5 million increase in non-interest bearing demand deposits during the nine month period ending September 30, 2011. However, our total deposits, as of September 30, 2011, were down $88.1 million or 12.4% compared to December 31, 2010. This decrease included decreases in money market deposits of $53.5 million, time deposits of $33.7 million and interest-bearing demand and savings deposits of $12.5 million.

 

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RESULTS OF OPERATIONS

Summary of Results of Operation for the Three Months Ended September 30, 2011 and 2010

Following is a condensed operations summary for the three months ended September 30, 2011 and 2010 (in thousands, except per share amounts):

 

     For the Three Months Ended              
     September 30, 2011     September 30, 2010     2011 vs.
2010
    Change %  

Interest Income

   $ 8,066      $ 9,599      $ (1,533     -16.0

Interest Expense

     2,907        3,848        (941     -24.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

     5,159        5,751        (592     -10.3

Provision for Loan Losses

     2,157        2,961        (804     -27.2

Noninterest income

     679        3,809        (3,130     -82.2

Noninterest expenses

     7,202        6,920        282        4.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax benefit

     (3,521     (321     (3,200     996.9

Income tax benefit

     —          (114     114        -100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Loss

     (3,521     (207     (3,314     1601.0

Preferred stock dividend and discount accretion

     (367     (330     (37     11.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss available to common stockholders

   $ (3,888   $ (537   $ (3,351     624.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss per common share - basic and diluted

   $ (0.25   $ (0.04   $ (0.21     525.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Selected Operating Ratios:

                        

Return on Average Assets

     -2.04     -0.25    

Return on Average Equity

     -31.13     -2.03    

Equity to Assets Ratio

     6.44     11.78    

Net Loss

The factors affecting the $3.3 million increase in net loss are displayed in the table above. A more detailed discussion of each major component of our financial performance is provided below.

Net Interest Income

Net interest income represents our single largest source of earnings and is the amount by which interest income on interest-earning assets exceeds interest expense incurred on interest-bearing liabilities. Net interest income is the largest component of our income, and is affected by the interest rate environment and the volume and the composition of interest-earning assets and interest-bearing liabilities. Our interest-earning assets include loans, federal funds sold, interest-bearing deposits at the FRB and in other banks and investment securities. Our interest-bearing liabilities include customer deposit and advances from the FHLB.

The decrease in our net interest income was mostly due to a decrease in loan balances, primarily resulting from accelerated loan payoffs and a decrease in loan demand. Partially offsetting the decrease in interest income was a decrease in our interest expense, which was mostly the result of decreases in our deposit balances and related rates, for time deposits and money market instruments, which were repriced at much lower rates. Time deposits carry a fixed rate of interest to maturity and most of our borrowings provide for a fixed rate of interest until maturity or conversion date. The average balance and interest rate paid on time deposits for the three month period ended September 30, 2011, was $337.3 million and 1.99% respectively, compared to an average balance and interest paid of $338.7 million and 2.73%, respectively, for the same period in 2010.

The decrease in interest on loans was primarily the result a reduction in our average loan balances and the effects of an $8.4 million increase in non-accruing loans for the three month period ending September 30, 2011 compared to the same period in 2010. Average loan balances were $528.4 million at September 30, 2011, a decrease of $101.4 million from the average loan balance at September 30, 2010.

 

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The following table reflects the components of net interest income, setting forth for the three month periods presented, (1) average assets, liabilities and shareholders’ equity, (2) interest income earned on interest-earning assets and interest paid on interest-bearing liabilities, (3) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (4) our net interest spread (i.e., the average yield on interest-earning assets less the average rate on interest-bearing liabilities) and (5) our net interest margin (i.e., the net yield on interest earning assets):

($ in thousands)

 

     September 30, 2011     September 30, 2010  
     Balance     Interest      Rate     Balance     Interest      Rate  

ASSETS

              

Loans

   $ 528,432      $ 7,055         5.30   $ 629,863      $ 8,453         5.32

Securities available for sale

     159,035        950         2.37     140,064        1,075         3.04

Other interest-earning assets

     55,695        61         0.43     48,108        71         0.59
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Earning Assets

     743,162        8,066         4.31     818,035        9,599         4.66
    

 

 

        

 

 

    

Cash & Due from Banks

     3,702             2,632        

Allowance For Loan Losses

     (20,050          (25,561     

Other Assets

     37,322             67,756        
  

 

 

        

 

 

      

Total Assets

   $ 764,136           $ 862,862        
  

 

 

        

 

 

      

LIABILITIES

              

Demand

   $ 60,353      $ 87         0.57   $ 69,450      $ 137         0.78

Savings

     9,491        9         0.38     11,068        15         0.54

Money Market

     158,153        399         1.00     188,668        598         1.26

Time

     337,346        1,688         1.99     338,748        2,327         2.73
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Interest Bearing Deposits

     565,343        2,183         1.53     607,934        3,077         2.01

FHLB advances

     67,700        724         4.24     77,700        771         3.94
  

 

 

   

 

 

      

 

 

   

 

 

    

Total Interest Bearing Liabilities

     633,043        2,907         1.82     685,634        3,848         2.23

Noninterest bearing Deposits

     77,150             64,724        

Other Liabilities

     3,841             7,365        
  

 

 

        

 

 

      

Total Liabilities

     714,034             757,723        

Total Shareholder’s Equity

     50,102             105,139        
  

 

 

        

 

 

      

Total Liabilities & Shareholder’s Equity

   $ 764,136           $ 862,862        
  

 

 

        

 

 

      
       

 

 

        

 

 

 

Interest Rate Spread

          2.49          2.43
       

 

 

        

 

 

 
    

 

 

        

 

 

    

Net Interest Income

     $ 5,159           $ 5,751      
    

 

 

        

 

 

    
       

 

 

        

 

 

 

Net Interest Margin

          2.75          2.79
       

 

 

        

 

 

 

Going forward, we expect short-term market interest rates to remain low for a period of time and deposit costs to continue to decline, however, this decline may not fully offset the decline on loan and investment yields. If there is strong demand in the financial markets and banking system for liquidity, then this may lead to elevated pricing competition for deposits, thereby, limiting any net interest margin expansion.

