10-Q 1 form10q-16661_fbnc.htm 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2016

 

 

 

Commission File Number 0-15572

 

                         FIRST BANCORP                         

(Exact Name of Registrant as Specified in its Charter)

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x YES      o NO

 

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

 

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

 

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

 

The number of shares of the registrant's Common Stock outstanding on October 31, 2016 was 20,119,411.

 

 

INDEX

FIRST BANCORP AND SUBSIDIARIES

 

 

  Page
   
Part I.  Financial Information  
   
Item 1 - Financial Statements  
   
Consolidated Balance Sheets -
     September 30, 2016 and September 30, 2015
     (With Comparative Amounts at December 31, 2015)
4
   
Consolidated Statements of Income -  
     For the Periods Ended September 30, 2016 and 2015
5
   
Consolidated Statements of Comprehensive Income -
     For the Periods Ended September 30, 2016 and 2015
6
   
Consolidated Statements of Shareholders’ Equity -
     For the Periods Ended September 30, 2016 and 2015
7
   
Consolidated Statements of Cash Flows -  
     For the Periods Ended September 30, 2016 and 2015
8
   
Notes to Consolidated Financial Statements 9
   
Item 2 – Management’s Discussion and Analysis of Consolidated Results of Operations and Financial Condition 38
   
Item 3 – Quantitative and Qualitative Disclosures About Market Risk 58
   
Item 4 – Controls and Procedures 59
   
Part II.  Other Information  
   
Item 1 – Legal Proceedings 60
   
Item 1A – Risk Factors 60
   
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds 60
   
Item 6 – Exhibits 60
   
Signatures 62
   

 

Page 2

FORWARD-LOOKING STATEMENTS

 

Part I of this report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995, which statements are inherently subject to risks and uncertainties. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Further, forward-looking statements are intended to speak only as of the date made. Such statements are often characterized by the use of qualifying words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” or other statements concerning our opinions or judgment about future events. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of our customers, our level of success in integrating acquisitions, actions of government regulators, the level of market interest rates, and general economic conditions. For additional information about factors that could affect the matters discussed in this paragraph, see the “Risk Factors” section of our 2015 Annual Report on Form 10-K.

 

 

Page 3

 

Part I. Financial Information

Item 1 - Financial Statements

 

First Bancorp and Subsidiaries

Consolidated Balance Sheets

 

($ in thousands-unaudited)  September 30,
2016
  December 31,
2015 (audited)
  September 30,
2015
ASSETS               
Cash and due from banks, noninterest-bearing  $64,145    53,285    52,788 
Due from banks, interest-bearing   217,188    213,426    165,271 
Federal funds sold       557    730 
     Total cash and cash equivalents   281,333    267,268    218,789 
                
Securities available for sale   199,156    165,614    178,765 
Securities held to maturity (fair values of $139,514, $157,146, and $162,858)   135,808    154,610    160,048 
                
Presold mortgages in process of settlement   4,094    4,323    3,150 
                
Loans – non-covered   2,651,459    2,416,285    2,375,094 
Loans – covered by FDIC loss share agreement       102,641    106,609 
   Total loans   2,651,459    2,518,926    2,481,703 
   Total allowance for loan losses   (24,575)   (28,583)   (30,055)
   Net loans   2,626,884    2,490,343    2,451,648 
                
Premises and equipment   76,731    74,559    74,839 
Accrued interest receivable   8,785    9,166    9,008 
FDIC indemnification asset       8,439    7,649 
Goodwill   75,392    65,835    65,835 
Other intangible assets   4,603    1,336    1,516 
Foreclosed real estate   10,103    9,994    10,873 
Bank-owned life insurance   73,613    72,086    56,557 
Other assets   40,978    38,492    34,164 
        Total assets  $3,537,480    3,362,065    3,272,841 
                
LIABILITIES               
Deposits:   Noninterest bearing checking accounts  $749,256    659,038    635,287 
Interest bearing checking accounts   593,065    626,878    609,908 
Money market accounts   659,741    639,189    584,490 
Savings accounts   207,494    186,616    187,607 
Time deposits of $100,000 or more   451,622    403,545    381,895 
Other time deposits   249,662    296,019    308,566 
     Total deposits   2,910,840    2,811,285    2,707,753 
Borrowings   236,394    186,394    176,394 
Accrued interest payable   523    585    588 
Other liabilities   24,775    21,611    16,932 
     Total liabilities   3,172,532    3,019,875    2,901,667 
                
Commitments and contingencies               
                
SHAREHOLDERS’ EQUITY               
Preferred stock, no par value per share.  Authorized: 5,000,000 shares               
     Series B issued & outstanding:  None, None, and 31,500 shares           31,500 
     Series C, convertible, issued & outstanding:  728,706, 728,706, and 728,706 shares   7,287    7,287    7,287 
Common stock, no par value per share.  Authorized: 40,000,000 shares               
     Issued & outstanding:  20,119,411, 19,747,509, and 19,785,314 shares   139,979    133,393    133,211 
Retained earnings   219,233    205,060    199,886 
Accumulated other comprehensive loss   (1,551)   (3,550)   (710)
     Total shareholders’ equity   364,948    342,190    371,174 
          Total liabilities and shareholders’ equity  $3,537,480    3,362,065    3,272,841 

 

See accompanying notes to consolidated financial statements.

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Index  

First Bancorp and Subsidiaries

Consolidated Statements of Income

 

($ in thousands, except share data-unaudited)  Three Months Ended
September 30,
  Nine Months Ended
September 30,
   2016  2015  2016  2015
INTEREST INCOME                    
Interest and fees on loans  $29,919    29,863    90,301    88,257 
Interest on investment securities:                    
     Taxable interest income   1,688    1,670    5,472    4,693 
     Tax-exempt interest income   435    455    1,312    1,375 
Other, principally overnight investments   213    142    612    523 
     Total interest income   32,255    32,130    97,697    94,848 
                     
INTEREST EXPENSE                    
Savings, checking and money market accounts   401    292    1,204    842 
Time deposits of $100,000 or more   657    657    1,931    2,236 
Other time deposits   196    308    725    977 
Borrowings   647    487    1,750    1,099 
     Total interest expense   1,901    1,744    5,610    5,154 
                     
Net interest income   30,354    30,386    92,087    89,694 
Provision for loan losses – non-covered       267    2,109    1,372 
Provision (reversal) for loan losses – covered       (1,681)   (2,132)   (2,109)
Total provision (reversal) for loan losses       (1,414)   (23)   (737)
Net interest income after provision (reversal) for loan losses   30,354    31,800    92,110    90,431 
                     
NONINTEREST INCOME                    
Service charges on deposit accounts   2,710    2,951    7,960    8,724 
Other service charges, commissions and fees   2,996    2,778    8,869    8,091 
Fees from presold mortgage loans   710    481    1,491    2,020 
Commissions from sales of insurance and financial products   969    691    2,844    1,917 
SBA consulting fees   1,178        1,898     
SBA loan sale gains   694        694     
Bank-owned life insurance income   514    382    1,526    1,136 
Foreclosed property losses   (266)   (939)   (189)   (1,522)
FDIC indemnification asset expense, net   (5,711)   (2,865)   (10,255)   (7,085)
Securities (losses) gains       (1)   3    (1)
Other gains (losses)   1,363    28    1,237    (241)
     Total noninterest income   5,157    3,506    16,078    13,039 
                     
NONINTEREST EXPENSES                    
Salaries   13,430    12,378    37,465    35,456 
Employee benefits   2,608    2,221    7,892    6,702 
   Total personnel expense   16,038    14,599    45,357    42,158 
Net occupancy expense   2,005    1,823    5,791    5,504 
Equipment related expenses   904    900    2,693    2,805 
Merger and acquisition expenses   600        1,286     
Intangibles amortization   387    181    834    541 
Other operating expenses   7,784    7,111    22,677    21,620 
     Total noninterest expenses   27,718    24,614    78,638    72,628 
                     
Income before income taxes   7,793    10,692    29,550    30,842 
Income tax expense   3,115    3,687    10,396    10,605 
                     
Net income   4,678    7,005    19,154    20,237 
                     
Preferred stock dividends   (58)   (137)   (175)   (566)
                     
Net income available to common shareholders  $4,620    6,868    18,979    19,671 
                     
Earnings per common share:                    
     Basic  $0.23    0.35    0.95    1.00 
     Diluted   0.23    0.34    0.93    0.97 
                     
Dividends declared per common share  $0.08    0.08    0.24    0.24 
                     
Weighted average common shares outstanding:                    
     Basic   20,007,518    19,781,789    19,904,226    19,760,807 
     Diluted   20,785,689    20,512,959    20,697,125    20,491,973 

 

See accompanying notes to consolidated financial statements.

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Index  

First Bancorp and Subsidiaries

Consolidated Statements of Comprehensive Income

 

 

   Three Months Ended
September 30,
  Nine Months Ended
September 30,
($ in thousands-unaudited)  2016  2015  2016  2015
             
Net income  $4,678    7,005    19,154    20,237 
Other comprehensive income (loss):                    
   Unrealized gains (losses) on securities available for sale:                    
Unrealized holding gains (losses) arising during the period, pretax   241    589    3,131    (154)
      Tax (expense) benefit   (94)   (231)   (1,223)   60 
Reclassification to realized (gains) losses       1    (3)   1 
      Tax expense           1     
Postretirement Plans:                    
Amortization of unrecognized net actuarial (gain) loss   50    (16)   152    (63)
       Tax expense (benefit)   (20)   6    (59)   24 
Other comprehensive income (loss)   177    349    1,999    (132)
Comprehensive income  $4,855    7,354    21,153    20,105 
                     

 

See accompanying notes to consolidated financial statements.

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Index  

 

First Bancorp and Subsidiaries

Consolidated Statements of Shareholders’ Equity

 

                

(In thousands, except per share -
unaudited)

  Preferred  Common Stock  Retained  Accumulated
Other
Comprehensive
  Total
Share-
holders’
   Stock  Shares  Amount  Earnings  Income (Loss)  Equity
                   
                   
Balances, January 1, 2015  $70,787    19,710   $132,532    184,958    (578)   387,699 
                               
Net income                  20,237         20,237 
Preferred stock redeemed (Series B)   (32,000)                       (32,000)
Stock option exercises        2    32              32 
Cash dividends declared ($0.24 per common share)                  (4,743)        (4,743)
Preferred dividends                  (566)        (566)
Stock-based compensation        73    647              647 
Other comprehensive loss                       (132)   (132)
                               
Balances, September 30, 2015  $38,787    19,785   $133,211    199,886    (710)   371,174 
                               
                               
Balances, January 1, 2016  $7,287    19,748   $133,393    205,060    (3,550)   342,190 
                               
Net income                  19,154         19,154 
Cash dividends declared ($0.24 per common share)                  (4,806)        (4,806)
Preferred dividends                  (175)        (175)
Equity issued pursuant to acquisitions        279    5,509              5,509 
Stock option exercises        23    375              375 
Stock-based compensation        69    702              702 
Other comprehensive income                       1,999    1,999 
                               
Balances, September 30, 2016  $7,287    20,119   $139,979    219,233    (1,551)   364,948 

 

See accompanying notes to consolidated financial statements.

