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First Community Bancshares 10-Q 2014

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

Commission file number 000-19297

 

 

FIRST COMMUNITY BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Nevada   55-0694814

(State or other jurisdiction of

incorporation)

 

(IRS Employer

Identification No.)

P.O. Box 989

Bluefield, Virginia

  24605-0989
(Address of principal executive offices)   (Zip Code)

(276) 326-9000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ¨  Yes    x  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class – Common Stock, $1.00 Par Value; 18,392,020 shares outstanding as of May 1, 2014

 

 

 


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

FORM 10-Q

For the quarter ended March 31, 2014

INDEX

 

         Page  

PART I. FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements

  
 

Condensed Consolidated Balance Sheets as of March 31, 2014 (Unaudited) and December 31, 2013

     3   
 

Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2014 and 2013 (Unaudited)

     4   
 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2014 and 2013 (Unaudited)

     5   
 

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2014 and 2013 (Unaudited)

     6   
 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013 (Unaudited)

     7   
 

Notes to Condensed Consolidated Financial Statements (Unaudited)

     8   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     40   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     53   

Item 4.

 

Controls and Procedures

     54   

PART II. OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     55   

Item 1A.

 

Risk Factors

     55   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     55   

Item 3.

 

Defaults Upon Senior Securities

     55   

Item 4.

 

Mine Safety Disclosures

     55   

Item 5.

 

Other Information

     55   

Item 6.

 

Exhibits

     56   

SIGNATURES

     58   

EXHIBIT INDEX

     59   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

     March 31,     December 31,  
     2014     2013  
(Amounts in thousands, except share and per share data)    (Unaudited)        

Assets

    

Cash and due from banks

   $ 45,879      $ 43,598   

Federal funds sold

     22,352        1,817   

Interest-bearing deposits in banks

     10,771        11,152   
  

 

 

   

 

 

 

Total cash and cash equivalents

     79,002        56,567   

Securities available for sale

     483,864        519,820   

Securities held to maturity

     8,161        568   

Loans held for sale

     1,743        883   

Loans held for investment, net of unearned income:

    

Covered under loss share agreements

     143,170        151,682   

Not covered under loss share agreements

     1,588,694        1,559,039   

Less allowance for loan losses

     (23,798     (24,077
  

 

 

   

 

 

 

Loans held for investment, net

     1,708,066        1,686,644   

FDIC indemnification asset

     32,510        34,691   

Premises and equipment, net

     60,043        61,116   

Other real estate owned:

    

Covered under loss share agreements

     8,705        7,541   

Not covered under loss share agreements

     5,923        7,318   

Interest receivable

     6,259        7,521   

Goodwill

     105,455        105,455   

Other intangible assets

     2,691        2,866   

Other assets

     107,924        111,524   
  

 

 

   

 

 

 

Total assets

   $ 2,610,346      $ 2,602,514   
  

 

 

   

 

 

 

Liabilities

    

Deposits:

    

Noninterest-bearing

   $ 353,137      $ 339,680   

Interest-bearing

     1,621,552        1,611,062   
  

 

 

   

 

 

 

Total deposits

     1,974,689        1,950,742   

Interest, taxes, and other liabilities

     23,323        22,770   

Federal funds purchased

     —          16,000   

Securities sold under agreements to repurchase

     112,337        118,308   

FHLB borrowings

     150,000        150,000   

Other borrowings

     16,087        16,088   
  

 

 

   

 

 

 

Total Liabilities

     2,276,436        2,273,908   

Stockholders’ equity

    

Preferred stock, undesignated par value; 1,000,000 shares authorized: Series A Noncumulative Convertible Preferred Stock, $0.01 par value; 25,000 shares authorized; 15,151 and 15,251 shares outstanding at March 31, 2014, and December 31, 2013, respectively

     15,151        15,251   

Common stock, $1 par value; 50,000,000 shares authorized; 20,499,683 and 20,493,057 shares issued at March 31, 2014, and December 31, 2013, respectively; 2,107,663 and 1,978,478 shares in treasury at March 31, 2014, and December 31, 2013, respectively

     20,500        20,493   

Additional paid-in capital

     215,827        215,663   

Retained earnings

     129,115        125,826   

Treasury stock, at cost

     (35,996     (33,887

Accumulated other comprehensive loss

     (10,687     (14,740
  

 

 

   

 

 

 

Total stockholders’ equity

     333,910        328,606   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 2,610,346      $ 2,602,514   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

3


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

     Three Months Ended  
     March 31,  
(Amounts in thousands, except share and per share data)    2014     2013  

Interest income

    

Interest and fees on loans held for investment

   $ 22,834      $ 24,844   

Interest on securities — taxable

     2,097        1,886   

Interest on securities — nontaxable

     1,122        1,208   

Interest on deposits in banks

     30        66   
  

 

 

   

 

 

 

Total interest income

     26,083        28,004   

Interest expense

    

Interest on deposits

     1,888        2,362   

Interest on short-term borrowings

     502        590   

Interest on long-term debt

     1,668        1,690   
  

 

 

   

 

 

 

Total interest expense

     4,058        4,642   
  

 

 

   

 

 

 

Net interest income

     22,025        23,362   

Provision for loan losses

     1,793        1,142   
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     20,232        22,220   

Noninterest income

    

Wealth management

     1,008        846   

Service charges on deposit accounts

     3,070        3,168   

Other service charges and fees

     1,771        1,786   

Insurance commissions

     1,964        1,666   

Impairment losses on securities

     (264     —     

Portion of losses recognized in other comprehensive income

     —          —     
  

 

 

   

 

 

 

Net impairment losses recognized in earnings

     (264     —     

Net gain on sale of securities

     45        117   

Net FDIC indemnification asset amortization

     (1,134     (1,539

Other operating income

     774        1,817   
  

 

 

   

 

 

 

Total noninterest income

     7,234        7,861   

Noninterest expense

    

Salaries and employee benefits

     9,905        10,110   

Occupancy expense of bank premises

     1,778        1,855   

Furniture and equipment

     1,194        1,343   

Amortization of intangible assets

     175        179   

FDIC premiums and assessments

     434        472   

Merger related expense

     —          49   

Other operating expense

     5,694        5,536   
  

 

 

   

 

 

 

Total noninterest expense

     19,180        19,544   
  

 

 

   

 

 

 

Income before income taxes

     8,286        10,537   

Income tax expense

     2,561        3,396   
  

 

 

   

 

 

 

Net income

     5,725        7,141   

Dividends on preferred stock

     228        258   
  

 

 

   

 

 

 

Net income available to common shareholders

   $ 5,497      $ 6,883   
  

 

 

   

 

 

 

Basic earnings per common share

   $ 0.30      $ 0.34   

Diluted earnings per common share

     0.29        0.34   

Cash dividends per common share

     0.12        0.12   

Weighted average basic shares outstanding

     18,423,123        20,032,694   

Weighted average diluted shares outstanding

     19,506,647        21,258,490   

See Notes to Consolidated Financial Statements.