 

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Provision for Loan Losses

The provision for loan losses for the quarter ended September 30, 2011 was $2.2 million compared to $3.0 million for the quarter ended September 30, 2010. Some of the provision decrease reflects the fact that the higher provision recorded during the 2010 period, was in response to effects of the significant contraction of commercial and residential real estate activity and the ripple effect on our local economies resulting in an increase in nonperforming loans, the significant reduction in the fair values of loan collateral and an increase in our net loan charge-off experience. As a result of the higher reserves being recorded in the 2010 period and a moderation in the decline in the fair values of collateral, the amount of provision required for the current period has decreased. Charge-offs, net of recoveries, in the third quarter of 2011 totaled $1.2 million compared to $7.2 million in the same period in 2010.

Management performs regular internal loan reviews and regularly engages the services of third party loan review firms to obtain an independent review of our loans. In addition, various regulatory agencies, as an integral part of their examination process, review our allowance for loan losses. Management considers the results of each of these reviews in establishing its estimated allowance for loan losses. We will continue to monitor the credit quality of the loan portfolio in order for management to record the provision which represents its best estimate as of the financial statement date.

While there is some recently published information on the state and local economies indicating that the trend of local economic contractions may be reaching a plateau, we cannot be sure how long the economic contraction will continue. Consequently, we may experience higher levels of delinquent and nonperforming loans, which may require higher provisions for loan losses, higher charge-offs and higher collection related expenses in future periods.

Noninterest Income

Our noninterest income for the third quarter of 2011 reflects an unfavorable change of $3.1 million over the same period in 2010, primarily as a result of a $3.2 million net gain on the sale of securities available for sale recorded in the third quarter of 2010 not repeated in 2011.

Noninterest Expense

The table below reflects the major components of noninterest expense (in thousands):

 

     Three Months Ended September 30,               
     2011      2010      change     %  

Salaries and employee benefits

   $ 2,635       $ 3,324         (689     -20.7

Occupancy

     1,160         1,428         (268     -18.8

Data processing

     347         291         56        19.2

Stationary, printing and supplies

     59         67         (8     -11.9

Business development

     44         114         (70     -61.4

Insurance, including deposit insurance premium

     532         545         (13     -2.4

Professional fees

     224         426         (202     -47.4

Marketing

     9         14         (5     -35.7

Loss on sale of foreclosed real estate

     50         127         (77     -60.6

Write-down of foreclosed real estate

     1,764         150         1,614        1076.0

Foreclosed real estate expense

     156         142         14        9.9

Other

     222         292         (70     -24.0
  

 

 

    

 

 

    

 

 

   

 

 

 

Total noninterest expenses

   $ 7,202       $ 6,920         282        4.1
  

 

 

    

 

 

    

 

 

   

 

 

 

The factors contributing to the $0.3 million, or 4.1%, increase in noninterest expense for the three months ended September 30, 2011, compared to the same period in 2010 are noted in the table above. Explanations for significant changes are as follows: (a) a $1.6 million increase in the write-down of foreclosed real estate results from shortfalls identified by current updated appraisals. Partially offsetting this increase in noninterest expenses were the following decreases: (b) a $0.7 million decrease in salary and employee benefits mostly resulting from a third quarter of 2010 reduction in force which resulted in the elimination of 19 employee positions and employee attrition. The purpose of the reduction in force was to more closely align our expense structure with our related revenues. Under our current operating structure, this specific action could result in a $2.0 million reduction in salary and benefit expenses on an annualized basis; (c) There were further reductions in personnel through attrition and as a result of two branch closures in the fourth quarter of 2010. Our total full-time employees were 130 at September 30, 2011 compared to 150 at September 30, 2010; (d) a $0.3 million decrease in occupancy expenses primarily resulting from the closure of two branch locations during 2010 and the sublease of excess office space in our downtown Jacksonville and Tampa, Florida locations and (e) a $0.2 million decrease in professional fees are the result of expenses related to merger activities in the third quarter of 2010 not being incurred in the third quarter of 2011.

 

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Income Tax Benefit

During the third quarter of 2010, we recorded an income tax benefit of $0.1 million, however, we did not record an income tax benefit during the third quarter of 2011 because at the end of 2010, we determined that significant negative evidence existed that led us to conclude that it was more likely than not that we would not realize any portion of the deferred tax asset that was previously recorded, and therefore placed a full valuation allowance on the deferred taxes. As of September 30, 2011, we have not changed our position. As a result of this position, we will not recognize any income tax benefit that result from our net operating losses during the quarter.

Summary of Results of Operation for the Nine months Ended September 30, 2011 and 2010

Following is a condensed earnings summary for the nine months ended September 30, 2011 and 2010 (in thousands, except per share amounts):

 

     For the Nine Months Ended              
     September 30, 2011     September 30, 2010     2011 vs.
2010
    Change %  

Interest Income

   $ 25,175      $ 29,025      $ (3,850     -13.3

Interest Expense

     9,395        12,097        (2,702     -22.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

     15,780        16,928        (1,148     -6.8

Provision for Loan Losses

     15,651        14,902        749        5.0

Noninterest income

     1,804        4,357        (2,553     -58.6

Noninterest expenses

     19,034        21,651        (2,617     -12.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax expense (benefit)

     (17,101     (15,268     (1,833     12.0

Income tax expense (benefit)

     25        (5,715     5,740        -100.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Loss

     (17,126     (9,553     (7,573     79.3

Preferred stock dividend and discount accretion

     (2,279     (990     (1,289     130.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss available to common stockholders

   $ (19,405   $ (10,543   $ (8,862     84.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss per common share - basic and diluted

   $ (1.32   $ (0.74   $ (0.58     79.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Selected Operating Ratios:

                        

Return on Average Assets

     -4.90     -1.66    

Return on Average Equity

     -78.66     -12.67    

Equity to Assets Ratio

     6.44     11.78    

Net Loss

The factors affecting the $7.6 million increase in net loss are displayed in the table above. A more detailed discussion of each major component of our financial performance is provided below.

