PINX:TMAK Touchmark Bancshares, Inc. Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

TMAK Fair Value Estimate
Premium
TMAK Consider Buying
Premium
TMAK Consider Selling
Premium
TMAK Fair Value Uncertainty
Premium
TMAK Economic Moat
Premium
TMAK Stewardship
Premium
 

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended June 30, 2012

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from                to                

 

Commission file number 000-53655

 

TOUCHMARK BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

Georgia

 

20-8746061

(State or other jurisdiction

 

(I.R.S. Employer

of incorporation)

 

Identification No.)

 

3651 Old Milton Parkway

Alpharetta, Georgia 30005

(Address of principal executive offices)

 

(770) 407-6700

(Registrant’s telephone number)

 


 

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

 

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

 

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

 

Large accelerated filer  o

 

Accelerated filer  o

 

 

 

Non-accelerated filer  o

 

Smaller reporting company  x

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o YES x NO

 

Indicate the number of shares outstanding of each of the registrant’s classes of common equity, as of the latest practicable date: 3,465,391 shares of common stock, par value $.01 per share, outstanding as of August 14, 2012.

 

 

 



Table of Contents

 

INDEX

 

 

 

 

 

Page

 

 

 

 

 

Part I. Financial Information

 

 

 

 

 

 

 

 

Item 1. Financial Statements (unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income (Loss) for the Three and Six Months Ended June 30, 2012 and 2011

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2011

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

 

 

 

 

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

 

31

 

 

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

40

 

 

 

 

 

 

Item 4. Controls and Procedures

 

40

 

 

 

 

 

Part II. Other Information

 

41

 

 

 

 

 

 

Item 6. Exhibits

 

41

 

 

 

 

 

 

SIGNATURES

 

42

 

 

 

 

 

 

EXHIBIT INDEX

 

43

 



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

TOUCHMARK BANCSHARES, INC.

AND SUBSIDIARY

 

CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 30, 2012 AND DECEMBER 31, 2011

 

 

 

(Unaudited)

 

 

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

5,310,259

 

$

2,509,157

 

Federal funds sold

 

 

325,000

 

Interest-bearing accounts with other banks

 

7,029,785

 

6,729,905

 

Investment securities

 

27,643,388

 

36,134,645

 

Restricted stock

 

1,710,100

 

1,478,500

 

Loans held for sale

 

248,658

 

248,658

 

Loans, less allowance for loan losses of $1,830,086 and $1,745,400, respectively

 

78,608,189

 

74,268,936

 

Accrued interest receivable

 

388,708

 

434,178

 

Premises and equipment

 

2,409,026

 

2,486,685

 

Foreclosed real estate

 

4,922,300

 

5,375,473

 

Land held for sale

 

2,409,023

 

2,409,023

 

Other assets

 

218,084

 

200,806

 

Total assets

 

$

130,897,520

 

$

132,600,966

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Deposits:

 

 

 

 

 

Non-interest bearing demand

 

$

7,106,627

 

$

9,119,354

 

Interest-bearing

 

82,281,566

 

85,197,277

 

Total deposits

 

89,388,193

 

94,316,631

 

Accrued interest payable

 

29,979

 

36,011

 

Federal Home Loan Bank advances

 

15,250,000

 

12,500,000

 

Other liabilities

 

465,953

 

523,263

 

Total liabilities

 

105,134,125

 

107,375,905

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

Preferred stock, no par value, 10,000,000 shares authorized, none issued

 

 

 

Common stock, $.01 par value, 50,000,000 shares authorized, 3,465,391 issued and outstanding

 

34,654

 

34,654

 

Paid in capital

 

36,215,170

 

36,189,165

 

Accumulated deficit

 

(10,813,456

)

(11,428,518

)

Accumulated other comprehensive income

 

327,027

 

429,760

 

Total shareholders’ equity

 

25,763,395

 

25,225,061

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

130,897,520

 

$

132,600,966

 

 

See accompanying notes to the condensed consolidated financial statements

 

3



Table of Contents

 

TOUCHMARK BANCSHARES, INC.

