UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10–Q |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
Commission file number:
001-35915
FIRST NBC BANK HOLDING COMPANY | ||
(Exact name of registrant as specified in its charter) |
Louisiana | 14-1985604 | |||
(State of incorporation or organization) | (I.R.S. Employer Identification Number) | |||
210 Baronne Street, New Orleans, Louisiana | 70112 | |||
(Address of principal executive offices) | (Zip code) | |||
Registrant’s telephone number, including area code: (504) 566-8000 |
Indicate by check mark whether the registrant: (i) 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 (ii) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or 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.
Large accelerated filer | ¨ | Accelerated filer | x | |
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
As of May 1, 2015, the registrant had 18,653,670 shares of common stock, par value $1.00 per share, outstanding.
1
FIRST NBC BANK HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands) | (Unaudited) March 31, 2015 | December 31, 2014 | |||||
Assets | |||||||
Cash and due from banks | $ | 53,234 | $ | 32,484 | |||
Short-term investments | 151,586 | 18,404 | |||||
Investment in short-term receivables | 236,644 | 237,135 | |||||
Investment securities available for sale, at fair value | 257,865 | 247,647 | |||||
Investment securities held to maturity | 87,265 | 89,076 | |||||
Mortgage loans held for sale | 3,986 | 1,622 | |||||
Loans, net of allowance for loan losses of $45,195 and $42,336, respectively | 2,858,844 | 2,731,928 | |||||
Bank premises and equipment, net | 55,969 | 52,881 | |||||
Accrued interest receivable | 11,702 | 11,451 | |||||
Goodwill and other intangible assets | 7,739 | 7,831 | |||||
Investment in real estate properties | 13,426 | 12,771 | |||||
Investment in tax credit entities | 147,104 | 140,913 | |||||
Cash surrender value of bank-owned life insurance | 47,641 | 47,289 | |||||
Other real estate | 4,966 | 5,549 | |||||
Deferred tax asset | 95,817 | 83,461 | |||||
Other assets | 35,534 | 30,175 | |||||
Total assets | $ | 4,069,322 | $ | 3,750,617 | |||
Liabilities and equity | |||||||
Deposits: | |||||||
Noninterest-bearing | $ | 433,377 | $ | 364,534 | |||
Interest-bearing | 2,933,069 | 2,756,316 | |||||
Total deposits | 3,366,446 | 3,120,850 | |||||
Short-term borrowings | — | — | |||||
Repurchase agreements | 111,864 | 117,991 | |||||
Long-term borrowings | 103,392 | 40,000 | |||||
Accrued interest payable | 7,200 | 6,650 | |||||
Other liabilities | 30,457 | 28,752 | |||||
Total liabilities | 3,619,359 | 3,314,243 | |||||
Shareholders’ equity: | |||||||
Preferred stock | |||||||
Convertible preferred stock Series C – no par value; 1,680,219 shares authorized; 364,983 shares issued and outstanding at March 31, 2015 and December 31, 2014 | 4,471 | 4,471 | |||||
Preferred stock Series D – no par value; 37,935 shares authorized, issued and outstanding at March 31, 2015 and December 31, 2014 | 37,935 | 37,935 | |||||
Common stock- par value $1 per share; 100,000,000 shares authorized; 18,609,753 shares issued and outstanding at March 31, 2015 and 18,576,488 shares issued and outstanding at December 31, 2014 | 18,610 | 18,576 | |||||
Additional paid-in capital | 236,847 | 239,528 | |||||
Accumulated earnings | 171,572 | 155,599 | |||||
Accumulated other comprehensive loss, net | (19,474 | ) | (19,737 | ) | |||
Total shareholders’ equity | 449,961 | 436,372 | |||||
Noncontrolling interest | 2 | 2 | |||||
Total equity | 449,963 | 436,374 | |||||
Total liabilities and equity | $ | 4,069,322 | $ | 3,750,617 |
See accompanying notes.
2
FIRST NBC BANK HOLDING COMPANY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For the Three Months Ended March 31, | |||||||
(In thousands) | 2015 | 2014 | |||||
Interest income: | |||||||
Loans, including fees | $ | 35,248 | $ | 31,099 | |||
Investment securities | 2,104 | 2,352 | |||||
Investment in short-term receivables | 1,690 | 1,695 | |||||
Short-term investments | 64 | 15 | |||||
39,106 | 35,161 | ||||||
Interest expense: | |||||||
Deposits | 10,244 | 9,659 | |||||
Borrowings and securities sold under repurchase agreements | 1,240 | 654 | |||||
11,484 | 10,313 | ||||||
Net interest income | 27,622 | 24,848 | |||||
Provision for loan losses | 3,000 | 3,000 | |||||
Net interest income after provision for loan losses | 24,622 | 21,848 | |||||
Noninterest income: | |||||||
Service charges on deposit accounts | 559 | 559 | |||||
Investment securities loss, net | (50 | ) | — | ||||
Gain on assets sold, net | 43 | 75 | |||||
Gain on sale of loans, net | 15 | — | |||||
Cash surrender value income on bank-owned life insurance | 352 | 159 | |||||
Income from sales of state tax credits | 519 | 1,033 | |||||
Community Development Entity fees earned | 123 | 679 | |||||
ATM fee income | 501 | 473 | |||||
Other | 448 | 381 | |||||
2,510 | 3,359 | ||||||
Noninterest expense: | |||||||
Salaries and employee benefits | 6,907 | 5,397 | |||||
Occupancy and equipment expenses | 2,928 | 2,584 | |||||
Professional fees | 2,141 | 1,899 | |||||
Taxes, licenses and FDIC assessments | 1,239 | 1,199 | |||||
Tax credit investment amortization | 4,852 | 2,827 | |||||
Write-down of foreclosed assets | 58 | 166 | |||||
Data processing | 1,422 | 1,098 | |||||
Advertising and marketing | 1,018 | 578 | |||||
Other | 1,939 | 1,589 | |||||
22,504 | 17,337 | ||||||
Income before income taxes | 4,628 | 7,870 | |||||
Income tax benefit | (11,440 | ) | (4,958 | ) | |||
Net income attributable to Company | 16,068 | 12,828 | |||||
Less preferred stock dividends | (95 | ) | (95 | ) | |||
Less earnings allocated to participating securities | (308 | ) | (246 | ) | |||
Income available to common shareholders | $ | 15,665 | $ | 12,487 | |||
Earnings per common share – basic | $ | 0.84 | $ | 0.68 | |||
Earnings per common share – diluted | $ | 0.82 | $ | 0.66 |
See accompanying notes.
3
FIRST NBC BANK HOLDING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
For the Three Months Ended March 31, | |||||||
(In thousands) | 2015 | 2014 | |||||
Net income | $ | 16,068 | $ | 12,828 | |||
Other comprehensive income (loss): | |||||||
Fair value of derivative instruments designated as cash flow hedges: | |||||||
Change in fair value of derivative instruments designated as cash flow hedges during the period, before tax | (3,773 | ) | (5,106 | ) | |||
Less: reclassification adjustment for losses included in net income from terminated cash flow hedge | 266 | — | |||||
Unrealized losses on cash flow hedges, before tax | (3,507 | ) | (5,106 | ) | |||
Unrealized gains on investment securities: | |||||||
Unrealized gains on investment securities arising during the period | 3,783 | 5,511 | |||||
Amortization of unrealized net gain on securities transferred from available for sale to held to maturity | 128 | 104 | |||||
Unrealized gains on investment securities, before tax | 3,911 | 5,615 | |||||
Other comprehensive income, before taxes | 404 | 509 | |||||
Income tax expense related to items of other comprehensive income | 141 | 178 | |||||
Other comprehensive income, net of tax | 263 | 331 | |||||
Comprehensive income | $ | 16,331 | $ | 13,159 | |||
Comprehensive income attributable to preferred shareholders | (95 | ) | (95 | ) | |||
Comprehensive income attributable to participating securities | (308 | ) | (246 | ) | |||
Comprehensive income available to common shareholders | $ | 15,928 | $ | 12,818 |
See accompanying notes.
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FIRST NBC BANK HOLDING COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
(In thousands) | Preferred Stock Series C | Preferred Stock Series D | Common Stock | Additional Paid-In Capital | Accumulated Earnings | Accumulated Other Comprehensive Income | Total Shareholders’ Equity | Non-Controlling Interest | Total Equity | ||||||||||||||||||||||||||
Balance, December 31, 2013(1) | $ | 4,471 | $ | 37,935 | $ | 18,514 | $ | 237,063 | $ | 100,389 | $ | (16,515 | ) | $ | 381,857 | $ | 2 | $ | 381,859 | ||||||||||||||||
Net income | — | — | — | — | 12,828 | — | 12,828 | — | 12,828 | ||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | 331 | 331 | — | 331 | ||||||||||||||||||||||||||
Share-based compensation | — | — | — | 272 | — | — | 272 | — | 272 | ||||||||||||||||||||||||||
Issuance of common stock: | |||||||||||||||||||||||||||||||||||
Stock option and director plans | — | — | 8 | 186 | — | — | 194 | — | 194 | ||||||||||||||||||||||||||
Net tax benefit related to stock option plans | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
Preferred stock dividends | — | — | — | — | (95 | ) | — | (95 | ) | — | (95 | ) | |||||||||||||||||||||||
Balance, March 31, 2014 | $ | 4,471 | $ | 37,935 | $ | 18,522 | $ | 237,521 | $ | 113,122 | $ | (16,184 | ) | $ | 395,387 | $ | 2 | $ | 395,389 | ||||||||||||||||
Balance, December 31, 2014(1) | $ | 4,471 | $ | 37,935 | $ | 18,576 | $ | 239,528 | $ | 155,599 | $ | (19,737 | ) | $ | 436,372 | $ | 2 | $ | 436,374 | ||||||||||||||||
Net income | — | — | — | — | 16,068 | — | 16,068 | — | 16,068 | ||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | 263 | 263 | — | 263 | ||||||||||||||||||||||||||
Share-based compensation | — | — | — | 185 | — | — | 185 | — | 185 | ||||||||||||||||||||||||||
Restricted stock awards compensation | — | — | — | (406 | ) | — | — | (406 | ) | — | (406 | ) | |||||||||||||||||||||||
Issuance of common stock: | |||||||||||||||||||||||||||||||||||
Stock option and director plans | — | — | 21 | 325 | — | — | 346 | — | 346 | ||||||||||||||||||||||||||
Restricted stock awards | — | — | 13 | 429 | — | — | 442 | — | 442 | ||||||||||||||||||||||||||
Net tax benefit related to stock option plans | — | — | — | 97 | — | — | 97 | — | 97 | ||||||||||||||||||||||||||
Purchase of common shares by ESOP | — | — | — | (3,212 | ) | — | — | (3,212 | ) | — | (3,212 | ) | |||||||||||||||||||||||
Allocation of ESOP shares | — | — | — | (99 | ) | — | — | (99 | ) | — | (99 | ) | |||||||||||||||||||||||
Preferred stock dividends | — | — | — | — | (95 | ) | — | (95 | ) | — | (95 | ) | |||||||||||||||||||||||
Balance, March 31, 2015 | $ | 4,471 | $ | 37,935 | $ | 18,610 | $ | 236,847 | $ | 171,572 | $ | (19,474 | ) | $ | 449,961 | $ | 2 | $ | 449,963 |
(1) | Balances as of December 31, 2013 and December 31, 2014 are audited. |
See accompanying notes.
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FIRST NBC BANK HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Three Months Ended March 31, | |||||||
(In thousands) | 2015 | 2014 | |||||
Operating activities | |||||||
Net income | $ | 16,068 | $ | 12,828 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Deferred tax benefit | (12,520 | ) | (5,258 | ) | |||
Amortization of tax credit investments | 4,852 | 2,827 | |||||
Accretion of market value adjustments related to acquisition | (42 | ) | (11 | ) | |||
Net discount accretion or premium amortization | 38 | (212 | ) | ||||
Loss on sale of investment securities | 50 | — | |||||
Gain on assets sold | (43 | ) | (75 | ) | |||
Write-down of foreclosed assets | 58 | 166 | |||||
Proceeds from sale of mortgage loans held for sale | 8,301 | 17,581 | |||||
Mortgage loans originated and held for sale | (10,665 | ) | (16,332 | ) | |||
Gain on sale of loans | (15 | ) | — | ||||
Derivative losses on terminated interest rate hedge | 266 | — | |||||
Provision for loan losses | 3,000 | 3,000 | |||||
Depreciation and amortization | 901 | 870 | |||||
Share-based and other compensation expense | (221 | ) | 272 | ||||
Increase in cash surrender value of bank-owned life insurance | (352 | ) | (158 | ) | |||
Changes in operating assets and liabilities: | |||||||
Change in other assets | (5,526 | ) | (4,040 | ) | |||
Change in accrued interest receivable | (251 | ) | (158 | ) | |||
Change in accrued interest payable | 550 | 95 | |||||
Change in other liabilities | (2,063 | ) | (2,952 | ) | |||
Net cash provided by operating activities | 2,386 | 8,443 | |||||
Investing activities | |||||||
Proceeds from maturities, prepayments, and calls of available for sale investment securities | 3,023 | 12,373 | |||||
Proceeds from maturities, prepayments, and calls of held to maturity securities | 1,986 | 745 | |||||
Net change in investments in short-term receivables | 491 | 9,161 | |||||
Purchases of investments in tax credit entities | (11,043 | ) | (6,531 | ) | |||
Loans originated, net of repayments | (102,485 | ) | (116,092 | ) | |||
Cash received in acquisition | 31,517 | — | |||||
Purchases of bank premises and equipment | (778 | ) | (1,527 | ) | |||
Proceeds from disposition of real estate owned | 917 | 2,015 | |||||
Net cash used in investing activities | (76,372 | ) | (99,856 | ) | |||
Financing activities | |||||||
Net change in repurchase agreements | (6,127 | ) | 30,849 | ||||
Proceeds from borrowings | 60,000 | — | |||||
Proceeds from ESOP loan | 3,392 | — | |||||
Repayment of borrowings | — | (8,425 | ) | ||||
Purchase of common stock by ESOP | (3,311 | ) | — | ||||
Net increase in deposits | 173,271 | 158,537 | |||||
Proceeds from sale of common stock | 788 | 194 | |||||
Dividends paid | (95 | ) | (95 | ) | |||
Net cash provided by financing activities | 227,918 | 181,060 | |||||
Net change in cash, due from banks, and short-term investments | 153,932 | 89,647 | |||||
Cash, due from banks, and short-term investments at beginning of period | 50,888 | 31,642 | |||||
Cash, due from banks, and short-term investments at end of period | $ | 204,820 | $ | 121,289 |
See accompanying notes.
6
FIRST NBC BANK HOLDING COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of First NBC Bank Holding Company (Company) have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three-month period ended March 31, 2015 are not necessarily indicative of the results that may be expected for the entire fiscal year. These statements should be read in conjunction with the Company’s audited financial statements, including the notes thereto, which were filed with the Securities and Exchange Commission as part of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
In preparing the financial statements, the Company is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Nature of Operations
The Company is a bank holding company that offers a broad range of financial services through First NBC Bank, a Louisiana state non-member bank, to businesses, institutions, and individuals in southeastern Louisiana, the Mississippi Gulf Coast, and the Florida panhandle. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States and to prevailing practices within the banking industry.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and First NBC Bank, and First NBC Bank’s wholly owned subsidiaries, which include First NBC Community Development, LLC (FNBC CDC) and First NBC Community Development Fund, LLC (FNBC CDE) (collectively referred to as the Bank), and any variable interest entities (VIE) of which the Company is primary beneficiary. Substantially all of the VIEs for which the Company is the primary beneficiary relate to tax credit investments. FNBC CDC is a Community Development Corporation formed to construct, purchase, and renovate affordable residential real estate properties in the New Orleans area. FNBC CDE is a Community Development Entity (CDE) formed to apply for and receive allocations of Federal New Markets Tax Credits (NMTC).
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are susceptible to a significant change in the near term are the allowance for loan losses, income tax provision, fair value adjustments, and share-based compensation.
Concentration of Credit Risk
The Company’s loan portfolio consists of the various types of loans described in Note 4. Real estate or other assets secure most loans. The majority of these loans have been made to individuals and businesses in the Company’s market area of southeastern Louisiana, southern Mississippi, and the Florida panhandle, which are dependent on the area economy for their livelihoods and servicing of their loan obligations. The Company does not have any significant concentrations to any one industry or customer.
The Company maintains deposits in other financial institutions that may, from time to time, exceed the federally insured deposit limits.
Recent Accounting Pronouncements
ASU No. 2014-09
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 205): An Amendment of the FASB Accounting Standards Codification, which clarifies the principles for recognizing revenue from contracts with customers. The new accounting guidance, which does not apply to financial instruments, is effective on a retrospective basis for annual
7
reporting periods beginning after December 15, 2016, with early adoption not permitted. The Company does not expect the new guidance to have a material impact on the Company's financial condition or results of operations.
ASU No. 2014-12
In June 2014, the FASB issued ASU No. 2014-12 Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period, which requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 is intended to resolve the diverse accounting treatments of these types of awards in practice and is effective for annual and interim periods beginning after December 15, 2015. The Company does not expect the new guidance to have a material impact on the Company's financial condition or results of operations.
ASU No. 2014-13
In August 2014, the FASB issued ASU No. 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and Financial Liabilities of a Consolidated Collateralized Financing Entity, which will allow an alternative fair value measurement approach for consolidated collateralized financing entities (CFEs) to eliminate a practice issue that results in measuring the fair value of a CFE’s financial assets at a different amount from the fair value of its financial liabilities even when the financial liabilities have recourse to only the financial assets. The approach would permit the parent company of a consolidated CFE to measure the CFE’s financial assets and financial liabilities based on the more observable of the fair value of the financial assets and the fair value of the financial liabilities. The new accounting guidance is for the annual period ending after December 15, 2015, and for annual periods and interim periods thereafter, with early application permitted as of the beginning of an annual period. The Company does not expect the new guidance to have a material impact on the Company’s financial condition or results of operations.
ASU No. 2014-15
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which will require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards in connection with preparing financial statements for each annual and interim reporting period. The new accounting guidance is for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter, with early application permitted. The Company does not expect the new guidance to have a material impact on the Company's financial condition or results of operations.
ASU No. 2015-02
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which eliminates the deferral of FAS 167 and makes changes to both the variable interest model and the voting model. The new accounting guidance is for the annual period beginning after December 15, 2015, and for annual periods and interim periods thereafter, with early application permitted. The Company does not expect the new guidance to have a material impact on the Company's financial condition or results of operations.
ASU No. 2015-03
In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction form the carrying amount of that debt liability, consistent with debt discounts. The new accounting guidance is for the annual period beginning after December 15, 2015, and for annual periods and interim periods thereafter, with early application permitted. The Company does not expect the new guidance to have a material impact on the Company's financial condition or results of operations.
2. Acquisitions
On January 16, 2015, the Company acquired certain assets and assumed certain liabilities from the Federal Deposit Insurance Corporation ("FDIC"), as receiver for First National Bank of Crestview, a full-service commercial bank headquartered in Crestview, Florida, which was closed and placed into receivership. Under the terms of the agreement, the Company agreed to assume all of the deposit liabilities, and acquire approximately $62.3 million of assets, of the the failed bank. The acquired assets included the failed bank's performing loans, substantially all of its investment securities portfolio, and its three banking facilities, with the FDIC retaining the remaining assets. The transaction did not include a loss-share agreement with the FDIC. The Company received an initial settlement amount from the FDIC of $10.1 million.