 

4


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

 

     Three Months Ended  
     March 31,  
(Amounts in thousands, except share and per share data)    2014     2013  

Comprehensive Income

    

Net income

   $ 5,725      $ 7,141   

Other comprehensive income (loss), before tax:

    

Available-for-sale securities:

    

Unrealized gains (losses) on securities available for sale with other-than-temporary impairment

     482        (197

Unrealized gains (losses) on securities available for sale without other-than-temporary impairment

     5,706        (1,121

Less: reclassification adjustment for gains realized in net income

     (45     (117

Less: reclassification adjustment for credit related other-than-temporary impairments recognized in net income

     264        —     
  

 

 

   

 

 

 

Unrealized gains (losses) on available-for-sale securities

     6,407        (1,435

Employee benefit plans:

    

Net actuarial gain (loss) on pension and other postretirement benefit plans

     29        (300

Net prior service cost attributed to plan amendments

     —          (94

Less: reclassification adjustment for amortization of prior service cost and net actuarial loss included in net periodic benefit cost

     65        81   
  

 

 

   

 

 

 

Unrealized gains (losses) on employee benefit plans

     94        (313
  

 

 

   

 

 

 

Other comprehensive income (loss), before tax

     6,501        (1,748

Income tax (expense) benefit

     (2,448     653   
  

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     4,053        (1,095
  

 

 

   

 

 

 

Total comprehensive income

   $ 9,778      $ 6,046   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

 

                                    Accumulated        
                  Additional                 Other        
     Preferred     Common      Paid-in     Retained     Treasury     Comprehensive        
(Amounts in thousands, except share and per share data)    Stock     Stock      Capital     Earnings     Stock     Income (Loss)     Total  

Balance January 1, 2013

   $ 17,421      $ 20,343       $ 213,829      $ 113,013      $ (6,458   $ (1,825   $ 356,323   

Net income

     —          —           —          7,141        —          —          7,141   

Other comprehensive loss

     —          —           —          —          —          (1,095     (1,095

Common dividends declared — $0.12 per share

     —          —           —          (2,407     —          —          (2,407

Preferred dividends declared — $15.00 per share

     —          —           —          (258     —          —          (258

Equity-based compensation expense

     —          —           32        —          —          —          32   

Common stock options exercised — 800 shares

     —          —           (6     —          18        —          12   

Purchase of treasury shares — 69,054 shares at $15.55 per share

     —          —           —          —          (1,077     —          (1,077
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance March 31, 2013

   $ 17,421      $ 20,343       $ 213,855      $ 117,489      $ (7,517   $ (2,920   $ 358,671   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance January 1, 2014

   $ 15,251      $ 20,493       $ 215,663      $ 125,826      $ (33,887   $ (14,740   $ 328,606   

Net income

     —          —           —          5,725        —          —          5,725   

Other comprehensive income

     —          —           —          —          —          4,053        4,053   

Common dividends declared — $0.12 per share

     —          —           —          (2,208     —          —          (2,208

Preferred dividends declared — $15.00 per share

     —          —           —          (228     —          —          (228

Preferred stock converted to common stock — 6,900 shares

     (100     7         93        —          —          —          —     

Equity-based compensation expense

     —          —           73        —          —          —          73   

Common stock options exercised — 554 shares

     —          —           —          —          9        —          9   

Restricted stock awards — 1,761 shares

     —          —           (2     —          30        —          28   

Purchase of treasury shares — 131,500 shares at $16.30 per share

     —          —           —          —          (2,148     —          (2,148
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance March 31, 2014

   $ 15,151      $ 20,500       $ 215,827      $ 129,115      $ (35,996   $ (10,687   $ 333,910   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

6


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     Three Months Ended  
     March 31,  
(Amounts in thousands)    2014     2013  

Operating activities

    

Net income

   $ 5,725      $ 7,141   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for loan losses

     1,793        1,142   

Depreciation and amortization of property, plant, and equipment

     1,105        1,227   

Amortization (accretion) of premiums on investments, net

     1,104        (330

Amortization of FDIC indemnification asset, net

     1,134        1,539   

Amortization of intangible assets

     175        179   

Gain on sale of loans

     (153     (454

Equity-based compensation expense

     73        32   

Gain on sale of property, plant, and equipment

     (4     (48

Loss on sales of other real estate

     1,292        613   

Gain on sale of securities

     (45     (117

Net impairment losses recognized in earnings

     264        —     

FHLB debt prepayment fees

     —          (296

Proceeds from sale of mortgage loans

     5,264        28,226   

Origination of mortgage loans

     (5,971     (23,894

Decrease (increase) in accrued interest receivable

     1,262        (324

Decrease (increase) in other operating activities

     12        (9,112
  

 

 

   

 

 

 

Net cash provided by operating activities

     13,030        5,524   

Investing activities

    

Proceeds from sale of securities available for sale

     24,204        75,506   

Proceeds from maturities, prepayments, and calls of securities available for sale

     18,785        19,757   

Payments to acquire securities available for sale

     (2,082     (99,532

Payments to acquire securities held to maturity

     (7,594     —     

(Originations) collections of loans, net

     (25,705     31,277   

Proceeds from the redemption of FHLB stock, net

     1,649        1,184   

Proceeds from the FDIC

     1,143        1,141   

Payments to acquire property, plant, and equipment

     (204     (1,219

Proceeds from sale of property, plant, and equipment

     176        96   

Proceeds from sale of other real estate

     1,632        1,041   
  

 

 

   

 

 

 

Net cash provided by investing activities

     12,004        29,251   

Financing activities

    

Net increase in noninterest-bearing deposits

     13,457        12,566   

Net increase in interest-bearing deposits

     10,490        4,756   

Net decrease in federal funds purchased

     (16,000     —     

Repayments of securities sold under agreements to repurchase

     (5,971     (14,612

Repayments of long-term debt

     (1     (11,558

Proceeds from stock options exercised

     9        12   

Excess tax benefit from equity-based compensation

     1        —     

Payments for repurchase of treasury stock

     (2,148     (1,077

Payments of common dividends

     (2,208     (2,407

Payments of preferred dividends

     (228     (261
  

 

 

   

 

 

 

Net cash used in financing activities

     (2,599     (12,581
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     22,435        22,194   

Cash and cash equivalents at beginning of period

     56,567        144,847   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 79,002      $ 167,041   
  

 

 

   

 

 

 

Supplemental transactions — noncash items

    

Transfer of loans to other real estate

   $ 2,693      $ 6,865   

Loans originated to finance other real estate

     —          2,864   

 

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Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. General

The accompanying unaudited condensed consolidated financial statements of First Community Bancshares, Inc. and subsidiaries (“First Community” or the “Company”) have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments, including normal recurring accruals, necessary for a fair presentation have been made. All significant intercompany balances and transactions have been eliminated in consolidation. Operating results for the interim period are not necessarily indicative of the results that may be expected for the full calendar year.

The condensed consolidated balance sheet as of December 31, 2013, has been derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K (the “2013 Form 10-K”), as filed with the Securities and Exchange Commission (the “SEC”) on March 11, 2014. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been omitted in accordance with standards for the preparation of interim consolidated financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s 2013 Form 10-K.

The Company operates in one business segment, Community Banking, which consists of commercial and consumer banking, lending activities, wealth management, and insurance services. The Company’s executive office is located at One Community Place, Bluefield, Virginia. As of March 31, 2014, our operations were conducted through 74 locations in 5 states: Virginia, West Virginia, North Carolina, South Carolina, and Tennessee.

Significant Accounting Policies

A complete and detailed description of the Company’s significant accounting policies is included in Note 1, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of the Company’s 2013 Form 10-K. A discussion of the Company’s application of critical accounting estimates is included in “Critical Accounting Estimates” in Item 2 of this report.

Reclassifications and Corrections

Certain amounts reported in prior years have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on the Company’s results of operations, financial position, or cash flow.

Recent Accounting Pronouncements

There were no recent accounting pronouncements that had, or are likely to have, a material effect on the Company’s financial position or results of operations.

Earnings per Common Share

Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of potential common stock that could be issued by the Company. In accordance with the treasury stock method of accounting, potential common stock could be issued for stock options, nonvested restricted stock awards, performance based stock awards, and convertible preferred stock. Diluted earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding for the period plus the number of dilutive potential common shares. The calculation of diluted earnings per common share excludes potential common shares that have an exercise price greater than the average market value of the Company’s common stock because the effect would be antidilutive.

