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EX-31.1 - EX-31.1 - FIRST BANCORP /NC/ex31-1.htm
EX-32.2 - EX-32.2 - FIRST BANCORP /NC/ex32-2.htm
EX-32.1 - EX-32.1 - FIRST BANCORP /NC/ex32-1.htm
EX-31.2 - EX-31.2 - FIRST BANCORP /NC/ex31-2.htm
EX-12 - EX-12 - FIRST BANCORP /NC/ex12.htm

 

 

 

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 June 30, 2015

 

 

Commission File Number 0-15572

 

FIRST BANCORP

(Exact Name of Registrant as Specified in its Charter)

 

North Carolina   56-1421916
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification Number)
     
300 SW Broad St., Southern Pines, North Carolina   28387
(Address of Principal Executive Offices)   (Zip Code)
     
(Registrant's telephone number, including area code)   (910)   246-2500

 

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 twelve 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     o NO

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x YES     o 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. (Check one)

 

o Large Accelerated Filer     x Accelerated Filer     o Non-Accelerated Filer     o Smaller Reporting Company

 

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

 

The number of shares of the registrant's Common Stock outstanding on July 31, 2015 was 19,780,017.

 

 

 

 

INDEX

FIRST BANCORP AND SUBSIDIARIES

 

   
  Page
   
Part I.  Financial Information  
   
Item 1 - Financial Statements  
   
Consolidated Balance Sheets - June 30, 2015 and June 30, 2014 (With Comparative Amounts at December 31, 2014) 4
   
Consolidated Statements of Income - For the Periods Ended June 30, 2015 and 2014 5
   
Consolidated Statements of Comprehensive Income - For the Periods Ended June 30, 2015 and 2014 6
   
Consolidated Statements of Shareholders’ Equity - For the Periods Ended June 30, 2015 and 2014 7
   
Consolidated Statements of Cash Flows - For the Periods Ended June 30, 2015 and 2014 8
   
Notes to Consolidated Financial Statements 9
   
Item 2 – Management’s Discussion and Analysis of Consolidated Results of Operations and Financial Condition 44
   
Item 3 – Quantitative and Qualitative Disclosures About Market Risk 67
   
Item 4 – Controls and Procedures 69
   
Part II.  Other Information  
   
Item 1 – Legal Proceedings 69
   
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds 70
   
Item 6 – Exhibits 70
   
Signatures 72

 

 

Page 2

FORWARD-LOOKING STATEMENTS

 

Part I of this report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995, which statements are inherently subject to risks and uncertainties. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Further, forward-looking statements are intended to speak only as of the date made. Such statements are often characterized by the use of qualifying words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” or other statements concerning our opinions or judgment about future events. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of our customers, our level of success in integrating acquisitions, actions of government regulators, the level of market interest rates, and general economic conditions. For additional information about factors that could affect the matters discussed in this paragraph, see the “Risk Factors” section of our 2014 Annual Report on Form 10-K.

Page 3

 

Part I. Financial Information

Item 1 - Financial Statements

First Bancorp and Subsidiaries

Consolidated Balance Sheets

 

 

($ in thousands-unaudited)

  June 30,
2015
   December 31,
2014 (audited)
   June 30,
2014
 
ASSETS               
Cash and due from banks, noninterest-bearing  $75,151    81,068    92,633 
Due from banks, interest-bearing   102,567    171,248    313,141 
Federal funds sold   674    768    1,508 
     Total cash and cash equivalents   178,392    253,084    407,282 
                
Securities available for sale   214,450    158,018    118,062 
Securities held to maturity (fair values of $167,759, $182,411, and $57,612)   165,245    178,687    53,879 
                
Presold mortgages in process of settlement   4,934    6,019    5,926 
                
Loans – non-covered   2,298,955    2,268,580    2,257,530 
Loans – covered by FDIC loss share agreement   113,824    127,594    176,855 
   Total loans   2,412,779    2,396,174    2,434,385 
Allowance for loan losses – non-covered   (30,155)   (38,345)   (41,966)
Allowance for loan losses – covered   (1,935)   (2,281)   (3,830)
   Total allowance for loan losses   (32,090)   (40,626)   (45,796)
   Net loans   2,380,689    2,355,548    2,388,589 
                
Premises and equipment   75,087    75,113    76,705 
Accrued interest receivable   9,134    8,920    8,795 
FDIC indemnification asset   11,982    22,569    29,406 
Goodwill   65,835    65,835    65,835 
Other intangible assets   1,697    2,058    2,446 
Foreclosed real estate – non-covered   9,954    9,771    9,346 
Foreclosed real estate – covered   1,945    2,350    9,934 
Bank-owned life insurance   56,175    55,421    44,685 
Other assets   36,000    24,990    45,609 
        Total assets  $3,211,519    3,218,383    3,266,499 
                
LIABILITIES               
Deposits:   Noninterest bearing checking accounts  $614,619    560,230    525,332 
Interest bearing checking accounts   553,918    583,903    551,577 
Money market accounts   578,405    551,002    558,373 
Savings accounts   184,786    180,317    175,084 
Time deposits of $100,000 or more   398,348    470,066    554,537 
Other time deposits   323,051    350,388    389,676 
     Total deposits   2,653,127    2,695,906    2,754,579 
Borrowings   176,394    116,394    116,394 
Accrued interest payable   625    686    778 
Other liabilities   15,984    17,698    13,655 
     Total liabilities   2,846,130    2,830,684    2,885,406 
                
Commitments and contingencies               
                
SHAREHOLDERS’ EQUITY               
Preferred stock, no par value per share.  Authorized: 5,000,000 shares               
     Series B issued & outstanding:  31,500, 63,500, and 63,500 shares   31,500    63,500    63,500 
     Series C, convertible, issued & outstanding:  728,706, 728,706, and 728,706 shares   7,287    7,287    7,287 
Common stock, no par value per share.  Authorized: 40,000,000 shares               
     Issued & outstanding:  19,780,017, 19,709,881, and 19,705,381 shares   133,061    132,532    132,417 
Retained earnings   194,600    184,958    175,871 
Accumulated other comprehensive income (loss)   (1,059)   (578)   2,018 
     Total shareholders’ equity   365,389    387,699    381,093 
          Total liabilities and shareholders’ equity  $3,211,519    3,218,383    3,266,499 

 

See accompanying notes to consolidated financial statements.

Page 4

 

First Bancorp and Subsidiaries

Consolidated Statements of Income

 

($ in thousands, except share data-unaudited)  Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2015   2014   2015   2014 
INTEREST INCOME                    
Interest and fees on loans  $28,953    34,376    58,394    70,462 
Interest on investment securities:                    
     Taxable interest income   1,664    876    3,023    1,877 
     Tax-exempt interest income   457    471    920    941 
Other, principally overnight investments   186    232    381    351 
     Total interest income   31,260    35,955    62,718    73,631 
                     
INTEREST EXPENSE                    
Savings, checking and money market accounts   281    259    550    511 
Time deposits of $100,000 or more   732    1,172    1,579    2,355 
Other time deposits   327    419    669    875 
Borrowings   315    297    612    547 
     Total interest expense   1,655    2,147    3,410    4,288 
                     
Net interest income   29,605    33,808    59,308    69,343 
Provision for loan losses – non-covered   1,001    1,158    1,105    4,523 
Provision (reversal) for loan losses – covered   (160)   2,501    (428)   2,711 
Total provision for loan losses   841    3,659    677    7,234 
Net interest income after provision for loan losses   28,764    30,149    58,631    62,109 
                     
NONINTEREST INCOME                    
Service charges on deposit accounts   2,881    3,446    5,773    7,019 
Other service charges, commissions and fees   2,771    2,562    5,313    4,929 
Fees from presold mortgage loans   731    790    1,539    1,397 
Commissions from sales of insurance and financial products   665    706    1,226    1,300 
Bank-owned life insurance income   383    318    754    645 
Foreclosed property gains (losses) – non-covered   (580)   (551)   (1,075)   (707)
Foreclosed property gains (losses) – covered   254    (1,173)   492    (3,290)
FDIC indemnification asset income (expense), net   (1,828)   (1,578)   (4,220)   (6,494)
Securities gains       786        786 
Other gains (losses)   (273)   (336)   (269)   (317)
     Total noninterest income   5,004    4,970    9,533    5,268 
                     
NONINTEREST EXPENSES                    
Salaries   11,581    11,366    23,078    23,014 
Employee benefits   2,298    2,286    4,481    4,597 
   Total personnel expense   13,879    13,652    27,559    27,611 
Net occupancy expense   1,812    1,804    3,681    3,684 
Equipment related expenses   949    1,024    1,905    1,952 
Intangibles amortization   180    194    360    388 
Other operating expenses   7,480    8,106    14,509    14,696 
     Total noninterest expenses   24,300    24,780    48,014    48,331 
                     
Income before income taxes   9,468    10,339    20,150    19,046 
Income tax expense   3,224    3,693    6,918    6,724 
                     
Net income   6,244    6,646    13,232    12,322 
                     
Preferred stock dividends   (212)   (217)   (429)   (434)
                     
Net income available to common shareholders  $6,032    6,429    12,803    11,888 
                     
Earnings per common share:                    
     Basic  $0.30    0.33    0.65    0.60 
     Diluted   0.30    0.32    0.63    0.59 
                     
Dividends declared per common share  $0.08    0.08    0.16    0.16 
                     
Weighted average common shares outstanding:                    
     Basic   19,778,640    19,698,581    19,750,316    19,693,382 
     Diluted   20,508,955    20,434,263    20,481,466    20,428,861 

 

See accompanying notes to consolidated financial statements.

Page 5

First Bancorp and Subsidiaries

Consolidated Statements of Comprehensive Income

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
($ in thousands-unaudited)  2015   2014   2015   2014 
                 
Net income  $6,244    6,646    13,232    12,322 
Other comprehensive income (loss):                    
   Unrealized gains (losses) on securities available for sale:                    
Unrealized holding gains (losses) arising during the period, pretax   (990)   749    (743)   1,052 
      Tax (expense) benefit   386    (292)   291    (410)
Reclassification to realized gains       (786)       (786)
      Tax expense       306        306 
Postretirement Plans:                    
Amortization of unrecognized net actuarial (gain) loss   (16)   (56)   (47)   (110)
       Tax expense (benefit)   6    33    18    66 
Other comprehensive income (loss)   (614)   (46)   (481)   118 
Comprehensive income  $5,630    6,600    12,751    12,440 
                     

 

See accompanying notes to consolidated financial statements.

Page 6

 

First Bancorp and Subsidiaries

Consolidated Statements of Shareholders’ Equity

 

 

 

 

 

(In thousands, except per share - unaudited)

  Preferred   Common Stock   Retained   Accumulated
Other
Comprehensive
   Total
Share-
holders’
 
   Stock   Shares   Amount   Earnings   Income (Loss)   Equity 
                         
                         
Balances, January 1, 2014  $70,787    19,680   $132,099    167,136    1,900    371,922 
                               
Net income                  12,322         12,322 
Cash dividends declared ($0.16 per common share)                  (3,153)        (3,153)
Preferred dividends                  (434)        (434)
Stock-based compensation        25    318              318 
Other comprehensive income (loss)                       118    118 
                               
Balances, June 30, 2014  $70,787    19,705   $132,417    175,871    2,018    381,093 
                               
                               
Balances, January 1, 2015  $70,787    19,710   $132,532    184,958    (578)   387,699 
                               
Net income                  13,232         13,232 
Preferred stock redeemed (Series B)   (32,000)                       (32,000)
Stock option exercises        2    32              32 
Cash dividends declared ($0.16 per common share)                  (3,161)        (3,161)
Preferred dividends                  (429)        (429)
Stock-based compensation        68    497              497 
Other comprehensive income (loss)                       (481)   (481)
                               
Balances, June 30, 2015  $38,787    19,780   $133,061    194,600    (1,059)   365,389 

 

See accompanying notes to consolidated financial statements.

 

Page 7

First Bancorp and Subsidiaries

Consolidated Statements of Cash Flows

 

   Six Months Ended
June 30,
 
($ in thousands-unaudited)  2015   2014 
Cash Flows From Operating Activities          
Net income  $13,232   $12,322 
Reconciliation of net income  to net cash provided by operating activities:          
     Provision for loan losses   677    7,234 
     Net security premium amortization   1,612    1,036 
     Purchase accounting accretion and amortization, net   983    (7,208)
     Foreclosed property losses and write-downs, net   583    3,997 
     Gain on securities available for sale       (786)
     Other losses   269    317 
     Decrease in net deferred loan costs   127    277 
     Depreciation of premises and equipment   2,255    2,325 
     Stock-based compensation expense   404    225 
     Amortization of intangible assets   360    388 
     Origination of presold mortgages in process of settlement   (56,744)   (47,696)
     Proceeds from sales of presold mortgages in process of settlement   57,759    47,347 
     Decrease (increase) in accrued interest receivable   (214)   854 
     Decrease (increase) in other assets   (2,193)   6,375 
     Decrease in accrued interest payable   (61)   (101)
     Decrease in other liabilities   (1,595)   (1,222)
          Net cash provided by operating activities   17,454    25,684 
           
Cash Flows From Investing Activities          
     Purchases of securities available for sale   (83,313)   (15,406)
     Purchases of securities held to maturity   (2,003)    
     Proceeds from sales of securities available for sale       30,272 
     Proceeds from maturities/issuer calls of securities available for sale   25,515    19,151 
     Proceeds from maturities/issuer calls of securities held to maturity   14,458     
     Purchases of Federal Reserve Bank stock and Federal Home Loan Bank stock, net   (9,582)   (2,122)
     Net decrease (increase) in loans   (27,549)   21,825 
     Proceeds from FDIC loss share agreements   6,912    15,256 
     Proceeds from sales of foreclosed real estate   3,935    21,396 
     Purchases of premises and equipment   (2,956)   (2,842)
     Proceeds from sale of premises and equipment   847    811 
          Net cash provided (used) by investing activities   (73,736)   88,341 
           
Cash Flows From Financing Activities          
     Net increase (decrease) in deposits   (42,779)   3,567 
     Net increase in borrowings   60,000    70,000 
     Cash dividends paid – common stock   (3,154)   (3,150)
     Cash dividends paid – preferred stock   (509)   (434)
     Redemption of preferred stock   (32,000)    
     Proceeds from stock option exercises   32     
          Net cash provided (used) by financing activities   (18,410)   69,983 
           
Increase (decrease) in cash and cash equivalents   (74,692)   184,008 
Cash and cash equivalents, beginning of period   253,084    223,274 
           
Cash and cash equivalents, end of period  $178,392    407,282 
           
Supplemental Disclosures of Cash Flow Information:          
Cash paid during the period for:          
     Interest  $3,471    4,389 
     Income taxes   9,093    421 
Non-cash transactions:          
     Unrealized gain (loss) on securities available for sale, net of taxes   (452)   162 
     Foreclosed loans transferred to other real estate   4,296    7,925 

 

See accompanying notes to consolidated financial statements.

Page 8

 

First Bancorp and Subsidiaries

Notes to Consolidated Financial Statements

 

(unaudited) For the Periods Ended June 30, 2015 and 2014  

 

Note 1 - Basis of Presentation

 

In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated financial position of the Company as of June 30, 2015 and 2014 and the consolidated results of operations and consolidated cash flows for the periods ended June 30, 2015 and 2014. All such adjustments were of a normal, recurring nature. Reference is made to the 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) for a discussion of accounting policies and other relevant information with respect to the financial statements. The results of operations for the periods ended June 30, 2015 and 2014 are not necessarily indicative of the results to be expected for the full year. The Company has evaluated all subsequent events through the date the financial statements were issued.

 

Note 2 – Accounting Policies

 

Note 1 to the 2014 Annual Report on Form 10-K filed with the SEC contains a description of the accounting policies followed by the Company and discussion of recent accounting pronouncements. The following paragraphs update that information as necessary.

 

In January 2014, the Financial Accounting Standards Board (“FASB”) amended the Equity Method and Joint Ventures topic of the Accounting Standards Codification. The amendments provide criteria that must be met in order to apply a proportional amortization method to Low-Income Housing Tax Credit investments and provide guidance on the method used to amortize the investment, the impairment approach, and the eligibility criteria for entities that have other arrangements (e.g., loans) with the limited liability entity. The amendments were effective for the Company on January 1, 2015 for new investments in qualified affordable housing projects. These amendments did not have a material effect on the Company’s financial statements.

 

In January 2014, the FASB amended the Receivables topic of the Accounting Standards Codification. The amendments are intended to resolve diversity in practice with respect to when a creditor should reclassify a collateralized consumer mortgage loan to other real estate owned (“OREO”). In addition, the amendments require a creditor to reclassify a collateralized consumer mortgage loan to OREO upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. The amendments were effective for the Company on January 1, 2015. In implementing this guidance, assets that are reclassified from real estate to loans are measured at the carrying value of the real estate at the date of adoption. Assets reclassified from loans to real estate are measured at the lower of the net amount of the loan receivable or the fair value of the real estate less costs to sell at the date of adoption. These amendments did not have a material effect on the Company’s financial statements.

 

In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for interim and annual reporting periods beginning after December 15, 2017. The Company can apply the guidance using either a full retrospective approach or a modified retrospective approach. The Company does not expect these amendments to have a material effect on its financial statements.

 

In June 2014, the FASB issued guidance which makes limited amendments to the guidance on accounting for certain repurchase agreements. The new guidance (1) requires entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements), (2) eliminates accounting guidance on linked repurchase financing transactions, and (3) expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers (specifically, repos, securities lending transactions, and repurchase-to-maturity transactions) accounted for as secured borrowings. The amendments were effective for the Company on January 1, 2015. These amendments did not have a material effect on the Company’s financial statements.

 

Page 9

In June 2014, the FASB issued guidance which clarifies that performance targets associated with stock compensation should be treated as a performance condition and should not be reflected in the grant date fair value of the stock award. The amendments will be effective for the Company for fiscal years that begin after December 15, 2015. The Company will apply the guidance to all stock awards granted or modified after the amendments are effective. The Company does not expect these amendments to have a material effect on its financial statements.

 

In January 2015, the FASB issued guidance to eliminate from U.S. GAAP the concept of an extraordinary item, which is an event or transaction that is both (1) unusual in nature and (2) infrequently occurring. Under the new guidance, an entity will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; or (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company will apply the guidance prospectively.

 

In February 2015, the FASB issued guidance which amends the consolidation requirements and significantly changes the consolidation analysis required under U.S. GAAP. The amendments are expected to result in the deconsolidation of many entities. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted (including during an interim period), provided that the guidance is applied as of the beginning of the annual period containing the adoption date. The Company does not expect these amendments to have a material effect on its financial statements.

 

In April 2015, the FASB issued guidance that will require debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This update affects disclosures related to debt issuance costs but does not affect existing recognition and measurement guidance for these items. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. The Company does not expect these amendments to have a material effect on its financial statements.

 

In April 2015, the FASB issued guidance which provides a practical expedient that permits the Company to measure defined benefit plan assets and obligations using the month-end that is closest to the Company’s fiscal year-end. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. The Company does not expect these amendments to have a material effect on its financial statements.

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

Note 3 – Reclassifications

 

Certain amounts reported in the period ended June 30, 2014 have been reclassified to conform to the presentation for June 30, 2015. These reclassifications had no effect on net income or shareholders’ equity for the periods presented, nor did they materially impact trends in financial information.

 

Note 4 – Equity-Based Compensation Plans

 

At June 30, 2015, the Company had the following equity-based compensation plans: the First Bancorp 2014 Equity Plan, the First Bancorp 2007 Equity Plan, and the First Bancorp 2004 Stock Option Plan. The Company’s shareholders approved all equity-based compensation plans. The First Bancorp 2014 Equity Plan became effective upon the approval of shareholders on May 8, 2014. As of June 30, 2015, the First Bancorp 2014 Equity Plan was the only plan that had shares available for future grants.

 

The First Bancorp 2014 Equity Plan is intended to serve as a means to attract, retain and motivate key employees and directors and to associate the interests of the plans’ participants with those of the Company and its shareholders. The First Bancorp 2014 Equity Plan allows for both grants of stock options and other types of equity-based compensation, including stock appreciation rights, restricted stock, restricted performance stock, unrestricted stock, and performance units.

 

Page 10

Recent equity grants to employees have either had performance vesting conditions, service vesting conditions, or both. Compensation expense for these grants is recorded over the various service periods based on the estimated number of equity grants that are probable to vest. No compensation cost is recognized for grants that do not vest and any previously recognized compensation cost will be reversed.

 

As it relates to director equity grants, the Company grants common shares, valued at approximately $16,000 to each non-employee director (currently 8 in total) in June of each year. Compensation expense associated with these director grants is recognized on the date of grant since there are no vesting conditions. On June 1, 2015, the Company granted 8,176 shares of common stock to non-employee directors (1,022 shares per director), at a fair market value of $15.75 per share, which was the closing price of the Company’s common stock on that date. On June 2, 2014, the Company granted 10,065 shares of common stock to non-employee directors (915 shares per director), at a fair market value of $17.60 per share, which was the closing price of the Company’s common stock on that date.

 

Pursuant to an employment agreement, the Company granted the chief executive officer 75,000 non-qualified stock options and 40,000 shares of restricted stock during the third quarter of 2012. The option award would have fully vested on December 31, 2014 if the Company achieved a certain earnings target for 2014. The Company did not achieve the applicable target, and therefore, the option award was forfeited as of December 31, 2014. No compensation expense was recognized for the option award. The restricted stock award will vest in full on December 31, 2015, if the Company achieves a certain earnings target in 2015, and will be forfeited if the applicable target is not achieved. Based on current conditions, the Company has concluded that it is not probable that the restricted stock award will vest, and thus no compensation expense has been recorded.

 

In 2014, the Company’s Compensation Committee determined that seven of the Company’s senior officers would receive 50% of the bonus earned under the Company’s annual incentive plan in shares of restricted stock, instead of being exclusively cash, which had been the Company’s standard practice. This resulted in the Company granting a total of 14,882 shares of restricted common stock to those officers on February 24, 2015. The shares vest annually in one-third increments beginning on December 31, 2015. The total compensation expense associated with this grant was $258,000, which is being recorded over the vesting period. The Company recorded $23,300 and $46,600 in compensation expense during the three and six months ended June 30, 2015 related to these grants, and expects to record $23,300 in compensation expense during each remaining quarter of 2015.

 

Also, on February 24, 2015, the Company granted a total of 30,404 shares of restricted common stock to eleven senior officers. The shares vest annually in one-third increments beginning on December 31, 2015. The total compensation expense associated with this grant was $527,000, which is being recorded over the vesting period. The Company recorded $80,500 and $161,000 in compensation expense during the three and six months ended June 30, 2015 related to these grants, and expects to record $80,500 in compensation expense during each remaining quarter of 2015.

 

On April 10, 2015, the Company granted a total of 14,425 shares of restricted common stock to five key employees. The shares vest three years from the date of the grant on April 10, 2018. The total compensation expense associated with this grant was $249,000, which is being recorded over the vesting period. The Company recorded $20,700 in compensation expense during the three and six months ended June 30, 2015 related to these grants, and expects to record $20,700 in compensation expense during each remaining quarter of 2015.

