Exhibit 99.2
COMMUNITY & SOUTHERN HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Management’s Report on Internal Controls | 1 | |||
Report of Independent Auditor | 2 | |||
Consolidated Balance Sheets – December 31, 2013 and 2012 | 4 | |||
Consolidated Statements of Operations for the years ended December 31, 2013 and 2012 | 5 | |||
Consolidated Statements of Comprehensive Income for the years ended December 31, 2013 and 2012 | 6 | |||
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2013 and 2012 | 7 | |||
Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012 | 8 | |||
Notes to Consolidated Financial Statements – (Audited) | 9 | |||
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Community & Southern Holdings, Inc.’s (the “Company”) internal control over financial reporting is a process effected by those charged with governance, management, and other personnel, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of reliable financial statements in accordance with accounting principles generally accepted in the United States of America. The Company’s assessment was conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), and included controls over the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and with the regulatory reporting requirements associated with Form FR Y-9C, Form FR Y-9LP, and the Consolidated Reports of Condition and Income. An entity’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and financial statements for regulatory reporting purposes, and that receipts and expenditures of the entity are being made only in accordance with authorizations of management and those charged with governance; and (3) provide reasonable assurance regarding prevention, or timely detection and correction of unauthorized acquisition, use, or disposition of the entity’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Management is responsible for establishing and maintaining effective internal control over financial reporting, including controls over the preparation of regulatory financial statements. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission inInternal Control—Integrated Framework (1992). Based on that assessment, management concluded that, as of December 31, 2013, the Company’s internal control over financial reporting, including controls over the preparation of regulatory financial statements, is effective based on the criteria established inInternal Control—Integrated Framework (1992).
Management’s assessment of the effectiveness of internal control over financial reporting, including controls over the preparation of regulatory financial statements, as of December 31, 2013, has been audited by PricewaterhouseCoopers, an independent public accounting firm, as stated in their report dated March 25, 2014.
Community & Southern Holdings, Inc.
March 25, 2014
| /s/ Patrick M. Frawley |
Patrick M. Frawley Chief Executive Officer |
| /s/ Anthony P. Valduga |
Anthony P. Valduga Chief Financial Officer |
| /s/ James C. Musselwhite |
James C. Musselwhite Controller |
1
Report of Independent Auditors
To the Board of Directors and Shareholders
of Community & Southern Holdings, Inc.
We have audited the accompanying consolidated financial statements of Community & Southern Holdings, Inc. and its subsidiaries (the “Company”), which comprise the consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for the years then ended. We also have audited the Company’s internal control over financial reporting as of December 31, 2013 based on criteria established inInternal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Management’s Responsibility
The Company’s management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, for maintaining internal control over financial reporting including the design, implementation, and maintenance of controls relevant to the preparation and fair presentation of the consolidated financial statements that are free from material misstatement, whether due to error or fraud, and for its assertion about the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting.
Auditor’s Responsibility
Our responsibility is to express an opinion on the consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We conducted our audits of the consolidated financial statements in accordance with auditing standards generally accepted in the United States of America and our audit of internal control over financial reporting in accordance with attestation standards established by the American Institute of Certified Public Accountants. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement and whether effective internal control over financial reporting was maintained in all material respects.
An audit of financial statements involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit of internal control over financial reporting involves obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that the audit evidence we obtained is sufficient and appropriate to provide a basis for our opinions.
2
Definition and Inherent Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process effected by those charged with governance, management, and other personnel, designed to provide reasonable assurance regarding the preparation of reliable financial statements in accordance with accounting principles generally accepted in the United States of America. Because management’s assessment and our audit were conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), our audit of the Company’s internal control over financial reporting included controls over the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C). A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and those charged with governance; and (iii) provide reasonable assurance regarding prevention or timely detection and correction of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Community & Southern Holdings, Inc. and its subsidiaries at December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established inInternal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ PricewaterhouseCoopers LLP
March 25, 2014
3
Community & Southern Holdings, Inc.
December 31, 2013 and 2012
(In thousands of dollars, except share data)
| 2013 | 2012 | |||||||
Assets | ||||||||
Cash and due from banks | $ | 217,071 | $ | 214,489 | ||||
Investment securities available-for-sale (amortized cost of $432,945 and $351,815, respectively) | 433,037 | 361,696 | ||||||
Investment securities held-to-maturity (market value of $77,527 and $72,084, respectively) | 75,680 | 66,550 | ||||||
Loans held for sale | 1,967 | 24,146 | ||||||
Loans | ||||||||
Originated | 1,358,251 | 865,937 | ||||||
Acquired (including $377,926 and $511,952 covered under FDIC loss share agreements, respectively) | 404,386 | 547,103 | ||||||
Allowance for loan losses for originated loans | (18,450 | ) | (11,792 | ) | ||||
Allowance for loan losses for acquired loans | (12,085 | ) | (18,753 | ) | ||||
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Loans, net of allowance for loan losses | 1,732,102 | 1,382,495 | ||||||
Premises and equipment | 61,962 | 59,751 | ||||||
Other real estate owned (including $46,999 and $121,524 covered under FDIC loss share agreements, respectively) | 47,793 | 122,826 | ||||||
FDIC loss share receivable | 108,267 | 236,400 | ||||||
Goodwill | 11,740 | 10,028 | ||||||
Other intagible assets | 8,554 | 9,391 | ||||||
Bank owned life insurance | 58,999 | 57,561 | ||||||
Other assets | 47,848 | 33,186 | ||||||
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Total assets | $ | 2,805,020 | $ | 2,578,519 | ||||
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Liabilities and Shareholders’ Equity | ||||||||
Liabilities | ||||||||
Deposits | ||||||||
Noninterest-bearing | $ | 279,795 | $ | 244,437 | ||||
Interest-bearing | 1,960,159 | 1,764,963 | ||||||
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Total deposits | 2,239,954 | 2,009,400 | ||||||
Other borrowings | 95,183 | 111,806 | ||||||
Other liabilities | 46,048 | 43,677 | ||||||
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Total liabilities | 2,381,185 | 2,164,883 | ||||||
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Shareholders’ equity | ||||||||
Common stock ($0.01 par value; 100,000,000 shares authorized; 36,949,266 shares issued and outstanding as of December 31, 2013 and 2012, respectively) | 369 | 369 | ||||||
Additional paid-in capital | 370,139 | 366,642 | ||||||
Retained earnings | 52,617 | 39,427 | ||||||
Accumulated other comprehensive income | 710 | 7,198 | ||||||
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Total shareholders’ equity | 423,835 | 413,636 | ||||||
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Total liabilities and shareholders’ equity | $ | 2,805,020 | $ | 2,578,519 | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
4
Community & Southern Holdings, Inc.
Consolidated Statements of Income
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars)
| 2013 | 2012 | |||||||
Interest income | ||||||||
Interest and fees on loans | $ | 124,485 | $ | 125,776 | ||||
Interest and dividends on investment securities | 10,042 | 10,398 | ||||||
Interest on other earning assets | 664 | 667 | ||||||
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Total interest income | 135,191 | 136,841 | ||||||
Interest expense | ||||||||
Deposits | 11,572 | 13,653 | ||||||
Other borrowings | 1,907 | 2,157 | ||||||
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Total interest expense | 13,479 | 15,810 | ||||||
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Net interest income | 121,712 | 121,031 | ||||||
Provision for credit losses for acquired loans | (7,837 | ) | 4,665 | |||||
Provision for credit losses for originated loans | 9,043 | 9,854 | ||||||
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Net interest income after provision for credit losses | 120,506 | 106,512 | ||||||
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Noninterest income | ||||||||
Service charges on deposit accounts | 10,996 | 10,614 | ||||||
Securities gains, net | 2,532 | 1,440 | ||||||
Gain on acquisitions | — | 6,860 | ||||||
FDIC loss share receivable gain (loss) | (7,138 | ) | 4,796 | |||||
Other | 10,514 | 12,722 | ||||||
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Total noninterest income | 16,904 | 36,432 | ||||||
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Noninterest expense | ||||||||
Salaries and employee benefits | 45,375 | 47,637 | ||||||
Occupancy and equipment expense | 11,340 | 10,541 | ||||||
Expense on loans and other real estate owned | 6,135 | 7,140 | ||||||
Other real estate owned and repossession losses, net | 4,715 | 10,041 | ||||||
Amortization expense | 2,309 | 2,137 | ||||||
FDIC accretion expense | 28,222 | 27,126 | ||||||
Other | 22,312 | 25,847 | ||||||
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Total noninterest expense | 120,408 | 130,469 | ||||||
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Income before income taxes | 17,002 | 12,475 | ||||||
Income tax expense (benefit) | 3,812 | (103 | ) | |||||
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Net income | $ | 13,190 | $ | 12,578 | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
5
Community & Southern Holdings, Inc.
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars)
| 2013 | 2012 | |||||||
Net Income | $ | 13,190 | $ | 12,578 | ||||
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Components of other comprehensive income / (loss): | ||||||||
Unrealized gains / (losses) on available-for-sale securities arising during period (net of $2,566 and $783 tax, respectively) | (4,691 | ) | 1,224 | |||||
Reclassification adjustment for net gains realized in earnings (net of $861 and $490 tax, respectively) | (1,671 | ) | (950 | ) | ||||
Amortization of unrealized gains on investment securities transferred from available-for-sale to held-to-maturity | (126 | ) | (123 | ) | ||||
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Total other comprehensive income / (loss) | (6,488 | ) | 151 | |||||
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Comprehensive income | $ | 6,702 | $ | 12,729 | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
6
Community & Southern Holdings, Inc.
