2012 ANNUAL REPORT TO SHAREHOLDERS
TO OUR SHAREHOLDERS FBC Mortgage, LLC created Gateway Home Lending. This Legendary Green Bay Packers coach Vince Lombardi is restructuring reduced operating costs and expanded product known for his commitment to having the best prepared, offerings to our customers while not compromising earnings. most focused and cohesive teams to ever take the field of Our business development efforts were deliberate and professional sport. Among his many notable quotations on careful. Throughout this time period, we sought high quality preparedness and teamwork is his statement “Individual customer relationships because a community bank is only as commitment to a group effort - that is what makes a team strong as the customers it serves. We strengthened our work, a company work, a society work, a civilization work.” customer base with the goal of He believed in the value of CONSOLIDATED FINANCIAL R ATIOS making every customer a client hard work in training and FOR THE YEAR ENDED 12/31/12 by expanding the number of preparation for success and the value of teamwork. RETURN ON AVERAGE ASSETS 0.93% relationships with these core customers. While the Gateway banks RETURN ON AVERAGE EQUITY 8.15% Each of these carefully are yet to be compared to the 10.27% orchestrated steps was taken to dominant Green Bay Packers, TIER ONE CAPITAL RATIO 18.15% achieve and maintain the for the past five years many of TOTAL RISK BASED CAPITAL RATIO our strategies have mirrored EFFICIENCY RATIO 76.32% strongest possible position in anticipation of an economic the philosophies of this ALLOWANCE FOR LOAN LOSSES TO TOTAL LOANS 2.50% recovery. Although early in the coaching icon. Teamwork. NET CHARGE OFFS TO AVERAGE LOANS 1.34% process and still somewhat Preparedness. Patience. NET INTEREST MARGIN 3.93% fragile, the early signs of Resourcefulness. recovery became more evident Since 2008, we have in 2012, and the Gateway banks were poised to reap the reported to our shareholders the grim economic conditions benefits. The diligent work of the past five years in challenging Florida banks. We know the contributing developing relationships, strengthening the balance sheet, factors all too well: rapidly declining real estate values; building alliances, developing diverse income streams and bloated non-performing asset balances; eroded capital maximizing efficiency were rewarded mightily in 2012. reserves; record unemployment and lack of consumer In terms of assets, the company experienced significant confidence. These factors all contributed mightily to the quality growth. At 12/31/12, the company posted total assets worst, and longest lasting recession in the past 70 years. of $624.9 million, an increase of $63.8 million when Evidence of the impact of these conditions is found in compared to the $561.1 million in assets posted at 12/31/11. the number of failed banks nationwide. Since 2008, 465 During 2012, the company continued the systematic US banks were ultimately closed by regulators and 64 of strengthening of the loan portfolio and this effort resulted in these closings were in Florida. In 2007, there were 284 a decrease in loan portfolio size during the year. At 12/31/12, Florida based banks. Today, only 209 remain. loans totaled $291.4 million. Consistent with our strategy to During these five long years we assured our build from a quality base, our bank resisted the temptation shareholders the Gateway banks would weather this storm to compete for “hot” loans in favor of building solid of economic uncertainty by employing a strategy based on relationships. Holding fast to this strategy resulted in a small maintaining capital strength, developing diverse income reduction in loan portfolio size as loans were reduced by streams, minimizing risk and controlling cost. Our unified $17.1 million from the $308.5 million posted at 12/31/11. group of Gateway banks tightened their belts, fine tuned The company continues to place emphasis on their balance sheets, vigorously attacked loans impacted by cementing our relationship with clients by securing core economic conditions, and prepared to capitalize on the deposit relationships with these clients. We have defined opportunities a rebounding economy would present. core deposits more simply as “non-time” deposits, meaning Not unlike the rowing team featured on the cover of deposits other than higher rate certificates of deposit. the 2012 Annual Report, our banks worked in concert to Deposit portfolio management is a key factor in the net equally strengthen our individual charters and to develop interest margin equation as well. At 12/31/12, deposits earning opportunities across the board. Cooperative efforts totaled $488.5 million, a 10.8% increase of $47.6 million in lending, sharing of resources and products including when compared to the $440.9 million posted at 12/31/11. those provided by Gateway Private | Wealth sowed the Likewise, low cost savings, money market and transaction seeds for increased market penetration. Reorganizing accounts increased to $248.6 million at 12/31/12 – a $27.2 residential lending programs into a strategic alliance with 2 - GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC.
2012 Q UA R T E R LY T R E NDS DE POSITS $ 620
DOLLARS IN MILLIONS
$ 560 $ 500 $ 440
$440.9
$452.6
$466.6
03/12
06/12
$480.8
$488.5
09/12
12/12
$ 380 $ 320 $ 260 $ 200
12/11
DEPOSITS AT QUARTER ENDED
LOANS $ 620 $ 560 DOLLARS IN MILLIONS
million increase in comparison to the $221.4 posted at 12/31/11. A benefit of this increase in low cost deposits was an increase of 0.09% in average net interest margin to 3.93% for 2012. The strengthening process undertaken for the past five years at both the Holding Company level and on the ground at the three chartered Gateway banks yielded exceptional rewards for the year ended 12/31/12. The company posted a series of profitable quarters and the first annual Holding Company profit. For the year ended 12/31/12, the company posted a profit of $9.3 million before provisions of $2.4 million to loan loss reserve and $1.4 million for taxes. After these provisions, the company posted a net profit of $5.5 million. This total represents an improvement of $5.3 million when compared to the $231,788 net loss for the year ended 12/31/11. While the dollar amount of profit is impressive, these figures take on greater perspective when viewed as a function of asset size. For the year ended 12/31/12, the company posted a return on average assets (ROAA) of 0.93% and a return on average equity (ROAE) of 8.15%. Both of these ratios rank the company among the highest performing Florida based banks. These results must be viewed in the proper context. As we have stated, one facet of our strategy is building multiple revenue streams, one of these being investments in low risk investments. In 2012, the market was extremely favorable,and it is unlikely this level of investment performance is sustainable for the long term. We invite all shareholders to review the complete detail of the audited financial report, available on the Investor Relations page of any Gateway Bank internet site. Gateway Financial Holdings of Florida has now logged six consecutive profitable quarters and we carry significant momentum into 2013. We look forward to reporting future results to our valued shareholders and thank you for your continued support of the Gateway banking organization.
$ 500 $ 440 $ 380 $ 320
$308.5
$296.6
$296.8
12/11
03/12
06/12
$291.6
$291.4
09/12
12/12
$ 260 $ 200
LOANS AT QUARTER ENDED
A SSE TS $ 720
DOLLARS IN MILLIONS
$ 660 $ 600
$559.7
$576.7
12/11
03/12
$603.7
$617.4
$624.3
06/12
09/12
12/12
$ 540 $ 480 $ 420 $ 360
Dr. P.T. “Bud” Fleuchaus Chairman of the Board
David K. Maholias President & CEO
$ 300
ASSETS AT QUARTER ENDED
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. - 3
MARKET REPORTS 2012 QUARTERLY TRE ND S G ATEWAY BANK OF FLORI DA
Gateway Bank of Florida
David K. Maholias - President & CEO
In 2011, Gateway Bank of Florida reaped the rewards of years of balance sheet strengthening and loan portfolio restructuring while building a market position in the Volusia County market area. The bank entered 2012 poised to continue to capitalize on surfacing opportunities and posted a year of record performance. Following a strategy of measured growth and long term relationship building, the bank posted gains in assets and deposits while continuing to manage the loan portfolio to market conditions. The bank is reaping the benefits of a slowly improving economy while continuing to cautiously manage exposure to risk. This strategy is delivering results placing Gateway Bank of Florida among the top performing banks in the state of Florida. At 12/31/12, assets totaled $229.5 million, an increase of $37.2 million (19.3%) when compared to the $192.3 million in assets posted at 12/31/11. Consistent with the system wide strategy to maximize the earning power of multiple income streams, the bank continued to build earning opportunities in low risk investments while cautiously fine tuning the loan portfolio. In 2012, the loan portfolio was reduced by $12.5 million. At 12/31/12, loans totaled $75.0 million, compared to the portfolio size of $87.5 at 12/31/11. Management has taken the position more widespread opportunities will be present in lending as the economy shows lasting signs of improvement. The bank has and will exercise patience in lending holding fast to standards of pricing, terms and credit worthiness. Gateway Bank of Florida continues to gain market share as evidenced by significant gains in the deposit portfolio. At 12/31/12, deposits totaled $183.2 million, a 24.0% increase of $35.5 million when compared to the $147.7 million posted at 12/31/11. For the same time period, non-interest bearing deposits grew 32.5% from $13.2 million at 12/31/11 to $17.5 million at 12/31/12. For the year ended 12/31/12, Gateway Bank of Florida posted a net profit of $2.83 million – a 58.0% increase when compared to the impressive $1.79 million profit posted for the year ended 12/31/11. The overall financial results filed by the company also resulted in the bank receiving a Five Star rating from Bauer Financial, the only Volusia County based bank to achieve this rating. 4 - GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC.
