UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2015
OR
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| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number
FIRST COMMUNITY FINANCIAL PARTNERS, INC.
(Exact name of registrant as specified in its charter)
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| Illinois | | 20-4718752 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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| 2801 Black Road, Joliet, IL | | 60435 |
| (Address of Principal Executive Offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (815) 725-0123
Securities registered pursuant to Section 12(b) of the Act:
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| Common Stock, par value $1.00 per share | | The NASDAQ Stock Market LLC |
| (Title of each class) | | (Name of cash exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is (§ 229.405) not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o | | Accelerated filer x |
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Non-accelerated filer o (Do not check if a smaller reporting company) | | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The aggregate market value of the voting shares held by non-affiliates of the Registrant was approximately $86,004,674 as of June 30, 2015, the last business day of the Registrant’s most recently completed second fiscal quarter. Solely for the purpose of this computation, it has been assumed that executive officers and directors of the Registrant are “affiliates,” and the Registrant is not bound by this determination for any other purpose.
There were issued and outstanding 17,165,864 shares of the Registrant’s common stock as of February 29, 2016.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 19, 2016 are incorporated by reference into Part III hereof.
FIRST COMMUNITY FINANCIAL PARTNERS, INC.
FORM 10-K
December 31, 2015
PART I
Item 1. Business
First Community
First Community Financial Partners, Inc. (“First Community” or the “Company”) was formed as a bank holding company in 2006. First Community is headquartered in Joliet, Illinois. First Community has one banking subsidiary, First Community Financial Bank (the “Bank”). The Bank is the result of the consolidation of our four legacy banking subsidiaries and affiliates (the “Consolidation”).
As of December 31, 2015, on a consolidated basis, First Community had total assets of $1.0 billion, total deposits of $866.0 million and total shareholders’ equity of $103.0 million. For the Company’s complete financial information as of December 31, 2015 and 2014 and for each of the years then ended, see Item 8. Financial Statements and Supplementary Data.
The Bank
The Bank is a full-service community bank principally engaged in the business of commercial, family and personal banking, and offers customers a broad range of loan, deposit, and other financial products and services through six full-service banking offices located in Cook, DuPage, and Will Counties, Illinois.
The Bank’s primary business is making loans and accepting deposits. The Bank also offers customers a variety of financial products and services that are related or ancillary to loans and deposits, including cash management, funds transfers, bill payment and other online banking transactions, automated teller machines, and safe deposit boxes.
The Bank’s primary lending area consists of the counties where its banking offices are located, and contiguous counties in the State of Illinois. The Bank derives the most significant portion of its revenues from these geographic areas.
The Bank originates deposits predominantly from the areas where its banking offices are located. The Bank relies on its favorable locations, customer service, competitive pricing, internet and mobile banking, and related deposit services, such as cash management, to attract and retain deposits. While the Bank accepts certificates of deposit in excess of FDIC deposit insurance limits, the Bank generally does not solicit such deposits because they are more difficult to retain than core deposits and at times are more costly than wholesale deposits.
Lending Activities
The Bank’s loan portfolio consists primarily of non-residential real estate loans (owner occupied commercial real estate and investor commercial real estate, multi-family, construction and land development loans), which represented 57.93% of the total loan portfolio, or $447.4 million, at December 31, 2015. At December 31, 2015, $34.3 million, or 4.44% of the total loan portfolio, consisted of multi-family mortgage loans; $381.1 million, or 49.34% of the total loan portfolio, consisted of other commercial real estate loans; $179.6 million, or 23.26% of the total loan portfolio, consisted of commercial loans; $22.1 million, or 2.86%, of the total loan portfolio, consisted of construction and land loans; and $135.9 million, or 17.59% of the total loan portfolio, consisted of one-to-four family residential mortgage loans, including home equity loans and lines of credit. In addition, the Bank had farm and agricultural loans totaling $10.0 million, or 1.29%, and consumer and other loans totaling $9.4 million, or 1.22%, of the total portfolio as of December 31, 2015.
Deposit Activities
The Bank’s deposit accounts consist principally of savings accounts, NOW accounts, checking accounts, money market accounts, certificates of deposit, and individual retirement accounts (“IRAs”) and other qualified plan accounts. The Bank also provides commercial checking accounts and related services such as cash management, as well as provide low-cost checking account services.
At December 31, 2015, the Bank’s deposits totaled $866.0 million; interest bearing deposits totaled $669.9 million; non-interest bearing demand deposits totaled $196.1 million; savings, money market and NOW account deposits totaled $372.4 million; and certificates of deposit totaled $297.5 million.
Competition
First Community and the Bank face significant competition in both originating loans and attracting deposits. The Chicago metropolitan area has a high concentration of financial institutions, many of which are significantly larger institutions that have greater financial resources than us, and many of which are our competitors to varying degrees. Our competition for loans comes principally from commercial banks, savings banks, mortgage banking companies, the U.S. government, credit unions, leasing companies, insurance companies, real estate conduits and other companies that provide financial services to businesses and individuals. Our most direct competition for deposits has historically come from commercial banks, savings
banks and credit unions. We face additional competition for deposits from Internet-based financial institutions and non-depository competitors such as the mutual fund industry, securities and brokerage firms and insurance companies.
We seek to meet this competition by emphasizing personalized service and efficient decision-making tailored to individual needs. In addition, we reward long-standing relationships with preferred rates and terms on deposit products based on existing and prospective lending business. We do not rely on any individual, group or entity for a material portion of our loans or our deposits.
Employees
At December 31, 2015, First Community and the Bank had 108 full-time employees and 11 part-time employees. The employees are not represented by a collective bargaining unit and we consider our working relationship with our employees to be good.
Internet Website
We maintain a website with the address www.fcbankgroup.com. The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. Other than an investor’s own Internet access charges, we make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we have electronically filed such material with, or furnished such material to, the Securities and Exchange Commission (“SEC”).
SUPERVISION AND REGULATION
General
FDIC-insured institutions, their holding companies and their affiliates are extensively regulated under federal and state law. As a result, our growth and earnings performance may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including the Illinois Department of Financial and Professional Regulation (the “DFPR”), the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Federal Deposit Insurance Corporation (the “FDIC”) and the Bureau of Consumer Financial Protection (the “CFPB”). Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities, accounting rules developed by the Financial Accounting Standards Board, securities laws administered by the SEC and state securities authorities, and anti-money laundering laws enforced by the U.S. Department of the Treasury (the “Treasury”) have an impact on our business. The effect of these statutes, regulations, regulatory policies and accounting rules are significant to our operations and results, and the nature and extent of future legislative, regulatory or other changes affecting FDIC-insured institutions are impossible to predict with any certainty.
Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of FDIC-insured institutions, their holding companies and affiliates that is intended primarily for the protection of the FDIC-insured deposits and depositors of banks, rather than shareholders. These federal and state laws, and the regulations of the bank regulatory agencies issued under them, affect, among other things, the scope of our business, the kinds and amounts of investments banks may make, reserve requirements, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, the ability to merge, consolidate and acquire, dealings with insiders and affiliates and the payment of dividends. In the last several years, we have experienced heightened regulatory requirements and scrutiny following the global financial crisis and as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Although the reforms primarily targeted systemically important financial service providers, their influence filtered down in varying degrees to community banks over time, and the reforms have caused our compliance and risk management processes, and the costs thereof, to increase.
This supervisory and regulatory framework subjects FDIC-insured institutions and their holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that are not publicly available and that can impact the conduct and growth of their business. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors. The regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies.
The following is a summary of the material elements of the supervisory and regulatory framework applicable to First Community and the Bank, beginning with a discussion of the continuing regulatory emphasis on capital levels. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of those that are described. The descriptions are qualified in their entirety by reference to the particular statutory and regulatory provision.
Regulatory Emphasis on Capital
Regulatory capital represents the net assets of a banking organization available to absorb losses. Because of the risks attendant to their business, FDIC-insured institutions are generally required to hold more capital than other businesses, which directly affects our earnings capabilities. Although capital has historically been one of the key measures of the financial health of banks, its role became fundamentally more important in the wake of the global financial crisis, as the banking regulators recognized that the amount and quality of capital held by banks prior to the crisis was insufficient to absorb losses during periods of severe stress. Certain provisions of the Dodd-Frank Act and Basel III, discussed below, establish strengthened capital standards for banking organizations, require more capital to be held in the form of common stock and disallow certain funds from being included in capital determinations. These standards represent regulatory capital requirements that are meaningfully more stringent than those in place previously.
Minimum Required Capital Levels. Bank holding companies have historically had to comply with less stringent capital standards than their bank subsidiaries and have been able to raise capital with hybrid instruments such as trust preferred securities. The Dodd-Frank Act mandated that the Federal Reserve establish minimum capital levels for holding companies on a consolidated basis as stringent as those required for FDIC-insured institutions. As a consequence, the components of holding company permanent capital known as “Tier 1 Capital” were restricted to those capital instruments that were considered Tier 1 Capital for FDIC-insured institutions. A result of this change is that the proceeds of hybrid instruments, such as trust preferred securities, are being excluded from Tier 1 Capital over a phase-out period. However, if such securities were issued prior to May 19, 2010 by bank holding companies with less than $15 billion of assets, they may be retained, subject to certain restrictions. Because we have assets of less than $15 billion, we are able to maintain our trust preferred proceeds as Tier 1 Capital but we have to comply with new capital mandates in other respects and will not be able to raise Tier 1 Capital in the future through the issuance of trust preferred securities.
Our capital standards changed on January 1, 2015 to add the requirements of Basel III, discussed below. The minimum capital standards effective prior to and including December 31, 2014 are:
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| • | A leverage requirement, consisting of a minimum ratio of Tier 1 Capital to total adjusted average quarterly assets of 3% for the most highly-rated banks with a minimum requirement of at least 4% for all others, and |
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| • | A risk-based capital requirement, consisting of a minimum ratio of Total Capital to total risk-weighted assets of 8% and a minimum ratio of Tier 1 Capital to total risk-weighted assets of 4%. |
For these purposes, “Tier 1 Capital” consists primarily of common stock, noncumulative perpetual preferred stock and related surplus less intangible assets (other than certain loan servicing rights and purchased credit card relationships). Total Capital consists primarily of Tier 1 Capital plus “Tier 2 Capital,” which includes other non-permanent capital items, such as certain other debt and equity instruments that do not qualify as Tier 1 Capital, and the Bank’s allowance for loan losses, subject to a limitation of 1.25% of risk-weighted assets. Further, risk-weighted assets for the purpose of the risk-weighted ratio calculations are balance sheet assets and off-balance sheet exposures to which required risk weightings of 0% to 100% are applied.
The Basel International Capital Accords. The risk-based capital guidelines described above are based upon the 1988 capital accord known as “Basel I” adopted by the international Basel Committee on Banking Supervision, a committee of central banks and bank supervisors, as implemented by the U.S. federal banking regulators on an interagency basis. In 2008, the banking agencies collaboratively began to phase-in capital standards based on a second capital accord, referred to as “Basel II,” for large or “core” international banks (generally defined for U.S. purposes as having total assets of $250 billion or more, or consolidated foreign exposures of $10 billion or more). On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced agreement on a strengthened set of capital requirements for banking organizations around the world, known as Basel III, to address deficiencies recognized in connection with the global financial crisis. Because of Dodd-Frank Act requirements, Basel III essentially layers a new set of capital standards on the previously existing Basel I standards.
The Basel III Rule. In July 2013, the U.S. federal banking agencies approved the implementation of the Basel III regulatory capital reforms in pertinent part, and, at the same time, promulgated rules effecting certain changes required by the Dodd-Frank Act (the “Basel III Rule”). In contrast to capital requirements historically, which were in the form of guidelines, Basel III was released in the form of regulations by each of the regulatory agencies. The Basel III Rule is applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies, other than “small bank holding companies” (generally bank holding companies with consolidated assets of less than $1 billion which are not publically traded companies).
The Basel III Rule not only increased most of the required minimum capital ratios effective January 1, 2015, but it introduced the concept of Common Equity Tier 1 Capital, which consists primarily of common stock, related surplus (net of treasury stock), retained earnings, and Common Equity Tier 1 minority interests subject to certain regulatory adjustments. The Basel III Rule also expanded the definition of capital by establishing more stringent criteria that instruments must meet to be considered Additional Tier 1 Capital (Tier 1 Capital in addition to Common Equity) and Tier 2 Capital. A number of instruments that qualified as Tier 1 Capital do not qualify, or their qualifications will change. For example, noncumulative perpetual preferred stock, which qualified as simple Tier 1 Capital, does not qualify as Common Equity Tier 1 Capital, but qualifies as Additional Tier 1 Capital. The Basel III Rule also constrained the inclusion of minority interests, mortgage-servicing assets, and deferred tax assets in capital and requires deductions from Common Equity Tier 1 Capital in the event that such assets exceed a certain percentage of a banking organization’s Common Equity Tier 1 Capital.
The Basel III Rule requires minimum capital ratios beginning January 1, 2015, as follows:
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| • | A new ratio of minimum Common Equity Tier 1 equal to 4.5% of risk-weighted assets; |
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| • | An increase in the minimum required amount of Tier 1 Capital to 6% of risk-weighted assets; |
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| • | A continuation of the current minimum required amount of Total Capital (Tier 1 plus Tier 2) at 8% of risk-weighted assets; and |
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| • | A minimum leverage ratio of Tier 1 Capital to total quarterly adjusted average assets equal to 4% in all circumstances. |
Not only did the capital requirements change but the risk weightings (or their methodologies) for bank assets that are used to determine the capital ratios changed as well. For nearly every class of assets, the Basel III Rule requires a more complex, detailed and calibrated assessment of credit risk and calculation of risk weightings.
Banking organizations (except for large, internationally active banking organizations) became subject to the new rules on January 1, 2015. However, there are separate phase-in/phase-out periods for: (i) the capital conservation buffer; (ii) regulatory capital adjustments and deductions; (iii) nonqualifying capital instruments; and (iv) changes to the prompt corrective action rules. The phase-in periods commenced on January 1, 2016 and extend until 2019.
Well-Capitalized Requirements. The ratios described above are minimum standards in order for banking organizations to be considered “adequately capitalized” under the Prompt Corrective Action rules discussed below. Bank regulatory agencies uniformly encourage banking organizations to hold more capital and be “well-capitalized” and, to that end, federal law and regulations provide various incentives for such organizations to maintain regulatory capital at levels in excess of minimum regulatory requirements. For example, a banking organization that is well-capitalized may: (i) qualify for exemptions from prior notice or application requirements otherwise applicable to certain types of activities; (ii) qualify for expedited processing of other required notices or applications; and (iii) accept, roll-over or renew brokered deposits. Higher capital levels could also be required if warranted by the particular circumstances or risk profiles of individual banking organizations. Moreover, the Federal Reserve’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 Capital less all intangible assets), well above the minimum levels.
Under the capital regulations of the FDIC and Federal Reserve, in order to be well‑capitalized, a banking organization must maintain:
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| • | A new Common Equity Tier 1 Capital ratio to risk-weighted assets of 6.5% or more; |
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| • | A minimum ratio of Tier 1 Capital to total risk-weighted assets of 8% (6% under Basel I); |
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| • | A minimum ratio of Total Capital to total risk-weighted assets of 10% (the same as Basel I); and |
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| • | A leverage ratio of Tier 1 Capital to total quarterly adjusted average assets of 5% or greater. |
In addition, banking organizations that seek the freedom to make capital distributions (including for dividends and repurchases of stock) and pay discretionary bonuses to executive officers without restriction must also maintain 2.5% in Common Equity Tier 1 attributable to a capital conservation buffer to be phased in over three years beginning in 2016. The purpose of the conservation buffer is to ensure that banking organizations maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. Factoring in the fully phased-in conservation buffer increases the minimum ratios depicted above to:
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| • | 7% for Common Equity Tier 1 Ratio, |
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| • | 8.5% for Tier 1 Capital and |
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| • | 10.5% for Total Capital. |
It is possible under the Basel III Rule to be well-capitalized while remaining out of compliance with the capital conservation buffer.
As of December 31, 2015: (i) the Bank was not subject to a directive from its regulatory agencies to increase its capital and (ii) the Bank was “well-capitalized,” as defined by FDIC regulations. As of December 31, 2015, First Community had regulatory capital in excess of the Federal Reserve’s requirements and met the Dodd-Frank Act requirements.
Prompt Corrective Action. An FDIC-insured institution’s capital plays an important role in connection with regulatory enforcement as well. This regime applies to FDIC-insured institutions, not holding companies, and provides escalating powers to bank regulatory agencies as a bank’s capital diminishes. Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators’ powers depends on whether the institution in question is “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” in each case as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution’s asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to sell itself; (iv) restricting transactions between the institution and its affiliates; (v) restricting the interest rate that the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring dismissal of senior executive officers or directors; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution.
Regulation and Supervision of First Community
General. As the sole shareholder of the Bank, we are a bank holding company. As a bank holding company, we are registered with, and are subject to regulation by, the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the “BHCA”). In accordance with Federal Reserve policy, and as now codified by the Dodd-Frank Act, we are legally obligated to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where we might not otherwise do so. Under the BHCA, we are subject to periodic examination by the Federal Reserve. We are required to file with the Federal Reserve periodic reports of our operations and such additional information regarding our operations as the Federal Reserve may require.
Acquisitions, Activities and Change in Control. The primary purpose of a bank holding company is to control and manage banks. The BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding company or any acquisition by a bank holding company of another bank or bank holding company. Subject to certain conditions (including deposit concentration limits established by the BHCA and the Dodd-Frank Act), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States. In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) and state laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company. Furthermore, in accordance with the Dodd-Frank Act, bank holding companies must be well-capitalized and well-managed in order to effect interstate mergers or acquisitions. For a discussion of the capital requirements, see “Regulatory Emphasis on Capital” above.
The BHCA generally prohibits us from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve prior to November 11, 1999 to be “so closely related to banking ... as to be a proper incident thereto.” This authority would permit us to engage in a variety of banking-related businesses, including the ownership and operation of a savings association, or any entity engaged in consumer finance, equipment leasing, the operation of a computer service bureau (including software development) and mortgage banking and brokerage. The BHCA generally does not place territorial restrictions on the domestic activities of nonbank subsidiaries of bank holding companies.
Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. We do not currently operate as a financial holding company.
Federal law also prohibits any person or company from acquiring “control” of an FDIC-insured depository institution or its holding company without prior notice to the appropriate federal bank regulator. “Control” is conclusively presumed to exist
upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may arise under certain circumstances between 10% and 24.99% ownership.
Capital Requirements. Bank holding companies are required to maintain capital in accordance with Federal Reserve capital adequacy requirements, as affected by the Dodd-Frank Act and Basel III. For a discussion of capital requirements, see “-Regulatory Emphasis on Capital” above.
Dividend Payments. Our ability to pay dividends to our shareholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies. As an Illinois corporation, we are subject to the Illinois Business Corporation Act, as amended, which prohibits us from paying a dividend if, after giving effect to the dividend: (i) First Community would be insolvent; (ii) the net assets of First Community would be less than zero; or (iii) the net assets of First Community would be less than the maximum amount then payable to shareholders of First Community who would have preferential distribution rights if we were liquidated. In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends will have to maintain 2.5% in Common Equity Tier 1 attributable to the capital conservation buffer to be phased in over three years beginning in 2016. See “-Regulatory Emphasis on Capital” above.
As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should eliminate, defer or significantly reduce dividends to shareholders if: (i) the company’s net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) the prospective rate of earnings retention is inconsistent with the company’s capital needs and overall current and prospective financial condition; or (iii) the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. The Federal Reserve also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies.
Monetary Policy. The monetary policy of the Federal Reserve has a significant effect on the operating results of financial or bank holding companies and their subsidiaries. Among the tools available to the Federal Reserve to affect the money supply are open market transactions in U.S. government securities, changes in the discount rate on bank borrowings and changes in reserve requirements against bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid on deposits.
Federal Securities Regulation. Our common stock is registered with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Consequently, we are subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act.
Corporate Governance. The Dodd-Frank Act addressed many investor protection, corporate governance and executive compensation matters that will affect most U.S. publicly traded companies. The Dodd-Frank Act increased stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizing the SEC to promulgate rules that allow stockholders to nominate and solicit voters for their own candidates using a company’s proxy materials. The legislation also directed the Federal Reserve to promulgate rules prohibiting excessive compensation paid to executives of bank holding companies, regardless of whether such companies are publicly traded.
Supervision and Regulation of the Bank
General. The Bank is an Illinois-chartered bank. The deposit accounts of the Bank are insured by the FDIC’s Deposit Insurance Fund (“DIF”) to the maximum extent provided under federal law and FDIC regulations. As an Illinois-chartered FDIC-insured bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the DFPR, the chartering authority for Illinois banks, and the FDIC, designated by federal law as the primary federal regulator of insured state banks that, like the Bank, are not members of the Federal Reserve System (“nonmember banks”).
Capital Requirements. Banks are generally required to maintain capital levels in excess of other businesses. For a discussion of capital requirements, see “-Regulatory Emphasis on Capital” above.
Liquidity Requirements. Liquidity is a measure of the ability and ease with which bank assets may be converted to cash. Liquid assets are those that can be converted to cash quickly if needed to meet financial obligations. To remain viable, FDIC-insured institutions must have enough liquid assets to meet their near-term obligations, such as withdrawals by depositors. Because the global financial crisis was in part a liquidity crisis, Basel III also included a liquidity framework that requires FDIC-insured institutions to measure their liquidity against specific liquidity tests. One test, referred to as the Liquidity Coverage Ratio (“LCR”), is designed to ensure that the banking entity has an adequate stock of unencumbered high-quality liquid assets that can be converted easily and immediately in private markets into cash to meet liquidity needs for a 30-calendar day liquidity stress scenario. The other test, known as the Net Stable Funding Ratio (“NSFR”), is designed to promote more medium- and long-term funding of the assets and activities of FDIC-insured institutions over a one-year horizon. These tests provide an incentive for banks and holding
companies to increase their holdings in Treasury securities and other sovereign debt as a component of assets, increase the use of long-term debt as a funding source and rely on stable funding like core deposits (in lieu of brokered deposits).
In addition to liquidity guidelines already in place, the U.S. bank regulatory agencies implemented the LCR in September 2014, which requires large financial firms to hold levels of liquid assets sufficient to protect against constraints on their funding during times of financial turmoil. While the LCR only applies to the largest banking organizations in the country, certain elements are expected to filter down to all insured depository institutions. We are reviewing our liquidity risk management policies in light of the LCR and NSFR.
Continuing De Novo Bank Requirements. Each of FCB Plainfield, FCB Homer Glen and Burr Ridge were chartered as follows:
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| Bank | Charter Date |
| FCB Plainfield | October 28, 2008 |
| FCB Homer Glen | December 15, 2008 |
| Burr Ridge | April 9, 2009 |
As a result, the Bank, which was known as FCB Plainfield prior to the Consolidation, remains subject to certain of the FDIC’s de novo bank requirements until the Bank has been chartered for a period longer than seven years. Until the Bank has been chartered for a period longer than seven years, it is required, among other items, to obtain FDIC approval for any material change to its business plan and to maintain a Tier 1 Leverage Capital Ratio of at least 8%. As of October 28, 2015, the Bank is no longer subject to the de novo bank requirements.
Stress Testing. A stress test is an analysis or simulation designed to determine the ability of a given FDIC-insured institution to deal with an economic crisis. In October 2012, U.S. bank regulators unveiled new rules mandated by the Dodd-Frank Act that require the largest U.S. banks to undergo stress tests twice per year, once internally and once conducted by the regulators, and began recommending portfolio stress testing as a sound risk management practice for community banks. Although stress tests are not officially required for banks with less than $10 billion in assets, they have become part of annual regulatory exams even for banks small enough to be officially exempted from the process. The FDIC now recommends stress testing as means to identify and quantify loan portfolio risk and the Bank has begun evaluating a process for stress testing.
Deposit Insurance. As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system whereby FDIC-insured institutions pay insurance premiums at rates based on their risk classification. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to the regulators. For deposit insurance assessment purposes, an FDIC-insured institution is placed in one of four risk categories each quarter. An institution’s assessment is determined by multiplying its assessment rate by its assessment base. The total base assessment rates range from 2.5 basis points to 45 basis points. The assessment base is calculated using average consolidated total assets minus average tangible equity. At least semi-annually, the FDIC will update its loss and income projections for the DIF and, if needed, will increase or decrease the assessment rates, following notice and comment on proposed rulemaking.
Amendments to the Federal Deposit Insurance Act revised the assessment base against which an FDIC-insured institution’s deposit insurance premiums paid to the DIF are calculated to be its average consolidated total assets less its average tangible equity. This change shifted the burden of deposit insurance premiums toward those large depository institutions that rely on funding sources other than U.S. deposits. Additionally, the Dodd-Frank Act altered the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of total insured deposits and eliminating the requirement that the FDIC pay dividends to FDIC-insured institutions. In lieu of dividends, the FDIC has adopted progressively lower assessment rate schedules that will take effect when the reserve ratio exceeds 1.15%, 2%, and 2.5%. As a consequence, premiums will decrease once the 1.15% threshold is exceeded. The FDIC has until September 3, 2020 to meet the 1.35% reserve ratio target. Several of these provisions could increase the Bank’s FDIC deposit insurance premiums.
The Dodd-Frank Act also permanently established the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per insured depositor.
FICO Assessments. In addition to paying basic deposit insurance assessments, FDIC-insured institutions must pay Financing Corporation (“FICO”) assessments. FICO is a mixed-ownership governmental corporation chartered by the former Federal Home Loan Bank Board pursuant to the Competitive Equality Banking Act of 1987 to function as a financing vehicle for the recapitalization of the former Federal Savings and Loan Insurance Corporation. FICO issued 30-year noncallable bonds of approximately $8.1 billion that mature in 2017 through 2019. FICO’s authority to issue bonds ended on December 12, 1991. Since 1996, federal legislation has required that all FDIC-insured institutions pay assessments to cover interest payments on FICO’s outstanding obligations. The FICO assessment rate is adjusted quarterly and for the fourth quarter of 2015 was 0.60 basis points (60 cents per $100 dollars of assessable deposits).
Supervisory Assessments. Illinois-chartered banks are required to pay supervisory assessments to the DFPR to fund its operations. The amount of the assessment paid by an Illinois bank to the DFPR is calculated on the basis of the institution’s total assets, including consolidated subsidiaries, as reported to the DFPR. During the year ended December 31, 2015, the Bank paid supervisory assessments to the DFPR totaling $94,983.
Dividend Payments. The primary source of funds for First Community is dividends from the Bank. Under the Illinois Banking Act, the Bank generally may not pay dividends in excess of its net profits.
The payment of dividends by any FDIC-insured institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and an FDIC-insured institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, the Bank exceeded its minimum capital requirements under applicable guidelines as of December 31, 2015. Notwithstanding the availability of funds for dividends, however, the FDIC and DFPR may prohibit the payment of dividends by the Bank if it determines such payment would constitute an unsafe or unsound practice. In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends will have to maintain 2.5% in Common Equity Tier 1 attributable to the capital conservation buffer to be phased in over three years beginning in 2016. See “-Regulatory Emphasis on Capital” above.
Insider Transactions. The Bank is subject to certain restrictions imposed by federal law on “covered transactions” between the Bank and its “affiliates.” We are an affiliate of the Bank for purposes of these restrictions, and covered transactions subject to the restrictions include extensions of credit to us, investments in our stock or other securities and the acceptance of our stock or other securities as collateral for loans made by the Bank. The Dodd-Frank Act enhances the requirements for certain transactions with affiliates as of July 21, 2011, including an expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements regarding covered transactions must be maintained.
Limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to directors and officers of First Community and its subsidiaries, to our principal shareholders and to “related interests” of such directors, officers and principal shareholders. In addition, federal law and regulations may affect the terms upon which any person who is a director or officer of First Community or the Bank, or a principal shareholder of First Community, may obtain credit from banks with which the Bank maintains a correspondent relationship.
Safety and Soundness Standards/Risk Management. The federal banking agencies have adopted guidelines that establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.
In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each FDIC-insured institution is responsible for establishing its own procedures to achieve those goals. If an FDIC-insured institution fails to comply with any of the standards set forth in the guidelines, the FDIC-insured institution’s primary federal regulator may require the FDIC-insured institution to submit a plan for achieving and maintaining compliance. If an FDIC-insured institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the FDIC-insured institution to cure the deficiency. Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the FDIC-insured institution’s rate of growth, require the FDIC-insured institution to increase its capital, restrict the rates the FDIC-insured institution pays on deposits or require the FDIC-insured institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty assessments.
