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EXCEL - IDEA: XBRL DOCUMENT - C1 Financial, Inc. | Financial_Report.xls |
EX-31.2 - EXHIBIT 31.2 - C1 Financial, Inc. | v406116_ex31-2.htm |
EX-31.1 - EXHIBIT 31.1 - C1 Financial, Inc. | v406116_ex31-1.htm |
EX-32.1 - EXHIBIT 32.1 - C1 Financial, Inc. | v406116_ex32-1.htm |
EX-32.2 - EXHIBIT 32.2 - C1 Financial, Inc. | v406116_ex32-2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015.
OR
¨
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 001-36595
C1 FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Florida | 46-4241720 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
100 5th Street South | 33701 | |
St. Petersburg, Florida | (Zip Code) | |
(Address of principal executive offices) |
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. Yes x No ¨
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 (§ 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). Yes x 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). (Check one):
Large accelerated filer ¨ | Accelerated filer ¨ | |
Non-accelerated filer x (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨
Indicate the number of shares outstanding of the issuer’s common stock, par value $1.00 per share, as of April 17, 2015: 16,100,966.
C1
FINANCIAL, INC. AND SUBSIDIARIES
INDEX
Forward-Looking Statements
We have made statements under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other sections of this Quarterly Report on Form 10-Q that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or “may,” the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events.
Any or all of our forward-looking statements in this Quarterly Report on Form 10-Q may turn out to be inaccurate. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.
There are a number of potential factors, risks and uncertainties that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including, the following:
· | changes in general economic and financial market conditions; |
· | changes in the regulatory environment, economic conditions generally and in the financial services industry; |
· | changes in the economy affecting real estate values; |
· | our ability to achieve loan and deposit growth; |
· | projected population and income growth in our targeted market areas; |
· | volatility and direction of market interest rates and a weakening of the economy which could materially impact credit quality trends and the ability to generate loans; and |
· | those other factors and risks described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Item 1A of Part I of the Annual Report of C1 Financial, Inc. on Form 10-K for the year ended December 31, 2014. |
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We are under no duty to update any of these forward-looking statements after the date of this Quarterly Report on Form 10-Q to conform our prior statements to actual results or revised expectations.
1 |
C1 Financial, Inc.
Consolidated
Balance Sheets (Unaudited)
March 31, 2015 and December 31, 2014
(Dollars in thousands, except per share data)
(Balance Sheet data at December 31, 2014 is derived from audited financial statements)
March 31, 2015 | December 31, 2014 | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 182,824 | $ | 185,703 | ||||
Federal Home Loan Bank stock, at cost | 9,989 | 9,224 | ||||||
Loans receivable (net of allowance of $5,787 at March 31, 2015 and $5,324 at December 31, 2014) | 1,245,938 | 1,179,056 | ||||||
Premises and equipment, net | 64,973 | 64,075 | ||||||
Other real estate owned, net | 30,321 | 34,916 | ||||||
Bank-owned life insurance (BOLI) | 43,999 | 43,907 | ||||||
Accrued interest receivable | 3,668 | 3,490 | ||||||
Core deposit intangible | 904 | 987 | ||||||
Prepaid expenses | 5,660 | 5,243 | ||||||
Other assets | 8,463 | 10,090 | ||||||
Total assets | $ | 1,596,739 | $ | 1,536,691 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Deposits | ||||||||
Noninterest bearing | $ | 318,510 | $ | 278,543 | ||||
Interest bearing | 881,318 | 888,959 | ||||||
Total deposits | 1,199,828 | 1,167,502 | ||||||
Federal Home Loan Bank advances | 202,500 | 178,500 | ||||||
Other liabilities | 4,599 | 4,051 | ||||||
Total liabilities | 1,406,927 | 1,350,053 | ||||||
Commitments and contingencies (Note 8) | ||||||||
Stockholders’ equity | ||||||||
Common stock, par value $1.00; 100,000,000 shares authorized; 16,100,966 shares issued and outstanding at both March 31, 2015 and December 31, 2014 | 16,101 | 16,101 | ||||||
Additional paid-in capital | 148,122 | 148,122 | ||||||
Retained earnings | 25,589 | 22,415 | ||||||
Accumulated other comprehensive income | - | - | ||||||
Total stockholders’ equity | 189,812 | 186,638 | ||||||
Total liabilities and stockholders’ equity | $ | 1,596,739 | $ | 1,536,691 |
See accompanying notes to unaudited consolidated financial statements.
2 |
C1
Financial, Inc.
Consolidated Income Statements (Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended | ||||||||
March 31, 2015 | March 31, 2014 (1) | |||||||
Interest income | ||||||||
Loans, including fees | $ | 17,564 | $ | 14,985 | ||||
Securities | 3 | 28 | ||||||
Federal funds sold and other | 202 | 182 | ||||||
Total interest income | 17,769 | 15,195 | ||||||
Interest expense | ||||||||
Savings and interest-bearing demand deposits | 602 | 508 | ||||||
Time deposits | 784 | 982 | ||||||
Federal Home Loan Bank advances | 808 | 544 | ||||||
Other borrowings | - | 15 | ||||||
Total interest expense | 2,194 | 2,049 | ||||||
Net interest income | 15,575 | 13,146 | ||||||
Provision for loan losses | 191 | 36 | ||||||
Net interest income after provision for loan losses | 15,384 | 13,110 | ||||||
Noninterest income | ||||||||
Gains on sales of securities | - | - | ||||||
Gains on sales of loans | 230 | 744 | ||||||
Service charges and fees | 567 | 594 | ||||||
Bargain purchase gain | - | 41 | ||||||
Gains on sales of other real estate owned, net | 348 | 277 | ||||||
Bank-owned life insurance | 92 | 36 | ||||||
Mortgage banking fees | - | 43 | ||||||
Other noninterest income | 365 | 305 | ||||||
Total noninterest income | 1,602 | 2,040 | ||||||
Noninterest expense | ||||||||
Salaries and employee benefits | 5,217 | 4,467 | ||||||
Occupancy expense | 1,212 | 1,063 | ||||||
Furniture and equipment | 756 | 640 | ||||||
Regulatory assessments | 361 | 350 | ||||||
Network services and data processing | 1,084 | 851 | ||||||
Printing and office supplies | 58 | 105 | ||||||
Postage and delivery | 84 | 55 | ||||||
Advertising and promotion | 826 | 883 | ||||||
Other real estate owned related expense, net | 593 | 620 | ||||||
Other real estate owned – valuation allowance expense | 31 | 379 | ||||||
Amortization of intangible assets | 83 | 154 | ||||||
Professional fees | 698 | 596 | ||||||
Loan collection expenses | 84 | 148 | ||||||
Other noninterest expense | 748 | 686 | ||||||
Total noninterest expense | 11,835 | 10,997 | ||||||
Income before income taxes | 5,151 | 4,153 | ||||||
Income tax expense | 1,977 | 1,627 | ||||||
Net income | $ | 3,174 | $ | 2,526 | ||||
Earnings per common share: | ||||||||
Basic | $ | 0.20 | $ | 0.20 | ||||
Diluted | $ | 0.20 | $ | 0.20 |
(1) Per share amounts have been restated to reflect the 7-for-1 reverse stock split completed on August 13, 2014. Please refer to Note 2 – Initial Public Offering for additional information related to the reverse stock split.
See accompanying notes to unaudited consolidated financial statements.
3 |
Consolidated
Statements of Comprehensive Income (Unaudited)
(Dollars in thousands)
Three Months Ended | ||||||||
March 31, 2015 | March 31, 2014 | |||||||
Net income | $ | 3,174 | $ | 2,526 | ||||
Other comprehensive income: | ||||||||
Unrealized gains/losses on available for sale securities: | ||||||||
Unrealized holding gains arising during the period | - | 182 | ||||||
Reclassification adjustments for gains included in net income* | - | - | ||||||
Tax effect* | - | (71 | ) | |||||
Total other comprehensive income, net of tax | - | 111 | ||||||
Comprehensive income | $ | 3,174 | $ | 2,637 |
* | Amounts for realized gains on available for sale securities are included in gains on sales of securities in the consolidated income statements. Income taxes associated with the unrealized holding gains arising during the period, net of the reclassification adjustments for gains included in net income for the three months ended March 31, 2015 and 2014 were $0 and $(71), respectively. The amounts related to income taxes on gains included in net income are included in income tax expense in the consolidated income statements. |
See accompanying notes to unaudited consolidated financial statements.
4 |
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
Three months ended March 31, 2015 and 2014
(Dollars in thousands)
Common Stock | Additional Paid in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||
Balance at January 1, 2014 | $ | 12,217 | $ | 93,906 | $ | 15,691 | $ | - | $ | 121,814 | ||||||||||
Issuance of common stock, net of costs of $0 (834,800 shares) (1) | 835 | 11,630 | - | - | 12,465 | |||||||||||||||
Net income | - | - | 2,526 | - | 2,526 | |||||||||||||||
Other comprehensive income | - | - | - | 111 | 111 | |||||||||||||||
Balance at March 31, 2014 | $ | 13,052 | $ | 105,536 | $ | 18,217 | $ | 111 | $ | 136,916 | ||||||||||
Balance at January 1, 2015 | $ | 16,101 | $ | 148,122 | $ | 22,415 | $ | - | $ | 186,638 | ||||||||||
Net income | - | - | 3,174 | - | 3,174 | |||||||||||||||
Other comprehensive income | - | - | - | - | - | |||||||||||||||
Balance at March 31, 2015 | $ | 16,101 | $ | 148,122 | $ | 25,589 | $ | - | $ | 189,812 |
———————————————
(1) Amounts have been restated to reflect the 7-for-1 reverse stock split completed on August 13, 2014. Please refer to Note 2 – Initial Public Offering for additional information related to the reverse stock split.
See accompanying notes to unaudited consolidated financial statements.
5 |
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended March 31, 2015 and 2014
(Dollars in thousands, except per share data)
2015 | 2014 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 3,174 | $ | 2,526 | ||||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||
Provision for loan losses | 191 | 36 | ||||||
Depreciation | 791 | 637 | ||||||
Net accretion of purchase accounting adjustments | (518 | ) | (770 | ) | ||||
Accretion of loan discount | (58 | ) | (68 | ) | ||||
Amortization of other intangible assets | 83 | 154 | ||||||
Increase in other real estate owned valuation allowance | 31 | 379 | ||||||
Increase in cash surrender value of BOLI | (92 | ) | (36 | ) | ||||
Bargain purchase gain | - | (41 | ) | |||||
Net change in deferred income tax expense (benefit) | 23 | (365 | ) | |||||
Gains on sales of loans | (230 | ) | (744 | ) | ||||
Gains on sales of other real estate owned, net | (348 | ) | (277 | ) | ||||
Change in assets and liabilities: | ||||||||
Accrued interest receivable and other assets | 1,009 | (1,323 | ) | |||||
Other liabilities | 623 | 566 | ||||||
Net cash from operating activities | 4,679 | 674 | ||||||
Cash flows from investing activities | ||||||||
Loan originations, net of repayments | (68,567 | ) | 2,701 | |||||
Proceeds from loans sold | 1,983 | 6,794 | ||||||
Proceeds from sales of other real estate owned | 5,140 | 3,222 | ||||||
Purchases of Federal Home Loan Bank stock | (1,992 | ) | - | |||||
Proceeds from sales of Federal Home Loan Bank stock | 1,227 | 246 | ||||||
Purchases of premises and equipment | (1,689 | ) | (3,612 | ) | ||||
Net cash transferred in bank acquisition | - | 41 | ||||||
Net cash from investing activities | (63,898 | ) | 9,392 | |||||
Cash flows from financing activities | ||||||||
Net proceeds from issuance of common stock | - | 12,465 | ||||||
Net change in deposits | 32,340 | 74,278 | ||||||
Repayment of Federal Home Loan Bank advances | (16,000 | ) | - | |||||
Proceeds from Federal Home Loan Bank advances | 40,000 | - | ||||||
Net cash from financing activities | 56,340 | 86,743 | ||||||
Net change in cash and cash equivalents | (2,879 | ) | 96,809 | |||||
Cash and cash equivalents at beginning of the period | 185,703 | 143,452 | ||||||
Cash and cash equivalents at end of the period | $ | 182,824 | $ | 240,261 | ||||
Supplemental information: | ||||||||
Cash paid during the period for interest | $ | 2,202 | $ | 1,981 | ||||
Cash paid during the period for income taxes | 2,229 | 2,720 | ||||||
Non-cash items: | ||||||||
Transfers from loans to other real estate owned | 228 | 512 |
See accompanying notes to unaudited consolidated financial statements.
6 |
NOTES TO Consolidated FINANCIAL Statements
(Unaudited)
March 31, 2015 and 2014
(Dollars in thousands, except per share data)
NOTE 1 – BASIS OF PRESENTATION
Nature of Operations and Principles of Consolidation: The consolidated financial statements as of and for the three months ended March 31, 2015 and 2014 include C1 Financial, Inc. (“Parent Company”) and its wholly owned subsidiary, C1 Bank (the “Bank”), together referred to as “the Company”.
C1 Bank is a state chartered bank and is subject to the regulations of certain government agencies. The Bank provides a variety of banking services to individuals through its 30 banking centers and one loan production office located in nine counties (Pinellas, Hillsborough, Pasco, Manatee, Sarasota, Charlotte, Lee, Miami-Dade, and Orange). Its primary deposit products are checking, money market, savings, and term certificate accounts, and its primary lending products are commercial real estate loans, residential real estate loans, commercial loans, and consumer loans. Substantially all loans are secured by specific items of collateral including commercial and residential real estate, business assets and consumer assets. There are no significant concentrations of loans to any one industry or customer. However, the customers’ ability to repay their loans is dependent on real estate values and general economic conditions.
The consolidated financial information included herein as of and for the three months ended March 31, 2015 and 2014 is unaudited. Accordingly, it does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. However, such information reflects all adjustments consisting of normal recurring accruals which are, in the opinion of management, necessary for a fair statement of the financial condition and results of operations for the interim periods. Certain account reclassifications have been made to the 2014 financial statements in order to conform to classifications used in the current year. Reclassifications had no effect on 2014 net income or stockholders’ equity. The results for the three months ended March 31, 2015 are not indicative of annual results. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The December 31, 2014 consolidated balance sheet was derived from the Company’s December 31, 2014 audited Consolidated Financial Statements.
Earnings per share: Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share includes the effect of any potentially dilutive common stock equivalents (i.e., outstanding stock options). Earnings per common share is restated for all stock splits and stock dividends through the date of the issuance of the financial statements.
NOTE 2 – INITIAL PUBLIC OFFERING
C1 Financial, Inc. qualifies as an “emerging growth company” as defined by the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”). On June 2, 2014, the Company submitted a confidential draft Registration Statement on Form S-1 with the SEC with respect to the shares to be registered and sold. On July 11, 2014, the Company filed a public Registration Statement on Form S-1 with the SEC. On July 17, 2014, the Board of Directors of the Company approved a resolution for C1 Financial, Inc. to sell shares of common stock to the public in an initial public offering. The Registration statement was declared effective by the SEC on August 13, 2014. The Company issued 2,761,356 shares of common stock at $17 per share, which included 129,777 shares of common stock purchased by the underwriters of the offering on September 9, 2014 in connection with the partial exercise of the over-allotment option held by such underwriters. Total proceeds received by the Company, net of offering costs was $42.3 million.
In connection with the initial public offering, on July 17, 2014, the Board of Directors approved a 7-for-1 reverse stock split of the Company’s common stock, which was approved by the majority stockholders and became effective on August 13, 2014. The effect of the split on authorized, issued and outstanding common and preferred shares and earnings per share has been retroactively applied to all periods presented.
7 |
NOTE 3 – INVESTMENT SECURITIES
C1 Financial, Inc.’s Directors’ Asset Liability Committee resolved in early 2013 that improving economic conditions could begin to put upward pressure on interest rates in 2013 and beyond, especially considering the fact that rates still remain at historically low levels. Given the concern relative to this economic and interest rate scenario, the Committee made the decision to sell all marketable securities in the Bank’s portfolio. These actions, taken in September and August of 2013, eliminated the mark-to-market risk that holding the securities would have posed in a rising interest rate environment and allowed the excess funds to be redeployed into loans. As a result, the Bank had no securities available for sale as of March 31, 2015 and December 31, 2014. In addition, there were no sales of securities available for sale for the three months ended March 31, 2015 and 2014.
As of March 31, 2014, the Bank carried $938 thousand of equity securities corresponding to a fund investment from an acquired bank, which was converted to equity shares as a result of a public offering. These shares were sold at a gain during the three months ended June 30, 2014.