D E P O SI T S
A S S E TS
06/12 09/12 QUARTER ENDED
12/12
$ 245 DOLLARS IN MILLIONS
Locations in Daytona Beach, Port Orange and Ormond Beach, Florida
LOA N S $ 280
$ 210 $ 175 $ 140 $ 105 $ 70 $ 35
12/11
03/12
Gateway Bank of Central Florida Locations in Ocala, Gainesville and Alachua, Florida Thomas D. Ingram - CEO
Gateway Bank of Central Florida serves the Ocala/ Gainesville market area where adverse economic conditions continue to linger in 2012. Most notable among these is a slow to rebound real estate market pressuring borrowers and lenders. The greatest impact is felt in the area of resolving underperforming loans, due to below average demand for the underlying real estate collateral. Like all area banks, Gateway Bank of Central Florida has felt the impact of these conditions. However, the bank was well positioned to address these issues and during the year the bank was able to resolve certain loan issues with minimal impact. Concurrent with the ongoing effort to resolve the last of the lingering recessionary loan issues, the bank continues to cement its position as the community bank of first choice serving this region. The bank has become the center of many civic activities and is building alliances which serve both the community and the business interests of the banks. The success of the balance sheet management efforts of 2012 is evident in the annual results. At 12/31/12, total assets stood at $172.2 million, a reduction of $11.9 million, when compared to the $184.1 million posted at 12/31/11. Likewise, the loan portfolio was strategically reduced as underperforming loans were resolved. At 12/31/12, the bank posted total loans of $118.0 million. This total represents a reduction of $12.7 million when compared to the $130.7 million posted at 12/31/11.
Efforts to further strengthen the balance sheet were also evident in the deposit portfolio. At 12/31/12, Total Deposits stood at $132.0 million, a reduction of $15.2 million from the $147.2 million posted at 12/31/11. While higher cost deposits were shed as a part of this process, non-interest bearing deposit balances increased. At 12/31/12, the bank posted non-interest bearing deposits totaling $31.3 million. This total represents an increase of $3.3 million when compared to the $28.0 million posted at 12/31/11. While 2012 was a year of balance sheet strengthening for Gateway Bank of Central Florida, the bank returned to profitability posting four consecutive profitable quarters and recording a $345,198 net profit. This total represents a $1.75 million improvement when compared to the $1.4 million loss posted for the year ended 12/31/11. The bank has considerable positive momentum heading into 2013.
2012 Q UAR T ER LY T R END S G AT E WA Y B A N K OF C ENT R AL FLOR I DA LOA N S
D E P OS IT S
ASSETS
06/12 09/12 QUARTER ENDED
12/12
$ 280
DOLLARS IN MILLIONS
$ 245 $ 210 $ 175 $ 140 $ 105 $ 70 $ 35
12/11
03/12
Gateway Bank of Southwest Florida
Gateway Bank of Southwest Florida has followed a textbook community banking plan in building the franchise in the Sarasota/Bradenton area. The bank has established deep roots in community service in two counties through employee involvement. This strategy has helped the community and is paying large dividends to the bank in developing strong relationships in the business community. Further, the bank has structured a no compromises roster of products and services including those provided by Gateway Private | Wealth and Gateway Home Lending. At 12/31/11, the bank posted Total Assets of $217.7 million, an increase of $34.8 million or 19.0%, when compared to the $182.9 million posted at 12/31/11. Selectively capitalizing on loan opportunities, the bank expanded the loan portfolio as well. At 12/31/12, the bank posted loans of $96.8 million. This total represents an increase of $8.0 million in comparison to the $88.8 million in loans posted at 12/31/11. Loan quality is unprecedented as the bank has a zero balance of Non-Performing Assets and a zero balance of Other Real Estate Owned (OREO). Gateway Bank of Southwest Florida continued to strengthen the deposit portfolio in 2012 as well. At 12/31/12, deposits totaled $176.6 million, an increase of $22.6 million when compared to the $154.0 million posted at 12/31/11. Non-interest bearing deposits increased 38.9% to $32.5 million at 12/31/12 from the $23.4 million posted at 12/31/11. These positive steps were all contributing factors to the bank posting a record net profit of $3.19 million for 2012. This total is a $2.4 million increase in comparison to the net profit of $786,404 earned for the year ended 12/31/11. When considered as a function of asset size, the bank posted a Return on Average Assets of 1.60% placing Gateway Bank of Southwest Florida among the top ten highest performing banks in the state.
2012 QUARTERLY TRE NDS G ATEWAY BANK OF SOUTHWE ST FLO RI DA
Two locations in Sarasota, Florida One location in Bradenton, Florida
LOA N S
A S S E TS
06/12 09/12 QUARTER ENDED
12/12
$ 280
Shaun P. Merriman - President & CEO
$ 245 DOLLARS IN MILLIONS
In 2012, Gateway Bank of Southwest Florida furthered an already dominant position among community banks serving the Sarasota/Bradenton market. With nine community bank closings in this market in the past four years, personal and business banking clients have sought new community bank relationships, and Gateway Bank is winning many such relationships. The bank has distinguished itself with exceptional financial performance resulting in a Five Star Bauer Financial rating.
D E P O SI T S
$ 210 $ 175 $ 140 $ 105 $ 70 $ 35
12/11
03/12
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. - 5
FINANCIAL RESULTS CONSOLIDATED STATEMENT OF CONDITION (AUDITED) Cash and Cash Equivalents Federal Funds Sold Interest-bearing Time Deposits Securities Available for Sale Loans Held for Sale Total Loans Allowance for Loan Losses Property and Equipment Other Assets Total Assets Noninterest-bearing Demand Deposits Savings, NOW & Money-Market Deposits Time Deposits Total Deposits Federal Home Loan Bank Advances and Other Borrowings Official Checks Accrued Interest Payable & Other Liabilities Total Liabilities Total Stockholders’ Equity Total Liabilities & Stockholders’ Equity CONSOLIDATED STATEMENT OF INCOME (AUDITED) Interest Income Interest Expense Net Interest Income Provision for Loan Losses Non Interest Income Non Interest Expense Realized Gains on Securities Realized Gains on Sale of Loans Profit (Loss) Before Income Tax Expense (Benefit) Income Tax Expense (Benefit) Net Profit (Loss)
($’s In 000’s) 12/31/12
12/31/11
11,277 17,960 264,265 636 291,415 (7,273) 25,873 20,780
15,237 14,935 183,322 308,529 (8,956) 26,710 21,286
624,933
561,063
78,221 170,354 239,965
60,835 160,552 219,574
488,540
440,961
62,550 798 1,714
54,474 627 1,332
553,602
497,394
71,331
63,669
624,933
561,063
12/31/12
12/31/11
22,706 3,621
24,799 5,128
19,085
19,671
2,369
7,583
1,558 18,710 7,015 386
1,640 17,499 2,702 177
6,965 1,406
(892) (660)
5,559
(232)
The Consolidated Statements of Condition and Income are compiled from the Independent Auditors’ Report dated April 30, 2013 prepared by Hacker, Johnson and Smith, PA. In keeping with the environmental commitment of the company, the full auditors’ report is available in the investor relations section of any Gateway Bank website. 6 - GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC.
INSIDE THE NUMBERS . . . NON-PERFORMING ASSETS
CAPITAL RATIOS
% OF N PAs V S S TAT E WID E AV E R AG E
NPAs/TOTAL ASSETS
6.0%
VE R SUS R E G U L AT O R Y STA N DA R D O F W E L L C API TALI ZE D
5.30%
5.0%
4.85%
4.82%
12.00%
3.0%
9.00%
2.52% 1.94%
2.0%
1.41%
16.89%
15.00%
4.57%
4.0%
6.00%
1.38%
10.27%
10.0% 6.0%
5.0%
3.00%
1.0% 0.0%
18.15%
18.00%
03/12
06/12
09/12
0.00%
12/12
QUARTER ENDED STATEWIDE AVERAGE
TIER 1 LEVERAGE RATIO
TIER 1 RISK BASED CAPITAL
CAPITAL RATIOS AT 12/31/12 GW CONSOLIDATED
WELL-CAPITALIZED STANDARD
RETURN ON AVERAGE ASSETS
GW CONSOLIDATED
RETURN ON AVERAGE EQUITY
ROA A VS S TAT E WID E AV E R AG E
R OA E VS STAT E W I D E AV E R AG E 9.75%
0.92%
0.92%
0.75% 0.53%
0.50% 0.25%
.017%
.03%
0.0%
-.03%
-.01%
-0.25% -0.50%
03/12
06/12
09/12
NET PROFIT/ AVERAGE ASSETS
NET PROFIT/ AVERAGE ASSETS
1.11%
1.00%
9.0% 6.0%
4.65%
3.0% 0.0%
-9.22%
-5.23%
03/12
06/12
GW CONSOLIDATED
STATEWIDE AVERAGE
$219.5
227.8
234.5
248.6
239.9
$200 $150 $100 $50 $0
03/12
06/12
09/12
12/12
4.50% 3.75%
4.10% 3.57%
3.96%
3.94%
3.93% 3.58%
3.57%
3.56%
3.00% 2.25% 1.50% 0.75% 0.0%
03/12
06/12
QUARTER ENDED RELATIONSHIP DEPOSITS
GW CONSOLIDATED
V S STAT E W I D E AVE R AG E
AVERAGE NET INTEREST MARGIN
DOLLARS IN MILLIONS
$233.1
12/12
NET INTEREST MARGIN
$300 245.0
09/12
QUARTER ENDED
DEPOSIT COMPOSITION
237.4
-3.48%
-6.0%
REL AT ION SHIP D E P OS IT S V S T IM E D E P OS IT S
$250
-3.64%
-3.0%
-9.0%
12/12
8.15%
8.10%
QUARTER ENDED STATEWIDE AVERAGE
TOTAL RISK BASED CAPITAL
09/12
12/12
QUARTER ENDED TIME DEPOSITS
Sources: Monroe Securities/The Carson Medlin Company, Saltmarsh, Cleaveland & Gund
STATEWIDE AVERAGE
GW CONSOLIDATED
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. - 7
Audited Consolidated Financial Statements At December 31, 2012 and 2011 and for the Years Then Ended (Together with Independent Auditors' Report)
Independent Auditors' Report
The Board of Directors and Stockholders Gateway Financial Holdings of Florida, Inc. Daytona Beach, Florida: We have audited the accompanying consolidated financial statements of Gateway Financial Holdings of Florida, Inc. 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, stockholders' equity, and cash flows for the years then ended, and the related notes to the financial statements. Management's Responsibility for 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 America; 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. Auditor's Responsibility 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 auditor's 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 entity's 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 entity's 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. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and subsidiaries 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.