During the past decade, the bank regulatory agencies have increasingly emphasized the importance of sound risk management processes and strong internal controls when evaluating the activities of the FDIC-insured institutions they supervise. Properly managing risks has been identified as critical to the conduct of safe and sound banking activities and has become even more important as new technologies, product innovation, and the size and speed of financial transactions have changed the nature of banking markets. The agencies have identified a spectrum of risks facing a banking institution including, but not limited to, credit, market, liquidity, operational, legal, and reputational risk. In particular, recent regulatory pronouncements have focused on operational risk, which arises from the potential that inadequate information systems, operational problems, breaches in internal controls, fraud, or unforeseen catastrophes will result in unexpected losses. New products and services, third-party risk management and cybersecurity are critical sources of operational risk that FDIC-insured institutions are expected to address in the current environment. The Bank is expected to have active board and senior management oversight; adequate policies, procedures, and limits; adequate risk measurement, monitoring, and management information systems; and comprehensive internal controls.
Branching Authority. Illinois banks, such as the Bank, have the authority under Illinois law to establish branches anywhere in the State of Illinois, subject to receipt of all required regulatory approvals.
Federal law permits state and national banks to merge with banks in other states subject to: (i) regulatory approval; (ii) federal and state deposit concentration limits; and (iii) state law limitations requiring the merging bank to have been in existence for a minimum period of time (not to exceed five years) prior to the merger. The establishment of new interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) has historically been permitted only in those states the laws of which expressly authorize such expansion. However, the Dodd-Frank Act permits well-capitalized and well-managed banks to establish new branches across state lines without these impediments.
State Bank Investments and Activities. The Bank is permitted to make investments and engage in activities directly or through subsidiaries as authorized by Illinois law. However, under federal law, FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law also prohibits FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines that the activity would not pose a significant risk to the DIF. These restrictions have not had, and are not currently expected to have, a material impact on the operations of the Bank.
Transaction Account Reserves. Federal Reserve regulations require FDIC-insured institutions to maintain reserves against their transaction accounts (primarily NOW and regular checking accounts). For 2016: the first $15.2 million of otherwise reservable balances are exempt from reserves and have a zero percent reserve requirement; for transaction accounts aggregating more than $15.2 million to $110.2 million, the reserve requirement is 3% of total transaction accounts; and for net transaction accounts in excess of $110.2 million, the reserve requirement is 3% up to $110.2 million plus 10% of the aggregate amount of total transaction accounts in excess of $110.2 million. These reserve requirements are subject to annual adjustment by the Federal Reserve.
Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank of Chicago (the “FHLB”), which serves as a central credit facility for its members. The FHLB is funded primarily from proceeds from the sale of obligations of the FHLB system. It makes loans to member banks in the form of FHLB advances. All advances from the FHLB are required to be fully collateralized as determined by the FHLB.
Community Reinvestment Act Requirements. The Community Reinvestment Act requires the Bank to have a continuing and affirmative obligation in a safe and sound manner to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. Federal regulators regularly assess the Bank’s record of meeting the credit needs of its communities. Applications for additional acquisitions would be affected by the evaluation of the Bank’s effectiveness in meeting its Community Reinvestment Act requirements.
Anti-Money Laundering. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act”), along with anti-money laundering and bank secrecy laws (“AML-BSA”), are designed to deny terrorists and criminals the ability to obtain access to the U.S. financial system and has significant implications for FDIC-insured institutions, brokers, dealers and other businesses involved in the transfer of money. The laws mandate financial services companies to have policies and procedures with respect to measures designed to address any or all of the following matters: (i) customer identification and ongoing due diligence programs; (ii) money laundering; (iii) terrorist financing; (iv) identifying and reporting suspicious activities and currency transactions; (v) currency crimes; and (vi) cooperation among FDIC-insured institutions and law enforcement authorities.
Concentrations in Commercial Real Estate. Concentration risk exists when FDIC-insured institutions deploy too many assets to any one industry or segment. A concentration in commercial real estate is one example of regulatory concern. The interagency Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices guidance (“CRE Guidance”) provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny: (i) commercial real estate loans exceeding 300% of capital and increasing 50% or more in the preceding three years; or (ii) construction and land development loans exceeding 100% of capital. The CRE Guidance does not limit banks’ levels of commercial real estate lending activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations. On December 18, 2015, the federal banking agencies issued a statement to reinforce prudent risk-management practices related to CRE lending, having observed substantial growth in many CRE asset and lending markets, increased competitive pressures, rising CRE concentrations in banks, and an easing of CRE underwriting standards. The federal bank agencies reminded FDIC-insured institutions to maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor, and manage the risks arising from CRE lending. In addition, FDIC-insured institutions must maintain capital commensurate with the level and nature of their CRE concentration risk. Based on the Bank’s loan portfolio, the Bank does not exceed these guidelines.
Consumer Financial Services. The historical structure of federal consumer protection regulation applicable to all providers of consumer financial products and services changed significantly on July 21, 2011, when the CFPB commenced operations to supervise and enforce consumer protection laws. The CFPB has broad rulemaking authority for a wide range of
consumer protection laws that apply to all providers of consumer products and services, including the Bank, as well as the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over providers with more than $10 billion in assets. FDIC-insured institutions with $10 billion or less in assets, like the Bank, continue to be examined by their applicable bank regulators.
Because abuses in connection with residential mortgages were a significant factor contributing to the global financial crisis, many new rules issued by the CFPB and required by the Dodd-Frank Act address mortgage and mortgage-related products, their underwriting, origination, servicing and sales. The Dodd-Frank Act significantly expanded underwriting requirements applicable to loans secured by 1-4 family residential real property and augmented federal law combating predatory lending practices. In addition to numerous disclosure requirements, the Dodd‑Frank Act imposed new standards for mortgage loan originations on all lenders, including all FDIC-insured institutions, in an effort to strongly encourage lenders to verify a borrower’s “ability to repay,” while also establishing a presumption of compliance for certain “qualified mortgages.” In addition, the Dodd-Frank Act generally required lenders or securitizers to retain an economic interest in the credit risk relating to loans that the lender sells, and other asset‑backed securities that the securitizer issues, if the loans have not complied with the ability-to-repay stand. We do not currently expect the CFPB’s rules to have a significant impact on our operations, except for higher compliance costs.
Item 1A. Risk Factors
RISK FACTORS
Various risks and uncertainties, some of which are difficult to predict and beyond First Community’s control, could negatively impact First Community or the Bank. As financial institutions, First Community and the Bank are exposed to interest rate risk, liquidity risk, credit risk, operational risk, risks from economic or market conditions, and general business risks among others. Adverse experience with these or other risks could have a material impact on the financial condition and results of operations of First Community or the Bank, as well as the value of First Community common stock.
Our business may be adversely affected by the highly regulated environment in which we operate.
The Company and the Bank are subject to extensive federal and state regulation, supervision and examination. Banking regulations are primarily intended to protect depositors’ funds, FDIC funds, customers and the banking system as a whole, rather than stockholders. These regulations affect the Company’s lending practices, capital structure, investment practices, dividend policy and growth, among other things.
As a bank holding company, we are subject to regulation and supervision primarily by the Federal Reserve. The Bank, as an Illinois-chartered bank, is subject to regulation and supervision by both the IDFPR and the FDIC. We and the Bank undergo periodic examinations by these regulators, which have extensive discretion and authority to prevent or remedy unsafe or unsound practices or violations of law by banks and bank holding companies.
The primary federal and state banking laws and regulations that affect us are described in Item 1. Business under the section captioned “Supervision and Regulation.” These laws, regulations, rules, standards, policies and interpretations are constantly evolving and may change significantly over time. For example, on July 21, 2010, the Dodd-Frank Act was signed into law, which significantly changed the regulation of financial institutions and the financial services industry. The Dodd-Frank Act, together with the regulations to be developed thereunder, includes provisions affecting large and small financial institutions alike, including several provisions that will affect how community banks will be regulated. In addition, the Federal Reserve has adopted numerous new regulations addressing banks’ overdraft and mortgage lending practices. Further, the CFPB was recently established, with broad powers to supervise and enforce consumer protection laws, and additional consumer protection legislation and regulatory activity is anticipated in the near future.
In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III Rule. The Basel III Rule is applicable to all U.S. banks that are subject to minimum capital requirements as well as to bank and saving and loan holding companies, other than “small bank holding companies” (generally bank holding companies with consolidated assets of less than $1 billion). The Basel III Rule not only increases most of the required minimum regulatory capital ratios, it introduces a new Common Equity Tier 1 Capital ratio and the concept of a capital conservation buffer. The Basel III Rule also expands the current definition of capital by establishing additional criteria that capital instruments must meet to be considered Additional Tier 1 Capital (i.e., Tier 1 Capital in addition to Common Equity) and Tier 2 Capital. A number of instruments that now generally qualify as Tier 1 Capital will not qualify, or their qualifications will change when the Basel III Rule is fully implemented. However, the Basel III Rule permits banking organizations with less than $15 billion in assets to retain, through a one-time election, the existing treatment for accumulated other comprehensive income, which currently does not affect regulatory capital. The Basel III Rule has maintained the general structure of the current prompt corrective action thresholds while incorporating the increased requirements, including the Common Equity Tier 1 Capital ratio. In order to be a “well-capitalized” depository institution under the new regime, an institution must maintain a Common Equity Tier 1 Capital ratio of 6.5% or more; a Tier 1 Capital ratio of 8% or more; a Total Capital ratio of 10.0% or more; and a leverage ratio of 5.0% or more. Institutions must also maintain a capital conservation buffer consisting of Common Equity Tier 1 Capital to avoid certain restrictions on dividends and compensation. Generally, financial institutions became subject to the Basel III Rule on January 1, 2015 with a phase-in period through 2019 for many of the changes.
Such changes, including changes regarding interpretations and implementation, could affect the Company in substantial and unpredictable ways and could have a material adverse effect on the Company’s business, financial condition and results of operations. Further, such changes could subject the Company to additional costs, limit the types of financial services and products the Company may offer, and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with applicable laws, regulations or policies could result in sanctions by regulatory agencies, civil monetary penalties, and/or damage to the Company’s reputation, which could have a material adverse effect on the Company’s business, financial condition and results of operations.
Competition from financial institutions and other financial services providers may adversely affect our growth and profitability and have a material adverse effect on us.
We operate in a highly competitive industry and experience intense competition from other financial institutions in our market. We compete with these institutions in making loans, attracting deposits and recruiting and retaining talented people. We also compete with non-bank financial service providers, including mortgage companies, finance companies, mutual funds and credit unions. Many of these competitors are not subject to the same regulatory restrictions that we are and may be able to compete more effectively as a result. We have observed that the competition in our market for making commercial loans has resulted in more competitive pricing and credit structure, as well as intense competition for qualified commercial lending officers. We also may face a competitive disadvantage as a result of our smaller size, limited branch network, narrower product offerings and lack of geographic diversification as compared to some of our larger competitors. Although our competitive strategy is to provide a distinctly superior customer and employee experience, this strategy could be unsuccessful. Our growth and profitability depend on our continued ability to compete effectively within our market area and our inability to do so could have a material adverse effect on us.
Our business is subject to the conditions of the local economy in which we operate and weakness in the local economy and the real estate markets may materially and adversely affect us.
Our success is dependent to a large extent upon the general economic conditions in the Illinois and Chicago area where the Bank provides banking and financial services. Accordingly, the local economic conditions in Chicago have a significant impact on the demand for our products and services as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources.
While economic conditions have generally improved since the recession, weakness in the Illinois and Chicago area economy has had and may continue to have a material adverse affect on us, including higher provisions for loan losses and net loan charge-offs, lower net interest income caused by an increase in nonaccrual loans, and higher legal and collection costs. In addition, we may be required to continue to devote substantial additional attention and resources to nonperforming asset management rather than focusing on business growth activities. Adverse conditions in the local economy could also reduce demand for new loans and other financial services and impair our ability to attract and retain deposits.
Our business is subject to economic conditions and other factors, many of which are beyond our control and could materially and adversely affect us.
From December 2007 through June 2009, the United States economy was in recession. Business activity across a wide range of industries and regions in the United States was greatly reduced. Although general economic conditions have improved, certain sectors remain weak. In addition, local governments and many businesses continue to experience difficulty due to decreased liquidity in the credit markets.
The Company’s financial performance generally, and in particular the ability of customers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services the Company offers, is highly dependent upon the business environment in the markets where the Company operates, in the state of Illinois generally and in the United States as a whole. A favorable business environment is generally characterized by, among other factors: economic growth; efficient capital markets; low inflation; low unemployment; high business and investor confidence; and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by: declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; natural disasters; or a combination of these or other factors.
The financial condition of the State of Illinois, in which the largest portion of the Company’s customer base resides, is among the most troubled of any state in the United States with credit downgrade concerns, severe pension under-funding, budget deficits and political standoffs. State budget restructuring to improve its financial condition may have negative financial effects on local governments and businesses, their employees, and directly and indirectly the Company’s customers. Conversely, a lack of state budget restructuring to achieve budget balance and growing debt burden may also have negative financial effects on local governments and businesses, their employees, and directly and indirectly the Company’s customers.
While economic conditions in the Chicago area, the state of Illinois and the United States have generally improved since the recession, improvement may not continue or occur at a meaningful rate. Such conditions could materially and adversely affect us.
The preparation of our consolidated financial statements requires us to make estimates and judgments, which are subject to an inherent degree of uncertainty and which may differ from actual results.
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles and general reporting practices within the financial services industry, which require us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Some accounting policies, such as those pertaining to our allowance for loan losses and deferred tax assets and the necessity of any related valuation allowance, require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and actual results may differ from these estimates and judgments under different assumptions or conditions, which may have a material adverse effect on our financial condition or results of operations in subsequent periods.
Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio, which could have a material adverse effect on us.
Making loans is a substantial part of our business, and every loan we make is subject to the risk that it will not be repaid or that any underlying collateral in the case of secured loans will not be sufficient to assure full repayment. Among other things, the risk of non-payment is affected by:
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| | Ÿ | | changes in economic, market and industry conditions, |
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| | Ÿ | | the credit risks associated with the particular borrower and type of loan, |
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| | Ÿ | | cash flow of the borrower and/or the project being financed, |
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| | Ÿ | | the duration of the loan, and |
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| | Ÿ | | opportunities to identify potential loan repayment issues when remedial action may be most effective. |
We maintain an allowance for loan losses, which is an accounting reserve established through a provision for loan losses charged to expense, which we believe is adequate to provide for probable losses inherent in our loan portfolio as of the corresponding balance sheet date. The determination of the appropriate level of the allowance for loan losses involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which are subject to material changes. Deterioration in or stagnation of economic conditions affecting borrowers, new information regarding existing loans and any underlying collateral, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in our allowance for loan losses.
In addition, our federal and state regulators periodically review our allowance for loan losses and, based on judgments that differ from those of our management, may require an increase in our provision for loan losses or the recognition of further loan charge-offs. Further, if loan charge-offs in future periods exceed our allowance for loan losses, we will need additional provisions to increase the allowance. Any increases in our allowance for loan losses will result in a decrease in net income, and possibly capital, and may have a material adverse effect on us.
We are subject to interest rate risk, including interest rate fluctuations, that could have a material adverse effect on us.
Our earnings and cash flows are largely dependent upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond the Company’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Open Market Committee of the Federal Reserve.
Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect:
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| | Ÿ | | the Company’s ability to originate loans and obtain deposits, |
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| | Ÿ | | the average duration of the Company’s securities portfolio. |
If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Company’s net interest income, and therefore, earnings and cash flows, could be adversely affected. Earnings and cash flows could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.
Although management believes it has implemented effective asset and liability management strategies, to reduce the potential effects of changes in interest rates on the Company’s results of operations, if these strategies prove ineffective, or if
any substantial, unexpected and prolonged change in market interest rates occurs, such events could have a material adverse effect on us.
We have counterparty risk and therefore we may be materially and adversely affected by the soundness of other financial institutions.
Our ability to engage in routine funding and other transactions could be materially and negatively affected by the actions and the soundness of other financial institutions. Financial services institutions are generally interrelated as a result of trading, clearing, counterparty, credit or other relationships. We have exposure to many different industries and counterparties and regularly engage in transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks and other institutional customers. Many of these transactions may expose us to credit or other risks if another financial institution experiences adverse circumstances. In certain circumstances, the collateral that we hold may be insufficient to fully cover the risk that a counterparty defaults on its obligations, which may cause us to experience losses that could have a material adverse affect on us.
We are subject to certain operational risks, including, but not limited to, data processing system failures and errors and customer or employee fraud. First Community’s controls and procedures may fail or be circumvented.
There have been a number of highly publicized cases involving fraud or other misconduct by employees of financial services firms in recent years. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. Employee fraud, errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to civil claims for negligence.
We maintain a system of internal controls and procedures designed to reduce the risk of loss from employee or customer fraud or misconduct, employee errors and operational risks, including data processing system failures and errors and customer or employee fraud. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Company’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on us.
We are dependent upon outside third parties for the processing and handling of our records and data.
We rely on software developed by third party vendors to process various Company transactions. In some cases, we have contracted with third parties to run their proprietary software on behalf of the Company. These systems include, but are not limited to, general ledger, payroll, employee benefits, loan and deposit processing, and securities portfolio management. While the Company performs a review of controls instituted by the applicable vendor over these programs in accordance with industry standards and performs its own testing of user controls, we must rely on the continued maintenance of controls by these third party vendors, including safeguards over the security of customer data. In addition, the Company maintains, or contracts with third parties to maintain, backups of key processing output daily in the event of a failure on the part of any of these systems. Nonetheless, we may incur a temporary disruption in our ability to conduct our business or process our transactions, or incur damage to our reputation if the third party vendor fails to adequately maintain internal controls or institute necessary changes to systems. Such disruption or a breach of security may have a material adverse effect on us.
System failure or breaches of our network security, including with respect to our Internet banking activities, could subject us to increased operating costs as well as litigation and other liabilities.
The computer systems and network infrastructure we use in our operations and Internet banking activities could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Computer break-ins, “phishing” and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, as well as that of our customers engaging in Internet banking activities. In addition, advances in computer capabilities or other developments could result in a compromise or breach of our systems designed to protect customer data.
These risks have increased for all financial institutions as new technologies, the use of the Internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others. In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers recently have engaged in attacks against large
financial institutions, particularly denial of service attacks, that are designed to disrupt key business services, such as customer-facing web sites.
The Company also faces risks related to cyber-attacks and other security breaches in connection with credit card and debit card transactions that typically involve the transmission of sensitive information regarding the Company’s customers through various third parties, including merchant acquiring banks, payment processors, payment card networks and its processors. Some of these parties have in the past been the target of security breaches and cyber-attacks, and because the transactions involve third parties and environments such as the point of sale that the Company does not control or secure, future security breaches or cyber-attacks affecting any of these third parties could impact the Company through no fault of its own, and in some cases it may have exposure and suffer losses for breaches or attacks relating to them. Further cyber-attacks or other breaches in the future, whether affecting the Company or others, could intensify consumer concern and regulatory focus and result in reduced use of payment cards and increased costs, all of which could have a material adverse effect on the Company’s business. To the extent we are involved in any future cyber-attacks or other breaches, the Company’s reputation could be affected, would could also have a material adverse effect on the Company’s business, financial condition or results of operations.
Although we have procedures in place to prevent or limit the effects of any of these potential problems and intend to continue to implement security technology and establish operational procedures to mitigate the risk of such occurrences, these measures could be unsuccessful. Any interruption in, or breach in security of, our computer systems and network infrastructure, or that of our Internet banking customers, could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on us.
We are subject to lending concentration risks.
As of December 31, 2015, 75.46% of the Bank’s loan portfolio consisted of commercial loans, of which approximately 52.20% were commercial real estate loans. Our commercial loans are typically larger in amount than loans to individual consumers and, therefore, have the potential for higher losses on an individual loan basis. Credit quality issues on larger commercial loans, if they were to occur, could cause greater volatility in reported credit quality performance measures, such as total impaired or non-performing loans, and the amount of charge-offs and recoveries between periods. The deterioration of any one or a few of these loans may cause a significant increase in uncollectible loans, which would have a material adverse impact on us. In such case, we may not be able to realize the amount of security that we anticipated at the time of originating the loan, which could cause us to increase our provision for loan losses and materially and adversely affect our operating results, financial condition or capital levels.
The Company is a bank holding company and its sources of funds are limited.
The Company is a bank holding company, and its operations are primarily conducted by the Bank, which is subject to significant federal and state regulation. The Company’s ability to receive dividends or loans from the Bank is restricted and therefore the ability to pay dividends to shareholders is restricted. Until June 30, 2015, the Bank was unable to pay dividends due to negative retained earnings. Dividend payments by the Bank to the Company in the future, if any, will require generation of future earnings by the Bank and could require regulatory approval if any proposed dividends are in excess of prescribed guidelines. Further, as a structural matter, the Company’s right to participate in the assets of the Bank in the event of a liquidation or reorganization of the Bank would be subject to the claims of the Bank’s creditors, including depositors, which would take priority except to the extent the Company may be a creditor with a recognized claim. As of December 31, 2015, the Bank had deposits and other liabilities of approximately $937.6 million.
We may not be able to access sufficient and cost-effective sources of liquidity.
Liquidity is essential to our business and drives our ability to make new loans or invest in securities. In addition, the Company requires liquidity to meet its deposit and debt obligations as they come due. Our access to funding sources in amounts adequate to finance our activities or on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or the economy generally. Factors that could reduce our access to liquidity sources include a downturn in the Chicago area market, difficult credit markets or adverse regulatory actions against us.
As part of our liquidity management, we use a number of funding sources in addition to what is provided by in-market deposit and repayments and maturities of loans and investments. Although we have recently increased our funding from our core customers to reduce our reliance on wholesale funding, we continue to use brokered money market accounts and certificates of deposits, out-of-local-market certificates of deposit, broker/dealer repurchase agreements, federal funds purchased and FHLB and Federal Reserve Bank advances as a source of liquidity.
Our liquidity position is affected by the amount of cash and other liquid assets on hand, payment of interest and dividends on our outstanding debt and equity instruments, capital we inject into the Bank, redemption of our previously issued debt,
proceeds we raise through the issuance of debt and equity instruments, and dividends received from the Bank. Our future liquidity position may be materially adversely affected if, in the future, one or a combination of the following events occur:
|
| | | |
| | Ÿ | | the Bank reports net losses or its earnings are weak relative to our cash flow needs as a holding company, |
|
| | | |
| | Ÿ | | we deem it advisable or are required by our regulators to use cash at the holding company level to support loan growth of the Bank or address other capital needs of the Bank through downstream capital injections, or |
|
| | | |
| | Ÿ | | we have difficulty raising cash at the holding company level through the issuance of debt or equity securities or accessing additional sources of credit. |
Our usual liquidity management challenges include responding to potential volatility in our customers’ deposit balances. We primarily use advances from the FHLB, broker/dealer repurchase agreements and federal funds purchased to meet our immediate liquidity needs. We maintain stable client deposits, which allows us to not heavily rely on wholesale funding sources. However, our client deposits may not remain at current levels and we may not be able to maintain the recent reduced reliance on wholesale deposits. Increased customer confidence in general economic conditions, higher expected rates of return on other investments (including a rise in interest rates) or additional restrictions on the availability of FDIC coverage could each cause our customers to move all or a portion of their deposits to other investment options, thus causing a reduction in our deposits and increasing our reliance on wholesale or other funding sources.
Given the losses recorded by our legacy bank subsidiaries and affiliates from 2008 through 2011, the negative retained earnings at the Bank as of June 30, 2015, and the resulting limitations on the ability of the Bank to pay dividends to First Community, we had been dependent upon our current cash position and cash proceeds generated by capital raises to meet liquidity needs at the holding company level. If we foresee that we face diminished liquidity, we may, to the extent possible, seek to issue additional debt or securities which could cause ownership or economic dilution to our current shareholders.
The repeal of federal prohibitions on payment of interest on business demand deposits could increase the Company’s interest expense and have a material adverse effect on us.
All federal prohibitions on the ability of financial institutions to pay interest on business demand deposit accounts were repealed as part of the Dodd-Frank Act. As a result, some financial institutions have commenced offering interest on these demand deposits to compete for customers. If competitive pressures require the Company to pay interest on these demand deposits to attract and retain business customers, its interest expense would increase and its net interest margin would decrease. This could have a material adverse effect on us. Further, the effect of the repeal of the prohibition could be more significant in a higher interest rate environment as business customers would have a greater incentive to seek interest on demand deposits.
Changes in our credit ratings could increase our financing costs or make it more difficult for us to obtain funding or capital on commercially acceptable terms.
We are rated by several different rating agencies, including International Data Corporation and Bankrate.com. Many factors, both within and out of our control, may cause these agencies to downgrade their ratings related to the Company, which could subject us to negative publicity, adversely impact our ability to acquire or retain deposits and increase our cost of borrowing or limit our asset growth. Also, our credit ratings are an important factor to the institutions that provide our sources of liquidity, and reductions in our credit ratings could adversely affect our liquidity, increase our borrowing costs, limit our access to the capital markets or trigger unfavorable contractual obligations.
Our business strategy is dependent on our continued ability to attract, develop and retain highly qualified and experienced personnel in senior management and customer relationship positions.
We believe our future success is dependent, in part, on our ability to attract and retain highly qualified and experienced personnel in key senior management and other positions. Our competitive strategy is to provide each of our commercial customers with a highly qualified relationship manager that will serve as the customer’s key point of contact with us. Achieving the status of a “trusted advisor” for our customers also requires that we minimize relationship manager turnover and provide stability to our customer relationships. Competition for experienced personnel in our industry is intense, and we may not be able to successfully attract and retain such personnel.
Our reputation could be damaged by negative publicity.
Reputational risk, or the risk to us from negative publicity, is inherent in our business. Negative publicity can result from actual or alleged conduct in a number of areas, including legal and regulatory compliance, lending practices, corporate governance, litigation, inadequate protection of customer data, ethical behavior of our employees, and from actions taken by
regulators, ratings agencies and others as a result of that conduct. Damage to our reputation could impact our ability to attract new or maintain existing loan and deposit customers, employees and business relationships.
New lines of business or new products and services may subject us to certain additional risks.
From time to time, we will consider and may enter into new lines of business or offer new products or services. These activities can involve a number of uncertainties, risks and expenses, including the investment of significant time and resources, and our projected price and profitability targets may not be attainable or our efforts may not be successful. These initiatives have required and will continue to require us to enter geographical markets that are new to us. In addition, new lines of business and new products and services could significantly impact the effectiveness of our system of internal controls, and present requirements for legal compliance with which we were previously unfamiliar. Failure to successfully manage these risks could have a material adverse affect on us.
We may experience difficulties in managing our future growth.
Our future success, in part, depends on our achieving growth in commercial banking relationships that results in increased commercial loans at yields that are profitable to us. Achieving our growth targets requires us to attract customers who currently bank at other financial institutions in our market, thereby increasing our share of the market. Although we believe that we have the necessary resources in place to successfully manage our future growth, our growth strategy exposes us to certain risks and expenses, including adversely affecting our results of operations and placing a significant strain on our management, personnel, systems and resources. In addition, maintaining credit quality while growing our loan portfolio is critical to achieving and sustaining profitable growth. We may not be able to manage our growth effectively. If we fail to do so, we would be materially harmed.
In furtherance of our growth strategy, we may also seek to further reorganize our corporate structure or acquire other financial institutions or parts of those institutions in the future, and we may engage in banking center expansion. In connection with future reorganizations or acquisitions, we may issue equity securities which could cause ownership and economic dilution to our current shareholders. Moreover, our regulators will need to formally approve our implementation of a reorganization or acquisition strategy. Furthermore, following any future reorganization merger or acquisition, our integration efforts may not be successful or, after giving effect to the acquisition, we may not achieve a level of profitability that will justify the investment that we made in any such acquisition.
The Company and the Bank are subject to changes in federal and state tax laws and changes in interpretation of existing laws.
The Company’s financial performance is impacted by federal and state tax laws. Given the current economic and political environment, and ongoing federal and state budgetary pressures, the enactment of new federal or state tax legislation may occur. For example, in January 2011, the State of Illinois passed an income tax increase for both individuals and corporations, which increased our state income tax rate. The further enactment of such legislation, or changes in the interpretation of existing law, including provisions impacting tax rates, apportionment, consolidation or combination, income, expenses, and credits, may have a material adverse effect on us.
