Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2014

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to              

 

Commission file number 001-12669

 

FIRST FINANCIAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

South Carolina

 

57-0799315

(State or other jurisdiction of incorporation)

 

(IRS Employer Identification No.)

 

520 Gervais Street

 

 

Columbia, South Carolina

 

29201

(Address of principal executive offices)

 

(Zip Code)

 

(800) 277-2175

(Registrant’s telephone number, including area code)

 

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

 

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 (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  o

 

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

 

Large Accelerated Filer x

 

Accelerated Filer o

 

 

 

Non-Accelerated Filer o

 

Smaller Reporting Company o

 

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

 

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

 

Class

 

Outstanding as of April 30, 2014

Common Stock, $2.50 par value

 

24,122,494

 

 

 



Table of Contents

 

First Financial Holdings, Inc. and Subsidiary

March 31, 2014 Form 10-Q

 

INDEX

 

 

 

Page

 

 

 

PART I — FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets at March 31, 2014, December 31, 2013 and March 31, 2013

1

 

 

 

 

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

2

 

 

 

 

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

3

 

 

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2014 and 2013

4

 

 

 

 

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

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6-44

 

 

 

Item 2.

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

45-64

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

64

 

 

 

Item 4.

Controls and Procedures

64

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

65

 

 

 

Item 1A.

Risk Factors

66

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

67

 

 

 

Item 3.

Defaults Upon Senior Securities

67

 

 

 

Item 4.

Mine Safety Disclosures

67

 

 

 

Item 5.

Other Information

67

 

 

 

Item 6.

Exhibits

68

 



Table of Contents

 

PART I — FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

 

First Financial Holdings, Inc. and Subsidiary

Condensed Consolidated Balance Sheets

(Dollars in thousands, except par value)

 

 

 

March 31,

 

December 31,

 

March 31,

 

 

 

2014

 

2013

 

2013

 

 

 

(Unaudited)

 

(Audited)

 

(Unaudited)

 

ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

Cash and due from banks

 

$

361,816

 

$

184,611

 

$

227,326

 

Interest-bearing deposits with banks

 

4,690

 

32,632

 

5,743

 

Federal funds sold and securities purchased under agreements to resell

 

246,109

 

262,218

 

262,800

 

Total cash and cash equivalents

 

612,615

 

479,461

 

495,869

 

Investment securities:

 

 

 

 

 

 

 

Securities held to maturity (fair value of $11,427, $12,891, and $15,555, respectively)

 

10,891

 

12,426

 

14,598

 

Securities available for sale, at fair value

 

793,124

 

786,791

 

510,852

 

Other investments

 

10,518

 

13,386

 

7,805

 

Total investment securities

 

814,533

 

812,603

 

533,255

 

Loans held for sale

 

57,200

 

30,586

 

50,449

 

Loans:

 

 

 

 

 

 

 

Acquired credit impaired (covered of $263,735, $289,122, and $225,789, respectively; non-covered of $850,028, $926,958 and $667,955, respectively), net of allowance for loan losses

 

1,113,763

 

1,216,080

 

893,744

 

Acquired non-credit impaired (covered of $8,246, $7,824, and $0, respectively; non-covered of $1,503,955, $1,590,227 and $70,234, respectively)

 

1,512,201

 

1,598,051

 

70,234

 

Non-acquired

 

2,979,958

 

2,865,216

 

2,604,298

 

Less allowance for non-acquired loan losses

 

(34,669

)

(34,331

)

(41,669

)

Loans, net

 

5,571,253

 

5,645,016

 

3,526,607

 

FDIC receivable for loss share agreements

 

67,984

 

93,947

 

124,340

 

Other real estate owned (covered of $29,003, $27,520, and $34,244, respectively; non-covered of $35,144, $37,398, and $36,446, respectively)

 

64,147

 

64,918

 

70,690

 

Premises and equipment, net

 

187,127

 

188,114

 

110,792

 

Bank owned life insurance

 

97,314

 

97,197

 

43,008

 

Deferred tax assets

 

70,923

 

76,690

 

31,348

 

Mortgage servicing rights

 

20,925

 

20,729

 

 

Core deposit and other intangibles

 

57,568

 

59,908

 

24,180

 

Goodwill

 

319,107

 

319,107

 

103,292

 

Other assets

 

50,279

 

43,222

 

28,099

 

Total assets

 

$

7,990,975

 

$

7,931,498

 

$

5,141,929

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest-bearing

 

$

1,581,157

 

$

1,487,798

 

$

995,214

 

Interest-bearing

 

5,049,496

 

5,067,699

 

3,224,142

 

Total deposits

 

6,630,653

 

6,555,497

 

4,219,356

 

Federal funds purchased and securities sold under agreements to repurchase

 

254,985

 

211,401

 

328,701

 

Other borrowings

 

100,963

 

102,060

 

54,638

 

Other liabilities

 

70,211

 

81,071

 

25,023

 

Total liabilities

 

7,056,812

 

6,950,029

 

4,627,718

 

Shareholders’ equity:

 

 

 

 

 

 

 

Preferred stock - $.01 par value; authorized 10,000,000 shares; 0, 65,000, and 0 shares issued and outstanding, respectively

 

 

1

 

 

Common stock - $2.50 par value; authorized 40,000,000 shares; 24,118,243, 24,104,124, and 17,017,904 shares issued and outstanding, respectively

 

60,296

 

60,260

 

42,545

 

Surplus

 

698,079

 

762,354

 

329,636

 

Retained earnings

 

179,842

 

168,577

 

143,573

 

Accumulated other comprehensive loss

 

(4,054

)

(9,723

)

(1,543

)

Total shareholders’ equity

 

934,163

 

981,469

 

514,211

 

Total liabilities and shareholders’ equity

 

$

7,990,975

 

$

7,931,498

 

$

5,141,929

 

 

The Accompanying Notes are an Integral Part of the Financial Statements.

 

1



Table of Contents

 

First Financial Holdings, Inc. and Subsidiary

Condensed Consolidated Statements of Income (unaudited)

(Dollars in thousands, except per share data)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2014

 

2013

 

Interest income:

 

 

 

 

 

Loans, including fees

 

$

81,841

 

$

52,384

 

Investment securities:

 

 

 

 

 

Taxable

 

3,881

 

2,161

 

Tax-exempt

 

1,156

 

1,206

 

Federal funds sold and securities purchased under agreements to resell

 

460

 

418

 

Total interest income

 

87,338

 

56,169

 

Interest expense:

 

 

 

 

 

Deposits

 

2,393

 

1,559

 

Federal funds purchased and securities sold under agreements to repurchase

 

101

 

136

 

Other borrowings

 

1,502

 

673

 

Total interest expense

 

3,996

 

2,368

 

Net interest income

 

83,342

 

53,801

 

Provision for loan losses

 

849

 

1,060

 

Net interest income after provision for loan losses

 

82,493

 

52,741

 

Noninterest income:

 

 

 

 

 

Service charges on deposit accounts

 

8,988

 

5,761

 

Bankcard services income

 

7,124

 

3,893

 

Trust and investment services income

 

4,543

 

2,314

 

Mortgage banking income

 

3,291

 

3,355

 

Amortization of FDIC indemnification assets, net

 

(7,078

)

(7,171

)

Other

 

3,811

 

1,371

 

Total noninterest income

 

20,679

 

9,523

 

Noninterest expense:

 

 

 

 

 

Salaries and employee benefits

 

39,093

 

23,252

 

Merger and branding related expense

 

5,985

 

1,963

 

Net occupancy expense

 

5,590

 

3,345

 

OREO expense and loan related

 

4,269

 

3,102

 

Information services expense

 

4,222

 

3,192

 

Furniture and equipment expense

 

3,754

 

2,572

 

Bankcard expense

 

2,299

 

1,164

 

Amortization of intangibles

 

2,104

 

1,034

 

FDIC assessment and other regulatory charges

 

1,576

 

1,224

 

Professional fees

 

1,341

 

691

 

Advertising and marketing

 

1,134

 

842

 

Other

 

6,056

 

4,060

 

Total noninterest expense

 

77,423

 

46,441

 

Earnings:

 

 

 

 

 

Income before provision for income taxes

 

25,749

 

15,823

 

Provision for income taxes

 

8,832

 

5,174

 

Net income

 

16,917

 

10,649

 

Preferred stock dividends

 

1,073

 

 

Net income available to common shareholders

 

$

15,844

 

$

10,649

 

Earnings per common share:

 

 

 

 

 

Basic

 

$

0.66

 

$

0.64

 

Diluted

 

$

0.66

 

$

0.63

 

Dividends per common share

 

$

0.19

 

$

0.18

 

Weighted-average common shares outstanding:

 

 

 

 

 

Basic

 

23,873

 

16,787

 

Diluted

 

24,116

 

16,954

 

 

The Accompanying Notes are an Integral Part of the Financial Statements.

 

2



Table of Contents

 

First Financial Holdings, Inc. and Subsidiary

Condensed Consolidated Statements of Comprehensive Income (unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended

 

 

 

March, 31

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Net income

 

$

16,917

 

$

10,649

 

Other comprehensive income (loss):

 

 

 

 

 

Unrealized gains (losses) on securities:

 

 

 

 

 

Unrealized holding gains (losses) arising during period

 

9,158

 

(3,203

)

Tax effect

 

(3,492

)

1,221

 

Reclassification adjustment for gains included in net income

 

 

 

Tax effect

 

 

 

Net of tax amount

 

5,666

 

(1,982

)

Unrealized gains (losses) on derivative financial instruments qualifying as cash flow hedges:

 

 

 

 

 

Unrealized holding gains (losses) arising during period

 

(71

)

29

 

Tax effect

 

27

 

(11

)

Reclassification adjustment for losses included in interest expense

 

76

 

73

 

Tax effect

 

(29

)

(28

)

Net of tax amount

 

3

 

63

 

Other comprehensive income (loss), net of tax

 

5,669

 

(1,919

)

Comprehensive income

 

$

22,586

 

$

8,730

 

 

The Accompanying Notes are an Integral Part of the Financial Statements.

 

3



Table of Contents

 

First Financial Holdings, Inc. and Subsidiary

Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited)

Three months ended March 31, 2014 and 2013

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other

 

 

 

 

 

Preferred Stock

 

Common Stock

 

 

 

Retained

 

Comprehensive

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Surplus

 

Earnings

 

Income (Loss)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2012

 

 

$

 

 

16,937,464

 

$

 

42,344

 

$

 

328,843

 

$

 

135,986

 

$

 

376

 

$

 

507,549

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

10,649

 

 

10,649

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

(1,919

)

(1,919

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,730

 

Cash dividends declared on common stock at $.18 per share

 

 

 

 

 

 

(3,062

)

 

(3,062

)

Stock options exercised

 

 

 

18,211

 

45

 

471

 

 

 

516

 

Restricted stock awards

 

 

 

68,308

 

171

 

(171

)

 

 

 

Common stock repurchased

 

 

 

(6,079

)

(15

)

(290

)

 

 

(305

)

Share-based compensation expense

 

 

 

 

 

783

 

 

 

783

 

Balance, March 31, 2013

 

 

$

 

 

17,017,904

 

$

 

42,545

 

$

 

329,636

 

$

 

143,573

 

$

 

(1,543

)

$

 

514,211

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2013

 

65,000

 

$

 

1

 

24,104,124

 

$

 

60,260

 

$

 

762,354

 

$

 

168,577

 

$

 

(9,723

)

$

 

981,469

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

16,917

 

 

16,917

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

5,669

 

5,669

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22,586

 

Cash dividends on Series A preferred stock at annual dividend rate of 9%

 

 

 

 

 

 

(1,073

)

 

(1,073

)

Cash dividends declared on common stock at $.19 per share

 

 

 

 

 

 

(4,579

)

 

(4,579

)

Stock options exercised

 

 

 

4,660

 

12

 

117

 

 

 

129

 

Restricted stock awards

 

 

 

13,592

 

34

 

(34

)

 

 

 

Repurchase of Series A preferred stock

 

(65,000

)

(1

)

 

 

(64,999

)

 

 

(65,000

)

Common stock repurchased

 

 

 

(4,133

)

(10

)

(243

)

 

 

(253

)

Share-based compensation expense

 

 

 

 

 

884

 

 

 

884

 

Balance, March 31, 2014

 

 

$

 

 

24,118,243

 

$

 

60,296

 

$

 

698,079

 

$

 

179,842

 

$

 

(4,054

)

$

 

934,163

 

 

The Accompanying Notes are an Integral Part of the Financial Statements.

 

4



Table of Contents

 

First Financial Holdings, Inc. and Subsidiary

Condensed Consolidated Statements of Cash Flows (unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2014

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

16,917

 

$

10,649

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

5,367

 

3,500

 

Provision for loan losses

 

849

 

1,060

 

Deferred income taxes

 

2,303

 

2,212

 

Share-based compensation expense

 

884

 

783

 

Amortization on FDIC indemnification asset

 

7,078

 

7,171

 

Accretion on acquired loans

 

(21,877

)

(23,370

)

(Gain) loss on sale of premises and equipment

 

(4

)

5

 

Gain on sale of OREO

 

(2,712

)

(2,582

)

Net amortization of premium on investment securities

 

998

 

1,246

 

OREO write downs

 

3,001

 

2,570

 

Originations and purchases of mortgage loans for sale

 

(141,939

)

(216,333

)

Proceeds from sales of mortgage loans for sale

 

132,935

 

231,163

 

Net change in:

 

 

 

 

 

Accrued interest receivable

 

(2,385

)

(2,480

)

Prepaid assets

 

2,105

 

(949

)

FDIC Loss Share Receivable

 

18,884

 

14,660

 

Accrued interest payable

 

(534

)

(585

)

Accrued income taxes

 

10,725

 

5,379

 

Miscellaneous assets and liabilities

 

(19,817

)

(11,726

)

Net cash provided by operating activities

 

12,778

 

22,373

 

Cash flows from investing activities:

 

 

 

 

 

Proceeds from maturities and calls of investment securities held to maturity

 

1,535

 

843

 

Proceeds from maturities and calls of investment securities available for sale

 

29,157

 

56,888

 

Proceeds from sales of other investment securities

 

2,868

 

1,963

 

Purchases of investment securities available for sale

 

(27,413

)

(37,283

)

Purchases of other investments

 

(6,186

)

 

Net decrease in customer loans

 

65,199

 

54,021

 

Net cash received from acquisitions

 

749

 

 

Purchases of premises and equipment

 

(5,389

)

(2,936

)

Proceeds from sale of OREO

 

13,070

 

11,356

 

Proceeds from sale of premises and equipment

 

6

 

 

Net cash provided by investing activities

 

73,596

 

84,852

 

Cash flows from financing activities:

 

 

 

 

 

Net increase (decrease) in deposits

 

75,156

 

(79,004

)

Net increase in federal funds purchased and securities sold under agreements to repurchase and other short-term borrowings

 

43,584

 

90,080

 

Repayment of other borrowings

 

(1,184

)

(311

)

Preferred stock repurchase

 

(65,000

)

 

Common stock repurchase

 

(253

)

(305

)

Dividends paid on preferred stock

 

(1,073

)

 

Dividends paid on common stock

 

(4,579

)

(3,062

)

Stock options exercised

 

129

 

516

 

Net cash provided by financing activities

 

46,780

 

7,914

 

Net increase in cash and cash equivalents

 

133,154

 

115,139

 

Cash and cash equivalents at beginning of period

 

479,461

 

380,730

 

Cash and cash equivalents at end of period

 

$

612,615

 

$

495,869

 

 

 

 

 

 

 

Supplemental Disclosures:

 

 

 

 

 

Cash Flow Information:

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Interest

 

$

4,540

 

$

2,811

 

Income taxes

 

$

421

 

$

564

 

 

 

 

 

 

 

Schedule of Noncash Investing Transactions:

 

 

 

 

 

Real estate acquired in full or in partial settlement of loans (covered of $6,822 and $6,186, respectively; and non-covered of $5,766 and $10,542, respectively)

 

$

12,588

 

$

16,728

 

 

The Accompanying Notes are an Integral Part of the Financial Statements.

 

5



Table of Contents

 

First Financial Holdings, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements (unaudited)

 

Note 1 — Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Certain prior period information has been reclassified to conform to the current period presentation, and these reclassifications had no impact on net income or equity as previously reported.  Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

 

The condensed consolidated balance sheet at December 31, 2013 has been derived from the audited financial statements at that date but does not include all of the information and disclosures required by GAAP for complete financial statements.

 

Note 2 — Summary of Significant Accounting Policies

 

The information contained in the consolidated financial statements and accompanying notes included in First Financial Holdings, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2014,  should be referenced when reading these unaudited condensed consolidated financial statements.  Unless otherwise mentioned or unless the context requires otherwise, references herein to the “Company” “we,” “us,” “our” or similar references mean First Financial Holdings, Inc. and its consolidated subsidiaries.  References to the “Bank” or “SCBT” mean the Company’s wholly-owned bank subsidiary, SCBT, a South Carolina banking corporation.

 

Subsequent Events

 

The Company has evaluated subsequent events for accounting and disclosure purposes through the date the financial statements are issued.

 

Note 3 — Recent Accounting and Regulatory Pronouncements

 

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, a consensus of the FASB Emerging Issues Task Force (“ASU 2014-04”). ASU 2014-04 clarifies that an in-substance foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (i) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (ii) the borrower conveying all interest in the residential real estate property to the creditor to satisfy the loan through completion of a deed in lieu of foreclosure or similar legal agreement. ASU 2014-04 also requires disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in loans collateralized by residential real estate property that are in the process of foreclosure. ASU 2014-04 is effective for public companies for interim and annual periods beginning after December 15, 2014, with early adoption permitted. Once adopted, an entity can elect either (i) a modified retrospective transition method or (ii) a prospective transition method. The modified retrospective transition method is applied by means of a cumulative-effect adjustment to residential mortgage loans and foreclosed residential real estate properties existing as of the beginning of the period for which the amendments of ASU 2014-04 are effective, with real estate reclassified to loans measured at the carrying value of the real estate at the date of adoption and loans reclassified to real estate measured at the lower of net carrying value of the loan or the fair value of the real estate less costs to sell at the date of adoption. The prospective transition method is applied by means of applying the amendments of ASU 2014-04 to all instances of receiving physical possession of residential real estate properties that occur after the date of adoption. The adoption of ASU 2014-04 is not expected to have a material impact on the Company’s financial statements.

 

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Table of Contents

 

Note 3 — Recent Accounting and Regulatory Pronouncements (Continued)

 

In January 2014, the FASB issued ASU No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects (“ASU 2014-01”). ASU 2014-01 amends FASB ASC 323, Investments — Equity Method and Joint Ventures, to permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). ASU 2014-01 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2014 and should be applied retrospectively. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but does not expect it to have a material impact.

 

In July 2013, FASB issued ASU No. 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes (“ASU 2013-10”).  The amendments in this update permit the Fed Funds Effective Swap Rate (OIS) to be used as a benchmark interest rate for hedge accounting in addition to UST and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges. ASU 2013-10 is effective prospectively for qualifying new or re-designated hedging relationships entered into on or after July 17, 2013 and did not have a significant impact on the Company’s financial statements.

 

Note 4 — Mergers and Acquisitions

 

The following mergers and acquisitions are referenced throughout this Form 10-Q:

 

Community Bank & Trust (“CBT”) — January 29, 2010 — FDIC purchase and assumption agreement

Habersham Bank (“Habersham”) — February 18, 2011 — FDIC purchase and assumption agreement

BankMeridian, N.A. (“BankMeridian”) — July 29, 2011 — FDIC purchase and assumption agreement

Peoples Bancorporation, Inc. (“Peoples”) — April 24, 2012 — Whole bank acquisition (non FDIC)

The Savannah Bancorp, Inc. (“Savannah”) — December 13, 2012 — Whole bank acquisition (non FDIC)

Former First Financial Holdings, Inc. (“FFHI”) — July 26, 2013 — Whole bank acquisition with FDIC purchase and assumption agreements of Cape Fear Bank (“Cape Fear”) — April 10, 2009 and Plantation Federal Bank (“Plantation”) — April 27, 2012

 

“FDIC purchase and assumption agreement” means that only certain assets and liabilities were acquired by the bank from the FDIC.  A “whole bank acquisition” means that the two parties in the transaction agreed to the transaction, and there was no involvement of the FDIC.  A “whole bank acquisition with FDIC purchase and assumption agreements” means that the two parties in the transaction agreed to the merger, and there was existing FDIC purchase and assumption agreements.

 

First Financial Holdings, Inc. Merger

 

On July 26, 2013, the Company acquired all of the outstanding common stock of First Financial Holdings, Inc. (“FFHI”), of Charleston, South Carolina, the bank holding company for First Federal Bank (“First Federal”), in a stock transaction and changed the name of the Company from SCBT Financial Corporation to First Financial Holdings, Inc.  FFHI common shareholders received 0.4237 shares of the Company’s common stock in exchange for each share of FFHI common stock, resulting in the Company issuing 7,018,274 shares of its common stock.  Each outstanding share of FFHI Fixed Rate Cumulative Perpetual Preferred Stock, Series A (“FFHI Preferred Stock”), was converted into the right to receive one share of preferred stock of the Company, designated Series A Fixed Rate Cumulative Perpetual Preferred Stock and having such rights, preferences and privileges as are not materially less favorable than the rights, preferences and privileges of the FFHI Preferred Stock.  In total, the purchase price for the FFHI acquisition was $447.0 million including $65.0 million in preferred stock and the value of “in the money” outstanding stock options (i.e., stock options for which the exercise price of the stock option is below the market price of the underlying stock) totaling $530,000.

 

The FFHI transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date.  Fair values are preliminary and subject to refinement for up to a year after the closing date of the acquisition.

 

7



Table of Contents

 

Note 4 — Mergers and Acquisitions (Continued)

 

The following table presents the assets acquired and liabilities assumed as of July 26, 2013, as recorded by FFHI on the acquisition date and initial and subsequent fair value adjustments.

 

 

 

 

 

Initial

 

Subsequent

 

 

 

 

 

As Recorded by

 

Fair Value

 

Fair Value

 

As Recorded

 

(Dollars in thousands)

 

FFHI

 

Adjustments

 

Adjustments

 

by the Company

 

Assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

174,082

 

$

 

$

 

$

174,082

 

Investment securities

 

313,200

 

(1,388

)(a)

 

311,812

 

Loans held for sale

 

19,858

 

6

(b)

 

19,864

 

Loans

 

2,355,527

 

(92,720

)(b)

2,614

(b)

2,265,421

 

Premises and equipment

 

82,399

 

(5,435

)(c)

(198

)(c)

76,766

 

Intangible assets

 

7,037

 

33,738

(d)

(236

)(d)

40,539

 

Mortgage servicing rights

 

19,156

 

 

 

19,156

 

Other real estate owned

 

13,271

 

(2,065

)(e)

1,927

(e)

13,133

 

FDIC receivable for loss sharing agreement

 

47,459

 

(18,122

)(f),(k)

(124

)(f)

29,213

 

Bank owned life insurance

 

51,513

 

 

(493

)(m)

51,020

 

Deferred tax asset

 

(5,279

)

42,741

(g)

(3,361

)(g)

34,101

 

Other assets

 

47,257

 

(6,125

)(h)

2,230

(l)

43,362

 

Total assets

 

$

3,125,480

 

$

(49,370

)

$

2,359

 

$

3,078,469

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

430,517

 

$

 

$

 

$

430,517

 

Interest-bearing

 

2,083,495

 

7,801

(i)

 

2,091,296

 

Total deposits

 

2,514,012

 

7,801

 

 

2,521,813

 

Federal funds purchased and securities sold under agreements to repurchase

 

 

 

 

 

Other borrowings

 

280,187

 

21,526

(j)

 

301,713

 

Other liabilities

 

25,584

 

(2,059

)(k)

280

(k)

23,805

 

Total liabilities

 

2,819,783

 

27,268

 

280

 

2,847,331

 

Net identifiable assets acquired over (under) liabilities assumed

 

305,697

 

(76,638

)

2,079

 

231,138

 

Goodwill

 

 

217,894

 

(2,079

)

215,815

 

Net assets acquired over liabilities assumed

 

$

305,697

 

$

141,256

 

$

 

$

446,953

 

 

 

 

 

 

 

 

 

 

 

Consideration:

 

 

 

 

 

 

 

 

 

SCBT Financial Corporation common shares issued

 

7,018,274

 

 

 

 

 

 

 

Purchase price per share of the Company’s common stock

 

$

54.34

 

 

 

 

 

 

 

Company common stock issued and cash exchanged for fractional shares

 

381,423

 

 

 

 

 

 

 

Cash paid for stock options outstanding

 

530

 

 

 

 

 

 

 

Assumption of preferred stock

 

65,000

 

 

 

 

 

 

 

Fair value of total consideration transferred

 

$

446,953

 

 

 

 

 

 

 

 


Explanation of fair value adjustments

(a)—Adjustment reflects marking the securities portfolio to fair value as of the acquisition date.

(b)—Adjustment reflects the fair value adjustments based on the Company’s evaluation of the acquired loan portfolio and excludes the allowance for loan losses recorded by FFHI.

(c)—Adjustment reflects the fair value adjustments based on the Company’s evaluation of the acquired premises and equipment.

(d)—Adjustment reflects the recording of the core deposit intangible on the acquired deposit accounts and other intangibles for credit cards and customer lists.

(e)—Adjustment reflects the fair value adjustments to OREO based on the Company’s evaluation of the acquired OREO portfolio.

(f)—Adjustment reflects the fair value adjustments to the Federal Deposit Insurance Corporation (the “FDIC”) receivable for loss sharing agreements based on the Company’s evaluation of the losses on the acquired assets covered under loss share agreements with the FDIC net of any clawback.

(g) —Adjustment to record deferred tax asset related to fair value adjustments.

(h)—Adjustment reflects uncollectible portion of accrued interest receivable and loan fees receivable.

(i)—Adjustment arises since the rates on interest-bearing deposits are higher than rates available on similar deposits as of the acquisition date.

(j)— Adjustment reflects the fair value adjustment which was equal to the prepayment fee paid to fully pay off the FHLB advances on July 26, 2013.  This fair value adjustment and the fair value adjustment of the junior subordinated debt were determined based upon interest rates.

(k)— Adjustment reflects the reclassification of the clawback to net against the FDIC receivable, the incremental accrual for employee related benefits, lease liabilities, and adjustment of other miscellaneous accruals.

 

8



Table of Contents

 

Note 4 — Mergers and Acquisitions (Continued)

 

(l)— Adjustment reflects the adjustment of miscellaneous accruals.

(m)—Adjustment reflects the fair value adjustments to bank owned life insurance based on the Company’s evaluation of the policies.

 

The operating results of the Company for the period ended March 31, 2014, include the operating results of the acquired assets and assumed liabilities since the acquisition date of July 26, 2013.  Merger and branding related charges of $6.0 million were recorded in the consolidated statement of income for the three months ended March 31, 2014; and include incremental costs related to the closing of certain branch locations, employment related cost, professional cost (legal, accounting and audit related), travel, printing and supplies, and other related costs.

