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EX-32.2 - EXHIBIT 32.2 - HCBF Holding Company, Inc.tv478388_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - HCBF Holding Company, Inc.tv478388_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - HCBF Holding Company, Inc.tv478388_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - HCBF Holding Company, Inc.tv478388_ex31-1.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the Quarterly Period Ended September 30, 2017

 

OR

 

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

 

For the transition period from ____________ to ____________

 

Commission File Number: 333-217395

 

HCBF HOLDING COMPANY, INC.

(Exact name of registrant as specified in its charter)

 

Florida   27-2326440
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

200 S. Indian River Drive, Suite 101, Fort Pierce, Florida   34950
(Address of principal executive office)   (Zip Code)

 

(772) 409-2270

(Registrant’s telephone number, including area code)

 

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 ¨ No x

 

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

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of The Exchange Act. ¨

 

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x Smaller reporting company ¨
    (Do not check if smaller reporting company) Emerging growth company x

 

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

 

At October 31, 2017, 22,217,216 shares of the Registrant’s common stock, $0.001 par value, were outstanding.

 

 

 

 

 

 

HCBF HOLDING COMPANY, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED SEPTEMBER 30, 2017

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION 4
   
ITEM 1. CONSOLIDATED FINANCIAL INFORMATION 4
   
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 48
   
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 62
   
ITEM 4: CONTROLS AND PROCEDURES 64
   
PART II. OTHER INFORMATION 64
   
ITEM 1. LEGAL PROCEEDINGS 64
   
ITEM 1A. RISK FACTORS 64
   
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 67
   
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 67
   
ITEM 4. MINE SAFETY DISCLOSURE 67
   
ITEM 5. OTHER INFORMATION 67
   
ITEM 6. EXHIBITS 67

 

 2 

 

INTRODUCTORY NOTE

Caution Concerning Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among others, statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “target,” “goal,” and similar expressions are intended to identify forward-looking statements.

 

All forward-looking statements, by their nature, are subject to risks and uncertainties. Our actual future results may differ materially from those set forth in our forward-looking statements.

 

Our ability to achieve our financial objectives could be adversely affected by the factors discussed in detail in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q, the risk factors identified in our Registration Statement on Form S-4, filed with the SEC on April 20, 2017, as subsequently amended, under the caption “Risk Factors,” as well as:

 

·our ability to obtain regulatory approvals and meet other closing conditions to the merger (the “CenterState Merger”) with CenterState Bank Corporation (“CenterState”), including approval by our shareholders, on the expected terms and schedule;
·delays in closing the CenterState Merger;
·difficulties and delays in integrating our business with the business of CenterState or fully realizing cost savings or other benefits;
·business disruption following the proposed CenterState Merger;
·changes in the stock price of CenterState prior to the closing of the CenterState Merger;
·the reaction to the CenterState Merger of our and CenterState’s customers and employees;
·diversion of our management’s time on issues relating to the CenterState Merger;
·our ability to integrate the business and operations of the companies and banks that we have acquired;
·our ability to successfully manage interest rate risk, liquidity risk, and other risks inherent to our industry;
·legislative or regulatory changes, including the Dodd-Frank Act, Basel III, and the ability to repay and qualified mortgage standards;
·the effects of security breaches and computer viruses that may affect our computer systems or fraud related to debit card products;
·the accuracy of our financial statement estimates and assumptions, including the estimates used for our loan loss provision and deferred tax asset valuation;
·the frequency and magnitude of foreclosure of our loans;
·the effects of our lack of a diversified loan portfolio, including the risks of geographic and industry concentrations;
·the strength of the United States economy in general and the strength of the local economies in which we conduct operations;
·our ability to declare and pay dividends, the payment of which is now subject to our compliance with heightened capital requirements;
·changes in the securities and real estate markets;
·changes in monetary and fiscal policies of the U.S. Government;
·inflation, interest rate, market and monetary fluctuations;
·the effects of harsh weather conditions, including hurricanes, and man-made disasters;
·our ability to comply with the extensive laws and regulations to which we are subject, including the laws for each jurisdiction where we operate;
·the willingness of clients to accept third-party products and services rather than our products and services and vice versa;
·increased competition and its effect on pricing;
·technological changes;
·negative publicity and the impact on our reputation;
·changes in consumer spending and saving habits;
·growth and profitability of our noninterest income;
·changes in accounting principles, policies, practices or guidelines;
·the lack of a trading market for our common stock;
·the concentration of ownership of our common stock;
·anti-takeover provisions under federal and state law as well as our Articles of Incorporation and our Bylaws;
·other risks described from time to time in our filings with the Securities and Exchange Commission; and
·our ability to manage the risks involved in the foregoing.

 

However, other factors besides those discussed in our final prospectus filed with the Securities and Exchange Commission, or SEC, on June 21, 2017 related to our Registration Statement on Form S-4, as amended (File No. 333-217395), or referenced by, this Form 10-Q also could adversely affect our results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Any forward-looking statements made by us or on our behalf speak only as of the date they are made. We do not undertake to update any forward-looking statement, except as required by applicable law.

 

 3 

 

PART I.FINANCIAL INFORMATION

 

ITEM 1.CONSOLIDATED FINANCIAL INFORMATION

 

HCBF HOLDING COMPANY, INC.

Consolidated Balance Sheets (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

Assets  September 30, 2017   December 31, 2016 
         
Cash and due from financial institutions  $37,456   $33,957 
Interest-earning deposits in other financial institutions   32,466    10,601 
Cash and cash equivalents   69,922    44,558 
           
Securities available for sale, at fair value   451,019    346,634 
Securities held to maturity (fair value of $168,923 and $176,286 at September 30, 2017 and December 31, 2016, respectively)   170,194    178,232 
Loans held for sale   7,548    8,384 
Loans (net of allowance of $7,912 and $7,260 at September 30, 2017 and December 31, 2016, respectively)   1,306,572    1,027,211 
Covered loans (net of allowance for loan losses of $0 and $378 at September 30, 2017 and December 31, 2016, respectively)   -    31,089 
Federal Home Loan Bank Stock, at cost   8,111    4,584 
Premises and equipment, net   53,920    51,442 
Real estate owned, net   8,064    9,018 
Goodwill   25,750    12,286 
Other intangible assets   14,463    12,548 
Bank owned life insurance   38,834    38,054 
Deferred tax asset   13,195    15,022 
FDIC indemnification asset   -    526 
Accrued interest receivable and other assets   12,014    10,302 
           
Total assets  $2,179,606   $1,789,890 

 

See accompanying notes

 

 4 

 

HCBF HOLDING COMPANY, INC.

Consolidated Balance Sheets (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

Liabilities and Stockholders’ Equity  September 30, 2017   December 31, 2016 
         
Deposits          
Non-interest-bearing  $558,162   $444,745 
Interest-bearing   1,181,390    1,034,063 
Total deposits   1,739,552    1,478,808 
Securities sold under agreement to repurchase   4,191    - 
Federal Home Loan Bank advances   146,866    71,622 
Junior subordinated debenture   6,015    5,943 
Capital lease obligation   730    769 
Official checks   5,974    5,248 
Accrued interest payable and other liabilities   19,435    9,807 
Total liabilities   1,922,763    1,572,197 
           
Commitments and contingencies (Note 6)          
           
Stockholders’ equity:          
Preferred stock, noncumulative, $.001 par value, 5,000,000 shares authorized, none issued or outstanding   -    - 
Common stock voting, $.001 par value, 40,000,000 shares authorized, 20,979,111 and 18,827,833 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively   21    19 
Common stock nonvoting, $.001 par value, 10,000,000 shares authorized, 1,224,997 and 1,224,997 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively   1    1 
Additional paid-in capital   233,781    202,369 
Retained earnings   25,301    18,772 
Accumulated other comprehensive (loss)   (2,261)   (3,468)
Total stockholders’ equity   256,843    217,693 
Total liabilities and stockholders’ equity  $2,179,606   $1,789,890 

 

See accompanying notes

 

 5 

  

HCBF HOLDING COMPANY, INC.

Consolidated Statements of Income (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

   Three months ended   Nine months ended 
   September 30, 2017   September 30, 2016   September 30, 2017   September 30, 2016 
Interest and dividend income:                    
Loans, including fees  $16,199   $13,343   $43,870   $41,087 
Securities   3,298    2,505    9,173    7,144 
Interest-earning deposits and other   179    91    437    331 
Total interest income   19,676    15,939    53,480    48,562 
                     
Interest expense:                    
Deposits   1,423    1,132    4,011    3,331 
Federal Home Loan Bank advances   368    216    732    621 
Subordinated debentures and other   96    86    276    256 
Total interest expense   1,887    1,434    5,019    4,208 
Net interest income   17,789    14,505    48,461    44,354 
                     
Provision for loan losses   825    347    2,388    1,841 
Net interest income after provision for loan losses   16,964    14,158    46,073    42,513 
                     
Noninterest income:                    
Service charges on deposit accounts   873    595    2,437    1,804 
ATM and interchange income   736    721    2,293    2,158 
Net gain on sale of loans   727    1,312    2,488    2,960 
Net gains on sale of securities available for sale   4    282    18    287 
Bank owned life insurance income   256    279    780    705 
FDIC indemnification asset amortization, net   (70)   (283)   (381)   (500)
Purchased credit impaired loan recoveries   253    251    720    692 
Other   309    248    991    781 
Total noninterest income   3,088    3,405    9,346    8,887 
                     
Noninterest expense:                    
Salaries and employee benefits   7,849    7,040    22,416    21,376 
Occupancy and equipment   2,205    2,112    6,092    6,418 
Data processing   1,610    1,595    4,488    4,624 
Regulatory assessments   252    198    682    985 
Professional Fees   510    426    1,491    1,156 
Office expenses and supplies   366    350    1,015    1,156 
Foreclosed assets, net   314    456    1,118    1,044 
Advertising   139    170    474    572 
Amortization of intangibles   677    606    1,820    1,929 
Acquisition and conversion costs   1,745    73    2,125    262 
Other   924    875    3,264    2,769 
Total non-interest expense   16,591    13,901    44,985    42,291 
                     
Income before taxes   3,461    3,662    10,434    9,109 
Income tax expense   1,364    1,399    3,905    3,624 
Net income  $2,097   $2,263   $6,529   $5,485 
                     
Earnings per share                    
Basic  $0.10   $0.11   $0.32   $0.27 
Diluted  $0.09   $0.11   $0.31   $0.27 

 

See accompanying notes

 

 6 

 

HCBF HOLDING COMPANY, INC.

Consolidated Statements of Comprehensive Income (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

   Three months ended   Nine months ended 
   September 30, 2017   September 30, 2016   September 30, 2017   September 30, 2016 
                 
Net Income  $2,097   $2,263   $6,529   $5,485 
                     
Other comprehensive income (loss) :                    
Unrealized gain (loss) arising during the period   404    (665)   1,778    3,769 
Amortization of unrealized loss on securities transferred to held to maturity   51    331    157    484 
Deferred income tax benefit (expense)   (171)   126    (728)   (1,600)
Total other comprehensive income (loss)   284    (208)   1,207    2,653 
                     
Comprehensive income  $2,381   $2,055   $7,736   $8,138 

 

See accompanying notes

 

 7 

  

HCBF HOLDING COMPANY, INC.

Consolidated Statements of Changes in Stockholders’ Equity

For nine months ended September 30, 2017 and September 30, 2016 (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

   Common Stock
Voting
   Common Stock
Nonvoting
  

Additional

Paid-in

   Retained   Accumulated
Other
Comprehensive
     
   Shares   Amt   Shares   Amt   Capital   Earnings   Income(Loss)   Total 
Balance at January 1, 2016   18,827,303   $19    1,224,997   $1   $201,817   $12,517   $(1,914)  $212,440 
Net income   -    -    -    -    -    5,485    -    5,485 
Other comprehensive loss   -    -    -    -    -    -    2,653    2,653 
Stock-based compensation   -    -    -    -    450    -    -    450 
Balance at September 30, 2016   18,827,303   $19    1,224,997   $1   $202,267   $18,002   $739   $221,028 
                                         
Balance at January 1. 2017   18,827,833   $19    1,224,997   $1   $202,369   $18,772   $(3,468)  $217,693 
Net Income   -    -    -    -    -    6,529    -    6,529 
Other comprehensive income   -    -    -    -    -    -    1,207    1,207 
Common stock issued pursuant to Jefferson Bank acquisition - voting   2,119,020    2    -    -    30,724    -    -    30,726 
Exercise of stock options   32,258    -    -    -    325    -    -    325 
Stock-based compensation   -    -    -    -    363    -    -    363 
Balance at September 30, 2017   20,979,111   $21    1,224,997   $1   $233,781   $25,301   $(2,261)  $256,843 

 

See accompanying notes

 

 8 

 

HCBF HOLDING COMPANY, INC.

Consolidated Statements of Cash Flows (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

   Nine months ended 
   September 30, 2017   September 30, 2016 
Cash flows from operating activities:          
Net income  $6,529   $5,485 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   2,388    1,841 
Depreciation and amortization of premises and equipment   2,092    2,100 
Net accretion of purchase accounting adjustments   (1,060)   (2,510)
Net amortization of investment securities   3,631    4,212 
Net deferred loan origination fees   (179)   45 
Gain on sale of securities available for sale   (18)   (287)
Origination of loans held for sale   (60,655)   (63,214)
Proceeds from sales of loans held for sale   62,792    64,012 
Gain on loans held for sale   (2,488)   (2,960)
(Gain)Loss on disposal of real estate owned   (200)   (187)
Provision for real estate owned   935    897 
FDIC indemnification expense, net   381    (470)
Stock based compensation expense   364    450 
Increase in cash surrender value of bank owned life insurance   (780)   (705)
Deferred income tax expense   1,794    560 
Net change in:          
Accrued interest receivable and other assets   (73)   (849)
Accrued interest payable and other liabilities   7,150    1,615 
Net cash from operating activities   22,603    10,035 
           
Cash flows from investing activities:          
Available for sale securities:          
Purchases   (119,784)   (124,674)
Maturities, prepayments, and calls   54,672    64,293 
Sales   7,185    51,163 
Held to maturity securities:          
Purchases   (10,280)   (59,634)
Maturities, prepayments, and calls   14,378    22,852 
Loan origination and repayments, net   (5,634)   (29,737)
Purchases of premises and equipment, net   (251)   (810)
Changes in FHLB stock, net   (1,263)   20 
Proceeds from sale of real estate owned   2,960    3,416 
Purchase of bank owned life insurance   -    (10,000)
Cash received from FDIC loss sharing agreement   -    785 
Cash received from Bank acquisition, net   7,209    - 
 Net cash used in investing activities   (50,808)   (82,326)

 

See accompanying notes

 

 9 

  

HCBF HOLDING COMPANY, INC.

Consolidated Statements of Cash Flows (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

(continued)

 

   Nine months ended 
   September 30, 2017   September 30, 2016 
Cash flows from financing activities:          
Net change in deposits   29,499    46,126 
Net change in securities sold under agreement to repurchase   (1,656)   - 
Proceeds from Federal Home Loan Bank advances and other debt   275,000    543,300 
Repayments on Federal Home Loan Bank advances and other debt   (246,569)   (543,154)
Extinguishment of senior debt   (3,030)   - 
Proceeds from exercised stock options   325    - 
Net proceeds from financing activities   53,569    46,272 
           
Net change in cash and cash equivalents   25,364    (26,019)
Beginning cash and cash equivalents   44,558    80,737 
           
Ending cash and cash equivalents  $69,922   $54,718 
           
Supplemental cash flow information:          
Interest paid  $5,187   $4,765 
Income taxes paid  $3,650   $1,993 
           
Supplemental noncash disclosures:          
Transfers from loans held for sale to loans held for investment  $1,198   $1,749 
Transfers from loans to real estate owned  $2,743   $1,707 
Transfer from premises and equipment to real estate owned  $-   $1,209 
Loans provided for sales of real estate owned  $180   $685 

 

See accompanying notes

 

 10 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 1 - NATURE OF OPERATIONS AND BASIS OF CONSOLIDATION

 

Nature of Operations and basis of Consolidation

 

The consolidated financial statements include HCBF Holding Company, Inc. (the “Holding Company”) and its wholly owned subsidiary, Harbor Community Bank (the “Bank”), together referred to as the “Company.” Intercompany transactions and balances are eliminated in consolidation.

