EXHIBIT A
2004 EQUITY INCENTIVE PLANAppendix A
Information included under “Financial Statements and Supplementary Data” in TIB Financial Corp.’s Annual Report on Form 10-K for the year ended December 31, 2009.
2004 EQUITY INCENTIVE PLAN
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1. Plan Purpose. The purpose of the Plan is to promote the long-term interests of the Company and its shareholders by providing a means for attracting and retaining officers, directors and key employees of the Company and its Affiliates.
2. Definitions. The following definitions are applicable to the Plan:
“Affiliate” means any “parent corporation” or “subsidiary corporation” of the Company as such terms are defined in Code sections 424(e) and (f), respectively.
“Award” means the grant by the Board with input from Compensation Committee of Incentive Stock Options, Non-Qualified Stock Options, Restricted Shares, Performance Shares, Performance Units or any combination thereof, as provided in the Plan.
“Award Agreement” means the written agreement setting forth the terms and provisions applicable to each Award granted under the Plan.
“Bank” means TIB Bank of the Keys.
“Board” means the Board of Directors of the Company.
“Cause” means, in connection with a Participant’s termination of service, theft or embezzlement from the Company or any Affiliate, violation of a material term or condition of employment, disclosure of confidential information of the Company or any Affiliate, conviction of the Participant of a crime of moral turpitude, stealing of trade secrets or intellectual property owned by the Company or any Affiliate, any act by the Participant in competition with the Company or any Affiliate, issuance of an order for removal of the Participant by the Company’s banking regulator, or any other act, activity or conduct of a Participant which in the opinion of the Company is adverse to the best interests of the Company or any Affiliate. “Cause” shall also include any definition includ ed in the employment agreement between any plan participant and the Company or any of its subsidiaries.
“Change of Control” a Change of Control shall mean:
(a) a merger in which the Company is not the surviving entity or a sale by the Company or the Bank of all or substantially all of its assets,
(b) the acquisition by any individual or group (other than the Company) of the Bank by means of a merger, consolidation or purchase of 80% or more of its outstanding shares. The term “group” and the concept of beneficial ownership shall have such meanings ascribed thereto as set forth in the Exchange Act and the regulations and rules thereunder.
(c) or the acquisition by any individual or group of beneficial ownership of more than 50% of the outstanding shares of the Company. The term “group” and the concept of beneficial ownership shall have such meanings ascribed thereto, as set forth in the Exchange Act and the regulations and rules thereunder.
For purposes of this Plan, where a change of control of the Company results from a series of related transactions, the change of control of the Company shall be deemed to have occurred on the date of the consummation of the first such transaction.
“Code” means the Internal Revenue Code of 1986, as amended, and its interpretive regulations.
“Committee” means the Compensation Committee appointed by the Board pursuant to Section 3 of the Plan.
“Company” means TIB Financial Corp.
“Continuous Service” means, in the case of an Employee, the absence of any interruption or termination of service as an Employee of the Company or an Affiliate; and in the case of an individual who is not an Employee, the absence of any interruption or termination of the service relationship between the individual and the Company or an Affiliate. Service will not be considered interrupted in the case of sick leave, military leave or any other leave of absence approved by the Company or in the case of a Participant’s transfer between the Company and an Affiliate or any successor to the Company.
“Director” means any individual who is a member of the Board.
“Disability” means total and permanent disability as determined by the Board pursuant to Code section 22(e)(3).
“EBITDA” means earnings before interest, taxes, depreciation and amortization.
“Employee” means any person, including an officer, who is employed by the Company or any Affiliate.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Exercise Price” means the price per Share at which the Shares subject to an Option may be purchased upon exercise of the Option.
“Incentive Stock Option” means an option to purchase Shares granted by the Board with input from Compensation Committee pursuant to the terms of the Plan that is intended to qualify under Code section 422.
“Market Value” means the last reported sale price on the trading date preceding the date in question (or, if there is no reported sale on such date, on the last preceding date on which any reported sale occurred) of the Shares on the Nasdaq National Market, or, if the Shares are not listed on the Nasdaq National Market, on the principal exchange on which the Shares are listed for trading, or, if the Shares are not then listed for trading on any exchange, the mean between the closing high bid and low asked quotations of the Shares on the date in question as reported by NASDAQ or any similar system then in use, or, if no such quotations are available, the fair market value on such date of the Shares as the Board shall determine.
“Non-Qualified Stock Option” means an option to purchase Shares granted by the Board with input from Compensation Committee pursuant to the terms of the Plan, which option is not intended to qualify under Code section 422.
“Option” means an Incentive Stock Option or a Non-Qualified Stock Option.
“Participant” means any individual selected by the Board with input from Compensation Committee to receive an Award.
“Performance Cycle” means the period of time, designated by the Board with input from Compensation Committee, over which Performance Shares or Performance Units may be earned.
“Performance Shares” means Shares awarded pursuant to Section 14 of the Plan.
“Performance Unit” means an Award granted to a Participant pursuant to Section 14 of the Plan.
“Plan” means the TIB Financial Corp. 2004 Equity Incentive Plan.
“Restricted Period” means the period of time selected by the Board with input from Compensation Committee for the purpose of determining when restrictions are in effect under Section 12 of the Plan with respect to Restricted Shares.
“Restricted Shares” means Shares that have been contingently awarded to a Participant by the Board with input from Compensation Committee subject to the restrictions referred to in Section 12 of the Plan, so long as such restrictions are in effect.
“Retirement” means, in the case of an Employee or Director, a termination of Continuous Service by reason of the Employee’s or Director’s retirement on or after the Employee’s or Director’s 65th birthday.
“Securities Act” means the Securities Act of 1933, as amended.
“Shares” means the shares of common stock, par value of .10 per share.
3. Administration. The Plan will be administered by the Board with input from Compensation Committee, which will consist of two or more members of the Board, each of whom will be independent directors as a “non-employee director” as provided under Rule 16b-3 of the Exchange Act, an “outside director” as provided under Code section 162(m), and an “independent director” under Rule 4200(a)(15)(A)-(6) of the NASDAQ Corporate Governance Rules approved November 4, 2003, as amended. The members of the Committee will be appointed by the Board. Except as limited by the express provisions of the Plan, the Board with input from Compensation Committee will have sole and complete authority and discretion to (a) select Participants and grant Awards; (b) determine the number of Shares to be subject to types of Awards generally, as well as to individual Awards granted under the Plan; (c) determine the terms and conditions upon which Awards will be granted under the Plan including the vesting requirements of such Awards made under the Plan; (d) prescribe the form and terms of Award Agreements; (e) establish procedures and regulations for the administration of the Plan; (f) interpret the Plan; and (g) make all determinations deemed necessary or advisable for the administration of the Plan.
A majority of the Board will constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by all members of the Board without a meeting, will be acts of the Board. All determinations and decisions made by the Board pursuant to the provisions of the Plan will be final, conclusive, and binding on all persons, and will be given the maximum deference permitted by law.
4. Participants. The Board with input from Compensation Committee may select from time to time Participants in the Plan from those officers, Directors, and Employees of the Company or its Affiliates who, in the opinion of the Board, have the capacity for contributing in a substantial measure to the successful performance of the Company or its Affiliates.
5. Substitute Options. In the event the Company or an Affiliate consummates a transaction described in Code Section 424(a), persons who become Employees or Directors on account of such transaction may be granted Options in substitution for Options granted by the former employer. The Board with input from Compensation Committee and consistent with Code Section 424(a) shall determine the Exercise Price of the substitute Options.
6. Shares Subject to Plan, Limitations on Grants and Exercise Price. Subject to adjustment by the operation of Section 16 hereof:
(a) The maximum number of Shares that may be issued with respect to Awards made under the Plan is 400,000 Shares (340,000 Shares allocated to the Employees, all of which may be issued as Incentive Stock Options, and 60,000 Shares allocated to Directors), no more than 133,000 of which may be issued pursuant to Awards granted in the form of Restricted Shares.
(b) The Shares with respect to which Awards may be made under the Plan are authorized and unissued Shares. Any Award that expires, terminates or is surrendered for cancellation, or with respect to Restricted Shares, which is forfeited (so long as any cash dividends paid on such Shares are also forfeited), may be subject to new Awards under the Plan with respect to the number of Shares as to which a termination or forfeiture has occurred. Additionally, Shares that are withheld by the Company or delivered by the Participant to the Company in order to satisfy payment of the Exercise Price or any tax withholding obligation and Shares granted pursuant to an Award Agreement which is subsequently settled in cash rather than Shares, may be subject to new Awards under the Plan.
(c) Notwithstanding any other provision under the Plan, the Exercise Price for any Option awarded under the Plan may not be less than the Market Value of the Shares on the date of grant.
7. General Terms and Conditions of Options.
(a) The Board with input from Compensation Committee will have full and complete authority and discretion, except as expressly limited by the Plan, to grant Options and to prescribe the terms and conditions (which need not be identical among Participants) of the Options. Each Option will be evidenced by an Award Agreement that will specify: (i) the Exercise Price, (ii) the number of Shares subject to the Option, (iii) the expiration date of the Option, (iv) the manner, time and rate (cumulative or otherwise) of exercise of the Option, (v) the restrictions, if any, to be placed upon the Option or upon Shares that may be issued upon exercise of the Option, (vi) the conditions, if any, under which a Participant may transfer or assign Options, and (vii) any other terms and conditi ons as the Board, in its sole discretion, may determine.
(b) Other than in connection with a change in the Company’s capitalization (as described in Section 15 of the Plan), the Board shall not, without the further approval of the shareholders of the Company, authorize the amendment of any outstanding Option Award Agreement to reduce the Exercise Price. Furthermore, no Option shall be cancelled and replaced by issuance to the same participant of an Option having a lower Exercise Price without further approval of the shareholders of the Company.
8. Exercise of Options.
(a) Except as provided in Section 17, an Option granted under the Plan will be exercisable only by the Participant, and except as provided in Section 9 of the Plan, no Option may be exercised unless at the time the Participant exercises the Option, the Participant has maintained Continuous Service since the date of the grant of the Option.
(b) To exercise an Option under the Plan, the Participant must give written notice to the Company specifying the number of Shares with respect to which the Participant elects to exercise the Option together with full payment of the Exercise Price. The date of exercise will be the date on which the notice is received by the Company. Payment may be made either (i) in cash (including check, bank draft or money order), (ii) by tendering Shares already owned by the Participant for at least six (6) months prior to the date of exercise and having a Market Value on the date of exercise equal to the Exercise Price, or (iii) by any other means determined by the Board in its sole discretion.
9. Termination of Options. Unless otherwise specifically provided elsewhere in the Plan or by the Board with input from Compensation Committee in the Award Agreement or any amendment thereto, Options will terminate as provided in this Section.
(a) Unless sooner terminated under the provisions of this Section, Options will expire on the earlier of the date specified in the Award Agreement or the expiration of ten (10) years from the date of grant.
(b) If the Continuous Service of a Participant is terminated for reason of Retirement, the Participant may exercise outstanding Options to the extent that the Participant was entitled to exercise the Options at the date of cessation of Continuous Service, but only within the period of three (3) months immediately succeeding the Participant’s cessation of Continuous Service. Any unvested options at the date of cessation of continuous service will be forfeited by the Participant.
(c) If the Continuous Service of a Participant is terminated for Cause, all rights under any Options granted to the Participant will terminate immediately upon the Participant’s cessation of Continuous Service, and the Participant will (unless the Board, in its sole discretion, waives this requirement) repay to the Company within ten (10) days the amount of any gain realized by the Participant upon any exercise of an Option, awarded under the Plan, within three (3) months prior to the cessation of Continuous Service.
(d) If the Continuous Service of a Participant is terminated voluntarily by the Participant for any reason other than death, Disability, or Retirement, the Participant may exercise outstanding Options to the extent that the Participant was entitled to exercise the Options at the date of cessation of Continuous Service, but only within the period of three (3) months immediately succeeding the Participant’s cessation of Continuous Service, and in no event after the applicable expiration dates of the Options.
(e) If the Continuous Service of a Participant is terminated by the Company without Cause, the Participant may exercise outstanding Options to the extent that the Participant was entitled to exercise the Options at the date of cessation of Continuous Service, but only within the period of three (3) months immediately succeeding the Participant’s cessation of Continuous Service, and in no event after the applicable expiration dates of the Options; provided, however, that if a Participant is terminated by the Company without Cause within twelve months after a Change of Control, such Participant may exercise outstanding Options to the extent he or she was entitled to exercise the Options at the date of cessation of Continuous Service, within the period of three (3) months i mmediately succeeding the cessation of Continuous Service but in no event after the applicable expiration dates of the Options.
(f) In the event of the Participant’s death or disability, all Options heretofore granted and not fully exercisable will terminate immediately. The Participant or the Participant’s beneficiary, as the case may be, may exercise all vested Options within the period of one (1) year immediately succeeding the Participant’s cessation of Continuous Service by reason of death or Disability, and in no event after the applicable expiration date of the Options.
(g) Notwithstanding the provisions of the foregoing paragraphs of this Section 9, the Board may, in its sole discretion, establish different terms and conditions pertaining to the effect of the cessation of Continuous Service, to the extent permitted by applicable federal and state law. Additionally, notwithstanding the provisions of the foregoing paragraphs of this Section 9, the Board may, in its sole discretion, allow the exercise of an expired Option if the Board determines that: (i) the expiration was solely the result of the Company’s inability to execute the exercise of an Option due to conditions beyond the Company’s control, and (ii) the Participant made valid and reasonable efforts to exercise the Award. In the event the Board makes such a dete rmination, the Company shall allow the exercise to occur as promptly as possible following its receipt of exercise instructions subsequent to such determination.
10. Restrictive Covenants. In its discretion, the Board may condition the grant of any Award under the Plan upon the Participant agreeing to reasonable covenants in favor of the Company and/or any Affiliate (including, without limitation, covenants not to compete, not to solicit employees and customers, and not to disclose confidential information) that may have effect following the termination of employment with the Company or any Affiliate.
11. Incentive and Non-Qualified Stock Options.
(a) Incentive Stock Options may be granted only to Participants who are Employees. Any provisions of the Plan to the contrary notwithstanding, (i) no Option will be granted more than ten (10) years from the earlier of the date the Plan is adopted by the Board of Directors of the Company or approved by the Company’s shareholders, (ii) no Option will be exercisable more than ten (10) years from the date the Option is granted, (iii) the Exercise Price of each Option will not be less than the Market Value per Share on the date such Option is granted, (iv) no Incentive Stock Option will be transferable by the Participant to whom such Incentive Stock Option is granted other than by will or the laws of descent and distribution and will be exercisable during the Participant̵ 7;s lifetime only by such Participant, (v) no Incentive Stock Option will be granted that would permit a Participant to acquire, through the exercise of Incentive Stock Options in any calendar year, under all plans of the Company and its Affiliates, Shares having an aggregate Market Value (determined as of the time any Incentive Stock Option is granted) in excess of $100,000 (determined by assuming that the Participant will exercise each Incentive Stock Option on the date that such Option first becomes exercisable), and (vi) no Option may be exercised more than three (3) months after the Participant’s cessation of Continuous Service (one (1) year in the case of Disability) for any reason other than death. Notwithstanding the foregoing, in the case of any Participant who, at the date of grant, owns as defined in Code section 424(d), shares possessing more than 10% of the total combined voting power of all classes of capital stock of the Company or any Affiliate, the Exercise Price of any Incentive Stock Option will not be less than 110% of the Market Value per Share on the date such Incentive Stock Option is granted and such Incentive Stock Option shall not be exercisable more than five years from the date such Incentive Stock Option is granted.
(b) Notwithstanding any other provisions of the Plan, if for any reason an Option granted under the Plan that is intended to be an Incentive Stock Option fails to qualify as an Incentive Stock Option, such Option will be deemed to be a Non-Qualified Stock Option, and such Option will be deemed to be fully authorized and validly issued under the Plan.
12. Terms and Conditions of Restricted Shares. The Board with input from Compensation Committee will have full and complete authority, subject to the limitations of the Plan, to grant Awards of Restricted Shares and to prescribe the terms and conditions (which need not be identical among Participants) in respect of the Awards. Unless the Board otherwise specifically provides in the Award Agreement, an Award of Restricted Shares will be subject to the following provisions:
(a) At the time of an Award of Restricted Shares, the Board with input from Compensation Committee will establish for each Participant a Restricted Period during which, or at the expiration of which, the Restricted Shares will vest; but in no event earlier than one year from grant date. Subject to paragraph (e) of this Section, the Participant will have all the rights of a shareholder with respect to the Restricted Shares, including, but not limited to, the right to receive all dividends paid on the Restricted Shares and the right to vote the Restricted Shares. The Board will have the authority, in its discretion, to accelerate the time at which any or all of the
restrictions will lapse with respect to any Restricted Shares prior to the expiration of the Restricted Period, or to remove any or all restrictions, whenever it may determine that such action is appropriate by reason of changes in applicable tax or other laws or other changes in circumstances occurring after the commencement of the Restricted Period.
(b) Subject to Section 16, if a Participant ceases Continuous Service for any reason before the Restricted Shares have vested, a Participant’s rights with respect to the unvested portion of the Restricted Shares will terminate and be returned to the Company.
(c) Each certificate issued in respect to Restricted Shares will be registered in the name of the Participant and deposited by the Participant, together with a stock power endorsed in blank, with the Company and will bear a legend referring to the terms, conditions and restrictions applicable to such shares.
(d) At the time of an Award of Restricted Shares, the Participant will enter into an Award Agreement with the Company in a form specified by the Board agreeing to the terms and conditions of the Award.
(e) At the expiration of the restrictions imposed by this Section, the Company will redeliver to the Participant the certificate(s) and stock powers, deposited with the Company pursuant to paragraph (c) of this Section and the Shares represented by the certificate(s) will be free of all restrictions.
(f) No Award of Restricted Shares may be assigned, transferred or encumbered.
13. Terms and Conditions of Stock Appreciation Rights. The Board with input from Compensation Committee will have full and complete authority, subject to the limitations of the Plan, to grant Awards of Stock Appreciation Rights and to prescribe the terms and conditions (which need not be identical among Participants) in respect of the Awards. Unless the Board otherwise specifically provides in the Award Agreement, an Award of Stock Appreciation Rights will be subject to the following provisions:
(a) The Board with input from Compensation Committee may grant a Stock Appreciation Right or “SAR” under this Plan. A SAR shall provide a Participant with the right to receive a payment, in cash and/or Common Stock, equal to the excess of the Market Value of a specified number of shares of Common Stock on the date the SAR is exercised over the Market Value of a share of Common Stock on the date the SAR was granted (the “base price”) as set forth in the applicable Award Agreement:
(b) In the case of a SAR granted in tandem with or as a substitution for another Award, the base price may be no lower than the Market Value of a share of Common Stock on the date such other Award was granted (and no SAR may be retroactively granted).
(c) The maximum term of a SAR shall be ten (10) years. The Board may also grant limited SARs, which are exercisable only upon a Change of Control or other specified event and may be payable based on the spread between the base price of the SAR and the Fair Market Value of a share of Common Stock during a specified period or at a specified time within a specified period before, after or including the date of the Change of Control or other specified event.
(d) If the Continuous Service of a Participant is terminated for reason of Retirement, the Participant may exercise any outstanding SAR to the extent that the Participant was entitled to exercise the Options at the date of cessation of Continuous Service, but only within the period of three (3) months immediately succeeding the Participant’s cessation of Continuous Service. Any unvested options at the date of cessation of continuous service will be forfeited by the Participant.
(e) If the Continuous Service of a Participant is terminated for Cause, all rights under any SAR granted to the Participant will terminate immediately upon the Participant’s cessation of Continuous Service, and the Participant will (unless the Board , in its sole discretion, waives this requirement) repay to the Company within ten (10) days the amount of any gain realized by the Participant upon any exercise of an SAR awarded under the Plan, within the 90-day period prior to the cessation of Continuous Service.
(f) If the Continuous Service of a Participant is terminated voluntarily by the Participant for any reason other than death, Disability, or Retirement, the Participant may exercise any outstanding SAR to the extent that the Participant was entitled to exercise the SAR at the date of cessation of Continuous Service, but only within the period of three (3) months immediately succeeding the Participant’s cessation of Continuous Service, and in no event after the applicable expiration dates of the SAR.
(g) If the Continuous Service of a Participant is terminated by the Company without Cause, the Participant may exercise any outstanding SAR to the extent that the Participant was entitled to exercise the SAR at the date of cessation of Continuous Service, but only within the period of three (3) months immediately succeeding the Participant’s cessation of Continuous Service, and in no event after the applicable expiration dates of the SAR; provided, however, that if a Participant is terminated by the Company without Cause within twelve months after a Change of Control, such Participant may exercise any outstanding SAR to the extent he or she was entitled to exercise the Options at the date of cessation of Continuous Service, within the period of three (3) months immediate ly succeeding the cessation of Continuous Service but in no event after the applicable expiration dates of the Options.
(h) In the event of the Participant’s death or Disability, any SAR heretofore granted and not fully exercisable will terminate immediately. The Participant or the Participant’s beneficiary, as the case may be, may exercise fully vested SARs within the period of one (1) year immediately succeeding the Participant’s cessation of Continuous Service by reason of death or Disability, and in no event after the applicable expiration date of the SAR.
(i) Notwithstanding the provisions of the foregoing paragraphs of this Section 13, the Board may, in its sole discretion, establish different terms and conditions pertaining to the effect of the cessation of Continuous Service, to the extent permitted by applicable federal and state law. Additionally, notwithstanding the provisions of the foregoing paragraphs of this Section 13, the Board may, in its sole discretion, allow the exercise of an expired SAR if the Board determines that: (i) the expiration was solely the result of the Company’s inability to execute the exercise of an SAR due to conditions beyond the Company’s control, and (ii) the Participant made valid and reasonable efforts to exercise the Award. In the event the Board makes such a determination, the Company shall allow the exercise to occur as promptly as possible following its receipt of exercise instructions subsequent to such determination.
14. Performance Shares and Performance Units.
(a) The Board with input from Compensation Committee, may from time to time authorize the grant of Performance Shares and Performance Units upon the achievement of performance goals (which may be cumulative and/or alternative) within a designated Performance Cycle as may be established, in writing, by the Board based on any one or any combination of the following business criteria (the “Performance Goals”): (i) earnings per Share; (ii) return on equity; (iii) return on assets; (iv) operating income; (v) market value per Share; (vi) EBITDA; (vii) cash flow; (viii) net income (before or after taxes); (ix) changes in the Company’s efficiency ratio (the ratio of non-interest expense to the sum of non-interest income plus taxable equivalent net-interest income); ( x) improvements in the Company’s credit quality as measured by changes to the Company’s allowance for loan losses, the ratio of the allowance for loan losses to total loans, net of unearned income, or the ratio of net charge-offs to average loans, net of unearned income; (xi) enterprise value added (“EVA”); (xii) market value added (“MVA”); (xiii) fee income; (xiv) net interest income; (xv) growth in loans; (xvi) growth in deposits; (xvii) total return to shareholders; and (xviii) other criteria determined by the Board.
(b) In the case of Performance Units, the Board with input from Compensation Committee shall determine the value of Performance Units under each Award.
(c) As determined in the discretion of the Board with input from Compensation Committee, performance goals may differ among Participants and/or relate to performance on a Company-wide or divisional basis.
(d) At such time as it is certified, in writing, by the Board with input from Compensation Committee that the Performance Goals established by the Board have been attained or otherwise satisfied within the Performance Cycle, the Board will authorize the payment of Performance Shares or Performance Units in the form of cash or Shares registered in the name of the Participant, or a combination of cash and Shares, equal to the value of the Performance Shares or Performance Units at the end of the Performance Cycle. Payment shall be made in a lump sum following the close of the applicable Performance Cycle.
(e) The grant of an Award of Performance Shares or Performance Units will be evidenced by an Award Agreement containing the terms and conditions of the Award as determined by the Board . To the extent required under Code section 162(m), the business criteria under which Performance Goals are determined by the Board will be resubmitted to shareholders for reapproval no later than the first shareholder meeting that occurs in the fifth year following the year in which shareholders previously approved the Plan.
(f) Subject to Section 16, if the Participant ceases Continuous Service before the end of a Performance Cycle for any reason other than Disability or death, the Participant will forfeit all rights with respect to any Performance Shares or Performance Units that were being earned during the Performance Cycle. The Board with input from Compensation Committee, may establish guidelines providing that if a Participant ceases Continuous Service before the end of a Performance Cycle by reason of Disability or death, the Participant will be entitled to a prorated payment with respect to any Performance Shares or Performance Units that were being earned during the Performance Cycle.
15. Adjustments Upon Changes in Capitalization. In the event of any change in the outstanding Shares subsequent to the effective date of the Plan by reason of any reorganization, recapitalization, stock split, stock dividend, combination or exchange of shares, merger, consolidation or any change in the corporate structure affecting the Shares of the Company, the maximum aggregate number and class of Shares as to which Awards may be granted under the Plan and the number and class of Shares, and the exercise price and base price, with respect to which Awards theretofore have been granted under the Plan will be appropriately adjusted by the Board to prevent the dilution or diminution of Awards. The Board ‘s determination with respect to any adjustments will be conclusive. Any Shares or other securities received, as a result of any of the foregoing, by a Participant with respect to Restricted Shares will be subject to the same restrictions and the certificate(s) or other instruments representing or evidencing the Shares or other securities will be legended and deposited with the Company in the manner provided in Section 12 of this Agreement.
16. Effect of Change of Control.
(a) If the Continuous Service of any Participant of the Company or any Affiliate is involuntarily terminated, for whatever reason except for Cause, at any time within twelve (12) months after a Change of Control, unless the Board has otherwise provided in the Award Agreement, (i) any Restricted Period with respect to an Award of Restricted Shares will lapse upon the Participant’s termination of Continuous Service and all Restricted Shares will become fully vested in the Participant to whom the Award was made; and (ii) with respect to Performance Shares and Performance Units, the Participant will be entitled to receive a prorata payment to the same extent as if the Participant ceases Continuous Service by reason of death or Disability under Section 14 of the Plan. If a Ch ange of Control occurs, unless the Board has otherwise provided in the Award Agreement, all Option Awards theretofore granted and not fully exercisable will become exercisable in full upon the happening of such event and will remain exercisable in accordance with their terms; provided, however, that no Option which has previously been exercised or otherwise terminated will become exercisable.
17. Assignments and Transfers. No Award nor any right or interest of a Participant in any Award under the Plan may be assigned, encumbered or transferred otherwise than by will or the laws of descent and distribution. Notwithstanding the foregoing, the Board may, in its sole discretion, set forth in an Award Agreement at the time of grant or thereafter, that the Award (other than Options) may be transferred to members of the Participant’s immediate family, to one or more trusts solely for the benefit of such immediate family members and to partnerships in which such family members or trusts are the only partners. For this purpose, immediate family means the Participant’s spouse, parents, children, step-children, grandchildren and legal dependents. Any transfer of an Award under this provision w ill not be effective until notice of such transfer is delivered to the Company.
18. Employee Rights Under the Plan. No officer, Director, Employee or other person will have a right to be selected as a Participant nor, having been so selected, to be selected again as a Participant, and no officer, Director, Employee or other person will have any claim or right to be granted an Award under the Plan or under any other incentive or similar plan of the Company or any Affiliate. Neither the Plan nor any action taken under the Plan will be construed as giving any Employee, Director or other person, any right to Continuous Service.
19. Delivery and Registration of Shares. The Company’s obligation to deliver Shares with respect to an Award will, if the Company requests, be conditioned upon the receipt of a representation as to the investment intention of the Participant to whom such Shares are to be delivered, in such form as the Board will determine to be necessary or advisable to comply with the provisions of the Securities Act or any other applicable federal or state securities laws. It may be provided that any representation requirement will become inoperative upon a registration of the Shares or other action eliminating the necessity of the representation under the Securities Act or other state securities laws. The Company will not be required to deliver any Shares under the Plan prior to (a) the admission of such Shares to listing on any stock exchange or system on which Shares may then be listed, and (b) the completion of any registration or other qualification of the Shares under any state or federal law, rule or regulation, as the Company determines to be necessary or advisable.
20. Withholding Tax. Prior to the delivery of any Shares or cash pursuant to an Award, the Company has the right and power to deduct or withhold, or require the Participant to remit to the Company, an amount sufficient to satisfy all applicable tax withholding requirements. The Board, in its sole discretion and pursuant to such procedures as it may specify from time to time, may permit or require a Participant to satisfy all or part of the tax withholding obligations in connection with an Award by (a) having the Company withhold otherwise deliverable Shares, or (b) delivering to the Company Shares already owned for a period of at least six months and having a value equal to the amount required to be withheld. The amount of the withholding requirement will be deemed to include any amount that the Board dete rmines, not to exceed the amount determined by using the maximum federal, state or local marginal income tax rates applicable to the Participant with respect to the Award on the date that the amount of tax to be withheld is to be determined for these purposes. For these purposes, the value of the Shares to be withheld or delivered will be equal to the Market Value as of the date that the taxes are required to be withheld.
21. Termination, Amendment and Modification of Plan. The Board may at any time terminate, and may at any time and from time to time and in any respect amend or modify the Plan; provided, however, that to the extent necessary and desirable to comply with Rule 16b-3 under the Exchange Act or Code section 422 (or any other applicable law or regulation, including requirements of any stock exchange or quotation system on which the Company’s common stock is listed or quoted), shareholder approval of any Plan amendment will be obtained in the manner and to the degree as is required by the applicable law or regulation; and provided further, that no termination, amendment or modification of the Plan will in any manner affect any Award theretofore granted pursuant to the Plan without the consent of the Partici pant to whom the Award was granted or the transferee of the Award.
22. Effective Date and Term of Plan. The Plan will become effective upon its adoption by the Board of Directors and shareholders of the Company. Unless sooner terminated pursuant to Section 21, no further Awards may be made under the Plan after ten (10) years from the effective date of the Plan.
23. Governing Law. The Plan and Award Agreements will be construed in accordance with and governed by the internal laws of the State of Florida.
25. Repricing of Options. Nothing in this Plan shall permit the repricing of any outstanding options other than (a) with the prior approval of the Company’s shareholders, or (b) pursuant to Section 15. The foregoing restriction shall also apply to any other transaction which would be treated as a repricing of outstanding options under generally accepted accounting principles.
Adopted by the Board of Directors of
--------------------------------------------------------------------------------
as of February 24, 2004
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Adopted by the Shareholders of
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as of May 25, 2004
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
TIB Financial Corp.
Naples, Florida
We have audited the accompanying consolidated balance sheets of TIB Financial Corp. as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2009. We also have audited the Company's internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Repo rt on Internal Control Over Financial Reporting contained in Item 9A.(b) of the accompanying Form 10-K. Our responsibility is to express an opinion on these financial statements and an opinion on the Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financia l reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of ma nagement and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TIB Financial Corp. as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company incurred net losses in 2009, 2008 and 2007, primarily from loan and investment impairments. In addition, as discussed in Note 2, the Company’s bank subsidiary is operating under an informal agreement with bank regulatory agencies that requires, among other provisions, higher regulatory capital requirements. The Bank did not meet the higher capital requirement as of December 31, 2009 and therefore is not in compliance with the regulatory agreement. Failure to comply with the regulatory agreement may result in additional regulatory enforcement actions. These events raise substantial doubt about the Company’s ability to continue as a going conc ern. Management’s plans are also discussed further in Note 2. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/Crowe Horwath LLP
Crowe Horwath LLP
Fort Lauderdale, Florida
March 31, 2010
TIB Financial Corp. and Subsidiaries
Consolidated Balance Sheets
As of December 31,
(Dollars in thousands, except per share data) | | 2009 | | | 2008 | |
Assets | | | | | | |
Cash and due from banks | | $ | 167,402 | | | $ | 69,607 | |
Federal funds sold and securities purchased under agreements to resell | | | - | | | | 4,127 | |
Cash and cash equivalents | | | 167,402 | | | | 73,734 | |
| | | | | | | | |
Investment securities available for sale | | | 250,339 | | | | 225,770 | |
| | | | | | | | |
Loans, net of deferred loan costs and fees | | | 1,197,516 | | | | 1,224,975 | |
Less: Allowance for loan losses | | | 29,083 | | | | 23,783 | |
Loans, net | | | 1,168,433 | | | | 1,201,192 | |
| | | | | | | | |
Premises and equipment, net | | | 40,822 | | | | 38,326 | |
Goodwill | | | 622 | | | | 5,160 | |
Intangible assets, net | | | 6,667 | | | | 3,010 | |
Other real estate owned | | | 21,352 | | | | 4,323 | |
Accrued interest receivable and other assets | | | 49,770 | | | | 58,599 | |
Total assets | | $ | 1,705,407 | | | $ | 1,610,114 | |
| | | | | | | | |
Liabilities and Shareholders’ Equity | | | | | | | | |
Liabilities | | | | | | | | |
Deposits: | | | | | | | | |
Noninterest-bearing demand | | $ | 171,821 | | | $ | 128,384 | |
Interest-bearing | | | 1,197,563 | | | | 1,007,284 | |
Total deposits | | | 1,369,384 | | | | 1,135,668 | |
| | | | | | | | |
Federal Home Loan Bank (FHLB) advances | | | 125,000 | | | | 202,900 | |
Short-term borrowings | | | 80,475 | | | | 71,423 | |
Long-term borrowings | | | 63,000 | | | | 63,000 | |
Accrued interest payable and other liabilities | | | 12,030 | | | | 16,009 | |
Total liabilities | | | 1,649,889 | | | | 1,489,000 | |
| | | | | | | | |
Commitments and Contingencies (Notes 1, 6 and 16) | | | | | | | | |
| | | | | | | | |
Shareholders’ Equity | | | | | | | | |
Pref Preferred stock – $.10 par value: 5,000,000 shares authorized, 37,000 shares issued and outstanding, liquidation preference of $37,702 and $37,134, respectively | | | 33,730 | | | | 32,920 | |
ComCommon stock - $.10 par value: 100,000,000 and 40,000,000 shares authorized, 14,961,376 and 14,968,597 shares issued, 14,887,922 and 14,895,143 shares outstanding, respectively | | | 1,496 | | | | 1,497 | |
Additional paid in capital | | | 74,673 | | | | 73,148 | |
Retained earnings (accumulated deficit) | | | (49,994 | ) | | | 14,737 | |
Accumulated other comprehensive loss | | | (3,818 | ) | | | (619 | ) |
Treasury stock, at cost, 73,454 shares | | | (569 | ) | | | (569 | ) |
Total shareholders’ equity | | | 55,518 | | | | 121,114 | |
| | | | | | | | |
Total Liabilities and Shareholders’ Equity | | $ | 1,705,407 | | | $ | 1,610,114 | |
| | | | | | | | |
See accompanying notes to consolidated financial statements | |
TIB Financial Corp. and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31,
(Dollars in thousands, except per share data) | | 2009 | | | 2008 | | | 2007 | |
Interest and dividend income | | | | | | | | | |
Loans, including fees | | $ | 68,925 | | | $ | 77,875 | | | $ | 84,773 | |
Investment securities: | | | | | | | | | | | | |
U.S. Treasury securities | | | - | | | | - | | | | 152 | |
U.S. Government agencies and corporations | | | 11,395 | | | | 7,610 | | | | 5,404 | |
States and political subdivisions, tax-exempt | | | 299 | | | | 316 | | | | 396 | |
States and political subdivisions, taxable | | | 143 | | | | 150 | | | | 157 | |
Other investments | | | 212 | | | | 385 | | | | 1,193 | |
Interest-bearing deposits in other banks | | | 124 | | | | 104 | | | | 19 | |
Federal Home Loan Bank stock | | | 24 | | | | 350 | | | | 503 | |
F Federal funds sold and securities purchased under agreements to resell | | | 5 | | | | 1,374 | | | | 2,144 | |
Total interest and dividend income | | | 81,127 | | | | 88,164 | | | | 94,741 | |
| | | | | | | | | | | | |
Interest expense | | | | | | | | | | | | |
Interest-bearing demand and money market | | | 4,052 | | | | 6,581 | | | | 12,721 | |
Savings | | | 2,142 | | | | 669 | | | | 968 | |
Time deposits of $100 or more | | | 8,587 | | | | 10,296 | | | | 12,622 | |
Other time deposits | | | 12,865 | | | | 15,050 | | | | 11,549 | |
Long-term debt - subordinated debentures | | | 1,578 | | | | 2,267 | | | | 2,708 | |
Federal Home Loan Bank advances | | | 5,199 | | | | 6,058 | | | | 6,197 | |
Short-term borrowings | | | 104 | | | | 1,392 | | | | 1,664 | |
Long-term borrowings | | | 1,209 | | | | 1,191 | | | | 292 | |
Total interest expense | | | 35,736 | | | | 43,504 | | | | 48,721 | |
| | | | | | | | | | | | |
Net interest income | | | 45,391 | | | | 44,660 | | | | 46,020 | |
Provision for loan losses | | | 42,256 | | | | 28,239 | | | | 9,657 | |
Net interest income after provision for loan losses | | | 3,135 | | | | 16,421 | | | | 36,363 | |
| | | | | | | | | | | | |
Non-interest income | | | | | | | | | | | | |
Service charges on deposit accounts | | | 4,165 | | | | 2,938 | | | | 2,692 | |
Fees on mortgage loans originated and sold | | | 1,143 | | | | 775 | | | | 1,446 | |
Investment advisory and trust fees | | | 997 | | | | 555 | | | | - | |
Other income | | | 3,510 | | | | 1,865 | | | | 2,884 | |
Investment securities gains, net | | | 5,058 | | | | 1,077 | | | | 1 | |
Other-than-temporary impairment losses on investments prior to April 1, 2009 adoption of ASC 320-10-65-1 | | | (23 | ) | | | (6,426 | ) | | | (5,661 | ) |
Other-than-temporary impairment losses on investments subsequent to April 1, 2009 | | | | | | | | | | | | |
Gross impairment losses | | | (740 | ) | | | N/A | | | | N/A | |
Less: Impairments recognized in other comprehensive income | | | - | | | | N/A | | | | N/A | |
Net impairment losses recognized in earnings subsequent to April 1, 2009 | | | (740 | ) | | | N/A | | | | N/A | |
Total non-interest income | | | 14,110 | | | | 784 | | | | 1,362 | |
| | | | | | | | | | | | |
Non-interest expense | | | | | | | | | | | | |
Salaries and employee benefits | | | 28,594 | | | | 24,534 | | | | 22,550 | |
Net occupancy and equipment expense | | | 9,442 | | | | 8,539 | | | | 7,979 | |
Goodwill impairment | | | 5,887 | | | | - | | | | - | |
Other expense | | | 21,419 | | | | 17,915 | | | | 11,392 | |
Total non-interest expense | | | 65,342 | | | | 50,988 | | | | 41,921 | |
TIB Financial Corp. and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31,
(Continued)
(Dollars in thousands, except per share data) | | 2009 | | | 2008 | | | 2007 | |
Loss before income taxes | | | (48,097 | ) | | | (33,783 | ) | | | (4,196 | ) |
Income tax expense (benefit) | | | 13,451 | | | | (12,853 | ) | | | (1,775 | ) |
| | | | | | | | | | | | |
Net Loss | | $ | (61,548 | ) | | $ | (20,930 | ) | | $ | (2,421 | ) |
| | | | | | | | | | | | |
Preferred dividends earned by preferred shareholders and discount accretion | | | 2,662 | | | | 165 | | | | - | |
| | | | | | | | | | | | |
Net loss allocated to common shareholders | | $ | (64,210 | ) | | $ | (21,095 | ) | | $ | (2,421 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Basic and diluted loss per common share | | $ | (4.33 | ) | | $ | (1.45 | ) | | $ | (0.19 | ) |
| | | | | | | | | | | | |
See accompanying notes to consolidated financial statements | |
TIB Financial Corp. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands except per share data)
| | Preferred Shares | | | Preferred Stock | | | Common Shares | | | Common Stock | | | Additional Paid in Capital | | | Retained Earnings | | | Accumulated Other Comprehensive Income (Loss) | | | Treasury Stock | | | Total Shareholders’ Equity | |
Balance, January 1, 2007 | | | - | | | $ | - | | | | 12,440,372 | | | $ | 1,244 | | | $ | 40,442 | | | $ | 44,620 | | | $ | (444 | ) | | $ | - | | | $ | 85,862 | |
Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | | | | | | | | | | | | | | | | | | | | | (2,421 | ) | | | | | | | | | | | (2,421 | ) |
O Other comprehensive income, net of tax: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Net market valuation adjustment on securities available for sale | | | | | | | | | | | | | | | | | | | | | | | | | | | (2,846 | ) | | | | | | | | |
AddAdd: reclassification adjustment for losses net of tax benefit of 2,130 | | | | | | | | | | | | | | | | | | | | | | | | | | | 3,530 | | | | | | | | | |
Oth Other comprehensive income, net of tax expense of $429 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 684 | |
Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (1,737 | ) |
R Restricted stock grants, net of 208 cancellations | | | | | | | | | | | 38,912 | | | | 4 | | | | (4 | ) | | | | | | | | | | | | | | | - | |
The The Bank of Venice acquisition | | | | | | | | | | | 1,002,498 | | | | 100 | | | | 13,855 | | | | | | | | | | | | | | | | 13,955 | |
Exercise of stock options | | | | | | | | | | | 160,049 | | | | 16 | | | | 1,092 | | | | | | | | | | | | | | | | 1,108 | |
P Purchase of treasury stock | | | | | | | | | | | (73,454 | ) | | | | | | | | | | | | | | | | | | | (569 | ) | | | (569 | ) |
StStock-based compensation and related tax effect | | | | | | | | | | | | | | | | | | | 669 | | | | | | | | | | | | | | | | 669 | |
C Cash dividends declared, $.2284 per common share | | | | | | | | | | | | | | | | | | | | | | | (3,048 | ) | | | | | | | | | | | (3,048 | ) |
Balance, December 31, 2007 | | | - | | | $ | - | | | | 13,568,377 | | | $ | 1,364 | | | $ | 56,054 | | | $ | 39,151 | | | $ | 240 | | | $ | (569 | ) | | $ | 96,240 | |
C Cumulative-effect adjustment for split-dollar life insurance postretirement benefit | | | | | | | | | | | | | | | | | | | | | | | (141 | ) | | | | | | | | | | | (141 | ) |
Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | | | | | | | | | | | | | | | | | | | | | (20,930 | ) | | | | | | | | | | | (20,930 | ) |
O Other comprehensive loss, net of tax: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Net market valuation adjustment on securities available for sale | | | | | | | | | | | | | | | | | | | | | | | | | | | (4,195 | ) | | | | | | | | |
AddAdd: reclassification adjustment for losses net of tax benefit of 2,013 | | | | | | | | | | | | | | | | | | | | | | | | | | | 3,336 | | | | | | | | | |
Oth Other comprehensive loss, net of tax benefit of $523 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (859 | ) |
Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (21,789 | ) |
R Restricted stock grants, net of 1,476 cancellations | | | | | | | | | | | 37,233 | | | | 4 | | | | (4 | ) | | | | | | | | | | | | | | | - | |
Private placement of common shares | | | | | | | | | | | 1,273,824 | | | | 127 | | | | 9,809 | | | | | | | | | | | | | | | | 9,936 | |
Exercise of stock options | | | | | | | | | | | 15,709 | | | | 2 | | | | 96 | | | | | | | | | | | | | | | | 98 | |
PrPreferred stock issued with common stock warrants | | | 37,000 | | | $ | 32,889 | | | | | | | | | | | | 4,103 | | | | | | | | | | | | | | | | 36,992 | |
Pref Prefrred stock discount accretion | | | | | | | 31 | | | | | | | | | | | | | | | | (31 | ) | | | | | | | | | | | - | |
StocStock-based compensation and related tax effect | | | | | | | | | | | | | | | | | | | 655 | | | | | | | | | | | | | | | | 655 | |
C Common stock dividends declared | | | | | | | | | | | | | | | | | | | 2,435 | | | | (2,437 | ) | | | | | | | | | | | (2 | ) |
C Cash dividends declared, $.0589 per common share | | | | | | | | | | | | | | | | | | | | | | | (875 | ) | | | | | | | | | | | (875 | ) |
Balance, December 31, 2008 | | | 37,000 | | | $ | 32,920 | | | | 14,895,143 | | | $ | 1,497 | | | $ | 73,148 | | | $ | 14,737 | | | $ | (619 | ) | | $ | (569 | ) | | $ | 121,114 | |
TIB Financial Corp. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands except per share data)
(Continued)
| | Preferred Shares | | | Preferred Stock | | | Common Shares | | | Common Stock | | | Additional Paid in Capital | | | Retained Earnings (Accumulated Deficit) | | | Accumulated Other Comprehensive Income (Loss) | | | Treasury Stock | | | Total Shareholders’ Equity | |
Balance, December 31, 2008 | | | 37,000 | | | $ | 32,920 | | | | 14,895,143 | | | $ | 1,497 | | | $ | 73,148 | | | $ | 14,737 | | | $ | (619 | ) | | $ | (569 | ) | | $ | 121,114 | |
Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | | | | | | | | | | | | | | | | | | | | | (61,548 | ) | | | | | | | | | | | (61,548 | ) |
O Other comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Net market valuation adjustment on securities available for sale | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,096 | | | | | | | | | |
LessLess : reclassification adjustment for gains | | | | | | | | | | | | | | | | | | | | | | | | | | | (4,295 | ) | | | | | | | | |
O Other comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (3,199 | ) |
Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (64,747 | ) |
R Restricted stock cancellations | | | | | | | | | | | (7,221 | ) | | | (1 | ) | | | 1 | | | | | | | | | | | | | | | | - | |
Is Issuance costs associated with preferred stock issued | | | | | | | | | | | | | | | | | | | (48 | ) | | | | | | | | | | | | | | | (48 | ) |
PrPreferred stock discount accretion | | | | | | | 810 | | | | | | | | | | | | | | | | (810 | ) | | | | | | | | | | | - | |
StocStock-based compensation and related tax effect | | | | | | | | | | | | | | | | | | | 484 | | | | | | | | | | | | | | | | 484 | |
C Common stock dividends declared | | | | | | | | | | | | | | | | | | | 1,088 | | | | (1,088 | ) | | | | | | | | | | | - | |
C Cash dividends declared, preferred stock | | | | | | | | | | | | | | | | | | | | | | | (1,285 | ) | | | | | | | | | | | (1,285 | ) |
Balance, December 31, 2009 | | | 37,000 | | | $ | 33,730 | | | | 14,887,922 | | | $ | 1,496 | | | $ | 74,673 | | | $ | (49,994 | ) | | $ | (3,818 | ) | | $ | (569 | ) | | $ | 55,518 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements
TIB Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands except per share data)
| | Years Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
Cash flows from operating activities: | | | | | | | | | |
Net loss | | $ | (61,548 | ) | | $ | (20,930 | ) | | $ | (2,421 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | | | |
| Depreciation and amortization | | | 4,516 | | | | 4,008 | | | | 3,328 | |
| Provision for loan losses | | | 42,256 | | | | 28,239 | | | | 9,657 | |
| Deferred income tax benefit (loss) | | | 10,998 | | | | (4,848 | ) | | | (4,472 | ) |
| Investment securities net realized gains | | | (5,058 | ) | | | (1,077 | ) | | | (1 | ) |
| Net amortization of investment premium/discount | | | 2,031 | | | | (31 | ) | | | (99 | ) |
| Write-down of investment securities | | | 763 | | | | 6,426 | | | | 5,661 | |
| Goodwill impairment | | | 5,887 | | | | - | | | | - | |
| Stock based compensation | | | 690 | | | | 737 | | | | 646 | |
| (Gain) loss on sale of OREO | | | 168 | | | | (2 | ) | | | - | |
| Other | | | 140 | | | | (247 | ) | | | (735 | ) |
Mortgage loans originated for sale | | | (60,439 | ) | | | (42,518 | ) | | | (90,818 | ) |
Proceeds from sales of mortgage loans | | | 57,778 | | | | 46,836 | | | | 91,218 | |
Fees on mortgage loans sold | | | (1,105 | ) | | | (767 | ) | | | (1,434 | ) |
Change in accrued interest receivable and other asset | | | 1,894 | | | | (5,750 | ) | | | (5,022 | ) |
Change in accrued interest payable and other liabilities | | | (4,118 | ) | | | (869 | ) | | | (1,738 | ) |
Net cash provided by operating activities | | | (5,147 | ) | | | 9,207 | | | | 3,770 | |
| | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Purchases of investment securities available for sale | | | (728,578 | ) | | | (160,943 | ) | | | (71,669 | ) |
Sales of investment securities available for sale | | | 525,359 | | | | 51,135 | | | | 5,491 | |
R Prepayments of principal and maturities of investment securities available for sale | | | 209,566 | | | | 37,696 | | | | 34,863 | |
A Acquisition of Naples Capital Advisors business | | | (148 | ) | | | (1,378 | ) | | | - | |
Cash equivalents acquired from The Bank of Venice acquisition | | | - | | | | - | | | | 10,176 | |
Cash paid for The Bank of Venice | | | - | | | | - | | | | (888 | ) |
Net cash received in acquisition of operations-Riverside Bank of the Gulf Coast | | | 271,397 | | | | - | | | | - | |
Net (purchase) sale of FHLB stock | | | 1,277 | | | | (2,843 | ) | | | (673 | ) |
Loans originated or acquired, net of principal repayments | | | (30,111 | ) | | | (117,411 | ) | | | (14,809 | ) |
Purchases of premises and equipment | | | (2,760 | ) | | | (1,041 | ) | | | (5,265 | ) |
Proceeds from sales of loans | | | 3,500 | | | | - | | | | 624 | |
Proceeds from sales of OREO | | | 5,934 | | | | 837 | | | | - | |
Proceeds from disposal of premises, equipment and intangible assets | | | 51 | | | | 39 | | | | 1,822 | |
Net cash provided by (used) investing activities | | | 255,487 | | | | (193,909 | ) | | | (40,328 | ) |
| | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
N Net increase (decrease) in demand, money market and savings accounts | | | 82,350 | | | | (90,211 | ) | | | 9,614 | |
Net increase (decrease) in time deposits | | | (61,122 | ) | | | 98,890 | | | | (104,499 | ) |
N Net change in brokered time deposits | | | (106,577 | ) | | | 77,031 | | | | 57,671 | |
N Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase | | | 8,116 | | | | (6,499 | ) | | | 55,672 | |
Net change short term FHLB advances | | | (70,000 | ) | | | 70,000 | | | | - | |
Increase in long term FHLB advances | | | - | | | | 92,900 | | | | 60,000 | |
Repayment of long term FHLB advances | | | (7,900 | ) | | | (100,000 | ) | | | (50,000 | ) |
Proceeds from long term repurchase agreements | | | - | | | | - | | | | 30,000 | |
Repayment of notes payable | | | - | | | | - | | | | (4,000 | ) |
Income tax effect related to stock-based compensation | | | (206 | ) | | | (82 | ) | | | 21 | |
Net proceeds from issuance costs of preferred stock and common warrants | | | (48 | ) | | | 36,992 | | | | - | |
Net proceeds from issuance of common shares | | | - | | | | 10,033 | | | | 1,108 | |
Repurchase of company common stock | | | - | | | | - | | | | (569 | ) |
Cash dividends paid | | | (1,285 | ) | | | (1,677 | ) | | | (2,953 | ) |
Net cash provided by (used in) financing activities | | | (156,672 | ) | | | 187,377 | | | | 52,065 | |
TIB Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands except per share data)
(Continued)
| | Years Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
Net increase in cash and cash equivalents | | | 93,668 | | | | 2,675 | | | | 15,507 | |
Cash and cash equivalents at beginning of period | | | 73,734 | | | | 71,059 | | | | 55,552 | |
Cash and cash equivalents at end of period | | $ | 167,402 | | | $ | 73,734 | | | $ | 71,059 | |
| | | | | | | | | | | | |
Supplemental disclosures of cash paid: | | | | | | | | | | | | |
Interest | | $ | 38,291 | | | $ | 44,504 | | | $ | 50,678 | |
Income taxes | | | - | | | | 125 | | | | 4,193 | |
| | | | | | | | | | | | |
Supplemental disclosures of non-cash transactions: | | | | | | | | | | | | |
Financing of sale of premises and equipment to third parties | | $ | - | | | $ | 60 | | | $ | - | |
Fair value of noncash assets acquired | | | 49,193 | | | | 1,416 | | | | 68,458 | |
Fair value of liabilities assumed | | | 320,594 | | | | 40 | | | | 63,882 | |
Transfer of loans to OREO | | | 27,547 | | | | 6,961 | | | | 1,875 | |
Transfer of OREO to Premises and Equipment | | | 2,941 | | | | 2,391 | | | | - | |
Fair value of common stock and stock options issued | | | - | | | | - | | | | 13,992 | |
| | | | | | | | | | | | |
See accompanying notes to consolidated financial statements | |
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Note 1—Summary of Significant Accounting Policies
Principles of Consolidation and Nature of Operations
TIB Financial Corp. is a bank holding company headquartered in Naples, Florida, whose business is conducted primarily through our wholly-owned subsidiaries, TIB Bank (the “Bank) and Naples Capital Advisors, Inc. Together with its subsidiaries, TIB Financial Corp. (collectively the “Company”) has a total of twenty-eight full service banking offices. On February 13, 2009, TIB Bank acquired the deposits (excluding brokered deposits), branch office operations and certain assets from the FDIC as receiver of the former Riverside Bank of the Gulf Coast (“Riverside”). On September 25, 2009, The Bank of Venice, acquired by the Company in April 2007, was merged into TIB Bank. The consolidated financial statements include the accounts of TIB Financial Corp. (Parent Company) and its wholly-owned subsidiaries, TIB Bank and subsidiaries, and Naples Capital Advisors, Inc. All significant inter-company accounts and transactions have been eliminated in consolidation. Additionally, TIBFL Statutory Trust I, TIBFL Statutory Trust II and TIBFL Statutory Trust III were formed in conjunction with the issuance of trust preferred securities as further discussed in Note 10.
TIB Bank is the Company’s primary operating subsidiary. The Bank provides banking services from its twenty eight branch locations in Monroe, Miami-Dade, Collier, Lee, and Sarasota counties, Florida. The Bank offers a wide range of commercial and retail banking and financial services to businesses and individuals. Account services include checking, interest-bearing checking, money market, certificates of deposit and individual retirement accounts. The Bank offers all types of commercial loans, including: owner-operated commercial real estate; acquisition, development and construction; income-producing properties; working capital; inventory and receivable facilities; and equipment loans. Consumer loan products include residential real estate, installment loans, home equity, home equity lines, and indirect auto loans.
The share and per share amounts discussed throughout this document have been adjusted to account for the effects of six one percent stock dividends declared by the Board of Directors during 2008 and 2009 which were distributed July 17, 2008, October 10, 2008, January 10, 2009, April 10, 2009, July 10, 2009 and October 10, 2009 to all TIB Financial Corp. common shareholders of record as of July 7, 2008, September 30, 2008, December 31, 2008, March 31, 2009, June 30, 2009 and September 30, 2009 respectively.