 

Based on the Company’s performance in 2013, the Company granted long-term restricted shares of common stock to the chief executive officer on February 11, 2014 with a two year minimum vesting period. The total compensation expense associated with this grant was $278,200 and the grant will fully vest on January 1, 2016. One third of this value was expensed during each of 2013 and 2014, with the remaining one third being expensed in 2015. The Company recorded $23,200 and $46,400 in compensation expense during each of the three and six months ended June 30, 2015 and 2014, respectively, and expects to record $23,200 in compensation expense in each remaining quarter of 2015.

 

Under the terms of the predecessor plans and the First Bancorp 2014 Equity Plan, options can have a term of no longer than ten years, and all options granted thus far under these plans have had a term of ten years. The Company’s options provide for immediate vesting under certain conditions if there is a change in control (as defined in the plans).

 

Page 11

At June 30, 2015, there were 128,464 options outstanding under the Company’s three option plans, with exercise prices ranging from $14.35 to $22.04. At June 30, 2015, there were 930,224 shares remaining available for grant under the First Bancorp 2014 Equity Plan.

 

The Company issues new shares of common stock when options are exercised.

 

The Company measures the fair value of each option award on the date of grant using the Black-Scholes option-pricing model. The Company determines the assumptions used in the Black-Scholes option pricing model as follows: the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant; the dividend yield is based on the Company’s dividend yield at the time of the grant (subject to adjustment if the dividend yield on the grant date is not expected to approximate the dividend yield over the expected life of the option); the volatility factor is based on the historical volatility of the Company’s stock (subject to adjustment if future volatility is reasonably expected to differ from the past); and the weighted-average expected life is based on the historical behavior of employees related to exercises, forfeitures and cancellations.

 

The Company recorded total stock-based compensation expense of $277,000 and $201,000 for the three months ended June 30, 2015 and 2014, respectively, and $404,000 and $225,000 for the six months ended June 30, 2015 and 2014, respectively. Of the $404,000 in expense that was recorded in 2015, approximately $129,000 related to the June 1, 2015 director grants, which is classified as “other operating expenses” in the Consolidated Statements of Income. The remaining $275,000 in expense relates to the employee grants discussed above and is recorded as “salaries expense.” Stock based compensation is reflected as an adjustment to cash flows from operating activities on the Company’s Consolidated Statement of Cash Flows. The Company recognized $157,500 and $87,000 of income tax benefits related to stock based compensation expense in the income statement for the six months ended June 30, 2015 and 2014, respectively.

 

As noted above, certain of the Company’s stock option grants contain terms that provide for a graded vesting schedule whereby portions of the award vest in increments over the requisite service period. The Company has elected to recognize compensation expense for awards with graded vesting schedules on a straight-line basis over the requisite service period for the entire award. Compensation expense is based on the estimated number of stock options and awards that will ultimately vest. Over the past five years, there have only been minimal amounts of forfeitures, and therefore the Company assumes that all awards granted without performance conditions will become vested.

 

The following table presents information regarding the activity for the first six months of 2015 related to the Company’s stock options outstanding:

 

   Options Outstanding 
   Number of
Shares
   Weighted-
Average
Exercise
Price
   Weighted-
Average
Contractual
Term (years)
   Aggregate Intrinsic
Value
 
                 
Balance at January 1, 2015   179,102   $18.55           
                     
   Granted                  
   Exercised   (2,250)   14.35           
   Forfeited                  
   Expired   (48,388)   20.07           
                     
Outstanding at June 30, 2015   128,464   $18.05    2.2   $46,400 
                     
Exercisable at June 30, 2015   128,464   $18.05    2.2   $46,400 

 

During the three and six months ended June 30, 2015, the Company received $32,000 as a result of stock option exercises. The Company did not have any stock option exercises during the three and six months ended June 30, 2014. The Company recorded no tax benefits from the exercise of nonqualified stock options during the three and six months ended June 30, 2015 or 2014.

 

Page 12

The following table presents information regarding the activity the first six months of 2015 related to the Company’s outstanding restricted stock:

 

   Long-Term Restricted Stock 
   Number of Units   Weighted-Average
Grant-Date Fair Value
 
         
Nonvested at January 1, 2015   45,219   $10.68 
           
Granted during the period   59,711    17.31 
Vested during the period        
Forfeited or expired during the period        
           
Nonvested at June 30, 2015   104,930   $14.45 

 

Note 5 – 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 is computed by assuming the issuance of common shares for all potentially dilutive common shares outstanding during the reporting period. Currently, the Company’s potentially dilutive common stock issuances relate to stock option grants under the Company’s equity-based compensation plans and the Company’s Series C Preferred Stock, which is convertible into common stock on a one-for-one ratio.

 

In computing Diluted Earnings Per Common Share, adjustments are made to the computation of Basic Earnings Per Common shares, as follows. As it relates to stock options, it is assumed that all dilutive stock options are exercised during the reporting period at their respective exercise prices, with the proceeds from the exercises used by the Company to buy back stock in the open market at the average market price in effect during the reporting period. The difference between the number of shares assumed to be exercised and the number of shares bought back is included in the calculation of dilutive securities. As it relates to the Series C Preferred Stock, it is assumed that the preferred stock was converted to common stock during the reporting period. Dividends on the preferred stock are added back to net income and the shares assumed to be converted are included in the number of shares outstanding.

 

If any of the potentially dilutive common stock issuances have an anti-dilutive effect, which is the case when a net loss is reported, the potentially dilutive common stock issuance is disregarded.

 

The following is a reconciliation of the numerators and denominators used in computing Basic and Diluted Earnings Per Common Share:

 

   For the Three Months Ended June 30, 
   2015   2014 

 

($ in thousands except per

share amounts)

  Income
(Numer-
ator)
   Shares
(Denom-
inator)
   Per Share
Amount
   Income
(Numer-
ator)
   Shares
(Denom-
inator)
   Per Share
Amount
 
                         
Basic EPS                              
Net income available to common shareholders  $6,032    19,778,640   $0.30   $6,429    19,698,581   $0.33 
                               
Effect of Dilutive Securities   58    730,315         58    735,682      
                               
Diluted EPS per common share  $6,090    20,508,955   $0.30   $6,487    20,434,263   $0.32 

 

Page 13

 

   For the Six Months Ended June 30 
   2015   2014 

 

($ in thousands except per

share amounts)

  Income
(Numer-
ator)
   Shares
(Denom-
inator)
   Per Share
Amount
   Income
(Numer-
ator)
   Shares
(Denom-
inator)
   Per Share
Amount
 
                         
Basic EPS                              
Net income available to common shareholders  $12,803    19,750,316   $0.65   $11,888    19,693,382   $0.60 
                               
Effect of Dilutive Securities   117    731,150         117    735,479      
                               
Diluted EPS per common share  $12,920    20,481,466   $0.63   $12,005    20,428,861   $0.59 

 

For the three and six months ended June 30, 2015, there were 108,214 options and 52,500 options, respectively, that were antidilutive because the exercise price exceeded the average market price for the period, and thus are not included in the calculation to determine the effect of dilutive securities. For both the three and six months ended June 30, 2014, there were 93,000 options that were anti-dilutive. Also, for both the three and six months ended June 30, 2014, the Company excluded 75,000 options that had an exercise price below the average market price for the period, but had performance vesting requirements that the Company concluded were not probable to vest.

 

Note 6 – Securities

 

The book values and approximate fair values of investment securities at June 30, 2015 and December 31, 2014 are summarized as follows:

 

   June 30, 2015   December 31, 2014 
   Amortized   Fair   Unrealized   Amortized   Fair   Unrealized 
($ in thousands)  Cost   Value   Gains   (Losses)   Cost   Value   Gains   (Losses) 
                                 
Securities available for sale:                                        
  Government-sponsored enterprise securities  $58,291    58,276    53    (68)   27,546    27,521    33    (58)
  Mortgage-backed securities   132,272    131,309    461    (1,424)   130,073    129,510    751    (1,314)
  Corporate bonds   25,231    24,733    40    (538)   1,000    865        (135)
  Equity securities   89    132    55    (12)   89    122    46    (13)
Total available for sale  $215,883    214,450    609    (2,042)   158,708    158,018    830    (1,520)
                                         
Securities held to maturity:                                        
  Mortgage-backed securities  $112,923    112,235        (688)   124,924    124,861    45    (108)
  State and local governments   52,322    55,524    3,224    (22)   53,763    57,550    3,787     
Total held to maturity  $165,245    167,759    3,244    (710)   178,687    182,411    3,832    (108)

 

Included in mortgage-backed securities at June 30, 2015 were collateralized mortgage obligations with an amortized cost of $77,000 and a fair value of $79,000. Included in mortgage-backed securities at December 31, 2014 were collateralized mortgage obligations with an amortized cost of $108,000 and a fair value of $111,000. All of the Company’s mortgage-backed securities, including the collateralized mortgage obligations, were issued by government-sponsored corporations.

 

The following table presents information regarding securities with unrealized losses at June 30, 2015:

 

 

($ in thousands)

  Securities in an Unrealized
Loss Position for
Less than 12 Months
   Securities in an Unrealized
Loss Position for
More than 12 Months
   Total 
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
 
  Government-sponsored enterprise securities  $13,955    45    2,977    23    16,932    68 
  Mortgage-backed securities   161,589    1,102    29,740    1,010    191,329    2,112 
  Corporate bonds   19,773    458    920    80    20,693    538 
  Equity securities           20    12    20    12 
  State and local governments   832    22            832    22 
      Total temporarily impaired securities  $196,149    1,627    33,657    1,125    229,806    2,752 

 

Page 14

The following table presents information regarding securities with unrealized losses at December 31, 2014:

 

 

($ in thousands)

  Securities in an Unrealized
Loss Position for
Less than 12 Months
   Securities in an Unrealized
Loss Position for
More than 12 Months
   Total 
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized Losses   Fair Value   Unrealized Losses 
  Government-sponsored enterprise securities  $5,489    11    2,953    47    8,442    58 
  Mortgage-backed securities   69,985    318    33,557    1,104    103,542    1,422 
  Corporate bonds           865    135    865    135 
  Equity securities           17    13    17    13 
  State and local governments                        
      Total temporarily impaired securities  $75,474    329    37,392    1,299    112,866    1,628 

 

In the above tables, all of the non-equity securities that were in an unrealized loss position at June 30, 2015 and December 31, 2014 are bonds that the Company has determined are in a loss position due primarily to interest rate factors and not credit quality concerns. The Company has evaluated the collectability of each of these bonds and has concluded that there is no other-than-temporary impairment. The Company does not intend to sell these securities, and it is more likely than not that the Company will not be required to sell these securities before recovery of the amortized cost. The Company has also concluded that each of the equity securities in an unrealized loss position at June 30, 2015 and December 31, 2014 was in such a position due to temporary fluctuations in the market prices of the securities. The Company’s policy is to record an impairment charge for any of these equity securities that remains in an unrealized loss position for twelve consecutive months unless the amount is insignificant.

 

The book values and approximate fair values of investment securities at June 30, 2015, by contractual maturity, are summarized in the table below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   Securities Available for Sale   Securities Held to Maturity 
   Amortized   Fair   Amortized   Fair 
($ in thousands)  Cost   Value   Cost   Value 
                 
Debt securities                    
Due within one year  $        773    787 
Due after one year but within five years   50,291    50,276    12,755    13,502 
Due after five years but within ten years   28,231    27,773    36,098    38,458 
Due after ten years   5,000    4,960    2,696    2,777 
Mortgage-backed securities   132,272    131,309    112,923    112,235 
Total debt securities   215,794    214,318    165,245    167,759 
                     
Equity securities   89    132         
Total securities  $215,883    214,450    165,245    167,759 

 

At June 30, 2015 and December 31, 2014 investment securities with carrying values of $87,087,000 and $100,113,000, respectively, were pledged as collateral for public deposits.

 

The Company recorded no gains or losses on securities during the three or six month periods ended June 30, 2015. During the second quarter of 2014, the Company sold approximately $47,473,000 in securities and recorded a net gain of $786,000 related to the sale.

 

The aggregate carrying amount of cost-method investments was $15,453,000 and $6,016,000 at June 30, 2015 and December 31, 2014, respectively, which is recorded within the line item “other assets” on the Company’s Consolidated Balance Sheets. These investments are comprised of both Federal Home Loan Bank (“FHLB”) stock and Federal Reserve Bank of Richmond (“FRB”) stock. The FHLB stock had a cost and fair value of $8,421,000 at June 30, 2015 and $6,016,000 at December 31, 2014, and serves as part of the collateral for the Company’s line of credit with the FHLB and is also a requirement for membership in the FHLB system. Periodically the FHLB recalculates the Company’s required level of holdings, and the Company either buys more stock or the FHLB redeems a portion of the stock at cost. The FRB stock had a cost and fair value of $7,032,000 at June 30, 2015. The Company was required to purchase this stock when it became a member of the Federal Reserve System in the second quarter of 2015. The Company determined that neither stock was impaired at either period end.

 

Page 15

Note 7 – Loans and Asset Quality Information

 

The loans and foreclosed real estate that were acquired in FDIC-assisted transactions are covered by loss share agreements between the FDIC and the Company’s banking subsidiary, First Bank, which afford First Bank significant loss protection - see Note 2 to the financial statements included in the Company’s 2011 Annual Report on Form 10-K for detailed information regarding these transactions. Because of the loss protection provided by the FDIC, the risk of the loans and foreclosed real estate that are covered by loss share agreements are significantly different from those assets not covered under the loss share agreements. Accordingly, the Company presents separately loans subject to the loss share agreements as “covered loans” in the information below and loans that are not subject to the loss share agreements as “non-covered loans.”

 

On July 1, 2014, one of the Company’s loss share agreements with the FDIC expired. The agreement that expired related to the non-single family assets of Cooperative Bank, a failed bank acquisition from June 2009. Accordingly, the remaining balances associated with these loans and foreclosed real estate were transferred from the covered portfolio to the non-covered portfolio on July 1, 2014. The Company will bear all future losses on this portfolio of loans and foreclosed real estate. Immediately prior to the transfer to non-covered status, the loans in this portfolio had a carrying value of $39.7 million and the foreclosed real estate in this portfolio had a carrying value of $3.0 million. Of the $39.7 million in loans that lost loss share protection, approximately $9.7 million were on nonaccrual status and $2.1 million were classified as accruing troubled debt restructurings as of July 1, 2014. Additionally, approximately $1.7 million in allowance for loan losses associated with this portfolio of loans was transferred to the allowance for loan losses for non-covered loans on July 1, 2014.

 

The following is a summary of the major categories of total loans outstanding:

 

 

($ in thousands)

  June 30, 2015   December 31, 2014   June 30, 2014 
   Amount   Percentage   Amount   Percentage   Amount   Percentage 
All  loans (non-covered and covered):                        
                         
Commercial, financial, and agricultural  $179,909    7%   $160,878    7%   $165,021    7% 
Real estate – construction, land development & other land loans   282,262    12%    288,148    12%    295,868    12% 
Real estate – mortgage – residential (1-4 family) first mortgages   777,515    32%    789,871    33%    814,712    33% 
Real estate – mortgage – home equity loans / lines of credit   220,534    9%    223,500    9%    227,381    9% 
Real estate – mortgage – commercial and other   904,496    38%    882,127    37%    868,599    36% 
Installment loans to individuals   47,244    2%    50,704    2%    62,153    3% 
    Subtotal   2,411,960    100%    2,395,228    100%    2,433,734    100% 
Unamortized net deferred loan costs   819         946         651      
    Total loans  $2,412,779        $2,396,174        $2,434,385      

 

Page 16

 

The following is a summary of the major categories of non-covered loans outstanding:

 

 

($ in thousands)

  June 30, 2015   December 31, 2014   June 30, 2014 
   Amount   Percentage   Amount   Percentage   Amount   Percentage 
Non-covered loans:                        
                         
Commercial, financial, and agricultural  $178,756    8%   $159,195    7%   $162,303    7% 
Real estate – construction, land development & other land loans   278,406    12%    282,604    13%    274,975    12% 
Real estate – mortgage – residential (1-4 family) first mortgages   694,794    30%    700,101    31%    718,962    32% 
Real estate – mortgage – home equity loans / lines of credit   208,778    9%    210,697    9%    213,542    9% 
Real estate – mortgage – commercial and other   890,158    39%    864,333    38%    825,450    37% 
Installment loans to individuals   47,244    2%    50,704    2%    61,647    3% 
    Subtotal   2,298,136    100%    2,267,634    100%    2,256,879    100% 
Unamortized net deferred loan costs   819         946         651      
    Total non-covered loans  $2,298,955        $2,268,580        $2,257,530      

 

 

The carrying amount of the covered loans at June 30, 2015 consisted of impaired and nonimpaired purchased loans (as determined on the date of acquisition), as follows:

 

 

($ in thousands)

  Impaired
Purchased
Loans –
Carrying
Value
   Impaired
Purchased
Loans –
Unpaid
Principal
Balance
   Nonimpaired
Purchased
Loans –
Carrying
Value
   Nonimpaired
Purchased
Loans -
Unpaid
Principal
Balance
   Total
Covered
Loans –
Carrying
Value
   Total
Covered
Loans –
Unpaid
Principal
Balance
 
Covered loans:                        
Commercial, financial, and agricultural  $60    118    1,093    1,132    1,153    1,250 
Real estate – construction, land development & other land loans   301    526    3,555    3,962    3,856    4,488 
Real estate – mortgage – residential (1-4 family) first mortgages   310    1,275    82,411    96,461    82,721    97,736 
Real estate – mortgage – home equity loans / lines of credit   8    15    11,748    13,635    11,756    13,650 
Real estate – mortgage – commercial and other   1,092    3,162    13,246    14,111    14,338    17,273 
     Total  $1,771    5,096    112,053    129,301    113,824    134,397 

 

The carrying amount of the covered loans at December 31, 2014 consisted of impaired and nonimpaired purchased loans (as determined on the date of the acquisition), as follows:

 

($ in thousands)

  Impaired
Purchased
Loans –
Carrying
Value
   Impaired
Purchased
Loans –
Unpaid
Principal
Balance
   Nonimpaired
Purchased
Loans –
Carrying
Value
   Nonimpaired
Purchased
Loans -
Unpaid
Principal
Balance
   Total
Covered
Loans –
Carrying
Value
   Total
Covered
Loans –
Unpaid
Principal
Balance
 
Covered loans:                        
Commercial, financial, and agricultural  $66    123    1,617    1,661    1,683    1,784 
Real estate – construction, land development & other land loans   309    534    5,235    6,471    5,544    7,005 
Real estate – mortgage – residential (1-4 family) first mortgages   362    1,298    89,408    104,678    89,770    105,976 
Real estate – mortgage – home equity loans / lines of credit   12    19    12,791    15,099    12,803    15,118 
Real estate – mortgage – commercial and other   1,201    3,209    16,593    17,789    17,794    20,998 
     Total  $1,950    5,183    125,644    145,698    127,594    150,881 

 

Page 17

The following table presents information regarding covered purchased nonimpaired loans since December 31, 2013. The amounts include principal only and do not reflect accrued interest as of the date of the acquisition or beyond.

 

($ in thousands)

 

    
Carrying amount of nonimpaired covered loans at December 31, 2013  $207,167 
Principal repayments   (50,183)
Transfers to foreclosed real estate   (5,061)
Transfers to non-covered loans due to expiration of loss-share agreement   (38,987)
Net loan (charge-offs) / recoveries   (3,301)
Accretion of loan discount   16,009 
Carrying amount of nonimpaired covered loans at December 31, 2014   125,644 
Principal repayments   (15,709)
Transfers to foreclosed real estate   (656)
Net loan (charge-offs) / recoveries   82 
Accretion of loan discount   2,692 
Carrying amount of nonimpaired covered loans at June 30, 2015  $112,053 

 

As reflected in the table above, the Company accreted $2,692,000 of the loan discount on purchased nonimpaired loans into interest income during the first six months of 2015. As of June 30, 2015, there was remaining loan discount of $15,072,000 related to purchased accruing loans. If these loans continue to be repaid by the borrowers, the Company will accrete the remaining loan discount into interest income over the covered lives of the respective loans. In such circumstances, a corresponding entry to reduce the indemnification asset will be recorded amounting to approximately 80% of the loan discount accretion, which reduces noninterest income. At June 30, 2015, the Company also had $2,560,000 of loan discount related to purchased nonaccruing loans. It is not expected that a significant amount of this discount will be accreted, as it represents estimated losses on these loans.

 

The following table presents information regarding all purchased impaired loans since December 31, 2013, the majority of which are covered loans. The Company has applied the cost recovery method to all purchased impaired loans at their respective acquisition dates due to the uncertainty as to the timing of expected cash flows, as reflected in the following table.

 

 

($ in thousands)

 

 

 

Purchased Impaired Loans

  Contractual
Principal
Receivable
   Fair Market
Value
Adjustment –
Write Down
(Nonaccretable
Difference)
   Carrying
Amount
 
Balance at December 31, 2013  $6,263    3,121    3,142 
Change due to payments received   (599)   227    (826)
Change due to loan charge-off   (2)   29    (31)
Other   197    (115)   312 
Balance at December 31, 2014  $5,859    3,262    2,597 
Change due to payments received   (99)   112    (211)
Other   (3)   (3)    
Balance at June 30, 2015  $5,757    3,371    2,386 

 

Because of the uncertainty of the expected cash flows, the Company is accounting for each purchased impaired loan under the cost recovery method, in which all cash payments are applied to principal. Thus, there is no accretable yield associated with the above loans. During the first six months of 2015 and 2014, the Company received $0 and $179,000, respectively, in payments that exceeded the initial carrying amount of the purchased impaired loans, which is included in the loan discount accretion amount discussed previously.

Page 18

 

Nonperforming assets are defined as nonaccrual loans, restructured loans, loans past due 90 or more days and still accruing interest, nonperforming loans held for sale, and foreclosed real estate. Nonperforming assets are summarized as follows:

 

 

ASSET QUALITY DATA ($ in thousands)

  June 30,
2015
   December 31,
2014
   June 30,
2014
 
             
Non-covered nonperforming assets               
Nonaccrual loans  $44,123   $50,066   $47,533 
Restructured loans - accruing   32,059    35,493    27,250 
Accruing loans > 90 days past due            
     Total non-covered nonperforming loans   76,182    85,559    74,783 
Foreclosed real estate   9,954    9,771    9,346 
Total non-covered nonperforming assets  $86,136   $95,330   $84,129 
                
Covered nonperforming assets               
Nonaccrual loans (1)  $7,378   $10,508   $20,938 
Restructured loans - accruing   3,910    5,823    8,193 
Accruing loans > 90 days past due            
     Total covered nonperforming loans   11,288    16,331    29,131 
Foreclosed real estate   1,945    2,350    9,934 
Total covered nonperforming assets  $13,233   $18,681   $39,065 
                
     Total nonperforming assets  $99,369   $114,011   $123,194 

 

(1) At June 30, 2015, December 31, 2014, and June 30, 2014, the contractual balance of the nonaccrual loans covered by FDIC loss share agreements was $12.7 million, $16.0 million, and $34.3 million, respectively.

 

At June 30, 2015, the Company had $5.1 million in residential mortgage loans in process of foreclosure. The remaining tables in this note present information derived from the Company’s allowance for loan loss model. Relevant accounting guidance requires certain disclosures to be disaggregated based on how the Company develops its allowance for loan losses and manages its credit exposure. This model combines loan types in a different manner than the tables previously presented.

 

The following table presents the Company’s nonaccrual loans as of June 30, 2015.

