FEDERAL DEPOSIT INSURANCE CORPORATION Washington, DC FORM 10-K

Transcription

1 FEDERAL DEPOSIT INSURANCE CORPORATION Washington, DC FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2011 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR (Name of Registrant as specified in its charter) Florida (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) NW 79 th Court, Suite 200, Miami Lakes, Florida (Address of principal executive offices) (Zip Code) Registrant s telephone number, including area code: (305) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $5.00 per share (Title of Class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES NO X Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. [ ] 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] Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-K contained in this form, and will not be contained, to the best of the registrant s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act.) YES NO X Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company as defined in Rule 12b-2 of the Exchange Act. Large Accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company X

2 The aggregate market value of the Common Stock of the issuer held by nonaffiliates of the issuer (6,849,937 Class A shares and 1,446,903 Class B shares) on June 30, 2011 was approximately $2,323,115. The aggregate market value was computed by reference to the reported closing price of the Common Stock of the issuer at the close of business on June 30, 2011 which was $0.28 per share. For the purposes of this response, directors, officers and holders of 5% or more of the issuer s Common Stock are considered the affiliates of the issuer at that date. As of March 12, 2012, there were issued and outstanding 10,446,804 shares of the issuer s Class A Common Stock and 2,665,696 shares of the issuer s Class B Common Stock. Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on April 26, 2012 to be filed with the Federal Deposit Insurance Corporation pursuant to Regulation 14A within 120 days of the issuer's fiscal year end are incorporated into Part III, Items 10 through 14, of this Annual Report on Form 10-K. This statement has not been reviewed, or confirmed for accuracy or relevance, by the Federal Deposit Insurance Corporation.

3 TABLE OF CONTENTS Page PART I Item 1 Business... 1 Item 1A Risk Factors Item 1B Unresolved Staff Comments Item 2 Description of Properties Item 3 Legal Proceedings Item 4 Reserved PART II 20 Item 5 Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity securities Item 6 Selected Financial Data Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Item 7A Quantitative and Qualitative Disclosures About Market Risk Item 8 Financial Statements and Supplementary Data Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A Controls and Procedures Item 9B Other Information PART III Item 10 Directors, Executive Officers and Corporate Governance Item 11 Executive Compensation Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13 Certain Relationships, Related Transactions and Director Independence Item 14 Principal Accounting Fees and Services PART IV Item 15 Exhibits and Financial Statement Schedules Signatures Exhibit Index Section 302 Certifications Section 906 Certifications

4 PART I Item 1. Business GENERAL Great Florida Bank (the Bank ) was organized under the laws of Florida and commenced operations as a commercial bank on June 29, The Bank provides a range of consumer and commercial banking services to individuals, businesses and industries. The basic services offered by the Bank include: interest-bearing and noninterest-bearing demand deposit accounts, money market deposit accounts, time deposits, credit cards, cash management, direct deposits, notary services, night depository, cashier s checks, domestic collections, bank drafts, and automated teller services. In addition, the Bank makes secured and unsecured commercial, consumer, and real estate loans and issues stand-by and commercial letters of credit. The Bank provides automated teller machine (ATM) cards and is a member of the Star, Presto, Jeanie and Cirrus ATM networks, thereby permitting customers to utilize the convenience of larger ATM networks. In addition to the foregoing services, the offices of the Bank provide customers with extended banking hours. The Bank does not have trust powers and, accordingly, no trust services are provided. The revenues of the Bank are primarily derived from interest and fees on real estate and other loans, interest and dividends on investment and mortgage-backed securities, and interest on federal funds sold and interest bearing deposits. The principal sources of funds for the Bank s lending activities are customer deposits, repayments of loans, sales, maturities and repayments of investment securities and other borrowed funds, primarily advances from the Federal Home Loan Bank of Atlanta. The primary expenses of the Bank are interest paid on deposits and borrowings, salaries and benefits, and other general and administrative expenses. As is the case with banking institutions in general, the Bank s operations are materially and significantly influenced by general economic conditions and by the related monetary and fiscal policies of financial institution regulatory agencies, including the Board of Governors of the Federal Reserve System (the Federal Reserve ) and the Federal Deposit Insurance Corporation ( FDIC ). Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn are affected by the interest rates at which such financing may be offered and other factors affecting local demand and availability of funds. The Bank faces strong competition in the attraction of deposits (its primary source of funds) and in the origination of loans. See Competition. The Bank has evaluated subsequent events through the date which the financial statements were filed with the FDIC. Certain prior period amounts have been reclassified to conform to the December 31, 2011 financial statement presentation. Dollars presented within this Form 10K are in thousands, unless noted otherwise. SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS This Form 10K Report ( Report ) contains certain forward looking statements which represent our expectations or beliefs, including, but not limited to, statements concerning the banking industry and the issuer's operations, performance, financial condition and growth. For this purpose, any statements contained in this Report that are not statements of historical fact may be deemed forward looking statements. Without limiting the generality of the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "should," "can," "estimate," or "continue" or the negative of other variations thereof or comparable terminology are intended to identify forwardlooking statements. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors, including competition, general economic conditions, changes in interest rates, and changes in the value of real estate and other collateral securing loans, among other things. 1