AND SUBSIDIARY

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011

(UNAUDITED)

 

 

 

Three Months

 

Three Months

 

Six Months

 

Six Months

 

 

 

Ended

 

Ended

 

Ended

 

Ended

 

 

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Interest income:

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

1,244,334

 

$

1,200,574

 

$

2,455,780

 

$

2,388,372

 

Investment income

 

181,018

 

369,850

 

397,519

 

760,347

 

Federal funds sold

 

341

 

349

 

521

 

606

 

Total interest income

 

1,425,693

 

1,570,773

 

2,853,820

 

3,149,325

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

191,092

 

305,580

 

403,137

 

663,089

 

Federal Home Loan Bank advances

 

80,542

 

69,704

 

148,660

 

139,566

 

Other borrowings

 

 

869

 

521

 

4,484

 

Total interest expense

 

271,634

 

376,153

 

552,318

 

807,139

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

1,154,059

 

1,194,620

 

2,301,502

 

2,342,186

 

Provision for loan losses

 

300,000

 

209,563

 

375,000

 

209,563

 

Net interest income after provision for loan losses

 

854,059

 

985,057

 

1,926,502

 

2,132,623

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts and other fees

 

9,909

 

12,832

 

19,679

 

26,754

 

Gain (loss) on sale of securities available for sale

 

157,348

 

(3,485

)

197,533

 

60,073

 

Gain on sale of foreclosed real estate

 

14,400

 

 

54,988

 

 

Gain on sale of SBA loans

 

245,104

 

191,575

 

721,700

 

479,789

 

Loss on fair value mark of derivative instrument

 

(1,451

)

(51,510

)

(8,759

)

(42,454

)

Other noninterest income

 

91,807

 

11,954

 

170,621

 

22,845

 

Total noninterest income

 

517,117

 

161,366

 

1,155,762

 

547,007

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

624,377

 

708,730

 

1,246,878

 

1,411,637

 

Occupancy and equipment

 

157,047

 

152,037

 

309,304

 

304,538

 

Other operating expense

 

494,783

 

536,626

 

911,020

 

1,023,349

 

Total noninterest expense

 

1,276,207

 

1,397,393

 

2,467,202

 

2,739,524

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

94,969

 

$

(250,970

)

$

615,062

 

$

(59,894

)

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

0.03

 

$

(0.07

)

$

0.18

 

$

(0.02

)

Diluted earnings (loss) per share

 

$

0.03

 

$

(0.07

)

$

0.18

 

$

(0.02

)

Dividends per share

 

$

 

$

 

$

 

$

 

 

See accompanying notes to the condensed consolidated financial statements

 

4



Table of Contents

 

TOUCHMARK BANCSHARES, INC.

AND SUBSIDIARY

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011

(UNAUDITED)

 

 

 

Three Months

 

Three Months

 

Six Months

 

Six Months

 

 

 

Ended

 

Ended

 

Ended

 

Ended

 

 

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net income (loss)

 

$

94,969

 

$

(250,970

)

$

615,062

 

$

(59,894

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Unrealized holding gains arising during the period

 

141,560

 

1,073,612

 

44,200

 

1,041,424

 

Reclassification adjustment for (gain) loss realized in net income (loss)

 

(157,348

)

3,485

 

(197,533

)

(60,073

)

Tax effect

 

5,210

 

(355,441

)

50,600

 

(323,845

)

Other comprehensive income (loss):

 

(10,578

)

721,656

 

(102,733

)

657,506

 

Comprehensive income

 

$

84,391

 

$

470,686

 

$

512,329

 

$

597,612

 

 

See accompanying notes to the condensed consolidated financial statements

 

5



Table of Contents

 

TOUCHMARK BANCSHARES, INC.

AND SUBSIDIARY

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2012 AND 2011

(UNAUDITED)

 

 

 

Six Months

 

Six Months

 

 

 

Ended

 

Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

Cash flow from operating activities:

 

 

 

 

 

Net income (loss)

 

$

615,062

 

$

(59,894

)

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

131,541

 

142,199

 

Net amortization

 

277,013

 

125,892

 

Provision for loan losses

 

375,000

 

209,563

 

Gain on sale of securities available for sale

 

(197,533

)

(60,073

)

Gain on sale of SBA loans

 

(721,700

)

(479,789

)

Gain on sale of foreclosed real estate

 

(54,988

)

 

Stock compensation expense

 

26,005

 

50,280

 

Decrease in interest receivable

 

45,470

 

102,681

 

