Attached files
| file | filename |
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| EX-23 - EXHIBIT 23 - C1 Financial, Inc. | v429411_ex23.htm |
| EX-31.1 - EXHIBIT 31.1 - C1 Financial, Inc. | v429411_ex31-1.htm |
| EX-32.2 - EXHIBIT 32.2 - C1 Financial, Inc. | v429411_ex32-2.htm |
| EX-32.1 - EXHIBIT 32.1 - C1 Financial, Inc. | v429411_ex32-1.htm |
| EX-31.2 - EXHIBIT 31.2 - C1 Financial, Inc. | v429411_ex31-2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015.
¨
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) | ||
| (877) 266-2265 | ||
| (Telephone number, including area code) | ||
| Securities Registered pursuant to Section 12(b) of the Act: | ||
| Title of Each Class: | Name of Each Exchange on Which Registered: | |
| Common stock, par value $1.00 per share | New York Stock Exchange | |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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 x |
| Non-accelerated filer ¨ (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
State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, for the last business day of the registrant’s most recently completed second fiscal quarter: $141,490,279 as of June 30, 2015.
Indicate the number of shares outstanding of the issuer’s common stock, as of the latest practicable date: 16,100,966 as of February 5, 2016.
Documents Incorporated by Reference
None.
C1
FINANCIAL, INC. AND SUBSIDIARIES
INDEX
Forward-Looking Statements
We have made statements in this Annual Report on Form 10-K 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. In addition, forward-looking statements in this Annual Report on Form 10-K include information regarding our proposed acquisition by OZRK (as defined below), the potential effects of the pending acquisition on our business and operations prior to the consummation thereof, the effects on the Company if the acquisition is not consummated and information regarding the combined operations and business of OZRK and C1 Financial, Inc. (“C1 Financial”) following the acquisition, if consummated. 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 Annual Report on Form 10-K 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, whether with respect to us as a stand-alone company or the combined company, if the merger with OZRK is consummated, including the following:
| · | OZRK and C1 Financial’s businesses may not be combined successfully, or such combination may take longer to accomplish than expected; |
| · | the diversion of management’s time on transaction related issues; |
| · | regulatory approvals of the merger may not be obtained, or adverse regulatory conditions may be imposed in connection with regulatory approvals of the merger; |
| · | other closing conditions may not be satisfied on the expected terms, schedule, or at all, including approval by C1 Financial’s shareholders, and other delays in closing the merger may occur; |
| · | 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 “Risk Factors” included in Item 1A of Part I of this annual report. |
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements, whether as a stand-alone company or of the combined company, if the merger is consummated. 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 Annual Report on Form 10-K to conform our prior statements to actual results or revised expectations.
In this Annual Report on Form 10-K, references to “C1 Financial,” “C1 Financial, Inc.,” “C1,” the “Company,” “we,” “us” and “our” refer to C1 Financial, Inc., its subsidiaries (including its wholly owned subsidiary, C1 Bank), and its predecessor CBM Florida Holding Company, and the “Bank” and “C1 Bank” refer to C1 Bank, formerly known as the Community Bank of Manatee through February 2011 and Community Bank & Co. through April 2012.
C1 Bank
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 32 banking centers and one loan production office on the West Coast of Florida and in Miami-Dade, Broward and Orange Counties. As of December 31, 2015, we were the 17th largest bank headquartered in the state of Florida by assets and the 16th largest by equity, having grown both organically and through acquisitions.
On November 9, 2015, C1 Financial and its wholly owned bank subsidiary, C1 Bank, entered into a definitive agreement and plan of merger (“Agreement”) with Bank of the Ozarks, Inc. (“OZRK”) and its wholly owned bank subsidiary, Bank of the Ozarks (“Ozarks Bank”), whereby, subject to the terms and conditions of the Agreement, C1 Financial will merge with and into OZRK with OZRK surviving the merger, in an all-stock transaction valued at approximately $402.5 million, or approximately $25.00 per share of C1 Financial common stock, subject to potential adjustments as described in the Agreement.
Subject to the terms and conditions of the Agreement, each holder of outstanding shares of common stock of C1 Financial will receive shares of common stock of OZRK. The number of OZRK shares to be issued will be determined based on OZRK’s ten day average closing stock price as of the second business day prior to the closing date, subject to a minimum and maximum stock price of $39.79 to $66.31, respectively. The consideration payable to C1 Financial shareholders is subject to downward adjustment on a dollar-for-dollar basis if the net book value of C1 Financial is less than $174 million as of the business day that, subject to adjustment as set forth in the Agreement, is closest to ten calendar days prior to the closing date and is subject to an upward adjustment if certain Brazilian loans of C1 Bank are sold at a price above a specified amount. The potential adjustments described in the immediately preceding sentence are not expected to result in any material change to the consideration payable and are described in the Agreement.
Upon the closing of the transaction, C1 Financial will merge into OZRK and C1 Bank will merge into Ozarks Bank, with each of OZRK and Ozarks Bank to continue as the surviving entity, respectively. Completion of the transaction is subject to certain closing conditions, including customary regulatory approvals and approval by C1 Financial shareholders and are described in the Agreement. Although there can be no assurance, the transaction is expected to close late in the first quarter or in the second quarter of 2016.
OZRK, an Arkansas corporation, together with its subsidiaries, provides a wide range of retail and commercial banking services, with operations conducted in nine states in the United States.
A special meeting of the shareholders of C1 Financial (the “Special Meeting”) at which shareholders will be asked to, among other matters, approve the Agreement and transaction with OZRK, is scheduled to occur on March 3, 2016 absent any adjournment thereof. For additional information regarding OZRK and the proposed transaction, including certain pro forma financial information regarding the combined operations of OZRK and C1 Financial, see C1 Financial’s definitive proxy statement filed with the SEC on February 1, 2016 (the “C1 Financial Proxy Statement”).
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Our History
While the Bank’s charter dates back to 1995, the modern history of the Bank began in December 2009, in the midst of the recession, when four investors, including our President and CEO, Trevor Burgess, made a significant recapitalizing investment in Community Bank of Manatee, a small five-branch traditional community bank based in Bradenton, Florida. These investors led the turnaround and transformation of the Bank by instituting the entrepreneurial and service-based culture the Bank enjoys today, changing the name to C1 Bank, and making the following successful strategic acquisitions of challenged Florida banks:
| • | First Community Bank of America. On May 31, 2011, we acquired First Community Bank of America for $10 million in cash, adding approximately $434 million in assets and 11 banking centers, raising our total assets to approximately $750 million and expanding our footprint to 17 locations covering the entire Tampa Bay region. |
| • | The Palm Bank. On May 31, 2012, we acquired The Palm Bank for $5.5 million in cash, adding approximately $119 million in assets and three banking centers taking us to 21 total locations and expanding our footprint in Tampa. |
| • | First Community Bank of Southwest Florida. On August 2, 2013, we assumed approximately $241 million in assets and all of the approximately $237 million in deposits of the failed First Community Bank of Southwest Florida from the Federal Deposit Insurance Corporation (“FDIC”) as receiver. This transaction raised our total assets to approximately $1.3 billion, total deposits to approximately $1 billion, and total loans to approximately $900 million. Additionally, we acquired all seven of First Community Bank of Southwest Florida’s banking centers to expand our footprint further south on the West Coast of Florida into Fort Myers, Cape Coral and Bonita Springs. |
These acquisitions immediately increased our scale and geographic footprint. We were incorporated in the state of Florida in July 2013 and became the holding company of the Bank that same month when the stockholders of the Bank exchanged their shares of common stock in the Bank for shares of our common stock. The stockholders received one share of our common stock for each share of common stock of the Bank that they held. As a result, the Bank’s former stockholders owned all of our shares and the Bank became our wholly owned subsidiary. On December 19, 2013, the Bank’s primary stockholder, CBM, merged with and into us. As part of the merger, the stockholders of CBM received shares of the Company in exchange for their shares of CBM.
On August 13, 2014, we completed our initial public offering on the New York Stock Exchange (“NYSE”) under the symbol “BNK”.
On November 9, 2015, we entered into a definitive agreement and plan of merger pursuant to which OZRK will acquire C1 Financial and C1 Bank. Upon the closing of the transaction, C1 Financial will merge into OZRK and C1 Bank will merge into Ozarks Bank, with each of OZRK and Ozarks Bank to continue as the surviving entity, respectively. Completion of the transaction is subject to certain closing conditions, including customary regulatory approvals and approval by C1 Financial shareholders. Although there can be no assurance, the transaction is expected to close late in the first quarter or in the second quarter of 2016.
C1 Market Areas
Our banking operations are concentrated in three of the top six metropolitan statistical areas in the Southeast by population and the three largest business markets in Florida: Tampa Bay, Miami-Dade and Orlando. Our Florida market includes our headquarters in St. Petersburg and 32 banking centers and one loan production office which are located in Pinellas, Hillsborough, Pasco, Manatee, Sarasota, Charlotte, Lee, Miami-Dade, Broward and Orange counties. We have chosen to operate in these markets because we believe they will continue to exhibit higher growth rates than other markets across the state.
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We have successfully executed our growth initiative through strategic acquisitions and organic growth. Our acquisitions of First Community Bank of America, The Palm Bank and First Community Bank of Southwest Florida strengthened our presence in our existing markets, while growing our franchise in surrounding counties. Our recent entry into the Miami-Dade market provides us a platform to further expand into the highly populated Miami-Dade market, which is home to many small businesses and entrepreneurs. We entered the Miami-Dade market with a loan production office in January 2013. In January 2014, we closed the loan production office and opened our first Miami banking center with a highly differentiated look and feel in Miami’s Wynwood Arts District. In October 2014, we continued our expansion into the Miami-Dade market by opening our Coral Gables banking center. In November 2014, we opened a temporary pop-up branch in Miami Beach in preparation for our full-service branch, which is expected to open across the street in 2016. In addition, in April 2015, we opened our fourth banking center in the Miami-Dade market located in Doral and in November 2015, we expanded to Broward County with the opening of our first banking center in Fort Lauderdale.
We opened a loan production office in Orlando in June 2014 and hired our first full-time commercial lender focused on that market, aiming to replicate our successful Miami strategy. We plan to open our first banking center in Orange County in 2016.
Our Competitive Strengths
Entrepreneurial approach to banking. Entrepreneurial spirit is paramount to our culture. We focus on hiring and training sophisticated bankers who can be trusted advisors to our business clients in stark contrast to what we believe to be the impersonal, transactional approach of many of our competitors. We seek to establish long-term relationships with our clients so that we can customize loans to meet the needs of these entrepreneurs. Fast, local decision making and certainty of execution further differentiate our approach and we believe give us the ability to charge a competitive, yet premium yield on our new loans. By focusing on entrepreneurial clients, we further refine our ability to provide sophisticated and tailored services, which many of our competitors are unable to match. We focus on growing core deposits from businesses and individuals through our extensive banking center network and via our new proprietary technologies, such as our iPad account opening software. At our headquarters we have no individual offices and no secretaries in order to emphasize the importance of productivity, collaboration, speed, the use of technology, and client focus. We have also developed a Management Associate Program in partnership with the University of South Florida to attract and develop the future leaders of the Bank.
Well positioned in a growing and attractive market. The state of Florida is the third largest and fourth fastest growing state in the United States based on population. Its population has grown from 12.9 million in 1990 to 20.3 million in 2015 and is expected to exceed 21 million by 2020. This growth generates job creation, commercial development and housing starts. Our operations are focused in the Tampa Bay area, with 27 banking centers in seven contiguous counties along the West Coast of Florida. In 2014, we opened three banking centers in Miami-Dade (Wynwood, Coral Gables and Miami Beach), one of the fastest growing markets in the state, and a fourth (Doral) in 2015. Also in 2015, we expanded to Broward County with the opening of our first banking center in Fort Lauderdale and plan to open our first banking center in Orange County in 2016. We believe our demonstrated ability to grow successfully and our focus on entrepreneurs will give us a competitive advantage in these growing markets.
Differentiated brand positioning. We actively work to position our brand to attract entrepreneurs in four ways. First, we have been able to capture the press and the public’s attention through an aggressive public relations strategy. Second, we are deeply involved in the communities in which we serve, which increases our local market knowledge, grows our relationships with members of the local business community and increases awareness of our brand. Third, we use sports marketing to entertain thousands of existing and potential clients each year and to increase brand awareness and strengthen relationships with existing and potential clients. Fourth, we are focused on a highly differentiated modern and technology-forward design for our banking centers and our headquarters, which makes us stand out from our more traditional, mahogany-laden competitors.
Long-term risk mitigation focus. Our directors and management have invested a material portion of their net worth in the Bank and, as a result, are acutely focused on risk mitigation and cost discipline. Our experience of turning around four troubled banks was extremely valuable in developing broad risk-mitigation policies and procedures. Having foreclosed on hundreds of loans, we learned much about the mistakes made by banks in Florida. We make many decisions to benefit long-term risk reduction, even at the expense of short-term gain, such as:
| • | we seek a lower risk profile by actively managing our assets and liabilities. We focus on limiting fixed-rate loans to five years or less and more than 60% of our loans have some variable rate component. We continue to grow core deposits and use certificates of deposit, or CDs, and Federal Home Loan Bank, or FHLB, borrowings to extend fixed-rate liabilities. For example, our FHLB borrowings have a weighted average maturity of 38 months as of December 31, 2015; |
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| • | we primarily require properly margined real estate to secure our business loans; |
| • | we have a complete separation between the lending and credit departments with no individual lending authority at the Bank. All loans over $1 million require consensus of all members of our loan committee; and |
| • | we liquidated our securities portfolio in 2013 to eliminate mark-to-market interest rate risk in a rising rate environment. Therefore, our liquidity largely consists of cash, greatly reducing risk while increasing flexibility to fund loan demand. |
Innovative approach to technology. We established C1 Labs as a group of bank employees focused on developing proprietary technology to improve our productivity and enhance our client relationships. For example, our iPad account opening software allows our bankers to open accounts more quickly and accurately than the traditional branch-based method. This software and technology also enables us to open accounts at a client’s office or place of business, or at our banking centers, in under three minutes. In addition, we have an internal tool that empowers our client managers to price loans in real time, in field with a pre-approved, risk-adjusted return-on-equity calculator. We believe our technology offers our clients a unique and convenient banking experience that is not available at traditional community banks, which will help drive future loan and deposit growth in the markets we serve.
We have filed ten nonprovisional patent applications in the United States and intend to file additional patent applications on these technologies and others we have in development. During 2015, we announced a partnership with a third party to offer Smart Loans Express, an inexpensive mobile relationship profitability model for community bankers to use in the field. We continue to explore the opportunity of licensing these technologies to third parties.
Our Business Strategy
Our strategy is to “care more and try harder.” We strive to enhance stockholder value by:
Growing organically to leverage our brand awareness and expand our loan and deposit market share in Florida, particularly in the high-growth Tampa Bay and Miami-Dade markets by:
| • | growing relationships with new clients and enhancing existing relationships by hiring and retaining client managers with deep community ties, deep subject matter expertise and the sophistication to offer valuable business advice and creative solutions to meet the needs of our clients; |
| • | opening new banking centers including our Doral and Fort Lauderdale locations in 2015; |
| • | having opened a loan production office in Orlando in June 2014, expanding into one of the fastest growing markets in Florida and the third largest business market after Miami-Dade and Tampa, with plans for our first banking center in that market to open in 2016; and |
| • | hiring, training, and equipping best-in-class client managers to serve the needs of Florida’s entrepreneurs. |
Increasing profitability and improving efficiency to increase our return on equity and return on assets by:
| • | capitalizing on our established infrastructure to realize economies of scale. Our average assets per average employee, for example, have grown from $4.6 million in 2012 to $6.8 million in 2015 (a metric we intend to continue to increase); |
| • | continuing to invest in technology to drive productivity; and |
| • | resolving problem loans and selling foreclosed-upon property from acquired banks to reduce costs and to allow those assets to be redeployed into profitable new loans. We work to maximize the outcome of these classified assets by focusing on the recovery of all amounts due under the law, including through the collection of deficiency judgments. |
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Completing strategic acquisitions by building on our track record of successfully acquiring and integrating community banks as follows:
| • | analyzing opportunities for acquisition, especially FDIC assisted acquisitions located in our target markets outside of the panhandle; |
| • | targeting community banks in our existing markets or in adjacent growth regions of Florida such as the I-4 corridor, Orlando and south Florida; and |
| • | using the Wall Street experience and background of our President and CEO, and fellow investors in negotiating and structuring acquisitions to increase the overall value of our franchise. |
Our Products and Services
We offer the following services and products:
Deposits. We offer a full range of interest-bearing and noninterest-bearing deposit accounts, including commercial and retail checking accounts, savings accounts, individual retirement accounts, and other deposits of various types, ranging from daily money market accounts to longer term certificates of deposit. We seek deposits from residents, businesses and employees of businesses in these markets. The FDIC insures all of our accounts up to the maximum amount permitted by law.
Lending Activities. We utilize deposits, together with borrowings and other sources of funds, to originate and purchase loans. We offer a full range of short and medium-term small business and real estate, commercial and consumer loans. We direct our lending activities primarily to individuals and businesses in the markets where demand for funds falls within the Bank’s legal lending limits and who are potential deposit customers. The following is a description of each of the major categories of loans that we make:
Real Estate Loans. Real estate loans consist of the following:
| • | Residential Real Estate Loans. We make residential real estate loans to qualified individuals for the purchase of existing single-family residences in our markets. We make these loans in accordance with our appraisal policy and real estate lending policy, which detail maximum loan to value ratios and maturities. We believe that these loan to value ratios are sufficient to compensate us for fluctuations in real estate market value and to minimize losses that could result from a downturn in the residential real estate market. Starting in 2014, we decided to retain all residential real estate loans in our portfolio and currently only offer a 5/1 ARM product. |
| • | Commercial Real Estate Loans. Commercial real estate loans consist of loans to developers of both commercial and residential properties. We manage credit risk associated with these loans by actively monitoring such measures as advance rate, cash flow, collateral value and other appropriate credit factors. Risks associated with commercial real estate loans include the general risk of the failure of the commercial borrower, which are different for each type of business and commercial entity. We evaluate each business on an individual basis and attempt to determine such business’ risks and credit profile. We attempt to reduce credit risks in the commercial real estate portfolio by emphasizing loans on owner-occupied office and retail buildings where the loan-to-value ratio, established by independent appraisals, generally does not exceed limits set by law and regulation. In addition, we may also require personal guarantees of the principal owners. |
| • | Acquisition, Construction and Development Loans. We make acquisition, construction and development loans on a pre-sold and speculative basis. If the borrower has entered into an arrangement to sell or lease the property prior to beginning construction, we consider the loan to be on a pre-sold or pre-leased basis. If the borrower has not entered into an agreement to sell the property prior to beginning construction, we consider the loan to be on a speculative basis. We make residential and commercial construction loans to builders and developers and to consumers who wish to build their own home. We limit the term of most construction and development loans to 24 months, although we may structure the payments based on a longer amortization basis. We base speculative loans on the borrower’s financial strength and cash flow position. We disburse loan proceeds based on the percentage of completion and only after an experienced construction lender or appraiser inspects the project. These loans generally command higher rates and fees commensurate with the risks associated with construction lending. The risk in construction lending depends upon the performance of the builder, building the project to the plans and specifications of the borrower and our ability to administer and control all phases of the construction disbursements. Upon completion of the construction, we typically convert construction loans to permanent loans. |
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Commercial Loans. Commercial loans consist of loans made to individuals, partnerships or corporate borrowers for a variety of business purposes. We place particular emphasis on loans to small and medium-sized professional firms, retail and wholesale businesses, light industry and manufacturing concerns operating in our markets. We consider small and medium-sized businesses to include commercial, professional and retail businesses with annual gross sales of less than $50 million. Our commercial loans include term loans with both variable and fixed interest rates secured by equipment, inventory, receivables and real estate, as well as secured and unsecured working capital lines of credit. Risks of these types of loans depend on the general business conditions of the local economy and the borrower’s ability to sell its products and services in order to generate sufficient business profits to repay the loans under the agreed upon terms and conditions. Personal guarantees may be obtained from the principals of business borrowers and third parties to further support the borrowers’ ability to service the debt and reduce the risk of nonpayment.
Consumer and Installment Loans. Consumer loans consist of lines of credit and term loans secured by second mortgages on the residences of borrowers for a variety of purposes, including home improvements, education and other personal expenditures. Consumer loans also include installment loans to individuals for personal, family and household purposes, including automobile loans to individuals and pre-approved lines of credit. Consumer loans generally involve more risk than first mortgage loans because the collateral for a defaulted loan may not provide an adequate source of repayment of the principal. This risk is due to the potential for damage to the collateral or other loss of value, while the remaining deficiency often does not warrant further collection efforts. In addition, consumer loan performance depends on the borrower’s continued financial stability and is, therefore, more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.
Other Services. Our other services include cash management services, safe deposit boxes, direct deposit of payroll and social security checks, wire transfers, telephone banking, and automatic drafts for various accounts. We offer a debit card and MasterCard credit card services through our correspondent banks. We offer extended banking hours, both drive-in and lobby, and after-hours depositories. We are associated with a shared network of automated teller machines that customers may use throughout our market areas and other regions. We are associated with third-party internet banking service providers that enable us to provide customers with a cost-effective, secure and reliable internet banking solution.
Information Technology
During the last few years, we have made significant investments in our technology infrastructure needed to support our rapid growth, reduce long-term operational costs, adapt to the changing banking environment and improve the customer experience and convenience. The current infrastructure supports efficient expansion via progressive modernization. Progressive modernization leverages service-oriented architecture to deliver new business processes and web services for accelerated implementation and will allow us to provide a delivery model transformation that uses public and private web application programming interfaces. This new approach will enable us to respond quickly to new opportunities.
In addition to investments in information technology (IT) infrastructure, we started an innovation lab, or C1 Labs, in 2012 with the goal of accelerating the development and implementation of cutting-edge banking technologies to help increase productivity and improve our relationships with our clients. Our C1 Labs team currently consists of five engineers, including our Chief Information Officer who leads the team. With the help of our C1 Labs team, we have filed ten patent applications for financial technology products, which we believe will help increase productivity and improve our relationships with our clients.
Our recent innovations include a mobile application that performs a predictive analysis of client data in order to identify client needs without any of our employees interacting directly with the client, which enables us to proactively provide needed solutions to our clients. For example, as soon as a client walks into one of our banking centers, our mobile application alerts our employees to certain needs that the client may have and solutions we may be able to provide. We are also developing a method for processing payment transactions initiated by mobile devices, including technologies recently introduced by Apple, Google and other technology companies entering the mobile payment market. The system in development offers the capability to integrate third-party applications and data sources into secure banking core systems while complying with data privacy, security, and regulatory requirements.
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We consider our intellectual property rights to be important to our business. We rely on patent, trademark, copyright, and trade secret laws, as well as provisions in our agreements with third parties to protect our intellectual property rights. We obtained our right to use the “C1” trademark pursuant to an October 2013 trademark assignment agreement. We have filed ten nonprovisional patent applications with claims directed to certain aspects of our technology and expect to file additional applications in the future.
Our patent applications may cover current banking technology products that we use or products that we intend to attempt to license to third parties. We may also license patent rights from third parties that cover technologies that we plan to use in our business. We cannot assure investors that pending patent and trademark applications will result in issued patents and registered trademarks, that patents licensed by us or that may be issued to us in the future will not be challenged or circumvented by competitors, or that any patents that we may obtain will not be determined invalid or unenforceable or that such patents will provide us with any competitive advantage.
We intend to continue to invest in our technology and develop new technologies that enhance our customer’s experience and increase the efficiency of our operations.
Partnership with CenterState
On March 4, 2015, we entered into a partnership with CenterState Bank of Florida, N.A., or CenterState, pursuant to which CenterState will provide analytics, launch and market C1 Lab's Smart Loan Express to financial institutions across the country. Smart Loan Express helps bank lenders and management teams better understand and manage the risk-adjusted return on equity of a new loan and relationship through an easy to use online, mobile or tablet interface. C1 Labs is our in-house development team focused on rapid fin-tech application development. Smart Loan Express is a secure, cloud-based application that is customized for each bank and is priced as low as $80 per month. Coming in both a web and app version, Smart Loan Express has no upfront or set up fees and can be set up for a bank in minutes as opposed to weeks. We have used Smart Loan Express since 2013, running over 4,000 simulations to date, and have seen an improvement in both production and profitability. Smart Loan Express asks the user to input basic information about the proposed loan and then calculates the risk-adjusted profitability of that loan including deposits and fees. Our lender incentive program is linked to the Smart Loan Express output so that the incentive structure favors those loans with a higher risk-adjusted incremental return on equity.
Customers
We believe that the ongoing consolidation of the Florida banking industry provides community banks with significant opportunities to build a successful service platform while maintaining the mindset of a locally oriented bank. We further believe that many financial institutions do not provide the high level of personalized services desired by many small and medium-sized businesses and their principals. We intend to focus our marketing efforts on attracting entrepreneurs and their families, who require sophisticated tailored solutions, as well as on growing core deposits from businesses and individuals.
Although we concentrate our lending efforts on commercial business, we also attract a significant amount of consumer business. Many of our retail customers are the principals of our small and medium-sized business customers. We expect that most of our new business will be developed through our lending officers and board of directors and by pursuing an aggressive strategy of calling on customers throughout our market areas.
Credit Policy and Procedures
General
The board of directors of the Bank is responsible for the safety and soundness of the Bank. As such, they are charged to monitor the efforts of the Bank’s management activities. Since lending represents risk exposure, our board of directors and its duly appointed committees seek to ensure that the Bank maintains high credit quality standards. We have established asset oversight committees to administer the loan portfolio. These committees include: the enterprise risk management committee; the directors’ loan committee; and the classified asset committee. These committees meet at least quarterly to review the lending activities of the Bank.
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Credit Concentration
Diversification of risk is a key factor in prudent asset management. Risk from concentration is actively managed by management and reviewed by the board of directors, and exposures relating to borrower, industry, and commercial real estate categories will be tracked and measured against established policy limits. These limits are reviewed as part of our periodic review of the credit policy. Loan concentration levels are monitored on a monthly basis by product type and geography by the credit administration department and the Bank’s Chief Credit Officer. These levels are reported to the board of directors monthly.
Loan Approval Process
The credit approval method used at the Bank provides for the prompt and thorough underwriting and approval or decline of loan requests. The board of directors approves loan authorities for credit personnel and these authorities are periodically reviewed and updated.
The approval of loans and other credit risk products is the responsibility of management with oversight from the board of directors. Authority is granted to officers deemed experienced at making decisions consistent with our credit philosophy and policy.
Our loan approval policy dictates a complete separation between the lending function and the credit approval function. As such, loan officers have no individual approval authorities. Furthermore, no bank employee may approve credit acting alone, regardless of the size of the loan. Loans with credit exposure less than or equal to $1 million may be approved via joiner authority limits between two or more executive officers previously deemed by the board of directors to be experienced at making decisions consistent with our credit philosophy and policy. Loans with credit exposure greater than $1 million must be approved by unanimous consent by the management loan committee, which consists of the Chief Executive Officer, the Senior Lender, Chief Credit Officer, Director of Risk Management and the Chairman of the board of directors. In July 2014, we established a “house limit” guideline of $30.0 million per relationship for new loans. Any relationship approved above this level must be specifically designated as such by our board of directors.
Our lending activities are subject to a variety of lending limits imposed by federal law. In general, the Bank is subject to a legal limit on loans to a single borrower equal to 15% of the Bank’s capital and unimpaired surplus, or 25% if the loan is fully secured. This limit increases or decreases as the Bank’s capital increases or decreases. Based upon the capitalization of the Bank at December 31, 2015, the Bank’s legal lending limits were approximately $28.5 million (15%) and $47.6 million (25%). We may seek to sell participations in our larger loans to other financial institutions, which will allow us to manage the risk involved in these loans and to meet the lending needs of our customers requiring extensions of credit in excess of these limits.
The board of directors reviews and approves loan policy changes, monitors loan portfolio trends and credit trends, and reviews and approves loan transactions that exceed management thresholds as set forth in our loan policies. Loan pricing is established in conjunction with the loan approval process based on pricing guidelines for loans that are set by the directors’ loan committee.
We believe that our credit approval process provides for thorough internal controls, underwriting, and decision making.
Enterprise Risk Management
We maintain an enterprise wide risk management program that enables us to identify, manage, monitor and control potential risks that may affect us, including (i) credit risk; (ii) interest rate risk; (iii) liquidity risk; (iv) price risk; (v) foreign exchange risk; (vi) transaction risk; (vii) compliance risk; (viii) operational risk; (ix) strategic risk; and (x) reputation risk.
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Risk identification is a continuous process and occurs at both the transaction level and the portfolio level. In addition, management seeks to identify interdependencies and correlations across portfolios and lines of business that may amplify risk exposure.
The board of directors reviews and approves loan policy changes, monitors loan portfolio trends and credit trends, and reviews and approves loan transactions that exceed management thresholds as set forth in our loan policies. Loan pricing is established in conjunction with the loan approval process based on pricing guidelines for loans that are set by the directors’ loan committee.
Credit Risk Management
Credit risk management is a component of our enterprise risk management. We employ consistent analysis and underwriting to examine credit information and prepare underwriting documentation. We monitor and approve exceptions to policy as required, and we also track and address technical exceptions.
We maintain a robust loan review function by utilizing an internal loan review team as well as third-party loan review firms that report to the audit committee of the board of directors to ensure independence and objectivity. The audit committee shares loan review reports with the enterprise risk management committee of the board of directors to assist that committee with its obligations, and it provides a quarterly summary to the board of directors that describes trends and identifies significant changes in the overall quality of the portfolio identified by the loan review department.
Competition
The banking business is highly competitive. We compete with numerous commercial banks, savings banks and savings and loan associations, many of which have assets, capital and lending limits larger than those that we have. While much of our competition is in the form of local community banks, other competitors have statewide or nationwide presence. However, C1 Bank’s ability to cultivate profitable complete banking relationships helps to differentiate C1 Bank among our competitors.
We also compete with large banks in major financial centers and other financial intermediaries, such as consumer finance companies, brokerage firms, mortgage banking companies, insurance companies, securities firms, mutual funds and certain government agencies as well as major retailers, all actively engaged in providing various types of loans and other financial services. We believe that our banking professionals, the personalized service we provide for our entrepreneurial clients, and our emphasis on doing what’s right for our clients, community and employees is what distinguishes C1 Bank from its competition.
According to SNL Financial LC, C1 Bank holds 1% or less market share of deposits in the counties in which we operate. This leaves substantial room for organic growth as we continue to concentrate our efforts in our key markets and offer the specialized service many clients desire. We believe that our tailored approach and continued positive momentum will allow C1 Bank to grow substantially without having to materially expand beyond our current market reach.
Employees
As of December 31, 2015, we had 229 full-time equivalent employees.
Supervision and Regulation
The following is a general summary of the material aspects of certain statutes and regulations applicable to the Company and the Bank. These summary descriptions are not complete, and you should refer to the full text of the statutes, regulations, and corresponding guidance for more information. These statutes and regulations are subject to change, and additional statutes, regulations, and corresponding guidance may be adopted. We are unable to predict these future changes or the effects, if any, that these changes could have on the business, revenues, and results of the Company and the Bank.
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General
As a registered bank holding company, the Company is subject to regulation, supervision and examination by the Federal Reserve under The Bank Holding Company Act of 1956, as amended, or the BHCA. In addition, as a Florida state chartered bank that is not a member of the Federal Reserve system, the Bank is subject to primary regulation, supervision and examination by the FDIC and its state banking regulator, the Florida Office of Financial Regulation, or OFR. Supervision, regulation, and examination of the Company and the Bank by the bank regulatory agencies are intended primarily for the protection of consumers, bank depositors and the Deposit Insurance Fund of the FDIC, rather than holders of our capital stock.
Recent Changes as a Result of the Dodd-Frank Act
In addition to the framework of regulation and supervision referenced above, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, created the Consumer Financial Protection Bureau, or the CFPB, a new federal regulatory body with broad authority to regulate the offering and provision of consumer financial products and services. The authority to examine depository institutions with $10.0 billion or less in assets, such as the Bank, for compliance with federal consumer laws remained largely with our primary federal regulator, the FDIC. However, the CFPB may participate in examinations of smaller institutions on a “sampling basis” and may refer potential enforcement actions against such institutions to their primary regulators.
As a result of the Dodd-Frank Act, the regulatory framework under which the Company and the Bank operate has changed and will continue to change substantially over the next several years. The Dodd-Frank Act brought about a significant overhaul of many aspects of the regulation of the financial services industry, addressing issues including, among others, systemic risk, capital adequacy, deposit insurance assessments, consumer financial protection, interchange fees, lending limits, mortgage lending practices, and changes among the bank regulatory agencies. Many of the provisions of the Dodd-Frank Act became effective upon enactment, while others are subject to further study, rulemaking, and the discretion of regulatory bodies and have only recently taken effect or will take effect in the coming years. In light of these significant changes and the discretion afforded to federal banking regulators, we cannot fully predict the effect that compliance with the Dodd-Frank Act or any implementing regulations will have on the Company or the Bank’s businesses or their ability to pursue future business opportunities.
Holding Company Regulation
Permitted Activities
Under the BHCA, a bank holding company is generally permitted to engage in, or acquire direct or indirect control of more than five percent of any class of the voting shares of any company that is not a bank or bank holding company and that is engaged in, the following activities:
| • | banking or managing or controlling banks; |
| • | furnishing services to or performing services for our subsidiaries; and |
| • | any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking, including: |
| • | factoring accounts receivable; |
| • | making, acquiring, brokering or servicing loans and usual related activities; |
| • | leasing personal or real property; |
| • | operating a nonbank depository institution, such as a savings association; |
| • | performing trust company functions; |
| • | conducting financial and investment advisory activities; |
| • | conducting discount securities brokerage activities; |
| • | underwriting and dealing in government obligations and money market instruments; |
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| • | providing specified management consulting and counseling activities; |
| • | performing selected data processing services and support services; |
| • | acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; |
| • | performing selected insurance underwriting activities; |
| • | providing certain community development activities (such as making investments in projects designed primarily to promote community welfare); and |
| • | issuing and selling money orders and similar consumer-type payment instruments. |
While the Federal Reserve has found these activities in the past acceptable for other bank holding companies, the Federal Reserve may not allow us to conduct any or all of these activities, which are reviewed on a case by case basis.
The Federal Reserve has the authority to order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding company’s continued ownership, activity or control constitutes a serious risk to the financial safety, soundness or stability of it or any of its bank subsidiaries. Under the BHCA, as amended by the Gramm-Leach-Bliley Act, or GLBA, a bank holding company may also file an election with the Federal Reserve to be treated as a financial holding company and engage in an expanded list of financial activities, subject to certain eligibility requirements.
Acquisitions Subject to Prior Regulatory Approval
The BHCA requires the prior approval of the Federal Reserve for a bank holding company to acquire substantially all the assets of a bank or to acquire direct or indirect ownership or control of more than 5% of any class of the voting shares of any bank, bank holding company or savings association, or to increase any such non-majority ownership or control of any bank, bank holding company or savings association, or to merge or consolidate with any bank holding company.
Bank Holding Company Obligations to Bank Subsidiaries
Under current law and Federal Reserve policy, a bank holding company is expected to act as a source of financial and managerial strength to its depository institution subsidiaries and to maintain resources adequate to support such subsidiaries, which could require the Company to commit resources to support the Bank in situations where additional investments in a bank may not otherwise be warranted. These situations include guaranteeing the compliance of an “undercapitalized” bank with its obligations under a capital restoration plan, as described further under “—Bank Regulation—Capitalization Levels and Prompt Corrective Action” below. As a result of these obligations, a bank holding company may be required to contribute additional capital to its subsidiaries in the form of capital notes or other instruments that qualify as capital under regulatory rules. Any such loan from a holding company to a subsidiary bank is likely to be unsecured and subordinated to the bank’s depositors and perhaps to other creditors of the bank. If the Company were to enter bankruptcy or become subject to the orderly liquidation process established by the Dodd-Frank Act, any commitment by us to a federal bank regulatory agency to maintain the capital of the Bank would be assumed by the bankruptcy trustee or the FDIC, as appropriate, and entitled to a priority of payment.
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Restrictions on Bank Holding Company Dividends.
The Federal Reserve’s policy regarding dividends is that a bank holding company should not declare or pay a cash dividend which would impose undue pressure on the capital of any bank subsidiary or would be funded only through borrowing or other arrangements that might adversely affect a bank holding company’s financial position. As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should consult with the Federal Reserve and eliminate, defer or significantly reduce the bank holding company’s dividends if:
| • | its net income available to stockholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; |
| • | its prospective rate of earnings retention is not consistent with its capital needs and overall current and prospective financial condition; or |
| • | it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. |
Should an insured depository institution controlled by a bank holding company be “significantly undercapitalized” under the applicable federal bank capital ratios, or if the bank subsidiary is “undercapitalized” and has failed to submit an acceptable capital restoration plan or has materially failed to implement such a plan, federal banking regulators (in the case of the Bank, the FDIC) may choose to require prior Federal Reserve approval for any capital distribution by the bank holding company. For more information, see “—Bank Regulation—Capitalization Levels and Prompt Corrective Action.”
In addition, since the Company is a legal entity separate and distinct from the Bank and does not conduct stand-alone operations, its ability to pay dividends depends on the ability of the Bank to pay dividends to it, which is also subject to regulatory restrictions as described below in “—Bank Regulation—Bank Dividends.”
We have not paid any dividends on our common stock since inception, and we currently anticipate that we will retain all available funds for use in the operation and expansion of our business, and do not anticipate paying any cash dividends in the foreseeable future. Any future determination relating to this dividend policy will be made by our board of directors and will depend on a number of factors, including our financial condition and results of operations, tax considerations, capital requirements, industry standards, and economic conditions.
U.S. Basel III Capital Rules
The federal banking agencies have adopted risk-based and leverage capital standards for banks and bank holding companies. These standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure, to minimize disincentives for holding liquid assets, and to achieve greater consistency in evaluating the capital adequacy of major banks throughout the world. Under the risk-based capital standards, assets and off-balance sheet items are assigned to broad risk categories, each with designated weights, and the resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.
In July 2013, the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency adopted the U.S. Basel III Capital Rules, which implement many aspects of the Basel III Capital Standards and are aimed at increasing both the quantity and quality of regulatory capital. The U.S. Basel III Capital Rules apply to all national and state banks and savings associations and most bank holding companies and savings and loan holding companies, which we collectively refer to herein as “covered” banking organizations. The requirements in the U.S. Basel III Capital Rules began to phase in on January 1, 2015, for many covered banking organizations, including the Company and the Bank. Most requirements in the U.S. Basel III Capital Rules will be fully phased in by January 1, 2019.
Under the U.S. Basel III Capital Rules, the Company and the Bank are subject to the following minimum capital ratios:
| • | a new Common Equity Tier 1 risk-based capital ratio of 4.5%; |
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| • | a Tier 1 risk-based capital ratio of 6%; |
| • | a Total risk-based capital ratio of 8%; and |
| • | a Tier 1 leverage ratio of 4%. |
In addition, the Company and the Bank are subject to a Common Equity Tier 1 capital conservation buffer on top of the minimum risk-based capital ratios. The buffer will be phased in over three years beginning January 1, 2016: 0.625 percent of risk-weighted assets for 2016, 1.25 percent for 2017, and 1.875 percent for 2018, with the fully phased-in level of greater than 2.5 percent effective as of January 1, 2019. Failure to maintain the buffer will result in restrictions on the ability to make capital distributions or to pay discretionary bonuses to executive officers. Including the buffer, by January 1, 2019, the Company and the Bank will be required to maintain the following minimum capital ratios: a Common Equity Tier 1 risk-based capital ratio of greater than 7.0 percent, a Tier 1 risk-based capital ratio of greater than 8.5 percent and a Total risk-based capital ratio of greater than 10.5 percent.
Banking organizations such as the Bank that are experiencing or anticipating significant growth, as well as those organizations whose financial condition or operations give rise to supervisory concerns, are generally required to maintain a higher Tier 1 leverage ratio.
The bank regulators also continue to consider a “tangible Tier 1 leverage ratio” in evaluating proposals for expansion or new activities. The tangible Tier 1 leverage ratio is the ratio of a banking organization’s Tier 1 capital, less deductions for intangibles otherwise includable in Tier 1 capital, to total tangible assets.
Under the U.S. Basel III Capital Rules, Tier 1 capital is redefined to include two components: Common Equity Tier 1 capital and Additional Tier 1 capital. The new and highest form of capital, Common Equity Tier 1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, and limited amounts of qualifying minority interests that are in the form of common stock. Additional Tier 1 capital includes noncumulative perpetual preferred stock. Additionally, bank holding companies with less than $15.0 billion in total consolidated assets, such as the Company, may include a limited amount of trust-preferred securities and cumulative perpetual preferred stock issued before May 19, 2010 in Additional Tier 1 capital, but not in Common Equity Tier 1 capital, subject to certain restrictions. Tier 2 capital includes subordinated debt meeting certain eligibility criteria, limited amounts of the allowance for loan and lease losses as well as any excess of qualifying trust preferred securities and cumulative perpetual preferred stock.
The U.S. Basel III Capital Rules retain or modify certain deductions from and adjustments to regulatory capital and also provide for new ones. Deductions from Common Equity Tier 1 capital are required for goodwill (net of associated deferred tax liabilities); intangible assets such as nonmortgage servicing assets and purchased credit card relationships (net of associated deferred tax liabilities); deferred tax assets that arise from net operating loss and tax credit carryforwards (net of any related valuation allowances and net of deferred tax liabilities); any gain on sale in connection with a securitization exposure; any defined benefit pension fund net asset (net of any associated deferred tax liabilities) held by a bank holding company (this provision does not apply to a bank or savings association); the aggregate amount of outstanding equity investments (including retained earnings) in financial subsidiaries; investments in a banking organization’s own capital instruments; and identified losses. Deductions from the other tiers of regulatory capital are also required.
Additionally, the U.S. Basel III Capital Rules provide for limited recognition in Common Equity Tier 1 capital of three categories of assets: (i) deferred tax assets arising from temporary differences that cannot be realized through net operating loss carrybacks (net of related valuation allowances and of deferred tax liabilities), (ii) mortgage servicing assets (net of associated deferred tax liabilities) and (iii) investments in more than 10% of the issued and outstanding common stock of unconsolidated financial institutions (net of associated deferred tax liabilities). The amount in each category that exceeds 10% of Common Equity Tier 1 capital (after applying certain regulatory adjustments) must be fully deducted from Common Equity Tier 1 capital. The remaining, nondeducted amounts are then aggregated, and the amount by which this total amount exceeds 15% of Common Equity Tier 1 capital must be deducted from Common Equity Tier 1 capital. Amounts of minority investments in consolidated subsidiaries that exceed certain limits and investments in unconsolidated financial institutions may also have to be deducted from the category of capital to which such instruments belong.
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Accumulated other comprehensive income, or AOCI, is presumptively included in Common Equity Tier 1 capital and often would operate to reduce this category of capital. The U.S. Basel III Capital Rules provided a one-time opportunity at the end of the first quarter of 2015 for many covered banking organizations to opt out of much of this treatment of AOCI. The Bank opted out of the AOCI treatment in March 2015.