5 CRITICAL ACCOUNTING POLICIES Our financial condition and results of operations are sensitive to accounting measurements and estimates of matters that are inherently uncertain. When applying accounting policies in areas that are subjective in nature, the Bank must use its best judgment to arrive at the carrying value of certain assets. The most critical accounting policies applied are the determination of the amount of the allowance for loan losses and valuation of deferred tax assets. The allowance for loan losses is the most difficult and subjective judgment made by the Bank. The allowance is established and maintained at a level that the Bank believes is adequate to cover losses resulting from the inability of borrowers to make required payments on loans. Estimates for loan losses are arrived at by analyzing risks associated with specific loans and the loan portfolio, current trends in delinquencies, charge-offs, directives from banking regulators, changes in the size and composition of the loan portfolio, and peer comparisons. The analysis also requires consideration of the economic climate and direction, changes in the interest rate environment, which may impact a borrower s ability to pay, legislation impacting the banking industry and economic conditions specific to the Bank s service area. Because the calculation of the allowance for loan losses relies on estimates and judgments relating to inherently uncertain events, actual results may differ from our estimates. The allowance for loan losses is also discussed as part of Management's Discussion and Analysis - Lending and in Note 4 to the consolidated financial statements. The significant accounting policies are discussed in Note 2 to the consolidated financial statements. The Bank uses the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the tax consequences in future years to differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the time periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the period and the change during the period in the deferred asset and liability. RECENT ACCOUNTING PRONOUNCEMENTS Receivables: Disclosures about Credit Quality of Financing Receivables and the Allowance for Credit Losses In July 2010, the Financial Accounting Standards Board ( FASB ) issued an accounting standard update which requires enhanced disclosures, including an increased amount of disaggregated information, of financing receivables and the allowance for credit losses. The amendments that require disclosures as of the end of a reporting period are effective for interim and annual periods ending on or after December 15, 2010 except for troubled debt restructurings. Disclosures related to troubled debt restructurings are effective for interim and annual periods beginning on or after June 15, Disclosures about activity that occurs during a reporting period (such as a roll-forward of credit losses) are effective for interim and annual periods beginning on or after December 15, The Bank adopted this accounting standard update on December 31, 2010; refer to Note 4, Loans and Allowance for Loan Losses, in the consolidated financial statements for the new expanded disclosures. Receivables: A Creditor s Determination of Whether a Restructuring is a Troubled Debt Restructuring In April 2011, the FASB issued an accounting standard update to provide additional guidance and clarification to assist creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The update is effective for public entities for the interim or annual reporting period beginning on or after June 15, 2011 with a restrospective application to the beginning of the annual period of adoption. The adoption of this update did not have a material impact on the Bank s consolidated financial statements. 2

6 Reconsideration of Effective Control for Repurchase Agreements In April 2011, the FASB issued an accounting standard update which improves the accounting for repurchase agreements ( repo ) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The update removes from the assessment of effective control: (1) the criterion relating to the transferor s ability to repurchase or redeem financial assets on substantially the agreed terms, and (2) the collateral maintenance implementation guidance related to that criterion. The update is effective prospectively for new transactions and modifications of existing transactions as of the beginning of the interim or annual periods beginning on or after December 15, The Bank is currently evaluating the effect the update will have on its consolidated financial statements. Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs In May 2011, the FASB issued an accounting standard update which works to achieve common fair value measurement and disclosure requirements in United States GAAP and International Financial Reporting Standards. The update both clarifies the FASB s intent about the application of existing fair value guidance, and also changes certain principles regarding measurement and disclosure. The update is effective prospectively and is effective for interim and annual periods beginning after December 15, 2011 with early application not permitted. The Bank is currently evaluating the effect the update will have on its consolidated financial statements. Presentation of Comprehensive Income In June 2011, the FASB issued an accounting standards update aimed at increasing the prominence of other comprehensive income in financial statements by requiring comprehensive income to be reported in either a single statement or in two consecutive statements reporting net income and other comprehensive income. The amendments do not change what items are reported in other comprehensive income or the requirement to report reclassification of items from other comprehensive income to net income. The update is to be applied retrospectively and is effective for annual periods, and interim periods within those years, beginning after December 15, Early application is permitted. The Bank is currently evaluating the effect the update will have on its consolidated financial statements.. 3