The accounting and reporting policies of TIB Financial Corp. and subsidiaries conform to generally accepted accounting principles and to general practices within the banking industry. The following is a summary of the more significant of these policies.
Use of Estimates and Assumptions
To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. A material estimate that is particularly susceptible to significant change in the near term is the allowance for loan losses. Another material estimate is the fair value and impairment of financial instruments. Changes in assumptions or in market conditions could significantly affect the fair value estimates.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold, and interest-bearing deposits at the Federal Home Loan Bank of Atlanta and the Federal Reserve Bank of Atlanta. Net cash flows are reported for customer loan and deposit transactions and short term borrowings.
Investment Securities and Other than Temporary Impairment
Investment securities which may be sold prior to maturity are classified as available for sale and are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income. Other securities such as Federal Home Loan Bank stock are carried at cost and are included in other assets on the balance sheets.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method based on the amortized cost of the security sold.
Management regularly reviews each investment security for impairment based on criteria that include the extent to which cost exceeds fair value, the duration of that market decline, the financial health of and specific prospects for the issuer(s) and our ability and intention with regard to holding the security. Future declines in the fair value of these or other securities may result in additional impairment charges which may be material to the financial condition and results of operations of the Company.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities classified as available for sale or held-to-maturity are generally evaluated for OTTI under FASB Accounting Standards Codification (“ASC”) 320-10-35. However, certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase of below AAA are evaluated using the model outlined in ASC 325-40-35.
In determining OTTI under the ASC 320-10-35 model, management considers many factors, including but not limited to: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
The second segment of the portfolio uses the OTTI guidance provided by ASC 325-10-35 that is specific to purchased beneficial interests that are rated below “AAA”. Under this model, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.
When OTTI occurs under either model, the amount of the impairment recognized in earnings depends on whether we intend to sell the security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If we intend to sell or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the impairment is required to be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis less any current-perio d loss, the impairment is separated into the amount representing the credit loss and the amount related to all other factors. The amount of impairment related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the impairment related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.
Loans
Loans are reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for loan losses. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. If the collectibility of interest appears doubtful, the accrual of interest is discontinued and all unpaid interest is reversed. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Loans Held for Sale
The majority of residential fixed rate mortgage loans originated by TIB Bank are sold servicing released to third parties immediately with temporary recourse provisions. The recourse provisions may require the repurchase of the outstanding balance of loans which default within a limited period of time subsequent to the sale of the loan. The recourse periods vary by investor and extend up to seven months subsequent to the sale of the loan. All fees are recognized as income at the time of the sale. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. TIB Bank has not historically experienced significant losse s resulting from the recourse provisions described above. Accordingly, management believes that no such provision or allowance is necessary as of December 31, 2009 or 2008.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses, which is increased by the provision for loan losses and decreased by charge-offs less recoveries. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required based on factors including 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 cha rged off.
The allowance consists of specific and general components. The specific component relates to loans that are individually internally classified as impaired. The general component covers non-impaired loans and is based on subjective factors and historical loss experience adjusted for current factors.
A loan is considered impaired when it is probable that not all principal and interest amounts will be collected according to the loan contract or when the loan contract terms have been modified resulting in a concession of terms and where the borrower is experiencing financial difficulty. Individual commercial, commercial real estate and residential loans exceeding certain size thresholds established by management are individually evaluated for impairment. If a loan is considered to be impaired, a portion of the allowance is allocated so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the lesser of the recorded investment in the loan or the fair value of collateral if repayment is expected solely from the collateral. Generally, large groups of smaller balance homogeneous loans, such as consumer, indirect, and residential real estate loans (other than those evaluated individually), are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Premises and Equipment
Land is carried at cost. Premises and equipment are reported at cost less accumulated depreciation. For financial reporting purposes, building and related components are depreciated using the straight-line method with useful lives ranging from 3 to 40 years. Furniture, fixtures and equipment are depreciated using straight-line method with useful lives ranging from 1 to 40 years. Expenditures for maintenance and repairs are charged to operations as incurred, while major renewals and betterments are capitalized. For Federal income tax reporting purposes, depreciation is computed using primarily accelerated methods.
Foreclosed Assets
Assets acquired through, or in lieu of, loan foreclosure or repossession are generally held for sale and are initially recorded at fair value less cost to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Costs incurred after acquisition are generally expensed.
Goodwill and Other Intangible Assets
Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009 represents the future economic benefits arising from other assets acquired that are not individually identified and separately recognized. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. The Company performed a review of goodwill for potential impairment as of December 31, 2009. Based on the review, it was determined that impairment existed as of December 31, 2009. The amount of the goodwill impairment cha rge was $5,887.
Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. The only intangible assets with indefinite lives on our balance sheet are goodwill and a trade name. Other intangible assets include core deposit base premiums and customer relationship intangibles arising from acquisitions and are initially measured at fair value. The intangibles are being amortized using the straight-line method over estimated lives ranging from 5 to 15 years.
Long-lived Assets
Long-lived assets, including premises and equipment, core deposit and other intangible assets, are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Company Owned Life Insurance
The Company has purchased life insurance polices on certain key executives. These policies are recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement, if applicable.
Income Taxes
Income tax expense (or benefit) is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.
Stock Splits and Stock Dividends
Stock splits and stock dividends in excess of 20% are reported by transferring the par value of the stock issued from retained earnings to common stock. Stock dividends for 20% or less are reported by transferring the fair value, as of the ex-dividend date, of the stock issued from retained earnings to common stock and additional paid-in capital. Fractional share amounts are paid in cash with a reduction in retained earnings.
Earnings (Loss) Per Common Share
Basic earnings (loss) per share is net income (loss) allocated to common shareholders divided by the weighted average number of common shares and vested restricted shares outstanding during the period. Diluted earnings per share includes the dilutive effect of additional potential common shares issuable under stock options, warrants and restricted shares computed using the treasury stock method.
Since we reported a net loss for each of the three periods reported all outstanding stock options, restricted stock awards and warrants are considered anti-dilutive. Loss per share has been computed based on 14,819,954, 14,545,827 and 13,055,735 basic and diluted shares for the years ended December 31, 2009, 2008 and 2007, respectively. The dilutive effect of stock options and warrants and the dilutive effect of unvested restricted shares are the only common stock equivalents for purposes of calculating diluted earnings per common share.
Weighted average anti-dilutive stock options and warrants and unvested restricted shares excluded from the computation of diluted earnings per share are as follows:
| | 2009 | | | 2008 | | | 2007 | |
Anti-dilutive stock options | | | 738,172 | | | | 736,659 | | | | 681,930 | |
Anti-dilutive restricted stock awards | | | 73,091 | | | | 100,780 | | | | 82,949 | |
Anti-dilutive warrants | | | 2,380,213 | | | | 1,119,233 | | | | N/A | |
Stock-Based Compensation
Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as separate components of equity.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase
Securities purchased under agreements to resell and securities sold under agreements to repurchase are generally accounted for as collateralized financing transactions and are recorded at the amounts at which the securities were acquired or sold plus accrued interest. The fair value of collateral either received from or provided to a third party is regularly monitored, and additional collateral is obtained, provided or requested to be returned as appropriate.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are currently any such matters that will have a material effect on the financial statements.
Operating Segments
While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company wide basis. As operating results for all segments are similar, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 18. Fair value estimates include uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
Recent Accounting Pronouncements
In December 2007, the FASB issued ASC 805 which revises pre-codification Statement 141. FAS 141(R) requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information needed to evaluate and understand the nature and financial effect of the business combination. ASC 805 is effective for fiscal years beginning after December 15, 2008. Adoption on January 1, 2009, as required, did not have a material effect on the Company’s financial condition, results of operations or liquidity. ASC 805 was applied in accounting for the Riverside acquisition and w ill impact future acquisitions.
In December 2007, the FASB issued ASC 810-10-65-1 which requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. Additionally, this pronouncement requires that transactions between an entity and noncontrolling interests be treated as equity transactions and is effective for fiscal years beginning after December 15, 2008. Adoption on January 1, 2009, as required, did not have a material effect on the Company’s financial condition, results of operations or liquidity.
In March 2008, the FASB issued ASC 815-1 which requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related items are accounted for and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The new standard is effective for the Company on January 1, 2009 and adoption, as required, did not have a material effect on the Company’s financial condition, results of operations or liquidity.
In April 2009, the FASB issued ASC 320-10-65 which amends existing guidance for determining whether impairment is other-than-temporary for debt securities. This guidance requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized in earnings. For securities that do not meet the aforementioned criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income. Additionally, the guidance expands and increases the frequency of exi sting disclosures about other-than-temporary impairments for debt and equity securities. ASC 320-10-65 is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of ASC 320-10-65 on April 1, 2009 did not have a material impact on the results of operations or financial position of the Company. During the twelve months ended December 31, 2009, the Company recognized $763 of OTTI charges in income. Had the standard not been issued, there would not have been a material difference in the amount of OTTI that would have been recognized.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
In April 2009, the FASB issued ASC 820-10 which emphasizes that even if there has been a significant decrease in the volume and level of activity, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants. ASC 820-10 provides a number of factors to consider when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity. In addition, when transactions or quoted prices are not considered orderly, adjustments to those prices based on the weight of available information may be needed to determine the appropriate fair value. & #160;ASC 820-10 also requires increased disclosures and is effective for interim and annual reporting periods ending after June 15, 2009, and is required to be applied prospectively. Adoption at June 30, 2009, as required, did not have a material impact on the results of operations or financial position of the Company.
In April 2009, the FASB issued ASC 825-10 which requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies that were previously only required in annual financial statements. ASC 825-10 is effective for interim reporting periods ending after June 15, 2009. The adoption of ASC 825-10 at June 30, 2009, as required, did not have a material impact on the results of operations or financial position as it only required disclosures which are included in Note 18.
In April 2009, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 111 (“SAB 111”). SAB 111 amends Topic 5.M. in the Staff Accounting Bulletin series entitled “Other Than Temporary Impairment of Certain Investments Debt and Equity Securities.” On April 9, 2009, the FASB issued ASC 320-10-65 to provide guidance for assessing whether an impairment of a debt security is other than temporary. SAB 111 maintains the previous views related to equity securities and amends Topic 5.M. to exclude debt securities from its scope. SAB 111 is effective for the Company beginning April 1, 2009. The adoption of this SAB on April 1, 2009 did not have a material impact on the results of operations or financial position of the Company.
In June 2009, the FASB issued Statement No. 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140 (ASC 810). This statement removes the concept of a qualifying special-purpose entity from Statement 140 and removes the exception from applying FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities”, to qualifying special-purpose entities. The objective in issuing this Statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial asset s. This Statement must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Adoption did not have a material impact on the results of operations or financial position of the Company.
In June 2009, the FASB issued ASC 105-10 which establishes the FASB Accounting Standards Codification as the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification became non-authoritative. ASC 105-10 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. Adoption, as required, did not have a materia l impact on the results of operations or financial position of the Company.
Reclassifications
Some items in the prior year financial statements were reclassified to conform to the current presentation.
Note 2—Going Concern Considerations and Management's Plans
The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the foreseeable future. However, the events and circumstances described below create an uncertainty about the Company’s ability to continue as a going concern.
The Company recorded net losses of $61,548, $20,930 and $2,421 in 2009, 2008 and 2007, respectively, for a three year total of $84,899. It is important for us to reduce our rate of credit loss and execute the following plans.
Our losses are largely a result of loan and investment impairments. From 2007 to 2009, we recorded total provisions for loan losses of $80,152 and other than temporary losses on investments of $12,854. While our net losses also included a charge off of goodwill of $5,887 and charges to establish an allowance against the realization of our deferred tax asset of $30,392, these latter charges may not have been required had we not incurred the losses on loans and investments.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Despite these losses, TIB Bank remained adequately capitalized at December 31, 2009 under the regulatory capital guidelines. On July 2, 2009, TIB Bank entered into a Memorandum of Understanding, which is an informal agreement, with Bank regulatory agencies that it will move in good faith to increase its Tier 1 leverage capital ratio to not less than 8% and its total risk-based capital ratio to not less than 12% by December 31, 2009 and maintain these higher ratios for as long as this agreement is in effect. Late during the second quarter of 2009, we retained a nationally recognized investment banking firm to assist us in raising capital. On August 14, 2009, we filed a registration statement with the U.S. Securities and Exchange Commission (“SEC”) on Form S-1 with the intent of issuing up to 40,250,000 shares of our common stock for maximum proceeds of $75,670,000. On September 23, 2009 we held a special meeting of shareholders at which an amendment to the Company’s Restated Articles of Incorporation was approved to increase the number of authorized shares of the Company’s common stock from 40,000,000 to 100,000,000 was approved. Due in part to the timing of this action, we believed that investors would require us to update our registration statement with third quarter financial results prior to commencing an offering. As discussed in our December 23, 2009 letter to shareholders, during this process, we received a comment letter from the SEC which indicated that our Annual Report for the year ended December 31, 2008 on Form 10-K and our March 31, 2009 and June 30, 2009 quarterly reports on Form 10-Q were under a routine review by the Division of Corporation Finance. The SEC staff periodically reviews filings of all publicly owned companies. As our timeline drew near the holiday and year-end period, we recei ved notification that the SEC staff concluded their review on December 17, 2009 without requiring any adjustments to our reported financial results. However, as advised by our investment banking firm noting that the financial markets traditionally are not receptive to offerings during this time period, we withdrew our registration statement on December 23, 2009 and intend to pursue our capital efforts in March and into the early second quarter of 2010. Due to the timing of our plans to raise capital, we requested an extension of time to April 30, 2010 to comply with the informal agreement. The Florida Office of Financial Regulation (“OFR”) agreed to the extension provided the FDIC also were to agree. We have not yet received the FDIC's response to our request.
At December 31, 2009, these elevated capital ratios were not met. We notified the bank regulatory agencies prior to December 31, 2009, that the increased capital levels would not be achieved and as we remain in regular contact with the FDIC and OFR, we expect the agencies will reevaluate our progress toward the higher capital ratios at March 31, 2010.
Our Board of Directors and management team have determined to take the following courses of action to improve our capital ratios:
· | First and foremost, to file a registration statement with the SEC for the offering of up to 80,000,000 shares of our common stock in a follow on public offering or in a public offering of common shares with a concurrent private placement of common and preferred shares. This is the main focus of our Board of Directors and management team over the coming months. |
· | Second, to continue to operate the Company and to maintain the bank at adequately capitalized until we complete our planned capital raise. This will most likely require us to reduce lending, potentially sell loans, and take significant operating expense reductions and other cost cutting measures aimed at lowering expenses. Additionally we would adjust the mix of our assets to reduce the total risk weight of our assets, reduce total assets over time and potentially sell branches, deposits and loans. |
· | Third, in the event the issuance of additional capital is not possible in the near term, seek strategic alternatives including but not limited to the sale of certain assets, all or a portion of the Company, or seeking a complementary partner in a merger of equals or where the Company is acquired. |
These financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Note 3—Cash and Due From Banks
Cash on hand or on deposit with the Federal Reserve Bank of $3,682 and $2,539 was required to meet regulatory reserve and clearing requirements at December 31, 2009 and 2008, respectively. Balances on deposit at the Federal Reserve Bank did not earn interest prior to October 19, 2008; subsequently they became interest bearing. The total on deposit was approximately $147,709 and $47,613 at December 31, 2009 and 2008, respectively.
The Bank maintains an interest bearing account at the Federal Home Loan Bank of Atlanta. The total on deposit was approximately $52 and $356 at December 31, 2009 and 2008, respectively.
Note 4—Investment Securities
The amortized cost, estimated fair value, and the related gross unrealized gains and losses recognized in accumulated other comprehensive income of investment securities available for sale at December 31, 2009 and December 31, 2008 are presented below:
December 31, 2009 | | Amortized Cost | | | Unrealized Gains | | | Unrealized Losses | | | Estimated Fair Value | |
U.S. Government agencies and corporations | | $ | 29,232 | | | $ | 24 | | | $ | 84 | | | $ | 29,172 | |
States and political subdivisions—tax exempt | | | 7,754 | | | | 307 | | | | - | | | | 8,061 | |
States and political subdivision—taxable | | | 2,313 | | | | - | | | | 101 | | | | 2,212 | |
Marketable equity securities | | | 12 | | | | - | | | | 4 | | | | 8 | |
Mortgage-backed securities - residential | | | 207,344 | | | | 2,083 | | | | 1,312 | | | | 208,115 | |
Corporate bonds | | | 2,878 | | | | - | | | | 866 | | | | 2,012 | |
Collateralized debt obligations | | | 4,996 | | | | - | | | | 4,237 | | | | 759 | |
| | $ | 254,529 | | | $ | 2,414 | | | $ | 6,604 | | | $ | 250,339 | |
| | | | | | | | | | | | | | | | |
December 31, 2008 | | Amortized Cost | | | Unrealized Gains | | | Unrealized Losses | | | Estimated Fair Value | |
U.S. Government agencies and corporations | | $ | 50,892 | | | $ | 776 | | | $ | - | | | $ | 51,668 | |
States and political subdivisions—tax exempt | | | 7,751 | | | | 59 | | | | 21 | | | | 7,789 | |
States and political subdivision—taxable | | | 2,407 | | | | - | | | | 70 | | | | 2,337 | |
Marketable equity securities | | | 12 | | | | - | | | | - | | | | 12 | |
Mortgage-backed securities - residential | | | 157,066 | | | | 1,332 | | | | 421 | | | | 157,977 | |
Corporate bonds | | | 2,870 | | | | - | | | | 1,158 | | | | 1,712 | |
Collateralized debt obligations | | | 5,763 | | | | - | | | | 1,488 | | | | 4,275 | |
| | $ | 226,761 | | | $ | 2,167 | | | $ | 3,158 | | | $ | 225,770 | |
| | | | | | | | | | | | | | | | |
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Securities with unrealized losses not recognized in income, and the period of time they have been in an unrealized loss position, are as follows:
| | Less than 12 Months | | | 12 Months or Longer | | | Total | |
December 31, 2009 | | Estimated Fair Value | | | Unrealized Losses | | | Estimated Fair Value | | | Unrealized Losses | | | Estimated Fair Value | | | Unrealized Losses | |
U.U.S. Government agencies and corporations | | $ | 5,034 | | | $ | 84 | | | $ | - | | | $ | - | | | $ | 5,034 | | | $ | 84 | |
StStates and political subdivisions—tax exempt | | | - | | | | - | | | | 275 | | | | - | | | | 275 | | | | - | |
StStates and political subdivisions—taxable | | | - | | | | - | | | | 2,212 | | | | 101 | | | | 2,212 | | | | 101 | |
MMarketable equity securities | | | 8 | | | | 4 | | | | - | | | | - | | | | 8 | | | | 4 | |
Mortgage-backed securities - residential | | | 98,746 | | | | 1,206 | | | | 10,542 | | | | 106 | | | | 109,288 | | | | 1,312 | |
Corporate bonds | | | - | | | | - | | | | 2,012 | | | | 866 | | | | 2,012 | | | | 866 | |
Collateralized debt obligations | | | - | | | | - | | | | 759 | | | | 4,237 | | | | 759 | | | | 4,237 | |
Total temporarily impaired | | $ | 103,788 | | | $ | 1,294 | | | $ | 15,800 | | | $ | 5,310 | | | $ | 119,588 | | | $ | 6,604 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 Months | | | 12 Months or Longer | | | Total | |
December 31, 2008 | | Estimated Fair Value | | | Unrealized Losses | | | Estimated Fair Value | | | Unrealized Losses | | | Estimated Fair Value | | | Unrealized Losses | |
U.U.S. Government agencies and corporations | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
StStates and political subdivisions—tax exempt | | | 2,413 | | | | 20 | | | | 274 | | | | 1 | | | | 2,687 | | | | 21 | |
StStates and political subdivisions-taxable | | | 2,247 | | | | 70 | | | | - | | | | - | | | | 2,247 | | | | 70 | |
Mortgage-backed securities - residential | | | 14,045 | | | | 83 | | | | 17,015 | | | | 338 | | | | 31,060 | | | | 421 | |
Corporate bonds | | | - | | | | - | | | | 1,712 | | | | 1,158 | | | | 1,712 | | | | 1,158 | |
Collateralized debt obligations | | | - | | | | - | | | | 3,512 | | | | 1,488 | | | | 3,512 | | | | 1,488 | |
Total temporarily impaired | | $ | 18,705 | | | $ | 173 | | | $ | 22,513 | | | $ | 2,985 | | | $ | 41,218 | | | $ | 3,158 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
The Company views the unrealized losses in the above table to be temporary in nature for the following reasons. First, the declines in fair values are mostly due to an increase in spreads due to risk and volatility in financial markets. Excluding the taxable state and political subdivision securities, corporate bonds and collateralized debt obligations, these securities are primarily AAA rated securities and have experienced no significant deterioration in value due to credit quality concerns and the magnitude of the unrealized losses of approximately 3% or less of the amortized cost of those securities with losses is consistent with normal fluctuations of value due to the volatility of market interest rates. The nature of what makes up the security portfolio is determined by the overall balance sheet of the Company and curren tly it is suitable for the Company’s security portfolio to be primarily comprised of fixed rate securities. Fixed rate securities will by their nature react in price inversely to changes in market rates and that is liable to occur in both directions.
We own a municipal bond guaranteed by a state housing finance agency which is currently rated “A-”, a corporate bond of a large financial institution which is currently rated “BB” and a collateralized debt obligation secured by debt obligations of banks and insurance companies which was rated “B” at December 31, 2009, whose fair values have declined more than 5% below their original cost. We believe these declines in fair value relate to a significant widening of interest rate spreads associated with these securities. While these securities have experienced deterioration in credit quality, we have evaluated these securities and have determined that these securities have not experienced a credit loss. As we have the intent and ability to hold these securities until their fair market value recovers, they are not other than temporarily impaired as of December 31, 2009.
As of December 31, 2009, the Company owned three collateralized debt obligation investment securities (backed primarily by corporate debt obligations of homebuilders, REITs, real estate companies and commercial mortgage backed securities) with an aggregate original cost of $9,996. Through December 31, 2009, the Company has recorded cumulative other than temporary impairment losses of $9,996 on these securities. In determining the estimated fair value of these securities, management utilizes a discounted cash flow modeling valuation approach which is discussed in greater detail in Note 18 - Fair Value. These securities are floating rate securities which were rated "A" or better by an independent and nationally recognized rating agency at the time of purchase. In late December 2007, these securities were downgraded be low investment grade by a nationally recognized rating agency. Due to the ratings downgrade and the amount of unrealized loss, management concluded that the loss of value was other than temporary under generally accepted accounting principles and the Company wrote these investment securities down to their estimated fair value. This resulted in the recognition of an other than temporary impairment loss of $3,885 in 2007. During 2008, the estimated fair value of these securities declined further due to the occurrence of additional defaults by certain underlying issuers and changes in the cash flow and discount rate assumptions used to estimate the value of these securities. During 2008, management concluded that the further declines in values were other than temporary under generally accepted accounting principles. Accordingly, the Company wrote-down these investment securities by an additional $5,348. These additional write downs included the complete write off of two of the three securities, with a combined original cost of $3,996. The third security, with an original cost of $6,000 was valued at an estimated fair value of $763 as of December 31, 2008. During 2009, additional defaults by underlying issuers and corresponding changes in estimated future cash flow assumptions resulted in the write-down of this third security to $0.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Additionally, during 2007, the market value of an investment in equity securities, which the Company originally acquired in 2003 for $3,000 to obtain community reinvestment credit, of a publicly owned company declined significantly. During 2007, management determined that the decline was other than temporary; accordingly, we wrote this investment down by $1,776. Due to significant further declines in market value during 2008, the Company wrote this investment down further by $1,078 in 2008 and decided to sell a portion of this investment in December 2008 to ensure the full realization of the associated capital loss carryback potential for Federal income tax purposes. In doing so, the Company recognized an additional realized loss of approximately $124 upon the partial disposition of this investment.
The write downs described above resulted in total recognized other than temporary impairment losses of $763, $6,426 and $5,661 during 2009, 2008 and 2007, respectively.
Management regularly reviews each investment security for impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer(s) and our ability and intention with regard to holding the security. Future declines in the fair value of these or other securities may result in additional impairment charges which may be material to the financial condition and results of operations of the Company.
As of December 31, 2009, the Company’s security portfolio consisted of 55 securities positions, 20 of which were in an unrealized loss position. The majority of unrealized losses are related to the Company’s collateralized debt obligation, corporate bonds and mortgage-backed and other securities, as discussed below:
State and political subdivision-taxable securities
At December 31, 2009, the Company owned taxable municipal revenue bonds issued by Florida Housing Financial Corporation (FHFC). These bonds were currently rated “AA" at year end 2009 and were subsequently downgraded to an underlying rating of “A-“ by nationally recognized ratings agencies. The Company has held this position since November 2001. These bonds were issued in 2001 for the purpose of financing the acquisition and construction of a multifamily residential development located within Collier County to be occupied by persons and families of low, moderate or middle income, as determined by Florida Housing and other applicable regulatory agency guidelines. The bonds become continuously callable at par each year after December 1, 2011. The FHFC/HUD guarantee provides protection and collection of the mortgage note balance, which approximates the amount of the bonds outstanding. These bonds are insured by a third party bond-insurer who insures the principal and any unpaid interest on the bonds. During 2009, the bond insurer was downgraded to “AA” by a nationally recognized rating agency. The fair value of these bonds has declined since we acquired them due to the ratings downgrades, wider spreads required by the market, the overall decline in the Florida real estate market and the underlying development experiencing a decrease in rents and negative cash flows. As the guarantee and bond insurance offer additional credit enhancement to this security, we believe we will continue to be paid principal and interest as scheduled on these bonds and/or the bonds will be called at their full par value. As the Company does not have the intent to sell these bonds and it is likely t hat it will not be required to sell the bonds before their anticipated recovery, the Company does not consider these bonds to be other-than-temporarily impaired at December 31, 2009.
Mortgage-backed securities
At December 31, 2009, the Company owned residential mortgage backed securities guaranteed by U.S. Government agencies and corporations. The fair values of certain of these securities have declined since we acquired them due to wider spreads required by the market.
Corporate bonds
At December 31, 2009, the Company owned corporate bonds issued by one of the largest banking and financial institutions in the United States. These bonds had been downgraded to “B” due to increased credit concerns, however recently the rating agencies upgraded these bonds to “BB.” The institution has received significant capital investment from the United States Treasury under the Capital Purchase Program/TARP and its financial performance is beginning to improve. As the Company does not have the intent to sell these bonds and it is likely that it will not be required to sell the bonds before their anticipated recovery, the Company does not consider these bonds to be other-than-temporarily impaired at December 31, 2009.
Collateralized debt obligation
The Company owns a collateralized debt security collateralized by trust preferred securities issued primarily by banks and several insurance companies. Our analysis of this investment falls within the scope of ASC 325-40. This security was rated high quality “AA” at the time of purchase, but at December 31, 2009, nationally recognized rating agencies rated this security as “B.” The Company compares the present value of expected cash flows to the previous estimate to ensure there are no adverse changes in the expected cash flows. The Company utilizes a discounted cash flow valuation model which considers the structure and term of the CDO and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timing and amo unt of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults by issuers of the underlying trust preferred securities. Assumptions used in the model include expected future default rates. Interest payment deferrals are generally treated as defaults even though they may not actually result in defaults. As of December 31, 2009, we engaged an independent third party valuation firm to estimate the fair value and credit loss potential of this security. Management reviewed the assumptions and methodology employed in this analysis and while the assumptions differed somewhat from those used in prior quarters to estimate the fair value of the security, the general premise of the methodology of discounting estimated future cash flows based upon the expected performan ce of the underlying issuers collateralizing the security was consistent with management’s previous approach. Based upon this analysis, as of December 31, 2009, management concluded that the further decline in value does not meet the definition of other than temporary under generally accepted accounting principles because no credit loss has been incurred. Additionally, we used the model to evaluate alternative scenarios with higher than expected default assumptions to evaluate the sensitivity of our default assumptions and the level of additional defaults required before a credit loss would be incurred. This security remained classified as available for sale at December 31, 2009, and accounted for the $4,237 of unrealized loss in the collateralized debt obligation category at December 31, 2009.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
The table below presents a rollforward of the credit losses recognized in earnings for the period from April 1, 2009 (the effective date of ASC 325-40 which requires the recognition of unrealized credit losses determined as a result of other than temporary impairment charges through the income statement and the unrealized losses related to all other factors through accumulated other comprehensive income) through December 31, 2009:
| | 2009 | |
Beginning balance, April 1, 2009 | | $ | 9,256 | |
Additions/subtractions | | | | |
Credit losses recognized during the period | | | 740 | |
Ending balance, December 31, 2009 | | $ | 9,996 | |
The estimated fair value of investment securities available for sale at December 31, 2009, by contractual maturity, are shown as follows. Expected maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.
December 31, 2009 | |
Due in one year or less | | $ | - | |
Due after one year through five years | | | 8,257 | |
Due after five years through ten years | | | 23,942 | |
Due after ten years | | | 10,017 | |
Marketable equity securities | | | 8 | |
Mortgage-backed securities | | | 208,115 | |
| | $ | 250,339 | |
| | | | |
At December 31, 2009, securities with a fair value of approximately $21,338 are subject to call during 2010.
Sales of available for sale securities were as follows:
| | 2009 | | | 2008 | | | 2007 | |
Proceeds | | $ | 525,359 | | | $ | 51,135 | | | $ | 5,491 | |
Gross gains | | | 5,003 | | | | 1,217 | | | | 1 | |
Gross losses | | | 6 | | | | 140 | | | | - | |
| | | | | | | | | | | | |
The tax expense related to net realized gains was $405 during 2008. In 2009, no associated tax expense was recorded due to the net loss for 2009 and a full valuation allowance against deferred income taxes that was recorded in 2009 which is discussed in greater detail in Note 11.
Maturities, principal repayments, and calls of investment securities available for sale during 2009, 2008 and 2007 were $209,566, $37,696, and $34,863, respectively. Net gains realized from calls and mandatory redemptions of securities during 2009, 2008 and 2007 were $61, $72, and $0, respectively.
Investment securities having carrying values of approximately $207,353 and $156,773 at December 31, 2009 and 2008, respectively, were pledged to secure public funds on deposit, securities sold under agreements to repurchase, and for other purposes as required by law.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Note 5—Loans
Major classifications of loans are as follows:
December 31, | | 2009 | | | 2008 | |
Real estate mortgage loans: | | | | | | |
| Commercial | | $ | 680,409 | | | $ | 658,516 | |
| Residential | | | 236,945 | | | | 205,062 | |
| Farmland | | | 13,866 | | | | 13,441 | |
| Construction and vacant land | | | 97,424 | | | | 147,309 | |
Commercial and agricultural loans | | | 69,246 | | | | 71,352 | |
Indirect auto loans | | | 50,137 | | | | 82,028 | |
Home equity loans | | | 37,947 | | | | 34,062 | |
Other consumer loans | | | 10,190 | | | | 11,549 | |
Total loans | | | 1,196,164 | | | | 1,223,319 | |
| | | | | | | | |
Net deferred loan costs | | | 1,352 | | | | 1,656 | |
Loans, net of deferred loan costs | | $ | 1,197,516 | | | $ | 1,224,975 | |
| | | | | | | | |
In 1998, TIB Bank made a $10,000 loan to construct a lumber mill in northern Florida. Of this amount, $6,400 had been sold by TIB Bank to other lenders. The loan was 80% guaranteed as to principal and interest by the U.S. Department of Agriculture (USDA). In addition to business real estate and equipment, the loan was collateralized by the business owner’s interest in a trust. Under provisions of the trust agreement, beneficiaries cannot receive trust assets until November 2010.
The portion of this loan guaranteed by the USDA and held by us was approximately $1,600 at December 31, 2007. The loan was accruing interest until December 2006 when TIB Bank ceased the accrual of interest pursuant to a ruling made by the USDA. Accrued interest on this loan totaled approximately $941 at December 31, 2007. During the second quarter of 2008, the USDA paid the Company the principal and accrued interest and allowed the Company to apply other proceeds previously received to capitalized liquidation costs and protective advances.
The non-guaranteed principal and interest (approximately $2,000 at December 31, 2009 and December 31, 2008) and the reimbursable capitalized liquidation costs and protective advance costs totaling approximately $126 and $112 at December 31, 2009 and 2008, respectively, are included as “other assets” in the financial statements.
Florida law requires a bank to liquidate or charge off repossessed real property within five years, and repossessed personal property within six months. Since the property had not been liquidated during this period, TIB Bank charged-off the non guaranteed principal and interest totaling approximately $2,000 at June 30, 2003, for regulatory purposes. Since the Company believes this amount is ultimately realizable, it did not write off this amount for financial statement purposes under generally accepted accounting principles.
Activity in the allowance for loan losses is as follows:
Years ended December 31, | | 2009 | | | 2008 | | | 2007 | |
Balance, beginning of year | | $ | 23,783 | | | $ | 14,973 | | | $ | 9,581 | |
Acquisition of The Bank of Venice | | | - | | | | - | | | | 667 | |
Provision for loan losses charged to expense | | | 42,256 | | | | 28,239 | | | | 9,657 | |
Loans charged off | | | (37,266 | ) | | | (19,509 | ) | | | (5,202 | ) |
Recoveries of loans previously charged off | | | 310 | | | | 80 | | | | 270 | |
Balance, end of year | | $ | 29,083 | | | $ | 23,783 | | | $ | 14,973 | |
| | | | | | | | | | | | |
Impaired loans are as follows:
Years ended December 31, | | 2009 | | | 2008 | |
Year end loans with no specifically allocated allowance for loan losses | | $ | 60,629 | | | $ | 8,344 | |
Year end loans with allocated allowance for loan losses | | | 87,823 | | | | 53,765 | |
Total | | $ | 148,452 | | | $ | 62,109 | |
Amount of the allowance for loan losses allocated to impaired loans | | $ | 9,040 | | | $ | 6,116 | |
| | | | | | | | |
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
The average balance of impaired loans during 2009, 2008 and 2007 was $114,297, $35,928 and $4,464, respectively. The amounts of interest income recognized during impairment and cash basis interest income recognized was not meaningful during 2009, 2008 and 2007. As of December 31, 2009, the balances of impaired loans reflect cumulative charge-downs of approximately $17,768. Impaired loans as of December 31, 2009 and 2008, also include $35,906 and $16,755, respectively, of restructured loans which are in compliance with modified terms and not reported as non-performing. No additional funding availability was committed to restructured loans as of December 31, 2009.
Non-performing loans include nonaccrual loans and accruing loans contractually past due 90 days or more. Nonaccrual loans are comprised principally of loans 90 days past due as well as certain loans, which are current but where serious doubt exists as to the ability of the borrower to comply with the repayment terms. Generally, interest previously accrued and not yet paid on nonaccrual loans is reversed during the period in which the loan is placed in a nonaccrual status. Non-performing loans are as follows:
Years ended December 31, | | 2009 | | | 2008 | |
Nonaccrual loans | | $ | 72,833 | | | $ | 39,776 | |
Loans past due over 90 days still on accrual | | | - | | | | - | |
| | | | | | | | |
Non-performing loans and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one category.
Note 6—Premises and Equipment
A summary of the cost and accumulated depreciation of premises and equipment follows:
December 31, | | 2009 | | | 2008 | | Estimated Useful Life |
Land | | $ | 12,955 | | | $ | 12,171 | | |
Buildings and leasehold improvements | | | 29,376 | | | | 26,272 | | 3 to 40 years |
Furniture, fixtures and equipment | | | 16,044 | | | | 15,426 | | 1 to 40 years |
Construction in progress | | | 1,824 | | | | 1,590 | | |
| | | 60,199 | | | | 55,459 | | |
Less accumulated depreciation | | | (19,377 | ) | | | (17,133 | ) | |
Premises and equipment, net | | $ | 40,822 | | | $ | 38,326 | | |
| | | | | | | | | |
Depreciation expense for the years ended December 31, 2009, 2008, and 2007, was approximately $3,085, $3,355, and $2,887, respectively.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
The Bank is obligated under operating leases for office and banking premises which expire in periods varying from one to seventeen years. Future minimum lease payments, before considering renewal options that generally are present, are as follows at December 31, 2009:
Years Ending December 31, | | | |
2010 | | $ | 884 | |
2011 | | | 816 | |
2012 | | | 460 | |
2013 | | | 260 | |
2014 | | | 257 | |
Thereafter | | | 1,804 | |
| | $ | 4,481 | |
| | | | |
Rental expense for the years ended December 31, 2009, 2008, and 2007, was approximately $1,615, $1,422, and $1,128, respectively.
Note 7—Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the years ended December 31, 2009, 2008 and 2007 are as follows:
| | 2009 | | | 2008 | | | 2007 | |
Balance January 1, | | $ | 5,160 | | | $ | 4,686 | | | $ | 106 | |
Goo Goodwill associated with the acquisition of Naples Capital Advisors, Inc. | | | 148 | | | | 474 | | | | - | |
Goo Goodwill associated with the acquisition of The Bank of Venice | | | - | | | | - | | | | 4,580 | |
Goo Goodwill associated with the acquisition of Riverside Bank of the Gulf Coast | | | 1,201 | | | | - | | | | - | |
Goodwill impairment | | | (5,887 | ) | | | - | | | | - | |
Balance December 31, | | $ | 622 | | | $ | 5,160 | | | $ | 4,686 | |
| | | | | | | | | | | | |
The Company performed a review of goodwill for potential impairment as of December 31, 2009. Based on this review, which included valuing the Company considering a variety of methodologies including using the Company’s stock price as of year end 2009, transaction multiples of recent comparable transactions and the expected present value of future cash flows, it was determined that impairment existed as of December 31, 2009. Accordingly, the Company wrote off $5,887 of goodwill relating primarily to the acquisitions of The Bank of Venice and Riverside.
Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value, which is determined through a two-step impairment test. Step 1 includes the determination of the carrying value of a reporting unit, including the existing goodwill and intangible assets, and estimating the fair value of the reporting unit. We determine the fair value of the reporting unit and compare it to its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, we are required to perform a second step to the impairment test.
Our annual impairment analysis as of December 31, 2009, indicated that the Step 2 analysis was necessary. Step 2 of the goodwill impairment test is performed to measure the impairment loss. Step 2 requires that the implied fair value of the reporting unit goodwill be compared to the carrying amount of that goodwill. As the carrying amount of the reporting unit goodwill exceeded the implied fair value of that goodwill, an impairment loss was required to be recognized in an amount equal to that excess.
Intangible assets consist of the following:
| | December 31, 2009 | | | December 31, 2008 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | | | Gross Carrying Amount | | | Accumulated Amortization | | Net Book Value |
Core deposit intangible | | $ | 8,733 | | | $ | 2,826 | | | $ | 5,907 | | | $ | 5,091 | | | $ | 3,027 | | | $ | 2,064 | | |
Customer relationship intangible | | | 1,095 | | | | 382 | | | | 713 | | | | 1,095 | | | | 197 | | | | 898 | | |
Trade Name and Other | | | 57 | | | | 10 | | | | 47 | | | | 57 | | | | 9 | | | | 48 | | |
Total | | $ | 9,885 | | | $ | 3,218 | | | $ | 6,667 | | | $ | 6,243 | | | $ | 3,233 | | | $ | 3,010 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Aggregate intangible asset amortization expense was $1,431, $653, and $440 for 2009, 2008, and 2007, respectively.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Estimated amortization expense for each of the next five years is as follows:
Years Ending December 31, | | | |
2010 | | $ | 1,552 | |
2011 | | | 1,418 | |
2012 | | | 1,418 | |
2013 | | | 1,249 | |
2014 | | | 359 | |
| | | | |
Note 8—Time Deposits
Time deposits of $100 or more were $288,021 and $241,011 at December 31, 2009 and 2008, respectively.
At December 31, 2009, the scheduled maturities of time deposits are as follows:
Years Ending December 31, | | | |
2010 | | $ | 466,880 | |
2011 | | | 153,798 | |
2012 | | | 38,013 | |
2013 | | | 2,987 | |
2014 | | | 3,059 | |
Thereafter | | | 43 | |
| | $ | 664,780 | |
| | | | |
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Note 9—Short-Term Borrowings and Federal Home Loan Bank Advances
Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase, advances from the Federal Home Loan Bank, and a Treasury, tax and loan note option.
At December 31, 2009, the Bank had an unsecured overnight federal funds purchased accommodation up to a maximum of $25,000 from its correspondent bank. On February 17, 2010, the Bank was notified that the maximum amount of the accommodation was changed to $7,500 and a secured repurchase agreement was entered into with a maximum accommodation of $24,388. Additionally, the Bank has agreements with various financial institutions under which securities can be sold under agreements to repurchase. TIB Bank also has securities sold under agreements to repurchase with commercial account holders whereby TIB Bank sweeps the customer’s accounts on a daily basis and pays interest on these amounts. These agreements are collateralized by investment securities chosen by TIB Bank.
The Bank accepts Treasury, tax and loan deposits from certain commercial depositors and remits these deposits to the appropriate government authorities. TIB Bank can hold up to $1,700 of these deposits more than a day under a note option agreement with its regional Federal Reserve Bank and pays interest on those funds held. TIB Bank pledges certain investment securities against this account.
As of December 31, 2009, collateral availability under our agreement with the Federal Reserve Bank of Atlanta (“FRB”) provided for up to approximately $98,646 of borrowing availability from the FRB discount window.
The Bank invests in Federal Home Loan Bank stock for the purpose of establishing credit lines with the Federal Home Loan Bank. The credit availability to the Bank is based on a percentage of the Bank’s total assets as reported on the most recent quarterly financial information submitted to the regulators subject to the pledging of sufficient collateral. On January 7, 2010, the Federal Home Loan Bank notified the Bank that the credit availability has been rescinded and the rollover of existing advances outstanding is limited to twelve months or less. At December 31, 2009, in addition to $25,150 in letters of credit used in lieu of pledging securities to the State of Florida and $150 in letters of credit on behalf of customers, there was $125,000 in advances outstanding. At December 31, 2008, the amount of outstanding adva nces was $202,900. The outstanding amount at December 31, 2009 consists of:
Amount | | Issuance Date | Maturity Date | Repricing Frequency | | Rate at December 31, 2009 | |
$ | 50,000 | | April 2008 | April 2013 (a) | Fixed | | | 3.80 | % |
| 50,000 | | December 2006 | December 2011 (a) | Fixed | | | 4.18 | % |
| 10,000 | | September 2007 | September 2012 (a) | Fixed | | | 4.05 | % |
| 10,000 | | September 2008 | March 2010 | Fixed | | | 3.12 | % |
| 5,000 | | March 2007 | March 2012 (a) | Fixed | | | 4.29 | % |
(a) These advances have quarterly conversion dates beginning six months to one year from date of issuance. If the FHLB chooses to convert the advance, the Bank has the option of prepaying the entire balance without penalty. Otherwise, the advance will convert to an adjustable rate, repricing on a quarterly basis. If the FHLB does not convert the advance, it will remain at the contracted fixed rate until the maturity date. |
The Bank’s collateral with the FHLB consists of a blanket floating lien pledge of the Bank’s residential 1-4 family mortgage and commercial real estate secured loans. The amount of eligible collateral at December 31, 2009 was $258,465.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
The following table reflects the average daily outstanding, year-end outstanding, maximum month-end outstanding and the weighted average rates paid for each of the categories of short-term borrowings and FHLB advances:
Year Ended December 31, | | 2009 | | | 2008 | |
Federal funds purchased: | | | | | | |
Balance: | | | | | | |
| Average daily outstanding | | $ | 68 | | | $ | 600 | |
| Year-end outstanding | | | - | | | | - | |
| Maximum month-end outstanding | | | - | | | | 6 | |
Rate: | | | | | | | | |
| Weighted average for year | | | 0.7 | % | | | 2.4 | % |
| Weighted average interest rate at December 31, | | | N/A | | | | N/A | |
| | | | | | | | |
Securities sold under agreements to repurchase: | | | | | | | | |
Balance: | | | | | | | | |
| Average daily outstanding | | $ | 71,073 | | | $ | 75,271 | |
| Year-end outstanding | | | 78,893 | | | | 69,593 | |
| Maximum month-end outstanding | | | 83,610 | | | | 85,654 | |
Rate: | | | | | | | | |
| Weighted average for year | | | 0.1 | % | | | 1.8 | % |
| Weighted average interest rate at December 31, | | | 0.1 | % | | | 0.1 | % |
| | | | | | | | |
Treasury, tax and loan note option: | | | | | | | | |
Balance: | | | | | | | | |
| Average daily outstanding | | $ | 1,001 | | | $ | 1,111 | |
| Year-end outstanding | | | 1,582 | | | | 1,830 | |
| Maximum month-end outstanding | | | 1,760 | | | | 1,830 | |
Rate: | | | | | | | | |
| Weighted average for year | | | 0.0 | % | | | 1.5 | % |
| Weighted average interest rate at December 31, | | | 0.0 | % | | | 0.0 | % |
| | | | | | | | |
Advances from the Federal Home Loan Bank-Short Term: | | | | | | | | |
Balance: | | | | | | | | |
| Average daily outstanding | | $ | 14,842 | | | $ | 32,111 | |
| Year-end outstanding | | | - | | | | 70,000 | |
| Maximum month-end outstanding | | | 76,650 | | | | 85,000 | |
Rate: | | | | | | | | |
| Weighted average for year | | | 0.8 | % | | | 1.9 | % |
| Weighted average interest rate at December 31, | | | N/A | | | | 1.2 | % |
| | | | | | | | |
Advances from the Federal Home Loan Bank-Long Term: | | | | | | | | |
Balance: | | | | | | | | |
| Average daily outstanding | | $ | 125,599 | | | $ | 133,118 | |
| Year-end outstanding | | | 125,000 | | | | 132,900 | |
| Maximum month-end outstanding | | | 126,250 | | | | 157,900 | |
Rate: | | | | | | | | |
| Weighted average for year | | | 4.0 | % | | | 4.1 | % |
| Weighted average interest rate at December 31, | | | 3.9 | % | | | 3.9 | % |
| | | | | | | | |
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Note 10—Long-Term Borrowings
Securities Sold Under Agreements to Repurchase
During 2007, the Company entered into agreements with another financial institution for the sale of certain securities to be repurchased at a future date. The interest rates on these repurchase agreements are fixed for the remaining term of the agreement. The financial institution has the ability to terminate these agreements on a quarterly basis. The outstanding amount at December 31, 2009 was $30,000 and consists of:
Amount | | Maturity Date | | Rate at December 31, 2009 | |
$ | 20,000 | | September 2010 | | | 4.18 | % |
| 10,000 | | December 2010 | | | 3.46 | % |
Subordinated Debentures
On September 7, 2000, the Company participated in a pooled offering of trust preferred securities. The Company formed TIBFL Statutory Trust I (the “Trust”) a wholly-owned statutory trust subsidiary for the purpose of issuing the trust preferred securities. The Trust used the proceeds from the issuance of $8,000 in trust preferred securities to acquire junior subordinated deferrable interest debentures of the Company. The trust preferred securities essentially mirror the debt securities, carrying a cumulative preferred dividend at a fixed rate equal to the 10.6% interest rate on the debt securities. The debt securities and the trust preferred securities each have 30-year lives. The trust preferred securities and the debt securities are callable by the Company or the Trust, at their respective o ption after ten years, and at varying premiums and sooner in specific events, subject to prior approval by the Federal Reserve Board, if then required.
On July 31, 2001, the Company participated in a pooled offering of trust preferred securities. The Company formed TIBFL Statutory Trust II (the “Trust II”) a wholly-owned statutory trust subsidiary for the purpose of issuing the trust preferred securities. The Trust II used the proceeds from the issuance of $5,000 in trust preferred securities to acquire junior subordinated deferrable interest debentures of the Company. The trust preferred securities essentially mirror the debt securities, carrying a cumulative preferred dividend at a variable rate equal to the interest rate on the debt securities (three month LIBOR plus 358 basis points). The initial rate in effect at the time of issuance was 7.29% and is subject to change quarterly. The rate in effect at December 31, 20 09 was 3.86%. The debt securities and the trust preferred securities each have 30-year lives. The trust preferred securities and the debt securities are callable by the Company or the Trust, at their respective option after five years, and at varying premiums and sooner in specific events, subject to prior approval by the Federal Reserve Board, if then required.
On June 23, 2006, the Company issued $20,000 of additional trust preferred securities through a private placement. The Company formed TIBFL Statutory Trust III (the “Trust III”), a wholly-owned statutory trust subsidiary for the purpose of issuing the trust preferred securities. The Trust III used the proceeds from the issuance of $20,000 in trust preferred securities to acquire junior subordinated deferrable interest debentures of the Company. The trust preferred securities essentially mirror the debt securities, carrying a cumulative preferred dividend at a variable rate equal to the interest rate on the debt securities (three month LIBOR plus 155 basis points). The rate in effect at December 31, 2009 was 1.83%. The debt securities and the trust preferred securities each have 30-year lives. The trust preferred se curities and the debt securities are callable by the Company or the Trust, at their respective option at par after five years, and sooner, at a 5% premium, if specific events occur, subject to prior approval by the Federal Reserve Board, if then required.
The Company received a request from the Federal Reserve Bank of Atlanta for the Company’s Board of Directors to adopt a resolution that it will not make any payments or distributions on the outstanding trust preferred securities without the prior written approval of the Reserve Bank. The Board adopted this resolution on October 5, 2009. The Company has notified the trustees of its $20,000 trust preferred securities due July 7, 2036 and its $5,000 trust preferred securities due July 31, 2031 of its election to defer interest payments on the trust preferred securities beginning with the payments due in October 2009. The Company also notified the trustees of its $8,000 trust preferred securities due September 7, 2030 of its election to defer interest payments on the trust preferred securities beginning with the payments due in March 2010. Deferral of the trust preferred securities is allowed for up to 60 months without being considered an event of default.
The Company has treated the trust preferred securities as Tier 1 capital up to the maximum amount allowed, and the remainder as Tier 2 capital for federal regulatory purposes (see Note 14).
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Contractual Maturities
At December 31, 2009, the contractual maturities of long-term borrowings were as follows:
| | Fixed Rate | | | Floating Rate | | | Total | |
Due in 2010 | | $ | 30,000 | | | $ | - | | | $ | 30,000 | |
Due in 2011 | | | - | | | | - | | | | - | |
Due in 2012 | | | - | | | | - | | | | - | |
Due in 2013 | | | - | | | | - | | | | - | |
Thereafter | | | 8,000 | | | | 25,000 | | | | 33,000 | |
Total long-term debt | | $ | 38,000 | | | $ | 25,000 | | | $ | 63,000 | |
| | | | | | | | | | | | |
Note 11—Income Taxes
Income tax expense (benefit) from continuing operations was as follows:
Years ended December 31, | | 2009 | | | 2008 | | | 2007 | |
Current income tax provision: | | | | | | | | | |
| Federal | | $ | (188 | ) | | $ | (7,515 | ) | | $ | 2,798 | |
| State | | | (32 | ) | | | (572 | ) | | | 436 | |
| | | (220 | ) | | | (8,087 | ) | | | 3,234 | |
Deferred tax benefit: | | | | | | | | | | | | |
| Federal | | | (14,292 | ) | | | (3,395 | ) | | | (4,334 | ) |
| State | | | (2,429 | ) | | | (1,371 | ) | | | (675 | ) |
| | | (16,721 | ) | | | (4,766 | ) | | | (5,009 | ) |
| | | | | | | | | | | | |
Valuation allowance | | | 30,392 | | | | - | | | | - | |
| | | | | | | | | | | | |
Total | | $ | 13,451 | | | $ | (12,853 | ) | | $ | (1,775 | ) |
| | | | | | | | | | | | |
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
A reconciliation of income tax computed at applicable Federal statutory income tax rates to total income taxes reported is as follows:
Years ended December 31, | | 2009 | | | 2008 | | | 2007 | |
Pretax income from continuing operations | | $ | (48,097 | ) | | $ | (33,783 | ) | | $ | (4,196 | ) |
Income taxes computed at Federal statutory tax rate | | $ | (16,353 | ) | | $ | (11,486 | ) | | $ | (1,427 | ) |
Effect of: | | | | | | | | | | | | |
| Tax-exempt income, net | | | (685 | ) | | | (253 | ) | | | (322 | ) |
| State income taxes, net | | | (1,624 | ) | | | (1,282 | ) | | | (156 | ) |
| Non-deductible goodwill | | | 1,557 | | | | - | | | | - | |
| Stock based compensation expense, net | | | 96 | | | | 90 | | | | 92 | |
| Other, net | | | 68 | | | | 78 | | | | 38 | |
| Change in valuation allowance | | | 30,392 | | | | - | | | | - | |
Total income tax expense (benefit) | | $ | 13,451 | | | $ | (12,853 | ) | | $ | (1,775 | ) |
| | | | | | | | | | | | |
A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. In assessing the need for a valuation allowance, management considered various factors including the significant cumulative losses incurred by the Company over the last three years coupled with the expectation that our future realization of deferred taxes will be limited as a result of the planned capital offering discussed in Note 2 above. These factors represent the most significant negative evidence that management considered in concluding that a full valuation allowance was necessary at December 31, 2009. As of December 31, 2008, management considered the need for a valuation allowance and, based upon its assessment of the relative weight of the positi ve and negative evidence available at the time, concluded that no valuation allowance was necessary at such time.
The details of the net deferred tax asset as of December 31, 2009 and 2008 are as follows:
Years ended December 31, | | 2009 | | | 2008 | |
Allowance for loan losses | | $ | 10,983 | | | $ | 9,053 | |
Recognized impairment losses on available for sale securities | | | 560 | | | | 2,529 | |
Net operating loss and AMT carryforward | | | 18,315 | | | | 1,165 | |
Recognized impairment of other real estate owned | | | 299 | | | | 474 | |
Acquisition related intangibles | | | 1,043 | | | | 330 | |
Deferred compensation | | | 906 | | | | 2,051 | |
Net unrealized losses on securities available for sale | | | 1,577 | | | | 373 | |
Other | | | 706 | | | | 450 | |
Total gross deferred tax assets | | | 34,389 | | | | 16,425 | |
| | | | | | | | |
Accumulated depreciation | | | (1,187 | ) | | | (1,013 | ) |
Deferred loan costs | | | (905 | ) | | | (833 | ) |
Acquisition related intangibles | | | (639 | ) | | | (758 | ) |
Other | | | (63 | ) | | | (151 | ) |
Total gross deferred tax liabilities | | | (2,794 | ) | | | (2,755 | ) |
| | | | | | | | |
Net temporary differences | | | 31,595 | | | | 13,670 | |
| | | | | | | | |
Valuation allowance | | | (31,595 | ) | | | - | |
| | | | | | | | |
Net deferred tax asset | | $ | - | | | $ | 13,670 | |
| | | | | | | | |
At December 31, 2009, the Company had a State net operating loss carryforward of approximately $22,427 which expires in 2028 if unused and Federal and state net operating loss carryforwards of $46,553 and $45,223, respectively, which expire in 2029 if unused.
