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| FSGI > SEC Filings for FSGI > Form 10-Q on 15-May-2012 | All Recent SEC Filings |
15-May-2012
Quarterly Report
The Bank and the OCC agreed as to the areas of the Bank's operations that
warrant improvement and a plan for making those improvements. The Order required
the Bank to develop and submit written strategic and capital plans covering at
least a three-year period. The Board of Directors is required to ensure that
competent management is in place in all executive officer positions to manage
the Bank in a safe and sound manner. The Bank is also required to review and
revise various policies and procedures, including those associated with credit
concentration management, the allowance for loan and lease losses, liquidity
management, criticized assets, loan review and credit. The Bank is continuing to
work with the OCC to ensure the policies and procedures are both appropriate and
fully implemented.
Within 120 days of the effective date of the Order, the Bank was required to
achieve and thereafter maintain total capital at least equal to 13 percent of
risk-weighted assets and Tier 1 capital at least equal to 9 percent of adjusted
total assets. As of March 31, 2012, the seventh financial reporting period
subsequent to the 120 day requirement, the Bank's total capital to risk-weighted
assets was 9.8 percent and the Tier 1 capital to adjusted total assets was 5.2
percent. The Bank has notified the OCC of its non-compliance with the
requirements of the Order.
During the third quarter of 2010, the OCC requested additional information and
clarifications to the Bank's submitted strategic and capital plans as well as
the management assessments. Subsequent to the resignation of the CEO in April
2011, the Bank requested an extension on the submission date for the strategic
and capital plans until a new CEO was appointed and had sufficient time to
modify the strategic plan.
Because the Order established specific capital amounts to be maintained by the
Bank, the Bank may not be considered better than "adequately capitalized" for
capital adequacy purposes, even if the Bank exceeds the levels of capital set
forth in the Order. As an adequately capitalized institution, the Bank may not
pay interest on deposits that are more than 0.75% above the rate applicable to
the applicable market of the Bank as determined by the FDIC. Additionally, the
Bank may not accept, renew or roll over brokered deposits without prior approval
of the Federal Deposit Insurance Corporation (FDIC).
The Bank is currently deemed not in compliance with some provisions of the
Order, including the capital requirements. Any material noncompliance may result
in further enforcement actions by the OCC, including the OCC requiring that
FSGBank develop a plan to sell, merge or liquidate. Management believes the
successful execution of the strategic initiatives discussed above will
ultimately result in full compliance with the Order and position the Bank for
long-term growth and a return to profitability.
On April 29, 2010, the Company filed a current report on Form 8-K describing the
Order. A copy of the Order is filed as Exhibit 10.1 to such Form 8-K. The
foregoing summary is not complete and is qualified in all respects by reference
to the actual language of the Order.
Management's Plans
The Company continues to operate in a difficult environment and has been significantly impacted by the downturn in real estate values and the general recessionary economy. The Company has experienced significant net operating losses for the quarter ended March 31, 2012 and years ended December 31, 2011, 2010, and 2009, substantially resulting from declining net interest margins and elevated levels of provision for loan losses. Losses on other real estate owned have also significantly impacted net income. Each of these financial trends was significantly impacted by significant levels of nonperforming assets and related deterioration in the economy.
During 2011 and through the first quarter of 2012, the Company underwent significant change within the Board of Directors and executive management. The changes were predicated on strengthening and deepening the Company's leadership in order to successfully execute a strategic and capital plan to return the Company to profitable operations, satisfy the requirements of the regulatory actions detailed below, and lower the level of problem assets to an acceptable level.
In December 2011, the Company appointed Michael Kramer as President and Chief Executive Officer. Subsequently, the Company appointed a Chief Credit Officer, Retail Banking Officer and Director of FSGBank's Wealth Management and Trust Department. The Company added three additional directors to the Board in 2011 and has added three additional directors in 2012, including a new independent Chairman of the Board, Larry D. Mauldin.
The Company's strategic plan addresses the actions necessary to restore profitability and achieve full compliance with all regulatory agreements, including, but not limited to, restoring capital to the prescribed regulatory levels of the Order. Management is pursuing various options to restore the Company's capital to a satisfactory level, including, but not limited to, a private stock placement and select asset divestitures of nonperforming assets. Since December 2011, the Company has been in preliminary discussions with multiple potential investors and asset disposition firms but can give no assurances as to the terms on which any such transactions may take place if at all.