Regulatory requirements, growth plans or operating results may require us to raise additional capital, which may not be available on favorable terms or at all.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. At December 31, 2015, the Bank was categorized as “well-capitalized” under the applicable regulatory capital framework. To the extent regulatory requirements change, our future operating results erode capital or we seek to expand through loan growth or acquisitions, we may be required to raise additional capital. Our ability to raise capital in any such event would depend on conditions in the capital markets, which are outside of our control, and on our financial condition and performance. Accordingly, our ability to raise capital when needed or on favorable terms is uncertain. The inability to attract new capital investment, or to attract capital on terms acceptable to us, could have a material adverse impact on us.
We have not paid a dividend on our common stock since the Company’s formation in 2006. In addition, regulatory restrictions and liquidity constraints at the holding company level could impair our ability to make distributions on our outstanding securities.
Historically, our primary source of funds at the holding company level has been debt and equity issuances. The Bank and its predecessor banks had not paid dividends to the Company until 2015, and the Company has not paid dividends to our common shareholders, since the Company’s formation in 2006. Current and future liquidity constraints at the holding company level could continue to impair our ability to declare and pay dividends on our common stock or pay interest on our outstanding debt securities in the future. If we are unable to pay dividends or interest on our outstanding securities in the future, the market value of such securities may be materially adversely affected.
We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors. In addition, our election not to opt out of JOBS Act extended accounting transition period may make our financial statements less easily comparable to the financial statements of other companies.
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We will remain an emerging growth company for up to five years, though we may cease to be an emerging growth company earlier under certain circumstances, including if, before the end of such five years, we are deemed to be a large accelerated filer under the rules of the SEC (which depends on, among other things, having a market value of common stock held by non-affiliates in excess of $700 million). We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. We have elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accountant standards used.
The utilization of our tax losses could be substantially limited if we experienced an ownership change, as defined in the Internal Revenue Code.
Our net deferred tax asset totaled $9.2 million as of December 31, 2015. The ultimate realization of a deferred tax asset is dependent upon the generation of future taxable income during the periods prior to the expiration of the related net operating losses and the limitations of Section 382 of the Internal Revenue Code. Section 382 contains rules that limit the ability of a company that undergoes an ownership change to utilize its net operating loss carryforwards and certain built-in losses recognized in years after the ownership change. Under the rules, such an ownership change is generally any change in ownership of more than 50% of its stock within a rolling three-year period, as calculated in accordance with the rules. The rules generally operate by focusing on changes in ownership among stockholders considered by the rules as owning directly or indirectly 5% or more of the stock of the company and any change in ownership arising from new issuances of stock by the company. If we undergo an ownership change for purposes of Section 382 as a result of future transactions involving our common stock, our ability to use any of our net operating loss carryforwards, tax credit carryforwards or net unrealized built-in losses at the time of ownership change would be subject to the limitations of Section 382 on their use against future taxable income. The limitation may affect the amount of our deferred income tax asset and, depending on the limitation, a portion of our built-in losses, any net operating loss carryforwards or tax credit carryforwards could expire before we would be able to use them. This could adversely affect our financial position, results of operations and cash flow.
We have a substantial amount of debt outstanding and may incur additional indebtedness in the future, which could restrict our operations.
As of December 31, 2015, we had $15.3 million of subordinated debt outstanding. We currently expect our interest expense to be approximately $1.2 million in fiscal year 2016. In addition, as of December 31, 2015, we had senior debt of $11.9
million outstanding. We currently expect our interest expense to be approximately $192,000 in fiscal year 2016. We may not generate sufficient revenues to service or repay our debt, and have sufficient funds left over to achieve or sustain profitability in our operations, meet our working capital and capital expenditure needs, and to pay dividends to our common shareholders.
The degree to which we are leveraged could have important consequences for our shareholders, including:
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| • | limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; |
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| • | making it more difficult for us to satisfy its debt and other obligations; |
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| • | limiting our ability to borrow additional funds, or to sell assets to raise funds, if needed, for working capital, capital expenditures, acquisitions or other purposes; |
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| • | increasing our vulnerability to general adverse economic and industry conditions, including changes in interest rates; and |
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| • | placing us at a competitive disadvantage compared to our competitors that have less debt. |
The market price of our common stock may be volatile, which could cause the value of an investment in our common stock to decline.
The market price of our common stock may fluctuate substantially due to a variety of factors, many of which are beyond our control, including:
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| Ÿ | general market conditions; |
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| Ÿ | domestic and international economic factors unrelated to our performance; |
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| Ÿ | actual or anticipated fluctuations in our quarterly operating results; |
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| Ÿ | changes in or failure to meet publicly disclosed expectations as to our future financial performance; |
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| Ÿ | downgrades in any securities analysts’ estimates of our financial performance or lack of research and reports by industry analysts; |
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| Ÿ | changes in market valuations or earnings of similar companies; |
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| Ÿ | any future sales of our common stock or other securities; and |
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| Ÿ | additions or departures of key personnel. |
The stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of particular companies. These types of broad market fluctuations may adversely affect the trading price of our common stock. In the past, shareholders have sometimes instituted securities class action litigation against companies following periods of volatility in the market price of their securities. Any similar litigation against us could result in substantial costs, divert management’s attention and resources and harm our business or results of operations.
Our stock is relatively thinly traded.
Although our common stock is quoted on the NASDAQ Capital Market, the average daily trading volume of our common stock is relatively small compared to many public companies. The desired market characteristics of depth, liquidity, and orderliness require the substantial presence of willing buyers and sellers in the marketplace at any given time. In our case, this presence depends on the individual decisions of a relatively small number of investors and general economic and market conditions over which we have no control. Due to the relatively small trading volume of our common stock, significant sales of our common stock, or the expectation of these sales, could cause the stock price to fall more than would be justified by the inherent worth of the Company. Conversely, attempts to purchase a significant amount of our stock could cause the market price to rise above the reasonable inherent worth of the Company.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
As of December 31, 2015, the net book value of our properties was $18.5 million. The following is a list of our offices:
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| Location | Address | Ownership | Square Footage |
| Joliet Branch | 2801 Black Road, Joliet, Illinois, 60435 | Owned | 11,048 |
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| Channahon Branch | 25407 South Bell Road, Channahon, Illinois 60410 | Owned | 8,880 |
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| Naperville Branch | 24 West Gartner Road, Suite 104, Naperville, Illinois 60540 | Leased | 4,100 |
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| Plainfield Branch | 14150 S. Rt. 30, Plainfield, Illinois 60544 | Owned | 12,000 |
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| Homer Glen Branch | 13901 S. Bell Road, Homer Glen, Illinois 60491 | Owned | 4,000 |
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| Burr Ridge Branch | 7020 County Line Road, Burr Ridge, Illinois 60527 | Owned | 18,863 |
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Item 3. Legal Proceedings
The Company is involved from time to time in various legal actions arising in the normal course of business. While the outcome of the pending proceedings cannot be predicted with certainty, it is the opinion of management that the resolution of these proceedings should not have a material adverse effect on our consolidated financial position or results of operation.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
First Community’s common stock was quoted on the OTCQB marketplace under the symbol “FCMP” for the first two quarters of 2015. As of July 17, 2015, the Company began trading on NASDAQ Capital Market under the symbol “FCFP.” There were approximately 907 holders of record of our common stock as of February 29, 2016. Additionally, there are an estimated 820 beneficial holders whose stock was held in street name by brokerage and other nominees as of that date.
The following table presents quarterly high and low bid prices per share information for our common stock for 2015 and 2014. These quotations represent inter-dealer prices without retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions. |
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| | Market Price Range |
| | High | | Low |
| 2015 | | | |
| Quarter ended December 31 | $ | 7.31 |
| | $ | 6.26 |
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| Quarter ended September 30 | 7.00 |
| | 6.25 |
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| Quarter ended June 30 | 6.55 |
| | 5.47 |
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| Quarter ended March 31 | 5.75 |
| | 5.14 |
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| 2014 | | | |
| Quarter ended December 31 | $ | 5.43 |
| | $ | 4.60 |
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| Quarter ended September 30 | 4.78 |
| | 4.30 |
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| Quarter ended June 30 | 4.39 |
| | 4.00 |
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| Quarter ended March 31 | 3.90 |
| | 4.35 |
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The timing and amount of cash dividends paid on our common stock depends on our earnings, capital requirements, financial condition and other relevant factors including the ability of the Bank to pay dividends to the Company. See Item 1. Business and Note 13 to our Consolidated Financial Statements contained in Item 8. Financial Statements and Supplementary Data.
First Community has not paid cash dividends on its common stock since its formation in 2006.
Item 6. Selected Financial Data
Not applicable.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our financial statements and related notes thereto included elsewhere in this report. This report may contain certain forward-looking statements, such as discussions of the Company’s pricing and fee trends, credit quality and outlook, liquidity, new business results, expansion plans, anticipated expenses and planned schedules. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many risks and uncertainties, including those described in Item 1A. Risk Factors and other sections of the Company’s December 31, 2015 Annual Report on Form 10-K and the Company’s other filings with the SEC, and other risks and uncertainties, including changes in interest rates, general economic conditions and those in the Company’s market area, legislative/regulatory changes, including the rules adopted by the U.S. Federal banking authorities to implement the Basel III capital accords, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Department of the Treasury and the Board of Governors of the Federal Reserve System, the Company’s success in raising capital, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area and accounting principles, policies and guidelines. Furthermore, forward-looking statements speak only as of the date they are made. Except as required under the federal securities laws or the rules and regulations of the SEC, we do not undertake any obligation to update or review any forward-looking information, whether as a result of new information, future events or otherwise.
Overview
First Community, an Illinois corporation, is the holding company for the Bank. Through the Bank, we provide a full range of financial services to individuals and corporate clients.
The Bank has banking centers located at 2801 Black Road, Joliet, Illinois, 24 West Gartner Road, Suite 104, Naperville, Illinois, 25407 South Bell Road, Channahon, Illinois, 14150 South U.S. Route 30, Plainfield, Illinois, 13901 South Bell Road, Homer Glen, Illinois, and 7020 South County Line Road, Burr Ridge, Illinois.
Through these banking centers the Bank offers a full range of deposit products and services, as well as credit and operational services. Depository services include: Individual Retirement Accounts (IRAs), tax depository and payment services, automatic transfers, bank by mail, direct deposits, money market accounts, savings accounts, and various forms and terms of certificates of deposit (CDs), both fixed and variable rate. The Bank attracts deposits through advertising and by pricing depository services competitively. Credit services include: commercial and industrial loans, real estate construction and land development loans, conventional and adjustable rate real estate loans secured by residential properties, real estate loans secured by commercial properties, customer loans for items such as home improvements, vehicles, boats and education offered on installment and single payment bases, as well as government guaranteed loans including Small Business Administration (“SBA”) loans, and letters of credit. The Bank’s operation services include: cashier’s checks, traveler’s checks, collections, currency and coin processing, wire transfer services, deposit bag rentals, and stop payments. Other services include servicing of secondary market real estate loans, notary services, and signature guarantees. The Bank does not offer trust services at this time.
Full Year 2015 Highlights
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| • | Return on average assets improved to 0.99% for the year ended December 31, 2015, from 0.60% for the year ended December 31, 2014, while return on average equity rose sharply to 10.08% for the year ended December 31, 2015 compared with 5.68% for the year ended December 31, 2014. |
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| • | Pre-tax pre-provision core income, a non-GAAP measure, rose 15.8%, or $1.7 million, to $12.6 million for the year ended December 31, 2015 compared with $10.9 million for the same period in 2014. |
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| • | Net interest income before provision for loan losses increased 6.53% or $1.9 million to $30.8 million for the year ended December 31, 2015 compared with $28.9 million for the year ended December 31, 2014. This was the result of higher interest income from current year loan growth, and lower year-over-year interest expense. Interest expense was lower in 2015 due to a decrease in debt related expenses, in addition to improved deposit funding including noninterest bearing deposit growth. |
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| • | Noninterest expense was stable with a decrease of $31,000, or 0.15%, from the year ended December 31, 2014 to the year ended December 31, 2015. |
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| • | Total assets increased $116.6 million, or 12.62%, and reached a Company-record $1.0 billion at December 31, 2015 from $924.1 million at December 31, 2014. |
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| • | Total loans increased 12.06%, or $83.1 million, to $772.3 million at December 31, 2015 from $689.1 million at December 31, 2014, with year-over-year growth in almost all loan categories led by commercial, commercial real estate, and residential 1-4 family. |
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| • | Total deposits increased 12.55%, or $96.6 million, to $866.0 million at December 31, 2015 from $769.4 million at December 31, 2014. Core demand deposits comprised 65.6% of total deposits at the end of 2015 compared with 59.59% of total deposits at the end of 2014. Noninterest bearing deposit accounts, an important source of lower-cost funding to support loan activity, increased $37.7 million, or 23.83%, to $196.1 million at the end of 2015 from $158.3 million at the end of 2014. |
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| • | Asset quality measures improved dramatically, including a decline in the ratio of nonperforming assets to total assets to 0.67% at December 31, 2015 from 1.03% a year earlier. Nonperforming assets decreased $2.5 million, or 26.89%, from $9.5 million to $7.0 million at December 31, 2015. |
Results of Operations
Net interest income was $30.8 million for the year ended December 31, 2015, compared to $28.9 million for the year ended December 31, 2014, an increase of $1.9 million or 6.53%. The Company’s net interest margin was 3.26% during the year ended December 31, 2015, compared to 3.39% during the year ended December 31, 2014, while the net interest spread was 3.06% compared to 3.18% in the prior year.
Interest income on loans was $32.5 million for the year ended December 31, 2015, compared to $32.1 million for the year ended December 31, 2014, reflecting contributions from $83.1 million in loan growth, partially offset by newer loans booked at lower average yields due to the ongoing low interest rate environment and competitive market conditions. There were approximately $204.0 million in new loans and renewals during 2015, at a weighted average yield of 4.14%.
Interest income on securities was $4.1 million for the year ended December 31, 2015, compared to $3.1 million for the year ended December 31, 2014. The increase in interest income on securities was the result of growth in the portfolio, along with improvement in the overall yield of the government sponsored enterprises and state and political subdivision portfolios.
Interest expense on deposits was $3.9 million for the year ended December 31, 2015, compared to $4.4 million for the year ended December 31, 2014 , which primarily reflected a decline in time deposits that were replaced by growth in noninterest bearing deposits, along with an increase in lower cost NOW, money market and savings accounts. In addition, after the refinancing of outstanding subordinated debt with a lower interest senior credit facility the reduced borrowing costs at the parent company helped to lower interest expense, primarily subordinated debt interest expense.
Noninterest income was $2.5 million for the year ended December 31, 2015, a decrease of $796,000, or 24.17% from the same period in 2014. The decrease was partially due to lower gains on sales of securities offset by small increases in service charges on deposit accounts and higher mortgage fee income of $531,000, compared to $402,000 for 2014.
Noninterest expense was $20.5 million for the year ended December 31, 2015 compared to $20.6 million for the year ended December 31, 2014. Salaries and benefits were slightly higher and occupancy expenses were slightly lower for the year ended December 31, 2015. The year ended December 31, 2015 included a net loss on foreclosed assets of $187,000 compared to $434,000 in the same period in 2014. Losses were related to changes in property values, as appraisals are updated annually or based on offers on properties held by the Bank.
Financial Condition
Total assets were $1.0 billion at December 31, 2015, an increase of 12.62% or $116.6 million, from $924.1 million at December 31, 2014.
Total loans were $772.3 million at December 31, 2015, a 12.06%, or $83.1 million, increase from $689.2 million at December 31, 2014, reflecting balanced growth in all lending categories other than consumer and other.
Investment securities grew to $207.0 million at December 31, 2015, compared with $170.1 million at December 31, 2014. Strong gains in low-cost deposits facilitated this growth.
Total deposits increased $96.6 million from December 31, 2014, or 12.6%, to $866.0 million at December 31, 2015. The growth in deposits has been focused on growth in lower cost transactional accounts. Noninterest bearing demand deposits increased 23.8%, or $37.0 million, year-over-year. Our focus on relationship banking and growth in transactional accounts has resulted in a decline in time deposits of $13.4 million or 4.30%, to $297.5 million at December 31, 2015 from $310.9 million at December 31, 2014.
Asset Quality
Total nonperforming assets declined by 26.9%, or $2.5 million, to $7.0 million at December 31, 2015 from $9.5 million at December 31, 2014. The improvement reflected a decline in total nonperforming loans to $1.5 million from $7.0 million a year
earlier. Foreclosed assets were $5.5 million at December 31, 2015, which were up from $2.5 million at December 31, 2014. Two properties totaling $1.8 million and one property totaling $1.5 million were transferred from nonperforming loans to foreclosed assets during the second and fourth quarters, respectively.
Net charge-offs for the year ended December 31, 2015 were $87,000 as compared to $4.9 million for the same period in 2014.
The Company’s allowance for loan losses to nonperforming loans increased to 794.38% at December 31, 2015, compared to 198.73% at December 31, 2014.
Because of the continued improvements in asset quality during 2015, the Company had a negative provision for loan losses of $2.1 million for the year ended December 31, 2015, compared to a provision for loan losses of $3.0 million for the year ended December 31, 2014.
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| | | | | | |
| FINANCIAL SUMMARY | | |
| | Year ended December 31, |
| | 2015 | 2014 |
| Interest income: | (Dollars in thousands, except per share data) |
| Loans, including fees | $ | 32,525 |
| $ | 32,066 |
|
| Securities | 4,134 |
| 3,104 |
|
| Federal funds sold and other | 66 |
| 78 |
|
| Total interest income | 36,725 |
| 35,248 |
|
| Interest expense: | | |
| Deposits | 3,923 |
| 4,439 |
|
| Federal funds purchased and other borrowed funds | 215 |
| 68 |
|
| Subordinated debt | 1,800 |
| 1,841 |
|
| Total interest expense | 5,938 |
| 6,348 |
|
| Net interest income | 30,787 |
| 28,900 |
|
| Provision for loan losses | (2,077 | ) | 3,000 |
|
| Net interest income after provision for loan losses | 32,864 |
| 25,900 |
|
| Noninterest income: | | |
| Service charges on deposit accounts | 756 |
| 677 |
|
| Gain on sale of loans | — |
| 39 |
|
| Gain on foreclosed assets, net | — |
| 19 |
|
| Gain on sale of securities | 484 |
| 912 |
|
| Mortgage fee income | 531 |
| 402 |
|
| Other | 726 |
| 1,244 |
|
| Total noninterest income | 2,497 |
| 3,293 |
|
| Noninterest expenses: | | |
| Salaries and employee benefits | 11,538 |
| 11,191 |
|
| Occupancy and equipment expense | 1,977 |
| 2,111 |
|
| Data processing | 912 |
| 959 |
|
| Professional fees | 1,201 |
| 1,283 |
|
| Advertising and business development | 853 |
| 845 |
|
| Losses (gains) on sale and writedowns of foreclosed assets, net | 187 |
| 434 |
|
| Foreclosed assets, net of rental income | 130 |
| 219 |
|
| Other expense | 3,744 |
| 3,531 |
|
| Total noninterest expense | 20,542 |
| 20,573 |
|
| Income before income taxes | 14,819 |
| 8,620 |
|
| Income taxes | 5,000 |
| 2,737 |
|
| Net income | 9,819 |
| 5,883 |
|
| Dividends and accretion on preferred shares | — |
| (526 | ) |
| Gain on redemption of preferred shares | — |
| 5 |
|
| Net income applicable to common shareholders | $ | 9,819 |
| $ | 5,362 |
|
| |
|
|
|
|
| Basic earnings per share | $ | 0.58 |
| $ | 0.32 |
|
| |
|
|
|
|
| Diluted earnings per share | $ | 0.57 |
| $ | 0.32 |
|
|
| | | | | | | |
| FINANCIAL SUMMARY | |
|
| | | |
| December 31, 2015 | | December 31, 2014 |
| Period-End Balance Sheet |
| |
|
| (Dollars in thousands) |
| |
|
| Assets |
| |
|
| Mortgage loans held for sale | $ | 400 |
| | $ | 738 |
|
| Construction and land development | 22,082 |
| | 18,700 |
|
| Farmland and agricultural production | 9,989 |
| | 9,350 |
|
| Residential 1-4 family | 135,864 |
| | 100,773 |
|
| Multifamily | 34,272 |
| | 24,426 |
|
| Commercial real estate | 381,098 |
| | 353,973 |
|
| Commercial | 179,623 |
| | 171,452 |
|
| Consumer and other | 9,391 |
| | 10,519 |
|
| Total loans | 772,319 |
| | 689,193 |
|
| Allowance for credit losses | 11,741 |
| | 13,905 |
|
| Net loans | 760,578 |
| | 675,288 |
|
| Investment securities | 206,971 |
| | 170,054 |
|
| Other earning assets | 23,967 |
| | 23,990 |
|
| Other non-earning assets | 48,736 |
| | 54,005 |
|
| Total Assets | $ | 1,040,652 |
| | $ | 924,075 |
|
|
| |
|
| Liabilities and Shareholders' Equity | |
|
| Noninterest bearing deposits | $ | 196,063 |
| | $ | 158,329 |
|
| Savings deposits | 36,207 |
| | 30,211 |
|
| NOW accounts | 102,882 |
| | 73,755 |
|
| Money market accounts | 233,315 |
| | 196,222 |
|
| Time deposits | 297,524 |
| | 310,893 |
|
| Total deposits | 865,991 |
| | 769,410 |
|
| Total borrowings | 68,315 |
| | 58,662 |
|
| Other liabilities | 3,305 |
| | 3,950 |
|
| Total Liabilities | 937,611 |
| | 832,022 |
|
| Shareholders’ equity - common | 103,041 |
| | 92,053 |
|
| Total Shareholders’ Equity | 103,041 |
| | 92,053 |
|
| Total Liabilities and Shareholders’ Equity | $ | 1,040,652 |
| | $ | 924,075 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| INVESTMENT PORTFOLIO | | | | | | | | | | |
| (Dollars in thousands) | | | | | | | | | | |
| | As of December 31, 2015 |
| | Cost | | Unrealized Gains | | Unrealized Loss | | Fair Value | | Yield (%) | | Duration (Years) |
| | | | | | | | | | | | |
| Investment Securities | | | | | | | | | | | |
| Government sponsored enterprises | $ | 16,284 |
| | $ | 125 |
| | $ | — |
| | $ | 16,409 |
| | 1.82 | % | | 3.48 |
|
| Residential collateralized mortgage obligations | 62,701 |
| | 138 |
| | 475 |
| | 62,364 |
| | 2.13 | % | | 3.37 |
|
| Residential mortgage backed securities | 28,494 |
| | 65 |
| | 268 |
| | 28,291 |
| | 1.54 | % | | 2.88 |
|
| State and political subdivisions | 96,480 |
| | 2,178 |
| | 118 |
| | 98,540 |
| | 2.58 | % | | 4.82 |
|
| Total debt securities | 203,959 |
| | 2,506 |
| | 861 |
| | 205,604 |
| | 2.23 | % | | 4.42 |
|
| Federal Home Loan Bank stock | 1,367 |
| | — |
| | — |
| | 1,367 |
| | — | % | | — |
|
| Total Investment Securities | $ | 205,326 |
| | $ | 2,506 |
| | $ | 861 |
| | $ | 206,971 |
| | 2.23 | % | | 4.42 |
|
| | | | | | | | | | | | |
| (Dollars in thousands) | | | | | | | | | | |
| | As of December 31, 2014 |
| | Cost | | Unrealized Gains | | Unrealized Loss | | Fair Value | | Yield (%) | | Duration (Years) |
| | | | | | | | | | | | |
| Investment Securities | | | | | | | | | | | |
| Government sponsored enterprises | $ | 30,904 |
| | $ | 83 |
| | $ | 36 |
| | $ | 30,951 |
| | 1.69 | % | | 2.80 |
|
| Residential collateralized mortgage obligations | 44,095 |
| | 241 |
| | 62 |
| | 44,274 |
| | 2.35 | % | | 2.71 |
|
| Residential mortgage backed securities | 27,208 |
| | 137 |
| | 128 |
| | 27,217 |
| | 2.26 | % | | 4.10 |
|
| State and political subdivisions | 65,240 |
| | 1,096 |
| | 91 |
| | 66,245 |
| | 2.48 | % | | 4.16 |
|
| Total debt securities | 167,447 |
| | 1,557 |
| | 317 |
| | 168,687 |
| | 2.27 | % | | 3.85 |
|
| Federal Home Loan Bank stock | 1,367 |
| | — |
| | — |
| | 1,367 |
| | — | % | | — |
|
| Total Investment Securities | $ | 168,814 |
| | $ | 1,557 |
| | $ | 317 |
| | $ | 170,054 |
| | 2.27 | % | | 3.85 |
|
|
| | | | | | | |
| ASSET QUALITY DATA | | | |
| | | |
| | December 31, 2015 | | December 31, 2014 |
| (Dollars in thousands) | | | |
| Loans identified as nonperforming | $ | 1,411 |
| | $ | 6,947 |
|
| Other nonperforming loans | 67 |
| | 50 |
|
| Total nonperforming loans | 1,478 |
| | 6,997 |
|
| Foreclosed assets | 5,487 |
| | 2,530 |
|
| Total nonperforming assets | $ | 6,965 |
| | $ | 9,527 |
|
| | | | |
| Allowance for loan losses losses | 11,741 |
| | 13,905 |
|
| Nonperforming assets to total assets | 0.67 | % | | 1.03 | % |
| Nonperforming loans to total assets | 0.14 | % | | 0.76 | % |
| Allowance for loan losses to nonperforming loans | 794.38 | % | | 198.73 | % |
|
| | | | | | | |
| Allowance for loan losses rollforward: | | |
| | Years ended December 31, |
| | 2015 | | 2014 |
| Beginning balance | $ | 13,905 |
| | $ | 15,820 |
|
| Charge-offs | 1,859 |
| | 6,633 |
|
| Recoveries | 1,772 |
| | 1,718 |
|
| Net charge-offs | 87 |
| | 4,915 |
|
| Provision for loan losses | (2,077 | ) | | 3,000 |
|
| Ending Balance | $ | 11,741 |
| | $ | 13,905 |
|
| | | | |
| Net charge-offs | 87 |
| | 4,915 |
|
| Net chargeoff percentage (annualized) | 0.01 | % | | 0.73 | % |
|
| | | | | | |
| OTHER DATA | | |
| | | |
| | For the year ended December 31, |
| | 2015 | 2014 |
| Return on average assets | 0.99 | % | 0.60 | % |
| Return on average equity | 10.08 | % | 5.68 | % |
| Net yield on earning assets | 3.26 | % | 3.39 | % |
| Average loans to assets | 87.68 | % | 75.04 | % |
| Average loans to deposits | 87.62 | % | 90.13 | % |
| Average noninterest bearing deposits to total deposits | 20.45 | % | 16.96 | % |
| Average equity to assets | 9.36 | % | 10.21 | % |
| | | |
COMPANY CAPITAL RATIOS (1) | | |
| (Dollars in thousands) | December 31, 2015 | December 31, 2014 |
| Tier 1 leverage ratio | 9.36 | % | 8.55 | % |
| Common equity tier 1 capital ratio | 11.62 | % | n/a |
|
| Tier 1 capital ratio | 11.62 | % | 10.27 | % |
| Total capital ratio | 14.69 | % | 15.28 | % |
| Tangible common equity | $ | 89,748 |
| $ | 92,053 |
|
| | | |
(1) The December 31, 2015 capital ratios are calculated under the Basel III capital rules that became effective on January 1, 2015. Prior period capital ratios were calculated under the prompt corrective action capital rules that were in effect for those periods. |
|
| | | | | | | | |
| OTHER NON-GAAP MEASURES | | | |
| | | | |
Pre-tax pre-provision core income (1) | | | |
| (Dollars in thousands) | | | |
| | For the years ended December 31, |
| | 2015 | | 2014 |
| | | | |
| Pre-tax net income | $ | 14,819 |
| | $ | 8,620 |
|
| Provision for loan losses | (2,077 | ) | | 3,000 |
|
| Gain on sale of securities | (484 | ) | 466 |
| (912 | ) |
| Gain on sale of foreclosed assets | — |
| | (19 | ) |
| Bank owned life insurance gain | — |
| | (483 | ) |
| Losses on sale and writedowns of foreclosed assets, net | 187 |
| | 434 |
|
| Foreclosed assets, net of rental income | 130 |
| | 219 |
|
| Adjusted pre-tax pre-provision core income | $ | 12,575 |
|
| $ | 10,859 |
|
|
|
(1) This is a non-GAAP financial measure. The Company’s management believes the presentation of pre-tax pre-provision core net operating income provides investors with a greater understanding of the Company’s operating results, in addition to the results measured in accordance with GAAP. |
Results of Operations
Net Interest Income
Net interest income is the largest component of our income, and is affected by the interest rate environment and the volume and the composition of interest-earning assets and interest-bearing liabilities. Our interest-earning assets include loans, interest-bearing deposits in other banks, investment securities, and federal funds sold. Our interest-bearing liabilities include deposits, advances from the FHLB, subordinated debentures, repurchase agreements and other short-term borrowings.