For purposes of calculating the denominator of the three risk-based capital ratios, the assets of covered banking organizations are given risk weights that, under the U.S. Basel III Capital Rules, range from 0% to 1,250%, depending on the nature of the asset. The U.S. Basel III Capital Rules increase the risk weight for certain assets, such as high volatility commercial real estate loans, mortgage servicing rights not includable in Common Equity Tier 1 capital, equity exposures, and claims on qualifying securities firms, meaning that more capital must be held against such assets. Direct obligations of the U.S. Treasury or obligations unconditionally guaranteed by the U.S. government have a 0% risk weight, while general obligation claims on states or other political subdivisions of the United States are assigned a 20% risk weight, except for municipal or state revenue bonds, which have a 50% risk weight. Most first-lien residential mortgage exposures that are prudently underwritten and performing according to their original terms carry a 50% risk weight, with a 100% risk weight for other residential mortgage exposures. In addition, certain off-balance sheet items are assigned credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk weight is applied. For example, the unused portion of unconditionally cancellable commitments is assigned a 0% conversion factor, while self-liquidating, transaction-related contingent items with an original maturity of one year or less and the amount of a commitment with an initial maturity of one year or less that is not unconditionally cancellable by the covered banking organization are converted at 20%. Transaction-related contingencies such as bid bonds and standby letters of credit backing nonfinancial obligations, as well as the amount of a commitment with an original maturity of more than one year that is not unconditionally cancellable, have a 50% conversion factor. General guarantees and standby letters of credit backing financial obligations are given a 100% conversion factor.
The U.S. Basel III Capital Rules also make important changes to the “prompt corrective action” framework discussed below in “—Bank Regulation—Capitalization Levels and Prompt Corrective Action.”
Restrictions on Affiliate Transactions
See “—Bank Regulation—Restrictions on Affiliate Transactions” below.
Bank Regulation
The Bank is a banking institution that is chartered by and headquartered in the state of Florida, and it is subject to supervision and regulation by the OFR and the FDIC. The OFR supervises and regulates all areas of the Bank’s operations including, without limitation, the making of loans, the issuance of securities, the conduct of the Bank’s corporate affairs, the satisfaction of capital adequacy requirements, the payment of dividends, and the establishment or closing of banking offices. The FDIC is the Bank’s primary federal regulatory agency, which periodically examines the Bank’s operations and financial condition and compliance with federal consumer protection laws. In addition, the Bank’s deposit accounts are insured by the FDIC to the maximum extent permitted by law, and the FDIC has certain enforcement powers over the Bank.
As a state-chartered banking institution in the state of Florida, the Bank is empowered by statute, subject to the limitations contained in those statutes, to take and pay interest on, savings and time deposits, to accept demand deposits, to make loans on residential and other real estate, to make consumer and commercial loans, to invest, with certain limitations, in equity securities and in debt obligations of banks and corporations and to provide various other banking services for the benefit of the Bank’s customers. Various state consumer laws and regulations also affect the operations of the Bank, including state usury laws, consumer credit and equal credit opportunity laws, and fair credit reporting. In addition, the Federal Deposit Insurance Corporation Improvement Act of 1991, or FDICIA, generally prohibits insured state chartered institutions from conducting activities as principal that are not permitted for national banks.
Capital Adequacy
See “—Holding Company Regulation—Capital Regulations.”
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Capitalization Levels and Prompt Corrective Action
Federal law and regulations establish a capital-based regulatory scheme designed to promote early intervention for troubled banks and require the FDIC to choose the least expensive resolution of bank failures. The capital-based regulatory framework contains five categories of regulatory capital requirements: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” The U.S. Basel III Capital Rules revised the capital thresholds for the prompt corrective action categories. Effective January 1, 2015, in order to qualify as well capitalized, an insured depository institution must maintain a Common Equity Tier 1 risk-based capital ratio of at least 6.5 percent, a Tier 1 risk-based capital ratio of at least 8.0 percent, a Total risk-based capital ratio of at least 10.0 percent, and a Tier 1 leverage ratio of at least 5.0 percent, and the bank must not be under any order or directive from the appropriate regulatory agency to meet and maintain a specific capital level. Generally, a financial institution must be “well capitalized” before the Federal Reserve will approve an application by a bank holding company to acquire a bank or merge with a bank holding company, and the FDIC applies the same requirement in approving bank merger applications. It should be noted that the minimum ratios referred to above in this section are merely guidelines, and the bank regulators possess the discretionary authority to require higher capital ratios.
Immediately upon becoming undercapitalized, a depository institution becomes subject to the provisions of Section 38 of the Federal Deposit Insurance Act, or the FDIA, which: (i) restrict payment of capital distributions and management fees; (ii) require that the appropriate federal banking agency monitor the condition of the institution and its efforts to restore its capital; (iii) require submission of a capital restoration plan; (iv) restrict the growth of the institution’s assets; and (v) require prior approval of certain expansion proposals. Bank holding companies controlling financial institutions can be called upon to boost the institutions’ capital and to partially guarantee the institutions’ performance under their capital restoration plans. The appropriate federal banking agency for an undercapitalized institution also may take any number of discretionary supervisory actions if the agency determines that any of these actions is necessary to resolve the problems of the institution at the least possible long-term cost to the deposit insurance fund, subject in certain cases to specified procedures. These discretionary supervisory actions include: (i) requiring the institution to raise additional capital; (ii) restricting transactions with affiliates; (iii) requiring divestiture of the institution or the sale of the institution to a willing purchaser; (iv) requiring the institution to change and improve its management; (iv) prohibiting the acceptance of deposits from correspondent banks; (v) requiring prior Federal Reserve approval for any capital distribution by a bank holding company controlling the institution; and (vi) any other supervisory action that the agency deems appropriate. These and additional mandatory and permissive supervisory actions may be taken with respect to significantly undercapitalized and critically undercapitalized institutions.
As of December 31, 2015, the Bank exceeded the requirements contained in the applicable regulations, policies and directives pertaining to capital adequacy to be classified as “well capitalized,” and it is unaware of any material violation or alleged violation of these regulations, policies or directives. Rapid growth, poor loan portfolio performance, or poor earnings performance, or a combination of these factors, could change the Bank’s capital position in a relatively short period of time, making additional capital infusions necessary.
Bank Reserves
The Federal Reserve requires all depository institutions, even if not members of the Federal Reserve System, to maintain reserves against some transaction accounts (primarily negotiable order of withdrawal, or NOW, and Super NOW checking accounts). The balances maintained to meet the reserve requirements imposed by the Federal Reserve may be used to satisfy liquidity requirements. An institution may borrow from the Federal Reserve Bank “discount window” as a secondary source of funds, provided that the institution meets the Federal Reserve Bank’s credit standards.
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Bank Dividends
Florida law places restrictions on the declaration of dividends by state chartered banks to their stockholders. Pursuant to the Florida Financial Institutions Code, the board of directors of state-chartered banks, after charging off bad debts, depreciation and other worthless assets, if any, and making provision for reasonably anticipated future losses on loans and other assets, may quarterly, semiannually or annually declare a dividend of up to the aggregate net profits of that period combined with a bank’s retained net profits for the preceding two years and, with the approval of the OFR, declare a dividend from retained net profits which accrued prior to the preceding two years. Before declaring such dividends, 20% of the net profits for the preceding period as is covered by the dividend must be transferred to the surplus fund of a bank until this fund becomes equal to the amount of a bank’s common stock then issued and outstanding. A state-chartered bank may not declare any dividend if (i) its net income (loss) from the current year combined with the retained net income (loss) for the preceding two years aggregates a loss or (ii) the payment of such dividend would cause the capital account of a bank to fall below the minimum amount required by law, regulation, order or any written agreement with the OFR or a federal regulatory agency.
Insurance of Accounts and Other Assessments
The Bank pays deposit insurance assessments to the Deposit Insurance Fund, which is determined through a risk-based assessment system. The Bank’s deposit accounts are currently insured by the Deposit Insurance Fund, generally up to a maximum of $250,000 per separately insured depositor. The Bank pays assessments to the FDIC for such deposit insurance. Under the current assessment system, the FDIC assigns an institution to a risk category based on the institution’s most recent supervisory and capital evaluations, which are designed to measure risk. Under the FDIA, the FDIC may terminate a bank’s deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, agreement or condition imposed by the FDIC.
In addition, all FDIC-insured institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation (“FICO”), an agency of the federal government established to recapitalize the predecessor to the Savings Association Insurance Fund. FICO assessments are set quarterly and the assessment rate was .600 (annual) basis points for the first, second and fourth quarters of 2015, .580 (annual) basis points for the third quarter of 2015 and .620 (annual) basis points for all four quarters of 2014. These assessments will continue until the FICO bonds mature in 2017 through 2019.
Restrictions on Affiliate Transactions
The Bank is subject to sections 23A and 23B of the Federal Reserve Act and the Federal Reserve’s Regulation W, as made applicable to state nonmember banks by section 18(j) of the Federal Deposit Insurance Act. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the Bank. Accordingly, transactions between the Company, the Bank and any nonbank subsidiaries will be subject to a number of restrictions. Sections 23A and 23B of the Federal Reserve Act impose restrictions and limitations on the Bank from making extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, the Company or other affiliates, the purchase of, or investment in, stock or other securities thereof, the taking of such securities as collateral for loans, and the purchase of assets of the Company or other affiliates. Such restrictions and limitations prevent the Company or other affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts. Furthermore, such secured loans and investments by the Bank to or in the Company or to or in any other nonbanking affiliate are limited, individually, to ten percent (10%) of the Bank’s capital and surplus, and such secured loans are limited in the aggregate to twenty percent (20%) of the Bank’s capital and surplus.
All such transactions must be on terms that are no less favorable to the Bank than those that would be available from nonaffiliated third parties. Moreover, state banking laws impose restrictions on affiliate transactions similar to those imposed by federal law. Federal Reserve policies also forbid the payment by bank subsidiaries of management fees which are unreasonable in amount or exceed the fair market value of the services rendered or, if no market exists, actual costs plus a reasonable profit.
Financial Subsidiaries
Under the GLBA, subject to certain conditions imposed by their respective banking regulators, national and state-chartered banks are permitted to form “financial subsidiaries” that may conduct financial or incidental activities, thereby permitting bank subsidiaries to engage in certain activities that previously were impermissible. The GLBA imposes several safeguards and restrictions on financial subsidiaries, including that the parent bank’s equity investment in the financial subsidiary be deducted from the bank’s assets and tangible equity for purposes of calculating the bank’s capital adequacy. In addition, the GLBA imposed new restrictions on transactions between a bank and its financial subsidiaries similar to restrictions applicable to transactions between banks and nonbank affiliates. As of December 31, 2015, the Bank did not have any financial subsidiaries.
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Loans to Insiders
Loans to executive officers, directors or to any person who directly or indirectly, or acting through or in concert with one or more persons, owns, controls or has the power to vote more than 10% of any class of voting securities of a bank, which the Bank refers to as “10% Stockholders,” or to any political or campaign committee the funds or services of which will benefit those executive officers, directors, or 10% Stockholders or which is controlled by those executive officers, directors or 10% Stockholders, are subject to Sections 22(g) and 22(h) of the Federal Reserve Act and their corresponding regulations (Regulation O). Among other things, these loans must be made on terms substantially the same as those prevailing on transactions made to unaffiliated individuals and certain extensions of credit to those persons must first be approved in advance by a disinterested majority of the entire board of directors. Regulation O prohibits loans to any of those individuals where the aggregate amount exceeds an amount equal to 15% of an institution’s unimpaired capital and surplus plus an additional 10% of unimpaired capital and surplus in the case of loans that are fully secured by readily marketable collateral, or when the aggregate amount on all of the extensions of credit outstanding to all of these persons would exceed the Bank’s unimpaired capital and unimpaired surplus. Section 22(g) identifies limited circumstances in which the Bank is permitted to extend credit to executive officers.
Change in Control
Subject to certain exceptions, the BHCA and the Change in Bank Control Act require Federal Reserve approval prior to any person or company acquiring “control” of a bank or bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25 percent or more of any class of voting securities, and in general is rebuttably presumed to exist if a person acquires 10 percent or more, but less than 25 percent, of any class of voting securities. In certain cases, a company may also be presumed to have control under the BHCA if it acquires 5 percent or more of any class of voting securities. Control may also be deemed to exist where a person or company is found to hold “controlling influence” over a bank or bank holding company.
Community Reinvestment Act
The Community Reinvestment Act, or the CRA, and its corresponding regulations are intended to encourage banks to help meet the credit needs of their service areas, including low and moderate-income neighborhoods, consistent with safe and sound operations. These regulations provide for regulatory assessment of a bank’s record in meeting the credit needs of its service area. Federal banking agencies are required to make public a rating of a bank’s performance under the CRA. The federal banking agencies consider a bank’s CRA rating when a bank submits an application to establish banking centers, merge, or acquire the assets and assume the liabilities of another bank. In the case of a bank holding company, the CRA performance record of all banks involved in the merger or acquisition are reviewed in connection with the filing of an application to acquire ownership or control of shares or assets of a bank or to merge with any other financial holding company. An unsatisfactory record can substantially delay, block or impose conditions on the transaction. The Bank received a satisfactory rating on its most recent CRA assessment dated November 24, 2014.
Interstate Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, or the Riegle-Neal Act, provides that adequately capitalized and managed bank holding companies are permitted to acquire banks in any state. Previously, under the Riegle-Neal Act, a bank’s ability to branch into a particular state was largely dependent upon whether the state “opted in” to de novo interstate branching. Many states did not “opt-in,” which resulted in branching restrictions in those states. The Dodd-Frank Act amended the Riegle-Neal legal framework for interstate branching to permit national banks and state banks to establish branches in any state if that state would permit the establishment of the branch by a state bank chartered in that state. All branching remains subject to applicable regulatory approval and adherence to applicable legal requirements.
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Anti-Money Laundering and Economic Sanctions
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, provides the federal government with additional powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering, or AML, requirements. By way of amendments to the Bank Secrecy Act, or BSA, the USA PATRIOT Act imposed new requirements that obligate financial institutions, such as banks, to take certain steps to control the risks associated with money laundering and terrorist financing.
Among other requirements, the USA PATRIOT Act and implementing regulations require banks to establish anti-money laundering programs that include, at a minimum:
| • | internal policies, procedures and controls designed to implement and maintain the savings association’s compliance with all of the requirements of the USA PATRIOT Act, the BSA and related laws and regulations; |
| • | systems and procedures for monitoring and reporting of suspicious transactions and activities; |
| • | designated compliance officer; |
| • | employee training; |
| • | an independent audit function to test the anti-money laundering program; |
| • | procedures to verify the identity of each customer upon the opening of accounts; and |
| • | heightened due diligence policies, procedures and controls applicable to certain foreign accounts and relationships. |
Additionally, the USA PATRIOT Act requires each financial institution to develop a customer identification program, or CIP, as part of the Bank’s anti-money laundering program. The key components of the CIP are identification, verification, government list comparison, notice and record retention. The purpose of the CIP is to enable the financial institution to determine the true identity and anticipated account activity of each customer. To make this determination, among other things, the financial institution must collect certain information from customers at the time they enter into the customer relationship with the financial institution. This information must be verified within a reasonable time through documentary and nondocumentary methods. Furthermore, all customers must be screened against any CIP-related government lists of known or suspected terrorists. Financial institutions are also required to comply with various reporting and recordkeeping requirements. The Federal Reserve and the FDIC consider an applicant’s effectiveness in combating money laundering, among other factors, in connection with an application to approve a bank merger or acquisition of control of a bank or bank holding company.
Likewise, the U.S. Treasury Department’s Office of Foreign Assets Control, or OFAC, is responsible for helping to ensure that United States entities do not engage in transactions with the subjects of U.S. sanctions, as defined by various Executive Orders and Acts of Congress. OFAC has sent, and will send, our banking regulatory agencies lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts. If the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list, it must freeze such account, file a suspicious activity report and notify appropriate authorities.
The Bank has adopted policies, procedures and controls to comply with the BSA, the USA PATRIOT Act and OFAC regulations.
Regulatory Enforcement Authority
Federal and state banking laws grant substantial enforcement powers to federal and state banking regulators. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to initiate injunctive actions against banking organizations and “institution-affiliated parties,” such as management, employees and agents. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities. When issued by a banking regulator, cease-and-desist and similar orders may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss. A bank may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions determined to be appropriate by the ordering regulatory agency.
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Federal Home Loan Bank System
The Bank is a member of the FHLB of Atlanta, which is one of 12 regional FHLBs. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the FHLB system. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the FHLB.
As a member of the FHLB of Atlanta, the Bank is required to own capital stock in the FHLB in an amount generally at least equal to 0.20% (or 20 basis points) of the Bank’s total assets at the end of each calendar year, plus 4.5% of its outstanding advances (borrowings) from the FHLB of Atlanta under the activity-based stock ownership requirement. These requirements are subject to adjustment from time to time. On December 31, 2015, the Bank was in compliance with these requirements.
Privacy and Data Security
Under the GLBA, federal banking regulators adopted rules limiting the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties. The rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to nonaffiliated third parties. The GLBA also directed federal regulators, including the FDIC, to prescribe standards for the security of consumer information. The Bank is subject to such standards, as well as standards for notifying customers in the event of a security breach.
Consumer Laws and Regulations
The Bank is also subject to other federal and state consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth below is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Check Clearing for the 21st Century Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Fair and Accurate Transactions Act, the Servicemembers Civil Relief Act, the Military Lending Act, the Mortgage Disclosure Improvement Act, and the Real Estate Settlement Procedures Act, among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with consumers when offering consumer financial products and services.
Rulemaking authority for these and other consumer financial protection laws transferred from the prudential regulators to the CFPB on July 21, 2011. In some cases, regulators such as the Federal Trade Commission, or FTC, and the Department of Justice also retain certain rulemaking or enforcement authority. The CFPB also has broad authority to prohibit unfair, deceptive and abusive acts and practices, or UDAAP, and to investigate and penalize financial institutions that violate this prohibition. While the statutory language of the Dodd-Frank Act sets forth the standards for acts and practices that violate the prohibition on UDAAP, certain aspects of these standards are untested, and thus it is currently not possible to predict how the CFPB will exercise this authority.
The Dodd-Frank Act also authorized the CFPB to establish certain minimum standards for the origination of residential mortgages, including a determination of the borrower’s ability to repay. Under the Dodd-Frank Act, financial institutions may not make a residential mortgage loan unless they make a “reasonable and good faith determination” that the consumer has a “reasonable ability” to repay the loan. The act allows borrowers to raise certain defenses to foreclosure but provides a full or partial safe harbor from such defenses for loans that are “qualified mortgages.” On January 10, 2013, the CFPB published final rules to, among other things, specify the types of income and assets that may be considered in the ability-to-repay determination, the permissible sources for verification, and the required methods of calculating the loan’s monthly payments. Since then the CFPB made certain modifications to these rules. The rules extend the requirement that creditors verify and document a borrower’s “income and assets” to include all “information” that creditors rely on in determining repayment ability. The rules also provide further examples of third-party documents that may be relied on for such verification, such as government records and check-cashing or funds-transfer service receipts. The new rules were effective beginning on January 10, 2014. The rules also define “qualified mortgages,” imposing both underwriting standards—for example, a borrower’s debt-to-income ratio may not exceed 43%—and limits on the terms of their loans. Points and fees are subject to a relatively stringent cap, and the terms include a wide array of payments that may be made in the course of closing a loan. Certain loans, including interest-only loans and negative amortization loans, cannot be qualified mortgages.
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Other Dodd-Frank Act Reforms
Volcker Rule
On December 10, 2013, five federal regulators including the FDIC and the Federal Reserve issued final rules to implement the Volcker Rule required by the Dodd-Frank Act. The Volcker Rule prohibits “banking entities,” which include the Bank and the Company, from (i) engaging in “proprietary trading,” and (ii) investing in or sponsoring certain types of funds (covered funds), in each case subject to certain limited exceptions. The final rules contain exemptions for market-making, hedging, underwriting, and trading in U.S. government and agency obligations and also permit certain ownership interests in certain types of funds to be retained. They also permit the offering and sponsoring of funds under certain conditions. Banking entities were required to bring all of their activities and investments into conformance with the Volcker Rule by July 21, 2015, subject to certain extensions. In addition, the Volcker Rule requires banking entities to have comprehensive compliance programs reasonably designed to ensure and monitor compliance with the Volcker Rule. The Company is of the view that the ongoing impact of the Volcker Rule will not be material to its business operations.
Executive Compensation and Corporate Governance
The Dodd-Frank Act requires public companies to include, at least once every three years, a separate nonbinding “say on pay” vote in their proxy statement by which stockholders may vote on the compensation of the public company’s named executive officers. In addition, if such public companies are involved in a merger, acquisition, or consolidation, or if they propose to sell or dispose of all or substantially all of their assets, stockholders have a right to an advisory vote on any golden parachute arrangements in connection with such transaction (frequently referred to as “say-on-golden parachute” vote). Other provisions of the act may impact our corporate governance. For instance, the act requires the Securities and Exchange Commission (“SEC”) to adopt rules prohibiting the listing of any equity security of a company that does not have an independent compensation committee; and requiring all exchange-traded companies to adopt clawback policies for incentive compensation paid to executive officers in the event of accounting restatements based on material noncompliance with financial reporting requirements.
Future Legislative Developments
Various legislative acts are from time to time introduced in Congress and the Florida legislature. This legislation may change banking statutes and the environment in which the Company and the Bank operate in substantial and unpredictable ways. The Company and the Bank cannot determine the ultimate effect that potential legislation, if enacted, or implementing regulations and interpretations with respect thereto, would have upon the Company’s and the Bank’s financial condition or results of operations.
Implications of Being an Emerging Growth Company
As a company with less than $1.0 billion in gross revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of reduced regulatory and reporting requirements that are otherwise generally applicable to public companies. As an emerging growth company:
| • | we are exempt from the requirement to obtain an attestation and report from our auditors on the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act; |
| • | we are permitted to provide less extensive disclosure about our executive compensation arrangements; and |
| • | we are not required to hold nonbinding advisory votes on executive compensation or golden parachute arrangements. |
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We may take advantage of these provisions for up to approximately another four years unless we earlier cease to be an emerging growth company. We will cease to be an emerging growth company if we have more than $1.0 billion in annual gross revenues, have more than $700.0 million in market value of our common stock held by nonaffiliates, or issue more than $1.0 billion of nonconvertible debt in a three-year period. We may choose to take advantage of some but not all of these reduced regulatory and reporting requirements. We have elected to adopt the reduced disclosure requirements described above for purposes of this Annual Report on Form 10-K.
We may continue to take advantage of some or all of the reduced regulatory, accounting and reporting requirements that will be available to us as long as we continue to qualify as an emerging growth company. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. While we have elected to retain the ability to delay adopting new or revised accounting standards in the future, at December 31, 2015, 2014 and 2013, we had adopted all new accounting standards that could affect the comparability of our financial statements to those of other public entities.
Available Information
The Company maintains an internet site at www.c1bank.com on which it makes available, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC. In addition, stockholders may access these reports and documents on the SEC’s website at www.sec.gov.
You should carefully consider the following risks and all of the other information set forth in this annual report before deciding to invest in shares of our common stock. If any of the following risks actually occurs, our business, financial condition or results of operations would likely suffer. In such case, the trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment.
Risks Related to Our Business
The geographic concentration of our markets makes our business highly susceptible to downturns in the local economies and depressed banking markets, which could be detrimental to our financial condition.
Unlike larger financial institutions that are more geographically diversified, we are a banking franchise concentrated in the state of Florida. As of December 31, 2015, approximately 94% of the loans in our loan portfolio were made to borrowers who live and/or conduct business in Florida. Deterioration in local economic conditions in the loan market or in the commercial or industrial real estate market could have a material adverse effect on the quality of our portfolio by eroding the loan-to-value ratio of our portfolio, the demand for our products and services, the ability of borrowers to timely repay loans, the value of the collateral securing loans and our financial condition, results of operations and future prospects. In addition, if the population or income growth in the region is slower than projected, income levels, deposits and real estate development could be adversely affected and could result in the curtailment of our expansion, growth and profitability. If any of these developments were to result in losses that materially and adversely affected the Bank’s capital, we might be subject to regulatory restrictions on operations and growth and to a requirement to raise additional capital.
We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so may materially adversely affect our performance.
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We are a community bank, and our reputation is one of the most valuable components of our business. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results may be materially adversely affected.
A return of recessionary conditions could result in increases in our level of nonperforming loans and/or reduced demand for our products and services, which could have an adverse effect on our results of operations.
Economic growth has been slow and uneven, and unemployment levels remain high. Recovery by many businesses has been impaired by lower consumer spending. A return to prolonged deteriorating economic conditions and/or continued negative developments in the domestic and international credit markets could significantly affect the ability of our customers to operate, the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. These events may cause us to incur losses and may adversely affect our financial condition and results of operations.
Our allowance for loan losses and fair value adjustments may prove to be insufficient to absorb losses for our loans that we originated or acquired.
Lending money is a substantial part of our business and each loan carries a certain risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things:
| • | cash flow of the borrower and/or the project being financed; |
| • | the changes and uncertainties as to the future value of the collateral, in the case of a collateralized loan; |
| • | the duration of the loan; |
| • | the discount on the loan at the time of acquisition, if acquired; |
| • | the credit history of a particular borrower; and |
| • | changes in economic and industry conditions. |
As of December 31, 2015, the allowance for loan losses was $8.0 million while total nonperforming loans was $36.0 million. The total nonperforming loans amount is primarily due to two nonaccrual commercial real estate loans to a Brazilian borrower. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Foreign Outstandings to Brazil and —Nonperforming and Substandard Assets.” The amount of our allowance for loan losses for nonperforming loans is determined by our management team through periodic reviews. 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.
Like all banks, we have developed and applied a methodology for determining, based upon a number of factors—including, for example, historical loss rates and assumptions regarding future losses—the appropriate level of allowance to maintain in respect of probable loan losses. In applying this methodology and determining the appropriate level of the allowance, we inherently face a high degree of subjectivity and are required to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans that we originate, identification of additional problem loans originated by us and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for probable loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan losses, we will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and capital and may have a material adverse effect on our financial condition and results of operations. Furthermore, if our methodology or assumptions in determining our allowance for loan losses are not sound, then our allowance for loan losses will not be sufficient to cover our loan losses. See Note 1, “Summary of Significant Accounting Policies” to our Consolidated Financial Statements for further information about this estimate and our methodology.
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Our financial performance may be negatively affected if our loans are not repaid as expected.
Given our limited history and significant portfolio growth, many of the loans originated by C1 Bank may be unseasoned, meaning that many of the loans were originated relatively recently. In particular, approximately 81% of our loans outstanding at December 31, 2015, had been originated by C1 Bank since 2010. Our limited experience with these loans does not provide us with a significant payment history pattern with which to judge future collectability. As a result, it may be difficult to predict the future performance of our loan portfolio. These loans may have delinquency or charge-off levels above our expectations, which could negatively affect our performance.
If we are unable to manage our rapid growth, our business could be disrupted and the price of our common stock could go down.
Since we began our activities, we have experienced rapid growth. We expect to continue to implement a strategy of aggressive growth in our loans and deposits. Our growth is expected to place significant demands on our management and other resources and will require us to continue to develop and improve our operational, credit, financial and other internal risk controls. Rapid growth may also lead to deterioration in underwriting standards and puts pressure on internal systems. This growth will also provide challenges in our effort to maintain and improve the quality of our assets. Our inability to manage our growth effectively could have a material adverse effect on our business, our future financial performance and the price of our common stock.
Our risk management framework may not be effective in mitigating risks and/or losses to us.
Our risk management framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and compliance. Our framework also includes financial or other modeling methodologies that involve management assumptions and judgment. Our risk management framework may not be effective under all circumstances or that it will adequately mitigate any risk or loss to us. In addition, our rapid growth may put additional pressure on our framework. If our framework is not effective, we could suffer unexpected losses and our business, financial condition, results of operations or prospects could be materially and adversely affected. We may also be subject to potentially adverse regulatory consequences.
Our financial performance will be negatively impacted if we are unable to execute our growth strategy.
Our current growth strategy is to grow organically and supplement that growth with select acquisitions. Our ability to grow organically depends primarily on generating loans and deposits of acceptable risk and expense, and we may not be successful in continuing this organic growth. Our ability to identify appropriate markets for expansion, recruit and retain qualified personnel, and fund growth at a reasonable cost, depends upon prevailing economic conditions, maintenance of sufficient capital, competitive factors and changes in banking laws, among other factors. Conversely, if we grow too quickly and are unable to control costs and maintain asset quality, such growth, whether organic or through select acquisitions, could materially and adversely affect our financial condition and results of operations.
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We are subject to risks associated with loans to Brazilian companies.
We have made four commercial real estate loans to three Brazilian corporations, with aggregate outstanding balances at December 31, 2015 and December 31, 2014 of $41.3 million and $44.0 million, respectively. The collateral for these loans is held in Brazil and consists primarily of real estate. Two of the loans are secured by a first lien on farmland appraised at $44.5 million, of which we are entitled to 50.9%, as the collateral is shared on a first lien basis with another bank. The three main parcels of this collateral pool (representing 83% of the collateral) were appraised during 2014, and the rest in 2012. At December 31, 2015, these two loans were included in the 60-89 days past due category and on nonaccrual status as we determined that the full timely collection of principal and interest was doubtful. The third loan is secured by a first lien on farmland appraised at $39.7 million during 2015. This loan was included in the 60-89 days past due category as of December 31, 2015 and a payment was received in early February 2016, which brought the loan current to December 5, 2015. The final loan is secured by closely held stock. This loan is current and paying as agreed. There is inherent country risk associated with this international business. International trade laws, U.S. relations with Brazil, foreign exchange volatility, the foreign nature of the Brazilian legal system and government policy, and regulatory changes may inhibit our ability to collect payment, or claim collateral (if any) located in Brazil. Furthermore, we may experience loss due to unforeseen economic, social or weather conditions that affect Brazilian markets and in particular the market for Brazilian agriculture products. The expense of collecting on defaulted loans may be higher than in the United States, which may reduce the size of any recovery. We are also subject to the risk that the value of any real estate collateral could decline, further harming our ability to fully collect on any defaulted loan. The appraised values of the collateral securing these loans have decreased in U.S. Dollar terms as the Brazilian currency has devalued against the U.S. Dollar and could decrease further if the Brazilian currency continues to devalue. The Brazilian economy is experiencing negative growth, a material decline in the value of its currency, increasing rates of inflation, growing unemployment and higher interest rates; the country has been recently downgraded by two of the rating agencies to non-investment grade (junk) status. These macroeconomic trends coupled with a growing corruption scandal involving the government, state-owned enterprises and some of the largest private corporations have placed significant stress on the Brazilian economy and may affect the ability of our borrowers to repay their loans and the value of our underlying collateral. Exchange rate fluctuations may stress the debt service coverage of these borrowers and impact the U.S. dollar value of the collateral. We may be forced to modify these loans in an attempt to collect, which could further increase our level of classified assets, harm our earnings, negatively impact our capital, and increase regulatory scrutiny. The substantial size of each of these individual relationships could, if unpaid, materially adversely affect our earnings and capital.
The institutions we have acquired, and may acquire in the future, have high levels of distressed assets and we may not be able to realize the value we predict from these assets or accurately estimate the future write-downs taken in respect of these assets.
Delinquencies and losses in the loan portfolios and other assets of financial institutions that we have acquired, and may acquire in the future, may exceed our initial forecasts developed during the due diligence investigation prior to acquiring those institutions. Even if we conduct extensive due diligence on an entity we decide to acquire, this diligence may not reveal all material issues that may affect that particular entity. The diligence process in FDIC-assisted transactions is also expedited due to the short acquisition timeline that is typical for these depository institutions. If, during the diligence process, we fail to identify issues specific to an entity or the environment in which the entity operates, we may be forced to later write down or write off assets, restructure our operations, or incur impairment or other charges that could result in other reporting losses. Moreover, the process of resolving the problem assets that we have acquired takes a significant amount of time. Throughout this process, such problem assets are subject to regular reappraisals, which could lead to write-offs or require us to establish additional allowance for loan losses. Any of these events could adversely affect the financial condition, liquidity, capital position and value of institutions we acquire and of the Company as a whole.
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Changes in interest rates could have significant adverse effects on our financial condition and results of operations.
Fluctuations in interest rates could have significant adverse effects on our financial condition and results of operations. We are unable to predict changes in market interest rates, which are affected by many factors beyond our control, including inflation, recession, unemployment, money supply, domestic and international events and changes in financial markets in the United States and in other countries. Our net interest income is affected not only by the level and direction of interest rates, but also by the shape of the yield curve and relationships between interest-sensitive instruments and key driver rates, as well as balance sheet growth, client loan and deposit preferences and the timing of changes in these variables. In an environment in which interest rates are increasing, our interest costs on liabilities may increase more rapidly than our income on interest-earning assets. This could result in a deterioration of our net interest margin.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to our business. Our loan-to-deposit ratio, calculated by dividing our total loans by our total deposits, exceeded 100% at December 31, 2015. A higher loan-to-deposit ratio generally means that a financial institution might not have enough liquidity to cover any unforeseen requirements or that the institution is more reliant on borrowings that may no longer be available.
An inability to raise funds through deposits, borrowings, and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities on terms that are acceptable to us could be impaired by factors that affect us specifically, the financial services industry, or economy in general. Factors that could negatively impact our access to liquidity sources include a decrease of our business activity as a result of a downturn in the markets in which our loans are concentrated, adverse regulatory action against us, or our inability to attract and retain deposits. The loss of any single large depositor could have a negative effect on our liquidity. Our ability to borrow could be impaired by factors that are not specific to us, such as a disruption in the financial markets and diminished expectations or growth in the financial services industry.
Our funding sources may prove insufficient to replace deposits and support our future growth.
We rely on customer deposits, advances from the FHLB, nationally marketed CDs, brokered CDs and lines of credit at other financial institutions to fund our operations. Although we have historically been able to replace maturing deposits and advances if desired, we may not be able to replace such funds in the future if our financial condition, the financial condition of the FHLB or market conditions were to change. Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our profitability would be adversely affected.
FHLB borrowings and other current sources of liquidity may not be available or, if available, sufficient to provide adequate funding for operations. Furthermore, our own actions could result in a loss of adequate funding. For example, our availability at the FHLB could be reduced if we are deemed to have poor documentation or processes. Accordingly, we may seek additional higher-cost debt in the future to achieve our long-term business objectives. Additional borrowings, if sought, may not be available to us or, if available, may not be available on favorable terms. If additional financing sources are unavailable or are not available on reasonable terms, our growth and future prospects could be adversely affected.
Our loan portfolio includes unsecured, commercial, real estate, consumer and other loans that may have higher risks, and we currently exceed the regulatory guidelines for commercial real estate loans.
Our residential real estate, commercial real estate, construction, commercial, and consumer loans at December 31, 2015, were $303.6 million, $783.8 million, $197.1 million, $63.6 million, and $94.5 million, respectively, or 21.0%, 54.3%, 13.7%, 4.4%, and 6.6%, respectively, of our total loans. We have a high concentration of commercial real estate loans which at December 31, 2015 exceeded the guidance by bank regulators. At December 31, 2015 and December 31, 2014, our ratio for construction, development and other land loans to total capital was 99% and 57%, respectively, compared to the FDIC guideline of 100%, while the ratio for commercial real estate loans (including construction, development and other land loans and loans secured by multifamily and nonowner occupied nonfarm nonresidential property) to total capital was 355% and 284%, respectively, compared to the FDIC guideline of 300%. The higher ratios at December 31, 2015 when compared to December 31, 2014, resulted from loan growth. Our board of directors authorized us to operate up to 125% of total risk based capital for construction, development and other land loans until April 30, 2016 and 400% of total risk based capital for commercial real estate loans until December 31, 2016.
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Commercial loans and commercial real estate loans generally carry larger balances and can involve a greater degree of financial and credit risk than other loans. As a result, banking regulators continue to give greater scrutiny to lenders with a high concentration of commercial real estate loans in their portfolios, such as us, and such lenders are expected to implement stricter underwriting standards, internal controls, risk management policies, and portfolio stress testing, as well as higher capital levels and loss allowances. The increased financial and credit risk associated with these types of loans are a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the size of loan balances, the effects of general economic conditions on income-producing properties, and the increased difficulty of evaluating and monitoring these types of loans. During the recent economic downturn, financial institutions with high commercial real estate loan concentrations were more susceptible to failure. If we cannot effectively manage the risk associated with our high concentration of commercial real estate loans, our financial condition and results of operations may be adversely affected.
The nature of our commercial loan portfolio may expose us to increased lending risks.
We make both secured and unsecured commercial loans. Secured commercial loans are generally collateralized by real estate, accounts receivable, inventory, equipment or other assets owned by the borrower and include a personal guaranty of the business owner. Unsecured loans generally involve a higher degree of risk of loss than do secured loans because, without collateral, repayment is wholly dependent upon the success of the borrowers’ businesses. Because of this lack of collateral, we are limited in our ability to collect on defaulted unsecured loans.
We may not be able to gain the expected benefits of our partnership with CenterState.
On March 4, 2015, we entered into a partnership with CenterState Bank of Florida, N.A., or CenterState, pursuant to which CenterState will provide analytics, launch and market C1 Lab's Smart Loan Express to financial institutions across the country. Our lender incentive program is linked to the Smart Loan Express output so that the incentive structure favors those loans with a higher risk-adjusted incremental return on equity. If we are not able to gain the expected benefits of our partnership with CenterState, our results of operations may be negatively affected.
Our largest loan relationships currently make up a material percentage of our total loan portfolio.
As of December 31 2015, our ten largest loan relationships totaled over $309 million in loan exposure, or 19.1% of the total loan portfolio and unfunded commitments. The concentration risk associated with having a small number of extremely large loan relationships is that if one or more of these relationships were to become delinquent or suffer default, we could be at serious risk of material losses. The allowance for loan losses may not be adequate to cover losses associated with any of these relationships and any loss or increase in the allowance would negatively affect our earnings and capital. Even if the loans are collateralized, the large increase in classified assets could harm our reputation with our regulators and inhibit our ability to execute our business plan. The prepayment of any of these relationships could harm our interest income.
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Many of our investments are focused on long-term returns, are expensive and may not yield the expected returns to justify their cost.
Part of our business plan has been to make material investments into our infrastructure, technology, banking centers and personnel, with a focus on long-term results. However, many of these investments are expensive in the short term and rely heavily on their future success to remain financially justifiable. Examples include (i) we spend materially more than an average bank our size on sports marketing, the results of which are hard to measure and may not justify the cost; (ii) our management-training program is expensive and the graduates from this program may not produce superior results to employees from less expensive forms of hiring and training; (iii) our strategy to fund our liabilities with longer-duration, higher-cost funds that will only pay off if interest rates increase during their term; and (iv) we invest heavily in technology to increase our productivity and our relationships with our clients, yet the products are new and may not yield the desired results. These investments, especially if not successful, reduce earnings, capital and financial flexibility and if not successful in the long term will have not produced the desired returns.
We may realize future losses if (i) our levels of nonperforming assets increase and if the proceeds we receive upon liquidation of assets are less than the carrying value of such assets or (ii) we are unable to sell our OREO assets within the holding periods established by federal and state regulators.
Nonperforming assets (including nonaccrual loans and other real estate owned, or OREO) totaled $64.3 million at December 31, 2015. These nonperforming assets can adversely affect net income through reduced interest income, increased operating expenses incurred to maintain such assets or loss charges related to subsequent declines in the estimated fair value of foreclosed assets. Any decrease in real estate market prices may lead to OREO write-downs, with a corresponding expense in our income statement. We evaluate OREO properties periodically and write down the carrying value of the properties if the results of our evaluation require it. Holding OREO properties is expensive and negatively impacts our earnings and results of operations. The expenses associated with OREO and any further property write-downs, both expected and unexpected, could have a material adverse effect on our financial condition and results of operations.
Furthermore, federal and state regulators place limits on the total amount of time that we may hold foreclosed upon real estate. If we are unable to sell such real estate within the prescribed time frames (or if our regulators are unwilling to grant us extensions to the holding period), we may be required to charge off OREO balances, which could have a material adverse effect on our financial condition and results of operations.
The Bank currently invests in bank-owned life insurance (“BOLI”) and may continue to do so in the future. Investing in BOLI exposes us to liquidity, credit and interest rate risk, which could adversely affect our results of operations and financial condition.
The Bank had $37.3 million in general and separate account BOLI contracts at December 31, 2015. BOLI is an illiquid long-term asset that provides tax savings because cash value growth and life insurance proceeds are not taxable. However, if the Bank needed additional liquidity and converted the BOLI to cash, any cash value gain above basis would be subject to ordinary income tax and applicable penalties. The Bank is also exposed to the credit risk of the underlying securities in the investment portfolio, and to the insurance carrier provider credit risk (in a general account contract). If BOLI was exchanged to another carrier, additional fees would be incurred and a tax-free exchange could only be done for insureds that were still actively employed by the Bank at that time. There is interest rate risk relating to the market value of the underlying investment securities associated with the BOLI in that there is no assurance that the market value of these securities will not decline.
Certain of our activities are restricted due to commitments entered into with the Federal Reserve by us and certain of our foreign national controlling stockholders.
Certain of our controlling stockholders are foreign nationals, and we and these controlling stockholders have entered into commitments with the Federal Reserve that restrict some of our activities. In particular, we are restricted from engaging in certain transactions with these controlling stockholders, their immediate family, any company controlled by the controlling stockholders, and any executive officer, director, or principal stockholder of a company controlled by these controlling stockholders. Such transactions include (i) extensions of credit, (ii) covered transactions described in sections 23A and 23B of the Federal Reserve Act and the Federal Reserve’s Regulation W, (iii) any other business transaction or relationship, without approval of the Federal Reserve, with any company controlled by such controlling stockholder, and (iv) restrictions on the amount of deposits held by the Bank of any company controlled by such controlling stockholders. We are also prohibited from incurring additional debt to any third party without prior approval from the Federal Reserve. Finally, we are restricted from directly accepting wires from or sending wires to foreign accounts, and we must instead use a correspondent bank when our clients need to send or receive such foreign wires. This makes the wire process more difficult for our clients and as a result may result in a loss of business from these clients.
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The loss of any member of our management team and our inability to make up for such loss with a qualified replacement could harm our business.
Our success and future growth depend upon the continued success of our management team, in particular our President and Chief Executive Officer, Trevor Burgess, and other key employees. Competition for qualified management in our industry is intense. Many of the companies with which we compete for management personnel have greater financial and other resources than we do or are located in geographic areas which may be considered by some to be more desirable places to live. If we are not able to retain any of our key management personnel, our business could be harmed.
Our business is highly competitive. If we are unable to successfully implement our business strategy, we risk losing market share to current and future competitors.
Commercial and consumer banking is highly competitive. Our market contains not only a large number of community and regional banks, but also a significant presence of the country’s largest commercial banks. We compete with other state and national financial institutions as well as savings and loan associations, savings banks and credit unions for deposits and loans. In addition, we compete with financial intermediaries, such as consumer finance companies, mortgage banking companies, insurance companies, securities firms, mutual funds and several government agencies as well as major retailers, all actively engaged in providing various types of loans and other financial services. Some of these competitors may have a long history of successful operations in our markets, greater ties to local businesses and more expansive banking relationships, as well as better established depositor bases. Competitors with greater resources may possess an advantage by attracting our clients through very aggressive product pricing that we are unable to match, maintaining numerous banking locations in more convenient sites, operating more ATMs and conducting extensive promotional and advertising campaigns or operating a more developed internet platform.