8
The acquisition was accounted for under the purchase method of accounting in accordance with ASC Topic 805. Both the purchased assets and liabilities were recorded at the acquisition date fair values. Identifiable intangible assets, including core deposit intangible assets, if any, will be recorded at fair value.
In accordance with ASC Topic 805, estimated fair values are subject to change up to one year after the acquisition date. This allows for adjustments to the initial purchase entries if additional information relative to closing date fair values becomes available. Material adjustments to acquisition date estimated fair values would be recorded in the period in which the acquisition occurred, and as a result, previously reported results are subject to change. Information regarding the amounts recorded in the acquisition may be adjusted as the Company refines its estimates of the fair value of loans acquired, core deposit intangible asset, and the deferred tax assets or liabilities created from the acquisition. Determining the fair value of assets and liabilities, particularly illiquid assets and liabilities, is a complicated process involving significant judgment regarding estimates and assumptions used to calculate estimated fair value. Fair value adjustments based on updated estimates could materially affect the goodwill, if any, recorded on the acquisition. The Company may incur losses on the acquired loans that are materially different from losses the Company originally projected.
The acquired assets and liabilities, as well as the adjustments to record the assets and liabilities at their estimated fair values, are presented in the following table:
(In thousands) | As Acquired | ||
Assets | |||
Cash and due from banks | $ | 1,511 | |
Short-term investments | 19,971 | ||
Investment securities-available for sale | 9,559 | ||
Loans | 27,647 | ||
Bank premises | 3,120 | ||
Core deposit intangible(1) | — | ||
Other assets | 455 | ||
Total Assets | $ | 62,263 | |
Liabilities | |||
Deposits: | |||
Non-interest bearing | $ | 22,680 | |
Interest bearing | 49,584 | ||
Total deposits | 72,264 | ||
Other liabilities | 34 | ||
Total Liabilities | $ | 72,298 |
(1) The Company is still evaluating the fair value of the core deposit intangible created in the acquisition and, as such, has not recorded a fair value of core deposit intangible as of March 31, 2015.
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3. Earnings Per Share
The following table sets forth the computation of basic net income per common share and diluted net income per common share:
For the Three Months Ended March 31, | |||||||
(In thousands, except per share data) | 2015 | 2014 | |||||
Basic: Income available to common shareholders | $ | 15,665 | $ | 12,487 | |||
Weighted-average common shares outstanding | 18,586 | 18,509 | |||||
Basic earnings per share | $ | 0.84 | $ | 0.68 | |||
Diluted: Income available to common shareholders | $ | 15,665 | $ | 12,487 | |||
Weighted-average common shares outstanding | 18,586 | 18,509 | |||||
Effect of dilutive securities: | |||||||
Stock options outstanding | 384 | 408 | |||||
Warrants | 119 | 119 | |||||
Weighted-average common shares outstanding – assuming dilution | 19,089 | 19,036 | |||||
Diluted earnings per share | $ | 0.82 | $ | 0.66 |
4. Investment Securities
The amortized cost and market values of investment securities, with gross unrealized gains and losses, as of March 31, 2015 and December 31, 2014, were as follows (in thousands):
March 31, 2015 | |||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Market Value | ||||||||||||||||
Less Than One Year | Greater Than One Year | ||||||||||||||||||
Available for sale: | |||||||||||||||||||
U.S. government agency securities | $ | 162,439 | $ | 1,236 | $ | (387 | ) | $ | (1,520 | ) | $ | 161,768 | |||||||
U.S. Treasury securities | 13,018 | — | — | (217 | ) | 12,801 | |||||||||||||
Municipal securities | 12,160 | 167 | (43 | ) | — | 12,284 | |||||||||||||
Mortgage-backed securities | 62,516 | 733 | (391 | ) | (111 | ) | 62,747 | ||||||||||||
Corporate bonds | 8,224 | 20 | — | — | 8,244 | ||||||||||||||
Other equity securities | 21 | — | — | — | 21 | ||||||||||||||
$ | 258,378 | $ | 2,156 | $ | (821 | ) | $ | (1,848 | ) | $ | 257,865 | ||||||||
Held to maturity: | |||||||||||||||||||
Municipal securities | $ | 40,071 | $ | 2,429 | $ | (12 | ) | $ | (1 | ) | $ | 42,487 | |||||||
Mortgage-backed securities | 47,194 | 1,299 | (1,518 | ) | (130 | ) | 46,845 | ||||||||||||
$ | 87,265 | $ | 3,728 | $ | (1,530 | ) | $ | (131 | ) | $ | 89,332 |
10
December 31, 2014 | |||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Market Value | ||||||||||||||||
Less Than One Year | Greater Than One Year | ||||||||||||||||||
Available for sale: | |||||||||||||||||||
U.S. government agency securities | $ | 161,461 | $ | 891 | $ | — | $ | (4,825 | ) | $ | 157,527 | ||||||||
U.S. Treasury securities | 13,019 | — | — | (409 | ) | 12,610 | |||||||||||||
Municipal securities | 12,175 | 107 | (36 | ) | — | 12,246 | |||||||||||||
Mortgage-backed securities | 57,025 | 635 | (137 | ) | (436 | ) | 57,087 | ||||||||||||
Corporate bonds | 8,263 | — | — | (86 | ) | 8,177 | |||||||||||||
$ | 251,943 | $ | 1,633 | $ | (173 | ) | $ | (5,756 | ) | $ | 247,647 | ||||||||
Held to maturity: | |||||||||||||||||||
Municipal securities | $ | 41,255 | $ | 2,182 | $ | (62 | ) | $ | — | $ | 43,375 | ||||||||
Mortgage-backed securities | 47,821 | 1,098 | (208 | ) | (1,130 | ) | 47,581 | ||||||||||||
$ | 89,076 | $ | 3,280 | $ | (270 | ) | $ | (1,130 | ) | $ | 90,956 |
During 2013, the Company transferred securities with a fair value of $95.4 million from available for sale to held to maturity. Management determined it had both the positive intent and ability to hold these securities until maturity. The reclassified securities consisted of municipal and mortgage-backed securities and were transferred due to movements in interest rates. The securities were reclassified at fair value at the time of transfer and represented a non-cash transaction. Accumulated other comprehensive income (loss) included pre-tax unrealized losses of $5.9 million on these securities at the date of transfer. As of March 31, 2015, $5.0 million of pre-tax unrealized losses on these securities were included in accumulated other comprehensive income. These unrealized losses and offsetting other comprehensive income components are being amortized into net interest income over the remaining life of the related securities as a yield adjustment, resulting in no impact on future net income.
As of March 31, 2015 and December 31, 2014, the Company had 42 and 38 securities, respectively, that were in a loss position. The unrealized losses for each of the 42 securities relate to market interest rate changes. The Company has considered the current market for the securities in a loss position, as well as the severity and duration of the impairments, and expects that the value will recover. As of March 31, 2015, management does not intend to sell these investment securities until the fair value exceeds amortized cost and it is more likely than not the Company will not be required to sell debt securities before the anticipated recovery of the amortized cost basis of the security; thus, the impairment is determined not to be other-than-temporary.
The amortized cost and estimated market values by contractual maturity of investment securities as of March 31, 2015 and December 31, 2014 are shown in the following table (in thousands). Mortgage-backed securities have been allocated based on expected maturities. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
March 31, 2015 | December 31, 2014 | ||||||||||||||||||||
Weighted Average Yield | Amortized Cost | Estimated Market Value | Weighted Average Yield | Amortized Cost | Estimated Market Value | ||||||||||||||||
Available for sale: | |||||||||||||||||||||
Due in one year or less | 2.79 | % | $ | 10,761 | $ | 11,181 | 1.78 | % | $ | 571 | $ | 573 | |||||||||
Due after one year through five years | 2.12 | 68,799 | 69,682 | 2.64 | 51,037 | 51,916 | |||||||||||||||
Due after five years through ten years | 1.63 | 150,818 | 149,395 | 2.02 | 176,631 | 172,012 | |||||||||||||||
Due after ten years | 3.17 | 28,000 | 27,607 | 3.34 | 23,704 | 23,146 | |||||||||||||||
Total securities | 1.95 | % | $ | 258,378 | $ | 257,865 | 2.27 | % | $ | 251,943 | $ | 247,647 | |||||||||
Held to maturity: | |||||||||||||||||||||
Due in one year or less | 8.06 | % | $ | 2,966 | $ | 2,998 | 3.88 | % | $ | 2,045 | $ | 2,003 | |||||||||
Due after one year through five years | 3.33 | 19,607 | 20,483 | 4.16 | 20,921 | 21,875 | |||||||||||||||
Due after five years through ten years | 3.38 | 29,331 | 30,265 | 3.39 | 32,618 | 33,898 | |||||||||||||||
Due after ten years | 3.29 | 35,361 | 35,586 | 3.30 | 33,492 | 33,180 | |||||||||||||||
Total securities | 3.54 | % | $ | 87,265 | $ | 89,332 | 3.55 | % | $ | 89,076 | $ | 90,956 |
11
Securities with estimated market values of $289.7 million and $279.1 million at March 31, 2015 and December 31, 2014, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, and long-term borrowings.
5. Loans
Major classifications of loans at March 31, 2015 and December 31, 2014 were as follows (in thousands):
March 31, 2015 | December 31, 2014 | ||||||
Commercial real estate loans: | |||||||
Construction | $ | 344,340 | $ | 316,492 | |||
Mortgage(1) | 1,277,635 | 1,252,225 | |||||
1,621,975 | 1,568,717 | ||||||
Consumer real estate loans: | |||||||
Construction | 11,182 | 10,393 | |||||
Mortgage | 159,217 | 131,031 | |||||
170,399 | 141,424 | ||||||
Commercial and industrial loans | 1,054,837 | 1,016,414 | |||||
Loans to individuals, excluding real estate | 17,706 | 18,316 | |||||
Nonaccrual loans | 22,978 | 21,228 | |||||
Other loans | 16,144 | 8,165 | |||||
2,904,039 | 2,774,264 | ||||||
Less allowance for loan losses | (45,195 | ) | (42,336 | ) | |||
Loans, net | $ | 2,858,844 | $ | 2,731,928 |
(1) | Included in commercial real estate loans, mortgage, are owner-occupied real estate loans of $412.2 million at March 31, 2015 and $419.3 million at December 31, 2014. |
A summary of changes in the allowance for loan losses during the three months ended March 31, 2015 and March 31, 2014 is as follows (in thousands):
March 31, 2015 | March 31, 2014 | ||||||
Balance, beginning of period | $ | 42,336 | $ | 32,143 | |||
Provision charged to operations | 3,000 | 3,000 | |||||
Charge-offs | (207 | ) | (697 | ) | |||
Recoveries | 66 | 19 | |||||
Balance, end of period | $ | 45,195 | $ | 34,465 |
12
The allowance for loan losses and recorded investment in loans, including loans acquired with deteriorated credit quality, as of the dates indicated are as follows (in thousands):
March 31, 2015 | |||||||||||||||||||||||
Construction | Commercial Real Estate | Consumer Real Estate | Commercial and Industrial | Consumer | Total | ||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||||||
Balance, beginning of period | $ | 4,030 | $ | 14,965 | $ | 3,316 | $ | 19,814 | $ | 211 | �� | $ | 42,336 | ||||||||||
Charge-offs | (2 | ) | (29 | ) | — | (150 | ) | (26 | ) | (207 | ) | ||||||||||||
Recoveries | — | — | — | 61 | 5 | 66 | |||||||||||||||||
Provision | 705 | 1,814 | — | 480 | 1 | 3,000 | |||||||||||||||||
Balance, end of period | $ | 4,733 | $ | 16,750 | $ | 3,316 | $ | 20,205 | $ | 191 | $ | 45,195 | |||||||||||
Ending balances: | |||||||||||||||||||||||
Individually evaluated for impairment | $ | — | $ | 4,427 | $ | 2 | $ | 4,249 | $ | — | $ | 8,678 | |||||||||||
Collectively evaluated for impairment | $ | 4,733 | $ | 12,323 | $ | 3,314 | $ | 15,956 | $ | 191 | $ | 36,517 | |||||||||||
Loans receivable: | |||||||||||||||||||||||
Ending balance-total | $ | 356,487 | $ | 1,291,344 | $ | 161,308 | $ | 1,077,153 | $ | 17,747 | $ | 2,904,039 | |||||||||||
Ending balances: | |||||||||||||||||||||||
Individually evaluated for impairment | $ | 895 | $ | 14,355 | $ | 2,256 | $ | 16,178 | $ | — | $ | 33,684 | |||||||||||
Collectively evaluated for impairment | $ | 355,592 | $ | 1,276,989 | $ | 159,052 | $ | 1,060,975 | $ | 17,747 | $ | 2,870,355 |
March 31, 2014 | |||||||||||||||||||||||
Construction | Commercial Real Estate | Consumer Real Estate | Commercial and Industrial | Consumer | Total | ||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||||||
Balance, beginning of period | $ | 2,790 | $ | 13,780 | $ | 2,656 | $ | 12,677 | $ | 240 | $ | 32,143 | |||||||||||
Charge-offs | (4 | ) | (386 | ) | (43 | ) | (254 | ) | (10 | ) | (697 | ) | |||||||||||
Recoveries | — | 1 | — | 13 | 5 | 19 | |||||||||||||||||
Provision | 346 | 411 | 720 | 1,485 | 38 | 3,000 | |||||||||||||||||
Balance, end of period | $ | 3,132 | $ | 13,806 | $ | 3,333 | $ | 13,921 | $ | 273 | $ | 34,465 | |||||||||||
Ending balances: | |||||||||||||||||||||||
Individually evaluated for impairment | $ | 40 | $ | 1,730 | $ | 997 | $ | 2,294 | $ | 1 | $ | 5,062 | |||||||||||
Collectively evaluated for impairment | $ | 3,092 | $ | 12,076 | $ | 2,336 | $ | 11,627 | $ | 272 | $ | 29,403 | |||||||||||
Loans receivable: | |||||||||||||||||||||||
Ending balance-total | $ | 237,190 | $ | 1,145,380 | $ | 122,005 | $ | 948,029 | $ | 18,359 | $ | 2,470,963 | |||||||||||
Ending balances: | |||||||||||||||||||||||
Individually evaluated for impairment | $ | 414 | $ | 11,433 | $ | 2,574 | $ | 4,324 | $ | 3 | $ | 18,748 | |||||||||||
Collectively evaluated for impairment | $ | 236,776 | $ | 1,133,947 | $ | 119,431 | $ | 943,705 | $ | 18,356 | $ | 2,452,215 |
13
Credit quality indicators on the Company’s loan portfolio, including loans acquired with deteriorated credit quality, as of the dates indicated were as follows (in thousands):
March 31, 2015 | |||||||||||||||||||
Pass and Pass/Watch | Special Mention | Substandard | Doubtful | Total | |||||||||||||||
Construction | $ | 342,409 | $ | 1 | $ | 14,077 | $ | — | $ | 356,487 | |||||||||
Commercial real estate | 1,243,132 | — | 48,212 | — | 1,291,344 | ||||||||||||||
Consumer real estate | 156,100 | 59 | 5,149 | — | 161,308 | ||||||||||||||
Commercial and industrial | 1,051,028 | — | 26,125 | — | 1,077,153 | ||||||||||||||
Consumer | 17,659 | 6 | 82 | — | 17,747 | ||||||||||||||
Total loans | $ | 2,810,328 | $ | 66 | $ | 93,645 | $ | — | $ | 2,904,039 |
December 31, 2014 | |||||||||||||||||||
Pass and Pass/Watch | Special Mention | Substandard | Doubtful | Total | |||||||||||||||
Construction | $ | 313,987 | $ | 2 | $ | 13,688 | $ | — | $ | 327,677 | |||||||||
Commercial real estate | 1,215,673 | 1,613 | 47,085 | — | 1,264,371 | ||||||||||||||
Consumer real estate | 128,507 | 60 | 4,383 | — | 132,950 | ||||||||||||||
Commercial and industrial | 1,005,829 | — | 24,800 | — | 1,030,629 | ||||||||||||||
Consumer | 18,247 | 7 | 383 | — | 18,637 | ||||||||||||||
Total loans | $ | 2,682,243 | $ | 1,682 | $ | 90,339 | $ | — | $ | 2,774,264 |
The table above as of March 31, 2015 includes $5.4 million of substandard loans which are loans acquired with deteriorated credit quality. As of December 31, 2014, included in the above table were $5.4 million of substandard loans and $1.6 million of special mention loans all of which are loans acquired with deteriorated credit quality.
The above classifications follow regulatory guidelines and can generally be described as follows:
• | Pass and pass/watch loans are of satisfactory quality. |
• | Special mention loans have an existing weakness that could cause future impairment, including the deterioration of financial ratios, past due status, questionable management capabilities, and possible reduction in the collateral values. |
• | Substandard loans have an existing specific and well-defined weakness that may include poor liquidity and deterioration of financial ratios. The loan may be past due and related deposit accounts experiencing overdrafts. Immediate corrective action is necessary. |
• | Doubtful loans have specific weaknesses that are severe enough to make collection or liquidation in full improbable. |
14
Age analysis of past due loans, including loans acquired with deteriorated credit quality, as of the dates indicated were as follows (in thousands):
March 31, 2015 | |||||||||||||||||||
Greater Than 30 and Fewer Than 90 Days Past Due | 90 Days and Greater Past Due | Total Past Due | Current Loans | Total Loans | |||||||||||||||
Real estate loans: | |||||||||||||||||||
Construction | $ | 1 | $ | 965 | $ | 966 | $ | 355,521 | $ | 356,487 | |||||||||
Commercial real estate | 359 | 11,538 | 11,897 | 1,279,447 | 1,291,344 | ||||||||||||||
Consumer real estate | 2,306 | 1,399 | 3,705 | 157,603 | 161,308 | ||||||||||||||
Total real estate loans | 2,666 | 13,902 | 16,568 | 1,792,571 | 1,809,139 | ||||||||||||||
Other loans: | |||||||||||||||||||
Commercial and industrial | 438 | 4,422 | 4,860 | 1,072,293 | 1,077,153 | ||||||||||||||
Consumer | 291 | 43 | 334 | 17,413 | 17,747 | ||||||||||||||
Total other loans | 729 | 4,465 | 5,194 | 1,089,706 | 1,094,900 | ||||||||||||||
Total loans | $ | 3,395 | $ | 18,367 | $ | 21,762 | $ | 2,882,277 | $ | 2,904,039 |
December 31, 2014 | |||||||||||||||||||
Greater Than 30 and Fewer Than 90 Days Past Due | 90 Days and Greater Past Due | Total Past Due | Current Loans | Total Loans | |||||||||||||||
Real estate loans: | |||||||||||||||||||
Construction | $ | 97 | $ | 750 | $ | 847 | $ | 326,830 | $ | 327,677 | |||||||||
Commercial real estate | 2,497 | 9,545 | 12,042 | 1,252,329 | 1,264,371 | ||||||||||||||
Consumer real estate | 1,623 | 1,255 | 2,878 | 130,072 | 132,950 | ||||||||||||||
Total real estate loans | 4,217 | 11,550 | 15,767 | 1,709,231 | 1,724,998 | ||||||||||||||
Other loans: | |||||||||||||||||||
Commercial and industrial | 159 | 4,426 | 4,585 | 1,026,044 | 1,030,629 | ||||||||||||||
Consumer | 564 | 322 | 886 | 17,751 | 18,637 | ||||||||||||||
Total other loans | 723 | 4,748 | 5,471 | 1,043,795 | 1,049,266 | ||||||||||||||
Total loans | $ | 4,940 | $ | 16,298 | $ | 21,238 | $ | 2,753,026 | $ | 2,774,264 |
In the table above, there were $13 thousand of tuition loans included with other consumer loans 90 days and greater past due as of March 31, 2015 and $28 thousand of tuition loans included with other consumer loans 90 days and greater past due as of December 31, 2014. These loans are cash secured and the Company has a right of offset against the guarantors’ deposit account when the loans are 120 days past due.