NOTE 4 – LOANS
The loan portfolio was as follows at March 31, 2015 and December 31, 2014:
March 31, 2015 | December 31, 2014 | |||||||
Real estate | ||||||||
Residential | $ | 229,011 | $ | 224,416 | ||||
Commercial | 758,151 | 723,577 | ||||||
Construction | 111,127 | 107,436 | ||||||
Total real estate | 1,098,289 | 1,055,429 | ||||||
Commercial | 72,387 | 75,360 | ||||||
Consumer | 85,930 | 57,733 | ||||||
Total loans, gross | 1,256,606 | 1,188,522 | ||||||
Less: | ||||||||
Net deferred loan fees | (4,881 | ) | (4,142 | ) | ||||
Allowance for loan losses | (5,787 | ) | (5,324 | ) | ||||
Total loans, net | $ | 1,245,938 | $ | 1,179,056 |
The Bank has divided the loan portfolio into various loan classes, each with different risk characteristics and methodologies for assessing risk. The loan classes identified are as follows:
Residential real estate loans are typically secured by 1-4 family residential properties located mostly in Florida and are underwritten in accordance with policies set forth and approved by the Board of Directors, including repayment capacity and source, value of the underlying property, credit history and stability.
Repayment of residential real estate loans is primarily dependent upon the personal income or business income generated by the secured rental property of the borrowers (in the case of investment properties), which can be impacted by the economic conditions in their market area or, in the case of loans to foreign borrowers, their country of origin from which their source of income originates. Risk is mitigated by the fact that the properties securing the Bank’s residential real estate loan portfolio are diverse in type and spread over a large number of borrowers.
Commercial real estate loans are typically segmented into categories such as office buildings and condominiums, retail buildings and shopping centers, warehouse and other. Commercial real estate loans are secured by the subject property and are underwritten based upon standards set forth in the Bank’s policies approved by the Board of Directors. Such standards include, among other factors, loan to value limits, cash flow and debt service coverage, and general creditworthiness of the obligors.
8 |
Construction loans to borrowers are extended for the purpose of financing the construction of owner occupied and nonowner occupied properties. These loans are categorized as construction loans during the construction period, later converting to commercial or residential real estate loans after the construction is complete and amortization of the loan begins. Construction loans are approved based on an analysis of the borrower and guarantor, the viability of the project and on an acceptable percentage of the appraised value of the property securing the loan. Construction loan funds are disbursed periodically based on the percentage of construction completed.
Commercial loans are primarily underwritten on the basis of the borrowers’ ability to service such debt from income. When possible, commercial loans are secured by real estate. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. As a general practice, collateral is taken as a security interest in any available real estate, equipment, or other chattel, although loans may also be made on an unsecured basis. Collateralized working capital loans typically are secured by short-term assets whereas long-term loans are primarily secured by long-term assets.
Consumer loans are extended for various purposes. This loan class also includes home improvement loans, lines of credit, personal loans, and deposit account collateralized loans. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Loans to consumers are extended after a credit evaluation, including the creditworthiness of the borrower, the purpose of the credit, and the primary and secondary sources of repayment.
The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2015:
Three Months Ended March 31, 2015 | Residential Real Estate | Commercial Real Estate | Construction | Commercial | Consumer | Total | ||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Beginning balance | $ | 820 | $ | 3,423 | $ | 416 | $ | 373 | $ | 292 | $ | 5,324 | ||||||||||||
Loans charged-off | - | (1 | ) | - | - | (3 | ) | (4 | ) | |||||||||||||||
Recoveries | 69 | 112 | 23 | 33 | 39 | 276 | ||||||||||||||||||
Net recoveries | 69 | 111 | 23 | 33 | 36 | 272 | ||||||||||||||||||
Provision (reversal of provision) for loan losses | 41 | (56 | ) | 40 | 24 | 142 | 191 | |||||||||||||||||
Ending balance | $ | 930 | $ | 3,478 | $ | 479 | $ | 430 | $ | 470 | $ | 5,787 |
9 |
The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2014:
Three Months Ended March 31, 2014 | Residential Real Estate | Commercial Real Estate | Construction | Commercial | Consumer | Total | ||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Beginning balance | $ | 439 | $ | 1,860 | $ | 241 | $ | 537 | $ | 335 | $ | 3,412 | ||||||||||||
Loans charged-off | - | (157 | ) | - | (9 | ) | (2 | ) | (168 | ) | ||||||||||||||
Recoveries | 160 | 89 | 83 | 13 | 1 | 346 | ||||||||||||||||||
Net (charge-offs) recoveries | 160 | (68 | ) | 83 | 4 | (1 | ) | 178 | ||||||||||||||||
Provision (reversal of provision) for loan losses | (186 | ) | 220 | (107 | ) | 83 | 26 | 36 | ||||||||||||||||
Ending balance | $ | 413 | $ | 2,012 | $ | 217 | $ | 624 | $ | 360 | $ | 3,626 |
The following table provides the allocation of the allowance for loan losses by portfolio segment at March 31, 2015:
March 31, 2015 | Residential Real Estate | Commercial Real Estate | Construction | Commercial | Consumer | Total | ||||||||||||||||||
Specific Reserves: | ||||||||||||||||||||||||
Impaired Loans | $ | 103 | $ | 328 | $ | - | $ | 127 | $ | - | $ | 558 | ||||||||||||
Purchased credit impaired loans | 32 | 17 | 4 | - | - | 53 | ||||||||||||||||||
Total Specific Reserves | 135 | 345 | 4 | 127 | - | 611 | ||||||||||||||||||
General Reserves | 795 | 3,133 | 475 | 303 | 470 | 5,176 | ||||||||||||||||||
Total | $ | 930 | $ | 3,478 | $ | 479 | $ | 430 | $ | 470 | $ | 5,787 | ||||||||||||
Loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 1,782 | $ | 5,151 | $ | 91 | $ | 941 | $ | 1 | $ | 7,966 | ||||||||||||
Purchased credit impaired loans | 6,575 | 19,327 | 1,474 | 673 | 65 | 28,114 | ||||||||||||||||||
Collectively evaluated for impairment | 220,654 | 733,673 | 109,562 | 70,773 | 85,864 | 1,220,526 | ||||||||||||||||||
Total ending loans balance | $ | 229,011 | $ | 758,151 | $ | 111,127 | $ | 72,387 | $ | 85,930 | $ | 1,256,606 |
The following table provides the allocation of the allowance for loan losses by portfolio segment at December 31, 2014:
December 31, 2014 | Residential Real Estate | Commercial Real Estate | Construction | Commercial | Consumer | Total | ||||||||||||||||||
Specific Reserves: | ||||||||||||||||||||||||
Impaired Loans | $ | 107 | $ | 339 | $ | - | $ | 68 | $ | - | $ | 514 | ||||||||||||
Purchase credit impaired loans | 46 | 37 | 8 | - | 1 | 92 | ||||||||||||||||||
Total Specific Reserves | 153 | 376 | 8 | 68 | 1 | 606 | ||||||||||||||||||
General Reserves | 667 | 3,047 | 408 | 305 | 291 | 4,718 | ||||||||||||||||||
Total | $ | 820 | $ | 3,423 | $ | 416 | $ | 373 | $ | 292 | $ | 5,324 | ||||||||||||
Loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 1,813 | $ | 5,395 | $ | 230 | $ | 1,013 | $ | 104 | $ | 8,555 | ||||||||||||
Purchase credit impaired loans | 6,580 | 19,360 | 1,480 | 687 | 66 | 28,173 | ||||||||||||||||||
Collectively evaluated for impairment | 216,023 | 698,822 | 105,726 | 73,660 | 57,563 | 1,151,794 | ||||||||||||||||||
Total ending loans balance | $ | 224,416 | $ | 723,577 | $ | 107,436 | $ | 75,360 | $ | 57,733 | $ | 1,188,522 |
10 |
The following table presents loans individually evaluated for impairment by portfolio segment as of March 31, 2015 and December 31, 2014. The difference between the unpaid principal balance and the recorded investment is the amount of partial charge-offs that have been taken.
March 31, 2015 | December 31, 2014 | |||||||||||||||||||||||
Unpaid Principal Balance | Recorded Investment | Allowance for Loan Losses Allocated | Unpaid Principal Balance | Recorded Investment | Allowance for Loan Losses Allocated | |||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||||||
Residential real estate | $ | 1,388 | $ | 1,277 | $ | - | $ | 1,643 | $ | 1,464 | $ | - | ||||||||||||
Commercial real estate | ||||||||||||||||||||||||
Multifamily | - | - | - | - | - | - | ||||||||||||||||||
Owner occupied | 4,284 | 3,795 | - | 4,346 | 4,000 | - | ||||||||||||||||||
Nonowner occupied | 602 | 532 | - | 608 | 553 | - | ||||||||||||||||||
Secured by farmland | 185 | 143 | - | 185 | 143 | - | ||||||||||||||||||
Construction | 128 | 91 | - | 280 | 230 | - | ||||||||||||||||||
Commercial | 920 | 725 | - | 1,007 | 777 | - | ||||||||||||||||||
Consumer | 2 | 1 | - | 169 | 104 | - | ||||||||||||||||||
With allowance recorded: | ||||||||||||||||||||||||
Residential real estate | 530 | 505 | 103 | 364 | 349 | 107 | ||||||||||||||||||
Commercial real estate | ||||||||||||||||||||||||
Multifamily | - | - | - | - | - | - | ||||||||||||||||||
Owner occupied | 736 | 681 | 328 | 776 | 699 | 339 | ||||||||||||||||||
Nonowner occupied | - | - | - | - | - | - | ||||||||||||||||||
Secured by farmland | - | - | - | - | - | - | ||||||||||||||||||
Construction | - | - | - | - | - | - | ||||||||||||||||||
Commercial | 248 | 216 | 127 | 314 | 236 | 68 | ||||||||||||||||||
Consumer | - | - | - | - | - | - | ||||||||||||||||||
Total | $ | 9,023 | $ | 7,966 | $ | 558 | $ | 9,692 | $ | 8,555 | $ | 514 |
11 |
Average impaired loans and related interest income for the three months ended March 31, 2015 and 2014 were as follows:
Three Months Ended March 31, 2015 | Three Months Ended March 31, 2014 | |||||||||||||||||||||||
Average Recorded Investment | Interest Income Recognized | Cash Basis Interest Recognized | Average Recorded Investment | Interest Income Recognized | Cash Basis Interest Recognized | |||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||||||
Residential real estate | $ | 1,300 | $ | - | $ | - | $ | 606 | $ | - | $ | - | ||||||||||||
Commercial real estate | ||||||||||||||||||||||||
Multifamily | - | - | - | - | - | - | ||||||||||||||||||
Owner occupied | 3,861 | - | - | 3,758 | 13 | - | ||||||||||||||||||
Nonowner occupied | 548 | - | - | 941 | - | - | ||||||||||||||||||
Secured by farmland | 143 | - | - | 1,936 | - | - | ||||||||||||||||||
Construction | 130 | - | - | 6 | - | - | ||||||||||||||||||
Commercial | 732 | - | - | 271 | 4 | - | ||||||||||||||||||
Consumer | 2 | - | - | 79 | - | - | ||||||||||||||||||
With allowance recorded: | ||||||||||||||||||||||||
Residential real estate | 539 | - | - | 237 | 2 | - | ||||||||||||||||||
Commercial real estate | ||||||||||||||||||||||||
Multifamily | - | - | - | - | - | - | ||||||||||||||||||
Owner occupied | 684 | 4 | - | 832 | 5 | - | ||||||||||||||||||
Nonowner occupied | - | - | - | - | - | - | ||||||||||||||||||
Secured by farmland | - | - | - | - | - | - | ||||||||||||||||||
Construction | - | - | - | - | - | - | ||||||||||||||||||
Commercial | 223 | 1 | - | 848 | 3 | - | ||||||||||||||||||
Consumer | - | - | - | - | - | - | ||||||||||||||||||
Total | $ | 8,162 | $ | 5 | $ | - | $ | 9,514 | $ | 27 | $ | - |
12 |
The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2015 and December 31, 2014:
March 31, 2015 | Nonaccrual | Loans Past Due Over 90 Days Still Accruing | ||||||
Residential real estate | $ | 4,136 | $ | - | ||||
Commercial real estate | 13,752 | - | ||||||
Construction | 304 | - | ||||||
Commercial | 1,511 | - | ||||||
Consumer | 1 | - | ||||||
Total | $ | 19,704 | $ | - |
December 31, 2014 | Nonaccrual | Loans Past Due Over 90 Days Still Accruing | ||||||
Residential real estate | $ | 4,168 | $ | - | ||||
Commercial real estate | 14,582 | - | ||||||
Construction | 449 | - | ||||||
Commercial | 1,591 | - | ||||||
Consumer | 104 | - | ||||||
Total | $ | 20,894 | $ | - |
The reported amounts as of March 31, 2015 and December 31, 2014 include nonaccrual purchased credit impaired loans of $12,370 and $12,980, respectively. Loans are placed on nonaccrual and accounted for under the cost recovery method when repayment is expected through foreclosure or repossession of the collateral, and the timing of foreclosure or repossession cannot be estimated with reasonable certainty. These loans are measured for impairment under the Bank’s policy for measuring impairment on collateral dependent impaired loans that were originated by the Bank and included in impaired loans if there is a subsequent decline in the value of the collateral.
13 |
The following table presents the aging of the recorded investment in past due loans as of March 31, 2015 by class of loans:
30 - 59 Days Past Due | 60 - 89 Days Past Due | Greater than 89 Days Past Due | Total Past Due | Loans Not Past Due | Total | |||||||||||||||||||
March 31, 2015 | ||||||||||||||||||||||||
Residential real estate | $ | 1,002 | $ | 68 | $ | 4,136 | $ | 5,206 | $ | 223,805 | $ | 229,011 | ||||||||||||
Commercial real estate | ||||||||||||||||||||||||
Multifamily | 356 | - | - | 356 | 31,777 | 32,133 | ||||||||||||||||||
Owner occupied | 322 | 488 | 9,982 | 10,792 | 228,847 | 239,639 | ||||||||||||||||||
Nonowner occupied | 482 | - | 3,627 | 4,109 | 425,519 | 429,628 | ||||||||||||||||||
Secured by farmland | - | - | 143 | 143 | 56,608 | 56,751 | ||||||||||||||||||
Construction | - | - | 304 | 304 | 110,823 | 111,127 | ||||||||||||||||||
Commercial | 64 | - | 1,511 | 1,575 | 70,812 | 72,387 | ||||||||||||||||||
Consumer | 99 | - | 1 | 100 | 85,830 | 85,930 | ||||||||||||||||||
Total | $ | 2,325 | $ | 556 | $ | 19,704 | $ | 22,585 | $ | 1,234,021 | $ | 1,256,606 |
The following table presents the aging of the recorded investment in past due loans as of December 31, 2014 by class of loans:
30 – 59 Days Past Due | 60 – 89 Days Past Due | Greater than 89 Days Past Due | Total Past Due | Loans Not Past Due | Total | |||||||||||||||||||
December 31, 2014 | ||||||||||||||||||||||||
Residential real estate | $ | 1,256 | $ | 165 | $ | 4,168 | $ | 5,589 | $ | 218,827 | $ | 224,416 | ||||||||||||
Commercial real estate | ||||||||||||||||||||||||
Multifamily | 356 | - | - | 356 | 32,545 | 32,901 | ||||||||||||||||||
Owner occupied | 1,829 | - | 10,261 | 12,090 | 219,146 | 231,236 | ||||||||||||||||||
Nonowner occupied | 2,593 | - | 4,178 | 6,771 | 392,831 | 399,602 | ||||||||||||||||||
Secured by farmland | - | - | 143 | 143 | 59,695 | 59,838 | ||||||||||||||||||
Construction | 85 | - | 449 | 534 | 106,902 | 107,436 | ||||||||||||||||||
Commercial | 550 | - | 1,591 | 2,141 | 73,219 | 75,360 | ||||||||||||||||||
Consumer | 49 | 48 | 104 | 201 | 57,532 | 57,733 | ||||||||||||||||||
Total | $ | 6,718 | $ | 213 | $ | 20,894 | $ | 27,825 | $ | 1,160,697 | $ | 1,188,522 |
14 |
Troubled Debt Restructurings:
The following table is a summary of troubled debt restructurings that were performing in accordance with the restructured terms at March 31, 2015:
March 31, 2015 | Number of Loans | Recorded Investment | ||||||
Residential real estate | - | $ | - | |||||
Commercial real estate | ||||||||
Multifamily | - | - | ||||||
Owner occupied | 1 | 528 | ||||||
Nonowner occupied | 1 | 372 | ||||||
Secured by farmland | - | - | ||||||
Construction | - | - | ||||||
Commercial | - | - | ||||||
Consumer | - | - | ||||||
Total | 2 | $ | 900 |
The Bank had no nonaccruing troubled debt restructurings and was not committed to lend any additional amounts as of March 31, 2015 to customers with outstanding loans that were classified as troubled debt restructurings.
