Ameris: Audited Consolidated Financial Statements
The following excerpt is from the company's SEC filing
We have audited the
accompanying consolidated financial statements of The Prosperity Banking Company and Subsidiaries (the Company), which comprise the consolidated balance sheets as of December 31, 2012 and 2011, and the related consolidated
statements of operations, comprehensive income (loss), stockholders equity, and cash flows for the years then ended, and the related notes to the financial statements.
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles
generally accepted in the United States of Ameri
ca; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing
standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures
selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal
control relevant to the entitys preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entitys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained
is sufficient and appropriate to provide a basis for our audit opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and its
subsidiary as of December 31, 2012 and 2011, and the results of their operations and cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Prosperity Banking Company (the Holding Company) is a one-bank holding company. The Holding Companys wholly-owned subsidiaries are Prosperity Bank (the Bank) and Prosperity Land Holdings, LLC (PLH). The Bank
is state-(Florida) chartered and its deposits are insured up to the applicable limits by the Federal Deposit Insurance Corporation. The Bank offers a variety of community banking services to individuals and businesses through twelve banking offices
located in St. Johns, Duval, Flagler, Bay, Putnam and Volusia Counties, Florida. PLH was organized to facilitate certain land acquisition transactions.
Basis of Presentation. The consolidated financial statements include the accounts of the Holding Company, the
Bank and PLH (collectively, the Company). All significant intercompany accounts and transactions have been eliminated in consolidation. The accounting and reporting practices of the Company conform to accounting principles generally
accepted in the United States of America (GAAP) and to general practices within the banking industry. The following summarizes the more significant of these policies and practices.
Use of Estimates. The preparation of consolidated financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, deferred tax assets, the valuation of foreclosed
assets and the determination of whether an investment security is other-than-temporarily impaired.
Events. The Company has evaluated events occurring subsequent to the balance sheet date through March 20, 2013 (the financial statement issuance date), determining no events require additional disclosure in these consolidated financial
Cash and Cash Equivalents. For purposes of the consolidated statements of cash flows, cash and
cash equivalents include cash and balances due from banks and interest-earning deposits with banks.
The Bank is required under Federal
Reserve Board regulations to maintain reserves, generally consisting of cash or noninterest-earning accounts, against its transaction deposit accounts. At December 31, 2012 and 2011, these required reserves were approximately $1.0 million and
$1.1 million, respectively.
Securities. The Company may classify its securities as either
trading, held to maturity or available for sale. Trading securities are held principally for resale and recorded at their fair values. Unrealized gains and losses on trading securities are included immediately in operations. Held-to-maturity
securities are those which the Company has the positive intent and ability to hold to maturity and are reported at amortized cost. Available-for-sale securities consist of securities not classified as trading securities nor as held-to-maturity securities. Unrealized holding gains and losses on available-for-sale securities are excluded from operations and reported as a net amount in accumulated
other comprehensive loss. Gains and losses on the sale of available-for-sale securities are determined using the
specific-identification method. Premiums and discounts on securities available for sale and held to maturity are recognized in interest income using the interest method over the period to maturity.
The Company views the determination of whether an investment security is temporarily or other-than-temporarily impaired as a critical
accounting policy, as the estimate is susceptible to significant change from period to period because it requires management to make significant judgments, assumptions and estimates in the preparation of its consolidated financial statements.
Management considers whether an investment security is other-than-temporarily impaired under the guidance provided in Accounting Standards Codification (ASC) Topic 320, Investments Debt and Equity Securities. The Company
assesses individual securities in its investment securities portfolio for impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. An investment is impaired if the fair value of the
security is less than its carrying value at the financial statement date. When a security is impaired, the Company then determines whether this impairment is temporary or other-than-temporary. In estimating other-than-temporary impairment
(OTTI) losses, management assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of these
criteria is met, the entire difference between amortized cost and fair value is recognized in operations. For securities that do not meet the aforementioned criteria, the amount of impairment recognized in operations is limited to the amount related
to credit losses, while impairment related to other factors is recognized in other comprehensive loss. Management utilizes cash flow models to segregate impairments to distinguish between impairment related to credit losses and impairment related to
other factors. To assess for OTTI, management considers, among other things, (i) the severity and duration of the impairment; (ii) the ratings of the security; (iii) the overall transaction structure (the Companys position
within the structure, the aggregate, near-term financial performance of the underlying collateral, delinquencies, defaults, loss severities, recoveries, prepayments, cumulative loss projections, and discounted cash flows); and (iv) the timing
and magnitude of a break in modeled cash flows.
