XNAS:FCBC First Community Bancshares Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended June 30, 2012

Commission file number 000-19297

 

 

FIRST COMMUNITY BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Nevada   55-0694814

(State or other jurisdiction

of incorporation)

 

(IRS Employer

Identification No.)

P.O. Box 989

Bluefield, Virginia

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

(276) 326-9000

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

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

Class – Common Stock, $1.00 Par Value; 20,008,181 shares outstanding as of August 3, 2012

 

 

 


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

FORM 10-Q

For the quarter ended June 30, 2012

INDEX

 

     Page  

PART I. FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements

  
  

Condensed Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011

     3   
  

Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2012 and 2011 (Unaudited)

     4   
  

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2011 (Unaudited)

     5   
  

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2012 and 2011 (Unaudited)

     6   
  

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 (Unaudited)

     7   
  

Notes to Condensed Consolidated Financial Statements

     8   

Item 2.

  

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

     43   

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 3.

  

Defaults Upon Senior Securities

     61   

Item 4.

  

Mine Safety Disclosures

     61   

Item 5.

  

Other Information

     61   

Item 6.

  

Exhibits

     61   

SIGNATURES

     64   

EXHIBIT INDEX

     65   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

     June 30,
2012
    December 31,
2011
 
(Amounts in thousands, except per share data)    (Unaudited)        

Assets

    

Cash and due from banks

   $ 54,494      $ 34,578   

Federal funds sold

     64,815        1,909   

Interest-bearing deposits in banks

     36,856        10,807   
  

 

 

   

 

 

 

Total cash and cash equivalents

     156,165        47,294   

Securities available-for-sale

     526,607        482,430   

Securities held-to-maturity

     1,295        3,490   

Loans held for sale

     1,179        5,820   

Loans held for investment, net of unearned income:

    

Covered under loss share agreements

     238,777        —     

Not covered under loss share agreements

     1,568,312        1,396,067   

Less allowance for loan losses

     26,171        26,205   
  

 

 

   

 

 

 

Loans held for investment, net

     1,780,918        1,369,862   

FDIC receivable under loss share agreements

     52,067        —     

Property, plant, and equipment, net

     60,829        54,721   

Other real estate owned:

    

Covered under loss share agreements

     5,325        —     

Not covered under loss share agreements

     4,938        5,914   

Interest receivable

     8,396        6,193   

Goodwill

     99,402        83,056   

Intangible assets

     3,903        4,326   

Other assets

     109,297        101,683   
  

 

 

   

 

 

 

Total assets

   $ 2,810,321      $ 2,164,789   
  

 

 

   

 

 

 

Liabilities

    

Deposits:

    

Noninterest-bearing

   $ 340,895      $ 240,268   

Interest-bearing

     1,764,312        1,303,199   
  

 

 

   

 

 

 

Total deposits

     2,105,207        1,543,467   

Interest, taxes, and other liabilities

     22,465        20,452   

Securities sold under agreements to repurchase

     148,367        129,208   

FHLB advances

     176,653        150,000   

Other borrowings

     15,918        15,933   
  

 

 

   

 

 

 

Total liabilities

     2,468,610        1,859,060   
  

 

 

   

 

 

 

Stockholders’ equity

    

Preferred stock, undesignated par value; 1,000,000 shares authorized: Series A

    

Noncumulative Convertible Preferred Stock, $0.01 par value; 25,000 shares authorized; 18,921 shares issued at June 30, 2012, and December 31, 2011

     18,921        18,921   

Common stock, $1 par value; 50,000,000 shares authorized; 20,239,827 and 18,082,822 shares issued at June 30, 2012, and December 31, 2011, respectively; 231,646 and 233,446 shares in treasury at June 30, 2012, and December 31, 2011, respectively

     20,240        18,083   

Additional paid-in capital

     212,510        188,118   

Retained earnings

     99,418        93,656   

Treasury stock, at cost

     (5,672     (5,721

Accumulated other comprehensive loss

     (3,706     (7,328
  

 

 

   

 

 

 

Total stockholders’ equity

     341,711        305,729   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,810,321      $ 2,164,789   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

3


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
(Amounts in thousands, except share and per share data)    2012     2011      2012      2011  

Interest income

          

Interest and fees on loans held for investment

   $ 20,853      $ 20,094       $ 40,221       $ 40,549   

Interest on securities — taxable

     1,992        1,850         4,071         4,383   

Interest on securities — nontaxable

     1,265        1,291         2,461         2,824   

Interest on deposits in banks

     72        100         111         169   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total interest income

     24,182        23,335         46,864         47,925   
  

 

 

   

 

 

    

 

 

    

 

 

 

Interest expense

          

Interest on deposits

     2,360        3,273         4,765         7,153   

Interest on short-term borrowings

     589        632         1,184         1,272   

Interest on long-term borrowings

     1,749        1,676         3,454         3,471   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total interest expense

     4,698        5,581         9,403         11,896   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net interest income

     19,484        17,754         37,461         36,029   

Provision for loan losses

     1,620        3,079         2,542         4,691   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     17,864        14,675         34,919         31,338   
  

 

 

   

 

 

    

 

 

    

 

 

 

Noninterest income

          

Wealth management income

     940        930         1,834         1,824   

Service charges on deposit accounts

     3,329        3,353         6,342         6,384   

Other service charges and fees

     1,564        1,461         3,149         2,867   

Insurance commissions

     1,336        1,561         2,912         3,504   

Impairment losses on securities

     —          —           —           (527

Portion of losses recognized in other comprehensive income

     —          —           —           —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Net impairment losses recognized in earnings

     —          —           —           (527

Net gain on sale of securities

     (9     3,224         42         5,060   

Other operating income

     1,183        834         2,055         1,750   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total noninterest income

     8,343        11,363         16,334         20,862   
  

 

 

   

 

 

    

 

 

    

 

 

 

Noninterest expense

          

Salaries and employee benefits

     8,892        8,685         17,114         17,814   

Occupancy expense of bank premises

     1,654        1,568         3,180         3,215   

Furniture and equipment

     975        909         1,786         1,824   

Amortization of intangible assets

     189        261         422         520   

FDIC premiums and assessments

     290        414         612         1,292   

FHLB debt prepayment fees

     —          —           —           471   

Merger related expense

     3,419        —           3,582         —     

Other operating expense

     4,713        5,901         9,629         10,665   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total noninterest expense

     20,132        17,738         36,325         35,801   
  

 

 

   

 

 

    

 

 

    

 

 

 

Income before income taxes

     6,075        8,300         14,928         16,399   

Income tax expense

     1,997        2,572         4,849         4,920   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net income

     4,078        5,728         10,079         11,479   

Dividends on preferred stock

     283        131         566         131   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

   $ 3,795      $ 5,597       $ 9,513       $ 11,348   
  

 

 

   

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 0.20      $ 0.31       $ 0.52       $ 0.63   

Diluted earnings per common share

   $ 0.20      $ 0.31       $ 0.52       $ 0.63   

Cash dividends per common share

   $ 0.11      $ 0.10       $ 0.21       $ 0.20   

Weighted average basic shares outstanding

     18,561,714        17,895,904         18,205,545         17,882,006   

Weighted average diluted shares outstanding

     19,909,242        18,534,489         19,549,582         18,200,184   

See Notes to Consolidated Financial Statements.