The following tables reflect the components of net interest income for the years ended December 31, 2015, 2014 and 2013: |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | | | |
| | 2015 | 2014 | 2013 |
| (Dollars in thousands) | Average
Balances | Income/
Expense | Yields/
Rates | Average
Balances | Income/
Expense | Yields/
Rates | Average
Balances | Income/
Expense | Yields/
Rates |
| Assets | | | | | | | | | |
Loans (1) | $ | 728,276 |
| $ | 32,525 |
| 4.47 | % | $ | 675,866 |
| $ | 32,066 |
| 4.74 | % | $ | 659,140 |
| $ | 32,664 |
| 4.96 | % |
Investment securities (2) | 197,427 |
| 4,134 |
| 2.09 | % | 155,914 |
| 3,104 |
| 1.99 | % | 103,596 |
| 2,056 |
| 1.98 | % |
| Federal funds sold | — |
| — |
| — | % | — |
| — |
| — | % | 17,049 |
| 11 |
| 0.06 | % |
| Interest-bearing deposits with other banks | 18,087 |
| 66 |
| 0.36 | % | 21,737 |
| 78 |
| 0.36 | % | 72,721 |
| 167 |
| 0.23 | % |
| Total earning assets | $ | 943,790 |
| $ | 36,725 |
| 3.89 | % | $ | 853,517 |
| $ | 35,248 |
| 4.13 | % | $ | 852,506 |
| $ | 34,898 |
| 4.09 | % |
| Other assets | 49,879 |
| | | 47,199 |
| | | 28,490 |
| | |
| Total assets | $ | 993,669 |
| | | $ | 900,716 |
| | | $ | 880,996 |
| | |
| | | | | | | |
| | |
| Liabilities | | | | | | | | | |
| NOW accounts | $ | 91,410 |
| $ | 204 |
| 0.22 | % | $ | 73,256 |
| $ | 108 |
| 0.15 | % | $ | 64,858 |
| $ | 152 |
| 0.23 | % |
| Money market accounts | 224,640 |
| 620 |
| 0.28 | % | 182,264 |
| 498 |
| 0.27 | % | 158,505 |
| 459 |
| 0.29 | % |
| Savings accounts | 33,815 |
| 56 |
| 0.17 | % | 26,799 |
| 41 |
| 0.15 | % | 23,505 |
| 47 |
| 0.20 | % |
| Time deposits | 303,668 |
| 3,043 |
| 1.00 | % | 337,068 |
| 3,792 |
| 1.12 | % | 412,258 |
| 4,278 |
| 1.04 | % |
| Total interest bearing deposits | 653,533 |
| 3,923 |
| 0.60 | % | 619,387 |
| 4,439 |
| 0.72 | % | 659,126 |
| 4,936 |
| 0.75 | % |
| Securities sold under agreements to repurchase | 30,849 |
| 39 |
| 0.13 | % | 29,081 |
| 30 |
| 0.10 | % | 23,992 |
| 33 |
| 0.14 | % |
| Secured borrowings | 6,662 |
| 160 |
| 2.40 | % | — |
| — |
| — |
| — |
| — |
| — | % |
| Mortgage payable | 180 |
| 13 |
| 7.22 | % | 572 |
| 36 |
| 6.29 | % | 779 |
| 47 |
| 6.03 | % |
| FHLB borrowings | 1,686 |
| 3 |
| 0.18 | % | 1,017 |
| 2 |
| 0.20 | % | — |
| — |
| — | % |
| Subordinated debentures | 22,124 |
| 1,800 |
| 8.14 | % | 20,984 |
| 1,841 |
| 8.77 | % | 13,340 |
| 1,190 |
| 8.92 | % |
| Total interest bearing liabilities | 715,034 |
| $ | 5,938 |
| 0.83 | % | 671,041 |
| 6,348 |
| 0.95 | % | 697,237 |
| 6,206 |
| 0.89 | % |
| Noninterest bearing deposits | 177,085 |
| | | 130,515 |
| | | 99,613 |
| | |
| Other liabilities | 4,157 |
| | | 4,794 |
| | | 5,361 |
| | |
| Total liabilities | $ | 896,276 |
| | | $ | 806,350 |
| | | $ | 802,211 |
| | |
| | | | | | | | | | |
| Total shareholders' equity | $ | 97,393 |
| | | $ | 94,366 |
| | | $ | 78,755 |
| | |
| | | | | | | | | | |
| Total liabilities and equity | $ | 993,669 |
| | | $ | 900,716 |
| | | $ | 880,966 |
| | |
| | | | | | | |
|
| | |
| Net interest income | | $ | 30,787 |
| | | $ | 28,900 |
| | | $ | 28,692 |
| |
| | | | | | | | | | |
| Interest rate spread | | | 3.06 | % | | | 3.18 | % | | | 3.20 | % |
| | | | | | | | | | |
| Net interest margin | | | 3.26 | % | | | 3.39 | % | | | 3.37 | % |
The net interest income increase and margin decrease was primarily due to changes in loans. Loans booked in the past year have been at lower yields due to current competitive market conditions, which was offset by the volume of new loans booked over the past four quarters.
Rate/Volume Analysis
The following table sets forth certain information regarding changes in our interest income and interest expense for the years noted (dollars in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 compared to 2014 | 2014 compared to 2013 |
| | Average Volume | Average Rate | Mix | Net Increase (Decrease) | Average Volume | Average Rate | Mix | Net Increase (Decrease) |
| | | | | | | | | |
| Interest Income | | | | | | | | |
| Loans | $ | 2,426 |
| $ | (1,825 | ) | $ | (142 | ) | $ | 459 |
| $ | 830 |
| $ | (1,391 | ) | $ | (37 | ) | $ | (598 | ) |
| Investment securities | 832 |
| 156 |
| 42 |
| 1,030 |
| 1,033 |
| 10 |
| 5 |
| 1,048 |
|
| Federal funds sold | — |
| — |
| — |
| — |
| (11 | ) | (10 | ) | 10 |
| (11 | ) |
| Interest bearing deposits with other banks | (12 | ) | — |
| — |
| (12 | ) | (118 | ) | 95 |
| (66 | ) | (89 | ) |
| Total interest income | 3,246 |
| (1,669 | ) | (100 | ) | 1,477 |
| 1,734 |
| (1,296 | ) | (88 | ) | 350 |
|
| | | | | | | | | |
| Interest expense | | | | | | | | |
| NOW accounts | $ | 27 |
| $ | 56 |
| $ | 13 |
| $ | 96 |
| $ | 19 |
| $ | (56 | ) | $ | (7 | ) | $ | (44 | ) |
| Money market accounts | 100 |
| 18 |
| 4 |
| 122 |
| 76 |
| (32 | ) | (5 | ) | 39 |
|
| Savings accounts | 9 |
| 5 |
| 1 |
| 15 |
| 7 |
| (11 | ) | (2 | ) | (6 | ) |
| Time deposits | (374 | ) | (415 | ) | 40 |
| (749 | ) | (756 | ) | 330 |
| (60 | ) | (486 | ) |
| Term borrowings | — |
| — |
| 160 |
| 160 |
| — |
| — |
| — |
| — |
|
| Securities sold under agreements to repurchase | 2 |
| 6 |
| 1 |
| 9 |
| 7 |
| (8 | ) | (2 | ) | (3 | ) |
| FHLB advances | 1 |
| — |
| — |
| 1 |
| — |
| — |
| 2 |
| 2 |
|
| Mortgage payable | (24 | ) | 5 |
| (4 | ) | (23 | ) | (12 | ) | 2 |
| (1 | ) | (11 | ) |
| Subordinated debentures | 100 |
| (134 | ) | (7 | ) | (41 | ) | 682 |
| (20 | ) | (11 | ) | 651 |
|
| Total interest expense | (159 | ) | (459 | ) | 208 |
| (410 | ) | 23 |
| 205 |
| (86 | ) | 142 |
|
| | | | | | | | | |
| Change in net interest income | $ | 3,405 |
| $ | (1,210 | ) | $ | (308 | ) | $ | 1,887 |
| $ | 1,711 |
| $ | (1,501 | ) | $ | (2 | ) | $ | 208 |
|
Provision for Loan Losses
The Company had a negative provision for loan losses of $2.1 million and provision for loan losses of $3.0 million for the years ended December 31, 2015 and 2014, respectively. The Company had net charge-offs of $87,000 and of $4.9 million for the years ended December 31, 2015 and 2014, respectively. Nonperforming loans decreased 78.88% from $7.0 million at December 31, 2014 to $1.5 million at December 31, 2015. The decreases in nonperforming loans is the result of management’s continued focus on improving asset quality and cleaning up the loan portfolio in addition to foreclosure activity.
Noninterest Income
The following table sets forth the components of noninterest income for the periods indicated: |
| | | | | | |
| | For the year ended December 31, |
| (Dollars in thousands) | 2015 | 2014 |
| Service charges on deposit accounts | $ | 756 |
| $ | 677 |
|
| Gain on sale of loans | — |
| 39 |
|
| Gain on foreclosed assets, net | — |
| 19 |
|
| Gain on sale of securities | 484 |
| 912 |
|
| Mortgage fee income | 531 |
| 402 |
|
| Other | 726 |
| 1,244 |
|
| Total noninterest income | $ | 2,497 |
| $ | 3,293 |
|
Noninterest income for the year ended December 31, 2015 decreased from the same period in 2014, primarily due to a decrease in gains on sales of securities and other income items. The gains on sales of securities were higher in 2014 as a result of changes in the investment strategy that took place in the third quarter of 2014. Service charges on deposit accounts were up year-over-year, primarily due to overdraft fees charged as the result of increases in overdraft balances as compared to the same period in 2014. For the year ended December 31, 2015, the Company saw higher mortgage loan sale volumes than in 2014, and in turn, higher mortgage fee income. Other noninterest income was down as compared to the same period of 2014. There was a decrease in other noninterest income for the year ended December 31, 2015, which was primarily due to recognition of income in 2014 from income related to proceeds received from a bank owned life insurance policy in the amount of $483,000 in the second quarter of 2014.
Noninterest Expense
The following table sets forth the components of noninterest expense for the periods indicated:
|
| | | | | | |
| | For the year ended December 31, |
| (Dollars in thousands) | 2015 | 2014 |
| Salaries and employee benefits | 11,538 |
| 11,191 |
|
| Occupancy and equipment expense | 1,977 |
| 2,111 |
|
| Data processing | 912 |
| 959 |
|
| Professional fees | 1,201 |
| 1,283 |
|
| Advertising and business development | 853 |
| 845 |
|
| Losses on sale and writedowns of foreclosed assets, net | 187 |
| 434 |
|
| Foreclosed assets, net of rental income | 130 |
| 219 |
|
| Other expense | 3,744 |
| 3,531 |
|
| Total noninterest expense | $ | 20,542 |
| $ | 20,573 |
|
Salaries and employee benefits were slightly higher for the year ended December 31, 2015 compared to the same period in 2014. This was the result of new hires during 2015 primarily related to the lending area. Occupancy and equipment expense was down for the year ended 2015 as we continue to see cost savings resulting from the purchase of the Channahon branch building. Professional fees also remained fairly consistent for the year ended December 31, 2015, compared to the same period in 2014. Advertising and business development costs were flat as compared to the prior year. Losses on sale and writedowns of foreclosed assets, net, were down from the prior period as a result of larger writedowns on foreclosed assets taken during 2014. During the first quarter of 2014, we reversed the accrual for a contingent liability of approximately $210,000, which lowered other expense for the 2014 period. In addition, there have been some smaller increases in other expenses during the year ended December 31, 2015, such as correspondent fees and restricted stock and stock option expense for directors.
Income Taxes
The Company realized income tax expense of $5.0 million and $2.7 million for the years ended December 31, 2015 and 2014, respectively. Net deferred tax assets were $9.2 million and $14.2 million at December 31, 2015 and December 31, 2014, respectively.
Under U.S. GAAP, a valuation allowance against a net deferred tax asset is required to be recognized if it is more-likely-than-not that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax asset is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, forecasts of future income, applicable tax planning strategies and assessments of current and future economic and business conditions. As of December 31, 2015, the Company did not have a valuation allowance against the net deferred tax assets.
The Company had a federal net operating loss carryforward of $9.3 million and $20.3 million at December 31, 2015 and December 31, 2014, respectively, which could be used to offset future regular corporate federal income tax as of December 31, 2015 and December 31, 2014. The net operating loss carryforward expires between the December 31, 2031 and December 31, 2033, fiscal tax years. The Company had an Illinois net operating loss carryforward of $11.1 million and $22.6 million at December 31, 2015 and December 31, 2014, respectively, that could be used to offset future regular corporate state income tax, as of December 31, 2015 and December 31, 2014. This Illinois net operating loss carryforward will expire between the December 31, 2026 and December 31, 2028, fiscal tax years.
Financial Condition
Our assets totaled $1.0 billion at December 31, 2015 as compared to $924.1 million at December 31, 2014, an increase of $116.6 million, or 12.62%. Total loans at December 31, 2015 and December 31, 2014 were $772.3 million and $689.2 million, respectively, an increase of $83.1 million, or 12.06%. Total deposits were $866.0 million and $769.4 million at December 31, 2015 and December 31, 2014, respectively, an increase of $96.6 million, or 12.55%.
Loans
The loan portfolio consists principally of loans to individuals and small- and medium-sized businesses within our primary market area. The table below shows our loan portfolio composition (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2015 | December 31, 2014 | December 31, 2013 | December 31, 2012 | December 31, 2011 |
| | Amount | % of Total | Amount | % of Total | Amount | % of Total | Amount | % of Total | Amount | % of Total |
| Construction and Land Development | $ | 22,082 |
| 3 | % | $ | 18,700 |
| 3 | % | $ | 20,745 |
| 3 | % | $ | 30,494 |
| 5 | % | $ | 41,946 |
| 6 | % |
| Farmland and Agricultural Production | 9,989 |
| 1 | % | 9,350 |
| 1 | % | 8,505 |
| 1 | % | 7,211 |
| 1 | % | 12,761 |
| 2 | % |
| Residential 1-4 Family | 135,864 |
| 18 | % | 100,773 |
| 15 | % | 86,770 |
| 13 | % | 77,567 |
| 12 | % | 86,703 |
| 13 | % |
| Multifamily | 34,272 |
| 5 | % | 24,426 |
| 4 | % | 21,939 |
| 3 | % | 19,149 |
| 3 | % | 17,998 |
| 3 | % |
| Commercial Real Estate | 381,098 |
| 49 | % | 353,973 |
| 51 | % | 344,750 |
| 53 | % | 347,752 |
| 55 | % | 361,883 |
| 52 | % |
| Commercial and Industrial | 179,623 |
| 23 | % | 171,452 |
| 25 | % | 159,427 |
| 25 | % | 140,895 |
| 22 | % | 147,184 |
| 21 | % |
| Consumer and other | 9,417 |
| 1 | % | 10,706 |
| 1 | % | 10,315 |
| 2 | % | 14,361 |
| 2 | % | 23,385 |
| 3 | % |
| Total Loans | $ | 772,345 |
| 100 | % | $ | 689,380 |
| 100 | % | $ | 652,451 |
| 100 | % | $ | 637,429 |
| 100 | % | $ | 691,860 |
| 100 | % |
Total loans increased by $83.1 million during the twelve months ended December 31, 2015 as a result of new loan originations. New loans originated during the twelve months ended December 31, 2015 were primarily in the commercial real estate, multifamily, commercial and industrial, and residential 1-4 family categories.
The contractual maturity distributions of our loan portfolio as of December 31, 2015 are indicated in the tables below:
|
| | | | | | | | | | | | |
| | Loans Maturities December 31, 2015 |
| (Dollars in thousands) | Within One Year | One Year to Five Years | After Five Years | Total |
| Construction and Land Development | $ | 14,536 |
| $ | 6,213 |
| $ | 1,333 |
| $ | 22,082 |
|
| Farmland and Agricultural Production | 2,459 |
| 7,530 |
| — |
| 9,989 |
|
| Residential 1-4 Family | 18,104 |
| 84,410 |
| 33,350 |
| 135,864 |
|
| Multifamily | 3,212 |
| 29,704 |
| 1,356 |
| 34,272 |
|
| Commercial Real Estate | 27,647 |
| 251,807 |
| 101,644 |
| 381,098 |
|
| Commercial and Industrial | 79,817 |
| 87,470 |
| 12,336 |
| 179,623 |
|
| Consumer and other | 3,072 |
| 6,345 |
| — |
| 9,417 |
|
| Total | $ | 148,847 |
| $ | 473,479 |
| $ | 150,019 |
| $ | 772,345 |
|
|
| | | |
| | December 31, 2015 |
| (Dollars in thousands) | Due After One Year |
| Loans with: | |
| Predetermined interest rates | $ | 113,403 |
|
| Floating or adjustable rates | 510,095 |
|
| | $ | 623,498 |
|
Allowance for Loan Losses
Management reviews the level of the allowance for loan losses on a quarterly basis. The methodology used to assess the adequacy of the allowance includes the allocation of specific and general reserves. The specific component relates to loans that are impaired. For such loans that are classified as impaired, an allowance is established when the collateral value, discounted cash flows or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. These qualitative factors include local economic trends, concentrations, management experience, and other elements of the Company’s lending operations.
At December 31, 2015 and December 31, 2014, the allowance for loan losses was $11.7 million and $13.9 million, respectively. Over the past year, we have seen a reduction in the allowance to total loan percentage from 2.02% at December 31, 2014, to 1.52% at December 31, 2015. This decrease has been the result of the reduction in nonperforming assets and an improving net charge-off history, which is the starting point for the Company’s allowance for loan losses calculation. In addition, the allowance for loan losses to nonperforming loans increased from 198.72% at December 31, 2014, to 794.38% at December 31, 2015.
For the years ended December 31, 2015 and 2014, the Company had net charge-offs of $87,000 and $4.9 million, respectively. Overall decreases in charge-offs have been seen over the past year as a result of the continued improvement in asset quality.
Charge-offs and recoveries for each major loan category are shown in the table below:
|
| | | | | | | | | | | | | | | |
| | Year ended December 31, |
| (Dollars in thousands) | 2015 | 2014 | 2013 | 2012 | 2011 |
| Balance at beginning of period | $ | 13,905 |
| $ | 15,820 |
| $ | 22,878 |
| $ | 26,991 |
| $ | 24,799 |
|
| Charge-offs: | | | | | |
| Construction and Land Development | — |
| 1,186 |
| 1,295 |
| 1,762 |
| 8,397 |
|
| Farmland and Agricultural Production | — |
| — |
| — |
| 1,353 |
| — |
|
| Residential 1-4 Family | 195 |
| 264 |
| 1,192 |
| 946 |
| 1,744 |
|
| Multifamily | — |
| — |
| — |
| — |
| 102 |
|
| Commercial Real Estate | 548 |
| 2,836 |
| 8,511 |
| 8,027 |
| 4,595 |
|
| Commercial and Industrial | 1,106 |
| 2,321 |
| 6,229 |
| 1,452 |
| 2,005 |
|
| Consumer and other | 10 |
| 26 |
| 604 |
| — |
| 35 |
|
| Total charge-offs | $ | 1,859 |
| $ | 6,633 |
| $ | 17,831 |
| $ | 13,540 |
| $ | 16,878 |
|
| Recoveries: | | | | | |
| Construction and Land Development | 71 |
| 73 |
| 1,470 |
| 605 |
| 503 |
|
| Farmland and Agricultural Production | — |
| — |
| 5 |
| — |
| — |
|
| Residential 1-4 Family | 254 |
| 32 |
| 266 |
| 84 |
| 78 |
|
| Multifamily | — |
| — |
| — |
| — |
| 15 |
|
| Commercial Real Estate | 1,235 |
| 1,292 |
| 394 |
| 1,123 |
| 863 |
|
| Commercial and Industrial | 202 |
| 315 |
| 627 |
| 547 |
| 162 |
|
| Consumer and other | 10 |
| 6 |
| 9 |
| 6 |
| 2 |
|
| Total recoveries | $ | 1,772 |
| $ | 1,718 |
| $ | 2,771 |
| $ | 2,365 |
| $ | 1,623 |
|
| Net charge-offs | 87 |
| 4,915 |
| 15,060 |
| 11,175 |
| 15,255 |
|
| Provision for loan losses | (2,077 | ) | 3,000 |
| 8,002 |
| 7,062 |
| 17,447 |
|
| Allowance for loan losses at end of period | $ | 11,741 |
| $ | 13,905 |
| $ | 15,820 |
| $ | 22,878 |
| $ | 26,991 |
|
| Selected loan quality ratios: | | | | | |
| Net charge-offs to average loans | 0.01 | % | 0.73 | % | 2.28 | % | 1.70 | % | 2.02 | % |
| Allowance to total loans | 1.52 | % | 2.02 | % | 2.42 | % | 3.59 | % | 3.90 | % |
| Allowance to nonperforming loans | 794.38 | % | 198.73 | % | 68.21 | % | 81.88 | % | 80.07 | % |
The following table provides additional detail of the balance of the allowance for loan losses by portfolio segment:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, | | |
| (Dollars in thousands) | 2015 | 2014 | 2013 | 2012 | 2011 |
| Balance at end of period applicable to: | Amount | % of Total Loans | Amount | % of Total Loans | Amount | % of Total Loans | Amount | % of Total Loans | Amount | % of Total Loans |
| Construction and Land Development | $ | 813 |
| 7 | % | $ | 758 |
| 5 | % | $ | 2,711 |
| 17 | % | $ | 4,755 |
| 21 | % | $ | 6,252 |
| 23 |
|
| Farmland and Agricultural Production | 43 |
| — | % | 459 |
| 3 | % | 427 |
| 3 | % | 472 |
| 2 |
| 1,595 |
| 6 |
|
| Residential 1-4 Family | 1,370 |
| 12 | % | 1,199 |
| 9 | % | 1,440 |
| 9 | % | 2,562 |
| 11 |
| 2,408 |
| 9 |
|
| Multifamily | 141 |
| 1 | % | 67 |
| 1 | % | 97 |
| 1 | % | 209 |
| 1 |
| 313 |
| 1 |
|
| Commercial Real Estate | 4,892 |
| 42 | % | 6,828 |
| 49 | % | 7,812 |
| 49 | % | 11,655 |
| 51 |
| 11,125 |
| 41 |
|
| Commercial | 4,286 |
| 37 | % | 4,296 |
| 31 | % | 3,183 |
| 20 | % | 3,075 |
| 13 |
| 4,337 |
| 16 |
|
| Consumer and other | 196 |
| 1 | % | 298 |
| 2 | % | 150 |
| 1 | % | 150 |
| 1 |
| 280 |
| 1 |
|
| Unallocated | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 681 |
| 3 |
|
| Total | $ | 11,741 |
| 100 | % | $ | 13,905 |
| 100 | % | $ | 15,820 |
| 100 | % | $ | 22,878 |
| 100 | % | $ | 26,991 |
| 100 | % |
Impaired Loans
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining the impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls on a case by case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis using the fair value of collateral if the loan is collateral dependent, the present value of expected future cash flows discounted at the loan’s effective interest rate, or the loan’s obtainable market price due to financial difficulties of the borrower.
Residential 1-4 family and consumer loans are collectively evaluated for impairment since they are not individually risk rated. Accordingly, the Company does not separately identify individual consumer loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.
There were approximately $1.5 million of nonperforming loans at December 31, 2015, which were down from $7.0 million at December 31, 2014.
Impaired loans were $9.8 million and $15.6 million at December 31, 2015 and December 31, 2014, respectively. Included in impaired loans at December 31, 2015 were $1.1 million in loans with valuation allowances totaling $471,000, and $8.7 million in loans without valuation allowances. Included in impaired loans at December 31, 2014 were $1.4 million in loans with valuation allowances totaling $590,000, and $14.2 million in loans without valuation allowances.
The following presents the recorded investment in nonaccrual loans and loans past due over 90 days and still accruing: |
| | | | | | | | | | | | | | | |
| | At December 31, |
| | 2015 | 2014 | 2013 | 2012 | 2011 |
| Nonaccrual loans | $ | 1,411 |
| $ | 6,947 |
| $ | 22,843 |
| $ | 27,941 |
| $ | 38,234 |
|
| Accruing loans delinquent 90 days or more | 67 |
| 50 |
| 351 |
| — |
| — |
|
| Nonperforming loans | 1,478 |
| 6,997 |
| 23,194 |
| 27,941 |
| 38,234 |
|
| Troubled debt restructurings accruing interest | 2,738 |
| 2,814 |
| 3,167 |
| 12,817 |
| 4,500 |
|
We define potential problem loans as loans rated substandard which are still accruing interest. We do not necessarily expect to realize losses on all potential problem loans, but we recognize potential problem loans carry a higher probability of default and require additional attention by management. The aggregate principal amounts of potential problem loans as of December 31, 2015 and December 31, 2014 were approximately $11.8 million and $4.9 million, respectively. Management believes it has established an adequate allowance for probable loan losses, as appropriate under U.S. GAAP and applicable regulatory guidance.
Investment Securities
Investment securities serve to enhance the overall yield on interest earning assets while supporting interest rate sensitivity and liquidity positions, and as collateral on public funds and securities sold under agreements to repurchase. All securities are classified as “available for sale” as the Company intends to hold the securities for an indefinite period of time, but not necessarily to maturity. Securities available for sale are reported at fair value with unrealized gains or losses reported as a separate component of other comprehensive income, net of the related deferred tax effect. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.
The amortized cost and fair value of securities available for sale (in thousands) are as follows:
|
| | | | | | | | | | | | | | | | | | |
| | December 31, 2015 | December 31, 2014 | December 31, 2013 |
| | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value |
| Government sponsored enterprises | $ | 16,284 |
| $ | 16,409 |
| $ | 30,904 |
| $ | 30,951 |
| $ | 22,185 |
| $ | 22,277 |
|
| Residential collateralized mortgage obligations | 62,701 |
| 62,364 |
| 44,095 |
| 44,274 |
| 23,444 |
| 23,237 |
|
| Residential mortgage backed securities | 28,494 |
| 28,291 |
| 27,208 |
| 27,217 |
| 27,924 |
| 28,006 |
|
| Corporate securities | — |
| — |
| — |
| — |
| 29,013 |
| 29,092 |
|
| State and political subdivisions | 96,480 |
| 98,540 |
| 65,240 |
| 66,245 |
| 38,217 |
| 38,704 |
|
| Total securities available for sale | $ | 203,959 |
| $ | 205,604 |
| $ | 167,447 |
| $ | 168,687 |
| $ | 140,783 |
| $ | 141,316 |
|
Available for sale securities increased $36.9 million to $205.6 million at December 31, 2015 from $168.7 million at December 31, 2014, as the Company continued to invest its excess cash, generated as a result of core deposit growth, in investment securities during 2015 in order to generate additional interest income.
Securities with a fair value of $82.2 million and $40.5 million were pledged as collateral on public funds, securities sold under agreements or for other purposes as required or permitted by law, as of December 31, 2015 and December 31, 2014, respectively. The increase in pledged securities is a result of increases in public funds deposits, in addition to securities sold under agreements to repurchase.