The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax of the State of Florida. The Company is no longer subject to examination by taxing authorities for years before 2006.
There were no unrecognized tax benefits at December 31, 2009, and the Company does not expect the total of unrecognized tax benefits to significantly increase in the next twelve months.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Note 12—Employee Benefit Plans
The Company maintains an Employee Stock Ownership Plan with 401(k) provisions that covers all employees who are qualified as to age and length of service. Three types of contributions can be made to the Plan by the Company and participants: basic voluntary contributions which are discretionary contributions made by all participants; a matching contribution, whereby the Company will match 50 percent of salary reduction contributions up to 5 percent of compensation; and an additional discretionary contribution which may be made by the Company and allocated to the accounts of participants on the basis of total relative compensation. The Company contributed $334, $327, and $307, to the plan in 2009, 2008 and 2007, respectively. As of December 31, 2009, the Plan contained approximately 331,000 shares of the Company’s common s tock.
In 2001, TIB Bank entered into salary continuation agreements with three of its executive officers. Two additional TIB Bank executive officers entered into salary continuation agreements in 2003, another in 2004 and two additional TIB Bank executives entered into salary continuation agreements in 2008. In 2007, an additional two pre-existing salary continuation agreements with The Bank of Venice’s executive officers were assumed as part of the acquisition. The plans are nonqualified deferred compensation arrangements that are designed to provide supplemental retirement income benefits to participants. The Company expensed $227, $351, and $811 for the accrual of fu ture salary continuation benefits in 2009, 2008 and 2007, respectively. The Bank has purchased single premium life insurance policies on several of these individuals. Cash value income (net of related insurance premium expense) totaled $328, $236, and $266 in 2009, 2008 and 2007, respectively. In addition, a $1,186 gain was recognized on the policy of a deceased former employee. Other assets included $6,347 and $7,652 in surrender value and other liabilities included salary continuation benefits payable of $1,070 and $3,071 at December 31, 2009 and 2008, respectively. Three of these executive officers terminated employment in 2008 and two terminated employment in 2009. In 2009 a total of $2,229 of salary continuation benefits were paid to terminated executives in accordance with their agreements.
In 2001, TIB Bank established a non qualified retirement benefit plan for eligible Bank directors. Under the plan, the Bank pays each participant, or their beneficiary, the amount of directors fees deferred and interest in 120 equal monthly installments, beginning the month following the director’s normal retirement date. TIB Bank expensed $42, $214, and $239 for the accrual of current and future retirement benefits in 2009, 2008 and 2007, respectively, which included $0, $112, and $160 in 2009, 2008 and 2007 related to the annual director retainer fees and monthly meeting fees that certain directors elected to defer. TIB Bank has purchased single premium split dollar life insurance policies on these individuals.& #160; Cash value income (net of related insurance premium expense) totaled $170, $162, and $152 in 2009, 2008 and 2007, respectively. Other assets included $4,621 and $4,451 in surrender value in other assets and other liabilities included retirement benefits payable of $653 and $1,627 at December 31, 2009 and 2008, respectively. In connection with changes made to bring the plan agreements into compliance with section 409A of the Internal Revenue Code the four current directors participating in the plan each elected to receive a lump sum distribution in 2009 of the amount vested, accrued and earned through December 31, 2008.
Note 13—Related Party Transactions
The Bank had loans outstanding to certain of the Company’s executive officers, directors, and their related business interests as follows:
Beginning balance, January 1, 2009 | | $ | 270 | |
New loans | | | 223 | |
Repayments | | | (227 | ) |
Change in Parties | | | - | |
Ending balance, December 31, 2009 | | $ | 266 | |
| | | | |
Unfunded loan commitments to these individuals and their related business interests totaled $206 at December 31, 2009. Deposits from these individuals and their related interests were $3,215 and $2,081 at December 31, 2009 and 2008, respectively.
Note 14—Shareholders’ Equity and Minimum Regulatory Capital Requirements
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements results in certain discretionary and required actions by regulators that could have an effect on the Company’s operations. The regulations require the Company and the Bank to meet specific capital adequacy guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Capital Adequacy and Ratios
To be considered well capitalized and adequately capitalized (as defined) under the regulatory framework for prompt corrective action, the Banks must maintain minimum Tier 1 leverage, Tier 1 risk-based, and total risk-based ratios. At December 31, 2009 the Company and the Bank maintained capital ratios to be considered adequately capitalized. In September, our Bank of Venice subsidiary was merged into TIB Bank. Therefore capital ratios for The Bank of Venice are not reported for December 31, 2009. These minimum amounts and ratios along with the actual amounts and ratios for the Company and the Bank at of December 31, 2009 and 2008 are presented in the following tables.
December 31, 2009 | | Well Capitalized Requirement | | | Adequately Capitalized Requirement | | | Actual | |
| | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
Tier 1 Capital (to Average Assets) | | | | | | | | | | | | | | | | | | |
| Consolidated | | | N/A | | | | N/A | | | $ | ³ 68,316 | | | | ³ 4.0 | % | | $ | 69,450 | | | | 4.1 | % |
| TIB Bank | | $ | ³ 85,321 | | | | ³ 5.0 | % | | | ³ 68,256 | | | | ³ 4.0 | % | | | 82,696 | | | | 4.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Tier 1 Capital ( to Risk Weighted Assets) | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | | N/A | | | | N/A | | | $ | ³ 48,347 | | | | ³ 4.0 | % | | $ | 69,450 | | | | 5.7 | % |
| TIB Bank | | $ | ³ 72,504 | | | | ³ 6.0 | % | | | ³ 48,336 | | | | ³ 4.0 | % | | | 82,696 | | | | 6.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total Capital (to Risk Weighted Assets) | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | | N/A | | | | N/A | | | $ | ³ 96,694 | | | | ³ 8.0 | % | | $ | 98,362 | | | | 8.1 | % |
| TIB Bank | | $ | ³ 120,840 | | | | ³ 10.0 | % | | | ³ 96,672 | | | | ³ 8.0 | % | | | 97,975 | | | | 8.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2008 | | Well Capitalized Requirement | | | Adequately Capitalized Requirement | | | Actual | |
| | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
Tier 1 Capital (to Average Assets) | | | | | | | | | | | | | | | | | | |
| Consolidated | | | N/A | | | | N/A | | | $ | ³ 63,303 | | | | ³ 4.0 | % | | $ | 140,396 | | | | 8.9 | % |
| TIB Bank | | $ | ³ 75,032 | | | | ³ 5.0 | % | | | ³ 60,026 | | | | ³ 4.0 | % | | | 109,254 | | | | 7.3 | % |
| The Bank of Venice | | | ³ 4,072 | | | | ³ 5.0 | % | | | ³ 3,258 | | | | ³ 4.0 | % | | | 6,555 | | | | 8.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Tier 1 Capital ( to Risk Weighted Assets) | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | | N/A | | | | N/A | | | $ | ³ 49,521 | | | | ³ 4.0 | % | | $ | 140,396 | | | | 11.3 | % |
| TIB Bank | | $ | ³ 70,676 | | | | ³ 6.0 | % | | | ³ 47,117 | | | | ³ 4.0 | % | | | 109,254 | | | | 9.3 | % |
| The Bank of Venice | | | ³ 3,528 | | | | ³ 6.0 | % | | | ³ 2,351 | | | | ³ 4.0 | % | | | 6,555 | | | | 11.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total Capital (to Risk Weighted Assets) | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | | N/A | | | | N/A | | | $ | ³ 99,042 | | | | ³ 8.0 | % | | $ | 155,977 | | | | 12.6 | % |
| TIB Bank | | $ | ³ 117,793 | | | | ³ 10.0 | % | | | ³ 94,234 | | | | ³ 8.0 | % | | | 124,070 | | | | 10.5 | % |
| The Bank of Venice | | | ³ 5,880 | | | | ³ 10.0 | % | | | ³ 4,704 | | | | ³ 8.0 | % | | | 7,301 | | | | 12.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other than compliance with the request to attain elevated capital ratios as defined in the informal agreement discussed in Note 2 above, management believes, as of December 31, 2009, that the Company and the Bank meet all capital requirements to which they are subject. Tier 1 Capital for the Company includes the trust preferred securities that were issued in September 2000, July 2001 and June 2006 to the extent allowable.
If a bank is classified as adequately capitalized, the bank is subject to certain restrictions. One of the restrictions is that the bank may not accept, renew or roll over any brokered deposits (including CDARs deposits) without being granted a waiver of the prohibition by the FDIC. As of December 31, 2009, we had $95,028 of brokered deposits consisting of $46,827 of reciprocal CDARs deposits and $48,201 of traditional brokered and one-way CDARs deposits representing approximately 6.9% of our total deposits. $59,802 of CDARs deposits and $21,193 of traditional brokered deposits mature within the next twelve months. An inability to roll over or raise funds through CDARs deposits or brokered deposits could have a material adverse impact on our liquidity. Additional restrictions include limitations on deposit pricing, the preclus ion from paying “golden parachute” severance payments and the requirement to notify the bank regulatory agencies of certain significant events.
Subsidiary Dividend Limitations
Under state banking law, regulatory approval will be required if the total of all dividends declared in any calendar year by a bank exceeds the bank’s net profits to date for that year combined with its retained net profits for the preceding two years. Based on the losses incurred for the prior two years, declaration of dividends by TIB Bank to the Company, during 2009, would have required regulatory approval.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Private Placement Transaction
On March 7, 2008, we consummated a private placement transaction whereby two of Southwest Florida’s prominent families, their representatives and their related business interests purchased 1.3 million shares of common stock and warrants to purchase an additional 1.3 million shares of common stock. The warrants have an exercise price of $7.91 per share and may be exercised at any time prior to March 7, 2011. This private placement resulted in gross proceeds of $10,080. The terms of the transaction limits the ownership of each of the two groups to 9.9% of outstanding shares.
Issuance of Preferred Stock TARP
On December 5, 2008, under the U.S. Department of Treasury’s (the “Treasury”) Capital Purchase Program (the “CPP”) established under the Troubled Asset Relief Program (the “TARP”) that was created as part of the Emergency Economic Stabilization Act of 2008 (the “EESA”), the Company issued to Treasury 37,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, $0.10 par value, having a liquidation amount of $1,000 per share, and a ten-year warrant to purchase 1,106,389 shares of common stock at an exercise price of $5.02 per share, for aggregate proceeds of $37,000. Approximately $32,889 was allocated to the initial carrying value of the preferred stock and $4,111 to the warrant based on their relative estimated fair values on the issue date. The fair value of the prefe rred stock was determined using a discount rate of 13% and an assumed life of 10 years and resulted in an estimated fair value of $23,095. The fair value of the warrant was determined using the Black-Scholes Model utilizing a 0% dividend yield, a 2.67% risk-free interest rate, a 43% volatility assumption and 10 year expected life. These assumptions resulted in an estimated fair value of $2,887 for the warrant. The $37,000 of proceeds received were allocated between the preferred stock and the warrant based on their relative fair values. This resulted in the preferred stock being recognized at a discount from its $37,000 liquidation preference by an amount equal to the relative fair value of the warrant. The discount is currently being accreted using the constant effective yield method over the first five years. During 2009, $810 of accretion and $1,285 of dividends were recorded. During 2008, $31 of accretion was recorded. The total capital raised through this issue qualifies as Tier 1 regulatory capital and can be used in calculating all regulatory capital ratios.
Cumulative preferred stock dividends are payable quarterly at a 5% annual rate on the per share liquidation amount for the first five years and 9% thereafter. Under the original terms of the CPP, the Company may not redeem the preferred stock for three years unless it finances the redemption with the net cash proceeds from sales of common or preferred stock that qualify as Tier 1 regulatory capital (qualified equity offering), and only once such proceeds total at least $9,250. All redemptions, whether before of after the first three years, would be at the liquidation amount per share plus accrued and unpaid dividends and are subject to prior regulatory approval. The Company received a request from the Federal Reserve Bank of Atlanta for the Company’s Board of Directors to adopt a resolution that it will not make any payments or dis tributions on the outstanding trust preferred securities without the prior written approval of the Reserve Bank. The Board adopted this resolution on October 5, 2009. The Company has also notified the Treasury of its election to defer the dividend payment on the Series A preferred stock issued under TARP beginning in November 2009.
The Company may not declare or pay dividends on its common stock or, with certain exceptions, repurchase common stock without first having paid all accrued cumulative preferred dividends that are due. For three years from the issue date, the Company also may not increase its common stock dividend rate above a quarterly rate of $0.0589 per share or repurchase its common shares without Treasury’s consent, unless Treasury has transferred all the preferred shares to third parties or the preferred stock has been redeemed.
Treasury could only transfer or exercise an aggregate of one-half of the original number of shares underlying the warrant before December 31, 2009. If, before that date, the Company had received aggregate gross cash proceeds of not less than $37,000 from a qualified equity offering, then the remaining number of shares issuable to Treasury upon exercise of the warrant would have been reduced by one-half of the original number of shares under warrant. Both the number of shares of common stock underlying the warrant and the exercise price are subject to adjustment in accordance with customary anti-dilution provisions and upon certain issuances of the Company’s common stock or stock rights at less than 90% of market value.
To be eligible for the CPP, the Company has also agreed to comply with certain executive compensation and corporate governance requirements of the EESA, including a limit on the tax deductibility of executive compensation above $500. The specific rules covering these requirements were recently developed by Treasury and other government agencies. Additionally, under the EESA, Congress has the ability to impose “after-the-fact” terms and conditions on participants in the CPP. As a participant in the CPP, the Company may be subject to any such retroactive terms and conditions. The Company cannot predict whether, or in what form, additional terms or conditions may be imposed.
The American Recovery and Reinvestment Act (the “ARRA”) became law on February 17, 2009. Among its many provisions, the ARRA imposes certain new executive compensation and corporate expenditure limits on all current and future TARP recipients, including the Company, that are in addition to those previously announced by the Treasury. These limits are effective until the institution has repaid the Treasury, which is now permitted under the ARRA without penalty and without the need to raise new capital, subject to the Treasury’s consultation with the recipient’s appropriate regulatory agency.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Note 15 – Stock-Based Compensation
As of December 31, 2009, the Company has one compensation plan under which shares of its common stock are issuable in the form of stock options, restricted shares, stock appreciation rights, performance shares or performance units. This is its 2004 Equity Incentive Plan (the “2004 Plan”), which was approved by the Company’s shareholders at the May 25, 2004 annual meeting. Pursuant to the merger agreement, upon the April 30, 2007 closing of its acquisition of The Bank of Venice, the Company granted 87,840 stock options in exchange for the options outstanding for the purchase of shares of common stock of The Bank of Venice at such date. The options were fully vested at the grant date and ranged in price from $8.64 to $9.93 per share as determined by the conversion ratio specified in the merger agreement. Previously, the C ompany had granted stock options under the 1994 Incentive Stock Option and Nonstatutory Stock Option Plan (the “1994 Plan”) as amended and restated as of August 31, 1996. Under the 2004 Plan, the Board of Directors of the Company may grant nonqualified stock–based awards to any director, and incentive or nonqualified stock-based awards to any officer, key executive, administrative, or other employee including an employee who is a director of the Company. Subject to the provisions of the 2004 Plan, the maximum number of shares of common stock of the Company that may be optioned or awarded through the 2014 expiration of the plan is 849,215 shares, no more than 282,364 of which may be issued pursuant to awards granted in the form of restricted shares. Such shares may be treasury, or authorized but unissued, shares of common stock of the Company. If options or awards granted under the Plan expire or terminate for any reason without having been exercised in full or released from restriction, the corresponding shares shall again be available for option or award for the purposes of the Plan as long as no dividends have been paid to the holder in accordance with the provisions of the grant agreement.
The following table summarizes the components and classification of stock-based compensation expense for the years ended December 31,
| | 2009 | | | 2008 | | | 2007 | |
Stock options | | $ | 296 | | | $ | 280 | | | $ | 284 | |
Restricted stock | | | 394 | | | | 457 | | | | 364 | |
Total stock-based compensation expense | | $ | 690 | | | $ | 737 | | | $ | 648 | |
| | | | | | | | | | | | |
Salaries and employee benefits | | $ | 381 | | | $ | 436 | | | $ | 417 | |
Other expense | | | 309 | | | | 301 | | | | 231 | |
Total stock-based compensation expense | | $ | 690 | | | $ | 737 | | | $ | 648 | |
| | | | | | | | | | | | |
The tax benefit related to stock-based compensation expense arising from restricted stock awards and non-qualified stock options was approximately $177 and $142 for the years ended December 31, 2008 and 2007, respectively. No tax benefit was recorded for the year ended December 31, 2009 due to the recognition of a full valuation allowance against deferred income tax assets as discussed in greater detail in Note 11 above.
The fair value of each option is estimated as of the date of grant using the Black-Scholes Option Pricing Model. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate. The assumptions for the current period grants were developed based on ASC 718 and SEC guidance contained in Staff Accounting Bulletin (SAB) No. 107, “Share-Based Payment.” The following table summarizes the weighted average assumptions used to compute the grant-date fair value of options granted for the years ended December 31,
| | 2009 | | | 2008 | | | 2007 | |
Dividend yield | | | 0.00 | % | | | 2.31 | % | | | 1.63 | % |
Risk-free interest rate | | | 3.06 | % | | | 2.99 | % | | | 4.18 | % |
Expected option life | | 6.5 years | | | 6.4 years | | | 4.6 years | |
Volatility | | | 80 | % | | | 26 | % | | | 21 | % |
Weighted average grant-date fair value of options granted | | $ | 1.16 | | | $ | 1.72 | | | $ | 3.81 | |
| | | | | | | | | | | | |
· | The dividend yield was estimated using historical dividends paid and market value information for the Company’s stock. An increase in dividend yield will decrease stock compensation expense. |
· | The risk-free interest rate was developed using the U.S. Treasury yield curve for periods equal to the expected life of the options on the grant date. An increase in the risk-free interest rate will increase stock compensation expense. |
· | The expected option life for the current period grants was estimated using the vesting period, the term of the option and estimates of future exercise behavior patterns. An increase in the option life will increase stock compensation expense. |
· | The volatility was estimated using historical volatility for periods approximating the expected option life. An increase in the volatility will increase stock compensation expense. |
ASC 718 requires the recognition of stock-based compensation for the number of awards that are ultimately expected to vest. During 2007, 2008 and 2009, stock based compensation expense was recorded based upon estimates that we would experience no forfeitures. Our estimate of forfeitures will be reassessed in subsequent periods based on historical forfeiture rates and may change based on new facts and circumstances. Any changes in our estimates will be accounted for prospectively in the period of change.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
As of December 31, 2009, unrecognized compensation expense associated with stock options and restricted stock was $650 and $346 which is expected to be recognized over weighted average periods of approximately 2 years and 1 year, respectively.
Stock Options
Under the 2004 Plan, the exercise price for common stock must equal at least 100 percent of the fair market value of the stock on the day an option is granted. The exercise price under an incentive stock option granted to a person owning stock representing more than 10 percent of the common stock must equal at least 110 percent of the fair market value at the date of grant, and such option is not exercisable after five years from the date the incentive stock option was granted. The Board of Directors may, at its discretion, provide that an option not be exercised in whole or in part for any period or periods of time as specified in the option agreements. No option may be exercised after the expiration of ten years from the date it is granted. Stock options vest over varying service periods which range from vesting i mmediately to up to nine years.
A summary of the stock option activity in the plans is as follows:
| | Shares | | | Weighted Average Exercise Price | |
Balance, January 1, 2007 | | | 751,068 | | | $ | 8.65 | |
| Granted | | | 159,396 | | | | 8.79 | |
| Exercised | | | (160,049 | ) | | | 6.93 | |
| Expired or forfeited | | | (32,340 | ) | | | 11.21 | |
Balance, December 31, 2007 | | | 718,075 | | | $ | 8.95 | |
| Granted | | | 103,917 | | | | 7.43 | |
| Exercised | | | (15,712 | ) | | | 6.26 | |
| Expired or forfeited | | | (106,109 | ) | | | 7.86 | |
Balance, December 31, 2008 | | | 700,171 | | | $ | 8.95 | |
| Granted | | | 231,392 | | | | 1.62 | |
| Exercised | | | - | | | | - | |
| Expired or forfeited | | | (112,668 | ) | | | 9.49 | |
Balance, December 31, 2009 | | | 818,895 | | | $ | 6.81 | |
| | | | | | | | |
Options exercisable at December 31, | | 2009 | | | 2008 | |
| | Shares | | | Weighted Average Exercise Price | | | Shares | | | Weighted Average Exercise Price | |
| | | 363,226 | | | $ | 8.87 | | | | 330,482 | | | $ | 8.94 | |
| | | | | | | | | | | | | | | | |
The weighted average remaining terms for outstanding stock options and for exercisable stock options were 6.2 years and 4.3 years at December 31, 2009, respectively. The aggregate intrinsic value at December 31, 2009 was $0 for stock options outstanding and $0 for stock options exercisable. The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of the Company’s common stock as of the reporting date.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Options outstanding at December 31, 2009 were as follows:
| | | Outstanding Options | | | Options Exercisable | |
Range of Exercise Prices | | | Number | | | Weighted Average Remaining Contractual Life | | | Weighted Average Exercise Price | | | Number | | | Weighted Average Exercise Price | |
$ | 1.58 – $5.84 | | | | 363,116 | | | | 6.81 | | | $ | 3.07 | | | | 90,567 | | | $ | 5.51 | |
| 6.02 – 10.72 | | | | 273,872 | | | | 6.15 | | | | 8.02 | | | | 151,385 | | | | 8.01 | |
| 10.72 – 14.90 | | | | 181,907 | | | | 5.07 | | | | 12.44 | | | | 121,274 | | | | 12.46 | |
$ | 1.58 – $14.90 | | | | 818,895 | | | | 6.20 | | | $ | 6.81 | | | | 363,226 | | | $ | 8.87 | |
| | | | | | | | | | | | | | | | | | | | | | |
Proceeds received from the exercise of stock options were $0, $98 and $1,108 during the years ended December 31, 2009, 2008 and 2007, respectively. The intrinsic value related to the exercise of stock options was $0, $13 and $1,194, during the years ended December 31, 2009, 2008 and 2007, respectively. The intrinsic value related to exercises of non-qualified stock options and disqualifying dispositions of incentive stock options resulted in the realization of tax benefits of $3 and $51, during the years ended December 31, 2008 and 2007, respectively. No tax benefit was recorded for the year ended December 31, 2009 as there were no exercises of non-qualified stock options or disqualifying dispositions.
Restricted Stock
Restricted stock provides the grantee with voting, dividend and anti-dilution rights equivalent to common shareholders, but is restricted from transfer until vested, at which time all restrictions are removed. Vesting for restricted shares is generally on a straight-line basis and ranges from one to five years. The value of the restricted stock, estimated to be equal to the closing market price on the date of grant, is being amortized on a straight-line basis over the respective service periods. The fair market value of restricted stock awards that vested was $101, $185 and $202 during the years ended December 31, 2009, 2008 and 2007, respectively. Tax benefits related to the vesting of restricted shares of $33 and $10 were realized during the years ended December 31, 2008 and 2007, respectively. No tax benefit was recorded fo r the year ended December 31, 2009 due to the recognition of a full valuation allowance against deferred income tax assets as discussed in greater detail in Note 11 above.
A summary of the restricted stock activity in the plan is as follows:
| | 2009 | | | 2008 | | | 2007 | |
| | Shares | | | Weighted Average Grant-Date Fair Value | | | Shares | | | Weighted Average Grant-Date Fair Value | | | Shares | | | Weighted Average Grant-Date Fair Value | |
Balance, January 1, | | | 96,736 | | | $ | 10.87 | | | | 90,723 | | | $ | 13.58 | | | | 70,984 | | | $ | 14.76 | |
| Granted | | | - | | | | - | | | | 38,707 | | | | 6.91 | | | | 39,120 | | | | 12.01 | |
| Vested | | | (40,409 | ) | | | 11.53 | | | | (31,218 | ) | | | 13.68 | | | | (19,173 | ) | | | 14.77 | |
| Expired or forfeited | | | (7,225 | ) | | | 7.32 | | | | (1,476 | ) | | | 13.95 | | | | (208 | ) | | | 13.38 | |
Balance, December 31, | | | 49,102 | | | $ | 10.86 | | | | 96,736 | | | $ | 10.87 | | | | 90,723 | | | $ | 13.58 | |
Note 16—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 of credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
The contractual amount of financial instruments with off-balance-sheet risk was as follows at December 31:
| | 2009 | | | 2008 | |
| | Fixed Rate | | | Variable Rate | | | Fixed Rate | | | Variable Rate | |
Commitments to make loans | | $ | 13,496 | | | $ | 1,350 | | | $ | 10,786 | | | $ | 4,919 | |
Unfunded commitments under lines of credit | | | 3,890 | | | | 52,887 | | | | 8,181 | | | | 79,577 | |
| | | | | | | | | | | | | | | | |
Commitments to make loans are generally made for periods of 30 days. As of December 31, 2009, the fixed rate loan commitments have interest rates ranging from 4.25% to 18.00% and maturities ranging from 1 year to 30 years.
As of December 31, 2009 and 2008, the Company was subject to letters of credit totaling $1,896 and $2,542, respectively.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Note 17—Supplemental Financial Data
Components of other expense in excess of 1 percent of total interest and non-interest income are as follows:
Years Ended December 31, | | 2009 | | | 2008 | | | 2007 | |
Goodwill impairment | | $ | 5,887 | | | $ | - | | | $ | - | |
FDIC & State assessments | | | 3,962 | | | | 1,153 | | | | 629 | |
Legal and professional fees | | | 3,270 | | | | 2,558 | | | | 1,372 | |
OREO Expenses | | | 3,149 | | | | 1,694 | | | | 14 | |
Computer services | | | 2,708 | | | | 2,093 | | | | 2,172 | |
Amortization of intangibles | | | 1,431 | | | | 653 | | | | 440 | |
Marketing and community relations | | | 1,128 | | | | 1,246 | | | | 1,151 | |
Collection Expense | | | 353 | | | | 1,341 | | | | 772 | |
Operational Charge-offs | | | 155 | | | | 1,528 | | | | 74 | |
Net (gain) loss on disposition of repossessed assets | | | (244 | ) | | | 1,387 | | | | 986 | |
| | | | | | | | | | | | |
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Note 18—Fair Values of Financial Instruments
ASC 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The fair values of securities available for sale are determined by 1) obtaining quoted prices on nationally recognized securities exchanges when available (Level 1 inputs), 2) matrix pricing, which is a mathematical technique widely used in the industry to value 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) and 3) for collateralized debt obligations, custom discounted cash flow modeling (Level 3 inputs).
Valuation of Collateralized Debt Securities
As of December 31, 2009, the Company owned three collateralized debt obligations where the underlying collateral is comprised primarily of corporate debt obligations of homebuilders, REITs, real estate companies and commercial mortgage backed securities. The company also owned a collateralized debt security where the underlying collateral is comprised primarily of trust preferred securities of banks and insurance companies. The inputs used in determining the estimated fair value of these securities are Level 3 inputs. In determining their estimated fair value, management utilizes a discounted cash flow modeling valuation approach. Discount rates utilized in the modeling of these securities are estimated based upon a variety of factors including the market yields of publicly traded trust preferred securities of larger financial institutio ns and other non-investment grade corporate debt. Cash flows utilized in the modeling of these securities were based upon actual default history of the underlying issuers and issuer specific assumptions of estimated future defaults of the underlying issuers. As of December 31, 2009, we engaged an independent third party valuation firm to estimate the fair value and credit loss potential of this security. Management reviewed the assumptions and methodology employed in this analysis and while the assumptions differed from those used in prior quarters to estimate the fair value of the security, the general premise of the methodology of discounting estimated future cash flows based upon the expected performance of the underlying issuers collateralizing the security was consistent with management’s previous approach. The most significant difference in assumptions used as of December 31, 2009 as compared to those used as of December 31, 2008 was that no prepayments were assumed in the 2009 analysis as compar ed to the 2008 valuation where future prepayment assumptions were utilized in the expected cash flow assumptions.
Valuation of Impaired Loans and Other Real Estate Owned
The fair value of collateral dependent impaired loans with specific allocations of the allowance for loan losses and other real estate owned 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 appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below:
| | | | | Fair Value Measurements Using | |
December 31, 2009 | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Assets: | | | | | | | | | | | | |
U.S. U.S. Government agencies and corporations | | $ | 29,172 | | | $ | - | | | $ | 29,172 | | | $ | - | |
Stat States and political subdivisions—tax exempt | | | 8,061 | | | | - | | | | 8,061 | | | | - | |
Stat States and political subdivisions—taxable | | | 2,212 | | | | - | | | | 2,212 | | | | - | |
Mar Marketable equity securities | | | 8 | | | | - | | | | 8 | | | | - | |
MorMortgage-backed securities - residential | | | 208,115 | | | | - | | | | 208,115 | | | | - | |
Cor Corporate bonds | | | 2,012 | | | | - | | | | 2,012 | | | | - | |
Coll Collateralized debt obligations | | | 759 | | | | - | | | | - | | | | 759 | |
| A Available for sale securities | | $ | 250,339 | | | $ | - | | | $ | 249,580 | | | $ | 759 | |
| | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements Using | |
December 31, 2008 | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Assets: | | | | | | | | | | | | |
U.S. U.S. Government agencies and corporations | | $ | 51,668 | | | $ | - | | | $ | 51,668 | | | $ | - | |
Stat States and political subdivisions—tax exempt | | | 7,789 | | | | - | | | | 7,789 | | | | - | |
Stat States and political subdivisions—taxable | | | 2,337 | | | | - | | | | 2,337 | | | | - | |
Mar Marketable equity securities | | | 12 | | | | - | | | | 12 | | | | - | |
Mor Morttgage-backed securities - residential | | | 157,977 | | | | - | | | | 157,977 | | | | - | |
Cor Corporate bonds | | | 1,712 | | | | - | | | | 1,712 | | | | - | |
Coll Collateralized debt obligations | | | 4,275 | | | | - | | | | - | | | | 4,275 | |
| AAvailable for sale securities | | $ | 225,770 | | | $ | - | | | $ | 221,495 | | | $ | 4,275 | |
| | | | | | | | | | | | | | | | |
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2009 and still held at December 31, 2009.
| | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | |
| | Collateralized Debt Obligations | |
B Beginning balance, January 1, 2009 | | $ | 4,275 | |
Included in earnings – other than temporary impairment | | | (763 | ) |
Included in other comprehensive income | | | (2,753 | ) |
Transfer in to Level 3 | | | - | |
E Ending balance, December 31, 2009 | | $ | 759 | |
| | | | |
The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2008 and still held at December 31, 2008.
| | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | |
| | Collateralized Debt Obligations | |
B Beginning balance, January 1, 2008 | | $ | 6,111 | |
Included in earnings – other than temporary impairment | | | (5,348 | ) |
Included in other comprehensive income | | | (1,206 | ) |
Transfer in to Level 3 | | | 4,718 | |
E Ending balance, December 31, 2008 | | $ | 4,275 | |
| | | | |
| | | | |
Assets and Liabilities Measured on a Non-Recurring Basis
Assets and liabilities measured at fair value on a non-recurring basis are summarized below:
| | | | | Fair Value Measurements Using | |
December 31, 2009 | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Assets: | | | | | | | | | | | | |
I Impaired loans with specific allocations of the allowance for loan losses | | $ | 52,122 | | | $ | - | | | $ | - | | | $ | 52,122 | |
Other real estate owned | | | 21,352 | | | | - | | | | - | | | | 21,352 | |
Other repossessed assets | | | 326 | | | | - | | | | 326 | | | | - | |
| | | | | | | | | | | | | | | | |
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
| | | | | Fair Value Measurements Using | |
December 31, 2008 | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Assets: | | | | | | | | | | | | |
I Impaired loans with specific allocations of the allowance for loan losses | | $ | 47,649 | | | $ | - | | | $ | - | | | $ | 47,649 | |
| | | | | | | | | | | | | | | | |
Collateral dependent impaired loans, which are measured for impairment using the fair value of the collateral, had a carrying amount of $60,413, with a valuation allowance of $8,291 as of December 31, 2009. During the year ended December 31, 2009, $26,085 of the allowance for loan losses was specifically allocated to collateral dependent impaired loans. The amounts of the specific allocations for impairment are considered in the overall determination of the reserve and provision for loan losses. As of December 31, 2008, impaired loans had a carrying amount of $53,765, with a valuation allowance of $6,116. Other real estate owned which is measured at the lesser of fair value less costs to sell or our recorded investment in the foreclosed loan had a carrying amount of $22,147, less a valuation allowance of $795 as of December 31, 2009. As a result of sales of foreclosed properties, receipt of updated appraisals, reduced listing prices or entering into contracts to sell these properties, write downs of fair value of $1,980 were recognized in our statements of operations during the year ended December 31, 2009. Other repossessed assets are primarily comprised of repossessed automobiles and are measured at fair value as of the date of repossession. As a result of the disposition of repossessed vehicles, gains of $244 were recognized in our statements of operations during the year ended December 31, 2009.
Carrying amount and estimated fair values of financial instruments were as follows at December 31:
| | 2009 | | | 2008 | |
| | Carrying Value | | | Estimated Fair Value | | | Carrying Value | | | Estimated Fair Value | |
Financial assets: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 167,402 | | | $ | 167,402 | | | $ | 73,734 | | | $ | 73,734 | |
Investment securities available for sale | | | 250,339 | | | | 250,339 | | | | 225,770 | | | | 225,770 | |
Loans, net | | | 1,168,433 | | | | 1,101,080 | | | | 1,201,192 | | | | 1,164,238 | |
F Federal Home Loan Bank and Independent Bankers’ Bank stock | | | 10,735 | | | | N/A | | | | 12,012 | | | | N/A | |
Accrued interest receivable | | | 5,790 | | | | 5,790 | | | | 6,839 | | | | 6,839 | |
| | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | |
Non-contractual deposits | | | 704,604 | | | | 704,604 | | | | 446,993 | | | | 446,993 | |
Contractual deposits | | | 664,780 | | | | 669,073 | | | | 688,675 | | | | 697,676 | |
Federal Home Loan Bank Advances | | | 125,000 | | | | 131,924 | | | | 202,900 | | | | 211,827 | |
Short-term borrowings | | | 80,475 | | | | 80,472 | | | | 71,423 | | | | 71,412 | |
Long-term repurchase agreements | | | 30,000 | | | | 30,737 | | | | 30,000 | | | | 31,248 | |
Subordinated debentures | | | 33,000 | | | | 11,482 | | | | 33,000 | | | | 15,588 | |
Accrued interest payable | | | 5,457 | | | | 5,457 | | | | 8,012 | | | | 8,012 | |
| | | | | | | | | | | | | | | | |
The methods and assumptions used to estimate fair value are described as follows:
Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest receivable and payable, non-contractual demand deposits and certain short-term borrowings. As it is not practicable to determine the fair value of Federal Home Loan Bank stock and other bankers’ bank stock due to restrictions placed on its transferability, the estimated fair value is equal to their carrying amount. Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer including estimates of discounted cash flows when necessary. For fixed rate loans or contractual deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using cu rrent market rates applied to the estimated life, adjusted for the allowance for loan losses. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of long-term debt is based on current rates for similar financing. The fair value of off-balance sheet items that includes commitments to extend credit to fund commercial, consumer, real estate construction and real estate-mortgage loans and to fund standby letters of credit is considered nominal.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Note 19—Condensed Financial Information of TIB Financial Corp.
Condensed Balance Sheets
(Parent Only)
December 31, | | 2009 | | | 2008 | |
Assets: | | | | | | |
Cash on deposit with subsidiary | | $ | 874 | | | $ | 23,559 | |
Dividends receivable from subsidiaries | | | - | | | | 20 | |
Investment in bank subsidiaries | | | 86,960 | | | | 128,351 | |
Investment in other subsidiaries | | | 2,017 | | | | 2,107 | |
Other assets | | | 844 | | | | 1,791 | |
Total Assets | | $ | 90,695 | | | $ | 155,828 | |
| | | | | | | | |
Liabilities and Shareholders’ Equity: | | | | | | | | |
Dividends payable | | $ | - | | | $ | - | |
Interest payable | | | 564 | | | | 653 | |
Notes payable | | | 34,022 | | | | 34,022 | |
Other liabilities | | | 591 | | | | 39 | |
Shareholders’ equity | | | 55,518 | | | | 121,114 | |
Total Liabilities and Shareholders’ Equity | | $ | 90,695 | | | $ | 155,828 | |
| | | | | | | | |
Condensed Statements of Income
(Parent Only)
Year Ended December 31, | | 2009 | | | 2008 | | | 2007 | |
Operating income: | | | | | | | | | |
Interest Income | | $ | 97 | | | $ | 83 | | | $ | - | |
Dividends from bank subsidiaries | | | - | | | | - | | | | 11,340 | |
Dividends from other subsidiaries | | | 31 | | | | 70 | | | | 83 | |
Total operating income | | | 128 | | | | 153 | | | | 11,423 | |
| | | | | | | | | | | | |
Operating expense: | | | | | | | | | | | | |
Interest expense | | | 1,626 | | | | 2,336 | | | | 2,798 | |
Other expense | | | 1,660 | | | | 1,908 | | | | 1,298 | |
Total operating expense | | | 3,286 | | | | 4,244 | | | | 4,096 | |
| | | | | | | | | | | | |
InIncome (loss) before income tax benefit and equity in undistributed earnings of subsidiaries | | | (3,158 | ) | | | (4,091 | ) | | | 7,327 | |
Income tax benefit | | | 540 | | | | 1,537 | | | | 1,509 | |
InIncome (loss) before equity in undistributed earnings of subsidiaries | | | (2,618 | ) | | | (2,554 | ) | | | 8,836 | |
Equity in losses of subsidiaries | | | (58,930 | ) | | | (18,376 | ) | | | (11,257 | ) |
| | | | | | | | | | | | |
Net loss | | $ | (61,548 | ) | | $ | (20,930 | ) | | $ | (2,421 | ) |
| | | | | | | | | | | | |
Note 19—Condensed Financial Information of TIB Financial Corp. (Continued)
Condensed Statements of Cash Flows
(Parent Only)
Year Ended December 31, | | 2009 | | | 2008 | | | 2007 | |
Cash flows from operating activities: | | | | | | | | | |
Net loss | | $ | (61,548 | ) | | $ | (20,930 | ) | | $ | (2,421 | ) |
Equity in losses of subsidiaries | | | 58,930 | | | | 18,376 | | | | 11,257 | |
Stock-based compensation expense | | | 287 | | | | 274 | | | | 231 | |
Increase (decrease) in net income tax obligation | | | 997 | | | | (1,047 | ) | | | 157 | |
(Increase) decrease in other assets | | | 128 | | | | 7,190 | | | | (7,416 | ) |
Increase (decrease) in other liabilities | | | 307 | | | | 2 | | | | (175 | ) |
Net cash provided by (used in) operating activities | | | (899 | ) | | | 3,865 | | | | 1,633 | |
| | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Investment in bank subsidiaries | | | (20,500 | ) | | | (25,750 | ) | | | (888 | ) |
Investment in other subsidiaries | | | (148 | ) | | | (1,378 | ) | | | - | |
Net cash used in investing activities | | | (20,648 | ) | | | (27,128 | ) | | | (888 | ) |
| | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
Repayment of note payable | | | - | | | | - | | | | (4,000 | ) |
Net proceeds from issuance of common shares | | | (48 | ) | | | 10,033 | | | | 1,108 | |
Income tax effect of stock based compensation | | | (206 | ) | | | (82 | ) | | | 21 | |
Proceeds from issuance of preferred stock and common warrants | | | - | | | | 36,992 | | | | - | |
Proceeds from subsidiaries for equity awards | | | 401 | | | | 464 | | | | 417 | |
Payment to repurchase stock | | | - | | | | - | | | | (569 | ) |
Cash dividends paid | | | (1,285 | ) | | | (1,677 | ) | | | (2,953 | ) |
Net cash provided by (used in) financing activities | | | (1,138 | ) | | | 45,730 | | | | (5,976 | ) |
| | | | | | | | | | | | |
Net increase (decrease) in cash | | | (22,685 | ) | | | 22,467 | | | | (5,231 | ) |
Cash, beginning of year | | | 23,559 | | | | 1,092 | | | | 6,323 | |
Cash, end of year | | $ | 874 | | | $ | 23,559 | | | $ | 1,092 | |
| | | | | | | | | | | | |
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Note 20—Quarterly Financial Data (Unaudited)
The following is a summary of unaudited quarterly results for 2009 and 2008:
| | 2009 | | | 2008 | |
| | Fourth | | | Third | | | Second | | | First | | | Fourth | | | Third | | | Second | | | First | |
Condensed income statements: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income | | $ | 19,120 | | | $ | 20,327 | | | $ | 20,858 | | | $ | 20,822 | | | $ | 21,223 | | | $ | 22,242 | | | $ | 21,777 | | | $ | 22,922 | |
Net interest income | | | 11,177 | | | | 11,763 | | | | 11,694 | | | | 10,757 | | | | 10,719 | | | | 11,676 | | | | 11,409 | | | | 10,856 | |
Provision for loan losses | | | 16,428 | | | | 14,756 | | | | 5,763 | | | | 5,309 | | | | 15,101 | | | | 4,768 | | | | 5,716 | | | | 2,654 | |
Investment securities gain (loss), net | | | 2,477 | | | | 1,127 | | | | 95 | | | | 596 | | | | (4,221 | ) | | | (126 | ) | | | (1,912 | ) | | | 910 | |
Loss from continuing operations | | | (45,106 | ) | | | (8,097 | ) | | | (4,887 | ) | | | (3,458 | ) | | | (13,255 | ) | | | (2,196 | ) | | | (4,034 | ) | | | (1,445 | ) |
Income earned by preferred shareholders | | | 654 | | | | 650 | | | | 650 | | | | 708 | | | | 165 | | | | - | | | | - | | | | - | |
Net loss allocated to common shareholders | | | (45,760 | ) | | | (8,747 | ) | | | (5,537 | ) | | | (4,166 | ) | | | (13,420 | ) | | | (2,196 | ) | | | (4,034 | ) | | | (1,445 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Net loss per common share – Basic and diluted | | $ | (3.08 | ) | | $ | (0.59 | ) | | $ | (0.37 | ) | | $ | (0.28 | ) | | $ | (0.91 | ) | | $ | (0.15 | ) | | $ | (0.27 | ) | | $ | (0.11 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The net loss for the fourth quarter of 2009 was primarily due to the provision for income taxes of $24,032 resulting from the recognition of a full valuation allowance against deferred income tax assets of $30,392, the provision for loan losses of $16,428 and a goodwill impairment charge of $5,887. The net loss for the fourth quarter of 2008 was primarily due to the provision for loan losses of $15,101 and $4,221 in non-cash charges relating to the other than temporary impairment of investment securities brought about by a deepening of the economic downturn on a national and local basis during the quarter.
Note 21—Acquisitions
The Bank of Venice
On April 30, 2007, the Company completed the acquisition of The Bank of Venice, a Florida chartered commercial bank in exchange for consideration consisting of 1,002,499 shares of the Company’s common stock valued at approximately $13,628, cash of $568 and stock options valued at $364. The total purchase price, which includes certain direct acquisition costs of $194, totaled $14,754. Under the purchase method of accounting, the assets and liabilities of The Bank of Venice were recorded at their respective estimated fair values as of April 30, 2007 and are included in the accompanying balance sheets as of December 31, 2009 and 2008. Purchase accounting adjustments will be amortized or accreted into income over the estimated lives of the related assets and liabilities. Goodwill and other intangible assets identified were approximatel y $6,980 and are not deductible for income tax purposes.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition:
Cash and cash equivalents | | $ | 10,176 | |
Securities available for sale | | | 2,292 | |
Federal Home Loan Bank Stock and other equity securities | | | 496 | |
Loans, net | | | 55,373 | |
Fixed assets | | | 2,714 | |
Goodwill | | | 4,580 | |
Core deposit intangible | | | 2,150 | |
Customer relationship intangible | | | 250 | |
Other | | | 605 | |
| Total assets acquired | | | 78,636 | |
| | | | |
Deposits | | | 57,715 | |
FHLB advances | | | 5,000 | |
Other liabilities | | | 1,167 | |
| Total liabilities assumed | | | 63,882 | |
| | | | |
Total consideration paid for The Bank of Venice | | $ | 14,754 | |
| | | | |
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
The acquisition of The Bank of Venice provided an established entry point into the Sarasota County market and allowed us to significantly accelerate the rate of franchise growth of the combined entity which was expected to be greater than the Company could achieve on a de novo basis. On September 25, 2009, The Bank of Venice was merged into TIB Bank.
Naples Capital Advisors
On January 2, 2008, the Company completed the acquisition of Naples Capital Advisors, Inc., a registered investment advisor in exchange for consideration consisting of $1,333 in cash. In addition, the sellers are entitled to receive additional cash consideration up to $148 on each of the first three anniversaries of TIB Bank receiving a trust department license under the Florida Financial Institutions Codes subject to the achievement of certain total revenue milestones. On December 8, 2008, TIB Bank received authority to exercise trust powers from the FDIC and the State of Florida. In December 2009, the first $148 additional payment was made to the sellers. The total purchase price, which includes certain direct acquisition costs of $45, totaled $1,526.
Under the purchase method of accounting, the assets and liabilities of Naples Capital Advisors, Inc. were recorded at their respective estimated fair value as of January 2, 2008 and are included in the accompanying balance sheet as of December 31, 2009 and 2008. Purchase accounting adjustments will be amortized or accreted into income over the estimated lives of the related assets and liabilities. Goodwill and other intangible assets identified were approximately $1,513 and are deductible for income tax purposes.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition as adjusted for the additional payment of $148 in 2009:
Cash and cash equivalents | | $ | 2 | |
Fixed assets | | | 10 | |
Goodwill | | | 622 | |
Trade name | | | 46 | |
Customer relationship intangible | | | 845 | |
Other | | | 41 | |
| Total assets acquired | | | 1,566 | |
| | | | |
Other liabilities | | | 40 | |
| Total liabilities assumed | | | 40 | |
| | | | |
Total consideration paid for Naples Capital Advisors Inc. | | $ | 1,526 | |
| | | | |
This acquisition of Naples Capital Advisors, Inc. was the beginning of the Company’s entry into the new business lines of private banking, trust services and wealth management. Naples Capital Advisors, Inc .had $145,648 in assets under advisement as of December 31, 2009.
Riverside
On February 13, 2009, the Company purchased the deposits and operations of the former Riverside Bank of the Gulf Coast, a failed bank based in Cape Coral, Florida, from the Federal Deposit Insurance Corporation for a deposit premium of $4,126, representing 1.3% of deposits. Under the acquisition method of accounting, the acquired assets and assumed liabilities of Riverside were recorded at their respective estimated fair values and are included in the accompanying balance sheet as of December 31, 2009. Acquisition accounting adjustments will be amortized or accreted into income over the estimated lives of the related assets and liabilities. Goodwill and intangible assets identified were approximately $6,288 and are deductible for income tax purposes.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in connection with the acquisition:
Cash and cash equivalents | | $ | 271,398 | |
Securities available for sale | | | 31,850 | |
Loans | | | 10,737 | |
Intangible assets | | | 5,087 | |
Goodwill | | | 1,201 | |
Other | | | 321 | |
| Total assets acquired | | $ | 320,594 | |
| | | | |
Deposits (including deposit premium on certificates of deposit) | | $ | 319,232 | |
Other liabilities | | | 1,362 | |
| Total liabilities assumed | | $ | 320,594 | |
Riverside operated from nine branch banking offices of which eight were owned and one was leased. Subsequent to the acquisition, the Company had an option to assume the lease for the leased office and to purchase the eight owned offices for fair value which was determined by appraisal. Currently, the Company has elected to assume the lease and purchase six offices. Of the two offices the Company did not acquire, one was closed and the operations of the other were moved to a nearby location in March 2010. As a result of this acquisition, the Company has expanded its customer base and market presence in Southwest Florida.
Appendix B
Information included under “Financial Statements” in TIB Financial Corp.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TIB FINANCIAL CORP. CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands, except per share amounts) | |
| | June 30, 2010 | | | December 31, 2009 | |
| | | | | | |
Assets | | | | | | |
Cash and due from banks | | $ | 157,876 | | | $ | 167,402 | |
Investment securities available for sale | | | 282,621 | | | | 250,339 | |
Loans, net of deferred loan costs and fees | | | 1,101,672 | | | | 1,197,516 | |
Less: Allowance for loan losses | | | 27,710 | | | | 29,083 | |
Loans, net | | | 1,073,962 | | | | 1,168,433 | |
| | | | | | | | |
Premises and equipment, net | | | 51,480 | | | | 40,822 | |
Goodwill | | | 622 | | | | 622 | |
Intangible assets, net | | | 5,888 | | | | 6,667 | |
Other real estate owned | | | 38,699 | | | | 21,352 | |
Accrued interest receivable and other assets | | | 47,917 | | | | 49,770 | |
Total Assets | | $ | 1,659,065 | | | $ | 1,705,407 | |
| | | | | | | | |
Liabilities and Shareholders’ Equity | | | | | | | | |
Liabilities | | | | | | | | |
Deposits: | | | | | | | | |
Noninterest-bearing demand | | $ | 178,159 | | | $ | 171,821 | |
Interest-bearing | | | 1,163,572 | | | | 1,197,563 | |
Total deposits | | | 1,341,731 | | | | 1,369,384 | |
| | | | | | | | |
Federal Home Loan Bank (FHLB) advances | | | 125,000 | | | | 125,000 | |
Short-term borrowings | | | 73,894 | | | | 80,475 | |
Long-term borrowings | | | 63,000 | | | | 63,000 | |
Accrued interest payable and other liabilities | | | 16,404 | | | | 12,030 | |
Total liabilities | | | 1,620,029 | | | | 1,649,889 | |
| | | | | | | | |
Shareholders’ equity | | | | | | | | |
PrPreferred stock – $.10 par value: 5,000,000 shares authorized, 37,000 shares issued and outstanding, liquidation preference of $38,645 and $37,697, respectively | | | 34,110 | | | | 33,730 | |
C Common stock - $.10 par value: 750,000,000 and 100,000,000 shares authorized, 14,961,376 shares issued, 14,887,922 shares outstanding | | | 1,496 | | | | 1,496 | |
Additional paid in capital | | | 74,929 | | | | 74,673 | |
Accumulated deficit | | | (69,524 | ) | | | (49,994 | ) |
Accumulated other comprehensive loss | | | (1,406 | ) | | | (3,818 | ) |
Treasury stock, at cost, 73,454 shares | | | (569 | ) | | | (569 | ) |
Total shareholders’ equity | | | 39,036 | | | | 55,518 | |
| | | | | | | | |
Total Liabilities and Shareholders’ Equity | | $ | 1,659,065 | | | $ | 1,705,407 | |
| | | | | | | | |
See accompanying notes to consolidated financial statements | |
TIB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
| | Three Months Ended June 30 | | | Six Months Ended June 30 | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | |
Interest and dividend income | | | | | | | | | | | | |
Loans, including fees | | $ | 14,636 | | | $ | 17,352 | | | $ | 30,635 | | | | 35,191 | |
Investment securities: | | | | | | | | | | | | | | | | |
Taxable | | | 2,229 | | | | 3,410 | | | | 4,373 | | | | 6,314 | |
Tax-exempt | | | 41 | | | | 74 | | | | 108 | | | | 149 | |
Interest-bearing deposits in other banks | | | 75 | | | | 20 | | | | 149 | | | | 40 | |
Federal Home Loan Bank stock | | | 7 | | | | - | | | | 10 | | | | (19 | ) |
F Federal funds sold and securities purchased under agreements to resell | | | - | | | | 2 | | | | - | | | | 5 | |
Total interest and dividend income | | | 16,988 | | | | 20,858 | | | | 35,275 | | | | 41,680 | |
| | | | | | | | | | | | | | | | |
Interest expense | | | | | | | | | | | | | | | | |
Deposits | | | 4,509 | | | | 7,151 | | | | 9,411 | | | | 15,050 | |
Federal Home Loan Bank advances | | | 1,181 | | | | 1,279 | | | | 2,395 | | | | 2,685 | |
Short-term borrowings | | | 25 | | | | 26 | | | | 48 | | | | 50 | |
Long-term borrowings | | | 671 | | | | 708 | | | | 1,325 | | | | 1,444 | |
Total interest expense | | | 6,386 | | | | 9,164 | | | | 13,179 | | | | 19,229 | |
| | | | | | | | | | | | | | | | |
Net interest income | | | 10,602 | | | | 11,694 | | | | 22,096 | | | | 22,451 | |
| | | | | | | | | | | | | | | | |
Provision for loan losses | | | 7,700 | | | | 5,763 | | | | 12,625 | | | | 11,072 | |
Net interest income after provision for loan losses | | | 2,902 | | | | 5,931 | | | | 9,471 | | | | 11,379 | |
| | | | | | | | | | | | | | | | |
Non-interest income | | | | | | | | | | | | | | | | |
Service charges on deposit accounts | | | 839 | | | | 1,202 | | | | 1,754 | | | | 2,168 | |
Fees on mortgage loans originated and sold | | | 481 | | | | 318 | | | | 764 | | | | 433 | |
Investment advisory and trust fees | | | 313 | | | | 228 | | | | 620 | | | | 421 | |
Loss on sale of indirect auto loans | | | - | | | | - | | | | (346 | ) | | | - | |
Other income | | | 868 | | | | 489 | | | | 1,481 | | | | 998 | |
Investment securities gains (losses), net | | | 993 | | | | 835 | | | | 2,635 | | | | 1,454 | |
O Other-than-temporary impairment losses on investments prior to April 1, 2009 adoption of ASC 320-10-65-1 | | | - | | | | - | | | | - | | | | (23 | ) |
O Other-than-temporary impairment losses on investments subsequent to April 1, 2009 | | | | | | | | | | | | | | | | |
Gross impairment losses | | | - | | | | (740 | ) | | | - | | | | (740 | ) |
Less: Impairments recognized in other comprehensive income | | | - | | | | - | | | | - | | | | - | |
N Net impairment losses recognized in earnings subsequent to April 1, 2009 | | | - | | | | (740 | ) | | | - | | | | (740 | ) |
Total non-interest income | | | 3,494 | | | | 2,332 | | | | 6,908 | | | | 4,711 | |
| | | | | | | | | | | | | | | | |
Non-interest expense | | | | | | | | | | | | | | | | |
Salaries and employee benefits | | | 6,413 | | | | 7,068 | | | | 13,249 | | | | 14,448 | |
Net occupancy and equipment expense | | | 2,273 | | | | 2,438 | | | | 4,557 | | | | 4,590 | |
Foreclosed asset related expense | | | 5,149 | | | | 1,086 | | | | 6,249 | | | | 1,406 | |
Other expense | | | 6,660 | | | | 5,566 | | | | 11,474 | | | | 9,081 | |
Total non-interest expense | | | 20,495 | | | | 16,158 | | | | 35,529 | | | | 29,525 | |
| | | | | | | | | | | | | | | | |
Loss before income taxes | | | (14,099 | ) | | | (7,895 | ) | | | (19,150 | ) | | | (13,435 | ) |
| | | | | | | | | | | | | | | | |
Income tax benefit | | | - | | | | (3,008 | ) | | | - | | | | (5,090 | ) |
| | | | | | | | | | | | | | | | |
Net Loss | | $ | (14,099 | ) | | $ | (4,887 | ) | | $ | (19,150 | ) | | $ | (8,345 | ) |
PrPreferred dividends earned by preferred shareholders and discount accretion | | | 669 | | | | 650 | | | | 1,329 | | | | 1,358 | |
Net loss allocated to common shareholders | | $ | (14,768 | ) | | $ | (5,537 | ) | | $ | (20,479 | ) | | $ | (9,703 | ) |
| | | | | | | | | | | | | | | | |
Basic and diluted loss per common share | | $ | (0.99 | ) | | $ | (0.37 | ) | | $ | (1.38 | ) | | $ | (0.66 | ) |
| | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements
TIB FINANCIAL CORP.
