UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) April 1, 2019
CENTERSTATE BANK CORPORATION
(Exact name of registrant as specified in its charter)
Florida |
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000-32017 |
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59-3606741 |
(State or other jurisdiction
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(Commission
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(IRS employer
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1101 First Street South, Suite 202, Winter Haven, FL |
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33880 |
(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: (863) 293-4710
Not Applicable
(Former name or former address, if changed since last report)
___________________
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Closing of Acquisition of National Commerce Corporation
Effective April 1, 2019 (the “Effective Time”), CenterState Bank Corporation (the “Company” or “CSFL”) completed its previously-announced acquisition of National Commerce Corporation (“NCOM”), pursuant to an Agreement and Plan of Merger by and between CSFL and NCOM, dated as of November 23, 2018 (the “Merger Agreement”). The acquisition was effected through the merger of NCOM with and into CSFL (the “Merger”), with CSFL as the surviving entity in the Merger. Immediately following the Merger, NCOM’s wholly-owned subsidiary bank, National Bank of Commerce (“NBC”), merged with and into CenterState Bank, N.A. (“CenterState Bank”), with CenterState Bank as the surviving national bank subsidiary of the Company.
Pursuant to the Merger Agreement, NCOM’s stockholders received 1.65 shares (the “exchange ratio”) of CSFL common stock plus for each outstanding share of NCOM common stock held immediately prior to the effective time of the Merger, with cash payable in lieu of any fractional shares. Each option or warrant to purchase shares of NCOM common stock was assumed by CSFL according to its terms and was converted into an option or warrant, as applicable, to purchase the number of shares of CSFL common stock equal to the exchange ratio multiplied by the number of shares of NCOM common stock which such option or warrant entitled the holder thereof to purchase, at an exercise price per share of CSFL common stock equal to the exercise price per share of NCOM common stock that applied to such NCOM stock option or warrant divided by the exchange ratio. The deferrals of NCOM common stock representing equity awards and director fees credited to participant accounts under the National Commerce Corporation Deferral of Compensation Plan were converted into the right to receive the merger consideration in respect of each such deferred share, net of withholding taxes. Each performance share award with respect to shares of NCOM common stock vested in accordance with the applicable NCOM equity plan and award agreement and became entitled to receive the merger consideration as a deferred share (to be treated as described above) or an outstanding share of common stock, as applicable.
As a result of the Merger, CSFL will issue approximately 34,668,731 shares of CSFL common stock to former holders of NCOM common stock, which based on the closing price of CSFL common stock on March 29, 2019, had a value of approximately $826 million. Each share of CSFL common stock outstanding immediately prior to the Merger remained outstanding and was unaffected by the Merger.
In connection with the Merger, the Company assumed NCOM’s rights and obligations under and relating to NCOM’s outstanding 6.0% Fixed-to-Floating Rate Subordinated Notes due June 1, 2026, in the aggregate principal amount of $25 million, and NCOM’s outstanding 6.5% Fixed-to-Floating Subordinated Notes due June 30, 2027, in the aggregate principal amount of $13 million (in each case before related acquisition accounting fair market value adjustments).
The foregoing description of the Merger Agreement and the Merger does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is incorporated herein by reference to Exhibit 2.1.
Item 5.02 |
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Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers |
As previously disclosed, in connection with the Merger and pursuant to the terms of the Merger Agreement, the Company increased the size of its board of directors (the “Board”), effective April 1, 2019, from 16 members to 19 members and appointed John H. Holcomb, III, the former Vice Chair of the NCOM board, Richard Murray, IV, the former Chair and CEO of NCOM, and G. Ruffner Page, Jr., the former lead independent director of NCOM, to the Board and the board of directors of CenterState Bank (the “Bank Board”). The Bank Board also took action to appoint Mark L. Drew, a former NCOM and former NBC director, to the Bank Board only, effective April 1, 2019.
At this time, none of these directors have been named to serve on any committees of the board of directors of the Company or CenterState Bank, nor has the Board or the Bank Board identified any committees to which any of the appointees is expected to be appointed.
Each of these directors other than Mr. Murray is entitled to receive the same compensation as other nonemployee directors of the Company: an annual cash retainer of $30,000, payable on a quarterly basis for his service on the board of the Company and CenterState Bank, and a $50,000 annual retainer fee paid in the Company’s common stock. These amounts exclude meeting fees paid to serve on a committee of the board of directors of the Company (i.e., Audit, Compensation,
Nominating, Risk and Culture), which are currently $1,000 per meeting attended by members of a committee.
In addition, effective April 1, 2019, Mr. Murray was appointed as the Chief Executive Officer of CSFL’s subsidiary bank, and William E. Matthews, V, the former President and Chief Financial Officer of NCOM, was appointed as the Chief Financial Officer of CSFL and CenterState Bank. As previously described in the Company’s joint proxy statement/prospectus, filed with the Securities and Exchange Commission on January 8, 2019, each of Messrs. Murray and Matthews has entered into an employment agreement with CenterState Bank. The description of such employment agreements is incorporated by reference herein, and the description of the employment agreements with Messrs. Murray and Matthews is qualified in its entirety by reference to the full text of the respective employment agreements.
See “ Interests of NCOM’s Executive Officers and Directors in the Merge r” of the joint proxy statement/prospectus contained in the Registration Statement (File No. 333-229159) filed by CSFL with the Securities and Exchange Commission on January 8, 2019, which is incorporated herein by reference, for additional information about arrangements and transactions between the Company and Messrs. Holcomb, Murray, Matthews, Page, and Drew.
Item 8.01 |
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Other Events |
On April 1, 2019, the Company issued a press release announcing the closing of the Merger. A copy of the press release is attached as Exhibit 99.1 to this Current Report on Form 8-K, and is incorporated by reference herein.
Item 9.01 |
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Financial Statements and Exhibits |
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(a) |
Financial statements of business acquired |
The audited consolidated balance sheets of NCOM as of December 31, 2018 and 2017, and the related statements of earnings, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes and report of registered public accounting firm thereto, are filed as Exhibit 99.2 and incorporated by reference herein.
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(b) |
Pro forma financial information |
The unaudited pro forma combined consolidated balance sheet as of December 31, 2018, and the unaudited pro forma combined consolidated statement of income for the year ended December 31, 2018 are filed as Exhibit 99.3 and incorporated by reference herein.
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(1) The Company has omitted schedules and similar attachments to the subject agreement pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedule or similar attachment upon request.
The Company assumed pursuant to the Merger certain long-term debt instruments of NCOM with respect to subordinated notes under which the aggregate principal amount totaled $38 million (before related acquisition accounting fair market value adjustments), which total amount represents less than one-quarter of one percent of the total unaudited pro-forma combined assets of the Company as of December 31, 2018 as set forth in Exhibit 99.3 of this Form 8-K. The Company agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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CENTERSTATE BANK CORPORATION |
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By: |
/s/ Jennifer L. Idell |
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Jennifer L. Idell |
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Executive Vice President and |
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Chief Administrative Officer |
Date: April 1, 2019
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements No. 333-225276, No. 333-222382, No. 333-222381, No. 333-217572, No. 333-193625, No. 333-188725, No. 333-159416 and No. 333-225276 on Forms S-8 and No. 333-215481 on Form S-3 of CenterState Bank Corporation of our report dated March 4, 2019 relating to the consolidated financial statements of National Commerce Corporation and subsidiaries included as Exhibit 99.2 in this Current Report of CenterState Bank Corporation on Form 8-K on April 1, 2019.
/s/ Porter Keadle Moore, LLC
Atlanta, Georgia
April 1, 2019
Exhibit 99.1
FOR IMMEDIATE RELEASE
April 1, 2019
CenterState Bank Corporation Completes Acquisition of
National Commerce Corporation
WINTER HAVEN, FL. – April 1, 2019 /PR Newswire - CenterState Bank Corporation (NASDAQ: CSFL) (“CenterState” or the “Company”) announced today that it completed its acquisition of National Commerce Corporation (NASDAQ: NCOM) (“NCOM”), effective as of April 1, 2019. Immediately following the acquisition, NCOM’s subsidiary bank, National Bank of Commerce, merged with and into CenterState Bank, N.A., a national banking association and wholly owned subsidiary of CenterState, with CenterState Bank as the surviving bank in the merger. With this transaction, the Company is now a leading Southeastern regional bank, with 162 branches located throughout Florida, Georgia and Alabama, and, based on December 31, 2018 financial data and excluding purchase accounting adjustments, has assets of $16.5 billion, gross loans of $11.7 billion, deposits of $12.9 billion and a market capitalization of approximately $3.3 billion.
Pursuant to the merger agreement, NCOM’s stockholders are entitled to receive, for each share of NCOM common stock outstanding immediately prior to the merger, 1.65 shares of CenterState common stock.
In addition, in connection with the closing of the merger, Richard Murray, IV, Chairman and Chief Executive Officer of NCOM, has been named the Chief Executive Officer of the Company’s wholly-owned bank subsidiary, and William E. Matthews, V, President and Chief Financial Officer of NCOM, has been named Chief Financial Officer of both the holding company and its bank subsidiary. Jennifer L. Idell, the former Chief Financial Officer of the Company and its subsidiary bank, has been named Chief Administrative Officer of the Company. Additionally, three NCOM directors – John H. Holcomb, III, Richard Murray, and G. Ruffner Page, Jr. – have been appointed to the board of directors of the Company and its subsidiary bank, and Mark L. Drew has been appointed to the board of directors of the bank only.
About CenterState
CenterState operates as one of the leading Southeastern regional bank franchises headquartered in the state of Florida. Both CenterState and its nationally chartered bank subsidiary are based in Winter Haven, Florida, between Orlando and Tampa. With over $16 billion in assets, the Bank provides traditional retail, commercial, mortgage, wealth management and SBA services throughout its Florida, Georgia and Alabama branch network and customer relationships in neighboring states. The Bank also has a national footprint, serving clients coast to coast through its correspondent banking division.
For further information, please contact Steve Young at 863-293-4710.
Information in this press release, other than statements of historical facts, may constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, CenterState’s plans, objectives, expectations and intentions, and other statements that are not historical facts. Forward-looking statements may be identified by terminology such as “may,” “will,” “should,” “scheduled,” “plans,” “intends,” “anticipates,” “expects,” “believes,” estimates,” “potential,” or “continue” or negative of such terms or other comparable terminology. All forward-looking statements are subject to risks, uncertainties and other facts that may cause the actual results, performance or achievements of CenterState to differ materially from any results expressed or implied by such forward-looking statements. Such factors include, among others, the impact on failing to implement our business strategy, including our growth and acquisition strategy, including the merger with NCOM and its integration; any litigation that has been or might be filed in connection with the merger; the ability to successfully integrate our acquisitions; additional capital requirements due to our growth plans; the impact of an increase in our asset size to over $10 billion; the risks of changes in interest rates and the level and composition of deposits; loan demand, the credit and other risks in our loan portfolio and the values of loan collateral; the impact of us not being able to manage our risk; the impact on a loss of management or other experienced employees; the impact if we failed to maintain our culture and attract and retain skilled people; the risk of changes in technology and customer preferences; the impact of any material failure or breach in our infrastructure or the infrastructure of third parties on which we rely including as a result of cyber-attacks; or material regulatory liability in areas such as BSA or consumer protection; reputational risks from such failures or liabilities or other events; legislative and regulatory changes; general competitive, political, legal, economic and market conditions and developments; financial market conditions and the results of financing efforts; changes in commodity prices and interest rates; weather, natural disasters and other catastrophic events; and other factors discussed in our filings with the Securities and Exchange Commission under the Exchange Act. Additional factors that could cause results to differ materially from those contemplated by forward-looking statements can be found in CenterState’s Annual Report on Form 10-K for the year ended December 31, 2018, and otherwise in our SEC reports and filings, which are available in the “Investor Relations” section of CenterState’s website, http://www.centerstatebanks.com. Forward-looking statements speak only as of the date they are made. You should not expect us to update any forward-looking statements.
Exhibit 99.2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
National Commerce Corporation and subsidiaries
Birmingham, Alabama
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of National Commerce Corporation and subsidiaries (the “Company”), as of December 31, 2018 and 2017, and the related consolidated statements of earnings, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting 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.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2003.
Atlanta, Georgia
March 4, 2019
Consolidated Balance Sheets
December 31, 2018 and 2017
(In thousands, except share and per share data)
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December 31, 2018 |
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December 31, 2017 |
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Assets |
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Cash and due from banks |
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$ |
50,628 |
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36,246 |
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Interest-bearing deposits with banks |
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166,502 |
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199,042 |
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Cash and cash equivalents |
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217,130 |
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235,288 |
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Investment securities held-to-maturity (fair value of $24,821 and $25,932 at December 31, 2018 and December 31, 2017, respectively) |
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25,045 |
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25,562 |
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Investment securities available-for-sale |
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187,516 |
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85,834 |
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Other investments |
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16,946 |
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11,350 |
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Mortgage loans held-for-sale |
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15,031 |
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29,191 |
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Loans, net of unearned income |
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3,317,965 |
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2,138,058 |
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Less: allowance for loan losses |
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18,176 |
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14,985 |
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Loans, net |
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3,299,789 |
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2,123,073 |
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Premises and equipment, net |
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86,658 |
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52,455 |
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Accrued interest receivable |
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10,348 |
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6,157 |
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Bank-owned life insurance |
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55,114 |
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31,584 |
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Other real estate |
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974 |
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1,094 |
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Deferred tax assets, net |
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13,005 |
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12,041 |
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Goodwill |
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249,812 |
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113,394 |
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Core deposit intangible, net |
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18,372 |
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4,455 |
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Other assets |
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9,748 |
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6,198 |
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Total assets |
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$ |
4,205,488 |
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2,737,676 |
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Liabilities and Shareholders’ Equity |
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Deposits: |
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Noninterest-bearing demand |
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$ |
929,820 |
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697,144 |
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Interest-bearing demand |
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692,725 |
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362,266 |
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Savings and money market |
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1,315,337 |
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951,846 |
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Time |
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494,407 |
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274,575 |
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Total deposits |
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3,432,289 |
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2,285,831 |
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Federal Home Loan Bank advances |
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2,000 |
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7,000 |
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Securities sold under agreements to repurchase |
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18,851 |
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- |
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Subordinated debt |
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37,235 |
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24,553 |
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Accrued interest payable |
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1,437 |
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900 |
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Other liabilities |
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16,618 |
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19,434 |
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Total liabilities |
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3,508,430 |
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2,337,718 |
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Commitments and contingencies |
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Shareholders’ equity: |
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Preferred stock, 250,000 shares authorized, no shares issued or outstanding |
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- |
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- |
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Common stock, $0.01 par value, 30,000,000 shares authorized, 20,762,084 and 14,788,436 shares issued and outstanding at December 31, 2018 and December 31, 2017, respectively |
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208 |
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148 |
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Additional paid-in capital |
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604,965 |
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347,999 |
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Retained earnings |
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86,433 |
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43,989 |
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Accumulated other comprehensive (loss) income |
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(2,203 |
) |
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474 |
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Total shareholders' equity attributable to National Commerce Corporation |
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689,403 |
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392,610 |
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Noncontrolling interest |
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7,655 |
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7,348 |
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Total shareholders' equity |
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697,058 |
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399,958 |
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Total liabilities and shareholders' equity |
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$ |
4,205,488 |
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2,737,676 |
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See accompanying notes to consolidated financial statements.
Consolidated Statements of Earnings
For the Years Ended December 31, 2018, 2017 and 2016
(In thousands, except per share data)
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2018 |
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2017 |
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2016 |
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Interest and dividend income: |
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Interest and fees on loans |
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$ |
162,332 |
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104,194 |
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71,225 |
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Interest and dividends on taxable investment securities |
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5,654 |
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2,627 |
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1,813 |
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Interest on non-taxable investment securities |
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751 |
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783 |
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802 |
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Interest on interest-bearing deposits and federal funds sold |
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2,921 |
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2,187 |
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723 |
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Total interest income |
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171,658 |
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109,791 |
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74,563 |
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Interest expense: |
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Interest on deposits |
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19,205 |
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8,530 |
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6,127 |
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Interest on Federal Home Loan Bank advances |
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190 |
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283 |
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294 |
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Interest on securities sold under agreements to repurchase |
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121 |
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1 |
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- |
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Interest on subordinated debt |
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1,921 |
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1,553 |
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960 |
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Total interest expense |
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21,437 |
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10,367 |
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7,381 |
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Net interest income |
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150,221 |
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99,424 |
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67,182 |
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Provision for loan losses |
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4,723 |
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3,894 |
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|
3,248 |
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Net interest income after provision for loan losses |
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145,498 |
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|
95,530 |
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63,934 |
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Noninterest income: |
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Service charges and fees on deposit accounts |
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4,372 |
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2,711 |
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2,019 |
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Mortgage origination and fee income |
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7,864 |
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11,529 |
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6,975 |
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Merchant sponsorship revenue |
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2,979 |
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2,560 |
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2,168 |
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Income from bank-owned life insurance |
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1,225 |
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|
855 |
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810 |
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Wealth management fees |
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73 |
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47 |
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49 |
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Gain on other real estate, net |
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56 |
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44 |
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244 |
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Gain (loss) on sale of investment securities available-for-sale |
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193 |
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(91 |
) |
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- |
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Other |
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2,519 |
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2,056 |
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1,691 |
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Total noninterest income |
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19,281 |
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19,711 |
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13,956 |
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Other expense: |
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Salaries and employee benefits |
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58,166 |
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39,556 |
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27,735 |
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Commission-based compensation |
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6,955 |
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6,855 |
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4,091 |
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Occupancy and equipment, net |
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8,994 |
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6,209 |
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4,640 |
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Core deposit intangible amortization |
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4,249 |
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1,455 |
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|
756 |
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Other operating expense |
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28,711 |
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19,120 |
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11,857 |
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Total other expense |
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107,075 |
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73,195 |
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49,079 |
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Earnings before income taxes |
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57,704 |
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42,046 |
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28,811 |
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Income tax expense |
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12,791 |
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|
20,071 |
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|
9,394 |
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Net earnings |
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44,913 |
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21,975 |
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19,417 |
|
Less: Net earnings attributable to noncontrolling interest |
|
|
2,469 |
|
|
|
1,907 |
|
|
|
1,564 |
|
Net earnings attributable to National Commerce Corporation |
|
$ |
42,444 |
|
|
|
20,068 |
|
|
|
17,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
2.26 |
|
|
|
1.45 |
|
|
|
1.64 |
|
Diluted earnings per common share |
|
$ |
2.21 |
|
|
|
1.41 |
|
|
|
1.61 |
|
See accompanying notes to consolidated financial statements.
NATIONAL COMMERCE CORPORATION
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2018, 2017 and 2016
(In thousands)
|
|
2018 |
|
|
2017 |
|
|
2016 |
|
|||
Net earnings |
|
$ |
42,444 |
|
|
$ |
20,068 |
|
|
|
17,853 |
|
Other comprehensive (loss) income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (losses) gains on investment securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (losses) gains arising during the period, net of tax of $(672), $44, $(160), respectively |
|
|
(2,525 |
) |
|
|
82 |
|
|
|
(299 |
) |
Reclassification adjustment for (gains) losses included in net earnings, net of tax of $41 and $(32), in 2018 and 2017, respectively |
|
|
(152 |
) |
|
|
59 |
|
|
|
- |
|
Other comprehensive (loss) income |
|
|
(2,677 |
) |
|
|
141 |
|
|
|
(299 |
) |
Comprehensive income |
|
$ |
39,767 |
|
|
$ |
20,209 |
|
|
|
17,554 |
|
See accompanying notes to consolidated financial statements.
NATIONAL COMMERCE CORPORATION
Consolidated Statements of Changes in Shareholders’ Equity
For the Years Ended December 31, 2018, 2017 and 2016
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
||
|
|
Common |
|
|
Paid-in |
|
|
Retained |
|
|
Comprehensive |
|
|
Noncontrolling |
|
|
|
|
|
|||||
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
Income |
|
|
Interest |
|
|
Total |
|
||||||
Balance, December 31, 2015 |
|
$ |
108 |
|
|
|
202,456 |
|
|
|
6,152 |
|
|
|
548 |
|
|
|
7,372 |
|
|
|
216,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense |
|
|
- |
|
|
|
1,226 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,226 |
|
Net earnings attributable to National Commerce Corporation |
|
|
- |
|
|
|
- |
|
|
|
17,853 |
|
|
|
- |
|
|
|
- |
|
|
|
17,853 |
|
Reclassification for Delaware reincorporation |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Exercise of stock options and issuance of performance shares |
|
|
1 |
|
|
|
1,315 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,316 |
|
Tax benefit resulting from exercise of stock options and issuance of performance shares, net of adjustment |
|
|
- |
|
|
|
375 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
375 |
|
Net earnings attributable to noncontrolling interest |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,564 |
|
|
|
1,564 |
|
Distributions paid to noncontrolling interest |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,627 |
) |
|
|
(1,627 |
) |
Share repurchase and retirement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Change in unrealized gain/loss on securities available-for-sale, net of tax |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(299 |
) |
|
|
- |
|
|
|
(299 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016 |
|
$ |
109 |
|
|
|
205,372 |
|
|
|
24,005 |
|
|
|
249 |
|
|
|
7,309 |
|
|
|
237,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense |
|
|
- |
|
|
|
1,684 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,684 |
|
Net earnings attributable to National Commerce Corporation |
|
|
- |
|
|
|
- |
|
|
|
20,068 |
|
|
|
- |
|
|
|
- |
|
|
|
20,068 |
|
Exercise of stock options and issuance of performance shares |
|
|
3 |
|
|
|
2,810 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,813 |
|
Net earnings attributable to noncontrolling interest |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,907 |
|
|
|
1,907 |
|
Distributions paid to noncontrolling interest |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,868 |
) |
|
|
(1,868 |
) |
Sale of common stock, net of offering expenses of $103 |
|
|
11 |
|
|
|
38,692 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
38,703 |
|
Acquisition of Private Bancshares, Inc., net of offering expenses of $139 |
|
|
18 |
|
|
|
71,412 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
71,430 |
|
Acquisition of Patriot Bank, net of offering expenses of $55 |
|
|
7 |
|
|
|
28,029 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
28,036 |
|
Reclassification due to the effects of the Tax Cuts and Jobs Act of 2017 |
|
|
- |
|
|
|
- |
|
|
|
(84 |
) |
|
|
84 |
|
|
|
- |
|
|
|
- |
|
Change in unrealized gain/loss on securities available-for-sale, net of tax |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
141 |
|
|
|
- |
|
|
|
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017 |
|
$ |
148 |
|
|
|
347,999 |
|
|
|
43,989 |
|
|
|
474 |
|
|
|
7,348 |
|
|
|
399,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense |
|
|
- |
|
|
|
2,097 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,097 |
|
Net earnings attributable to National Commerce Corporation |
|
|
- |
|
|
|
- |
|
|
|
42,444 |
|
|
|
- |
|
|
|
- |
|
|
|
42,444 |
|
Exercise of stock options, warrants and issuance of performance shares |
|
|
3 |
|
|
|
2,157 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,160 |
|
Net earnings attributable to noncontrolling interest |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,469 |
|
|
|
2,469 |
|
Distributions paid to noncontrolling interest |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,162 |
) |
|
|
(2,162 |
) |
Acquisition of FirstAtlantic Financial Holdings, Inc., net of offering expenses of $94 |
|
|
24 |
|
|
|
97,034 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
97,058 |
|
Acquisition of Premier Community Bank of Florida, net of offering expenses of $53 |
|
|
10 |
|
|
|
49,079 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
49,089 |
|
Acquisition of Landmark Bancshares, Inc., net of offering expenses of $83 |
|
|
23 |
|
|
|
106,599 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
106,622 |
|
Change in unrealized gain/loss on securities available-for-sale, net of tax |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,677 |
) |
|
|
- |
|
|
|
(2,677 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018 |
|
$ |
208 |
|
|
|
604,965 |
|
|
|
86,433 |
|
|
|
(2,203 |
) |
|
|
7,655 |
|
|
|
697,058 |
|
See accompanying notes to consolidated financial statements.