The Bank has successfully maintained elevated liquidity and has chosen to do so primarily by maintaining excess cash at the Federal Reserve. The Company's cash position as of March 31, 2012 was $225,386 thousand compared to $258,181 thousand and $197,742 thousand at December 31, 2011 and March 31, 2011, respectively.
The Company's strategic plan includes maintaining adequate liquidity, reducing nonperforming assets, and appropriately increasing the Company's capital ratios. Compliance with the capital ratios required in the Order can be achieved by increasing capital and / or through asset sales. The Company is currently implementing the strategic initiatives within the applicable plan.
Any failure by the Company or the Bank to achieve compliance with the applicable
regulatory enforcement order may result in additional adverse regulatory action.
Regulatory Capital Ratios
Banks and bank holding companies, as regulated institutions, must maintain
required levels of capital. OCC and the Federal Reserve, the primary federal
regulators for FSGBank and the Company, respectively, have adopted minimum
capital regulations or guidelines that categorize components and the level of
risk associated with various types of assets. Financial institutions are
expected to maintain a level of capital commensurate with the risk profile
assigned to their assets in accordance with the guidelines. As described above,
the Order requires FSGBank to achieve and maintain total capital to risk
adjusted assets of at least 13% and a leverage ratio of at least 9%. The Order
provided 120 days from April 28, 2010, the effective date of the Order, to
achieve these ratios. FSGBank is currently not in compliance with the capital
requirements.
The following table compares the required capital ratios maintained by the
Company and FSGBank:
CAPITAL RATIOS
Minimum
Capital
Requirements
under Prompt
Corrective
FSGBank Action First
March 31, 2012 Consent Order1 Provisions Security FSGBank
Tier I capital to risk adjusted assets n/a 4.0 % 8.6 % 8.6 %
Total capital to risk adjusted assets 13.0 % 8.0 % 9.8 % 9.8 %
Leverage ratio 9.0 % 4.0 % 5.2 % 5.2 %
December 31, 2011
Tier I capital to risk adjusted assets n/a 4.0 % 9.7 % 9.7 %
Total capital to risk adjusted assets 13.0 % 8.0 % 11.0 % 10.9 %
Leverage ratio 9.0 % 4.0 % 5.7 % 5.6 %
March 31, 2011
Tier I capital to risk adjusted assets n/a 4.0 % 11.3 % 11.1 %
Total capital to risk adjusted assets 13.0 % 8.0 % 12.6 % 12.4 %
Leverage ratio 9.0 % 4.0 % 7.5 % 7.3 %
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1 FSGBank was required to achieve and maintain the above capital ratios within 120 days from April 28, 2010.
NOTE 3 - STOCK-BASED COMPENSATION
As of March 31, 2012, the Company has two stock-based compensation plans, the
2002 Long-Term Incentive Plan (the 2002 LTIP) and the 1999 Long-Term Incentive
Plan (the 1999 LTIP). The plans are administered by the Compensation Committee
of the Board of Directors (the Committee), which selects persons eligible to
receive awards and determines the number of shares and/or options subject to
each award, the terms, conditions and other provisions of the award. The plans
are described in further detail below.
The 2002 LTIP was approved by the shareholders of the Company at the 2002 annual
meeting and subsequently amended by the shareholders of the Company at the 2004
and 2007 annual meetings to increase the number of shares available for issuance
under the 2002 LTIP by 480 thousand and 750 thousand shares, respectively. The
total number of shares authorized for awards prior to the 10-for-1 reverse stock
split was 1.5 million. As a result of the 10-for-1 reverse stock split in 2011,
the total shares currently authorized under the 2002 LTIP is 151,800, of which
not more than 20% may be granted as awards of restricted stock. Eligible
participants include eligible employees, officers, consultants and directors of
the Company or any affiliate. The exercise price per share of a stock option
granted may not be less than the fair market value as of the grant date. The
exercise price must be at least 110% of the fair market value at the grant date
for options granted to individuals, who at the grant date, are 10% owners of the
Company's voting stock (each a 10% owner). Restricted stock may be awarded to
participants with terms and conditions determined by the Committee. The term of
each award is determined by the Committee, provided that the term of any
incentive stock option may not exceed ten years (five years for 10% owners) from
its grant date. Each option award vests in approximately equal percentages each
year over a period of not less than three years from the date of grant as
determined by the Committee subject to accelerated vesting under terms of the
2002 LTIP or as provided in any award agreement. As a result of the Company's
participation in TARP CPP, the terms of awards are also subject to compliance
with applicable TARP compensation regulations.