 

The Company provides financial services through its offices in Florida. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. There are no significant concentrations of loans to any one industry or customer. However, the customers’ ability to repay their loans is dependent on the real estate and general economic conditions in the area. The Company engages in mortgage banking activities and, as such, acquires and sells one-to-four family residential mortgage loans and small business administration loans (SBA). These loans are generally sold without servicing rights retained. The Company originates and services residential mortgage loans in Florida.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These statements should be read in conjunction with the consolidated financial statements included in the annual report for the year ended December 31, 2016. In the Company’s opinion, all adjustments necessary for a fair presentation of the results for interim periods have been made. The results of operations for the three months ended September 30, 2017 and the nine months ended September 30, 2017 are not necessarily indicative of the results expected for the full year.

 

Accounting policy 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 uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required 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.

 

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. 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 (TDRs) and classified as impaired.

 

During the first quarter of 2017, the Company modified its accounting policy for allowance for loan losses. In determining impairment for specifically identified impaired loans, the Company began to segregate small, homogeneous loans with relationship balances under $250 thousand. The rationale for the accounting policy change was to streamline and improve the timeliness of the loan impairment valuation process for small balance loans that the Company deems to be insignificant to its operations. These small balance loans are now evaluated for impairment on a pooled basis and are not included in impairment disclosures. The change in accounting policy did not have a material effect on allowance for loan losses during the first nine months of 2017.

 

 11 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 1 - Continued

 

Adoption of New Accounting Standards and Newly Issued Not Yet Effective Accounting Standards

 

The following table provides a description of recently adopted or newly issued not yet effective accounting standards that could have a material effect on our financial statements:

 

ASU 2014-09, Revenue From Contracts With Customers (Topic 606) and ASU 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date

 

In May 2014 the FASB amended existing guidance related to revenue from contracts with customers. This amendment supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific guidance, establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, this amendment specifies the accounting for some costs to obtain or fulfill a contract with a customer. These amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that period. The amendments should be applied retrospectively to all periods presented or retrospectively with the cumulative effect recognized at the date of initial application. In addition, the FASB has begun to issue targeted updates to clarify specific implementation issues of ASU 2014-09. These updates include ASU 2016-08 “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU 2016-10, “Identifying Performance Obligations and Licensing” and ASU 2016-12 “Narrow-Scope Improvements and Practical Expedients.” The Company is studying the provisions of ASU 2014-09 and its related updates. However, the Company does not expect this new standard to have a significant impact on the Company’s Consolidated Financial Statements. The Company’s primary sources of revenues are derived from interest on loans, investment securities, and other financial instruments that are not within the scope of ASU 2014-09. The Company expects to adopt ASU 2014-09 in the first quarter of 2018 using the modified retrospective approach with a cumulative effect of initial application along with supplementary disclosures.

 

ASU 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial assets and Financial Liabilities

 

In January 2016, the FASB amended existing guidance relating to the recognition and measurement of financial assets and financial liabilities. The amendment: 1) Requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of investee) to be measured at fair value with changes in fair value recognized in net income. 2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. 3) Eliminate the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. 4) Require entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 5) Require an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. 6) Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities and receivables) on the balance sheet or the accompanying notes to the financial statements. 7) Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. These amendments should be applied by means of a cumulative effect adjustment to the balance sheet as of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

 

 12 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 1 - Continued

 

ASU 2016-02, Leases

 

In February 2016, the FASB amended existing guidance that requires lessees recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. These amendments are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e. January 1, 2019 for a calendar year entity). Early application is permitted for all public business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company leases certain property and equipment under operating leases that will result in the recognition of lease assets and lease liabilities on the Company’s Consolidated Balance Sheet. The Company is currently evaluating this new accounting standard to determine the dollar impact on the consolidated financial statements.

 

ASU 2016-09, Improvements to Employee Share-Based Payment Accounting

 

In March 2016, the FASB issued ASU no. 2016-09 ”Improvements to Employee Share-Based Payment Accounting”, which includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. Some of the key provisions of this ASU include: (1) companies no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement and APIC pools are eliminated. The guidance also eliminates the requirement that excess tax benefits be realized before companies can recognize them. In addition, the guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity; (2) increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. The new guidance requires an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on its statement of cash flows; and (3) permit companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated today, or recognized when they occur. ASU no. 2016-09 was effective for interim and annual reporting periods beginning after December 15, 2016. The Company implemented ASU no. 2016-09 on January 1, 2017. The impact on operations for three months and nine months ended September 31, 2017 was not material.

 

ASU 2016-13, Measurement of Credit Losses on Financial Instruments

 

In June 2016, the FASB issued guidance to replace the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables, held to maturity debt securities, and reinsurance receivables. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investment in leases recognized by a lessor. The transition will be applied as follows: (1) for debt securities with other-than-temporary impairment (OTTI), the guidance will be applied prospectively (2) existing purchased credit impaired (PCI) assets will be grandfathered and classified as purchased credit deteriorated (PCD) assets at the date of adoption. These assets will be grossed up for the allowance for expected credit losses for all PCD assets at the date of adoption and will continue to recognize the noncredit discount in interest income based on the yield of such assets as of the adoption date. Subsequent changes in expected credit losses will be recorded through the allowance and (3) for all other assets within the scope of CECL, a cumulative effect adjustment will be recognized in retained earnings as of the beginning of the first reporting period in which the guidance is effective. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018.

 

 13 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 1 - Continued

 

The Company is currently evaluating the provisions of ASU 2016-13 to determine the potential impact the new standard will have on the Company’s consolidated financial statements. To date, certain members of senior management have attended educational conferences relating to CECL. In the fourth quarter of 2017, the Company expects to establish a management committee to begin to develop of a detailed framework on the design and internal controls necessary for the implementation of CECL.

 

 14 

 

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 2 - SECURITIES

 

The following table summarizes the amortized cost and fair value of securities available for sale and securities held to maturity at September 30, 2017 and December 31, 2016 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses:

 

   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
 
September 30, 2017                    
Available for sale                    
Agency notes and bonds  $2,925   $8   $-   $2,933 
Asset backed securities   16,631    1    (176)   16,456 
Small business administration securities   42,076    169    (126)   42,119 
Collateralized mortgage obligations   101,677    410    (792)   101,295 
Mortgage-backed securities   290,562    152    (2,498)   288,216 
Total available for sale  $453,871   $740   $(3,592)  $451,019 
                     
Held to Maturity                    
Agency notes and bonds  $1,910   $55   $-   $1,965 
Municipal securities   4,379    95    -    4,474 
Collateralized mortgage obligations   68,819    99    (855)   68,063 
Mortgage-backed securities   95,086    287    (952)   94,421 
Total held to maturity  $170,194   $536   $(1,807)  $168,923 

 

   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
 
December 31, 2016                    
Available for sale                    
Agency notes and bonds  $1,594   $20   $-   $1,614 
Asset backed securities   17,579    -    (699)   16,880 
Small business administration securities   48,724    175    (103)   48,796 
Collateralized mortgage obligations   44,817    25    (480)   44,362 
Mortgage-backed securities   238,550    74    (3,642)   234,982 
Total available for sale  $351,264   $294   $(4,924)  $346,634 
                     
Held to Maturity                    
Agency notes and bonds  $1,900   $39   $-   $1,939 
Municipal securities   4,397    80    (2)   4,475 
Collateralized mortgage obligations   78,465    90    (1,037)   77,518 
Mortgage-backed securities   93,470    108    (1,224)   92,354 
Total held to maturity  $178,232   $317   $(2,263)  $176,286 

 

 15 

 

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 2 - Continued

 

During 2014, the Company transferred $58.8 million of securities from available for sale classification to held to maturity classification. At time of transfer, the securities had unrealized losses of $1.2 million, net of deferred taxes. The losses are amortized on the Company’s books over the remaining life of the securities using the level yield method. The unamortized losses net of deferred taxes are recorded in equity as a reduction of accumulated other comprehensive income. The unamortized losses on transferred securities net of deferred taxes was $483 thousand and $581 thousand at September 30, 2017 and December 31, 2016, respectively. The amount of pre-tax loss amortization was $157 thousand for nine months ended September 30, 2017 and $46 thousand for nine months ended September 30, 2016. The amortization of unrealized holding losses reported in equity will offset the effect of the amortization of the discount.

 

The proceeds from sales and calls of securities and the associated gains and losses are listed below:

 

   Nine months ended 
   September 30, 2017   September 30, 2016 
Proceeds  $7,185   $51,163 
Gross gains  $18   $351 
Gross losses  $-   $64 

 

The tax provision related to these net realized gains and losses were $7 thousand and $108 thousand for nine months ended September 30, 2017 and September 30, 2016, respectively.

 

The amortized cost and fair value of debt securities are shown by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

 

   Available for Sale   Held to Maturity 
September 30, 2017  Amortized
Cost
   Fair
Value
   Amortized
Cost
   Fair
Value
 
Within one year  $-   $-   $-   $- 
One to five years   976    980    1,998    2,011 
Five to ten years   1,949    1,953    3,501    3,611 
Beyond ten years   -    -    790    817 
Asset-backed securities   16,631    16,456    -    - 
Small business administration securities   42,076    42,119    -    - 
Collateralized mortgage obligations   101,677    101,295    68,819    68,063 
Mortgage-backed securities   290,562    288,216    95,086    94,421 
   $453,871   $451,019   $170,194   $168,923 

 

Securities pledged at September 30, 2017 and December 31, 2016 had a carrying amount of $241 million and $208 million, respectively. These securities were pledged to secure public deposits, Federal Home Loan Bank advances, Federal Reserve discount window borrowings and other purposes.

 

 16 

 

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 2 - Continued

 

The following table summarizes securities with unrealized losses at September 30, 2017 and December 31, 2016, aggregated by major security type and length of time in a continuous unrealized loss position:

 

   Less than 12 Months   12 Months or Longer   Total 
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
 
September 30, 2017                              
Available for sale                              
Asset backed securities  $-   $-   $14,387   $(176)  $14,387   $(176)
Small Business Administration securities   4,993    (35)   10,088    (91)   15,081    (126)
Collateralized mortgage obligations   51,255    (470)   17,258    (322)   68,513    (792)
Mortgage backed securities   197,821    (1,264)   56,338    (1,234)   254,159    (2,498)
Total available for sale  $254,069   $(1,769)  $98,071   $(1,823)  $352,140   $(3,592)
                               
Held to maturity                              
Collateralized mortgage obligations  $22,695   $(147)  $25,854   $(708)  $48,549   $(855)
Mortgage backed securities   29,214    (145)   30,696    (807)   59,910    (952)
Total held to maturity  $51,909   $(292)  $56,550   $(1,515)  $108,459   $(1,807)

 

 17 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 2 - Continued

 

   Less than 12 Months   12 Months or Longer   Total 
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
 
December 31, 2016                              
Available for sale                              
Asset backed securities  $-   $-   $16,879   $(699)  $16,879   $(699)
Small Business Administration securities   5,480    (13)   21,430    (90)   26,910    (103)
Collateralized mortgage obligations   32,390    (324)   9,486    (156)   41,876    (480)
Mortgage backed securities   216,756    (3,442)   8,540    (200)   225,296    (3,642)
Total available for sale  $254,626   $(3,779)  $56,335   $(1,145)  $310,961   $(4,924)
                               
Held to maturity                              
Municipal securities  $611   $(2)  $-   $-   $611   $(2)
Collateralized mortgage obligations   62,878    (999)   4,462    (38)   67,340    (1,037)
Mortgage backed securities   77,179    (1,224)   -    -    77,179    (1,224)
Total held to maturity  $140,668   $(2,225)  $4,462   $(38)  $145,130   $(2,263)

 

At September 30, 2017, the Company’s security portfolio consisted of 225 securities, 132 of which were in an unrealized loss position, including 42 securities with an unrealized loss position of 12 months or longer. The majority of unrealized losses are related to the Company’s collateralized mortgage obligations, mortgage backed securities, and asset-backed securities, as discussed below:

 

Collateralized Mortgage Obligations

 

At September 30, 2017, the Company’s collateralized mortgage obligations were issued by U.S. government sponsored entities and agencies, Fannie Mae, Freddie Mac, and Ginnie Mae. Fannie Mae and Freddie Mac are institutions that the government has affirmed its commitment to support. The underlying collateral of these mortgage instruments are 30-year, 20-year and15-year fixed rate mortgage-backed securities. Because the decline in fair value is attributable to changes in interest rates, spreads and liquidity, and not credit quality, and because the Company does not have the intent to sell these collateralized mortgage obligations and it is unlikely that the Company will be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2017.

 

Mortgage-Backed Securities

 

At September 30, 2017, all of the mortgage-backed securities held by the Company were issued by U.S. government-sponsored entities and agencies: Fannie Mae, Freddie Mac, and Ginnie Mae. Fannie Mae and Freddie Mac are institutions that the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates, spreads and liquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is unlikely that the Company will be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2017.

 

 18 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 2 - Continued

 

Asset Backed Securities

 

At September 30, 2017, the Company’s asset backed securities consisted of four pools of U.S. government guaranteed student loans. The U.S. government guarantee secures up to 97% of the principal balance. The student loans were pooled and held in trusts. Three of the four trusts were rated AAA, and one trust was rated BBB by the national rating agencies.

 

The decline in fair value is attributable to changes in interest rates, spreads and liquidity, and not credit quality. It is unlikely that the Company will be required to sell these securities before their anticipated recovery and the Company does not have the intent to sell these securities. The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2017 and December 31, 2016.

 

NOTE 3 - LOANS

 

Loans at period-end were as follows:

 

   September 30, 2017   December 31, 2016 
   Non covered
Loans
   Covered
 Loans
   Total   Non covered
Loans
   Covered
 Loans
   Total 
Commercial real estate  $632,849   $-   $632,849   $435,188   $27,483   $462,671 
Residential real estate   382,802    -    382,802    362,729    246    362,975 
Land and construction   139,179    -    139,179    95,202    1,178    96,380 
Total real estate   1,154,830    -    1,154,830    893,119    28,907    922,026 
Commercial   117,632    -    117,632    97,188    2,568    99,756 
Consumer and other   42,580    -    42,580    44,894    -    44,894 
Total non-real estate   160,212    -    160,212    142,082    2,568    144,650 
Subtotal   1,315,042    -    1,315,042    1,035,201    31,475    1,066,676 
Less:                              
Net deferred fees   558    -    558    730    8    738 
Allowance for loan losses   7,912    -    7,912    7,260    378    7,638 
Loans, net  $1,306,572   $-   $1,306,572   $1,027,211   $31,089   $1,058,300 

 

 19 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 3 - Continued

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the periods presented:

 

   Real Estate Mortgage Loans     
   Commercial
Real 
Estate
   Residential
Real 
Estate
   Land 
and
Construction
   Commercial   Consumer
and 
other
 Loans
   Total 
Three months ended September 30, 2017                              
Allowance for loan losses - loans:                              
Beginning Balance  $3,069   $1,433   $372   $2,019   $227   $7,120 
Provision for loan losses   499    30    32    138    126    825 
Loans charged-off   (2)   (150)   -    -    (72)   (224)
Recoveries   27    80    15    47    22    191 
Ending allowance balance – loans  $3,593   $1,393   $419   $2,204   $303   $7,912 
                               
Allowance for loan losses – covered loans:                              
Beginning Balance  $-   $-   $-   $-   $-   $- 
Provision for loan losses   -    -    -    -    -    - 
Loans charged-off   -    -    -    -    -    - 
Recoveries   -    -    -    -    -    - 
Ending allowance balance – covered loans  $-   $-   $-   $-   $-   $- 
Total ending allowance balance  $3,593   $1,393   $419   $2,204   $303   $7,912 

 

 20 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 3 - Continued

 

   Real Estate Mortgage Loans     
   Commercial
Real 
Estate
   Residential
Real 
Estate
   Land 
and
Construction
   Commercial   Consumer
and 
other
 Loans
   Total 
Three months ended September 30, 2016                              
Allowance for loan losses - loans:                              
Beginning Balance  $1,381   $1,461   $262   $577   $210   $3,891 
Provision for loan losses   290    169    182    (97)   155    699 
Loans charged-off   (265)   (99)   (150)   -    (103)   (617)
Recoveries   9    117    10    14    29    179 
Ending allowance balance – loans  $1,415   $1,648   $304   $494   $291   $4,152 
                               