There were no loans modified as troubled debt restructurings during the three months ended March 31, 2015 and 2014.
The following table is a summary of troubled debt restructurings that were performing in accordance with the restructured terms at December 31, 2014:
December 31, 2014 | Number of Loans | Recorded Investment | ||||||
Residential real estate | - | $ | - | |||||
Commercial real estate | ||||||||
Multifamily | - | - | ||||||
Owner occupied | 1 | 532 | ||||||
Nonowner occupied | 1 | 374 | ||||||
Secured by farmland | - | - | ||||||
Construction | - | - | ||||||
Commercial | - | - | ||||||
Consumer | - | - | ||||||
Total | 2 | $ | 906 |
15 |
The Bank had no nonaccruing troubled debt restructurings and was not committed to lend any additional amounts as of December 31, 2014 to customers with outstanding loans that were classified as troubled debt restructurings.
There were no troubled debt restructurings that defaulted during the three months ended March 31, 2015 and 2014. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.
Credit Quality Indicators:
The Bank 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 Bank analyzes loans individually by classifying the loans as to credit risk. This analysis is performed at least annually. The Bank uses the following definitions for risk ratings:
Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans not meeting the criteria above include homogeneous loans, which includes residential real estate and consumer loans. The credit quality indicators used for loans not meeting the criteria above are payment status and historical payment experience. As of March 31, 2015 and December 31, 2014, the risk category of loans by class of loans is as follows:
16 |
Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||
March 31, 2015 | ||||||||||||||||||||
Residential real estate | $ | 220,821 | $ | 2,199 | $ | 5,991 | $ | - | $ | 229,011 | ||||||||||
Commercial real estate | ||||||||||||||||||||
Multifamily | 32,133 | - | - | - | 32,133 | |||||||||||||||
Owner occupied | 216,303 | 8,557 | 14,779 | - | 239,639 | |||||||||||||||
Nonowner occupied | 421,242 | 4,759 | 3,627 | - | 429,628 | |||||||||||||||
Secured by farmland | 55,955 | 653 | 143 | - | 56,751 | |||||||||||||||
Construction | 108,869 | 1,342 | 916 | - | 111,127 | |||||||||||||||
Commercial | 70,444 | 304 | 1,639 | - | 72,387 | |||||||||||||||
Consumer | 85,799 | 55 | 76 | - | 85,930 | |||||||||||||||
Total | $ | 1,211,566 | $ | 17,869 | $ | 27,171 | $ | - | $ | 1,256,606 |
Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||
December 31, 2014 | ||||||||||||||||||||
Residential real estate | $ | 215,998 | $ | 2,405 | $ | 6,013 | $ | - | $ | 224,416 | ||||||||||
Commercial real estate | ||||||||||||||||||||
Multifamily | 32,667 | 234 | - | - | 32,901 | |||||||||||||||
Owner occupied | 205,078 | 11,059 | 15,099 | - | 231,236 | |||||||||||||||
Nonowner occupied | 389,430 | 5,994 | 4,178 | - | 399,602 | |||||||||||||||
Secured by farmland | 59,022 | 673 | 143 | - | 59,838 | |||||||||||||||
Construction | 105,027 | 1,357 | 1,052 | - | 107,436 | |||||||||||||||
Commercial | 73,321 | 311 | 1,728 | - | 75,360 | |||||||||||||||
Consumer | 57,568 | 61 | 104 | - | 57,733 | |||||||||||||||
Total | $ | 1,138,111 | $ | 22,094 | $ | 28,317 | $ | - | $ | 1,188,522 |
The Bank acquired loans through the acquisitions of First Community Bank of America, The Palm Bank and First Community Bank of Southwest Florida for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of these purchased credit impaired loans at March 31, 2015 and December 31, 2014 was approximately $28,060 and $28,081, respectively.
The Bank maintained an allowance for loan losses of $53 and $92 at March 31, 2015 and December 31, 2014, respectively, for loans acquired with deteriorated quality. During the three months ended March 31, 2015 and 2014, the Bank accreted $141 and $149, respectively, into interest income on these loans. The remaining accretable discount was $2,280 at March 31, 2015. The Bank did not transfer any nonaccretable discount on these loans during the periods presented.
NOTE 5 – FAIR VALUES
Fair value is the exchange price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels that may be used to measure fair value:
17 |
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations. The fair value of investment securities available for sale is considered a Level 2 in the fair value hierarchy and is measured on a recurring basis.
The Company had no securities available for sale or any other assets measured at fair value on a recurring basis at March 31, 2015 and December 31, 2014.
The fair values of impaired loans with specific allocations of the allowance for loan losses and other real estate owned are generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. For the commercial real estate impaired loans and other real estate owned, appraisers may use either a single valuation approach or a combination of approaches such as comparative sales, cost or the income approach. A significant unobservable input in the income approach is the estimated income capitalization rate for a given piece of collateral. At March 31, 2015 and December 31, 2014, the range of capitalization rates utilized to determine the fair value of the underlying collateral ranged from 8.0% to 12.0%. Adjustments to comparable sales may be made by the appraiser to reflect local market conditions or other economic factors and may result in changes in the fair value of a given asset over time. As such, the fair values of impaired loans and other real estate owned are considered a Level 3 in the fair value hierarchy and are measured on a nonrecurring basis.
The following tables present assets reported on the balance sheet at their fair value by level within the fair value hierarchy as of March 31, 2015 and December 31, 2014. As required by Accounting Standards Codification (“ASC”) 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The fair value of assets measured on a nonrecurring basis was as follows at March 31, 2015:
March 31, 2015 Using: | ||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||
Fair Value Measured on a Nonrecurring Basis: | ||||||||||||
Impaired Loans | ||||||||||||
Residential real estate | $ | - | $ | - | $ | 402 | ||||||
Commercial real estate | - | - | 353 | |||||||||
Construction | - | - | - | |||||||||
Commercial | - | - | 89 | |||||||||
Consumer | - | - | - | |||||||||
Total Impaired Loans | - | - | 844 | |||||||||
Other real estate owned | ||||||||||||
Residential | - | - | 1,401 | |||||||||
Commercial | - | - | 11,586 | |||||||||
Total other real estate owned | - | - | 12,987 | |||||||||
Total | $ | - | $ | - | $ | 13,831 |
18 |
Impaired loans, which had a specific allowance for loan losses allocated, had a recorded investment of $1,402 with a valuation allowance of $558 at March 31, 2015. The recorded investment reflected a provision for loan losses of $45 for the three months ended March 31, 2015.
Other real estate owned, which is measured at fair value less costs to sell, had a net carrying amount of $12,987 (outstanding balance of $16,767, net of a valuation allowance of $3,780) at March 31, 2015. The net carrying amount reflected write-downs of $31 for the three months ended March 31, 2015.
The fair value of assets measured on a nonrecurring basis was as follows at December 31, 2014:
December 31, 2014 Using: | ||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||
Fair Value Measured on a Nonrecurring Basis: | ||||||||||||
Impaired Loans | ||||||||||||
Residential real estate | $ | - | $ | - | $ | 242 | ||||||
Commercial real estate | - | - | 360 | |||||||||
Construction | - | - | - | |||||||||
Commercial | - | - | 168 | |||||||||
Consumer | - | - | - | |||||||||
Total Impaired Loans | - | - | 770 | |||||||||
Other real estate owned | ||||||||||||
Residential | - | - | 2,337 | |||||||||
Commercial | - | - | 12,867 | |||||||||
Total other real estate owned | - | - | 15,204 | |||||||||
Total | $ | - | $ | - | $ | 15,974 |
Impaired loans, which had a specific allowance for loan losses allocated, had a recorded investment of $1,284 with a valuation allowance of $514 at December 31, 2014. The recorded investment reflected a provision for loan losses of $97 for the three months ended March 31, 2014.
Other real estate owned had a net carrying amount of $15,204 (outstanding balance of $20,054, net of a valuation allowance of $4,850) at December 31, 2014. The net carrying amount reflected write-downs of $379 for the three months ended March 31, 2014.
The following methods and assumptions were used to estimate the fair value of each class of financial assets and liabilities for which it is practicable to estimate that value. These financial assets and liabilities are reported in the Company’s consolidated balance sheets at their carrying amounts. Fair value methods and assumptions are periodically evaluated by the Company.
Cash and cash equivalents – For these short-term highly liquid instruments, the carrying amount is a reasonable estimate of fair value.
19 |
Investment securities – Fair values for investment securities, excluding Federal Home Loan Bank stock, are discussed above. It was not practicable to determine the fair value of Federal Home Loan Bank stock due to restrictions placed on its transferability.
Loans – The fair value measurement of certain impaired loans is discussed above. For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for all other loans are estimated using discounted cash flow analyses, using the interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. An overall valuation adjustment was made for specific credit risks as well as general portfolio credit risk. The methods utilized to estimate the fair value do not necessarily represent an exit price.
Accrued interest receivable and payable – The carrying amount of accrued interest receivable and payable approximates fair value due to the short-term nature of these financial instruments.
Deposits – The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable upon demand at March 31, 2015 and December 31, 2014, resulting in a Level 1 classification in the fair value hierarchy. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities, resulting in a Level 2 classification in the fair value hierarchy.
Short-term borrowings – Rates currently available to the Company for borrowings with similar terms and remaining maturities are used to estimate fair value of existing borrowings by discounting future cash flows.
Long-term debt – Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt by discounting future cash flows.
Commitments to extend credit and standby letters of credit – The value of the unrecognized financial instruments is estimated based on the related deferred fee income associated with the commitments, which is not material to the Company's financial statements at March 31, 2015 and December 31, 2014.
The estimated fair values of the Bank's financial assets and liabilities at March 31, 2015 and December 31, 2014 approximated as follows:
Fair Value Measurements at March 31, 2015 Using: | ||||||||||||||||
Carrying amount | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Financial assets | ||||||||||||||||
Cash and cash equivalents | $ | 182,824 | $ | 182,824 | $ | - | $ | - | ||||||||
Loans, net | 1,245,938 | - | - | 1,250,486 | ||||||||||||
Accrued interest receivable | 3,668 | - | - | 3,668 | ||||||||||||
Financial liabilities | ||||||||||||||||
Deposits | $ | 1,199,828 | $ | 926,316 | $ | 274,623 | $ | - | ||||||||
Federal Home Loan Bank advances | 202,500 | - | 203,258 | - | ||||||||||||
Accrued interest payable | 249 | - | 249 | - |
Fair Value Measurements at December 31, 2014 Using: | ||||||||||||||||
Carrying amount | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Financial assets | ||||||||||||||||
Cash and cash equivalents | $ | 185,703 | $ | 185,703 | $ | - | $ | - | ||||||||
Loans, net | 1,179,056 | - | - | 1,177,725 | ||||||||||||
Accrued interest receivable | 3,490 | - | - | 3,490 | ||||||||||||
Financial liabilities | ||||||||||||||||
Deposits | $ | 1,167,502 | $ | 854,246 | $ | 314,201 | $ | - | ||||||||
Federal Home Loan Bank advances | 178,500 | - | 178,162 | - | ||||||||||||
Accrued interest payable | 235 | - | 235 | - |
20 |
NOTE 6 – EARNINGS PER COMMON SHARE
Basic earnings per common share is net income divided by the weighted average number of shares outstanding during the period. Diluted earnings per share includes the effect of any potentially dilutive common stock equivalents (i.e., outstanding stock options).
There were no antidilutive common stock equivalents during the periods presented.
Three months ended March 31, | ||||||||
2015 | 2014 (1) | |||||||
Basic | ||||||||
Net Income | $ | 3,174 | $ | 2,526 | ||||
Weighted average shares of common stock outstanding | 16,100,966 | 12,499,890 | ||||||
Basic earnings per common share | $ | 0.20 | $ | 0.20 | ||||
Diluted | ||||||||
Net Income | $ | 3,174 | $ | 2,526 | ||||
Weighted average shares of common stock outstanding | 16,100,966 | 12,499,890 | ||||||
Add: Dilutive effect of common stock equivalents | - | - | ||||||
Average shares and dilutive potential common shares | 16,100,966 | 12,499,890 | ||||||
Diluted earnings per common share | $ | 0.20 | $ | 0.20 |
(1) | Amounts have been restated to reflect the 7-for-1 reverse stock split completed on August 13, 2014. Please refer to Note 2 – Initial Public Offering for additional information related to the reverse stock split. |
NOTE 7 – REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies, including the Bank’s primary federal regulator, the Federal Deposit Insurance Corporation (FDIC). Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators, which if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines involving quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's 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 Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined), or leverage ratio. For March 31, 2015, Interim Final Basel III rules require the Bank to maintain minimum amounts and ratios of common equity Tier I capital (as defined in the regulations) to risk-weighted assets (as defined). Additionally under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in regulatory capital. For December 31, 2014, regulatory capital ratios were calculated under Basel I rules.
21 |
To be categorized as well capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based, common equity Tier I risk-based (March 31, 2015) and Tier I leverage ratios as set forth in the table below. As of March 31, 2015 and December 31, 2014, the Bank met all capital adequacy requirements to be considered well capitalized. There were no conditions or events since the end of the first quarter of 2015 that management believes have changed the Bank’s classification as well capitalized. There is no threshold for well-capitalized status for bank holding companies.
The Company’s and Bank's actual and required capital ratios as of March 31, 2015 and December 31, 2014 were as follows:
Actual | Required for Capital Adequacy Purposes | Well Capitalized Under Prompt Corrective Action Provision | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
March 31, 2015 | ||||||||||||||||||||||||
Total capital to risk-weighted assets | ||||||||||||||||||||||||
C1 Financial, Inc. | $ | 194,932 | 14.01 | % | $ | 111,345 | 8.00 | % | $ | N/A | N/A | |||||||||||||
C1 Bank | 194,239 | 13.96 | % | 111,337 | 8.00 | % | 139,171 | 10.00 | % | |||||||||||||||
Tier 1 capital to risk-weighted assets | ||||||||||||||||||||||||
C1 Financial, Inc. | 189,145 | 13.59 | % | 83,509 | 6.00 | % | N/A | N/A | ||||||||||||||||
C1 Bank | 188,452 | 13.54 | % | 83,503 | 6.00 | % | 111,337 | 8.00 | % | |||||||||||||||
Common equity tier 1 capital to risk-weighted assets | ||||||||||||||||||||||||
C1 Financial, Inc. | 189,145 | 13.59 | % | 62,632 | 4.50 | % | N/A | N/A | ||||||||||||||||
C1 Bank | 188,452 | 13.54 | % | 62,627 | 4.50 | % | 90,461 | 6.50 | % | |||||||||||||||
Tier 1 capital to average assets | ||||||||||||||||||||||||
C1 Financial, Inc. | 189,145 | 12.01 | % | 63,021 | 4.00 | % | N/A | N/A | ||||||||||||||||
C1 Bank | 188,452 | 11.96 | % | 63,016 | 4.00 | % | 78,771 | 5.00 | % |
Actual | Required for Capital Adequacy Purposes | Well Capitalized Under Prompt Corrective Action Provision | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
December 31, 2014 | ||||||||||||||||||||||||
Total capital to risk-weighted assets | ||||||||||||||||||||||||
C1 Financial, Inc. | $ | 190,712 | 14.74 | % | $ | 103,532 | 8.00 | % | $ | N/A | N/A | |||||||||||||
C1 Bank | 190,019 | 14.68 | % | 103,523 | 8.00 | % | 129,404 | 10.00 | % | |||||||||||||||
Tier 1 capital to risk-weighted assets | ||||||||||||||||||||||||
C1 Financial, Inc. | 185,388 | 14.33 | % | 51,766 | 4.00 | % | N/A | N/A | ||||||||||||||||
C1 Bank | 184,695 | 14.27 | % | 51,762 | 4.00 | % | 77,642 | 6.00 | % | |||||||||||||||
Tier 1 capital to average assets | ||||||||||||||||||||||||
C1 Financial, Inc. | 185,388 | 11.95 | % | 62,049 | 4.00 | % | N/A | N/A | ||||||||||||||||
C1 Bank | 184,695 | 11.91 | % | 62,045 | 4.00 | % | 77,556 | 5.00 | % |
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NOTE 8 – COMMITMENTS AND CONTINGENCIES
The financial statements do not reflect various commitments and contingent liabilities which arise in the normal course of business and which involve elements of credit risk, interest rate risk and liquidity risk. These commitments and contingent liabilities are commitments to extend credit and standby letters of credit. A summary of these commitments and contingent liabilities is as follows:
Fixed | Variable | Total | ||||||||||
March 31, 2015 | ||||||||||||
Unused lines of credit | $ | 7,554 | $ | 46,731 | $ | 54,285 | ||||||
Standby letters of credit | 1,637 | 182 | 1,819 | |||||||||
Commitments to fund loans | 23,535 | 165,412 | 188,947 | |||||||||
Total | $ | 32,726 | $ | 212,325 | $ | 245,051 | ||||||
December 31, 2014 | ||||||||||||
Unused lines of credit | $ | 3,549 | $ | 36,081 | $ | 39,630 | ||||||
Standby letters of credit | 1,358 | 182 | 1,540 | |||||||||
Commitments to fund loans | 22,986 | 124,893 | 147,879 | |||||||||
Total | $ | 27,893 | $ | 161,156 | $ | 189,049 |
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following is management’s discussion and analysis of certain significant factors that have affected our financial condition and operating results during the periods included in the accompanying consolidated financial statements, and should be read in conjunction with such financial statements. The following discussion pertains to our historical results, on a consolidated basis. However, because we conduct all of our material business operations through the Bank, the discussion and analysis relates to activities primarily conducted at the subsidiary level.