NATIONAL COMMERCE CORPORATION
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2018, 2017 and 2016
(In thousands)
|
|
2018 |
|
|
2017 |
|
|
2016 |
|
|||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
42,444 |
|
|
|
20,068 |
|
|
|
17,853 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
4,723 |
|
|
|
3,894 |
|
|
|
3,248 |
|
Net earnings attributable to noncontrolling interest |
|
|
2,469 |
|
|
|
1,907 |
|
|
|
1,564 |
|
Depreciation, amortization and accretion, net |
|
|
(372 |
) |
|
|
(386 |
) |
|
|
1,065 |
|
Gain on sale of premises and equipment |
|
|
(4 |
) |
|
|
8 |
|
|
|
7 |
|
Gain on ineffective portion of fair value hedge derivative |
|
|
(8 |
) |
|
|
(48 |
) |
|
|
(45 |
) |
Change in mortgage loan derivative |
|
|
289 |
|
|
|
(139 |
) |
|
|
(62 |
) |
Deferred tax expense |
|
|
4,010 |
|
|
|
7,189 |
|
|
|
894 |
|
Excess tax benefit from share-based compensation |
|
|
(1,058 |
) |
|
|
(799 |
) |
|
|
- |
|
Gain on sale of investment securities available-for-sale |
|
|
(193 |
) |
|
|
91 |
|
|
|
- |
|
Share-based compensation expense |
|
|
2,097 |
|
|
|
1,684 |
|
|
|
1,226 |
|
Income from bank-owned life insurance |
|
|
(1,225 |
) |
|
|
(855 |
) |
|
|
(810 |
) |
Net gain on sale of other real estate |
|
|
(56 |
) |
|
|
(44 |
) |
|
|
(244 |
) |
Other real estate write-downs |
|
|
- |
|
|
|
219 |
|
|
|
- |
|
Change in (net of effect of business combinations): |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held-for-sale |
|
|
14,161 |
|
|
|
10,810 |
|
|
|
(353 |
) |
Other assets and accrued interest receivable |
|
|
(131 |
) |
|
|
(66 |
) |
|
|
386 |
|
Other liabilities and accrued interest payable |
|
|
(9,303 |
) |
|
|
2,137 |
|
|
|
4,753 |
|
Net cash provided by operating activities |
|
|
57,843 |
|
|
|
45,670 |
|
|
|
29,482 |
|
Cash flows from investing activities (net of effect of business combinations): |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from calls, maturities, and paydowns of securities available-for-sale |
|
|
64,720 |
|
|
|
25,705 |
|
|
|
35,429 |
|
Proceeds from calls, maturities, and paydowns of securities held-to-maturity |
|
|
687 |
|
|
|
900 |
|
|
|
997 |
|
Proceeds from sale of securities available-for-sale |
|
|
154,708 |
|
|
|
22,240 |
|
|
|
1,494 |
|
Purchases of securities available-for-sale |
|
|
(159,185 |
) |
|
|
(45,072 |
) |
|
|
(57,725 |
) |
Purchases of securities held-to-maturity |
|
|
(500 |
) |
|
|
(250 |
) |
|
|
- |
|
Proceeds from sale of other investments |
|
|
488 |
|
|
|
- |
|
|
|
693 |
|
Purchases of other investments |
|
|
(4,336 |
) |
|
|
(3,078 |
) |
|
|
(2,337 |
) |
Net cash received in acquisitions |
|
|
47,858 |
|
|
|
12,710 |
|
|
|
- |
|
Net change in loans |
|
|
(240,289 |
) |
|
|
(268,060 |
) |
|
|
(165,711 |
) |
Proceeds from sale of other real estate |
|
|
1,136 |
|
|
|
2,309 |
|
|
|
2,622 |
|
Proceeds from death benefit of bank-owned life insurance |
|
|
- |
|
|
|
599 |
|
|
|
- |
|
Investment in bank-owned life insurance |
|
|
(3,200 |
) |
|
|
- |
|
|
|
- |
|
Proceeds from the sale of premises and equipment |
|
|
652 |
|
|
|
2,342 |
|
|
|
225 |
|
Purchases of premises and equipment |
|
|
(8,233 |
) |
|
|
(18,732 |
) |
|
|
(2,848 |
) |
Net cash used by investing activities |
|
|
(145,494 |
) |
|
|
(268,387 |
) |
|
|
(187,161 |
) |
Cash flows from financing activities (net of effect of business combinations): |
|
|
|
|
|
|
|
|
|
|
|
|
Net change in deposits |
|
|
87,643 |
|
|
|
202,118 |
|
|
|
153,412 |
|
Proceeds from Federal Home Loan Bank advances |
|
|
- |
|
|
|
- |
|
|
|
(15,000 |
) |
Repayment of Federal Home Loan Bank advances |
|
|
(18,000 |
) |
|
|
- |
|
|
|
- |
|
Net change in other borrowings |
|
|
94 |
|
|
|
(860 |
) |
|
|
- |
|
Issuance of subordinated debt |
|
|
- |
|
|
|
- |
|
|
|
25,000 |
|
Debt offering expenses |
|
|
- |
|
|
|
- |
|
|
|
(533 |
) |
Cash distribution paid to noncontrolling interests |
|
|
(2,162 |
) |
|
|
(1,868 |
) |
|
|
(1,627 |
) |
Proceeds from stock offering |
|
|
- |
|
|
|
38,806 |
|
|
|
- |
|
Stock offering expenses |
|
|
- |
|
|
|
(103 |
) |
|
|
- |
|
Stock offering expenses related to acquisition |
|
|
(230 |
) |
|
|
(194 |
) |
|
|
- |
|
Proceeds from exercise of options and warrants |
|
|
2,149 |
|
|
|
2,813 |
|
|
|
1,263 |
|
Net cash (used) provided by financing activities |
|
|
69,494 |
|
|
|
240,712 |
|
|
|
162,515 |
|
Net change in cash and cash equivalents |
|
|
(18,158 |
) |
|
|
17,995 |
|
|
|
4,836 |
|
Cash and cash equivalents at beginning of the period |
|
|
235,288 |
|
|
|
217,293 |
|
|
|
212,457 |
|
Cash and cash equivalents at end of the period |
|
$ |
217,130 |
|
|
|
235,288 |
|
|
|
217,293 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|||
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
21,394 |
|
|
|
10,351 |
|
|
|
7,179 |
|
Income taxes |
|
$ |
11,617 |
|
|
|
12,759 |
|
|
|
7,143 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized (losses) gains on securities available-for-sale, net of tax |
|
$ |
(2,677 |
) |
|
|
141 |
|
|
|
(299 |
) |
Transfer of loans to other real estate |
|
$ |
721 |
|
|
|
488 |
|
|
|
481 |
|
Assets acquired and liabilities assumed in acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired in acquisitions |
|
$ |
1,318,959 |
|
|
|
507,404 |
|
|
|
- |
|
Liabilities assumed in acquisitions |
|
$ |
1,113,817 |
|
|
|
420,453 |
|
|
|
- |
|
Tax benefit resulting from exercise of stock options |
|
$ |
- |
|
|
|
- |
|
|
|
375 |
|
See accompanying notes to consolidated financial statements.
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements
(amounts in tables in thousands, except share and per share data)
(1) |
Summary of Significant Accounting Policies |
Basis of Presentation
The consolidated financial statements include the accounts of National Commerce Corporation (the “Company”) and its wholly-owned banking subsidiary, National Bank of Commerce (“NBC” or the “Bank”) and wholly-owned non-banking subsidiary, National Commerce Risk Management, Inc., a captive insurance company used to insure certain corporate risks. The consolidated financial statements also include the accounts of NBC’s majority-owned subsidiary, CBI Holding Company, LLC (“CBI”), which owns Corporate Billing, LLC (“Corporate Billing”). Corporate Billing is a transaction-based finance company headquartered in Decatur, Alabama that provides factoring, invoicing, collection and accounts receivable management services to transportation companies and automotive parts and service providers nationwide. The Bank provides a full range of commercial and consumer banking services throughout Alabama, central and northeast Florida and the Atlanta, Georgia metropolitan area. NBC is primarily regulated by the Office of the Comptroller of Currency (the “OCC”) and is subject to periodic examinations by the OCC. The Company is regulated by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and is also subject to periodic examinations by the Federal Reserve.
The accounting principles followed by the Company and the method of applying these principles conform with accounting principles generally accepted in the United States of America (“GAAP”) and with general practices within the banking industry. In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts in the consolidated financial statements. Actual results could differ significantly from those estimates. Material estimates common to the banking industry that are particularly susceptible to significant change in the near term include, but are not limited to, the determination of the allowance for loan losses, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, the fair value of purchase accounting adjustments, and valuation allowances associated with the realization of deferred tax assets, which are based on future taxable income.
Cash and Cash Equivalents
Cash equivalents include amounts due from banks, interest-bearing deposits with the Federal Reserve Bank of Atlanta (“FRB”), the Federal Home Loan Bank (“FHLB”) and correspondent banks, and federal funds sold. Generally, federal funds are sold for one-day periods. The Company is required to maintain certain average reserve balances with the FRB or in cash. At December 31, 2018 and 2017, the Company’s reserve requirement (net of vault cash) was approximately $37,840,000 and $16,452,000, respectively.
Investment Securities
The Company classifies its securities in one of three categories: trading, available-for-sale or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities that the Company has the ability and intent to hold until maturity. All securities not included in trading or held-to-maturity are classified as available-for-sale. At December 31, 2018, securities classified as held-to-maturity totaled $25,045,000, and available-for-sale securities totaled $187,516,000. At December 31, 2017, securities classified as held-to-maturity totaled $25,562,000, and available-for-sale securities totaled $84,834,000. No securities were classified as trading securities as of either date.
Available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains and losses, net of the related tax effect, on securities available-for-sale are excluded from earnings and are reported as a separate component of shareholders’ equity until realized. Transfers of securities between categories are recorded at fair value at the date of transfer.
Management evaluates investment securities for other-than-temporary impairment on a quarterly basis. A decline in the market value of any investment below cost that is deemed other-than-temporary is charged to earnings for the decline in value deemed to be credit-related, and a new cost basis in the security is established. The decline in value attributed to non-credit-related factors is recognized in other comprehensive income.
Premiums and discounts are amortized or accreted over the life of the related securities as adjustments to the yield. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities sold.
Other Investments
Other investments include FRB stock, FHLB stock and other investments that do not have a readily determinable market value. These investments are carried at cost, which approximates fair value.
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
Loans and Allowance for Loan Losses
Loans are stated at the principal amount outstanding, net of the allowance for loan losses. Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding.
Nonrefundable loan fees and costs incurred for loans are deferred and recognized in income over the life of the loans.
A loan is considered impaired when, based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, at the loan’s observable market price, or at the fair value of the collateral of the loan if the loan is collateral-dependent. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful. When a loan is placed on non-accrual status, previously accrued and uncollected interest is charged to interest income on loans. Generally, payments on non-accrual loans are applied to principal. When a borrower has demonstrated the capacity to service the debt for a reasonable period of time, management may elect to resume the accrual of interest on the loan.
The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The allowance represents an amount that, in management’s judgment, will be adequate to absorb probable losses on existing loans that may become uncollectible.
Management’s judgment in determining the adequacy of the allowance is based on evaluations of the collectibility of loans. These evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, current economic conditions that may affect the borrower’s ability to pay, overall portfolio quality, and review of specific problem loans.
Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination processes, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on judgments different than those of management.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company (i.e., put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership), (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Mortgage Loans Held-for-Sale
Prior to the year ended December 31, 2016, mortgage loans held-for-sale were carried at the lower of cost or market value, and all mortgage loans were delivered on a “best efforts” basis. During the year ended December 31, 2016, the Company began to enter into mandatory delivery of a portion of its residential mortgage loans originated for sale in the secondary market.
In connection with mandatory delivery, the Company elected to record its mortgage loans held-for-sale at fair value. The fair value of committed residential loans held-for-sale is determined by outstanding commitments from investors, and the fair value of uncommitted loans is based on the current delivery prices in the secondary mortgage market. To mitigate the interest rate risk associated with mandatory delivery, the Company enters into forward commitments to sell mortgage-backed securities and records the change in fair value of these derivatives through income.
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Major additions and improvements are charged to the property accounts, while replacements, maintenance, and repairs that do not improve or extend the life of the respective assets are expensed currently. When property is retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and the resulting gain or loss, if any, is recognized. Depreciation expense is computed using the straight-line method over the following estimated useful lives:
|
|
Useful Life |
|
|||
|
|
(in years) |
|
|||
Building and improvements |
|
|
10 |
- |
40 |
|
Furniture and equipment |
|
|
5 |
- |
10 |
|
Leasehold improvements |
|
|
Various |
|
||
Computer equipment |
|
|
3 |
- |
5 |
|
Other Real Estate and Repossessed Assets
Other real estate represents properties acquired through or in lieu of loan foreclosure and is initially recorded at fair value less estimated disposal costs. Costs of improvements are capitalized, whereas costs relating to holding other real estate and valuation adjustments are expensed. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from other real estate.
Business Combinations
The Company accounts for business combinations under the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations . The Company recognizes the full fair value of the assets acquired and liabilities assumed and immediately expenses transaction costs. There is no separate recognition of the acquired allowance for loan losses on the acquirer’s balance sheet, as credit-related factors are incorporated directly into the fair value of the net tangible and intangible assets acquired. If the amount of consideration exceeds the fair value of assets purchased less the fair value of liabilities assumed, goodwill is recorded. Alternatively, if the amount by which the fair value of assets purchased exceeds the fair value of liabilities assumed and consideration paid, a gain is recorded. Fair values are subject to refinement for up to one year after the closing date of an acquisition as additional information affecting closing date fair values becomes available. Results of operations of the acquired business are included in the statement of income from the effective date of the acquisition. Additional information regarding acquisitions is provided in Note 2.
Goodwill and Intangible Assets
Goodwill represents the excess of cost over the fair value of the net assets purchased in business combinations. Goodwill is required to be tested annually for impairment or whenever events occur that may indicate that the recoverability of the carrying amount is not probable. In the event of an impairment, the amount by which the carrying amount exceeds the fair value is charged to earnings. The Company performs an annual test of impairment in the fourth quarter of each year.
Intangible assets consist of core deposit premiums acquired in connection with business combinations and are based on the established value of acquired customer deposits. The core deposit premium is initially recognized based on a valuation performed as of the consummation date and is amortized over an estimated useful life of three to ten years. Amortization periods are reviewed annually in connection with the annual impairment testing of goodwill.
Purchased Loans
Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date. Pursuant to ASC 310-30, Loans and Debt Securities with Deteriorated Credit Quality, when the loans have 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, the difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference. The Company must estimate expected cash flows at each reporting date. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in expected cash flows result in a reversal of the provision for loan losses to the extent of prior provisions and an adjustment to accretable discount if no prior provisions have been made. This increase in accretable discount has a positive impact on interest income.
In determining the initial fair value of purchased loans without evidence of credit deterioration at the date of acquisition, management includes an adjustment to reflect an appropriate market rate of interest given the risk profile and grade assigned to each loan. This adjustment is accreted into earnings as a yield adjustment, using the effective yield method, over the remaining life of each loan.
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
In the event that the future tax consequences of differences between the financial reporting bases and the tax bases of the assets and liabilities result in deferred tax assets, an evaluation of the probability of realizing the future benefits indicated by such asset is required. A valuation allowance is provided for the portion of the deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the realizability of the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies.
The Company currently evaluates income tax positions judged to be uncertain. A loss contingency reserve is accrued if: (1) it is probable that the tax position will be challenged, (2) it is probable that the future resolution of the challenge will confirm that a loss has been incurred, and (3) the amount of such loss can be reasonably estimated.
Derivative Financial Instruments and Hedging Activities
In the normal course of business, the Company enters into derivative contracts to manage interest rate risk by modifying the characteristics of the related balance sheet instruments in order to reduce the adverse effect of changes in interest rates.
All derivatives are recognized on the balance sheet at their value in accordance with ASC 815, Accounting for Derivative Instruments and Hedging Activities . On the date that the derivative contract is entered into, the Company designates the derivative as a hedge of fair value of a recognized asset or liability or of an unrecognized firm commitment. Changes in the fair value of a derivative that are highly effective, and that are designated and qualify as a fair value hedge, along with the loss or gain on the hedged asset or liability that is attributable to the hedged risk (including gains or losses on firm commitments), are recorded in current-period earnings.
The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedged transactions. This process includes linking all derivatives that are designated as fair value hedges to specific assets and liabilities on the balance sheet. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values of hedged items. When it is determined that a derivative is not highly effective as a hedge, the Company discontinues hedge accounting prospectively, as discussed below.
The Company discontinues hedge accounting prospectively when (1) it is determined that the derivative is no longer effective in offsetting changes in the fair value of a hedged item; (2) the derivative expires or is sold, terminated or exercised; (3) a hedged firm commitment no longer meets the definition of a firm commitment; or (4) management determines that designation of the derivative as a hedge instrument is no longer appropriate.
When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair value hedge, the derivative will continue to be carried on the balance sheet at its fair value, and the hedged asset or liability will no longer be adjusted for changes in fair value. When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the derivative will continue to be carried on the balance sheet at its fair value, and any asset or liability that was recorded pursuant to recognition of the firm commitment will be removed from the balance sheet and recognized as a gain or loss in current-period earnings. In all other situations in which hedge accounting is discontinued, the derivative will be carried at its fair value on the balance sheet, with changes in its fair value recognized in current-period earnings.
Mortgage Banking Derivative Commitments
In connection with its mortgage banking activities, the Company enters into loan commitments to fund residential mortgage loans at specified interest rates and within a specified period of time, generally up to 60 days from the time of the rate lock. A loan commitment related to a loan that will be held for sale upon funding is a derivative instrument under ASC 815, Derivatives and Hedging, which must be recognized at fair value on the consolidated balance sheet in other assets and other liabilities, with changes in its value recorded in income from mortgage banking operations.
To hedge the exposure of changes in interest rates impacting the fair value of loans held for sale and related loan commitments, the Company will enter into forward sales commitments with its secondary market investors at the time that a loan commitment is granted to lock in the ultimate sale and price of the loan. These commitments are generally on a best-efforts basis. Accordingly, our sales commitment derivative instruments are not considered material. For the loans that are mandatory delivery, in order to mitigate interest rate risk, the Company enters into forward commitments to sell mortgage-backed securities and records the change in fair value of these derivatives through income.
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
As of December 31, 2018 and 2017, the fair value of the Company’s interest rate lock commitment derivatives was approximately $523,000 and $528,000, respectively, and is included in other assets in the accompanying consolidated balance sheets. The Company recognized (loss) income relating to interest rate lock commitment derivatives of $(5,000), $66,000 and $62,000 during the years ended December 31, 2018, 2017 and 2016, respectively. These amounts are included in mortgage origination and fee income in the consolidated statements of earnings.
Operating Segments
Operating segments are components of a business about which separate financial information is available and evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assessing performance. Public companies are required to report certain financial information about operating segments in interim and annual financial statements. The Company’s retail and commercial banking operations are divided among geographic regions and local community markets within those regions. Those regions and markets have similar economic characteristics and are therefore considered to be one operating segment.
Additionally, management assessed other operating divisions to determine if they should be classified and reported as segments. These divisions include the mortgage and receivables factoring divisions. Each was assessed for separate reporting on both a qualitative and a quantitative basis in accordance ASC 280, Segment Reporting . Qualitatively, the mortgage division operates in the same footprint as our retail and commercial banking operations. However, the chief operating decision maker does have profitability, performance and other measures that allow him to analyze the performance on a stand-alone basis. The receivables factoring division operates independently as a wholly-owned subsidiary of the Bank. Therefore, the financial results are distinct and separate from the retail and commercial bank operations and the mortgage division.
Based on this analysis, the Company has concluded that it has three operating and reportable segments, which are retail and commercial banking, mortgage division and the receivables factoring division.
Stock-Based Compensation
The Company accounts for its stock-based compensation plans using a fair value-based method of accounting, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period.
Accumulated Other Comprehensive Income
At December 31, 2018, 2017 and 2016, accumulated other comprehensive income consisted of net unrealized gains on investment securities available-for-sale.
Net Earnings per Common Share
Basic earnings per common share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the year. Diluted earnings per common share are computed by dividing net income by the sum of potential common shares that are dilutive plus the weighted-average number of shares of common stock outstanding. Anti-dilutive potential common shares (options) are excluded from the diluted earnings per share computation. During 2018, 2017 and 2016, there were no anti-dilutive potential common shares.
The reconciliation of the components of basic and diluted earnings per share is as follows:
|
|
2018 |
|
|
2017 |
|
|
2016 |
|
|||
Net earnings available to common shareholders |
|
$ |
42,444 |
|
|
|
20,068 |
|
|
|
17,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
18,753,066 |
|
|
|
13,800,595 |
|
|
|
10,886,092 |
|
Dilutive effect of stock options and warrants |
|
|
238,364 |
|
|
|
200,521 |
|
|
|
111,374 |
|
Dilutive effect of directors' deferred shares |
|
|
57,287 |
|
|
|
37,229 |
|
|
|
20,471 |
|
Dilutive effect of performance share awards |
|
|
181,473 |
|
|
|
155,088 |
|
|
|
76,050 |
|
Diluted common shares |
|
|
19,230,190 |
|
|
|
14,193,433 |
|
|
|
11,093,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
2.26 |
|
|
|
1.45 |
|
|
|
1.64 |
|
Diluted earnings per common share |
|
$ |
2.21 |
|
|
|
1.41 |
|
|
|
1.61 |
|
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
Reclassifications
Certain 2017 and 2016 amounts have been reclassified to conform to the presentation used in 2018. These reclassifications had no material effect on the operations, financial condition or cash flows of the Company.
Recently Issued Accounting Pronouncements
In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-13, “ Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; however, entities will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. Entities are also allowed to elect early adoption of the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. As ASU No. 2018-13 only revises disclosure requirements, it will not have a material impact on the Company’s consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU 2018-02 was issued to address the income tax accounting treatment of the stranded tax effects within other comprehensive income due to the prohibition of backward tracing due to an income tax rate change that was initially recorded in other comprehensive income. This issue arose as a result of the enactment of the Tax Cuts and Jobs Act on December 22, 2017, which changed the Company’s federal income tax rate from 35% to 21%. Specifically, this ASU changed current accounting whereby an entity may elect to reclassify the stranded tax effect from accumulated other comprehensive income to retained earnings. The ASU is effective for periods beginning after December 15, 2018, although early adoption is permitted. The Company elected to early adopt this standard and accordingly reclassified $84,000 that was stranded in accumulated other comprehensive income to retained earnings as of December 31, 2017.
In August 2017, the FASB issued ASU 2017-12, “ Targeted Improvements to Accounting for Hedging Activities . ” This ASU simplifies and expands the eligible hedging strategies for financial and nonfinancial risks by more closely aligning hedge accounting with a company’s risk management activities, and also simplifies the application of Topic 815, Derivatives and Hedging , through targeted improvements in key practice areas. This includes expanding the list of items eligible to be hedged and amending the methods used to measure the effectiveness of hedging relationships. In addition, the ASU prescribes how hedging results should be presented and requires incremental disclosures. These changes are intended to allow preparers more flexibility and to enhance the transparency of how hedging results are presented and disclosed. Further, the ASU provides partial relief on the timing of certain aspects of hedge documentation and eliminates the requirement to recognize hedge ineffectiveness separately in earnings in the current period. The ASU is effective for years beginning after December 15, 2018, and interim periods within those years. The Company does not expect the impact of adoption of this ASU to be material.
In May 2014, the FASB issued ASU 2014-09, Revenue From Contracts With Customers (Topic 606) . The amendments in this ASU affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition , and most industry-specific guidance, and creates a Topic 606, Revenue from Contracts with Customers . The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The ASU allows for either full retrospective or modified retrospective adoption. In August 2015, the FASB issued ASU 2015-14, Revenue From Contracts With Customers (Topic 606): Deferral of the Effective Date. This ASU deferred the effective date of ASU 2014-09, Revenue From Contracts With Customers (Topic 606), by one year. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The Company’s revenue has been more significantly weighted towards net interest income on financial assets and liabilities, which is explicitly excluded from the scope of the new standard, and noninterest income has not been as significant. The Company is continuing to assess its revenue streams and review its contracts with customers that are potentially affected by the new guidance, including fees on deposits, gains and losses on the sale of other real estate owned, credit and debit card interchange fees, and credit card revenue, to determine the potential impact the new guidance is expected to have on the Company’s consolidated financial statements. However, the Company’s revenue recognition pattern for these revenue streams is not expected to change materially from current practice. In addition, the Company continues to follow implementation issues specific to financial institutions, which are still under discussion by the FASB’s Transition Resource Group. The Company adopted the ASU on January 1, 2018 utilizing the modified retrospective approach, and the adoption did not have a material impact on the Company’s consolidated financial statements.
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
In January 2016, the FASB issued ASU 2016-01, Financial Instruments Overall (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities . The amendments in ASU 2016-01: (1) require equity investments (except for those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value, with changes in fair value recognized in net income; (2) simplify the impairment assessment of equity securities without readily determinable fair values by requiring a qualitative assessment to identify impairment; (3) eliminate the requirement for public business entities to disclose the method and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (4) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (5) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (6) require separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the notes to the financial statements; and (7) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The Company adopted the new ASU on January 1, 2018, and the adoption did not have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early application of this ASU is permitted for all entities. The Company leases some of its banking offices under lease agreements that it classifies as operating leases. The Company adopted the ASU on January 1, 2019 utilizing the modified retrospective approach and recorded a right-of-use lease asset and operating lease liability of approximately $12,296,000 and $12,682,000, respectively.
In June 2016, the FASB issued ASU 2016-13 , Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which applies to the use of the so-called CECL model, or current expected credit losses. Among other things, the amendments in this ASU require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For SEC reporting companies, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with later effective dates for non-SEC registrant public companies and other organizations. Early adoption will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact of the amendments in this ASU on its consolidated financial statements and is collecting data that will be needed to produce historical inputs into any models created as a result of adopting this ASU. The Company expects the allowance for credit losses to increase upon adoption, with a corresponding adjustment to retained earnings.
(2) |
Business Combinations |
Landmark Bancshares, Inc.
Effective August 1, 2018, the Company completed its merger with Landmark Bancshares, Inc. (“Landmark”). Landmark was the parent company of First Landmark Bank, headquartered in Marietta, Georgia, and was merged with and into NCC. Immediately following the holding company merger, First Landmark Bank merged with and into NBC, but NBC continues to operate the former offices of First Landmark Bank under the trade name “First Landmark Bank, a division of National Bank of Commerce.”
At the effective time of the merger, each share of common stock of Landmark issued and outstanding was converted into the right to receive 0.5961 shares of NCC common stock and cash in the amount of $1.33. The Company paid approximately $5,218,000 in cash and issued 2,334,385 shares of NCC common stock for the issued and outstanding shares of Landmark common stock.
The acquisition of Landmark was accounted for using the purchase method of accounting in accordance with ASC 805, Business Combinations . Assets acquired, liabilities assumed and consideration exchanged were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities is a complicated process involving significant judgment regarding the methods and assumptions to be used. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available.
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
The following table presents the assets acquired and liabilities assumed of Landmark as of August 1, 2018 at their initial fair value estimates:
|
|
As Recorded By |
|
|
Fair Value |
|
|
|
As Recorded |
|
|||
|
|
Landmark |
|
|
Adjustments |
|
|
|
By the Company |
|
|||
Cash and cash equivalents |
|
$ |
10,572 |
|
|
|
- |
|
|
|
|
10,572 |
|
Investment securities |
|
|
66,561 |
|
|
|
(2,282 |
) |
a |
|
|
64,279 |
|
Other investments |
|
|
1,172 |
|
|
|
- |
|
|
|
|
1,172 |
|
Mortgage loans held-for-sale |
|
|
1 |
|
|
|
- |
|
|
|
|
1 |
|
Loans |
|
|
469,931 |
|
|
|
(12,463 |
) |
b |
|
|
460,700 |
|
|
|
|
|
|
|
|
3,232 |
|
c |
|
|
|
|
Allowance for loan losses |
|
|
5,155 |
|
|
|
(5,155 |
) |
d |
|
|
- |
|
Net loans |
|
|
464,776 |
|
|
|
(4,076 |
) |
|
|
|
460,700 |
|
Premises and equipment, net |
|
|
7,626 |
|
|
|
1,940 |
|
e |
|
|
9,566 |
|
Core deposit intangible |
|
|
- |
|
|
|
8,414 |
|
f |
|
|
8,414 |
|
Existing intangible assets |
|
|
6,433 |
|
|
|
(6,433 |
) |
g |
|
|
- |
|
Bank-owned life insurance |
|
|
5,782 |
|
|
|
- |
|
|
|
|
5,782 |
|
Other assets |
|
|
5,371 |
|
|
|
(266 |
) |
h |
|
|
5,105 |
|
Total assets |
|
$ |
568,294 |
|
|
|
(2,703 |
) |
|
|
|
565,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
$ |
137,875 |
|
|
|
- |
|
|
|
|
137,875 |
|
Interest-bearing deposits |
|
|
341,187 |
|
|
|
1,099 |
|
i |
|
|
342,286 |
|
Total deposits |
|
|
479,062 |
|
|
|
1,099 |
|
|
|
|
480,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other borrowings |
|
|
26,258 |
|
|
|
- |
|
|
|
|
26,258 |
|
Other liabilities |
|
|
3,924 |
|
|
|
(189 |
) |
j |
|
|
3,735 |
|
Total liabilities |
|
|
509,244 |
|
|
|
910 |
|
|
|
|
510,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net identifiable assets acquired over liabilities assumed |
|
|
59,050 |
|
|
|
(3,613 |
) |
|
|
|
55,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
- |
|
|
|
56,486 |
|
|
|
|
56,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired over liabilities assumed |
|
$ |
59,050 |
|
|
|
52,873 |
|
|
|
|
111,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consideration: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock issued |
|
|
|
|
|
|
2,334,385 |
|
|
|
|
|
|
Estimated value per share of the Company's stock |
|
|
|
|
|
$ |
43.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of Company stock issued |
|
|
|
|
|
|
101,779 |
|
|
|
|
|
|
Cash paid for shares and in lieu of fractional shares |
|
|
|
|
|
|
5,218 |
|
|
|
|
|
|
Value of assumed stock options |
|
|
|
|
|
|
4,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of total consideration transferred |
|
|
|
|
|
$ |
111,923 |
|
|
|
|
|
|
Explanation of fair value adjustments:
|
a. |
Adjustment reflects fair value adjustments of the available-for-sale portfolio at acquisition date. |
|
b. |
Adjustment reflects the fair value adjustments based on the Company’s evaluation of the acquired loan portfolio. |
|
c. |
Adjustment to remove loan marks from Landmark’s prior acquisition and existing deferred fees and costs. |
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
|
d. |
Adjustment reflects the elimination of Landmark’s allowance for loan losses. |
|
e. |
Adjustment reflects the write-off of certain fixed assets and fair value adjustments of real property. |
|
f. |
Adjustment reflects the recording of core deposit intangible asset. |
|
g. |
Adjustment to remove intangible assets from Landmark’s balance sheet from prior acquisition. |
|
h. |
Adjustment to record the deferred tax asset created by purchase adjustments. |
|
i. |
Adjustment reflects the fair value adjustment to time deposit accounts. |
|
j. |
Adjustment to adjust balances of certain liabilities. |
The accretable yield on loans will be accreted to interest income over the estimated average life of the loans using a level yield method. The Company records a non-accretable difference on PCI loans and estimates the amount and timing of expected cash flows for these loans and increases in expected cash flows is recorded as interest income over the remaining life of the loans. The core deposit intangible asset is being amortized over a seven-year life on an accelerated basis.