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
(Dollars in thousands, except share and per share amounts)
| | Preferred Shares | | | Preferred Stock | | | Common Shares | | | Common Stock | | | Additional Paid in Capital | | | Accumulated Deficit | | | Accumulated Other Comprehensive Loss | | | Treasury Stock | | | Total Shareholders’ Equity | |
Balance, April 1, 2010 | | | 37,000 | | | $ | 33,919 | | | | 14,887,922 | | | $ | 1,496 | | | $ | 74,823 | | | $ | (55,234 | ) | | $ | (3,649 | ) | | $ | (569 | ) | | $ | 50,786 | |
Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | | | | | | | | | | | | | | | | | | | | | (14,099 | ) | | | | | | | | | | | (14,099 | ) |
O Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Net market valuation adjustment on securities available for sale | | | | | | | | | | | | | | | | | | | | | | | | | | | 3,236 | | | | | | | | | |
LessLess: reclassification adjustment for gains | | | | | | | | | | | | | | | | | | | | | | | | | | | (993 | ) | | | | | | | | |
Other comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,243 | |
Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (11,856 | ) |
Preferred stock discount accretion | | | | | | | 191 | | | | | | | | | | | | | | | | (191 | ) | | | | | | | | | | | - | |
StStock-based compensation | | | | | | | | | | | | | | | | | | | 106 | | | | | | | | | | | | | | | | 106 | |
Balance, June 30, 2010 | | | 37,000 | | | $ | 34,110 | | | | 14,887,922 | | | $ | 1,496 | | | $ | 74,929 | | | $ | (69,524 | ) | | $ | (1,406 | ) | | $ | (569 | ) | | $ | 39,036 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
TIB FINANCIAL CORP.
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
(Dollars in thousands, except share and per share amounts)
| | Preferred Shares | | | Preferred Stock | | | Common Shares | | | Common Stock | | | Additional Paid in Capital | | | Retained Earnings | | | Accumulated Other Comprehensive Loss | | | Treasury Stock | | | Total Shareholders’ Equity | |
Balance, April 1, 2009 | | | 37,000 | | | $ | 33,166 | | | | 14,895,143 | | | $ | 1,497 | | | $ | 73,768 | | | $ | 10,204 | | | $ | (214 | ) | | $ | (569 | ) | | $ | 117,852 | |
Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | | | | | | | | | | | | | | | | | | | | | (4,887 | ) | | | | | | | | | | | (4,887 | ) |
Other comprehensive loss, net of tax: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
N Net market valuation adjustment on securities available for sale | | | | | | | | | | | | | | | | | | | | | | | | | | | (608 | ) | | | | | | | | |
L Less: reclassification adjustment for gains, net of tax expense of $36 | | | | | | | | | | | | | | | | | | | | | | | | | | | (59 | ) | | | | | | | | |
Other comprehensive loss, net of tax benefit of $403 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (667 | ) |
Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (5,554 | ) |
Preferred stock discount accretion | | | | | | | 188 | | | | | | | | | | | | | | | | (188 | ) | | | | | | | | | | | - | |
Stock-based compensation and related tax effect | | | | | | | | | | | | | | | | | | | 133 | | | | | | | | | | | | | | | | 133 | |
C Common stock dividends declared, 1% | | | | | | | | | | | | | | | | | | | 407 | | | | (407 | ) | | | | | | | | | | | - | |
Cash dividends declared, preferred stock | | | | | | | | | | | | | | | | | | | | | | | (463 | ) | | | | | | | | | | | (463 | ) |
Balance, June 30, 2009 | | | 37,000 | | | $ | 33,354 | | | | 14,895,143 | | | $ | 1,497 | | | $ | 74,308 | | | $ | 4,259 | | | $ | (881 | ) | | $ | (569 | ) | | $ | 111,968 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
TIB FINANCIAL CORP.
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
(Dollars in thousands, except share and per share amounts)
| | Preferred Shares | | | Preferred Stock | | | Common Shares | | | Common Stock | | | Additional Paid in Capital | | | Accumulated Deficit | | | Accumulated Other Comprehensive Loss | | | Treasury Stock | | | Total Shareholders’ Equity | |
Balance, January 1, 2010 | | | 37,000 | | | $ | 33,730 | | | | 14,887,922 | | | $ | 1,496 | | | $ | 74,673 | | | $ | (49,994 | ) | | $ | (3,818 | ) | | $ | (569 | ) | | $ | 55,518 | |
Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | | | | | | | | | | | | | | | | | | | | | (19,150 | ) | | | | | | | | | | | (19,150 | ) |
O Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Net market valuation adjustment on securities available for sale | | | | | | | | | | | | | | | | | | | | | | | | | | | 5,047 | | | | | | | | | |
LessLess: reclassification adjustment for gains | | | | | | | | | | | | | | | | | | | | | | | | | | | (2,635 | ) | | | | | | | | |
Other comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,412 | |
Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (16,738 | ) |
Preferred stock discount accretion | | | | | | | 380 | | | | | | | | | | | | | | | | (380 | ) | | | | | | | | | | | - | |
StStock-based compensation | | | | | | | | | | | | | | | | | | | 256 | | | | | | | | | | | | | | | | 256 | |
Balance, June 30, 2010 | | | 37,000 | | | $ | 34,110 | | | | 14,887,922 | | | $ | 1,496 | | | $ | 74,929 | | | $ | (69,524 | ) | | $ | (1,406 | ) | | $ | (569 | ) | | $ | 39,036 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
TIB FINANCIAL CORP.
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
(Dollars in thousands, except share and per share amounts)
| | Preferred Shares | | | Preferred Stock | | | Common Shares | | | Common Stock | | | Additional Paid in Capital | | | Retained Earnings | | | Accumulated Other Comprehensive Loss | | | Treasury Stock | | | Total Shareholders’ Equity | |
Balance, January 1, 2009 | | | 37,000 | | | $ | 32,920 | | | | 14,895,143 | | | $ | 1,497 | | | $ | 73,148 | | | $ | 14,737 | | | $ | (619 | ) | | $ | (569 | ) | | $ | 121,114 | |
Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | | | | | | | | | | | | | | | | | | | | | (8,345 | ) | | | | | | | | | | | (8,345 | ) |
Other comprehensive loss, net of tax benefit: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
N Net market valuation adjustment on securities available for sale | | | | | | | | | | | | | | | | | | | | | | | | | | | 169 | | | | | | | | | |
L Less: reclassification adjustment for gains, net of tax expense of $260 | | | | | | | | | | | | | | | | | | | | | | | | | | | (431 | ) | | | | | | | | |
Other comprehensive loss, net of tax benefit of $158 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (262 | ) |
Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (8,607 | ) |
Is Issuance costs associated with preferred stock issued | | | | | | | | | | | | | | | | | | | (48 | ) | | | | | | | | | | | | | | | (48 | ) |
Preferred stock discount accretion | | | | | | | 434 | | | | | | | | | | | | | | | | (434 | ) | | | | | | | | | | | - | |
Stock-based compensation and related tax effect | | | | | | | | | | | | | | | | | | | 332 | | | | | | | | | | | | | | | | 332 | |
C Common stock dividends declared, 1% | | | | | | | | | | | | | | | | | | | 876 | | | | (876 | ) | | | | | | | | | | | - | |
Cash dividends declared, preferred stock | | | | | | | | | | | | | | | | | | | | | | | (823 | ) | | | | | | | | | | | (823 | ) |
Balance, June 30, 2009 | | | 37,000 | | | $ | 33,354 | | | | 14,895,143 | | | $ | 1,497 | | | $ | 74,308 | | | $ | 4,259 | | | $ | (881 | ) | | $ | (569 | ) | | $ | 111,968 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
TIB FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (Unaudited) (Dollars in thousands) | |
| | Six Months Ended June 30, | |
| | 2010 | | | 2009 | |
Cash flows from operating activities: | | | | | | |
Net loss | | $ | (19,150 | ) | | $ | (8,345 | ) |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | | | |
| Depreciation and amortization | | | 2,267 | | | | 2,216 | |
| Provision for loan losses | | | 12,625 | | | | 11,072 | |
| Deferred income tax benefit (loss) | | | - | | | | (6,461 | ) |
| Investment securities net realized gains | | | (2,635 | ) | | | (1,454 | ) |
| Net amortization of investment premium/discount | | | 1,588 | | | | 847 | |
| Write-down of investment securities | | | - | | | | 763 | |
| Stock-based compensation | | | 256 | | | | 370 | |
| (Gain)/Loss on sales of OREO | | | 111 | | | | 182 | |
| OREO valuation adjustments | | | 4,776 | | | | 801 | |
| Loss on the sale of indirect auto loans | | | 346 | | | | - | |
| Other | | | 264 | | | | 260 | |
Mortgage loans originated for sale | | | (37,650 | ) | | | (23,297 | ) |
Proceeds from sales of mortgage loans | | | 36,264 | | | | 21,706 | |
Fees on mortgage loans sold | | | (764 | ) | | | (395 | ) |
Change in accrued interest receivable and other assets | | | 3,819 | | | | 647 | |
Change in accrued interest payable and other liabilities | | | 4,834 | | | | 1,772 | |
Net cash provided by operating activities | | | 6,951 | | | | 684 | |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | | |
Purchases of investment securities available for sale | | | (265,628 | ) | | | (497,814 | ) |
Sales of investment securities available for sale | | | 188,601 | | | | 290,916 | |
Repayments of principal and maturities of investment securities available for sale | | | 48,202 | | | | 105,489 | |
Net cash received in acquisition of operations - Riverside Bank of the Gulf Coast | | | - | | | | 271,398 | |
Net (purchase) sale of FHLB stock | | | - | | | | 1,277 | |
Principal repayments on loans, net of loans originated or acquired | | | 29,752 | | | | (22,490 | ) |
Purchases of premises and equipment | | | (12,350 | ) | | | (1,252 | ) |
Proceeds from sales of loans | | | 25,767 | | | | - | |
Proceeds from sale of OREO | | | 3,604 | | | | 2,038 | |
Proceeds from disposal of equipment | | | 41 | | | | 18 | |
Net cash provided by investing activities | | | 17,989 | | | | 149,580 | |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | | |
Net increase (decrease) in demand, money market and savings accounts | | | (87,461 | ) | | | 85,803 | |
Net increase (decrease) in time deposits | | | 96,853 | | | | (52,486 | ) |
N Net change in brokered time deposits | | | (37,277 | ) | | | (93,399 | ) |
N Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase | | | (6,581 | ) | | | 11,755 | |
Repayment of long term FHLB advances | | | - | | | | (7,900 | ) |
Net change in short term FHLB advances | | | - | | | | (70,000 | ) |
Income tax effect related to stock-based compensation | | | - | | | | (38 | ) |
Net proceeds from issuance costs of preferred stock and common warrants | | | - | | | | (48 | ) |
Cash dividends paid to preferred shareholders | | | - | | | | (823 | ) |
Net cash used in financing activities | | | (34,466 | ) | | | (127,136 | ) |
| | | | | | | | |
Net increase in cash and cash equivalents | | | (9,526 | ) | | | 23,128 | |
Cash and cash equivalents at beginning of period | | | 167,402 | | | | 73,734 | |
Cash and cash equivalents at end of period | | $ | 157,876 | | | $ | 96,862 | |
| | | | | | | | |
Supplemental disclosures of cash paid: | | | | | | | | |
Interest | | $ | 10,999 | | | $ | 18,857 | |
Income taxes | | | - | | | | - | |
Supplemental information: | | | | | | | | |
Fair value of noncash assets acquired | | $ | - | | | $ | 49,193 | |
Fair value of liabilities assumed | | | - | | | | 320,594 | |
Transfer of loans to OREO | | | 25,702 | | | | 8,780 | |
Transfer of OREO to Premises and Equipment | | | - | | | | 2,941 | |
See accompanying notes to consolidated financial statements | |
TIB Financial Corp.
Unaudited Notes to Consolidated Financial Statements
(Dollars in thousands except for share and per share amounts)
Note 1 – Basis of Presentation & Accounting Policies
TIB Financial Corp. is a bank holding company headquartered in Naples, Florida, whose business is conducted primarily through our wholly-owned subsidiaries, TIB Bank and Naples Capital Advisors, Inc. Together with its subsidiaries, TIB Financial Corp. (collectively the “Company”) has a total of twenty-eight full service banking offices in Monroe, Miami-Dade, Collier, Lee, and Sarasota counties, Florida. On February 13, 2009, TIB Bank acquired the deposits (excluding brokered deposits), branch office operations and certain assets from the FDIC as receiver of the former Riverside Bank of the Gulf Coast (“Riverside”). On September 25, 2009, The Bank of Venice, acquired by the Company in April 2007, was merged into TIB Bank.
The accompanying unaudited consolidated financial statements for the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and Regulation S-X. 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 statement presentation. For further information and an additional description of the Company’s accounting policies, refer to the Company’s annual report on Form 10-K for the year ended December 31, 2009.
The consolidated statements include the accounts of TIB Financial Corp. and its wholly-owned subsidiaries, TIB Bank and subsidiaries and Naples Capital Advisors, Inc. All significant inter-company accounts and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The share and per share amounts discussed throughout this document have been adjusted to account for the effects of three one percent stock dividends declared by the Board of Directors during 2009 which were distributed April 10, 2009, July 10, 2009 and October 10, 2009 to all TIB Financial Corp. common shareholders of record as of March 31, 2009, June 30, 2009 and September 30, 2009, respectively.
As used in this document, the terms “we,” “us,” “our,” “TIB Financial,” and “Company” mean TIB Financial Corp. and its subsidiaries (unless the context indicates another meaning) and the term “Bank” means TIB Bank.
Recent losses, Regulatory Agreements and Definitive Investment Agreement
The unaudited consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the foreseeable future. However, the events and circumstances described below create uncertainty about the Company’s ability to continue as a going concern.
The Company recorded net losses of $61,548, $20,930 and $2,421 in 2009, 2008 and 2007, respectively, for a three year total of $84,899. During the first half of 2010, additional net losses of $19,150 were recorded. It is important for us to reduce our rate of credit loss, strengthen the financial position of the Company and TIB Bank and execute the following plans.
On July 2, 2009, the Bank entered into a Memorandum of Understanding, which is an informal agreement, with bank regulatory agencies that it would move in good faith to increase its Tier 1 leverage capital ratio to not less than 8% and its total risk-based capital ratio to not less than 12% by December 31, 2009 and maintain these higher ratios for as long as this agreement is in effect. At December 31, 2009, these elevated capital ratios were not met. As of June 30, 2010, the Company and Bank were considered undercapitalized under the regulatory capital guidelines.
On July 2, 2010, the Bank entered a Consent Order with the bank regulatory agencies under which, among other things, the Bank has agreed to maintain a Tier 1 Capital ratio of at least 8% of total assets and a Total Risk Based Capital ratio of at least 12% within 90 days. The Consent Order also governs certain aspects of the Bank’s operations including a requirement that it reduce the balance of assets classified substandard and doubtful by at least 70% over a two-year period, and not undertake asset growth of 5% or more per year without prior approval from the regulatory agencies. The Consent Order supersedes the Memorandum of Understanding.
On June 29, 2010, the Company and the Bank entered into a definitive agreement with North American Financial Holdings, Inc. (“NAFH”) for the investment of up to $350,000 in TIB through the purchase of common stock, preferred stock and warrant. Pursuant to the definitive agreement, the Company agreed to sell to NAFH, at the closing of the investment, 700 million shares of its common stock at a purchase price of $0.15 per share and 70,000 shares of newly created mandatorily convertible participating voting preferred stock at a purchase price of $1,000 per share for a cumulative total of $175,000. The preferred stock will have a liquidation preference of $1,000 per share and each share of preferred stock will be convertible into a number of shares of the Company’s common stock equal to the liquidation preference divided by $0.15 (subject to customary anti-dilution adjustments). After giving effect to the NAFH investment, it is expected that NAFH would own approximately 99% of the Company’s common stock (on an as-converted basis). The Company also intends to conduct a rights offering to legacy shareholders of rights to purchase up to 149 million shares of common stock at a price of $0.15 per share, which would raise up to $22,400, which would equate to 12% of the Company’s pro-forma fully diluted equity. The record date for the rights offering was July 12, 2010. In addition, during the 18-month period following the closing, NAFH will have the right to invest up to an additional $175,000 in preferred stock and/or common stock on the above terms. Upon closing of the investment, each of the Company and the Bank will add experienced bankers R. Eugene (Gene) Taylor, Christopher (Chris) G. Marshall, R. Bruce Singletary and Kenneth (Ken) A. Posne r to its board of directors, along with other directors to be designated by NAFH. The investment is subject to satisfaction or waiver of certain closing conditions, including reaching an agreement with the U.S. Department of the Treasury (Treasury) to repurchase the preferred stock and warrant issued under the Troubled Asset Relief Program Capital Purchase Program on terms acceptable to NAFH, the receipt by NAFH and the Company of the requisite governmental and regulatory approvals as well as the approval of the NASDAQ Stock Market to issue the common stock, preferred stock and warrant in reliance on the shareholder approval exemptions set forth in NASDAQ Rule 5635(f). While the NAFH investment is expected to close in the third quarter of 2010, there is no assurance it will close during the quarter, or ever. At this time, all the applications required to be filed with regulatory agencies have been filed and we have reached an agreement on the significant terms on the repurchase of the P referred Stock and warrant issued to the Treasury under the TARP Capital Purchase Program. Upon consummation of the investment it is estimated that both the Company and the Bank will be well capitalized and the Bank will be in compliance with the required capital ratios of the Consent Order.
TIB Financial Corp.
Unaudited Notes to Consolidated Financial Statements
(Dollars in thousands except for share and per share amounts)
If the investment by NAFH is not consummated, the Board of Directors and management team intend to seek other strategic alternatives including but not limited to the sale of certain assets, all or a portion of the Company, or seeking a complementary partner in a merger of equals or where the Company is acquired. There is no assurance the Company will be successful in entering into any agreement or closing such an alternative transaction.
These financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Critical Accounting Policies
The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted within the United States of America and conform to general practices within the banking industry.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses, which is increased by the provision for loan losses and decreased by charge-offs less recoveries. Loan losses are charged against the allowance when management believes the uncollectiblity of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required based on factors including 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 char ged off.
The allowance consists of specific and general components. The specific component relates to loans that are impaired and are individually internally classified as special mention, substandard or doubtful. The general component covers non-classified loans and is based on subjective factors and historical loss experience adjusted for current factors.
A loan is considered impaired when it is probable that not all principal and interest amounts will be collected according to the loan contract. Individual commercial, commercial real estate and residential loans exceeding certain size thresholds established by management are individually evaluated for impairment. If a loan is considered to be impaired, a portion of the allowance is allocated so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Generally, large groups of smaller balance homogeneous loans, such as consumer, indirect, and residential real estate loans (other than those evaluated individually), are collectively evaluated for impairment, and accordi ngly, they are not separately identified for impairment disclosures.
Investment Securities and Other Than Temporary Impairment
Investment securities which may be sold prior to maturity are classified as available for sale and are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income. Other securities such as Federal Home Loan Bank stock are carried at cost and are included in other assets on the balance sheets.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method based on the amortized cost of the security sold.
Management regularly reviews each investment security for impairment based on criteria that include the extent to which cost exceeds fair value, the duration of that market decline, the financial health of and specific prospects for the issuer(s) and our ability and intention with regard to holding the security. Future declines in the fair value of these or other securities may result in additional impairment charges which may be material to the financial condition and results of operations of the Company.
Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities classified as available for sale or held-to-maturity are generally evaluated for OTTI under FASB Accounting Standards Codification (“ASC”) 320-10-35. However, certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase of below AAA are evaluated using the model outlined in ASC 325-40-35.
In determining OTTI under the ASC 320-10-35 model, management considers many factors, including but not limited to: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
The second segment of the portfolio uses the OTTI guidance provided by ASC 325-40-35 that is specific to purchased beneficial interests that are rated below “AAA”. Under this model, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected present value of the remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.
When OTTI occurs under either model, the amount of the impairment recognized in earnings depends on whether we intend to sell the security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If we intend to sell or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the impairment is required to be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis less any current-perio d loss, the impairment shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of impairment related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the impairment related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.
TIB Financial Corp.
Unaudited Notes to Consolidated Financial Statements
(Dollars in thousands except for share and per share amounts)
Earnings (Loss) Per Common Share
Basic earnings (loss) per share is net income (loss) allocated to common shareholders divided by the weighted average number of common shares and vested restricted shares outstanding during the period. Diluted earnings per share includes the dilutive effect of additional potential common shares issuable under stock options, warrants and restricted shares computed using the treasury stock method.
Additional information with regard to the Company’s methodology and reporting of investment securities, the allowance for loan losses and earnings per common share is included in the 2009 Annual Report on Form 10-K.
Acquisitions
The Company accounts for its business combinations based on the acquisition method of accounting. The acquisition method of accounting requires the Company to determine the fair value of the tangible net assets and identifiable intangible assets acquired. The fair values are based on available information and current economic conditions at the date of acquisition. The fair values may be obtained from independent appraisers, discounted cash flow present value techniques, management valuation models, quoted prices on national markets or quoted market prices from brokers. These fair value estimates will affect future earnings through the disposition or amortization of the underlying assets and liabilities. While management believes the sources utilized to arrive at the fair value estimates are reliable, different sources or methods could ha ve yielded different fair value estimates. Such different fair value estimates could affect future earnings through different values being utilized for the disposition or amortization of the underlying assets and liabilities acquired.
Goodwill and Other Intangible Assets
Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009 represents the future economic benefits arising from other assets acquired that are not individually identified and separately recognized. Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. The Company performed a review of goodwill for potential impairment as of December 31, 2009. Based on the review, it was determined that impairment existed as of December 31, 2009. The amount of the goodwill impairment charge in De cember 2009 was $5,887.
Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. The only intangible assets with indefinite lives on our balance sheet are goodwill and a trade name related to the acquisition of Naples Capital Advisors, Inc. Other intangible assets include core deposit base premiums and customer relationship intangibles arising from acquisitions and are initially measured at fair value. The intangibles are being amortized using the straight-line method over estimated lives ranging from 5 to 15 years.
Income Taxes
Income tax expense (or benefit) is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.
A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. In assessing the need for a valuation allowance, management considered various factors including the significant cumulative losses incurred by the Company over the last three years coupled with the expectation that our future realization of deferred taxes will be limited as a result of the planned investment by NAFH. These factors represent the most significant negative evidence that management considered in concluding that a full valuation allowance was necessary at June 30, 2010 and December 31, 2009.
Recent Accounting Pronouncements
In June 2009, the FASB issued Statement No. 166 (not yet integrated into the ASC), “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140.” This statement removes the concept of a qualifying special-purpose entity from Statement 140 and removes the exception from applying FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities”, to qualifying special-purpose entities. The objective in issuing this Statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This Statement must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Adoption did not have a material impact on the results of operations or financial position of the Company.
In June 2009, the FASB issued ASC 105-10 which establishes the FASB Accounting Standards Codification as the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification became non-authoritative. ASC 105-10 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. Adoption, as required, did not have a materia l impact on the results of operations or financial position of the Company.
TIB Financial Corp.
Unaudited Notes to Consolidated Financial Statements
(Dollars in thousands except for share and per share amounts)
Note 2 – Investment Securities
The amortized cost, estimated fair value and the related gross unrealized gains and losses recognized in accumulated other comprehensive income of investment securities available for sale at June 30, 2010 and December 31, 2009 are presented below:
| | June 30, 2010 | |
| | Amortized Cost | | | Unrealized Gains | | | Unrealized Losses | | | Estimated Fair Value | |
U.S. Government agencies and corporations | | $ | 28,774 | | | $ | 64 | | | $ | - | | | $ | 28,838 | |
States and political subdivisions—tax exempt | | | 2,992 | | | | 86 | | | | - | | | | 3,078 | |
States and political subdivisions—taxable | | | 2,311 | | | | - | | | | 45 | | | | 2,266 | |
Marketable equity securities | | | 12 | | | | 164 | | | | - | | | | 176 | |
Mortgage-backed securities—residential | | | 242,439 | | | | 3,085 | | | | 40 | | | | 245,484 | |
Corporate bonds | | | 2,880 | | | | - | | | | 859 | | | | 2,021 | |
Collateralized debt obligation | | | 4,992 | | | | - | | | | 4,234 | | | | 758 | |
| | $ | 284,400 | | | $ | 3,399 | | | $ | 5,178 | | | $ | 282,621 | |
| | December 31, 2009 | |
| | Amortized Cost | | | Unrealized Gains | | | Unrealized Losses | | | Estimated Fair Value | |
U.S. Government agencies and corporations | | $ | 29,232 | | | $ | 24 | | | $ | 84 | | | $ | 29,172 | |
States and political subdivisions—tax exempt | | | 7,754 | | | | 307 | | | | - | | | | 8,061 | |
States and political subdivisions—taxable | | | 2,313 | | | | - | | | | 101 | | | | 2,212 | |
Marketable equity securities | | | 12 | | | | - | | | | 4 | | | | 8 | |
Mortgage-backed securities—residential | | | 207,344 | | | | 2,083 | | | | 1,312 | | | | 208,115 | |
Corporate bonds | | | 2,878 | | | | - | | | | 866 | | | | 2,012 | |
Collateralized debt obligation | | | 4,996 | | | | - | | | | 4,237 | | | | 759 | |
| | $ | 254,529 | | | $ | 2,414 | | | $ | 6,604 | | | $ | 250,339 | |
Proceeds from sales and calls of securities available for sale were $118,645 and $208,603 for the three and six months ended June 30, 2010, respectively. Gross gains of approximately $993 and $2,635 were realized on these sales and calls during the three and six months ended June 30, 2010, respectively.
The estimated fair value of investment securities available for sale at June 30, 2010 by contractual maturity, are shown as follows. Expected maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.
| | June 30, 2010 | |
| | Fair Value | | | Amortized Cost | |
Due in one year or less | | $ | 276 | | | $ | 275 | |
Due after one year through five years | | | 22,538 | | | | 22,476 | |
Due after five years through ten years | | | 1,681 | | | | 1,637 | |
Due after ten years | | | 12,466 | | | | 17,561 | |
Marketable equity securities | | | 176 | | | | 12 | |
Mortgage-backed securities - residential | | | 245,484 | | | | 242,439 | |
| | $ | 282,621 | | | $ | 284,400 | |
| | | | | | | | |
TIB Financial Corp.
Unaudited Notes to Consolidated Financial Statements
(Dollars in thousands except for share and per share amounts)
Securities with unrealized losses not recognized in income, and the period of time they have been in an unrealized loss position, are as follows:
| | Less than 12 Months | | | 12 Months or Longer | | | Total | |
June 30, 2010 | | Estimated Fair Value | | | Unrealized Losses | | | Estimated Fair Value | | | Unrealized Losses | | | Estimated Fair Value | | | Unrealized Losses | |
U.U.S. Government agencies and corporations | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
StStates and political subdivisions—tax exempt | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
StStates and political subdivisions—taxable | | | - | | | | - | | | | 2,266 | | | | 45 | | | | 2,266 | | | | 45 | |
MMortgage-backed securities - residential | | | 21,917 | | | | 40 | | | | - | | | | - | | | | 21,917 | | | | 40 | |
Corporate bonds | | | - | | | | - | | | | 2,021 | | | | 859 | | | | 2,021 | | | | 859 | |
Collateralized debt obligation | | | - | | | | - | | | | 758 | | | | 4,234 | | | | 758 | | | | 4,234 | |
Total temporarily impaired | | $ | 21,917 | | | $ | 40 | | | $ | 5,045 | | | $ | 5,138 | | | $ | 26,962 | | | $ | 5,178 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 Months | | | 12 Months or Longer | | | Total | |
December 31, 2009 | | Estimated Fair Value | | | Unrealized Losses | | | Estimated Fair Value | | | Unrealized Losses | | | Estimated Fair Value | | | Unrealized Losses | |
U.U.S. Government agencies and corporations | | $ | 5,034 | | | $ | 84 | | | $ | - | | | $ | - | | | $ | 5,034 | | | $ | 84 | |
StStates and political subdivisions—tax exempt | | | - | | | | - | | | | 275 | | | | - | | | | 275 | | | | - | |
StStates and political subdivisions-taxable | | | - | | | | - | | | | 2,212 | | | | 101 | | | | 2,212 | | | | 101 | |
MMarketable equity securities | | | 8 | | | | 4 | | | | - | | | | - | | | | 8 | | | | 4 | |
MMortgage-backed securities - residential | | | 98,746 | | | | 1,206 | | | | 10,542 | | | | 106 | | | | 109,288 | | | | 1,312 | |
Corporate bonds | | | - | | | | - | | | | 2,012 | | | | 866 | | | | 2,012 | | | | 866 | |
Collateralized debt obligation | | | - | | | | - | | | | 759 | | | | 4,237 | | | | 759 | | | | 4,237 | |
Total temporarily impaired | | $ | 103,788 | | | $ | 1,294 | | | $ | 15,800 | | | $ | 5,310 | | | $ | 119,588 | | | $ | 6,604 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other-Than-Temporary-Impairment
The Company views the unrealized losses in the above table to be temporary in nature for the following reasons. First, the declines in fair values are mostly due to an increase in spreads due to risk and volatility in financial markets. Excluding the taxable state and political subdivision securities, corporate bonds and collateralized debt obligation, these securities are primarily AAA rated securities and have experienced no significant deterioration in value due to credit quality concerns and the magnitude of the unrealized losses of approximately 3% or less of the amortized cost of those securities with losses is consistent with normal fluctuations of value due to the volatility of market interest rates. The nature of what makes up the security portfolio is determined by the overall balance sheet of t he Company and currently it is suitable for the Company’s security portfolio to be primarily comprised of fixed rate securities. Fixed rate securities will by their nature react in price inversely to changes in market rates and that is liable to occur in both directions.
We own a municipal bond guaranteed by a state housing finance agency which is currently rated “A-”, a corporate bond of a large financial institution which is currently rated “BB” and a collateralized debt obligation secured by debt obligations of banks and insurance companies which was rated “CC” at June 30, 2010, whose fair values have declined more than 4% below their original cost. We believe these declines in fair value relate to a significant widening of interest rate spreads associated with these securities. While these securities have experienced deterioration in credit quality, we have evaluated these securities and have determined that these securities have not experienced a credit loss. As we have the intent to hold and it is not more likely than not that we will be required to sell these securities before their fair market value recovers, they are not other than temporarily impaired as of June 30, 2010 or December 31, 2009.
Management regularly reviews each investment security for impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer(s) and our intention with regard to holding the security and whether it is more likely than not that we will be required to sell the security. Future declines in the fair value of these or other securities may result in impairment charges which may be material to the financial condition and results of operations of the Company.
As of June 30, 2010, the Company’s security portfolio consisted of 50 security positions, 6 of which were in an unrealized loss position. The majority of unrealized losses are related to the Company’s collateralized debt obligation, corporate bonds and mortgage-backed and other securities, as discussed below:
TIB Financial Corp.
Unaudited Notes to Consolidated Financial Statements
(Dollars in thousands except for share and per share amounts)
Mortgage-backed securities
At June 30, 2010, the Company owned residential mortgage backed securities guaranteed by U.S. Government agencies and corporations. The fair values of certain of these securities have declined since we acquired them due to wider spreads required by the market or changes in market interest rates.
Corporate bonds
At June 30, 2010, the Company owned corporate bonds issued by one of the largest banking and financial institutions in the United States. These bonds had been downgraded to “B” due to increased credit concerns, however recently the rating agencies upgraded these bonds to “BB”. The institution has received significant capital investment from the United States Treasury under the Capital Purchase Program/TARP and its financial performance is beginning to improve and it recently repaid the capital investment from the United States Treasury. As the Company does not have the intent to sell these bonds and it is likely that it will not be required to sell the bonds before their anticipated recovery, the Company does not consider these bonds to be other-than-temporarily impaired at June 30, 2010.
Collateralized debt obligation
The Company owns a collateralized debt security collateralized by trust preferred securities issued primarily by banks and several insurance companies. Our analysis of this investment falls within the scope of ASC 325-40. This security was rated high quality “AA” at the time of purchase, but at June 30, 2010, nationally recognized rating agencies rated this security as “CC.” The Company compares the present value of expected cash flows to the previous estimate to ensure there are no adverse changes in the expected cash flows. The Company utilizes a discounted cash flow valuation model which considers the structure and term of the CDO and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults by issuers of the underlying trust preferred securities. Assumptions used in the model include expected future default rates. Interest payment deferrals are generally treated as defaults even though they may not actually result in defaults. As of June 30, 2010 and December 31, 2009, we engaged an independent third party valuation firm to estimate the fair value and credit loss potential of this security. Management reviewed the assumptions and methodology employed in these analyses and while the assumptions differ somewhat from period to period, the methodology of discounting estimated future cash flows based upon the expected performance of the underlying issuers collateralizing the security has no t changed during 2010. Based upon the most recent analysis, as of June 30, 2010, management concluded that the unrealized loss does not meet the definition of other than temporary impairment under generally accepted accounting principles because no credit loss has been incurred. Additionally, we used the model to evaluate alternative scenarios with higher than expected default assumptions to evaluate the sensitivity of our default assumptions and the level of additional defaults required before a credit loss would be incurred. This security remained classified as available for sale at June 30, 2010, and accounted for the $4,234 of unrealized loss in the collateralized debt obligation category at June 30, 2010. In arriving at the estimate of fair value for this security as of June 30, 2010, the model used a discount margin of 11% above the LIBOR forward interest rate curve and a projected cumulative default assumption of approximately 40%. As of June 30, 2010, the trustee’s most recent report indicated actual defaults and deferrals of approximately 33% net of assumed recoveries.
The table below presents a rollforward of the credit losses recognized in earnings for the three and six month period ended June 30, 2010:
| | Three Months Ended June 30, 2010 | | | Six Months Ended June 30, 2010 | |
Balance at beginning of period | | $ | 9,996 | | | $ | 9,996 | |
Additions/Subtractions | | | | | | | | |
| Credit losses recognized during the period | | | - | | | | - | |
Ending balance, June 30, 2010 | | $ | 9,996 | | | $ | 9,996 | |
| | | | | | | | |
TIB Financial Corp.
Unaudited Notes to Consolidated Financial Statements
(Dollars in thousands except for share and per share amounts)
Note 3 – Loans
Major classifications of loans are as follows:
| | June 30, 2010 | | | December 31, 2009 | |
Real estate mortgage loans: | | | | | | |
Commercial | | $ | 649,679 | | | $ | 680,409 | |
Residential | | | 235,423 | | | | 236,945 | |
Farmland | | | 13,571 | | | | 13,866 | |
Construction and vacant land | | | 60,698 | | | | 97,424 | |
Commercial and agricultural loans | | | 68,696 | | | | 69,246 | |
Indirect auto loans | | | 25,918 | | | | 50,137 | |
Home equity loans | | | 36,856 | | | | 37,947 | |
Other consumer loans | | | 9,759 | | | | 10,190 | |
Total loans | | | 1,100,600 | | | | 1,196,164 | |
| | | | | | | | |
Net deferred loan costs | | | 1,072 | | | | 1,352 | |
Loans, net of deferred loan costs | | $ | 1,101,672 | | | $ | 1,197,516 | |
Note 4 – Allowance for Loan Losses
Activity in the allowance for loan losses for the three and six months ended June 30, 2010 and 2009 follows:
| | Three Months Ended June 30, | | | Six Month Ended June 30, | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | |
Balance, beginning of period | | $ | 27,829 | | | $ | 25,488 | | | $ | 29,083 | | | $ | 23,783 | |
Provision for loan losses charged to expense | | | 7,700 | | | | 5,763 | | | | 12,625 | | | | 11,072 | |
Loans charged off | | | (8,634 | ) | | | (5,911 | ) | | | (14,987 | ) | | | (9,533 | ) |
Recoveries of loans previously charged off | | | 815 | | | | 106 | | | | 989 | | | | 124 | |
Balance, June 30 | | $ | 27,710 | | | $ | 25,446 | | | $ | 27,710 | | | $ | 25,446 | |
| Nonaccrual loans were as follows: |
| | As of June 30, 2010 | | | As of December 31, 2009 | |
Collateral Type | | Number of Loans | | | Outstanding Balance | | | Number of Loans | | | Outstanding Balance | |
Residential 1-4 family | | | 42 | | | $ | 11,116 | | | | 36 | | | $ | 9,250 | |
H Home equity loans | | | 9 | | | | 1,377 | | | | 8 | | | | 1,488 | |
C Commercial 1-4 family investment | | | 12 | | | | 7,273 | | | | 19 | | | | 8,733 | |
C Commercial and agricultural | | | 9 | | | | 1,982 | | | | 7 | | | | 2,454 | |
C Commercial real estate | | | 35 | | | | 39,733 | | | | 29 | | | | 24,392 | |
L Land development | | | 16 | | | | 14,643 | | | | 13 | | | | 25,295 | |
G Government guaranteed loans | | | 1 | | | | 137 | | | | 2 | | | | 143 | |
InIndirect auto, auto and consumer loans | | | 38 | | | | 371 | | | | 97 | | | | 1,078 | |
| | | | | | $ | 76,632 | | | | | | | $ | 72,833 | |
Impaired loans were as follows:
| | June 30, 2010 | | | December 31, 2009 | |
Loans with no allocated allowance for loan losses | | $ | 23,415 | | | $ | 60,629 | |
Loans with allocated allowance for loan losses | | | 88,354 | | | | 87,823 | |
Total | | $ | 111,769 | | | $ | 148,452 | |
| | | | | | | | |
Amount of the allowance for loan losses allocated | | $ | 7,358 | | | $ | 9,040 | |
TIB Financial Corp.
Unaudited Notes to Consolidated Financial Statements
(Dollars in thousands except for share and per share amounts)
Note 5 – Earnings Per Share and Common Stock
Since we reported a net loss for each period reported, all outstanding stock options, restricted stock awards and warrants are considered anti-dilutive. Loss per share has been computed based on 14,849,681 and 14,815,798 basic and diluted shares for the three months ended June 30, 2010 and 2009, respectively and 14,844,426 and 14,808,498 basic and diluted shares for the six months ended June 30, 2010 and 2009, respectively. The dilutive effect of stock options, warrants and unvested restricted shares are the only common stock equivalents for purposes of calculating diluted earnings per common share.
Weighted average anti-dilutive stock options and warrants and unvested restricted shares excluded from the computation of diluted earnings per share are as follows:
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | |
Anti-dilutive stock options | | | 793,690 | | | | 681,907 | | | | 804,529 | | | | 690,884 | |
Anti-dilutive unvested restricted stock awards | | | 38,108 | | | | 76,827 | | | | 43,419 | | | | 86,752 | |
Anti-dilutive warrants | | | 2,380,213 | | | | 2,380,213 | | | | 2,380,213 | | | | 2,380,213 | |
Note 6 – Capital Adequacy
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements result in certain discretionary and required actions by regulators that could have an effect on the Company’s operations. The regulations require the Company and the Bank to meet specific capital adequacy guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
To be considered well capitalized and adequately capitalized (as defined) under the regulatory framework for prompt corrective action, the Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based, and total risk-based capital ratios. At June 30, 2010, the Company and the Bank’s leverage capital ratios and total risk-based capital ratios fell below the levels required to be considered adequately capitalized. At December 31, 2009, both the Bank and the Company maintained capital ratios to be considered adequately capitalized. These minimum ratios along with the actual ratios for the Company and the Bank at June 30, 2010 and December 31, 2009, are presented in the following table.
| | Well Capitalized Requirement | | | Adequately Capitalized Requirement | | | June 30, 2010 Actual | | | December 31, 2009 Actual | |
Tier 1 Capital (to Average Assets) | | | | | | | | | | | | |
| Consolidated | | | N/A | | | | ³ 4.0 | % | | | 2.7 | % | | | 4.1 | % |
| TIB Bank | | | ³ 5.0 | % | | | ³ 4.0 | % | | | 3.9 | % | | | 4.8 | % |
| | | | | | | | | | | | | | | | |
Tier 1 Capital (to Risk Weighted Assets) | | | | | | | | | | | | | | | | |
| Consolidated | | | N/A | | | | ³ 4.0 | % | | | 4.0 | % | | | 5.7 | % |
| TIB Bank | | | ³ 6.0 | % | | | ³ 4.0 | % | | | 5.9 | % | | | 6.8 | % |
| | | | | | | | | | | | | | | | |
Total Capital (to Risk Weighted Assets) | | | | | | | | | | | | | | | | |
| Consolidated | | | N/A | | | | ³ 8.0 | % | | | 7.1 | % | | | 8.1 | % |
| TIB Bank | | | ³ 10.0 | % | | | ³ 8.0 | % | | | 7.1 | % | | | 8.1 | % |
| | | | | | | | | | | | | | | | |
On July 2, 2009, the Bank entered into a Memorandum of Understanding, which is an informal agreement, with bank regulatory agencies that it would move in good faith to increase its Tier 1 leverage capital ratio to not less than 8% and its total risk-based capital ratio to not less than 12% by December 31, 2009 and maintain these higher ratios for as long as this agreement is in effect. At December 31, 2009, these elevated capital ratios were not met. On July 2, 2010, the Bank entered a Consent Order, which is a formal agreement, with the bank regulatory agencies under which, among other things, the Bank has agreed to maintain a Tier 1 capital ratio of at least 8% of total assets and a total risk based capital ratio of at least 12% within 90 days. The Consent Order also governs certain aspects of the Bank’s ope rations including a requirement that it reduce the balance of assets classified substandard and doubtful by at least 70% over a two-year period, and not undertake asset growth of 5% or more per year without prior approval from the regulatory agencies. The Consent Order supersedes the Memorandum of Understanding.
TIB Financial Corp.
Unaudited Notes to Consolidated Financial Statements
(Dollars in thousands except for share and per share amounts)
On June 29, 2010, the Company and the Bank entered into a definitive agreement with NAFH for the investment of up to $350,000 in TIB through the purchase of common stock, preferred stock and a warrant. Pursuant to the definitive agreement, the Company agreed to sell to NAFH, at the closing of the investment, 700 million shares of its common stock at a purchase price of $0.15 per share and 70,000 shares of newly created mandatorily convertible participating voting preferred stock at a purchase price of $1,000 per share for a cumulative total of $175,000. The preferred stock will have a liquidation preference of $1,000 per share and each share of preferred stock will be convertible into a number of shares of the Company’s common stock equal to the liquidation preference divided by $0.15 (subject to customary ant i-dilution adjustments). After giving effect to the NAFH investment, it is expected that NAFH would own approximately 99% of the Company’s common stock (on an as-converted basis). The Company also intends to conduct a rights offering to legacy shareholders of rights to purchase up to 149 million shares of common stock at a price of $0.15 per share, which would raise up to $22,400, which would equate to 12% of the Company’s pro-forma fully diluted equity. The record date for the rights offering was July 12, 2010. In addition, during the 18-month period following the closing, NAFH will have the right to invest up to an additional $175,000 in preferred stock and/or common stock on the above terms. Upon closing of the investment, each of the Company and the Bank will add experienced bankers R. Eugene (Gene) Taylor, Christopher (Chris) G. Marshall, R. Bruce Singletary and Kenneth (Ken) A. Posner to its board of directors, along with other director s to be designated by NAFH. The investment is subject to satisfaction or waiver of certain closing conditions, including reaching an agreement with the Treasury to repurchase the preferred stock and warrant issued under the Troubled Asset Relief Program Capital Purchase Program on terms acceptable to NAFH, the receipt by NAFH and the Company of the requisite governmental and regulatory approvals as well as the approval of the NASDAQ Stock Market to issue the common stock, preferred stock and warrant in reliance on the shareholder approval exemptions set forth in NASDAQ Rule 5635(f). While the NAFH investment is expected to close in the third quarter of 2010, there is no assurance it will close during such quarter, or ever. At this time, all the applications required to be filed with regulatory agencies have been filed and we have reached an agreement on the significant terms on the repurchase of the Preferred Stock and warrant issued to the Treasury under the TARP Capital Purchase Program.
On July 16, 2010, the Company received a letter from the Treasury (the “Treasury Letter”) that indicated that the Treasury would be willing to consent to a proposal made by the Company to repurchase the Treasury Preferred Stock and the Warrant subsequent to the closing of the NAFH investment. The Company’s proposal provides for consideration for the repurchase of the Treasury Preferred Stock in the amount of 31% of the sum of (i) the aggregate liquidation preference ($37,000) and (ii) all accrued but unpaid dividends on the Treasury Preferred Stock as of the day prior to the signing of final documents. The consideration for the repurchase of the Warrant would be $40. Total consideration relating to the proposed repurchase would be approximately $12,070. The Treasury’s consent to the repurchase is subject to enteri ng into final definitive documentation acceptable to the Treasury in its sole discretion. The Treasury Letter does not constitute an amendment to or modification or waiver of any term or provision of the Securities Purchase Agreement previously entered into between Treasury and the Company.
The Company has been advised by NAFH that the Treasury’s consent to the Company’s redemption of the Treasury Preferred Stock and repurchase of the Warrant for the consideration proposed by the Company as set forth in the Treasury Letter will satisfy the maximum price requirement specified in the definitive investment agreement for the repurchase of the Treasury Preferred Stock and the Warrant. Upon consummation of the NAFH investment, it is estimated that both the Company and the Bank will be well capitalized and the Bank will be in compliance with the required capital ratios of the Consent Order.
If the investment by NAFH is not consummated, the Board of Directors and management team intend to seek other strategic alternatives including but not limited to the sale of certain assets, all or a portion of the Company, or seeking a complementary partner in a merger of equals or where the Company is acquired. There is no assurance the Company will be successful in entering into any agreement or closing such an alternative transaction.
Note 7 – Fair Values of Financial Instruments
ASC 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The fair values of securities available for sale are determined by 1) obtaining quoted prices on nationally recognized securities exchanges when available (Level 1 inputs), 2) matrix pricing, which is a mathematical technique widely used in the financial markets to value 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) and 3) for collateralized debt obligations, custom discounted cash flow modeling (Level 3 inputs).
Valuation of Collateralized Debt Securities
As of June 30, 2010, the Company owned a collateralized debt security where the underlying collateral is comprised primarily of trust preferred securities of banks and insurance companies. The inputs used in determining the estimated fair value of this security are Level 3 inputs. In determining its estimated fair value, management utilizes a discounted cash flow modeling valuation approach. Discount rates utilized in the modeling of this security are estimated based upon a variety of factors including the market yields of publicly traded trust preferred securities of larger financial institutions and other non-investment grade corporate debt. Cash flows utilized in the modeling of this security were based upon actual default history of the underlying issuers and issuer specific assumptions of estimated future defaults of the underlying issuers. Since the fourth quarter of 2009, we have engaged an independent third party valuation firm to estimate the fair value and credit loss potential of this security. Management reviewed the assumptions and methodology employed in this analysis. The valuation approach for the collateralized debt security did not change during the first six months of 2010.
TIB Financial Corp.
Unaudited Notes to Consolidated Financial Statements
(Dollars in thousands except for share and per share amounts)
Valuation of Impaired Loans and Other Real Estate Owned
The fair value of collateral dependent impaired loans with specific allocations of the allowance for loan losses and other real estate owned is generally based on recent real estate appraisals and other available observable market information. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below:
| | | | | Fair Value Measurements at June 30, 2010 Using | |
| | June 30, 2010 | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Assets: | | | | | | | | | | | | |
U.U.S. Government agencies and corporations | | $ | 28,838 | | | $ | - | | | $ | 28,838 | | | $ | - | |
StStates and political subdivisions—tax exempt | | | 3,078 | | | | - | | | | 3,078 | | | | - | |
StStates and political subdivisions—taxable | | | 2,266 | | | | - | | | | 2,266 | | | | - | |
Marketable equity securities | | | 176 | | | | - | | | | 176 | | | | - | |
Mortgage-backed securities—residential | | | 245,484 | | | | - | | | | 245,484 | | | | - | |
Corporate bonds | | | 2,021 | | | | - | | | | 2,021 | | | | - | |
Collateralized debt obligations | | | 758 | | | | - | | | | - | | | | 758 | |
| A Available for sale securities | | $ | 282,621 | | | $ | - | | | $ | 281,863 | | | $ | 758 | |
| | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at December 31, 2009 Using | |
| | December 31, 2009 | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Assets: | | | | | | | | | | | | |
U U..S. Government agencies and corporations | | $ | 29,172 | | | $ | - | | | $ | 29,172 | | | $ | - | |
StStates and political subdivisions—tax exempt | | | 8,061 | | | | - | | | | 8,061 | | | | - | |
StStates and political subdivisions—taxable | | | 2,212 | | | | - | | | | 2,212 | | | | - | |
Marketable equity securities | | | 8 | | | | - | | | | 8 | | | | - | |
Mortgage-backed securities—residential | | | 208,115 | | | | - | | | | 208,115 | | | | - | |
Corporate bonds | | | 2,012 | | | | - | | | | 2,012 | | | | - | |
Collateralized debt obligations | | | 759 | | | | - | | | | - | | | | 759 | |
| A Available for sale securities | | $ | 250,339 | | | $ | - | | | $ | 249,580 | | | $ | 759 | |
| | | | | | | | | | | | | | | | |
The tables below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2010 and 2009 and held at June 30, 2010 and 2009, respectively.
| | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Collateralized Debt Obligations | |
| | 2010 | | | 2009 | |
B Beginning balance, April 1, | | $ | 769 | | | $ | 3,958 | |
Included in earnings – other than temporary impairment | | | - | | | | (740 | ) |
Included in other comprehensive income | | | (11 | ) | | | (1,114 | ) |
Transfer in to Level 3 | | | - | | | | - | |
E Ending balance June 30, | | $ | 758 | | | $ | 2,104 | |
| | | | | | | | |
TIB Financial Corp.
Unaudited Notes to Consolidated Financial Statements
(Dollars in thousands except for share and per share amounts)
| | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Collateralized Debt Obligations | |
| | 2010 | | | 2009 | |
B Beginning balance, January 1, | | $ | 759 | | | $ | 4,275 | |
Included in earnings – other than temporary impairment | | | - | | | | (763 | ) |
Included in other comprehensive income | | | (1 | ) | | | (1,408 | ) |
Transfer in to Level 3 | | | - | | | | - | |
E Ending balance June 30, | | $ | 758 | | | $ | 2,104 | |
| | | | | | | | |
Assets and Liabilities Measured on a Non-Recurring Basis
Assets and liabilities measured at fair value on a non-recurring basis are summarized below:
| | | | | Fair Value Measurements at June 30, 2010 Using | |
| | June 30, 2010 | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Assets: | | | | | | | | | | | | |
| I Impaired loans with specific allocations of the allowance for loan losses | | $ | 57,325 | | | $ | - | | | $ | - | | | $ | 57,325 | |
Other real estate owned | | | 38,699 | | | | - | | | | - | | | | 38,699 | |
Other repossessed assets | | | 204 | | | | - | | | | 204 | | | | - | |
| | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at December 31, 2009 Using | |
| | December 31, 2009 | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Assets: | | | | | | | | | | | | |
| I Impaired loans with specific allocations of the allowance for loan losses | | $ | 52,122 | | | $ | - | | | $ | - | | | $ | 52,122 | |
| Other real estate owned | | | 21,352 | | | | - | | | | - | | | | 21,352 | |
| Other repossessed assets | | | 326 | | | | - | | | | 326 | | | | - | |
| | | | | | | | | | | | | | | | |
Collateral dependent impaired loans, which are measured for impairment using the fair value of the collateral, had a carrying amount of $64,007, with a valuation allowance of $6,682, as of June 30, 2010. During the six months ended June 30, 2010, $5,884 of the allowance for loan losses was specifically allocated to collateral dependent impaired loans. The amounts of the specific allocations for impairment are considered in the overall determination of the reserve and provision for loan losses. Other real estate owned which is measured at the lesser of fair value less costs to sell or our recorded investment in the foreclosed loan had a carrying amount of $43,959, less a valuation allowance of $5,260 as of June 30, 2010. As a result of sales of foreclosed properties, receipt of updated appraisals, reduced listing prices or ente ring into contracts to sell these properties, valuation adjustments of $4,250 and $4,887 were recognized in our statements of operations during the three and six months ended June 30, 2010, respectively. Other repossessed assets are primarily comprised of repossessed automobiles and are measured at fair value as of the date of repossession. As a result of the disposition of repossessed vehicles, gains/(losses) of $(6) and $46 were recognized in our statements of operations during the three and six months ended June 30, 2010, respectively. Collateral dependent impaired loans had a carrying amount of $60,413, with a valuation allowance of $8,291 as of December 31, 2009. Other real estate owned had a carrying amount of $22,147, less a valuation allowance of $795 as of December 31, 2009.
TIB Financial Corp.
