ITEM 1: BUSINESS
General
We are a bank holding company headquartered in Naples, Florida, whose business is conducted primarily through our wholly-owned subsidiaries, TIB Bank, established in 1974, and Naples Capital Advisors, Inc. Together we have twenty-seven full-service banking offices in Florida that are located in Monroe, Miami-Dade, Collier, Lee, and Sarasota counties. As of December 31, 2010, the Company’s SEC Registered Investment Advisory firm, Naples Capital Advisors, managed $193 million for high net worth clients. At December 31, 2010, we had approximately $1.76 billion in total assets, $1.37 billion in total deposits, $1.00 billion in total loans, and $176.8 million in shareholders’ equity.
Through our subsidiaries, we offer a wide range of commercial, retail and private banking and trust, investment management and other financial services to businesses, individuals and families. Our deposit account services include checking, interest-bearing checking, money market, savings, certificates of deposit and individual retirement accounts. We offer all types of commercial loans, including: owner-operated commercial real estate; acquisition, development and construction; income-producing properties; short-term working capital; inventory and receivable facilities; and equipment loans. We also offer a full complement of consumer loan products. Our lending focus is on small to medium-sized business, private banking clients and consumer borrowers. Most importantly, we provide our customers with access to local bank officers who are empowered to act with flexibility to meet customers' needs in an effort to foster and develop long-term, multi-service relationships. Through Naples Capital Advisors, Inc., and TIB Bank, we offer wealth management, investment advisory and trust services.
TIB Bank has been executing a community bank business strategy for individuals and businesses in the Florida Keys for 37 years. It is a unique market defined largely by its geography. From Key Largo to Key West, the Florida Keys stretch approximately 130 miles through a chain of islands each less than two miles wide. The islands of the Florida Keys are connected principally by a single highway, U.S. 1. TIB Bank is one of the few banks in the Florida Keys operating throughout the entire expanse of the market. It is a very competitive market based on personal attention and service rather than branch locations.
In 2001, TIB Bank expanded into the Southwest Florida markets of Collier and Lee County. Similar to the strategy honed in the Florida Keys, TIB focuses on small businesses and individuals appreciative of community bank service. These efforts have been bolstered by the recent introduction of private banking and wealth management services. The private banking team, since January, 2008 and as of December 31, 2010 had generated $36 million in new client deposits and $8 million in loans.
In April, 2007, the Company completed the acquisition of The Bank of Venice. Combined with the two offices of Riverside Bank of the Gulf Coast, purchased in February 2009, TIB Bank is now the largest community banking presence, as measured by deposits in the Venice-Nokomis market.
On December 5, 2008, as part of the Troubled Asset Relief Program (“TARP”) Capital Purchase Program, we sold to the U.S. Department of the Treasury, $37 million of Series A preferred stock of TIB Financial Corp., with a 5% cumulative annual dividend yield for the first five years, and 9% thereafter, and a ten year warrant to purchase up to 11,064 shares of the Company’s voting common stock, at an exercise price of $501.63 per share, for an aggregate purchase price of $5.5 million in cash.
In February 2009, TIB Bank assumed $317 million of deposits (which excluded brokered deposits) of Riverside Bank of the Gulf Coast from the FDIC. Riverside Bank’s nine offices reopened on February 17, 2009 as branches of TIB Bank. The assumption of the deposits increased our market presence in Fort Myers and Venice, and expanded our banking operations into the contiguous market of Cape Coral. The transaction also provided us with additional core deposit funding for loan growth, the potential for new customer relationships and will improve and increase our brand awareness throughout the Southwest Florida markets we serve.
On September 30, 2010, the Company issued and sold to North American Financial Holdings, Inc. (“NAFH”) 7,000,000 shares of Common Stock, 70,000 shares of Series B Preferred Stock and a warrant to purchase up to 11,666,667 shares of Common Stock of the Company for aggregate consideration of $175 million (the “Investment”). The consideration was comprised of approximately $162.8 million in cash and approximately $12.2 million in the form of contribution to the Company of all 37,000 shares of Series A preferred stock issued to the United States Department of the Treasury under the TARP Capital Purchase Program and the related warrant to purchase shares of the Company’s common stock which NAFH purchased directly from the Treasury. The Series A preferred stock and the related warrant were retired on September 30, 2010 and are no longer outstanding.
Pursuant to the Company’s investment agreement with NAFH, the Company’s shareholders as of July 12, 2010 received non-transferable rights to purchase a number of shares of the Company’s common stock proportional to the number of shares of common stock held by such holders on such date, at a purchase price equal to $15.00 per share, subject to certain limitations (the “Rights Offering”). Approximately 533,029 shares of the Company’s common stock were issued in exchange for approximately $7,776,000 upon completion of the Rights Offering on January 18, 2011.
We are subject to examination and regulation by the Board of Governors of the Federal Reserve System, the Florida Office of Financial Regulation, the United States Securities and Exchange Commission (the “SEC”) and the Federal Deposit Insurance Corporation (the “FDIC”). This regulation is intended for the protection of our depositors and clients, not our shareholders.
Business Strategy
Our business strategy is to operate as a profitable, diversified financial services company providing a variety of banking and other financial services, with an emphasis on building multi-service relationships through commercial loans to small and medium-sized businesses, private banking, trust and investment management and consumer and residential mortgage lending and to be the premier community bank in the markets we serve. As a result of the consolidation of locally based small and medium-sized financial institutions and the emergence of large, nationally focused financial institutions, we believe there is a significant opportunity for community based and focused banks to provide a full range of financial services to small and middle-market commercial and retail customers. We emphasize comprehensive retail, private banking, wealth management and business products and responsive, decentralized decision-making which reflect our knowledge of customers and experience in our local markets.
Our business strategy is targeted to:
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To operate a full service retail network with competitive products and outstanding customer service;
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Capture commercial lending opportunities with small to mid-sized businesses which we believe are underserved by our larger competitors;
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Pursue private banking and wealth management opportunities with affluent individuals and families which are underserved or served remotely by our larger competitors, headquartered out of the state of Florida;
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Provide residential mortgage financing on both a mortgage banking basis with conforming loans sold through the secondary market and on a portfolio basis with jumbo and other nonconforming loans originated for customers with an existing relationship;
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Originate consumer loans on a direct and indirect basis to diversify our sources of loans and revenue, concentrating on consumers with prime credit;
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Cross-sell our products and services to our more than 60,000 existing customers to leverage our relationships, grow fee income and enhance profitability; and
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Adhere to safe and sound credit standards as we improve the quality of assets.
Banking services
Commercial Banking. The Bank focuses its commercial loan originations on established small and mid-sized businesses. These loans are usually accompanied by significant related deposits. Commercial underwriting is driven by cash flow analysis supported by collateral analysis and review. The Bank offers a complete range of commercial loan products, including owner-occupied commercial real estate construction and term loans; working capital loans and lines of credit; demand, term and time loans; and equipment, inventory and accounts receivable financing. We offer a wide range of cash management services and deposit products to commercial customers.
Retail Banking. Retail banking activities emphasize providing excellent customer service and cross selling multiple services to our customer base. An extensive range of these services is offered by the Bank to meet the varied needs of its customers. In addition to traditional products and services, the Bank offers state of the art Internet banking services. Consumer loan products offered by the Bank include home equity lines of credit, second mortgages, new and used auto loans, new and used boat loans, overdraft protection, and unsecured personal credit lines.
Mortgage Banking. The Bank’s mortgage banking business is structured to provide a source of fee and interest income. Fees are generated by originating conforming fixed and variable rate loans for sale to the secondary market. To compliment cross sell efforts to Private Banking and affluent customers, adjustable rate loans (mostly jumbo) are held in our loan portfolio. Mortgage banking capabilities include conventional and nonconforming mortgage underwriting; and construction and permanent financing.
Private Banking, Trust and Investment Management. A key component of the overall strategy is the integrated offering of private banking and wealth management. The Company is targeting affluent clients, business owners and retirees, building new relationships and expanding existing relationships to grow deposits, loans and fiduciary and investment management fee income. Through private banking, we offer deposit products tailored to meet the needs of the wealthy, along with lines of credit and traditional mortgage financing. These banking services are typically integrated with professional investment management and personal trust services.
Unlike most traditional community banks that appeal almost exclusively to one segment of the business market, the Bank reaches out to the community with multiple distribution channels, including private banking and wealth management. This approach not only provides a competitive edge relative to other community banks, but also benefits the enterprise in the following ways:
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They are services in demand and closely matching to the demographics of the market areas;
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They will generate a scalable, diversified and profitable source of non-interest income; and
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They will serve as an attractive platform from which to continuously attract new clients and new banking professionals.
Lending activities
Loan Portfolio Composition. At December 31, 2010, the Bank’s loan portfolio totaled $1.00 billion, representing approximately 57% of our total assets of $1.76 billion. For a discussion of our loan portfolio, see “Management's Discussion and Analysis of Financial Condition and Results of Operations - Loan Portfolio.”
The composition of the Bank’s loan portfolios at December 31, 2010 and 2009 is indicated below:
Commercial Real Estate Mortgage Loans. At December 31, 2010, the Bank’s commercial real estate loan portfolio totaled $600.4 million. The Bank also has $12.1 million in loans outstanding that are secured by farmland. The Bank originates commercial mortgages primarily secured by hotels, guesthouses, restaurants, retail buildings, and general purpose business space. The Bank seeks to reduce the risks associated with commercial mortgage lending by generally lending in its market area and obtaining periodic financial statements and tax returns from borrowers. Commercial real estate loans are generally underwritten with future cash flows as the primary source of repayment and the pledged collateral as a secondary source of repayment. It is also the Bank’s general policy to obtain personal guarantees from the principals of the borrowers and assignments of all leases related to the collateral.
Commercial Loans. At December 31, 2010, the Bank’s commercial loan portfolio totaled $60.6 million. The Bank originates secured and unsecured loans for business purposes. Loans are made for acquisition, expansion, and working capital purposes and may be secured by real estate, accounts receivable, inventory, equipment or other assets. The financial condition and cash flow of commercial borrowers are closely monitored by the submission of corporate financial statements, personal financial statements and income tax returns. The frequency of submissions of required financial information depends on the size and complexity of the credit and the collateral that secures the loan. It is the Bank’s general policy to obtain personal guarantees from the principals of the commercial loan borrowers.
Construction and Vacant Land Loans. At December 31, 2010, the Bank’s construction loan and vacant land portfolio totaled $39.0 million. The Bank provides interim real estate acquisition development and construction loans to builders, developers and other persons who will ultimately occupy the building. Real estate development and construction loans to provide interim financing on the property are based on acceptable percentages of the appraised value of the property securing the loan in each case. Real estate development and construction loan funds are disbursed periodically at pre-specified stages of completion. Interest rates on these loans are generally adjustable. The Bank carefully monitors these loans with on-site inspections and control of disbursements.
Development and construction loans are secured by the properties under development or construction and personal guarantees are typically obtained. Further, to assure that reliance is not placed solely in the value of the underlying property, the Bank considers the financial condition, experience and reputation of the borrower and any guarantors, the amount of the borrower’s equity in the project, independent appraisals, costs estimates and pre-construction sale information.
Loans to individuals for the construction of their primary or secondary residences are secured by the property under construction. The loan to value ratio of construction loans is based on the lesser of the cost to construct or the appraised value of the completed home. Construction loans normally have a maturity of 12-18 months. An independent general contractor is required and funds are disbursed periodically at pre-specified stages of completion. The Bank carefully monitors these loans with on site inspections and control of disbursements. These construction loans, to individuals, may be converted to permanent loans upon completion of construction.
Residential Real Estate Mortgage Loans. At December 31, 2010, the Bank’s residential loan portfolio totaled $225.9 million. The Bank originates adjustable and fixed-rate residential mortgage loans through its mortgage banking operations. These mortgage loans are generally originated under terms, conditions and documentation acceptable to the secondary mortgage market. Beginning in late 2007, due to the collapse of the secondary market for jumbo residential mortgage loans, the Bank began to originate jumbo mortgage loans for retention in our loan portfolio for customers with whom we could develop a broader banking relationship. This strategy has been integrated with our private banking and wealth management business line and is generating deeper banking services and customer relationships. These jumbo loans retained in our loan portfolio are principally to finance owner occupied residences for higher net worth individuals and are generally adjustable rate mortgages with attractive yields.
Indirect Auto Loans. At December 31, 2010, TIB Bank’s indirect auto loan portfolio totaled $28.0 million. We strive to deliver attractive risk adjusted returns while maintaining credit quality in our indirect lending operations due to a combination of factors including:
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Business with a limited number of dealers - The dealerships we do business with are characterized by being very sound financially and trade predominately in vehicles which retain market value reasonably well over time. We continually monitor dealers for compliance with our lending guidelines.
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Thorough underwriting of applicants - We evaluate credit scores and other pertinent information such as the stability of the applicant's job, home ownership, and the nature of any credit issues which may give us a better indication of creditworthiness than just the credit score.
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Effective collections - We get to customers quickly and more often as payment issues arise. We begin contacting the customer once their payment is 10 days past due. After an account is 15 days past due, it is referred to our collections department for resolution including field contacts as necessary.
Other Consumer Loans and Home Equity Loans. At December 31, 2010, the Bank’s consumer loan portfolio totaled $8.7 million, and its home equity portfolio totaled $29.7 million. The Bank offers a variety of consumer loans. These loans are typically collateralized by residential real estate or personal property, including automobiles and boats. Home equity loans (closed-end and lines of credit) are typically made up to 75% of the appraised value of the property securing the loan, in each case, less the amount of any existing liens on the property and are made principally to existing customers of the bank. Closed-end loans have terms of up to 15 years. Lines of credit have an original maturity of 10 years. The interest rates on closed-end home equity loans are fixed, while interest rates on home equity lines of credit are variable.
Credit administration
The Bank’s lending activities are subject to written policies approved by the board of directors to ensure proper management of credit risk. Loans are subject to a defined credit process that includes credit evaluation of borrowers, risk-rating of credits, establishment of lending limits and application of lending procedures, including the holding of adequate collateral and the maintenance of compensating balances, as well as procedures for on-going identification and management of credit deterioration. Regular portfolio reviews are performed to identify potential underperforming credits, estimate loss exposure, and to ascertain compliance with the Bank’s policies. Management review consists of evaluation of the financial strengths of the borrower and the guarantor, the related collateral and the effects of economic conditions.
The Bank generally does not make commercial or consumer loans outside its market area unless the borrower has an established relationship with the Bank and conducts its principal business operations within the Bank’s market area. Consequently, the Bank and borrowers are affected by the economic conditions prevailing in our market areas.
Private Banking, Wealth Management and Trust Services
The Company offers private banking and trust services through credentialed professionals who provide clients customized financial solutions. The Company also delivers sophisticated investment management services to individuals, families, trusts and non-profit organizations through Naples Capital Advisors, Inc. Naples Capital Advisors, Inc. is an SEC registered investment advisory firm and a wholly owned subsidiary of the Company.
As of December 31, 2010, private banking deposits totaled $36 million and private banking loans totaled $8 million at December 31, 2010.
Assets under management by Naples Capital Advisors and TIB Bank’s trust department totaled $193 million as of December 31, 2010.
Employees
As of December 31, 2010, the Bank and Naples Capital Advisors, Inc. employed 374 full-time employees and 17 part-time employees. The Company has one employee, who serves as an officer of TIB Bank. The Company and its subsidiaries are not a party to any collective bargaining agreement, and management believes the Company and its subsidiaries enjoy satisfactory relations with their employees.
Related Party Transactions
At December 31, 2010, we had $1.00 billion in total loans outstanding, of which $195,000 was outstanding to certain of our executive officers and directors and their related business interests. In the ordinary course of business, the Bank makes loans to our directors and their affiliates and to policy-making officers.
SUPERVISION AND REGULATION
General
We are extensively regulated under federal and state law. Generally, these laws and regulations are intended to protect depositors, not shareholders. The following is a summary description of certain provisions of certain laws that affect the regulation of bank holding companies and banks. The discussion is qualified in its entirety by reference to applicable laws and regulations. Changes in such laws and regulations may have a material effect on our business and prospects, as well as those of the Bank. Additionally, the Bank files a quarterly report of condition and income, commonly referred to as Call Report, with the FDIC. This report is made available shortly after being filed at the FDIC’s website, www.fdic.gov . The Company files quarterly reports with the Board of Governors of the Federal Reserve System.
Federal Bank Holding Company Regulation and Structure
We are a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended, and, as such, we are subject to regulation, supervision, and examination by the Federal Reserve. We are required to file annual and quarterly reports with the Federal Reserve and to provide the Federal Reserve with such additional information as it may require. The Federal Reserve may examine us and our subsidiaries.
With certain limited exceptions, we are required to obtain prior approval from the Federal Reserve before acquiring direct or indirect ownership or control of more than 5% of any voting securities or substantially all of the assets of a bank or bank holding company, or before merging or consolidating with another bank holding company. In acting on applications for such approval, the Federal Reserve must consider various statutory factors, including among others, the effect of the proposed transaction on competition in the relevant geographical and product markets, each party’s financial condition and management resources and record of performance under the Community Reinvestment Act. Additionally, with certain exceptions, any person proposing to acquire control through direct or indirect ownership of our voting securities is required to give 60 days’ written notice of the acquisition to the Federal Reserve, which may prohibit the transaction, and to publish notice to the public.
Generally, a bank holding company may not engage in any activities other than banking, managing or controlling its bank and other authorized subsidiaries, and providing services to these subsidiaries. With prior approval of the Federal Reserve, we may acquire more than 5% of the assets or outstanding shares of a company engaging in non-bank activities determined by the Federal Reserve to be closely related to the business of banking or of managing or controlling banks.
Subsidiary banks of a bank holding company are subject to certain quantitative and qualitative restrictions on extensions of credit to the bank holding company or its subsidiaries, investments in their securities, and the use of their securities as collateral for loans to any borrower. These regulations and restrictions may limit our ability to obtain funds from the Bank for our cash needs, including funds for the payment of dividends, interest and operating expenses. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. For example, the Bank may not generally require a customer to obtain other services from themselves or us, and may not require that a customer promise not to obtain other services from a competitor as a condition to an extension of credit to the customer.
Under Federal Reserve policy, a bank holding company is expected to act as a source of financial strength to its subsidiary banks and to make capital injections into a troubled subsidiary bank, and the Federal Reserve may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank when required. A required capital injection may be called for at a time when the holding company does not have the resources to provide it. In addition, depository institutions insured by the FDIC can be held liable for any losses incurred by, or reasonably anticipated to be incurred by, the FDIC in connection with the default of, or assistance provided to, a commonly controlled FDIC-insured depository institution.
Enacted in 1999, the Graham-Leach-Bliley Act reformed and modernized certain areas of financial services regulations and repealed the affiliation provisions of the federal Glass-Steagall Act of 1933, which, taken together, limited the securities, insurance and other non-banking activities of any company that controls a FDIC insured financial institution. The law provides that a financial holding company may engage in a full range of financial activities, including insurance and securities sales and underwriting activities, real estate development, and, with certain exceptions, merchant banking activities, with expedited notice procedures. The law also permits certain qualified national banks to form “financial subsidiaries,” which have broad authority to engage in all financial activities except insurance underwriting, insurance investments, real estate investment or development, and merchant banking, and expands the potential financial activities of subsidiaries of state banks, subject to applicable state law. The range of activities in which bank holding companies and their subsidiaries may engage is not as broad. The law also includes substantive requirements for maintenance of customer financial privacy.
Emergency Economic Stabilization Act of 2008
The Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted on October 3, 2008. EESA authorized the Treasury to purchase or guarantee up to $700 billion in troubled assets from financial institutions under the Troubled Asset Relief Program. Pursuant to authority granted under EESA, the Treasury created the TARP Capital Purchase Program under which the Treasury was authorized to invest up to $250 billion in senior preferred stock of U.S. banks and savings associations or their holding companies.
Institutions participating in the TARP or CPP were required to issue warrants for common or preferred stock or senior debt to the Treasury. If an institution participates in the CPP or if the Treasury acquires a meaningful equity or debt position in the institution as a result of TARP participation, the institution is required to meet certain standards for executive compensation and corporate governance, including a prohibition against incentives to take unnecessary and excessive risks, recovery of bonuses paid to senior executives based on materially inaccurate earnings or other statements and a prohibition against agreements for the payment of golden parachutes.
American Recovery and Reinvestment Act
The American Recovery and Reinvestment Act (the “ARRA”) became law on February 17, 2009. Among its many provisions, the ARRA imposes certain new executive compensation and corporate expenditure limits on all current and future TARP recipients that are in addition to those previously announced by the Treasury. These limits are effective until the institution has repaid the Treasury, which is now permitted under the ARRA without penalty and without the need to raise new capital, subject to the Treasury’s consultation with the recipient’s appropriate regulatory agency.
Dodd-Frank Act
In July 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act contains provisions that will, among other things, establish a Bureau of Consumer Financial Protection, establish a systemic risk regulator, consolidate certain federal bank regulators and impose increased corporate governance and executive compensation requirements. The Dodd-Frank Act requires various federal agencies to adopt a broad range of rules and regulations and the impact of the Dodd-Frank Act are not known yet.
Federal and State Bank Regulation
The Bank is a Florida state-chartered bank, with all the powers of a commercial bank regulated and examined by the Florida Office of Financial Regulation and the FDIC. The FDIC and the Florida Office of Financial Regulation have extensive enforcement authority over the institutions they regulate to prohibit or correct activities that violate law, regulation or written agreement with the FDIC and the Office of Financial Regulation. Enforcement powers also regulate activities that are deemed to constitute unsafe or unsound practices. Enforcement actions may include the appointment of a conservator or receiver, the issuance of a cease and desist order, the termination of deposit insurance, the imposition of civil money penalties on the institution, its directors, officers, employees and institution-affiliated parties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the removal of or restrictions on directors, officers, employees and institution-affiliated parties, and the enforcement of any such mechanisms through restraining orders or other court actions.
On July 2, 2009, the Bank entered into a Memorandum of Understanding, which is an informal agreement, with bank regulatory agencies that it would move in good faith to increase its Tier 1 leverage capital ratio to not less than 8% and its total risk-based capital ratio to not less than 12% by December 31, 2009 and maintain these higher ratios for as long as this agreement is in effect. At December 31, 2009, these elevated capital ratios were not met. On July 2, 2010, the Bank entered into a Consent Order, which is a formal agreement, with the bank regulatory agencies under which, among other things, the Bank has agreed to maintain a Tier 1 capital ratio of at least 8% of total assets and a total risk based capital ratio of at least 12% within 90 days. At December 31, 2010 the Bank achieved a Tier 1 capital ratio of 8.1% and a total risk-based capital ratio of 13.1% which meet the ratios required in the Consent Order. The Consent Order also governs certain aspects of the Bank’s operations including a requirement that it reduce the balance of assets classified substandard and doubtful by at least 70% over a two-year period, and not undertake asset growth of 5% or more per year without prior approval from the regulatory agencies. The Consent Order supersedes the Memorandum of Understanding.
In its lending activities, the maximum legal rate of interest, fees and charges that a financial institution may charge on a particular loan depends on a variety of factors such as the type of borrower, the purpose of the loan, the amount of the loan and the date the loan is made. Other laws tie the maximum amount that may be loaned to any one customer and its related interest to capital levels. The Bank is also subject to certain restrictions on extensions of credit to executive officers, directors, principal shareholders or any related interest of such persons which generally require that such credit extensions be made on substantially the same terms as are available to third persons dealing with the Bank and not involve more than the normal risk of repayment. The Bank is also subject to federal laws establishing certain record keeping, customer identification and reporting requirements with respect to certain large cash transactions, sales of travelers’ checks or other monetary instruments, and international transportation of cash or monetary instruments. Further, under the USA Patriot Act of 2001, financial institutions, including the Bank, are required to implement additional policies and procedures with respect to, or additional measures designed to address, any or all of the following matters, among others: money laundering, suspicious activities and currency transaction reporting, and currency crimes.
The Community Reinvestment Act requires that, in connection with the examination of financial institutions within their jurisdictions, the FDIC evaluates the record of the financial institution in meeting the credit needs in its communities including low and moderate income neighborhoods, consistent with the safe and sound operation of those banks. These factors are also considered by all regulatory agencies in evaluating mergers, acquisitions and applications to open a branch or facility. As of the date of their most recent examination reports, the Bank has a Community Reinvestment Act rating of “Satisfactory.”
Under the Federal Deposit Insurance Corporation Improvement Act of 1991, each federal banking agency is required to prescribe, by regulation, noncapital safety and soundness standards for institutions under its authority. The federal banking agencies, including the FDIC, have adopted standards covering internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. An institution that fails to meet those standards may be subject to regulatory sanctions and/or be required by the agency to develop a plan acceptable to the agency, specifying the steps that the institution will take to meet the standards. We believe that we substantially meet all standards that have been adopted. This law also imposes capital standards on insured depository institutions. See “Capital Requirements” below.
The Federal Deposit Insurance Corporation Improvement Act of 1991 also provides for, among other things, (i) publicly available annual financial condition and management reports for financial institutions, including audits by independent accountants, (ii) the establishment of uniform accounting standards by federal banking agencies, (iii) the establishment of a “prompt corrective action” system of regulatory supervision and intervention, based on capitalization levels with more scrutiny and restrictions placed on depository institutions with lower levels of capital, (iv) additional grounds for the appointment of a conservator or receiver, and (v) restrictions or prohibitions on accepting brokered deposits, except for institutions which significantly exceed minimum capital requirements. FDICIA also provides for increased funding of the FDIC insurance funds and the implementation of risked-based premiums.
Deposit Insurance
As a FDIC member institution, deposits of the Bank are currently insured to the current maximum allowed by law through the Bank Insurance Fund, which is administered by the FDIC.
Limits on Dividends and Other Payments
The Company received a request from the Federal Reserve Bank of Atlanta for the Company’s Board of Directors to adopt a resolution that it will not declare or pay any dividends on its outstanding common or preferred stock, nor will it make any payments or distributions on the outstanding trust preferred securities or corresponding subordinated debentures without the prior written approval of the Reserve Bank. The Board adopted this resolution on October 5, 2009.
Additionally, we have issued junior subordinated debentures to special purpose trusts which are senior to our common stock. As a result, we must make payments on the junior subordinated debentures before any dividends can be paid on our preferred or common stock. We have elected to defer interest payments on the Trust Preferred securities since October 2009. We expect that these future payments due will be deferred for the foreseeable future.
Our ability to pay dividends is largely dependent upon the receipt of dividends from the Bank. Both federal and state laws impose restrictions on the ability of the Bank to pay dividends. Federal law prohibits the payment of a dividend by an insured depository institution if the depository institution is considered “undercapitalized” or if the payment of the dividend would make the institution “undercapitalized.” See “Capital Requirements" below. The Federal Reserve has issued a policy statement that provides that bank holding companies should pay dividends only out of the prior year’s net income, and then only if their prospective rate of earnings retention appears consistent with their capital needs, asset quality, and overall financial condition. For a Florida state-chartered bank, dividends may be paid out of the bank’s aggregate net profits for the current year combined with its retained earnings for the preceding two years as the board deems appropriate. No dividends may be paid at a time when a bank’s net income from the preceding two years is a loss or which would cause the capital accounts of the bank to fall below the minimum amount required by law. In addition to these specific restrictions, bank regulatory agencies also have the ability to prohibit proposed dividends by a financial institution that would otherwise be permitted under applicable regulations if the regulatory body determines that such distribution would constitute an unsafe or unsound practice. Based on the level of losses of TIB Bank for the prior two years, declaration of dividends by TIB Bank during 2010 would require regulatory approval.