Loans Held for Sale. Loans held for sale are carried at the
lower of cost or estimated fair value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to operations. Loan origination fees are deferred and direct loan origination costs are capitalized until the
related loan is sold, at which time the net fees are included in the gain on sale of loans in the consolidated statements of operations. At December 31, 2012 and 2011, the Company had no loans held for sale.
Loans. Loans that management has the intent and the Company has the ability to hold for the foreseeable future
or until maturity or pay-off are reported at their outstanding principal adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs.
Loan origination fees are deferred and certain direct origination costs are capitalized. Both are recognized as an adjustment of the yield
of the related loan.
The accrual of interest on loans is discontinued at the time the loan is ninety days delinquent unless the loan is
well collateralized and in process of collection. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans placed on nonaccrual or charged-off is reversed against interest income. The interest on these
loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are
Allowance for Loan Losses. The allowance for loan losses is established as losses are
estimated to have occurred through a provision for loan losses charged to operations. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are
credited to the allowance. There were no changes in the Companys accounting policies or methodology during the years ended December 31, 2012 and 2011.
The allowance for loan losses is evaluated on a regular basis by management and is based upon managements periodic review of the
collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrowers ability to repay, estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
Allowance for Loan Losses, Continued. The allowance
consists of specific and general components. The specific component relates to loans that are classified as impaired. For such loans, an allowance is established when the discounted cash flows or the collateral value of the impaired loan is lower
than the carrying value of that loan. The general component covers nonimpaired loans and is based on historical loss experience, adjusted for qualitative factors, such as economic conditions and other trends or uncertainties that could affect
managements estimate of probable losses.
The historical loss component of the allowance is determined by losses recognized by
portfolio segment over the preceding three years. This is supplemented by the risks for each portfolio segment. Risk factors impacting loans in each of the portfolio segments include broad deterioration of property values, reduced consumer and
business spending as a result of continued high unemployment and reduced credit availability and lack of confidence in a sustainable recovery. The historical experience is adjusted for the following qualitative factors, changes in underwriting,
lending policies and procedures, nature of volume, or terms of loans, experience of lending management, credit concentrations, volume of past due and nonaccrual loans, quality of loan reviews, international, national, regional, and local economic
business conditions and other trends or uncertainties that could affect managements estimate of probable losses.
A loan is
considered impaired when, based on current information and events, it is probable the Company will be unable to collect the scheduled payments of principal or interest when due. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the
borrowers prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial, commercial real estate, residential real estate and construction and
land development loans by either the present value of expected future cash flows discounted at the loans effective interest rate, the loans obtainable market price, or the fair value of the collateral if the loan is collateral-dependent.
Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately
identify loans less than $50,000 for impairment disclosures.
Premises and Equipment. Land is stated at
cost. Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expense are computed using the straight-line method over the shorter of the estimated useful lives of the assets or related
Foreclosed Assets. Assets acquired through, or in lieu of,
foreclosure, are held for sale and are initially recorded at fair value less disposition costs at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the assets are
carried at the lower of the new cost basis or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in operations.
Transfer of Financial Assets. Transfers of financial assets or a participating interest in an entire financial
asset are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right
(free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them
before their maturity. A participating interest is a portion of an entire financial asset that (1) conveys proportionate ownership rights with equal priority to each participating interest holder (2) involves no recourse (other than
standard representations and warranties) to, or subordination by, any participating interest holder, and (3) does not entitle any participating interest holder to receive cash before any other participating interest holder.
Income Taxes. GAAP results in two components of income tax expense: current and deferred. Current income tax
expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or
balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in
the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods.
Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than fifty percent; the
terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount
of tax benefit that has a greater than fifty percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the
more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to managements judgment. Deferred tax assets are reduced by a valuation allowance if, based on the
weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. As of December 31, 2012, management is not aware of any uncertain tax positions that would have a material effect on
the Companys consolidated financial statements.
The Company files consolidated income tax returns. Income taxes are
allocated to the Holding Company and Bank as if separate income tax returns were filed.
Compensation. The Company expenses the fair value of any stock options as they vest. The Company recognizes stock-based compensation in the accompanying consolidated statements of operations.
Off-Balance-Sheet Financial Instruments. In the ordinary course of business, the Company has entered into
off-balance-sheet financial instruments consisting of commitments to extend credit, construction loans in process, unused lines of credit and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements
when they are funded.
Earnings (Loss) Per Share. Earnings (loss) per share is computed on the basis of the
weighted-average number of common shares outstanding. For 2011, outstanding stock options were not considered dilutive due to the loss incurred by the Company. Outstanding stock options were not dilutive during the year ended December 31, 2012
because their exercise price was in excess of the per share value of the Companys common stock.
of Financial Instruments. The following methods and assumptions were used by the Company in estimating fair values of financial instruments:
Loans. For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on
carrying values. Fair values for fixed-rate mortgage (e.g. one-to-four family residential), commercial real estate and commercial loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Fair values for collateral dependent impaired loans are based on the framework for measuring fair value.
Federal Home Loan Bank Stock. Fair value of the Companys investment in Federal Home Loan Bank stock is its redemption
value, which is its cost of $100 per share.
Deposits. The fair values disclosed for demand, NOW, money-market and savings
deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). Fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently
being offered on time deposits to a schedule of aggregated expected monthly maturities of time deposits.
Federal Home Loan Bank
Advances. Fair values are estimated using discounted cash flow analysis based on the Companys current incremental borrowing rates for similar types of borrowing arrangements.
Junior Subordinated debentures. The junior subordinated debentures are only transferrable in the case of a merger, therefore, the
fair value is estimated to be their settlement value which approximates par.
Off-Balance-Sheet Financial Instruments. Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties credit standing.
Comprehensive Income (Loss). Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in operations. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the consolidated balance
sheets, such items, along with net earnings (loss), are components of comprehensive income (loss).
Fair Value Measurements. Fair value is the exchange price that
would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value
hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy describes three levels of inputs that may be used to measure fair value:
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted
prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; and model-driven valuations whose inputs are observable or whose significant value drivers are observable.
Valuations may be obtained from, or corroborated by, third-party pricing services.
Level 3: Unobservable inputs to measure fair value of
assets and liabilities for which there is little, if any market activity at the measurement date, using reasonable inputs and assumptions based upon the best information at the time, to the extent that inputs are available without undue cost and
Securities Available for Sale. Where quoted prices are available in an active market, securities are classified within Level 1 of the
valuation hierarchy. Level 1 securities include highly liquid government bonds, certain mortgage products and exchange-traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices
of securities with similar characteristics, or discounted cash flows. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include certain collateralized mortgage and debt obligations and
certain high-yield debt securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Securities classified within Level 3
include certain residual interests in securitizations and other less liquid securities.
Impaired Loans and Foreclosed Assets.
Estimates of fair value are determined based on a variety of information, including the use of available appraisals, estimates of market value by licensed appraisers or local real estate brokers and the knowledge and experience of the Companys
management related to values of properties in the Companys market areas. Management takes into consideration the type, location and occupancy of the property as well as current economic conditions in the area the property is located in
assessing estimates of fair value. Accordingly, fair value estimates for impaired loans and foreclosed assets are classified as Level 3.
Mortgage Servicing Rights. Mortgage servicing rights (MSRs) do not trade
in an active, open market with readily observable prices. While sales of MSRs do occur, the precise terms and conditions typically are not readily available. Accordingly, the Company estimates the fair value of MSRs using discounted cash flow
For MSRs, the Company uses an option adjusted spread (OAS) valuation model in conjunction with the
Company proprietary prepayment model to project MSR cash flows over multiple interest rate scenarios, which are then discounted at risk-adjusted rates to estimate an expected fair value of the MSRs. The OAS model considers portfolio characteristics,
contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenues, costs to service and other economic factors. Due to the nature of the valuation inputs, MSRs are classified as Level 3.