Consolidated Statements of Shareholders’ Equity
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars)
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | ||||||||||||||||
Balance at January 1, 2012 | $ | 369 | $ | 363,390 | $ | 26,849 | $ | 7,047 | $ | 397,655 | ||||||||||
Net income | — | — | 12,578 | — | 12,578 | |||||||||||||||
Change in accumulated other comprehensive income | — | — | — | 151 | 151 | |||||||||||||||
Stock-based compensation expense | — | 3,252 | — | — | 3,252 | |||||||||||||||
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Balance at December 31, 2012 | 369 | 366,642 | 39,427 | 7,198 | 413,636 | |||||||||||||||
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Net income | — | — | 13,190 | — | 13,190 | |||||||||||||||
Change in accumulated other comprehensive income | — | — | — | (6,488 | ) | (6,488 | ) | |||||||||||||
Stock-based compensation expense | — | 3,497 | — | — | 3,497 | |||||||||||||||
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Balance at December 31, 2013 | $ | 369 | $ | 370,139 | $ | 52,617 | $ | 710 | $ | 423,835 | ||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
7
Community & Southern Holdings, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars)
| 2013 | 2012 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 13,190 | $ | 12,578 | ||||
Adjustments to reconcile net income to cash provided by operating activities | ||||||||
Net amortization/accretion of premiums and discounts | (55,731 | ) | (80,349 | ) | ||||
Provision for credit losses | (1,206 | ) | 14,519 | |||||
Other real estate owned and repossession losses, net | 4,715 | 10,041 | ||||||
Stock-based compensation expense | 3,497 | 3,252 | ||||||
Deferred income tax expense (benefit) | (17,305 | ) | 6,636 | |||||
Depreciation, amortization and accretion | 3,109 | 1,665 | ||||||
Gain on acquisitions | — | (6,860 | ) | |||||
Securities gains, net | (2,532 | ) | (1,440 | ) | ||||
Net change in loans held for sale | 22,179 | (21,767 | ) | |||||
Net change in FDIC loss share receivable | 128,133 | 126,051 | ||||||
Increase in cash surrender value of bank owned life insurance | (1,437 | ) | (16,700 | ) | ||||
Net change in other assets | (14,420 | ) | 7,742 | |||||
Net change in other liabilities | 23,025 | (11,922 | ) | |||||
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Net cash provided by operating activities | 105,217 | 43,446 | ||||||
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Cash flows from investing activities | ||||||||
Net change in loans held for investment (originations, net of principal repayments) | (317,407 | ) | (323,060 | ) | ||||
Purchases of investment securities available-for-sale | (225,698 | ) | (87,992 | ) | ||||
Proceeds from maturities and calls of investment securities available-for-sale | 99,950 | 121,166 | ||||||
Proceeds from sales of securities available-for-sale | 44,272 | 93,677 | ||||||
Proceeds from calls and maturities of securities held-to-maturity | 1,472 | 2,082 | ||||||
Purchases of securities held-to-maturity | (10,940 | ) | (6,272 | ) | ||||
Purchases of premises and equipment | (3,667 | ) | (9,024 | ) | ||||
Disposals of premises and equipment | 2,500 | 631 | ||||||
Other adjustments in other real estate owned | 15,734 | 36,963 | ||||||
Proceeds from sales of other real estate owned | 91,857 | 61,046 | ||||||
Net cash acquired from acquisitions | 201,313 | 86,370 | ||||||
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Net cash provided by (used in) investing activities | (100,614 | ) | (24,413 | ) | ||||
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Cash flows from financing activities | ||||||||
Net change in deposits | 12,979 | 97,917 | ||||||
Proceeds from other borrowings | 215,000 | — | ||||||
Repayment of other borrowings | (230,000 | ) | (40,000 | ) | ||||
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Net cash provided by (used in) financing activities | (2,021 | ) | 57,917 | |||||
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Change in cash and due from banks | 2,582 | 76,950 | ||||||
Beginning of period | 214,489 | 137,539 | ||||||
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End of period | $ | 217,071 | $ | 214,489 | ||||
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Supplemental disclosure of cash flow information | ||||||||
Transfers of loans to other real estate owned | $ | 37,273 | $ | 90,530 | ||||
Cash paid for interest | 13,516 | 16,087 | ||||||
Cash paid for income taxes | 15,742 | — | ||||||
Change in unrealized gain on securities available-for-sale | (9,788 | ) | 567 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
8
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
| 1. | Summary of Significant Accounting Policies and Nature of Business |
Community & Southern Holdings, Inc. (the “Company”), headquartered in Atlanta, Georgia, is a registered bank holding company with one banking subsidiary: Community & Southern Bank (“CSB”) which operates branches throughout the Atlanta, Georgia metro area and northern Georgia. CSB is the parent company of CSB Investments, Inc. (“CSB Investments”) and Acru Wealth, LLC (“Acru”). CSB Investments is a Nevada corporation which owns all of the investment securities of the Company. Acru is a Georgia limited liability company acquired on July 20, 2012 in connection with the acquisition of First Cherokee State Bank (“FCSB”). Community & Southern Holdings, Inc. was organized on September 18, 2009, as a Delaware corporation, with no activity until January 29, 2010. CSB was organized as a Georgia-state chartered bank and opened on January 29, 2010. As used herein, “the Company” refers to Community & Southern Holdings, Inc., except where the context requires otherwise.
Nature of Business
CSB offers full-service banking services designed to meet the needs of retail and commercial customers in the markets in which it operates, with a focus on the resolution of assets acquired from the Federal Deposit Insurance Corporation (“FDIC”). The services offered include transaction and savings deposit accounts, commercial and consumer lending, asset management and full-service securities brokerage through a third-party provider and other activities related to commercial banking. Acru historically provided insurance products, trust services and access to various other investment products and services through non-bank affiliated, registered third parties. During 2013, the Company discontinued offering these products and services through Acru and transferred all custody accounts to an outside third party. The Company and CSB are subject to the regulations of certain federal and state agencies and are periodically examined by those regulatory agencies.
Basis of Presentation and Consolidation
The accounting and reporting policies of the Company and its subsidiary are in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and, with regard to the banking subsidiary, conform to general industry practices. All intercompany accounts and transactions have been eliminated in consolidation. Assets and liabilities of purchased companies are stated at estimated fair values at the date of acquisition. Results of operations of companies purchased are included from the date of acquisition. Certain reclassifications have been made to prior period amounts to conform to the current period presentation.
Use of Estimates in the Preparation of Financial Statements
The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change include:
| • | Determination of the allowance for loan losses, reserve for unfunded lending commitments, and provision for credit losses |
| • | Income taxes |
| • | Determination of fair values of acquired assets and liabilities |
9
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
| • | Loss estimates related to acquired loans and other real estate owned (“OREO”) |
| • | Goodwill and other intangible assets, including assessment of impairment |
| • | Valuation of OREO |
Cash and Due from Banks
Cash and due from banks includes cash on hand, interest-bearing demand deposits in other banks and amounts due from banks. Cash on hand is defined as having maturities of three months or less, and accordingly, the carrying amount of these instruments is deemed to be a reasonable estimate of fair value.
The Company is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing requirements.
Investment Securities
The Company classifies debt and equity securities into three categories: trading, held-to-maturity and available-for-sale.
Management determines the appropriate classification of investment securities at the time of purchase. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are carried at amortized cost.
Securities classified as trading are held principally for resale in the near term and are recorded at fair value. Gains or losses, either unrealized or realized, are reported in noninterest income. At December 31, 2013 and 2012, the Company had no investment securities classified as trading.
Investment securities not classified as either held-to-maturity or trading are classified as available-for-sale. Investment securities available-for-sale are stated at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of accumulated other comprehensive income in the Consolidated Statements of Comprehensive Income.
The amortized cost of debt securities classified as either held-to-maturity or available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization is considered an adjustment to yield on the security and included in interest income from investments. Interest and dividends are included in interest and dividends on investment securities in the Consolidated Statements of Income.
Gains and losses realized from the sales of investment securities are determined by specific identification and are included in noninterest income. Available-for-sale and held-to-maturity securities are reviewed quarterly for potential impairment. The Company determines whether it has the intent to sell a debt security or whether it is more likely than not it will be required to sell the debt security before the recovery of its amortized cost basis. If either condition is met, the Company will recognize an impairment loss necessary to reduce the carrying value of the debt security to fair value. For all other debt securities for which the Company does not expect to recover the entire amortized cost basis of the security and do not meet either condition, an other-than-temporary loss is considered to have occurred and the Company records the credit loss portion of impairment in earnings and the impairment related to all other factors in other comprehensive income/(loss).
10
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
Loans Held for Sale
Loans held for sale are residential mortgage loans, secured by single family residential dwellings, newly originated for the purpose of sale to third parties. Loans held for sale are measured at the lower of cost or fair value. Origination fees and costs for loans held for sale are capitalized in the basis of the loan and are included in the calculation of realized gains and losses upon sale.
Originated Loans
Loans that the Company has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at the principal balance outstanding. Loan origination and commitment fees received and certain direct loan origination costs paid are deferred and the net amount is amortized as an adjustment to the related loan’s yield using the effective interest method. All loan types are placed on nonaccrual status when it is probable that principal or interest is not fully collectible, or when principal or interest becomes 90 days past due, whichever occurs first. Certain loans past due 90 days or more may remain in accrual status if management determines that it does not have a concern over the collectability of principal or interest. Loans of all types which become 90 days delinquent are reviewed for collectability. Unless such loans are in the process of modification, collection through repossession or foreclosure, those loans deemed uncollectible are charged off against the allowance for loan losses.
When a loan is placed on nonaccrual, interest income that has been accrued in the current year is reversed. Interest income on nonaccrual loans, if recognized, is recorded after principal on a loan has first been reduced to zero. If and when borrowers demonstrate the sustained ability to repay a loan in accordance with the contractual terms of a loan classified as nonaccrual, the loan may be returned to accrual status.
Acquired Loans (including loans covered under FDIC loss share agreements)
The Company accounts for its acquisitions using 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 as the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value, exclusive of any loss share agreements with the FDIC. The fair value assumptions associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.
The Company is accounting for the majority of loans acquired through FDIC assisted transactions under the guidance governing acquired loans with deteriorated credit quality except loans with revolving privileges, which are outside the scope of this guidance. For acquired loans being accounted for as acquired loans with deteriorated credit quality, interest income is recognized through accretion of the difference between the carrying value of the loan pool and the gross expected cash flows, from such pool, on a level-yield basis over the loans’ estimated life. For pools that have no carrying value, income is recognized as cash is received under the cost recovery method.
Acquired loans outside the scope of acquired loans with deteriorated credit quality guidance are accounted for under the guidance related to recognizing discount accretion based upon the acquired loan’s contractual cash flows. Discounts created when the loans were recorded at their estimated fair values at acquisition are ratably amortized over the remaining contractual term of the loan as an adjustment to the related loan’s yield. The accrual of contractual interest income and any unamortized discounts is discontinued when the collection of a loan or interest, in whole or part, is doubtful.
11
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
Loans acquired in FDIC-assisted transactions that are initially covered under loss share agreements are referred to as covered loans.
Troubled Debt Restructuring
A restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to a borrower that it would not otherwise consider. That concession either stems from an agreement between the Company and a borrower or is imposed by law or a court.
TDRs are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered to be a collateral-dependent loan, the loan is reported, net, at the fair value of the collateral.
Modification of loans accounted for within a pool are not subject to TDR guidance and therefore do not result in removal of these loans from the pool even if the modification would otherwise be considered a TDR. Loans accounted for individually under the acquired loans with deteriorated credit quality guidance continue to be subject to the TDR accounting provisions.
Allowance for Loan Losses for Originated Loans
The allowance for loan losses is a valuation account available to absorb probable incurred losses within the loan portfolio. The level of the allowance for loan losses is based upon management’s evaluation of the loan portfolio including such factors as past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, market and economic conditions, borrower’s payment status, internal credit risk ratings and other relevant factors. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Loans are charged off when management believes that the ultimate collectability of the loan is unlikely. Allocation of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, is deemed to be uncollectible.
Management’s determination of the adequacy of the allowance is based upon an assessment of the estimated probable incurred losses in the loan portfolio given the conditions at the time. The allowance is increased by provisions charged to expense and decreased by actual charge-offs, net of recoveries.
The allowance adequacy assessment begins with a process of estimating the probable incurred losses in the loan portfolio. These estimates are established by category and based upon the Company’s internal system of credit risk ratings and historical loss data. The estimate of probable incurred losses in the loan portfolio may then be adjusted for management’s estimate of additional probable incurred losses as a result of specific credit exposures, trends in delinquent and nonaccrual loans, as well as other factors such as prevailing economic conditions, lending strategies and other influencing factors.
The Company considers a loan to be impaired and placed on nonaccrual when, based upon current information and events, it believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Management reviews all impaired loans individually to determine if a specific allowance based upon the borrower’s overall financial condition, resources and payment record, support from guarantors and the realizable value of any collateral is necessary. Specific allowances are based upon
12
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
discounted cash flows using a loan’s initial effective interest rate or the fair value of the collateral for collateral dependent loans. If the recorded investment in the impaired loan exceeds its fair value, a valuation allowance is required as a component of the allowance for loan losses. Interest income for impaired, nonaccruing, loans is recorded on a cash basis during the period the loans are considered impaired after recovery of principal.