The amortized cost of debt securities available for sale as of December 31, 2015, by contractual maturity are shown below (in thousands). Maturities may differ from contractual maturities in residential collateralized mortgage obligations and residential mortgage backed securities because the mortgages underlying the securities may be called or repaid without any penalties. Therefore these securities are segregated in the following maturity summary.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Within One Year | | After One Year Within Five Years | | After Five Years Within Ten Years | | After Ten Years | | Other Securities |
| | Amount | Yield | | Amount | Yield | | Amount | Yield | | Amount | Yield | | Amount |
| Government sponsored enterprises | $ | — |
| — | % | | $ | 6,043 |
| 1.60 | % | | $ | 10,241 |
| 1.95 | % | | $ | — |
| — | % | | $ | — |
|
| Residential collateralized mortgage obligations and residential mortgage backed securities | — |
| — | % | | — |
| — | % | | — |
| — | % | | — |
| — | % | | 91,195 |
|
| State and political subdivisions | 4,216 |
| 2.00 | % | | 19,367 |
| 2.08 | % | | 35,546 |
| 2.43 | % | | 37,351 |
| 2.93 | % | | — |
|
| | $ | 4,216 |
| 2.00 | % | | $ | 25,410 |
| 1.97 | % | | $ | 45,787 |
| 2.32 | % | | $ | 37,351 |
| 2.93 | % | | $ | 91,195 |
|
No tax-equivalent yield adjustments were made as the effect thereof was not material.
Deposits
Deposits, which include noninterest-bearing demand deposits, NOW and money market accounts, savings deposits and time deposits, are the primary source of the Bank’s funds. The Bank offers a variety of products designed to attract and retain customers, with a primary focus on building and expanding relationships. The Bank continues to focus on establishing comprehensive relationships with business borrowers, seeking deposit as well as lending relationships.
The following table sets forth the composition of our deposits at the dates indicated (dollars in thousands):
|
| | | | | | | | | | |
| | December 31, 2015 | December 31, 2014 |
| | Amount | Percent | Amount | Percent |
| Noninterest bearing demand deposits | $ | 196,063 |
| 22.64 | % | $ | 158,329 |
| 20.58 | % |
| NOW and money market accounts | 336,197 |
| 38.82 | % | 269,977 |
| 35.09 | % |
| Savings | 36,207 |
| 4.18 | % | 30,211 |
| 3.93 | % |
| Time deposit certificates of $250,000 or more | 69,961 |
| 8.08 | % | 50,682 |
| 6.59 | % |
| Time deposit certificates, $100,000 to $250,000 | 127,091 |
| 14.68 | % | 145,506 |
| 18.91 | % |
| Other time deposit certificates | 100,472 |
| 11.60 | % | 114,705 |
| 14.90 | % |
| Total | $ | 865,991 |
| 100.00 | % | $ | 769,410 |
| 100.00 | % |
Total deposits increased $96.6 million to $866.0 million at December 31, 2015, from $769.4 million at December 31, 2014. The increase was primarily related to the increase in noninterest bearing demand deposits and NOW and money market accounts, which helped to improve the Bank’s core deposits and lower the Company’s overall cost of funds. Moreover, in 2015, there were increases in brokered deposits in response to funding needs to support the current year’s loan growth.
The composition of brokered deposits included in deposits was as follows (in thousands):
|
| | | | | | |
| | December 31, 2015 | December 31, 2014 |
| NOW and money market accounts | $ | 35,271 |
| $ | — |
|
| Time deposit certificates | 11,874 |
| 9,145 |
|
| | $ | 47,145 |
| $ | 9,145 |
|
The following table sets forth our time deposits segmented by months to maturity and deposit amount (dollars in thousands):
|
| | | | | | | | | | | | |
| | December 31, 2015 |
| | Time Deposits $250 and Greater | Time Deposits of $100 - $250 | Time Deposits of Less than $100 | Total |
| Months to maturity: | | | | |
| Three or less | $ | 18,927 |
| $ | 19,945 |
| $ | 16,427 |
| $ | 55,299 |
|
| Over Three to Six | 7,573 |
| 17,279 |
| 12,364 |
| 37,216 |
|
| Over Six to Twelve | 20,102 |
| 37,657 |
| 27,464 |
| 85,223 |
|
| Over Twelve | 23,358 |
| 52,210 |
| 44,218 |
| 119,786 |
|
| Total | $ | 69,960 |
| $ | 127,091 |
| $ | 100,473 |
| $ | 297,524 |
|
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and the accompanying notes have been prepared in accordance with U.S. GAAP, which require the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.
Off-Balance Sheet Arrangements
Refer to Note 11 of our Consolidated Financial Statements for a description of off-balance sheet arrangements.
Liquidity and Capital Resources
Our goal in liquidity management is to satisfy the cash flow requirements of depositors and borrowers as well as our operating cash needs with cost-effective funding. Our Board of Directors has established an Asset/Liability Policy in order to achieve and maintain earnings performance consistent with long-term goals while maintaining acceptable levels of interest rate risk, a “well-capitalized” balance sheet, and adequate levels of liquidity. This policy designates the Bank’s Asset/Liability Committee (“ALCO”) as the body responsible for meeting these objectives. The ALCO, which includes members of management, reviews liquidity on a periodic basis and approves significant changes in strategies that affect balance sheet or cash flow positions.
Overall deposit levels are monitored on a constant basis as are liquidity policy levels. Primary sources of liquidity include cash and due from banks, short-term investments such as federal funds sold, securities sold under agreements to repurchase, and our investment portfolio, which can also be used as collateral on public funds. Alternative sources of funds include unsecured federal funds lines of credit through correspondent banks, brokered deposits, and FHLB advances. The Bank has established contingency plans in the event of extraordinary fluctuations in cash resources.
The following table reflects the average daily outstanding, year-end outstanding, maximum month-end outstanding and weighted average rates paid for each of the categories of short-term borrowings: |
| | | | | | | | | |
| | December 31, |
| | 2015 | 2014 | 2013 |
| (Dollars in thousands) | | | |
| Securities sold under agreements to repurchase: | | | |
| Balance: | | | |
| Average daily outstanding | $ | 30,849 |
| $ | 29,081 |
| $ | 23,992 |
|
| Outstanding at end of period | 25,069 |
| 29,059 |
| 24,896 |
|
| Maximum month-end outstanding | 37,474 |
| 32,668 |
| 32,431 |
|
| Rate: | | | |
| Weighted average interest rate during the year | 0.15 | % | 0.10 | % | 0.14 | % |
| Weighted average interest rate at end of the period | 0.16 | % | 0.10 | % | 0.11 | % |
| | | | |
| FHLB borrowings: | | | |
| Balance: | | | |
| Average daily outstanding | $ | 1,686 |
| $ | 1,017 |
| $ | 330 |
|
| Outstanding at end of period | 16,000 |
| — |
| — |
|
| Maximum month-end outstanding | 16,000 |
| 5,000 |
| — |
|
| Rate: | | | |
| Weighted average interest rate during the year | 0.18 | % | 0.13 | % | 0.15 | % |
| Weighted average interest rate at end of the period | 0.24 | % | — | % | — | % |
Provisions of the Illinois banking laws place restrictions upon the amount of dividends that can be paid to the Company by the Bank. The availability of dividends may be further limited because of the need to maintain capital ratios satisfactory to applicable regulatory agencies. As of December 31, 2015, the Bank was permitted to pay dividends due to having retained earnings of $2.8 million, compared to an accumulated deficit in recent periods, including an accumulated deficit of $7.0 million at December 31, 2014.
The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial results and condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total, common equity, Tier 1 capital and Tier 1 capital to risk-weighted assets, and Tier 1 capital to average assets, each as defined in the applicable regulations. Management believes, as of December 31, 2015 and
December 31, 2014, the Company and the Bank met all capital adequacy requirements to which they were subject. See Note 12 to our Consolidated Financial Statements for more information.
Critical Accounting Policies and Estimates
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. 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. When establishing the allowance for loan losses, management categorizes loans into risk categories generally based on the nature of the collateral and the basis of repayment.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the Company to recognize adjustments to its allowance based on their judgments of information available to them at the time of their examinations.
The allowance consists of specific and general components. The specific component relates to loans that are classified as either doubtful or substandard. For such loans that are classified as impaired, an allowance is established when the collateral value, discounted cash flows or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical loss experience adjusted for qualitative factors. These qualitative factors consider local economic trends, concentrations, management experience, and other elements of the Company’s lending operations.
Foreclosed Assets
Assets acquired through loan foreclosure or other proceedings are initially recorded at fair value less estimated selling costs at the date of foreclosure, establishing a new cost basis. After foreclosure, foreclosed assets are held for sale and are carried at the lower of cost or fair value less estimated costs of disposal. Any valuation adjustments required at the date of transfer are charged to the allowance for loan losses. Subsequently, unrealized losses and realized gains and losses on sales are included in other noninterest income. Operating results from foreclosed assets are recorded in other noninterest expense.
Income taxes
Deferred taxes are provided using the liability method. Deferred tax assets are recognized for deductible temporary differences, operating loss and tax credit carryforwards while deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company follows the accounting guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. There were no uncertain tax positions as of December 31, 2015 and December 31, 2014.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized or sustained upon examination. The term more-likely-than-not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
FIRST COMMUNITY FINANCIAL PARTNERS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015 and 2014
INDEX
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| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | |
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| FINANCIAL STATEMENTS | |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
First Community Financial Partner, Inc.
Joliet, Illinois
We have audited the accompanying consolidated balance sheets of First Community Financial Partners, Inc. and subsidiaries (the Company) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the years then ended. First Community Financial Partners, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes 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, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Community Financial Partners, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ CliftonLarsonAllen LLP
Oak Brook, Illinois
March 11, 2016
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
|
| | | | | | |
| First Community Financial Partners, Inc. and Subsidiaries | | |
| Consolidated Balance Sheets | December 31, |
| | 2015 | 2014 |
| Assets | (in thousands, except per share data) |
| Cash and due from banks | $ | 10,699 |
| $ | 13,329 |
|
| Interest-bearing deposits in banks | 7,406 |
| 19,667 |
|
| Securities available for sale | 205,604 |
| 168,687 |
|
| Non-marketable equity securities | 1,367 |
| 1,367 |
|
| Mortgage loans held for sale | 400 |
| 738 |
|
| Loans, net of allowance for loan losses of $11,741 in 2015; $13,905 in 2014 | 760,578 |
| 675,288 |
|
| Premises and equipment, net | 18,529 |
| 19,369 |
|
| Foreclosed assets | 5,487 |
| 2,530 |
|
| Cash surrender value of life insurance | 16,561 |
| 4,323 |
|
| Deferred tax asset, net | 9,191 |
| 14,233 |
|
| Accrued interest receivable and other assets | 4,830 |
| 4,544 |
|
| Total assets | $ | 1,040,652 |
| $ | 924,075 |
|
| | | |
| Liabilities and Shareholders’ Equity |
|
|
| Liabilities |
|
|
| Deposits |
|
|
| Noninterest bearing | $ | 196,063 |
| $ | 158,329 |
|
| Interest bearing | 669,928 |
| 611,081 |
|
| Total deposits | 865,991 |
| 769,410 |
|
| Other borrowed funds | 53,015 |
| 29,529 |
|
| Subordinated debt | 15,300 |
| 29,133 |
|
| Accrued interest payable and other liabilities | 3,305 |
| 3,950 |
|
| Total liabilities | 937,611 |
| 832,022 |
|
| | | |
| Concentrations, Commitments and Contingencies (Note 11) |
|
|
|
|
| | | |
| First Community Financial Partners, Inc. Shareholders’ Equity | | |
| Common stock, $1.00 par value; 60,000,000 shares authorized; 17,026,941 issued and outstanding at December 31, 2015 and 16,668,002 issued and outstanding at December 31, 2014 | 17,027 |
| 16,668 |
|
| Additional paid-in capital | 82,211 |
| 81,648 |
|
| Retained earnings (accumulated deficit) | 2,800 |
| (7,019 | ) |
| Accumulated other comprehensive income | 1,003 |
| 756 |
|
| Total shareholders' equity | 103,041 |
| 92,053 |
|
| Total liabilities and shareholders' equity | $ | 1,040,652 |
| $ | 924,075 |
|
| | | |
| See Notes to Consolidated Financial Statements. | | |
|
| | | | | | |
| First Community Financial Partners, Inc. and Subsidiaries | | |
| Consolidated Statements of Operations | | |
| Years Ended December 31, |
| 2015 | 2014 |
| Interest income: | (in thousands, except share data) |
| Loans, including fees | $ | 32,525 |
| $ | 32,066 |
|
| Securities | 4,134 |
| 3,104 |
|
| Federal funds sold and other | 66 |
| 78 |
|
| Total interest income | 36,725 |
| 35,248 |
|
| Interest expense: |
|
|
| Deposits | 3,923 |
| 4,439 |
|
| Federal funds purchased and other borrowed funds | 215 |
| 68 |
|
| Subordinated debt | 1,800 |
| 1,841 |
|
| Total interest expense | 5,938 |
| 6,348 |
|
| Net interest income | 30,787 |
| 28,900 |
|
| Provision for loan losses | (2,077 | ) | 3,000 |
|
| Net interest income after provision for loan losses | 32,864 |
| 25,900 |
|
| Noninterest income: |
|
|
| Service charges on deposit accounts | 756 |
| 677 |
|
| Gain on sale of loans | — |
| 39 |
|
| Gain on sale of securities | 484 |
| 912 |
|
| Gain on foreclosed assets, net | — |
| 19 |
|
| Mortgage fee income | 531 |
| 402 |
|
| Other | 726 |
| 1,244 |
|
| 2,497 |
| 3,293 |
|
| Noninterest expenses: |
|
|
| Salaries and employee benefits | 11,538 |
| 11,191 |
|
| Occupancy and equipment expense | 1,977 |
| 2,111 |
|
| Data processing | 912 |
| 959 |
|
| Professional fees | 1,201 |
| 1,283 |
|
| Advertising and business development | 853 |
| 845 |
|
| Losses on sale and writedowns of foreclosed assets, net | 187 |
| 434 |
|
| Foreclosed assets expenses, net of rental income | 130 |
| 219 |
|
| Other expense | 3,744 |
| 3,531 |
|
| 20,542 |
| 20,573 |
|
| Income before income taxes | 14,819 |
| 8,620 |
|
| Income taxes | 5,000 |
| 2,737 |
|
| Net income attributable to First Community Financial Partners | 9,819 |
| 5,883 |
|
| Dividends and accretion on preferred shares | — |
| (526 | ) |
| Gain on redemption of preferred shares | — |
| 5 |
|
| Net income applicable to common shareholders | $ | 9,819 |
| $ | 5,362 |
|
| | | |
| Common share data | | |
| Basic earnings per common share | $ | 0.58 |
| $ | 0.32 |
|
| Diluted earnings per common share | 0.57 |
| 0.32 |
|
| | | |
| Weighted average common shares outstanding for basic earnings per common share | 16,939,010 |
| 16,515,489 |
|
| Weighted average common shares outstanding for diluted earnings per common share | 17,085,752 |
| 16,741,215 |
|
| | | |
| See Notes to Consolidated Financial Statements. | | |
|
| | | | | | |
| First Community Financial Partners, Inc. and Subsidiaries | | |
| Consolidated Statements of Comprehensive Income | | |
| | | |
| | Years Ended December 31, |
| | 2015 | 2014 |
| | (in thousands) |
| Net income | $ | 9,819 |
| $ | 5,883 |
|
| | | |
| Unrealized holding gains on investment securities | 889 |
| 1,619 |
|
| Reclassification adjustments for gains included in net income | (484 | ) | (912 | ) |
| Tax effect of realized and unrealized gains and losses on investment securities | (158 | ) | (276 | ) |
| Other comprehensive income, net of tax | 247 |
| 431 |
|
| | | |
| Comprehensive income | $ | 10,066 |
| $ | 6,314 |
|
| | | |
| See Notes to Consolidated Financial Statements. | | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | First Community Financial Partners, Inc. and Subsidiaries | | |
| | Consolidated Statements of Changes in Shareholders’ Equity | |
| | Years ended December 31, 2015 and 2014 | |
| | | | | | | | | |
| | | Series B Preferred Stock | Series C Preferred Stock | Common Stock | Additional Paid-In Capital | Retained earnings (accumulated deficit) | Accumulated Other Comprehensive Income | Total |
| |
| |
| | | (in thousands, except share data) |
| | Balance, December 31, 2013 | $ | 5,176 |
| $ | 892 |
| $ | 16,334 |
| $ | 81,241 |
| $ | (12,381 | ) | $ | 325 |
| $ | 91,587 |
|
| | Net income | — |
| — |
| — |
| — |
| 5,883 |
| — |
| 5,883 |
|
| | Other comprehensive income, net of tax | — |
| — |
| — |
| — |
| — |
| 431 |
| 431 |
|
| | Repurchase of preferred shares | (5,176 | ) | (1,093 | ) | — |
| — |
| 5 |
| — |
| (6,264 | ) |
| | Discount accretion on preferred shares | — |
| 201 |
| — |
| — |
| (201 | ) | — |
| — |
|
| | Dividends on preferred shares | — |
| — |
| — |
| — |
| (325 | ) | — |
| (325 | ) |
| | Issuance of 334,420 shares of common stock for restricted stock awards and amortization | — |
| — |
| 334 |
| (421 | ) | — |
| — |
| (87 | ) |
| | Stock based compensation expense | — |
| — |
| — |
| 828 |
| — |
| — |
| 828 |
|
| | Balance, December 31, 2014 | — |
| — |
| 16,668 |
| 81,648 |
| (7,019 | ) | 756 |
| 92,053 |
|
| | Net income | — |
| — |
| — |
| — |
| 9,819 |
| — |
| 9,819 |
|
| | Other comprehensive income, net of tax | — |
| — |
| — |
| — |
| — |
| 247 |
| 247 |
|
| | Issuance of 306,189 shares of common stock for restricted stock awards and amortization | — |
| — |
| 306 |
| (310 | ) | — |
| — |
| (4 | ) |
| | Issuance of 52,750 shares of common stock for exercise of warrants | — |
| — |
| 53 |
| 178 |
| — |
| — |
| 231 |
|
| | Reclass of warrants upon redemption of subordinated debt, net of amortization | — |
| — |
| — |
| (214 | ) | — |
| — |
| (214 | ) |
| | Stock based compensation expense | — |
| — |
| — |
| 909 |
| — |
| — |
| 909 |
|
| | Balance, December 31, 2015 | $ | — |
| $ | — |
| $ | 17,027 |
| $ | 82,211 |
| $ | 2,800 |
| $ | 1,003 |
| $ | 103,041 |
|
| | | | | | | | | |
| | See Notes to Consolidated Financial Statements. | | | |
|
| | | | | | |
| First Community Financial Partners, Inc. and Subsidiaries | | |
| Consolidated Statements of Cash Flows | | |
| | December 31, |
| | 2015 | 2014 |
| | (in thousands) |
| Cash Flows From Operating Activities | | |
| Net income applicable to First Community Financial Partners, Inc. | $ | 9,819 |
| $ | 5,883 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| Net amortization of securities | 1,929 |
| 737 |
|
| Provision for loan losses | (2,077 | ) | 3,000 |
|
| Gain on sale of foreclosed assets, net | (13 | ) | (2 | ) |
| Writedown of foreclosed assets | 200 |
| 417 |
|
| Net accretion (amortization) of deferred loan fees | 87 |
| (75 | ) |
| Warrant accretion | 6 |
| 28 |
|
| Depreciation and amortization of premises and equipment | 1,293 |
| 1,250 |
|
| Realized gains on sales of available for sale securities, net | (484 | ) | (912 | ) |
| Proceeds from life insurance | — |
| 412 |
|
| Increase in cash surrender value of life insurance | (12,238 | ) | (222 | ) |
| Deferred income taxes | 4,884 |
| 2,273 |
|
| Proceeds from sale of loans | — |
| 9,446 |
|
| Gain on sale of loans | — |
| (39 | ) |
| Net increase in mortgage loans held for sale | 338 |
| (738 | ) |
| Net decrease in loans held for sale | — |
| 2,619 |
|
| Increase in accrued interest receivable and other assets | (286 | ) | (378 | ) |
| Decrease in accrued interest payable and other liabilities | (411 | ) | (1,858 | ) |
| Restricted stock compensation expense | 838 |
| 828 |
|
| Stock option compensation expense | 71 |
| — |
|
| Net cash provided by operating activities | 3,956 |
| 22,669 |
|
| Cash Flows From Investing Activities | | |
| Net change in interest bearing deposits in banks | 12,261 |
| 9,625 |
|
| Activity in available for sale securities: | | |
| Purchases | (88,757 | ) | (126,494 | ) |
| Maturities, prepayments and calls | 20,350 |
| 28,408 |
|
| Sales | 30,450 |
| 71,597 |
|
| Purchases of non-marketable equity securities | — |
| (400 | ) |
| Net increase in loans | (86,591 | ) | (51,405 | ) |
| Purchases of premises and equipment | (453 | ) | (4,239 | ) |
| Proceeds from sale of foreclosed assets | 147 |
| 1,567 |
|
| Net cash used in investing activities | (112,593 | ) | (71,341 | ) |
| Cash Flows From Financing Activities | | |
| Net increase in deposits | 96,581 |
| 44,009 |
|
| Cash paid on redemption of subordinated debt | (14,060 | ) | — |
|
| Net increase in other borrowings | 23,486 |
| 3,966 |
|
| Proceeds from issuance of subordinated debt | — |
| 9,800 |
|
| Dividends paid on preferred shares | — |
| (325 | ) |
| Repurchase of preferred shares | — |
| (6,264 | ) |
| Net cash provided by financing activities | 106,007 |
| 51,186 |
|
| Net change in cash and due from banks | (2,630 | ) | 2,514 |
|
| Cash and due from banks: | | |
| Beginning | 13,329 |
| 10,815 |
|
| Ending | $ | 10,699 |
| $ | 13,329 |
|
|
| | | | | | |
| Supplemental Disclosures of Cash Flow Information | | |
| Cash payments for interest | $ | 6,421 |
| $ | 6,428 |
|
| Supplemental Schedule of Noncash Investing and Financing Activities | | |
| Transfer of loans to foreclosed assets | 3,291 |
| 96 |
|
| | | |
| See Notes to Consolidated Financial Statements. | | |
Notes to Consolidated Financial Statements
| |
| Note 1. | Summary of Significant Accounting Policies |
Principles of consolidation: The consolidated financial statements include the accounts of First Community Financial Partners, Inc. (the “Company” or “First Community”) and its subsidiaries, including its wholly-owned bank subsidiary, First Community Financial Bank (the “Bank”), based in Plainfield, Illinois, and other wholly-owned real estate holding entities.
All significant intercompany balances and transactions have been eliminated in consolidation.
Nature of operations: First Community is a bank holding company providing a full range of financial services to individuals and corporate clients through the Bank.
Use of estimates: In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, valuation of foreclosed assets, and the valuation of deferred tax assets.
Presentation of cash flows: For purposes of the statements of cash flows, cash and cash equivalents include cash on hand, cash items and balances due from banks. Cash flows from federal funds sold, interest bearing deposits in banks, loans originated by the Company, deposits and other borrowings are reported as net increases or decreases.
Interest bearing deposits in banks: Interest bearing deposits in banks mature within one year and are carried at cost.
Securities: All securities are classified as available for sale as the Company intends to hold the securities for an indefinite period of time, but not necessarily to maturity. Securities available for sale are reported at fair value with unrealized gains or losses reported as a separate component of other comprehensive income, net of the related deferred tax effect. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.
Declines in the fair value of individual securities available for sale below their cost that are related to credit losses are deemed to be other-than-temporary and reflected in earnings as realized losses. In determining whether other-than-temporary impairment exists, management considers many factors, including (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, and (3) the intent or requirement of the Company to sell its investment in the issuer prior to any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
Non-marketable equity securities: The Company owns common stock issued by the FHLB. No ready market exists for these stocks, and they have no quoted market values. The Bank, as a member of the FHLB, is required to maintain an investment in the capital stock of the FHLB. The stock is redeemable at par value by the FHLB, and is therefore, carried at cost and periodically evaluated for impairment. The Company records dividends in income on the date received.
Loans held for sale: Loans held for sale consists of loans the Company has identified for sale. The loans are transferred from the portfolio to held for sale once the determination is made and they are carried at fair value less any costs to sell with charges being taken through the allowance for loan losses.
Loans: The Company grants commercial, commercial and residential mortgage and consumer loans to clients. A substantial portion of the loan portfolio is represented by commercial and commercial mortgage loans throughout communities in Will, Grundy, DuPage, Cook, and Kane counties in Illinois. The ability of the Company’s loan clients to honor their contracts is dependent upon general economic conditions and real estate values in this area.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield.
The accrual of interest is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on non-accrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Troubled debt restructurings: Loans are accounted for as troubled debt restructurings (“TDRs”) when a borrower is experiencing financial difficulties that leads to a restructuring of the loan, and the Company grants a “concession” to the borrower that they would not otherwise consider. These concessions include a modification of terms such as a reduction of the stated interest rate or loan balance, a reduction of accrued interest, an extension of the maturity date at an interest rate lower than a current market rate for a new loan with similar risk, or some combination thereof to facilitate repayment.
TDRs are classified as impaired loans. TDRs are reviewed at the time of modification and on a quarterly basis to determine if a specific reserve is needed. The carrying amount of the loan is compared to the expected payments to be received, discounted at the loan’s original rate, or for collateral dependent loans, to the fair value of the collateral. Any shortfall is recorded as a specific reserve. Payment performance prior and subsequent to the restructuring is taken into account in assessing whether it is likely that the borrower can meet the new terms. A period of sustained repayment for at least six months generally is required for return to accrual status. This may result in the loan being returned to accrual at the time of restructuring. A loan that is modified at a market rate of interest will not be classified as a TDR in the calendar year subsequent to the restructuring if it is in compliance with the modified terms.
Allowance for loan losses: The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. 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.
When establishing the allowance for loan losses, management categorizes loans into risk categories generally based on the nature of the collateral and the basis of repayment. These risk categories and the relevant risk characteristics are as follows:
Construction and land development loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates, and financial analyses of the developers and property owners. Construction and land development loans are generally based upon estimates of costs and value associated with the completed project. Construction and land development loans often involve the disbursement of substantial funds with repayment primarily dependent upon the success of the completed project. Sources of repayment for these types of loans may be permanent loans from long-term lenders, sales of developed property, or an interim loan commitment until permanent financing is obtained. Generally, these loans have a higher risk profile than other real estate loans due to their repayment being sensitive to real estate values, interest rate changes, governmental regulation of real property, demand and supply of alternative real estate, the availability of long-term financing, and changes in general economic conditions.
Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to ensure repayment of loans and mitigate loss exposure. As part of the underwriting process, the Company examines current and projected cash flows to determine the ability of the borrower to repay its obligation as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of the borrower, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and usually incorporate a personal guarantee. However, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent upon the ability of the borrower to collect amounts due from its customers. Agricultural production loans are subject to underwriting standards and processes similar to commercial loans.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans, in addition to those standards and processes specific to real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is largely dependent upon the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate market or in the general economy. The properties securing the Company’s commercial real estate portfolio are
diverse in terms of type and geographic location within Will, Grundy, Dupage, Cook and Kane counties and their surrounding communities. Management monitors and evaluates commercial real estate loans based on cash flow, collateral, geography, and risk grade criteria. Farmland loans are subject to underwriting standards and processes similar to commercial real estate loans.
Residential 1-4 family and consumer loans are underwritten by evaluating the credit history of the borrower, the ability of the borrower to meet the debt service requirements of the loan and total debt obligations, as well as the underlying collateral and the loan to collateral value. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, loan-to-value and affordability ratios, risk-based pricing strategies, and documentation requirements. Included in the Company’s residential 1-4 family loans are loans made to investors. These loans are underwritten using the same criteria as other residential 1-4 family loans.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the Company to recognize adjustments to its allowance based on their judgments of information available to them at the time of their examinations.
The allowance consists of specific and general components. The specific component relates to impaired loans. For loans classified as impaired, an allowance is established when the collateral value, discounted cash flows or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. These qualitative factors consider local economic trends, concentrations, management experience, and other elements of the Company’s lending operations.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining the impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the fair value of collateral if the loan is collateral dependent, the present value of expected future cash flows discounted at the loan’s effective interest rate, or the loan’s obtainable market price.
Residential 1-4 family and consumer loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.
Premises and equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed over the lesser of the remaining lease term, including renewal options controlled by the Company or the assets’ useful lives using the straight-line method.
Foreclosed assets: Assets acquired through loan foreclosure or other proceedings are initially recorded at fair value less estimated selling costs at the date of foreclosure establishing a new cost basis. After foreclosure, foreclosed assets are held for sale and are carried at the lower of cost or fair value less estimated costs of disposal. Any valuation adjustments required at the date of transfer are charged to the allowance for loan losses. Subsequently, unrealized losses and realized losses on sales are included in noninterest expense, while realized gains on sales are included in noninterest income. Operating results from foreclosed assets are recorded in noninterest expense.