HACKER, JOHNSON & SMITH PA Orlando, Florida April 30, 2013
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Consolidated Balance Sheets ($ in thousands, except share amounts) At December 31, 2012 2011
Assets Cash and due from banks Interest-bearing deposits
$
Total cash and cash equivalents Interest-bearing time deposits Securities available for sale Loans held for sale Loans, net of allowance for loan losses of $7,273 and $8,956 Premises and equipment, net Foreclosed real estate Federal Home Loan Bank stock Accrued interest receivable Deferred income taxes Bank-owned life insurance Other assets Total assets
5,519 5,758
9,791 5,446
11,277
15,237
17,960 264,265 636 284,142 25,873 3,416 3,578 4,025 3,469 5,258 1,034
14,935 183,322 299,573 26,710 2,773 3,915 2,572 5,583 4,566 1,877
$ 624,933
561,063
78,221 170,354 239,965
60,835 160,552 219,574
488,540
440,961
2,000 60,550 798 1,714
52,700 1,774 627 1,332
553,602
497,394
Liabilities and Stockholders' Equity Liabilities: Noninterest-bearing demand deposits Savings, NOW and money-market deposits Time deposits Total deposits Federal Reserve Bank overnight borrowings Federal Home Loan Bank advances Other borrowings Official checks Accrued interest payable and other liabilities Total liabilities Commitments and contingencies (Notes 5, 10 and 17) Stockholders' equity: Preferred stock, $5 par value; 3,855,000 shares authorized, none issued and outstanding Class A preferred stock, $5 par value; 1,125,000 shares authorized, 916,586 issued and outstanding Class B perpetual preferred stock, $5 par value; 20,000 shares authorized, 4,096 issued and outstanding Common stock, $5 par value; 50,000,000 shares authorized, 5,411,829 shares issued and outstanding Additional paid-in capital Accumulated deficit Accumulated other comprehensive income Total stockholders' equity Total liabilities and stockholders' equity See Accompanying Notes to Consolidated Financial Statements. 2
-
-
4,583
4,583
20
20
27,059 41,512 (5,924) 4,081
27,059 41,325 (11,279) 1,961
71,331
63,669
$ 624,933
561,063
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Consolidated Statements of Operations (In thousands) Year Ended December 31, 2012 2011
Interest income: Loans Investment securities Other
$ 16,081 6,127 498
17,920 6,485 394
22,706
24,799
3,033 588
4,549 579
3,621
5,128
19,085
19,671
2,369
7,583
16,716
12,088
Noninterest income: Service charges on deposit accounts Mortgage banking fees Gain on sale of securities available for sale Gain on sale of loans Other
298 176 7,015 386 1,084
241 293 2,702 177 1,106
Total noninterest income
8,959
4,519
9,122 2,567 1,028 167 457 154 663 2,588 1,964
9,053 2,626 888 205 557 153 781 1,440 1,796
18,710
17,499
Total interest income Interest expense: Deposits Other borrowings Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses
Noninterest expenses: Salaries and employee benefits Occupancy and equipment Data processing Advertising Professional fees Stationary and supplies Deposit insurance Foreclosed real estate Other Total noninterest expenses Earnings (loss) before income taxes (benefit) Income taxes (benefit) Net earnings (loss) Class B preferred stock dividends paid
6,965
(892)
1,406
(660)
5,559
(232)
(204)
Net earnings (loss) applicable to common stockholders See Accompanying Notes to Consolidated Financial Statements. 3
$ 5,355
(157) (389)
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (In thousands)
Year Ended December 31, 2012 2011
Net earnings (loss)
$ 5,559
Other comprehensive income: Change in unrealized gain (loss) on investments: Unrealized gain arising during the year Reclassification adjustment for realized gains
(232)
10,414 (7,015)
8,122 (2,702)
Net change in unrealized gain (loss)
3,399
5,420
Deferred income taxes on above change
1,279
2,039
Total other comprehensive income
2,120
3,381
$ 7,679
3,149
Comprehensive income
See Accompanying Notes to Consolidated Financial Statements.
4
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years Ended December 31, 2012 and 2011 ($ in thousands)
Class A Preferred Stock Shares Amount
Balance at December 31, 2010
916,336
$ 4,582
Class B Perpetual Preferred Stock Shares Amount
3,509
$ 17
Common Stock Shares Amount
5,411,829 $ 27,059
Accumulated Other CompreAdditional hensive Total Paid-In Accumulated Income Stockholders' Capital Deficit (Loss) Total
40,642
(10,890)
(1,420)
Net loss
-
-
-
-
-
-
-
(232)
Net change in unrealized loss on securities available for sale, net of income taxes of $2,039
-
-
-
-
-
-
-
-
Sale of preferred stock, net
250
587
3
-
-
507
-
-
511
Stock-based compensation
-
-
-
-
-
-
176
-
-
176
Dividends paid on Class B perpetual preferred stock
-
-
-
-
-
-
-
(157)
-
(157)
4,096
20
27,059
41,325
(11,279) 5,559
Balance at December 31, 2011
916,586
1
4,583
5,411,829
-
59,990
3,381
1,961
3,381
63,669
Net earnings
-
-
-
-
-
-
-
Net change in unrealized gain on securities available for sale, net of income taxes of $1,279
-
-
-
-
-
-
-
-
Stock-based compensation
-
-
-
-
-
-
187
-
-
187
Dividends paid on Class B perpetual preferred stock
-
-
-
-
-
-
-
(204)
-
(204)
Balance at December 31, 2012
916,586
$ 4,583
4,096
$ 20
See Accompanying Notes to Consolidated Financial Statements.
