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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For the quarterly period ended September 30, 2012

 

¨ Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For the transition period from              to             

(Commission File No. 333-182414)

 

 

TGR FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

 

 

 

United States   20-8397856

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

3560 Kraft Road Naples, Florida 34105

(Address of principal executive offices)

(239) 348-8000

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at November 13, 2012

Common Stock, $1.00 Par Value   14,060,143 Shares

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

     2   

ITEM 1. Financial Statements (Unaudited)

     2   

Consolidated Statements of Financial Condition

     2   

Consolidated Statements of Operations and Comprehensive Income

     3   

Consolidated Statements of Stockholders’ Equity

     4   

Consolidated Statements of Cash Flows

     5   

Notes to Consolidated Financial Statements

     6   

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

     39   

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

     50   

ITEM 4. Controls and Procedures

     51   

PART II. OTHER INFORMATION

     51   

ITEM 1. Legal Proceedings

     51   

ITEM 1A. Risk Factors

     51   

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

     52   

ITEM 3. Defaults Upon Senior Securities

     52   

ITEM 4. Mine Safety Disclosures

     52   

ITEM 5. Other Information

     52   

ITEM 6. Exhibits

     52   

Signatures

     54   


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

TGR Financial, Inc. and Subsidiaries

Consolidated Statements of Financial Condition

 

(dollars in thousands)

   September 30, 2012     December 31, 2011  

Assets:

    

Cash and due from banks

   $ 7,977      $ 9,950   

Interest earning balances due from banks

     21,066        45,550   
  

 

 

   

 

 

 

Total cash and cash equivalents

     29,043        55,500   

Securities available-for-sale

     186,939        130,649   

Federal Reserve Bank stock

     1,938        1,922   

Federal Home Loan Bank stock

     1,223        449   

Loans, net of allowance for loan losses $4,782 and $3,057, respectively

     319,676        181,162   

Loans held for sale

     417        237   

Premises and equipment, net

     18,264        18,544   

Other real estate owned, net

     2,781        799   

Accrued interest receivable

     1,953        1,085   

Goodwill and other intangibles

     5,289        5,196   

Other assets

     2,471        512   
  

 

 

   

 

 

 

Total assets

   $ 569,994      $ 396,055   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity:

    

Liabilities:

    

Noninterest-bearing demand deposits

   $ 48,007      $ 23,151   

Interest-bearing liabilities:

    

Money market

     124,704        90,649   

NOW

     62,607        74,356   

Savings

     56,305        33,218   

Certificates of deposit $100,000 or more

     105,841        55,086   

Certificates of deposit under $100,000

     42,846        14,093   
  

 

 

   

 

 

 

Total deposits

     440,310        290,553   

Securities sold under agreements to repurchase

     47,314        38,580   

Short term borrowings

     5,000        —     

Long term borrowings

     6,000        —     
  

 

 

   

 

 

 

Total borrowings

     58,314        38,580   

Other liabilities

     3,660        2,167   
  

 

 

   

 

 

 

Total liabilities

     502,284        331,300   
  

 

 

   

 

 

 

Stockholders’ Equity:

    

Common stock, $1 par value; 500,000,000 shares authorized, 14,060,143 issued and outstanding, respectively

     14,060        14,060   

Stock subscriptions

     2,000        —     

Additional paid-in capital

     74,015        74,015   

Accumulated deficit

     (24,308     (24,434

Accumulated other comprehensive income

     1,943        1,114   
  

 

 

   

 

 

 

Total stockholders’ equity

     67,710        64,755   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 569,994      $ 396,055   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

2


Table of Contents

TGR Financial, Inc. and Subsidiaries

Consolidated Statements of Operations (unaudited)

 

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

(dollars in thousands, except per share data)

   2012     2011     2012     2011  

Interest income:

        

Loans

   $ 9,445      $ 5,227      $ 3,828      $ 1,947   

Investment securities

     3,313        3,325        1,100        1,021   

Interest bearing balances due from banks

     135        244        27        82   

Federal funds sold

     —          4        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     12,893        8,800        4,955        3,050   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits

     2,133        1,905        787        574   

Repurchase agreements

     128        98        44        36   

Short term borrowings

     3        —          3        —     

Long term borrowings

     31        —          12        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     2,295        2,003        846        610   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     10,598        6,797        4,109        2,440   

Provision for loan losses

     1,963        1,316        361        490   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     8,635        5,481        3,748        1,950   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest income:

        

Service charges and fees on deposit accounts

     305        224        119        81   

Title and closing services revenue

     173        163        65        80   

Gain (loss) on loans held for sale

     (3     28        (1     11   

Gains on sale of securities, net

     1,951        557        791        281   

Bargain purchase gain

     982        —          982        —     

Other non-interest income

     84        71        45        32   
  

 

 

   

 

 

   

 

 

   

 

 

 
     3,492        1,043        2,001        485   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expense:

        

Salaries and employee benefits

     6,236        5,062        2,246        1,749   

Occupancy and equipment

     1,939        1,900        708        659   

Professional fees

     314        328        103        120   

Data processing

     407        282        162        61   

Advertising, marketing, and business development

     197        192        52        84   

FDIC and OCC assessments

     404        329        150        96   

Merger, reorganization and acquisition related expense

     1,462        —          1,462        —     

Other non-interest expense

     1,042        851        326        291   
  

 

 

   

 

 

   

 

 

   

 

 

 
     12,001        8,944        5,209        3,060   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income/(loss) before income taxes

     126        (2,420     540        (625

Provision for income taxes

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income/(loss)

   $ 126      $ (2,420   $ 540      $ (625
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted income/(loss) per common share

   $ 0.01      $ (0.24   $ 0.04      $ (0.05
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted weighted average number of shares outstanding

     14,060,143        9,904,399        14,060,143        13,402,644   

TGR Financial, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (unaudited)

 

     Nine Months Ended
September 30,
    Three Months Ended
September 30,
 
     2012     2011     2012     2011  

Net income/(loss)

   $ 126      $ (2,420   $ 540      $ (625

Other comprehensive income, net of tax:

        

Unrealized holding gains (losses) arising during the period

     2,780        6,453        1,355        2,953   

Less: Reclassification adjustment for (gains) losses recognized in earnings

     (1,951     (557     (791     (281
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income, net of tax:

     829        5,896        564        2,672   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net comprehensive income

   $ 955      $ 3,476      $ 1,104      $ 2,047   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

3


Table of Contents

TGR Financial, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity (unaudited)

 

(dollars in thousands)

   Number of
Outstanding
Common
Stock Shares
     Common
Stock
     Stock
Subscriptions
     Additional
Paid in
Capital
     Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income

(Loss)
    Total  

Balance, December 31, 2010

     5,310,523       $ 5,311       $ —         $ 43,036       $ (18,501   $ (3,716   $ 26,130   

Stock sale:

                  

Pursuant to private placement

     8,089,731         8,090            28,410             36,500   

Pursuant to rights offering

     31,550         32            125             157   

Net loss

                 (2,420       (2,420

Change in net unrealized gain (loss) on securities, net of reclassification and income tax

                   5,896        5,896   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance, September 30, 2011

     13,431,804       $ 13,433       $ —         $ 71,571       $ (20,921   $ 2,180      $ 66,263   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

     14,060,143       $ 14,060       $ —         $ 74,015       $ (24,434   $ 1,114      $ 64,755   

Stock sale:

                  

Shares to be issued

           2,000                2,000   

Net income

                 126          126   

Change in net unrealized gain (loss) on securities, net of reclassification and income tax

                   829        829   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance, September 30, 2012

     14,060,143       $ 14,060       $ 2,000       $ 74,015       $ (24,308   $ 1,943      $ 67,710   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

On September 25, 2012, First National Bank of the Gulf Coast (“the Bank”) completed its reorganization with TGR Financial, Inc. Pursuant to the terms of the reorganization, each share of common stock of First National Bank of the Gulf Coast was exchanged, on a one-for-one basis, for TGR Financial, Inc. common stock. The par value for shares of First National Bank of the Gulf Coast common stock is $5.00 and the par value of shares of TGR Financial, Inc. common stock is $1.00. The values for common stock and additional paid in capital have been restated to reflect the change to the $1.00 par value per share of the Company’s common stock in the above tables.

 

4


Table of Contents

TGR Financial, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

 

    

Nine Months Ended

September 30,

 

(dollars in thousands)

   2012     2011  

Cash Flows From Operating Activities

    

Net income/(loss)

     126        (2,420

Adjustments to reconcile net income/(loss) to net cash provided by operating activities:

    

Provision for loan losses

     1,963        1,316   

Premium amortization and discount accretion on securities, net

     1,072        455   

Depreciation and amortization of premises and equipment

     866        867   

Loss on sale of fixed assets

     —          25   

Amortization of net deferred loan costs

     444        135   

Origination of loans held for sale

     (4,193     (2,711

Proceeds from sales of loans held for sale

     4,009        2,450   

(Gain)/loss on sales of loans held for sale

     3        (28

Gain on sales of securities available for sale

     (1,951     (557

Amortization of purchase accounting adjustments

     (284     (172

Amortization of other intangibles

     8        5   

Bargain purchase gain recorded with Royal Palm acquisition

     (982     —     

Net change in:

    

Accrued interest receivable

     (868     20   

Other assets

     286        414   

Other liabilities

     985        285   
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,484        84   
  

 

 

   

 

 

 

Cash Flows From Investing Activities

    

Cash and equivalents received in Royal Palm acquisition (net of gain, including FDIC)

     34,816        —     

Purchase of premises and equipment

     (587     (341

Proceeds from the sale of premises and equipment

     —          3   

Purchase of Federal Home Loan and Federal Reserve Bank stock

     (729     (266

Redemption of Federal Home Loan and Federal Reserve Bank stock

     93        219   

Purchase of securities available for sale

     (157,155     (43,394

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

     27,047        20,279   

Proceeds from the sale of securities available for sale

     77,287        32,817   

Proceeds from the sale of other real estate

     1,167        —     

Originations and principal collections on loans, net

     (101,884     (50,664
  

 