 

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Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 

     Three Months Ended
June  30,
    Six Months Ended
June  30,
 
(Amounts in thousands, except share and per share data)    2012     2011     2012     2011  

Net income

   $ 4,078      $ 5,728      $ 10,079      $ 11,479   

Other comprehensive income, before tax

        

Available-for-sale securities:

        

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

     (314     (964     (105     (21

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

     5,326        6,387        5,821        12,479   

Less: reclassification adjustment for losses (gains) realized in net income

     9        (3,224     (42     (5,060

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

     —          —          —          527   
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains on available-for-sale securities in OCI

     5,021        2,199        5,674        7,925   

Defined benefit plans:

        

Less: reclassification adjustment for amortization in net prior service cost

     106        —          150        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains on benefit plans

     106        —          150        —     

Derivative securities:

        

Unrealized gains on derivative securities

     —          —          —          30   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax

     5,127        2,199        5,823        7,955   

Income tax expense related to items of other comprehensive income

     (1,938     (819     (2,201     (2,963
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax

     3,189        1,380        3,622        4,992   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 7,267      $ 7,108      $ 13,701      $ 16,471   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

5


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

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

 

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

Balance January 1, 2011

   $ —         $ 18,083       $ 189,239      $ 81,486      $ (6,740   $ (12,190   $ 269,878   

Comprehensive income

                

Net income

     —           —           —          11,479        —          —          11,479   

Other comprehensive income

     —           —           —          —          —          4,992        4,992   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income, net of tax

     —           —           —          11,479        —          4,992        16,471   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Common dividends declared — $0.20 per share

     —           —           —          (3,577     —          —          (3,577

Preferred dividends declared — $6.90 per share

     —           —           —          (131     —          —          (131

Issuance of preferred stock — 18,921 shares

     18,921         —           (80     —          —          —          18,841   

Equity-based compensation expense

     —           —           (9     —          30        —          21   

Common stock options exercised — 2,969 shares

     —           —           (60     —          92        —          32   

Issuance of treasury stock to 401(k) plan — 47,570 shares

     —           —           (812     —          1,481        —          669   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2011

   $ 18,921       $ 18,083       $ 188,278      $ 89,257      $ (5,137   $ (7,198   $ 302,204   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance January 1, 2012

   $ 18,921       $ 18,083       $ 188,118      $ 93,656      $ (5,721   $ (7,328   $ 305,729   

Comprehensive income

                

Net income

     —           —           —          10,079        —          —          10,079   

Other comprehensive income

     —           —           —          —          —          3,622        3,622   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income, net of tax

     —           —           —          10,079        —          3,622        13,701   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Common dividends declared — $0.21 per share

     —           —           —          (3,751     —          —          (3,751

Preferred dividends declared — $30.00 per share

     —           —           —          (566     —          —          (566

Equity-based compensation expense

     —           —           94        —          17        —          111   

Common stock options exercised — 1,300 shares

     —           —           (15     —          32        —          17   

Acquisition of Peoples Bank of Virginia — 2,157,005 shares

     —           2,157         24,313        —          —          —          26,470   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2012

   $ 18,921       $ 20,240       $ 212,510      $ 99,418      $ (5,672   $ (3,706   $ 341,711   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

6


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

     Six Months Ended  
     June 30,  
(Amounts in thousands)    2012     2011  

Operating activities

    

Net income

   $ 10,079      $ 11,479   

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

    

Provision for loan losses

     2,542        4,691   

Depreciation and amortization of property, plant, and equipment

     1,887        2,034   

Accretion of discounts and premiums on investments

     964        162   

Amortization of intangible assets

     422        520   

Gain on sale of loans

     (475     (406

Equity-based compensation expense

     111        21   

Contribution of treasury stock to 401(k) plan

     —          1,481   

Gain (loss) on sale of property, plant, and equipment

     54        (32

Losses on sales of other real estate

     825        1,233   

Gain on sale of securities

     (42     (5,060

Net impairment losses recognized in earnings

     —          527   

Losses on payments of FHLB debt prepayment fees

     —          471   

Deferred income tax expense

     8,445        2,618   

Proceeds from sale of mortgage loans

     34,658        23,884   

Origination of mortgage loans

     (29,542     (19,704

(Increase) decrease in accrued interest receivable

     (176     1,473   

(Increase) decrease in other operating activities

     (1,526     157   
  

 

 

   

 

 

 

Net cash provided by operating activities

     28,226        25,549   
  

 

 

   

 

 

 

Investing activities

    

Proceeds from sale of securities available-for-sale

     20,649        182,167   

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

     43,019        19,317   

Proceeds from maturities, prepayments, and calls of securities held-to-maturity

     2,210        535   

Payments to acquire securities available-for-sale

     (40,801     (59,334

Origination of loans

     3,517        2,506   

Proceeds from FHLB stock

     504        736   

Net cash acquired in acquisitions

     152,774        —     

Payments to acquire property, plant, and equipment

     (1,500     (1,799

Proceeds from sale of property, plant, and equipment

     887        175   

Proceeds from sale of other real estate

     2,685        3,157   
  

 

 

   

 

 

 

Net cash provided by investing activities

     183,944        147,460   
  

 

 

   

 

 

 

Financing activities

    

Net increase in noninterest-bearing deposits

     10,191        14,337   

Net increase (decrease) in interest-bearing deposits

     (97,634     (55,616

Repayments of securities sold under agreements to repurchase

     (923     (3,116

Repayments of long-term debt

     (10,633     (25,014

Proceeds from issuance of preferred stock

     —          18,841   

Proceeds from stock options exercised

     17        32   

Payments of FHLB debt prepayment fees

     —          (471

Excess tax benefit from share-based compensation

     —          5   

Payments of common dividends

     (3,751     (3,577

Payments of preferred dividends

     (566     —     
  

 

 

   

 

 

 

Net cash used in financing activities

     (103,299     (54,579
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     108,871        118,430   

Cash and cash equivalents at beginning of period

     47,294        112,189   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 156,165      $ 230,619   
  

 

 

   

 

 

 

Supplemental information — noncash items

    

Transfer of other real estate

   $ 3,311      $ 5,065   

Loans originated to finance other real estate

   $ 840     

See Notes to Consolidated Financial Statements.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. General

The accompanying unaudited condensed consolidated financial statements of First Community Bancshares, Inc. and subsidiaries (“First Community” or the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments, including normal recurring accruals, necessary for a fair presentation have been made. All significant intercompany balances and transactions have been eliminated in consolidation. Operating results for the interim period are not necessarily indicative of the results that may be expected for the full calendar year. The Company has made certain reclassifications of prior period information necessary to conform to the current period presentation. These reclassifications had no effect on the Company’s financial position, results of operations, or stockholders’ equity.

The condensed consolidated balance sheet as of December 31, 2011, has been derived from the audited consolidated financial statements included in the Company’s 2011 Annual Report on Form 10-K (the “2011 Form 10-K”), as filed with the Securities and Exchange Commission (the “SEC”) on March 2, 2012. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been omitted in accordance with standards for the preparation of interim consolidated financial statements. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2011 Form 10-K.