15
The following is a summary of information pertaining to impaired loans excluding loans acquired with deteriorated credit quality, as of the periods indicated (in thousands):
March 31, 2015 | |||||||||||
Recorded Investment | Contractual Balance | Related Allowance | |||||||||
With no related allowance recorded: | |||||||||||
Construction | $ | 895 | $ | 895 | $ | — | |||||
Commercial real estate | 2,670 | 2,616 | — | ||||||||
Consumer real estate | 2,152 | 2,167 | — | ||||||||
Commercial and industrial | 320 | 44 | — | ||||||||
Total | $ | 6,037 | $ | 5,722 | $ | — | |||||
With an allowance recorded: | |||||||||||
Construction | $ | — | $ | — | $ | — | |||||
Commercial real estate | 11,685 | 11,981 | 4,427 | ||||||||
Consumer real estate | 104 | 117 | 2 | ||||||||
Commercial and industrial | 15,858 | 16,104 | 4,249 | ||||||||
Total | $ | 27,647 | $ | 28,202 | $ | 8,678 | |||||
Total impaired loans: | |||||||||||
Construction | $ | 895 | $ | 895 | $ | — | |||||
Commercial real estate | 14,355 | 14,597 | 4,427 | ||||||||
Consumer real estate | 2,256 | 2,284 | 2 | ||||||||
Commercial and industrial | 16,178 | 16,148 | 4,249 | ||||||||
Total | $ | 33,684 | $ | 33,924 | $ | 8,678 |
December 31, 2014 | |||||||||||
Recorded Investment | Contractual Balance | Related Allowance | |||||||||
With no related allowance recorded: | |||||||||||
Construction | $ | 927 | $ | 927 | $ | — | |||||
Commercial real estate | 7,175 | 7,453 | — | ||||||||
Consumer real estate | 2,085 | 2,097 | — | ||||||||
Commercial and industrial | 436 | 498 | — | ||||||||
Consumer | 256 | 256 | — | ||||||||
Total | $ | 10,879 | $ | 11,231 | $ | — | |||||
With an allowance recorded: | |||||||||||
Construction | $ | — | $ | — | $ | — | |||||
Commercial real estate | 5,955 | 6,235 | 3,138 | ||||||||
Consumer real estate | — | — | — | ||||||||
Commercial and industrial | 14,721 | 14,774 | 5,889 | ||||||||
Consumer | 3 | 3 | 1 | ||||||||
Total | $ | 20,679 | $ | 21,012 | $ | 9,028 | |||||
Total impaired loans: | |||||||||||
Construction | $ | 927 | $ | 927 | $ | — | |||||
Commercial real estate | 13,130 | 13,688 | 3,138 | ||||||||
Consumer real estate | 2,085 | 2,097 | — | ||||||||
Commercial and industrial | 15,157 | 15,272 | 5,889 | ||||||||
Consumer | 259 | 259 | 1 | ||||||||
Total | $ | 31,558 | $ | 32,243 | $ | 9,028 |
16
For the Three Months Ended | |||||||||||||||
March 31, 2015 | March 31, 2014 | ||||||||||||||
Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | ||||||||||||
With no related allowance recorded: | |||||||||||||||
Construction | $ | 911 | $ | — | $ | 24 | $ | 1 | |||||||
Commercial real estate | 4,923 | — | 4,428 | 76 | |||||||||||
Consumer real estate | 2,119 | 3 | 1,977 | — | |||||||||||
Commercial and industrial | 378 | — | 1,090 | 28 | |||||||||||
Consumer | 128 | — | — | — | |||||||||||
Total | $ | 8,459 | $ | 3 | $ | 7,519 | $ | 105 | |||||||
With an allowance recorded: | |||||||||||||||
Construction | $ | — | $ | — | $ | 338 | $ | 7 | |||||||
Commercial real estate | 8,820 | — | 6,135 | 8 | |||||||||||
Consumer real estate | 52 | — | 865 | 7 | |||||||||||
Commercial and industrial | 15,290 | 4 | 3,075 | — | |||||||||||
Consumer | 2 | — | 2 | — | |||||||||||
Total | $ | 24,164 | $ | 4 | $ | 10,415 | $ | 22 | |||||||
Total impaired loans: | |||||||||||||||
Construction | $ | 911 | $ | — | $ | 362 | $ | 8 | |||||||
Commercial real estate | 13,743 | — | 10,563 | 84 | |||||||||||
Consumer real estate | 2,171 | 3 | 2,842 | 7 | |||||||||||
Commercial and industrial | 15,668 | 4 | 4,165 | 28 | |||||||||||
Consumer | 130 | — | 2 | — | |||||||||||
Total | $ | 32,623 | $ | 7 | $ | 17,934 | $ | 127 |
As of March 31, 2015, there were $13 thousand of cash secured tuition loans that were past due 90 days or more that were still accruing interest, and $28 thousand in cash secured tuition loans that were past due 90 days or more still accruing interest as of December 31, 2014.
The following is a summary of information pertaining to nonaccrual loans as of the periods indicated (in thousands):
March 31, 2015 | December 31, 2014 | ||||||
Nonaccrual loans: | |||||||
Construction | $ | 965 | $ | 792 | |||
Commercial real estate | 13,709 | 12,146 | |||||
Consumer real estate | 2,091 | 1,919 | |||||
Commercial and industrial | 6,172 | 6,051 | |||||
Consumer | 41 | 320 | |||||
$ | 22,978 | $ | 21,228 |
As of March 31, 2015 and December 31, 2014, the average recorded investment in nonaccrual loans was $22.1 million and $19.6 million, respectively. The amount of interest income that would have been recognized on nonaccrual loans based on contractual terms was $0.3 million and $1.0 million at March 31, 2015 and December 31, 2014, respectively. As of March 31, 2015, the Company was not committed to lend additional funds to any customer whose loan was classified as impaired.
17
ASC 310-30 Loans
During 2011, the Company acquired certain loans from the Federal Deposit Insurance Corporation, as receiver for Central Progressive Bank, that are subject to ASC 310-30. ASC 310-30 provides recognition, measurement, and disclosure requirements for acquired loans that have evidence of deterioration of credit quality since origination for which it is probable, at acquisition, that the Company will be unable to collect all contractual amounts owed. The Company’s allowance for loan losses for all acquired loans subject to ASC 310-30 would reflect only those losses incurred after acquisition.
The following is a summary of changes in the accretable yields of acquired loans as of the periods indicated as follows (in thousands):
March 31, 2015 | March 31, 2014 | ||||||
Balance, beginning of period | $ | 115 | $ | 170 | |||
Acquisition | — | — | |||||
Net transfers from nonaccretable difference to accretable yield | — | 1,437 | |||||
Accretion | (74 | ) | (381 | ) | |||
Balance, end of period | $ | 41 | $ | 1,226 |
Information about the Company’s troubled debt restructurings (TDRs) at March 31, 2015 and March 31, 2014 is presented in the following tables (in thousands):
Current | Greater Than 30 Days Past Due | Nonaccrual TDRs | Total TDRs | ||||||||||||
As of March 31, 2015 | |||||||||||||||
Real estate loans: | |||||||||||||||
Construction | $ | 201 | $ | — | $ | — | $ | 201 | |||||||
Commercial real estate | — | — | 1,879 | 1,879 | |||||||||||
Consumer real estate | 597 | — | 131 | 728 | |||||||||||
Total real estate loans | 798 | — | 2,010 | 2,808 | |||||||||||
Other loans: | |||||||||||||||
Commercial and industrial | 629 | — | 179 | 808 | |||||||||||
Total loans | $ | 1,427 | $ | — | $ | 2,189 | $ | 3,616 |
Current | Greater Than 30 Days Past Due | Nonaccrual TDRs | Total TDRs | ||||||||||||
As of March 31, 2014 | |||||||||||||||
Real estate loans: | |||||||||||||||
Construction | $ | 306 | $ | — | $ | — | $ | 306 | |||||||
Commercial real estate | 356 | — | 102 | 458 | |||||||||||
Consumer real estate | 619 | — | 140 | 759 | |||||||||||
Total real estate loans | 1,281 | — | 242 | 1,523 | |||||||||||
Other loans: | |||||||||||||||
Commercial and industrial | 318 | — | — | 318 | |||||||||||
Total loans | $ | 1,599 | $ | — | $ | 242 | $ | 1,841 |
There were no new TDRs which were modified during the three months ended March 31, 2015 and 2014.
18
A summary of information pertaining to modified terms of loans, as of the dates indicated, is as follows:
As of March 31, 2015 | ||||||||||
Number of Contracts | Pre- Modification Outstanding Recorded Investment | Post- Modification Outstanding Recorded Investment | ||||||||
Troubled debt restructuring: | ||||||||||
Construction | 3 | $ | 201 | $ | 201 | |||||
Commercial real estate | 2 | 1,879 | 1,879 | |||||||
Consumer real estate | 4 | 728 | 728 | |||||||
Commercial and industrial | 2 | 808 | 808 | |||||||
11 | $ | 3,616 | $ | 3,616 |
As of March 31, 2014 | ||||||||||
Number of Contracts | Pre- Modification Outstanding Recorded Investment | Post- Modification Outstanding Recorded Investment | ||||||||
Troubled debt restructuring: | ||||||||||
Construction | 2 | $ | 306 | $ | 306 | |||||
Commercial real estate | 3 | 458 | 458 | |||||||
Consumer real estate | 3 | 759 | 759 | |||||||
Commercial and industrial | 1 | 318 | 318 | |||||||
9 | $ | 1,841 | $ | 1,841 |
None of the performing TDRs defaulted subsequent to the restructuring through the date the financial statements were available to be issued.
As of March 31, 2015 and December 31, 2014, the Company was not committed to lend additional funds to any customer whose loan was classified as impaired or as a TDR.
6. Investments in Tax Credit Entities
Federal NMTC
Investment in Bank Owned CDE
The Federal NMTC program is administered by the Community Development Financial Institutions Fund of the U.S. Treasury and is aimed at stimulating economic and community development and job creation in low-income communities. The program provides federal tax credits to investors who make qualified equity investments (QEIs) in a Community Development Entity. The CDE is required to invest the proceeds of each QEI in projects located in or benefiting low-income communities, which are generally defined as those census tracts with poverty rates greater than 20% and/or median family incomes that are less than or equal to 80% of the area median family income. FNBC CDE has received allocations of Federal NMTC, totaling $118.0 million since 2011. These allocations generated $46.0 million in tax credits.
The credit provided to the investor totals 39% of each QEI in a CDE and is claimed over a seven-year credit allowance period. In each of the first three years, the investor receives a credit equal to 5% of the total QEI allocated to each project. For each of the remaining four years, the investor receives a credit equal to 6% of the total QEI allocated to each project. The Company is eligible to receive up to $46.0 million in tax credits over the seven-year credit allowance period, beginning with the period in which the QEI was made, for its QEI of $118.0 million. Through March 31, 2015, FNBC CDE had invested in allocations of $118.0 million, of which $40.0 million was invested by the Company and $78.0 million was invested by other investors and leverage lenders, which include the Company. Of the $78.0 million invested by other investors and leverage lenders, $17.5 million was invested by the Company as the leverage lender. The Company's investment is eliminated upon consolidation. The Federal NMTC claimed by the Company, with respect to each QEI, remain subject to recapture over each QEI’s credit allowance period upon the occurrence of any of the following:
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• | FNBC CDE does not invest substantially all (defined as a minimum of 85%) of the QEI proceeds in qualified low-income community investments; |
• | FNBC CDE ceases to be a CDE; or |
• | FNBC CDE redeems its QEI investment prior to the end of the current credit allowance period. |
At March 31, 2015 and December 31, 2014, none of the above recapture events had occurred, nor, in the opinion of management, are such events anticipated to occur in the foreseeable future. As of March 31, 2015, FNBC CDE had total assets of $130.3 million, consisting of cash of $5.2 million, loans of $112.3 million and other assets of $12.8 million, with liabilities of $0.6 million and capital of $129.7 million.
Investments in Non-Bank Owned CDEs
The Company is also a limited partner in several tax-advantaged limited partnerships and a shareholder in several C corporations whose purpose is to invest in approved Federal NMTC projects through CDEs that are not associated with FNBC CDE. During 2014 and 2013, several of these partnerships in which the Company was a limited partner converted to C corporations. The Company’s ownership in the CDEs did not change based on the conversion. These investments are accounted for using the cost method of accounting and are included in investment in tax credit entities in the accompanying consolidated balance sheets. The limited partnerships and C corporations are considered VIEs. The VIEs have not been consolidated because the Company is not considered the primary beneficiary. All of the Company’s investments in Federal NMTC structures are privately held, and their market values are not readily determinable. Based on the structure of these transactions, the Company expects to recover its investment solely through use of the tax credits that were generated by the investments. As such, the investment in these entities will be amortized on a straight-line basis over the period over which the Company holds its investment (approximately seven years).
Low-Income Housing Tax Credits
The Company is a limited partner in several tax-advantaged limited partnerships whose purpose is to invest in approved Low-Income Housing tax credit projects. These investments are accounted for using the cost method of accounting and are included in investments in tax credit entities in the accompanying consolidated balance sheets. The limited partnerships are considered to be VIEs. The VIEs have not been consolidated because the Company is not considered the primary beneficiary. All of the Company’s investments in low-income housing partnerships are evaluated for impairment at the end of each reporting period. Based on the structure of these transactions, the Company expects to recover its remaining investments at March 31, 2015 solely through use of the tax credits that were generated by the investments. As such, the investment in these partnerships will be amortized on a straight-line basis over the period for which the Company maintains its ownership interest in the property (approximately 15 years).
Federal Historic Rehabilitation Tax Credits
The Company is a limited partner in several tax-advantaged limited partnerships whose purpose is to invest in approved Federal Historic Rehabilitation tax credit projects. These investments are accounted for using the cost method of accounting and are included in investments in tax credit entities in the accompanying consolidated balance sheets. The limited partnerships are considered to be VIEs. The VIEs have not been consolidated because the Company is not considered the primary beneficiary. All of the Company’s investments in limited partnerships are evaluated for impairment at the end of each reporting period. Based on the structure of these transactions, the Company expects to recover its remaining investments in Federal Historic Rehabilitation tax credits at March 31, 2015 solely through use of the tax credits that were generated by the investments. As such, these amounts will be amortized on a straight-line basis over the period during which the Company retains its ownership interest in the tax credit entity (approximately 10 years).
State NMTC
Investments in Non-Bank Owned CDEs
The Company is a limited partner in several tax-advantaged limited partnerships that are CDEs, whose purpose is to invest in approved state projects that are not associated with FNBC CDE. Based on the structure of these transactions, the Company expects to recover its remaining investments at March 31, 2015 in State NMTC through the transfer of its ownership interest to third party investors.
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The tables below set forth the Company's investment in Federal NMTC, State NMTC, Federal Low-Income Housing, Federal Historic Rehabilitation, and State Historic Rehabilitation tax credits, along with the credits expected to be generated through its participation in these programs as of March 31, 2015 and December 31, 2014 (in thousands):
March 31, 2015 | ||||||||||||||||||||||||||||||||||||
Investment | Accumulated Amortization | Loans to Investment Funds(1) | Elimination | Net Investment | Tax Benefits Recognized Through December 31, 2014 | Tax Benefits Expected to be Recognized in 2015 | Tax Benefits Expected to be Recognized in 2016, and Thereafter | Total Tax Benefits Expected to be Recognized | ||||||||||||||||||||||||||||
NMTC: | ||||||||||||||||||||||||||||||||||||
Federal: | ||||||||||||||||||||||||||||||||||||
Non-Bank Owned CDEs | $ | 172,192 | $ | (17,816 | ) | $ | (127,520 | ) | $ | — | $ | 26,856 | $ | 36,580 | $ | 9,769 | $ | 20,076 | $ | 66,425 | ||||||||||||||||
Bank Owned CDEs(2) | 118,000 | — | — | (118,000 | ) | — | 16,490 | 6,580 | 22,949 | 46,019 | ||||||||||||||||||||||||||
Bank Owned CDE Equity Investment(3) | 5,700 | — | — | — | 5,700 | — | — | — | — | |||||||||||||||||||||||||||
Total Bank Owned CDEs | 123,700 | — | — | (118,000 | ) | 5,700 | 16,490 | 6,580 | 22,949 | 46,019 | ||||||||||||||||||||||||||
State | 28,227 | — | — | — | 28,227 | — | — | — | — | |||||||||||||||||||||||||||
Total NMTC | 324,119 | (17,816 | ) | (127,520 | ) | (118,000 | ) | 60,783 | 53,070 | 16,349 | 43,025 | 112,444 | ||||||||||||||||||||||||
Low-Income Housing | 44,161 | (7,988 | ) | — | — | 36,173 | 13,188 | 4,490 | 37,618 | 55,296 | ||||||||||||||||||||||||||
Historic Rehabilitation: | ||||||||||||||||||||||||||||||||||||
Federal(4) | 46,357 | (4,235 | ) | — | — | 42,122 | 37,143 | 27,351 | 33,795 | 98,289 | ||||||||||||||||||||||||||
State | 8,026 | — | — | — | 8,026 | — | — | — | — | |||||||||||||||||||||||||||
Total Historic Rehabilitation | 54,383 | (4,235 | ) | — | — | 50,148 | 37,143 | 27,351 | 33,795 | 98,289 | ||||||||||||||||||||||||||
Total | $ | 422,663 | $ | (30,039 | ) | $ | (127,520 | ) | $ | (118,000 | ) | $ | 147,104 | $ | 103,401 | $ | 48,190 | $ | 114,438 | $ | 266,029 |
(1) Interest only loan made to the investment fund during the compliance period for Federal NMTC.
(2) Through March 31, 2015, FNBC CDE received allocations of Federal NMTC from the CDFI Fund of the U.S. Treasury totaling $118.0 million over a three year period beginning in 2011. These investments are eliminated upon consolidation by the Company.
(3) The Company made an equity investment of $5.7 million in various Federal NMTC projects. This investment generated Federal NMTC. For its equity investment, the Company is a limited partner and will have the right to share in the activity of the Partnership.
(4) As of March 31, 2015, the Company had $15.7 million invested in Federal Rehabilitation Tax Credit projects which the Company expects to generate Federal Rehabilitation Tax Credits in 2015 and 2016 when the projects are completed, receive the certificates of occupancy, and the property is placed into service. The amount of tax credits to be received will be determined when the costs are certified.