7 EXECUTIVE OVERVIEW OF OPERATIONS AND CONDITION The financial services industry is operating in one of the most turbulent periods in history while the rapidity of economic and financial change presents unprecedented risks which are extremely difficult to quantify. This is especially true of the economic and real estate conditions in the South Florida market where the Bank s primary market is located. As of December 31, 2011, the Bank was considered adequately capitalized with a Tier 1 and Total Risk Based ratios of 6.89% and 8.15%, respectively. However, for the year ended December 31, 2011 the Bank posted a net loss of $9.5 million compared to a net loss of $41.1 million in During 2011, the Bank charged off, net of recoveries, $20.2 million of loans and recorded a provision for loan losses of $8.9 million. These charges represent a significant decrease from 2010 when the Bank charged off, net of recoveries, $34.5 million and provided for loan losses of $27.6 million. In addition, the Bank s delinquent and nonperforming loans decreased during 2011 and at December 31, 2011 were $136.6 million presenting 15.4% of total gross loans compared to $179.0 million and 17.3% at December 31, The Bank defines delinquent loans as loans that are 30 to 90 days past due and still accruing. Nonperforming loans are defined as non-accrual loans. The Bank s common stock price is trading below $1 per share. This current price reflects a deep discount to the Bank s book value of $4.47 per share at December 31, 2011 and reflects the severe financial and economic conditions that we are operating under. In the event the Bank was required to raise additional equity capital at the current price levels it is possible that current shareholders would be diluted to a minority position. The Bank also has the ability to raise capital through the issuance of Preferred Stock which shareholders approved in a special shareholder meeting on January 21, The exact terms and conditions of any issuance of Preferred Stock would be subject to Board of Directors and regulatory approval. The ability to raise capital either through common or preferred stock issuance in today s market is extremely limited and potentially financially prohibitive. The preceding discussion is only a brief summary of the Bank s major changes in condition and operations and should be read in conjunction with Risk Factors, Legal Proceedings, Management s Discussion and Analysis of Financial Conditions and Results of Operations, Consolidated Financial Statements and the Notes to Consolidated Financial Statements. INVESTMENT ACTIVITIES The Bank invests a portion of its assets in U.S. government agency obligations and mortgage-backed securities. Investments are managed in relation to loan demand and deposit growth, and are generally used to provide for the investment of excess funds at minimal risks while providing liquidity to fund increases in loan demand or to offset fluctuations in deposits. As of December 31, 2011, the Bank had $115.4 million in its investment portfolio of which $102.9 million were mortgage-backed securities issued by the Federal National Mortgage Association (FannieMae), Federal Home Loan Mortgage Corporation (FreddieMac) and the Government National Mortgage Association (GinnieMae). Securities issued by the Small Business Administration, a U.S. government agency obligation, totaled $12.5 million at December 31, With respect to the investment portfolio, the Bank s total portfolio may be invested in U.S. Treasury and general obligations of its agencies because such securities generally represent a minimal investment risk. Federal funds sold are the excess cash we have available over and above daily cash needs. This money is invested on an overnight basis with approved correspondent banks or with the Federal Reserve. The Bank continually monitors changes in financial markets. In addition to investments in its own portfolio, the Bank monitors its daily cash position to ensure that all available funds earn interest at the earliest possible date. Daily surplus funds, if any, are sold in the federal funds market for one business day. The Bank attempts to stagger the maturities of its securities so as to produce a steady cash-flow in the event we need cash, or economic conditions change to a more favorable rate environment. 4