Decrease in interest payable

 

(6,032

)

(40,980

)

Decrease (increase) in other assets

 

(17,278

)

154,514

 

Increase (decrease) in other liabilities

 

(6,710

)

278,147

 

 

 

 

 

 

 

Net cash provided by operating activities

 

465,850

 

422,540

 

 

 

 

 

 

 

Cash flow from investing activities:

 

 

 

 

 

Decrease (increase) in federal funds sold, net

 

325,000

 

(125,000

)

Increase in interest bearing accounts

 

(299,880

)

(1,531,937

)

Purchase of securities available for sale

 

(7,054,977

)

(9,728,675

)

Proceeds from paydowns, calls and maturities of securities available for sale

 

6,813,307

 

4,640,936

 

Proceeds from sales of securities available for sale

 

8,500,114

 

11,274,281

 

Purchase of restricted stock

 

(231,600

)

(750

)

Proceeds from sale of foreclosed real estate

 

1,566,004

 

17,713

 

Loan originations and collections, net

 

(5,050,396

)

8,305,488

 

Purchase of premises and equipment

 

(53,882

)

(16,263

)

 

 

 

 

 

 

Net cash provided by investing activities

 

4,513,690

 

12,835,793

 

 

See accompanying notes to the condensed consolidated financial statements

 

6



Table of Contents

 

TOUCHMARK BANCSHARES, INC.

AND SUBSIDIARY

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2012 AND 2011

(UNAUDITED)

 

 

 

Six Months

 

Six Months

 

 

 

Ended

 

Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

Cash flow from financing activities:

 

 

 

 

 

Net decrease in deposits

 

(4,928,438

)

(11,667,293

)

Repayment of secured borrowings

 

 

(2,027,311

)

Proceeds from Federal Home Loan Bank advances

 

2,750,000

 

1,100,000

 

 

 

 

 

 

 

Net cash used by financing activities

 

(2,178,438

)

(12,594,604

)

 

 

 

 

 

 

Net change in cash

 

2,801,102

 

663,729

 

 

 

 

 

 

 

Cash at the beginning of the period

 

2,509,157

 

1,220,785

 

 

 

 

 

 

 

Cash at the end of the period

 

$

5,310,259

 

$

1,884,514

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information - Interest paid

 

$

558,350

 

$

848,119

 

 

 

 

 

 

 

Non cash activities:

 

 

 

 

 

Transfer of loan principal to foreclosed real estate

 

$

1,057,843

 

$

3,185,000

 

 

See accompanying notes to the condensed consolidated financial statements

 

7



Table of Contents

 

TOUCHMARK BANCSHARES, INC.

AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

1.                   BASIS OF PRESENTATION:

 

The consolidated financial information included for Touchmark Bancshares, Inc. herein is unaudited; however, such information reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods. These statements should be read in conjunction with the financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

The results of operations for the three and six month periods ended June 30, 2012 are not necessarily indicative of the results to be expected for the full year.

 

2.                   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

Reporting Entity and Nature of Operations

 

Touchmark Bancshares, Inc. (the “Company”, “we”, “us” or “our”), a Georgia corporation, was established on April 3, 2007 for the purpose of organizing and managing Touchmark National Bank, (the “Bank”).  The Company is a one-bank holding company with respect to its subsidiary, Touchmark National Bank, which is organized as a national bank. The Bank, which is headquartered in Fulton County, Georgia, began operations on January 28, 2008 with the purpose of providing community banking services to Gwinnett County, Dekalb, north Fulton and south Forsyth counties and surrounding areas in the State of Georgia.

 

Basis of Accounting: The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, shareholders’ equity and net income. Actual results may differ significantly from those estimates. The Company uses the accrual basis of accounting by recognizing revenues when they are earned and expenses in the period incurred, without regard to the time of receipt or payment of cash.

 

Allowance for Loan Losses: Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. The Company’s allowance for loan losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio. Due to our limited operating history, the loans in our loan portfolio and our lending relationships are of relatively recent origin. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process known as seasoning. As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio. Because our loan portfolio is relatively new, the current level of delinquencies and defaults may not be representative of the level that will prevail when the portfolio becomes more seasoned, which may be higher or lower than current levels. If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which would adversely affect our results of operations and financial condition. The allowance for loan losses is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off.