Net Interest Income

The decrease in our net interest income was mostly due to a decrease in loan balances, primarily resulting from accelerated loan payoffs and a decrease in loan demand. Average loan balances were $557.7 million at September 30, 2011, a decrease of $80.2 million from the average loan balance at September 30, 2010. Partially offsetting this decrease was a decrease in our interest expense, which was mostly the result of decreases in our deposit rates, primarily related to time deposits which were repriced at a much lower rate, and to a lesser extent, our money market deposits. Time deposits carry a fixed rate of interest to maturity and most of our borrowings provide for a fixed rate of interest until maturity or conversion date. The average balance and interest rate paid on time deposits for the nine month period ended September 30, 2011, was $349.2 million and 2.15% respectively, compared to an average balance and interest paid of $348.5 million and 2.88%, respectively, for the same period in 2010. In addition, we reduced our interest expense on borrowings through the early retirement and restructuring of certain higher cost advances from the FHLB.

 

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The following table reflects the components of net interest income, setting forth for the nine month periods presented, (1) average assets, liabilities and shareholders’ equity, (2) interest income earned on interest-earning assets and interest paid on interest-bearing liabilities, (3) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (4) our net interest spread (i.e., the average yield on interest-earning assets less the average rate on interest-bearing liabilities) and (5) our net interest margin (i.e., the net yield on interest earning assets):

($ in thousands)

 

                           
     September 30, 2011     September 30, 2010  
     Balance     Interest      Rate     Balance     Interest      Rate  

ASSETS

              

Loans

   $ 557,650      $ 21,827         5.23   $ 637,833      $ 25,681         5.38

Securities available for sale

     168,152        3,154         2.51     122,335        3,148         3.44

Other interest-earning assets

     51,247        194         0.51     43,927        196         0.60
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Earning Assets

     777,049        25,175         4.33     804,095        29,025         4.83
    

 

 

        

 

 

    

Cash & Due from Banks

     3,771             2,647        

Allowance For Loan Losses

     (20,335          (23,447     

Other Assets

     38,759             66,777        
  

 

 

        

 

 

      

Total Assets

   $ 799,244           $ 850,072        
  

 

 

        

 

 

      

LIABILITIES

              

Demand

   $ 62,424      $ 276         0.59   $ 67,121      $ 458         0.91

Savings

     9,589        29         0.40     11,900        56         0.63

Money Market

     172,220        1,317         1.02     165,717        1,688         1.36

Time

     349,237        5,604         2.15     348,480        7,501         2.88
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Interest Bearing Deposits

     593,470        7,226         1.63     593,218        9,703         2.19

FHLB advances

     72,520        2,169         4.00     78,982        2,394         4.05

Other borrowings

     —          —           0.00     18        —           0.00
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Interest Bearing Liabilities

     665,990        9,395         1.89     672,218        12,097         2.41

Noninterest bearing Deposits

     79,521             62,133        

Other Liabilities

     3,988             5,743        
  

 

 

        

 

 

      

Total Liabilities

     749,499             740,094        

Total Shareholder’s Equity

     49,745             109,978        
  

 

 

        

 

 

      

Total Liabilities & Shareholder’s Equity

   $ 799,244           $ 850,072        
  

 

 

        

 

 

      
       

 

 

        

 

 

 

Interest Rate Spread

          2.44          2.42
       

 

 

        

 

 

 
    

 

 

        

 

 

    

Net Interest Income

     $ 15,780           $ 16,928      
    

 

 

        

 

 

    
       

 

 

        

 

 

 

Net Interest Margin

          2.72          2.81
       

 

 

        

 

 

 

Provision for Loan Losses

The provision for loan losses for the nine months ended September 30, 2011, was $15.7 million compared to $14.9 million for the nine month period ended September 30, 2010. For each of the periods, our provision for loan losses exceeded our net charge offs during that period. The provision provides for probable incurred credit losses inherent in the loan portfolio. The amounts recorded for

 

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the provision reflect the fact that loans secured by commercial and residential real estate are continuing to experience stresses resulting from the current economic conditions. We have continued to closely monitor the impact of economic circumstances on our lending clients, and are working with these clients to minimize losses. See above for a discussion of allowance for loan losses coverage and a discussion of economic factors’ effect on our loan loss reserves.

Noninterest Income

The decrease in noninterest income of $2.6 million for the nine months ended September 30, 2011, compared to the nine months ended September 30, 2010 primarily results from a $3.2 million net gain on the sale of securities available for sale recorded in the third quarter of 2010 not repeated in 2011, offset in part, by the recognition of an other-than-temporary impairment (“OTTI”) during the 2010, period which did not occur during the nine months ended September 30, 2011.

Noninterest Expense

The table below reflects the major components of noninterest expense (in thousands):

 

     Nine Months Ended September 30,               
     2011      2010      change     %  

Salaries and employee benefits

   $ 8,060       $ 10,819         (2,759     -25.5

Occupancy

     3,494         4,164         (670     -16.1

Data processing

     1,004         890         114        12.8

Stationary, printing and supplies

     201         226         (25     -11.1

Business development

     139         316         (177     -56.0

Insurance, including deposit insurance premium

     1,826         1,549         277        17.9

Professional fees

     845         1,339         (494     -36.9

Marketing

     40         51         (11     -21.6

Federal Home Loan Bank advance prepayment penalties

     2         41         (39     -95.1

Loss on sale of foreclosed real estate

     55         262         (207     -79.0

Write-down of foreclosed real estate

     2,178         792         1,386        175.0

Foreclosed real estate expense

     359         327         32        9.8

Other

     831         875         (44     -5.0
  

 

 

    

 

 

    

 

 

   

 

 

 

Total noninterest expenses

   $ 19,034       $ 21,651         (2,617     -12.1
  

 

 

    

 

 

    

 

 

   

 

 

 

The factors contributing to the $2.6 million, or 12.1%, decrease in noninterest expense for the nine months ended September 30, 2011, compared to the same period in 2010 are noted in the table above. Explanations for significant changes are as follows: (a) a $2.8 million decrease in salary and employee benefits resulting primarily from a third quarter of 2010 reduction in force, and employee attrition as our total full-time employees were 130 at September 30, 2011 compared to 150 at September 30, 2010; (b) a $0.7 million decrease in occupancy expenses primarily resulting from the closure of two branch locations and the sublease of excess office space in our downtown Jacksonville and Tampa, Florida locations, all in the second half of 2010; (c) a $0.5 million decrease in professional fees resulting from expenses related to merger activities in the second and third quarters of 2010 not being repeated in 2011; offset in part by, (d) a $1.4 million increase in the write-down of foreclosed real estate, which reflects the recent fair values of recent appraisals conducted in the third quarter and, (e) a $0.3 million increase in deposit insurance premiums.