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December 31, 2014 | ||||||||||||||||||||||||||||||||||||
Investment | Accumulated Amortization | Loans to Investment Funds(1) | Elimination | Net Investment | Tax Benefits Recognized Through December 31, 2013 | Tax Benefits Recognized in 2014 | Tax Benefits Expected to be Recognized in 2015, and Thereafter | Total Tax Benefits Expected to be Recognized | ||||||||||||||||||||||||||||
NMTC: | ||||||||||||||||||||||||||||||||||||
Federal: | ||||||||||||||||||||||||||||||||||||
Non-Bank Owned CDEs | $ | 162,192 | $ | (15,852 | ) | $ | (120,540 | ) | $ | — | $ | 25,800 | $ | 27,213 | $ | 9,367 | $ | 25,945 | $ | 62,525 | ||||||||||||||||
Bank Owned CDEs(2) | 118,000 | — | — | (118,000 | ) | — | 10,375 | 6,115 | 29,530 | 46,020 | ||||||||||||||||||||||||||
Bank Owned CDE Equity Investment(3) | 5,700 | — | — | — | 5,700 | — | — | — | — | |||||||||||||||||||||||||||
Total Bank Owned CDEs | 123,700 | — | — | (118,000 | ) | 5,700 | 10,375 | 6,115 | 29,530 | 46,020 | ||||||||||||||||||||||||||
State | 28,227 | — | — | — | 28,227 | — | — | — | — | |||||||||||||||||||||||||||
Total NMTC | 314,119 | (15,852 | ) | (120,540 | ) | (118,000 | ) | 59,727 | 37,588 | 15,482 | 55,475 | 108,545 | ||||||||||||||||||||||||
Low-Income Housing | 43,733 | (7,264 | ) | — | — | 36,469 | 9,546 | 3,642 | 42,109 | 55,297 | ||||||||||||||||||||||||||
Historic Rehabilitation: | ||||||||||||||||||||||||||||||||||||
Federal(4) | 41,794 | (3,412 | ) | — | — | 38,382 | 17,823 | 19,321 | 37,295 | 74,439 | ||||||||||||||||||||||||||
State | 6,335 | — | — | — | 6,335 | — | — | — | — | |||||||||||||||||||||||||||
Total Historic Rehabilitation | 48,129 | (3,412 | ) | — | — | 44,717 | 17,823 | 19,321 | 37,295 | 74,439 | ||||||||||||||||||||||||||
Total | $ | 405,981 | $ | (26,528 | ) | $ | (120,540 | ) | $ | (118,000 | ) | $ | 140,913 | $ | 64,957 | $ | 38,445 | $ | 134,879 | $ | 238,281 |
(1) Interest only loan made to the investment fund during the compliance period for Federal NMTC.
(2) Through December 31, 2014, FNBC CDE received allocations of Federal NMTC from the CDFI Fund of the U.S. Treasury totaling $118.0 million over a three year period beginning in 2011. These investments are eliminated upon consolidation by the Company.
(3) The Company made an equity investment of $5.7 million in various Federal NMTC projects. This investment generated Federal NMTC. For its equity investment, the Company is a limited partner and will have the right to share in the activity of the Partnership.
(4) As of December 31, 2014, the Company had $12.6 million invested in Federal Historic Rehabilitation Tax Credit projects which the Company expects to generate Federal Historic Rehabilitation Tax Credits in 2015 and 2016 when the projects are completed, receive the certificate of occupancy, and the property is placed in service. The amount of tax credits to be received will be determined when the costs are certified.
The amortization of tax credit investments for the three month periods ended March 31, 2015 and March 31, 2014 were as follows (in thousands):
For the Three Months Ended March 31, | |||||||
2015 | 2014 | ||||||
Federal NMTC (1) | $ | 3,305 | $ | 1,914 | |||
Low-Income Housing | 724 | 541 | |||||
Federal Historic Rehabilitation | 823 | 372 | |||||
Total amortization | $ | 4,852 | $ | 2,827 |
(1) Included in the amortization of Federal NMTC tax credit investments was $1.3 million of amortization related to the QLICI loans generated by the $118.0 million allocation from the CDFI Fund of the U.S. Treasury.
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The amount of basis reduction recorded related to the Company's investment in tax credit entities for the three month periods ended March 31, 2015 and March 31, 2014 were as follows (in thousands):
For the Three Months Ended March 31, | |||||||
2015 | 2014 | ||||||
Federal NMTC | $ | 368 | $ | 417 | |||
Federal Historic Rehabilitation | 138 | — | |||||
Total basis reduction | $ | 506 | $ | 417 |
The Company also made loans to the tax credit related projects. The proceeds from these loans can be utilized for the generation and use of tax credits on the related real estate project or as funding for the tax credit real estate project itself. These loans are subject to the Company's normal underwriting criteria and all loans were performing according to their contractual terms at March 31, 2015. These loans were classified in the Company's loan portfolio at March 31, 2015 and December 31, 2014 as follows (in thousands):
March 31, 2015 | December 31, 2014 | ||||||
Construction | $ | 82,776 | $ | 80,741 | |||
Commercial real estate | 80,280 | 67,520 | |||||
Commercial and industrial | 141,379 | 117,191 | |||||
Total loans | $ | 304,435 | $ | 265,452 |
7. Long-term Borrowings
Subordinated Notes Due 2025
In February 2015, the Company issued $60.0 million in aggregate principal amount of subordinated notes to certain qualified institutional investors. Unless earlier redeemed, the notes have a maturity date of February 18, 2025 and bear interest, payable semiannually in arrears on February 18 and August 18 of each year, commencing August 18, 2015, at a fixed interest rate of 5.75% per year.
The notes are not convertible into common stock or preferred stock of the Company and are not subject to redemption at the option of the holders. The notes may be redeemed by the Company, in whole or in part, on or after November 18, 2024 or, in whole but not in part, under certain limited circumstances set forth in the Indenture. Any redemption by the Company would be at a redemption price equal to 100% of the principal balance being redeemed, together with any accrued and unpaid interest to the date of redemption.
Principal and interest on the notes are not subject to acceleration, except upon certain bankruptcy-related events. The notes are the unsecured, subordinated obligations of the Company and rank junior in right of payment to the Company’s current and future senior indebtedness and to the Company’s obligations to its general creditors.
The Company plans to use the net proceeds from the sale of the subordinated notes for general corporate purposes, which may include supporting the continued growth of its business, acquisitions, and the redemption or repayment of other fixed obligations.
Employee Stock Ownership Plan Loan
In March 2015, the Company sponsored Employee Stock Ownership Trust entered into a loan from First National Bankers Bank (FNBB) in order to purchase 100,000 shares of Company stock for $3.3 million. This borrowing is required to be recorded on the Company’s balance sheet, with an offsetting entry to additional paid-in capital. The loan matures on December 5, 2024, and bears interest at a floating rate equal to the Wall Street Journal Prime rate, which was 3.25% as of March 31, 2015. The loan is subject to a pledge of 99,000 shares of the Company stock, owned by the Trust, as of March 31, 2015.
The $40.0 million borrowing included within long-term borrowings at March 31, 2015 and December 31, 2014 consists of a borrowing by the Company from Credit Suisse which is in the legal form of a long-term repurchase agreement. The borrowing matures on April 1, 2019, and bears interest at a floating rate equal to three-month USD LIBOR plus 1.35%, and was 1.61% at March 31, 2015.
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The following table includes a summary of long-term borrowings as of March 31, 2015 and December 31, 2014 (in thousands):
March 31, 2015 | December 31, 2014 | ||||||
FNBB | $ | 3,392 | $ | — | |||
Credit Suisse Securities (USA) LLC | 40,000 | 40,000 | |||||
5.75% Subordinated Notes due 2025 | 60,000 | — | |||||
Total long-term borrowings | $ | 103,392 | $ | 40,000 |
8. Derivative - Interest Rate Swap Agreements
Interest Rate Swaps. During 2014, the Company entered into three delayed interest rate swaps with Counterparty C to manage exposure against the variability in the expected future cash flows attributed to changes in the benchmark interest rate on a portion of its variable-rate debt. The Company entered into these interest rate swap agreements to convert a portion of its forecasted variable-rate debt to a fixed rate, which is a cash flow hedge of a forecasted transaction. The total notional amount of the three derivative contracts is $165.0 million.
In December 2014, the Company terminated its cash flow hedge with Counterparty A, which the Company had entered into in 2012, as internal forecasts for future interest rates changed since this transaction was initiated. The total notional amount of the derivative contract was $115.0 million. The termination of the cash flow hedge resulted in a loss of $8.0 million which had been reflected in the Company’s operating cash flows and will be reclassified from accumulated other comprehensive income (loss) to net income as interest expense as it is amortized over a multi-year period consistent with the original maturity dates of the hedge which began in January 2015 and terminates in January 2022.
The Company entered into a delayed interest rate swap with Counterparty B in 2013 to manage exposure against the variability in the expected future cash flows attributed to changes in the benchmark interest rate on a portion of its variable-rate debt. The Company entered into this interest rate swap agreement to convert a portion of its variable-rate debt to a fixed rate, which is a cash flow hedge of a forecasted transaction. The total notional amount of the derivative contract is $150.0 million.
Interest Rate-Prime Swaps. In March 2015, the Company entered into four interest rate swaps with Counterparty C to manage exposure against the variability in the expected future cash flows on the designated Prime plus 1% floored at 5%, Prime plus 2%, Prime plus 2% actual/365, and Prime plus 2.25% pools of its floating rate loan portfolio (the Prime Hedges). The Company entered into the interest rate-prime swap agreements to hedge the cash flows from these pools of its floating rate loan portfolio, which is expected to offset the variability in the expected future cash flows attributable to the fluctuations in the daily weighted average Wall Street Journal Prime index, which is a cash flow hedge of a forecasted transaction. The notional amount of the contracts are Prime plus 1% floored at 5% tranche of $40.0 million, Prime plus 2% tranche of $15.0 million, Prime plus 2% actual/365 tranche of $10.0 million, and Prime plus 2.25% tranche of $10.0 million for a total notional amount of $75.0 million. The Company will receive payments from the counterparty at a fixed rate of interest and pay the counterparty at the Prime rate associated with each tranche on its notional amount. The Prime plus 1% floored at 5% tranche will receive payments at a fixed rate of 5.81% and pay the counterparty at Prime plus 1%, floored at 5% on the notional amount. The Prime plus 2% and Prime plus 2% actual/365 tranches will receive payments at a fixed rate of 6.56% and pay the counterparty at Prime plus 2% on the notional amounts. The Prime plus 2.25% tranche will receive payments at a fixed rate of 6.81% and pay the counterparty at Prime plus 2.25% on the notional amount. The cash flow payments on the derivatives begin March 2015 and terminate March 2021.
During 2013, the Company entered into four interest rate swaps with Counterparty B to manage exposure against the variability in the expected future cash flows on the designated Prime, Prime plus 1%, Prime plus 1% floored at 5% and Prime plus 1% floored at 5.5% pools of its floating rate loan portfolio (the Prime Hedges). The Company entered into the interest rate swap agreements to hedge the cash flows from these pools of its floating rate loan portfolio, which is expected to offset the variability in the expected future cash flows attributable to the fluctuations in the daily weighted average Wall Street Journal Prime index, which is a cash flow hedge of a forecasted transaction. The total notional amount of the prime hedges is $250.0 million. The cash flow payments on the derivatives began September 2013 and terminate September 2019.
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Information pertaining to outstanding derivative instruments is as follows (in thousands):
Derivative Assets Fair Value | Derivative Liabilities Fair Value | ||||||||||||||||||
Balance Sheet Location | March 31, 2015 | December 31, 2014 | Balance Sheet Location | March 31, 2015 | December 31, 2014 | ||||||||||||||
Derivatives designated as hedging instruments under ASC Topic 815: | |||||||||||||||||||
Interest rate swaps - Counterparty B | Other Assets | $ | — | $ | — | Other Liabilities | $ | 19,783 | $ | 15,995 | |||||||||
Interest rate-prime swaps - Counterparty B | Other Assets | 5,415 | 3,042 | Other Liabilities | — | — | |||||||||||||
Interest rate swaps - Counterparty C | Other Assets | — | 37 | Other Liabilities | 2,787 | — | |||||||||||||
Interest rate-prime swaps - Counterparty C | Other Assets | 466 | — | Other Liabilities | — | — | |||||||||||||
$ | 5,881 | $ | 3,079 | $ | 22,570 | $ | 15,995 |
The Company entered into master netting arrangements with both Counterparty B and Counterparty C whereby the delayed interest rate swaps and Prime Hedges would be settled net. Net fair values of the Counterparty B and Counterparty C delayed interest rate swaps and Prime Hedges as of March 31, 2015 and December 31, 2014 are as follows (in thousands):
March 31, 2015 | |||||||||||||||
Gross Amounts Presented in the Balance Sheet | Gross Amounts Not Offset in the Balance Sheet | ||||||||||||||
Derivatives | Collateral | Net | |||||||||||||
Derivatives subject to master netting arrangements: | |||||||||||||||
Derivative assets: | |||||||||||||||
Interest rate-prime swaps - Counterparty B | $ | 5,415 | $ | — | $ | — | $ | 5,415 | |||||||
Interest rate-prime swaps - Counterparty C | 466 | — | — | 466 | |||||||||||
$ | 5,881 | $ | — | $ | — | $ | 5,881 | ||||||||
Derivative liabilities: | |||||||||||||||
Interest rate swaps - Counterparty B | $ | 19,783 | $ | — | $ | — | $ | 19,783 | |||||||
Interest rate swaps - Counterparty C | 2,787 | — | — | 2,787 | |||||||||||
$ | 22,570 | — | — | $ | 22,570 | ||||||||||
Net derivative liability | $ | 16,689 | $ | — | $ | — | $ | 16,689 |
December 31, 2014 | |||||||||||||||
Gross Amounts Presented in the Balance Sheet | Gross Amounts Not Offset in the Balance Sheet | ||||||||||||||
Derivatives | Collateral | Net | |||||||||||||
Derivatives subject to master netting arrangements: | |||||||||||||||
Derivative assets: | |||||||||||||||
Interest rate-prime swaps - Counterparty B | $ | 3,042 | $ | — | $ | — | $ | 3,042 | |||||||
$ | 3,042 | $ | — | $ | — | $ | 3,042 | ||||||||
Derivative liabilities: | |||||||||||||||
Interest rate swaps - Counterparty B | $ | 15,995 | $ | — | $ | — | $ | 15,995 | |||||||
$ | 15,995 | — | — | $ | 15,995 | ||||||||||
Net derivative liability | $ | 12,953 | $ | — | $ | — | $ | 12,953 |
Pursuant to the interest rate swap agreements described above with Counterparty B, the Company pledged collateral in the form of investment securities totaling $16.2 million (with a fair value at March 31, 2015 of $16.7 million), which has been presented
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gross in the Company’s balance sheet. Pursuant to the interest rate swap agreements described above with Counterparty C, the Company pledged collateral in the form of investment securities totaling $4.5 million (with a fair value at March 31, 2015 of $4.0 million), which has been presented gross in the Company’s balance sheet. There was no collateral posted from the counterparties to the Company as of March 31, 2015.
For the three months ended March 31, 2015, the Company reclassified $0.3 million from accumulated other comprehensive income (loss) into interest expense as a result of the discontinuance of the cash flow hedge with Counterparty A. No amounts were reclassified into earnings for the three months ended March 31, 2014.
As of March 31, 2015 and 2014, no amounts of gains or losses have been reclassified from accumulated comprehensive income (loss), nor have any amounts of gains or losses been recognized due to ineffectiveness of a portion of the derivatives. At March 31, 2015, no amount of the derivatives will mature within the next 12 months. The Company does not expect to reclassify any amount from accumulated other comprehensive income (loss) into interest income over the next 12 months for derivatives that will be settled.
At March 31, 2015 and 2014, and for the three months then ended, information pertaining to the effect of the hedging instruments on the consolidated financial statements is as follows (in thousands):
Amount of Gain (Loss) Recognized in OCI, net of taxes (Effective Portion) | |||||||
As of March 31, | |||||||
Derivatives in ASC Topic 815 Cash Flow Hedging Relationships: | 2015 | 2014 | |||||
Interest rate swap with Counterparty A | $ | (5,021 | ) | $ | (751 | ) | |
Interest rate swap and prime swaps with Counterparty B | (9,339 | ) | (4,622 | ) | |||
Interest rate swap and prime swaps with Counterparty C | (1,510 | ) | $ | — | |||
Total | $ | (15,870 | ) | $ | (5,373 | ) |
9. Income Taxes
The income tax benefit on the statement of income for the three months ended March 31, 2015 and 2014 was as follows (in thousands):
March 31, 2015 | March 31, 2014 | ||||||
Current tax expense | $ | 1,080 | $ | 300 | |||
Deferred tax benefit | (12,520 | ) | (5,258 | ) | |||
Total tax benefit | $ | (11,440 | ) | $ | (4,958 | ) |
The amount of taxes in the accompanying consolidated statements of income is different from the expected amount using statutory federal income tax rates primarily due to the effect of various tax credits. As discussed in Note 6, the Company earns Federal NMTC, Federal Historic Rehabilitation, and Low-Income Housing tax credits, which reduce the Company’s federal income tax liability or create a carryforward as applicable. The Company is also required to reduce its tax basis of the investment in certain of the projects that generated the Federal NMTC or Federal Historic Rehabilitation tax credits by the amount of the credit generated in that year. No valuation allowance was recorded for the net deferred tax assets at March 31, 2015 and December 31, 2014, as the amounts will more likely than not be realized as reductions of future taxable income or by utilizing available tax planning strategies.
10. Commitments and Contingencies
Off-Balance-Sheet Arrangements
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These transactions include commitments to extend credit in the ordinary course of business to approved customers. Generally, loan commitments have been granted on a temporary basis for working capital or commercial real estate financing requirements or may be reflective of loans in various stages of funding. These commitments are recorded on the Company’s financial statements as they are funded. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Loan commitments include unused commitments for open-end lines secured by one to four family residential properties and commercial properties, commitments to fund loans secured by commercial real estate, construction loans, business lines of credit, and other unused commitments. Standby letters of credit are written conditional commitments issued by the Company to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be
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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 of the commitment. If the commitment is funded, the Company would be entitled to seek recovery from the customer. The Company minimizes its exposure to loss under loan commitments and standby letters of credit by subjecting them to credit approval and monitoring procedures. The effect on the Company’s revenues, expenses, cash flows, and liquidity of the unused portions of these commitments cannot be reasonably predicted because there is no guarantee that the lines of credit will be used.
The following is a summary of the total notional amount of loan commitments and standby letters of credit outstanding at March 31, 2015 and December 31, 2014 (in thousands):
March 31, 2015 | December 31, 2014 | ||||||
Standby letters of credit | $ | 109,057 | $ | 110,636 | |||
Unused loan commitments | 641,697 | 509,665 | |||||
Total | $ | 750,754 | $ | 620,301 |
11. Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income (loss) and changes in those components are presented in the following table (in thousands):
Cash Flow Hedges(1) | Terminated Cash Flow Hedge(2) | Transfers of Available for Sale Securities to Held to Maturity | Available for Sale Securities | Total | |||||||||||||||
Balance at January 1, 2015 | $ | (8,396 | ) | $ | (5,194 | ) | $ | (3,354 | ) | $ | (2,793 | ) | $ | (19,737 | ) | ||||
Other comprehensive income (loss) before income taxes: | |||||||||||||||||||
Net change in unrealized gain (loss) | (3,773 | ) | — | — | 3,783 | 10 | |||||||||||||
Reclassification of net losses realized and included in earnings | — | 266 | — | — | 266 | ||||||||||||||
Amortization of unrealized net gain | — | — | 128 | — | 128 | ||||||||||||||
Income tax expense (benefit) | (1,320 | ) | 93 | 45 | 1,323 | 141 | |||||||||||||
Balance at March 31, 2015 | $ | (10,849 | ) | $ | (5,021 | ) | $ | (3,271 | ) | $ | (333 | ) | $ | (19,474 | ) |
Cash Flow Hedges(1) | Terminated Cash Flow Hedge(2) | Transfers of Available for Sale Securities to Held to Maturity | Available for Sale Securities | Total | |||||||||||||||
Balance at January 1, 2014 | $ | (2,054 | ) | $ | — | $ | (3,710 | ) | $ | (10,751 | ) | $ | (16,515 | ) | |||||
Other comprehensive income (loss) before income taxes: | |||||||||||||||||||
Net change in unrealized gain (loss) | (5,106 | ) | — | — | 5,511 | 405 | |||||||||||||
Amortization of unrealized net gain | — | — | 104 | — | 104 | ||||||||||||||
Income tax expense (benefit) | (1,787 | ) | — | 36 | 1,929 | 178 | |||||||||||||
Balance at March 31, 2014 | $ | (5,373 | ) | $ | — | $ | (3,642 | ) | $ | (7,169 | ) | $ | (16,184 | ) |
(1) Balances in the Cash Flow Hedge column represent the net operating changes in all of the Company's cash flow hedge relationships as of the dates stated.