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q.
Overview
Our name expresses our ideals to put our Clients 1st and our Community 1st. We are focused on serving the needs of entrepreneurs, tailoring a wide range of relationship banking services to entrepreneurs and their families, including commercial loans and a full line of depository products. We are based in St. Petersburg, Florida and operate from 30 banking centers and one loan production office on the West Coast of Florida and in Miami-Dade and Orange Counties. As of December 31, 2014, we were the 18th largest bank headquartered in the state of Florida by assets and the 16th largest by equity, having grown both organically and through acquisitions, and we were the sixth fastest-growing bank in the country as measured by asset growth for the five-year period ending June 30, 2014.
We generate most of our revenue from interest on loans. Our primary source of funding for our loans is deposits. Our largest expenses are interest on those deposits and salaries plus related employee benefits. We measure our performance through our net interest margin, return on average assets, and return on average common equity, while maintaining appropriate regulatory leverage and risk-based capital ratios.
Our common stock is listed on the New York Stock Exchange under the symbol “BNK”.
Overview of Recent Financial Performance and Trends
Our financial performance reflects improvements in economic conditions in Florida in the areas in which we operate, the acquisitions we have completed, our progress in restructuring the acquired banks and implementing our banking strategy and other general economic and competitive trends in our markets.
Our net interest income was $15.6 million and $13.1 million in the three-month periods ended March 31, 2015 and March 31, 2014, respectively. In the three-month periods ended March 31, 2015 and March 31, 2014, our net income of $3.2 million and $2.5 million, respectively, represented a return on average assets, or ROAA, of 0.82% and 0.74%, respectively, and a return on average equity, or ROAE, of 6.81% and 8.03%, respectively. Our ratio of average equity to average assets in the three-month periods ended March 31, 2015 and March 31, 2014 was 11.99% and 9.24%, respectively.
Our assets totaled $1.597 billion and $1.537 billion as of March 31, 2015 and December 31, 2014, respectively. Loans receivable, net, as of March 31, 2015 and December 31, 2014 were $1.246 billion and $1.179 billion, respectively. Total deposits were $1.2 billion and $1.168 billion as of March 31, 2015 and December 31, 2014, respectively.
On July 17, 2014, the Board of Directors of the Company approved a resolution for C1 Financial, Inc. to sell shares of common stock to the public in an initial public offering. On June 2, 2014, the Company submitted a confidential draft Registration Statement on Form S-1 with the SEC with respect to the shares to be registered and sold. On July 11, 2014, the Company filed a public Registration Statement on Form S-1 with the SEC. The Registration statement was declared effective by the SEC on August 13, 2014. The Company issued 2,761,356 shares of common stock at $17 per share, which included 129,777 shares of common stock purchased by the underwriters of the offering, on September 9, 2014 in connection with the partial exercise of the over-allotment option held by such underwriters. Total proceeds received by the Company, net of offering costs, was approximately $42.3 million.
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In connection with the initial public offering, on July 17, 2014, the Board of Directors approved a 7-for-1 reverse stock split of the Company’s common stock, which was approved by the majority shareholders and became effective on August 13, 2014. The effect of the split on authorized, issued and outstanding common and preferred shares and income per share has been retroactively applied to all periods presented.
Critical Accounting Policies and Estimates
To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, our management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses, fair value of other real estate owned, purchased credit impaired, or PCI, loans, deferred tax assets and fair values of financial instruments are particularly subject to change.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required for each loan class using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.
A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts 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.
All substandard commercial, commercial real estate and construction loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, may be collectively evaluated for impairment, and accordingly, not separately identified for impairment disclosures.
Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral-dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, we determine the amount of valuation allowance in accordance with the accounting policy for the allowance for loan losses.
The general component of our allowance analysis covers nonimpaired loans and is based on our historical loss experience over the past two years as adjusted for certain current factors described in the paragraph below. As of March 31, 2015, approximately 26% of our loan portfolio consisted of loans underwritten by different credit teams than our current team, including loans acquired from Community Bank of Manatee, First Community Bank of America, The Palm Bank and First Community Bank of Southwest Florida (together, the “Acquired Loans”). The Acquired Loans were originated under different economic conditions than exist today and were underwritten utilizing different underwriting standards. We consider the Acquired Loans to be seasoned since they were originated more than five years ago. As such, we use the historical loss experience for the pool of Acquired Loans over the past two years as part of the general component of our allowance analysis for the Acquired Loans (except for First Community Bank of Southwest Florida, since acquisition was completed less than 2 years ago with loans transferred at fair value).
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This actual historical loss experience is supplemented with management adjustment factors based on the risks present for each class of loans (separated for originated and acquired loans), including: (i) levels of and trends in delinquencies and nonaccrual loans; (ii) trends in volume and terms of loans; (iii) changes in lending policies, procedures, and practices; (iv) experience, ability and depth of lending management and other relevant staff; (v) changes in the quality of the loan review system; (vi) changes in the underlying collateral; (vii) changes in competition, legal and regulatory environment; (viii) effects of changes in credit concentrations; and (ix) national and local economic trends and conditions. To determine the impact of these factors, management looks at external indicators such as unemployment rate, GDP growth, trends in consumer credit, real estate prices in the geographical areas where the Bank operates, information related to the other Florida banks, the competitive and regulatory environment, as well as internal indicators such as loan growth, credit concentrations and loan review process. Each of the adjustment factors is graded in a scale from “significantly improved compared to historical period” to “significantly declined compared to historical period,” and historical loss rates are adjusted based on this assessment. If a factor is graded “same compared to historical period,” no adjustments are made to the historical loss experience for that specific pool and loan category with respect to such factor. In addition, a risk rating adjustment factor is determined at the loan level, based on the individual risk rating of each loan.
As of March 31, 2015, approximately 74% of our loan portfolio consists of loans originated by C1 Bank from 2010 to the present and, as such, may not be seasoned. Generally, the historical loss rate of the C1 Bank originated loans has been very low; however, due to the unseasoned nature of the C1 Bank originated loans, the historical loss rate may not effectively capture the probable incurred losses in this portion of our loan portfolio. Accordingly, we performed a peer statistical analysis of U.S. banks to determine what would be a normalized loss rate for our originated loans, considering characteristics like profitability, asset growth and geographical location, among others. While there are characteristics unique to each financial institution that drive loss rates and make a bank more or less risky than its peers, the purpose of this peer statistical analysis was to estimate a “better” loss rate, but in the context of a model that controls for characteristics like geography, asset growth and recovering economic conditions.
For this analysis, we first looked at two- and three-year median loss rates for all U.S. banks, which were both below loss rates in the C1 Bank originated loan portfolio after factoring in management adjustments. Understanding that the median peer loss rates may not capture specifics of the C1 Bank originated loans, such as profitability, asset growth and geographical location, among others, we performed a regression-based study of credit-loss rates for all commercial banks in the United States over a three-year period ending in 2013. The model incorporated the following variables: amount of past due loans, geography, capitalization, bank age, management, asset size, asset quality, earnings, and credit risk. We completed this analysis during the second quarter of 2014 and it was first used for the calculation of the allowance for loan losses as of June 30, 2014.
This peer analysis affects the determination of our allowance for loan losses, as we use the highest of the actual losses and the outcome of the analysis as the input for the calculation of the general component of the allowance for loan losses for the C1 Bank originated loans. The peer analysis will be updated during the first quarter of each year and will be used as an element for the calculation of the allowance for loan losses during that specific year. The purpose of using the highest of actual and peer analysis loss rates is to prevent relying on lower C1 Bank originated loan loss rates, which could actually be caused by an unseasoned portfolio and may not effectively capture the probable incurred losses in the C1 Bank originated loan portion of our portfolio.
During the first quarter of 2015, we updated the analysis applying the same statistical regression for the two and three year periods ending in 2014, and the result was used as an element to the calculation of the allowance for loan losses as of March 31, 2015.
We view this peer analysis as a short-term proxy until we develop additional loss history for the C1 Bank originated loans that approximate a full business cycle. The average business cycle length according to the National Bureau of Economic Research during the last 11 business cycles has been close to six years, and the FDIC defines seven years as a de novo period for extended supervisory activities for new charters (although we are not a de novo institution). By the end of 2015, our first loans (2010 vintage) will be completing 6 years since origination, in line with the average U.S. business cycle and close to the 7 year de novo period defined by the FDIC. We expect our historical losses to become more representative as we get closer to this point.
Fair Value of Other Real Estate Owned
Other real estate owned (“OREO”) represents assets acquired through foreclosure or other proceedings. Foreclosed assets acquired are initially recorded at fair value at the date of foreclosure less estimated costs to sell, which establishes a new cost basis. Any write-down to fair value at the time of transfer to OREO is charged to the allowance for loan losses. After foreclosure, valuations are periodically performed by management to ensure that properties recorded in OREO are carried at the lower of cost or fair value less estimated costs of disposal. Valuation allowances are adjusted as necessary. Expenses from the operations of OREO foreclosed assets, net of rental income and changes in the OREO valuation allowance are included in noninterest expense.
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Purchased Credit Impaired, or PCI, Loans
As part of our acquisitions, we acquired loans that have evidence of credit deterioration since origination. These acquired loans are recorded at their fair value, such that there is no carryover of the allowance for loan losses.
Such purchased loans are accounted for individually or aggregated into pools of loans based on common risk characteristics. We estimate the amount and timing of expected cash flows for each purchased loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the loan’s or pool’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference). Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded through the allowance for loan losses. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.
Loans are placed on nonaccrual and accounted for under the cost recovery method when repayment is expected through foreclosure or repossession of the collateral, and the timing of foreclosure or repossession cannot be estimated with reasonable certainty. These loans are measured for impairment under the Bank’s policy for measuring impairment on collateral-dependent impaired loans that were originated by the Bank and included in impaired loans if there is a subsequent decline in the value of the collateral.
Deferred Tax Assets
Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes currently due plus deferred taxes. The deferred tax assets and liabilities represent the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. We recognize interest and/or penalties related to income tax matters in income tax expense.
Fair Values of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
JOBS Act
The JOBS Act allows us to delay the implementation of certain new accounting standards on our financial statements. However, at March 31, 2015 and December 31, 2014, we have adopted all new accounting standards that could affect the comparability of our financial statements to those of other public entities.
Results of Operations
Net Interest Income
Net interest income is the largest component of our income, and is affected by the interest rate environment, and the volume and the composition of our interest-earning assets and interest-bearing liabilities. Net interest margin represents net interest income divided by average interest-earning assets. We earn interest income from interest, dividends and fees earned on interest-earning assets, as well as from accretion of discounts on acquired loans. Our interest-earning assets include loans, securities available for sale and other securities, Federal funds sold and balances at the Federal Reserve Bank, time deposits in other financial institutions, and Federal Home Loan Bank (“FHLB”) stock. We incur interest expense on interest-bearing liabilities, including interest-bearing deposits, borrowings and other forms of indebtedness as well as from amortization of premiums on purchased time deposits and debt. Our interest-bearing liabilities include deposits, advances from the FHLB, and other borrowings.
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Three-month period ended March 31, 2015 compared to three-month period ended March 31, 2014
Our net interest income increased 18.5% to $15.6 million in the three-month period ended March 31, 2015 from $13.1 million in the three-month period ended March 31, 2014, primarily due to increased average balances, higher yields on loans and improvements in deposit mix. Net interest margin in the three-month period ended March 31, 2015 increased to 4.56% from 4.41% in the three-month period ended March 31, 2014, mainly due to the yield on average earning assets increasing 11 basis points (bps).
Interest income increased 16.9% to $17.8 million in the three-month period ended March 31, 2015 from $15.2 million in the three-month period ended March 31, 2014, primarily due to higher average balances of and yields earned on interest-earning assets. In the three-month period ended March 31, 2015, average interest-earning assets increased to $1.384 million from $1.209 million in the three-month period ended March 31, 2014, mainly due to growth in our loan portfolio, which resulted from organic loan originations (partially offset by acquired loans rolling off). The average yield earned on interest-earning assets increased to 5.21% in the three-month period ended March 31, 2015 from 5.10% in the three-month period ended March 31, 2014, primarily due to a higher yield on loans. The yield on loans was enhanced by greater loan fees and partially offset by a lower effect of accretion income on acquired loans from First Community Bank of Southwest Florida in 2013. The yield on interest-earning assets also improved due to a lower share of cash investments as a percentage of average interest-earning assets. Average loans receivable as a percentage of average interest-earning assets increased from 86.2% in the three-month period ended March 31, 2014 to 87.3% in the three-month period ended March 31, 2015.
Interest expense increased 7.1% to $2.2 million in the three-month period ended March 31, 2015 from $2.0 million in the three-month period ended March 31, 2014, primarily due to an increase in the average balances of and rates paid on interest-bearing liabilities. In the three-month period ended March 31, 2015, average interest-bearing liabilities increased to $1.082 million from $1.037 million in the three-month period ended March 31, 2014, mainly due to longer term borrowings from the FHLB. In addition, the average rate paid on interest-bearing liabilities increased from 0.80% to 0.82%, primarily due to a higher rate on FHLB borrowings. Borrowing longer term from the FHLB was an asset/liability management decision to reduce exposure to increasing interest rates. Partially offsetting the increase in rates due to FHLB borrowings was a reduction in rates on interest-bearing deposits, mainly due to an improvement in the deposit mix. The cost of interest-bearing deposits decreased to 0.64% in the three-month period ended March 31, 2015 when compared to 0.68% in the three-month period ended March 31, 2014, due to a lower share of time deposits. In addition, average noninterest-bearing deposits increased by 43.0% to $301.1 million in the three-month period ended March 31, 2015 (representing 25.4% of total average deposits), from $210.5 million in the three-month period ended March 31, 2014 (representing 19.3% of total average deposits).