FINANCIAL CONDITION

Total assets at September 30, 2011 were $744.3 million, a decrease of $94.1 million or 11.2%, from total assets at December 31, 2010. Total cash and cash equivalents at September 30, 2011 were $55.0 million, up $14.7 million, or 36.5%, from cash and cash equivalents at December 31, 2010. Investment securities available for sale decreased $21.1 million, or 11.9%, to $156.3 million at September 30, 2011 from $177.5 million at December 31, 2010. See our discussion on liquidity and capital resources below for an explanation of the changes in our cash and cash equivalents. Our net loans decreased $81.8 million, or 14.3%, to $490.2 million at September 30, 2011 from $572.0 million at December 31, 2010. The decrease in net loans was primarily due to principal repayments. Foreclosed real estate decreased $1.5 million or 21.3% at September 30, 2011, compared to December 31, 2010, primarily as a result of write-downs and sales of certain foreclosed properties.

Total liabilities at September 30, 2011 decreased $88.4 million to $696.4 million from $784.8 million at December 31, 2010, primarily due to a reduction in all interest bearing deposits.

 

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Total stockholders’ equity decreased $5.7 million to $47.9 million at September 30, 2011 from $53.6 million at December 31, 2010. The decrease reflects a net loss of $17.1 million, offset in part by $5.3 million from the sale of 5,257 shares of Series C preferred stock and a $6.1 million change in unrealized holding loss on available-for-sale securities.

Loans and Non-Performing Assets

Loan Portfolio.

Our loan portfolio consists principally of loans to individuals and small and medium-sized businesses within our primary market areas of greater Tampa Bay, Jacksonville and Tallahassee, Florida. The table below shows our loan portfolio composition for the periods presented:

($ in Thousands)

 

     As of  
     September 30,
2011
    December 31,
2010
 

Commercial

   $ 34,992      $ 47,475   

Commercial Real Estate (1)

     293,254        329,487   

Residential Real Estate

     176,514        203,488   

Consumer Loans

     8,050        12,879   
  

 

 

   

 

 

 
     512,810        593,329   

Less:

    

Net deferred fees

     (251     (454

Allowance for loan losses

     (22,333     (20,830
  

 

 

   

 

 

 

Loans, Net

   $ 490,226      $ 572,045   
  

 

 

   

 

 

 

 

(1) Includes $117.7 million and $127.2 million of owner-occupied nonresidential properties at September 30, 2011 and December 31, 2010, respectively.

The overall decrease in gross loans was primarily the result of loan payoffs by customers.

Allowance and Provision for Loan Losses.

The allowance for loan losses is a valuation allowance established and maintained at a level believed adequate by management to absorb probable incurred credit losses associated with loans in the loan portfolio. The allowance is recorded through a provision for loan losses charged to operations. Loan losses are charged against the allowance when in management’s judgment, the loan’s lack of collectability is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired. For such loans, an allowance is established when the discounted cash flows or collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers all other loans and is based on historical loss experience adjusted for qualitative factors.

For quantitative loss factors, management has determined the historical loss rate for each group of loans with similar risk characteristics and has then considered the current qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the group’s historical loss experience. The overall effect of these factors on each loan group has been reflected as an adjustment that, as appropriate, increases or decreases the historical loss rate applied to each loan group.

We segregate our portfolio of loans not deemed to be impaired by call report category for the purposes of calculating and applying historical loss factors, adjustment factors and total loss factors. Considerable judgment is necessary to establish adjustment factors.

 

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The adjustment factors described below are deemed to be applied to pass credits. Through our reserve methodology, these factors are scaled higher if applied to weak pass, special mention or substandard credits.

The following current environmental factors, among others, have been taken into consideration in determining the adequacy of the Allowance for Loan and Lease Losses (“ALLL”):

 

  a. Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;

 

  b. Changes in international, national, regional and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments;

 

  c. Changes in the nature and volume of the portfolio and in the terms of loans;

 

  d. Changes in the experience, ability, and depth of the lending management and other relevant staff;

 

  e. Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans;

 

  f. Changes in the quality of our loan review system;

 

  g. Changes in the value of underlying collateral for collateral-dependent loans;

 

  h. The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and

 

  i. The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio.

The specific component of the allowance relates to loans that are impaired. A loan is considered impaired when, based on current information and events, it is probable the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. It should be noted that substantially all of our impaired loans are collateral dependent and thus impairment is usually measured by the fair value of the collateral method.

As of September 30, 2011, we held an allowance for loan losses of $22.3 million or 4.36% of total loans compared to the allowance for loan losses of $20.8 million or 3.51% at December 31, 2010. Based on an analysis performed by management as of September 30, 2011, management considers the allowance for loan losses to be adequate to cover probable incurred credit losses in the portfolio as of that date. Although we believe we use the best information available to make determinations with respect to the allowance for loan losses, future adjustments to the allowance may be necessary if facts and circumstances differ from those previously assumed in the determination of the allowance. For example, a continued downturn in real estate values and economic conditions could have an adverse impact on our asset quality and may result in an increase in future loan charge-offs and loan loss provisions, and may also result in the decrease in the estimated value of real estate we acquired through foreclosure.