Capital Requirements
The Federal Reserve and FDIC have adopted certain risk-based capital guidelines to assist in the assessment of the capital adequacy of a banking organization’s operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit and recourse arrangements which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 200% for assets with relatively high credit risk, such as asset-backed and mortgage-backed securities that are rated below investment grade.
A banking organization’s risk-based capital ratio is obtained by dividing its qualifying capital by its total risk adjusted assets. The regulators measure risk-adjusted assets, which include off balance sheet items, against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. “Tier 1,” or core capital includes common equity, perpetual preferred stock (excluding auction rate issues), trust preferred securities (subject to certain limitations), and minority interest in equity accounts of consolidated subsidiaries (less goodwill and other intangibles), subject to certain exceptions. “Tier 2,” or supplementary capital, includes, among other things limited-life preferred stock, hybrid capital instruments, mandatory convertible securities and trust preferred securities, qualifying and subordinated debt, and the allowance for loan and lease losses, subject to certain limitations and less required deductions. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies.
The federal banking agencies are required to take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements. As a result, the federal bank regulatory authorities have adopted regulations setting forth a five tiered system for measuring the capital adequacy of the depository institutions that they supervise. Under these regulations, a depository institution is classified in one of the following capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” An institution may be deemed by the regulators to be in a capitalization category that is lower than is indicated by its actual capital position if, among other things, it receives an unsatisfactory examination rating with respect to asset quality, management, earnings or liquidity. As of December 31, 2010, the Bank was classified as an “adequately capitalized” institution.
A depository institution generally is prohibited from making any capital distribution (including payment of a cash dividend) or paying any management fees to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of other requirements and restrictions including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and stop accepting deposits from correspondent banks. Critically undercapitalized institutions are subject to the appointment of a receiver or conservator; generally within 90 days of the date such institution is determined to be critically undercapitalized.
The federal banking agencies also have significantly expanded powers to take enforcement action against institutions that fail to comply with capital or other standards. Such action may include limitations on the right to pay dividends, the issuance by the applicable regulatory authority of a capital directive to increase capital and, in the case of depository institutions, the termination of deposit insurance by the FDIC. The circumstances under which the FDIC is permitted to provide financial assistance to an insured institution before appointment of a conservator or receiver also is limited under law. In addition, future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of the Bank to grow and could restrict the amount of profits, if any, available for the payment of dividends to us.
Interstate Banking Legislation
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Riegle-Neal”), subject to certain restrictions, allows adequately capitalized and managed bank holding companies to acquire existing banks across state lines, regardless of state statutes that would prohibit acquisitions by out-of-state institutions. Further, a bank holding company may consolidate interstate bank subsidiaries into branches and a bank may merge with an unaffiliated bank across state lines to the extent that the applicable states authorize such transactions. Florida has a law which permits interstate branching through merger transactions under the federal interstate laws. Under the Florida law, with the prior approval of the Florida Office of Financial Regulation, a Florida bank may establish, maintain and operate one or more branches in a state other than the State of Florida pursuant to a merger transaction in which the Florida bank is the resulting bank. In addition, Florida law provides that one or more Florida banks may enter into a merger transaction with one or more out-of-state banks, and an out-of-state bank resulting from such transaction may maintain and operate branches of a Florida bank that participated in such merger.
Sarbanes-Oxley Act
In 2002, the Sarbanes-Oxley Act was enacted which imposes a myriad of corporate governance and accounting measures designed so that shareholders have full and accurate information about the public companies in which they invest. All public companies are affected by the Act. Some of the principal provisions of the Act include:
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The creation of an independent accounting oversight board to oversee the audit of public companies and auditors who perform such audits;
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Auditor independence provisions which restrict non-audit services that independent accountants may provide to their audit clients;
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Additional corporate governance and responsibility measures which (a) require the chief executive officer and chief financial officer to certify financial statements and to forfeit salary and bonuses in certain situations, and (b) protect whistleblowers and informants;
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Expansion of the authority and responsibilities of the company’s audit, nominating and compensation committees;
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Mandatory disclosure by analysts of potential conflicts of interest; and
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Enhanced penalties for fraud and other violations.
Other Legislative Considerations
The United States Congress and the Florida Legislature periodically consider and may adopt legislation that results in additional deregulation, among other matters, of banks and other financial institutions. Such legislation could modify or eliminate current prohibitions with other financial institutions, including mutual funds, securities, brokerage firms, insurance companies, banks from other states, and investment banking firms. The effect of any such legislation on our business or that of the Bank cannot be accurately predicted. We cannot predict what legislation might be enacted or what other implementing regulations might be adopted, and if enacted or adopted, the effect on us.
Competition
The banking business is highly competitive. Banks generally compete with other financial institutions through the banking products and services offered, the pricing of services, the level of service provided, the convenience and availability of services, and the degree of expertise and the personal manner in which services are offered. The Bank encounters strong competition from most of the financial institutions in the Bank’s primary service areas. In the conduct of certain areas of its banking business, the Bank also competes with credit unions, consumer finance companies, insurance companies, money market mutual funds and other financial institutions, some of which are not subject to the same degree of regulation and restrictions imposed upon the Bank. Many of these competitors have substantially greater resources and lending limits than the Bank currently has. Management believes that personalized service and competitive pricing is a sustainable competitive advantage that will provide us with a method to compete effectively in our primary service areas.
Monetary Policy
Our earnings are affected by domestic and foreign economic conditions, particularly by the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve has an important impact on the operating results of banks and other financial institutions through its power to implement national monetary policy. The methods used by the Federal Reserve include setting the reserve requirements of banks, establishing the discount rate on bank borrowings and conducting open market transactions in United States Government securities.
FDIC Insurance Assessments
The FDIC insures the deposits of the Bank up to prescribed limits for each depositor. The amount of FDIC assessments paid by each Bank Insurance Fund (BIF) member institution is based on its relative risks of default as measured by regulatory capital ratios and other factors. Specifically, the assessment rate is based on the institution’s capitalization risk category and supervisory subgroup category. An institution’s capitalization risk category is based on the FDIC’s determination of whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. An institution’s supervisory subgroup category is based on the FDIC’s assessment of the financial condition of the institution and the probability that FDIC intervention or other corrective action will be required. The FDIC may terminate insurance of deposits upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC. As a result of the Federal Deposit Insurance Reform Act of 2005, the Bank was assessed risk-based deposit insurance premiums on a quarterly basis beginning January 1, 2007. Insurance assessments paid per $100.00 in deposits are listed below by quarter:
The FDIC adopted a revised risk-based deposit insurance assessment schedule on February 27, 2009, which raised deposit insurance premiums effective April 1, 2009. On May 22, 2009, the FDIC also implemented a five basis point special assessment of each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009, but no more than 10 basis points times the institution’s assessment base for the second quarter of 2009, collected on September 30, 2009. This amount was approximately $800,000. The FDIC approved collecting a prepayment of insurance premiums for the next three years (for 2010, 2011 and 2012) plus fourth quarter 2009’s premium in December 2009. This prepayment was approximately $10.9 million, of which $6.6 million remains as a prepaid asset for the Bank as of December 31, 2010.
We participated in the FDIC’s Temporary Liquidity Guarantee Program (“TLG”) for noninterest-bearing transaction deposit accounts. Banks that participated in the TLG’s noninterest-bearing transaction account guarantee paid the FDIC an annual assessment of 10 basis points, through December 31, 2009, on the amounts in such accounts above the amounts covered by FDIC insurance. Subsequent to December 31, 2009, the annual assessment increased to a range of 15 to 25 basis points. During 2010, we paid 20 basis points during the first quarter and 25 basis points through the expiration of the TLG program on December 31, 2010.
Effective April 1, 2011, the FDIC is implementing changes to the calculation of deposit insurance premiums. The assessment base will be equal to average total assets less Tier 1 capital. Assessment rates will initially range between an annualized 2.5 and 45 basis points. Assessment rates will decrease if the FDIC’s reserve ratio increases to certain thresholds.
Statistical Information
Certain statistical information is found in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K.
ITEM 1A:
ITEM 1A: RISK FACTORS
RISK FACTORS
Our business is subject to a variety of risks, including the risks described below as well as adverse business conditions and changes in regulations and the local, regional and national economic environment. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not known to us or not described below which we have not determined to be material may also impair our business operations. You should carefully consider the risks described below, together with all other information in this report, including information contained in the “Business,” “Management’s Discussion and Analysis of Results of Operations and Financial Condition,” and “Quantitative and Qualitative Disclosures about Market Risk” sections. This report contains forward-looking statements that involve risks and uncertainties, including statements about our future plans, objectives, intentions and expectations. Many factors, including those described below, could cause actual results to differ materially from those discussed in forward-looking statements. If any of the following risks actually occur, our business, financial condition and results of operations could be adversely affected, and we may not be able to achieve our goals. Such events may cause actual results to differ materially from expected and historical results, and the trading price of our common stock could decline.
Risks Related to Our Business
The Bank has entered into a Consent Order and a Written Agreement with bank regulatory agencies and certain terms of that order may not be met.
On July 2, 2010, TIB Bank entered into a Consent Order, a formal agreement, with bank regulatory agencies under which, among other things, the Bank has agreed to maintain a Tier 1 capital ratio of at least 8% of total assets and a total risk based capital ratio of at least 12%. At December 31, 2010, the Bank was in compliance with these elevated capital ratios. The Consent Order also governs certain aspects of the Bank’s operations including a requirement that it reduce the balance of assets classified substandard and doubtful by at least 70% over a two-year period, and not undertake asset growth of 5% or more per year without prior approval from the regulatory agencies. The Consent Order supersedes the Memorandum of Understanding entered into with regulatory agencies on July 2, 2009.
While the Company and the Bank intend to take such actions as may be necessary to comply with the requirements of the Written Agreement and Consent Order, there can be no assurance that the Company will be able to comply fully with the provisions of the Written Agreement or that the Bank will be able to comply fully with the provisions of the Consent Order, that compliance with the Written Agreement and Consent Order will not be more time consuming or more expensive than anticipated, that compliance with the Written Agreement and Consent Order will enable the Company and the Bank to continue profitable operations, or that efforts to comply with the Written Agreement and Consent Order will not have adverse effects on the operations and financial condition of the Company or the Bank.
Even though the Company has completed the NAFH Investment, it cannot assure you whether or when the Written Agreement and Consent Order will be lifted or terminated. Even if they are lifted or terminated in whole or in part, the Company may still be subject to supervisory enforcement actions that restrict its activities.
Recently enacted regulatory reforms could have a significant impact on the Company’s business, financial condition and results of operations.
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”), which is perhaps the most significant financial reform since the Great Depression and contains numerous and wide-ranging reforms to the United States financial system. The Act contains many provisions which will affect institutions such as the Company and the Bank in substantial and unpredictable ways. Consequently, compliance with the Act’s provisions may reduce the Company’s and the Bank’s revenue opportunities increase their operating costs, require them to hold higher levels of regulatory capital and/or liquidity and otherwise adversely affect their business or financial results in the future. The Company’s management is actively reviewing the provisions of the Act and assessing its probable impact on the Company’s business, financial condition, and result of operations. However, because many aspects of the Act are subject to future rulemaking, it is difficult to precisely anticipate its overall impact, financially and otherwise, on the Company and the Bank at this time.
We are not paying dividends on our common stock and are deferring distributions on our trust preferred securities, and we are restricted in otherwise paying cash dividends on our common stock. The failure to resume paying dividends on our trust preferred securities may adversely affect us.
We historically paid cash dividends before we began making quarterly 1% stock dividends in lieu of cash dividend payments on our common stock from the second quarter of 2008 through the third quarter of 2009. During the third quarter of 2009, we began deferring dividend payments on our trust preferred securities and our preferred stock pursuant to the adoption of a board resolution requiring 30 day advance notice to and written approval from the Federal Reserve Bank prior to making any dividend payments. There is no assurance that we will receive approval to resume paying cash dividends. All dividends are declared and paid at the discretion of our board of directors and are dependent upon our liquidity, financial condition, results of operations, regulatory capital requirements and such other factors as our board of directors may deem relevant.
Further, distributions on our trust preferred securities are cumulative and therefore unpaid distributions will accrue and compound on each subsequent dividend payment date.
Higher FDIC deposit insurance premiums and assessments could adversely affect our financial condition.
FDIC insurance premiums increased substantially in 2009 as market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits. The FDIC adopted a revised risk-based deposit insurance assessment schedule on February 27, 2009, which raised deposit insurance premiums. On May 22, 2009, the FDIC also implemented a five basis point special assessment of each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009, but no more than 10 basis points times the institution’s assessment base for the second quarter of 2009, collected on September 30, 2009. Additional special assessments may be imposed by the FDIC for future periods. The FDIC collected a prepayment of insurance premiums for 2010, 2011 and 2012 plus the fourth quarter 2009’s premium in December 2009. The prepayment was $10.9 million.
Effective April 1, 2011, the FDIC is implementing changes to the calculation of deposit insurance premiums. The assessment base will be equal to average total assets less Tier 1 capital. Assessment rates will initially range between an annualized 2.5 and 45 basis points. Assessment rates will decrease if the FDIC’s reserve ratio increases to certain thresholds.
Our loan portfolio includes commercial and real estate loans that have higher risks.
The Bank’s commercial, commercial real estate and construction and vacant land loans at December 31, 2010, were $60.6 million, $612.5 million and $39.0 million, respectively, or 6%, 61% and 4% of total loans. Commercial, commercial real estate and construction and vacant land loans generally carry larger loan balances and can involve a greater degree of financial and credit risk than other loans. Any significant failure to pay on time by the Bank’s customers would hurt our earnings. The increased financial and credit risk associated with these types of loans are a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the size of loan balances, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans. In addition, when underwriting a commercial or industrial loan, the Bank may take a security interest in commercial real estate, and, in some instances upon a default by the borrower, we may foreclose on and take title to the property, which may lead to potential financial risks for us under applicable environmental laws. If hazardous substances were discovered on any of these properties, we may be liable to governmental agencies or third parties for the costs of remediation of the hazard, as well as for personal injury and property damage. Many environmental laws can impose liability regardless of whether the Bank knew of, or was responsible for, the contamination.
During 2006, the federal bank regulatory agencies released guidance on “Concentrations in Commercial Real Estate Lending” (the “Guidance”). The Guidance defines commercial real estate loans as exposures secured by raw land, land development and construction (including 1-4 family residential construction), multi-family property, and non-farm nonresidential property where the primary or a significant source of repayment is derived from rental income associated with the property (that is, loans for which 50% or more of the source of repayment comes from third party, non-affiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. The Guidance requires that appropriate processes be in place to identify, monitor and control risks associated with real estate lending concentrations. This could include enhanced strategic planning, underwriting policies, risk management, internal controls, portfolio stress testing and risk exposure limits as well as appropriately designed compensation and incentive programs. Higher allowances for loan losses and capital levels may also be required. The Guidance is triggered when commercial real estate loan concentrations exceed either:
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total reported loans for construction, land development, and other land of 100% or more of a bank’s total capital; or
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total reported loans secured by multifamily and nonfarm nonresidential properties and loans for construction, land development, and other land of 300% or more of a bank’s total capital.
Furthermore, the repayment of loans secured by commercial real estate is typically dependent upon the successful operation or resale of the related real estate or commercial project. If the cash flows from the project are reduced, a borrower’s ability to repay the loan may be impaired. This cash flow shortage may result in the failure to make loan payments. In such cases, the Bank may be compelled to modify the terms of the loan. In addition, the nature of these loans is such that they are generally less predictable and more difficult to evaluate and monitor. As a result, repayment of these loans may, to a greater extent than residential loans, be subject to adverse conditions in the real estate market or economy.
Our business is subject to the success of the local economies where we operate.
Our success significantly depends upon the growth in population, income levels, deposits and housing starts in our primary and secondary markets. Over the past 36 months, each of these four factors has decreased. If the communities in which we operate do not grow or if prevailing economic conditions locally or nationally continue to remain challenged, our business may be adversely affected. Our specific market areas have recently experienced economic contraction, which has affected the ability of our customers to repay their loans to us and generally affected our financial condition and results of operations. We are less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified markets and economies. Moreover, we cannot give any assurance we will benefit from any market growth or favorable economic conditions in our primary market areas if they do occur.
We may face risks with respect future expansion or acquisitions.
We may acquire other financial institutions or parts of those institutions in the future and we may engage in additional de novo branch expansion. We may also consider and enter into new lines of business or offer new products or services. We also may receive future inquiries and have discussions with potential acquirers of us. Acquisitions and mergers involve a number of risks, including, but not limited to valuation risk, integration risk and management resources.
On March 11, 2011, NAFH disclosed that it is seeking regulatory approval to combine its three banks, Capital Bank, TIB Bank and NAFH National Bank and that it may also seek to combine its holding companies (the Company, NAFH, and Capital Bank Corporation). No assurances can be given that applicable regulatory approvals will be obtained, that the transactions described above will be consummated, or if consummated, as to the timing, price, structure or other terms of the transactions.
We may incur substantial costs to expand, and we can give no assurance such expansion will result in the levels of profits we seek. There can be no assurance integration efforts for any future mergers or acquisitions will be successful. Also, we may issue equity securities, including common stock and securities convertible into shares of our common stock in connection with future acquisitions, which could cause ownership and economic dilution to our current shareholders. There is no assurance that, following any future mergers or acquisitions, our integration efforts will be successful or our company, after giving effect to the acquisition, will achieve profits comparable to or better than our historical experience.
Changes in interest rates may negatively affect our earnings and the value of our assets.
Our earnings and cash flows are largely dependent upon our net interest income. Net interest income is the difference between interest income earned on interest-earnings assets, such as loans and investment securities, and interest expense paid on interest-bearing liabilities, such as deposits and borrowed funds. Interest rates are sensitive to many factors that are beyond our control, including general economic conditions, competition and policies of various governmental and regulatory agencies and, in particular, the policies of the Board of Governors of the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence not only the interest our Bank receives on loans and investment securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) the Bank’s ability to originate loans and obtain deposits, (ii) the fair value of our financial assets and liabilities, including the available for sale securities portfolio, and (iii) the average duration of our interest-earning assets. This also includes the risk that interest-earning assets may be more responsive to changes in interest rates than interest-bearing liabilities, or vice versa (repricing risk), the risk that the individual interest rates or rates indices underlying various interest-earning assets and interest-bearing liabilities may not change in the same degree over a given time period (basis risk), and the risk of changing interest rate relationships across the spectrum of interest-earning asset and interest-bearing liability maturities (yield curve risk), including a prolonged flat or inverted yield curve environment. Any substantial, unexpected, prolonged change in market interest rates could have a material adverse affect on our financial condition and results of operations.
Our cost of funds may increase as a result of general economic conditions, interest rates and competitive pressures. We have traditionally obtained funds principally through local deposits and we have a base of lower cost transaction deposits. Generally, we believe local deposits are a less expensive and more stable source of funds than other borrowings because interest rates paid for local deposits are typically lower than interest rates charged for borrowings from other institutional lenders and reflect a mix of transaction and time deposits. Our costs of funds and our profitability and liquidity are likely to be adversely affected, if and to the extent we have to rely upon higher cost borrowings from other institutional lenders to fund loan demand or liquidity needs, and changes in our deposit mix and growth could adversely affect our profitability and the ability to expand our loan portfolio.
Competition from financial institutions and other financial service providers may adversely affect our profitability.
The banking business is highly competitive and we experience competition in each of our markets from many other financial institutions. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other super-regional, national and international financial institutions that operate offices in our primary market areas and elsewhere.
We compete with these institutions both in attracting deposits and assets under management, and in making loans. In addition, we have to attract our customer base from other existing financial institutions and from new residents. Many of our competitors are well-established, larger financial institutions. While we believe we can and do successfully compete with these other financial institutions in our primary markets, we may face a competitive disadvantage as a result of our smaller size, regulatory scrutiny, lack of geographic diversification and inability to spread our marketing costs across a broader market. Although we compete by concentrating our marketing efforts in our primary markets with local advertisements, personal contacts, and greater flexibility and responsiveness in working with local customers, we can give no assurance this strategy will be successful.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding and other transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. Defaults by, or even rumors or questions about, one or more financial institutions, or the financial services industry generally, may lead to market-wide liquidity problems and losses of depositor, creditor and counterparty confidence and could lead to losses or defaults by us or by other institutions.
We are dependent upon the services of our management team.
Our future success and profitability is substantially dependent upon the management and banking abilities of our senior executives. We believe that our future results will also depend in part upon our attracting and retaining highly skilled and qualified management and sales and marketing personnel. Competition for such personnel is intense, and we cannot assure you that we will be successful in retaining such personnel. We also cannot guarantee that members of our executive management team will remain with us. Changes in key personnel and their responsibilities may be disruptive to our business and could have a material adverse effect on our business, financial condition and results of operations.
A substantial decline in the value of our Federal Home Loan Bank of Atlanta common stock may result in an other than temporary impairment charge.
We are a member of the Federal Home Loan Bank of Atlanta, or FHLB, which enables us to borrow funds under the Federal Home Loan Bank advance program. As a FHLB member, we are required to own FHLB common stock, the amount of which increases with the level of our FHLB borrowings. Due to weak financial results, the FHLB has substantially reduced the payment of dividends. The FHLB has also suspended daily repurchases of FHLB common stock, which adversely affects the liquidity of these shares. The carrying value and fair market value of our FHLB common stock was $9.3 million as of December 31, 2010. Consequently, there is a risk that our investment could be deemed other than temporarily impaired at some time in the future.
Hurricanes or other adverse weather events would negatively affect our local economies or disrupt our operations, which would have an adverse effect on our business or results of operations.
Our market areas in Florida are susceptible to hurricanes and tropical storms and related flooding and wind damage. Such weather events can disrupt operations, result in damage to properties and negatively affect the local economies in the markets where they operate. We cannot predict whether or to what extent damage that may be caused by future hurricanes will affect our operations or the economies in our current or future market areas, but such weather events could result in a decline in loan originations, a decline in the value or destruction of properties securing our loans and an increase in delinquencies, foreclosures or loan losses. Our business or results of operations may be adversely affected by these and other negative effects of future hurricanes or tropical storms, including flooding and wind damage. Many of our customers have incurred significantly higher property and casualty insurance premiums on their properties located in our markets, which may adversely affect real estate sales and values in those markets.
Risks Related to Our Common Stock
NAFH is a controlling shareholder and may have interests that differ from the interests of our other shareholders.
Upon completion of the NAFH Investment and shareholder rights offering and before accounting for any stock that may subsequently be issued pursuant to the Warrant, NAFH owned approximately 94% of the Company’s outstanding voting power. As a result, NAFH will be able to control the election of our directors, determine our corporate and management policies and determine the outcome of any corporate transaction or other matter submitted to our shareholders for approval. Such transactions may include mergers and acquisitions (which may include mergers of the Company and/or its subsidiaries with or into NAFH and/or NAFH's other subsidiaries), sales of all or some of the Company's assets (including sales of such assets to NAFH and/or NAFH's other subsidiaries) or purchases of assets from NAFH and/or NAFH's other subsidiaries, and other significant corporate transactions.
On March 11, 2011, NAFH disclosed that it is seeking regulatory approval to combine its three banks, Capital Bank, TIB Bank and NAFH National Bank and that it may also seek to combine its holding companies (the Company, NAFH, and Capital Bank Corporation). No assurances can be given that applicable regulatory approvals will be obtained, that the transactions described above will be consummated, or if consummated, as to the timing, price, structure or other terms of the transactions.
Five of our seven directors, our Chief Executive Officer, our Chief Financial Officer, and our Chief Risk Officer are affiliates of NAFH. NAFH also has sufficient voting power to amend our organizational documents. The interests of NAFH may differ from those of our other shareholders, and it may take actions that advance its interests to the detriment of our other shareholders. Additionally, NAFH is in the business of making investments in or acquiring financial institutions and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. NAFH may also pursue, for its own account, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us.
This concentration of ownership could also have the effect of delaying, deferring or preventing a change in our control or impeding a merger or consolidation, takeover or other business combination that could be favorable to the other holders of our common stock, and the trading prices of our common stock may be adversely affected by the absence or reduction of a takeover premium in the trading price.
As a controlled company, we are exempt from certain NASDAQ corporate governance requirements.
The Company’s common stock is currently listed on the NASDAQ Capital Market. The NASDAQ generally requires a majority of directors to be independent and requires independent director oversight over the nominating and executive compensation functions. However, under the rules applicable to the NASDAQ, if another company owns more than 50% of the voting power of a listed company, that company is considered a “controlled company” and exempt from rules relating to independence of the board of directors and the compensation and nominating committees. The Company is a controlled company because NAFH beneficially owns more than 50% of the Company’s outstanding voting stock. Accordingly, the Company is exempt from certain corporate governance requirements and its shareholders may not have all the protections that these rules are intended to provide.
We may choose to voluntarily delist our common stock from NASDAQ or cease to be a reporting issuer under SEC rules.
We may choose to, or our majority shareholder NAFH may cause us to, voluntarily delist from the NASDAQ Capital Market. If we were to delist from NASDAQ, we may or may not list ourselves on another exchange, and may or may not be required to continue to file periodic and current reports and other information as a reporting issuer under SEC rules. A delisting of our common stock could negatively impact shareholders by reducing the liquidity and market price of our common stock, reducing information available about the Company on an ongoing basis and potentially reducing the number of investors willing to hold or acquire our common stock. In addition, if we were to delist from NASDAQ, we would no longer be subject to any of the corporate governance rules applicable to NASDAQ listed companies. See also “-As a controlled company, we are exempt from certain NASDAQ corporate governance requirements.”
Future issuance or sales of our common stock or other securities, including through exercise of NAFH’s Warrant, will dilute the ownership interests of our existing shareholders and could depress the market price of our common stock.
NAFH received, in connection with the Investment, a warrant representing the right to purchase, during the 18-month period following the closing of the Investment, up to 11,666,667 shares of our common stock at $15.00 per share. If it does so, whether in part or in full, shareholders other than NAFH will suffer dilution of their common shares.
Further, although we presently do not have any intention of issuing additional common stock apart from the issuances contemplated by the Investment, we may do so in the future in order to meet our capital needs and regulatory requirements, and will be able to do so without shareholder approval, up to the newly increased number of authorized shares. Our board of directors may determine from time to time a need to obtain additional capital through the issuance of additional shares of common stock or other preferred securities including securities convertible into or exchangeable for shares of our common stock, subject to limitations imposed by the NASDAQ and the Federal Reserve Board. There can be no assurance that such shares can be issued at prices or on terms better than or equal to the terms obtained by our current shareholders. The issuance of any additional shares of common stock or convertible or exchangeable preferred securities by us in the future may result in a reduction of the per share book value or market price, if any, of the then-outstanding common stock. Issuance of additional shares of common stock or convertible or exchangeable preferred securities will reduce the proportionate ownership and voting power of our existing shareholders.