Reserve for Unfunded Lending Commitments
The Company also estimates probable incurred losses related to unfunded lending commitments, such as letters of credit and binding unfunded loan commitments. Unfunded lending commitments are analyzed and segregated by risk similar to funded loans based upon the Company’s internal credit risk ratings. These risk classifications, in combination with an analysis of historical loss experience, existing economic conditions, and any other pertinent information, result in the estimation of the reserve for unfunded lending commitments. The unfunded commitment reserve is reported in the Consolidated Balance Sheets within other liabilities while the change in the reserve is reported within the provision for credit losses for originated loans within the Consolidated Statements of Income.
Allowance for Loan Losses for Acquired Loans (including loans covered under FDIC loss share agreements)
The Company also maintains an allowance for loan losses on acquired loans. For purposes of applying the guidance for acquired loans with deteriorated credit quality, the Company groups acquired loans into pools based upon common risk characteristics and periodically re-estimates expected cash flows. Estimated fair values for acquired loans are based upon a discounted cash flows methodology that considers various factors including the type of loan, collateral, credit quality, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting effective yield of the pool. These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change in future periods.
A decline in gross expected cash flows for a pool of loans results in impairment and is recorded as provision for credit losses on acquired loans expense on a discounted basis during the period. Improvement in gross expected cash flows for a pool of loans, once any previously recorded impairment is recaptured, is recognized prospectively as an adjustment to the yield on the loans in the pool. The estimated reimbursement on covered loan losses due from the FDIC under loss share agreements resulting from changes to loan impairment is recorded as both an FDIC loss share receivable gain and an increase to the FDIC loss share receivable at the time loan impairment is recognized.
Charge-offs on acquired loans accounted for under the guidance of acquired loans with deteriorated credit quality are first applied to purchase discount until exhausted. Subsequent charge-offs are applied to the allowance for loan losses.
For acquired loans outside the scope of acquired loans with deteriorated credit quality guidance, an allowance for loan losses is measured using a similar methodology to the originated portfolio. The allowance for loan losses is recorded once the incurred credit losses exceed remaining purchase discount.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed by the straight-line method and are expensed over the estimated useful lives of the assets, which range from 25 to 50 years for premises and 3 to 10 years for furniture, software and equipment.
13
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
Leasehold improvements are amortized over the terms of the respective leases or the useful lives of the improvements, whichever is shorter. Gains and losses on dispositions are recorded in other noninterest income. Premises and equipment are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Maintenance and repairs are charged to occupancy and equipment expense as incurred.
OREO
OREO includes assets that have been acquired in satisfaction of debt through foreclosure. OREO is recorded at the lower of cost or fair value, minus estimated costs to sell. Subsequent to foreclosure, losses resulting from the periodic revaluation of the property are charged to net income and a new carrying value is established. Any gains or losses realized at the time of disposal are reflected in the Consolidated Statements of Income.
FDIC Loss Share Receivable
The FDIC loss share receivable results from loss share agreements in FDIC-assisted transactions which are measured separately from the related covered assets as they are not contractually embedded in those assets and are not transferable should the Company choose to dispose of the covered assets. The FDIC loss share receivable represents expected reimbursements from the FDIC for losses on covered assets.
Pursuant to the terms of the loss share agreements, covered assets are subject to a stated loss threshold or loss tranches, as outlined in each loss share agreement, whereby the FDIC will reimburse the Company for certain losses in accordance with each respective loss share agreement. The Company will reimburse the FDIC for its share of recoveries with respect to losses for which the FDIC paid the Company a reimbursement under the loss share agreement. The FDIC’s obligation to reimburse the Company for losses with respect to covered assets begins with the first dollar of loss incurred.
The FDIC loss share receivable was recorded at its estimated fair value at the time each FDIC-assisted transaction was consummated. Subsequent accounting for the FDIC loss share receivable is closely related to the accounting for the underlying, covered assets and is treated as an indemnification asset under the guidance for identifiable assets and liabilities in a business combination. The Company re-estimates the gross expected indemnification asset cash flows in conjunction with the periodic re-estimation of cash flows on covered loans accounted for under the guidance related to acquired loans with deteriorated credit quality. Improvements in cash flow expectations on covered loans generally result in a related decline in the expected indemnification cash flows. The resultant decrease in the value of the FDIC loss share receivable is reflected as an adjustment to its level-yield basis amortization over the lesser of the contractual term of the indemnification agreement and the remaining life of the indemnified assets. Conversely, declines in gross cash flow expectations on covered loans generally result in an increase in expected indemnification cash flows. The resultant increase in the value of the FDIC loss share receivable is reflected immediately in earnings to the extent that a previously recorded valuation allowance is reversed; otherwise, the increase in the value of the FDIC loss share receivable is reflected as an adjustment to its level-yield basis amortization over the lesser of the contractual term of the indemnification agreement and the remaining life of the indemnified assets. For covered OREO, additional FDIC loss share receivable may be established as subsequent write-downs to OREO occur or as gains and losses on sales of OREO are recognized.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Goodwill is not amortized but tested for impairment on an annual basis, or more often, if events or
14
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
circumstances indicate there may be impairment. Goodwill impairment exists when a reporting unit’s carrying value of goodwill exceeds its implied fair value, which is determined through a two-step impairment test. As described in Recent Accounting Pronouncements, new guidance governing the testing of indefinite lived intangible assets for impairment allows the option to first assess Goodwill by utilizing qualitative factors in determining if it is more likely than not that carrying value exceeds fair value. If, through this analysis, it is determined that it is more likely than not that carrying value exceeds fair value, then the next step, referred to as Step 1, requires estimation of the fair value of the reporting unit. If the fair value of the reporting unit exceeds its carrying value, no further testing is required. If the carrying value exceeds the fair value, further analysis is required to determine whether an impairment charge must be recorded based upon the implied fair value of goodwill and, if so, the amount of such charge. A qualitative assessment was performed on the Company’s one reporting unit as of September 30, 2013. Qualitative factors indicated that it was more likely than not that the fair value of the Company’s goodwill exceeded its carrying value. As such, Step 1 testing was not required. Additionally, no triggering events were identified since the analysis performed on September 30, 2013.
As a result of the Company’s acquisitions, identifiable intangible assets were recorded representing the estimated value of core deposits assumed. These intangible assets are amortized over their estimated useful lives, which are periodically reviewed for reasonableness and are evaluated for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable.
Bank Owned Life Insurance
Bank Owned Life Insurance (“BOLI”) is long-term life insurance on the lives of certain employees where the insurance policy benefits and ownership are retained by the employer. To date, the Company has purchased life insurance policies on certain senior officers. BOLI is recorded at the cash surrender value that can be adjusted for charges due at settlement at the balance sheet date. The cash value accumulation on BOLI is permanently tax deferred if the policy is held to the insured person’s death.
Other Assets
Other assets include investments in the Federal Home Loan Bank of Atlanta (“FHLBA”) stock, prepaid expenses, net tax assets (current and deferred), and accrued interest receivable. The FHLBA requires member banks to purchase stock as a condition of membership and other criteria including the amount of advances outstanding. FHLBA stock is generally redeemable based upon guidelines established by the issuing bank. The investments in FHLBA stock are reported at cost and evaluated for impairment based upon the ultimate recoverability of the par value. Prepaid expenses are payments made by the Company for services to be received in the near future. While the Company initially records these as assets, their value is expensed, as incurred, when the benefit is received. Accrued interest represents the interest that has been earned from a borrowers’ loan or investment securities but not yet received.
Other Liabilities
Other liabilities include the FDIC Clawback liability, the unfunded commitment reserve, accrued interest on deposits and other payables. The FDIC Clawback liability represents a reimbursement the Company may be required to pay the FDIC if actual losses are less than certain thresholds established in each loss share agreement. Accrued interest on deposits represents interest that has been earned and payable to depositors. Other payables are expenses incurred by the Company for services received that will be paid in the near future.
15
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
Income Taxes
Income tax expense is based upon income before income taxes and generally differs from income taxes paid due to deferred income taxes and benefits arising from income and expenses being recognized in different periods for financial and income tax reporting purposes, as well as permanent differences, such as gains on acquisitions. The Company uses the asset and liability method to account for deferred income taxes. The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the income tax basis of the Company’s assets and liabilities at the effective rates expected to be in effect when such amounts are realized or settled. The Company evaluates the realization of deferred tax assets based upon all positive and negative evidence available at the balance sheet date. Realization of deferred tax assets is based upon the Company’s judgments, including taxable income within any applicable carryback periods, future projected taxable income, reversal of taxable temporary differences and other tax-planning strategies to maximize realization of the deferred tax assets. A valuation allowance is recognized for a deferred tax asset if, based upon the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. In computing the income tax provision or benefit, the Company evaluates the technical merits of its income tax positions based upon current legislative, judicial and regulatory guidance.
The Company continually monitors and evaluates the potential impact of current events on the estimates used to establish income tax expense and income tax liabilities. The Company and its subsidiary file a consolidated federal income tax return and separate state income tax returns based upon current tax law, positions taken by various tax auditors within the jurisdictions that the Company is required to file income tax returns, as well as potential or pending audits or assessments by such tax auditors. If the Company incurs interest and/or penalties related to income tax matters it will report them as a part of income tax expense.
Pension Accounting
The Company maintains an unfunded, noncontributory, nonqualified supplemental executive retirement plan (“SERP”) that covers key executives. The plan provides defined benefits based upon a fixed cash benefits schedule. The Company adopted authoritative guidance for employers’ accounting for pensions which require accounting for the SERP using the actuarial model and requires the recognition of the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability on the Consolidated Balance Sheets.
Other Comprehensive Income
Other comprehensive income is defined as the change in shareholders’ equity during the period from transactions and other events and circumstances from nonowner sources. Accumulated other comprehensive income includes the reclassification for realized gains and losses from securities sales during the period, the unrealized holding gains and losses from investment securities available-for-sale and the amortization of unrealized gains on investment securities transferred from available-for-sale to held-to-maturity.
Stock-based Compensation
The Company grants stock options and other equity awards to purchase its common stock to certain key officers/employees and directors. Stock options are for a fixed number of shares with an exercise price equal to the fair value of the shares at the grant date. Stock-based compensation expense is recognized in the Consolidated Statements of Income on a straight-line basis over the vesting period. In addition, the Company estimates the
16
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
number of awards for which vesting is probable and adjusts compensation cost accordingly. As compensation expense is recognized, a deferred tax asset is recorded that represents an estimate of the future tax deduction from exercise. At the time that stock-based awards are exercised, cancelled, or expire, the Company may be required to recognize an adjustment to income tax expense.
Fair Values
US GAAP requires the use of fair values in determining the carrying values of certain assets and liabilities, as well as for specific disclosures. Fair value is defined as the price that would be received to sell an asset or transfer a liability in an orderly transaction between willing market participants at the measurement date. When determining the fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which those assets or liabilities are sold and considers assumptions that market participants would use when pricing those assets or liabilities.
Individual fair value estimates are ranked on a three-tiered scale based upon the relative reliability of the inputs used in the valuation. Fair values determined using Level 1 inputs rely on active and observable markets to price identical assets or liabilities. In situations where identical assets and liabilities are not traded in active markets, fair values may be determined based upon Level 2 inputs, which are used when observable data exists for similar assets and liabilities. Fair values for assets and liabilities that are not actively traded in observable markets are based upon Level 3 inputs, which are considered to be unobservable. Certain financial assets and liabilities are eligible for measurement at fair value with changes in fair value recognized in the income statements each period. Upon inception, the Company elected not to measure any assets and liabilities at fair value other than those otherwise required to be measured at fair value.