The Company operates in one business segment, Community Banking. The Community Banking segment consists of all operations, including commercial and consumer banking, lending activities, wealth management, and insurance services.

Significant Accounting Policies

A complete and detailed description of the Company’s significant accounting policies is included in Note 1, “Summary of Significant Accounting Policies,” of the Notes to Condensed Consolidated Financial Statements in Part II, Item 8, “Financial and Supplementary Data,” of the Company’s 2011 Form 10-K and Note 1, “General,” of the Notes to Consolidated Financial Statements in Part I, Item 1, “Financial Statements,” of the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2012. Additional discussion of the Company’s application of critical accounting estimates is included within “Application of Critical Accounting Estimates” in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” herein.

Recent Accounting Pronouncements

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

 

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Note 2. Earnings Per Common Share

Basic earnings per common share is determined by dividing net income available to common shareholders by the weighted average common shares outstanding. Diluted earnings per common share is determined by dividing net income by the weighted average common shares outstanding, including diluted shares for stock options, warrants, contingently issuable shares, and convertible preferred shares. The calculation for basic and diluted earnings per common share follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
(Amounts in thousands, except share and per share data)    2012      2011      2012      2011  

Net income

   $ 4,078       $ 5,728       $ 10,079       $ 11,479   

Dividends on preferred stock

     283         131         566         131   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

   $ 3,795       $ 5,597       $ 9,513       $ 11,348   

Weighted average common shares outstanding, basic

     18,561,714         17,895,904         18,205,545         17,882,006   

Diluted shares for stock options

     41,979         27,497         38,488         6,706   

Contingently issuable shares

     —           8,527         —           8,527   

Convertible preferred shares

     1,305,549         602,561         1,305,549         302,945   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, diluted

     19,909,242         18,534,489         19,549,582         18,200,184   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 0.20       $ 0.31       $ 0.52       $ 0.63   

Diluted earnings per common share

   $ 0.20       $ 0.31       $ 0.52       $ 0.63   

The 18,921 shares of the Company’s Series A Noncumulative Convertible Preferred Stock (“Series A Preferred Stock”) carry a 6% dividend rate. Each share is convertible into 69 shares of Common Stock at any time and mandatorily converts after five years. The Company may redeem the shares at face value after May 20, 2014.

The following outstanding options and warrants to purchase the Company’s Common Stock (“Common Stock”) were excluded from the calculation of diluted earnings per share because the exercise price was greater than the market value of the Common Stock, which would result in an antidilutive effect on diluted earnings per share:

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2012      2011      2012      2011  

Options and warrants

     451,915         457,045         451,915         480,396   

Note 3. Business Combinations

The Company accounts for business combinations under FASB ASC 805 which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in FASB ASC Topic 820, Fair Value Measurements and Disclosures, exclusive of the loss share agreements with the Federal Deposit Insurance Corporation (the “FDIC”). The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of expected principal, interest, and other cash flows. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available.

Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality, formerly American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer, and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Loans exhibit evidence of credit deterioration when it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. Evidence of credit quality deterioration, as of the purchase date, may include measures such as nonaccrual status, credit scores, declines in collateral value, current loan to value percentages, and days past due. The

 

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Company considers expected prepayments and estimates the amount and timing of expected principal, interest, and other cash flows for each loan or pool of loans meeting the criteria above, and determines the excess of the loan’s scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted (nonaccretable difference). The remaining amount, representing the excess of the loan’s or pool’s cash flows expected to be collected over the amount deemed paid for the loan or pool of loans, is accreted into interest income over the remaining life of the loan or pool (accretable yield). The Company records a discount on these loans at acquisition to record them at their realizable cash flows. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference which is included in the carrying amount of the loans. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or a reversal of the nonaccretable difference with a positive impact on interest income prospectively. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. In accordance with FASB ASC Topic 310-30, the Company aggregated loans that have common risk characteristics into pools within the following loan categories: construction and development, commercial and industrial, commercial real estate, consumer, home equity lines of credit, residential real estate – 1st lien, residential real estate – 2nd lien, and lines of credit.

Purchased performing loans are recorded at fair value and include credit and interest rate marks associated with acquisition accounting adjustments, as accounted for under the contractual cash flow method of accounting. The fair value adjustment is accreted as an adjustment to yield over the estimated contractual lives of the loans. There is no allowance for loan losses established at the acquisition date for acquired performing loans. A provision for loan losses is recorded for any credit deterioration in these loans subsequent to the acquisition. In accordance with GAAP, there was no carryover of previously established allowance for loan losses on acquired portfolios.

Peoples Bank of Virginia

On May 31, 2012, the Company completed the acquisition of Peoples Bank of Virginia (“Peoples”), a commercial bank headquartered in Richmond, Virginia. At acquisition, Peoples had total assets of $276.88 million, total loans of $184.84 million, total deposits of $232.75 million, and common equity of $43.38 million. The transaction was accounted for under the purchase method of accounting and accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair value on the acquisition date. The acquisition expands the Company’s existing presence in the Richmond, Virginia market by four branches and affords the opportunity to realize certain operating cost savings.

Peoples’ shareholders received $6.08 in cash and 1.07 shares of the Company’s Common Stock for each share of Peoples’ common stock resulting in a purchase price of approximately $40.28 million, which includes Common Stock valued at $26.47 million and total cash consideration of $12.26 million. In connection with the transaction, the Company issued 2,157,005 shares of Common Stock valued based on the five-day variable weighted average price of $12.27 for the two days immediately preceding, two days immediate proceeding, and including May 31, 2012. The preliminary purchase price has been allocated to the identifiable tangible and intangible assets resulting in an addition to goodwill of $9.02 million. Because the consideration paid was greater than the net fair value of the assets acquired and liabilities assumed, the Company recorded goodwill as part of the acquisition. The Company does not expect any goodwill recorded in connection with the acquisition to be deductible for tax purposes.

The Company estimated the fair value of assets acquired and liabilities assumed using expected cash flows discounted at appropriate rates of interest. The estimated fair values, including identifiable intangible assets, are preliminary and subject to refinement for up to one year after the closing date of the acquisition.

 

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The consideration transferred and the net assets acquired in connection with the Peoples acquisition are presented as of the acquisition date:

 

(Amounts in thousands, except per share data)       

Consideration

  

Cash consideration

   $ 12,259   

Common stock — 2,157,005 shares

     26,469   

Cash in lieu of fractional shares

     2   

Stock option consideration

     1,547   
  

 

 

 

Fair value of consideration paid

   $ 40,277   
  

 

 

 

Identifiable assets

  

Cash and cash equivalents

   $ 81,834   

Securities

     2,917   

Loans

     166,609   

Property, plant, and equipment

     3,434   

Other assets

     11,354   
  

 

 

 

Identifiable assets

     266,148   

Identifiable liabilities

  

Total deposits

     234,146   

Other liabilities

     741   
  

 

 

 

Identifiable liabilities

     234,887   

Identifiable net assets acquired

     31,261   
  

 

 

 

Goodwill recorded for acquisition

   $ 9,016   
  

 

 

 

The Company is currently in the process of identifying the purchased performing and credit impaired loans from the Peoples acquisition; therefore, disclosures related to the division of the purchased loans have been omitted in this current quarterly filing.