Resales of our common stock or other securities in the public market may cause the market price of our common stock to fall.
Sales of a substantial number of shares of our common stock in the public market by our shareholders (including NAFH), or the perception that such sales are likely to occur, could cause the market price of our common stock to decline. Pursuant to the Company’s investment agreement with NAFH, we have agreed to provide customary registration rights for the shares of common stock issued to NAFH and NAFH can exercise those rights in order to sell additional shares of our common stock at its discretion. We cannot predict the effect, if any, that future sales of our common stock in the market, or availability of shares of our common stock for sale in the market, will have on the market price of our common stock. We therefore can give no assurance that sales of substantial amounts of our common stock in the market, or the potential for large amounts of sales in the market, would not cause the price of our common stock to decline or impair our ability to raise capital through sales of our common stock.
Market conditions and other factors may affect the value of our common stock.
The trading price of the shares of our common stock will depend on many factors, which may change from time to time, including:
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conditions in the regional and national credit, mortgage and housing markets, the markets for securities relating to mortgages or housing, and developments with respect to financial institutions generally;
• market interest rates;
• the market for similar securities;
• government action or regulation;
• general economic conditions or conditions in the financial markets;
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changes in global financial markets and global economies and general market conditions, such as interest or foreign exchange rates, stock, commodity or real estate valuations or volatility;
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our past and future dividend practice; and
• our financial condition, performance, creditworthiness and prospects.
The trading volume in our common stock has been low and the sale of substantial amounts of our common stock in the public market could depress the price of our common stock.
Our common stock is thinly traded. The average daily trading volume of our shares on The Nasdaq National Market during the 2010 was approximately 1,311 shares. Thinly traded stock can be more volatile than stock trading in an active public market. In recent years, the stock market has experienced a high level of price and volume volatility, and market prices for the stock of many companies have experienced wide price fluctuations that have not necessarily been related to their operating performance. Therefore, our shareholders may not be able to sell their shares at the volumes, prices, or times that they desire.
We cannot predict the effect, if any, that future sales of our common stock in the market, or availability of shares of our common stock for sale in the market, will have on the market price of our common stock. We therefore can give no assurance sales of substantial amounts of our common stock in the market, or the potential for large amounts of sales in the market, would not cause the price of our common stock to decline or impair our ability to raise capital through sales of our common stock.
Holders of our junior subordinated debentures have rights that are senior to those of our common stockholders.
We have supported our continued growth through the issuance of trust preferred securities from special purpose trusts and accompanying junior subordinated debentures. At December 31, 2010, we had outstanding trust preferred securities and accompanying junior subordinated debentures with face values totaling $33.0 million. Payments of the principal and interest on the trust preferred securities of these special purpose trusts are conditionally guaranteed by us. Further, the accompanying junior subordinated debentures we issued to the special purpose trusts are senior to our shares of common stock. As a result, we must make payments on the junior subordinated debentures before any dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the junior subordinated debentures must be satisfied before any distributions can be made on our common stock. We have the right to defer distributions on our junior subordinated debentures (and the related trust preferred securities) for up to five years, during which time no dividends may be paid on our common stock. As discussed above, pursuant to the board resolution adopted on October 5, 2009, we began deferring interest payments on our junior subordinated debentures in October 2009.
The Warrant and other potential issuances of equity securities may impact net income available to our common shareholders and our earnings per share.
We may issue and sell shares of preferred stock or common stock in the future, and such future issuances of equity could further impact the earnings per share available to our existing shareholders.
Our earnings per share could also be diluted by the shares of common stock issuable upon exercise of the Warrant currently held by NAFH. As of December 31, 2010, the shares issuable upon exercise of the Warrant would represent approximately 49% of our outstanding common shares. This percentage includes the shares issuable upon exercise of the Warrant in our total outstanding shares.
An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, our shareholders may lose some or all of their investment in our common stock.
ITEM 1B:
ITEM 1B: UNRESOLVED STAFF COMMENTS
We did not receive any written comments during 2010 from the Commission staff regarding our periodic and current reports under the Act that remain unresolved from any prior period.
ITEM 2:
ITEM 2: PROPERTIES
The Company’s executive offices are located at 599 9th Street North, Naples, Florida. TIB Bank‘s main office is located at 6435 Naples Boulevard, Naples, Florida. All Company operated properties are as follows:
In 2008, TIB Bank completed the lease and vacated the office space located at 632 Washington Avenue in Homestead, Florida 33030 and occupied the office space located at 704 Washington Street in Homestead, Florida. TIB Bank terminated an option to acquire land located at 10815 Bonita Beach Road in Bonita Springs, Florida. TIB Bank also sold a vacant commercial lot located at 5 Homestead Avenue in Key Largo, Florida. TIB Bank repossessed a property located at 9465 Tamiami Trail North in Naples, Florida which was transferred to fixed assets and is being used for office space by TIB Bank beginning in 2009. During 2008, TIB Bank also purchased a building located at 17000 Alico Commerce Court in Ft. Myers, Florida.
On February 13, 2009, the Company acquired the operations of eight branches of the former Riverside Bank of the Gulf Coast. On March 30, 2009, TIB Bank opened the Alico Branch located at 17000 Alico Commerce Court in Ft. Myers, Florida.
ITEM 3:
ITEM 3: LEGAL PROCEEDINGS
While the Company and the Bank are from time to time parties to various legal proceedings arising in the ordinary course of their business, management believes after consultation with legal counsel that at December 31, 2010 there were no proceedings threatened or pending against the Company or the Bank that will, individually or in the aggregate, have a material adverse effect on the consolidated results of operations or financial condition of the Company.
ITEM 4:
ITEM 4: (REMOVED AND RESERVED)
PART II
ITEM 5:
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the NASDAQ Capital Market under the symbol “TIBB.” As of December 31, 2010, there were 636 registered shareholders of record and 11,816,865 shares of our common stock outstanding. The share and per share amounts discussed throughout this document have been adjusted to account for the effects of 6 (six) 1% (one percent) stock dividends declared for shareholders of record on July 7, 2008, September 30, 2008, December 31, 2008, March 31, 2009, June 30, 2009 and September 30, 2009 and distributed July 17, 2008, October 10, 2008, January 10, 2009, April 10, 2009, July 10, 2009 and October 10, 2009, respectively and the effects of the 1 for 100 reverse stock split effective after the close of business on December 15, 2010.
On January 4, 2010, we received a letter from NASDAQ that stated the Company’s common stock closed below the required minimum $1.00 per share bid price for the previous 30 consecutive business days. The letter also indicated that, in accordance with listing rules, we have a period of 180 calendar days, until July 6, 2010, to regain compliance with this requirement. The Company was not able to regain compliance and requested a hearing to appeal NASDAQ’s determination to delist the Company’s common stock. The hearing was held on August 5, 2010 and the Company requested an extension to January 3, 2011 to regain compliance. The request was subsequently granted. The Company was not able to regain compliance with the continued listing requirements of the NASDAQ Global Select market by January 3, 2011. However, through a rights offering which was completed on January 18, 2011 and a 1 for 100 reverse stock split effective December 15, 2010, the Company met the continued listing requirements of the NASDAQ Capital Market. Accordingly, we requested that NASDAQ transfer the Company’s shares to The NASDAQ Capital Market. The request was granted and was effective upon the open of trading on January 27, 2011.
The following table sets forth, for the periods indicated, the high and low sale prices per share for our common stock on the NASDAQ Global Select Market:
We did not pay any cash dividends for the years ended December 31, 2009 and December 31, 2010. For the year ended December 31, 2009 we issued stock dividends in lieu of cash dividends for the first three quarters. Our ability to pay cash dividends to our shareholders is primarily dependent on the earnings of the Bank, as well as the dividend restrictions under the terms of our outstanding junior subordinated debentures. Payment of dividends by the Bank to us is also limited by dividend restrictions in capital requirements imposed by bank regulators. Information regarding restrictions on the ability of the Bank to pay dividends to us is contained in Note 15 of the "Notes to Consolidated Financial Statements" contained in Item 8 hereof.
The Company received a request from the Federal Reserve Bank of Atlanta for the Company’s Board of Directors to adopt a resolution that it will not declare or pay any dividends on its outstanding common or preferred stock, nor will it make any payments or distributions on the outstanding trust preferred securities or corresponding subordinated debentures without the prior written approval of the Reserve Bank. The Board adopted this resolution on October 5, 2009. On September 22, 2010 the Federal Reserve Bank of Atlanta (FRB) and the Company entered into a written agreement where the Company agrees, among other things, that it will not make any payments on the outstanding trust preferred securities or declare or pay any dividends without the prior written approval of the FRB. The Company has notified the trustees of its $20 million trust preferred securities due July 7, 2036 and its $5 million trust preferred securities due July 31, 2031 of its election to defer interest payments on the trust preferred securities beginning with the payments due in October 2009. The Company has notified the trustees of its $8 million trust preferred securities due September 27, 2030 of its election to defer interest payments on the trust preferred securities beginning with the payments due in March 2010. Deferral of the trust preferred securities is allowed for up to 60 months without being considered an event of default. Additionally, the Company may not declare or pay dividends on its capital stock, including dividends on preferred stock, or, with certain exceptions, repurchase capital stock without first having paid all trust preferred interest and all cumulative preferred dividends that are due. At this time it is unlikely that the Company will resume payment of cash dividends on its common stock for the foreseeable future.
With respect to information regarding our securities authorized for issuance under equity incentive plans, the information contained in the section entitled “Executive Compensation - Equity Compensation Plan Information” of our definitive Proxy Statement for the 2011 Annual Meeting of Shareholders is incorporated herein by reference.
Issuer Purchases of Equity Securities
For the year ended December 31, 2010, we did not repurchase any shares of our common stock.
STOCK PRICE PERFORMANCE GRAPH
The stock price performance graph below shall not be deemed incorporated by reference by any general statement incorporating by reference this Form 10-K into any filing under the Securities Act of 1933 or under the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts.
The graph below compares the cumulative total return of the Company, the Nasdaq Composite Index and a peer group index.
ITEM 6:
ITEM 6: SELECTED FINANCIAL DATA
The selected consolidated financial data presented below as of and for the years ended December 31, 2010, 2009, 2008, 2007 and 2006 is unaudited and has been derived from our Consolidated Financial Statements and from our records. The information presented below should be read in conjunction with the Consolidated Financial Statements and related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Balance Sheet Data and Ratios
As of December 31,
Income Statement and Performance Data
*
Non-interest income for 2009 and 2008 includes $5.1 million and $1.1 million of net gains on securities sold, respectively. Non-interest income for 2009, 2008 and 2007 includes charges related to the other than temporary impairment of investment securities of $763,000, $6.4 million and $5.7 million, respectively, as discussed in more detail in the “Investment Portfolio” section of management’s discussion and analysis.
**
Non-interest expense for 2009 includes a goodwill impairment charge of $5.9 million.
***
Income tax expense (benefit) for 2009 includes a valuation allowance against deferred income tax assets of $30.4 million.
****
For predecessor only, calculation includes unvested shares of restricted.
*****
The computation of return on average assets and return on average equity is based on net income from continuing operations.
******
The computation of the dividend payout ratio is based on net income (loss) from continuing operations.
ITEM 7:
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
TIB Financial Corp. is a bank holding company in the Southern Florida marketplace and the parent company of TIB Bank and Naples Capital Advisors, Inc. The Bank operates primarily as a real estate secured commercial lender, focusing on middle-market businesses in our Southern Florida markets. The Bank funds its lending activity primarily by gathering retail and commercial deposits from our service area. TIB Bank was formed in 1974 and has a substantial market presence in the Florida Keys. In recent years, TIB Bank has expanded into the adjacent Florida counties of Miami-Dade, Collier, Lee and Sarasota.
Memorandum of Understanding and Consent Order
On July 2, 2009, TIB Bank entered into a Memorandum of Understanding, which is an informal agreement, with bank regulatory agencies that it would move in good faith to increase its Tier 1 leverage capital ratio to not less than 8% and its total risk-based capital ratio to not less than 12% by December 31, 2009 and maintain these higher ratios for as long as this agreement was in effect. At December 31, 2009, these elevated capital ratios were not met. On July 2, 2010, TIB Bank entered into a Consent Order, which is a formal agreement, with the bank regulatory agencies under which, among other things, the Bank has agreed to maintain a Tier 1 capital ratio of at least 8% of total assets and a total risk based capital ratio of at least 12% within 90 days. At September 30, 2010, based upon the preliminary acquisition accounting adjustments, these ratios were not met. TIB Bank achieved a Tier 1 capital ratio of 7.8% and a total risk-based capital ratio of 12.9%. At December 31, 2010, TIB Bank achieved a Tier 1 capital ratio of 8.1% and a total risk-based capital ratio of 13.1% and exceeded all regulatory requirements. The Consent Order also governs certain aspects of TIB Bank’s operations including a requirement that it reduce the balance of assets classified substandard and doubtful by at least 70% over a two-year period, and not undertake asset growth of 5% or more per year without prior approval from the regulatory agencies. The Consent Order superseded the Memorandum of Understanding. On September 22, 2010 the Federal Reserve Bank of Atlanta (“FRB”) and the Company entered into a written agreement (the “Written Agreement”) where the Company agreed, among other things, that it will not make any payments on the outstanding trust preferred securities or declare or pay any dividends without the prior written approval of the FRB.
Recent Capital Investments
On March 7, 2008, the Company consummated a transaction whereby two of Southwest Florida’s prominent families, their representatives and their related business interests purchased 1.2 million shares of the Company’s common stock and warrants. Gross proceeds from the investment provided additional capital of $10.1 million.
On December 5, 2008, the Company issued $37 million of preferred stock and a related warrant to the U.S. Treasury under the U.S. Treasury’s Capital Purchase Program to strengthen the Company’s capital base and to support our continued capacity to provide new loans to creditworthy individual and commercial customers.
On September 30, 2010, (the “Transaction Date”) the Company completed the issuance and sale to NAFH of 7,000,000 shares of Common Stock, 70,000 shares of Series B Preferred Stock and a warrant (the “Warrant”) to purchase up to 11,666,667 shares of Common Stock of the Company (the “Warrant Shares”) for aggregate consideration of $175,000,000.The consideration was comprised of approximately $162,840,000 in cash and approximately $12,160,000 in the form of a contribution to the Company of all 37,000 outstanding shares of Series A Preferred Stock previously issued to the United States Department of the Treasury under the TARP Capital Purchase Program and the related warrant to purchase shares of the Company’s Common Stock, which NAFH purchased directly from the Treasury. The Series A Preferred Stock and the related warrant were retired on September 30, 2010 and are no longer outstanding. The 70,000 shares of Series B Preferred Stock received by NAFH converted into an aggregate of 4,666,667 shares of Common Stock following shareholder approval of an amendment to the Company’s Restated Articles of Incorporation (the “Articles of Incorporation”) to increase the number of authorized shares of Common Stock to 50,000,000. The Warrant is exercisable, in whole or in part, and from time to time, from September 30, 2010 to March 30, 2012, at an exercise price of $15.0 per Warrant Share.
As a result of the Investment and following the completion on January 18, 2011 of a rights offering, pursuant to which shareholders of the Company as of July 12, 2010 purchased 533,029 shares of Common Stock, NAFH owns approximately 94% of the issued and outstanding voting power of the Company. Upon the completion of the Investment, R. Eugene Taylor (Chairman), Christopher G. Marshall, Peter N. Foss, William A. Hodges and R. Bruce Singletary were named to board of directors of the Company (the “Company Board”). Mr. Howard Gutman and Mr. Brad Boaz, currently members of the Company Board, remained as such following the closing of the Investment. All other members of the board of directors of the Company resigned effective September 30, 2010.
TIB Bank added R. Eugene Taylor, Christopher G. Marshall, R. Bruce Singletary and Bradley Boaz to its board of directors. Mr. Howard Gutman, a current member of TIB Bank's board, remained as such following the closing of the Investment. All other members of the board of directors of TIB Bank resigned effective September 30, 2010. In addition, the Company has appointed several new executive officers: R. Eugene Taylor as Chief Executive Officer, Christopher G. Marshall as Chief Financial Officer, and R. Bruce Singletary as Chief Risk Officer. Stephen J. Gilhooly will continue to serve as the Treasurer of the Company.
Because of the controlling proportion of voting securities in the Company acquired by NAFH, the Investment is considered an acquisition for accounting purposes and requires the application and push down of the acquisition method of accounting. The accounting guidance for acquisition accounting requires that the assets acquired and liabilities assumed be recorded at their respective fair values as of the acquisition date. Any purchase price in excess of the net assets acquired is recorded as goodwill.
The most significant fair value adjustments resulting from the application of the acquisition method of accounting were made to loans. Accounting guidance requires that all loans held by the Company on the Transaction Date be recorded at their fair value. The fair value of these acquired loans takes into account both the differences in loan interest rates and market rates and any deterioration in their credit quality. Because concerns about the probability of receiving the full amount of the contractual payments from the borrowers was considered in estimating the fair value of the loans, stating the loans at their fair value results in no allowance for loan loss being provided for these loans as of the Transaction Date. As of September 30, 2010, certain loans had evidence of credit deterioration since origination, and it was probable that not all contractually required principal and interest payments would be collected. Such loans identified at the time of the acquisition were accounted for using the measurement provision for purchased credit-impaired (“PCI”) loans, according to the FASB Accounting Standards Codification (“ASC”) 310-30. The special accounting for PCI loans not only requires that they are recorded at fair value at the date of acquisition and that any related allowance for loan and lease losses is not permitted to be carried forward past the Transaction Date, but it also governs how interest income will be recognized on these loans and how any further deterioration in credit quality after the Transaction Date will be recognized and reported.
As a result of the adjustments required by the acquisition method of accounting, the Company’s balance sheet and results of operations from periods prior to the Transaction Date are labeled as Predecessor Company amounts and are not comparable to balances and results of operations from periods subsequent to the Transaction Date, which are labeled as Successor Company. The lack of comparability arises from the assets and liabilities having new accounting bases as a result of recording them at their fair values as of the Transaction Date rather than at their historical cost basis. As a result of the change in accounting bases, items of income and expense such as the rate of interest income and expense as well as depreciation and rental expense will change. In general, these changes in income and expense relate to the amortization of premiums or accretion of discounts to arrive at contractual amounts due. To call attention to this lack of comparability, the Company has placed a black line between the Successor Company and Predecessor Company columns in the Consolidated Financial Statements and in the tables in the notes to the statements and in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
NASDAQ Delisting
On July 7, 2010, the Company received a delisting notice from The NASDAQ Stock Market LLC, which was anticipated, due to the Company’s non-compliance with the NASDAQ’s $1.00 per share bid price requirement. The letter from the NASDAQ notified the Company that it was in violation of NASDAQ Marketplace Rule 5505 in that the bid price for its common stock was below the required listing standard and that its common stock would be delisted from the NASDAQ on July 16, 2010 unless the Company asked for a hearing before a NASDAQ Listing Qualifications Hearing Panel. This hearing was held on August 5, 2010. During the hearing the Company requested an extension to January 3, 2011 for the Company to demonstrate a closing bid price of $1.00 per share in accordance with the NASDAQ rules. The Company advised NASDAQ that the Company intended to call a special meeting of its shareholders following the closing of the NAFH Investment to approve the adoption of an amendment to the Company’s Restated Articles of Incorporation to affect a reverse stock split and thereby regain compliance with the listing rules. On September 2, 2010, the Company was advised by the NASDAQ that its request for an extension to January 3, 2011 was granted. On December 15, 2010, the Company affected a 1 for 100 reverse stock split. Additionally, on January 18, 2011, the Company completed a Rights Offering through which 533,029 shares of the Company’s common stock were issued in exchange for approximately $8.0 million. As a result of these actions, the Company met the continued listing requirements for the NASDAQ Capital Market. Pursuant to our request the listing of the Company’s shares was transferred to the NASDAQ Capital Market effective upon the open of trading on January 27, 2011.
Performance Overview
The Company reported net income of $560,000 for the three months ended December 31, 2010. Basic and diluted income per common share was $0.05. The most significant factor for the 2010 net income was increases in net interest income due to the impact of the purchase accounting adjustments which revalued deposits and borrowings to yield market interest rates as of September 30, 2010. The provision for loan losses of $402,000 recorded reflects the allowance for loan losses established for loans originated subsequent to September 30, 2010. No net charge-offs or losses on the disposition of other real estate owned were recorded as credit losses experienced were incorporated in the net discounts recorded on loans and other real estate acquired as of September 30, 2010.
The net loss for the nine months ended September 30, 2010 was $52.8 million. Basic and diluted loss per common share was $205.64. Contributing to the loss during the nine months ended September 20, 2010 were: $21.7 million of valuation adjustments, losses on sale and operating expenses associated with foreclosed real estate; no tax benefit recorded in the current period as a result of the Company’s deferred tax assets being fully reserved; and $2.1 million in expenses incurred in connection with our capital raise activities and the termination of a related consulting agreement.
For the year ended December 31, 2009, our operations resulted in a net loss before dividends and accretion on preferred stock of $61.5 million. The net loss allocated to common shareholders was $64.2 million, or $433.27 per share, for the year ended December 31, 2009. The most significant factors contributing to the 2009 loss were a $42.3 million provision for loan losses, a $13.5 million provision for income taxes and a $5.9 million goodwill impairment charge, partially offset by $4.3 million in net gains from investment securities and a $1.2 million gain resulting from the death benefit received from a bank owned life insurance policy covering a former employee.
(1) Non-interest income excludes gains on the conversion of life insurance policies covering a former employee and a former director and investment securities gains and losses.
(2) Non-interest expense excludes goodwill impairment charges.
We have made significant progress in redirecting our focus on primary objectives of growth, expansion and improving profitability and efficiency. The satisfaction of regulatory capital requirements and compliance with its regulatory agreements has allowed a shift of the Company’s attention to operating a conventional commercial and retail bank and providing competitive financial services and exceptional customer service to the communities we serve. We continue to increase our emphasis and focus on loan origination and core deposit growth.
Net interest income was $12.4 million for the three months ended December 31, 2010 and was significantly impacted by the purchase accounting adjustments to the interest earning assets and interest bearing liabilities. Additionally, the high level of cash and highly liquid investment securities maintained during the three months ended December 31, 2010, while available to be redeployed to fund higher yielding assets as such opportunities arise, have an unfavorable impact on the margin and the overall yield on earning assets is unfavorably impacted these lower yielding assets . Net interest income for the nine months ended September 30, 2010 was $32.8 million. Net interest income for this period was impacted by the increase in the net interest margin due to reductions of the cost of interest bearing deposits and the successful repricing or replacement of maturing higher priced time deposits with lower cost funding in this continuing low interest rate environment. Partially offsetting the increase in the net interest margin was continued higher levels of nonperforming loans and the change in asset mix resulting in lower volumes of higher yielding loans and investment securities. Net interest income was $45.4 million for the year ended December 31, 2009. The monetary policy pursued by the Federal Reserve affects market interest rates including the prime rate, our loan yields, our deposit and borrowing costs and our net interest margin. Our earning assets and deposits increased with the acquisition of Riverside, offset by increases in non-performing loans.
Non-interest income includes service charges on deposit accounts, investment securities gains and losses, real estate fees and other operating income. Non-interest income for the three months ended December 31, 2010 was $2.7 million. Non-interest income for the nine months ended September 30, 2010 was $9.3 million which included $2.6 million of investment security gains and a $134,000 death benefit received on a bank owned life insurance policy covering a former employee. Non-interest income for the year ended December 31, 2009 was $14.1 million which included $4.3 million of investment security gains and a $1.2 million death benefit received on a bank owned life insurance policy covering a former employee.
Non-interest expense for the three months ended December 31, 2010 was $13.9 million. FDIC insurance continues to remain elevated to higher deposit insurance premiums. Non-interest expense for the nine months ended September 30, 2010 was $65.3 million. Non-interest expense includes $21.7 million of OREO valuation adjustments and related expense and $2.1 million of expense related to our capital raise initiative. Non-interest expense for the year ended December 31, 2009 was $65.3 million. Non-interest expense for 2009 includes a $5.9 million goodwill impairment charge. Salary and employee benefits include increases in employee benefits largely due to employee medical insurance costs, the addition of new positions to manage the higher level of problem assets plus merit adjustments for certain employees and due to the lower level of loan origination activity during 2009, the amount of salary and benefit costs capitalized as direct loan origination costs decreased. FDIC insurance costs include a one-time special assessment of $800,000. Information system conversion costs of $223,000 were incurred in merging the operations of The Bank of Venice and OREO valuation adjustments and expenses increased due to higher levels of foreclosed assets.
Total assets were $1.76 billion as of December 31, 2010 (Successor Company) and $1.71 billion at December 31, 2009 (Predecessor Company). Total loans were $1.00 billion as of December 31, 2010 (Successor Company) and $1.20 billion a year ago (Predecessor Company). Due to the application of the acquisition method of accounting, loans were recorded at their fair value at September 30, 2010. During the nine months ended September 30, 2010, $20.1 million of indirect auto loans were sold.
As of December 31, 2010 the allowance for loan losses totaled $402,000. The allowance represents allowance for loan losses established for loans originated subsequent to September 30, 2010.
Economic and Operating Environment Overview
During 2010 the national economic recession reached a plateau reflecting stable but historically high levels of unemployment and signs that economic activity is beginning to increase. In our local markets the economic contraction that began in late 2006 and early 2007 continued with unemployment in Florida reaching 12% by the end of 2010. Declining retail sales and lower personal income also reflect the contracting economic environment in our local markets.
While global and national financial market volatility and liquidity concerns receded towards the end of the year and the banking system began to stabilize along with economic fundamentals. Due largely to the accommodative monetary policy maintained by the Federal Reserve system, liquidity concerns in the national banking system lessened during the second half of the year.
In response to the continuing economic stress, the Federal Reserve maintained an accommodating monetary policy through open market transactions and maintained the targeted fed funds rate at 0% to 0.25% throughout 2010. Accordingly, the prime rate remained at 3.25% during the year.
The extended economic downturn on a national and local basis has continued to adversely impact our individual and business customers. The markets we serve continue to be among the most severely impacted in the country. The continuing economic stress to consumers and local businesses was apparent during 2010 as we continued to encounter higher than historical levels of borrowers who become unable to continue meeting the contractual terms of their loans.
Analysis of Financial Condition
Successor Company
Our assets totaled $1.76 billion at year ended December 31, 2010. Total loans at December 31, 2010 were $1.00 billion. Due to the application of the acquisition method of accounting, loans were recorded at their fair value at September 30, 2010.
Total deposits were $1.37 billion at December 31, 2010. Borrowed funds, consisting of Federal Home Loan Bank (FHLB) advances, short-term borrowings, notes payable and subordinated debentures, totaled $201.2 million at December 31, 2010.