Acquisitions
US GAAP requires that the acquisition method of accounting be used for all business combinations and an acquirer be identified. The acquirer is the entity that obtains control of one or more businesses in the business combination and the acquisition date is the date the acquirer achieved control. The acquirer recognizes the fair value of assets acquired, liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date. If the fair value of assets purchased exceeded the fair value of liabilities assumed, it results in a “gain on acquisition”. If the consideration given exceeds the fair value of the net assets received, goodwill is recognized. Generally, fair values are subject to refinement for up to one year after the closing date of an acquisition as information relative to closing date fair values becomes available (the “measurement period”). During the measurement period, the Company recognizes adjustments to the initial amounts recorded as if the accounting for the business combination had been completed at the acquisition date. Adjustments are typically recorded as a result of new information received after the acquisition date that is necessary to identify and measure identifiable assets acquired and liabilities assumed.
Operating Segments
Accounting standards require that information be reported about a company’s operating segments using a “management approach.” Reportable segments are identified in these standards as those revenue-producing components for which separate financial information is produced internally and which are subject to evaluation by the chief operating decision maker. While the chief operating decision maker monitors the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.
17
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
Recent Accounting Pronouncements
In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The ASU provides additional guidance to assist creditors in determining whether a modification of a receivable meets the criteria to be considered a TDR, both for purposes of recognizing loan losses and additional disclosures regarding TDRs. A modification of a credit arrangement constitutes a TDR if the debtor is experiencing financial difficulties and the Company grants a concession to the debtor that it would not otherwise consider. The clarifications for classification apply to all restructurings occurring on or after January 1, 2011. The related disclosures, which were previously deferred by ASU 2011-01 are required for annual periods ending on or after December 15, 2012 with early adoption permitted and require that all restructurings occurring after the beginning of the year of adoption be evaluated under the new guidance. The adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations.
In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. A repurchase agreement is a transaction in which a company sells financial instruments to a buyer, typically in exchange for cash and simultaneously enters into an agreement to repurchase the same or substantially the same financial instruments from the buyer at a stated price plus accrued interest at a future date. The determination of whether the transaction is accounted for as a sale or a collateralized financing is determined by assessing whether the seller retains effective control of the financial instrument. The ASU changes the assessment of effective control by removing the criterion that requires the seller to have the ability to repurchase or redeem financial assets with substantially the same terms, even in the event of default by the buyer and the collateral maintenance implementation guidance related to that criterion. The guidance is effective for annual periods beginning on or after December 15, 2011. The adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820):Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRS.Certain provisions clarify the Board’s intent about the application of existing fair value measurement and disclosure requirements, while others change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The guidance is to be applied prospectively and is effective for annual periods beginning after December 15, 2011. The adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations.
In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220):Presentation of Comprehensive Income. The ASU requires presentation of the components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. The update does not change the items presented in other comprehensive income. The guidance is effective on January 1, 2012 and must be applied retrospectively for all periods presented. The adoption of the guidance did not have a material impact on the Company’s financial condition or results of operations.
In September 2011, the FASB issued ASU 2011-08, Intangibles-Goodwill and Other (Topic 350):Testing Goodwill for Impairment. The ASU amends interim and annual goodwill impairment testing requirements. Under the ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The “more likely than not” threshold is defined as having a likelihood of more than 50 percent. The guidance is effective for
18
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
annual and interim goodwill impairment tests beginning January 1, 2012 with early adoption permitted. The adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations.
In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210):Disclosures about Offsetting Assets and Liabilities and then amended the scope of ASU 2011-11 in January 2013 through the issuance of ASU 2013-01, Balance Sheet (Topic 210):Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The update requires entities to disclose information about offsetting and related arrangements of financial instruments and derivative instruments. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with current literature or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with current literature. The guidance is effective for fiscal years beginning on or after January 1, 2013. The adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations.
In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220):Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The amendments in this update defer those changes in ASU 2011-05 that relate to the presentation of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. All other requirements in ASU 2011-05 are not affected by this update. The amendments are effective for fiscal years ending after December 15, 2012. The adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations.
In July 2012, the FASB issued ASU 2012-02, Intangibles – Goodwill and Other (Topic 350):Testing Indefinite – Lived Intangible Assets for Impairment. The ASU amends the guidance related to testing indefinite-lived intangible assets, other than goodwill, for impairment. The ASU allows for a qualitative assessment in testing an indefinite-lived intangible asset for impairment before calculating the fair value of the asset. If the qualitative assessment determines that it is more likely than not that the asset is impaired, then a quantitative assessment of the fair value of the asset is required; otherwise, the quantitative calculation is not necessary. The guidance is effective January 1, 2013; however, early adoption is permitted. The adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations.
In October 2012, the FASB issued ASU 2012-06, Business Combinations (Topic 805):Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution. The amendments in this update clarify the applicable guidance for subsequently measuring an indemnification asset recognized as a result of a government-assisted acquisition of a financial institution. The update provides that changes in cash flows expected to be collected on the indemnification asset arising subsequent to initial recognition as a result of changes in cash flows expected to be collected on the related indemnified assets should be accounted for on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement. The guidance is effective prospectively for fiscal years beginning on or after December 15, 2012. The adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations.
In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220):Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The new amendment requires companies to present information about reclassification adjustments from accumulated other comprehensive income in a single
19
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
note or on the face of the financial statements. Additionally, companies are to disclose, by component, reclassifications out of accumulated other comprehensive income and their effects on the respective line items on net income and other disclosures currently required under U.S. GAAP. The guidance is effective prospectively for fiscal years beginning on or after December 15, 2012. The adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations.
| 2. | Acquisitions |
The Company has determined that the acquisitions completed during the years ended December 31, 2013 and 2012 constitute business combinations. Accordingly, assets acquired and liabilities assumed are recorded initially at their acquisition-date fair values. In many cases, the determination of these fair values requires management to make estimates about discount rates, future expected cash flows, market conditions, and other future events that are highly subjective in nature and subject to change.
Estimated fair values are considered preliminary and, in accordance with US GAAP, are subject to change for up to one year after the acquisition date if additional information relative to acquisition-date fair values becomes available. Material adjustments to acquisition-date fair values are recorded in the period in which the acquisition occurs; therefore, previously reported results are subject to change.
On November 8, 2013, the Company purchased Essex Bank’s (“Essex”) Georgia banking franchise, which was comprised of four bank branches located in Loganville, Snellville, Grayson and Covington, Georgia. The table below presents a summary of the assets and liabilities purchased from Essex:
| Essex | Carrying Value Acquired | Purchase Adjustments | As Recorded by CSB | |||||||||
Assets | ||||||||||||
Cash and due from banks | $ | 187,940 | $ | — | $ | 187,940 | ||||||
Other intangible assets | — | 1,214 | 1,214 | |||||||||
Premises and equipment | 5,174 | (43 | ) | 5,131 | ||||||||
Other assets | 191 | — | 191 | |||||||||
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Total assets acquired | $ | 193,305 | $ | 1,171 | $ | 194,476 | ||||||
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Liabilities | ||||||||||||
Deposits | ||||||||||||
Noninterest-bearing | $ | 15,869 | $ | — | $ | 15,869 | ||||||
Interest-bearing | 177,301 | 192 | 177,493 | |||||||||
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Total deposits | 193,170 | 192 | 193,362 | |||||||||
Other liabilities | 135 | — | 135 | |||||||||
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Total liabilities assumed | $ | 193,305 | $ | 192 | $ | 193,497 | ||||||
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Net identifiable assets acquired | $ | 979 | ||||||||||
Cash consideration transferred to Essex | (2,569 | ) | ||||||||||
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Goodwill | $ | (1,590 | ) | |||||||||
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The acquisition of the Essex branches resulted in the recognition of $1,590 in goodwill, which is fully tax-deductible for tax purposes. The goodwill arose primarily as a result of the expected synergies from combining the operations of the Essex branches with the Company.
20
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
On July 20, 2012, the Company purchased substantially all of the assets and assumed substantially all of the deposits and other borrowings of Georgia Trust Bank (“GTB”) from the FDIC, as Receiver of GTB, in order to expand the Company’s banking presence in Georgia. GTB operated two commercial banking branches in north metro Atlanta, Georgia. GTB was placed into receivership with the FDIC upon its closure by the Georgia Department of Banking and Finance.
The Company and the FDIC entered into a loss share agreement regarding future losses incurred on loans and OREO existing at the acquisition date. The FDIC will reimburse the Company for 80 percent of total losses incurred on applicable non-single family loans. The term for loss share on non-single family loans is five years with respect to losses and eight years with respect to loss recoveries.
The Company did not acquire the real estate, banking facilities, furniture and equipment of GTB as of July 20, 2012, but retained the option to purchase these assets at fair market value from the FDIC. The Company completed a review of the former GTB locations and notified the FDIC that it did not intend to purchase any real estate, banking facilities, furniture and equipment of GTB.
During 2013, the Company made certain adjustments to the estimated fair values of the assets and liabilities acquired in connection with the GTB acquisition based upon new information that was not originally available as of the acquisition date.
The table below presents a summary of the assets and liabilities purchased in the GTB acquisition:
| GTB | Carrying Value per FDIC | Purchase Adjustments | As Initially Recorded by CSB | Subsequent Adjustments | As Finally Recorded by CSB | |||||||||||||||
Assets | ||||||||||||||||||||
Cash and due from banks | $ | 23,110 | $ | 11,381 | $ | 34,491 | $ | — | $ | 34,491 | ||||||||||
Federal funds sold | 4,475 | — | 4,475 | — | 4,475 | |||||||||||||||
Investment securities available-for-sale | 9,994 | (29 | ) | 9,965 | — | 9,965 | ||||||||||||||
Loans | 69,108 | (16,606 | ) | 52,502 | — | 52,502 | ||||||||||||||
OREO | 6,446 | (2,763 | ) | 3,683 | — | 3,683 | ||||||||||||||
FDIC Loss Share Receivable | — | 11,245 | 11,245 | — | 11,245 | |||||||||||||||
Other intangible assets | — | 342 | 342 | — | 342 | |||||||||||||||
Other assets | 280 | (185 | ) | 95 | (57 | ) | 38 | |||||||||||||
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Total assets acquired | $ | 113,413 | $ | 3,385 | $ | 116,798 | $ | (57 | ) | $ | 116,741 | |||||||||
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Deposits | ||||||||||||||||||||
Noninterest-bearing | $ | 55,605 | $ | — | $ | 55,605 | $ | — | $ | 55,605 | ||||||||||
Interest-bearing | 54,574 | — | 54,574 | — | 54,574 | |||||||||||||||
Total deposits | 110,179 | — | 110,179 | — | 110,179 | |||||||||||||||
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| |||||||||||
FDIC clawback liability | — | 236 | 236 | — | 236 | |||||||||||||||
Deferred tax liability | — | 2,468 | 2,468 | (22 | ) | 2,446 | ||||||||||||||
Other liabilities | 40 | — | 40 | — | 40 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total liabilities assumed | $ | 110,219 | $ | 2,704 | $ | 112,923 | $ | (22 | ) | $ | 112,901 | |||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Excess of assets assumed over liabilities acquired | $ | 3,194 | $ | 681 | $ | (35 | ) | |||||||||||||
|
|
|
|
|
| |||||||||||||||
Gain on acquisition of GTB | $ | 3,875 | $ | 3,840 | ||||||||||||||||
|
|
|
| |||||||||||||||||
21
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
The acquisition of GTB resulted in a bargain purchase gain of $3,840, which is included in “gain on acquisitions” within the Consolidated Statements of Income. The gain represents the excess of the estimated fair value of the assets acquired (including cash payments received from the FDIC) over the estimated fair value of the liabilities assumed and is influenced significantly by the FDIC-assisted transaction process.