Recent Pronouncements. In June 2011, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) No. 2011-05, Comprehensive Income (Topic 220). The amendments in this update remove the option to present the components of other comprehensive income as part of the consolidated statements
of stockholders equity. ASU No. 2011-05 was effective for annual periods, beginning on January 1, 2012. The adoption of this guidance did not have a material impact on the Companys consolidated financial statements.
In December 2011, 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 was issued. In order to defer only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs in this ASU supersede certain
pending paragraphs in ASU 2011-05. The amendments were made to allow the FASB time to re-deliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the
components of net income and other comprehensive income for all periods presented. While the FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users
for additional information about reclassification adjustments, entities are required to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05.
All other requirements in ASU 2011-05 are not affected by this ASU, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. The provisions of
ASU 2011-12 had no effect on the Companys consolidated financial statements.
Carrying value of securities pledged to secure Federal Home Loan Bank advances, other borrowings, public deposits or for other purposes
required or permitted by law, at year end
Information pertaining to securities with gross unrealized losses at
December 31, 2012, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows (in thousands):
There were no other-than-temporary impairments recognized on trust preferred securities
during the years ended December 31, 2012 and 2011. However, cumulative OTTI losses recognized in previous years total $5,522,000.
Management will continue to evaluate the investment ratings in the securities portfolio, severity in pricing declines, market
price quotes along with timing and receipt of amounts contractually due. Based upon these and other factors, the securities portfolio may experience further impairment.
The unrealized losses with respect to mortgage-backed securities, collateralized mortgage obligations and trust preferred
securities that are not deemed other-than-temporarily impaired are considered by management to be principally attributable to changes in market interest rates, and not to credit risk or deterioration on the part of the issuer. Since the Company has
the intent and ability to hold their investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.
The Company has divided the loan portfolio into five portfolio segments and classes, each
with different risk characteristics and methodologies for assessing risk. The portfolio segments and classes are identified by the Company as follows:
Residential Real Estate Loans. The Company originates adjustable-rate and fixed-rate, residential real estate loans for the
construction, purchase or refinancing of a mortgage. These loans are collateralized by owner-occupied properties located in the Companys market area. Residential real estate loans are underwritten in accordance with polices set forth and
approved by the Companys board of directors. Such standards include repayment capacity and source, value of the underlying property, credit history stability.
Commercial Real Estate Loans. Commercial real estate loans consist of loans to finance real estate purchases, refinancings,
expansions and improvements to commercial properties. These loans are secured by first liens on office buildings, apartments, farms, retail and mixed-use properties, churches, warehouses and restaurants located within the market area. The
Companys underwriting analysis includes credit verification, independent appraisals, a review of the borrowers financial condition, and a detailed analysis of the borrowers underlying cash flows. Commercial real estate loans are
larger than residential loans and involve greater credit risk. The repayment of these loans largely depends on the results of operations and management of these properties. Adverse economic conditions also affect the repayment ability to a greater
extent than residential real estate loans.
Construction and Land Development Loans. Construction loans consist of loans to
builders and commercial borrowers and, to a limited extent, loans to individuals for the construction of their primary residences. These loans are categorized as construction and land development loans during the construction period, later
converting to commercial or residential real estate loans after the construction is complete and amortization of the loan begins. Construction and land development loans are approved based on an analysis of the borrower and guarantor, the viability
of the project and on an acceptable percentage of the appraised value of the property securing the loan. The funds are disbursed periodically based on the percentage of construction completed. The Company carefully monitors these loans with on-site
inspections and requires the receipt of lien waivers on funds advanced. To the extent construction loans are not made to owner-occupants of single-family homes, they are more vulnerable to changes in economic conditions. Further, the nature of these
loans is such that they are more difficult to evaluate and monitor. The risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the propertys value upon completion of the project and the estimated
cost (including interest) of the project.