Shareholders’ equity was $176.8 million at December 31, 2010.
Predecessor Company
Our assets totaled $1.71 billion at year ended December 31, 2009. Total loans were $1.20 billion at December 31, 2009.
Total deposits were $1.37 billion at December 31, 2009. Borrowed funds, consisting of FHLB advances, short-term borrowings, notes payable and subordinated debentures, totaled $268.5 million at December 31, 2009.
Shareholders’ equity was $55.5 million at December 31, 2009.
Results of Operations
Net income
Three months ended December 31, 2010:
The Company reported net income of $560,000 for the three months ended December 31, 2010. Increases in net interest income are primarily due to the impact of the purchase accounting adjustments which revalued market deposits and borrowings to yield market interest rates as of September 30, 2010. The provision for loan losses of $402,000 recorded reflects the allowance for loan losses established for loans originated subsequent to September 30, 2010. No net charge-offs or losses on the disposition of other real estate owned were recorded as credit losses experienced were incorporated in the net discounts recorded on loans and other real estate acquired as of September 30, 2010.
Nine months ended September 30, 2010:
The net loss for the nine months ended September 30, 2010 was $52.8 million. Basic and diluted loss per common share was $205.64.
The loss on average assets for the nine months ended September 30, 2010 was 4.22%. On the same basis, the loss on average shareholders’ equity was 144.96% for the same period of 2010.
Contributing to the loss during the nine months ended September 20, 2010 were: $21.7 million of valuation adjustments, losses on sale and operating expenses associated with foreclosed real estate; no tax benefit recorded in the current period as a result of the Company’s deferred tax assets being fully reserved; and $2.1 million in expenses incurred in connection with our capital raise activities and the termination of a related consulting agreement.
Year ended 2009 compared with 2008:
The net loss for 2009 was $61.5 million compared to a net loss of $20.9 million for 2008. Basic and diluted loss per common share for 2009 was $433.27, as compared to basic and diluted loss per common share of $145.02 in 2008.
The loss on average assets for 2009 was 3.47% compared to a loss on average assets of 1.36% for 2008. On the same basis, the loss on average shareholders’ equity was 53.92% for 2009 compared to 20.4% for 2008.
Contributing significantly to the loss during 2009 were the $42.3 million provision for loan losses, the valuation allowance against deferred income tax assets of $30.4 million and the goodwill impairment charge of $5.9 million, partially offset by $5.1 million in net gains on securities sold and a $1.2 million gain resulting from the death benefit received from a Bank owned life insurance policy covering a former employee. In response to continued slowing economic activity and softening real estate values in our markets, our allowance for loan losses increased to $29.1 million or 2.43% of total loans, resulting from our provision for loan losses of $42.3 million exceeding net charge-offs of $37.0 million for the period. For additional information on these items, see the sections that follow entitled “Allowance and Provision for Loan Losses” and “Investment Portfolio”, respectively.
Net interest income
Net interest income represents the amount by which interest income on interest-earning assets exceeds interest expense incurred on interest-bearing liabilities. Net interest income is the largest component of our income, and is affected by the interest rate environment, and the volume and the composition of interest-earning assets and interest-bearing liabilities. Our interest-earning assets include loans, federal funds sold and securities purchased under agreements to resell, interest-bearing deposits in other banks, and investment securities. Our interest-bearing liabilities include deposits, federal funds purchased, subordinated debentures, advances from the FHLB and other short-term borrowings.
Rate and volume variance analyses allocate the change in interest income and interest expense between that which is due to changes in the rate earned or paid for specific categories of assets and liabilities and that which is due to changes in the average balance between two periods. The Company is unable to provide a rate and volume variance analyses in this discussion because there are no comparable periods as the periods required to be presented are of different lengths. Because of the purchase accounting adjustments, the amounts for the three month period ended December 31, 2010 cannot be added to the nine months ended September 30, 2010 to get to the full year 2010 to compare to the full year of 2009.
Three Months ended December 31, 2010:
Net interest income was $12.4 million for the three months ended December 31, 2010. The net interest income was significantly impacted by the purchase accounting adjustments to the interest earning assets and interest bearing liabilities. Because of the accretion of new discounts and premiums established by re-valuing the assets and liabilities to their fair value as of September 30, 2010, the rates at which interest income and expense are accrued changed from prior periods irrespective of whether market rates or contractual rates changed. Due to the continued favorable repricing of deposit liabilities coupled with the purchase accounting adjustments the net interest margin increased to 3.16%. Additionally, the high level of cash and highly liquid investment securities maintained during the three months ended December 31, 2010, while available to be redeployed to fund higher yielding assets as such opportunities arise, have an unfavorable impact on the margin and the overall yield on earning assets is unfavorably impacted these lower yielding assets .
Going forward, we expect market short-term interest rates to remain low for an extended period of time. We expect deposit costs to continue to decline but they may decrease more slowly or to a lesser extent than loan yields, or they could increase due to strong demand in the financial markets and banking system for liquidity which may be reflected in elevated pricing competition for deposits. The predominant drivers affecting net interest income are the composition of earning assets, the interest rates paid on our deposits and the net change in non-performing assets.
Nine months ended September 30, 2010:
Net interest income was $32.9 million for the nine months ended September 30, 2010 while the net interest margin was 2.84%. The increase in the net interest margin is due to reductions of the cost of interest bearing deposits and the successful repricing or replacement of maturing higher priced time deposits with lower cost funding in this continuing low interest rate environment. Partially offsetting the increase in the net interest margin was continued higher levels of nonperforming loans and the change in asset mix resulting in lower volumes of higher yielding loans and investment securities.
Interest and dividend income for the nine months of 2010 was impacted by lower balances of loans, higher levels of nonperforming loans and significant declines in market interest rates and the related impact on loan and investment yields. Due to the lower interest rate environment, the lower volumes of higher yielding loans, and the higher level of non-accrual loans, the yield of our loans declined.
Partially offsetting the decline in interest and dividend income, were decreases in interest expense on deposits as a result of lower interest rates paid. The average interest cost of interest bearing deposits declined and the overall cost of interest bearing liabilities declined.
Year ended 2009 compared with 2008:
Net interest income was $45.4 million for the year ended December 31, 2009, compared to $44.7 million for the same period in 2008. The $731,000 or 2% increase was due to the significant increase in interest earning assets and interest bearing liabilities as a result of the assumption of the Riverside deposits and investment of the proceeds and the growth of the Company. The 34 basis point decrease in the net interest margin from 3.10% to 2.76% substantially offset the effect of the growth of the balance sheet.
The net interest margin continued to be adversely impacted by the level of nonaccrual loans and non-performing assets which reduced the margin by an estimated 19 basis points during the twelve months ended December 31, 2009. The utilization of the proceeds from the Riverside transaction to reduce borrowings and brokered time deposits and purchase investment securities further reduced the net interest rate spread because a greater portion of the Company’s assets were comprised of lower yielding investment securities and short-term money market investments. We continue to maintain a higher level of short-term investments in light of the continuing economic stress and elevated volatility of financial markets, which has also reduced the margin.
The $7.0 million decrease in interest and dividend income compared to 2008 was mainly attributable to decreased average rates on loan balances and investment securities due primarily to the 400 basis point decrease in prime rate and the significant decline in other interest rates combined with a higher level of non-performing loans. Partially offsetting this decline were decreases in the interest cost of transaction accounts, time deposits and borrowings due to decreases in deposit interest rates paid and other market interest rates. Increases in balances and changes in product mix, favoring higher yielding products, led to an increase in interest expense on savings deposits.
Interest rates during 2009 were significantly lower than the prior year period due to the highly stimulative monetary policies undertaken by the Federal Reserve beginning in the third quarter of 2007. As a result of the actions taken by the Federal Reserve, the prime rate declined from 7.25% in the first quarter of 2008 to 3.25% by the fourth quarter of 2008 and has remained at that level in 2009.
Due to the rapid and significant decline in the prime rate, the overall lower interest rate environment and the higher level of non-performing loans, the yield on our loans declined 93 basis points. The yield of our interest earning assets declined 117 basis points in 2009 compared to 2008 due to the reduction in the yield on our loans and the significant increase in lower yielding investment securities and short-term money market investments.
The lower interest rate environment also resulted in a significant decline in the interest cost of interest bearing liabilities. The average interest cost of interest bearing deposits declined by 105 basis points and the overall cost of interest bearing liabilities declined by 99 basis points. Due to the rapidly declining interest rate environment and highly competitive deposit pricing on a local and national basis, we were not able to reduce the cost of our deposits as quickly and to the same extent as the decline in our earning asset yield.
The following table presents average balances of the Company, the taxable-equivalent interest earned, and the rate paid thereon during the three months ended December 31, 2010 and the nine months ended September 30, 2010.
The following table presents the average balances and yields for interest earning assets and interest bearing liabilities for the years ending December 31, 2009 and 2008.
Average Balance Sheets
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(1)
Average loans include non-performing loans. Interest on loans includes loan fees of $498 in 2009, $420 in 2008.
(2)
Interest income and rates include the effects of a tax equivalent adjustment using applicable Federal tax rates in adjusting tax exempt interest on tax exempt investment securities and loans to a fully taxable basis.
(3)
Net interest margin is net interest income divided by average total interest-earning assets.
Changes in net interest income
The table below details the components of the changes in net interest income for 2009 compared to 2008. For each major category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes due to average volumes and changes due to rates, with the changes in both volumes and rates allocated to these two categories based on the proportionate absolute changes in each category.
(1) Interest income includes the effects of a tax equivalent adjustment using applicable federal tax rates in adjusting tax exempt interest on tax exempt investment securities and loans to a fully taxable basis.
(2) Average loan volumes include non-performing loans which results in the impact of the nonaccrual of interest being reflected in the change in average rate on loans.
Non-interest income
The following table presents the principal components of non-interest income for the three months ended December 31, 2010, nine months ended September 30, 2010 and years ended December 31, 2009 and 2008:
The Company is unable to provide a comparable analysis in this discussion because there are no comparable periods, as the periods required to be presented are of different lengths. During the year ended December 31, 2009 a gain of $1.2 million was recognized resulting from the death benefit received from a bank owned life insurance policy covering a former employee. Additionally, during the nine months ended September 30, 2010, a $344,000 loss was recognized on the sale of approximately $20.1 million of indirect auto loans.
2009 compared to 2008:
Excluding the effect of investment security gains, non-interest income was $9.8 million in 2009 compared to $6.1 million 2008. The increase is due primarily to a gain of $1.2 million resulting from the death benefit received from a bank owned life insurance policy covering a former employee and the acquisition of Riverside which contributed $1.6 million of service charge and other income during the period.
Residential mortgage originations were $126 million in 2009 compared to $154 million in 2008. Residential loans originated and sold increased from $46.8 million in 2008 to $60.4 million in 2009 and fees on mortgage loans sold increased from $775,000 to $1.1 million for the respective periods.
Investment advisory and trust fees from Naples Capital Advisors and the Bank’s trust department increased from $555,000 in 2008 to $997,000 in 2009.
Non-interest expenses
The following table presents the principal components of non-interest income for the three months ended December 31, 2010, nine months ended September 30, 2010 and years ended December 31, 2009 and 2008:
The Company is unable to provide a comparable analysis in this discussion because there are no comparable periods, as the periods required to be presented are of different lengths. For the nine months ended September 30, 2010, OREO valuation adjustments and related expenses were $21.8 million reflecting the decline in real estate values determined by updated appraisals, comparable sales and local market trends in asking prices and data from recent closed transactions. FDIC insurance costs of $3.5 million related to higher deposit insurance premium rates. Capital raise expense of $2.1 million related to our capital raising initiatives and the termination of a related consulting agreement. During the year ended December 31, 2009, there was a goodwill impairment charge of $5.9 million and a one-time special FDIC assessment of $800,000.
During the nine months ended September 30, 2010, there was $561,000 of stock based compensation expense related to the accelerated vesting of stock options and restricted stock due to the closing of the NAFH Investment on September 30, 2010.
2009 compared to 2008:
Non-interest expense increased $14.4 million, or 28%, to $65.3 million compared to $51.0 million in 2008. Of this increase, $6.2 million is attributed to the assumed former Riverside operations and $5.9 million is attributable to a goodwill impairment charge, which includes $1.2 million of goodwill relating to the Riverside acquisition. Excluding the effect of the former Riverside operations and goodwill impairment charge, FDIC insurance costs increased primarily due to a one-time special assessment, higher deposit insurance premium rates and growth of deposits. Information system conversion costs were incurred in merging the operations of The Bank of Venice and OREO write-downs and expenses increased due to higher levels of foreclosed assets. Salaries and employee benefits costs in 2009 included severance costs, increased employee medical insurance benefits costs, incremental cost of additional staff to manage the higher level of problem assets and the impact of merit adjustments for certain employees.
Salaries and employee benefits increased $4.1 million in 2009 relative to 2008. Salaries and employee benefits of $1.9 million reflect the hiring of new employees in connection with the Riverside transaction. Severance costs accounted for approximately $545,000 of the increase and employee benefits increased by $391,000 largely due to employee medical insurance costs. The addition of new positions to manage the higher level of problem assets and additional Riverside branches plus merit adjustments for certain employees resulted in approximately $928,000 of increased compensation related expenses. Additionally, due to the lower level of loan origination activity during 2009, the amount of salary and benefits costs capitalized as direct loan origination costs decreased by approximately $301,000 as compared to 2008.
There was a $903,000 increase in occupancy expense in 2009 as compared to 2008. Excluding the $1.5 million of occupancy costs related to the operations of the former Riverside branch network and facilities, the Company would have had a $614,000 decrease in occupancy costs for 2009. This decrease is a result of our continued focus on consolidating facilities and containing operating costs.
The first quarter of 2008 included $1.2 million in write-downs of repossessed vehicles and related assets attributable to the restructuring of our indirect lending operations.
Other operating expense for 2009 includes $2.8 million attributable to the former Riverside operations including $890,000 in amortization of acquisition related intangibles and $698,000 of FDIC insurance assessments.
Legal and professional fees in 2009 increased by $713,000 due principally to higher legal fees incurred in managing and resolving non-performing loans and assets.
An increase in the cost of FDIC insurance assessments of $2.8 million relative to 2008 is due primarily to a special assessment of approximately $800,000, higher deposits and a higher deposit insurance premium rate. The special assessment was charged to all FDIC insured institutions during 2009 based on assets.
Other operating expense also includes $223,000 of information system conversion costs related to The Bank of Venice merger and non-facility related insurance costs increased by $571,000 to $870,000 in 2009.
Foreclosed asset related expenses of $3.1 million during 2009 included approximately $1.8 million of valuation adjustments on nine properties due to the decline in real estate values reflected in updated appraisals as well as net losses of $168,000 recognized on the sales of thirteen properties.
Provision for income taxes
The provision for income taxes includes federal and state income taxes. Fluctuations in effective tax rates reflect the effect of the differences in the inclusion or deductibility of certain income and expenses, respectively, for income tax purposes. The effective income tax rate for the three months ended December 31, 2010 was 31%. As of December 31, 2010, management considered the need for a valuation allowance and, based upon its assessment of the relative weight of the positive and negative evidence available at the time of the analysis, concluded that a valuation allowance was not necessary as temporary differences which would become recognizable for tax purposes but considered built in losses in excess of the annual limitations established by the Internal Revenue Code due to the NAFH Investment were assigned no fair value in the application of the acquisition method of accounting.
No tax benefit was recorded during the nine months ended September 30, 2010 due to an offsetting increase in the valuation allowance against deferred taxes. The effective income tax rates for the years ended December 31 2009, and 2008 were (28%) and 38%, respectively. The income tax expense reported during 2009 was due to the recognition of a full valuation allowance against our deferred tax assets as of December 31, 2009, of which $30.4 million was recorded as income tax expense and the $1.2 million relating to unrealized losses on available for sale securities was recorded as an adjustment to equity through accumulated other comprehensive income.
A valuation allowance related to deferred tax assets is required when it is considered more likely than not (greater than 50% likelihood) that all or part of the benefit related to such assets will not be realized. In assessing the need for a valuation allowance, management considered various factors including the significant cumulative losses we had incurred prior to the Investment by NAFH coupled with the expectation that our future realization of deferred taxes will be limited as a result of a planned capital offering. These factors represent the most significant negative evidence that management considered in concluding that a full valuation allowance was necessary at December 31, 2009. Excluding the impact of the valuation allowance, the effective tax benefit would have been approximately 35% for 2009. This benefit was reduced by the impairment charge recorded against non-deductible goodwill which was partially offset by the impact of a non-taxable gain resulting from the receipt of proceeds from a life insurance policy covering a former employee. The benefit during 2008 was higher than statutory rates primarily due to the recognition of a state income tax credit related to the Company’s funding of affordable housing construction costs for local charitable organizations.
Our future effective income tax rate will fluctuate based on the mix of taxable and tax free investments we make and our overall level of taxable income. See Notes 1 and 12 of our consolidated financial statements for additional information about the calculation of income tax expense and the various components thereof. Additionally, there were no unrecognized tax benefits at December 31, 2010, and we do not expect the total of unrecognized tax benefits to significantly increase in the next twelve months.
Loan Portfolio
The loan portfolio is comprised of loans located within the Company’s three primary markets: Florida Keys (Monroe County), south Miami-Dade County and Southwest Florida (Collier and Lee Counties). Since the Florida Keys primary industry is tourism, commercial loan demand is primarily for resort, hotel, restaurant, marina, and related real estate secured property loans. We serve this market by offering long-term, adjustable rate financing to the owners of these types of properties for acquisition and improvements. As our business has expanded into the Southwest Florida market, the resulting geographic diversification provided more industry-based diversity to our loan portfolio.
The cost of living in Monroe County is higher in comparison to other counties in Florida due in large part to the limited and expensive real estate with various construction restrictions and environmental considerations. Accordingly, collateral values on loans secured by property in this market are greater. Collier and Lee counties in Southwest Florida have historically been higher growth communities and the majority of the growth of our commercial loan portfolio in recent years has been generated by serving this market.
Loans are expected to produce higher yields than investment securities and other interest-earning assets. The absolute volume of loans and the volume as a percentage of total earning assets are important determinants of the net interest margin. Total loans were $1.00 billion at the end of 2010. As of December 31, 2010, real estate mortgage loans consisted of, commercial real estate mortgage loans of $600.4 million, residential loans of $225.9 million, construction and vacant land of $38.9, commercial and agricultural loans of $72.7 million. The indirect auto portfolio was $28.0 million at December 31, 2010. The balance of outstanding indirect loans declined in 2010 primarily due to an asset sale in March of 2010 of $20.1 million.
The following table presents the composition our loan portfolio at December 31:
Two of the most significant components of our loan portfolio are commercial real estate and construction and vacant land. Our goal of maintaining high standards of credit quality include a strategy of diversification of loan type and purpose within these categories. The following charts illustrate the composition of these portfolios as of December 31:
The contractual maturity distribution of our loan portfolio at December 31, 2010 is indicated in the table below. The majority of these are amortizing loans.
Allowance and Provision for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses in the loan portfolio. Our formalized process for assessing the adequacy of the allowance for loan losses and the resultant need, if any, for periodic provisions to the allowance charged to income, includes both individual loan analyses and loan pool analyses. Individual loan analyses are periodically performed on loan relationships of a significant size, or when otherwise deemed necessary, and primarily encompass commercial real estate and other commercial loans. The result is that commercial real estate loans and commercial loans are divided into the following risk categories: Pass, Special Mention, Substandard and Loss. The allowance consists of specific and general components. When appropriate, a specific reserve will be established for individual loans based upon the risk classifications and the estimated potential for loss. The specific component relates to loans that are individually classified as impaired. Otherwise, we estimate an allowance for each risk category. The general allocations to each risk category are based on factors including historical loss rate, perceived economic conditions (local, national and global), perceived strength of our management, recent trends in loan loss history, and concentrations of credit.
Home equity loans, indirect auto loans, residential loans and consumer loans generally are not analyzed individually and or separately identified for impairment disclosures. These loans are grouped into pools and assigned risk categories based on their current payment status and management’s assessment of risk inherent in the various types of loans. The allocations are based on the same factors mentioned above.
Senior management and the Board of Directors review this calculation and the underlying assumptions on a routine basis not less frequently than quarterly.
Due to the closing of the NAFH Investment on September 30, 2010, which resulted in their ownership of approximately 99% of the Company, immediately following the Investment, significant preliminary accounting adjustments were recorded resulting in the Company’s balance sheet being revalued to fair value. The most significant adjustments related to loans which previously were recorded based upon their contractual amounts and were adjusted to reflect September 30, 2010 estimated fair values. During the nine months of 2010, prior to the application of adjustments related to the application of the acquisition method of accounting, the provision for loan losses reflected increases in the amount of required valuation allowances on impaired loans. The allowance for loan losses had increased due primarily to the impact of recent historical charge-off experience on the factors used in estimating the allowance for loan losses. Partially offsetting the impact of historical loss rate factors used in estimating the provision for loan losses were overall declines in loan balances outstanding, declines in loans classified as impaired and changes in the mix of loan types. As of September 30, 2010, due to the application of the acquisition method of accounting loans were recorded at fair value and no allowance for loan losses was required. The provision for loan losses of $402,000 at December 31, 2010, reflects the allowance for loan losses established for loans originated subsequent to September 30, 2010.
The provision for loan losses is a charge to income in the current period to replenish the allowance and maintain it at a level that management has determined to be adequate to absorb estimated incurred losses in the loan portfolio. Our provision for loan losses was $29.7 million for the nine months ended September 30, 2010, $42.3 million and $28.2 million for the years ended December 31, 2009 and 2008, respectively. The provision for loan losses was impacted by many factors including changes in the value of real estate collateralizing loans, net charge-offs, the decline in loans outstanding, the decline in impaired loans, historical loss rates and the mix of loan types. The higher provision for loan losses in 2010 and 2009 was primarily attributable to the national and local market economic recession and the continued financial challenges of our consumer and commercial customers as well as the increase in our nonperforming loans, delinquencies and charge-offs.. Net charge-offs were $26.4 million, or 2.33% of average loans during the first nine months of 2010, and $37.0 million and $19.4 million, or 3.01% and 1.64% of average loans as of December 31, 2009 and 2008, respectively.
Our provision for loan losses in future periods will be influenced by the differences in actual credit losses resulting from the resolution of problem loans from the estimated credit losses used in determining the estimated fair value of loans as of September 30, 2010. As we have not yet finalized our analysis of the estimated fair value of loans or the estimated amount of credit losses, these amounts may change significantly. For loans originated following the NAFH Investment, the provision for loan losses will be affected by the loss potential of impaired loans and trends in the delinquency of loans, non-performing loans and net charge offs, which cannot be reasonably predicted.
Management continuously monitors and actively manages the credit quality of the entire loan portfolio and will continue to recognize the provision required to maintain the allowance for loan losses at an appropriate level.
Changes affecting the allowance for loan losses are summarized below:
While no portion of the allowance is in any way restricted to any individual loan or group of loans and the entire allowance is available to absorb probable incurred credit losses from any and all loans, the following table represents management’s best estimate of the allocation of the allowance for loan losses to the various segments of the loan portfolio based on information available as of December 31. The provision for loan losses of $402,000 at December 31, 2010, reflects the allowance for loan losses established for loans originated subsequent to September 30, 2010.
Impaired Loans
Non-performing loans and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one category. A loan is considered impaired when it is probable that not all principal and interest amounts will be collected according to the loan contract. Generally, residential mortgages, commercial and commercial real estate loans exceeding certain size thresholds established by management are individually evaluated for impairment. Nonaccrual loans and restructured loans where loan term concessions benefitting the borrowers have been made are generally designated as impaired. The application of purchase accounting due to the September 30, 2010 NAFH Investment impacted the disclosure for impaired loans. All loans, impaired as well as non-impaired loans were recorded in the financial statements at their fair value and the allowance for loan loss was eliminated because the fair value is determined by the net present value of the expected cash flows taking into consideration the credit quality. Consequently, after recording the purchase accounting adjustment, none of the loans have a carrying amount greater than their fair value.
Within the context of the accounting for impaired loans described in the preceding paragraph, there were no impaired loans after the purchase accounting adjustment and based on payments received during the three months ended December 31, 2010 compared to the estimate of expected cash flows developed as of September 30, 2010, no new impairment was identified.
As of December 31, 2009, impaired loans presented in the table below include the $72.8 million of nonperforming loans, other than indirect and consumer loans. Impaired loans as of December 31, 2009 also include $35.9 million of restructured loans which were in compliance with modified terms and not reported as non-performing. Impaired loans also include loans which were not classified as non-accrual, but otherwise meet the criteria for classification as an impaired loan (i.e. loans for which the collection of all principal and interest amounts as specified in the original loan contract are not expected, or where management has substantial doubt that the collection will be as specified, but is still expected to occur in its entirety). Collectively, these loans comprise the potential problem loans individually considered along with historical portfolio loss experience and trends and other quantitative and qualitative factors applied to the balance of our portfolios in our evaluation of the adequacy of the allowance for loan losses.
If a loan is considered to be impaired, a portion of the allowance is allocated so that the carrying value of the loan is reported at the present value of estimated future cash flows discounted using the loan’s original rate or at the fair value of collateral, less disposition costs, if repayment is expected solely from the collateral. Impaired loans are as follows:
Non-Performing Assets
Non-performing assets include non-accrual loans and investments securities, repossessed personal property, and other real estate. Loans and investments in debt securities are placed on non-accrual status when management has concerns relating to the ability to collect the principal and interest and generally when such assets are 90 days past due. Non-performing assets were as follows for the periods ending December 31:
__________
(1)
In December 2006, the Bank stopped accruing interest on a loan pursuant to a ruling made by the USDA. Accordingly, the loan was included in total non-accrual loans as of December 31, 2006 and 2007. During 2008, the USDA repaid the guaranteed portion of the loan in accordance with the provisions of the guarantee agreement. Other non-accrual loans at December 31, 2006 are primarily indirect auto loans.
Non-accrual loans as of December 31, 2009 and 2008 are comprised of the following:
(2)
In December 2007, we placed a collateralized debt obligation (“CDO”) collateralized primarily by homebuilders, REITs, real estate companies and commercial mortgage backed securities on non-accrual. This security had an original cost of $6.0 million. During 2008, two additional similarly secured collateralized debt obligations with original costs of $2.0 million each were also placed on nonaccrual. As of December 31, 2007 and throughout 2008, the estimated fair value of these securities declined further and management has periodically deemed such declines other than temporary. Through December 31, 2008, we had recorded cumulative realized losses totaling $9.2 million relating to these securities. During 2009, the remaining balance of these securities was written off and an additional CDO with an original cost of $5.0 million, collateralized by trust preferred securities of banks and insurance companies, was placed on nonaccrual. As this security has been downgraded and interest payments are currently being deferred, the estimated fair value of this security had declined to approximately $759,000 as of December 31, 2009. Due to the NAFH Investment and the application of the acquisition method of accounting, the recorded investment in this remaining CDO was adjusted to its September 30, 2010 estimated fair value of $807,000. As of December 31, 2010, the estimated fair value had declined to $795,000. The estimated fair values for this CDO are based upon analyses performed by an independent third-party engaged by the Company as of December 31, 2010 and 2009 which estimated the fair value and credit loss potential of the security. Based upon our review of the analysis and the assumptions used therein, we believe this decline to be temporary in nature based upon current projections of the performance of the underlying collateral which indicate that the entirety of principal and interest owed will be collected at maturity. For additional details on these and other investment securities, see the section of management’s discussion and analysis that follows entitled “Investment Portfolio”.