Allowance for loan losses – covered loans:                              
Beginning Balance  $829   $(1)  $(29)  $(51)  $-   $748 
Provision for loan losses   (457)   4    51    50    -    (352)
Loans charged-off   -    -    -    -    -    - 
Recoveries   -    -    -    7    -    7 
Ending allowance balance – covered loans  $375   $-   $22   $6   $-   $403 
Total ending allowance balance  $1,787   $1,651   $327   $500   $291   $4,555 

 

 21 

 

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data) 

NOTE 3 - Continued

 

   Real Estate Mortgage Loans     
   Commercial
Real 
Estate
   Residential
Real 
Estate
   Land 
and
Construction
   Commercial   Consumer
and 
other
 Loans
   Total 
Nine months ended September 30, 2017                              
Allowance for loan losses - loans:                              
Beginning Balance  $3,106   $1,990   $318   $1,648   $198   $7,260 
Provision for loan losses   1,444    (336)   164    1033    344    2,648 
Loans charged-off   (1,023)   (465)   (106)   (676)   (307)   (2,576)
Recoveries   66    204    43    199    68    580 
Ending allowance balance – loans  $3,593   $1,393   $419   $2,204   $303   $7,912 
                               
Allowance for loan losses – covered loans:                              
Beginning Balance  $210   $-   $26   $142   $-   $378 
Provision for loan losses   (210)   -    (26)   (24)   -    (260)
Loans charged-off   -    -    -    (132)   -    (132)
Recoveries   -    -    -    14    -    14 
Ending allowance balance – covered loans  $-   $-   $-   $-   $-   $- 
Total ending allowance balance  $3,593   $1,393   $419   $2,204   $303   $7,912 
                               
Nine months ended September 30, 2016                              
Allowance for loan losses - loans:                              
Beginning Balance  $595   $802   $201   $212   $641   $2,451 
Provision for loan losses   1,370    743    231    369    (19)   2,694 
Loans charged-off   (568)   (100)   (175)   (156)   (415)   (1,414)
Recoveries   18    203    47    69    84    421 
Ending allowance balance – loans  $1,415   $1,648   $304   $494   $291   $4,152 
                               
Allowance for loan losses – covered loans:                              
Beginning Balance  $890   $-   $251   $136   $-   $1,277 
Provision for loan losses   (519)   3    (229)   (108)   -    (853)
Loans charged-off   -    -    -    (45)   -    (45)
Recoveries   1    -    -    23    -    24 
Ending allowance balance – covered loans  $372   $3   $22   $6   $-   $403 
Total ending allowance balance  $1,787   $1,651   $326   $500   $291   $4,555 

 

 22 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 3 - Continued

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2017 and December 31, 2016:

 

   Real Estate Mortgage Loans             
   Commercial
Real
Estate
   Residential
Real

Estate
   Land
and
Construction
   Commercial   Consumer and
Other
Loans
   Total 
September 30, 2017                              
Allowance for loan losses:                              
Ending allowance balance attributable to loans:                              
Individually evaluated for impairment  $882   $119   $8   $1,590   $-   $2,599 
Collectively evaluated for impairment   2,303    847    320    518    303    4,291 
Acquired with deteriorated credit quality   408    427    91    96    -    1,022 
Total ending allowance balance  $3,593   $1,393   $419   $2,204   $303   $7,912 
                               
Loans – recorded  investment:                              
Loans individually evaluated for impairment  $12,357   $5,243   $1,358   $2,809   $-   $21,767 
Loans  collectively evaluated for impairment   604,344    372,408    136,391    114,679    42,580    1,270,402 
Loans  acquired with deteriorated credit quality   16,148    5,151    1,430    144    -    22,873 
Total ending loans recorded investment  $632,849   $382,802   $139,179   $117,632   $42,580    1,315,042 

 

 23 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 3 - Continued

 

   Real Estate Mortgage Loans             
   Commercial
Real
Estate
   Residential
Real 
Estate
   Land
and
Construction
   Commercial   Consumer and
Other
Loans
   Total 
December 31, 2016                              
Allowance for loan losses:                              
Ending allowance balance attributable to loans:                              
Individually evaluated for impairment                              
Collectively evaluated for impairment  $1,509   $615   $52   $1,268   $3   $3,447 
Acquired with deteriorated credit quality   1,322    874    265    425    195    3,081 
Total ending allowance balance   485    501    27    97    -    1,110 
   $3,316   $1,990   $344   $1,790   $198   $7,638 
Loans – recorded  investment:                              
Loans individually evaluated for impairment                              
Loans  collectively evaluated for impairment  $19,109   $10,542   $1,519   $4,582   $4   $35,756 
Loans  acquired with deteriorated credit quality   427,369    346,554    93,401    94,958    44,890    1,007,172 
Total ending loans recorded  investment   16,193    5,879    1,460    216    -    23,748 
   $462,671   $362,975   $96,380   $99,756   $44,894   $1,066,676 

 

 24 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 3 - Continued

 

The following tables present information related to impaired loans by class of loans as of September 30, 2017 and December 31, 2016:

 

   Unpaid
Principal
Balance
   Recorded
Investment
   Allowance for
Loan Losses
Allocated
 
September 30, 2017               
With no related allowance recorded:               
Commercial real estate  $12,798   $8,857   $- 
Residential real estate   6,020    4,820    - 
Land and construction   1,706    1,300    - 
Commercial   143    118    - 
Subtotal – excluding PCI   20,667    15,095    - 
PCI loans   13,318    9,364    - 
Subtotal – including PCI   33,985    24,459    - 
                
With an allowance recorded:               
Commercial real estate  $3,863   $3,500   $882 
Residential real estate   430    423    119 
Land and construction   59    59    8 
Commercial   2,905    2,690    1,590 
Subtotal – excluding PCI   7,257    6,672    2,599 
PCI loans   20,935    13,509    1,022 
Subtotal – including PCI   28,192    20,181    3,621 
                
Total – excluding PCI  $27,924   $21,767   $2,599 
Total – including PCI  $62,177   $44,640   $3,621 

 

 25 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 3 - Continued

 

   Unpaid
Principal
Balance
   Recorded
Investment
   Allowance for
Loan Losses
Allocated
 
December 31, 2016               
With no related allowance recorded:               
Commercial real estate  $7,864   $4,106   $- 
Residential real estate   7,101    5,758    - 
Land and construction   1,307    770    - 
Commercial   967    934    - 
Subtotal – excluding PCI   17,239    11,568    - 
PCI loans   21,622    9,271    - 
Subtotal – including PCI   38,861    20,839    - 
                
With an allowance recorded:               
Commercial real estate  $15,542   $15,003   $1,509 
Residential real estate   5,392    4,784    615 
Land and construction   756    749    52 
Commercial   3,766    3,649    1,268 
Consumer and other loans   3    3    3 
Subtotal – excluding PCI   25,459    24,188    3,447 
PCI loans   26,807    14,477    1,110 
Subtotal – including PCI   52,266    38,665    4,557 
                
Total – excluding PCI  $42,698   $35,756   $3,447 
Total – including PCI  $91,127   $59,504   $4,557 

 

 26 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 3 - Continued

 

The following tables present information regarding impaired loans excluding PCI loans.

 

   Average
Recorded
Investment
   Interest
Income
Recognized
 
Three months ended September 30, 2017          
Commercial real estate  $13,874   $51 
Residential real estate   5,149    18 
Land and construction   1,201    8 
Commercial   3,105    6 
Total  $23,329   $83 

 

   Average
Recorded
Investment
   Interest
Income
Recognized
 
Three months ended September 30, 2016          
Commercial real estate  $15,891   $66 
Residential real estate   8,722    22 
Land and construction   1,403    7 
Commercial   1,625    9 
Total  $27,641   $104 

 

   Average
Recorded
Investment
   Interest
Income
Recognized
 
Nine months ended September 30, 2017          
Commercial real estate  $16,136   $172 
Residential real estate   5,483    40 
Land and construction   1,179    23 
Commercial   3,543    28 
Total  $26,341   $263 

 

   Average
Recorded
Investment
   Interest
Income
Recognized
 
Nine months ended September 30, 2016          
Commercial real estate  $13,787   $227 
Residential real estate   8,790    73 
Land and construction   1,445    21 
Commercial   1,819    26 
Total  $25,841   $347 

 

 27 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 3 - Continued

 

The recorded investment in loans excludes accrued interest receivable and loan origination fees, net.

 

Non-accrual loans and loans past due 90 days or more and still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. Impaired loans include commercial loans that are individually evaluated for impairment and deemed impaired (i.e., individually classified impaired loans) as well as TDRs for all loan portfolio segments. The sum of non-accrual loans and loans past due 90 days or more still on accrual will differ from the total impaired loan amount.

 

The following tables present the recorded investment in non-accrual and loans past due over 90 days still on accrual by class of loans, as of September 30, 2017 and December 31, 2016:

 

   Non- Accrual   Loans past due 90 days or more still
accruing
 
   September 30,  2017   December 31, 2016   September 30, 2017   December 31, 2016 
Commercial real estate  $10,876   $13,000   $354   $330 
Residential real estate   8,041    9,742    494    488 
Land and construction   920    1,111    223    3,423 
Commercial   3,085    1,874    221    49 
Consumer and other loans   256    338    -    12 
Total – excluding PCI  $23,178   $26,065   $1,292   $4,302 
PCI loans   96    1,187    2,982    1,773 
Total – including PCI  $23,274   $27,252   $4,274   $6,075 

 

The following table presents the aging of the recorded investment in past due loans as of September 30, 2017 and December 31, 2016 by class of loans:

 

   30-59
Days
Past Due
   60-89
Days
Past Due
   Greater
Than 
89 Days
Past Due
   Total
Past Due
   Loans Not
Past Due
   Total 
September 30, 2017                              
Commercial real estate  $5,173   $46   $6,677   $11,896   $604,805   $616,701 
Residential real estate   7,874    2,009    5,202    15,085    362,566    377,651 
Land and construction   1,903    194    971    3,068    134,682    137,750 
Commercial   1,434    191    2,979    4,604    112,883    117,487 
Consumer and other loans   101    90    175    366    42,214    42,580 
Total – excluding PCI  $16,485   $2,530   $16,004   $35,019   $1,257,150   $1,292,169 
PCI loans   725    366    3,077    4,168    18,705    22,873 
Total – including PCI  $17,210   $2,896   $19,081   $39,187   $1,275,855   $1,315,042 

 

 28 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 3 - Continued

 

   30-59
Days
Past Due
   60-89
Days
Past Due
   Greater
Than 
89 Days
Past Due
   Total
Past Due
   Loans Not
Past Due
   Total 
December 31, 2016                              
Commercial real estate  $4,745   $409   $7,576   $12,730   $433,748   $446,478 
Residential real estate   6,448    2,148    4,967    13,563    343,533    357,096 
Land and construction   215    -    4,329    4,544    90,376    94,920 
Commercial   2,827    328    873    4,028    95,512    99,540 
Consumer and other loans   189    191    280    660    44,234    44,894 
Total – excluding PCI  $14,424   $3,076   $18,025   $35,525   $1,007,403   $1,042,928 
PCI loans   353    2,319    1,773    4,445    19,303    23,748 
Total – including PCI  $14,777   $5,395   $19,798   $39,970   $1,026,706   $1,066,676 

 

Troubled Debt Restructurings:

 

Under certain circumstances, it may be beneficial to modify or restructure the terms of a loan for the mutual benefit of the Company and the borrower. In cases where the borrower is experiencing financial difficulties, the Company may grant concessions to the borrower to avoid the cost of foreclosure of property or bankruptcy by the borrower. In these circumstances, the modification of loan terms where a concession is granted to the borrower is known as a troubled debt restructuring (TDR). Concessions granted to financially troubled borrowers could include forgiveness of interest, forgiveness of principal, below market interest rate concessions, and a change in loan amortization or repayment terms. In general, the Company does not forgive principal in loan modifications. Typically, the Company will lower borrower payment amounts through a temporary interest rate concession and/or extension of amortization or maturity terms. At September 30, 2017, there are no commitments to extend credit on TDR’s.

 

At September 30, 2017 and December 31, 2016, the Company has a recorded investment in troubled debt restructurings of $11.1 million and $13 million, respectively. The Company has allocated $469 thousand and $592 thousand of specific allowance for those loans at September 30, 2017 and December 31, 2016, respectively. The Company granted a temporary TDR rate concession of 0.50% during three months ended September 30, 2017 and no rate concessions during three months ended September 30, 2016. During the three months ended September 30, 2017 the Company granted a payment extension on a troubled debt restructuring of 60 months and none for the 2016 period. The Company granted temporary TDR rate concessions with a range of 0.36% to 17.24% during nine months ended September 30, 2017 and a range of 0.75% to 1.25% during nine months ended September 30, 2016. During the nine months ended September 30, 2017 and September 30, 2016, payment extensions from troubled debt restructurings ranged from 42 months to 144 months and 7 months to 36 months, respectively.

 

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended September 30, 2017 and September 30, 2016:

 

 29 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 3 - Continued

 

   Number
of 
Loans
  Pre-
Modification
Outstanding
Recorded
Investment
   Post-
Modification
Outstanding
Recorded
Investment
 
Three months ended September 30, 2017             
Troubled Debt Restructurings:             
Residential real estate  1  $48   $48 
Total  1  $48   $48 

 

There were no troubled debt restructurings that occurred during the three months ended September 30, 2016.

 

The troubled debt restructurings described above had no effect on the allowance for loan losses during the three months ended September 30, 2017 and September 30, 2016, respectively. These restructurings did not result in any charge-offs during the three-month period ended September 30, 2017 and September 30, 2016.

 

The following table presents loans by class modified as troubled debt restructurings that occurred during the nine months ended September 30, 2017 and September 30, 2016:

 

   Number
of 
Loans
  Pre-
Modification
Outstanding
Recorded
Investment
   Post-
Modification
Outstanding
Recorded
Investment
 
Nine months ended September 30, 2017             
Troubled Debt Restructurings:             
Commercial real estate  4  $1,605   $1,605 
Residential real estate  2   177    177 
Land and construction  2   154    154 
Consumer and other loans  2   21    21 
Total  10  $1,957   $1,957 

 

   Number 
of
Loans
  Pre-
Modification
Outstanding
Recorded
Investment
   Post-
Modification
Outstanding
Recorded
Investment
 
Nine months ended September 30, 2016             
Troubled Debt Restructurings:             
Commercial real estate  3  $1,637   $1,608 
Residential real estate  6   1,121    1,121 
Total  9  $2,758   $2,729 

 

 30 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 3 - Continued

 

The troubled debt restructurings described above had no effect on the allowance for loan losses during the nine months ended September 30, 2017 and September 30, 2016, respectively. These restructurings did not result in any charge-offs during the nine months ended September 30, 2017 and September 30, 2016.

 

There were no troubled debt restructurings for which there was a payment default within 12 months following the modification during the three months ended September 30, 2017 or September 30, 2016.

 

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within 12 months following the modification during the nine months ended September 30, 2017 and September 30, 2016:

 

   Nine months ended
   September 30, 2017  September 30, 2016
   Number of
Loans
  Recorded
Investment
   Number of
Loans
  Recorded
Investment
 
Commercial real estate  -  $-   -  $- 
Residential real estate  1   129   1   84 
Land and construction  -   -   2   550 
Commercial  1   165   -   - 
Total  2  $294   3  $634 

 

The troubled debt restructurings that subsequently defaulted described above had no impact on allowance for loan losses and increased the allowance for loan losses by $37 thousand during the nine months ended September 30, 2017 and September 30, 2016, respectively.

 

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

 

Credit Quality Indicators

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on an ongoing basis, but no less than annually for commercial loans with balances greater than $1 million. The Company uses the following definitions for risk ratings:

 

Pass. Loans classified as pass have satisfactory primary sources of repayment, with adequate secondary sources of repayment if necessary.

 

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.

 

 31 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 3 - Continued

 

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.