Cash surrender value of life insurance: The Bank has purchased bank-owned life insurance policies on certain executives. Bank-owned life insurance is recorded at its cash surrender value. Changes in the cash surrender values and death proceeds after recovery of cash surrender values are included in non-interest income.
Transfers of financial assets: Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2)
the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
The transfer of a participating interest in an entire financial asset must also meet the definition of a participating interest. A participating interest in a financial asset has all of the following characteristics: (1) from the date of transfer, it must represent a proportionate (pro rata) ownership interest in the financial asset, (2) from the date of transfer, all cash flows received, except any cash flows allocated as any compensation for servicing or other services performed, must be divided proportionately among participating interest holders in the amount equal to their share ownership, (3) the rights of each participating interest holder must have the same priority, (4) no party has the right to pledge or exchange the entire financial asset unless all participating interest holders agree to do so.
Income taxes: Deferred taxes are provided using the liability method. Deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely- -than-not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company follows the accounting guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. There are no uncertain tax positions as of December 31, 2015 and 2014.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized or sustained upon examination. The term more-likely-than-not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.
The Company would recognize interest and penalties on income taxes as a component of income tax expense.
The Company is no longer subject to U.S. federal or state and local income tax examinations by tax authorities for years before 2012.
Stock compensation plans: The Company recognizes compensation cost relating to share-based payment transactions (stock options and restricted stock units) in the consolidated financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued.
The Company calculates and recognizes compensation cost for all stock awards over the employees’ 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. The Company uses a Black-Sholes model 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.
Comprehensive income: Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on securities available for sale net of deferred taxes, are reported as a separate component of the equity section of the balance sheets, such items, along with net income, are components of comprehensive income. The amounts reclassified from accumulated other comprehensive income are included in “gain on sale of securities” in the consolidated statements of operations.
Basic and diluted earnings per common share: Earnings per common share is computed using the two-class method. Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the applicable period. Diluted earnings per share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation and warrants using the treasury stock method.
The following table presents a reconciliation of the number of shares used in the calculation of basic and diluted earnings per common share (amounts in thousands, except common share data). |
| | | | | | |
| | Years Ended December 31, |
| | 2015 | 2014 |
| | | |
| Undistributed earnings allocated to common stock | $ | 9,819 |
| $ | 5,883 |
|
| Less: preferred stock dividends and discount accretion | — |
| (526 | ) |
| Redemption of preferred shares | — |
| 5 |
|
| Net income allocated to common stock | $ | 9,819 |
| $ | 5,362 |
|
| | | |
| Weighted average shares outstanding for basic earnings per common share | 16,939,010 |
| 16,515,489 |
|
| Dilutive effect of stock-based compensation and warrants | 146,742 |
| 225,726 |
|
| Weighted average shares outstanding for diluted earnings per common share | 17,085,752 |
| 16,741,215 |
|
| | | |
| Basic income per common share | $ | 0.58 |
| $ | 0.32 |
|
| Diluted income per common share | 0.57 |
| 0.32 |
|
Segment: The Company’s operations consist of one segment called community banking.
Reclassifications: Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications did not result in any changes to previously reported net income or shareholders’ equity.
Emerging Growth Company Critical Accounting Policy Disclosure
The Company qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act (the “JOBS Act”). Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards. As an emerging growth company, the Company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company elected to take advantage of the benefits of this extended transition period.
Management anticipates that the Company will no longer be considered an emerging growth company, and thus will no longer be eligible to use this extended transition period, after the fiscal year ending December 31, 2018.
| |
| Note 2. | Securities Available for Sale |
All securities are classified as “available for sale” as the Company intends to hold the securities for an indefinite period of time, but not necessarily to maturity. Securities available for sale are reported at fair value with unrealized gains or losses reported as a separate component of other comprehensive income, net of the related deferred tax effect. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. The amortized cost and fair value of securities available for sale, with gross unrealized gains and losses, follows (in thousands):
|
| | | | | | | | | | | | |
| December 31, 2015 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| Government sponsored enterprises | $ | 16,284 |
| $ | 125 |
| $ | — |
| $ | 16,409 |
|
| Residential collateralized mortgage obligations | 62,701 |
| 138 |
| 475 |
| 62,364 |
|
| Residential mortgage backed securities | 28,494 |
| 65 |
| 268 |
| 28,291 |
|
| State and political subdivisions | 96,480 |
| 2,178 |
| 118 |
| 98,540 |
|
| | $ | 203,959 |
| $ | 2,506 |
| $ | 861 |
| $ | 205,604 |
|
| December 31, 2014 | | | | |
| Government sponsored enterprises | $ | 30,904 |
| $ | 83 |
| $ | 36 |
| $ | 30,951 |
|
| Residential collateralized mortgage obligations | 44,095 |
| 241 |
| 62 |
| 44,274 |
|
| Residential mortgage backed securities | 27,208 |
| 137 |
| 128 |
| 27,217 |
|
| State and political subdivisions | 65,240 |
| 1,096 |
| 91 |
| 66,245 |
|
| | $ | 167,447 |
| $ | 1,557 |
| $ | 317 |
| $ | 168,687 |
|
Securities with a fair value of $82.2 million and $40.5 million were pledged as collateral on public funds, securities sold under agreements to repurchase or for other purposes as required or permitted by law as of December 31, 2015 and December 31, 2014, respectively.
The amortized cost and fair value of debt securities available for sale as of December 31, 2015, by contractual maturity are shown below (in thousands). Maturities may differ from contractual maturities in residential collateralized mortgage obligations and residential mortgage backed securities because the mortgages underlying the securities may be called or repaid without any penalties. Therefore, these securities are segregated in the following maturity summary:
|
| | | | | | |
| | Amortized | Fair |
| | Cost | Value |
| Within 1 year | $ | 4,216 |
| $ | 4,244 |
|
| Over 1 year through 5 years | 25,410 |
| 25,729 |
|
| Over 5 years through 10 years | 45,787 |
| 46,421 |
|
| Over 10 years | 37,351 |
| 38,555 |
|
| Residential collateralized mortgage obligations and mortgage backed securities | 91,195 |
| 90,655 |
|
| | $ | 203,959 |
| $ | 205,604 |
|
Gains on the sales of securities were $484,000 and $912,000 during the twelve months ended December 31, 2015 and 2014, respectively.
There were no securities with material unrealized losses existing longer than 12 months, and no securities with unrealized losses which management believed were other-than-temporarily impaired, at December 31, 2015 and December 31, 2014.
The unrealized losses in the portfolio at December 31, 2015 resulted from fluctuations in market interest rates and not from deterioration in the creditworthiness of the issuers. Because the Company does not intend to sell and does not believe it will be required to sell these securities until market price recovery or maturity, these investment securities are not considered to be other-than-temporarily impaired.
A summary of the balances of loans follows (in thousands):
|
| | | | | | |
| | December 31, 2015 | December 31, 2014 |
| Construction and Land Development | $ | 22,082 |
| $ | 18,700 |
|
| Farmland and Agricultural Production | 9,989 |
| 9,350 |
|
| Residential 1-4 Family | 135,864 |
| 100,773 |
|
| Multifamily | 34,272 |
| 24,426 |
|
| Commercial Real Estate | 381,098 |
| 353,973 |
|
| Commercial and Industrial | 179,623 |
| 171,452 |
|
| Consumer and other | 9,417 |
| 10,706 |
|
| | 772,345 |
| 689,380 |
|
| Net deferred loan fees | (26 | ) | (187 | ) |
| Allowance for loan losses | (11,741 | ) | (13,905 | ) |
| | $ | 760,578 |
| $ | 675,288 |
|
The following table presents the contractual aging of the recorded investment in past due and non-accrual loans by class of loans as of December 31, 2015 and December 31, 2014 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| December 31, 2015 | Current | 30-59 Days Past Due | 60-89 Days Past Due | 90+ Days Past Due and Still Accruing | Total Accruing Loans | Non-accrual Loans | Total Loans |
| Construction and Land Development | $ | 21,885 |
| $ | — |
| $ | 197 |
| — |
| $ | 22,082 |
| $ | — |
| $ | 22,082 |
|
| Farmland and Agricultural Production | 9,989 |
| — |
| — |
| — |
| 9,989 |
| — |
| 9,989 |
|
| Residential 1-4 Family | 135,632 |
| 182 |
| — |
| — |
| 135,814 |
| 50 |
| 135,864 |
|
| Multifamily | 34,272 |
| — |
| — |
| — |
| 34,272 |
| — |
| 34,272 |
|
| Commercial Real Estate |
|
|
|
|
|
|
|
| Retail | 95,570 |
| — |
| — |
| — |
| 95,570 |
| — |
| 95,570 |
|
| Office | 55,151 |
| — |
| — |
| — |
| 55,151 |
| — |
| 55,151 |
|
| Industrial and Warehouse | 65,536 |
| — |
| — |
| — |
| 65,536 |
| — |
| 65,536 |
|
| Health Care | 29,985 |
| — |
| — |
| — |
| 29,985 |
| — |
| 29,985 |
|
| Other | 134,762 |
| — |
| — |
| — |
| 134,762 |
| 94 |
| 134,856 |
|
| Commercial and Industrial | 178,289 |
| — |
| — |
| 67 |
| 178,356 |
| 1,267 |
| 179,623 |
|
| Consumer and other | 9,417 |
| — |
| — |
| — |
| 9,417 |
| — |
| 9,417 |
|
| Total | $ | 770,488 |
| $ | 182 |
| $ | 197 |
| 67 |
| $ | 770,934 |
| $ | 1,411 |
| $ | 772,345 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2014 | Current | 30-59 Days Past Due | 60-89 Days Past Due | 90+ Days Past Due and Still Accruing | Total Accruing Loans | Non-accrual Loans | Total Loans |
| Construction and Land Development | $ | 18,619 |
| $ | — |
| $ | 81 |
| $ | — |
| $ | 18,700 |
| $ | — |
| $ | 18,700 |
|
| Farmland and Agricultural Production | 9,350 |
| — |
| — |
| — |
| 9,350 |
| — |
| 9,350 |
|
| Residential 1-4 Family | 100,285 |
| — |
| 109 |
| — |
| 100,394 |
| 379 |
| 100,773 |
|
| Multifamily | 24,426 |
| — |
| — |
| — |
| 24,426 |
| — |
| 24,426 |
|
| Commercial Real Estate |
|
|
|
|
|
|
|
| | | |
| Retail | 91,725 |
| — |
| — |
| — |
| 91,725 |
| — |
| 91,725 |
|
| Office | 44,255 |
| — |
| — |
| — |
| 44,255 |
| — |
| 44,255 |
|
| Industrial and Warehouse | 57,410 |
| — |
| — |
| — |
| 57,410 |
| 1,907 |
| 59,317 |
|
| Health Care | 26,974 |
| — |
| — |
| — |
| 26,974 |
| — |
| 26,974 |
|
| Other | 128,940 |
| — |
| — |
| — |
| 128,940 |
| 2,762 |
| 131,702 |
|
| Commercial and Industrial | 169,395 |
| — |
| 118 |
| 50 |
| 169,563 |
| 1,889 |
| 171,452 |
|
| Consumer and other | 10,695 |
| 1 |
| — |
| — |
| 10,696 |
| 10 |
| 10,706 |
|
| Total | $ | 682,074 |
| $ | 1 |
| $ | 308 |
| $ | 50 |
| $ | 682,433 |
| $ | 6,947 |
| $ | 689,380 |
|
As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt and comply with various terms of their loan agreements. The Company considers current financial information, historical payment experience, credit documentation, public information and current economic trends. Generally, all sizable credits receive a financial review no less than annually to monitor and adjust, if necessary, the credit’s risk profile. Credits classified as watch generally receive a review more frequently than annually. For special mention, substandard, and doubtful credit classifications, the frequency of review is increased to no less than quarterly in order to determine potential impact on credit loss estimates.
The Company categorizes loans into the following risk categories based on relevant information about the ability of borrowers to service their debt:
Pass - A pass asset is well protected by the current worth and paying capacity of the borrower (or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral in a timely manner. Pass assets also include certain assets considered watch, which are still protected by the worth and paying capacity of the borrower but deserve closer attention and a higher level of credit monitoring.
Special Mention - A special mention asset, or risk rating of 5, has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard - A substandard asset, or risk rating of 6 or 7, is an asset with a well-defined weakness that jeopardizes repayment, in whole or in part, of the debt. These credits are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. These assets are characterized by the distinct possibility that the Company will or has sustained some loss of principal and/or interest if the deficiencies are not corrected.
Doubtful - An asset that has all the weaknesses, or risk rating of 8, inherent in the substandard classification, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. These credits have a high probability for loss, yet because certain important and reasonably specific pending factors may work toward the strengthening of the asset, its classification of loss is deferred until its more exact status can be determined.
Loss - An asset, or portion thereof, classified as loss, or risk rated 9, is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted. This classification does not necessarily mean that an asset has no recovery or salvage value but that it is not practical or desirable to defer writing off this basically worthless asset even though a partial recovery may occur in the future. There was no balance to report at December 31, 2015 and December 31, 2014.
Residential 1-4 family, consumer and other loans are assessed for credit quality based on the contractual aging status of the loan and payment activity. In certain cases, based upon payment performance, the loan being related with another commercial type loan or for other reasons, a loan may be categorized into one of the risk categories noted above. Such assessment is completed at the end of each reporting period.
The following tables present the risk category of loans evaluated by internal asset classification based on the most recent analysis performed and the contractual aging as of December 31, 2015 and December 31, 2014 (in thousands):
|
| | | | | | | | | | | | | | | |
| December 31, 2015 | Pass | Special Mention | Substandard | Doubtful | Total |
| Construction and Land Development | $ | 19,450 |
| $ | 2,632 |
| $ | — |
| $ | — |
| $ | 22,082 |
|
| Farmland and Agricultural Production | 9,989 |
| — |
| — |
| — |
| 9,989 |
|
| Multifamily | 33,598 |
| 674 |
| — |
| — |
| 34,272 |
|
| Commercial Real Estate |
|
|
|
|
|
| Retail | 87,665 |
| — |
| 7,905 |
| — |
| 95,570 |
|
| Office | 55,151 |
| — |
| — |
| — |
| 55,151 |
|
| Industrial and Warehouse | 64,699 |
| 837 |
| — |
| — |
| 65,536 |
|
| Health Care | 29,985 |
| — |
| — |
| — |
| 29,985 |
|
| Other | 128,988 |
| 2,664 |
| 3,192 |
| 12 |
| 134,856 |
|
| Commercial and Industrial | 173,324 |
| 4,714 |
| 355 |
| 1,230 |
| 179,623 |
|
| Total | $ | 602,849 |
| $ | 11,521 |
| $ | 11,452 |
| $ | 1,242 |
| $ | 627,064 |
|
|
| | | | | | | | | |
| December 31, 2015 | Performing | Non-performing* | Total |
| Residential 1-4 Family | $ | 135,814 |
| $ | 50 |
| $ | 135,864 |
|
| Consumer and other | 9,417 |
| — |
| 9,417 |
|
| Total | $ | 145,231 |
| $ | 50 |
| $ | 145,281 |
|
|
| | | | | | | | | | | | | | |
| December 31, 2014 | Pass | Special Mention | Substandard | Doubtful | Total |
| Construction and Land Development | $ | 14,900 |
| $ | 3,800 |
| $ | — |
| — |
| $ | 18,700 |
|
| Farmland and Agricultural Production | 9,350 |
| — |
| — |
| — |
| 9,350 |
|
| Multifamily | 24,426 |
| — |
| — |
| — |
| 24,426 |
|
| Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
| Retail | 78,258 |
| 13,467 |
| — |
| — |
| 91,725 |
|
| Office | 44,255 |
| — |
| — |
| — |
| 44,255 |
|
| Industrial and Warehouse | 56,316 |
| 1,094 |
| — |
| 1,907 |
| 59,317 |
|
| Health Care | 26,974 |
| — |
| — |
| — |
| 26,974 |
|
| Other | 121,526 |
| 4,185 |
| 3,329 |
| 2,662 |
| 131,702 |
|
| Commercial and Industrial | 159,648 |
| 8,706 |
| 2,116 |
| 982 |
| 171,452 |
|
| Total | $ | 535,653 |
| $ | 31,252 |
| $ | 5,445 |
| 5,551 |
| $ | 577,901 |
|
|
| | | | | | | | | |
| December 31, 2014 | Performing | Non-performing* | Total |
| Residential 1-4 Family | $ | 100,394 |
| $ | 379 |
| $ | 100,773 |
|
| Consumer and other | 10,696 |
| 10 |
| 10,706 |
|
| Total | $ | 111,090 |
| $ | 389 |
| $ | 111,479 |
|
* Non-performing loans include those on non-accrual status and those past due 90 days or more and still on accrual.
The following table provides additional detail of the activity in the allowance for loan losses, by portfolio segment, for the twelve months ended December 31, 2015 and 2014 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2015 | Construction and Land Development | Farmland and Agricultural Production | Residential 1-4 Family | Multifamily | Commercial Real Estate | Commercial and Industrial | Consumer and other | Total |
| Allowance for loan losses: | | | | | | |
|
|
| Beginning balance | $ | 758 |
| $ | 459 |
| $ | 1,199 |
| $ | 67 |
| $ | 6,828 |
| $ | 4,296 |
| $ | 298 |
| $ | 13,905 |
|
| Provision for loan losses | (16 | ) | (416 | ) | 112 |
| 74 |
| (2,623 | ) | 894 |
| (102 | ) | (2,077 | ) |
| Loans charged-off | — |
| — |
| (195 | ) | — |
| (548 | ) | (1,106 | ) | (10 | ) | (1,859 | ) |
| Recoveries of loans previously charged-off | 71 |
| — |
| 254 |
| — |
| 1,235 |
| 202 |
| 10 |
| 1,772 |
|
| Ending balance | $ | 813 |
| $ | 43 |
| $ | 1,370 |
| $ | 141 |
| $ | 4,892 |
| $ | 4,286 |
| $ | 196 |
| $ | 11,741 |
|
| | | | | | | | | |
| December 31, 2014 | | | | | | |
|
|
| Allowance for loan losses: | | | | | | | | |
| Beginning balance | $ | 2,711 |
| $ | 427 |
| $ | 1,440 |
| $ | 97 |
| $ | 7,812 |
| $ | 3,183 |
| $ | 150 |
| $ | 15,820 |
|
| Provision for loan losses | (840 | ) | 32 |
| (9 | ) | (30 | ) | 560 |
| 3,119 |
| 168 |
| 3,000 |
|
| Loans charged-off | (1,186 | ) | — |
| (264 | ) | — |
| (2,836 | ) | (2,321 | ) | (26 | ) | (6,633 | ) |
| Recoveries of loans previously charged-off | 73 |
| — |
| 32 |
| — |
| 1,292 |
| 315 |
| 6 |
| 1,718 |
|
| Ending balance | $ | 758 |
| $ | 459 |
| $ | 1,199 |
| $ | 67 |
| $ | 6,828 |
| $ | 4,296 |
| $ | 298 |
| $ | 13,905 |
|
The following table presents the balance in the allowance for loan losses and the unpaid principal balance of loans by portfolio segment and based on impairment method as of December 31, 2015 and December 31, 2014 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2015 | Construction and Land Development | Farmland and Agricultural Production | Residential 1-4 Family | Multifamily | Commercial Real Estate | Commercial and Industrial | Consumer and other | Total |
| Period-ended amount allocated to: | | | |
| | | | |
| Individually evaluated for impairment | $ | — |
| $ | — |
| $ | 30 |
| $ | — |
| $ | — |
| $ | 441 |
| $ | — |
| $ | 471 |
|
| Collectively evaluated for impairment | 813 |
| 43 |
| 1,340 |
| 141 |
| 4,892 |
| 3,845 |
| 196 |
| 11,270 |
|
| Ending balance | $ | 813 |
| $ | 43 |
| $ | 1,370 |
| $ | 141 |
| $ | 4,892 |
| $ | 4,286 |
| $ | 196 |
| $ | 11,741 |
|
| Loans: | | | | | | | | |
| Individually evaluated for impairment | $ | — |
| $ | — |
| $ | 1,661 |
| $ | — |
| $ | 4,381 |
| $ | 3,777 |
| $ | — |
| $ | 9,819 |
|
| Collectively evaluated for impairment | 22,082 |
| 9,989 |
| 134,203 |
| 34,272 |
| 376,717 |
| 175,846 |
| 9,417 |
| 762,526 |
|
| Ending balance | $ | 22,082 |
| $ | 9,989 |
| $ | 135,864 |
| $ | 34,272 |
| $ | 381,098 |
| $ | 179,623 |
| $ | 9,417 |
| $ | 772,345 |
|
| | | | | | | | | |
| December 31, 2014 | | | | | | | | |
| Period-ended amount allocated to: | | | | | | | | |
| Individually evaluated for impairment | $ | — |
| — |
| $ | 29 |
| $ | — |
| $ | — |
| $ | 561 |
| $ | — |
| $ | 590 |
|
| Collectively evaluated for impairment | 758 |
| 459 |
| 1,170 |
| 67 |
| 6,828 |
| 3,735 |
| 298 |
| 13,315 |
|
| Ending balance | $ | 758 |
| $ | 459 |
| $ | 1,199 |
| $ | 67 |
| $ | 6,828 |
| $ | 4,296 |
| $ | 298 |
| $ | 13,905 |
|
| Loans: | | | | | | | | |
| Individually evaluated for impairment | $ | — |
| — |
| $ | 2,020 |
| $ | — |
| $ | 9,084 |
| $ | 4,495 |
| $ | 11 |
| $ | 15,610 |
|
| Collectively evaluated for impairment | 18,700 |
| 9,350 |
| 98,753 |
| 24,426 |
| 344,889 |
| 166,957 |
| 10,695 |
| 673,770 |
|
| Ending balance | $ | 18,700 |
| $ | 9,350 |
| $ | 100,773 |
| $ | 24,426 |
| $ | 353,973 |
| $ | 171,452 |
| $ | 10,706 |
| $ | 689,380 |
|
The following tables present additional detail regarding impaired loans, segregated by class, as of and for the twelve months ended December 31, 2015 and year ended December 31, 2014 (dollars in thousands). The unpaid principal balance represents the recorded balance prior to any partial charge-offs. The recorded investment represents customer balances net of any partial charge-offs recognized on the loans. The interest income recognized column represents all interest income reported after the loan became impaired.
|
| | | | | | | | | | | | | | | |
| December 31, 2015 | | |
| Unpaid Principal Balance | Recorded Investment | Allowance for Loan Losses Allocated | Average Recorded Investment | Interest Income Recognized |
| With no related allowance recorded: | | | | | |
| Construction and Land Development | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
| Farmland and Agricultural Production | — |
| — |
| — |
| — |
| — |
|
| Residential 1-4 Family | 1,232 |
| 1,193 |
| — |
| 1,280 |
| 61 |
|
| Multifamily | — |
| — |
| — |
| — |
| — |
|
| Commercial Real Estate | | | | | |
| Retail | — |
| — |
| — |
| — |
| — |
|
| Office | 494 |
| 494 |
| — |
| 502 |
| 26 |
|
| Industrial and Warehouse | — |
| — |
| — |
| 1,441 |
| — |
|
| Health Care | — |
| — |
| — |
| — |
| — |
|
| Other | 3,952 |
| 3,887 |
| — |
| 5,015 |
| 127 |
|
| Commercial and Industrial | 3,331 |
| 3,131 |
| — |
| 3,640 |
| 130 |
|
| Consumer and other | — |
| — |
| — |
| 4 |
| — |
|
| With an allowance recorded: | | | | | |
| Construction and Land Development | — |
| — |
| — |
| — |
| — |
|
| Farmland and Agricultural Production | — |
| — |
| — |
| — |
| — |
|
| Residential 1-4 Family | 468 |
| 468 |
| 30 |
| 473 |
| 23 |
|
| Multifamily | — |
| — |
| — |
| — |
| — |
|
| Commercial Real Estate | | | | | |
| Retail | — |
| — |
| — |
| — |
| — |
|
| Office | — |
| — |
| — |
| — |
| — |
|
| Industrial and Warehouse | — |
| — |
| — |
| — |
| — |
|
| Health Care | — |
| — |
| — |
| — |
| — |
|
| Other | — |
| — |
| — |
| 64 |
| — |
|
| Commercial and Industrial | 1,109 |
| 646 |
| 441 |
| 491 |
| — |
|
| Consumer and other | — |
| — |
| — |
| — |
| — |
|
| Total | $ | 10,586 |
| $ | 9,819 |
| $ | 471 |
| $ | 12,910 |
| $ | 367 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2014 |
| Unpaid Principal Balance | Recorded Investment | Allowance for Loan Losses Allocated | Average Recorded Investment | Interest Income Recognized |
| With no related allowance recorded: | | | | | |
| Construction and Land Development | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
| Farmland and Agricultural Production | — |
| — |
| — |
| — |
| — |
|
| Residential 1-4 Family | 1,732 |
| 1,543 |
| — |
| 1,298 |
| 63 |
|
| Multifamily | — |
| — |
| — |
| 119 |
| — |
|
| Commercial Real Estate | | | | | |
| Retail | — |
| — |
| — |
| 707 |
| — |
|
| Office | 511 |
| 510 |
| — |
| 779 |
| 25 |
|
| Industrial and Warehouse | 1,994 |
| 1,907 |
| — |
| 1,550 |
| — |
|
| Health Care | — |
| — |
| — |
| — |
|
|
|
| Other | 9,658 |
| 6,667 |
| — |
| 6,126 |
| 144 |
|
| Commercial and Industrial | 3,733 |
| 3,534 |
| — |
| 4,147 |
| 183 |
|
| Consumer and other | 20 |
| 11 |
| — |
| 14 |
| — |
|
| With an allowance recorded: | | | | | |
| Construction and Land Development | — |
| — |
| — |
| 887 |
| — |
|
| Farmland and Agricultural Production | — |
| — |
| — |
| — |
| — |
|
| Residential 1-4 Family | 477 |
| 477 |
| 29 |
| 637 |
| 31 |
|
| Multifamily | — |
| — |
| — |
| — |
| — |
|
| Commercial Real Estate | | | | | |
| Retail | — |
| — |
| — |
| 1,907 |
| — |
|
| Office | — |
| — |
| — |
| — |
| — |
|
| Industrial and Warehouse | — |
| — |
| — |
| — |
| — |
|
| Health Care | — |
| — |
| — |
| — |
| — |
|
| Other | — |
| — |
| — |
| 1,084 |
| — |
|
| Commercial and Industrial | 1,312 |
| 961 |
| 561 |
| 453 |
| — |
|
| Consumer and other | — |
| — |
| — |
| — |
| — |
|
| Total | $ | 19,437 |
| $ | 15,610 |
| $ | 590 |
| $ | 19,708 |
| $ | 446 |
|
During the year ended December 31, 2015, there were no troubled debt restructurings added. During the year ended December 31, 2014, there were six loans totaling $3.7 million in troubled debt restructurings added, five of which were the result of the payment of real estate taxes by the Bank on the behalf of the customer and the sixth was the result of a payment concession.
Troubled debt restructurings that were accruing were $2.7 million and $2.8 million as of December 31, 2015 and 2014, respectively. Troubled debt restructurings that were non-accruing were $94,000 and $2.8 million as of December 31, 2015 and December 31, 2014.
The following presents a rollfoward activity of troubled debt restructurings (in thousands, except number of loans):
|
| | | | | | | | | | | |
| | Years ended December 31, |
| | 2015 | 2014 |
| | Recorded Investment | Number of Loans | Recorded Investment | Number of Loans |
| Balance, beginning | $ | 5,621 |
| 10 |
| $ | 8,274 |
| $ | 11 |
|
| Additions to troubled debt restructurings | — |
| — |
| 3,711 |
| 6 |
|
| Removal of troubled debt restructurings | (309 | ) | (1 | ) | — |
| — |
|
| Charge-off related to troubled debt restructurings | — |
| — |
| (780 | ) | — |
|
| Transfers to other real estate owned | (1,486 | ) | (1 | ) | (30 | ) | — |
|
| Repayments and other reductions | (994 | ) | (2 | ) | (5,554 | ) | (7 | ) |
| Balance, ending | $ | 2,832 |
| 6 |
| $ | 5,621 |
| 10 |
|
Restructured loans are evaluated for impairment at each reporting date as part of the Company’s determination of the allowance for loan losses.