Commercial. Commercial loans consist of loans to small- and medium-sized companies
in the Companys market area. Commercial loans are generally used for working capital purposes or for acquiring equipment, inventory or furniture. Primarily all of the Companys commercial loans are secured loans, along with a small amount
of unsecured loans. The Companys underwriting analysis consists of a review of the financial statements of the borrower, the lending history of the borrower, the debt service capabilities of the borrower, the projected cash flows of the
business, the value of the collateral, if any, and whether the loan is guaranteed by the principals of the borrower. These loans are generally secured by accounts receivable, inventory and equipment. Commercial loans are typically made on the basis
of the borrowers ability to make repayment from the cash flow of the borrowers business, which makes them of higher risk than residential loans and the collateral securing loans may be difficult to appraise and may fluctuate in value
based on the success of the business. The Company seeks to minimize these risks through our underwriting standards.
Other. Consumer loans mainly consist of variable-rate and fixed-rate home equity lines-of-credit secured by a lien on the borrowers primary residence. Most of the Companys consumer loans share approximately the same level of risk
as residential mortgages.
The Company categorizes loans into risk categories based on relevant information about the
ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.
The Company analyzes loans individually by classifying the loans as to credit risk. Loans classified as substandard or
special mention are reviewed quarterly by the Company for further deterioration or improvement to determine if they are appropriately classified and whether there is any impairment. All loans are graded upon initial issuance. Further, commercial
loans are typically reviewed at least annually to determine the appropriate loan grading. In addition, during the renewal process of any loan, as well as if a loan becomes past due, the Company will determine the appropriate loan grade.
Loans excluded from the review process above are generally classified as pass credits until: (a) they become past due;
(b) management becomes aware of a deterioration in the credit worthiness of the borrower; or (c) the customer contacts the Company for a modification. In these circumstances, the loan is specifically evaluated for potential classification
as to special mention, substandard or even charged-off. The Company uses the following definitions for risk ratings:
Pass loans primary source of loan repayment is satisfactory, with secondary sources very likely to be realized if necessary.
Special Mention A Special Mention loan has potential weaknesses that deserve
managements close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Companys credit position at some future date. Special Mention loans are not
adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.
Substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans 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 Company will sustain some loss if the deficiencies are not corrected.
Doubtful A loan classified Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristics
that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loss A loan classified Loss is considered uncollectible and of such little value that continuance as a bankable asset is not
warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in
The average net investment in impaired loans and interest income recognized
and received on impaired loans are as follows (in thousands):
The following is a summary of loans determined to be troubled debt
restructuring during the years ended December 31, 2012 and 2011 (dollars in thousands):
The allowance for loan losses on residential real estate, commercial real
estate, construction and land development, commercial and consumer and other loans that have been restructured and are considered trouble debt restructurings (TDR) is included in the Companys specific reserve. The specific reserve
is determined on a loan by loan basis by either the present value of expected future cash flows discounted at the loans effective interest rate, or the fair value of the collateral if the loan is collateral-dependent. TDRs that have
subsequently defaulted are considered collateral-dependent.
Loans serviced for other entities are not included in the accompanying consolidated balance
sheets. The unpaid principal balances of these loans were approximately $31.9 million and $40.2 million at December 31, 2012 and 2011, respectively. Loan servicing income, net of amortization of mortgage servicing rights, was $86,000 and
$16,000 for the years ended December 31, 2012 and 2011, respectively, and is included in other noninterest income on the consolidated statements of operations.
The balance of capitalized servicing rights at December 31, 2012 and 2011 was $147,000 and $185,000, respectively. The
fair value of servicing rights was determined from a third-party valuation using discount rates ranging from 8% to 10% and prepayment speeds ranging from 17.46% to 25.68%, depending upon the stratification of the specific right.
The Company grants the majority of its loans to
borrowers throughout St. Johns, Clay, Duval, Flagler, Bay, Putnam, Columbia and Volusia Counties, Florida. Although the Company has a diversified loan portfolio, a significant portion of its borrowers ability to honor their contracts is
dependent upon the economy in these counties.