 

Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

   Pass  

Special

Mention

   Substandard   Doubtful   Total 
September 30, 2017                         
Commercial real estate  $604,262   $14,618   $13,969   $-   $632,849 
Residential real estate   369,485    2,852    10,465    -    382,802 
Land and construction   136,237    1,470    1,472    -    139,179 
Commercial   109,578    4,527    3,527    -    117,632 
Consumer and other loans   42,261    30    289    -    42,580 
Total  $1,261,823   $23,497   $29,722   $-   $1,315,042 
                          
December 31, 2016                         
Commercial real estate  $425,773   $16,545   $15,439   $4,914   $462,671 
Residential real estate   348,182    2,574    12,219    -    362,975 
Land and construction   91,213    3,590    1,577    -    96,380 
Commercial   91,293    3,670    3,614    1,179    99,756 
Consumer and other loans   44,523    51    320    -    44,894 
Total  $1,000,984   $26,430   $33,169   $6,093   $1,066,676 

 

Purchased Credit Impaired Loans

 

The Company has purchased loans, 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. At September 30, 2017 and December 31, 2016, the carrying amount of those loans is as follows:

 

 32 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 3 - Continued

 

   September 30, 2017   December 31, 2016 
Commercial real estate  $16,148   $16,193 
Residential real estate   5,151    5,879 
Land and construction   1,430    1,460 
Commercial   144    216 
Recorded Investment  $22,873   $23,748 
Allowance for loan losses   1,022    1,110 
Carrying amount  $21,851   $22,638 

 

Accretable yield, or income expected to be collected, is as follows:

 

   Three months ended   Nine months ended 
   September 30, 2017   September 30, 2016   September 30, 2017   September 30, 2016 
Balance at beginning of period  $15,086   $15,535   $14,164   $15,874 
New loan purchases   -    -    -    - 
Accretion of income   (793)   (874)   (2,332)   (2,785)
Reclassifications from nonaccretable difference   981    1,398    3,676    3,922 
Disposals   (232)   (1,416)   (466)   (2,368)
Balance at end of period  $15,042   $14,643   $15,042   $14,643 

 

For those purchased credit impaired loans disclosed above, the Company increased the allowance for loan losses by $60 thousand and decreased the allowance for loan losses by $275 thousand during the three-month period ending September 30, 2017 and 2016, respectively. The Company decreased the allowance for loan losses by $87 thousand and increased the allowance for loan losses by $211 thousand during the nine-month period ending September 30, 2017 and 2016, respectively.

 

There were no purchased credit impaired loans purchased during the three-month period ended, or nine-month period ended, September 30, 2017 or September 30, 2016, for which it was probable at acquisition that all contractually required payments would not be collected.

 

Income is not recognized on purchased credit impaired loans if the Company cannot reasonably estimate the cash flows expected to be collected. During the three-month period and nine-month period ended September 30, 2017 and September 30, 2016 there were no significant purchased credit impaired loans for which the cash flows could not be reasonably estimated.

 

 33 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 4 - FAIR VALUE

 

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

 

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 Company used the following methods and significant assumptions to estimate fair value:

 

Investment Securities: 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), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). 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). See below for additional discussion of Level 3 valuation methodologies and significant inputs. 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.

 

Derivatives: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third- party pricing services.

 

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is 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 independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans. A significant unobservable input in the income approach is the capitalization rate. At September 30, 2017 and December 31, 2016, the range of capitalization rates utilized to determine fair value of the underlying collateral ranged from 8.5% to 9.0% and from 7.0% to 11.25%, respectively. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy.

 

 34 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 4 - Continued

 

Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at the lower of charged down loan balance or fair value less costs to sell. This process may establish a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals that are periodically updated, as management deems necessary. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. A significant unobservable input in the income approach is the capitalization rate. At September 30, 2017 and December 31, 2016, the range of capitalization rates utilized to determine fair value of the underlying collateral ranged from 8.5% to 9.45% and from 9.2% to 13%, respectively.

 

Appraisals for both collateral-dependent impaired loans and real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Special Assets Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. In rare cases, when significant valuation differences exist, management may choose a valuation that lies within a range of two recent independent appraisals.

 

Loans Held For Sale: Loans held for sale are carried at the lower of cost or fair value, which is evaluated on a pool-level basis. The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors (Level 2).

 

 35 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 4 - Continued

 

Assets and liabilities measured at fair value on a recurring basis are summarized below:

 

   Fair Value Measurement Using: 
   Quoted Prices in
Active Markets
for Identical
Assess
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
   Total 
September 30, 2017                    
Financial Assets                    
Investment Securities available for sale                    
Agency notes and bonds  $-   $2,933   $-   $2,933 
Asset backed securities   -    16,456    -    16,456 
Small Business administration  securities   -    42,119    -    42,119 
Collateralized mortgage obligations   -    101,295    -    101,295 
Mortgage-backed securities   -    288,216    -    288,216 
Total investment securities available for sale  $-   $451,019   $-   $451,019 

 

   Fair Value Measurement Using: 
   Quoted Prices in
Active Markets
for Identical
Assess
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
   Total 
December 31, 2016                    
Financial Assets                    
Investment Securities available for sale                    
Agency notes and bonds  $-   $1,614   $-   $1,614 
Asset backed securities   -    16,880    -    16,880 
Small Business administration securities   -    48,796    -    48,796 
Collateralized mortgage obligations   -    44,362    -    44,362 
Mortgage-backed securities   -    234,982    -    234,982 
Total investment securities available for sale  $-   $346,634   $-   $346,634 

 

There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2017 and the year ended 2016.

 

 36 

 

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 4 - Continued

 

Assets measured at fair value with a related valuation allowance on a non-recurring basis are summarized below:

 

       Fair Value Measurements Using: 
   Carrying
Value
   Quoted Prices
in Active
Markets for
Identical
Assess
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
   Total 
September 30, 2017                         
Impaired loans:                         
Commercial real estate  $5,356   $-   $-   $5,356   $5,356 
Residential real estate   304    -    -    304    304 
Land and construction   50    -    -    50    50 
Commercial   2,653    -    -    2,653    2,653 
                          
Commercial real estate owned, net  $3,408   $-   $-   $3,408   $3,408 
Land and construction real estate owned, net  $2,643   $-   $-   $2,643   $2,643 

 

       Fair Value Measurements Using: 
   Carrying
Value
   Quoted Prices
in Active
Markets for
Identical
Assess
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
   Total 
December 31, 2016                         
Impaired loans:                         
Commercial real estate  $8,318   $-   $-   $8,318   $8,318 
Residential real estate   2,087    -    -    2,087    2,087 
Land and construction   730    -    -    730    730 
Commercial   21    -    -    21    21 
                          
Commercial real estate owned, net  $2,933   $-   $-   $2,933   $2,933 
Residential real estate owned, net  $2,583   $-   $-   $2,583   $2,583 

 

 37 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 4 - Continued

 

Fair Value of Financial Instruments

 

The carrying amounts and estimated fair values of financial instruments, at September 30, 2017 and December 31, 2016 are as follows:

 

   Carrying   Fair Value Measurements Using: 
   Value   (Level 1)   (Level 2)   (Level 3)   Total 
September 30, 2017                         
Financial Assets:                         
Cash and cash equivalents  $69,922   $69,922   $-   $-   $69,922 
Securities available for sale   451,019    -    451,019    -    451,019 
Securities held to maturity   170,194    -    168,923    -    168,923 
Federal Home Loan Bank stock   8,111    -    -    -    n/a 
Loans held for sale   7,548    -    7,707    -    7,707 
Loans, net   1,306,572    -    -    1,311,843    1,311,843 
Accrued interest receivable   5,660    -    -    5,660    5,660 
                          
Financial Liabilities:                         
Deposits – without stated maturities  $1,400,758   $1,400,758   $-   $-   $1,400,758 
Deposits – with stated maturities   338,794    -    339,796    -    339,796 
Securities sold under agreement to repurchase   4,191    -    4,191    -    4,191 
Federal Home Loan Bank advances   146,866    -    -    146,365    146,365 
Junior subordinated debentures   6,015    -    -    4,711    4,711 
Accrued interest payable   469    -    469         469 

 

   Carrying   Fair Value Measurements Using: 
   Value   (Level 1)   (Level 2)   (Level 3)   Total 
December 31, 2016                         
Financial Assets:                         
Cash and cash equivalents  $44,558   $44,558   $-   $-   $44,558 
Securities available for sale   346,634    -    346,634    -    346,634 
Securities held to maturity   178,232    -    176,286    -    176,286 
Federal Home Loan Bank stock   4,584    -    -    -    n/a 
Loans held for sale   8,384    -    8,633    -    8,633 
Loans, net   1,058,300    -    -    1,037,142    1,037,142 
FDIC indemnification asset   526    -    -    -    n/a 
Accrued interest receivable   4,543    -    -    4,543    4,543 
                          
Financial Liabilities:                         
Deposits – without stated maturities  $1,126,649   $1,126,649   $-   $-   $1,126,649 
Deposits – with stated maturities   352,159    -    353,375    -    353,375 
Federal Home Loan Bank advances   71,622    -    -    71,569    71,569 
Junior subordinated debentures   5,943    -    -    4,874    4,874 
Accrued interest payable   424    -    424         424 

 

 38 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 4 - Continued

 

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

 

(a)Cash and Cash Equivalent

 

The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

 

(b)Securities available for sale and Securities held to maturity

 

The fair value of securities available for sale are determined by obtaining quoted prices on national recognized securities exchanges (Level 1) or matrix pricing, which is a mathematical pricing technique used in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2).

 

(c)FHLB Stock

 

It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

 

(d)Loans held-for-sale

 

The fair value of loans held for sale is estimated based upon binding contracts from third party investors resulting in a level 2 classification.

 

(e)Loans

 

Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

 

(f)FDIC indemnification asset

 

It is not practical to determine the fair value of the FDIC indemnification asset due to the lack of its transferability.

 

(g)Accrued interest receivable

 

The carrying value of accrued interest receivable approximates fair value and is classified as Level 3.

 

(h)Deposits

 

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date i.e., their carrying amount) resulting in a Level 1 classification. The carrying amounts of variable rate, fixed- term money market accounts and certificates of deposit approximate their fair values at the reporting date resulting in a Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

 

 39 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 4 - Continued

 

(i)Securities sold under agreement to repurchase

 

The fair value amounts of securities sold under agreement to repurchase are considered equal to the carrying amount as these short-term borrowings have a one-day maturity.

 

(j)Federal Home Loan Bank advances

 

The fair values of Federal Home Loan Bank advances are determined by using a discounted cash flow calculation that applies interest rates currently offered on Federal Home loan Bank advances with similar averages lives and
characteristics resulting in a level 3 classification.

 

(k)Junior subordinated debentures

 

The fair values of the Company’s Junior Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

 

(l)Accrued Interest Payable

 

The carrying amounts of accrued interest payable approximate fair value and is classified as Level 2.

 

(m)Off-balance Sheet Instruments

 

Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

 

NOTE 5 - SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE

 

The Bank enters into short-term borrowing arrangements with our retail customers through agreements to repurchase (“securities sold under agreement to repurchase”). The Bank pledges investment securities owned and under the Bank’s control as collateral to secure these one-day borrowing arrangements. These short-term borrowings were acquired from our Jefferson Bank acquisition on July 28, 2017 and totaled $4.2 million on September 30, 2017. At September 30, 2017, the Bank pledged investment securities with a market value totaling $ 14.8 million, which represented 352% of the carrying amount of the borrowings.

 

Any risk related to these arrangements, primarily market value changes, are minimized due to the overnight (one-day) maturity and the additional collateral pledged over the borrowed amounts.

 

 40 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 6 - REGULATORY CAPITAL MATTERS

 

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. These rules require a capital conservation buffer of up to 2.5% above each of CET1, tier 1, and total risk-based capital that must be met for a bank to be able to pay dividends, engage in share buybacks or make discretionary bonus payments to executive management without restriction. This capital conservation buffer requirement is being phased in over a four-year period starting on January 1, 2016 and was 0.625% in 2016 and 1.25% as of January 1, 2017. At September 30, 2017 the capital conservation buffer was 7.75% for consolidated and 7.48% for Bank only, respectively. At December 31, 2016 the capital conservation buffer was 9.83% consolidated and 8.41% for Bank only. When fully implemented, a banking organization would need to maintain a CET1 capital ratio of at least 7%, a total Tier 1 capital ratio of at least 8.5% and a total risk-based capital ratio of at least 10.5%. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of September 30, 2017 and December 31, 2016, the Company and Bank meet all capital adequacy requirements to which they are subject.

 

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At September 30, 2017 and year-end 2016, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

 

 41 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 6 - Continued

 

Actual and required capital amounts and ratios are presented below at September 30, 2017 and December 31, 2016. The ratios for capital adequacy purposes do not include capital conservation buffer requirements.

 

   Actual   Required for Capital
Adequacy Purposes
   To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
 
   Amount   Ratio   Amount   Percent   Amount   Percent 
September 30, 2017                              
Total Capital to risk weighted assets                              
Consolidated  $233,394    15.75%  $118,587    8.00%   N/A    N/A 
Bank   229,238    15.48    118,432    8.00   $148,040    10.00%
Tier 1 (Core) Capital to risk weighted assets                              
Consolidated   225,318    15.20    88,940    6.00    N/A    N/A 
Bank   221,162    14.94    88,824    6.00    118,432    8.00 
Common Tier 1 (CET 1)                              
Consolidated   219,943    14.84    66,705    4.50    N/A    N/A 
Bank   221,162    14.94    66,618    4.50    96,226    6.50 
Tier 1 (Core) Capital to average assets                              
Consolidated   225,318    10.95    82,292    4.00    N/A    N/A 
Bank   221,162    10.76    82,207    4.00    102,759    5.00 

 

   Actual   Required for Capital
Adequacy Purposes
   To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
 
   Amount   Ratio   Amount   Percent   Amount   Percent 
December 31, 2016                              
Total Capital to risk weighted assets                              
Consolidated  $212,007    17.83%  $95,109    8.00%   N/A    N/A 
Bank   194,788    16.41    94,986    8.00   $118,733    10.00%
Tier 1 (Core) Capital to risk weighted assets                              
Consolidated   204,272    17.18    71,332    6.00    N/A    N/A 
Bank   187,054    15.75    71,240    6.00    94,986    8.00 
Common Tier 1 (CET 1)                              
Consolidated   199,643    16.79    53,499    4.50    N/A    N/A 
Bank   187,054    15.75    53,430    4.50    77,176    6.50 
Tier 1 (Core) Capital to average assets                              
Consolidated   204,272    11.52    70,929    4.00    N/A    N/A 
Bank   187,054    10.57    70,811    4.00    88,514    5.00 

 

 42 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 6 - Continued

 

Dividend Restrictions - The Company’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. During 2016, the Bank paid a dividend to the Holding Company of $13 million, which approximately represented the Bank’s 2014 and 2015 net income. At year-end 2016, the Bank could, without prior approval, declare dividends equal to the amount of net profits retained for 2016. At September 30, 2017, the Bank could without prior approval, declare dividends equal to the amount of net retained profits for 2016 plus the amount of profits retained during the first nine months of 2017.

 

NOTE 7 - LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES

 

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies that are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

 

The contractual amounts of financial instruments with off-balance-sheet risk at period-end were as follows:

 

   September 30, 2017   December 31, 2016 
Commitments to make loans  $59,326   $25,698 
Unused lines of credit  $245,218   $150,553 
Standby letters of credit  $8,887   $5,003 

 

The following instruments are considered financial guarantees and are carried at fair value, which approximates $0 at period end September 30, 2017 and December 31, 2016.

 

   September 30, 2017   December 31, 2016 
   Contract
Amount
   Fair
Value
   Contract
Amount
   Fair
Value
 
Standby letters of credit  $8,887   $-   $5,003   $- 
Loans sold with recourse  $60,548   $-   $67,425   $- 

 

 43 

 

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 8 - EARNINGS PER SHARE

 

   Three months ended   Nine months ended 
   September 30, 2017   September 30, 2016   September 30, 2017   September 30, 2016 
Basic                    
Net Income  $2,097   $2,263   $6,529   $5,485 
Average shares   21,549,855    20,052,300    20,557,322    20,052,300 
Basic earnings per share  $0.10   $0.11   $0.32   $0.27 
                     
Diluted                    
Net Income  $2,097   $2,263   $6,529   $5,485 
Weighted average shares for basic earnings per share   21,549,855    20,052,300    20,557,322    20,052,300 
Add: dilutive effects of assumed exercises of stock options   539,549    547,501    544,627    548,268 
Average shares and dilutive potential shares   22,089,404    20,599,801    21,101,949    20,600,568 
Diluted earnings per share  $0.09   $0.11   $0.31   $0.27 

 

There were no anti-dilutive stock options for the three months ended September 30, 2017 and September 30, 2016. There were no anti-dilutive stock options for the nine months ended September 30, 2017 and September 30, 2016.