 

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The Company’s operating results for the three and six months ended June 30, 2012, include the impact of the Peoples acquisition since May 31, 2012. The following table presents unaudited proforma information as if the acquisition had occurred on January 1, 2011. The information presented does not necessarily reflect the results of operation that would have occurred had the acquisition been completed at the beginning of each fiscal period, nor does it indicate future consolidated results. For the three and six months ended June 30, 2012, the Company incurred merger related expenses related to the Peoples acquisition of $2.83 million and $2.99 million, respectively.

 

     For the Six Months Ended June 30, 2012  
(Amounts in thousands)    First Community      Peoples      Proforma
Adjustments
    Proforma
Combined
 

Interest income

   $ 46,013       $ 5,479       $ —        $ 51,492   

Interest expense

     9,212         1,521         (122     10,611   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income

     36,801         3,958         122        40,881   

Provision for loan losses

     2,542         100         —          2,642   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     34,259         3,858         122        38,239   

Noninterest income

     16,287         254         —          16,541   

Noninterest expense (1)

     33,188         2,932         2,988        39,108   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before taxes

     17,358         1,180         (2,866     15,672   

Income tax expense (benefit)

     5,852         397         (1,133     5,116   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income (loss)

     11,506         783         (1,733     10,556   

Dividends on preferred stock

     566         —           —          566   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income (loss) available to common shareholders

   $ 10,940       $ 783       $ (1,733   $ 9,990   
  

 

 

    

 

 

    

 

 

   

 

 

 
     For the Six Months Ended June 30, 2011  
     First Community      Peoples      Proforma
Adjustments
    Proforma
Combined
 

Interest income

   $ 47,925       $ 6,337       $ —        $ 54,262   

Interest expense

     11,896         1,800         (122     13,574   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income

     36,029         4,537         122        40,688   

Provision for loan losses

     4,691         750         —          5,441   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     31,338         3,787         122        35,247   

Noninterest income

     20,862         226         —          21,088   

Noninterest expense (1)

     35,801         2,489         2,988        41,278   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before taxes

     16,399         1,524         (2,866     15,057   

Income tax expense (benefit)

     4,920         513         (1,133     4,300   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income (loss)

     11,479         1,011         (1,733     10,757   

Dividends on preferred stock

     131         —           —          131   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income (loss) available to common shareholders

   $ 11,348       $ 1,011       $ (1,733   $ 10,626   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Proforma adjustments in noninterest expense result from merger related expense.

Waccamaw Bank

On June 8, 2012, the Company’s wholly-owned subsidiary, First Community Bank (the “Bank”), entered into a Purchase and Assumption Agreement (the “Agreement”) with loss share arrangements with the FDIC to purchase certain assets and assume substantially all of the deposits and certain liabilities of Waccamaw Bank (“Waccamaw”), a full service community bank, headquartered in Whiteville, North Carolina. Waccamaw operated sixteen branches in total throughout North Carolina and South Carolina.

Pursuant to the Agreement, the Bank received a discount of $15.00 million on the assets acquired and did not pay the FDIC a premium to assume all customer deposits. Most of the loans and foreclosed real estate purchased are covered by loss share agreements between the FDIC and the Bank. Under the loss share agreements, the FDIC will cover 80% of loan and foreclosed real estate losses and certain collection costs. Gains and recoveries on covered assets will offset losses, or be paid to the FDIC, at the applicable loss share percentage at the time of recovery. The loss sharing agreement applicable to single family assets, both loans and OREO, provides for FDIC loss sharing and Bank reimbursement to the FDIC for ten years. The loss share agreement applicable to commercial assets, both loans and OREO, provides for FDIC loss sharing for five years and Bank reimbursement of recoveries to the FDIC for eight years. As of the date of acquisition, we calculated the amount of such reimbursements that we expect to receive from the FDIC using the present value of anticipated cash flows from the loss

 

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sharing based on the adjustments estimated for each pool of loans and the estimated losses on foreclosed assets. In accordance with FASB ASC Topic 805, the FDIC indemnification asset was initially recorded at its fair value, and is measured separately from the loan assets and foreclosed assets because the loss sharing agreements are not contractually embedded in them or transferable with them in the event of disposal. The balance of the FDIC indemnification asset increases and decreases as the expected and actual cash flows from the covered assets fluctuate, as loans are paid off or impaired and as loans and foreclosed assets are sold. There are no contractual interest rates on this contractual receivable from the FDIC; however, a discount was recorded against the initial balance of the FDIC indemnification asset in conjunction with the fair value measurement as this receivable will be collected over the term of the loss sharing agreement. This discount will be accreted to non-interest income over future periods.

The Bank did not immediately acquire all the real estate, furniture, and equipment of Waccamaw as a part of the purchase agreement. The bank purchased two properties at acquisition; however, the Bank has the option to purchase the remaining real estate, furniture, and equipment from the FDIC. The term of this option expires approximately 30 days from the date of the acquisition; additionally, the Bank has approximately 90 days to assume or repudiate leases for leased branch properties.

As of June 30, 2012, there have been no adjustments or changes to the initial fair values related to the Waccamaw acquisition. The purchase accounting adjustments and the loss sharing arrangement with the FDIC significantly impact the effects of the acquired entity on the ongoing operations of the Company. Additionally, disclosure of pro forma financial information is made more difficult by the nature of Waccamaw’s operations prior to the date of the combination. Accordingly, no pro forma financial information has been presented.

Goodwill of $7.13 million was recorded as part of the acquisition of Waccamaw. The amount of the goodwill was equal to the amount by which the fair value of liabilities assumed exceeded the fair value of assets acquired, and resulted from the discount bid on the assets acquired and the impact of the FDIC loss share agreements. For the three and six months ended June 30, 2012, the Company incurred merger related expenses related to the Waccamaw acquisition of $594 thousand.

 

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The following table presents the assets acquired and liabilities assumed as of June 8, 2012, as recorded by Waccamaw on the acquisition date and as adjusted for purchase accounting adjustments:

 

(Amounts in thousands)    Balances Acquired
from FDIC
     Fair Value and
Purchase  Adjustments
    Recorded
Investment
 

Assets

       

Cash and due from banks (1)

   $ 44,809       $ —        $ 44,809   

Interest-bearing deposits in banks

     40,140         —          40,140   
  

 

 

    

 

 

   

 

 

 

Total cash and cash equivalents

     84,949         —          84,949   

Securities available-for-sale

     59,816         (194     59,622   

Loans held for investment, net of unearned income

     318,317         (65,464     252,853   

FDIC receivable under loss share agreements

     —           52,067        52,067   

Property, plant, and equipment, net

     4,102         —          4,102   

Other real estate owned

     9,347         (3,959     5,388   

Interest receivable

     1,363         —          1,363   

Other assets

     5,264         —          5,264   
  

 

 

    

 

 

   

 

 

 

Total assets

   $ 483,158       $ (17,550   $ 465,608   
  

 

 

    

 

 

   

 

 

 

Liabilities

       

Deposits:

       

Noninterest-bearing

   $ 47,892       $ —        $ 47,892   

Interest-bearing

     366,233         912        367,145   
  

 

 

    

 

 

   

 

 

 

Total deposits

     414,125         912        415,037   

Securities sold under agreements to repurchase

     17,042         3,040        20,082   

FHLB advances

     35,000         2,271        37,271   

Other borrowings

     345         —          345   
  

 

 

    

 

 

   

 

 

 

Total liabilities

   $ 466,512       $ 6,223      $ 472,735   
  

 

 

    

 

 

   

 

 

 

Net assets acquired over (under) liabilities assumed

   $ 16,646       $ (23,773   $ (7,127
  

 

 

    

 

 

   

 

 

 

Excess of net assets acquired over liabilities assumed

   $ 16,646        
  

 

 

      

Aggregate fair value and purchase adjustments

      $ (23,773  
     

 

 

   

 

 

 

Goodwill on acquisition

        $ 7,127   
       

 

 

 

 

(1) Includes $17.27 million transferred to the FDIC in connection with the acquisition.