The Company leases office space and equipment under operating leases. Some leases contain
escalation clauses and expense pass-throughs as well as renewal options. Total rent expense for the years ended December 31, 2012 and 2011 was approximately $161,000 and $160,000, respectively. Approximate future minimum lease payments at
December 31, 2012 are as follows (in thousands):
The Company leases space to third parties. The Company recognized $274,000 and $291,000 in
rental income during the years ended December 31, 2012 and 2011, respectively, which is netted against occupancy and equipment expense in the consolidated statements of operations.
The aggregate amount of time deposits with a minimum
denomination of $100,000, was approximately $24.1 million and $21.3 million at December 31, 2012 and 2011, respectively.
The advances are collateralized by the Companys FHLB stock,
mortgage-backed securities and qualifying residential and commercial real estate mortgages pledged as collateral under a blanket floating lien agreement. As of December 31, 2012, the Company had $20 million available on their line with the
The Company offers retail repurchase agreements to
its customers that sweep funds from deposit accounts to investment accounts. These investment accounts are not federally insured and are treated as borrowings. These agreements require the Company to pledge securities as collateral for borrowings
under these agreements. The Company pledged securities with carrying values of approximately $22.7 million and $21.2 million in 2012 and 2011, respectively, as collateral for these agreements.
During 2006, the Company issued subordinated debt for Tier II capital. The debentures have a ten year term and mature in
2016. Interest is paid quarterly. The amount of subordinated debt qualifying for Tier II treatment is reduced by 20% in each year of the last five years of the debenture term.
Provisions of a Consent Order issued by the Federal Deposit Insurance Corporation and the Florida Office of Financial
Regulation, effective June 28, 2010, prevent the Bank from making any distributions of interest on subordinated debentures. As such, the Bank did not make the September 2010 and December 2010 quarterly payments or any of the 2011 or 2012
quarterly payments. Interest payments deferred on the Banks subordinated debt totaled $263,000 and $154,000 at December 31, 2012 and 2011, respectively. In addition, provisions of a Written Agreement issued by the Federal Reserve Bank of
Atlanta, effective, July 26, 2010, prevent the Company from making any distributions of interest on subordinated debentures. As such, the Company did not make the December 2010 quarterly payment or any of the 2011 or 2012 quarterly payments for
the holding company subordinated debt. Interest payments deferred on the holding company subordinated debt at December 31, 2012 and 2011 totaled $752,000 and $393,000, respectively.
The Company has formed four statutory trusts for the sole purpose of issuing trust preferred securities. The Trusts sold
adjustable-rate Trust Preferred Securities (the Capital Securities) in pooled trust preferred securities offerings. The proceeds from these sales, along with the proceeds from the sale of the Trusts common securities, were paid to
the Holding Company in exchange for its adjustable-rate Junior Subordinated Debentures (the Debentures). The Debentures have the same terms as the Capital Securities. The sole assets of the Trusts, the obligors on the Capital Securities,
are the Debentures. The Holding Company has guaranteed the Trusts payment of distributions on, payments on any redemptions of, and any liquidation distribution with respect to, the Capital Securities. Cash distributions on both the Capital
Securities and the Debentures are payable quarterly in arrears. The terms of the Debenture agreements allow the Company to defer payments of interest on the Debentures by extending the interest payment period at any time during the term of the
Debentures for up to twenty consecutive quarterly periods. During 2009, the Company exercised its right to defer payment of interest on all Debentures. Deferred interest payments on all debentures as of December 31, 2012 and 2011 totaled $4.9
million and $3.5 million, respectively. The following summarizes the Companys outstanding debentures to the Trusts ($ in thousands):
The Capital Securities are subject to mandatory redemption (i) in whole, but not in
part, upon repayment of the Debentures at stated maturity or, at the option of the Holding Company, their earlier redemption in whole upon the occurrence of certain changes in the tax treatment or capital treatment of the Capital Securities, or a
change in the law such that the Trust would be considered an investment company and (ii) in whole or in part at any time on or after five years from issuance contemporaneously with the optional redemption by the Holding Company of the
Debentures in whole or in part. The Debentures are redeemable prior to maturity at the option of the Holding Company (i) on or after five years from issuance, in whole at any time or in part from time to time, or (ii) in whole, but not in
part, at any time within 90 days following the occurrence and continuation of certain changes in the tax treatment or capital treatment of the Capital Securities, or a change in law such that the Trust would be considered an Investment Company,
required to be registered under the Investment Company Act of 1940.