(2) Balances in the Terminated Cash Flow Hedge column represent the net unrealized loss at termination of a certain cash flow hedge relationship. See Note 8 for further explanation on the terminated cash flow hedge.
12. Capital Requirements and Other Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements administered by the federal and state 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 consolidated financial statements of the
27
Company and the Bank. 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 their assets, liabilities and certain off-balance sheet items. The capital amounts and classification 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 and Tier 1 capital to risk-weighted assets, Tier 1 capital to average assets, and common equity tier 1 to risk-weighted assets. Management believes, as of March 31, 2015 and December 31, 2014, that the Company and the Bank met all capital adequacy requirements to which they are subject.
As of March 31, 2015, the Bank was in compliance with all regulatory requirements and the Bank was classified as “well capitalized” for purposes of the Federal Deposit Insurance Corporation's prompt corrective action requirements. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage, and common equity tier 1 ratios as set forth in the following table. There are no conditions or events since the notification that management believes have changed that categorization.
The following tables present the actual capital amounts and regulatory capital ratios for the Company and the Bank as of March 31, 2015 and December 31, 2014:
March 31, 2015 | |||||||||
"Well Capitalized" Minimums | Actual | ||||||||
(in thousands) | Ratio | Amount | |||||||
First NBC Bank Holding Company | |||||||||
Tier 1 leverage capital | 9.99 | % | $ | 388,593 | |||||
Tier 1 risk-based capital | 11.01 | % | 388,593 | ||||||
Total risk-based capital | 13.97 | % | 493,267 | ||||||
Common equity tier 1 risk-based capital | 9.81 | % | 346,187 | ||||||
First NBC Bank | |||||||||
Tier 1 leverage capital | 5.00 | % | 10.71 | % | $ | 415,939 | |||
Tier 1 risk-based capital | 8.00 | % | 11.79 | % | 415,939 | ||||
Total risk-based capital | 10.00 | % | 13.06 | % | 460,613 | ||||
Common equity tier 1 risk-based capital | 6.50 | % | 11.79 | % | 415,939 |
December 31, 2014 | |||||||||
"Well Capitalized" Minimums | Actual | ||||||||
(in thousands) | Ratio | Amount | |||||||
First NBC Bank Holding Company | |||||||||
Tier 1 leverage capital | 10.66 | % | $ | 387,224 | |||||
Tier 1 risk-based capital | 11.59 | % | 387,224 | ||||||
Total risk-based capital | 12.84 | % | 428,962 | ||||||
Common equity tier 1 risk-based capital | NA | NA | |||||||
First NBC Bank | |||||||||
Tier 1 leverage capital | 5.00 | % | 9.95 | % | $ | 361,078 | |||
Tier 1 risk-based capital | 6.00 | % | 10.82 | % | 361,078 | ||||
Total risk-based capital | 10.00 | % | 12.07 | % | 402,816 | ||||
Common equity tier 1 risk-based capital | NA | NA | NA |
13. Fair Value of Financial Instruments
ASC 820, Fair Value Measurements and Disclosures, clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the inputs used to develop those assumptions and measure fair value. The hierarchy requires companies to maximize the use of
28
observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
• | Level 1 – Quoted prices in active markets for identical assets or liabilities. |
• | Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data. |
• | Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs. |
A description of the valuation methodologies used for instruments measured at fair value follows, as well as the classification of such instruments within the valuation hierarchy. Securities are classified within Level 1 when quoted market prices are available in an active market. Inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are unavailable, fair value is estimated using pricing models or quoted prices of securities with similar characteristics, at which point the securities would be classified within Level 2 of the hierarchy. Examples include certain available for sale securities. The Company’s investment portfolio did not include Level 3 securities as of March 31, 2015 and December 31, 2014.
The Company has segregated all financial assets and liabilities that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy, based on the inputs used to determine the fair value at the measurement date in the tables below (in thousands):
March 31, 2015 | |||||||||||||||
Fair Value Measurement Using | |||||||||||||||
Total | Quoted Prices in Active Markets for Identical Assets ( Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Assets | |||||||||||||||
Available for sale securities: | |||||||||||||||
U.S. government agency securities | $ | 161,768 | $ | — | $ | 161,768 | $ | — | |||||||
U.S. Treasury securities | 12,801 | — | 12,801 | — | |||||||||||
Municipal securities | 12,284 | — | 12,284 | — | |||||||||||
Mortgage-backed securities | 62,747 | — | 62,747 | — | |||||||||||
Corporate bonds | 8,244 | — | 8,244 | — | |||||||||||
Other equity securities | 21 | — | 21 | — | |||||||||||
$ | 257,865 | $ | — | $ | 257,865 | $ | — | ||||||||
Liabilities | |||||||||||||||
Derivative instruments | $ | 16,689 | $ | — | $ | 16,689 | $ | — |
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December 31, 2014 | |||||||||||||||
Fair Value Measurement Using | |||||||||||||||
Total | Quoted Prices in Active Markets for Identical Assets ( Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Assets | |||||||||||||||
Available for sale securities: | |||||||||||||||
U.S. government agency securities | $ | 157,527 | $ | — | $ | 157,527 | $ | — | |||||||
U.S. Treasury securities | 12,610 | — | 12,610 | — | |||||||||||
Municipal securities | 12,246 | — | 12,246 | — | |||||||||||
Mortgage-backed securities | 57,087 | — | 57,087 | — | |||||||||||
Corporate bonds | 8,177 | — | 8,177 | — | |||||||||||
$ | 247,647 | $ | — | $ | 247,647 | $ | — | ||||||||
Derivative instruments | 37 | — | 37 | — | |||||||||||
Total | $ | 247,684 | $ | — | $ | 247,684 | $ | — | |||||||
Liabilities | |||||||||||||||
Derivative instruments | $ | 12,953 | $ | — | $ | 12,953 | $ | — |
The Company has segregated all financial assets and liabilities that are measured at fair value on a nonrecurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the tables below (in thousands):
March 31, 2015 | |||||||||||||||
Fair Value Measurement Using | |||||||||||||||
Total | Quoted Prices in Active Markets for Identical Assets ( Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Assets | |||||||||||||||
Loans | $ | 27,647 | $ | — | $ | — | $ | 27,647 | |||||||
Other real estate owned | 2,946 | — | — | 2,946 | |||||||||||
$ | 30,593 | $ | — | $ | — | $ | 30,593 |
December 31, 2014 | |||||||||||||||
Fair Value Measurement Using | |||||||||||||||
Total | Quoted Prices in Active Markets for Identical Assets ( Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Assets | |||||||||||||||
Loans | $ | 20,679 | $ | — | $ | — | $ | 20,679 | |||||||
Other real estate owned | 3,022 | — | — | 3,022 | |||||||||||
$ | 23,701 | $ | — | $ | — | $ | 23,701 |
In accordance with ASC Topic 310, the Company records loans and other real estate considered impaired at the lower of cost or fair value. Impaired loans, recorded at fair value, are Level 3 assets measured using appraisals from external parties of the collateral, less any prior liens primarily using the market or income approach.
The Company did not record any liabilities at fair value for which measurement of the fair value was made on a nonrecurring basis during the three months ended March 31, 2015 or the year ended December 31, 2014.
ASC 820 requires the disclosure of the fair value for each class of financial instruments for which it is practicable to estimate. The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no
30
quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. ASC 820 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value.
Cash and Due from Banks and Short-Term Investments
The carrying amounts of these short-term instruments approximate their fair values and would be classified within Level 1 of the hierarchy.
Investment in Short-Term Receivables
The carrying amounts of these short-term receivables approximate their fair value and would be classified within Level 1 of the hierarchy.
Investment Securities
Securities are classified within Level 1 where quoted market prices are available in the active market. If quoted market prices are unavailable, fair value is estimated using pricing models or quoted prices of securities with similar characteristics, at which point the securities would be classified within Level 2 of the hierarchy. Inputs include securities that have quoted prices in active markets for identical assets.
Loans
For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for fixed-rate commercial real estate, commercial loans, and consumer loans are estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms and borrowers of similar credit quality. Fair value of mortgage loans held for sale is based on commitments on hand from investors or prevailing market rates. The fair value associated with the loans includes estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows, which would be classified as Level 3 of the hierarchy.
Bank-Owned Life Insurance
The carrying amounts of the bank-owned life insurance policies are recorded at cash surrender value, which approximate their fair values and would be classified within Level 1 of the hierarchy.
Deposits
The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts) and would be categorized within Level 2 of the fair value hierarchy. The carrying amounts of variable-rate, fixed-term money market accounts approximate their fair values 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. The fair value of the Company’s interest-bearing deposits would, therefore, be categorized within Level 3 of the fair value hierarchy.
Short-Term Borrowings and Repurchase Agreements
The carrying amounts of these short-term instruments approximate their fair values and would be classified within Level 2 of the hierarchy.
Long-Term Borrowings
The fair values of long-term borrowings are estimated using discounted cash flows analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. The fair value of the Company’s long-term debt would, therefore, be categorized within Level 3 of the fair value hierarchy.
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Derivative Instruments
Fair values for interest rate swap agreements are based upon the amounts required to settle the contracts. The derivative instruments are classified within Level 2 of the fair value hierarchy.
The estimated fair values of the Company’s financial instruments were as follows as of the dates indicated (in thousands):
Fair Value Measurements at March 31, 2015 | |||||||||||||||||||
Carrying Amount | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||
Financial Assets: | |||||||||||||||||||
Cash and due from banks | $ | 53,234 | $ | 53,234 | $ | 53,234 | $ | — | $ | — | |||||||||
Short-term investments | 151,586 | 151,586 | 151,586 | — | — | ||||||||||||||
Investment in short-term receivables | 236,644 | 236,644 | 236,644 | — | — | ||||||||||||||
Investment securities available for sale | 257,865 | 257,865 | — | 257,865 | — | ||||||||||||||
Investment securities held to maturity | 87,265 | 89,332 | — | 89,332 | — | ||||||||||||||
Loans and loans held for sale | 2,908,025 | 3,135,123 | — | — | 3,135,123 | ||||||||||||||
Cash surrender value of bank-owned life insurance | 47,641 | 47,641 | 47,641 | — | — | ||||||||||||||
Financial Liabilities: | |||||||||||||||||||
Deposits, noninterest-bearing | 433,377 | 433,377 | — | 433,377 | — | ||||||||||||||
Deposits, interest-bearing | 2,933,069 | 2,904,142 | — | — | 2,904,142 | ||||||||||||||
Repurchase agreements | 111,864 | 111,864 | — | 111,864 | — | ||||||||||||||
Long-term borrowings | 103,392 | 103,080 | — | — | 103,080 | ||||||||||||||
Derivative instruments | 16,689 | 16,689 | — | 16,689 | — |
Fair Value Measurements at December 31, 2014 | |||||||||||||||||||
Carrying Amount | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||
Financial Assets: | |||||||||||||||||||
Cash and due from banks | $ | 32,484 | $ | 32,484 | $ | 32,484 | $ | — | $ | — | |||||||||
Short-term investments | 18,404 | 18,404 | 18,404 | — | — | ||||||||||||||
Investment in short-term receivables | 237,135 | 237,135 | 237,135 | — | — | ||||||||||||||
Investment securities available for sale | 247,647 | 247,647 | — | 247,647 | — | ||||||||||||||
Investment securities held to maturity | 89,076 | 90,956 | — | 90,956 | — | ||||||||||||||
Loans and loans held for sale | 2,775,886 | 3,003,280 | — | — | 3,003,280 | ||||||||||||||
Cash surrender value of bank-owned life insurance | 47,289 | 47,289 | 47,289 | — | — | ||||||||||||||
Derivative instruments | 37 | 37 | — | 37 | — | ||||||||||||||
Financial Liabilities: | |||||||||||||||||||
Deposits, noninterest-bearing | 364,534 | 364,534 | — | 364,534 | — | ||||||||||||||
Deposits, interest-bearing | 2,756,316 | 2,722,134 | — | — | 2,722,134 | ||||||||||||||
Repurchase agreements | 117,991 | 117,991 | — | 117,991 | — | ||||||||||||||
Long-term borrowings | 40,000 | 42,270 | — | — | 42,270 | ||||||||||||||
Derivative instruments | 12,953 | 12,953 | — | 12,953 | — |
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to assist readers in understanding the consolidated financial condition and results of operations of First NBC Bank Holding Company and its wholly owned subsidiary, First NBC Bank, as of March 31, 2015 and December 31, 2014 and for the three month period ended March 31, 2015 and March 31, 2014. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements, the accompanying footnotes and supplemental data included herein.
To the extent that statements in this Form 10-Q relate to future plans, objectives, financial results or performance of the Company, these statements are deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements, which are based on management’s current information, estimates and assumptions and the current economic environment, are generally identified by the use of words such as “plan,” “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions, or by future or conditional terms such as “will,” “would,” “should,” “could,” “may,” “likely,” “probably,” or “possibly”. The Company’s actual strategies and results in future periods may differ materially from those currently expected due to various risks and uncertainties.
Forward-looking statements are not historical facts and may be affected by numerous factors, many of which are uncertain and beyond the Company’s control. Factors that may cause actual results to differ materially from these forward-looking statements are discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 and other filings with the Securities and Exchange Commission (“SEC”). The Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made.
EXECUTIVE OVERVIEW
The Company is a bank holding company, which operates through one segment, community banking, and offers a broad range of financial services to businesses, institutions, and individuals in its market area of southeastern Louisiana, the Mississippi Gulf Coast, and the Florida panhandle. The Company generates most of its revenue from interest on loans and investments, service charges, income from sales of state tax credits and CDE fees earned. The Company’s primary source of funding for its loans is deposits. The largest expenses are interest on these deposits and salaries and related employee benefits. The Company measures its performance through its net interest margin, return on average assets and return on average common equity, while maintaining appropriate regulatory leverage and risk-based capital ratios.
For the quarter ended March 31, 2015, the Company’s income available to common shareholders totaled $15.7 million, an increase of $3.2 million, or 25.5%, compared to the quarter ended March 31, 2014. Diluted earnings per share for the three months ended March 31, 2015 were $0.82, an increase of $0.16, or 24.2%, compared to the three months ended March 31, 2014.
Key components of the Company’s performance during the first three months of 2015 are summarized below.
• | On January 16, 2015, the Company acquired $62.3 million of assets and assumed all of the deposit liabilities from the Federal Deposit Insurance Corporation ("FDIC") as receiver for First National Bank of Crestview ("Crestview"), a full service commercial bank headquartered in Crestview, Florida, which was closed and placed into receivership. |
• | Total assets at March 31, 2015 were $4.1 billion, an increase of $318.7 million, or 8.5%, from December 31, 2014. |
• | Total loans at March 31, 2015 were $2.9 billion, an increase of $129.8 million, or 4.7%, from December 31, 2014. The increase in loans was primarily due to increases of $28.8 million, or 8.8%, in construction loans and $46.5 million, or 4.5%, in commercial loans from December 31, 2014. |
• | Total deposits increased $245.6 million, or 7.9%, from December 31, 2014. The increase was due primarily to increases in money market deposits of $78.8 million, or 7.5%, and noninterest-bearing demand deposits of $68.8 million, or 18.9%, from December 31, 2014. |
• | Shareholders’ equity increased $13.6 million, or 3.1%, to $450.0 million from December 31, 2014. The increase was primarily attributable to the Company’s retained earnings over the period. |
• | Interest income increased $3.9 million, or 11.2%, in the first quarter of 2015 compared to the first quarter of 2014. The increases were driven primarily by higher volume on loans. |
• | Interest expense increased $1.2 million, or 11.4%, in the first quarter of 2015 compared to the first quarter of 2014. The increases were primarily due to higher average balances of interest-bearing deposits and the issuance of $60.0 million in subordinated debentures during the first quarter of 2015 which bear interest at 5.75%. The Company’s cost of funds decreased 7 basis points compared to the first quarter of 2014. |
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• | The Company’s ratio of allowance for loan losses to total loans was 1.56%, compared to 1.53% at December 31, 2014 and 1.39% at March 31, 2014. |
• | Net charge-offs for the first quarter of 2015 were $0.1 million, compared to net loan charge-offs of $0.7 million for the first quarter of 2014. |
• | Noninterest income for the first quarter of 2015 decreased $0.8 million, or 25.3%, compared to the first quarter of 2014 due primarily to decreases in CDE fees of $0.6 million and income from sales of state tax credits of $0.5 million, offset by an increase in cash surrender value income on bank-owned life insurance of $0.2 million. |
• | Noninterest expense for the first quarter of 2015 increased $5.2 million, or 29.8%, compared to the first quarter of 2014. The increase in noninterest expense in the first quarter of 2015 compared to the first quarter of 2014 resulted primarily from increases in all other components of noninterest expense, primarily tax credit amortization of $2.0 million and salaries and employee benefits of $1.5 million. |
NON-GAAP FINANCIAL MEASURES
This discussion and analysis contains financial information determined by methods other than in accordance with generally accepted accounting principles, or GAAP. The Company’s management uses these non-GAAP financial measures in their analysis of the Company’s performance.
As a material part of its business plan, the Company invests in entities that generate federal income tax credits, and management believes that understanding the impact of the Company’s investment in tax credit entities is critical to understanding its financial performance on a standalone basis and in relation to its peers. Like its investments in loans and investment securities, the Company’s investment in tax credit entities generates a return for the Company. However, unlike the income generated by its loans and investment securities, service charges or other noninterest income, which under GAAP are taken into account in the determination of income before income taxes, the return generated by the Company’s investment in tax credit entities is reflected only as a reduction of income tax expense.
Under current GAAP accounting, the returns generated from the Company’s investment in tax credit entities are a component of the Company’s income tax provision whereas all of the expenses, primarily tax credit amortization, are recorded in noninterest expense. Because of the level of the Company’s investment in tax credit entities, management believes that the effect of adjusting the relevant GAAP measures to account for returns generated by the Company’s investment in tax credit entities is meaningful to a more complete understanding of the Company’s financial performance.
Accordingly, in measuring the Company’s financial performance, in addition to financial measures that are prepared in accordance with GAAP, management utilizes a non-GAAP performance measure that adjusts noninterest income to reflect the effect of the federal income taxes generated from the Company’s investment in tax credit entities to derive at an adjusted income before income taxes non-GAAP measure. The non-GAAP measure of adjusted income before income taxes is reconciled to the corresponding measure determined in accordance with GAAP on “Table 1-Reconciliations of Non-GAAP Financial Measures.” Management believes that this non-GAAP financial measure should facilitate an investor’s understanding and analysis of the Company’s underlying financial performance and trends, in addition to the corresponding financial information prepared and reported in accordance with GAAP.