The Company is currently in the process of identifying the purchased performing and credit impaired loans from the Waccamaw acquisition; therefore, disclosures related to the division of the purchased loans have been omitted in this current quarterly filing.

The following table presents fair value of loans acquired from Peoples and Waccamaw at their acquisition date. The amounts include principal only and do not reflect accrued interest as of the date of the acquisition or beyond:

 

     Peoples     Waccamaw  
(Amounts in thousands)    May 31, 2012     June 8, 2012  

Contractually required principal payments receivable

   $ 185,624      $ 328,939   

Fair value of adjustment for credit, interest rate, and liquidity

     (19,015     (76,086
  

 

 

   

 

 

 

Fair value of loans receivable

   $ 166,609      $ 252,853   
  

 

 

   

 

 

 

 

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Note 4. Investment Securities

The amortized cost and estimated fair value of available-for-sale securities, including gross unrealized gains and losses, at June 30, 2012, and December 31, 2011, were as follows:

 

     June 30, 2012  
(Amounts in thousands)    Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
    Fair
Value
     OTTI in
AOCI(1)
 

Municipal securities

   $ 144,940       $ 7,249       $ (198   $ 151,991       $ —     

Single issue trust preferred securities

     55,678         —           (11,172     44,506         —     

Corporate FDIC insured securities

     13,540         10         —          13,550         —     

Mortgage-backed securities:

             

Agency

     300,036         6,310         (257     306,089         —     

Non-Agency Alt-A residential

     15,533         —           (5,607     9,926         (5,607
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total mortgage-backed securities

     315,569         6,310         (5,864     316,015         (5,607

Equity securities

     419         220         (94     545         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 530,146       $ 13,789       $ (17,328   $ 526,607       $ (5,607
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
     December 31, 2011  
(Amounts in thousands)    Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
    Fair
Value
     OTTI in
AOCI(1)
 

Municipal securities

   $ 131,498       $ 6,317       $ —        $ 137,815       $ —     

Single issue trust preferred securities

     55,649         —           (15,405     40,244         —     

Corporate FDIC insured securities

     13,685         33         —          13,718         —     

Mortgage-backed securities:

             

Agency

     274,384         6,003         (285     280,102         —     

Non-Agency Alt-A residential

     15,980         —           (5,950     10,030         (5,950
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total mortgage-backed securities

     290,364         6,003         (6,235     290,132         (5,950

Equity securities

     419         206         (104     521         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 491,615       $ 12,559       $ (21,744   $ 482,430       $ (5,950
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

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

The amortized cost and estimated fair value of held-to-maturity securities, including gross unrealized gains and losses, at June 30, 2012, and December 31, 2011, were as follows:

 

     June 30, 2012  
     Amortized      Unrealized      Unrealized     Fair  
(Amounts in thousands)    Cost      Gains      Losses     Value  

Municipal securities

   $ 1,295       $ 24       $ (1   $ 1,318   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 1,295       $ 24       $ (1   $ 1,318   
  

 

 

    

 

 

    

 

 

   

 

 

 
     December 31, 2011  
(Amounts in thousands)    Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
    Fair
Value
 

Municipal securities

   $ 3,490       $ 42       $ —        $ 3,532   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 3,490       $ 42       $ —        $ 3,532   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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The amortized cost and estimated fair value of available-for-sale and held-to-maturity securities by contractual maturity at June 30, 2012, are shown 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.

 

(Amounts in thousands)    Amortized
Cost
     Fair Value  

Available-for-sale securities

     

Due within one year

   $ 14,646       $ 14,657   

Due after one year but within five years

     17,311         17,978   

Due after five years but within ten years

     19,262         20,238   

Due after ten years

     162,939         157,174   
  

 

 

    

 

 

 
     214,158         210,047   

Mortgage-backed securities

     315,569         316,015   

Equity securities

     419         545   
  

 

 

    

 

 

 

Total

   $ 530,146       $ 526,607   
  

 

 

    

 

 

 

Held-to-maturity securities

     

Due within one year

   $ 430       $ 434   

Due after one year but within five years

     865         884   

Due after five years but within ten years

     —           —     

Due after ten years

     —           —     
  

 

 

    

 

 

 

Total

   $ 1,295       $ 1,318   
  

 

 

    

 

 

 

Available-for-sale securities in a continuous unrealized loss position for less than 12 months and for 12 months or longer at June 30, 2012, and December 31, 2011 were as follows:

 

     June 30, 2012  
     Less than 12 Months     12 Months or longer     Total  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  
(Amounts in thousands)    Value      Losses     Value      Losses     Value      Losses  

Municipal securities

   $ 12,610       $ (198   $ —         $ —        $ 12,610       $ (198

Single issue trust preferred securities

     —           —          44,506         (11,172     44,506         (11,172

Mortgage-backed securities:

               

Agency

     52,932         (252     11,790         (5     64,722         (257

Non-Agency Alt-A residential

     —           —          9,925         (5,607     9,925         (5,607
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total mortgage-backed securities

     52,932         (252     21,715         (5,612     74,647         (5,864

Equity securities

     —           —          94         (94     94         (94
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 65,542       $ (450   $ 66,315       $ (16,878   $ 131,857       $ (17,328
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     December 31, 2011  
     Less than 12 Months     12 Months or longer     Total  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  
(Amounts in thousands)    Value      Losses     Value      Losses     Value      Losses  

Municipal securities

   $ —         $ —        $ 40,244       $ (15,405   $ 40,244       $ (15,405

Mortgage-backed securities:

               

Agency

     52,300         (285     —           —          52,300         (285

Non-Agency Alt-A residential

     —           —          10,030         (5,950     10,030         (5,950
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total mortgage-backed securities

     52,300         (285     10,030         (5,950     62,330         (6,235

Equity securities

     —           —          188         (104     188         (104
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 52,300       $ (285   $ 50,462       $ (21,459   $ 102,762       $ (21,744
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

There were no held-to-maturity securities in a continuous unrealized loss position at June 30, 2012, or December 31, 2011. The carrying value of securities pledged to secure public deposits and for other purposes was $295.37 million and $288.80 million at June 30, 2012, and December 31, 2011, respectively.