 

   

 

 

 

Net cash used in investing activities

     (119,945     (41,347
  

 

 

   

 

 

 

Cash Flows From Financing Activities

    

Net increase in deposits

     72,270        17,346   

Net increase in securities sold under agreements to repurchase

     8,734        13,705   

Net increase in short term borrowings

     5,000        —     

Net increase in long term borrowings

     6,000        —     

Net proceeds from exercise of warrants

     —          157   
  

 

 

   

 

 

 

Net cash provided by financing activities

     92,004        31,208   
  

 

 

   

 

 

 

Net (decrease)/increase in cash and cash equivalents

     (26,457     (10,055

Cash and cash equivalents:

    

Beginning of period

     55,500        28,096   
  

 

 

   

 

 

 

End of period

   $ 29,043      $ 18,041   
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information

    

Cash: Cash payments for interest

   $ 1,997      $ 2,010   

Non-cash: Stock subscriptions

   $ 2,000      $ —     

Non-cash: Loans transferred to other real estate owned

   $ —        $ 799   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

5


Table of Contents

TGR Financial, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of business: TGR Financial, Inc. (the “Company”) is a Florida corporation organized in November 2011 at the direction of the Board of Directors of First National Bank of the Gulf Coast (the “Bank”) solely for the purpose of becoming a holding company for the Bank. Prior to September 25, 2012, the Company had no operating history and no business purpose other than to become a bank holding company. Effective September 25, 2012 (the “Effective Date”), the Company and the Bank completed a Reorganization, as more fully described in the Company’s registration statement on Form S-4, filed with the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended, on June 26, 2012, and amended on Form S-4/A, filed with the SEC on August 3, 2012, (SEC Registration No. 333-182414). At the Effective Date, each issued and outstanding share of the Bank’s common stock was converted solely into the right to receive one (1) share of the Company’s common stock, pursuant to the terms of a Reorganization Agreement and Plan of Share Exchange, dated June 26, 2012, entered into between the Company and the Bank. All outstanding Bank warrants or options on the Effective Date were converted into Company warrants and options on a one-for-one basis. Upon completion of the reorganization, the Bank became a wholly owned subsidiary of the Company. The Company incurred approximately $665,000 in costs associated with the holding company formation. These costs are reflected in the Company’s results of operations for the three and nine months ended September 30, 2012.

The Bank commenced operations on October 23, 2009, as a federally chartered commercial bank in the State of Florida. Effective October 23, 2009 the Bank, formerly known as Panther Community Bank, N.A. (“Panther”) acquired First National Bank of the Gulf Coast (in organization) (“First National”); immediately thereafter Panther changed its name to First National Bank of the Gulf Coast. The acquisition was accounted for as a reverse acquisition. During its period of organization, First National incurred organizational, start-up and pre-opening costs of $8.8 million.

The Bank provides a full range of banking services to individual and corporate customers from its branch locations in Southwest Florida. All of the Bank’s activities relate to community banking and accordingly, the Bank has a single reportable segment.

Basis of presentation: The accompanying consolidated balance sheet as of December 31, 2011, which was derived from audited financial statements, and the unaudited consolidated financial statements for the three and nine months ended September 30, 2012 and 2011 have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and should be read in conjunction with the annual financial statements of the Bank for the year ended December 31, 2011 and notes thereto. In the opinion of Management, all adjustments (consisting of normal recurring accruals) considered necessary in order to make the financial statements not misleading have been included.

Results for the nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. For further information, refer to the financial statements and footnotes thereto included in the Bank’s Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the Office of the Comptroller of the Currency (the “OCC”) on March 26, 2012, as amended on March 29, 2012.

Subsequent events: Management has evaluated subsequent events through the date the financial statements were issued.

 

6


Table of Contents

TGR Financial, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

 

Recent accounting pronouncements: In April 2011, the Financial Accounting Standards Board, (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring” to amend previous guidance with respect to troubled debt restructurings. This updated guidance is designed to assist creditors with determining whether or not a restructuring constitutes a troubled debt restructuring (“TDR”). In particular, additional guidance has been added to help creditors determine whether a concession has been granted and whether a debtor is experiencing financial difficulties. Both of these conditions are required to be met for a restructuring to constitute a troubled debt restructuring. The amendments in the update are effective for the first interim period beginning on or after June 15, 2011, and have been applied retrospectively to the beginning of the annual period of adoption. The Bank adopted the provisions of this update and it did not have a material impact on the Company’s financial position or results of operations.

In April 2011, the FASB issued ASU No. 2011-03 “Reconsideration of Effective Control for Repurchase Agreements.” The amendments in this ASU remove from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. The amendments in this ASU also eliminate the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Bank has adopted the methodologies prescribed by this ASU. The provisions of this update did not have a material impact on the Company’s financial position or results of operations.

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 International Financial Reporting Standards.” The amendments in this ASU generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This ASU results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards (“IFRSs”). The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The Company has adopted the methodologies prescribed by this ASU. The provisions of this update did not have a material impact on the Company’s financial position or results of operations.

In June 2011, the FASB issued ASU No. 2011-05 “Amendments to Topic 220, Comprehensive Income.” Under the amendments in this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this ASU should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of the update has impacted disclosures only and did not have a material impact on the financial position or results of operations of the Company.

 

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Table of Contents

TGR Financial, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

 

In December 2011, FASB issued an update ASU No. 2011-12 “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05,” to defer the effective date for those changes related to the presentation of reclassifications of items out of accumulated other comprehensive income. While FASB continues to deliberate whether the reclassification adjustments should be presented on the face of the financial statements, reclassifications out of accumulated other comprehensive income should be reported in accordance with presentation requirements in effect prior to FASB’s update. The adoption of the update has impacted disclosures only and did not have a material impact on the financial position or results of operations of the Company. The Company will adopt the reclassifications disclosure related to ASU No. 2011-05 when the due date is finalized.

In September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment.” The ASU provides the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the results of the qualitative analysis indicate it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative two-step impairment test, which is required under current U.S. GAAP, would not be necessary. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The Bank has adopted the methodologies prescribed by this ASU. The provisions of this update did not have a material impact on the Company’s financial position or results of operations.

In July 2012, the FASB issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment.” The provisions of ASU No. 2012-02 permit an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform a quantitative impairment test, as is currently required by GAAP. ASU No. 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The provisions of this update are not expected to have a material impact on the Company’s financial position or results of operations.

Reclassifications: Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications did not result in any changes to previously reported net income or stockholders’ equity.

 

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Notes to Consolidated Financial Statements

 

 

NOTE 2. ACQUISITION OF THE ROYAL PALM BANK OF FLORIDA

On July 20, 2012 (the “Closing Date”), the Florida Office of Financial Regulation closed The Royal Palm Bank of Florida, (“Royal”), Naples, Florida, and appointed the Federal Deposit Insurance Corporation (the “FDIC”) as receiver. That same date, the Bank assumed approximately $77 million of Royal’s deposits and acquired approximately $78 million in assets from the FDIC under a whole-bank purchase and assumption agreement without loss share (the “Acquisition”). The Bank did not pay the FDIC a premium to assume the deposits, and the assets were acquired at a discount to Royal’s historical book value as of July 20, 2012 of approximately $19.3 million, subject to customary adjustments.

The Acquisition resulted in a net gain of $613,000, after the establishment of a deferred tax liability of $369,000. The net after tax gain had been previously reported at $880,000 on the Company’s Current Report on Form 8-K filed October 3, 2012. There were measurement period adjustments totaling approximately $267,000, after tax, recorded subsequent to October 3, 2012. The adjustments represented tax liabilities for pending foreclosures ($295,000), additional fair value adjustments on investment securities ($16,000) and the write off of fixed assets removed from service ($118,000).

At September 30, 2012, the Company was in a consolidated cumulative net loss position and a full valuation reserve had been established for its net deferred tax asset. An updated analysis of the effect on the Company’s deferred tax status will be included in its Annual Report on Form 10-K for the fiscal year ending December 31, 2012. The foregoing gain is considered a bargain purchase gain under FASB ASC Topic 805, “Business Combinations,” since the total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred. The Company recognized this gain as non-interest income in the Company’s consolidated statements of operations for the three and nine months ended September 30, 2012.

Acquisition costs related to the Acquisition of $797,000 were recognized under the line item “merger, reorganization and acquisition related expense” in the Company’s consolidated statements of operations for the three and nine months ended September 30, 2012.

 

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As of the Closing Date, the Bank acquired assets with a fair value of approximately $79 million and assumed liabilities with a fair value of approximately $78 million. The following table sets forth the fair values of the assets acquired and liabilities assumed by the Bank as of July 20, 2012:

 

(dollars in thousands)

   July 20, 2012  

Assets Acquired:

  

Cash and due from banks

   $ 8,281   

Interest earning balances due from banks

     9,383   
  

 

 

 

Total cash and cash equivalents

     17,664   

Securities available-for-sale

     1,761   

Federal Home Loan Bank stock

     154   

Loans

     38,807   

Other real estate owned

     3,149   

Core deposit intangible

     101   

Receivable from FDIC

     17,152   

Interest receivable and other assets

     244   
  

 

 

 

Total assets acquired

   $ 79,032   
  

 

 

 

Liabilities Assumed:

  

Noninterest-bearing demand deposits

   $ 16,546   

Interest-bearing liabilities:

  

Money market

     23,542   

NOW

     7,270   

Savings

     4,526   

Certificates of deposit greater than $100,000

     12,816   

Certificates of deposit $100,000 or less

     12,841   
  

 

 

 

Total deposits

     77,541   

Other liabilities

     878   
  

 

 

 

Total liabilities assumed

     78,419   

Stockholders’ Equity:

  

Bargain purchase gain, net of deferred taxes

     613   
  

 

 

 

Total stockholders’ equity

     613   

Total liabilities and stockholders’ equity

   $ 79,032   
  

 

 

 

See Notes to Consolidated Financial Statements.