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Index  

First Bancorp and Subsidiaries

Consolidated Statements of Cash Flows

 

   Nine Months Ended
September 30,
($ in thousands-unaudited)  2016  2015
Cash Flows From Operating Activities          
Net income  $19,154    20,237 
Reconciliation of net income  to net cash provided by operating activities:          
     Provision (reversal) for loan losses   (23)   (737)
     Net security premium amortization   2,418    2,380 
     Purchase accounting accretion   (3,553)   (3,897)
     FDIC indemnification asset expense, net   9,993    6,162 
     Foreclosed property losses and write-downs, net   189    1,522 
     (Gain) loss on securities available for sale   (3)   1 
     Other losses   126    241 
     Decrease in net deferred loan costs   675    181 
     Depreciation of premises and equipment   3,405    3,375 
     Stock-based compensation expense   527    554 
     Amortization of intangible assets   834    541 
     Fees/gains from sales of presold mortgages and SBA loans   (2,185)   (2,020)
     Origination of presold mortgages and SBA loans   (64,731)   (76,728)
     Proceeds from sales of presold mortgages and SBA loans   67,180    81,620 
     Gain on sale of branch   (1,356)    
     Decrease (increase) in accrued interest receivable   381    (88)
     Increase in other assets   (1,530)   (990)
     Decrease in accrued interest payable   (20)   (98)
     Increase (decrease) in other liabilities   185    (667)
          Net cash provided by operating activities   31,666    31,589 
           
Cash Flows From Investing Activities          
     Purchases of securities available for sale   (99,896)   (83,313)
     Purchases of securities held to maturity       (2,003)
     Proceeds from maturities/issuer calls of securities available for sale   68,206    61,426 
     Proceeds from maturities/issuer calls of securities held to maturity   17,652    19,246 
     Proceeds from sales of securities available for sale   8     
     Purchases of Federal Reserve and Federal Home Loan Bank stock, net   (2,263)   (9,597)
     Net increase in loans   (138,044)   (98,347)
     (Payments) proceeds related to FDIC loss share agreements   (1,554)   8,758 
     Payment to FDIC for termination of loss share agreements   (2,012)    
     Proceeds from sales of foreclosed real estate   6,670    6,426 
     Purchases of premises and equipment   (6,876)   (3,828)
     Proceeds from sales of premises and equipment   21    847 
     Proceeds from branch sale   26,211     
     Net cash paid in acquisitions   (53,640)    
          Net cash used by investing activities   (185,517)   (100,385)
           
Cash Flows From Financing Activities          
     Net increase in deposits   122,476    11,847 
     Net increase in borrowings   50,000    60,000 
     Cash dividends paid – common stock   (4,760)   (4,732)
     Cash dividends paid – preferred stock   (175)   (646)
     Redemption of preferred stock       (32,000)
     Proceeds from stock option exercises   375    32 
          Net cash provided by financing activities   167,916    34,501 
           
Increase (decrease) in cash and cash equivalents   14,065    (34,295)
Cash and cash equivalents, beginning of period   267,268    253,084 
           
Cash and cash equivalents, end of period  $281,333    218,789 
           
Supplemental Disclosures of Cash Flow Information:          
Cash paid during the period for:          
     Interest  $5,672   $5,252 
     Income taxes   10,511    11,139 
Non-cash transactions:          
     Unrealized gain (loss) on securities available for sale, net of taxes   1,906    (94)
     Foreclosed loans transferred to other real estate   6,968    6,700 

 

 

See accompanying notes to consolidated financial statements.

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Index  

 

First Bancorp and Subsidiaries

Notes to Consolidated Financial Statements

 

(unaudited) For the Periods Ended September 30, 2016 and 2015  

 

Note 1 - Basis of Presentation

 

In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated financial position of the Company as of September 30, 2016 and 2015 and the consolidated results of operations and consolidated cash flows for the periods ended September 30, 2016 and 2015. All such adjustments were of a normal, recurring nature. Reference is made to the 2015 Annual Report on Form 10-K filed with the SEC for a discussion of accounting policies and other relevant information with respect to the financial statements. The results of operations for the periods ended September 30, 2016 and 2015 are not necessarily indicative of the results to be expected for the full year. The Company has evaluated all subsequent events through the date the financial statements were issued.

 

Note 2 – Accounting Policies

 

Note 1 to the 2015 Annual Report on Form 10-K filed with the SEC contains a description of the accounting policies followed by the Company and discussion of recent accounting pronouncements. The following paragraphs update that information as necessary.

 

In June 2014, the Financial Accounting Standards Board (“FASB”) issued guidance which clarifies that performance targets associated with stock compensation should be treated as a performance condition and should not be reflected in the grant date fair value of the stock award. The amendments were effective for the Company on January 1, 2016. The Company will apply the guidance to all stock awards granted or modified after January 1, 2016. The Company’s adoption of these amendments did not have a material effect on its financial statements.

 

In January 2015, the FASB issued guidance to eliminate from U.S. GAAP the concept of an extraordinary item, which is an event or transaction that is both (1) unusual in nature and (2) infrequently occurring. Under the new guidance, an entity will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; or (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. The amendments were effective for the Company on January 1, 2016, and did not have a material effect on its financial statements.

 

In February 2015, the FASB issued guidance which amends the consolidation requirements and significantly changes the consolidation analysis required under U.S. GAAP. The amendments were expected to result in the deconsolidation of many entities. The amendments were effective for the Company on January 1, 2016. The adoption of these amendments did not have a material effect on the Company’s financial statements.

 

In April 2015, the FASB issued guidance that will require debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This update affects disclosures related to debt issuance costs but does not affect existing recognition and measurement guidance for these items. The amendments were effective for the Company on January 1, 2016. The Company’s adoption of these amendments did not have a material effect on its financial statements.

 

In April 2015, the FASB issued guidance which provides a practical expedient that permits the Company to measure defined benefit plan assets and obligations using the month-end that is closest to the Company’s fiscal year-end. The amendments were effective for the Company on January 1, 2016. The Company’s adoption of these amendments did not have a material effect on its financial statements.

 

In June 2015, the FASB issued amendments to clarify the Accounting Standards Codification, correct unintended application of guidance, and make minor improvements that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments were effective upon issuance (June 12, 2015) for amendments that do not have transition guidance. Amendments that were subject to transition guidance were effective for the Company on January 1, 2016. The adoption of this guidance did not have a material effect on the Company’s financial statements.

 

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Index  

In September 2015, the FASB amended the Business Combinations topic of the Accounting Standards Codification to simplify the accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted for financial statements that have not been issued. All entities are required to apply the amendments prospectively to adjustments to provisional amounts that occur after the effective date. The amendment was effective for the Company on January 1, 2016 and these amendments did not have a material effect on its financial statements.

 

In January 2016, the FASB amended the Financial Instruments topic of the Accounting Standards Codification to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company does not expect these amendments to have a material effect on its financial statements.

 

In February 2016, the FASB issued new guidance on accounting for leases, which generally requires all leases to be recognized in the statement of financial position. The provisions of this guidance are effective for reporting periods beginning after December 15, 2018; early adoption is permitted. These provisions are to be applied using a modified retrospective approach. The Company is evaluating the effect that this new guidance will have on our consolidated financial statements, but does not expect it will have a material effect on its financial statements.

 

In March 2016, the FASB amended the Liabilities topic of the Accounting Standards Codification to address the current and potential future diversity in practice related to the derecognition of a prepaid stored-value product liability. The amendments will be effective for financial statements issued for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance using a modified retrospective transition method by means of a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year in which the guidance is effective to each period presented. The Company does not expect these amendments to have a material effect on its financial statements.

 

In March 2016, the FASB amended the Investments—Equity Method and Joint Ventures topic of the Accounting Standards Codification to eliminate the requirement to retroactively adopt the equity method of accounting. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company will apply the guidance prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. The Company does not expect these amendments to have a material effect on its financial statements

 

In March 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify the implementation guidance on principal versus agent considerations and address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

 

In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payment award transactions including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. Additionally, the guidance simplifies two areas specific to entities other than public business entities allowing them apply a practical expedient to estimate the expected term for all awards with performance or service conditions that have certain characteristics and also allowing them to make a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value. The amendments will be effective for the Company for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company does not expect these amendments to have a material effect on its financial statements.

 

In April 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify the guidance related to identifying performance obligations and accounting for licenses of intellectual property. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

 

In May 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify guidance related to collectability, noncash consideration, presentation of sales tax, and transition. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

 

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In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.

 

In August 2016, the FASB amended the Statement of Cash Flows topic of the Accounting Standards Codification to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments will be effective for the Company for fiscal years beginning after December 15, 2017, including interim periods within those years. The Company does not expect these amendments to have a material effect on its financial statements.

 

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

 

Note 3 – Reclassifications

 

Certain amounts reported in the period ended September 30, 2015 have been reclassified to conform to the presentation for September 30, 2016. These reclassifications had no effect on net income or shareholders’ equity for the periods presented, nor did they materially impact trends in financial information.

 

Note 4 – Acquisitions and Divestures

 

The Company completed the following acquisitions in 2016.

 

(1)On January 1, 2016, the Company completed the acquisition of Bankingport, Inc. (“Bankingport”). The results of Bankingport are included in First Bancorp’s results for the three and nine months ended September 30, 2016 beginning on the January 1, 2016 acquisition date.

 

Bankingport was an insurance agency based in Sanford, North Carolina. This acquisition represented an opportunity to expand the insurance agency operations into a contiguous and significant banking market for the Company. Also, this acquisition provided the Company with a larger platform for leveraging insurance services throughout the Company’s bank branch network. The deal value was $2.2 million and the transaction was completed on January 1, 2016 with the Company paying $700,000 in cash and issuing 79,012 shares of its common stock, which had a value of approximately $1.5 million. In connection with the acquisition, the Company also paid $1.1 million to purchase the office space previously leased by Bankingport.