 

($ in thousands)  Non-covered   Covered   Total 
Commercial, financial, and agricultural:               
Commercial – unsecured  $210    22    232 
Commercial – secured   2,727        2,727 
Secured by inventory and accounts receivable   86    34    120 
                
Real estate – construction, land development & other land loans   6,387    96    6,483 
                
Real estate – residential, farmland and multi-family   23,347    4,756    28,103 
                
Real estate – home equity lines of credit   2,235    431    2,666 
                
Real estate – commercial   8,663    2,039    10,702 
                
Consumer   468        468 
  Total  $44,123    7,378    51,501 
                

 

Page 19

 

The following table presents the Company’s nonaccrual loans as of December 31, 2014.

 

($ in thousands)  Non-covered   Covered   Total 
Commercial, financial, and agricultural:               
Commercial – unsecured  $187    1    188 
Commercial – secured   2,927        2,927 
Secured by inventory and accounts receivable   454    103    557 
                
Real estate – construction, land development & other land loans   7,891    1,140    9,031 
                
Real estate – residential, farmland and multi-family   24,459    7,785    32,244 
                
Real estate – home equity lines of credit   2,573    278    2,851 
                
Real estate – commercial   11,070    1,201    12,271 
                
Consumer   505        505 
  Total  $50,066    10,508    60,574 
                

 

The following table presents an analysis of the payment status of the Company’s loans as of June 30, 2015.

 

($ in thousands)  30-59
Days Past
Due
   60-89 Days
Past Due
   Nonaccrual
Loans
   Current   Total Loans
Receivable
 
Non-covered loans                         
Commercial, financial, and agricultural:                         
Commercial - unsecured  $196    1    210    41,667    42,074 
Commercial - secured   495    478    2,727    113,920    117,620 
Secured by inventory and accounts receivable           86    23,241    23,327 
                          
Real estate – construction, land development & other land loans   445    98    6,387    249,505    256,435 
                          
Real estate – residential, farmland, and multi-family   4,452    2,406    23,347    818,158    848,363 
                          
Real estate – home equity lines of credit   806    69    2,235    195,235    198,345 
                          
Real estate - commercial   3,216    371    8,663    756,743    768,993 
                          
Consumer   331    266    468    41,914    42,979 
  Total non-covered  $9,941    3,689    44,123    2,240,383    2,298,136 
Unamortized net deferred loan costs                       819 
           Total non-covered loans                      $2,298,955 
                          
Covered loans  $632    653    7,378    105,161    113,824 
                          
                Total loans  $10,573    4,342    51,501    2,345,544    2,412,779 

 

The Company had no non-covered or covered loans that were past due greater than 90 days and accruing interest at June 30, 2015.

Page 20

 

The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2014.

 

($ in thousands)  30-59
Days Past
Due
   60-89 Days
Past Due
   Nonaccrual
Loans
   Current   Total Loans
Receivable
 
Non-covered loans                         
Commercial, financial, and agricultural:                         
Commercial - unsecured  $191    35    187    36,871    37,284 
Commercial - secured   1,003    373    2,927    102,671    106,974 
Secured by inventory and accounts receivable   30    225    454    21,761    22,470 
                          
Real estate – construction, land development & other land loans   1,950    139    7,891    247,535    257,515 
                          
Real estate – residential, farmland, and multi-family   11,272    3,218    24,459    807,884    846,833 
                          
Real estate – home equity lines of credit   1,585    352    2,573    194,067    198,577 
                          
Real estate - commercial   3,738    996    11,070    738,981    754,785 
                          
Consumer   695    131    505    41,865    43,196 
  Total non-covered  $20,464    5,469    50,066    2,191,635    2,267,634 
Unamortized net deferred loan costs                       946 
           Total non-covered loans                      $2,268,580 
                          
Covered loans  $4,385    964    10,508    111,737    127,594 
                          
                Total loans  $24,849    6,433    60,574    2,303,372    2,396,174 

 

The Company had no non-covered or covered loans that were past due greater than 90 days and accruing interest at December 31, 2014.

Page 21

The following table presents the activity in the allowance for loan losses for non-covered loans for the three and six months ended June 30, 2015.

 

($ in thousands)  Commercial,
Financial, and
Agricultural
   Real Estate –
Construction,
Land
Development, &
Other Land
Loans
   Real Estate –
Residential,
Farmland,
and Multi-
family
   Real
Estate –
Home
Equity
Lines of
Credit
   Real Estate –
Commercial
and Other
   Consumer   Unallo-
cated
   Total 
                                 
As of and for the three months ended June 30, 2015
                                 
Beginning balance  $5,757    6,006    10,826    4,163    5,919    795    304    33,770 
Charge-offs   (2,083)   (702)   (844)   (496)   (1,026)   (252)       (5,403)
Recoveries   260    50    156    28    193    100        787 
Provisions   1,630    (338)   (497)   (528)   (363)   305    792    1,001 
Ending balance  $5,564    5,016    9,641    3,167    4,723    948    1,096    30,155 
                                         
As of and for the six months ended June 30, 2015
                                         
Beginning balance  $8,391    6,470    9,720    3,731    9,045    841    147    38,345 
Charge-offs   (3,027)   (1,958)   (2,413)   (563)   (1,949)   (853)       (10,763)
Recoveries   348    317    172    45    395    191        1,468 
Provisions   (148)   187    2,162    (46)   (2,768)   769    949    1,105 
Ending balance  $5,564    5,016    9,641    3,167    4,723    948    1,096    30,155 
                                         
Ending balances as of June 30, 2015:  Allowance for loan losses
                                            
Individually evaluated for impairment  $134    364    1,794        328            2,620 
                                         
Collectively evaluated for impairment  $5,430    4,652    7,847    3,167    4,395    948    1,096    27,535 
                                         
Loans acquired with deteriorated credit quality  $                             
                                         
Loans receivable as of June 30, 2015:
                                         
Ending balance – total  $183,021    256,435    848,363    198,345    768,993    42,979        2,298,136 
Unamortized net deferred loan costs                                      819 
Total non-covered loans                                     $2,298,955 
                                         
Ending balances as of June 30, 2015: Loans
                                         
Individually evaluated for impairment  $764    4,920    23,833        17,453            46,970 
                                         
Collectively evaluated for impairment  $182,257    251,515    824,530    198,345    750,926    42,979        2,250,552 
                                         
Loans acquired with deteriorated credit quality  $                614            614 

 

 

Page 22

 

The following table presents the activity in the allowance for loan losses for non-covered loans for the year ended December 31, 2014.

 

($ in thousands)  Commercial,
Financial,
and Agricultural
   Real Estate –
Construction,
Land
Development, &
Other Land
Loans
   Real Estate –
Residential,
Farmland,
and Multi-
family
   Real
Estate –
Home
Equity
Lines of
Credit
   Real Estate –
Commercial
and Other
   Consumer   Unallo-
cated
   Total 
                                 
As of and for the year ended December 31, 2014
                                 
Beginning balance  $7,432    12,966    15,142    1,838    5,524    1,513    (152)   44,263 
Charge-offs   (4,039)   (2,148)   (4,417)   (912)   (3,048)   (1,724)       (16,288)
Recoveries   140    398    331    45    181    451        1,546 
Transfer from covered category   36    813    51        833    4        1,737 
Provisions   4,822    (5,559)   (1,387)   2,760    5,555    597    299    7,087 
Ending balance  $8,391    6,470    9,720    3,731    9,045    841    147    38,345 
                                         
Ending balances as of December 31, 2014:  Allowance for loan losses
                                            
Individually evaluated for impairment  $211    415    1,686        165            2,477 
                                         
Collectively evaluated for impairment  $8,180    6,055    8,034    3,731    8,880    841    147    35,868 
                                         
Loans acquired with deteriorated credit quality  $                             
                                         
Loans receivable as of December 31, 2014:
                                         
Ending balance – total  $166,728    257,515    846,833    198,577    754,785    43,196        2,267,634 
Unamortized net deferred loan costs                                      946 
Total non-covered loans                                     $2,268,580 
                                         
Ending balances as of December 31, 2014: Loans
                                         
Individually evaluated for impairment  $784    7,991    24,010    476    20,910    7        53,531 
                                         
Collectively evaluated for impairment  $165,944    249,524    822,823    198,101    733,228    43,189        2,213,456 
                                         
Loans acquired with deteriorated credit quality  $                647            647 

 

Page 23

The following table presents the activity in the allowance for loan losses for non-covered loans for the three and six months ended June 30, 2014.

 

($ in thousands)  Commercial,
Financial, and
Agricultural
   Real Estate –
Construction,
Land
Development, &
Other Land
Loans
   Real Estate –
Residential,
Farmland,
and Multi-
family
   Real
Estate –
Home
Equity
Lines of
Credit
   Real Estate –
Commercial
and Other
   Consumer   Unallo-
cated
   Total 
                                 
As of and for the three months ended June 30, 2014
                                 
Beginning balance  $8,889    8,650    12,733    3,662    9,375    1,030    367    44,706 
Charge-offs   (2,041)   (307)   (861)   (397)   (277)   (371)       (4,254)
Recoveries   21    73    114    6    26    116        356 
Provisions   2,079    (1,002)   (854)   484    88    131    232    1,158 
Ending balance  $8,948    7,414    11,132    3,755    9,212    906    599    41,966 
                                         
As of and for the six months ended June 30, 2014
                                         
Beginning balance  $7,432    12,966    15,142    1,838    5,524    1,513    (152)   44,263 
Charge-offs   (2,666)   (1,234)   (1,631)   (503)   (889)   (799)       (7,722)
Recoveries   49    309    179    11    121    233        902 
Provisions   4,133    (4,627)   (2,558)   2,409    4,456    (41)   751    4,523 
Ending balance  $8,948    7,414    11,132    3,755    9,212    906    599    41,966 
                                         
Ending balances as of June 30, 2014:  Allowance for loan losses
                                            
Individually evaluated for impairment  $290    818    2,016        528            3,652 
                                         
Collectively evaluated for impairment  $8,658    6,596    9,116    3,755    8,684    906    599    38,314 
                                         
Loans acquired with deteriorated credit quality  $                             
                                         
Loans receivable as of June 30, 2014:
                                         
Ending balance – total  $178,670    247,369    867,175    200,510    717,905    45,250        2,256,879 
Unamortized net deferred loan costs                                      651 
Total non-covered loans                                     $2,257,530 
                                         
Ending balances as of June 30, 2014: Loans
                                         
Individually evaluated for impairment  $679    7,541    22,505    483    17,009    10        48,227 
                                         
Collectively evaluated for impairment  $177,991    239,828    844,670    200,027    700,896    45,240        2,208,652 
                                         
Loans acquired with deteriorated credit quality  $                             

 

Page 24

The following table presents the activity in the allowance for loan losses for covered loans for the three and six months ended June 30, 2015.

 

($ in thousands)  Covered Loans 
     
As of and for the three months ended June 30, 2015
Beginning balance  $2,226 
Charge-offs   (676)
Recoveries   545 
Provisions   (160)
Ending balance  $1,935 
      
As of and for the six months ended June 30, 2015
Beginning balance  $2,281 
Charge-offs   (1,116)
Recoveries   1,198 
Provisions   (428)
Ending balance  $1,935 
 
Ending balances as of June 30, 2015: Allowance for loan losses
 
Individually evaluated for impairment  $455 
Collectively evaluated for impairment   1,434 
Loans acquired with deteriorated credit quality   46 
      
Loans receivable as of June 30, 2015:
      
Ending balance – total  $113,824 
      
Ending balances as of June 30, 2015: Loans
      
Individually evaluated for impairment  $6,763 
Collectively evaluated for impairment   105,290 
Loans acquired with deteriorated credit quality   1,771 

 

 

The following table presents the activity in the allowance for loan losses for covered loans for the year ended December 31, 2014.

 

($ in thousands)  Covered Loans 
     
As of and for the year ended December 31, 2014
Beginning balance  $4,242 
Charge-offs   (6,948)
Recoveries   3,616 
Transferred to non-covered   (1,737)
Provisions   3,108 
Ending balance  $2,281 
 
Ending balances as of December 31, 2014: Allowance for loan losses
 
Individually evaluated for impairment  $1,161 
Collectively evaluated for impairment   1,046 
Loans acquired with deteriorated credit quality   74 
      
Loans receivable as of December 31, 2014:
      
Ending balance – total  $127,594 
      
Ending balances as of December 31, 2014: Loans
      
Individually evaluated for impairment  $11,484 
Collectively evaluated for impairment   114,160 
Loans acquired with deteriorated credit quality   1,950 

 

Page 25

The following table presents the activity in the allowance for loan losses for covered loans for the three and six months ended June 30, 2014.

 

($ in thousands)  Covered Loans 
     
As of and for the three months ended June 30, 2014
Beginning balance  $3,421 
Charge-offs   (2,722)
Recoveries   630 
Provisions   2,501 
Ending balance  $3,830 
      
As of and for the six months ended June 30, 2014
Beginning balance  $4,242 
Charge-offs   (5,670)
Recoveries   2,547 
Provisions   2,711 
Ending balance  $3,830 
 
Ending balances as of June 30, 2014: Allowance for loan losses
 
Individually evaluated for impairment  $1,312 
Collectively evaluated for impairment   2,472 
Loans acquired with deteriorated credit quality   46 
      
Loans receivable as of June 30, 2014:
      
Ending balance – total  $176,855 
      
Ending balances as of June 30, 2014: Loans
      
Individually evaluated for impairment  $20,615 
Collectively evaluated for impairment   153,357 
Loans acquired with deteriorated credit quality   2,883 

 

Page 26

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2015.

 

 

($ in thousands)

  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
 
Non-covered loans with no related allowance recorded:                       
Commercial, financial, and agricultural:                    
Commercial - unsecured  $70    84        45 
Commercial - secured   108    109        44 
Secured by inventory and accounts receivable                
                     
Real estate – construction, land development & other land loans   3,483    4,540        5,045 
                     
Real estate – residential, farmland, and multi-family   9,788    11,017        9,575 
                     
Real estate – home equity lines of credit               159 
                     
Real estate – commercial   15,164    17,279        16,800 
                     
Consumer               2 
Total non-covered impaired loans with no allowance  $28,613    33,029        31,670 
                     
Total covered impaired loans with no allowance  $5,698    10,040        6,354 
                     
Total impaired loans with no allowance recorded  $34,311    43,069        38,024 
                     
Non-covered  loans with an allowance recorded:               
Commercial, financial, and agricultural:                    
Commercial - unsecured  $101    107    46    136 
Commercial - secured   485    502    88    558 
Secured by inventory and accounts receivable                
                     
Real estate – construction, land development & other land loans   1,437    3,601    364    1,499 
                     
Real estate – residential, farmland, and multi-family   14,045    14,547    1,794    14,215 
                     
Real estate – home equity lines of credit                
                     
Real estate – commercial   2,903    3,008    328    3,237 
                     
Consumer                
Total non-covered impaired loans with allowance  $18,971    21,765    2,620    19,645 
                     
Total covered impaired loans with allowance  $2,836    3,109    501    4,173 
                     
Total impaired loans with an allowance recorded  $21,807    24,874    3,121    23,818 

 

Interest income recorded on non-covered and covered impaired loans during the year ended June 30, 2015 was insignificant.

Page 27

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2014.

 

 

($ in thousands)

  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
 
Non-covered loans with no related allowance recorded:                       
Commercial, financial, and agricultural:                    
Commercial - unsecured  $33    35        20 
Commercial - secured   5    6        95 
Secured by inventory and accounts receivable                
                     
Real estate – construction, land development & other land loans   6,877    7,944        6,430 
                     
Real estate – residential, farmland, and multi-family   9,165    10,225        7,776 
                     
Real estate – home equity lines of credit   476    498        388 
                     
Real estate – commercial   17,409    20,786        11,911 
                     
Consumer   7    10        7 
Total non-covered impaired loans with no allowance  $33,972    39,504        26,627 
                     
Total covered impaired loans with no allowance  $8,097    12,081        16,986 
                     
Total impaired loans with no allowance recorded  $42,069    51,585        43,613 
                     
Non-covered  loans with an allowance recorded:                       
Commercial, financial, and agricultural:                    
Commercial - unsecured  $140    143    47    142 
Commercial - secured   606    612    164    550 
Secured by inventory and accounts receivable               15 
                     
Real estate – construction, land development & other land loans   1,114    3,243    415    1,487 
                     
Real estate – residential, farmland, and multi-family   14,845    15,257    1,686    14,418 
                     
Real estate – home equity lines of credit               4 
                     
Real estate – commercial   3,501    3,530    165    6,420 
                     
Consumer               8 
Total non-covered impaired loans with allowance  $20,206    22,785    2,477    23,044 
                     
Total covered impaired loans with allowance  $5,220    5,719    1,229    8,513 
                     
Total impaired loans with an allowance recorded  $25,426    28,504    3,706    31,557 

 

Interest income recorded on non-covered and covered impaired loans during the year ended December 31, 2014 was insignificant.

Page 28

The Company tracks credit quality based on its internal risk ratings. Upon origination a loan is assigned an initial risk grade, which is generally based on several factors such as the borrower’s credit score, the loan-to-value ratio, the debt-to-income ratio, etc. Loans that are risk-graded as substandard during the origination process are declined. After loans are initially graded, they are monitored monthly for credit quality based on many factors, such as payment history, the borrower’s financial status, and changes in collateral value. Loans can be downgraded or upgraded depending on management’s evaluation of these factors. Internal risk-grading policies are consistent throughout each loan type.

 

The following describes the Company’s internal risk grades in ascending order of likelihood of loss:

 

  Numerical Risk Grade Description
Pass:  
  1 Loans with virtually no risk, including cash secured loans.
  2 Loans with documented significant overall financial strength, including non-cash secured or unsecured loans that have no minor or major exceptions to the lending guidelines.
  3 Loans with documented satisfactory overall financial strength, including non-cash secured or unsecured loans that have no major exceptions to the lending guidelines.  If unsecured, loans would include support of a strong guarantor or co-maker.
  4 Loans to borrowers with acceptable financial condition, including non-cash secured or unsecured loans that have minor or major exceptions to the lending guidelines, but the exceptions are properly mitigated.  Primary or secondary source of repayment is sufficient and if secured, loan would include the support of a satisfactory guarantor or co-maker.
Watch or Standard:  
  9 Existing loans that meet the guidelines for a Risk Graded 5 loan, except the collateral coverage is sufficient to satisfy the debt with no risk of loss under reasonable circumstances.  
Special Mention:  
  5 Existing loans with major exceptions that cannot be mitigated.  Potential for loss is possible.
Classified:  
  6 Loans that have a well-defined weakness that may jeopardize the liquidation of the debt if deficiencies are not corrected.  Loss is not only possible, but probable.
  7 Loans that have a well-defined weakness that make the collection or liquidation improbable.  Loss appears imminent, but the exact amount and timing is uncertain.
  8 Loans that are considered uncollectible and are in the process of being charged-off.  This grade is a temporary grade assigned for administrative purposes until the charge-off is completed.

 

Page 29

The following table presents the Company’s recorded investment in loans by credit quality indicators as of June 30, 2015.

 

($ in thousands)  Credit Quality Indicator (Grouped by Internally Assigned Grade) 
   Pass
(Grades 1, 2,
& 3)
   Pass –
Acceptable/
Average
(Grade 4)
   Watch or
Standard
Loans
(Grade 9)
   Special
Mention
Loans
(Grade 5)
   Classified
Loans
(Grades
6, 7, & 8)
   Nonaccrual
Loans
   Total 
Non-covered loans:                                   
Commercial, financial, and agricultural:                                   
Commercial - unsecured  $19,718    20,202    5    1,170    769    210    42,074 
Commercial - secured   51,546    57,399    60    3,241    2,647    2,727    117,620 
Secured by inventory and accounts receivable   7,721    14,587        292    641    86    23,327 
                                    
Real estate – construction, land development & other land loans   94,263    132,055    723    13,738    9,269    6,387    256,435 
                                    
Real estate – residential, farmland, and multi-family   215,193    529,845    4,862    40,743    34,373    23,347    848,363 
                                    
Real estate – home equity lines of credit   125,505    59,684    1,525    5,043    4,353    2,235    198,345 
                                    
Real estate - commercial   263,746    445,742    8,240    30,392    12,210    8,663    768,993 
                                    
Consumer   27,913    13,568    53    436    541    468    42,979 
  Total  $805,605    1,273,082    15,468    95,055    64,803    44,123    2,298,136 
Unamortized net deferred loan costs                                 819 
          Total non-covered  loans                                $2,298,955 
                                    
Total covered loans  $12,014    64,847    323    10,109    19,153    7,378    113,824 
                                    
               Total loans  $817,619    1,337,929    15,791    105,164    83,956    51,501    2,412,779 

 

At June 30, 2015, there was an insignificant amount of loans that were graded “8” with an accruing status.

Page 30

The following table presents the Company’s recorded investment in loans by credit quality indicators as of December 31, 2014.

 

($ in thousands)  Credit Quality Indicator (Grouped by Internally Assigned Grade) 
   Pass
(Grades 1, 2,
& 3)
   Pass –
Acceptable/
Average
(Grade 4)
   Watch or
Standard
Loans
(Grade 9)
   Special
Mention
Loans
(Grade 5)
   Classified
Loans
(Grades
6, 7, & 8)
   Nonaccrual
Loans
   Total 
Non-covered loans:                                   
Commercial, financial, and agricultural:                                   
Commercial - unsecured  $17,856    15,649    5    1,356    2,231    187    37,284 
Commercial - secured   32,812    62,361    62    4,481    4,331    2,927    106,974 
Secured by inventory and accounts receivable   10,815    9,928        767    506    454    22,470 
                                    
Real estate – construction, land development & other land loans   87,806    135,072    771    13,066    12,909    7,891    257,515 
                                    
Real estate – residential, farmland, and multi-family   221,581    520,790    4,536    40,993    34,474    24,459    846,833 
                                    
Real estate – home equity lines of credit   122,528    62,642    1,135    5,166    4,533    2,573    198,577 
                                    
Real estate - commercial   223,197    465,395    9,057    30,318    15,748    11,070    754,785 
                                    
Consumer   25,520    15,614    54    855    648    505    43,196 
  Total  $742,115    1,287,451    15,620    97,002    75,380    50,066    2,267,634 
Unamortized net deferred loan costs                                 946 
          Total non-covered  loans                                $2,268,580 
                                    
Total covered loans  $14,349    70,989    632    10,503    20,613    10,508    127,594 
                                    
               Total loans  $756,464    1,358,440    16,252    107,505    95,993    60,574    2,396,174 

 

At December 31, 2014, there was an insignificant amount of loans that were graded “8” with an accruing status.

 

Troubled Debt Restructurings

 

The restructuring of a loan is considered a “troubled debt restructuring” if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses.

 

The vast majority of the Company’s troubled debt restructurings modified during the periods ended June 30, 2015 and 2014 related to interest rate reductions combined with restructured amortization schedules. The Company does not generally grant principal forgiveness.

 

All loans classified as troubled debt restructurings are considered to be impaired and are evaluated as such for determination of the allowance for loan losses. The Company’s troubled debt restructurings can be classified as either nonaccrual or accruing based on the loan’s payment status. The troubled debt restructurings that are nonaccrual are reported within the nonaccrual loan totals presented previously.

Page 31

The following table presents information related to loans modified in a troubled debt restructuring during the three months ended June 30, 2015 and 2014.