8 LENDING ACTIVITIES The Bank offers a range of lending services, including: land, land development and real estate construction, consumer and commercial loans, to individuals, small businesses and other organizations that are located in or conduct a substantial portion of their business in the Bank s market area. The Bank s net loans at December 31, 2011 and 2010 were $870 million and $1.0 billion, or 76.0% and 64.8% of total Bank assets, respectively. The interest rates charged on loans vary with the type of loan, term of loan, degree of risk, and amount of the loan, and are further subject to competitive pressures, market interest rates, availability of funds, and government regulations. The Bank has no foreign loans or loans for highly leveraged transactions. The Bank s loans are concentrated in the following major areas: land, land development and real estate construction, commercial and industrial, residential real estate, and commercial real estate loans. A majority of the Bank s loans are made on a secured basis. Approximately 87.9% of the Bank s loan portfolio consisted of loans secured by mortgages on real estate at both December 31, 2011 and Approximately 49.2% and 48.5% of the loan portfolio were secured by 1-4 family residential properties at December 31, 2011 and 2010, respectively. The Bank does not have any sub-prime mortgage or negatively amortizing mortgage loans on its books. There has been substantial industry concern and publicity over asset quality among financial institutions due in large part to issues related to declining real estate values and general economic concerns. Furthermore, the housing and the residential markets have continued to experience a variety of difficulties and changed economic conditions. If market conditions continue to deteriorate, they may lead to additional valuation adjustments on the Bank s loan portfolios and real estate owned as the Bank continues to reassess the market value of its loan portfolio, the losses associated with the loans in default and the net realizable value of real estate owned. The homebuilding industry has experienced a significant and sustained decline in demand for new homes and an oversupply of new and existing homes available for sale in various markets, including the markets in which the Bank lends. Its customers who are builders and developers face greater difficulty in selling their homes in markets where these trends are more pronounced. Consequently, the Bank is facing increased delinquencies and non-performing assets as these customers are forced to default on their loans. The Bank does not anticipate that the housing market will improve in the near-term, and accordingly, additional downgrades, provisions for loan losses and charge-offs relating to its loan portfolio may occur. The Bank s commercial loan portfolio includes loans to individuals and small-to-medium sized businesses located primarily in Miami-Dade, Broward and Palm Beach counties for working capital, equipment purchases, and various other business purposes. A majority of commercial loans are secured by real estate, equipment, or similar assets, but these loans may also be made on an unsecured basis. Commercial loans are made with both fixed and variable rates of interest. Commercial lines of credit are typically granted on a one-year basis, with loan covenants and monetary thresholds. Other commercial loans with terms longer than one year may carry interest rates that vary with the prime lending rate and will become payable in full or refinanced in three to five years. Commercial loans not secured by real estate amounted to approximately 11.6% and 11.5% of the Bank s total loan portfolio as of December 31, 2011 and 2010, respectively. The Bank s real estate loans are secured by mortgages and consist primarily of loans to individuals and businesses for the purchase, improvement of or investment in real estate and for the construction of single-family residential units, the development of single-family residential building lots and the construction of commercial properties. As of December 31, 2011, acquisition, development and construction loans made up 12.3% of the Bank s loan portfolio compared to 13.9% at December 31, Real estate loans are made with both fixed and adjustable interest rates. The Bank generally does not make fixed-rate commercial real estate loans for terms exceeding five years. Loans in excess of five years are generally made with adjustable rates. The Bank s residential real estate loans are repayable in monthly installments, have terms of up to 30 years and are made with both fixed and adjustable interest rates. Fixed rate loans are made primarily with maturities no longer than 30 years. Adjustable rate loans are made with initial fixed interest rate terms between 1 and 10 years. 5