The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Increased competition among financial services companies due to the recent consolidation of certain competing financial institutions may adversely affect our ability to market our products and services. Also, technology has lowered barriers to entry and made it possible for banks to compete in our market without a retail footprint by offering competitive rates, as well as making it possible for nonbanks to offer products and services traditionally provided by banks. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may offer a broader range of products and services as well as better pricing for certain products and services than we can offer. For example, in the current low interest rate environment, competitors with lower costs of capital may solicit our customers to refinance their loans with a lower interest rate.
Our ability to compete successfully depends on a number of factors, including:
| • | our ability to develop, maintain and build upon long-term customer relationships based on quality service and high ethical standards; |
| • | our ability to attract and retain qualified employees to operate our business effectively; |
| • | our ability to expand our market position; |
| • | the scope, relevance and pricing of products and services that we offer to meet customer needs and demands; |
| • | the rate at which we introduce new products and services relative to our competitors; |
| • | customer satisfaction with our level of service; and |
| • | industry and general economic trends. |
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Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could harm our business, financial condition and results of operations.
The Bank’s lending limit per borrower will continue to be lower than many of our competitors, which may discourage potential clients and limit our loan growth.
The Bank’s legally mandated lending limit per borrower is lower than that of many of our larger competitors because we have less capital. At December 31, 2015, the Bank’s legal lending limit for loans was approximately $48 million to any one borrower on a secured basis and $29 million on an unsecured basis. The Bank’s lower lending limit may discourage potential borrowers with loan needs that exceed our limit from doing business with us, which may restrict our ability to grow. In addition, in July 2014, we established a $30.0 million “house limit” guideline for future relationships that may further impact our ability to lend to large borrowers and discourage these large borrowers from doing business with us.
We may be adversely affected by the lack of soundness of other financial institutions or market utilities.
Our ability to engage in routine funding and other transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial institutions are interrelated as a result of trading, clearing, counterparty or other relationships. Defaults by, or even rumors or questions about, one or more financial institutions or market utilities, or the financial services industry generally, may lead to market-wide liquidity problems and losses of depositor, creditor and counterparty confidence and could lead to losses or defaults by us or by other institutions.
Changes in accounting standards could materially impact our financial statements.
From time to time, the Financial Accounting Standards Board or the Securities and Exchange Commission, may change the financial accounting and reporting standards that govern the preparation of our financial statements. Such changes may result in us being subject to new or changing accounting and reporting standards. In addition, the bodies that interpret the accounting standards (such as banking regulators or outside auditors) may change their interpretations or positions on how these standards should be applied. These changes may be beyond our control, can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retrospectively, or apply an existing standard differently, also retrospectively, in each case resulting in our needing to revise or restate prior period financial statements.
We depend on the accuracy and completeness of information about customers and counterparties.
In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished to us by or on behalf of customers and counterparties, including financial statements and other financial information. We also may rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. In deciding whether to extend credit, we may rely upon our customers’ representations that their financial statements conform to accounting principles generally accepted in the United States of America, or GAAP, and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. We also may rely on customer representations and certifications, or other audit or accountants’ reports, with respect to the business and financial condition of our clients. Our financial condition, results of operations, financial reporting and reputation could be negatively affected if we rely on materially misleading, false, inaccurate or fraudulent information.
Our small to medium-sized business and entrepreneurial customers may have fewer financial resources than larger entities to weather a downturn in the economy, which may impair a borrower’s ability to repay a loan, and such impairment could adversely affect our results of operations and financial condition.
We focus our business development and marketing strategy primarily to serve the banking and financial services needs of small to medium-sized businesses and entrepreneurs. These small to medium-sized businesses and entrepreneurs may have fewer financial resources in terms of capital or borrowing capacity than larger entities. In general, if economic conditions negatively impact the Florida market generally and small to medium-sized businesses are adversely affected, our results of operations and financial condition may be negatively affected.
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If third parties infringe upon our intellectual property or if we were to infringe upon the intellectual property of third parties, we may expend significant resources enforcing or defending our rights or suffer competitive injury.
We rely on a combination of patent, copyright, trademark, trade secret laws and confidentiality provisions to establish and protect our proprietary rights, including those created by C1 Labs. If we fail to successfully maintain, protect and enforce our intellectual property rights, our competitive position could suffer. Similarly, if we were to infringe on the intellectual property rights of others, our competitive position could suffer. Third parties may challenge, invalidate, circumvent, infringe or misappropriate our intellectual property, or such intellectual property may not be sufficient to permit us to take advantage of current market trends or otherwise to provide competitive advantages, which could result in costly redesign efforts, discontinuance of certain product or service offerings, or other competitive harm. We may also be required to spend significant resources to monitor and police our intellectual property rights. Others, including our competitors, may independently develop similar technology, duplicate our products or services or design around our intellectual property, and in such cases we could not assert our intellectual property rights against such parties. Further, our contractual arrangements may not effectively prevent disclosure of our confidential information or provide an adequate remedy in the event of unauthorized disclosure of our confidential or proprietary information. We may have to litigate to enforce or determine the scope and enforceability of our intellectual property rights, trade secrets and know-how, which could be time-consuming and expensive, could cause a diversion of resources and may not prove successful. The loss of intellectual property protection or the inability to obtain rights with respect to third-party intellectual property could harm our business and ability to compete. In addition, because of the rapid pace of technological change in our industry, aspects of our business and our products and services rely on technologies developed or licensed by third parties, and we may not be able to obtain or continue to obtain licenses and technologies from these third parties on reasonable terms or at all.
In some instances, litigation may be necessary to enforce our intellectual property rights and protect our proprietary information, or to defend against claims by third parties that our products, services or technology infringe or otherwise violate their intellectual property or proprietary rights. Third parties may have, or may eventually be issued, patents that could be infringed by our products, services or technology. Any of these third parties could bring an infringement claim against us with respect to our products, services or technology. We may also be subject to third-party infringement, misappropriation, breach or other claims with respect to copyright, trademark, license usage or other intellectual property rights. In addition, in recent years, individuals and groups, including patent holding companies have been purchasing intellectual property assets in order to make claims of infringement and attempt to extract settlements from companies in the banking and financial services industry. Any litigation or claims brought by or against us, whether with or without merit, could result in substantial costs to us and divert the attention of our management, which could harm our business and results of operations. In addition, any intellectual property litigation or claims against us could result in the loss or compromise of our intellectual property and proprietary rights, subject us to significant liabilities including damage awards, result in an injunction prohibiting us from marketing or selling certain of our services, require us to redesign affected products or services, or require us to seek licenses which may only be available on unfavorable terms, if at all, any of which could harm our business and results of operations.
We are dependent on our information technology and telecommunications systems and third-party servicers, and systems failures, interruptions and security breaches could result in serious reputational harm to our business and have an adverse effect on our financial condition and results of operations.
Our business is highly dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party servicers. We outsource many of our major systems, such as data processing, loan servicing and deposit processing systems. In particular, we rely almost exclusively on FiServ, Inc. for our information management systems. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of our ability to process new and renewal loans or gather deposits and provide customer service, compromise our ability to operate effectively, result in potential noncompliance with applicable laws or regulations, damage our reputation, result in a loss of customer business and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.
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Failure in or breach of our operational or security systems or infrastructure, or those of our third-party vendors and other service providers, including as a result of cyber-attacks, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses. As a financial institution, we depend on our ability to process, record and monitor a large number of customer transactions on a continuous basis. As customer, public and regulatory expectations regarding operational and information security have increased, our operational systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions and breakdowns. Our business, financial, accounting, data processing systems or other operating systems and facilities may stop operating properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control. For example, there could be sudden increases in customer transaction volume, electrical or telecommunications outages, natural disasters such as earthquakes, tornadoes and hurricanes, disease pandemics, events arising from local or larger scale political or social matters, including terrorist acts and, as described below, cyber-attacks. Although we have business continuity plans and other safeguards in place, our business operations may be adversely affected by significant and widespread disruption to our physical infrastructure or operating systems that support our businesses and customers.
Information security risks for financial institutions have generally increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties. As noted above, our operations rely on the secure processing, transmission and storage of confidential information in our computer systems and networks. In addition, to access our products and services, our customers may use personal smartphones, tablet PCs, and other mobile devices that are beyond our control systems. Our technologies, systems, networks, and our customers’ devices may become the target of cyber-attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our customers’ confidential, proprietary and other information, or otherwise disrupt our or our customers’ or other third parties’ business operations. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities.
We are under continuous threat of loss due to hacking and cyber-attacks, especially as we continue to expand customer capabilities to utilize internet and other remote channels to transact business. Two of the most significant cyber-attack risks that we face are e-fraud and loss of sensitive customer data. Loss from e-fraud occurs when cybercriminals breach and extract funds directly from customer or our accounts. The attempts to breach sensitive customer data, such as account numbers and social security numbers, are less frequent but could present significant reputational, legal and/or regulatory costs to us if successful. Our risk and exposure to these matters remains heightened because of the evolving nature and complexity of these threats from cybercriminals and hackers, our plans to continue to provide internet banking and mobile banking channels, and our plans to develop additional remote connectivity solutions to serve our customers. While we have not experienced any material losses relating to cyber-attacks or other information security breaches to date, we may suffer such losses in the future. The occurrence of any cyber-attack or information security breach could result in potential liability to clients, reputational damage, damage to our competitive position and the disruption of our operations, all of which could adversely affect our business, financial condition or results of operations.
We are subject to certain operational risks, including customer or employee fraud.
Employee error and employee and customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee error and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee error could also subject us to financial claims for negligence.
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If our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured, exceeds applicable insurance limits or if insurance coverage is denied or not available, it could have a material adverse effect on our business, financial condition and results of operations.
We are subject to environmental liability risk associated with lending activities.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on nonresidential real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations.
We may make future acquisitions, which may be restricted by applicable regulation, difficult to integrate, divert management resources, result in unanticipated costs, or dilute our stockholders.
Part of our continuing business strategy is to make acquisitions of, or investments in, companies that complement our current position or offer growth opportunities.
The BHCA and federal and Florida state banking laws restrict the activities that the Company and the Bank may lawfully conduct, whether directly or indirectly through acquisitions, subsidiaries and certain interests in other companies. These laws also affect the ability to effect a change of control of the Company or another bank holding company, as discussed under “—There are substantial regulatory limitations on changes of control of bank holding companies.” These regulatory regimes are summarized in greater detail under “Business—Supervision and Regulation—Holding Company Regulation” and “Business—Supervision and Regulation—Bank Regulation.” Certain acquisitions may be subject to regulatory approval, and we may not receive timely regulatory approval for future acquisitions. Changes in the number or scope of permissible activities under applicable law could have an adverse effect on our ability to realize our strategic goals.
Furthermore, future acquisitions could pose numerous risks to our operations, including:
| • | we may have difficulty integrating the purchased operations; |
| • | we may incur substantial unanticipated integration costs; |
| • | assimilating the acquired businesses may divert significant management attention and financial resources from our other operations and could disrupt our ongoing business; |
| • | acquisitions could result in the loss of key employees, particularly those of the acquired operations; |
| • | we may have difficulty retaining or developing the acquired businesses’ customers; |
| • | acquisitions could adversely affect our existing business relationships with customers; |
| • | we may be unable to effectively compete in the markets serviced by the acquired bank; |
| • | we may fail to realize the potential cost savings or other financial benefits and/or the strategic benefits of the acquisitions; and |
| • | we may incur liabilities from the acquired businesses and we may not be successful in seeking indemnification for such liabilities or claims. |
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In connection with these acquisitions or investments, we could incur debt, amortization expenses related to intangible assets or large and immediate write-offs, assume liabilities, or issue stock that would dilute our current stockholders’ percentage of ownership. We may not be able to complete acquisitions or integrate the operations, products or personnel gained through any such acquisition without a material adverse effect on our business, financial condition and results of operations.
The requirements of being a public company may strain our resources and distract our management, which could make it difficult to manage our business, particularly after we are no longer an “emerging growth company.”
We are required to comply with various regulatory and reporting requirements, including those required by the SEC. Complying with these reporting and other regulatory requirements is time-consuming and results in increased costs to us, which could have a negative effect on our business, financial condition and results of operations.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and requirements of the Sarbanes-Oxley Act. We are inexperienced with these reporting and accounting requirements and, as such, these requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. To maintain and improve the effectiveness of our disclosure controls and procedures, we have committed significant resources, hired additional staff and provided additional management oversight. We have implemented additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. Sustaining our growth also will require us to commit additional management, operational and financial resources to identify new professionals to join our firm and to maintain appropriate operational and financial systems to adequately support expansion. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations.
As an “emerging growth company” as defined in the JOBS Act, we take advantage of certain temporary exemptions from various reporting requirements, including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. While at December 31, 2015 and December 31, 2014, we had adopted all new accounting standards that could affect the comparability of our financial statements to those of other public entities, we may elect to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies.
When these exemptions cease to apply, we expect to incur additional expenses and devote increased management effort toward ensuring compliance with them. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.
Hurricanes or other adverse weather events would negatively affect our local economies or disrupt our operations, which would have an adverse effect on our business or results of operations.
Our market area is susceptible to natural disasters, such as hurricanes, tropical storms, other severe weather events and related flooding and wind damage. These natural disasters could negatively impact regional economic conditions, disrupt operations, cause a decline in the value or destruction of mortgaged properties and an increase in the risk of delinquencies, foreclosures or loss on loans originated by us, damage our banking facilities and offices, result in a decline in local loan demand and our loan originations, and negatively impact our growth strategy. We cannot predict whether or to what extent damage that may be caused by future natural disasters will affect our operations or the economies in our current or future market areas. Our business or results of operations may be adversely affected by these and other negative effects of natural disasters.
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We are or may become involved from time to time in suits, legal proceedings, information-gathering requests, investigations and proceedings by governmental and self-regulatory agencies that may lead to adverse consequences.
Many aspects of our business involve substantial risk of legal liability. We have been named or threatened to be named as defendants in various lawsuits arising from our business activities (and in some cases from the activities of companies we have acquired). In addition, from time to time, we are, or may become, the subject of governmental and self-regulatory agency information-gathering requests, reviews, investigations and proceedings and other forms of regulatory inquiry, including by bank regulatory agencies, the SEC and law enforcement authorities. The results of such proceedings could lead to significant civil or criminal penalties, including monetary penalties, damages, adverse judgments, settlements, fines, injunctions, restrictions on the way in which we conduct our business, or reputational harm.
Although we establish accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated, we do not have accruals for all legal proceedings where we face a risk of loss. In addition, due to the inherent subjectivity of the assessments and unpredictability of the outcome of legal proceedings, amounts accrued may not represent the ultimate loss to us from the legal proceedings in question. Thus, our ultimate losses may be higher, and possibly significantly so, than the amounts accrued for legal loss contingencies, which could adversely affect our financial condition and results of operations.
Risks Related to the Acquisition of C1 Financial by OZRK
The Amount of Merger Consideration May Decrease Following the Special Meeting.
Pursuant to the terms of the merger agreement, the aggregate purchase price is subject to a downward adjustment, on a dollar-for-dollar basis, in the event our closing consolidated net book value is less than $174 million.
Our closing consolidated net book value will be calculated as our unaudited consolidated net shareholders’ equity determined in accordance with GAAP as of the determination date, but without giving effect to the after-tax impact of the following items: (i) any negative provision for loan and lease losses for the period between June 30, 2015 and the determination date, which provision would otherwise have the effect of decreasing the allowance for loan and lease losses; provided, however, any negative provision resulting from (A) the resolution of a loan for which a specific allowance for loan and lease losses has been calculated as of June 30, 2015 where the resolution creates a reduction of such specific calculated allowance in excess of the loss actually incurred on the loan, or (B) recoveries or payoffs in excess of the carrying value of a loan, which carrying value is the amount the loan is recorded in the books and records of C1 Bank in accordance with GAAP, including any accrued but unpaid interest and excluding any allowance for loan and lease losses or other valuation accounts for such loan, shall be reflected in the closing consolidated net book value; provided, however, that such adjustment is limited to the lesser of (x) the actual amount of the reduction of such specific allowance determined in (A) above plus the recoveries or payoff in excess of the carrying value determined in (B) above, or (y) the actual negative provision recorded by C1 Bank, determined in accordance with GAAP, during the fiscal quarter in which such resolution or recovery occurs; (ii) any of the actions or changes taken only to comply with certain coordination procedures required by the merger agreement, which would otherwise not have been taken or required to be taken; (iii) increases in our consolidated net shareholders’ equity resulting from the issuance of our common stock after June 30, 2015; or (iv) the amount paid by us prior to closing in the event we purchase a tail policy for directors’ and officers’ liability insurance on the terms described in the merger agreement (subject to the limits on expended premiums described therein) to the extent such amount is fully expensed prior to the effective time of the merger. For purposes of calculating the closing consolidated net book value, we shall include, without duplication, reductions for: (A) the after-tax amount of any fees and commissions payable by us or any C1 Financial subsidiary to any broker, finder, financial advisor or investment banking firm in connection with the merger, the bank merger, the merger agreement and the transactions contemplated thereby; (B) the after-tax amount of any legal and accounting fees incurred by us or any C1 Financial subsidiary in connection with the merger or the merger agreement, the bank merger and the transactions contemplated thereby and any related SEC and regulatory filings, including any printing expenses and SEC filing fees; (C) the after-tax amount of the costs expected to be incurred by OZRK after the closing date related to certain environmental clean-up matters, as provided in the merger agreement; (D) the after-tax amount of any compensation, bonus, severance, or payments payable by us or any C1 Financial subsidiary and triggered in connection with the change-of-control or merger or other similar payment payable by us or any C1 Financial subsidiary; (E) the after-tax amount of the projected loss from the planned sale of the Brazilian loans, calculated based on the projected net proceeds to be received pursuant to the applicable purchase agreement for such loans, subtracted from the net book value of the Brazilian loans (net book value shall include unpaid principal balance, net of any unamortized discounts, premiums or deferrals of costs or fees; accrued but uncollected interest; related contra account; and related allowance for loan and lease losses); and (F) the after-tax amounts resulting from the accruals of (1) $3.5 million of costs associated with the termination of certain data processing services and related vendor contracts, (2) $3.5 million of costs associated with real estate appraisals, changes of signage, and write offs of leasehold improvements, and (3) $2.5 million of costs associated with employee training and relocation. The closing consolidated net book value may be further adjusted upon the mutual written agreement of the parties.
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While our closing consolidated net book value will not be known until the determination date, we expect that in the ordinary course of business, which our management believes will be the case, our closing consolidated net book value at the determination date will be at least $174 million. As of the date of this Annual Report, our consolidated net book value, calculated in accordance with the above formula, continues to exceed $174 million, and if the closing of the merger were to occur on the date of this Annual Report, no adjustment to the aggregate purchase price would be made based on this calculation. The calculation date for the closing consolidated net book value will occur subsequent to the date of the Special Meeting, and if the closing consolidated net book value is less than $174 million on the determination date, the aggregate merger consideration to be received by our shareholders will be adjusted downward on a dollar-for-dollar basis. There can be no assurance that there will not be a downward adjustment or that if there is a downward adjustment it will not be material. For additional information on the possibility of a downward adjustment in the aggregate purchase price, including a sensitivity analysis of potential adjustments to the per share merger consideration based on changes in our closing consolidated net book value, see “The Merger Agreement—Merger Consideration, Purchase Price and Purchase Price Adjustments” in the C1 Financial Proxy Statement.
Because the Market Price of OZRK Common Stock Will Fluctuate and as a Result of Other Factors, Our Shareholders Cannot Be Sure of the Number of Shares or Exact Value of the Shares of OZRK Common Stock They Will Receive.
Upon completion of the merger, each outstanding share of our common stock will be converted into the merger consideration payable in shares of OZRK common stock as provided in the merger agreement. The number of shares that a C1 Financial shareholder will receive for each share of our common stock will depend, in part, on the average closing price of OZRK common stock for the 10 trading days ending on the second business day prior to closing, subject to a minimum and maximum price equal to $39.79 and $66.31, respectively, which we refer to as the OZRK average stock price. The value of such shares of OZRK common stock received for each share of our common stock will depend on the price per share of OZRK common stock at the time the shares are actually received by a C1 Financial shareholder. The closing price of OZRK common stock on the date that the shareholder actually receives the shares of such stock after the merger is completed and the OZRK average stock price may vary from each other, as well as from the closing price of OZRK common stock on the date that OZRK and we announced the merger, on the date of this Annual Report, and on the date of the Special Meeting.
Fluctuation in the market price of OZRK common stock after the Special Meeting could change the value of the shares of OZRK common stock that our shareholders will receive, depending on whether the OZRK average stock price to be used in determining the exchange ratio is higher than $66.31 per share or lower than $39.79 per share. If such price is higher than $66.31, our shareholders will receive more shares of OZRK common stock than they otherwise would if there were no cap on the stock price used in determining the exchange ratio. Conversely, if the OZRK average stock price is lower than $39.79 per share, our shareholders will receive fewer shares of OZRK common stock than they otherwise would if there were no floor on the stock price used in determining the exchange ratio.
Stock price changes may result from a variety of factors, including general market and economic conditions, changes in OZRK’s business, operations and prospects, and regulatory considerations, among other things. Many of these factors are beyond OZRK’s control. Accordingly, at the time of the Special Meeting, because of the above timing differences our shareholders will not be able to calculate the number of shares of OZRK common stock they may receive upon completion of the merger or the exact value of OZRK common stock they may receive upon completion of the merger.
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The Merger is Subject to the Receipt of Consents and Approvals from Governmental Entities that May Impose Conditions that Could Have an Adverse Effect on OZRK.
Before the merger may be completed, various approvals or consents must be obtained from various federal and state governmental entities. These governmental entities may impose conditions on the completion of the merger or require changes to the terms of the merger. Although we and OZRK do not currently expect that any such conditions or changes would be imposed, there can be no assurance that they will not be, and such conditions or changes could have the effect of delaying completion of the merger or imposing additional costs on or limiting the revenues of OZRK following the merger, any of which might have a material adverse effect on OZRK following the merger. OZRK is not obligated to complete the merger if the regulatory approvals received in connection with the completion of the merger impose certain burdensome conditions on OZRK or us, as described more fully in “The Merger Agreement—Regulatory Approvals Required for the Merger” in the C1 Financial Proxy Statement.
Certain of Our Officers and Directors Have Interests in the Merger Different From the Interests of Non-director or Non-management Shareholders.
Some of our officers and directors have interests in the merger that are in addition to their interests as our shareholders generally. For example, our President and Chief Executive Officer, Trevor Burgess, will receive a “change of control” payment in connection with the merger pursuant to a change of control agreement with us, which we refer to as the “change of control agreement”. In addition, Mr. Burgess has entered into a retention and non-compete agreement, which we refer to as the “retention and non-compete agreement”, with Ozarks Bank, to be effective upon closing of the merger, pursuant to which Mr. Burgess will serve as the Chief Innovation Officer for OZRK and Ozarks Bank and as Ozarks Bank’s Florida Market President following the merger. Furthermore, an affiliate (which we refer to as the standby purchaser) of Marcelo Faria de Lima (a director of ours and the general partner of a significant C1 Financial shareholder of record) entered into a Brazilian standby purchase agreement with OZRK pursuant to which such affiliate agreed to purchase certain loans of C1 Bank (the “Brazilian loans”) on a standby basis immediately following the merger closing for an amount equal to 75.14% of the aggregate net book value of the Brazilian loans. The Brazilian loans had a net book value at December 31, 2015 of approximately $40.6 million. For further information, see “The Brazilian Standby Purchase Agreement” in the C1 Financial Proxy Statement. In addition, in connection with our initial public offering of shares of common stock, certain of our executive officers and directors received a one-time cash bonus payment in amounts ranging from $35,000 to $500,000. These amounts remain subject to a clawback until the earlier of (i) a specific date (with dates ranging from August 13, 2016 to August 13, 2019) or (ii) a vesting event. The closing of the merger will constitute a vesting event for this purpose.
These interests also include indemnification provisions contained in the merger agreement and OZRK’s purchase of an officers’ and directors’ liability insurance policy for a limited time (at current levels) following the merger. Although the members of the respective boards of directors of each of OZRK and us knew about these additional interests and considered them when they considered and approved the merger agreement and the merger, you should be aware of them. See “The Merger Agreement—Interests of C1 Executive Officers and Directors in the Merger” in the C1 Financial Proxy Statement.
The Fairness Opinion Delivered By Our Financial Advisor Will Not Reflect Changes in Circumstances Between the Date of the Merger Agreement and the Completion of the Merger.
The fairness opinion obtained by our board of directors from Sandler O’Neill, our financial advisor, regarding the fairness, from a financial point of view, of the consideration to be received by our common shareholders in connection with the merger is dated November 9, 2015. Such opinion has not been updated as of the date of this Annual Report and will not be updated at, or prior to, the time of the completion of the merger. Changes in the operations and prospects of OZRK and us, general market and economic conditions and other factors that may be beyond the control of OZRK and us, and on which the fairness opinion was based, may alter the value of OZRK or us or the prices of shares of OZRK common stock or our common stock by the time the merger is completed. The opinion does not speak as of the time the merger is completed or as of any date other than the date of the opinion. Management of OZRK is not aware of any material changes in OZRK’s operations or performance since the delivery of the Sandler O’Neill opinion or that are anticipated to occur before the Special Meeting takes place or before the merger is completed. Our management is not aware of any material changes in our operations or performance since the delivery of the Sandler O’Neill opinion or that are anticipated to occur before the Special Meeting takes place or by the time the merger is completed. Sandler O’Neill does not have any obligation to update, revise or reaffirm its opinion to reflect subsequent developments and has not done so. For a description of the opinion that we received from our financial advisor, please refer to “The Merger—Opinion of C1’s Financial Advisor” in the C1 Financial Proxy Statement. For a description of the other factors considered by our board of directors in determining to approve the merger, please refer to “The Merger—C1’s Reasons for the Merger; Recommendation of the C1 Board of Directors” in the C1 Financial Proxy Statement.
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The Financial Projections Considered By Us and Our Financial Advisor May Not Be Realized, Which May, Among Other Things, Adversely Affect the Market Price of OZRK Shares Following the Merger.
In performing its financial analyses and rendering its opinion regarding the fairness, from a financial point of view, of the merger consideration set forth in the merger agreement to the holders of our common stock, our financial advisor independently reviewed and relied on, among other things, certain financial projections prepared by our management in early 2015 and certain financial projections prepared by our management in the summer of 2015 to reflect events that had occurred during 2015 and prior to the time of their preparation, each of which were provided in whole or in part to OZRK and certain other potential counterparties that entered into confidentiality agreements with us. In addition, at the direction of our management, in the case of C1 Financial, and following discussions with, and confirmation of reasonableness by, OZRK management, in the case of OZRK, our financial advisor independently reviewed and relied upon publicly available earnings per share estimates for OZRK and us, respectively, and an estimated long-term earnings per share growth rate of 15% for OZRK and us, respectively, and used such estimates and growth rate to prepare certain projections that were reviewed by our board of directors. See the section titled “The Merger—Certain Financial Projections” in the C1 Financial Proxy Statement. The financial projections were not prepared with a view toward public disclosure or with a view toward complying with generally accepted accounting principles in the U.S. (“GAAP”), the published guidelines of the SEC regarding financial projections or the guidelines established by the American Institute of Certified Public Accountants with respect to the preparation and presentation of financial projections. The financial projections have not generally been updated since the date they were prepared, are not fact and should not be relied upon as being indicative of future results, and readers of this Annual Report are cautioned not to rely on the financial projections. These projections are inherently based on various estimates and assumptions that are subject to the judgment of those preparing them. Accordingly, our and/or OZRK’s financial condition or results of operations may not be consistent with those set forth in such projections. Worse financial results could, among other things, have a material adverse effect on the market price of OZRK common stock following the merger.
The Merger Will Not be Completed Unless Important Conditions are Satisfied.
Specified conditions set forth in the merger agreement must be satisfied or waived to complete the merger. If the conditions are not satisfied or waived, to the extent permitted by law or stock exchange rules, the merger will not occur or will be delayed and each of OZRK and us may lose some or all of the intended benefits of the merger. The following conditions, in addition to other closing conditions, must be satisfied or, if permissible, waived before we and OZRK are obligated to complete the merger:
| • | the approval of the merger agreement and merger by the requisite vote of our shareholders; |
| • | the receipt of all regulatory approvals and consents required for consummation of the merger; |
| • | no law shall have been enacted that prohibits or makes illegal the consummation of the merger and no temporary, preliminary or permanent restraining order preventing the consummation of the merger shall be in effect; |
| • | all necessary consents and approvals, including any applicable regulatory approvals, shall have been obtained to effect the sale of the Brazilian loans, including the assignment of all obligations thereunder, and either the third party purchaser(s) under the Brazilian purchase agreement(s) shall, prior to the closing, consummate the purchase of such loans, or OZRK shall be reasonably satisfied that the standby purchaser will, immediately after the effective time of the merger and a dividend of the loans from Ozarks Bank to OZRK, consummate the purchase of the Brazilian loans from OZRK in accordance with the terms of the Brazilian standby purchase agreement; |
| • | the receipt by OZRK of the report from a specified third party consultant to us to the effect that, on the basis of the facts, representations and assumptions set forth in such report, the amount payable as the service payment under the retention and non-compete agreement is reasonable and will not be deemed an “excess parachute payment” within the meaning of Section 280G of the Code; |
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| • | the retention and non-compete agreement between Ozarks Bank and Trevor Burgess shall have been executed and delivered by Mr. Burgess and Ozarks Bank, to be effective at the closing; |
| • | the shares of OZRK common stock to be issued to holders of our common stock upon consummation of the merger must have been authorized for listing on NASDAQ; |
| • | We and OZRK, respectively, must have received opinions from Davis Polk & Wardwell LLP and Kutak Rock LLP, respectively, each dated as of the closing date, in form and substance reasonably satisfactory to OZRK and us, to the effect that the merger will be treated for U.S. federal income tax purposes as a “reorganization” within the meaning of Section 368(a) of the Code; and |
| • | certain other conditions generally customary for agreements of this sort, such as the accuracy of representations and warranties subject to the materiality standards set forth in the merger agreement, the compliance in all material respects by the parties with their obligations under the merger agreement, and the non-existence of a material adverse effect (as such term is defined in the merger agreement). |
Termination of the Merger Agreement Could Negatively Impact Us.
If the merger agreement is terminated before closing of the merger, there may be various consequences. For example, our business may have been impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger. Also, we will have incurred substantial expenses in connection with the proposed merger without realizing the benefits of the merger. If the merger agreement is terminated and our board of directors seeks another merger or business combination, our shareholders cannot be certain that we will be able to find a party willing to pay the equivalent or greater consideration than that which OZRK has agreed to pay in the merger. In addition, if the merger agreement is terminated under certain circumstances, we may be required to pay OZRK a termination fee or liquidated damages. See the section entitled “The Merger Agreement—Effect of Termination” in the C1 Financial Proxy Statement for additional details.
We and OZRK Will Incur Significant, Non-Recurring Merger-Related Transaction and Integration Costs in Connection With the Merger, Which Could Adversely Affect Either Company’s Financial Condition and Results of Operations.
We and OZRK each have incurred and expect to continue to incur substantial costs in connection with the negotiation and completion of the merger and combining the businesses and operations of the two companies, and additional unanticipated transaction- and merger-related costs may be incurred prior to or following the consummation of the merger. Whether or not the merger is consummated, we and OZRK expect to continue to incur substantial expenses associated with planning for and completing the merger and combining the operations of the two companies, including such non-recurring expenses as legal, accounting and financial advisory fees, printing fees, data processing and other fees related to formulating integration and conversion plans. Although we and OZRK expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, may offset incremental transaction- and merger-related costs over time, this net benefit may not be achieved in the near term, or at all. The costs described above, as well as other unanticipated costs and expenses, could have a material adverse effect on the financial condition and operating results of OZRK following completion of the merger.
The Merger Agreement Contains Provisions That May Discourage Other Companies from Trying to Acquire Us for Greater Merger Consideration.
The merger agreement contains provisions that may discourage a third party from submitting a business combination proposal to us that might result in greater value to our shareholders than the merger. These provisions include a general prohibition on us from soliciting or, subject to certain exceptions, entering into discussions with any third party regarding any acquisition proposal or offers for competing transactions. We may be required to pay OZRK a termination fee of $10 million in the event the merger agreement is terminated under circumstances involving an acquisition proposal for a competing transaction. In addition, unless the merger agreement is terminated before the Special Meeting, we are required to submit the proposal to approve the merger agreement to our shareholders even if our board of directors has withdrawn, modified or qualified its recommendation. For further information, please see the sections entitled “The Merger Agreement—Agreement to Not Solicit Other Offers” and “The Merger Agreement—Effect of Termination” in the C1 Financial Proxy Statement.
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We and OZRK Will be Subject to Business Uncertainties and We Will be Subject to Contractual Restrictions While the Merger is Pending.
Uncertainty about the effect of the merger on employees and customers may have an adverse effect on OZRK and us. These uncertainties may impair our or OZRK’s ability to attract, retain and motivate strategic personnel until the merger is consummated, and could cause customers and others that deal with OZRK or us to seek to change existing business relationships. Experienced employees in the financial services industry are in high demand, and competition for their talents can be intense. Our employees may experience uncertainty about their future role with the surviving corporation until, or even after, strategies with regard to the combined company are announced or executed. If any of our or OZRK’s key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the surviving corporation, our business prior to the merger closing and OZRK business after the merger closes, could be harmed. In addition, subject to certain exceptions, we have agreed to operate our business in the ordinary course, and to comply with certain other operational restrictions, prior to closing the merger. See “The Merger Agreement—Conduct of Business Pending the Merger” in the C1 Financial Proxy Statement for a description of the restrictive covenants applicable to us.
Our Shareholders Will Have Less Influence as Shareholders of OZRK Than As Our Shareholders.
Our shareholders currently have the right to vote in the election of our board of directors and on other matters affecting us. When the merger occurs, each shareholder that receives shares of OZRK common stock will become a shareholder of OZRK with a percentage ownership of the combined organization much smaller than such shareholder’s percentage ownership of C1 Financial. Assuming (1) the OZRK average stock price is $49.46 (which was the closing price of OZRK common stock on December 31, 2015), (2) there are no adjustments in the aggregate purchase price of $402,525,000 and (3) there is no change to the number of shares of our common stock outstanding since November 9, 2015, then we anticipate that an aggregate of approximately 8.1 million shares of OZRK common stock would be issued to our shareholders upon completion of the merger, which would represent approximately [9]% of the outstanding shares of OZRK common stock as of the date of this Annual Report. If our merger with OZRK and the pending merger between OZRK and Community & Southern Holdings, Inc. (“C&S”) are both completed, then our former shareholders will own approximately 7% and former C&S stockholders will own approximately 14% of OZRK outstanding common stock, respectively. Because of this, our shareholders will have less influence on the management and policies of OZRK than they may now have on our management and policies.
Shares of OZRK Common Stock to be Received by Our Shareholders in the Merger Will Have Rights Different From Shares of Our Common Stock.
Upon completion of the merger, the rights of our former shareholders will be governed by the articles of incorporation and bylaws of OZRK. OZRK is organized under Arkansas law and we are organized under Florida law. Accordingly, certain rights associated with our common stock may differ from the rights associated with OZRK common stock. Please see the section entitled “Comparison Of Shareholders’ Rights” in the C1 Financial Proxy Statement for a discussion of the different rights associated with OZRK common stock and our common stock.
The Merger between OZRK and C1 Financial May Distract Management From Their Other Responsibilities.
The acquisition of C1 Financial by OZRK could cause management to focus their time and energies on matters related to the acquisition that otherwise would be directed to the business and operations of OZRK and us. Any such distraction on the part of management, if significant, could affect their ability to service existing business and develop new business and adversely affect our and OZRK’s business and earnings.
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We and OZRK May Fail to Realize the Anticipated Benefits of the Merger.
The success of the merger will depend on, among other things, OZRK’s ability to combine the businesses of OZRK and C1 Financial and to combine the businesses of additional acquisitions. If OZRK is not able to successfully achieve this objective, the anticipated benefits of the merger may not be realized fully, or at all, or may take longer to realize than expected.
We and OZRK have operated and, until the consummation of the merger, will continue to operate independently. It is possible that the integration process or other factors could result in the loss or departure of key employees, the disruption of the ongoing business of OZRK or inconsistencies in standards, controls, procedures and policies. It is also possible that our clients, customers, depositors and counterparties could choose to discontinue their relationships with the combined company post-merger because they prefer doing business with an independent company or for any other reason, which would adversely affect the future performance of the combined company. These transition matters could have an adverse effect on each of OZRK and us during the pre-merger period and for an undetermined time after the consummation of the merger.
The Merger May Fail To Qualify as a Reorganization for Federal Tax Purposes, Resulting in Your Recognition of Taxable Gain or Loss in Respect of Your C1 Financial Shares.
We and OZRK intend the merger to qualify as a reorganization within the meaning of Section 368(a) of the Code. Although the Internal Revenue Service, or IRS, will not provide a ruling on the matter, we and OZRK will, as a condition to closing, obtain an opinion from our and OZRK’s respective legal counsel that the merger will constitute a reorganization under Code Section 368(a) for federal income tax purposes. These opinions do not bind the IRS or prevent the IRS from adopting a contrary position. If the merger fails to qualify as such reorganization, a C1 Financial shareholder generally would recognize gain or loss on each share of our common stock surrendered in an amount equal to the difference between such shareholder’s adjusted tax basis in that share and the fair market value of the merger consideration received in exchange for that share upon completion of the merger.
Litigation Filed Against Us and Our Board Of Directors and OZRK Could Prevent Or Delay the Completion of the Merger Or Result in the Payment Of Damages Following Completion Of the Merger.
In connection with the merger, a putative class action lawsuit has been filed by a purported shareholder of C1 Financial against us and our board of directors and OZRK. Among other remedies, the plaintiff seeks court approval of the plaintiff as a proper class representative and certification of the lawsuit as a shareholders’ class action, and seeks to enjoin the merger. On January 22, 2016, the plaintiff filed an amended complaint adding, among other things, details about the merger sales process and proposed transaction and allegations of material misrepresentations and omissions concerning the content of the preliminary Registration Statement on Form S-4 filed by OZRK on January 5, 2016. If a dismissal is not granted or a settlement is not reached and approved by the court, the lawsuit could prevent or delay completion of the merger and result in substantial costs to OZRK and us, including any costs associated with indemnification. Additional lawsuits may be filed against us, OZRK, or the directors and officers of either company in connection with the merger. The defense or settlement of any lawsuit or claim seeking remedies against us, our board of directors or OZRK in connection with the merger transaction that remains unresolved at the effective time of the merger may adversely affect OZRK’s business, financial condition, results of operations and cash flows. See the section entitled “Legal Proceedings” for more information. See also “The Merger Agreement—Interests of C1 Executive Officers and Directors in the Merger—Indemnification” and “The Merger Agreement— Interests of C1 Executive Officers and Directors in the Merger—Officers’ and Directors’ Liability Insurance” in the C1 Financial Proxy Statement.
Risks Related to Our Regulatory Environment
We are subject to regulation, which increases the cost and expense of regulatory compliance and, therefore, reduces our net income and may restrict our growth and ability to acquire other financial institutions.
As a bank holding company under federal law, we are subject to regulation under the BHCA, and the examination and reporting requirements of the Federal Reserve. In addition to supervising and examining us, the Federal Reserve, through its adoption of regulations implementing the BHCA, places certain restrictions on the activities that are deemed permissible for bank holding companies to engage in. Changes in the number or scope of permissible activities could have an adverse effect on our ability to realize our strategic goals.
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As a Florida state-chartered bank that is not a member of the Federal Reserve System, the Bank is separately subject to regulation by both the FDIC and the Florida Office of Financial Regulation, or OFR. The FDIC and OFR regulate numerous aspects of the Bank’s operations, including adequate capital and financial condition, permissible types and amounts of extensions of credit and investments, permissible nonbanking activities and restrictions on dividend payments. The Bank may undergo periodic examinations by the FDIC and OFR. Following such examinations, the Bank may be required, among other things, to change its asset valuations or the amounts of required loan loss allowances or to restrict its operations, which could adversely affect our results of operations.
Supervision, regulation, and examination of the Company and the Bank by the bank regulatory agencies are intended primarily for the protection of consumers, bank depositors and the Deposit Insurance Fund of the FDIC, rather than holders of our common stock.
Particularly as a result of new regulations and regulatory agencies under the Dodd-Frank Act, we may be required to invest significant management attention and resources to evaluate and make any changes necessary to comply with applicable laws and regulations. This allocation of resources, as well as any failure to comply with applicable requirements, may negatively impact our results of operations and financial condition.
Changes in laws, government regulation and monetary policy may have a material effect on our results of operations.
Financial institutions have been the subject of significant legislative and regulatory changes and may be the subject of further significant legislation or regulation in the future, none of which is within our control. Significant new laws or regulations or changes in, or repeals of, existing laws or regulations, including those with respect to federal and state taxation, may cause our results of operations to differ materially. In addition, the costs and burden of compliance could adversely affect our ability to operate profitably. Further, federal monetary policy significantly affects our credit conditions, as well as those of our borrowers, particularly as implemented through the Federal Reserve System, primarily through open market operations in U.S. government securities, the discount rate for bank borrowings and reserve requirements. A material change in any of these conditions could have a material impact on us or our borrowers and, therefore, on our results of operations.
The enactment of the Dodd-Frank Act may have a material effect on our operations.
On July 21, 2010, President Obama signed into law the Dodd-Frank Act, which imposes significant regulatory and compliance changes. The key effects of the Dodd-Frank Act on our business are, or may include:
| • | increases in regulatory capital requirements and additional restrictions on the types of instruments that may satisfy such requirements; |
| • | creation of new government regulatory agencies (particularly the Consumer Financial Protection Bureau, which will develop and enforce rules for bank and nonbank providers of consumer financial products); |
| • | changes to deposit insurance assessments; |
| • | regulation of debit interchange fees we earn; |
| • | changes in retail banking regulations, including potential limitations on certain fees we may charge; |
| • | changes in regulation of consumer mortgage loan origination and risk retention; and |
| • | changes in corporate governance requirements for public companies. |
In addition, the Dodd-Frank Act restricts the ability of banks to engage in certain proprietary trading or to sponsor or invest in private equity or hedge funds. The Dodd-Frank Act also contains provisions designed to limit the ability of insured depository institutions, their holding companies and their affiliates to conduct certain swaps and derivatives activities and to take certain principal positions in financial instruments.
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Some provisions of the Dodd-Frank Act became effective immediately upon its enactment. Many provisions, however, required or will require regulations to be promulgated by various federal agencies in order to be implemented, some of which have been enacted or proposed by the applicable federal agencies. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage requirements, or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. Failure to comply with the new requirements may negatively impact our results of operations and financial condition. While we cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on us, these changes could be materially adverse to investors in our common stock.
As a result of the Dodd-Frank Act and recent rulemaking, we are subject to more stringent capital requirements.
Pursuant to the Dodd-Frank Act, in July 2013, the federal banking agencies adopted final rules, or the U.S. Basel III Capital Rules, to update their general risk-based capital and leverage capital requirements to incorporate agreements reflected in the Third Basel Accord adopted by the Basel Committee on Banking Supervision, or Basel III Capital Standards, as well as the requirements of the Dodd-Frank Act. As of January 1, 2015, the Bank was required to comply with the U.S. Basel III Capital Rules, which are aimed at increasing both the quantity and quality of regulatory capital. The U.S. Basel III Capital Rules are described in more detail in “Business – Supervision and Regulation – U.S. Basel III Capital Rules.” The U.S. Basel III Capital Rules may still have a material impact on our business, financial condition and results of operations. In addition, the failure to meet the established capital requirements could result in one or more of our regulators placing limitations or conditions on our activities or restricting the commencement of new activities, and such failure could subject us to a variety of enforcement remedies available to the federal regulatory authorities, including limiting our ability to pay dividends, issuing a directive to increase our capital and terminating our FDIC deposit insurance.