Premier Community Bank of Florida
Effective July 1, 2018, the Company completed its merger with Premier Community Bank of Florida (“Premier”), headquartered in Bradenton, Florida. Premier was merged with and into NBC, but NBC continues to operate the former offices of Premier under the trade name “Premier Community Bank, a division of National Bank of Commerce.”
At the effective time of the merger, each share of common stock of Premier issued and outstanding was converted into the right to receive 0.4218 shares of NCC common stock and cash in the amount of $0.93. The Company paid approximately $2,275,000 in cash and issued 1,028,092 shares of NCC common stock for the issued and outstanding shares of Premier common stock.
The acquisition of Premier was accounted for using the purchase method of accounting in accordance with ASC 805, Business Combinations . Assets acquired, liabilities assumed and consideration exchanged were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities is a complicated process involving significant judgment regarding the methods and assumptions to be used. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available.
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
The following table presents the assets acquired and liabilities assumed of Premier as of July 1, 2018 at their initial fair value estimates:
|
|
As Recorded By |
|
|
Fair Value |
|
|
|
As Recorded |
|
|||
|
|
Premier |
|
|
Adjustments |
|
|
|
By the Company |
|
|||
Cash and cash equivalents |
|
$ |
41,317 |
|
|
|
- |
|
|
|
|
41,317 |
|
Investment securities |
|
|
20,175 |
|
|
|
(9 |
) |
a |
|
|
20,166 |
|
Other investments |
|
|
181 |
|
|
|
- |
|
|
|
|
181 |
|
Loans |
|
|
174,102 |
|
|
|
(5,361 |
) |
b |
|
|
168,810 |
|
|
|
|
|
|
|
|
69 |
|
c |
|
|
|
|
Allowance for loan losses |
|
|
1,219 |
|
|
|
(1,219 |
) |
d |
|
|
- |
|
Net loans |
|
|
172,883 |
|
|
|
(4,073 |
) |
|
|
|
168,810 |
|
Premises and equipment, net |
|
|
7,170 |
|
|
|
(16 |
) |
e |
|
|
7,154 |
|
Core deposit intangible |
|
|
- |
|
|
|
3,500 |
|
f |
|
|
3,500 |
|
Bank-owned life insurance |
|
|
3,050 |
|
|
|
- |
|
|
|
|
3,050 |
|
Other assets |
|
|
2,114 |
|
|
|
356 |
|
g |
|
|
2,470 |
|
Total assets |
|
$ |
246,890 |
|
|
|
(242 |
) |
|
|
|
246,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
$ |
24,470 |
|
|
|
- |
|
|
|
|
24,470 |
|
Interest-bearing deposits |
|
|
179,949 |
|
|
|
661 |
|
h |
|
|
180,610 |
|
Total deposits |
|
|
204,419 |
|
|
|
661 |
|
|
|
|
205,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase liability |
|
|
18,108 |
|
|
|
- |
|
|
|
|
18,108 |
|
Other liabilities |
|
|
717 |
|
|
|
(126 |
) |
|
|
|
591 |
|
Total liabilities |
|
|
223,244 |
|
|
|
535 |
|
|
|
|
223,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net identifiable assets acquired over liabilities assumed |
|
|
23,646 |
|
|
|
(777 |
) |
|
|
|
22,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
- |
|
|
|
28,549 |
|
|
|
|
28,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired over liabilities assumed |
|
$ |
23,646 |
|
|
|
27,772 |
|
|
|
|
51,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consideration: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock issued |
|
|
|
|
|
|
1,028,092 |
|
|
|
|
|
|
Estimated value per share of the Company's stock |
|
|
|
|
|
$ |
46.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of Company stock issued |
|
|
|
|
|
|
47,601 |
|
|
|
|
|
|
Cash paid for shares and in lieu of fractional shares |
|
|
|
|
|
|
2,275 |
|
|
|
|
|
|
Value of assumed stock options |
|
|
|
|
|
|
1,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of total consideration transferred |
|
|
|
|
|
$ |
51,418 |
|
|
|
|
|
|
Explanation of fair value adjustments:
|
a. |
Adjustment reflects fair value adjustments of the available-for-sale portfolio at acquisition date. |
|
b. |
Adjustment reflects the fair value adjustments based on the Company’s evaluation of the acquired loan portfolio. |
|
c. |
Adjustment to remove deferred fees and costs. |
|
d. |
Adjustment reflects the elimination of Premier’s allowance for loan losses. |
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
|
e. |
Adjustment reflects the write-off of certain fixed assets and fair value adjustments of real property. |
|
f. |
Adjustment reflects the recording of core deposit intangible asset. |
|
g. |
Adjustment to record the deferred tax asset created by purchase adjustments. |
|
h. |
Adjustment reflects the fair value adjustment to time deposit accounts. |
The accretable yield on loans will be accreted to interest income over the estimated average life of the loans using a level yield method. The Company records a non-accretable difference on PCI loans and estimates the amount and timing of expected cash flows for these loans and increases in expected cash flows is recorded as interest income over the remaining life of the loans. The core deposit intangible asset is being amortized over a seven-year life on an accelerated basis.
FirstAtlantic Financial Holdings, Inc.
Effective January 1, 2018, the Company completed its merger with FirstAtlantic Holdings, Inc. (“FirstAtlantic”). FirstAtlantic was the parent company of FirstAtlantic Bank, headquartered in Jacksonville, Florida, and was merged with and into NCC. Immediately following the holding company merger, FirstAtlantic Bank merged with and into NBC, but NBC continues to operate the former offices of FirstAtlantic Bank under the trade name “FirstAtlantic Bank, a division of National Bank of Commerce.”
At the effective time of the merger, each share of common stock of FirstAtlantic issued and outstanding was converted into the right to receive 0.44 shares of NCC common stock and cash in the amount of $17.25. The Company paid approximately $12,802,000 in cash and issued 2,393,382 shares of NCC common stock for the issued and outstanding shares of FirstAtlantic common stock.
At the effective time of the merger, each outstanding and unexercised option to purchase shares of FirstAtlantic common stock converted into the right receive a cash payment equal to the excess, if any, of $17.25 over the exercise price per share of FirstAtlantic common stock subject to such option, less any required withholding tax. The Company paid approximately $425,000 in cash to cancel the outstanding and unexercised stock options. Each outstanding warrant to purchase FirstAtlantic common stock will represent a right to purchase shares of NCC common stock, with the exercise price and number of shares underlying the warrant adjusted according to exchange ratio. At the effective date, 49,781 warrants to purchase FirstAtlantic common stock converted to the right to acquire 21,898 shares of NCC common stock.
The acquisition of FirstAtlantic was accounted for using the purchase method of accounting in accordance with ASC 805, Business Combinations . Assets acquired, liabilities assumed and consideration exchanged were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities is a complicated process involving significant judgment regarding the methods and assumptions to be used. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available.
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
The following table presents the assets acquired and liabilities assumed of FirstAtlantic as of January 1, 2018 at their initial fair value estimates:
|
|
As Recorded By |
|
|
Fair Value |
|
|
|
As Recorded |
|
|||
|
|
FirstAtlantic |
|
|
Adjustments |
|
|
|
By the Company |
|
|||
Cash and cash equivalents |
|
$ |
16,264 |
|
|
|
- |
|
|
|
|
16,264 |
|
Investment securities |
|
|
83,761 |
|
|
|
(2,491 |
) |
a |
|
|
81,270 |
|
Other investments |
|
|
393 |
|
|
|
- |
|
|
|
|
393 |
|
Mortgage loans held-for-sale |
|
|
- |
|
|
|
- |
|
|
|
|
- |
|
Loans |
|
|
310,636 |
|
|
|
(8,687 |
) |
b |
|
|
303,831 |
|
|
|
|
|
|
|
|
1,882 |
|
c |
|
|
|
|
Allowance for loan losses |
|
|
2,614 |
|
|
|
(2,614 |
) |
d |
|
|
- |
|
Net loans |
|
|
308,022 |
|
|
|
(4,191 |
) |
|
|
|
303,831 |
|
Premises and equipment, net |
|
|
13,688 |
|
|
|
(46 |
) |
e |
|
|
13,642 |
|
Core deposit intangible |
|
|
- |
|
|
|
6,251 |
|
f |
|
|
6,251 |
|
Existing intangible assets |
|
|
2,188 |
|
|
|
(2,188 |
) |
g |
|
|
- |
|
Bank-owned life insurance |
|
|
10,273 |
|
|
|
- |
|
|
|
|
10,273 |
|
Other real estate and repossessions |
|
|
365 |
|
|
|
(127 |
) |
h |
|
|
238 |
|
Other assets |
|
|
5,738 |
|
|
|
(198 |
) |
i |
|
|
5,540 |
|
Total assets |
|
$ |
440,692 |
|
|
|
(2,990 |
) |
|
|
|
437,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
$ |
113,964 |
|
|
|
- |
|
|
|
|
113,964 |
|
Interest-bearing deposits |
|
|
259,864 |
|
|
|
457 |
|
j |
|
|
260,321 |
|
Total deposits |
|
|
373,828 |
|
|
|
457 |
|
|
|
|
374,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase liability |
|
|
- |
|
|
|
- |
|
|
|
|
- |
|
Other liabilities |
|
|
4,557 |
|
|
|
253 |
|
k |
|
|
4,810 |
|
Total liabilities |
|
|
378,385 |
|
|
|
710 |
|
|
|
|
379,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net identifiable assets acquired over liabilities assumed |
|
|
62,307 |
|
|
|
(3,700 |
) |
|
|
|
58,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
- |
|
|
|
51,347 |
|
|
|
|
51,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired over liabilities assumed |
|
$ |
62,307 |
|
|
|
47,647 |
|
|
|
|
109,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consideration: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock issued |
|
|
|
|
|
|
2,393,382 |
|
|
|
|
|
|
Estimated value per share of the Company's stock |
|
|
|
|
|
$ |
40.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of Company stock issued |
|
|
|
|
|
|
96,334 |
|
|
|
|
|
|
Cash paid for shares and in lieu of fractional shares |
|
|
|
|
|
|
12,802 |
|
|
|
|
|
|
Cash paid for stock options |
|
|
|
|
|
|
425 |
|
|
|
|
|
|
Value of assumed stock warrants |
|
|
|
|
|
|
393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of total consideration transferred |
|
|
|
|
|
$ |
109,954 |
|
|
|
|
|
|
Explanation of fair value adjustments:
|
a. |
Adjustment reflects fair value adjustments of the available-for-sale portfolio at acquisition date. |
|
b. |
Adjustment reflects the fair value adjustments based on the Company’s evaluation of the acquired loan portfolio. |
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
|
c. |
Adjustment to remove FirstAtlantic’s loan marks from prior acquisition and existing deferred fees and costs. |
|
d. |
Adjustment reflects the elimination of FirstAtlantic’s allowance for loan losses. |
|
e. |
Adjustment reflects the write-off of certain fixed assets and fair value adjustments of real property. |
|
f. |
Adjustment reflects the recording of core deposit intangible asset. |
|
g. |
Adjustment to remove intangible assets from FirstAtlantic’s balance sheet from prior acquisition. |
|
h. |
Adjustment reflects the fair value adjustments of other real estate. |
|
i. |
Adjustment to record the deferred tax asset created by purchase adjustments. |
|
j. |
Adjustment reflects the fair value adjustment to time deposit accounts. |
|
k. |
Adjustment to reflect unrecorded liabilities. |
The accretable yield on loans will be accreted to interest income over the estimated average life of the loans using a level yield method. The Company records a non-accretable difference on PCI loans and estimates the amount and timing of expected cash flows for these loans and increases in expected cash flows is recorded as interest income over the remaining life of the loans. The core deposit intangible asset is being amortized over a seven-year life on an accelerated basis.
Patriot Bank
On August 31, 2017, the Company completed its acquisition of Patriot Bank. Patriot Bank was headquartered in Trinity, Florida, and was merged with and into NBC. NBC continues to operate the former offices of Patriot Bank as a division of NBC under the trade name “Patriot Bank.”
At the effective time of the merger, each share of common stock of Patriot Bank issued and outstanding was converted into the right to receive 0.1711 shares of NCC common stock and cash in the amount of $0.725. The Company paid approximately $3,002,000 in cash and issued 706,702 shares of NCC common stock for the issued and outstanding shares of Patriot Bank common stock.
The acquisition of Patriot Bank was accounted for using the purchase method of accounting in accordance with ASC 805, Business Combinations . Assets acquired, liabilities assumed and consideration exchanged were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities is a complicated process involving significant judgment regarding the methods and assumptions to be used. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available.
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
The following table presents the assets acquired and liabilities assumed of Patriot Bank as of August 31, 2017 at their initial fair value estimates:
|
|
As Recorded By |
|
|
Fair Value |
|
|
|
As Recorded |
|
|||
|
|
Patriot Bank |
|
|
Adjustments |
|
|
|
By the Company |
|
|||
Cash and cash equivalents |
|
$ |
3,373 |
|
|
|
- |
|
|
|
|
3,373 |
|
Interest-bearing deposits in banks |
|
|
2,895 |
|
|
|
(27 |
) |
a |
|
|
2,868 |
|
Investment securities |
|
|
4,967 |
|
|
|
(56 |
) |
a |
|
|
4,911 |
|
Loans |
|
|
124,714 |
|
|
|
(2,999 |
) |
b |
|
|
121,715 |
|
Allowance for loan losses |
|
|
1,531 |
|
|
|
(1,531 |
) |
c |
|
|
- |
|
Net loans |
|
|
123,183 |
|
|
|
(1,468 |
) |
|
|
|
121,715 |
|
Premises and equipment, net |
|
|
6,457 |
|
|
|
(343 |
) |
d |
|
|
6,114 |
|
Core deposit intangible |
|
|
- |
|
|
|
899 |
|
e |
|
|
899 |
|
Other real estate and repossessions |
|
|
1,601 |
|
|
|
(580 |
) |
f |
|
|
1,021 |
|
Other assets |
|
|
2,838 |
|
|
|
1,858 |
|
g |
|
|
4,660 |
|
|
|
|
|
|
|
|
(36 |
) |
h |
|
|
|
|
Total assets |
|
$ |
145,314 |
|
|
|
247 |
|
|
|
|
145,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
$ |
27,247 |
|
|
|
- |
|
|
|
|
27,247 |
|
Interest-bearing deposits |
|
|
100,425 |
|
|
|
68 |
|
i |
|
|
100,493 |
|
Total deposits |
|
|
127,672 |
|
|
|
68 |
|
|
|
|
127,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase liability |
|
|
860 |
|
|
|
- |
|
|
|
|
860 |
|
Other liabilities |
|
|
517 |
|
|
|
73 |
|
j |
|
|
590 |
|
Total liabilities |
|
|
129,049 |
|
|
|
141 |
|
|
|
|
129,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net identifiable assets acquired over liabilities assumed |
|
|
16,265 |
|
|
|
106 |
|
|
|
|
16,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
- |
|
|
|
14,722 |
|
|
|
|
14,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired over liabilities assumed |
|
$ |
16,265 |
|
|
|
14,828 |
|
|
|
|
31,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consideration: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock issued |
|
|
|
|
|
|
706,702 |
|
|
|
|
|
|
Estimated value per share of the Company's stock |
|
|
|
|
|
$ |
39.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of Company stock issued |
|
|
|
|
|
|
28,091 |
|
|
|
|
|
|
Cash paid for shares and in lieu of fractional shares |
|
|
|
|
|
|
3,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of total consideration transferred |
|
|
|
|
|
$ |
31,093 |
|
|
|
|
|
|
Explanation of fair value adjustments:
|
a. |
Adjustment reflects fair value adjustments of the interest bearing deposits in banks and available-for-sale portfolio at acquisition date. |
|
b. |
Adjustment reflects the fair value adjustments based on the Company’s evaluation of the acquired loan portfolio. |
|
c. |
Adjustment reflects the elimination of Patriot Bank’s allowance for loan losses. |
|
d. |
Adjustment reflects the write-off of certain fixed assets. |
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
|
e. |
Adjustment reflects the recording of core deposit intangible asset. |
|
f. |
Adjustment to reflect the fair value of other real estate. |
|
g. |
Adjustment to record the deferred tax asset created by purchase adjustments. |
|
h. |
Adjustment to write-off miscellaneous assets |
|
i. |
Adjustment reflects the fair value adjustment to time deposit accounts. |
|
j. |
Adjustment to reflect fair value of liabilities. |
The accretable yield on loans will be accreted to interest income over the estimated average life of the loans using a level yield method. The Company records a non-accretable difference on PCI loans and estimates the amount and timing of expected cash flows for these loans and increases in expected cash flows is recorded as interest income over the remaining life of the loans. The core deposit intangible asset is being amortized over a seven-year life on an accelerated basis.
Private Bancshares, Inc.
On January 1, 2017, the Company completed its acquisition of Private Bank of Buckhead, headquartered in Atlanta, Georgia, through a merger of Private Bank of Buckhead’s holding company, Private Bancshares, Inc. (“Private Bancshares”), with and into NCC, followed immediately by the merger of Private Bank of Buckhead with and into NBC. NBC continues to operate the former offices of Private Bank of Buckhead as a division of NBC under the trade names “Private Bank of Buckhead,” “Private Bank of Decatur” and “PrivatePlus Mortgage.”
At the effective time of the merger, each share of common stock of Private Bancshares issued and outstanding was converted into the right to receive either 0.85417 shares of NCC common stock or cash in the amount of $20.50. The Company paid approximately $8,322,000 in cash and issued 1,809,189 shares of NCC common stock for the issued and outstanding shares of Private Bancshares common stock.
The acquisition of Private Bancshares was accounted for using the purchase method of accounting in accordance with ASC 805, Business Combinations . Assets acquired, liabilities assumed and consideration exchanged were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities is a complicated process involving significant judgment regarding the methods and assumptions to be used. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available.
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
The following table presents the assets acquired and liabilities assumed of Private Bancshares as of January 1, 2017 at their initial fair value estimates:
|
|
As Recorded By |
|
|
Fair Value |
|
|
|
As Recorded |
|
|||
|
|
Private Bancshares |
|
|
Adjustments |
|
|
|
By the Company |
|
|||
Cash and cash equivalents |
|
$ |
17,793 |
|
|
|
- |
|
|
|
|
17,793 |
|
Investment securities |
|
|
10,030 |
|
|
|
(312 |
) |
a |
|
|
9,718 |
|
Other investments |
|
|
252 |
|
|
|
- |
|
|
|
|
252 |
|
Mortgage loans held-for-sale |
|
|
24,628 |
|
|
|
- |
|
|
|
|
24,628 |
|
Loans |
|
|
266,750 |
|
|
|
(6,716 |
) |
b |
|
|
260,034 |
|
Allowance for loan losses |
|
|
3,306 |
|
|
|
(3,306 |
) |
c |
|
|
- |
|
Net loans |
|
|
263,444 |
|
|
|
(3,410 |
) |
|
|
|
260,034 |
|
Premises and equipment, net |
|
|
558 |
|
|
|
(95 |
) |
d |
|
|
463 |
|
Core deposit intangible |
|
|
- |
|
|
|
2,979 |
|
e |
|
|
2,979 |
|
Bank-owned life insurance |
|
|
3,294 |
|
|
|
- |
|
|
|
|
3,294 |
|
Other assets |
|
|
2,569 |
|
|
|
1,524 |
|
f |
|
|
4,093 |
|
Total assets |
|
$ |
322,568 |
|
|
|
686 |
|
|
|
|
323,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
$ |
135,822 |
|
|
|
- |
|
|
|
|
135,822 |
|
Interest-bearing deposits |
|
|
150,260 |
|
|
|
131 |
|
g |
|
|
150,391 |
|
Total deposits |
|
|
286,082 |
|
|
|
131 |
|
|
|
|
286,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase liability |
|
|
2,201 |
|
|
|
- |
|
|
|
|
2,201 |
|
Other liabilities |
|
|
3,374 |
|
|
|
(525 |
) |
h |
|
|
2,849 |
|
Total liabilities |
|
|
291,657 |
|
|
|
(394 |
) |
|
|
|
291,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net identifiable assets acquired over liabilities assumed |
|
|
30,911 |
|
|
|
1,080 |
|
|
|
|
31,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
- |
|
|
|
47,901 |
|
|
|
|
47,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired over liabilities assumed |
|
$ |
30,911 |
|
|
|
48,981 |
|
|
|
|
79,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consideration: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock issued |
|
|
|
|
|
|
1,809,189 |
|
|
|
|
|
|
Estimated value per share of the Company's stock |
|
|
|
|
|
$ |
37.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of Company stock issued |
|
|
|
|
|
|
67,211 |
|
|
|
|
|
|
Cash paid for shares and in lieu of fractional shares |
|
|
|
|
|
|
8,322 |
|
|
|
|
|
|
Value of assumed stock options and restricted stock units converted to common stock |
|
|
|
|
|
|
4,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of total consideration transferred |
|
|
|
|
|
$ |
79,892 |
|
|
|
|
|
|
Explanation of fair value adjustments:
|
a. |
Adjustment reflects fair value adjustments of the available-for-sale portfolio at acquisition date. |
|
b. |
Adjustment reflects the fair value adjustments based on the Company’s evaluation of the acquired loan portfolio. |
|
c. |
Adjustment reflects the elimination of Private Bancshares’ allowance for loan losses. |
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
|
d. |
Adjustment reflects the write-off of certain fixed assets. |
|
e. |
Adjustment reflects the recording of core deposit intangible asset. |
|
f. |
Adjustment to record the deferred tax asset created by purchase adjustments. |
|
g. |
Adjustment reflects the fair value adjustment to time deposit accounts. |
|
h. |
Adjustment to reflect unrecorded liabilities. |
The accretable yield on loans will be accreted to interest income over the estimated average life of the loans using a level yield method. The Company records a non-accretable difference on PCI loans and estimates the amount and timing of expected cash flows for these loans and increases in expected cash flows is recorded as interest income over the remaining life of the loans. The core deposit intangible asset is being amortized over a seven-year life on an accelerated basis.
The following unaudited supplemental pro forma information is presented to show estimated results assuming that FirstAtlantic, Patriot Bank, Premier and Landmark were acquired as of January 1, 2017. These unaudited pro forma results are not necessarily indicative of the operating results that the Company would have achieved had it completed the acquisitions as of such date and should not be considered as representative of future operating results. Because the acquisition of Private Bancshares was completed on January 1, 2017, it is included in the Company’s actual results for 2017 and 2018.
|
|
For The Year Ended December 31, |
|
|||||
Performance Measure (pro forma, unaudited) |
|
2018 |
|
|
2017 |
|
||
Net interest income |
|
$ |
170,332 |
|
|
$ |
155,369 |
|
Net earnings |
|
$ |
45,663 |
|
|
$ |
31,169 |
|
Diluted earnings per common share |
|
$ |
2.21 |
|
|
$ |
1.52 |
|
In many cases, determining the fair value of acquired assets and assumed liabilities requires the Company to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest. The most significant of those determinations is related to the fair value of acquired loans. Acquired loans are initially recorded at their acquisition date fair values. The carryover of the allowance for loan losses is prohibited, as any credit losses in the loans are included in the determination of the fair value of the loans at the acquisition date. Fair values for acquired loans are based on a discounted cash flow methodology that involves assumptions including the remaining life of the acquired loans, estimated prepayments, estimated value of the underlying collateral and net present value of cash flows expected to be collected. Acquired loans that have evidence of deterioration in credit quality since origination and for which it is probable, at acquisition, that the acquirer will be unable to collect all contractually required payments are specifically identified and analyzed. The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable discount. The non-accretable discount represents estimated future credit losses expected to be incurred over the life of the loan.