9 The Bank s commercial real estate and commercial loan portfolio generally carries larger loan balances and can involve a greater degree of financial and credit risk than other loans. Any significant failure to pay on time by Bank customers would continue to hurt the earnings of the Bank. The increased financial and credit risk associated with these types of loans is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the size of loan balances, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans. In addition, when underwriting a commercial real estate or commercial loan the Bank may take a security interest in commercial real estate, and in some instances upon a default by the borrower, we may foreclose on and take title to the property, which may lead to potential financial risk for us under applicable environmental laws. If hazardous substances were discovered on any of these properties, we may be liable to governmental agencies or third parties for the costs of remediation of the hazard, as well as for personal injury and property damage. Many environmental laws can impose liability regardless of whether the Bank knew of, or was responsible for, the contamination. Furthermore, the repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate or commercial project. If the cash flow from the project is reduced, a borrower s ability to repay the loan may be impaired. This cash flow shortage may result in the failure to make loan payments. In such cases, the Bank may be compelled to modify the terms of the loan. In addition, the nature of these loans is such that they are generally less predictable and more difficult to evaluate and monitor. As a result, repayment of these loans may, to a greater extent than residential loans, be subject to adverse conditions in the real estate market or economy. The Bank s consumer loan portfolio consists primarily of loans to individuals for various consumer purposes. Most of these loans are for terms of less than five years and are secured by liens on various personal assets of the borrowers, however, consumer loans may also be made on an unsecured basis. Consumer loans are made with fixed and variable interest rates, and have amortization periods of up to ten years. Loan originations are derived from a number of sources. Loan originations can be attributed to direct solicitation by the Bank s relationship managers, existing customers, advertising and walk-in customers. Certain credit risks are inherent in making loans. These risks include prepayment risk, risk resulting from uncertainties in the future value of collateral, risk resulting from changes in economic and industry conditions, and risk inherent in dealing with individual borrowers. In particular, longer maturities increase the risk that economic conditions will change and adversely affect collectability. The Bank attempts to minimize credit losses through various means. In particular, on larger credits, the Bank generally relies on the cash flow of a debtor as the source of repayment and secondarily on the value of the underlying collateral. In addition, the Bank attempts to utilize shorter loan terms in order to reduce the risk of a decline in the value of such collateral. DEPOSIT ACTIVITIES Deposits are the major source of the Bank s funds for lending and other investment activities. The Bank considers the majority of its regular savings, demand and money market deposit accounts to be core deposits. These accounts comprised approximately 44.3% and 33.5% of the Bank s total deposits at December 31, 2011 and 2010, respectively. As of December 31, 2011 and 2010 approximately 55.7% and 66.5%, respectively, of the Bank s deposits were certificates of deposit. Generally, the Bank attempts to maintain the rates paid on its deposits at a competitive level. Time deposits of $100,000 and more made up approximately 36.6% and 36.0%, respectively, of the Bank s total deposits at December 31, 2011 and The majority of the deposits of the Bank are generated in the Bank s primary service area of Miami-Dade, Broward and Palm Beach counties. The Bank does not use broker deposits as an alternative source of funding for liquidity and profitability considerations. The Bank maintained no brokered deposits at December 31, In addition, under the current regulatory Order the Bank is precluded from acquiring broker deposits. See Business Regulatory Action. 6

10 IMPACT OF CHANGES IN INTEREST RATES The Bank s profitability, like that of most financial institutions, is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest-earning assets, such as loans and investment securities, and its interest expense on interest-bearing liabilities, such as deposits and other borrowings. The Bank has been and will continue to be affected by general changes in levels of interest rates and other economic factors beyond its control. Changes in market interest rates may also affect the average life, yield to maturity, and related market value of the Bank s loans and other investments. Declines in the market values of any of the Bank s available-for-sale investment will cause deterioration in the Bank s shareholders equity, as such available-for-sale investments are required under generally accepted accounting principles to be recorded at fair value, with net unrealized gains or losses included in shareholders equity. As a result, changes in the underlying market values of such securities will result in volatility in shareholder s equity. Significant decreases in such underlying market values could have a material adverse effect on the Bank s capital position. The change in interest rate environment has been one of the contributing factors to the Bank s interest rate spread, which increased from 1.87% for the year ended December 31, 2010 to 2.64% for the year ended December 31, If interest rates continue to change, the Bank may not be able to maintain its net interest spread at this level. Interest rate spread is an important factor in the calculation of net interest income. Unless offset by changes in the mix or volume of interestearning assets and interest-bearing liabilities, a decline in the Bank s interest rate spread would have an adverse effect on its net interest income. CORRESPONDENT BANKING Correspondent banking involves one bank providing services to another bank which cannot provide that service for itself from an economic or practical standpoint. The Bank purchases correspondent services offered by larger banks, including check collections, federal funds purchases and sales, security safekeeping services, investment services, and coin and currency services. Additionally, the Bank sells loan participations to correspondent banks with respect to loans which exceed the Bank s legal lending limit. The Bank also purchases participations in loans and loan syndications from and with other financial institutions. In all such cases the Bank does not rely on the other bank s credit underwriting but, in all cases, performs its own credit underwriting analysis. The Bank has correspondent relationships with the Federal Reserve Bank, the Federal Home Loan Bank of Atlanta, SunTrust Bank, and Fifth Third Bank. The Bank pays for such correspondent services. DATA PROCESSING The Bank licenses its core banking software and operates the software in-house. The licensed software provides an automated general ledger system, loan accounting system and deposit accounting system. EFFECT OF GOVERNMENTAL POLICIES The earnings and business of the Bank are and will be affected by the policies of various regulatory authorities of the United States, especially the Federal Reserve. The Federal Reserve, among other things, regulates the supply of credit and deals with general economic conditions within the United States. The instruments of monetary policy employed by the Federal Reserve for these purposes influence in various ways the overall level of investments, loans, other extensions of credit and deposits, and the interest rates paid on liabilities and received on assets. 7