 

NOTE 9 - BUSINESS COMBINATIONS

 

Jefferson Bankshares, Inc. acquisition

 

On July 28, 2017, the Company completed its acquisition of Jefferson Bankshares, Inc., the parent company of Jefferson Bank. Pursuant to and simultaneously with the merger of Jefferson Bankshares, Inc. with and into the Company, Jefferson’s wholly owned subsidiary, Jefferson Bank, merged with and into the Company’s subsidiary bank, Harbor Community Bank.

 

The Company’s primary reasons for the transaction were to expand geographically into the Tampa Bay area market on Florida’s west coast. The Company seeks to expand its customer base to enhance deposit fee income and leverage operating efficiencies through economies of scale. The acquisition increased the Company’s assets by 17.5% compared with balances at June 30, 2017 prior to the acquisition.

 

The acquisition was accounted for under the acquisition method of accounting in accordance with ACS topic 805, Business Combinations. The Company recognized $13.5 million of goodwill, which is nondeductible for tax purposes as this acquisition was a nontaxable transaction. Goodwill was calculated based on fair value estimates of the assets acquired and liabilities assumed as of acquisition date. Fair value estimates were based on current information available, and are subject to change for up to one year after closing date of the acquisition as additional information relative to closing values becomes available. Fair values are estimates and are subject to final valuation adjustments including appraisals on loans and bank property and final income tax returns or adjustments.

 

During the nine month period ended September 30, 2017, the company paid or accrued transaction costs of approximately $1.7 million relating to legal fees, valuation, investment banker fees, contract terminations, and other one-time costs associated with the Jefferson Bank acquisition. These costs were charged to operations during the period.

 

 44 

  

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 9 - Continued

 

The Company acquired 100% of the outstanding common stock of Jefferson Bankshares, Inc. The purchase price consisted of both cash and common stock of the Company. Each share of Jefferson Bankshares, Inc. was exchanged for 0.9676 per share of HCBF common stock. Jefferson shareholders had the option of receiving all stock or a portion of cash and stock as consideration. Under the acquisition agreement, the assigned value of Company’s stock per share was $14.50. In addition, the Company paid out all Jefferson common stock option holders. The payout price per option share was $14.03 less the option strike price per share. The table below summarizes the purchase price calculation.

 

Jefferson shares outstanding at closing on July 28, 2017   2,730,202 
Exchange ratio   0.9676 
Converted HCBF shares   2,641,742 
      
Converted HCBF shares receiving stock consideration   2,119,020 
Assigned value of HCBF shares  $14.50 
Total stock consideration  $30,726 
      
Converted HCBF shares receiving cash consideration   522,522 
Rounding shares receiving cash   200 
Total converted HCBF shares receiving cash consideration   522,722 
Assigned value of HCBF shares  $14.50 
Total cash consideration paid to shareholders  $7,579 
      
Jefferson common stock options outstanding at close   321,772 
Pre-conversion assigned cash price  $14.03 
Average strike price   (8.23)
Options pay out price  $5.80 
Total cash consideration paid to option holders (rounded)  $1,867 
      
Total purchase price  $40,172 

 

The table below summarizes the estimates of fair value of the assets purchased, including goodwill, and liabilities assumed as of the July 28, 2017 purchase date.

 

Assets:     
Cash and cash equivalents  $16,654 
Investment securities available for sale   44,420 
Loans held for investment   243,803 
Federal Home Loan Bank stock and other   2,918 
Premises and Equipment   4,320 
Goodwill   13,464 
Core Deposit Intangible   3,735 
Accrued interest receivable and other assets   806 
Total fair value of assets acquired  $330,120 
      
Liabilities:     
Deposits  $231,375 
Securities sold under agreement to repurchase   5,847 
Federal Home Loan Bank advances   46,963 
Senior note payable   3,030 
Deferred tax liability   156 
Official checks   1,349 
Accrued interest payable and other liabilities   1,228 
Total fair value of liabilities assumed  $289,948 

 

 45 

 

HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

NOTE 9 - Continued

 

The Company acquired $243.8 million of loans at fair value, net of discount of $2.7 million or 1.11% of outstanding principal balance. The fair value of loans acquired represented 22.9% of the Company’s total loans at June 30, 2017 prior to the acquisition.

 

Pursuant to ASC Topic 310-30, at acquisition, management did not identify any loans that would qualify as purchase credit impaired. However, management identified three unsecured credit lines with outstanding principal totaling $953 thousand for which further cash flows were considered doubtful. These loans were fully discounted at acquisition. Management believed all other acquired loans are collectable under contractual loan terms.

 

The table below presents the unpaid principal balance (“Book Balance”) and the fair values of loans acquired at the acquisition date.

 

   Book   Fair 
   Balance   Value 
Loans:          
Commercial real estate  $124,181   $122,932 
Residential real estate   60,453    60,269 
Land and construction   37,421    36,966 
Commercial   23,048    22,208 
Consumer and other loans   1,445    1,428 
Total acquired loans  $246,548   $243,803 

 

In the assumption of deposit liabilities, the Company believed the deposit relationships acquired from the Jefferson transaction have an intangible economic value. Pursuant to ASC Topic 805, which prescribes the accounting for goodwill and intangible assets such as core deposit intangibles, the Company estimated the fair value of core deposit intangible at $3.7 million on acquisition date. The core deposit intangible will be amortized using an accelerated amortization method over an estimated economic life not to exceed ten years. In determining the valuation amount of the core deposit intangible, the Company considered factors such as type of deposit, historical deposit retention, interest rates and age of deposit relationships.

 

The Company paid off the senior note payable shortly after closing at carrying value of $3.030 million with no associated gain or loss.

 

Announced Acquisition of HCBF Holding Company, Inc. by CenterState Bank Corporation

 

On August 12, 2017, HCBF Holding Company, Inc. (“HCBF”) and CenterState Bank Corporation (“CenterState”) entered into an Agreement and Plan of Merger (the “merger agreement”), that provides for the combination of the two companies. Pursuant to the merger agreement, HCBF will merge with and into CenterState, with CenterState as the surviving company (the “merger”). Immediately thereafter, HCBF’s direct wholly-owned subsidiary, Harbor Community Bank, will be merged with and into CenterState’s direct wholly-owned subsidiary, CenterState Bank N.A. (“CenterState Bank”), with CenterState Bank being the surviving subsidiary bank of CenterState (the “bank merger”). Under the terms of the merger agreement, each outstanding share of HCBF common stock will be converted into the right to receive 0.675 shares of CenterState common stock and $1.925 in cash. The transaction was unanimously approved by the boards of directors of both companies. The transaction is expected to close in the first quarter of 2018 subject to customary closing conditions, including receipt of all applicable regulatory approvals and shareholder approval of both companies.

 

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HCBF HOLDING COMPANY, INC.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts shown in tables in thousands, except share data)

 

 

NOTE 10 - Disaster Recovery - Hurricane Irma

 

On September 10, 2017, Hurricane Irma, a large powerful storm, made landfall in the Florida Keys and moved northward to impact most regions of the State of Florida. Immediately upon passing of the storm, the Company’s management team implemented disaster recovery procedures to assess the property damage and business impact to our Company, our customers, our employees, and our significant vendors.

 

Fortunately, the Company experienced no significant property damage to any of its branch offices, administrative offices or foreclosed properties. Additionally, our employees were able to return to work safely with some minimal delays or disruptions shortly after the passing of the storm. The majority of our retail banking locations were open for normal business within 24 hours after the storm and all branch offices were open for business within 48 hours after the storms’ passing. Branch opening and processing delays were generally caused by power loss, loss of data connectivity, or both. The Company had equipment and alternative processing procedures to help minimize customer disruptions caused by these outages.

 

The storm did have a significant impact on our loan origination volume during September 2017. We were unable to timely originate, process, close, and sell residential loans for several weeks after the storm as the collateral for these loans required additional inspections and damage assessment. As a result, our gains on loan sales during third quarter of 2017 was $231 thousand below the gains we recorded in the prior quarter. The business impact to our customers was sporadic and geographically wide spread but generally concentrated in Highlands and St. Johns counties. The Company has received approximately 100 requests for loan payment deferral, with a recorded investment of approximately $18.9 million, from our customers due to storm hardships. The Company provides payment deferrals of up to 60 to 90 days for qualifying customers. The Company continues to accrue interest income on loans with deferred payments and the loan amortization and loan maturity are extended accordingly.

 

The Company believes that there will be no significant impact from Hurricane Irma on our operating results in the fourth quarter of 2017. Furthermore, we do not expect to submit any loss damage or business interruption claims to our insurance carriers relating to the storm.

 

NOTE 11 - SUBSEQUENT EVENTS

 

On October 11, 2017, the Company and the FDIC mutually agreed to terminate the FDIC loss share agreement relating to the Putnam State Bank acquisition in June 2012. Under the terms of the FDIC loss share agreement, the FDIC was obligated to reimburse the Company 80% of losses, less recoveries, on qualifying assets for a five-year period ending June 30, 2017. The Company was obligated reimburse the FDIC 80% of recoveries, less costs, on qualifying assets where a loss share claim was previously submitted to the FDIC. The Company’s reimbursement obligation was for a three-year period ending June 30, 2020. In addition, the Company was obligated to pay the FDIC, at the end of the contract, a claw back amount provided that overall losses were a specified amount less than original FDIC loss estimates. Under the terms of the termination agreement, the Company paid $1.3 million to the FDIC to cancel the contract and forgive the accrued claw back amount of approximately $900 thousand. The Company will no longer be required to reimburse the FDIC for losses on qualifying assets. The Company expects to record a pre-tax loss of approximately $340 thousand on termination of the FDIC loss share contract in the fourth quarter of 2017.

 

 47 

 

 

ITEM 2:        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

COMPARISON OF BALANCE SHEETS AT SEPTEMBER 30, 2017 AND DECEMBER 31, 2016

 

Overview

 

Our total assets increased approximately $389.7 million or 21.8% from December 31, 2016 to September 30, 2017, which was the result of our acquisition of Jefferson Bank on July 28, 2017 and organic balance sheet growth. The Jefferson Bank acquisition added $330.1 million of assets measured at fair value during the third quarter of 2017. In addition, we acquired $243.8 million of loans measured at fair value, $231.4 million of deposits and increased our net worth capital by $ 30.7 million as a result of the Jefferson acquisition. Our loan balances, exclusive of acquired Jefferson loans, increased by $ 4.7 million or .45% for the nine months ended September 30, 2017. Our organic deposit growth, exclusive of acquired Jefferson deposits, was $29.3 million or 2.0% for nine months ended, September 30, 2017. The Jefferson acquisition helped increase our loan-to-deposit ratio to 75.6% at September 30, 2017, compared to 68.2% at June 30, 2017 and 72.1% at December 31, 2016.

 

A detailed discussion and analysis of balance sheet changes for the period is shown below and on the following pages.

 

Interest-earning deposits in other financial institutions

 

Interest-earning deposits in other financial institutions represent overnight deposits at the Federal Reserve and other correspondent banks. These balances are an integral part of our day-to-day cash management and liquidity. During the nine months ended September 30, 2017, these balances increased by $21.9 million or 206.3%. The higher balances at September 30, 2017 were available to cover seasonal day-to-day deposit balance volatility.

 

Investment securities available for sale

 

Securities available for sale, consisting of primarily U.S. government and U.S. government sponsored enterprises mortgage-backed securities were $451.0 million at September 30, 2017 representing 20.7% of total assets. Securities available for sale at December 31, 2016 were $346.6 million, representing 19.4% of total assets. The increase during the period represented investment of funds generated from deposit growth as well as approximately $44.4 million of securities from the Jefferson Bank acquisition. We use securities available for sale primarily for liquidity purposes, to fund new loan growth, to provide flexibility to respond to changing interest rate environments, and secondarily, for investment yield. Our available for sale securities are carried at fair value.

 

Investment securities held to maturity

 

At September 30, 2017, we had $170.2 million, carried at amortized cost, of securities designated as held to maturity. This compares to $178.2 million, at amortized cost, as of December 31, 2016. The reduction of $8.0 million of securities held for sale between December 31, 2016 and September 30, 2017 was due to principal repayments and amortization of premiums and discounts on these securities. The unrealized loss on securities held to maturity was $1.3 million and $1.9 million on September 30, 2017 and December 31, 2016 respectively. Securities designated as held to maturity generally have longer portfolio durations and are primarily held for investment yield, and secondarily, for cash flow provided from security repayments and prepayments.

 

Loans

 

Our loan portfolio is the most important component driving our net interest income and is a major contributor to our overall profitability. The loan portfolio is the largest component of our earning assets. At September 30, 2017, our net loan portfolio was $1.3 billion, which was 59.9% of assets compared to $1.1 billion and 59.1% of assets at December 31, 2016. The increase in net loans during the nine-month period ended September 30, 2017 was $248.2 million or 23.5%. The primary reason for the increase in net loan balances during the period was the addition of $243.8 million of loans, measured at fair value, from the Jefferson Bank acquisition.

 

The table below reflects loans by collateral type including and excluding purchased credit impaired (PCI) loans for the dates shown:

 

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LOANS BY COLLATERAL TYPE

 

   September 30, 2017   December 31, 2016 
Loans excluding PCI Loans          
Commercial real estate  $616,700   $446,478 
Residential real estate   377,651    357,096 
Land and construction   137,750    94,920 
Commercial   117,488    99,540 
Consumer & Other Loans   42,580    44,894 
Subtotal   1,292,169    1,042,928 
Net unearned fees & costs   (558)   (738)
Total  loans excluding PCI  $1,291,611   $1,042,190 

 

   September 30, 2017   December 31, 2016 
PCI Loans (ACS Topic 310-30)          
Commercial real estate  $16,148   $16,193 
Residential real estate   5,151    5,879 
Land and construction   1,430    1,460 
Commercial   144    216 
Total PCI loans   22,873    23,748 
Total Loans   1,314,484    1,065,938 
Allowance for loan losses for non PCI Loans   (6,890)   (6,528)
Allowance for loan losses for PCI loans   (1,022)   (1,110)
Total  loans, net of allowance for loan losses  $1,306,572   $1,058,300 

 

Allowance for loan losses

 

We maintain the allowance for loan losses at a level sufficient to provide for probable credit losses inherent in the loan portfolio. Credit losses arise from the borrowers’ inability or unwillingness to repay, and from other risks inherent in the lending process including collateral risk, operational risk, concentration risk and economic risk. As such, all related risks of lending are considered when assessing the adequacy of the allowance for loan losses.

 

The allowance for loan losses is increased by the provision for loan losses, which is a charge to current earnings. The allowance for loan losses is reduced by loan charge-offs, net of loan recoveries of prior loan charge-offs. Loans are charged off against the allowance when management has confirmed the loss and believes collection of principal is unlikely. The table below reflects that activity in allowance for loan losses, by loan type, for the periods shown.

 

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ANALYSIS OF ALLOWANCE FOR LOAN LOSSES

 

  

Three months ended, September 30,

  

Nine months ended, September 30,

 
   2017   2016   2017   2016 
                 
Balance at Beginning of Period  $7,120   $4,639   $7,638   $3,728 
                     
Charge-Offs:                    
Commercial real estate   2    268    1,022    568 
Residential real estate   150    97    465    100 
Land and construction   -    149    106    175 
Commercial   -    -    808    201 
Consumer & Other Loans   72    103    307    415 
Total Charge-Offs   224    617    2,708    1,459 
                     
Recoveries:                    
Commercial real estate   27    9    66    19 
Residential real estate   80    117    204    203 
Land and construction   15    10    43    47 
Commercial   47    21    213    92 
Consumer & Other Loans   22    29    68    84 
Total Recoveries   191    186    594    445 
Net Charge-Offs   33    431    2,114    1,014 
Provision for Loan Losses   825    347    2,388    1,841 
Balance at End of Period  $7,912   $4,555   $7,912   $4,555 
                     
Ratio of Net Charge-Offs to Average Loans Outstanding   0.00%   0.04%   0.19%   0.10%
Allowance for Loan Losses as a Percent of Loans at End of Period   0.60%   0.45%   0.60%   0.45%
Allowance for Loan Losses as a Multiple of Net Charge-Offs   239.8x   10.6x   3.7x   4.5x

 

Our allowance for loan losses as a percentage of loans at period end was 0.60% at September 30, 2017 compared to 0.72% at December 31, 2016. The decrease was primarily attributable to additional loans acquired from the Jefferson acquisition, measured at fair value, during the nine months ended September 30, 2017. The table below reflects the amount of the allowance for loan losses allocated to each loan type at the dates shown. The allocation of allowance to a particular loan type does not limit its ability to absorb losses in another loan type.