5
5,411,829 $ 27,059
41,512
(5,924)
-
(232)
2,120
4,081
5,559
2,120
71,331
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) Year Ended December 31, 2012 2011
Cash flows from operating activities: Net earnings (loss) $ Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization Provision for loan losses Net amortization of premiums and discounts on securities Net amortization of deferred loan fees and costs Deferred income taxes (benefit) Stock-based compensation Gain on loans held for sale Originations of loans held for sale Proceeds from loans held for sale Loss on sale of foreclosed real estate Write-down on foreclosed real estate Gain on sale of securities available for sale Increase in accrued interest receivable Decrease in other assets Net earnings on bank-owned life insurance Increase (decrease) in official checks Increase (decrease) in accrued interest payable and other liabilities Net cash provided by operating activities Cash flows from investing activities: Purchase of securities available for sale Principal repayments, maturities and calls of securities available for sale Proceeds from sale of securities available for sale Net decrease in loans Purchase of premises and equipment, net Redemption of Federal Home Loan Bank stock Increase in interest-bearing time deposits Proceeds on foreclosed real estate Purchase of bank-owned life insurance
5,559
(232)
932 2,369 4,103 56 835 187 (386) (13,744) 13,494 89 2,214 (7,015) (1,453) 843 (167) 171 382
986 7,583 1,970 33 (660) 176 (177) (11,556) 12,018 167 963 (2,702) (313) 470 (167) (227) (37)
8,469
8,295
(199,655)
(141,348)
26,362 98,661 6,917 (95) 337 (3,025) 3,143 (525)
12,254 111,577 17,176 (657) 114 (3,737) 2,692 (525)
(67,880)
(2,454)
47,579 7,850 (1,774) (204) 2,000
1,656 (3,800) (71) 511 (157) -
55,451
(1,861)
Net (decrease) increase in cash and cash equivalents
(3,960)
3,980
Cash and cash equivalents at beginning of year
15,237
11,257
$ 11,277
15,237
Net cash used in investing activities Cash flows from financing activities: Net increase in deposits Increase (decrease) in Federal Home Loan Bank advances Decrease in other borrowings Proceeds from issuance of preferred stock, net Dividends paid Increase in Federal Reserve Bank overnight borrowings Net cash provided by (used in) financing activities
Cash and cash equivalents at end of year
(continued)
6
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued (In thousands) Year Ended December 31, 2012 2011
Supplemental disclosure of cash flow information: Cash paid during the year for: Interest Income taxes
$ 3,726 $
Noncash transactions: Accumulated other comprehensive income (loss), net change in unrealized gain (loss) on securities available for sale, net of income taxes Transfer of loans to foreclosed real estate
See Accompanying Notes to Consolidated Financial Statements. 7
570
5,580 -
$ 2,120
3,381
$ 6,089
3,052
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements At December 31, 2012 and 2011 and for the Years Then Ended
(1) Summary of Significant Accounting Policies General. Gateway Financial Holdings of Florida, Inc. (the "Holding Company") owns 100% of the outstanding common stock of Gateway Bank of Florida ("GBFL"), Gateway Bank of Central Florida ("GBCFL"), Gateway Bank of Southwest Florida ("GBSWFL") (collectively, the "Banks"), and Gateway Asset Holdings ("GAH") (collectively the "Company"). The Holding Company's only business activities are the operation of the Banks and GAH. The Banks are state (Florida) chartered commercial banks. The deposits of the Banks are insured up to applicable limits by the Federal Deposit Insurance Corporation. GBFL offers a variety of community banking services to individual and corporate customers through its three banking offices located in Daytona Beach, Port Orange and Ormond Beach, Florida. GBCFL offers a variety of community banking services to individual and corporate customers through its three banking offices located in Ocala, Alachua and Gainesville, Florida. GBSWFL offers a variety of community banking services to individual and corporate customers through its three banking offices located in Sarasota and Bradenton, Florida. GAH is a nonbank subsidiary formed to hold nonreadily liquid assets of the Holding Company and the Banks. Management has evaluated all significant events occurring subsequent to the balance sheet date through April 30, 2013, which is the date the consolidated financial statements were available to be issued, determining no events require additional disclosure in the consolidated financial statements. Basis of Presentation. The accompanying consolidated financial statements include the accounts of the Holding Company and the Banks. All significant intercompany accounts and transactions have been eliminated in consolidation. The following is a description of the significant accounting policies and practices followed by the Company, which conform to accounting principles generally accepted in the United States of America ("GAAP") and prevailing practices within the banking industry. Use of Estimates. In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, foreclosed real estate valuation allowances and deferred income taxes. (continued) 8
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued 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-bearing deposits, all of which have original maturities of less than ninety days. At December 31, 2012 and 2011, the Banks were required to maintain cash reserves with the Federal Reserve totaling $1,088,000 and $363,000, respectively. Securities. Securities may be classified 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-tomaturity 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, net of tax, on available-for-sale securities are excluded from operations and reported in comprehensive loss. Gains and losses on the sale of available-for-sale securities are recorded on the trade date and are determined using the specific-identification method. Premiums and discounts on securities are recognized in interest income using the interest method over the period to maturity. Management evaluates securities for other than-temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in operations as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Loans Held for Sale. The Company originates and sells residential mortgage loans in the secondary market. Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate, determined by outstanding commitments from investors or current investors yield requirements. The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate-lock commitments). Rate-lock commitments on mortgage loans that are intended to be sold are considered to be derivatives in accordance with GAAP. Accordingly, such commitments, along with any related fees received from potential borrowers, are recorded at fair value in derivative assets or liabilities, with changes in fair value recorded in the net gain or loss on sale of loans held for sale. Fair value is based on fees currently charged to enter into similar agreements, and for fixed-rate commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of the rate-lock commitments was not material to the Company's consolidated financial statements for the years ended December 31, 2012 or 2011. (continued) 9
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued Loans. Loans that management has the intent and 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 and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan. For loans amortized at cost, interest income is accrued based on the unpaid principal balance. 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. Past due status is based on contractual terms of the loans. All interest accrued but not collected for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cashbasis 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 reasonably assured. 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 Company's accounting policies or methodology during the year ended December 31, 2012. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of specific and general components. The specific component relates to loans that are considered impaired. For such loans, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers all other loans and is based on industry historical loss experience adjusted for qualitative factors. (continued)
10
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued Allowance for Loan Losses, Continued. The historical loss component of the allowance is determined by losses recognized by portfolio segment over the preceding rolling eighteen months. 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 numerous qualitative factors including, changes in lending's policies and procedures, changes in national and local economic conditions, unfavorable local construction news, trend analysis of Bank charge offs, changes in nature and volume of portfolio, changes in lending management experience, changes in the trends of the volume of problem loans, changes in the quality of loan review system, existence and effects of concentration of credit, and lastly competition and regulatory changes. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for all loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral-dependent. Premises and Equipment. Land and improvements are stated at cost. Premises and equipment are stated at cost, less accumulated depreciation and amortization. Interest costs are capitalized in connection with the construction of new banking offices. Depreciation and amortization expense are computed using the straight-line method basis over the shorter of the lease term or estimated useful life of each type of asset. Foreclosed Real Estate. Assets acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at the fair value less estimated selling costs at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of the new cost basis or fair value less estimated selling costs. Revenue and expenses from operations are included in the statements of operations. (continued)
11
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued 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. There are two components of income taxes: current and deferred. Current income taxes reflect 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 taxes result from changes in deferred tax assets and liabilities between periods. 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. Uncertain tax positions are recognized if it is more likely than not that the tax position will be realized or sustained upon examination including resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management's judgment. As of December 31, 2012, management is not aware of any uncertain tax positions that would have a material effect on the Company's consolidated financial statements. The Company recognizes interest and penalties on income taxes as a component of income tax expense. The Holding Company, the Banks and GAH file consolidated income tax returns. Income taxes are allocated proportionately to the Holding Company, the Banks and GAH as though separate income tax returns were filed. (continued)
12