 

The following table discloses the impact of the merger with FFHI (excluding the impact of merger and branding related expenses) for the three months ended March 31, 2014.  The table also presents comparative pro forma information as if FFHI had been acquired on January 1, 2013.  These results combine the historical results of FFHI in the Company’s consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2013.

 

Merger-related costs of $2.0 million from the acquisition of Savannah were included in the Company’s consolidated statements of income for the three months ended March 31, 2013, and are not included in the pro forma information below.  The Company expects to incur additional expenses related to systems conversions and other costs of integration during the remainder of 2014.  We also expect to achieve further operating cost savings and other business synergies as a result of the systems conversion and integration effort which are not reflected in the pro forma amounts below:

 

 

 

 

 

Pro Forma

 

 

 

Three Months

 

Three Months

 

(Dollars in thousands)

 

Ended March 31, 2014

 

Ended March 31, 2013

 

Total revenues (net interest income plus noninterest income)

 

$

104,021

 

$

112,353

 

Net operating income available to the common shareholder

 

$

19,776

 

$

18,193

 

 

Note 5 — Investment Securities

 

The following is the amortized cost and fair value of investment securities held to maturity:

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(Dollars in thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

March, 2014:

 

 

 

 

 

 

 

 

 

State and municipal obligations

 

$

10,891

 

$

538

 

$

(2

)

$

11,427

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

State and municipal obligations

 

$

12,426

 

$

480

 

$

(15

)

$

12,891

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013:

 

 

 

 

 

 

 

 

 

State and municipal obligations

 

$

14,598

 

$

957

 

$

 

$

15,555

 

 

9



Table of Contents

 

Note 5 — Investment Securities (Continued)

 

The following is the amortized cost and fair value of investment securities available for sale:

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(Dollars in thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

March 31, 2014:

 

 

 

 

 

 

 

 

 

Government-sponsored entities debt *

 

$

141,900

 

$

406

 

$

(4,705

)

137,601

 

State and municipal obligations

 

140,840

 

2,462

 

(1,664

)

141,638

 

Mortgage-backed securities **

 

507,159

 

5,896

 

(2,676

)

510,379

 

Corporate stocks

 

3,161

 

612

 

(267

)

3,506

 

 

 

$

793,060

 

$

9,376

 

$

(9,312

)

$

793,124

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

Government-sponsored entities debt *

 

$

149,708

 

$

185

 

$

(6,899

)

$

142,994

 

State and municipal obligations

 

142,934

 

1,798

 

(4,081

)

140,651

 

Mortgage-backed securities **

 

500,000

 

4,394

 

(4,915

)

499,479

 

Corporate stocks

 

3,161

 

638

 

(132

)

3,667

 

 

 

$

795,803

 

$

7,015

 

$

(16,027

)

$

786,791

 

March 31, 2013:

 

 

 

 

 

 

 

 

 

Government-sponsored entities debt *

 

$

71,408

 

$

515

 

$

(121

)

$

71,802

 

State and municipal obligations

 

144,979

 

4,308

 

(391

)

148,896

 

Mortgage-backed securities **

 

283,348

 

6,585

 

(191

)

289,742

 

Corporate stocks

 

241

 

172

 

(1

)

412

 

 

 

$

499,976

 

$

11,580

 

$

(704

)

$

510,852

 

 


* - The Company’s government-sponsored entities holdings are comprised of debt securities offered by Federal Home Loan Mortgage Corporation (“FHLMC”) or Freddie Mac, Federal National Mortgage Association (“FNMA”) or Fannie Mae, Federal Home Loan Bank (“FHLB”), and Federal Farm Credit Banks (“FFCB”).  Also included in the Company’s government-sponsored entities are debt securities offered by the Small Business Administration (“SBA”), which have the full faith and credit backing of the United States Government.

** - All of the mortgage-backed securities are issued by government-sponsored entities; there are no private-label holdings.

 

The following is the amortized cost and fair value of other investment securities:

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(Dollars in thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

March 31, 2014:

 

 

 

 

 

 

 

 

 

Federal Home Loan Bank stock

 

$

7,484

 

$

 

$

 

$

7,484

 

Investment in unconsolidated subsidiaries

 

3,034

 

 

 

3,034

 

 

 

$

10,518

 

$

 

$

 

$

10,518

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

Federal Home Loan Bank stock

 

$

10,352

 

$

 

$

 

$

10,352

 

Investment in unconsolidated subsidiaries

 

3,034

 

 

 

3,034

 

 

 

$

13,386

 

$

 

$

 

$

13,386

 

March 31, 2013:

 

 

 

 

 

 

 

 

 

Federal Home Loan Bank stock

 

$

6,163

 

$

 

$

 

$

6,163

 

Investment in unconsolidated subsidiaries

 

1,642

 

 

 

1,642

 

 

 

$

7,805

 

$

 

$

 

$

7,805

 

 

The Company has determined that the investment in FHLB stock is not other than temporarily impaired as of March 31, 2014 and ultimate recoverability of the par value of these investments is probable.

 

10



Table of Contents

 

Note 5 — Investment Securities (Continued)

 

The amortized cost and fair value of debt securities at March 31, 2014 by contractual maturity are detailed below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.

 

 

 

Securities

 

Securities

 

 

 

Held to Maturity

 

Available for Sale

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

(Dollars in thousands)

 

Cost

 

Value

 

Cost

 

Value

 

Due in one year or less

 

$

730

 

$

749

 

$

3,645

 

$

3,697

 

Due after one year through five years

 

986

 

1,028

 

31,472

 

31,878

 

Due after five years through ten years

 

8,505

 

8,942

 

232,778

 

232,512

 

Due after ten years

 

670

 

708

 

525,165

 

525,037

 

 

 

$

10,891

 

$

11,427

 

$

793,060

 

$

793,124

 

 

Information pertaining to the Company’s securities with gross unrealized losses at March 31, 2014, December 31, 2013 and March 31, 2013, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position is as follows:

 

 

 

Less Than Twelve Months

 

Twelve Months or More

 

 

 

Gross

 

 

 

Gross

 

 

 

 

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

(Dollars in thousands)

 

Losses

 

Value

 

Losses

 

Value

 

March 31, 2014:

 

 

 

 

 

 

 

 

 

Securities Held to Maturity

 

 

 

 

 

 

 

 

 

State and municipal obligations

 

$

2

 

$

499

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale

 

 

 

 

 

 

 

 

 

Government-sponsored entities debt

 

$

4,176

 

$

81,116

 

$

529

 

$

9,409

 

State and municipal obligations

 

1,079

 

62,307

 

585

 

14,400

 

Mortgage-backed securities

 

2,551

 

187,215

 

125

 

4,288

 

Corporate Stocks

 

267

 

1,964

 

 

 

 

 

$

8,073

 

$

332,602

 

$

1,239

 

$

28,097

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

Securities Held to Maturity

 

 

 

 

 

 

 

 

 

State and municipal obligations

 

$

15

 

$

486

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale

 

 

 

 

 

 

 

 

 

Government-sponsored entities debt

 

$

6,899

 

$

112,085

 

$

 

$

 

State and municipal obligations

 

3,901

 

87,060

 

180

 

3,900

 

Mortgage-backed securities

 

4,874

 

263,383

 

41

 

2,125

 

Corporate stocks

 

132

 

2,099

 

 

 

 

 

$

15,806

 

$

464,627

 

$

221

 

$

6,025

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013:

 

 

 

 

 

 

 

 

 

Securities Held to Maturity

 

 

 

 

 

 

 

 

 

State and municipal obligations

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale

 

 

 

 

 

 

 

 

 

Government-sponsored entities debt

 

$

121

 

$

27,852

 

$

 

$

 

State and municipal obligations

 

391

 

27,502

 

 

 

Mortgage-backed securities

 

191

 

26,765

 

 

 

FHLMC preferred stock

 

1

 

9

 

 

 

 

 

$

704

 

$

82,128

 

$

 

$

 

 

11



Table of Contents

 

Note 5 — Investment Securities (Continued)

 

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.  Consideration is given to (1) the financial condition and near-term prospects of the issuer, (2) the outlook for receiving the contractual cash flows of the investments, (3) the length of time and the extent to which the fair value has been less than cost, (4) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that the Company will be required to sell the debt security prior to recovering its fair value, and (5) the anticipated outlook for changes in the general level of interest rates.  All securities available for sale in an unrealized loss position as of March 31, 2014 continue to perform as scheduled.  As part of the Company’s evaluation of its intent and ability to hold investments for a period of time sufficient to allow for any anticipated recovery in the market, the Company considers its investment strategy, cash flow needs, liquidity position, capital adequacy and interest rate risk position.  The Company does not currently intend to sell the securities within the portfolio and it is not more-likely-than-not that the Company will be required to sell the debt securities; therefore, management does not consider these investments to be other-than-temporarily impaired at March 31, 2014. Management continues to monitor all of these securities with a high degree of scrutiny.  There can be no assurance that the Company will not conclude in future periods that conditions existing at that time indicate some or all of these securities may be sold or are other than temporarily impaired, which would require a charge to earnings in such periods.

 

Note 6 — Loans and Allowance for Loan Losses

 

The following is a summary of non-acquired loans:

 

 

 

March 31,

 

December 31,

 

March 31,

 

(Dollars in thousands)

 

2014

 

2013

 

2013

 

Non-acquired loans:

 

 

 

 

 

 

 

Commercial non-owner occupied real estate:

 

 

 

 

 

 

 

Construction and land development

 

$

319,441

 

$

299,951

 

$

273,488

 

Commercial non-owner occupied

 

285,145

 

291,171

 

298,707

 

Total commercial non-owner occupied real estate

 

604,586

 

591,122

 

572,195

 

Consumer real estate:

 

 

 

 

 

 

 

Consumer owner occupied

 

595,652

 

548,170

 

443,134

 

Home equity loans

 

263,057

 

257,139

 

249,356

 

Total consumer real estate

 

858,709

 

805,309

 

692,490

 

Commercial owner occupied real estate

 

845,728

 

833,513

 

796,139

 

Commercial and industrial

 

333,574

 

321,824

 

291,308

 

Other income producing property

 

158,186

 

143,204

 

131,776

 

Consumer

 

147,710

 

136,410

 

93,997

 

Other loans

 

31,465

 

33,834

 

26,393

 

Total non-acquired loans

 

2,979,958

 

2,865,216

 

2,604,298

 

Less allowance for loan losses

 

(34,669

)

(34,331

)

(41,669

)

Non-acquired loans, net

 

$

2,945,289

 

$

2,830,885

 

$

2,562,629

 

 

12



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses (Continued)

 

The following is a summary of acquired non-credit impaired loans accounted for under FASB ASC Topic 310-20, net of related discount:

 

 

 

March 31,

 

December 31,

 

March 31,

 

(Dollars in thousands)

 

2014

 

2013

 

2013

 

FASB ASC Topic 310-20 acquired loans:

 

 

 

 

 

 

 

Commercial non-owner occupied real estate:

 

 

 

 

 

 

 

Construction and land development

 

$

39,181

 

$

58,396

 

$

501

 

Commercial non-owner occupied

 

52,625

 

58,598

 

2,859

 

Total commercial non-owner occupied real estate

 

91,806

 

116,994

 

3,360

 

Consumer real estate:

 

 

 

 

 

 

 

Consumer owner occupied

 

732,564

 

742,597

 

21

 

Home equity loans

 

256,963

 

264,150

 

34,464

 

Total consumer real estate

 

989,527

 

1,006,747

 

34,485

 

Commercial owner occupied real estate

 

71,607

 

73,714

 

12,815

 

Commercial and industrial

 

44,183

 

58,773

 

15,494

 

Other income producing property

 

73,753

 

74,566

 

4,080

 

Consumer

 

241,325

 

267,257

 

 

Total FASB ASC Topic 310-20 acquired loans

 

$

1,512,201

 

$

1,598,051

 

$

70,234

 

 

In accordance with FASB ASC Topic 310-30, the Company aggregated acquired loans that have common risk characteristics into pools of loan categories as described in the table below.

 

The following is a summary of acquired credit impaired loans accounted for under FASB ASC Topic 310-30 (identified as credit impaired at the time of acquisition), net of related discount:

 

 

 

March 31,

 

December 31,

 

March 31,

 

(Dollars in thousands)

 

2014

 

2013

 

2013

 

FASB ASC Topic 310-30 acquired loans:

 

 

 

 

 

 

 

Commercial loans greater than or equal to $1 million-CBT

 

$

21,479

 

$

24,109

 

$

37,869

 

Commercial real estate

 

402,505

 

439,785

 

347,238

 

Commercial real estate—construction and development

 

98,060

 

114,126

 

110,059

 

Residential real estate

 

444,115

 

476,689

 

335,625

 

Consumer

 

99,545

 

103,998

 

13,168

 

Commercial and industrial

 

58,973

 

68,862

 

64,986

 

Single pay

 

132

 

129

 

404

 

Total FASB ASC Topic 310-30 acquired loans

 

1,124,809

 

1,227,698

 

909,349

 

Less allowance for loan losses

 

(11,046

)

(11,618

)

(15,605

)

FASB ASC Topic 310-30 acquired loans, net

 

$

1,113,763

 

$

1,216,080

 

$

893,744

 

 

13



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses (Continued)

 

Contractual loan payments receivable, estimates of amounts not expected to be collected, other fair value adjustments and the resulting fair values of acquired credit impaired loans at the acquisition date for FFHI (July 26, 2013) are as follows:

 

 

 

July 26, 2013

 

 

 

 

 

Loans

 

 

 

 

 

Loans Impaired

 

Not Impaired

 

 

 

(Dollars in thousands)

 

at Acquisition

 

at Acquisition

 

Total

 

Contractual principal and interest

 

$

650,331

 

$

222,820

 

$

873,151

 

Non-accretable difference

 

(125,701

)

(24,719

)

(150,420

)

Cash flows expected to be collected

 

524,630

 

198,101

 

722,731

 

Accretable yield

 

(102,260

)

(28,520

)

(130,780

)

Carrying value

 

$

422,370

 

$

169,581

 

$

591,951

 

 

The table above excludes $1.67 billion ($1.71 billion in contractual principal less a $40.6 million fair value adjustment) in acquired loans at fair value that were identified as either performing with no discount related to credit or as revolving lines of credit (commercial or consumer) as of the acquisition date and are accounted for under FASB ASC Topic 310-20.

 

Contractual loan payments receivable, estimates of amounts not expected to be collected, other fair value adjustments and the resulting carrying values of acquired credit impaired loans as of March 31, 2014 and 2013 are as follows:

 

 

 

March 31,

 

December 31,

 

March 31,

 

(Dollars in thousands)

 

2014

 

2013

 

2013

 

Contractual principal and interest

 

$

1,568,978

 

$

1,700,129

 

$

1,167,760

 

Non-accretable difference

 

(212,934

)

(222,091

)

(108,890

)

Cash flows expected to be collected

 

1,356,044

 

1,478,038

 

1,058,870

 

Accretable yield

 

(231,235

)

(250,340

)

(149,521

)

Carrying value

 

$

1,124,809

 

$

1,227,698

 

$

909,349

 

Allowance for acquired loan losses

 

$

(11,046

)

$

(11,618

)

$

(15,605

)

 

Income on acquired credit impaired loans that are not impaired at the acquisition date is recognized in the same manner as loans impaired at the acquisition date. A portion of the fair value discount on acquired non- impaired loans has been ascribed as an accretable difference that is accreted into interest income over the estimated remaining life of the loans. The remaining nonaccretable difference represents cash flows not expected to be collected.

 

The following are changes in the carrying value of acquired credit impaired loans:

 

 

 

Three Months Ended March 31,

 

(Dollars in thousands)

 

2014

 

2013

 

Balance at beginning of period

 

$

1,216,080

 

$

969,395

 

Net reductions for payments, foreclosures, and accretion

 

(102,889

)

(76,506

)

Change in the allowance for loan losses on acquired loans

 

572

 

855

 

Balance at end of period, net of allowance for loan losses on acquired loans

 

$

1,113,763

 

$

893,744

 

 

14



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses (Continued)

 

The following are changes in the amount of accretable difference for acquired credit impaired loans for the three months ended March 31, 2014 and 2013:

 

 

 

Three Months Ended March 31,

 

(Dollars in thousands)

 

2014

 

2013

 

Balance at beginning of period

 

$

250,340

 

$

160,849

 

Accretion

 

(28,767

)

(21,712

)

Reclass of nonaccretable difference due to improvement in expected cash flows

 

10,750

 

13,812

 

Other changes, net

 

(1,088

)

(3,428

)

Balance at end of period

 

$

231,235

 

$

149,521

 

 

Our loan loss policy adheres to generally accepted accounting principles in the United States as well as interagency guidance.  The allowance for loan losses is based upon estimates made by management. We maintain an allowance for loan losses at a level that we believe is appropriate to cover estimated credit losses on individually evaluated loans that are determined to be impaired as well as estimated credit losses inherent in the remainder of our loan portfolio. Arriving at the allowance involves a high degree of management judgment and results in a range of estimated losses. We regularly evaluate the adequacy of the allowance through our internal risk rating system, outside credit review, and regulatory agency examinations to assess the quality of the loan portfolio and identify problem loans. The evaluation process also includes our analysis of current economic conditions, composition of the loan portfolio, past due and nonaccrual loans, concentrations of credit, lending policies and procedures, and historical loan loss experience. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on, among other factors, changes in economic conditions in our markets. In addition, regulatory agencies, as an integral part of their examination process, periodically review our allowances for losses on loans. These agencies may require management to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. Because of these and other factors, it is possible that the allowances for losses on loans may change. The provision for loan losses is charged to expense in an amount necessary to maintain the allowance at an appropriate level.

 

The allowance for loan losses on non-acquired loans consists of general and specific reserves. The general reserves are determined by applying loss percentages to the portfolio that are based on historical loss experience for each class of loans and management’s evaluation and “risk grading” of the loan portfolio. Additionally, the general economic and business conditions affecting key lending areas, credit quality trends, collateral values, loan volumes and concentrations, seasoning of the loan portfolio, the findings of internal and external credit reviews and results from external bank regulatory examinations are included in this evaluation. Currently, these adjustments are applied to the non-acquired loan portfolio when estimating the level of reserve required. The specific reserves are determined on a loan-by-loan basis based on management’s evaluation of our exposure for each credit, given the current payment status of the loan and the value of any underlying collateral. These are loans classified by management as doubtful or substandard. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. Generally, the need for specific reserve is evaluated on impaired loans greater than $250,000, and once a specific reserve is established for a loan, a charge off of that amount occurs in the quarter subsequent to the establishment of the specific reserve. Loans that are determined to be impaired are provided a specific reserve, if necessary, and are excluded from the calculation of the general reserves.

 

With the FFHI acquisition, the Company segregated the loan portfolio into performing loans (“non-credit impaired) and purchased credit impaired loans. The performing loans and revolving type loans are accounted for under FASB ASC 310-20, with each loan being accounted for individually. The allowance for loan losses on these loans will be measured and recorded consistent with non-acquired loans. The acquired credit impaired loans will follow the description in the next paragraph.

 

15



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses (Continued)

 

In determining the acquisition date fair value of purchased loans, and in subsequent accounting, the Company generally aggregates purchased loans into pools of loans with common risk characteristics. Expected cash flows at the acquisition date in excess of the fair value of loans are recorded as interest income over the life of the loans using a level yield method if the timing and amount of the future cash flows of the pool is reasonably estimable. Subsequent to the acquisition date, increases in cash flows over those expected at the acquisition date are reclassified from the non-accretable difference to accretable difference and recognized as interest income prospectively. Decreases in expected cash flows after the acquisition date are recognized by recording an allowance for loan losses. Management analyzes the acquired loan pools using various assessments of risk to determine an expected loss. The expected loss is derived based upon a loss given default based upon the collateral type and/or detailed review by loan officers of loans greater than $25,000 and the probability of default that is determined based upon historical data at the loan level. The Company changed the threshold of loans reviewed from $500,000 during the second quarter of 2013 to more accurately derive the expected loss in pools where there are few, if any, loans greater than $500,000. Trends are reviewed in terms of accrual status, past due status, and weighted-average grade of the loans within each of the accounting pools. In addition, the relationship between the change in the unpaid principal balance and change in the mark is assessed to correlate the directional consistency of the expected loss for each pool. Offsetting the impact of the provision established for acquired loans covered under FDIC loss share agreements, the receivable from the FDIC is adjusted to reflect the indemnified portion of the post-acquisition exposure with a corresponding credit to the provision for loan losses.

 

An aggregated analysis of the changes in allowance for loan losses is as follows:

 

 

 

 

 

Acquired

 

 

 

 

 

Non-acquired

 

Credit Impaired

 

 

 

(Dollars in thousands)

 

Loans

 

Loans

 

Total

 

Three months ended March 31, 2014:

 

 

 

 

 

 

 

Balance at beginning of period

 

$

34,331

 

$

11,618

 

$

45,949

 

Loans charged-off

 

(1,370

)

 

(1,370

)

Recoveries of loans previously charged off

 

1,038

 

 

1,038

 

Net charge-offs

 

(332

)

 

(332

)

Provision for loan losses

 

670

 

304

 

974

 

Benefit attributable to FDIC loss share agreements

 

 

(125

)

(125

)

Total provision for loan losses charged to operations

 

670

 

179

 

849

 

Provision for loan losses recorded through the FDIC loss share receivable

 

 

125

 

125

 

Reduction due to loan removals

 

 

(876

)

(876

)

Balance at end of period

 

$

34,669

 

$

11,046

 

$

45,715

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2013:

 

 

 

 

 

 

 

Balance at beginning of period

 

$

44,378

 

$

17,218

 

$

61,596

 

Loans charged-off

 

(4,607

)

 

(4,607

)

Recoveries of loans previously charged off

 

1,045

 

 

1,045

 

Net charge-offs

 

(3,562

)

 

(3,562

)

Provision for loan losses

 

853

 

(855

)

(2

)

Benefit attributable to FDIC loss share agreements

 

 

1,062

 

1,062

 

Total provision for loan losses charged to operations

 

853

 

207

 

1,060

 

Provision for loan losses recorded through the FDIC loss share receivable

 

 

(1,062

)

(1,062

)

Reduction due to loan removals

 

 

(758

)

(758

)

Balance at end of period

 

$

41,669

 

$

15,605

 

$

57,274

 

 

16



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses (Continued)

 

The following tables present a disaggregated analysis of activity in the allowance for loan losses and loan balances for non-acquired loans:

 

 

 

Construction

 

Commercial

 

Commercial

 

Consumer

 

 

 

 

 

Other Income

 

 

 

 

 

 

 

 

 

& Land

 

Non-owner

 

Owner

 

Owner

 

Home

 

Commercial

 

Producing

 

 

 

Other

 

 

 

(Dollars in thousands)

 

Development

 

Occupied

 

Occupied

 

Occupied

 

Equity

 

& Industrial

 

Property

 

Consumer

 

Loans

 

Total

 

Three months ended March 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2013

 

$

6,789

 

$

3,677

 

$

7,767

 

$

6,069

 

$

2,782

 

$

3,592

 

$

2,509

 

$

937

 

$

209

 

$

34,331

 

Charge-offs

 

(92

)

(144

)

(216

)

(78

)

(143

)

(60

)

(86

)

(551

)

 

(1,370

)

Recoveries

 

145

 

331

 

6

 

203

 

13

 

90

 

6

 

244

 

 

1,038

 

Provision

 

(520

)

(421

)

760

 

(72

)

269

 

(181

)

419

 

475

 

(59

)

670

 

Balance, March 31, 2014

 

$

6,322

 

$

3,443

 

$

8,317

 

$

6,122

 

$

2,921

 

$

3,441

 

$

2,848

 

$

1,105

 

$

150

 

$

34,669

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

563

 

$

39

 

$

106

 

$

72

 

$

1

 

$

21

 

$

617

 

$

2

 

$

 

$

1,421

 

Loans collectively evaluated for impairment

 

$

5,759

 

$

3,404

 

$

8,211

 

$

6,050

 

$

2,920

 

$

3,420

 

$

2,231

 

$

1,103

 

$

150

 

$

33,248

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

6,150

 

$

4,153

 

$

12,799

 

$

2,550

 

$

48

 

$

1,536

 

$

6,498

 

$

88

 

$

 

$

33,822

 

Loans collectively evaluated for impairment

 

313,291

 

280,992

 

832,929

 

593,102

 

263,009

 

332,038

 

151,688

 

147,622

 

31,465

 

2,946,136

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total non-acquired loans

 

$

319,441

 

$

285,145

 

$

845,728

 

$

595,652

 

$

263,057

 

$

333,574

 

$

158,186

 

$

147,710

 

$

31,465

 

$

2,979,958

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2012

 

$

10,836

 

$

4,921

 

$

8,743

 

$

6,568

 

$

3,626

 

$

4,939

 

$

3,747

 

$

781

 

$

217

 

$

44,378

 

Charge-offs

 

(2,197

)

 

(695

)

(150

)

(197

)

(324

)

(339

)

(705

)

 

(4,607

)

Recoveries

 

258

 

254

 

10

 

89

 

72

 

99

 

9

 

254

 

 

1,045

 

Provision

 

339

 

96

 

150

 

16

 

35

 

71

 

42

 

104

 

 

853

 

Balance, March 31, 2013

 

$

9,236

 

$

5,271

 

$

8,208

 

$

6,523

 

$

3,536

 

$

4,785

 

$

3,459

 

$

434

 

$

217

 

$

41,669

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

1,027

 

$

2,059

 

$

623

 

$

200

 

$

 

$

84

 

$

809

 

$

 

$

 

$

4,802

 

Loans collectively evaluated for impairment

 

$

8,209

 

$

3,212

 

$

7,585

 

$

6,323

 

$

3,536

 

$

4,701

 

$

2,650

 

$

434

 

$

217

 

$

36,867

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

12,057

 

$

4,861

 

$

17,629

 

$

1,177

 

$

 

$

1,934

 

$

4,040

 

$

 

$

 

$

41,698

 

Loans collectively evaluated for impairment

 

261,431

 

293,846

 

778,510

 

441,957

 

249,356

 

289,374

 

127,736

 

93,997

 

26,393

 

2,562,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total non-acquired loans

 

$

273,488

 

$

298,707

 

$

796,139

 

$

443,134

 

$

249,356

 

$

291,308

 

$

131,776

 

$

93,997

 

$

26,393

 

$

2,604,298

 

 

As of March 31, 2014 and 2013, the Company has not recorded any allowance for loan losses for loans acquired and accounted for under FASB ASC Topic 310-20.