 

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ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

 

   September 30, 2017   December 31, 2016 
   Allowance
Amount
   Allowance Amount
to Total Loans
   Allowance
Amount
   Allowance Amount
to Total Loans
 
Commercial real estate  $3,593    0.27%  $3,316    0.31%
Residential real estate   1,393    0.11    1,990    0.19 
Land and construction   419    0.03    344    0.03 
Commercial   2,204    0.17    1,790    0.17 
Consumer & Other   303    0.02    198    0.02 
Not Allocated   -    -    -    - 
Total  $7,912    0.60%  $7,638    0.72%

 

Nonperforming loans and Nonperforming assets

 

Nonperforming loans exclude accreting PCI loans and include non-accrual loans and loans 90 days or more past due and still accruing. PCI loans are excluded from the nonperforming loan category due to the accretion of acquired loan discounts into income. Non-performing assets include non-accrual loans, loans 90 days or more past due and still accruing, and other real estate owned (OREO). At September 30, 2017, non-accrual loans and loans 90 days or more past due and still accruing totaled $27.5 million compared to $33.3 million at December 31, 2016, representing a decrease of $5.8 million or 17.4% for the nine-month period. At September 30, 2017, OREO totaled $8.1 million compared to $9.0 million at December 31, 2016, representing a decrease of $954 thousand or 10.6% for the nine-month period. Non-performing assets totaled $35.6 million at September 30, 2017 compared to $42.3 million at December 31, 2016, representing a $6.7 million or 15.8% decrease for the nine-month period. The table below reflects the activity of nonperforming assets, including non-accrual loans and OREO, for the periods shown.

 

NONPERFORMING ASSET ACTIVITY

 

  

Three months ended, September 30,

  

Nine months ended, September 30,

 
   2017   2016   2017   2016 
NPA beginning balance  $38,662   $39,735   $42,345   $36,253 
Change in nonaccrual loans and accruing loans 90 days or more past due:                    
Beginning balance   29,997    26,912    33,327    23,158 
Additions   5,778    8,074    16,580    22,848 
Charge-Offs   (36)   (384)   (2,303)   (1,228)
Transferred to OREO   -    (584)   (2,743)   (1,560)
Paid Off/Payments   (2,823)   (2,768)   (6,942)   (7,558)
Restored to accrual   (5,368)   (1,918)   (10,371)   (6,328)
Ending balance   27,548    29,332    27,548    29,332 
                     
Change in OREO:                    
Beginning Balance   8,665    12,823    9,018    13,095 
Loans transferred to OREO   -    584    2,743    1,560 
Transfers from premises and equipment   -    146    -    1,355 
OREO acquired through acquisitions   -    -    -    - 
Net Change in valuation allowance   (228)   (329)   (936)   (897)
Sales   (373)   (1,342)   (2,761)   (3,231)
Ending Balance   8,064    11,882    8,064    11,882 
NPA Net Change   (3,050)   1,479    (6,733)   4,961 
NPA Ending Balance  $35,612   $41,214   $35,612   $41,214 

 

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The table below shows nonaccrual loans and loans 90 days or more past due and still accruing by loan type as well as information on, past due balances, and non-performing loan ratios.

 

RISK ELEMENT ASSETS

 

   September 30, 2017   December 31, 2016 
         
Non-accruing Loans and accruing loans 90 days or more past due:          
Commercial real estate  $13,133   $14,350 
Residential real estate   9,249    11,447 
Land and construction   1,156    4,810 
Commercial   3,754    2,370 
Consumer & Other Loans   256    350 
Total Non-performing Loans (“NPLs”)   27,548    33,327 
Other Real Estate Owned   8,064    9,018 
Total Non-performing Assets (“NPAs”)  $35,612   $42,345 
           
Past Due Loans 30 – 89 days (accruing)  $18,851   $17,697 
Past Due Loans 90 days or more (accruing)  $4,274   $6,075 
Performing Troubled Debt Restructurings  $3,814   $4,667 
Non-Performing Loans/Loans   2.08%   3.11%
Non-performing Assets/Total Assets   1.64%   2.37%
Non-performing Assets/Loans Plus OREO   2.68%   3.92%
Allowance /Non-performing Loans   28.72%   22.92%

 

Bank Premises and equipment

 

Bank premises and equipment was $53.9 million at September 30, 2017 compared to $51.4 million at December 31, 2016, an increase of $2.5 million or 4.8%. The increase primarily relates to premises and equipment acquired from the Jefferson acquisition measured at fair value. The table below reflects a summary of the components of bank premises and equipment for the periods shown.

 

PREMISES AND EQUIPMENT

 

   September 30, 2017   December 31, 2016 
Land  $19,211   $17,001 
Buildings   33,196    32,079 
Furniture, fixtures and equipment   8,654    8,173 
Leasehold improvements   3,177    2,404 
Automobiles   148    158 
Subtotal   64,386    59,815 
Less accumulated depreciation   10,466    8,373 
Total  $53,920   $51,442 

 

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Deposits

 

Total deposits at September 30, 2017 was $1.7 billion compared to $1.48 billion at December 31, 2016, representing an increase of $260.7 million or 17.6% for the period. The growth in deposits was primarily related to the Jefferson Bank acquisition. The Company acquired approximately $231.3 million of deposits in the Tampa Bay region of Florida from Jefferson Bank during the third quarter of 2017. Excluding the deposits acquired from Jefferson Bank, deposits increased by $29.4 million or 2.0% for nine months ended September 30, 2017. Noninterest bearing deposits as a percentage of total deposits increased from 30% at December 31, 2016 to 32% at September 30, 2017.

 

We believe our deposit base is well diversified among the various deposit products as shown in the table below as of the dates presented.

 

   September 30, 2017   % of
total
   December 31, 2016   % of
total
 
Noninterest-bearing deposits  $558,162    32%  $444,745    30%
NOW accounts   229,001    13%   204,951    14%
Money market accounts   426,301    25%   312,219    21%
Savings   187,293    11%   164,734    11%
Time deposits   338,795    19%   352,159    24%
Total deposits  $1,739,552    100%  $1,478,808    100%

 

We continue to focus on the value of our deposit franchise, which produces a strong base of core deposits with minimal reliance on wholesale funding.

 

Federal Home Loan Bank Advances

 

Federal Home loan Bank advances are a key source of liquidity and funding for our day-to-day operations and our long-term financing needs. We borrow funds from the Federal Home Loan Bank to cover intraday cash shortfalls, to cover temporary deposit outflows, to finance asset purchases such as loans and investments securities, and to provide long-term funding to help mitigate interest rate risk in a rising interest rate environment. At September 30, 2017, Federal Home Loan Bank Advances totaled $146.9 million compared to $71.6 million at December 31, 2016, representing an increase of $75.2 million or 105.1%. The increase resulted from $47.0 million of advances acquired from the Jefferson Bank acquisition measured at fair value and $28.2 million net new advances used to fund short-term, seasonal deposit outflows.

 

Stockholders’ Equity

 

Stockholders’ equity totaled $256.8 million at September 30, 2017 compared to $217.7 million at December 31, 2016 for an increase of $39.1 million or 18.0%. The increase in Stockholders’ equity was primarily related to $30.7 million of additional capital from the Jefferson Bank acquisition. The $30.7 million of additional capital from Jefferson represented $40.2 million of net assets acquired, measured at fair value, including goodwill and core deposit intangible, less $9.4 million of cash consideration paid to Jefferson stockholders and option holders. Stockholders’ equity also increased by $6.5 million due to retained earnings and $1.2 million due to a reduction in accumulated other comprehensive income during the period. The reduction in accumulated other comprehensive loss during the first nine months of 2017 was attributable to improved market values on our available of sale investment securities, net of tax.

 

We continue to maintain a strong capital position. The ratio of stockholders’ equity to total assets at September 30, 2017 and December 31, 2016 was 11.8% and 12.2%, respectively. Our regulatory Tier 1 leverage ratio was 10.95% and 11.52% at September 30, 2017 and December 31, 2016, respectively. Our Common Tier 1 (CET 1) ratio was 14.84% at September 30, 2017 compared to 16.79% at December 31. 2017. Our regulatory total risk-weighted capital ratio and regulatory Tier 1 risk-weighted ratio at September 30, 2017 was 15.75% and 15.20%, respectively. Our regulatory total risk-weighted capital ratio and regulatory Tier 1 risk-weighted ratio at December 31, 2016 was 17.83 and 17.18%, respectively.

 

We did not pay a dividend to our stockholders during the first nine months of 2017 or during the full year of 2016.

 

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COMPARISON OF RESULTS OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

 

Overview

 

We recognized net income of $2.1 million or $0.09 per share basic and $0.09 per share diluted for the three- month period ended September 30, 2017, compared to $2.3 million or $0.11 per share basic and $0.10 per share diluted for the same period in 2016. A condensed summary of the differences are listed in the table below.

 

CONDENSED SUMMARIZED OVERVIEW OF OPERATIONS

 

   Three months ended   Increase 
   September 30, 2017   September 30, 2016   (Decrease) 
Net Interest Income  $17,789   $14,505   $3,284 
Provision for loan losses   825    347    478 
Net interest income after loan loss provision   16,964    14,158    2,806 
Noninterest income   3,088    3,405    (317)
Noninterest expense   16,591    13,901    2,690 
Income before taxes   3,461    3,662    (201)
Income tax expense   1,364    1,399    (35)
Net Income  $2,097   $2,263   $(166)
                
Earnings per share - Basic  $0.10   $0.11   $(0.01)
Earnings per share - Diluted  $0.09   $0.11   $(0.02)

 

The primary difference between the two quarters presented above relate to increased net interest income and increased non-interest expense. The net interest income and non-interest expense included two months of Jefferson’s operations in the three months ended September 30, 2017. These items are discussed and analyzed in further detail below.

 

Net interest income and net interest margin

 

Net interest income increased $3.3 million or 22.6% to $17.8 million during the three-month period ended September 30, 2017 compared to $14.5 million for the same period in 2016. The $3.3 million increase in net interest income was the result of a $3.7 million increase in interest income offset by $453 thousand increase in interest expense. Interest income and interest expense were higher primarily due to the Jefferson acquisition and organic growth during the three months ended September 30, 2017 compared to the same period in 2016.

 

Interest-earning assets averaged $1.9 billion during the three-month period ended September 30, 2017 as compared to $1.6 billion for the same period in 2016, for an increase of $298.4 million or 18.8%. The yield on average interest earning assets increased by .14% to 4.13% during the three-month period ended September 30, 2017, compared to 3.99% for the same period in 2016. The increase in yield on interest-earning assets during the third quarter of 2017 compared to the third quarter of 2016 was primarily due to a better asset mix between higher yielding loans compared to lower yielding investment securities mostly due to the Jefferson acquisition.

 

Interest-bearing liabilities averaged $1.3 billion during the three-month period ended September 30, 2017 as compared to $1.1 billion for the same period in 2016, for increase of $172.2 million or 15.36%. The yield on average interest-bearing liabilities increased 7 basis points to 0.58% during the three-month period ended September 30, 2017, compared to 0.51% for the same period in 2016. The higher average interest-earning liability balances and the higher interest-bearing liabilities yields produced higher interest expense during the three-month period ended September 30, 2017 compared to the same period in 2016.

 

 54 

 

The table below summarizes the analysis of changes in interest income and interest expense for the three-month periods ended September 30, 2017 and September 30, 2016.

 

NET INTEREST INCOME AND INTERET MARGIN

 

   Three months ended 
   September 30, 2017   September 30, 2016 
   Average
Balance
   Interest   Average
Rate
   Average
Balance
   Interest   Average
Rate
 
ASSETS                              
Loans, net of unearned income  $1,240,545   $16,199    5.18%  $1,007,026   $13,343    5.27%
Investment securities   622,151    3,298    2.10    563,382    2,505    1.77 
Interest earning deposits and other   25,630    179    2.77    19,428    91    1.86 
Total earning assets  $1,888,326   $19,676    4.13%  $1,589,836   $15,939    3.99%
Cash & Due from banks   35,180              29,614           
Allowance for loan losses   (7,373)             (4,622)          
Other assets   179,067              168,071           
TOTAL ASSETS  $2,095,200             $1,782,899           
                               
LIABILITIES                              
Interest-bearing Checking & NOW accounts  $227,955   $128    0.22%  $190,343   $71    0.15%
Money Market accounts   409,378    356    0.35    304,837    186    0.24 
Savings accounts   184,928    119    0.26    172,415    114    0.26 
Other Time Deposits   341,934    820    0.95    352,980    761    0.86 
Total interest-bearing deposits  $1,164,195   $1,423    0.48%  $1,020,575   $1,132    0.44%
FHLB Advances   118,434    368    1.23    93,965    216    0.91 
Securities sold under agreement to repurchase   4,011    3    0.30    -    -    - 
Subordinated debentures and other   6,826    93    5.41    6,677    86    5.12 
Total interest-bearing liabilities  $1,293,466   $1,887    0.58%  $1,121,217   $1,434    0.51%
Noninterest-bearing deposits   531,750              421,235           
Other liabilities   22,468              20,183           
TOTAL LIABILITIES  $1,847,684             $1,562,635           
                               
STOCKHOLDERS’ EQUITY                              
TOTAL STOCKHOLDERS’ EQUITY   247,516              220,264           
                               
TOTAL LIABILITIES & EQUITY  $2,095,200             $1,782,899           
                               
Interest rate spread             3.56%             3.48%
Net interest income       $17,789             $14,505      
Net interest margin             3.74%             3.63%

 

Our net interest margin increased by 11 basis points to 3.74% for the three-month period ended September 30, 2017, compared to 3.63% for the same period in 2016. The primary reason for the increase in net interest margin for the three-month period ending September 30, 2017 compared to the same period in 2016 was attributable to a better asset mix between higher yielding loans and lower yielding investment securities in the September 30, 2017 period as shown. Loan yields declined during the 2017 period primarily due to reduced discount accretion on acquired loans. Net loan discount accretion on acquired loans was $792 thousand for the three-month period ended 2017 compared to $923 thousand for the same period in 2016.

 

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Provision for Loan Losses

 

The provision for loan losses increased $478 thousand to $825 thousand during the three-month period ended September 30, 2017 compared to provision expense of $347 thousand for the same period in 2016. The higher loan loss provision in the 2017 period compared to the 2016 period was primarily attributable to increased specific impairments on acquired loans in the 2017 period of $139 thousand compared to reversed specific impairments of $(291) thousand in the 2016 period.

 

Noninterest income

 

Our noninterest income decreased by $317 thousand to $3.1 million or 9.3% for the three-month period ended September 30, 2017, compared to $3.4 million for the same period in 2016. The decrease was the result of the following components reflected in the table below.

 

NONINTEREST INCOME

 

  

Three months ended September 30,

   Increase   %
Increase
 
   2017   2016   (Decrease)   (Decrease) 
Service charges on deposit accounts  $873   $595   $278    46.7%
ATM interchange income   736    721    15    2.1 
Net gain on sale of  loans   727    1,312    (585)   (44.6)
Net gains on sale of securities available for sale   4    282    (278)   (98.6)
Bank owned life insurance income   256    279    (23)   (8.2)
FDIC indemnification asset amortization, net   (70)   (283)   213    (75.3)
Purchase credit impaired loans recoveries   253    251    2    0.8 
Other   309    248    61    24.6 
Total Noninterest Income  $3,088   $3,405   $(317)   (9.3)%

 

Service charges on deposit accounts for the three-month period ended September 30, 2017 was $873 thousand, compared to $595 thousand for the same period in 2016 resulting in an increase of $278 thousand or 46.7%. The increase in services charges on deposit accounts was attributable to a new deposit fee pricing structure implemented in the fall of 2016 as well as additional service charges from the Jefferson acquisition during quarter three of 2017. Net gain on the sale of loans for the three-month period ended September 30, 2017 was $727 thousand, compared to $1.3 million for the same period in 2016 resulting in a decrease of $585 thousand or 44.6%. The decrease in net gains on loan sales was attributable to lower profit margins on sold loans, fewer loans sold due to processing delays from Hurricane Irma (see footnote 10 of the unaudited financial statements for discussion on disaster recovery) in September 2017, and fewer SBA loans sold with high profit margins in the three months ended September 30, 2017 compared to the same period in 2016. Net gains on sale of investment securities for the three-month period ended September 30, 2017 was $4 thousand, compared to $282 thousand for the same period in 2016 resulting in a decrease of $278 thousand or 98.6%. The cost associated with the FDIC indemnification asset declined to $70 thousand for the three-month period ended September 30, 2017 compared to $283 thousand for a decrease of $213 thousand or 75.3% from the same period in 2016.