 

This acquisition has been accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of Bankingport were recorded based on estimates of fair values as of January 1, 2016. In connection with this transaction, the Company recorded $1.7 million in goodwill, which is non-deductible for tax purposes, and $0.7 million in other amortizable intangible assets.

 

(2)On May 5, 2016, the Company completed the acquisition of SBA Complete, Inc. (“SBA Complete”). The results of SBA Complete are included in First Bancorp’s results for the three and nine months ended September 30, 2016 beginning on the May 5, 2016 acquisition date. SBA Complete is a consulting firm that specializes in consulting with financial institutions across the country related to Small Business Administration (“SBA”) loan origination and servicing. The deal value was $8.9 million and the transaction was completed on May 5, 2016 with the Company paying $1.5 million in cash and issuing 199,829 shares of its common stock, which had a value of approximately $4.0 million. Per the terms of the agreement, the Company also recorded an earn-out liability valued at $3.4 million, which will be paid in shares of Company stock in annual distributions over a three year period if pre-determined goals are met for those three years.

 

This acquisition has been accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of SBA Complete were recorded based on estimates of fair values as of May 5, 2016. In connection with this transaction, the Company recorded $6.0 million in goodwill, which is non-deductible for tax purposes, and $2.0 million in other amortizable intangible assets.

 

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(3)On July 15, 2016, the Company completed a branch exchange with First Community Bank headquartered in Bluefield, Virginia. In the branch exchange transaction, the Bank acquired six of First Community Bank’s branches located in North Carolina, while concurrently selling seven of its branches in the southwestern area of Virginia to First Community Bank.

 

In connection with the sale, the Company sold $150.6 million in loans, $5.7 million in premises and equipment and $134.3 million in deposits to First Community Bank. In connection with the sale, the Company received a deposit premium of $3.8 million, removed $1.0 million of allowance for loan losses associated with the sold loans, allocated and wrote-off $3.5 million of previously recorded goodwill, and recorded a net gain of $1.4 million in this transaction.

 

In connection with the purchase transaction, the Company acquired assets with a fair value of $156.1 million, including $152.2 million in loans and $3.4 million in premises and equipment. Additionally, the Company assumed $111.3 million in deposits and $0.2 million in other liabilities. In connection with the purchase, the Company recorded: i) a discount on acquired loans of $1.5 million, ii) a premium on deposits of $0.3 million, iii) a $1.2 million core deposit intangible, iv) and $5.4 million in goodwill.

 

The branch acquisition has been accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of the acquired branches were recorded on the Company’s balance sheet at their fair values as of July 15, 2016 and the related results of operations for the acquired branches have been included in the Company’s consolidated statement of comprehensive income since that date. The goodwill recorded in the branch exchange is deductible for tax purposes.

 

In addition to the acquisitions completed during 2016 discussed above, on June 21, 2016, the Company announced that it had reached an agreement to acquire Carolina Bank Holdings, Inc. (“Carolina Bank”), headquartered in Greensboro, North Carolina, with a total deal value of $97.3 million. The merger consideration is a combination of both cash and stock, with each share of Carolina Bank common stock being exchanged for either $20.00 in cash or 1.002 shares of First Bancorp stock, subject to the total consideration being 75% stock / 25% cash. Carolina Bank operates eight branches located in Greensboro, High Point, Burlington, and Winston-Salem, North Carolina and also operates three mortgage offices in North Carolina. The acquisition is a natural extension of the Company’s recent expansion into these high-growth areas. As of September 30, 2016, Carolina Bank had $709 million in total assets, $546 million in gross loans, and $601 million in total deposits. Subject to regulatory approval and the satisfaction of customary closing conditions, the transaction is expected to close in the fourth quarter of 2016 or the first quarter of 2017.

 

Note 5 – Equity-Based Compensation Plans

 

The Company recorded total stock-based compensation expense of $146,000 and $150,000 for the three months ended September 30, 2016 and 2015, respectively, and $527,000 and $554,000 for the nine months ended September 30, 2016 and 2015, respectively. Of the $527,000 in expense that was recorded in 2016, approximately $129,000 related to the June 1, 2016 director grants, which is classified as “other operating expenses” in the Consolidated Statements of Income. The remaining $398,000 in expense relates to the employee grants discussed below and is recorded as “salaries expense.” Stock based compensation is reflected as an adjustment to cash flows from operating activities on the Company’s Consolidated Statement of Cash Flows. The Company recognized $206,000 and $216,000 of income tax benefits related to stock based compensation expense in the income statement for the nine months ended September 30, 2016 and 2015, respectively.

 

At September 30, 2016, the Company had the following equity-based compensation plans: the First Bancorp 2014 Equity Plan, the First Bancorp 2007 Equity Plan, and the First Bancorp 2004 Stock Option Plan. The Company’s shareholders approved all equity-based compensation plans. The First Bancorp 2014 Equity Plan became effective upon the approval of shareholders on May 8, 2014. As of September 30, 2016, the First Bancorp 2014 Equity Plan was the only plan that had shares available for future grants, and there were 850,308 shares remaining available for grant.

 

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

 

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

 

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

 

As it relates to director equity grants, the Company grants common shares, valued at approximately $16,000 to each non-employee director (currently eight in total) in June of each year. Compensation expense associated with these director grants is recognized on the date of grant since there are no vesting conditions. On June 1, 2016, the Company granted 6,584 shares of common stock to non-employee directors (823 shares per director), at a fair market value of $19.56 per share, which was the closing price of the Company’s common stock on that date. On June 1, 2015, the Company granted 8,176 shares of common stock to non-employee directors (1,022 shares per director), at a fair market value of $15.75 per share, which was the closing price of the Company’s common stock on that date.

 

Based on the Company’s performance in 2013, the Company granted long-term 15,657 restricted shares of common stock to the chief executive officer on February 11, 2014 with a two-year vesting period. The total compensation expense associated with the grant was $278,200. The Company recorded $70,000 in compensation expense related to this grant during the nine months ended September 30, 2015.

 

In 2014, the Company’s Compensation Committee determined that seven of the Company’s senior officers would receive their annual bonus earned under the Company’s annual incentive plan in a mix of 50% cash and 50% stock, with the stock being subject to a three year vesting term. Previously, awards under this plan were paid solely in cash. Accordingly, in February 2015 and February 2016, a total of 40,914 shares of restricted stock were granted related to performance in the preceding fiscal year. Total compensation expense associated with those grants was $742,000 and is being recognized over the vesting period. For the three and nine months ended September 30, 2016, total compensation expense related to these grants was $55,000 and $165,000, respectively compared to $23,000 and $70,000 for the three and nine months ended September 30, 2015, respectively.

 

In 2015 and 2016, the Compensation Committee also granted 87,471 shares of stock to various employees of the Company to promote retention. The total value associated with these grants amounted to $1.6 million, which is being recorded as expense over their three year vesting periods. For the three and nine months ended September 30, 2016, total compensation expense related to these grants was $92,000 and $234,000, respectively compared to $104,000 and $286,000 for the three and nine months ended September 30, 2015, respectively.

 

Based on the vesting schedules of the shares of restricted stock currently outstanding, the Company expects to record $182,000 in stock-based compensation expense over the remainder of 2016.

 

Under the terms of the predecessor plans and the First Bancorp 2014 Equity Plan, stock options can have a term of no longer than ten years. In a change in control (as defined in the plans), unless the awards remain outstanding or substitute equivalent awards are provided, the awards become immediately vested.

 

At September 30, 2016, there were 59,948 stock options outstanding related to the three First Bancorp plans, with exercise prices ranging from $14.35 to $20.80.

 

The following table presents information regarding the activity for the first nine months of 2016 related to the Company’s stock options outstanding:

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   Options Outstanding 
   Number of
Shares
   Weighted-
Average
Exercise
Price
   Weighted-
Average
Contractual
Term (years)
   Aggregate
Intrinsic
Value
 
                 
Balance at January 1, 2016   117,408   $18.12           
                     
   Granted                  
   Exercised   (23,710)   15.84        $81,894 
   Forfeited                  
   Expired   (33,750)   21.39           
                     
Outstanding at September 30, 2016   59,948   $17.18    1.6   $156,086 
                     
Exercisable at September 30, 2016   59,948   $17.18    1.6   $156,086 

 

 

During the nine months ended September 30, 2016, the Company received $375,000 as a result of stock option exercises and recorded insignificant tax benefits from the exercise of nonqualified options during the period. During the nine months ended September 30, 2015, the Company received $32,000 as a result of stock option exercises.

 

The following table presents information regarding the activity for the first nine months of 2016 related to the Company’s outstanding restricted stock:

 

   Long-Term Restricted Stock 
 
 
  Number of
Units
   Weighted-
Average
Grant-Date
Fair Value
 
         
Nonvested at January 1, 2016    55,329   $ 17.31 
           
Granted during the period   62,767    19.37 
Vested during the period   (5,219)   17.77 
Forfeited or expired during the period        
           
Nonvested at September 30, 2016   112,877   $18.44 

 

Note 6 – Earnings Per Common Share

 

Basic Earnings Per Common Share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period, with nonvested restricted stock excluded from the calculation. Diluted Earnings Per Common Share is computed by assuming the issuance of common shares for all potentially dilutive common shares outstanding during the reporting period. The Company’s potentially dilutive common stock issuances relate to grants of stock options and nonvested restricted stock under the Company’s equity-based compensation plans and the Company’s Series C Preferred Stock, which is convertible into common stock on a one-for-one ratio.

 

In computing Diluted Earnings Per Common Share, adjustments are made to the computation of Basic Earnings Per Common shares, as follows. As it relates to stock options, it is assumed that all dilutive stock options are exercised during the reporting period at their respective exercise prices, with the proceeds from the exercises used by the Company to buy back stock in the open market at the average market price in effect during the reporting period. The difference between the number of shares assumed to be exercised and the number of shares bought back is included in the calculation of dilutive securities. As it relates to nonvested restricted stock, cash equal to the average amount of compensation cost attributable to future services and not yet recognized as expense is assumed to be used by the Company to buy back stock in the open market and are deducted from the total number of nonvested restricted stock that is included in the denominator of the calculation. As it relates to the Series C Preferred Stock, it is assumed that the preferred stock was converted to common stock during the reporting period. Dividends on the preferred stock are added back to net income and the shares assumed to be converted are included in the number of shares outstanding.