 

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As a result of these factors and analyses in conjunction with the sustained weakness in asset values, particularly real estate, we recorded a loan loss provision of $15.7 million for the nine months ended September 30, 2011, an increase of $0.7 million compared to the provision recorded for the nine months ended September 30, 2010. We establish specific reserves for impaired loans and general reserves for the remainder of the portfolio as follows (in thousands):

 

     September 30,
2011
    December 31,
2010
 

Specific Reserves :

    

Impaired loans with no specific reserves

   $ 29,139      $ 34,028   

Impaired loans with specific reserves

     37,406        26,055   
  

 

 

   

 

 

 

Total impaired loans

   $ 66,545      $ 60,083   

Reserve

   $ 12,369      $ 9,890   
  

 

 

   

 

 

 

Reserve % of impaired loans

     18.59     16.46

General Reserves:

    

Loans subject to general reserve

   $ 446,265      $ 533,246   

Reserve

   $ 9,964      $ 10,940   

Reserve % of loans

     2.23     2.05

Total impaired loans increased $6.5 million from December 31, 2010 to September 30, 2011 mostly as a result of additional loans meeting the criteria for impaired loans. For the nine months ended September 30, 2011, the loan portfolio subject to the general reserve decreased approximately $87.0 million as a result of impairment and/or payoffs. Management evaluates the reserves on a regular basis to determine its adequacy.

 

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During the three and nine months ended September 30, 2011 and 2010, the activity in our loan loss allowance was as follows:

(in Thousands)

 

0000,000 0000,000 0000,000 0000,000
     Three Months Ended September 30,     Nine Months Ended September 30,  
     2011     2010     2011     2010  

Balance At Beginning Of Period

   $ 21,399      $ 25,545      $ 20,830      $ 21,342   

Charge-Offs

     (2,719     (7,164     (16,611     (15,354

Recoveries

     1,496        11        2,463        463   

Provision For Loan Losses

     2,157        2,961        15,651        14,902   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance At End Of Period

   $ 22,333      $ 21,353      $ 22,333      $ 21,353   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

0000,000 0000,000 0000,000 0000,000
     Three Months Ended September 30,     Nine Months Ended September 30,  
     2011     2010     2011     2010  

Charge-Offs:

        

Commercial

   $ (96   $ (700   $ (1,881   $ (821

Commercial Real Estate

     (1,612     (4,116     (7,910     (9,075

Residential Real Estate

     (935     (1,791     (5,457     (4,495

Consumer and Other Loans

     (76     (557     (1,363     (963
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (2,719   $ (7,164   $ (16,611   $ (15,354
  

 

 

   

 

 

   

 

 

   

 

 

 

 

0000,000 0000,000 0000,000 0000,000
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2011     2010     2011      2010  

Recoveries:

        

Commercial

  $ 182      $ 2      $ 294       $ 366   

Commercial Real Estate

    145        1        542         5   

Residential Real Estate

    151        8        601         92   

Consumer and Other Loans

    1,018        —          1,026         —     
 

 

 

   

 

 

   

 

 

    

 

 

 
  $ 1,496      $ 11      $ 2,463       $ 463   
 

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents

The following table reflects the allowance allocation per loan category and percent of dollar value of loans in each category to total dollar value of loans for the periods indicated (in thousands):

 

     September 30, 2011     December 31, 2010  
     Amount      %     Amount      %  

Commercial

   $ 1,616         6.82   $ 868         8.00

Commercial Real Estate

     13,022         57.19     15,518         55.53

Residential Real Estate

     7,500         34.42     4,232         34.30

Consumer and Other Loans

     195         1.57     212         2.17
  

 

 

    

 

 

   

 

 

    

 

 

 

Total allowance

   $ 22,333         100.00   $ 20,830         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Impaired Loans

The following is an analysis of impaired loans as of September 30, 2011:

(in Thousands)

 

     At September 30, 2011      Three Months Ended
September 30, 2011
    Nine Months Ended
September 30, 2011
 
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
    Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

                   

Commercial

   $ 1,284       $ 8,152       $ —         $ 1,262       $ 80      $ 1,250       $ 220   

Commercial Real Estate

     18,444         28,731         —           17,415         591        17,956         965   

Residential Real Estate

     9,352         15,580         —           9,692         159        9,105         451   

Consumer Loans

     59         101         —           1,114         (126     58         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 29,139       $ 52,564       $ —         $ 29,483       $ 704      $ 28,369       $ 1,637   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

With an allowance recorded:

                   

Commercial

   $ 1,226       $ 1,282       $ 993       $ 869       $ —        $ 1,193       $ 18   

Commercial Real Estate

     24,493         26,216         7,519         23,763         53        23,845         367   

Residential Real Estate

     11,610         12,288         3,802         8,662         294        11,303         416   

Consumer Loans

     77         82         55         88         —          75         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 37,406       $ 39,868       $ 12,369       $ 33,382       $ 347      $ 36,416       $ 801   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 66,545       $ 92,432       $ 12,369       $ 62,865       $ 1,051      $ 64,785       $ 2,438   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Non-Performing Assets

Non-performing assets include non-accrual loans and foreclosed real estate. Non-accrual loans represent loans on which interest accruals have been discontinued. Foreclosed real estate is comprised principally of real estate properties obtained in partial or total loan satisfactions and is included in other assets at its estimated fair value less selling costs.

 

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Table of Contents

Non Performing Loans and Assets ($ in thousands):

 

     As of        
     September 30, 2011     December 31, 2010     Percent Change  

Commercial

   $ 2,510      $ 1,573        59.5

Commercial Real Estate

     32,605        33,907        -3.8

Residential Real Estate

     13,197        18,506        -28.7

Consumer Loans

     136        3,071        -95.6
  

 

 

   

 

 

   

Total

     48,448        57,057        -15.1
  

 

 

   

 

 

   

 

 

 

Foreclosed Real Estate

     5,521        7,018        -21.3
  

 

 

   

 

 

   

 

 

 

Total Non-Performing Assets

   $ 53,969      $ 64,075        -15.8
  

 

 

   

 

 

   

 

 

 

Non-Performing Loans as a Percentage of Total Loans, net of Deferred Fees

     9.45     9.62  
  

 

 

   

 

 

   

Non-Performing Assets as a Percentage of Total Assets

     7.25     6.81  
  

 

 

   

 

 

   

Generally, a loan is placed on nonaccrual status when principal or interest becomes 90 days or more past due unless the loan is well secured and in the process of collection. Other factors, such as insufficient collateral or insufficient projected cash flows, may also cause a loan to be placed on nonaccrual status. In addition, all previously accrued and uncollected interest and late charges are reversed through a charge to interest income. While loans are on nonaccrual status, interest income is normally recognized only to the extent cash is received until a return to accrual status is warranted. Non-accrual loans may not be restored to accrual status until all delinquent principal and interest have been paid.