 

17



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses (Continued)

 

The following tables present a disaggregated analysis of activity in the allowance for loan losses and loan balances for acquired credit impaired loans:

 

 

 

Commercial

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans Greater

 

 

 

Real Estate-

 

 

 

 

 

 

 

 

 

 

 

 

 

Than or Equal

 

Commercial

 

Construction and

 

Residential

 

 

 

Commercial

 

 

 

 

 

(Dollars in thousands)

 

to $1 Million-CBT

 

Real Estate

 

Development

 

Real Estate

 

Consumer

 

and Industrial

 

Single Pay

 

Total

 

Three months ended March 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2013

 

$

 

303

 

$

 

1,816

 

$

 

2,244

 

$

 

5,132

 

$

 

538

 

$

 

1,481

 

$

 

104

 

$

 

11,618

 

Provision for loan losses before benefit attributable to FDIC loss share agreements

 

(3

)

126

 

289

 

141

 

(112

)

(142

)

5

 

304

 

Benefit attributable to FDIC loss share agreements

 

5

 

(116

)

(112

)

(138

)

101

 

140

 

(5

)

(125

)

Total provision for loan losses charged to operations

 

2

 

10

 

177

 

3

 

(11

)

(2

)

 

179

 

Provision for loan losses recorded through the FDIC loss share receivable

 

(5

)

116

 

112

 

138

 

(101

)

(140

)

5

 

125

 

Reduction due to loan removals

 

11

 

(4

)

(561

)

(83

)

(16

)

(220

)

(3

)

(876

)

Balance, March 31, 2014

 

$

 

311

 

$

 

1,938

 

$

 

1,972

 

$

 

5,190

 

$

 

410

 

$

 

1,119

 

$

 

106

 

$

 

11,046

 

Loans individually evaluated for impairment

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

Loans collectively evaluated for impairment

 

$

 

311

 

$

 

1,938

 

$

 

1,972

 

$

 

5,190

 

$

 

410

 

$

 

1,119

 

$

 

106

 

$

 

11,046

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

Loans collectively evaluated for impairment

 

21,479

 

402,505

 

98,060

 

444,115

 

99,545

 

58,973

 

132

 

1,124,809

 

Total acquired loans

 

$

 

21,479

 

$

 

402,505

 

$

 

98,060

 

$

 

444,115

 

$

 

99,545

 

$

 

58,973

 

$

 

132

 

$

 

1,124,809

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2012

 

$

 

5,337

 

$

 

1,517

 

$

 

1,628

 

$

 

4,207

 

$

 

96

 

$

 

4,139

 

$

 

294

 

$

 

17,218

 

Provision for loan losses before benefit attributable to FDIC loss share agreements

 

(452

)

(675

)

856

 

(55

)

(7

)

(522

)

 

(855

)

Benefit attributable to FDIC loss share agreements

 

429

 

526

 

(686

)

290

 

7

 

496

 

 

1,062

 

Total provision for loan losses charged to operations

 

(23

)

(149

)

170

 

235

 

 

(26

)

 

207

 

Provision for loan losses recorded through the FDIC loss share receivable

 

(429

)

(526

)

686

 

(290

)

(7

)

(496

)

 

(1,062

)

Reduction due to loan removals

 

(219

)

 

 

4

 

 

(531

)

(12

)

(758

)

Balance, March 31, 2013

 

$

 

4,666

 

$

 

842

 

$

 

2,484

 

$

 

4,156

 

$

 

89

 

$

 

3,086

 

$

 

282

 

$

 

15,605

 

Loans individually evaluated for impairment

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

Loans collectively evaluated for impairment

 

$

 

4,666

 

$

 

842

 

$

 

2,484

 

$

 

4,156

 

$

 

89

 

$

 

3,086

 

$

 

282

 

$

 

15,605

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

Loans collectively evaluated for impairment

 

37,869

 

347,238

 

110,059

 

335,625

 

13,168

 

64,986

 

404

 

909,349

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total acquired loans

 

$

 

37,869

 

$

 

347,238

 

$

 

110,059

 

$

 

335,625

 

$

 

13,168

 

$

 

64,986

 

$

 

404

 

$

 

909,349

 

 


*—The carrying value of acquired credit impaired loans includes a non-accretable difference which is primarily associated with the assessment of credit quality of acquired loans.

 

18



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses (Continued)

 

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the level of classified loans, (ii) net charge-offs, (iii) non-performing loans (see details below), and (iv) the general economic conditions of the markets that we serve.

 

The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. A description of the general characteristics of the risk grades is as follows:

 

·                  Pass—These loans range from minimal credit risk to average, however still acceptable credit risk.

 

·                  Special mention—A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’s credit position at some future date.

 

·                  Substandard—A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that may jeopardize the liquidation of the debt. A substandard loan is characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

 

·                  Doubtful—A doubtful loan has all of the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of the currently existing facts, conditions and values, highly questionable and improbable.

 

The following table presents the credit risk profile by risk grade of commercial loans for non-acquired loans:

 

 

 

Construction & Development

 

Commercial Non-owner Occupied

 

Commercial Owner Occupied

 

 

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

(Dollars in thousands)

 

2014

 

2013

 

2013

 

2014

 

2013

 

2013

 

2014

 

2013

 

2013

 

Pass

 

$

284,775

 

$

263,698

 

$

221,162

 

$

253,863

 

$

259,120

 

$

242,738

 

$

799,450

 

$

785,406

 

$

735,463

 

Special mention

 

19,692

 

20,814

 

29,006

 

24,523

 

24,779

 

36,901

 

25,850

 

26,148

 

28,262

 

Substandard

 

14,974

 

15,439

 

23,320

 

6,759

 

7,272

 

19,068

 

20,428

 

21,959

 

32,414

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

 

$

319,441

 

$

299,951

 

$

273,488

 

$

285,145

 

$

291,171

 

$

298,707

 

$

845,728

 

$

833,513

 

$

796,139

 

 

 

 

Commercial & Industrial

 

Other Income Producing Property

 

Commercial Total

 

 

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

 

 

2014

 

2013

 

2013

 

2014

 

2013

 

2013

 

2014

 

2013

 

2013

 

Pass

 

$

321,466

 

$

309,360

 

$

270,759

 

$

139,373

 

$

124,519

 

$

112,843

 

$

1,798,927

 

$

1,742,103

 

$

1,582,965

 

Special mention

 

10,098

 

10,376

 

11,400

 

8,530

 

9,903

 

9,596

 

88,693

 

92,020

 

115,165

 

Substandard

 

2,010

 

2,088

 

9,149

 

10,283

 

8,753

 

9,337

 

54,454

 

55,511

 

93,288

 

Doubtful

 

 

 

 

 

29

 

 

 

29

 

 

 

 

$

333,574

 

$

321,824

 

$

291,308

 

$

158,186

 

$

143,204

 

$

131,776

 

$

1,942,074

 

$

1,889,663

 

$

1,791,418

 

 

19



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses (Continued)

 

The following table presents the credit risk profile by risk grade of consumer loans for non-acquired loans:

 

 

 

Consumer Owner Occupied

 

Home Equity

 

Consumer

 

 

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

(Dollars in thousands)

 

2014

 

2013

 

2013

 

2014

 

2013

 

2013

 

2014

 

2013

 

2013

 

Pass

 

$

549,663

 

$

500,999

 

$

397,998

 

$

248,561

 

$

243,615

 

$

235,428

 

$

146,538

 

$

135,476

 

$

92,698

 

Special mention

 

26,618

 

25,317

 

23,410

 

9,093

 

8,437

 

8,150

 

826

 

646

 

869

 

Substandard

 

19,371

 

21,854

 

21,148

 

5,380

 

5,064

 

5,754

 

346

 

288

 

430

 

Doubtful

 

 

 

578

 

23

 

23

 

24

 

 

 

 

 

 

$

595,652

 

$

548,170

 

$

443,134

 

$

263,057

 

$

257,139

 

$

249,356

 

$

147,710

 

$

136,410

 

$

93,997

 

 

 

 

Other

 

Consumer Total

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

 

 

 

 

 

 

 

 

2014

 

2013

 

2013

 

2014

 

2013

 

2013

 

 

 

 

 

 

 

Pass

 

$

31,465

 

$

33,834

 

$

26,393

 

$

976,227

 

$

913,924

 

$

752,517

 

 

 

 

 

 

 

Special mention

 

 

 

 

36,537

 

34,400

 

32,429

 

 

 

 

 

 

 

Substandard

 

 

 

 

25,097

 

27,206

 

27,332

 

 

 

 

 

 

 

Doubtful

 

 

 

 

23

 

23

 

602

 

 

 

 

 

 

 

 

 

$

31,465

 

$

33,834

 

$

26,393

 

$

1,037,884

 

$

975,553

 

$

812,880

 

 

 

 

 

 

 

 

The following table presents the credit risk profile by risk grade of total non-acquired loans:

 

 

 

Total Non-acquired Loans

 

 

 

March 31,

 

December 31,

 

March 31,

 

(Dollars in thousands)

 

2014

 

2013

 

2013

 

Pass

 

$

2,775,154

 

$

2,656,027

 

$

2,335,482

 

Special mention

 

125,230

 

126,420

 

147,594

 

Substandard

 

79,551

 

82,717

 

120,620

 

Doubtful

 

23

 

52

 

602

 

 

 

$

2,979,958

 

$

2,865,216

 

$

2,604,298

 

 

The following table presents the credit risk profile by risk grade of commercial loans for acquired non-credit impaired loans:

 

 

 

Construction & Development

 

Commercial Non-owner Occupied

 

Commercial Owner Occupied

 

 

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

(Dollars in thousands)

 

2014

 

2013

 

2013

 

2014

 

2013

 

2013

 

2014

 

2013

 

2013

 

Pass

 

$

38,150

 

$

57,389

 

$

352

 

$

50,127

 

$

56,539

 

$

1,539

 

$

69,637

 

$

71,984

 

$

12,417

 

Special mention

 

106

 

109

 

104

 

1,510

 

1,565

 

1,320

 

315

 

318

 

 

Substandard

 

925

 

898

 

45

 

988

 

494

 

 

1,655

 

1,412

 

398

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

 

$

39,181

 

$

58,396

 

$

501

 

$

52,625

 

$

58,598

 

$

2,859

 

$

71,607

 

$

73,714

 

$

12,815

 

 

 

 

Commercial & Industrial

 

Other Income Producing Property

 

 

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

 

 

2014

 

2013

 

2013

 

2014

 

2013

 

2013

 

Pass

 

$

42,192

 

$

56,777

 

$

6,729

 

$

69,465

 

$

70,812

 

$

1,216

 

Special mention

 

942

 

924

 

7,862

 

2,333

 

2,177

 

578

 

Substandard

 

1,049

 

1,072

 

903

 

1,955

 

1,577

 

2,286

 

Doubtful

 

 

 

 

 

 

 

 

 

$

44,183

 

$

58,773

 

$

15,494

 

$

73,753

 

$

74,566

 

$

4,080

 

 

20



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses (Continued)

 

The following table presents the credit risk profile by risk grade of consumer loans for acquired non-credit impaired loans:

 

 

 

Consumer Owner Occupied

 

Home Equity

 

Consumer

 

 

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

(Dollars in thousands)

 

2014

 

2013

 

2013

 

2014

 

2013

 

2013

 

2014

 

2013

 

2013

 

Pass

 

$

729,165

 

$

739,894

 

$

21

 

$

241,895

 

$

246,274

 

$

30,566

 

$

239,336

 

$

266,645

 

$

 

Special mention

 

334

 

417

 

 

4,627

 

6,733

 

1,012

 

465

 

127

 

 

Substandard

 

3,065

 

2,286

 

 

10,441

 

11,143

 

2,886

 

1,524

 

485

 

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

 

$

732,564

 

$

742,597

 

$

21

 

$

256,963

 

$

264,150

 

$

34,464

 

$

241,325

 

$

267,257

 

$

 

 

The following table presents the credit risk profile by risk grade of acquired credit impaired loans (identified as credit-impaired at the time of acquisition), net of the related discount (this table should be read in conjunction with the allowance for acquired loan losses table found on page 18):

 

 

 

Commercial Loans Greater Than

 

 

 

Commercial Real Estate—

 

 

 

or Equal to $1 million-CBT

 

Commercial Real Estate

 

Construction and Development

 

 

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

(Dollars in thousands)

 

2014

 

2013

 

2013

 

2014

 

2013

 

2013

 

2014

 

2013

 

2013

 

Pass

 

$

11,761

 

$

12,047

 

$

13,492

 

$

232,060

 

$

244,293

 

$

183,889

 

$

34,992

 

$

38,748

 

$

37,605

 

Special mention

 

1,054

 

2,513

 

3,089

 

37,932

 

46,159

 

61,906

 

13,183

 

13,762

 

18,995

 

Substandard

 

8,664

 

9,549

 

21,288

 

132,513

 

149,333

 

101,296

 

49,885

 

61,616

 

52,566

 

Doubtful

 

 

 

 

 

 

147

 

 

 

893

 

 

 

$

21,479

 

$

24,109

 

$

37,869

 

$

402,505

 

$

439,785

 

$

347,238

 

$

98,060

 

$

114,126

 

$

110,059

 

 

 

 

Residential Real Estate

 

Consumer

 

Commercial & Industrial

 

 

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

 

 

2014

 

2013

 

2013

 

2014

 

2013

 

2013

 

2014

 

2013

 

2013

 

Pass

 

$

190,157

 

$

198,738

 

$

184,684

 

$

7,058

 

$

8,804

 

$

10,215

 

$

33,036

 

$

38,450

 

$

39,960

 

Special mention

 

81,960

 

91,468

 

51,657

 

37,072

 

38,322

 

933

 

3,670

 

3,968

 

10,685

 

Substandard

 

171,925

 

186,405

 

98,804

 

55,415

 

56,872

 

2,020

 

22,267

 

26,444

 

14,311

 

Doubtful

 

72

 

78

 

480

 

 

 

 

 

 

30

 

 

 

$

444,114

 

$

476,689

 

$

335,625

 

$

99,545

 

$

103,998

 

$

13,168

 

$

58,973

 

$

68,862

 

$

64,986

 

 

 

 

Single Pay

 

 

 

March 31,

 

December 31,

 

March 31,

 

 

 

2014

 

2013

 

2013

 

Pass

 

$

54

 

$

52

 

$

60

 

Special mention

 

 

 

51

 

Substandard

 

78

 

77

 

293

 

Doubtful

 

 

 

 

 

 

$

132

 

$

129

 

$

404

 

 

The risk grading of acquired credit impaired loans is determined utilizing a loan’s contractual balance, while the amount recorded in the financial statements and reflected above is the carrying value. In a FDIC-assisted acquisition, covered acquired loans are initially recorded at their fair value, including a credit discount due to the high concentration of substandard and doubtful loans. In addition to the credit discount and the allowance for loan losses on covered acquired loans, the Company’s risk of loss is mitigated by the FDIC loss share arrangement.

 

21



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses (Continued)

 

The following table presents an aging analysis of past due loans, segregated by class for non-acquired loans:

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

30-59 Days

 

60-89 Days

 

90+ Days

 

Past

 

 

 

Total

 

(Dollars in thousands)

 

Past Due

 

Past Due

 

Past Due

 

Due

 

Current

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

1,289

 

$

236

 

$

2,069

 

$

3,594

 

$

315,847

 

$

319,441

 

Commercial non-owner occupied

 

1,092

 

 

2,791

 

3,883

 

281,262

 

285,145

 

Commercial owner occupied

 

2,051

 

923

 

4,333

 

7,307

 

838,421

 

845,728

 

Consumer real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer owner occupied

 

1,826

 

484

 

3,559

 

5,869

 

589,783

 

595,652

 

Home equity loans

 

843

 

144

 

685

 

1,672

 

261,385

 

263,057

 

Commercial and industrial

 

316

 

437

 

403

 

1,156

 

332,418

 

333,574

 

Other income producing property

 

114

 

493

 

2,339

 

2,946

 

155,240

 

158,186

 

Consumer

 

195

 

44

 

79

 

318

 

147,392

 

147,710

 

Other loans

 

44

 

22

 

32

 

98

 

31,367

 

31,465

 

 

 

$

7,770

 

$

2,783

 

$

16,290

 

$

26,843

 

$

2,953,115

 

$

2,979,958

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

557

 

$

476

 

$

2,707

 

$

3,740

 

$

296,211

 

$

299,951

 

Commercial non-owner occupied

 

1,780

 

1

 

2,684

 

4,465

 

286,706

 

291,171

 

Commercial owner occupied

 

457

 

650

 

3,601

 

4,708

 

828,805

 

833,513

 

Consumer real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer owner occupied

 

1,526

 

1,107

 

2,621

 

5,254

 

542,916

 

548,170

 

Home equity loans

 

780

 

214

 

422

 

1,416

 

255,723

 

257,139

 

Commercial and industrial

 

390

 

105

 

370

 

865

 

320,959

 

321,824

 

Other income producing property

 

950

 

19

 

2,634

 

3,603

 

139,601

 

143,204

 

Consumer

 

337

 

142

 

28

 

507

 

135,903

 

136,410

 

Other loans

 

33

 

36

 

30

 

99

 

33,735

 

33,834

 

 

 

$

6,810

 

$

2,750

 

$

15,097

 

$

24,657

 

$

2,840,559

 

$

2,865,216

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

121

 

$

176

 

$

7,609

 

$

7,906

 

$

265,582

 

$

273,488

 

Commercial non-owner occupied

 

699

 

85

 

4,236

 

5,020

 

293,687

 

298,707

 

Commercial owner occupied

 

2,138

 

1,482

 

7,708

 

11,328

 

784,811

 

796,139

 

Consumer real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer owner occupied

 

1,631

 

516

 

3,425

 

5,572

 

437,562

 

443,134

 

Home equity loans

 

1,035

 

66

 

354

 

1,455

 

247,901

 

249,356

 

Commercial and industrial

 

302

 

970

 

703

 

1,975

 

289,333

 

291,308

 

Other income producing property

 

907

 

9

 

2,351

 

3,267

 

128,509

 

131,776

 

Consumer

 

384

 

12

 

66

 

462

 

93,535

 

93,997

 

Other loans

 

56

 

22

 

24

 

102

 

26,291

 

26,393

 

 

 

$

7,273

 

$

3,338

 

$

26,476

 

$

37,087

 

$

2,567,211

 

$

2,604,298

 

 

22



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses (Continued)

 

The following table presents an aging analysis of past due loans, segregated by class for acquired non-credit impaired loans:

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

30-59 Days

 

60-89 Days

 

90+ Days

 

Past

 

 

 

Total

 

(Dollars in thousands)

 

Past Due

 

Past Due

 

Past Due

 

Due

 

Current

 

Loans

 

March 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

428

 

$

 

$

295

 

$

723

 

$

38,458

 

$

39,181

 

Commercial non-owner occupied

 

 

 

 

 

52,625

 

52,625

 

Commercial owner occupied

 

 

371

 

248

 

619

 

70,988

 

71,607

 

Consumer real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer owner occupied

 

2,277

 

45

 

1,674

 

3,996

 

728,568

 

732,564

 

Home equity loans

 

846

 

339

 

1,018

 

2,203

 

254,760

 

256,963

 

Commercial and industrial

 

211

 

 

166

 

377

 

43,806

 

44,183

 

Other income producing property

 

 

 

334

 

334

 

73,419

 

73,753

 

Consumer

 

1,316

 

144

 

239

 

1,699

 

239,626

 

241,325

 

 

 

$

5,078

 

$

899

 

$

3,974

 

$

9,951

 

$

1,502,250

 

$

1,512,201

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

371

 

$

 

$

464

 

$

835

 

$

57,561

 

$

58,396

 

Commercial non-owner occupied

 

105

 

 

17

 

122

 

58,476

 

58,598

 

Commercial owner occupied

 

 

71

 

272

 

343

 

73,371

 

73,714

 

Consumer real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer owner occupied

 

3,368

 

393

 

1,196

 

4,957

 

737,640

 

742,597

 

Home equity loans

 

857

 

67

 

625

 

1,549

 

262,601

 

264,150

 

Commercial and industrial

 

827

 

894

 

282

 

2,003

 

56,770

 

58,773

 

Other income producing property

 

431

 

 

 

431

 

74,135

 

74,566

 

Consumer

 

291

 

213

 

154

 

658

 

266,599

 

267,257

 

 

 

$

6,250

 

$

1,638

 

$

3,010

 

$

10,898

 

$

1,587,153

 

$

1,598,051

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

 

$

 

$

 

$

 

$

501

 

$

501

 

Commercial non-owner occupied

 

 

 

 

 

2,859

 

2,859

 

Commercial owner occupied

 

 

 

 

 

12,815

 

12,815

 

Consumer real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer owner occupied

 

 

 

 

 

21

 

21

 

Home equity loans

 

313

 

189

 

 

502

 

33,962

 

34,464

 

Commercial and industrial

 

5

 

 

 

5

 

15,489

 

15,494

 

Other income producing property

 

253

 

579

 

 

832

 

3,248

 

4,080

 

 

 

$

571

 

$

768

 

$

 

$

1,339

 

$

68,895

 

$

70,234

 

 

23



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses (Continued)

 

The following table presents an aging analysis of past due loans, segregated by class for acquired credit impaired loans:

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

30-59 Days

 

60-89 Days

 

90+ Days

 

Past

 

 

 

Total

 

(Dollars in thousands)

 

Past Due

 

Past Due

 

Past Due

 

Due

 

Current

 

Loans

 

March 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans greater than or equal to $1 million-CBT

 

$

766

 

$

 

$

6,917

 

$

7,683

 

$

13,796

 

$

21,479

 

Commercial real estate

 

3,993

 

3,461

 

23,038

 

30,492

 

372,013

 

402,505

 

Commercial real estate—construction and development

 

1,145

 

1,311

 

13,220

 

15,676

 

82,384

 

98,060

 

Residential real estate

 

12,038

 

1,827

 

20,452

 

34,317

 

409,797

 

444,114

 

Consumer

 

2,335

 

593

 

1,562

 

4,490

 

95,055

 

99,545

 

Commercial and industrial

 

4,640

 

875

 

4,682

 

10,197

 

48,776

 

58,973

 

Single pay

 

 

 

47

 

47

 

85

 

132

 

 

 

$

24,917

 

$

8,067

 

$

69,918

 

$

102,902

 

$

1,021,906

 

$

1,124,808

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans greater than or equal to $1 million-CBT

 

$

 

$

 

$

7,217

 

$

7,217

 

$

16,892

 

$

24,109

 

Commercial real estate

 

4,493

 

3,728

 

24,362

 

32,583

 

407,202

 

439,785

 

Commercial real estate—construction and development

 

4,847

 

9,166

 

17,567

 

31,580

 

82,546

 

114,126

 

Residential real estate

 

13,794

 

3,792

 

27,061

 

44,647

 

432,042

 

476,689

 

Consumer

 

2,390

 

552

 

2,050

 

4,992

 

99,006

 

103,998

 

Commercial and industrial

 

3,875

 

634

 

3,829

 

8,338

 

60,524

 

68,862

 

Single pay

 

 

 

46

 

46

 

83

 

129

 

 

 

$

29,399

 

$

17,872

 

$

82,132

 

$

129,403

 

$

1,098,295

 

$

1,227,698

 

March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans greater than or equal to $1 million-CBT

 

$

 

$

 

$

15,903

 

$

15,903

 

$

21,966

 

$

37,869

 

Commercial real estate

 

7,224

 

2,233

 

14,868

 

24,325

 

322,913

 

347,238

 

Commercial real estate—construction and development

 

4,614

 

1,396

 

13,376

 

19,386

 

90,673

 

110,059

 

Residential real estate

 

5,766

 

4,932

 

19,742

 

30,440

 

305,185

 

335,625

 

Consumer

 

175

 

197

 

671

 

1,043

 

12,125

 

13,168

 

Commercial and industrial

 

490

 

1,011

 

4,131

 

5,632

 

59,354

 

64,986

 

Single pay

 

51

 

 

268

 

319

 

85

 

404

 

 

 

$

18,320

 

$

9,769

 

$

68,959

 

$

97,048

 

$

812,301

 

$

909,349

 

 

24



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses (Continued)

 

The following is a summary of information pertaining to impaired non-acquired and acquired loans accounted for under FASB ASC Topic 310-20:

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

Unpaid

 

Recorded

 

Recorded

 

 

 

 

 

 

 

Contractual

 

Investment

 

Investment

 

Total

 

 

 

 

 

Principal

 

With No

 

With

 

Recorded

 

Related

 

(Dollars in thousands)

 

Balance

 

Allowance

 

Allowance

 

Investment

 

Allowance

 

March 31, 2014

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

8,607

 

$

1,916

 

$

4,234

 

$

6,150

 

$

563

 

Commercial non-owner occupied

 

4,948

 

1,479

 

2,674

 

4,153

 

39

 

Commercial owner occupied

 

16,690

 

8,641

 

4,157

 

12,798

 

106

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer real estate:

 

 

 

 

 

 

 

 

 

 

 

Consumer owner occupied

 

2,895

 

 

2,550

 

2,550

 

72

 

Home equity loans

 

118

 

 

48

 

48

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

2,174

 

802

 

734

 

1,536

 

21

 

Other income producing property

 

6,891

 

1,246

 

5,252

 

6,498

 

617

 

Consumer

 

114

 

 

89

 

89

 

2

 

Other loans

 

 

 

 

 

 

Total impaired loans

 

$

42,437

 

$

14,084

 

$

19,738

 

$

33,822

 

$

1,421

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

7,341

 

$

3,555

 

$

2,184

 

$

5,739

 

$

704

 

Commercial non-owner occupied

 

3,592

 

2,681

 

 

2,681

 

 

Commercial owner occupied

 

14,017

 

10,441

 

1,119

 

11,560

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer real estate:

 

 

 

 

 

 

 

 

 

 

 

Consumer owner occupied

 

3,063

 

 

3,013

 

3,013

 

271

 

Home equity loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

477

 

405

 

 

405

 

 

Other income producing property

 

2,794

 

554

 

2,095

 

2,649

 

646

 

Consumer

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

Total impaired loans

 

$

31,284

 

$

17,636

 

$

8,411

 

$

26,047

 

$

1,631

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

22,813

 

$

8,327

 

$

3,730

 

$

12,057

 

$

1,027

 

Commercial non-owner occupied

 

7,832

 

2,675

 

2,186

 

4,861

 

2,059

 

Commercial owner occupied

 

21,450

 

13,138

 

4,491

 

17,629

 

623

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer real estate:

 

 

 

 

 

 

 

 

 

 

 

Consumer owner occupied

 

1,238

 

 

1,177

 

1,177

 

200

 

Home equity loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

3,105

 

1,596

 

338

 

1,934

 

84

 

Other income producing property

 

4,700

 

1,308

 

2,732

 

4,040

 

809

 

Consumer

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

Total impaired loans

 

$

61,138

 

$

27,044

 

$

14,654

 

$

41,698

 

$

4,802

 

 

Acquired credit impaired loans are accounted for in pools as shown on page 13 rather than being individually evaluated for impairment; therefore, the table above excludes acquired credit impaired loans.