 

($ in thousands)  For the three months ended
June 30, 2015
   For the three months ended
June 30, 2014
 
   Number of
Contracts
   Pre-
Modification
Restructured
Balances
   Post-
Modification
Restructured
Balances
   Number of
Contracts
   Pre-
Modification
Restructured
Balances
   Post-
Modification
Restructured
Balances
 
Non-covered TDRs – Accruing                              
Commercial, financial, and agricultural:                              
Commercial – unsecured   1   $8   $8       $   $ 
Commercial – secured                        
Secured by inventory and accounts receivable                        
Real estate – construction, land development & other land loans                        
Real estate – residential, farmland, and multi-family   1    152    152    5    411    411 
Real estate – home equity lines of credit                        
Real estate – commercial                        
Consumer                        
                               
Non-covered TDRs – Nonaccrual                              
Commercial, financial, and agricultural:                              
Commercial – unsecured                        
Commercial – secured                        
Secured by inventory and accounts receivable                        
Real estate – construction, land development & other land loans                           
Real estate – residential, farmland, and multi-family               2    332    332 
Real estate – home equity lines of credit                        
Real estate – commercial                        
Consumer                        
                               
Total non-covered TDRs arising during period   2    160    160    7    743    743 
                               
Total covered TDRs arising during period– Accruing      $   $    2   $248   $245 
Total covered TDRs arising during period – Nonaccrual                        
Total TDRs arising during period   2   $160   $160    9   $991   $988 

 

Page 32

 

The following table presents information related to loans modified in a troubled debt restructuring during the six months ended June 30, 2015 and 2014.

 

($ in thousands)  For the six months ended
June 30, 2015
   For the six months ended
June 30, 2014
 
   Number of
Contracts
   Pre-
Modification
Restructured
Balances
   Post-
Modification
Restructured
Balances
   Number of
Contracts
   Pre-
Modification
Restructured
Balances
   Post-
Modification
Restructured
Balances
 
Non-covered TDRs – Accruing                              
Commercial, financial, and agricultural:                              
Commercial – unsecured   1   $8   $8       $   $ 
Commercial – secured                        
Secured by inventory and accounts receivable                        
Real estate – construction, land development & other land loans                        
Real estate – residential, farmland, and multi-family   2    265    265    7    748    748 
Real estate – home equity lines of credit                        
Real estate – commercial   1    51    51             
Consumer                        
                               
Non-covered TDRs – Nonaccrual                              
Commercial, financial, and agricultural:                              
Commercial – unsecured                        
Commercial – secured                        
Secured by inventory and accounts receivable                        
Real estate – construction, land development & other land loans                           
Real estate – residential, farmland, and multi-family   4    305    305    4    438    438 
Real estate – home equity lines of credit                        
Real estate – commercial                        
Consumer                        
                               
Total non-covered TDRs arising during period   8    629    629    11    1,186    1,186 
                               
Total covered TDRs arising during period– Accruing   2   $139   $139    2   $248   $245 
Total covered TDRs arising during period – Nonaccrual               5    710    682 
                               
Total TDRs arising during period   10   $768   $768    18   $2,144   $2,113 

 

Page 33

 

Accruing restructured loans that were modified in the previous 12 months and that defaulted during the three months ended June 30, 2015 and 2014 are presented in the table below. The Company considers a loan to have defaulted when it becomes 90 or more days delinquent under the modified terms, has been transferred to nonaccrual status, or has been transferred to foreclosed real estate.

 

($ in thousands)  For the three months ended
June 30, 2015
   For the three months ended
June 30, 2014
 
   Number of
Contracts
   Recorded
Investment
   Number of
Contracts
   Recorded
Investment
 
                 
Non-covered accruing TDRs that subsequently defaulted                    
Commercial, financial, and agricultural:                    
Commercial – unsecured   1   $7       $ 
Real estate – construction, land development & other land loans                
Real estate – residential, farmland, and multi-family                
Real estate – commercial                
                     
Total non-covered TDRs that subsequently defaulted   1   $7       $ 
                     
Total accruing covered TDRs that subsequently defaulted      $       $ 
                     
Total accruing TDRs that subsequently defaulted   1   $7       $ 

 

Accruing restructured loans that were modified in the previous 12 months and that defaulted during the six months ended June 30, 2015 and 2014 are presented in the table below.

 

($ in thousands)  For the six months ended
June 30, 2015
   For the six months ended
June 30, 2014
 
   Number of
Contracts
   Recorded
Investment
   Number of
Contracts
   Recorded
Investment
 
                 
Non-covered accruing TDRs that subsequently defaulted                    
Commercial, financial, and agricultural:                    
Commercial – unsecured   1   $7       $ 
Real estate – construction, land development & other land loans           1    5 
Real estate – residential, farmland, and multi-family   1    34         
Real estate – commercial           1    71 
                     
Total non-covered TDRs that subsequently defaulted   2   $41    2   $76 
                     
Total accruing covered TDRs that subsequently defaulted      $       $ 
                     
Total accruing TDRs that subsequently defaulted   2   $41    2   $76 

Page 34

Note 8 – Deferred Loan Costs

 

The amount of loans shown on the Consolidated Balance Sheets includes net deferred loan costs of approximately $819,000, $946,000, and $651,000 at June 30, 2015, December 31, 2014, and June 30, 2014, respectively.

 

Note 9 – FDIC Indemnification Asset

 

The FDIC indemnification asset is the estimated amount that the Company will receive from the FDIC under loss share agreements associated with two FDIC-assisted failed bank acquisitions. See page 40 of the Company’s 2014 Annual Report on Form 10-K for a detailed explanation of this asset.

 

The FDIC indemnification asset was comprised of the following components as of the dates shown:

 

($ in thousands)  June 30,
2015
   December 31,
2014
   June 30,
2014
 
Receivable related to loss claims incurred, not yet reimbursed, net  $265    6,899    7,036 
Receivable related to estimated future claims on loans   11,003    14,933    20,196 
Receivable related to estimated future claims on foreclosed real estate   714    737    2,174 
     FDIC indemnification asset  $11,982    22,569    29,406 

 

Included in the receivable related to loss claims incurred, not yet reimbursed, at December 31, 2014, was $1.2 million related to two claims involving the same borrower. The FDIC initially denied both claims because the FDIC disagreed with the collection strategy that the Company undertook. During the second quarter of 2015, the Company and the FDIC reached an agreement to resolve this matter, as follows. One of the two claims amounting to $324,000 will be fully honored by the FDIC and the related loan will remain subject to the loss share agreement, which provides that any future recoveries realized prior to June 30, 2017 to be split on an 80%/20% basis with the FDIC (the FDIC receives 80%). For the other claim amounting to $886,000, the FDIC will pay the Company $480,000 and the related loan will be removed from the provisions of the loss share agreement. This will result in the Company retaining 100% of any future recoveries. As a result of this negotiated agreement, during the three months ended June 30, 2015, the Company wrote off the $406,000 portion of the claim not being reimbursed by the FDIC, which is reflected in the “Other gains (losses)” line item in the Consolidated Statements of Income.

 

The following presents a rollforward of the FDIC indemnification asset since December 31, 2014.

 

($ in thousands)    
Balance at December 31, 2014  $22,569 
Decrease related to favorable changes in loss estimates   (1,084)
Increase related to reimbursable expenses   794 
Cash received   (6,912)
Decrease related to accretion of loan discount   (3,158)
Decrease related to settlement of disputed claims   (406)
Other   179 
Balance at June 30, 2015  $11,982 

 

Page 35

 

Note 10 – Goodwill and Other Intangible Assets

 

The following is a summary of the gross carrying amount and accumulated amortization of amortizable intangible assets as of June 30, 2015, December 31, 2014, and June 30, 2014 and the carrying amount of unamortized intangible assets as of those same dates.

 

   June 30, 2015   December 31, 2014   June 30, 2014 

 

($ in thousands)

  Gross Carrying
Amount
   Accumulated
Amortization
   Gross Carrying
Amount
   Accumulated
Amortization
   Gross Carrying
Amount
   Accumulated
Amortization
 
Amortizable intangible assets:                              
   Customer lists  $678    528    678    505    678    484 
   Core deposit premiums   8,560    7,013    8,560    6,675    8,560    6,308 
        Total  $9,238    7,541    9,238    7,180    9,238    6,792 
                               
Unamortizable intangible assets:                              
   Goodwill  $65,835         65,835         65,835      

 

Amortization expense totaled $180,000 and $194,000 for the three months ended June 30, 2015 and 2014, respectively. Amortization expense totaled $360,000 and $388,000 for the six months ended June 30, 2015 and 2014, respectively.

 

The following table presents the estimated amortization expense for the last two quarters of calendar year 2015 and for each of the four calendar years ending December 31, 2019 and the estimated amount amortizable thereafter. These estimates are subject to change in future periods to the extent management determines it is necessary to make adjustments to the carrying value or estimated useful lives of amortized intangible assets.

 

($ in thousands)

 

  Estimated Amortization
Expense
 
July 1 to December 31, 2015  $361 
2016   654 
2017   404 
2018   129 
2019   122 
Thereafter   27 
         Total  $1,697 
      

 

Note 11 – Pension Plans

 

The Company has historically sponsored two defined benefit pension plans – a qualified retirement plan (the “Pension Plan”) which was generally available to all employees, and a Supplemental Executive Retirement Plan (the “SERP”), which was for the benefit of certain senior management executives of the Company. Effective December 31, 2012, the Company froze both plans for all participants. Although no previously accrued benefits were lost, employees no longer accrue benefits for service subsequent to 2012.

 

The Company recorded pension income totaling $288,000 and $242,000 for the three months ended June 30, 2015 and 2014, respectively, which primarily related to investment income from the Pension Plan’s assets. The following table contains the components of the pension income.

 

   For the Three Months Ended June 30, 
   2015   2014   2015   2014   2015 Total   2014 Total 
($ in thousands)  Pension Plan   Pension Plan   SERP   SERP   Both Plans   Both Plans 
Service cost – benefits earned during the period  $        46    80    46    80 
Interest cost   341    382    51    53    392    435 
Expected return on plan assets   (710)   (701)           (710)   (701)
Amortization of transition obligation                        
Amortization of net (gain)/loss           (16)   (56)   (16)   (56)
Amortization of prior service cost                        
   Net periodic pension cost (income)  $(369)   (319)   81    77    (288)   (242)

 

Page 36

The Company recorded pension income totaling $555,000 and $528,000 for the six months ended June 30, 2015 and 2014, respectively, which primarily related to investment income from the Pension Plan’s assets. The following table contains the components of the pension income.

 

   For the Six Months Ended June 30, 
   2015   2014   2015   2014   2015 Total   2014 Total 
($ in thousands)  Pension Plan   Pension Plan   SERP   SERP   Both Plans   Both Plans 
Service cost – benefits earned during the period  $        125    136    125    136 
Interest cost   682    731    103    105    785    836 
Expected return on plan assets   (1,418)   (1,390)           (1,418)   (1,390)
Amortization of transition obligation                        
Amortization of net (gain)/loss           (47)   (110)   (47)   (110)
Amortization of prior service cost                        
   Net periodic pension cost (income)  $(736)   (659)   181    131    (555)   (528)

 

The Company’s contributions to the Pension Plan are based on computations by independent actuarial consultants and are intended to be deductible for income tax purposes. The contributions are invested to provide for benefits under the Pension Plan. The Company does not expect to contribute to the Pension Plan in 2015.

 

The Company’s funding policy with respect to the SERP is to fund the related benefits from the operating cash flow of the Company.

 

Note 12 – Comprehensive Income

 

Comprehensive income is defined as the change in equity during a period for non-owner transactions and is divided into net income and other comprehensive income. Other comprehensive income includes revenues, expenses, gains, and losses that are excluded from earnings under current accounting standards. The components of accumulated other comprehensive income for the Company are as follows:

 

($ in thousands)

  June 30, 2015   December 31, 2014   June 30, 2014 
Unrealized gain (loss) on securities available for sale  $(1,433)   (691)   (1,755)
     Deferred tax asset (liability)   560    270    685 
Net unrealized gain (loss) on securities available for sale   (873)   (421)   (1,070)
                
Additional pension asset (liability)   (304)   (257)   5,025 
     Deferred tax asset (liability)   118    100    (1,937)
Net additional pension asset (liability)   (186)   (157)   3,088 
                
Total accumulated other comprehensive income (loss)  $(1,059)   (578)   2,018 

 

The following table discloses the changes in accumulated other comprehensive income (loss) for the six months ended June 30, 2015 (all amounts are net of tax).

 

($ in thousands)

 

  Unrealized Gain
(Loss) on
Securities
Available for Sale
   Additional
Pension Asset
(Liability)
   Total 
Beginning balance at January 1, 2015  $(421)   (157)   (578)
     Other comprehensive income (loss) before reclassifications   (452)       (452)
     Amounts reclassified from accumulated other comprehensive income       (29)   (29)
Net current-period other comprehensive income (loss)   (452)   (29)   (481)
                
Ending balance at June 30, 2015  $(873)   (186)   (1,059)

 

Page 37

The following table discloses the changes in accumulated other comprehensive income (loss) for the six months ended June 30, 2014 (all amounts are net of tax).

 

($ in thousands)

 

  Unrealized Gain
(Loss) on
Securities
Available for Sale
   Additional
Pension Asset
(Liability)
   Total 
Beginning balance at January 1, 2014  $(1,232)   3,132    1,900 
     Other comprehensive income (loss) before reclassifications   642        642 
     Amounts reclassified from accumulated other comprehensive income   (480)   (44)   (524)
Net current-period other comprehensive income (loss)   162    (44)   118 
                
Ending balance at June 30, 2014  $(1,070)   3,088    2,018 

 

Note 13 – Fair Value

 

Relevant accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:

 

Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at June 30, 2015.

 

($ in thousands)        
Description of Financial Instruments  Fair Value at
June 30, 2015
   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   Significant Other
Observable Inputs
(Level 2)
   Significant
Unobservable Inputs
(Level 3)
 
Recurring                    
     Securities available for sale:                    
        Government-sponsored enterprise securities  $58,276        58,276     
        Mortgage-backed securities   131,309        131,309     
        Corporate bonds   24,733        24,733     
        Equity securities   132        132     
          Total available for sale securities  $214,450        214,450     
                     
Nonrecurring                    
     Impaired loans – covered  $2,335            2,335 
     Impaired loans – non-covered   19,609            19,609 
     Foreclosed real estate – covered   1,945            1,945 
     Foreclosed real estate – non-covered   9,954            9,954 
                     

 

Page 38

The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at December 31, 2014.

 

($ in thousands)        
Description of Financial Instruments  Fair Value at
December 31,
2014
   Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
   Significant Other
Observable Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Recurring                    
Securities available for sale:                    
Government-sponsored enterprise securities  $27,521        27,521     
Mortgage-backed securities   129,510        129,510     
Corporate bonds   865        865     
Equity securities   122        122     
Total available for sale securities  $158,018        158,018     
                     
Nonrecurring                    
     Impaired loans – covered  $5,220            5,220 
     Impaired loans – non-covered   20,512            20,512 
     Foreclosed real estate – covered   2,350            2,350 
     Foreclosed real estate – non-covered   9,771            9,771 

 

The following is a description of the valuation methodologies used for instruments measured at fair value.

 

Securities Available for Sale — When quoted market prices are available in an active market, the securities are classified as Level 1 in the valuation hierarchy. If quoted market prices are not available, but fair values can be estimated by observing quoted prices of securities with similar characteristics, the securities are classified as Level 2 on the valuation hierarchy. Most of the fair values for the Company’s Level 2 securities are determined by our third-party securities portfolio manager using matrix pricing. Matrix pricing is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. For the Company, Level 2 securities include mortgage-backed securities, collateralized mortgage obligations, government-sponsored enterprise securities, and corporate bonds. In cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

 

The Company reviews the pricing methodologies utilized by the portfolio manager to ensure the fair value determination is consistent with the applicable accounting guidance and that the investments are properly classified in the fair value hierarchy. Further, the Company validates the fair values for a sample of securities in the portfolio by comparing the fair values provided by the portfolio manager to prices from other independent sources for the same or similar securities. The Company analyzes unusual or significant variances and conducts additional research with the portfolio manager, if necessary, and takes appropriate action based on its findings.

 

Impaired loans — Fair values for impaired loans in the above tables are measured on a non-recurring basis are based on the underlying collateral values securing the loans, adjusting for estimated selling costs, or the net present value of the cash flows expected to be received for such loans. Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined using an income or market valuation approach based on an appraisal conducted by an independent, licensed third party appraiser (Level 3). The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable borrower’s financial statements if not considered significant. Likewise, values for inventory and accounts receivable collateral are based on borrower financial statement balances or aging reports on a discounted basis as appropriate (Level 3). Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

 

Foreclosed real estate – Foreclosed real estate, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at the lower of cost or fair value. Fair value is measured on a non-recurring basis and is based upon independent market prices or current appraisals that are generally prepared using an income or market valuation approach and conducted by an independent, licensed third party appraiser, adjusted for estimated selling costs (Level 3). At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. For any real estate valuations subsequent to foreclosure, any excess of the real estate recorded value over the fair value of the real estate is treated as a foreclosed real estate write-down on the Consolidated Statements of Income.

 

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For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of June 30, 2015, the significant unobservable inputs used in the fair value measurements were as follows:

 

($ in thousands)       
Description  Fair Value at
June 30, 2015
   Valuation
Technique
  Significant Unobservable
Inputs
  General Range
of Significant
Unobservable
Input Values
Impaired loans – covered  $2,335   Appraised value; PV of expected cash flows  Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell  0-10%
Impaired loans – non-covered   19,609   Appraised value; PV of expected cash flows  Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell  0-10%
Foreclosed real estate – covered   1,945   Appraised value; independent market prices  Discounts to reflect current market conditions and estimated costs to sell  0-10%
Foreclosed real estate – non-covered   9,954   Appraised value; independent market prices  Discounts to reflect current market conditions, abbreviated holding period and estimated costs to sell  0-40%
               

 

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of December 31, 2014, the significant unobservable inputs used in the fair value measurements were as follows:

 

($ in thousands)       
Description  Fair Value at
December 31,
2014
   Valuation
Technique
  Significant Unobservable
Inputs
  General Range
of Significant
Unobservable
Input Values
Impaired loans – covered  $5,220   Appraised value; PV of expected cash flows  Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell  0-10%
Impaired loans – non-covered   20,512   Appraised value; PV of expected cash flows  Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell  0-10%
Foreclosed real estate – covered   2,350   Appraised value; independent market prices  Discounts to reflect current market conditions and estimated costs to sell  0-10%
Foreclosed real estate – non-covered   9,771   Appraised value; independent market prices  Discounts to reflect current market conditions, abbreviated holding period and estimated costs to sell  0-40%
               

 

Transfers of assets or liabilities between levels within the fair value hierarchy are recognized when an event or change in circumstances occurs. There were no transfers between Level 1 and Level 2 for assets or liabilities measured on a recurring basis during the three or six months ended June 30, 2015 or 2014.

 

For the six months ended June 30, 2015, the decrease in the fair value of securities available for sale was $743,000, which is included in other comprehensive income (loss) (net of tax benefit of $291,000). For the six months ended June 30, 2014, the increase in the fair value of securities available for sale was $266,000, which is included in other comprehensive income (net of tax expense of $104,000). Fair value measurement methods at June 30, 2015 and 2014 are consistent with those used in prior reporting periods.

 

Page 40

The carrying amounts and estimated fair values of financial instruments at June 30, 2015 and December 31, 2014 are as follows:

 

      June 30, 2015   December 31, 2014 

 

($ in thousands)

  Level in Fair
Value
Hierarchy
  Carrying
Amount
   Estimated
Fair Value
   Carrying
Amount
   Estimated
Fair Value
 
                    
Cash and due from banks, noninterest-bearing  Level 1  $75,151    75,151    81,068    81,068 
Due from banks, interest-bearing  Level 1   102,567    102,567    171,248    171,248 
Federal funds sold  Level 1   674    674    768    768 
Securities available for sale  Level 2   214,450    214,450    158,018    158,018 
Securities held to maturity  Level 2   165,245    167,759    178,687    182,411 
Presold mortgages in process of settlement  Level 1   4,934    4,934    6,019    6,019 
Total loans, net of allowance  Level 3   2,380,689    2,355,893    2,355,548    2,328,244 
Accrued interest receivable  Level 1   9,134    9,134    8,920    8,920 
FDIC indemnification asset  Level 3   11,982    11,692    22,569    21,856 
Bank-owned life insurance  Level 1   56,175    56,175    55,421    55,421 
                        
Deposits  Level 2   2,653,127    2,652,878    2,695,906    2,696,153 
Borrowings  Level 2   176,394    167,611    116,394    105,407 
Accrued interest payable  Level 2   625    625    686    686 

 

Fair value methods and assumptions are set forth below for the Company’s financial instruments.

 

Cash and Amounts Due from Banks, Federal Funds Sold, Presold Mortgages in Process of Settlement, Accrued Interest Receivable, and Accrued Interest Payable - The carrying amounts approximate their fair value because of the short maturity of these financial instruments.

 

Available for Sale and Held to Maturity Securities - Fair values are provided by a third-party and are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or matrix pricing.

 

Loans - For nonimpaired loans, fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, financial and agricultural, real estate construction, real estate mortgages and installment loans to individuals. Each loan category is further segmented into fixed and variable interest rate terms. The fair value for each category is determined by discounting scheduled future cash flows using current interest rates offered on loans with similar risk characteristics. Fair values for impaired loans are primarily based on estimated proceeds expected upon liquidation of the collateral or the present value of expected cash flows.

 

FDIC Indemnification Asset – Fair value is equal to the FDIC reimbursement rate of the expected losses to be incurred and reimbursed by the FDIC and then discounted over the estimated period of receipt.

 

Bank-Owned Life Insurance – The carrying value of life insurance approximates fair value because this investment is carried at cash surrender value, as determined by the issuer.

 

Deposits - The fair value of deposits with no stated maturity, such as noninterest-bearing checking accounts, savings accounts, interest-bearing checking accounts, and money market accounts, is equal to the amount payable on demand as of the valuation date. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered in the marketplace for deposits of similar remaining maturities.

 

Borrowings - The fair value of borrowings is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered by the Company’s lenders for debt of similar remaining maturities.

 

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 highly liquid market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These 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.

 

Page 41

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 assets or liabilities include net premises and equipment, intangible and other assets such as deferred income taxes, prepaid expense accounts, income taxes currently payable and other various accrued expenses. In addition, the income 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 any of the estimates.

 

Note 14 – Shareholders’ Equity Transactions

 

Small Business Lending Fund

 

On September 1, 2011, the Company completed the sale of $63.5 million of Series B Preferred Stock to the Secretary of the Treasury under the Small Business Lending Fund (“SBLF”). The fund was established under the Small Business Jobs Act of 2010 that was created to encourage lending to small businesses by providing capital to qualified community banks with assets less than $10 billion.

 

Under the terms of the stock purchase agreement, the Treasury received 63,500 shares of non-cumulative perpetual preferred stock with a liquidation value of $1,000 per share, in exchange for $63.5 million.