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
Loans at the acquisition date for the Company’s 2018 and 2017 acquisitions are presented in the following tables.
|
|
2018 Acquisitions |
|
|||||||||||||||||||||||||||||||||
|
|
FirstAtlantic |
|
|
Landmark |
|
|
Premier |
|
|||||||||||||||||||||||||||
|
|
Acquired Impaired Loans |
|
|
Acquired Performing Loans |
|
|
Total Acquired Loans |
|
|
Acquired Impaired Loans |
|
|
Acquired Performing Loans |
|
|
Total Acquired Loans |
|
|
Acquired Impaired Loans |
|
|
Acquired Performing Loans |
|
|
Total Acquired Loans |
|
|||||||||
Commercial, financial and agricultural |
|
$ |
- |
|
|
|
22,681 |
|
|
|
22,681 |
|
|
|
1,974 |
|
|
|
76,309 |
|
|
|
78,283 |
|
|
|
- |
|
|
|
3,849 |
|
|
|
3,849 |
|
Real estate - mortgage |
|
|
6,913 |
|
|
|
253,591 |
|
|
|
260,504 |
|
|
|
9,357 |
|
|
|
290,577 |
|
|
|
299,934 |
|
|
|
2,343 |
|
|
|
129,188 |
|
|
|
131,531 |
|
Real estate - construction |
|
|
1,079 |
|
|
|
17,432 |
|
|
|
18,511 |
|
|
|
335 |
|
|
|
80,656 |
|
|
|
80,991 |
|
|
|
- |
|
|
|
14,401 |
|
|
|
14,401 |
|
Consumer |
|
|
- |
|
|
|
2,135 |
|
|
|
2,135 |
|
|
|
- |
|
|
|
1,492 |
|
|
|
1,492 |
|
|
|
1,662 |
|
|
|
17,367 |
|
|
|
19,029 |
|
Total |
|
$ |
7,992 |
|
|
|
295,839 |
|
|
|
303,831 |
|
|
|
11,666 |
|
|
|
449,034 |
|
|
|
460,700 |
|
|
|
4,005 |
|
|
|
164,805 |
|
|
|
168,810 |
|
|
|
2017 Acquisitions |
|
|||||||||||||||||||||
|
|
Private Bancshares |
|
|
Patriot Bank |
|
||||||||||||||||||
|
|
Acquired Impaired Loans |
|
|
Acquired Performing Loans |
|
|
Total Acquired Loans |
|
|
Acquired Impaired Loans |
|
|
Acquired Performing Loans |
|
|
Total Acquired Loans |
|
||||||
Commercial, financial and agricultural |
|
$ |
366 |
|
|
|
34,161 |
|
|
|
34,527 |
|
|
|
- |
|
|
|
16,796 |
|
|
|
16,796 |
|
Real estate - mortgage |
|
|
9,038 |
|
|
|
145,531 |
|
|
|
154,569 |
|
|
|
7,397 |
|
|
|
88,106 |
|
|
|
95,503 |
|
Real estate - construction |
|
|
1,517 |
|
|
|
65,818 |
|
|
|
67,335 |
|
|
|
213 |
|
|
|
5,157 |
|
|
|
5,370 |
|
Consumer |
|
|
- |
|
|
|
3,603 |
|
|
|
3,603 |
|
|
|
359 |
|
|
|
3,687 |
|
|
|
4,046 |
|
Total |
|
$ |
10,921 |
|
|
|
249,113 |
|
|
|
260,034 |
|
|
|
7,969 |
|
|
|
113,746 |
|
|
|
121,715 |
|
The following tables present information about the purchased credit-impaired loans for the Company’s 2018 and 2017 acquisitions.
|
|
2018 Acquisitions |
|
|||||||||
|
|
FirstAtlantic |
|
|
Landmark |
|
|
Premier |
|
|||
Contractually required principal and interest payments |
|
$ |
11,181 |
|
|
|
18,998 |
|
|
|
7,293 |
|
Non-accretable difference |
|
|
2,953 |
|
|
|
7,329 |
|
|
|
3,191 |
|
Cash flows expected to be collected |
|
|
8,228 |
|
|
|
11,669 |
|
|
|
4,102 |
|
Accretable discount |
|
|
236 |
|
|
|
3 |
|
|
|
97 |
|
Fair value of loans acquired with a deterioration of credit quality |
|
$ |
7,992 |
|
|
|
11,666 |
|
|
|
4,005 |
|
|
|
2017 Acquisitions |
|
|||||
|
|
Private Bancshares |
|
|
Patriot Bank |
|
||
Contractually required principal and interest payments |
|
$ |
15,020 |
|
|
|
9,646 |
|
Non-accretable difference |
|
|
3,637 |
|
|
|
1,328 |
|
Cash flows expected to be collected |
|
|
11,383 |
|
|
|
8,318 |
|
Accretable discount |
|
|
462 |
|
|
|
349 |
|
Fair value of loans acquired with a deterioration of credit quality |
|
$ |
10,921 |
|
|
|
7,969 |
|
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
(3) |
Investment Securities |
Investment securities classified as held-to-maturity and available-for-sale at December 31, 2018 and 2017 were as follows:
|
|
Held-to-Maturity Securities |
|
|||||||||||||
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
|||
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
||||
December 31, 2018 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
||||
Residential mortgage-backed securities |
|
$ |
3,344 |
|
|
|
- |
|
|
|
68 |
|
|
|
3,276 |
|
Municipal securities |
|
|
21,201 |
|
|
|
50 |
|
|
|
211 |
|
|
|
21,040 |
|
Other debt securities |
|
|
500 |
|
|
|
5 |
|
|
|
- |
|
|
|
505 |
|
Total held-to-maturity securities |
|
$ |
25,045 |
|
|
|
55 |
|
|
|
279 |
|
|
|
24,821 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
|||
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
||||
December 31, 2017 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
||||
Residential mortgage-backed securities |
|
$ |
4,058 |
|
|
|
- |
|
|
|
21 |
|
|
|
4,037 |
|
Municipal securities |
|
|
21,254 |
|
|
|
392 |
|
|
|
1 |
|
|
|
21,645 |
|
Other debt securities |
|
|
250 |
|
|
|
- |
|
|
|
- |
|
|
|
250 |
|
Total held-to-maturity securities |
|
$ |
25,562 |
|
|
|
392 |
|
|
|
22 |
|
|
|
25,932 |
|
|
|
Available-for-Sale Securities |
|
|||||||||||||
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
|||
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
||||
December 31, 2018 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
||||
U.S. government agency obligations |
|
$ |
2,786 |
|
|
|
- |
|
|
|
6 |
|
|
|
2,780 |
|
Residential mortgage-backed securities |
|
|
141,999 |
|
|
|
46 |
|
|
|
2,087 |
|
|
|
139,958 |
|
Other commercial mortgage-backed securities |
|
|
3,982 |
|
|
|
- |
|
|
|
152 |
|
|
|
3,830 |
|
Other asset-backed securities |
|
|
39,226 |
|
|
|
- |
|
|
|
701 |
|
|
|
38,525 |
|
Municipal securities |
|
|
2,313 |
|
|
|
111 |
|
|
|
1 |
|
|
|
2,423 |
|
Total available-for-sale securities |
|
$ |
190,306 |
|
|
|
157 |
|
|
|
2,947 |
|
|
|
187,516 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
|||
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
||||
December 31, 2017 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
||||
U.S. government agency obligations |
|
$ |
3,261 |
|
|
|
3 |
|
|
|
- |
|
|
|
3,264 |
|
Residential mortgage-backed securities |
|
|
39,143 |
|
|
|
298 |
|
|
|
197 |
|
|
|
39,244 |
|
Other commercial mortgage-backed securities |
|
|
4,012 |
|
|
|
- |
|
|
|
88 |
|
|
|
3,924 |
|
Other asset-backed securities |
|
|
35,745 |
|
|
|
392 |
|
|
|
- |
|
|
|
36,137 |
|
Municipal securities |
|
|
3,074 |
|
|
|
191 |
|
|
|
- |
|
|
|
3,265 |
|
Total available-for-sale securities |
|
$ |
85,235 |
|
|
|
884 |
|
|
|
285 |
|
|
|
85,834 |
|
Management evaluates securities for other-than-temporary impairment on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given 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 and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
Details concerning investment securities with unrealized losses as of December 31, 2018 and 2017 are as follows:
|
|
Held-to-Maturity Securities |
|
|||||||||||||||||||||
|
|
Less than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|||||||||||||||
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
||||||
December 31, 2018 |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
||||||
Residential mortgage-backed securities |
|
$ |
- |
|
|
|
- |
|
|
|
3,276 |
|
|
|
68 |
|
|
|
3,276 |
|
|
|
68 |
|
Municipal securities |
|
|
1,787 |
|
|
|
28 |
|
|
|
12,178 |
|
|
|
183 |
|
|
|
13,965 |
|
|
|
211 |
|
Other debt securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total held-to-maturity securities |
|
$ |
1,787 |
|
|
|
28 |
|
|
|
15,454 |
|
|
|
251 |
|
|
|
17,241 |
|
|
$ |
279 |
|
|
|
Less than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|||||||||||||||
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
||||||
December 31, 2017 |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
||||||
Residential mortgage-backed securities |
|
$ |
4,037 |
|
|
|
21 |
|
|
|
- |
|
|
|
- |
|
|
|
4,037 |
|
|
|
21 |
|
Municipal securities |
|
|
- |
|
|
|
- |
|
|
|
246 |
|
|
|
1 |
|
|
|
246 |
|
|
|
1 |
|
Other debt securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total held-to-maturity securities |
|
$ |
4,037 |
|
|
|
21 |
|
|
|
246 |
|
|
|
1 |
|
|
|
4,283 |
|
|
|
22 |
|
|
|
Available-for-Sale Securities |
|
|||||||||||||||||||||
|
|
Less than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|||||||||||||||
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
||||||
December 31, 2018 |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
||||||
U.S. government agency obligations |
|
$ |
2,780 |
|
|
|
6 |
|
|
|
- |
|
|
|
- |
|
|
|
2,780 |
|
|
|
6 |
|
Residential mortgage-backed securities |
|
|
99,241 |
|
|
|
1,519 |
|
|
|
25,251 |
|
|
|
568 |
|
|
|
124,492 |
|
|
|
2,087 |
|
Other commercial mortgage-backed securities |
|
|
- |
|
|
|
- |
|
|
|
3,830 |
|
|
|
152 |
|
|
|
3,830 |
|
|
|
152 |
|
Other asset-backed securities |
|
|
37,525 |
|
|
|
701 |
|
|
|
- |
|
|
|
- |
|
|
|
37,525 |
|
|
|
701 |
|
Municipal securities |
|
|
- |
|
|
|
- |
|
|
|
482 |
|
|
|
1 |
|
|
|
482 |
|
|
|
1 |
|
Total available-for-sale securities |
|
$ |
139,546 |
|
|
|
2,226 |
|
|
|
29,563 |
|
|
|
721 |
|
|
|
169,109 |
|
|
|
2,947 |
|
|
|
Less than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|||||||||||||||
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
||||||
December 31, 2017 |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
||||||
U.S. government agency obligations |
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Residential mortgage-backed securities |
|
|
18,132 |
|
|
|
119 |
|
|
|
3,389 |
|
|
|
78 |
|
|
|
21,521 |
|
|
|
197 |
|
Other commercial mortgage-backed securities |
|
|
3,924 |
|
|
|
88 |
|
|
|
- |
|
|
|
- |
|
|
|
3,924 |
|
|
|
88 |
|
Other asset-backed securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Municipal securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total available-for-sale securities |
|
$ |
22,056 |
|
|
|
207 |
|
|
|
3,389 |
|
|
|
78 |
|
|
|
25,445 |
|
|
|
285 |
|
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
At December 31, 2018, 44 out of 47 mortgage-backed securities, 25 out of 39 municipal securities, 32 out of 33 other asset-backed securities, and our U.S. Government agency and other commercial mortgage-backed security were in a loss position. At December 31, 2017, 13 out of 25 mortgage-backed securities, one out of 41 municipal securities and our other commercial mortgage-backed security were in a loss position. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and industry analysts’ reports. Because the Company had the ability and intent to hold debt securities until maturity, no declines were deemed to be other-than-temporary as of December 31, 2018 and 2017.
During 2018, the Company elected to sell all of the debt securities that it acquired in connection with the acquisitions of FirstAtlantic, Premier and Landmark, resulting in proceeds of approximately $124,931,000, and did not realize a gain or loss on the sale, as the debt securities were marked to fair value at acquisition and immediately sold. In addition to these sales, during January 2018, the Company sold nine debt securities from its legacy portfolio for total proceeds of approximately $8,907,000 and realized a gross gain of $191,000. During May 2018, the Company sold one debt security for total proceeds of $252,000 and realized a gain of $2,000. The Company was required to liquidate this security as a condition of the Landmark merger.
During 2017, the Company sold all of the debt securities that it acquired in connection with the acquisitions of Private Bancshares and Patriot Bank, resulting in proceeds of $14,489,000, and did not realize a gain or loss on the sale, as the debt securities were marked to fair value at acquisition and immediately sold. In addition to these sales, during 2017, the Company sold seven debt securities from its legacy portfolio for proceeds of $7,750,000 and realized a gross loss of $119,000 and a gross gain of $28,000. During 2016, the Company sold one debt security for proceeds of $1,495,000 and realized a gross gain of $365.
At December 31, 2018 and 2017, securities with a carrying value of approximately $27,313,000 and $69,717,000, respectively, were pledged to secure public deposits as required by applicable laws and for other purposes. The amortized cost and estimated fair value of securities classified as available-for-sale and held-to-maturity at December 31, 2018, by contractual maturity, are shown below. Expected maturities differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
Available-for-Sale Securities |
|
|
Held-to-Maturity Securities |
|
||||||||||
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
||||
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
||||
Municipal securities and U.S. government agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 to 5 years |
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
5 to 10 years |
|
|
- |
|
|
|
- |
|
|
|
750 |
|
|
|
741 |
|
Over 10 years |
|
|
5,099 |
|
|
|
5,203 |
|
|
|
20,451 |
|
|
|
20,299 |
|
Residential and other mortgage-backed securities and other asset-backed securities |
|
|
185,207 |
|
|
|
182,313 |
|
|
|
3,844 |
|
|
|
3,781 |
|
Total |
|
$ |
190,306 |
|
|
|
187,516 |
|
|
|
25,045 |
|
|
|
24,821 |
|
(4) |
Loans |
Major classifications of loans at December 31, 2018 and 2017 are summarized as follows:
|
|
December 31, 2018 |
|
|
December 31, 2017 |
|
||
Commercial, financial and agricultural |
|
$ |
436,037 |
|
|
|
287,659 |
|
Factored commercial receivables |
|
|
126,686 |
|
|
|
118,710 |
|
Real estate - mortgage |
|
|
2,363,982 |
|
|
|
1,475,004 |
|
Real estate - construction |
|
|
361,263 |
|
|
|
231,030 |
|
Consumer |
|
|
31,192 |
|
|
|
26,314 |
|
|
|
|
3,319,160 |
|
|
|
2,138,717 |
|
Less: Unearned fees |
|
|
(1,195 |
) |
|
|
(659 |
) |
Total loans |
|
|
3,317,965 |
|
|
|
2,138,058 |
|
Allowance for loan losses |
|
|
(18,176 |
) |
|
|
(14,985 |
) |
Total net loans |
|
$ |
3,299,789 |
|
|
|
2,123,073 |
|
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
The Bank makes loans and extensions of credit to individuals and a variety of businesses located in its market areas. Through Corporate Billing, the Company also purchases receivables from transportation companies and automotive parts and service providers nationwide. Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent upon the real estate market. Portfolio segments utilized by the Bank are identified below. Relevant risk characteristics for these portfolio segments generally include (1) with respect to non-consumer loans, debt service coverage, loan-to-value ratios and financial performance, and (2) with respect to consumer loans, credit scores, debt-to-income ratios, collateral type and loan-to-value ratios.
At December 31, 2018, the outstanding principal balance and carrying value of purchased credit impaired (“PCI”) loans accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality , were $56.8 million and $39.5 million, respectively. At December 31, 2017, the outstanding principal balance and carrying value of PCI loans were $34.7 million and $25.7 million, respectively. The following table presents changes in the value of the accretable yield for PCI loans for the periods indicated.
|
|
For the Year Ended December 31, |
|
|||||||||
|
|
2018 |
|
|
2017 |
|
|
2016 |
|
|||
Balance at beginning of period |
|
$ |
703 |
|
|
|
375 |
|
|
|
286 |
|
Acquisition of Landmark |
|
|
3 |
|
|
|
- |
|
|
|
- |
|
Acquisition of Premier |
|
|
97 |
|
|
|
- |
|
|
|
- |
|
Acquisition of FirstAtlantic |
|
|
236 |
|
|
|
- |
|
|
|
- |
|
Acquisition of Private Bancshares |
|
|
- |
|
|
|
462 |
|
|
|
- |
|
Acquisition of Patriot Bank |
|
|
- |
|
|
|
349 |
|
|
|
- |
|
Accretion |
|
|
(5,310 |
) |
|
|
(1,873 |
) |
|
|
(733 |
) |
Reclassification from non-accretable difference |
|
|
8,537 |
|
|
|
1,390 |
|
|
|
822 |
|
Balance at period end |
|
$ |
4,266 |
|
|
|
703 |
|
|
|
375 |
|
The following tables present 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, 2018, 2017 and 2016. The acquired loans are not included in the allowance for loan losses calculation, as these loans were recorded at fair value at acquisition, and there has been no further indication of credit deterioration that would require an additional provision.
|
|
Commercial, |
|
|
Factored |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
financial and |
|
|
commercial |
|
|
Real estate - |
|
|
Real estate - |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Year ended December 31, 2018 |
|
agricultural |
|
|
receivables |
|
|
mortgage |
|
|
construction |
|
|
Consumer |
|
|
Unallocated |
|
|
Total |
|
|||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
2,511 |
|
|
|
600 |
|
|
|
9,845 |
|
|
|
1,884 |
|
|
|
145 |
|
|
|
- |
|
|
|
14,985 |
|
Provisions charged to operating expense |
|
|
1,483 |
|
|
|
344 |
|
|
|
2,839 |
|
|
|
24 |
|
|
|
33 |
|
|
|
- |
|
|
|
4,723 |
|
Loans charged off |
|
|
(878 |
) |
|
|
(3,048 |
) |
|
|
(748 |
) |
|
|
(1 |
) |
|
|
(66 |
) |
|
|
- |
|
|
|
(4,741 |
) |
Recoveries |
|
|
57 |
|
|
|
2,704 |
|
|
|
271 |
|
|
|
157 |
|
|
|
20 |
|
|
|
- |
|
|
|
3,209 |
|
Balance, December 31, 2018 |
|
$ |
3,173 |
|
|
|
600 |
|
|
|
12,207 |
|
|
|
2,064 |
|
|
|
132 |
|
|
|
- |
|
|
|
18,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, individually evaluated for impairment |
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10 |
|
|
|
- |
|
|
|
10 |
|
Ending balance, collectively evaluated for impairment |
|
|
3,173 |
|
|
|
600 |
|
|
|
12,207 |
|
|
|
2,064 |
|
|
|
122 |
|
|
|
- |
|
|
|
18,166 |
|
Total allowance for loan losses |
|
$ |
3,173 |
|
|
|
600 |
|
|
|
12,207 |
|
|
|
2,064 |
|
|
|
132 |
|
|
|
- |
|
|
|
18,176 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
|
$ |
- |
|
|
|
- |
|
|
|
6,202 |
|
|
|
- |
|
|
|
54 |
|
|
|
- |
|
|
|
6,256 |
|
Collectively evaluated for impairment |
|
|
433,621 |
|
|
|
126,686 |
|
|
|
2,322,881 |
|
|
|
359,580 |
|
|
|
30,600 |
|
|
|
- |
|
|
|
3,273,368 |
|
Acquired loans with deteriorated credit quality |
|
|
2,416 |
|
|
|
- |
|
|
|
34,899 |
|
|
|
1,683 |
|
|
|
538 |
|
|
|
- |
|
|
|
39,536 |
|
Total loans |
|
$ |
436,037 |
|
|
|
126,686 |
|
|
|
2,363,982 |
|
|
|
361,263 |
|
|
|
31,192 |
|
|
|
- |
|
|
|
3,319,160 |
|
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
|
|
Commercial, |
|
|
Factored |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
financial and |
|
|
commercial |
|
|
Real estate - |
|
|
Real estate - |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Year ended December 31, 2017 |
|
agricultural |
|
|
receivables |
|
|
mortgage |
|
|
construction |
|
|
Consumer |
|
|
Unallocated |
|
|
Total |
|
|||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
1,588 |
|
|
|
500 |
|
|
|
8,465 |
|
|
|
1,369 |
|
|
|
191 |
|
|
|
- |
|
|
|
12,113 |
|
Provisions charged to operating expense |
|
|
654 |
|
|
|
1,095 |
|
|
|
1,614 |
|
|
|
515 |
|
|
|
16 |
|
|
|
- |
|
|
|
3,894 |
|
Loans charged off |
|
|
(159 |
) |
|
|
(2,911 |
) |
|
|
(273 |
) |
|
|
- |
|
|
|
(69 |
) |
|
|
- |
|
|
|
(3,412 |
) |
Recoveries |
|
|
428 |
|
|
|
1,916 |
|
|
|
39 |
|
|
|
- |
|
|
|
7 |
|
|
|
- |
|
|
|
2,390 |
|
Balance, December 31, 2017 |
|
$ |
2,511 |
|
|
|
600 |
|
|
|
9,845 |
|
|
|
1,884 |
|
|
|
145 |
|
|
|
- |
|
|
|
14,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, individually evaluated for impairment |
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
24 |
|
|
|
- |
|
|
|
24 |
|
Ending balance, collectively evaluated for impairment |
|
|
2,511 |
|
|
|
600 |
|
|
|
9,845 |
|
|
|
1,884 |
|
|
|
121 |
|
|
|
- |
|
|
|
14,961 |
|
Total allowance for loan losses |
|
$ |
2,511 |
|
|
|
600 |
|
|
|
9,845 |
|
|
|
1,884 |
|
|
|
145 |
|
|
|
- |
|
|
|
14,985 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
|
$ |
- |
|
|
|
- |
|
|
|
142 |
|
|
|
- |
|
|
|
41 |
|
|
|
- |
|
|
|
183 |
|
Collectively evaluated for impairment |
|
|
286,859 |
|
|
|
118,710 |
|
|
|
1,451,177 |
|
|
|
230,385 |
|
|
|
25,707 |
|
|
|
- |
|
|
|
2,112,838 |
|
Acquired loans with deteriorated credit quality |
|
|
800 |
|
|
|
- |
|
|
|
23,685 |
|
|
|
645 |
|
|
|
566 |
|
|
|
- |
|
|
|
25,696 |
|
Total loans |
|
$ |
287,659 |
|
|
|
118,710 |
|
|
|
1,475,004 |
|
|
|
231,030 |
|
|
|
26,314 |
|
|
|
- |
|
|
|
2,138,717 |
|
|
|
Commercial, |
|
|
Factored |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
financial, and |
|
|
commercial |
|
|
Real estate - |
|
|
Real estate - |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Year ended December 31, 2016 |
|
agricultural |
|
|
receivables |
|
|
mortgage |
|
|
construction |
|
|
Consumer |
|
|
Unallocated |
|
|
Total |
|
|||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
1,345 |
|
|
|
500 |
|
|
|
5,525 |
|
|
|
1,412 |
|
|
|
236 |
|
|
|
824 |
|
|
|
9,842 |
|
Provisions charged to operating expense |
|
|
183 |
|
|
|
923 |
|
|
|
2,879 |
|
|
|
(52 |
) |
|
|
139 |
|
|
|
(824 |
) |
|
|
3,248 |
|
Loans charged off |
|
|
(16 |
) |
|
|
(2,331 |
) |
|
|
(53 |
) |
|
|
- |
|
|
|
(197 |
) |
|
|
- |
|
|
|
(2,597 |
) |
Recoveries |
|
|
76 |
|
|
|
1,408 |
|
|
|
114 |
|
|
|
9 |
|
|
|
13 |
|
|
|
- |
|
|
|
1,620 |
|
Balance, December 31, 2016 |
|
$ |
1,588 |
|
|
|
500 |
|
|
|
8,465 |
|
|
|
1,369 |
|
|
|
191 |
|
|
|
- |
|
|
|
12,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, individually evaluated for impairment |
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Ending balance, collectively evaluated for impairment |
|
|
1,588 |
|
|
|
500 |
|
|
|
8,465 |
|
|
|
1,369 |
|
|
|
191 |
|
|
|
- |
|
|
|
12,113 |
|
Total allowance for loan losses |
|
$ |
1,588 |
|
|
|
500 |
|
|
|
8,465 |
|
|
|
1,369 |
|
|
|
191 |
|
|
|
- |
|
|
|
12,113 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
|
$ |
- |
|
|
|
- |
|
|
|
180 |
|
|
|
- |
|
|
|
7 |
|
|
|
- |
|
|
|
187 |
|
Collectively evaluated for impairment |
|
|
170,342 |
|
|
|
83,901 |
|
|
|
1,045,208 |
|
|
|
155,533 |
|
|
|
18,807 |
|
|
|
- |
|
|
|
1,473,791 |
|
Acquired loans with deteriorated credit quality |
|
|
643 |
|
|
|
- |
|
|
|
10,826 |
|
|
|
280 |
|
|
|
246 |
|
|
|
- |
|
|
|
11,995 |
|
Total loans |
|
$ |
170,985 |
|
|
|
83,901 |
|
|
|
1,056,214 |
|
|
|
155,813 |
|
|
|
19,060 |
|
|
|
- |
|
|
|
1,485,973 |
|
The Bank individually evaluates for impairment all loans that are on non-accrual status. Additionally, all troubled debt restructurings are individually evaluated for impairment. A loan is considered impaired when, based on current events and circumstances, it is probable that all amounts due according to the contractual terms of the loan will not be collected. This determination requires judgment and the use of estimates, and the eventual outcome may differ significantly from those estimates. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, at the loan’s observable market price, or the fair value of the collateral (if the loan is collateral-dependent). Management may also elect to apply an additional collective reserve to groups of impaired loans based on current economic or market factors. Interest payments received on impaired loans are generally applied as a reduction of the outstanding principal balance until the loan is collected in full (including any charged-off portion). During 2018 and 2017, no loans were modified in such a way as to be considered a troubled debt restructuring.
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
The following tables present impaired loans by class of loans as of December 31, 2018 and 2017. The purchased credit-impaired loans are not included in these tables because they were recorded at fair value at acquisition, and there has been no further indication of credit deterioration that would require an allowance.
|
|
|
|
|
|
Unpaid |
|
|
|
|
|
|
Average |
|
||
|
|
Recorded |
|
|
Principal |
|
|
Related |
|
|
Recorded |
|
||||
December 31, 2018 |
|
Investment |
|
|
Balance |
|
|
Allowance |
|
|
Investment |
|
||||
Impaired loans without related allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural |
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
6 |
|
Factored commercial receivables |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Real estate - mortgage |
|
|
6,202 |
|
|
|
6,483 |
|
|
|
- |
|
|
|
1,392 |
|
Real estate - construction |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Consumer |
|
|
44 |
|
|
|
34 |
|
|
|
- |
|
|
|
24 |
|
Total |
|
$ |
6,246 |
|
|
|
6,517 |
|
|
|
- |
|
|
|
1,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with related allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural |
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Factored commercial receivables |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Real estate - mortgage |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
30 |
|
Real estate - construction |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Consumer |
|
|
10 |
|
|
|
25 |
|
|
|
10 |
|
|
|
15 |
|
Total |
|
|
10 |
|
|
|
25 |
|
|
|
10 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural |
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
6 |
|
Factored commercial receivables |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Real estate - mortgage |
|
|
6,202 |
|
|
|
6,483 |
|
|
|
- |
|
|
|
1,422 |
|
Real estate - construction |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Consumer |
|
|
54 |
|
|
|
59 |
|
|
|
10 |
|
|
|
39 |
|
Total |
|
$ |
6,256 |
|
|
|
6,542 |
|
|
|
10 |
|
|
|
1,467 |
|
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
|
|
|
|
|
|
Unpaid |
|
|
|
|
|
|
Average |
|
||
|
|
Recorded |
|
|
Principal |
|
|
Related |
|
|
Recorded |
|
||||
December 31, 2017 |
|
Investment |
|
|
Balance |
|
|
Allowance |
|
|
Investment |
|
||||
Impaired loans without related allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural |
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Factored commercial receivables |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Real estate - mortgage |
|
|
142 |
|
|
|
143 |
|
|
|
- |
|
|
|
131 |
|
Real estate - construction |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Consumer |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
14 |
|
Total |
|
$ |
142 |
|
|
|
143 |
|
|
|
- |
|
|
|
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with related allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural |
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Factored commercial receivables |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Real estate - mortgage |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9 |
|
Real estate - construction |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Consumer |
|
|
41 |
|
|
|
41 |
|
|
|
24 |
|
|
|
8 |
|
Total |
|
$ |
41 |
|
|
|
41 |
|
|
|
24 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural |
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Factored commercial receivables |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Real estate - mortgage |
|
|
142 |
|
|
|
143 |
|
|
|
- |
|
|
|
140 |
|
Real estate - construction |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Consumer |
|
|
41 |
|
|
|
41 |
|
|
|
24 |
|
|
|
22 |
|
Total |
|
$ |
183 |
|
|
|
184 |
|
|
|
24 |
|
|
|
162 |
|
For the years ended December 31, 2018, 2017 and 2016, we did not recognize a material amount of interest income on impaired loans.