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The table below shows the average balances, income and expense, and yields and rates of each of our interest-earning assets and interest-bearing liabilities for the periods indicated:
Three-month period ended March 31, | ||||||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||||||
Average | Income/ | Yields/ | Average | Income/ | Yields/ | |||||||||||||||||||
Balances(1) | Expense | Rates | Balances(1) | Expense | Rates | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans receivable(2) | $ | 1,207,295 | $ | 17,564 | 5.90 | % | $ | 1,042,129 | $ | 14,985 | 5.83 | % | ||||||||||||
Securities available for sale and other securities | 250 | 3 | 4.56 | % | 260 | 28 | 43.94 | % | ||||||||||||||||
Federal funds sold and balances at Federal Reserve Bank | 166,413 | 97 | 0.24 | % | 158,256 | 88 | 0.23 | % | ||||||||||||||||
FHLB stock | 10,001 | 105 | 4.25 | % | 8,180 | 94 | 4.64 | % | ||||||||||||||||
Total interest-earning assets | 1,383,959 | 17,769 | 5.21 | % | 1,208,825 | 15,195 | 5.10 | % | ||||||||||||||||
Noninterest-earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 38,175 | 52,147 | ||||||||||||||||||||||
Other assets(3) | 154,285 | 118,684 | ||||||||||||||||||||||
Total noninterest-earning assets | 192,460 | 170,831 | ||||||||||||||||||||||
Total assets | $ | 1,576,419 | $ | 1,379,656 | ||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||
Time | $ | 290,695 | 784 | 1.09 | % | $ | 366,686 | 982 | 1.09 | % | ||||||||||||||
Money market | 409,553 | 445 | 0.44 | % | 333,069 | 349 | 0.43 | % | ||||||||||||||||
Negotiable order of withdrawal (NOW) | 145,943 | 136 | 0.38 | % | 144,897 | 138 | 0.39 | % | ||||||||||||||||
Savings | 38,788 | 21 | 0.22 | % | 38,000 | 21 | 0.22 | % | ||||||||||||||||
Total interest-bearing deposits | 884,979 | 1,386 | 0.64 | % | 882,652 | 1,490 | 0.68 | % | ||||||||||||||||
Other interest-bearing liabilities: | ||||||||||||||||||||||||
FHLB advances | 197,000 | 808 | 1.66 | % | 151,224 | 544 | 1.46 | % | ||||||||||||||||
Other borrowings | - | - | 0.00 | % | 3,000 | 15 | 1.97 | % | ||||||||||||||||
Total interest-bearing liabilities | 1,081,979 | 2,194 | 0.82 | % | 1,036,876 | 2,049 | 0.80 | % | ||||||||||||||||
Noninterest-bearing liabilities and stockholders’ equity: | ||||||||||||||||||||||||
Demand deposits | 301,097 | 210,523 | ||||||||||||||||||||||
Other liabilities | 4,289 | 4,728 | ||||||||||||||||||||||
Stockholders’ equity | 189,054 | 127,529 | ||||||||||||||||||||||
Total noninterest-bearing liabilities and stockholders’ equity | 494,440 | 342,780 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,576,419 | $ | 1,379,656 | ||||||||||||||||||||
Interest rate spread (taxable-equivalent basis) | 4.39 | % | 4.30 | % | ||||||||||||||||||||
Net interest income (taxable-equivalent basis) | $ | 15,575 | $ | 13,146 | ||||||||||||||||||||
Net interest margin (taxable-equivalent basis) | 4.56 | % | 4.41 | % | ||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 127.91 | % | 116.58 | % |
(1) | Calculated using daily averages. |
(2) | Average loans are gross, including nonaccrual loans and overdrafts (net of deferred loan fees and before the allowance for loan losses). Interest on loans includes net deferred fees and costs of $913 thousand and $399 thousand in the three-month periods ended March 31, 2015 and 2014, respectively. |
(3) | Other assets include bank-owned life insurance, tax lien certificates, OREO, fixed assets, interest receivable, prepaid expense and others. |
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Rate/Volume Analysis
The table below details the components of the changes in net interest income for the three-month period ended March 31, 2015 when compared to the three-month period ended March 31, 2014. For each major category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes due to average volumes and changes due to average rates, with the changes in both volumes and rates allocated to these two categories based on the proportionate absolute changes in each category.
Three-month period ended March 31, 2015 compared to three-month period ended March 31, 2014
Three-month period
ended March 31, 2015 Compared to Three- month period ended March 31, 2014 Due to Changes in | ||||||||||||
Average Volume | Average Rate | Net Increase (Decrease) | ||||||||||
(in thousands) | ||||||||||||
Interest income from earning assets: | ||||||||||||
Loans receivable(1) | $ | 2,401 | $ | 178 | $ | 2,579 | ||||||
Securities available for sale and other securities | (1 | ) | (24 | ) | (25 | ) | ||||||
Federal funds sold and balances at Federal Reserve Bank | 5 | 4 | 9 | |||||||||
FHLB stock | 19 | (8 | ) | 11 | ||||||||
Total interest income(2) | 2,424 | 150 | 2,574 | |||||||||
Interest expense from deposits and borrowings: | ||||||||||||
Time deposits | (205 | ) | 7 | (198 | ) | |||||||
Money market deposit accounts | 83 | 13 | 96 | |||||||||
NOW accounts | 1 | (3 | ) | (2 | ) | |||||||
Savings deposits | - | - | - | |||||||||
FHLB advances | 181 | 83 | 264 | |||||||||
Other borrowings | (8 | ) | (7 | ) | (15 | ) | ||||||
Total interest expense | 52 | 93 | 145 | |||||||||
Change in net interest income | $ | 2,372 | $ | 57 | $ | 2,429 |
(1) | Average loans are gross, including nonaccrual loans and overdrafts (net of deferred loan fees and before the allowance for loan losses). |
(2) | Interest on loans includes net deferred fees and costs of $913 thousand and $399 thousand in the three-month periods ended March 31, 2015 and 2014, respectively. |
The $2.6 million increase in interest income when comparing the three-month period ended March 31, 2015 to the three-month period ended March 31, 2014 was primarily due to changes in loan volumes and yields. Higher average loan balances and yields increased interest income $2.4 million and $178 thousand, respectively. The $145 thousand increase in interest expense when comparing the three-month period ended March 31, 2015 to the three-month period ended March 31, 2014 was primarily due to changes in volumes and rates of FHLB borrowings. Higher average balances and rates of FHLB borrowings increased interest expense $181 thousand and $83 thousand, respectively, for a total increase of $264 thousand. Partially offsetting the increase in interest expense due to FHLB borrowings was $104 thousand less in interest expense due to changes in interest-bearing deposit volumes and rates, which reflected an improvement in the deposit mix.
Provision for Loan Losses
The provision for loan losses is the amount of expense that, based on our judgment, is required to maintain the allowance for loan losses at an adequate level to absorb probable incurred losses in the loan portfolio at the balance sheet date and that, in management’s judgment, is appropriate under GAAP. The determination of the amount of the allowance is complex and involves a high degree of judgment and subjectivity.
30 |
Three-month period ended March 31, 2015 compared to three-month period ended March 31, 2014
Our provision for loan losses increased to $191 thousand for the three-month period ended March 31, 2015 from $36 thousand for the three-month period ended March 31, 2014. This amount was primarily driven by $450 thousand of allowance for new loans funded during the quarter, partially offset by $272 thousand net recoveries, combined with $30 thousand reduction in general reserves related to existing loans (primarily acquired loans as a result of credit quality improvements reflected in a net recovery position) and a $43 thousand increase in specific reserves for impaired and purchased credit impaired loans. Our provision for loan losses for the first quarter of 2014 was primarily driven by growth in originated loans during the period, mainly offset by net recoveries of $178 thousand.
Noninterest Income
Noninterest income includes gains on sales of securities, gains on sales of loans, service charges and fees, bargain purchase gain, gains on sales of other real estate owned, net, bank-owned life insurance, mortgage banking fees and other noninterest income.
Three-month period ended March 31, 2015 compared to three-month period ended March 31, 2014
Noninterest income decreased 21.5% to $1.6 million in the three-month period ended March 31, 2015 from $2.0 million in the three-month period ended March 31, 2014, primarily due to a $514 thousand decline in gains on sales of Small Business Administration (“SBA”) loans. The decrease in gains on sales of SBA loans was mainly a result of the lower volume of loans sold, which depends on multiple factors such as loan originations, mix between marketable and portfolio loans (depending on loan type, terms and market conditions) and funding timing for loans available to be sold. The decline in gains on sales of SBA loans was partially offset by increases in gains on sales of OREO ($71 thousand) and income from BOLI ($56 thousand). The higher gains on sales of OREO were due to our continued effort to sell properties and the higher income from BOLI was due to the additional $35.0 million investment completed in December 2014, the income from which was not fully reflected as the ramp-up investment period was still in process during the first quarter of 2015.
The following table sets forth the components of noninterest income for the periods indicated:
Three-month periods ended March 31, | ||||||||
2015 | 2014 | |||||||
(in thousands) | ||||||||
Gains on sales of securities | $ | - | $ | - | ||||
Gains on sales of loans | 230 | 744 | ||||||
Service charges and fees | 567 | 594 | ||||||
Bargain purchase gain | - | 41 | ||||||
Gains on sales of other real estate owned, net | 348 | 277 | ||||||
Bank-owned life insurance | 92 | 36 | ||||||
Mortgage banking fees | - | 43 | ||||||
Other noninterest income | 365 | 305 | ||||||
Total noninterest income | $ | 1,602 | $ | 2,040 |
Noninterest Expense
Noninterest expense includes primarily salaries and employee benefits, occupancy expense, network services and data processing, advertising and promotion, OREO expenses and professional fees, among others. We monitor the ratio of noninterest expense to the sum of net interest income plus noninterest income, which is commonly known as the efficiency ratio.
31 |
Three-month period ended March 31, 2015 compared to three-month period ended March 31, 2014
Noninterest expense increased 7.6% to $11.8 million in the three-month period ended March 31, 2015 from $11.0 million in the three-month period ended March 31, 2014, primarily due to a $750 thousand increase in salaries and employee benefits, a $233 thousand increase in network services and data processing, a $149 thousand increase in occupancy expense and a $116 thousand increase in furniture and equipment. The increase in salaries and employee benefits was primarily related to growth in our base of employees and provisions for incentive compensation booked in 2015 based on our anticipated growth. The increase in noninterest expense in each of the other categories related mainly to the increased scale of our operations, including three additional banking centers since the end of the first quarter of 2014. The increase in noninterest expense was partially offset by a $348 thousand reduction in OREO valuation allowance expense.
The following table sets forth the components of noninterest expense for the periods indicated:
Three-month periods ended March 31, | ||||||||
2015 | 2014 | |||||||
(in thousands) | ||||||||
Salaries and employee benefits | $ | 5,217 | $ | 4,467 | ||||
Occupancy expense | 1,212 | 1,063 | ||||||
Furniture and equipment | 756 | 640 | ||||||
Regulatory assessments | 361 | 350 | ||||||
Network services and data processing | 1,084 | 851 | ||||||
Printing and office supplies | 58 | 105 | ||||||
Postage and delivery | 84 | 55 | ||||||
Advertising and promotion | 826 | 883 | ||||||
Other real estate owned related expense | 593 | 620 | ||||||
Other real estate owned-valuation allowance expense | 31 | 379 | ||||||
Amortization of intangible assets | 83 | 154 | ||||||
Professional fees | 698 | 596 | ||||||
Loan collection expenses | 84 | 148 | ||||||
Other noninterest expense | 748 | 686 | ||||||
Total noninterest expense | $ | 11,835 | $ | 10,997 |
In the three-month periods ended March 31, 2015 and March 31, 2014, our efficiency ratio was 68.9% and 72.4%, respectively. We also closely track average assets per employee and annualized revenue per employee, as measures of efficiency. Average assets per employee were $6.5 million in the three-month period ended March 31, 2015 as compared to $6.4 million in the three-month period ended March 31, 2014, and annualized revenue per employee was $326 thousand in the three-month period ended March 31, 2015 as compared to $322 thousand in the three-month period ended March 31, 2014, which reflected our efforts to achieve productivity gains as we grow our balance sheet. We had 244 full-time employees at March 31, 2015 and 215 at March 31, 2014.
Income Taxes
The provision for income taxes includes federal and state income taxes. Fluctuations in effective tax rates reflect the effect of the differences in the inclusion or deductibility of certain income and expenses, respectively, for income tax purposes. Our future effective income tax rate will fluctuate based on the mix of taxable and tax-free investments we make and our overall level of taxable income.
Three-month period ended March 31, 2015 compared to three-month period ended March 31, 2014
In the three-month period ended March 31, 2015, we recorded income tax expense of $2.0 million (an effective income tax rate of 38.4%), compared to income tax expense of $1.6 million (an effective income tax rate of 39.2%) in the three-month period ended March 31, 2014. The increase in income tax expense was due primarily to our greater income before taxes, while the lower effective income tax rate was due mainly to our projected effective income tax rate, which incorporates the effect of the nontaxable BOLI investment funded in December 2014.
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Net Income
We evaluate our net income using the common industry ratio, ROAA, which is equal to net income for the period annualized, divided by the daily average of total assets for the period. We also use ROAE, which is equal to net income for the period annualized, divided by the daily average of total stockholders’ equity for the period.
Three-month period ended March 31, 2015 compared to three-month period ended March 31, 2014
In the three-month period ended March 31, 2015, our net income of $3.2 million, or $0.20 basic and diluted net income per common share, represented an ROAA of 0.82% and an ROAE of 6.81%. Our average equity-to-assets ratio (average equity divided by average total assets) in the three-month period ended March 31, 2015 was 11.99%. In comparison, in the three-month period ended March 31, 2014, our net income of $2.5 million, or $0.20 basic and diluted net income per common share, represented an ROAA of 0.74% and an ROAE of 8.03%. Our average equity-to-assets ratio in the three-month period ended March 31, 2014 was 9.24%.
Financial Condition
Our assets totaled $1.597 billion and $1.537 billion at March 31, 2015 and December 31, 2014, respectively. Loans receivable, net, as of March 31, 2015 and December 31, 2014 were $1.246 billion and $1.179 billion, respectively. Total deposits were $1.2 billion and $1.168 billion as of March 31, 2015 and December 31, 2014, respectively. Total liabilities, consisting of deposits, FHLB advances and other liabilities totaled $1.407 billion and $1.350 billion as of March 31, 2015 and December 31, 2014, respectively. The increases in total assets, loans receivable, net, deposits and liabilities in 2015 were primarily due to organic growth.
Stockholders’ equity was $189.8 million and $186.6 million as of March 31, 2015 and December 31, 2014. The increase in stockholders’ equity was due to $3.2 million of net income earned during the three-month period ended March 31, 2015.
Loans
Our loan portfolio is our primary earning asset. Our strategy is to grow the loan portfolio by originating commercial and consumer loans that we believe to be of high quality, that comply with our credit policies and that produce revenues consistent with our financial objectives. We originate SBA loans which may be sold on the secondary market depending on loan terms and market conditions.
Loans by Class
The following table sets forth the carrying amounts of our loan portfolio by class as of the dates indicated:
As of March 31, 2015 | As of December 31, 2014 | |||||||||||||||
Amount | % of Total | Amount | % of Total | |||||||||||||
(in thousands, except %) | ||||||||||||||||
Real estate: | ||||||||||||||||
Residential | $ | 229,011 | 18.2 | $ | 224,416 | 18.9 | ||||||||||
Commercial | 758,151 | 60.4 | 723,577 | 60.9 | ||||||||||||
Construction | 111,127 | 8.8 | 107,436 | 9.0 | ||||||||||||
Total real estate | 1,098,289 | 87.4 | 1,055,429 | 88.8 | ||||||||||||
Commercial | 72,387 | 5.8 | 75,360 | 6.3 | ||||||||||||
Consumer | 85,930 | 6.8 | 57,733 | 4.9 | ||||||||||||
Total loans | 1,256,606 | 100.0 | 1,188,522 | 100.0 | ||||||||||||
Less: | ||||||||||||||||
Net deferred loan fees | (4,881 | ) | (4,142 | ) | ||||||||||||
Allowance for loan losses | (5,787 | ) | (5,324 | ) | ||||||||||||
Loans receivable, net | $ | 1,245,938 | $ | 1,179,056 |
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As of March 31, 2015 and December 31, 2014, 87.4% and 88.8%, respectively, of the total loan portfolio was collateralized by commercial and residential real estate mortgages.
Loan Maturity and Sensitivities
The following tables show the contractual maturities of our loan portfolio at the dates indicated. Loans with scheduled maturities are reported in the maturity category in which the payment is due. Demand loans with no stated maturity and overdrafts are reported in the “due in 1 year or less” category. Loans that have adjustable rates are shown as amortizing to final maturity rather than when the interest rates are next subject to change. The tables do not include prepayment or scheduled principal repayments.