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued 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 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. 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 effort. The following describes valuation methodologies used for assets measured at fair value: 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 U.S. Government mortgage-backed securities, municipal securities, corporate bonds and U.S. Government agencies. Impaired Loans. The Company's impaired loans are normally collateral dependent and, as such, are carried at the lower of the Company's net recorded investment in the loan or the fair market value of the collateral less estimated selling costs. 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 Company's management related to values of properties in the Company's 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 are classified as Level 3. (continued) 13
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued Fair Value Measurements, Continued. Foreclosed Assets. Estimates of fair values 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 Company's management related to values of properties in the Company's 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, the fair values estimates for foreclosed assets are classified as Level 3. Off-Balance-Sheet Financial Instruments. In the ordinary course of business the Company has entered into off-balance-sheet financial instruments consisting of unused lines of credit and undisbursed loans in process, standby letters of credit and commitments to extend credit. Such financial instruments are recorded in the consolidated financial statements when they are funded. Fair Values of Financial Instruments. The following methods and assumptions were used by the Company in estimating fair values of financial instruments: Cash and Cash Equivalents. The carrying amounts of cash and cash equivalents approximate their fair value. Interest-Bearing Time Deposits. The carrying amounts of interest-bearing time deposits approximate their fair value. Securities Available for Sale. Fair values for securities are based on the framework for measuring fair value. Loans Held for Sale. Fair values of loans held for sale are based on commitments on hand from investors or prevailing market prices. 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 impaired loans are based on the framework for measuring fair value. Federal Home Loan Bank Stock. The carrying value of Federal Home Loan Bank stock approximates fair value. Accrued Interest Receivable. Book value approximates fair value. (continued)
14
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued Fair Values of Financial Instruments, Continued. 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 fixed-rate 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. The fair value of the advances from the Federal Home Loan Bank was estimated using a discounted cash flow analysis based on the Company's current incremental borrowing rate for similar types of borrowings. Other Borrowings. The carrying amount of other borrowings approximate their fair value. Off-Balance-Sheet 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. Stock-Based Compensation Plans. The Company recognizes the fair value of stock-based compensation in salaries and employee benefits in the accompanying consolidated statements of operations on a straight-line basis over the vesting term. Advertising. The Company expenses all media advertising as incurred. Comprehensive Income (Loss). GAAP requires 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 sheet, such items, along with net loss, are components of comprehensive income (loss). (continued)
15
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued 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 changes in 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 Company's 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 adoption of this guidance did not have an impact on the Company's consolidated financial statements. (continued)
16
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(2) Securities Available for Sale Securities have been classified according to management's intention. The following is a summary of securities available for sale (in thousands): Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
At December 31, 2012:
U.S. Government agency mortgage-backed securities Municipal securities Corporate bonds U.S. Government agencies
$ 31,458 223,718 1,470 1,076
295 6,878 83
(130) (578) (5) -
31,623 230,018 1,465 1,159
$ 257,722
7,256
(713)
264,265
75,035 104,059 1,084
346 3,502 14
(558) (160) -
74,823 107,401 1,098
$ 180,178
3,862
(718)
183,322
At December 31, 2011:
U.S. Government agency mortgage-backed securities Municipal securities U.S. Government agencies
Securities with a carrying value of $33,364,000 and $30,735,000 at December 31, 2012 and 2011, respectively, were pledged to secure Federal Home Loan Bank ("FHLB") advances, other borrowings and public funds. Maturities of securities at amortized cost and fair value are as follows at December 31, 2012 (in thousands):
Due from one to five years Due from five to ten years Due greater than ten years U.S. Government agency mortgage-backed Total
Amortized Cost
Fair Value
1,470 7,467 217,327 31,458
1,465 8,067 223,110 31,623
$ 257,722
264,265
$
(continued)
17
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(2) Securities Available for Sale, Continued Securities sold are summarized as follows (in thousands): Year Ended December 31, 2012 2011
Proceeds received from sales
$ 98,661
Gross gains Gross losses
7,015 -
Net gain
$ 7,015
111,577 3,017 (315) 2,702
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, is as follows (in thousands): Less Than Twelve Months Gross Unrealized Fair Losses Value
Over Twelve Months Gross Unrealized Fair Losses Value
Securities Available for Sale:
U.S. Government agency mortgage-backed securities Municipal securities Corporate bonds
$ (95) (578) (5)
7,258 35,198 1,465
(35) -
6,964 -
$(678)
43,921
(35)
6,964
The unrealized losses on thirty-nine investment securities available for sale were caused by interest rate changes. It is expected that the securities would not be settled at a price less than the par value of the investments. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired. (continued)
18
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(2) Securities Available for Sale, Continued Available-for-sale securities measured at fair value on a recurring basis are summarized below (in thousands):
Fair Value
Fair Value Measurements at Reporting Date Using Quoted Prices In Active Significant Markets for Other Significant Identical Observable Unobservable Assets Inputs Inputs (Level 1) (Level 2) (Level 3)
As of December 31, 2012:
U.S. Government agency mortgage-backed securities Municipal securities Corporate bonds U.S. Government agencies
$ 31,623 230,018 1,465 1,159
-
31,623 230,018 1,465 1,159
-
$ 264,265
-
264,265
-
74,823 107,401 1,098
-
74,823 107,401 1,098
-
$ 183,322
-
183,322
-
As of December 31, 2011:
U.S. Government agency mortgage-backed securities Municipal securities U.S. Government agencies
During the years ended December 31, 2012 and 2011, no securities were transferred in or out of Level 1, Level 2 and Level 3. (continued)
19
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(3) Loans The three loan portfolio segments and five portfolio classes are as follows (in thousands): At December 31, 2012 2011
Nonresidential real estate: Commercial real estate Construction and land Commercial and industrial Consumer: Residential real estate Home equity and other Total loans Deduct: Allowance for loan losses Net deferred loan fees
$ 157,324 26,152 42,919
178,381 24,419 41,729
33,894 31,078
33,708 30,228
291,367
308,465
(7,273) 48
Loans, net
$ 284,142
(8,956) 64 299,573
The Company has divided the loan portfolio into three portfolio segments, each with different risk characteristics and methodologies for assessing risk. All loans are underwritten based upon standards set forth in the policies approved by the Company's board of directors. The portfolio segments identified by the Company as follows: Nonresidential Real Estate. Nonresidential real estate loans are typically divided into two classes: Commercial real estate, and Construction and Land. 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 or second liens on office buildings, apartments, farms, retail and mixed-use properties, churches, warehouses and restaurants located within the market area. The Company's underwriting analysis includes credit verification, independent appraisals, a review of the borrower's financial condition, and a detailed analysis of the borrower's 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. (continued)
20
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(3) Loans, Continued Construction loans consist of loans to individuals for the construction of their primary residences and, to a limited extent, loans to builders and commercial borrowers. The Company's underwriting analysis includes credit verification, independent appraisals, a review of the borrower's financial condition, and a detailed analysis of the borrower's underlying cash flows. 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 estimated costs (including interest) of the project. Commercial and Industrial Loans. Commercial and industrial loans consist of loans to small- and medium-sized companies in the Company's market area. Commercial and industrial loans are generally used for working capital purposes or for acquiring equipment, inventory or furniture. Primarily all of the Company's commercial and industrial loans are secured loans, along with a small amount of unsecured loans. The Company's 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 and industrial loans are typically made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's 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 its underwriting standards. Consumer Loans. Consumer loans are typically divided into two classes: residential real estate and home equity and other. The Company originates adjustable-rate and fixed-rate, residential real estate loans for purchase or refinancing of a mortgage. The Company's underwriting analysis includes credit verification, independent appraisals, a review of the borrower's financial condition, and a detailed analysis of the borrower's underlying cash flows. The majority of these loans are collateralized by owner-occupied properties located in the Company's market area. Home equity loans and other loans consist of both variable- and fixed-rate mortgage liens secured by a borrower's primary residence. These loans are underwritten based on a borrower's past credit history, present and future cash flow projections and the overall ability to service household debt repayments based on prescribed debt to income ratios. The risk inherent with this type of lending is economic conditions affecting the borrower's future employment or their spouse's loss of job affecting their ability to continue servicing debt repayments. (continued)
21
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(3) Loans, Continued The Company grants the majority of its loans to borrowers throughout Volusia, Sarasota, Manatee, Alachua and Marion Counties, Florida ("Market Area"). Although the Company has a diversified loan portfolio, a significant portion of its borrowers' ability to honor their contracts is dependent upon the economy and real estate market in the Market Area. An analysis of the change in the allowance for loan losses follows (in thousands): Nonresidential Commercial Real and Estate Industrial
Year Ended December 31, 2012: Beginning balance Provision for loan losses Charge-offs Recoveries Ending balance Individually evaluated for impairment: Recorded investment Balance in allowance for loan losses Collectively evaluated for impairment: Recorded investment Balance in allowance for loan losses