Executive officers, directors and principal shareholders of the Company, including their families and companies of which they are principal owners, are considered to be related parties. These related parties were loan clients of the Company in the ordinary course of business. Transfers from related party status are loans to directors who have resigned. Loans to related parties totaled as follows (in thousands):
|
| | | | | | |
| | Years ended December 31, |
| | 2015 | 2014 |
| Balance, beginning | $ | 35,583 |
| $ | 30,896 |
|
| New loans | 5,313 |
| 9,677 |
|
| Repayments and other reductions | (1,720 | ) | (3,117 | ) |
| Transfer from related party status | — |
| (1,873 | ) |
| Balance, ending | $ | 39,176 |
| $ | 35,583 |
|
No loans to executive officers, directors, and their affiliates were past due greater than 90 days at December 31, 2015 or 2014.
| |
| Note 4. | Premises and Equipment |
Premises and equipment are summarized as follows (in thousands):
|
| | | | | | |
| | December 31, |
| | 2015 | 2014 |
| | | |
| Land | $ | 4,226 |
| $ | 4,226 |
|
| Building and building improvements | 18,044 |
| 17,793 |
|
| Furniture and equipment | 4,238 |
| 4,036 |
|
| | 26,508 |
| 26,055 |
|
| Less: accumulated depreciation | 7,979 |
| 6,686 |
|
| | $ | 18,529 |
| $ | 19,369 |
|
Depreciation and amortization expense was $1.3 million and $1.3 million for the years ended December 31, 2015 and 2014, respectively.
Rent expense for banking facilities was $169,000 and $301,000 for the years ended December 31, 2015 and 2014, respectively.
The Company leases office space for one of its branches as well as additional back office space. The future minimum annual rental commitments for the noncancelable leases of these spaces are as follows (in thousands):
|
| | | |
| 2016 | 103 |
|
| 2017 | 103 |
|
| 2018 | 103 |
|
| 2019 | 103 |
|
| 2020 | 103 |
|
| Thereafter | 588 |
|
| | $ | 1,103 |
|
Under the terms of these leases, the Company is required to pay its pro rata share of the cost of maintenance and real estate taxes. Certain leases also provide for increased rental payments up to 3%.
During 2014, pursuant to its lease agreement with MCM Building LLC, the lessor, dated December 1, 2010, FCB Joliet, and the Bank as successor to FCB Joliet, made lease payments to MCM Building LLC in an aggregate amount of approximately $59,000 in 2014 with respect to FCB Joliet’s branch located at 25407 South Bell Road, Channahon, Illinois 60410. In 2013,
MCM Building LLC was owned (i) 70% by Roger A. D’Orazio, a First Community director until his resignation in July 2014, (ii) 10% by Rex Easton, a First Community director, (iii) 10% by Terry D’Orazio, the brother of Roger A. D’Orazio, and (iv) 10% by Keith Rezin, a director of the Bank. In March 2014, the Company purchased this building from MCM Building LLC for $3.3 million.
Foreclosed assets are presented net of an allowance for losses. An analysis of the foreclosed assets and the related provision for losses is as follows (in thousands):
|
| | | | | | |
| | Years ended December 31, |
| | 2015 | 2014 |
| | | |
| Beginning Balance | $ | 2,530 |
| $ | 4,416 |
|
| Transfers of loans | 3,291 |
| 96 |
|
| Writedown to realizable value | (200 | ) | (417 | ) |
| Gain (loss) on sale of foreclosed assets | 13 |
| 2 |
|
| Proceeds on sale | (147 | ) | (1,567 | ) |
| Ending Balance | $ | 5,487 |
| $ | 2,530 |
|
Expenses applicable to foreclosed assets include the following:
|
| | | | | | |
| | Years ended December 31, |
| | 2015 | 2014 |
| | | |
| Writedown to realizable value | $ | 200 |
| $ | 417 |
|
| Operating expenses, net of rental income | 130 |
| 219 |
|
| | $ | 330 |
| $ | 636 |
|
The composition of interest-bearing deposits was as follows (in thousands):
|
| | | | | | |
| | December 31, 2015 | December 31, 2014 |
| NOW and money market accounts | $ | 336,197 |
| $ | 269,977 |
|
| Savings | 36,207 |
| 30,211 |
|
| Time deposit certificates of $250,000 or more | 69,961 |
| 50,682 |
|
| Time deposit certificates of $100,000 to $250,000 | 127,091 |
| 145,506 |
|
| Other time deposit certificates | 100,472 |
| 114,705 |
|
| | $ | 669,928 |
| $ | 611,081 |
|
The composition of brokered deposits included in deposits was as follows (in thousands):
|
| | | | | | |
| | December 31, 2015 | December 31, 2014 |
| NOW and money market accounts | $ | 35,271 |
| $ | — |
|
| Time deposit certificates | 11,874 |
| 9,145 |
|
| | $ | 47,145 |
| $ | 9,145 |
|
At December 31, 2015, maturities of certificates of deposit are summarized as follows (in thousands):
|
| | | |
| 2016 | $ | 177,739 |
|
| 2017 | 72,289 |
|
| 2018 | 30,442 |
|
| 2019 | 14,497 |
|
| 2020 | 2,557 |
|
| | $ | 297,524 |
|
Deposits from related parties held by the Bank at December 31, 2015 and 2014 amounted to approximately $34.3 million and $38.5 million, respectively.
The following table summarizes subordinated debt outstanding at December 31, 2015 and 2014 (dollars in thousands): |
| | | | | | | | | |
| Date of issuance | Call date | Maturity Date | Interest rate | 2015 | 2014 |
| | | | | | |
| May 8, 2009 | May 8, 2014 | May 8, 2019 | 8.000% | $ | — |
| $ | 4,060 |
|
| March 12, 2013 | March 12, 2015 | March 12, 2023 | 9.000% | — |
| 9,773 |
|
| September 30, 2013 | September 30, 2018 | September 30, 2021 | 8.625% | 5,500 |
| 5,500 |
|
| October 31, 2014 | October 31, 2019 | October 31, 2022 | 7.00% | 9,800 |
| 9,800 |
|
| Total subordinated debt | | | | $ | 15,300 |
| $ | 29,133 |
|
In May 2009, the Company completed a private placement offering to individual accredited investors of $4.1 million of 8% Series A non-cumulative convertible preferred stock (the “Series A Preferred Stock”) with a purchase price and liquidation preference of $1,000 per share. The Series A Preferred Stock was convertible to common stock at $10.00 per share on or after five years. On July 9, 2009, each share of Series A Preferred Stock was, automatically and without any action on the part of the holder thereof, exchanged for Company subordinated notes in the same face amount as the shares for which they were exchanged. The holders of the notes were entitled to interest at 8.0% payable annually, and the notes were scheduled to mature on the tenth anniversary from the date of issuance. The notes were redeemable by the Company on or after five years of the date of issuance, in whole or in part. The notes were convertible to common stock at $10.00 per share on or after five years. On June 30, 2015 this issuance was refinanced with the secured borrowings discussed in Note 8.
On March 12, 2013, the Company completed a private placement offering of $10.0 million of subordinated indebtedness coupled with warrants to purchase in the aggregate 250,000 shares of Company common stock at a price of $4.00 per share. These securities were offered in denominations of $10,000 per note evidencing the subordinated indebtedness along with a warrant to purchase 250 shares of Company common stock at $4.00 per share. The subordinated indebtedness bears interest at an annual rate of 9.0% and was scheduled to mature on the tenth anniversary from the date of issuance. Interest on the subordinated indebtedness was accrued from the date of issuance and is payable semi-annually, in arrears. The warrants will remain outstanding following any such redemption of the subordinated indebtedness, and will have a term of ten years from the date of issuance, whereafter they will expire. The notes were redeemable by the Company on or after two years from the date of issuance, in whole or in part, at a price equal to 100% of the outstanding principal amount of such note redeemed. Proceeds from the private placement were allocated to the two instruments based on the relative fair values of the subordinated indebtedness without the warrants and of the warrants themselves at time of issuance. The portion of the proceeds allocated to the warrants was approximately $277,000 and was accounted for as paid-in capital at estimated fair value. The remainder of the discount was allocated to the subordinated indebtedness as part of the transaction. The discount will be accreted over the term of the warrants using the interest method. The outstanding balance net of the associated discount was $9.8 million and $9.7 million at December 31, 2014 and 2013, respectively. On June 30, 2015 this issuance was refinanced with the secured borrowings discussed in Note 8.
On September 30, 2013, the Company completed a private placement offering of $5.5 million of subordinated indebtedness. These securities were offered in denominations of $1,000 per note. The subordinated notes will mature on the eighth anniversary of the issuance of the notes. The Company will have the option to redeem the notes in whole or part, upon the
occurrence of certain events affecting the regulatory capital or tax treatment of the notes prior to the fifth anniversary of the issuance. The holders of the notes are entitled to interest at 8.625% payable quarterly, in arrears. On or after the fifth anniversary of the effective date of the subordinated notes, the Company may redeem the notes, in whole or in part. The outstanding balance was $5.5 million at December 31, 2015 and 2014.
On October 31, 2014, the Company completed a private placement offering of $9.8 million of subordinated indebtedness. These securities were offered in denominations of $10,000 per note. The subordinated notes will mature on the eighth anniversary of the issuance of the notes. The Company will have the option to redeem the notes in whole or part, upon the occurrence of certain events affecting the regulatory capital or tax treatment of the notes prior to the fifth anniversary of the issuance. The holders of the notes are entitled to interest at 7.0% payable semi-annually, in arrears. On or after the fifth anniversary of the effective date of the subordinated notes, the Company may redeem the notes, in whole or in part. The outstanding balance was $9.8 million at December 31, 2015 and 2014.
Approximately $2.8 million of the Company’s subordinated debt is held by related parties.
| |
| Note 8. | Other Borrowed Funds |
The composition of other borrowed funds was as follows (in thousands):
|
| | | | | | |
| | December 31, 2015 | December 31, 2014 |
| Securities sold under agreements to repurchase | $ | 25,069 |
| $ | 29,059 |
|
| Federal Home Loan Bank Advances | | |
| Maturity dates, fixed interest rate | | |
| Matures January 6, 2016, 0.28% | 11,000 |
| — |
|
| Matures January 4, 2016, 0.16% | 5,000 |
| — |
|
| Secured borrowings | 11,946 |
| — |
|
| Mortgage note payable | — |
| 470 |
|
| | $ | 53,015 |
| $ | 29,529 |
|
Securities sold under agreements to repurchase are agreements in which the Bank acquires funds by selling securities to another party under a simultaneous agreement to repurchase the same securities at a specified price and date. These agreements represent a demand deposit account product to clients that sweep their balances in excess of an agreed upon target amount into overnight repurchase agreements.
Information pertaining to securities sold under agreements to repurchase as of December 31, 2015 and 2014 is as follows:
|
| | | | | | |
| | December 31, 2015 | December 31, 2014 |
| Sweep repurchase agreements | $ | 25,069 |
| $ | 29,059 |
|
| Weighted average rate | 0.16 | % | 0.10 | % |
| Securities underlying the agreements: | | |
| Carrying value | $ | 40,101 |
| $ | 30,787 |
|
| Fair value | $ | 39,949 |
| $ | 31,042 |
|
| | | |
The securities underlying the agreements as of December 31, 2015 and 2014 were under the Company’s control in safekeeping at third-party financial institutions. The sweep agreements generally mature within one day from the transaction date.
A collateral pledge agreement exists whereby at all times, the Bank must keep on hand, free of all other pledges, liens, and encumbrances, commercial real estate loans, first mortgage loans, and home equity loans with unpaid principal balances aggregating no less than 133% for first mortgage loans and 200% for home equity loans of the outstanding secured advances from the Federal Home Loan Bank of Chicago (“FHLB”). The Bank had $338.0 million and $267.2 million of loans pledged as collateral for FHLB advances as of December 31, 2015 and December 31, 2014, respectively. There were $16 million and $0 in advances outstanding at December 31, 2015 and December 31, 2014, respectively. All FHLB advances were repaid upon maturity in January 2016.
On June 29, 2015, the Company entered into a credit facility with an unaffiliated bank for two credit facilities (secured borrowings). The credit facilities include a $4.0 million revolving line of credit, which had a balance of $1.9 million at December 31, 2015 and a $10.1 million term loan. The revolving line matures in 2020 and the term loan matures in 2021. The credit facilities have an annual interest rate of 2.25% plus LIBOR, which was 2.4% at December 31, 2015. The credit facilities are collateralized by the stock of the Company’s wholly-owned subsidiary, the Bank. These funds were used to repay the subordinated debt as discussed in Note 7.
The mortgage note payable was related to the purchase of a building in Burr Ridge, Illinois, the Bank, as successor in interest to Burr Ridge Bank and Trust, was the obligor to a $1.0 million mortgage note signed on February 28, 2012. During the second quarter of 2015, the remaining balance of this obligation was repaid in full.
The Bank has entered into collateral pledge agreements whereby the Bank pledges commercial, commercial real estate, agricultural and consumer loans to the Federal Reserve Bank of Chicago Discount Window which allows the Bank to borrow on a short term basis, typically overnight. The Bank had $100.1 million and $99.8 million of loans pledged as collateral under these agreements as of December 31, 2015 and December 31, 2014, respectively. There were no borrowings outstanding at December 31, 2015 and December 31, 2014.
Income tax expense recognized is as follows (in thousands):
|
| | | | | | |
| | For years ended December 31, |
| | 2015 | 2014 |
| Current | $ | 116 |
| $ | 464 |
|
| Deferred | 4,884 |
| 2,273 |
|
| | $ | 5,000 |
| $ | 2,737 |
|
The table below presents a reconciliation of the amount of income taxes determined by applying the U.S. federal income tax rate to pretax income (in thousands):
|
| | | | | | |
| | For years ended December 31, |
| 2015 | 2014 |
| Federal income tax at statutory rate | $ | 5,187 |
| $ | 3,017 |
|
| Increase (decrease) due to: |
|
|
| Federal tax exempt | (606 | ) | (331 | ) |
| State income tax, net of federal benefit | 758 |
| 541 |
|
| Benefit of income taxed at lower rate | (148 | ) | (86 | ) |
| Tax exempt income | (29 | ) | (25 | ) |
| Cash surrender value of life insurance | (81 | ) | (186 | ) |
| Other | (81 | ) | (193 | ) |
| $ | 5,000 |
| $ | 2,737 |
|
Deferred tax assets and liabilities consist of (in thousands):
|
| | | | | | |
| December 31, 2015 | December 31, 2014 |
|
| Deferred tax assets: |
|
|
| Allowance for loan losses | $ | 4,169 |
| $ | 4,836 |
|
| Merger expenses | 140 |
| 156 |
|
| Organization expenses | 226 |
| 262 |
|
| Net operating losses | 3,774 |
| 8,320 |
|
| Contribution carryforward | 5 |
| 38 |
|
| Non-qualified stock options | 644 |
| 860 |
|
| Foreclosed assets | 315 |
| 291 |
|
| Tax credits | 334 |
| 374 |
|
| Other | 135 |
| 76 |
|
| 9,742 |
| 15,213 |
|
| Deferred tax liabilities: |
|
|
|
|
| Depreciation | (186 | ) | (334 | ) |
| Unrealized gains on securities available for sale | (642 | ) | (484 | ) |
| Other | 277 |
| (162 | ) |
| (551 | ) | (980 | ) |
| Net deferred tax asset | $ | 9,191 |
| $ | 14,233 |
|
Under U.S. GAAP, a valuation allowance against a net deferred tax asset is required to be recognized if it is more-likely-than-not that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax asset is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, forecasts of future income, applicable tax planning strategies and assessments of current and future economic and business conditions. As of December 31, 2015, the Company did not have a valuation allowance against the net deferred tax assets.
The Company had a federal net operating loss carryforward of $9.3 million and $20.3 million at December 31, 2015 and December 31, 2014, respectively, which could be used to offset future regular corporate federal income tax as of December 31, 2015 and December 31, 2014. The net operating loss carryforward expires between the December 31, 2031 and December 31, 2033, fiscal tax years. The Company had an Illinois net operating loss carryforward of $11.1 million and $22.6 million at December 31, 2015 and December 31, 2014, respectively, that could be used to offset future regular corporate state income tax, as of December 31, 2015 and December 31, 2014. This Illinois net operating loss carryforward will expire between the December 31, 2026 and December 31, 2028, fiscal tax years.
| |
| Note 10. | Stock Compensation Plans |
The Company maintains the First Community Financial Partners, Inc. Amended and Restated 2008 Equity Incentive Plan (the “2008 Equity Incentive Plan”), which assumed and incorporated all outstanding awards under previously adopted Company equity incentive plans. The 2008 Equity Incentive Plan allows for the granting of awards including stock options, restricted stock, restricted stock units, stock appreciation rights, stock awards and cash incentive awards. This plan was amended in December 2011 to increase the number of shares authorized for delivery by 1,000,000 shares. As a result, under the 2008 Equity Incentive Plan, 2,430,000 shares of Company common stock have been reserved for the granting of awards.
Under the 2008 Equity Incentive Plan, options are to be granted at the fair value of the stock at the date of the grant and generally vest at 33-1/3% as of the first anniversary of the grant date and an additional 33-1/3% as of each successive anniversary of the grant date. Options must be exercised within 10 years after the date of grant.
On August 15, 2013, the Company adopted the First Community Financial Partners, Inc. 2013 Equity Incentive Plan (the “2013 Equity Incentive Plan”). The 2013 Equity Incentive Plan allows for the granting of awards including stock options, restricted stock, restricted stock units, stock appreciation rights, stock awards and cash incentive awards. This plan was amended in December 2014 to increase the number of shares authorized for delivery by 900,000 shares. As a result, under this plan, 1,000,000 shares of Company common stock have been reserved for the granting of awards.
The following table summarizes data concerning stock options (aggregate intrinsic value in thousands):
|
| | | | | | | | | | | | | | | | |
| | December 31, 2015 | December 31, 2014 |
| | Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value | Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value |
| Outstanding at beginning of year | 1,089,404 |
| $ | 7.00 |
| $ | — |
| 1,091,204 |
| $ | 7.00 |
| $ | — |
|
| Granted | 217,500 |
| 5.20 |
| 444 |
| — |
| — |
| |
| Exercised | — |
| — |
| — |
| — |
| — |
| |
| Canceled | — |
| — |
| — |
| — |
| — |
| |
| Expired | — |
| — |
| — |
| — |
| — |
| |
| Forfeited | (1,400 | ) | 8.25 |
| — |
| (1,800 | ) | 8.86 |
| |
| | | | | | | |
| Outstanding at end of period | 1,305,504 |
| $ | 6.69 |
| $ | 1,308 |
| 1,089,404 |
| $ | 7.00 |
| $ | — |
|
| | | | | | | |
| Exercisable at end of period | 1,088,004 |
| $ | 6.99 |
| $ | 864 |
| 1,089,404 |
| $ | 7.00 |
| $ | — |
|
The aggregate intrinsic value of a stock option in the table above represents the total pre-tax amount by which the current market value of the underlying stock exceeds the price of the option that would have been received by the option holders had all option holders exercised their options on December 31, 2015. There was $1,308,000 and $0 in intrinsic value of the stock options outstanding at December 31, 2015 and December 31, 2014. The intrinsic value will change when the market value of the Company’s stock changes. The fair value (present value of the estimated future benefit to the option holder) of each option grant is estimated on the date of grant using the Black-Scholes option pricing model.
The Company recognized $71,000 and $0 of compensation expense related to the stock options for the twelve months ended December 31, 2015 and 2014. At December 31, 2015, there was $163,000 in compensation expense to be recognized related to outstanding stock options.
Information pertaining to options outstanding at December 31, 2015 is as follows:
|
| | | | | |
| Exercise Prices | Number Outstanding | Weighted Average Remaining Life (yrs) | Number Exercisable |
| $5.00 | 364,376 |
| 3.54 | 364,376 |
|
| $5.20 | 217,500 |
| 9.01 | — |
|
| $5.53 | 6,000 |
| 4.34 | 6,000 |
|
| $6.25 | 30,600 |
| 3.92 | 30,600 |
|
| $6.38 | 10,000 |
| 0.30 | 10,000 |
|
| $7.50 | 433,500 |
| 1.57 | 433,500 |
|
| $8.00 | 4,000 |
| 3.71 | 4,000 |
|
| $9.25 | 239,528 |
| 2.38 | 239,528 |
|
| | 1,305,504 |
| | 1,088,004 |
|
No options vested during the year ended December 31, 2015.
The Company grants restricted stock units to select officers and directors within the organization under the 2008 Equity Incentive Plan and the 2013 Equity Incentive Plan, which entitle the holder to receive shares of Company common stock in the future, subject to certain terms, conditions and restrictions. Holders of restricted stock units are also entitled to receive additional units equal in value to any dividends paid with respect to the restricted stock units during the vesting period. Compensation expense for the restricted stock units equals the market price of the related stock at the date of grant and is amortized on a straight-line basis over the vesting period.
In January 2015, restricted stock units were issued with certain performance conditions for a minimum of 33,600 shares, and up to a maximum of 170,549 shares. These performance conditions were expected to be met by the end of 2015 and the expense related to these awards was recognized over the year.
The Company recognized compensation expense of $731,000 and $828,000, respectively, for the twelve months ended December 31, 2015 and 2014, related to the 2008 Equity Incentive Plan and the 2013 Equity Incentive Plan. Total unrecognized compensation expense related to restricted stock grants was approximately $102,000 as of December 31, 2015.
The following is a summary of nonvested restricted stock units:
|
| | | | | | | | | | |
| | December 31, 2015 | December 31, 2014 |
| | Number of Shares | Weighted Average Grant Date Fair Value | Number of Shares | Weighted Average Grant Date Fair Value |
| Outstanding at beginning of year | 212,020 |
| $ | 3.95 |
| 538,261 |
| $ | 3.43 |
|
| Granted | 151,059 |
| 5.24 |
| 129,000 |
| 4.45 |
|
| Vested | (338,079 | ) | 4.44 |
| (453,160 | ) | 3.48 |
|
| Canceled | — |
| — |
| — |
| — |
|
| Forfeited | — |
| — |
| (2,081 | ) | 3.97 |
|
| Nonvested shares, end of period | 25,000 |
| $ | 5.14 |
| 212,020 |
| $ | 3.95 |
|
| |
| Note 11. | Concentrations, Commitments and Contingencies |
Concentrations of credit risk: In addition to financial instruments with off-balance-sheet risk, the Company, to a certain extent, is exposed to varying risks associated with concentrations of credit. Concentrations of credit risk generally exist if a number of borrowers are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by economic or other conditions.
The Company conducts substantially all of its lending activities in Will, Grundy, DuPage, Cook and Kane counties in Illinois and their surrounding communities. Loans granted to businesses are primarily secured by business assets, investment real estate, owner-occupied real estate or personal assets of commercial borrowers. Loans to individuals are primarily secured by personal residences or other personal assets. Since the Company’s borrowers and its loan collateral have geographic concentration in its primary market area, the Company could have exposure to declines in the local economy and real estate
market. However, management believes that the diversity of its customer base and local economy, its knowledge of the local market, and its proximity to customers limits the risk of exposure to adverse economic conditions.
Credit related financial instruments: The Company is party to credit related 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. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.
The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments.
A summary of the Company’s commitments is as follows (in thousands):
|
| | | | | | |
| | December 31, 2015 | December 31, 2014 |
| Commitments to extend credit | $ | 179,517 |
| $ | 132,693 |
|
| Standby letters of credit | 10,353 |
| 10,169 |
|
| Performance letters of credit | 1,088 |
| 440 |
|
| | $ | 190,958 |
| $ | 143,302 |
|
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, is based on management’s credit evaluation of the party.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds collateral, which may include accounts receivable, inventory, property and equipment or, income producing properties, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount shown in the summary above. If the commitment were funded, the Company would be entitled to seek recovery from the customer.
Contingencies: In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such pending proceedings would not be expected to have a material adverse effect on the Company’s consolidated financial statements.
| |
| Note 12. | Capital and Regulatory Matters |
The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial results and condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
As of December 31, 2015, the Bank was well capitalized under the regulatory framework for prompt corrective action. Currently, to be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, common equity tier 1 capital, and Tier 1 leverage ratios as set forth in the following table. Bank regulators can modify capital requirements as part of their examination process.
In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III regulatory capital reforms and issued rules effecting certain changes required by the Dodd-Frank Act (the “Basel III Rules”). The Basel III Rules are applicable to all U.S. banks that are subject to minimum capital requirements, as well as to bank and savings and loan holding companies other than “small bank holding companies” (generally non-public bank holding companies with consolidated assets of less than $1 billion). The Basel III Rules not only increased most of the required minimum regulatory capital ratios, but they introduced a new common equity tier 1 capital ratio and the concept of a capital conservation buffer. The Basel III Rules also expanded the definition of capital by establishing criteria that instruments must meet to be considered additional Tier 1 capital (Tier 1 capital in addition to common equity) and Tier 2 capital. A number of instruments that generally qualified as Tier 1 capital will not qualify, or their qualifications will change when the Basel III rules are fully implemented. The Basel III Rules also permitted banking organizations with less than $15.0 billion in assets to retain, through a one-time election, the existing treatment for accumulated other comprehensive income, which currently does not affect regulatory capital. The Company made this one time election in the first quarter of 2015. The Basel III Rules have maintained the general structure of the current prompt corrective action framework, while incorporating the increased requirements. The prompt corrective action guidelines were also revised to add the common equity Tier 1 capital ratio. In order to be a “well-capitalized” depository institution under the new regime, a bank and holding company must maintain a common equity Tier 1 capital ratio of 6.5% or more; a Tier 1 capital ratio of 8% or more; a total capital ratio of 10% or more; and a leverage ratio of 5% or more. The Company and Bank became subject to the new Basel III Rules on January 1, 2015, with phase-in periods for many of the changes. Management believes, as of December 31, 2015 and December 31, 2014, the Company and the Bank met all capital adequacy requirements to which they were subject.
|
| | | | | | | | | | | | |
| | For the year ended December 31, | As of December 31, 2015 |
| | 2015 | 2014 | Regulatory Minimum To Be Well Capitalized under Prompt Corrective Action Provisions |
| | Ratio | Amount | Ratio | Amount | Ratio | Amount |
| Bank capital ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
| Total capital to risk-weighted assets | 15.79 | % | 133,247 |
| 14.79 | % | 111,470 |
| 10.00 | % | 84,374 |
|
| Tier 1 capital to risk weighted assets | 14.54 | % | 122,664 |
| 13.53 | % | 101,997 |
| 8.00 | % | 67,499 |
|
| Tier 1 common equity to risk-weighted assets | 14.54 | % | 122,664 |
| N/A |
| N/A |
| 6.50 | % | 54,843 |
|
| Tier 1 leverage to average assets | 11.71 | % | 122,664 |
| 11.23 | % | 101,997 |
| 5.00 | % | 52,366 |
|
| Company capital ratios: |
|
|
|
|
|
|
|
|
|
|
| Total capital to risk-weighted assets | 14.69 | % | 124,159 |
| 15.28 | % | 115,341 |
| N/A |
| N/A |
|
| Tier 1 capital to risk weighted assets | 11.62 | % | 98,276 |
| 10.27 | % | 77,547 |
| N/A |
| N/A |
|
| Tier 1 common equity to risk-weighted assets | 11.62 | % | 98,276 |
| N/A |
| N/A |
| N/A |
| N/A |
|
| Tier 1 leverage to average assets | 9.36 | % | 98,276 |
| 8.55 | % | 77,547 |
| N/A |
| N/A |
|
Under the Illinois Banking Act, Illinois-chartered banks generally may not pay dividends in excess of their net profits, after first deducting their losses (including any accumulated deficit) and provision for loan losses. The payment of dividends by any bank is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. Moreover, the Federal Deposit Insurance Corporation (“FDIC”) prohibits the payment of any dividends by a bank if the FDIC determines such payment would constitute an unsafe or unsound practice. In addition, the FDIC places restrictions on dividend payments during the first seven years of a new bank’s operations, after which time allowing cash dividends to be paid only from net operating income and does not permit dividends to be paid until an appropriate allowance for loan and lease losses has been established and overall capital is adequate.
| |
| Note 13. | Fair Value Measurements |
ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert expected future amounts, such as cash flows or earnings, to a single present value amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
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.
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s monthly and/or quarterly valuation process.
Financial Instruments Recorded at Fair Value on a Recurring Basis
Securities Available for Sale: The fair value of the Company’s securities available for sale is determined using Level 2 inputs from independent pricing services. Level 2 inputs consider observable data that may include dealer quotes, market spread, cash flows, treasury yield curve, trading levels, credit information and terms, among other factors. Certain state and political subdivision securities are not valued based on observable transactions and are, therefore, classified as Level 3.