 

25



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses (Continued)

 

The following summarizes the average investment in impaired loans, non-acquired and acquired loans accounted for under FASB ASC Topic 310-20, and interest income recognized on these loans:

 

 

 

Three Months Ended March 31,

 

 

 

2014

 

2013

 

 

 

Average

 

 

 

Average

 

 

 

 

 

Investment in

 

Interest Income

 

Investment in

 

Interest Income

 

(Dollars in thousands)

 

Impaired Loans

 

Recognized

 

Impaired Loans

 

Recognized

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

6,031

 

$

19

 

$

12,790

 

$

18

 

Commercial non-owner occupied

 

3,633

 

16

 

5,168

 

1

 

Commercial owner occupied

 

11,783

 

41

 

18,038

 

48

 

 

 

 

 

 

 

 

 

 

 

Consumer real estate:

 

 

 

 

 

 

 

 

 

Consumer owner occupied

 

1,278

 

19

 

1,941

 

5

 

Home equity loans

 

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

929

 

15

 

1,438

 

 

Other income producing property

 

5,148

 

27

 

4,237

 

8

 

Consumer

 

31

 

2

 

 

 

Other loans

 

 

 

 

 

Total Impaired Loans

 

$

28,850

 

$

139

 

$

43,612

 

$

80

 

 

The following is a summary of information pertaining to non-acquired nonaccrual loans by class, including restructured loans:

 

 

 

March 31,

 

December 31,

 

March 31,

 

(Dollars in thousands)

 

2014

 

2013

 

2013

 

Commercial non-owner occupied real estate:

 

 

 

 

 

 

 

Construction and land development

 

$

5,305

 

$

5,819

 

$

10,218

 

Commercial non-owner occupied

 

2,886

 

2,912

 

4,363

 

Total commercial non-owner occupied real estate

 

8,191

 

8,731

 

14,581

 

Consumer real estate:

 

 

 

 

 

 

 

Consumer owner occupied

 

7,840

 

8,382

 

8,200

 

Home equity loans

 

1,646

 

1,128

 

1,520

 

Total consumer real estate

 

9,486

 

9,510

 

9,720

 

Commercial owner occupied real estate

 

6,383

 

7,753

 

11,351

 

Commercial and industrial

 

857

 

586

 

2,133

 

Other income producing property

 

4,154

 

4,704

 

5,058

 

Consumer

 

119

 

49

 

102

 

Other loans

 

 

 

 

Restructured loans

 

8,156

 

10,690

 

13,636

 

Total loans on nonaccrual status

 

$

37,346

 

$

42,023

 

$

56,581

 

 

In the course of resolving delinquent loans, the Bank may choose to restructure the contractual terms of certain loans. Any loans that are modified are reviewed by the Bank to determine if a troubled debt restructuring (“TDR” or “restructured loan”) has occurred. A TDR is a modification in which the Bank grants a concession to a borrower that it would not otherwise consider due to economic or legal reasons related to a borrower’s financial difficulties. The concessions granted on TDRs generally include terms to reduce the interest rate, extend the term of the debt obligation, or modify the payment structure on the debt obligation.

 

26



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses (Continued)

 

The Bank designates loan modifications as TDRs when it grants a concession to the borrower that it would not otherwise consider due to the borrower experiencing financial difficulty (FASB ASC Topic 310-40). Loans on nonaccrual status at the date of modification are initially classified as nonaccrual TDRs. Loans on accruing status at the date of concession are initially classified as accruing TDRs if the note is reasonably assured of repayment and performance is expected in accordance with its modified terms. Such loans may be designated as nonaccrual loans subsequent to the concession date if reasonable doubt exists as to the collection of interest or principal under the restructuring agreement. Nonaccrual TDRs are returned to accruing status when there is economic substance to the restructuring, there is documented credit evaluation of the borrower’s financial condition, the remaining balance is reasonably assured of repayment in accordance with its modified terms, and the borrower has demonstrated sustained repayment performance in accordance with the modified terms for a reasonable period of time (generally a minimum of six months).

 

The following table presents non-acquired and acquired non-credit impaired loans designated as TDRs segregated by class and type of concession that were restructured during the three months ended March 31, 2014 and 2013:

 

 

 

Three Months Ended March 31,

 

 

 

2014

 

2013

 

 

 

 

 

Pre-

 

Post-

 

 

 

Pre-

 

Post-

 

 

 

 

 

Modification

 

Modification

 

 

 

Modification

 

Modification

 

 

 

 

 

Outstanding

 

Outstanding

 

 

 

Outstanding

 

Outstanding

 

 

 

Number

 

Recorded

 

Recorded

 

Number

 

Recorded

 

Recorded

 

(Dollars in thousands)

 

of loans

 

Investment

 

Investment

 

of loans

 

Investment

 

Investment

 

Interest rate modification

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer owner occupied

 

1

 

217

 

217

 

1

 

124

 

124

 

Total interest rate modifications

 

1

 

$

217

 

$

217

 

1

 

$

124

 

$

124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term modification

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

 

 

 

 

 

1

 

696

 

338

 

Total term modifications

 

 

$

 

$

 

1

 

$

696

 

$

338

 

 

 

1

 

$

217

 

$

217

 

2

 

$

820

 

$

462

 

 

At March 31, 2014 and 2013, the balance of accruing TDRs was $7.0 million, $5.0 million, respectively.

 

The following table presents the changes in status of non-acquired loans restructured within the previous 12 months as of March by type of concession:

 

 

 

Paying Under

 

 

 

 

 

 

 

Restructured Terms

 

Converted to Nonaccrual

 

Foreclosures and Defaults

 

 

 

Number

 

Recorded

 

Number

 

Recorded

 

Number

 

Recorded

 

(Dollars in thousands)

 

of Loans

 

Investment

 

of Loans

 

Investment

 

of Loans

 

Investment

 

Interest rate modification

 

5

 

$

1,417

 

 

$

 

 

$

 

Term modification

 

1

 

2,025

 

 

 

 

 

 

 

6

 

$

3,442

 

 

$

 

 

$

 

 

The amount of specific reserve associated with non-acquired restructured loans was $428,000 at March 31, 2014, none of which was related to the restructured loans that had subsequently defaulted. The Company had $4,000 remaining availability under commitments to lend additional funds on these restructured loans at March 31, 2014.

 

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Note 7—FDIC Indemnification Asset

 

The following table provides changes in FDIC indemnification asset:

 

 

 

Three Months Ended March 31,

 

(Dollars in thousands)

 

2014

 

2013

 

Balance at beginning of period

 

$

93,947

 

$

146,171

 

Increase (decrease) in expected losses on loans

 

125

 

(1,062

)

Additional losses (recoveries) on OREO

 

(643

)

841

 

Reimbursable expenses

 

676

 

1,097

 

Amortization of discounts and premiums, net

 

(7,078

)

(7,171

)

Reimbursements from FDIC

 

(19,043

)

(15,536

)

Balance at end of period

 

$

67,984

 

$

124,340

 

 

The FDIC indemnification asset is measured separately from the related covered assets.  At March 31, 2014, the projected cash flows related to the FDIC indemnification asset for losses on assets acquired were approximately $31.0 million less than the current carrying value.  This amount is being recognized as negative accretion (in non-interest income) over the shorter of the underlying asset’s remaining life or remaining term of the loss share agreements.  Subsequent to March 31, 2014, the Company expects to receive $8.0 million from loss share claims filed, including reimbursable expenses.

 

Included in the FDIC indemnification asset is an expected “true up” with the FDIC related to both the BankMeridian and Plantation acquisitions.  This amount is determined each reporting period and at March 31, 2014, was estimated to be approximately $3.8 million related to the BankMeridian acquisition at the end of the loss share agreement (July 2021) and $3.4 million related to the Plantation acquisition at the end of the loss share agreement (April 2017).  The actual payment will be determined at the end of the loss sharing agreement term for each of the five FDIC-assisted acquisitions and is based on the negative bid, expected losses, intrinsic loss estimate, and assets covered under loss share.  There was no true up expected from the CBT, Cape Fear, or Habersham FDIC-assisted transactions as of March 31, 2014.

 

Note 8—Other Real Estate Owned

 

The following is a summary of information pertaining to OREO at March 31, 2014:

 

(Dollars in thousands)

 

OREO

 

Covered
OREO

 

Total

 

Balance, December 31, 2013

 

$

37,398

 

$

27,520

 

$

64,918

 

Additions

 

5,766

 

6,822

 

12,588

 

Write-downs

 

(2,228

)

(773

)

(3,001

)

Sold

 

(5,792

)

(4,566

)

(10,358

)

Balance, March 31, 2014

 

$

35,144

 

$

29,003

 

$

64,147

 

 

The following is a summary of information pertaining to OREO at March 31, 2013:

 

(Dollars in thousands)

 

OREO

 

Covered
OREO

 

Total

 

Balance, December 31, 2012

 

$

32,248

 

$

34,257

 

$

66,505

 

Additions

 

10,542

 

6,186

 

16,728

 

Write-downs

 

(1,599

)

(971

)

(2,570

)

Sold

 

(4,745

)

(5,228

)

(9,973

)

Balance, March 31, 2013

 

$

36,446

 

$

34,244

 

$

70,690

 

 

The covered OREO above is covered pursuant to the FDIC loss share agreements and is presented net of the related fair value discount.  At March 31, 2014, there were 452 properties included in OREO, with 217 uncovered and 235 covered by loss share agreement with the FDIC.  At March 31, 2013, there were 403 properties included in OREO, with 172 uncovered and 231 covered by loss share agreement with the FDIC.

 

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Table of Contents

 

Note 9 — Deposits

 

The Company’s total deposits are comprised of the following:

 

 

 

March 31,

 

December 31,

 

March 31,

 

(Dollars in thousands)

 

2014

 

2013

 

2013

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

1,452,935

 

$

1,525,567

 

$

1,007,746

 

Interest-bearing demand deposits

 

2,915,756

 

2,893,646

 

1,855,137

 

Non-interest bearing demand deposits

 

1,581,157

 

1,487,798

 

995,214

 

Savings deposits

 

678,650

 

647,648

 

359,282

 

Other time deposits

 

2,155

 

838

 

1,977

 

Total deposits

 

$

6,630,653

 

$

6,555,497

 

$

4,219,356

 

 

At March 31, 2014, December 31, 2013, and March 31, 2013, the Company had $150.3 million, $166.1 million, and $136.0 million in certificates of deposits greater than $250,000, respectively.  At March 31, 2014, December 31, 2013, and March 31, 2013, the Company had $30.4 million, $34.8 million and $4.8 million, respectively, in traditional, out-of-market brokered deposits.

 

Note 10 — Retirement Plans

 

The Company and the Bank provide certain retirement benefits to their employees in the form of a non-contributory defined benefit pension plan and an employees’ savings plan.  The non-contributory defined benefit pension plan covers all employees hired on or before December 31, 2005, who have attained age 21, and who have completed a year of eligible service.  Employees hired on or after January 1, 2006 are not eligible to participate in the non-contributory defined benefit pension plan.  On this date, a new benefit formula applies only to participants who have not attained age 45 or who do not have five years of service.

 

Effective July 1, 2009, the Company suspended the accrual of benefits for pension plan participants under the non-contributory defined benefit plan.  The pension plan remained suspended as of March 31, 2014.

 

The components of net periodic pension expense recognized during the three months ended March 31, 2014 and 2013 are as follows:

 

 

 

Three Months Ended

 

 

 

March 31

 

(Dollars in thousands)

 

2014

 

2013

 

 

 

 

 

 

 

Interest cost

 

$

(277

)

$

(250

)

Expected return on plan assets

 

487

 

430

 

Recognized net actuarial loss

 

(165

)

(301

)

Net periodic pension benefit (cost)

 

$

45

 

$

(121

)

 

The Company contributed $300,000 to the pension plan for the three months ended March 31, 2014, and anticipates making similar additional contributions during the remainder of the year.

 

Electing employees are eligible to participate in the employees’ savings plan, under the provisions of Internal Revenue Code Section 401(k), after attaining age 21.  Plan participants elect to contribute portions of their annual base compensation as a before tax contribution.  Employer contributions may be made from current or accumulated net profits. Participants may elect to contribute 1% to 50% of annual base compensation as a before tax contribution. Effective September 1, 2012, employees participating in the plan receive a 100% matching of their 401(k) plan contribution, up to 5% of salary. Prior to September 1, 2012, participating employees received a 50% matching of their 401(k) plan contribution, up to 6% of salary.  The Company expensed $1,175,119 and $500,000 for the 401(k) plan during the three months ended March 31, 2014 and 2013, respectively.

 

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Table of Contents

 

Note 10 — Retirement Plans (Continued)

 

Employees hired on January 1, 2006 or thereafter will not participate in the defined benefit pension plan, but are eligible to participate in the employees’ savings plan.

 

Employees can enter the savings plan on or after the first day of each month.  The employee may enter into a salary deferral agreement at any time to select an alternative deferral amount or to elect not to defer in the plan.  If the employee does not elect an investment allocation, the plan administrator will select a retirement-based portfolio according to the employee’s number of years until normal retirement age.  The plan’s investment valuations are generally provided on a daily basis.

 

Note 11 — Earnings Per Share

 

Basic earnings per share are calculated by dividing net income available to common shareholders by the weighted-average shares of common stock outstanding during each period, excluding non-vested shares.  The Company’s diluted earnings per share are based on the weighted-average shares of common stock outstanding during each period plus the maximum dilutive effect of common stock issuable upon exercise of stock options or vesting of restricted shares.  The weighted-average number of shares and equivalents are determined after giving retroactive effect to stock dividends and stock splits.

 

The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2014 and 2013:

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars and shares in thousands)

 

2014

 

2013

 

Basic earnings per common share:

 

 

 

 

 

Net income available to common shareholders

 

$

15,844

 

$

10,649

 

 

 

 

 

 

 

Weighted-average basic common shares

 

23,873

 

16,787

 

Basic earnings per common share

 

$

0.66

 

$

0.63

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

Net income available to common shareholders

 

$

15,844

 

$

10,649

 

 

 

 

 

 

 

Weighted-average basic common shares

 

23,873

 

16,787

 

Effect of dilutive securities

 

243

 

167

 

Weighted-average dilutive shares

 

24,116

 

16,954

 

Diluted earnings per common share

 

$

0.66

 

$

0.63

 

 

The calculation of diluted earnings per common share excludes outstanding stock options for which the results would have been anti-dilutive under the treasury stock method as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars in thousands)

 

2014

 

2013

 

 

 

 

 

 

 

Number of shares

 

22,497

 

21,361

 

Range of exercise prices

 

$61.49-$66.32

 

$41.45-$41.45

 

 

Note 12 — Share-Based Compensation

 

The Company’s 2004 and 2012 share-based compensation programs are long-term retention programs intended to attract, retain, and provide incentives for key employees and non-employee directors in the form of incentive and non-qualified stock options, restricted stock, and restricted stock units (“RSUs”).

 

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Table of Contents

 

Note 12 — Share-Based Compensation (Continued)

 

Stock Options

 

With the exception of non-qualified stock options granted to directors under the 2004 and 2012 plans, which in some cases may be exercised at any time prior to expiration and in some other cases may be exercised at intervals less than a year following the grant date, incentive stock options granted under the plans may not be exercised in whole or in part within a year following the date of the grant, as these incentive stock options become exercisable in 25% increments pro ratably over the four-year period following the grant date.  The options are granted at an exercise price at least equal to the fair value of the common stock at the date of grant and expire ten years from the date of grant.  No options were granted under the 2004 plan after January 26, 2012, and the 2004 plan is closed other than for any options still unexercised and outstanding. The 2012 plan is the only plan from which new share-based compensation grants may be issued.  It is the Company’s policy to grant options out of the 1,684,000 shares registered under the 2012 plan, of which no more than 817,476 shares can be granted as restricted stock or restricted stock units.

 

Activity in the Company’s stock option plans is summarized in the following table.  All information has been retroactively adjusted for stock dividends and stock splits.

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Weighted-

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

 

Number of

 

Exercise

 

Contractual

 

Intrinsic

 

Options 

 

Shares

 

Price

 

Life (Yrs.)

 

Value (000’s)

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2014

 

295,916

 

$

33.26

 

 

 

 

 

Granted

 

22,497

 

65.59

 

 

 

 

 

Exercised

 

(4,660

)

27.70

 

 

 

 

 

Expired/Forfeited

 

(13

)

27.22

 

 

 

 

 

Outstanding at March 31, 2014

 

313,740

 

35.66

 

5.04

 

$

8,528

 

 

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2014

 

258,814

 

33.07

 

4.24

 

$

7,650

 

 

 

 

 

 

 

 

 

 

 

Weighted-average fair value of options granted during the year

 

$

26.44

 

 

 

 

 

 

 

 

The fair value of options is estimated at the date of grant using the Black-Scholes option pricing model and expensed over the options’ vesting periods.  The following weighted-average assumptions were used in valuing options issued:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Dividend yield

 

1.27%

 

1.70%

 

Expected life

 

6 years

 

6 years

 

Expected volatility

 

43.8%-44.7%

 

42.4%

 

Risk-free interest rate

 

2.10%

 

1.02%

 

 

As of March 31, 2014, there was $935,000 of total unrecognized compensation cost related to nonvested stock option grants under the plans.  The cost is expected to be recognized over a weighted-average period of 1.79 years as of March 31, 2014.  The total fair value of shares vested during the three months ended March 31, 2014 was $413,000.

 

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Table of Contents

 

Note 12 — Share-Based Compensation (Continued)

 

Restricted Stock

 

The Company from time-to-time also grants shares of restricted stock to key employees and non-employee directors.  These awards help align the interests of these employees and directors with the interests of the shareholders of the Company by providing economic value directly related to increases in the value of the Company’s stock.  The value of the stock awarded is established as the fair market value of the stock at the time of the grant.  The Company recognizes expenses, equal to the total value of such awards, ratably over the vesting period of the stock grants.  Restricted stock grants to employees typically “cliff vest” after four years.  Grants to non-employee directors typically vest within a 12-month period.

 

Nonvested restricted stock for the three months ended March 31, 2014 is summarized in the following table.  All information has been retroactively adjusted for stock dividends and stock splits.

 

 

 

 

 

Weighted-

 

 

 

 

 

Average

 

 

 

 

 

Grant-Date

 

 Restricted Stock 

 

Shares

 

Fair Value

 

 

 

 

 

 

 

Nonvested at January 1, 2014

 

232,547

 

$

35.15

 

Granted

 

16,796

 

61.87

 

Vested

 

(13,377

)

38.33

 

Forfeited

 

(3,204

)

41.45

 

Nonvested at March 31, 2014

 

232,762

 

36.81

 

 

As of March 31, 2014, there was $5.4 million of total unrecognized compensation cost related to nonvested restricted stock granted under the plans.  This cost is expected to be recognized over a weighted-average period of 2.98 years as of March 31, 2014.  The total fair value of shares vested during the three months ended March 31, 2014 was $513,000.

 

Restricted Stock Units

 

The Company from time-to-time also grants performance RSUs to key employees.  These awards help align the interests of these employees with the interests of the shareholders of the Company by providing economic value directly related to the performance of the Company.  Performance RSU grants contain a three year performance period. The Company communicates threshold, target, and maximum performance RSU awards and performance targets to the applicable key employees at the beginning of a performance period. Dividends are not paid in respect to the awards during the performance period.  The value of the RSUs awarded is established as the fair market value of the stock at the time of the grant.  The Company recognizes expenses on a straight-line basis typically over three years based upon the probable performance target that will be met. For the three months ended March 31, 2014, the Company accrued at the target RSU award level, or for 85% of the RSUs granted, based on Management’s expectations of performance.

 

Nonvested RSUs for the three months ended March 31, 2014 is summarized in the following table.

 

 

 

 

 

Weighted-

 

 

 

 

 

Average

 

 

 

 

 

Grant-Date

 

Restricted Stock Units

 

Shares

 

Fair Value

 

Nonvested at January 1, 2014

 

43,820

 

$

51.01

 

Granted

 

37,802

 

61.49

 

Nonvested at March 31, 2014

 

81,622

 

55.87

 

 

As of March 31, 2014, there was $3.6 million of total unrecognized compensation cost related to nonvested RSUs granted under the plan.  This cost is expected to be recognized over a weighted-average period of 2.18 years as of March 31, 2014.

 

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Table of Contents

 

Note 13 — Commitments and Contingent Liabilities

 

In the normal course of business, the Company makes various commitments and incurs certain contingent liabilities, which are not reflected in the accompanying financial statements.  The commitments and contingent liabilities include guarantees, commitments to extend credit, and standby letters of credit.  At March 31, 2014, commitments to extend credit and standby letters of credit totaled $1.3 billion.  The Company does not anticipate any material losses as a result of these transactions.

 

The Company has been named as defendant in various legal actions, arising from its normal business activities, in which damages in various amounts are claimed. The Company is also exposed to litigation risk related to the prior business activities of banks acquired through whole bank acquisitions as well as banks from which assets were acquired and liabilities assumed in FDIC-assisted transactions. Although the amount of any ultimate liability with respect to such matters cannot be determined, in the opinion of management, any such liability will not have a material effect on the Company’s consolidated financial statements.

 

Note 14 — Fair Value

 

FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value under accounting principles generally accepted in the United States, and enhances disclosures about fair value measurements. FASB ASC 820 clarifies that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.

 

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available for sale securities and derivative contracts are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, impaired loans, OREO, and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

 

FASB ASC 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:

 

Level 1   Observable inputs such as quoted prices in active markets;

Level 2   Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3          Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

The following is a description of valuation methodologies used for assets recorded at fair value.

 

Investment Securities

 

Securities available for sale are valued on a recurring basis at quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange and The NASDAQ Stock Market, or U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities and debentures issued by government sponsored entities, municipal bonds and corporate debt securities.  Securities held to maturity are valued at quoted market prices or dealer quotes similar to securities available for sale. The carrying value of FHLB stock approximates fair value based on the redemption provisions. The Level 3 security is an unrated single-issue private placement bond that was acquired in the Savannah transaction. This security is considered a Level 3 because there is not an active market for the security. Management considers the credit quality of the underlying issuer in determining the fair value of the security.

 

Mortgage Loans Held for Sale

 

Mortgage loans held for sale are carried at the lower of cost or market value. The fair values of mortgage loans held for sale are based on commitments on hand from investors within the secondary market for loans with similar characteristics. As such, the fair value adjustments for mortgage loans held for sale are nonrecurring Level 2.

 

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Table of Contents

 

Note 14 — Fair Value (Continued)

 

Loans

 

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan may be considered impaired and an allowance for loan losses may be established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment using estimated fair value methodologies. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2014, substantially all of the impaired loans were evaluated based on the fair value of the collateral because such loans were considered collateral dependent. Impaired loans, where an allowance is established based on the fair value of collateral; require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company considers the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company considers the impaired loan as nonrecurring Level 3.

 

Other Real Estate Owned (“OREO”)

 

Typically non-covered OREO, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs (Level 2). However, both non-covered and covered OREO are considered Level 3 in the fair value hierarchy because management has qualitatively applied a discount due to the size, supply of inventory, and the incremental discounts applied to the appraisals. Management also considers other factors, including changes in absorption rates, length of time the property has been on the market and anticipated sales values, which have resulted in adjustments to the collateral value estimates indicated in certain appraisals.  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. Gains or losses on sale and generally any subsequent adjustments to the value are recorded as a component of OREO expense, net of any FDIC indemnification proceeds in the case of covered OREO.

 

Derivative Financial Instruments

 

Fair value is estimated using pricing models of derivatives with similar characteristics; accordingly, the derivatives are classified within Level 2 of the fair value hierarchy (see Note 16—Derivative Financial Instruments for additional information).

 

Mortgage servicing rights (“MSRs”)

 

The estimated fair value of MSRs is obtained through an independent derivatives dealer analysis of future cash flows. The evaluation utilizes assumptions market participants would use in determining fair value including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market driven data, as well as the market’s perception of future interest rate movements. MSRs are classified as Level 3.

 

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Table of Contents

 

Note 14 — Fair Value (Continued)

 

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

 

The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis.

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

In Active

 

Significant

 

 

 

 

 

 

 

Markets

 

Other

 

Significant

 

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

 

 

 

 

Assets

 

Inputs

 

Inputs

 

(Dollars in thousands)

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

March 31, 2014:

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

1,005

 

$

 

$

1,005

 

$

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

Government-sponsored entities debt

 

137,601

 

 

137,601

 

 

State and municipal obligations

 

141,638

 

 

141,638

 

 

Mortgage-backed securities

 

510,379

 

 

510,379

 

 

Corporate stocks

 

3,506

 

3,281

 

225

 

 

Total securities available for sale

 

793,124

 

3,281

 

789,843

 

 

Mortgage servicing rights

 

20,925

 

 

 

20,925

 

 

 

$

814,227

 

$

3,281

 

$

790,021

 

$

20,925

 

Liabilities

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

1,460

 

$

 

$

1,460

 

$

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

701

 

$

 

$

701

 

$

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

Government-sponsored entities debt

 

142,994

 

 

142,994

 

 

State and municipal obligations

 

140,651

 

 

140,651

 

 

Mortgage-backed securities

 

499,479

 

 

499,479

 

 

Corporate stocks

 

3,667

 

3,442

 

225

 

 

Total securities available for sale

 

786,791

 

3,442

 

783,349

 

 

Mortgage servicing rights

 

20,729

 

 

 

20,729

 

 

 

$

808,221

 

$

3,442

 

$

784,050

 

$

20,729

 

Liabilities

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

1,857

 

$

 

$

1,857

 

$

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013:

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

290

 

$

 

$

290

 

$

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

Government-sponsored entities debt

 

$

71,802

 

$

 

$

71,802

 

$

 

State and municipal obligations

 

148,897

 

 

145,083

 

3,814

 

Mortgage-backed securities

 

289,741

 

 

289,741

 

 

Corporate stocks

 

412

 

387

 

25

 

 

Total securities available for sale

 

$

510,852

 

$

387

 

$

506,651

 

$

3,814

 

 

 

$

511,142

 

$

387

 

$

506,941

 

$

3,814

 

Liabilities

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

1,692

 

$

 

$

1,692

 

$

 

 

35



Table of Contents

 

Note 14 — Fair Value (Continued)

 

Changes in Level 1, 2 and 3 Fair Value Measurements

 

When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement.  However, since Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources), the gains and losses below include changes in fair value due in part to observable factors that are part of the valuation methodology.

 

There were no changes in hierarchy classifications of Level 3 assets or liabilities for the three months ended March 31, 2013.  A reconciliation of the beginning and ending balances of Level 3 assets and liabilities recorded at fair value on a recurring basis for the three months ended March 31, 2014 and 2013 is as follows:

 

(Dollars in thousands)

 

Assets

 

Liabilities

 

 

 

 

 

 

 

Fair value, January 1, 2013

 

$

3,851

 

$

 

Purchases, issuances and settlements, net

 

(37

)

 

Fair value, March 31, 2013

 

$

3,814

 

$

 

 

 

 

 

 

 

Fair value, January 1, 2014

 

$

20,729

 

$

 

Mortgage and other loan income

 

(664

)

 

Transfers in and/or out of level 3

 

860

 

 

Fair value, March 31, 2014

 

$

20,925

 

$

 

 

There were no unrealized losses included in accumulated other comprehensive income related to Level 3 financial assets and liabilities at March 31, 2014 or 2013.