Unaudited Notes to Consolidated Financial Statements
(Dollars in thousands except for share and per share amounts)
The carrying amounts and estimated fair values of financial instruments, at June 30, 2010 are as follows:
| | June 30, 2010 | |
| | Carrying Value | | | Estimated Fair Value | |
Financial assets: | | | | | | |
Cash and cash equivalents | | $ | 157,876 | | | $ | 157,876 | |
Investment securities available for sale | | | 282,621 | | | | 282,621 | |
Loans, net | | | 1,073,962 | | | | 1,049,001 | |
F Federal Home Loan Bank and Independent Bankers’ Bank stock | | | 10,735 | | | NM | |
Accrued interest receivable | | | 5,104 | | | | 5,104 | |
| | | | | | | | |
Financial liabilities: | | | | | | | | |
Non-contractual deposits | | $ | 617,376 | | | $ | 617,376 | |
Contractual deposits | | | 724,355 | | | | 730,078 | |
Federal Home Loan Bank Advances | | | 125,000 | | | | 131,935 | |
Short-term borrowings | | | 73,894 | | | | 73,888 | |
Long-term repurchase agreements | | | 30,000 | | | | 30,276 | |
Subordinated debentures | | | 33,000 | | | | 12,162 | |
Accrued interest payable | | | 7,637 | | | | 7,637 | |
| | | | | | | | |
The methods and assumptions used to estimate fair value are described as follows:
Carrying amount is the estimated fair value for cash and cash equivalents, interest bearing deposits, accrued interest receivable and payable, demand deposits or deposits that reprice frequently and fully. The methods for determining the fair values for securities and impaired loans were described previously. For loans, fixed rate deposits and for deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates. For loans, these market rates reflect significantly wider current credit spreads applied to the estimated life. Fair value of debt is based on current rates for similar financing. It was not practicable to determine the fair value of FHLB and IBB stock due to restrictions placed on their transferability. The fair value of off balance sheet items is not considered material.
Note 8 – Other Real Estate Owned
Activity in other real estate owned for the three and six months ended June 30, 2010 and 2009 is as follows:
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | |
Other real estate owned | | | | | | | | | | | | |
| Balance, beginning of period | | $ | 42,236 | | | $ | 6,327 | | | $ | 22,147 | | | $ | 5,582 | |
| Real estate acquired | | | 4,293 | | | | 7,727 | | | | 25,702 | | | | 8,646 | |
| Properties sold | | | (2,011 | ) | | | (2,859 | ) | | | (4,026 | ) | | | (3,042 | ) |
| Transfer to facilities used in operations | | | - | | | | (2,941 | ) | | | - | | | | (2,941 | ) |
| Other | | | (559 | ) | | | 3 | | | | 136 | | | | 12 | |
| Balance, June 30, | | $ | 43,959 | | | $ | 8,257 | | | $ | 43,959 | | | $ | 8,257 | |
| | | | | | | | | | | | | | | | |
Valuation allowance | | | | | | | | | | | | | | | | |
| Balance, beginning of period | | $ | (1,158 | ) | | $ | (1,295 | ) | | $ | (795 | ) | | $ | (1,259 | ) |
| Additions charged to expense | | | (4,264 | ) | | | (690 | ) | | | (4,776 | ) | | | (801 | ) |
| Relieved due to sale of property | | | 162 | | | | 870 | | | | 311 | | | | 945 | |
| Balance, June 30, | | $ | (5,260 | ) | | $ | (1,115 | ) | | $ | (5,260 | ) | | $ | (1,115 | ) |
| | | | | | | | | | | | | | | | |
Expenses related to foreclosed assets during period | | | | | | | | | | | | | | | | |
| Net loss (gain) on sales | | $ | (13 | ) | | $ | 181 | | | $ | 111 | | | $ | 182 | |
| Provision for unrealized losses | | | 4,264 | | | | 690 | | | | 4,776 | | | | 801 | |
| Operating expenses | | | 898 | | | | 215 | | | | 1,362 | | | | 423 | |
| | $ | 5,149 | | | $ | 1,086 | | | $ | 6,249 | | | $ | 1,406 | |
| | | | | | | | | | | | | | | | |
Appendix C
Information included under “Management’s Discussion And Analysis Of Financial Condition And Results Of Operations” in TIB Financial Corp.’s Annual Report on Form 10-K for the year ended December 31, 2009.
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
TIB Financial Corp. is a bank holding company in the Southern Florida marketplace and the parent company of TIB Bank and Naples Capital Advisors, Inc. The Bank operates primarily as a real estate secured commercial lender, focusing on middle-market businesses in our Southern Florida markets. The Bank funds its lending activity primarily by gathering retail and commercial deposits from our service area. TIB Bank was formed in 1974 and has a substantial market presence in the Florida Keys. In recent years, TIB Bank has expanded into the adjacent Florida counties of Miami-Dade, Collier, Lee and Sarasota.
Recent Losses, Memorandum of Understanding and Future Plans
The Company recorded net losses of $61.5 million, $20.9 million and $2.4 million in 2009, 2008 and 2007, respectively, for a three year total of $84.9 million. It is important for us to reduce our rate of credit loss and execute the following plans.
Our losses are largely a result of loan and investment impairments. From 2007 to 2009, we recorded total provisions for loan losses of $80.2 million and other than temporary losses on investments of $12.9 million. While our net losses for 2009 also included a charge off of goodwill of $5.9 million and charges to establish an allowance against the realization of our deferred tax asset of $30.4 million, these latter charges may not have been required had we not incurred the losses on loans and investments.
Despite these losses, TIB Bank remained adequately capitalized at December 31, 2009 under the regulatory capital guidelines. On July 2, 2009, TIB Bank entered into a Memorandum of Understanding, which is an informal agreement, with Bank regulatory agencies that it will move in good faith to increase its Tier 1 leverage capital ratio to not less than 8% and its total risk-based capital ratio to not less than 12% by December 31, 2009 and maintain these higher ratios for as long as this agreement is in effect. Late during the second quarter of 2009, we retained a nationally recognized investment banking firm to assist us in raising capital. On August 14, 2009, we filed a registration statement with the U.S. Securities and Exchange Commission (“SEC”) on Form S-1 with the intent of issuing up to 40,250,000 shares of our common stock for maximum proceeds of $75.7 million. On September 23, 2009 we held a special meeting of shareholders at which an amendment to the Company’s Restated Articles of Incorporation was approved to increase the number of authorized shares of the Company’s common stock from 40,000,000 to 100,000,000. Due in part to the timing of this action, we believed that investors would require us to update our registration statement with third quarter financial results prior to commencing an offering. As discussed in our December 23, 2009 letter to shareholders, during this process, we received a comment letter from the SEC which indicated that our Annual Report for the year ended December 31, 2008 on Form 10-K and our March 31, 2009 and June 30, 2009 quarterly reports on Form 10-Q were under a routine review by the Division of Corporation Finance. The SEC staff periodically reviews filings of all publicly owned companies. As our timeline drew near the holiday and year-end period, we recei ved notification that the SEC staff concluded their review on December 17, 2009 without requiring any adjustments to our reported financial results. However, as advised by our investment banking firm noting that the financial markets traditionally are not receptive to offerings during this time period, we withdrew our registration statement on December 23, 2009 and intend to pursue our capital efforts in March and into the early second quarter of 2010. Due to the timing of our plans to raise capital, we requested an extension of time to April 30, 2010 to comply with the informal agreement. The Florida Office of Financial Regulation (“OFR”) agreed to the extension provided the FDIC also were to agree. We have not yet received the FDIC's response to our request.
At December 31, 2009, the capital ratios specified in the Memorandum of Understanding were not met. We notified the bank regulatory agencies prior to December 31, 2009, that the increased capital levels would not be achieved and as we remain in regular contact with the FDIC and OFR, we expect the agencies will reevaluate our progress toward the higher capital ratios at March 31, 2010.
Our Board of Directors and management team have determined to take the following courses of action to improve our capital ratios:
· | First and foremost, to file a registration statement with the SEC for the offering of up to 80,000,000 shares of our common stock in a follow on public offering or in a public offering of common shares with a concurrent private placement of common and preferred shares. This is the main focus of our Board of Directors and management team over the coming months. |
· | Second, to continue to operate the Company and to maintain the bank at adequately capitalized, for regulatory purposes, until we complete our planned capital raise. This will most likely require us to reduce lending, potentially sell loans, and take significant operating expense reductions and other cost cutting measures aimed at lowering expenses. Additionally we would adjust the mix of our assets to reduce the total risk weight of our assets, reduce total assets over time and potentially sell branches, deposits and loans. |
· | Third, in the event the issuance of additional capital is not possible in the near term, seek strategic alternatives including but not limited to the sale of certain assets, all or a portion of the Company, or seeking a complementary partner in a merger of equals or where the Company is acquired. |
Recent Capital Investments
On March 7, 2008, the Company consummated a transaction whereby two of Southwest Florida’s prominent families, their representatives and their related business interests purchased 1.2 million shares of the Company’s common stock and warrants to purchase an additional 1.2 million shares of common stock at an exercise price of $7.91 per share at any time prior to March 7, 2011. Gross proceeds from the investment provided additional capital of $10.1 million.
On December 5, 2008, the Company issued $37 million of preferred stock and a related warrant to the U.S. Treasury under the U.S. Treasury’s Capital Purchase Program. This increase in capital allows the Company to remain highly competitive and provide the added capital to support our continued capacity to provide new loans to creditworthy individual and commercial customers.
Historical Expansion and Recent Acquisitions
Historically we have been utilizing a de novo branching strategy of evaluating and selecting sites and building new bank branch locations to enter and grow in these new markets. While de novo expansion has a negative effect on short-term earnings, we believe the resulting growth will continue to add significant value to our franchise. By timing our expansion, we plan to balance earnings, growth and expense.
On January 2, 2008 we completed our acquisition of Naples Capital Advisors, Inc. a registered investment advisor. This acquisition was the beginning of the Company’s initiative into the new business lines of private banking, trust services and wealth management. On December 8, 2008, TIB Bank received authority to exercise trust powers from the FDIC and the State of Florida. Staffing, operations, market presence and existing revenues will support the expansion of these integrated and complementary services going forward.
On February 13, 2009, TIB Bank assumed all the deposits (excluding brokered deposits) of Riverside Bank of the Gulf Coast from the FDIC. Riverside Bank’s nine offices reopened on February 17, 2009 as branches of TIB Bank. The assumption of the deposits increases our market presence in Ft. Myers and Venice, and expands our banking operations into the contiguous market of Cape Coral. This transaction also provides the Company with additional funding for loan growth, the potential for new customer relationships and the opportunity to improve and increase our brand awareness throughout all of the markets we serve.
On September 25, 2009, The Bank of Venice, acquired by the Company in April 2007, was merged into TIB Bank. This merger will provide further operational cost savings and improve product availability for our Sarasota County customers.
Performance Overview
For the year ended December 31, 2009, our operations resulted in a net loss before dividends and accretion on preferred stock of $61.5 million compared to a net loss of $20.9 million for the prior year. The net loss allocated to common shareholders was $64.2 million, or $4.33 per share, for the year ended December 31, 2009 compared to a net loss of $21.1 million, or $1.45 per share, for the prior year. The most significant factors contributing to the 2009 loss were a $42.3 million provision for loan losses, a $13.5 million provision for income taxes and a $5.9 million goodwill impairment charge, partially offset by $4.3 million in net gains from investment securities and a $1.2 million gain resulting from the death benefit received from a bank owned life insurance policy covering a former employee.
(Dollars in thousands) | | For the year ended December 31, | |
| | 2009 | | | 2008 | |
Net interest income | | $ | 45,391 | | | $ | 44,660 | |
Provision for loan losses | | | (42,256 | ) | | | (28,239 | ) |
Non-interest income (1) | | | 8,629 | | | | 6,133 | |
Life insurance gain | | | 1,186 | | | | - | |
Investment securities gains (losses) | | | 4,295 | | | | (5,349 | ) |
Non-interest expense (2) | | | (59,455 | ) | | | (50,988 | ) |
Goodwill impairment charge | | | (5,887 | ) | | | - | |
Loss before income taxes | | $ | (48,097 | ) | | $ | (33,783 | ) |
| | | | | | | | |
Net lNet loss before income taxes excluding life insurance conversion gain, investment securities gains (losses) and goodwill impairment charge | | $ | (47,691 | ) | | $ | (28,434 | ) |
(1) | Non-interest income excludes a gain on the conversion of a life insurance policy covering a former employee and investment securities gains and losses. |
(2) Non-interest expense excludes goodwill impairment charges
Our operating environment remains challenging. During this period of slower economic activity, our loans decreased 2% from last year. Our strategy of building relationships with small and middle-market business customers coupled with our recent initiative in private banking and wealth management continues to be our operating focus.
Deteriorating credit quality and the interest rate environment continue to be the dominant forces affecting our industry and our main challenges are managing asset quality and efficiently funding our loan portfolio. We are leveraging our current product and delivery advantages along with our sustainable customer service quality advantages in our efforts to increase market share and plan to continue to capitalize on the opportunities in our markets.
Net interest income on a tax-equivalent basis was $45.6 million for 2009, an increase of 2% from $44.8 million a year ago. The monetary policy pursued by the Federal Reserve affects market interest rates including the prime rate, our loan yields, our deposit and borrowing costs and our net interest margin. The principal reason for the increase was the increase in earning assets and deposits, partially offset by the increase in non-performing loans during the year which reduced our net interest income by an estimated $3.2 million.
Non-interest income, which includes service charges on deposit accounts, investment securities gains and losses, real estate fees and other operating income, increased approximately $13.3 million to $14.1 million in 2009 from $784,000 in 2008. The increase was due primarily to $4.3 million in net gains on investment securities and a gain of $1.2 million resulting from the death benefit received from a Bank owned life insurance policy covering a former employee. Adding to the current year increase were $5.3 million in net securities losses from the prior year. The former Riverside operations contributed $1.6 million of service charge and other income during 2009. Investment advisory fees and trust fees from Naples Capital Advisors, Inc. contributed $997,000 to the current year.
Non-interest expense for 2009 was $65.3 million, compared with $51.0 million a year ago. The increase in non-interest expense for 2009 is primarily attributable to $6.2 million of expense related to the acquired former Riverside operations and a $5.9 million goodwill impairment charge. Excluding the effect of the former Riverside operations, salaries and employee benefits increased by $2.2 million. Severance costs accounted for approximately $545,000 of the increase and employee benefits increased by $391,000 largely due to employee medical insurance costs. The addition of new positions to manage the higher level of problem assets and additional Riverside branches plus merit adjustments for certain employees resulted in approximately $928,000 of increased compensation related expenses. Additionally, due to the lower level of l oan origination activity during 2009, the amount of salary and benefit costs capitalized as direct loan origination costs decreased by approximately $301,000 as compared to 2008. Excluding the effect of the former Riverside operations, net occupancy expenses decreased approximately 7% due to our continued focus on consolidating facilities and containing operating costs. Excluding the effect of the former Riverside of $2.8 million, other expenses increased 4% compared to 2008. FDIC insurance costs increased $2.8 million primarily due to a special assessment of $800,000, higher deposit insurance premium rates and growth of deposits due to the acquisition of Riverside. The special assessment was charged to all FDIC insured institutions during 2009 based on assets. Information system conversion costs of $223,000 were incurred in merging the operations of The Bank of Venice and OREO write-downs and expenses increased due to higher levels of foreclosed assets.
Total assets increased 6% during 2009 to $1.71 billion as of December 31, 2009, compared with $1.61 billion a year ago. Total loans decreased 2% to $1.20 billion as of December 31, 2009, compared with $1.22 billion a year ago. A $49.9 million, or 34%, decline in construction and land loans and a $31.9 million, or 39%, decline in indirect auto loans offset growth in the commercial loan and residential loan portfolios. Asset growth was funded in part by an increase of $ 233.7 million in total deposits to $1.37 billion as of December 31, 2009, representing deposit growth of 21% from $1.14 billion in the prior year. In 2009, the acquisition of the operations of the former Riverside Bank contributed $288.0 million to the 2009 growth in deposits. The Private Banking group contributed $12 million in net new relationship-based deposits in 2 009.
In response to slowing economic activity, continued softness in residential real estate in our markets and the increase in non-performing loans, we increased our reserve for loan losses. As of December 31, 2009 the allowance for loan losses totaled $29.1 million, or 2.43% of total loans. The allowance represents 40% of non-performing loans at December 31, 2009. Annual net charge-offs represented 3.01% of average loans for the year ended December 31, 2009, compared with 1.64% for the year ended December 31, 2008.
Economic and Operating Environment Overview
During 2009 the national economic recession deepened with rapidly increasing unemployment and declining levels of economic activity. In our local markets the economic contraction that began in late 2006 and early 2007 accelerated with sharp increases in unemployment in Collier and Lee Counties in Southwest Florida to over 12% by the end of 2009. Declining retail sales and lower personal income also reflect the contracting economic environment in our local markets.
While global and national financial market volatility and liquidity concerns receded towards the end of the year and the banking system began to stabilize along with economic fundamentals, the level of non-performing loans and investment securities in banks continued to increase. Due largely to the accommodative monetary policy maintained by the Federal Reserve system, liquidity concerns in the national banking system lessened during the second half of the year.
In response to the continuing economic stress, the Federal Reserve maintained an accommodating monetary policy through open market transactions and maintained the targeted fed funds rate at 0% to 0.25% throughout 2009. Accordingly, the prime rate remained at 3.25% during the year. The Federal Reserve also implemented several liquidity facilities to provide added liquidity to financial institutions and other financial intermediaries.
The Emergency Economic Stabilization Act (“EESA”) authorized the FDIC to increase the amount of insured deposit accounts to $250,000 and provide unlimited deposit insurance on non-interest bearing deposits through 2009. On May 20, 2009, the provisions increasing the insured deposit limit to $250,000 were extended through December 31, 2013. On August 26, 2009, the unlimited account insurance on non-interest bearing accounts was extended through June 30, 2010. The EESA also authorized the U.S. Treasury to provide up to $700 billion of financial support to the U.S. banking industry. The Capital Purchase Program, as part of the Troubled Asset Relief Program, was one of the initiatives that provided additional capital to banks.
The deepening economic downturn on a national and local basis has continued to adversely impact our individual and business customers. The markets we serve continue to be among the most severely impacted in the country. The continuing economic stress to consumers and local businesses was apparent during 2009 as we continued to experience a pronounced increase in non-performing loans, which resulted in a significant level of loan charge-offs and a significant increase of our reserve for loan losses.
We believe we are seeing encouraging signs of improvement in our local real estate markets. We are beginning to observe the return of sophisticated, fundamentals-driven investors who see the long term value of southern Florida real estate and enterprises. On a monthly basis in 2009 compared to 2008, we have observed increases in unit volume sales of residential real estate in our markets ranging from 27% to 80% per month in the Naples area and 40% to well over 100% in the Fort Myers-Cape Coral market. While property values have declined markedly during this severe recession, the significant increase in unit sales signals improved buyer interest and increasing liquidity in our residential real estate markets which should begin to stabilize values. While we expect a local economic recovery to be muted and to lag the national recovery, we b elieve positive signs are beginning to emerge.
Analysis of Financial Condition
Our assets totaled $1.71 billion at December 31, 2009 compared to $1.61 billion at the end of 2008, an increase of $95.3 million, or 6%. The increase in assets during 2009 was primarily due to the assumption of the deposits of Riverside.
Total loans decreased $27.5 million or 2%, to $1.20 billion at December 31, 2009. In a continuing focus to reduce our exposure to higher risk loans, construction and land development loans declined $49.9 million and indirect auto loans declined $31.9 million. Partially offsetting these declines were growth in commercial real estate loans of $21.9 million and residential real estate loans of $31.9 million. The net decline in the loan portfolio was primarily attributed to loans secured by real estate transferred to OREO of $27.5 million, write-downs of impaired loans of $17.8 million and net charge-offs of $19.2 million.
Total deposits increased $233.7 million or 21%, from $1.14 billion at the end of 2008 to $1.37 billion at December 31, 2009. This increase is due primarily to the assumption of $317.0 million of deposits from the operations of former Riverside and is net of the $106.6 million reduction of brokered time deposits. Non-interest-bearing deposits increased $43.4 million or 34%, and interest-bearing deposits increased $190.3 million or 19%.
Borrowed funds, consisting of Federal Home Loan Bank (FHLB) advances, short-term borrowings, notes payable and subordinated debentures, totaled $268.5 million at year end 2009 compared to $337.3 million at the end of 2008. During 2009, as a result of the receipt of proceeds from the Riverside acquisition, we decreased our FHLB advances by $77.9 million.
Shareholders’ equity decreased $65.6 million or 54%, from $121.1 million on December 31, 2008 to $55.5 million at the end of 2009. The decrease in shareholder’s equity was due to the net loss for year of $61.5 million. The net loss for the year was primarily due to the provision for loan loss of $42.3 million, valuation allowance against deferred income tax assets of $30.4 million and a goodwill impairment charge of $5.9 million.
Book value per common share decreased to $1.42 at December 31, 2009, from $5.92 at December 31, 2008.
Results of Operations
Net income
2009 compared with 2008:
The net loss for 2009 was $61.5 million compared to a net loss of $20.9 million for 2008. Basic and diluted loss per common share for 2009 was $4.33, as compared to basic and diluted loss per common share of $1.45 in 2008.
The loss on average assets for 2009 was 3.47% compared to a loss on average assets of 1.36% for 2008. On the same basis, the loss on average shareholders’ equity was 53.92% for 2009 compared to 20.4% for 2008.
Contributing significantly to the loss during 2009 were the $42.3 million provision for loan losses, the valuation allowance against deferred income tax assets of $30.4 million and the goodwill impairment charge of $5.9 million, partially offset by $5.1 million in net gains on securities sold and a $1.2 million gain resulting from the death benefit received from a Bank owned life insurance policy covering a former employee. In response to continued slowing economic activity and softening real estate values in our markets, our allowance for loan losses increased to $29.1 million or 2.43% of total loans, resulting from our provision for loan losses of $42.3 million exceeding net charge-offs of $37.0 million for the period. For additional information on these items, see the sections that follow entitled “Allowance and Provi sion for Loan Losses” and “Investment Portfolio”, respectively.
2008 compared with 2007:
The net loss for 2008 was $20.9 million compared to a net loss of $2.4 million for 2007. Basic and diluted loss per common share for 2008 was $1.45, as compared to basic and diluted loss per common share of $0.19 in 2007.
The loss on average assets for 2008 was 1.36% compared to a loss on average assets of 0.18% for 2007. The loss on average shareholders’ equity was 20.4% for 2008 compared to 2.5% for 2007.
Contributing significantly to the loss during 2008 were the $28.2 million provision for loan losses and the write-down of $6.4 million of investment securities, partially offset by a $1.1 million in net gains on securities sold. In response to continued slowing economic activity and softening real estate values in our markets, our allowance for loan losses increased to $23.8 million or 1.94% of total loans, resulting from our provision for loan losses of $28.2 million exceeding net charge-offs for the period by 45%.
Net interest income
Net interest income represents the amount by which interest income on interest-earning assets exceeds interest expense incurred on interest-bearing liabilities. Net interest income is the largest component of our income, and is affected by the interest rate environment, and the volume and the composition of interest-earning assets and interest-bearing liabilities. Our interest-earning assets include loans, federal funds sold and securities purchased under agreements to resell, interest-bearing deposits in other banks, and investment securities. Our interest-bearing liabilities include deposits, federal funds purchased, subordinated debentures, advances from the FHLB and other short-term borrowings.
2009 compared with 2008:
Net interest income was $45.4 million for the year ended December 31, 2009, compared to $44.7 million for the same period in 2008. The $731,000 or 2% increase was due to the significant increase in interest earning assets and interest bearing liabilities as a result of the assumption of the Riverside deposits and investment of the proceeds and the growth of the Company. The 34 basis point decrease in the net interest margin from 3.10% to 2.76% substantially offset the effect of the growth of the balance sheet.
The net interest margin continues to be adversely impacted by the level of nonaccrual loans and non-performing assets which reduced the margin by an estimated 19 basis points during the twelve months ended December 31, 2009. The utilization of the proceeds from the Riverside transaction to reduce borrowings and brokered time deposits and purchase investment securities further reduced the net interest rate spread because a greater portion of the Company’s assets were comprised of lower yielding investment securities and short-term money market investments. We continue to maintain a higher level of short-term investments in light of the continuing economic stress and elevated volatility of financial markets, which has also reduced the margin.
The $7.0 million decrease in interest and dividend income compared to 2008 was mainly attributable to decreased average rates on loan balances and investment securities due primarily to the 400 basis point decrease in prime rate and the significant decline in other interest rates combined with a higher level of non-performing loans. Partially offsetting this decline were decreases in the interest cost of transaction accounts, time deposits and borrowings due to decreases in deposit interest rates paid and other market interest rates. Increases in balances and changes in product mix, favoring higher yielding products, led to an increase in interest expense on savings deposits.
Interest rates during 2009 were significantly lower than the prior year period due to the highly stimulative monetary policies undertaken by the Federal Reserve beginning in the third quarter of 2007. As a result of the actions taken by the Federal Reserve, the prime rate declined from 7.25% in the first quarter of 2008 to 3.25% by the fourth quarter of 2008 and has remained at that level in 2009.
Due to the rapid and significant decline in the prime rate, the overall lower interest rate environment and the higher level of non-performing loans, the yield on our loans declined 93 basis points. The yield of our interest earning assets declined 117 basis points in 2009 compared to 2008 due to the reduction in the yield on our loans and the significant increase in lower yielding investment securities and short-term money market investments.
The lower interest rate environment also resulted in a significant decline in the interest cost of interest bearing liabilities. The average interest cost of interest bearing deposits declined by 105 basis points and the overall cost of interest bearing liabilities declined by 99 basis points. Due to the rapidly declining interest rate environment and highly competitive deposit pricing on a local and national basis, we were not able to reduce the cost of our deposits as quickly and to the same extent as the decline in our earning asset yield.
Going forward, we expect market short-term interest rates to remain low for an extended period of time. We expect deposit costs to continue to decline but they may decrease more slowly or to a lesser extent than loan yields, or they could increase due to strong demand in the financial markets and banking system for liquidity which is reflected in elevated pricing competition for deposits. The predominant drivers affecting net interest income are the composition of earning assets, the interest rates paid on our deposits and the net change in non-performing assets.
2008 compared with 2007:
Net interest income was $44.7 million for the year ended December 31, 2008, compared to $46.0 million for the same period in 2007. The $1.4 million or 3% decrease in net interest income was due principally to the increase in non-accrual loans and investment securities during the year which reduced interest income and net interest income by $3.2 million and reduced the net interest margin by an estimated 21 basis points.
The $6.6 million decrease in interest and dividend income compared to 2007 is due principally to a lower interest rate environment in 2008 and the higher level of non-accrual loans and investment securities. As discussed previously, the Federal Reserve, in response to increasing economic weakness and contraction, reduced the targeted fed funds rate by 400 basis points during the year.
The prime rate declined by a similar amount to 3.25% as well. Interest rates throughout the interest rate yield curve declined in response to the Federal Reserve’s monetary policy and the flight to lower risk fixed income securities (principally U.S. Treasuries and U.S. Agency securities) due to the volatility and uncertainty in the financial markets that persisted during the year.
As a consequence, the yield on loans with rates tied to the prime rate declined, new loans were originated at rates lower than those that prevailed during 2007 and reinvestment of the proceeds of maturing investment securities and purchases of new investment securities were also at lower rates.
The positive effect on net interest income of the $162 million increase of average earning assets was more than offset by the effect of the 129 basis point reduction in the yield of average earning assets.
The lower interest rate environment also resulted in a significant decline in the interest cost of interest bearing liabilities. The average interest cost of interest bearing deposits declined by 93 basis points and the overall cost of interest bearing liabilities declined by 103 basis points. Due to the rapidly declining interest rate environment and highly competitive deposit pricing on a local and national basis, we were not able to reduce the cost of our deposits as quickly and to the same extent as the decline in our earning asset yield. As a consequence, the net interest margin declined.
As an additional consequence of the contracting economic conditions, our customers maintained lower levels of transaction account and short-term investment account balances which resulted in a reduction of non-interest bearing demand deposits and money market accounts. In the lower interest rate environment, customers also shifted deposits to higher rate certificates of deposit.
We have also maintained a higher level of investment securities and cash and equivalents due to the volatile and uncertain financial market conditions. All of these factors adversely impacted the net interest margin which declined 50 basis points to 3.10% from 3.60% in 2007.
On the basis of economic and financial market conditions that we observed during the second quarter of 2008, we began to shorten the maturity structure of our interest bearing liabilities by increasing the amount of FHLB borrowings with maturities of one month and by originating wholesale CD deposits with terms of 3 months to 6 months. This funding tactic was initiated to generate lower cost and shorter-term liabilities to improve our net interest margin and position our balance sheet for stable or declining short-term interest rates. This position was maintained through the fourth quarter and at December 31, 2008, we had $70 million of FHLB borrowings that matured in the first quarter of 2009 and over $96 million of wholesale CD’s that had original maturities of 3 months to 6 months.
The following table presents the average balances and yields for interest earning assets and interest bearing liabilities for the years ending December 31, 2009, 2008 and 2007.
Average Balance Sheets
| | 2009 | | | 2008 | | | 2007 | |
(Dollars in thousands) | | Average Balances | | | Income/ Expense | | | Yields/ Rates | | | Average Balances | | | Income/ Expense | | | Yields/ Rates | | | Average Balances | | | Income/ Expense | | | Yields/ Rates | |
ASSETS | | | | | | | | | | | | | | | | | | | | | | | | | | | |
In Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| L Loans (a)(b) | | $ | 1,225,804 | | | $ | 68,960 | | | | 5.63 | % | | $ | 1,186,839 | | | $ | 77,877 | | | | 6.56 | % | | $ | 1,088,751 | | | $ | 84,775 | | | | 7.79 | % |
| In Investment securities (b) | | | 327,963 | | | | 12,071 | | | | 3.68 | % | | | 183,649 | | | | 8,629 | | | | 4.70 | % | | | 146,376 | | | | 7,633 | | | | 5.21 | % |
| MMoney Market Mutual Funds | | | 31,277 | | | | 132 | | | | 0.42 | % | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| In Interest bearing deposits in other banks | | | 50,947 | | | | 124 | | | | 0.24 | % | | | 12,131 | | | | 104 | | | | 0.85 | % | | | 383 | | | | 19 | | | | 4.96 | % |
| F FHLB stock | | | 10,771 | | | | 24 | | | | 0.23 | % | | | 10,012 | | | | 350 | | | | 3.50 | % | | | 8,408 | | | | 503 | | | | 5.98 | % |
| FeFederal funds sold/Repo | | | 2,940 | | | | 5 | | | | 0.17 | % | | | 55,525 | | | | 1,374 | | | | 2.47 | % | | | 42,187 | | | | 2,144 | | | | 5.08 | % |
T Total interest-earning assets | | | 1,649,702 | | | | 81,316 | | | | 4.93 | % | | | 1,448,156 | | | | 88,334 | | | | 6.10 | % | | | 1,286,105 | | | | 95,074 | | | | 7.39 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
N Non-interest earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| C Cash and due from banks | | | 30,182 | | | | | | | | | | | | 17,507 | | | | | | | | | | | | 20,394 | | | | | | | | | |
| Pr Premises and equipment, net | | | 39,759 | | | | | | | | | | | | 37,596 | | | | | | | | | | | | 36,609 | | | | | | | | | |
| A Allowances for loan losses | | | (24,967 | ) | | | | | | | | | | | (16,111 | ) | | | | | | | | | | | (10,174 | ) | | | | | | | | |
| OtOther assets | | | 78,128 | | | | | | | | | | | | 54,395 | | | | | | | | | | | | 41,167 | | | | | | | | | |
T Total non-interest earning assets | | | 123,102 | | | | | | | | | | | | 93,387 | | | | | | | | | | | | 87,996 | | | | | | | | | |
T Total Assets | | $ | 1,772,804 | | | | | | | | | | | $ | 1,541,543 | | | | | | | | | | | $ | 1,374,101 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES & SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
In Interest bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest bearing deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| NOW accounts | | $ | 182,398 | | | | 1,235 | | | | 0.68 | % | | $ | 172,520 | | | | 2,932 | | | | 1.70 | % | | $ | 151,745 | | | | 4,967 | | | | 3.27 | % |
| Money market | | | 196,469 | | | | 2,817 | | | | 1.43 | % | | | 151,273 | | | | 3,649 | | | | 2.41 | % | | | 186,996 | | | | 7,753 | | | | 4.15 | % |
| Savings deposits | | | 116,956 | | | | 2,142 | | | | 1.83 | % | | | 52,896 | | | | 669 | | | | 1.26 | % | | | 55,360 | | | | 968 | | | | 1.75 | % |
| Time deposits | | | 696,606 | | | | 21,452 | | | | 3.08 | % | | | 591,723 | | | | 25,346 | | | | 4.28 | % | | | 486,658 | | | | 24,172 | | | | 4.97 | % |
Tot Total interest-bearing deposits | | | 1,192,429 | | | | 27,646 | | | | 2.32 | % | | | 968,412 | | | | 32,596 | | | | 3.37 | % | | | 880,759 | | | | 37,860 | | | | 4.30 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| S Short-term borrowings and FHLB advances | | | 212,585 | | | | 5,303 | | | | 2.49 | % | | | 242,210 | | | | 7,450 | | | | 3.08 | % | | | 174,583 | | | | 7,861 | | | | 4.50 | % |
| Long-term borrowings | | 63,000 | | | | 2,787 | | | | 4.42 | % | | | 63,000 | | | | 3,458 | | | | 5.49 | % | | | 39,860 | | | | 3,000 | | | | 7.53 | % |
Tot Total interest bearing liabilities | | | 1,468,014 | | | | 35,736 | | | | 2.43 | % | | | 1,273,622 | | | | 43,504 | | | | 3.42 | % | | | 1,095,202 | | | | 48,721 | | | | 4.45 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
N Non-interest bearing liabilities and shareholders’ equity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Demand deposits | | | 173,083 | | | | | | | | | | | | 146,158 | | | | | | | | | | | | 163,478 | | | | | | | | | |
Other liabilities | | | 17,557 | | | | | | | | | | | | 19,196 | | | | | | | | | | | | 19,338 | | | | | | | | | |
Shareholders’ equity | | | 114,150 | | | | | | | | | | | | 102,567 | | | | | | | | | | | | 96,083 | | | | | | | | | |
T Total non-interest bearing liabilities and shareholders’ equity | | | 304,790 | | | | | | | | | | | | 267,921 | | | | | | | | | | | | 278,899 | | | | | | | | | |
T Total liabilities and shareholders’ equity | | $ | 1,772,804 | | | | | | | | | | | $ | 1,541,543 | | | | | | | | | | | $ | 1,374,101 | | | | | | | | | |
In Interest rate spread | | | | | | | | | | | 2.50 | % | | | | | | | | | | | 2.68 | % | | | | | | | | | | | 2.94 | % |
N Net interest income | | | | | | $ | 45,580 | | | | | | | | | | | $ | 44,830 | | | | | | | | | | | $ | 46,353 | | | | | |
N Net interest margin (c) | | | | | | | | | | | 2.76 | % | | | | | | | | | | | 3.10 | % | | | | | | | | | | | 3.60 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
__________
(a) | Average loans include non-performing loans. Interest on loans includes loan fees of $498 in 2009, $420 in 2008, and $706 in 2007. |
(b) | Interest income and rates include the effects of a tax equivalent adjustment using applicable Federal tax rates in adjusting tax exempt interest on tax exempt investment securities and loans to a fully taxable basis. |
(c) | Net interest margin is net interest income divided by average total interest-earning assets. |
Changes in net interest income
The table below details the components of the changes in net interest income for the last two years. For each major category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes due to average volumes and changes due to rates, with the changes in both volumes and rates allocated to these two categories based on the proportionate absolute changes in each category.
| | 2009 compared to 2008 Due to changes in | | | 2008 compared to 2007 Due to changes in | |
(Dollars in thousands) | | Average Volume | | | Average Rate | | | Net Increase (Decrease) | | | Average Volume | | | Average Rate | | | Net Increase (Decrease) | |
In Interest income | | | | | | | | | | | | | | | | | | |
L Loans (a)(b) | | $ | 2,489 | | | $ | (11,406 | ) | | $ | (8,917 | ) | | $ | 7,200 | | | $ | (14,098 | ) | | $ | (6,898 | ) |
In Investment securities (a) | | | 5,629 | | | | (2,187 | ) | | | 3,442 | | | | 1,805 | | | | (809 | ) | | | 996 | |
MMoney Market Mutual Funds | | | 132 | | | | - | | | | 132 | | | | - | | | | - | | | | - | |
In Interest-bearing deposits in other banks | | | 138 | | | | (118 | ) | | | 20 | | | | 113 | | | | (28 | ) | | | 85 | |
F FHLB stock | | | 25 | | | | (351 | ) | | | (326 | ) | | | 83 | | | | (236 | ) | | | (153 | ) |
FeFederal funds sold | | | (690 | ) | | | (679 | ) | | | (1,369 | ) | | | 545 | | | | (1,315 | ) | | | (770 | ) |
T Total interest income | | | 7,723 | | | | (14,741 | ) | | | (7,018 | ) | | | 9,746 | | | | (16,486 | ) | | | (6,740 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
In Interest expense | | | | | | | | | | | | | | | | | | | | | | | | |
N NOW accounts | | | 159 | | | | (1,856 | ) | | | (1,697 | ) | | | 608 | | | | (2,643 | ) | | | (2,035 | ) |
MMoney market | | | 903 | | | | (1,735 | ) | | | (832 | ) | | | (1,287 | ) | | | (2,817 | ) | | | (4,104 | ) |
SaSavings deposits | | | 1,075 | | | | 398 | | | | 1,473 | | | | (41 | ) | | | (258 | ) | | | (299 | ) |
Ti Time deposits | | | 4,004 | | | | (7,898 | ) | | | (3,894 | ) | | | 4,780 | | | | (3,606 | ) | | | 1,174 | |
S Short-term borrowings and FHLB advances | | | (844 | ) | | | (1,303 | ) | | | (2,147 | ) | | | 2,514 | | | | (2,925 | ) | | | (411 | ) |
L Long-term borrowings | | | - | | | | (671 | ) | | | (671 | ) | | | 1,420 | | | | (962 | ) | | | 458 | |
Total interest expense | | | 5,297 | | | | (13,065 | ) | | | (7,768 | ) | | | 7,994 | | | | (13,211 | ) | | | (5,217 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Change in net interest income | | $ | 2,426 | | | $ | ( 1,676 | ) | | $ | 750 | | | $ | 1,752 | | | $ | ( 3,275 | ) | | $ | (1,523 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
__________ (a) Interest income includes the effects of a tax equivalent adjustment using applicable federal tax rates in adjusting tax exempt interest on tax exempt investment securities and loans to a fully taxable basis. (b) Average loan volumes include non-performing loans which results in the impact of the nonaccrual of interest being reflected in the change in average rate on loans. | |
Non-interest income
The following table presents the principal components of non-interest income for the years ended December 31:
(Dollars in thousands) | | 2009 | | | 2008 | | | 2007 | |
Service charges on deposit accounts | | $ | 4,165 | | | $ | 2,938 | | | $ | 2,692 | |
Investment securities gains (losses), net | | | 4,295 | | | | (5,349 | ) | | | (5,660 | ) |
Fees on mortgage loans sold | | | 1,143 | | | | 775 | | | | 1,446 | |
Investment advisory and trust fees | | | 997 | | | | 555 | | | | - | |
Debit card income | | | 1,066 | | | | 747 | | | | 733 | |
Earnings on bank owned life insurance policies | | | 546 | | | | 463 | | | | 445 | |
Life insurance gain | | | 1,186 | | | | - | | | | - | |
Gain on sale of assets | | | 14 | | | | 30 | | | | 957 | |
Other | | | 698 | | | | 625 | | | | 749 | |
Total non-interest income | | $ | 14,110 | | | $ | 784 | | | $ | 1,362 | |
| | | | | | | | | | | | |
2009 compared to 2008:
Excluding the effect of investment security gains, non-interest income was $9.8 million in 2009 compared to $6.1 million 2008. The increase is due primarily to a gain of $1.2 million resulting from the death benefit received from a bank owned life insurance policy covering a former employee and the acquisition of Riverside which contributed $1.6 million of service charge and other income during the period.
Residential mortgage originations were $126 million in 2009 compared to $154 million in 2008. Residential loans originated and sold increased from $46.8 million in 2008 to $60.4 million in 2009 and fees on mortgage loans sold increased from $775,000 to $1.1 million for the respective periods.
Investment advisory and trust fees from Naples Capital Advisors and the Bank’s trust department increased from $555,000 in 2008 to $997,000 in 2009.
2008 compared to 2007:
Excluding the effect of investment security losses, non-interest income was $6.1 million in 2008 compared to $7.0 million 2007. Due to the other than temporary impairment of three collateralized debt obligation investment securities and an equity investment security, we wrote down these securities by $6.4 million in 2008 and $5.7 million in 2007. Partially offsetting the loss in 2008 were net gains from the sale of investment securities of $1.1 million. See the section of management’s discussion and analysis entitled “Other than Temporary Impairment of Available for Sale Securities” for additional information.
Residential mortgage originations were $154 million in 2008 compared to $124 million in 2007. However, as a result of the lack of a secondary market for jumbo mortgages in 2008 we originated and retained jumbo mortgages in our loan portfolio as part of a strategy of generating loans on a relationship basis for customers with whom we can provide private banking and wealth management services. As a consequence, residential loans originated and sold declined from $91.2 million in 2007 to $46.8 million in 2008 and fees on mortgage loans sold declined from $1.4 million to $775,000 for the respective periods.
Naples Capital Advisors generated $555,000 of investment advisory fees since its acquisition in January 2008.
In 2007 as part of our operating cost reduction and containment, we sold an office building and land no longer necessary for our operations and recognized a gain of $957,000.
Non-interest expenses
The following table represents the principal components of non-interest expenses for the years ended December 31:
(Dollars in thousands) | | 2009 | | | 2009 Riverside | | | 2009 Without Riverside | | | 2008 | | | 2007 | |
SaSalary and employee benefits | | $ | 28,594 | | | $ | 1,896 | | | $ | 26,698 | | | $ | 24,534 | | | $ | 22,550 | |
N Net occupancy expense | | | 9,442 | | | | 1,517 | | | | 7,925 | | | | 8,539 | | | | 7,979 | |
A Accounting, legal, and other professional | | | 3,271 | | | | 94 | | | | 3,177 | | | | 2,558 | | | | 1,372 | |
In Information system conversion costs | | | 344 | | | | 121 | | | | 223 | | | | - | | | | - | |
C Computer services | | | 2,708 | | | | 427 | | | | 2,281 | | | | 2,093 | | | | 2,172 | |
C Collection costs | | | 353 | | | | - | | | | 353 | | | | 1,341 | | | | 772 | |
P Postage, courier and armored car | | | 1,084 | | | | 149 | | | | 935 | | | | 887 | | | | 837 | |
MMarketing and community relations | | | 1,128 | | | | 112 | | | | 1,016 | | | | 1,246 | | | | 1,151 | |
O Operating supplies | | | 716 | | | | 166 | | | | 550 | | | | 548 | | | | 581 | |
DiDirectors’ fees | | | 873 | | | | - | | | | 873 | | | | 825 | | | | 568 | |
TrTravel expenses | | | 368 | | | | 7 | | | | 361 | | | | 345 | | | | 396 | |
F FDIC and state assessments | | | 3,163 | | | | 529 | | | | 2,634 | | | | 1,153 | | | | 629 | |
S Special FDIC assessment | | | 800 | | | | 169 | | | | 631 | | | | - | | | | - | |
A Amortization of intangibles | | | 1,430 | | | | 890 | | | | 540 | | | | 648 | | | | 440 | |
N Net (gain) loss on disposition of repossessed assets | | | (244 | ) | | | - | | | | (244 | ) | | | 1,387 | | | | 986 | |
O Operational charge-offs | | | 155 | | | | 56 | | | | 99 | | | | 1,528 | | | | 74 | |
In Insurance, nonbuilding | | | 870 | | | | 2 | | | | 868 | | | | 287 | | | | 226 | |
OOREO write downs and expenses | | | 3,149 | | | | - | | | | 3,149 | | | | 1,694 | | | | 14 | |
G Goodwill impairment | | | 5,887 | | | | 1,201 | | | | 4,686 | | | | - | | | | - | |
O Other operating expenses | | | 1,251 | | | | 54 | | | | 1,197 | | | | 1,347 | | | | 1,174 | |
T Total non-interest expenses | | $ | 65,342 | | | $ | 7,390 | | | $ | 57,952 | | | $ | 50,988 | | | $ | 41,921 | |
| | | | | | | | | | | | | | | | | | | | |
2009 compared to 2008:
Non-interest expense increased $14.4 million, or 28%, to $65.3 million compared to $51.0 million in 2008. Of this increase, $6.2 million is attributed to the assumed former Riverside operations and $5.9 million is attributable to a goodwill impairment charge, which includes $1.2 million of goodwill relating to the Riverside acquisition. Excluding the effect of the former Riverside operations and goodwill impairment charge, FDIC insurance costs increased primarily due to a one-time special assessment, higher deposit insurance premium rates and growth of deposits. Information system conversion costs were incurred in merging the operations of The Bank of Venice and OREO write-downs and expenses increased due to higher levels of foreclosed assets. Salaries and employee benefits costs in 2009 included severance costs, increased employee medic al insurance benefits costs, incremental cost of additional staff to manage the higher level of problem assets and the impact of merit adjustments for certain employees.
Salaries and employee benefits increased $4.1 million in 2009 relative to 2008. Salaries and employee benefits of $1.9 million reflect the hiring of new employees in connection with the Riverside transaction. Severance costs accounted for approximately $545,000 of the increase and employee benefits increased by $391,000 largely due to employee medical insurance costs. The addition of new positions to manage the higher level of problem assets and additional Riverside branches plus merit adjustments for certain employees resulted in approximately $928,000 of increased compensation related expenses. Additionally, due to the lower level of loan origination activity during 2009, the amount of salary and benefits costs capitalized as direct loan origination costs decreased by approximately $301,000 as compared to 2008.
There was a $903,000 increase in occupancy expense in 2009 as compared to 2008. Excluding the $1.5 million of occupancy costs related to the operations of the former Riverside branch network and facilities, the Company would have had a $614,000 decrease in occupancy costs for 2009. This decrease is a result of our continued focus on consolidating facilities and containing operating costs.
The first quarter of 2008 included $1.2 million in write-downs of repossessed vehicles and related assets attributable to the restructuring of our indirect lending operations.
Other operating expense for 2009 includes $2.8 million attributable to the former Riverside operations including $890,000 in amortization of acquisition related intangibles and $698,000 of FDIC insurance assessments.
Legal and professional fees in 2009 increased by $713,000 due principally to higher legal fees incurred in managing and resolving non-performing loans and assets.
An increase in the cost of FDIC insurance assessments of $2.8 million relative to 2008 is due primarily to a special assessment of approximately $800,000, higher deposits and a higher deposit insurance premium rate. The special assessment was charged to all FDIC insured institutions during 2009 based on assets.
Other operating expense also includes $223,000 of information system conversion costs related to The Bank of Venice merger and non-facility related insurance costs increased by $571,000 to $870,000 in 2009.
OREO write downs and expenses of $3.1 million during 2009 included approximately $1.8 million of valuation adjustments on nine properties due to the decline in real estate values reflected in updated appraisals as well as net losses of $168,000 recognized on the sales of thirteen properties.
2008 compared to 2007:
Non-interest expenses were $51.0 million in 2008 compared to $41.9 million in 2007. A significant portion of the increase relates to additional costs that were incurred in 2008 due to the contracting economic environment in our markets and the increase in nonperforming loans and assets that we experienced during the year. The restructuring of our indirect auto financing business line also had a significant impact on expenses in 2008.
Salaries and employee benefits increased $2.0 million, reflecting the increase in staffing for our new initiative in private banking, wealth management and trust services ($1.4 million) and annual raises and an increase in personnel to support the growth and expansion of our operations. Severance costs of approximately $455,000 were included in salaries and employee benefits expenses during 2008.
Occupancy costs includes the added facilities cost of a new branch opened by The Bank of Venice, and our new IT facility that became operational in 2008 ($448,000). Unamortized leasehold improvements of $224,000 were written-off in 2008 due to the non-renewal of an office building lease and the closing of our Sebring branch in January 2009.
Accounting, legal and professional fees in 2008 include $387,000 of consulting fees related to the restructuring of our indirect auto finance business line and higher legal fees related to the restructuring and collection of nonperforming loans.
The increase in collection expenses reflects principally the increased collection costs related to the significantly higher delinquent and nonperforming loans in our indirect auto loan portfolio in 2008.
The FDIC assessed higher deposit insurance premiums on all banks in 2008 and the $524,000 increase over the 2007 expense is due to this higher deposit insurance premium and the growth of our deposits.
The restructuring of our indirect auto finance operations resulted in the acceleration of the disposition of repossessed vehicles from a retail sales strategy to a wholesale auction strategy. As a consequence, we wrote down the value of repossessed vehicles and related assets by $1.2 million to the lower wholesale values at March 31, 2008. This write-down is the principal component of repossessed asset expenses in 2008. Subsequently, repossessed vehicles were valued at the estimated wholesale auction values and were sold through the wholesale auction process.
Operational charge-offs increased significantly in 2008 due to the write-off of a non-loan account receivable, which remains the subject of litigation.
OREO expenses and write-downs include $1.3 million of write downs due to the decline in estimated market value of the foreclosed properties since they were acquired and $359,000 of ownership related expenses such as insurance, real estate taxes and maintenance on these properties.
Provision for income taxes
The provision for income taxes includes federal and state income taxes and the impact of the recognition of a full valuation allowance against our deferred tax assets in 2009. The effective income tax rates for the years ended December 31, 2009, 2008, and 2007 were (28%), 38% and 42%, respectively. Historically, the fluctuations in effective tax rates reflect the effect of the differences in the inclusion or deductibility of certain income and expenses, respectively, for income tax purposes. The income tax expense reported during 2009 was due to the recognition of a full valuation allowance against our deferred tax assets as of December 31, 2009, of which $30.4 million was recorded as income tax expense and the $1.2 million relating to unrealized losses on available for sale securities was recorded as an adjustment to equity through accumulated other comprehensive income. A valuation allowance related to deferred tax assets is required when it is considered more likely than not (greater than 50% likelihood) that all or part of the benefit related to such assets will not be realized. In assessing the need for a valuation allowance, management considered various factors including the significant cumulative losses we have incurred over the last three years coupled with the expectation that our future realization of deferred taxes will be limited as a result of our planned capital offering. These factors represent the most significant negative evidence that management considered in concluding that a full valuation allowance was necessary at December 31, 2009. As of December 31, 2008, management considered the need for a valuation allowance and, based upon its assessment of the relative weight of the positive and negative evidence available at the time, concluded that no valuation allowance was necessary at such time.
Excluding the impact of the valuation allowance, the effective tax benefit would have been approximately 35% for 2009. This benefit was reduced by the impairment charge recorded against non-deductible goodwill which was partially offset by the impact of a non-taxable gain resulting from the receipt of proceeds from a life insurance policy covering a former employee. The benefit during 2008 was higher than statutory rates primarily due to the recognition of a state income tax credit related to the Company’s funding of affordable housing construction costs for local charitable organizations. The primary factor resulting in the higher effective tax benefit rate during 2007 was the greater relative impact of the effect of tax exempt interest income on the pretax loss.
Our future effective income tax rate will fluctuate based on the mix of taxable and tax free investments we make and, to a greater extent, the impact of changes in the required amount of valuation allowance recorded against our net deferred tax assets and our overall level of taxable income. See Notes 1 and 11 of our consolidated financial statements for additional information about the calculation of income tax expense and the various components thereof. Additionally, there were no unrecognized tax benefits at December 31, 2009, and we do not expect the total of unrecognized tax benefits to significantly increase in the next twelve months.
Loan Portfolio
Prior to our entrance into the Southwest Florida market in 2001, our primary locations were in the Florida Keys (Monroe County) and south Miami-Dade County. As this region’s primary industry is tourism, commercial loan demand is primarily for resort, hotel, restaurant, marina, and related real estate secured property loans. We serve this market by offering long-term, adjustable rate financing to the owners of these types of properties for acquisition and improvements. As our business has expanded in Southwest Florida, the resulting geographic diversification is expected to provide more industry-based diversity to our loan portfolio. As of December 31, 2009, we had approximately $684.4 million of loans outstanding (including indirect auto loans) in Southwest Florida.
The cost of living in Monroe County is higher in comparison to other counties in Florida due in large part to the limited and expensive real estate with various construction restrictions and environmental considerations. Accordingly, collateral values on loans secured by property in this market are greater. Collier and Lee counties in Southwest Florida have historically been higher growth communities and the majority of the growth of our commercial loan portfolio in recent years has been generated by serving this market.
Loans are expected to produce higher yields than investment securities and other interest-earning assets. The absolute volume of loans and the volume as a percentage of total earning assets are important determinants of the net interest margin. Total loans outstanding decreased to $1.20 billion at the end of 2009 as compared to $1.22 billion at year end 2008, a decrease of 2%. Of this amount, real estate mortgage loans increased 0.4% from $1.02 billion to $1.03 billion. Commercial real estate mortgage loans accounted for some of this increase, growing from $658.5 million to $680.4 million at the respective year ends. Residential loans also increased from $205.1 million at December 31, 2008 to $236.9 million at December 31, 2009. Construction and vacant land decreased from $147.3 mill ion in 2008 to $97.4 million in 2009 offsetting the commercial real estate and residential loan growth. The indirect auto portfolio also decreased from $82.0 million at December 31, 2008 to $50.1 million at December 31, 2009. We generally originate commercial loans with rates that fluctuate with the prime lending rate or may be fixed for initial periods of 3 to 5 years and residential loans held in the portfolio with rates that adjust periodically and are tied to an index such as the one year treasury or one year LIBOR rate. At December 31, 2009, 82% of the total loan portfolio had floating or adjustable rates.