 

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If any of the potentially dilutive common stock issuances have an anti-dilutive effect, the potentially dilutive common stock issuance is disregarded.

 

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

 

   For the Three Months Ended September 30, 
   2016   2015 

 

($ in thousands except per

   share amounts)

  Income
(Numer-
ator)
   Shares
(Denom-
inator)
   Per Share
Amount
   Income
(Numer-
ator)
   Shares
(Denom-
inator)
   Per Share
Amount
 
                         
Basic EPS                              
Net income available to common shareholders  $4,620    20,007,518   $0.23   $6,868    19,781,789   $0.35 
                               
Effect of Dilutive Securities   58    778,171         58    731,170      
                               
Diluted EPS per common share  $4,678    20,785,689   $0.23   $6,926    20,512,959   $0.34 

 

 

   For the Nine Months Ended September 30, 
   2016   2015 

 

($ in thousands except per

   share amounts)

  Income
(Numer-
ator)
   Shares
(Denom-
inator)
   Per Share
Amount
   Income
(Numer-
ator)
   Shares
(Denom-
inator)
   Per Share
Amount
 
                         
Basic EPS                              
Net income available to common shareholders  $18,979    19,904,226   $0.95   $19,671    19,760,807   $1.00 
                               
Effect of Dilutive Securities   175    792,899         175    731,166      
                               
Diluted EPS per common share  $19,154    20,697,125   $0.93   $19,846    20,491,973   $0.97 

 

For both the three and nine months ended September 30, 2016, there were 16,250 options that were antidilutive because the exercise price exceeded the average market price for the period, and thus are not included in the calculation to determine the effect of dilutive securities. For the both the three and nine months ended September 30, 2015, there were 52,500 options that were antidilutive.

 

Note 7 – Securities

 

The book values and approximate fair values of investment securities at September 30, 2016 and December 31, 2015 are summarized as follows:

 

   September 30, 2016   December 31, 2015 
   Amortized   Fair   Unrealized   Amortized   Fair   Unrealized 
($ in thousands)  Cost   Value   Gains   (Losses)   Cost   Value   Gains   (Losses) 
                                 
Securities available for sale:                                        
  Government-sponsored enterprise securities  $3,000    2,999        (1)   19,000    18,972    1    (29)
  Mortgage-backed securities   160,267    161,443    1,441    (265)   122,474    121,553    348    (1,269)
  Corporate bonds   33,842    34,571    852    (123)   25,216    24,946        (270)
  Equity securities   83    143    67    (7)   88    143    64    (9)
Total available for sale  $197,192    199,156    2,360    (396)   166,778    165,614    413    (1,577)
                                         
Securities held to maturity:                                        
  Mortgage-backed securities  $86,463    87,249    786        102,509    101,767        (742)
  State and local governments   49,345    52,265    2,920        52,101    55,379    3,284    (6)
Total held to maturity  $135,808    139,514    3,706        154,610    157,146    3,284    (748)

 

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All of the Company’s mortgage-backed securities were issued by government-sponsored corporations.

 

The following table presents information regarding securities with unrealized losses at September 30, 2016:

 

($ in thousands)  Securities in an Unrealized
Loss Position for
Less than 12 Months
   Securities in an Unrealized
Loss Position for
More than 12 Months
   Total 
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
 
  Government-sponsored enterprise securities  $2,999    1            2,999    1 
  Mortgage-backed securities   11,695    49    17,069    216    28,764    265 
  Corporate bonds   2,500    58    935    65    3,435    123 
  Equity securities           10    7    10    7 
  State and local governments                        
      Total temporarily impaired securities  $17,194    108    18,014    288    35,208    396 

 

The following table presents information regarding securities with unrealized losses at December 31, 2015:

 

($ in thousands)  Securities in an Unrealized
Loss Position for
Less than 12 Months
   Securities in an Unrealized
Loss Position for
More than 12 Months
   Total 
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
 
  Government-sponsored enterprise securities  $5,993    7    2,978    22    8,971    29 
  Mortgage-backed securities   150,853    1,148    27,460    863    178,313    2,011 
  Corporate bonds   24,006    210    940    60    24,946    270 
  Equity securities           17    9    17    9 
  State and local governments   840    6            840    6 
      Total temporarily impaired securities  $181,692    1,371    31,395    954    213,087    2,325 

 

In the above tables, all of the non-equity securities that were in an unrealized loss position at September 30, 2016 and December 31, 2015 are bonds that the Company has determined are in a loss position due primarily to interest rate factors and not credit quality concerns. The Company has evaluated the collectability of each of these bonds and has concluded that there is no other-than-temporary impairment. The Company does not intend to sell these securities, and it is more likely than not that the Company will not be required to sell these securities before recovery of the amortized cost.

 

The Company has also concluded that each of the equity securities in an unrealized loss position at September 30, 2016 and December 31, 2015 was in such a position due to temporary fluctuations in the market prices of the securities. The Company’s policy is to record an impairment charge for any of these equity securities that remains in an unrealized loss position for twelve consecutive months unless the amount is insignificant.

 

The book values and approximate fair values of investment securities at September 30, 2016, by contractual maturity, are summarized in the table below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   Securities Available for Sale   Securities Held to Maturity 
   Amortized   Fair   Amortized   Fair 
($ in thousands)  Cost   Value   Cost   Value 
                 
Debt securities                    
Due within one year  $        1,556    1,571 
Due after one year but within five years   3,000    2,999    16,913    17,703 
Due after five years but within ten years   28,842    29,556    29,711    31,818 
Due after ten years   5,000    5,015    1,165    1,173 
Mortgage-backed securities   160,267    161,443    86,463    87,249 
Total debt securities   197,109    199,013    135,808    139,514 
                     
Equity securities   83    143         
Total securities  $197,192    199,156    135,808    139,514 

 

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At September 30, 2016 and December 31, 2015 investment securities with carrying values of $169,100,000 and $141,379,000, respectively, were pledged as collateral for public deposits.

 

For the nine months ended September 30, 2016, the Company received proceeds from sales of securities of $8,000 and recorded $3,000 in gains from the sales. The Company recorded insignificant losses on securities during the three and nine months ended September 30, 2015.

 

The aggregate carrying amount of cost-method investments was $18,156,000 and $15,468,000 at September 30, 2016 and 2015, respectively, which is recorded within the line item “other assets” on the Company’s Consolidated Balance Sheets. These investments are comprised of Federal Home Loan Bank (“FHLB”) stock and Federal Reserve Bank of Richmond (“FRB”) stock. The FHLB stock had a cost and fair value of $11,100,000 and $8,421,000 at September 30, 2016 and 2015, respectively, and serves as part of the collateral for the Company’s line of credit with the FHLB and is also a requirement for membership in the FHLB system. The FRB stock had a cost and fair value of $7,056,000 and $7,047,000 at September 30, 2016 and 2015, respectively. Periodically, both the FHLB and FRB recalculate the Company’s required level of holdings, and the Company either buys more stock or the redeems a portion of the stock at cost. The Company determined that neither stock was impaired at either period end.

 

Note 8 – Loans and Asset Quality Information

 

Prior to July 1, 2016, Company’s banking subsidiary, First Bank, had certain loans and foreclosed real estate that were covered by loss share agreements between the FDIC and First Bank which afforded First Bank significant loss protection - see Note 2 to the financial statements included in the Company’s 2011 Annual Report on Form 10-K for detailed information regarding FDIC-assisted purchase transactions. On July 1, 2014, the loss share provisions associated with non-single family assets related to the 2009 failed bank acquisition of Cooperative Bank expired. On April 1, 2016, the loss share provisions associated with non-single family assets related to the 2011 failed bank acquisition of The Bank of Asheville expired. Effective July 1, 2016, the Company terminated all of the loss share agreements with the FDIC such that all future losses and recoveries on loans and foreclosed real estate associated with the failed banks acquired through FDIC-assisted transactions will be borne solely by First Bank. As a result of the termination of the agreements, the Company recorded indemnification asset expense of $5.7 million during the three months ended September 30, 2016, which primarily related to the write-off of the remaining indemnification asset associated with the agreements.

 

In the information presented, the term “covered” is used to describe assets that were included in FDIC loss share agreements, while the term “non-covered” refers to the Company’s legacy assets, which are not included in any type of loss share arrangement. As discussed previously, all loss share agreements were terminated effective July 1, 2016 and thus the entire loan portfolio is now classified as non-covered. Certain prior period disclosures will continue to present the breakout of the loan portfolio between covered and non-covered.

 

As a result of the termination of all loss share agreements, the remaining balances associated with those loans and foreclosed real estate were reclassified from the covered portfolio to the non-covered portfolio. Balances related to the expired agreement and the termination of all remaining agreements as of the respective dates is as follows:

 

   Bank of
Asheville non-
single family
agreement
termination
April 1, 2016
   Remaining loss
share agreement
terminations
July 1, 2016
 
Carrying value of total covered loans transferred to non-covered  $17,737    78,387 
Covered nonaccrual loans transferred to non-covered   2,785    4,194 
Covered foreclosed real estate transferred to non-covered   1,165    385 
Allowance for loan losses associated with covered loans
transferred to allowance for non-covered loans
   307    1,074 

 

Page 17

Index  

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

 

($ in thousands)  September 30, 2016   December 31, 2015   September 30, 2015 
   Amount   Percentage   Amount   Percentage   Amount   Percentage 
All loans:                        
                         
Commercial, financial, and agricultural  $248,877    9%   $202,671    8%   $199,630    8% 
Real estate – construction, land development & other land loans   327,863    12%    308,969    12%    294,426    12% 
Real estate – mortgage – residential (1-4 family) first mortgages   756,880    29%    768,559    31%    770,691    31% 
Real estate – mortgage – home equity loans / lines of credit   239,049    9%    232,601    9%    224,639    9% 
Real estate – mortgage – commercial and other   1,026,328    39%    957,587    38%    944,432    38% 
Installment loans to individuals   52,264    2%    47,666    2%    47,120    2% 
    Subtotal   2,651,261    100%    2,518,053    100%    2,480,938    100% 
Unamortized net deferred loan costs   198         873         765      
    Total loans  $2,651,459        $2,518,926        $2,481,703      

 

 

The following is a summary of the major categories of loans outstanding allocated to the non-covered and covered loan portfolios for periods when the FDIC loss share agreements were in effect. There were no covered loans at September 30, 2016:

 

($ in thousands)  December 31, 2015   September 30, 2015 
   Non-covered   Covered   Total   Non-covered   Covered   Total 
                         