The acquisition was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. Both the purchased assets and liabilities assumed are recorded at their respective acquisition date fair values. Determining the fair values of assets and liabilities, especially the loan portfolio and foreclosed real estate, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values become available for loans and other real estate owned due to pending real estate appraisals.

The more significant fair value adjustments in our purchase accounting for the Acquisition were to loans. As of July 20, 2012, certain of the loans acquired from Royal had evidence of credit deterioration since origination, and it was probable that we would not collect all contractually required principal and interest

 

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Notes to Consolidated Financial Statements

 

 

payments. Such loans identified at the time of the acquisition are accounted for under Accounting Standards Codification (“ASC”) 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). ASC 310-30 requires that acquired credit-impaired loans be recorded at fair value and prohibits carryover of the related allowance for loan losses.

Loans subject to ASC 310-30 were written down to an amount estimated to be collectible. Accordingly, such loans are not classified as nonaccrual, even though they may be contractually past due, because we expect to fully collect the new carrying values of such loans (that is, the new cost basis arising out of our purchase accounting). Loans subject to ASC 310-30 are also not included in the disclosure of loans 90 days or more past due and still accruing interest even though certain of them are 90 days or more contractually past due.

As noted above, ASC 310-30 loans were reclassified to accrual status in purchase accounting, and one effect of the elimination of nonaccrual loans is that, as certain non-ASC 310-30 loans begin to migrate to nonaccrual status, the percentage increase in nonaccrual loans can be higher because there are minimal loans transferring out of nonaccrual status. For further detail on the Acquisition, see Note 5 – Loans to the Financial Statements in this Report.

Loans acquired that do not have evidence of credit deterioration since origination are accounted for under ASC 310-20, Nonrefundable Fees and Other Costs (“ASC 310-20”). Interest is recognized using the simple-interest method.

NOTE 3. SUBSEQUENT EVENTS

On October 10, 2012, the Company closed a private placement of securities to two investor groups, each of which were existing shareholders of the Company. The Company issued 105,109 shares of the Company’s common stock, $1.00 par value and 126,573 shares of the Company’s Series A Nonvoting Convertible Preferred Stock (see description below), $1.00 par value to one investor group, and 168,318 shares of the Company’s common stock to the second investor group, at a purchase price, for all securities sold, of $5.00 per share. The gross proceeds to the Company from this private placement was $2,000,000. As required by the Company’s Stockholders’ Agreement, the Company obtained necessary waivers from investors who are a party to the Stockholders’ Agreement to the requirement that capital drawdowns be made at a minimum $10,000,000 level, in order to conduct this private placement at the $2,000,000 level.

In accordance with U.S. GAAP, the private placement transaction described above has been included in the financial statements contained within this Report since stock subscriptions were executed prior to September 30, 2012 and the subscription receivable was collected before the financial statements were issued.

Nonvoting Series A Convertible Preferred Stock

Upon completion of the reorganization, and in conjunction with the filing of its Amended and Restated Articles of Incorporation and Articles of Share Exchange, the Company filed with the State of Florida, a Certificate of Designation, which defined the rights of a new series of 7,050,000 shares of authorized preferred stock. The newly authorized preferred stock is titled “Nonvoting Series A Convertible Preferred Stock” (the “Series A Preferred Stock”).

The Series A Preferred Stock does not carry any voting rights other than on matters with respect to which the holders of such Series A Preferred Stock are entitled to vote by law. Holders of the Series A Preferred Stock are entitled to receive any dividends declared by the Company pari passu with the Company’s common stock holders. Upon any liquidation, dissolution or winding-up of the Company, the holders of the Series A Preferred Stock are entitled to receive a liquidation preference on shares of the Series A

 

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Preferred Stock equal to the greater of (i) one cent ($0.01) per share and (ii) the amount the holder of such shares of Series A Preferred Stock would receive in respect of such share if such share had been converted (on a one-for-one) into Company common stock at the time of such liquidation. The Series A Preferred Stock is convertible into the Company’s common stock on a one-for-one basis: (i) at the election of the holder, if such conversion would not cause the holder to hold greater than 9.99% of the Company’s outstanding common stock at the time of such conversion, or (ii) automatically, if shares of such Series A Preferred Stock are ever transferred to a “non-affiliate” of the Company in a permissible transfer.

NOTE 4. SECURITIES

The amortized cost and fair value of securities available for sale at September 30, 2012 and December 31, 2011, respectively, are summarized as follows (dollars in thousands).

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 

September 30, 2012:

           

Securities Available for Sale

           

U.S. Government agencies and government sponsored entities

   $ 74,616       $ 694       $ 51       $ 75,259   

Agency mortgage backed securities

     46,361         1,079         —           47,440   

Agency collateralized mortgage obligations

     10,737         95         4         10,828   

State, county and municipal

     47,028         396         299         47,125   

Corporate bonds

     6,254         67         34         6,287   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 184,996       $ 2,331       $ 388       $ 186,939   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

           

Securities Available for Sale

           

U.S. Government agencies and government sponsored entities

   $ 32,346       $ 103       $ 58       $ 32,391   

Agency mortgage backed securities

     44,091         327         10         44,408   

Agency collateralized mortgage obligations

     17,620         154         41         17,733   

State, county and municipal

     30,028         1,099         180         30,947   

Corporate bonds

     5,450         22         302         5,170   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 129,535       $ 1,705       $ 591       $ 130,649   
  

 

 

    

 

 

    

 

 

    

 

 

 

Information pertaining to securities available for sale with gross unrealized losses at September 30, 2012 and December 31, 2011, respectively, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows (dollars in thousands).

 

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     Less than Twelve
Months
     Over Twelve Months      Total  
     Gross
Unrealized
Losses
     Fair Value      Gross
Unrealized
Losses
     Fair Value      Gross
Unrealized
Losses
     Fair Value  

September 30, 2012:

                 

U.S. Government agencies and government sponsored entities

   $ 49       $ 12,936       $ 2       $ 1,341       $ 51       $ 14,277   

Agency mortgage backed securities

     —           —           —           —           —           —     

Agency collateralized mortgage obligations

     3         1,252         1         107         4         1,359   

State, county and municipal

     299         24,077         —           —           299         24,077   

Corporate bonds

     10         490         24         2,476         34         2,966   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 361       $ 38,755       $ 27       $ 3,924       $ 388       $ 42,679   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

                 

U.S. Government agencies and government sponsored entities

   $ 58       $ 8,258       $ —         $ —         $ 58       $ 8,258   

Agency mortgage backed securities

     10         4,218         —           —           10         4,218   

Agency collateralized mortgage obligations

     41         3,332         —           —           41         3,332   

State, county and municipal

     180         9,004         —           —           180         9,004   

Corporate bonds

     237         2,713         65         1,935         302         4,648   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 526       $ 27,525       $ 65       $ 1,935       $ 591       $ 29,460   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of September 30, 2012, a total of 33 investment securities were in unrealized loss positions. The unrealized losses resulted from fair values falling below book values due to higher levels of market interest rates on the measurement date. The fair value of fixed rate investment securities is inversely related to interest rates, i.e., rising market rates of interest cause reductions in the fair values assigned to investment securities. Unrealized losses, by security type, as of September 30, 2012, are further described below.

As of September 30, 2012, nine U.S. government agency securities were in unrealized loss positions. All nine of these bonds were issued by the Small Business Administration (“SBA”). One of these bonds had remained in a loss position for 15 consecutive months, triggering Other Than Temporary Impairment (“OTTI”) assessments. The bond credit rating is implicit AAA. The bond’s small unrealized loss of only -0.16%, combined with the fact the issuer has not defaulted and carries the unconditional full faith and credit guarantee of the U.S. Government, led management to conclude that the unrealized loss within this security was not other-than-temporary. Since the remaining eight SBA bonds were AAA rated and no bond had remained in a loss position for longer than five consecutive months, management concluded that the unrealized losses within the agency securities were not other-than-temporary.

As of September 30, 2012, two mortgage-backed securities were in unrealized loss positions. One of these bonds had remained in a loss position for 16 months, triggering an OTTI assessment. The bond was a floating rate CMO issued by the Government National Mortgage Association (“GNMA”). The regular paydown on October 16, 2012 reduced this bond’s book value to $0. The bond has matured. No impairment exists. The second bond was a fixed rate CMO issued by the Federal Home Loan Mortgage Corporation (“FHLMC”). The bond had remained in a loss position for only one month. Management concluded that the unrealized loss within this fixed rate CMO was not other-than-temporary.