No securities were transferred in or out of Level 1, Level 2 or Level 3 during 2012. During
2011, one security for $4,605,000 was transferred out of Level 1 into Level 2 due to changes in inputs.
A reconciliation of all available for sale securities measured at fair value
on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2012 and 2011 are as follows (in thousands):
Foreclosed assets are recorded at fair value less estimated selling costs. Foreclosed assets
which are measured at fair value on a nonrecurring basis are as follows (in thousands):
The reasons for the differences between the statutory Federal income tax rate and the
effective tax rate are summarized as follows ($ in thousands):
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented below (in thousands):
At December 31, 2012, the Company has net operating loss carryforwards of approximately
$21.3 million for Federal and $25.5 million for Florida available to offset future taxable income. These carryforwards will begin to expire in 2028.
The Company believes it is more likely than not that it will realize the net deferred tax asset and that no allowance is
necessary at December 31, 2012. This determination is based on forecasted earnings and is supported by a strong earnings history exclusive of the loan losses that occurred during 2008, 2009, 2010, 2011 and 2012 which created the future
deductible amount. Management believes the magnitude of these loan losses occurred because of the current economic downturn and the situation is unusual and infrequent and an aberration rather than a continuing condition.
The Company did record a valuation allowance at December 31, 2011
related to the other-than-temporary impairment loss that was taken at the Holding Company. This loss was taken on a capital asset which would result in a capital loss when the underlying stock is disposed. For corporations, capital losses can only
be offset by capital gains for tax purposes. Since the Company believes that it is more likely than not that it will not be able to generate sufficient capital gains in the future to realize the tax benefit from the capital loss, a corresponding
valuation allowance has been recorded.
During the first quarter of 2012, the Internal Revenue Service completed an
examination of the Companys 2008 tax returns. As a result of the examination, the Company recorded a tax benefit of approximately $882,000 related to timing differences between tax years. This tax benefit was recorded by the Company in the
first quarter of 2012.
The Company files U.S. and Florida income tax returns. With few exceptions, the Company is no
longer subject to U.S. Federal or state and local income tax examinations by taxing authorities for years before 2009.
In the ordinary course of business, the
Company has granted loans to principal officers and directors and their affiliates. These loans are summarized as follows (in thousands):
The Company sponsors a 2005, 2008 and a 2010 Stock
Option Plan (the Option Plans) under which certain key officers and employees of the Company have been granted incentive stock options to purchase the Companys common stock. The expiration of the options range from thirty days from
the date they become fully vested to the tenth anniversary of the date of grant. The options vest over periods up to ten years. At December 31, 2012, 14,015 options remain available for grant.
The total fair value of shares vested and recognized as compensation expense was $119,000
during the years ended December 31, 2012 and 2011. As of December 31, 2012, the Company had 10,962 stock options not fully vested and there was $310,000 of total unrecognized compensation cost related to these nonvested options. The cost
is expected to be recognized over a weighted-average period of 2.6 years.
As part of the Option Plans, participants have
the option to receive shares of the Companys common stock in an amount equal to the excess of current market value of the stock over the options exercise price. This cashless-exercise option requires the Company to record
compensation expense as the value of the underlying stock increases on options expected to be settled through this cashless exercise option. No options holders had elected the cashless-exercise option during the years ended
December 31, 2012 and 2011.
The Company sponsors a 401(k) Profit
Sharing Plan (Plan) for all employees who have attained age eighteen with at least one month of service. In general, the Company contributes 50% of the first 6% contributed to the Plan by the participant. The Company incurred costs
related to the Plan of approximately $270,000 and $137,000 for the years ended December 31, 2012 and 2011, respectively.
The Company (on a consolidated basis) and the Bank
are subject to various regulatory capital requirements administered by the Federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Companys and the Banks financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective actions, the Company and the Bank must meet
specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain
minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined).