On July 20, 2012, the Company purchased substantially all of the assets and assumed substantially all of the deposits and other borrowings of FCSB from the FDIC, as Receiver, of FCSB, in order to expand the Company’s banking presence in Georgia. FCSB operated three commercial banking branches in north metro Atlanta, Georgia. FCSB was placed into receivership with the FDIC upon its closure by the Georgia Department of Banking and Finance.
The Company and the FDIC entered into loss share agreement regarding future losses incurred on loans and OREO existing at the acquisition date. The FDIC will reimburse the Company for 80 percent of total losses incurred on applicable non-single family loans. The term for loss share on non-single family loans is five years with respect to losses and eight years with respect to loss recoveries.
The Company did not acquire the real estate, banking facilities, furniture and equipment of FCSB as of July 20, 2012, but retained the option to purchase these assets at fair market value from the FDIC. The Company completed a review of the former FCSB locations and notified the FDIC of its intent to purchase certain real estate, banking facilities and equipment for a combined purchase price of $1,815. The purchase was completed in the second quarter of 2013.
During 2013, the Company made certain adjustments to the estimated fair values of the assets and liabilities acquired in connection with the FCSB acquisition based upon new information that was not originally available as of the acquisition date.
22
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
The table below presents a summary of the assets and liabilities purchased in the FCSB acquisition:
| FCSB | Carrying Value per FDIC | Purchase Adjustments | As Initially Recorded by CSB | Subsequent Adjustments | As Finally Recorded by CSB | |||||||||||||||
Assets | ||||||||||||||||||||
Cash and due from banks | $ | 28,409 | $ | 18,889 | $ | 47,298 | $ | 105 | $ | 47,403 | ||||||||||
Investment securities available-for-sale | 15,466 | (84 | ) | 15,382 | — | 15,382 | ||||||||||||||
Loans | 130,894 | (25,082 | ) | 105,812 | — | 105,812 | ||||||||||||||
OREO | 31,146 | (21,998 | ) | 9,148 | — | 9,148 | ||||||||||||||
FDIC Loss Share Receivable | — | 32,052 | 32,052 | — | 32,052 | |||||||||||||||
Other intangible assets | — | 1,068 | 1,068 | — | 1,068 | |||||||||||||||
Other assets | 4,680 | (3,215 | ) | 1,465 | — | 1,465 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total assets acquired | $ | 210,595 | $ | 1,630 | $ | 212,225 | $ | 105 | $ | 212,330 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Liabilities | ||||||||||||||||||||
Deposits | ||||||||||||||||||||
Noninterest-bearing | $ | 87,693 | $ | — | $ | 87,693 | $ | — | $ | 87,693 | ||||||||||
Interest-bearing | 91,363 | — | 91,363 | — | 91,363 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total deposits | 179,056 | — | 179,056 | — | 179,056 | |||||||||||||||
Other borrowings | 25,140 | 1,826 | 26,966 | — | 26,966 | |||||||||||||||
FDIC clawback liability | — | 385 | 385 | — | 385 | |||||||||||||||
Deferred tax liability | — | 2,164 | 2,164 | (243 | ) | 1,921 | ||||||||||||||
Other liabilities | 253 | — | 253 | 729 | 982 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total liabilities assumed | $ | 204,449 | $ | 4,375 | $ | 208,824 | $ | 486 | $ | 209,310 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Excess of assets assumed over liabilities acquired | $ | 6,146 | $ | (2,745 | ) | $ | (381 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||||||
Gain on acquisition of FCSB | 3,401 | $ | 3,020 | |||||||||||||||||
|
|
|
| |||||||||||||||||
The acquisition of FCSB resulted in a bargain purchase gain of $3,020, which is included in “gain on acquisitions” within the Consolidated Statements of Income. The gain represents the excess of the estimated fair value of the assets acquired (including cash payments received from the FDIC) over the estimated fair value of the liabilities assumed and is influenced significantly by the FDIC-assisted transaction process.
The following is a description of the methods used to determine the fair values of significant assets and liabilities acquired:
Cash and Due from Banks
The carrying amount of these assets is expected to reasonably approximate fair value given the short-term nature of the assets.
Federal Funds Sold
The carrying amount of federal funds sold is expected to reasonably approximate fair value based upon the short-term nature of the asset.
23
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
Investment Securities Available-for-sale
Fair values for investment securities are determined by quoted market prices at the time of acquisition.
Loans
Fair values for acquired loans are estimated upon a discounted cash flow methodology that considered factors including the type of loans and related collateral, classification status, fixed or variable interest rate, loan term and whether or not the loan was amortizing and a market discount rate reflecting risks inherent in the acquired loans. Fair values of acquired loans include both a rate-based valuation mark, representing the carrying value of discount required to establish the appropriate effective yield for acquired loans, as well as a credit-based valuation mark representing the valuation adjustment applied to acquired loans related to credit loss assumptions.
OREO
Fair values for OREO are estimated based upon the value that management expects to receive when the property is sold, net of related costs of disposal.
FDIC Loss Share Receivable
The fair value of the FDIC loss share receivable is estimated based upon a discounted cash flow methodology that considers the amount and timing of losses expected to be submitted to the FDIC for indemnification. The indemnification asset is measured separately from the related covered assets as it is not contractually embedded in the covered assets and is not transferable with the covered assets should the Company choose to dispose of them.
Other Intangible Assets
Fair values for intangible assets are estimated based upon a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the deposit base and the net maintenance cost attributable to customer deposits.
Premises and Equipment
Fair values for premises and equipment are estimated based upon independent appraisals.
Other Assets
Other assets include accrued interest that has been earned on borrowers’ loans or investment securities not yet received and prepaid expenses. The carrying value of these assets is expected to reasonably approximate fair value.
Deposits
The fair values used for the noninterest-bearing deposits that comprise the transactions accounts acquired closely approximate the amount payable on demand at the acquisition date and thus reasonably approximate fair value. The fair value of interest-bearing deposits is estimated based upon a discounted cash flow methodology. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. For GTB and FCSB, no fair value adjustments were applied for time deposits as the Company was provided with the option, upon acquisition, to reset deposit rates to market rates currently offered.
24
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
Other Borrowings
The fair values of other borrowings are estimated using a discounted cash flow methodology that considers contractual pre-payment penalties determined by the lender.
FDIC Clawback Liability
The FDIC clawback liability represents the present value of future payments to the FDIC in the event that losses fail to reach expected levels. The fair value of the FDIC clawback liability is estimated based upon a discounted cash flow methodology.
Deferred Tax Liability
Deferred tax liabilities are temporary differences between the carrying amount of a liability recognized in the Consolidated Balance Sheets and the related tax basis for the liability using enacted tax rates in effect for the year in which the difference are expected to be recovered.
Other Liabilities
Other liabilities include accrued interest on deposit accounts and additional accounts held in escrow. The carrying value of these liabilities is expected to reasonably approximate fair value.
| 3. | Investment Securities |
The aggregate values of investment securities at December 31, 2013 and 2012 along with gains and losses determined on an individual security basis are as follows:
| Held-to-Maturity As of December 31, 2013 | Available-for-Sale As of December 31, 2013 | |||||||||||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||||||
U.S. government | $ | — | $ | — | $ | — | $ | — | $ | 30,120 | $ | — | $ | 1,750 | $ | 28,370 | ||||||||||||||||
Certificates of deposit | 10,777 | 4 | 174 | 10,607 | — | — | — | — | ||||||||||||||||||||||||
FNMA, GNMA and FHLMC mortgage-backed securities | — | — | — | — | 211,093 | 2,312 | 2,485 | 210,920 | ||||||||||||||||||||||||
Asset backed securities | — | — | — | — | 19,470 | 14 | 79 | 19,405 | ||||||||||||||||||||||||
Collateralized mortgage obligations | — | — | — | — | 157,002 | 2,606 | 559 | 159,049 | ||||||||||||||||||||||||
State, county and municipal | 64,903 | 2,394 | 377 | 66,920 | — | — | — | — | ||||||||||||||||||||||||
Corporate bonds | — | — | — | — | 15,069 | 268 | 235 | 15,102 | ||||||||||||||||||||||||
Equity securities | — | — | — | — | 191 | — | — | 191 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total investment securities | $ | 75,680 | $ | 2,398 | $ | 551 | $ | 77,527 | $ | 432,945 | $ | 5,200 | $ | 5,108 | $ | 433,037 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
25
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
| Held-to-Maturity As of December 31, 2012 | Available-for-Sale As of December 31, 2012 | |||||||||||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||||||
U.S. government | $ | — | $ | — | $ | — | $ | — | $ | 25,143 | $ | 24 | $ | 18 | $ | 25,149 | ||||||||||||||||
FNMA, GNMA and FHLMC mortgage-backed securities | — | — | — | — | 117,760 | 4,415 | — | 122,175 | ||||||||||||||||||||||||
Asset backed securities | — | — | — | — | 16,747 | 23 | 83 | 16,687 | ||||||||||||||||||||||||
Collateralized mortgage obligations | — | — | — | — | 175,610 | 4,322 | 2 | 179,930 | ||||||||||||||||||||||||
State, county and municipal | 66,550 | 5,556 | 22 | 72,084 | 1,061 | 27 | — | 1,088 | ||||||||||||||||||||||||
Corporate bonds | — | — | — | — | 14,698 | 477 | — | 15,175 | ||||||||||||||||||||||||
Certificates of deposit | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Equity securities | — | — | — | — | 796 | 696 | — | 1,492 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total investment securities | $ | 66,550 | $ | 5,556 | $ | 22 | $ | 72,084 | $ | 351,815 | $ | 9,984 | $ | 103 | $ | 361,696 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
The following table provides contractual maturity information for investment securities as of December 31, 2013. Callable securities are assumed to mature on their earliest call date. Actual maturities may differ from contractual maturity because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
| Held-to-Maturity As of December 31, 2013 | Available-for-Sale As of December 31, 2013 | |||||||||||||||
| Cost | Fair Value | Cost | Fair Value | |||||||||||||
Maturing in | ||||||||||||||||
One year or less | $ | 2,112 | $ | 2,105 | $ | 6,235 | $ | 5,914 | ||||||||
One through five years | 26,545 | 27,080 | 327,379 | 330,311 | ||||||||||||
Five through ten years | 38,021 | 39,034 | 97,164 | 94,631 | ||||||||||||
Over ten years | 9,002 | 9,308 | 1,976 | 1,990 | ||||||||||||
Equity securities | — | — | 191 | 191 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total investment securities | $ | 75,680 | $ | 77,527 | $ | 432,945 | $ | 433,037 | ||||||||
|
|
|
|
|
|
|
| |||||||||
26
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
The following table provides information regarding securities with unrealized losses as of December 31, 2013 and 2012:
As of December 31, 2013 | ||||||||||||||||||||||||
| Less Than 12 Months | More Than 12 Months | Total | ||||||||||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
U.S. government | $ | 28,370 | $ | 1,750 | $ | — | $ | — | $ | 28,370 | $ | 1,750 | ||||||||||||
Certificates of deposit | 9,770 | 174 | — | — | 9,770 | 174 | ||||||||||||||||||
FNMA, GNMA and FHLMC mortgage-backed securities | 96,094 | 2,485 | — | — | 96,094 | 2,485 | ||||||||||||||||||
Collateralized mortgage obligation | 25,552 | 176 | 8,231 | 383 | 33,783 | 559 | ||||||||||||||||||
Asset backed securities | 8,283 | 46 | 9,133 | 33 | 17,416 | 79 | ||||||||||||||||||
Corporate bonds | 9,850 | 235 | — | — | 9,850 | 235 | ||||||||||||||||||
State, county and municipal | 12,490 | 321 | 666 | 56 | 13,156 | 377 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total investment securities | $ | 190,409 | $ | 5,187 | $ | 18,030 | $ | 472 | $ | 208,439 | $ | 5,659 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
As of December 31, 2012 | ||||||||||||||||||||||||
| Less Than 12 Months | More Than 12 Months | Total | ||||||||||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
U.S. government | $ | 10,152 | $ | 18 | $ | — | $ | — | $ | 10,152 | $ | 18 | ||||||||||||
FNMA, GNMA and FHLMC mortgage-backed securities | 881 | 2 | — | — | 881 | 2 | ||||||||||||||||||
Asset backed securities | 9,676 | 83 | — | — | 9,676 | 83 | ||||||||||||||||||
State, county and municipal | 1,284 | 22 | — | — | 1,284 | 22 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total investment securities | $ | 21,993 | $ | 125 | $ | — | $ | — | $ | 21,993 | $ | 125 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
The Company held certain investment securities having unrealized loss positions. As of December 31, 2013, the Company did not intend to sell these securities nor was it more likely than not that the Company would be required to sell these securities before their anticipated recovery or maturity. The Company has reviewed its portfolio for OTTI in accordance with the accounting policies outlined in Note 1, “Summary of Significant Accounting Policies and Nature of Business,” to the Consolidated Financial Statements. Market changes in interest rates and credit spreads will result in temporary unrealized losses as the market price of securities fluctuates. As a result, the Company had no other-than-temporary impairment for the years ended December 31, 2013 and 2012.