 

The process of reviewing the adequacy of the allowance for loan losses requires management to make numerous judgments and assumptions about current events and subjective judgments, including the likelihood of loan repayment, risk evaluation, historical losses, extrapolation of historical losses of similar banks, and similar judgments and assumptions. If these assumptions prove to be incorrect, charge-offs in future periods could exceed the allowance for loan losses.

 

See accompanying notes to the condensed consolidated financial statements

 

8



Table of Contents

 

TOUCHMARK BANCSHARES, INC.

AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

2.                   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

The allowance for loan losses may consist of specific, general, and unallocated components.  The specific component relates to loans that are classified as impaired.  For loans that are classified as impaired, an allowance is established when the collateral value, discounted cash flows or the observable market price of the impaired loan is lower than the carrying value of the loan. General allowances are established for non-impaired loans.  These loans are assigned a loan category, and the allocated allowance for loan losses is determined based upon the loss percentage factors that correspond to each loan category.

 

The general reserves are determined based on consideration of historic and peer loss data, and the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

 

Construction and development loans — Loans in this segment primarily include real estate development loans for which payment is derived from sale of the property as well as construction projects in which the property will ultimately be used by the borrower. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.

 

Real estate - mortgage — The Company generally does not originate loans with a loan-to-value ratio greater than 85 percent and does not make subprime loans. Loans in this segment are dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates, will have an effect on the credit quality in the segment.

 

Commercial real estate — Loans in this segment are primarily income-producing properties. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management monitors the cash flows of these loans.

 

Commercial and industrial loans — Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.

 

Other loans — Loans in this segment are made to individuals and are generally secured by personal property and/or personal guaranties.  Repayment is expected from the cash flows of the individual which is affected by the overall economy with specific regards to the unemployment rate.

 

Stock Based Compensation: The Company has adopted the fair value recognition provisions of Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) 718, Stock Compensation. Upon issuance of the Director and Organizer warrants, compensation cost was recognized in the consolidated financial statements of the Company for all share-based payments granted, based on the grant date fair value as estimated in accordance with the provisions of FASB ASC 718, which requires recognition of expense equal to the fair value of the warrant over the vesting period of the warrant. There were no options or warrants granted during the first six months of 2012.

 

The fair value of each warrant grant is estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatility for the period has been determined based on expected volatility of similar entities. The expected term of warrants granted is based on the short-cut method and represents the period of time that the warrants are expected to be outstanding. Expected dividends are based on dividend trends and the market price of the Company’s stock at grant date. The risk-free rate for periods within the contractual life of the warrant is based on the U.S. Treasury yield curve in effect at the time of grant.

 

The Company recorded no compensation expense related to the warrants for the six months ended June 30, 2012 and 2011, respectively.

 

9



Table of Contents

 

TOUCHMARK BANCSHARES, INC.

AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

2.                   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

At June 30, 2012, there was no unrecognized compensation cost related to warrants. The weighted average remaining contractual life of the warrants outstanding as of June 30, 2012 was approximately 5.51 years. The Company had 469,167 warrants exercisable as of June 30, 2012.

 

Through June 30, 2012, the Company has issued 219,822 options to purchase common stock to employees of the Company or the Bank and the Company has issued 10,000 options to purchase common stock to a new director.  There were no options issued during the first six months of 2012. During the first six months of 2011, 11,500 options were issued. Upon issuance of options, compensation cost is recognized in the consolidated financial statements of the Company for all options granted, based on the grant date fair value as estimated in accordance with the provisions of FASB ASC 718, which requires recognition of expense equal to the fair value of the options over the vesting period of the options.

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the assumptions listed in the table below. Expected volatility for the period has been determined based on expected volatility of similar entities. The expected term of options granted is based on the short-cut method and represents the period of time that the options are expected to be outstanding. Expected dividends are based on dividend trends and the market price of the Company’s stock at grant date. 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.

 

 

 

Six Months Ended

 

 

 

June 30, 2011

 

Risk-free interest rate

 

2.53

%

Expected life (years)

 

6.50

 

Expected volatility

 

56.10

%

Expected dividends

 

0.00

%

Expected forfeiture rate

 

28.99

%

Weighted average fair value of options granted

 

$

2.85

 

 

The Company recorded stock-based compensation expense related to the options of $26,005 and $50,280 during the six months ended June 30, 2012 and 2011, respectively.