 

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Table of Contents

The following table presents the calculation of basic and diluted earnings per common share for the periods indicated:

 

     Three Months Ended  
     March 31,  
(Amounts in thousands, except share and per share data)    2014      2013  

Net income

   $ 5,725       $ 7,141   

Dividends on preferred stock

     228         258   
  

 

 

    

 

 

 

Net income available to common shareholders

   $ 5,497       $ 6,883   
  

 

 

    

 

 

 

Weighted average number of common shares outstanding, basic

     18,423,123         20,032,694   

Dilutive effect of potential common shares from:

     

Stock options

     22,636         17,101   

Restricted stock

     730         6,646   

Convertible preferred stock

     1,048,486         1,202,049   

Contingently issuable shares

     11,672         —     
  

 

 

    

 

 

 

Weighted average number of common shares outstanding, diluted

     19,506,647         21,258,490   
  

 

 

    

 

 

 

Basic earnings per common share

   $ 0.30       $ 0.34   

Diluted earnings per common share

     0.29         0.34   

Antidilutive potential common shares:

     

Stock options

     245,030         337,693   

The Company’s Series A Noncumulative Convertible Preferred Stock (“Series A Preferred Stock”) carries a 6% dividend rate. Each share of the Series A Preferred Stock is convertible into 69 shares of the Company’s common stock at any time and mandatorily converts after five years. The Company may redeem the shares at face value after May 20, 2014. The number of Series A Preferred Stock outstanding was 15,151 shares as of March 31, 2014, 15,251 shares as of December 31, 2013, and 17,421 shares as of March 31, 2013.

 

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Note 2. Investment Securities

The following tables present the amortized cost and fair value of available-for-sale securities, including gross unrealized gains and losses, as of the dates indicated:

 

     March 31, 2014  
     Amortized      Unrealized      Unrealized     Fair      OTTI in  
(Amounts in thousands)    Cost      Gains      Losses     Value      AOCI(1)  

U.S. Treasury securities

   $ 9,715       $ —         $ (451   $ 9,264       $ —     

Municipal securities

     144,438         3,075         (2,641     144,872         —     

Single issue trust preferred securities

     55,778         —           (9,649     46,129         —     

Corporate securities

     5,000         —           —          5,000         —     

Mortgage-backed securities:

             

Agency

     271,524         2,332         (6,567     267,289         —     

Non-Agency Alt-A residential

     12,110         —           (1,838     10,272         (1,838
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total mortgage-backed securities

     283,634         2,332         (8,405     277,561         (1,838

Equity securities

     733         318         (13     1,038         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 499,298       $ 5,725       $ (21,159   $ 483,864       $ (1,838
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
     December 31, 2013  
     Amortized      Unrealized      Unrealized     Fair      OTTI in  
(Amounts in thousands)    Cost      Gains      Losses     Value      AOCI(1)  

U.S. Treasury securities

   $ 9,708       $ —         $ (695   $ 9,013       $ —     

Municipal securities

     147,049         1,868         (4,637     144,280         —     

Single issue trust preferred securities

     55,764         —           (9,530     46,234         —     

Corporate securities

     5,000         —           (129     4,871         —     

Mortgage-backed securities:

             

Agency

     306,319         2,575         (8,508     300,386         —     

Non-Agency Alt-A residential

     12,543         —           (2,754     9,789         (2,754
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total mortgage-backed securities

     318,862         2,575         (11,262     310,175         (2,754

Equity securities

     5,259         24         (36     5,247         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 541,642       $ 4,467       $ (26,289   $ 519,820       $ (2,754
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Other-than-temporary impairment in accumulated other comprehensive income

The following tables present the amortized cost and fair value of held-to-maturity securities, including gross unrealized gains and losses, as of the dates indicated:

 

     March 31, 2014  
     Amortized      Unrealized      Unrealized     Fair  
(Amounts in thousands)    Cost      Gains      Losses     Value  

U.S. Agency securities

   $ 4,464       $ —         $ (16   $ 4,448   

Municipal securities

     568         4         —          572   

Corporate securities

     3,129         —           (1     3,128   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 8,161       $ 4       $ (17   $ 8,148   
  

 

 

    

 

 

    

 

 

   

 

 

 
     December 31, 2013  
     Amortized      Unrealized      Unrealized     Fair  
(Amounts in thousands)    Cost      Gains      Losses     Value  

Municipal securities

   $ 568       $ 11       $ —        $ 579   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 568       $ 11       $ —        $ 579   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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The following table presents the amortized cost and fair value of available-for-sale securities and held-to-maturity securities, by contractual maturity, as of March 31, 2014. Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.

 

     Amortized         
(Amounts in thousands)    Cost      Fair Value  

Available-for-sale securities

     

Due within one year

   $ 2,030       $ 2,041   

Due after one year but within five years

     11,245         11,522   

Due after five years but within ten years

     42,252         42,497   

Due after ten years

     159,404         149,205   
  

 

 

    

 

 

 
     214,931         205,265   

Mortgage-backed securities

     283,634         277,561   

Equity securities

     733         1,038   
  

 

 

    

 

 

 

Total

   $ 499,298       $ 483,864   
  

 

 

    

 

 

 

Held-to-maturity securities

     

Due within one year

   $ —         $ —     

Due after one year but within five years

     8,161         8,148   

Due after five years but within ten years

     —           —     

Due after ten years

     —           —     
  

 

 

    

 

 

 

Total

   $ 8,161       $ 8,148   
  

 

 

    

 

 

 

 

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The following tables present the fair values and unrealized losses for available-for-sale securities in a continuous unrealized loss position for less than 12 months and for 12 months or longer as of the dates indicated:

 

     March 31, 2014  
     Less than 12 Months     12 Months or longer     Total  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  
(Amounts in thousands)    Value      Losses     Value      Losses     Value      Losses  

U.S. Treasury securities

   $ 9,264       $ (451   $ —         $ —        $ 9,264       $ (451

Municipal securities

     29,944         (1,629     8,840         (1,012     38,784         (2,641

Single issue trust preferred securities

     —           —          46,129         (9,649     46,129         (9,649

Mortgage-backed securities:

               

Agency

     98,271         (2,707     69,063         (3,860     167,334         (6,567

Non-Agency Alt-A residential

     —           —          10,272         (1,838     10,272         (1,838
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total mortgage-backed securities

     98,271         (2,707     79,335         (5,698     177,606         (8,405

Equity securities

     143         (13     —           —          143         (13
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 137,622       $ (4,800   $ 134,304       $ (16,359   $ 271,926       $ (21,159
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     December 31, 2013  
     Less than 12 Months     12 Months or longer     Total  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  
(Amounts in thousands)    Value      Losses     Value      Losses     Value      Losses  

U.S. Treasury securities

   $ 9,013       $ (695   $ —         $ —        $ 9,013       $ (695

Municipal securities

     57,950         (4,147     3,049         (490     60,999         (4,637

Single issue trust preferred securities

     —           —          46,234         (9,530     46,234         (9,530

Corporate securities

     4,871         (129     —           —          4,871         (129

Mortgage-backed securities:

               

Agency

     114,047         (4,361     55,706         (4,147     169,753         (8,508

Non-Agency Alt-A residential

     —           —          9,789         (2,754     9,789         (2,754
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total mortgage-backed securities

     114,047         (4,361     65,495         (6,901     179,542         (11,262

Equity securities

     4,976         (24     20         (12     4,996         (36
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 190,857       $ (9,356   $ 114,798       $ (16,933   $ 305,655       $ (26,289
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The following table presents the fair values and unrealized losses for held-to-maturity securities in a continuous unrealized loss position for less than 12 months and for 12 months or longer as of the dates indicated. There were no held-to-maturity securities in a continuous unrealized loss position as of December 31, 2013.