During the years ended December 31, 2013 and 2012, the Company had investment gross gains of $2,541 and $1,531 and investment losses of $9 and $91, respectively.
During the year ended December 31, 2011, the Company elected to transfer certain debt securities from its available-for-sale portfolio to its held-to-maturity portfolio. These transfers were made at fair value at the date of transfer and the unrealized holding gain of $898 at this date is retained in accumulated other comprehensive income. Such amounts are amortized as a yield adjustment over their remaining maturities.
27
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
The Company had pledged HTM and AFS securities having aggregate fair values of $64,305 and $333,062, respectively, at December 31, 2013 and $65,426 and $282,956, respectively, at December 31, 2012, to secure public funds on deposit and certain other borrowings, and for other purposes as required by law.
| 4. | Loans |
The Company’s recorded investment in loans outstanding at December 31, 2013 and 2012 is summarized as follows:
| 2013 | 2012 | |||||||
Commercial loans: | ||||||||
Commercial & industrial | $ | 274,923 | $ | 206,679 | ||||
Commercial real estate | 657,485 | 426,416 | ||||||
Commercial construction | 22,628 | 21,719 | ||||||
|
|
|
| |||||
Total commercial loans | 955,036 | 654,814 | ||||||
Consumer loans: | ||||||||
Residential real estate | 38,259 | 15,393 | ||||||
Residential construction | 42,089 | 27,008 | ||||||
Consumer purpose & other | 322,867 | 168,722 | ||||||
|
|
|
| |||||
Total consumer loans | 403,215 | 211,123 | ||||||
Other acquired loans | 26,460 | 35,151 | ||||||
|
|
|
| |||||
Total non-covered loans | 1,384,711 | 901,088 | ||||||
Covered loans | 377,926 | 511,952 | ||||||
|
|
|
| |||||
Total loans held for investment | $ | 1,762,637 | $ | 1,413,040 | ||||
|
|
|
| |||||
Loans held for sale | $ | 1,967 | $ | 24,146 | ||||
Covered loans represent loans acquired from the FDIC subject to one of the loss share agreements. Other acquired loans represent primarily consumer loans purchased from the FDIC that are not subject to one of the loss share agreements.
The Company monitors the credit quality of its commercial loan portfolio using internal risk ratings. These risk ratings are based upon established regulatory guidance and are assigned upon initial approval of credit to borrowers. Ratings are updated at least annually after the initial assignment or whenever management becomes aware of information affecting the borrowers’ ability to fulfill their obligations.
The Company utilizes the following categories of credit grades to evaluate its commercial loan portfolio:
Pass. Higher quality loans that do not fit any of the other categories described below.
Special Mention. The Company assigns a special mention rating to loans with potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease or the Company’s credit position at some future date.
Substandard. The Company assigns a substandard rating to loans that are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans have well-defined weaknesses that jeopardize repayment of the debt. Substandard loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not addressed.
28
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
Doubtful.The Company assigns a doubtful rating to loans with all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to the advantage and strengthening of the credit quality of the loan, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans.
The Company monitors the credit quality of its consumer portfolio based primarily on delinquency status, which is the primary factor considered in determining whether a consumer loan should be classified as nonaccrual.
The following tables illustrate the credit quality indicators associated with the Company’s originated loan portfolio as of December 31, 2013 and 2012:
| As of December 31, 2013 | ||||||||||||||||
| Commercial & Industrial | Commercial Real Estate | Commercial Construction | Total | |||||||||||||
Pass | $ | 270,216 | $ | 652,354 | $ | 22,518 | $ | 945,088 | ||||||||
Special Mention | 1,113 | 3,938 | 34 | 5,085 | ||||||||||||
Substandard | 3,594 | 1,193 | 76 | 4,863 | ||||||||||||
Doubtful | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
| $ | 274,923 | $ | 657,485 | $ | 22,628 | $ | 955,036 | |||||||||
|
|
|
|
|
|
|
| |||||||||
| As of December 31, 2012 | ||||||||||||||||
| Commercial & Industrial | Commercial Real Estate | Commercial Construction | Total | |||||||||||||
Pass | $ | 206,483 | $ | 422,139 | $ | 21,591 | $ | 650,213 | ||||||||
Special Mention | 21 | 1,948 | — | 1,969 | ||||||||||||
Substandard | 175 | 2,329 | 128 | 2,632 | ||||||||||||
Doubtful | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
| $ | 206,679 | $ | 426,416 | $ | 21,719 | $ | 654,814 | |||||||||
|
|
|
|
|
|
|
| |||||||||
| As of December 31, 2013 | ||||||||||||||||
| Residential Real Estate | Residential Construction | Consumer Purpose & Other | Total | |||||||||||||
Performing | $ | 38,140 | $ | 42,048 | $ | 322,769 | $ | 402,957 | ||||||||
Nonperforming | 119 | 41 | 98 | 258 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
| $ | 38,259 | $ | 42,089 | $ | 322,867 | $ | 403,215 | |||||||||
|
|
|
|
|
|
|
| |||||||||
| As of December 31, 2012 | ||||||||||||||||
| Residential Real Estate | Residential Construction | Consumer Purpose & Other | Total | |||||||||||||
Performing | $ | 14,742 | $ | 26,893 | $ | 168,471 | $ | 210,106 | ||||||||
Nonperforming | 651 | 115 | 251 | 1,017 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
| $ | 15,393 | $ | 27,008 | $ | 168,722 | $ | 211,123 | |||||||||
|
|
|
|
|
|
|
| |||||||||
29
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
The following tables illustrate the credit quality indicators associated with the Company’s acquired loan portfolio as of December 31, 2013 and 2012:
| As of December 31, 2013 | ||||||||||||||||
| Commercial & Industrial | Commercial Real Estate | Commercial Construction | Total | |||||||||||||
Pass | $ | 6,726 | $ | 119,837 | $ | 4,842 | $ | 131,405 | ||||||||
Special Mention | 7,148 | 16,536 | 1,073 | 24,757 | ||||||||||||
Substandard | 1,143 | 75,971 | 3,877 | 80,991 | ||||||||||||
Doubtful | 1,520 | 2,225 | 1,172 | 4,917 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
| $ | 16,537 | $ | 214,569 | $ | 10,964 | $ | 242,070 | |||||||||
|
|
|
|
|
|
|
| |||||||||
| As of December 31, 2012 | ||||||||||||||||
| Commercial & Industrial | Commercial Real Estate | Commercial Construction | Total | |||||||||||||
Pass | $ | 10,000 | $ | 138,878 | $ | 6,272 | $ | 155,150 | ||||||||
Special Mention | 8,673 | 32,562 | 3,041 | 44,276 | ||||||||||||
Substandard | 3,586 | 107,858 | 17,491 | 128,935 | ||||||||||||
Doubtful | 1,732 | 3,996 | 4,982 | 10,710 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
| $ | 23,991 | $ | 283,294 | $ | 31,786 | $ | 339,071 | |||||||||
|
|
|
|
|
|
|
| |||||||||
| As of December 31, 2013 | ||||||||||||||||
| Residential Real Estate | Residential Construction | Consumer Purpose & Other | Total | |||||||||||||
Performing | $ | 91,870 | $ | 39,569 | $ | 2,746 | $ | 134,185 | ||||||||
Nonperforming | 14,923 | 12,687 | 521 | 28,131 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
| $ | 106,793 | $ | 52,256 | $ | 3,267 | $ | 162,316 | |||||||||
|
|
|
|
|
|
|
| |||||||||
| As of December 31, 2012 | ||||||||||||||||
| Residential Real Estate | Residential Construction | Consumer Purpose & Other | Total | |||||||||||||
Performing | $ | 116,160 | $ | 45,029 | $ | 3,688 | $ | 164,877 | ||||||||
Nonperforming | 22,894 | 19,813 | 448 | 43,155 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
| $ | 139,054 | $ | 64,842 | $ | 4,136 | $ | 208,032 | |||||||||
|
|
|
|
|
|
|
| |||||||||
30
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
The Company tracks loan payment activity for the loan portfolio. Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement or any portion thereof remains unpaid after the due date of the scheduled payment. The payment status for the loan portfolio at December 31, 2013 and 2012 is shown in the tables below. Loans acquired with deteriorated credit quality have been excluded from this delinquency analysis because interest income on such loans is recognized using the accretion method and the related allowance is determined by loan pool performance.
| As of December 31, 2013 | ||||||||||||||||||||
| Accruing Current | Accruing 30 – 89 Days Past Due | Accruing 90+ Days Past Due | Nonaccruing | Total | ||||||||||||||||
Commercial loans: | ||||||||||||||||||||
Commercial & industrial | $ | 274,814 | $ | 20 | $ | — | $ | 89 | $ | 274,923 | ||||||||||
Commercial real estate | 656,999 | 486 | — | — | 657,485 | |||||||||||||||
Commercial construction | 22,569 | — | — | 59 | 22,628 | |||||||||||||||
Consumer loans: | ||||||||||||||||||||
Residential real estate | 38,140 | — | — | 119 | 38,259 | |||||||||||||||
Residential construction | 42,044 | 4 | — | 41 | 42,089 | |||||||||||||||
Consumer purpose & other | 322,323 | 439 | 7 | 98 | 322,867 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
| $ | 1,356,889 | $ | 949 | $ | 7 | $ | 406 | $ | 1,358,251 | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
| As of December 31, 2012 | ||||||||||||||||||||
| Accruing Current | Accruing 30 – 89 Days Past Due | Accruing 90+ Days Past Due | Nonaccruing | Total | ||||||||||||||||
Commercial loans: | ||||||||||||||||||||
Commercial & industrial | $ | 202,412 | $ | 44 | $ | 4,092 | $ | 131 | $ | 206,679 | ||||||||||
Commercial real estate | 425,094 | 336 | — | 986 | 426,416 | |||||||||||||||
Commercial construction | 21,619 | 100 | — | — | 21,719 | |||||||||||||||
Consumer loans: | ||||||||||||||||||||
Residential real estate | 15,005 | — | 320 | 68 | 15,393 | |||||||||||||||
Residential construction | 26,953 | — | — | 55 | 27,008 | |||||||||||||||
Consumer purpose & other | 168,435 | 105 | 15 | 167 | 168,722 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
| $ | 859,518 | $ | 585 | $ | 4,427 | $ | 1,407 | $ | 865,937 | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans accounted for as loans acquired with deteriorated credit quality are excluded from this analysis, even though they may be contractually past due, as any nonpayment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and is included in the resulting recognition of current period covered loan loss provision or future period yield adjustment.