 

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

 

The tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis:

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

In Active

 

Significant

 

 

 

 

 

 

 

Markets

 

Other

 

Significant

 

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

 

 

 

 

Assets

 

Inputs

 

Inputs

 

(Dollars in thousands)

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

March 31, 2014:

 

 

 

 

 

 

 

 

 

OREO

 

$

64,147

 

$

 

$

 

$

64,147

 

Non-acquired impaired loans

 

4,725

 

 

 

4,725

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

OREO

 

$

64,918

 

$

 

$

 

$

64,918

 

Non-acquired impaired loans

 

13,129

 

 

 

13,129

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013:

 

 

 

 

 

 

 

 

 

OREO

 

$

29,508

 

$

 

$

 

$

29,508

 

Non-acquired impaired loans

 

4,418

 

 

 

4,418

 

 

36



Table of Contents

 

Note 14 — Fair Value (Continued)

 

Quantitative Information about Level 3 Fair Value Measurements

 

 

 

 

 

 

 

General

 

Weighted

 

 

 

Valuation Technique

 

Unobservable Input

 

Range

 

Average

 

Nonrecurring measurements:

 

 

 

 

 

 

 

 

 

Impaired loans

 

Discounted appraisals

 

Collateral discounts

 

0-25%

 

4.20

%

OREO

 

Discounted appraisals

 

Collateral discounts and estimated costs to sell

 

0-50%

 

13.88

%

 

Fair Value of Financial Instruments

 

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those models are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The use of different methodologies may have a material effect on the estimated fair value amounts. The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2014, December 31, 2013 and March 31, 2013. Such amounts have not been revalued for purposes of these consolidated financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

 

Cash and Cash Equivalents — The carrying amount is a reasonable estimate of fair value.

 

Investment Securities — Securities held to maturity are valued at quoted market prices or dealer quotes.  The carrying value of FHLB stock approximates fair value based on the redemption provisions.  The carrying value of the Company’s investment in unconsolidated subsidiaries approximates fair value.  See Note 5—Investment Securities for additional information, as well as page 35 regarding fair value.

 

Loans — For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (e.g., one-to-four family residential) and other consumer loans are estimated using discounted cash flow analyses based on the Company’s current rates offered for new loans of the same type, structure and credit quality. Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial and industrial loans) are estimated using discounted cash flow analyses, using interest rates currently being offered by the Company for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

 

FDIC Receivable for Loss Share Agreements — The fair value is estimated based on discounted future cash flows using current discount rates.

 

Deposit Liabilities — The fair values disclosed for demand deposits (e.g., interest and non-interest bearing checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts, and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

 

Federal Funds Purchased and Securities Sold Under Agreements to Repurchase — The carrying amount of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days approximate their fair values.

 

Other Borrowings — The fair value of other borrowings is estimated using discounted cash flow analysis on the Company’s current incremental borrowing rates for similar types of instruments.

 

Accrued Interest — The carrying amounts of accrued interest approximate fair value.

 

37



Table of Contents

 

Note 14 — Fair Value (Continued)

 

Derivative Financial Instruments — The fair value of derivative financial instruments (including interest rate swaps) is estimated using pricing models of derivatives with similar characteristics.

 

Commitments to Extend Credit, Standby Letters of Credit and Financial Guarantees — The fair values of commitments to extend credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of guarantees and letters of credit are based on fees currently charged for similar agreements or on the estimated costs to terminate them or otherwise settle the obligations with the counterparties at the reporting date.

 

The estimated fair value, and related carrying amount, of the Company’s financial instruments are as follows:

 

 

 

Carrying

 

Fair

 

 

 

 

 

 

 

(Dollars in thousands)

 

Amount

 

Value

 

Level 1

 

Level 2

 

Level 3

 

March 31, 2014

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

612,615

 

$

612,615

 

$

612,615

 

$

 

$

 

Investment securities

 

814,533

 

815,069

 

13,799

 

801,270

 

 

Loans, net of allowance for loan losses, and loans held for sale

 

5,628,453

 

5,694,054

 

 

57,200

 

5,636,854

 

FDIC receivable for loss share agreements

 

67,984

 

35,255

 

 

 

35,255

 

Accrued interest receivable

 

15,389

 

15,389

 

 

3,963

 

11,426

 

Mortgage servicing rights

 

20,925

 

20,925

 

 

 

20,925

 

Interest rate swap — non-designated hedge

 

178

 

178

 

 

178

 

 

Other derivative financial instruments (mortgage banking related)

 

827

 

827

 

 

827

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

6,630,653

 

6,370,810

 

 

6,370,810

 

 

Federal funds purchased and securities sold under agreements to repurchase

 

254,985

 

254,985

 

 

254,985

 

 

Other borrowings

 

100,963

 

102,971

 

 

102,971

 

 

Accrued interest payable

 

4,854

 

4,854

 

 

4,854

 

 

Interest rate swap — cash flow hedge

 

908

 

908

 

 

908

 

 

Interest rate swap — non-designated hedge

 

178

 

178

 

 

178

 

 

Other derivative financial instruments (mortgage banking related)

 

374

 

374

 

 

374

 

 

Off balance sheet financial instruments:

 

 

 

 

 

 

 

 

 

 

 

Commitments to extend credit

 

 

15,494

 

 

15,494

 

 

Standby letters of credit and financial guarantees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

479,461

 

$

479,461

 

$

479,461

 

$

 

$

 

Investment securities

 

812,603

 

813,068

 

16,828

 

796,240

 

 

Loans, net of allowance for loan losses, and loans held for sale

 

5,675,602

 

5,742,078

 

 

30,586

 

5,711,492

 

FDIC receivable for loss share agreements

 

93,947

 

48,512

 

 

 

48,512

 

Accrued interest receivable

 

15,024

 

15,024

 

 

3,482

 

11,542

 

Mortgage servicing rights

 

20,729

 

20,729

 

 

 

20,729

 

Interest rate swap — non-designated hedge

 

178

 

178

 

 

178

 

 

Other derivative financial instruments (mortgage banking related)

 

523

 

523

 

 

523

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

6,555,497

 

6,313,543

 

 

6,313,543

 

 

Federal funds purchased and securities sold under agreements to repurchase

 

211,401

 

211,401

 

 

211,401

 

 

Other borrowings

 

102,060

 

92,751

 

 

92,751

 

 

Accrued interest payable

 

5,388

 

5,388

 

 

5,388

 

 

Interest rate swap — cash flow hedge

 

914

 

914

 

 

914

 

 

Interest rate swap — non-designated hedge

 

178

 

178

 

 

178

 

 

Other derivative financial instruments (mortgage banking related)

 

765

 

765

 

 

765

 

 

Off balance sheet financial instruments:

 

 

 

 

 

 

 

 

 

 

 

Commitments to extend credit

 

 

15,555

 

 

15,555

 

 

Standby letters of credit and financial guarantees

 

 

 

 

 

 

 

38



Table of Contents

 

Note 14 — Fair Value (Continued)

 

 

 

Carrying

 

Fair

 

 

 

 

 

 

 

(Dollars in thousands)

 

Amount

 

Value

 

Level 1

 

Level 2

 

Level 3

 

March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

495,869

 

$

495,869

 

$

495,869

 

$

 

$

 

Investment securities

 

533,255

 

534,212

 

8,192

 

522,206

 

3,814

 

Loans, net of allowance for loan losses, and loans held for sale

 

3,577,056

 

3,601,445

 

 

50,449

 

3,550,996

 

FDIC receivable for loss share agreements

 

124,340

 

86,049

 

 

 

86,049

 

Accrued interest receivable

 

10,669

 

10,669

 

 

3,068

 

7,601

 

Interest rate swap — non-designated hedge

 

290

 

290

 

 

290

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

4,219,356

 

4,119,850

 

 

4,119,850

 

 

Federal funds purchased and securities sold under agreements to repurchase

 

328,701

 

328,701

 

 

328,701

 

 

Other borrowings

 

54,638

 

55,712

 

 

55,712

 

 

Accrued interest payable

 

1,602

 

1,602

 

 

1,602

 

 

Interest rate swap — cash flow hedge

 

1,402

 

1,402

 

 

1,402

 

 

Interest rate swap — non-designated hedge

 

290

 

290

 

 

290

 

 

Off balance sheet financial instruments:

 

 

 

 

 

 

 

 

 

 

 

Commitments to extend credit

 

 

6,208

 

 

6,208

 

 

Standby letters of credit and financial guarantees

 

 

 

 

 

 

 

Note 15 — Accumulated Other Comprehensive Loss

 

The changes in each components of accumulated other comprehensive loss, net of tax, were as follows:

 

 

 

 

 

Unrealized Gains

 

 

 

 

 

 

 

 

 

and Losses

 

Gains and

 

 

 

 

 

 

 

on Securities

 

Losses on

 

 

 

 

 

Benefit

 

Available

 

Cash Flow

 

 

 

(Dollars in thousands)

 

Plans

 

for Sale

 

Hedges

 

Total

 

Balance at December 31, 2012

 

$

(7,458

)

$

8,764

 

$

(930

)

$

376

 

Other comprehensive income (loss) before reclassifications

 

 

(1,982

)

18

 

(1,964

)

Amounts reclassified from accumulated other comprehensive loss

 

 

 

45

 

45

 

Net comprehensive income (loss)

 

 

(1,982

)

63

 

(1,919

)

Balance at March 31, 2013

 

$

(7,458

)

$

6,782

 

$

(867

)

$

(1,543

)

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

 

$

(3,585

)

$

(5,573

)

$

(565

)

$

(9,723

)

Other comprehensive income (loss) before reclassifications

 

 

5,666

 

(44

)

5,622

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 

47

 

47

 

Net comprehensive income

 

 

5,666

 

3

 

5,669

 

Balance at March 31, 2014

 

$

(3,585

)

$

93

 

$

(562

)

$

(4,054

)

 

39



Table of Contents

 

Note 15 — Accumulated Other Comprehensive Loss (Continued)

 

The table below presents the reclassifications out of accumulated other comprehensive loss, net of tax, for the three months ended March 31, 2014:

 

 

 

Amount Reclassified from

 

 

 

Accumulated Other Comprehensive 

 

Accumulated Other

 

 

 

Loss Component

 

Comprehensive Loss

 

Income Statement Line Item Affected

 

 

 

 

 

 

 

Gains and losses on cash flow hedges:

 

 

 

 

 

Interest rate contracts

 

$

76

 

Interest expense

 

 

 

(29

)

Provision for income taxes

 

 

 

47

 

Net income

 

 

 

 

 

 

 

Total reclassifications for the period

 

$

47

 

 

 

 

Note 16 — Derivative Financial Instruments

 

Cash Flow Hedge of Interest Rate Risk

 

The Company utilizes this interest rate swap agreement to convert a portion of its variable-rate debt to a fixed rate (cash flow hedge). During 2009, the Company entered into a forward starting interest rate swap agreement with a notional amount of $8.0 million to manage interest rate risk due to periodic rate resets on its junior subordinated debt issued by SCBT Capital Trust II, an unconsolidated subsidiary of the Company established for the purpose of issuing trust preferred securities. The Company hedges the variable rate cash flows of subordinated debt against future interest rate increases by using an interest rate swap that effectively fixed the rate on the debt beginning on June 15, 2010, at which time the debt contractually converted from a fixed interest rate to a variable interest rate. This hedge expires on June 15, 2019. The notional amount on which the interest payments are based will not be exchanged. This derivatives contract calls for the Company to pay a fixed rate of 4.06% on $8.0 million notional amount and receive a variable rate of three-month LIBOR on the $8.0 million notional amount.

 

The Company recognized an after-tax unrealized gain on its cash flow hedge in other comprehensive income of $3,000 for the three months ended March 31, 2014, compared to an after-tax unrealized gain on its cash flow hedge in other comprehensive income of $63,000 for the three months ended March 31, 2013.  The Company recognized a $908,000 cash flow hedge liability in other liabilities on the balance sheet at March 31, 2014, compared to a $1.4 million liability recognized at March 31, 2013. There was no ineffectiveness in the cash flow hedge during the three months ended March 31, 2014 and 2013.

 

Credit risk related to the derivative arises when amounts receivable from the counterparty (derivatives dealer) exceed those payable. The Company controls the risk of loss by only transacting with derivatives dealers that are national market makers whose credit ratings are strong. Each party to the interest rate swap is required to provide collateral in the form of cash or securities to the counterparty when the counterparty’s exposure to a mark-to-market replacement value exceeds certain negotiated limits. These limits are typically based on current credit ratings and vary with ratings changes.  As of March 31, 2014 and 2013, the Company was required to provide $1.0 million and $1.6 million of collateral, respectively, which is included in cash and cash equivalents on the balance sheet as interest-bearing deposits with banks. Also, the Company has a netting agreement with the counterparty.

 

Non-designated Hedges of Interest Rate Risk

 

Customer Swap

 

As of March 31, 2014, the Company has two interest rate swap contracts that were classified as non-designated hedges that were acquired through the merger transaction with Savannah.  These derivatives are not designated as hedges and are not speculative in nature.  One of the derivatives is an interest rate swap that was executed with a commercial borrower to facilitate a respective risk management strategy and allow the customer to pay a fixed rate of interest to the Company.  This interest rate swap was simultaneously hedged by executing an offsetting interest rate swap that was entered into with a derivatives dealer to minimize the net risk exposure to the Company resulting from the transactions and allow the Company to receive a variable rate of interest.

 

40



Table of Contents

 

Note 16 — Derivative Financial Instruments (Continued)

 

The interest rate swap contract with the commercial borrower requires the borrower to pay or receive from the Company an amount equal to and offsetting the value of the interest rate swap.  If the commercial borrower fails to perform and the market value for the interest rate swap with the derivatives dealer is negative (net liability position), the Company would be obligated to pay the settlement amount for the financial derivative with the dealer.  If the market value for the interest rate swap with the derivatives dealer is positive (net asset position), the Company would receive a payment for the settlement amount for the financial derivative with the dealer.  The settlement amount is determined by the fluctuation of interest rates.

 

As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.  As of March 31, 2014, the interest rate swaps had an aggregate notional amount of approximately $4.2 million and the fair value of these two interest rate swap derivatives are recorded in other assets and in other liabilities for $178,000 on the balance sheet.  The net effect of recording the derivatives at fair value through earnings was immaterial to the Company’s financial condition and results of operations during 2014.

 

The Company also has an agreement with the derivatives dealer in this transaction that contains a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on this derivatives obligation.  As of March 31, 2014, the fair value of the interest rate swap derivative with the derivatives dealer was in a net liability position of $178,000, which excludes any adjustment for nonperformance risk, related to these agreements.  As of March 31, 2014, the Company provided $354,000 of collateral, which is included in cash and cash equivalents on the balance sheet as interest-bearing deposits with banks.  If the Company had breached any of these provisions at March 31, 2014, it would have been required to settle its obligations under the agreement at the termination value, $178,000.

 

Mortgage Banking

 

The Company also has derivatives contracts that were classified as non-designated hedges that were acquired through the merger transaction with FFHI.  These derivatives contracts are a part of the Company’s risk management strategy for its mortgage banking activities.  These instruments may include financial forwards, futures contracts, and options written and purchased, which are used to hedge mortgage servicing rights; while when-issued securities are typically used to hedge the mortgage pipeline.  Such instruments derive their cash flows, and therefore their values, by reference to an underlying instrument, index or referenced interest rate.  The Company does not elect hedge accounting treatment for any of these derivative instruments acquired through the merger with FFHI and as a result, changes in fair value of the instruments (both gains and losses) are recorded in the Consolidated Statements of Operations in mortgage banking income.

 

Mortgage Servicing Rights

 

Derivatives contracts related to mortgage servicing rights are used to help offset changes in fair value and are written in amounts referred to as notional amounts.  Notional amounts provide a basis for calculating payments between counterparties but do not represent amounts to be exchanged between the parties, and are not a measure of financial risk.  On March 31, 2014, the Company had derivative financial instruments outstanding with notional amounts totaling $75.5 million related to mortgage servicing rights.  The estimated net fair value of the open contracts related to the mortgage servicing rights was recorded as a loss of $374,000 at March 31, 2014.

 

Mortgage Pipeline

 

The following table presents the Company’s notional value of forward sale commitments and the fair value of those obligations along with the fair value of the mortgage pipeline.

 

(Dollars in thousands)

 

March 31, 2014

 

December 31, 2013

 

March 31, 2013

 

 

 

 

 

 

 

 

 

Mortgage loan pipeline*

 

$

68,433

 

$

44,678

 

$

 

Expected closures

 

51,325

 

33,508

 

 

Fair Value of mortgage loan pipeline commitments

 

349

 

112

 

 

Forward commitments

 

60,351

 

36,230

 

 

Fair value of forward commitments

 

250

 

296

 

 

 


*Represents at risk mortgage pipeline generally sold servicing retained to the agencies

 

41



Table of Contents

 

Note 17 — Capital Ratios

 

The Company is subject to certain risk-based capital guidelines. Certain ratios measure the relationship of capital to a combination of balance sheet and off-balance sheet risks. The values of both balance sheet and off-balance sheet items are adjusted to reflect credit risk. Under the guidelines promulgated by the Federal Reserve, which are substantially similar to those of the FDIC, Tier 1 risk-based capital must be at least 4% of risk-weighted assets, while total risk-based capital must be at least 8% of risk-weighted assets.

 

In conjunction with the risk-based capital ratios, the regulatory agencies have also prescribed a leverage capital ratio for assessing capital adequacy.

 

The Company’s capital adequacy ratios are reflected below:

 

 

 

March 31,

 

December 31,

 

March 31,

 

 

 

2014

 

2013

 

2013

 

 

 

 

 

 

 

 

 

First Financial Holdings, Inc.:

 

 

 

 

 

 

 

Tier 1 risk-based capital

 

12.78

%

13.58

%

13.21

%

Total risk-based capital

 

13.67

%

14.47

%

14.47

%

Tier 1 leverage

 

8.68

%

9.30

%

8.88

%

 

 

 

 

 

 

 

 

SCBT:

 

 

 

 

 

 

 

Tier 1 risk-based capital

 

12.56

%

13.37

%

12.92

%

Total risk-based capital

 

13.46

%

14.26

%

14.19

%

Tier 1 leverage

 

8.54

%

9.16

%

8.69

%

 

Note 18—Goodwill and Other Intangible Assets

 

The carrying amount of goodwill was $319.1 million and $103.3 million for March 31, 2014, and 2013, respectively. The Company’s other intangible assets, consisting of core deposit intangibles, noncompete intangibles, purchased credit card relationship intangibles, and client list intangibles are included on the face of the balance sheet.  The following is a summary of gross carrying amounts and accumulated amortization of other intangible assets:

 

 

 

March 31,

 

December 31,

 

March 31,

 

(Dollars in thousands)

 

2014

 

2013

 

2013

 

 

 

 

 

 

 

 

 

Gross carrying amount

 

$

77,660

 

$

77,896

 

$

37,121

 

Accumulated amortization

 

(20,092

)

(17,988

)

(12,941

)

 

 

$

57,568

 

$

59,908

 

$

24,180

 

 

Amortization expense totaled $2.1 million and $1.0 million for the three months ended March 31, 2014, and 2013, respectively.  Other intangibles are amortized using either the straight-line method or an accelerated basis over their estimated useful lives, with lives generally between 2 and 15 years.  Estimated amortization expense for other intangibles for each of the next five quarters is as follows:

 

(Dollars in thousands)

 

 

 

Quarters ending:

 

 

 

June 30, 2014

 

$

2,084

 

September 30, 2014

 

2,080

 

December 31, 2014

 

2,052

 

March 31, 2015

 

2,016

 

June 30, 2015

 

1,963

 

Thereafter

 

47,373

 

 

 

$

57,568

 

 

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Note 19 — Loan Servicing, Mortgage Origination, and Loans Held for Sale

 

The portfolio of residential mortgages serviced for others, which are not included in the accompanying balance sheets, was $2.1 billion at both March 31, 2014 and December 31, 2013. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts and disbursing payments to investors.  The amount of contractually specified servicing fees earned by the Company during the period from the merger date to March 31, 2014 was $1.3 million.  Servicing fees are recorded in mortgage banking income in the Consolidated Statements of Income.

 

At March 31, 2014 and December 31, 2013, mortgage servicing rights (“MSRs”) were $20.9 million and $20.7 million, respectively, on the consolidated balance sheet.  MSRs are recorded at fair value with changes in fair value recorded as a component of mortgage banking income in the Consolidated Statements of Operations. The market value adjustments related to MSRs recorded in mortgage banking income for the three months ended March 31, 2014 was a loss of $208,000.  Since the merger with FFHI, the Company has used various free standing derivative instruments to mitigate the income statement effect of changes in fair value due to changes in market value adjustments and to changes in valuation inputs and assumptions related to MSRs.

 

The following table presents the changes in the fair value of MSRs and its offsetting hedge for the three months ended March 31, 2014.

 

 

 

Three Months Ended

 

(Dollars in thousands)

 

March 31, 2014

 

Increase/(Decrease) in fair value of MSRs

 

$

(208

)

Decay of MSRs

 

(456

)

Gains/(Losses) related to derivatives

 

795

 

Net effect on Statements of Income

 

$

131

 

 

The following table is an analysis of the activity in the MSRs for the three months ended March 31, 2014.

 

 

 

Three Months Ended

 

(Dollars in thousands)

 

March 31, 2014

 

Balance at beginning of the period

 

$

20,729

 

Additions:

 

 

 

Servicing assets that resulted from transfers of financial assets

 

860

 

Increase in fair value due to change in valuation inputs or assumptions

 

(208

)

Decay in fair value:

 

 

 

Due to increases in principal paydowns or runoff

 

(456

)

Carrying value at end of period

 

$

20,925

 

 

The fair value of MSRs is highly sensitive to changes in assumptions and fair value is determined by estimating the present value of the asset’s future cash flows utilizing market-based prepayment rates, discount rates and other assumptions validated through comparison to trade information, industry surveys and with the use of independent third party appraisals. Changes in prepayment speed assumptions have the most significant impact on the fair value of MSRs. Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance activity, which results in a decrease in the fair value of the MSR. Measurement of fair value is limited to the conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different time.

 

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Note 19 — Loan Servicing, Mortgage Origination, and Loans Held for Sale (Continued)

 

The characteristics and sensitivity analysis of the MSR are included in the following table as of March 31, 2014.

 

 

 

March 31,

 

December 31,

 

(Dollars in thousands)

 

2014

 

2013

 

Composition of residential loans serviced for others

 

 

 

 

 

Fixed-rate mortgage loans

 

99.0

%

99.0

%

Adjustable-rate mortgage loans

 

1.0

%

1.0

%

Total

 

100.0

%

100.0

%

 

 

 

 

 

 

Weighted average life

 

6.68 years

 

6.91 years

 

Constant Prepayment rate (CPR)

 

10.5

%

10.2

%

Weighted average discount rate

 

9.9

%

10.1

%

Effect on fair value due to change in interest rates

 

 

 

 

 

25 basis point increase

 

$

1,042

 

$

1,059

 

50 basis point increase

 

1,937

 

1,964

 

25 basis point decrease

 

(1,218

)

(1,248

)

50 basis point decrease

 

(2,240

)

(2,255

)

 

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the changes in assumptions to fair value may not be linear. Also, in this table, the effects of an adverse variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumptions, while in reality, changes in one factor may result in changing another, which may magnify or contract the effect of the change.

 

Custodial escrow balances maintained in connection with the loan servicing were $13.2 million at March 31, 2014.

 

Mandatory cash forwards and whole loan sales were $115.6 million for the three months ended March 31, 2014, of which $87.8 million or 76.0% were sold with the servicing rights retained by the Company.

 

Loans held for sale have historically been comprised of residential mortgage loans awaiting sale in the secondary market, which generally settle in 15 to 45 days. Loans held for sale, which consists primarily of residential mortgage loans to be sold in the secondary market, were $57.2 million, $30.6 million, and $50.4 million at March 31, 2014, December 31, 2013, and March 31, 2013, respectively.  At March 31, 2014, the $57.2 million balance of loans held for sale also included $17.6 million of credit card loans that the Company decided to market.

 

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Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations relates to the financial statements contained in this Quarterly Report beginning on page 1.  For further information, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in the Annual Report on Form 10-K for the year ended December 31, 2013.

 

Overview

 

We are a bank holding company headquartered in Columbia, South Carolina, and were incorporated under the laws of South Carolina in 1985.  We provide a wide range of banking services and products to our customers through our wholly-owned bank subsidiary, SCBT (the “Bank”), a South Carolina-chartered commercial bank that opened for business in 1934.  We operate as NCBT, a division of the Bank, in Mecklenburg County of North Carolina, Community Bank & Trust (“CBT”), a division of the Bank, in northeast Georgia, The Savannah Bank, a division of the Bank, in coastal Georgia, and First Federal Bank (“First Federal”), a division of the Bank, in coastal South Carolina and North Carolina. The Bank also operates Minis & Co., Inc. and First Southeast 401k Fiduciaries, both wholly owned registered investment advisors; and First Southeast Investor Services, a wholly owned broker dealer.  We do not engage in any significant operations other than the ownership of our banking subsidiary.

 

At March 31, 2014, we had approximately $8.0 billion in assets and 2,104 full-time equivalent employees.  Through the Bank, we provide our customers with checking accounts, NOW accounts, savings and time deposits of various types, brokerage services and alternative investment products such as annuities and mutual funds, trust and asset management services, business loans, agriculture loans, real estate loans, personal use loans, home improvement loans, automobile loans, credit cards, letters of credit, home equity lines of credit, safe deposit boxes, bank money orders, wire transfer services, correspondent banking services, and use of ATM facilities.

 

We have pursued, and continue to pursue, a growth strategy that focuses on organic growth, supplemented by acquisition of select financial institutions, or branches in certain market areas.

 

The following discussion describes our results of operations for the quarter ended March 31, 2014 as compared to the quarter ended March 31, 2013 and also analyzes our financial condition as of March 31, 2014 as compared to December 31, 2013 and March 31, 2013.  Like most financial institutions, we derive most of our income from interest we receive on our loans and investments.  Our primary source of funds for making these loans and investments is our deposits, on which we may pay interest.  Consequently, one of the key measures of our success is the amount of our net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits.  Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.

 

Of course, there are risks inherent in all loans, so we maintain an allowance for loan losses (sometimes referred to as “ALLL”) to absorb probable losses on existing loans that may become uncollectible.  We establish and maintain this allowance by charging a provision for loan losses against our operating earnings.  In the following section, we have included a detailed discussion of this process.

 

In addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers.  We describe the various components of this noninterest income, as well as our noninterest expense, in the following discussion.

 

The following section also identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements.  We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included in this report.