The following tables present the aging of the recorded investment in past due loans and non-accrual loan balances as of December 31, 2018 and 2017 by class of loans. All loans greater than 90 days past due are placed on non-accrual status, excluding factored receivables. For Corporate Billing’s factored receivables, which are commercial trade credit rather than promissory notes, our practice is to charge off unpaid recourse receivables when they become 90 days past due from the invoice due date and non-recourse receivables at 120 days past due from the statement billing date. For the recourse receivables, the invoice is charged against the client reserve account established for such purposes, unless the client reserve is insufficient, in which case the invoice is charged against the allowance for loan losses. PCI loans are excluded from the past due balances in the table below and are presented in total by class of loan. All loans, whether acquired or non-acquired, are included in the non-accrual balances.
|
|
30-59 Days |
|
|
60-89 Days |
|
|
> 90 Days |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
December 31, 2018 |
|
Past Due |
|
|
Past Due |
|
|
Past Due |
|
|
Past Due |
|
|
Current |
|
|
PCI Loans |
|
|
Total |
|
|
Non-accrual |
|
||||||||
Commercial, financial and agricultural |
|
$ |
800 |
|
|
|
- |
|
|
|
- |
|
|
|
800 |
|
|
|
432,820 |
|
|
|
2,417 |
|
|
|
436,037 |
|
|
|
1,063 |
|
Factored commercial receivables |
|
|
16,832 |
|
|
|
3,804 |
|
|
|
818 |
|
|
|
21,454 |
|
|
|
105,232 |
|
|
|
- |
|
|
|
126,686 |
|
|
|
- |
|
Real estate - mortgage |
|
|
5,481 |
|
|
|
1,047 |
|
|
|
4,927 |
|
|
|
11,455 |
|
|
|
2,317,628 |
|
|
|
34,899 |
|
|
|
2,363,982 |
|
|
|
9,085 |
|
Real estate - construction |
|
|
1,139 |
|
|
|
48 |
|
|
|
- |
|
|
|
1,187 |
|
|
|
358,393 |
|
|
|
1,683 |
|
|
|
361,263 |
|
|
|
205 |
|
Consumer |
|
|
26 |
|
|
|
30 |
|
|
|
28 |
|
|
|
84 |
|
|
|
30,571 |
|
|
|
537 |
|
|
|
31,192 |
|
|
|
66 |
|
Total |
|
$ |
24,278 |
|
|
|
4,929 |
|
|
|
5,773 |
|
|
|
34,980 |
|
|
|
3,244,644 |
|
|
|
39,536 |
|
|
|
3,319,160 |
|
|
|
10,419 |
|
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
|
|
30-59 Days |
|
|
60-89 Days |
|
|
> 90 Days |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
December 31, 2017 |
|
Past Due |
|
|
Past Due |
|
|
Past Due |
|
|
Past Due |
|
|
Current |
|
|
PCI Loans |
|
|
Total |
|
|
Non-accrual |
|
||||||||
Commercial, financial and agricultural |
|
$ |
137 |
|
|
|
29 |
|
|
|
- |
|
|
|
166 |
|
|
|
286,693 |
|
|
|
800 |
|
|
|
287,659 |
|
|
|
- |
|
Factored commercial receivables |
|
|
10,035 |
|
|
|
1,779 |
|
|
|
677 |
|
|
|
12,491 |
|
|
|
106,219 |
|
|
|
- |
|
|
|
118,710 |
|
|
|
- |
|
Real estate - mortgage |
|
|
1,342 |
|
|
|
546 |
|
|
|
103 |
|
|
|
1,991 |
|
|
|
1,449,328 |
|
|
|
23,685 |
|
|
|
1,475,004 |
|
|
|
2,594 |
|
Real estate - construction |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
230,385 |
|
|
|
645 |
|
|
|
231,030 |
|
|
|
76 |
|
Consumer |
|
|
13 |
|
|
|
40 |
|
|
|
9 |
|
|
|
62 |
|
|
|
25,686 |
|
|
|
566 |
|
|
|
26,314 |
|
|
|
52 |
|
Total |
|
$ |
11,527 |
|
|
|
2,394 |
|
|
|
789 |
|
|
|
14,710 |
|
|
|
2,098,311 |
|
|
|
25,696 |
|
|
|
2,138,717 |
|
|
|
2,722 |
|
Loans are categorized into risk categories based on relevant information about the ability of borrowers to service their debt, including current financial information, historical payment experience, credit documentation, public information, current economic trends and other factors. Loans are analyzed individually and classified according to credit risk. This analysis is performed on a continuous basis. The following definitions are used for risk ratings:
Other Assets Especially Mentioned (“OAEM”): Weakness exists that could cause future impairment, including the deterioration of financial ratios, past due status and questionable management capabilities. Collateral values generally afford adequate coverage but may not be immediately marketable.
Substandard: Specific and well-defined weaknesses exist that may include poor liquidity and deterioration of financial ratios. The loan may be past due and related deposit accounts experiencing overdrafts. Immediate corrective action is necessary.
Doubtful: Specific weaknesses characterized as Substandard exist that are severe enough to make collection in full unlikely. There is no reliable secondary source of full repayment. Loans classified as Doubtful will usually be placed on non-accrual status, analyzed and fully or partially charged off based on a review of collateral and other relevant factors.
Loss: Specific weaknesses characterized as Doubtful exist that are severe enough to be considered uncollectible and of such minimal value that the continued characterization of the loan as an asset in not warranted.
Loans not meeting the criteria above that are analyzed individually as part of the above-described process are assigned a “Pass” rating. As of December 31, 2018 and 2017, based on the most recent analyses performed, the risk category of loans by class of loans was as follows:
December 31, 2018 |
|
Pass |
|
|
OAEM |
|
|
Substandard |
|
|
Doubtful |
|
|
Total |
|
|||||
Commercial, financial and agricultural |
|
$ |
419,426 |
|
|
|
8,622 |
|
|
|
7,989 |
|
|
|
- |
|
|
|
436,037 |
|
Factored commercial receivables |
|
|
126,686 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
126,686 |
|
Real estate - mortgage |
|
|
2,321,587 |
|
|
|
11,044 |
|
|
|
31,175 |
|
|
|
176 |
|
|
|
2,363,982 |
|
Real estate - construction |
|
|
359,360 |
|
|
|
1,118 |
|
|
|
785 |
|
|
|
- |
|
|
|
361,263 |
|
Consumer |
|
|
31,004 |
|
|
|
19 |
|
|
|
134 |
|
|
|
35 |
|
|
|
31,192 |
|
Total |
|
$ |
3,258,063 |
|
|
|
20,803 |
|
|
|
40,083 |
|
|
|
211 |
|
|
|
3,319,160 |
|
December 31, 2017 |
|
Pass |
|
|
OAEM |
|
|
Substandard |
|
|
Doubtful |
|
|
Total |
|
|||||
Commercial, financial and agricultural |
|
$ |
279,592 |
|
|
|
1,278 |
|
|
|
6,789 |
|
|
|
- |
|
|
|
287,659 |
|
Factored commercial receivables |
|
|
118,710 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
118,710 |
|
Real estate - mortgage |
|
|
1,460,112 |
|
|
|
5,465 |
|
|
|
8,580 |
|
|
|
847 |
|
|
|
1,475,004 |
|
Real estate - construction |
|
|
229,711 |
|
|
|
102 |
|
|
|
710 |
|
|
|
507 |
|
|
|
231,030 |
|
Consumer |
|
|
26,213 |
|
|
|
2 |
|
|
|
99 |
|
|
|
- |
|
|
|
26,314 |
|
Total |
|
$ |
2,114,338 |
|
|
|
6,847 |
|
|
|
16,178 |
|
|
|
1,354 |
|
|
|
2,138,717 |
|
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
The following tables present a rollforward of the acquired loans and a summary of the changes in the accretable discount and non-accretable difference, by acquisition, for the years ended December 31, 2018, 2017 and 2016.
December 31, 2018 |
|
United |
|
|
Reunion |
|
|
Private Bancshares |
|
|
Patriot Bank |
|
|
FirstAtlantic |
|
|
Premier |
|
|
Landmark |
|
|
|
|
|
|||||||
Acquired Loan Balance |
|
(2014 Acquisition) |
|
|
(2015 Acquisition) |
|
|
(2017 Acquisition) |
|
|
(2017 Acquisition) |
|
|
(2018 Acquisition) |
|
|
(2018 Acquisition) |
|
|
(2018 Acquisition) |
|
|
Total |
|
||||||||
Balance, beginning of period |
|
$ |
73,254 |
|
|
|
189,811 |
|
|
|
181,780 |
|
|
|
119,127 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
563,972 |
|
Additions due to acquisitions |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
303,831 |
|
|
|
168,810 |
|
|
|
460,700 |
|
|
|
933,341 |
|
Charge-offs |
|
|
(357 |
) |
|
|
(229 |
) |
|
|
(130 |
) |
|
|
- |
|
|
|
(30 |
) |
|
|
- |
|
|
|
(19 |
) |
|
|
(765 |
) |
Accretion |
|
|
685 |
|
|
|
1,348 |
|
|
|
1,686 |
|
|
|
484 |
|
|
|
2,144 |
|
|
|
861 |
|
|
|
1,373 |
|
|
|
8,581 |
|
Other net change in balances |
|
|
(19,071 |
) |
|
|
(37,313 |
) |
|
|
(78,529 |
) |
|
|
(18,566 |
) |
|
|
(77,646 |
) |
|
|
(7,923 |
) |
|
|
(28,487 |
) |
|
|
(267,535 |
) |
Balance, end of period |
|
$ |
54,511 |
|
|
|
153,617 |
|
|
|
104,807 |
|
|
|
101,045 |
|
|
|
228,299 |
|
|
|
161,748 |
|
|
|
433,567 |
|
|
|
1,237,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretable Discount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
703 |
|
|
|
961 |
|
|
|
1,921 |
|
|
|
1,519 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,104 |
|
Additions due to acquisitions |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,734 |
|
|
|
2,170 |
|
|
|
5,134 |
|
|
|
13,037 |
|
Charge-offs, other net changes in balance |
|
|
- |
|
|
|
(8 |
) |
|
|
- |
|
|
|
- |
|
|
|
(9 |
) |
|
|
- |
|
|
|
- |
|
|
|
(17 |
) |
Accretion |
|
|
(685 |
) |
|
|
(1,348 |
) |
|
|
(1,686 |
) |
|
|
(484 |
) |
|
|
(2,144 |
) |
|
|
(861 |
) |
|
|
(1,374 |
) |
|
|
(8,581 |
) |
Reclassifications from non-accretable |
|
|
606 |
|
|
|
2,297 |
|
|
|
1,642 |
|
|
|
515 |
|
|
|
831 |
|
|
|
529 |
|
|
|
277 |
|
|
|
6,697 |
|
Balance, end of period |
|
$ |
624 |
|
|
|
1,902 |
|
|
|
1,877 |
|
|
|
1,550 |
|
|
|
4,412 |
|
|
|
1,838 |
|
|
|
4,037 |
|
|
|
16,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Accretable Difference |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
1,153 |
|
|
|
3,394 |
|
|
|
2,289 |
|
|
|
1,512 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,348 |
|
Additions due to acquisitions |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,953 |
|
|
|
3,191 |
|
|
|
7,329 |
|
|
|
13,473 |
|
Charge-offs, other net changes in balance |
|
|
(155 |
) |
|
|
(271 |
) |
|
|
(51 |
) |
|
|
- |
|
|
|
(109 |
) |
|
|
(517 |
) |
|
|
(1,023 |
) |
|
|
(2,126 |
) |
Reclassifications to accretable |
|
|
(606 |
) |
|
|
(2,297 |
) |
|
|
(1,642 |
) |
|
|
(515 |
) |
|
|
(831 |
) |
|
|
(529 |
) |
|
|
(277 |
) |
|
|
(6,697 |
) |
Balance, end of period |
|
$ |
392 |
|
|
|
826 |
|
|
|
596 |
|
|
|
997 |
|
|
|
2,013 |
|
|
|
2,145 |
|
|
|
6,029 |
|
|
|
12,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discount on acquired loans at end of period |
|
$ |
1,016 |
|
|
|
2,728 |
|
|
|
2,473 |
|
|
|
2,547 |
|
|
|
6,425 |
|
|
|
3,983 |
|
|
|
10,066 |
|
|
|
29,238 |
|
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
December 31, 2017 |
|
United |
|
|
Reunion |
|
|
Private Bancshares |
|
|
Patriot Bank |
|
|
|
|
|
||||
Acquired Loan Balance |
|
(2014 Acquisition) |
|
|
(2015 Acquisition) |
|
|
(2017 Acquisition) |
|
|
(2017 Acquisition) |
|
|
Total |
|
|||||
Balance, beginning of period |
|
$ |
97,945 |
|
|
|
227,429 |
|
|
|
- |
|
|
|
- |
|
|
|
325,374 |
|
Additions due to acquisitions |
|
|
- |
|
|
|
- |
|
|
|
260,034 |
|
|
|
121,715 |
|
|
|
381,749 |
|
Charge-offs |
|
|
(68 |
) |
|
|
- |
|
|
|
(72 |
) |
|
|
(125 |
) |
|
|
(265 |
) |
Accretion |
|
|
635 |
|
|
|
860 |
|
|
|
2,907 |
|
|
|
113 |
|
|
|
4,515 |
|
Other net change in balances |
|
|
(25,258 |
) |
|
|
(38,478 |
) |
|
|
(81,089 |
) |
|
|
(2,576 |
) |
|
|
(147,401 |
) |
Balance, end of period |
|
$ |
73,254 |
|
|
|
189,811 |
|
|
|
181,780 |
|
|
|
119,127 |
|
|
|
563,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretable Discount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
1,237 |
|
|
|
1,699 |
|
|
|
- |
|
|
|
- |
|
|
|
2,936 |
|
Additions due to acquisitions |
|
|
- |
|
|
|
- |
|
|
|
3,588 |
|
|
|
1,721 |
|
|
|
5,309 |
|
Charge-offs, other net changes in balance |
|
|
(5 |
) |
|
|
- |
|
|
|
(26 |
) |
|
|
15 |
|
|
|
(16 |
) |
Accretion |
|
|
(635 |
) |
|
|
(860 |
) |
|
|
(2,907 |
) |
|
|
(113 |
) |
|
|
(4,515 |
) |
Reclassifications from non-accretable |
|
|
106 |
|
|
|
122 |
|
|
|
1,266 |
|
|
|
(104 |
) |
|
|
1,390 |
|
Balance, end of period |
|
$ |
703 |
|
|
|
961 |
|
|
|
1,921 |
|
|
|
1,519 |
|
|
|
5,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accretable difference |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
1,452 |
|
|
|
3,516 |
|
|
|
- |
|
|
|
- |
|
|
|
4,968 |
|
Additions due to acquisitions |
|
|
- |
|
|
|
- |
|
|
|
3,637 |
|
|
|
1,328 |
|
|
|
4,965 |
|
Charge-offs, other net changes in balance |
|
|
(193 |
) |
|
|
- |
|
|
|
(82 |
) |
|
|
80 |
|
|
|
(195 |
) |
Reclassifications to accretable |
|
|
(106 |
) |
|
|
(122 |
) |
|
|
(1,266 |
) |
|
|
104 |
|
|
|
(1,390 |
) |
Balance, end of period |
|
$ |
1,153 |
|
|
|
3,394 |
|
|
|
2,289 |
|
|
|
1,512 |
|
|
|
8,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discount on acquired loans at end of period |
|
$ |
1,856 |
|
|
|
4,355 |
|
|
|
4,210 |
|
|
|
3,031 |
|
|
|
13,452 |
|
December 31, 2016 |
|
United |
|
|
Reunion |
|
|
|
|
|
||
Acquired Loan Balance |
|
(2014 Acquisition) |
|
|
(2015 Acquisition) |
|
|
Total |
|
|||
Balance, beginning of period |
|
$ |
119,777 |
|
|
|
261,538 |
|
|
|
381,315 |
|
Charge-offs |
|
|
(41 |
) |
|
|
(168 |
) |
|
|
(209 |
) |
Accretion |
|
|
589 |
|
|
|
1,353 |
|
|
|
1,942 |
|
Other net change in balances |
|
|
(22,380 |
) |
|
|
(35,294 |
) |
|
|
(57,674 |
) |
Balance, end of period |
|
$ |
97,945 |
|
|
|
227,429 |
|
|
|
325,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretable Discount |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
1,603 |
|
|
|
2,456 |
|
|
|
4,059 |
|
Charge-offs, other net changes in balance |
|
|
(5 |
) |
|
|
- |
|
|
|
(5 |
) |
Accretion |
|
|
(589 |
) |
|
|
(1,351 |
) |
|
|
(1,940 |
) |
Reclassifications from non-accretable |
|
|
228 |
|
|
|
594 |
|
|
|
822 |
|
Balance, end of period |
|
$ |
1,237 |
|
|
|
1,699 |
|
|
|
2,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accretable difference |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
1,900 |
|
|
|
4,110 |
|
|
|
6,010 |
|
Charge-offs, other net changes in balance |
|
|
(220 |
) |
|
|
- |
|
|
|
(220 |
) |
Reclassifications to accretable |
|
|
(228 |
) |
|
|
(594 |
) |
|
|
(822 |
) |
Balance, end of period |
|
$ |
1,452 |
|
|
|
3,516 |
|
|
|
4,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discount on acquired loans at end of period |
|
$ |
2,689 |
|
|
|
5,215 |
|
|
|
7,904 |
|
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
(5) |
Premises and Equipment |
Major classifications of premises and equipment as of December 31, 2018 and 2017 were as follows:
|
|
2018 |
|
|
2017 |
|
||
Land |
|
$ |
27,194 |
|
|
$ |
15,575 |
|
Building and improvements |
|
|
54,245 |
|
|
|
31,605 |
|
Furniture and equipment |
|
|
16,620 |
|
|
|
9,807 |
|
Leasehold improvement |
|
|
7,804 |
|
|
|
7,051 |
|
Construction in process |
|
|
7,449 |
|
|
|
3,564 |
|
Automobile |
|
|
573 |
|
|
|
419 |
|
|
|
|
113,885 |
|
|
|
68,021 |
|
Less: accumulated depreciation |
|
|
(27,227 |
) |
|
|
(15,566 |
) |
Total premises and equipment, net |
|
$ |
86,658 |
|
|
$ |
52,455 |
|
Depreciation expense amounted to approximately $3,437,000, $2,095,000 and $1,700,000 in 2018, 2017 and 2016, respectively.
(6) |
Deposits |
Time deposits greater than or equal to $250,000 totaled approximately $245,900,000 and $123,324,000 as of December 31, 2018 and 2017, respectively.
At December 31, 2018, contractual maturities of time deposits were as follows:
Year of Maturity |
|
Amount |
|
|
2019 |
|
$ |
296,816 |
|
2020 |
|
|
121,111 |
|
2021 |
|
|
41,883 |
|
2022 |
|
|
19,140 |
|
2023 |
|
|
15,315 |
|
Thereafter |
|
|
142 |
|
|
|
|
|
|
Total time deposits |
|
$ |
494,407 |
|
As of December 31, 2018 and 2017, there were no deposit relationships that exceeded 5% of the Company’s total deposits.
At December 31, 2018, the Company had no outstanding brokered certificates of deposit. At December 31, 2017, the Company had outstanding brokered certificates of deposit of $11,748,000, with an average weighted interest rate of 1.19%.
(7) |
Federal Home Loan Bank Advances and Borrowings |
At December 31, 2018, the Company had advances outstanding from the FHLB as follows:
|
|
|
|
|
|
|
|
|
Call or |
|
|
Advance |
|
Interest Basis |
|
Current Rate |
|
Maturity |
|
Conversion Date |
|
||
$ |
2,000 |
|
Fixed |
|
4.06% |
|
February 1, 2019 |
|
|
N/A |
|
At December 31, 2017, the Company had advances outstanding from the FHLB as follows:
|
|
|
|
|
|
|
|
|
|
Call or |
|
|
Advance |
|
Interest Basis |
|
Current Rate |
|
Maturity |
|
Conversion Date |
|
|||
$ |
2,000 |
|
Fixed |
|
|
4.06 |
% |
February 1, 2019 |
|
|
N/A |
|
|
5,000 |
|
Fixed |
|
|
3.96 |
% |
July 2, 2018 |
|
|
N/A |
|
$ |
7,000 |
|
|
|
|
|
|
|
|
|
|
|
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
As of December 31, 2018, the Company had outstanding unfunded standby letters of credit with the FHLB totaling $162,500,000.
The Company has pledged under blanket floating liens approximately $2,355,631,000 and $1,486,469,000 in residential first mortgage loans, home equity lines of credit, commercial real estate loans, and loans secured by multifamily real estate as security for these advances and letters and possible future advances as of December 31, 2018 and 2017, respectively. The value of the pledged collateral, using appropriate discount percentages as prescribed by the FHLB, equals or exceeds the advances and unfunded standby letters of credit outstanding. At December 31, 2018, the Company had approximately $531,922,000 in additional borrowing capacity under its arrangement with the FHLB.
The Company had available lines of credit for overnight borrowings totaling $123,600,000 at December 31, 2018.
(8) |
Income Taxes |
The components of income tax expense for the years ended December 31, 2018, 2017 and 2016 were as follows:
|
|
2018 |
|
|
2017 |
|
|
2016 |
|
|||
Current |
|
$ |
8,781 |
|
|
|
12,882 |
|
|
|
8,500 |
|
Deferred |
|
|
2,962 |
|
|
|
62 |
|
|
|
257 |
|
Expense of operating loss carryforwards |
|
|
1,048 |
|
|
|
896 |
|
|
|
637 |
|
Enacted rate change |
|
|
- |
|
|
|
6,231 |
|
|
|
- |
|
Total income tax expense |
|
$ |
12,791 |
|
|
|
20,071 |
|
|
|
9,394 |
|
The difference between income tax expense and the amount computed by applying the statutory federal income tax rate to income before taxes for the years ended December 31, 2018, 2017 and 2016 is as follows:
|
|
2018 |
|
|
2017 |
|
|
2016 |
|
|||
Tax expense at statutory rate (21% for 2018 and 35% for 2017 and 2016) |
|
$ |
12,118 |
|
|
|
14,716 |
|
|
|
10,084 |
|
State income tax expense, net |
|
|
2,115 |
|
|
|
1,059 |
|
|
|
727 |
|
Cash surrender value income |
|
|
(257 |
) |
|
|
(470 |
) |
|
|
(284 |
) |
Tax-exempt interest |
|
|
(167 |
) |
|
|
(288 |
) |
|
|
(295 |
) |
Noncontrolling interest |
|
|
(518 |
) |
|
|
(667 |
) |
|
|
(547 |
) |
Merger-related expenses |
|
|
382 |
|
|
|
242 |
|
|
|
108 |
|
Stock options |
|
|
(883 |
) |
|
|
(517 |
) |
|
|
- |
|
Enacted rate change |
|
|
- |
|
|
|
6,231 |
|
|
|
- |
|
Other |
|
|
1 |
|
|
|
(235 |
) |
|
|
(399 |
) |
Total income tax expense |
|
$ |
12,791 |
|
|
|
20,071 |
|
|
|
9,394 |
|
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
The following table summarizes the components of deferred taxes at December 31, 2018 and 2017.
|
|
2018 |
|
|
2017 |
|
||
Deferred income tax assets: |
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
11,136 |
|
|
|
6,991 |
|
Accrued expenses |
|
|
576 |
|
|
|
396 |
|
Operating loss carryforwards and credits |
|
|
6,076 |
|
|
|
4,787 |
|
Premises and equipment |
|
|
- |
|
|
|
560 |
|
Non-accrual interest income |
|
|
162 |
|
|
|
66 |
|
Stock-based compensation |
|
|
1,021 |
|
|
|
771 |
|
Other real estate |
|
|
276 |
|
|
|
276 |
|
Deferred compensation |
|
|
1,066 |
|
|
|
564 |
|
Goodwill and intangible assets |
|
|
360 |
|
|
|
175 |
|
Other |
|
|
451 |
|
|
|
95 |
|
Unrealized loss on investment securities available-for-sale |
|
|
586 |
|
|
|
- |
|
Total gross deferred income tax assets |
|
|
21,710 |
|
|
|
14,681 |
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities: |
|
|
|
|
|
|
|
|
Unrealized gains on investment securities available-for-sale |
|
|
- |
|
|
|
126 |
|
Premises and equipment |
|
|
1,350 |
|
|
|
- |
|
Prepaid expenses |
|
|
823 |
|
|
|
380 |
|
Core deposit intangible |
|
|
4,639 |
|
|
|
1,125 |
|
Derivatives |
|
|
140 |
|
|
|
234 |
|
Investment in pass-through entity |
|
|
1,004 |
|
|
|
775 |
|
Other |
|
|
749 |
|
|
|
- |
|
Total gross deferred income tax liabilities |
|
|
8,705 |
|
|
|
2,640 |
|
Net deferred income tax assets |
|
$ |
13,005 |
|
|
|
12,041 |
|
Pursuant to ASC 740-10-30-2 Income Taxes , deferred tax assets and liabilities are measured using enacted tax rates applicable to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was enacted, which provides for a reduction in the corporate tax rate from a maximum tax rate of 35 percent to a flat tax rate of 21 percent effective for tax years beginning after December 31, 2017. As a result, the Company revalued its deferred tax assets and liabilities as of December 31, 2017 and recorded the effect of this change as a component of tax expense. The tax expense recorded related to the change in the enacted federal tax rate as of December 31, 2017 was $6,231,000.