The following table presents the composition our loan portfolio at December 31:
(Dollars in thousands) | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Real estate mortgage loans: | | | | | | | | | | | | | | | |
| Commercial | | $ | 680,409 | | | $ | 658,516 | | | $ | 612,084 | | | $ | 546,276 | | | $ | 451,969 | |
| Residential | | | 236,945 | | | | 205,062 | | | | 112,138 | | | | 82,243 | | | | 76,003 | |
| Farmland | | | 13,866 | | | | 13,441 | | | | 11,361 | | | | 24,210 | | | | 4,660 | |
| Construction and vacant land | | | 97,424 | | | | 147,309 | | | | 168,595 | | | | 157,672 | | | | 125,207 | |
Commercial and agricultural loans | | | 69,246 | | | | 71,352 | | | | 72,076 | | | | 84,905 | | | | 80,055 | |
Indirect auto loans | | | 50,137 | | | | 82,028 | | | | 117,439 | | | | 141,552 | | | | 118,018 | |
Home equity loans | | | 37,947 | | | | 34,062 | | | | 21,820 | | | | 17,199 | | | | 17,232 | |
Other consumer loans | | | 10,190 | | | | 11,549 | | | | 12,154 | | | | 9,795 | | | | 9,228 | |
Subtotal | | | 1,196,164 | | | | 1,223,319 | | | | 1,127,667 | | | | 1,063,852 | | | | 882,372 | |
Less: deferred loan costs (fees) | | | 1,352 | | | | 1,656 | | | | 1,489 | | | | 1,616 | | | | 1,652 | |
Less: allowance for loan losses | | | (29,083 | ) | | | (23,783 | ) | | | (14,973 | ) | | | (9,581 | ) | | | (7,546 | ) |
Net loans | | $ | 1,168,433 | | | $ | 1,201,192 | | | $ | 1,114,183 | | | $ | 1,055,887 | | | $ | 876,478 | |
| | | | | | | | | | | | | | | | | | | | |
Two of the most significant components of our loan portfolio are commercial real estate and construction and vacant land. Our goal of maintaining high standards of credit quality include a strategy of diversification of loan type and purpose within these categories. The following charts illustrate the composition of these portfolios as of December 31:
| | 2009 | | | 2008 | |
(Dollars in thousands) | | Commercial Real Estate | | | Percentage Composition | | | Commercial Real Estate | | | Percentage Composition | |
| | | | | | | | | | | | |
Mixed Use Commercial/Residential | | $ | 102,901 | | | | 15 | % | | $ | 85,580 | | | | 13 | % |
Office Buildings | | | 103,426 | | | | 15 | % | | | 105,238 | | | | 16 | % |
Hotels/Motels | | | 78,992 | | | | 12 | % | | | 90,091 | | | | 14 | % |
1-4 Family and Multi Family | | | 75,342 | | | | 11 | % | | | 88,334 | | | | 13 | % |
Guesthouses | | | 94,663 | | | | 14 | % | | | 84,993 | | | | 13 | % |
Retail Buildings | | | 78,852 | | | | 12 | % | | | 71,184 | | | | 11 | % |
Restaurants | | | 50,395 | | | | 7 | % | | | 47,680 | | | | 7 | % |
Marinas/Docks | | | 19,521 | | | | 3 | % | | | 20,130 | | | | 3 | % |
Warehouse and Industrial | | | 32,328 | | | | 5 | % | | | 27,541 | | | | 4 | % |
Other | | | 43,989 | | | | 6 | % | | | 37,745 | | | | 6 | % |
Total | | $ | 680,409 | | | | 100 | % | | $ | 658,516 | | | | 100 | % |
| | | | | | | | | | | | | | | | |
| | 2009 | | | 2008 | |
(Dollars in thousands) | | Construction and Vacant Land | | | Percentage Composition | | | Construction and Vacant Land | | | Percentage Composition | |
| | | | | | | | | | | | |
Construction: | | | | | | | | | | | | |
| Residential – owner occupied | | $ | 6,024 | | | | 6 | % | | $ | 11,866 | | | | 8 | % |
| Residential – commercial developer | | | 6,574 | | | | 7 | % | | | 21,052 | | | | 14 | % |
| Commercial structure | | | 13,127 | | | | 13 | % | | | 18,629 | | | | 13 | % |
Total construction | | | 25,725 | | | | 26 | % | | | 51,547 | | | | 35 | % |
| | | | | | | | | | | | | | | | |
Land: | | | | | | | | | | | | | | | | |
| Raw land | | | 20,684 | | | | 21 | % | | | 25,890 | | | | 18 | % |
| Residential lots | | | 12,773 | | | | 13 | % | | | 13,041 | | | | 9 | % |
| Land development | | | 16,877 | | | | 17 | % | | | 19,975 | | | | 13 | % |
| Commercial lots | | | 21,365 | | | | 23 | % | | | 36,856 | | | | 25 | % |
Total land | | | 71,699 | | | | 74 | % | | | 95,762 | | | | 65 | % |
| | | | | | | | | | | | | | | | |
Total | | $ | 97,424 | | | | 100 | % | | $ | 147,309 | | | | 100 | % |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
The contractual maturity distribution of our loan portfolio at December 31, 2009 is indicated in the table below. The majority of these are amortizing loans.
| | Loans maturing | |
(Dollars in thousands) | | Within 1 Year | | | 1 to 5 Years | | | After 5 Years | | | Total | |
Real estate mortgage loans: | | | | | | | | | | | | |
| Commercial | | $ | 65,479 | | | $ | 180,176 | | | $ | 434,754 | | | $ | 680,409 | |
| Residential | | | 3,341 | | | | 2,183 | | | | 231,421 | | | | 236,945 | |
| Farmland | | | 74 | | | | 2,458 | | | | 11,334 | | | | 13,866 | |
| Construction and vacant land (a) | | | 69,976 | | | | 12,548 | | | | 14,900 | | | | 97,424 | |
Commercial and agricultural loans | | | 27,406 | | | | 21,719 | | | | 20,121 | | | | 69,246 | |
Indirect auto loans | | | 3,519 | | | | 42,139 | | | | 4,479 | | | | 50,137 | |
Home equity loans | | | 1,599 | | | | 4,069 | | | | 32,279 | | | | 37,947 | |
Other consumer loans | | | 949 | | | | 7,954 | | | | 1,287 | | | | 10,190 | |
Total loans | | $ | 172,343 | | | $ | 273,246 | | | $ | 750,575 | | | $ | 1,196,164 | |
| | | | | | | | | | | | | | | | |
__________ (a) $6, (a) $6,024 of this amount relates to residential real estate construction loans that have been approved for permanent financing but are still under construction. The remaining amount relates to vacant land and commercial real estate construction loans, some of which have been approved for permanent financing but are still under construction. | |
| | Loans maturing | |
(Dollars in thousands) | | Within 1 Year | | | 1 to 5 Years | | | After 5 Years | | | Total | |
Loans with: | | | | | | | | | | | | |
| Predetermined interest rates | | $ | 64,808 | | | $ | 119,403 | | | $ | 33,639 | | | $ | 217,850 | |
| Floating or adjustable rates | | | 107,535 | | | | 153,843 | | | | 716,936 | | | | 978,314 | |
Total loans | | $ | 172,343 | | | $ | 273,246 | | | $ | 750,575 | | | $ | 1,196,164 | |
| | | | | | | | | | | | | | | | |
Allowance and Provision for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses in the loan portfolio. Our formalized process for assessing the adequacy of the allowance for loan losses and the resultant need, if any, for periodic provisions to the allowance charged to income, includes both individual loan analyses and loan pool analyses. Individual loan analyses are periodically performed on loan relationships of a significant size, or when otherwise deemed necessary, and primarily encompass commercial real estate and other commercial loans. The result is that commercial real estate loans and commercial loans are divided into the following risk categories: Pass, Special Mention, Substandard and Loss. The allowance consists of specific and general components. When appropriate, a specific reserv e will be established for individual loans based upon the risk classifications and the estimated potential for loss The specific component relates to loans that are individually classified as impaired. Otherwise, we estimate an allowance for each risk category. The general allocations to each risk category are based on factors including historical loss rate, perceived economic conditions (local, national and global), perceived strength of our management, recent trends in loan loss history, and concentrations of credit.
Home equity loans, indirect auto loans, residential loans and consumer loans generally are not analyzed individually and or separately identified for impairment disclosures. These loans are grouped into pools and assigned risk categories based on their current payment status and management’s assessment of risk inherent in the various types of loans. The allocations are based on the same factors mentioned above.
Senior management and the Board of Directors review this calculation and the underlying assumptions on a routine basis not less frequently than quarterly.
The allowance for loan losses amounted to $29.1 million and $23.8 million at December 31, 2009 and December 31, 2008, respectively. Based on an analysis performed by management at December 31, 2009, the allowance for loan losses is considered to be adequate to cover estimated incurred loan losses in the portfolio as of that date. However, management’s judgment is based upon our recent historical loss experience, the level of non-performing and delinquent loans, current information and a number of assumptions about future events, which are believed to be reasonable, but which may or may not prove valid. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that significant additional increases in the allowance for loan losses will no t be required. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
The provision for loan losses is a charge to income in the current period to replenish the allowance and maintain it at a level that management has determined to be adequate to absorb estimated incurred losses in the loan portfolio. Our provision for loan losses was $42.3 million, $28.2 million and $9.7 million for the years ended December 31, 2009, 2008 and 2007, respectively. The higher provision for loan losses in 2009 and 2008 was primarily attributable to the national and local market economic recession and the continued financial challenges of our consumer and commercial customers as well as the increase in our nonperforming loans, delinquencies and charge-offs. While there recently has been an increase in the number of real estate unit sales as compared to the prior year period in our markets, the impact of foreclosures and distressed sales is impacting the value of real estate and the economy broadly. Net charge-offs were $37.0 million, or 3.01% of average loans during 2009, compared to $19.4 million and $4.9 million, or 1.64% and 0.45% of average loans in 2008 and 2007, respectively. Of the 2009 net charge offs, approximately $17.8 million were related to loans classified as nonaccrual or impaired as of December 31, 2009.
Our provision for loan losses in future periods will be influenced by the loss potential of impaired loans, non-performing loans and net charge offs, which cannot be reasonably predicted.
Management continuously monitors and actively manages the credit quality of the entire loan portfolio and will continue to recognize the provision required to maintain the allowance for loan losses at an appropriate level. Due to the economic slowdown discussed above, our individual and business customers are exhibiting increasing difficulty in timely payment of their loan obligations. We believe that this trend will continue in the near term. Consequently, we may experience higher levels of delinquent and non-performing loans, which may require higher provisions for loan losses, higher charge-offs and higher collection related expenses in future periods.
As discussed in Note 2 to the consolidated financial statements, TIB Bank has entered into a Memorandum of Understanding with bank regulatory agencies. In addition to increasing capital ratios, the Bank has agreed to improve its asset quality by reducing the balance of assets classified substandard and doubtful in the report from the most recent regulatory examination through collection, disposition, charge-off or improvement in the credit quality of the loans. Further, the Bank has agreed to make every effort to reduce its risk in its concentration in commercial real estate consistent with the Interagency Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices. In addition, the Bank agreed to establish appropriate concentration limits and sublimits by types of loans and collateral and adopt appropri ate timelines to achieve those limits as a percent of capital and to report our progress to the regulators on a quarterly basis.
Changes affecting the allowance for loan losses are summarized for the years ended December 31,
(Dollars in thousands) | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Balance at beginning of year | | $ | 23,783 | | | $ | 14,973 | | | $ | 9,581 | | | $ | 7,546 | | | $ | 6,243 | |
| | | | | | | | | | | | | | | | | | | | |
Charge-offs: | | | | | | | | | | | | | | | | | | | | |
| Real estate mortgage loans: | | | | | | | | | | | | | | | | | | | | |
| Commercial | | | 10,418 | | | | 1,577 | | | | 118 | | | | - | | | | - | |
| Residential | | | 3,815 | | | | 1,897 | | | | 63 | | | | - | | | | - | |
| Farmland | | | - | | | | - | | | | - | | | | - | | | | - | |
| Construction and vacant land | | | 11,967 | | | | 4,324 | | | | 1,251 | | | | - | | | | - | |
| C Commercial and agricultural loans | | | 3,028 | | | | 587 | | | | 278 | | | | 12 | | | | 107 | |
| Indirect auto loans | | | 7,292 | | | | 10,674 | | | | 3,110 | | | | 1,557 | | | | 1,045 | |
| Home equity loans | | | 504 | | | | 270 | | | | 331 | | | | - | | | | - | |
| Other consumer loans | | | 242 | | | | 180 | | | | 51 | | | | 4 | | | | 67 | |
Total charge-offs | | | 37,266 | | | | 19,509 | | | | 5,202 | | | | 1,573 | | | | 1,219 | |
| | | | | | | | | | | | | | | | | | | | |
Recoveries: | | | | | | | | | | | | | | | | | | | | |
Real estate mortgage loans: | | | | | | | | | | | | | | | | | | | | |
Commercial | | | 21 | | | | - | | | | - | | | | - | | | | - | |
Residential | | | 153 | | | | 10 | | | | - | | | | - | | | | - | |
Farmland | | | - | | | | - | | | | - | | | | - | | | | - | |
Construction and vacant land | | | 13 | | | | 2 | | | | - | | | | - | | | | - | |
| C Commercial and agricultural loans | | | 45 | | | | - | | | | - | | | | 20 | | | | 6 | |
Indirect auto loans | | | 66 | | | | 54 | | | | 262 | | | | 55 | | | | 65 | |
Home equity loans | | | 11 | | | | - | | | | 2 | | | | 2 | | | | 8 | |
Other consumer loans | | | 1 | | | | 14 | | | | 6 | | | | 40 | | | | 30 | |
Total recoveries | | | 310 | | | | 80 | | | | 270 | | | | 117 | | | | 109 | |
| | | | | | | | | | | | | | | | | | | | |
Net charged off | | | 36,956 | | | | 19,429 | | | | 4,932 | | | | 1,456 | | | | 1,110 | |
| | | | | | | | | | | | | | | | | | | | |
Provision for loan losses | | | 42,256 | | | | 28,239 | | | | 9,657 | | | | 3,491 | | | | 2,413 | |
| | | | | | | | | | | | | | | | | | | | |
Acquisition of The Bank of Venice | | | - | | | | - | | | | 667 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Allo Allowance for loan losses at end of year | | $ | 29,083 | | | $ | 23,783 | | | $ | 14,973 | | | $ | 9,581 | | | $ | 7,546 | |
| | | | | | | | | | | | | | | | | | | | |
R Ratio of net charge-offs to average net loans outstanding | | | 3.01 | % | | | 1.64 | % | | | 0.45 | % | | | 0.15 | % | | | 0.14 | % |
| | | | | | | | | | | | | | | | | | | | |
While no portion of the allowance is in any way restricted to any individual loan or group of loans and the entire allowance is available to absorb probable incurred credit losses from any and all loans, the following table represents management’s best estimate of the allocation of the allowance for loan losses to the various segments of the loan portfolio based on information available as of December 31. Qualitative factors used in determining the allowance for loan losses resulted in the establishment of an unallocated reserve totaling approximately $652,000 and $1.1 million as of December 31, 2009 and 2007, respectively. Due to the ongoing evaluation and changes in the basis for the allowance for loan losses, actual future charge offs will not necessarily follow the allocations described below.
| | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
(Dollars in thousands) | | Allowance | | | % of Total Loans | | | Allowance | | | % of Total Loans | | | Allowance | | | % of Total Loans | | | Allowance | | | % of Total Loans | | | Allowance | | | % of Total Loans | |
R Real estate mortgage loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | $ | 13,895 | | | | 57 | % | | $ | 11,143 | | | | 54 | % | | $ | 5,250 | | | | 54 | % | | $ | 3,764 | | | | 51 | % | | $ | 2,971 | | | | 51 | % |
Residential | | | 3,897 | | | | 20 | % | | | 2,393 | | | | 17 | % | | | 381 | | | | 10 | % | | | 191 | | | | 8 | % | | | 168 | | | | 9 | % |
Farmland | | | 198 | | | | 1 | % | | | 134 | | | | 1 | % | | | 84 | | | | 1 | % | | | 161 | | | | 2 | % | | | 30 | | | | 1 | % |
| Construction and vacant land | | | 2,868 | | | | 8 | % | | | 1,313 | | | | 12 | % | | | 1,218 | | | | 15 | % | | | 922 | | | | 15 | % | | | 743 | | | | 14 | % |
C Commercial and agricultural loans | | | 3,033 | | | | 6 | % | | | 2,256 | | | | 6 | % | | | 1,547 | | | | 6 | % | | | 1,002 | | | | 8 | % | | | 912 | | | | 9 | % |
In Indirect auto loans | | | 3,244 | | | | 4 | % | | | 5,708 | | | | 6 | % | | | 5,072 | | | | 11 | % | | | 3,352 | | | | 13 | % | | | 2,523 | | | | 13 | % |
H Home equity loans | | | 1,011 | | | | 3 | % | | | 694 | | | | 3 | % | | | 213 | | | | 2 | % | | | 87 | | | | 2 | % | | | 85 | | | | 2 | % |
O Other consumer loans | | | 285 | | | | 1 | % | | | 142 | | | | 1 | % | | | 113 | | | | 1 | % | | | 102 | | | | 1 | % | | | 114 | | | | 1 | % |
U Unallocated | | | 652 | | | | | | | | - | | | | | | | | 1,095 | | | | | | | | - | | | | | | | | - | | | | | |
| | $ | 29,083 | | | | 100 | % | | $ | 23,783 | | | | 100 | % | | $ | 14,973 | | | | 100 | % | | $ | 9,581 | | | | 100 | % | | $ | 7,546 | | | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Impaired Loans
Non-performing loans and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one category. A loan is considered impaired when it is probable that not all principal and interest amounts will be collected according to the loan contract. Generally, residential mortgage, commercial and commercial real estate loans exceeding certain size thresholds established by management are individually evaluated for impairment. Nonaccrual loans and restructured loans where loan term concessions benefitting the borrowers have been made are generally designated as impaired. As of December 31, 2009 and 2008, impaired loans presented in the table below include the $72.8 million and $39.8 million, respectively, of nonperforming loans, other than indirect and consumer loa ns. Impaired loans as of December 31, 2009 and 2008, also include $35.9 million and $17.3 million, respectively, of restructured loans which are in compliance with modified terms and not reported as non-performing. Impaired loans also include loans which are not currently classified as non-accrual, but otherwise meet the criteria for classification as an impaired loan (i.e. loans for which the collection of all principal and interest amounts as specified in the original loan contract are not expected, or where management has substantial doubt that the collection will be as specified, but is still expected to occur in its entirety). Collectively, these loans comprise the potential problem loans individually considered along with historical portfolio loss experience and trends and other quantitative and qualitative factors applied to the balance of our portfolios in our evaluation of the adequacy of the allowance for loan losses.
If a loan is considered to be impaired, a portion of the allowance is allocated so that the carrying value of the loan is reported at the present value of estimated future cash flows discounted using the loan’s original rate or at the fair value of collateral, less disposition costs, if repayment is expected solely from the collateral. Impaired loans are as follows:
(Dollars in thousands) | | 2009 | | | 2008 | |
Year end loans with no specifically allocated allowance for loan losses | | $ | 60,629 | | | $ | 8,344 | |
Year end loans with allocated allowance for loan losses | | | 87,823 | | | | 53,765 | |
Total | | $ | 148,452 | | | $ | 62,109 | |
| | | | | | | | |
Amount of the allowance for loan losses allocated to impaired loans | | $ | 9,040 | | | $ | 6,116 | |
| | | | | | | | |
Amount of nonaccrual loans classified as impaired | | $ | 71,755 | | | $ | 37,881 | |
| | | | | | | | |
| | December 31, 2009 | |
(Dollars in thousands) | | Total Impaired Loans | | | Impaired Loans With Allocated Allowance | | | Amount of Allowance Allocated | | | Impaired Loans With No Allocated Allowance | |
Commercial | | $ | 6,210 | | | $ | 4,847 | | | $ | 1,455 | | | $ | 1,363 | |
Commercial Real Estate | | | 123,452 | | | | 70,868 | | | | 5,455 | | | | 52,584 | |
Residential | | | 16,261 | | | | 10,158 | | | | 1,704 | | | | 6,103 | |
Consumer | | | 699 | | | | 699 | | | | 274 | | | | - | |
HELOC | | | 1,830 | | | | 1,251 | | | | 152 | | | | 579 | |
Total | | $ | 148,452 | | | $ | 87,823 | | | $ | 9,040 | | | $ | 60,629 | |
| | December 31, 2008 | |
(Dollars in thousands) | | Total Impaired Loans | | | Impaired Loans With Allocated Allowance | | | Amount of Allowance Allocated | | | Impaired Loans With No Allocated Allowance | |
Commercial | | $ | 1,654 | | | $ | 1,219 | | | $ | 1,183 | | | $ | 435 | |
Commercial Real Estate | | | 52,924 | | | | 47,251 | | | | 3,963 | | | | 5,673 | |
Residential | | | 6,307 | | | | 4,312 | | | | 838 | | | | 1,995 | |
Consumer | | | 50 | | | | 44 | | | | - | | | | 6 | |
HELOC | | | 1,174 | | | | 939 | | | | 132 | | | | 235 | |
Total | | $ | 62,109 | | | $ | 53,765 | | | $ | 6,116 | | | $ | 8,344 | |
Non-Performing Assets
Non-performing assets include non-accrual loans and investments securities, repossessed personal property, and other real estate. Loans and investments in debt securities are placed on non-accrual status when management has concerns relating to the ability to collect the principal and interest and generally when such assets are 90 days past due. Non-performing assets were as follows for the periods ending December 31:
(Dollars in thousands) | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Total non-accrual loans (a) | | $ | 72,833 | | | $ | 39,776 | | | $ | 16,086 | | | $ | 4,223 | | | $ | 956 | |
Accruing loans delinquent 90 days or more (a) | | | - | | | | - | | | | - | | | | - | | | | - | |
Total non-performing loans | | | 72,833 | | | | 39,776 | | | | 16,086 | | | | 4,223 | | | | 956 | |
| | | | | | | | | | | | | | | | | | | | |
Non-accrual investment securities(b) | | | 759 | | | | 763 | | | | 3,154 | | | | - | | | | - | |
Repossessed personal property (primarily indirect auto loans) | | | 326 | | | | 601 | | | | 3,136 | | | | 1,958 | | | | 962 | |
Other real estate owned | | | 21,352 | | | | 4,323 | | | | 1,846 | | | | - | | | | 190 | |
Other assets (c) | | | 2,090 | | | | 2,076 | | | | 2,915 | | | | 2,861 | | | | 2,815 | |
Total non-performing assets | | $ | 97,360 | | | $ | 47,539 | | | $ | 27,137 | | | $ | 9,042 | | | $ | 4,923 | |
| | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses | | $ | 29,083 | | | $ | 23,783 | | | $ | 14,973 | | | $ | 9,581 | | | $ | 7,546 | |
| | | | | | | | | | | | | | | | | | | | |
Non-performing assets as a percent of total assets | | | 5.71 | % | | | 2.95 | % | | | 1.88 | % | | | 0.69 | % | | | 0.46 | % |
Non-performing loans as a percent of total loans | | | 6.09 | % | | | 3.25 | % | | | 1.43 | % | | | 0.40 | % | | | 0.11 | % |
Allowance for loan losses as a percent of non-performing loans (a) | | | 39.93 | % | | | 59.79 | % | | | 93.08 | % | | | 226.88 | % | | | 789.33 | % |
| | | | | | | | | | | | | | | | | | | | |
__________
(a) | Non-performing loans during 2005 excluded the $1.6 million loan discussed below that was guaranteed for both principal and interest by the USDA. In December 2006, the Bank stopped accruing interest on this loan pursuant to a ruling made by the USDA. Accordingly, the loan was included in total non-accrual loans as of December 31, 2006 and 2007. During 2008, the USDA repaid the guaranteed portion of the loan in accordance with the provisions of the guarantee agreement. Other non-accrual loans at December 31, 2005 through December 31, 2006 are primarily indirect auto loans. |
Non-accrual loans as of December 31, 2009, 2008 and 2007 are comprised of the following:
| | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | December 31, 2009 | | | December 31, 2008 | | | December 31, 2007 | |
Collateral Description | | Number of Loans | | | Outstanding Balance | | | Number of Loans | | | Outstanding Balance | | | Number of Loans | | | Outstanding Balance | |
RResidential 1-4 family | | | 44 | | | $ | 10,738 | | | | 18 | | | $ | 4,014 | | | | 19 | | | $ | 4,566 | |
C Commercial 1-4 family investment | | | 19 | | | | 8,733 | | | | 9 | | | | 7,943 | | | | 3 | | | | 1,122 | |
C Commercial and agricultural | | | 7 | | | | 2,454 | | | | 2 | | | | 64 | | | | 4 | | | | 293 | |
C Commercial real estate | | | 29 | | | | 24,392 | | | | 18 | | | | 13,133 | | | | 4 | | | | 2,619 | |
R Residential land development | | | 13 | | | | 25,295 | | | | 4 | | | | 12,584 | | | | 1 | | | | 2,686 | |
G Government guaranteed loans | | | 2 | | | | 143 | | | | 3 | | | | 143 | | | | 1 | | | | 1,641 | |
InIndirect auto, auto and consumer loans | | | 97 | | | | 1,078 | | | | 155 | | | | 1,895 | | | | 238 | | | | 3,159 | |
| | | | | | $ | 72,833 | | | | | | | $ | 39,776 | | | | | | | $ | 16,086 | |
(b) | In December 2007, we placed a collateralized debt obligation (“CDO”) collateralized primarily by homebuilders, REITs, real estate companies and commercial mortgage backed securities on non-accrual. This security had an original cost of $6.0 million. During 2008, two additional similarly secured collateralized debt obligations with original costs of $2.0 million each were also placed on nonaccrual. As of December 31, 2007 and throughout 2008, the estimated fair value of these securities declined further and management has periodically deemed such declines other than temporary. Through December 31, 2008, we had recorded cumulative realized losses totaling $9.2 million relating to these securities. During 2009, the remaining balance of these securities was writt en off and an additional CDO with an original cost of $5.0 million, collateralized by trust preferred securities of banks and insurance companies, was placed on nonaccrual. As this security has been downgraded and interest payments are currently being deferred, the estimated fair value of this security has declined to approximately $759,000 as of December 31, 2009. This estimated fair value is based upon an analysis performed by an independent third-party engaged by the Company as of December 31, 2009 which estimated the fair value and credit loss potential of the security. Based upon our review of the analysis and the assumptions used therein, we believe this decline to be temporary in nature based upon current projections of the performance of the underlying collateral which indicate that the entirety of principal and interest owed will be collected at maturity. For additional details on these and other investment securities, see the section of management’s discussion and analysis tha t follows entitled “Investment Portfolio”. |
(c) | In 1998, TIB Bank made a $10.0 million loan to construct a lumber mill in northern Florida. Of this amount, $6.4 million had been sold by the Bank to other lenders. The loan was 80% guaranteed as to principal and interest by the U.S. Department of Agriculture (USDA). In addition to business real estate and equipment, the loan was collateralized by the business owner’s interest in a trust. Under provisions of the trust agreement, beneficiaries cannot receive trust assets until November 2010. |
| The portion of this loan guaranteed by the USDA and held by us was approximately $1.6 million. During the second quarter of 2008, the USDA paid the Company the principal and accrued interest and allowed the Company to apply other proceeds previously received to reduce capitalized liquidation costs and protective advances. The non-guaranteed principal and interest ($2.0 million at December 31, 2009 and December 31, 2008) and the reimbursable capitalized liquidation costs and protective advance costs totaling approximately $126,000 and $112,000 at December 31, 2009 and 2008, respectively, are included as “other assets” in the financial statements. |
| Florida law requires a bank to liquidate or charge off repossessed real property within five years, and repossessed personal property within six months. Since the property had not been liquidated during this period, the Bank charged-off the non guaranteed principal and interest totaling $2.0 million at June 30, 2003, for regulatory purposes. Since we believe this amount is ultimately realizable, we did not write off this amount for financial statement purposes under generally accepted accounting principles. |
An expanded analysis of the more significant loans classified as nonaccrual during the fourth quarter of 2009 and remaining classified as of December 31, 2009, is as follows:
Significant Nonaccrual Loans (Other Than Indirect Auto and Consumer) | |
(Dollars in thousands) | |
Collateral Description | | Original Loan Amount | | | Original Loan to Value (Based on Original Appraisal) | | | Current Loan Amount | | | Specific Allocation of Reserve in Allowance for Loan Losses at December 31, 2009 | | | Amount Charged Against Allowance for Loan Losses During the Quarter Ended December 31, 2009 | | | Impact on the Provision for Loan Losses (*) During the Quarter Ended December 31, 2009 | |
Arising in Fourth Quarter 2009 | | | | | | | | | | | | | | | | | | |
Commercial 1-4 family residential SW Florida | | $ | 2,175 | | | | 66 | % | | $ | 1,520 | | | $ | 647 | | | $ | 163 | | | $ | 97 | |
Vacant land SW Florida | | | 5,826 | | | �� | 60 | % | | | 5,450 | | | | 191 | | | | 61 | | | | 121 | |
Commercial 1-4 family residential SW Florida | | | 1,933 | | | | 73-83 | % | | | 1,391 | | | | 195 | | | | 259 | | | | 210 | |
ComCommercial real estate, business assets and accounts receivable | | | 3,392 | | | | 80 | % | | | 3,358 | | | | 1,438 | | | | - | | | | 1,438 | |
Luxury boutique hotel in SW Florida | | | 9,775 | | | | 88 | % | | | 7,000 | | | | 245 | | | | 2,775 | | | | 2,608 | |
Bayfront land in FL Keys | | | 5,622 | | | | 54 | % | | | 5,459 | | | | - | | | | - | | | | - | |
Nu Numerous smaller balance primarily 1-4 family residential and commercial real estate loans | | | | | | | | | | | 8,169 | | | | 851 | | | | 1,154 | | | | 1,185 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Total | | | $ | 32,347 | | | $ | 3,567 | | | $ | 4,412 | | | $ | 5,659 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Nonaccrual Prior to Fourth Quarter 2009 Remaining on Nonaccrual at December 31, 2009 | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Commercial 1-4 family residential | | $ | 3,778 | | | | 72-78 | % | | $ | 3,401 | | | $ | 273 | | | $ | - | | | $ | (229 | ) |
Mixed use – developer | | | 3,602 | | | | 80 | % | | | 2,300 | | | | - | | | | 1,363 | | | | 18 | |
Commercial real estate | | | 1,720 | | | | 78 | % | | | 1,676 | | | | - | | | | - | | | | - | |
Commercial real estate | | | 1,408 | | | | 80 | % | | | 940 | | | | 75 | | | | 360 | | | | 73 | |
Residential 1-4 family home | | | 1,008 | | | | 80 | % | | | 665 | | | | 53 | | | | 336 | | | | - | |
Vacant land – residential development | | | 10,000 | | | | 61 | % | | | 5,385 | | | | 188 | | | | 4,615 | | | | (196 | ) |
Two restaurants SW Florida | | | 5,099 | | | | 57-70 | % | | | 4,949 | | | | 717 | | | | - | | | | 352 | |
Two office buildings – developer | | | 4,807 | | | | 75 | % | | | 2,200 | | | | 176 | | | | 2,485 | | | | 2,286 | |
Vacant land – residential development | | | 4,750 | | | | 42 | % | | | 4,750 | | | | - | | | | - | | | | - | |
Office Building | | | 1,118 | | | | 66 | % | | | 1,118 | | | | 20 | | | | - | | | | 20 | |
N Numerous smaller balance primarily 1-4 family residential and commercial real estate loans | | | | | | | | | | | 12,024 | | | | 775 | | | | 1,438 | | | | 531 | |
| | | | | | | | | | $ | 39,408 | | | $ | 2,277 | | | $ | 10,597 | | | $ | 2,855 | |
| | | | | | Total | | | $ | 71,755 | | | $ | 5,844 | | | $ | 15,009 | | | $ | 8,514 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
(*) | Impact on the provision for loan losses during the quarter represents the increase (decrease) in specific reserves. |
Of the $32.3 million of loans placed on nonaccrual during the fourth quarter and remaining on nonaccrual as of December 31, 2009, $8.1 million related to loans which we reviewed during the quarter and determined that no specific reserves were necessary at such time. The remaining loans which were also reviewed during the quarter required a $5.7 million increase in the allocation of specific reserves which resulted in specific reserves of $3.6 million as of December 31, 2009 after recognizing $4.4 million of partial charge-downs. Loans classified as nonaccrual prior to the fourth quarter of 2009 required additional specific reserves of $2.9 million during the fourth quarter of 2009 and required specific reserves of $2.2 million as of December 31, 2009 after recognizing partial charge-downs of $10.6 million during the fourth qua rter. As of December 31, 2009, the balances of nonaccrual and impaired loan are net of cumulative charge-downs of approximately $17.8 million.
An expanded analysis of the significant components of other real estate owned as of December 31, 2009 is as follows:
OREO Analysis as of December 31, 2009 (Dollars in thousands) | |
Property Description | | Original Loan Amount | | | Original LTV | | | Carrying Value at December 31, 2009 | |
Seven developed commercial lots | | $ | 13,500 | | | | 50 | % | | $ | 9,422 | |
Si Six 1-4 family residential condominiums (new construction) | | | 7,066 | | | | 72 | % | | | 4,939 | |
Luxury 1-4 family residence in Southwest Florida | | | 2,493 | | | | 67 | % | | | 2,494 | |
Commercial real estate (3 loans) | | | | | | | | | | | 2,243 | |
Other land (4 lots – 3 loans) | | | | | | | | | | | 1,611 | |
Other 1-4 family residential (3 loans) | | | | | | | | | | | 643 | |
| | | | | | Total | | | $ | 21,352 | |
Liquidity and Rate Sensitivity
Liquidity represents the ability to provide steady sources of funds for loan commitments and investment activities, as well as to provide sufficient funds to cover deposit withdrawals and payments of debt, off-balance sheet obligations and operating obligations. Funds can be obtained from operations by converting assets to cash, by attracting new deposits, by borrowing, by raising capital and other ways. We manage the levels, types and maturities of earning assets in relation to the sources available to fund current and future needs to ensure that adequate funding will be available at all times.
Major sources of net increases in cash and cash equivalents are as follows for the three years ending December 31:
(Dollars in thousands) | | 2009 | | | 2008 | | | 2007 | |
Provided by (used in) operating activities | | $ | (5,147 | ) | | $ | 9,207 | | | $ | 3,770 | |
Provided by (used in) investing activities | | | 255,487 | | | | (193,909 | ) | | | (40,328 | ) |
Provided by (used in) financing activities | | | (156,672 | ) | | | 187,377 | | | | 52,065 | |
Net increase in cash and cash equivalents | | $ | 93,668 | | | $ | 2,675 | | | $ | 15,507 | |
| | | | | | | | | | | | |
As discussed in Note 16 of the Consolidated Financial Statements, the Company had unfunded loan commitments and unfunded letters of credit totaling $73.5 million at December 31, 2009. We believe the likelihood of these commitments either needing to be totally funded or funded at the same time is low. However, should significant funding requirements occur, the Company has available borrowing capacity from various sources as discussed below.
In addition to maintaining a stable core deposit base, we maintain adequate liquidity primarily through the use of investment securities, short term investments such as federal funds sold and unused borrowing capacity. The Bank has invested in Federal Home Loan Bank stock for the purpose of establishing credit lines with the Federal Home Loan Bank. The credit availability to the Bank is based on a percentage of the Bank’s total assets as reported in their most recent quarterly financial information submitted to the Federal Home Loan Bank and subject to the pledging of sufficient collateral. At December 31, 2009, there were $125.0 million in advances outstanding in addition to $25.3 million in letters of credit including $25.1 million used in lieu of pledging securities to the State of Florida to collateralize governmental deposits. As of December 31, 2009, collateral availability under our agreements with the Federal Home Loan Bank provided for total borrowings of up to approximately $206.8 million of which $56.5 million was available. On January 7, 2010, the FHLB notified the Bank that the credit availability has been rescinded and the rollover of existing advances outstanding is limited to twelve months or less.
The Bank had an unsecured overnight federal funds purchased accommodations up to a maximum of $25.0 million from its correspondent bank as of December 31, 2009. On February 17, 2010, the Bank was notified that the maximum amount of the accommodation was changed to $7.5 million and a secured repurchase agreement with a maximum credit availability of $24.4 million. As of December 31, 2009, collateral availability under our agreement with the Federal Reserve Bank of Atlanta (“FRB”) provided for up to $98.6 million of borrowing availability from the FRB discount window. We believe that we have adequate funding sources through unused borrowing capacity from our correspondent banks and FRB, unpledged investment securities, loan principal repayment and potential asset maturities and sales to meet our foreseeable liquidity requiremen ts.
During the second, third, and fourth quarters of 2008 and the first, second, and third quarters of 2009, the Company’s Board of Directors declared 1% (one percent) stock dividends to holders of record as of July 7, 2008, September 30, 2008, December 31, 2008, March 31, 2009, June 30, 2009 and September 30, 2009 respectively. The stock dividends were distributed on July 17, 2008, October 10, 2008, January 10, 2009, April 10, 2009, July 10, 2009 and October 10, 2009. The decision to replace our quarterly cash dividend with a stock dividend was made after consideration of the current and projected economic and operating environment and to conserve cash and capital resources at the holding company to support the potential capital needs of the Bank. The Bank and the Company currently maintain regulatory capital which meets the definitio n of adequately capitalized. As previously described, TIB Bank has entered into an informal agreement with Bank regulatory agencies that it would move in good faith to increase its Tier 1 leverage capital ratio to not less than 8% and its total risk-based capital ratio to not less than 12% by December 31, 2009 and maintain these higher ratios for as long as this agreement is in effect. At December 31, 2009, TIB had a Tier 1 leverage capital ratio of 4.8% and a total risk-based capital ratio of 8.1%.
Due to the timing of our plans to raise capital, we requested an extension of time to April 30, 2010 to comply with the informal agreement. As the financial markets traditionally are not receptive to offerings during the holiday and year-end period, we withdrew our registration statement on December 23, 2009 and intend to pursue our capital efforts once year-end results are available. The Office of Financial Regulation has agreed to the extension provided the FDIC also agrees. We are currently awaiting the FDIC's response.
As of December 31, 2009, our holding company had cash of approximately $874,000. This cash is available for providing capital support to the subsidiary bank and for other general corporate purposes. During 2009, the holding company invested $20.5 million of capital in the Bank to support its growth in deposits and assets. The Company received a request from the Federal Reserve Bank of Atlanta for the Company’s Board of Directors to adopt a resolution that it will not declare or pay any dividends on its outstanding common or preferred stock, nor will make any payments or distributions on the outstanding trust preferred securities or corresponding subordinated debentures without the prior written approval of the Reserve Bank. The Board adopted this resolution on October 5, 2009. The Company has notified the trustees of its $20 million trust preferred securities due July 7, 2036 and its $5 million trust preferred securities due July 31, 2031 of its election to defer interest payments on the trust preferred securities beginning with the payments due in October 2009. In January 2010, the Company notified the trustees of its $8 million trust preferred securities due September 7, 2030 of its election to defer interest payments on the trust preferred securities beginning with the payment due in March 2010. The Company has also notified the Treasury of its election to defer the dividend payment on the Series A preferred stock issued under TARP beginning in November 2009. Deferral of the trust preferred securities is allowed for up to 60 months without being considered an event of default. Additionally, the Company may not declare or pay dividends on its capital stock, including dividends on preferred stock or, with certain exceptions, repurchase capital stock without first having paid all trust preferred interest and all cumulative preferred dividends that are due. If dividends on the Series A preferred stock are not paid for six quarters, whether or not consecutive, the Treasury has the right to appoint two members to the Board of Directors of the Company. At this time it is unlikely that the Company will resume payment of cash dividends on its common stock for the foreseeable future.
Under state banking law, regulatory approval will be required if the total of all dividends declared in any calendar year by a bank exceeds the bank’s net profits to date for that year combined with its retained net profits for the preceding two years. Based on the level of losses for the prior two years, declaration of dividends by TIB Bank, during 2009, would have required regulatory approval. Therefore, the Company does not expect to receive dividends from the Bank in the foreseeable future.
Closely related to liquidity management is the management of interest-earning assets and interest-bearing liabilities. The Company manages its rate sensitivity position to avoid wide swings in net interest margins and to minimize risk due to changes in interest rates.
Our interest rate sensitivity position at December 31, 2009 is presented in the table below.
(Dollars in thousands) | | 3 Months or Less | | | 4 to 6 Months | | | 7 to 12 Months | | | 1 to 5 Years | | | Over 5 Years | | | Total | |
Interest-earning assets: | | | | | | | | | | | | | | | | | | |
Loans | | $ | 386,105 | | | $ | 60,523 | | | $ | 106,591 | | | $ | 491,389 | | | $ | 151,556 | | | $ | 1,196,164 | |
Investment securities-taxable | | | 35,129 | | | | - | | | | - | | | | 14,490 | | | | 192,651 | | | | 242,270 | |
Investment securities-tax exempt | | | - | | | | - | | | | - | | | | 4,169 | | | | 3,892 | | | | 8,061 | |
Marketable equity securities | | | 8 | | | | - | | | | - | | | | - | | | | - | | | | 8 | |
FHLB stock | | | 10,447 | | | | - | | | | - | | | | - | | | | - | | | | 10,447 | |
InInterest-bearing deposits in other banks | | | 147,760 | | | | - | | | | - | | | | - | | | | - | | | | 147,760 | |
Total interest-bearing assets | | | 579,449 | | | | 60,523 | | | | 106,591 | | | | 510,048 | | | | 348,099 | | | | 1,604,710 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
NOW accounts | | | 195,960 | | | | - | | | | - | | | | - | | | | - | | | | 195,960 | |
Money market | | | 214,531 | | | | - | | | | - | | | | - | | | | - | | | | 214,531 | |
Savings deposits | | | 122,292 | | | | - | | | | - | | | | - | | | | - | | | | 122,292 | |
Time deposits | | | 169,295 | | | | 100,110 | | | | 197,490 | | | | 197,842 | | | | 43 | | | | 664,780 | |
Subordinated debentures | | | 25,000 | | | | - | | | | - | | | | - | | | | 8,000 | | | | 33,000 | |
Other borrowings | | | 120,475 | | | | - | | | | - | | | | 115,000 | | | | - | | | | 235,475 | |
Total interest-bearing liabilities | | | 847,553 | | | | 100,110 | | | | 197,490 | | | | 312,842 | | | | 8,043 | | | | 1,466,038 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest sensitivity gap | | $ | (268,104 | ) | | $ | (39,587 | ) | | $ | (90,899 | ) | | $ | 197,206 | | | $ | 340,056 | | | $ | 138,672 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative interest sensitivity gap | | $ | (268,104 | ) | | $ | (307,691 | ) | | $ | (398,590 | ) | | $ | (201,384 | ) | | $ | 138,672 | | | $ | 138,672 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative sensitivity ratio | | | (16.7 | %) | | | (19.2 | %) | | | (24.8 | %) | | | (12.5 | %) | | | 8.6 | % | | | 8.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
We are cumulatively liability sensitive through the five-year time period, and asset sensitive in the over five year timeframe above. Certain liabilities such as non-indexed NOW and passbook savings accounts, while technically subject to immediate re-pricing in response to changing market rates, historically do not re-price as quickly or to the extent as other interest-sensitive accounts. Approximately 13% of our deposit funding is comprised of non-interest-bearing liabilities and total interest-earning assets are greater than the total interest-bearing liabilities. Therefore it is anticipated that, over time, the effects on net interest income from changes in asset yield will be greater than the change in expense from liability cost. We expect market short-term interest rates to remain low for an extended period of time. We expect deposit costs to continue to decline but they may decrease more slowly or to a lesser extent than loan yields, or they could increase due to strong demand in the financial markets and banking system for liquidity which is reflected in elevated pricing competition for deposits. The predominant drivers to increase net interest income are the composition of earning assets, the interest rates paid on our deposits and the net change in non-performing assets.
Interest-earning assets and time deposits are presented based on their contractual terms. It is anticipated that run off in any deposit category will be approximately offset by new deposit generation.
As a primary measure of our interest rate risk, we employ a financial model derived from our assets and liabilities which simulates the effect of various changes in interest rates on our projected net interest income. This financial model is our principal tool for measuring and managing interest rate risk. Many assumptions regarding the timing and sensitivity of our assets and liabilities to a change in interest rates are made. We continually review and update these assumptions. This model is updated monthly for changes in our assets and liabilities and we model different interest rate scenarios based upon current and projected economic and interest rate conditions. We analyze the results of these simulations and develop tactics and strategies to attempt to mitigate, where possible, the projected unfavorable impact of various interest ra te scenarios on our projected net interest income. We also develop tactics and strategies to increase our net interest margin and net interest income that are consistent with our operating policies.
Investment Portfolio
Contractual maturities of investment securities at December 31, 2009 are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations without call or prepayment penalties. Other securities include mortgage-backed securities and marketable equity securities which are not due at a single maturity date.
(Dollars in thousands) | | Within 1 Year | | | After 1 Year Within 5 Years | | | After 5 Years Within 10 Years | | | After 10 Years | | | Other Securities | |
| | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | |
SsSecurities Available for Sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.U.S. Gov’t agencies and corporations | | | $- | | | | - | | | | $4,088 | | | | 3.60 | % | | | $20,050 | | | | 1.54 | % | | | $5,034 | | | | 3.93 | % | | | $- | |
StStates and political subdivisions – tax exempt (a) | | | - | | | | - | | | | 4,169 | | | | 5.86 | % | | | 3,892 | | | | 5.63 | % | | | - | | | | - | | | | - | |
StStates and political subdivisions – taxable | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,212 | | | | 6.10 | % | | | - | |
MMarketable equity securities (a) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 8 | |
MMortgage-backed securities - residential | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 208,115 | |
C Corporate bonds | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,012 | | | | 1.10 | % | | | - | |
C Collateralized debt obligations | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 759 | | | | 0.46 | % | | | - | |
T Total | | | $- | | | | - | | | | $8,257 | | | | 4.72 | % | | | $23,942 | | | | 2.18 | % | | | $10,017 | | | | 2.59 | % | | | $208,123 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Yield by classification of investment securities at December 31, 2009 was as follows:
(Dollars in thousands) | | Yield | | | Totals | |
Securities Available for Sale: | | | | | | |
U.S. Government agencies and corporations | | | 2.24 | % | | $ | 29,172 | |
States and political subdivisions – tax exempt (a) | | | 5.75 | % | | | 8,061 | |
States and political subdivisions – taxable | | | 6.10 | % | | | 2,212 | |
Marketable equity securities (a) | | | 0 | % | | | 8 | |
Mortgage-backed securities - residential | | | 3.83 | % | | | 208,115 | |
Corporate bonds | | | 1.10 | % | | | 2,012 | |
Collateralized debt obligations (b) | | | 0.46 | % | | | 759 | |
Total (b) | | | 3.63 | % | | $ | 250,339 | |
| | | | | | | | |
__________
(a) | Weighted average yields on tax exempt obligations and marketable equity securities have been computed by grossing up actual tax exempt income. |
(b) | Excluding the impact of the non-accrual collateralized debt obligation security, the total investment portfolio yield was 3.69%. |
The following table presents the amortized cost, unrealized gains, unrealized losses, and fair value for the major categories of our investment portfolio for each reported period:
Available for Sale—December 31, 2009
(Dollars in thousands) | | Amortized Cost | | | Unrealized Gains | | | Unrealized Losses | | | Fair Value | |
U.S. Government agencies and corporations | | $ | 29,232 | | | $ | 24 | | | $ | 84 | | | $ | 29,172 | |
States and political subdivisions-tax exempt | | | 7,754 | | | | 307 | | | | 0 | | | | 8,061 | |
States and political subdivisions-taxable | | | 2,313 | | | | - | | | | 101 | | | | 2,212 | |
Marketable equity securities | | | 12 | | | | - | | | | 4 | | | | 8 | |
Mortgage-backed securities - residential | | | 207,344 | | | | 2,083 | | | | 1,312 | | | | 208,115 | |
Corporate bonds | | | 2,878 | | | | - | | | | 866 | | | | 2,012 | |
Collateralized debt obligations | | | 4,996 | | | | - | | | | 4,237 | | | | 759 | |
| | $ | 254,529 | | | $ | 2,414 | | | $ | 6,604 | | | $ | 250,339 | |
| | | | | | | | | | | | | | | | |
Available for Sale—December 31, 2008
(Dollars in thousands) | | Amortized Cost | | | Unrealized Gains | | | Unrealized Losses | | | Fair Value | |
U.S. Government agencies and corporations | | $ | 50,892 | | | $ | 776 | | | $ | - | | | $ | 51,668 | |
States and political subdivisions-tax exempt | | | 7,751 | | | | 59 | | | | 21 | | | | 7,789 | |
States and political subdivisions-taxable | | | 2,407 | | | | - | | | | 70 | | | | 2,337 | |
Marketable equity securities | | | 12 | | | | - | | | | - | | | | 12 | |
Mortgage-backed securities - residential | | | 157,066 | | | | 1,332 | | | | 421 | | | | 157,977 | |
Corporate bonds | | | 2,870 | | | | - | | | | 1,158 | | | | 1,712 | |
Collateralized debt obligations | | | 5,763 | | | | - | | | | 1,488 | | | | 4,275 | |
| | $ | 226,761 | | | $ | 2,167 | | | $ | 3,158 | | | $ | 225,770 | |
| | | | | | | | | | | | | | | | |
Available for Sale—December 31, 2007
(Dollars in thousands) | | Amortized Cost | | | Unrealized Gains | | | Unrealized Losses | | | Fair Value | |
U.S. Government agencies and corporations | | $ | 72,482 | | | $ | 1,245 | | | $ | 66 | | | $ | 73,661 | |
States and political subdivisions-tax exempt | | | 9,629 | | | | 6 | | | | 51 | | | | 9,584 | |
States and political subdivisions-taxable | | | 2,495 | | | | 1 | | | | 21 | | | | 2,475 | |
Marketable equity securities | | | 1,224 | | | | - | | | | - | | | | 1,224 | |
Mortgage-backed securities - residential | | | 60,161 | | | | 295 | | | | 296 | | | | 60,160 | |
Corporate bonds | | | 2,865 | | | | - | | | | 100 | | | | 2,765 | |
Collateralized debt obligations | | | 11,110 | | | | - | | | | 622 | | | | 10,488 | |
| | $ | 159,966 | | | $ | 1,547 | | | $ | 1,156 | | | $ | 160,357 | |
| | | | | | | | | | | | | | | | |
Other than temporary impairment of available for sale securities
As of December 31, 2009, we owned three collateralized debt obligation investment securities collateralized by debt obligations of homebuilders, REITs, real estate companies and commercial mortgage backed securities with an aggregate original cost of $10.0 million. Through December 31, 2009, we have recorded cumulative other than temporary impairment losses of $10.0 million on these securities. In determining the estimated fair value of these securities, we utilized a discounted cash flow modeling valuation approach which is discussed in greater detail in Note 18 - Fair Value. These securities are floating rate securities which were rated “A” or better by an independent and nationally recognized rating agency at the time of our purchase. In late December 2007, these securities were downgraded below investment grade by a natio nally recognized rating agency. Due to the ratings downgrade, and the amount of unrealized loss, management concluded that the loss of value was other than temporary under generally accepted accounting principles and the Company wrote these investment securities down to their estimated fair value. This resulted in the recognition of other than temporary impairment loss of $3.9 million in 2007. During 2008, the estimated fair value of these securities declined further due to the occurrence of additional defaults by certain underlying issuers and changes in the cash flow and discount rate assumptions used to estimate the value of these securities. During 2008, we concluded that the further declines in values were other than temporary under generally accepted accounting principles. Accordingly, we wrote-down these investment securities by an additional $5.3 million. These additional write downs included the complete write off of two of the three securities, with an original cost of $2.0 million each. The third security, with an original cost of $6.0 million was valued at an estimated fair value of $763,000 as of December 31, 2008. During 2009, additional defaults by underlying issuers and corresponding changes in estimated future cash flow assumptions resulted in the write-down of this third security to $0.
As of December 31, 2009, the Company owned a collateralized debt security with an original cost of $5.0 million where the underlying collateral is comprised primarily of trust preferred securities of banks and insurance companies. This security was rated “AA” by a nationally recognized rating agency at the time of our purchase. The inputs used in determining the estimated fair value of this security are Level 3 inputs. In determining the estimated fair value, management utilized a discounted cash flow modeling valuation approach through September 30, 2009. Discount rates utilized in the modeling of these securities were estimated based upon a variety of factors including the market yields of publicly traded trust preferred securities of larger financial institutions and other non-investment grade corpor ate debt. Cash flows utilized in the modeling of these securities were based upon actual default history of the underlying issuers and varying assumptions of estimated future defaults of issuers. During 2009, the estimated fair value of this security declined further due to the occurrence of downgrades by rating agencies, additional defaults or deferrals by certain underlying issuers and changes in the estimated timing of the future cash flow and discount rate assumptions used to estimate the value of this security. As of December 31, 2009, we engaged an independent third party valuation firm to estimate the fair value and credit loss potential of this security. Management reviewed the assumptions and methodology employed in this analysis and while the assumptions differed from those used in prior quarters to estimate the fair value of the security, the general premise of the methodology of discounting estimated future cash flows based upon the expected performance of the underlying issuers collateralizing t he security was consistent with management’s previous approach. Based upon this analysis, as of December 31, 2009, management concluded that the further decline in value does not meet the definition of other than temporary under generally accepted accounting principles because no credit loss has been incurred.
Additionally, during 2007, the market value of an investment in equity securities, which the Company originally acquired in 2003 for $3.0 million to obtain community reinvestment credit, of a publicly owned company declined significantly. During 2007, management determined that the decline was other than temporary; accordingly, we wrote this investment down by $1.8 million. Due to significant further declines in market value during 2008, we wrote this investment down further by $1.1 million in 2008 and decided to sell a portion of this investment in December 2008 to ensure we would fully realize the associated capital loss carryback potential for Federal income tax purposes. In doing so, we recognized an additional realized loss of approximately $124,000 upon the partial disposition of this investment in 2008.
The write downs described above resulted in total recognized other than temporary impairment losses of $763,000, $6.4 million and $5.7 million during 2009, 2008 and 2007, respectively.
We regularly review each investment security for impairment based on criteria that include the extent to which cost exceeds the estimated fair value, the duration of that market decline, the financial health of and specific prospects for the issuer(s) and our ability and intention with regard to holding the security to maturity. Future declines in the fair value of these or other securities may result in additional impairment charges which may be material to the financial condition and results of operations of the Company. For additional detail regarding our impairment assessment process, see Notes 1 and 4 of the Notes to Consolidated financial statements below.