Non-performing loans, or non-accrual loans, are closely monitored on an ongoing basis as part of our loan review and work-out process. In addition, these loans are evaluated by comparing the recorded loan amount to the fair value of any underlying collateral or the present value of projected future cash flows. The results of this evaluation are used as part of the determination of the appropriate allowance and provision for loan losses and charge-offs, when appropriate.

As of September 30, 2011 and December 31, 2010, we had $8.5 million and $1.5 million, respectively, in restructured loans that are performing and in compliance with their modified terms. The criteria for a restructured loan to be considered performing is as follows: (1) none of its principal and interest is due and unpaid, and we expect repayment of the remaining contractual principal and interest, or (2) when the loan otherwise becomes well secured and in the process of collection. Since these loans have met these criteria, management does not consider these loans to be non-performing and has not included them in the table above.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Liquidity is the ability to provide for the cash flow requirements of deposit withdrawals, funding requirements of our borrowers, debt maturities, operating cash flows and off balance sheet obligations such as customer lines of credit. Our objective in managing our liquidity is to maintain our ability to meet all our cash flow requirements without an adverse impact on our current or future earnings. Our liquidity strategy is guided by policies that are formulated and monitored by our Asset Liability Committee (ALCO) and senior management, and which take into account the marketability of assets, the sources and stability of funding and the level of unfunded commitments. We regularly evaluate all of our various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness.

Our primary sources of liquidity are deposits provided by commercial and retail customers. The Bank attracts these deposits by offering an array of products designed to match customer needs at rates acceptable to the Bank. Deposits can be very price sensitive; we therefore monitor the Bank’s offering rates relative to our competition and adjust our offering rates accordingly to generate larger or smaller flows of deposit funds, depending on our cash-flow requirements and other factors we may consider.

In addition to local market deposits, the Bank has access to national brokered certificates of deposit markets as well as deposit subscription services. The Bank uses these alternative sources of deposits to supplement deposits particularly when these sources of deposits are less costly than the local market or in order to obtain specific funding amounts and terms that might not otherwise be available locally. These sources of deposits tend to be more price and credit sensitive and therefore the Bank has established policies to limit the amount of these types of funding sources.

 

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As a member of the FHLB, the Bank has access to a secured borrowing facility. Loans meeting certain criteria may be pledged as collateral and are subject to advance rates established by the FHLB. Alternatively, FHLB borrowings may be secured by marketable securities, which are generally afforded higher advance rates relative to the value of the pledged collateral. FHLB advances are a useful source of funding as they offer a broad variety of terms allowing the Bank to position its funding with greater flexibility. FHLB funding is also credit sensitive and therefore the Bank has established policies to limit the amount of its utilization of this funding source.

Other sources of liquidity include balances of cash and due from banks, short-term investments such as federal funds sold, and our investment portfolio, which can either be liquidated or used as collateral for borrowings. Additionally, our correspondent bank provides unsecured federal funds lines of credit, which may be used to access short term funds. All of these funding sources are part of the Bank’s contingency plans in the event of extraordinary fluctuations in cash resources.

The Bank has unsecured overnight federal funds purchased accommodation up to a maximum of $1.0 million from our correspondent banks. Further, the Bank has invested in FHLB stock for the purpose of establishing credit lines with the FHLB. The credit availability to the Bank on these credit lines is based on the amount of collateral pledged and limited by a percentage of the Bank’s total assets as reported on its most recent quarterly financial information submitted to the regulators. As of September 30, 2011 we had $67.7 million of FHLB advances outstanding and $32.6 million of letters of credit used in lieu of pledging securities to the State of Florida. Our unused borrowing capacity as of September 30, 2011, was approximately $7.6 million.

As of September 30, 2011, we had unfunded loan commitments of $1.6 million and unused lines and letters of credit totaling approximately $55.8 million. We believe the likelihood of these commitments either needing to be totally funded or funded at the same time is low. However, should significant funding requirements occur, the Bank has available borrowing capacity from various sources as discussed above.

As of September 30, 2011, our gross loan to deposit ratio was 82.2% compared to 83.3% at December 31, 2010. Management monitors and assesses the adequacy of our liquidity position on a daily and monthly basis to ensure that sufficient sources of liquidity are maintained and available. We believe that based on current forecasts, operating cash flows and available sources of liquidity will be sufficient to meet our operating needs, including planned capital expenditures for the next 12 to 18 months.

Major sources of increases and decreases in cash and cash equivalents were as follows for the nine months ending September 30, 2011 and 2010 (in thousands):

 

     September,
2011
    September 30,
2010
 

Provided by operating activities

   $ 4,459      $ 907   

Provided by (used in) investing activities

     93,131        (33,821

(Used in) provided by financing activities

     (82,876     47,452   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

   $ 14,714      $ 14,538   
  

 

 

   

 

 

 

Operating Activities

Net cash provided by operating activities of continuing operations for the nine months ended September 30, 2011 increased $3.6 million compared to the same period in 2010. The increase is mostly attributable to net period to period changes in key operating activities as follows: an increase of $3.1 million from net loss, adjusted for non-cash items, a $0.8 million increase in accrued interest receivable, a $0.3 million increase in prepaid expenses and other assets and a $0.2 million increase in official checks, offset in part by a $0.8 million increase in accrued expenses and other liabilities

Investment Activities

For the nine months ending September 30, 2011, cash of $93.1 million was provided by investing activities compared to net cash used by investing activities of $33.8 million during the 2010 period. The $126.9 million change reflects the following: $203.1 million related to the purchase of securities available for sale during the first nine months of 2010 not repeated in 2011, a decrease in loans of $64.7 million for the first nine months of 2011 versus a decrease of $8.1 million for the 2010 period, $0.9 million related to the change in cash generated from the redemption of Federal Reserve Bank stock and $0.8 million related to the change in net acquisition of premises and equipment, offset in part by a $127.4 million change in proceeds from repayments of securities available for sale , a $6.9 million change in the proceeds from the sale of foreclosed real estate and $0.1 million related to the change in cash generated from the redemption of Federal Home Loan Bank stock.