(3)
In 1998, TIB Bank made a $10.0 million loan to construct a lumber mill in northern Florida. Of this amount, $6.4 million had been sold by the Bank to other lenders. The loan was 80% guaranteed as to principal and interest by the U.S. Department of Agriculture (USDA). In addition to business real estate and equipment, the loan was collateralized by the business owner’s interest in a trust. Under provisions of the trust agreement, beneficiaries cannot receive trust assets until November 2010. As of December 31, 2010, the trust is in the process of liquidation and determining the distributions payable to the trust’s beneficiaries.
The portion of this loan guaranteed by the USDA and held by us was approximately $1.6 million. During the second quarter of 2008, the USDA paid the Company the principal and accrued interest and allowed the Company to apply other proceeds previously received to reduce capitalized liquidation costs and protective advances. The non-guaranteed principal and interest ($2.0 million at December 31, 2010 and December 31, 2009) and the reimbursable capitalized liquidation costs and protective advance costs totaling approximately $146,000 and $126,000 at December 31, 2010 and 2009, respectively, are included as “other assets” in the financial statements.
Florida law requires a bank to liquidate or charge off repossessed real property within five years, and repossessed personal property within six months. Since the property had not been liquidated during this period, the Bank charged-off the non guaranteed principal and interest totaling $2.0 million at June 30, 2003, for regulatory purposes. Since we believe this amount is ultimately realizable, we did not write off this amount for financial statement purposes under generally accepted accounting principles.
Liquidity and Rate Sensitivity
Liquidity represents the ability to provide steady sources of funds for loan commitments and investment activities, as well as to provide sufficient funds to cover deposit withdrawals and payments of debt, off-balance sheet obligations and operating obligations. Funds can be obtained from operations by converting assets to cash, by attracting new deposits, by borrowing, by raising capital and other ways. We manage the levels, types and maturities of earning assets in relation to the sources available to fund current and future needs to ensure that adequate funding will be available at all times.
Major sources of net increases in cash and cash equivalents are as follows for the three months ended December 31, 2010 and the nine months ended September 30, 2010 and two years ending December 31, 2009 and 2008:
As discussed in Note 17 of the Consolidated Financial Statements, the Company had unfunded loan commitments and unfunded letters of credit totaling $60.7 million at December 31, 2010. We believe the likelihood of these commitments either needing to be totally funded or funded at the same time is low. However, should significant funding requirements occur, the Company has available borrowing capacity from various sources as discussed below.
In addition to maintaining a stable core deposit base, we maintain adequate liquidity primarily through the use of investment securities, short term investments such as federal funds sold and unused borrowing capacity. The Bank has invested in Federal Home Loan Bank stock for the purpose of establishing credit lines with the Federal Home Loan Bank. The credit availability to the Bank is based on a percentage of the Bank’s total assets as reported in their most recent quarterly financial information submitted to the Federal Home Loan Bank and subject to the pledging of sufficient collateral. At December 31, 2010, there were $125.0 million in advances outstanding, with a fair market value of $131.1 million, in addition to $25.2 million in letters of credit including $25.1 million used in lieu of pledging securities to the State of Florida to collateralize governmental deposits. As of December 31, 2010, collateral availability under our agreements with the Federal Home Loan Bank provided for total borrowings of up to approximately $187.7 million of which $31.8 million was available. On January 7, 2010, the FHLB notified the Bank that the credit availability had been rescinded and the rollover of existing advances outstanding is limited to twelve months or less. On December 23, 2010, the FHLB notified the Bank that the credit availability had been re-established and any advance drawdown will be limited to twelve months or less. On February 7, 2011, the FHLB notified the Bank that the twelve month limitation on the term of advances had been eliminated.
The Bank had an unsecured overnight federal funds purchased accommodations up to a maximum of $30.0 million from its correspondent bank as of December 31, 2010. As of December 31, 2010, collateral availability under our agreement with the Federal Reserve Bank of Atlanta (“FRB”) provided for up to $39.7 million of borrowing availability from the FRB discount window. We believe that we have adequate funding sources through unused borrowing capacity from our correspondent banks and FRB, unpledged investment securities, loan principal repayment and potential asset maturities and sales to meet our foreseeable liquidity requirements.
During the second, third, and fourth quarters of 2008 and the first, second, and third quarters of 2009, the Company’s Board of Directors declared 1% (one percent) stock dividends to holders of record as of July 7, 2008, September 30, 2008, December 31, 2008, March 31, 2009, June 30, 2009 and September 30, 2009 respectively. The stock dividends were distributed on July 17, 2008, October 10, 2008, January 10, 2009, April 10, 2009, July 10, 2009 and October 10, 2009. The decision to replace our quarterly cash dividend with a stock dividend was made after consideration of the current and projected economic and operating environment and to conserve cash and capital resources at the holding company to support the potential capital needs of the Bank. The Company affected a 1 for 100 reverse stock split and launched a rights offering to shareholders of record as of July 12, 2010 which resulted in approximately $8.0 million of additional capital and compliance with the continued listing requirements of the Nasdaq Capital Market.
On July 2, 2009, TIB Bank entered into a Memorandum of Understanding, which is an informal agreement with bank regulatory agencies that it will move in good faith to increase its Tier 1 leverage capital ratio to not less than 8% and its total risk-based capital ratio to not less than 12% by December 31, 2009 and maintain these higher ratios for as long as this agreement is in effect. At September 30, 2010 and December 31, 2009, these elevated capital ratios were not met. On July 2, 2010, TIB Bank entered into a Consent Order, a formal agreement, with bank regulatory agencies under which, among other things, the Bank has agreed to maintain a Tier 1 capital ratio of at least 8% of total assets and a total risk based capital ratio of at least 12%. At December 31, 2010, TIB had a Tier 1 leverage capital ratio of 8.06% and a total risk-based capital ratio of 13.06%. The Consent Order also governs certain aspects of the Bank’s operations including a requirement that it reduce the balance of assets classified substandard and doubtful by at least 70% over a two-year period, and not undertake asset growth of 5% or more per year without prior approval from the regulatory agencies. The Consent Order supersedes the Memorandum of Understanding entered into with regulatory agencies on July 2, 2009.
As of December 31, 2010, our holding company had cash of approximately $3.5 million. This cash is available for providing capital support to the Bank and for other general corporate purposes. The Company received a request from the FRB for the Company’s Board of Directors to adopt a resolution that it will not declare or pay any dividends on its outstanding common or preferred stock, nor will make any payments or distributions on the outstanding trust preferred securities or corresponding subordinated debentures without the prior written approval of the FRB. The Board adopted this resolution on October 5, 2009. The Company notified the trustees of its $20 million trust preferred securities due July 7, 2036 and its $5 million trust preferred securities due July 31, 2031 of its election to defer interest payments on the trust preferred securities beginning with the payments due in October 2009. In January 2010, the Company notified the trustees of its $8 million trust preferred securities due September 7, 2030 of its election to defer interest payments on the trust preferred securities beginning with the payment due March 2010. The Company also notified the Treasury of its election to defer the dividend payment on the Series A preferred stock issued under TARP beginning in November 2009. On September 22, 2010, the Company entered into a written agreement with the FRB that, among other things, the Company will not declare or pay any dividends on its outstanding common or preferred stock, nor will make any payments or distributions on the outstanding trust preferred securities or corresponding subordinated debentures without the prior written approval of the FRB. Deferral of the trust preferred securities is allowed for up to 60 months without being considered an event of default. Additionally, the Company may not declare or pay dividends on its capital stock, including dividends on preferred stock, or, with certain exceptions, repurchase capital stock without first having paid all trust preferred interest and all cumulative preferred dividends that are due. At this time it is unlikely that the Company will resume payment of cash dividends on its common stock for the foreseeable future. As previously discussed, on September 30, 2010 we completed the issuance and sale to NAFH of shares of the Company’s common stock, preferred stock and warrant to purchase additional shares of the Company’s stock for aggregate consideration of $175 million. Approximately $12.2 million of the consideration was in the form of a contribution to the Company of all 37,000 shares of preferred stock issued to the Treasury under the TARP Capital Purchase Program and the related warrant to purchase shares of the Company’s Common Stock.
Under state banking law, regulatory approval will be required if the total of all dividends declared in any calendar year by a bank exceeds the bank’s net profits to date for that year combined with its retained net profits for the preceding two years. Based on the level of losses for the prior two years, declaration of dividends by TIB Bank, during 2010, would have required regulatory approval. Therefore, the Company does not expect to receive dividends from the Bank in the foreseeable future.
Closely related to liquidity management is the management of interest-earning assets and interest-bearing liabilities. The Company manages its rate sensitivity position to avoid wide swings in net interest margins and to minimize risk due to changes in interest rates.
Our interest rate sensitivity position at December 31, 2010 is presented in the table below.
We are cumulatively liability sensitive through the five-year time period, and asset sensitive in the over five year timeframe above. Certain liabilities such as non-indexed NOW and savings accounts, while technically subject to immediate re-pricing in response to changing market rates, historically do not re-price as quickly or to the extent as other interest-sensitive accounts. Approximately 14% of our deposit funding is comprised of non-interest-bearing liabilities and total interest-earning assets are greater than the total interest-bearing liabilities. Therefore it is anticipated that, over time, the effects on net interest income from changes in asset yield will be greater than the change in expense from liability cost. Generally, we expect loan and investment yields and deposit costs to continue to decline. However, deposit rates could increase due to demand in the financial markets, banking system and other local markets for liquidity which may be reflected in elevated pricing competition for deposits. The predominant drivers to increase net interest income are the composition of earning assets, the interest rates paid on our deposits and the net change in non-performing assets.
Interest-earning assets and time deposits are presented based on their contractual terms. It is anticipated that run off in any deposit category will be approximately offset by new deposit generation.
As a primary measure of our interest rate risk, we employ a financial model derived from our assets and liabilities which simulates the effect of various changes in interest rates on our projected net interest income. This financial model is our principal tool for measuring and managing interest rate risk. Many assumptions regarding the timing and sensitivity of our assets and liabilities to a change in interest rates are made. We continually review and update these assumptions. This model is updated monthly for changes in our assets and liabilities and we model different interest rate scenarios based upon current and projected economic and interest rate conditions. We analyze the results of these simulations and develop tactics and strategies to attempt to mitigate, where possible, the projected unfavorable impact of various interest rate scenarios on our projected net interest income. We also develop tactics and strategies to increase our net interest margin and net interest income that are consistent with our operating policies.
Investment Portfolio
Contractual maturities of investment securities at December 31, 2010 are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations without call or prepayment penalties. Other securities include mortgage-backed securities and marketable equity securities which are not due at a single maturity date.
Yield by classification of investment securities at December 31, 2010 was as follows:
__________
(1)
Weighted average yields on tax exempt obligations and marketable equity securities have been computed by grossing up actual tax exempt income.
(2)
Excluding the impact of the non-accrual collateralized debt obligation security; the total investment portfolio yield was 2.34%.
The following table presents the amortized cost, unrealized gains, unrealized losses, and fair value for the major categories of our investment portfolio for each reported period:
Available for Sale-December 31, 2010 (Successor Company)
Available for Sale-December 31, 2009 (Predecessor Company)
Available for Sale-December 31, 2008 (Predecessor Company)
Other than temporary impairment of available for sale securities
As of December 31, 2010, we owned three collateralized debt obligation investment securities collateralized by debt obligations of homebuilders, REITs, real estate companies and commercial mortgage backed securities with an aggregate original cost of $10.0 million. Through December 31, 2009, we recorded cumulative other than temporary impairment losses of $10.0 million on these securities. In determining the estimated fair value of these securities, we utilized a discounted cash flow modeling valuation approach which is discussed in greater detail in Note 19 - Fair Value. These securities are floating rate securities which were rated “A” or better by an independent and nationally recognized rating agency at the time of our purchase. In late December 2007, these securities were downgraded below investment grade by a nationally recognized rating agency. Due to the ratings downgrade, and the amount of unrealized loss, management concluded that the loss of value was other than temporary under generally accepted accounting principles and the Company wrote these investment securities down to their estimated fair value. This resulted in the recognition of other than temporary impairment loss of $3.9 million in 2007. During 2008, the estimated fair value of these securities declined further due to the occurrence of additional defaults by certain underlying issuers and changes in the cash flow and discount rate assumptions used to estimate the value of these securities. During 2008, we concluded that the further declines in values were other than temporary under generally accepted accounting principles. Accordingly, we wrote-down these investment securities by an additional $5.3 million. These additional write downs included the complete write off of two of the three securities, with an original cost of $2.0 million each. The third security, with an original cost of $6.0 million was valued at an estimated fair value of $763,000 as of December 31, 2008. During 2009, additional defaults by underlying issuers and corresponding changes in estimated future cash flow assumptions resulted in the write-down of this third security to $0.
As of December 31, 2010, the Company owned a collateralized debt security with an original cost of $5.0 million where the underlying collateral is comprised primarily of trust preferred securities of banks and insurance companies. This security was rated “AA” by a nationally recognized rating agency at the time of our purchase. The inputs used in determining the estimated fair value of this security are Level 3 inputs. In determining the estimated fair value, management utilized a discounted cash flow modeling valuation approach through September 30, 2010. Discount rates utilized in the modeling of these securities were estimated based upon a variety of factors including the market yields of publicly traded trust preferred securities of larger financial institutions and other non-investment grade corporate debt. Cash flows utilized in the modeling of these securities were based upon actual default history of the underlying issuers and varying assumptions of estimated future defaults of issuers. During 2009, the estimated fair value of this security declined further due to the occurrence of downgrades by rating agencies, additional defaults or deferrals by certain underlying issuers and changes in the estimated timing of the future cash flow and discount rate assumptions used to estimate the value of this security. As of December 31, 2009, we engaged an independent third party valuation firm to estimate the fair value and credit loss potential of this security. Management reviewed the assumptions and methodology employed in this analysis and while the assumptions differed from those used in prior quarters to estimate the fair value of the security, the general premise of the methodology of discounting estimated future cash flows based upon the expected performance of the underlying issuers collateralizing the security was consistent with management’s previous approach. Based upon this analysis, as of December 31, 2010, management concluded that the further decline in value does not meet the definition of other than temporary under generally accepted accounting principles because no credit loss has been incurred.
Additionally, during 2007, the market value of an investment in equity securities, which the Company originally acquired in 2003 for $3.0 million to obtain community reinvestment credit, of a publicly owned company declined significantly. During 2007, management determined that the decline was other than temporary; accordingly, we wrote this investment down by $1.8 million. Due to significant further declines in market value during 2008, we wrote this investment down further by $1.1 million in 2008 and decided to sell a portion of this investment in December 2008 to ensure we would fully realize the associated capital loss carryback potential for Federal income tax purposes. In doing so, we recognized an additional realized loss of approximately $124,000 upon the partial disposition of this investment in 2008.
The write downs described above resulted in total recognized other than temporary impairment losses of $763,000, and $6.4 million during 2009, 2008, respectively.
We regularly review each investment security for impairment based on criteria that include the extent to which cost exceeds the estimated fair value, the duration of that market decline, the financial health of and specific prospects for the issuer(s) and our ability and intention with regard to holding the security to maturity. Future declines in the fair value of these or other securities may result in additional impairment charges which may be material to the financial condition and results of operations of the Company. For additional detail regarding our impairment assessment process, see Notes 1 and 4 of the Notes to Consolidated financial statements below.
Deposits
The following table presents the average amount outstanding and the average rate paid on deposits for the three months ended December 31, 2010, nine months ended September 30, 2010 and years ended December 31, 2009, and 2008.
The following table presents the maturity of our time deposits at December 31, 2010:
Off-Balance Sheet Arrangements and Contractual Obligations
Our off-balance sheet arrangements and contractual obligations at December 31, 2010 are summarized in the table that follows. The amounts shown for commitments to extend credit and letters of credit are contingent obligations, some of which are expected to expire without being drawn upon. As a result, the amounts shown for these items do not necessarily represent future cash requirements. We believe that our current sources of liquidity are more than sufficient to fulfill the obligations we have as of December 31, 2010 pursuant to off-balance sheet arrangements and contractual obligations.
(1) In first quarter 2011, the director deferred agreements were terminated and the directors participating in the plan each received a lump sum distribution of their respective deferral account balances under the plan.
.
The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. The Bank uses the same credit policies in making commitments to extend credit and generally use the same credit policies for letters of credit as for on-balance sheet instruments.
Commitments to extend credit are legally binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since some of these commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Unused commercial lines of credit, which comprise a substantial portion of these commitments, generally expire within a year from their date of origination. Other loan commitments generally expire in 30 days. The amount of collateral obtained, if any, by the Bank upon extension of credit is based on management’s credit evaluation of the borrower. Collateral held varies but may include security interests in business assets, mortgages on commercial and residential real estate, deposit accounts with the Banks or other financial institutions, and securities.
Standby letters of credit are conditional commitments issued by the Bank to assure the performance or financial obligations of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. The Bank generally holds collateral and/or obtains personal guarantees supporting these commitments.
The Bank is obligated under operating leases for office and banking premises which expire in periods varying from one to twenty years. Future minimum lease payments, before considering renewal options that generally are present, total $3.6 million at December 31, 2010.
Purchase obligations consist of computer and item processing services, and debit and ATM card processing and support services contracted by the Company under long term contractual relationships and based upon estimated utilization.
Long term debt, at December 31, 2010, consists of subordinated debentures totaling $22.9 million These borrowings are further described in Note 11 of the Consolidated Financial Statements
The Bank has invested in FHLB stock for the purpose of establishing credit lines with the FHLB. The credit availability to the Bank is based on the amount of collateral pledged. FHLB advances total $131.1 million at December 31, 2010. These borrowings are further described in Note 10 of the Consolidated Financial Statements.
Other long-term liabilities represent obligations under the non-qualified retirement plan for some of the Predecessor Company’s directors. Under the director retirement plan, the Company pays each participant, or their beneficiary, the amount of board compensation fees that the director has elected to defer and interest in 120 equal monthly installments, beginning the month following the director’s normal retirement date. The amount presented above reflects the future obligation to be paid, assuming no future fee deferrals.
Capital Adequacy
There are various primary measures of capital adequacy for banks and bank holding companies such as risk based capital guidelines and the leverage capital ratio. See Notes 2 and 15 to the Consolidated Financial Statements.
On July 2, 2009, TIB Bank entered into a Memorandum of Understanding, which is an informal agreement, with Bank regulatory agencies that it would move in good faith to increase its Tier 1 leverage capital ratio to not less than 8% and its total risk-based capital ratio to not less than 12% by December 31, 2009 and maintain these higher ratios for as long as this agreement is in effect. At December 31, 2009, these elevated capital ratios were not met. On July 2, 2010, the Bank entered into a Consent Order, which is a formal agreement, with the bank regulatory agencies under which, among other things, the Bank has agreed to maintain a Tier 1 capital ratio of at least 8% of total assets and a total risk based capital ratio of at least 12% within 90 days.
On September 30, 2010, the Company issued and sold to NAFH 7,000,000 shares of Common Stock, 70,000 shares of Series B Preferred Stock and a warrant to purchase up to 11,666,667 shares of Common Stock of the Company for aggregate consideration of $175.0 million. As a result of this investment, the Company increased its level of capital under capital adequacy guidelines.
As of December 31, 2010, the Bank exceeded the level of capital required in order to achieve the capital ratios the Bank agreed to maintain according to the terms of the Consent Order. The risk-based capital ratio of Tier 1 capital to risk-weighted assets was 13.0%, the risk-based ratio of total capital to risk-weighted assets was 13.1%, and the leverage ratio was 8.1%, for TIB Bank.
As of December 31, 2010, the Company’s risk-based capital ratio of Tier 1 capital to risk-weighted assets was 13.3%, its risk-based ratio of total capital to risk-weighted assets was 13.4%, and its leverage ratio was 8.2%.
Inflation
Inflation has an important impact on the growth of total assets in the banking industry and causes a need to increase equity capital higher than normal levels in order to maintain an appropriate equity to assets ratio. We have been able to maintain an adequate level of equity, as previously mentioned and cope with the effects of inflation by managing our interest rate sensitivity position through our asset/liability management program, and by periodically adjusting our pricing of services and banking products to take into consideration current costs.
Critical Accounting Policies
In reviewing and understanding financial information for the Company, you are encouraged to read and understand the significant accounting policies which are used in preparing the consolidated financial statements of the Company. These policies are described in Note 1 to the Consolidated Financial Statements. Of these policies, management believes that the accounting for the allowance for loan losses, impairment of investment securities and the valuation allowance on deferred income tax assets are the most critical.
Losses on loans result from a broad range of causes from borrower specific problems, to industry issues, to the impact of the economic environment. The identification of these factors that lead to default or non-performance under a borrower loan agreement and the estimation of loss in these situations are very subjective. In addition, a dramatic change in the performance of one or a small number of borrowers can have a significant impact on the estimate of losses. As described above under the “Allowance and Provision for Loan Losses” heading, management has implemented a process that has been applied consistently to systematically consider the many variables that impact the estimation of the allowance for loan losses.
Loans acquired in a transfer, including business combinations and transactions similar to the Investment, where there is evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments, are accounted for under accounting guidance for purchased credit-impaired (“PCI”) loans. This guidance provides that the excess of the cash flows initially expected to be collected over the fair value of the loans at the acquisition date (i.e., the accretable yield) is accreted into interest income over the estimated remaining life of the purchased credit-impaired loans using the effective yield method, provided that the timing and amount of future cash flows is reasonably estimable. Accordingly, such loans are not classified as nonaccrual and they are considered to be accruing because their interest income relates to the accretable yield recognized under accounting for purchased credit-impaired loans and not to contractual interest payments. The difference between the contractually required payments and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference.
Subsequent to acquisition, estimates of cash flows expected to be collected are updated each reporting period based on updated assumptions regarding default rates, loss severities, and other factors that are reflective of current market conditions. If the Company has probable decreases in cash flows expected to be collected (other than due to decreases in interest rate indices), the Company charges the provision for credit losses, resulting in an increase to the allowance for loan losses. If the Company has probable and significant increases in cash flows expected to be collected, the Company will first reverse any previously established allowance for loan losses and then increase interest income as a prospective yield adjustment over the remaining life of the pool of loans. The impact of changes in variable interest rates are recognized prospectively as adjustments to interest income. The accounting pools of acquired loans are defined as of the date of acquisition of a portfolio of loans and are comprised of groups of loans with similar collateral types and credit risk.
Impairment of investment securities results in a write-down that must be included in net income when a market decline below cost is other-than-temporary. We regularly review each investment security for impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer(s) and our ability and intention with regard to holding the security to maturity.
A valuation allowance related to deferred tax assets is required when it is considered more likely than not (greater than 50% probability) that all or part of the benefit related to such assets will not be realized. Income tax expense (or benefit) is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.
ITEM 7A:
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk that a financial institution’s earnings and capital, or its ability to meet its business objectives, will be adversely affected by movements in market rates or prices such as interest rates, foreign exchange rates, equity rates, equity prices, credit spreads and/or commodity prices. The Company has assessed its market risk as predominately interest rate risk.
The estimated interest rate risk as of December 31, 2010 was analyzed using simulation analysis of the Company’s sensitivity to changes in net interest income under varying assumptions for changes in market interest rates. The Bank uses customized assumptions run against Bank data by an outsourced provider of Asset liability modeling. The model derives expected interest income and interest expense resulting from an immediate two percentage point increase or decrease parallel shift in the yield curve. The standard parallel yield curve shift uses the implied forward rates and a parallel shift in interest rates to measure the relative risk of change in the level of interest rates.
The analysis indicates an immediate 200 basis point parallel interest rate increase would result in a decrease in net interest income of approximately $659,000 or -1% over a twelve month period. While a 200 basis point parallel interest rate increase ramped over twelve months would result in an increase in net interest income of approximately $1.8 million or 3% over a twelve month period.
The projected impact on our net interest income of a 200 basis point parallel increase of the yield curve and 12 month ramped 200 basis point parallel increase of interest rates are summarized below:
We attempt to manage and moderate the variability of our net interest income due to changes in the level of interest rates and the slope of the yield curve by generating adjustable rate loans and managing the interest rate sensitivity of our investment securities, wholesale funding, and Fed Funds positions consistent with the re-pricing characteristics of our deposits and other interest bearing liabilities. The above projections assume that management does not take any measures to change the interest rate sensitivity of the Bank during the simulation period.
ITEM 8:
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, notes thereto and report of independent registered public accounting firm thereon included on the following pages are incorporated herein by reference.
Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets for the Years Ended December 31, 2010 (Successor) and 2009 (Predecessor)
Consolidated Statements of Operations for the three-month period ended December 31, 2010 (Successor), and the nine-month period ended September 30, 2010 and years Ended December 31, 2009, 2008 (Predecessor)
Consolidated Statements of Changes in Shareholders' Equity for the three-month period ended December 31, 2010 (Successor), and the nine-month period ended September 30, 2010 and years Ended December 31, 2009, 2008 (Predecessor)
Consolidated Statements of Cash Flows for the three-month period ended December 31, 2010 (Successor), and the nine-month period ended September 30, 2010 and years Ended December 31, 2009, 2008 (Predecessor)
Notes to Consolidated Financial Statements for the three-month period ended December 31, 2010 (Successor), and the nine-month period ended September 30, 2010 and years Ended December 31, 2009, 2008 (Predecessor)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
TIB Financial Corp.
Naples, Florida
We have audited the accompanying consolidated balance sheets of TIB Financial Corp. as of December 31, 2010 (Successor) and 2009 (Predecessor), and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for the three-month period ended December 31, 2010 (Successor), the nine-month period ended September 30, 2010 (Predecessor) and the years ended December 31, 2009 and 2008 (Predecessor). The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TIB Financial Corp. as of December 31, 2010 (Successor) and 2009 (Predecessor), and the results of its operations and its cash flows for the three-month period ended December 31, 2010 (Successor), the nine-month period ended September 30, 2010 (Predecessor) and the years ended December 31, 2009 and 2008 (Predecessor), in conformity with U.S. generally accepted accounting principles.