Deposits
The following table presents the average amount outstanding and the average rate paid on deposits by us for the years ended December 31, 2009, 2008, and 2007.
| | 2009 | | | 2008 | | | 2007 | |
(Dollars in thousands) | | Average Amount | | | Average Rate | | | Average Amount | | | Average Rate | | | Average Amount | | | Average Rate | |
Non-interest bearing deposits | | $ | 173,083 | | | | | | $ | 146,158 | | | | | | $ | 163,478 | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Interest-bearing deposits | | | | | | | | | | | | | | | | | | | | | |
NOW Accounts | | | 182,398 | | | | 0.68 | % | | | 172,520 | | | | 1.70 | % | | | 151,745 | | | | 3.27 | % |
Money market | | | 196,469 | | | | 1.43 | % | | | 151,273 | | | | 2.41 | % | | | 186,996 | | | | 4.15 | % |
Savings deposit | | | 116,956 | | | | 1.83 | % | | | 52,896 | | | | 1.26 | % | | | 55,360 | | | | 1.75 | % |
Time deposits | | | 696,606 | | | | 3.08 | % | | | 591,723 | | | | 4.28 | % | | | 486,658 | | | | 4.97 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 1,365,512 | | | | 2.02 | % | | $ | 1,114,570 | | | | 2.92 | % | | $ | 1,044,237 | | | | 3.63 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
The following table presents the maturity of our time deposits at December 31, 2009:
(Dollars in thousands) | | Deposits $100 and Greater | | | Deposits Less than $100 | | | Total | |
Months to maturity: | | | | | | | | | |
3 or less | | $ | 54,573 | | | $ | 114,722 | | | $ | 169,295 | |
4 to 6 | | | 39,312 | | | | 60,798 | | | | 100,110 | |
7 through 12 | | | 101,949 | | | | 95,541 | | | | 197,490 | |
Over 12 | | | 92,187 | | | | 105,698 | | | | 197,885 | |
Total | | $ | 288,021 | | | $ | 376,759 | | | $ | 664,780 | |
| | | | | | | | | | | | |
Off-Balance Sheet Arrangements and Contractual Obligations
Our off-balance sheet arrangements and contractual obligations at December 31, 2009 are summarized in the table that follows. The amounts shown for commitments to extend credit and letters of credit are contingent obligations, some of which are expected to expire without being drawn upon. As a result, the amounts shown for these items do not necessarily represent future cash requirements. We believe that our current sources of liquidity are more than sufficient to fulfill the obligations we have as of December 31, 2009 pursuant to off-balance sheet arrangements and contractual obligations.
| | Amount of Commitment Expiration Per Period | |
(Dollars in thousands) | | Total Amounts Committed | | | One Year or Less | | | Over One Year Through Three Years | | | Over Three Years Through Five Years | | | Over Five Years | |
Off-balance sheet arrangements | | | | | | | | | | | | | | | |
| Commitments to extend credit | | $ | 71,623 | | | $ | 41,970 | | | $ | 10,568 | | | $ | 2,001 | | | $ | 17,084 | |
| Standby letters of credit | | | 1,896 | | | | 1,626 | | | | 270 | | | | - | | | | - | |
Total | | $ | 73,519 | | | $ | 43,596 | | | $ | 10,838 | | | $ | 2,001 | | | $ | 17,084 | |
| | | | | | | | | | | | | | | | | | | | |
Contractual obligations | | | | | | | | | | | | | | | | | | | | |
| Time deposits | | $ | 664,780 | | | $ | 466,880 | | | $ | 191,811 | | | $ | 6,046 | | | $ | 43 | |
| Operating lease obligations | | | 4,481 | | | | 884 | | | | 1,276 | | | | 517 | | | | 1,804 | |
| Purchase obligations | | | 16,799 | | | | 2,953 | | | | 6,466 | | | | 7,380 | | | | - | |
| F FHLB Advances | | | 125,000 | | | | 10,000 | | | | 65,000 | | | | 50,000 | | | | - | |
| Long-term debt | | | 63,000 | | | | 30,000 | | | | - | | | | - | | | | 33,000 | |
| Other lOther Long-term liabilities reflected on the balance sheet under GAAP | | | 1,718 | | | | 32 | | | | 93 | | | | 93 | | | | 1,500 | |
Total | | $ | 875,778 | | | $ | 510,749 | | | | 264,646 | | | $ | 64,036 | | | $ | 36,347 | |
| | | | | | | | | | | | | | | | | | | | |
The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. The Bank uses the same credit policies in making commitments to extend credit and generally use the same credit policies for letters of credit as for on-balance sheet instruments.
Commitments to extend credit are legally binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since some of these commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Unused commercial lines of credit, which comprise a substantial portion of these commitments, generally expire within a year from their date of origination. Other loan commitments generally expire in 30 days. The amount of collateral obtained, if any, by the Bank upon extension of credit is based on management’s credit evaluation of the borrower. Collateral held varies but may include security interests in business assets, mortgages on commercial and reside ntial real estate, deposit accounts with the Banks or other financial institutions, and securities.
Standby letters of credit are conditional commitments issued by the Bank to assure the performance or financial obligations of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. The Bank generally holds collateral and/or obtains personal guarantees supporting these commitments.
The Bank is obligated under operating leases for office and banking premises which expire in periods varying from one to nineteen years. Future minimum lease payments, before considering renewal options that generally are present, total $4.5 million at December 31, 2009.
Purchase obligations consist of computer and item processing services, and debit and ATM card processing and support services contracted by the Company under long term contractual relationships and based upon estimated utilization.
Long term debt, at December 31, 2009, consists of subordinated debentures totaling $33.0 million and securities sold under repurchase agreement totaling $30.0 million. These borrowings are further described in Note 10 of the Consolidated Financial Statements.
The Bank has invested in FHLB stock for the purpose of establishing credit lines with the FHLB. The credit availability to the Bank is based on the amount of collateral pledged. FHLB advances total $125.0 million at December 31, 2009. These borrowings are further described in Note 9 of the Consolidated Financial Statements.
Other long-term liabilities represent obligations under the non-qualified retirement plan for the Company’s directors and the non-qualified deferred compensation arrangement with certain of the Company’s executive officers. Under the director retirement plan, the Company pays each participant, or their beneficiary, the amount of board compensation fees that the director has elected to defer and interest in 120 equal monthly installments, beginning the month following the director’s normal retirement date. The amount presented above reflects the future obligation to be paid, assuming no future fee deferrals. Under the executive deferred compensation plan, the Company pays each participant, or their beneficiary, up to 43% of the executive’s highest compensation level in the three yea rs immediately preceding the date of termination of employment for periods of 10 to 15 years. The amount presented reflects the amount vested in this plan as of December 31, 2009.
In December 2008, the Company entered into amended and restated deferred fee agreements with certain members of the Company’s Board of Directors (the “Directors”) and approved amendments to certain employment agreements and approved revised executive salary continuation and deferred compensation agreements (collectively, the “Agreements”). The Agreements were primarily amended in order to bring each agreement into compliance with the provisions of section 409A of the Internal Revenue Code. Section 409A of the Internal Revenue Code provided a one-time election for participants in deferred compensation agreements to receive a lump sum payment in 2009 prior to March 14, 2009. The Directors’ agreements and the agreement of one employee contained such an election provision and, in connection therewith, the Directors and employee elected to receive lump sum distributions in 2009 of the amount vested, accrued and earned through December 31, 2008. A total of $2.1 million was paid during the first quarter of 2009 to these individuals. These elections were made in connection with each individual’s personal tax planning strategy and resulted in an elimination of the future expenses that would have been incurred by the Company in connection with the Agreements, had the elections not been made.
Capital Adequacy
There are various primary measures of capital adequacy for banks and bank holding companies such as risk based capital guidelines and the leverage capital ratio. See Notes 2 and 14 to the Consolidated Financial Statements.
In March 2008, we sold 1.2 million shares of our common stock and warrants to purchase an additional 1.2 million shares resulting in gross proceeds of $10.1 million. On December 5, 2008, the Company issued $37 million of preferred stock and a related warrant to the U.S. Treasury under the U.S. Treasury’s Capital Purchase Program. As a result of these actions, the Company increased its levels of capital under capital adequacy guidelines.
On July 2, 2009, TIB Bank entered into a Memorandum of Understanding, which is an informal agreement, with Bank regulatory agencies that it would move in good faith to increase its Tier 1 leverage capital ratio to not less than 8% and its total risk-based capital ratio to not less than 12% by December 31, 2009 and maintain these higher ratios for as long as this agreement is in effect.
As of December 31, 2009, the Bank met the level of capital required in order to be categorized by the FDIC as adequately capitalized under the regulatory framework for prompt corrective action. The risk-based capital ratio of Tier 1 capital to risk-weighted assets was 6.8%, the risk-based ratio of total capital to risk-weighted assets was 8.1%, and the leverage ratio was 4.8%, for TIB Bank.
As of December 31, 2009, the Company’s risk-based capital ratio of Tier 1 capital to risk-weighted assets was 5.7%, its risk-based ratio of total capital to risk-weighted assets was 8.1%, and its leverage ratio was 4.1%.
Due to the contracting economic conditions, the higher level of nonperforming assets, general regulatory initiatives to increase capital levels, the potential for further operating losses and the agreement to move in good faith to increase its capital, the Company is evaluating its capital position and is proceeding with plans to increase its capital. This may result in the issuance of additional shares of common stock or securities convertible into common stock. While management believes we have sufficient capital to continue as a going concern, if we are unable to raise additional capital and/or we incur significant additional losses and are unable to comply with the terms of the informal agreement, uncertainty arises about our ability to continue as a going concern.
Inflation
Inflation has an important impact on the growth of total assets in the banking industry and causes a need to increase equity capital higher than normal levels in order to maintain an appropriate equity to assets ratio. We have been able to maintain an adequate level of equity, as previously mentioned and cope with the effects of inflation by managing our interest rate sensitivity position through our asset/liability management program, and by periodically adjusting our pricing of services and banking products to take into consideration current costs.
Critical Accounting Policies
In reviewing and understanding financial information for the Company, you are encouraged to read and understand the significant accounting policies which are used in preparing the consolidated financial statements of the Company. These policies are described in Note 1 to the Consolidated Financial Statements. Of these policies, management believes that the accounting for the allowance for loan losses, impairment of investment securities and the valuation allowance on deferred income tax assets are the most critical.
Losses on loans result from a broad range of causes from borrower specific problems, to industry issues, to the impact of the economic environment. The identification of these factors that lead to default or non-performance under a borrower loan agreement and the estimation of loss in these situations are very subjective. In addition, a dramatic change in the performance of one or a small number of borrowers can have a significant impact on the estimate of losses. As described above under the “Allowance and Provision for Loan Losses” heading, management has implemented a process that has been applied consistently to systematically consider the many variables that impact the estimation of the allowance for loan losses.
Impairment of investment securities results in a write-down that must be included in net income when a market decline below cost is other-than-temporary. We regularly review each investment security for impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer(s) and our ability and intention with regard to holding the security to maturity.
A valuation allowance related to deferred tax assets is required when it is considered more likely than not (greater than 50% probability) that all or part of the benefit related to such assets will not be realized. Income tax expense (or benefit) is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. As described above under the “Provision for Income Taxes” heading and in more deta il in Note 11 to the Consolidated Financial Statements, the Company recorded a full valuation allowance against its net deferred tax assets as of December 31, 2009.
Appendix D
Information included under “Management’s Discussion And Analysis Of Financial Condition And Results Of Operations” in TIB Financial Corp.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking Statements
Certain of the matters discussed under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-Q may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act and as such may involve known and unknown risk, uncertainties and other factors which may cause the actual results, performance or achievements of TIB Financial Corp. (the "Company") to be materially different from future results described in such forward-looking statements. Actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation: failure to continue as a going concern; failure to maintain adequate levels of capital and liquidity to support our op erations; the effects of future economic conditions; governmental monetary and fiscal policies, as well as legislative and regulatory changes; the risks of changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral, and interest rate risks; the effects of competition from other commercial banks, thrifts, consumer finance companies, and other financial institutions operating in the Company's market area and elsewhere. All forward-looking statements attributable to the Company are expressly qualified in their entirety by these cautionary statements. The Company disclaims any intent or obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise.
The following discussion addresses the factors that have affected the financial condition and results of operations of the Company as reflected in the unaudited consolidated statement of condition as of June 30, 2010, and statements of operations for the three and six months ended June 30, 2010. Operating results for the three and six months ended June 30, 2010 are not necessarily indicative of trends or results to be expected for the year ended December 31, 2010. TIB Financial's results of operations include the operations of TIB Bank (the “Bank”) and Naples Capital Advisors, Inc. as well as the operations of nine former branches of Riverside Bank of the Gulf Coast (“Riverside”) subsequent to their assumption on February 13, 2009.
Definitive Investment Agreement
We are required by regulation to maintain adequate levels of capital to support our operations. On July 2, 2009, the Bank entered into a Memorandum of Understanding, which is an informal agreement, with bank regulatory agencies that it would move in good faith to increase its Tier 1 leverage capital ratio to not less than 8% and its total risk-based capital ratio to not less than 12% by December 31, 2009 and maintain these higher ratios for as long as this agreement is in effect. At December 31, 2009, these elevated capital ratios were not met. On July 2, 2010, the Bank entered a Consent Order, a formal agreement with the bank regulatory agencies under which, among other things, the Bank has agreed to maintain a Tier 1 Capital ratio of at least 8% of total assets and a Total Risk Based Capital ratio of at least 12% within 90 d ays. The Consent Order also governs certain aspects of the Bank’s operations including a requirement that it reduce the balance of assets classified substandard and doubtful by at least 70% over a two-year period, and not undertake asset growth of 5% or more per year without prior approval from the regulatory agencies. The Consent Order supersedes the Memorandum of Understanding.
On June 29, 2010, the Company and the Bank entered into a definitive agreement with North American Financial Holdings, Inc. (“NAFH”) for the investment of up to $350 million in TIB through the purchase of common stock, preferred stock and a warrant. Pursuant to the definitive agreement, the Company agreed to sell to NAFH, at the closing of the investment, 700 million shares of its common stock at a purchase price of $0.15 per share and 70,000 shares of newly created mandatorily convertible participating voting preferred stock at a purchase price of $1,000 per share for a cumulative total of $175 million. The preferred stock will have a liquidation preference of $1,000 per share and each share of preferred stock will be convertible into a number of shares of the Company’s common stock equal to the l iquidation preference divided by $0.15 (subject to customary anti-dilution adjustments). After giving effect to the NAFH investment, it is expected that NAFH would own approximately 99% of the Company’s common stock (on an as-converted basis). The Company also intends to conduct a rights offering to legacy shareholders of rights to purchase up to 149 million shares of common stock at a price of $0.15 per share, which would raise up to $22.4 million, which would equate to 12% of the Company’s pro-forma fully diluted equity. The record date for the rights offering was July 12, 2010. In addition, during the 18-month period following the closing, NAFH will have the right to invest up to an additional $175 million in preferred stock and/or common stock on the above terms. Upon closing of the investment, each of the Company and the Bank will add experienced bankers R. Eugene (Gene) Taylor, Christopher (Chris) G. Marshall, R. Bruce Singletary and Ke nneth (Ken) A. Posner to its board of directors, along with other directors to be designated by NAFH. The investment is subject to satisfaction or waiver of certain closing conditions, including reaching an agreement with the Treasury to repurchase the preferred stock and warrant issued under the Troubled Asset Relief Program Capital Purchase Program on terms acceptable to NAFH, the receipt by NAFH and the Company of the requisite governmental and regulatory approvals as well as the approval of the NASDAQ Stock Market to issue the common stock, preferred stock and warrant in reliance on the shareholder approval exemptions set forth in NASDAQ Rule 5635(f). While the NAFH investment is expected to close in the third quarter of 2010, there is no assurance it will close during the quarter, or ever. At this time, all the applications required to be filed with regulatory agencies have been filed and we have reached an agreement on the significant terms for the repurchase of the Preferred Stoc k and warrant issued to the Treasury under the TARP Capital Purchase Program. Upon consummation of the investment, it is estimated that both the Company and the Bank will be well capitalized and the Bank will be in compliance with the required capital ratios of the Consent Order.
If the investment by NAFH is not consummated, the Board of Directors and management team intend to seek other strategic alternatives including but not limited to the sale of certain assets, all or a portion of the Company, or seeking a complementary partner in a merger of equals or where the Company is acquired. There is no assurance the Company will be successful in entering into any agreement or closing such an alternative transaction.
Quarterly Summary
For the second quarter of 2010, the Company reported a net loss before dividends and accretion on preferred stock of $14.1 million compared to a net loss of $4.9 million for the second quarter of 2009. The net loss allocated to common shareholders was $14.8 million, or $0.99 per share, for the second quarter of 2010, compared to a net loss of $5.5 million, or $0.37 per share, for the comparable 2009 quarter.
The higher net loss for the second quarter of 2010 compared to the net loss during the second quarter of 2009 was due to higher non-interest expenses, primarily relating to increased valuation adjustments, losses on sale and operating expenses associated with foreclosed real estate, expenses incurred in connection with our capital raising activities and the termination of a consulting agreement and a higher provision for loan losses. During the second quarter of 2010, no income tax benefit was recorded as a valuation allowance was recorded offsetting the increase in deferred tax assets attributed to the net operating loss for the quarter. Partially offsetting this impact was higher non-interest income.
Significant developments are outlined below.
· | We continue to focus on relationship-based lending and generated approximately $3.6 million of new commercial loans and originated $32 million of residential mortgages as well as approximately $7.5 million in consumer and indirect auto loans to prime borrowers during the quarter. |
· | Naples Capital Advisors and TIB Bank’s trust department continued to establish new investment management and trust relationships, increasing the market value of assets under management by $49 million, or 41%, from June 30, 2009. Assets under management increased by $5 million, or 3%, during the quarter to $169 million as of June 30, 2010. |
· | Our credit risk exposure in the construction and development loan portfolio declined significantly as this portfolio segment declined 56% and 38% from $139.4 million and $97.4 million as of June 30, 2009 and December 31, 2009, respectively. At June 30, 2010, this loan segment now represents $60.7 million and approximately 6% of our outstanding loans, down from approximately 11% of loans a year ago. |
· | Our special asset workout group was able to work with borrowers to achieve the pay off or pay down of approximately $6.4 million in nonaccrual loans, foreclose or negotiate deeds in lieu of foreclosure for approximately $4.3 million of nonaccrual loans and sell approximately $1.9 million of other real estate owned during the quarter. |
· | The net interest margin of 2.74% during the quarter decreased 20 basis points and 4 basis points in comparison to 2.94% in the first quarter of 2010 and 2.78% in the second quarter of 2009, due primarily to $892,000 and $1.1 million decreases in net interest income, respectively. These decreases are largely attributable to the increase in nonperforming loans and other real estate owned and a change in asset mix resulting in a lower level of higher yielding loans. We estimate that the nonperforming assets negatively impacted the margin by approximately 36 basis points during the second quarter of 2010. Partially offsetting these factors were continued reductions of the cost of interest bearing liabilities. We continue to maintain strong core funding sources and replace maturing higher priced time depos its with lower cost funding. |
Our provision for loan losses of $7.7 million primarily reflects net charge-offs of $7.8 million. As of June 30, 2010, non-performing loans were $76.6 million or 6.96% of loans, an increase from the $55.7 million and 4.94% of loans as of March 31, 2010.
The allowance for loan losses remained relatively unchanged at $27.7 million, or 2.52%, of total loans and represented 36% of non-performing loans, a decrease from 50% of non-performing loans at March 31, 2010. Net charge-offs during the quarter increased to 2.81% of average loans on an annualized basis compared to 2.13% for the prior quarter. As of June 30, 2010, the balance of nonaccrual loans reflects cumulative charge downs of $12.3 million based primarily on the net realizable values of collateral for collateral dependent loans.
We reported total assets of $1.66 billion as of June 30, 2010, a decrease of 3% from December 31, 2009. Total loans declined to $1.10 billion, compared to $1.20 billion at December 31, 2009, as a $36.7 million, or 38%, decline in construction and land loans, a $24.2 million, or 48%, decline in indirect auto loans and a $30.7 million, or 5%, decline in commercial real estate loans led the $95.8 million decline of our loan portfolio. Total deposits of $1.34 billion as of June 30, 2010 were approximately 2% lower than the $1.37 billion at December 31, 2009.
Three Months Ended June 30, 2010 and 2009:
Results of Operations
For the second quarter of 2010, our operations resulted in a net loss before dividends on preferred stock of $14.1 million compared to a net loss of $4.9 million in the previous year’s second quarter. The loss allocated to common shareholders was $0.99 per share for the 2010 quarter as compared to a net loss of $0.37 per share for the comparable 2009 quarter. The increased loss is primarily due to $4.1 million in increased valuation adjustments, losses on sale and operating expenses associated with foreclosed real estate (OREO); no tax benefit recorded in the current period as a result of the Company’s deferred tax assets being fully reserved; a $1.9 million higher provision for loan losses; and $1.6 million in expenses incurred in connection with our capital raising activities and the termination of a r elated consulting agreement.
Net Interest Income
Net interest income represents the amount by which interest income on interest-earning assets exceeds interest expense incurred on interest-bearing liabilities. Net interest income is the largest component of our income, and is affected by the interest rate environment and the volume and the composition of interest-earning assets and interest-bearing liabilities. Our interest-earning assets include loans, federal funds sold and securities purchased under agreements to resell, interest-bearing deposits in other banks and investment securities. Our interest-bearing liabilities include deposits, federal funds purchased, subordinated debentures, advances from the FHLB and other short term borrowings.
Net interest income was $10.6 million for the three months ended June 30, 2010, a decrease from the $11.7 million reported for the same period last year due principally to a $133.8 million, or 8%, decrease in average earning assets. The decrease in average earning assets was due primarily to loan principal payments, payoffs, charge-offs, the higher level of nonperforming loans and conversion of nonperforming loans to other real estate owned exceeding new loan originations. These factors resulted in a $112.6 million decrease in average loans outstanding during the second quarter of 2010 as compared to the second quarter of 2009.
Additionally, the net interest margin declined by 4 basis points from 2.78% to 2.74%. The decrease in net interest margin is due to higher levels of nonperforming loans, the continued maintenance of higher levels of liquid investment securities and cash equivalents and changes in asset mix resulting in lower volumes of higher yielding loans and investment securities. The net interest margin continues to be adversely impacted by the level of nonaccrual loans and non-performing assets, which reduced the margin by an estimated 36 basis points during the second quarter of 2010 compared to an 18 basis point estimated impact in the second quarter of 2009. Partially offsetting these factors were continued reductions of the cost of interest bearing deposits and the successful repricing or replacement of maturing higher pric ed time deposits with lower cost funding.
The $3.9 million decrease in interest and dividend income for the second quarter of 2010 compared to the second quarter of 2009 was mainly attributable to decreased average volumes and rates on loan balances and investment securities due primarily to the higher level of non-performing loans and significant declines in market interest rates. Due to the lower volumes of higher yielding loans and the higher level of non-accrual loans, the yield on our loans declined 39 basis points. The yield of our interest earning assets declined 57 basis points in the second quarter of 2010 compared to the second quarter of 2009 due to the reduction in the yield on our loans and investment securities.
Partially offsetting the decline in interest and dividend income, were decreases in deposit interest rates paid as well as other market interest rates. The average interest cost of interest bearing deposits declined 80 basis points and the overall cost of interest bearing liabilities declined by 68 basis points compared to the second quarter of 2009.
Going forward, we expect market short-term interest rates to remain low for an extended period of time. Generally, we expect loan and investment yields and deposit costs to stabilize. However, deposit rates could increase due to demand in the financial markets, banking system and other local markets for liquidity which may be reflected in elevated pricing competition for deposits. The predominant drivers affecting net interest income are the volume and composition of earning assets, the interest rates paid on our deposits and the net change in non-performing assets.
The following table presents average balances of the Company, the taxable-equivalent interest earned, and the rate paid thereon during the three months ended June 30, 2010 and June 30, 2009.
| | 2010 | | | 2009 | |
(Dollars in thousands) | | Average Balances | | | Income/ Expense | | | Yields/ Rates | | | Average Balances | | | Income/ Expense | | | Yields/ Rates | |
Interest-earning assets: | | | | | | | | | | | | | | | | | | |
| Loans (1)(2) | | $ | 1,116,406 | | | $ | 14,656 | | | | 5.27 | % | | $ | 1,229,026 | | | $ | 17,355 | | | | 5.66 | % |
| Investment securities (2) | | | 310,715 | | | | 2,292 | | | | 2.96 | % | | | 382,478 | | | | 3,495 | | | | 3.67 | % |
| Money Market Mutual Funds | | | - | | | | - | | | | - | | | | 36,991 | | | | 27 | | | | 0.29 | % |
| Interest-bearing deposits in other banks | | | 119,817 | | | | 75 | | | | 0.25 | % | | | 29,773 | | | | 20 | | | | 0.27 | % |
| Federal Home Loan Bank stock | | | 10,447 | | | | 7 | | | | 0.27 | % | | | 10,482 | | | | - | | | | 0.00 | % |
| F Federal funds sold and securities sold under agreements to resell | | | - | | | | - | | | | 0.00 | % | | | 2,407 | | | | 2 | | | | 0.33 | % |
Total interest-earning assets | | | 1,557,385 | | | | 17,030 | | | | 4.39 | % | | | 1,691,157 | | | | 20,899 | | | | 4.96 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Non-interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| C Cash and due from banks | | | 21,036 | | | | | | | | | | | | 34,477 | | | | | | | | | |
| PrPremises and equipment, net | | | 50,972 | | | | | | | | | | | | 38,215 | | | | | | | | | |
| aLAllowance for loan losses | | | (25,826 | ) | | | | | | | | | | | (24,459 | ) | | | | | | | | |
| O Other assets | | | 82,919 | | | | | | | | | | | | 69,138 | | | | | | | | | |
Total non-interest-earning assets | | | 129,101 | | | | | | | | | | | | 117,371 | | | | | | | | | |
Total assets | | $ | 1,686,486 | | | | | | | | | | | $ | 1,808,528 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | | | | | | | | | | | | | | |
| N NOW accounts | | $ | 210,200 | | | $ | 192 | | | | 0.37 | % | | $ | 190,457 | | | $ | 313 | | | | 0.66 | % |
| MMoney market | | | 178,889 | | | | 470 | | | | 1.05 | % | | | 212,324 | | | | 837 | | | | 1.58 | % |
| S Savings deposits | | | 75,833 | | | | 137 | | | | 0.72 | % | | | 121,709 | | | | 551 | | | | 1.82 | % |
| T Time deposits | | | 714,003 | | | | 3,710 | | | | 2.08 | % | | | 707,212 | | | | 5,450 | | | | 3.09 | % |
Total interest-bearing deposits | | | 1,178,925 | | | | 4,509 | | | | 1.53 | % | | | 1,231,702 | | | | 7,151 | | | | 2.33 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Oth Other interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| S Short-term borrowings and FHLB advances | | | 193,268 | | | | 1,206 | | | | 2.50 | % | | | 196,501 | | | | 1,305 | | | | 2.66 | % |
| L Long-term borrowings | | | 63,000 | | | | 671 | | | | 4.27 | % | | | 63,000 | | | | 708 | | | | 4.51 | % |
Total interest-bearing liabilities | | | 1,435,193 | | | | 6,386 | | | | 1.78 | % | | | 1,491,203 | | | | 9,164 | | | | 2.46 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
NNon-interest-bearing liabilities and shareholders’ equity: | | | | | | | | | | | | | | | | | | | | | | | | |
| D Demand deposits | | | 187,898 | | | | | | | | | | | | 183,329 | | | | | | | | | |
| O Other liabilities | | | 12,503 | | | | | | | | | | | | 16,766 | | | | | | | | | |
| S Shareholders’ equity | | | 50,892 | | | | | | | | | | | | 117,230 | | | | | | | | | |
T Total non-interest-bearing liabilities and shareholders’ equity | | | 251,293 | | | | | | | | | | | | 317,325 | | | | | | | | | |
Tot Total liabilities and shareholders’ equity | | $ | 1,686,486 | | | | | | | | | | | $ | 1,808,528 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate spread (tax equivalent basis) | | | | | | | | | | | 2.61 | % | | | | | | | | | | | 2.50 | % |
Net interest income (tax equivalent basis) | | | | | | $ | 10,644 | | | | | | | | | | | $ | 11,735 | | | | | |
Net interest margin (3) (tax equivalent basis) | | | | | | | | | | | 2.74 | % | | | | | | | | | | | 2.78 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
_______ (1) Average loans include non-performing loans. (2) Interest income and rates include the effects of a tax equivalent adjustment using applicable statutory tax rates in adjusting tax exempt interest on tax exempt investment securities and loans to a fully taxable basis. (3) Net interest margin is net interest income divided by average total interest-earning assets. | |
Changes in Net Interest Income
The table below details the components of the changes in net interest income for the three months ended June 30, 2010 and June 30, 2009. For each major category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes due to average volumes and changes due to rates, with the changes in both volumes and rates allocated to these two categories based on the proportionate absolute changes in each category.
| | 2010 Compared to 2009 (1) Due to Changes in | |
(Dollars in thousands) | | Average Volume | | | Average Rate | | | Net Increase (Decrease) | |
Interest income | | | | | | | | | |
| Loans (2) | | $ | (1,527 | ) | | $ | (1,172 | ) | | $ | (2,699 | ) |
| Investment securities (2) | | | (593 | ) | | | (610 | ) | | | (1,203 | ) |
| Money Market Mutual Funds | | | (27 | ) | | | - | | | | (27 | ) |
| Interest-bearing deposits in other banks | | | 56 | | | | (1 | ) | | | 55 | |
| Federal Home Loan Bank stock | | | - | | | | 7 | | | | 7 | |
| F Federal funds sold and securities purchased under agreements to resell | | | (2 | ) | | | - | | | | (2 | ) |
Total interest income | | | (2,093 | ) | | | (1,776 | ) | | | (3,869 | ) |
| | | | | | | | | | | | |
Interest expense | | | | | | | | | | | | |
| NOW accounts | | | 30 | | | | (151 | ) | | | (121 | ) |
| Money market | | | (118 | ) | | | (249 | ) | | | (367 | ) |
| Savings deposits | | | (160 | ) | | | (254 | ) | | | (414 | ) |
| Time deposits | | | 52 | | | | (1,792 | ) | | | (1,740 | ) |
| Short-term borrowings and FHLB advances | | | (21 | ) | | | (78 | ) | | | (99 | ) |
| Long-term borrowings | | | - | | | | (37 | ) | | | (37 | ) |
Total interest expense | | | (217 | ) | | | (2,561 | ) | | | (2,778 | ) |
| | | | | | | | | | | | |
Change in net interest income | | $ | (1,876 | ) | | $ | 785 | | | $ | (1,091 | ) |
| | | | | | | | | | | | |
________ (1) ((1) The change in interest due to both rate and volume has been allocated to the volume and rate components in proportion to the relationship of the dollar amounts of the absolute change in each. | |
(2) I (2) Interest income includes the effects of a tax equivalent adjustment using applicable statutory tax rates in adjusting tax exempt interest on tax exempt investment securities and loans to a fully taxable basis. | |
Provision for Loan Losses
The provision and allowance for loan losses were impacted by many factors including net charge-offs, the decline in loans outstanding, the decline in impaired loans, historical loss rates and the mix of loan types. The provision for loan losses increased to $7.7 million in the second quarter of 2010 compared to $5.8 million in the comparable prior year period. The higher provision for loan losses in 2010 is due principally to an increase in net charge-offs compared to the 2009 period. Net charge-offs were $7.8 million, or 2.81% of average loans on an annualized basis, during the three months ended June 30, 2010, compared to $5.8 million, or 1.89% of average loans on an annualized basis, for the same period in 2009. As of June 30, 2010, the balance of the allowance for loan losses decreased to $27.7 million as compared to $29.1 million at December 31, 2009 due primarily to a $95.6 million decline in loans outstanding, a $36.7 million decline in impaired loans and a change in the mix of loan types including a 38% decline in construction and vacant land loans and a 48% decline in indirect auto loans. At the same time, due primarily to the impact of recent historical charge-off experience on the factors used in estimating the allowance for loan losses, the June 30, 2010 allowance increased as a percentage of loans to 2.52% compared to 2.43% at December 31, 2009 and the percentage allocation of the reserve not specifically allocated to impaired loans increased to 2.06% of unimpaired loans at June 30, 2010 as compared to 1.91% at December 31, 2009. Offsetting the impact of historical loss rate factors used in estimating the allowance for loan losses were overall declines in loan balances outstanding, declines in loans classified as impaired and changes in the mix of loan types which, in combination, resulted in a lower balance of the a llowance for loan losses at June 30, 2010.
Our provision for loan losses in future periods will be influenced by the loss potential of impaired loans, trends in the delinquency of loans, non-performing loans and net charge offs, which cannot be reasonably predicted.
We continuously monitor and actively manage the credit quality of the entire loan portfolio and will continue to recognize the provision required to maintain the allowance for loan losses at an appropriate level. Due to the continued economic contraction, both individual and business customers are exhibiting difficulty in timely payment of their loan obligations. We believe that this trend may continue for the foreseeable future. Consequently, we may experience higher levels of delinquent and non-performing loans, which may require higher provisions for loan losses, higher charge-offs and higher collection related expenses in future periods. For additional information on nonperforming assets and the allowance for loan losses, refer to the section entitled Nonperforming Assets and Allowance for Loan Losses below.
Non-interest Income
Excluding net gains on investment securities, non-interest income was $2.5 million in the second quarter of 2010 compared to $2.2 million in the second quarter of 2009. The increase in non-interest income is primarily due to the following: a $163,000 increase in fees from the origination and sale of residential mortgages in the secondary market; an $85,000 increase in fees for investment advisory services; an increase of $176,000 in debit card income; and an insurance gain of $135,000 on a bank owned life insurance policy. Partially offsetting these increases was a decline in service charges on deposit accounts of $363,000.
The following table represents the principal components of non-interest income for the second quarter of 2010 and 2009:
(Dollars in thousands) | | 2010 | | | 2009 | |
Service charges on deposit accounts | | $ | 839 | | | $ | 1,202 | |
Investment securities gains, net | | | 993 | | | | 95 | |
Fees on mortgage loans sold | | | 481 | | | | 318 | |
Investment advisory fees | | | 313 | | | | 228 | |
Debit card income | | | 389 | | | | 213 | |
Earnings on bank owned life insurance policies | | | 265 | | | | 130 | |
Other | | | 214 | | | | 146 | |
Total non-interest income | | $ | 3,494 | | | $ | 2,332 | |
| | | | | | | | |
Non-interest Expense
During the second quarter of 2010, non-interest expense increased $4.3 million, or 27%, to $20.5 million compared to $16.2 million for the second quarter of 2009. The increase is due primarily to a $4.1 million increase in OREO related expenses and valuation adjustments, $1.6 million in expense related to our capital raising initiatives and the termination of a related consulting agreement during the second quarter of 2010 and $258,000 in increased insurance premiums. Offsetting these increased costs were reductions in salaries and employee benefits of $655,000, a net decrease in FDIC insurance assessments of $297,000 due to the one time special assessment of $800,000 recorded in second quarter of 2009 and a decrease in net occupancy expense of $165,000.
The decrease in salaries and employee benefits in the second quarter of 2010 relative to the second quarter of 2009 was due largely to the effect of a reduction in employee headcount beginning in 2009. At June 30, 2009, the Company had 417 employees compared to 379 employees at June 30, 2010.
For the second quarter of 2010, the decrease in occupancy expense as compared to the second quarter of 2009 is a result of our continued focus on consolidating facilities and containing operating costs.
Foreclosed asset related expenses increased $4.1 million in the second quarter of 2010 relative to the second quarter of 2009. Of this increase, $3.6 million relates to OREO valuation adjustments during the second quarter of 2010. Such estimated fair value adjustments reflect the decline in real estate values determined by updated appraisals, comparable sales and local market trends in asking prices and data from recent closed transactions. Other OREO operating and ownership expenses increased $683,000. Such costs include real estate taxes, insurance and other costs to own and maintain the properties.
Other expenses increased $1.1 million during the second quarter of 2010 compared to the second quarter of 2009. The increase is primarily due to $1.6 million in expenses relating to our capital raising initiatives and the termination of a related consulting agreement ($1.25 million). Offsetting this increase was a decrease in total FDIC insurance assessments of $297,000 which is comprised of an increase in regular assessments by $502,000 relative to the second quarter of 2009, due primarily to higher deposit insurance premium rates, offset by the $800,000 one time special assessment in second quarter of 2009.
The following table represents the principal components of non-interest expense for the second quarter of 2010 and 2009:
(Dollars in thousands) | | 2010 | | | 2009 | |
Sl Salary and employee benefits | | $ | 6,413 | | | $ | 7,068 | |
N Net occupancy expense | | | 2,273 | | | | 2,438 | |
F Foreclosed asset related expense | | | 5,149 | | | | 1,086 | |
L Legal, and other professional | | | 777 | | | | 860 | |
C Computer services | | | 647 | | | | 663 | |
C Collection costs | | | (4 | ) | | | 118 | |
P Postage, courier and armored car | | | 270 | | | | 280 | |
MMarketing and community relations | | | 276 | | | | 241 | |
O Operating supplies | | | 130 | | | | 194 | |
DiDirectors’ fees | | | 214 | | | | 221 | |
TrTravel expenses | | | 84 | | | | 93 | |
F FDIC and state assessments | | | 1,453 | | | | 951 | |
S Special FDIC assessment | | | - | | | | 800 | |
Amortization of intangibles | | | 389 | | | | 419 | |
N Net gains on disposition of repossessed assets | | | 7 | | | | (36 | ) |
C Capital raise expenses | | | 1,597 | | | | - | |
InInsurance, non-building | | | 340 | | | | 82 | |
O Other operating expense | | | 480 | | | | 680 | |
T Total non-interest expense | | $ | 20,495 | | | $ | 16,158 | |
| | | | | | | | |
Income Taxes
The provision for income taxes includes federal and state income taxes and in 2010 reflects a full valuation allowance against our deferred tax assets. The effective income tax rates for the three months ended June 30, 2010 and 2009 were 0% and 38%, respectively. Historically, the fluctuations in effective tax rates reflect the effect of the differences in the inclusion or deductibility of certain income and expenses, respectively, for income tax purposes. A valuation allowance related to deferred tax assets is required when it is considered more likely than not (greater than 50% likelihood) that all or part of the benefit related to such assets will not be realized. In assessing the need for a valuation allowance, management considered various factors including the significant cumulative losses we have incurred over the last three years coupled with the expectation that our future realization of deferred taxes will be substantially limited as a result of the planned investment by NAFH. These factors represent the most significant negative evidence that management considered in concluding that a full valuation allowance was necessary at June 30, 2010 and December 31, 2009.
Our future effective income tax rate will fluctuate based on the mix of taxable and tax free investments we make and, to a greater extent, the impact of changes in the required amount of the valuation allowance recorded against our net deferred tax assets and our overall level of taxable income. See Note 1 of our unaudited consolidated financial statements for additional information about the calculation of income tax expense. Additionally, there were no unrecognized tax benefits at June 30, 2010 or December 31, 2009, and we do not expect the total of unrecognized tax benefits to significantly increase in the next twelve months.
Six Months Ended June 30, 2010 and 2009:
Results of Operations
For the first six months of 2010, our operations resulted in a net loss before dividends on preferred stock of $19.2 million compared to a net loss of $8.3 million in the first half of the previous year. The loss allocated to common shareholders was $1.38 per share for the first six months of 2010 as compared a net loss of $0.66 per share for the comparable 2009 period. The increased loss is primarily due to $4.8 million in increased valuation adjustments, losses on sale and operating expenses associated with foreclosed real estate; no tax benefit recorded in the current period as a result of the Company’s deferred tax assets being fully reserved; a $1.6 million higher provision for loan losses; and $1.6 million in expenses incurred in connection with our capital raising activities and the termination of a rel ated consulting agreement.
Annualized loss on average assets for the first six months of 2010 was 2.28% compared to a loss on average assets of 0.94% for the first six months of 2009. The annualized loss on average shareholders’ equity was 72.54% for the first six months of 2010 compared to a loss of 13.83% for the same period of 2009.
Net Interest Income
Net interest income was $22.1 million for the six months ended June 30, 2010, a decrease from the $22.5 million reported for the same period last year due principally to a 6% decrease in average earning assets. The decrease in average earning assets was due primarily to loan principal payments, payoffs, charge-offs and the conversion of nonperforming loans to other real estate owned exceeding new loan originations and resulting in a $79.9 million decrease in average loans outstanding during the six months ended June 30, 2010 as compared to the six months ended June 30, 2009.
The net interest margin increased by 13 basis points from 2.71% to 2.84%. The increase in the net interest margin is due to continued reductions of the cost of interest bearing deposits and the successful repricing or replacement of maturing higher priced time deposits with lower cost funding. Partially offsetting the increase was continued higher levels of nonperforming loans and the change in asset mix resulting in lower volumes of higher yielding loans and investment securities. The net interest margin continues to be adversely impacted by the level of nonaccrual loans and non-performing assets, which reduced the margin by an estimated 31 basis points during the six months ended June 30, 2010 compared to an estimated 16 basis point impact during the six months ended June 30, 2009.
The $6.4 million decrease in interest and dividend income for the first half of 2010, compared to the first half of 2009, was mainly attributable to lower balances of loans, the higher level of non-performing loans, significant declines in market interest rates and the related impact on loan and investment yields. Due to the lower volumes of higher yielding loans and the higher level of non-accrual loans, the yield on our loans declined 39 basis points. The yield of our interest earning assets declined 50 basis points in the first half of 2010, compared to the first half of 2009, due to the reduction in the yield on our loans and investment securities.
Partially offsetting the decline in interest and dividend income, were decreases in deposit interest rates paid as well as other market interest rates. The average interest cost of interest bearing deposits declined 93 basis points and the overall cost of interest bearing liabilities declined by 77 basis points compared to the first half of 2009.
Going forward, we expect market short-term interest rates to remain low for an extended period of time. Generally, we expect loan and investment yields and deposit costs to stabilize. However, deposit rates could increase due to demand in the financial markets, banking system and other local markets for liquidity which may be reflected in elevated pricing competition for deposits. The predominant drivers affecting net interest income are the composition of earning assets, the interest rates paid on our deposits and the net change in non-performing assets.
The following table presents average balances of the Company, the taxable-equivalent interest earned, and the rate paid thereon during the six months ended June 30, 2010 and June 30, 2009.
| | 2010 | | | 2009 | |
(Dollars in thousands) | | Average Balances | | | Income/ Expense | | | Yields/ Rates | | | Average Balances | | | Income/ Expense | | | Yields/ Rates | |
Interest-earning assets: | | | | | | | | | | | | | | | | | | |
| Loans (1)(2) | | $ | 1,147,456 | | | $ | 30,674 | | | | 5.39 | % | | $ | 1,227,339 | | | $ | 35,196 | | | | 5.78 | % |
| Investment securities (2) | | | 297,279 | | | | 4,537 | | | | 3.08 | % | | | 335,415 | | | | 6,409 | | | | 3.85 | % |
| Money Market Mutual Funds | | | - | | | | - | | | | - | | | | 60,569 | | | | 130 | | | | 0.43 | % |
| Interest-bearing deposits in other banks | | | 120,006 | | | | 149 | | | | 0.25 | % | | | 35,519 | | | | 40 | | | | 0.23 | % |
| Federal Home Loan Bank stock | | | 10,447 | | | | 10 | | | | 0.19 | % | | | 11,389 | | | | (19 | ) | | | (0.34 | )% |
| Federal funds sold and securities sold under agreements to resell | | | 7 | | | | - | | | | 0.00 | % | | | 4,985 | | | | 5 | | | | 0.20 | % |
Total interest-earning assets | | | 1,575,195 | | | | 35,370 | | | | 4.53 | % | | | 1,675,216 | | | | 41,761 | | | | 5.03 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Non-interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| C Cash and due from banks | | | 22,821 | | | | | | | | | | | | 33,049 | | | | | | | | | |
| PrPremises and equipment, net | | | 45,918 | | | | | | | | | | | | 38,210 | | | | | | | | | |
| A Allowance for loan losses | | | (26,651 | ) | | | | | | | | | | | (23,908 | ) | | | | | | | | |
| O Other assets | | | 76,087 | | | | | | | | | | | | 73,056 | | | | | | | | | |
Total non-interest-earning assets | | | 118,175 | | | | | | | | | | | | 120,407 | | | | | | | | | |
Total assets | | $ | 1,693,370 | | | | | | | | | | | $ | 1,795,623 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | | | | | | | | | | | | | | |
| N NOW accounts | | $ | 210,356 | | | $ | 384 | | | | 0.37 | % | | $ | 179,061 | | | $ | 642 | | | | 0.72 | % |
| M Money market | | | 191,023 | | | | 998 | | | | 1.05 | % | | | 184,316 | | | | 1,499 | | | | 1.64 | % |
| S Savings deposits | | | 81,490 | | | | 291 | | | | 0.72 | % | | | 106,930 | | | | 959 | | | | 1.81 | % |
| TiTime deposits | | | 701,993 | | | | 7,738 | | | | 2.22 | % | | | 728,735 | | | | 11,950 | | | | 3.31 | % |
Total interest-bearing deposits | | | 1,184,862 | | | | 9,411 | | | | 1.60 | % | | | 1,199,042 | | | | 15,050 | | | | 2.53 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Oth Other interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| S Short-term borrowings and FHLB advances | | | 193,679 | | | | 2,443 | | | | 2.54 | % | | | 224,045 | | | | 2,735 | | | | 2.46 | % |
| L Long-term borrowings | | | 63,000 | | | | 1,325 | | | | 4.24 | % | | | 63,000 | | | | 1,444 | | | | 4.62 | % |
Total interest-bearing liabilities | | | 1,441,541 | | | | 13,179 | | | | 1.84 | % | | | 1,486,087 | | | | 19,229 | | | | 2.61 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
N Non-interest-bearing liabilities and shareholders’ equity: | | | | | | | | | | | | | | | | | | | | | | | | |
| D Demand deposits | | | 186,535 | | | | | | | | | | | | 169,824 | | | | | | | | | |
| Other liabilities | | | 12,058 | | | | | | | | | | | | 18,026 | | | | | | | | | |
| S Shareholders’ equity | | | 53,236 | | | | | | | | | | | | 121,686 | | | | | | | | | |
T Total non-interest-bearing liabilities and shareholders’ equity | | | 251,829 | | | | | | | | | | | | 309,536 | | | | | | | | | |
Tot Total liabilities and shareholders’ equity | | $ | 1,693,370 | | | | | | | | | | | $ | 1,795,623 | | | | | | | | | |
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Interest rate spread (tax equivalent basis) | | | | | | | | | | | 2.69 | % | | | | | | | | | | | 2.42 | % |
Net interest income (tax equivalent basis) | | | | | | $ | 22,191 | | | | | | | | | | | $ | 22,532 | | | | | |
Net interest margin (3) (tax equivalent basis) | | | | | | | | | | | 2.84 | % | | | | | | | | | | | 2.71 | % |
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_______ (1) Average loans include non-performing loans. (2) Interest income and rates include the effects of a tax equivalent adjustment using applicable statutory tax rates in adjusting tax exempt interest on tax exempt investment securities and loans to a fully taxable basis. (3) Net interest margin is net interest income divided by average total interest-earning assets. | |
Changes in Net Interest Income
The table below details the components of the changes in net interest income for the six months ended June 30, 2010 and June 30, 2009. For each major category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes due to average volumes and changes due to rates, with the changes in both volumes and rates allocated to these two categories based on the proportionate absolute changes in each category.
| | 2010 Compared to 2009 (1) Due to Changes in | |
(Dollars in thousands) | | Average Volume | | | Average Rate | | | Net Increase (Decrease) | |
Interest income | | | | | | | | | |
| Loans (2) | | $ | (2,215 | ) | | $ | (2,307 | ) | | $ | (4,522 | ) |
| Investment securities (2) | | | (676 | ) | | | (1,196 | ) | | | (1,872 | ) |
| Money Market Mutual Funds | | | (130 | ) | | | - | | | | (130 | ) |
| Interest-bearing deposits in other banks | | | 104 | | | | 5 | | | | 109 | |
| Federal Home Loan Bank stock | | | - | | | | 29 | | | | 29 | |
| F Federal funds sold and securities purchased under agreements to resell | | | (5 | ) | | | - | | | | (5 | ) |
Total interest income | | | (2,922 | ) | | | (3,469 | ) | | | (6,391 | ) |
| | | | | | | | | | | | |
Interest expense | | | | | | | | | | | | |
| NOW accounts | | | 98 | | | | (356 | ) | | | (258 | ) |
| Money market | | | 53 | | | | (554 | ) | | | (501 | ) |
| Savings deposits | | | (189 | ) | | | (479 | ) | | | (668 | ) |
| Time deposits | | | (424 | ) | | | (3,788 | ) | | | (4,212 | ) |
| Short-term borrowings and FHLB advances | | | (381 | ) | | | 89 | | | | (292 | ) |
| Long-term borrowings | | | - | | | | (119 | ) | | | (119 | ) |
Total interest expense | | | (843 | ) | | | (5,207 | ) | | | (6,050 | ) |
| | | | | | | | | | | | |
Change in net interest income | | $ | (2,079 | ) | | $ | 1,738 | | | $ | (341 | ) |
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________ (1) ((1) The change in interest due to both rate and volume has been allocated to the volume and rate components in proportion to the relationship of the dollar amounts of the absolute change in each. | |
(2) I (2) Interest income includes the effects of a tax equivalent adjustment using applicable statutory tax rates in adjusting tax exempt interest on tax exempt investment securities and loans to a fully taxable basis. | |
Provision for Loan Losses
The provision and allowance for loan losses were impacted by many factors including net charge-offs, the decline in loans outstanding, the decline in impaired loans, historical loss rates and the mix of loan types. The provision for loan losses increased to $12.6 million in the first six months of 2010 compared to $11.1 million in the comparable prior year period. The higher provision for loan loss in 2010 is principally due to an increase in net charge-offs compared to the 2009 period. Net charge-offs were $14.0 million, or 2.46% of average loans on an annualized basis, during the six months ended June 30, 2010, compared to $9.4 million, or 1.55% of average loans on an annualized basis, for the same period in 2009. As of June 30, 2010, the balance of the allowance for loan losses decreased to $27.7 million, as compared to $29 .1 million at December 31, 2009, due primarily to a $95.6 million decline in loans outstanding, a $36.7 million decline in impaired loans and a change in the mix of loan types including a 38% decline in construction and vacant land loans and a 48% decline in indirect auto loans. At the same time, due primarily to the impact of recent historical charge-off experience on the factors used in estimating the allowance for loan losses, the June 30, 2010 allowance increased as a percentage of loans to 2.52%, compared to 2.43% at December 31, 2009, and the percentage allocation of the reserve not specifically allocated to impaired loans increased to 2.06% of unimpaired loans at June 30, 2010 as compared to 1.91% at December 31, 2009. Offsetting the impact of historical loss rate factors used in estimating the allowance for loan losses were overall declines in loan balances outstanding, declines in loans classified as impaired and changes in the mix of loan types which, in combination, resulted in a lower balance of the allowance for loan losses at June 30, 2010.
Our provision for loan losses in future periods will be influenced by the loss potential of impaired loans, trends in the delinquency of loans, non-performing loans and net charge offs, which cannot be reasonably predicted.
We continuously monitor and actively manage the credit quality of the entire loan portfolio and will continue to recognize the provision required to maintain the allowance for loan losses at an appropriate level. Due to the continued economic contraction, both individual and business customers are exhibiting difficulty in timely payment of their loan obligations. We believe that this trend may continue for the foreseeable future. Consequently, we may experience higher levels of delinquent and non-performing loans, which may require higher provisions for loan losses, higher charge-offs and higher collection related expenses in future periods. For additional information on nonperforming assets and the allowance for loan losses, refer to the section entitled Nonperforming Assets and Allowance for Loan Losses below.
Non-interest Income
Excluding net gains on investment securities, non-interest income was $4.3 million in the first six months of 2010 compared to $4.0 million in the prior year period of 2009. The increase in non-interest income is primarily due to the following: a $331,000 increase in fees from the origination and sale of residential mortgages in the secondary market; a $199,000 increase in fees for investment advisory services; an increase of $335,000 in debit card income; and an insurance gain $135,000 on bank owned life insurance policies. These increases were offset by a decline in service charges on deposit accounts of $414,000 and a $346,000 loss recorded upon the sale of $20.1 million of indirec t auto loans during the first quarter of 2010. The indirect auto loans were sold at a price exceeding the face value of the underlying notes. However, as unamortized premiums paid to auto dealers upon the origination of these loans exceeded the premium received in the sale, the accounting result of the sale was the aforementioned loss. Premiums paid to auto dealers upon loan origination are recorded as deferred loan costs and amortized over the life of the individual loans. Economically, when the transaction is evaluated considering the reduction of approximately $621,000 of the allowance for loan losses attributable to the sold loans, we estimate the sale had a net positive impact of approximately $275,000.
The following table represents the principal components of non-interest income for the six months of 2010 and 2009:
(Dollars in thousands) | | 2010 | | | 2009 | |
Service charges on deposit accounts | | $ | 1,754 | | | $ | 2,168 | |
Investment securities gains, net | | | 2,635 | | | | 691 | |
Fees on mortgage loans sold | | | 764 | | | | 433 | |
Investment advisory fees | | | 620 | | | | 421 | |
Loss on sale of indirect loans | | | (346 | ) | | | - | |
Debit card income | | | 733 | | | | 398 | |
Earnings on bank owned life insurance policies | | | 365 | | | | 261 | |
Other | | | 383 | | | | 339 | |
Total non-interest income | | $ | 6,908 | | | $ | 4,711 | |
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Non-interest Expense
During the first six months of 2010, non-interest expense increased $6.0 million, or 20%, to $35.5 million compared to $29.5 million for the first six months of 2009. The increase is primarily due to a $4.8 million increase in OREO related expenses and valuation adjustments, $1.6 million related to our capital raising initiatives and the termination of a related consulting agreement during the second quarter of 2010, increased FDIC insurance costs of $793,000 due to higher deposit insurance premium rates, an increase in other professional fees of $332,000, and a $489,000 increase in insurance premiums related to corporate insurance coverage. Offsetting these increased costs were reductions in salaries and employee benefits and the $800,000 one time FDIC special assessment recorded in the second quarter of 2009.
Salaries and employee benefits decreased $1.2 million in the first six months of 2010 relative to the first six months of 2009. The primary reason for the decrease in salaries and employee benefits was due to a reduction in employee headcount beginning in 2009 and $674,000 of higher severance related costs incurred in the first half of 2009. At June 30, 2009, the Company had 417 employees compared to 379 employees as June 30, 2010.
Foreclosed asset related expenses increased $4.8 million in the first six months of 2010 relative to the first six months of 2009. Of this increase, $4.0 million relates to OREO valuation adjustments during the first half of 2010. Such estimated fair value adjustments reflect the decline in the real estate values determined by updated appraisals, comparable sales and local market trends in asking prices and data from recent closed transactions. Other OREO operating and ownership expenses increased $939,000. Such costs include real estate taxes, insurance and other costs to own and maintain the properties and the increase reflects the higher level of OREO in 2010 compared to 2009.
Other expenses increased $2.4 million in the first six months of 2010 compared to the first six months of 2009. The 2010 period includes $1.6 million in expenses relating to our capital raising initiatives and the termination of a related consulting agreement ($1.25 million) during the second quarter of 2010. Other professional fees increased by $332,000 due principally to the costs associated with a 2010 independent third party loan review and $489,000 of increased insurance premiums. FDIC insurance assessments increased by $793,000, relative to the first half of 2009, due primarily to higher deposit insurance premium rates offset by the impact of the $800,000 one time FDIC special assessment in second quarter of 2009.