Due in 1 Year or Less | Due in 1 to 5 Years | Due After 5 Years | Total | |||||||||||||
(in thousands) | ||||||||||||||||
As of March 31, 2015 | ||||||||||||||||
Real estate: | ||||||||||||||||
Residential | $ | 22,350 | $ | 76,752 | $ | 129,909 | $ | 229,011 | ||||||||
Commercial | 82,977 | 366,473 | 308,701 | 758,151 | ||||||||||||
Construction | 30,950 | 55,707 | 24,470 | 111,127 | ||||||||||||
Total real estate | 136,277 | 498,932 | 463,080 | 1,098,289 | ||||||||||||
Commercial | 18,683 | 30,365 | 23,339 | 72,387 | ||||||||||||
Consumer | 2,953 | 75,677 | 7,300 | 85,930 | ||||||||||||
Total loans | $ | 157,913 | $ | 604,974 | $ | 493,719 | $ | 1,256,606 |
Due in 1 Year or Less | Due in 1 to 5 Years | Due After 5 Years | Total | |||||||||||||
(in thousands) | ||||||||||||||||
As of December 31, 2014 | ||||||||||||||||
Real estate: | ||||||||||||||||
Residential | $ | 21,030 | $ | 76,262 | $ | 127,124 | $ | 224,416 | ||||||||
Commercial | 91,071 | 368,497 | 264,009 | 723,577 | ||||||||||||
Construction | 22,140 | 51,022 | 34,274 | 107,436 | ||||||||||||
Total real estate | 134,241 | 495,781 | 425,407 | 1,055,429 | ||||||||||||
Commercial | 20,325 | 32,425 | 22,610 | 75,360 | ||||||||||||
Consumer | 1,279 | 42,108 | 14,346 | 57,733 | ||||||||||||
Total loans | $ | 155,845 | $ | 570,314 | $ | 462,363 | $ | 1,188,522 |
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The following tables present the sensitivities to changes in interest rates of our portfolio at the dates indicated:
Fixed Interest Rate | Variable Interest Rate | Total | ||||||||||
(in thousands) | ||||||||||||
As of March 31, 2015 | ||||||||||||
Real estate: | ||||||||||||
Residential | $ | 65,893 | $ | 163,118 | $ | 229,011 | ||||||
Commercial | 303,106 | 455,045 | 758,151 | |||||||||
Construction | 36,131 | 74,996 | 111,127 | |||||||||
Total real estate | 405,130 | 693,159 | 1,098,289 | |||||||||
Commercial | 35,965 | 36,422 | 72,387 | |||||||||
Consumer | 38,570 | 47,360 | 85,930 | |||||||||
Total loans | $ | 479,665 | $ | 776,941 | $ | 1,256,606 | ||||||
As of December 31, 2014 | ||||||||||||
Real estate: | ||||||||||||
Residential | $ | 63,395 | $ | 161,021 | $ | 224,416 | ||||||
Commercial | 306,928 | 416,649 | 723,577 | |||||||||
Construction | 31,569 | 75,867 | 107,436 | |||||||||
Total real estate | 401,892 | 653,537 | 1,055,429 | |||||||||
Commercial | 37,312 | 38,048 | 75,360 | |||||||||
Consumer | 10,522 | 47,211 | 57,733 | |||||||||
Total loans | $ | 449,726 | $ | 738,796 | $ | 1,188,522 |
As part of our asset/liability management strategy, we rarely offer fixed-rate loans with maturity above five years. As of March 31, 2015, less than 3.0% of our total loans (and 1.5% of the loans in our originated loan portfolio) are fixed-rate with a maturity over 5 years. As of March 31, 2015, 61.8% of our total loans (and 58.6% of the loans in our originated loan portfolio) is made up of variable-rate loans. The fixed-rate portion of our originated portfolio has a weighted average time to maturity of 2.9 years. The following table presents the contractual maturities of our loan portfolio at the dates indicated, segregated into fixed and variable interest rate loans as of March 31, 2015:
Fixed Interest Rate | Variable Interest Rate | Total | ||||||||||
(in thousands) | ||||||||||||
As of March 31, 2015 | ||||||||||||
Maturity | ||||||||||||
One year or less | $ | 66,081 | $ | 91,832 | $ | 157,913 | ||||||
One to five years | 382,279 | 222,695 | 604,974 | |||||||||
More than five years | 31,305 | 462,414 | 493,719 | |||||||||
Total loans | $ | 479,665 | $ | 776,941 | $ | 1,256,606 |
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Loan Growth
We monitor new loan production by loan type, borrower type, market and profitability. Our operating strategy focuses on growing assets by originating commercial and consumer loans that we believe to be of high quality. For the three-month period ended March 31, 2015, we originated a total of $176.4 million of new loans, including $135.2 million of real estate loans ($10.9 million, $52.6 million and $71.7 million of which were residential, commercial and construction real estate loans, respectively), $11.8 million of commercial loans, and $29.4 million of consumer loans. As of March 31, 2015, the average loan size in our originated portfolio was $951 thousand. For the three-month period ended March 31, 2014, we originated a total of $44.6 million of new loans, including $41.0 million of real estate loans ($5.5 million, $15.2 million and $20.3 million of which were residential, commercial and construction real estate loans, respectively), $3.5 million of commercial loans, and $0.1 million of consumer loans.
Three-month period ended March 31, 2015 | Three-month period ended March 31, 2014 | |||||||||||||||
Amount | % of Total | Amount | % of Total | |||||||||||||
(in thousands, except %) | ||||||||||||||||
New loan originations | ||||||||||||||||
Real estate: | ||||||||||||||||
Residential | $ | 10,858 | 6.2 | $ | 5,501 | 12.3 | ||||||||||
Commercial | 52,592 | 29.8 | 15,195 | 34.1 | ||||||||||||
Construction | 71,734 | 40.6 | 20,300 | 45.5 | ||||||||||||
Total real estate | 135,184 | 76.6 | 40,996 | 91.9 | ||||||||||||
Commercial | 11,757 | 6.7 | 3,524 | 7.9 | ||||||||||||
Consumer | 29,415 | 16.7 | 91 | 0.2 | ||||||||||||
Total loans | $ | 176,356 | 100.0 | $ | 44,611 | 100.0 |
The total loan origination amount in the three-month period ended March 31, 2015 reflected strong organic growth across our markets.
In addition to growing organically, our acquisition strategy, which has focused on acquiring banks in Florida regional markets, has resulted in an increase in the number and balance of loans outstanding after each transaction. Subsequently, these balances decline as these loans mature and are paid down. These acquired loans were recorded at their fair value, such that there was no carryover of the allowance for loan losses. As of March 31, 2015 and December 31, 2014, the breakdown of our portfolio by originating bank was as follows:
As of March 31, 2015 | ||||||||
Amount | % of Total | |||||||
(in thousands, except %) | ||||||||
Originating Bank | ||||||||
C1 Bank | $ | 925,511 | 73.7 | |||||
Community Bank of Manatee | 61,581 | 4.9 | ||||||
First Community Bank of America | 129,367 | 10.3 | ||||||
The Palm Bank | 23,026 | 1.8 | ||||||
First Community Bank of Southwest Florida | 117,121 | 9.3 | ||||||
Total loans | $ | 1,256,606 | 100.0 |
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As of December 31, 2014 | ||||||||
Amount | % of Total | |||||||
(in thousands, except %) | ||||||||
Originating Bank | ||||||||
C1 Bank | $ | 840,275 | 70.7 | |||||
Community Bank of Manatee | 64,121 | 5.4 | ||||||
First Community Bank of America | 136,476 | 11.5 | ||||||
The Palm Bank | 24,073 | 2.0 | ||||||
First Community Bank of Southwest Florida | 123,577 | 10.4 | ||||||
Total loans | $ | 1,188,522 | 100.0 |
Asset Quality
In order to operate with a sound risk profile, we have focused on originating loans we believe to be of high quality and disposing of nonperforming assets as rapidly as possible.
For certain acquired loans, there was evidence at acquisition of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The unpaid principal balance and carrying amount of these purchased credit impaired loans at March 31, 2015 and December 31, 2014 were as follows:
March 31, 2015 | December 31, 2014 | |||||||
(in thousands) | ||||||||
Unpaid principal balance | $ | 39,122 | $ | 38,831 | ||||
Carrying amount, net of allowance of $53 and $92 | 28,060 | 28,081 |
Accretable yield, or income expected to be collected was $2.3 million and $2.4 million at March 31, 2015 and December 31, 2014, respectively.
Foreign Outstandings
We have made commercial loans to three Brazilian corporations, which at March 31, 2015 and December 31, 2014 exceeded 1% of our total assets. These loans to the three Brazilian borrowers are secured by collateral outside of the U.S., and had aggregate outstanding balances at March 31, 2015 and December 31, 2014, of $42.4 million and $44.0 million, representing 2.7% and 2.9% of our total assets, respectively. Loans to foreign borrowers are made in accordance with our credit policy and procedures. The responsible loan officer follows up frequently with these borrowers to ensure proper loan servicing, including annual site visits that are conducted to inspect operations and collateral. Two of the loans are secured by a first lien on farmland appraised during 2014 at $56.4 million, of which we are entitled to 50.9%, as the collateral is shared on a first lien basis with another bank. Another loan is secured by a first lien on farmland appraised during 2015 at $49.2 million and the final loan is secured by closely held stock. These three borrowers are not affiliates of our controlling stockholders and the loans were not made in consideration of our relationship with our controlling stockholders. We are not actively seeking additional loans with collateral in Brazil.
Nonperforming Assets
Our nonperforming loans consist of loans that are on nonaccrual status, including nonperforming troubled debt restructurings. Loans graded as substandard but still accruing, which may include loans restructured as troubled debt restructurings, are considered impaired and classified substandard. Troubled debt restructurings include loans on which we have granted a concession on the interest rate or original repayment terms due to financial difficulties of the borrower.
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We generally place loans on nonaccrual status when they become 90 days or more past due, unless they are well secured and in the process of collection. We also place loans on nonaccrual status if they are less than 90 days past due if the collection of principal or interest is in doubt. When a loan is placed on nonaccrual status, any interest previously accrued but not collected, is reversed from income. The interest on these loans is accounted for on the cash-basis or cost-recovery method until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. As of March 31, 2015 and December 31, 2014, there were $19.7 million and $20.9 million, respectively, in nonperforming loans. If such nonperforming loans would have been current during the three-month period ended March 31, 2015, the year ended December 31, 2014 and the three-month period ended March 31, 2014, we would have recorded an additional $268 thousand, $1.1 million and $262 thousand of interest income, respectively. No interest income from nonperforming loans was recognized for the three-month period ended March 31, 2015, the year ended December 31, 2014 and the three-month period ended March 31, 2014.
As of March 31, 2015 and December 31, 2014, we had no accruing loans that were contractually past due 90 days or more as to principal and interest, and as of both of these dates, we had two troubled debt restructurings totaling $900 thousand and $906 thousand, respectively.
Accounting standards require the Bank to identify loans, where full repayment of principal and interest is doubtful, as impaired loans. These standards require that impaired loans be valued at the present value of expected future cash flows, discounted at the loan’s effective interest rate, or using one of the following methods: the observable market price of the loan or the fair value of the underlying collateral if the loan is collateral dependent. We have implemented these standards in our monthly review of the adequacy of the allowance for loan losses, and identify and value impaired loans in accordance with guidance on these standards. As part of the review process, the Bank also identifies loans classified as special mention, which have a potential weakness that deserves management’s close attention. In our loan review process, we seek to identify and address classified and nonperforming loans as early as possible.
Loans totaling $27.2 million were classified substandard under the Bank’s policy at March 31, 2015, while loans totaling $28.3 were classified substandard under the Bank’s policy at December 31, 2014. The decrease in March 31, 2015 when compared to December 31, 2014 was mainly due to the work out of substandard loans as the Bank focuses its efforts in resolving nonperforming assets through foreclosure. The following tables set forth information related to the credit quality of our loan portfolio at March 31, 2015 and December 31, 2014:
Pass | Special Mention | Substandard | Total | |||||||||||||
(in thousands) | ||||||||||||||||
As of March 31, 2015 | ||||||||||||||||
Real estate: | ||||||||||||||||
Residential | $ | 220,821 | $ | 2,199 | $ | 5,991 | $ | 229,011 | ||||||||
Commercial | 725,633 | 13,969 | 18,549 | 758,151 | ||||||||||||
Construction | 108,869 | 1,342 | 916 | 111,127 | ||||||||||||
Total real estate | 1,055,323 | 17,510 | 25,456 | 1,098,289 | ||||||||||||
Commercial | 70,444 | 304 | 1,639 | 72,387 | ||||||||||||
Consumer | 85,799 | 55 | 76 | 85,930 | ||||||||||||
Total loans | $ | 1,211,566 | $ | 17,869 | $ | 27,171 | $ | 1,256,606 |
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Pass | Special Mention | Substandard | Total | |||||||||||||
(in thousands) | ||||||||||||||||
As of December 31, 2014 | ||||||||||||||||
Real estate: | ||||||||||||||||
Residential | $ | 215,998 | $ | 2,405 | $ | 6,013 | $ | 224,416 | ||||||||
Commercial | 686,197 | 17,960 | 19,420 | 723,577 | ||||||||||||
Construction | 105,027 | 1,357 | 1,052 | 107,436 | ||||||||||||
Total real estate | 1,007,222 | 21,722 | 26,485 | 1,055,429 | ||||||||||||
Commercial | 73,321 | 311 | 1,728 | 75,360 | ||||||||||||
Consumer | 57,568 | 61 | 104 | 57,733 | ||||||||||||
Total loans | $ | 1,138,111 | $ | 22,094 | $ | 28,317 | $ | 1,188,522 |
Real estate we have acquired through bank acquisitions or as a result of foreclosure is classified as OREO until sold. Our policy is to initially record OREO at fair value less estimated costs to sell at the date of foreclosure. After foreclosure, other real estate is carried at the lower of the initial carrying amount (fair value less estimated costs to sell or lease), or at the value determined by subsequent appraisals of the other real estate. Subsequent decreases in value are booked as other real estate owned—valuation allowance expense in the income statement. We held $30.3 million of OREO as of March 31, 2015, a decline of $4.6 million from the $34.9 million as of December 31, 2014, mainly due to sales. Our ratio of total nonperforming assets to total assets improved to 3.13% at March 31, 2015 from 3.63% at December 31, 2014, primarily due to the decline in OREO.
The following table sets forth certain information on nonperforming loans and OREO, the ratio of such loans and OREO to total assets as of the dates indicated, and certain other related information.
As of | ||||||||
March 31, 2015 | December 31, 2014 | |||||||
Total nonperforming loans | $ | 19,704 | $ | 20,894 | ||||
OREO | 30,321 | 34,916 | ||||||
Total nonperforming loans as a percentage of total loans | 1.57 | % | 1.76 | % | ||||
Total nonperforming assets as a percentage of total assets | 3.13 | % | 3.63 | % | ||||
Total accruing loans over 90 days delinquent as a percentage of total assets | 0.00 | % | 0.00 | % | ||||
Loans restructured as troubled debt restructurings | 900 | 906 | ||||||
Troubled debt restructurings as a percentage of total loans | 0.07 | % | 0.08 | % |
Allowance for Loan Losses
The provision for loan losses is the amount of expense that, based on our judgment, is required to maintain the allowance for loan losses at an adequate level to absorb probable incurred losses in the loan portfolio at the balance sheet date and that, in management’s judgment, is appropriate under GAAP. The determination of the amount of the allowance is complex and involves a high degree of judgment and subjectivity. Among the material estimates required to establish the allowance are loss exposure at default, the amount and timing of future cash flows on impacted loans, value of collateral, and determination of the loss factors to be applied to the various elements of the portfolio.
Our allowance for loan losses consists of two components. The first component is allocated to individually evaluated loans found to be impaired and is calculated in accordance with ASC 310. The second component is allocated to all other loans that are not individually identified as impaired pursuant to ASC 450 (“nonimpaired loans”). This component is calculated for all nonimpaired loans on a collective basis in accordance with ASC 450. For additional discussion on our calculation of allowance for loan losses, see “—Critical Accounting Policies and Estimates—Allowance for Loan Losses”.
39 |
The nonperforming loans related to acquired banks were marked to market and recorded at fair value at acquisition with no carryover of the allowance for loan losses. Therefore, our allowance for loan losses mainly reflects the general component allowance for performing loans originated by C1 Bank.