 

At June 30, 2012, there was $26,006 of unrecognized compensation cost related to options outstanding, which is expected to be recognized over a weighted-average period of 0.72 years. The weighted average remaining contractual life of the options outstanding as of June 30, 2012 was approximately 7.46 years. The Company had 95,283 options exercisable as of June 30, 2012.

 

Income Taxes: Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method.  Under this method, the net deferred tax asset or liability is determined based on the tax effects of the differences between the book and tax bases of the various balance sheet assets and liabilities, and gives current recognition to changes in tax rates and laws.  A valuation allowance for deferred tax assets is required when it is more likely than not that some portion or all of the deferred tax asset will not be realized.  In assessing the realization of the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income (in the near-term based on current projections), and tax planning strategies.

 

Statement of Cash Flows: The statement of cash flows was prepared using the indirect method. Under this method, net income was reconciled to net cash flows provided by operating activities by adjusting for the effects of operating activities.

 

10



Table of Contents

 

TOUCHMARK BANCSHARES, INC.

AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

2.                   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

Cash and Cash Equivalents: For purposes of presentation in the statement of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption “cash and due from banks.” Cash flows from interest-bearing accounts with other banks, deposits, federal funds purchased and sold, and originations, renewals and extensions of loans are reported net.

 

Loans Purchased: Discounts and premiums on loans purchased by the Company are amortized based upon specific identification over the contractual life of the loan.

 

3.                    INVESTMENT SECURITIES:

 

The amortized cost, gross unrealized gains and losses, and estimated fair value of investment securities at June 30, 2012 and December 31, 2011, are summarized as follows:

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

June 30, 2012:

 

Cost

 

Gains

 

Losses

 

Value

 

State and municipal securities

 

$

4,194,881

 

$

149,369

 

$

 

$

4,344,250

 

Mortgage-backed Government- sponsored enterprise (GSE)* residential

 

22,960,407

 

371,395

 

(32,664

)

23,299,138

 

 

 

 

 

 

 

 

 

 

 

 

 

$

27,155,288

 

$

520,764

 

$

(32,664

)

$

27,643,388

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

December 31, 2011:

 

Cost

 

Gains

 

Losses

 

Value

 

U.S. Government-sponsored enterprises (GSEs)*

 

$

2,000,000

 

$

12,163

 

$

 

$

2,012,163

 

State and municipal securities

 

4,140,071

 

233,654

 

 

4,373,725

 

Mortgage-backed GSE residential

 

29,353,141

 

420,639

 

(25,023

)

29,748,757

 

 

 

 

 

 

 

 

 

 

 

 

 

$

35,493,212

 

$

666,456

 

$

(25,023

)

$

36,134,645

 

 


*                 Such as Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and Federal Home Loan Banks

 

The amortized cost and estimated fair value of investment securities at June 30, 2012, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

11



Table of Contents

 

TOUCHMARK BANCSHARES, INC.

AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

3.                    INVESTMENT SECURITIES:

 

 

 

Amortized

 

Fair

 

 

 

Cost

 

Value

 

 

 

 

 

 

 

Due in one year or less

 

$

7,604,228

 

$

7,693,471

 

Due after one year but less than five years

 

12,501,618

 

12,684,036

 

Due after five years but less than ten years

 

4,569,412

 

4,659,638

 

Due after ten years

 

2,480,030

 

2,606,243

 

 

 

$

27,155,288

 

$

27,643,388

 

 

For the purpose of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted-average contractual maturities of underlying collateral.  The mortgage-backed securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.

 

During the period ended June 30, 2012, the Company had gross gains on sales of securities of $200,589 and gross losses on sales of securities of $3,056.  The Company had gross gains on sales of securities of $89,323 and gross losses on sales of securities of $29,250 during the period ended June 30, 2011.

 

Information pertaining to securities with gross unrealized losses at June 30, 2012 and December 31, 2011 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

 

 

 

Less than

 

More than

 

 

 

 

 

 

 

Twelve Months

 

Twelve Months

 

Total

 

 

 

Gross

 

Estimated

 

Gross

 

Estimated

 

Gross

 

Estimated

 

 

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

June 30, 2012:

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Mortgage-backed GSE residential

 

$

(32,664

)

$

6,830,416

 

$

 

$

 

$

(32,664

)

$

6,830,416

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(32,664

)

$

6,830,416

 

$

 

$

 

$

(32,664

)

$

6,830,416

 

 

12



Table of Contents

 

TOUCHMARK BANCSHARES, INC.

AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

 

 

Less than

 

More than

 

 

 

 

 

 

 

Twelve Months

 

Twelve Months

 

Total

 

 

 

Gross

 

Estimated

 

Gross

 

Estimated

 

Gross

 

Estimated

 

 

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

December 31, 2011:

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Mortgage-backed GSE residential

 

$

(25,023

)

$

6,383,330

 

$

 

$

 

$

(25,023

)

$

6,383,330

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(25,023

)

$

6,383,330

 

$

 

$

 

$

(25,023

)

$

6,383,330

 

 

3.                    INVESTMENT SECURITIES:

 

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.

 

At June 30, 2012, eight debt securities have unrealized losses with aggregate depreciation of 0.48% from the Company’s amortized cost basis. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. Although some of the issuers have shown declines in earnings and/or a weakened financial condition as a result of the weakened economy, no credit issues have been identified that cause management to believe the declines in market value are other than temporary. As management has the ability to hold debt securities until maturity, or for the foreseeable future, no declines are deemed to be other than temporary.

 

Mortgage-backed securities GSE residential. The unrealized losses on the Company’s investment in eight mortgage-backed securities GSE residential were caused by interest rate increases. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company’s investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and because it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2012.

 

13



Table of Contents

 

TOUCHMARK BANCSHARES, INC.

AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

4.                    LOANS AND ALLOWANCE FOR LOAN LOSSES:

 

The composition of loans as of June 30, 2012 and December 31, 2011 is summarized as follows:

 

 

 

June 30, 2012

 

December 31, 2011

 

Construction and development

 

$

8,009,368

 

$

9,255,356

 

Real estate - mortgage

 

7,389,638

 

7,676,754

 

Commercial real estate

 

59,859,995

 

51,405,126

 

Commercial and industrial

 

4,972,875

 

7,282,319

 

Other

 

304,720

 

516,849

 

 

 

 

 

 

 

 

 

80,536,596

 

76,136,404

 

 

 

 

 

 

 

Unearned loan origination income

 

(98,321

)

(122,068

)

Allowance for loan losses

 

(1,830,086

)

(1,745,400

)

 

 

 

 

 

 

Loans, net

 

$

78,608,189

 

$

74,268,936

 

 

For purposes of the disclosures required pursuant to the adoption of amendments to ASC 310, the loan portfolio was disaggregated into segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for loan losses. There are five loan portfolio segments that include construction and development, real estate — mortgage, commercial real estate, commercial and industrial, and other.

 

4.                    LOANS AND ALLOWANCE FOR LOAN LOSSES:

 

Construction and Development

 

Loans in this segment include real estate development loans for which the source of repayment is the sale of the property as well as construction projects in which the property will ultimately be used by the borrower. Total construction and development loans as of June 30, 2012 were 9.9% of the total loan portfolio.

 

Real Estate - Mortgage

 

These are loans secured by real estate mortgages.  Total real estate mortgage loans as of June 30, 2012 were 9.2% of the total loan portfolio.

 

Commercial Real Estate

 

The commercial real estate portfolio represents the largest category of the Company’s loan portfolio.  These loans are primarily income-producing properties and are dependent upon the borrower’s cash flow.  Total commercial real estate loans as of June 30, 2012 were 74.3% of the total loan portfolio.

 

Commercial and Industrial

 

Loans in this segment are made to businesses and are generally secured by business assets.  Total commercial and industrial loans as of June 30, 2012 were 6.2% of the total loan portfolio.

 

14



Table of Contents

 

TOUCHMARK BANCSHARES, INC.

AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Other

 

Loans in this segment are made to individuals and are secured by personal assets or unsecured.  Total other loans as of June 30, 2012 were 0.4% of the total loan portfolio.

 

Changes in the allowance for loan losses for the periods ended June 30, 2012 and 2011 are as follows:

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

Balance, beginning of period

 

$

1,745,400

 

$

3,462,375

 

Provision for loan losses

 

375,000

 

209,563

 

Loans charged off

 

(290,314

)

(206,162

)

Recoveries

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

1,830,086

 

$

3,465,776

 

 

15



Table of Contents

 

TOUCHMARK BANCSHARES, INC.

AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

4.      LOANS AND ALLOWANCE FOR LOAN LOSSES:

 

The allowance for loan losses as of June 30, 2012, by portfolio segment, is as follows:

 

 

 

Construction

 

 

 

Commercial

 

Commercial

 

 

 

 

 

 

 

 

 

and

 

Real Estate -

 

Real

 

and

 

 

 

 

 

 

 

 

 

Development

 

Mortgage

 

Estate

 

Industrial

 

Other

 

Unallocated

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

704,602

 

$

129,552

 

$

647,548

 

$

82,375

 

$

4,459

 

$

83,811

 

$

1,652,347

 

Charge-offs

 

 

(122,261

)

 

 

 

 

(122,261

)

Recoveries

 

 

 

 

 

 

 

 

Provision

 

(254,632

)

128,668

 

475,074

 

27,266

 

(178

)

(76,198

)

300,000

 

Ending balance

 

$

449,970

 

$

135,959

 

$

1,122,622

 

$

109,641

 

$

4,281

 

$

7,613

 

$

1,830,086

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

564,176

 

$

145,288

 

$

572,763

 

$

145,418

 

$

28,438

 

$

289,317

 

$

1,745,400

 

Charge-offs

 

 

(122,261

)

 

 

(168,053

)

 

(290,314

)

Recoveries

 

 

 

 

 

 

 

 

Provision

 

(114,206

)

112,932

 

549,859

 

(35,777

)

143,896

 

(281,704

)

375,000

 

Ending balance

 

$

449,970

 

$

135,959

 

$

1,122,622

 

$

109,641

 

$

4,281

 

$

7,613

 

$

1,830,086

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

 

$

 

$

 

$

227,710

 

$

 

$

 

$

 

$

227,710

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: collectively evaluated for impairment

 

$

449,970

 

$

135,959

 

$

894,912

 

$

109,641

 

$

4,281

 

$

7,613

 

$

1,602,376

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: loans acquired with deteriorated credit quality

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance

 

$

8,009,368

 

$

7,389,638

 

$

59,859,995

 

$

4,972,875

 

$

304,720

 

$

 

$

80,536,596

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

 

$

 

$

 

$

986,127

 

$

 

$

 

$

 

$

986,127

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: collectively evaluated for impairment

 

$

8,009,368

 

$

7,389,638

 

$

58,873,868

 

$

4,972,875

 

$

304,720

 

$

 

$

79,550,469

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: loans acquired with deteriorated credit quality

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

 

16



Table of Contents

 

TOUCHMARK BANCSHARES, INC.

AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

4.       LOANS AND ALLOWANCE FOR LOAN LOSSES:

 

The allowance for loan losses as of December 31, 2011, by portfolio segment, is as follows:

 

 

 

Construction

 

 

 

Commercial

 

Commercial

 

 

 

 

 

 

 

 

 

and

 

Real Estate -

 

Real

 

and

 

 

 

 

 

 

 

 

 

Development

 

Mortgage

 

Estate

 

Industrial

 

Other

 

Unallocated

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,259,996

 

$

68,905

 

$

1,933,810

 

$

156,457

 

$

43,207

 

$

 

$

3,462,375

 

Charge-offs

 

(93,190

)

 

(1,833,348

)

 

 

 

(1,926,538

)

Recoveries

 

 

 

 

 

 

 

 

Provision

 

(602,630

)

76,383

 

472,301

 

(11,039

)

(14,769

)

289,317

 

209,563

 

Ending balance

 

$

564,176

 

$

145,288

 

$

572,763

 

$

145,418

 

$

28,438

 

$

289,317

 

$

1,745,400

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: collectively evaluated for impairment

 

$

564,176

 

$

145,288

 

$

572,763

 

$

145,418

 

$

28,438

 

$

289,317

 

$

1,745,400

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: loans acquired with deteriorated credit quality

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance

 

$

9,255,356

 

$

7,676,754

 

$

51,405,126

 

$

7,282,319

 

$

516,849

 

$

 

$

76,136,404

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

 

$

 

$

 

$

1,251,803

 

$

 

$

 

$

 

$

1,251,803

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: collectively evaluated for impairment

 

$

9,255,356

 

$

7,676,754

 

$

50,153,323

 

$

7,282,319

 

$

516,849

 

$

 

$

74,884,601

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: loans acquired with deteriorated credit quality

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

 

17



Table of Contents

 

TOUCHMARK BANCSHARES, INC.

AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

4.       LOANS AND ALLOWANCE FOR LOAN LOSSES:

 

The allowance for loan losses as of June 30, 2011, by portfolio segment, is as follows:

 

 

 

Construction

 

 

 

Commercial

 

Commercial

 

 

 

 

 

 

 

and

 

Real Estate -

 

Real

 

and

 

 

 

 

 

 

 

Development

 

Mortgage

 

Estate

 

Industrial

 

Other

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,178,351

 

$

27,494

 

$

1,469,584

 

$

740,424

 

$

46,522

 

$

3,462,375

 

Charge-offs

 

(93,300

)

 

(112,862

)

 

 

(206,162

)

Recoveries

 

 

 

 

 

 

 

Provision

 

(24,439

)

(20,969

)

272,734

 

(16,428

)

(1,335

)

209,563

 

Reallocation

 

(99,130

)

48,253

 

44,565

 

47,183

 

(40,871

)

 

Ending balance

 

$

961,482

 

$

54,778

 

$

1,674,021

 

$

771,179

 

$

4,316

 

$

3,465,776

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,259,996

 

$

68,905

 

$

1,933,810

 

$

156,457

 

$

43,207

 

$

3,462,375

 

Charge-offs

 

(93,300

)

 

(112,862

)

 

 

(206,162

)

Recoveries

 

 

 

 

 

 

 

Provision

 

(24,439

)

(20,969

)

272,734

 

(16,428

)

(1,335

)

209,563

 

Reallocation

 

(180,775

)

6,842

 

(419,661

)

631,150

 

(37,556

)

 

Ending balance

 

$

961,482

 

$

54,778

 

$

1,674,021

 

$

771,179

 

$

4,316

 

$

3,465,776

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

 

$

 

$

 

$

1,346,653

 

$

 

$

 

$

1,346,653

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: collectively evaluated for impairment

 

$

961,482

 

$

54,778

 

$

327,368

 

$

771,179

 

$

4,316

 

$

2,119,123

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: loans acquired with deteriorated credit quality

 

$

 

$

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance

 

$

9,005,401

 

$

8,299,559

 

$

51,351,381

 

$

6,502,254

 

$

528,382

 

$

75,686,977

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

 

$

 

$

 

$

4,552,903

 

$

 

$

 

$

4,552,903

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: collectively evaluated for impairment

 

$

9,005,401

 

$

8,299,559

 

$

46,798,478

 

$

6,502,254

 

$

528,382

 

$

71,134,074

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: loans acquired with deteriorated credit quality

 

$

 

$

 

$

518,995

 

$

 

$

 

$

518,995

 

 

18



Table of Contents

 

TOUCHMARK BANCSHARES, INC.

AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

4.       LOANS AND ALLOWANCE FOR LOAN LOSSES:

 

Historically, the Company used a combination of peer loss history and its own loss history for its various loan types in arriving at its allowance for loan and lease loss (ALLL). Management revisited the Company’s methodology after the second quarter of 2011 for the purposes of determining the most effective means for arriving at an appropriate allowance for loan loss balance commensurate with the Company’s size and level of complexity.

 

Management concluded that a loss migration analysis based on the Company’s internal loan risk rating system provides a more precise and accurate estimate of potential losses within the loan portfolio. The basis for determining the appropriateness of the allowance for loan losses under the revised methodology focuses on the Company’s internal risk rated loss experience over a rolling eight quarter period as opposed to reliance on peer group data.

 

Impaired loans as of June 30, 2012 and December 31, 2011, by portfolio segment, are as follows:

 

 

 

Unpaid

 

Recorded

 

Recorded

 

 

 

 

 

 

 

Total

 

Investment

 

Investment

 

Total

 

 

 

 

 

Principal

 

With No

 

With

 

Recorded

 

Related

 

As of June 30, 2012

 

Balance

 

Allowance

 

Allowance

 

Investment

 

Allowance

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and development

 

$

 

$