5,708 3,098 (3,640) 18
1,618 (740) (176) 121
1,630 11 (393) 18
8,956 2,369 (4,209) 157
$
5,184
823
1,266
7,273
$ 13,423 $ 955
1,048 175
1,206 10
15,677 1,140
$ 170,053 $ 4,229
41,871 648
63,766 1,256
275,690 6,133
7,235 3,398 (5,052) 127
1,470 2,759 (2,674) 63
1,297 1,426 (1,113) 20
10,002 7,583 (8,839) 210
5,708
1,618
1,630
8,956
$ 22,754 $ 713
2,815 707
1,347 152
26,916 1,572
$ 180,046 $ 4,995
38,914 911
62,589 1,478
281,549 7,384
$
Individually evaluated for impairment: Recorded investment Balance in allowance for loan losses Collectively evaluated for impairment: Recorded investment Balance in allowance for loan losses
Total
$
Year Ended December 31, 2011: Beginning balance Provision for loan losses Charge-offs Recoveries Ending balance
Consumer
(continued)
22
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(3) Loans, Continued The following summarizes the loan credit quality (in thousands): Commercial Construction Commercial Real and and Estate Land Industrial
Credit Risk Profile by Internally Assigned Grade: At December 31, 2012: Grade: Pass Watch/Special Mention Substandard Doubtful Loss Total At December 31, 2011: Grade: Pass Watch/Special Mention Substandard Doubtful Loss Total
Residential Real Estate
Home Equity and Other
Total
$ 142,663 1,484 13,177 -
25,542 610 -
40,966 905 1,048 -
32,826 1,068 -
30,969 109 -
272,966 2,389 16,012 -
$ 157,324
26,152
42,919
33,894
31,078
291,367
150,061 8,075 20,245 -
23,277 185 957 -
37,841 1,073 2,815 -
31,151 1,142 1,415 -
30,112 84 32 -
272,442 10,559 25,464 -
$ 178,381
24,419
41,729
33,708
30,228
308,465
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. This analysis includes loans with an outstanding balance greater than $300,000 and nonhomogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on at least an annual basis. The Company uses the following definitions for risk ratings: Pass – A Pass loan's primary source of loan repayment is satisfactory, with secondary sources very likely to be realized if necessary. Watch/Special Mention – A Watch/Special Mention loan has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Company's credit position at some future date. Watch/Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Substandard – A 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. (continued) 23
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(3) Loans, Continued 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 future. Age analysis of past-due loans is as follows (in thousands): 30-59 Days Past Due
At December 31, 2012: Commercial real estate Construction and land Commercial and industrial Residential real estate Home equity and other Total At December 31, 2011: Commercial real estate Construction and land Commercial and industrial Residential real estate Home equity and other Total
Accruing Loans 60-89 90 Days or Total Days Greater Past Past Due Past Due Due
Current
Nonaccrual Loans
Total Loans
$ 280 555 -
350 -
-
280 350 555 -
153,362 25,678 42,239 32,826 30,972
3,682 124 125 1,068 106
157,324 26,152 42,919 33,894 31,078
$ 835
350
-
1,185
285,077
5,105
291,367
581 19 23
460 726 2
-
581 479 726 25
166,417 23,462 41,136 32,392 30,196
11,383 957 114 590 7
178,381 24,419 41,729 33,708 30,228
$ 623
1,188
-
1,811
293,603
13,051
308,465
(continued)
24
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(3) Loans, Continued The following summarizes the amount of impaired loans (in thousands): With No Related Allowance Recorded Unpaid Recorded Principal Investment Balance
At December 31, 2012: Commercial real estate Construction and land Commercial and industrial Residential real estate Home equity and other
At December 31, 2011: Commercial real estate Construction and land Commercial and industrial Residential real estate Home equity and other
With an Allowance Recorded Unpaid Recorded Principal Related Investment Balance Allowance
Total Unpaid Recorded Principal Related Investment Balance Allowance
$ 2,925 124 341 1,068 99
3,507 1,800 408 1,395 99
9,888 486 707 39
9,888 486 707 39
905 50 175 10
12,813 610 1,048 1,068 138
13,395 2,286 1,115 1,395 138
905 50 175 10
$ 4,557
7,209
11,120
11,120
1,140
15,677
18,329
1,140
12,757 957 327 590 -
16,303 1,688 1,706 883 -
9,040 2,488 726 31
9,040 2,488 726 42
713 707 130 22
21,797 957 2,815 1,316 31
25,343 1,688 4,194 1,609 42
713 707 130 22
$ 14,631
20,580
12,285
12,296
1,572
26,916
32,876
1,572
The average net investment in impaired loans and interest income recognized and received on impaired loans are as follows (in thousands): Average Interest Recorded Income Investment Recognized
Interest Income Received
Year Ended December 31, 2012:
Commercial real estate Construction and land Commercial and industrial Residential real estate Home equity and other
$ 15,179 2,130 1,377 471 88
500 34 50 57 4
509 42 49 61 6
$ 19,245
645
667
25,019 2,381 3,519 1,177 225
434 22 98 15 -
463 28 95 14 -
$ 32,321
569
600
Year Ended December 31, 2011:
Commercial real estate Construction and land Commercial and industrial Residential real estate Home equity and other
(continued)
25
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(3) Loans, Continued Troubled debt restructurings are as follows (dollars in thousands): PrePostModification Modification Number Outstanding Outstanding of Recorded Recorded Contracts Investment Investment
Troubled Debt Restructurings: Year Ended December 31, 2012:
Commercial real estateModified interest rate and amortization Commercial and industrialModified interest rate and amortization Home equity and otherModified interest rate and amortization
3
$ 1,058
1,058
3
519
519
1
32
32
7
$ 1,609
1,609
3
2,031
2,031
1
90
90
1
212
212
1
24
24
6
$ 2,357
2,357
Year Ended December 31, 2011:
Commercial real estateModified interest rate and amortization Commercial and industrialModified interest rate and amortization Residential real estateModified interest rate, amortization and principal Home equity and otherModified interest rate and amortization
(continued)
26
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(3) Loans, Continued The allowance for loan losses on commercial and industrial and other loans, commercial real estate and consumer loans that have been restructured and are considered trouble debt restructurings ("TDR") is included in the Company's 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 loan's effective interest rate, or the fair value of the collateral if the loan is collateral-dependent. TDR's that have subsequently defaulted are considered collateraldependent. Number of Contracts
Recorded Investment
Troubled Debt Restructurings That Subsequently Defaulted (dollars in thousands): Year Ended December 31, 2012:
Commercial real estate
1
$ 1,228
(The defaulted TDR recorded investment at year end is $0 and is completely charged-off) Year Ended December 31, 2011:
Commercial real estateConstruction and land
1
$
251
Impaired collateral-dependent loans are carried at fair value when the current collateral value is lower than the carrying value of the loan. Those impaired collateral-dependent loans which are measured at fair value on a nonrecurring basis are as follows (in thousands):
Level 3
Total Losses
Losses Recorded During the Year
-
5,187 125
1,160 2,050
975 1,476
-
-
598 1,068 99
20 327 -
20 327 -
$ 7,077
-
-
7,077
3,557
2,798
9,909 876 590
-
-
9,909 876 590
4,426 531 358
3,482 531 325
$ 11,375
-
-
11,375
5,315
4,338
At Year End Fair Value
Level 1
Level 2
$ 5,187 125
-
598 1,068 99
December 31, 2012:
Commercial real estate Construction and land Commercial and industrial Residential real estate Home equity and other
December 31, 2011:
Commercial real estate Construction and land Residential real estate
(continued)
27
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(4) Foreclosed Real Estate Foreclosed real estate expenses include the following (in thousands): Year Ended December 31, 2012 2011
Net loss on sale of foreclosed real estate Write-down of foreclosed real estate Operating expenses, net of rental income
$
89 2,214 285
167 963 310
$ 2,588
1,440
Foreclosed real estate is recorded at the lower of cost or fair value less estimated costs to sell. Foreclosed real estate which is measured at fair value on a nonrecurring basis is as follows (in thousands): At Year End
Losses Recorded During the Year
Fair Value
Level 1
Level 2
Level 3
Total Losses
December 31, 2012
$ 3,416
-
-
3,416
3,515
1,979
December 31, 2011
$ 2,773
-
-
2,773
1,552
642
(5) Premises and Equipment A summary of premises and equipment follows (in thousands): At December 31, 2012 2011
Land and improvements Building and improvements Leasehold improvements Furniture and equipment Automobile Construction in process Total, at cost Less accumulated depreciation and amortization Premises and equipment, net
$ 13,843 12,026 624 3,905 58 7
13,843 12,026 624 3,814 58 3
30,463
30,368
(4,590)
(3,658)
$ 25,873
26,710 (continued)
28
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(5) Premises and Equipment, Continued The Company leases certain facilities under operating leases. The leases require the Company to pay certain insurance, maintenance, real estate taxes and other annual adjustments and contain renewal options. The leases expire from 2014 through 2019. Net rent expense was $544,000 and $579,000 for the years ended December 31, 2012 and 2011, respectively. GBFL has a lease agreement that requires a 6 month notice of cancellation. All other leases are noncancelable. Future minimal rental commitments under these noncancelable leases are as follows (in thousands): Minimum Annual Rental Payments
Year Ending December 31,
2013 2014 2015 2016 2017 Thereafter
$
551 550 533 526 498 950
$ 3,608 (6) Deposits The aggregate amount of time deposits with a minimum denomination of $100,000, was $59,765,000 and $46,437,000 at December 31, 2012 and 2011, respectively. A schedule of maturities of time deposit follows (in thousands): Year Ending December 31,
Amount
2013 2014 2015 2016 2017 Thereafter
$ 152,505 46,179 18,947 6,990 12,050 3,294 $ 239,965 (continued)
29
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(7) Federal Home Loan Bank ("FHLB") Advances The maturity and interest rate of FHLB advances are as follows ($ in thousands): Maturity Year Ending December 31,
2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2014 2014 2014 2014 2014 2014 2014 2014 2015 2018
(a) (b) (c)
(d)
Fixed or Variable Rate
Interest Rate
Fixed (b) Fixed (b) Fixed (b) Fixed (b) Fixed (b) Fixed (b) Fixed (b) Fixed (b) Fixed (b) Fixed (b) Adjustable (d) Fixed (b) Fixed (b) Fixed (b) Fixed (b) Fixed (b) Fixed (b) Fixed (b) Fixed (b) Fixed (b) Variable (a) Fixed (b) Fixed (b) Fixed (b) Fixed (b) Fixed (b) Fixed (b) Fixed (b) Fixed (b) Fixed (b) Fixed (c)
0.12% 0.13% 0.14% 0.37% 0.60% 0.51% 0.44% 0.52% 0.53% 0.55% 0.91% 0.84% 0.89% 0.92% 0.17% 0.19% 0.20% 0.21% 0.31% 0.50% 0.35% 0.99% 0.89% 2.96% 0.30% 0.31% 0.37% 0.39% 0.48% 2.35% 3.09%
Amount At December 31, 2012 2011
$
2,000 1,000 2,000 2,000 2,300 500 4,000 2,000 4,000 10,600 5,000 3,000 2,000 2,000 2,000 2,000 4,000 2,650 2,500 5,000
1,000 6,200 5,000 1,000 2,000 4,000 1,000 2,000 1,000 2,000 5,000 2,000 1,000 2,000 5,000 3,000 2,000 2,500 5,000
$ 60,550
52,700
Daily-rate credit advance. Fixed-rate advance with no options to call from FHLB. Convertible advances. FHLB has the option to call every quarter. The Company has the option to prepay, but with penalty. Adjustable-rate credit, with index of Libor 3 Month Rate reset quarterly, beginning February 2011.