Our ability to raise additional capital, when and if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry and market condition, and governmental activities, many of which are outside our control, and on our financial condition and performance. Accordingly, we may not be able to raise additional capital if needed or on terms acceptable to us. If we fail to meet these capital and other regulatory requirements, our financial condition, liquidity and results of operations would be materially and adversely affected.
Our failure to meet applicable regulatory capital requirements, or to maintain appropriate capital levels in general, could affect customer and investor confidence, our ability to grow, our costs of funds and FDIC insurance costs, our ability to pay dividends on common stock, our ability to make acquisitions, and our business, results of operations and financial conditions, generally.
We may be required to contribute capital or assets to the Bank that could otherwise be invested or deployed more profitably elsewhere.
Federal law and regulatory policy impose a number of obligations on bank holding companies that are designed to reduce potential loss exposure to the depositors of insured depository subsidiaries and to the FDIC’s deposit insurance fund. For example, a bank holding company is required to serve as a source of financial strength to its insured depository subsidiaries and to commit financial resources to support such institutions where it might not do so otherwise, even if we would not ordinarily do so and even if such contribution is to our detriment or the detriment of our stockholders. These situations include guaranteeing the compliance of an “undercapitalized” bank with its obligations under a capital restoration plan, as described further under “Business—Bank Regulation— Capitalization Levels and Prompt Corrective Action.”
A capital injection may be required at times when we do not have the resources to provide it and, therefore, we may be required to issue common stock or debt. Issuing additional shares of common stock would dilute our current stockholders’ percentage of ownership and could cause the price of our common stock to decline. If we are required to issue debt, and in the event of a bankruptcy by the Company, the bankruptcy trustee would assume any commitment by the Company to a federal bank regulatory agency to maintain the capital of the Bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the Company’s general unsecured creditors, including the holders of any note obligations. Thus, any borrowing that must be done by the Company in order to make the required capital injection becomes more difficult and expensive and would adversely impact the Company’s cash flows, financial condition, results of operations and prospects.
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New and future rulemaking by the Consumer Financial Protection Bureau and other regulators, as well as enforcement of existing consumer protection laws, may have a material effect on our operations and operating costs.
The CFPB has the authority to implement and enforce a variety of existing federal consumer protection statutes and to issue new regulations and, with respect to institutions of our size, has exclusive examination and primary enforcement authority with respect to such laws and regulations. In some cases, regulators such as the FTC and the Department of Justice also retain certain rulemaking or enforcement authority, and we also remain subject to certain state consumer protection laws. As an independent bureau within the Federal Reserve, the CFPB may impose requirements more severe than the previous bank regulatory agencies. The CFPB has placed significant emphasis on consumer complaint management and has established a public consumer complaint database to encourage consumers to file complaints that they may have against financial institutions. We are expected to monitor and respond to these complaints, including those that we deem frivolous, and doing so may require management to reallocate resources away from more profitable endeavors.
Pursuant to the Dodd-Frank Act, the CFPB issued a series of final rules in January 2013 related to mortgage loan origination and mortgage loan servicing. These final rules, most provisions of which became effective January 10, 2014, prohibit creditors, such as the Bank, from extending mortgage loans without regard for the consumer’s ability to repay and add restrictions and requirements to mortgage origination and servicing practices. In addition, these rules restrict the application of prepayment penalties and compensation practices relating to mortgage loan underwriting. Compliance with these rules will likely increase our overall regulatory compliance costs and require us to change our underwriting practices. Moreover, these rules may adversely affect the volume of mortgage loans that we underwrite and may subject the Bank to increased potential liability related to its residential loan origination activities.
Banking agencies periodically conduct examinations of our business, including compliance with laws and regulations, and our failure to comply with any supervisory actions to which we become subject as a result of such examinations could materially and adversely affect us.
Florida and federal banking agencies periodically conduct examinations of our business, including compliance with laws and regulations. Accommodating such examinations may require management to reallocate resources, which would otherwise be used in the day-to-day operation of other aspects of our business. If, as a result of an examination, a Florida or federal banking agency were to determine that the financial condition, capital resources, allowance for loan losses, asset quality, earnings prospects, management, liquidity or other aspects of our operations had become unsatisfactory, or that the Company or its management was in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil monetary penalties against us, our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance. If we become subject to such regulatory actions, we could be materially and adversely affected.
Florida financial institutions face a higher risk of noncompliance and enforcement actions with respect to the Bank Secrecy Act and other anti-money laundering statutes and regulations.
Like all U.S. financial institutions, we are subject to monitoring requirements under federal law, including AML and BSA matters. Since September 11, 2001, banking regulators have intensified their focus on AML and BSA compliance requirements, particularly the AML provisions of the USA PATRIOT Act. There is also increased scrutiny of compliance with the rules enforced by OFAC. Moreover, we operate in areas designated as High Intensity Financial Crime Areas and High Intensity Drug Trafficking Areas. Since 2004, federal banking regulators and examiners have been extremely aggressive in their supervision and examination of financial institutions located in the state of Florida with respect to institutions’ BSA and AML compliance. Consequently, a number of formal enforcement actions have been issued against Florida financial institutions. Although we have adopted policies, procedures and controls to comply with the BSA and other AML statutes and regulations, this aggressive supervision and examination, and increased likelihood of enforcement actions may increase our operating costs, which could negatively affect our results of operation and reputation.
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We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material penalties.
Federal and state fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act, impose nondiscriminatory lending requirements on financial institutions. The Department of Justice, Consumer Financial Protection Bureau, and other federal and state agencies are responsible for enforcing these laws and regulations. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. A successful challenge to our performance under the fair lending laws and regulations could adversely impact our rating under the CRA and result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity, and restrictions on expansion activity, which could negatively impact our reputation, business, financial condition and results of operations.
Risks Related to Our Common Stock
We expect that our stock price will fluctuate significantly, and you may not be able to resell your shares at or above the price of your investment.
The trading price of our common stock is likely to be volatile and subject to wide price fluctuations in response to various factors, including:
| • | market conditions in the broader stock market in general, or in our industry in particular; |
| • | actual or anticipated fluctuations in our quarterly financial and operating results; |
| • | introduction of new products and services by us or our competitors; |
| • | issuance of new or changed securities analysts’ reports or recommendations; |
| • | sales of large blocks of our stock; |
| • | additions or departures of key personnel; |
| • | regulatory developments; |
| • | litigation and governmental investigations; and |
| • | economic and political conditions or events. |
These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business.
The trading market for our common stock will also be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, our stock price could decline.
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If a substantial number of shares become available for sale and are sold in a short period of time, the market price of our common stock could decline.
If substantial amounts of our common stock are sold in a short period of time, the market price of our common stock could decrease significantly. The perception that our principal stockholders (Marcelo Faria de Lima, Erwin Russel, Marcio Camargo and Trevor Burgess), who collectively own approximately 50.1% of the outstanding shares of our common stock, might sell shares of common stock could also depress our market price. The market price of shares of our common stock may drop significantly because the restrictions on resale by our existing stockholders have lapsed. A decline in the price of shares of our common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities.
Our principal stockholders have historically controlled and, subject to the consummation of the merger with OZRK, in the future will continue to control us.
Our principal stockholders (Marcelo Faria de Lima, Erwin Russel, Marcio Camargo and Trevor Burgess) collectively own approximately 50.1% of the outstanding shares of our common stock. As a result, these stockholders, acting together, are able to influence or control matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other extraordinary transactions. Our principal stockholders are also business partners in business ventures in addition to our company. They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. In addition, a dispute among these individuals in connection with the Company or another business venture could impact their relationship at the Company and, because of their prominence within the Company, the Company itself. The concentration of ownership may also have the effect of delaying, preventing or deterring a change of control of the Company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.
There are substantial regulatory limitations on changes of control of bank holding companies.
With certain limited exceptions, federal regulations prohibit a person or company or a group of persons deemed to be “acting in concert” from, directly or indirectly, acquiring more than 10% (5% if the acquirer is a bank holding company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of our directors or otherwise direct the management or policies of our company without prior notice or application to and the approval of the Federal Reserve. Accordingly, prospective investors need to be aware of and comply with these requirements, if applicable, in connection with any purchase of shares of our common stock. These provisions effectively inhibit certain mergers or other business combinations, which, in turn, could adversely affect the market price of our common stock.
We are currently exempt from certain corporate governance requirements since we are a “controlled company” within the meaning of NYSE rules and, as a result, you will not have the protections afforded by these corporate governance requirements.
Our principal stockholders (Marcelo Faria de Lima, Erwin Russel, Marcio Camargo and Trevor Burgess) collectively hold a majority of our common stock. As a result, we are considered a “controlled company” for the purposes of the listing requirements of the NYSE. Under these rules, a company of which more than 50% of the voting power is held by an individual, a group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements of the NYSE, including the requirements that our board of directors, our executive compensation committee and our directors’ nominating and corporate governance committee meet the standard of independence established by those corporate governance requirements. We have availed ourselves of certain of these exemptions. The independence standards are intended to ensure that directors who meet the independence standard are free of any conflicting interest that could influence their actions as directors. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the exchange on which our common stock is listed.
We have the ability to incur debt and pledge our assets, including our stock in the Bank, to secure that debt.
We have the ability to incur debt and pledge our assets to secure that debt. Absent special and unusual circumstances, a holder of indebtedness for borrowed money has rights that are superior to those of holders of common stock. For example, interest must be paid to the lender before dividends can be paid to the stockholders, and loans must be paid off before any assets can be distributed to stockholders if we were to liquidate. Furthermore, we would have to make principal and interest payments on our indebtedness, which could reduce our profitability or result in net losses on a consolidated basis even if the Bank were profitable.
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Shares of the Company’s common stock are not insured deposits and may lose value.
The shares of the Company’s common stock are not bank deposits and are not insured or guaranteed by the FDIC or any other government agency.
The laws that regulate our operations are designed for the protection of depositors and the public, not our stockholders.
The federal and state laws and regulations applicable to our operations give regulatory authorities extensive discretion in connection with their supervisory and enforcement responsibilities, and generally have been promulgated to protect depositors and the FDIC’s Deposit Insurance Fund, and not to protect stockholders. These laws and regulations can materially affect our future business. Laws and regulations now affecting us may be changed at any time, and the interpretation of such laws and regulations by bank regulatory authorities is also subject to change.
Future changes in laws and regulations or changes in their interpretation may also adversely affect our business. Legislative and regulatory changes may increase our cost of doing business or otherwise adversely affect us and create competitive advantages for nonbank competitors.
Applicable laws and regulations restrict both the ability of the Bank to pay dividends to the Company and the ability of the Company to pay dividends to our stockholders.
Both the Company and the Bank are subject to various regulatory restrictions relating to the payment of dividends. In addition, the Federal Reserve has the authority to prohibit bank holding companies from engaging in unsafe or unsound practices in conducting their business. These federal and state laws, regulations and policies are described in greater detail in “Business—Bank Regulation—Bank Dividends” and “Business—Holding Company Regulation—Restrictions on Bank Holding Company Dividends,” but generally look to factors such as previous results and net income, capital needs, asset quality, existence of enforcement or remediation proceedings, and overall financial condition.
For the foreseeable future, the majority, if not all, of the Company’s revenue will be from any dividends paid to the Company by the Bank. Accordingly, our ability to pay dividends also depends on the ability of the Bank to pay dividends to us. Furthermore, the present and future dividend policy of the Bank is subject to the discretion of its board of directors.
We cannot guarantee that the Company or the Bank will be permitted by financial condition or applicable regulatory restrictions to pay dividends, that the board of directors of the Bank will elect to pay dividends to us, nor can we guarantee the timing or amount of any dividend actually paid. See “Business—Holding Company Regulation—Restrictions on Bank Holding Company Dividends” for a discussion on our current dividend policy.
Anti-takeover protections under the Florida Business Corporation Act, or the FBCA, and other factors will make it more difficult to realize the value of an investment in the Company.
In general, the three principal ways that the stockholders of any company can realize a return on their investment are (i) to receive distributions (i.e., dividends) from the company, (ii) to sell their individual ownership interests to a third party, or (iii) to participate in a company-wide transaction in which they are able to sell their ownership interests, or an “exit event,” regardless of whether the exit event is voluntary (such as a friendly merger) or involuntary (such as a hostile takeover). There are significant impediments to the ability of a stockholder of the Company to realize a return on his or her investment in any of those ways. As stated previously under “Business—Holding Company Regulation—Restrictions on Bank Holding Company Dividends,” we do not intend to declare or pay dividends in the foreseeable future.
We do not anticipate paying any cash dividends in the foreseeable future.
We currently intend to retain our future earnings, if any, for the foreseeable future, to repay indebtedness and to fund the development and growth of our business. We do not intend to pay any dividends to holders of our common stock. As a result, capital appreciation in the price of our common stock, if any, will be your only source of gain on an investment in our common stock.
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Future equity issuances could result in dilution, which could cause our common stock price to decline.
We are generally not restricted from issuing additional shares of our common stock up to the 100 million shares authorized in our certificate of formation. We may issue additional shares of our common stock in the future pursuant to current or future employee stock option plans, upon exercise of warrants or in connection with future acquisitions or financings. If we choose to raise capital by selling shares of our common stock or securities convertible into common stock for any reason, the issuance would have a dilutive effect on the holders of our common stock and could have a material negative effect on the market price of our common stock.
Our internal controls over financial reporting may not be effective and our independent registered public accounting firm may not be able to certify as to their effectiveness, which could have a significant and adverse effect on our business and reputation.
We are not currently required to comply with SEC rules that implement Section 404 of the Sarbanes-Oxley Act and are, therefore, not required to make a formal assessment of the effectiveness of our internal controls over financial reporting for that purpose. We will be required to comply with these rules upon ceasing to be an “emerging growth company” as defined in the JOBS Act. However, we are required to perform our own assessment of the effectiveness of our internal controls over financial reporting and prepare a report on this assessment beginning with our Form 10-K for the year ended December 31, 2015.
When evaluating our internal controls over financial reporting, we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. We cannot be certain as to the timing of completion of our evaluation, testing and any remediation actions or the impact of the same on our operations. If we are not able to implement the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or with adequate compliance, our independent registered public accounting firm may issue an adverse opinion due to ineffective internal controls over financial reporting, and we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel. Any such action could negatively affect our results of operations and cash flows.
We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
As an “emerging growth company,” as defined in the JOBS Act, we have elected to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to nonemerging growth companies but any such election to opt out is irrevocable. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make our financial statements not comparable with those of another public company, which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period because of the potential differences in accounting standards used.
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We cannot predict if investors will find our common stock less attractive as a result of our election to rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
Item 1B. Unresolved Staff Comments
None.
The Company does not own or lease real or personal property. Instead, it uses the premises, equipment and furniture of the Bank without the direct payment of any rental fees to the Bank. The Bank currently owns or leases approximately 211,000 square feet of office and operations space in Florida. The Bank operates 32 banking centers in Florida. Of these banking centers, 11 are leased and 21 are owned. The Bank also owns condominium space for our permanent Miami Beach banking center, a parcel in Orlando for our future Orlando banking center and two vacant parcels that we are considering converting to new banking center locations. We lease our Orlando loan production office, with approximately 415 square feet of office space. We lease our St. Petersburg, Florida headquarters, with approximately 16,689 square feet of office space. We believe that the leases to which we are subject are generally on terms consistent with prevailing market terms, and none of the leases are with our directors, officers, beneficial owners of more than 5% of our voting securities or any affiliates of the foregoing. We believe that our facilities are in good condition and are adequate to meet our operating needs for the foreseeable future.
Following the announcement of the merger with OZRK, a putative class action complaint challenging the merger was filed in the Circuit Court of the Sixth Judicial Circuit In and For Pinellas County, Florida. The complaint is captioned Mariani v. C1 Financial et al., Case No. 15-007726. The complaint names C1 Financial, OZRK, and the individual members of the C1 Financial board as defendants. The complaint generally alleges, among other things, that members of the C1 Financial board breached their fiduciary duties to C1 Financial’s shareholders by agreeing to sell C1 Financial for an inadequate price and agreeing to inappropriate deal protection provisions in the merger agreement that may preclude C1 Financial from soliciting any potential acquirers and limit the ability of the C1 Financial board to act with respect to investigating and pursuing superior proposals and alternatives. The complaint also alleges that C1 Financial and OZRK have aided and abetted the C1 Financial board members’ breaches of their fiduciary duties. The complaint seeks certification by the court as a shareholders’ class action, approval of the plaintiff as a proper plaintiff class representative, injunctive relief enjoining the companies from consummating the merger at the agreed upon price unless and/or until the defendants cure their breaches of fiduciary duty (or, in the event the merger is consummated, rescinding the merger or awarding rescissory damages). The complaint also seeks to recover costs and disbursement from the defendants, including attorneys’ fees and experts’ fees. On January 22, 2016, the plaintiff filed an amended complaint adding, among other things, details about the merger sales process and proposed transaction and allegations of material misrepresentations and omissions concerning the content of the preliminary Registration Statement on Form S-4 filed by OZRK on January 5, 2016. The defendants believe these allegations are without merit and intend to defend vigorously against these allegations.
We are currently involved in various claims and lawsuits incidental to the ordinary course of conduct of our business. 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.
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Item 4. Mine Safety Disclosures
This item is not applicable.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The shares of our common stock have traded on the NYSE under the symbol “BNK” since August 14, 2014. As of February 5, 2016, we had approximately 372 holders of record. The high and low sales prices for the shares of our common stock, as reported on the NYSE, and the cash dividends declared on those shares for each quarterly period of 2015 and 2014 are shown in the table below. Sales prices prior to the third quarter of 2014 are not applicable because shares of our common stock were not traded publicly prior to our initial public offering. We have not paid any dividends on our common stock since inception, and we currently anticipate that we will retain all available funds for use in the operation and expansion of our business, and do not anticipate paying any cash dividends in the foreseeable future.
| 2015 | 2014 | |||||||||||||||||||||||
| High | Low | Dividends Paid | High | Low | Dividends Paid | |||||||||||||||||||
| First Quarter | $ | 19.10 | $ | 16.25 | $ | - | $ | N/A | $ | N/A | $ | - | ||||||||||||
| Second Quarter | 19.84 | 17.81 | - | N/A | N/A | - | ||||||||||||||||||
| Third Quarter | 19.77 | 17.66 | - | 18.77 | 16.66 | - | ||||||||||||||||||
| Fourth Quarter | 24.49 | 18.40 | - | 19.70 | 15.98 | - | ||||||||||||||||||
On February 5, 2016, the closing sales price for the shares of our common stock as reported on the NYSE was $23.90 per share.
Dividend Policy
As stated above, we have not paid any dividends on our common stock since inception, and we currently anticipate that we will retain all available funds for use in the operation and expansion of our business, and do not anticipate paying any cash dividends in the foreseeable future. Any future determination relating to this dividend policy will be made by our board of directors and will depend on a number of factors, including our financial condition and results of operations, tax considerations, capital requirements, industry standards, and economic conditions.
As a bank holding company, we are subject to the Federal Reserve’s policy regarding dividends, which holds that a bank holding company should not declare or pay a cash dividend which would impose undue pressure on the capital of any bank subsidiary or would be funded only through borrowing or other arrangements that might adversely affect a bank holding company’s financial position. As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should consult with the Federal Reserve and eliminate, defer or significantly reduce the bank holding company’s dividends if:
| • | its net income available to stockholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; |
| • | its prospective rate of earnings retention is not consistent with its capital needs and overall current and prospective financial condition; or |
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| • | it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. |
Should the Bank be “significantly undercapitalized” under the applicable federal bank capital ratios, or if the Bank is “undercapitalized” and has failed to submit an acceptable capital restoration plan or has materially failed to implement such a plan, the FDIC may choose to require prior Federal Reserve approval for any capital distribution by us as a bank holding company controlling the Bank. For more information, see “Business—Supervision and Regulation—Restrictions on Bank Holding Company Dividends.”
In addition, since the Company is a legal entity separate and distinct from the Bank and does not conduct stand-alone operations, the Company’s ability to pay dividends depends on the ability of the Bank to pay dividends to the Company. The present and future dividend policy of the Bank is subject to the discretion of its board of directors.
Florida law places restrictions on the declaration of dividends by state chartered banks such as the Bank to their stockholders. Pursuant to the Florida Financial Institutions Code, the board of directors of state-chartered banks, after charging off bad debts, depreciation and other worthless assets, if any, and making provision for reasonably anticipated future losses on loans and other assets, may quarterly, semiannually or annually declare a dividend of up to the aggregate net profits of that period combined with the bank’s retained net profits for the preceding two years and, with the approval of the OFR, declare a dividend from retained net profits which accrued prior to the preceding two years. Before declaring such dividends, 20% of the net profits for the preceding period as is covered by the dividend must be transferred to the surplus fund of the bank until this fund becomes equal to the amount of the bank’s common stock then issued and outstanding. A state-chartered bank may not declare any dividend if (i) its net income (loss) from the current year combined with the retained net income (loss) for the preceding two years aggregates a loss or (ii) the payment of such dividend would cause the capital account of the bank to fall below the minimum amount required by law, regulation, order or any written agreement with the OFR or a federal regulatory agency. Also, under FDIC regulations, no bank may pay a dividend if, after the payment of the dividend, it would be “undercapitalized” within the meaning of the prompt corrective action laws. See “Business—Supervision and Regulation—Bank Dividends” and “Business—Bank Regulation—Capitalization Levels and Prompt Corrective Action.”
The transfer agent for our common stock is:
Computershare Trust Company, NA
250 Royall Street
Canton, Massachusetts 02021
781-575-2000
www.computershare.com
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The performance graph below compares the cumulative total stockholder return on the common stock of the Company with the cumulative total return on the equity securities included in the Standard & Poor’s 500 Stock Index (S&P 500), which reflects overall stock market performance and the SNL Southeast Bank Index, which reflects changes in stocks of banking institutions in the same geographical region as the Company. The graph assumes an initial $100 investment on August 14, 2014 (the date that the stock of C1 Financial, Inc. began trading on the NYSE) through December 31, 2015. Data for the S&P 500 and SNL Southeast Bank Index assumes reinvestment of dividends. Returns are shown on a total return basis. The performance graph represents past performance and should not be considered to be an indication of future performance. This graph is not deemed filed with the SEC.
| Period Ending | ||||||||||||||||||||||||||||
| Index | 08/14/14 | 09/30/14 | 12/31/14 | 03/31/15 | 06/30/15 | 09/30/15 | 12/31/15 | |||||||||||||||||||||
| C1 Financial, Inc. | 100.00 | 106.65 | 107.59 | 110.29 | 114.00 | 112.06 | 142.41 | |||||||||||||||||||||
| S&P 500 | 100.00 | 101.13 | 106.12 | 107.13 | 107.43 | 100.51 | 107.59 | |||||||||||||||||||||
| SNL Southeast Bank | 100.00 | 106.86 | 113.25 | 104.29 | 114.38 | 104.28 | 111.48 | |||||||||||||||||||||
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Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with, and are qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this annual report.
| As of and for Years Ended December 31, | ||||||||||||||||||||
| (Dollars in thousands, except per share data) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
| Income Statement Data | ||||||||||||||||||||
| Interest income | $ | 77,739 | $ | 64,310 | $ | 48,499 | $ | 38,201 | $ | 27,015 | ||||||||||
| Interest expense | 9,579 | 8,626 | 6,650 | 6,127 | 5,815 | |||||||||||||||
| Net interest income | 68,160 | 55,684 | 41,849 | 32,074 | 21,200 | |||||||||||||||
| Provision for loan losses | 1,118 | 4,814 | 1,218 | 2,358 | 2,846 | |||||||||||||||
| Total noninterest income | 9,801 | 7,738 | 21,648 | 15,051 | 5,238 | |||||||||||||||
| Total noninterest expense | 51,372 | 47,232 | 42,637 | 33,963 | 18,027 | |||||||||||||||
| Income before income taxes | 25,471 | 11,376 | 19,642 | 10,804 | 5,565 | |||||||||||||||
| Income tax expense (benefit) | 11,128 | 4,652 | 7,652 | (2,304 | ) | - | ||||||||||||||
| Net income | 14,343 | 6,724 | 11,990 | 13,108 | 5,565 | |||||||||||||||
| Per Share Data | ||||||||||||||||||||
| Net earnings per share | $ | 0.89 | $ | 0.48 | $ | 1.08 | $ | 1.29 | $ | 0.78 | ||||||||||
| Diluted net earnings per share | 0.89 | 0.48 | 1.08 | 1.28 | 0.78 | |||||||||||||||
| Book value per share | 12.48 | 11.59 | 9.97 | 9.06 | 7.76 | |||||||||||||||
| Tangible book value per share (1) | 12.42 | 11.51 | 9.83 | 9.00 | 7.71 | |||||||||||||||
| Balance Sheet Data | ||||||||||||||||||||
| Total loans (2) | $ | 1,442,644 | $ | 1,188,522 | $ | 1,053,029 | $ | 663,634 | $ | 549,081 | ||||||||||
| Loans originated by C1 Bank (Nonacquired) | 1,163,212 | 840,275 | 614,613 | 301,858 | 169,227 | |||||||||||||||
| Loans not originated by C1 Bank (Acquired) | 279,432 | 348,247 | 438,416 | 361,776 | 379,854 | |||||||||||||||
| Total assets | 1,725,520 | 1,536,691 | 1,323,371 | 938,066 | 729,277 | |||||||||||||||
| Total deposits | 1,278,265 | 1,167,502 | 1,041,043 | 760,041 | 557,701 | |||||||||||||||
| Borrowings | 242,000 | 178,500 | 153,500 | 78,300 | 94,313 | |||||||||||||||
| Total stockholders’ equity | 200,981 | 186,638 | 121,814 | 96,447 | 74,593 | |||||||||||||||
| Selected Performance Metrics | ||||||||||||||||||||
| Return on average assets | 0.87 | % | 0.46 | % | 1.08 | % | 1.50 | % | 0.99 | % | ||||||||||
| Return on average equity | 7.33 | % | 4.36 | % | 11.43 | % | 15.63 | % | 10.16 | % | ||||||||||
| Net interest margin | 4.63 | % | 4.28 | % | 4.34 | % | 4.06 | % | 4.15 | % | ||||||||||
| Efficiency ratio (1) | 65.9 | % | 74.8 | % | 67.5 | % | 77.0 | % | 69.0 | % | ||||||||||
| Average Equity / Average Assets | 11.82 | % | 10.54 | % | 9.47 | % | 9.61 | % | 9.79 | % | ||||||||||
| Revenue per average number of employees (1) | $ | 362 | $ | 319 | $ | 332 | $ | 282 | $ | 307 | ||||||||||
| Average assets per average number of employees (1) | 6,836 | 6,476 | 5,250 | 4,604 | 5,329 | |||||||||||||||
(1) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — GAAP Reconciliation and Explanation of Non-GAAP Financial Measures.”
(2) Total loans before the deduction of net deferred loan fees and the allowance for loan losses.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our financial statements and related notes thereto included in Item 8 of Part II of this annual report. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections entitled “Forward-Looking Statements” and “Risk Factors” included in Item 1A of Part I of this annual report. We assume no obligation to update any of these forward-looking 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.
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 32 banking centers and one loan production office on the West Coast of Florida and in Miami-Dade, Broward and Orange Counties. As of September 30, 2015, we were the 17th largest bank headquartered in the state of Florida by assets and the 16th largest by equity, having grown both organically and through acquisitions.
On November 9, 2015, C1 Financial and its wholly owned bank subsidiary, C1 Bank, entered into a definitive agreement and plan of merger (“Agreement”) with Bank of the Ozarks, Inc. (“OZRK”) and its wholly owned bank subsidiary, Bank of the Ozarks (“Ozarks Bank”), whereby, subject to the terms and conditions of the Agreement, C1 Financial will merge with and into OZRK with OZRK surviving the merger in an all-stock transaction valued at approximately $402.5 million, or approximately $25.00 per share of C1 Financial common stock, subject to potential adjustments as described in the Agreement.
Subject to the terms and conditions of the Agreement, each holder of outstanding shares of common stock of C1 Financial will receive shares of common stock of OZRK. The number of OZRK shares to be issued will be determined based on OZRK’s ten day average closing stock price as of the second business day prior to the closing date, subject to a minimum and maximum stock price of $39.79 to $66.31, respectively. The consideration payable to C1 Financial shareholders is subject to downward adjustment on a dollar-for-dollar basis if the net book value of C1 Financial is less than $174 million as of the business day that, subject to adjustment as set forth in the Agreement, is closest to ten calendar days prior to the closing date and is subject to an upward adjustment if certain Brazilian loans of C1 Bank are sold at a price above a specified amount. The potential adjustments described in the immediately preceding sentence are not expected to result in any material change to the consideration payable and are described in the Agreement.
Upon the closing of the transaction, C1 Financial will merge into OZRK and C1 Bank will merge into Ozarks Bank, with each of OZRK and Ozarks Bank to continue as the surviving entity, respectively. Completion of the transaction is subject to certain closing conditions, including customary regulatory approvals and approval by C1 Financial shareholders and are described in the Agreement. Although there can be no assurance, the transaction is expected to close late in the first quarter or in the second quarter of 2016.
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 traded on the New York Stock Exchange under the symbol “BNK”.
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Overview of Recent Financial Performance and Trends
Our financial performance in 2015 reflected improvements in economic conditions in the areas in which we operate across Florida, the acquisitions we have completed, our progress in restructuring the acquired banks and disposing of classified assets, the implementation of our banking strategy and other general economic and competitive trends in our markets. As of December 31, 2013, we had completed the integration of all of the Bank’s acquisitions to date. We restructured the management teams of these banks at acquisition date and integrated them under our line of business model and policies and procedures shortly after acquisition. During 2013, we acquired First Community Bank of Southwest Florida. We completed this acquisition on August 2, 2013 and converted them to our core processing platform and merged them together with the Bank on October 19, 2013.
Our net interest income was $68.2 million, $55.7 million and $41.8 million in the years ended December 31, 2015, 2014 and 2013, respectively. In the years ended December 31, 2015, 2014 and 2013, our net income of $14.3 million, $6.7 million and $12.0 million, respectively, represented a return on average assets, or ROAA, of 0.87%, 0.46% and 1.08%, respectively, and a return on average equity, or ROAE, of 7.33%, 4.36% and 11.43%, respectively. Our ratio of average equity to average assets in the years ended December 31, 2015, 2014 and 2013 was 11.82%, 10.54%, and 9.47%, respectively. Net income for 2015 included after-tax merger related expenses of $2.6 million incurred pursuant to the Agreement with OZRK.
Our assets totaled $1.726 billion and $1.537 billion as of December 31, 2015 and December 31, 2014, respectively. Loans receivable, net, as of December 31, 2015 and December 31, 2014 were $1.429 billion and $1.179 billion, respectively. Total deposits were $1.278 billion and $1.168 billion as of December 31, 2015 and December 31, 2014, respectively.
On June 30, 2014, the Bank charged off in-full its only loan under the Shared National Credit Program, or Shared National Credit, in the amount of $4.0 million. The Bank deemed the loan to be uncollectible in June 2014 and the full loan was charged off as the Bank believed that cash flow to repay the loan was collateral-dependent and other sources of repayment were no more than nominal. The value of the collateral, in this case closely held stock, was determined to be uncertain. The related Shared National Credit made all scheduled payments through March 31, 2014. Additionally, the last regulatory Shared National Credit rating indicated a pass rating. A cash flow prediction for the underlying borrower that the Bank received in the second quarter of 2014 showed imminent negative cash flows. The negative cash flow projections along with other events taking place in June 2014 led to the belief that the outstanding balance would not be collected. Subsequently, the Bank collected $147 thousand of recoveries during the third quarter of 2014 and $484 thousand during 2015 related to this loan. The Bank holds no other Shared National Credits and has no existing plans to purchase any other Shared National Credits.
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.
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.
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Acquisitions and Comparability to Prior Periods
First Community Bank of Southwest Florida
On August 2, 2013, the Bank acquired First Community Bank of Southwest Florida through a Purchase and Assumption Agreement with the FDIC as receiver, for total cash consideration received from the FDIC of $23.5 million. The purchase was part of the Bank’s overall strategy to grow and expand its market presence in southwest Florida. The Bank included the results of operations of First Community Bank of Southwest Florida in its income statement beginning August 3, 2013. Consequently, the Bank’s results of operations for the year ended December 31, 2014 are not fully comparable with its results of operations for the year ended December 31, 2013.
Acquisition-related costs of approximately $831 thousand are included in the Bank’s income statement as non-interest expense for the year ended December 31, 2013. This acquisition resulted in a bargain purchase gain of $12.4 million as of the acquisition date, primarily as a result of the consideration received from the FDIC plus the fair value of the assets acquired being above fair value of the net assets acquired. After adjustments measured from the date of purchase until the fiscal year end, or the measurement period, the bargain purchase gain as of December 31, 2013 increased to $13.5 million.
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 portfolio segment 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 real estate, construction and commercial 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 residential real estate and consumer 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 December 31, 2015, approximately 19% 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.
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This actual historical loss experience is supplemented with management adjustment factors based on the risks present for each portfolio segment (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, and the 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 other Florida banks, the competitive and regulatory environment, as well as internal indicators such as loan growth, credit concentrations and the loan review process. Each of the adjustment factors is graded on 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 December 31, 2015, approximately 81% of our loan portfolio consisted 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, until such time when we develop relevant loss history for C1 Bank originated loans. 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 December 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). At the end of fiscal 2015, our first loans (2010 vintage) were completing six years since origination, in line with the average U.S. business cycle and close to the seven-year de novo period defined by the FDIC. We expect our historical losses to become more representative as we get closer to this point.
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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. The OREO valuation allowance is adjusted as necessary. Expenses from the operations of OREO, net of rental income and changes in the OREO valuation allowance, are included in noninterest expense.
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 flow 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.
PCI 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.
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JOBS Act
The JOBS Act allows us to delay the implementation of certain new accounting standards in our financial statements. However, at December 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—JOBS Act.”
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 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.
Year ended December 31, 2015 compared to year ended December 31, 2014
Our net interest income increased 22.4% to $68.2 million in 2015 from $55.7 million in 2014, primarily due to increased average balances of and yields on interest-earning assets, and improvements in the deposit mix, which was partially offset by higher average balances of and rates on FHLB advances. Net interest margin in 2015 increased to 4.63% from 4.28% in 2014, mainly due to the yield on average earning assets increasing 34 basis points.
Interest income increased 20.9% to $77.7 million in 2015 from $64.3 million in 2014, due to higher average balances of and yields on interest-earning assets. In 2015, average interest-earning assets increased to $1.5 billion from $1.3 billion in 2014, mainly due to growth in our loan portfolio, which resulted from organic loan originations (partially offset by loan prepayments in the C1 Bank originated loan portfolio, and loans paying off in both the C1 Bank originated loan portfolio and in the acquired portfolio). The average yield on interest-earning assets increased to 5.28% in 2015 from 4.94% in 2014, primarily due to a redeployment of lower-yielding cash investments into higher-yielding loans. Average loans receivable as a percentage of average interest-earning assets increased from 83.4% in 2014 to 89.6% in 2015.
Interest expense increased 11.0% to $9.6 million in 2015 from $8.6 million in 2014, due to an increase in the average balances of and rates on interest-bearing liabilities. In 2015, average interest-bearing liabilities increased to $1.132 billion from $1.054 billion in 2014, mainly due to longer term borrowings from the FHLB. In addition, the average rate paid on interest-bearing liabilities increased from 0.82% to 0.85%, primarily due to a higher rate on FHLB advances. 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 advances 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 0.63% in 2015 when compared to 0.68% in 2014, due to a lower share of time deposits. In addition, average noninterest-bearing deposits increased by 28.4% to $321.4 million in 2015 (representing 26.2% of total average deposits), from $250.3 million in 2014 (representing 22.1% of total average deposits).
Year ended December 31, 2014 compared to year ended December 31, 2013
Our net interest income increased 33.1% to $55.7 million in 2014 from $41.8 million in 2013, primarily due to increased average balances of interest-earning assets and an improvement in the deposit mix, partially offset by a lower yield on interest-earning assets. Net interest margin in 2014 decreased to 4.28% from 4.34% in 2013.
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Interest income increased 32.6% to $64.3 million in 2014 from $48.5 million in 2013, due to higher average balances of interest-earning assets, which were partially offset by lower average yields earned on these assets. In 2014, average interest-earning assets increased to $1.3 billion from $964.9 million in 2013, primarily due to growth in our loan portfolio resulting from organic loan originations and the full-year effect of the acquisition of First Community Bank of Southwest Florida, combined with increased liquidity driven by deposit growth, additional FHLB borrowings and our initial public offering. The yield on interest-earning assets decreased to 4.94% in 2014 from 5.03% in 2013, primarily due to a lower yield on loans (reflecting a higher effect of accretion income on acquired loans from First Community Bank of Southwest Florida in 2013) and to a higher share of cash as a percentage of average interest-earning assets. Average loans receivable as a percentage of average interest-earning assets decreased from 83.7% in 2013 to 83.4% in 2014, as a result of the Bank’s increased liquidity from deposit growth, additional FHLB borrowings and the initial public offering.
Interest expense increased 29.7% to $8.6 million in 2014 from $6.7 million in 2013, primarily due to a 24.9% increase in the average balance of interest-bearing liabilities, as the Bank grew its deposit base and borrowings to match its funding needs. In addition, the average rate paid on interest-bearing liabilities increased from 0.79% to 0.82%, primarily driven by an asset/liability management decision of the Bank to borrow longer term from the FHLB and use longer-term brokered time deposits to reduce exposure to increasing interest rates. The cost of interest-bearing deposits increased to 0.68% in 2014 compared to 0.66% in 2013, due to a higher share of time deposits and the use of brokered time deposits, as mentioned previously. Average noninterest-bearing deposits increased by 63.3% to $250.3 million in 2014 (representing 22.1% of total average deposits), from $153.3 million in 2013 (representing 17.4% of total average deposits), resulting in an improvement in the deposit mix of the Bank.
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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:
| Years Ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2015 | 2014 | 2013 | ||||||||||||||||||||||||||||||||||
| Average | Income/ | Yields/ | Average | Income/ | Yields/ | Average | Income/ | Yields/ | ||||||||||||||||||||||||||||
| Balances(1) | Expense | Rates | Balances(1) | Expense | Rates | Balances(1) | Expense | Rates | ||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||||||||||||||
| Loans receivable(2) | $ | 1,318,460 | $ | 76,861 | 5.83 | % | $ | 1,085,832 | $ | 63,351 | 5.83 | % | $ | 807,173 | $ | 47,362 | 5.87 | % | ||||||||||||||||||
| Securities available for sale and other securities | 250 | 12 | 4.56 | % | 452 | 62 | 13.76 | % | 45,379 | 698 | 1.54 | % | ||||||||||||||||||||||||
| Federal funds sold and balances at Federal Reserve Bank | 141,308 | 367 | 0.26 | % | 207,010 | 523 | 0.25 | % | 105,944 | 268 | 0.25 | % | ||||||||||||||||||||||||
| Time deposits in other financial institutions | 161 | 1 | 0.43 | % | - | - | 0.00 | % | 133 | 7 | 5.14 | % | ||||||||||||||||||||||||
| FHLB stock | 11,164 | 498 | 4.47 | % | 8,779 | 374 | 4.26 | % | 6,305 | 164 | 2.60 | % | ||||||||||||||||||||||||
| Total interest-earning assets | 1,471,343 | 77,739 | 5.28 | % | 1,302,073 | 64,310 | 4.94 | % | 964,934 | 48,499 | 5.03 | % | ||||||||||||||||||||||||
| Noninterest-earning assets: | ||||||||||||||||||||||||||||||||||||
| Cash and due from banks | 37,298 | 39,209 | 37,940 | |||||||||||||||||||||||||||||||||
| Other assets(3) | 145,724 | 122,203 | 104,924 | |||||||||||||||||||||||||||||||||
| Total noninterest-earning assets | 183,022 | 161,412 | 142,864 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 1,654,365 | $ | 1,463,485 | $ | 1,107,798 | ||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||
| Interest-bearing deposits: | ||||||||||||||||||||||||||||||||||||
| Time | $ | 270,325 | 3,100 | 1.15 | % | $ | 350,592 | 3,809 | 1.09 | % | $ | 262,140 | 2,948 | 1.12 | % | |||||||||||||||||||||
| Money market | 437,960 | 1,919 | 0.44 | % | 351,844 | 1,526 | 0.43 | % | 292,262 | 1,267 | 0.43 | % | ||||||||||||||||||||||||
| Interest-bearing demand | 156,539 | 579 | 0.37 | % | 142,588 | 542 | 0.38 | % | 139,331 | 544 | 0.39 | % | ||||||||||||||||||||||||
| Savings | 38,821 | 86 | 0.22 | % | 38,323 | 86 | 0.22 | % | 34,994 | 78 | 0.22 | % | ||||||||||||||||||||||||
| Total interest-bearing deposits | 903,645 | 5,684 | 0.63 | % | 883,347 | 5,963 | 0.68 | % | 728,727 | 4,837 | 0.66 | % | ||||||||||||||||||||||||
| Other interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||
| FHLB advances | 228,724 | 3,895 | 1.70 | % | 167,884 | 2,607 | 1.55 | % | 112,097 | 1,753 | 1.56 | % | ||||||||||||||||||||||||
| Other borrowings | - | - | 0.00 | % | 2,860 | 56 | 1.96 | % | 3,000 | 60 | 2.00 | % | ||||||||||||||||||||||||
| Total interest-bearing liabilities | 1,132,369 | 9,579 | 0.85 | % | 1,054,091 | 8,626 | 0.82 | % | 843,824 | 6,650 | 0.79 | % | ||||||||||||||||||||||||
| Noninterest-bearing liabilities and stockholders’ equity: | ||||||||||||||||||||||||||||||||||||
| Demand deposits | 321,401 | 250,268 | 153,276 | |||||||||||||||||||||||||||||||||
| Other liabilities | 5,030 | 4,847 | 5,779 | |||||||||||||||||||||||||||||||||
| Stockholders’ equity | 195,565 | 154,279 | 104,919 | |||||||||||||||||||||||||||||||||
| Total noninterest-bearing liabilities and stockholders’ equity | 521,996 | 409,394 | 263,974 | |||||||||||||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 1,654,365 | $ | 1,463,485 | $ | 1,107,798 | ||||||||||||||||||||||||||||||
| Interest rate spread (taxable-equivalent basis) | 4.43 | % | 4.12 | % | 4.24 | % | ||||||||||||||||||||||||||||||
| Net interest income (taxable-equivalent basis) | $ | 68,160 | $ | 55,684 | $ | 41,849 | ||||||||||||||||||||||||||||||
| Net interest margin (taxable-equivalent basis) | 4.63 | % | 4.28 | % | 4.34 | % | ||||||||||||||||||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities | 129.9 | % | 123.5 | % | 114.4 | % | ||||||||||||||||||||||||||||||
| (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, and other loan fees of $4.9 million, $2.4 million and $1.6 million in 2015, 2014 and 2013, respectively. |
| (3) | Other assets include bank-owned life insurance, tax lien certificates, OREO, fixed assets, interest receivable, prepaid expense and others. |
Rate/Volume Analysis
The tables below detail the components of the changes in net interest income for the year ended December 31, 2015 compared to the year ended December 31, 2014 and the year ended December 31, 2014 compared to the year ended December 31, 2013. 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.