 

Recent Events

 

Preferred Stock Redemption

 

On March 28, 2014, the Company redeemed all 65,000 outstanding shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A.  The shares had a liquidation preference of $1,000 per share, and dividends were accruing at 9% per annum.

 

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Table of Contents

 

Name Change

 

On February 17, 2014, the Company announced its plan to change the name of SCBT to “South State Bank.”  The Company also plans to change the name of the Company to “South State Corporation,” which was approved by the Company’s shareholders at the 2014 annual meeting of shareholders held on April 22, 2014.  The change to the new names for SCBT and the Company is expected to occur between June 30, 2014 and July 21, 2014.

 

Critical Accounting Policies

 

We have established various accounting policies that govern the application of accounting principles generally accepted in the United States (“GAAP”) in the preparation of our financial statements.  Significant accounting policies are described in Note 1 to the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2013.  These policies may involve significant judgments and estimates that have a material impact on the carrying value of certain assets and liabilities.  Different assumptions made in the application of these policies could result in material changes in our financial position and results of operations.

 

Allowance for Loan Losses

 

The allowance for loan losses reflects the estimated losses that will result from the inability of our bank’s borrowers to make required loan payments.  In determining an appropriate level for the allowance, we identify portions applicable to specific loans as well as providing amounts that are not identified with any specific loan but are derived with reference to actual loss experience, loan types, loan volumes, economic conditions, and industry standards.  Changes in these factors may cause our estimate of the allowance to increase or decrease and result in adjustments to the provision for loan losses.  See “Note 6 — Loans and Allowance for Loan Losses” in this 10-Q, “Provision for Loan Losses and Nonperforming Assets” in this MD&A and “Allowance for Loan Losses” in Note 1 to the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2013 for further detailed descriptions of our estimation process and methodology related to the allowance for loan losses.

 

Goodwill and Other Intangible Assets

 

Goodwill represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed in a business combination.  As of March 31, 2014, December 31, 2013 and March 31, 2013, the balance of goodwill was $319.1 million, $319.1 million, and $103.3 million, respectively.  The increase from the balance at March 31, 2013 was the result of the FFHI merger, which added $215.8 million in additional goodwill.  Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired.  An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. The goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing each reporting unit’s estimated fair value to its carrying value, including goodwill.  If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is not considered to be impaired.  If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment, if any.

 

If required, the second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment.  The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination.  If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment.  If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess.  An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted.  Management has determined that the Company has one reporting unit.

 

Our stock price has historically traded above its book value.  As of March 31, 2014, book value was $38.73 per share.  The lowest trading price during the first three months of 2014, as reported by the NASDAQ Global Select Market, was $56.88 per share, and the stock price closed on March 31, 2014 at $62.62, which is above book value.  In the event our stock was to consistently trade below its book value during the reporting period, we would consider performing an evaluation of the carrying value of goodwill as of the reporting date.  Such a circumstance would be one factor in our evaluation that could result in an eventual goodwill impairment charge.  We evaluated the carrying value of goodwill as of April 30, 2014, our annual test date, and determined that no impairment charge was necessary.  Additionally, should our future earnings and cash flows decline and/or discount rates increase, an impairment charge to goodwill and other intangible assets may be required.

 

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Table of Contents

 

Core deposit intangibles, client list intangibles, noncompetition (“noncompete”) intangibles, and purchased credit card relationships (“PCCRs”) intangible consist of costs that resulted from the acquisition of other banks from other financial institutions. Core deposit intangibles represent the estimated value of long-term deposit relationships acquired in these transactions. Client list intangibles represent the value of long-term client relationships for the wealth and trust management business. Noncompete intangibles represent the value of key personnel relative to various competitive factors such as ability to compete, willingness or likelihood to compete, and feasibility based upon the competitive environment, and what the Bank could lose from competition. PCCR intangibles result when existing credit card receivables are acquired at a premium and represent the right to conduct ongoing credit card business dealings with the cardholders. These costs are amortized over the estimated useful lives, such as deposit accounts in the case of core deposit intangible, on a method that we believe reasonably approximates the anticipated benefit stream from this intangible. The estimated useful lives are periodically reviewed for reasonableness.

 

Income Taxes and Deferred Tax Assets

 

Income taxes are provided for the tax effects of the transactions reported in the accompanying consolidated financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of available-for-sale securities, allowance for loan losses, accumulated depreciation, net operating loss carryforwards, accretion income, deferred compensation, intangible assets, and pension plan and post-retirement benefits. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled.  As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.  The Company files a consolidated federal income tax return with its subsidiary.

 

The Company recognizes interest and penalties accrued relative to unrecognized tax benefits in its respective federal or state income taxes accounts.  As of March 31, 2014, there were no accruals for uncertain tax positions and no accruals for interest and penalties.  The Company and its subsidiary file a consolidated United States federal income tax return, as well as income tax returns for its subsidiary in the states of South Carolina, Georgia, North Carolina, Florida, Virginia, Alabama, and Mississippi.  The Company’s filed income tax returns are no longer subject to examination by taxing authorities for years before 2010.

 

Other-Than-Temporary Impairment

 

We evaluate securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.  Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the outlook for receiving the contractual cash flows of the investments, (4) the anticipated outlook for changes in the general level of interest rates, and (5) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that the Company will be required to sell the debt security prior to recovering its fair value.  For further discussion of the Company’s evaluation of securities for other-than-temporary impairment, see Note 5 to the unaudited condensed consolidated financial statements.

 

Other Real Estate Owned

 

Other Real Estate Owned (“OREO”), consisting of properties obtained through foreclosure or through a deed in lieu of foreclosure in satisfaction of loans or through reclassification of former branch sites, is reported at the lower of cost or fair value, determined on the basis of current valuations obtained principally from independent sources, adjusted for estimated selling costs. At the time of foreclosure or initial possession of collateral, 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. Subsequent adjustments to this value are described below.

 

Subsequent declines in the fair value of OREO below the new cost basis are recorded through valuation adjustments.  Significant judgments and complex estimates are required in estimating the fair value of OREO, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility. In response to market conditions and other economic factors, management may utilize liquidation sales as part of its problem asset disposition strategy.  As a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from sales transactions could differ significantly from the current valuations used to determine the fair value of OREO.  Management reviews the value of OREO periodically and adjusts the values as appropriate. Revenue and expenses from OREO operations as well as gains or losses on sales and any subsequent adjustments to the value are recorded as OREO expense and loan related expense, a component of non-interest expense, and, for covered OREO, offset with an increase in the FDIC indemnification asset.

 

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Table of Contents

 

Business Combinations, Method of Accounting for Loans Acquired, and FDIC Indemnification Asset

 

We account for acquisitions under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, which requires the use of the acquisition method of accounting.  All identifiable assets acquired, including loans, are recorded at fair value.  No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk.

 

Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality, formerly American Institute of Certified Public Accountants (“AICPA”) Statement of Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer, and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans.  Loans acquired in business combinations with evidence of credit deterioration are considered impaired.  Loans acquired through business combinations that do not meet the specific criteria of FASB ASC Topic 310-30, but for which a discount is attributable, at least in part to credit quality, are also accounted for under this guidance.  Certain acquired loans, including performing loans and revolving lines of credit (consumer and commercial), are accounted for in accordance with FASB ASC Topic 310-20, where the discount is accreted through earnings based on estimated cash flows over the estimated life of the loan.

 

In accordance with FASB ASC Topic 805, the FDIC Indemnification Assets are initially recorded at fair value, and are measured separately from the loan assets and foreclosed assets because the loss sharing agreements are not contractually embedded in them or transferrable with them in the event of disposal. The FDIC indemnification asset is measured at carrying value subsequent to initial measurement. Improved cash flows of the underlying covered assets will result in impairment of the FDIC indemnification asset and negative accretion through non-interest income over the shorter of the lives of the FDIC indemnification asset or the underlying loans. Impairment of the underlying covered assets will result in improved cash flows of the FDIC indemnification asset and a credit to the provision for loan losses for acquired loans will result.

 

For further discussion of the Company’s loan accounting and acquisitions, see “Business Combinations and Method of Accounting for Loans Acquired” in our Annual Report on Form 10-K for the year ended December 31, 2013, Note 4—Mergers and Acquisitions to the unaudited condensed consolidated financial statements and Note 6—Loans and Allowance for Loan Losses to the unaudited condensed consolidated financial statements.

 

Results of Operations

 

We reported consolidated net income available to common shareholders of $15.8 million, or diluted earnings per share (“EPS”) of $0.66, for the first quarter of 2014 as compared to consolidated net income available to common shareholders of $10.6 million, or diluted EPS of $0.63, in the comparable period of 2013.  This $5.2 million increase was the net result of the following items:

 

·                  Improved net interest income of $29.5 million due primarily to acquisition of FFHI and the increase in average earning assets of $2.4 billion which increased interest income by $31.2 million and the yield to 5.18%.  Average interest-bearing liabilities increased $1.8 billion, and the related interest expense increased $1.6 million with a yield of 0.30%, three basis points higher than a year ago;

·                  An decrease in the provision for loan losses by $211,000 over the comparable quarter;

·                  An increase in noninterest income totaling $11.2 million, due in large part to the acquisition FFHI;

·                  An increase in all categories of noninterest expense totaling $31.0 million.  The larger increases were $15.8 million in salaries and benefits, $4.0 million in merger expenses, $2.2 million in net occupancy, $1.1 million in amortization of intangibles, $1.2 million in OREO and loan related expense, $1.2 million in furniture and equipment expense, and $2.0 million in other expense; and

·                  An increase in the provision for income taxes of $3.7 million due to higher pre-tax income.

 

Our asset quality related to non-acquired loans continues to be at manageable levels and improved from the end of 2013.  Non-acquired nonperforming assets declined from $55.7 million at December 31, 2013 to $49.6 million at March 31, 2014.  Compared to the balance of nonperforming assets at March 31, 2013, nonperforming assets decreased $26.8 million due to a reduction in nonperforming loans of $19.3 million and a reduction in non-acquired OREO of $7.5 million.  Our non-acquired OREO decreased by $1.3 million since December 31, 2013 to $12.2 million at March 31, 2014.  During the first quarter of 2014, classified assets declined by $4.5 million from December 31, 2013 to $91.8 million.  Since March 31, 2013 classified assets have declined by $49.4 million.  Annualized net charge-offs for the first quarter of 2014 were 0.05%, down from the fourth quarter of 2013 of 0.26% and down from the first quarter of 2013 of 0.56%.

 

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The allowance for loan losses decreased to 1.16% of total non-acquired loans at March 31, 2014, down from 1.20% at December 31, 2013 and 1.60% at March 31, 2013.  The allowance provides 0.93 times coverage of nonperforming loans at March 31, 2014, higher than 0.81 times at December 31, 2013, and 0.73 times at March 31, 2013.

 

The Company performs ongoing assessments of the estimated cash flows of its acquired loan portfolios.  In general, increases in cash flow expectations result in a favorable adjustment to interest income over the remaining life of the related loans, and decreases in cash flow expectations result in an immediate recognition of a provision for loans losses, in both cases, net of any adjustments to the receivable from the FDIC for loss sharing for those assets that are covered.  When a provision for loan losses (impairments) have been recognized in earlier periods, subsequent improvement in cash flows will result in reversals of those impairments.

 

These ongoing assessments of the acquired loan portfolio resulted in reduced loan interest accretion due to continued decline in loan balances.  The overall credit mark for these loans continued to decline, partially from charge offs and partially from net improvement in expected cash flow.  Below is a summary of the first quarter of 2014 assessment of the estimated cash flows of the acquired loan portfolio and the related impact on the indemnification asset:

 

·                  Removals from the loan pools due to repayments, charge offs, and transfers to other real estate owned or other assets owned through foreclosures resulted in a decline in loan accretion income of $1.2 million from the fourth quarter of 2013; and compared to the first quarter of 2013, there was a large increase in loan accretion income of $27.7 million primarily from the FFHI merger; and

·                  The negative accretion of the indemnification asset also decreased by approximately $350,000 compared to the fourth quarter of 2013, and by $93,000 compared to the first quarter of 2013.  This was primarily the result of the decline in the difference between the net carrying value of the FDIC indemnification asset and projected cash flows of this indemnification asset.

 

As of March 31, 2014, the Company had not made any changes to the estimated cash flow assumptions or expected losses for the acquired loans from the merger with FFHI.

 

Compared to the fourth quarter of 2013, our non-acquired loan portfolio has increased $114.7 million, or 16.0% annualized, to $3.0 billion, driven by increases in all categories, except commercial non-owner occupied loans and other loans.  Consumer real estate lending increased by $53.4 million, or 26.5% annualized; consumer non real estate lending by $11.3 million, or 33.1% annualized; other income producing property lending by of $15.0 million, or 41.9% annualized; commercial owner occupied loans of $12.2 million, or 5.9% annualized; construction and land development of $19.5 million or 26.0% annualized; and in commercial and industrial of $11.8 million, or 14.6% annualized.  The acquired loan portfolio decreased by $188.7 million due to continued charge-offs, transfers to OREO and payoffs.  Since March 31, 2013, the non-acquired loan portfolio has grown by $375.7 million, or 14.4%, in most categories.  Consumer real estate loans have led the way and increased by $166.2 million, or 24.0%, in the past year.

 

Non-taxable equivalent net interest income for the quarter increased $29.5 million or 54.9% compared to the first quarter of 2013.  Non-taxable equivalent net interest margin increased by 8 basis points to 4.94% from the first quarter of 2013 of 4.86% due to the increase in average earning assets.  Compared to the fourth quarter of 2013, net interest margin (taxable equivalent) increased by 7 basis points.  Interest earning assets yield increased by 6 basis points primarily from the increase in the yield of the acquired loan portfolios.  Interest bearing liabilities rate decreased by 2 basis points compared to the fourth quarter of 2013 from 3 basis point decrease in the rates on certificate of deposit balances.

 

Our quarterly efficiency ratio decreased to 73.8% compared to 79.2% in the fourth quarter of 2013, and increased from 72.4% in the first quarter of 2013.  The decrease in the efficiency ratio compared to the fourth quarter of 2013 was the result of $6.5 million reduction in noninterest expense from decreases in every category with the exception of the FDIC assessment and regulatory charges.  The increase in the efficiency ratio over the first quarter of 2013 was the result of a 66.7% increase in noninterest expense, a 117.1% increase in noninterest income, and a 54.9% increase in net interest income compared to the first quarter of 2013.  Compared to the first quarter of 2013 noninterest expense was up $31.0 million with a $4.0 million increase in merger expenses, $15.8 million increase in salaries and employee benefits, $2.2 million in net occupancy expense, and $2.0 million in other noninterest expense.  Excluding OREO and merger and branding related expenses, the efficiency ratio was 64.1% for the first quarter of 2014, compared to 66.3% for the fourth quarter of 2013 and 64.5% for the first quarter of 2013.

 

Diluted EPS increased to $0.66 for the first quarter of 2014 from $0.63 for the comparable period in 2013, and basic EPS increased to $0.66 for the first quarter of 2014 from $0.64 for the comparable period in 2013.  The increase in both diluted and basic EPS reflects the 48.8% increase in net income available to common shareholders compared to the 42.2% increase in weighted average basic and diluted common shares.

 

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Table of Contents

 

Selected Figures and Ratios

 

 

 

Three Months Ended

 

 

 

March, 31

 

(Dollars in thousands)

 

2014

 

2013

 

 

 

 

 

 

 

Return on average assets (annualized)

 

0.86

%

0.84

%

Return on average common equity (annualized)

 

6.89

%

8.45

%

Return on average equity (annualized)

 

6.90

%

8.45

%

Return on average tangible common equity (annualized)*

 

12.59

%

11.92

%

Return on average tangible equity (annualized)*

 

12.03

%

11.92

%

Dividend payout ratio **

 

28.91

%

28.75

%

Equity to assets ratio

 

11.69

%

10.00

%

Average shareholders’ common equity (in thousands)

 

$

931,961

 

$

511,392

 

Average shareholders’ equity (in thousands)

 

$

994,073

 

$

511,392

 

 


* - Ratio is a non-GAAP financial measure.  The section titled “Reconciliation of Non-GAAP to GAAP” below provides a table that reconciles non-GAAP measures to GAAP measures.

** - See explanation of the dividend payout ratio below.

 

·                  For the three months ended March 31, 2014, return on average assets (“ROAA”) and return on average tangible equity increased compared to the same period in 2013.  The increases were driven by a 58.9% increase in net income while average total assets increased 55.6%.  The increase in average total assets reflects the additions from the FFHI acquisition.

·                  Dividend payout ratio increased to 28.9% for the three months ended March 31, 2014 compared with 28.8% for the three months ended March 31, 2013.  The increase from the comparable period in 2013 primarily reflects the higher dividend paid at $0.19 per share vs. $0.18 per share and the additional shares from the FFHI acquisition.  The dividend payout ratio is calculated by dividing total dividends paid during the quarter by the total net income reported for the same period.

·                  Equity to assets ratio increased to 11.7% at March 31, 2014 compared with 10.0% at March 31, 2013.  The increase in the equity to assets ratio reflects a 55.4% increase in assets as a result of the FFHI acquisition compared to the 81.7% increase in equity as a result of the Company’s retained earnings and the issuance of $446.4 million in equity (both common and preferred) in the FFHI acquisition partially offset by the redemption of $65.0 million of preferred stock.

·                  Quarterly average shareholders’ equity increased $482.7 million, or 94.4%, from the quarter ended March 31, 2013 driven by the issuance of $446.4 million in common and preferred equity in the FFHI acquisition in the third quarter of 2013.

 

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Table of Contents

 

Reconciliation of Non-GAAP to GAAP

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars in thousands)

 

2014

 

2013

 

 

 

 

 

 

 

Return on average tangible equity (non-GAAP)

 

12.03

%

11.92

%

Effect to adjust for intangible assets

 

-5.13

%

-3.47

%

Return on average equity (GAAP)

 

6.90

%

8.45

%

 

 

 

 

 

 

Adjusted average shareholders’ equity (non-GAAP)

 

$

616,808

 

$

386,135

 

Average intangible assets

 

377,265

 

125,257

 

Average shareholders’ equity (GAAP)

 

$

994,073

 

$

511,392

 

 

 

 

 

 

 

Adjusted net income (non-GAAP)

 

$

18,299

 

$

11,345

 

Amortization of intangibles

 

(2,104

)

(1,034

)

Tax effect

 

722

 

338

 

Net income (GAAP)

 

$

16,917

 

$

10,649

 

 

 

 

 

 

 

Return on average common tangible equity (non-GAAP)

 

12.59

%

11.92

%

Effect to adjust for intangible assets

 

-5.70

%

-3.47

%

Return on average common equity (GAAP)

 

6.89

%

8.45

%

 

 

 

 

 

 

Adjusted average common shareholders’ equity (non-GAAP)

 

$

554,696

 

$

386,135

 

Average intangible assets

 

377,265

 

125,257

 

Average common shareholders’ equity (GAAP)

 

$

931,961

 

$

511,392

 

 

 

 

 

 

 

Adjusted net income available to common shareholders (non-GAAP)

 

$

17,226

 

$

11,345

 

Amortization of intangibles

 

(2,104

)

(1,034

)

Tax effect

 

722

 

338

 

Net income available to common shareholders (GAAP)

 

$

15,844

 

$

10,649

 

 

The returns on average tangible equity and average tangible common equity are non-GAAP financial measures. They exclude the effect of the average balance of intangible assets and add back the after-tax amortization of intangibles to GAAP basis net income.  Management believes that these non-GAAP measures provide additional useful information, particularly since these measures are widely used by industry analysts following companies with prior merger and acquisition activities.  Non-GAAP measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider the company’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the company.  Non-GAAP measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of our results of financial condition as reported under GAAP.

 

Net Interest Income and Margin

 

Summary

 

Our taxable equivalent (“TE”) net interest margin increased by five basis points from the first quarter of 2013, due primarily to the growth in interest earning assets from the FFHI acquisition and organic loan growth, partially offset by a three basis point increase in funding cost from 0.27% in the first quarter of 2013 to 0.30% in the first quarter of 2014.  The net interest margin increased by 8 basis points from the fourth quarter of 2013 to 4.99%.  Yields on average earning assets increased by 6 basis points from the fourth quarter of 2013 while the rate on average interest bearing liabilities decreased by 2 basis points.  Compared to March 31, 2013, the yield on interest earning assets increased by 11 basis points.

 

The Company remained in an excess liquidity position during the first quarter of 2014, and the impact represented an estimated 17 basis points reduction in the net interest margin compared to 24 basis points from the fourth quarter of 2013.

 

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Net interest income increased from the first quarter of 2013 and was driven by growth in average interest-earning assets due to the FFHI acquisition as well as organic growth.  Certificates of deposit increased by 6 basis points from the first quarter of 2013 with the addition of the CDs from the FFHI acquisition.  The year over year increase in interest expense totaled $1.6 million, from the addition of the FFHI acquisition of funding sources.  Non-TE net interest income increased from the first quarter of 2013 as a result of a volume increase in interest-earning assets, primarily as a result of the acquisition of FFHI.  The cost on interest bearing liabilities increased by three basis points comparing the three months ended periods March 31, 2014 and 2013.

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars in thousands)

 

2014

 

2013

 

 

 

 

 

 

 

Non-TE net interest income

 

$

83,342

 

$

53,801

 

Non-TE yield on interest-earning assets

 

5.18

%

5.07

%

Non-TE rate on interest-bearing liabilities

 

0.30

%

0.27

%

Non-TE net interest margin

 

4.94

%

4.86

%

TE net interest margin

 

4.99

%

4.94

%

 

Non-TE net interest income increased $29.5 million, or 54.9%, in the first quarter of 2014 compared to the same period in 2013.  Some key highlights are outlined below:

 

·                  Average interest-earning assets increased 52.4% to $6.8 billion in the first quarter of 2014 compared to the same period last year due largely to the acquisition of FFHI.

·                  Non-TE yield on interest-earning assets for the first quarter of 2014 increased 11 basis points from the comparable period in 2013.  The yield on a portion of our earning assets adjusts simultaneously, but to varying degrees of magnitude, with changes in the general level of interest rates.

·                  The average cost of interest-bearing liabilities for the first quarter of 2014 increased three basis points from the same period in 2013.  The increase since the first quarter of 2013 is a reflection of the addition of FFHI trust preferred securities at a fixed rate of 7% and a higher rate on the certificates of deposits acquired in the FFHI acquisition.

·                  TE net interest margin increased by five basis points in the first quarter of 2014, compared to the first quarter of 2013.

 

Loans

 

Total loans, net of deferred loan costs and fees (excluding mortgage loans held for sale) increased by $2.0 billion, or 56.7%, at March 31, 2014 as compared to the same period in 2013.  Acquired covered loans increased by $41.0 million and acquired non-covered loans increased by $1.6 billion due the FFHI acquisition partially offset by principal payments, charge offs, and foreclosures.  Non-acquired loans or legacy SCBT loans increased by $375.7 million, or 14.4%, from March 31, 2013 to March 31, 2014.  The increase was driven by loan growth in commercial owner occupied loans of $49.6 million, consumer owner occupied loans of $152.5 million, commercial and industrial loans of $42.3 million, consumer loans of $53.7 million, construction and land development loans of $46.0 million, other income producing property loans of $26.4 million, home equity loans of $13.7 million, and other loans of $5.1 million.  Commercial non-owner occupied loans decreased $13.6 million from March 31, 2013 to March 31, 2014.

 

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Table of Contents

 

The following table presents a summary of the loan portfolio by category:

 

 

 

March 31,

 

% of

 

December 31,

 

% of

 

March 31,

 

% of

 

(Dollars in thousands)

 

2014

 

Total

 

2013

 

Total

 

2013

 

Total

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquired covered loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial non-owner occupied real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

37,757

 

0.7

%

$

43,396

 

0.8

%

$

36,941

 

1.0

%

Commercial non-owner occupied

 

50,814

 

0.9

%

53,525

 

0.9

%

47,594

 

1.3

%

Total commercial non-owner occupied real estate

 

88,571

 

1.6

%

96,921

 

1.7

%

84,535

 

2.4

%

Consumer real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer owner occupied

 

37,111

 

0.7

%

38,946

 

0.7

%

41,879

 

1.2

%

Home equity loans

 

34,627

 

0.6

%

35,884

 

0.6

%

21,370

 

0.6

%

Total consumer real estate

 

71,738

 

1.3

%

74,830

 

1.3

%

63,249

 

1.8

%

Commercial owner occupied real estate

 

78,861

 

1.4

%

88,722

 

1.6

%

43,395

 

1.2

%

Commercial and industrial

 

11,964

 

0.2

%

14,475

 

0.3

%

10,742

 

0.3

%

Other income producing property

 

29,471

 

0.5

%

31,739

 

0.6

%

37,366

 

1.0

%

Consumer non real estate

 

1,772

 

0.0

%

1,878

 

0.0

%

2,107

 

0.1

%

Total acquired covered loans

 

282,377

 

5.0

%

308,565

 

5.5

%

241,394

 

6.8

%

Acquired non-covered loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial non-owner occupied real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

96,981

 

1.7

%

129,289

 

2.3

%

82,885

 

2.3

%

Commercial non-owner occupied

 

204,094

 

3.6

%

226,530

 

4.0

%

169,504

 

4.7

%

Total commercial non-owner occupied real estate

 

301,075

 

5.3

%

355,819

 

6.3

%

252,389

 

7.0

%

Consumer real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer owner occupied

 

951,131

 

16.9

%

974,392

 

17.1

%

98,117

 

2.7

%

Home equity loans

 

324,686

 

5.8

%

335,241

 

5.9

%

75,039

 

2.1

%

Total consumer real estate

 

1,275,817

 

22.7

%

1,309,633

 

23.0

%

173,156

 

4.8

%

Commercial owner occupied real estate

 

200,370

 

3.6

%

211,030

 

3.7

%

132,851

 

3.7

%

Commercial and industrial

 

76,016

 

1.4

%

98,046

 

1.7

%

64,913

 

1.8

%

Other income producing property

 

160,498

 

2.9

%

171,544

 

3.0

%

106,019

 

3.0

%

Consumer non real estate

 

340,857

 

6.1

%

371,112

 

6.5

%

8,861

 

0.2

%

Total acquired non-covered loans

 

2,354,633

 

42.0

%

2,517,184

 

44.2

%

738,189

 

20.5

%

Total acquired loans

 

2,637,010

 

47.0

%

2,825,749

 

49.7

%

979,583

 

27.3

%

Non-acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial non-owner occupied real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

319,441

 

5.7

%

299,951

 

5.3

%

273,488

 

7.6

%

Commercial non-owner occupied

 

285,145

 

5.1

%

291,170

 

5.1

%

298,707

 

8.3

%

Total commercial non-owner occupied real estate

 

604,586

 

10.8

%

591,121

 

10.4

%

572,195

 

15.9

%

Consumer real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer owner occupied

 

595,652

 

10.6

%

548,170

 

9.6

%

443,134

 

12.4

%

Home equity loans

 

263,057

 

4.7

%

257,139

 

4.5

%

249,356

 

7.0

%

Total consumer real estate

 

858,709

 

15.3

%

805,309

 

14.1

%

692,490

 

19.4

%

Commercial owner occupied real estate

 

845,728

 

15.0

%

833,513

 

14.6

%

796,139

 

22.2

%

Commercial and industrial

 

333,574

 

5.9

%

321,824

 

5.7

%

291,308

 

8.1

%

Other income producing property

 

158,186

 

2.8

%

143,204

 

2.5

%

131,776

 

3.7

%

Consumer non real estate

 

147,710

 

2.6

%

136,410

 

2.4

%

93,997

 

2.6

%

Other

 

31,465

 

0.6

%

33,835

 

0.6

%

26,393

 

0.8

%

Total non-acquired loans

 

2,979,958

 

53.0

%

2,865,216

 

50.3

%

2,604,298

 

72.7

%

Total loans (net of unearned income)

 

$

5,616,968

 

100.0

%

$

5,690,965

 

100.0

%

$

3,583,881

 

100.0

%

 

Note: Loan data excludes loans held for sale.