As of September 30, 2012, four corporate bonds were in unrealized loss positions. A senior, unsecured corporate bond issued by Morgan Stanley (“MS”) had remained in a loss position for 13 consecutive months, triggering an OTTI assessment. The bond’s Standard & Poor’s credit rating has been stable: A-. On June 21, 2012, Moody’s downgraded the ratings of 15 banks and securities firms with global capital market operations, including MS, citing significant exposure to the volatility and risk of outsized losses

 

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inherent to capital market activities. However, they engage in other, often market leading business activities providing important “shock absorbers” that mitigate the potential volatility of capital market operations. The bond’s very small and shrinking unrealized loss of only -0.89%, a credit assessment, the fact that the issuer had not defaulted, and the Bank’s ability to hold this investment to maturity in 2015, led management to conclude that the unrealized loss within this security was not other-than-temporary. A fixed-to-floating corporate bond issued by Goldman Sachs Group Inc. (“Goldman”) had remained in an unrealized loss position for 22 consecutive months, also triggering an OTTI assessment. The bond’s Standard & Poor’s credit rating has remained stable at A- since November 29, 2011, when Standard & Poor’s reviewed its ratings on 37 of the largest financial institutions in the world, including Goldman. S&P published an update on January 18, 2012 which did not affect the ratings, but S&P reported that despite difficult operating conditions, Goldman continues to perform well. On June 21, 2012, Moody’s downgraded 15 banks and securities firms with global capital market operations. Goldman’s senior unsecured debt rating was downgraded to A3 from A1. The bond’s very small and shrinking unrealized loss of only -1.68%, a credit assessment, combined with the fact the issuer had not defaulted, and the Bank’s ability to hold this investment to maturity in 2017, led management to conclude that the unrealized loss within this security was not other-than-temporary. A senior, unsecured corporate bond issued by Barclays Bank had remained in a loss position for 13 consecutive months, triggering an OTTI assessment. Moody’s and Standard & Poor’s on July 5, 2012 changed the outlooks on certain ratings of Barclays Bank to negative from stable, citing the recent senior management resignations at the bank’s parent Barclays PLC. Moody’s said the management upheaval and consequent uncertainty surrounding the firm’s direction are negative for bondholders. Specifically, the agency noted that shareholder and political pressures on Barclays Bank, which resulted in the resignations of the bank’s CEO and COO, could lead to broader pressure on the bank to shift its business model away from investment banking and reform perceived failures in its business culture. S&P revised the outlook on its long term rating of Barclays Bank to negative from stable, citing the resignation of CEO Bob Diamond. The bond’s very small and shrinking unrealized loss of only -0.70%, combined with the fact that the issuer has not defaulted, the issuers’ size and strength, and the bank’s ability to hold this investment to maturity in 2016, leads management to conclude that the unrealized loss within this security is not other-than-temporary. The other corporate bond had remained in an unrealized loss position for six months. Again, management concluded that the unrealized loss within the corporate security was not other-than-temporary.

As of September 30, 2012, 18 taxable municipal bonds were in unrealized loss positions. Since all eighteen bonds had remained in a loss position for no longer than 10 months, management concluded that the unrealized losses within the taxable municipal securities were not other-than-temporary. Management employs multiple techniques to assess the underlying credit quality of the bonds in the municipal portfolio. Pre-purchase, the bonds are analyzed geographically to avoid regions of the country which concern management, e.g., California. Post-purchase, management checks Moody’s credit rating by issue to detect downgrades. Sterne Agee generates Credit Obligor Risk Evaluation (“CORE”) reports for general obligation municipal bonds. CORE reports analyze the socioeconomic profile, financial performance and long-term obligations of bond issuers to derive investment grades. Next, management reviews the most recent financial statements of each municipal issue. Finally, the Credit Department performs an annual review of the demographics of each state or municipality to reveal negative trends. These assessments revealed no credit quality concerns.

As of December 31, 2011, a total of 25 investment securities were in unrealized loss positions. The unrealized losses resulted from fair values falling below book values due to higher levels of market interest rates on the measurement date. The fair value of fixed rate investment securities is inversely proportional to interest rates, i.e., higher market interest rates cause lower fair values. Since December 2010, market interest rates have fallen, reducing the aggregate level of unrealized losses. Unrealized losses, by security type, as of December 31, 2011, are further described below.

 

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As of December 31, 2011, seven U.S. government agency securities were in unrealized loss positions. All bonds were issued by the SBA. Since all seven bonds were AAA rated and no bond had remained in a loss position for longer than eight consecutive months, management concluded that the unrealized losses within the agency securities were not other-than-temporary.

As of December 31, 2011, two mortgage-backed securities were in unrealized loss positions. Since the bonds were issued by the Federal National Mortgage Association (“FNMA”) and the FHLMC, and no bond had remained in a loss position for longer than three consecutive months, management concluded that the unrealized loss within the mortgage-backed securities were not other-than-temporary. As of December 31, 2011, one floating rate, collateralized mortgage obligation was in an unrealized loss position. Since the bond was issued by the GNMA and had remained in a loss position for only seven consecutive months, management concluded that the unrealized loss within the floating rate collateralized mortgage obligation was not other-than-temporary. As of December 31, 2011, one fixed rate, collateralized mortgage obligation was in an unrealized loss position. Since the bond was also issued by GNMA and had remained in a loss position for only two consecutive months, management concluded that the unrealized loss within the fixed rate collateralized mortgage obligation was not other-than-temporary.

As of December 31, 2011, six corporate bonds were in unrealized loss positions. On September 21, 2011, the Bank of America corporate security was downgraded by Moody’s to Baa1. This bond had remained in a loss position for 20 consecutive months and management performed an OTTI assessment as of year end. Based on strong fourth quarter earnings, a credit assessment, the fact that the issuer had not defaulted, and the Bank’s ability to hold this investment to maturity, management concluded that the unrealized loss within this security was not other-than-temporary. A senior, unsecured corporate bond issued by General Electric Capital Corp. had remained in a loss position for 14 consecutive months, triggering an OTTI assessment. The bond credit ratings have been stable: Moody’s Aa2, Standard & Poor’s AA+. The bond’s small unrealized loss of -2%, a credit assessment, combined with the fact the issuer has not defaulted, and the Bank’s ability to hold this investment three years to maturity in 2015, led management to conclude that the unrealized loss within this security was not other-than-temporary. A fixed-to-floating corporate bond issued by Goldman. had remained in an unrealized loss position for 13 consecutive months, also triggering an OTTI assessment. On November 29, 2011, Standard & Poor’s reviewed its ratings on 37 of the largest financial institutions in the world, including Goldman. The Goldman credit rating was changed from A to A-. The bond’s small unrealized loss of -3%, a credit assessment, combined with the fact the issuer has not defaulted, and the Bank’s ability to hold this investment to maturity in 2017, led management to conclude that the unrealized loss within this security was not other-than-temporary. The other three corporate bonds in unrealized loss positions had persisted for six, four, and four months, respectively. Again, management concluded that the unrealized losses within the corporate securities were not other-than-temporary.

As of December 31, 2011, one tax-free municipal bond was in an unrealized loss position. Since the bond was rated Aa1 by Moody’s and had remained in a loss position for only one month, management concluded that the unrealized loss within the tax-free municipal bond was not other-than-temporary. As of December 31, 2011, seven taxable municipal bonds were in unrealized loss positions. Since all seven bonds had remained in a loss position for only one month, management concluded that the unrealized losses within the taxable municipal securities were not other-than-temporary.

On an annual basis, the OTTI Policy requires the Bank’s Treasurer to review the audited financial statements of the FHLB of Atlanta to evaluate impairment of our FHLB stock. Audited financial statements for 2011 indicate FHLB Atlanta is profitable, with adequate liquidity. As a result, management concluded that the FHLB stock held to maturity is not impaired.

As of September 30, 2012, management concluded that it is not more likely than not that the Bank will be required to sell any of the securities in an unrealized loss position before they recover in value.

 

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Notes to Consolidated Financial Statements

 

 

The amortized cost and fair value of securities at September 30, 2012 and December 31, 2011, respectively, by contractual maturity, are shown below (dollars in thousands).

 

     Securities Available for Sale  
     Amortized Cost      Fair Value  

September 30, 2012:

     

Due within one year

   $ 1,997       $ 2,013   

Due after one year through five years

     59,623         60,473   

Due after five years through ten years

     59,263         60,030   

Due over ten years

     64,113         64,423   
  

 

 

    

 

 

 

Total

   $ 184,996       $ 186,939   
  

 

 

    

 

 

 

December 31, 2011:

     

Due within one year

   $ 1,432       $ 1,429   

Due after one year through five years

     57,151         57,244   

Due after five years through ten years

     37,073         37,432   

Due over ten years

     33,879         34,544   
  

 

 

    

 

 

 

Total

   $ 129,535       $ 130,649   
  

 

 

    

 

 

 

Mortgage backed securities are included in the table above based on their contractual maturities.

During the three months ended September 30, 2012 and 2011, the Bank recognized net gains of $791,000 and $281,000, respectively, on the sale of securities.

At September 30, 2012, and December 31, 2011, securities with a carrying value of $64.3 million and $24.5 million, respectively, were pledged to the State of Florida as collateral for deposits of public entities. At September 30, 2012, and December 31, 2011, securities with a carrying value of $48.3 million and $40.3 million, respectively, were pledged as collateral for securities sold under agreements to repurchase.

 

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NOTE 5. LOANS, ALLOWANCE AND ASSET QUALITY

The composition of net loans is as follows at September 30, 2012 and December 31, 2011, respectively (dollars in thousands).

 

     September 30, 2012     December 31, 2011  

Commercial real estate

   $ 154,022        45   $ 82,615        45

Construction loans

     33,937        10     17,083        9

Commercial and industrial

     18,179        5     16,800        9

Home equity lines of credit

     8,594        3     4,453        3

Residential single family (includes loans held for sale, $417 and $237, respectively)

     96,808        29     38,793        21

Residential multifamily

     14,367        4     8,019        4

Consumer installment loans

     12,360        4     15,942        9
  

 

 

   

 

 

   

 

 

   

 

 

 
     338,267        100     183,705        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Less accretable discount

     (2,344       (330  

Less unaccretable discount

     (12,511       —       
  

 

 

     

 

 

   
     323,412          183,375     

Plus net deferred loan origination costs

     1,463          1,081     

Less allowance for loan losses

     (4,782       (3,057  
  

 

 

     

 

 

   

Net loans

   $ 320,093        $ 181,399     
  

 

 

     

 

 

   

The purchase discounts in the above table depict the remaining fair value adjustments for credit and market rate risk recorded in connection with the acquisitions of Panther in October 2009 and Royal in July 2012. Portions related to market rates are being accreted into income, under the simple-interest method, as a yield adjustment over the life of the underlying loans.