 

     March 31, 2014  
     Less than 12 Months     12 Months or longer      Total  
     Fair      Unrealized     Fair      Unrealized      Fair      Unrealized  
(Amounts in thousands)    Value      Losses     Value      Losses      Value      Losses  

U.S. Agency securities

   $ 4,448       $ (16   $ —         $ —         $ 4,448       $ (16

Corporate securities

     3,128         (1     —           —           3,128         (1
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,576       $ (17   $ —         $ —         $ 7,576       $ (17
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

As of March 31, 2014, there were 149 individual securities in an unrealized loss position, and their combined depreciation in value represented 4.30% of the investment securities portfolio. As of December 31, 2013, there were 219 individual securities in an unrealized loss position, and their combined depreciation in value represented 5.06% of the available-for-sale securities portfolio.

 

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The following table presents the components of the Company’s net gain from the sale of securities in the periods indicated:

 

     Three Months Ended  
     March 31,  
(Amounts in thousands)    2014     2013  

Gross realized gains

   $ 223      $ 155   

Gross realized losses

     (178     (38
  

 

 

   

 

 

 

Net gain on sale of securities

   $ 45      $ 117   
  

 

 

   

 

 

 

The carrying value of securities pledged to secure public deposits and for other purposes was $284.59 million as of March 31, 2014, and $284.77 million as of December 31, 2013.

The Company reviews its investment portfolio on a quarterly basis for indications of OTTI. Debt securities not beneficially owned by the Company include securities issued from the U.S. Department of the Treasury (the “Treasury”), municipal securities, and single issue trust preferred securities. For debt securities not beneficially owned, the Company analyzes factors such as the severity and duration of the impairment, adverse conditions within the issuing industry, prospects for the issuer, performance of the security, changes in rating by rating agencies, and other qualitative factors to determine if the impairment will be recovered. If the evaluation suggests that the impairment will not be recovered, the Company calculates the present value of the security to determine the amount of OTTI. The security is then written down to its current present value and the Company calculates and records the amount of the loss due to credit factors in earnings through noninterest income and the amount due to other factors in stockholders’ equity through OCI. During the three months ended March 31, 2014, and March 31, 2013, the Company incurred no OTTI charges related to debt securities not beneficially owned. Temporary impairment on these securities is primarily related to changes in interest rates, certain disruptions in the credit markets, destabilization in the Eurozone, and other current economic factors.

Debt securities beneficially owned by the Company consist of corporate FDIC securities and mortgage-backed securities (“MBS”). For debt securities beneficially owned, the Company analyzes the cash flows for each applicable security to determine if an adverse change in cash flows expected to be collected has occurred. If the projected value of cash flows at the current reporting date is less than the present value previously projected, and less than the current book value, an adverse change has occurred. The Company then compares the current present value of cash flows to the current net book value to determine the credit-related portion of the OTTI. The credit-related OTTI is recorded in earnings through noninterest income and any remaining noncredit-related OTTI is recorded in stockholders’ equity through OCI. During the three months ended March 31, 2014, the Company incurred credit-related OTTI charges related to debt securities beneficially owned of $232 thousand. These charges were related to a non-Agency MBS. During the three months ended March 31, 2013, the Company incurred no credit-related OTTI charges.

The Company uses a discounted cash flow model for the non-Agency Alt-A residential MBS with the following assumptions: constant voluntary prepayment rate of 2.5%, a customized constant default rate scenario that assumes approximately 15% of the remaining underlying mortgages will default over the life of the security, and a customized loss severity rate scenario that ramps the loss rate down from 51% to 10% over the course of approximately 33 months. The following table presents the activity for credit-related losses recognized in earnings on debt securities where a portion of an OTTI was recognized in OCI for the periods indicated:

 

     Three Months Ended  
     March 31,  
(Amounts in thousands)    2014      2013  

Beginning balance(1)

   $ 7,798       $ 7,478   

Additions for credit losses on securities previously recognized

     232         —     
  

 

 

    

 

 

 

Ending balance

   $ 8,030       $ 7,478   
  

 

 

    

 

 

 

 

(1) The beginning balance includes credit related losses included in OTTI charges recognized on debt securities in prior periods.

For equity securities, the Company considers its intent to hold or sell the security before recovery, the severity and duration of the decline in fair value of the security below its cost, the financial condition and near-term prospects of the issuer, and whether the decline appears to be related to issuer, general market, or industry conditions to determine if the impairment will be recovered. If the Company deems the impairment other-than-temporary in nature, the security is written down to its current present value and the OTTI loss is charged to earnings. During the three months ended March 31, 2014, the Company incurred OTTI charges related to certain equity holdings of $32 thousand. During the three months ended March 31, 2013, the

 

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Company recognized no OTTI charges related to equity securities.

Note 3. Loans

Loan Portfolio

The Company’s loans held for investment are grouped into three segments (commercial loans, consumer real estate loans, and consumer and other loans) with each segment divided into various classes. Covered loans are defined as loans acquired in FDIC-assisted transactions that are covered by loss share agreements. The following table presents loans, net of unearned income and disaggregated by class, as of the periods indicated:

 

     March 31, 2014     December 31, 2013  
(Amounts in thousands)    Amount      Percent     Amount      Percent  

Non-covered loans held for investment

          

Commercial loans

          

Construction, development, and other land

   $ 45,661         2.64   $ 35,255         2.06

Commercial and industrial

     94,403         5.45     95,455         5.58

Multi-family residential

     75,594         4.36     70,197         4.10

Single family non-owner occupied

     137,969         7.97     135,559         7.92

Non-farm, non-residential

     484,361         27.97     475,911         27.82

Agricultural

     2,093         0.12     2,324         0.14

Farmland

     32,410         1.87     32,614         1.91
  

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial loans

     872,491         50.38     847,315         49.53

Consumer real estate loans

          

Home equity lines

     113,137         6.53     111,770         6.53

Single family owner occupied

     492,627         28.45     496,012         28.99

Owner occupied construction

     34,360         1.98     28,703         1.68
  

 

 

    

 

 

   

 

 

    

 

 

 

Total consumer real estate loans

     640,124         36.96     636,485         37.20

Consumer and other loans

          

Consumer loans

     72,111         4.16     71,313         4.17

Other

     3,968         0.23     3,926         0.23
  

 

 

    

 

 

   

 

 

    

 

 

 

Total consumer and other loans

     76,079         4.39     75,239         4.40
  

 

 

    

 

 

   

 

 

    

 

 

 

Total non-covered loans

     1,588,694         91.73     1,559,039         91.13

Total covered loans

     143,170         8.27     151,682         8.87
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans held for investment, net of unearned income

   $ 1,731,864         100.00   $ 1,710,721         100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

Loans held for sale

   $ 1,743         $ 883      
  

 

 

      

 

 

    

 

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The following table presents the components of the Company’s covered loan portfolio, disaggregated by class, as of the dates indicated:

 

     March 31,      December 31,  
(Amounts in thousands)    2014      2013  

Covered loans

     

Commercial loans

     

Construction, development, and other land

   $ 15,956       $ 15,865   

Commercial and industrial

     3,062         3,325   

Multi-family residential

     1,903         1,933   

Single family non-owner occupied

     6,794         7,449   

Non-farm, non-residential

     31,458         34,646   

Agricultural

     162         164   

Farmland

     817         873   
  

 

 

    

 

 

 

Total commercial loans

     60,152         64,255   

Consumer real estate loans

     

Home equity lines

     66,895         69,206   

Single family owner occupied

     15,287         16,919   

Owner occupied construction

     727         1,184   
  

 

 

    

 

 

 

Total consumer real estate loans

     82,909         87,309   

Consumer and other loans

     

Consumer loans

     109         118   
  

 

 

    

 

 

 

Total covered loans

   $ 143,170       $ 151,682   
  

 

 

    

 

 

 

For information concerning off-balance sheet financing, see Note 13, “Litigation, Commitments and Contingencies,” to the Condensed Consolidated Financial Statements of this report.