11 INTEREST AND USURY The Bank is subject to numerous state and federal statutes that affect the interest rates that may be charged on loans. These laws do not, under present market conditions, deter the Bank from continuing the process of originating loans. SUPERVISION AND REGULATION Introduction Virtually all aspects of our business and operations, as well as that of other commercial banks and thrift institutions and their respective holding companies, are subject to extensive supervision, regulation and oversight under both federal and state law. These include various features of deposits, loans, interest rates, mortgages, capital, reserves, liquidity, employment relationships, securities issuances and repurchases, dividend payments and establishment of branches. Supervision, regulation and examination by bank regulatory agencies are intended primarily to protect depositors, the insurance fund of the FDIC and borrowers, rather than our stockholders. Certain of the major statutes and regulations affecting us are briefly summarized in the following materials. This summary is not intended as an exhaustive description of the statutes or regulations applicable to our business, and is qualified in its entirety by this reference to those Statutes and regulations, including the particular statutory and regulatory provisions referenced in the following text. Some of the laws having a significant impact on our day-to-day business and operations that are not further discussed include those that may have particular relevance for financial institutions, including laws regulating the interest we charge, the Truth-in-Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Home Mortgage Disclosure Act, the Electronic Funds Transfer Act and the Fair Debt Collection Practices Act, and those more generally applicable to businesses and employers, including the Equal Employment Opportunity Act and the Occupational Safety and Health Act. In addition, new laws are proposed from time-to-time that would have a significant impact on our business, and existing laws may be changed in a manner that would be more burdensome to us. No prediction is made as to the likelihood of the adoption of any such new laws or of such changes to existing laws. As a Florida-chartered commercial bank, we are supervised and regulated by the Florida Office, and the FDIC serves as our primary federal regulator. The FDIC is also the administrator of the Bank Insurance Fund of which we are a member, and deposits with us are insured by the FDIC to the maximum extent permitted by law. We file detailed quarterly reports, including financial statements and schedules, with the Florida Office and the FDIC. Regular examinations of our business operations, including our compliance with laws and regulations, the quality of loans and investments, the sufficiency of our interest-rate risk management, the adequacy of our loan loss reserves, and the propriety of management practices, are conducted by the Florida Office and the FDIC. They have wide-ranging authority to enforce the statutes and regulations with which they are concerned, including the ability to impose monetary penalties, initiate legal proceedings, require the removal of officers or directors, and require additional capital to be raised. Recent Legislation On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act ( Dodd-Frank Act ) was enacted into law. The Dodd-Frank Act will have a broad impact on the financial services industry, including potentially significant regulatory and compliance changes including, among other things, (1) enhanced resolution authority of troubled and failing banks and their holding companies; (2) potential changes to capital and liquidity requirements; (3) changes to regulatory examination fees; (4) changes to assessments to be paid to the FDIC for federal deposit insurance; and (5) numerous other provisions designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector. Additionally, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Federal Reserve, the Office of the Comptroller of the Currency ( OCC ), and the FDIC. Many of the requirements called for in the Dodd-Frank Act will be implemented over time and most will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on our operations is unclear. The changes 8