Loan Origination/Risk Management

The Bank has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions. Management evaluates credit risk on the following portfolio segments:

Commercial and Industrial Loans: Commercial credit is extended primarily to middle market customers. Such credits typically comprise working capital loans, loans for physical asset expansion, asset acquisition loans and other business loans. Loans to closely held businesses will generally be guaranteed in full or for a substantial amount by the businesses’ majority owners. Commercial loans are made based primarily on the historical and projected cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not behave as forecasted and collateral securing loans may fluctuate in value due to economic or individual performance factors. Minimum standards and underwriting guidelines have been established for all commercial loan types.

Commercial Real Estate Loans: The Bank’s goal is to originate and maintain a high quality portfolio of commercial real estate loans with customers who meet the quality and relationship profitability objectives of the Bank. Commercial real estate loans are subject to underwriting standards and processes similar to

 

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Notes to Consolidated Financial Statements

 

 

commercial and industrial loans. These loans are viewed primarily as cash flow loans and the repayment of these loans is largely dependent on the successful operation of the underlying property. The Bank also looks to the sale of the underlying collateral as a means of secondary repayment. Loan performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market such as geographic location and/or property type.

Construction Loans: The Bank defines construction loans as loans where the loan proceeds are controlled by the Bank and used exclusively for the improvement of residential or commercial real estate in which the Bank holds a mortgage. These loans generally must be supported by an adequate “as completed” value of the underlying project. In addition to the underlying project, the financial history of the borrower weighs significantly in determining approval. The repayment of these loans is typically through permanent financing upon completion of the construction. Real estate construction loans are inherently more risky than loans on completed properties due to the unimproved nature and the financial risks of construction. Due to the inherent risk in this type of loan, they are subject to industry specific policy guidelines outlined in the Bank’s Loan Policy and are monitored closely.

Residential Single and Multifamily Loans (including Home Equity Lines of Credit): The Bank originates fixed and adjustable rate residential real estate loans secured by one to four and, on a very limited basis, multifamily dwellings. First mortgage loan terms range from five to thirty years. In deciding whether to make a residential real estate loan, we consider the qualifications of the borrower as well as the value of the underlying property.

Residential mortgages that are sold generally have recourse obligations if any of the first four payments become past due over 30 days under certain investor contracts and over 90 days under other investor contracts. The Bank may also be required to repurchase mortgages that do not conform to FNMA or FHLMC underwriting standards or that contain critical documentation errors or fraud. The Bank only originates for sale mortgages that conform to FNMA or FHLMC underwriting guidelines. The Bank has not sustained any recourse-related losses in its mortgage program. No recourse liability was recorded for these mortgages.

Consumer Installment Loans: The Bank originates direct and indirect consumer loans. They mostly include automobile and light duty truck loans, lot loans and personal lines of credit, secured and unsecured. Each loan type has a separate underwriting matrix including but not limited to debt to income ratio, term requirements, type of collateral and loan to collateral value, credit history and relationship with the borrower.

 

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TGR Financial, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

 

Allowance For Loan Losses

The following tables illustrate certain information with respect to our allowance for loan losses and the composition of charge-offs and recoveries for the nine months ended September 30, 2012 and 2011, respectively, (dollars in thousands).

 

     Residential
Single &
Multifamily
     Commercial
Real Estate
     Construction
Loans
     Commercial
and Industrial
    Consumer
and Other
    Total  

The Bank’s activity in the allowance for loan losses is summarized below for the nine months ended 09/30/12:

  

Allowance For Loan Losses

               

Originated Loans:

               

Beginning Balance

   $ 398       $ 485       $ 604       $ 221      $ 135      $ 1,843   

Provision

     362         1,061         232         74        84        1,813   

Charge Offs

     —           —           —           —          75        75   

Recoveries

     —           —           —           —          31        31   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Ending Balance Originated Loans:

   $ 760       $ 1,546       $ 836       $ 295      $ 175      $ 3,612   

Acquired Loans:

               

Beginning balance

     219         922         43         23        7        1,214   

Provision

     57         34         74         (8     (6     151   

Charge Offs

     100         —           117         —          —          217   

Recoveries

     22         —           —           —          —          22   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Ending Balance Acquired Loans:

   $ 198       $ 956       $ —         $ 15      $ 1      $ 1,170   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Ending Balance Total Allowance:

   $ 958       $ 2,502       $ 836       $ 310      $ 176      $ 4,782   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

The Bank’s activity in the allowance for loan losses is summarized below for the nine months ended 09/30/11:

  

Allowance For Loan Losses

               

Originated Loans:

               

Beginning Balance

   $ 122       $ 528       $ 26       $ 105      $ 98      $ 879   

Provision

     152         226         124         6        82        590   

Charge Offs

              1        21        22   

Recoveries

                1        1   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Ending Balance Originated Loans:

   $ 274       $ 754       $ 150       $ 110      $ 160      $ 1,448   

Acquired Loans:

               

Beginning balance

     —           169         —           —          —          169   

Provision

     43         660         19         1        3        726   

Charge Offs

     —           —           —           —          —          —     

Recoveries

     —           —           —           —          —          —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Ending Balance Acquired Loans:

   $ 43       $ 829       $ 19       $ 1      $ 3      $ 895   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Ending Balance Total Allowance:

   $ 317       $ 1,583       $ 169       $ 111      $ 163      $ 2,343   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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Table of Contents

TGR Financial, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

 

The following tables illustrate certain information with respect to our allowance for loan losses and the composition of impaired loans as of September 30, 2012 and December 31, 2011, respectively, (dollars in thousands).

 

     Residential
Single &
Multifamily
     Commercial
Real Estate
     Construction
Loans
     Commercial
and Industrial
     Consumer
and Other
     Total  

The Bank’s allowance for loan losses impairment evaluation at September 30, 2012:

  

Individually evaluated for impairment

   $ 80       $ 117       $ —         $ —         $ —         $ 197   

Collectively evaluated for impairment

     878         2,385         836         310         176         4,585   

Acquired with deteriorated credit quality

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance Total Allowance:

   $ 958       $ 2,502       $ 836       $ 310       $ 176       $ 4,782   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Bank’s loan balances based on impairment evaluation at September 30, 2012:

  

     

Individually evaluated for impairment

   $ 306       $ 1,497       $ 449       $ —         $ 66       $ 2,318   

Collectively evaluated for impairment

     102,348         125,940         26,965         16,757         12,232         284,242   

Acquired with deteriorated credit quality

     13,887         15,081         6,523         1,333         28         36,852   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance Total Loans:

   $ 116,541       $ 142,518       $ 33,937       $ 18,090       $ 12,326       $ 323,412   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Bank’s allowance for loan losses impairment evaluation at December 31, 2011:

  

     

Individually evaluated for impairment

   $ 100       $ —         $ —         $ —         $ —         $ 100   

Collectively evaluated for impairment

     516         1,407         647         246         141         2,957   

Acquired with deteriorated credit quality

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance Total Allowance:

   $ 616       $ 1,407       $ 647       $ 246       $ 141       $ 3,057   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Bank’s loan balances based on impairment evaluation at December 31, 2011:

  

     

Individually evaluated for impairment

   $ 157       $ 855       $ —         $ —         $ 110       $ 1,122   

Collectively evaluated for impairment

     51,035         81,517         17,083         16,787         15,831         182,253   

Acquired with deteriorated credit quality

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance Total Loans:

   $ 51,192       $ 82,372       $ 17,083       $ 16,787       $ 15,941       $ 183,375   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The general loss reserve was $4.6 million as of September 30, 2012 and $3.0 million as of December 31, 2011. There were specific reserves of $197,000 on loans at September 30, 2012 and $100,000 at December 31, 2011. The increase in the general loss reserve was due to increases in net loans outstanding of approximately $102 million, excluding loans acquired in July 2012.

 

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TGR Financial, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

 

The below tables represent the loan portfolio, segmented by risk factors, as of September 30, 2012 and December 31, 2011, respectively (dollars in thousands).

 

As of September 30, 2012    Residential
Single &
Multifamily
     Commercial
Real Estate
     Construction
Loans
     Commercial
and Industrial
     Consumer
and Other
     Total Loans  

Originated Loans:

                 

Risk Free

   $ —         $ —         $ —         $ 320       $ 582       $ 902   

Excellent

     —           738         —           675         400         1,813   

Good

     4,812         23,312         1,647         2,463         126         32,360   

Satisfactory

     92,902         84,723         25,318         11,623         11,029         225,595   

Watch

     —           —           —           —           —           —     

OLEM

     —           —           —           —           67         67   

Substandard

     —           4,117         —           1,415         25         5,557   

Doubtful

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Sub-total

     97,714         112,890         26,965         16,496         12,229         266,294   

Acquired Loans:

                 

Risk Free

     —           —           —           —           —           —     

Excellent

     —           —           —           —           —           —     

Good

     13,887         15,081         6,523         1,333         28         36,852   

Satisfactory

     4,635         9,781         —           161         69         14,646   

Watch

     —           —           —           —           —           —     

OLEM

     225         541         —           42         —           808   

Substandard

     —           4,108         449         58         —           4,615   

Doubtful

     80         117         —           —           —           197   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Sub-total

     18,827         29,628         6,972         1,594         97         57,118   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 116,541       $ 142,518       $ 33,937       $ 18,090       $ 12,326       $ 323,412   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

As of December 31, 2011    Residential
Single &
Multifamily
     Commercial
Real Estate
     Construction
Loans
     Commercial
and Industrial
     Consumer
and Other
     Total Loans  

Originated Loans:

                 

Risk Free

   $ —         $ —         $ —         $ 359       $ 621       $ 980   

Excellent

     —           764         —           675         400         1,839   

Good

     974         15,539         4,047         2,726         579         23,865   

Satisfactory

     44,769         49,448         12,286         12,631         13,956         133,090   

Watch

     —           —           —           —           53         53   

OLEM

     —           —           —           —           —           —     

Substandard

     —           —           —           —           15         15   

Doubtful

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Sub-total

     45,743         65,751         16,333         16,391         15,624         159,842   

Acquired Loans:

                 

Risk Free

     —           —           —           —           —           —     

Excellent

     —           —           —           —           62         62   

Good

     —           —           —           —           —           —     

Satisfactory

     5,392         13,039         750         396         255         19,832   

Watch

     —           2,743         —           —           —           2,743   

OLEM

     —           —           —           —           —           —     

Substandard

     —           364         —           —           —           364   

Doubtful

     57         475         —           —           —           532   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Sub-total

     5,449         16,621         750         396         317         23,533   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $   51,192       $   82,372       $ 17,083       $ 16,787       $ 15,941       $ 183,375   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Notes to Consolidated Financial Statements

 

 

The Bank applies internal risk ratings to all loans on a scale of 1 to 9. A description of the general characteristics of the nine risk grades are as follows:

1-Risk Free – Loans are of the highest quality. Very sound financial position, high liquidity, little or no leverage, strong capital position and cash flow, superior management, seasoned stable industry, unqualified audits. Refinancing is easily available at virtually any bank. Any loan fully secured by short term government or cash deposits.