As of December 31, 2018, the Company had net operating loss carryforwards totaling approximately $24,460,000 for federal taxes and $21,039,000 for state taxes that will begin to expire in 2028, unless previously utilized. The federal operating loss carryforwards are subject to limitation under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), but are expected to be utilized within the carryforward period. The state net operating loss carryforwards are also subject to limitation under Section 382 of the Code. These net operating losses are also expected to be utilized during the carryforward period.
(9) |
Commitments and Contingencies |
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract amounts of these instruments reflect the extent of the involvement that the Company has in particular classes of financial instruments.
The exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
In most cases, the Company requires collateral or other security to support financial instruments with credit risk.
|
|
As of December 31, |
|
|||||
|
|
2018 |
|
|
2017 |
|
||
Financial instruments whose contract amounts represent credit risk: |
|
|
|
|
|
|
|
|
Commitments to extend credit |
|
$ |
711,189 |
|
|
$ |
483,952 |
|
Standby and performance letters of credit |
|
$ |
20,432 |
|
|
$ |
10,255 |
|
Commitments to extend credit are agreements to lend to a customer, as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit, if deemed necessary by the Company, is based on management’s credit evaluation. Collateral held varies but may include unimproved and improved real estate, certificates of deposit or personal property.
Standby and performance letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to local businesses. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
The Company has entered into operating lease agreements for 12 branch locations, one loan production office, an operations center and two mortgage operation offices. Total rent expense for 2018, 2017 and 2016 was approximately $2,339,000, $2,060,000 and $1,323,000, respectively. Future minimum rent on operating leases as of December 31, 2018 was as follows:
|
|
Minimum |
|
|
Year ending December 31, |
|
Lease Payments |
|
|
2019 |
|
$ |
2,135 |
|
2020 |
|
|
1,999 |
|
2021 |
|
|
1,699 |
|
2022 |
|
|
1,572 |
|
2023 |
|
|
1,174 |
|
Thereafter |
|
|
3,774 |
|
Total future minimum lease payments |
|
$ |
12,353 |
|
In the normal course of business, the Company may be named as a defendant in litigation. Some of these matters may claim substantial damages. After consultation with outside legal counsel about existing claims, management believes that resolution of these issues will not result in a material adverse effect on the Company’s financial position or results of operations.
(10) |
Derivative Financial Instruments and Hedging Transactions |
The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by derivative instruments is interest rate risk. Interest rate swaps are used to manage interest rate risk associated with certain of the Company’s fixed-rate loans. The Company has also entered into interest rate swap contracts with certain of its customers. To hedge the associated risk, the Company entered into reciprocal interest rate swap agreements with a third party. To mitigate the interest rate risk associated with the Company’s mortgage loans that are mandatory delivery, the Company enters into forward commitments to sell mortgage-backed securities.
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
ASC 815, Derivatives and Hedging , requires companies to recognize all derivative instruments as either assets or liabilities at fair value on the balance sheet. As of December 31, 2018 and 2017, the approximate fair values and notional amounts of the Company’s derivative instruments, as well as their location on the consolidated balance sheet, were as follows:
|
Balance Sheet |
|
|
|
|
|
Notional |
|
|
December 31, 2018 |
Location |
|
Fair Value |
|
|
Amount |
|
||
Interest rate swaps designated as fair value hedges |
Other Assets |
|
$ |
3 |
|
|
|
7,954 |
|
Interest rate swaps with customers |
Other Assets |
|
$ |
152 |
|
|
|
49,753 |
|
Reciprocal interest rate swaps |
Other Liabilities |
|
$ |
(152 |
) |
|
|
49,753 |
|
Forward commitment to sell mortgage-backed securities |
Other Liabilities |
|
$ |
(337 |
) |
|
|
18,000 |
|
Interest rate lock commitments on residential mortgages |
Other Assets |
|
$ |
523 |
|
|
|
22,571 |
|
|
Balance Sheet |
|
|
|
|
|
Notional |
|
|
December 31, 2017 |
Location |
|
Fair Value |
|
|
Amount |
|
||
Interest rate swaps designated as fair value hedges |
Other Liabilities |
|
$ |
(108 |
) |
|
|
15,121 |
|
Interest rate swaps with customers |
Other Assets |
|
$ |
192 |
|
|
|
42,832 |
|
Reciprocal interest rate swaps |
Other Liabilities |
|
$ |
(192 |
) |
|
|
42,832 |
|
Forward commitment to sell mortgage-backed securities |
Other Liabilities |
|
$ |
(52 |
) |
|
|
24,500 |
|
Interest rate lock commitments on residential mortgages |
Other Assets |
|
$ |
528 |
|
|
|
30,146 |
|
During the years ended December 31, 2018, 2017 and 2016, the Company recognized a gain of approximately $8,000, $48,000 and $45,000, respectively, related to the ineffective portion of derivatives designated as fair value hedges. The gains and losses are included in other income in the consolidated statements of earnings.
(11) |
Employee Benefit Plans |
Equity Incentive Plans
In 2011, the Company adopted the National Commerce Corporation 2011 Equity Incentive Plan (the “2011 Equity Incentive Plan”) to provide a means of enhancing and encouraging the recruitment and retention of individuals on whom the success of the Company depends. The 2011 Equity Incentive Plan provides for the grant of stock options, phantom stock, performance awards and restricted and unrestricted stock awards. A total of 500,000 shares were initially reserved for issuance under the plan.
In 2017, the Company adopted the National Commerce Corporation 2017 Equity Incentive Plan (the “2017 Equity Incentive Plan”). Upon adoption of the 2017 Equity Incentive Plan, the 2011 Equity Incentive Plan was frozen. The 2017 Equity Incentive Plan reserved 750,000 shares for future issuances under the plan and will provide a means of enhancing and encouraging the recruitment and retention of individuals on whom the success of the Company depends.
The Company did not issue any stock options during 2018, 2017 or 2016. During 2018, the Company assumed options to purchase 193,247 and 89,451 of the Company’s common stock in the acquisitions of Landmark and Premier, respectively. In the 2018 acquisition of FirstAtlantic, the Company assumed 21,898 warrants to purchase the Company’s common stock. During 2017, the Company assumed options to purchase 147,516 shares of the Company’s common stock in the acquisition of Private Bancshares. In each case, the Company assumed the applicable equity plan maintained by the acquired company at the time of the transaction.
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
A summary of activity related to options and warrants to purchase the Company’s common stock for the years ended December 31, 2018, 2017 and 2016 is presented below:
|
|
2018 |
|
|
2017 |
|
|
2016 |
|
|||||||||||||||
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|||
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|||
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|||
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
||||||
Outstanding, beginning of year |
|
|
315,622 |
|
|
$ |
16.26 |
|
|
|
389,253 |
|
|
$ |
16.66 |
|
|
|
479,594 |
|
|
$ |
16.31 |
|
Assumed |
|
|
304,596 |
|
|
|
20.08 |
|
|
|
147,516 |
|
|
|
11.83 |
|
|
|
- |
|
|
|
- |
|
Exercised |
|
|
(286,949 |
) |
|
|
17.55 |
|
|
|
(221,147 |
) |
|
|
14.01 |
|
|
|
(90,052 |
) |
|
|
14.78 |
|
Forfeited |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(289 |
) |
|
|
24.22 |
|
Outstanding, end of year |
|
|
333,269 |
|
|
$ |
18.64 |
|
|
|
315,622 |
|
|
$ |
16.26 |
|
|
|
389,253 |
|
|
$ |
16.66 |
|
Exercisable, end of year |
|
|
333,269 |
|
|
$ |
18.64 |
|
|
|
315,622 |
|
|
$ |
16.26 |
|
|
|
389,253 |
|
|
$ |
16.66 |
|
The options and warrants outstanding and exercisable at December 31, 2018 had a weighted average remaining contractual life of approximately 5.3 years. As of December 31, 2018, there was no unrecognized compensation expense, as all stock options previously granted by the Company immediately vested at the time of the grant, and the assumed options vested at the date of acquisition. The Company did not recognize any compensation expense related to stock options in 2018, 2017 or 2016.
During 2018, the Company granted performance shares under the 2017 Equity Incentive Plan to certain key employees. During 2017 and 2016, the Company granted performance share awards under the 2011 Equity Incentive Plan to certain key employees. The awards vest over four years, and the number of shares ultimately awarded may be fixed or variable, depending on the terms of the agreement with the employee to whom the award is granted. Some grants vest solely based on the passage of time, and the ultimate payout is fixed. Other awards are based on factors such as loan production and other metrics such as net income and asset quality. The Company records total compensation expense equal to the amount of shares that it expects to pay out at the end of the award period over the associated vesting period. The Company recognized $1,266,000, $1,087,000 and $826,000 in compensation expense related to performance share awards during 2018, 2017 and 2016, respectively. As of December 31, 2018, there was approximately $2,985,000 of unrecorded compensation related to the performance share awards.
In 2014, the Company adopted the National Commerce Corporation Deferral of Compensation Plan for Key Employees and Non-Employee Directors. Under the plan, non-employee directors can elect to defer their director fees in the form of the Company’s stock units. During 2018, 2017 and 2016, deferred fees under this plan totaled $831,000, $597,000 and $400,000, respectively.
Defined Contribution Plan
The Company sponsors a 401(k) savings plan under which eligible employees may choose to contribute up to 15% of their salary on a pre-tax or after-tax basis, subject to certain limits imposed by the Internal Revenue Service. Effective January 1, 2018, the Company amended the plan to include a matching employer contribution equal to 100% of the first 3% of deferral contributions plus 50% of the next 2% of deferral contributions by eligible participants. Effective January 1, 2017, the Company amended the plan to include a matching employer contribution equal to 50% of the first 6% deferred by eligible participants. Prior to this amendment, the matching employer contribution was equal to 50% of the first 3% deferred by eligible participants. During 2018, 2017 and 2016, the Company recognized matching contribution expense of approximately $1,224,000, $690,000 and $254,000, respectively.
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
(12) |
Related Party Transactions |
The Company conducts transactions with directors and executive officers, including companies in which they have a beneficial interest, in the normal course of business. It is the Company’s policy to comply with federal regulations that require loan and deposit transactions with directors and executive officers to be entered into on substantially the same terms as those prevailing at the time for comparable loans made to and deposits received from other persons. At December 31, 2018 and 2017, deposits from directors, executive officers and their related interests aggregated approximately $32,872,000 and $37,983,000, respectively. These deposits were taken in the normal course of business at market interest rates. The following is a summary of activity for related party loans for 2018:
Balance at December 31, 2017 |
|
$ |
14,504 |
|
New loans |
|
|
7,130 |
|
Repayments |
|
|
(4,449 |
) |
Changes in related parties |
|
|
(1,494 |
) |
|
|
|
|
|
Balance at December 31, 2018 |
|
$ |
15,691 |
|
(13) |
Shareholders’ Equity |
On June 12, 2017, the Company sold 960,000 shares of the Company’s common stock at $37.00 per share in an underwritten public offering. The underwriters had an option to purchase an additional 144,000 shares, which they exercised. In total, the Company sold 1,104,000 shares and raised approximately $38.7 million, net of offering expenses.
(14) |
Regulatory Matters |
Banking regulations limit the amount of dividends that the Bank may pay without prior approval of the applicable regulatory authorities. These restrictions are based on the Bank’s level of regulatory classified assets, prior years’ net earnings, and ratio of equity capital to total assets. The Bank is currently allowed to pay dividends to the Company, subject to safety and soundness requirements and other limitations imposed by law and federal regulatory authorities.
The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under the regulatory framework for capital adequacy and prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
In July 2013, the Federal Reserve and the OCC issued final rules implementing the Basel III regulatory capital framework, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The final rules took effect for the Company and the Bank on January 1, 2015, subject to a transition period for certain parts of the rules. The rules revise the minimum capital requirements and adjust the prompt corrective action thresholds applicable to financial institutions under the agencies’ jurisdiction. The rules revise the regulatory capital elements, add a new common equity Tier 1 capital ratio, increase the minimum Tier 1 capital ratio requirements and implement a new capital conservation buffer. The rules also permit certain banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income. The Company and the Bank have made the election to retain the existing treatment for accumulated other comprehensive income.
The rules are intended to provide an additional measure of a bank’s capital adequacy by assigning weighted levels of risk to asset categories. Banks are also required to systematically maintain capital against such “off-balance sheet” activities as loans sold with recourse, loan commitments, guarantees and standby letters of credit. These guidelines are intended to strengthen the quality of capital by increasing the emphasis on common equity and restricting the amount of loan loss reserves and other forms of equity, such as preferred stock, that may be included in capital. Certain items, such as goodwill and other intangible assets, are deducted from total capital in arriving at the various regulatory capital measures, such as common equity Tier 1 capital, Tier 1 capital and total risk-based capital.
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
As of December 31, 2018 and 2017, the Bank was well-capitalized under the regulatory framework for prompt corrective action. Under the current regulatory guidelines, banks must meet minimum capital adequacy levels based on both total assets and risk-adjusted assets. All banks are required to maintain a minimum ratio of total capital to risk-weighted assets of 8%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6%, a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%, and a minimum ratio of Tier 1 capital to average assets (leverage ratio) of 4%. Adherence to these guidelines has not had an adverse impact on the Bank. As of January 1, 2016, an additional capital conservation buffer was added to the minimum requirements for capital adequacy purposes and is subject to a three-year phase-in period. The capital conservation buffer will be fully phased-in on January 1, 2019 at 2.5%. A banking organization with a conservation buffer of less than 2.5% (or the required phase-in amount in years prior to 2019) will be subject to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. The ratios for the Company and Bank are currently sufficient to satisfy the fully phased-in conservation buffer.
The actual year-end capital amounts (in thousands) and ratios of the Company and Bank are presented in the table below.
(Dollars in thousands) |
|
Actual |
|
|
For Capital Adequacy Purposes |
|
|
To Be Well-Capitalized Under Prompt Corrective Action Provisions |
|
|||||||||||||||
As of December 31, 2018 |
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
||||||
Total Capital (to Risk-Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NCC |
|
$ |
479,002 |
|
|
|
14.82 |
% |
|
$ |
258,621 |
|
|
|
8.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
NBC |
|
$ |
456,718 |
|
|
|
14.13 |
% |
|
$ |
258,528 |
|
|
|
8.00 |
% |
|
$ |
323,159 |
|
|
|
10.00 |
% |
Tier 1 Capital (to Risk-Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NCC |
|
$ |
423,415 |
|
|
|
13.10 |
% |
|
$ |
193,966 |
|
|
|
6.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
NBC |
|
$ |
438,366 |
|
|
|
13.57 |
% |
|
$ |
193,896 |
|
|
|
6.00 |
% |
|
$ |
258,528 |
|
|
|
8.00 |
% |
Common Equity Tier 1 Capital (to Risk-Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NCC |
|
$ |
423,415 |
|
|
|
13.10 |
% |
|
$ |
145,474 |
|
|
|
4.50 |
% |
|
|
N/A |
|
|
|
N/A |
|
NBC |
|
$ |
438,366 |
|
|
|
13.57 |
% |
|
$ |
145,422 |
|
|
|
4.50 |
% |
|
$ |
210,054 |
|
|
|
6.50 |
% |
Tier 1 Capital (to Average Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NCC |
|
$ |
423,415 |
|
|
|
10.87 |
% |
|
$ |
155,877 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
NBC |
|
$ |
438,366 |
|
|
|
11.26 |
% |
|
$ |
155,690 |
|
|
|
4.00 |
% |
|
$ |
194,613 |
|
|
|
5.00 |
% |
As of December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NCC |
|
$ |
311,225 |
|
|
|
14.37 |
% |
|
$ |
173,301 |
|
|
|
8.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
NBC |
|
$ |
273,012 |
|
|
|
12.61 |
% |
|
$ |
173,243 |
|
|
|
8.00 |
% |
|
$ |
220,680 |
|
|
|
10.00 |
% |
Tier 1 Capital (to Risk-Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NCC |
|
$ |
271,687 |
|
|
|
12.54 |
% |
|
$ |
129,975 |
|
|
|
6.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
NBC |
|
$ |
258,027 |
|
|
|
11.92 |
% |
|
$ |
129,932 |
|
|
|
6.00 |
% |
|
$ |
176,543 |
|
|
|
8.00 |
% |
Common Equity Tier 1 Capital (to Risk-Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NCC |
|
$ |
271,687 |
|
|
|
12.54 |
% |
|
$ |
97,482 |
|
|
|
4.50 |
% |
|
|
N/A |
|
|
|
N/A |
|
NBC |
|
$ |
258,027 |
|
|
|
11.92 |
% |
|
$ |
97,449 |
|
|
|
4.50 |
% |
|
$ |
143,442 |
|
|
|
6.50 |
% |
Tier 1 Capital (to Average Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NCC |
|
$ |
271,687 |
|
|
|
10.89 |
% |
|
$ |
99,786 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
NBC |
|
$ |
258,027 |
|
|
|
10.36 |
% |
|
$ |
99,630 |
|
|
|
4.00 |
% |
|
$ |
124,538 |
|
|
|
5.00 |
% |
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
(15) |
Fair Value Measurements and Disclosures |
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale and derivative financial instruments are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans and other real estate and repossessed assets. These nonrecurring fair value adjustments typically involve application of the lower of cost or market accounting or write-downs of individual assets.
Fair Value Hierarchy
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1 – Valuation is based on quoted prices for identical instruments traded in active markets.
Level 2 – Valuation is based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.
The following is a description of valuation methodologies used for assets and liabilities recorded or disclosed at fair value.
Cash and Cash Equivalents
For disclosure purposes, for cash, due from banks, interest-bearing deposits and federal funds sold, the carrying amount is a reasonable estimate of fair value.
Investment Securities
Securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurements are based on quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques, such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors, including credit assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange or Nasdaq, and U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter market funds. Level 2 securities include mortgage-backed securities issued by government-sponsored enterprises, municipal bonds and other asset-backed securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.
The fair value of securities held-to-maturity is estimated using the same measurement techniques as securities available-for-sale.
Other Investments
For disclosure purposes, the carrying amount of other investments approximates their fair value.
Loans
The Company does not record loans at fair value on a recurring basis. However, if a loan is considered impaired, then an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment using one of three methods, based on collateral value, market value of similar debt or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At December 31, 2018 and 2017, impaired loans were evaluated based on the fair value of the collateral. Impaired loans for which an allowance is established based on the fair value of collateral, or loans that are charged down according to the fair value of collateral, require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price, the Company records the impaired loan as nonrecurring Level 2. When the fair value is based on an appraised value, the Company records the impaired loan as nonrecurring Level 3.
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
For disclosure purposes, the fair value of fixed-rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. For variable-rate loans, the carrying amount is a reasonable estimate of fair value.
Mortgage Loans Held-for-Sale
The fair value of committed mortgage loans held-for-sale is determined by outstanding commitments from investors, and the fair value of uncommitted loans is based on the current delivery prices in the secondary mortgage market.
Bank-Owned Life Insurance
For disclosure purposes, the fair value of the cash surrender value of life insurance policies is equivalent to the carrying value.
Other Real Estate
Other real estate properties are adjusted to fair value upon transfer of the loans to other real estate. Subsequently, other real estate assets are carried at the net realizable value. This value is based on independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price, the Company records the other real estate as nonrecurring Level 2. When fair value is based on an appraised value or management’s estimate of value, the Company records the other real estate or repossessed asset as nonrecurring Level 3.
Deposits
For disclosure purposes, the fair value of demand deposits, NOW and money market accounts and savings accounts is the amount payable on demand at the reporting date. The fair value of fixed-rate maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.
Federal Home Loan Bank Advances
For disclosure purposes, the fair value of the FHLB advances is based on the quoted value for similar remaining maturities provided by the FHLB.
Subordinated Debt
For disclosure purposes, the fair value of our fixed-rate subordinated debt is estimated using a discounted cash flow model that utilizes current market interest rates on borrowings with a similar maturity.
Derivative Financial Instruments
Derivative financial instruments are recorded at fair value on a recurring basis. The valuation of the Company’s derivative financial instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of the derivative. This analysis reflects the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair value of the interest rate swaps is determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments are based on an expectation of future interest rates (forward curves derived from observable market interest rate curves).
The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company or the counterparty. However, as of December 31, 2018 and 2017, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustment is not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations are classified in Level 2 of the fair value hierarchy.
Commitments to Extend Credit and Standby Letters of Credit
Because commitments to extend credit and standby letters of credit are generally short-term and made using variable rates, the carrying value and estimated fair value associated with these instruments are immaterial.
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis as of December 31, 2018 and 2017.
December 31, 2018 |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
U.S. government agency obligations |
|
$ |
- |
|
|
|
2,780 |
|
|
|
- |
|
|
|
2,780 |
|
Residential mortgage-backed securities |
|
|
- |
|
|
|
139,958 |
|
|
|
- |
|
|
|
139,958 |
|
Other commercial mortgage-backed securities |
|
|
- |
|
|
|
3,830 |
|
|
|
- |
|
|
|
3,830 |
|
Municipal securities |
|
|
- |
|
|
|
2,423 |
|
|
|
- |
|
|
|
2,423 |
|
Other asset-backed securities |
|
|
- |
|
|
|
38,525 |
|
|
|
- |
|
|
|
38,525 |
|
Total investment securities available-for-sale |
|
$ |
- |
|
|
|
187,516 |
|
|
|
- |
|
|
|
187,516 |
|
Mortgage loans held-for-sale |
|
$ |
- |
|
|
|
15,031 |
|
|
|
- |
|
|
|
15,031 |
|
Derivative assets |
|
$ |
- |
|
|
|
678 |
|
|
|
- |
|
|
|
678 |
|
Derivative liabilities |
|
$ |
- |
|
|
|
489 |
|
|
|
- |
|
|
|
489 |
|
December 31, 2017 |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
U.S. government agency obligations |
|
$ |
- |
|
|
|
3,264 |
|
|
|
- |
|
|
|
3,264 |
|
Residential mortgage-backed securities |
|
|
- |
|
|
|
39,244 |
|
|
|
- |
|
|
|
39,244 |
|
Other commercial mortgage-backed securities |
|
|
- |
|
|
|
3,924 |
|
|
|
- |
|
|
|
3,924 |
|
Municipal securities |
|
|
- |
|
|
|
3,265 |
|
|
|
- |
|
|
|
3,265 |
|
Other asset-backed securities |
|
|
- |
|
|
|
36,137 |
|
|
|
- |
|
|
|
36,137 |
|
Total investment securities available-for-sale |
|
|
- |
|
|
|
85,834 |
|
|
|
- |
|
|
|
85,834 |
|
Mortgage loans held-for-sale |
|
$ |
- |
|
|
|
29,191 |
|
|
|
- |
|
|
|
29,191 |
|
Derivative assets |
|
$ |
- |
|
|
|
720 |
|
|
|
- |
|
|
|
720 |
|
Derivative liabilities |
|
$ |
- |
|
|
|
352 |
|
|
|
- |
|
|
|
352 |
|
Assets Recorded at Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of December 31, 2018 and 2017.
December 31, 2018 |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Other real estate |
|
$ |
- |
|
|
|
- |
|
|
|
974 |
|
|
|
974 |
|
Non-accrual loans |
|
|
- |
|
|
|
- |
|
|
|
10,419 |
|
|
|
10,419 |
|
December 31, 2017 |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Other real estate |
|
$ |
- |
|
|
|
- |
|
|
|
1,094 |
|
|
|
1,094 |
|
Non-accrual loans |
|
|
- |
|
|
|
- |
|
|
|
2,698 |
|
|
|
2,698 |
|
The inputs used to determine the fair value of other real estate include market conditions, estimated holding period, underlying collateral characteristics and discount rates. The inputs used to determine the fair value of impaired loans include market conditions, loan term, estimated holding period, underlying collateral characteristics and discount rates.
For the years ended December 31, 2018 and 2017, there was no change in the methods and significant inputs used to estimate fair value.
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
The following table shows the significant unobservable inputs used in the fair value measurement of Level 3 assets.