12 resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements. Failure to comply with any such laws, regulations, or principles or changes thereto, may negatively impact our results of operations and financial condition. While we cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on us, these changes could be materially adverse to our investors and shareholders. The following items provide a brief description of the impact of the Dodd-Frank Act on our operations and activities, both currently and prospectively. Increased Capital Standards and Enhanced Supervision. The federal banking agencies are required to establish minimum leverage and risk-based capital requirements for banks and bank holding companies. These new standards will be no lower than existing regulatory capital and leverage standards applicable to insured depository institutions and may, in fact, be higher when established by the agencies. Compliance with heightened capital standards may reduce our ability to generate or originate revenue-producing assets and thereby restrict revenue generation from banking and non-banking operations. The Dodd-Frank Act also increases regulatory oversight, supervision and examination of banks, bank holding companies and their respective subsidiaries by the appropriate regulatory agency. Compliance with new regulatory requirements and expanded examination processes could increase our cost of operations. The Consumer Financial Protection Bureau. The Dodd-Frank Act creates a new, independent Consumer Financial Protection Bureau, or the Bureau, within the Federal Reserve. The Bureau is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services. The Bureau has rulemaking authority over many of the statutes governing products and services offered to bank consumers. Generally, we will not be directly subject to the rules and regulations of the Bureau. However, the Dodd- Frank Act permits states to adopt consumer protection laws and regulations that are stricter than those regulations promulgated by the Bureau and state attorneys general are permitted to enforce consumer protection rules adopted by the Bureau against certain state-chartered institutions. Although we do not currently offer many of these consumer products or services, compliance with any such new regulations would increase our cost of operations and, as a result, could limit our ability to expand into these products and services. Deposit Insurance. The Dodd-Frank Act makes permanent the $250,000 deposit insurance limit for insured deposits. Amendments to the Federal Deposit Insurance Act also revise the assessment base against which an insured depository institution s deposit insurance premiums paid to the FDIC s Deposit Insurance Fund, or the DIF, will be calculated. Under the amendments, the assessment base will no longer be the institution s deposit base, but rather its average consolidated total assets less its average tangible equity. Additionally, the Dodd-Frank Act makes changes to the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15 percent to 1.35 percent of the estimated amount of total insured deposits, and eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. Several of these provisions could increase the FDIC deposit insurance premiums paid by us. The Dodd-Frank Act also provides that, effective one year after the date of enactment, depository institutions may pay interest on demand deposits. Transactions with Affiliates. The Dodd-Frank Act enhances the requirements for certain transactions with affiliates under Section 23A and 23B of the Federal Reserve Act, including an expansion of the definition of covered transactions and increasing the amount of time for which collateral requirements regarding covered transactions must be maintained. Transactions with Insiders. Insider transaction limitations are expanded through the strengthening on loan restrictions to insiders and the expansion of the types of transactions subject to the various limits. Enhanced Lending Limits. The Dodd-Frank Act strengthens the existing limits on a depository institution s credit exposure to one borrower. Current banking law limits a depository institution s ability to extend credit 9

13 to one person (or group of related persons) in an amount exceeding certain thresholds. The Dodd-Frank Act expands the scope of these restrictions to include credit exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing transactions. Capital Adequacy; Prompt Corrective Action We are required to and do comply with the FDIC s capital adequacy regulations. These regulations have aspects requiring a risk-weighting for each asset of a financial institution and requiring a defined leverage ratio of common stockholders equity (less certain intangible assets) to total assets (excluding goodwill). These provisions generally result in requiring a financial institution to have more capital as the nature of its assets are determined to become more risky when assigned to risk categories defined in the regulations. Any failure to meet these capital requirements would subject us to a variety of enforcement remedies of the FDIC, including the requirement to raise additional capital, and restrictions on our growth and other aspects of our business. See Business Regulatory Action. For purposes of determining the severity of corrective action the appropriate federal banking agency may take when a financial institution reaches a given level of undercapitalization, the Federal Deposit Insurance Corporation Improvement Act of 1991 and related regulations establish five capital categories from well capitalized to critically undercapitalized. As an institution s capital level deteriorates, the nature and extent of action to be taken by the appropriate federal banking agency increases, as do the restrictions on the operations and transactions of the institution. Pursuant to this act, the federal banking agencies also adopted a series of regulations governing many of the day-to-day aspects of the business of financial institutions (e.g., loan documentation, credit underwriting criteria, interest-rate exposure, and compensation, fees and benefits). Were we to fail to comply with those regulations, or to meet applicable capital requirements under the 1991 act and the federal prompt corrective action regulations, substantial restrictions would be imposed on us. Our capital ratios as of December 31, 2011 were within the adequately capitalized category. In addition, we have agreed through a Consent Order with the FDIC and the Florida Office to maintain a minimum Tier 1 leverage ratio of 8% and a total risk-based capital ratio of at least 12%. At December 31, 2011, our Tier 1 leverage ratio was 4.96% and our total risk-based capital ratio was 8.15%. See Business Regulatory Action for additional information regarding federal capital requirements and our compliance with those requirements. The FDIC and the Florida Office also are continuously concerned with the capital of state-chartered financial institutions, and regulate various activities such as granting permission for the payment of dividends and branching based on the capital adequacy of institutions. Institutional Restructuring and Flexibility The Gramm-Leach-Bliley Act. It removed many of the barriers established to prevent affiliations of many types of financial services companies (e.g., bank holding, securities and insurance companies). For example, a bank holding company that becomes an authorized Financial Holding Company under this law, would be permitted to conduct many securities, insurance and merchant banking activities, as well as other activities financial in nature or incidental or complementary to a financial activity. This has led to further consolidation in the financial services field, and adds an additional range of competition to stand-alone commercial banks such as us. Another major aspect of this law was the establishment of a minimum federal standard of financial privacy. This requires, among other matters, repetitive disclosures to customers of an institution s privacy policies, and how information regarding customers is gathered, used and shared. Restrictions on Acquiring Control State and federal law and regulations restrict the amount of our common stock (as well as the voting stock of other banks) that a person, or two or more persons acting as a group, may acquire, directly or indirectly, without the prior approval of banking regulators. A presumption of control may arise when a person or a group acquires 10% or more of an institution s voting stock. These provisions make it more difficult to acquire control of a bank than a nonfinancial commercial enterprise, and may make it less likely that our stockholders would benefit from rapid increases in stock prices often accompanying tender offers, proxy contests or similar efforts to acquire control of other companies. A change in control of the Bank within the meaning of these laws and regulations would require an application to and the approval of the Florida Office, and would also require notice to and the approval of, or the failure to object by, the FDIC. 10