2-Excellent – Excellent loans run from the upper end to the middle of the high quality range. Sound financial position, good liquidity, modest leverage, good cash flow, experienced management and good trends in established business. Generally receive unqualified audits. Refinancing available at most banks. Real estate loans with strong loan to value and debt service coverage ratios. Marketable collateral values substantiated, strong and liquid.

3-Good – Good financial condition, liquidity and a history of earnings with indications that the trend will continue, typical of industry. Working capital or cash flow sufficient to repay debt as scheduled. Handles credit needs in a satisfactory manner. Real estate loans with acceptable loan to value and debt service coverage ratios. Marketable collateral values substantiated and adequate. Secured loans granted to high net worth individuals with adequate liquidity to support the loans. Adequate liquidity will be calculated as cash and or marketable securities equal to the amount of the loan granted to the borrower. Secured loans granted to high net worth individuals with adequate liquidity to support the loans. Adequate liquidity will be calculated as cash and or marketable securities equal to the amount of the loan granted to the borrower.

4-Satisfactory – An established borrower that represents a reasonable credit risk. Satisfactory loans run from medium to lower medium quality range. Financial condition and performance is acceptable, but may be subject to significant fluctuations. During periods of economic downturn, the financial condition may become unstable. May include borrowers growing rapidly with high leverage. Secondary sources of repayment require significant attention and may include close monitoring of a borrowing base or comprehensive loan covenant protection. This category will frequently include loans that:

 

   

Require special monitoring of any kind, such as wholesale auto financing (floor plans).

 

   

Are guaranteed by an agency of the U.S. government such as the SBA.

 

   

Involve speculative construction of the collateral.

 

   

Involve an average borrower in a highly cyclical industry such as machine shops or construction.

5-Watch – Watch Loans identify borrowers who are significantly uncertain in their ability to maintain or improve their financial performance. Loans are of minimum acceptable quality. Financial condition is unstable and shows minimally acceptable support for credit accommodation. Historic financial performance may be inconsistent or uncertain. Borrower has demonstrated the ability to meet all contractual obligations; however, payments may at times be delayed. Secondary sources of repayment are adequate, but weakened somewhat by lack of liquidity or properly documented value.

This category will frequently include loans that:

 

   

Lack adequate successor management. Also, management expertise is limited to technical areas, while demonstrated weaknesses are found in finance or administration.

 

   

Involve administrative and handling costs which may be above average for the portfolio.

 

   

Have no current financial statements and which are not fully secured by cash or marketable securities. Since an accurate assessment of an appropriate loan risk rating cannot be determined, the rating of 5 may be applied by default.

 

   

Liquidity is acceptable, but concentration in non-cash assets puts stress on solvency.

 

   

Infrequent overdrafts are quickly corrected.

 

   

Temporary documentation or collateral weaknesses, such as failure to be named as lender loss payee on insurance.

 

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Notes to Consolidated Financial Statements

 

 

A specific action plan including measurable benchmarks will be developed by the responsible lender and his supervisor for review. Progress is monitored on an interim basis by the Loan Officer and reported at subsequent reviews as scheduled.

6-OLEM (Other Loans Especially Mentioned) – Assets have potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Other Loans Especially Mentioned assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

OLEM assets have potential weaknesses that may, if not checked or corrected, weaken the asset or inadequately protect the institution’s position at some future date. These assets pose elevated risk, but their weakness does not yet justify a substandard classification. Borrowers may be experiencing adverse operating trends:

 

   

Declining revenues or margins

 

   

An ill-proportioned balance sheet

 

   

Example: increasing inventory without an increase in sales, high leverage, tight liquidity).

 

   

Adverse economic or market conditions,

 

   

Such as interest rate increases or entry of new competitor, may also support a OLEM rating

 

   

Non-financial reasons:

 

   

Management problems

 

   

Pending litigation,

 

   

An ineffective loan agreement

 

   

other material structural weakness

The OLEM rating is designed to identify a specific level of risk and concern about asset quality. Although an OLEM asset has a higher probability of default than a pass asset, its default is not imminent. OLEM is NOT a compromise between pass and substandard and should NOT be used to avoid exercising such judgment.

7-Substandard – A substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so, classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

Substandard assets have a high probability of payment default, or they have other well-defined weaknesses. They require more intensive supervision by bank management.

Substandard assets are generally characterized by:

 

   

current or expected unprofitable operations

 

   

inadequate debt service coverage

 

   

inadequate liquidity

 

   

marginal capitalization

Repayment may depend on collateral or other credit risk mitigates. For some substandard assets, the likelihood of full collection of interest and principal may be in doubt; such assets should be placed on nonaccrual. Although substandard assets in the aggregate will have a distinct potential for loss, an individual asset’s loss potential does not have to be distinct for the asset to be rated substandard.

 

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Notes to Consolidated Financial Statements

 

 

8-Doubtful – An asset classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

A doubtful asset has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity or capital, and lack the resources necessary to remain an operating entity. Pending events can include:

 

   

Mergers

 

   

Acquisitions

 

   

Liquidations

 

   

Capital injections

 

   

The perfection of liens on additional collateral

 

   

The valuation of collateral

 

   

Refinancing

Generally, pending events should be resolved within a relatively short period and the ratings will be adjusted based on the new information. Because of high probability of loss, nonaccrual accounting treatment is required for doubtful assets.

9-Loss – Assets classified loss are considered uncollectible and such little value that their continuance as bankable assets is not warranted. This classification does not mean that the assets has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future.

With loss assets, the underlying borrowers are often in bankruptcy, have formally suspended debt repayments, or have otherwise ceased normal business operations. Once an asset is classified loss, there is little prospect of collecting either its principal or interest. When access to collateral, rather than value of collateral, is the problem, a less severe classification may be appropriate. However, banks should not maintain an asset on the balance sheet it realizing its value would require long-term litigation or other lengthy recovery efforts. Losses are to be recorded in the period an obligation becomes uncollectible.

 

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Table of Contents

TGR Financial, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

 

Below are the statistics for past due and non-accrual loans, by portfolio segment, as of September 30, 2012 and December 31, 2011, respectively (dollars in thousands).

 

     30-59
Days
Past Due
     60-89
Days
Past Due
     90 +
Days
Past Due
     Non-
Accrual
     Total Past
Due and
Non-
Accrual
     Current      Total Loans      Current
Non-
Accrual
Loans
 

As of September 30, 2012

                       

Originated Loans:

                       

Residential single & multifamily

   $ —         $ —         $ —         $ —         $ —         $ 97,714       $ 97,714       $ —     

Commercial real estate

     —           —           —           1,327         1,327         111,563         112,890         —     

Construction loans

     —           —           —           —           —           26,965         26,965         —     

Commercial and industrial

     —           —           —           1,415         1,415         15,081         16,496         —     

Consumer and other

     137         —           —           25         162         12,067         12,229         —     

Acquired Loans:

                       

Commercial real estate

     370         —           —           3,232         3,602         26,026         29,628         3,232   

Residential, consumer and other

     93         737         —           449         1,279         26,211         27,490         449   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 600       $ 737       $ —         $ 6,448       $ 7,785       $ 315,627       $ 323,412       $ 3,681   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2011

                       

Originated Loans:

                       

Residential single & multifamily

   $ —         $ —         $ —            $ —         $ 45,743       $ 45,743       $ —     

Commercial real estate

     —           —           —              —           65,751         65,751         —     

Construction loans

     —           —           —              —           16,333         16,333         —     

Commercial and industrial

     —           —           —              —           16,391         16,391         —     

Consumer and other

     56         54         —           15         125         15,499         15,624         —     

Acquired Loans:

                       

Commercial real estate

     —           —           —           855         855         15,766         16,621         855   

Residential, consumer and other

     100         57         —           100         257         6,655         6,912         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 156       $ 111       $ —         $ 970       $ 1,237       $ 182,138       $ 183,375       $ 855   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2012, a portion of the Company’s acquired assets included loans which were contractually past due, including some that were 90 days or more past due. However, the elevated level of delinquencies of loans at the date of acquisition was considered in the Company’s performance expectations used in its determination of fair value for all acquired loans. Accordingly, all acquired loans continue to accrete interest income and all acquired loans continue to perform in accordance with management’s expectations established in conjunction with the determination of day one fair values. Acquired loans accounted for under ASC 310-30 have been omitted from the above past due schedule even though they may be “contractually” past due.

 

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Notes to Consolidated Financial Statements

 

 

The following is a summary of information pertaining to impaired loans as of September 30, 2012 and December 31, 2011, respectively (dollars in thousands).