Commercial, financial, and agricultural  $201,798    873    202,671    198,624    1,006    199,630 
Real estate – construction, land development & other land loans   305,228    3,741    308,969    290,465    3,961    294,426 
Real estate – mortgage – residential (1-4 family) first mortgages   692,902    75,657    768,559    692,431    78,260    770,691 
Real estate – mortgage – home equity loans / lines of credit   221,995    10,606    232,601    213,435    11,204    224,639 
Real estate – mortgage – commercial and other   945,823    11,764    957,587    932,254    12,178    944,432 
Installment loans to individuals   47,666        47,666    47,120        47,120 
    Subtotal   2,415,412    102,641    2,518,053    2,374,329    106,609    2,480,938 
Unamortized net deferred loan costs   873        873    765        765 
    Total  $2,416,285    102,641    2,518,926    2,375,094    106,609    2,481,703 

 

 

As a result of the termination of the FDIC loss share agreements during the third quarter of 2016, there were no covered loans at September 30, 2016. The follow presents the carrying amount of the covered loans at December 31, 2015 detailed by impaired and nonimpaired purchased loans (as determined on the date of the acquisition):

 

 

 

($ in thousands)

  Impaired
Purchased
Loans –
Carrying
Value
   Impaired
Purchased
Loans –
Unpaid
Principal
Balance
   Nonimpaired
Purchased
Loans –
Carrying
Value
   Nonimpaired
Purchased
Loans -
Unpaid
Principal
Balance
   Total
Covered
Loans –
Carrying
Value
   Total
Covered
Loans –
Unpaid
Principal
Balance
 
Covered loans:                              
Commercial, financial, and agricultural  $        873    886    873    886 
Real estate – construction, land development & other land loans   277    365    3,464    3,457    3,741    3,822 
Real estate – mortgage – residential (1-4 family) first mortgages   102    633    75,555    88,434    75,657    89,067 
Real estate – mortgage – home equity loans / lines of credit   7    14    10,599    12,099    10,606    12,113 
Real estate – mortgage – commercial and other   1,003    3,136    10,761    11,458    11,764    14,594 
     Total  $1,389    4,148    101,252    116,334    102,641    120,482 

 

Page 18

Index  

The following table presents information regarding covered purchased nonimpaired loans since December 31, 2014. The amounts include principal only and do not reflect accrued interest as of the date of the acquisition or beyond. All balances of covered loans were transferred to non-covered as of the termination of the loss share agreements.

 

($ in thousands)

 

    
Carrying amount of nonimpaired covered loans at December 31, 2014  $125,644 
Principal repayments   (30,238)
Transfers to foreclosed real estate   (1,211)
Net loan recoveries   2,306 
Accretion of loan discount   4,751 
Carrying amount of nonimpaired covered loans at December 31, 2015   101,252 
Principal repayments   (7,997)
Transfers to foreclosed real estate   (1,036)
Net loan recoveries   1,784 
Accretion of loan discount   1,908 
Transfer to non-covered loans due to expiration of loss-share agreement, April 1, 2016   (17,530)
Transfer to non-covered loans due to termination of loss-share agreements, July 1, 2016   (78,381)
Carrying amount of nonimpaired covered loans at September 30, 2016  $ 

 

As reflected in the table above, the Company accreted $1,908,000 of the loan discount on covered purchased nonimpaired loans into interest income during 2016 prior to the termination of the loss share agreements. There was no accretion or other activity on covered loans in the quarter ended September 30, 2016 with the exception of the transfer of the balance of covered loans to non-covered status. The Company also accreted $1,645,000 into interest income of loan discount on non-covered nonimpaired purchased loans during the first nine months of 2016.

 

As of September 30, 2016, there was a remaining loan discount of $12,358,000 related to purchased accruing loans, which will be accreted into interest income over the lives of the respective loans. At September 30, 2016, the Company also had $888,000 of loan discount related to purchased nonaccruing loans, which the Company does not expect will be accreted into income.

 

The following table presents information regarding all purchased impaired loans since December 31, 2014, the majority of which were previously covered loans. The Company has applied the cost recovery method to all purchased impaired loans at their respective acquisition dates due to the uncertainty as to the timing of expected cash flows, as reflected in the following table.

 

 

($ in thousands)

 

 

 

Purchased Impaired Loans

  Contractual
Principal
Receivable
   Fair Market
Value
Adjustment –
Write Down
(Nonaccretable
Difference)
   Carrying
Amount
 
Balance at December 31, 2014  $5,859    3,262    2,597 
Change due to payments received   (634)   (102)   (532)
Transfer to foreclosed real estate   (431)   (336)   (95)
Other   (3)   (3)    
Balance at December 31, 2015  $4,791    2,821    1,970 
Change due to payments received   (3,400)   (2,244)   (1,156)
Change due to loan charge-off   (428)   (358)   (70)
Balance at September 30, 2016  $963    219    744 

 

Because of the uncertainty of the expected cash flows, the Company is accounting for each purchased impaired loan under the cost recovery method, in which all cash payments are applied to principal. Thus, there is no accretable yield associated with the above loans. There were no excess payments received during the three months ended September 30, 2016. For the nine month period ended September 30, 2016, the Company received $1,108,000 in payments that exceeded the carrying amount of the related purchased impaired loans, of which $780,000 was recognized as discount accretion loan interest income and $328,000 was recorded as additional loan interest income. For the three and nine months ended September 30, 2015, payments received that exceeded the carrying amount of the related purchased impaired loans were insignificant.

 

Page 19

Index  

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

 

 

 

ASSET QUALITY DATA ($ in thousands)

  September 30,
2016
   December 31,
2015
   September 30,
2015
 
             
Nonperforming assets               
Nonaccrual loans  $32,796    47,810    47,720 
Restructured loans - accruing   27,273    31,489    33,075 
Accruing loans > 90 days past due            
     Total nonperforming loans   60,069    79,299    80,795 
Foreclosed real estate   10,103    9,994    10,873 
Total nonperforming assets  $70,172    89,293    91,668 
                
Total covered nonperforming assets included above (1)  $    12,100    10,767 

 

 

(1) All FDIC loss share agreements were terminated effective July 1, 2016 and, accordingly, assets previously covered under those agreements become non-covered on that date.

 

At September 30, 2016 and 2015, the Company had $1.7 million and $3.0 million in residential mortgage loans in process of foreclosure, respectively.

 

The following is a summary the Company’s nonaccrual loans by major categories.

 

($ in thousands)
 
  September 30,
2016
   December 31,
2015
   September 30,
2015
 
Commercial, financial, and agricultural  $2,253    2,964    2,852 
Real estate – construction, land development & other land loans   3,858    4,704    5,434 
Real estate – mortgage – residential (1-4 family) first mortgages   17,989    23,829    25,206 
Real estate – mortgage – home equity loans / lines of credit   2,441    3,525    2,472 
Real estate – mortgage – commercial and other   6,151    12,571    11,398 
Installment loans to individuals   104    217    358 
  Total  $32,796    47,810    47,720 
                
Total covered nonperforming assets included above  $    7,816    5,373 

  

The following table presents an analysis of the payment status of the Company’s loans as of September 30, 2016.

 

($ in thousands)  30-59
Days Past
Due
   60-89 Days
Past Due
   Nonaccrual
Loans
   Current   Total Loans
Receivable
 
                     
Commercial, financial, and agricultural  $111    90    2,253    246,423    248,877 
Real estate – construction, land development & other land loans   1,117    338    3,858    322,550    327,863 
Real estate – mortgage – residential (1-4 family) first mortgages   2,835    1,052    17,989    735,004    756,880 
Real estate – mortgage – home equity loans / lines of credit   670    65    2,441    235,873    239,049 
Real estate – mortgage – commercial and other   3,670    261    6,151    1,016,246    1,026,328 
Installment loans to individuals   345    258    104    51,557    52,264 
  Total  $8,748    2,064    32,796    2,607,653    2,651,261 
Unamortized net deferred loan costs                       198 
           Total loans                      $2,651,459 

 

The Company had no covered loans and no loans that were past due greater than 90 days and accruing interest at September 30, 2016.

Page 20

Index  

The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2015.

 

($ in thousands)  30-59
Days Past
Due
   60-89 Days
Past Due
   Nonaccrual
Loans
   Current   Total Loans
Receivable
 
                     
Commercial, financial, and agricultural  $999    127    2,964    198,581    202,671 
Real estate – construction, land development & other land loans   1,512    429    4,704    302,324    308,969 
Real estate – mortgage – residential (1-4 family) first mortgages   15,443    3,614    23,829    725,673    768,559 
Real estate – mortgage – home equity loans / lines of credit   1,276    105    3,525    227,695    232,601 
Real estate – mortgage – commercial and other   5,591    864    12,571    938,561    957,587 
Installment loans to individuals   278    255    217    46,916    47,666 
           Total loans  $25,099    5,394    47,810    2,439,750    2,518,053 
Unamortized net deferred loan costs                       873 
           Total loans                      $2,518,926 
                          
Covered loans included above  $3,313    402    7,816    91,110    102,641 

 

The Company had no non-covered or covered loans that were past due greater than 90 days and accruing interest at December 31, 2015.

 

As previously discussed in Note 4 – Acquisitions and Divestures, in connection with the branch exchange effective July 15, 2016, the Company acquired $152.2 million in performing loans and sold $150.6 million in performing loans. Allowance for loan losses totaling $1.0 million associated with loans sold were removed from the allowance as of the date of sale.

 

Page 21

Index  

The following table presents the activity in the allowance for loan losses loans for the three and nine months ended September 30, 2016. There were no covered loans at September 30, 2016 and all reserves associated with previously covered loans have been transferred to the non-covered allowance.