Purchased Credit Impaired Loans

When the fair values of purchased loans are established at acquisition, certain loans are identified as impaired. These purchased credit impaired (“PCI”) loans are aggregated into loan pools that have common risk characteristics. The Company’s loan pools consist of Waccamaw commercial, Waccamaw lines of credit, Peoples commercial, Waccamaw serviced home equity lines, Waccamaw residential, Peoples residential, and Waccamaw consumer. The Company estimates cash flows to be collected on PCI loans and discounts those cash flows at a market rate of interest. The following table presents the carrying and contractual unpaid principal balance of PCI loans, by acquisition, as of the dates indicated:

 

(Amounts in thousands)    Peoples      Waccamaw      Other      Total  

Carrying balance, January 1, 2013

   $ 26,907       $ 112,093       $ 2,340       $ 141,340   

Carrying balance, March 31, 2013

     21,715         96,537         2,364         120,616   

Unpaid principal balance, March 31, 2013

     28,821         134,158         5,892         168,871   

Carrying balance, January 1, 2014

   $ 9,196       $ 70,584       $ 1,931       $ 81,711   

Carrying balance, March 31, 2014

     9,196         65,780         1,918         76,894   

Unpaid principal balance, March 31, 2014

     16,825         99,582         5,385         121,792   

 

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The following table presents the activity in the accretable yield related to PCI loans, by acquisition, in the periods indicated:

 

(Amounts in thousands)    Peoples     Waccamaw     Other     Total  

Balance, January 1, 2013

   $ 2,342      $ 21,886      $ 15      $ 24,243   

Additions

     7        66        —          73   

Accretion

     (376     (1,385     (51     (1,812

Reclassifications from (to) nonaccretable difference

     2,302        (12,482     46        (10,134

Disposals

     (537     (585     —          (1,122
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2013

   $ 3,738      $ 7,500      $ 10      $ 11,248   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 1, 2014

   $ 5,294      $ 10,338      $ 8      $ 15,640   

Additions

     1        7        —          8   

Accretion

     (563     (1,563     (11     (2,137

Reclassifications from nonaccretable difference

     337        8,977        11        9,325   

Disposals

     (112     (167     —          (279
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2014

   $ 4,957      $ 17,592      $ 8      $ 22,557   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Note 4. Credit Quality

The Company identifies loans for potential impairment through a variety of means, including, but not limited to, ongoing loan review, renewal processes, delinquency data, market communications, and public information. If the Company determines that it is probable all principal and interest amounts contractually due will not be collected, the loan is generally deemed to be impaired.

The following tables present the recorded investment and related information for loans considered to be impaired, excluding PCI loans, as of the periods indicated:

 

     March 31, 2014      December 31, 2013  
            Unpaid                    Unpaid         
     Recorded      Principal      Related      Recorded      Principal      Related  
(Amounts in thousands)    Investment      Balance      Allowance      Investment      Balance      Allowance  

Impaired loans with no related allowance:

                 

Commercial loans

                 

Commercial and industrial

   $ 292       $ 292       $ —         $ 292       $ 292       $ —     

Multi-family residential

     —           —           —           —           —           —     

Single family non-owner occupied

     420         420         —           289         317         —     

Non-farm, non-residential

     5,559         5,903         —           5,352         5,682         —     

Farmland

     351         363         —           351         363         —     

Consumer real estate loans

                 

Home equity lines

     254         264         —           257         264         —     

Single family owner occupied

     1,690         2,101         —           2,006         2,414         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with no allowance

     8,566         9,343         —           8,547         9,332         —     

Impaired loans with a related allowance:

                 

Commercial loans

                 

Commercial and industrial

     4,943         5,319         3,504         4,897         10,244         3,794   

Multi-family residential

     5,601         5,601         500         —           —           —     

Single family non-owner occupied

     364         371         38         375         375         47   

Non-farm, non-residential

     4,458         4,459         377         600         600         114   

Farmland

     —           —           —           —           —           —     

Consumer real estate loans

                 

Home equity lines

     208         229         171         215         230         52   

Single family owner occupied

     4,377         4,578         692         4,844         5,035         735   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with an allowance

     19,951         20,557         5,282         10,931         16,484         4,742   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 28,517       $ 29,900       $ 5,282       $ 19,478       $ 25,816       $ 4,742   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table presents the average recorded investment and interest income recognized on impaired loans, excluding PCI loans, in the periods indicated:

 

     For the Three Months Ended  
     March 31, 2014      March 31, 2013  
     Average      Interest      Average      Interest  
     Recorded      Income      Recorded      Income  
(Amounts in thousands)    Investment      Recognized      Investment      Recognized  

Impaired loans with no related allowance:

           

Commercial loans

           

Construction, development, and other land

   $ —         $ —         $ 2,195       $ 43   

Commercial and industrial

     292         12         599         11   

Multi-family residential

     —           —           35         2   

Single family non-owner occupied

     420         1         841         79   

Non-farm, non-residential

     5,918         36         5,955         212   

Farmland

     363         11         88         9   

Consumer real estate loans

           

Home equity lines

     265         2         298         25   

Single family owner occupied

     2,101         51         547         70   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with no allowance

     9,359         113         10,558         451   

Impaired loans with a related allowance:

           

Commercial loans

           

Construction, development, and other land

     —           —           2,670         117   

Commercial and industrial

     5,157         47         3,217         —     

Multi-family residential

     5,603         22         376         7   

Single family non-owner occupied

     372         1         1,728         3   

Non-farm, non-residential

     4,399         25         2,756         26   

Farmland

     —           —           —           —     

Consumer real estate loans

           

Home equity lines

     229         1         222         3   

Single family owner occupied

     4,580         34         4,485         37   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with an allowance

     20,340         130         15,454         193   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 29,699       $ 243       $ 26,012       $ 644   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The Company determined that 3 of the 7 PCI loan pools were impaired as of March 31, 2014, compared to 4 impaired pools as of December 31, 2013. The following tables present balance and interest income related to the impaired loan pools as of the dates, and in the periods, indicated:

 

(Amounts in thousands)    March 31, 2014      December 31, 2013  

Recorded investment

   $ 47,382       $ 52,033   

Unpaid principal balance

     62,325         69,320   

Allowance for loan losses

     485         747   

 

     Three Months Ended March 31,  
(Amounts in thousands)    2014      2013  

Interest income recognized

   $ 782       $ 84   

Average recorded investment

     49,276         20,233   

As part of the ongoing monitoring of the Company’s loan portfolio, management tracks certain credit quality indicators that include: trends related to the risk rating of commercial loans, the level of classified commercial loans, net charge-offs, nonperforming loans, and general economic conditions. The Company’s loan review function generally analyzes all commercial loan relationships greater than $3.0 million on an annual basis and at various times during the year. In addition, smaller commercial and retail loans are sampled for review during the year. Loan risk ratings may be upgraded or downgraded to reflect current information identified during the loan review process. The Company uses a risk grading matrix to assign a risk grade to each loan in its portfolio. The general characteristics of each risk grade are as follows:

 

    Pass — This grade is assigned to loans with acceptable credit quality and risk. The Company further segments this grade based on borrower characteristics that include: capital strength, earnings stability, liquidity leverage, and industry conditions.

 

    Special Mention — This grade is assigned to loans that require an above average degree of supervision and attention. These loans have the characteristics of an asset with acceptable credit quality and risk; however, adverse economic or financial conditions exist that create potential weaknesses deserving of management’s close attention. If potential weaknesses are not corrected, the prospect of repayment may worsen.