 

Our loan portfolio remains our largest category of interest-earning assets.  Our acquired loan portfolio, covered and non-covered, decreased this quarter by $188.7 million. The percentage of non-acquired loans for each category is described below.  Non-acquired commercial non-owner occupied real estate loans represented 10.8% of total loans as of March 31, 2014 a decrease from 15.9% of total loans at the end of the same period for 2013 and an increase from 10.4% of total loans at December 31, 2013.  At March 31, 2014, non-acquired construction and land development loans represented 5.7% of our total loan portfolio, a decrease from 7.6% of our total loan portfolio at March 31, 2013.  At March 31, 2014, non-acquired construction and land development loans consisted of $214.7 million in land and lot loans and $104.7 million in construction loans, which represented 7.2% and 3.5%,

 

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Table of Contents

 

respectively, of our total non-acquired loan portfolio.  At December 31, 2013, non-acquired construction and land development loans consisted of $206.5 million in land and lot loans and $93.4 million in construction loans, which represented 7.2% and 3.3%, respectively, of our total non-acquired loan portfolio.

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars in thousands)

 

2014

 

2013

 

 

 

 

 

 

 

Average total loans

 

$

5,647,034

 

$

3,573,555

 

Interest income on total loans

 

81,521

 

52,002

 

Non-TE yield

 

5.85

%

5.90

%

 

Interest earned on loans increased $29.5 million, or 56.8%, in the first quarter of 2014 compared to the first quarter of 2013.  Some key highlights for the quarter ended March 31, 2014 are outlined below:

 

·                  Our non-TE yield on total loans decreased five basis points during the first quarter of 2014 and average total loans increased 58.0%, as compared to the first quarter of 2013.  The increase in average total loans was a result of the growth in both non-acquired loans, due to organic growth, and acquired loans, due to the FFHI acquisition during 2013.  The acquired loan portfolio effective yield declined primarily due to the impact of the FFHI acquisition.  This resulted in a yield of 7.56%, compared to approximately 9.51% one year ago.

·                  Acquired covered loans had a balance of $282.4 million at the end of the first quarter of 2014 compared to $241.4 million in March of 2013.

·                  Acquired non-covered loans grew to a balance of $2.4 billion at the end of the first quarter of 2014 compared to $738.2 million in the comparable period of 2013 due to the loans acquired in the FFHI acquisition.

·                  Non-acquired construction and land development loans increased $46.0 million, or 16.8%, to $319.4 million from the ending balance at March 31, 2013.

·                  Non-acquired commercial non-owner occupied loans decreased $13.6 million, or 4.5%, to $285.1 million from the ending balance at March 31, 2013.

·                  Non-acquired consumer real estate loans increased $166.2 million, or 24.0%, to $858.7 million from the ending balance at March 31, 2013.

·                  Non-acquired commercial owner occupied loans increased $49.6 million, or 6.2%, to $845.7 million from the ending balance at March 31, 2013.

·                  Non-acquired commercial and industrial loans increased $42.3 million, or 14.5%, to $333.6 million from the ending balance at March 31, 2013.

·                  Non-acquired consumer non-real estate loans increased $53.7 million, or 57.1%, to $147.7 million from the ending balance at March 31, 2013.

·                  Non-acquired other income producing property loans increased $26.4 million, or 20.0%, to $158.2 million from the ending balance at March 31, 2013.

 

The balance of mortgage loans held for sale increased $26.6 million from December 31, 2013 to $57.2 million at March 31, 2014, and $6.8 million compared to the balance of mortgage loans held for sale at March 31, 2013 of $50.4 million.  Driving the increase in loans held for sale in the first quarter of 2014, the Company decided to market the credit card loan portfolio and reclassified $17.6 million of loans from acquired loans to loans held for sale.

 

Investment Securities

 

We use investment securities, our second largest category of earning assets, to generate interest income through the deployment of excess funds, to provide liquidity, to fund loan demand or deposit liquidation, and to pledge as collateral for public funds deposits and repurchase agreements.  At March 31, 2014, investment securities totaled $814.5 million, compared to $812.6 million at December 31, 2013 and $533.3 million at March 31, 2013.  The increase in investment securities from the comparable period of 2013 was primarily the result of the acquisition of $311.8 million in FFHI investment securities partially offset by the sale of $177.5 million of FFHI securities during the third quarter of 2013.  The securities sold were replaced with $205.9 million of securities during the fourth quarter of 2013. This resulted in quarterly average and period-end balances increasing by 44.8% and 52.7%, respectively, from March 31, 2013.

 

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Table of Contents

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars in thousands)

 

2014

 

2013

 

 

 

 

 

 

 

Average investment securities

 

$

801,263

 

$

553,214

 

Interest income on investment securities

 

5,037

 

3,367

 

Non-TE yield

 

2.55

%

2.47

%

 

Interest earned on investment securities increased 49.6% in the first quarter of 2014 compared to the first quarter of 2013.  The increase resulted largely from the $248.0 million increase in average investment securities for the first quarter, which was largely the result of the addition of the securities from the FFHI acquisition, as well as an 8 basis point increase in the average yield.

 

The following table provides a summary of the credit ratings for our investment portfolio (including held-to-maturity and available-for-sale securities) at the end of the first quarter of 2014:

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

Fair

 

Gain

 

 

 

 

 

BB or

 

 

 

(Dollars in thousands)

 

Cost

 

Value

 

(Loss)

 

AAA - A

 

BBB

 

Lower

 

Not Rated

 

March 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-sponsored entities debt

 

$

141,900

 

$

137,601

 

$

(4,299

)

$

128,513

 

$

 

$

 

$

13,387

 

State and municipal obligations

 

151,731

 

153,065

 

1,334

 

150,245

 

375

 

501

 

610

 

Mortgage-backed securities *

 

507,159

 

510,379

 

3,220

 

 

 

 

507,159

 

Corporate stocks

 

3,161

 

3,506

 

345

 

 

 

 

3,161

 

 

 

$

803,951

 

$

804,551

 

$

600

 

$

278,758

 

$

375

 

$

501

 

$

524,317

 

 


* - Agency mortgage-backed securities (“MBS”) are guaranteed by the issuing GSE as to the timely payments of principal and interest.  Except for Government National Mortgage Association (“GNMA”) securities, which have the full faith and credit backing of the United States Government, the GSE alone is responsible for making payments on this guaranty.  While the rating agencies have not rated any of the MBS issued, senior debt securities issued by GSEs are rated consistently as “Triple-A.”  Most market participants consider agency MBS as carrying an implied Aaa rating (S&P rating of AA+) because of the guarantees of timely payments and selection criteria of mortgages backing the securities.  We do not own any private label mortgage-backed securities.

 

At March 31, 2014, we had 199 securities available for sale in an unrealized loss position, which totaled $9.3 million. At December 31, 2013, we had 257 securities available for sale in an unrealized loss position, and totaled $16.0 million.

 

During the first quarter of 2014 as compared to the first quarter of 2013, the total number of available for sale securities with an unrealized loss position increased by 128 securities, while the total dollar amount of the unrealized loss increased by $8.6 million.

 

All securities available for sale in an unrealized loss position as of March 31, 2014 continue to perform as scheduled.  We have evaluated the cash flows and determined that all contractual cash flows should be received; therefore impairment is temporary because we have the ability to hold these securities within the portfolio until the maturity or until the value recovers, and we believe that it is not likely that we will be required to sell these securities prior to recovery.  We continue to monitor all of these securities with a high degree of scrutiny.  There can be no assurance that we will not conclude in future periods that conditions existing at that time indicate some or all of these securities are other than temporarily impaired, which would require a charge to earnings in such periods.  Any charges for OTTI related to securities available-for-sale would not impact cash flow, tangible capital or liquidity.

 

Although securities classified as available for sale may be sold from time to time to meet liquidity or other needs, it is not our normal practice to trade this segment of the investment securities portfolio. While management generally holds these assets on a long-term basis or until maturity, any short-term investments or securities available for sale could be converted at an earlier point, depending partly on changes in interest rates and alternative investment opportunities.

 

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Table of Contents

 

Other Investments

 

Other investment securities include primarily our investments in Federal Home Loan Bank of Atlanta (“FHLB”) stock with no readily determinable market value.  The amortized cost and fair value of all these securities are equal at March 31, 2014.  As of March 31, 2014, the investment in FHLB stock represented approximately $7.5 million, or 0.1% as a percentage of total assets.

 

Interest-Bearing Liabilities

 

Interest-bearing liabilities include interest-bearing transaction accounts, savings deposits, CDs, other time deposits, federal funds purchased, and other borrowings.  Interest-bearing transaction accounts include NOW, HSA, IOLTA, and Market Rate checking accounts.

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars in thousands)

 

2014

 

2013

 

 

 

 

 

 

 

Average interest-bearing liabilities

 

$

5,409,046

 

$

3,614,081

 

Interest expense

 

3,996

 

2,368

 

Average rate

 

0.30

%

0.27

%

 

The average balance of interest-bearing liabilities increased in the first quarter of 2014 compared to the first quarter of 2013 due primarily to the FFHI acquisition in July 2013. The increase in interest expense for the quarter was largely driven by higher balances in all interest-bearing liabilities, with the exception of federal funds purchased and repurchase agreements, even though rates continue to decline or remain stable in all categories, other than federal funds purchased.  Overall, we experienced a 3 basis point increase in the average rate on all interest-bearing liabilities, and a 2 basis point decline from the fourth quarter of 2013.  Some key highlights are outlined below:

 

·                  Average interest-bearing deposits for the three months ended March 31, 2014 grew 55.5% from the same period in 2013.

·                  Interest-bearing deposits increased 56.6% to $5.0 billion at March 31, 2014 from the period end balance at March 31, 2013 of $3.2 billion. This was the result of the addition of $2.1 billion interest-bearing deposits from the FFHI acquisition, which was partially offset by a decline in interest-bearing deposits from the remaining franchise.  The Company continues to monitor and adjust rates paid on deposit products as part of its strategy to manage its net interest margin.

·                  The average rate on transaction and money market account deposits for the three months ended March 31, 2014 decreased two basis points from the comparable period in 2013; however, due to the increase in balances from the FFHI acquisition and core deposit growth there was an increase in interest expense of $209,000 for the first quarter of 2014.

·                  Average certificates of deposit and other time deposits increased 44.5%, up $460.5 million from the average balance in the first quarter of 2013.  Interest expense on certificates of deposit and other time deposits increased $587,000 as a result of the balances acquired in the FFHI acquisition.  The average rate increased six basis points for the three months ended March 31, 2014 as compared to the same period in 2013.

·                  Average other borrowings increased $47.6 million comparing first quarter of 2014 to the first quarter of 2013.  The increase was the result of the FFHI acquisition.

 

Noninterest-Bearing Deposits

 

Noninterest-bearing deposits are transaction accounts that provide our Bank with “interest-free” sources of funds.  Average noninterest-bearing deposits increased $517.3 million, or 53.5%, to $1.5 billion in the first quarter of 2014 compared to $967.7 million at March 31, 2013.  At March 31, 2014, noninterest-bearing deposits were $1.6 billion, exceeding the balance of certificates of deposits of $1.5 billion by $128.2 million.  Excluding the noninterest-bearing deposits acquired in the FFHI acquisition, period end noninterest-bearing deposits increased $135.3 million, or 13.6%, from the balance at March 31, 2013.

 

Provision for Loan Losses and Nonperforming Assets

 

We have established an allowance for loan losses through a provision for loan losses charged to expense.  The ALLL represents an amount we believe will be adequate to absorb probable losses on existing loans that may become uncollectible.  We assess the adequacy of the ALLL by using an internal risk rating system, independent credit reviews, and regulatory agency examinations—all of which evaluate the quality of the loan portfolio and seek to identify problem loans.  Based on this analysis, management and the board of directors consider the current allowance to be adequate.  Nevertheless, our evaluation is inherently

 

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subjective as it requires estimates that are susceptible to significant change.  Actual losses may vary from our estimates, and there is a possibility that charge-offs in future periods could exceed the ALLL as estimated at any point in time.

 

In addition, regulatory agencies, as an integral part of the examination process, periodically review our Bank’s ALLL.  Such agencies may require additions to the ALLL based on their judgments about information available to them at the time of their examination.

 

Loans acquired in the CBT, Habersham, BankMeridian, Peoples, Savannah, and FFHI acquisitions were recorded at their acquisition date fair value, which was based on expected cash flows and included an estimation of expected future loan losses for the purchased credit-impaired loans, including principal and interest.  Our estimates of credit losses on loans acquired in the FFHI acquisition continue to be adequate, and there is no evidence of additional credit deterioration that would require additional allowance for loan loss as of March 31, 2014.  Under current accounting principles, information regarding our estimate of loan fair values may be adjusted for a period of up to one year as we continue to refine our estimate of expected future cash flows in the acquired portfolio.  If we determine that losses arise after the acquisition date, generally the additional losses will be reflected as a provision for loan losses, and offset with an increase in the FDIC indemnification asset for those acquired loans covered by loss sharing agreements.  Peoples and Savannah acquisitions were not part of any loss share agreements with the FDIC; therefore, there is no offset for any additional losses recorded in a provision for loan losses.  The FFHI acquisition included assets that are both covered and uncovered under FDIC loss share agreements.  See “Business Combinations and Method of Accounting for Loans Acquired” in our Annual Report on Form 10-K for the year ended December 31, 2013 for further discussion of the method of accounting for acquired loans.

 

During the first quarter of 2014, we increased the valuation allowance on acquired loans by $304,000 on certain acquired loan pools due to evidence of minor impairment during the quarterly review process, which resulted in a $179,000 net provision for loan losses on acquired loans (net of the impact of the FDIC loss sharing agreements).

 

The following tables present a summary of the changes in the ALLL for the three months ended March 31, 2014 and 2013:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2014

 

2013

 

 

 

 

 

Acquired

 

 

 

 

 

Acquired

 

 

 

 

 

Non-acquired

 

Credit Impaired

 

 

 

Non-acquired

 

Credit Impaired

 

 

 

(Dollars in thousands)

 

Loans

 

Loans

 

Total

 

Loans

 

Loans

 

Total

 

Balance at beginning of period

 

$

34,331

 

$

11,618

 

$

45,949

 

$

44,378

 

$

17,218

 

$

61,596

 

Loans charged-off

 

(1,370

)

 

(1,370

)

(4,607

)

 

(4,607

)

Recoveries of loans previously charged off

 

1,038

 

 

1,038

 

1,045

 

 

1,045

 

Net charge-offs

 

(332

)

 

(332

)

(3,562

)

 

(3,562

)

Provision for loan losses

 

670

 

304

 

974

 

853

 

(855

)

(2

)

Benefit attributable to FDIC loss share agreements

 

 

(125

)

(125

)

 

1,062

 

1,062

 

Total provision for loan losses charged to operations

 

670

 

179

 

849

 

853

 

207

 

1,060

 

Provision for loan losses recorded through the FDIC loss share receivable

 

 

125

 

125

 

 

(1,062

)

(1,062

)

Reductions due to loan removals

 

 

(876

)

(876

)

 

(758

)

(758

)

Balance at end of period

 

$

34,669

 

$

11,046

 

$

45,715

 

$

41,669

 

$

15,605

 

$

57,274

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total non-acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

At period end

 

2,979,958

 

 

 

 

 

2,604,298

 

 

 

 

 

Average

 

2,909,175

 

 

 

 

 

2,576,545

 

 

 

 

 

Net charge-offs as a percentage of average non-acquired loans (annualized)

 

0.05

%

 

 

 

 

0.56

%

 

 

 

 

Allowance for loan losses as a percentage of period end non-acquired loans

 

1.16

%

 

 

 

 

1.60

%

 

 

 

 

Allowance for loan losses as a percentage of period end non-performing non-acquired loans (“NPLs”)

 

92.59

%

 

 

 

 

73.49

%

 

 

 

 

 

The allowance for loan losses as a percent of non-acquired loans reflects a decrease due primarily to the decline in our three-year historical charge off rate.  Additionally, our classified loans, nonaccrual loans, and non-performing loans declined during the first quarter of 2014 compared to the same quarter in 2013 and to the fourth quarter of 2013.  Our overall net charge offs for the quarter on non-acquired loans was 5 basis points annualized, or $332,000, compared to 56 basis points, or $3.6 million, a year ago and 26 basis points, or $1.8 million, in the fourth quarter of 2013.  The low level of net charge offs may not be sustainable given the remaining uncertainty which exist within the overall economy and markets in which we operate.  Excluding acquired assets,

 

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nonperforming loans decreased by $19.3 million during the first quarter of 2014 compared to the first quarter of 2013 and decreased by $4.8 million from the fourth quarter of 2013.  The ratio of the ALLL to cover total nonperforming non-acquired loans increased from 73.49% at March 31, 2013 to 92.59% at March 31, 2014.

 

We decreased the ALLL compared to the first quarter of 2013 due primarily to the improvement in asset quality metrics during the first quarter of 2014.  Compared to the fourth quarter of 2013, the ALLL increased due primarily to the 16% annualized loan growth experienced during the first quarter of 2014.  On a general basis, we consider three-year historical loss rates on all loan portfolios, except residential lot loans where two-year historical loss rates are applied.  We also consider economic risk, model risk and operational risk when determining the ALLL.  All of these factors are reviewed and adjusted each reporting period to account for management’s assessment of loss within the loan portfolio.  Overall, the general reserve decreased by $3.6 million compared to the balance at March 31, 2013 and increased by $548,000 from December 31, 2013.

 

We have adjusted our qualitative factors to account for uncertainty and certain risk inherent in the portfolio that cannot be measured with historical loss rates.  We currently view that the low level of net charge offs and historical loss rates may not be indicative of the losses inherent in the overall loan portfolio.  Therefore, we have adjusted our qualitative factors to account for the uncertainty which exist in the economy as a whole and within the markets in which we operate.

 

On a specific reserve basis, the allowance for loan losses decreased by $210,000 from December 31, 2013, and decreased by approximately $3.4 million from March 31, 2013.  However, the loan balances being evaluated for specific reserves increased from $26.0 million at December 31, 2013 to $33.8 million at March 31, 2014.  This increase in loan balances was primarily the result of small balance TDR loans which are now being included and identified for specific reserve review.  Our practice, generally, is that once a specific reserve is established for a loan, a charge off occurs in the quarter subsequent to the establishment of the specific reserve.

 

During the three months ended March 31, 2014, the decline in our total nonperforming assets (“NPAs”) was reflective of improvement in the real estate market and economy.  The following table summarizes our NPAs for the past five quarters.

 

 

 

March 31,

 

December 31,

 

September 30,

 

June 30,

 

March 31,

 

(Dollars in thousands)

 

2014

 

2013

 

2013

 

2013

 

2013

 

Nonaccrual loans (1)

 

$

29,190

 

$

31,333

 

$

38,631

 

$

40,854

 

$

42,945

 

Accruing loans past due 90 days or more

 

96

 

258

 

122

 

198

 

121

 

Restructured loans - nonaccrual

 

8,156

 

10,690

 

10,837

 

11,689

 

13,636

 

Total nonperforming loans

 

37,442

 

42,281

 

49,590

 

52,741

 

56,702

 

Other real estate owned (“OREO”) (2)

 

12,187

 

13,456

 

16,555

 

15,950

 

19,680

 

Other nonperforming assets (3)

 

 

 

 

 

 

Total nonperforming assets excluding acquired assets

 

49,629

 

55,737

 

66,145

 

68,691

 

76,382

 

Covered OREO (2)

 

29,003

 

27,520

 

40,543

 

35,142

 

34,244

 

Acquired OREO not covered under loss share

 

22,957

 

23,941

 

18,775

 

17,536

 

16,766

 

Other covered nonperforming assets (3)

 

1,032

 

943

 

718

 

 

26

 

Total nonperforming assets including covered assets

 

$

102,621

 

$

108,141

 

$

126,181

 

$

121,369

 

$

127,418

 

 

 

 

 

 

 

 

 

 

 

 

 

Excluding Acquired Assets

 

 

 

 

 

 

 

 

 

 

 

Total NPAs as a percentage of total loans and repossessed assets (4)

 

1.66

%

1.94

%

2.40

%

2.56

%

2.91

%

Total NPAs as a percentage of total assets (5)

 

0.62

%

0.70

%

0.82

%

1.36

%

1.49

%

Total NPLs as a percentage of total loans (4)

 

1.26

%

1.48

%

1.81

%

1.98

%

2.18

%

 

 

 

 

 

 

 

 

 

 

 

 

Including Acquired Assets

 

 

 

 

 

 

 

 

 

 

 

Total NPAs as a percentage of total loans and repossessed assets (4)

 

1.81

%

1.88

%

2.16

%

3.32

%

3.47

%

Total NPAs as a percentage of total assets

 

1.28

%

1.36

%

1.57

%

2.41

%

2.48

%

Total NPLs as a percentage of total loans (4)

 

0.67

%

0.74

%

0.86

%

1.47

%

1.58

%

 


(1) Excludes the acquired loans that are contractually past due 90 days or more totaling $73.9 million, $85.1 million, $97.4 million, $77.6 million, and $69.0 million as of March 31, 2014, December 31, 2013, September 30, 2013, June 30, 2013, and March 31, 2013,  respectively, including the valuation discount.  Acquired loans are considered to be performing due to the application of the

 

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accretion method under FASB ASC Topic 310-30. (For further discussion of the Company’s application of the accretion method, see Business Combinations and Method of Accounting for Loans Acquired” in our Annual Report on Form 10-K for the year ended December 31, 2013.

(2) Includes certain real estate acquired as a result of foreclosure and property not intended for bank use.

(3) Consists of non-real estate foreclosed assets, such as repossessed vehicles.

(4) Loan data excludes mortgage loans held for sale.

(5) For purposes of this calculation, total assets include all assets (both acquired and non-acquired).

 

Excluding the acquired loans, total nonaccrual loans, including restructured loans, were $37.4 million, or 1.26% of total loans, a decrease of $19.3 million or 34.0% from March 31, 2013. The decrease in nonaccrual loans was driven by a decrease in consumer nonaccrual loans of $1.2 million and a decrease in commercial nonaccrual loans of $18.1 million.

 

Nonaccrual non-acquired loans and restructured loans decreased by approximately $4.8 million during the first quarter of 2014 from the level December 31, 2013.  This decrease was the net result of $581,000 in charge offs, $730,000 in transfers to OREO, $2.9 million in payments, $4.5 million returning to accruing loans, and $4.0 million in additions.

 

At March 31, 2014, non-acquired OREO decreased by $1.3 million from December 31, 2013.  At March 31 2014, non-acquired OREO consisted of 85 properties with an average value of $156,000, which remained flat from December 31, 2013 when we had 86 properties.  In the first quarter of 2014, we added 10 properties with an aggregate value of $1.9 million into non-acquired OREO, and we sold 11 properties with a basis of $1.0 million in the quarter.  We wrote down 24 OREO properties by $1.7 million during the first quarter of 2014.  Many of these assets were to liquidation levels in anticipation of an auction scheduled for late May 2014.  Our non-acquired OREO balance of $12.2 million at March 31, 2014 is comprised of 16% in the Low Country/Orangeburg region, 27% in the Coastal region (Beaufort to Myrtle Beach), 15% in the Charlotte region, and 19% in the Upstate region (Greenville).

 

Potential Problem Loans

 

Potential problem loans (excluding acquired loans), which are not included in nonperforming loans, amounted to approximately $7.9 million, or 0.26%, of total non-acquired loans outstanding at March 31, 2014, compared to $7.2 million, or 0.28%, of total non-acquired loans outstanding at March 31, 2013, and compared to $7.3 million, or 0.25% of total non-acquired loans outstanding at December 31, 2013.  Potential problem loans represent those loans where information about possible credit problems of the borrowers has caused management to have serious concern about the borrower’s ability to comply with present repayment terms.

 

Noninterest Income

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars in thousands)

 

2014

 

2013

 

 

 

 

 

 

 

Service charges on deposit accounts

 

$

8,988

 

$

5,761

 

Bankcard services income

 

7,124

 

3,893

 

Trust and investment services income

 

4,543

 

2,314

 

Mortgage banking income

 

3,291

 

3,355

 

Accretion on FDIC indemnification asset

 

(7,078

)

(7,171

)

Other

 

3,811

 

1,371

 

Total noninterest income

 

$

20,679

 

$

9,523

 

 

Excluding the negative accretion on the FDIC indemnification asset, noninterest income increased 66.3% in the first quarter of 2014 as compared to the same period in 2013.  The quarterly increase in total noninterest income primarily resulted from the following:

 

·                  Bankcard services income increased 83.0%, or $3.2 million.  Debit card income increased 7.8%, or $241,000, due to organic growth as well as an increased customer base resulting from the FFHI acquisition.

·                  Trust and investment services income increased 96.3%, or $2.2 million, driven primarily by the addition of investment services income generated by the FFHI acquisition which added more than $747,000 for the quarter.

·                  Other noninterest income increased $2.4 million, or 178.0%, driven by a $919,000 increase in recoveries on acquired loans.

 

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·                  Negative accretion on the FDIC indemnification asset decreased $93,000, resulting from increases in expected cash flows from the FDIC.  This increase in expected cash flows from the FDIC was driven by declines in the cash flows in certain acquired loan pools.

·                  Mortgage banking income declined $64,000, driven by a reduction in refinancing activities in the secondary market due to rising interest rates, reduced gains from loans sold, and a decline in the fair value hedges related to mortgage banking activity.