/s/Crowe Horwath LLP
Crowe Horwath LLP
Fort Lauderdale, Florida
March 31, 2011
TIB Financial Corp. and Subsidiaries
Consolidated Balance Sheets
As of December 31,
TIB Financial Corp. and Subsidiaries
Consolidated Statements of Operations
TIB Financial Corp. and Subsidiaries
Consolidated Statements of Operations
(Continued)
See accompanying notes to consolidated financial statements
TIB Financial Corp. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars and shares in thousands except per share data)
TIB Financial Corp. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars and shares in thousands except per share data)
See accompanying notes to consolidated financial statements
TIB Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars and shares in thousands except per share data)
TIB Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars and shares in thousands except per share data)
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Note 1-Summary of Significant Accounting Policies
Principles of Consolidation and Nature of Operations
TIB Financial Corp. is a bank holding company headquartered in Naples, Florida, whose business is conducted primarily through our wholly-owned subsidiaries, TIB Bank (the “Bank) and Naples Capital Advisors, Inc. Together with its subsidiaries, TIB Financial Corp. (collectively the “Company”) has a total of twenty-seven full service banking offices. On February 13, 2009, TIB Bank acquired the deposits (excluding brokered deposits), branch office operations and certain assets from the FDIC as receiver of the former Riverside Bank of the Gulf Coast (“Riverside”). On September 25, 2009, The Bank of Venice, acquired by the Company in April 2007, was merged into TIB Bank. The consolidated financial statements include the accounts of TIB Financial Corp. (Parent Company) and its wholly-owned subsidiaries, TIB Bank and subsidiaries, and Naples Capital Advisors, Inc. All significant inter-company accounts and transactions have been eliminated in consolidation. Additionally, TIBFL Statutory Trust I, TIBFL Statutory Trust II and TIBFL Statutory Trust III were formed in conjunction with the issuance of trust preferred securities as further discussed in Note 11. The Company is not considered the primary beneficiary of the trusts (variable interest entities), therefore the trusts are not consolidated in the Company’s consolidated financial statements, but rather the subordinate debentures are presented as a liability.
TIB Bank is the Company’s primary operating subsidiary. The Bank provides banking services from its twenty-seven branch locations in Monroe, Miami-Dade, Collier, Lee, and Sarasota counties, Florida. The Bank offers a wide range of commercial and retail banking and financial services to businesses and individuals. Account services include checking, interest-bearing checking, money market, certificates of deposit and individual retirement accounts. The Bank offers all types of commercial loans, including: owner-operated commercial real estate; acquisition, development and construction; income-producing properties; working capital; inventory and receivable facilities; and equipment loans. Consumer loan products include residential real estate, installment loans, home equity, home equity lines, and indirect auto loans.
Share and per share amounts have been adjusted to account for the effects of six one percent stock dividends declared by the Board of Directors during 2008 and 2009 which were distributed July 17, 2008, October 10, 2008, January 10, 2009, April 10, 2009, July 10, 2009 and October 10, 2009 to all TIB Financial Corp. common shareholders of record as of July 7, 2008, September 30, 2008, December 31, 2008, March 31, 2009, June 30, 2009 and September 30, 2009, respectively and the effects of the 1 for 100 reverse stock split effective after the close of business on December 15, 2010. As a result of the reverse stock split, every 100 shares of the Company’s common stock issued and outstanding immediately prior to the effective time were combined and reclassified into 1 share of common stock.
North American Financial Holdings, Inc. Investment
On September 30, 2010, (the “Transaction Date”) the Company completed the issuance and sale to North American Financial Holdings, Inc. (“NAFH”) of 7,000 shares of common stock, 70 shares of Series B Preferred Stock and a warrant (the “Warrant”) to purchase up to 11,667 shares of Common Stock of the Company (the “Warrant Shares”) for aggregate consideration of $175,000 (the “Investment”). The consideration was comprised of approximately $162,840 in cash and approximately $12,160 in the form of a contribution to the Company of all 37 outstanding shares of Series A Preferred Stock previously issued to the U.S. Treasury Department (“Treasury”) under the TARP Capital Purchase Program and the related warrant to purchase shares of the Company’s common stock, which NAFH purchased directly from the Treasury. The Series A Preferred Stock and the related warrant were retired on September 30, 2010 and are no longer outstanding. The 70 shares of Series B Preferred Stock received by NAFH converted into an aggregate of 4,667 shares of common stock following shareholder approval of an amendment to increase the number of authorized shares of common stock to 50,000. The Warrant is exercisable, in whole or in part, and from time to time, from September 30, 2010 to March 30, 2012, at an exercise price of $15.00 per Warrant Share.
As a result of the Investment, pursuant to which NAFH acquired approximately 99% (which has subsequently been reduced to approximately 94% as a result of the Rights Offering) of the voting securities of the Company, the Company followed the acquisition method of accounting as required by the Business Combinations Topic of the FASB Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”). Under the rules of the SEC Staff Accounting Bulletin Topic 5J, New Basis of Accounting Required in Certain Circumstances (“SEC SAB T. 5J”) the application of “push down” accounting is required.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Acquisition accounting requires that the assets purchased, the liabilities assumed, and non-controlling interests all be reported in the acquirer’s financial statements at their fair value, with any excess of purchase consideration over the net assets being reported as goodwill. Acquisition accounting requires that the valuation of assets, liabilities, and non-controlling interests be recorded in the acquiree’s records as well. Accordingly, the Company’s Consolidated Financial Statements and transactional records prior to the NAFH Investment reflect the historical accounting basis of assets and liabilities and are labeled “Predecessor Company,” while such records subsequent to the NAFH Investment are labeled “Successor Company” and reflect the push down basis of accounting for the new fair values in the Company’s financial statements. This change in accounting basis is represented in the Consolidated Financial Statements by a vertical black line which appears between the columns entitled “Predecessor Company” and “Successor Company” on the statements and in the relevant notes. The black line signifies that the amounts shown for the periods prior to and subsequent to the NAFH Investment are not comparable.
In addition to the new accounting basis established for assets, liabilities and noncontrolling interests, acquisition accounting also requires the reclassification of any retained earnings from periods prior to the acquisition to be recognized as common share equity and the elimination of any accumulated other comprehensive income or loss and surplus within the Company’s Shareholders’ Equity section of the Company’s Consolidated Financial Statements. Accordingly, retained earnings and accumulated other comprehensive income at September 30, 2010 represent only the results of operations subsequent to September 30, 2010, the date of the NAFH Investment.
Pursuant to the Investment Agreement, shareholders as of July 12, 2010 received non-transferable rights to purchase a number of shares of the Company’s common stock proportional to the number of shares of common stock held by such holders on such date, at a purchase price equal to $15.00 per share, subject to certain limitations. Approximately 533 shares of the Company’s common stock were issued in exchange for approximately $7,776 upon completion of the Rights Offering on January 18, 2011.
Use of Estimates and Assumptions
To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. A material estimate that is particularly susceptible to significant change in the near term is the allowance for loan losses. Another material estimate is the fair value and impairment of financial instruments. Changes in assumptions or in market conditions could significantly affect the fair value estimates.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold, and interest-bearing deposits at the Federal Home Loan Bank of Atlanta and the Federal Reserve Bank of Atlanta. Net cash flows are reported for customer loan and deposit transactions and short term borrowings.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Investment Securities and Other than Temporary Impairment
Investment securities which may be sold prior to maturity are classified as available for sale and are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income. As of September 30, 2010, resulting from the application of acquisition accounting and related fair value adjustments, unrealized gains and losses on investment securities were eliminated as the recorded costs of these investments were adjusted to their fair values. Other securities such as Federal Home Loan Bank stock are carried at cost and are included in other assets on the balance sheets.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method based on the amortized cost of the security sold.
Management regularly reviews each investment security for impairment based on criteria that include the extent to which cost exceeds fair value, the duration of that market decline, the financial health of and specific prospects for the issuer(s) and our ability and intention with regard to holding the security. Future declines in the fair value of these or other securities may result in additional impairment charges which may be material to the financial condition and results of operations of the Company.
Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities classified as available for sale or held-to-maturity are generally evaluated for OTTI under FASB Accounting Standards Codification (“ASC”) 320-10-35. However, certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase of below AAA are evaluated using the model outlined in ASC 325-40-35.
In determining OTTI under the ASC 320-10-35 model, management considers many factors, including but not limited to: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
The second segment of the portfolio uses the OTTI guidance provided by ASC 325-10-35 that is specific to purchased beneficial interests that are rated below “AAA”. Under this model, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.
When OTTI occurs under either model, the amount of the impairment recognized in earnings depends on whether we intend to sell the security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If we intend to sell or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the impairment is required to be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the impairment is separated into the amount representing the credit loss and the amount related to all other factors. The amount of impairment related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the impairment related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Loans Held for Sale
The majority of residential fixed rate mortgage loans originated by TIB Bank are sold servicing released to third parties immediately with temporary recourse provisions. The recourse provisions may require the repurchase of the outstanding balance of loans which default within a limited period of time subsequent to the sale of the loan. The recourse periods vary by investor and extend up to seven months subsequent to the sale of the loan. All fees are recognized as income at the time of the sale. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. TIB Bank has not historically experienced significant losses resulting from the recourse provisions described above. Accordingly, management believes that no such provision or allowance is necessary as of December 31, 2010.
Loans Held for Investment
Loans held for investment are reported at the principal amounts outstanding, net of unamortized purchase discount or premium, nonrefundable loan fees and related direct loan origination costs. Unearned income and deferred net fees, costs, purchase premiums or discounts related to loans held for investment are recognized in interest income on an effective yield basis over the contractual loan term.
Nonaccrual loans are those for which management has discontinued accrual of interest because there exists significant uncertainty as to the full and timely collection of either principal or interest or, for commercial and agricultural, construction and vacant land, farmland and commercial mortgage loans, such loans have become contractually past due 90 days with respect to principal or interest. Home equity loans and residential real estate loans are placed on nonaccrual when these loans are delinquent 90 days or more, or in foreclosure. Indirect auto loans and other consumer loans are placed on nonaccrual when these loans are delinquent 90 days or more. These loans are charged off or written down to their net realizable value when delinquency reaches 120 days. For commercial and agricultural, construction and vacant land, farmland and commercial mortgage loans, interest accruals are also continued for loans that are both well-secured and in the process of collection. For this purpose, loans are considered well-secured if they are collateralized by property having a net realizable value in excess of the amount of principal and accrued interest outstanding or are guaranteed by a financially responsible and willing party. Loans are considered "in the process of collection" if collection is proceeding in due course either through legal action or other actions that are reasonably expected to result in the prompt repayment of the debt or in its restoration to current status. For all loans, past due status is determined based on the contractual terms of the loan and the actual number of days since the due date of the earliest unpaid payment.
When a loan is placed on nonaccrual status, all previously accrued but uncollected interest is reversed against current period operating results. When full collection of the outstanding principal balance is in doubt, subsequent payments received are first applied to unpaid principal and then to uncollected interest. A loan may be returned to accrual status at such time as the loan is brought fully current as to both principal and interest, and, in management's judgment, such loan is considered to be fully collectible on a timely basis. However, the Company's policy also allows management to continue the recognition of interest income on certain commercial and agricultural, construction and vacant land, farmland and commercial mortgage loans placed on nonaccrual status. This portion of the nonaccrual portfolio is referred to as "Cash Basis Nonaccrual" loans. This policy only applies to loans that are well-secured and in management's judgment are considered to be fully collectible but the timely collection of payments is in doubt. Although the accrual of interest is suspended, interest income is recognized as it is received.
A troubled debt restructuring is a restructuring of a loan in which a concession is granted to a borrower experiencing financial difficulty. A loan is accounted for as a troubled debt restructured loan (“TDR”) if the Company, for reasons related to the borrower's financial difficulties, grants a concession to the borrower that it would not otherwise grant. A TDR typically involves a modification of terms such as a reduction of the interest rate below the current market rate for a loan with similar risk characteristics or the waiving of certain financial loan covenants without corresponding offsetting compensation or additional support. The Company measures the impairment loss of a TDR using the methodology for individually impaired loans.
Purchased Credit-Impaired Loans
Loans acquired in a transfer, including business combinations and transactions similar to the Investment, where there is evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments, are accounted for under accounting guidance for purchased credit-impaired (“PCI”) loans. This guidance provides that the excess of the cash flows initially expected to be collected over the fair value of the loans at the acquisition date (i.e., the accretable yield) is accreted into interest income over the estimated remaining life of the purchased credit-impaired loans using the effective yield method, provided that the timing and amount of future cash flows is reasonably estimable. Accordingly, such loans are not classified as nonaccrual and they are considered to be accruing because their interest income relates to the accretable yield recognized under accounting for purchased credit-impaired loans and not to contractual interest payments. The difference between the contractually required payments and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference.
Subsequent to acquisition, estimates of cash flows expected to be collected are updated each reporting period based on updated assumptions regarding default rates, loss severities, and other factors that are reflective of current market conditions. If the Company has probable decreases in cash flows expected to be collected (other than due to decreases in interest rate indices), the Company charges the provision for credit losses, resulting in an increase to the allowance for loan losses. If the Company has probable and significant increases in cash flows expected to be collected, the Company will first reverse any previously established allowance for loan losses and then increase interest income as a prospective yield adjustment over the remaining life of the pool of loans. The impact of changes in variable interest rates are recognized prospectively as adjustments to interest income. The accounting pools of acquired loans are defined as of the date of acquisition of a portfolio of loans and are comprised of groups of loans with similar collateral types and credit risk.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Allowance for Loan Losses
The Company maintains an allowance for loan losses to absorb losses incurred in the loan portfolio. The allowance is based on ongoing, quarterly assessments of the probable estimated incurred losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses, which is charged against current period operating results and decreased by the amount of charge offs, net of recoveries. The Company's methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formulaic allowance and the specific allowance for impaired loans. Management develops and documents its systematic methodology for determining the allowance for loan losses by first dividing its portfolio into segments-commercial mortgage, residential mortgage, construction and vacant land, commercial and agricultural, indirect auto, home equity and other consumer loans. The Company furthers divides the portfolio segments into classes based on initial measurement attributes, risk characteristics or its method of monitoring and assessing credit risk. The classes for the Company are as follows:
·
Commercial real estate mortgage - owner occupied, office building, hotel or motel, guest houses, retail, multi-family, and other;
·
Residential mortgage - primary residence, second residence and investment;
·
Land, lot and construction;
·
Consumer;
·
Indirect auto - prime and sub-prime; and
·
Home equity
The allowance is calculated by applying loss factors to outstanding loans. Loss factors are based on the Company's historical loss experience and may be adjusted for significant factors that, in management's judgment, affect the collectability of the portfolio as of the evaluation date. The Company derives the loss factors for all segments from pooled loan loss factors. Such pooled loan loss factors (for loans not individually graded) are based on expected net charge off ranges.
Loan loss factors, which are used in determining the allowance, are adjusted quarterly primarily based upon the changes in the level of historical net charge offs and parameter updates by management. Management estimates probable incurred losses in the portfolio based on a historical loss look-back period. The look-back period is representative of management’s expectations of relevant historical loss experience. Based upon the Company's evaluation process, management believes that the look-back period is generally eight quarters.
Furthermore, based on management's judgment, the Company's methodology permits adjustments to any loss factor used in the computation of the allowance for significant factors, which affect the collectability of the portfolio as of the evaluation date, but are not reflected in the loss factors. By assessing the probable estimated incurred losses in the loan portfolio on a quarterly basis, management is able to adjust specific and inherent loss estimates based upon the most recent information that has become available. This includes changing the number of periods that are included in the calculation of the loss factors and adjusting qualitative factors to be representative of the economic cycle that management expects will impact the portfolio. Updates of the loss confirmation period are done when significant events cause management to reexamine data.
At December 31, 2010, substantially all of the Company's loans are purchased credit-impaired loans. Estimates of cash flows expected to be collected for purchased credit-impaired loans are updated each reporting period. If the Company has probable decreases in expected cash flows to be collected after acquisition, the Company charges the provision for loan losses and establishes an allowance for loan losses.
The Company individually evaluates for impairment larger nonaccruing commercial and agricultural, construction and vacant land, farmland and commercial mortgage loans. Residential mortgage and consumer loans are not individually evaluated for impairment unless they exceed $500 in recorded investment or represent troubled debt restructurings. Loans are considered impaired when the individual evaluation of current information regarding the borrower's financial condition, loan collateral, and cash flows indicates that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including interest payments. Impaired loans are carried at the lower of the recorded investment in the loan, the present value of expected future cash flows discounted at the loan's effective rate, the loan's observable market price, or the fair value of the collateral, if the loan is collateral dependent. Excluded from the impairment analysis are large groups of smaller balance homogeneous loans such as consumer, indirect auto and residential mortgage loans, which are evaluated on a pool basis. The Company's policy for recognition of interest income, charge offs of loans, and application of payments on impaired loans is the same as the policy applied to nonaccrual loans.
Significant risk characteristics considered in estimating the allowance for credit losses include the following:
•
Commercial and agricultural-industry specific economic trends and individual borrower financial condition
•
Construction and vacant land, farmland and commercial mortgage loans-type of property (i.e., residential, commercial, industrial) and geographic concentrations and risks and individual borrower financial condition
•
Residential mortgage, indirect auto and consumer-historical and expected future charge-offs, borrower's credit, property collateral, and loan characteristics
Loans are charged off in whole or in part when they are considered to be uncollectible. For commercial and agricultural, construction and vacant land, farmland and commercial mortgage loans, they are generally considered uncollectible based on an evaluation of borrower financial condition as well as the value of any collateral. For residential mortgage and consumer loans, this is generally based on past due status as discussed above, as well as an evaluation of borrower creditworthiness and the value of any collateral. Recoveries of amounts previously charged off are recorded as a recovery to the allowance for loan losses.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Premises and Equipment
Land is carried at cost. Premises and equipment are reported at cost less accumulated depreciation. For financial reporting purposes, building and related components are depreciated using the straight-line method with useful lives ranging from 3 to 40 years. Furniture, fixtures and equipment are depreciated using straight-line method with useful lives ranging from 1 to 40 years. Expenditures for maintenance and repairs are charged to operations as incurred, while major renewals and betterments are capitalized. For Federal income tax reporting purposes, depreciation is computed using primarily accelerated methods.
Foreclosed Assets
Assets acquired through, or in lieu of, loan foreclosure or repossession are generally held for sale and are initially recorded at fair value less cost to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Costs incurred after acquisition are generally expensed.
Goodwill and Other Intangible Assets
Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Other intangible assets include core deposit base premiums and customer relationship intangibles arising from acquisitions and are initially measured at fair value. The intangibles are being amortized using the straight-line method over estimated lives ranging from 5 to 15 years.
Long-lived Assets
Long-lived assets, including premises and equipment, core deposit and other intangible assets, are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Company Owned Life Insurance
The Company has purchased life insurance polices on certain key executives. These policies are recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement, if applicable.
Income Taxes
Income tax expense (or benefit) is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
The predecessor company will file a consolidated Federal and Florida income tax return for the period ended September 30, 2010. The successor company will be included in NAFH’s consolidated Federal income tax return for the short period ended December 31, 2010 and will file a separate Florida income tax return for the short period ended December 31, 2010.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Stock Splits and Stock Dividends
Stock splits and stock dividends in excess of 20% are reported by transferring the par value of the stock issued from retained earnings to common stock. Stock dividends for 20% or less are reported by transferring the fair value, as of the ex-dividend date, of the stock issued from retained earnings to common stock and additional paid-in capital.
Effective December 15, 2010, the Company completed a reverse stock split of the Company’s issued and outstanding common stock at a ratio of 1:100. The number of authorized shares of common stock was correspondingly adjusted from 5,000,000,000 shares to 50,000,000 shares. As a result of the reverse stock split, every 100 shares of the Company’s common stock issued and outstanding immediately prior to the effective time were combined and reclassified into 1 share of common stock. Fractional shares resulting from the reverse stock split were rounded up to the nearest whole share.
Earnings (Loss) Per Common Share
Basic earnings (loss) per share is net income (loss) allocated to common shareholders divided by the weighted average number of common shares and vested restricted shares outstanding during the period. Diluted earnings per share includes the dilutive effect of additional potential common shares issuable under stock options, warrants and restricted shares computed using the treasury stock method.
Earnings (loss) per share have been computed based the following for the periods ended:
The dilutive effect of stock options and warrants and the dilutive effect of unvested restricted shares are the only common stock equivalents for purposes of calculating diluted earnings per common share.
Weighted average anti-dilutive stock options and warrants and unvested restricted shares excluded from the computation of diluted earnings per share are as follows:
Stock-Based Compensation
Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as separate components of equity.
Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase
Securities purchased under agreements to resell and securities sold under agreements to repurchase are generally accounted for as collateralized financing transactions and are recorded at the amounts at which the securities were acquired or sold plus accrued interest. The fair value of collateral either received from or provided to a third party is regularly monitored, and additional collateral is obtained, provided or requested to be returned as appropriate.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are currently any such matters that will have a material effect on the financial statements.
Operating Segments
While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company wide basis. As operating results for all segments are similar, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 19. Fair value estimates include uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
Recent Accounting Pronouncements
In January 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2011-1, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, to amend FASB Accounting Standards Codification (“ASC”) Topic 320, Receivables. The amendments in this update temporarily delay the effective date of the disclosures about troubled debt restructurings in ASU 2010-20 for public entities. The delay is intended to allow the FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated.
In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations, to amend ASC Topic 805, Business Combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Management does not believe that adoption of this update will have a material impact on the Company’s financial position or results of operations.
In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, to amend ASC Topic 320, Receivables. The amendments in this update are intended to provide disclosures that facilitate financial statement users’ evaluation of the nature of credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Adoption of this update did not have a material impact on the Company’s financial position or results of operations.
In April 2010, the FASB issued ASU 2010-18, Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset, to amend ASC Topic 320, Receivables. The amendments in this update provide that for acquired troubled loans which meet the criteria to be accounted for within a pool, modifications to one or more of these loans does not result in the removal of the modified loan from the pool even if the modification would otherwise be considered a troubled debt restructuring. The pool of assets in which the loan is included will continue to be considered for impairment. The amendments do not apply to loans not meeting the criteria to be accounted for within a pool. These amendments were effective for modifications of loans accounted for within pools occurring in the first interim or annual period ending on or after July 15, 2010. Adoption of this update did not have a material impact on the Company’s financial position or results of operations.
In February 2010, the FASB issued ASU 2010-09, Amendments to Certain Recognition and Disclosure Requirements, to amend ASC Topic 855, Subsequent Events. The amendments in this update removed the requirement to disclose the date through which subsequent events have been evaluated and became effective immediately upon issuance. Adoption of this update did not have a material impact on the Company’s financial position or results of operations.
Reclassifications
Some items in the prior year financial statements were reclassified to conform to the current presentation.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Note 2-Business Combinations
NAFH Investment
On September 30, 2010, the Company issued and sold to NAFH 7,000 shares of Common Stock, 70 shares of Series B Preferred Stock and a warrant to purchase up to 11,667 shares of Common Stock of the Company for aggregate consideration of $175,000. The consideration was comprised of approximately $162,840 in cash and approximately $12,160 in the form of contribution to the Company of all 37 shares of preferred stock issued to the United States Department of the Treasury under the TARP Capital Purchase Program and the related warrant to purchase shares of the Company’s Common Stock which NAFH purchased directly from the Treasury.
Immediately following the Investment, NAFH controlled 98.7% of the voting securities of the Company (which has been subsequently reduced to approximately 94% as a result of the Rights Offering) and followed the acquisition method of accounting and applied “acquisition accounting.” Acquisition accounting requires that the assets purchased, the liabilities assumed, and non-controlling interests all be reported in the acquirer’s financial statements at their fair value, with any excess of purchase consideration over the net assets being reported as goodwill. As part of the valuation, intangible assets were identified and a fair value was determined as required by the accounting guidance for business combinations. Accounting guidance also requires the application of “push down accounting,” whereby the adjustments of assets and liabilities to fair value and the resultant goodwill are shown in the financial statements of the acquiree.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The methodology used to obtain the fair values to apply acquisition accounting is described in Note 19, “Fair Value Measurements of Financial Instruments” of these Consolidated Financial Statements. The following table summarizes the Investment Transaction:
The above estimated fair values of assets acquired and liabilities assumed are based on the information that was available as of the Transaction Date to make preliminary estimates of the fair value of assets acquired and liabilities assumed. While the Company believes that information provides a reasonable basis for estimating the fair values, it expects to obtain additional information and evidence during the measurement period (not exceed one year from the Transaction Date) that will likely result in changes to the estimated fair value amounts. Thus, the provisional measurements of fair value reflected are subject to change and such changes could be significant. The Company expects to finalize the valuation and complete the purchase price allocation as soon as practicable but no later than one-year from the Transaction Date. Based on the applicable accounting literature on business combinations, subsequent adjustments, if any, will be retrospectively recorded in future filings.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
A summary and description of the assets, liabilities and non-controlling interests fair valued in conjunction with applying the acquisition method of accounting is as follows:
Cash and cash equivalents
The cash and cash equivalents of $229,665 held at the Transaction Date approximated the fair value on the Transaction Date and did not require a fair value adjustment.
Investment securities
Investment securities are reported at fair value and were $309,320 on the Transaction Date. To account for the NAFH Investment, the unamortized premium and discounts were recognized as acquisition accounting adjustments and the unrealized gain or loss on investment securities became the new premium or discount for each security held by the Company.
The fair value of the investment securities is primarily based on values obtained from third parties which are based on recent activity for the same or similar securities. Before the Transaction Date, the investment securities portfolio had a book value of $310,316 and a fair value of $309,320. The difference between the fair value and the current par value was recorded as the new premium or discount on a security by security basis.
Loans
All loans in the loan portfolio at the Transaction Date were evaluated and a fair value of $1,017,842 was assigned in accordance with the accounting guidance for receivables. All loans were considered to be purchase credit impaired loans or “PCI loans” with the exception of revolving lines of credit, loans collateralized by cash deposits and other types of loans with no real credit risk. The revolving lines of credit were also evaluated but are not considered PCI loans. A summary of the valuation for the PCI loans is in Note 5, “Loans” of these Consolidated Financial Statements.
Goodwill and intangible assets
As disclosed above, the excess of purchase consideration over the net assets being reported at fair value is the goodwill. The goodwill represents the value of the Company’s total franchise. This acquisition was nontaxable and, as a result, there is no tax basis in the goodwill. Accordingly, none of the goodwill associated with the acquisition is deductible for tax purposes. The intangible assets identified as part of the valuation of the NAFH Investment were Core Deposit Intangibles (“CDI”), Customer Relationship Intangibles (“CRI”) and Trade Names. All of the identified intangible assets are amortized as a non-interest expense over their estimated lives, except the TIB Bank and Naples Capital Advisors trade names.
Core Deposit Intangible
The CDI valuation is based on the Bank’s transaction related deposit accounts, interest rates on the deposits compared to the market rate on the Transaction Date and estimated life of those deposits. The value of non-interest bearing deposits comprises the largest portion of the CDI. The estimated value of the CDI is the present value of the difference between a market participant’s cost of obtaining alternative funds and the cost to maintain the acquired deposit base. The present value is calculated over the estimated life of the deposit base.
The type of deposit accounts evaluated for the CDI were demand deposit accounts, money market accounts and savings accounts.
Customer Relationship Intangible
The CRI was based on the assets under management by Naples Capital Advisors, Inc. on the Transaction Date. CRI is created when a customer relationship exists between an entity and its customer if the entity has information about the customer and has regular contact with the customer, and the customer has the ability to make direct contact with the entity. Customer relationships meet the contractual-legal criterion if an entity has a practice of establishing contracts with its customers, regardless of whether a contract exists at the acquisition date. Customer relationships also may arise through means other than contracts, such as through regular contact by sales or service representatives.