Tangible book value per common share and the ratio of tangible common equity to tangible assets are not financial measures recognized under GAAP and, therefore, are considered non-GAAP financial measures. The Company’s management, banking regulators, many financial analysts and other investors use these non-GAAP financial measures to compare the capital adequacy of banking organizations with significant amounts of preferred equity and/or goodwill or other intangible assets, which typically stem from the use of the purchase accounting method of accounting for mergers and acquisitions. Tangible common equity, tangible assets, tangible book value per share or related measures should not be considered in isolation or as a substitute for total shareholders’ equity, total assets, book value per share or any other measure calculated in accordance with GAAP. Moreover, the manner in which the Company calculates tangible common equity, tangible assets, tangible book value per share and any other related measures may differ from that of other companies reporting measures with similar names. These non-GAAP disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP. The following table reconciles, as of the dates set forth below, income before income taxes (on a GAAP basis) to income before income taxes adjusted for investments in federal tax credit programs, shareholders’ equity (on a GAAP basis) to tangible common equity and total assets (on a GAAP basis) to tangible assets and calculates tangible book value per share.
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TABLE 1-RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES
For the Three Months Ended | |||||||
(In thousands, except per share data) | March 31, 2015 | March 31, 2014 | |||||
Income before income taxes: | |||||||
Income before income taxes (GAAP) | $ | 4,628 | $ | 7,870 | |||
Income adjustment before income taxes related to the impact of tax credit related activities (Non-GAAP) | |||||||
Tax equivalent income associated with investment in federal tax credit programs(1) | 18,583 | 10,142 | |||||
Income before income taxes (Non-GAAP) | 23,211 | 18,012 | |||||
Income tax expense-adjusted (Non-GAAP) | (7,143 | ) | (5,184 | ) | |||
Net income (GAAP) | $ | 16,068 | $ | 12,828 | |||
As of | |||||||
March 31, 2015 | December 31, 2014 | ||||||
Tangible equity and asset calculations: | |||||||
Total equity (GAAP) | $ | 449,963 | $ | 436,374 | |||
Adjustments: | |||||||
Preferred equity | 42,406 | 42,406 | |||||
Goodwill | 4,808 | 4,808 | |||||
Other intangibles | 2,931 | 3,023 | |||||
Tangible common equity | $ | 399,818 | $ | 386,137 | |||
Total assets (GAAP) | $ | 4,069,322 | $ | 3,750,617 | |||
Adjustments: | |||||||
Goodwill | 4,808 | 4,808 | |||||
Other intangibles | 2,931 | 3,023 | |||||
Tangible assets | $ | 4,061,583 | $ | 3,742,786 | |||
Total common shares | 18,610 | 18,576 | |||||
Book value per common share | $ | 21.90 | $ | 21.21 | |||
Effect of adjustment | 0.42 | 0.42 | |||||
Tangible book value per common share | $ | 21.48 | $ | 20.79 | |||
Total shareholders' equity to assets | 11.06 | % | 11.63 | % | |||
Effect of adjustment | 1.22 | % | 1.31 | % | |||
Tangible common equity to tangible assets | 9.84 | % | 10.32 | % |
(1) | Tax equivalent income associated with investment in federal tax credit programs represents the gross amount of tax benefit from federal tax credits. |
FINANCIAL CONDITION
Assets increased $318.7 million, or 8.5%, to $4.1 billion as of March 31, 2015 compared to $3.8 billion as of December 31, 2014 as the Company continued to experience strong growth in the New Orleans market area. Net loans increased $126.9 million, or 4.6%, to $2.9 billion as of March 31, 2015, compared to $2.7 billion as of December 31, 2014. The Company’s investment securities portfolio totaled $345.1 million compared to $336.7 million as of December 31, 2014, an increase of 2.5%. Deposits increased $245.6 million, or 7.9%, to $3.4 billion as of March 31, 2015, compared to $3.1 billion as of December 31, 2014. Total shareholders’ equity increased $13.6 million, or 3.1%, to $450.0 million as of March 31, 2015, compared to $436.4 million as of December 31, 2014.
Loan Portfolio
The Company’s primary source of income is interest on loans to small-and medium-sized businesses, real estate owners in its market area and its private banking clients. The loan portfolio consists primarily of commercial loans and real estate loans secured by commercial real estate properties located in the Company’s primary market area. The Company’s loan portfolio represents the highest yielding component of its earning asset base.
35
The following table sets forth the amount of loans, by category, as of the respective periods:
TABLE 2-TOTAL LOANS BY LOAN TYPE
March 31, 2015 | December 31, 2014 | ||||||||||||
(In thousands) | Amount | Percent | Amount | Percent | |||||||||
Construction | $ | 356,487 | 12.3 | % | $ | 327,677 | 11.8 | % | |||||
Commercial real estate | 1,291,344 | 44.5 | % | 1,264,371 | 45.6 | % | |||||||
Consumer real estate | 161,308 | 5.6 | % | 132,950 | 4.8 | % | |||||||
Commercial and industrial | 1,077,153 | 37.1 | % | 1,030,629 | 37.2 | % | |||||||
Consumer | 17,747 | 0.5 | % | 18,637 | 0.6 | % | |||||||
Total loans | $ | 2,904,039 | 100 | % | $ | 2,774,264 | 100 | % |
The Company’s primary focus has been on commercial real estate and commercial lending, which represented approximately 82% and 83% of the loan portfolio as of March 31, 2015 and December 31, 2014, respectively. Although management expects continued growth with respect to the loan portfolio, it does not expect any significant changes over the foreseeable future in the composition of the loan portfolio or in the emphasis on commercial real estate and commercial lending.
A significant portion, $412.2 million, or 32.3%, as of March 31, 2015, compared to $419.3 million, or 33.5%, as of December 31, 2014, of the commercial real estate exposure represented loans to commercial businesses secured by owner occupied real estate which, in effect, are commercial loans with the borrowers’ real estate providing a secondary source of repayment. The Company's construction portfolio increased $28.8 million, or 8.8%, compared to December 31, 2014. The increase in the construction portfolio has been due to the funding of construction loans related to hotels, residential real estate development, and federal tax credit related projects.
Commercial loans, which represent 37.1% of total loans in the portfolio, increased $46.5 million, or 4.5%, compared to December 31, 2014. The Company attributes its commercial loan growth to increases in all segments of the portfolio. The Company has exposure to oil and gas in its commercial loan portfolio. As of March 31, 2015, the Company's oil and gas exposure was 3.4% of its total loan portfolio. The Company had outstanding commitments of $10.5 million related to its oil and gas portfolio, of which $6.4 million was related to exploration and production. The Company had $57.4 million in loans related to exploration and production in its oil and gas portfolio. The Company is actively monitoring its oil and gas related credits.
The consumer real estate loan portfolio increased $28.4 million, or 21.3%, compared to December 31, 2014. The increase in consumer real estate loans was attributable to the acquisition of $21.5 million in consumer real estate loans in the Crestview acquisition.
Nonperforming Assets
Nonperforming assets consist of nonperforming loans, other real estate owned and other repossessed assets. Nonperforming loans consist of loans that are on nonaccrual status and restructured loans, which are loans on which the Company has granted a concession on the interest rate or original repayment terms due to financial difficulties of the borrower. Other real estate owned consists of real property acquired through foreclosure. The Company initially records other real estate owned at the lower of carrying value or fair value, less estimated costs to sell the assets. Estimated losses that result from the ongoing periodic valuations of these assets are charged to earnings as noninterest expense in the period in which they are identified. Once the Company owns the property, it is maintained, marketed, rented and sold to repay the original loan. Historically, foreclosure trends have been low due to the seasoning of the portfolio. The Company accounts for troubled debt restructurings in accordance with ASC 310, “Receivables.”
The Company generally will place loans on nonaccrual status when they become 90 days past due, unless they are well secured and in the process of collection. The Company also places loans on nonaccrual status if they are less than 90 days past due if the collection of principal or interest is in doubt. When a loan is placed on nonaccrual status, any interest previously accrued, but not collected, is reversed from income.
Any loans that are modified or extended are reviewed for classification as a restructured loan in accordance with regulatory guidelines. The Company completes the process that outlines the modification, the reasons for the proposed modification and documents the current status of the borrower.
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The following table sets forth information regarding nonperforming assets as of the dates indicated:
TABLE 3-NONPERFORMING ASSETS
(In thousands) | March 31, 2015 | December 31, 2014 | |||||
Nonaccrual loans: | |||||||
Construction | $ | 965 | $ | 792 | |||
Commercial real estate | 13,709 | 12,146 | |||||
Consumer real estate | 2,091 | 1,919 | |||||
Commercial and industrial | 6,172 | 6,051 | |||||
Consumer | 41 | 320 | |||||
Total nonaccrual loans | 22,978 | 21,228 | |||||
Restructured loans | 1,427 | 1,571 | |||||
Total nonperforming loans | 24,405 | 22,799 | |||||
Other assets owned(1) | 293 | 290 | |||||
Other real estate owned | 4,966 | 5,549 | |||||
Total nonperforming assets | $ | 29,664 | $ | 28,638 | |||
Accruing loans past due 90+ days | $ | 13 | $ | 28 | |||
Nonperforming loans to total loans | 0.84 | % | 0.82 | % | |||
Nonperforming loans to total assets | 0.60 | % | 0.61 | % | |||
Nonperforming assets to total assets | 0.73 | % | 0.76 | % | |||
Nonperforming assets to loans, other real estate owned and other assets owned | 1.02 | % | 1.03 | % |
(1) | Represents repossessed property other than real estate. |
Approximately $0.3 million and $1.0 million of gross interest income would have been accrued if all loans on nonaccrual status had been current in accordance with their original terms at March 31, 2015 and December 31, 2014.
Total nonperforming assets increased $1.0 million, or 3.6%, as compared to December 31, 2014, and total nonperforming assets as a percentage of loans and other real estate owned decreased by 1 basis points over the period. The decrease resulted primarily from a decrease in other real estate owned of $0.6 million, or 10.5%, compared to December 31, 2014.
Potential problem loans are those loans that are not categorized as nonperforming loans, but where current information indicates that the borrower may not be able to comply with present loan repayment terms. These are generally referred to as its watch list loans. The Company monitors past due status as an indicator of credit deterioration and potential problem loans. A loan is considered past due when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. To the extent that loans become past due, management assesses the potential for loss on such loans as it would with other problem loans and considers the effect of any potential loss in determining its provision for probable loan losses. Management also assesses alternatives to maximize collection of any past due loans, including, without limitation, restructuring loan terms, requiring additional loan guarantee(s) or collateral or other planned action. Additional information regarding past due loans as of March 31, 2015 is included in Note 5 to the Company’s financial statements included in this report.
Allowance for Loan Losses
The Company maintains an allowance for loan losses that represents management’s best estimate of the loan losses inherent in the loan portfolio. In determining the allowance for loan losses, management estimates losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the allowance for loan losses is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates.
The allowance for loan losses is increased by provisions charged against earnings and reduced by net loan charge-offs. Loans are charged-off when it is determined that collection has become unlikely. Recoveries are recorded only when cash payments are received.
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The allowance for loan losses was $45.2 million, or 1.56%, of total loans, as of March 31, 2015, compared to $34.5 million, or 1.39% of total loans, as of March 31, 2014, an increase of 17 basis points over the period.
The following table provides an analysis of the allowance for loan losses and net charge-offs for the respective periods:
TABLE 4-SUMMARY OF ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES
For the Three Months Ended March 31, | |||||||
(In thousands) | 2015 | 2014 | |||||
Balance, beginning of period | $ | 42,336 | $ | 32,143 | |||
Charge-offs: | |||||||
Construction | 2 | 4 | |||||
Commercial real estate | 29 | 386 | |||||
Consumer real estate | — | 43 | |||||
Commercial and industrial | 150 | 254 | |||||
Consumer | 26 | 10 | |||||
Total charge-offs | 207 | 697 | |||||
Recoveries: | |||||||
Construction | — | — | |||||
Commercial real estate | — | 1 | |||||
Consumer real estate | — | — | |||||
Commercial and industrial | 61 | 13 | |||||
Consumer | 5 | 5 | |||||
Total recoveries | 66 | 19 | |||||
Net charge-offs | 141 | 678 | |||||
Provision for loan loss | 3,000 | 3,000 | |||||
Balance, end of period | $ | 45,195 | $ | 34,465 | |||
Net charge-offs to average loans | 0.01 | % | 0.03 | % | |||
Allowance for loan losses to total loans | 1.56 | % | 1.39 | % |
Although management believes that the allowance for loan losses has been established in accordance with accounting principles generally accepted in the United States and that the allowance for loan losses was appropriate to provide for incurred losses in the portfolio at all times shown above, future provisions will be subject to ongoing evaluations of the risks in the loan portfolio. If the economy declines or if asset quality deteriorates, material additional provisions could be required.
The allowance for loan losses is allocated to loan categories based on the relative risk characteristics, asset classifications, and actual loss experience of the loan portfolio. Note 5 of the footnotes to the consolidated financial statements provides further information on the Company’s allowance for loan losses.
Securities
The securities portfolio is used to provide a source of interest income, maintain a source of liquidity and serve as collateral for certain types of deposits and borrowings. The Company manages its investment portfolio according to a written investment policy approved by the Board of Directors. Investment balances in the securities portfolio are subject to change over time based on the Company’s funding needs and interest rate risk management objectives. Liquidity levels take into account anticipated future cash flows and all available sources of credits and are maintained at levels management believes are appropriate to assure future flexibility in meeting anticipated funding needs.
The securities portfolio consists primarily of U.S. government agency obligations, mortgage-backed securities, and municipal securities, although the Company also holds corporate bonds. All of the securities have varying contractual maturities. However, these maturities do not necessarily represent the expected life of the securities as the securities may be called or paid down with or without penalty prior to their stated maturities, and the targeted duration for the investment portfolios is in the three to four year range. No investment in any of these securities exceeds any applicable limitation imposed by law or regulation. The Asset Liability Committee reviews the investment portfolio on an ongoing basis to ensure that the investments
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conform to the Company’s investment policy. All securities as of March 31, 2015 were classified as Level 2 assets, as their fair value was estimated using pricing models or quoted prices of securities with similar characteristics.
The investment portfolio consists of available for sale and held to maturity securities. The carrying values of the Company’s available for sale securities are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income. Any expected credit loss due to the inability to collect all amounts due according to the security’s contractual terms is recognized as a charge against earnings. Any remaining unrealized loss related to other factors would be recognized in other comprehensive income, net of taxes. The Company’s held to maturity securities are securities that the Company both positively intends and has the ability to hold to maturity and are carried at amortized cost.
The Company’s investment securities portfolio totaled $345.1 million at March 31, 2015, an increase of $8.4 million, or 2.5%, from December 31, 2014. The increase was attributable to the available for sale securities acquired from the Crestview transaction which totaled $9.4 million as of March 31, 2015. As of March 31, 2015, investment securities having a carrying value of $289.7 million were pledged to secure public deposits, securities sold under agreements to repurchase and borrowings.
The following table presents a summary of the amortized cost and estimated fair value of the investment portfolio:
TABLE 5-CARRYING VALUE OF SECURITIES
March 31, 2015 | December 31, 2014 | ||||||||||||||||||||||
(In thousands) | Amortized Cost | Unrealized Gain (Loss) | Estimated Fair Value | Amortized Cost | Unrealized Gain (Loss) | Estimated Fair Value | |||||||||||||||||
Available for sale: | |||||||||||||||||||||||
U.S. government agency securities | $ | 162,439 | $ | (671 | ) | $ | 161,768 | $ | 161,461 | $ | (3,934 | ) | $ | 157,527 | |||||||||
U.S. Treasury securities | 13,018 | (217 | ) | 12,801 | 13,019 | (409 | ) | 12,610 | |||||||||||||||
Municipal securities | 12,160 | 124 | 12,284 | 12,175 | 71 | 12,246 | |||||||||||||||||
Mortgage-backed securities | 62,516 | 231 | 62,747 | 57,025 | 62 | 57,087 | |||||||||||||||||
Corporate bonds | 8,224 | 20 | 8,244 | 8,263 | (86 | ) | 8,177 | ||||||||||||||||
Other equity securities | 21 | — | 21 | — | — | — | |||||||||||||||||
Total available for sale | $ | 258,378 | $ | (513 | ) | $ | 257,865 | $ | 251,943 | $ | (4,296 | ) | $ | 247,647 | |||||||||
Held to maturity: | |||||||||||||||||||||||
Municipal securities | $ | 40,071 | $ | 2,416 | $ | 42,487 | $ | 41,255 | $ | 2,120 | $ | 43,375 | |||||||||||
Mortgage-backed securities | 47,194 | (349 | ) | 46,845 | 47,821 | (240 | ) | 47,581 | |||||||||||||||
Total held to maturity | $ | 87,265 | $ | 2,067 | $ | 89,332 | $ | 89,076 | $ | 1,880 | $ | 90,956 |
As of March 31, 2015, all of the Company’s mortgage-backed securities were agency securities and the Company did not hold any Fannie Mae or Freddie Mac preferred stock, corporate equity, collateralized debt obligations, collateralized loan obligations, structured investment vehicles, private label collateralized mortgage obligations, sub-prime, Alt-A, or second lien elements in the investment portfolio.
The funds generated as a result of sales and prepayments are used to fund loan growth and purchase other securities. The Company monitors the market conditions to take advantage of market opportunities with the appropriate interest rate risk management objectives.
Note 4 to the consolidated financial statements included in this report provides further information on the Company’s investment securities.
Investments in Short-term Receivables
The Company invests in short-term trade receivables. These receivables are traded on an exchange and are covered by a repurchase agreement of the seller of the receivables, if not paid within a specified period of time. The Company invests in these receivables since they provide a higher short-term return for the Company. The Company had $236.6 million invested in short-term receivables at March 31, 2015, a decrease of $0.5 million, or 0.2%, compared to December 31, 2014.
Short-term Investments
Short-term investments result from excess funds that fluctuate daily depending on the funding needs of the Company and are currently invested overnight in interest-bearing deposit accounts at the Federal Reserve Bank of Atlanta, First National Bankers Bank, JP Morgan Chase Bank, and Comerica Bank. The balance in interest-bearing deposits at other institutions increased
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$133.2 million, to $151.6 million at March 31, 2015, from $18.4 million at December 31, 2014. The primary cause of the increase at March 31, 2015 was the existence of cash from excess deposits and proceeds from the issuance of the subordinated debenture which had not been reinvested at March 31, 2015. The Company’s cash activity is further discussed in the “Liquidity and Capital Resources” section below.
Investment in Tax Credit Entities
The Company has received a total of $118.0 million in Federal New Markets Tax Credits (NMTC) allocations since 2011. The Company received allocations of $50.0 million in 2013, $40.0 million in 2012, and $28.0 million in 2011. The Company was notified during 2014 by the Community Development Financial Institutions Fund (CDFI) of the U.S. Treasury that it did not receive an allocation of Federal NMTC. The lack of an allocation in 2014 did not preclude the Company from making investments in Federal NMTC projects and utilizing Federal NMTC allocations of other CDEs as was common practice for the Company when it began its tax credit investment program. The Company generated 42% of its total tax credit investment from Federal New Markets Tax Credit projects, which consisted of 59% invested in outside CDEs and 41% invested in the Company’s CDE, 37% was generated by investments in Federal Historic Rehabilitation Tax Credits, and 21% was generated by investments in Low-Income Housing Tax Credits. The Company has made and will continue to make material investments in tax credit-motivated projects. The Company generates returns on tax credit-motivated projects through the receipt of federal and, if applicable, state tax credits. The Company maintains a pipeline of tax credit eligible projects which it may invest in to generate federal tax credits. The Company expects to generate Federal Historic Rehabilitation Tax Credits of $27.4 million $32.6 million, and $1.2 million in 2015, 2016, and 2017, respectively. Table 14-Future Tax Credits provides information on tax credits the Company expects to generate in future years based on investments the Company has made as of December 31, 2014.