14 Several factors in addition to the 10% presumption go into a determination under Florida and federal law of the existence of control of a bank. These include ownership, control or the power to vote 25% of any class of voting stock of the bank; controlling the election of a majority of its directors; and the Florida Office s determination that there exists the direct or indirect power to exercise a controlling influence over the management or policies of the bank. The responsibility for complying with these and other change in control laws and regulations is on those persons who acquire shares of financial institutions, and not on the financial institutions issuing the shares. Limits on Loans to One Borrower, and Transactions with Affiliates Subject to limited exceptions, we may extend secured credit to any one borrower in an amount equal to 25% of our capital accounts (i.e., unimpaired capital, surplus and undivided profits), and unsecured credit to any one borrower in an amount that does not exceed 15% of our capital accounts. However, when loans to any one borrower consist of both secured and unsecured portions, the aggregate amount may not exceed 25% of our capital accounts, and the unsecured portion may not exceed 15% of our capital accounts. At December 31, 2011, these restrictions would permit us to lend $14.4 million on a secured basis and $8.6 million on an unsecured basis, without participating any portion of the loan to another lender. Sections 23A and 23B of the Federal Reserve Act, among other matters, place multiple restrictions on the amount of loans or other extensions of credit by us to our affiliates, investments by us in any affiliate, and on certain transactions with affiliates. These limitations include dollar amounts based on our capital and surplus, collateral requirements, and that any otherwise permissible transaction be on terms substantially the same, or at least as favorable to us, as those prevailing at the time for comparable transactions with nonaffiliated companies or persons. Regulation of Dividend Payments As a Florida state-chartered commercial bank, we may not pay cash dividends that would cause our capital to fall below the minimum amount required by federal or state law, or at any time when our net income from the current year combined with our retained net income from the preceding two years is a loss. The FDIC may take action to stop a bank from paying a dividend if it believes it would be an unsafe or unsound practice (e.g., if the payment would reduce an institution s capital to an inadequate level). We have agreed that we will not pay any cash dividends without the prior approval of the FDIC and the Florida Office. See Business Regulatory Action. Community Reinvestment We have a continuing and affirmative obligation, consistent with safe and sound operation, to help meet the credit needs of our entire community, including low and moderate-income individuals and neighborhoods, under the Community Reinvestment Act of This act requires the appropriate federal bank regulatory agency (in our case, the FDIC) to assess a financial institution s record in meeting the credit needs of the community served by it, including low and moderate-income neighborhoods, in connection with its regular examinations. The agency s assessment focuses on an evaluation of the institution s: (i) record of making loans in its service areas; (ii) record of investing in community development projects; and (iii) delivery of services through its branches and other offices. A review of the performance of an institution under this legislation and related regulations is made in connection with many applications the institution might make to its federal regulator, including an application to establish or to acquire a new branch. 11