 

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The following table details the Company’s gross gains and gross losses realized from the sale of securities for the three and six months ended June 30, 2012 and 2011.

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
(Amounts in thousands)    2012     2011     2012     2011  

Gross realized gains

   $ 30      $ 4,325      $ 119      $ 6,681   

Gross realized losses

     (39     (1,101     (77     (1,621
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) gain on sale of securities

   $ (9   $ 3,224      $ 42      $ 5,060   
  

 

 

   

 

 

   

 

 

   

 

 

 

At June 30, 2012, the combined depreciation in value of 58 individual securities in an unrealized loss position was 3.31% of the combined reported value of the aggregate securities portfolio. At December 31, 2011, the combined depreciation in value of 28 individual securities in an unrealized loss position was 4.51% of the combined reported value of the aggregate securities portfolio.

The Company reviews its investment portfolio on a quarterly basis for indications of other-than-temporary impairment (“OTTI”). The analysis differs depending upon the type of investment security being analyzed. For debt securities, the Company has determined that it does not intend to sell securities that are impaired and has asserted that it is not more likely than not that the Company will have to sell impaired securities before recovery of the impairment occurs. This determination is based upon the Company’s investment strategy for the particular type of debt security and its cash flow needs, liquidity position, capital adequacy, and interest rate risk position.

For nonbeneficial interest debt securities, the Company analyzes several qualitative factors such as the severity and duration of the impairment, adverse conditions within the issuing industry, prospects for the issuer, performance of the security, changes in rating by rating agencies, and other qualitative factors to determine if the impairment will be recovered. Nonbeneficial interest debt securities consist of U.S. treasury securities, states and political subdivisions, and single issue trust preferred securities. If it is determined that there is evidence that the impairment will not be recovered, the Company performs a present value calculation to determine the amount of impairment and records any credit-related OTTI through earnings and noncredit-related OTTI through OCI. During the three and six months ended June 30, 2012 and June 30, 2011, the Company incurred no OTTI charges related to nonbeneficial interest debt securities. Temporary impairment on these securities is primarily related to changes in interest rates, certain disruptions in the credit markets, destabilization in the Eurozone, and other current economic factors.

For beneficial interest debt securities, the Company reviews cash flow analyses on each applicable security to determine if an adverse change in cash flows expected to be collected has occurred. Beneficial interest debt securities consist of corporate FDIC insured securities and mortgage-backed securities (“MBS”). An adverse change in cash flows expected to be collected has occurred if the present value of cash flows previously projected is greater than the present value of cash flows projected at the current reporting date and less than the current book value. If an adverse change in cash flows is deemed to have occurred, then an OTTI has occurred. The Company then compares the present value of cash flows using the current yield for the current reporting period to the reference amount, or current net book value, to determine the credit-related OTTI. The credit-related OTTI is then recorded through earnings and the noncredit-related OTTI is accounted for in OCI. During the three and six months ended June 30, 2012, the Company incurred no credit-related OTTI charges on beneficial interest debt securities. During the three months ended June 30, 2011, the Company incurred no credit-related OTTI charges related to beneficial interest debt securities. During the six months ended June 30, 2011, the Company incurred credit-related OTTI charges on beneficial interest debt securities of $527 thousand related to a non-Agency MBS.

For the non-Agency Alt-A residential MBS, the Company uses a discounted cash flow model with the following assumptions: voluntary constant prepayment rate of 5%, a customized constant default rate scenario that assumes approximately 18% of the remaining underlying mortgages will default within three years, and a customized loss severity rate scenario that ramps the loss rate down from 60% to 15% over the course of 5 years.

 

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The following table provides a cumulative roll forward of credit losses recognized in earnings for debt securities for which a portion of the OTTI is recognized in OCI:

 

     Three Months Ended
June  30,
     Six Months Ended
June  30,
 
(Amounts in thousands)    2012      2011      2012      2011  

Beginning balance (1)

   $ 6,536       $ 4,778       $ 6,536       $ 4,251   

Additions for credit losses on securities not previously recognized

     —           —           —           —     

Additions for credit losses on securities previously recognized

     —           —           —           527   

Reduction for increases in cash flows

     —           —           —           —     

Reduction for securities management no longer intends to hold to recovery

     —           —           —           —     

Reduction for securities sold/realized losses

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 6,536       $ 4,778       $ 6,536       $ 4,778   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

For equity securities, the Company reviews for OTTI based upon the prospects of the underlying companies, analysts’ expectations, and certain other qualitative factors to determine if impairment is recoverable over a foreseeable period of time. During the three and six months ended June 30, 2012 and 2011, the Company recognized no OTTI charges on equity securities.

As a condition to membership in the Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) systems, the Company is required to subscribe to a minimum level of stock in the FHLB of Atlanta (“FHLBA”) and FRB of Richmond (“FRB Richmond”). The Company feels this ownership position provides access to relatively inexpensive wholesale and overnight funding. FHLBA and FRB Richmond stock are reported as long-term investments in “Other assets” on the Company’s “Condensed Consolidated Balance Sheets.” At June 30, 2012, and December 31, 2011, the Company owned $12.78 million and $10.82 million, respectively, of FHLBA stock. The Company’s policy is to review the stock for impairment at each reporting period. During the first half of 2012, the FHLBA paid quarterly dividends and repurchased excess activity-based stock. Based on the Company’s review and publicly available information concerning the FHLBA, it believes that as of June 30, 2012, its FHLBA stock was not impaired. At June 30, 2012, and December 31, 2011, the Company owned $5.69 and $4.78 million, respectively, of FRB Richmond stock.

 

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Note 5. Loans

Loan Portfolio

Loans, net of unearned income, consisted of the following at June 30, 2012, and December 31, 2011:

 

     June 30, 2012     December 31, 2011  
(Amounts in thousands)    Amount      Percent     Amount      Percent  

Covered loans

   $ 238,777         13.21   $ —           0.00

Non-covered loans

          

Commercial loans

          

Construction — commercial

     20,877         1.16     35,482         2.54

Land development

     6,549         0.36     2,902         0.21

Other land loans

     26,571         1.47     23,384         1.67

Commercial and industrial

     99,364         5.50     91,939         6.58

Multi-family residential

     86,040         4.76     77,050         5.52

Single family non-owner occupied

     140,684         7.79     106,743         7.65

Non-farm, non-residential

     453,820         25.12     336,005         24.07

Agricultural

     1,643         0.09     1,374         0.10

Farmland

     38,423         2.13     37,161         2.66
  

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial loans

     873,971         48.38     712,040         51.00

Consumer real estate loans

          

Home equity lines

     115,843         6.41     111,387         7.98

Single family owner occupied

     466,450         25.81     473,067         33.89

Owner occupied construction

     30,417         1.68     19,577         1.40
  

 

 

    

 

 

   

 

 

    

 

 

 

Total consumer real estate loans

     612,710         33.90     604,031         43.27

Consumer and other loans

          

Consumer loans

     75,781         4.19     67,129         4.81

Other

     5,850         0.32     12,867         0.92
  

 

 

    

 

 

   

 

 

    

 

 

 

Total consumer and other loans

     81,631         4.51     79,996         5.73
  

 

 

    

 

 

   

 

 

    

 

 

 

Total non-covered loans

     1,568,312         86.79     1,396,067         100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans held for investment, net of unearned income

   $ 1,807,089         100.00   $ 1,396,067         100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

Loans held for sale

   $ 1,179         $ 5,820      
  

 

 

      

 

 

    

 

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Table of Contents

Covered loans held for investment, net of unearned income, consisted of the following at June 30, 2012.