 

     As of September 30, 2012      Nine Months Ended
September 30, 2012
 
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With No Related Allowance Recorded:

              

Residential single & multifamily

   $ —         $ —         $ —         $ 44       $ —     

Commercial real estate

     795         1,886         —           818         —     

Construction loans

     449         580         —           506         —     

Commercial and industrial

     —           —           —           —           —     

Consumer and other

     66         66         —           70         4   

With An Allowance Recorded:

              

Residential single & multifamily

     306         306         80         305         10   

Commercial real estate

     702         731         117         710         —     

Construction loans

     —           —           —           —           —     

Commercial and industrial

     —           —           —           —           —     

Consumer and other

     —           —           —           —           —     

Total:

              

Residential single & multifamily

     306         306         80         349         10   

Commercial real estate

     1,497         2,617         117         1,528         —     

Construction loans

     449         580         —           506         —     

Commercial and industrial

     —           —           —           —           —     

Consumer and other

     66         66         —           70         4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,318       $ 3,569       $ 197       $ 2,454       $ 14   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     As of December 31, 2011      Nine Months Ended
September 30, 2011
 
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With No Related Allowance Recorded:

              

Residential single & multifamily

   $ 57       $ 100       $ —         $ —         $ —     

Commercial real estate

     855         1,713         —           1,477         31   

Construction loans

     —           —           —           —           —     

Commercial and industrial

     —           —           —           —           —     

Consumer and other

     110         110         —           42         6   

With An Allowance Recorded:

              

Residential single & multifamily

     100         100         100         —           —     

Commercial real estate

     —           —           —           —           —     

Construction loans

     —           —           —           —           —     

Commercial and industrial

     —           —           —           —           —     

Consumer and other

     —           —           —           —           —     

Total:

              

Residential single & multifamily

     157         200         100         —           —     

Commercial real estate

     855         1,713         —           1,477         31   

Construction loans

     —           —           —           —           —     

Commercial and industrial

     —           —           —           —           —     

Consumer and other

     110         110         —           42         6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,122       $ 2,023       $ 100       $ 1,519       $ 37   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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TGR Financial, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

 

The following is a summary of information pertaining to loans modified as troubled debt restructurings for the periods listed below (dollars in thousands).

 

     Loans Modified as a TDR for the Nine Months Ended  
Troubled Debt Restructuring    September 30, 2012      September 30, 2011  

Commercial Real Estate:

     

Number of loans

     1         1   

Pre-modification balances outstanding

   $ 1,128       $ 1,014   

Post-modification balances outstanding

   $ 702       $ 1,005   

Home Equity Lines of Credit:

     

Number of loans

     —           —     

Pre-modification balances outstanding

   $ —         $ —     

Post-modification balances outstanding

   $ —         $ —     

Construction Loans:

     

Number of loans

     1         —     

Pre-modification balances outstanding

   $ 580       $ —     

Post-modification balances outstanding

   $ 449       $ —     

Consumer Loans:

     

Number of loans

     —           1   

Pre-modification balances outstanding

   $ —         $ 40   

Post-modification balances outstanding

   $ —         $ 36   
  

 

 

    

 

 

 

Total Loans:

     

Number of loans

     2         2   

Pre-modification balances outstanding

   $ 1,708       $ 1,054   

Post-modification balances outstanding

   $ 1,151       $ 1,041   
  

 

 

    

 

 

 

The Bank had two loans classified as troubled debt restructurings during the nine months ended September 30, 2012. The restructured terms included either rate reductions between 100 - 150 basis points and/or payment terms reduced from principal and interest to interest only. All loans are performing under the restructured terms.

There were no loans classified as troubled debt restructurings that re-defaulted during the period of 12 months from their modification date.

 

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TGR Financial, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

 

The following tables illustrate information related to the Bank’s other real estate owned, net of valuation allowances and direct write-downs:

 

     September 30, 2012      December 31, 2011  

Commercial real estate

   $ 2,101       $ 799   

Construction and land loans

     680         —     
  

 

 

    

 

 

 

Total

   $ 2,781       $ 799   
  

 

 

    

 

 

 

Balance at January 1, 2012

      $ 799   

Transfers of loans

        —     

Fair value of other real estate owned acquired

        3,149   

Write downs

        (105

Dispositions

        (1,061

Other

        (1
     

 

 

 

Balance at September 30, 2012

      $ 2,781   
     

 

 

 

Loans Acquired in the Royal Palm Acquisition

All loans acquired with credit deterioration are being accounted for pursuant to ASC Topic 310-30. We arrived at this conclusion as follows. First, we segregated all acquired loans with specifically identified credit deficiency factor(s). The factors we used were all acquired loans that were non-accrual, 60 days or more past due, designated as Troubled Debt Restructurings (“TDR”), graded “special mention” or “substandard,” had more than five 30 day past due notices, or had any 60 day or 90 day past due notices during the loan term. For this disclosure purpose, we refer to these loans as 310-30 loans. Second, all remaining acquired loans, those without specifically identified credit deficiency factors, have been accounted for pursuant to ASC 310-20. These loans were evaluated to determine estimated fair values as of the Closing Date.

 

As of September 30, 2012    ASC 310-30      ASC 310-20      Total  

Commercial real estate

   $ 11,198       $ 7,490       $ 18,689   

Construction loans

     1,291         288         1,579   

Commercial and industrial

     38         1,194         1,232   

Home equity lines of credit

     88         902         990   

Residential single family

     5,835         8,397         14,233   

Consumer installment loans

     —           129         129   
  

 

 

    

 

 

    

 

 

 
   $ 18,451       $ 18,401       $ 36,852   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

TGR Financial, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

 

The following table summarizes the total contractually required principal and interest cash payments, management’s estimate of expected cash payments and the carrying value of the loans as of September 30, 2012. Contractually required principal and interest payments have been adjusted for estimated prepayments.

 

(dollars in thousands)

   July 20, 2012     Income
Accretion
     Other
Adjustments
    September 30,
2012
 

Contractually-required principal

   $ 54,045      $ —         $ (2,603   $ 51,442   

Non-accretable difference

     (12,200     46         7        (12,147
  

 

 

   

 

 

    

 

 

   

 

 

 

Cash flows expected to be collected

     41,845        46         (2,596     39,295   

Accretable yield

     (3,038     119         476        (2,443
  

 

 

   

 

 

    

 

 

   

 

 

 

Carrying value of acquired loans

   $ 38,807      $ 165       $ (2,120   $ 36,852   
  

 

 

   

 

 

    

 

 

   

 

 

 

For the period from the Closing Date through September 30, 2012, there was a single reclassification of $46,000 from non-accretable to accretable for the short sale of a credit impaired loan.

NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill not subject to amortization of $3.9 million was recorded in conjunction with the business combination between First National and Panther. Additionally, an indefinite lived bank charter intangible asset of $1.2 million was recorded in conjunction with the business combination. Goodwill has been assigned to the Bank’s single reporting unit. Fair value of the Bank’s single reporting segment is determined using either discounted cash flow analyses based on internal financial forecasts or, if available, market-based valuation multiples for comparable businesses. No impairment was identified for the Bank’s goodwill as a result of the testing performed for the years ended December 31, 2011 and 2010.

Intangible assets subject to amortization include the Bank’s trademarked logo and core deposit intangibles recorded with the Royal Palm Acquisition. The carrying amount of these assets was $213,000 at September 30, 2012. The trademarked logo is being amortized over a period of 20 years. The core deposit intangible is being amortized over five years. The annual amortization is approximately $27,000.

The carrying amount of the Bank’s intangibles was $122,000 at September 30, 2011.

NOTE 7. BORROWINGS

Short and Long Term Borrowings

The FHLB of Atlanta has extended credit availability to the Bank equal to approximately 20% of total assets or $101 million in remaining credit availability at September 30, 2012. All borrowings must be fully secured with eligible collateral. As of September 30, 2012, the Bank had $63.6 million in eligible loans pledged as collateral for advances listed in the schedule below (dollars in thousands).

 

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Notes to Consolidated Financial Statements

 

 

     As of September 30, 2012  
Short Term Advances    Term    Maturity
Date
   Interest Rate     Advance
Amount
 

Fixed rate advance

   30 days    10/26/12      0.19   $ 5,000   
        

 

 

   

 

 

 

Average weighted rate

           0.19   $ 5,000   
        

 

 

   

 

 

 

 

Long Term Advances    Term    Maturity
Date
   Interest Rate     Advance
Amount
 

Fixed rate advance

   3 years    02/03/15      0.66   $ 3,000   

Fixed rate advance

   4 years    02/03/16      0.91     3,000   
        

 

 

   

 

 

 

Average weighted rate

           0.78   $ 6,000   
        

 

 

   

 

 

 

The Bank had available credit of $25 million under unsecured federal funds lines of credit with two correspondent banks at September 30, 2012. There were no borrowings outstanding under the agreements at September 30, 2012 or December 31, 2011.

The Bank has securities sold under agreements to repurchase with commercial account holders whereby the Bank sweeps the customer’s accounts on a daily basis and pays interest on these amounts. These agreements are collateralized by investment securities chosen by the Bank. The Bank had approximately $47 million and $39 million in such accounts as of September 30, 2012 and December 31, 2011, respectively. The average rate of interest paid for the three months ended September 30, 2012 was 0.38%.

NOTE 8. STOCK OPTIONS AND WARRANTS

The Company has two stock option plans, one for (i) directors and one for (ii) officers and employees, with options outstanding at September 30, 2012 of 185,856 and 64,944, respectively. The maximum number of options that can be granted under both plans may not exceed 10% of the aggregate of outstanding common and preferred stock. There are 1,155,214 options available for grant between the plans. With the closing of the reorganization on September 25, 2012, the Company adopted both of the stock option plans (which had formerly been plans of the Bank), and issued Company stock options (and warrants) on a one-for-one basis to option and warrant holders of the Bank.

Under the terms of the plans, employees’ options generally vest over a period of three years and have a term of 10 years. The directors’ options generally vest over five years and have a term of 10 years. New shares of Company common stock will be issued upon the exercise of options.