 

The Series B Preferred Stock qualifies as Tier 1 capital. The dividend rate, as a percentage of the liquidation amount, fluctuated on a quarterly basis during the first 10 quarters during which the Series B Preferred Stock was outstanding, based upon changes in the level of “Qualified Small Business Lending” or “QSBL”. For the first nine quarters after issuance, the dividend rate could range from one percent (1%) to five percent (5%) per annum based upon the increase in QSBL as compared to the baseline. For the tenth calendar quarter through four and one half years after issuance (the “temporary fixed rate period”), the dividend rate will be fixed at between one percent (1%) and seven percent (7%) based upon the level of QSBL compared to the baseline. After four and one half years from the issuance, the dividend rate will increase to nine percent (9%). For quarters subsequent to the issuance in 2011, the Company was able to continually increase its level of small business lending and as a result, the dividend rate has steadily decreased from 5.0% in 2011 to 1.0% in early 2013. The Company is now in the “temporary fixed rate period,” in which the dividend rate is fixed for the Company at 1%. Unless redeemed, this rate will increase to 9% after four and one half years from the stock issuance, which is March 2016 for the Company. Subject to regulatory approval, the Company is generally permitted to redeem the Series B Preferred Shares at par plus unpaid dividends.

 

On June 25, 2015, the Company redeemed $32 million (32,000 shares) of the outstanding Series B Preferred Stock (“SBLF Stock”). The shares were redeemed at their liquidation value of $1,000 per share plus accrued dividends. The Company continues to have outstanding $31.5 million (31,500 shares) of SBLF Stock.

 

For the three months ended June 30, 2015 and 2014, the Company accrued approximately $153,000 and $159,000, respectively, in preferred dividend payments for the Series B Preferred Stock. For the six months ended June 30, 2015 and 2014, the Company accrued approximately $312,000 and $317,000, respectively, in preferred dividend payments for the Series B Preferred Stock. This amount is deducted from net income in computing “Net income available to common shareholders.”

 

Stock Issuance

 

On December 21, 2012, the Company issued 2,656,294 shares of its common stock and 728,706 shares of the Company’s Series C Preferred Stock to certain accredited investors, each at the price of $10.00 per share, pursuant to a private placement transaction. Net proceeds from this sale of common and preferred stock were $33.8 million and were used to strengthen and remove risk from the Company’s balance sheet in anticipation of a planned disposition of certain classified loans and write-down of foreclosed real estate.

 

Page 42

The Series C Preferred Stock qualifies as Tier 1 capital and is Convertible Perpetual Preferred Stock, with dividend rights equal to the Company’s Common Stock. Each share of Series C Preferred Stock will automatically convert into one share of Common Stock on the date the holder of Series C Preferred Stock transfers any shares of Series C Preferred Stock to a non-affiliate of the holder in certain permissible transfers. The Series C Preferred Stock is non-voting, except in limited circumstances.

 

The Series C Preferred Stock pays a dividend per share equal to that of the Company’s common stock. During each of the second quarters of 2015 and 2014, the Company accrued approximately $58,000 in preferred dividend payments for the Series C Preferred Stock. During each of the first six months of 2015 and 2014, the Company accrued approximately $117,000 in preferred dividend payments for the Series C Preferred Stock.

 

Note 15 – Legal Proceedings and Contingencies

 

The Company is not involved in any legal proceedings which, in management's opinion, could have a material effect on the consolidated financial position of the Company. As previously disclosed, in November 2014, the Company received a Wells Notice from the SEC related to the Company's alleged failure to disclose certain related party transactions from 2009-2011. After receiving the notice, the Company cooperated with the SEC and pursued negotiation discussions with them in an attempt to resolve the matters. On June 1, 2015, the matters were resolved, with the SEC issuing a cease and desist order against the Company and two former executive officers of the Company. In the order, the SEC concluded the following: 1) the Company violated related party transaction disclosure requirements, 2) the Company did not maintain effective disclosure controls and procedures, and 3) the Company did not maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles. The order included a requirement that the Company not commit any future similar violations and imposed a $275,000 civil money penalty on the Company. Also, see “Part II, Item 1 - Legal Proceedings” for more information.

 

As discussed above in Note 9 and as previously disclosed, at March 31, 2015 the FDIC had denied $1.2 million related to two loss share claims because the FDIC disagreed with the collection strategy that the Company undertook. In the second quarter of 2015, this matter was resolved with the FDIC agreeing to pay the Company $0.8 million of those claims, while removing one of the related loans from the loss share agreement. This will result in the Company retaining 100% of any future recoveries on that loan, instead of reimbursing 80% of such recoveries to the FDIC as called for by the loss share agreement. As a result of this negotiated settlement, during the three months ended June 30, 2015, the Company wrote off the $0.4 million portion of the claim that the FDIC will not pay.

 

Page 43

Item 2 - Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition

 

Critical Accounting Policies

 

The accounting principles we follow and our methods of applying these principles conform with accounting principles generally accepted in the United States of America and with general practices followed by the banking industry. Certain of these principles involve a significant amount of judgment and may involve the use of estimates based on our best assumptions at the time of the estimation. The allowance for loan losses, intangible assets, and the fair value and discount accretion of loans acquired in FDIC-assisted transactions are three policies we have identified as being more sensitive in terms of judgments and estimates, taking into account their overall potential impact to our consolidated financial statements.

 

Allowance for Loan Losses

 

Due to the estimation process and the potential materiality of the amounts involved, we have identified the accounting for the allowance for loan losses and the related provision for loan losses as an accounting policy critical to our consolidated financial statements. The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance considered adequate to absorb losses inherent in the portfolio.

 

Our determination of the adequacy of the allowance is based primarily on a mathematical model that estimates the appropriate allowance for loan losses. This model has two components. The first component involves the estimation of losses on individually evaluated “impaired loans”. A loan is considered to be impaired when, based on current information and events, it is probable we will be unable to collect all amounts due according to the contractual terms of the loan agreement. A loan is specifically evaluated for an appropriate valuation allowance if the loan balance is above a prescribed evaluation threshold (which varies based on credit quality, accruing status, troubled debt restructured status, and type of collateral) and the loan is determined to be impaired. Factors considered by management in determining impairment include payment status, borrowers’ financial data, cash flow, and various other factors. The estimated valuation allowance is the difference, if any, between the loan balance outstanding and the value of the impaired loan as determined by either 1) an estimate of the cash flows that we expect to receive from the borrower discounted at the loan’s effective rate, or 2) in the case of a collateral-dependent loan, the fair value of the collateral.

 

The second component of the allowance model is an estimate of losses for all loans not considered to be impaired loans (“general reserve loans”). General reserve loans are segregated into pools by loan type and risk grade, and estimated loss percentages are assigned to each loan pool, based on historical losses adjusted for any environmental factors used to reflect changes in the collectability of the portfolio not captured by the historical loss data. Loss percentages are based on a migration analysis in which loss rates are calculated based on an analysis of losses incurred on similar loan types and risk grades over the preceding three years.

 

The reserves estimated for individually evaluated impaired loans are then added to the reserve estimated for general reserve loans. This becomes our “allocated allowance.” The allocated allowance is compared to the actual allowance for loan losses recorded on our books and any adjustment necessary for the recorded allowance to absorb losses inherent in the portfolio is recorded as a provision for loan losses. The provision for loan losses is a direct charge to earnings in the period recorded. Any remaining difference between the allocated allowance and the actual allowance for loan losses recorded on our books is our “unallocated allowance.”

 

Loans covered under loss share agreements (referred to as “covered loans”) are recorded at fair value at acquisition date. Therefore, amounts deemed uncollectible at acquisition date become a part of the fair value calculation and are excluded from the allowance for loan losses. Subsequent decreases in the amount expected to be collected result in a provision for loan losses with a corresponding increase in the allowance for loan losses. Subsequent increases in the amount expected to be collected are accreted into income over the life of the loan. Proportional adjustments are also recorded to the FDIC indemnification asset.

 

Although we use the best information available to make evaluations, future material adjustments may be necessary if economic, operational, or other conditions change. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on the examiners’ judgment about information available to them at the time of their examinations.

 

Page 44

For further discussion, see “Nonperforming Assets” and “Summary of Loan Loss Experience” below.

 

Intangible Assets

 

Due to the estimation process and the potential materiality of the amounts involved, we have also identified the accounting for intangible assets as an accounting policy critical to our consolidated financial statements.

 

When we complete an acquisition transaction, the excess of the purchase price over the amount by which the fair market value of assets acquired exceeds the fair market value of liabilities assumed represents an intangible asset. We must then determine the identifiable portions of the intangible asset, with any remaining amount classified as goodwill. Identifiable intangible assets associated with these acquisitions are generally amortized over the estimated life of the related asset, whereas goodwill is tested annually for impairment, but not systematically amortized. Assuming no goodwill impairment, it is beneficial to our future earnings to have a lower amount assigned to identifiable intangible assets and higher amount of goodwill as opposed to having a higher amount considered to be identifiable intangible assets and a lower amount classified as goodwill.

 

The primary identifiable intangible asset we typically record in connection with a whole bank or bank branch acquisition is the value of the core deposit intangible, whereas when we acquire an insurance agency, the primary identifiable intangible asset is the value of the acquired customer list. Determining the amount of identifiable intangible assets and their average lives involves multiple assumptions and estimates and is typically determined by performing a discounted cash flow analysis, which involves a combination of any or all of the following assumptions: customer attrition/runoff, alternative funding costs, deposit servicing costs, and discount rates. We typically engage a third party consultant to assist in each analysis. For the whole bank and bank branch transactions recorded to date, the core deposit intangibles have generally been estimated to have a life ranging from seven to ten years, with an accelerated rate of amortization. For insurance agency acquisitions, the identifiable intangible assets related to the customer lists were determined to have a life of ten to fifteen years, with amortization occurring on a straight-line basis.

 

Subsequent to the initial recording of the identifiable intangible assets and goodwill, we amortize the identifiable intangible assets over their estimated average lives, as discussed above. In addition, on at least an annual basis, goodwill is evaluated for impairment by comparing the fair value of our reporting units to their related carrying value, including goodwill (our community banking operation is our only material reporting unit). If the carrying value of a reporting unit were ever to exceed its fair value, we would determine whether the implied fair value of the goodwill, using a discounted cash flow analysis, exceeded the carrying value of the goodwill. If the carrying value of the goodwill exceeded the implied fair value of the goodwill, an impairment loss would be recorded in an amount equal to that excess. Performing such a discounted cash flow analysis would involve the significant use of estimates and assumptions.

 

In our 2014 goodwill impairment evaluation, we engaged a consulting firm that used various valuation techniques to assist us in concluding that our goodwill was not impaired.

 

We review identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our policy is that an impairment loss is recognized, equal to the difference between the asset’s carrying amount and its fair value, if the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Estimating future cash flows involves the use of multiple estimates and assumptions, such as those listed above.

 

Fair Value and Discount Accretion of Loans Acquired in FDIC-Assisted Transactions

 

We consider the determination of the initial fair value of loans acquired in FDIC-assisted transactions, the initial fair value of the related FDIC indemnification asset, and the subsequent discount accretion of the purchased loans to involve a high degree of judgment and complexity. We determine fair value accounting estimates of newly assumed assets and liabilities in accordance with relevant accounting guidance. However, the amount that we realize on these assets could differ materially from the carrying value reflected in our financial statements, based upon the timing of collections on the acquired loans in future periods. To the extent the actual values realized for the acquired loans are different from the estimates, the FDIC indemnification asset will generally be impacted in an offsetting manner due to the loss-sharing support from the FDIC.

 

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Because of the inherent credit losses associated with the acquired loans in a failed bank acquisition, the amount that we record as the fair values for the loans is generally less than the contractual unpaid principal balance due from the borrowers, with the difference being referred to as the “discount” on the acquired loans. We have applied the cost recovery method of accounting to all purchased impaired loans due to the uncertainty as to the timing of expected cash flows. This will generally result in the recognition of interest income on these impaired loans only when the cash payments received from the borrower exceed the recorded net book value of the related loans.

 

For nonimpaired purchased loans, we accrete the discount over the lives of the loans in a manner consistent with the guidance for accounting for loan origination fees and costs.

 

FDIC Indemnification Asset

 

The FDIC indemnification asset is the estimated amount that the Company will receive from the FDIC under loss share agreements associated with two FDIC-assisted failed bank acquisitions. See page 40 of the Company’s 2014 Annual Report on Form 10-K for a detailed explanation of this asset.

 

The following table presents additional information regarding our covered loans, loan discounts, allowances for loan losses and the corresponding FDIC indemnification asset:

 

($ in thousands)                

At June 30, 2015

  Cooperative
Single Family
Loss Share
Loans
   Bank of Asheville
Single Family
Loss Share
Loans
   Bank of Asheville
Non-Single
Family Loss
Share Loans
   Total 
Expiration of loss share agreement  6/30/2019   3/31/2021   3/31/2016     
                 
Nonaccrual covered loans                    
     Unpaid principal balance  $5,111    880    6,666    12,657 
     Carrying value prior to loan discount*   4,935    720    4,283    9,938 
     Loan discount   696    442    1,422    2,560 
     Net carrying value   4,239    278    2,861    7,378 
     Allowance for loan losses   119    6    69    194 
     Indemnification asset recorded   527    293    436    1,256 
                     
All other covered loans                    
     Unpaid principal balance   93,703    8,238    19,799    121,740 
     Carrying value prior to loan discount*   93,574    8,159    19,785    121,518 
     Loan discount   12,540    1,481    1,051    15,072 
     Net carrying value   81,034    6,678    18,734    106,446 
     Allowance for loan losses   1,252    61    428    1,741 
     Indemnification asset recorded   8,149    1,101    517    9,767 
                     
All covered loans                    
     Unpaid principal balance   98,814    9,118    26,465    134,397 
     Carrying value prior to loan discount*   98,509    8,879    24,068    131,456 
     Loan discount   13,236    1,923    2,473    17,632 
     Net carrying value   85,273    6,956    21,595    113,824 
     Allowance for loan losses   1,371    67    497    1,935 
     Indemnification asset recorded   8,676    1,394    953    11,023**
                     
Foreclosed Properties                    
     Net carrying value   1,101     —    844    1,945 
     Indemnification asset recorded   533        181    714 
                     
For the Six Months Ended June 30, 2015                       
Loan discount accretion recognized   962    383    1,347    2,692 
Indemnification asset expense associated with the loan discount accretion recognized   1,441    336    1,381    3,158 

 

 

* Reflects partial charge-offs

** A present value adjustment of $20 reduces the carrying value of this asset to $11,003.

Page 46

Current Accounting Matters

 

See Note 2 to the Consolidated Financial Statements above for information about accounting standards that we have recently adopted.

 

RESULTS OF OPERATIONS

 

Net income available to common shareholders for the second quarter of 2015 amounted to $6.0 million, or $0.30 per diluted common share, compared to the $6.4 million, or $0.32 per diluted common share, recorded in the second quarter of 2014. The lower earnings recorded in the second quarter of 2015 were primarily due to a lower amount of discount accretion on loans purchased in failed-bank acquisitions, which was partially offset by a lower provision for loan losses.

 

For the six months ended June 30, 2015, net income available to common shareholders amounted to $12.8 million, or $0.63 per diluted common share, compared to the $11.9 million, or $0.59 per diluted common share, for the six months ended June 30, 2014. The higher earnings were primarily the result of a lower provision for loan losses.

 

Net Interest Income and Net Interest Margin

 

Net interest income for the second quarter of 2015 amounted to $29.6 million, a 12.4% decrease from the $33.8 million recorded in the second quarter of 2014. Net interest income for the first six months of 2015 amounted to $59.3 million, a 14.5% decrease from the $69.3 million recorded in the comparable period of 2014.

 

Our net interest margin (tax-equivalent net interest income divided by average earning assets) in the second quarter of 2015 was 4.15% compared to 4.65% for the second quarter of 2014. For the six month period ended June 30, 2015, our net interest margin was 4.17% compared to 4.89% for the same period in 2014. The lower margins were primarily due to lower amounts of discount accretion on loans purchased in failed-bank acquisitions – see additional discussion below. Loan discount accretion amounted to $1.1 million in the second quarter of 2015 and $4.9 million in the second quarter of 2014. For the first six months of 2015, loan discount accretion amounted to $2.7 million compared to $11.3 million for the first six months of 2014. The lower amount of accretion is due to the continued winding down of the unaccreted discount amount that resulted from failed-bank acquisitions in 2009 and 2011.

 

We continue to experience lower loan yields due to the prolonged low interest rate environment, but began to invest our excess cash balances into higher yielding investment securities late in the fourth quarter of 2014, which has partially offset the lower loan yields. Investment securities totaled $380 million at June 30, 2015 compared to $172 million at June 30, 2014.

 

Our cost of funds has steadily declined from 0.30% in the second quarter of 2014 to 0.24% in the second quarter of 2015, which has had a positive impact on our net interest margin.

 

Provision for Loan Losses and Asset Quality

 

We recorded total provisions for loan losses of $0.8 million in the second quarter of 2015 compared to $3.7 million in the second quarter of 2014. For the six months ended June 30, 2015, we recorded total provisions for loan losses of $0.7 million compared to $7.2 million for the same period of 2014. As discussed below, we record provisions for loan losses related to both non-covered and covered loan portfolios – see explanation of the terms “non-covered” and “covered” in the section below entitled “Note Regarding Components of Earnings.”

 

The provision for loan losses on non-covered loans amounted to $1.0 million in the second quarter of 2015 compared to $1.2 million in the second quarter of 2014. For the first six months of 2015, the provision for loan losses on non-covered loans amounted to $1.1 million compared to $4.5 million for the same period of 2014. The lower provisions recorded in 2015 were primarily a result of continued favorable credit quality trends and generally improving economic trends.

 

We recorded a negative provision for loan losses on covered loans (reduction of allowance for loan losses) of $0.2 million in the second quarter of 2015 compared to a $2.5 million provision for loan losses in the second quarter of 2014. For the six months ended June 30, 2015, we recorded a negative provision for loan losses on covered loans of $0.4 million compared to a $2.7 million provision for loan losses in the comparable period of 2014. The negative provisions in 2015 primarily resulted from lower levels of covered nonperforming loans, minimal net charge-offs, and declining levels of total covered loans.

 

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Total non-covered nonperforming assets amounted to $86.1 million at June 30, 2015 (2.78% of total non-covered assets), $95.3 million at December 31, 2014 (3.09% of total non-covered assets), and $84.1 million at June 30, 2014 (2.73% of total non-covered assets). The increase in non-covered nonperforming assets when comparing June 30, 2014 to December 31, 2014 and June 30, 2015 was primarily due to the Company transferring $14.8 million in nonperforming assets from covered status to non-covered status on July 1, 2014 upon the scheduled expiration of a loss share agreement with the FDIC associated with those assets.

 

Total covered nonperforming assets have declined in the past year, amounting to $13.2 million at June 30, 2015, $18.7 million at December 31, 2014 and $39.1 million at June 30, 2014. Over the past twelve months, we have resolved a significant amount of covered loans and have experienced strong property sales along the North Carolina coast, which is where most of our covered assets are located. Also, as discussed in the preceding paragraph, on July 1, 2014 the Company transferred $14.8 million in nonperforming assets from covered status to non-covered status upon the expiration of a loss share agreement.

 

Noninterest Income

 

Total noninterest income was $5.0 million for each of the three month periods ended June 30, 2015 and 2014. For the six months ended June 30, 2015, noninterest income amounted to $9.5 million compared to $5.3 million for the six months ended June 30, 2014.

 

Core noninterest income for the second quarter of 2015 was $7.4 million, a decrease of 5.0% from the $7.8 million reported for the second quarter of 2014. For the first six months of 2015, core noninterest income amounted to $14.6 million, a 4.5% decrease from the $15.3 million recorded in the comparable period of 2014. Core noninterest income includes i) service charges on deposit accounts, ii) other service charges, commissions, and fees, iii) fees from presold mortgages, iv) commissions from financial product sales, and v) bank-owned life insurance income. The primary reason for the decrease in core noninterest income in 2015 was lower service charges on deposit accounts, which is discussed further in the section entitled “Components of Earnings.”

 

Noncore components of noninterest income resulted in a net decrease to income of $2.4 million in the second quarter of 2015 and a net decrease to income of $2.9 million in the second quarter of 2014. For the six months ended June 30, 2015 and 2014, the Company recorded net decreases to income of $5.1 million and $10.0 million, respectively, related to the noncore components of noninterest income. The largest variances in noncore noninterest income related to gains (losses) on covered foreclosed properties and indemnification asset income (expense) – see discussion in the section entitled “Components of Earnings.”

 

Noninterest Expenses

 

Noninterest expenses amounted to $24.3 million in the second quarter of 2015 compared to $24.8 million recorded in the second quarter of 2014. Noninterest expenses for the six months ended June 30, 2015 amounted to $48.0 million compared to $48.3 million recorded in the first half of 2014. The decreases in 2015 were mainly due to decreases in miscellaneous items of other operating expense.

 

Balance Sheet and Capital

 

Total assets at June 30, 2015 amounted to $3.2 billion, a 1.7% decrease from a year earlier. Total loans at June 30, 2015 amounted to $2.4 billion, a 0.9% decrease from a year earlier, and total deposits amounted to $2.7 billion at June 30, 2015, a 3.7% decrease from a year earlier.

 

Investment securities totaled $379.7 million at June 30, 2015 compared to $171.9 million at June 30, 2014. Over the past three quarters, we have used a portion of our excess cash balances to purchase investment securities.

 

Non-covered loans amounted to $2.3 billion at June 30, 2015, an increase of $41.4 million from June 30, 2014. The increase was partially due to the reclassification of $39.7 million in loans from covered status to non-covered status in connection with the July 1, 2014 expiration of a loss share agreement. Non-covered loans increased $23.4 million, or 4.1% on an annualized basis, during the second quarter of 2015 as a result of ongoing internal initiatives to drive loan growth. Loans covered by FDIC loss share agreements are expected to continue to decline as those loans continue to pay down.

 

Page 48

The decline in total deposits at June 30, 2015 compared to June 30, 2014 was primarily due to decreases in retail time deposits and brokered deposits, with increases in checking accounts and other retail deposit accounts offsetting a portion of the decline. Time deposits are generally one of our most expensive funding sources, and thus the shift from this category has benefited our overall cost of funds.

 

On June 25, 2015, we redeemed $32 million (32,000 shares) of the outstanding Non-Cumulative Perpetual Preferred Stock, Series B (“SBLF Stock”) that had been issued to the United States Secretary of the Treasury in September 2011 related to the Company’s participation in the Small Business Lending Fund. The shares were redeemed at their liquidation value of $1,000 per share plus accrued dividends. We continue to have outstanding $31.5 million (31,500 shares) of SBLF Stock.

 

We remain well-capitalized by all regulatory standards, with a Total Risk-Based Capital Ratio at June 30, 2015 of 16.14% compared to the 10.00% minimum to be considered well-capitalized. Our tangible common equity to tangible assets ratio was 8.24% at June 30, 2015, an increase of 67 basis points from a year earlier.

 

Note Regarding Components of Earnings

 

Our results of operation are significantly affected by the on-going accounting for two FDIC-assisted failed bank acquisitions. In the discussion above and elsewhere in this document, the term “covered” is used to describe assets included as part of FDIC loss share agreements, which generally result in the FDIC reimbursing the Company for 80% of losses incurred on those assets. The term “non-covered” refers to the Company’s legacy assets, which are not included in any type of loss share arrangement.