 

 

($ in thousands)

  Commercial,
Financial,
and
Agricultural
   Real Estate

Construction,
Land
Development,
& Other
Land Loans
   Real Estate

Residential
(1-4 Family)
First
Mortgages
   Real Estate
– Mortgage
– Home
Equity
Lines of
Credit
   Real Estate
– Mortgage

Commercial
and Other
   Installment
Loans to
Individuals
   Unallo
-cated
   Covered   Total 
 
As of and for the three months ended September 30, 2016
                                     
Beginning balance  $4,282    2,899    7,860    2,285    5,571    1,480    572    1,074    26,023 
Charge-offs   (495)   (161)   (692)   (196)   (288)   (223)           (2,055)
Recoveries   252    588    377    69    317    55            1,658 
Transfer from covered status       3    788    281    1        1    (1,074)    
Removed due to branch loan sale   (263)   (39)   (347)   (110)   (228)   (63)   (1)       (1,051)
Provisions   755    (612)   (492)   54    (165)   (38)   498         
Ending balance  $4,531    2,678    7,494    2,383    5,208    1,211    1,070        24,575 
                                              
As of and for the nine months ended September 30, 2016
                                              
Beginning balance  $4,742    3,754    7,832    2,893    5,816    1,051    696    1,799    28,583 
Charge-offs   (1,229)   (638)   (3,383)   (930)   (850)   (741)       (244)   (8,015)
Recoveries   554    799    672    188    602    308        1,958    5,081 
Transfer from covered status   56    65    839    293    127        1    (1,381)    
Removed due to branch loan sale   (263)   (39)   (347)   (110)   (228)   (63)   (1)       (1,051)
Provisions   671    (1,263)   1,881    49    (259)   656    374    (2,132)   (23)
Ending balance  $4,531    2,678    7,494    2,383    5,208    1,211    1,070        24,575 
                                              
Ending balances as of September 30, 2016:  Allowance for loan losses
                                              
Individually evaluated for impairment  $9    169    1,306    5    444                1,933 
Collectively evaluated for impairment  $4,522    2,509    6,188    2,372    4,764    1,211    1,070        22,636 
Loans acquired with deteriorated credit quality  $            6                    6 
                                              
Loans receivable as of September 30, 2016:
                                              
Ending balance – total  $248,877    327,863    756,880    239,049    1,026,328    52,264            2,651,261 
Unamortized net deferred loan costs                                           198 
Total loans                                          $2,651,459 
                                              
Ending balances as of September 30, 2016: Loans
                                              
Individually evaluated for impairment  $1,732    4,181    21,611    310    11,291    1            39,126 
Collectively evaluated for impairment  $247,145    323,682    735,062    238,733    1,014,506    52,263            2,611,391 
Loans acquired with deteriorated credit quality  $        207    6    531                744 

Page 22

Index  

The following table presents the activity in the allowance for loan losses for non-covered and covered loans for the year ended December 31, 2015.

 

($ in thousands)  Commercial,
Financial,
and
Agricultural
   Real Estate –
Construction,
Land
Development,
& Other Land
Loans
   Real Estate
– Residential
(1-4 Family)
First
Mortgages
   Real
Estate–
Mortgage –
Home
Equity
Lines of
Credit
   Real
Estate–
Mortgage–
Commercial
and Other
   Installment
Loans to
Individuals
   Unallo-
cated
   Total Non-
Covered
   Total
Covered
 
                                     
As of and for the year ended December 31, 2015    
Beginning balance  $6,769    8,158    10,136    4,753    6,466    1,916    147    38,345    2,281 
Charge-offs   (2,908)   (3,034)   (4,904)   (1,054)   (2,804)   (2,411)       (17,115)   (1,316)
Recoveries   831    998    279    121    904    413        3,546    3,622 
Provisions   50    (2,368)   2,321    (927)   1,250    1,133    549    2,008    (2,788)
Ending balance  $4,742    3,754    7,832    2,893    5,816    1,051    696    26,784    1,799 
                                              
Ending balances as of December 31, 2015:  Allowance for loan losses
Individually evaluated for impairment  $304    241    1,440    321    336    45        2,687    554 
Collectively evaluated for impairment  $4,438    3,513    6,392    2,572    5,480    1,006    696    24,097    1,175 
Loans acquired with deteriorated credit quality  $                                70 
                                              
Loans receivable as of December 31, 2015:
Ending balance – total  $201,798    305,228    692,902    221,995    945,823    47,666        2,415,412    102,641 
Unamortized net deferred loan costs                                      873     
Total non-covered loans                                      2,416,285    102,641 
                                              
Ending balances as of December 31, 2015: Loans
Individually evaluated for impairment  $992    4,898    21,325    758    16,605    76        44,654    7,055 
Collectively evaluated for impairment  $200,806    300,330    671,577    221,237    928,637    47,590        2,370,177    94,197 
Loans acquired with deteriorated credit quality  $                581            581    1,389 

 

Page 23

Index  

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

 

($ in thousands)  Commercial,
Financial,
and
Agricultural
   Real Estate –
Construction,
Land
Development,
& Other Land
Loans
   Real Estate
– Residential
(1-4 Family)
First
Mortgages
   Real
Estate–
Mortgage–
Home
Equity
Lines of
Credit
   Real
Estate–
Mortgage–
Commercial
and Other
   Installment
Loans to
Individuals
   Unallo-
cated
   Total Non-
Covered
   Total
Covered
 
                                     
As of and for the three months ended September 30, 2015    
Beginning balance  $5,387    5,427    8,082    3,383    5,664    1,116    1,096    30,155    1,935 
Charge-offs   (473)   (642)   (1,692)   (129)   (289)   (419)       (3,644)   (84)
Recoveries   354    626    82    47    150    118        1,377    1,730 
Provisions   (187)   (1,088)   1,275    (498)   226    223    316    267    (1,681)
Ending balance  $5,081    4,323    7,747    2,803    5,751    1,038    1,412    28,155    1,900 
                                              
As of and for the nine months ended September 30, 2015
Beginning balance  $6,769    8,158    10,136    4,753    6,466    1,916    147    38,345    2,281 
Charge-offs   (2,774)   (2,650)   (3,949)   (726)   (2,311)   (1,997)       (14,407)   (1,200)
Recoveries   697    944    241    105    545    313        2,845    2,928 
Provisions   389    (2,129)   1,319    (1,329)   1,051    806    1,265    1,372    (2,109)
Ending balance  $5,081    4,323    7,747    2,803    5,751    1,038    1,412    28,155    1,900 
                                              
Ending balances as of September 30, 2015:  Allowance for loan losses
Individually evaluated for impairment  $93    270    1,502    46    456    42        2,409    466 
Collectively evaluated for impairment  $4,988    4,053    6,245    2,757    5,295    996    1,412    25,746    1,391 
Loans acquired with deteriorated credit quality  $                                43 
                                              
Loans receivable as of September 30, 2015:
Ending balance – total  $198,624    290,465    692,431    213,435    932,254    47,120        2,374,329    106,609 
Unamortized net deferred loan costs                                      765     
Total non-covered loans                                      2,375,094    106,609 
                                              
Ending balances as of September 30, 2015: Loans
Individually evaluated for impairment  $909    5,126    20,857    435    18,521    77        45,925    5,167 
Collectively evaluated for impairment  $197,715    285,339    671,574    213,000    913,136    47,043        2,327,807    99,892 
Loans acquired with deteriorated credit quality  $                597            597    1,520 

 

Page 24

Index  

 

The following table presents loans individually evaluated for impairment as of September 30, 2016.

 

 

($ in thousands)

  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
 
Loans with no related allowance recorded:                    
                     
Commercial, financial, and agricultural  $1,674    1,796        872 
Real estate – mortgage – construction, land development & other land loans   3,397    4,703        3,746 
Real estate – mortgage – residential (1-4 family) first mortgages   10,321    12,522        9,098 
Real estate – mortgage –home equity loans / lines of credit   143    202        140 
Real estate – mortgage –commercial and other   6,103    7,049        8,777 
Installment loans to individuals   1    2        2 
Total impaired loans with no allowance  $21,639    26,274        22,635 
                     
Loans with an allowance recorded:                    
                     
Commercial, financial, and agricultural  $58    110    9    229 
Real estate – mortgage – construction, land development & other land loans   784    800    169    861 
Real estate – mortgage – residential (1-4 family) first mortgages   11,497    11,725    1,306    12,021 
Real estate – mortgage –home equity loans / lines of credit   173    179    11    358 
Real estate – mortgage –commercial and other   5,719    5,887    444    5,548 
Installment loans to individuals               61 
Total impaired loans with allowance  $18,231    18,701    1,939    19,078 

 

Interest income recorded on impaired loans during the nine months ended September 30, 2016 was insignificant.

 

The following table presents loans individually evaluated for impairment as of December 31, 2015.

 

 

($ in thousands)

  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
 
Impaired loans with no related allowance recorded:                    
                     
Commercial, financial, and agricultural  $360    422        235 
Real estate – mortgage – construction, land development & other land loans   3,944    7,421        4,651 
Real estate – mortgage – residential (1-4 family) first mortgages   12,346    14,644        11,258 
Real estate – mortgage –home equity loans / lines of credit   121    175        505 
Real estate – mortgage –commercial and other   13,156    16,818        18,112 
Installment loans to individuals   3    4        5 
Total impaired loans with no allowance  $29,930    39,484        34,766 
                     
Total covered impaired loans with no allowance included above  $5,231    8,529        5,607 
                     
Impaired loans with an allowance recorded:                    
                     
Commercial, financial, and agricultural  $676    709    348    616 
Real estate – mortgage – construction, land development & other land loans   954    976    241    1,980 
Real estate – mortgage – residential (1-4 family) first mortgages   15,285    15,691    1,912    15,636 
Real estate – mortgage –home equity loans / lines of credit   667    678    344    430 
Real estate – mortgage –commercial and other   6,094    6,279    421    4,950 
Installment loans to individuals   73    80    45    111 
Total impaired loans with allowance  $23,749    24,413    3,311    23,723 
                     
Total covered impaired loans with allowance included above  $3,213    3,476    624    3,742 

 

Interest income recorded on impaired loans during the year ended December 31, 2015 was insignificant.

 

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Index  

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

 

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

 

  Risk Grade Description
Pass:  
  1 Loans with virtually no risk, including cash secured loans.
  2 Loans with documented significant overall financial strength.  These loans have minimum chance of loss due to the presence of multiple sources of repayment – each clearly sufficient to satisfy the obligation.
  3 Loans with documented satisfactory overall financial strength.  These loans have a low loss potential due to presence of at least two clearly identified sources of repayment – each of which is sufficient to satisfy the obligation under the present circumstances.
  4 Loans to borrowers with acceptable financial condition.  These loans could have signs of minor operational weaknesses, lack of adequate financial information, or loans supported by collateral with questionable value or marketability.  
  5 Loans that represent above average risk due to minor weaknesses and warrant closer scrutiny by management. Collateral is generally required and felt to provide reasonable coverage with realizable liquidation values in normal circumstances. Repayment performance is satisfactory.
 