Derivatives: The Bank provides clients with interest rate swap transactions and offset the transactions with interest rate swap transactions with another financial institution as a means of providing loan terms agreeable to both parties. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the
expected cash flows of each derivative and classified as Level 2. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including LIBOR rate curves.
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of December 31, 2015 and December 31, 2014, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
|
| | | | | | | | | | | | |
| December 31, 2015 | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
| Financial Assets | | | | |
| Securities Available for Sale: | | | | |
| Government sponsored enterprises | $ | 16,409 |
| $ | — |
| $ | 16,409 |
| $ | — |
|
| Residential collateralized mortgage obligations | 62,364 |
| — |
| 62,364 |
| — |
|
| Residential mortgage backed securities | 28,291 |
| — |
| 28,291 |
| — |
|
| State and political subdivisions | 98,540 |
| — |
| 97,036 |
| 1,504 |
|
| Derivative financial instruments | 95 |
| — |
| 95 |
| — |
|
| Financial Liabilities | | | | |
| Derivative financial instruments | 95 |
| — |
| 95 |
| — |
|
| | | | | |
| December 31, 2014 | | | | |
| Financial Assets | | | | |
| Securities Available for Sale: | | | | |
| Government sponsored enterprises | $ | 30,951 |
| $ | — |
| $ | 30,951 |
| $ | — |
|
| Residential collateralized mortgage obligations | 44,274 |
| — |
| 44,274 |
| — |
|
| Residential mortgage backed securities | 27,217 |
| — |
| 27,217 |
| — |
|
| State and political subdivisions | 66,245 |
| — |
| 64,731 |
| 1,514 |
|
| Derivative financial instruments | 314 |
| — |
| 314 |
| — |
|
| Financial Liabilities |
|
|
|
|
|
|
|
|
| Derivative financial instruments | 314 |
| — |
| 314 |
| — |
|
|
|
|
|
|
|
|
|
|
The significant unobservable inputs used in the Level 3 fair value measurements of the Company’s state and political subdivisions in the table above primarily relate to the discounted cash flows including the bond’s coupon, yield and expected maturity date.
The Company did not have any transfers between Level 1 and Level 2 of the fair value hierarchy during the twelve months ended December 31, 2015. The Company’s policy for determining transfers between levels occurs at the end of the reporting period when circumstances in the underlying valuation criteria change and result in transfer between levels.
The following tables present additional information about assets and liabilities measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value (in thousands):
|
| | | |
| | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | State and political subdivisions |
| Beginning balance, December 31, 2014 | $ | 1,514 |
|
| Total gains or losses (realized/unrealized) included in other comprehensive income | (10 | ) |
| Included in earnings | — |
|
| Purchases | — |
|
| Paydowns and maturities | — |
|
| Transfers in and/or out of Level 3 | — |
|
| Ending balance, December 31, 2015 | $ | 1,504 |
|
| | |
| Beginning balance, December 31, 2013 | $ | 2,719 |
|
| Total gains or losses (realized/unrealized) included in other comprehensive income | 14 |
|
| Included in earnings | — |
|
| Purchases | — |
|
| Paydowns and maturities | (1,219 | ) |
| Transfers in and/or out of Level 3 | — |
|
| Ending balance, December 31, 2014 | $ | 1,514 |
|
Financial Instruments Recorded at Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a nonrecurring basis in accordance with generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are set forth below:
|
| | | | | | | | | | |
| December 31, 2015 | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
| Financial Assets | | | | |
| Mortgage loans held for sale | $ | 400 |
| — |
| — |
| $ | 400 |
|
| Impaired loans | $ | 9,348 |
| — |
| — |
| $ | 9,348 |
|
| Foreclosed assets | 5,487 |
| — |
| — |
| 5,487 |
|
| | | | | |
| December 31, 2014 | | | | |
| Financial Assets | | | | |
| Mortgage loans held for sale | $ | 738 |
| — |
| — |
| $ | 738 |
|
| Impaired loans | 15,020 |
| — |
| — |
| 15,020 |
|
| Foreclosed assets | 2,530 |
| — |
| — |
| 2,530 |
|
The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis for which the Company has utilized Level 3 inputs to determine fair value:
|
| | | | | | |
| | Quantitative Information about Level 3 Fair Value Measurements |
| | Fair Value Estimate | Valuation Techniques | Unobservable Input | Discount Range |
| Assets | | | | |
| December 31, 2015 | | | | |
| Mortgage loans held for sale | $ | 400 |
| Secondary market pricing | Selling costs | — |
| Impaired loans | $ | 9,348 |
| Appraisal of Collateral | Appraisal adjustments Selling costs | 10% to 25% |
| Foreclosed assets | 5,487 |
| Appraisal of Collateral | Selling costs | 10.00% |
| December 31, 2014 | | | | |
| Mortgage loans held for sale | 738 |
| Secondary market pricing | Selling costs | — |
| Impaired loans | 15,020 |
| Appraisal of Collateral | Appraisal adjustments Selling costs | 10% to 25% |
| Foreclosed assets | 2,530 |
| Appraisal of Collateral | Selling costs | 10.00% |
Impaired loans: Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value. Fair value is measured based on the value of the collateral securing these loans and is classified at a Level 3 in the fair value hierarchy. The fair value for an impaired loan is generally determined utilizing appraisals for real estate loans and value guides or consultants for commercial and industrial loans and other loans secured by items such as equipment, inventory, accounts receivable or vehicles. In substantially all instances, a 10% discount is utilized for selling costs which includes broker fees and closing costs. It is our general practice to obtain updated values on impaired loans every twelve to eighteen months. In instances where the appraisal is greater than one year old, an additional discount is considered ranging from 5% to 15%. Any adjustment is based on either comparisons from other recent appraisals obtained by the Company on like properties or using third party resources such as real estate brokers or Reis, Inc., a nationally recognized provider of commercial real estate information including real estate values.
As of December 31, 2015 and December 31, 2014, approximately $3.1 million, or 32%, and $10.8 million, or 69%, of impaired loans were evaluated for impairment using appraisals performed within twelve months of these dates, respectively.
Loans Held for Sale: The fair value of loans held for sale is determined using quoted secondary market prices and classified as Level 2.
Foreclosed assets: Foreclosed assets upon initial recognition are measured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed asset. Fair values are generally based on third party appraisals of the property resulting in Level 3 classification. The appraised value is discounted by 10% for estimated selling costs which includes broker fees and closing costs and appraisals are obtained annually.
Disclosures about Fair Value of Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. Fair value is determined under the framework established by Fair Value Measurements, based upon criteria noted above. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value at the Company. The methodologies for measuring fair value of financial assets and financial liabilities that are measured at fair value on a recurring or nonrecurring basis are discussed above. The methodologies for other financial assets and financial liabilities are discussed below.
The following methods and assumptions were used by the Company in estimating the fair value disclosures of its other financial instruments:
Cash and due from banks: The carrying amounts reported in the consolidated balance sheets for cash and due from banks and approximate their fair values.
Interest-bearing deposits in banks: The carrying amounts of interest-bearing deposits maturing within one year approximate their fair values.
Nonmarketable equity securities: These securities are either redeemable at par or current redemption values; therefore, market value equals cost.
Loans: For those variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for fixed rate and all other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality.
Deposits: The fair values disclosed for deposits with no defined maturities are equal to their carrying amounts, which represent the amount payable on demand. The carrying amounts for variable-rate certificates of deposit approximate their fair value at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Subordinated debt: The fair values of the Company’s subordinated debt are estimated using discounted cash flows based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
Other borrowed funds: The carrying amounts of securities sold under repurchase agreements, term notes, revolving lines of credit and mortgage notes payable approximate their fair values.
Accrued interest receivable and payable: The carrying amounts of accrued interest approximate their fair values.
Off-balance-sheet instruments: Fair values for the Company’s off-balance-sheet lending commitments (standby letters of credit and commitments to extend credit) are based on fees currently charged to enter into similar agreements taking into account the remaining term of the agreements and the counterparties’ credit standing. The fair value of these commitments is not material.
The estimated fair values of the Company’s financial instruments are as follows as of December 31, 2015 (in thousands):
|
| | | | | | | | | | | | | | | |
| | Carrying Amount | Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
| Financial assets: | | | | | |
| Cash and due from banks | $ | 10,699 |
| $ | 10,699 |
| $ | 10,699 |
| $ | — |
| $ | — |
|
| Interest-bearing deposits in banks | 7,406 |
| 7,406 |
| 7,406 |
| — |
| — |
|
| Securities available for sale | 205,604 |
| 205,604 |
| — |
| 204,100 |
| 1,504 |
|
| Nonmarketable equity securities | 1,367 |
| 1,367 |
| — |
| — |
| 1,367 |
|
| Loans, net | 760,578 |
| 760,159 |
| — |
| — |
| 760,159 |
|
| Accrued interest receivable | 3,106 |
| 3,106 |
| 3,106 |
| — |
| — |
|
| Derivative financial instruments | 319 |
| 319 |
| — |
| 319 |
| — |
|
| Financial liabilities: | | | | | |
| Non-interest bearing deposits | 196,063 |
| 196,063 |
| 196,063 |
| — |
| — |
|
| Interest-bearing deposits | 669,928 |
| 663,174 |
| 372,404 |
| — |
| 290,770 |
|
| Other borrowed funds | 53,015 |
| 53,015 |
| 53,015 |
| — |
| — |
|
| Subordinated debt | 15,300 |
| 15,656 |
| — |
| — |
| 15,656 |
|
| Accrued interest payable | 545 |
| 545 |
| 545 |
| — |
| — |
|
| Derivative financial instruments | 319 |
| 319 |
| — |
| 319 |
| — |
|
The estimated fair values of the Company’s financial instruments are as follows as of December 31, 2014 (in thousands):
|
| | | | | | | | | | | | | | | |
| | Carrying Amount | Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
| Financial assets: | | | | | |
| Cash and due from banks | $ | 13,329 |
| $ | 13,329 |
| $ | 13,329 |
| $ | — |
| $ | — |
|
| Interest-bearing deposits in banks | 19,667 |
| 19,667 |
| 19,667 |
| — |
| — |
|
| Securities available for sale | 168,687 |
| 168,687 |
| — |
| 167,173 |
| 1,514 |
|
| Nonmarketable equity securities | 1,367 |
| 1,367 |
| — |
| — |
| 1,367 |
|
| Mortgage loans held for sale | 738 |
| 738 |
| — |
| — |
| 738 |
|
| Loans, net | 675,288 |
| 675,287 |
| — |
| — |
| 675,287 |
|
| Accrued interest receivable | 2,396 |
| 2,396 |
| 2,396 |
| — |
| — |
|
| Derivative financial instruments | 314 |
| 314 |
| — |
| 314 |
| — |
|
| Financial liabilities: | | | | | |
| Non-interest bearing deposits | 158,329 |
| 158,329 |
| 158,329 |
| — |
| — |
|
| Interest-bearing deposits | 611,081 |
| 604,726 |
| 300,188 |
| — |
| 304,538 |
|
| Other borrowed funds | 29,529 |
| 28,957 |
| 28,957 |
| — |
| — |
|
| Subordinated debt | 29,133 |
| 28,819 |
| — |
| — |
| 28,819 |
|
| Accrued interest payable | 1,029 |
| 1,029 |
| 1,029 |
| — |
| — |
|
| Derivative financial instruments | 314 |
| 314 |
| — |
| 314 |
| — |
|
| |
| Note 14. | Derivatives and Hedging Activities |
Derivative contracts entered into by the Bank are limited to those that do not qualify for hedge accounting treatment. The Bank provides clients with interest rate swap transactions and offsets the transactions with interest rate swap transactions with another financial institution as a means of providing loan terms agreeable to both parties. As of December 31, 2015 and December 31, 2014, there were $1.3 million and $3.4 million, respectively, outstanding notional values of swaps where the Bank receives a variable rate of interest and the client receives a fixed rate of interest. This is offset with counterparty contracts where the Bank pays a floating rate of interest and receives a fixed rate of interest. The estimated fair value of interest rate swaps was $95,000 and $314,000 as of December 31, 2015 and December 31, 2014, respectively, and was recorded gross as an asset and a liability. Swaps with clients and third-party financial institutions are carried at fair value with adjustments recorded in other income. The gross amount of the adjustments to the income statement were $219,000 and $10,000 during the years ended December 31, 2015 and December 31, 2014, respectively.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Company’s management carried out an evaluation, under the supervision and with the participation of the chief executive officer and the chief financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rule 15d-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2015. Based upon that evaluation, the chief executive officer along with the chief financial officer concluded that the Company’s disclosure controls and procedures as of December 31, 2015, were effective.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined by Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act). The Company’s internal control over financial reporting is a process designed under the supervision of the chief executive officer and the chief financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with U.S. GAAP.
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.
Management has made a comprehensive review, evaluation, and assessment of the Company’s internal control over financial reporting as of December 31, 2015. In making its assessment of the effectiveness of the Company’s internal control over financial reporting, management used the framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework in 2013. Based on that assessment, management concluded that, as of December 31, 2015, the Company’s internal control over financial reporting was effective.
This Annual Report on Form 10-K does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to the rules of the SEC permitting the Company to provide only a management’s report in this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this item is incorporated herein by reference from our definitive proxy statement for our 2016 Annual Meeting of Stockholders, a copy of which will be filed with the SEC not later than 120 days after the end of our fiscal year.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference from our definitive proxy statement for our 2016 Annual Meeting of Stockholders, a copy of which will be filed with the SEC not later than 120 days after the end of our fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Except as provided below, the information required by this item is incorporated herein by reference from our definitive proxy statement for our 2016 Annual Meeting of Stockholders, a copy of which will be filed with the SEC no later than 120 days after the end of our fiscal year.
Equity Compensation Plan Information
All shares authorized for issuance under our compensation plans as of December 31, 2015 were authorized under the First Community Financial Partners, Inc. Amended and Restated 2008 Equity Incentive Plan (our “2008 Plan”) or the First Community Financial Partners, Inc. 2013 Equity Incentive Plan (our “2013 Plan,” and together with our 2008 Plan, our “Equity Plans”).
Our 2008 Plan was amended and restated effective May 20, 2009, which amendment and restatement was approved by our shareholders. Our 2008 Plan was subsequently amended, effective December 21, 2011, to increase the number of shares of our common stock available by 1,000,000 (from 1,430,000 to 2,430,000). Our shareholders did not approve this amendment. Our 2008 Plan was further amended, effective June 19, 2014, to allow certain awards to expire more than 10 years after the date of grant where provided by the Board of Directors. Our shareholders did not approve this amendment. Our 2008 Plan has not been amended further.
Our 2013 Plan was adopted by the Board of Directors on August 15, 2013 and was not approved by our shareholders. Under our 2013 Plan, the maximum number of shares of our common stock that may be issued to participants is 100,000. On December 18, 2014, the Board of Directors approved an amendment to the Plan to increase the maximum number of shares from 100,000 shares to 1,000,000 shares.
Our Equity Plans permit awards of stock options, stock appreciation rights, other stock awards (including without limitation restricted stock units and restricted stock awards) and cash incentive awards to our employees, directors and other service providers. Each Equity Plan will remain in effect as long as any awards under the respective plan are outstanding. However, no awards may be granted after the 10-year anniversary of the respective plan’s effective date. The Company generally reserves the right to amend or terminate our Equity Plans at any time. Awards under our Equity Plans may also be amended by the Company, but the participant generally must consent to the change if it impairs the participant’s rights under the award. Our Compensation Committee currently administers our Equity Plans.
The following table provides certain summary information as of December 31, 2015 concerning our compensation plans under which shares of our common stock may be issued.
|
| | | | | | | |
| Plan Category | Number of Securities to Be Issued upon Exercise of Outstanding Options, Warrants and Rights (a)(#) | Weighted-Average Exercise Price Of Outstanding Options, Warrants And Rights($) (b) | Number Of Securities Remaining Available For Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))(#) (c) |
| Equity Compensation Plans Approved By Security Holders (1) | 1,088,004 (3) |
| $ | 6.99 |
| 161,060 |
|
| Equity Compensation Plans Not Approved By Security Holders (2) | 332,900 (4) |
| 5.20 |
| 372,161 |
|
| Total | 1,420,904 |
| $6.69 (5) |
| 533,221 |
|
(1) Reflects amounts related to our 2008 Plan. Our shareholders approved an amendment and restatement of our 2008 Plan, effective May 20, 2009, at which time 1,430,000 shares of our common stock were available for issuance. Our 2008 Plan was subsequently amended, effective December 21, 2011 (the “Amendment”), to increase the number of shares of our common stock available for issuance by 1,000,000 (from 1,430,000 to 2,430,000). Our shareholders did not approve this amendment. Of the amounts reflected in this row, none of the 1,088,004 securities issuable upon exercise of outstanding options, warrants and rights relate to awards authorized pursuant to the Amendment. 77,578 of the 161,060 securities available for future issuance under the 2008 Plan relate to awards authorized pursuant to the Amendment.
(2) Reflects amounts related to our 2013 Plan. Our shareholders did not approve our 2013 Plan.
(3) Reflects outstanding stock options under our 2008 Plan, which are granted at the fair market value of our common stock at the grant date, generally vest in three equal annual increments beginning on the first anniversary of the grant date and unless the Board of Directors provides otherwise, must be exercised within 10 years after the grant date.
(4) Reflects 115,400 outstanding restricted stock units and 217,500 stock options granted under our 2013 Plan. Restricted stock units entitle the holder to a specified number of shares of our common stock at a specified future date, subject to the continued service of the holder.
(5) The weighted average exercise price in this column (b) does not take into account the 332,900 restricted stock units issued under the 2013 Plan.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is incorporated herein by reference from our definitive proxy statement for our 2016 Annual Meeting of Stockholders, a copy of which will be filed with the SEC not later than 120 days after the end of our fiscal year.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference from our definitive proxy statement for our 2016 Annual Meeting of Stockholders, a copy of which will be filed with the SEC not later than 120 days after the end of our fiscal year.
Part IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements: See Item 8. Financial Statements and Supplementary Data.
(a)(2) Financial Statement Schedules: All financial statement schedules have been omitted as the information is not required under the related instructions or is not applicable.
(a)(3) Exhibits: See Exhibit Index.
(b) Exhibits: See Exhibit Index.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
First Community Financial Partners, Inc.
(registrant)
By: /s/ Glen L. Stiteley
Glen L. Stiteley
Executive Vice President and Chief Financial Officer
Date: March 11, 2016
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 11, 2016 by the following persons on behalf of the Registrant and in the capacities indicated: |
| |
| Signature | Title |
/s/ Roy C. Thygesen Roy C. Thygesen | Chief Executive Officer and Director (Principal Executive Officer) |
/s/ Glen L. Stiteley Glen L. Stiteley | Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
/s/ Patrick Roe Patrick Roe | President, Chief Operating Officer and Director |
/s/ George Barr George Barr | Chairman of the Board and Director |
/s/ Peter Coules, Jr. Peter Coules, Jr. | Director |
/s/ Terrence O. D’Arcy Terrence O. D’Arcy | Director |
/s/ John J. Dollinger John J. Dollinger | Director |
/s/ Rex D. Easton Rex D. Easton | Director |
/s/ Vincent E. Jackson Vincent E. Jackson | Director |
/s/ Patricia L. Lambrecht Patricia L. Lambrecht | Director |
/s/ Stephen G. Morrissette Stephen G. Morrissette | Director |
/s/ Daniel Para Daniel Para | Director |
/s/ Michael F. Pauritsch Michael F. Pauritsch | Director |
/s/ William L. Pommerening William L. Pommerening | Director |
/s/ Robert L. Sohol Robert L. Sohol | Director |
/s/ Dennis G. Tonelli Dennis G. Tonelli | Director |
/s/ Scott A. Wehrli Scott A. Wehrli | Director |
Exhibit Index |
| | |
| 2.1 |
| Agreement and Plan of Merger, dated as of August 27, 2012, by and among First Community Financial Partners, Inc., Interim First Community Bank of Plainfield and First Community Bank of Plainfield (incorporated herein by reference to Exhibit 2.1 to First Community Financial Partners, Inc.’s Registration Statement on Form S-4 (Registration No. 333-185041)). |
| 2.2 |
| Agreement and Plan of Merger, dated as of August 27, 2012, by and among First Community Financial Partners, Inc., First Community Bank of Joliet and First Community Bank of Homer Glen & Lockport (incorporated herein by reference to Exhibit 2.2 to First Community Financial Partners, Inc.’s Registration Statement on Form S-4 (Registration No. 333-185041)). |
| 2.3 |
| Agreement and Plan of Merger, dated as of August 27, 2012, by and among First Community Financial Partners, Inc., First Community Bank of Joliet and Burr Ridge Bank and Trust (incorporated herein by reference to Exhibit 2.3 to First Community Financial Partners, Inc.’s Registration Statement on Form S-4 (Registration No. 333-185041)). |
| 2.4 |
| Agreement and Plan of Merger, dated as of August 27, 2012, by and between First Community Bank of Joliet and First Community Bank of Plainfield (incorporated herein by reference to Exhibit 2.4 to First Community Financial Partners, Inc.’s Registration Statement on Form S-4 (Registration No. 333-185041)). |
| 3.1 |
| Articles of Incorporation, as amended (incorporated herein by reference to Exhibit 3.1 to First Community Financial Partners, Inc.’s Registration Statement on Form S-4 (Registration No. 333-185041)). |
| 3.2 |
| Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3.2 to First Community Financial Partners, Inc.’s Registration Statement on Form S-4 (Registration No. 333-185041)). |
| 4.1 |
| Specimen of common stock certificate (incorporated herein by reference to Exhibit 4.1 to First Community Financial Partners, Inc.’s Registration Statement on Form S-4 (Registration No. 333-185041)). |
| 4.2 |
| Specimen of preferred stock certificate (incorporated herein by reference to Exhibit 4.1 to First Community Financial Partners, Inc.’s Registration Statement on Form S-4 (Registration No. 333-185041)). |
| 4.3 |
| Form of warrant (incorporated by reference to Exhibit 4.1 of our current report on Form 8-K filed March 13, 2013). |
| 4.4 |
| In accordance with Item 601(b)(4)(iii)(A) of Regulation S-K, certain instruments respecting long-term debt of the registrant have been omitted but will be furnished to the SEC upon request. |
| 9.1 |
| Voting Trust Agreement by and among First Community Financial Partners, Inc., the grantors and trustees named therein, and First Community Bank of Plainfield, dated as of November 18, 2008 (incorporated herein by reference to Exhibit 10.2 to First Community Financial Partners, Inc.’s Registration Statement on Form S-4 (Registration No. 333-185041)). |
| 9.2 |
| Voting Trust Agreement by and among First Community Financial Partners, Inc., the grantors and trustees named therein, and First Community Bank of Homer Glen & Lockport, dated as of December 17, 2008 (incorporated herein by reference to Exhibit 10.3 to First Community Financial Partners, Inc.’s Registration Statement on Form S-4 (Registration No. 333-185041)). |
| 9.3 |
| Voting Trust Agreement by and among First Community Financial Partners, Inc., the grantors and trustees named therein, and Burr Ridge Bank and Trust, dated as of June 19, 2011 (incorporated herein by reference to Exhibit 10.4 to First Community Financial Partners, Inc.’s Registration Statement on Form S-4 (Registration No. 333-185041)). |
| 10.1 |
| Employment Agreement, dated as of March 12, 2013, between First Community Financial Bank and Roy C. Thygesen (incorporated herein by reference to Exhibit 10.1 to First Community Financial Partners, Inc.’s Form 8-K filed March 13, 2013). |
| 10.2 |
| Employment Agreement, dated as of March 12, 2013, between First Community Financial Bank and Patrick J. Roe (incorporated herein by reference to Exhibit 10.2 to First Community Financial Partners, Inc.’s Form 8-K filed March 13, 2013). |
|
| | |
| 10.3 |
| Employment Agreement, dated as of March 12, 2013, between First Community Financial Bank and Glen L. Stiteley (incorporated herein by reference to Exhibit 10.3 to First Community Financial Partners, Inc.’s Form 8-K filed March 13, 2013). |
| 10.4 |
| Employment Agreement, dated as of March 12, 2013, between First Community Financial Bank and Donn P. Domico (incorporated herein by reference to Exhibit 10.4 to First Community Financial Partners, Inc.’s Form 8-K filed March 13, 2013). |
| 10.5 |
| Employment Agreement, dated as of March 12, 2013, between First Community Financial Bank and Steven Randich (incorporated herein by reference to Exhibit 10.5 to First Community Financial Partners, Inc.’s Form 8-K filed March 13, 2013). |
| 10.6 |
| First Community Financial Partners, Inc. Amended and Restated 2008 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.11to the First Community Financial Partner’s Inc.’s Registration Statement on Form S-4 (Registration No. 333-180541)). |
|
| | |
| 10.7 |
| First Community Financial Partners, Inc. First Amendment of the Amended and Restated 2008 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.12 to First Community Financial Partners, Inc.’s Registration Statement on Form S-4 (Registration No. 333-185041)). |
| 10.8 |
| First Community Financial Partners, Inc. Second Amendment of the Amended and Restated 2008 Equity Incentive Plan (filed herewith). |
| 10.9 |
| Form of First Community Financial Partners, Inc. Amended and Restated 2008 Equity Incentive Plan Restricted Stock Unit Award Agreement (incorporated herein by reference to Exhibit 10.13 to First Community Financial Partners, Inc.’s Registration Statement on Form S-4 (Registration No. 333-185041)). |
| 10.10 |
| Form of First Community Financial Partners, Inc. Amended and Restated 2008 Equity Incentive Plan Incentive Stock Option Award Terms (incorporated herein by reference to Exhibit 10.14 to First Community Financial Partners, Inc.’s Registration Statement on Form S-4 (Registration No. 333-185041)). |
| 10.11 |
| Form of First Community Financial Partners, Inc. Amended and Restated 2008 Equity Incentive Plan Non-Qualified Stock Option Award Terms (incorporated herein by reference to Exhibit 10.15 to First Community Financial Partners, Inc.’s Registration Statement on Form S-4 (Registration No. 333-185041)). |
| 10.12 |
| First Community Financial Partners, Inc. 2013 Equity Incentive Plan (incorporated herein by reference to Exhibit 4.4 to First Community Financial Partners, Inc.’s Registration Statement on Form S-8 (Registration No. 333-190691)). |
| 10.13 |
| First Community Financial Partners, Inc. First Amendment of the First Community Financial Partners, Inc. 2013 Equity Incentive Plan (filed herewith). |
| 10.14 |
| Form of First Community Financial Partners, Inc. 2013 Equity Incentive Plan Restricted Stock Unit Award Agreement (incorporated herein by reference to Exhibit 4.5 to First Community Financial Partners, Inc.’s Registration Statement on Form S-8 (Registration No. 333-190691)). |
| 10.15 |
| Form of First Community Financial Partners, Inc. 2013 Equity Incentive Plan Restricted Stock Award Agreement (incorporated herein by reference to Exhibit 4.6 to First Community Financial Partners, Inc.’s Registration Statement on Form S-8 (Registration No. 333-190691)). |
| 10.16 |
| Form of First Community Financial Partners, Inc. 2013 Equity Incentive Plan Nonqualified Stock Option Award Agreement (incorporated herein by reference to Exhibit 4.7 to First Community Financial Partners, Inc.’s Registration Statement on Form S-8 (Registration No. 333-190691)). |
| 10.17 |
| Form of First Community Financial Partners, Inc. 2013 Equity Incentive Plan Employee Performance Unit Award Agreement (filed herewith). |
| 10.18 |
| Form of First Community Financial Bank Executive Pre-Retirement Split Dollar Agreement adopted and dated October 1, 2015 (filed herewith). |
| 21.1 |
| Subsidiaries of First Community Financial Partners, Inc. (filed herewith). |
| 23.1 |
| Consent of Independent Registered Public Accounting Firm (filed herewith). |
| 31.1 |
| Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
| 31.2 |
| Certification of Chief Financial Officer Pursuant to Rule 12a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
| 32.1 |
| Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
| 32.2 |
| Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
| 101 |
| Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of December 31, 2015 and December 31, 2014; (ii) Consolidated Statements of Operations for the years ended December 31, 2015 and December 31, 2014; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2015 and December 31, 2014; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2015 and December 31, 2014; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2015 and December 31, 2014; and (vi) Notes to Unaudited Consolidated Financial Statements. |