As of December 31, 2012, the Holding Company has failed to maintain the minimum regulatory capital. Therefore, the
Federal Reserve considers the Holding Company to be under capitalized. Absent clear extenuating circumstances, the Federal Reserve will require the Holding Company to submit a comprehensive capital plan that includes a program for achieving
compliance with the required minimum ratios within a reasonable time period. The Federal Reserve may institute appropriate supervisory and/or administrative enforcement action, which may include the issuance of a capital directive or denial of
applications, unless a capital plan acceptable to the Federal Reserve has been adopted by the Holding Company.
As of December 31, 2012, the Bank is subject to a Consent Order issued
by the Federal Deposit Insurance Corporation and the State of Florida Office of Financial Regulation, and accordingly is deemed to be adequately capitalized even though its capital ratios exceed those generally required to be a
well capitalized bank. There are no conditions or events since the notification that management believes have changed the Banks category. The Companys and the Banks actual capital amounts and percentages are also
presented in the table ($ in thousands).
On June 28, 2010, the Bank entered into a Consent Order with the
Federal Deposit Insurance Corporation and the State of Florida Office of Financial Regulation (collectively referred to as Supervisory Authorities). Among other things, the Consent Order requires the Board of Directors to cause the Bank
to comply with the following: continue Board of Director participation in the affairs of the Bank, maintain qualified management, maintain minimum capital ratios as follows: leverage ratio of 8% and risk-weighted ratios of 12%, review its written
asset/liability management policy, reduce classified assets, submit a written plan for expenses and profitability, continue to review and determine the adequacy of the allowance for loan losses and not declare or pay any dividends, bonuses or
interest and principal on subordinated debentures without written approval of the Supervisory Authorities.
July 26, 2010, the Company entered into a Written Agreement with the Federal Reserve Bank of Atlanta (referred to as Reserve Bank). Among other things, the Written Agreement requires the Board of Directors to cause the Company to
comply with the following: utilize the Companys financial and managerial resources and to serve as a source of strength to the Bank, not declare or pay any dividends or interest and principal on subordinated debentures without the prior
written approval of the Reserve Bank, not incur, increase or guarantee any debt without the prior written approval of the Reserve Bank, submit a written plan to maintain sufficient capital on a consolidated statement, submit a written statement of
the Companys planned sources and uses of cash for operating expenses and other purposes and not purchase or redeem any shares of its stock without the prior written approval of the Reserve Bank.
Management believes the Company and the Bank to be in substantial compliance with the Consent Order and the Written Agreement
with the exception of the Companys capital levels and the Banks leverage ratio. Management intends to vigorously seek full compliance with all the provisions of the Consent Order and Written Agreement. Management does not believe that
the Consent Order or Written Agreement will have a material impact on the Companys financial statements.
The Company is limited in the amount of cash
dividends that may be paid by the amount the Bank may pay to the Holding Company. The amount of cash dividends that may be paid by the Bank is based on the Banks net earnings of the current year combined with the Banks retained earnings
of the preceding two years, as defined by state banking regulations. However, for any dividend declaration, the Bank must consider additional factors such as the amount of current period net earnings, liquidity, asset quality, capital adequacy and
economic conditions. It is likely that these factors would further limit the amount of dividends which the Bank could declare. In addition, bank regulators have the authority to prohibit banks from paying dividends if they deem such payment to be an
unsafe or unsound practice. At December 31, 2012, the Bank and Holding Company could not pay cash dividends without written approval of the Supervisory Authorities and Reserve Bank.
The Company is a party to
financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are commitments to extend credit, construction loans
in process, unused lines of credit and standby letters of credit and may involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated balance
sheets. The contract amounts of these instruments reflect the extent of involvement the Company has in these financial instruments.
The Companys exposure to credit loss in the event of nonperformance by the other party to the financial instrument for
available lines of credit, construction loans in process and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments.
Commitments to extend credit and unused lines of credit are agreements to
lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customers credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on managements credit evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a
third party. These letters of credit are primarily issued to support third-party borrowing arrangements and generally have expiration dates within one year of issuance. The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers.
Various legal claims also arise from time to time
in the normal course of business. In the opinion of management of the Company, none have occurred that will have a material effect on the Companys consolidated financial statements.
The above information was disclosed in a filing to the SEC. To see this filing in its entirety, click here.
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