(continued) 30
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(7) Federal Home Loan Bank ("FHLB") Advances, Continued At December 31, 2012 and 2011, securities available for sale with a carrying value of approximately $24,420,000 and $23,951,000, respectively, and a blanket floating lien on commercial real estate, multifamily, residential real estate and certain home equity loans were pledged as collateral for FHLB advances. At December 31, 2012, the Company had $62.5 million in available credit at the FHLB. (8) Other Borrowings The Company enters into repurchase agreements with customers. These agreements require the Company to pledge securities as collateral for these borrowings. At December 31, 2012 and 2011, the outstanding balance of such borrowings totaled $0 and $1,774,000, respectively, and the Company pledged securities with a carrying value of $0 and $3,316,000, respectively, as collateral for these agreements. (9) Income Taxes Income taxes (benefit) consisted of the following (in thousands): Year Ended December 31, 2012 2011
Current: Federal State
$
Total current Deferred: Federal State Total deferred Income taxes (benefit)
571 -
-
571
-
453 382
(582) (78)
835
(660)
$ 1,406
(660) (continued)
31
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(9) Income Taxes, Continued The reasons for the differences between the statutory Federal income tax rate and the effective tax rate are summarized as follows ($ in thousands): Year Ended December 31, 2012 2011 % of % of Pretax Pretax Amount Earnings Amount Loss
Income taxes (benefit) at statutory rate (Increase) decrease resulting from: State taxes, net of federal tax benefit Tax exempt income, net of disallowed interest expense Other Income taxes (benefit)
$ 2,368 252 (1,214) $ 1,406
(34.0)%
$(303)
(34.0)%
3.6
(51)
(5.7)
(17.4) -
(145) (161)
(16.3) (18.0)
20.2%
$(660)
(74.0)%
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 2011
Deferred tax assets: Allowance for loan losses Organizational and preopening costs Stock-based compensation Net operating loss carryforwards Foreclosed property expenses Alternative minimum tax credits Other Deferred tax assets Deferred tax liabilities: Premises and equipment Unrealized gains on securities available for sale Deferred loan costs Deferred tax liabilities Net deferred tax asset
$ 3,218 670 253 1,506 459 207
3,752 743 232 1,557 821 273
6,313
7,378
(205) (2,462) (177)
(436) (1,183) (176)
(2,844)
(1,795)
$ 3,469
5,583
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. (continued) 32
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(10) Off-Balance-Sheet Financial Instruments 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 unused lines of credit and undisbursed loans in process, standby letters of credit and commitments to extend credit and may involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheet. The contract amounts of these instruments reflect the extent of involvement the Company has in these financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for unused lines of credit and undisbursed loans in process 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 are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management's credit evaluation of the counterparty. Standby letters-of-credit are conditional lending commitments issued by the Company to guarantee the performance of a customer to a third party and to support private borrowings arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters-of-credit is essentially the same as that involved in extending credit. The Company may hold collateral supporting those commitments. Commitments to extend credit, unused lines of credit and undisbursed loans in process and standby letters of credit typically result in loans with a market interest rate when funded. A summary of the amounts of the Company's financial instruments with off-balance-sheet risk at December 31, 2012 follows (in thousands): Contract Amount
Unused lines of credit and undisbursed loans in process
$ 15,613
Standby letters of credit
$
Commitments to extend credit
$ 18,075
309
(continued)
33
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(11) Fair Value of Financial Instruments The estimated fair values of the Company's financial instruments are as follows (in thousands): At December 31, 2012
Financial assets: Cash and cash equivalents Interest-bearing time deposits Securities available for sale Loans held for sale Loans Federal Home Loan Bank stock Accrued interest receivable
2011
Carrying Amount
Fair Value
Carrying Amount
Fair Value
$ 11,277 17,960 264,265 636 284,142 3,578 4,025
11,277 17,960 264,265 638 287,471 3,578 4,025
15,237 14,935 183,322 299,573 3,915 2,572
15,237 14,935 183,322 299,403 3,915 2,572
488,540 60,550 2,000 -
485,006 61,166 2,000 -
440,961 52,700 1,774 -
437,173 53,075 1,774 -
Financial liabilities: Deposits Federal Home Loan Bank advances Other borrowings Off-balance-sheet financial instruments
(12) Regulatory Matters The Company (on a consolidated basis) and the Banks are subject to various regulatory capital requirements administered by the regulatory banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Banks' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Banks must meet specific capital guidelines that involve quantitative measures of 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. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Banks to maintain minimum amounts and percentages (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). As of December 31, 2012 and 2011, the Company and Banks met all capital adequacy requirements to which they are subject. (continued)
34
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(12) Regulatory Matters, Continued As of December 31, 2012, to be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage percentages as set forth in the following table. There are no conditions or events since that notification that has changed the Banks' categories. The Company's and the Banks' actual capital amounts and percentages are also presented in the tables ($ in thousands).
Actual As of December 31, 2012: Total Capital to RiskWeighted Assets: Holding Company (consolidated) GBFL GBCFL GBSWFL Tier I Capital to RiskWeighted Assets: Holding Company (consolidated) GBFL GBCFL GBSWFL Tier I Capital to Total Assets: Holding Company (consolidated) GBFL GBCFL GBSWFL
Amount
%
$ 67,301 23,042 17,820 20,959
18.15% 19.98 13.79 16.52
For Capital Adequacy Purposes: Amount %
Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions: Amount %
$ 29,665 9,225 10,340 10,150
N/A $ 11,535 12,920 12,690
8.00% 8.00 8.00 8.00
N/A 10.00% 10.00 10.00
62,634 21,591 16,186 19,367
16.89 18.72 12.53 15.26
14,835 4,615 5,170 5,080
4.00 4.00 4.00 4.00
N/A 6,920 7,750 7,615
N/A 6.00 6.00 6.00
62,634 21,591 16,186 19,367
10.27 9.51 9.36 9.11
24,395 9,080 6,920 8,505
4.00 4.00 4.00 4.00
N/A 11,350 8,645 10,630
N/A 5.00 5.00 5.00
(continued)
35
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(12) Regulatory Matters, Continued
Actual As of December 31, 2011: Total Capital to RiskWeighted Assets: Holding Company (consolidated) GBFL GBCFL GBSWFL Tier I Capital to RiskWeighted Assets: Holding Company (consolidated) GBFL GBCFL GBSWFL Tier I Capital to Total Assets: Holding Company (consolidated) GBFL GBCFL GBSWFL
Amount
%
$ 61,234 20,009 17,515 16,678
17.38% 18.70 12.60 16.17
For Capital Adequacy Purposes: Amount %
$ 28,185 8,560 11,120 8,250
8.00% 8.00** 8.00 8.00**
Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions: Amount %
N/A $ 10,700 13,900 10,310
N/A 10.00% 10.00 10.00
56,773 18,648 15,751 15,382
16.11 17.43 11.33 14.91
14,095 4,280 5,560 4,125
4.00 4.00 4.00 4.00
N/A 6,420 8,340 6,190
N/A 6.00 6.00 6.00
56,773 18,648 15,751 15,382
10.15 9.46 8.61 8.59
22,375 7,885 7,320 7,165
4.00 4.00* 4.00* 4.00*
N/A 9,855 9,150 8,955
N/A 5.00 5.00 5.00
* The Bank has agreed to maintain a minimum of 8% Tier I Capital to Total Assets ratio. ** The Bank has agreed to maintain a minimum of 12% Total Capital to Risk-Weighted Assets ratio.
(13) Stock Compensation Plans Officers and Employee Plan. The Company has established a stock option plan for officers and employees of the Company. Under the plan, the total number of options which may be granted to purchase common stock is 534,770. At December 31, 2012, 75,908 options remain available for grant under the officers and employees' plan. The officers and employees' options vest over six years with one third vesting in years four, five and six. (continued)
36
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(13) Stock Compensation Plans, Continued A summary of the activity in the Company's officers and employee stock option plan is as follows: WeightedAverage Remaining Contractual Term
Number of Options
WeightedAverage Exercise Price
Outstanding at December 31, 2010 Granted Forfeited
405,866 50,097 (25,650)
$ 11.35 9.13 11.42
Outstanding at December 31, 2011 Granted Forfeited
430,313 46,599 (18,050)
11.09 9.45 12.09
Outstanding at December 31, 2012
458,862
$ 10.89
6.37 years
Exercisable at December 31, 2012
198,058
$ 11.05
4.45 years
Directors Plan. The Company has established a stock option plan for directors of the Company. Under the plan, the total number of options which may be granted to purchase common stock is 727,662. At December 31, 2012, 30,014 options remain available for grant under the directors' plan. The directors' options vest over four years with one fourth vesting in years one, two, three and four. A summary of the activity in the Company's director stock option plan is as follows: WeightedAverage Remaining Contractual Term
Number of Options
WeightedAverage Exercise Price
Outstanding at December 31, 2010 Granted Forfeited
584,485 52,800 (25,500)
$ 11.00 9.13 10.91
Outstanding at December 31, 2011 Granted Forfeited
611,785 113,382 (27,519)
10.84 9.41 10.23
Outstanding at December 31, 2012
697,648
$ 10.63
6.40 years
Exercisable at December 31, 2012
524,800
$ 11.48
5.34 years (continued)
37
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(13) Stock Compensation Plans, Continued At December 31, 2012, there was $192,000 of total unrecognized compensation expense related to nonvested share-based compensation arrangements granted under all plans. The cost is expected to be recognized over a weighted-average period of 27 months. The total fair value of shares vesting and recognized as compensation expense during the years ended December 31, 2012 and 2011 was $189,000 and $176,000, respectively and the associated income tax benefit recognized was $20,000 and $29,000 for the years then ended. The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model for all plans with the following assumptions: Year Ended December 31, 2012 2011
Weighted-average risk-free interest rate Expected dividend yield Expected stock volatility Expected weighted-average expected life in years Per share weighted-average grant-date fair value of options issued during the year
0.98% - % 13.11% 6.4 $ 0.54
2.20% - % 11.81% 6.5 0.50
The Company used the guidance in Staff Accounting Bulletin No. 107 to determine the estimated life of options issued. Expected volatility is based on historical volatility of similar peer banks' common stock. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield assumption is based on the Company's expectation of dividend payments. (14) Related Party Transactions In the ordinary course of business, the Banks have granted loans to, accepted deposits from, and entered into other transactions with its executive officers and directors and their affiliates. These related-party transactions are summarized as follows (in thousands): Year Ended December 31, 2012 2011
Loan balances at the beginning of the year New loans or advances Principal repayments
$ 17,000 1,019 (2,004)
17,272 725 (997)
Loan balances at the end of the year
$ 16,015
17,000
Deposits at end of year
$ 21,745
27,417 (continued)
38
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(15) Preferred Stock The Company has issued two types of preferred stock, Class A and Class B, all being nonvoting stock. Class A preferred stock holders are entitled to a preference in the unlikely event of liquidation, in the distribution of assets of the Company after the preference of Class B perpetual preferred stock. Upon a change in control all Class A preferred stock will automatically covert to shares of common stock. Class A preferred stock holders receive preference in the distribution of dividends, but subject to the prior preference to the payment of dividends on the shares of Class B perpetual preferred stock. The Company is not required to pay dividends on the Class A preferred stock. Class B perpetual preferred stock, with respect to dividend rights and rights upon liquidation or dissolution of the Company, ranks senior to the common stock and the shares of Class A preferred stock. Each share of Class B perpetual preferred stock bears a noncumulative quarterly dividend of 5% per annum. The dividend can be paid in the form of cash or additional shares of preferred stock. Class B perpetual preferred stockholders also will be entitled to receive nontransferable stock purchase warrants, entitling them to purchase shares of Company common stock or Class A preferred stock. The exercise price is $7.00 per share. An investor will be entitled to 10 warrants for each share of Class B preferred stock purchased (depending upon whether the purchase is a current hold of common stock or Class A preferred stock, or a nonshareholder). The shares of preferred stock are not convertible into shares of common stock and are redeemable by the Company at its option at any time. In the event of any voluntary or involuntary liquidation or dissolution of the Company, the holders of Class B perpetual preferred stock are entitled to liquidating distributions in the amount of $1,000 per share plus the amount of any declared and unpaid dividends before any payment or distribution is made to holders of common stock and Class A preferred stock. At December 31, 2012, 34,860 warrants to purchase common stock and 5,850 warrants to purchase Class A preferred stock were outstanding. These warrants expire on June 30, 2014. (16) Dividends The Company is limited in the amount of dividends it may pay by the amount of dividends the Banks pay to the Holding Company. The Banks are limited in the amount of cash dividends that may be paid by Florida law. The amount of cash dividends that may be paid is based on the Banks' net earnings of the current year combined with the Banks' retained earning of the preceding two years, as defined by state banking regulations. However, for any dividend declaration, the Banks 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 Banks could declare. In addition, bank regulators have the authority to prohibit banks from paying dividends. (17) Contingencies The Company may be involved in litigation arising from transactions in the ordinary course of business. Management believes that the ultimate liability, if any, resulting from transactions in the ordinary course of business will not have a material effect on the financial condition and results of operations of the Company. (continued) 39
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (18) Consolidating Financial Statements The consolidating balance sheet as of December 31, 2012 and the consolidating statement of operations for the year ended December 31, 2012 are as follows (in thousands):
Assets
Gateway Financial Holdings of Florida, Inc.