Our allowance for loan losses was allocated as follows as of the dates indicated in the table below:
As of | ||||||||||||||||
March 31, 2015 | December 31, 2014 | |||||||||||||||
Amount | % of Loans to Total Loans | Amount | % of Loans to Total Loans | |||||||||||||
Real estate: | ||||||||||||||||
Residential | $ | 930 | 18.2 | $ | 820 | 18.9 | ||||||||||
Commercial | 3,478 | 60.4 | 3,423 | 60.9 | ||||||||||||
Construction | 479 | 8.8 | 416 | 9.0 | ||||||||||||
Total real estate | 4,887 | 87.4 | 4,659 | 88.8 | ||||||||||||
Commercial | 430 | 5.8 | 373 | 6.3 | ||||||||||||
Consumer | 470 | 6.8 | 292 | 4.9 | ||||||||||||
Total allowance for loan losses | $ | 5,787 | 100.0 | $ | 5,324 | 100.0 |
The following table sets forth certain information with respect to activity in our allowance for loan losses during the periods indicated:
Three-month period ended | ||||||||
March 31, | ||||||||
2015 | 2014 | |||||||
Allowance for loan losses at beginning of period | $ | 5,324 | $ | 3,412 | ||||
Charge-offs: | ||||||||
Residential real estate | - | - | ||||||
Commercial real estate | (1 | ) | (157 | ) | ||||
Construction | - | - | ||||||
Commercial | - | (9 | ) | |||||
Consumer | (3 | ) | (2 | ) | ||||
Total charge-offs | (4 | ) | (168 | ) | ||||
Recoveries: | ||||||||
Residential real estate | 69 | 160 | ||||||
Commercial real estate | 112 | 89 | ||||||
Construction | 23 | 83 | ||||||
Commercial | 33 | 13 | ||||||
Consumer | 39 | 1 | ||||||
Total recoveries | 276 | 346 | ||||||
Net recoveries | 272 | 178 | ||||||
Provision for loan losses | 191 | 36 | ||||||
Allowance for loan losses at end of period | $ | 5,787 | $ | 3,626 | ||||
Ratio of annualized net recoveries during the period to average loans outstanding during the period | (0.09 | )% | (0.07 | )% | ||||
Allowance for loan losses as a percentage of total loans at end of period | 0.46 | 0.35 | ||||||
Allowance for loan losses as a percentage of nonperforming loans | 29.37 | 16.71 |
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As a result of our acquisition strategy, we acquired the right to seek deficiency judgments resulting from defaulted loans from our acquired banks (including loans that defaulted before the acquisitions). We have actively pursued recovery of these deficiency amounts. This strategy has resulted in recoveries of $276 thousand and $346 thousand in the three-month periods ended March 31, 2015 and March 31, 2014, respectively.
Deposits
We monitor deposit growth by account type, market and rate. We seek to fund asset growth primarily with low-cost customer deposits in order to maintain a stable liquidity profile and net interest margin. Total deposits as of March 31, 2015 and December 31, 2014 were $1.2 billion and $1.168 billion, respectively. Our growth in deposits during the first quarter of 2015 was due primarily to our organic growth efforts by our banking centers and marketing team to expand our client reach.
The following table sets forth the distribution by type of our deposit accounts for the dates indicated.
As of | ||||||||||||||||
March 31, 2015 | December 31, 2014 | |||||||||||||||
Amount | % of Total Deposits | Amount | % of Total Deposits | |||||||||||||
(in thousands, except %) | ||||||||||||||||
Deposit Type | ||||||||||||||||
Noninterest-bearing demand | $ | 318,510 | 26.5 | $ | 278,543 | 23.9 | ||||||||||
Interest-bearing demand/NOW | 146,873 | 12.2 | 140,598 | 12.0 | ||||||||||||
Money market and savings | 460,933 | 38.5 | 435,105 | 37.3 | ||||||||||||
Time | 273,512 | 22.8 | 313,256 | 26.8 | ||||||||||||
Total deposits | $ | 1,199,828 | 100.0 | $ | 1,167,502 | 100.0 | ||||||||||
Time Deposits | ||||||||||||||||
0.00 - 0.50% | $ | 30,393 | 11.1 | $ | 25,294 | 8.1 | ||||||||||
0.51 - 1.00% | 56,848 | 20.8 | 77,480 | 24.7 | ||||||||||||
1.01 - 1.50% | 138,918 | 50.7 | 160,808 | 51.3 | ||||||||||||
1.51 - 2.00% | 26,972 | 9.9 | 27,813 | 8.9 | ||||||||||||
2.01 - 2.50% | 11,127 | 4.1 | 11,160 | 3.6 | ||||||||||||
Above 2.50% | 9,254 | 3.4 | 10,701 | 3.4 | ||||||||||||
Total time deposits | $ | 273,512 | 100.0 | $ | 313,256 | 100.0 |
The following tables set forth our time deposits segmented by months to maturity and deposit amount:
41 |
As of March 31, 2015 | ||||||||||||
Time Deposits of $100 and Greater | Time Deposits of Less Than $100 | Total | ||||||||||
(dollars in thousands) | ||||||||||||
Months to maturity: | ||||||||||||
Three or less | $ | 33,680 | $ | 21,426 | $ | 55,106 | ||||||
Over Three to Six | 6,775 | 12,508 | 19,283 | |||||||||
Over Six to Twelve | 21,174 | 22,514 | 43,688 | |||||||||
Over Twelve | 80,135 | 75,300 | 155,435 | |||||||||
Total | $ | 141,764 | $ | 131,748 | $ | 273,512 |
As of December 31, 2014 | ||||||||||||
Time Deposits of $100 and Greater | Time Deposits of Less Than $100 | Total | ||||||||||
(dollars in thousands) | ||||||||||||
Months to maturity: | ||||||||||||
Three or less | $ | 48,262 | $ | 22,535 | $ | 70,797 | ||||||
Over Three to Six | 33,493 | 21,831 | 55,324 | |||||||||
Over Six to Twelve | 22,783 | 25,137 | 47,920 | |||||||||
Over Twelve | 79,180 | 60,035 | 139,215 | |||||||||
Total | $ | 183,718 | $ | 129,538 | $ | 313,256 |
As of March 31, 2015 and December 31, 2014, we had brokered deposits of $36.0 million and $17.0 million, respectively.
Investment Securities
We did not carry any balance of investment securities as of March 31, 2015 and December 31, 2014 due to our decision to sell the entirety of our securities available for sale portfolio in 2013. This decision was based on our assessment that improving economic conditions could begin to put upward pressure on interest rates, which prompted us to redeploy these assets into loans.
Borrowings
Deposits are the primary source of funds for our lending activities and general business purposes; however, we may obtain advances from the FHLB, purchase federal funds, and engage in overnight borrowing from the Federal Reserve, correspondent banks, or enter into client purchase agreements. We also use these sources of funds as part of our asset/liability management process to control our long-term interest rate risk exposure, even if it may increase our short-term cost of funds. This may include match funding of fixed-rate loans. Our level of short-term borrowings can fluctuate on a daily basis depending on funding needs and the source of funds to satisfy the needs. As of March 31, 2015, we had $202.5 million outstanding in advances from the FHLB with the following average rates and maturities:
42 |
As of March 31, 2015 | ||||||||||||||
Amount | % of total | Average rate (%) | ||||||||||||
Maturity year: | ||||||||||||||
2015 | $ | 18,500 | 9.1 | 1.14 | % | |||||||||
2016 | 32,000 | 15.8 | 1.66 | % | ||||||||||
2017 | 12,000 | 5.9 | 2.13 | % | ||||||||||
2018 | 45,000 | 22.2 | 1.52 | % | ||||||||||
2019 | 45,000 | 22.2 | 1.98 | % | ||||||||||
2020 | 40,000 | 19.9 | 1.85 | % | ||||||||||
2023 | 10,000 | 4.9 | 2.70 | % | ||||||||||
Total | $ | 202,500 | 100.0 | 1.77 | % |
Bank-Owned Life Insurance
As of March 31, 2015 and December 31, 2014, we maintained investments in bank-owned life insurance of $44.0 million and $43.9 million, respectively, $35.0 million of which was purchased during December 2014. The purchase allowed us to deploy excess cash, will enhance noninterest income once fully invested and offset the rising costs of employee benefits. Included in the balance at March 31, 2015 and December 31, 2014 was $9.0 million and $8.9 million, respectively, relating to policies on former officers of an acquired bank.
Liquidity and Capital Resources
Liquidity Management
We are expected to maintain adequate liquidity at the Bank. Liquidity refers to our ability to maintain cash flow that is adequate to fund operations and meet present and future financial obligations through either the sale or maturity of existing assets or by obtaining additional funding through liability management. We manage liquidity based upon policy limits set by the board of directors and cash flow modeling. To maintain adequate liquidity, we also monitor indicators of potential liquidity risk, utilize cash flow projection models to forecast liquidity needs, model liquidity stress scenarios and develop contingency plans, and identify alternative back-up sources of liquidity. The liquidity reserve may consist of cash on hand, cash on demand in deposits with correspondent banks, cash equivalents such as federal funds sold, United States securities or securities guaranteed by the United States, and other investments. In addition, we have a fed funds line of $25 million with our correspondent bank and available borrowing capacity with the FHLB of $384 million based on our collateral position. We believe that the sources of available liquidity are adequate to meet all reasonably immediate short-term and intermediate-term demands.
As of March 31, 2015, we held cash equal to 15.0% of total deposits and borrowings due in less than 12 months, which represented approximately $50 million of liquidity in excess of our target of 10.0%.
We intend to use our current excess liquidity and capital for general corporate purposes, including loan growth as well as opportunistic acquisitions.
Capital Management
We manage capital to comply with our internal planning targets and regulatory capital standards. We review capital levels on a monthly basis. We evaluate a number of capital ratios, including regulatory capital ratios required by the federal banking agencies such as Tier 1 capital to risk-weighted assets and Tier 1 capital to average total adjusted assets (the leverage ratio).
43 |
As of March 31, 2015 and December 31, 2014, we had an equity-to-assets ratio of 11.89% and 12.15%, respectively. As of March 31, 2015 and December 31, 2014, we had a Tier 1 capital to risk-weighted assets ratio of 13.59% and 14.33%, respectively, and a Tier 1 leverage ratio of 12.01% and 11.95%, respectively. The regulatory capital ratios as of March 31, 2015 were calculated under Interim Final Basel III rules and the regulatory capital ratios as of December 31, 2014 were calculated under Basel I rules. There is no threshold for well-capitalized status for bank holding companies.
As of March 31, 2015 and December 31, 2014, the regulatory capital ratios of the Company and Bank exceeded the required minimums, as seen in the table below:
Actual | Required for Capital Adequacy Purposes | Well Capitalized Under Prompt Corrective Action Provision | ||||||||||||||||||||||||
Amount | Ratio (%) | Amount | Ratio (%) | Amount | Ratio (%) | |||||||||||||||||||||
(in thousands, except %) | ||||||||||||||||||||||||||
March 31, 2015 | ||||||||||||||||||||||||||
Total capital to risk-weighted assets | ||||||||||||||||||||||||||
C1 Financial, Inc. | $ | 194,932 | 14.01 | % | $ | 111,345 | 8.00 | % | $ | N/A | N/A | |||||||||||||||
C1 Bank | 194,239 | 13.96 | % | 111,337 | 8.00 | % | 139,171 | 10.00 | % | |||||||||||||||||
Tier 1 capital to risk-weighted assets | ||||||||||||||||||||||||||
C1 Financial, Inc. | 189,145 | 13.59 | % | 83,509 | 6.00 | % | N/A | N/A | ||||||||||||||||||
C1 Bank | 188,452 | 13.54 | % | 83,503 | 6.00 | % | 111,337 | 8.00 | % | |||||||||||||||||
Common equity tier 1 capital to risk-weighted assets | ||||||||||||||||||||||||||
C1 Financial, Inc. | 189,145 | 13.59 | % | 62,632 | 4.50 | % | N/A | N/A | ||||||||||||||||||
C1 Bank | 188,452 | 13.54 | % | 62,627 | 4.50 | % | 90,461 | 6.50 | % | |||||||||||||||||
Tier 1 leverage ratio | ||||||||||||||||||||||||||
C1 Financial, Inc. | 189,145 | 12.01 | % | 63,021 | 4.00 | % | N/A | N/A | ||||||||||||||||||
C1 Bank | 188,452 | 11.96 | % | 63,016 | 4.00 | % | 78,771 | 5.00 | % | |||||||||||||||||
December 31, 2014 | ||||||||||||||||||||||||||
Total capital to risk-weighted assets | ||||||||||||||||||||||||||
C1 Financial, Inc. | $ | 190,712 | 14.74 | % | $ | 103,532 | 8.00 | % | $ | N/A | N/A | |||||||||||||||
C1 Bank | 190,019 | 14.68 | % | 103,523 | 8.00 | % | 129,404 | 10.00 | % | |||||||||||||||||
Tier 1 capital to risk-weighted assets | ||||||||||||||||||||||||||
C1 Financial, Inc. | 185,388 | 14.33 | % | 51,766 | 4.00 | % | N/A | N/A | ||||||||||||||||||
C1 Bank | 184,695 | 14.27 | % | 51,762 | 4.00 | % | 77,642 | 6.00 | % | |||||||||||||||||
Tier 1 leverage ratio | ||||||||||||||||||||||||||
C1 Financial, Inc. | 185,388 | 11.95 | % | 62,049 | 4.00 | % | N/A | N/A | ||||||||||||||||||
C1 Bank | 184,695 | 11.91 | % | 62,045 | 4.00 | % | 77,556 | 5.00 | % |
We have performed a preliminary assessment using the regulatory capital estimation tool made available by the FDIC and believe the Company is prepared to meet the new requirements after full adoption of the Basel III Notice of Proposed Rulemaking.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements and contractual obligations at March 31, 2015 and December 31, 2014 are summarized in the table that follows:
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Amount of Commitment Expiration Per Period as of March 31, 2015 | ||||||||||||||||||||
Total Amounts Committed | 1 Year or Less | Over 1 Through 3 Years | Over 3 Through 5 Years | Over 5 Years | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Unused lines of credit | $ | 54,285 | $ | 10,459 | $ | 18,716 | $ | 7,772 | $ | 17,338 | ||||||||||
Standby letters of credit | 1,819 | 1,526 | 192 | 101 | - | |||||||||||||||
Commitments to fund loans | 188,947 | 30,601 | 111,968 | 21,267 | 25,111 | |||||||||||||||
Total | $ | 245,051 | $ | 42,586 | $ | 130,876 | $ | 29,140 | $ | 42,449 |
Amount of Commitment Expiration Per Period as of December 31, 2014 | ||||||||||||||||||||
Total Amounts Committed | 1 Year or Less | Over 1 Through 3 Years | Over 3 Through 5 Years | Over 5 Years | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Unused lines of credit | $ | 39,630 | $ | 12,808 | $ | 10,778 | $ | 6,340 | $ | 9,704 | ||||||||||
Standby letters of credit | 1,540 | - | 1,473 | 67 | - | |||||||||||||||
Commitments to fund loans | 147,879 | 17,080 | 65,402 | 26,838 | 38,559 | |||||||||||||||
Total | $ | 189,049 | $ | 29,888 | $ | 77,653 | $ | 33,245 | $ | 48,263 |
We are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments largely include commitments to extend credit and standby letters of credit. Total amounts committed under these financial instruments were $245.1 million and $189.0 million as of March 31, 2015 and December 31, 2014, respectively. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.
Our exposure to credit loss in the event of nonperformance by the other party to financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. We use the same credit policies in making commitments to extend credit and generally use the same credit policies for letters of credit as for on-balance sheet instruments.
Unused lines of credit and commitments to fund loans are legally binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since some of these commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Unused commercial lines of credit, which comprise a substantial portion of these commitments, generally expire within a year from their date of origination. The amount of collateral obtained, if any, by us upon extension of credit is based on management’s credit evaluation of the borrower. Collateral held varies but may include security interests in business assets, mortgages on commercial and residential real estate, deposit accounts with financial institutions, and securities.
We believe the likelihood of our standby letters of credit and unused lines of credit either needing to be totally funded or funded at the same time is low. However, should significant funding requirements occur, we have cash and available borrowing capacity from various sources to meet these requirements.
Generally Accepted Accounting Principles (GAAP) Reconciliation and Explanation of Non-GAAP Financial Measures
(In thousands, except per share and employee data)
45 |
Some of the financial measures included in this Quarterly Report on Form 10-Q are not measures of financial performance recognized by GAAP. We believe these non-GAAP financial measures provide useful information to management and investors that is supplementary to our financial condition and results of operations computed in accordance with GAAP; however, we acknowledge that our non-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP measures that other companies use. The following tables provide a more detailed analysis of these non-GAAP financial measures.