 

(Amounts in thousands)    June 30, 2012  

Covered loans

  

Commercial loans

  

Construction — commercial

   $ 17,770   

Land development

     —     

Other land loans

     —     

Commercial and industrial

     7,663   

Multi-family residential

     3,706   

Single family non-owner occupied

     —     

Non-farm, non-residential

     66,751   

Agricultural

     307   

Farmland

     1,345   
  

 

 

 

Total commercial loans

     97,542   

Consumer real estate loans

  

Home equity lines

     88,508   

Single family owner occupied

     45,691   

Owner occupied construction

     2,502   
  

 

 

 

Total consumer real estate loans

     136,701   

Consumer and other loans

  

Consumer loans

     4,534   

Other

     —     
  

 

 

 

Total consumer and other loans

     4,534   
  

 

 

 

Total covered loans

   $ 238,777   
  

 

 

 

See Note 11, “Commitments and Contingencies,” for information concerning the Company’s off-balance sheet credit risk related to lending activities.

Acquired Impaired Loans

The following table presents the carrying balance of acquired impaired loans and activity within those loans during the periods indicated. The Company has estimated the cash flows to be collected on the loans and discounted those cash flows at a market rate of interest. As previously discussed in Note 3, “Business Combinations,” the Company is in the process of identifying the purchased performing and credit impaired loans from the Peoples and Waccamaw acquisitions; therefore, acquisitions completed during the second quarter of 2012 are not reflected in the following tables.

 

     Six Months Ended June 30,  
(Amounts in thousands)    2012     2011  

Balance, January 1

   $ 2,886      $ 3,221   

Accretion

     1,146        13   

Principal payments received

     (1,739     (173

Other

     4        60   

Charge-offs

     (4     —     
  

 

 

   

 

 

 

Balance, June 30

   $ 2,293      $ 3,121   
  

 

 

   

 

 

 

The outstanding balance of acquired impaired loans, excluding the Peoples and Waccamaw portfolios, was $5.98 million at June 30, 2012, $7.71 million at December 31, 2011, and $8.45 million at June 30, 2011.

 

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The following table presents changes in the accretable yield during the periods indicated:

 

     Six Months Ended June 30,  
(Amounts in thousands)    2012     2011  

Balance, January 1

   $ 919      $ 944   

Accretion

     (1,146     (13

Reclassifications from nonaccretable difference

     92        —     

Disposals

     161        —     
  

 

 

   

 

 

 

Balance, June 30

   $ 26      $ 931   
  

 

 

   

 

 

 

Note 6. Allowance for Loan Losses and Credit Quality Indicators

Allowance for Loan Losses

The allowance for loan losses is maintained at a level management deems sufficient to absorb probable loan losses inherent in the loan portfolio. The allowance is increased by charges to earnings in the form of provision for loan losses and recoveries of prior loan charge-offs, and decreased by loans charged off. The provision is calculated to bring the allowance to a level which, according to a systematic process of measurement, reflects the amount management estimates is needed to absorb probable losses within the portfolio. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates, and the view of the regulatory authorities toward loan classifications. Purchased credit impaired loan pools are evaluated separately from the non-purchased credit impaired portfolio for impairment. See Note 3, “Business Combinations,” for additional information.

Management performs quarterly assessments to determine the appropriate level of allowance for loan losses. Differences between actual loan loss experience and estimates are reflected through adjustments that are made by increasing or decreasing the allowance based upon current measurement criteria. Commercial, consumer real estate, and non-real estate consumer loan portfolios are evaluated separately for purposes of determining the allowance. The specific components of the allowance include allocations to individual commercial loans and credit relationships and allocations to the remaining nonhomogeneous and homogeneous pools of loans that have been deemed impaired. Additionally, a loan that becomes adversely classified or graded is removed from a group of loans with similar risk characteristics that are not classified or graded to evaluate the removed loan collectively in a group of adversely classified or graded loans with similar risk characteristics. Management’s general reserve allocations are based on judgment of qualitative and quantitative factors about macro and micro economic conditions reflected within the portfolio of loans and the economy as a whole. Factors considered in this evaluation include, but are not necessarily limited to, probable losses from loan and other credit arrangements, general economic conditions, changes in credit concentrations or pledged collateral, historical loan loss experience, and trends in portfolio volume, maturities, composition, delinquencies, and nonaccruals. Historical loss rates for each risk grade of commercial loans are adjusted by environmental factors to estimate the amount of reserve needed by segment. While management has allocated the allowance for loan losses to various portfolio segments, the entire allowance is available for use against any type of loan loss deemed appropriate by management.

The following tables detail activity within the allowance for loan losses, by portfolio segment, for the three and six months ended June 30, 2012 and 2011.

 

     Three Months Ended June 30, 2012     Three Months Ended June 30, 2011  
           Consumer     Consumer                 Consumer     Consumer        
(Amounts in thousands)    Commercial     Real Estate     and Other     Total     Commercial     Real Estate     and Other     Total  

Beginning balance

   $ 17,865      $ 7,259      $ 676      $ 25,800      $ 12,300      $ 12,641      $ 1,541      $ 26,482   

Provision for loan losses

     950        623        47        1,620        2,504        408        167        3,079   

Loans charged off

     (836     (619     (157     (1,612     (2,727     (457     (272     (3,456

Recoveries credited to allowance

     278        9        76        363        223        49        105        377   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (558     (610     (81     (1,249     (2,504     (408     (167     (3,079
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 18,257      $ 7,272      $ 642      $ 26,171      $ 12,300      $ 12,641      $ 1,541      $ 26,482   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Six Months Ended June 30, 2012     Six Months Ended June 30, 2011  
           Consumer     Consumer                 Consumer     Consumer        
(Amounts in thousands)    Commercial     Real Estate     and Other     Total     Commercial     Real Estate     and Other     Total  

Beginning balance

   $ 17,752      $ 7,711      $ 742      $ 26,205      $ 12,300      $ 12,641      $ 1,541      $ 26,482   

Provision for loan losses

     1,216        1,237        89        2,542        2,865        1,621        205        4,691   

Loans charged off

     (1,086     (1,727     (361     (3,174     (3,167     (1,829     (487     (5,483

Recoveries credited to allowance

     375        51        172        598        302        208        282        792   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (711     (1,676     (189     (2,576     (2,865     (1,621     (205     (4,691
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 18,257      $ 7,272      $ 642      $ 26,171      $ 12,300      $ 12,641      $ 1,541      $ 26,482   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Credit Quality Indicators

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

 

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Table of Contents

The following tables present the Company’s recorded investment in non-purchased loans considered to be impaired and related information on those impaired loans for the periods indicated:

 

     June 30, 2012      December 31, 2011  
            Unpaid                    Unpaid         
     Recorded      Principal      Related      Recorded      Principal      Related  
(Amounts in thousands)    Investment      Balance      Allowance      Investment      Balance      Allowance  