Participation in the 1999 LTIP is limited to eligible employees. The total
number of shares of stock authorized for awards prior to the 10-for-1 reverse
stock split was 936 thousand. As a result of the 10-for-1 reverse stock split in
2011, the total shares currently authorized under the 1999 LTIP is 93,600, of
which not more than 10% could be granted as awards of restricted stock. Under
the terms of the 1999 LTIP, incentive stock options to purchase shares of the
Company's common stock may not be granted at a price less than the fair market
value of the stock as of the date of the grant. Options must be exercised within
ten years from the date of grant subject to conditions specified by the 1999
LTIP. Restricted stock could also be awarded by the Committee in accordance with
the 1999 LTIP. Generally, each award vests in approximately equal percentages
each year over a period of not less than three years and vest from the date of
grant as determined by the Committee subject to accelerated vesting under terms
of the 1999 LTIP or as provided in any award agreement. As a result of the
Company's participation in TARP CPP, the terms of awards are also subject to
compliance with applicable TARP compensation regulations.
Stock Options
The following table illustrates the effect on operating results for stock-based
compensation for the three months ended March 31, 2012 and 2011.
Three Months Ended
2012 2011
(in thousands)
Stock option compensation expense $ 2 $ 5
Stock option compensation expense, net of tax 1 $ 1 $ 3
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During the three months ended March 31, 2012 and 2011, no options were
exercised.
The fair value of each option award is estimated on the date of grant using a
closed form option valuation (Black-Scholes) model that uses the following
assumptions: expected dividend yield, expected volatility, risk-free interest
rate, expected life of the option and the grant date fair value. Expected
volatilities are based on historical volatilities of the Company's common stock.
The Company uses historical data to estimate option exercise and post-vesting
termination behavior. The expected term of options granted is based on
historical data and represents the period of time that options granted are
expected to be outstanding, which takes into account that the options are not
transferable. The risk-free interest rate for the expected term of the option is
based on the U.S. Treasury yield curve in effect at the time of the grant.
During the three months ended March 31, 2012 and 2011, no options were granted.
The following table represents stock option activity for the three months ended
March 31, 2012:
Weighted
Average
Remaining
Contractual Aggregate
Weighted Average Term (in Intrinsic
Shares Exercise Price years) Value
Outstanding, January 1, 2012 48,205 $ 82.58
Granted -
Exercised -
Forfeited 100
Outstanding, March 31, 2012 48,105 $ 82.58 3.15 - 1
Exercisable, March 31, 2012 46,120 $ 85.19 2.94 - 1
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As of March 31, 2012, shares available for future option grants to employees and
directors under existing plans were 48,183 and 94,579 shares for the 1999 LTIP
and 2002 LTIP, respectively.
As of March 31, 2012, there was $4 thousand of total unrecognized compensation
cost related to nonvested stock options granted under the Plans. The cost is
expected to be recognized over a weighted-average period of less than one year.
Restricted Stock
The plans described above allow for the issuance of restricted stock awards that may not be sold or otherwise transferred until certain restrictions have lapsed. The unearned stock-based compensation related to these awards is being amortized to compensation expense over the period the restrictions lapse. The share-based expense for these awards was determined based on the market price of the Company's stock at the grant date applied to the total number of shares that were anticipated to fully vest and then amortized over the vesting period.
As of March 31, 2012, unearned stock-based compensation associated with these
awards totaled $323 thousand. The Company recognized $23 thousand and less than
$1 thousand of compensation expense, net of forfeitures, in the first quarter of
2012 and 2011, respectively, related to the amortization of deferred
compensation that was included in salaries and benefits in the accompanying
consolidated statements of operations. The remaining cost is expected to be
recognized over a weighted-average period of 2.80 years.
The following table represents restricted stock activity for the period ended
March 31, 2012:
Weighted Average
Grant-Date Fair
Shares Value
Nonvested shares at January 1, 2012 41,940 1 $ 1.83
Granted 78,000 2
Vested (39 )
Forfeited -
Nonvested, March 31, 2012 119,901 3 $ 2.87
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1 Includes 35,000 shares issued as an inducement grant from available and unissued shares
and not from the 1999 or 2002 LTIPs.
2 Includes 58,000 shares issued as inducement grants from available and unissued shares
and not from the 1999 or 2002 LTIPs.
3 Includes 93,000 shares issued as inducement grants from available and unissued shares
and not from the 1999 or 2002 LTIPs.
The restricted stock awards granted during 2012 vest according to the TARP CPP compensation regulations such that 66%
vest after two years and the remainder vest after the third year. Additional transferability restrictions also apply.