The Company’s investment in tax credit entities totaled $147.1 million as of March 31, 2015, an increase of $6.2 million, or 4.4%, compared to December 31, 2014. The Company has seen increasing demand in its markets for investment in tax credit projects. The Company anticipates its investment in tax credit entities to be driven by increases in Federal Historic Rehabilitation Tax Credit project investments in 2015 and 2016. The Low-Income Housing and Federal NMTC associated with the Company's investment in tax credit entities are recognized over the compliance periods of the respective projects, which range from seven to 15 years. Projects for which an investment was made during 2011 to 2013 from the Company's own tax credit allocation substantially increased the Company's supply of credits recognizable over future periods.
Deferred Tax Asset
The Company had a net deferred tax asset of $95.8 million as of March 31, 2015 due to its tax net operating losses, carryforwards related to unused tax credits, and the non-deductibility of the loan loss provision for tax purposes. The Company assesses the recoverability of its deferred tax asset quarterly, and the current and projected level of taxable income provides for the ultimate realization of the carrying value of these deferred tax assets. Net deferred tax assets as of March 31, 2015 increased $12.4 million, or 14.8%, from December 31, 2014, primarily as a result of $13.5 million in estimated tax credits generated during the first three months of 2015 offset by tax credit basis adjustment of $0.5 million and current income tax expense of $0.6 million.
Deposits
Deposits are the Company’s primary source of funds to support earning assets. Total deposits were $3.4 billion at March 31, 2015, compared to $3.1 billion at December 31, 2014, an increase of $245.6 million, or 7.9%, as total interest-bearing deposits were up $176.8 million, or 6.4%. The increase in deposits was due to organic deposit growth of 5.6%, which occurred across all deposit categories, coupled with growth of 2.3% attributable to the assumption of deposit liabilities from the Crestview transaction. The Company also experienced an increase in its money market deposits of $78.8 million, or 7.5%, from December 31, 2014. This increase was a result of a shift by customers from NOW accounts to money market deposit accounts due to the Company lowering NOW account rates in April 2014, especially in lower balance tiers. The increase in certificates of deposit of $32.7 million, or 2.8%, from December 31, 2014 was primarily due to the assumption of $17.0 million in certificates of deposit from the Crestview transaction. The increase was also impacted by the implementation of tiered pricing on its certificates of deposit accounts in the higher balance tiers. As the certificates of deposit mature, the Company has seen its traditional certificate of deposit customers move into money market and NOW accounts due to the implementation of the tiered pricing program. The increase in noninterest-bearing demand deposits of $68.8 million, or 18.9%, was due primarily to the growth initiatives commencing during the fourth quarter of 2014, the increase in commercial customer deposits which has occurred with the expansion of the Company’s commercial lending, and the assumption of $22.8 million in deposits from the Crestview transaction.
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The following table sets forth the composition of the Company’s deposits as of March 31, 2015 and December 31, 2014:
TABLE 6-DEPOSIT COMPOSITION BY PRODUCT
Increase/(Decrease) | ||||||||||||||||||||
(In thousands) | March 31, 2015 | December 31, 2014 | Amount | Percent | ||||||||||||||||
Noninterest-bearing demand | $ | 433,377 | 12.9 | % | $ | 364,534 | 11.7 | % | $ | 68,843 | 18.9 | % | ||||||||
NOW accounts | 536,926 | 15.9 | % | 476,825 | 15.3 | % | 60,101 | 12.6 | % | |||||||||||
Money market accounts | 1,134,338 | 33.7 | % | 1,055,505 | 33.8 | % | 78,833 | 7.5 | % | |||||||||||
Savings deposits | 54,750 | 1.6 | % | 49,634 | 1.6 | % | 5,116 | 10.3 | % | |||||||||||
Certificates of deposit | 1,207,055 | 35.9 | % | 1,174,352 | 37.6 | % | 32,703 | 2.8 | % | |||||||||||
Total deposits | $ | 3,366,446 | 100.0 | % | $ | 3,120,850 | 100.0 | % | $ | 245,596 | 7.9 | % |
Short-term Borrowings
Although deposits are the primary source of funds for lending, investment activities and general business purposes, as an alternative source of liquidity, the Company may obtain advances from the Federal Home Loan Bank of Dallas, sell investment securities subject to its obligation to repurchase them, purchase Federal funds, and engage in overnight borrowings from the Federal Home Loan Bank or its correspondent banks. The level of short-term borrowings can fluctuate on a daily basis depending on the funding needs and the source of funds to satisfy the needs. The Company had no short-term borrowings outstanding at March 31, 2015 and at December 31, 2014.
The Company also enters into repurchase agreements to facilitate customer transactions that are accounted for as secured borrowings. These transactions typically involve the receipt of deposits from customers that the Company collateralizes with its investment portfolio and had average rates of 1.42% for the three months ended March 31, 2015.
The following table details the average and ending balances of repurchase transactions as of and for the three months ended March 31, 2015 and 2014:
TABLE 7-REPURCHASE TRANSACTIONS
(In thousands) | 2015 | 2014 | |||||
Average balance | $ | 121,845 | $ | 82,753 | |||
Ending balance | 111,864 | 106,806 |
Long-term Borrowings
During February 2015, the Company issued $60.0 million in subordinated debentures, with a rate of 5.75% and a maturity date of February 2025, unless early redeemed. Interest on the debentures is payable semiannually in arrears on February 18 and August 18 of each year, commencing August 18, 2015. The Company plans to use the net proceeds from the sale of the subordinated notes for general corporate purposes, which may include supporting the continued growth of its business, acquisitions, and the redemption or repayment of other fixed obligations.
In March 2015, the Company sponsored Employee Stock Ownership Trust entered into a loan from First National Bankers Bank (FNBB) in order to purchase 100,000 shares of Company stock for $3.3 million. The loan matures on December 5, 2024, and bears interest at a floating rate equal to the Wall Street Journal Prime rate, which was 3.25% as of March 31, 2015. The loan is subject to a pledge of 99,000 shares of the Company stock, owned by the Trust, as of March 31, 2015.
The Company’s other long-term borrowing consist of a borrowing by the Company which is in the legal form of a long-term repurchase agreement which was entered into in connection with the Company’s asset liability management as a hedge against rising interest rates. During 2014, the borrowing was refinanced and its maturity extended to 2019. The interest related to the debt issuances is tied to the London Interbank Offered Rate, or LIBOR, and includes an interest rate cap to fix the rate at specified levels as the index rate rises.
Shareholders’ Equity
Shareholders’ equity provides a source of permanent funding, allows for future growth, and provides the Company with a cushion to withstand unforeseen adverse developments. Shareholders’ equity increased $13.6 million, or 3.1%, from $436.4 million as of December 31, 2014, primarily as a result of the Company’s retained earnings over the period.
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Regulatory Capital
As of March 31, 2015, the Company and First NBC Bank were in compliance with all regulatory requirements and First NBC Bank was classified as “well capitalized” for purposes of the FDIC’s prompt corrective action requirements.
The following table presents the actual capital amounts and regulatory capital ratios for the Company and First NBC Bank as of March 31, 2015:
TABLE 8-REGULATORY CAPITAL RATIOS
“Well Capitalized” Minimums | March 31, 2015 | ||||||||
(In thousands) | Actual | Amount | |||||||
First NBC Bank Holding Company | |||||||||
Tier 1 leverage capital | 9.99 | % | $ | 388,593 | |||||
Tier 1 risk-based capital | 11.01 | % | 388,593 | ||||||
Total risk-based capital | 13.97 | % | 493,267 | ||||||
Common equity tier 1 risk-based capital | 9.81 | % | 346,187 | ||||||
First NBC Bank | |||||||||
Tier 1 leverage capital | 5.00 | % | 10.71 | % | 415,939 | ||||
Tier 1 risk-based capital | 8.00 | % | 11.79 | % | 415,939 | ||||
Total risk-based capital | 10.00 | % | 13.06 | % | 460,613 | ||||
Common equity tier 1 risk-based capital | 6.50 | % | 11.79 | % | 415,939 |
RESULTS OF OPERATIONS
Income available to common shareholders was $15.7 million and $12.5 million for the three months ended March 31, 2015 and 2014, respectively. Earnings per share on a diluted basis were $0.82 and $0.66 for the first quarters of 2015 and 2014, respectively. For the three months ended March 31, 2015, net interest income increased $2.8 million, or 11.2%, over the same period of 2014, as interest income increased $3.9 million, or 11.2%, and interest expense increased $1.2 million, or 11.4%. The increase in interest income of $3.9 million, compared to the same period of 2014, was due primarily to an increase in average interest-earning assets of $497.3 million, which increased interest income due to volume of $5.5 million. Net interest income was also impacted by an increase in interest expense of $1.2 million during the first quarter of 2015 compared to the first quarter of 2014. The increase was attributable to an increase in average interest-bearing liabilities of $430.7 million, which increased interest expense volume to $1.5 million. Interest expense was also impacted by the subordinated debentures that were issued in February 2015 which bear interest at 5.75% and had a $0.4 million impact on interest expense.
Net Interest Income
Net interest income, the primary contributor to the Company’s earnings, represents the difference between the income that the Company earns on interest-earning assets and the cost of interest-bearing liabilities. Net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume changes.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as “rate changes.”
The Company’s net interest spread, which is the difference between the average yield earned on average earning assets and the average rates paid on average interest-bearing liabilities, was 2.96% and 3.09% during the three months ended March 31, 2015 and 2014, respectively, a decrease of 13 basis points. The Company’s net interest margin was 3.16% for the first quarter of 2015, compared to 3.30% for the first quarter of 2014, a decrease of 14 basis points.
Net interest income increased to $27.6 million, or 11.2%, for the three months ended March 31, 2015, from $24.8 million for the same period in 2014. The primary driver of the increase in net interest income was a $3.9 million, or 11.2%, increase in interest income during the first quarter of 2015, as compared to the same period in 2014, which was partially offset by a $1.2 million, or 11.4%, increase in interest expense over the same periods. The increase in interest income was due primarily to the significant growth in average interest-earning assets during the first quarter of 2015 to $3.5 billion from $3.1 billion during the first quarter of 2014, which was partially offset by a decrease in the earning asset yield of 20 basis points to 4.47% from 4.67% over the same period in 2014. The decrease in the earning asset yield was due primarily to a 12 basis points impact from the net proceeds from the subordinated debt issuance and excess liquidity of the Company which increased the average short-term investments balance by $87.2 million compared to the prior year. Also impacting the earning asset yield was a decrease of 21
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basis points in the loan yield compared to the same period of 2014. This was due primarily to the shift in the loan portfolio to more variable-rate loans than fixed rate loans. The Company entered into four additional Prime rate swaps with a notional amount of $75.0 million during March 2015 to help mitigate this shift to a more evenly balanced portfolio. The Company's total notional value on all of its Prime cash flow hedges is $325.0 million. The decrease in the earning asset yield was offset by a 4 basis points increase in the the average yield of the investment in short-term receivables. The increase in interest expense was due primarily to an increase in average interest-bearing deposits for the first quarter of 2015 to $2.9 billion, as compared to $2.5 billion for the same period in 2014, while the Company's cost of deposits decreased 13 basis points. The decrease in the cost of deposits was due to the Company's tiered pricing strategy on all of its deposit products (including certificates of deposit). The Company's cost of funds decreased 7 basis points compared to the same period in 2014. The decrease in the cost of funds was offset by a 4 basis point increase in the cost of borrowings due to the issuance of the subordinated debentures in February 2015.
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The following table presents, for the periods indicated, the distribution of average assets, liabilities and equity, interest income and resulting yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing liabilities. Nonaccrual loans are included in the calculation of the average loan balances and interest on nonaccrual loans is included only to the extent recognized on a cash basis.
TABLE 9-AVERAGE BALANCES, NET INTEREST INCOME AND INTEREST YIELDS/RATES
For the Three Months Ended March 31, | |||||||||||||||||||||
2015 | 2014 | ||||||||||||||||||||
(In thousands) | Average Balance | Interest | Average Yield/Rate | Average Balance | Interest | Average Yield/Rate | |||||||||||||||
Assets: | |||||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||||
Short-term investments | $ | 117,118 | $ | 64 | 0.22 | % | $ | 29,961 | $ | 15 | 0.20 | % | |||||||||
Investment in short-term receivables | 233,688 | 1,690 | 2.93 | % | 237,514 | 1,695 | 2.89 | % | |||||||||||||
Investment securities | 346,775 | 2,104 | 2.46 | % | 369,966 | 2,352 | 2.58 | % | |||||||||||||
Loans (including fee income) | 2,851,659 | 35,248 | 5.01 | % | 2,414,495 | 31,099 | 5.22 | % | |||||||||||||
Total interest-earning assets | 3,549,240 | 39,106 | 4.47 | % | 3,051,936 | 35,161 | 4.67 | % | |||||||||||||
Less: Allowance for loan losses | (43,315 | ) | (32,593 | ) | |||||||||||||||||
Noninterest-earning assets | 454,348 | 348,342 | |||||||||||||||||||
Total assets | $ | 3,960,273 | $ | 3,367,685 | |||||||||||||||||
Liabilities and shareholders’ equity: | |||||||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||||
Savings deposits | $ | 54,262 | $ | 82 | 0.61 | % | $ | 53,219 | $ | 106 | 0.81 | % | |||||||||
Money market accounts | 1,096,127 | 3,288 | 1.22 | % | 711,261 | 2,480 | 1.41 | % | |||||||||||||
NOW accounts | 530,757 | 1,308 | 1.00 | % | 518,275 | 1,439 | 1.13 | % | |||||||||||||
Certificates of deposit under $100,000 | 339,383 | 1,278 | 1.53 | % | 380,367 | 1,514 | 1.61 | % | |||||||||||||
Certificates of deposit of $100,000 or more | 640,396 | 3,073 | 1.95 | % | 658,374 | 3,154 | 1.94 | % | |||||||||||||
CDARS® | 219,554 | 1,215 | 2.24 | % | 178,935 | 966 | 2.19 | % | |||||||||||||
Total interest-bearing deposits | 2,880,479 | 10,244 | 1.44 | % | 2,500,431 | 9,659 | 1.57 | % | |||||||||||||
Short-term borrowings and repurchase agreements | 121,845 | 427 | 1.42 | % | 82,931 | 305 | 1.49 | % | |||||||||||||
Borrowings | 70,505 | 813 | 4.68 | % | 58,757 | 349 | 2.41 | % | |||||||||||||
Total interest-bearing liabilities | 3,072,829 | 11,484 | 1.51 | % | 2,642,119 | 10,313 | 1.58 | % | |||||||||||||
Noninterest-bearing liabilities: | |||||||||||||||||||||
Non-interest-bearing deposits | 405,395 | 301,642 | |||||||||||||||||||
Other liabilities | 40,415 | 34,938 | |||||||||||||||||||
Total liabilities | 3,518,639 | 2,978,699 | |||||||||||||||||||
Shareholders’ equity | 441,634 | 388,986 | |||||||||||||||||||
Total liabilities and equity | $ | 3,960,273 | $ | 3,367,685 | |||||||||||||||||
Net interest income | $ | 27,622 | $ | 24,848 | |||||||||||||||||
Net interest spread(1) | 2.96 | % | 3.09 | % | |||||||||||||||||
Net interest margin(2) | 3.16 | % | 3.30 | % |
(1) | Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities. |
(2) | Net interest margin is net interest income divided by average interest-earning assets. |
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The following table analyzes the dollar amount of change in interest income and interest expense with respect to the primary components of interest-earning assets and interest-bearing liabilities. The table shows the amount of the change in interest income or interest expense caused by either changes in outstanding balances or changes in interest rates. The effect of a change in balances is measured by applying the average rate during the first period to the average balance (“volume”) change between the two periods. The effect of changes in rate is measured by applying the change in rate between the two periods to the average volume during the first period. Changes attributable to both rate and volume that cannot be segregated have been allocated proportionately to the absolute value of the change due to volume and the change due to rate.
TABLE 10-SUMMARY OF CHANGES IN NET INTEREST INCOME
For the Three Months Ended March 31, | |||||||||||
2014/2013 Change Attributable To | |||||||||||
(In thousands) | Volume | Rate | Total | ||||||||
Interest-earning assets: | |||||||||||
Loans (including fee income) | $ | 5,581 | $ | (1,432 | ) | $ | 4,149 | ||||
Short-term investments | 43 | 6 | 49 | ||||||||
Investment in short-term receivables | (27 | ) | 22 | (5 | ) | ||||||
Securities available for sale | (145 | ) | (103 | ) | (248 | ) | |||||
Total increase (decrease) in interest income | $ | 5,452 | $ | (1,507 | ) | $ | 3,945 | ||||
Interest-bearing liabilities: | |||||||||||
Savings deposits | $ | 1 | $ | (25 | ) | $ | (24 | ) | |||
Money market accounts | 1,282 | (474 | ) | 808 | |||||||
NOW accounts | 31 | (162 | ) | (131 | ) | ||||||
Certificates of deposit | (26 | ) | (42 | ) | (68 | ) | |||||
Borrowed funds | 261 | 325 | 586 | ||||||||
Total increase (decrease) in interest expense | 1,549 | (378 | ) | 1,171 | |||||||
Increase (decrease) in net interest income | $ | 3,903 | $ | (1,129 | ) | $ | 2,774 |
Provision for Loan Losses
The provision for loan losses represents management’s determination of the amount necessary to be charged against the current period’s earnings to maintain the allowance for loan losses at a level that is considered appropriate in relation to the estimated losses inherent in the loan portfolio. The Company assesses the allowance for loan losses monthly and will make provisions for loan losses as deemed appropriate.
For the three months ended March 31, 2015 and March 31, 2014, the provision for loan losses was $3.0 million. As of March 31, 2015, the ratio of allowance for loan losses to total loans was 1.56%, compared to 1.53% at December 31, 2014.
Noninterest Income
For the three months ended March 31, 2015, noninterest income was $2.5 million compared to $3.4 million for the same period in 2014, a decrease of $0.8 million, or 25.3%. The decrease was driven by decreases of $0.5 million in income from sales of state tax credits which related to the qualified equity investment authority from the State of Louisiana under the Louisiana New Markets Jobs Act received in 2013 and $0.6 million in Community Development Entity fees, offset by an increase of $0.2 million in cash surrender value income on bank-owned life insurance.
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The following table presents the components of noninterest income for the respective periods:
TABLE 11-NONINTEREST INCOME
For the Three Months Ended | ||||||||||
March 31, | Percent Increase (Decrease) | |||||||||
(In thousands) | 2015 | 2014 | ||||||||
Service charges on deposit accounts | $ | 559 | $ | 559 | — | % | ||||
Investment securities loss, net | (50 | ) | — | (100.0 | ) | |||||
Gain on assets sold, net | 43 | 75 | (42.7 | ) | ||||||
Gain on sale of loans, net | 15 | — | 100.0 | |||||||
Cash surrender value income on bank-owned life insurance | 352 | 159 | 121.4 | |||||||
Income from sale of state tax credits | 519 | 1,033 | (49.8 | ) | ||||||
Community Development Entity fees | 123 | 679 | (81.9 | ) | ||||||
ATM fee income | 501 | 473 | 5.9 | |||||||
Other | 448 | 381 | 17.6 | |||||||
Total noninterest income | $ | 2,510 | $ | 3,359 | (25.3 | )% |
Service charges on deposit accounts. The Company earns fees from its customers for deposit-related services and these fees comprise a significant and predictable component of the Company’s noninterest income.