 

    Substandard — This grade is assigned to loans that have well defined weaknesses that may make payment default, or principal exposure, possible. In order to meet repayment terms, these loans will likely be dependent on collateral liquidation, secondary repayment sources, or events outside the normal course of business.

 

    Doubtful — This grade is assigned to loans on nonaccrual status. These loans have the weaknesses inherent in substandard loans; however, the weaknesses are so severe that collection or liquidation in full is extremely unlikely based on current facts, conditions, and values. Due to certain specific pending factors, the amount of loss cannot yet be determined.

 

    Loss — This grade is assigned to loans that will be charged off or charged down when payments, including the timing and value of payments, are determined to be uncertain. This risk grade does not imply that the asset has no recovery or salvage value, but simply means that it is not practical or desirable to defer writing off, either all or a portion of, the loan balance even though partial recovery may be realized in the future.

Losses on covered loans are generally reimbursable by the FDIC at the applicable loss share percentage, 80%; therefore, covered loans are disclosed separately in the following credit quality discussion. PCI loan pools are disaggregated and included in their applicable loan class in the following discussion. In addition, PCI loans are generally not classified as nonaccrual or nonperforming due to the accrual of interest income under the accretion method of accounting.

 

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The following tables present loans held for investment, by internal credit risk grade, as of the periods indicated:

 

     March 31, 2014  
            Special                              
(Amounts in thousands)    Pass      Mention      Substandard      Doubtful      Loss      Total  

Non-covered loans

                 

Commercial loans

                 

Construction, development, and other land

   $ 41,707       $ 1,138       $ 2,664       $ 152       $ —         $ 45,661   

Commercial and industrial

     86,139         953         3,371         3,940         —           94,403   

Multi-family residential

     67,083         2,095         6,416         —           —           75,594   

Single family non-owner occupied

     123,772         4,021         9,812         364         —           137,969   

Non-farm, non-residential

     446,848         18,478         19,035         —           —           484,361   

Agricultural

     2,077         7         9         —           —           2,093   

Farmland

     29,277         1,307         1,826         —           —           32,410   

Consumer real estate loans

                 

Home equity lines

     109,135         1,390         2,404         208         —           113,137   

Single family owner occupied

     454,285         10,179         27,999         164         —           492,627   

Owner occupied construction

     33,495         422         443         —           —           34,360   

Consumer and other loans

                 

Consumer loans

     70,929         794         386         2         —           72,111   

Other

     3,968         —           —           —           —           3,968   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-covered loans

     1,468,715         40,784         74,365         4,830         —           1,588,694   

Covered loans

                 

Commercial loans

                 

Construction, development, and other land

     9,607         1,465         4,837         47         —           15,956   

Commercial and industrial

     2,474         468         119         1         —           3,062   

Multi-family residential

     1,458         —           445         —           —           1,903   

Single family non-owner occupied

     3,832         1,474         1,478         10         —           6,794   

Non-farm, non-residential

     11,352         6,606         13,483         17         —           31,458   

Agricultural

     162         —           —           —           —           162   

Farmland

     512         —           305         —           —           817   

Consumer real estate loans

                 

Home equity lines

     64,707         1,147         1,039         2         —           66,895   

Single family owner occupied

     10,117         201         4,969         —           —           15,287   

Owner occupied construction

     88         235         404         —           —           727   

Consumer and other loans

                 

Consumer loans

     109         —           —           —           —           109   

Other

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

     104,418         11,596         27,079         77         —           143,170   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 1,573,133       $ 52,380       $ 101,444       $ 4,907       $ —         $ 1,731,864   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     December 31, 2013  
            Special                              
(Amounts in thousands)    Pass      Mention      Substandard      Doubtful      Loss      Total  

Non-covered loans

                 

Commercial loans

                 

Construction, development, and other land

   $ 30,719       $ 1,094       $ 3,139       $ 303       $ —         $ 35,255   

Commercial and industrial

     87,589         1,056         2,919         3,891         —           95,455   

Multi-family residential

     67,257         2,237         703         —           —           70,197   

Single family non-owner occupied

     121,367         4,501         9,316         375         —           135,559   

Non-farm, non-residential

     440,334         21,046         14,500         31         —           475,911   

Agricultural

     2,306         8         10         —           —           2,324   

Farmland

     27,421         1,721         3,472         —           —           32,614   

Consumer real estate loans

                 

Home equity lines

     107,411         1,355         2,789         215         —           111,770   

Single family owner occupied

     460,166         8,170         27,507         169         —           496,012   

Owner occupied construction

     28,242         261         200         —           —           28,703   

Consumer and other loans

                 

Consumer loans

     69,973         864         472         —           4         71,313   

Other

     3,918         —           8         —           —           3,926   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-covered loans

     1,446,703         42,313         65,035         4,984         4         1,559,039   

Covered loans

                 

Commercial loans

                 

Construction, development, and other land

     9,722         1,378         4,714         51         —           15,865   

Commercial and industrial

     2,865         247         189         24         —           3,325   

Multi-family residential

     1,472         —           461         —           —           1,933   

Single family non-owner occupied

     4,362         1,519         1,552         16         —           7,449   

Non-farm, non-residential

     13,077         4,630         16,901         38         —           34,646   

Agricultural

     164         —           —           —           —           164   

Farmland

     572         —           301         —           —           873   

Consumer real estate loans

                 

Home equity lines

     66,797         1,138         1,269         2         —           69,206   

Single family owner occupied

     10,832         148         5,939         —           —           16,919   

Owner occupied construction

     198         —           986         —           —           1,184   

Consumer and other loans

                 

Consumer loans

     118         —           —           —           —           118   

Other

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

     110,179         9,060         32,312         131         —           151,682   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 1,556,882       $ 51,373       $ 97,347       $ 5,115       $ 4       $ 1,710,721   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Credit quality continued to improve in the covered loan portfolio with special mention and classified loans declining $2.75 million, or 6.63%, as of March 31, 2014, compared to December 31, 2013.

 

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The following table presents nonaccrual loans, by loan class, as of the dates indicated:

 

     March 31, 2014      December 31, 2013  
(Amounts in thousands)    Non-covered      Covered      Total      Non-covered      Covered      Total  

Commercial loans

                 

Construction, development, and other land

   $ 816       $ 127       $ 943       $ 1,187       $ 761       $ 1,948   

Commercial and industrial

     5,357         75         5,432         5,341         92         5,433   

Multi-family residential

     115         —           115         —           —           —     

Single family non-owner occupied

     2,407         114         2,521         1,966         222         2,188   

Non-farm, non-residential

     2,972         —           2,972         2,685         —           2,685   

Farmland

     432         —           432         441         301         742   

Consumer real estate loans

                 

Home equity lines

     774         246         1,020         765         232         997   

Single family owner occupied

     7,890         582         8,472         6,567         1,555         8,122   

Owner occupied construction

     —           117         117         —           190         190   

Consumer and other loans

                 

Consumer loans

     138         —           138         201         —           201   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     20,901         1,261         22,162         19,153         3,353         22,506   

Purchased impaired loans

     8         —           8         8         —           8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total nonaccrual loans

   $ 20,909       $ 1,261       $ 22,170       $ 19,161       $ 3,353       $ 22,514   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following tables present the aging of past due loans, by loan class, as of the dates indicated. Nonaccrual loans 30 days or more past due are included in the applicable delinquency category. There were no non-covered accruing loans contractually past due 90 days or more as of March 31, 2014, or December 31, 2013. Accruing loans contractually past due 90 days or more totaled $109 thousand as of March 31, 2014, and $86 thousand as of December 31, 2013 which were attributed to covered home equity lines.