 

Noninterest Expense

 

 

 

Three Months Ended

 

 

 

March 31

 

(Dollars in thousands)

 

2014

 

2013

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

39,093

 

$

23,252

 

Merger and branding related expense

 

5,985

 

1,963

 

Net occupancy expense

 

5,590

 

2,932

 

Information services expense

 

4,222

 

3,192

 

Furniture and equipment expense

 

3,754

 

2,572

 

OREO expense and loan related

 

4,269

 

3,102

 

Bankcard expense

 

2,299

 

1,164

 

Amortization of intangibles

 

2,104

 

1,034

 

FDIC assessment and other regulatory charges

 

1,576

 

1,224

 

Professional fees

 

1,341

 

691

 

Business development and staff related

 

1,496

 

1,228

 

Advertising and marketing

 

1,134

 

842

 

Other

 

4,560

 

3,245

 

Total noninterest expense

 

$

77,423

 

$

46,441

 

 

Noninterest expense increased $31.0 million or 66.7% in the first quarter of 2014 as compared to the same period in 2013.  The quarterly increase in total noninterest expense primarily resulted from the following:

 

·                  Salaries and employee benefits expense increased by $15.8 million or 68.1% driven by the addition of staff from the FFHI acquisition, along with increases in both incentive and merit pay for employees.

·                  OREO and loan related expense increased $1.2 million or 37.62% driven by the FFHI acquisition.

·                  Amortization of intangibles increased by $1.1 million due to the amortizing intangibles added from the FFHI acquisition.  This expense is expected to be approximately $2.0 million for the next five quarters.

·                  All other categories of noninterest expense increased primarily as a result of the acquisition of FFHI.

·                  Merger related expenses increased by $4.0 million due to FFHI merger costs related as well as $1.3 million in branding costs.

 

Income Tax Expense

 

Our effective income tax rate increased to 34.3% for the three months ended March 31, 2014 compared to 32.7% for the three months ended March 31, 2013.  The higher effective tax rate for the quarter was primarily attributable to tax exempt income on municipal bonds making up a smaller percentage of pre-tax income for the quarter.

 

Capital Resources

 

Our ongoing capital requirements have been met primarily through retained earnings, less the payment of cash dividends.  As of March 31, 2014, shareholders’ equity was $934.2 million, a decrease of $47.3 million, or 4.8%, from $981.5 million at December 31, 2013, and an increase of $420.0 million or 81.7% from $514.2 million at March 31, 2013.  The driving factor for the decrease from year end was the redemption of the $65.0 million preferred stock; in contrast, the increase from the comparable period of 2013 was primarily the result of the issuance of common shares in the FFHI acquisition fair valued at $381.4 million.  Our common equity-to-assets ratio increased to 11.69% at March 31, 2014 from 11.55% at the end of the fourth quarter of 2013 and increased from 10.00% at the end of the comparable period of 2013.

 

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We are subject to certain risk-based capital guidelines. Certain ratios measure the relationship of capital to a combination of balance sheet and off-balance sheet risks. The values of both balance sheet and off-balance sheet items are adjusted to reflect credit risk. Under the guidelines promulgated by the Federal Reserve, which are substantially similar to those of the FDIC, Tier 1 risk-based capital must be at least 4% of risk-weighted assets, while total risk-based capital must be at least 8% of risk-weighted assets.

 

In conjunction with the risk-based capital ratios, the regulatory agencies have also prescribed a leverage capital ratio for assessing capital adequacy.

 

The Company’s capital adequacy ratios for the following periods are reflected below:

 

 

 

March 31,

 

December 31,

 

March 31,

 

 

 

2014

 

2013

 

2013

 

 

 

 

 

 

 

 

 

First Financial Holdings, Inc.:

 

 

 

 

 

 

 

Tier 1 risk-based capital

 

12.78

%

13.58

%

13.21

%

Total risk-based capital

 

13.67

%

14.47

%

14.47

%

Tier 1 leverage

 

8.68

%

9.30

%

8.88

%

 

 

 

 

 

 

 

 

SCBT:

 

 

 

 

 

 

 

Tier 1 risk-based capital

 

12.56

%

13.37

%

12.92

%

Total risk-based capital

 

13.46

%

14.26

%

14.19

%

Tier 1 leverage

 

8.54

%

9.16

%

8.69

%

 

Compared to December 31, 2013, our Tier 1 risk-based capital and total risk-based capital have decreased due primarily to the decrease in capital as a result of the $65 million redemption of preferred stock partially offset by a decrease in risk-weighted assets.  The growth in capital from the comparable period in 2013 was primarily a result of the issuance of $381.4 million in common equity in the FFHI acquisition.  Our Tier 1 risk-based capital and total risk-based capital have decreased from March 31, 2013 and December 31, 2013 due to capital decreasing faster than the decrease in risk-weighted assets.  The Tier 1 leverage ratio has decreased compared to December 31, 2013, due to the decrease in capital.  Our capital ratios are currently well in excess of the minimum standards and continue to be in the “well capitalized” regulatory classification.

 

In July 2013, the Federal Reserve announced its approval of a final rule to implement the Basel III regulatory capital reforms, among other changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The framework requires banking organizations to hold more and higher quality capital, which acts as a financial cushion to absorb losses, taking into account the impact of risk. The approved rule includes a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% as well as a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking institutions. For the largest, most internationally active banking organizations, the rule includes a new minimum supplementary leverage ratio that takes into account off-balance sheet exposures. In terms of quality of capital, the final rule emphasizes common equity Tier 1 capital and implements strict eligibility criteria for regulatory capital instruments. It also changes the methodology for calculating risk-weighted assets to enhance risk sensitivity. The changes begin to take effect for the Company and the Bank in January 2015.  The ultimate impact of the new capital standards on the Company and the Bank is currently being reviewed.

 

Liquidity

 

Liquidity refers to our ability to generate sufficient cash to meet our financial obligations, which arise primarily from the withdrawal of deposits, extension of credit and payment of operating expenses.  Our Asset/Liability Management Committee (“ALCO”) is charged with monitoring liquidity management policies, which are designed to ensure acceptable composition of asset/liability mix.  Two critical areas of focus for ALCO are interest rate sensitivity and liquidity risk management.  We have employed our funds in a manner to provide liquidity from both assets and liabilities sufficient to meet our cash needs.

 

Asset liquidity is maintained by the maturity structure of loans, investment securities and other short-term investments.  Management has policies and procedures governing the length of time to maturity on loans and investments.  Normally, changes in the earning asset mix are of a longer-term nature and are not utilized for day-to-day corporate liquidity needs.

 

Our liabilities provide liquidity on a day-to-day basis.  Daily liquidity needs are met from deposit levels or from our use of federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings.  We engage in routine

 

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activities to retain deposits intended to enhance our liquidity position.  These routine activities include various measures, such as the following:

 

·                  Emphasizing relationship banking to new and existing customers, where borrowers are encouraged and normally expected to maintain deposit accounts with our Bank,

·                  Pricing deposits, including certificates of deposit, at rate levels that will attract and/or retain balances of deposits that will enhance our Bank’s asset/liability management and net interest margin requirements, and

·                  Continually working to identify and introduce new products that will attract customers or enhance our Bank’s appeal as a primary provider of financial services.

 

Our legacy SCBT loan portfolio increased by approximately $375.7 million, or about 14.4% compared to the balance at March 31, 2013, and by $114.7 million, or 16.0% annualized compared to the balance at December 31, 2013.  Our investment securities portfolio increased $281.3 million from first quarter 2013 and remained relatively flat compared to fourth quarter 2013. Total cash and cash equivalents were $612.6 million at March 31, 2014 as compared to $479.5 million at December 31, 2013 and $495.9 million at March 31, 2013.

 

At March 31, 2014, December 31, 2013 and March 31, 2013, the Company had $30.4 million, $34.8 million and $4.8 million, respectively, in traditional, out-of-market brokered deposits and $85.5 million, $85.3 million, and $49.8 million, respectively, of reciprocal brokered deposits.  Total deposits increased $2.4 billion, or 57.1% from March 31, 2013, to $6.6 billion resulting primarily from the FFHI merger; excluding deposits acquired in the FFHI merger, total deposits increased $56.6 million, or 1.3%.  Other borrowings grew by $46.3 million, or 84.8%, from March 31, 2013 due to the addition of First Financial Capital Trust I through the FFHI merger.  To the extent that we employ other types of non-deposit funding sources, typically to accommodate retail and correspondent customers, we continue to emphasize shorter maturities of such funds.  Our approach may provide an opportunity to sustain a low funding rate or possibly lower our cost of funds but could also increase our cost of funds if interest rates rise.

 

Our ongoing philosophy is to remain in a liquid position taking into account our current composition of earning assets, asset quality, capital position, and operating results.  Our liquid earning assets include federal funds sold, balances at the Federal Reserve Bank, reverse repurchase agreements, and/or other short-term investments.  Cyclical and other economic trends and conditions can disrupt our Bank’s desired liquidity position at any time.  We expect that these conditions would generally be of a short-term nature.  Under such circumstances, our Bank’s federal funds sold position and any balances at the Federal Reserve Bank serve as the primary sources of immediate liquidity.  At March 31, 2014, our Bank had total federal funds credit lines of $376.0 million with no outstanding advances.  If additional liquidity were needed, the Bank would turn to short-term borrowings as an alternative immediate funding source and would consider other appropriate actions such as promotions to increase core deposits or the sale of a portion of our investment portfolio.  At March 31, 2014, our Bank had $250.7 million of credit available at the Federal Reserve Bank’s Discount Window, but had no outstanding advances as of the end of the quarter.  In addition, we could draw on additional alternative immediate funding sources from lines of credit extended to us from our correspondent banks and/or the FHLB.  At March 31, 2014, our Bank had a total FHLB credit facility of $874.8 million with total outstanding letters of credit consuming $27.4 million and $140,000 in outstanding advances.  The Company had a $30 million unsecured line of credit with U.S. Bank National Association with no outstanding advances.  We believe that our liquidity position continues to be adequate and readily available.

 

Our contingency funding plans incorporate several potential stages based on liquidity levels.  Also, we review on at least an annual basis our liquidity position and our contingency funding plans with our principal banking regulator.  The Company maintains various wholesale sources of funding.  If our deposit retention efforts were to be unsuccessful, our Company would utilize these alternative sources of funding.  Under such circumstances, depending on the external source of funds, our interest cost would vary based on the range of interest rates charged to our Company.  This could increase our Company’s cost of funds, impacting net interest margins and net interest spreads.

 

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Loss Share

 

The following table presents the expected losses on acquired assets covered under loss share agreements as of March 31, 2014:

 

 

 

 

 

 

 

 

 

Losses

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incurred *

 

Incurred **

 

Remaining

 

 

 

 

 

 

 

FDIC

 

Original

 

Original

 

By FFCH

 

By SCBT

 

Estimated

 

OREO

 

Projected

 

 

 

Threshold

 

Estimated

 

Estimated

 

through

 

through

 

Losses

 

Mark ***

 

Total

 

(Dollars in thousands)

 

or ILE

 

Gross Losses

 

Covered Losses

 

7/26/2013

 

3/31/2014

 

for Loans

 

3/31/2014

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CBT

 

$

233,000

 

$

340,039

 

$

334,082

 

$

 

$

308,212

 

$

7,122

 

$

5,139

 

$

320,473

 

Habersham

 

94,000

 

124,363

 

119,978

 

 

88,727

 

5,029

 

2,686

 

96,442

 

BankMeridian

 

70,827

 

70,190

 

67,780

 

 

28,737

 

4,106

 

4,412

 

37,255

 

Cape Fear ****

 

131,000

 

20,105

 

17,399

 

76,122

 

5,004

 

12,072

 

323

 

93,521

 

Plantation ****

 

70,178

 

24,273

 

16,176

 

35,190

 

10,689

 

5,306

 

180

 

51,365

 

Total

 

$

599,005

 

$

578,970

 

$

555,415

 

$

111,312

 

$

441,369

 

$

33,635

 

$

12,740

 

$

599,056

 

 


* Claimed or claimable loan and OREO losses excluding expenses, net of revenues, from bank failure date through July 26, 2013.

** Claimed or claimable loan and OREO losses excluding expenses, net of revenues, since bank failure date under SCBT ownership.

*** Represents the estimated losses on OREO at period end.  These losses have been recognized to record OREO at net realizable value. These losses are claimable from the FDIC upon sale or receipt of a valid appraisal.

**** For Cape Fear and Plantation, the original estimated gross losses and the original estimated covered losses represent estimated losses subsequent to July 26, 2013.

 

Under the Habersham and BankMeridian loss share agreements, all losses (whether or not they exceed the intrinsic loss estimate (“ILE”)) are reimbursable by the FDIC at 80% of the losses and reimbursable expenses paid. During the fourth quarter of 2011, the losses and reimbursable expenses claimed under the CBT loss share agreement exceeded the $233.0 million threshold and became reimbursable at 95% rather than 80%. Under the loss sharing agreement for Cape Fear, the Bank assumes the first $32.4 million of losses and the FDIC reimburses the Bank for 80% of the losses greater than $32.4 million and up to $110.0 million. On losses exceeding $110.0 million, the FDIC will reimburse the Bank for 95% of the losses.  Under the loss sharing agreement for Plantation, the Bank shares in the losses on certain commercial loans and commercial OREO in three tranches. On losses up to $55.0 million, the FDIC reimburses the Bank for 80% of all eligible losses; the Bank absorbs losses greater than $55.0 million up to $65.0 million; and the FDIC reimburses the Bank for 60% of all eligible losses in excess of $65.0 million.

 

Deposit and Loan Concentrations

 

We have no material concentration of deposits from any single customer or group of customers.  We have no significant portion of our loans concentrated within a single industry or group of related industries.  Furthermore, we attempt to avoid making loans that, in an aggregate amount, exceed 10% of total loans to a multiple number of borrowers engaged in similar business activities. As of March 31, 2014, there were no aggregated loan concentrations of this type.  We do not believe there are any material seasonal factors that would have a material adverse effect on us.  We do not have foreign loans or deposits.

 

Concentration of Credit Risk

 

We consider concentrations of credit to exist when, pursuant to regulatory guidelines, the amounts loaned to a multiple number of borrowers engaged in similar business activities which would cause them to be similarly impacted by general economic conditions represents 25% of total risk-based capital, or $176.1 million at March 31, 2014. Based on this criteria, the Company had four such credit concentrations for non-acquired loans and acquired non-credit impaired loans at March 31, 2014, including $265.2 million of loans to lessors of residential buildings, $307.1 million of loans to lessors of nonresidential buildings (except mini-warehouses), $200.7 million of loans to religious organizations, and $261.7 million of loans to offices of physicians, dentists and other health practitioners.

 

Cautionary Note Regarding Any Forward-Looking Statements

 

Statements included in Management’s Discussion and Analysis of Financial Condition and Results of Operations which are not historical in nature are intended to be, and are hereby identified as, forward-looking statements for purposes of the safe harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934.  The words “may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “may,” and

 

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“intend,” as well as other similar words and expressions of the future, are intended to identify forward-looking statements.  We caution readers that forward-looking statements are estimates reflecting our judgment based on current information, and are subject to certain risks and uncertainties that could cause actual results to differ materially from anticipated results.  Such risks and uncertainties include, among others, the matters described in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2013, and the following:

 

·                  Credit risk associated with an obligor’s failure to meet the terms of any contract with the Bank or otherwise fail to perform as agreed;

·                  Interest rate risk involving the effect of a change in interest rates on both the Bank’s earnings and the market value of the portfolio equity;

·                  Liquidity risk affecting our Bank’s ability to meet its obligations when they come due;

·                  Price risk focusing on changes in market factors that may affect the value of financial instruments which are “marked-to-market” periodically;

·                  Merger integration risk including potential deposit attrition, higher than expected costs, customer loss and business disruption associated with the integration of FFHI, including, without limitation, potential difficulties in maintaining relationships with key personnel and other integration related-matters;

·                  Transaction risk arising from problems with service or product delivery;

·                  Compliance risk involving risk to earnings or capital resulting from violations of or nonconformance with laws, rules, regulations, prescribed practices, or ethical standards;

·                  Regulatory change risk resulting from new laws, rules, regulations, proscribed practices or ethical standards, including the possibility that regulatory agencies may require higher levels of capital above the current regulatory-mandated minimums, including the impact of the capital rules under Basel III and the possibility of changes in accounting principles relating to loan loss recognition;

·                  Strategic risk resulting from adverse business decisions or improper implementation of business decisions;

·                  Reputation risk that adversely affects earnings or capital arising from negative public opinion;

·                  Terrorist activities risk that result in loss of consumer confidence and economic disruptions;

·                  Cyber security risk related to our dependence on internal computer systems and the technology of outside service providers,  as well as the potential impacts of third-party security breaches, subjects us to potential business disruptions or financial losses resulting from deliberate attacks or unintentional events;

·                  Noninterest income risk resulting from the effect of final rules amending Regulation E that prohibit financial institutions from charging consumer fees for paying overdrafts on ATM and one-time debit card transactions, unless the consumer consents or opts-in to the overdraft service for those types of transactions; and

·                  Economic downturn risk resulting in changes in the credit markets, greater than expected non-interest expenses, excessive loan losses and other factors, which risks could be exacerbated by potential negative economic developments resulting from the expiration of the federal tax reductions, and the implementation of federal spending cuts currently scheduled to go into effect.

 

All forward-looking statements in this report are based on information available to us as of the date of this report.  We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

 

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We have no material changes in our quantitative and qualitative disclosures about market risk as of March 31, 2014 from that presented in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

Item 4.  CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

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The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events.  There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

 

Changes in Internal Control over Financial Reporting

 

There has been no change in our internal control over financial reporting during the three months ended March 31, 2014, 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

 

As of March 31, 2014 and the date of this form 10-Q, we believe that we are not a party to, nor is any of our property the subject of, any pending material legal proceeding other than those that may occur in the ordinary course of our business, except for those described below.

 

Rational Lawsuit.  On October 11, 2012, a purported shareholder of Savannah filed a lawsuit in the Supreme Court of the State of New York captioned Rational Strategies Fund v. Robert H. Demere, Jr. et al., No. 653566/2012 (the “Rational Lawsuit”), naming Savannah, members of Savannah’s board of directors and SCBT as defendants. This lawsuit is purportedly brought on behalf of a putative class of Savannah’s common shareholders and seeks a declaration that it is properly maintainable as a class action with the Plaintiff as the proper class representative. The Rational Lawsuit alleges that Savannah, Savannah’s directors and SCBT breached duties and/or aided and abetted such breaches by failing to disclose certain material information about the proposed merger between Savannah and SCBT. Among other relief, the Complaint seeks to enjoin the merger. SCBT believes that the claims asserted in the Complaint are without merit and that the proceeding will not have any material adverse effect on the financial condition or operations of SCBT.

 

On November 23, 2012, SCBT, Savannah and the other named defendants entered into a memorandum of understanding (the “Rational MOU”) with the Plaintiff regarding a settlement of the Rational Lawsuit. Pursuant to the Rational MOU, Savannah made available additional information concerning the Savannah merger to Savannah shareholders in a Current Report on Form 8-K.

 

On March 20, 2014, the parties entered into and filed with the court a stipulation of settlement.  The stipulation of settlement is subject to customary conditions, including court approval following notice to Savannah’s shareholders.  If the settlement is finally approved by the Court, the settlement will resolve and release all claims in the action that were or could have been brought challenging any aspect of the Savannah merger, the Savannah merger agreement, and any disclosure made in connection therewith, and that the action will be dismissed with prejudice. There can be no assurance that the court will approve the settlement. In the event the court fails to approve it, the proposed settlement as contemplated by the stipulation may be terminated.

 

FFHI Litigation.  On March 5, 2013, a purported shareholder of First Financial filed a lawsuit in the Court of Chancery of the State of Delaware captioned Arthur Walter v. R. Wayne Hall et al., No. 8386-VCN.  On March 25, 2013, another purported shareholder of FFHI filed a lawsuit in the same court captioned Emmy Moore v. R. Wayne Hall et al., No. 8434-VCN. Each complaint named FFHI, members of FFHI’s board of directors and SCBT as defendants.  The complaints were purportedly brought on behalf of a putative class of FFHI’s common shareholders and sought a declaration that the lawsuits are properly maintainable as a class action with the named plaintiffs as the proper class representatives. Each complaint alleged that FFHI’s board of directors breached their fiduciary duties to FFHI shareholders by attempting to sell FFHI to SCBT by means of an unfair process and for an unfair price and that SCBT aided and abetted these alleged breaches of fiduciary duty. Among other relief, each complaint sought declaratory and injunctive relief to prevent the proposed merger between FFHI and SCBT. On April 18, 2013, the Court of Chancery issued an order consolidating the two lawsuits into one action captioned In re First Financial Holdings, Inc. Shareholder Litigation, No. 8386-VCN, and requiring the plaintiffs to file a single consolidated amended complaint as soon as practicable. On May 7, 2013, the plaintiffs filed a consolidated amended complaint, which generally alleges that FFHI’s board of directors breached their fiduciary duties to FFHI shareholders by attempting to sell FFHI to SCBT by means of an unfair process and for an unfair price and by failing to disclose certain material information about the proposed merger.

 

On July 16, 2013, SCBT, FFHI and the director defendants entered into a memorandum of understanding (the “FFHI MOU”) with plaintiffs regarding the settlement of the action, subject to the approval of the court.  Pursuant to the terms of the FFHI MOU, SCBT and FFHI agreed to make available additional information to FFHI shareholders regarding the FFHI merger.  In return, the plaintiffs agreed to the dismissal of the lawsuit with prejudice and not to seek any interim relief in favor of the alleged class of FFHI stockholders. On October 30, 2013, the parties entered into and filed with the Delaware court a stipulation of

 

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settlement.  On January 24, 2014, the court issued an Order and Final Judgment approving the settlement and dismissing the action with prejudice.

 

On May 3, 2013, a purported shareholder of SCBT filed a lawsuit in the Supreme Court of the State of New York in the County of New York captioned Rational Strategies Fund v. Robert R. Hill Jr. et al., No. 651625/2013, naming SCBT and members of its board of directors as defendants. This lawsuit is purportedly brought on behalf of a putative class of SCBT’s common shareholders and seeks a declaration that it is properly maintainable as a class action with the Plaintiff as the proper class representative. The lawsuit alleges that SCBT and members of its board of directors breached duties by failing to disclose certain material information about the proposed merger between FFHI and SCBT. Among other relief, the Complaint seeks to enjoin the merger.

 

On July 18, 2013, the court granted a temporary injunction enjoining SCBT from certifying the vote of its shareholders at its special meeting on July 24, 2013 to consider and vote upon the FFHI merger, pending a hearing scheduled for the same date on the defendants’ motion to vacate that temporary injunction. On July 19, 2013, SCBT entered into a memorandum of understanding (the “Rational/FFHI MOU”) with plaintiff regarding the settlement of the action.  Pursuant to the Rational/FFHI MOU, SCBT agreed to make available additional information to SCBT shareholders regarding the FFHI merger, and the plaintiff agreed to jointly request with SCBT that the temporary injunction be lifted so that the results of the special meeting could be certified without any delay or impediment. Under the terms of the Rational/FFHI MOU, SCBT, the SCBT director defendants and the plaintiff have agreed to settle the lawsuit and release the defendants from all claims made by the plaintiff relating to the FFHI merger.

 

On February 20, 2014, the parties entered into a stipulation of settlement that was later filed with the court.  On March 31, 2014, the court issued an Order for Notice and Hearing, which preliminarily approved the stipulation of settlement, directed that notice of the settlement be given to the former SCBT shareholders, and scheduled a hearing to consider final approval of the settlement for June 3, 2014.  On April 17, 2014, notice of the settlement was mailed to the former SCBT shareholders.  There can be no assurance that the court will approve the settlement.  In the event that the court fails to do so, the proposed settlement as contemplated by the stipulation may be terminated.

 

Item 1A.  RISK FACTORS

 

Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as well as cautionary statements contained in this Form 10-Q, including those under the caption “Cautionary Note Regarding Any Forward-Looking Statements” set forth in Part I, Item 2 of this Form 10-Q, risks and matters described elsewhere in this Form 10-Q and in our other filings with the SEC.

 

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Item 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

(a)           Not applicable

 

(b)           Not applicable

 

(c)           Issuer Purchases of Registered Equity Securities:

 

In February 2004, we announced a stock repurchase program with no formal expiration date to repurchase up to 250,000 shares of our common stock.  There are 147,872 shares that may yet be purchased under that program.  The following table reflects share repurchase activity during the first quarter of 2014:

 

Period

 

(a) Total
Number of
Shares (or
Units)
Purchased

 

(b) Average
Price Paid per
Share (or Unit)

 

(c) Total
Number of
Shares (or
Units)
Purchased as
Part of Publicly
Announced
Plans or
Programs

 

(d) Maximum
Number (or
Approximate
Dollar Value) of
Shares (or
Units) that May
Yet Be
Purchased
Under the Plans
or Programs

 

 

 

 

 

 

 

 

 

 

 

January 1- January 31

 

(599

)*

$

65.62

 

 

147,872

 

February 1 - February 28

 

(1,666

)*

59.39

 

 

147,872

 

March 1 - March 31

 

(1,868

)*

61.53

 

 

147,872

 

 

 

 

 

 

 

 

 

 

 

Total

 

(4,133

)

 

 

 

147,872

 

 


* These shares were repurchased under arrangements, authorized by our stock-based compensation plans and Board of Directors, whereby officers or directors may sell previously owned shares to the Company in order to pay for the exercises of stock options or for income taxes owed on vesting shares of restricted stock.  These shares are not purchased under the plan to repurchase 250,000 shares announced in February 2004.

 

Item 3.  DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

Item 4.  MINE SAFETY DISCLOSURES

 

Not applicable.

 

Item 5.  OTHER INFORMATION

 

Not applicable.

 

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Item 6.  EXHIBITS

 

The exhibits required to be filed as part of this Quarterly Report on Form 10-Q are listed in the Exhibit Index attached hereto and are incorporated by reference.

 

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 FINANCIAL HOLDINGS, INC.

 

(Registrant)

 

 

 

 

Date: May 9, 2014

/s/ Robert R. Hill, Jr.

 

Robert R. Hill, Jr.

 

Chief Executive Officer

 

(Principal Executive Officer)

 

 

Date: May 9, 2014

/s/ John C. Pollok

 

John C. Pollok

 

Senior Executive Vice President,

 

Chief Financial Officer, and

 

Chief Operating Officer

 

(Principal Financial Officer)

 

 

Date: May 9, 2014

/s/ Keith S. Rainwater

 

Keith S. Rainwater

 

Executive Vice President and

 

Director of External Reporting

 

(Principal Accounting Officer)

 

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Exhibit Index

 

Exhibit No.

 

Description

 

 

 

Exhibit 31.1

 

Rule 13a-14(a) Certification of Principal Executive Officer

 

 

 

Exhibit 31.2

 

Rule 13a-14(a) Certification of Principal Financial Officer

 

 

 

Exhibit 32

 

Section 1350 Certifications of Principal Executive Officer and Principal Financial Officer

 

 

 

Exhibit 101

 

The following financial statements from the Quarterly Report on Form 10-Q of First Financial Holdings, Inc. for the quarter ended March 31, 2014, formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity, (v) Condensed Consolidated Statement of Cash Flows and (vi) Notes to Condensed Consolidated Financial Statements.

 

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