P

(Pass)

Consumer loans (<$500,000) that are of satisfactory credit quality with borrowers who exhibit good personal credit history, average personal financial strength and moderate debt levels.  These loans generally conform to Bank policy, but may include approved mitigated exceptions to the guidelines.  
Special Mention:  
  6 Existing loans with defined weaknesses in primary source of repayment that, if not corrected, could cause a loss to the Bank.
Classified:  
  7 An existing loan inadequately protected by the current sound net worth and paying capacity of the obligor or the collateral pledged, if any.  These loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.
  8 Loans that have a well-defined weakness that make the collection or liquidation in full highly questionable and improbable.  Loss appears imminent, but the exact amount and timing is uncertain.
  9 Loans that are considered uncollectible and are in the process of being charged-off.  This grade is a temporary grade assigned for administrative purposes until the charge-off is completed.
 

F

(Fail)

Consumer loans (<$500,000) with a well-defined weakness, such as exceptions of any kind with no mitigating factors, history of paying outside the terms of the note, insufficient income to support the current level of debt, etc.  

 

In the second quarter of 2016, the Company made nonsubstantive changes to the numerical scale of risk grades. Previously, the description for grade 5 noted above was assigned a grade of 9. As a result of the change, most grade 9 loans were assigned a grade of 5 and the numerical grade assignments for the previous grades of 5 and below were moved one row lower in the descriptions. In the tables below, prior periods have been adjusted to be consistent with the presentation for September 30, 2016.

 

Also during the second quarter of 2016, the Company introduced a pass/fail grade system for smaller balance consumer loans (balances less than $500,000), primarily residential home loans and installment consumer loans. Accordingly, all such consumer loans are no longer graded on a scale of 1-9, but instead are assigned a rating of “pass” or “fail”, with “fail” loans being considered as classified loans. As of the implementation of the revised grade definitions, there were approximately $29.7 million of consumer loans that had previously been assigned grade of “special mention” and were assigned a rating of “pass”, which impacts the comparability of the September 30, 2016 table below to prior periods.

 

The changes noted above had no significant impact on the Company’s allowance for loan loss calculation.

 

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Index  

The following table presents the Company’s recorded investment in loans by credit quality indicators as of September 30, 2016.

 

($ in thousands)    
   Pass   Special
Mention Loans
   Classified
Accruing Loans
   Classified
Nonaccrual
Loans
   Total 
                     
Commercial, financial, and agricultural  $233,267    10,062    3,295    2,253    248,877 
Real estate – construction, land development & other land loans   305,881    9,693    8,431    3,858    327,863 
Real estate – mortgage – residential (1-4 family) first mortgages   684,241    16,997    37,653    17,989    756,880 
Real estate – mortgage – home equity loans / lines of credit   226,103    1,394    9,111    2,441    239,049 
Real estate – mortgage – commercial and other   977,505    27,950    14,722    6,151    1,026,328 
Installment loans to individuals   51,561    349    250    104    52,264 
  Total  $2,478,558    66,445    73,462    32,796    2,651,261 
Unamortized net deferred loan costs                       198 
            Total loans                       2,651,459 

 

The following table presents the Company’s recorded investment in loans by credit quality indicators as of December 31, 2015.

 

($ in thousands)    
   Pass   Special
Mention Loans
   Classified
Accruing Loans
   Classified
Nonaccrual
Loans
   Total 
                     
Commercial, financial, and agricultural  $192,454    3,733    3,520    2,964    202,671 
Real estate – construction, land development & other land loans   280,647    13,489    10,129    4,704    308,969 
Real estate – mortgage – residential (1-4 family) first mortgages   664,618    39,895    40,217    23,829    768,559 
Real estate – mortgage – home equity loans / lines of credit   212,391    7,374    9,311    3,525    232,601 
Real estate – mortgage – commercial and other   897,579    33,155    14,282    12,571    957,587 
Installment loans to individuals   46,209    776    464    217    47,666 
  Total  $2,293,898    98,422    77,923    47,810    2,518,053 
Unamortized net deferred loan costs                       873 
Total loans                       2,518,926 
                          
Total covered loans included above  $71,398    7,423    16,004    7,816    102,641 

 

 

Troubled Debt Restructurings

 

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

 

The vast majority of the Company’s troubled debt restructurings modified related to interest rate reductions combined with restructured amortization schedules. The Company does not generally grant principal forgiveness.

 

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

 

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Index  

The following table presents information related to loans modified in a troubled debt restructuring during the three months ended September 30, 2016 and 2015.

 

($ in thousands)  For the three months ended
September 30, 2016
   For the three months ended
September 30, 2015
 
   Number of
Contracts
   Pre-
Modification
Restructured
Balances
   Post-
Modification
Restructured
Balances
   Number of
Contracts
   Pre-
Modification
Restructured
Balances
   Post-
Modification
Restructured
Balances
 
TDRs – Accruing                              
Commercial, financial, and agricultural   1   $1,071   $1,071       $   $ 
Real estate – construction, land development & other land loans               1    235    235 
Real estate – mortgage – residential (1-4 family) first mortgages                        
Real estate – mortgage – home equity loans / lines of credit               2    411    411 
Real estate – mortgage – commercial and other                        
Installment loans to individuals                        
                               
TDRs – Nonaccrual                              
Commercial, financial, and agricultural                        
Real estate – construction, land development & other land loans               2    495    495 
Real estate – mortgage – residential (1-4 family) first mortgages               1    95    95 
Real estate – mortgage – home equity loans / lines of credit                        
Real estate – mortgage – commercial and other                        
Installment loans to individuals                        
                               
Total TDRs arising during period   1   $1,071   $1,071    6   $1,236   $1,236 

 

The following table presents information related to loans modified in a troubled debt restructuring during the nine months ended September 30, 2016 and 2015.

 

($ in thousands)  For the nine months ended
September 30, 2016
   For the nine months ended
September 30, 2015
 
   Number of
Contracts
   Pre-
Modification
Restructured
Balances
   Post-
Modification
Restructured
Balances
   Number of
Contracts
   Pre-
Modification
Restructured
Balances
   Post-
Modification
Restructured
Balances
 
TDRs – Accruing                              
Commercial, financial, and agricultural   1   $1,071   $1,071    2   $52   $52 
Real estate – construction, land development & other land loans               1    235    235 
Real estate – mortgage – residential (1-4 family) first mortgages               2    265    265 
Real estate – mortgage – home equity loans / lines of credit                        
Real estate – mortgage – commercial and other               4    557    557 
Installment loans to individuals                        
                               
TDRs – Nonaccrual                              
Commercial, financial, and agricultural                        
Real estate – construction, land development & other land loans               3    496    496 
Real estate – mortgage – residential (1-4 family) first mortgages               4    399    399 
Real estate – mortgage – home equity loans / lines of credit                        
Real estate – mortgage – commercial and other                        
Installment loans to individuals                        
                               
Total TDRs arising during period   1   $1,071   $1,071    16   $2,004   $2,004 
                               
Total covered TDRs arising during period included above               2   $139   $139 

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Index  

Accruing restructured loans that were modified in the previous 12 months and that defaulted during the three months ended September 30, 2016 and 2015 are presented in the table below. The Company considers a loan to have defaulted when it becomes 90 or more days delinquent under the modified terms, has been transferred to nonaccrual status, or has been transferred to foreclosed real estate.

 

($ in thousands)  For the three months ended
September 30, 2016
   For the three months ended
September 30, 2015
 
   Number of
Contracts
   Recorded
Investment
   Number of
Contracts
   Recorded
Investment
 
                 
Accruing TDRs that subsequently defaulted                    
Real estate – mortgage – residential (1-4 family first mortgages)      $    1   $152 
                     
Total accruing TDRs that subsequently defaulted      $    1   $152 

 

Accruing restructured loans that were modified in the previous 12 months and that defaulted during the nine months ended September 30, 2016 and 2015 are presented in the table below.

 

($ in thousands)  For the nine months ended
September 30, 2016
   For the nine months ended
September 30, 2015
 
   Number of
Contracts
   Recorded
Investment
   Number of
Contracts
   Recorded
Investment
 
                 
Accruing TDRs that subsequently defaulted                    
Commercial, financial, and agricultural   1   $44    1   $7 
Real estate – mortgage – residential (1-4 family first mortgages)           2    186 
Real estate – mortgage – commercial and other   1    21         
                     
Total accruing TDRs that subsequently defaulted   2   $65    3   $193 
Total covererd accruing TDRs that subsequently defaulted included above   1   $44       $ 

 

 

Note 9 – Deferred Loan Costs

 

The amount of loans shown on the Consolidated Balance Sheets includes net deferred loan costs of approximately $198,000, $873,000, and $765,000 at September 30, 2016, December 31, 2015, and September 30, 2015, respectively.

 

Note 10 – FDIC Indemnification Asset

 

As discussed previously in Note 8 – Loans and Asset Quality Information, the Company terminated all loss share agreements with the FDIC effective July 1, 2016. As a result, the remaining balance in the FDIC Indemnification Asset, which represented the estimated amount to be received from the FDIC under the loss share agreements, was written off as indemnification asset expense as of the termination date.

 

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

 

($ in thousands)  September 30,
2016
   December 31,
2015
   September 30,
2015
 
Receivable (payable) related to loss claims incurred (recoveries), not yet received (paid), net  $    (633)   (2,427)
Receivable related to estimated future claims on loans       8,675    9,522 
Receivable related to estimated future claims on foreclosed real estate       397    554 
     FDIC indemnification asset  $    8,439    7,649 

 

Page 29

Index  

The following presents a rollforward of the FDIC indemnification asset since December 31, 2015 through agreement termination July 1, 2016.

 

($ in thousands)    
Balance at December 31, 2015  $8,439 
Decrease related to favorable changes in loss estimates   (2,246)
Increase related to reimbursable expenses   205 
Cash paid    1,554 
Amortization associated with accretion of loan discount   (2,005)
Other   (236)
Write off of asset balance upon termination of FDIC loss share agreements effective July 1, 2016   (5,711)
Balance at September 30, 2016  $ 

 

Note 11 – Goodwill and Other Intangible Assets

 

The following is a summary of the gross carrying amount and accumulated amortization of amortizable intangible assets as of September 30, 2016, December 31, 2015, and September 30, 2015 and the carrying amount of unamortized intangible assets as of those same dates. Activity related to transactions during the year includes the following:

 

(1)In connection with the January 1, 2016 acquisition of Bankingport, Inc., an insurance agency located in Sanford, North Carolina, the Company recorded $1,693,000 in goodwill, $591,000 in a customer list intangible, and $92,000 in other amortizable intangible assets.
(2)In connection with the May 4, 2016 acquisition of SBA Complete, Inc., a SBA loan consulting firm, the Company recorded $6,013,000 in goodwill, $1,100,000 in a customer list intangible, and $940,000 in other amortizable intangible assets.
(3)In connection with the branch exchange transaction with First Community Bank in Bluefield, Virginia, the Company recorded a net increase of $1,851,000 in goodwill and $1,170,000 in core deposit premiums.