The value of the CRI is based on the present value of future cash flows arising from the management of investment accounts of customers generated from Naples Capital Advisors, Inc. based on the assets under management at September 30, 2010. The valuation of this intangible asset involves three steps: determining the useful life of the intangible asset, determining the resulting cash flows of the intangible and determining the discount rate.
The assets under management as of the Transaction Date were approximately $184,489.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Trade Name Intangible
Trademarks, service marks and other registered marks (collectively referred to as the “Trade Name”) can have great significance to customers. The function of a mark is to indicate to the consumer the sources from which goods and services originate. The trade names considered to have value are TIB Bank and Naples Capital Advisors.
The trade name value was based on the estimated income from each trade name used by the Company. The trade name for TIB Bank and Naples Capital Advisors has an indefinite life because there are not legal, regulatory, contractual, competitive, economic, or other factors that limit the useful life of an intangible asset to the reporting entity. The useful life of the asset shall be considered to be indefinite. The term indefinite does not mean the same as infinite or indeterminate. The useful life of an intangible asset is indefinite if that life extends beyond the foreseeable horizon-that is, there is no foreseeable limit on the period of time over which it is expected to contribute to the cash flows of the reporting entity.
Other Assets
A majority of the other assets held by the Company did not have a fair value adjustment as part of the purchase accounting since their carrying value approximated fair value such as accrued interest receivable. It was not practicable to determine the fair value of FHLB and IBB stock due to restrictions placed on their transferability. The most significant other asset impacted by the application of the acquisition method of accounting was the recognition of a net deferred tax asset of $19,262. The net deferred tax asset is primarily related to the recognition of differences between certain tax and book bases of assets and liabilities related to the acquisition method of accounting, including the fair value adjustments discussed elsewhere in this section, along with Federal and state net operating losses that the Company deemed realizable as of the acquisition date.
Deposits
Term deposits were not included as part of the CDI valuation. Instead, a separate valuation of term deposit liabilities was conducted due to the contractual time frame associated with these liabilities. The term deposits which were evaluated for acquisition accounting consisted of certificates of deposit, brokered deposits and Certificate of Deposit Account Registry Services (“CDARS”) CDs. The fair value of these deposits was determined by first stratifying the deposit pool by monthly maturity and calculating the interest rate for each maturity period. Then cash flows were projected by period and discounted to present value using current market interest rates. Based on the characteristics of the certificates, either a retail rate or a brokered certificate of deposit rate was used.
Certificates of deposit liabilities had a fair value of $730,034 as of September 30, 2010, compared to a carrying value of $724,899 for an amortizable premium of $5,135. Brokered Deposit liabilities had a fair value of $11,054 as of September 30, 2010 compared to a carrying value of $10,836 for an amortizable premium of $217. CDARs liabilities had a fair value of $9,453 as of September 30, 2010, compared to a carrying value of $9,363 million for an amortizable premium of $90. The Company will amortize these premiums into income as a reduction of interest expense on a level-yield basis over the weighted average term.
Long-term debt and other borrowings
Included in long-term debt and other borrowings in the summary table above are FHLB advances, securities sold under agreements to repurchase and trust preferred debt securities. These were fair valued by developing cash flow estimates for each of these debt instruments based on scheduled principal and interest payments, current interest rates, and prepayment penalties. Once the cash flows were determined, a market rate for comparable debt was used to discount the cash flows to the present value. The Company will amortize the premium and accrete the discount into income on a level-yield basis over the contractual term as an adjustment to interest expense.
FHLB advances had a fair value of $132,077 as of September 30, 2010, compared to a carrying value of $125,000 for an amortizable premium of $7,077.
Securities sold under agreements to repurchase on a long-term basis had a fair value of $10,063 as of September 30, 2010, compared to a carrying value of $10,000 for an amortizable premium of $63. The carrying values of Commercial customer repurchase agreements of $43,244 and Treasury tax and loan deposits of $584 approximated their fair values due to their short-term nature.
The trust preferred securities had a fair value of $22,815 as of September 30, 2010 compared to a book value of $33,000 for a net accretable discount of $10,185. The premium will be amortized and the discount will be accreted into income as a reduction of interest expense and an increase to interest expense on a level yield bases over the contractual terms, respectively.
Lease Liability
The Company operates approximately 6 properties under long term operating leases. The classification of the Company’s leases as operating, as opposed to capital, was not changed in applying the acquisition method of accounting.
When reviewing the leases, the contractual lease payments and terms were compared to the current market conditions for a similar location and building leased. The Company’s leases were considered to be unfavorable relative to the market terms of leases at September 30, 2010 to the extent that the existing lease terms were higher than the current market terms, and a liability of $251 was recognized as part of the acquisition accounting.
Non-Controlling Interest
In determining the estimated fair value of the non-controlling interest, the Company utilized the market valuation of its common stock as part of the purchase accounting as of September 30, 2010.
Transaction Expenses
As required by the Investment Agreement, the Company reimbursed certain transaction-related third party due diligence, valuation and legal costs of approximately $2,457 which were recorded as a reduction of the $175,000 of proceeds received from the issuance of preferred and common shares.
There were no indemnification assets identified in this business combination, nor were there any contingent consideration assets or liabilities to be recognized.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Note 3-Cash and Due From Banks
Cash on hand or on deposit with the Federal Reserve Bank of $2,393 and $3,682 was required to meet regulatory reserve and clearing requirements at December 31, 2010 and 2009, respectively. Balances on deposit at the Federal Reserve Bank did not earn interest prior to October 19, 2008; subsequently they became interest bearing. The total on deposit was approximately $130,946 and $147,709 at December 31, 2010 and 2009, respectively.
The Bank maintains an interest bearing account at the Federal Home Loan Bank of Atlanta. The total on deposit was approximately $638 and $52 at December 31, 2010 and 2009, respectively.
Note 4-Investment Securities
The amortized cost, estimated fair value, and the related gross unrealized gains and losses recognized in accumulated other comprehensive income of investment securities available for sale at December 31, 2010 and December 31, 2009 are presented below:
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Securities with unrealized losses not recognized in income, and the period of time they have been in an unrealized loss position, are as follows:
As of December 31, 2010, the Company’s security portfolio consisted of 62 securities, 37 of which were in an unrealized loss position. The majority of unrealized losses are related to the Company’s mortgage-backed securities.
The mortgage-backed securities in an unrealized loss position at December 31, 2010, were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae and Freddie Mac, institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at December 31, 2010.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
The table below presents a rollforward of the credit losses recognized in earnings for the period from April 1, 2009 (the effective date of ASC 325-40 which requires the recognition of unrealized credit losses determined as a result of other than temporary impairment charges through the income statement and the unrealized losses related to all other factors through accumulated other comprehensive income) through December 31, 2010:
The estimated fair value of investment securities available for sale at December 31, 2010, by contractual maturity, are shown as follows. Expected maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.
At December 31, 2010, securities with a fair value of approximately $38,363 are subject to call during 2011.
Sales of available for sale securities were as follows:
For the nine months ended September 30, 2010 and year ended 2009, no associated tax expense was recorded due to the net loss for the periods and a full valuation allowance against deferred income taxes that was recorded which is discussed in greater detail in Note 12. The tax expense related to net realized gains was $405 during 2008.
Maturities, principal repayments, and calls of investment securities available for sale were as follows: $49,824 for the three months ended December 31, 2010 (Successor Company); $90,955 for the nine months ended September 30, 2010 Predecessor Company); and $209,566, and $37,696 for the years ended 2009 and 2008 (Predecessor Company), respectively. Net gains realized from calls and mandatory redemptions of securities during the three months ended December 31, 2010 (Successor Company) was $0, for the nine months ended September 30, 2010 and years ended 2009 and 2008 (Predecessor Company) were $0, $61, and $72, respectively.
Investment securities having carrying values of approximately $110,408 and $207,353 at December 31, 2010 and 2009, respectively, were pledged to secure public funds on deposit, securities sold under agreements to repurchase, and for other purposes as required by law.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Note 5-Loans
Major classifications of loans are as follows:
Activity in the allowance for loan losses is as follows:
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Successor Company
Purchased credit-impaired loans for which it was probable at acquisition that all contractually required payments would not be collected are as follows:
Accretable yield, or income expected to be collected, related to purchased credit-impaired loans is as follows:
The contractually required payments represent the total undiscounted amount of all uncollected contractual principal and contractual interest payments both past due and scheduled for the future, adjusted for the timing of estimated prepayments and any full or partial charge-offs prior to the NAFH Investment. Nonaccretable difference represents contractually required payments in excess of the amount of estimated cash flows expected to be collected. The accretable yield represents the excess of estimated cash flows expected to be collected over the initial fair value of the PCI loans, which is their fair value at the time of the NAFH Investment. The accretable yield is accreted into interest income over the estimated life of the PCI loans using the level yield method. The accretable yield will change due to changes in:
·
the estimate of the remaining life of PCI loans which may change the amount of future interest income, and possibly principal, expected to be collected;
·
the estimate of the amount of contractually required principal and interest payments over the estimated life that will not be collected (the nonaccretable difference); and
·
indices for PCI loans with variable rates of interest.
For PCI loans, the impact of loan modifications is included in the evaluation of expected cash flows for subsequent decreases or increases of cash flows. For variable rate PCI loans, expected future cash flows will be recalculated as the rates adjust over the lives of the loans. At acquisition, the expected future cash flows were based on the variable rates that were in effect at that time.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2010:
(1)
Loans collectively evaluated for impairment include $24,395 of acquired home equity loans, $3,269 of commercial and agricultural loans and $4,935 of other consumer loans which are presented net of unamortized purchase discounts of $(897), (61), and (46), respectively.
There were no loans individually evaluated for impairment at December 31, 2010 or during the three months ended December 31, 2010, due to substantially all loans being accounted for as purchase credit-impaired loans as a result of the NAFH Investment. No allowance for loan losses was recorded for those purchased credit-impaired loans disclosed above during the three months ended December 31, 2010.
The following table presents the aging of the recorded investment in past due loans, based on contractual terms, as of December 31, 2010 by class of loans:
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Purchased credit-impaired loans are not classified as nonaccrual as they are considered to be accruing because their interest income relates to the accretable yield recognized under accounting for purchased credit-impaired loans and not to contractual interest payments.
There were no troubled debt restructurings as of December 31, 2010.
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a monthly basis. The Company uses the following definitions for risk ratings:
·
Pass - These loans range from superior quality with minimal credit risk to loans requiring heightened management attention but that are still an acceptable risk and continue to perform as contracted.
·
Special Mention - Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.
·
Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
·
Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
The following table summarizes loans, excluding purchased credit-impaired loans, monitored for credit quality based on internal ratings at December 31, 2010:
Predecessor Company
Impaired loans as of December 31, 2009 were as follows:
Non-performing loans include nonaccrual loans and accruing loans contractually past due 90 days or more. Nonaccrual loans are comprised principally of loans 90 days past due as well as certain loans, which are current but where serious doubt exists as to the ability of the borrower to comply with the repayment terms. Generally, interest previously accrued and not yet paid on nonaccrual loans is reversed during the period in which the loan is placed in a nonaccrual status. Non-performing loans are as follows:
Non-performing loans and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one category.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Note 6-Premises and Equipment
A summary of the cost and accumulated depreciation of premises and equipment follows:
Depreciation expense for the Successor Company in the three months ended December 31, 2010 was $727, and depreciation expense for the Predecessor Company in the nine months ended September 30, 2010 and for the years ended December 31, 2009 and 2008, was $2,363, $3,085, and $3,355, respectively.
The Bank is obligated under operating leases for office and banking premises which expire in periods varying from one to twenty years. Future minimum lease payments, before considering renewal options that generally are present, are as follows at December 31, 2010:
Rental expense for the Successor Company in the three months ended December 31, 2010 was $250, and rental expense for the Predecessor Company in the nine months ended September 30, 2010 and for the years ended December 31, 2009 and 2008, was $821, $1,615, and $1,422, respectively.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Note 7-Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the Successor Company three months ended December 31, 2010, and for the Predecessor Company nine months ended September 30, 2010 and years ended December 31, 2009 and 2008 are as follows:
Successor Company
NAFH acquired the voting securities of the Company immediately following its Investment and followed the acquisition method of accounting and applied “acquisition accounting”. Acquisition accounting requires that the assets purchased, the liabilities assumed, and non-controlling interests all be reported in the acquirer’s financial statements at their fair value, with any excess of purchase consideration over the net assets being reported at fair value is the goodwill. This acquisition was nontaxable and, as a result, there is no tax basis in the goodwill. Accordingly, none of the goodwill associated with the acquisition is deductible for tax purposes.
Predecessor Company
The Company performed a review of goodwill for potential impairment as of December 31, 2009. Based on this review, which included valuing the Company considering a variety of methodologies including using the Company’s stock price as of year end 2009, transaction multiples of recent comparable transactions and the expected present value of future cash flows, it was determined that impairment existed as of December 31, 2009. Accordingly, the Company wrote off $5,887 of goodwill relating primarily to the acquisitions of The Bank of Venice and Riverside.
Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value, which is determined through a two-step impairment test. Step 1 includes the determination of the carrying value of a reporting unit, including the existing goodwill and intangible assets, and estimating the fair value of the reporting unit. We determine the fair value of the reporting unit and compare it to its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, we are required to perform a second step to the impairment test.
Our annual impairment analysis as of December 31, 2009, indicated that the Step 2 analysis was necessary. Step 2 of the goodwill impairment test is performed to measure the impairment loss. Step 2 requires that the implied fair value of the reporting unit goodwill be compared to the carrying amount of that goodwill. As the carrying amount of the reporting unit goodwill exceeded the implied fair value of that goodwill, an impairment loss was required to be recognized in an amount equal to that excess.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Intangible assets consist of the following:
As disclosed above, the intangible assets identified as part of the valuation of the NAFH Investment were Core Deposit Intangibles, Customer Relationship Intangibles and Trade Names. All of the identified intangible assets are amortized as a non-interest expense over their estimated lives, except the TIB Bank and Naples Capital Advisors Trade Names.
Aggregate intangible asset amortization expense was $364 for the three months ended December 31, 2010 (Successor Company) and $1,168, $1,431, and $653 for the nine months ended September 30, 2010, and year ended 2009, and 2008 (Predecessor Company), respectively.
Estimated amortization expense for each of the next five years is as follows:
Note 8- Other Real Estate Owned
Activity in other real estate owned is as follows:
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Note 9-Time Deposits
Time deposits of $100 or more were $359,869 and $288,021 at December 31, 2010 (Successor Company) and 2009 (Predecessor Company), respectively.
At December 31, 2010, the scheduled maturities of time deposits are as follows:
Note 10-Short-Term Borrowings and Federal Home Loan Bank Advances
Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase, advances from the Federal Home Loan Bank, and a Treasury, tax and loan note option.
As of December 31, 2010, the Bank had an unsecured overnight federal funds purchased with a maximum accommodation of $30,000 from a correspondent bank. Additionally, the Bank has agreements with various financial institutions under which securities can be sold under agreements to repurchase. TIB Bank also has securities sold under agreements to repurchase with commercial account holders whereby TIB Bank sweeps the customer’s accounts on a daily basis and pays interest on these amounts. These agreements are collateralized by investment securities chosen by TIB Bank.
The Bank accepts Treasury, tax and loan deposits from certain commercial depositors and remits these deposits to the appropriate government authorities. TIB Bank can hold up to $1,700 of these deposits more than a day under a note option agreement with its regional Federal Reserve Bank and pays interest on those funds held. TIB Bank pledges certain investment securities against this account.
As of December 31, 2010, collateral availability under our agreement with the Federal Reserve Bank of Atlanta (“FRB”) provided for up to approximately $39,653 of borrowing availability from the FRB discount window.
The Bank invests in Federal Home Loan Bank stock for the purpose of establishing credit lines with the Federal Home Loan Bank. The credit availability to the Bank is based on a percentage of the Bank’s total assets as reported on the most recent quarterly financial information submitted to the regulators subject to the pledging of sufficient collateral. In February 2011, the Federal Home Loan Bank notified the Bank that the credit availability has been re-established with no restriction to term of the borrowing. At December 31, 2010 (Successor Company), in addition to $25,150 in letters of credit used in lieu of pledging securities to the State of Florida, there was $125,000 in advances outstanding with a carrying value of $131,116. At December 31, 2009 (Predecessor Company), the amount of outstanding advances was $125,000. Advances outstanding at December 31, 2010 consist of:
(a) These advances have quarterly conversion dates beginning six months to one year from date of issuance. If the FHLB chooses to convert the advance, the Bank has the option of prepaying the entire balance without penalty. Otherwise, the advance will convert to an adjustable rate, repricing on a quarterly basis. If the FHLB does not convert the advance, it will remain at the contracted fixed rate until the maturity date.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
The Bank’s collateral with the FHLB consists of a blanket floating lien pledge of the Bank’s residential 1-4 family mortgage and commercial real estate secured loans. The amount of eligible collateral at December 31, 2010 was $187,722.
The following table reflects the average daily outstanding, year-end outstanding, maximum month-end outstanding and the weighted average rates paid for each of the categories of short-term borrowings and FHLB advances:
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Note 11-Long-Term Borrowings
Securities Sold Under Agreements to Repurchase
During 2007, the Company entered into agreements with another financial institution for the sale of certain securities to be repurchased at a future date. The interest rates on these repurchase agreements are fixed for the remaining term of the agreement. The agreement in the amount of $20,000 and an interest rate of 4.18% matured in September 2010 and the agreement in the amount of $10,000 with an interest rate of 3.46% matured in December 2010. No amounts were outstanding at December 31, 2010.
Subordinated Debentures
TIBFL Statutory Trust I, TIBFL Statutory Trust II and TIBFL Statutory Trust III were formed in conjunction with the issuance of trust preferred securities as further discussed below. The Company is not considered the primary beneficiary of the trusts (variable interest entities), therefore the trusts are not consolidated in the Company’s consolidated financial statements, but rather the subordinate debentures are presented as a liability.
On September 7, 2000, the Company participated in a pooled offering of trust preferred securities. The Company formed TIBFL Statutory Trust I (the “Trust”) a wholly-owned statutory trust subsidiary for the purpose of issuing the trust preferred securities. The Trust used the proceeds from the issuance of $8,000 in trust preferred securities to acquire junior subordinated deferrable interest debentures of the Company. The trust preferred securities essentially mirror the debt securities, carrying a cumulative preferred dividend at a fixed rate equal to the 10.6% interest rate on the debt securities. The debt securities and the trust preferred securities each have 30-year lives. The trust preferred securities and the debt securities are callable by the Company or the Trust, at their respective option after ten years, and at varying premiums and sooner in specific events, subject to prior approval by the Federal Reserve Board, if then required. At December 31, 2010, the carrying value was $8,865.
On July 31, 2001, the Company participated in a pooled offering of trust preferred securities. The Company formed TIBFL Statutory Trust II (the “Trust II”) a wholly-owned statutory trust subsidiary for the purpose of issuing the trust preferred securities. The Trust II used the proceeds from the issuance of $5,000 in trust preferred securities to acquire junior subordinated deferrable interest debentures of the Company. The trust preferred securities essentially mirror the debt securities, carrying a cumulative preferred dividend at a variable rate equal to the interest rate on the debt securities (three month LIBOR plus 358 basis points). The initial rate in effect at the time of issuance was 7.29% and is subject to change quarterly. The rate in effect at December 31, 2010 was 3.87%. The debt securities and the trust preferred securities each have 30-year lives. The trust preferred securities and the debt securities are callable by the Company or the Trust, at their respective option after five years, and at varying premiums and sooner in specific events, subject to prior approval by the Federal Reserve Board, if then required. At December 31, 2010, the carrying value was $3,674.
On June 23, 2006, the Company issued $20,000 of additional trust preferred securities through a private placement. The Company formed TIBFL Statutory Trust III (the “Trust III”), a wholly-owned statutory trust subsidiary for the purpose of issuing the trust preferred securities. The Trust III used the proceeds from the issuance of $20,000 in trust preferred securities to acquire junior subordinated deferrable interest debentures of the Company. The trust preferred securities essentially mirror the debt securities, carrying a cumulative preferred dividend at a variable rate equal to the interest rate on the debt securities (three month LIBOR plus 155 basis points). The rate in effect at December 31, 2010 was 1.84%. The debt securities and the trust preferred securities each have 30-year lives. The trust preferred securities and the debt securities are callable by the Company or the Trust, at their respective option at par after five years, and sooner, at a 5% premium, if specific events occur, subject to prior approval by the Federal Reserve Board, if then required. At December 31, 2010, the carrying value was $10,348.
The Company received a request from the Federal Reserve Bank of Atlanta (FRB) for the Company’s Board of Directors to adopt a resolution that it will not make any payments or distributions on the outstanding trust preferred securities without the prior written approval of the Reserve Bank. The Board adopted this resolution on October 5, 2009. On September 22, 2010 the FRB and the Company entered into a written agreement where the Company agrees, among other things, that it will not make any payments on the outstanding trust preferred securities or declare or pay any dividends without the prior written approval of the FRB. The Company has notified the trustees of its $20,000 trust preferred securities due July 7, 2036 and its $5,000 trust preferred securities due July 31, 2031 of its election to defer interest payments on the trust preferred securities beginning with the payments due in October 2009. The Company also notified the trustees of its $8,000 trust preferred securities due September 7, 2030 of its election to defer interest payments on the trust preferred securities beginning with the payments due in March 2010. Deferral of the trust preferred securities is allowed for up to 60 months without being considered an event of default.
The Company has treated the trust preferred securities as Tier 1 capital up to the maximum amount allowed, and the remainder as Tier 2 capital for federal regulatory purposes (see Note 15).
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
At December 31, 2010, the maturities of long-term borrowings were as follows:
Note 12-Income Taxes
Income tax expense (benefit) from continuing operations was as follows:
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
A reconciliation of income tax computed at applicable Federal statutory income tax rates to total income taxes reported is as follows:
The details of the net deferred tax asset as of December 31, 2010 and 2009 are as follows:
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Successor Company
A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. As of December 31, 2010, management considered the need for a valuation allowance and, based upon its assessment of the relative weight of the positive and negative evidence available at the time of the analysis, concluded that a valuation allowance was not necessary as temporary differences would become recognizable for tax purposes after consideration of the limitation on the utilization of net operating losses and net unrealized built-in losses (NUBIL).
As a result of the Investment made by NAFH on September 30 2010, the Company had undergone a “change in ownership” as that term is defined in the Internal Revenue Code. This change in ownership resulted in a significant limitation of the amount of net operating losses and net NUBIL that can be utilized by the Company. NUBIL represents the excess of the tax basis of the Company’s assets over their fair market value. As a consequence, no deferred taxes have been recognized for NUBIL’s that are estimated not to be realizable as a result of the limitation on the utilization of NUBILs.
At December 31, 2010, the Company had recognizable Federal and state net operating loss carryforwards of $13,737 which expire in 2030 if unused. Due to the change in ownership that occurred from NAFH’s Investment with the Company, the utilization of net operating losses generated prior to October 1, 2010 will be subject to an annual limitation estimated to be $723. As a result of this annual limitation, the Company estimates that only $13,918 of the total Federal and state net operating loss carryfowards will be utilizable. As a consequence, no deferred taxes have been recognized for net operating losses that are not expected to be utilized due to the change in ownership limitation.
The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax of the State of Florida. The Company is no longer subject to examination by taxing authorities for years before 2006.
There were no unrecognized tax benefits at December 31, 2010 and the Company does not expect the total of unrecognized tax benefits to significantly increase in the next twelve months.
Predecessor Company
In assessing the need for a valuation allowance at December 31, 2009, management considered various factors including the significant cumulative losses incurred by the Company over the previous three years coupled with the expectation that the future realization of deferred taxes would be limited as a result of a planned capital offering. These factors represent the most significant negative evidence that management considered in concluding that a full valuation allowance was necessary at December 31, 2009. As of December 31, 2008, management considered the need for a valuation allowance and, based upon its assessment of the relative weight of the positive and negative evidence available at the time, concluded that no valuation allowance was necessary at such time.
Note 13-Employee Benefit Plans
The Company maintains an Employee Stock Ownership Plan with 401(k) provisions that covers all employees who are qualified as to age and length of service. Three types of contributions can be made to the Plan by the Company and participants: basic voluntary contributions which are discretionary contributions made by all participants; a matching contribution, whereby the Company will match 50 percent of salary reduction contributions up to 5 percent of compensation; and an additional discretionary contribution which may be made by the Company and allocated to the accounts of participants on the basis of total relative compensation. The Successor Company contributed $83 for the three months ended December 31, 2010 to the plan and the Predecessor Company contributed $256, $334 and $327 to the plan for the nine months ended September 30, 2010 and years ended December 31, 2009 and December 31, 2008, respectively. As of December 31, 2010, the Plan contained approximately 4 shares of the Company’s common stock.
In 2001, TIB Bank entered into salary continuation agreements with three of its executive officers. Two additional TIB Bank executive officers entered into salary continuation agreements in 2003, another in 2004 and two additional TIB Bank executives entered into salary continuation agreements in 2008. In 2007, an additional two pre-existing salary continuation agreements with The Bank of Venice’s executive officers were assumed as part of the acquisition. The plans are nonqualified deferred compensation arrangements that are designed to provide supplemental retirement income benefits to participants. The Predecessor Company expensed $236, $227, and $351 for the accrual of future salary continuation benefits in the nine months ended September 30, 2010, and year ended December 31, 2009 and 2008, respectively. The Bank has purchased single premium life insurance policies on several of these individuals. Cash value income (net of related insurance premium expense) totaled $197, $328, and $236 in the nine months ended 2010, and year ended December 31, 2009 and 2008 (Predecessor Company), respectively and $66 for the three months ended December 31, 2010 (Successor Company). In addition, a $1,186 gain was recognized on the policy of a deceased former employee by the Predecessor Company in 2009. Other assets included $6,610 and $6,347 in surrender value and other liabilities included salary continuation benefits payable of $0 and $1,070 at December 31, 2010 (Successor Company) and 2009 (Predecessor Company), respectively. Three of these executive officers terminated employment in 2008 and two terminated employment in 2009. In 2009 a total of $2,229 of salary continuation benefits were paid to terminated executives by the Predecessor Company in accordance with their agreements. In 2010, following the investment by NAFH Inc. and the TARP repayment, the salary continuation agreements were terminated and the executives each received a lump sum distribution of their respective accrued benefit earned under their agreement resulting in a total payout of $1,305 by the Successor Company.