Gateway Asset Holdings
3
Gateway Bank of Florida
Gateway Bank of Central Florida
Gateway Bank of Southwest Florida
7,425 5,259 26,483 636 114,791 9,299 2,573 1,244 686 1,342 2,029 424
2,130 1,743 106,114 95,038 8,066 1,112 1,608 134 1,565 184
-
2,471(a) 67,215 (b)
11,277 17,960 264,265 636 284,142 25,873 3,416 3,578 4,025 3,469 5,258 1,034
-
69,686
624,933
Eliminations Debit Credit
Consolidated
Cash and cash equivalents Interest-bearing time deposit Securities available for sale Loans held for sale Loans, net Premises and equipment, net Foreclosed real estate Federal Home Loan Bank stock Accrued interest receivable Deferred income taxes Bank-owned life insurance Other assets
$ 2,287 172 1,206 484 67,215
1,281 584 1,972 -
1,903 10,958 131,668 72,860 7,302 259 1,222 1,731 (463) 1,664 426
Total assets
$ 71,364
3,840
229,530
172,191
217,694
-
131,822 21,500 188 442
176,479 18,600 149 845
2,471(a) -
-
488,540 60,550 2,000 798 1,714
Liabilities and Stockholder's Equity Liabilities: Total deposits Federal Home Loan Bank advances Other borrowings Official checks Accrued interest payable and other liabilities Total liabilities Total stockholder's equity Total liabilities and stockholder's equity (a) (b)
33
10
182,710 20,450 2,000 461 384
33
10
206,005
153,952
196,073
2,471
-
553,602
71,331
3,830
23,525
18,239
21,621
67,215(b)
-
71,331
$ 71,364
3,840
229,530
172,191
217,694
69,686
-
624,933
Elimination of intercompany accounts. Elimination of investment in subsidiaries. (continued)
40
GATEWAY FINANCIAL HOLDINGS OF FLORIDA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (18) Consolidating Financial Statements, Continued
Interest income: Loans Investment securities Other
Gateway Financial Holdings of Florida, Inc.
$
Gateway Asset Holdings
Gateway Bank of Florida
Gateway Bank of Central Florida
Gateway Bank of Southwest Florida
12 -
-
4,498 2,904 288
6,569 789 153
5,002 2,434 60
12
-
7,690
7,511
7,496
-
-
1,051 115
858 416
1,124 60
-
-
1,166
1,274
1,184
Net interest income
12
-
6,524
6,237
6,312
Provision for loan losses
-
90
1,309
970
12
(90)
5,215
5,267
6,312
-
5 5,887
-
68 5 3,275 142 -
174 94 733 225 235 -
5,892
-
3,490
389 25 13 3 41 17 54
80 600 -
542
Total interest income Interest expense: Deposits Other borrowings Total interest expense
Net interest income (loss) after provision for loan losses Noninterest income: Service charges on deposit accounts Mortgage banking fees Gain on sale of securities available for sale Gain on sale of loans Other service charges and fees Gain of subsidiaries Total noninterest income (loss) Noninterest expense: Salaries and employee benefits Occupancy and equipment Data processing Advertising Professional fees Stationary and supplies Deposit insurance Foreclosed real estate Other Total noninterest expense Gain (loss) earnings before income taxes cost (benefit)
5,362
Income taxes (benefit) Net gain earnings (loss) (c) (d)
(197) $ 5,559
Eliminations Debit Credit
-
16,081 6,127 498
-
22,706
-
3(c)
3,033 588
-
3
3,621
3
19,085
-
2,369
3
3
16,716
56 77 3,007 161 702 -
5,887
-
298 176 7,015 386 1,084 -
1,461
4,003
5,887
-
8,959
2,535 595 277 45 236 33 232 452 722
2,662 820 381 70 84 56 242 1,536 566
3,536 1,047 357 49 96 48 189 622
-
-
9,122 2,567 1,028 167 457 154 663 2,588 1,964
680
5,127
6,417
5,944
-
-
18,710
(770)
3,578
311
4,371
5,890
3
6,965
(290)
750
(34)
1,177
-
-
1,406
(480)
2,828
345
3,194
5,890
3
5,559
Elimination of intercompany interest income and expense. Elimination of loss of subsidiaries.
41
-
-
Consolidated
3
(c)
3
3 -
ABOUT GATEWAY FINANCIAL HOLDINGS Gateway Financial Holdings of Florida, Inc. is the multiple charter holding company comprising Gateway Bank of Florida, Gateway Bank of Central Florida and Gateway Bank of Southwest Florida. Serving business and personal banking clients in key markets throughout Florida, these banks provide retail and commercial banking services as well as residential and commercial mortgage lending and wealth and investment management services. GATEWAY BANK OF FLORIDA
Daytona Beach Banking Center 1950 W. International Speedway Blvd, Daytona Beach, FL 32114 Ormond Beach Banking Center 112 N. Nova Rd, Ormond Beach, FL 32174 Port Orange Banking Center 3741 S. Nova Rd, Port Orange, FL 32129 www.gatewaybankfl.com • 386/947-5400
GATEWAY BANK OF CENTRAL FLORIDA
Ocala Banking Center 1632 E. Silver Springs Blvd, Ocala FL 34470 Gainesville Banking Center 4100 NW 37TH PL, Gainesville, FL 32606 City of Alachua Banking Center 15652 NW Highway 441, Unit D, Alachua,, FL 32615 www.gatewaybankcfl.com • 352/368-3756
GATEWAY BANK OF SOUTHWEST FLORIDA
Downtown Sarasota Banking Center 1100 South Tamiami Tr., Sarasota, FL 34236 Downtown Bradenton Banking Center 2100 Manatee Ave. West, Bradenton, FL 34205 University Parkway Banking Center 6204 N. Lockwood Ridge Rd., Sarasota, FL 34243 www.gatewaybankswfl.com • 941/306-0100
Gateway Financial Holdings of Florida, Inc.
1950 W. International Speedway Blvd, Daytona Beach, FL 32114 • 386/947-5400 Raymond James does not offer tax advice or services. Please consult your tax professional to discuss your situation. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC, an independent broker/dealer, and are not insured by bank insurance, the FDIC or any government agency, are not deposits or obligations of the bank, are not guaranteed by the bank, and are subject to risks, including the possible loss of principal. Gateway Bank of Southwest Florida, Gateway Private | Wealth, and Gateway Wealth Advisors are not affiliated with Raymond James Financial Services.
Gateway Bank of Florida, Gateway Bank of Central Florida and Gateway Bank of Southwest Florida are Equal Housing Lenders and Members FDIC.