 

Noninterest expense

 

Our noninterest expense increased by $2.7 million or 19.4% to $16.6 million for the three-month period ended September 30, 2017, compared to $13.9 million for the same period in 2016. The increase was the result of the following components reflected in the table below.

 

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NONINTEREST EXPENSE

 

  

Three months ended September 30,

   Increase   %
Increase
 
   2017   2016   (Decrease)   (Decrease) 
Salaries and employee benefits  $7,849   $7,040   $809    11.5%
Occupancy and equipment   2,205    2,112    93    4.4 
Data processing   1,610    1,595    15    0.9 
Regulatory assessments   252    198    54    27.3 
Professional fees   510    426    84    19.7 
Office expense and supplies   366    350    16    4.6 
Foreclosed assets, net   314    456    (142)   (31.1)
Advertising   139    170    (31)   (18.2)
Amortization of Intangibles   677    606    71    11.7 
Acquisition and conversion costs   1,745    73    1,672    2,290.4 
Other   924    875    49    5.6 
Total  Noninterest Expense  $16,591   $13,901   $2,690    19.4%

 

Salaries and employee benefits increased by $809 thousand or 11.5% during the three-month period ended September 30, 2017 compared to the same period in 2016 primarily due to additional salaries and benefits of officers and staff acquired from the Jefferson acquisition in the third quarter of 2017. Foreclosed asset expense declined by $142 thousand or 31.1% in the three-month period ended September 30, 2017 compared to the same period in 2016 primarily due to a reduction of foreclosed properties and fewer property write-downs in the 2017 period. Acquisition and conversion costs were $1.7 million for the three months ended September 30, 2017 compared to $73 thousand for the same period in 2016 for an increase of $1.672 million. The increase in acquisition costs during the 2017 period was primarily related to the Jefferson acquisition.

 

Provision of Income Taxes

 

Our income tax expense for the three-month period ended September 30, 2017 was $1.4 million on pretax income of $3.5 million at an effective tax rate of 39.4% compared to $1.4 million on pretax income of $3.7 million at an effective tax rate of 38.2% for the same period in 2016.

 

 57 

  

COMPARISON OF RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

 

Overview

 

During the first nine months of 2017, we recognized net income of $6.5 million or $0.32 per share basic and $0.31 per share diluted, compared to $5.5 million or $0.27 per share basic and $0.27 per share diluted for the same period in 2016. A condensed summary of the differences are listed in the table below.

 

CONDENSED SUMMARIZED OVERVIEW OF OPERATIONS

 

   Nine months ended   Increase 
   September 30, 2017   September 30, 2016   (Decrease) 
Net Interest Income  $48,461   $44,354   $4,107 
Provision for loan losses   2,388    1,841    547 
Net interest income after loan loss provision   46,073    42,513    3,560 
Noninterest income   9,346    8,887    459 
Noninterest expense   44,985    42,291    2,694 
Income before taxes   10,434    9,109    1,325 
Income tax expense   3,905    3,624    281 
Net Income  $6,529   $5,485   $1,044 
                
Earnings per share - Basic  $0.32   $0.27   $0.05 
Earnings per share - Diluted  $0.31   $0.27   $0.04 

 

The primary difference between the two periods presented above relate to increased net interest income and increased noninterest expense during the nine months ended September 30, 2017 as compared to the same period in 2016. These items are discussed and analyzed in further detail below.

 

Net interest income and Net interest margin

 

Net interest income increased $4.1 million or 9.3% to $48.5 million during the nine-month period ended September 30, 2017 compared to $44.4 million for the same period in 2016. The $4.1 million increase was the result of a $4.9 million increase in interest income offset by $811 thousand increase in interest expense.

 

Interest-earning assets averaged $1.7 billion during the nine-month period ended September 30, 2017 as compared to $1.6 billion for the same period in 2016, and increase of $169.0 million or 10.8%. The yield on average interest-bearing assets decreased 2 basis points to 4.11% during the nine-month period ended September 30, 2017, compared to 4.13% for the same period in 2016. The higher average interest-earning asset balances more than offset the lower interest-earning assets yields to produce higher interest income during the nine-month period ended September 30, 2017 compared to the same period in 2016.

 

Interest-bearing liabilities averaged $1.2 billion during the nine-month period ended September 30, 2017 as compared to $1.1 billion for the same period in 2016, an increase of $81.6 million or 7.3%. The yield on average-interest bearing liabilities increased 5 basis points 0.56% during the nine-month period ended September 30, 2017, compared to 0.51% for the same period in 2016. The higher average interest-earning liability balances plus the higher interest-bearing liabilities yields produced higher interest expense during the nine-month period ended September 30, 2017 compared to the same period in 2016.

 

The table below summarizes the analysis of changes in interest income and interest expense for the nine-month periods ended September 30, 2017 and 2016.

 

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NET INTEREST INCOME AND INTEREST MARGIN

 

   Nine months ended 
   September 30, 2017   September 30, 2016 
   Average
Balance
   Interest   Average
Rate
   Average
Balance
   Interest   Average
Rate
 
ASSETS                              
Loans, net of unearned income  $1,123,545   $43,870    5.22%  $995,528   $41,087    5.51%
Investment securities   586,619    9,173    2.09    541,359    7,144    1.76 
Interest earning deposits and other   28,816    437    2.03    33,138    331    1.33 
Total earning assets  $1,738,980   $53,480    4.11%  $1,570,025   $48,562    4.13%
Cash & Due from banks   32,609              30,115           
Allowance for loan losses   (7,208)             (4,441)          
Other assets   167,539              162,447           
TOTAL ASSETS  $1,931,920             $1,758,146           
                               
LIABILITIES                              
Interest-bearing Checking & NOW accounts  $221,152   $365    0.22%  $184,726   $192    0.14%
Money Market accounts   360,357    853    0.32    315,592    618    0.26 
Savings accounts   177,433    324    0.24    167,031    310    0.25 
Other Time Deposits   345,418    2,469    0.96    352,226    2,211    0.84 
Total interest-bearing deposits  $1,104,360   $4,011    0.49%  $1,019,575   $3,331    0.44%
FHLB Advances   84,574    732    1.16    89,153    621    0.93 
Securities sold under agreement to repurchase   1,352    3    0.30    -    -    - 
Subordinated debentures and other   6,749    273    5.41    6,662    256    5.13 
Total interest-bearing liabilities  $1,197,035   $5,019    0.56%  $1,115,390   $4,208    0.50%
Noninterest-bearing deposits   486,027              406,736           
Other liabilities   18,767              18,567           
TOTAL LIABILITIES  $1,701,829             $1,540,693           
                               
STOCKHOLDERS’ EQUITY                              
TOTAL STOCKHOLDERS’ EQUITY   230,091              217,453           
                               
TOTAL LIABILITIES & EQUITY  $1,931,920             $1,758,146           
                               
Interest rate spread             3.55%             3.63%
Net interest income       $48,461             $44,354      
Net interest margin             3.73%             3.77%

 

Our net interest margin declined by 4 basis points to 3.73% for the nine-month period ended September 30, 2017, compared to 3.77% for the same period in 2016. The decrease in net interest margin for the nine-month period ending September 30, 2017 compared to the same period in 2016 was primarily attributable to lower loan yields and higher costing yields on interest bearing deposits partially offset by increased yields on investment securities in the September 30, 2017 period as shown. Loan yields declined during the 2017 period primarily due to reduced discount accretion on acquired loans. Net loan discount accretion on acquired loans was $2.6 million for the nine-month period ended 2017 compared to $3.9 million for the same period in 2016.

 

 59 

 

Provision for Loan Losses

 

The provision for loan losses increased $547 thousand or 29.7% to $2.4 million during the nine-month period ended September 30, 2017 compared to provision expense of $1.8 million for the same period in 2016. The increased loan loss provision during the nine-month period ended September 30, 2017 was primarily attributable to higher reserves on originated loans.

 

Noninterest income

 

Our noninterest income increased by $459 thousand to $9.3 million or 5.2% for the nine-month period ended September 30, 2017, compared to $8.9 million for the same period in 2016. The increase was the result of the following components reflected in the table below.

 

NONINTEREST INCOME

 

  

Nine months ended September 30,

   Increase   %
Increase
 
   2017   2016   (Decrease)   (Decrease) 
Service charges on deposit accounts  $2,437   $1,804   $633    35.1%
ATM interchange income   2,293    2,158    135    6.3 
Net gain on sale of  loans   2,488    2,960    (472)   (15.9)
Net gains on sale of securities available for sale   18    287    (269)   (93.7)
Bank owned life insurance income   780    705    75    10.6 
FDIC indemnification asset amortization, net   (381)   (500)   119    (23.8)
Purchase credit impaired loans recoveries   720    692    28    4.0 
Other   991    781    210    26.9 
Total Noninterest Income  $9,346   $8,887   $459    5.2%

 

Service charges on deposit accounts increased by $635 thousand or 35.1% to $2.4 million for the nine-month period ended September 30, 2017, compared to $1.8 million from the same period in 2016. The increase in service charges on deposits accounts in the first nine months of 2017 was primarily attributable to a new deposit fee pricing structure implemented in the fall of 2016 as well as additional service charges relating to the Jefferson acquisition on July 28, 2017. Net gains on loan sales declined by $472 thousand or 15.9% to 2.5 million for the nine-month period ended September 30, 2017 compared to $3.0 million for the same period in 2016. The decreased gains on loan sales during the first nine months of 2017 was attributable to reduced origination and sales volume of residential and SBA loans of loans held for sale. Net gains on investment securities available for sale declined by $269 thousand or 93.7% to $18 thousand for the nine-month period ended September 30, 2017 compared to $287 thousand for the same period in 2016. Other noninterest income increased by $210 thousand or 26.9% to $991 thousand for the nine-month period ended September 30, 2017 compared to $781 thousand for the same period in 2016. The increased other noninterest income for the nine months of 2017 was attributable higher loan servicing fees, gains on sale of assets and check printing fee income compared to the same period in 2016.

 

Noninterest expense

 

Our noninterest expense increased by $2.7 million or 6.4% to $45.0 million for the nine-month period ended September 30, 2017, compared to $42.3 million for the same period in 2016. The increase in noninterest expense for the nine months of 2017 was the result of the following components reflected in the table below.

 

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NONINTEREST EXPENSE

 

  

Nine months ended September 30,

   Increase   % Increase 
   2017   2016   (Decrease)   (Decrease) 
Salaries and employee benefits  $22,416   $21,376   $1,040    4.9%
Occupancy and equipment   6,092    6,418    (326)   (5.1)
Data processing   4,488    4,624    (136)   (2.9)
Regulatory assessments   682    985    (303)   (30.8)
Professional fees   1,491    1,156    335    29.0 
Office expense and supplies   1,015    1,156    (141)   (12.2)
Foreclosed assets, net   1,118    1,044    74    7.1 
Advertising   474    572    (98)   (17.1)
Amortization of Intangibles   1,820    1,929    (109)   (5.7)
Acquisition and conversion costs   2,125    262    1,863    711.1 
Other   3,264    2,769    495    17.9 
Total  Noninterest Expense  $44,985   $42,291   $2,694    6.4%

 

Salaries and employee benefits increased by 1.0 million or 4.9% to $22.4 million for the nine-month period ended September 30, 2017 from $21.4 million for the same period in 2016. The increased salaries and employee benefits during the nine months of 2017 was primarily attributable normal merit salary increases in 2017 and additional salaries and benefits relating to officers and staff acquired from the Jefferson acquisition on July 28, 2017. Occupancy and equipment declined by $326 thousand or 5.1% during the nine-month period ended September 30, 2017 compared to the same period in 2016 primarily due to closure of three branch facilities during 2016. Regulatory assessments declined by $303 thousand or 30.8% in the nine-month period ended September 30, 2017 compared to the same period in 2016 due to a reduction by the FDIC of deposit insurance rates beginning in July 2016. Professional fees increased by $335 thousand or 30.8% to $1.4 million for the nine-month period ended September 30, 2017 compared to $1.2 million for the same period in 2016. Acquisition and conversion costs increased by $1.9 million or 711.1% to $2.1 million for the nine-month period ended September 30, 2017 compared to $262 thousand for the same period in 2016. Higher acquisition costs in 2017 primarily resulted from the Jefferson acquisition.

 

Provision of income taxes

 

Our income tax expense for the nine-month period ended September 30, 2017 was $3.9 million on pretax income of $10.4 million at an effective tax rate of 37.4% compared to $3.6 million on pretax income of $9.1 million at an effective tax rate of 39.8% for the same period in 2016.

 

Liquidity

 

In general, liquidity is a measurement of our ability to meet our cash needs. Our objective in managing our liquidity is to maintain our ability to fund loan commitments, purchase securities, accommodate deposit withdrawals or repay other liabilities in accordance with their terms, without an adverse impact on our current or future earnings. Our liquidity strategy is guided by policies that are formulated and monitored by our Asset and Liability Management Committee (“ALCO”) and senior management. These policies take into account the marketability of assets, the sources and stability of funding and the level of unfunded commitments. We regularly evaluate all of our various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness. Our principal source of funding has been our clients’ deposits, supplemented by our short-term and long-term borrowings, primarily from FHLB borrowings. We believe that the cash generated from operations, our high quality, liquid investment portfolio, our borrowing capacity and our access to capital resources are sufficient to meet our future operating capital and funding requirements.

 

In addition to the primary borrowing outlets mentioned above, we also have the ability to generate liquidity by borrowing from the Federal Reserve Discount Window, through brokered deposits and internet deposits, through short-term collateralized repurchase agreements with broker/dealers, and through correspondent commercial banks. Management recognizes the importance of maintaining liquidity and has developed a Contingent Liquidity Plan, which addresses various liquidity stress levels and our response and action based on the level of severity. We periodically test our credit facilities for access to the funds, but also understand that as the severity of the liquidity level increases certain credit facilities may no longer be available. A liquidity stress test is completed quarterly based on events that could potentially occur with the results reported to ALCO and the Board of Directors. We believe the liquidity available to us is sufficient to meet our ongoing needs.

 

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We currently do not have any significant capital expenditure or capital commitment plans to fund purchases of long-term capital assets, such as land, new buildings, furniture and fixtures, or major technology systems. Management believes that any such capital expenditures would be funded with existing resources without impairing our ability to meet our ongoing obligations.

 

Off-Balance Sheet Arrangements

 

We do not currently engage in the use of derivative instruments to hedge interest rate risks. However, we are a party to financial instruments with off-balance sheet risks in the normal course of business to meet the financing needs of our clients.

 

At September 30, 2017, we had $313.4 million in commitments to extend credit and $8.9 million in standby letters of credit. Commitments to extend credit are agreements to lend to a client so long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued by us to guarantee the performance of a client to a third party. We use the same credit policies in establishing commitments and issuing letters of credit as we do for on-balance sheet instruments.

 

If commitments arising from these financial instruments continue to require funding at historical levels, management does not anticipate that such funding will adversely influence our ability to meet on-going obligations. In the event these commitments require funding in excess of historical levels, management believes current liquidity, investment security maturities, available advances from the FHLB and retail deposit growth provide a sufficient source of funds to meet these commitments.

 

ITEM 3:QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk arises from changes in interest rates, currency exchange rates, commodity prices and equity prices. HCBF has risk management policies designed to monitor and limit exposure to market risk and the Company does not participate in activities that give rise to significant market risk involving exchange rates, commodity prices, or equity prices. In asset and liability management activities, HCBF’s policies are designed to minimize structural interest rate risk.

 

Interest rate risk management

 

Our net income is largely dependent on net interest income, or NII. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market interest rates could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income. Net interest income is also affected by changes in the portion of interest-earning assets that are funded by interest-bearing liabilities rather than by other sources of funds, such as noninterest-bearing deposits and stockholder’s equity.

 

Analysis

 

Measures of net interest income at risk as of September 30, 2017 produced by simulation analysis are indicators of an institution’s short-term performance in alternative interest rate environments. These measures are typically based upon a relatively brief period, and do not necessarily indicate the long-term prospects or economic value. The tables below represent the results of our computer model simulation of net interest income, under parallel interest rate shocks, as of September 30, 2017.