December 31, 2018 |
|
Fair Value |
|
Valuation Technique |
|
Unobservable Inputs |
|
Range of Discounts |
|
|
Weighted Average Discounts |
|
||||
Other real estate |
|
$ |
974 |
|
Third party appraisals, sales contracts, broker price opinions |
|
Collateral discounts and estimated costs to sell |
|
57% |
- |
58% |
|
|
|
57 |
% |
Non-accrual loans |
|
|
10,419 |
|
Third party appraisals and discounted cash flows |
|
Collateral discounts and discount rates |
|
0% |
- |
100% |
|
|
|
18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate |
|
$ |
1,094 |
|
Third party appraisals, sales contracts, broker price opinions |
|
Collateral discounts and estimated costs to sell |
|
9% |
- |
57% |
|
|
|
48 |
% |
Non-accrual loans |
|
|
2,698 |
|
Third party appraisals and discounted cash flows |
|
Collateral discounts and discount rates |
|
0% |
- |
100% |
|
|
|
33 |
% |
The carrying amounts and estimated fair values of the Company’s financial instruments at December 31, 2018 and 2017 were as follows:
|
|
Carrying |
|
|
Estimated Fair Value |
|
||||||||||
December 31, 2018 |
|
Amount |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
217,130 |
|
|
|
217,130 |
|
|
|
- |
|
|
|
- |
|
Investment securities held-to-maturity |
|
|
25,045 |
|
|
|
- |
|
|
|
24,821 |
|
|
|
- |
|
Investment securities available-for-sale |
|
|
187,516 |
|
|
|
- |
|
|
|
187,516 |
|
|
|
- |
|
Other investments |
|
|
16,946 |
|
|
|
- |
|
|
|
16,946 |
|
|
|
- |
|
Loans, net |
|
|
3,299,789 |
|
|
|
- |
|
|
|
3,296,334 |
|
|
|
10,419 |
|
Mortgage loans held-for-sale |
|
|
15,031 |
|
|
|
- |
|
|
|
15,031 |
|
|
|
- |
|
Bank-owned life insurance |
|
|
55,114 |
|
|
|
- |
|
|
|
55,114 |
|
|
|
- |
|
Derivative assets |
|
|
678 |
|
|
|
- |
|
|
|
678 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
3,432,289 |
|
|
|
- |
|
|
|
3,211,374 |
|
|
|
- |
|
Federal Home Loan Bank advances and other borrowings |
|
|
20,851 |
|
|
|
- |
|
|
|
20,855 |
|
|
|
- |
|
Subordinated debt |
|
|
37,235 |
|
|
|
- |
|
|
|
36,359 |
|
|
|
- |
|
Derivative liabilities |
|
|
489 |
|
|
|
- |
|
|
|
489 |
|
|
|
- |
|
|
|
Carrying |
|
|
Estimated Fair Value |
|
||||||||||
December 31, 2017 |
|
Amount |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
235,288 |
|
|
|
235,288 |
|
|
|
- |
|
|
|
- |
|
Investment securities held-to-maturity |
|
|
25,562 |
|
|
|
- |
|
|
|
25,932 |
|
|
|
- |
|
Investment securities available-for-sale |
|
|
85,834 |
|
|
|
- |
|
|
|
85,834 |
|
|
|
- |
|
Other investments |
|
|
11,350 |
|
|
|
- |
|
|
|
11,350 |
|
|
|
- |
|
Loans, net |
|
|
2,123,073 |
|
|
|
- |
|
|
|
2,117,065 |
|
|
|
2,698 |
|
Mortgage loans held-for-sale |
|
|
29,191 |
|
|
|
- |
|
|
|
29,191 |
|
|
|
- |
|
Bank-owned life insurance |
|
|
31,584 |
|
|
|
- |
|
|
|
31,584 |
|
|
|
- |
|
Derivative assets |
|
|
720 |
|
|
|
- |
|
|
|
720 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
2,285,831 |
|
|
|
- |
|
|
|
2,156,600 |
|
|
|
- |
|
Federal Home Loan Bank advances |
|
|
7,000 |
|
|
|
- |
|
|
|
7,089 |
|
|
|
- |
|
Subordinated debt |
|
|
24,553 |
|
|
|
- |
|
|
|
23,709 |
|
|
|
- |
|
Derivative liabilities |
|
|
352 |
|
|
|
- |
|
|
|
352 |
|
|
|
- |
|
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include mortgage banking operations, deferred income taxes, and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
(16) |
National Commerce Corporation (Parent Company Only) Financial Information |
Balance Sheets
|
|
As of December 31, |
|
|||||
|
|
2018 |
|
|
2017 |
|
||
Assets |
|
|||||||
Cash and due from banks |
|
$ |
14,612 |
|
|
|
33,355 |
|
Investment in subsidiaries |
|
|
713,828 |
|
|
|
387,830 |
|
Other assets |
|
|
6,118 |
|
|
|
3,554 |
|
Total assets |
|
$ |
734,558 |
|
|
|
424,739 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity |
|
|||||||
Other liabilities |
|
$ |
265 |
|
|
|
228 |
|
Subordinated debt |
|
|
37,235 |
|
|
|
24,553 |
|
Total liabilities |
|
|
37,500 |
|
|
|
24,781 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity: |
|
|
|
|
|
|
|
|
Common stock |
|
|
208 |
|
|
|
148 |
|
Additional paid-in capital |
|
|
604,965 |
|
|
|
347,999 |
|
Retained earnings |
|
|
86,433 |
|
|
|
43,989 |
|
Accumulated other comprehensive (loss) income |
|
|
(2,203 |
) |
|
|
474 |
|
Total shareholders' equity attributable to National Commerce Corporation |
|
|
689,403 |
|
|
|
392,610 |
|
Noncontrolling interest |
|
|
7,655 |
|
|
|
7,348 |
|
Total shareholders' equity |
|
|
697,058 |
|
|
|
399,958 |
|
Total liabilities and shareholders' equity |
|
$ |
734,558 |
|
|
|
424,739 |
|
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
Statements of Earnings
|
|
For the Years Ended December 31, |
|
|||||||||
|
|
2018 |
|
|
2017 |
|
|
2016 |
|
|||
Dividend from subsidiaries |
|
$ |
900 |
|
|
|
850 |
|
|
|
- |
|
Other expense |
|
|
4,746 |
|
|
|
2,907 |
|
|
|
1,314 |
|
Interest expense |
|
|
1,921 |
|
|
|
1,553 |
|
|
|
960 |
|
Total expenses |
|
|
6,667 |
|
|
|
4,460 |
|
|
|
2,274 |
|
Loss before equity in undistributed earnings of subsidiaries |
|
|
(5,767 |
) |
|
|
(3,610 |
) |
|
|
(2,274 |
) |
Equity in undistributed earnings of subsidiaries |
|
|
45,966 |
|
|
|
22,259 |
|
|
|
19,351 |
|
Income tax benefit |
|
|
2,245 |
|
|
|
1,419 |
|
|
|
776 |
|
Net earnings |
|
$ |
42,444 |
|
|
|
20,068 |
|
|
|
17,853 |
|
Statements of Cash Flows
|
|
For the Years Ended December 31, |
|
|||||||||
|
|
2018 |
|
|
2017 |
|
|
2016 |
|
|||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
42,444 |
|
|
|
20,068 |
|
|
|
17,853 |
|
Adjustments to reconcile net earnings to net cash used by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of subsidiaries |
|
|
(45,966 |
) |
|
|
(22,259 |
) |
|
|
(19,351 |
) |
Deferred income tax expense (benefit) |
|
|
(334 |
) |
|
|
451 |
|
|
|
(75 |
) |
Share-based expense |
|
|
488 |
|
|
|
333 |
|
|
|
224 |
|
Change in other assets |
|
|
1,536 |
|
|
|
(231 |
) |
|
|
(393 |
) |
Change in other liabilities |
|
|
(2,216 |
) |
|
|
(897 |
) |
|
|
351 |
|
Net cash used by operating activities |
|
|
(4,048 |
) |
|
|
(2,535 |
) |
|
|
(1,391 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital injection in subsidiaries |
|
|
- |
|
|
|
(26,000 |
) |
|
|
(5,000 |
) |
Cash paid in acquisition (including offering expenses) |
|
|
(16,855 |
) |
|
|
(5,974 |
) |
|
|
- |
|
Net cash used by investing activities |
|
|
(16,855 |
) |
|
|
(31,974 |
) |
|
|
(5,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from stock offerings |
|
|
- |
|
|
|
38,806 |
|
|
|
- |
|
Stock offering expenses |
|
|
- |
|
|
|
(103 |
) |
|
|
- |
|
Issuance of subordinated debt |
|
|
- |
|
|
|
- |
|
|
|
25,000 |
|
Debt offering expenses |
|
|
- |
|
|
|
- |
|
|
|
(533 |
) |
Proceeds from exercise of stock options and warrants |
|
|
2,160 |
|
|
|
2,813 |
|
|
|
1,263 |
|
Net cash provided by financing activities |
|
|
2,160 |
|
|
|
41,516 |
|
|
|
25,730 |
|
Net change in cash |
|
|
(18,743 |
) |
|
|
7,007 |
|
|
|
19,339 |
|
Cash at beginning of year |
|
|
33,355 |
|
|
|
26,348 |
|
|
|
7,009 |
|
Cash at end of year |
|
$ |
14,612 |
|
|
|
33,355 |
|
|
|
26,348 |
|
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
(17) |
Segment Reporting |
The Company’s three reportable segments represent distinct product lines and are viewed separately for strategic planning purposes and internal reporting. The following table is a reconciliation of the reportable segment revenues, expenses and profit to the Company’s consolidated totals.
|
|
Retail and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Mortgage |
|
|
Receivables |
|
|
Elimination |
|
|
|
|
|
||||
|
|
Banking |
|
|
Division (1) |
|
|
Factoring |
|
|
Entries (2) |
|
|
Total |
|
|||||
For the Twelve Months Ended December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
156,939 |
|
|
|
834 |
|
|
|
19,194 |
|
|
|
(5,309 |
) |
|
|
171,658 |
|
Interest expense |
|
|
20,962 |
|
|
|
475 |
|
|
|
5,309 |
|
|
|
(5,309 |
) |
|
|
21,437 |
|
Net interest income |
|
|
135,977 |
|
|
|
359 |
|
|
|
13,885 |
|
|
|
- |
|
|
|
150,221 |
|
Provision for loan and lease losses |
|
|
4,379 |
|
|
|
- |
|
|
|
344 |
|
|
|
- |
|
|
|
4,723 |
|
Noninterest income |
|
|
7,495 |
|
|
|
11,727 |
|
|
|
59 |
|
|
|
- |
|
|
|
19,281 |
|
Noninterest expense |
|
|
87,301 |
|
|
|
11,726 |
|
|
|
8,048 |
|
|
|
- |
|
|
|
107,075 |
|
Net earnings before tax and noncontrolling interest |
|
|
51,792 |
|
|
|
360 |
|
|
|
5,552 |
|
|
|
- |
|
|
|
57,704 |
|
Income tax expense |
|
|
11,895 |
|
|
|
94 |
|
|
|
802 |
|
|
|
- |
|
|
|
12,791 |
|
Noncontrolling interest |
|
|
- |
|
|
|
- |
|
|
|
(2,469 |
) |
|
|
- |
|
|
|
(2,469 |
) |
Net earnings attributable to National Commerce Corporation |
|
$ |
39,897 |
|
|
|
266 |
|
|
|
2,281 |
|
|
|
- |
|
|
|
42,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as of December 31, 2018 |
|
$ |
3,933,351 |
|
|
|
15,031 |
|
|
|
146,697 |
|
|
|
110,409 |
|
|
|
4,205,488 |
|
For the Twelve Months Ended December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
97,471 |
|
|
|
679 |
|
|
|
15,126 |
|
|
|
(3,485 |
) |
|
|
109,791 |
|
Interest expense |
|
|
10,056 |
|
|
|
311 |
|
|
|
3,485 |
|
|
|
(3,485 |
) |
|
|
10,367 |
|
Net interest income |
|
|
87,415 |
|
|
|
368 |
|
|
|
11,641 |
|
|
|
- |
|
|
|
99,424 |
|
Provision for loan and lease losses |
|
|
2,799 |
|
|
|
- |
|
|
|
1,095 |
|
|
|
- |
|
|
|
3,894 |
|
Noninterest income |
|
|
6,177 |
|
|
|
13,386 |
|
|
|
148 |
|
|
|
- |
|
|
|
19,711 |
|
Noninterest expense |
|
|
52,930 |
|
|
|
13,798 |
|
|
|
6,467 |
|
|
|
- |
|
|
|
73,195 |
|
Net earnings before tax and noncontrolling interest |
|
|
37,863 |
|
|
|
(44 |
) |
|
|
4,227 |
|
|
|
- |
|
|
|
42,046 |
|
Income tax expense |
|
|
19,206 |
|
|
|
(17 |
) |
|
|
882 |
|
|
|
- |
|
|
|
20,071 |
|
Noncontrolling interest |
|
|
- |
|
|
|
- |
|
|
|
(1,907 |
) |
|
|
- |
|
|
|
(1,907 |
) |
Net earnings attributable to National Commerce Corporation |
|
$ |
18,657 |
|
|
|
(27 |
) |
|
|
1,438 |
|
|
|
- |
|
|
|
20,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as of December 31, 2017 |
|
$ |
2,673,020 |
|
|
|
29,191 |
|
|
|
139,130 |
|
|
|
(103,665 |
) |
|
|
2,737,676 |
|
For the Twelve Months Ended December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
64,256 |
|
|
|
489 |
|
|
|
11,762 |
|
|
|
(1,944 |
) |
|
|
74,563 |
|
Interest expense |
|
|
7,181 |
|
|
|
200 |
|
|
|
1,944 |
|
|
|
(1,944 |
) |
|
|
7,381 |
|
Net interest income |
|
|
57,075 |
|
|
|
289 |
|
|
|
9,818 |
|
|
|
- |
|
|
|
67,182 |
|
Provision for loan and lease losses |
|
|
2,325 |
|
|
|
- |
|
|
|
923 |
|
|
|
- |
|
|
|
3,248 |
|
Noninterest income |
|
|
5,848 |
|
|
|
8,039 |
|
|
|
69 |
|
|
|
- |
|
|
|
13,956 |
|
Noninterest expense |
|
|
37,280 |
|
|
|
6,604 |
|
|
|
5,195 |
|
|
|
- |
|
|
|
49,079 |
|
Net earnings before tax and noncontrolling interest |
|
|
23,318 |
|
|
|
1,724 |
|
|
|
3,769 |
|
|
|
- |
|
|
|
28,811 |
|
Income tax expense |
|
|
7,901 |
|
|
|
655 |
|
|
|
838 |
|
|
|
- |
|
|
|
9,394 |
|
Noncontrolling interest |
|
|
- |
|
|
|
- |
|
|
|
(1,564 |
) |
|
|
- |
|
|
|
(1,564 |
) |
Net earnings attributable to National Commerce Corporation |
|
$ |
15,417 |
|
|
|
1,069 |
|
|
|
1,367 |
|
|
|
- |
|
|
|
17,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as of December 31, 2016 |
|
$ |
1,903,602 |
|
|
|
15,373 |
|
|
|
105,812 |
|
|
|
(74,003 |
) |
|
|
1,950,784 |
|
(1) |
Noninterest income for the mortgage division segment includes intercompany income allocation. |
(2) |
Entry to remove intercompany interest allocated to the receivables factoring segment. For segment reporting purposes, the Company allocates funding costs to the receivables factoring segment at the federal funds rate plus 2.50%. |
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
(18) |
Goodwill and Intangible Assets |
Goodwill
During 2018, the Company recorded initial goodwill of $51,347,000, $56,486,000 and $28,549,000 associated with the acquisitions of FirstAtlantic, Landmark and Premier, respectively. During 2017, the Company recorded initial goodwill of $47,901,000 and $14,722,000 associated with the acquisitions of Private Bancshares and Patriot Bank, respectively.
Changes to the carrying amount of goodwill during 2018 and 2017 are provided in the following table.
Balance, December 31, 2016 |
|
$ |
50,771 |
|
Acquisition of Private Bancshares, Inc. |
|
|
47,901 |
|
Acquisition of Patriot Bank |
|
|
14,722 |
|
Balance, December 31, 2017 |
|
$ |
113,394 |
|
Adjustments to goodwill |
|
|
36 |
|
Acquisition of FirstAtlantic Financial Holdings, Inc. |
|
|
51,347 |
|
Acquisition of Premier Community Bank of Florida |
|
|
28,549 |
|
Acquisition of Landmark Bancshares, Inc. |
|
|
56,486 |
|
Balance, December 31, 2018 |
|
$ |
249,812 |
|
The adjustments to goodwill during 2018 resulted from the recognition of liabilities that existed as of the date on which the Company acquired Patriot but were not recorded. The adjustments were made following the Company’s review of additional information that existed at the time of acquisition that affected the recorded fair value of certain assets and liabilities. Net of deferred taxes, the adjustment resulted in a $36,000 increase to the amount of goodwill initially recorded in the Company’s acquisition of Patriot.
These adjustments to goodwill had no impact on net earnings or shareholders’ equity of the Company during 2018.
Intangible Assets
During 2018, in addition to the goodwill recorded for FirstAtlantic, Landmark and Premier, the Company recorded core deposit intangible assets of $6,251,000, $8,414,000 and $3,500,000, respectively. During 2017, in addition to the goodwill recorded for Private Bancshares and Patriot Bank, the Company recorded core deposit intangible assets of $2,979,000 and $899,000, respectively. The core deposit intangible asset for each acquisition will be amortized using an accelerated method over seven years. The aggregate amount of amortization expense for intangible assets during 2018, 2017 and 2016 was $4,249,000, $1,455,000 and $756,000, respectively.
A summary of core deposit intangible assets as of December 31, 2018 and 2017 is set forth below.
|
|
December 31, 2018 |
|
|
December 31, 2017 |
|
||
Gross carrying amount |
|
$ |
25,359 |
|
|
|
7,193 |
|
Less: accumulated amortization |
|
|
(6,987 |
) |
|
|
(2,738 |
) |
Net carrying amount |
|
$ |
18,372 |
|
|
|
4,455 |
|
The estimated amortization expense for each of the next five years is as follows:
2019 |
|
$ |
5,245 |
|
2020 |
|
|
4,340 |
|
2021 |
|
|
3,416 |
|
2022 |
|
|
2,528 |
|
2023 |
|
|
1,695 |
|
Thereafter |
|
|
1,148 |
|
Total amortization expense |
|
$ |
18,372 |
|
NATIONAL COMMERCE CORPORATION
Notes to Consolidated Financial Statements, continued
(amounts in tables in thousands, except share and per share data)
(19) |
Subordinated Debt |
On May 19, 2016, the Company completed the underwritten public offering of $25 million of its unsecured 6.0% Fixed-to-Floating Rate Subordinated Notes due June 1, 2026 (the “Notes”). The Notes bear interest at a fixed rate of 6.0% per year, from, and including, May 19, 2016, to, but excluding, June 1, 2021. On June 1, 2021, the Notes convert to a floating rate equal to three-month LIBOR plus 479 basis points. The Notes may be redeemed by the Company after June 1, 2021. The Company incurred expenses associated with the offering totaling $533 thousand.
The Company assumed $13.0 million of unsecured 6.5% Fixed-to-Floating Rate Subordinated Notes due June 30, 2027 (the “Landmark Notes’) in the Landmark acquisition. The Landmark Notes bear interest at a fixed rate of 6.5% per year, to, but excluding, June 30, 2022. On June 30, 2022, the Landmark Notes convert to a floating rate equal to three-month LIBOR plus 467 basis points.
Selected Quarterly Financial Data (Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Income Data |
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 Quarter Ended |
|
|||||||||||||
(Dollars in thousands, except per share information) |
|
December 31, |
|
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
||||
Interest income |
|
$ |
51,430 |
|
|
|
46,195 |
|
|
|
37,713 |
|
|
|
36,320 |
|
Interest expense |
|
|
7,533 |
|
|
|
6,174 |
|
|
|
4,310 |
|
|
|
3,420 |
|
Net interest income |
|
|
43,897 |
|
|
|
40,021 |
|
|
|
33,403 |
|
|
|
32,900 |
|
Provision for loan losses |
|
|
1,548 |
|
|
|
1,001 |
|
|
|
856 |
|
|
|
1,318 |
|
Gain on sale of securities |
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
191 |
|
Other noninterest income |
|
|
5,130 |
|
|
|
4,768 |
|
|
|
4,673 |
|
|
|
4,517 |
|
Other noninterest expense (1) |
|
|
33,385 |
|
|
|
27,096 |
|
|
|
22,619 |
|
|
|
23,975 |
|
Income before income taxes |
|
|
14,094 |
|
|
|
16,692 |
|
|
|
14,603 |
|
|
|
12,315 |
|
Income tax expense |
|
|
2,672 |
|
|
|
4,040 |
|
|
|
3,303 |
|
|
|
2,776 |
|
Net income before minority interest |
|
|
11,422 |
|
|
|
12,652 |
|
|
|
11,300 |
|
|
|
9,539 |
|
Net income attributable to minority interest |
|
|
721 |
|
|
|
676 |
|
|
|
616 |
|
|
|
456 |
|
Net income to common shareholders |
|
|
10,701 |
|
|
|
11,976 |
|
|
|
10,684 |
|
|
|
9,083 |
|
Net earnings per share |
|
$ |
0.52 |
|
|
|
0.60 |
|
|
|
0.62 |
|
|
|
0.53 |
|
Diluted net earnings per share |
|
|
0.51 |
|
|
|
0.59 |
|
|
|
0.61 |
|
|
|
0.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes merger/conversion-related expenses of $2.8 million, $897 thousand, $542 thousand, and $2.3 million for the quarters ended December 31, September 30, June 30, and March 31, 2018, respectively. |
Statement of Income Data |
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Quarter Ended |
|
|||||||||||||
(Dollars in thousands, except per share information) |
|
December 31, |
|
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
||||
Interest income |
|
$ |
30,224 |
|
|
|
28,202 |
|
|
|
26,466 |
|
|
|
24,899 |
|
Interest expense |
|
|
2,824 |
|
|
|
2,561 |
|
|
|
2,513 |
|
|
|
2,469 |
|
Net interest income |
|
|
27,400 |
|
|
|
25,641 |
|
|
|
23,953 |
|
|
|
22,430 |
|
Provision for loan losses |
|
|
1,478 |
|
|
|
1,105 |
|
|
|
1,155 |
|
|
|
156 |
|
(Loss) gain on sale of securities |
|
|
(119 |
) |
|
|
- |
|
|
|
28 |
|
|
|
- |
|
Other noninterest income |
|
|
4,984 |
|
|
|
4,630 |
|
|
|
5,072 |
|
|
|
5,440 |
|
Other noninterest expense (1) |
|
|
19,250 |
|
|
|
18,071 |
|
|
|
17,737 |
|
|
|
18,461 |
|
Income before income taxes |
|
|
11,537 |
|
|
|
11,095 |
|
|
|
10,161 |
|
|
|
9,253 |
|
Income tax expense (2) |
|
|
10,121 |
|
|
|
3,828 |
|
|
|
3,281 |
|
|
|
2,841 |
|
Net income before minority interest |
|
|
1,416 |
|
|
|
7,267 |
|
|
|
6,880 |
|
|
|
6,412 |
|
Net income attributable to minority interest |
|
|
413 |
|
|
|
570 |
|
|
|
431 |
|
|
|
493 |
|
Net income to common shareholders |
|
|
1,003 |
|
|
|
6,697 |
|
|
|
6,449 |
|
|
|
5,919 |
|
Net earnings per share |
|
$ |
0.07 |
|
|
|
0.47 |
|
|
|
0.49 |
|
|
|
0.46 |
|
Diluted net earnings per share |
|
|
0.07 |
|
|
|
0.46 |
|
|
|
0.48 |
|
|
|
0.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes merger/conversion-related expenses of $1.2 million, $417 thousand, $344 thousand, and $387 thousand for the quarters ended December 31, September 30, June 30, and March 31, 2017, respectively. |
(2) |
The quarter ended December 31, 2017 includes $6.2 million of expense related to the deferred tax write-down related to the 2017 Tax Cuts and Jobs Act. |
Exhibit 99.3
UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma combined consolidated financial information and accompanying notes show the impact on the financial conditions and results of operations of CenterState Bank Corporation (“CSFL”) and National Commerce Corporation (“NCOM”) and have been prepared to illustrate the effects of the merger under the acquisition method of accounting. See “Note 1 - Basis of Pro Forma Presentation.”
The unaudited pro forma combined consolidated balance sheet as of December 31, 2018 is presented as if the NCOM merger had occurred on December 31, 2018. The unaudited pro forma combined consolidated statement of income for the year ended December 31, 2018 is presented as if the merger had occurred on January 1, 2018. The historical consolidated financial information has been adjusted to reflect factually supportable items that are directly attributable to the merger and, with respect to the income statement only, expected to have a continuing impact on consolidated results of operations, and, as such, CSFL’s one-time merger costs for the merger are not included.
The unaudited pro forma combined consolidated statement of income for the year ended December 31, 2018 include pro forma results of operations for CSFL. CSFL’s results of operations for the year ended December 31, 2018 were adjusted to include the historical results of operations for its previously closed acquisition of Charter Financial Corporation (“Charter”), closed on September 1, 2018. The unaudited pro forma combined consolidated statement of income for the year ended December 31, 2018 assumes the Charter merger was completed on January 1, 2018. No pro forma adjustments for Charter is presented for the unaudited pro forma combined consolidated balance sheet at December 31, 2018 since the transaction is already reflected in CSFL’s historical financial condition at December 31, 2018.
The unaudited pro forma condensed combined statement of income presented below for NCOM also includes the pro forma effect of the acquisition of Landmark Bancshares, Inc. (“Landmark”), which was completed on August 1, 2018, as if the acquisition of Landmark by NCOM had occurred on January 1, 2018. The unaudited pro forma condensed combined statement of income data appearing below does not give pro forma effect to NCOM’s acquisition of Premier Community Bank of Florida (“Premier”), which was completed on July 1, 2018 for any period prior to the applicable date the transaction was consummated.