NOTE 4 - EARNINGS (LOSS) PER SHARE
The difference in basic and diluted weighted average shares is due to the
assumed conversion of outstanding stock options, restricted stock awards and
common stock warrants using the treasury stock method. The Company has issued
certain restricted stock awards, which are unvested share-based payment awards
that contain nonforfeitable rights to dividends or dividend equivalents. These
restricted shares are considered participating securities. Accordingly, the
Company calculated net income available to common shareholders pursuant to the
two-class method, whereby net income is allocated between common shareholders
and participating securities. In periods of a net loss, no allocation is made to
participating securities as they are not contractually required to fund net
losses. The computation of basic and diluted earnings per share is as follows:
Three Months Ended
March 31,
2012 2011
(in thousands, except per share
amounts)
Numerator:
Net loss $ (5,827 ) $ (2,658 )
Preferred stock dividends 413 413
Accretion of preferred stock discount 104 98
Dividends and undistributed earnings allocated on
participating securities - -
Net loss allocated to common stockholders $ (6,344 ) $ (3,169 )
Denominator:
Weighted average common shares outstanding including
participating securities 1,702 1,585
Less: Participating securities 90 1
Weighted average basic common shares outstanding 1,612 1,584
Effect of diluted securities:
Equivalent shares issuable upon exercise of stock options,
stock warrants and restricted stock awards - -
Weighted average diluted common shares outstanding 1,612 1,584
Net loss per share:
Basic $ (3.94 ) $ (2.00 )
Diluted $ (3.94 ) $ (2.00 )
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Due to the net loss allocated to common shareholders for all periods shown, all stock options, stock warrants, and restricted stock grants are considered anti-dilutive and are not included in the computation of diluted earnings per share. As of March 31, 2012, a total of 250 thousand stock options, stock warrants and restricted stock grants were considered anti-dilutive. All prior periods have been restated to give retroactive effect to the one-for-ten reverse stock split that took effect on September 19, 2011.
NOTE 5 - SECURITIES
Investment Securities by Type
The following table presents the amortized cost and fair value of securities,
with gross unrealized gains and losses.
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Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
(in thousands)
Securities available-for-sale
March 31, 2012
Debt securities-
Federal agencies $ 21,989 $ 155 $ 2 $ 22,142
Mortgage-backed-residential 167,115 3,253 181 170,187
Municipals 29,507 1,287 14 30,780
Other 128 - 82 46
Total $ 218,739 $ 4,695 $ 279 $ 223,155
Securities available-for-sale
December 31, 2011
Debt securities-
Federal agencies $ 23,984 $ 251 $ - $ 24,235
Mortgage-backed-residential 134,210 2,817 129 136,898
Municipals 30,453 1,419 - 31,872
Other 127 - 91 36
Total $ 188,774 $ 4,487 $ 220 $ 193,041
Securities available-for-sale
March 31, 2011
Debt securities-
Federal agencies $ 29,969 $ 237 $ 169 $ 30,037
Mortgage-backed-residential 86,713 2,278 110 88,881
Municipals 34,377 1,062 73 35,366
Other 127 - 94 33
Total $ 151,186 $ 3,577 $ 446 $ 154,317
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There were no sales of securities for the three months ended March 31, 2012, nor
were there sales for the three months ended March 31, 2011.
At March 31, 2012, December 31, 2011 and March 31, 2011, federal agencies,
municipals and mortgage-backed securities with a carrying value of $31,975
thousand, $22,449 thousand and $22,823 thousand, respectively, were pledged to
secure public deposits. At March 31, 2012, December 31, 2011 and March 31, 2011,
the carrying amount of securities pledged to secure repurchase agreements was
$19,523 thousand, $26,635 thousand and $18,581 thousand, respectively. At
March 31, 2012, December 31, 2011 and March 31, 2011, securities of $5,945
thousand, $5,678 thousand and $5,762 thousand were pledged to the Federal
Reserve Bank of Atlanta to secure the Company's daytime correspondent
transactions. At March 31, 2012, the carrying amount of securities pledged to
secure lines of credit with the FHLB totaled $10,119 thousand. At March 31,
2012, pledged and unpledged securities totaled $67,562 thousand and $155,593
thousand, respectively.
Maturity of Securities
The following table presents the amortized cost and fair value of debt
securities by contractual maturity at March 31, 2012.
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Amortized Fair
Cost Value
(in thousands)
Within 1 year $ 3,534 $ 3,579
Over 1 year through 5 years 20,546 21,166
. . .
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