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Year ended December 31, 2015 compared to year ended December 31, 2014
| Year Ended December 31, 2015 Compared to | ||||||||||||
| Year Ended December 31, 2014 | ||||||||||||
| Due to Changes in | ||||||||||||
| Average Volume | Average Rate | Net Increase (Decrease) | ||||||||||
| (in thousands) | ||||||||||||
| Interest income from earning assets: | ||||||||||||
| Loans receivable(1) | $ | 13,510 | $ | - | $ | 13,510 | ||||||
| Securities available for sale and other securities | (20 | ) | (30 | ) | (50 | ) | ||||||
| Federal funds sold and balances at Federal Reserve Bank | (176 | ) | 20 | (156 | ) | |||||||
| Time deposits in other financial institutions | 1 | - | 1 | |||||||||
| FHLB stock | 105 | 19 | 124 | |||||||||
| Total interest income(2) | 13,420 | 9 | 13,429 | |||||||||
| Interest expense from deposits and borrowings: | ||||||||||||
| Time deposits | (910 | ) | 201 | (709 | ) | |||||||
| Money market deposit accounts | 357 | 36 | 393 | |||||||||
| Interest-bearing demand deposits | 52 | (15 | ) | 37 | ||||||||
| Savings deposits | - | - | - | |||||||||
| FHLB advances | 1,017 | 271 | 1,288 | |||||||||
| Other borrowings | (28 | ) | (28 | ) | (56 | ) | ||||||
| Total interest expense | 488 | 465 | 953 | |||||||||
| Change in net interest income | $ | 12,932 | $ | (456 | ) | $ | 12,476 | |||||
| (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, and other loan fees of $4.9 million and $2.4 million in 2015 and 2014, respectively. |
The $13.4 million increase in interest income when comparing 2015 to 2014 was primarily due to changes in loan volumes. The $953 thousand increase in interest expense when comparing 2015 to 2014 was primarily due to changes in volumes and rates of FHLB advances. Higher average balances and rates of FHLB advances increased interest expense $1.0 million and $271 thousand, respectively, for a total increase of $1.3 million. Partially offsetting the increase in interest expense due to FHLB advances was $279 thousand less in interest expense due to changes in interest-bearing deposit volumes and rates, which reflected an improvement in the deposit mix.
Year ended December 31, 2014 compared to year ended December 31, 2013
| Year Ended December 31, 2014 Compared to | ||||||||||||
| Year Ended December 31, 2013 | ||||||||||||
| Due to Changes in | ||||||||||||
| Average Volume | Average Rate | Net Increase (Decrease) | ||||||||||
| (in thousands) | ||||||||||||
| Interest income from earning assets: | ||||||||||||
| Loans receivable(1) | $ | 16,313 | $ | (324 | ) | $ | 15,989 | |||||
| Securities available for sale and other securities | (1,300 | ) | 664 | (636 | ) | |||||||
| Federal funds sold and balances at Federal Reserve Bank | 255 | - | 255 | |||||||||
| Time deposits in other financial institutions | (4 | ) | (3 | ) | (7 | ) | ||||||
| FHLB stock | 80 | 130 | 210 | |||||||||
| Total interest income(2) | 15,344 | 467 | 15,811 | |||||||||
| Interest expense from deposits and borrowings: | ||||||||||||
| Time deposits | 943 | (82 | ) | 861 | ||||||||
| Money market deposit accounts | 259 | - | 259 | |||||||||
| Interest-bearing demand deposits | 12 | (14 | ) | (2 | ) | |||||||
| Savings deposits | 8 | - | 8 | |||||||||
| FHLB advances | 865 | (11 | ) | 854 | ||||||||
| Other borrowings | (3 | ) | (1 | ) | (4 | ) | ||||||
| Total interest expense | 2,084 | (108 | ) | 1,976 | ||||||||
| Change in net interest income | $ | 13,260 | $ | 575 | $ | 13,835 | ||||||
| (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, and other loan fees of $2.4 million and $1.6 million in 2014 and 2013, respectively. |
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The $15.8 million increase in interest income when comparing 2014 to 2013 was primarily due to changes in loan volumes and yields. The combined increase in the average volume of loans, net of the decline in the average rate on loans, increased interest income $16.0 million. The decline in interest income from securities available for sale and other securities was due to our decision to sell all of the securities in the 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.
The $2.0 million increase in interest expense when comparing to 2014 to 2013 was primarily due to increases in volumes of deposits and FHLB advances. The increase in the average volume of deposits in 2014, as compared to 2013, was primarily due to organic deposit growth to match the Bank’s funding needs and to deposits acquired from First Community Bank of Southwest Florida. In addition, the average volume of FHLB advances increased due to funding needs. The slight decrease in the average rate on time deposits and FHLB advances in 2014, as compared to 2013, resulted from the rolling off of these instruments at a higher price.
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.
Year ended December 31, 2015 compared to year ended December 31, 2014
Our provision for loan losses declined to $1.1 million for 2015 from $4.8 million for 2014. The provision for 2015 included $2.1 million of allowance for new loans funded year-to-date, $517 thousand in general reserves related to existing loans and a $65 thousand increase in specific reserves for impaired and purchased credit impaired loans, partially offset by $1.6 million in net recoveries (including a $484 thousand recovery related to our only Shared National Credit loan charged off in June 2014).
The provision for 2014 was primarily driven by $2.9 million of expense to replenish net charge offs (including the $4.0 million charge off of our only Shared National Credit on June 30, 2014 and $1.3 million in other charge-offs mainly related to acquired loans, partially offset by $2.4 million in gross recoveries, $147 thousand of which related to the Shared National Credit). Our provision for 2014 also included $1.6 million of allowance for new loans funded during 2014, an addition of $0.5 million to the general reserves related to existing loans (mainly driven by the adoption of the peer analysis and change in management adjustment factors related to C1 Bank originated loans during 2014, and partially offset by a reduction in the allowance for performing acquired loans as balances rolled off) and a $0.2 million reversal related to a change in specific reserves for impaired and purchased credit impaired loans.
Year ended December 31, 2014 compared to year ended December 31, 2013
Our provision for loan losses increased to $4.8 million in 2014 from $1.2 million in 2013. The provision for 2014 was primarily driven by $2.9 million of expense to replenish net charge offs (including the $4.0 million charge off of our only Shared National Credit on June 30, 2014 and $1.3 million in other charge-offs mainly related to acquired loans, partially offset by $2.4 million in gross recoveries). Our provision for 2014 also included $1.6 million of allowance for new loans funded during 2014, an addition of $0.5 million to the general reserves related to existing loans (mainly driven by the adoption of the peer analysis and change in management adjustment factors related to C1 Bank originated loans during 2014, and partially offset by a reduction in the allowance for performing acquired loans as balances rolled off) and a $0.2 million reversal related to a change in specific reserves for impaired and purchased credit impaired loans. Our provision for loan losses for 2013 was mainly driven by net charge-offs of $620 thousand and growth in originated loans during the period.
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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.
Year ended December 31, 2015 compared to the year ended December 31, 2014
Noninterest income increased 26.7% to $9.8 million in 2015 from $7.7 million in 2014, primarily due to a $2.6 million gain on the sale of land (excess parking lots in Wynwood), a $670 thousand gain on the early redemption of FHLB advances (redeemed to adjust our liability duration mix and included in other noninterest income) and $733 thousand more in income from BOLI due to an additional $35.0 million investment completed in December 2014. Partially offsetting these increases in noninterest income were a $1.3 million decline in gains on sales of Small Business Administration (“SBA”) loans and a $307 thousand decline in gains on sales of OREO. 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. Noninterest income for 2014 included $241 thousand in gains on sales of securities.
The following table sets forth the components of noninterest income for the periods indicated:
| Years Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| (in thousands) | ||||||||
| Gains on sales of securities | $ | - | $ | 241 | ||||
| Gains on sales of loans | 1,219 | 2,532 | ||||||
| Service charges and fees | 2,383 | 2,240 | ||||||
| Bargain purchase gain | - | 48 | ||||||
| Gains on sales of other real estate owned, net | 742 | 1,049 | ||||||
| Bank-owned life insurance | 893 | 160 | ||||||
| Mortgage banking fees | - | 47 | ||||||
| Gains (losses) on disposals of premises and equipment, net | 2,590 | (16 | ) | |||||
| Other noninterest income | 1,974 | 1,437 | ||||||
| Total noninterest income | $ | 9,801 | $ | 7,738 | ||||
Year ended December 31, 2014 compared to year ended December 31, 2013
Noninterest income decreased to $7.7 million in 2014 from $21.6 million in 2013, primarily due to a $13.5 million bargain purchase gain and a $1.9 million gain on the early redemption of FHLB advances (included in other noninterest income) recorded in 2013. Gains on sales of loans increased to $2.5 million in 2014 from $1.2 million in 2013, and service charges and fees increased to $2.2 million in 2014 from $1.9 million in 2013. The increase in the gains on sales of loans was due primarily to a strong demand for SBA loans in the secondary market and the increase in service charges and fees was due primarily to the growth in deposit accounts and balances. Gains on sales of OREO increased $363 thousand, which reflected our continued effort to sell properties. These increases were offset in part by a $543 thousand decrease in mortgage banking fees, primarily due to the Bank exiting residential real estate loan originations for sale in the secondary market in early 2014.
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The following table sets forth the components of noninterest income for the periods indicated:
| Years Ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| (in thousands) | ||||||||
| Gains on sales of securities | $ | 241 | $ | 305 | ||||
| Gains on sales of loans | 2,532 | 1,169 | ||||||
| Service charges and fees | 2,240 | 1,898 | ||||||
| Bargain purchase gain | 48 | 13,462 | ||||||
| Gains on sales of other real estate owned, net | 1,049 | 686 | ||||||
| Bank-owned life insurance | 160 | 173 | ||||||
| Mortgage banking fees | 47 | 590 | ||||||
| Gains (losses) on disposals of premises and equipment, net | (16 | ) | (22 | ) | ||||
| Other noninterest income | 1,437 | 3,387 | ||||||
| Total noninterest income | $ | 7,738 | $ | 21,648 | ||||
Noninterest Expense
Noninterest expense includes primarily salaries and employee benefits, occupancy expense, network services and data processing, advertising and promotion, other real estate owned 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.
Year ended December 31, 2015 compared to year ended December 31, 2014
Noninterest expense increased 8.8% to $51.4 million in 2015 from $47.2 million in 2014. The increase was mainly due to higher salaries and employee benefits of $3.8 million (primarily related to growth in our average number of employees and incentive compensation expense) and merger related expenses of $2.6 million pursuant to the Agreement with OZRK. Also impacting the increase in noninterest expense were greater occupancy expense ($802 thousand), network services and data processing ($606 thousand), and furniture and equipment ($323 thousand), the higher amounts in each mainly related to the increased scale of our operations, including two additional banking centers since the end of 2014 (Doral and Fort Lauderdale). The increase in noninterest expense was partially offset by a reduction in OREO valuation allowance expense ($3.0 million), professional fees ($519 thousand), and loan collection expenses ($328 thousand). Lower OREO valuation allowance expense reflected that a smaller amount of write-downs were required on OREO properties and lower professional fees and loan collection expenses were due to less activity required relating to nonperforming assets.
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The following table sets forth the components of noninterest expenses for the periods indicated:
| Years Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| (in thousands) | ||||||||
| Salaries and employee benefits | $ | 22,192 | $ | 18,360 | ||||
| Occupancy expense | 5,307 | 4,505 | ||||||
| Furniture and equipment | 2,989 | 2,666 | ||||||
| Regulatory assessments | 1,505 | 1,467 | ||||||
| Network services and data processing | 4,425 | 3,819 | ||||||
| Printing and office supplies | 269 | 389 | ||||||
| Postage and delivery | 320 | 255 | ||||||
| Advertising and promotion | 3,620 | 3,546 | ||||||
| Other real estate owned related expense | 1,930 | 2,168 | ||||||
| Other real estate owned – valuation allowance expense | 374 | 3,331 | ||||||
| Amortization of intangible assets | 288 | 498 | ||||||
| Professional fees | 2,401 | 2,920 | ||||||
| Loan collection expenses | 130 | 458 | ||||||
| Merger related expenses | 2,626 | - | ||||||
| Other noninterest expense | 2,996 | 2,850 | ||||||
| Total noninterest expense | $ | 51,372 | $ | 47,232 | ||||
In 2015 and 2014, our efficiency ratio was 65.9% and 74.8%, respectively. The efficiency ratio for 2015 improved mainly due to higher net interest income and noninterest income (which included the $2.6 million gain on the sale of land and the $670 thousand gain on the early redemption of FHLB advances), despite the $2.6 million in merger related expense. We also closely track annualized revenue per employee and average assets per employee, as measures of efficiency. Annualized revenue per employee was $362 thousand in 2015 as compared to $319 thousand in 2014 and average assets per employee were $6.8 million in 2015 as compared to $6.5 million in 2014, which reflected our productivity gains and growth.
Year ended December 31, 2014 compared to year ended December 31, 2013
Noninterest expense increased 10.8% to $47.2 million in 2014 from $42.6 million in 2013, primarily due to higher salaries and employee benefits ($1.3 million), occupancy expense ($875 thousand) and furniture and equipment ($825 thousand). The increase in noninterest expense in each of these areas related primarily to our acquisition of First Community Bank of Southwest Florida in 2013 and to the increased scale of our operations, including the opening of our banking centers in Miami, Sarasota, Coral Gables and Miami Beach in January, May, October and November 2014, respectively. OREO valuation allowance expense increased $1.6 million to $3.3 million in 2014 from $1.7 million in 2013. Included in the OREO valuation allowance expense for 2014 was $2.1 million in expenses due to appraisals of OREO associated with the purchase of First Community Bank of Southwest Florida. These properties were re-appraised to ensure that they continued to be held at the lower of cost or fair value at year-end 2014. These increases in noninterest expense were partially offset by a $1.0 million decrease in merger related expenses that were incurred in 2013 for the acquisition of First Community Bank of Southwest Florida.
The following table sets forth the components of noninterest expenses for the periods indicated:
| Years Ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| (in thousands) | ||||||||
| Salaries and employee benefits | $ | 18,360 | $ | 17,015 | ||||
| Occupancy expense | 4,505 | 3,630 | ||||||
| Furniture and equipment | 2,666 | 1,841 | ||||||
| Regulatory assessments | 1,467 | 1,096 | ||||||
| Network services and data processing | 3,819 | 3,402 | ||||||
| Printing and office supplies | 389 | 481 | ||||||
| Postage and delivery | 255 | 256 | ||||||
| Advertising and promotion | 3,546 | 3,422 | ||||||
| Other real estate owned related expense | 2,168 | 2,163 | ||||||
| Other real estate owned – valuation allowance expense | 3,331 | 1,739 | ||||||
| Amortization of intangible assets | 498 | 434 | ||||||
| Professional fees | 2,920 | 2,785 | ||||||
| Loan collection expenses | 458 | 710 | ||||||
| Merger related expenses | - | 1,010 | ||||||
| Other noninterest expense | 2,850 | 2,653 | ||||||
| Total noninterest expense | $ | 47,232 | $ | 42,637 | ||||
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In 2014 and 2013, our efficiency ratio was 74.8% and 67.5%, respectively. The efficiency ratio was positively impacted in 2013 by the $13.5 million bargain purchase gain on the acquisition of First Community Bank of Southwest Florida. Annualized revenue per employee was $319 thousand in 2014 as compared to $332 thousand in 2013, impacted in 2013 by the $13.5 million bargain purchase gain on the acquisition of First Community Bank of Southwest Florida, while average assets per employee were $6.5 million in 2014 as compared to $5.2 million in 2013, which reflected our continued growth in the balance sheet.
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. See the notes to our consolidated financial statements for additional information about the calculation of income tax expense and the various components thereof.
Year ended December 31, 2015 compared to year ended December 31, 2014
In 2015, we recorded income tax expense of $11.1 million, compared to income tax expense of $4.7 million in 2014. The increase in income tax expense was primarily due to our greater income before taxes. The effective income tax rate was 43.7% for 2015, higher than the effective tax rate of 40.9% for 2014 mainly due to our nondeductible merger related expenses associated with the Agreement with OZRK, a $163 thousand audit related tax adjustment and $120 thousand in tax expense related to BOLI policies surrendered during 2015. As of December 31, 2015, the Company had Federal and state net operating loss carryforwards of approximately $3.2 million and $7.2 million, respectively. The Federal and state carryforwards begin to expire in 2029.
Year ended December 31, 2014 compared to year ended December 31, 2013
In 2014, we recorded income tax expense of $4.7 million, compared to income tax expense of $7.7 million in 2013. The decrease in income tax expense was primarily due to our lower income before taxes. The effective income tax rate was 40.9% for 2014, higher than the effective tax rate of 39.0% for 2013 mainly due to our nondeductible expenses representing a larger share of pre-tax income in 2014.
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.
Year ended December 31, 2015 compared to year ended December 31, 2014
In 2015, our net income of $14.3 million, or $0.89 basic and diluted net income per common share, represented an ROAA of 0.87% and an ROAE of 7.33%. Our average equity-to-assets ratio (average equity divided by average total assets) in 2015 was 11.82%. For 2014, our net income of $6.7 million, or $0.48 basic and diluted net income per common share, represented an ROAA of 0.46% and an ROAE of 4.36%. Our average equity-to-assets ratio in 2014 was 10.54%.
Year ended December 31, 2014 compared to year ended December 31, 2013
In 2014, our net income of $6.7 million, or $0.48 basic and diluted net income per common share, represented an ROAA of 0.46% and an ROAE of 4.36%. Our average equity-to-assets ratio in 2014 was 10.54%. For 2013, our net income of $12.0 million, or $1.08 basic and diluted net income per common share, represented an ROAA of 1.08% and an ROAE of 11.43%. Our average equity-to-assets ratio in 2013 was 9.47%.
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Financial Condition
Our assets totaled $1.726 billion and $1.537 billion at December 31, 2015 and December 31, 2014, respectively. Loans receivable, net, as of December 31, 2015 and December 31, 2014 were $1.429 billion and $1.179 billion, respectively. Total deposits were $1.278 billion and $1.168 billion as of December 31, 2015 and December 31, 2014, respectively. Total liabilities, consisting of deposits, FHLB advances and other liabilities totaled $1.525 billion and $1.350 billion as of December 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 $201.0 million and $186.6 million as of December 31, 2015 and December 31, 2014, respectively. The increase in stockholders’ equity in 2015 was due to $14.3 million of net income earned during 2015.
We have not paid any dividends on our common stock since inception, and we currently anticipate that all available funds in stockholders’ equity will be used for the operation and expansion of our business, and not for the payment of cash dividends in the foreseeable future. Any future determination relating to our dividend policy will be made by our board of directors and will depend on a number of factors, including our financial condition and results of operations, tax considerations, capital requirements, industry standards, and economic conditions.
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 Portfolio Segment
The following table sets forth the carrying amounts of our loans by portfolio segment as of the dates indicated:
| As of December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||||||||
| Amount | % of Total | Amount | % of Total | Amount | % of Total | Amount | % of Total | Amount | % of Total | |||||||||||||||||||||||||||||||
| (in thousands, except %) | ||||||||||||||||||||||||||||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||||||||||||||
| Residential | $ | 303,644 | 21.0 | $ | 224,416 | 18.9 | $ | 196,238 | 18.7 | $ | 151,650 | 22.9 | $ | 161,172 | 29.4 | |||||||||||||||||||||||||
| Commercial | 783,774 | 54.3 | 723,577 | 60.9 | 636,238 | 60.4 | 366,431 | 55.1 | 281,451 | 51.3 | ||||||||||||||||||||||||||||||
| Construction | 197,070 | 13.7 | 107,436 | 9.0 | 90,974 | 8.6 | 59,419 | 9.0 | 30,992 | 5.6 | ||||||||||||||||||||||||||||||
| Total real estate | 1,284,488 | 89.0 | 1,055,429 | 88.8 | 923,450 | 87.7 | 577,500 | 87.0 | 473,615 | 86.3 | ||||||||||||||||||||||||||||||
| Commercial | 63,635 | 4.4 | 75,360 | 6.3 | 85,511 | 8.1 | 66,828 | 10.1 | 54,454 | 9.9 | ||||||||||||||||||||||||||||||
| Consumer | 94,521 | 6.6 | 57,733 | 4.9 | 44,068 | 4.2 | 19,306 | 2.9 | 21,012 | 3.8 | ||||||||||||||||||||||||||||||
| Total loans | 1,442,644 | 100.0 | 1,188,522 | 100.0 | 1,053,029 | 100.0 | 663,634 | 100.0 | 549,081 | 100.0 | ||||||||||||||||||||||||||||||
| Less: | ||||||||||||||||||||||||||||||||||||||||
| Net deferred loan fees | (5,482 | ) | (4,142 | ) | (2,880 | ) | (831 | ) | (109 | ) | ||||||||||||||||||||||||||||||
| Allowance for loan losses | (8,031 | ) | (5,324 | ) | (3,412 | ) | (2,814 | ) | (5,792 | ) | ||||||||||||||||||||||||||||||
| Loans receivable, net | $ | 1,429,131 | $ | 1,179,056 | $ | 1,046,737 | $ | 659,989 | $ | 543,180 | ||||||||||||||||||||||||||||||
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As of December 31, 2015 and December 31, 2014, 89.0% 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.
| As of December 31, 2015 | Due in 1 Year or Less | Due in 1 to 5 Years | Due After 5 Years | Total | ||||||||||||
| (in thousands) | ||||||||||||||||
| Real estate: | ||||||||||||||||
| Residential | $ | 49,192 | $ | 110,979 | $ | 143,473 | $ | 303,644 | ||||||||
| Commercial | 123,767 | 356,141 | 303,866 | 783,774 | ||||||||||||
| Construction | 99,652 | 59,599 | 37,819 | 197,070 | ||||||||||||
| Total real estate | 272,611 | 526,719 | 485,158 | 1,284,488 | ||||||||||||
| Commercial | 14,635 | 24,636 | 24,364 | 63,635 | ||||||||||||
| Consumer | 5,833 | 79,301 | 9,387 | 94,521 | ||||||||||||
| Total loans | $ | 293,079 | $ | 630,656 | $ | 518,909 | $ | 1,442,644 | ||||||||
| As of December 31, 2014 | Due in 1 Year or Less | Due in 1 to 5 Years | Due After 5 Years | Total | ||||||||||||
| (in thousands) | ||||||||||||||||
| 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:
| As of December 31, 2015 | Fixed Interest Rate | Variable Interest Rate | Total | |||||||||
| (in thousands) | ||||||||||||
| Real estate: | ||||||||||||
| Residential | $ | 97,746 | $ | 205,898 | $ | 303,644 | ||||||
| Commercial | 288,124 | 495,650 | 783,774 | |||||||||
| Construction | 61,542 | 135,528 | 197,070 | |||||||||
| Total real estate | 447,412 | 837,076 | 1,284,488 | |||||||||
| Commercial | 22,010 | 41,625 | 63,635 | |||||||||
| Consumer | 36,252 | 58,269 | 94,521 | |||||||||
| Total loans | $ | 505,674 | $ | 936,970 | $ | 1,442,644 | ||||||
| As of December 31, 2014 | Fixed Interest Rate | Variable Interest Rate | Total | |||||||||
| (in thousands) | ||||||||||||
| 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 December 31, 2015, 2.2% of our total loans (and 1.4% of the loans in our originated loan portfolio) were fixed rate with a maturity over five years. As of December 31, 2015, 64.9% of our total loans (and 63.0% of the loans in our originated loan portfolio) was made up of variable-rate loans. The fixed-rate portion of our originated portfolio had a weighted average time to maturity of 2.7 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 December 31, 2015:
| As of December 31, 2015 | Fixed Interest Rate | Variable Interest Rate | Total | |||||||||
| (in thousands) | ||||||||||||
| Maturity | ||||||||||||
| One year or less | $ | 104,468 | $ | 188,611 | $ | 293,079 | ||||||
| One to five years | 369,223 | 261,433 | 630,656 | |||||||||
| More than five years | 31,983 | 486,926 | 518,909 | |||||||||
| Total loans | $ | 505,674 | $ | 936,970 | $ | 1,442,644 | ||||||
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 year ended December 31, 2015, we originated a total of $548.6 million of new loans, including $469.3 million of real estate loans ($119.1 million, $190.2 million and $160.0 million of which were residential, commercial and construction real estate loans, respectively), $32.2 million of commercial loans, and $47.1 million of consumer loans. As of December 31, 2015, the average loan outstanding size in our originated portfolio was $1.1 million. For the year ended December 31, 2014, we originated a total of $488.7 million of new loans, including $432.0 million of real estate loans ($54.0 million, $213.1 million and $164.9 million of which were residential, commercial and construction real estate loans, respectively), $50.0 million of commercial loans, and $6.6 million of consumer loans.
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The following table provides information on new loan originations for the periods indicated:
| Year Ended December 31, 2015 | Year Ended December 31, 2014 | |||||||||||||||
| Amount | % of Total | Amount | % of Total | |||||||||||||
| (in thousands, except %) | ||||||||||||||||
| New loan originations | ||||||||||||||||
| Real estate: | ||||||||||||||||
| Residential | $ | 119,062 | 21.7 | $ | 53,982 | 11.1 | ||||||||||
| Commercial | 190,192 | 34.7 | 213,124 | 43.5 | ||||||||||||
| Construction | 160,012 | 29.2 | 164,923 | 33.8 | ||||||||||||
| Total real estate | 469,266 | 85.6 | 432,029 | 88.4 | ||||||||||||
| Commercial | 32,246 | 5.9 | 50,042 | 10.2 | ||||||||||||
| Consumer | 47,121 | 8.5 | 6,596 | 1.4 | ||||||||||||
| Total loans | $ | 548,633 | 100.0 | $ | 488,667 | 100.0 | ||||||||||
The total loan origination amount for 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 December 31, 2015 and December 31, 2014, the breakdown of our portfolio by originating bank was as follows:
| As of December 31, 2015 | As of December 31, 2014 | |||||||||||||||
| Amount | % of Total | Amount | % of Total | |||||||||||||
| (in thousands, except %) | ||||||||||||||||
| Originating Bank | ||||||||||||||||
| C1 Bank | $ | 1,163,212 | 80.6 | $ | 840,275 | 70.7 | ||||||||||
| Community Bank of Manatee | 50,493 | 3.5 | 64,121 | 5.4 | ||||||||||||
| First Community Bank of America | 110,532 | 7.7 | 136,476 | 11.5 | ||||||||||||
| The Palm Bank | 18,895 | 1.3 | 24,073 | 2.0 | ||||||||||||
| First Community Bank of Southwest Florida | 99,512 | 6.9 | 123,577 | 10.4 | ||||||||||||
| Total loans | $ | 1,442,644 | 100.0 | $ | 1,188,522 | 100.0 | ||||||||||
Asset Quality
In order to operate with a sound risk profile, we have focused on originating loans that we believe to be of high quality and disposing of nonperforming assets as rapidly as possible. In total, our originated loan portfolio has experienced only $3.5 million in net losses since the December 2009 recapitalizing investment, of which $3.4 million related to the $4.0 million full charge-off of our only Shared National Credit in June 2014, net of $147 thousand in recoveries during the third quarter of 2014 and $484 thousand during 2015. See “—Overview of Recent Financial Performance and Trends”.
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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 December 31, 2015 and December 31, 2014 were as follows:
| December 31, 2015 | December 31, 2014 | |||||||
| (in thousands) | ||||||||
| Unpaid principal balance | $ | 33,637 | $ | 38,831 | ||||
| Carrying amount, net of allowance of $124 and $92 | 24,259 | 28,081 | ||||||
Accretable yield, or income expected to be collected was $1.8 million and $2.4 million at December 31, 2015 and December 31, 2014, respectively.
Foreign Outstandings to Brazil
We have made four commercial real estate loans to three Brazilian corporations, which at December 31, 2015 and December 31, 2014 in total 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 (including accrued interest) at December 31, 2015 and December 31, 2014, of $41.3 million and $44.0 million, representing 2.4% and 2.9% of our total assets, respectively. These loans to foreign borrowers were made in accordance with the credit policy and procedures in place at the time of origination. Two of these loans, which were made to one of the Brazilian borrowers, had a combined recorded investment of $17.5 million and are secured by a first lien on farmland appraised at $44.5 million (of which we are entitled to 50.9%, as the collateral is shared on a first lien basis with another bank), representing a 77% loan-to-value. The three main parcels of this collateral pool (representing 83% of the collateral) were appraised during 2014 and the rest in 2012. At December 31, 2015, these loans were included in the 60-89 days past due category and on nonaccrual status as we determined that the full timely collection of principal and interest was doubtful. The third loan, which was made to another Brazilian borrower, had a recorded investment of $17.5 million and is secured by a first lien on farmland appraised at $39.7 million during 2015, representing a 44% loan-to-value. This loan was included in the 60-89 days past due category as of December 31, 2015 and a payment was received in early February 2016, which brought the loan current to December 5, 2015. The final loan, which was made to the third Brazilian borrower, had a recorded investment of $6.3 million and is secured by closely held stock. This loan is current and paying as agreed. The Brazilian economy is experiencing negative growth, a material decline in the value of its currency, increasing rates of inflation, growing unemployment, banking strikes and higher interest rates; the country has been recently downgraded by two of the rating agencies to non-investment grade (junk) status. These macroeconomic trends coupled with a growing corruption scandal involving the government, state-owned enterprises and some of the largest private corporations have placed significant stress on the Brazilian economy and may affect the ability of our borrowers to repay their loans and the value of our underlying collateral. Exchange rate fluctuations may stress the debt service coverage of these borrowers and impact the U.S. dollar value of the collateral. We may be forced to modify these loans in an attempt to collect, which would increase our level of classified assets, would harm our earnings, negatively impact our capital, and which could increase regulatory scrutiny. The substantial size of each of these individual relationships could, if unpaid, materially adversely affect our earnings and capital. 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.
In connection with our merger agreement with OZRK, we have agreed to use commercially reasonable efforts to hire a broker and conduct a marketing process to solicit offers for the purchase for cash of these Brazilian loans. For further information, see “The Brazilian Standby Purchase Agreement” in the C1 Financial Proxy Statement.
Nonperforming and Substandard 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, may be 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 principal and interest amounts contractually due are brought current and future payments are reasonably assured. As of December 31, 2015, there were $36.0 million in nonperforming loans, an increase of $15.1 million (primarily due to the two nonaccrual commercial real estate loans to a Brazilian borrower discussed above) from the $20.9 million at December 31, 2014. If such nonperforming loans would have been current during the years ended December 31, 2015 and 2014, we would have recorded an additional $1.3 million and $1.1 million of interest income, respectively. No interest income from nonperforming loans was recognized for the years ended December 31, 2015 and 2014.
As of December 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. As of December 31, 2015, we had three troubled debt restructurings totaling $954 thousand and as of December 31, 2014, we had two troubled debt restructurings totaling $906 thousand.
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 by using 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 $40.0 million and $28.3 million were classified substandard under the Bank’s policy at December 31, 2015 and 2014, respectively. The increase in December 31, 2015 when compared to December 31, 2014 was mainly due to the two nonaccrual commercial real estate loans to a Brazilian borrower discussed previously, partially offset by 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 December 31, 2015 and December 31, 2014:
| As of December 31, 2015 | Pass | Special Mention | Substandard | Total | ||||||||||||
| (in thousands) | ||||||||||||||||
| Real estate: | ||||||||||||||||
| Residential | $ | 294,790 | $ | 1,683 | $ | 7,171 | $ | 303,644 | ||||||||
| Commercial | 716,519 | 35,746 | 31,509 | 783,774 | ||||||||||||
| Construction | 195,468 | 877 | 725 | 197,070 | ||||||||||||
| Total real estate | 1,206,777 | 38,306 | 39,405 | 1,284,488 | ||||||||||||
| Commercial | 56,364 | 6,655 | 616 | 63,635 | ||||||||||||
| Consumer | 94,381 | 130 | 10 | 94,521 | ||||||||||||
| Total loans | $ | 1,357,522 | $ | 45,091 | $ | 40,031 | $ | 1,442,644 | ||||||||
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| As of December 31, 2014 | Pass | Special Mention | Substandard | Total | ||||||||||||
| (in thousands) | ||||||||||||||||
| 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 $28.3 million of OREO as of December 31, 2015, a decline of $6.6 million from the $34.9 million as of December 31, 2014, mainly due to sales. Our ratio of total nonperforming assets to total assets was 3.73% at December 31, 2015 and 3.63% at December 31, 2014.
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 December 31, | ||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
| (in thousands, except %) | ||||||||||||||||||||
| Total nonperforming loans | $ | 35,951 | $ | 20,894 | $ | 23,782 | $ | 23,315 | $ | 24,187 | ||||||||||
| OREO | 28,330 | 34,916 | 41,049 | 19,027 | 14,338 | |||||||||||||||
| Total nonperforming loans as a percentage of total loans | 2.49 | % | 1.76 | % | 2.26 | % | 3.51 | % | 4.40 | % | ||||||||||
| Total nonperforming assets as a percentage of total assets | 3.73 | % | 3.63 | % | 4.90 | % | 4.51 | % | 5.28 | % | ||||||||||
| Total accruing loans over 90 days delinquent as a percentage of total assets | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||||
| Loans restructured as troubled debt restructurings | $ | 954 | $ | 906 | $ | 980 | $ | 2,124 | $ | 2,952 | ||||||||||
| Troubled debt restructurings as a percentage of total loans | 0.07 | % | 0.08 | % | 0.09 | % | 0.32 | % | 0.54 | % | ||||||||||
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.
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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 Accounting Standards Codification 310, or 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 the allowance for loan losses, see “—Critical Accounting Policies and Estimates—Allowance for Loan Losses” and Note 1 in the notes to our audited financial statements.
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 December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||||||||
| Amount | % of Loans to Total Loans | Amount | % of Loans to Total Loans | Amount | % of Loans to Total Loans | Amount | % of Loans to Total Loans | Amount | % of Loans to Total Loans | |||||||||||||||||||||||||||||||
| (in thousands, except %) | ||||||||||||||||||||||||||||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||||||||||||||
| Residential | $ | 1,763 | 21.0 | $ | 820 | 18.9 | $ | 439 | 18.7 | $ | 523 | 22.9 | $ | 1,455 | 29.4 | |||||||||||||||||||||||||
| Commercial | 4,007 | 54.3 | 3,423 | 60.9 | 1,860 | 60.4 | 1,337 | 55.1 | 1,969 | 51.3 | ||||||||||||||||||||||||||||||
| Construction | 1,206 | 13.7 | 416 | 9.0 | 241 | 8.6 | 251 | 9.0 | 1,233 | 5.6 | ||||||||||||||||||||||||||||||
| Total real estate | 6,976 | 89.0 | 4,659 | 88.8 | 2,540 | 87.7 | 2,111 | 87.0 | 4,657 | 86.3 | ||||||||||||||||||||||||||||||
| Commercial | 437 | 4.4 | 373 | 6.3 | 537 | 8.1 | 399 | 10.1 | 885 | 9.9 | ||||||||||||||||||||||||||||||
| Consumer | 618 | 6.6 | 292 | 4.9 | 335 | 4.2 | 304 | 2.9 | 250 | 3.8 | ||||||||||||||||||||||||||||||
| Total allowance for loan losses | $ | 8,031 | 100.0 | $ | 5,324 | 100.0 | $ | 3,412 | 100.0 | $ | 2,814 | 100.0 | $ | 5,792 | 100.0 | |||||||||||||||||||||||||
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The following table sets forth certain information with respect to activity in our allowance for loan losses during the periods indicated:
| For the Years Ended December 31, | ||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
| Allowance for loan loss at beginning of period | $ | 5,324 | $ | 3,412 | $ | 2,814 | $ | 5,792 | $ | 3,984 | ||||||||||
| Charge-offs: | ||||||||||||||||||||
| Residential real estate | (119 | ) | (304 | ) | (506 | ) | (3,094 | ) | (927 | ) | ||||||||||
| Commercial real estate | (3 | ) | (430 | ) | (940 | ) | (752 | ) | (939 | ) | ||||||||||
| Construction | (7 | ) | (51 | ) | (120 | ) | (1,763 | ) | (29 | ) | ||||||||||
| Commercial | (67 | ) | (4,163 | ) | (918 | ) | (965 | ) | (438 | ) | ||||||||||
| Consumer | (64 | ) | (347 | ) | (180 | ) | (240 | ) | (179 | ) | ||||||||||
| Total charge-offs | (260 | ) | (5,295 | ) | (2,664 | ) | (6,814 | ) | (2,512 | ) | ||||||||||
| Recoveries: | ||||||||||||||||||||
| Residential real estate | 417 | 1,100 | 1,012 | 347 | 547 | |||||||||||||||
| Commercial real estate | 295 | 351 | 181 | 268 | 394 | |||||||||||||||
| Construction | 267 | 472 | 317 | 422 | 112 | |||||||||||||||
| Commercial | 710 | 414 | 330 | 355 | 352 | |||||||||||||||
| Consumer | 160 | 56 | 204 | 86 | 69 | |||||||||||||||
| Total recoveries | 1,849 | 2,393 | 2,044 | 1,478 | 1,474 | |||||||||||||||
| Net (charge-offs) recoveries | 1,589 | (2,902 | ) | (620 | ) | (5,336 | ) | (1,038 | ) | |||||||||||
| Provision for loan losses | 1,118 | 4,814 | 1,218 | 2,358 | 2,846 | |||||||||||||||
| Allowance for loan loss at end of period | $ | 8,031 | $ | 5,324 | $ | 3,412 | $ | 2,814 | $ | 5,792 | ||||||||||
| Ratio of net charge-offs (recoveries) during the period to average loans outstanding during the period | (0.12 | )% | 0.27 | % | 0.08 | % | 0.88 | % | 0.26 | % | ||||||||||
| Allowance for loan loss as a percentage of total loans at end of period | 0.56 | 0.45 | 0.32 | 0.42 | 1.05 | |||||||||||||||
| Allowance for loan loss as a percentage of nonperforming loans | 22.34 | 25.48 | 14.35 | 12.07 | 23.95 | |||||||||||||||
Our allowance for loan losses to total loans increased to 0.56% at December 31, 2015 from 0.45% at December 31, 2014, while our allowance for loan losses to nonperforming loans declined to 22.34% at December 31, 2015 from 25.48% at December 31, 2014. Additionally, 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 $1.8 million, $2.4 million and $2.0 million in the years ended December 31, 2015, 2014 and 2013, respectively.
Investment Securities
We did not carry any balance of investment securities as of December 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.
Bank-Owned Life Insurance
As of December 31, 2015 and December 31, 2014, we maintained investments in bank-owned life insurance of $37.3 million and $43.9 million, respectively, $35.0 million of which was purchased in December 2014. This purchase allowed us to deploy excess cash, has enhanced noninterest income and offset the rising costs of employee benefits. Included in the balance at December 31, 2015 and December 31, 2014 was $1.5 million and $8.9 million, respectively, relating to policies on former officers of an acquired bank, $7.5 million of which was surrendered during 2015. During the second quarter of 2015, we sent surrender notices for the remaining $1.5 million acquired polices. We expect to receive the proceeds within three to nine months.
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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 December 31, 2015 and December 31, 2014 were $1.278 billion and $1.168 billion, respectively. Our growth in deposits in 2015 was due primarily to our organic growth efforts by our banking centers and marketing team to expand our client reach, including the opening of our branches in Doral and Fort Lauderdale in 2015.
The following table sets forth the distribution by type of our deposit accounts for the dates indicated:
| As of December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||||||||
| Amount | %
of Total Deposits | Amount | %
of Total Deposits | Amount | %
of Total Deposits | Amount | %
of Total Deposits | Amount | %
of Total Deposits | |||||||||||||||||||||||||||||||
| (in thousands, except %) | ||||||||||||||||||||||||||||||||||||||||
| Deposit Type | ||||||||||||||||||||||||||||||||||||||||
| Noninterest-bearing demand | $ | 321,034 | 25.1 | $ | 278,543 | 23.9 | $ | 194,383 | 18.7 | $ | 108,862 | 14.3 | $ | 66,277 | 11.9 | |||||||||||||||||||||||||
| Interest-bearing demand | 182,212 | 14.3 | 140,598 | 12.0 | 138,765 | 13.3 | 131,562 | 17.3 | 39,324 | 7.1 | ||||||||||||||||||||||||||||||
| Money market and savings | 494,943 | 38.7 | 435,105 | 37.3 | 362,591 | 34.8 | 277,775 | 36.6 | 222,477 | 39.9 | ||||||||||||||||||||||||||||||
| Time | 280,076 | 21.9 | 313,256 | 26.8 | 345,304 | 33.2 | 241,842 | 31.8 | 229,623 | 41.1 | ||||||||||||||||||||||||||||||
| Total deposits | $ | 1,278,265 | 100.0 | $ | 1,167,502 | 100.0 | $ | 1,041,043 | 100.0 | $ | 760,041 | 100.0 | $ | 557,701 | 100.0 | |||||||||||||||||||||||||
| Time Deposits | ||||||||||||||||||||||||||||||||||||||||
| 0.00 - 0.50% | $ | 30,159 | 10.8 | $ | 25,294 | 8.1 | $ | 37,201 | 10.8 | $ | 29,760 | 12.3 | $ | 22,033 | 9.6 | |||||||||||||||||||||||||
| 0.51 - 1.00% | 44,421 | 15.9 | 77,480 | 24.7 | 94,229 | 27.3 | 54,237 | 22.4 | 45,640 | 19.9 | ||||||||||||||||||||||||||||||
| 1.01 - 1.50% | 158,454 | 56.5 | 160,808 | 51.3 | 159,770 | 46.3 | 86,992 | 36.0 | 63,692 | 27.7 | ||||||||||||||||||||||||||||||
| 1.51 - 2.00% | 28,233 | 10.1 | 27,813 | 8.9 | 23,652 | 6.8 | 28,963 | 12.0 | 37,982 | 16.5 | ||||||||||||||||||||||||||||||
| 2.01 - 2.50% | 15,336 | 5.5 | 11,160 | 3.6 | 15,595 | 4.5 | 21,098 | 8.7 | 27,305 | 11.9 | ||||||||||||||||||||||||||||||
| Above 2.50% | 3,473 | 1.2 | 10,701 | 3.4 | 14,857 | 4.3 | 20,792 | 8.6 | 32,971 | 14.4 | ||||||||||||||||||||||||||||||
| Total time deposits | $ | 280,076 | 100.0 | $ | 313,256 | 100.0 | $ | 345,304 | 100.0 | $ | 241,842 | 100.0 | $ | 229,623 | 100.0 | |||||||||||||||||||||||||
The following tables set forth our time deposits segmented by months to maturity and deposit amount:
| As of December 31, 2015 | ||||||||||||
| Time Deposits of $100 and Greater | Time Deposits of Less Than $100 | Total | ||||||||||
| (dollars in thousands) | ||||||||||||
| Months to maturity: | ||||||||||||
| Three or less | $ | 6,986 | $ | 10,019 | $ | 17,005 | ||||||
| Over Three to Six | 20,465 | 12,320 | 32,785 | |||||||||
| Over Six to Twelve | 44,990 | 20,179 | 65,169 | |||||||||
| Over Twelve | 97,115 | 68,002 | 165,117 | |||||||||
| Total | $ | 169,556 | $ | 110,520 | $ | 280,076 | ||||||
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| 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 December 31, 2015 and December 31, 2014, we had brokered deposits of $38.7 million and $17.0 million, respectively.