 

     March 31, 2014  
     30 - 59 Days      60 - 89 Days      90+ Days      Total      Current      Total  
(Amounts in thousands)    Past Due      Past Due      Past Due      Past Due      Loans      Loans  

Non-covered loans

                 

Commercial loans

                 

Construction, development, and other land

   $ 111       $ 113       $ 217       $ 441       $ 45,220       $ 45,661   

Commercial and industrial

     59         —           2,576         2,635         91,768         94,403   

Multi-family residential

     85         —           115         200         75,394         75,594   

Single family non-owner occupied

     432         254         1,527         2,213         135,756         137,969   

Non-farm, non-residential

     1,216         203         2,325         3,744         480,617         484,361   

Agricultural

     8         —           —           8         2,085         2,093   

Farmland

     —           —           432         432         31,978         32,410   

Consumer real estate loans

                 

Home equity lines

     479         80         191         750         112,387         113,137   

Single family owner occupied

     4,771         2,951         3,390         11,112         481,515         492,627   

Owner occupied construction

     —           —           —           —           34,360         34,360   

Consumer and other loans

                 

Consumer loans

     509         76         29         614         71,497         72,111   

Other

     —           —           —           —           3,968         3,968   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-covered loans

     7,670         3,677         10,802         22,149         1,566,545         1,588,694   

Covered loans

                 

Commercial loans

                 

Construction, development, and other land

     178         10         74         262         15,694         15,956   

Commercial and industrial

     —           —           35         35         3,027         3,062   

Multi-family residential

     —           —           —           —           1,903         1,903   

Single family non-owner occupied

     —           —           114         114         6,680         6,794   

Non-farm, non-residential

     195         354         —           549         30,909         31,458   

Agricultural

     —           —           —           —           162         162   

Farmland

     —           —           —           —           817         817   

Consumer real estate loans

                 

Home equity lines

     353         1         187         541         66,354         66,895   

Single family owner occupied

     148         58         434         640         14,647         15,287   

Owner occupied construction

     —           —           117         117         610         727   

Consumer and other loans

                    —     

Consumer loans

     —           —           —           —           109         109   

Other

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

     874         423         961         2,258         140,912         143,170   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 8,544       $ 4,100       $ 11,763       $ 24,407       $ 1,707,457       $ 1,731,864   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     December 31, 2013  
     30 - 59 Days      60 - 89 Days      90+ Days      Total      Current      Total  
(Amounts in thousands)    Past Due      Past Due      Past Due      Past Due      Loans      Loans  

Non-covered loans

                 

Commercial loans

                 

Construction, development, and other land

   $ 118       $ 10       $ 532       $ 660       $ 34,595       $ 35,255   

Commercial and industrial

     93         39         2,631         2,763         92,692         95,455   

Multi-family residential

     115         —           —           115         70,082         70,197   

Single family non-owner occupied

     611         554         1,203         2,368         133,191         135,559   

Non-farm, non-residential

     1,014         318         1,770         3,102         472,809         475,911   

Agricultural

     —           —           —           —           2,324         2,324   

Farmland

     245         —           —           245         32,369         32,614   

Consumer real estate loans

                 

Home equity lines

     289         317         442         1,048         110,722         111,770   

Single family owner occupied

     7,428         1,228         145         8,801         487,211         496,012   

Owner occupied construction

     205         —           2,284         2,489         26,214         28,703   

Consumer and other loans

                 

Consumer loans

     811         86         105         1,002         70,311         71,313   

Other

     —           —           —           —           3,926         3,926   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-covered loans

     10,929         2,552         9,112         22,593         1,536,446         1,559,039   

Covered loans

                 

Commercial loans

                 

Construction, development, and other land

     479         —           453         932         14,933         15,865   

Commercial and industrial

     5         44         92         141         3,184         3,325   

Multi-family residential

     —           —           —           —           1,933         1,933   

Single family non-owner occupied

     —           —           184         184         7,265         7,449   

Non-farm, non-residential

     209         —           —           209         34,437         34,646   

Agricultural

     —           —           —           —           164         164   

Farmland

     —           —           301         301         572         873   

Consumer real estate loans

                 

Home equity lines

     488         86         163         737         68,469         69,206   

Single family owner occupied

     197         120         1,466         1,783         15,136         16,919   

Owner occupied construction

     —           —           190         190         994         1,184   

Consumer and other loans

                    —     

Consumer loans

     —           —           —           —           118         118   

Other

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

     1,378         250         2,849         4,477         147,205         151,682   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 12,307       $ 2,802       $ 11,961       $ 27,070       $ 1,683,651       $ 1,710,721   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company may make concessions in interest rates, loan terms and/or amortization terms when restructuring loans for borrowers experiencing financial difficulty. All restructured loans to borrowers experiencing financial difficulty in excess of $250 thousand are evaluated for a specific reserve based on either the collateral or net present value method, whichever is most applicable. Specific reserves in the allowance for loan losses attributed to TDRs totaled $1.83 million as of March 31, 2014, and $1.84 million as of December 31, 2013. Restructured loans under $250 thousand are subject to the reserve calculation at the historical loss rate for classified loans. Certain TDRs are classified as nonperforming at the time of restructuring and are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as impaired until full payment or other satisfaction of the obligation occurs. The Company recognized interest income on TDRs of $149 thousand for the three months ended March 31, 2014, and $240 thousand for the three months ended March 31, 2013.

 

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Loans acquired with credit deterioration, with a discount, are generally not considered TDRs as long as the loans remain in the assigned loan pool. There were no covered loans recorded as TDRs as of March 31, 2014, or December 31, 2013. The following table presents loans modified as TDRs, by loan class, segregated by accrual status, as of the dates indicated:

 

     March 31, 2014      December 31, 2013  
(Amounts in thousands)    Nonaccrual(1)      Accruing      Total      Nonaccrual(1)      Accruing      Total  

Commercial loans

                 

Commercial and industrial

   $ 1,115       $ —         $ 1,115       $ 1,115       $ —         $ 1,115   

Single family non-owner occupied

     364         —           364         375         —           375   

Non-farm, non-residential

     124         5,742         5,866         128         5,490         5,618   

Consumer real estate loans

                 

Home equity lines

     —           50         50         159         51         210   

Single family owner occupied

     532         6,930         7,462         423         6,670         7,093   

Owner occupied construction

     —           246         246         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 2,135       $ 12,968       $ 15,103       $ 2,200       $ 12,211       $ 14,411   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) TDRs on nonaccrual status are included in the total nonaccrual loan balance disclosed in the table above.

The following table presents loans modified as TDRs, by type of concession made and loan class, that were restructured during the periods indicated. The post-modification recorded investment represents the loan balance immediately following modification.

 

     Three Months Ended March 31,  
     2014      2013  
(Amounts in thousands)    Total
Contracts
     Pre-Modification
Recorded
Investment
     Post-
Modification
Recorded
Investment
     Total
Contracts
     Pre-Modification
Recorded
Investment
     Post-
Modification
Recorded
Investment
 

Below market interest rate

                 

Owner occupied construction

     1       $ 245       $ 245         —         $ —         $ —     

Extended payment term

                 

Non-farm, non-residential

     1       $ 303       $ 303         —           —           —     

Single family owner occupied

     1         134         134         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2         437         437         —           —           —     

Below market interest rate and extended payment term

                 

Single family owner occupied

     2         266         266         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5       $ 948       $ 948         —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no payment defaults on loans modified as TDRs, that were restructured within the previous 12 months, for the three months ended March 31, 2014 or 2013.

Note 5. Allowance for Loan Losses

The allowance for loan losses is maintained at a level management deems adequate to absorb probable loan losses inherent in the loan portfolio. The allowance is increased by provisions charges to operations and reduced by net charge-offs. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent on a variety of factors that may be beyond the Company’s control: the performance of the Company’s loan portfolio, the economy, changes in interest rates, the view of regulatory authorities towards loan classifications, and other factors. These uncertainties may result in a material change to the allowance for loan losses in the near term; however, the amount of the change cannot reasonably be estimated.