As of September 30, 2012, there was no unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the two plans.

 

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Notes to Consolidated Financial Statements

 

 

There were no stock based compensation awards granted during the periods ended September 30, 2012 or 2011, respectively. The following table presents the activity of the Company’s outstanding stock options and warrants, for the periods ended September 30, 2012 and 2011, respectively. The table includes option and warrant activity of the Bank, before closing of the reorganization on September 25, 2012.

 

     For the Nine Months Ended September 30,  
     2012      2011  
     Number of
Options
    Weighted
Average Exercise
Price
     Number of
Options
    Weighted
Average Exercise
Price
 

STOCK OPTIONS:

         

Options outstanding, beginning of period

     254,496      $ 7.58         277,728      $ 7.58   

Options granted

     —          —           —          —     

Options exercised

     —          —           —          —     

Options repurchased

     —          —           —          —     

Options expired

     (3,696     7.58         (23,232     7.58   
  

 

 

   

 

 

    

 

 

   

 

 

 

Options outstanding, end of period

     250,800      $ 7.58         254,496      $ 7.58   
  

 

 

   

 

 

    

 

 

   

 

 

 

Exercisable at end of period

     250,800      $ 7.58         254,496      $ 7.58   
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted Average Remaining Contractual Term

       5.53 years           6.55 years   

STOCK WARRANTS:

         

Warrants outstanding, beginning of period

     1,633,443      $ 10.00         1,633,443      $ 10.00   

Warrants granted

     —          —           —          —     

Warrants exercised

     —          —           —          —     

Warrants repurchased

     —          —           —          —     

Warrants expired

     —          —           —          —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Warrants outstanding, end of period

     1,633,443      $ 10.00         1,633,443      $ 10.00   
  

 

 

   

 

 

    

 

 

   

 

 

 

Exercisable at end of period

     1,633,443      $ 10.00         1,633,443      $ 10.00   
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted Average Remaining Contractual Term

       4.98 years           5.98 years   

In accordance with the terms of the original offering prospectus dated July 14, 2009, and as part of the Agreement and Plan of Merger between Panther and First National, dated April 23, 2009, organizers and founders received organizer warrants to purchase 952,500 shares with a term of 10 years and shareholder warrants to purchase 10,020 shares of common stock with a term of five years. Additionally, all other common shareholders received warrants to purchase a total of 671,054 shares with a term of five years. All warrants were at an exercise price of $10 per share and immediately exercisable. All outstanding warrants to purchase shares of the Bank’s common stock were converted into warrants to purchase shares of the Company’s common stock upon closing of the reorganization on September 25, 2012.

On September 16, 2011; the Bank issued rights to each shareholder of record as of July 12, 2011. This offering consisted of rights to purchase 5,412,523 shares of common stock at a price of $5.00. As of September 30, 2011, rights to purchase 5,380,973 shares of common stock were outstanding. A total of 31,550 shares were purchased. The rights offering expired on November 15, 2011.

NOTE 9. LOSS PER SHARE

Basic loss per share represents the net loss divided by the weighted average number of common stock outstanding during the period. Diluted earnings per share reflects additional potential common stock that would have been outstanding if dilutive potential common stock had been issued, as well as any adjustment to income that would result from the assumed issuance, determined using the treasury stock method. Potential common stock that may be issued by the Company relate solely to outstanding stock options and warrants.

There is no dilutive effect from stock options or warrants. There were a total of 1,884,243 and 1,887,939 outstanding warrants and options, at September 30, 2012 and 2011, respectively, excluded from the calculation of diluted loss per share because the effect would be anti-dilutive.

 

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TGR Financial, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

 

At September 30, 2012; the Company had subscriptions receivable representing 273,427 shares of common stock and 126,573 shares of convertible preferred stock. The impact on basic and diluted shares outstanding for the three and nine months ended September 30, 2012 is insignificant based upon timing and would not change the resulting earnings per share calculation in either period. As such, the impact of this event has been excluded from the table below and on the consolidated statements of operations.

 

Nine Months Ended:

   September 30, 2012      September 30, 2011  

Weighted average number of shares of common stock outstanding:

     14,060,143         9,904,399   

Basic and diluted gain/(loss), per share

   $ 0.01       $ (0.24
  

 

 

    

 

 

 

Three Months Ended:

   September 30, 2012      September 30, 2011  

Weighted average number of shares of common stock outstanding:

     14,060,143         13,402,644   

Basic and diluted gain/(loss), per share

   $ 0.04       $ (0.05
  

 

 

    

 

 

 

NOTE 10. COMMITMENTS AND CONTINGENCIES

The Bank, in the normal course of business, is party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized on the statement of financial condition. The contractual amounts of these instruments reflect the Bank’s involvement in particular classes of financial instruments.

The Bank’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instruments for commitments to extend credit and letters of credit is represented by the contractual amounts of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Following is a summary of off-balance sheet credit risk information (dollars in thousands).

 

     September 30, 2012      December 31, 2011  

Commitments to extend credit

   $ 38,078       $ 35,580   

Standby letters of credit

   $ 431       $ 506   

Commitments to extend credit are commitments 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 Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if any, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include cash, accounts receivable, inventory, property, plant and equipment and residential and commercial real estate.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Letters of credit are collateralized by certificates of deposit or other collateral. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Bank is required to fund the commitment. The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount of the letter of credit. If the commitment is funded, the Bank is entitled to seek recovery from its customer. No liabilities were recorded for these guarantees at September 30, 2012.

 

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Notes to Consolidated Financial Statements

 

 

NOTE 11. CONCENTRATIONS OF RISK

The Bank is not party to any claims, lawsuits or other litigation that might have a material effect on its consolidated financial statements.

Most of the Bank’s business activity is with customers located within its primary market area, generally southwest Florida. Approximately 91% of the Bank’s loan portfolio at September 30, 2012 was concentrated in loans secured by real estate. Residential first mortgages and home equity lines of credit represent 32% of gross loans or approximately $105 million. Commercial real estate comprises 45% of gross loans or approximately $154 million. At September 30, 2012 and December 31, 2011, the Bank had no significant concentrations of credit risk with any individual counterparty.

At September 30, 2012, deposits and/or repurchase agreements of two customers individually exceeded 5% of total deposits. These deposits totaled approximately $59.8 million or 12% of total deposits and repurchase agreements. Of the $59.8 million, $37 million is represented by term CDs with the State of Florida. These deposits are deemed to be core relationships, as these accounts are all with the State and local community based businesses. Management does not view this concentration as a liquidity risk. The interest rate paid on these deposits ranges between 0.30% and 0.58%.

NOTE 12. RESTRICTIONS ON RETAINED EARNINGS AND REGULATORY MATTERS

The Bank is subject to certain restrictions on the amount of dividends that may be declared without prior regulatory approval. At September 30, 2012, there were no retained earnings available for the payment of dividends.

The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, banks must meet specific capital guidelines that involve quantitative measures of the bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets (as defined by FDIC regulations). The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. 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 Bank’s financial statements. Management believes that the Bank met all capital adequacy requirements to which it was subject at September 30, 2012.

At September 30, 2012, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s category.

 

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Notes to Consolidated Financial Statements

 

 

The Company and the Bank’s actual capital amounts and ratios are also presented in the table below (dollars in thousands). The maximum amount of Tier II capital, contributed via the allowance for loan losses, is limited to 1.25% of gross risk weighted assets. This limitation, where applicable, is reflected in the total capital amounts listed below.

 

     Actual     For Capital Adequacy
Purposes
    To Be Well Capitalized
Under Prompt Corrective
Action  Provisions
 

TGR Financial, Inc.

               

As of September 30, 2012:

               

Total capital (to risk weighted assets):

   $ 64,820         18.69   $ 27,751         8.00   $ 34,689         10.00

Tier I capital (to risk weighted assets):

     60,478         17.43        13,875         4.00        20,813         6.00   

Tier I capital (to average assets):

     60,478         10.92        22,149         4.00        27,687         5.00   

First National Bank of the Gulf Coast

               

As of September 30, 2012:

               

Total capital (to risk weighted assets):

   $ 63,459         18.40   $ 27,589         8.00   $ 34,486         10.00

Tier I capital (to risk weighted assets):

     59,143         17.15        13,794         4.00        20,691         6.00   

Tier I capital (to average assets):

     59,143         10.68        22,145         4.00        27,681         5.00   

First National Bank of the Gulf Coast

               

As of December 31, 2011:

               

Total capital (to risk weighted assets):

   $ 61,205         27.75   $ 17,645         8.00   $ 22,056         10.00

Tier I capital (to risk weighted assets):

     58,444         26.50        8,822         4.00        13,234         6.00   

Tier I capital (to average assets):

     58,444         15.74        14,854         4.00        18,568         5.00   

The Bank is additionally required to maintain reserve requirements based on its specified deposit liabilities with the Federal Reserve Bank. The reserve requirements can be satisfied in the form of vault cash or average deposit balances with the Federal Reserve Bank.

Operating Agreement with the Office of the Comptroller of the Currency

The Bank was previously subject to the terms of an Operating Agreement between the Bank and the OCC, executed on October 26, 2009. In a letter dated September 13, 2012, the OCC indicated that the Bank had met all the requirements pursuant to the Operating Agreement. The letter further stated the primary purpose of the Operating Agreement was to ensure that the Bank operate in a safe and sound manner, in accordance with all applicable laws, rules and regulations, to address the high level of liquidity risk and the need to maintain satisfactory capital levels. The OCC indicated the Bank had adopted, implemented and adhered to all the provisions of the Operating Agreement and therefore, pursuant to Article VII, paragraph (4), the OCC has terminated the Operating Agreement effective October 8, 2012.

NOTE 13. FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Fair value is defined as the price that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

   

Level I: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

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TGR Financial, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

 

   

Level II: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other observable inputs or can be corroborated by observable market data.