 

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Investment activities serve to enhance our liquidity position and interest rate sensitivity while also providing a yield on interest earning assets. All of our securities are categorized as securities available for sale and are recorded at fair value. Securities, like loans, are subject to similar interest rate and credit risk. In addition, by their nature, securities classified as available for sale are also subject to market value risks that could negatively affect the level of liquidity available to us, as well as stockholders’ equity.

The following table sets forth the carrying amount of our investment portfolio, as of the periods indicated:

($ in Thousands)

 

     Balance as of  
     September 30,
2011
     December 31,
2010
 

Fair value of investment in:

     

Mortgage backed securities

   $ 155,827       $ 176,959   

Mutual Funds

     522         492   
  

 

 

    

 

 

 

Total

   $ 156,349       $ 177,451   
  

 

 

    

 

 

 

Federal Reserve Bank stock

   $ 1,428       $ 2,781   
  

 

 

    

 

 

 

Federal Home Loan Bank stock

   $ 4,775       $ 5,032   
  

 

 

    

 

 

 

Financing Activities

For the nine months ended September 30, 2011, we had net cash used in financing activities of $82.9 million compared to net cash provided by financing activities of $47.5 million during the 2010 period. The primary drivers for the $130.3 million change were: $140.4 million related to a change in deposits as deposits decreased by $88.1 million during the nine month period ended September 30, 2011 compared to an increase of $52.3 million during the 2010 period. The Bank’s primary source of funds is deposits. Deposits are provided by businesses, municipalities, and individuals located within the markets served by the Bank. Partially offsetting the deposit decrease was the receipt of $5.3 million from a capital raise and a $4.0 million decrease in FHLB advances that occurred in the 2010 period but did not occur in the current year.

See table in above subsection titled “Net Interest Income” on page 30 for a distribution by type of our deposit accounts.

Capital Resources

The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, changing competitive conditions and economic forces. We seek to maintain a strong capital base to support our business activities, to provide stability to current operations and to promote public confidence.

As of September 30, 2011 and December 31, 2010, we exceeded the levels of capital required in order to be considered “well capitalized” by the regulatory authorities. The basic measures of capitalization applied by the regulatory authorities are provided below as of September 30, 2011 and December 31, 2010 for the Company and the Bank:

 

     As of     As of     Minimum to be  
     September 30, 2011     December 31, 2010     Well Capitalized  

Total Risk Based Capital Ratio - Consolidated

     10.38     11.06     N/A   

Total Risk Based Capital Ratio - Bank

     10.33     10.98     10.00

Tier One Risk Based Capital Ratio - Consolidated

     8.04     9.78     N/A   

Tier One Risk Based Capital Ratio - Bank

     9.04     9.70     6.00

Tier One Leverage Ratio - Consolidated

     5.32     6.46     N/A   

Tier One Leverage Ratio - Bank

     5.97     6.48     5.00

Prior to the payment of dividends on our preferred stock issued under the U.S. Treasury Department’s Capital Purchase Program (CPP Dividends), we must request and be granted approval by the Federal Reserve Bank of Atlanta (the “FRB”). We have not paid dividends on our preferred stock for the last four quarters as a result of our agreement with the FRB that we will not pay any cash dividends without prior approval from the FRB. At September 30, 2011, we had $1.3 million in unpaid dividends owing on our preferred stock. To date, we have deferred four quarterly dividend payments. If we miss six quarterly dividend payments, whether or not consecutive, the U.S. Treasury will have the right to appoint two directors and/or observers to our Board of Directors until all accrued and unpaid dividends have been paid.

 

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Sale of Preferred Stock

We continue to pursue efforts to increase our capital, and as part of these efforts, on June 30, 2011 we closed a private placement offering (the “offering”) resulting in the issuance of 5,107 shares of our Non-Cumulative Perpetual Series C Preferred Stock (“Series C Preferred Stock”) to accredited investors for an aggregate purchase price of $5.1 million in cash consideration, or $1,000 per share. Also, during the three months ended September 30, 2011, we sold an additional 150 shares of our Series C preferred Stock to accredited investors for an aggregate purchase price of $150,000 in cash considerations.

Please see Note 7 to our September 30, 2011 Condensed Consolidated Financial Statements and PART II, Item 3 – Unregistered Sales of Equity Securities and Use of Proceeds, below, for a detailed discussion of our sale of preferred stock.

In addition, we are in the process of pursuing a larger capital raise, and in this regard, we have retained the services of an investment advisor to assist us in these efforts.

Inflation.

The impact of inflation on the banking industry differs significantly from that of other industries in which a large portion of total resources are invested in fixed assets such as property, plant and equipment.

Assets and liabilities of financial institutions are virtually all monetary in nature, and therefore are primarily impacted by interest rates rather than changing prices. While the general level of inflation underlies most interest rates, interest rates react more to changes in the expected rate of inflation and to changes in monetary and fiscal policy. Net interest income and the interest rate spread are good measures of our ability to react to changing interest rates and are discussed in further detail above.

Off-Balance Sheet Arrangements.

We do not currently have any off-balance sheet arrangements, other than approved and unfunded loans and letters of credit to our customers in the ordinary course of business. Please see Note 4 to our September 30, 2011 Condensed Consolidated Financial Statements for further discussion.

Critical Accounting Estimates.

Allowance for Loan Losses.

See above for a discussion of this item.

Income Taxes.

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred income taxes result from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.

Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. The realization of deferred tax assets associated with the net operating loss carry forward, which expires in the years 2027, 2028, and 2029, as well as other deductible temporary differences is dependent upon generating sufficient future taxable income. In 2010, we determined that significant negative evidence existed that led us to conclude that it was more likely than not that we would not realize any portion of the deferred tax asset, and therefore placed a full valuation allowance on the deferred taxes. As of September 30, 2011, we have not changed our position and have a net deferred asset of zero. Please see “Critical Accounting Policies” of our Annual Report on Form 10-K for the year ended December 31, 2010, for a more detailed discussion of this item.

Other Than Temporary Impairment

Impairment of investment securities results in a write-down that must be reflected in net income when a market decline below cost is other-than-temporary. We regularly review each investment security for impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer(s) and our ability and intention with regard to holding the security to maturity. Please refer to Note 2 of our Condensed Consolidated Financial Statements for a more detailed discussion.

 

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Recent Accounting Pronouncements.

The Financial Accounting Standards Board, the SEC, and other regulatory bodies have enacted new accounting pronouncements and standards that either have impacted our results in prior years presented, or may likely impact our results in 2011. Please refer to Note 11 in the Notes to our Condensed Consolidated Financial Statements for the period ended September 30, 2011.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not presented as the Company qualifies as a smaller reporting company as defined by Regulation S-K, Item 10 (f) of the Securities Act.

 

Item 4. Controls and Procedures.

Under the supervision and with the participation of our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer), we have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, and, based on this evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that these disclosure controls and procedures are effective.

There have been no changes in our internal controls over financial reporting during the quarter ended September 30, 2011, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II OTHER INFORMATION

 

Item 1. Legal Proceedings.

We are periodically a party to or otherwise involved in legal proceedings arising in the normal course of business, such as claims to enforce liens, claims involving the making and servicing of real property loans, and other issues incident to our business. Management does not believe that there is any pending or threatened proceeding against us that, if determined adversely, would have a material adverse effect on our financial position, liquidity, or results of operations.

 

Item 1a. Risk Factors

In our Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, we included an additional risk factor discussing limitations on our ability to accept or roll over brokered deposits (including CDARs) resulting from the Bank’s regulatory capital position declining from well-capitalized to adequately capitalized during the first quarter of 2011. However, as of September 30, 2011, the Bank exceeded the levels of capital required in order to be considered “well capitalized” by regulatory authorities. Consequently, the additional risk factor included in the Form 10-Q for the quarter ended March 31, 2011 is no longer effective. Other than the additional risk factor discussed above, there have not been any material changes in the risk factor disclosure from that contained in the Company’s 2010 Annual Report on Form 10-K for the year ended December 31, 2010.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On June 30, 2011 we closed a private placement offering resulting in the issuance of 5,107 shares of our Non-Cumulative Perpetual Series C Preferred Stock (“Series C Preferred Stock”) to accredited investors for an aggregate purchase price of $5.1 million in cash consideration, or $1,000 per share. In addition, during the three months ended September 30, 2011, the Company sold an additional 150 shares of its Series C preferred Stock to accredited investors for an aggregate purchase price of $150,000 in cash considerations.

The holders of Series C Preferred Stock are entitled to receive for each share of Series C Preferred Stock such non-cumulative dividends if, as, and when declared by the Board of Directors out of funds legally available for such dividends. However, the payment of any dividend on the Series C Preferred Stock is subject to the prior approval of the Federal Reserve Bank of Atlanta and the Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System. The shares of Series C Preferred Stock have no stated dividend rates.

The Series C Preferred Stock may be converted at the election of a holder at any time and from time to time, into shares of Common Stock after December 31, 2011. The Series C Preferred Stock shall be automatically converted into shares of Common Stock upon the earlier of (i) the closing of a Qualified Private Offering, or (ii) the closing of a Qualified Public Offering. A “Qualified Private Offering” means the closing of a private placement of shares of Common Stock with minimum proceeds of $50,000,000 by December 31, 2011. A “Qualified Public Offering” means the closing of an offering of shares of Common Stock registered in accordance with the provisions of the Securities Act of 1933. The conversion price for the shares of Preferred Stock will be equal to the price per share at which shares of common stock are sold in a Qualified Private Offering. If we do not close a Qualified Private

 

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Offering on or before December 31, 2011, then the Conversion Price thereafter will be equal to 50% of the tangible common stock book value per share as of the end of the calendar quarter prior to conversion, subject to a 10% annualized reduction from the date of issuance to the date of conversion.

The purchasers of the shares of Series C Preferred Stock also received a non-transferable stock purchase warrant exercisable for 1,250 shares of our common stock at $0.01 per share for each share of Series C Preferred Stock purchased. The warrant may be exercised at any time, and from time to time, in whole or in part before March 31, 2012. The warrant also is mandatorily exercisable upon the occurrence of any one of the following events (which event must occur before March 31, 2012): (a) the closing of (i) a Qualified Private Offering, (ii) a Qualified Public Offering, or (iii) a Change in Control, (b) the complete redemption of the shares of Series C Preferred Stock held by a holder, or (c) liquidation or dissolution of the Company. Any unexercised portion of the warrant will expire on March 31, 2012. As such, the warrants were all exercisable at September 30, 2011 and if all were exercised, this would result in the issuance of 6,571,250 additional shares, generating an additional $66,000 of common equity. As of September 30, 2011, a total of 2,307,500 warrants have been exercised resulting in $23,075 of additional common equity.

 

Item 3. Defaults Upon Senior Securities.

None

 

Item 4. (Removed and Reserved)

 

Item 5. Other Information.

None

 

Item 6. Exhibits

 

Exhibit

No.

  

Description

31.1   

Certification of Chief Executive Officer pursuant to Securities and Exchange Act Section 302 of the Sarbanes-Oxley

Act of 2002.

31.2   

Certification of Chief Financial Officer pursuant to Securities and Exchange Act Section 302 of the Sarbanes-Oxley

Act of 2002.

32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101    The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, is formatted in Extensible Business Reporting Language: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss) (Unaudited), (iii) Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited), (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 10th day of November 2011.

 

  FLORIDA BANK GROUP, INC.
Date: November 10, 2011   By:  

/S/    Gary J. Ward        

   

Gary J. Ward,

Chief Financial Officer,

Executive Vice President

 

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