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 by entering 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 December 31, 2015, we had $242.0 million outstanding in advances from the FHLB with the following average rates and maturities:
| As of December 31, 2015 | ||||||||||||
| Amount | % of total | Average rate (%) | ||||||||||
| Maturity year: | ||||||||||||
| 2016 | $ | 45,000 | 18.6 | 1.31 | % | |||||||
| 2017 | 12,000 | 5.0 | 2.13 | % | ||||||||
| 2018 | 45,000 | 18.6 | 1.52 | % | ||||||||
| 2019 | 45,000 | 18.6 | 1.98 | % | ||||||||
| 2020 | 85,000 | 35.1 | 1.85 | % | ||||||||
| 2023 | 10,000 | 4.1 | 2.70 | % | ||||||||
| Total | $ | 242,000 | 100.0 | 1.76 | % | |||||||
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 Federal Home Loan Bank based upon our collateral position. We believe that the sources of available liquidity are adequate to meet all reasonably immediate short-term and intermediate-term demands.
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As of December 31, 2015, we held cash equal to 10.4% of total deposits and borrowings due in less than 12 months, which represented approximately $5.2 million of excess cash above our target.
We intend to use our current excess liquidity and capital for general corporate purposes, including loan growth.
We are subject to various restrictions, such as limits on capital expenditures, loans and investments, under the Agreement with OZRK that apply during the period from November 9, 2015 until the consummation of the merger. For additional information, see “The Merger Agreement” in the C1 Financial Proxy Statement.
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).
As of December 31, 2015 and December 31, 2014, we had an equity-to-assets ratio of 11.65% and 12.15%, respectively. As of December 31, 2015 and December 31, 2014, we had a Tier 1 capital to risk-weighted assets ratio of 13.32% and 14.33%, respectively, and a Tier 1 leverage ratio of 11.55% and 11.95%, respectively. The regulatory capital ratios as of December 31, 2015 were calculated under Basel III rules and the regulatory capital ratios as of December 31, 2014 and 2013 were calculated under Basel I rules. There is no threshold for well-capitalized status for bank holding companies.
As of December 31, 2015, 2014 and 2013, 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 | ||||||||||||||||||||||||
| December 31, 2015 | Amount | Ratio (%) | Amount | Ratio (%) | Amount | Ratio (%) | ||||||||||||||||||||
| (in thousands, except %) | ||||||||||||||||||||||||||
| Total capital to risk-weighted assets | ||||||||||||||||||||||||||
| C1 Financial, Inc. | $ | 208,426 | 13.85 | % | $ | 120,369 | 8.00 | % | $ | N/A | N/A | |||||||||||||||
| C1 Bank | 198,316 | 13.19 | % | 120,252 | 8.00 | % | 150,315 | 10.00 | % | |||||||||||||||||
| Tier 1 capital to risk-weighted assets | ||||||||||||||||||||||||||
| C1 Financial, Inc. | 200,396 | 13.32 | % | 90,277 | 6.00 | % | N/A | N/A | ||||||||||||||||||
| C1 Bank | 190,286 | 12.66 | % | 90,189 | 6.00 | % | 120,252 | 8.00 | % | |||||||||||||||||
| Common equity tier 1 capital to risk-weighted assets | ||||||||||||||||||||||||||
| C1 Financial, Inc. | 200,396 | 13.32 | % | 67,707 | 4.50 | % | N/A | N/A | ||||||||||||||||||
| C1 Bank | 190,286 | 12.66 | % | 67,642 | 4.50 | % | 97,705 | 6.50 | % | |||||||||||||||||
| Tier 1 leverage ratio | ||||||||||||||||||||||||||
| C1 Financial, Inc. | 200,396 | 11.55 | % | 69,410 | 4.00 | % | N/A | N/A | ||||||||||||||||||
| C1 Bank | 190,286 | 10.97 | % | 69,376 | 4.00 | % | 86,720 | 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 | % | |||||||||||||||||
| December 31, 2013 | ||||||||||||||||||||||||||
| Total capital to risk-weighted assets | ||||||||||||||||||||||||||
| C1 Financial, Inc. | $ | 124,020 | 10.97 | % | $ | 90,407 | 8.00 | % | $ | N/A | N/A | |||||||||||||||
| C1 Bank | 124,020 | 10.97 | % | 90,407 | 8.00 | % | 113,008 | 10.00 | % | |||||||||||||||||
| Tier 1 capital to risk-weighted assets | ||||||||||||||||||||||||||
| C1 Financial, Inc. | 120,008 | 10.62 | % | 45,203 | 4.00 | % | N/A | N/A | ||||||||||||||||||
| C1 Bank | 120,008 | 10.62 | % | 45,203 | 4.00 | % | 67,805 | 6.00 | % | |||||||||||||||||
| Tier 1 leverage ratio | ||||||||||||||||||||||||||
| C1 Financial, Inc. | 120,008 | 9.36 | % | 51,292 | 4.00 | % | N/A | N/A | ||||||||||||||||||
| C1 Bank | 120,008 | 9.36 | % | 51,292 | 4.00 | % | 64,115 | 5.00 | % | |||||||||||||||||
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During 2015, the Bank paid dividends of $12.0 million to the Company. At December 31, 2015, the Bank could have paid additional dividends to the Company of approximately $23.6 million without the prior consent and approval of its regulatory agencies.
Off-Balance Sheet Arrangements
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 $176.4 million and $189.0 million as of December 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 unused lines of credit and standby letters 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.
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Our off-balance sheet arrangements at December 31, 2015 and December 31, 2014 are summarized in the tables that follow:
| Amount of Commitment Expiration Per Period as of December 31, 2015 | ||||||||||||||||||||
| 1 Year or Less | Over 1 Through 3 Years | Over 3 Through 5 Years | Over 5 Years | Total Amounts Committed | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Unused lines of credit | $ | 10,386 | $ | 8,450 | $ | 2,892 | $ | 15,887 | $ | 37,615 | ||||||||||
| Standby letters of credit | 2,102 | 125 | 101 | - | 2,328 | |||||||||||||||
| Commitments to fund loans | 29,386 | 50,027 | 7,096 | 49,948 | 136,457 | |||||||||||||||
| Total | $ | 41,874 | $ | 58,602 | $ | 10,089 | $ | 65,835 | $ | 176,400 | ||||||||||
| Amount of Commitment Expiration Per Period as of December 31, 2014 | ||||||||||||||||||||
| 1 Year or Less | Over 1 Through 3 Years | Over 3 Through 5 Years | Over 5 Years | Total Amounts Committed | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Unused lines of credit | $ | 12,808 | $ | 10,778 | $ | 6,340 | $ | 9,704 | $ | 39,630 | ||||||||||
| Standby letters of credit | - | 1,473 | 67 | - | 1,540 | |||||||||||||||
| Commitments to fund loans | 17,080 | 65,402 | 26,838 | 38,559 | 147,879 | |||||||||||||||
| Total | $ | 29,888 | $ | 77,653 | $ | 33,245 | $ | 48,263 | $ | 189,049 | ||||||||||
Contractual Obligations
In the normal course of business, we have various outstanding contractual obligations that will require future cash outflows. The following table represents the largest contractual obligations as of December 31, 2015:
| As of December 31, 2015 | ||||||||||||||||||||
| Less than 1 Year | 1 to 3 Years | 3 to 5 Years | More than 5 Years | Total | ||||||||||||||||
| Deposits without stated maturity | $ | 998,189 | $ | - | $ | - | $ | - | $ | 998,189 | ||||||||||
| Time deposits | 114,959 | 106,718 | 54,184 | 4,215 | 280,076 | |||||||||||||||
| FHLB and other borrowings | 45,000 | 57,000 | 130,000 | 10,000 | 242,000 | |||||||||||||||
| Operating lease obligations | 1,037 | 1,834 | 1,807 | 10,866 | 15,544 | |||||||||||||||
| Total | $ | 1,159,185 | $ | 165,552 | $ | 185,991 | $ | 25,081 | $ | 1,535,809 | ||||||||||
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JOBS Act
The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company”, we have elected under the JOBS Act to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. However, at December 31, 2015, December 31, 2014 and December 31, 2013, we have adopted all new accounting standards that could affect the comparability of our financial statements to those of other public entities. In the event we choose to delay adoption of future accounting pronouncements applicable to public companies, our consolidated financial statements as of a particular date and for a particular period in the future may not be comparable to the financial statements as of such date and for such period of a public company situated similarly to us that is neither an emerging growth company nor an emerging growth company that has opted out of the extended transition period. Such financial statements of the other company may be prepared in conformity with new or revised accounting standards then applicable to public companies, but not to private companies, while, if we are then in the extended transition period, our consolidated financial standards would not be prepared in conformity with such new or revised accounting standards. Additionally, we are in the process of evaluating the benefits of relying on the other reduced reporting requirements provided by the JOBS Act.
Subject to certain conditions set forth in the JOBS Act, if, as an “emerging growth company,” we choose to rely on such exemptions we may not be required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404, (ii) provide all of the compensation disclosure that may be required of nonemerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (iv) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation. These exemptions will apply for a period of five years following the completion of our initial public offering or until we are no longer an “emerging growth company,” whichever is earlier.
GAAP Reconciliation and Explanation of Non-GAAP Financial Measures
(In thousands, except per share and employee data)
Some of the financial measures included in this Annual Report on Form 10-K 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.
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| As of and for Years Ended December 31, | ||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
| Loan loss reserves | ||||||||||||||||||||
| Allowance for loan losses | $ | 8,031 | $ | 5,324 | $ | 3,412 | $ | 2,814 | $ | 5,792 | ||||||||||
| Acquired performing loans discount | 2,629 | 3,532 | 4,831 | 3,595 | 5,918 | |||||||||||||||
| Total | $ | 10,660 | $ | 8,856 | $ | 8,243 | $ | 6,409 | $ | 11,710 | ||||||||||
| Loans receivable, gross | $ | 1,442,644 | $ | 1,188,522 | $ | 1,053,029 | $ | 663,634 | $ | 549,081 | ||||||||||
| Allowance for loan losses to total loans receivable | 0.56 | % | 0.45 | % | 0.32 | % | 0.42 | % | 1.05 | % | ||||||||||
| Allowance plus performing loans discount to total loans receivable | 0.74 | % | 0.75 | % | 0.78 | % | 0.97 | % | 2.13 | % | ||||||||||
| Efficiency ratio | ||||||||||||||||||||
| Noninterest expense | $ | 51,372 | $ | 47,232 | $ | 42,637 | $ | 33,963 | $ | 18,027 | ||||||||||
| Taxable-equivalent net interest income | $ | 68,160 | $ | 55,684 | $ | 41,849 | $ | 32,074 | $ | 21,200 | ||||||||||
| Noninterest income | $ | 9,801 | $ | 7,738 | $ | 21,648 | $ | 15,051 | $ | 5,238 | ||||||||||
| Gains on sales of securities | - | (241 | ) | (305 | ) | (3,035 | ) | (294 | ) | |||||||||||
| Adjusted noninterest income | $ | 9,801 | $ | 7,497 | $ | 21,343 | $ | 12,016 | $ | 4,944 | ||||||||||
| Efficiency ratio | 65.9 | % | 74.8 | % | 67.5 | % | 77.0 | % | 69.0 | % | ||||||||||
| Revenue and average assets per average number of employees | ||||||||||||||||||||
| Interest income | $ | 77,739 | $ | 64,310 | $ | 48,499 | $ | 38,201 | $ | 27,015 | ||||||||||
| Noninterest income | 9,801 | 7,738 | 21,648 | 15,051 | 5,238 | |||||||||||||||
| Total revenue | $ | 87,540 | $ | 72,048 | $ | 70,147 | $ | 53,252 | $ | 32,253 | ||||||||||
| Total revenue annualized | $ | 87,540 | $ | 72,048 | $ | 70,147 | $ | 53,252 | $ | 32,253 | ||||||||||
| Total average assets | $ | 1,654,365 | $ | 1,463,485 | $ | 1,107,798 | $ | 870,202 | $ | 559,522 | ||||||||||
| Average number of employees | 242 | 226 | 211 | 189 | 105 | |||||||||||||||
| Revenue per average number of employees | $ | 362 | $ | 319 | $ | 332 | $ | 282 | $ | 307 | ||||||||||
| Average assets per average number of employees | $ | 6,836 | $ | 6,476 | $ | 5,250 | $ | 4,604 | $ | 5,329 | ||||||||||
| Tangible stockholders' equity and Tangible book value per share | ||||||||||||||||||||
| Total stockholders' equity | $ | 200,981 | $ | 186,638 | $ | 121,814 | $ | 96,447 | $ | 74,593 | ||||||||||
| Less: Goodwill | (249 | ) | (249 | ) | (249 | ) | (249 | ) | - | |||||||||||
| Other intangible assets | (699 | ) | (987 | ) | (1,485 | ) | (370 | ) | (503 | ) | ||||||||||
| Tangible stockholders' equity | $ | 200,033 | $ | 185,402 | $ | 120,080 | $ | 95,828 | $ | 74,090 | ||||||||||
| Common shares outstanding | 16,101 | 16,101 | 12,217 | 10,649 | 9,614 | |||||||||||||||
| Book value per share | $ | 12.48 | $ | 11.59 | $ | 9.97 | $ | 9.06 | $ | 7.76 | ||||||||||
| Tangible book value per share | 12.42 | 11.51 | 9.83 | 9.00 | 7.71 | |||||||||||||||
| Adjusted yield earned on loans | ||||||||||||||||||||
| Reported yield on loans | 5.83 | % | 5.83 | % | 5.87 | % | 5.84 | % | 6.34 | % | ||||||||||
| Effect of accretion income on acquired loans | (0.11 | )% | (0.18 | )% | (0.24 | )% | (0.34 | )% | (0.76 | )% | ||||||||||
| Adjusted yield on loans | 5.72 | % | 5.65 | % | 5.63 | % | 5.50 | % | 5.58 | % | ||||||||||
| Adjusted rate paid on total deposits | ||||||||||||||||||||
| Reported rate paid on total deposits | 0.46 | % | 0.53 | % | 0.55 | % | 0.70 | % | 1.10 | % | ||||||||||
| Effect of premium amortization on acquired deposits | 0.01 | % | 0.01 | % | 0.04 | % | 0.10 | % | 0.05 | % | ||||||||||
| Adjusted rate paid on total deposits | 0.47 | % | 0.54 | % | 0.59 | % | 0.80 | % | 1.15 | % | ||||||||||
| Adjusted net interest margin | ||||||||||||||||||||
| Reported net interest margin | 4.63 | % | 4.28 | % | 4.34 | % | 4.06 | % | 4.15 | % | ||||||||||
| Effect of accretion income on acquired loans | (0.10 | )% | (0.15 | )% | (0.20 | )% | (0.26 | )% | (0.60 | )% | ||||||||||
| Effect of premium amortization on acquired | ||||||||||||||||||||
| deposits and borrowings | (0.02 | )% | (0.04 | )% | (0.10 | )% | (0.17 | )% | (0.12 | )% | ||||||||||
| Adjusted net interest margin | 4.51 | % | 4.09 | % | 4.04 | % | 3.63 | % | 3.43 | % | ||||||||||
| Average excess cash | ||||||||||||||||||||
| Average total deposits | $ | 1,225,046 | $ | 1,133,615 | $ | 882,003 | $ | 693,742 | $ | 440,369 | ||||||||||
| Borrowings due one year or less | 23,316 | 30,956 | 14,117 | 17,971 | 8,968 | |||||||||||||||
| Total base for liquidity | $ | 1,248,362 | $ | 1,164,571 | $ | 896,120 | $ | 711,713 | $ | 449,337 | ||||||||||
| Minimum liquidity level (10% of base) (a) | $ | 124,836 | $ | 116,457 | $ | 89,612 | $ | 71,171 | $ | 44,934 | ||||||||||
| Average cash and cash equivalents (b) | 178,606 | 246,219 | 143,884 | 78,755 | 39,101 | |||||||||||||||
| Cash above liquidity level (b)-(a) | 53,770 | 129,762 | 54,272 | 7,584 | (5,833 | ) | ||||||||||||||
| Less estimated short-term deposits | (17,017 | ) | (24,961 | ) | (4,251 | ) | (725 | ) | (187 | ) | ||||||||||
| Average excess cash | $ | 36,753 | $ | 104,801 | $ | 50,021 | $ | 6,859 | $ | (6,020 | ) | |||||||||
| Tangible equity to tangible assets | ||||||||||||||||||||
| Total stockholders' equity | $ | 200,981 | $ | 186,638 | $ | 121,814 | $ | 96,447 | $ | 74,593 | ||||||||||
| Less: Goodwill | (249 | ) | (249 | ) | (249 | ) | (249 | ) | - | |||||||||||
| Other intangible assets | (699 | ) | (987 | ) | (1,485 | ) | (370 | ) | (503 | ) | ||||||||||
| Tangible stockholders' equity | $ | 200,033 | $ | 185,402 | $ | 120,080 | $ | 95,828 | $ | 74,090 | ||||||||||
| Total assets | $ | 1,725,520 | $ | 1,536,691 | $ | 1,323,371 | $ | 938,066 | $ | 729,277 | ||||||||||
| Less: Goodwill | (249 | ) | (249 | ) | (249 | ) | (249 | ) | - | |||||||||||
| Other intangible assets | (699 | ) | (987 | ) | (1,485 | ) | (370 | ) | (503 | ) | ||||||||||
| Tangible assets | $ | 1,724,572 | $ | 1,535,455 | $ | 1,321,637 | $ | 937,447 | $ | 728,774 | ||||||||||
| Equity/Assets | 11.65 | % | 12.15 | % | 9.20 | % | 10.28 | % | 10.23 | % | ||||||||||
| Tangible Equity/Tangible Assets | 11.60 | % | 12.07 | % | 9.09 | % | 10.22 | % | 10.17 | % | ||||||||||
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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 total deposits is our cost of deposits after excluding amortization of premiums 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 premiums 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 premiums related to deposits or borrowings is expected to decrease as the acquired loans and deposits mature or roll off of our balance sheet.
83
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. In 2015, based on an historical analysis, we changed our methodology for estimating short-term deposits, which reduced the results.
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 total 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 7A. Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Risk Management
Interest rate risk management is carried out through our directors’ asset/liability committee (“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 that the minus 200, minus 300 and minus 400 basis point scenarios are highly unlikely.
Based upon the current interest rate environment, as of December 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:
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| As of December 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 | ) | $ | (10.3 | ) | (13.9 | ) | $ | (43.8 | ) | (19.7 | ) | |||||||
| (300 | ) | (8.6 | ) | (11.5 | ) | (33.5 | ) | (15.1 | ) | |||||||||
| (200 | ) | (6.0 | ) | (8.1 | ) | (21.5 | ) | (9.7 | ) | |||||||||
| (100 | ) | (2.7 | ) | (3.6 | ) | (7.3 | ) | (3.3 | ) | |||||||||
| 0 | - | - | - | - | ||||||||||||||
| 100 | 4.0 | 5.4 | 6.8 | 3.1 | ||||||||||||||
| 200 | 8.0 | 10.8 | 12.7 | 5.7 | ||||||||||||||
| 300 | 11.9 | 16.1 | 17.9 | 8.1 | ||||||||||||||
| 400 | 15.9 | 21.4 | 22.3 | 10.1 | ||||||||||||||
| 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 that 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 December 31, 2015, we were in compliance with all of the limits and policies established by management.
Inflation Risk Management
Inflation has an important impact on the growth of total assets in the banking industry and creates a need to increase equity capital to higher than normal levels in order to maintain an appropriate equity-to-assets ratio. We cope with the effects of inflation by managing our interest rate sensitivity position through our asset/liability management program, and by periodically adjusting our pricing of services and banking products to take into consideration current costs.
85
Item 8. Financial Statements and Supplementary Data
86
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of C1 Financial, Inc. (the “Company”) is responsible for the preparation, integrity and fair presentation of the consolidated financial statements included in this annual report. The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, as such, include some amounts that are based on the best estimates and judgments of management.
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. This internal control system is designed to provide reasonable assurance to management and the Board of Directors regarding the reliability of the Company’s financial reporting and the preparation and presentation of financial statements for external reporting purposes in conformity with accounting principles generally accepted in the United States of America, as well as to safeguard assets from unauthorized use or disposition. The system of internal control over financial reporting is evaluated for effectiveness by management and tested for reliability through a program of internal audit with actions taken to correct potential deficiencies as they are identified. Because of inherent limitations in any internal control system, no matter how well designed, misstatement due to error or fraud may occur and not be detected, including the possibility of the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, internal control effectiveness may vary over time.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015 based upon criteria set forth in Internal Control – Integrated Framework issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment and on the foregoing criteria, management has concluded that, as of December 31, 2015, the Company’s internal control over financial reporting is effective.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
February 19, 2016
| /s/ Trevor R. Burgess | /s/ Cristian A. Melej | ||
| Trevor R. Burgess | Cristian A. Melej | ||
| President and Chief Executive Officer | Chief Financial Officer | ||
| (Principal Executive Officer) | (Principal Financial Officer) |
87
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
C1 Financial, Inc.
St. Petersburg, Florida
We have audited the accompanying consolidated balance sheets of C1 Financial, Inc. as of December 31, 2015 and 2014, and the related consolidated income statements, statements of comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
| /s/ Crowe Horwath LLP | |
| Crowe Horwath LLP |
Fort Lauderdale, Florida
February 19, 2016
88
Consolidated
Balance Sheets
December 31, 2015 and 2014
(Dollars in thousands, except per share
data)
| December 31, 2015 | December 31, 2014 | |||||||
| ASSETS | ||||||||
| Cash and cash equivalents | $ | 137,259 | $ | 185,703 | ||||
| Time deposits in other financial institutions | 248 | - | ||||||
| Federal Home Loan Bank stock, at cost | 11,668 | 9,224 | ||||||
| Loans receivable (net of allowance of $8,031 at December 31, 2015 and $5,324 at December 31, 2014) | 1,429,131 | 1,179,056 | ||||||
| Premises and equipment, net | 65,139 | 64,075 | ||||||
| Other real estate owned, net | 28,330 | 34,916 | ||||||
| Bank-owned life insurance (BOLI) | 37,275 | 43,907 | ||||||
| Accrued interest receivable | 4,641 | 3,490 | ||||||
| Core deposit intangible, net | 699 | 987 | ||||||
| Prepaid expenses | 5,613 | 5,243 | ||||||
| Other assets | 5,517 | 10,090 | ||||||
| Total assets | $ | 1,725,520 | $ | 1,536,691 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Deposits | ||||||||
| Noninterest bearing | $ | 321,034 | $ | 278,543 | ||||
| Interest bearing | 957,231 | 888,959 | ||||||
| Total deposits | 1,278,265 | 1,167,502 | ||||||
| Federal Home Loan Bank advances | 242,000 | 178,500 | ||||||
| Other liabilities | 4,274 | 4,051 | ||||||
| Total liabilities | 1,524,539 | 1,350,053 | ||||||
| Commitments and contingencies (Note 12) | ||||||||
| Stockholders’ equity | ||||||||
| Common stock, par value $1.00; 100,000,000 shares authorized; 16,100,966 shares issued and outstanding at both December 31, 2015 and December 31, 2014 | 16,101 | 16,101 | ||||||
| Additional paid-in capital | 148,122 | 148,122 | ||||||
| Retained earnings | 36,758 | 22,415 | ||||||
| Accumulated other comprehensive income | - | - | ||||||
| Total stockholders’ equity | 200,981 | 186,638 | ||||||
| Total liabilities and stockholders’ equity | $ | 1,725,520 | $ | 1,536,691 | ||||
See accompanying notes to the consolidated financial statements.
89
C1
Financial, Inc.
Consolidated Income Statements
Years ended December 31, 2015, 2014 and 2013
(Dollars in thousands, except per share data)
| 2015 | 2014 | 2013 (1) | ||||||||||
| Interest income | ||||||||||||
| Loans, including fees | $ | 76,861 | $ | 63,351 | $ | 47,362 | ||||||
| Securities | 12 | 62 | 705 | |||||||||
| Federal funds sold and other | 866 | 897 | 432 | |||||||||
| Total interest income | 77,739 | 64,310 | 48,499 | |||||||||
| Interest expense | ||||||||||||
| Savings and interest-bearing demand deposits | 2,584 | 2,154 | 1,889 | |||||||||
| Time deposits | 3,100 | 3,809 | 2,948 | |||||||||
| Federal Home Loan Bank advances | 3,895 | 2,607 | 1,753 | |||||||||
| Other borrowings | - | 56 | 60 | |||||||||
| Total interest expense | 9,579 | 8,626 | 6,650 | |||||||||
| Net interest income | 68,160 | 55,684 | 41,849 | |||||||||
| Provision for loan losses | 1,118 | 4,814 | 1,218 | |||||||||
| Net interest income after provision for loan losses | 67,042 | 50,870 | 40,631 | |||||||||
| Noninterest income | ||||||||||||
| Gains on sales of securities | - | 241 | 305 | |||||||||
| Gains on sales of loans | 1,219 | 2,532 | 1,169 | |||||||||
| Service charges and fees | 2,383 | 2,240 | 1,898 | |||||||||
| Bargain purchase gain | - | 48 | 13,462 | |||||||||
| Gains on sales of other real estate owned, net | 742 | 1,049 | 686 | |||||||||
| Bank-owned life insurance | 893 | 160 | 173 | |||||||||
| Mortgage banking fees | - | 47 | 590 | |||||||||
| Gains (losses) on disposals of premises and equipment, net | 2,590 | (16 | ) | (22 | ) | |||||||
| Other noninterest income | 1,974 | 1,437 | 3,387 | |||||||||
| Total noninterest income | 9,801 | 7,738 | 21,648 | |||||||||
| Noninterest expense | ||||||||||||
| Salaries and employee benefits | 22,192 | 18,360 | 17,015 | |||||||||
| Occupancy expense | 5,307 | 4,505 | 3,630 | |||||||||
| Furniture and equipment | 2,989 | 2,666 | 1,841 | |||||||||
| Regulatory assessments | 1,505 | 1,467 | 1,096 | |||||||||
| Network services and data processing | 4,425 | 3,819 | 3,402 | |||||||||
| Printing and office supplies | 269 | 389 | 481 | |||||||||
| Postage and delivery | 320 | 255 | 256 | |||||||||
| Advertising and promotion | 3,620 | 3,546 | 3,422 | |||||||||
| Other real estate owned related expense, net | 1,930 | 2,168 | 2,163 | |||||||||
| Other real estate owned – valuation allowance expense | 374 | 3,331 | 1,739 | |||||||||
| Amortization of intangible assets | 288 | 498 | 434 | |||||||||
| Professional fees | 2,401 | 2,920 | 2,785 | |||||||||
| Loan collection expenses | 130 | 458 | 710 | |||||||||
| Merger related expense | 2,626 | - | 1,010 | |||||||||
| Other noninterest expense | 2,996 | 2,850 | 2,653 | |||||||||
| Total noninterest expense | 51,372 | 47,232 | 42,637 | |||||||||
| Income before income taxes | 25,471 | 11,376 | 19,642 | |||||||||
| Income tax expense | 11,128 | 4,652 | 7,652 | |||||||||
| Net income | $ | 14,343 | $ | 6,724 | $ | 11,990 | ||||||
| Earnings per common share: | ||||||||||||
| Basic | $ | 0.89 | $ | 0.48 | $ | 1.08 | ||||||
| Diluted | $ | 0.89 | $ | 0.48 | $ | 1.08 | ||||||
(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 the consolidated financial statements.
90
Consolidated
Statements of Comprehensive Income
Years ended December 31, 2015, 2014 and 2013
(Dollars in thousands)
| 2015 | 2014 | 2013 | ||||||||||
| Net income | $ | 14,343 | $ | 6,724 | $ | 11,990 | ||||||
| Other comprehensive income: | ||||||||||||
| Unrealized gains/losses on available-for-sale securities: | ||||||||||||
| Unrealized holding gains arising during the period | - | 241 | 228 | |||||||||
| Reclassification adjustments for gains included in net income* | - | (241 | ) | (305 | ) | |||||||
| Tax effect* | - | - | 29 | |||||||||
| Total other comprehensive income, net of tax | - | - | (48 | ) | ||||||||
| Comprehensive income | $ | 14,343 | $ | 6,724 | $ | 11,942 | ||||||
| * | 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, were $0, $0 and $29 for the years ended December 31, 2015, 2014 and 2013, 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 the consolidated financial statements.
91
Consolidated Statements of Changes in Stockholders’ Equity
Years ended December 31, 2015, 2014 and 2013
(Dollars in thousands)
| Preferred Stock Series E | Common Stock | Additional Paid in Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||||||||
| Balance at January 1, 2013 | $ | 1,033 | $ | 9,616 | $ | 82,016 | $ | 3,738 | $ | (4 | ) | $ | 48 | $ | 96,447 | |||||||||||||
| Issuance of common stock, net of costs of $0 (1,567,825 shares) (1) | - | 1,568 | 11,894 | - | - | - | 13,462 | |||||||||||||||||||||
| Conversion of preferred stock to common stock (1) | (1,033 | ) | 1,033 | - | - | - | - | - | ||||||||||||||||||||
| Retirement of treasury stock (1) | - | - | (4 | ) | - | 4 | - | - | ||||||||||||||||||||
| Net income | - | - | - | 11,990 | - | - | 11,990 | |||||||||||||||||||||
| Other | - | - | - | (37 | ) | - | - | (37 | ) | |||||||||||||||||||
| Other comprehensive loss | - | - | - | - | - | (48 | ) | (48 | ) | |||||||||||||||||||
| Balance at December 31, 2013 | - | 12,217 | 93,906 | 15,691 | - | - | 121,814 | |||||||||||||||||||||
| Issuance of common stock, net of costs of $4,653 (3,884,034 shares) (1) | - | 3,884 | 54,023 | - | - | - | 57,907 | |||||||||||||||||||||
| Net income | - | - | - | 6,724 | - | - | 6,724 | |||||||||||||||||||||
| Other | - | - | 193 | - | - | - | 193 | |||||||||||||||||||||
| Other comprehensive income | - | - | - | - | - | - | - | |||||||||||||||||||||
| Balance at December 31, 2014 | - | 16,101 | 148,122 | 22,415 | - | - | 186,638 | |||||||||||||||||||||
| Net income | - | - | - | 14,343 | - | - | 14,343 | |||||||||||||||||||||
| Other comprehensive income | - | - | - | - | - | - | - | |||||||||||||||||||||
| Balance at December 31, 2015 | $ | - | $ | 16,101 | $ | 148,122 | $ | 36,758 | $ | - | $ | - | $ | 200,981 | ||||||||||||||
(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 the consolidated financial statements.
92
Consolidated Statements of Cash Flows
Years ended December 31, 2015, 2014 and 2013
(Dollars in thousands)
| 2015 | 2014 | 2013 | ||||||||||
| Cash flows from operating activities | ||||||||||||
| Net income | $ | 14,343 | $ | 6,724 | $ | 11,990 | ||||||
| Adjustments to reconcile net income to net cash from operating activities: | ||||||||||||
| Provision for loan losses | 1,118 | 4,814 | 1,218 | |||||||||
| Depreciation | 3,408 | 2,841 | 2,069 | |||||||||
| Net accretion of purchase accounting adjustments | (1,742 | ) | (2,483 | ) | (2,856 | ) | ||||||
| Net amortization of securities | - | - | 589 | |||||||||
| Accretion of loan discount | (438 | ) | (270 | ) | (383 | ) | ||||||
| Amortization of other intangible assets | 288 | 498 | 434 | |||||||||
| Increase in other real estate owned valuation allowance | 374 | 3,331 | 1,739 | |||||||||
| Increase in cash surrender value of BOLI | (893 | ) | (160 | ) | (173 | ) | ||||||
| Gains on sales of securities | - | (241 | ) | (305 | ) | |||||||
| Bargain purchase gain | - | (48 | ) | (13,462 | ) | |||||||
| Net change in deferred income tax expense (benefit) | (538 | ) | (798 | ) | 5,660 | |||||||
| Gains on sales of loans | (1,219 | ) | (2,532 | ) | (1,169 | ) | ||||||
| Gains on sales of other real estate owned, net | (742 | ) | (1,049 | ) | (686 | ) | ||||||
| (Gains) losses on disposals of premises and equipment, net | (2,590 | ) | 16 | 22 | ||||||||
| Gains on early redemption of Federal Home Loan Bank advances | (670 | ) | - | (1,881 | ) | |||||||
| Net change in other assets and liabilities: | ||||||||||||
| Accrued interest receivable and other assets | 3,590 | (3,132 | ) | (1,296 | ) | |||||||
| Other liabilities | 527 | (1,622 | ) | 4,099 | ||||||||
| Net cash from operating activities | 14,816 | 5,889 | 5,609 | |||||||||
| Cash flows from investing activities | ||||||||||||
| Net change in time deposits in other financial institutions | (248 | ) | - | 249 | ||||||||
| Loan originations, net of repayments | (264,004 | ) | (162,412 | ) | (258,693 | ) | ||||||
| Proceeds from loans sold | 11,676 | 26,697 | 33,200 | |||||||||
| Proceeds from sales of other real estate owned | 11,218 | 7,206 | 9,855 | |||||||||
| Proceeds from sales, calls and maturities of securities | - | 996 | 130,562 | |||||||||
| Purchases of Federal Home Loan Bank stock | (5,030 | ) | (1,958 | ) | (4,868 | ) | ||||||
| Proceeds from sales of Federal Home Loan Bank stock | 2,586 | 944 | 2,248 | |||||||||
| Purchases of premises and equipment | (6,330 | ) | (9,654 | ) | (14,852 | ) | ||||||
| Proceeds from sales of premises and equipment | 4,448 | 6 | 1 | |||||||||
| Purchase of BOLI | - | (35,000 | ) | - | ||||||||
| Surrender of BOLI | 7,467 | - | - | |||||||||
| Net cash transferred in bank acquisition | - | 48 | 41,819 | |||||||||
| Net cash from investing activities | (238,217 | ) | (173,127 | ) | (60,479 | ) | ||||||
| Cash flows from financing activities | ||||||||||||
| Net proceeds from issuance of common stock | - | 57,907 | 13,462 | |||||||||
| Net change in deposits | 110,787 | 126,582 | 44,341 | |||||||||
| Repayment of Federal Home Loan Bank advances | (48,830 | ) | (17,000 | ) | (66,519 | ) | ||||||
| Proceeds from Federal Home Loan Bank advances | 113,000 | 45,000 | 130,000 | |||||||||
| Repayment of other borrowings | - | (3,000 | ) | - | ||||||||
| Net cash from financing activities | 174,957 | 209,489 | 121,284 | |||||||||
| Net change in cash and cash equivalents | (48,444 | ) | 42,251 | 66,414 | ||||||||
| Cash and cash equivalents at beginning of the period | 185,703 | 143,452 | 77,038 | |||||||||
| Cash and cash equivalents at end of the period | $ | 137,259 | $ | 185,703 | $ | 143,452 | ||||||
| Supplemental information: | ||||||||||||
| Cash paid during the period for interest | $ | 9,782 | $ | 9,002 | $ | 7,452 | ||||||
| Cash paid during the period for income taxes | 12,058 | 6,584 | 155 | |||||||||
| Non-cash items: | ||||||||||||
| Transfers from loans to other real estate owned | 4,264 | 3,355 | 6,829 | |||||||||
See accompanying notes to the consolidated financial statements.
93
NOTES TO Consolidated FINANCIAL Statements
December 31, 2015, 2014 and 2013
(Dollars in thousands, except per share data)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation The consolidated financial statements as of and for the years ended December 31, 2015, 2014 and 2013 include C1 Financial, Inc. (“C1 Financial”) and its wholly owned subsidiary, C1 Bank (the “Bank”), together referred to as the “Company”.
C1 Financial, Inc. is the Parent Company for its wholly owned subsidiary, C1 Bank. C1 Financial, Inc. is a Bank Holding Company and a Florida Corporation organized in 2013, and C1 Bank became its wholly owned subsidiary after the share reorganization that took place on December 19, 2013, when 11,632,448 common shares of C1 Financial Inc. were issued to C1 Bank shareholders in exchange for their C1 Bank shares, with C1 Financial Inc. becoming the owner of all 11,632,448 outstanding common shares of C1 Bank as of that date. After the reorganization and up to December 31, 2013, C1 Financial, Inc. raised $5,605 of new capital through the issuance of 584,484 common shares. All of this capital was injected into C1 Bank resulting in C1 Financial, Inc. purchasing an additional 584,484 common shares of C1 Bank. At December 31, 2013, C1 Financial Inc. had 12,216,932 common shares outstanding and owned 12,216,932 common shares of C1 Bank.
As described in Note 2, 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. As a result of the initial public offering, which became effective on August 13, 2014, C1 Financial, Inc. issued 2,761,356 shares of common stock.
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 completed 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.
C1 Bank is a state chartered bank and is subject to the regulations of certain government agencies. During 2011, the Bank changed its name from Community Bank of Manatee to Community Bank & Company, and during 2012, the Bank changed its name to C1 Bank. The Bank provides a variety of banking services to individuals through its 32 offices and one loan production office which are located in ten counties (Pinellas, Hillsborough, Pasco, Manatee, Sarasota, Charlotte, Lee, Miami-Dade, Broward 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.
As described in Note 3, on August 2, 2013, the Bank acquired First Community Bank of Southwest Florida through an FDIC assisted transaction, consolidating substantially all of its assets and assuming all of the deposits.
The consolidated financial information included herein reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the financial condition and results of operations for the reported periods, with all significant intercompany transactions eliminated. The accounting and reporting policies of the Company conform to GAAP. Certain account reclassifications have been made to the 2014 and 2013 financial statements in order to conform to classifications used in the current year. Reclassifications had no effect on 2014 or 2013 net income or stockholders’ equity.
To prepare financial statements in conformity with GAAP, 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 loans, deferred tax assets and fair values of financial instruments are particularly subject to change.
94
While the Company’s chief decision makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated into one reportable operating segment.
Cash and Cash Equivalents: Cash and cash equivalents include cash, deposits with other financial institutions with original maturities less than 90 days, excess balances held at the Federal Reserve Bank of Atlanta, and Federal funds sold. Net cash flows are reported for customer loan and deposit transactions, bank acquisitions, interest bearing deposits in other financial institutions, and other borrowings.
Securities Available for Sale: When purchased, securities are classified as available for sale when management intends to hold the securities for an indefinite period of time, or when the securities may be used for tactical asset/liability purposes and may be sold from time to time to effectively manage interest rate exposure, prepayment risk and liquidity needs.
Securities available for sale are carried at fair value with unrealized gains and losses reported in other comprehensive income, net of income tax. Realized gains (losses) on securities available for sale are included in noninterest income. Gains and losses on sales of securities are determined by the specific identification method. Amortization of premiums and accretion of discounts, computed by the interest method over their contractual lives, are included in interest income.
Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.
Federal Home Loan Bank (FHLB) Stock: The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
Preferred Stock: During 2010 the Bank issued 1,033,335 shares of Series E Non-Cumulative Preferred stock with a par value of $1.00. Holders of Class E Preferred stock participate in any dividends and other distributions declared on the Common Stock. During 2013, all Series E Non-Cumulative Perpetual preferred stock was converted to common stock. No dividends were paid during the period the Series E Non-Cumulative Perpetual preferred stock was outstanding.
Concentration of Credit Risk: Most of the Bank’s business activity is with customers located within Pinellas, Hillsborough, Pasco, Manatee, Sarasota, Charlotte, Lee, Miami-Dade, Broward and Orange Counties. Therefore, the Bank’s exposure to credit risk is significantly affected by changes in the economy in these counties. The Bank has made four commercial real estate loans to three Brazilian corporations which, at December 31, 2015 and 2014, exceeded 1% of total assets. These loans to Brazilian borrowers are secured by collateral outside of the U.S., and outstanding balances (including accrued interest) at December 31, 2015 and 2014 were $41,324 and $44,003, representing 2.4% and 2.9% of total assets, respectively. At December 31, 2015, two of these Brazilian loans with a combined recorded investment of $17,532 were included in the 60-89 days past due category and on nonaccrual status. The third Brazilian loan with a recorded investment of $17,473 was included in the 60-89 days past due category as of December 31, 2015 and a payment was received in February 2016, which brought the loan current to December 5, 2015. The final Brazilian loan with a recorded investment of $6,319 was current and paying as agreed at December 31, 2015.
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Loans: Loans (excluding Purchased Credit Impaired loans which have shown evidence of deterioration since origination) which management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. The recorded investment in loans is the outstanding principal balance, net of partial charge offs.
A loan is considered a troubled debt restructured loan based on individual facts and circumstances. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.
Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. If the loan is prepaid, the remaining unamortized fees and costs are charged or credited to interest income.
A loan is moved to nonaccrual status in accordance with the Bank’s policy, typically after 90 days of nonpayment, or less than 90 days of nonpayment if management determines that the full timely collection of principal and interest becomes doubtful. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer loans are typically charged off no later than 120 days past due.
Interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cost-recovery method with cash payments applied as principal reduction, 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.
Purchased Credit Impaired Loans (PCI Loans): As part of business acquisitions (First Community Bank of America, The Palm Bank and First Community Bank of Southwest Florida), the Bank 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. The Bank estimates the amount and timing of expected cash flows for each purchased loan or pool, and the expected cash flow 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.
Purchased credit impaired 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.
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 portfolio segment 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.
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A loan is impaired when, based on current information and events, it is probable that the Bank 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 real estate, construction and commercial 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 residential real estate and consumer 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 December 31, 2015, 19% 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.
This actual historical loss experience is supplemented with management adjustment factors based on the risks present for each portfolio segment (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, and the 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 the loan review process. Each of the adjustment factors is graded on 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 December 31, 2015, 81% of our loan portfolio consisted 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.
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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 higher 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, until such time when we develop relevant loss history for C1 Bank originated loans. 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 December 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). At the end of 2015, our first loans (2010 vintage) were completing six years since origination, in line with the average U.S. business cycle and close to the seven-year de novo period defined by the FDIC. We expect our historical losses to become more representative as we get closer to this point.
Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The face amount for these items represents the exposure to loss before considering customer collateral or ability to repay. Such financial instruments are recorded when funded.
Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost, less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 10 to 40 years. Furniture, fixtures and equipment are depreciated using the straight-line or accelerated method with useful lives ranging from 3 to 10 years. Leasehold improvements are amortized using the straight-line method over the lesser of their estimated useful lives or the respective lease terms including reasonable renewal periods.
Costs of major additions and improvements are capitalized. Maintenance, repairs and minor improvements are expensed as incurred. Gains and losses on dispositions are included in current operations.
Premises and equipment and other long-term assets are reviewed for impairment when events indicate that their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
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. The OREO valuation allowance is adjusted as necessary. Expenses from the operations of OREO, net of rental income and changes in the OREO valuation allowance, are included in noninterest expense.
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Bank-Owned Life Insurance: As part of a bank acquisition, the Bank acquired life insurance policies on certain executives of the acquired bank. The Bank also invested in separate account bank-owned life insurance in December 2014. Bank-owned life insurance is recorded at the amount that can be realized under the insurance contracts at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Included in the balance at December 31, 2015 was $1.5 million relating to policies on former officers of an acquired bank. During the second quarter of 2015, we sent surrender notices for these $1.5 million acquired polices. We expect to receive the proceeds within three to nine months.
Other Intangible Assets: Other intangible assets consist of the core deposit intangible arising from acquisitions by the Bank. These intangible assets are amortized on an accelerated method over their estimated useful life.