The Company’s allowance is comprised of specific reserves related to loans individually evaluated, including credit relationships, and general reserves related to loans not individually evaluated that are segmented into groups with similar risk characteristics, based on an internal risk grading matrix. General reserve allocations are based on management’s judgments of qualitative and quantitative factors about macro and micro economic conditions reflected within the loan portfolio and the economy. For loans acquired in a business combination, loans identified as credit impaired at the acquisition date are grouped into pools and evaluated separately from the non-PCI portfolio. The Company has aggregated PCI loans into the following pools: Waccamaw commercial, Waccamaw lines of credit, Peoples commercial, Waccamaw serviced home equity lines, Waccamaw residential, Peoples residential, and Waccamaw consumer. Provisions calculated for PCI loans are offset by an adjustment to the FDIC indemnification asset to reflect the indemnified portion, 80%, of the post-acquisition exposure. While allocations are made to various portfolio segments, the allowance for loan losses, excluding reserves allocated to specific loans and PCI loan pools, is available for use against any loan loss management deems appropriate. As of March 31, 2014, management believed the allowance was adequate to absorb probable loan losses inherent in the loan portfolio.

 

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Table of Contents

The following table presents the aggregate activity in the allowance for loan losses in the periods indicated:

 

(Amounts in thousands)    Allowance Excluding
PCI Loans
    Allowance for
PCI Loans
    Total
Allowance
 

Balance, January 1, 2013

   $ 25,762      $ 8      $ 25,770   

Provision for loan losses

     1,142        —          1,142   

Benefit attributable to the FDIC indemnification asset

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Provision for loan losses charged to operations

     1,142        —          1,142   

Provision for loan losses recorded through the FDIC indemnification asset

     —          —          —     

Charge-offs

     (2,759     —          (2,759

Recoveries

     697        —          697   
  

 

 

   

 

 

   

 

 

 

Net charge-offs

     (2,062     —          (2,062
  

 

 

   

 

 

   

 

 

 

Balance, March 31, 2013

   $ 24,842      $ 8      $ 24,850   
  

 

 

   

 

 

   

 

 

 

Balance, January 1, 2014

   $ 23,322      $ 755      $ 24,077   

Provision for loan losses

     1,852        (262     1,590   

Benefit attributable to the FDIC indemnification asset

     —          203        203   
  

 

 

   

 

 

   

 

 

 

Provision for loan losses charged to operations

     1,852        (59     1,793   

Provision for loan losses recorded through the FDIC indemnification asset

     —          (203     (203

Charge-offs

     (2,216     —          (2,216

Recoveries

     347        —          347   
  

 

 

   

 

 

   

 

 

 

Net charge-offs

     (1,869     —          (1,869
  

 

 

   

 

 

   

 

 

 

Balance, March 31, 2014

   $ 23,305      $ 493      $ 23,798   
  

 

 

   

 

 

   

 

 

 

The following table presents the components of the activity in the allowance for loan losses, excluding PCI loans, by loan segment, in the periods indicated:

 

           Consumer     Consumer        
(Amounts in thousands)    Commercial     Real Estate     and Other     Total  

Balance, January 1, 2013

   $ 17,259      $ 7,906      $ 597      $ 25,762   

Provision for loan losses charged to operations

     483        480        179        1,142   

Loans charged off

     (783     (1,396     (580     (2,759

Recoveries credited to allowance

     283        13        401        697   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (500     (1,383     (179     (2,062
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2013

   $ 17,242      $ 7,003      $ 597      $ 24,842   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 1, 2014

   $ 16,090      $ 6,597      $ 635      $ 23,322   

Provision for loan losses charged to operations

     1,218        485        149        1,852   

Loans charged off

     (1,051     (710     (455     (2,216

Recoveries credited to allowance

     82        21        244        347   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (969     (689     (211     (1,869
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2014

   $ 16,339      $ 6,393      $ 573      $ 23,305   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following table presents the components of the activity in the allowance for loan losses for PCI loans, by loan segment, in the periods indicated:

 

           Consumer     Consumer         
(Amounts in thousands)    Commercial     Real Estate     and Other      Total  

Balance, January 1, 2013

   $ 8      $ —        $ —         $ 8   

Purchased impaired provision

     —          —          —           —     

Benefit attributable to FDIC indemnificaton asset

     —          —          —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Provision for loan losses charged to operations

     —          —          —           —     

Provision for loan losses recorded through the FDIC indemnificaton asset

     —          —          —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance, March 31, 2013

   $ 8      $ —        $ —         $ 8   
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance, January 1, 2014

   $ 77      $ 678      $ —         $ 755   

Purchased impaired provision

     (69     (193     —           (262

Benefit attributable to FDIC indemnificaton asset

     55        148        —           203   
  

 

 

   

 

 

   

 

 

    

 

 

 

Provision for loan losses charged to operations

     (14     (45     —           (59

Provision for loan losses recorded through the FDIC indemnificaton asset

     (55     (148     —           (203
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance, March 31, 2014

   $ 8      $ 485      $ —         $ 493   
  

 

 

   

 

 

   

 

 

    

 

 

 

The following tables present the Company’s allowance for loan losses and recorded investment in loans, excluding PCI loans, by loan class, as of the dates indicated:

 

     March 31, 2014  
(Amounts in thousands)    Loans
Individually
Evaluated for
Impairment
     Allowance for
Loans
Individually
Evaluated
     Loans
Collectively
Evaluated for
Impairment
     Allowance for
Loans
Collectively
Evaluated
 

Commercial loans

           

Construction, development, and other land

   $ —         $ —         $ 56,996       $ 1,293   

Commercial and industrial

     5,235         3,504         91,317         1,312   

Multi-family residential

     5,601         500         71,451         1,216   

Single family non-owner occupied

     784         38         138,357         3,431   

Non-farm, non-residential

     10,017         377         486,594         4,411   

Agricultural

     —           —           2,255         19   

Farmland

     351         —           32,876         238   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     21,988         4,419         879,846         11,920   

Consumer real estate loans

           

Home equity lines

     462         171         137,869         1,289   

Single family owner occupied

     6,067         692         498,010         4,029   

Owner occupied construction

     —           —           34,565         212   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer real estate loans

     6,529         863         670,444         5,530   

Consumer and other loans

           

Consumer loans

     —           —           72,195         573   

Other

     —           —           3,968         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer and other loans

     —           —           76,163         573   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, excluding PCI loans

   $ 28,517       $ 5,282       $ 1,626,453       $ 18,023   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     December 31, 2013  
(Amounts in thousands)    Loans
Individually
Evaluated for
Impairment
     Allowance
for Loans
Individually
Evaluated
     Loans
Collectively
Evaluated for
Impairment
     Allowance
for Loans
Collectively
Evaluated
 

Commercial loans

           

Construction, development, and other land

   $ —         $ —         $ 46,404       $ 1,141   

Commercial and industrial

     5,189         3,794         92,612         1,421   

Multi-family residential

     —           —           71,669         1,211   

Single family non-owner occupied

     664         47         136,567         3,502   

Non-farm, non-residential

     5,952         114         483,126         4,536   

Agricultural

     —           —           2,488         23   

Farmland

     351         —           33,136         301   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     12,156         3,955         866,002         12,135   

Consumer real estate loans

           

Home equity lines

     472         52         136,896         1,309   

Single family owner occupied

     6,850         735         502,229         4,295   

Owner occupied construction

     —           —           29,090         206   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer real estate loans

     7,322         787         668,215         5,810   

Consumer and other loans

           

Consumer loans

     —           —           71,389         635   

Other

     —