31
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
The following table sets forth certain information regarding the Company’s impaired loans as of December 31, 2013 and 2012:
| As of December 31, 2013 | ||||||||||||||||
| Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | |||||||||||||
With no related allowance recorded: | ||||||||||||||||
Commercial loans: | ||||||||||||||||
Commercial & industrial | $ | 89 | $ | 101 | $ | — | $ | 110 | ||||||||
Commercial real estate | — | — | — | — | ||||||||||||
Commercial construction | 59 | 64 | — | 61 | ||||||||||||
Consumer loans: | ||||||||||||||||
Residential real estate | 1,100 | 2,004 | — | 882 | ||||||||||||
Residential construction | 42 | 105 | — | 49 | ||||||||||||
Consumer purpose & other | 56 | 110 | — | 74 | ||||||||||||
With an allowance recorded: | ||||||||||||||||
Commercial loans: | ||||||||||||||||
Commercial & industrial | 35 | 35 | 1 | 37 | ||||||||||||
Commercial real estate | — | — | — | — | ||||||||||||
Commercial construction | — | — | — | — | ||||||||||||
Consumer loans: | ||||||||||||||||
Residential real estate | 226 | 226 | 26 | 228 | ||||||||||||
Residential construction | 34 | 47 | 6 | 34 | ||||||||||||
Consumer purpose & other | 49 | 57 | 10 | 55 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total impaired loans | $ | 1,690 | $ | 2,749 | $ | 43 | $ | 1,530 | ||||||||
|
|
|
|
|
|
|
| |||||||||
| As of December 31, 2012 | ||||||||||||||||
| Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | |||||||||||||
With no related allowance recorded: | ||||||||||||||||
Commercial loans: | ||||||||||||||||
Commercial & industrial | $ | 264 | $ | 264 | $ | — | $ | 268 | ||||||||
Commercial real estate | 3,589 | 6,481 | — | 5,103 | ||||||||||||
Commercial construction | — | — | — | — | ||||||||||||
Consumer loans: | ||||||||||||||||
Residential real estate | 978 | 1,806 | — | 928 | ||||||||||||
Residential construction | 116 | 218 | — | 142 | ||||||||||||
Consumer purpose & other | 167 | 174 | — | 167 | ||||||||||||
With an allowance recorded: | ||||||||||||||||
Commercial loans: | ||||||||||||||||
Commercial & industrial | — | — | — | — | ||||||||||||
Commercial real estate | — | — | — | — | ||||||||||||
Commercial construction | — | — | — | — | ||||||||||||
Consumer loans: | ||||||||||||||||
Residential real estate | — | — | — | — | ||||||||||||
Residential construction | — | — | — | — | ||||||||||||
Consumer purpose & other | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total impaired loans | $ | 5,114 | $ | 8,943 | $ | — | $ | 6,608 | ||||||||
|
|
|
|
|
|
|
| |||||||||
32
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
Interest income recognized on impaired loans wasde minimis for the years ended December 31, 2013 and 2012. No such income was recognized on a cash basis.
TDRs are loans in which the borrower is experiencing financial difficulty and the Company has granted an economic concession to the borrower. Prior to modifying a borrower’s loan terms, the Company performs an evaluation of the borrower’s financial condition and ability to service under the potential modified loan terms. The types of concessions granted are generally interest rate reductions or term extensions. If a loan is accruing at the time of modification, the loan remains on accrual status and is subject to the Company’s charge-off and nonaccrual policies. If a loan is on nonaccrual before it is determined to be a TDR, then the loan remains on nonaccrual. TDRs may be returned to accrual status if there has been a sustained period of repayment performance by the borrower. Generally, once a loan becomes a TDR, it is probable that the loan will likely continue to be reported as a TDR for the life of the loan.
During the periods ended December 31, 2013 and 2012, certain loans were modified under the terms of a TDR. Modifications typically involve a reduction in the stated interest rate of the loan lower than a market rate for new debt with similar risks, an extension of the maturity date of the loan, or both.
The following table presents loans, by class, which had been modified under the terms of a TDR for the years ended December 31, 2013 and 2012:
| As of December 31, 2013 | ||||||||||||
| Number of Modifications | Unpaid Principal Balance | Recorded Investment | ||||||||||
Commercial loans: | ||||||||||||
Commercial & industrial | 1 | $ | 35 | $ | 35 | |||||||
Commercial real estate | 4 | 9,896 | 7,288 | |||||||||
Commercial construction | — | — | — | |||||||||
Consumer loans: | ||||||||||||
Residential real estate | 15 | 2,229 | 1,326 | |||||||||
Residential construction | 3 | 152 | 76 | |||||||||
Consumer purpose & other | 3 | 45 | 44 | |||||||||
|
|
|
|
|
| |||||||
Total | 26 | $ | 12,357 | $ | 8,769 | |||||||
|
|
|
|
|
| |||||||
| As of December 31, 2012 | ||||||||||||
| Number of Modifications | Unpaid Principal Balance | Recorded Investment | ||||||||||
Commercial loans: | ||||||||||||
Commercial & industrial | 3 | $ | 133 | $ | 133 | |||||||
Commercial real estate | 2 | 5,495 | 2,603 | |||||||||
Commercial construction | — | — | — | |||||||||
Consumer loans: | ||||||||||||
Residential real estate | 12 | 1,738 | 910 | |||||||||
Residential construction | 2 | 108 | 64 | |||||||||
Consumer purpose & other | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total | 19 | $ | 7,474 | $ | 3,710 | |||||||
|
|
|
|
|
| |||||||
33
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
The Company is not committed to lend additional amounts as of December 31, 2013 and December 31, 2012 to customers with outstanding loans that are classified as TDRs. Charge-offs on such loans are factored into the rolling historical loss rate, which is used in the calculation of the allowance for loan losses.
The Company does not have a significant concentration of risk to any individual client except for the U.S. government and its agencies. However, a geographic concentration arises because the Company operates primarily in the state of Georgia. The Company does not engage in international banking activities.
Under a line of credit agreement with the FHLBA, at December 31, 2013 and 2012, the Company had pledged certain loans under a blanket lien as collateral for its FHLBA borrowings. The loans encumbered by the blanket lien included all qualifying 1-4 family first mortgage loans, multi-family first mortgage loans and commercial real estate loans.
Acquired Loans
The following tables reflect the recorded investment of all acquired loans as of December 31, 2013 and 2012:
| As of December 31, 2013 | ||||||||||||
| Acquired Loans | ||||||||||||
| Credit Impaired1 | Non-credit Impaired | Total | ||||||||||
Covered Loans: | ||||||||||||
Commercial loans: | ||||||||||||
Commercial & industrial | $ | 14,669 | $ | 593 | $ | 15,262 | ||||||
Commercial real estate | 206,432 | 879 | 207,311 | |||||||||
Commercial construction | 10,513 | 226 | 10,739 | |||||||||
Consumer loans: | ||||||||||||
Residential real estate | 76,929 | 14,641 | 91,570 | |||||||||
Residential construction | 49,095 | 1,792 | 50,887 | |||||||||
Consumer purpose & other | 1,306 | 851 | 2,157 | |||||||||
Non-covered Loans: | ||||||||||||
Other acquired loans | 20,229 | 6,231 | 26,460 | |||||||||
|
|
|
|
|
| |||||||
| $ | 379,173 | $ | 25,213 | $ | 404,386 | |||||||
|
|
|
|
|
| |||||||
| 1 | Acquired loans under the guidance governing acquired loans with deteriorated credit quality. |
34
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
| As of December 31, 2012 | ||||||||||||
| Acquired Loans | ||||||||||||
| Credit Impaired1 | Non-credit Impaired | Total | ||||||||||
Covered Loans: | ||||||||||||
Commercial loans: | ||||||||||||
Commercial & industrial | $ | 20,388 | $ | 1,161 | $ | 21,549 | ||||||
Commercial real estate | 273,368 | 2,062 | 275,430 | |||||||||
Commercial construction | 31,661 | 83 | 31,744 | |||||||||
Consumer loans: | ||||||||||||
Residential real estate | 99,950 | 16,875 | 116,825 | |||||||||
Residential construction | 62,406 | 1,661 | 64,067 | |||||||||
Consumer purpose & other | 1,882 | 455 | 2,337 | |||||||||
Non-covered Loans: | ||||||||||||
Other acquired loans | 30,306 | 4,845 | 35,151 | |||||||||
|
|
|
|
|
| |||||||
| $ | 519,961 | $ | 27,142 | $ | 547,103 | |||||||
|
|
|
|
|
| |||||||
| 1 | Acquired loans under the guidance governing acquired loans with deteriorated credit quality. |
Changes in the recorded investment of acquired loans for the years ended December 31, 2013 and 2012 were as follows:
| 2013 | 2012 | |||||||
Carrying value of acquired loans: | ||||||||
Balance, beginning of period | $ | 547,103 | $ | 608,240 | ||||
Additions | — | 152,022 | ||||||
Cash basis income on loans accounted for under the cost recovery method | 8,846 | 9,440 | ||||||
Accretion of fair value discounts | 59,633 | 87,577 | ||||||
Reductions in principal balances from repayments, write-offs, and foreclosures | (211,196 | ) | (310,176 | ) | ||||
|
|
|
| |||||
Balance, end of period | $ | 404,386 | $ | 547,103 | ||||
|
|
|
| |||||
The outstanding unpaid principal balance for all acquired loans as of December 31, 2013 and 2012 was $642,619 and $1,020,328, respectively.
The Company purchased loans during the year ended December 31, 2012, in connection with the GTB and FCSB acquisitions, as further discussed in Note 2, “Acquisitions”. These loans were deemed to have been acquired with deteriorated credit quality due to the nature of FDIC-assisted acquisitions.