 

For covered loans that deteriorate in terms of repayment expectations, we record immediate allowances through the provision for loan losses. For covered loans that experience favorable changes in credit quality compared to what was expected at the acquisition date, including loans that payoff, we record positive adjustments to interest income over the life of the respective loan – also referred to as loan discount accretion. For covered foreclosed properties that are sold at gains or losses or that are written down to lower values, we record the gains/losses within noninterest income.

 

The adjustments discussed above are recorded within the income statement line items noted without consideration of the FDIC loss share agreements. Because favorable changes in covered assets result in lower expected FDIC claims, and unfavorable changes in covered assets result in higher expected FDIC claims, the FDIC indemnification asset is adjusted to reflect those expectations. The net increase or decrease in the indemnification asset is reflected within noninterest income.

 

The adjustments noted above can result in volatility within individual income statement line items. Because of the FDIC loss share agreements and the associated indemnification asset, pretax income resulting from amounts recorded as provisions for loan losses on covered loans, discount accretion, and losses from covered foreclosed properties is generally only impacted by 20% of these amounts due to the corresponding adjustments made to the indemnification asset.

 

Page 49

Components of Earnings

 

Net interest income is the largest component of earnings, representing the difference between interest and fees generated from earning assets and the interest costs of deposits and other funds needed to support those assets. Net interest income for the three month period ended June 30, 2015 amounted to $29.6 million, a decrease of $4.2 million, or 12.4%, from the $33.8 million recorded in the second quarter of 2014. Net interest income on a tax-equivalent basis for the three month period ended June 30, 2015 amounted to $30.0 million, a decrease of $4.2 million, or 12.2%, from the $34.2 million recorded in the second quarter of 2014. We believe that analysis of net interest income on a tax-equivalent basis is useful and appropriate because it allows a comparison of net interest income amounts in different periods without taking into account the different mix of taxable versus non-taxable investments that may have existed during those periods.

 

   Three Months Ended June 30, 
($ in thousands)  2015   2014 
Net interest income, as reported  $29,605    33,808 
Tax-equivalent adjustment   402    375 
Net interest income, tax-equivalent  $30,007    34,183 

 

Net interest income for the six month period ended June 30, 2015 amounted to $59.3 million, a decrease of $10.0 million, or 14.5%, from the $69.3 million recorded in the first half of 2014. Net interest income on a tax-equivalent basis for the six month period ended June 30, 2015 amounted to $60.1 million, a decrease of $10.0 million, or 14.3%, from the $70.1 million recorded in the comparable period of 2014.

 

   Six Months Ended June 30, 
($ in thousands)  2015   2014 
Net interest income, as reported  $59,308    69,343 
Tax-equivalent adjustment   792    749 
Net interest income, tax-equivalent  $60,100    70,092 

 

There are two primary factors that cause changes in the amount of net interest income we record - 1) changes in our loans and deposits balances, and 2) our net interest margin (tax-equivalent net interest income divided by average interest-earning assets).

 

For the three and six months ended June 30, 2015, the lower net interest income compared to the same periods of 2014 was due to a lower net interest margin (see discussion below).

 

Page 50

The following tables present net interest income analysis on a tax-equivalent basis for the periods indicated.

 

   For the Three Months Ended June 30, 
   2015   2014 

 

 

($ in thousands)

  Average
Volume
   Average
Rate
   Interest
Earned
or Paid
   Average
Volume
   Average
Rate
   Interest
Earned
or Paid
 
Assets                        
Loans (1)  $2,389,735    4.86%   $28,953   $2,438,364    5.65%   $34,376 
Taxable securities   309,589    2.16%    1,664    176,382    1.99%    876 
Non-taxable securities (2)   52,227    6.60%    859    53,917    6.29%    846 
Short-term investments, principally federal funds   150,219    0.50%    186    277,923    0.33%    232 
Total interest-earning assets   2,901,770    4.38%    31,662    2,946,586    4.95%    36,330 
                               
Cash and due from banks   64,518              81,327           
Premises and equipment   75,789              76,958           
Other assets   157,193              154,679           
   Total assets  $3,199,270             $3,259,550           
                               
Liabilities                               
Interest bearing checking  $558,087    0.06%   $82   $535,304    0.06%   $80 
Money market deposits   572,458    0.12%    176    556,264    0.11%    156 
Savings deposits   183,828    0.05%    23    175,504    0.05%    23 
Time deposits >$100,000   416,962    0.70%    732    574,037    0.82%    1,172 
Other time deposits   328,375    0.40%    327    396,885    0.42%    419 
     Total interest-bearing deposits   2,059,710    0.26%    1,340    2,237,994    0.33%    1,850 
Borrowings   121,036    1.04%    315    116,774    1.02%    297 
Total interest-bearing liabilities   2,180,746    0.30%    1,655    2,354,768    0.37%    2,147 
                               
Noninterest bearing checking   607,939              513,472           
Other liabilities   15,886              10,768           
Shareholders’ equity   394,699              380,542           
     Total liabilities and shareholders’ equity  $3,199,270             $3,259,550           
                               
Net yield on interest-earning assets and net interest income        4.15%   $30,007         4.65%   $34,183 
Interest rate spread        4.08%              4.58%      
                               
Average prime rate        3.25%              3.25%      
(1) Average loans include nonaccruing loans, the effect of which is to lower the average rate shown.
(2)Includes tax-equivalent adjustments of $402,000 and $375,000 in 2015 and 2014, respectively, to reflect the tax benefit that we receive related to tax-exempt securities, which carry interest rates lower than similar taxable investments due to their tax exempt status. This amount has been computed assuming a 39% tax rate and is reduced by the related nondeductible portion of interest expense.

Page 51

 

   For the Six Months Ended June 30, 
   2015   2014 

 

 

($ in thousands)

  Average
Volume
   Average
Rate
   Interest
Earned
or Paid
   Average
Volume
   Average
Rate
   Interest
Earned
or Paid
 
Assets                        
Loans (1)  $2,390,403    4.93%   $58,394   $2,448,866    5.80%   $70,462 
Taxable securities   296,552    2.06%    3,023    178,305    2.12%    1,877 
Non-taxable securities (2)   52,638    6.56%    1,712    53,946    6.32%    1,690 
Short-term investments, principally federal funds   166,658    0.46%    381    210,579    0.34%    351 
Total interest-earning assets   2,906,251    4.41%    63,510    2,891,696    5.19%    74,380 
                               
Cash and due from banks   65,214              82,285           
Premises and equipment   75,733              77,199           
Other assets   149,722              168,019           
   Total assets  $3,196,920             $3,219,199           
                               
Liabilities                               
Interest bearing checking  $560,468    0.06%   $164   $532,207    0.06%   $160 
Money market deposits   565,008    0.12%    341    555,028    0.11%    307 
Savings deposits   182,491    0.05%    45    174,366    0.05%    44 
Time deposits >$100,000   433,610    0.73%    1,579    574,832    0.83%    2,355 
Other time deposits   335,232    0.40%    669    405,936    0.43%    875 
     Total interest-bearing deposits   2,076,809    0.27%    2,798    2,242,369    0.34%    3,741 
Borrowings   118,715    1.04%    612    82,084    1.34%    547 
Total interest-bearing liabilities   2,195,524    0.31%    3,410    2,324,453    0.37%    4,288 
                               
Noninterest bearing checking   591,502              502,961           
Other liabilities   16,458              13,305           
Shareholders’ equity   393,436              378,480           
     Total liabilities and shareholders’ equity  $3,196,920             $3,219,199           
                               
Net yield on interest-earning assets and net interest income        4.17%   $60,100         4.89%   $70,092 
Interest rate spread        4.10%              4.82%      
                               
Average prime rate        3.25%              3.25%      
(1)Average loans include nonaccruing loans, the effect of which is to lower the average rate shown.
(2)Includes tax-equivalent adjustments of $792,000 and $749,000 in 2015 and 2014, respectively, to reflect the tax benefit that we receive related to tax-exempt securities, which carry interest rates lower than similar taxable investments due to their tax exempt status. This amount has been computed assuming a 39% tax rate and is reduced by the related nondeductible portion of interest expense.

 

Average loans outstanding for the second quarter of 2015 were $2.390 billion, which was 2.0% lower than the average loans outstanding for the second quarter of 2014 ($2.438 billion). Average loans for the six months ended June 30, 2015 were $2.390 billion, which was 2.4% less than the average loans outstanding for the six months ended June 30, 2014 ($2.449 billion). The lower amount of average loans outstanding in 2015 is due to minimal organic loan growth and the continued resolution of covered loans within our “covered loan” portfolio through foreclosure, charge-off, or repayment.

 

The mix of our loan portfolio remained substantially the same at June 30, 2015 compared to December 31, 2014, with approximately 91% of our loans being real estate loans, 7% being commercial, financial, and agricultural loans, and the remaining 2% being consumer installment loans. The majority of our real estate loans are personal and commercial loans where real estate provides additional security for the loan.

 

Average total deposits outstanding for the second quarter of 2015 were $2.668 billion, which was 3.0% less than the average deposits outstanding for the second quarter of 2014 ($2.751 billion). Average deposits outstanding for the six months ended June 30, 2015 were $2.668 billion, which was 2.8% less than the average deposits outstanding for the six months ended June 30, 2014 ($2.745 billion).

 

Average transaction deposit accounts (noninterest bearing checking, interest bearing checking, money market and savings accounts) increased from $1.765 billion for the first six months of 2014 to $1.899 billion for the first six months of 2015, representing growth of $135 million, or 7.6%. With the growth of our transaction deposit accounts, we were able to further reduce our reliance on higher cost sources of funding, especially time deposits. Average time deposits declined from $981 million for the first six months of 2014 to $769 million for the first six months of 2015, a decrease of $212 million, or 21.6%. This favorable change in funding mix was largely responsible for our average cost of interest bearing liabilities decreasing from 0.37% in the first six months of 2014 to 0.31% in the first six months of 2015. Our total cost of funds, which includes noninterest bearing checking accounts at a zero percent cost, was 0.25% for the first half of 2015 compared to 0.30% in the first half of 2014.

 

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See additional information regarding changes in the Company’s loans and deposits in the section below entitled “Financial Condition.”

 

Our net interest margin (tax-equivalent net interest income divided by average earning assets) for the second quarter of 2015 was 4.15% compared to 4.65% for the second quarter of 2014. For the six month period ended June 30, 2015, our net interest margin was 4.17% compared to 4.89% for the same period in 2014. The lower margins were primarily a result of a lower amount of discount accretion on loans purchased in failed-bank acquisitions (see discussion below).

 

We continue to experience lower loan yields in 2015 due to the prolonged low interest rate environment, but began to invest our excess cash balances into higher yielding investment securities late in the fourth quarter of 2014, which has partially offset the lower loan yields.

 

Our net interest margin benefitted from the net accretion of purchase accounting premiums/discounts associated with the Cooperative acquisition that occurred in June 2009 and the acquisition of The Bank of Asheville in January 2011. For the three months ended June 30, 2015 and 2014, we recorded $1,135,000 and $4,806,000, respectively, in net accretion of purchase accounting premiums/discounts that increased net interest income. For the six months ended June 30, 2015 and 2014, we recorded $2,692,000 and $11,168,000, respectively, in net accretion of purchase accounting premiums/discounts. The following table presents the detail of the purchase accounting adjustments that impacted net interest income.

 

   For the Three Months Ended   For the Six Months Ended 
$ in thousands  June 30, 2015   June 30, 2014   June 30, 2015   June 30, 2014 
                 
Interest income – reduced by premium amortization on loans  $    (49)       (98)
Interest income – increased by accretion of loan discount   1,135    4,851    2,692    11,259 
Interest expense – reduced by premium amortization of deposits       4        7 
     Impact on net interest income  $1,135    4,806    2,692    11,168 

 

See additional information regarding net interest income in the section entitled “Interest Rate Risk.”

 

The decrease in discount accretion in 2015 is due to the unnaccreted discount amount that resulted from aforementioned acquisitions continuing to wind down. Unaccreted loan discount has declined from $39.6 million at December 31, 2013 to $17.6 million at June 30, 2015.

 

We recorded total provisions for loan losses of $0.8 million in the second quarter of 2015 compared to $3.7 million in the second quarter of 2014. For the six months ended June 30, 2015, we recorded total provisions for loan losses of $0.7 million compared to $7.2 million for the same period of 2014. As discussed below, we record provisions for loan losses related to both non-covered and covered loan portfolios – see explanation of the terms “non-covered” and “covered” in the section below entitled “Note Regarding Components of Earnings.”

 

Our provision for loan losses on non-covered loans amounted to $1.0 million in the second quarter of 2015 compared to $1.2 million in the second quarter of 2014. For the first six months of 2015, the provision for loan losses on non-covered loans amounted to $1.1 million compared to $4.5 million for the same period of 2014. The lower provisions recorded in 2015 were primarily a result of continued favorable credit quality trends and generally improving economic trends.

 

We recorded a negative provision for loan losses on covered loans (reduction of allowance for loan losses) of $0.2 million in the second quarter of 2015 compared to a $2.5 million provision for loan losses in the second quarter of 2014. For the six months ended June 30, 2015, we recorded a negative provision for loan losses on covered loans of $0.4 million compared to a $2.7 million provision for loan losses in the comparable period of 2014. The negative provisions in 2015 primarily resulted from lower levels of covered nonperforming loans, minimal net charge-offs, and declining levels of total covered loans.

 

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Total noninterest income was $5.0 million for each of the three month periods ended June 30, 2015 and 2014. For the six months ended June 30, 2015, noninterest income amounted to $9.5 million compared to $5.3 million for the six months ended June 30, 2014.

 

As presented in the table below, core noninterest income for the second quarter of 2015 was $7.4 million, a decrease of 5.0% from the $7.8 million reported for the second quarter of 2014. For the first six months of 2015, core noninterest income amounted to $14.6 million, a 4.5% decrease from the $15.3 million recorded in the comparable period of 2014. As noted above, core noninterest income includes i) service charges on deposit accounts, ii) other service charges, commissions, and fees, iii) fees from presold mortgages, iv) commissions from financial product sales, and v) bank-owned life insurance income.

 

The following table presents our core noninterest income for the three and six month periods ending June 30, 2015 and 2014 respectively.

 

   For the Three Months Ended   For the Six Months Ended 
$ in thousands  June 30, 2015   June 30, 2014   June 30, 2015   June 30, 2014 
                 
Service charges on deposit accounts  $2,881    3,446    5,773    7,019 
Other service charges, commissions, and fees   2,771    2,562    5,313    4,929 
Fees from presold mortgages   731    790    1,539    1,397 
Commissions from sales of insurance and financial products   665    706    1,226    1,300 
Bank-owned life insurance income   383    318    754    645 
     Core noninterest income  $7,431    7,822    14,605    15,290 

 

As shown in the table above, service charges on deposit accounts declined from $3.4 million in the second quarter of 2014 to $2.9 million in the second quarter of 2015. For the six months ended June 30, 2015, service charges on deposit accounts amounted to $5.8 million, which is a $1.2 million decrease from the $7.0 million recorded in the comparable period of 2014. After the elimination of free checking for most customers with low balances in late 2013, monthly fees earned on deposit accounts have gradually declined over the past several quarters as a result of more customers meeting the requirements to have the monthly service charge waived. Fewer instances of fees earned from customers overdrawing their accounts have also impacted this line item.

 

Other service charges, commissions, and fees increased in 2015 compared to 2014, primarily as a result of higher debit card interchange fees. We earn a small fee each time a customer uses a debit card to make a purchase. Due to the growth in checking accounts and increased customer usage of debit cards, we have experienced increases in this line item. Interchange income from credits cards has also increased due to growth in the number and usage of credit cards, which we believe is a result of increased promotion of this product.

 

Fees from presold mortgages did not vary significantly among the periods presented. These fees amounted to $0.7 million the second quarter of 2015 compared to the $0.8 million recorded in the second quarter of 2014. For the six months ended June 30, 2015 and 2014, fees from presold mortgages amounted to $1.5 million and $1.4 million, respectively.

 

Commissions from sales of insurance and financial products were also consistent among the periods presented. These commissions amounted to approximately $0.7 million for each of the three months ended June 30, 2015 and 2014. For the six months ended June 30, 2015, commissions from sales of insurance and financial products amounted to $1.2 million compared to $1.3 million in the comparable period of 2014.

 

Bank-owned life insurance income amounted to $0.4 million in the second quarter of 2015 compared to $0.3 million in the second quarter of 2014. For the six months ended June 30, 2015, bank-owned life insurance income amounted to $0.8 million compared to $0.6 million for the six months ended June 30, 2014. The increases in 2015 are a result of increased purchases of bank-owned life insurance.

 

Within the noncore components of noninterest income, we recorded net losses on non-covered foreclosed properties of $0.6 million in each of the three months ended June 30, 2015 and 2014, and net losses of $1.1 million and $0.7 million for the six months ended June 30, 2015 and 2014, respectively. We continue to actively pursue disposal of our foreclosed properties and in some cases, we have been willing to accept reasonable levels of losses in order to do so.

 

Gains on covered foreclosed properties were $0.3 million and $0.5 million for the three and six months ended June 30, 2015, respectively, compared to losses of $1.2 million and $3.3 million recorded for the three and six months ended June 30, 2014. The favorable variances in 2015 were a result of significantly lower levels of covered foreclosed properties held by the Company and recovery in property values, particularly along the coast of North Carolina, which is where most of the Company’s foreclosed properties are located.

 

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Indemnification asset income (expense) is recorded to reflect additional (decreased) amounts expected to be received from the FDIC during the period related to covered assets. The three primary items that result in recording indemnification asset income (expense) are 1) income from loan discount accretion, which results in indemnification expense, 2) provisions for loan losses on covered loans, which result in indemnification income and 3) foreclosed property gains (losses) on covered assets, which also result in indemnification expense (income). In the second quarter of 2015, we recorded $1.8 million in indemnification asset expense compared to $1.6 million in indemnification asset expense in the second quarter of 2014. For the six months ended June 30, 2015, indemnification asset expense amounted to $4.2 million compared to $6.5 million in indemnification asset expense for the same period of 2014. These variances are primarily due to lower indemnification asset expense associated with the lower loan discount accretion income recorded in the three and six months ended June 30, 2015, as shown in the following table:

 

($ in millions)  For the Three Months
Ended
   For the Six Months
Ended
 
   June 30, 2015   June 30, 2014   June 30, 2015   June 30, 2014 
                 
Indemnification asset expense associated with loan discount accretion income  $(1.4)   (4.4)   (3.2)   (10.4)
Indemnification asset income (expense) associated with loan losses (recoveries), net   (0.2)  1.9    (0.7)   1.6 
Indemnification asset income (expense) associated with foreclosed property losses (gains), net   (0.2)   0.9    (0.4)   2.6 
Other sources of indemnification asset income (expense)           0.1    (0.3)
Total indemnification asset income (expense)  $(1.8)   (1.6)   (4.2)   (6.5)

 

We recorded no gains or losses on securities during the three and six month periods ended June 30, 2015. For the three and six month periods ended June 30, 2014, we recorded $0.8 million in gains on sales of approximately $46.7 million in available for sale securities.

 

Other gains (losses) amounted to $0.3 million for each of the three and six month periods in both 2015 and 2014. For both periods in 2015, the primary component of this line item is the $0.4 million write-off of a FDIC claim associated with a dispute settlement (see Note 9 for additional discussion), whereas for both periods in 2014, the net loss related primarily to losses on sales of vacated branch buildings.

 

Noninterest expenses amounted to $24.3 million in the second quarter of 2015 compared to $24.8 million recorded in the second quarter of 2014. Noninterest expenses for the six months ended June 30, 2015 amounted to $48.0 million compared to $48.3 million recorded in the first half of 2014.

 

Personnel expense (salaries and employee benefits expense) was $13.9 million for the second quarter of 2015 compared to $13.7 million in the second quarter of 2014. For both of the six months ended June 30, 2015 and June 30, 2014, personnel expense amounted to $27.6 million. Comparing the first half of 2015 to 2014, lower salaries expense in 2015 associated with a decline in total employees due primarily to branch consolidations was largely offset by higher amounts of incentive compensation expense. The higher amounts of incentive compensation expense relates to the Company’s improved earnings as well as retention-related grants of common stock made to certain officers.

 

The combined amount of occupancy and equipment expense did not vary significantly when comparing 2015 to 2014, amounting to $2.8 million in each of the second quarters of 2015 and 2014 and $5.6 million in each of the first six months of 2015 and 2014.

 

Other operating expenses amounted to $7.5 million for the second quarter of 2015 compared to $8.1 million in the second quarter of 2014, and $14.5 million in the first half of 2015 compared to $14.7 million in the first half of 2014. The decreases in 2015 relate primarily to deposit insurance premium expense which declined due to lower deposit insurance premium rates.

 

For the second quarter of 2015, the provision for income taxes was $3.2 million, an effective tax rate of 34.1%, compared to $3.7 million for the same period of 2014, which is an effective tax rate of 35.7%. For the first six months of 2015, the provision for income taxes was $6.9 million, an effective tax rate of 34.3%, compared to $6.7 million for the same period of 2014, which was an effective tax rate of 35.3%. The slightly lower provisions in 2015 are due to higher amounts of non-taxable income and a decline in the statutory income tax rate in North Carolina.

 

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We accrued total preferred stock dividends of $0.2 million in each of the three month periods ended June 30, 2015 and 2014. For each of the first six months of 2015 and 2014, we accrued preferred stock dividends of $0.4 million. These amounts are deducted from net income in computing “net income available to common shareholders.” Preferred dividends related to our Series B Preferred Stock and our Series C Preferred Stock. Our Series B Preferred Stock relates to $63.5 million in preferred stock that was issued to the U.S. Treasury in September 2011 in connection with our participation in the Small Business Lending Fund. From the September 2011 issuance date until December 31, 2013, the dividend rate on this stock was subject to fluctuation between 1% and 5% per anum based upon changes in the level of our “Qualified Small Business Lending” (“QSBL”).  We were able to continually increase our levels of QSBL such that our dividend rate decreased to approximately 1.0% by the first quarter of 2013 and remained at that level through December 31, 2013, at which point the dividend rate became fixed at 1.0%. The dividend rate will remain at 1.0% until March 2016, at which point the dividend rate automatically increases to 9%. In June 2015, we redeemed $32.0 million of the Series B Preferred Stock. Subject to regulatory approval, which cannot be assured, it is our intent to redeem the remaining Series B Preferred Stock prior to the dividend rate increase. Our Series C Preferred Stock relates to the December 2012 issuance of 728,706 shares of preferred stock that pay dividends at the same rate as we pay to holders of our common stock.

 

The Consolidated Statements of Comprehensive Income reflect other comprehensive loss of $614,000 and $46,000 during the second quarters of 2015 and 2014, respectively. During the six months ended June 30, 2015 and 2014, we recorded other comprehensive loss of $481,000 and other comprehensive income of $118,000, respectively. The primary component of other comprehensive income for the periods presented was changes in unrealized holding gains (losses) of our available for sale securities. Our available for sale securities portfolio is predominantly comprised of fixed rate bonds that generally increase in value when market yields for fixed rate bonds decrease and decline in value when market yields for fixed rate bonds increase. Management has evaluated any unrealized losses on individual securities at each period end and determined that there is no other-than-temporary impairment.

 

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FINANCIAL CONDITION

 

Total assets at June 30, 2015 amounted to $3.21 billion, a 1.7% decrease from a year earlier. Total loans at June 30, 2015 amounted to $2.41 billion, a 0.9% decrease from a year earlier, and total deposits amounted to $2.65 billion, a 3.7% decrease from a year earlier.