 

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NET INTEREST INCOME SIMULATION - DYNAMIC

 

Dynamic Forecast Year 1 
Parallel Rate Shock (bps)   Change in NII %   Policy Limit %   Within Policy?   Net Interest Margin% 
 400    (0.52)   -25.0    Yes    3.80 
 300    0.03    -25.0    Yes    3.82 
 200    0.30    -20.0    Yes    3.83 
 100    0.47    -15.0    Yes    3.84 
 Level    -    -    -    3.82 
 -100    (5.06)   -15.0    Yes    3.62 
 -200    (8.92)   -20.0    Yes    3.48 
 -300    (9.41)   -25.0    Yes    3.46 
 -400    (9.33)   -25.0    Yes    3.46 

 

Dynamic Forecast Year 2 
Parallel Rate Shock (bps)   Change in NII %   Policy Limit %   Within Policy?   Net Interest Margin% 
 400    10.29    -30.0    Yes    4.23 
 300    8.43    -30.0    Yes    4.16 
 200    5.99    -25.0    Yes    4.07 
 100    3.37    -20.0    Yes    3.97 
 Level    -    -    -    3.84 
 -100    (7.10)   -20.0    Yes    3.57 
 -200    (12.42)   -25.0    Yes    3.36 
 -300    (13.46)   -30.0    Yes    3.32 
 -400    (13.39)   -30.0    Yes    3.33 

 

Management believes that the simulation results for changes in net interest income at September 30, 2017 were consistent with, and show a similar level of interest rate risk exposure, as compared to model simulations at June 30, 2017 and December 31, 2016. At September 30, 2017, the Company is operating within its prescribed policy limits for changes in net interest income under all interest rate shock scenarios.

 

The measures of equity at risk indicate ongoing economic value by considering the effects of changes in interest rates on all cash flows by discounting the cash flows to estimate the present value of assets and liabilities. The difference between these discounted values of assets and liabilities is the economic value of equity, or EVE, which in theory, approximates the fair value of net assets. The table below reflects our calculation of the change in EVE under parallel interest rate shocks at September 30, 2017.

 

ECONOMIC VALUE OF EQUITY (EVE) ANALYSIS

 

Parallel Rate Shock (bps)   Change in EVE %   Policy Limit %   Within Policy? 
 400    (8.22)   -40.0    Yes 
 300    (4.35)   -40.0    Yes 
 200    (1.49)   -35.0    Yes 
 100    .27    -25.0    Yes 
 Level    -    -    - 
 -100    (4.82)   -25.0    Yes 
 -200    (11.55)   -35.0    Yes 
 -300    (6.99)   -40.0    Yes 
 -400    2.56    -40.0    Yes 

 

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Management believes the results of the analysis showing the change in EVE for the given parallel interest rates shocks at September 30, 2017 are consistent with, and show a similar level of interest rate risk exposure, as compared to EVE analysis at June 30, 2017 and December 31, 2016. At September 30, 2017, we were operating within our prescribed policy limits for changes in EVE under all interest rate shock scenarios.

 

ITEM 4:CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

As of September 30, 2017, the end of the period covered by this Quarterly Report on Form 10-Q, our management, including our Chief Executive officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer each concluded that as of September 30, 2017, the end of the period covered by this Quarterly Report on Form 10-Q, we maintained effective disclosure controls and procedures.

 

Changes in Internal Control over Financial Reporting

 

Our management, including the Chief Executive Officer and Chief Financial Officer, has reviewed our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934). There have been no significant changes in our internal control over financial reporting during the most recently completed quarter that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.

 

PART II.OTHER INFORMATION

 

ITEM 1.LEGAL PROCEEDINGS

 

We are party to lawsuits arising out of the normal course of business. In management’s opinion, there is no known pending litigation, the outcome of which would, individually or in the aggregate, have a material effect on our consolidated results of operations, financial position, or cash flows.

 

ITEM 1A.RISK FACTORS

 

An investment in our securities involves risks. You should carefully consider the risk factors as previously disclosed in our final prospectus filed with the SEC on June 21, 2017 related to our Registration Statement on Form S-4, as amended (File No. 333-217395), together with the other information in this Quarterly Report on Form 10-Q, including the financial statements and related notes, before deciding whether to purchase, hold, or sell our securities. The occurrence of any of these risks could harm our business, financial condition, or results of operations or cause our actual results to differ materially from those contained in forward-looking statements we have made in this report and those we may make from time to time. You should consider all of the risk factors described when evaluating our business. There have been no material changes to the risk factors as previously disclosed in our final prospectus filed with the SEC on June 20, 2017, the discussion of which is specifically incorporated by reference into this Quarterly Report on Form 10-Q.

 

Risks Related to the Merger

 

Throughout this section, HCBF Holding Company, Inc., and its subsidiaries, collectively, are referred to as “HCBF,” and CenterState Bank Corporation and its subsidiaries, collectively, are referred to as “CenterState.”

 

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Because the market price of the CenterState common stock may fluctuate, HCBF shareholders cannot be sure of the market value of the merger consideration they will receive until the closing.

 

Upon completion of the merger, each share of HCBF common stock outstanding immediately prior to the effective time of the merger will be converted into the right to receive (i) 0.675 shares of CenterState common stock and (ii) a cash amount equal to $1.925 plus any cash dividends payable with respect to shares of CenterState common stock that are payable to CenterState shareholders of record as of any date after the closing date ((i) and (ii) together, the “merger consideration”). The market value of the equity portion of the merger consideration will fluctuate from the closing price of CenterState common stock on the date CenterState and HCBF announced the merger, the date of the special meetings of HCBF and CenterState relating to the Merger, and the date the merger is completed and thereafter. There will be no adjustment to the merger consideration for changes in the market price of either shares of CenterState common stock or shares of HCBF common stock; provided that if (i) the average closing price of CenterState common stock over a specified period prior to completion of the merger decreases below certain specified thresholds and (ii) HCBF elects to terminate the merger agreement due to such decrease, then CenterState may elect to increase the merger consideration through payment of additional cash and by a formula-based amount outlined in the merger agreement. Stock price changes may result from a variety of factors that are beyond the control of CenterState, including, but not limited to, general market and economic conditions, changes in CenterState’s business, operations and prospects, and regulatory considerations. HCBF makes no assurances as to whether or when the merger will be completed. Therefore, at the time of the special meetings of HCBF and CenterState, shareholders will not know the precise market value of the aggregate merger consideration shareholders of HCBF will be entitled to receive at the effective time of the merger. You should obtain current market quotations for shares of CenterState common stock before you vote. There are no current market quotations for HCBF common stock because HCBF’s common stock is not traded on any established public trading market.

 

The merger will not be completed unless important conditions are satisfied or waived, including approval by both CenterState and HCBF shareholders.

 

Specified conditions set forth in the merger agreement must be satisfied or waived to complete the merger and the bank merger. If the conditions are not satisfied or waived, to the extent permitted by law or stock exchange rules, the merger and the bank merger will not occur or will be delayed and each of CenterState and HCBF 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 waived, if permissible, before CenterState and HCBF are obligated to complete the merger:

 

·The merger agreement and the transactions contemplated thereby must have been approved by the affirmative vote of a majority of the outstanding shares of HCBF common stock entitled to vote on the proposal, and the approval of the issuance of CenterState common stock in the merger must be approved by the affirmative vote of a majority of the outstanding shares of CenterState common stock entitled to vote on the proposal;

 

·All required regulatory approvals required to consummate the merger and the bank merger must have been obtained and all statutory waiting periods must have expired;

 

·No judgment, order, injunction or decree issued by any court or agency of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the merger shall be in effect and no statute, rule or decree shall have been enacted or enforced by any governmental authority that prohibits or makes illegal the consummation of the merger;

 

·The registration statement registering shares of CenterState common stock to be issued in the merger must have been declared effective and no stop order may have been issued or threatened by the SEC or any governmental authority; and

 

·CenterState and HCBF shall have received from their respective tax counsel a U.S. federal income tax opinion that the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code.

 

The termination fees and the restrictions on third party proposals set forth in the merger agreement may discourage others from trying to acquire HCBF.

 

Until the completion of the merger, with some exceptions, HCBF is prohibited from initiating, soliciting, inducing, knowingly encouraging, or participating in any discussion of or otherwise considering any inquiries or proposals that may lead to a proposal to acquire HCBF, such as a merger or other business combination transaction, with any person other than CenterState. In addition, HCBF has agreed to pay to CenterState in certain circumstances a termination fee equal to $16.67 million. These provisions could discourage a potential competing acquiror from trying to acquire HCBF even though this third party might be willing to offer greater value to HCBF shareholders than CenterState has offered in the merger. Similarly, such a competing company might propose a price lower than it might otherwise have been willing to offer because of the potential added expense of the termination fee that may become payable to CenterState in certain circumstances under the merger agreement. The payment of any termination fee could also have a material adverse effect on HCBF’s financial condition.

 

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If for a specified period prior to completion of the merger (a) the CenterState average closing price divided by $23.93 is less than 0.80 and (b) this ratio is less than the number obtained by (i) dividing the average closing prices for the Nasdaq Bank Index during a specified time prior to completion of the merger by $3,569.16, and (ii) then subtracting 0.20 from such quotient, then HCBF has the right to terminate the merger agreement and the merger would not occur.

 

If for a specified period prior to completion of the merger (a) the CenterState average stock price divided by $23.93 is less than 0.80 and (b) this ratio is less than the number obtained by (i) dividing the average closing prices for the Nasdaq Bank Index during a specified time prior to completion of the merger by $3,569.16, and (ii) then subtracting 0.20 from such quotient , then HCBF may terminate the merger agreement subject to CenterState’s discretion (but not obligation) to increase the cash component of the merger consideration by a specified amount. If CenterState elects not to increase the cash component of the merger consideration, HCBF may then terminate the merger agreement.

 

As a result, even if HCBF shareholders approve the merger agreement, the merger may ultimately not be completed. Although the CenterState board of directors has the ability to increase the cash component of the merger consideration and HCBF’s board of directors has the power to choose not to terminate the merger agreement and proceed with the merger if CenterState does not increase the merger consideration, there is no obligation of either board to exercise such power.

 

The merger and the bank merger are subject to the receipt of consents and approvals from regulatory authorities that may impose conditions that could have an adverse effect on CenterState.

 

Before the merger and the bank merger can be completed, various approvals or consents must be obtained from bank regulatory authorities, including the Federal Reserve and the OCC. These authorities may impose conditions on the completion of the merger or the bank merger or require changes to their terms. Such conditions or changes and the process of obtaining regulatory approvals or waivers could have the effect of delaying completion of the merger or the bank merger. The regulatory approvals or waivers may not be received at all, may not be received in a timely fashion or may contain conditions on the completion of the merger and the bank merger that are that are burdensome, not anticipated or cannot be met. If the completion of the merger is delayed, including by a delay in receipt of necessary governmental approvals or waivers, the business, financial condition and results of operations of each company may also be materially adversely affected.

 

HCBF will be subject to business uncertainties and contractual restrictions while the merger is pending.

 

Uncertainty about the effect of the merger on employees, customers, suppliers and vendors may have an adverse effect on the business, financial condition and results of operations of HCBF, which could negatively affect CenterState’s and HCBF’s combined business operations. These uncertainties may impair HCBF’s ability to attract, retain and motivate key personnel, depositors and borrowers pending the consummation of the merger, as such personnel, depositors and borrowers may experience uncertainty about their future roles following the consummation of the merger. Additionally, these uncertainties could cause customers (including depositors and borrowers), suppliers, vendors and others who deal with HCBF to seek to change existing business relationships with HCBF or fail to extend an existing relationship with HCBF. In addition, competitors may target each party’s existing customers by highlighting potential uncertainties and integration difficulties that may result from the merger.

 

The pursuit of the merger and the preparation for the integration may place a burden on each company’s management and internal resources. Any significant diversion of management attention away from ongoing business concerns and any difficulties encountered in the transition and integration process could have a material adverse effect on each company’s business, financial condition and results of operations. Retention of certain employees by HCBF also may be challenging while the merger is pending, as certain employees may experience uncertainty about their future roles with CenterState after the merger. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with HCBF, HCBF’s business could be harmed.

 

In addition, in the merger agreement HCBF has agreed to operate its business in the ordinary course prior to closing and is restricted from taking certain actions without the CenterState’s consent while the merger is pending. These restrictions may, among other matters, prevent HCBF from pursuing otherwise attractive business opportunities, selling assets, incurring indebtedness, engaging in significant capital expenditures in excess of certain limits set forth in the merger agreement, entering into other transactions or making other changes to HCBF’s business prior to consummation of the merger or termination of the merger agreement. These restrictions could have a material adverse effect on HCBF’s business, financial condition and results of operations.

 

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Failure of the merger to be consummated, the termination of the merger agreement or a significant delay in the consummation of the merger could negatively impact CenterState and HCBF.

 

If the merger is not consummated, the ongoing business, financial condition and results of operations of each party may be materially adversely affected and the market price of CenterState’s common stock may decline significantly, particularly to the extent that the current market price reflects a market assumption that the merger will be consummated. If the consummation of the merger is delayed, the business, financial condition and results of operations of each company may be materially adversely affected. If the merger agreement is terminated and a party’s board of directors seeks another merger or business combination, such party’s shareholders cannot be certain that such party will be able to find a party willing to engage in a transaction on more attractive terms than the merger.

 

Additionally, the CenterState/HCBF Joint Proxy Statement/Prospectus filed on Form S-4, filed on October 31, 2017, includes “Risk Factors” related to the transaction with CenterState.

 

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.MINE SAFETY DISCLOSURE

 

None.

 

ITEM 5.OTHER INFORMATION

 

None.

 

ITEM 6.EXHIBITS

 

(A)Exhibits

 

2.1 Agreement and Plan of Merger, dated as of August 12, 2017, by and between CenterState Banks, Inc. – incorporated by reference herein to Exhibit 2.1 to the Company’s Current Report on From 8-K (filed 8/14/17)(No. 333-217395).
   
31.1 Certification of Michael J. Brown, Sr., Chairman and Chief Executive Officer of HCBF Holding Company, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
   
31.2 Certification of Randall A. Ezell, Executive Vice President and Chief Financial Officer of HCBF Holding Company, Inc., Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
   
32.1 Certification of Michael J. Brown, Sr., Chairman and Chief Executive Officer of HCBF Holding Company, Inc., Pursuant to 18 U.S.C. Section 1350.
   
32.2 Certification of Randall A. Ezell, Executive Vice President and Chief Financial Officer of HCBF Holding Company, Inc., Pursuant to 18 U.S.C. Section 1350.

 

  101.INS XBRL Instance Document

 

  101.SCH XBRL Taxonomy Extension Schema Document

 

  101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

 

  101.LAB XBRL Taxonomy Extension Label Linkbase Document

 

  101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

  101.DEF XBRL Taxonomy Extension Definition Linkbase Document

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned officer hereunto duly authorized.

 

  HCBF HOLDING COMPANY, INC.
  (Registrant)
   
  /s/ Randall A. Ezell
  Randall A. Ezell
  Executive Vice President and Chief Financial Officer
  (Mr. Ezell is the Principal Financial Officer and has been duly authorized to sign on behalf of the Registrant)
   
  Date: November 6, 2017

 

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EXHIBIT INDEX

 

Exhibit   Description
     
2.1  Agreement and Plan of Merger, dated as of August 12, 2017, by and between CenterState Banks, Inc. – incorporated by reference herein to Exhibit 2.1 to the Company’s Current Report on From 8-K (filed 8/14/17)(No. 333-217395).
    
31.1   Certification of Michael J. Brown, Sr., Chairman and Chief Executive Officer of HCBF Holding Company, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
     
31.2   Certification of Randall A. Ezell, Executive Vice President and Chief Financial Officer of HCBF Holding Company, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
     
32.1   Certification of Michael J. Brown, Sr., Chairman and Chief Executive Officer of HCBF Holding Company, Inc., Pursuant to 18 U.S.C. Section 1350.
     
32.2   Certification of Randall A. Ezell, Executive Vice President and Chief Financial Officer of HCBF Holding Company, Inc., Pursuant to 18 U.S.C. Section 1350.

 

  101.INS XBRL Instance Document

 

  101.SCH XBRL Taxonomy Extension Schema Document

 

  101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

 

  101.LAB XBRL Taxonomy Extension Label Linkbase Document

 

  101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

  101.DEF XBRL Taxonomy Extension Definition Linkbase Document

 

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