In 2001, TIB Bank established a non qualified retirement benefit plan for eligible Bank directors. Under the plan, the Bank pays each participant, or their beneficiary, the amount of directors fees deferred and interest in 120 equal monthly installments, beginning the month following the director’s normal retirement date. TIB Bank expensed $29, $42, and $214 for the accrual of current and future retirement benefits for the nine months ended September 30, 2010, and year ended December 31, 2009 and 2008 (Predecessor Company), respectively, which included $0, $0, and $112 in the nine months ended 2010, and year ended December 31, 2009 and 2008 related to the annual director retainer fees and monthly meeting fees that certain directors elected to defer. The Successor Company expensed $9 in the three months ended December 31, 2010 for the accrual of the retirement benefits. TIB Bank has purchased single premium split dollar life insurance policies on these individuals. Cash value income (net of related insurance premium expense) totaled $38 for the three months ended December 31, 2010 (Successor Company) and $120, $170, and $162 in the nine months ended September 30, 2010, and year ended December 31, 2009 and 2008 (Predecessor Company), respectively. In addition, a $134 gain was recognized on the policy of a deceased former director by the Predecessor Company in the nine months ended September 30, 2010. Other assets included $4,336 and $4,621 in surrender value in other assets and other liabilities included retirement benefits payable of $430 and $653 at December 31, 2010 (Successor Company) and 2009 (Predecessor Company), respectively. In connection with changes made to bring the plan agreements into compliance with section 409A of the Internal Revenue Code the four current directors participating in the plan each elected to receive a lump sum distribution from the Predecessor Company in 2009 of the amount vested, accrued and earned through December 31, 2008. In 2011 the director deferred agreements were terminated and the directors participating in the plan each received a lump sum distribution of their respective deferral account balances resulting in a total payout of $431 by the Successor Company.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Note 14-Related Party Transactions
The Bank had loans outstanding to certain of the Company’s executive officers, directors, and their related business interests as follows:
Unfunded loan commitments to Successor Company individuals and their related business interests totaled $12 at December 31, 2010. Deposits from these individuals and their related interests were $2,727.
Note 15-Regulatory Capital Requirements
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements results in certain discretionary and required actions by regulators that could have an effect on the Company’s operations. The regulations require the Company and the Bank to meet specific capital adequacy guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Capital Adequacy and Ratios
To be considered well capitalized and adequately capitalized (as defined) under the regulatory framework for prompt corrective action, the Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based, and total risk-based ratios. At December 31, 2010 the Company and the Bank maintained capital ratios exceeding the requirement to be considered adequately capitalized. These minimum amounts and ratios along with the actual amounts and ratios for the Company and the Bank at of December 31, 2010 and 2009 are presented in the following tables.
Management believes, as of December 31, 2010, that the Company and the Bank meet all capital requirements to which they are subject. Tier 1 Capital for the Company includes the trust preferred securities that were issued in September 2000, July 2001 and June 2006 to the extent allowable.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
If a bank is classified as adequately capitalized, the bank is subject to certain restrictions. One of the restrictions is that the bank may not accept, renew or roll over any brokered deposits (including CDARs deposits) without being granted a waiver of the prohibition by the FDIC. As of December 31, 2010, we had $18,457 of brokered deposits consisting of $7,656 of reciprocal CDARs deposits and $10,801 of traditional brokered and one-way CDARs deposits representing approximately 1.4% of our total deposits. $5,613 of CDARs deposits and $10,032 of traditional brokered deposits mature within the next twelve months. An inability to roll over or raise funds through CDARs deposits or brokered deposits could have a material adverse impact on our liquidity. Additional restrictions include limitations on deposit pricing, the preclusion from paying “golden parachute” severance payments and the requirement to notify the bank regulatory agencies of certain significant events.
Subsidiary Dividend Limitations
Under state banking law, regulatory approval will be required if the total of all dividends declared in any calendar year by a bank exceeds the bank’s net profits to date for that year combined with its retained net profits for the preceding two years. Based on the losses incurred for the prior two years, declaration of dividends by TIB Bank to the Company, during 2010, would have required regulatory approval.
On July 2, 2009, the Bank entered into a Memorandum of Understanding, which is an informal agreement, with bank regulatory agencies that it would move in good faith to increase its Tier 1 leverage capital ratio to not less than 8% and its total risk-based capital ratio to not less than 12% by December 31, 2009 and maintain these higher ratios for as long as this agreement is in effect. At December 31, 2009, these elevated capital ratios were not met. On July 2, 2010, the Bank entered into a Consent Order, which is a formal agreement, with the bank regulatory agencies under which, among other things, the Bank has agreed to maintain a Tier 1 capital ratio of at least 8% of total assets and a total risk based capital ratio of at least 12% within 90 days. At December 31, 2010 the Bank achieved a Tier 1 capital ratio of 8.1% and a total risk-based capital ratio of 13.1% which meet the ratios required in the Consent Order. The Consent Order also governs certain aspects of the Bank’s operations including a requirement that it reduce the balance of assets classified substandard and doubtful by at least 70% over a two-year period, and not undertake asset growth of 5% or more per year without prior approval from the regulatory agencies. The Consent Order supersedes the Memorandum of Understanding. On September 22, 2010 the Federal Reserve Bank of Atlanta (FRB) and the Company entered into a written agreement (the “Written Agreement”) where the Company agrees, among other things, that it will not make any payments on the outstanding trust preferred securities or declare or pay any dividends without the prior written approval of the FRB.
Note 16 - Stock-Based Compensation
As of December 31, 2010, the Company has one compensation plan under which shares of its common stock are issuable in the form of stock options, restricted shares, stock appreciation rights, performance shares or performance units. This is its 2004 Equity Incentive Plan (the “2004 Plan”), which was approved by the Company’s shareholders at the May 25, 2004 annual meeting. Pursuant to the merger agreement, upon the April 30, 2007 closing of its acquisition of The Bank of Venice, the Company granted 1 stock option in exchange for the options outstanding for the purchase of shares of common stock of The Bank of Venice at such date. The options were fully vested at the grant date and ranged in price from $863.92 to $992.68 per share as determined by the conversion ratio specified in the merger agreement. Previously, the Company had granted stock options under the 1994 Incentive Stock Option and Nonstatutory Stock Option Plan (the “1994 Plan”) as amended and restated as of August 31, 1996. Under the 2004 Plan, the Board of Directors of the Company may grant nonqualified stock-based awards to any director, and incentive or nonqualified stock-based awards to any officer, key executive, administrative, or other employee including an employee who is a director of the Company. Subject to the provisions of the 2004 Plan, the maximum number of shares of common stock of the Company that may be optioned or awarded through the 2014 expiration of the plan is 8 shares, no more than 3 of which may be issued pursuant to awards granted in the form of restricted shares. Such shares may be treasury, or authorized but unissued, shares of common stock of the Company. If options or awards granted under the Plan expire or terminate for any reason without having been exercised in full or released from restriction, the corresponding shares shall again be available for option or award for the purposes of the Plan as long as no dividends have been paid to the holder in accordance with the provisions of the grant agreement.
The following table summarizes the components and classification of stock-based compensation expense for the three months ended December 31, 2010 (Successor Company), and for the nine months ended September 31, 2010 and the years ended December 31, 2009 and 2008 (Predecessor Company).
The tax benefit related to stock-based compensation expense arising from restricted stock awards and non-qualified stock options were approximately $177 for the year ended December 31, 2008. No tax benefit was recorded for the nine months ended September 30, 2010 and year ended December 31, 2009 due to the recognition of a full valuation allowance against deferred income tax assets as discussed in greater detail in Note 12 above.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
The fair value of each option is estimated as of the date of grant using the Black-Scholes Option Pricing Model. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate. The assumptions for the current period grants were developed based on ASC 718 and SEC guidance contained in Staff Accounting Bulletin (SAB) No. 107, “Share-Based Payment.” The following table summarizes the weighted average assumptions used to compute the grant-date fair value of options granted for the years ended December 31,
·
The dividend yield was estimated using historical dividends paid and market value information for the Company’s stock. An increase in dividend yield will decrease stock compensation expense.
·
The risk-free interest rate was developed using the U.S. Treasury yield curve for periods equal to the expected life of the options on the grant date. An increase in the risk-free interest rate will increase stock compensation expense.
·
The expected option life for the current period grants was estimated using the vesting period, the term of the option and estimates of future exercise behavior patterns. An increase in the option life will increase stock compensation expense.
·
The volatility was estimated using historical volatility for periods approximating the expected option life. An increase in the volatility will increase stock compensation expense.
No stock options were granted for the Successor Company three months ended December 31, 2010 or the Predecessor Company nine months ended September 30, 2010.
ASC 718 requires the recognition of stock-based compensation for the number of awards that are ultimately expected to vest. During 2008, 2009 and 2010, stock based compensation expense was recorded based upon estimates that we would experience no forfeitures. Our estimate of forfeitures will be reassessed in subsequent periods based on historical forfeiture rates and may change based on new facts and circumstances. Any changes in our estimates will be accounted for prospectively in the period of change.
As of December 31, 2010, there was no unrecognized compensation expense associated with stock options and restricted stock due to the accelerated vesting of all stock options and restricted stock and the recognition of associated compensation expense upon the closing of the investment by NAFH on September 30, 2010.
Stock Options
Under the 2004 Plan, the exercise price for common stock must equal at least 100 percent of the fair market value of the stock on the day an option is granted. The exercise price under an incentive stock option granted to a person owning stock representing more than 10 percent of the common stock must equal at least 110 percent of the fair market value at the date of grant, and such option is not exercisable after five years from the date the incentive stock option was granted. The Board of Directors may, at its discretion, provide that an option not be exercised in whole or in part for any period or periods of time as specified in the option agreements. No option may be exercised after the expiration of ten years from the date it is granted. Stock options vest over varying service periods which range from vesting immediately to up to nine years.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
A summary of the stock option activity in the plans is as follows:
The weighted average remaining terms for outstanding stock options and for exercisable stock options were 4.9 years and 4.9 years at December 31, 2010, respectively. The aggregate intrinsic value at December 31, 2010 was $0 for stock options outstanding and $0 for stock options exercisable. The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of the Company’s common stock as of the reporting date.
Options outstanding at December 31, 2010 were as follows:
Successor Company
Proceeds received from the exercise of stock options were $0 during the three months ended December 31, 2010. The intrinsic value related to the exercise of stock options was $0 during the three months ended December 31, 2010. No tax benefit was recorded for the three months ended December 31, 2010 as there were no exercises of non-qualified stock options or disqualifying dispositions.
Predecessor Company
Proceeds received from the exercise of stock options were $0, $0 and $98 during the nine months ended September 30, 2010 and the years ended December 31, 2009 and 2008, respectively. The intrinsic value related to the exercise of stock options was $0, $0 and $13, the nine months ended September 30, 2010 and the years ended December 31, 2009 and 2008, respectively. The intrinsic value related to exercises of non-qualified stock options and disqualifying dispositions of incentive stock options resulted in the realization of tax benefits of $51 during the year ended December 31, 2008. No tax benefit was recorded for the nine months ended September 30, 2010 and the year ended December 31, 2009 as there were no exercises of non-qualified stock options or disqualifying dispositions.
Restricted Stock
Restricted stock provides the grantee with voting, dividend and anti-dilution rights equivalent to common shareholders, but is restricted from transfer until vested, at which time all restrictions are removed. Vesting for restricted shares is generally on a straight-line basis and ranges from one to five years. The value of the restricted stock, estimated to be equal to the closing market price on the date of grant, is being amortized on a straight-line basis over the respective service periods. The fair market value of restricted stock awards that vested was $27, $101 and $185 during the nine months ended September 30, 2010, the years ended December 31, 2009 and 2008, respectively. Tax benefits related to the vesting of restricted shares of $33 was realized during the year ended December 31, 2008. No tax benefit was recorded for the year ended December 31, 2009 due to the recognition of a full valuation allowance against deferred income tax assets as discussed in greater detail in Note 12 above.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
A summary of the restricted stock activity in the plan is as follows:
Note 17-Loan Commitments and Other Related Activities
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk of credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
The contractual amount of financial instruments with off-balance-sheet risk was as follows at December 31:
Commitments to make loans are generally made for periods of 30 days. As of December 31, 2010, the fixed rate loan commitments have interest rates ranging from 2.94% to 11.00% and maturities ranging from 1 year to 30 years.
As of December 31, 2010 (Successor Company) and 2009 (Predecessor Company), letters of credit totaled $1,638 and $1,896, respectively.
Note 18-Supplemental Financial Data
Components of other expense in excess of 1 percent of total interest and non-interest income are as follows:
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Note 19-Fair Values of Financial Instruments
ASC 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated
by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Valuation of securities available for sale
The fair values of securities available for sale are determined by 1) obtaining quoted prices on nationally recognized securities exchanges when available (Level 1 inputs), 2) matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs) and 3) for collateralized debt obligations, custom discounted cash flow modeling (Level 3 inputs).
As of December 31, 2010, the Company owned three collateralized debt obligations where the underlying collateral is comprised primarily of corporate debt obligations of homebuilders, REITs, real estate companies and commercial mortgage backed securities. The company also owned a collateralized debt security where the underlying collateral is comprised primarily of trust preferred securities of banks and insurance companies. The inputs used in determining the estimated fair value of these securities are Level 3 inputs. In determining their estimated fair value, management utilizes a discounted cash flow modeling valuation approach. Discount rates utilized in the modeling of these securities are estimated based upon a variety of factors including the market yields of publicly traded trust preferred securities of larger financial institutions and other non-investment grade corporate debt. Cash flows utilized in the modeling of these securities were based upon actual default history of the underlying issuers and issuer specific assumptions of estimated future defaults of the underlying issuers.
Valuation of Impaired Loans and Other Real Estate Owned
The fair value of collateral dependent impaired loans with specific allocations of the allowance for loan losses and other real estate owned is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below:
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended December 31, 2010 (Successor Company), for the nine months ended September 30, 2010 and year ended December 31, 2009 (Predecessor Company) and still held at the end of each respective period.
Assets and Liabilities Measured on a Non-Recurring Basis
Assets and liabilities measured at fair value on a non-recurring basis are summarized below:
During the nine months ended September 30, 2010 prior to the application of adjustments related to the application of the acquisition method of accounting, $18,581 of the allowance for loan losses was specifically allocated to collateral dependent impaired loans. The amounts of the specific allocations for impairment were considered in the overall determination of the provision for loan losses. As a result of sales of foreclosed properties, receipt of updated appraisals, reduced listing prices or entering into contracts to sell these properties, valuation adjustments of $19,171 were recognized in our statement of operations during the nine months ended September 30, 2010. Other repossessed assets are primarily comprised of repossessed automobiles and are measured at fair value as of the date of repossession. As a result of the disposition of repossessed vehicles, losses of $39 and $9 were recognized in our statements of operations during the Successor Company three months ended December 31, 2010 and the Predecessor Company nine months ended September 30, 2010, respectively. For the Predecessor Company, collateral dependent impaired loans, which are measured for impairment using the fair value of the collateral, had a carrying amount of $60,413, with a valuation allowance of $8,291 as of December 31, 2009. During the year ended December 31, 2009, $26,085 of the allowance for loan losses was specifically allocated to collateral dependent impaired loans. The amounts of the specific allocations for impairment are considered in the overall determination of the reserve and provision for loan losses. Other real estate owned which is measured at the lesser of fair value less costs to sell or our recorded investment in the foreclosed loan had a carrying amount of $22,147, less a valuation allowance of $795 as of December 31, 2009. As a result of sales of foreclosed properties, receipt of updated appraisals, reduced listing prices or entering into contracts to sell these properties, write downs of fair value of $1,980 were recognized in our statements of operations during the year ended December 31, 2009. Other repossessed assets are primarily comprised of repossessed automobiles and are measured at fair value as of the date of repossession. As a result of the disposition of repossessed vehicles, gains of $244 were recognized in our statements of operations during the year ended December 31, 2009.
Carrying amount and estimated fair values of financial instruments were as follows at December 31:
The methods and assumptions used to estimate fair value are described as follows:
Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest receivable and payable, non-contractual demand deposits and certain short-term borrowings. As it is not practicable to determine the fair value of Federal Home Loan Bank stock and other bankers’ bank stock due to restrictions placed on its transferability, the estimated fair value is equal to their carrying amount. Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer including estimates of discounted cash flows when necessary. For fixed rate loans or contractual deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life, adjusted for the allowance for loan losses. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of long-term debt is based on current rates for similar financing. The fair value of off-balance sheet items that includes commitments to extend credit to fund commercial, consumer, real estate construction and real estate-mortgage loans and to fund standby letters of credit is considered nominal.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Note 20-Condensed Financial Information of TIB Financial Corp.
Condensed Balance Sheets
(Parent Only)
Condensed Statements of Income
(Parent Only)
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
-Condensed Financial Information of TIB Financial Corp. (Continued)
Condensed Statements of Cash Flows
(Parent Only)
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and shares in thousands except per share data)
Note 21-Quarterly Financial Data (Unaudited)
The following is a summary of unaudited quarterly results for 2010 and 2009:
The Successor Company reported net income of $560 for the three months ended December 31, 2010. Increases in net interest income are primarily due to the impact of the purchase accounting adjustments which revalued market deposits and borrowings to yield market interest rates as of September 30, 2010. The provision for loan losses of $402 recorded reflects the allowance for loan losses established for loans originated subsequent to September 30, 2010. No net charge-offs or losses on the disposition of other real estate owned were recorded as credit losses experienced were incorporated in the net discounts recorded on loans and other real estate acquired as of September 30, 2010.
The net loss for the fourth quarter of 2009 (Predecessor Company) was primarily due to the provision for income taxes of $24,032 resulting from the recognition of a full valuation allowance against deferred income tax assets of $30,392, the provision for loan losses of $16,428 and a goodwill impairment charge of $5,887.
ITEM 9:
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A:
ITEM 9A: CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, they have concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and are also designed to ensure that the information required to be disclosed in the reports filed or submitted under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
(b) Management’s Annual Report on Internal Control Over Financial Reporting
Changes in internal control over financial reporting
As discussed elsewhere in this filing, during the fourth fiscal quarter the company began to account for a substantial portion of its loans receivable as purchased credit-impaired loans as a result of the NAFH Investment on September 30, 2010. Prior to this, the company did not account for any of its loans receivable in this manner. Accordingly, the company has implemented new processes and related internal control over financial reporting associated with this change in accounting.
There have been no other significant changes in the Company's internal control over financial reporting during the fourth fiscal quarter ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of TIB Financial Corp. is responsible for establishing and maintaining adequate internal control over financial reporting, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). TIB Financial Corp.’s system of internal control over financial reporting was designed under the supervision of the company’s chief executive officer and chief financial officer to provide reasonable assurance regarding the reliability of the preparation of the company’s financial statements for external reporting purposes, in accordance with U.S. generally accepted accounting principles.
Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
TIB Financial Corp.’s management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the assessment, management determined that, as of December 31, 2010, the company’s internal control over financial reporting is effective.
This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.
Date: March 31, 2011
/s/R. Eugene Taylor
R. Eugene Taylor
Chairman and Chief Executive Officer
/s/Christopher G. Marshall
Christopher G. Marshall
Chief Financial Officer
ITEM 9B:
ITEM 9B: OTHER INFORMATION
Not applicable.
PART III
ITEM 10:
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information set forth under the captions “Information About the Board of Directors and Their Committees” and “Executive Officers” under the caption "Election of Directors", “Audit Committee Report” and “Filings Under Section 16(A) Beneficial Ownership Reporting Compliance” in the Proxy Statement to be utilized in connection with the Company's 2011 Annual Shareholders Meeting is incorporated herein by reference.
We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer, controller, and persons performing similar functions. We have posted the text of our code of ethics on our website at www.tibfinancialcorp.com in the section titled “Investor Relations.” In addition, we intend to promptly disclose (i) the nature of any amendment to our code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer, controller, or persons performing similar functions and (ii) the nature of any waiver, including an implicit waiver, from a provision of our code of ethics that is granted to one of these specified individuals, the name of such person who is granted the waiver, and the date of the waiver on our website in the future.
ITEM 11:
ITEM 11: EXECUTIVE COMPENSATION
The information contained under the captions “Compensation Discussion and Analysis,” “Compensation Committee Report”, “Compensation Committee Interlocks and Insider Participation”, "Executive Compensation” and “Compensation of Directors" in the Proxy Statement to be utilized in connection with the Company's 2011 Annual Shareholders Meeting is incorporated herein by reference.
ITEM 12:
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The information contained under the captions "Management and Principal Shareholders" and “Equity Compensation Plan Information” under “Executive Compensation” in the Proxy Statement to be utilized in connection with the Company's 2011 Annual Shareholders Meeting is incorporated herein by reference.
ITEM 13:
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information contained under the captions “Director Independence” under “Election of Directors” and "Certain Relationships and Related Transactions" in the Proxy Statement to be utilized in connection with the Company's 2011 Annual Shareholders Meeting is incorporated herein by reference.
ITEM 14:
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained under the caption "Independent Public Accountants" in the Proxy Statement to be utilized in connection with the Company's 2010 Annual Shareholders Meeting is incorporated herein by reference.
PART IV
ITEM 15:
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Financial Statements
The consolidated financial statements, notes thereto and independent auditors' report thereon, filed as part hereof, are listed in Item 8.
2. Financial Statement Schedules
Financial Statement schedules have been omitted as the required information is not applicable or the required information has been incorporated in the consolidated financial statements and related notes incorporated by reference herein.
3. Exhibits
(a)
Incorporated by reference to Appendix A in the Company’s Definitive Proxy Statement filed on April 8, 2004.
(b)
Item 3.2 was previously filed by the Company as an Exhibit to the Form 8-K filed by the Company on September 28, 2006 and is incorporated herein by reference.
(c)
Previously filed by the Company as an Exhibit to the Company's Registration Statement (Registration No. 333-113489) and such document is incorporated herein by reference.
(d)
Previously filed by the Company as an Exhibit (with the same respective Exhibit Number as indicated herein) to the Company's Registration Statement (Registration No. 333-03499) and such document is incorporated herein by reference.
(e)
Represents a management contract or a compensation plan or arrangement required to be filed as an exhibit.
(f)
Items 10.1, 10.10 and 10.11 were previously filed by the Company as Exhibits to the Company’s December 31, 2003 10-K and such documents are incorporated herein by reference.
(g)
Items 10.4 and 10.5 were previously filed by the Company as an Exhibit to the Form 10-Q filed by the Company on November 8, 2006 and are incorporated herein by reference.
(h)
Item 10.6 was previously filed by the Company as an Exhibit to the Form 8-K filed by the Company on September 27, 2006 and is incorporated herein by reference.
(i)
Items 10.7 through 10.9 were previously filed by the Company as Exhibits to the Company’s December 31, 2001 10-K and such documents are incorporated herein by reference.
(j)
Item 10.12 was previously filed by the Company as an Exhibit to the Company’s December 31, 2004 10-K and is incorporated herein by reference.
(k)
Items 10.13, 10.14, 10.16, 10.17, 14.1 and 14.2 were previously filed by the Company as Exhibits to the Company’s December 31, 2005 10-K and such documents are incorporated herein by reference.
(l)
Item 3.4 was previously filed by the Company as an Exhibit to the Form 10-K filed by the Company on March 17, 2008 and is incorporated herein by reference.
(m)
Items 10.15 and 99.1 were previously filed by the Company as Exhibits (with the same respective exhibit number as indicated herein) to the Company's December 31, 2006 Form 10-K and such documents are incorporated herein by reference.
(n)
Item 10.18 was previously filed by the Company as an Exhibit to the Form 8-K filed by the Company on February 7, 2008 and is incorporated herein by reference.
(o)
Item 10.19 was previously filed by the Company as an Exhibit to the Form 8-K filed by the Company on December 13, 2007 and is incorporated herein by reference.
(p)
Item 10.22 was previously filed by the Company as an Exhibit to the Form 10-Q filed by the Company on November 9, 2007 and is incorporated herein by reference.
(q)
Item 10.21 was previously filed by the Company as an Exhibit to the Form 8-K filed by the Company on May 2, 2007 and is incorporated herein by reference.
(r)
Items 3.5 through 3.6 and 10.27 through 10.30 were previously filed by the Company as Exhibits to the Form 8-K filed by the Company on December 5, 2008 and such documents are incorporated herein by reference.
(s)
Items 10.23 through 10.26 were previously filed by the Company as Exhibits to the Form 8-K filed by the Company on March 11, 2008 and such documents are hereby incorporated by reference.
(t)
Item 10.20 was previously filed by the Company as an Exhibit to the Form 8-K filed by the Company on October 1, 2007 and is incorporated herein by reference.
(u)
Item 3.7 was previously filed by the Company as an Exhibit to the Form 8-K filed by the Company on October 1, 2010 and is incorporated herein by reference.
(v)
Item 3.8 was previously filed by the Company as an Exhibit to the Form 8-K filed by the Company on December 7, 2010 and is incorporated herein by reference.
(w)
Item 3.9 was previously filed by the Company as an Exhibit to the Form 8-K filed by the Company on December 15, 2010 and is incorporated herein by reference.
(x)
Item 3.10 was previously filed by the Company as an Exhibit to the Form 8-K filed by the Company on November 30, 2010 and is incorporated herein by reference.
(y)
Items 10.31 and 10.32 were previously filed by the Company as Exhibits to the Form 8-K filed by the Company on October 6, 2010 and such documents are incorporated herein by reference.
(z)
Items 4.2 through 4.4 were previously filed by the Company as Exhibits (with the same respective exhibit number as indicated herein) to the Company's December 31, 2009 Form 10-K and such documents are incorporated herein by reference.
(aa)
Items 3,11, 4.5, 10.33, 10.34 and 10.35 were previously filed by the Company as Exhibits to the Form 8-K filed by the Company on October 1, 2010 and such documents are incorporated herein by reference.
(bb)
Item 10.36 was previously filed by the Company as an Exhibit to the Form 8-K filed by the Company on September 23, 2010 and is incorporated herein by reference.
(cc)
Item 10.37 was previously filed by the Company as an Exhibit to the Form 8-K filed by the Company on July 8, 2010 and is incorporated herein by reference.
(dd)
Item 10.38 was previously filed by the Company as an Exhibit to the Form 8-K filed by the Company on June 30, 2010 and is incorporated herein by reference.
(ee)
Items 10.39 and 10.40 were previously filed by the Company as Exhibits to the Form 8-K filed by the Company on June 11, 2010 and such documents are incorporated herein by reference.
(ff)
Items 3.12 and 99.3 were previously filed by the Company as Exhibits to the Form 8-K filed by the Company on May 26, 2010 and such documents are incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on March 31, 2011.
TIB FINANCIAL CORP.
By:
/s/R. Eugene Taylor
R. Eugene Taylor
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 31, 2010.
Signature
Title
/s/R. Eugene Taylor
Chief Executive Officer (Principal Executive Officer), Chairman of the Board of Directors.
R. Eugene Taylor
/s/Christopher G. Marshall
Chief Financial Officer (Principal Financial Officer) (Principal Accounting Officer), Director
Christopher G. Marshall
/s/R. Bruce Singletary
Chief Risk Officer, Director
R. Bruce Singletary
/s/Peter N. Foss
Director
Peter N. Foss
/s/William A. Hodges
Director
William A. Hodges
/s/Bradley A. Boaz
Director
Bradley A. Boaz
/s/Howard B. Gutman
Director
Howard B. Gutman