Impaired loans with no related allowance:

                 

Commercial loans

                 

Construction — commercial

   $ 12       $ 12       $ —         $ 411       $ 411       $ —     

Land development

     —           —           —           250         250         —     

Other land loans

     —           —           —           —           —           —     

Commercial and industrial

     61         66         —           114         127         —     

Multi-family residential

     796         801         —           278         278         —     

Single family non-owner occupied

     1,202         1,248         —           1,206         1,244         —     

Non-farm, non-residential

     816         856         —           1,616         1,647         —     

Agricultural

     —           —           —           —           —           —     

Farmland

     —           —           —           258         258         —     

Consumer real estate loans

                 

Home equity lines

     366         385         —           368         378         —     

Single family owner occupied

     5,812         5,926         —           2,428         2,508         —     

Owner occupied construction

     —           —           —           —           —           —     

Consumer and other loans

                 

Consumer loans

     —           —           —           6         6         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with no allowance

     9,065         9,294         —           6,935         7,107         —     

Impaired loans with a related allowance:

                 

Commercial loans

                 

Construction — commercial

     —           —           —           —           —           —     

Land development

     —           —           —           —           —           —     

Other land loans

     111         111         4         112         112         4   

Commercial and industrial

     3,914         3,936         3,739         4,031         4,069         2,048   

Multi-family residential

     —           —           —           —           —           —     

Single family non-owner occupied

     2,895         2,914         441         2,232         2,232         124   

Non-farm, non-residential

     6,620         6,966         1,647         5,317         5,480         1,819   

Agricultural

     —           —           —           —           —           —     

Farmland

     —           —           —           —           —           —     

Consumer real estate loans

                 

Home equity lines

     250         250         250         —           —           —     

Single family owner occupied

     2,586         2,686         710         5,529         5,612         1,203   

Owner occupied construction

     —           —           —           —           —           —     

Consumer and other loans

                 

Consumer loans

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with an allowance

     16,376         16,863         6,791         17,221         17,505         5,198   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 25,441       $ 26,157       $ 6,791       $ 24,156       $ 24,612       $ 5,198   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     For the Three Months Ended      For the Six Months Ended  
     June 30, 2012      June 30, 2012  
     Average      Interest      Average      Interest  
     Recorded      Income      Recorded      Income  
(Amounts in thousands)    Investment      Recognized      Investment      Recognized  

Impaired loans with no related allowance:

           

Commercial loans

           

Construction — commercial

   $ 11       $ —         $ 30       $ —     

Land development

     —           —           —           —     

Other land loans

     —           —           —           —     

Commercial and industrial

     67         5         77         5   

Multi-family residential

     879         4         1,196         4   

Single family non-owner occupied

     1,405         8         1,813         17   

Non-farm, non-residential

     886         7         1,119         17   

Agricultural

     —           —           —           —     

Farmland

     —           —           —           —     

Consumer real estate loans

           

Home equity lines

     378         8         503         14   

Single family owner occupied

     5,842         27         7,155         48   

Owner occupied construction

     —           —           —           —     

Consumer and other loans

           

Consumer loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with no allowance

     9,468         59         11,893         105   

Impaired loans with a related allowance:

           

Commercial loans

           

Construction — commercial

     —           —           —           —     

Land development

     —           —           —           —     

Other land loans

     111         —           111         1   

Commercial and industrial

     3,922         72         3,973         72   

Multi-family residential

     —           —           —           —     

Single family non-owner occupied

     2,888         11         2,910         42   

Non-farm, non-residential

     6,683         145         6,952         236   

Agricultural

     —           —           —           —     

Farmland

     —           —           —           —     

Consumer real estate loans

           

Home equity lines

     250         —           250         —     

Single family owner occupied

     2,581         28         2,697         53   

Owner occupied construction

     —           —           —           —     

Consumer and other loans

           

Consumer loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with an allowance

     16,435         256         16,893         404   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 25,903       $ 315       $ 28,786       $ 509   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

24


Table of Contents
     For the Three Months Ended      For the Six Months Ended  
     June 30, 2011      June 30, 2011  
     Average      Interest      Average      Interest  
     Recorded      Income      Recorded      Income  
(Amounts in thousands)    Investment      Recognized      Investment      Recognized  

Impaired loans with no related allowance:

           

Commercial loans

           

Construction — commercial

   $ 481       $ —         $ 322       $ —     

Land development

     916         —           458         —     

Other land loans

     2,291         —           1,491         1   

Commercial and industrial

     4,015         —           4,097         —     

Multi-family residential

     1,357         1         1,578         14   

Single family non-owner occupied

     1,158         19         1,263         19   

Non-farm, non-residential

     1,676         10         2,322         10   

Agricultural

     —           —           —           —     

Farmland

     —           —           —           —     

Consumer real estate loans

           

Home equity lines

     644         5         506         8   

Single family owner occupied

     1,479         6         1,250         5   

Owner occupied construction

     241         3         121         3   

Consumer and other loans

           

Consumer loans

     —           —           3         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with no allowance

     14,258         44         13,411         60   

Impaired loans with a related allowance:

           

Commercial loans

           

Construction — commercial

     269         —           135         —     

Land development

     —           —           —           —     

Other land loans

     113         2         113         3   

Commercial and industrial

     651         8         651         8   

Multi-family residential

     786         —           644         —     

Single family non-owner occupied

     2,263         27         2,389         54   

Non-farm, non-residential

     3,052         8         2,322         11   

Agricultural

     —           —           —           —     

Farmland

     333         —           166         —     

Consumer real estate loans

           

Home equity lines

     —           —           49         —     

Single family owner occupied

     6,079         56         5,734         92   

Owner occupied construction

     —           —           —           —     

Consumer and other loans

           

Consumer loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with an allowance

     13,546         101         12,203         168   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 27,804       $ 145       $ 25,614       $ 228   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

25


Table of Contents

The following tables detail the Company’s recorded investment in loans related to each segment in the allowance for loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology at June 30, 2012, and December 31, 2011. The Company is still in the process of identifying purchased performing and credit impaired loans from the Peoples and Waccamaw acquisitions; therefore, those acquired loans have been excluded from the table below.

 

<
     June 30, 2012  
(Amounts in thousands)    Non-acquired
Loans Individually
Evaluated for
Impairment
     Allowance
for Loans
Individually
Evaluated
     Loans
Collectively
Evaluated for
Impairment
     Allowance
for Loans
Collectively
Evaluated
     Acquired
Impaired Loans
Evaluated for
Impairment
     Allowance
for Acquired
Impaired Loans
Evaluated
 

Commercial loans

                 

Construction — commercial

   $ 12       $ —         $ 13,298       $ 491       $ —         $ —     

Land development

     —           —           6,549         136         —           —     

Other land loans

     111         4         26,460         346         —           —     

Commercial and industrial

     3,967         3,731         75,236         1,333         255         8   

Multi-family residential

     796         —           80,010         2,163         —           —     

Single family non-owner occupied

     4,097         441         135,446         2,458         1,141         —     

Non-farm, non-residential

     7,436         1,647         350,269         5,105         483         —     

Agricultural

     —           —           1,643         19         —           —