 

The following table presents information regarding the nature of changes in our levels of loans and deposits for the twelve months ended June 30, 2015 and for the six months of 2015.

 

July 1, 2014 to
June 30, 2015
  Balance at
beginning
of period
   Internal
Growth,
net
   Transfer
due to
Expiration
of Loss
Share
Agreement
   Balance at
end of
period
   Total
percentage
growth
   Internal
percentage
growth
 
Loans – Non-covered  $2,257,530    1,752    39,673    2,298,955    1.8%    0.1% 
Loans – Covered   176,855    (23,358)   (39,673)   113,824    -35.6%    -13.2% 
     Total loans   2,434,385    (21,606)       2,412,779    -0.9%    -0.9% 
                               
Deposits – Noninterest bearing checking   525,332    89,287        614,619    17.0%    17.0% 
Deposits – Interest bearing checking   551,577    2,341        553,918    0.4%    0.4% 
Deposits – Money market   554,731    21,629        576,360    3.9%    3.9% 
Deposits – Savings   175,084    9,702        184,786    5.5%    5.5% 
Deposits – Brokered   135,300    (76,766)       58,534    -56.7%    -56.7% 
Deposits – Internet time   2,216    (2,216)           -100.0%    -100.0% 
Deposits – Time>$100,000   421,255    (79,231)       342,024    -18.8%    -18.8% 
Deposits – Time<$100,000   389,084    (66,198)       322,886    -17.0%    -17.0% 
     Total deposits  $2,754,579    (101,452)       2,653,127    -3.7%    -3.7% 
                               
January 1, 2015 to
June 30, 2015
                              
Loans – Non-covered  $2,268,580    30,375        2,298,955    1.3%    1.3% 
Loans – Covered   127,594    (13,770)       113,824    -10.8%    -10.8% 
     Total loans  $2,396,174    16,605        2,412,779    0.7%    0.7% 
                               
Deposits – Noninterest bearing checking  $560,230    54,389        614,619    9.7%    9.7% 
Deposits – Interest bearing checking   583,903    (29,985)       553,918    -5.1%    -5.1% 
Deposits – Money market   548,255    28,105        576,360    5.1%    5.1% 
Deposits – Savings   180,317    4,469        184,786    2.5%    2.5% 
Deposits – Brokered   88,375    (29,841)       58,534    -33.8%    -33.8% 
Deposits – Internet time   747    (747)           -100.0%    -100.0% 
Deposits – Time>$100,000   384,127    (42,103)       342,024    -11.0%    -11.0% 
Deposits – Time<$100,000   349,952    (27,066)       322,886    -7.7%    -7.7% 
     Total deposits  $2,695,906    (42,779)       2,653,127    -1.6%    -1.6% 
                               

 

As derived from the table above, for the twelve months preceding June 30, 2015, our total loans decreased $22 million, or 0.9%. This decline was caused primarily by continued resolution of covered loans that were acquired in FDIC-assisted transactions, which is steadily declining as those loans pay down or are otherwise resolved. Internal non-covered loan growth was $2 million, or 0.1%, for the twelve months ended June 30, 2015. Lending levels have been impacted over the past year by intense competition, a relatively slow economic recovery in many of our market areas, as well as pressures from internal loan process changes implemented in mid-2014 designed to enhance loan quality. We continue to pursue lending opportunities in order to improve our asset yields and have introduced initiatives in 2015 to drive loan growth. For the first six months of 2015, we experienced internal growth in our non-covered loan portfolio of $30 million, or 1.3%. This increase was partially offset by a decline in our covered loans of $14 million.

 

The mix of our loan portfolio remains substantially the same at June 30, 2015 compared to December 31, 2014. The majority of our real estate loans are personal and commercial loans where real estate provides additional security for the loan.

 

Note 7 to the Consolidated Financial Statements presents additional detailed information regarding our mix of loans, including a break-out between loans covered by FDIC loss share agreements and non-covered loans. Additionally, the section above titled “FDIC Indemnification Asset” contains detail of our covered loans and foreclosed properties segregated by each of the three remaining loss share agreements.

 

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For both the three and twelve month periods ended June 30, 2015, we experienced net declines in total deposits, with growth in transaction account balances (checking, money market, and savings) being more than offset by declines in time deposits. Time deposits are price sensitive, and with low levels of loan growth, we have not aggressively priced time deposits, and we have also elected not to renew maturing brokered deposits. Also, due to the low interest rates environment, some customers are shifting their funds from time deposits into transaction accounts at our company, which do not pay a materially lower interest rate, while being more liquid.

 

We obtained new borrowings of $60 million in the second quarter of 2015 from a low cost funding source in order to enhance our cash position and in anticipation of future loan growth. The average life of these new borrowings was approximately 2 years with a weighted average interest rate of 1.17%. Total borrowings at June 30, 2015 amounted to $176.4 million compared to $116.4 million a year earlier.

 

Nonperforming Assets

 

Nonperforming assets include nonaccrual loans, troubled debt restructurings, loans past due 90 or more days and still accruing interest, nonperforming loans held for sale, and foreclosed real estate. As previously discussed, as a result of two FDIC-assisted transactions, we entered into loss share agreements that afford us significant protection from losses from all loans and foreclosed real estate acquired in those acquisitions.

 

Because of the loss protection provided by the FDIC, the financial risk of the acquired loans and foreclosed real estate is significantly different from the risk associated with assets not covered under the loss share agreements. Accordingly, we present separately nonperforming assets subject to the loss share agreements as “covered” nonperforming assets, and nonperforming assets that are not subject to the loss share agreements as “non-covered.”

 

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Nonperforming assets are summarized as follows:

 

 

 

ASSET QUALITY DATA ($ in thousands)

  As of/for the
quarter ended
June 30, 2015
   As of/for the
quarter ended
December 31, 2014
   As of/for the
quarter ended
June 30, 2014
 
             
Non-covered nonperforming assets               
   Nonaccrual loans  $44,123    50,066    47,533 
   Restructured loans – accruing   32,059    35,493    27,250 
   Accruing loans >90 days past due            
      Total non-covered nonperforming loans   76,182    85,559    74,783 
   Foreclosed real estate   9,954    9,771    9,346 
          Total non-covered nonperforming assets  $86,136    95,330    84,129 
                
Covered nonperforming assets (1)               
   Nonaccrual loans  $7,378    10,508    20,938 
   Restructured loans – accruing   3,910    5,823    8,193 
   Accruing loans > 90 days past due            
      Total covered nonperforming loans   11,288    16,331    29,131 
   Foreclosed real estate   1,945    2,350    9,934 
          Total covered nonperforming assets  $13,233    18,681    39,065 
                
Total nonperforming assets  $99,369    114,011    123,194 
                
Asset Quality Ratios – All Assets               
Net charge-offs to average loans - annualized   0.80%    0.82%    0.99% 
Nonperforming loans to total loans   3.63%    4.25%    4.27% 
Nonperforming assets to total assets   3.09%    3.54%    3.77% 
Allowance for loan losses to total loans   1.33%    1.70%    1.88% 
Allowance for loan losses to nonperforming loans   36.69%    39.87%    44.07% 
                
Asset Quality Ratios – Based on Non-covered Assets only               
Net charge-offs to average non-covered loans - annualized   0.81%    0.78%    0.69% 
Non-covered nonperforming loans to non-covered loans   3.31%    3.77%    3.31% 
Non-covered nonperforming assets to total non-covered assets   2.78%    3.09%    2.73% 
Allowance for loan losses to non-covered loans   1.31%    1.69%    1.86% 
Allowance for loan losses to non-covered nonperforming loans   39.58%    44.82%    56.12% 

 

(1) Covered nonperforming assets consist of assets that are included in loss share agreements with the FDIC.

 

We have reviewed the collateral for our nonperforming assets, including nonaccrual loans, and have included this review among the factors considered in the evaluation of the allowance for loan losses discussed below.

 

Consistent with the weak economy experienced in much of our market associated with the onset of the recession in 2008, we experienced higher levels of loan losses, delinquencies and nonperforming assets compared to our historical averages. While economic conditions have improved recently and our asset quality has steadily improved, we continue to have elevated levels of losses and nonperforming assets.

 

As noted in the table above, at June 30, 2015, total nonaccrual loans (covered and non-covered) amounted to $51.5 million, compared to $60.6 million at December 31, 2014 and $68.5 million at June 30, 2014. Non-covered nonaccrual loans were $44.1 million, $50.1 million, and $47.5 million at June 30, 2015, December 31, 2014 and June 30, 2014, respectively. Nonaccrual loans decreased during the first half of 2015 as we continue to focus on resolving our problem assets. The increase from June 30, 2014 to December 31, 2014 related to the transfer of covered nonaccrual loans to non-covered status, as discussed in the following paragraph.

 

As previously disclosed, on July 1, 2014, we transferred $9.7 million of covered nonaccrual loans, $2.1 million of covered accruing troubled debt restructurings, and $3.0 million of covered foreclosed real estate to non-covered status due to the scheduled expiration of one of our loss share agreements with the FDIC.

 

“Restructured loans – accruing”, or troubled debt restructurings (“TDRs”), are accruing loans for which we have granted concessions to the borrower as a result of the borrower’s financial difficulties. As seen in the table above “Asset Quality Data”, at June 30, 2015, total TDRs (covered and non-covered) amounted to $36.0 million, compared to $41.3 million at December 31, 2014 and $35.4 million at June 30, 2014.

 

Page 59

Foreclosed real estate includes primarily foreclosed properties. Non-covered foreclosed real estate has not varied significantly over the past year, amounting to $10.0 million at June 30, 2015, $9.8 million at December 31, 2014, and $9.3 million at June 30, 2014.

 

At June 30, 2015, we also held $1.9 million in foreclosed real estate that is subject to the loss share agreements with the FDIC, which is a decline from $2.4 million at December 31, 2014 and $9.9 million at June 30, 2014. The decline is primarily due to increased property sales activity, particularly along the North Carolina coast, which is where most of our covered foreclosed properties are located.

 

The following is the composition, by loan type, of all of our nonaccrual loans (covered and non-covered) at each period end, as classified for regulatory purposes:

 

($ in thousands)  At June 30,
2015
   At December 31,
2014
   At June 30,
2014
 
Commercial, financial, and agricultural  $3,138    3,575    4,305 
Real estate – construction, land development, and other land loans   7,172    10,079    15,466 
Real estate – mortgage – residential (1-4 family) first mortgages   23,174    26,916    21,230 
Real estate – mortgage – home equity loans/lines of credit   3,439    4,214    4,190 
Real estate – mortgage – commercial and other   14,191    15,190    22,670 
Installment loans to individuals   387    600    610 
   Total nonaccrual loans  $51,501    60,574    68,471 

 

The following segregates our nonaccrual loans at June 30, 2015 into covered and non-covered loans, as classified for regulatory purposes:

 

($ in thousands)  Covered
Nonaccrual
Loans
   Non-covered
Nonaccrual
Loans
   Total
Nonaccrual
Loans
 
Commercial, financial, and agricultural  $34    3,104    3,138 
Real estate – construction, land development, and other land loans   96    7,076    7,172 
Real estate – mortgage – residential (1-4 family) first mortgages   4,569    18,605    23,174 
Real estate – mortgage – home equity loans/lines of credit   447    2,992    3,439 
Real estate – mortgage – commercial and other   2,232    11,959    14,191 
Installment loans to individuals       387    387 
   Total nonaccrual loans  $7,378    44,123    51,501 

 

The following segregates our nonaccrual loans at December 31, 2014 into covered and non-covered loans, as classified for regulatory purposes:

 

($ in thousands)  Covered
Nonaccrual
Loans
   Non-covered
Nonaccrual
Loans
   Total
Nonaccrual
Loans
 
Commercial, financial, and agricultural  $104    3,471    3,575 
Real estate – construction, land development, and other land loans   1,140    8,939    10,079 
Real estate – mortgage – residential (1-4 family) first mortgages   7,724    19,192    26,916 
Real estate – mortgage – home equity loans/lines of credit   339    3,875    4,214 
Real estate – mortgage – commercial and other   1,201    13,989    15,190 
Installment loans to individuals       600    600 
   Total nonaccrual loans  $10,508    50,066    60,574 

 

The tables above indicate declines in most categories of nonaccrual loans. The decreases reflect stabilization in most of our market areas and our increased focus on the resolution of our nonperforming assets.

 

We believe that the fair values of the items of foreclosed real estate, less estimated costs to sell, equal or exceed their respective carrying values at the dates presented. The following table presents the detail of all of our foreclosed real estate at each period end (covered and non-covered):

 

($ in thousands)  At June 30, 2015   At December 31, 2014   At June 30, 2014 
Vacant land  $4,414    4,964    6,838 
1-4 family residential properties   3,965    2,878    5,536 
Commercial real estate   3,520    4,279    6,906 
   Total foreclosed real estate  $11,899    12,121    19,280 

 

Page 60

The following segregates our foreclosed real estate at June 30, 2015 into covered and non-covered:

 

($ in thousands)  Covered Foreclosed
Real Estate
   Non-covered
Foreclosed Real Estate
   Total Foreclosed
Real Estate
 
Vacant land  $581    3,833    4,414 
1-4 family residential properties   823    3,142    3,965 
Commercial real estate   541    2,979    3,520 
   Total foreclosed real estate  $1,945    9,954    11,899 

 

The following segregates our foreclosed real estate at December 31, 2014 into covered and non-covered:

 

($ in thousands)  Covered Foreclosed
Real Estate
   Non-covered
Foreclosed Real Estate
   Total Foreclosed
Real Estate
 
Vacant land  $639    4,325    4,964 
1-4 family residential properties   866    2,012    2,878 
Commercial real estate   845    3,434    4,279 
   Total foreclosed real estate  $2,350    9,771    12,121 

 

The following table presents geographical information regarding our nonperforming assets at June 30, 2015.

 

   As of June 30, 2015 
($ in thousands)  Covered   Non-covered   Total   Total Loans   Nonperforming
Loans to Total
Loans
 
                     

Nonaccrual loans and

Troubled Debt Restructurings (1)

                         
Eastern Region (NC)  $7,402    17,406    24,808   $610,000    4.1% 
Triangle Region (NC)       22,614    22,614    718,000    3.1% 
Triad Region (NC)       15,897    15,897    331,000    4.8% 
Charlotte Region (NC)       1,642    1,642    92,000    1.8% 
Southern Piedmont Region (NC)   152    6,869    7,021    260,000    2.7% 
Western Region (NC)   3,703    1    3,704    71,000    5.2% 
South Carolina Region   31    3,565    3,596    105,000    3.4% 
Virginia Region       8,188    8,188    207,000    4.0% 
Other               19,000    0.0% 
          Total nonaccrual loans and troubled debt restructurings  $11,288    76,182    87,470   $2,413,000    3.6% 
                          
Foreclosed Real Estate (1)                         
Eastern Region (NC)  $1,101    1,832    2,933           
Triangle Region (NC)       2,642    2,642           
Triad Region (NC)       2,445    2,445           
Charlotte Region (NC)       804    804           
Southern Piedmont Region (NC)       1,139    1,139           
Western Region (NC)   844        844           
South Carolina Region       842    842           
Virginia Region       250    250           
Other                      
          Total foreclosed real estate   1,945    9,954    11,899           
                          

 

(1)The counties comprising each region are as follows:

Eastern North Carolina Region - New Hanover, Brunswick, Duplin, Dare, Beaufort, Pitt, Onslow, Carteret

Triangle North Carolina Region - Moore, Lee, Harnett, Chatham, Wake

Triad North Carolina Region - Montgomery, Randolph, Davidson, Rockingham, Guilford, Stanly

Charlotte North Carolina Region - Iredell, Cabarrus, Rowan

Southern Piedmont North Carolina Region - Anson, Richmond, Scotland, Robeson, Bladen, Columbus, Cumberland

Western North Carolina Region - Buncombe

South Carolina Region - Chesterfield, Dillon, Florence

Virginia Region - Wythe, Washington, Montgomery, Roanoke

 

Page 61

Summary of Loan Loss Experience

 

The allowance for loan losses is created by direct charges to operations (known as a “provision for loan losses” for the period in which the charge is taken). Losses on loans are charged against the allowance in the period in which such loans, in management’s opinion, become uncollectible. The recoveries realized during the period are credited to this allowance.

 

We have no foreign loans, few agricultural loans and do not engage in significant lease financing or highly leveraged transactions. Commercial loans are diversified among a variety of industries. The majority of our real estate loans are primarily personal and commercial loans where real estate provides additional security for the loan. Collateral for virtually all of these loans is located within our principal market area.

 

The weak economic environment since 2008 has resulted in elevated levels of classified and nonperforming assets, which has generally led to higher provisions for loan losses compared to historical averages. While we are seeing signs of a recovering economy in most of our market areas, the recovery seems to be lagging and is less robust than that of the national economy. Although we continue to have an elevated level of past due and adversely classified assets compared to historic averages, we believe the severity of the loss rate inherent in our current inventory of classified loans is less than in recent years.

 

Our total provision for loan losses was $0.8 million for the second quarter of 2015 compared to a provision for loan losses of $3.7 million in the second quarter of 2014. Our total provision for loan losses for the first six months of 2015 and 2014 was $0.7 million and $7.2 million, respectively. The total provision for loan losses is comprised of provisions for loan losses for non-covered loans and provisions for loan losses for covered loans, as discussed in the following paragraphs.

 

The provision for loan losses on non-covered loans amounted to $1.0 million and $1.2 million in the second quarters of 2015 and 2014, respectively, and $1.1 million and $4.5 million for the first half of 2015 and 2014, respectively. The lower provision in 2015 was primarily the result of improved credit quality trends and generally improving economic trends, as discussed in the following paragraph.

 

Non-covered loan growth for the first six months of 2015 was $30 million compared to $5 million for the first six months of 2014, which resulted in a larger incremental provision for the loan losses attributable to loan growth. However, offsetting this larger incremental provision were favorable trends in our asset quality. As shown in a table within Note 7 to the Consolidated Financial Statements, our total non-covered classified and nonaccrual loans decreased from $125 million at December 31, 2014 to $109 million at June 30, 2015. Additionally, our allowance for loan loss model utilizes the net charge-offs experienced in the most recent years as a significant component of estimating the current allowance for loan losses that is necessary. Thus, older years (and parts thereof) systematically age out and are excluded from the analysis as time goes on. Periods of high net charge-offs we experienced during the peak of the recession are now dropping out of the analysis and being replaced by the more modest levels of net charge-offs now being experienced. The second quarter of 2015 marked our tenth consecutive quarter of annualized net charge-offs related to non-covered loans being less than 1.00%, whereas at the peak of the recession that ratio was frequently over 1.00%. In the near term, we expect that net charge-offs experienced in the next few quarters will continue to be less than those experienced in the recessionary periods that are dropping out of the analysis, and for that reason we expect our resulting provisions for loan losses to be positively impacted.

 

We recorded negative provisions for loan losses on covered loans (reduction of the allowance for loan losses) of $0.2 million and $0.4 million during the three and six months ended June 30, 2015, respectively, compared to $2.5 million and $2.7 million in the same periods of 2014. The negative provisions in 2015 primarily resulted from lower levels of covered nonperforming loans, declining levels of total covered loans and minimal net loan charge-offs.

 

For the first six months of 2015, we recorded $9.2 million in net charge-offs, compared to $9.9 million for the comparable period of 2014. The net charge-offs in 2015 included $0.1 million of net covered loan recoveries and $9.3 million of net non-covered loan charge-offs, whereas in 2014 net charge-offs included $3.1 million in net charge-offs of covered loans and $6.8 million in net charge-offs of non-covered loans. The covered loan net charge-offs in 2014 also include a recovery of $1.9 million that was recorded in the first quarter of 2014.

 

The allowance for loan losses amounted to $32.0 million at June 30, 2015, compared to $40.6 million at December 31, 2014 and $45.8 million at June 30, 2014. The allowance for loan losses for non-covered loans was $30.2 million, $38.3 million, and $42.0 million at June 30, 2015, December 31, 2014, and June 30, 2014 respectively. The ratio of our allowance for non-covered loans to total non-covered loans has declined from 1.86% at June 30, 2014 to 1.31% at June 30, 2015 as a result of the factors discussed above that impacted our provision for loan losses on non-covered loans.

 

Page 62

At June 30, 2015, December 31, 2014, and June 30, 2014, the allowance for loan losses attributable to covered loans was $1.9 million, $2.3 million, and $3.8 million, respectively. The decline from June 30, 2014 to December 31, 2014 was primarily due to the July 1, 2014 transfer of $1.7 million in allowance for loan losses from covered status to non-covered status in connection with the expiration of one of our loss sharing agreements on June 30, 2014, as discussed above.

 

We believe our reserve levels are adequate to cover probable loan losses on the loans outstanding as of each reporting date. It must be emphasized, however, that the determination of the reserve using our procedures and methods rests upon various judgments and assumptions about economic conditions and other factors affecting loans. No assurance can be given that we will not in any particular period sustain loan losses that are sizable in relation to the amounts reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for loan losses or future charges to earnings. See “Critical Accounting Policies – Allowance for Loan Losses” above.

 

In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses and value of other real estate. Such agencies may require us to recognize adjustments to the allowance or the carrying value of other real estate based on their judgments about information available at the time of their examinations.

 

For the periods indicated, the following table summarizes our balances of loans outstanding, average loans outstanding, changes in the allowance for loan losses arising from charge-offs and recoveries, and additions to the allowance for loan losses that have been charged to expense.

 

 

($ in thousands)  Six Months
Ended
June 30,
   Twelve Months
Ended
December 31,
   Six Months
Ended
June 30,
 
   2015   2014   2014 
Loans outstanding at end of period  $2,412,779    2,396,174    2,434,385 
Average amount of loans outstanding  $2,390,403    2,434,331    2,448,866 
                
Allowance for loan losses, at beginning of year  $40,626    48,505    48,505 
Provision for loan losses   677    10,195    7,234 
    41,303    58,700    55,739 
Loans charged off:               
Commercial, financial, and agricultural   (2,412)   (5,179)   (3,566)
Real estate – construction, land development & other land loans   (2,554)   (6,071)   (4,791)
Real estate – mortgage – residential (1-4 family) first mortgages   (2,375)   (4,050)   (1,886)
Real estate – mortgage – home equity loans / lines of credit   (638)   (1,607)   (753)
Real estate – mortgage – commercial and other   (2,321)   (4,405)   (1,432)
Installment loans to individuals   (1,578)   (1,924)   (964)
       Total charge-offs   (11,878)   (23,236)   (13,392)
Recoveries of loans previously charged-off:               
Commercial, financial, and agricultural   365    149    50 
Real estate – construction, land development & other land loans   1,108    3,363    2,535 
Real estate – mortgage – residential (1-4 family) first mortgages   351    646    314 
Real estate – mortgage – home equity loans / lines of credit   67    100    30 
Real estate – mortgage – commercial and other   578    446    286 
Installment loans to individuals   196    458    234 
       Total recoveries   2,665    5,162    3,449 
            Net charge-offs   (9,213)   (18,074)   (9,943)
Allowance for loan losses, at end of period  $32,090    40,626    45,796 
                
Ratios:               
   Net charge-offs as a percent of average loans (annualized)   0.78%    0.74%    0.82% 
   Allowance for loan losses as a percent of loans at end of  period   1.33%    1.70%    1.88% 

 

Page 63

The following table discloses the activity in the allowance for loan losses for the six months ended June 30, 2015, segregated into covered and non-covered.