The following table represents the principal components of non-interest expense for the first six months of 2010 and 2009:
| | | | | 2010 | | | | | | | | | 2009 | | | | |
(Dollars in thousands) | | Total | | | Riverside Operations | | | Excluding Riverside | | | Total | | | Riverside Operations | | | Excluding Riverside | |
SaSalary and employee benefits | | $ | 13,249 | | | $ | 959 | | | $ | 12,290 | | | $ | 14,448 | | | $ | 946 | | | $ | 13,502 | |
N Net occupancy expense | | | 4,557 | | | | 710 | | | | 3,847 | | | | 4,590 | | | | 696 | | | | 3,894 | |
F Foreclosed asset related expense | | | 6,249 | | | | - | | | | 6,249 | | | | 1,406 | | | | - | | | | 1,406 | |
L Legal, and other professional | | | 1,640 | | | | 3 | | | | 1,637 | | | | 1,308 | | | | 264 | | | | 1,044 | |
C Computer services | | | 1,369 | | | | 344 | | | | 1,025 | | | | 1,288 | | | | 213 | | | | 1,075 | |
C Collection costs | | | 39 | | | | - | | | | 39 | | | | 222 | | | | - | | | | 222 | |
P Postage, courier and armored car | | | 552 | | | | 51 | | | | 501 | | | | 531 | | | | 103 | | | | 428 | |
MMarketing and community relations | | | 658 | | | | 86 | | | | 572 | | | | 519 | | | | 52 | | | | 467 | |
O Operating supplies | | | 275 | | | | 44 | | | | 231 | | | | 336 | | | | 92 | | | | 244 | |
D Directors’ fees | | | 409 | | | | - | | | | 409 | | | | 453 | | | | - | | | | 453 | |
T Travel expenses | | | 166 | | | | 2 | | | | 164 | | | | 176 | | | | 5 | | | | 171 | |
F FDIC and state assessments | | | 2,315 | | | | 444 | | | | 1,871 | | | | 1,522 | | | | 241 | | | | 1,281 | |
F FDIC special assessment | | | - | | | | - | | | | - | | | | 800 | | | | 169 | | | | 631 | |
A Amortization of intangibles | | | 779 | | | | 509 | | | | 270 | | | | 652 | | | | 382 | | | | 270 | |
N Net gains on disposition of repossessed assets | | | (46 | ) | | | - | | | | (46 | ) | | | (105 | ) | | | - | | | | (105 | ) |
C Capital raise expense | | | 1,597 | | | | - | | | | 1,597 | | | | - | | | | - | | | | - | |
In Insurance, non-building | | | 652 | | | | 1 | | | | 651 | | | | 163 | | | | 1 | | | | 162 | |
O Other operating expense | | | 1,069 | | | | 24 | | | | 1,045 | | | | 1,216 | | | | 75 | | | | 1,141 | |
T Total non-interest expense | | $ | 35,529 | | | $ | 3,177 | | | $ | 32,352 | | | $ | 29,525 | | | $ | 3,239 | | | $ | 26,286 | |
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Income Taxes
The provision for income taxes includes federal and state income taxes and in 2010 reflects a full valuation allowance against our deferred tax assets. The effective income tax rates for the six months ended June 30, 2010 and 2009 were 0% and 38%, respectively. Historically, the fluctuations in effective tax rates reflect the effect of the differences in the inclusion or deductibility of certain income and expenses, respectively, for income tax purposes. A valuation allowance related to deferred tax assets is required when it is considered more likely than not (greater than 50% likelihood) that all or part of the benefit related to such assets will not be realized. In assessing the need for a valuation allowance, management considered various factors including the significant cumulative losses we have incurred over the last three years c oupled with the expectation that our future realization of deferred taxes will be substantially limited as a result of the planned investment by NAFH. These factors were among the most significant negative evidence that management considered in concluding that a full valuation allowance was necessary at June 30, 2010 and December 31, 2009.
Our future effective income tax rate will fluctuate based on the mix of taxable and tax free investments we make and, to a greater extent, the impact of changes in the required amount of the valuation allowance recorded against our net deferred tax assets and our overall level of taxable income. See Note 1 of our unaudited consolidated financial statements for additional information about the calculation of income tax expense. Additionally, there were no unrecognized tax benefits at June 30, 2010 or December 31, 2009, and we do not expect the total of unrecognized tax benefits to significantly increase in the next twelve months.
Balance Sheet
Total assets at June 30, 2010 were $1.66 billion, a decrease of $46.3 million, or 3%, from total assets of $1.71 billion at December 31, 2009. Total loans declined to $1.10, billion compared to $1.20 billion at December 31, 2009, as a $36.7 million, or 38%, decline in construction and land loans, a $24.2 million, or 48%, decline in indirect auto loans and a $30.7 million, or 5%, decline in commercial real estate loans led the $95.8 million decline of our loan portfolio. Of this decline in loans outstanding, $26.3 million related to loans foreclosed and transferred to other real estate owned, $14.0 million related to charge-offs and $5.6 million related to sales of nonperforming loans. The decline in indirect auto loans was due primarily to the sale of approximately $20.1 million of such loans during the first quarter of 2010. Also, in the first six months of 2010, investment securities increased $32.3 million, or 13%.
At June 30, 2010, advances from the Federal Home Loan Bank were $125.0 million, which remained even with December 31, 2009. Total deposits of $1.34 billion as of June 30, 2010 decreased $27.7 million, or 2%, compared to $1.37 billion at December 31, 2009. Brokered deposits declined $37.2 million from $48.2 million at December 31, 2009 to $10.9 million at June 30, 2010.
Shareholders’ equity totaled $39.0 million at June 30, 2010, decreasing $16.5 million from December 31, 2009. Book value per common share decreased to $0.22 at June 30, 2010 from $1.42 at December 31, 2009.
Investment Securities
During the first six months of 2010 and 2009, we realized net gains of $2.6 million and $1.5 million relating to sales of approximately $188.6 million and $290.9 million (including the liquidation of funds temporarily invested in money market mutual funds) of available for sale securities, respectively.
As previously described in the Annual Report on Form 10-K for 2009, as of June 30, 2010, the Company owns four collateralized debt obligation investment securities (three backed primarily by corporate debt obligations of homebuilders, REITs, real estate companies and commercial mortgage backed securities and the fourth backed by trust preferred securities of banks and insurance companies) with an aggregate original cost of $15.0 million. In determining the estimated fair value of these securities, management utilizes a discounted cash flow modeling valuation approach which is discussed in greater detail in Note 7 - Fair Value. These securities are floating rate securities which were rated "A" or better by an independent and nationally recognized rating agency at the time of purchase. At various dates during 2008 and 2009, due to ratings downgrades, changes in estimates of future cash flows and the amounts of impairment, management concluded that the losses of value for the collateralized debt obligations backed by debt securities of homebuilders, REITs and real estate companies and commercial mortgage backed securities, aggregating $10.0 million, were other than temporary under generally accepted accounting principles. Accordingly, the Company wrote these investment securities down at various dates to their estimated fair value. During 2009, the Company recognized approximately $763,000 of such write-downs. Through the end of the second quarter of 2009 the write-down of these three securities to $0 resulted in the recognition of cumulative other than temporary impairment losses of $10.0 million. During 2009, the estimated fair value of the security backed by trust preferred securities of banks and insurance companies declined further due to the occurrence of additional defaults or deferrals by certain underlying issuer s and changes in the estimated timing of the future cash flow and discount rate assumptions used to estimate the value of these securities. As of June 30, 2010, management concluded that the unrealized loss on this security does not meet the definition of other than temporary under generally accepted accounting principles because no credit loss has been incurred.
As these securities are not readily marketable and there have been no observable transactions involving substantially similar securities, estimates of future cash flows, levels and timing of future default and assumptions of applicable discount rates are highly subjective and have a material impact on the estimated fair value of these securities. The estimated fair value may fluctuate significantly from period to period based upon actual occurrence of future events of default, recovery, and changes in expectations of assumed future levels of default and discount rates applied.
We regularly review each investment security for impairment based on criteria that include the extent to which cost exceeds fair value, the duration of that impairment, the financial health of and specific prospects for the issuer(s) and our ability and intention with regard to holding the security to maturity. Future declines in the fair value of these or other securities may result in additional impairment charges which may be material to the financial condition and results of operations of the Company. For additional detail regarding our impairment assessment process, see Note 2 of the Unaudited Notes to Consolidated financial statements above.
Loan Portfolio Composition
Two significant components of our loan portfolio are classified in the notes to the accompanying unaudited financial statements as commercial real estate and construction and vacant land. Our goal of maintaining high standards of credit quality include a strategy of diversification of loan type and purpose within these categories. The following charts illustrate the composition of these portfolios as of June 30, 2010 and December 31, 2009.
| | June 30, 2010 | | | December 31, 2009 | |
(Dollars in thousands) | | Commercial Real Estate | | | Percentage Composition | | | Commercial Real Estate | | | Percentage Composition | |
Mixed Use Commercial/Residential | | $ | 101,425 | | | | 16 | % | | $ | 102,901 | | | | 15 | % |
Office Buildings | | | 100,719 | | | | 16 | % | | | 103,426 | | | | 15 | % |
Hotels/Motels | | | 68,339 | | | | 10 | % | | | 78,992 | | | | 12 | % |
1-4 Family and Multi Family | | | 66,344 | | | | 10 | % | | | 75,342 | | | | 11 | % |
Guesthouses | | | 92,591 | | | | 14 | % | | | 94,663 | | | | 14 | % |
Retail Buildings | | | 76,222 | | | | 12 | % | | | 78,852 | | | | 12 | % |
Restaurants | | | 49,758 | | | | 8 | % | | | 50,395 | | | | 7 | % |
Marinas/Docks | | | 20,182 | | | | 3 | % | | | 19,521 | | | | 3 | % |
Warehouse and Industrial | | | 28,208 | | | | 4 | % | | | 32,328 | | | | 5 | % |
Other | | | 45,891 | | | | 7 | % | | | 43,989 | | | | 6 | % |
Total | | $ | 649,679 | | | | 100 | % | | $ | 680,409 | | | | 100 | % |
| | | | | | | | | | | | | | | | |
| | June 30, 2010 | | | December 31, 2009 | |
| | Construction and Vacant Land | | | Percentage Composition | | | Construction and Vacant Land | | | Percentage Composition | |
Construction: | | | | | | | | | | | | |
| Residential – owner occupied | | $ | 2,991 | | | | 5 | % | | $ | 6,024 | | | | 6 | % |
| Residential – commercial developer | | | 1,669 | | | | 3 | % | | | 6,574 | | | | 7 | % |
| Commercial structure | | | 4,488 | | | | 7 | % | | | 13,127 | | | | 13 | % |
| | | 9,148 | | | | 15 | % | | | 25,725 | | | | 26 | % |
Land: | | | | | | | | | | | | | | | | |
| Raw land | | | 10,556 | | | | 17 | % | | | 20,684 | | | | 21 | % |
| Residential lots | | | 17,004 | | | | 28 | % | | | 12,773 | | | | 13 | % |
| Land development | | | 9,054 | | | | 15 | % | | | 16,877 | | | | 17 | % |
| Commercial lots | | | 14,936 | | | | 25 | % | | | 21,365 | | | | 23 | % |
Total land | | | 51,550 | | | | 85 | % | | | 71,699 | | | | 74 | % |
| | | | | | | | | | | | | | | | |
Total | | $ | 60,698 | | | | 100 | % | | $ | 97,424 | | | | 100 | % |
| | | | | | | | | | | | | | | | |
Non-performing Assets and Allowance for Loan Losses
Non-performing assets include non-accrual loans and investment securities, repossessed personal property, and other real estate. Loans and investments in debt securities are placed on non-accrual status when management has concerns relating to the ability to collect the principal and interest and generally when loans are 90 days past due. A loan is considered impaired when it is probable that not all principal and interest amounts will be collected according to the loan contract. Non-performing assets are as follows:
(Dollars in thousands) | | June 30, 2010 | | | December 31, 2009 | |
Total non-accrual loans | | $ | 76,632 | | | $ | 72,833 | |
Accruing loans delinquent 90 days or more | | | - | | | | - | |
Total non-performing loans | | | 76,632 | | | | 72,833 | |
| | | | | | | | |
Non-accrual investment securities | | | 758 | | | | 759 | |
Repossessed personal property (primarily indirect auto loans) | | | 204 | | | | 326 | |
Other real estate owned | | | 38,699 | | | | 21,352 | |
Other assets (*) | | | 2,097 | | | | 2,090 | |
Total non-performing assets | | $ | 118,390 | | | $ | 97,360 | |
| | | | | | | | |
Allowance for loan losses | | $ | 27,710 | | | $ | 29,083 | |
| | | | | | | | |
Loa Loans in compliance with terms modified in troubled debt restructurings and not included in non-performing loans above | | $ | 22,318 | | | $ | 35,906 | |
| | | | | | | | |
Non-performing assets as a percent of total assets | | | 7.14 | % | | | 5.71 | % |
Non-performing loans as a percent of gross loans | | | 6.96 | % | | | 6.08 | % |
Allowance for loan losses as a percent of non-performing loans | | | 36.16 | % | | | 39.93 | % |
Annualized net charge-offs as a percent of average loans for the quarter ended | | | 2.81 | % | | | 6.40 | % |
| | | | | | | | |
| (*) | In 1998, TIB Bank made a $10.0 million loan to construct a lumber mill in northern Florida. Of this amount, $6.4 million had been sold by the Bank to other lenders. The loan was 80% guaranteed as to principal and interest by the U.S. Department of Agriculture (USDA). In addition to business real estate and equipment, the loan was collateralized by the business owner’s interest in a trust. Under provisions of the trust agreement, beneficiaries cannot receive trust assets until November 2010. |
The portion of this loan guaranteed by the USDA and held by us was approximately $1.6 million. During the second quarter of 2008, the USDA paid the Company the
principal and accrued interest and allowed the Company to apply other proceeds previously received to capitalized liquidation costs and protective advances. The non- guaranteed principal and interest ($2.0 million at June 30, 2010 and December 31, 2009) and the reimbursable capitalized liquidation costs and protective advance costs
totaling approximately $133,000 and $126,000 at June 30, 2010 and December 31, 2009, respectively, are included as “other assets” in the financial statements.
Florida law requires a bank to liquidate or charge off repossessed real property within five years, and repossessed personal property within six months. Since the
property had not been liquidated during this period, the Bank charged-off the non guaranteed principal and interest totaling $2.0 million at June 30, 2003, for
regulatory purposes. Since we believe this amount is ultimately realizable, we did not write off this amount for financial statement purposes under generally accepted
accounting principles.
Non-accrual loans as of June 30, 2010 and December 31, 2009 are as follows:
(Dollars in thousands) | | June 30, 2010 | | | December 31, 2009 | |
Collateral Description | | Number of Loans | | | Outstanding Balance | | | Number of Loans | | | Outstanding Balance | |
Residential 1-4 family | | | 42 | | | $ | 11,115 | | | | 36 | | | $ | 9,250 | |
Home equity loans | | | 9 | | | | 1,376 | | | | 8 | | | | 1,488 | |
Commercial 1-4 family investment | | | 12 | | | | 7,274 | | | | 19 | | | | 8,733 | |
Commercial and agricultural | | | 9 | | | | 1,982 | | | | 7 | | | | 2,454 | |
Commercial real estate | | | 35 | | | | 39,734 | | | | 29 | | | | 24,392 | |
Residential land development | | | 16 | | | | 14,643 | | | | 13 | | | | 25,295 | |
Government guaranteed loans | | | 1 | | | | 137 | | | | 2 | | | | 143 | |
Indi Indirect auto, auto and consumer loans | | | 38 | | | | 371 | | | | 97 | | | | 1,078 | |
| | | | | | $ | 76,632 | | | | | | | $ | 72,833 | |
Net activity relating to nonaccrual loans during the second quarter of 2010 is as follows:
Nonaccrual Loan Activity (Other Than Indirect Auto and Consumer) | |
(Dollars in thousands) | |
| | | |
Nonaccrual loans at March 31, 2010 | | $ | 55,288 | |
Returned to accrual | | | - | |
Net principal paid down on nonaccrual loans | | | (6,427 | ) |
Charge-offs | | | (7,392 | ) |
Loans foreclosed – transferred to OREO | | | (4,293 | ) |
Loans placed on nonaccrual | | | 39,085 | |
Nonaccrual loans at June 30, 2010 | | $ | 76,261 | |
| | | | |
An expanded analysis of the more significant loans classified as nonaccrual during the second quarter of 2010 and remaining classified as of June 30, 2010, is as follows:
Significant Nonaccrual Loans (Other Than Indirect Auto and Consumer) | |
(Dollars in thousands) | |
Collateral Description | | Original Loan Amount | | | Original Loan to Value (Based on Original Appraisal) | | | Current Loan Amount | | | Specific Allocation of Reserve in Allowance for Loan Losses at June 30, 2010 | | | Amount Charged Against Allowance for Loan Losses During the Quarter Ended June 30, 2010 | | | Impact on the Provision for Loan Losses During the Quarter Ended June 30, 2010 (1) | |
Arising in Second Quarter 2010 | | | | | | | | | | | | | | | | | | |
Aut Auto dealerships and commercial land in SW Florida | | $ | 12,938 | | | | 59 | % | | $ | 12,476 | | | $ | 241 | | | $ | - | | | $ | 241 | |
Ow Owner-occupied commercial real estate in Key West Florida | | | 11,772 | | | | 75 | % | | | 11,583 | | | | 836 | | | | - | | | | 836 | |
Two office buildings in SW Florida | | | 2,450 | | | | 52 | % | | | 2,212 | | | | 349 | | | | 138 | | | | 205 | |
1-4 family residential in Florida Keys | | | 2,047 | | | | 77 | % | | | 1,880 | | | | 193 | | | | 86 | | | | 279 | |
o Mobile home park in Florida Keys | | | 1,375 | | | | 69 | % | | | 1,282 | | | | - | | | | - | | | | - | |
Nur Nursery land and residence in South Florida | | | 1,425 | | | | 83 | % | | | 944 | | | | 420 | | | | - | | | | 420 | |
Mix Mixed use – office/residential in Key West Florida | | | 862 | | | | 63 | % | | | 849 | | | | 35 | | | | - | | | | 35 | |
O Office condominiums in SW Florida | | | 848 | | | | 74 | % | | | 720 | | | | 58 | | | | 106 | | | | 150 | |
O Office space in Florida Keys | | | 799 | | | | 75 | % | | | 678 | | | | 58 | | | | 87 | | | | 140 | |
Numerous smaller balance primarily 1-4 family residential and commercial real estate loans | | | | | | | | | | | 3,690 | | | | 943 | | | | 1,551 | | | | 2,037 | |
| | | | | | Total | | | $ | 36,314 | | | $ | 3,133 | | | $ | 1,968 | | | $ | 4,343 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Nonaccrual Prior to Second Quarter 2010 Remaining on Nonaccrual at June 30, 2010 | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial lots in SW Florida | | $ | 3,840 | | | | 54 | % | | $ | 3,300 | | | $ | 415 | | | $ | 449 | | | $ | 152 | |
C Commercial lots in SW Florida | | | 1,450 | | | | 76 | % | | | 1,383 | | | | 49 | | | | - | | | | - | |
Commercial 1-4 family residential | | | 1,288 | | | | 75 | % | | | 1,228 | | | | - | | | | - | | | | - | |
Commercial real estate SW Florida | | | 1,700 | | | | 65 | % | | | 965 | | | | 77 | | | | 188 | | | | - | |
Waterfront 1-4 family residential home | | | 1,050 | | | | 32 | % | | | 1,023 | | | | - | | | | - | | | | - | |
Commercial 1-4 family residential | | | 1,640 | | | | 75 | % | | | 1,323 | | | | 133 | | | | - | | | | 31 | |
Mixed use - developer | | | 3.602 | | | | 80 | % | | | 2,300 | | | | 248 | | | | - | | | | 232 | |
Two restaurants SW Florida | | | 5,099 | | | | 57-70 | % | | | 4,000 | | | | 627 | | | | 914 | | | | 229 | |
Office Building - developer | | | 1,346 | | | | 53 | % | | | 1,250 | | | | 158 | | | | - | | | | (19 | ) |
Vacant land – residential development | | | 4,750 | | | | 42 | % | | | 4,795 | | | | - | | | | - | | | | - | |
Commercial 1-4 family residential | | | 1,050 | | | | 33 | % | | | 1,155 | | | | - | | | | - | | | | - | |
Two commercial 1-4 family residential | | | 1,281 | | | | 80 | % | | | 1,045 | | | | 84 | | | | - | | | | - | |
Office building | | | 1,118 | | | | 66 | % | | | 1,095 | | | | 215 | | | | - | | | | 202 | |
N Numerous smaller balance primarily 1-4 family residential and commercial real estate loans | | | | | | | | | | | 15,085 | | | | 1,172 | | | | 490 | | | | 661 | |
| | | | | | | | | | $ | 39,947 | | | $ | 3,178 | | | $ | 2,041 | | | $ | 1,488 | |
| | | | | | Total | | | $ | 76,261 | | | $ | 6,311 | | | $ | 4,009 | | | $ | 5,831 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Of the $36.3 million of loans placed on nonaccrual during the second quarter of 2010 included in the table above, $1.6 million related to loans which we reviewed during the second quarter and determined that no specific reserves were necessary at such time. The remaining loans which were also reviewed during the period had allocated specific reserves of $3.1 million, after related charge downs, and resulted in the provision of additional specific reserves of $4.3 million during the period.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses in the loan portfolio and amounted to approximately $27.7 million and $29.1 million at June 30, 2010 and December 31, 2009, respectively. Our formalized process for assessing the adequacy of the allowance for loan losses and the resultant need, if any, for periodic provisions to the allowance charged to income, includes both individual loan analyses and loan pool analyses. Individual loan analyses are periodically performed on loan relationships of a significant size, or when otherwise deemed necessary, and primarily encompass commercial real estate and other commercial loans. The result is that commercial real estate loans and commercial loans are class ified into the following risk categories: Pass, Special Mention, Substandard or Loss. The allowance consists of specific and general components. When appropriate, a specific reserve will be established for individual loans based upon the risk classification and the estimated potential for loss. The specific component relates to loans that are individually classified as impaired. Otherwise, we estimate an allowance for each risk category. The general allocations to each risk category are based on factors including historical loss rate, perceived economic conditions (local, national and global), perceived strength of our management, recent trends in loan loss history, and concentrations of credit.
Non-performing loans and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one category. A loan is considered impaired when it is probable that not all principal and interest amounts will be collected according to the loan contract. Generally, residential mortgage, commercial and commercial real estate loans exceeding certain size thresholds established by management, are individually evaluated for impairment. Nonaccrual loans and restructured loans where loan term concessions benefitting the borrowers have been made are generally designated as impaired. Impaired loans presented in the table below include the $76.3 million of nonperforming loans included in the tables above, other than indirect auto and consumer loans, along with $22.3 million of restructure d loans which are in compliance with modified terms and not reported as non-performing and other impaired loans which are not currently classified as non-accrual, but meet the criteria for classification as an impaired loan (i.e. loans for which the collection of all principal and interest amounts as specified in the original loan contract are not expected, or where management has substantial doubt that the collection will be as specified, but is still expected to occur in its entirety). Collectively, these loans comprise the potential problem loans individually considered along with historical portfolio loss experience and trends and other quantitative and qualitative factors applied to the balance of our portfolios in our evaluation of the adequacy of the allowance for loan losses.
If a loan is considered to be impaired, a portion of the allowance is allocated so that the carrying value of the loan is reported at the present value of estimated future cash flows discounted using the loan’s original rate or at the fair value of collateral, less disposition costs, if repayment is expected solely from the collateral. Impaired loans are as follows:
(Dollars in thousands) | | June 30, 2010 | | | December 31, 2009 | |
Loans with no allocated allowance for loan losses | | $ | 23,415 | | | $ | 60,629 | |
Loans with allocated allowance for loan losses | | | 88,354 | | | | 87,823 | |
Total | | $ | 111,769 | | | $ | 148,452 | |
| | | | | | | | |
Amount of the allowance for loan losses allocated | | $ | 7,358 | | | $ | 9,040 | |
| | | | | | | | |
Amount of nonaccrual loans classified as impaired | | $ | 76,261 | | | $ | 71,755 | |
| | | | | | | | |
| | June 30, 2010 | |
(Dollars in thousands) | | Total Impaired Loans | | | Impaired Loans With Allocated Allowance | | | Amount of Allowance Allocated | | | Impaired Loans With No Allocated Allowance | |
Commercial | | $ | 4,433 | | | $ | 2,227 | | | $ | 550 | | | $ | 2,206 | |
Commercial Real Estate | | | 90,450 | | | | 73,836 | | | | 5,093 | | | | 16,614 | |
Residential | | | 14,410 | | | | 10,172 | | | | 998 | | | | 4,238 | |
Consumer | | | 100 | | | | 100 | | | | 100 | | | | - | |
HELOC | | | 2,376 | | | | 2,019 | | | | 617 | | | | 357 | |
Total | | $ | 111,769 | | | $ | 88,354 | | | $ | 7,358 | | | $ | 23,415 | |
| | December 31, 2009 | |
(Dollars in thousands) | | Total Impaired Loans | | | Impaired Loans With Allocated Allowance | | | Amount of Allowance Allocated | | | Impaired Loans With No Allocated Allowance | |
Commercial | | $ | 6,210 | | | $ | 4,847 | | | $ | 1,455 | | | $ | 1,363 | |
Commercial Real Estate | | | 123,452 | | | | 70,868 | | | | 5,455 | | | | 52,584 | |
Residential | | | 16,261 | | | | 10,158 | | | | 1,704 | | | | 6,103 | |
Consumer | | | 699 | | | | 699 | | | | 274 | | | | - | |
HELOC | | | 1,830 | | | | 1,251 | | | | 152 | | | | 579 | |
Total | | $ | 148,452 | | | $ | 87,823 | | | $ | 9,040 | | | $ | 60,629 | |
Indirect auto loans and consumer loans generally are not analyzed individually and or separately identified for impairment disclosures. These loans are grouped into pools and assigned risk categories based on their current payment status and management’s assessment of risk inherent in the various types of loans. The allocations are based on the same factors mentioned above.
Based on an analysis performed by management at June 30, 2010, the allowance for loan losses is considered to be adequate to cover estimated loan losses in the portfolio as of that date. However, management’s judgment is based upon our recent historical loss experience, the level of non-performing and delinquent loans, information known today and a number of assumptions about future events, which are believed to be reasonable, but which may or may not prove valid. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that significant additional increases in the allowance for loan losses will not be required. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agenci es may require us to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
As previously discussed in Note 6 to the unaudited consolidated financial statements, TIB Bank has entered into a Consent Order with bank regulatory agencies. In addition to increasing capital ratios, the Bank has agreed to improve its asset quality by reducing the balance of assets classified substandard and doubtful in the report from the most recent regulatory examination through collection, disposition, charge-off or improvement in the credit quality of the loans.
Charge-offs of $1.9 million related to foreclosed loans were recorded during the second quarter of 2010 of which $1.8 million was reserved for. Valuation adjustments on OREO of $4.3 million were primarily due to updated appraisals, comparable sales and local market trends in asking prices and data from recent closed transactions. Net activity relating to other real estate owned loans during the second quarter of 2010 is as follows:
OREO Activity | |
(Dollars in thousands) | |
| | | |
OREO as of March 31, 2010 | | $ | 41,078 | |
Real estate acquired | | | 4,293 | |
Valuation Adjustments | | | (4,250 | ) |
Properties sold | | | (1,863 | ) |
Other | | | (559 | ) |
OREO as of June 30, 2010 | | $ | 38,699 | |
| | | | |
An expanded analysis of the significant components of other real estate owned as of June 30, 2010 is as follows:
OREO Analysis as of June 30, 2010 | |
(Dollars in thousands) | |
Property Description | | Original Loan Amount | | | Original LTV | | | Carrying Value at June 30, 2010 | |
Acquired in Second Quarter of 2010 | | | | | | | | | |
Commercial real estate (3 loans) | | | | | | | | $ | 2,840 | |
Other 1-4 family residential (4 loans) | | | | | | | | | 1,373 | |
| | | | | | | | $ | 4,213 | |
| | | | | | | | | | |
Acquired Prior to the Second Quarter of 2010 | | | | | | | | | | |
Seven undeveloped commercial lots | | $ | 13,500 | | | | 50 | % | | $ | 8,245 | |
Luxury boutique hotel in Southwest Florida | | | 9,775 | | | | 88 | % | | | 6,755 | |
B Bayfront land in the Florida Keys | | | 5,622 | | | | 54 | % | | | 5,592 | |
Vacant land in Southwest Florida | | | 5,826 | | | | 60 | % | | | 4,412 | |
F Five 1-4 family residential condominiums (new construction) | | | 7,066 | * | | | 72 | % | | | 3,841 | |
Luxury 1-4 family residential in Southwest Florida | | | 2,493 | | | | 67 | % | | | 1,610 | |
Four commercial 1-4 family residential loans Southwest Florida | | | 1,933 | | | | 73-80 | % | | | 626 | |
Commercial real estate (3 loans) | | | | | | | | | | | 1,817 | |
Other land (4 Lots – 3 loans) | | | | | | | | | | | 931 | |
Other 1-4 family residential (2 loans) | | | | | | | | | | | 657 | |
| | | | | | | | | | $ | 34,486 | |
Total OREO | | | | | | | | | | $ | 38,699 | |
* Original loan financed the construction of eight units.
Capital and Liquidity
Capital
If a bank is classified as undercapitalized the bank is subject to certain restrictions. One of the restrictions is that the bank may not accept, renew or roll over any brokered deposits (including CDARs deposits) without being granted a waiver of the prohibition by the FDIC. As of June 30, 2010, we had $33.1 million of brokered deposits consisting of $22.2 million of reciprocal CDARs deposits and $10.9 million of traditional brokered deposits representing approximately 2.5% of our total deposits. CDARs deposits of $20.2 million and traditional brokered deposits of $571,000 mature within the next twelve months. An inability to roll over or raise funds through CDARs deposits or brokered deposits could have a material adverse impact on our liquidity. Additional restrictions include limitations on deposit pricing, the preclusion from paying “golden parachute” severance payments and the requirement to notify the bank regulatory agencies of certain significant events.
On July 2, 2009, TIB Bank entered into a Memorandum of Understanding, which is an informal agreement, with bank regulatory agencies that it will move in good faith to increase its Tier 1 leverage capital ratio to not less than 8% and its total risk-based capital ratio to not less than 12% by December 31, 2009 and maintain these higher ratios for as long as this agreement is in effect. At June 30, 2010 and December 31, 2009, these elevated capital ratios were not met. On July 2, 2010, the Bank entered a Consent Order, a formal agreement with the bank regulatory agencies under which, among other things, the Bank has agreed to maintain a Tier 1 capital ratio of at least 8% of total assets and a total risk based capital ratio of at least 12% within 90 days. The Consent Order also governs certain aspects of the Bank’s operati ons including a requirement that it reduce the balance of assets classified substandard and doubtful by at least 70% over a two-year period, and not undertake asset growth of 5% or more per year without prior approval from the regulatory agencies. The Consent Order supersedes the Memorandum of Understanding.
As of June 30, 2010, the Company’s ratio of total capital to risk-weighted assets was 7.1% and the leverage ratio was 2.7% which fell below the levels required to be considered adequately capitalized. The decline in the leverage ratio from December 31, 2009 is primarily related to net losses incurred.
On December 5, 2008, under the U.S. Department of Treasury’s (the “Treasury”) Capital Purchase Program (the “CPP”) established under the Troubled Asset Relief Program (the “TARP”) that was created as part of the Emergency Economic Stabilization Act of 2008 (the “EESA”), the Company issued to Treasury 37,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, $0.10 par value, having a liquidation amount of $1,000 per share, and a ten-year warrant to purchase 1,106,389 shares of common stock at an exercise price of $5.02 per share, for aggregate proceeds of $37.0 million. Approximately $32.9 million was allocated to the initial carrying value of the preferred stock and $4.1 million to the warrant based on their relative estimated fair values on the issue date. The fair value of the preferred stock was determined using a discount rate of 13% and an assumed life of 10 years and resulted in an estimated fair value of $23.1 million. The fair value of the warrant was determined using the Black-Scholes Model utilizing a 0% dividend yield, a 2.67% risk-free interest rate, a 43% volatility assumption and 10 year expected life. These assumptions resulted in an estimated fair value of $2.9 million for the warrant. Both the number of shares of common stock underlying the warrant and the exercise price are subject to adjustment in accordance with customary anti-dilution provisions and upon certain issuances of the Company’s common stock or stock rights at less than 90% of market value. The $37.0 million of proceeds received were allocated between the preferred stock and the warrant based on their relative fair values. This resulted in the preferred stock being recognized at a discount from its $37.0 million liquidation preference by an amount equal to the relative fair value of the warrant. The discount is currently being accreted using the constant effective yield method over the first five years. Accretion in the amount of $380,000 and $434,000 was recorded during the first six months of 2010 and 2009, respectively. During the first six months of 2009, $823,000 of dividends were recorded. The total capital raised through this issue qualifies as Tier 1 regulatory capital and can be used in calculating all regulatory capital ratios.
Cumulative preferred stock dividends are payable quarterly at a 5% annual rate on the per share liquidation amount for the first five years and 9% thereafter. Under the original terms of the CPP, the Company may not redeem the preferred stock for three years unless it finances the redemption with the net cash proceeds from sales of common or preferred stock that qualify as Tier 1 regulatory capital (qualified equity offering), and only once such proceeds total at least $9.3 million. All redemptions, whether before or after the first three years, would be at the liquidation amount per share plus accrued and unpaid dividends and are subject to prior regulatory approval.
The Company received a request from the Federal Reserve Bank of Atlanta for the Company’s Board of Directors to adopt a resolution that it will not make any payments or distributions on the outstanding trust preferred securities without the prior written approval of the Reserve Bank. The Board adopted this resolution on October 5, 2009. The Company has also notified the Treasury of its election to defer the dividend payment on the Series A preferred stock issued under TARP beginning in November 2009.
The Company may not declare or pay dividends on its common stock or, with certain exceptions, repurchase common stock without first having paid all accrued cumulative preferred dividends that are due. For three years from the issue date, the Company also may not increase its common stock dividend rate above a quarterly rate of $0.0589 per share or repurchase its common shares without Treasury’s consent, unless Treasury has transferred all the preferred shares to third parties or the preferred stock has been redeemed.
To be eligible for the CPP, the Company also agreed to comply with certain executive compensation and corporate governance requirements of the EESA, including a limit on the tax deductibility of executive compensation above $500,000. The specific rules covering these requirements were recently developed by Treasury and other government agencies. Additionally, under the EESA, Congress has the ability to impose “after-the-fact” terms and conditions on participants in the CPP. As a participant in the CPP, the Company may be subject to any such retroactive terms and conditions. The Company cannot predict whether, or in what form, additional terms or conditions may be imposed.
The American Recovery and Reinvestment Act (the “ARRA”) became law on February 17, 2009. Among its many provisions, the ARRA imposes certain new executive compensation and corporate expenditure limits on all current and future TARP recipients, including the Company, that are in addition to those previously announced by the Treasury. These limits are effective until the institution has repaid the Treasury, which is now permitted under the ARRA without penalty and without the need to raise new capital, subject to the Treasury’s consultation with the recipient’s appropriate regulatory agency.
Due to the contracting economic conditions, the higher level of nonperforming assets, the potential for further operating losses and the agreement to increase its capital under the Consent Order, the Company is proceeding with plans to increase its capital. These plans will likely result in the issuance of additional shares of common stock and securities convertible into common stock. While management believes we have sufficient capital to continue as a going concern, if we are unable to raise additional capital and/or we incur significant additional losses and are unable to comply with the terms of the Consent Order, uncertainty arises about our ability to continue as a going concern and we may be subject to further regulatory enforcement actions.
On June 29, 2010, the Company and the Bank entered into a definitive agreement with NAFH for the investment of up to $350 million in TIB through the purchase of common stock, preferred stock and a warrant. Pursuant to the definitive agreement, the Company agreed to sell to NAFH, at the closing of the investment, 700 million shares of its common stock at a purchase price of $0.15 per share and 70,000 shares of newly created mandatorily convertible participating voting preferred stock at a purchase price of $1,000 per share for a cumulative total of $175 million. The preferred stock will have a liquidation preference of $1,000 per share and each share of preferred stock will be convertible into a number of shares of the Company’s common stock equal to the liquidation preference divided by $0.15 (subject to custo mary anti-dilution adjustments). After giving effect to the NAFH investment, it is expected that NAFH would own approximately 99% of the Company’s common stock (on an as-converted basis). The Company also intends to conduct a rights offering to legacy shareholders of rights to purchase up to 149 million shares of common stock at a price of $0.15 per share, which would raise up to $22.4 million, which would equate to 12% of the Company’s pro-forma fully diluted equity. The record date for the rights offering was July 12, 2010. In addition, during the 18-month period following the closing, NAFH will have the right to invest up to an additional $175 million in preferred stock and/or common stock on the above terms. Upon closing of the investment, each of the Company and the Bank will add experienced bankers R. Eugene (Gene) Taylor, Christopher (Chris) G. Marshall, R. Bruce Singletary and Kenneth (Ken) A. Posner to its board of directors, along w ith other directors to be designated by NAFH. The investment is subject to satisfaction or waiver of certain closing conditions, including reaching an agreement with the Treasury to repurchase the preferred stock and warrant issued under the Troubled Asset Relief Program Capital Purchase Program on terms acceptable to NAFH, the receipt by NAFH and the Company of the requisite governmental and regulatory approvals as well as the approval of the NASDAQ Stock Market to issue the common stock, preferred stock and warrant in reliance on the shareholder approval exemptions set forth in NASDAQ Rule 5635(f). While the NAFH investment is expected to close in the third quarter of 2010, there is no assurance it will close during the quarter, or ever. At this time, all the applications required to be filed with regulatory agencies have been filed and we have reached an agreement on the significant terms of the repurchase of the Preferred Stock and warrant issued to the Treasury under the TARP Capit al Purchase Program.
If the investment by NAFH is not consummated, the Board of Directors and management team intend to seek other strategic alternatives including but not limited to the sale of certain assets, all or a portion of the Company, or seeking a complementary partner in a merger of equals or where the Company is acquired. There is no assurance the Company will be successful in entering into any agreement or closing such an alternative transaction.
Liquidity
The goal of liquidity management is to ensure the availability of an adequate level of funds to meet the loan demand and deposit withdrawal needs of the Company’s customers. We manage the levels, types and maturities of earning assets in relation to the sources available to fund current and future needs to ensure that adequate funding will be available at all times.
In addition to maintaining a stable core deposit base, we seek to maintain adequate liquidity primarily through the use of investment securities, short term investments such as federal funds sold and unused borrowing capacity. The Bank has invested in Federal Home Loan Bank stock for the purpose of establishing credit lines with the Federal Home Loan Bank. The credit availability to the Bank is based on a percentage of the Bank’s total assets as reported in its most recent quarterly financial information submitted to the Federal Home Loan Bank and subject to the pledging of sufficient collateral. At June 30, 2010, there were $125.0 million in advances outstanding in addition to $25.2 million in letters of credit including $25.1 million used in lieu of pledging securities to the State of Florida to collateraliz e governmental deposits. On January 7, 2010, the FHLB notified the Bank that the credit availability has been rescinded and the rollover of existing advances outstanding is limited to twelve months or less.
The Bank had unsecured overnight federal funds purchased accommodations up to a maximum of $7.5 million from its correspondent bank and a secured repurchase agreement with a maximum credit availability of $23.6 million as of June 30, 2010. On August 11, 2010, the Bank was notified that the unsecured accommodation was terminated and the secured repurchase agreement availability was increased to $26.3 million. As of June 30, 2010, collateral availability under our agreement with the Federal Reserve Bank of Atlanta (“FRB”) provides for up to $86.8 million of borrowing availability from the FRB discount window. We believe that we have adequate funding sources through unused borrowing capacity from our correspondent banks and FRB, available cash, unpledged investment securities, loan principal repayment and potential as set maturities and sales to meet our foreseeable liquidity requirements.
As of June 30, 2010, our holding company had cash of approximately $341,000. This cash is available for providing capital support to the Bank and for other general corporate purposes. The Company received a request from the FRB for the Company’s Board of Directors to adopt a resolution that it will not declare or pay any dividends on its outstanding common or preferred stock, nor will make any payments or distributions on the outstanding trust preferred securities or corresponding subordinated debentures without the prior written approval of the FRB. The Board adopted this resolution on October 5, 2009. The Company notified the trustees of its $20 million trust preferred securities due July 7, 2036 and its $5 million trust preferred securities due July 31, 2031 of its election to defer interest paym ents on the trust preferred securities beginning with the payments due in October 2009. In January 2010, the Company notified the trustees of its $8 million trust preferred securities due September 7, 2030 of its election to defer interest payments on the trust preferred securities beginning with the payment due March 2010. The Company also notified the Treasury of its election to defer the dividend payment on the Series A preferred stock issued under TARP beginning in November 2009. Deferral of the trust preferred securities is allowed for up to 60 months without being considered an event of default. Additionally, the Company may not declare or pay dividends on its capital stock, including dividends on preferred stock, or, with certain exceptions, repurchase capital stock without first having paid all trust preferred interest and all cumulative preferred dividends that are due. If dividends on the Series A preferred stock are not paid for six quarters, whether or not consecutive, the Treasury has the right to appoint two members to the Board of Directors of the Company. At this time it is unlikely that the Company will resume payment of cash dividends on its common stock for the foreseeable future. As previously announced, we have entered into a definitive agreement with NAFH for the investment of up to $350 million in the Company through the purchase of common stock, preferred stock and warrant. For additional information on the potential NAFH investment, refer to Note 1 of the unaudited consolidated financial statements.
Asset and Liability Management
Closely related to liquidity management is the management of the relative interest rate sensitivity of interest-earning assets and interest-bearing liabilities. The Company manages its interest rate sensitivity position to manage net interest margins and to minimize risk due to changes in interest rates. As a secondary measure of interest rate risk, we review and evaluate our gap position as presented below as part of our asset and liability management process.
(Dollars in thousands) | | 3 Months or Less | | | 4 to 6 Months | | | 7 to 12 Months | | | 1 to 5 Years | | | Over 5 Years | | | Total | |
Interest-earning assets: | | | | | | | | | | | | | | | | | | |
Loans | | $ | 354,647 | | | $ | 38,213 | | | $ | 128,981 | | | $ | 421,154 | | | $ | 157,605 | | | $ | 1,100,600 | |
Investment securities-taxable | | | 36,057 | | | | - | | | | - | | | | 1,355 | | | | 241,955 | | | | 279,367 | |
Investment securities-tax exempt | | | - | | | | - | | | | 276 | | | | 1,121 | | | | 1,681 | | | | 3,078 | |
Marketable equity securities | | | 176 | | | | - | | | | - | | | | - | | | | - | | | | 176 | |
FHLB stock | | | 10,447 | | | | - | | | | - | | | | - | | | | - | | | | 10,447 | |
InInterest-bearing deposits in other banks | | | 139,278 | | | | - | | | | - | | | | - | | | | - | | | | 139,278 | |
Total interest-earning assets | | | 540,605 | | | | 38,213 | | | | 129,257 | | | | 423,630 | | | | 401,241 | | | | 1,532,946 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
NOW accounts | | | 194,663 | | | | - | | | | - | | | | - | | | | - | | | | 194,663 | |
Money market | | | 171,495 | | | | - | | | | - | | | | - | | | | - | | | | 171,495 | |
Savings deposits | | | 73,059 | | | | - | | | | - | | | | - | | | | - | | | | 73,059 | |
Time deposits | | | 107,438 | | | | 118,028 | | | | 353,222 | | | | 145,624 | | | | 43 | | | | 724,355 | |
Subordinated debentures | | | 25,000 | | | | - | | | | - | | | | - | | | | 8,000 | | | | 33,000 | |
Other borrowings | | | 103,894 | | | | - | | | | 10,000 | | | | 115,000 | | | | - | | | | 228,894 | |
Total interest-bearing liabilities | | | 675,549 | | | | 118,028 | | | | 363,222 | | | | 260,624 | | | | 8,043 | | | | 1,425,466 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest sensitivity gap | | $ | (134,944 | ) | | $ | (79,815 | ) | | $ | (233,965 | ) | | $ | 163,006 | | | $ | 393,198 | | | $ | 107,480 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative interest sensitivity gap | | $ | (134,944 | ) | | $ | (214,759 | ) | | $ | (448,724 | ) | | $ | (285,718 | ) | | $ | 107,480 | | | $ | 107,480 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative sensitivity ratio | | | (8.8 | %) | | | (14.0 | %) | | | (29.3 | %) | | | (18.6 | %) | | | 7.0 | % | | | 7.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
We are cumulatively liability sensitive through the five-year time period, and asset sensitive in the over five year timeframe above. Certain liabilities such as non-indexed NOW and savings accounts, while technically subject to immediate re-pricing in response to changing market rates, historically do not re-price as quickly or to the extent as other interest-sensitive accounts. Approximately 13% of our deposit funding is comprised of non-interest-bearing liabilities and total interest-earning assets are greater than the total interest-bearing liabilities. Therefore it is anticipated that, over time, the effects on net interest income from changes in asset yield will be greater than the change in expense from liability cost. Generally, we expect loan and investment yields and deposit costs to stabilize. However, deposit rates could incr ease due to demand in financial markets, banking system and other local markets for liquidity which may be reflected in elevated pricing competition for deposits. The predominant drivers to increase net interest income are the volume and composition of earning assets, the interest rates paid on our deposits and the net change in non-performing assets.
Interest-earning assets and time deposits are presented based on their contractual terms. It is anticipated that run off in any deposit category will be approximately offset by new deposit generation.
As a primary measure of our interest rate risk, we employ a financial model derived from our assets and liabilities which simulates the effect of various changes in interest rates on our projected net interest income. This financial model is our principal tool for measuring and managing interest rate risk. Many assumptions regarding the timing and sensitivity of our assets and liabilities to a change in interest rates are made. We continually review and update these assumptions. This model is updated monthly for changes in our assets and liabilities and we model different interest rate scenarios based upon current and projected economic and interest rate conditions. We analyze the results of these simulations and develop tactics and strategies to attempt to mitigate, where possible, the projected unfavorable impact of various interest rate scenarios on our projected net interest income. We also develop tactics and strategies to increase our net interest margin and net interest income that are consistent with our operating policies.
Commitments
The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. The Bank uses the same credit policies in making commitments to extend credit and generally uses the same credit policies for letters of credit as it does for on-balance sheet instruments.
Commitments to extend credit are legally binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since some of these commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. At June 30, 2010, total unfunded loan commitments were approximately $63.5 million.
Standby letters of credit are conditional commitments issued by the Bank to assure the performance or financial obligations of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. The Bank generally holds collateral and/or obtains personal guarantees supporting these commitments. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements. At June 30, 2010, commitments under standby letters of credit aggregated approximately $1.1 million.
The Company believes the likelihood of the unfunded loan commitments and unfunded letters of credit either needing to be totally funded or funded at the same time is low. However, should significant funding requirements occur, we have available borrowing capacity from various sources as discussed in the “Capital and Liquidity” section above.
Appendix E
Information included under “Quantitative And Qualitative Disclosures About Market Risk” in TIB Financial Corp.’s Annual Report on Form 10-K for the year ended December 31, 2009.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk that a financial institution’s earnings and capital, or its ability to meet its business objectives, will be adversely affected by movements in market rates or prices such as interest rates, foreign exchange rates, equity rates, equity prices, credit spreads and/or commodity prices. The Company has assessed its market risk as predominately interest rate risk.
The estimated interest rate risk as of December 31, 2009 was analyzed using simulation analysis of the Company’s sensitivity to changes in net interest income under varying assumptions for changes in market interest rates. The Bank uses standardized assumptions run against Bank data by an outsourced provider of Asset Liability modeling. The model derives expected interest income and interest expense resulting from an immediate two percentage point increase or decrease parallel shift in the yield curve. The standard parallel yield curve shift uses the implied forward rates and a parallel shift in interest rates to measure the relative risk of change in the level of interest rates.
The analysis indicates an immediate 200 basis point parallel interest rate increase would result in a decrease in net interest income of approximately $398,000 or -1% over a twelve month period. While a 200 basis point parallel interest rate decrease would result in an increase in net interest income of approximately $338,000 or 1% over a twelve month period.
A non-parallel yield curve twist is used to estimate risk related to the level of interest rates and changes in the slope or shape of the yield curve using static rates. The increase or decrease steepening/twist of the yield curve is “ramped” over a twelve month period. Yield curve twists change both the level and slope of the yield curve, are more realistic than parallel yield curve shifts and are more useful for planning purposes. As an example, a 300 basis point yield twist increase would result in short term rates increasing 300 basis points and long term rates would increase approximately 100 basis points over a 12 month period. This scenario reflects a rapid shift in monetary policy by the Federal Reserve which could occur if the Federal Reserve increased short term rates by 300 basis points over a 12 month period.
Such, a 300 basis point yield curve twist increase is projected to result in a decrease in net interest income of approximately $666,000 or -1% over a twelve month period.
The projected impact on our net interest income of a 200 basis point parallel increase and decrease, respectively, of the yield curve and a 300 basis point yield curve twist increase of short-term rates are summarized below.
| December 31, 2009 | | |
| Parallel Shift | Twist | | | |
Twelve Month Period | -2% +2% | +300%/100% | | | |
| | | | | |
Percentage change in net interest income | +1% -1% | -1% | | | |
We attempt to manage and moderate the variability of our net interest income due to changes in the level of interest rates and the slope of the yield curve by generating adjustable rate loans and managing the interest rate sensitivity of our investment securities, wholesale funding, and Fed Funds positions consistent with the re-pricing characteristics of our deposits and other interest bearing liabilities. The above projections assume that management does not take any measures to change the interest rate sensitivity of the Bank during the simulation period.
Appendix F
Information included under “Quantitative And Qualitative Disclosures About Market Risk” in TIB Financial Corp.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk that a financial institution’s earnings and capital, or its ability to meet its business objectives, will be adversely affected by movements in market rates or prices such as interest rates, foreign exchange rates, equity rates, equity prices, credit spreads and/or commodity prices. The Company has assessed its market risk as predominately interest rate risk.
The estimated interest rate risk as of June 30, 2010 was analyzed using simulation analysis of the Company’s sensitivity to changes in net interest income under varying assumptions for changes in market interest rates. The Bank uses standardized assumptions run against Bank data by an outsourced provider of Asset Liability modeling. The model derives expected interest income and interest expense resulting from an immediate two percentage point increase or decrease parallel shift in the yield curve. The standard parallel yield curve shift uses the implied forward rates and a parallel shift in interest rates to measure the relative risk of change in the level of interest rates.
The analysis indicates an immediate 200 basis point parallel interest rate increase would result in a decrease in net interest income of approximately $221,000, or -0.5%, over a twelve month period.
A non-parallel yield curve twist is used to estimate risk related to the level of interest rates and changes in the slope or shape of the yield curve using static rates. The increase or decrease steepening/twist of the yield curve is “ramped” over a twelve month period. Yield curve twists change both the level and slope of the yield curve, are more realistic than parallel yield curve shifts and are more useful for planning purposes. As an example, a 500 basis point yield curve twist increase would result in short term rates increasing 600 basis points and long term rates would increase approximately 300 basis points over a 12 month period. This scenario reflects a potential rapid shift in monetary policy by the Federal Reserve which could occur if the Federal Reserve increased short term rates by 600 bas is points over a 12 month period.
Such a 500 basis point yield curve twist increase is projected to result in an increase in net interest income of approximately $1,844,000, or 4%, over a twelve month period.
The projected impact on our net interest income of a 200 basis point parallel increase of the yield curve and a 500 basis point yield curve twist increase of short-term rates are summarized below.
| | June 30, 2010 | |
| | Parallel Shift | Twist | |
Twelve Month Period | | | +2 | % | | | +600%/300 | % |
| | | | | | | | |
Percentage change in net interest income | | | -0.5 | % | | | +4 | % |
We attempt to manage and moderate the variability of our net interest income due to changes in the level of interest rates and the slope of the yield curve by generating adjustable rate loans and managing the interest rate sensitivity of our investment securities, wholesale funding, and Fed Funds positions consistent with the re-pricing characteristics of our deposits and other interest bearing liabilities. The above projections assume that management does not take any measures to change the interest rate sensitivity of the Bank during the simulation period.
TIB FINANCIAL CORP. 599 9TH STREET NORTH, SUITE 101 NAPLES, FL 34102-5624 | VOTE BY INTERNET - — www.proxyvote.comwww.proxyvote.com -- Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 P.M. Eastern Time the day before the cut-offcutoff date or meeting date. Have your proxy card in hand when you access the webWeb site and follow the instructions to obtain your records and to create an electronic voting instruction form. |
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1. For approval of an amendment to the Company’s Restated Articles of Incorporation to increase the number of authorized shares of the Company’s Common Stock as described in the accompanying proxy statement.
2. For approval of an amendment to the Company’s Restated Articles of Incorporation to effect a reverse stock split as described in the accompanying proxy statement.
3. For approval of an amendment to the Company’s Restated Articles of Incorporation to permit shareholders to act by written consent as described in the accompanying proxy statement.
In their discretion, the proxies are authorized to vote upon such of the matters as may properly come before the Special Meeting. This proxy revokes all prior proxies with respect to the Special Meeting and may be revoked prior to its exercise. Unless otherwise specified, this proxy will be voted for all three of the above proposals and in the discretion of the persons named as proxies on all other matters that may properly come before the Special Meeting or any adjournments thereof. IMPORTANT PLEASE MARK, SIGN BELOW, DATE AND RETURN THIS PROXY PROMPTLY IN THE ENVELOPE FURNISHED.
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Important Notice Regarding the Availability of Proxy Materials for the AnnualSpecial Meeting: TheThis Proxy Statement, TIB Financial Corp.’s Proxy Statement for the 2010 Annual Meeting of
Shareholders and Annual Report on Form 10K report to shareholders are available at https://materials.proxyvote.com/872449[●] (for information only).
PROXY
TIB FINANCIAL CORP.
PROXY TIB FINANCIAL CORP. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned shareholder hereby appoints [●] and [●], and each or any of them, with full power of substitution, as Proxies to represent and to vote, as designated on the reverse, all the shares of Common Stock of TIB Financial Corp. (the “Company”), held of record by the undersigned on October 1, 2010, at the Special Meeting of Shareholders (the “Special Meeting”) to be held on December [●], 2010, or any adjournments thereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
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The undersigned stockholder hereby appoints Howard B. Gutman and Paul O. Jones, Jr., and each or any of them, with full power of substitution, as Proxies to represent and to vote, as designated on the reverse, all the shares of common stock of TIB Financial Corp. (the "Company"), held of record by the undersigned on April 9, 2010, at the Annual Meeting of Shareholders (the "Annual Meeting") to be held on May 25, 2010, or any adjournments thereof.
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