Income Taxes: 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. The Bank recognizes interest and/or penalties related to income tax matters in income tax expense.
Advertising Costs: Advertising costs are expensed as incurred except for certain costs related to sports marketing contracts, which are initially capitalized and amortized during the expected time during which the Bank will benefit from the agreements, which is generally one to three years.
Information Technology Costs: Information technology costs are expensed as incurred except for software licenses, which are capitalized and amortized during their expected useful life.
Intellectual Property Rights: The Information Technology team of the Company develops information technology solutions for the benefit of the Company. In some cases, the Company files patents to protect the intellectual property. All related costs are expensed as incurred and the patents have no carrying value in the balance sheet.
Stock-Based Compensation: Compensation cost is recognized for stock options and restricted stock awards based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
During 2014, the Board of Directors of the Company adopted an omnibus incentive plan, which reserved 1,000,000 shares of the Company’s common stock for the grant of awards to eligible employees. The omnibus incentive plan is scheduled to expire after ten years. As of December 31, 2015, there were no awards granted under the omnibus incentive plan.
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.
Transfers and Servicing of Financial Assets: A transfer of financial assets is accounted for as a sale when control of the transferred asset is surrendered. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Servicing rights and other retained interests in the sold assets are recorded at fair value at the date of transfer. The fair values of servicing rights and other retained interests are determined at the date of transfer using the present value of estimated future cash flows, using assumptions that market participants would use in their estimates of fair values.
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Fair Value 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.
Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any such matters as of December 31, 2015 that will have a material effect on the financial statements.
Comprehensive Income (loss): Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale, net of related income tax, which are also recognized as separate components of equity.
Restrictions on Cash: A portion of cash on hand is required to be maintained to meet regulatory reserve and clearing requirements.
Dividend Restriction: Banking regulations require maintaining certain capital levels and impose certain restrictions on the payment of dividends.
Recent Accounting Standards Adopted
Accounting Standards Update (“ASU”) 2014-04, “Receivables (Accounting Standards Codification (“ASC”) Topic 310) – Troubled Debt Restructurings by Creditors, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” ASU 2014-04 clarifies when an in substance repossession or foreclosure occurs which is defined as when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The ASU requires that the real property be recognized upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. The Company adopted ASU No. 2014-04 effective January 1, 2015. The adoption of ASU No. 2014-04 did not have a material impact on the Company's Consolidated Financial Statements.
Recent Accounting Standards Newly Issued But Not Yet Effective
ASU 2014-09, "Revenue from Contracts with Customers” (ASC Topic 606). The core principle of ASU 2014-09 is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies generally will be required to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard was initially effective for public entities for interim and annual reporting periods beginning after December 15, 2016; with early adoption not permitted. However, in August 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers - Deferral of the Effective Date", which defers the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). Early adoption is permitted, but not before the original effective date (i.e., interim and annual reporting periods beginning after December 15, 2016). For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. The Company is currently evaluating the provisions of ASU No. 2014-09 and will be closely monitoring developments and additional guidance to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements.
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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 completed 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.
NOTE 3 – BUSINESS COMBINATIONS
On August 2, 2013, the Bank acquired First Community Bank of Southwest Florida through the FDIC. First Community Bank of Southwest Florida operations were included in the Bank’s income statement beginning August 3, 2013. Acquisition-related costs of approximately $831 were included in the Bank’s income statement as noninterest expense for the year ended December 31, 2013. The total value of the consideration paid to the Bank by the FDIC was $23,494 in cash. The purchase was part of the Bank’s overall strategy to grow and expand its market presence in Southwest Florida. The acquisition resulted in a bargain purchase gain of $12,387 as of acquisition date, primarily as a result of the bid price being below the fair value of the net assets acquired. After measurement period adjustments, the bargain purchase gain as of December 31, 2013 was $13,462.
The following table summarizes the consideration received for First Community Bank of Southwest Florida and the fair value of the assets acquired and liabilities assumed at the acquisition date:
| August 2, 2013 | Measurement Period | December 31, 2013 | ||||||||||
| Assets | ||||||||||||
| Cash and cash equivalents | $ | 18,645 | $ | – | $ | 18,645 | ||||||
| Securities available for sale | 21,500 | – | 21,500 | |||||||||
| Restricted stock | 926 | – | 926 | |||||||||
| Loans | 164,965 | 578 | 165,543 | |||||||||
| Premises and equipment | 5,630 | – | 5,630 | |||||||||
| Core deposit intangibles | 1,549 | – | 1,549 | |||||||||
| Other real estate owned | 25,604 | 497 | 26,101 | |||||||||
| Other assets | 905 | – | 905 | |||||||||
| Total assets acquired | 239,724 | 1,075 | 240,799 | |||||||||
| Liabilities | ||||||||||||
| Deposits | 237,053 | – | 237,053 | |||||||||
| FHLB Advances | 13,600 | – | 13,600 | |||||||||
| Other liabilities | 178 | – | 178 | |||||||||
| Total liabilities assumed | 250,831 | – | 250,831 | |||||||||
| Net assets acquired | (11,107 | ) | 1,075 | (10,032 | ) | |||||||
| Net cash received | 23,494 | – | 23,494 | |||||||||
| Bargain purchase gain | $ | 12,387 | $ | 1,075 | $ | 13,462 | ||||||
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The acquisition was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. Both the assets purchased and liabilities assumed were recorded at their estimated fair values. Determining the fair values of assets and liabilities, especially the loan portfolio and foreclosed real estate, involved significant judgment and assumptions. Due primarily to the significant amount of fair value adjustments, troubled condition, and regulatory constraints, historical results of First Community Bank of Southwest Florida were not believed to be relevant to the Company’s results, and thus no pro forma information is presented.
NOTE 4—INTANGIBLE ASSETS
Acquired intangible assets at December 31, 2015 and 2014 were as follows:
| December 31, 2015 | December 31, 2014 | |||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||
| Amortized intangible assets: | ||||||||||||||||
| Core deposit intangibles | $ | 2,572 | $ | (1,873 | ) | $ | 2,572 | $ | (1,585 | ) | ||||||
Amortization expense for 2015, 2014 and 2013 was $288, $498 and $434, respectively. Estimated amortization expense for each of the next five years is as follows:
| 2016 | $ | 200 | ||
| 2017 | 143 | |||
| 2018 | 104 | |||
| 2019 | 77 | |||
| 2020 | 57 |
NOTE 5 – INVESTMENT SECURITIES
The Bank had no securities available for sale as of December 31, 2015 and December 31, 2014 due to the decision to sell the entirety of the securities available for sale portfolio in 2013. This decision was based on the assessment that improving economic conditions could begin to put upward pressure on interest rates. This action 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. During 2014, the Bank recorded gains on the sale of securities from an acquired bank.
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Proceeds and gross gains and (losses) from the sale of securities available for sale for the years ended December 31, 2015, 2014 and 2013 were as follows:
| 2015 | 2014 | 2013 | ||||||||||
| Proceeds from sales of securities | $ | - | $ | 996 | $ | 130,091 | ||||||
| Gross gains | $ | - | $ | 241 | $ | 576 | ||||||
| Gross (losses) | - | - | (271 | ) | ||||||||
| Net gains on sales of securities | $ | - | $ | 241 | $ | 305 | ||||||
NOTE 6 – LOANS
The following table provides information on the loan portfolio by portfolio segment at the dates indicated:
| December 31, 2015 | December 31, 2014 | |||||||
| Real estate | ||||||||
| Residential | $ | 303,644 | $ | 224,416 | ||||
| Commercial | 783,774 | 723,577 | ||||||
| Construction | 197,070 | 107,436 | ||||||
| Total real estate | 1,284,488 | 1,055,429 | ||||||
| Commercial | 63,635 | 75,360 | ||||||
| Consumer | 94,521 | 57,733 | ||||||
| Total loans, gross | 1,442,644 | 1,188,522 | ||||||
| Less: | ||||||||
| Net deferred loan fees | (5,482 | ) | (4,142 | ) | ||||
| Allowance for loan losses | (8,031 | ) | (5,324 | ) | ||||
| Total loans, net | $ | 1,429,131 | $ | 1,179,056 | ||||
The Bank has divided the loan portfolio into various portfolio segments, each with different risk characteristics and methodologies for assessing risk. The portfolio segments 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.
Commercial real estate loans are typically segmented into classes 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.
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.
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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 segment 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.
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The following table presents the activity in the allowance for loan losses by portfolio segment for the year ended December 31, 2015:
| Year Ended December 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 | (119 | ) | (3 | ) | (7 | ) | (67 | ) | (64 | ) | (260 | ) | ||||||||||||
| Recoveries | 417 | 295 | 267 | 710 | 160 | 1,849 | ||||||||||||||||||
| Net recoveries | 298 | 292 | 260 | 643 | 96 | 1,589 | ||||||||||||||||||
| Provision (reversal of provision) for loan losses | 645 | 292 | 530 | (579 | ) | 230 | 1,118 | |||||||||||||||||
| Ending balance | $ | 1,763 | $ | 4,007 | $ | 1,206 | $ | 437 | $ | 618 | $ | 8,031 | ||||||||||||
105
The following table presents the activity in the allowance for loan losses by portfolio segment for the year ended December 31, 2014:
| Year Ended December 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 | (304 | ) | (430 | ) | (51 | ) | (4,163 | ) | (347 | ) | (5,295 | ) | ||||||||||||
| Recoveries | 1,100 | 351 | 472 | 414 | 56 | 2,393 | ||||||||||||||||||
| Net (charge-offs) recoveries | 796 | (79 | ) | 421 | (3,749 | ) | (291 | ) | (2,902 | ) | ||||||||||||||
| Provision (reversal of provision) for loan losses | (415 | ) | 1,642 | (246 | ) | 3,585 | 248 | 4,814 | ||||||||||||||||
| Ending balance | $ | 820 | $ | 3,423 | $ | 416 | $ | 373 | $ | 292 | $ | 5,324 | ||||||||||||
On June 30, 2014, the Bank charged-off in-full its only loan under the Shared National Credit Program in the amount of $4.0 million. The Bank deemed the loan to be uncollectible in June 2014 and the full loan was charged off as the Bank believed that cash flow to repay the loan was collateral-dependent and other sources of repayment were no more than nominal. The value of the collateral, in this case closely held stock, was determined to be uncertain. Subsequently, the Bank collected $147 thousand of recoveries during the third quarter of 2014 and $484 thousand during 2015.
The following table presents the activity in the allowance for loan losses by portfolio segment for the year ended December 31, 2013:
| Year Ended December 31, 2013 | Residential Real Estate | Commercial Real Estate | Construction | Commercial | Consumer | Total | ||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||
| Beginning balance | $ | 523 | $ | 1,337 | $ | 251 | $ | 399 | $ | 304 | $ | 2,814 | ||||||||||||
| Loans charged-off | (506 | ) | (940 | ) | (120 | ) | (918 | ) | (180 | ) | (2,664 | ) | ||||||||||||
| Recoveries | 1,012 | 181 | 317 | 330 | 204 | 2,044 | ||||||||||||||||||
| Net (charge-offs) recoveries | 506 | (759 | ) | 197 | (588 | ) | 24 | (620 | ) | |||||||||||||||
| Provision (reversal of provision) for loan losses | (590 | ) | 1,282 | (207 | ) | 726 | 7 | 1,218 | ||||||||||||||||
| Ending balance | $ | 439 | $ | 1,860 | $ | 241 | $ | 537 | $ | 335 | $ | 3,412 | ||||||||||||
106
The following table provides the allocation of the allowance for loan losses by portfolio segment at December 31, 2015:
| December 31, 2015 | Residential Real Estate | Commercial Real Estate | Construction | Commercial | Consumer | Total | ||||||||||||||||||
| Specific Reserves: | ||||||||||||||||||||||||
| Impaired Loans | $ | 156 | $ | 189 | $ | 125 | $ | 77 | $ | - | $ | 547 | ||||||||||||
| Purchased credit impaired loans | 72 | 48 | 4 | - | - | 124 | ||||||||||||||||||
| Total Specific Reserves | 228 | 237 | 129 | 77 | - | 671 | ||||||||||||||||||
| General Reserves | 1,535 | 3,770 | 1,077 | 360 | 618 | 7,360 | ||||||||||||||||||
| Total | $ | 1,763 | $ | 4,007 | $ | 1,206 | $ | 437 | $ | 618 | $ | 8,031 | ||||||||||||
| Loans: | ||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 3,550 | $ | 23,304 | $ | 177 | $ | 616 | $ | 10 | $ | 27,657 | ||||||||||||
| Purchased credit impaired loans | 5,086 | 17,885 | 1,171 | 179 | 62 | 24,383 | ||||||||||||||||||
| Collectively evaluated for impairment | 295,008 | 742,585 | 195,722 | 62,840 | 94,449 | 1,390,604 | ||||||||||||||||||
| Total ending loans balance | $ | 303,644 | $ | 783,774 | $ | 197,070 | $ | 63,635 | $ | 94,521 | $ | 1,442,644 | ||||||||||||
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 | ||||||||||||
| Purchased 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 | ||||||||||||
| Purchased 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 | ||||||||||||
107
The following table presents impaired loans individually evaluated for impairment by portfolio segment as of December 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. The increase in the recorded investment was related to two commercial real estate loans secured by Brazilian farmland.
| December 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 | $ | 3,079 | $ | 2,970 | $ | - | $ | 1,643 | $ | 1,464 | $ | - | ||||||||||||
| Commercial real estate | ||||||||||||||||||||||||
| Multifamily | - | - | - | - | - | - | ||||||||||||||||||
| Owner occupied | 2,886 | 2,595 | - | 4,346 | 4,000 | - | ||||||||||||||||||
| Nonowner occupied | 2,071 | 2,071 | - | 608 | 553 | - | ||||||||||||||||||
| Secured by farmland | 17,458 | 17,416 | - | 185 | 143 | - | ||||||||||||||||||
| Construction | - | - | - | 280 | 230 | - | ||||||||||||||||||
| Commercial | 639 | 440 | - | 1,007 | 777 | - | ||||||||||||||||||
| Consumer | 11 | 10 | - | 169 | 104 | - | ||||||||||||||||||
| With allowance recorded: | ||||||||||||||||||||||||
| Residential real estate | 610 | 580 | 156 | 364 | 349 | 107 | ||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||
| Multifamily | - | - | - | - | - | - | ||||||||||||||||||
| Owner occupied | 1,287 | 1,222 | 189 | 776 | 699 | 339 | ||||||||||||||||||
| Nonowner occupied | - | - | - | - | - | - | ||||||||||||||||||
| Secured by farmland | - | - | - | - | - | - | ||||||||||||||||||
| Construction | 177 | 177 | 125 | - | - | - | ||||||||||||||||||
| Commercial | 204 | 176 | 77 | 314 | 236 | 68 | ||||||||||||||||||
| Consumer | - | - | - | - | - | - | ||||||||||||||||||
| Total | $ | 28,422 | $ | 27,657 | $ | 547 | $ | 9,692 | $ | 8,555 | $ | 514 | ||||||||||||
108
Average impaired loans and related interest income for the years ended December 31, 2015 and 2014 were as follows:
| Year Ended December 31, 2015 | Year Ended December 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 | $ | 1,639 | $ | 4 | $ | - | $ | 1,053 | $ | 5 | $ | - | ||||||||||||
| Commercial real estate | ||||||||||||||||||||||||
| Multifamily | - | - | - | - | - | - | ||||||||||||||||||
| Owner occupied | 3,623 | 2 | - | 2,779 | 13 | - | ||||||||||||||||||
| Nonowner occupied | 789 | - | - | 720 | 1 | - | ||||||||||||||||||
| Secured by farmland | 4,461 | - | - | 1,312 | 17 | - | ||||||||||||||||||
| Construction | 43 | - | - | 95 | - | - | ||||||||||||||||||
| Commercial | 581 | 1 | - | 399 | 8 | - | ||||||||||||||||||
| Consumer | 4 | - | - | 76 | - | - | ||||||||||||||||||
| With allowance recorded: | ||||||||||||||||||||||||
| Residential real estate | 560 | - | - | 486 | 7 | - | ||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||
| Multifamily | - | - | - | - | - | - | ||||||||||||||||||
| Owner occupied | 971 | 12 | - | 1,773 | 21 | - | ||||||||||||||||||
| Nonowner occupied | - | - | - | 68 | - | - | ||||||||||||||||||
| Secured by farmland | - | - | - | - | - | - | ||||||||||||||||||
| Construction | 102 | - | - | 45 | - | - | ||||||||||||||||||
| Commercial | 180 | 5 | - | 693 | 12 | - | ||||||||||||||||||
| Consumer | 27 | - | - | 58 | - | - | ||||||||||||||||||
| Total | $ | 12,980 | $ | 24 | $ | - | $ | 9,557 | $ | 84 | $ | - | ||||||||||||
109
Average impaired loans and related interest income for the year ended December 31, 2013 was as follows:
| Year Ended December 31, 2013 | ||||||||||||
| Average Recorded Investment | Interest Income Recognized | Cash Basis Interest Recognized | ||||||||||
| With no related allowance recorded: | ||||||||||||
| Residential real estate | $ | 1,391 | $ | 6 | $ | - | ||||||
| Commercial real estate | ||||||||||||
| Multifamily | 259 | 8 | - | |||||||||
| Owner occupied | 3,459 | 60 | - | |||||||||
| Nonowner occupied | 320 | 2 | - | |||||||||
| Secured by farmland | 746 | 2 | - | |||||||||
| Construction | 31 | - | - | |||||||||
| Commercial | 359 | 8 | - | |||||||||
| Consumer | 79 | - | - | |||||||||
| With allowance recorded: | ||||||||||||
| Residential real estate | 401 | 2 | - | |||||||||
| Commercial real estate | ||||||||||||
| Multifamily | - | - | - | |||||||||
| Owner occupied | 702 | 15 | - | |||||||||
| Nonowner occupied | - | - | - | |||||||||
| Secured by farmland | - | - | - | |||||||||
| Construction | - | - | - | |||||||||
| Commercial | 691 | 5 | - | |||||||||
| Consumer | 479 | 3 | - | |||||||||
| Total | $ | 8,917 | $ | 111 | $ | - | ||||||
110
The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual as of December 31, 2015 and December 31, 2014:
| December 31, 2015 | December 31, 2014 | |||||||||||||||
| Nonaccrual | Loans Past Due Over 90 Days Still Accruing | Nonaccrual | Loans Past Due Over 90 Days Still Accruing | |||||||||||||
| Residential real estate | $ | 4,763 | $ | - | $ | 4,168 | $ | - | ||||||||
| Commercial real estate | 30,457 | - | 14,582 | - | ||||||||||||
| Construction | 177 | - | 449 | - | ||||||||||||
| Commercial | 544 | - | 1,591 | - | ||||||||||||
| Consumer | 10 | - | 104 | - | ||||||||||||
| Total | $ | 35,951 | $ | - | $ | 20,894 | $ | - | ||||||||
The increase in nonaccrual loans was related to two commercial real estate loans secured by Brazilian farmland. The reported amounts as of December 31, 2015 and December 31, 2014 include nonaccrual purchased credit impaired loans of $8,880 and $12,980, respectively. Purchased credit impaired 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.
111
The following table presents the aging of the recorded investment in past due loans as of December 31, 2015:
| December 31, 2015 | 30 - 59 Days Past Due | 60 - 89 Days Past Due | Greater than 89 Days Past Due | Total Past Due | Loans Not Past Due | Total | ||||||||||||||||||
| Residential real estate | $ | 464 | $ | 118 | $ | 3,525 | $ | 4,107 | $ | 299,537 | $ | 303,644 | ||||||||||||
| Commercial real estate | ||||||||||||||||||||||||
| Multifamily | - | - | - | - | 33,950 | 33,950 | ||||||||||||||||||
| Owner occupied | 2,913 | 1,075 | 4,549 | 8,537 | 215,877 | 224,414 | ||||||||||||||||||
| Nonowner occupied | 3,043 | 799 | 2,211 | 6,053 | 467,323 | 473,376 | ||||||||||||||||||
| Secured by farmland | - | 34,349 | 143 | 34,492 | 17,542 | 52,034 | ||||||||||||||||||
| Construction | 424 | - | 177 | 601 | 196,469 | 197,070 | ||||||||||||||||||
| Commercial | 34 | 76 | 351 | 461 | 63,174 | 63,635 | ||||||||||||||||||
| Consumer | 141 | - | - | 141 | 94,380 | 94,521 | ||||||||||||||||||
| Total | $ | 7,019 | $ | 36,417 | $ | 10,956 | $ | 54,392 | $ | 1,388,252 | $ | 1,442,644 | ||||||||||||
The increase in 60-89 days past due was related to commercial real estate loans secured by Brazilian farmland.
The following table presents the aging of the recorded investment in past due loans as of December 31, 2014:
| December 31, 2014 | 30 – 59 Days Past Due | 60 – 89 Days Past Due | Greater than 89 Days Past Due | Total Past Due | Loans Not Past Due | Total | ||||||||||||||||||
| 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 | ||||||||||||
112
Troubled Debt Restructurings
The following table is a summary of troubled debt restructurings that were performing in accordance with the restructured terms at December 31, 2015 and December 31, 2014:
| December 31, 2015 | December 31, 2014 | |||||||||||||||
| Number of Loans | Recorded Investment | Number of Loans | Recorded Investment | |||||||||||||
| Residential real estate | - | $ | - | - | $ | - | ||||||||||
| Commercial real estate | ||||||||||||||||
| Multifamily | - | - | - | - | ||||||||||||
| Owner occupied | 1 | 513 | 1 | 532 | ||||||||||||
| Nonowner occupied | 1 | 367 | 1 | 374 | ||||||||||||
| Secured by farmland | - | - | - | - | ||||||||||||
| Construction | - | - | - | - | ||||||||||||
| Commercial | - | - | - | - | ||||||||||||
| Consumer | 1 | 74 | - | - | ||||||||||||
| Total | 3 | $ | 954 | 2 | $ | 906 | ||||||||||
As of December 31, 2015 and December 31, 2014, the Bank had no nonaccruing troubled debt restructurings and was not committed to lend any additional amounts to customers with outstanding loans that were classified as troubled debt restructurings.
There was one loan (a consumer loan with a recorded investment of $74) modified as a troubled debt restructuring during 2015. There were no loans modified as troubled debt restructurings during 2014.
There were no troubled debt restructurings that defaulted during 2015, 2014 or 2013. A troubled debt restructuring is considered to be in payment default once it is 90 days contractually past due under the modified terms.
113
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 include 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 December 31, 2015 and December 31, 2014, loans by risk category were as follows:
114
| December 31, 2015 | Pass | Special Mention | Substandard | Doubtful | Total | |||||||||||||||
| Residential real estate | $ | 294,790 | $ | 1,683 | $ | 7,171 | $ | - | $ | 303,644 | ||||||||||
| Commercial real estate | ||||||||||||||||||||
| Multifamily | 33,950 | - | - | - | 33,950 | |||||||||||||||
| Owner occupied | 203,155 | 12,278 | 8,981 | - | 224,414 | |||||||||||||||
| Nonowner occupied | 462,288 | 5,976 | 5,112 | - | 473,376 | |||||||||||||||
| Secured by farmland | 17,126 | 17,492 | 17,416 | - | 52,034 | |||||||||||||||
| Construction | 195,468 | 877 | 725 | - | 197,070 | |||||||||||||||
| Commercial | 56,364 | 6,655 | 616 | - | 63,635 | |||||||||||||||
| Consumer | 94,381 | 130 | 10 | - | 94,521 | |||||||||||||||
| Total | $ | 1,357,522 | $ | 45,091 | $ | 40,031 | $ | - | $ | 1,442,644 | ||||||||||
| December 31, 2014 | Pass | Special Mention | Substandard | Doubtful | Total | |||||||||||||||
| 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 | ||||||||||
Both the increase in special mention and substandard loans were related to commercial real estate loans secured by Brazilian farmland.
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 December 31, 2015 and December 31, 2014 was approximately $24,259 and $28,081, respectively.
The Bank maintained an allowance for loan losses of $124 and $92 at December 31, 2015 and December 31, 2014, respectively, for loans acquired with deteriorated quality. During the years ended December 31, 2015, 2014 and 2013, the Bank accreted $582, $652 and $284, respectively, into interest income on these loans. The remaining accretable discount was $1,804 at December 31, 2015 and $2,421 at December 31, 2014. The Bank did not transfer any nonaccretable discount on these loans during the periods presented.
115
Loans related to the acquisition of First Community Bank of Southwest Florida for which it was probable at acquisition that all contractually required payments would not be collected were as follows:
| 2013 | ||||
| Contractually required payments receivable of loans purchased during the year (assuming no prepayments) | $ | 35,650 | ||
| Cash flows expected to be collected at acquisition | $ | 24,030 | ||
| Fair value of acquired loans at acquisition | $ | 20,901 | ||
The Bank has entered into transactions with certain directors, officers, significant stockholders and their affiliates. The aggregate amount of loans to such related parties at December 31, 2015 and 2014 was $2,677 and $2,520, respectively. During 2015 and 2014, loan additions were $708 and $2,493, respectively, and loan repayments were $551 and $786, respectively.
NOTE 7 – OTHER REAL ESTATE OWNED
Other real estate owned activity was as follows:
| 2015 | 2014 | 2013 | ||||||||||
| Balance at beginning of period | $ | 34,916 | $ | 41,049 | $ | 19,027 | ||||||
| Acquired other real estate owned | - | - | 26,101 | |||||||||
| Loans transferred to other real estate owned | 4,264 | 3,355 | 6,829 | |||||||||
| Valuation allowance expense | (374 | ) | (3,331 | ) | (1,739 | ) | ||||||
| Sales of other real estate owned | (10,476 | ) | (6,157 | ) | (9,169 | ) | ||||||
| Balance at end of period | $ | 28,330 | $ | 34,916 | $ | 41,049 | ||||||
Activity in the other real estate owned valuation allowance was as follows:
| 2015 | 2014 | 2013 | ||||||||||
| Balance at beginning of period | $ | 4,850 | $ | 2,709 | $ | 1,520 | ||||||
| Valuation allowance expense | 374 | 3,331 | 1,739 | |||||||||
| Removals due to sales | (2,135 | ) | (1,190 | ) | (550 | ) | ||||||
| Balance at end of period | $ | 3,089 | $ | 4,850 | $ | 2,709 | ||||||
Expenses related to other real estate owned include:
| 2015 | 2014 | 2013 | ||||||||||
| Operating expenses, net of rental income | $ | 1,930 | $ | 2,168 | $ | 2,163 | ||||||
| Valuation allowance expense | 374 | 3,331 | 1,739 | |||||||||
| Other real estate owned expense | $ | 2,304 | $ | 5,499 | $ | 3,902 | ||||||
NOTE 8 – PREMISES AND EQUIPMENT
A summary of the Company’s premises and equipment and the total accumulated depreciation are as follows:
| December 31, 2015 | December 31, 2014 | |||||||
| Land | $ | 15,208 | $ | 15,298 | ||||
| Buildings and improvements | 43,043 | 38,104 | ||||||
| Furniture, equipment and autos | 15,590 | 12,937 | ||||||
| Construction in progress | 4,803 | 7,899 | ||||||
| 78,644 | 74,238 | |||||||
| Less: accumulated depreciation | (13,505 | ) | (10,163 | ) | ||||
| Net book value | $ | 65,139 | $ | 64,075 | ||||
116
At December 31, 2015, the Bank was obligated under noncancelable operating leases for land and branch locations through the year 2056. These leases contain escalation clauses providing for increased rent based primarily on increases in real estate taxes, increases in the average consumer price index, or predetermined fixed rates. Rent expense, which is included in occupancy expense, was $1,740, $1,713 and $1,508 for the years ended December 31, 2015, 2014 and 2013, respectively.
The required minimum rental payments under the terms of the leases at December 31, 2015 for each of the next five years and thereafter are as follows:
| 2016 | $ | 1,037 | ||
| 2017 | 900 | |||
| 2018 | 934 | |||
| 2019 | 931 | |||
| 2020 | 876 | |||
| Thereafter | 10,866 | |||
| $ | 15,544 |
NOTE 9 – DEPOSITS
Deposit account balances are summarized as follows:
| December 31, 2015 | December 31, 2014 | |||||||
| Noninterest-bearing demand | $ | 321,034 | $ | 278,543 | ||||
| Interest-bearing demand | 182,212 | 140,598 | ||||||
| Money market and savings | 494,943 | 435,105 | ||||||
| Time | 280,076 | 313,256 | ||||||
| $ | 1,278,265 | $ | 1,167,502 | |||||
117
Time deposits maturing in years ending after December 31, 2015 are as follows:
| 2016 | $ | 114,959 | ||
| 2017 | 86,399 | |||
| 2018 | 20,319 | |||
| 2019 | 37,776 | |||
| 2020 | 16,408 | |||
| Thereafter | 4,215 | |||
| $ | 280,076 |
The aggregate amount of certificates of deposit that are $250 or more included in time deposits as of December 31, 2015 and 2014 was $36,555 and $26,277, respectively. As of December 31, 2015 and 2014, we had brokered deposits of $38,672 and $17,052, respectively. At December 31, 2015 and 2014, officers and directors of the Bank and entities in which they hold a financial interest had approximately $12,465 and $6,259 in deposits, respectively.
NOTE 10 – FEDERAL HOME LOAN BANK ADVANCES
Advances from the FHLB at year end were as follows:
| December 31, 2015 | December 31, 2014 | |||||||
| Fixed rate hybrid advance, 1.94%, due January 2015 | $ | - | $ | 5,000 | ||||
| Convertible, 4.62%, due October 2016 | 5,000 | 5,000 | ||||||
| Convertible, 2.92%, due December 2017 | 6,000 | 6,000 | ||||||
| Convertible, 2.76%, due February 2015 | - | 5,000 | ||||||
| Convertible, 2.92%, due February 2015 | - | 5,000 | ||||||
| Convertible, 3.66%, due July 2015 | - | 3,000 | ||||||
| Fixed rate credit advance, 1.97%, due March 2015 | - | 1,000 | ||||||
| Fixed rate credit advance, 1.87%, due May 2015 | - | 1,500 | ||||||
| Fixed rate credit advance, 1.55%, due July 2015 | - | 1,000 | ||||||
| Fixed rate hybrid advance, 1.58%, due October 2016 | 5,000 | 5,000 | ||||||
| Fixed rate credit advance, 1.42%, due December 2016 | 5,000 | 5,000 | ||||||
| Fixed rate hybrid advance, 1.19%, due May 2018 | 20,000 | 20,000 | ||||||
| Fixed rate hybrid advance, 2.70%, due May 2023 | 10,000 | 10,000 | ||||||
| Fixed rate credit advance, 0.83%, due July 2016 | 1,000 | 1,000 | ||||||
| Fixed rate hybrid advance, 1.78%, due September 2018 | 20,000 | 20,000 | ||||||
| Fixed rate hybrid advance, 0.92%, due September 2016 | 10,000 | 10,000 | ||||||
| Fixed rate hybrid advance, 0.44%, due December 2015 | - | 13,000 | ||||||
| Fixed rate hybrid advance, 1.80%, due December 2018 | 5,000 | 5,000 | ||||||
| Fixed rate hybrid advance, 1.34%, due December 2017 | 6,000 | 6,000 | ||||||
| Fixed rate hybrid advance, 0.82%, due December 2016 | 6,000 | 6,000 | ||||||
| Fixed rate hybrid advance, 1.92%, due May 2019 | 15,000 | 15,000 | ||||||
| Fixed rate hybrid advance, 1.99%, due August 2019 | 15,000 | 15,000 | ||||||
| Fixed rate hybrid advance, 2.02%, due August 2019 | 15,000 | 15,000 | ||||||
| Fixed rate hybrid advance, 1.88%, due January 2020 | 20,000 | - | ||||||
| Fixed rate hybrid advance, 1.82%, due February 2020 | 20,000 | - | ||||||
| Fixed rate hybrid advance, 1.59%, due April 2020 | 15,000 | - | ||||||
| Fixed rate hybrid advance, 1.98%, due June 2020 | 30,000 | - | ||||||
| Fixed rate credit advance, 0.45%, due February 2016 | 13,000 | - | ||||||
| Total | $ | 242,000 | $ | 178,500 | ||||
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As of December 31, 2015, the option to convert from a fixed rate to variable rate remains for the convertible advance with a fixed interest rate of 2.92% and due December 2017. The convertible advances are callable by the FHLB. Hybrid advances offer symmetrical prepayment and a one-time option to embed an interest rate cap or floor.
Maturities of FHLB advances for the next five years are as follows:
| 2016 | $ | 45,000 | ||
| 2017 | 12,000 | |||
| 2018 | 45,000 | |||
| 2019 | 45,000 | |||
| 2020 | 85,000 | |||
| Thereafter | 10,000 | |||
| $ | 242,000 |
NOTE 11 – SUBORDINATED DEBENTURES
The Bank sold $3,000 of nonconvertible capital debentures to a single institution in 2005. The debentures had a stated maturity of ten years. The interest rate was fixed for the first five years of the life of the debentures, and variable (1.7% over the 3-month LIBOR) for the final five years. The debentures were unsecured and subordinate in right of payment to the Bank’s obligation to its depositors and to the Bank’s other obligations to its creditors. The debentures were included in other borrowings on the balance sheet. The debentures were callable by the Bank after five years at par in whole or in part on any coupon date. The debentures were called by the Bank in December 2014.
NOTE 12 – 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:
| December 31, 2015 | Fixed | Variable | Total | |||||||||
| Unused lines of credit | $ | 8,275 | $ | 29,340 | $ | 37,615 | ||||||
| Standby letters of credit | 2,294 | 34 | 2,328 | |||||||||
| Commitments to fund loans | 9,207 | 127,250 | 136,457 | |||||||||
| Total | $ | 19,776 | $ | 156,624 | $ | 176,400 | ||||||
| December 31, 2014 | Fixed | Variable | Total | |||||||||
| 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 | ||||||
There were $63 and $0 in standby letters of credit to related parties at December 31, 2015 and 2014.
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NOTE 13 – 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:
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 assets or liabilities measured at fair market value on a recurring basis at December 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 December 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 December 31, 2015 and December 31, 2014. As required by 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.
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The fair value of assets measured on a nonrecurring basis was as follows at December 31, 2015:
| December 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 | $ | - | $ | - | $ | 424 | ||||||
| Commercial real estate | - | - | 1,033 | |||||||||
| Construction | - | - | 52 | |||||||||
| Commercial | - | - | 99 | |||||||||
| Consumer | - | - | - | |||||||||
| Total Impaired Loans | - | - | 1,608 | |||||||||
| Other real estate owned | ||||||||||||
| Residential | - | - | 1,336 | |||||||||
| Commercial | - | - | 7,354 | |||||||||
| Total other real estate owned | - | - | 8,690 | |||||||||
| Total | $ | - | $ | - | $ | 10,298 | ||||||
Impaired loans, which had a specific allowance for loan losses allocated, had a fair value of $1,608 (recorded investment of $2,155 with a valuation allowance of $547) at December 31, 2015, which reflected a provision for loan losses of $37 for the year ended December 31, 2015.
Other real estate owned, which is measured at fair value less costs to sell, had a net carrying amount of $8,690 (recorded investment of $11,779, net of a valuation allowance of $3,089) at December 31, 2015, which reflected write-downs of $374 for the year ended December 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 fair value of $770 (recorded investment of $1,284 with a valuation allowance of $514) at December 31, 2014, which reflected a provision for loan losses of $292 for the year ended December 31, 2014.
Other real estate owned had a net carrying amount of $15,204 (recorded investment of $20,054, net of a valuation allowance of $4,850) at December 31, 2014, which reflected write-downs of $3,242 for the year ended December 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.
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Cash and cash equivalents – For these short-term highly liquid instruments, the carrying amount is a reasonable estimate of fair value.
Investment securities – Fair values for investment securities, excluding FHLB stock, are discussed above. It was not practicable to determine the fair value of FHLB 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 re-price 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 December 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 the 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 the 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 December 31, 2015 and December 31, 2014.
The estimated fair values of the Bank’s financial assets and liabilities at December 31, 2015 and December 31, 2014 approximated as follows:
| Fair Value Measurement at December 31, 2015 Using: | ||||||||||||||||
| Carrying amount | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Financial assets | ||||||||||||||||
| Cash and cash equivalents | $ | 137,259 | $ | 137,259 | $ | - | $ | - | ||||||||
| Loans, net | 1,429,131 | - | - | 1,431,551 | ||||||||||||
| Accrued interest receivable | 4,641 | - | - | 4,641 | ||||||||||||
| Financial liabilities | ||||||||||||||||
| Deposits | $ | 1,278,265 | $ | 998,189 | $ | 280,570 | $ | - | ||||||||
| Federal Home Loan Bank advances | 242,000 | - | 243,460 | - | ||||||||||||
| Accrued interest payable | 145 | - | 145 | - | ||||||||||||
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| Fair Value Measurement 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 | - | ||||||||||||
NOTE 14 – INCOME TAX MATTERS
The income tax expense included in operations consisted of the following:
| 2015 | 2014 | 2013 | ||||||||||
| Current provision | ||||||||||||
| Federal | $ | 9,986 | $ | 4,635 | $ | 1,685 | ||||||
| State | 1,680 | 815 | 307 | |||||||||
| Total | 11,666 | 5,450 | 1,992 | |||||||||
| Deferred provision | ||||||||||||
| Federal | (440 | ) | (633 | ) | 4,856 | |||||||
| State | (98 | ) | (165 | ) | 804 | |||||||
| Total | (538 | ) | (798 | ) | 5,660 | |||||||
| Total provision | ||||||||||||
| Federal | 9,546 | 4,002 | 6,541 | |||||||||
| State | 1,582 | 650 | 1,111 | |||||||||
| Income tax expense | $ | 11,128 | $ | 4,652 | $ | 7,652 | ||||||
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The net deferred tax asset consisted of the following:
| December 31, 2015 | December 31, 2014 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss and credit carryforward | $ | 1,390 | $ | 1,628 | ||||
| Allowance for loan losses | 3,098 | 2,054 | ||||||
| Accrued expenses | 209 | 206 | ||||||
| Other real estate owned | 1,191 | 1,988 | ||||||
| Nonaccrual loan interest | 874 | 447 | ||||||
| Other | 150 | 170 | ||||||
| 6,912 | 6,493 | |||||||
| Deferred tax liabilities: | ||||||||
| Bargain purchase gain | (2,161 | ) | (2,714 | ) | ||||
| Depreciation | (2,812 | ) | (2,609 | ) | ||||
| Net deferred loan costs | (339 | ) | (406 | ) | ||||
| Purchase accounting adjustments | (263 | ) | (197 | ) | ||||
| Prepaid expenses | (452 | ) | - | |||||
| Other | (200 | ) | (420 | ) | ||||
| (6,227 | ) | (6,346 | ) | |||||
| Net deferred tax asset | $ | 685 | $ | 147 | ||||
At December 31, 2015, the Company had Federal and state net operating loss carryforwards of approximately $3,232 and $7,233, respectively. The Federal and state carryforwards begin to expire in 2029. A valuation allowance for deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. At December 31, 2015 and 2014, no valuation allowance for deferred taxes was recorded as management believed it was more likely than not that the deferred tax assets would be realized.
The effective tax rate differed from the Federal statutory rate of 35% for 2015 and 2014 and 34% for 2013 applied to income before taxes due to the following:
| 2015 | 2014 | 2013 | ||||||||||
| Federal statutory rate times financial statement income | $ | 8,915 | $ | 3,982 | $ | 6,678 | ||||||
| Effect of: | ||||||||||||
| State taxes | 1,028 | 423 | 733 | |||||||||
| Meals and entertainment | 276 | 228 | 176 | |||||||||
| Merger related expenses | 870 | - | - | |||||||||
| BOLI income | (263 | ) | - | - | ||||||||
| Other, net | 302 | 19 | 65 | |||||||||
| Total | $ | 11,128 | $ | 4,652 | $ | 7,652 | ||||||
At December 31, 2015, the Company had no amounts recorded for uncertain tax positions and does not expect any material changes in uncertain tax benefits during the next 12 months. The Company recognizes interest and penalties related to income tax matters in income tax expense. The Company is subject to U.S. Federal income tax as well as income tax of the state of Florida. Included in income tax expense for 2015 was a $163 adjustment related to a completed Internal Revenue Service tax audit for 2012 and 2013, and $120 in tax expense related to BOLI policies surrendered during 2015.
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NOTE 15 – 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.
The following table provides information on the calculation of earnings per common share for the periods indicated:
| 2015 | 2014 | 2013 | ||||||||||
| Basic | ||||||||||||
| Net Income | $ | 14,343 | $ | 6,724 | $ | 11,990 | ||||||
| Weighted average shares of common stock outstanding | 16,100,966 | 14,112,443 | 11,108,040 | |||||||||
| Basic earnings per common share | $ | 0.89 | $ | 0.48 | $ | 1.08 | ||||||
| Diluted | ||||||||||||
| Net Income | $ | 14,343 | $ | 6,724 | $ | 11,990 | ||||||
| Weighted average shares of common stock outstanding | 16,100,966 | 14,112,443 | 11,108,040 | |||||||||
| Add: Dilutive effect of common stock equivalents | - | - | 15,786 | |||||||||
| Average shares and dilutive potential common shares | 16,100,966 | 14,112,443 | 11,123,826 | |||||||||
| Diluted earnings per common share | $ | 0.89 | $ | 0.48 | $ | 1.08 | ||||||
NOTE 16 – 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 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 the U.S. Basel III Capital Rules and the regulatory framework for prompt corrective action, the Bank must meet specific capital standards 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 its classification under the prompt corrective action framework are also subject to qualitative judgments by the regulators about components of capital, risk weightings, and other factors.
As of January 1, 2015, the U.S. Basel III Capital Rules require the Bank and the Company to maintain minimum amounts and ratios (set forth in the table below) of Common Equity Tier 1 capital, Tier 1 capital and Total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined), or leverage ratio. As of December 31, 2015, management believes that the Company and the Bank met all capital adequacy requirements to which they were subject. Additionally, as permitted under the U.S. Basel III Capital Rules, in March 2015 the Bank opted out of including accumulated other comprehensive income in regulatory capital. For December 31, 2014, regulatory capital ratios were calculated under the U.S. Basel I rules.
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To qualify as well capitalized, the Bank must maintain minimum Total risk-based, Tier 1 risk-based, Common Equity Tier 1 risk-based (2015) and Tier 1 leverage capital ratios as set forth in the table below. As of December 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 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.
Certain of our activities are restricted due to commitments entered into with the Federal Reserve by us and certain of our foreign national controlling stockholders, including but not limited to being prohibited from incurring additional debt to any third party without prior approval from the Federal Reserve.