Investment securities gains (loss). The Company experienced a decrease in investment securities gains (loss) during the first quarter of 2015 when compared to the same period of 2014. The Company recorded no securities gains (loss) during the first quarter of 2014. From time to time, the Company sells or has investment securities which are called. The proceeds are used to fund loan demand, manage its asset liability sensitivity or for other business purposes.
Gain on sale of loans. The Company has historically been an active participant in Small Business Administration and USDA loan programs as a preferred lender and typically sells the guaranteed portion of the loans it originates. The Company believes these government guaranteed loan programs are an important part of its service to the businesses in its communities and expects to continue expanding its efforts and income related to these programs.
Cash surrender value income on bank-owned life insurance. The income earned from bank-owned life insurance increased $0.2 million in the first quarter of 2015 when compared to the first quarter of 2014. The Company increased its investment by approximately $20.0 million during the second quarter of 2014 and management expects the income to be higher in future periods.
Income from sales of state tax credits. As part of the Company’s investment in projects that generate federal income tax credits, the Company may receive state tax credits along with federal credits. Although the Company cannot utilize state tax credits to offset its own tax liability, the Company earns income on the sale of state tax credits. The balance decreased $0.5 million for the first quarter of 2015, compared to the first quarter of 2014 which was due primarily to the syndication fees in income from sales of state tax credits generated from the $23.9 million in qualified equity investment authority that the Company was awarded under the State of Louisiana New Markets Jobs Act in 2013.
Community Development Entity fees earned. The Company earns management fees through its subsidiary, First NBC Community Development Fund, LLC, related to the Fund’s New Markets Tax Credit investments. The Company’s results are impacted on a quarterly basis by seasonal factors related to its participation in federal and state tax credit programs. The Company’s fee income reflects this timing as it earns fees as each project closes; the fee is a percentage of the award. The Company recognizes the fees related to the tax credit projects when they are earned. For the first quarter of 2015, the management fees recognized were $0.1 million compared to $0.7 million for the same period of 2014. The decrease was due to the timing of several projects which closed during the first quarter of 2014. The Company receives CDE fees on an annual basis for projects which are still within the compliance period.
ATM fee income. This category includes income generated by automated teller machines, or ATMs. The income earned from ATMs increased for the three month period ended March 31, 2015 compared to the same period in 2014 due primarily to increased transaction volume.
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Other. This category includes a variety of other income producing activities, including income generated from trust services, credit cards and wire transfers. The Company experienced an increase in the first quarter of 2015 compared to the first quarter of 2014.
Noninterest Expense
Noninterest expense consists primarily of salary and employee benefits, occupancy and other expenses related to the Company’s operation and expansion. Noninterest expense increased by $5.2 million, or 29.8%, in the first quarter of 2015, compared to the same period in 2014.
The following table presents the components of noninterest expense for the respective periods:
TABLE 12-NONINTEREST EXPENSE
Three Months Ended | ||||||||||
March 31, | Percent Increase (Decrease) | |||||||||
(In thousands) | 2015 | 2014 | ||||||||
Salaries and employee benefits | $ | 6,907 | $ | 5,397 | 28.0 | % | ||||
Occupancy and equipment expenses | 2,928 | 2,584 | 13.3 | |||||||
Professional fees | 2,141 | 1,899 | 12.7 | |||||||
Taxes, licenses, and FDIC assessments | 1,239 | 1,199 | 3.3 | |||||||
Tax credit investment amortization | 4,852 | 2,827 | 71.6 | |||||||
Write-down of other real estate | 58 | 166 | (65.1 | ) | ||||||
Data processing | 1,422 | 1,098 | 29.5 | |||||||
Advertising and marketing | 1,018 | 578 | 76.1 | |||||||
Other | 1,939 | 1,589 | 22.0 | |||||||
Total noninterest expense | $ | 22,504 | $ | 17,337 | 29.8 | % |
Salaries and employee benefits. These expenses increased $1.5 million, or 28.0%, during the first quarter of 2015 compared to the same period of 2014. The increase is primarily due to merit increases awarded during the first quarter of 2015, as well as the increase in the Company’s headcount compared to the same period of 2014. The Company had 509 full-time equivalent employees at March 31, 2015, compared to 481 employees as of March 31, 2014, an increase of 28 full-time equivalent employees, or 5.8%. The increase in headcount was due to the growth of the Company and the acquisition of Crestview.
Occupancy and equipment expenses. Occupancy and equipment expenses, consisting primarily of rent and depreciation, increased $0.3 million, or 13.3%, between the first quarter of 2015 and 2014. The level of the Company’s occupancy expenses is related to the number of branch offices that it maintains, and management expects that these expenses will increase as the Company continues to implement its strategic growth plan and the acquisition of three branches from Crestview.
Professional fees. Professional fees increased $0.2 million, or 12.7%, between the first quarter of 2015 and 2014. The increase between the first quarter of 2015 compared to the first quarter of 2014 was due primarily to a an increase in outside loan review.
Taxes, licenses and FDIC assessments. The expenses related to taxes, licenses and FDIC insurance premiums and assessments increased 3.3% from the same period of 2014. The increase over the comparable three month period was primarily attributable to increases in the FDIC assessment due to the strong growth in the Company’s deposits and increases in the bank shares tax expense.
Tax credit investment amortization. Tax credit investment amortization reflects amortization of investments in entities that undertake projects that qualify for tax credits against federal income taxes. At this time, investments are directed at tax credits issued under the Federal New Markets, Federal Historic Rehabilitation and Low-Income Housing Tax Credit programs. The Company amortizes investments related to Federal New Markets, Federal Historic Rehabilitation and Low-Income Housing Tax Credits over the periods the Company is required by tax law (compliance period) or contract to maintain its ownership interest in the entity. These periods are 15 years for Low-Income Housing projects, 7 years for Federal New Market projects and 10 years for Federal Historic Rehabilitation projects.
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The following table presents the amortization of tax credit investments by type of credit for the respective periods:
TABLE 13-TAX CREDIT AMORTIZATION BY CREDIT TYPE
For the Three Months Ended March 31, | |||||||
(In thousands) | 2015 | 2014 | |||||
Low-Income Housing | $ | 724 | $ | 541 | |||
Federal Historic Rehabilitation | 823 | 372 | |||||
Federal NMTC | 3,305 | 1,914 | |||||
Total tax credit amortization | $ | 4,852 | $ | 2,827 |
The significant increases in amortization expense related to Federal Historic Rehabilitation and Federal New Markets Tax Credits reflect the increase in the level of activity. The Company has increased its investment in Federal Historic Rehabilitation projects during 2014 and in the first quarter of 2015.
Data processing. Data processing expenses increased $0.3 million over the three month periods ended March 31, 2015 and 2014 and increased as a result of increased transaction volume due to the Company's organic growth.
Advertising and marketing. Advertising and marketing expenses increased $0.4 million over the three month periods ended March 31, 2015 and 2014. The increase was due primarily to an increase in contributions in the markets it operates of $0.2 million and advertising of $0.1 million.
Other. These expenses include costs related to insurance, customer service, communications, supplies and other operations. The increase in other noninterest expense over the periods shown was primarily attributable to an increase in categories of other noninterest expenses proportional to the overall growth and an increase in transaction volume and number of customers resulting from the Company’s organic growth.
Provision for Income Taxes
The provision for income taxes varies due to the amount of income recognized under generally accepted accounting principles and for tax purposes and as a result of the tax benefits derived from the Company’s investments in tax-advantaged securities and tax credit projects. The Company engages in material investments in entities that are designed to generate tax credits, which it utilizes to reduce its current and future taxes. These credits are recognized when earned as a benefit in the provision for income taxes.
The Company recognized an income tax benefit for the quarterly period ended March 31, 2015 of $11.4 million, compared to $5.0 million for the same quarterly period in 2014. The Company's income tax benefit was offset by $0.4 million of Federal NMTC basis reduction for the quarterly periods ended March 31, 2015 and 2014 and $0.1 million in Federal Historic Rehabilitation basis reduction for the quarterly period ended March 31, 2015 and no basis reduction for the quarterly period ended March 31, 2014. The increase in income tax benefit for the periods presented was due primarily to the increase in Federal Historic Rehabilitation Tax Credit investment activity in 2015 compared to 2014.
The Company expects to experience an effective tax rate below the statutory rate of 35% due primarily to the receipt of Federal New Markets Tax Credits, Low-Income Housing Tax Credits and Federal Historic Rehabilitation Tax Credits.
Although the Company’s ability to continue to access new tax credits in the future will depend, among other factors, on federal and state tax policies, as well as the level of competition for future tax credits, the Company has contracted for the following levels of tax credits over the next six calendar years based only on Federal New Markets, Federal Historic Rehabilitation and the Low-Income Housing Tax Credit investments that have been made, as of December 31, 2014.
TABLE 14-FUTURE TAX CREDITS
For the Year Ended December 31, | |||||||||||||||||||||||
(In thousands) | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | |||||||||||||||||
Federal NMTC | $ | 15,849 | $ | 15,372 | $ | 13,352 | $ | 7,302 | $ | 3,300 | $ | 300 | |||||||||||
Low-Income Housing | 4,625 | 5,100 | 5,100 | 5,100 | 5,100 | 4,536 | |||||||||||||||||
Federal Historic Rehabilitation | 21,558 | 15,737 | — | — | — | — | |||||||||||||||||
Total tax credits | $ | 42,032 | $ | 36,209 | $ | 18,452 | $ | 12,402 | $ | 8,400 | $ | 4,836 |
The gross Federal Historic Rehabilitation credits, depending on the tax structure, could be offset by basis reduction of 35%.
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Liquidity and Capital Resources
Liquidity refers to the Company’s ability to maintain cash flow that is adequate to fund operations and meet present and future financial obligations through either the sale or maturity of existing assets or by obtaining additional funding through liability management. Management believes that the sources of available liquidity are adequate to meet all reasonably foreseeable short-term and intermediate-term demands.
The Company evaluates liquidity both at the parent company level and at the bank level. Because First NBC Bank represents the Company’s only material asset, other than cash, the primary sources of funds at the parent company level are cash on hand, dividends paid to the Company from First NBC Bank, the net proceeds of capital offerings, and net proceeds from the issuance of subordinated debentures. The primary sources of funds at First NBC Bank are deposits, short and long-term funding from the Federal Home Loan Bank (FHLB) or other financial institutions, and principal and interest payments on loans and securities. While maturities and scheduled payments on loans and securities provide an indication of the timing of the receipt of funds, other sources of funds such as loan prepayments and deposit inflows are less predictable as they depend on the effects of changes in interest rates, economic conditions and competition. The primary investing activities are the origination of loans and the purchase of investment securities. If necessary, First NBC Bank has the ability to raise liquidity through additional collateralized borrowings, FHLB advances or the sale of its available for sale investment portfolio.
Investing activities are funded primarily by net deposit inflows, principal repayments on loans and securities, and borrowed funds. Gross loans increased to $2.9 billion as of March 31, 2015, from $2.8 billion as of December 31, 2014. At March 31, 2015, First NBC Bank had total commitments to make loans of approximately $750.8 million which include un-advanced lines of credit and loans of approximately $641.7 million. The Company anticipates that First NBC Bank will have sufficient funds available to meet its current loan originations and other commitments.
At March 31, 2015, total deposits were approximately $3.4 billion, of which approximately $858.2 million were in certificates of deposits of $100,000 or more. Certificates of deposits scheduled to mature in one year or less as of March 31, 2015 totaled approximately $639.3 million while certificates of deposits of $100,000 or more with a maturity of one year or less totaled approximately $463.9 million.
In general, the Company monitors and manages liquidity on a regular basis by maintaining appropriate levels of liquid assets so that funds are available when needed. Excess liquidity is invested in overnight federal funds sold and other short-term investments. As a member of the Federal Home Loan Bank of Dallas, First NBC Bank had access to approximately $449.2 million of available lines of credit secured by a blanket lien of its real estate loans as of March 31, 2015. In addition, First NBC Bank maintained $85.0 million in lines of credit with its correspondent banks to support its liquidity.
Asset/Liability Management
The Company’s asset/liability management policy provides guidelines for effective funds management and the Company has established a measurement system for monitoring its net interest rate sensitivity position. The Company seeks to maintain a sensitivity position within established guidelines.
As a financial institution, the primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of the assets and liabilities, other than those which have a short term to maturity. Because of the nature of its operations, the Company is not subject to foreign exchange or commodity price risk. The Company does not own any trading assets.
Interest rate risk is the potential of economic loss due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. The Company recognizes that certain risks are inherent and that the goal is to identify and understand the risks.
The Company actively manages exposure to adverse changes in interest rates through asset and liability management activities within guidelines established by the asset/liability management committee. The committee, which is composed primarily of senior officers and directors of First NBC Bank and First NBC Bank Holding Company, has the responsibility for ensuring compliance with asset/liability management policies. Interest rate risk is the exposure to adverse changes in net interest income as a result of market fluctuations in interest rates. On a regular basis, the committee monitors interest rate and liquidity risk in order to implement appropriate funding and balance sheet strategies.
The Company utilizes a net interest income simulation model to analyze net interest income sensitivity. Potential changes in market interest rates and their subsequent effects on net interest income are then evaluated. The model projects the effect of instantaneous movements in interest rates. Decreases in interest rates apply primarily to long-term rates, as short-term rates are
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not modeled to decrease below zero. Assumptions based on the historical behavior of the Company’s deposit rates and balances in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.
The Company’s interest sensitivity profile was somewhat asset sensitive as of March 31, 2015, though its base net interest income would increase in the case of either an interest rate increase or decrease. Hedging instruments utilized by First NBC Bank, which consist primarily of interest rate swaps and options, protect the bank in a rising interest rate environment by providing long term funding costs at a fixed interest rate to allow the bank to continue to fund its projected loan growth. In addition, the bank utilizes interest rate floors in loan pricing to manage interest rate risk in a declining rate environment.
The following table sets forth the net interest income simulation analysis as of March 31, 2015:
TABLE 15-CHANGE IN NET INTEREST INCOME FROM INTEREST RATE CHANGES
Interest Rate Scenario | % Change in Net Interest Income | ||
+300 basis points | 7.9 | % | |
+200 basis points | 7.0 | % | |
+100 basis points | 2.9 | % | |
Base | — |
The Company also manages exposure to interest rates by structuring its balance sheet in the ordinary course of business. An important measure of interest rate risk is the relationship of the repricing period of earning assets and interest-bearing liabilities. The more closely the repricing periods are correlated, the less interest rate risk it has. From time to time, the Company may use instruments such as leveraged derivatives, structured notes, interest rate swaps, caps, floors, financial options, financial futures contracts or forward delivery contracts to reduce interest rate risk. As of March 31, 2015, the Company had hedging instruments in the notional amount of $315.0 million with a fair value liability of $22.6 million.
An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate change in line with general market interest rates. A measurement of interest rate risk is performed by analyzing the maturity and repricing relationships between interest earning assets and interest bearing liabilities at specific points in time (gap). Interest rate sensitivity reflects the potential effect on net interest income of a movement in interest rates. An institution is considered to be asset sensitive, or having a positive gap, when the amount of its interest-earning assets maturing or repricing within a given period exceeds the amount of its interest-bearing liabilities also maturing or repricing within that time period. Conversely, an institution is considered to be liability sensitive, or having a negative gap, when the amount of its interest-bearing liabilities maturing or repricing within a given period exceeds the amount of its interest-earning assets also maturing or repricing within that time period. During a period of rising interest rates, a negative gap would tend to affect net interest income adversely, while a positive gap would tend to increase net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely.
Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates.
Additionally, certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates, both on a short-term basis and over the life of the asset. More importantly, changes in interest rates, prepayments and early withdrawal levels may deviate significantly from those assumed in the calculations in the table. As a result of these shortcomings, management focuses more on a net interest income simulation model than on gap analysis. Although the gap analysis reflects a ratio of cumulative gap to total earning assets within acceptable limits, the net interest income simulation model is considered by management to be more informative in forecasting future income at risk.
The Company faces the risk that borrowers might repay their loans sooner than the contractual maturity. If interest rates fall, the borrower might repay their loan, forcing the bank to reinvest in a potentially lower yielding asset. This prepayment would have the effect of lowering the overall portfolio yield which may result in lower net interest income. The Company has assumed that these loans will prepay, if the borrower has sufficient incentive to do so, using prepayment tables provided by third party consultants. In addition, some assets, such as mortgage-backed securities or purchased loans, are held at a premium, and if these assets prepay, the Company would have to write down the premium, which would temporarily reduce the yield. Conversely, as interest rates rise, borrowers might prepay their loans more slowly, which would leave lower yielding assets as interest rates rise.
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Impact of Inflation
The Company’s financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles in the United States, which require the measure of financial position and operating results in terms of historic dollars, without considering changes in the relative purchasing power of money over time due to inflation.
Inflation generally increases the costs of funds and operating overhead, and to the extent loans and other assets bear variable rates, the yields on such assets. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant effect on the performance of a financial institution than the effects of general levels of inflation. In addition, inflation affects a financial institution’s cost of goods and services purchased, the cost of salaries and benefits, occupancy expense and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings and shareholders’ equity.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Since December 31, 2014, there has been no material change in the quantitative or qualitative aspect of the Company’s market risk profile. Quantitative and qualitative disclosures about market risk are presented at December 31, 2014 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. Additional information at March 31, 2015 is included herein under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Item 4. Controls and Procedures
An evaluation of the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2015 was carried out under the supervision, and with the participation of, the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective in alerting them in a timely manner to material information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”).
Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed by the Company under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosures. Disclosure controls include review of internal controls that are designed to provide reasonable assurance that transactions are properly authorized, assets are safeguarded against unauthorized or improper use and transactions are properly recorded and reported. There have not been any change in the Company’s internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Any control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are achieved. The design of a control system inherently has limitations, including the controls’ cost relative to their benefits. Additionally, controls can be circumvented. No cost-effective control system can provide absolute assurance that all control issues and instances of fraud, if any, will be detected.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company and its direct and indirect subsidiaries are parties to lawsuits arising in the ordinary course of business. However, there are no material pending to which the Company, any of its direct and indirect subsidiaries, or any of their respective properties are currently subject.
Item 1A. Risk Factors
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
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Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit No. 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Exhibit No. 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Exhibit No. 32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
Exhibit No. 32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
Exhibit No. 101.INS | XBRL Instance Document | |
Exhibit No. 101.SCH | XBRL Taxonomy Extension Schema Document | |
Exhibit No. 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
Exhibit No. 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
Exhibit No. 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
Exhibit No. 101.DEF | XBRL Taxonomy Extension Definitions Linkbase Document |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
First NBC Bank Holding Company | |||
Date: May 8, 2015 | By: | /s/ Ashton J. Ryan, Jr. | |
Ashton J. Ryan, Jr. | |||
President and Chief Executive Officer | |||
Date: May 8, 2015 | By: | /s/ Mary Beth Verdigets | |
Mary Beth Verdigets | |||
Executive Vice President and Chief Financial Officer |
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