 

In addition to the above acquisition related activity, the Company recorded $208,000 in servicing assets associated with the guaranteed portion of SBA loans originated and sold during the quarter. Servicing assets are recorded at fair value and amortized as a reduction of service fee income over the expected life of the related loans.

 

   September 30, 2016   December 31, 2015   September 30, 2015 
($ in thousands)  Gross Carrying
Amount
   Accumulated
Amortization
   Gross Carrying
Amount
   Accumulated
Amortization
   Gross Carrying
Amount
   Accumulated
Amortization
 
Amortizable intangible assets:                              
   Customer lists  $2,369    668    678    550    678    539 
   Core deposit premiums   9,730    7,902    8,560    7,352    8,560    7,183 
   Other   1,032    166                 
        Total  $13,131    8,736    9,238    7,902    9,238    7,722 
                               
SBA servicing asset  $208                        
                               
Unamortizable intangible assets:                              
   Goodwill  $75,392         65,835         65,835      

 

Amortization expense totaled $387,000 and $181,000 for the three months ended September 30, 2016 and 2015, respectively. Amortization expense totaled $834,000 and $541,000 for the nine months ended September 30, 2016 and 2015, respectively.

 

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Index  

The following table presents the estimated amortization expense for the last quarter of calendar year 2016 and for each of the four calendar years ending December 31, 2020 and the estimated amount amortizable thereafter. These estimates are subject to change in future periods to the extent management determines it is necessary to make adjustments to the carrying value or estimated useful lives of amortized intangible assets.

 

($ in thousands)

 

  Estimated Amortization
Expense
 
October 1 to December 31, 2016  $376 
2017   1,240 
2018   874 
2019   665 
2020   437 
Thereafter   803 
         Total  $4,395 
      

 

 

Note 12 – Pension Plans

 

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

 

The Company recorded pension income totaling $163,000 and $300,000 for the three months ended September 30, 2016 and 2015, respectively, which primarily related to investment income from the Pension Plan’s assets. The following table contains the components of the pension income.

 

   For the Three Months Ended September 30, 
   2016   2015   2016   2015   2016 Total   2015 Total 
($ in thousands)  Pension Plan   Pension Plan   SERP   SERP   Both Plans   Both Plans 
Service cost – benefits earned during the period  $        27    36    27    36 
Interest cost   375    341    60    52    435    393 
Expected return on plan assets   (675)   (713)           (675)   (713)
Amortization of transition obligation                        
Amortization of net (gain)/loss   59        (9)   (16)   50    (16)
Amortization of prior service cost                        
   Net periodic pension (income)/cost  $(241)   (372)   78    72    (163)   (300)

 

The Company recorded pension income totaling $488,000 and $855,000 for the nine months ended September 30, 2016 and 2015, respectively, which primarily related to investment income from the Pension Plan’s assets. The following table contains the components of the pension income.

 

   For the Nine Months Ended September 30, 
   2016   2015   2016   2015   2016 Total   2015 Total 
($ in thousands)  Pension Plan   Pension Plan   SERP   SERP   Both Plans   Both Plans 
Service cost – benefits earned during the period  $        80    164    80    164 
Interest cost   1,127    1,023    178    154    1,305    1,177 
Expected return on plan assets   (2,025)   (2,133)           (2,025)   (2,133)
Amortization of transition obligation                        
Amortization of net (gain)/loss   179        (27)   (63)   152    (63)
Amortization of prior service cost                        
   Net periodic pension cost (income)  $(719)   (1,110)   231    255    (488)   (855)

 

The Company’s contributions to the Pension Plan are based on computations by independent actuarial consultants and are intended to be deductible for income tax purposes. The contributions are invested to provide for benefits under the Pension Plan. The Company does not expect to contribute to the Pension Plan in 2016.

 

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

Page 31

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Note 13 – Comprehensive Income

 

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

 

($ in thousands)

  September 30,
2016
   December 31,
2015
   September 30,
2015
 
Unrealized gain (loss) on securities available for sale  $1,964    (1,163)   (843)
     Deferred tax asset (liability)   (767)   454    329 
Net unrealized gain (loss) on securities available for sale   1,197    (709)   (514)
                
Additional pension liability   (4,505)   (4,657)   (320)
     Deferred tax liability   1,757    1,816    124 
Net additional pension liability   (2,748)   (2,841)   (196)
                
Total accumulated other comprehensive loss  $(1,551)   (3,550)   (710)

 

The following table discloses the changes in accumulated other comprehensive income (loss) for the nine months ended September 30, 2016 (all amounts are net of tax).

 

($ in thousands)

 

  Unrealized Gain
(Loss) on
Securities
Available for Sale
   Additional
Pension Asset
(Liability)
   Total 
Beginning balance at January 1, 2016  $(709)   (2,841)   (3,550)
     Other comprehensive income before reclassifications   1,908        1,908 
     Amounts reclassified from accumulated other comprehensive income   (2)   93    91 
Net current-period other comprehensive income   1,906    93    1,999 
                
Ending balance at September 30, 2016  $1,197    (2,748)   (1,551)

 

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

 

($ in thousands)

 

  Unrealized Gain
(Loss) on
Securities
Available for Sale
   Additional
Pension Asset
(Liability)
   Total 
Beginning balance at January 1, 2015  $(421)   (157)   (578)
     Other comprehensive loss before reclassifications   (94)       (94)
     Amounts reclassified from accumulated other comprehensive income   1    (39)   (38)
Net current-period other comprehensive loss   (93)   (39)   (132)
                
Ending balance at September 30, 2015  $(514)   (196)   (710)

 

 

Note 14 – Fair Value

 

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

 

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

 

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

 

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

 

The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at September 30, 2016.

 

($ in thousands)        
Description of Financial Instruments  Fair Value at
September 30, 2016
   Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
   Significant Other
Observable Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Recurring                    
     Securities available for sale:                    
        Government-sponsored enterprise securities  $2,999        2,999     
        Mortgage-backed securities   161,443        161,443     
        Corporate bonds   34,571        34,571     
        Equity securities   143        143     
          Total available for sale securities  $199,156        199,156     
                     
Nonrecurring                    
     Impaired loans  $16,437            16,437 
     Foreclosed real estate   10,103            10,103 
                     

 

The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at December 31, 2015.

 

($ in thousands)        
Description of Financial Instruments  Fair Value at
December 31,
2015
   Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
   Significant Other
Observable Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Recurring                    
Securities available for sale:                    
Government-sponsored enterprise securities  $18,972        18,972     
Mortgage-backed securities   121,553        121,553     
Corporate bonds   24,946        24,946     
Equity securities   143        143     
Total available for sale securities  $165,614        165,614     
                     
Nonrecurring                    
     Impaired loans  $20,645            20,645 
     Foreclosed real estate   9,994            9,994 

 

 

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

 

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

 

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

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

 

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

 

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of September 30, 2016, the significant unobservable inputs used in the fair value measurements were as follows:

 

($ in thousands)       
Description  Fair Value at
September
30, 2016
   Valuation
Technique
  Significant Unobservable
Inputs
  General Range
of Significant
Unobservable
Input Values
Impaired loans  $16,437   Appraised value; PV of expected cash flows  Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell  0-10%
Foreclosed real estate   10,103   Appraised value; List or contract price  Discounts to reflect current market conditions and estimated costs to sell  0-10%
               

 

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of December 31, 2015, the significant unobservable inputs used in the fair value measurements were as follows:

 

($ in thousands)       
Description  Fair Value at
December 31,
2015
   Valuation
Technique
  Significant Unobservable
Inputs
  General Range
of Significant
Unobservable
Input Values
Impaired loans  $20,645   Appraised value; PV of expected cash flows  Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell  0-10%
Foreclosed real estate   9,994   Appraised value; List or contract price  Discounts to reflect current market conditions, abbreviated holding period and estimated costs to sell  0-10%
               

 

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Transfers of assets or liabilities between levels within the fair value hierarchy are recognized when an event or change in circumstances occurs. There were no transfers between Level 1 and Level 2 for assets or liabilities measured on a recurring basis during the three or nine months ended September 30, 2016 or 2015.

 

For the nine months ended September 30, 2016 and 2015, the increase (decrease) in the fair value of securities available for sale was $3,128,000 and ($153,000), respectively, which is included in other comprehensive income (net of tax expense (benefit) of $1,222,000 and ($60,000), respectively). Fair value measurement methods at September 30, 2016 and 2015 are consistent with those used in prior reporting periods.

 

The carrying amounts and estimated fair values of financial instruments at September 30, 2016 and December 31, 2015 are as follows:

 

      September 30, 2016   December 31, 2015 

 

($ in thousands)

 
  Level in Fair
Value
Hierarchy
  Carrying
Amount
   Estimated
Fair Value
   Carrying
Amount
   Estimated
Fair Value
 
                    
Cash and due from banks, noninterest-bearing  Level 1  $64,145    64,145    53,285    53,285 
Due from banks, interest-bearing  Level 1   217,188    217,188    213,426    213,426 
Federal funds sold  Level 1           557    557 
Securities available for sale  Level 2   199,156    199,156    165,614    165,614 
Securities held to maturity  Level 2   135,808    139,514    154,610    157,146 
Presold mortgages in process of settlement  Level 1   4,094    4,094    4,323    4,323 
Total loans, net of allowance  Level 3   2,626,884    2,594,567    2,490,343    2,484,059 
Accrued interest receivable  Level 1   8,785    8,785    9,166    9,166 
FDIC indemnification asset  Level 3           8,439    8,256 
Bank-owned life insurance  Level 1   73,613    73,613    72,086    72,086 
Servicing asset on SBA loans  Level 3   208    208         
                        
Deposits  Level 2   2,910,840    2,909,736    2,811,285    2,809,828 
Borrowings  Level 2   236,394    228,289    186,394    178,468 
Accrued interest payable  Level 2   523    523    585    585 
                        

 

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

 

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

 

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

 

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

 

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

 

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

 

Servicing Asset on SBA Loans – The fair value is based on the estimated excess of the future cash flows that the Company that will receive according to the contractual servicing rate over the estimated cost to service the loans. The excess cash flows are then discounted using an interest rate that approximates the average life of the loan.

 

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