The unaudited pro forma combined consolidated financial statements are provided for informational purposes only. The unaudited pro forma combined consolidated financial statements are not necessarily, and should not be assumed to be, an indication of the results that would have been achieved had the mergers been completed as of the dates indicated or that may be achieved in the future. The preparation of the unaudited pro forma combined consolidated financial statements and related adjustments required management to make certain assumptions and estimates. The unaudited pro forma combined consolidated financial statements should be read together with:
|
• |
|
the accompanying notes to the unaudited pro forma combined consolidated financial statements; |
|
• |
|
CSFL’s audited consolidated financial statements and accompanying notes as of and for the year ended December 31, 2018, included in CSFL’s Annual Report on Form 10-K for the year ended December 31, 2018; and |
|
• |
|
NCOM’s audited consolidated financial statements and accompanying notes as of December 31, 2018 and 2017 and for each of the years in the three-year period ended December 31, 2018, which is included as exhibit 99.2. |
|
|
|
|
1
Unaudited Pro Forma Combined Consolidated Balance Sheet
As of December 31, 2018
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
CenterState |
|
|
CenterState |
|
NCC |
|
Pro Forma |
|
|
NCC |
|
|
as reported |
|
as reported |
|
adjustments |
|
|
Pro Forma |
Assets: |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$367,333 |
|
$217,130 |
|
($28,999) |
b |
|
$555,464 |
Investment securities, AFS and HTM |
|
1,944,181 |
|
212,561 |
|
(224) |
c |
|
2,156,518 |
Loans held for sale |
|
40,399 |
|
15,031 |
|
- |
|
|
55,430 |
|
|
|
|
|
|
|
|
|
|
Loans held for investment |
|
8,340,504 |
|
3,317,965 |
|
(26,110) |
d |
|
11,632,359 |
Allowance for loan losses |
|
(39,770) |
|
(18,176) |
|
18,176 |
e |
|
(39,770) |
Net loans |
|
8,300,734 |
|
3,299,789 |
|
|
|
|
11,592,589 |
|
|
|
|
|
|
|
|
|
|
Other Real Estate Owned ("OREO") |
|
2,909 |
|
974 |
|
(335) |
f |
|
3,548 |
Bank premises and equipment, net |
|
227,454 |
|
86,658 |
|
- |
|
|
314,112 |
Goodwill |
|
802,880 |
|
249,812 |
|
51,853 |
i,l |
|
1,104,545 |
Other intangibles |
|
69,178 |
|
18,372 |
|
40,174 |
g,l |
|
127,724 |
Bank owned life insurance |
|
267,820 |
|
55,114 |
|
- |
|
|
322,934 |
Deferred income tax asset, net |
|
51,462 |
|
13,005 |
|
(8,755) |
h,l |
|
55,712 |
Prepaid and other assets |
|
263,238 |
|
37,042 |
|
5,876 |
b |
|
306,156 |
Total Assets |
|
$12,337,588 |
|
$4,205,488 |
|
|
|
|
$16,594,732 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity: |
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
Deposits |
|
$9,477,336 |
|
$3,432,289 |
|
- |
|
|
$12,909,625 |
Other borrowings |
|
713,132 |
|
58,086 |
|
1,376 |
j,k |
|
772,594 |
Corporate debentures |
|
32,415 |
|
- |
|
- |
|
|
32,415 |
Payables and other liabilities |
|
143,361 |
|
18,055 |
|
- |
|
|
161,416 |
Total liabilities |
|
10,366,244 |
|
3,508,430 |
|
|
|
|
13,876,050 |
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity: |
|
|
|
|
|
|
|
|
|
Common Stock |
|
957 |
|
208 |
|
140 |
a,n |
|
1,305 |
Additional paid in capital |
|
1,699,031 |
|
604,965 |
|
131,525 |
a,n |
|
2,435,521 |
Retained earnings |
|
293,777 |
|
86,433 |
|
(86,433) |
b,n |
|
293,777 |
Accumulated other comprehensive loss |
|
(22,421) |
|
(2,203) |
|
2,203 |
n |
|
(22,421) |
Total common stockholders' equity |
|
1,971,344 |
|
689,403 |
|
|
|
|
2,708,182 |
Noncontrolling interest |
|
- |
|
7,655 |
|
2,845 |
m |
|
10,500 |
Total stockholders' equity |
|
1,971,344 |
|
697,058 |
|
|
|
|
2,718,682 |
Total Liabilities and Stockholders' Equity |
|
$12,337,588 |
|
$4,205,488 |
|
|
|
|
16,594,732 |
See accompanying notes to Unaudited Pro Forma Combined Consolidated Financial Information
2
Unaudited Pro Forma Combined Consolidated Statement of Income
For the twelve months ended December 31, 2018
(in thousands, except per share data)
|
|
|
Charter |
|
|
|
|
|
|
|
|
Landmark |
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from |
|
Pro |
|
|
CenterState |
|
|
|
Period from |
|
Pro |
|
|
NCC |
|
Pro |
|
|
CenterState |
|
CenterState |
|
1/1/18 to |
|
Forma |
|
|
Charter |
|
NCC |
|
1/1/18 to |
|
Forma |
|
|
Landmark |
|
Forma |
|
|
NCC |
|
as reported |
|
8/31/18 |
|
adjustments |
|
|
Pro Forma |
|
as reported |
|
7/31/18 |
|
adjustments |
|
|
Pro Forma |
|
adjustments |
|
|
Pro Forma |
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
$405,881 |
|
$40,356 |
|
$3,386 |
o |
|
$449,623 |
|
$162,332 |
|
$15,308 |
|
$1,873 |
o |
|
$179,513 |
|
$2,425 |
o |
|
$631,561 |
Investment securities |
49,122 |
|
2,942 |
|
- |
|
|
52,064 |
|
6,405 |
|
799 |
|
- |
|
|
7,204 |
|
56 |
p |
|
59,324 |
Federal funds sold and other |
5,629 |
|
1,559 |
|
- |
|
|
7,188 |
|
2,921 |
|
250 |
|
- |
|
|
3,171 |
|
- |
|
|
10,359 |
|
460,632 |
|
44,857 |
|
3,386 |
|
|
508,875 |
|
171,658 |
|
16,357 |
|
1,873 |
|
|
189,888 |
|
2,481 |
|
|
701,244 |
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
33,260 |
|
4,247 |
|
(367) |
q |
|
37,140 |
|
19,205 |
|
1,964 |
|
- |
|
|
21,169 |
|
- |
|
|
58,309 |
Other borrowings |
14,290 |
|
1,363 |
|
- |
|
|
15,653 |
|
2,232 |
|
972 |
|
(265) |
s |
|
2,939 |
|
(338) |
s |
|
18,254 |
|
47,550 |
|
5,610 |
|
(367) |
|
|
52,793 |
|
21,437 |
|
2,936 |
|
(265) |
|
|
24,108 |
|
(338) |
|
|
76,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
413,082 |
|
39,247 |
|
3,753 |
|
|
456,082 |
|
150,221 |
|
13,421 |
|
2,138 |
|
|
165,780 |
|
2,819 |
|
|
624,681 |
Provision (credit) for loan losses |
8,283 |
|
(350) |
|
- |
|
|
7,933 |
|
4,723 |
|
2,110 |
|
- |
|
|
6,833 |
|
- |
|
|
14,766 |
Net interest income after loan loss provision |
404,799 |
|
39,597 |
|
3,753 |
|
|
448,149 |
|
145,498 |
|
11,311 |
|
2,138 |
|
|
158,947 |
|
2,819 |
|
|
609,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Correspondent banking capital markets revenue |
28,884 |
|
- |
|
- |
|
|
28,884 |
|
- |
|
- |
|
- |
|
|
- |
|
- |
|
|
28,884 |
Other correspondent banking related revenue |
4,504 |
|
- |
|
- |
|
|
4,504 |
|
- |
|
- |
|
- |
|
|
- |
|
- |
|
|
4,504 |
Mortgage banking revenue |
12,610 |
|
1,454 |
|
- |
|
|
14,064 |
|
7,864 |
|
608 |
|
- |
|
|
8,472 |
|
- |
|
|
22,536 |
Gain on sale of SBA loans |
3,532 |
|
- |
|
- |
|
|
3,532 |
|
- |
|
787 |
|
- |
|
|
787 |
|
- |
|
|
4,319 |
Service charges on deposit accounts |
22,831 |
|
5,479 |
|
- |
|
|
28,310 |
|
4,372 |
|
282 |
|
- |
|
|
4,654 |
|
- |
|
|
32,964 |
Debit, prepaid, ATM and merchant card related fees |
16,243 |
|
4,351 |
|
- |
|
|
20,594 |
|
2,979 |
|
- |
|
- |
|
|
2,979 |
|
- |
|
|
23,573 |
Wealth management related revenue |
2,657 |
|
497 |
|
- |
|
|
3,154 |
|
73 |
|
- |
|
- |
|
|
73 |
|
- |
|
|
3,227 |
Bank owned life insurance income |
5,976 |
|
975 |
|
- |
|
|
6,951 |
|
1,225 |
|
- |
|
- |
|
|
1,225 |
|
- |
|
|
8,176 |
Other non interest income |
7,912 |
|
1,657 |
|
- |
|
|
9,569 |
|
2,575 |
|
287 |
|
- |
|
|
2,862 |
|
- |
|
|
12,431 |
Net (loss) gain on sale of securities available for sale |
(22) |
|
(4,119) |
|
- |
|
|
(4,141) |
|
193 |
|
- |
|
- |
|
|
193 |
|
- |
|
|
(3,948) |
Total other income |
105,127 |
|
10,294 |
|
- |
|
|
115,421 |
|
19,281 |
|
1,964 |
|
- |
|
|
21,245 |
|
- |
|
|
136,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and employee benefits |
172,318 |
|
20,618 |
|
- |
|
|
192,936 |
|
65,121 |
|
6,540 |
|
- |
|
|
71,661 |
|
- |
|
|
264,597 |
Occupancy expense |
30,685 |
|
10,030 |
|
- |
|
|
40,715 |
|
8,994 |
|
958 |
|
- |
|
|
9,952 |
|
- |
|
|
50,667 |
Data processing expense |
14,308 |
|
(1,153) |
|
- |
|
|
13,155 |
|
- |
|
- |
|
- |
|
|
- |
|
- |
|
|
13,155 |
Professional fees |
6,163 |
|
730 |
|
- |
|
|
6,893 |
|
- |
|
- |
|
- |
|
|
- |
|
- |
|
|
6,893 |
Bank regulatory expenses |
4,885 |
|
616 |
|
- |
|
|
5,501 |
|
- |
|
- |
|
- |
|
|
- |
|
- |
|
|
5,501 |
Amortization of intangibles |
10,018 |
|
471 |
|
1,980 |
r |
|
12,469 |
|
4,249 |
|
- |
|
1,227 |
r |
|
5,476 |
|
3,306 |
r |
|
21,251 |
Credit related expenses |
1,502 |
|
14 |
|
- |
|
|
1,516 |
|
- |
|
- |
|
- |
|
|
- |
|
- |
|
|
1,516 |
Marketing expenses |
6,235 |
|
1,177 |
|
- |
|
|
7,412 |
|
- |
|
- |
|
- |
|
|
- |
|
- |
|
|
7,412 |
Merger related expenses |
34,912 |
|
5,128 |
|
(17,115) |
t |
|
22,925 |
|
- |
|
- |
|
- |
|
|
- |
|
(2,837) |
t |
|
20,088 |
Other expenses |
31,441 |
|
3,265 |
|
- |
|
|
34,706 |
|
28,711 |
|
2,477 |
|
- |
|
|
31,188 |
|
- |
|
|
65,894 |
Total other expenses |
312,467 |
|
40,896 |
|
(15,135) |
|
|
338,228 |
|
107,075 |
|
9,975 |
|
1,227 |
|
|
118,277 |
|
469 |
|
|
456,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
197,459 |
|
8,995 |
|
18,888 |
|
|
225,342 |
|
57,704 |
|
3,300 |
|
911 |
|
|
61,915 |
|
2,350 |
|
|
289,607 |
Provision for income taxes (benefits) |
41,024 |
|
(2,583) |
|
4,344 |
u |
|
42,785 |
|
12,791 |
|
682 |
|
191 |
u |
|
13,664 |
|
541 |
u |
|
56,990 |
Net income |
$156,435 |
|
$11,578 |
|
$14,544 |
|
|
$182,557 |
|
$44,913 |
|
$2,618 |
|
$720 |
|
|
$48,251 |
|
$1,809 |
|
|
$232,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: earnings allocated to participating securities |
116 |
|
- |
|
- |
|
|
116 |
|
- |
|
- |
|
- |
|
|
- |
|
- |
|
|
116 |
Less: earnings attributable to noncontrolling interest |
- |
|
- |
|
- |
|
|
- |
|
2,469 |
|
- |
|
- |
|
|
2,469 |
|
- |
|
|
2,469 |
Net income available to common shareholders |
$156,319 |
|
$11,578 |
|
$14,544 |
|
|
$182,441 |
|
$42,444 |
|
$2,618 |
|
$720 |
|
|
$45,782 |
|
$1,809 |
|
|
$230,032 |
Basic earnings per common share |
$1.78 |
|
|
|
|
|
|
$1.92 |
|
$2.26 |
|
|
|
|
|
|
$2.28 |
|
|
|
|
$1.79 |
Diluted earnings per common share |
$1.76 |
|
|
|
|
|
|
$1.89 |
|
$2.21 |
|
|
|
|
|
|
$2.23 |
|
|
|
|
$1.77 |
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
87,641 |
|
|
|
7,606 |
v |
|
95,247 |
|
18,753 |
|
|
|
1,356 |
w |
|
20,109 |
|
33,180 |
x |
|
128,427 |
Diluted |
88,759 |
|
|
|
7,606 |
v |
|
96,365 |
|
19,230 |
|
|
|
1,338 |
w |
|
20,568 |
|
33,937 |
x |
|
130,302 |
See accompanying notes to Unaudited Pro Forma Combined Consolidated Financial Informational Information
3
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(all amounts are in thousands, except per share data, unless otherwise indicated)
Note 1 - Basis of Pro Forma Presentation
The unaudited pro forma combined consolidated balance sheet as of December 31, 2018 and the unaudited pro forma combined consolidated statement of income for the year ended December 31, 2018 are based on the financial statements of CSFL and NCOM after giving effect to the completion of the merger and the assumptions and adjustments described in the accompanying notes. Such financial statements do not reflect cost savings or operating synergies expected to result from the merger, or the costs to achieve these cost savings or operating synergies, or any anticipated disposition of assets that may result from the integration of the operations of the two companies. The unaudited pro forma condensed combined statement of income presented above for NCOM includes the pro forma effect of the acquisition of Landmark, which was completed on August 1, 2018, as if the acquisition of Landmark by NCOM had occurred on January 1, 2018. The unaudited pro forma combined consolidated statement of income for the year ended December 31, 2018 include pro forma results of operations for CSFL. CSFL’s results of operations for the year ended were adjusted to include the historical results of operations for its previously closed acquisition of Charter, which closed on September 1, 2018, as if the acquisition was completed on January 1, 2018. No pro forma adjustments for Charter are presented for the unaudited pro forma combined consolidated balance sheet at December 31, 2018 since the transaction is already reflected in CSFL’s historical financial condition at December 31, 2018. Certain historical financial information has been reclassified to conform to the current presentation.
The transactions will be accounted for under the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”). In business combination transactions in which the consideration given is not in the form of cash (that is, in the form of non-cash assets, liabilities incurred, or equity interests issued), measurement of the acquisition consideration is based on the fair value of the consideration given or the fair value of the asset (or net assets) acquired, whichever is more clearly evident and, thus, more reliably measurable.
Under ASC 805, all of the assets acquired and liabilities assumed in a business combination are recognized at their acquisition-date fair value, while transaction costs and restructuring costs associated with the business combination are expensed as incurred. The excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill. Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally affect income tax expense. Subsequent to the completion of the merger, CSFL and NCOM will finalize an integration plan, which may affect how the assets acquired, including intangible assets, will be utilized by the combined company. For those assets in the combined company that will be phased out or will no longer be used, additional amortization, depreciation and possibly impairment charges will be recorded after management completes the integration plan.
The unaudited pro forma information is presented solely for informational purposes and is not necessarily indicative of the combined results of operations or financial position that might have been achieved for the periods or dates indicated, nor is it necessarily indicative of the future results of the combined company.
4
Note 2 – Preliminary Estimated Acquisition Consideration
Under the terms of the merger agreement, NCOM stockholders will be entitled to receive 1.65 shares of CSFL common stock, plus cash in lieu of fractional shares.
Based on the number of shares of NCOM common stock outstanding as of December 31, 2018, the preliminary estimated acquisition consideration is as follows.
Note 3 - Preliminary Estimated Acquisition Consideration Allocation
Under the acquisition method of accounting, the total acquisition consideration is allocated to the acquired tangible and intangible assets and assumed liabilities of NCOM based on their estimated fair values as of the closing of the merger. The excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed for the acquisition, if any, is allocated to goodwill.
The allocation of the estimated acquisition consideration with regard to NCOM is preliminary because the proposed merger has not yet been completed. The preliminary allocation is based on estimates, assumptions, valuations, and other studies that have not progressed to a stage where there is sufficient information to make a definitive allocation. Accordingly, the acquisition consideration allocation adjustments will remain preliminary until CSFL management determines the final acquisition consideration and the fair values of the assets acquired and liabilities assumed. The final determination of the acquisition consideration allocation is anticipated to be completed as soon as practicable after the completion of the merger and will be based on the value of the CSFL common stock at the closing of the merger. The final amounts allocated to assets acquired and liabilities assumed could differ significantly from the amounts presented in the unaudited pro forma combined consolidated financial statements.
5
The total preliminary estimated acquisition consideration as shown in the table above is allocated to NCOM ’s tangible and intangible assets and liabilities as of December 31 , 2018 based on their preliminary estimated fair values as follows ( dollars are in the thousands) .
Cash and cash equivalents |
|
|
$188,131 |
Investment securities, AFS and HTM |
|
|
212,337 |
Loans held for sale |
|
|
15,031 |
Loans held for investment |
|
|
3,291,855 |
OREO (foreclosed assets) |
|
|
639 |
Bank premises and equipment |
|
|
86,658 |
Bank owned life insurance |
|
|
55,114 |
Deferred income tax asset, net |
|
|
4,250 |
Other assets |
|
|
42,918 |
Intangible assets |
|
|
58,546 |
Goodwill |
|
|
301,665 |
Deposits |
|
|
(3,432,289) |
Other borrowings |
|
|
(59,462) |
Other liabilities |
|
|
(18,055) |
Noncontrolling interest |
|
|
(10,500) |
Total Purchase Price |
|
|
$736,838 |
Approximately $58,546 has been preliminarily allocated to amortizable intangible assets acquired. The amortization related to the preliminary fair value of net amortizable intangible assets is reflected as a pro forma adjustment to the unaudited pro forma condensed combined financial statements.
Identifiable intangible assets. The preliminary fair values of intangible assets were determined based on the provisions of ASC 805, which defines fair value in accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Intangible assets were identified that met either the separability criterion or the contractual-legal criterion described in ASC 805. The preliminary allocation to intangible assets is allocated to core deposit intangibles.
Goodwill.
Goodwill represents the excess of the preliminary estimated acquisition consideration over the preliminary fair value of the underlying net tangible and intangible assets. Among the factors that contributed to a purchase price in excess of the fair value of the net tangible and intangible assets are the experience and expertise of personnel, operations, customer base and organizational cultures that can be leveraged to enable the combined company to build an enterprise greater than the sum of its parts. In accordance with ASC Topic 350,
Intangibles—Goodwill and Other
, goodwill will not be amortized, but instead will be tested for impairment at least annually and whenever events or circumstances have occurred that may indicate a possible impairment. In the event management determines that the value of goodwill has become impaired, the combined company will incur an accounting charge for the amount of the impairment during the period in which the determination is made.
6
Note 4 - Preliminary Unaudited Pro Forma and Acquisition Accounting Adjustments
The unaudited pro forma financial information is not necessarily indicative of what the financial position actually would have been had the merger been completed at the date indicated. Such information includes adjustments that are preliminary and may be revised. Such revisions may result in material changes. The financial position shown herein is not necessarily indicative of what the past financial position of the combined companies would have been, nor necessarily indicative of the financial position of the post-merger periods. The unaudited pro forma financial information does not give consideration to the impact of possible cost savings, expense efficiencies, synergies, strategy modifications, asset dispositions or other actions that may result from the mergers.
The following unaudited pro forma adjustments result from accounting for the merger, including the determination of fair value of the assets, liabilities, and commitments that CSFL, as the acquirer, will acquire from NCOM. The descriptions related to these preliminary adjustments are as follows ( dollars are in thousands ):
Balance Sheet – the explanations and descriptions below are referenced to the December 31, 2018 Unaudited Pro Forma Combined Consolidated Balance Sheet on page 2.
Pro Forma Adjusting entries (Balance Sheet): |
|
Debit ($) |
|
Credit ($) |
|
a |
Common stock |
|
- |
|
348 |
a |
Additional paid in capital |
|
- |
|
736,490 |
b |
Cash |
|
- |
|
28,999 |
b |
Other assets |
|
5,876 |
|
- |
b |
Retained earnings |
|
23,123 |
|
- |
c |
Investment securities |
|
- |
|
224 |
d |
Loans held for investment |
|
- |
|
26,110 |
e |
Allowance for loan losses |
|
18,176 |
|
- |
f |
Other real estate owned ("OREO") |
|
- |
|
335 |
g |
Core deposit intangible ("CDI") |
|
58,546 |
|
- |
h |
Deferred tax asset |
|
- |
|
12,337 |
i |
Preliminary goodwill estimate |
|
301,665 |
|
- |
j |
Federal Home Loan Bank advances |
|
- |
|
23 |
k |
Subordinated debt |
|
- |
|
1,353 |
l |
Goodwill |
|
- |
|
249,812 |
l |
CDI |
|
- |
|
18,372 |
l |
Deferred tax asset |
|
3,582 |
|
- |
m |
Noncontrolling interest |
|
- |
|
2,845 |
n |
Common Stock |
|
208 |
|
- |
n |
Additional paid in capital |
|
604,965 |
|
- |
n |
Retained earnings |
|
63,310 |
|
- |
n |
Accumulated other comprehensive loss |
|
- |
|
2,203 |
a . |
CSFL common shares issued to NCOM’s stockholders representing the stock consideration component of the total respective merger consideration. For the purpose of this pro-forma presentation, the value of a share of CSFL common stock was assumed to equal its closing price on December 31, 2018, the pro forma date, as reported by NASDAQ ($21.04 per share). |
b . |
Represents NCOM’s estimated merger expenses, which are expected to be paid immediately prior to the merger’s closing date, the related tax benefit and the net effect on NCOM’s retained earnings. |
c . |
Adjustment to investment securities to reflect the preliminary estimated fair value. |
d . |
Adjustment to loans held for investment to reflect the preliminary estimated fair value. |
e . |
Adjustment to allowance for loan losses to reflect the reversal of NCOM’s allowance for loan and lease losses. |
|
|
7
f . |
Adjustment to OREO to reflect the preliminary estimated fair value associated with CSFL ’s estimated marketability discounts and liquidation strategy. |
g . |
Adjustment to reflect the preliminary estimate of the core deposit intangible. |
h . |
Adjustment to reflect the net deferred tax asset generated by the net fair value adjustments using an assumed effective tax rate equal to 25.345%. |
i . |
Adjustment to reflect the preliminary estimated goodwill generated as a result of consideration paid in excess of the fair value of the net assets acquired. |
j . |
Adjustment to FHLB advances to reflect the preliminary estimated fair value. |
k . |
Adjustment to subordinated debt to reflect the preliminary estimated fair value. |
l . |
Adjustments to reflect the reversal of existing CDI and the related deferred tax asset, and goodwill at NCOM from previous acquisitions. |
m . |
Adjustment to reflect the preliminary estimated fair value of the noncontrolling interest. |
n. |
Reflects the reversal of stockholders’ equity after adjustments in b above. |
Income Statements – the explanations and descriptions below are referenced to the Unaudited Pro Forma Combined Consolidated Statements of Income for the year ended December 31, 2018 starting on page 3.
Income Statements – Pro Forma Adjustments
Twelve months ended December 31, 2018 |
|
|
|
|
|
|
|
Pro Forma Adjusting entries (Income Statements) ( dollars are in thousands ): |
|
Charter |
|
Landmark |
|
NCC |
|
o |
Preliminary estimate of loan interest accretion |
|
$6,765 |
|
$1,873 |
|
$2,425 |
o |
Remove existing loan accretion of fair value adjustment |
|
(3,379) |
|
- |
|
- |
p |
Investment securities accretion of fair value adjustment at acquisition date |
|
- |
|
- |
|
56 |
q |
Remove existing time deposit amortization of fair value adjustment |
|
368 |
|
- |
|
- |
q |
Time Deposits amortization of fair value adjustment at acquisition date |
|
(735) |
|
- |
|
- |
r |
Remove amortization of existing CDI |
|
(989) |
|
- |
|
(5,476) |
r |
Amortization of new CDI |
|
2,969 |
|
1,227 |
|
8,782 |
s |
Amortization of new fair value adjustment on other borrowings |
|
- |
|
(265) |
|
(338) |
t |
Remove merger related expense |
|
(17,115) |
|
- |
|
(2,837) |
u |
Income tax expense of pro-forma adjustments |
|
4,344 |
|
191 |
|
541 |
8
p. |
Represents the estimate of investment securities accretion related to the preliminary estimate of the fair value adjustment on investment securities pursuant to the NCOM merger. |
q. |
Represents the reversal of existing time deposits amortization recorded by CSFL and estimates of time deposit amortization related to the fair value adjustments on the time deposits assumed from the Charter merger. The carrying amount of time deposits for NCOM are assumed to approximate fair value, therefore no fair value adjustments are included for NCOM’s time deposits. |
r. |
Represents the reversal of existing CDI amortization recorded by CSFL for deposits assumed from the Charter merger, existing CDI amortization recorded by Charter and NCOM for their prior acquisitions, and estimates of CDI amortization related to preliminary estimates of the fair value adjustments on the core deposits acquired pursuant to the Charter, Landmark and NCOM mergers. The preliminary estimate of CDI related to CSFL’s acquisition of NCOM is expected to approximate $58,546, and will be amortized over a ten-year period on an accelerated basis. The CDI amortization expense for NCOM is expected to be approximately $8,782 during the first year of combined operations. Below is the preliminary estimated amortization schedule. |
Year |
|
|
Year |
|
1 |
$8,782 |
|
6 |
$5,094 |
2 |
7,465 |
|
7 |
5,094 |
3 |
6,345 |
|
8 |
5,094 |
4 |
5,393 |
|
9 |
5,094 |
5 |
5,094 |
|
10 |
5,094 |
s. |
Represents the estimate of other borrowings amortization related to the preliminary estimate of the fair value adjustment on FHLB advances and subordinated debt pursuant to the Landmark and NCOM mergers. |
t. |
Adjustment to reflect the reversal of merger related expenses incurred by CSFL for the Charter and NCOM mergers as well as merger costs incurred by Charter and NCOM pursuant to the mergers with CSFL. |
u. |
Adjustment to reflect the income tax provision of the pro forma adjustments using 23.0%, 21% and 23% as the incremental effective tax rate for the twelve months ended December 31, 2018 for Charter, Landmark and NCOM, respectively. |
v. |
Adjustment reflects the incremental effect of CSFL common shares issued pursuant to the Charter merger which shares would have been outstanding for the full twelve months ended December 31, 2018. The |
Charter merger was completed on September 1, 2018.
w . |
Adjustment reflects the number of NCOM common shares assumed issued for the year ended December 31, |
2018 pursuant to the acquisition of Landmark by NCOM as if the merger had occurred on January 1, 2018.
x. |
Adjustment reflects the number of CSFL common shares issued pursuant to the NCC merger by applying the exchange ratio of 1.65 to the weighted average NCOM shares outstanding for the period presented, including NCOM’s common shares assumed issued for the Landmark merger. |
Note 5 - Earnings per Common Share
The following table sets forth the calculation of basic and diluted unaudited pro forma earnings per common share for the year ended December 31, 2018 were calculated as if the merger had occurred on January 1, 2018. Unaudited pro forma earnings per common share for the year ended December 31, 2018 were calculated using CSFL’s pro forma weighted average common shares outstanding and the common shares estimated to be issued to NCOM’s stockholders in the merger by applying the exchange ratio of 1.65 to NCOM’s weighted average shares outstanding
9
for the period presented below, including the pro forma effect of the Landmark merger (dollars are in thousands, except for per share data ).
|
Twelve months ended |
||
|
December 31, 2018 |
||
|
Basic |
|
Diluted |
Pro forma net income available to common shareholders |
$230,032 |
|
$230,032 |
Weighted average common shares outstanding: |
|
|
|
CenterState |
87,641 |
|
88,759 |
Incremental effect of common shares issued to Charter stockholders |
7,606 |
|
7,606 |
Common shares issued to NCC stockholders |
33,180 |
|
33,937 |
Pro forma weighted average common shares outstanding |
128,427 |
|
130,302 |
Pro forma net income per common share |
$1.79 |
|
$1.77 |
Note 6 – Merger Related Charges
CSFL’s preliminary estimated transaction expenses, net of tax, related to the NCOM merger are approximately $24,661. These one-time merger related expenses have not been included in the unaudited pro forma combined consolidated statement of income, as the pro forma adjustments do not give consideration to non-recurring items, the impact of possible cost savings, expense efficiencies, synergies, strategy modifications, asset dispositions or other actions that may result from the mergers. NCOM’s preliminary estimated transaction expenses, net of tax, related to the merger are approximately $23,123. These preliminary estimated merger transaction expenses (CSFL and NCOM) are still being developed and will continue to be refined over the next several months, and will include assessing personnel, benefit plans, premises, equipment, and service contracts to determine where they may take advantage of redundancies. The preliminary estimated pro forma presentation of merger transaction costs is in the following table ( dollars are in thousands ).
|
(Seller) |
|
(Buyer) |
|
NCOM |
|
CSFL |
Change in control and severance expenses |
$18,499 |
|
$7,685 |
System termination fees and system conversion expenses |
|
|
10,215 |
Investment bankers, accounting, auditing and legal |
10,475 |
|
6,110 |
Other related expenses |
25 |
|
7,406 |
Total non-interest expense |
$28,999 |
|
$31,416 |
Tax benefit |
5,876 |
|
6,755 |
Net expense after tax benefit |
$23,123 |
|
$24,661 |
10