First Quarter | Fourth Quarter | Third Quarter | Second Quarter | First Quarter | ||||||||||||||||
2015 | 2014 | 2014 | 2014 (1) | 2014 (1) | ||||||||||||||||
Loan loss reserves | ||||||||||||||||||||
Allowance for loan losses | $ | 5,787 | $ | 5,324 | $ | 5,441 | $ | 4,593 | $ | 3,626 | ||||||||||
Acquired performing loans discount | 3,242 | 3,532 | 3,811 | 4,093 | 4,461 | |||||||||||||||
Total | $ | 9,029 | $ | 8,856 | $ | 9,252 | $ | 8,686 | $ | 8,087 | ||||||||||
Loans receivable, gross | $ | 1,256,606 | $ | 1,188,522 | $ | 1,134,351 | $ | 1,062,701 | $ | 1,044,786 | ||||||||||
Allowance for loan losses to total loans receivable | 0.46 | % | 0.45 | % | 0.48 | % | 0.43 | % | 0.35 | % | ||||||||||
Allowance plus performing loans discount to total loans receivable | 0.72 | % | 0.75 | % | 0.82 | % | 0.82 | % | 0.77 | % | ||||||||||
Efficiency ratio | ||||||||||||||||||||
Noninterest expense | $ | 11,835 | $ | 14,005 | $ | 11,280 | $ | 10,950 | $ | 10,997 | ||||||||||
Taxable-equivalent net interest income | $ | 15,575 | $ | 14,919 | $ | 14,022 | $ | 13,597 | $ | 13,146 | ||||||||||
Noninterest income | $ | 1,602 | $ | 1,554 | $ | 1,797 | $ | 2,347 | $ | 2,040 | ||||||||||
Gains on sales of securities | - | - | - | (241 | ) | - | ||||||||||||||
Adjusted noninterest income | $ | 1,602 | $ | 1,554 | $ | 1,797 | $ | 2,106 | $ | 2,040 | ||||||||||
Efficiency ratio | 68.9 | % | 85.0 | % | 71.3 | % | 69.7 | % | 72.4 | % | ||||||||||
Revenue and average assets per average number of employees | ||||||||||||||||||||
Interest income | $ | 17,769 | $ | 17,158 | $ | 16,245 | $ | 15,712 | $ | 15,195 | ||||||||||
Noninterest income | 1,602 | 1,554 | 1,797 | 2,347 | 2,040 | |||||||||||||||
Total revenue | $ | 19,371 | $ | 18,712 | $ | 18,042 | $ | 18,059 | $ | 17,235 | ||||||||||
Total revenue annualized | $ | 78,560 | $ | 74,238 | $ | 71,580 | $ | 72,434 | $ | 69,898 | ||||||||||
Total average assets | $ | 1,576,419 | $ | 1,552,264 | $ | 1,493,667 | $ | 1,426,124 | $ | 1,379,656 | ||||||||||
Average number of employees | 241 | 242 | 235 | 211 | 217 | |||||||||||||||
Revenue per average number of employees | $ | 326 | $ | 307 | $ | 305 | $ | 343 | $ | 322 | ||||||||||
Average assets per average number of employees | $ | 6,541 | $ | 6,414 | $ | 6,356 | $ | 6,759 | $ | 6,358 | ||||||||||
Tangible stockholders' equity and Tangible book value per share | ||||||||||||||||||||
Total stockholders' equity | $ | 189,812 | $ | 186,638 | $ | 185,296 | $ | 140,191 | $ | 136,916 | ||||||||||
Less: Goodwill | (249 | ) | (249 | ) | (249 | ) | (249 | ) | (249 | ) | ||||||||||
Other intangible assets | (904 | ) | (987 | ) | (1,074 | ) | (1,190 | ) | (1,331 | ) | ||||||||||
Tangible stockholders' equity | $ | 188,659 | $ | 185,402 | $ | 183,973 | $ | 138,752 | $ | 135,336 | ||||||||||
Common shares outstanding | 16,101 | 16,101 | 16,101 | 13,340 | 13,052 | |||||||||||||||
Book value per share | $ | 11.79 | $ | 11.59 | $ | 11.51 | $ | 10.51 | $ | 10.49 | ||||||||||
Tangible book value per share | 11.72 | 11.51 | 11.43 | 10.40 | 10.37 |
46 |
Adjusted yield earned on loans | ||||||||||||||||||||
Reported yield on loans | 5.90 | % | 5.84 | % | 5.79 | % | 5.87 | % | 5.83 | % | ||||||||||
Effect of accretion income on acquired loans | (0.14 | )% | (0.19 | )% | (0.14 | )% | (0.15 | )% | (0.24 | )% | ||||||||||
Adjusted yield on loans | 5.76 | % | 5.65 | % | 5.65 | % | 5.72 | % | 5.59 | % | ||||||||||
Adjusted rate paid on total deposits | ||||||||||||||||||||
Reported rate paid on deposits | 0.47 | % | 0.50 | % | 0.52 | % | 0.54 | % | 0.55 | % | ||||||||||
Effect of premium amortization on acquired deposits | 0.01 | % | 0.00 | % | 0.01 | % | 0.01 | % | 0.02 | % | ||||||||||
Adjusted rate paid on deposits | 0.48 | % | 0.50 | % | 0.53 | % | 0.55 | % | 0.57 | % | ||||||||||
Adjusted net interest margin | ||||||||||||||||||||
Reported net interest margin | 4.56 | % | 4.24 | % | 4.18 | % | 4.29 | % | 4.41 | % | ||||||||||
Effect of accretion income on acquired loans | (0.12 | )% | (0.16 | )% | (0.11 | )% | (0.13 | )% | (0.21 | )% | ||||||||||
Effect of premium amortization on acquired deposits and borrowings | (0.03 | )% | (0.03 | )% | (0.04 | )% | (0.04 | )% | (0.05 | )% | ||||||||||
Adjusted net interest margin | 4.41 | % | 4.05 | % | 4.03 | % | 4.12 | % | 4.15 | % | ||||||||||
Average excess cash | ||||||||||||||||||||
Average total deposits | $ | 1,186,076 | $ | 1,174,001 | $ | 1,147,816 | $ | 1,118,423 | $ | 1,093,175 | ||||||||||
Borrowings due in one year or less | 25,189 | 28,940 | 34,753 | 33,750 | 26,311 | |||||||||||||||
Total base for liquidity | $ | 1,211,265 | $ | 1,202,941 | $ | 1,182,569 | $ | 1,152,173 | $ | 1,119,486 | ||||||||||
Minimum liquidity level (10% of base) (a) | $ | 121,127 | $ | 120,294 | $ | 118,257 | $ | 115,217 | $ | 111,949 | ||||||||||
Average cash and cash equivalents (b) | 204,588 | 271,827 | 262,617 | 239,171 | 210,403 | |||||||||||||||
Cash above liquidity level (b)-(a) | 83,461 | 151,533 | 144,360 | 123,954 | 98,454 | |||||||||||||||
Less estimated short-term deposits | (11,353 | ) | (24,421 | ) | (28,440 | ) | (24,662 | ) | (22,260 | ) | ||||||||||
Average excess cash | $ | 72,108 | $ | 127,112 | $ | 115,920 | $ | 99,292 | $ | 76,194 |
47 |
Tangible equity to tangible assets | ||||||||||||||||||||
Total stockholders' equity | $ | 189,812 | $ | 186,638 | $ | 185,296 | $ | 140,191 | $ | 136,916 | ||||||||||
Less: Goodwill | (249 | ) | (249 | ) | (249 | ) | (249 | ) | (249 | ) | ||||||||||
Other intangible assets | (904 | ) | (987 | ) | (1,074 | ) | (1,190 | ) | (1,331 | ) | ||||||||||
Tangible stockholders' equity | $ | 188,659 | $ | 185,402 | $ | 183,973 | $ | 138,752 | $ | 135,336 | ||||||||||
Total assets | $ | 1,596,739 | $ | 1,536,691 | $ | 1,548,045 | $ | 1,449,214 | $ | 1,412,871 | ||||||||||
Less: Goodwill | (249 | ) | (249 | ) | (249 | ) | (249 | ) | (249 | ) | ||||||||||
Other intangible assets | (904 | ) | (987 | ) | (1,074 | ) | (1,190 | ) | (1,331 | ) | ||||||||||
Tangible assets | $ | 1,595,586 | $ | 1,535,455 | $ | 1,546,722 | $ | 1,447,775 | $ | 1,411,291 | ||||||||||
Equity/Assets | 11.89 | % | 12.15 | % | 11.97 | % | 9.67 | % | 9.69 | % | ||||||||||
Tangible Equity/Tangible Assets | 11.82 | % | 12.07 | % | 11.89 | % | 9.58 | % | 9.59 | % |
(1) | Share and per share amounts have been restated to reflect the 7-for-1 reverse stock split completed on August 13, 2014. |
Definitions of Non-GAAP financial measures
Allowance for loan losses plus performing loans discount to total loans receivable adds the remaining discount on acquired performing loans to the allowance for loan losses to determine the total reserves and loan discounts established against our loans. Our management believes that this metric provides useful information for investors to analyze the overall level of reserves in banks that have completed acquisitions with no allowance carryover.
Efficiency ratio is defined as total noninterest expense divided by the sum of taxable-equivalent net interest income and noninterest income. Noninterest income is adjusted for nonrecurring gains and losses on sales of securities. This ratio is important to investors looking for a measure of efficiency in the Company's productivity measured by the amount of revenue generated for each dollar spent.
Revenue per average number of employees is annualized total interest income and total noninterest income divided by the average number of employees during the period and measures the Company's productivity by calculating the average amount of revenue generated per employee. Average assets per average number of employees is average assets divided by the average number of employees during the period and measures the average value of assets per employee.
Tangible stockholders' equity is defined as total equity reduced by goodwill and other intangible assets. Tangible book value per share is tangible stockholders' equity divided by total common shares outstanding. This measure is important to investors interested in changes from period-to-period in book value per share exclusive of changes in intangible assets. We have not considered loan servicing rights as an intangible asset for purposes of this calculation.
Adjusted yield earned on loans is our yield on loans after excluding loan accretion from our acquired loan portfolio. Our management uses this metric to better assess the impact of purchase accounting on yield on loans, as the effect of loan discounts accretion is expected to decrease as the acquired loans mature or roll off of our balance sheet.
Adjusted rate paid on deposits is our cost of deposits after excluding amortization of premium for acquired time deposits. Our management uses this metric to better assess the impact of purchase accounting on cost of deposits, as the effect of amortization of premium related to deposits is expected to decrease as the acquired deposits mature or roll off of our balance sheet.
Adjusted net interest margin is net interest margin after excluding loan accretion from the acquired loan portfolio and amortization of premiums for acquired time deposits and Federal Home Loan Bank advances. Our management uses this metric to better assess the impact of purchase accounting on net interest margin, as the effect of loan discounts accretion and amortization of premium related to deposits or borrowings is expected to decrease as the acquired loans and deposits mature or roll off of our balance sheet.
48 |
Average excess cash represents the cash and cash equivalents in excess of our minimum liquidity level (defined as 10% of average total deposits plus borrowings due in one year or less), minus Company estimated short-term deposits. Beginning in 2015 and based on an historical analysis, we changed our methodology for estimating short-term deposits. This change resulted in a reduction that is reflected in 1Q15.
Tangible equity to tangible assets is defined as total equity reduced by goodwill and other intangible assets, divided by total assets reduced by goodwill and other intangible assets. This measure is important to investors interested in relative changes from period-to-period in equity and total assets, each exclusive of changes in intangible assets. We have not considered loan servicing rights as an intangible asset for purposes of this calculation.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Risk Management
Interest rate risk management is carried out through our directors’ ALCO & investments committee, which consists of certain directors and our Chief Executive Officer, supported by our Chief Financial Officer, business unit heads and certain other officers. To manage interest rate risk, our board of directors has established quantitative and qualitative guidelines with respect to our net interest income exposure and how interest rate shocks affect our financial performance. Consistent with industry practice, we measure interest rate risk by utilizing the concept of economic value of equity, which is the intrinsic value of assets, less the intrinsic value of liabilities. Economic value of equity does not take into account management intervention and assumes the change is instantaneous. Further, economic value of equity only evaluates risk to the current balance sheet. Therefore, in addition to this measurement, we also evaluate and consider the impact of interest rate shocks on other business factors, such as forecasted net interest income for subsequent years. In both cases, sensitivity is measured versus a base case, which assumes the forward curve for interest rates as of the balance sheet date.
Management continually reviews and refines its interest rate risk management process in response to the changing economic climate. Currently, our model projects minus 400, minus 300, minus 200, minus 100, 0, plus 100, plus 200, plus 300 and plus 400 basis point changes to evaluate our interest rate sensitivity and to determine whether specific action is needed to improve the current structure, either through economic hedges and matching strategies or by utilizing derivative instruments. In the current interest rate environment, management believes the minus 200, minus 300 and minus 400 basis point scenarios are highly unlikely.
Based upon the current interest rate environment, as of March 31, 2015 and December 31, 2014, our sensitivity to interest rate risk based on a static scenario, assuming no change in asset and liability balances, was as follows:
As of March 31, 2015 | ||||||||||||||||||
Next 12 Months | ||||||||||||||||||
Interest Rate | Net Interest Income | Economic Value of Equity | ||||||||||||||||
Change in Basis Points | $ Change | % Change | $ Change | % Change | ||||||||||||||
(in millions, except %) | ||||||||||||||||||
(400 | ) | $ | (5.5 | ) | (8.5 | ) | $ | (40.9 | ) | (18.8 | ) | |||||||
(300 | ) | (4.9 | ) | (7.5 | ) | (32.3 | ) | (14.8 | ) | |||||||||
(200 | ) | (2.7 | ) | (4.2 | ) | (20.2 | ) | (9.3 | ) | |||||||||
(100 | ) | (0.8 | ) | (1.3 | ) | (7.4 | ) | (3.4 | ) | |||||||||
0 | - | - | - | - | ||||||||||||||
100 | 2.2 | 3.4 | 7.0 | 3.2 | ||||||||||||||
200 | 5.0 | 7.7 | 13.4 | 6.2 | ||||||||||||||
300 | 7.7 | 12.0 | 19.1 | 8.8 | ||||||||||||||
400 | 10.5 | 16.3 | 24.2 | 11.1 |
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As of December 31, 2014 | ||||||||||||||||||
Next 12 Months | ||||||||||||||||||
Interest Rate | Net Interest Income | Economic Value of Equity | ||||||||||||||||
Change in Basis Points | $ Change | % Change | $ Change | % Change | ||||||||||||||
(in millions, except %) | ||||||||||||||||||
(400 | ) | $ | (5.3 | ) | (8.6 | ) | $ | (38.5 | ) | (18.5 | ) | |||||||
(300 | ) | (4.7 | ) | (7.7 | ) | (35.2 | ) | (16.9 | ) | |||||||||
(200 | ) | (2.6 | ) | (4.2 | ) | (25.1 | ) | (12.1 | ) | |||||||||
(100 | ) | (0.4 | ) | (0.7 | ) | (9.6 | ) | (4.6 | ) | |||||||||
0 | - | - | - | - | ||||||||||||||
100 | 2.2 | 3.6 | 4.5 | 2.2 | ||||||||||||||
200 | 4.6 | 7.5 | 7.4 | 3.5 | ||||||||||||||
300 | 7.1 | 11.5 | 9.9 | 4.7 | ||||||||||||||
400 | 9.5 | 15.5 | 11.7 | 5.6 |
We used many assumptions to calculate the impact of changes in interest rates on our portfolio, and actual results may not be similar to projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve. Actual results may also differ due to our actions, if any, in response to the changing rates.
In the event the model indicates an unacceptable level of risk, we may take a number of actions to reduce this risk, including adjusting the maturity and/or rate sensitivity of our borrowings, changing our loan portfolio strategy or entering into hedging transactions, among others. As of March 31, 2015, we were in compliance with all of the limits and policies established by management.
Item 4. Controls and Procedures.
Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures, as defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), as of March 31, 2015, and have concluded that these disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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We are currently involved in various claims and lawsuits incidental to the conduct of our business in the ordinary course. We carry insurance coverage in such amounts as we believe to be reasonable under the circumstances, although insurance may or may not cover any or all of our liabilities in respect of claims and lawsuits. We do not believe that the ultimate resolution of these matters will have a material adverse effect on our consolidated financial position, cash flows or operating results.
As of April 17, 2015, there have been no material changes from the risk factors previously disclosed in response to “Part I —Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2014.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None Applicable.
None.
The exhibits filed or furnished with this quarterly report are shown on the Exhibit List that follows the signatures to this report, which list is incorporated herein by reference.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
C1 FINANCIAL, INC.
Signature | Title | Date | ||
/s/ Cristian A. Melej | Chief Financial Officer | April 17, 2015 | ||
Cristian A. Melej | (Principal Financial Officer) |
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Number | Exhibit Title | |
31.1* | Certification Statement of Chief Executive Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2* | Certification Statement of Chief Financial Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1** | Certification Statement of Chief Executive Officer of the Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2** | Certification Statement of Chief Financial Officer of the Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101* | Interactive Data Files | |
* | Filed herewith. | |
** | Furnished herewith. | |
*** | Reports filed under the Securities Exchange Act (Form 10-K, Form 10-Q and Form 8-K) are under File No. 001-36595. |
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