The Company’s and Bank's actual and required capital ratios as of December 31, 2015 and December 31, 2014 were as follows:
| Actual | Required for Capital Adequacy Purposes | Well Capitalized Under Prompt Corrective Action Provision | ||||||||||||||||||||||
| December 31, 2015 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
| Total capital to risk-weighted assets | ||||||||||||||||||||||||
| C1 Financial, Inc. | $ | 208,426 | 13.85 | % | $ | 120,369 | 8.00 | % | $ | N/A | N/A | |||||||||||||
| C1 Bank | 198,316 | 13.19 | % | 120,252 | 8.00 | % | 150,315 | 10.00 | % | |||||||||||||||
| Tier 1 capital to risk-weighted assets | ||||||||||||||||||||||||
| C1 Financial, Inc. | 200,396 | 13.32 | % | 90,277 | 6.00 | % | N/A | N/A | ||||||||||||||||
| C1 Bank | 190,286 | 12.66 | % | 90,189 | 6.00 | % | 120,252 | 8.00 | % | |||||||||||||||
| Common equity tier 1 capital to risk-weighted assets | ||||||||||||||||||||||||
| C1 Financial, Inc. | 200,396 | 13.32 | % | 67,707 | 4.50 | % | N/A | N/A | ||||||||||||||||
| C1 Bank | 190,286 | 12.66 | % | 67,642 | 4.50 | % | 97,705 | 6.50 | % | |||||||||||||||
| Tier 1 capital to average assets | ||||||||||||||||||||||||
| C1 Financial, Inc. | 200,396 | 11.55 | % | 69,410 | 4.00 | % | N/A | N/A | ||||||||||||||||
| C1 Bank | 190,286 | 10.97 | % | 69,376 | 4.00 | % | 86,720 | 5.00 | % | |||||||||||||||
| Actual | Required for Capital Adequacy Purposes | Well Capitalized Under Prompt Corrective Action Provision | ||||||||||||||||||||||
| December 31, 2014 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
| 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 | % | |||||||||||||||
During 2015, the Bank paid dividends of $12.0 million to the Company. At December 31, 2015, the Bank could have paid additional dividends to the Company of approximately $23.6 million without the prior consent and approval of its regulatory agencies.
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NOTE 17 – PARENT COMPANY ONLY FINANCIAL INFORMATION
The following tables provide condensed financial information for the Parent Company of C1 Financial, Inc.
Condensed Balance Sheets
| December 31, 2015 | December 31, 2014 | |||||||
| ASSETS | ||||||||
| Cash and cash equivalents | $ | 8,514 | $ | 505 | ||||
| Investment in subsidiary | 190,870 | 185,945 | ||||||
| Other assets | 2,331 | 188 | ||||||
| Total assets | $ | 201,715 | $ | 186,638 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Other liabilities | $ | 734 | $ | - | ||||
| Stockholders’ equity | 200,981 | 186,638 | ||||||
| Total liabilities and stockholders’ equity | $ | 201,715 | $ | 186,638 | ||||
Condensed Income Statements
| 2015 | 2014 | |||||||
| Dividends from subsidiary | $ | 12,000 | $ | - | ||||
| Other noninterest expense | (2,643 | ) | - | |||||
| Income before income taxes and equity in undistributed net income of subsidiary | 9,357 | - | ||||||
| Income tax benefit | 61 | - | ||||||
| Income before equity in undistributed net income of subsidiary | 9,418 | - | ||||||
| Equity in undistributed net income of subsidiary | 4,925 | 6,724 | ||||||
| Net income | $ | 14,343 | $ | 6,724 | ||||
| Comprehensive income | $ | 14,343 | $ | 6,724 | ||||
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Condensed Statements of Cash Flows
| 2015 | 2014 | |||||||
| Cash flows from operating activities | ||||||||
| Net income | $ | 14,343 | $ | 6,724 | ||||
| Adjustments to reconcile net income to net cash from operating activities: | ||||||||
| Equity in undistributed net income of subsidiary | (4,925 | ) | (6,724 | ) | ||||
| Net change in other assets | (2,143 | ) | - | |||||
| Net change in other liabilities | 734 | - | ||||||
| Net cash from operating activities | 8,009 | - | ||||||
| Cash flows from investing activities | ||||||||
| Investment in subsidiary | - | (57,407 | ) | |||||
| Net cash from investing activities | - | (57,407 | ) | |||||
| Cash flows from financing activities | ||||||||
| Net proceeds from issuance of common stock | - | 57,907 | ||||||
| Other | - | 5 | ||||||
| Net cash from financing activities | - | 57,912 | ||||||
| Net change in cash and cash equivalents | 8,009 | 505 | ||||||
| Cash and cash equivalents at beginning of the period | 505 | - | ||||||
| Cash and cash equivalents at end of the period | $ | 8,514 | $ | 505 | ||||
NOTE 18 - MERGER
On November 9, 2015, C1 Financial and its wholly owned bank subsidiary, C1 Bank, entered into a definitive agreement and plan of merger (“Agreement”) with Bank of the Ozarks, Inc. (“OZRK”) and its wholly owned bank subsidiary, Bank of the Ozarks (“Ozarks Bank”), whereby, subject to the terms and conditions of the Agreement, C1 Financial will merge with and into OZRK with OZRK surviving the merger in an all-stock transaction valued at approximately $402.5 million, or approximately $25.00 per share of C1 Financial common stock, subject to potential adjustments as described in the Agreement.
Subject to the terms and conditions of the Agreement, each holder of outstanding shares of common stock of C1 Financial will receive shares of common stock of OZRK. The number of OZRK shares to be issued will be determined based on OZRK’s ten day average closing stock price as of the second business day prior to the closing date, subject to a minimum and maximum stock price of $39.79 to $66.31, respectively. The consideration payable to C1 Financial shareholders is subject to downward adjustment on a dollar-for-dollar basis if the net book value of C1 Financial is less than $174 million as of the business day that, subject to adjustment as set forth in the Agreement, is closest to ten calendar days prior to the closing date and is subject to an upward adjustment if certain Brazilian loans of C1 Bank are sold at a price above a specified amount. The potential adjustments described in the immediately preceding sentence are not expected to result in any material change to the consideration payable and are described in the Agreement.
We are subject to various restrictions, such as limits on capital expenditures, loans and investments, under the Agreement with OZRK that apply during the period from November 9, 2015 until the consummation of the merger. For additional information, see “The Merger Agreement” in the C1 Financial Proxy Statement.
Upon the closing of the transaction, C1 Financial will merge into OZRK and C1 Bank will merge into Ozarks Bank, with each of OZRK and Ozarks Bank to continue as the surviving entity, respectively. Completion of the transaction is subject to certain closing conditions, including customary regulatory approvals and approval by C1 Financial shareholders and are described in the Agreement. Although there can be no assurance, the transaction is expected to close late in the first quarter or in the second quarter of 2016.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. 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 December 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.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting due to a transition period established by the rules of the Securities and Exchange Commission for newly public companies.
None.
Item 10. Directors, Executive Officers and Corporate Governance
Directors Serving until the 2016 Annual Meeting of Stockholders
Phillip L. Burghardt (age 68). Mr. Burghardt is a founding director of the Bank and has served as a director of the board of directors of the Company (the “Board”) since its inception in July 2013. Mr. Burghardt is Chair of the Board’s Audit Committee and Nominating and Corporate Governance Committee, and a member of the Board’s Executive Compensation Committee. Mr. Burghardt is a master electrician and former co-owner of PDG Electric. After selling PDG Electric in 2002, he became a private investor. Mr. Burghardt has also served as director of the Manasota Industrial Council, the Manatee Chamber of Commerce and the Economic Development Council of the Chamber. Mr. Burghardt provides strong investment and business management skills to the Board and valuable experience gained from owning and leading a successful business in the local community. His brother, Brian D.Burghardt, is also a director.
Robert P. Glaser (age 62). Mr. Glaser has served as a director of the Bank since 2011 and as a director of the Company since its inception in July 2013. Mr. Glaser is a member of the Board’s Enterprise Risk Management Committee. He has served as the President of Smith & Associates Real Estate since 1985 as well as the Chief Executive Officer since 1979. Mr. Glaser has nearly 30 years of real estate experience, managing Tampa Bay’s number one independent real estate company. Mr. Glaser provides strong real estate investment skills to our board of directors and valuable experience gained from leading large real estate investments in the community and throughout the world.
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Neil D. Grossman (age 58). Mr. Grossman has served as a director of the Bank since 2012 and as a director of the Company since its inception in July 2013. Mr. Grossman is Chair of the Board’s ALCO & Investment Committee, and a member of the Board’s Audit Committee and Enterprise Risk Management Committee. He is a Co-Founder and Chief Investment Officer of TKNG Capital Partners, LLC since 2003. Mr. Grossman has spent the last two decades in the financial industry working as a proprietary trader, asset manager and market-maker. In particular, he has traded liquid products in major markets around the globe. Mr. Grossman’s experience includes positions in the Investment Office of JPMorgan Chase where, as an Executive Director, he ran a Proprietary Trading Group that focused on global rates and currencies, and the Central Bank of Norway, where he served as Senior Portfolio Manager. Earlier in his career he was a lawyer representing financial services companies, including banks. Mr. Grossman received his J.D. from the Columbia University School of Law, and an M.S. and B.S. in Fluid Dynamics from the Columbia University School of Engineering and Applied Science. Mr. Grossman provides strong financial analysis and risk management skills to our board of directors and valuable experience gained from more than two decades as an investment professional.
Directors Serving until the 2017 Annual Meeting of Stockholders
Trevor R. Burgess (age 43). Mr. Burgess has served as the Chief Executive Officer and Director of the Company since its inception in July 2013, as the Chief Executive Officer of the Bank since April 1, 2012 and as President of the Company and the Bank since October 2014. Mr. Burgess joined the Bank in December 2009 as a member of its board of directors. Mr. Burgess has been responsible for the management of the Bank since his election as a director in December 2009. Mr. Burgess is Chair of the Board’s Enterprise Risk Management Committee and a member of the Board’s Executive Compensation Committee, Nominating and Corporate Governance Committee and ALCO & Investments Committee. Mr. Burgess was named the 2014 American Banker Community Bank of the Year. In 2013, he was named the Ernst & Young Florida Entrepreneur of the Year in the Financial Services Category. Mr. Burgess is a co-inventor of the technology for which the Bank has filed ten patent applications. Prior to joining the Bank, Mr. Burgess gained an extensive finance background working as a Managing Director for Morgan Stanley & Co. LLC, where, among other responsibilities, he executed initial public offerings and other capital raising transactions as an investment banker in the Equity Capital Markets division. Prior to his nearly ten years at Morgan Stanley, Mr. Burgess also worked as a management consultant at Monitor Company. He earned his bachelor’s degree from Dartmouth College in 1994. Mr. Burgess’ position as Chief Executive Officer allows him to advise the board of directors on management’s perspective over a full range of issues affecting the Company.
Marcelo Faria de Lima (age 54). Mr. Lima has served as a director of the Bank since December 2009 and as a director of the Company since its inception in July 2013. Mr. Lima is Chair of the Board’s Executive Compensation Committee and a member of the Board’s Enterprise Risk Management Committee, Nominating and Corporate Governance Committee and ALCO & Investments Committee. Mr. Lima is an entrepreneur with interests in companies located in the United States, Brazil, Mexico, Turkey, Denmark, Portugal and Russia. Mr. Lima started his career as a commercial banker working for ABN Amro Bank in Brazil and Chicago from 1989 to 1996 before working as an investment banker for Donaldson, Lufkin and Jenrette between 1998 and 2000 and Garantia between 1996 and 1998. He graduated from Pontificia Universidade Catolica do Rio de Janeiro in 1985. Mr. Lima provides strong banking and finance skills to our board of directors and valuable experience gained from a career as a banking and investment professional.
William H. Sedgeman, Jr. (age 74). Mr. Sedgeman has served as a member of the board of directors of the Company and as the Chairman of the board of directors since the Company’s inception in July 2013. He also serves as Senior Advisor to the Bank. He previously served as the Company’s and the Bank’s Senior Lender and West Florida Market Manager, overseeing the Bank’s West Florida lending team. Mr. Sedgeman has served as a director of the Bank and its predecessor bank since 1995, served as the President of the Bank from 1995 to 1997 as well as Chief Executive Officer of the Bank from 1995 to 2012. In 1995, he founded Community Bank of Manatee, the predecessor to C1 Bank (his second start-up bank) with nine other local business leaders. Prior to joining the Bank, Mr. Sedgeman spent 35 years as a banker in Florida. Mr. Sedgeman received his Bachelor of Arts degree from Harvard College in 1964 and graduated from the Rutgers University Graduate School of Banking in 1980. Mr. Sedgeman provides strong lending and credit analysis skills to our board of directors and valuable experience gained from spending over 40 years as a banker in Florida.
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Ryan L. Snyder (age 36). Mr. Snyder has served as a director of the Company since July 2014. Mr. Snyder is a member of the Board’s Enterprise Risk Management Committee. He is the owner and principal attorney of Snyder Law Group, P.A., a law firm that Mr. Snyder founded in 2005. Mr. Snyder received his J.D. from Stetson University College of Law in 2004, and a Bachelor’s Degree from the University of North Carolina in 2002. Mr. Snyder provides strong legal expertise to our board of directors, particularly in the areas of real estate and foreclosure law.
Directors Serving until the 2018 Annual Meeting of Stockholders
Brian D. Burghardt (age 72). Mr. Burghardt is a founding director of the Bank and has served as a director of the Company since its inception in July 2013. Mr. Burkhardt is a member of the Board’s ALCO & Investments Committee. He is a master electrician and former co-owner of PDG Electric, an electrical contractor in Manatee County. After selling PDG Electric in 2002, he became a private investor. Mr. Burghardt provides strong business management skills to our board of directors and valuable experience gained from owning and leading a successful business in the local community. His brother, Phillip L. Burghardt, is also a director.
Duane L. Moore (age 77). Mr. Moore is a founding director of the Bank and has served as a director of the Company since its inception in July 2013. Mr. Moore is a member of the Board’s Audit Committee. After attending college to study veterinary science, Mr. Moore returned to operate his family’s dairy business, which was formed in 1970 in Bradenton, Florida. He has been an active member of the Manatee County Historical Society and serves on the Florida Feed Technical Committee of the Florida Department of Agriculture. Mr. Moore provides strong business management and community leadership skills to our board of directors and valuable experience gained from a career running a successful dairy business.
Adelaide Alexander Sink (age 67). Ms. Sink has served as a director of the Bank since March 2013, as a director of the Company since its inception in July 2013 and as lead independent director of the Company since July 2014. Ms. Sink is a member of the Board’s Audit Committee. Ms. Sink also serves as Founder and Chair of the Florida Next Foundation, a non-profit, non-partisan organization focused on diversifying Florida’s economy through the growth of small businesses and entrepreneurship. Prior thereto, Ms. Sink served as the state of Florida’s Chief Financial Officer from 2007 to 2011 as one of the four statewide elected officials. During her tenure, she managed over $15.0 billion in state treasury funds, was responsible for state accounting, and implemented reforms in contracting and transparency for citizens. Prior to elected office, Ms. Sink had a 26 year career with Bank of America, including as the President of Florida operations until her retirement in 2000, where she managed the state’s largest bank with $40.0 billion in deposits, leading 9,000 employees in over 800 branches. Ms. Sink provides strong financial and regulatory skills to our board of directors and valuable experience gained from her years as a leader in the Florida financial industry.
Audit Committee
The Board’s Audit Committee, which consists of Phillip L. Burghardt (Chair), Neil D. Grossman, Duane L. Moore and Adelaide Alexander Sink, assists the board of directors in overseeing our accounting and financial reporting processes and the audits of our financial statements. In addition, the audit committee is directly responsible for the appointment, compensation, retention and oversight of the work of our independent registered public accounting firm. The board of directors has determined that both Neil D. Grossman and Adelaide Alexander Sink qualify as an “audit committee financial expert,” as such term is defined in the rules of the SEC and that each member of the audit committee is an independent director, as independence for audit committee members is defined by the New York Stock Exchange. The audit committee met five times during 2015. The audit committee’s charter is available under the Corporate Information link on the Investor Relations page of our website at www.c1bank.com.
Executive Officers
The following table sets forth the names, ages and positions of our executive officers:
|
Name |
Position | |
| Trevor R. Burgess | Chief Executive Officer, President and Director | |
| Cristian A. Melej | Executive Vice President and Chief Financial Officer | |
| Rita J. Lowman | Executive Vice President and Chief Operating Officer | |
| Alan G. Randolph | Executive Vice President and Senior Lender |
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The following is certain biographical information for our executive officers. Please see above for the biographical information for Trevor R. Burgess.
Cristian A. Melej (age 38)—Executive Vice President and Chief Financial Officer. Mr. Melej joined the Company as Deputy Chief Financial Officer of the Company and the Bank in 2013 and has served as the Chief Financial Officer of the Company and the Bank since May 1, 2014. Prior to joining the Company, Mr. Melej served as the Chief Financial Officer and Investor Relations Officer of Restoque Comercio e Confecçoes de Roupas, a Brazilian clothing retailer, from 2011 to 2013 and as an Investment Associate at Artesia Gestão de Recursos, a Brazilian investment firm, from 2009 to 2011, where he advised C1 Bank during its acquisition of First Community Bank of America. Prior to Artesia, he served as Global Financial Supervisor of Metalfrio Solutions, a Brazilian refrigeration company, in 2009 and as a Supply Chain Controller at Nestle from 2003 to 2007. Mr. Melej holds a Master of Business Administration degree from IE Business School (Madrid, Spain) and a bachelor’s degree in civil engineering from Pontificia Universidad Católica de Chile. Mr. Melej is also a CFA charterholder. Mr. Melej’s primary responsibilities include administering our accounting system, budgeting, financial reporting, regulatory reporting, taxes, investments and asset/liability management. Mr. Melej works closely with the Board’s ALCO & investments committee and administers the financial, accounting, and ALCO policies of the Bank.
Rita J. Lowman (age 62)—Executive Vice President and Chief Operating Officer. Ms. Lowman has served as the Executive Vice President and Chief Operating Officer of the Company since its inception in July 2013 and has also served the Bank in those same capacities since 2011. Prior to joining the Bank, Ms. Lowman was the Florida Market President and Chief Administrative Officer of American Momentum Bank from 2006 to 2011. She was an Executive Vice President with Regions Bank from 2005 to 2006 overseeing 45 retail branches and 175 associates with $2.3 billion in deposits. She also served with Republic Bank from 2000 to 2004 as an Executive Vice President, where she oversaw 600 associates across 71 branches, and prior to working at Republic Bank, Ms. Lowman spent 15 years with Bank of America as the State Administration Executive and Senior Vice President, overseeing over 100 branches and 1,300 associates with $5.3 billion in deposits. Ms. Lowman currently serves on the Board of Directors for the Florida School of Banking at the University of Florida and is the 2017 Chairwoman-elect of the Florida Bankers Association. Ms. Lowman oversees our retail branch network, which includes a focus on marketing, corporate partnerships, business development and all depository relationships of the Bank.
Alan G. Randolph (age 48)—Executive Vice President, Senior Lender. Mr. Randolph has served as Executive Vice President, Senior Lender of the Company and the Bank since October 2014. Mr. Randolph joined the Company in 2013 from SunTrust Bank, where he served as a Senior Vice President of private banking from 2012 to 2013. Prior to this position, Mr. Randolph served as a Senior Banker in private banking at J.P. Morgan in 2011 and from 2009 to 2011, he was an Executive Vice President for Bank of Miami. Mr. Randolph also served as President of Ocean Drive Media group, a luxury publishing company, from 2006 to 2009. Mr. Randolph also served as Senior Vice President and Business Development Manager at Mellon Financial from 1998 to 2006 and as Vice President and Private Banking Manager at SunTrust Bank from 1990 to 1998. Mr. Randolph is a graduate of the University of Tampa and holds a Bachelor of Science degree in Finance. Mr. Randolph currently acts as Senior Lender to the commercial lending team.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, officers and persons who beneficially own more than 10% of our common shares to file initial reports of ownership on Form 3 and reports of changes of ownership on Forms 4 and 5 with the SEC. These officers, directors and 10% beneficial owners are also required to furnish us with copies of all Section 16(a) forms that they file. Specific due dates for these reports have been established by regulation, and we are required to report in this Annual Report any failure to file by these dates during the fiscal year ended December 31, 2015.
To our knowledge, based solely on our review of the copies of such forms received by us, we believe that all Section 16(a) filing requirements applicable to our officers, directors and 10% beneficial owners have been complied with for the fiscal year ended December 31, 2015.
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Code of Ethics and Business Conduct
We have adopted a Code of Ethics and Business Conduct that is designed to ensure that our directors, executive officers and employees meet the highest standards of ethical conduct. The Code of Ethics and Business Conduct requires that our directors, executive officers and employees avoid conflicts of interest, comply with all laws and other legal requirements, conduct business in an honest and ethical manner and otherwise act with integrity and in C1 Financial’s best interest.
Under the terms of the Code of Ethics and Business Conduct, directors, executive officers and employees are required to report any conduct that they believe in good faith to be an actual or apparent violation of the Code of Ethics and Business Conduct. As a mechanism to encourage compliance with the Code of Ethics and Business Conduct, we have established procedures to receive, retain, and treat complaints received regarding accounting controls or auditing matters. These procedures ensure that individuals may submit concerns regarding questionable accounting or auditing matters in a confidential and anonymous manner. It is our policy that no reprisal will be taken against any director, executive officer or employee who reports a concern in good faith and pursuant to and in accordance with the Code of Ethics and Business Conduct.
The Code of Business Conduct and Ethics is available under the Corporate Information link on the Investor Relations page of our website at www.c1bank.com. The information on our website is not incorporated by reference into this Annual Report on Form 10-K. We will disclose any amendments to or waivers of the Code of Business Conduct and Ethics on our website at www.c1bank.com.
Item 11. Executive Compensation
Because C1 Financial is an emerging growth company, under SEC rules, we are not required to include a Compensation Discussion and Analysis section and have elected to comply with reduced compensation disclosure requirements, as permitted under the JOBS Act.
On November 9, 2015, C1 Financial and its wholly owned bank subsidiary, C1 Bank, entered into a definitive agreement and plan of merger (“Agreement”) with Bank of the Ozarks, Inc. (“OZRK”) and its wholly owned bank subsidiary, Bank of the Ozarks (“Ozarks Bank”), whereby, subject to the terms and conditions of the Agreement, C1 Financial will merge with and into OZRK with OZRK surviving the merger in an all-stock transaction valued at approximately $402.5 million, or approximately $25.00 per share of C1 Financial common stock, subject to potential adjustments as described in the Agreement.
Subject to the terms and conditions of the Agreement, each holder of outstanding shares of common stock of C1 Financial will receive shares of common stock of OZRK. The number of OZRK shares to be issued will be determined based on OZRK’s ten day average closing stock price as of the second business day prior to the closing date, subject to a minimum and maximum stock price of $39.79 to $66.31, respectively. The consideration payable to C1 Financial shareholders is subject to downward adjustment on a dollar-for-dollar basis if the net book value of C1 Financial is less than $174 million as of the business day that, subject to adjustment as set forth in the Agreement, is closest to ten calendar days prior to the closing date and is subject to an upward adjustment if certain Brazilian loans of C1 Bank are sold at a price above a specified amount. The potential adjustments described in the immediately preceding sentence are not expected to result in any material change to the consideration payable and are described in the Agreement.
Upon the closing of the transaction, C1 Financial will merge into OZRK and C1 Bank will merge into Ozarks Bank, with each of OZRK and Ozarks Bank to continue as the surviving entity, respectively. Completion of the transaction is subject to certain closing conditions, including customary regulatory approvals and approval by C1 Financial shareholders and are described in the Agreement. Although there can be no assurance, the transaction is expected to close late in the first quarter or in the second quarter of 2016.
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Summary Compensation Table
The following table provides information regarding the compensation awarded to or earned during 2015 and 2014 by our CEO and each of the next two most highly compensated executive officers who were serving as executive officers through December 31, 2015 (our Named Executive Officers or “NEOs”).
| Name and Principal Position | Year | Salary ($) | Bonus ($)(1) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Compensation ($) | All
Other Compen- sation (2) ($) | Total ($) | ||||||||||||||||||||||||
| Trevor R. Burgess | 2015 | 532,237 | 2,300,000 | - | - | - | 1,000 | 2,833,237 | ||||||||||||||||||||||||
| President and Chief Executive Officer | 2014 | 467,824 | 875,000 | - | - | - | 500 | 1,343,324 | ||||||||||||||||||||||||
| Cristian A. Melej | 2015 | 250,000 | 100,000 | - | - | - | - | 350,000 | ||||||||||||||||||||||||
| Executive Vice President and Chief Financial Officer | 2014 | 210,000 | 170,000 | - | - | - | - | 380,000 | ||||||||||||||||||||||||
| Alan G. Randolph | 2015 | 225,000 | 100,000 | - | - | - | 1,000 | 326,000 | ||||||||||||||||||||||||
| Executive Vice President and Senior Lender | 2014 | 210,000 | 170,000 | - | - | - | 500 | 380,500 | ||||||||||||||||||||||||
| (1) | Represents annual bonuses, the amounts of which were determined by the Executive Compensation Committee. These bonuses were purely discretionary and not based on a predetermined formula. In connection with the Change of Control Agreement discussed below, in 2015 Mr. Burgess received a cash payment in the amount of $800,000. In connection with our initial public offering (“IPO”), in 2014 Mr. Burgess received a one-time cash bonus payment in the amount of $500,000 and Messrs. Melej and Randolph each received a one-time cash bonus payment in the amount of $100,000. |
| (2) | Represents 401(k) matching payments. This category does not include a $10 million dollar term life insurance policy on Mr. Burgess for which the Bank is both owner and beneficiary. |
Elements of Our Executive Compensation Program
Equity Compensation Plan
Our board of directors adopted an equity compensation plan in the form of an omnibus incentive plan, or Omnibus Plan, on July 17, 2014, under which the NEOs are eligible to receive awards. The Omnibus Plan will be administered by the executive compensation committee or such other committee as may be designated by our board of directors, or if no committee is designated, our board of directors, and provides for grants of incentive and non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, deferred awards and other share-based and cash-based awards. We did not grant any awards under the Omnibus Plan in 2015. The Omnibus Plan will be terminated in connection with the consummation of the merger with OZRK.
Employee Stock Purchase Plan
Our board of directors adopted the C1 Financial, Inc. 2014 Employee Stock Purchase Plan, or ESPP, on July 17, 2014, which permits our employees (including the NEOs) to contribute up to a specified percentage of base salary and commissions to purchase our shares at a discount. We did not commence any offering period under the ESPP in 2015. The ESPP will be terminated in connection with the consummation of the merger with OZRK.
Agreements with NEOs
Employment Agreements.
None of our NEOs have employment agreements.
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| Mr. Burgess’ Change of Control Agreement. |
On November 9, 2015, the Company entered into a change of control agreement (the “Change of Control Agreement”) with Mr. Burgess, which became effective on that date. The Change of Control Agreement was approved by the Executive Compensation Committee on November 8, 2015.
In connection with a Change of Control (as defined in the Change of Control Agreement), the Company agreed to pay Mr. Burgess a total cash payment of $3,300,000 (the “Transaction Payment”) as follows:
| · | Promptly following the execution of the definitive agreement and plan of merger (the “Agreement”) of the Company with Bank of the Ozarks, Inc., Mr. Burgess received a lump-sum cash payment of $800,000. Mr. Burgess will reimburse to the Company the after-tax amount of such cash payment, if any, on the later of (x) the termination of the Agreement and (y) the good faith determination by the Company’s board of directors that it is not possible for a Change of Control to occur. |
| · | Subject to Mr. Burgess’ continued employment with the Company through the effective date of a Change of Control and his execution and delivery to the Company of a release of claims, the Company will pay to Mr. Burgess a lump-sum cash payment of $2,500,000 within 20 days of such effective date. |
The Company also agreed to pay Mr. Burgess the Transaction Payment within 20 days of the effective date of a Change of Control if Mr. Burgess’ employment terminates prior to a Change of Control due to either a termination by the Company without Cause (as defined in the Change of Control Agreement) or a termination by Mr. Burgess for Good Reason (as defined in the Change of Control Agreement) (in either case, a “Qualifying Termination”). Mr. Burgess’ receipt of the Transaction Payment in the case of a Qualifying Termination is conditioned on his execution and delivery to the Company of a release of claims.
The Company also agreed that if any Transaction Payment received by Mr. Burgess pursuant to the Change of Control Agreement (or any payments that he would receive from the Company or otherwise in connection with a Change of Control) is subject to the excise tax imposed by Section 4999 of the Internal Revenue Code, then Mr. Burgess will be entitled to receive a gross-up payment. The Company does not anticipate that an excise tax will be imposed.
Retirement Benefits
Other than benefits under our 401(k) plan, we have not provided the NEOs with any retirement benefits.
Termination Benefits
Other than the Change of Control Agreement entered into with Mr. Burgess, the NEOs are not parties to any plans or arrangements that provide for payments or benefits following the termination of their employment.
Cash Incentive Plan
Our board of directors adopted a cash incentive plan, or the Cash Bonus Plan, on July 17, 2014. The Cash Bonus Plan was adopted to enable the Company to recognize the contributions, and reward the performance, of key employees of the Company and its affiliates, including the NEOs. The executive compensation committee will administer the Cash Bonus Plan, subject to delegation, and has authority to grant awards thereunder. Awards may be discretionary or earned based on factors, criteria, or objectives, which may include the performance measures provided in the Omnibus Plan, determined by the executive compensation committee or its delegate.
IPO Bonuses
In connection with our IPO, in 2014 Mr. Burgess received a one-time cash bonus payment in the amount of $500,000 and Messrs. Melej and Randolph each received a one-time cash bonus payment in the amount of $100,000. These cash bonus payments will vest in equal installments over a three-year period (in the case of Messrs. Melej and Randolph) or a five-year period (in the case of Mr. Burgess) beginning on the date of the pricing of the IPO and will automatically vest in full upon a change in control. (The closing of the merger with OZRK would qualify as a change in control.) In the event of a voluntary termination of employment by Messrs. Burgess, Melej or Randolph, any unvested portion will be subject to clawback.
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Outstanding Equity Awards at Fiscal Year End
None of our NEOs held any outstanding equity awards as of December 31, 2015.
Director Compensation
We currently do not pay fees to our directors for their services.
In connection with the IPO, our directors also received cash bonus payments. William H. Sedgeman received a one-time cash bonus of $100,000, Adelaide Alexander Sink received a one-time cash bonus of $70,000 and each of Brian D. Burghardt, Phillip L. Burghardt, Robert P. Glaser, Neil D. Grossman, Duane L. Moore and Ryan L. Snyder received a one-time cash bonus payment of $35,000. These amounts remain subject to a clawback until the earlier of (i) August 13, 2017 (in the case of Mr. Sedgeman) or August 13, 2016 (in the case of the other directors) or (ii) a vesting event. The closing of the merger with OZRK will constitute a vesting event.
Executive Compensation Committee Interlocks and Insider Participation
For the year ended December 31, 2015, our executive compensation committee consisted of Marcelo Faria de Lima (Chair), Trevor R. Burgess and Phillip L. Burghardt. Mr. Burgess is an officer and employee of the Company and the Bank. None of the other members of our executive compensation committee is or has ever been an officer or employee of the Company or the Bank. None of the members of our executive compensation committee has had any relationship with the Company of the type that is required to be disclosed under Item 404 of Regulation S-K. None of our executive officers or the executive officers of the Bank serves or has served as a member of the board of directors on an executive compensation committee (or other board committee performing equivalent functions or if there is no such committee, the entire board of directors) of any other entity that has an executive officer serving as a member of our board of directors or our executive compensation committee.
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
Equity Compensation Plan Information
The following table summarizes equity compensation plan information as of December 31, 2015.
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (#) | Weighted-average exercise price of outstanding options, warrants and rights ($) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (#) | |||||||||
| (a) | (b) | (c) | ||||||||||
| Equity compensation plans approved by security holders | — | — | 2,000,000 | (1) | ||||||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||||
| Total | — | — | 2,000,000 | (1) | ||||||||
(1) Includes 1,000,000 shares available for issuance under the Omnibus Plan and 1,000,000 shares available for issuance under the C1 Financial, Inc. 2014 Employee Stock Purchase Plan. As of December 31, 2015, there were no awards outstanding under either plan.
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Security Ownership of Management and Certain Beneficial Owners
The following table sets forth certain information with respect to the beneficial ownership of our common shares, on a fully-diluted basis, as of February 5, 2016 for:
| · | each of our named executive officers |
| · | each of our directors; |
| · | all of our executive officers and directors as a group; and |
| · | each stockholder known by us to be the beneficial owner of more than 5% of our issued and outstanding common shares. |
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. Percentage of ownership is based on 16,100,966 common shares issued and outstanding on February 5, 2016. Unless otherwise indicated, the address for each listed stockholder is: c/o C1 Financial, Inc., 100 5th Street South, St. Petersburg, Florida 33701.
| Name and Address of Beneficial Owner | Number of Shares Beneficially Owned | Percentage of Shares Beneficially Owned | ||||||
| Directors and Named Executive Officers | ||||||||
| Marcelo Faria de Lima(1) | 3,447,948 | 21.41 | % | |||||
| Trevor R. Burgess(2) | 1,266,179 | 7.86 | % | |||||
| Phillip L. Burghardt(3) | 183,079 | 1.14 | % | |||||
| Neil D. Grossman | 136,700 | * | ||||||
| Rita J. Lowman (4) | 123,871 | * | ||||||
| Brian D. Burghardt(3) | 94,452 | * | ||||||
| Cristian A. Melej | 80,294 | * | ||||||
| Duane L. Moore | 51,893 | * | ||||||
| Robert P. Glaser | 30,629 | * | ||||||
| Ryan L. Snyder | 20,975 | * | ||||||
| Marcio de Oliveira | 17,770 | * | ||||||
| Alan G. Randolph | 17,479 | * | ||||||
| James Steiner | 12,036 | * | ||||||
| Adelaide Alexander Sink | 9,348 | * | ||||||
| William H. Sedgeman, Jr.(5) | 8,608 | * | ||||||
| Dustin Symes | 4,200 | * | ||||||
| Diane Morton | 2,000 | * | ||||||
| Jerry Allen | 734 | * | ||||||
| All directors and executive officers as a group (18 persons) | 5,445,485 | 33.82 | % | |||||
| Five Percent Stockholders | ||||||||
| Erwin Russel(6) | 1,875,616 | 11.65 | % | |||||
| Marcio Camargo(7) | 1,479,025 | 9.19 | % | |||||
| * | Less than 1% |
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| (1) | Shares beneficially owned by Marcelo Faria de Lima are held by CBM Holdings Qualified Family, L.P. The address of CBM Holdings Qualified Family, L.P. is 155 Wellington Street West, 37th floor, Toronto, Ontario, Canada, M5V 3J7. Mr. Faria de Lima is a business partner with three other principal stockholders (Erwin Russel, Marcio Camargo and Trevor R. Burgess). Mr. Faria de Lima disclaims beneficial ownership of all shares of our common stock that are held of record or beneficially owned by these principal stockholders. |
| (2) | Mr. Burgess’ shares include 2,181 shares held by his spouse Gary M. Hess through an IRA. Mr. Burgess disclaims beneficial ownership of such shares. Mr. Burgess is a business partner with three other principal stockholders (Marcelo Faria de Lima, Erwin Russel and Marcio Camargo). Mr. Burgess disclaims beneficial ownership of all shares of our common stock that are held of record or beneficially owned by these principal stockholders. |
| (3) | Shares held by Philip L. Burghardt and Brian D. Burghardt include 62,710 shares of C1 Financial held indirectly through PDG Electric, a Florida partnership. Philip L. Burghardt and Brian D. Burghardt disclaim beneficial ownership thereof except to the extent of their pecuniary interest therein. |
| (4) | Shares held by Ms. Lowman include 12,987 shares owned by her spouse, William G. Lowman. |
| (5) | Shares beneficially owned by William H. Sedgeman, Jr. are held by the William H. Sedgeman Trust dated January 28, 1981, for which Mr. Sedgeman and Katherine S. Elias are co-trustees. |
| (6) | Shares beneficially owned by Erwin Russel are held by Amazonite Family LP. The address of Amazonite Family LP is 155 Wellington Street West, Toronto, Ontario, Canada, M5V 3J7 and Mr. Russel’s business address is Artesia Gestão, Av. Das Nações Unidas 12551, CJ 1507, São Paulo, SP 04578, Brazil. Mr. Russel is a business partner with three other principal stockholders (Marcelo Faria de Lima, Marcio Camargo and Trevor R. Burgess). Mr. Russel disclaims beneficial ownership of all shares of our common stock that are held of record or beneficially owned by these principal stockholders. |
| (7) | Shares beneficially owned by Marcio Camargo are held by Oakland Investment LLC. The address of Oakland Investment LLC is 16192 Coastal Highway, Lewes, DE 19958 and Mr. Camargo’s business address is Av. Das Nações Unidas 12551, CJ 1507, São Paulo, SP 04578, Brazil. Mr. Camargo is a business partner with three other principal stockholders (Marcelo Faria de Lima, Erwin Russel and Trevor R. Burgess). Mr. Camargo disclaims beneficial ownership of all shares of our common stock that are held of record or beneficially owned by these principal stockholders. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
Loans to Officers, Directors and Affiliates
We offer loans in the ordinary course of business to our insiders, including executive officers and directors, their related interests and immediate family members, and other employees. Applicable law and our written credit policies require that loans to insiders be on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated parties, and must not involve more than the normal risk of repayment or present other unfavorable features. Loans to non-insider employees and other non-insiders are subject to the same requirements and underwriting standards and meet our normal lending guidelines, except that non-insider employees and other non-insiders may receive preferential interest rates and fees as an employee benefit. Loans to individual employees, directors and executive officers must also comply with the Bank’s statutory lending limits. All extensions of credit to the related parties must be reviewed and approved by the Bank’s board of directors, and directors with a personal interest in any loan application are excluded from the consideration of such loan application.
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We have made loans to directors and executive officers. Such loans amounted to $2.7 million and $2.5 million at December 31, 2015 and 2014, respectively. The loans to such persons (i) complied with our Regulation O policies and procedures, (ii) were made in the ordinary course of business, (iii) were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to us, and (iv) did not involve more than a normal risk of collectability or did not present other features unfavorable to the Company.
Related Party Transaction Policy
Transactions by us with related parties are subject to a formal written policy, as well as regulatory requirements and restrictions. These requirements and restrictions include Sections 23A and 23B of the Federal Reserve Act, which govern certain transactions by us with our affiliates, and the Federal Reserve’s Regulation O, which governs certain loans by us to executive officers, directors and principal stockholders. We have adopted policies to comply with these regulatory requirements and restrictions.
We have adopted a written policy that complies with all applicable requirements of the SEC and the NYSE concerning related party transactions. Pursuant to this policy, our (i) directors and executive officers, including any immediate family member of such persons; and (ii) beneficial holders of five percent or more of our common stock, including any immediate family member of such beneficial holder, are not permitted to enter into a related party transaction with us without the consent of our board of directors or a designated committee thereof consisting solely of independent directors. Any request for us to enter into a transaction in which any such party has a direct or indirect material interest, subject to exceptions, will be required to be presented to our board of directors or the designated committee for review, consideration and approval. Each director and executive officer will be required to report to our board of directors or the designated committee any such related party transaction and such related party transaction will be reviewed and approved or disapproved by the board of directors or the designated committee.
In connection with our merger agreement with OZRK, an affiliate (which we refer to as the standby purchaser ) of Marcelo Faria de Lima (a director of ours and the general partner of a significant C1 Financial shareholder of record) entered into a Brazilian standby purchase agreement with OZRK pursuant to which such affiliate agreed to purchase certain loans of C1 Bank (the “Brazilian loans”) on a standby basis immediately following the merger closing for an amount equal to 75.14% of the aggregate net book value of the Brazilian loans. The Brazilian loans had a net book value at December 31, 2015 of approximately $40.6 million. For further information, see “The Brazilian Standby Purchase Agreement” in the C1 Financial Proxy Statement.
Director Independence
The Board has reviewed the materiality of any relationship that each of our directors has with us, either directly or indirectly. Based on this review, the Board has determined that each of Brian D. Burghardt, Phillip L. Burghardt, Robert P. Glaser, Neil D. Grossman, Duane L. Moore and Adelaide Alexander Sink, is independent under applicable NYSE rules.
Item 14. Principal Accountant Fees and Services
Crowe Horwath LLP was our independent registered public accounting firm for 2015 and 2014. Aggregate fees for professional services rendered by Crowe Horwath LLP for the years ended December 31, 2015 and December 31, 2014 were as follows:
| 2015 | 2014 | |||||||
| Audit fees | $ | 275,000 | $ | 250,000 | ||||
| Audit-related fees | - | 12,500 | ||||||
| Tax fees | 49,200 | 45,100 | ||||||
| All other fees | 75,125 | 91,478 | ||||||
| Total fees | $ | 399,325 | $ | 399,078 | ||||
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Audit Fees. Audit fees consisted of fees billed by Crowe Horwath LLP for professional services rendered in connection with audits of our consolidated financial statements, quarterly reviews of our consolidated financial statements as well as certain audit-related accounting consultations.
Audit-Related Fees. Audit-related fees consisted of costs incurred related to certain attestation and agreed upon procedures.
Tax Fees. Tax fees consisted of costs incurred related to tax compliance services and consultations on various tax issues.
All Other Fees. For 2015, all other fees primarily related to services rendered in connection with an Internal Revenue Service tax audit for 2012 and 2013. For 2014, all other fees related to services rendered in connection with our initial public offering.
Audit Committee Policy on Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm
Our audit committee has established a policy governing our use of the services of our independent registered public accounting firm. Under the policy, our audit committee is required to pre-approve all audit and non-audit services performed by our independent registered public accounting firm in order to ensure that the provision of such services does not impair the public accountants’ independence. All fees paid to Crowe Horwath for our fiscal years ended December 31, 2015 and 2014 were pre-approved by our audit committee.
Item 15. Exhibits and Financial Statement Schedules
(a)(1), (2) and (c) Financial statements and schedules:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2015 and 2014
Consolidated Income Statements — Years Ended December 31, 2015, 2014, and 2013
Consolidated Statements of Comprehensive Income — Years Ended December 31, 2015, 2014, and 2013
Consolidated Statements of Changes in Stockholders’ Equity — Years Ended December 31, 2015, 2014, and 2013
Consolidated Statements of Cash Flows — Years Ended December 31, 2015, 2014, and 2013
Notes to Consolidated Financial Statements for the years ended December 31, 2015, 2014, and 2013
(a)(3) and (b) Exhibits required to be filed by Item 601 of Regulation S-K:
The exhibits filed or furnished with this annual report are shown on the Exhibit Index that follows the signatures to this annual report, which index is incorporated herein by reference.
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Pursuant to the requirements of Section 13 or 15(d) 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. | ||
| By: | /s/ Trevor R. Burgess | |
| Trevor R. Burgess | ||
| President & Chief Executive Officer | ||
| Date: | February 19, 2016 | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Trevor R. Burgess | President & Chief Executive Officer and Director | February 19, 2016 | ||
| Trevor R. Burgess | (principal executive officer) | |||
| /s/ Cristian A. Melej | Chief Financial Officer | February 19, 2016 | ||
| Cristian A. Melej | (principal financial and accounting officer) |
| /s/ Brian D. Burghardt | /s/ Phillip L. Burghardt | |
| Brian D. Burghardt, Director | Phillip L. Burghardt, Director | |
| February 19, 2016 | February 19, 2016 | |
| /s/ Marcelo Faria de Lima | /s/ Robert P. Glaser | |
| Marcelo Faria de Lima, Director | Robert P. Glaser, Director | |
| February 19, 2016 | February 19, 2016 | |
| /s/ Neil D. Grossman | /s/ Duane L. Moore | |
| Neil D. Grossman, Director | Duane L. Moore, Director | |
| February 19, 2016 | February 19, 2016 | |
| /s/ William H. Sedgeman, Jr. | /s/ Adelaide Alexander Sink | |
| William H. Sedgeman, Jr., Director | Adelaide Alexander Sink, Director | |
| February 19, 2016 | February 19, 2016 | |
| /s/ Ryan L. Snyder | ||
| Ryan L. Snyder, Director | ||
| February 19, 2016 |
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