 

   As of June 30, 2015 
($ in thousands)  Covered   Non-covered   Total 
             
Loans outstanding at end of period  $113,824    2,298,955    2,412,779 
Average amount of loans outstanding  $120,416    2,269,987    2,390,403 
                
Allowance for loan losses, at beginning of year  $2,281    38,345    40,626 
Provision (reversal) for loan losses   (428)   1,105    677 
    1,853    39,450    41,303 
Loans charged off:               
Commercial, financial, and agricultural   (111)   (2,301)   (2,412)
Real estate – construction, land development & other land loans   (523)   (2,031)   (2,554)
Real estate – mortgage – residential (1-4 family) first mortgages   (141)   (2,234)   (2,375)
Real estate – mortgage – home equity loans / lines of credit   (41)   (597)   (638)
Real estate – mortgage – commercial and other   (300)   (2,021)   (2,321)
Installment loans to individuals       (1,578)   (1,578)
       Total charge-offs   (1,116)   (10,762)   (11,878)
                
Recoveries of loans previously charged-off:               
Commercial, financial, and agricultural   22    343    365 
Real estate – construction, land development & other land loans   790    318    1,108 
Real estate – mortgage – residential (1-4 family) first mortgages   192    159    351 
Real estate – mortgage – home equity loans / lines of credit   9    58    67 
Real estate – mortgage – commercial and other   183    395    578 
Installment loans to individuals   2    194    196 
       Total recoveries   1,198    1,467    2,665 
            Net (charge-offs)/recoveries   82    (9,295)   (9,213)
Allowance for loan losses, at end of period  $1,935    30,155    32,090 
                

 

The following table discloses the activity in the allowance for loan losses for the six months ended June 30, 2014, segregated into covered and non-covered.

 

   Six Months Ended June 30, 2014 
($ in thousands)  Covered   Non-covered   Total 
             
Loans outstanding at end of period  $176,855    2,257,530    2,434,385 
Average amount of loans outstanding  $192,572    2,256,294    2,448,866 
                
Allowance for loan losses, at beginning of year  $4,242    44,263    48,505 
Provision for loan losses   2,711    4,523    7,234 
    6,953    48,786    55,739 
Loans charged off:               
Commercial, financial, and agricultural   (1,086)   (2,480)   (3,566)
Real estate – construction, land development & other land loans   (3,520)   (1,271)   (4,791)
Real estate – mortgage – residential (1-4 family) first mortgages   (558)   (1,328)   (1,886)
Real estate – mortgage – home equity loans / lines of credit   (74)   (679)   (753)
Real estate – mortgage – commercial and other   (430)   (1,002)   (1,432)
Installment loans to individuals   (2)   (962)   (964)
       Total charge-offs   (5,670)   (7,722)   (13,392)
                
Recoveries of loans previously charged-off:               
Commercial, financial, and agricultural   2    48    50 
Real estate – construction, land development & other land loans   2,213    322    2,535 
Real estate – mortgage – residential (1-4 family) first mortgages   184    130    314 
Real estate – mortgage – home equity loans / lines of credit       30    30 
Real estate – mortgage – commercial and other   148    138    286 
Installment loans to individuals       234    234 
       Total recoveries   2,547    902    3,449 
            Net charge-offs   (3,123)   (6,820)   (9,943)
Allowance for loan losses, at end of period  $3,830    41,966    45,796 
                

 

Based on the results of our loan analysis and grading program and our evaluation of the allowance for loan losses at June 30, 2015, there have been no material changes to the allocation of the allowance for loan losses among the various categories of loans since December 31, 2014.

Page 64

Liquidity, Commitments, and Contingencies

 

Our liquidity is determined by our ability to convert assets to cash or acquire alternative sources of funds to meet the needs of our customers who are withdrawing or borrowing funds, and to maintain required reserve levels, pay expenses and operate the Company on an ongoing basis. Our primary liquidity sources are net income from operations, cash and due from banks, federal funds sold and other short-term investments. Our securities portfolio is comprised almost entirely of readily marketable securities, which could also be sold to provide cash.

 

In addition to internally generated liquidity sources, we have the ability to obtain borrowings from the following four sources - 1) an approximately $562 million line of credit with the FHLB (of which $130 million was outstanding at June 30, 2015), 2) a $50 million overnight federal funds line of credit with a correspondent bank (of which none was outstanding at June 30, 2015), 3) a $35 million federal funds line of credit with a correspondent bank (of which none was outstanding at June 30, 2015), and 4) an approximately $92 million line of credit through the Federal Reserve Bank of Richmond’s discount window (of which none was outstanding at June 30, 2015). In addition to the outstanding borrowings from the FHLB that reduce the available borrowing capacity of that line of credit, our borrowing capacity was reduced by $193 million at both June 30, 2015 and June 30, 2014 as a result of our pledging letters of credit for public deposits at each of those dates. Unused and available lines of credit amounted to $416 million at June 30, 2015 compared to $288 million at December 31, 2014.

 

Our overall liquidity has remained relatively stable since June 30, 2014. Our liquid assets (cash and securities) as a percentage of our total deposits and borrowings were 20.2% at June 30, 2014, 21.2% at December 31, 2014 and 19.7% at June 30, 2015.

 

We believe our liquidity sources, including unused lines of credit, are at an acceptable level and remain adequate to meet our operating needs in the foreseeable future. We will continue to monitor our liquidity position carefully and will explore and implement strategies to increase liquidity if deemed appropriate.

 

The amount and timing of our contractual obligations and commercial commitments has not changed materially since December 31, 2014, detail of which is presented in Table 18 on page 88 of our 2014 Annual Report on Form 10-K.

 

We are not involved in any legal proceedings that, in our opinion, could have a material effect on our consolidated financial position.

 

Off-Balance Sheet Arrangements and Derivative Financial Instruments

 

Off-balance sheet arrangements include transactions, agreements, or other contractual arrangements pursuant to which we have obligations or provide guarantees on behalf of an unconsolidated entity. We have no off-balance sheet arrangements of this kind other than letters of credit and repayment guarantees associated with our trust preferred securities.

 

Derivative financial instruments include futures, forwards, interest rate swaps, options contracts, and other financial instruments with similar characteristics. We have not engaged in significant derivative activities through June 30, 2015, and have no current plans to do so.

 

Capital Resources

 

We are regulated by the Board of Governors of the Federal Reserve System (the “FED”) and are subject to the securities registration and public reporting regulations of the SEC. Our banking subsidiary is regulated by the North Carolina Office of the Commissioner of Banks and until April 22, 2015, our bank subsidiary was also regulated by the Federal Deposit Insurance Corporation (“FDIC”). Effective April 22, 2015, our bank subsidiary became a member of the FED, and therefore, the Federal Reserve Bank replaced the FDIC as our bank’s primary federal regulator. We are not aware of any recommendations of regulatory authorities or otherwise which, if they were to be implemented, would have a material effect on our liquidity, capital resources, or operations.

 

Page 65

We must comply with regulatory capital requirements established by the FED. 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 our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

The FED has approved the final rules implementing the Basel Committee on Banking Supervision capital guidelines, referred to a “Basel III.” The final rules established a new “Common Equity Tier 1” ratio; new higher capital ratio requirements, including a capital conservation buffer; narrowed the definitions of capital; imposed new operating restrictions on banking organizations with insufficient capital buffers; and increased the risk weighting of certain assets. The final rules became effective January 1, 2015 for the Company. The capital conservation buffer requirement will be phased in beginning January 1, 2016, at 0.625% of risk weighted assets, increasing each year until fully implemented at 2.5% in January 1, 2019.

 

The capital standards require us to maintain minimum ratios of “Common Equity Tier 1” capital to total risk-weighted assets, “Tier 1” capital to total risk-weighted assets, and total capital to risk-weighted assets of 4.50%, 6.00% and 8.00%, respectively. Common Equity Tier 1 capital in comprised of common stock and related surplus, plus retained earnings, and is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities. Tier 1 capital is comprised of Common Equity Tier 1 capital plus Additional Tier 1 Capital, which for the Company includes non-cumulative perpetual preferred stock and trust preferred securities. Total capital is comprised of Tier 1 capital plus certain adjustments, the largest of which is our allowance for loan losses. Risk-weighted assets refer to our on- and off-balance sheet exposures, adjusted for their related risk levels using formulas set forth in FED and FDIC regulations.

 

In addition to the risk-based capital requirements described above, we are subject to a leverage capital requirement, which calls for a minimum ratio of Tier 1 capital (as defined above) to quarterly average total assets of 3.00% to 5.00%, depending upon the institution’s composite ratings as determined by its regulators. The FED has not advised us of any requirement specifically applicable to us.

 

At June 30, 2015, our capital ratios exceeded the regulatory minimum ratios discussed above. The following table presents our capital ratios and the regulatory minimums discussed above for the periods indicated.

 

   June 30,
2015
   December 31,
2014
   June 30,
2014
 
   (Based on Basel III)   (Pre-Basel III)   (Pre-Basel III) 
Risk-based capital ratios:               
Common Equity Tier 1 to Tier 1 risk weighted assets   11.38%    n/a    n/a 
Minimum required Common Equity Tier 1 capital   4.50%    n/a    n/a 
                
Tier I capital to Tier 1 risk weighted assets   14.89%    16.35%    15.88% 
Minimum required Tier 1 capital   6.00%    4.00%    4.00% 
                
Total risk-based capital to Tier II risk weighted assets   16.14%    17.60%    17.14% 
Minimum required total risk-based capital   8.00%    8.00%    8.00% 
                
Leverage capital ratios:               
Tier 1 capital to quarterly average total assets   11.29%    11.61%    11.15% 
Minimum required Tier 1 leverage capital   4.00%    4.00%    4.00% 

 

Our bank subsidiary is also subject to capital requirements similar to those discussed above. The bank subsidiary’s capital ratios do not vary materially from our capital ratios presented above. At June 30, 2015, our bank subsidiary exceeded the minimum ratios established by the regulatory authorities.

 

In the table above, the declines in our capital ratios at June 30, 2015 are as a result of the Company redeeming $32 million in Series B Preferred Stock in June 2015. See Note 14 to the Consolidated Financial Statements for additional discussion.

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In addition to regulatory capital ratios, we also closely monitor our ratio of tangible common equity to tangible assets (“TCE Ratio”). Our TCE ratio was 8.24% at June 30, 2015 compared to 7.90% at December 31, 2014 and 7.57% at June 30, 2014.

 

BUSINESS DEVELOPMENT MATTERS

 

The following is a list of business development and other miscellaneous matters affecting the Company and First Bank, our bank subsidiary.

 

·On June 16, 2015, the Company announced a quarterly cash dividend of $0.08 per share payable on July 24, 2015 to shareholders of record on June 30, 2015. This is the same dividend rate as the Company declared in the second quarter of 2014.

 

·On May 18, 2015, the Company opened a new branch facility at 4110 Western Boulevard, Jacksonville, North Carolina. The First Bank branch located at 400 Western Boulevard in Jacksonville was closed and the accounts serviced at that branch were reassigned to the new and improved branch.

 

SHARE REPURCHASES

 

We did not repurchase any shares of our common stock during the first six months of 2015. At June 30, 2015, we had approximately 214,000 shares available for repurchase under existing authority from our board of directors. We may repurchase these shares in open market and privately negotiated transactions, as market conditions and our liquidity warrants, subject to compliance with applicable regulations. See also Part II, Item 2 “Unregistered Sales of Equity Securities and Use of Proceeds.”

 

 

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

 

INTEREST RATE RISK (INCLUDING QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK)

 

Net interest income is our most significant component of earnings. Notwithstanding changes in volumes of loans and deposits, our level of net interest income is continually at risk due to the effect that changes in general market interest rate trends have on interest yields earned and paid with respect to our various categories of earning assets and interest-bearing liabilities. It is our policy to maintain portfolios of earning assets and interest-bearing liabilities with maturities and repricing opportunities that will afford protection, to the extent practical, against wide interest rate fluctuations. Our exposure to interest rate risk is analyzed on a regular basis by management using standard GAP reports, maturity reports, and an asset/liability software model that simulates future levels of interest income and expense based on current interest rates, expected future interest rates, and various intervals of “shock” interest rates. Over the years, we have been able to maintain a fairly consistent yield on average earning assets (net interest margin). Over the past five calendar years, our net interest margin has ranged from a low of 4.39% (realized in 2010) to a high of 4.92% (realized in 2013). During that five year period, the prime rate of interest has consistently remained at 3.25% (which was the rate as of June 30, 2015). The consistency of the net interest margin is aided by the relatively low level of long-term interest rate exposure that we maintain. At June 30, 2015, approximately 76% of our interest-earning assets are subject to repricing within five years (because they are either adjustable rate assets or they are fixed rate assets that mature) and substantially all of our interest-bearing liabilities reprice within five years.

 

Using stated maturities for all fixed rate instruments except mortgage-backed securities (which are allocated in the periods of their expected payback) and securities and borrowings with call features that are expected to be called (which are shown in the period of their expected call), at June 30, 2015, we had approximately $897 million more in interest-bearing liabilities that are subject to interest rate changes within one year than earning assets. This generally would indicate that net interest income would experience downward pressure in a rising interest rate environment and would benefit from a declining interest rate environment. However, this method of analyzing interest sensitivity only measures the magnitude of the timing differences and does not address earnings, market value, or management actions. Also, interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. In addition to the effects of “when” various rate-sensitive products reprice, market rate changes may not result in uniform changes in rates among all products. For example, included in interest-bearing liabilities subject to interest rate changes within one year at June 30, 2015 are deposits totaling $1.3 billion comprised of checking, savings, and certain types of money market deposits with interest rates set by management. These types of deposits historically have not repriced with, or in the same proportion, as general market indicators.

 

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Overall, we believe that in the near term (twelve months), net interest income will not likely experience significant downward pressure from rising interest rates. Similarly, we would not expect a significant increase in near term net interest income from falling interest rates. Generally, when rates change, our interest-sensitive assets that are subject to adjustment reprice immediately at the full amount of the change, while our interest-sensitive liabilities that are subject to adjustment reprice at a lag to the rate change and typically not to the full extent of the rate change. In the short-term (less than six months), this results in us being asset-sensitive, meaning that our net interest income benefits from an increase in interest rates and is negatively impacted by a decrease in interest rates. However, in the twelve-month horizon, the impact of having a higher level of interest-sensitive liabilities lessens the short-term effects of changes in interest rates.

 

The general discussion in the foregoing paragraph applies most directly in a “normal” interest rate environment in which longer-term maturity instruments carry higher interest rates than short-term maturity instruments, and is less applicable in periods in which there is a “flat” interest rate curve. A “flat yield curve” means that short-term interest rates are substantially the same as long-term interest rates. As a result of the prolonged fragile economic environment that continued into 2014, the Federal Reserve took steps to suppress long-term interest rates in an effort to boost the housing market, increase employment, and stimulate the economy, which resulted in a flat interest rate curve. A flat interest rate curve is an unfavorable interest rate environment for many banks, including the Company, as short-term interest rates generally drive our deposit pricing and longer-term interest rates generally drive loan pricing. When these rates converge, the profit spread we realize between loan yields and deposit rates narrows, which pressures our net interest margin.

 

While there have been periods in the last few years that the yield curve has steepened somewhat, it currently remains relatively flat. This flat yield curve and the intense competition for high-quality loans in our market areas have limited our ability to charge higher rates on loans, and thus we continue to experience downward pressure on our loan yields and net interest margin.

 

As it relates to deposits, the Federal Reserve has made no changes to the short term interest rates it sets directly since 2008, and since that time we have been able to reprice many of our maturing time deposits at lower interest rates. We were also able to generally decrease the rates we paid on other categories of deposits as a result of declining short-term interest rates in the marketplace and an increase in liquidity that lessened our need to offer premium interest rates. However, as short-term rates are already near zero, it is unlikely that we will be able to continue the trend of reducing our funding costs in the same proportion as experienced in recent years.

 

As previously discussed in the section “Net Interest Income,” our net interest income has been impacted by certain purchase accounting adjustments related primarily to our acquisitions of Cooperative Bank and The Bank of Asheville. The purchase accounting adjustments related to the premium amortization on loans, deposits and borrowings are based on amortization schedules and are thus systematic and predictable. The accretion of the loan discount on loans acquired from Cooperative Bank and The Bank of Asheville, which amounted to $1.1 million and $4.9 million for the second quarters of 2015 and 2014, respectively, and $2.7 million and $11.3 million for the first six months of 2015 and 2014, respectively, is less predictable and could be materially different among periods. This is because of the magnitude of the discounts that were initially recorded ($280 million in total) and the fact that the accretion being recorded is dependent on both the credit quality of the acquired loans and the impact of any accelerated loan repayments, including payoffs. If the credit quality of the loans declines, some, or all, of the remaining discount will cease to be accreted into income. If the underlying loans experience accelerated paydowns or improved performance expectations, the remaining discount will be accreted into income on an accelerated basis. In the event of total payoff, the remaining discount will be entirely accreted into income in the period of the payoff. Each of these factors is difficult to predict and susceptible to volatility. However, with the remaining loan discount on accruing loans having naturally declined since inception, amounting to $15.1 million at June 30, 2015, we expect that loan discount accretion, and the related indemnification asset expense associated with the accretion, will continue to decline in 2015. If that occurs, our net interest margin will be negatively impacted and our noninterest income will be positively impacted (due to the lower indemnification asset expense).

 

Based on our most recent interest rate modeling, which assumes no changes in interest rates for 2015 (federal funds rate = 0.25%, prime = 3.25%), we project that our net interest margin for the remainder of 2015 will experience some compression. We expect loan yields to continue to trend downwards, while many of our deposit products already have interest rates near zero.

 

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We have no market risk sensitive instruments held for trading purposes, nor do we maintain any foreign currency positions.

 

See additional discussion regarding net interest income, as well as discussion of the changes in the annual net interest margin in the section entitled “Net Interest Income” above.

 

Item 4 – Controls and Procedures

 

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, which are our controls and other procedures that are designed to ensure that information required to be disclosed in our periodic reports with the SEC is recorded, processed, summarized and reported within the required time periods.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed is communicated to our management to allow timely decisions regarding required disclosure.  Based on the evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective in allowing timely decisions regarding disclosure to be made about material information required to be included in our periodic reports with the SEC. In addition, no change in our internal control over financial reporting has occurred during, or subsequent to, the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Part II. Other Information

 

Item 1 – Legal Proceedings

 

Various legal proceedings may arise in the ordinary course of business and may be pending or threatened against the Company and its subsidiaries.  However, neither the Company nor any of its subsidiaries is currently involved in any pending legal proceedings that management believes are material to the Company or its consolidated financial position.  If an exposure were to be identified, it is the Company’s policy to establish and accrue appropriate reserves during the accounting period in which a loss is deemed to be probable and the amount is determinable.

 

As previously disclosed, in November 2014, we received a “Wells Notice” letter from the SEC relating to an investigation into our alleged failure to disclose certain related party transactions between the Company and certain of our officers and/or directors or their immediate family members during the period from 2009 through 2011. After receiving the notice, we cooperated with the SEC and pursued negotiations with them in an attempt to resolve the matters at issue. On June 1, 2015, the matters were resolved, with the SEC issuing a cease and desist order against the Company and two former executive officers of the Company. In the order, the SEC concluded the following: 1) we violated related party transaction disclosure requirements, 2) we did not maintain effective disclosure controls and procedures, and 3) we did not maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles. The order included a requirement that we not commit any future similar violations and imposed a $275,000 civil money penalty on the Company. The full order is available at the SEC’s website – www.sec.gov.

 

At December 31, 2014, there were $1.2 million in loss share agreement claims related to two loans that the FDIC denied because they disagreed with the collection strategy that we undertook. As discussed in Note 9 to the Consolidated Financial Statements, a negotiated agreement was reached with the FDIC during the three months ended June 30, 2015 in which the FDIC will pay $0.8 million of the disputed claims and one of the loans being removed from the loss share agreement, which will result in the Company keeping 100% of any future recoveries. As a result of this agreement, we wrote-off $0.4 million of our FDIC loss share receivable during the three months ended June 30, 2015.

 

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Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchases of Equity Securities
Period  Total Number of
Shares
Purchased (2)
   Average Price
Paid per Share
   Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (1)
   Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs (1)
 
April 1, 2015 to April 30, 2015           214,241 
May 1, 2015 to May 31, 2015               214,241 
June 1, 2015 to June 30, 2015               214,241 
Total               214,241 

 

Footnotes to the Above Table

(1)All shares available for repurchase are pursuant to publicly announced share repurchase authorizations. On July 30, 2004, the Company announced that its board of directors had approved the repurchase of 375,000 shares of the Company’s common stock. The repurchase authorization does not have an expiration date. There are no plans or programs the Company has determined to terminate prior to expiration, or under which we do not intend to make further purchases.

 

(2)The table above does not include shares that were used by option holders to satisfy the exercise price of the call options issued by the Company to its employees and directors pursuant to the Company’s stock option plans. There were no such exercises during the three months ended June 30, 2015.

 

There were no unregistered sales of our securities during the three months ended June 30, 2015.

 

Item 6 - Exhibits

 

The following exhibits are filed with this report or, as noted, are incorporated by reference. Except as noted below the exhibits identified have SEC File No. 000-15572. Management contracts, compensatory plans and arrangements are marked with an asterisk (*).

 

3.aArticles of Incorporation of the Company and amendments thereto were filed as Exhibits 3.a.i through 3.a.v to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2002, and are incorporated herein by reference. Articles of Amendment to the Articles of Incorporation were filed as Exhibits 3.1 and 3.2 to the Company’s Current Report on Form 8-K filed on January 13, 2009, and are incorporated herein by reference. Articles of Amendment to the Articles of Incorporation were filed as Exhibit 3.1.b to the Company’s Registration Statement on Form S-3D filed on June 29, 2010 (Commission File No. 333-167856), and are incorporated herein by reference. Articles of Amendment to the Articles of Incorporation were filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on September 6, 2011, and are incorporated herein by reference. Articles of Amendment to the Articles of Incorporation were filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 26, 2012, and are incorporated herein by reference.

 

3.bAmended and Restated Bylaws of the Company were filed as Exhibit 3.1 to the Company's Current Report on Form 8-K filed on November 23, 2009, and are incorporated herein by reference.

 

4.aForm of Common Stock Certificate was filed as Exhibit 4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, and is incorporated herein by reference.

 

4.bForm of Certificate for Series B Preferred Stock was filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on September 6, 2011, and is incorporated herein by reference.

 

4.cForm of Certificate for Series C Preferred Stock was filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 26, 2012, and is incorporated herein by reference.

 

12Computation of Ratio of Earnings to Fixed Charges.
31.1Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

 

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31.2Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

 

32.1Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

101The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements.

 

 

 

Copies of exhibits are available upon written request to: First Bancorp, Elizabeth B. Bostian, Secretary, 300 SW Broad Street, Southern Pines, North Carolina, 28387

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

    FIRST BANCORP  
       
       
  August 10, 2015 BY:/s/ Richard H. Moore  
              Richard H. Moore  
                  President  
      (Principal Executive Officer),  
         Treasurer and Director  
       
       
       
  August 10, 2015 BY:/s/ Eric P. Credle  
              Eric P. Credle  
     Executive Vice President  
    and Chief Financial Officer  

 

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