35
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
Contractual loan payments receivable, estimates of amounts not expected to be collected, accretable yield, and the resulting fair values of the loans acquired in the GTB and FCSB acquisitions (as of the acquisition date) are as follows:
| 2012 | ||||
Contractually required payments receivable | $ | 244,890 | ||
Cash flows expected to be collected | 192,265 | |||
|
| |||
Nonaccretable difference | $ | 52,625 | ||
|
| |||
Cash flows expected to be collected | $ | 192,265 | ||
Fair value of acquired impaired loans | 152,022 | |||
|
| |||
Accretable yield | $ | 40,243 | ||
|
| |||
Changes in the amount of accretable yield on loans acquired with deteriorated credit quality for the years ended December 31, 2013 and 2012 were as follows:
| First National Bank of Georgia | Appalachian Community Bank | Bank of Ellijay | The Peoples’ Bank | First Commerce Community Bank | Georgia Trust Bank | First Cherokee State Bank | TOTAL | |||||||||||||||||||||||||
Balance at January 1, 2012 | $ | 95,818 | $ | 95,820 | $ | 8,347 | $ | 19,467 | $ | 8,638 | $ | — | $ | — | $ | 228,090 | ||||||||||||||||
Additions | — | — | — | — | — | 5,457 | 34,786 | 40,243 | ||||||||||||||||||||||||
Transfer to cost recovery | (12,276 | ) | (7,800 | ) | — | — | — | — | — | (20,076 | ) | |||||||||||||||||||||
Reclassifications from / (to) nonaccretable difference | (3,175 | ) | (20,629 | ) | 4,874 | 11,700 | 6,841 | (156 | ) | (1,373 | ) | (1,918 | ) | |||||||||||||||||||
Accretion | (27,865 | ) | (27,543 | ) | (5,403 | ) | (11,273 | ) | (7,629 | ) | (1,494 | ) | (3,153 | ) | (84,360 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Balance at December 31, 2012 | 52,502 | 39,848 | 7,818 | 19,894 | 7,850 | 3,807 | 30,260 | 161,979 | ||||||||||||||||||||||||
Additions | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Transfer to cost recovery | — | — | (6 | ) | (4 | ) | — | — | — | (10 | ) | |||||||||||||||||||||
Reclassifications from / (to) nonaccretable difference | 6,016 | 4,291 | 4,124 | 3,335 | 3,999 | 4,557 | 6,957 | 33,279 | ||||||||||||||||||||||||
Accretion | (17,545 | ) | (12,673 | ) | (4,783 | ) | (7,289 | ) | (5,154 | ) | (3,176 | ) | (6,827 | ) | (57,447 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Balance at December 31, 2013 | $ | 40,973 | $ | 31,466 | $ | 7,153 | $ | 15,936 | $ | 6,695 | $ | 5,188 | $ | 30,390 | $ | 137,801 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
36
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
| 5. | Allowance for Credit Losses |
Activity in the allowance for credit losses for the years ended December 31, 2013 and 2012 is summarized in the table below:
| As of December 31, 2013 | ||||||||||||||||||||
| Beginning Balance | Charge-Offs | Recoveries | Provision | Ending Balance | ||||||||||||||||
Commercial loans: | ||||||||||||||||||||
Commercial & industrial | $ | 4,475 | $ | (18 | ) | $ | 3 | 1,817 | $ | 6,277 | ||||||||||
Commercial real estate | 3,726 | (134 | ) | 8 | 1,818 | 5,418 | ||||||||||||||
Commercial construction | 223 | — | — | (31 | ) | 192 | ||||||||||||||
Consumer loans: | ||||||||||||||||||||
Residential real estate | 142 | (12 | ) | — | 538 | 668 | ||||||||||||||
Residential construction | 241 | — | — | (2 | ) | 239 | ||||||||||||||
Consumer purpose & other | 2,395 | (798 | ) | 47 | 4,012 | 5,656 | ||||||||||||||
Covered and other acquired | 18,753 | (3,749 | ) | 4,918 | (7,837 | ) | 12,085 | |||||||||||||
Unallocated | 590 | — | — | (590 | ) | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Allowance for loan losses | 30,545 | (4,711 | ) | 4,976 | (275 | ) | 30,535 | |||||||||||||
Reserve for unfunded lending commitments | 4,724 | — | — | 1,481 | 6,205 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Allowance for credit losses | $ | 35,269 | $ | (4,711 | ) | $ | 4,976 | $ | 1,206 | $ | 36,740 | |||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
| As of December 31, 2012 | ||||||||||||||||||||
| Beginning Balance | Charge-Offs | Recoveries | Provision | Ending Balance | ||||||||||||||||
Commercial loans: | ||||||||||||||||||||
Commercial & industrial | $ | 2,069 | $ | (50 | ) | $ | — | $ | 2,456 | $ | 4,475 | |||||||||
Commercial real estate | 1,790 | — | — | 1,936 | 3,726 | |||||||||||||||
Commercial construction | 323 | (14 | ) | — | (86 | ) | 223 | |||||||||||||
Consumer loans: | ||||||||||||||||||||
Residential real estate | 35 | — | — | 107 | 142 | |||||||||||||||
Residential construction | 88 | (57 | ) | — | 210 | 241 | ||||||||||||||
Consumer purpose & other | 533 | (183 | ) | 4 | 2,041 | 2,395 | ||||||||||||||
Covered and other acquired | 37,717 | (23,799 | ) | 170 | 4,665 | 18,753 | ||||||||||||||
Unallocated | 255 | — | — | 335 | 590 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Allowance for loan losses | 42,810 | (24,103 | ) | 174 | 11,664 | 30,545 | ||||||||||||||
Reserve for unfunded lending commitments | 1,869 | — | — | 2,855 | 4,724 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Allowance for credit losses | $ | 44,679 | $ | (24,103 | ) | $ | 174 | $ | 14,519 | $ | 35,269 | |||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
37
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
The following tables present the Company’s allowance for loan losses and the carrying value of the associated loans based upon the method for determining the allowance as of December 31, 2013 and 2012:
| As of December 31, 2013 | ||||||||||||||||||||||||||||||||
| Commercial | Consumer | Acquired | Total | |||||||||||||||||||||||||||||
| Recorded Investment | Associated Allowance | Recorded Investment | Associated Allowance | Recorded Investment | Associated Allowance | Recorded Investment | Associated Allowance | |||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 148 | $ | — | $ | 101 | $ | 13 | $ | — | $ | — | $ | 249 | $ | 13 | ||||||||||||||||
Loans collectively evaluated for impairment | 954,888 | 11,887 | 403,114 | 6,550 | 25,213 | 344 | 1,383,215 | 18,781 | ||||||||||||||||||||||||
Loans acquired with deteriorated credit quality | — | — | — | — | 379,173 | 11,741 | 379,173 | 11,741 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 955,036 | $ | 11,887 | $ | 403,215 | $ | 6,563 | $ | 404,386 | $ | 12,085 | $ | 1,762,637 | $ | 30,535 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
| As of December 31, 2012 | ||||||||||||||||||||||||||||||||
| Commercial | Consumer | Acquired | Total1 | |||||||||||||||||||||||||||||
| Recorded Investment | Associated Allowance | Recorded Investment | Associated Allowance | Recorded Investment | Associated Allowance | Recorded Investment | Associated Allowance | |||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 1,117 | $ | — | $ | 287 | $ | — | $ | — | $ | — | $ | 1,404 | $ | — | ||||||||||||||||
Loans collectively evaluated for impairment | 653,697 | 8,424 | 210,836 | 2,778 | 27,142 | 5 | 891,675 | 11,207 | ||||||||||||||||||||||||
Loans acquired with deteriorated credit quality | — | — | — | — | 519,961 | 18,748 | 519,961 | 18,748 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 654,814 | $ | 8,424 | $ | 211,123 | $ | 2,778 | $ | 547,103 | $ | 18,753 | $ | 1,413,040 | $ | 29,955 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
| 1 | Excludes $590 of unallocated allow ance that is associated with the reserve for collectively evaluated loans. |
| 6. | Premises and Equipment |
Major classifications of premises and equipment at December 31, 2013 and 2012 are summarized as follows:
| 2013 | 2012 | |||||||
Land | $ | 15,989 | $ | 13,237 | ||||
Premises and leasehold improvements | 36,177 | 34,121 | ||||||
Furniture and equipment | 22,404 | 20,552 | ||||||
|
|
|
| |||||
| 74,570 | 67,910 | |||||||
Less: Accumulated depreciation and amortization | 12,608 | 8,159 | ||||||
|
|
|
| |||||
Total premises and equipment | $ | 61,962 | $ | 59,751 | ||||
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| |||||
There were no premises pledged to secure borrowings at December 31, 2013 and 2012.
The Company leases certain premises and equipment under various lease agreements that provide for payment of property taxes, insurance and maintenance costs. Operating leases frequently provide for one or more renewal
38
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
options on the same basis as current rental terms. However, certain leases require increased rentals under cost of living escalation clauses. Some leases also provide purchase options.
Future minimum rental commitments for noncancelable operating leases with initial or remaining terms of one or more years consisted of the following at December 31, 2013:
2014 | $ | 2,162 | ||
2015 | 2,081 | |||
2016 | 1,839 | |||
2017 | 1,481 | |||
2018 | 1,178 | |||
Thereafter | 4,264 | |||
|
| |||
Total minimum payments | $ | 13,005 | ||
|
|
Total rent expense for all operating leases amounted to $2,562 and $2,601 in 2013 and 2012, respectively, net of rent income, which totaled $34 and $81 during 2013 and 2012, respectively.
| 7. | OREO |
The following table provides details of the Company’s OREO covered and not covered under a loss share agreement:
| Covered OREO | Not Covered OREO | Total OREO | ||||||||||
December 31, 2013 | ||||||||||||
Commercial construction | $ | 9,073 | $ | 9 | $ | 9,082 | ||||||
Commercial real estate | 18,978 | 532 | 19,510 | |||||||||
Residential construction | 14,781 | 11 | 14,792 | |||||||||
Residential real estate | 4,167 | 242 | 4,409 | |||||||||
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| |||||||
Total | $ | 46,999 | $ | 794 | $ | 47,793 | ||||||
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| Covered OREO | Not Covered OREO | Total OREO | ||||||||||
December 31, 2012 | ||||||||||||
Commercial construction | $ | 17,710 | $ | — | $ | 17,710 | ||||||
Commercial real estate | 45,650 | — | 45,650 | |||||||||
Residential construction | 49,622 | 1,302 | 50,924 | |||||||||
Residential real estate | 8,542 | — | 8,542 | |||||||||
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| |||||||
Total | $ | 121,524 | $ | 1,302 | $ | 122,826 | ||||||
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| |||||||
39
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
Changes in the Company’s OREO covered and not covered under a loss share agreement were as follows:
| Covered OREO | Not Covered OREO | Total OREO | ||||||||||
Balance January 1, 2012 | $ | 127,515 | $ | — | $ | 127,515 | ||||||
Additions through acquisitions | 10,504 | 2,328 | 12,832 | |||||||||
Additions | 90,276 | 254 | 90,530 | |||||||||
Sales | (59,766 | ) | (1,280 | ) | (61,046 | ) | ||||||
Losses and other adjustments | (47,005 | ) | — | (47,005 | ) | |||||||
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| |||||||
Balance December 31, 2012 | $ | 121,524 | $ | 1,302 | $ | 122,826 | ||||||
Additions | 36,060 | 1,213 | 37,273 | |||||||||
Sales | (90,196 | ) | (1,661 | ) | (91,857 | ) | ||||||
Losses and other adjustments | (20,389 | ) | (60 | ) | (20,449 | ) | ||||||
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| |||||||
Balance December 31, 2013 | $ | 46,999 | $ | 794 | $ | 47,793 | ||||||
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| |||||||
| 8. | FDIC Loss Share Receivable |
In connection with each FDIC-assisted acquisition, a FDIC loss share receivable has been established for each acquired bank’s loan and OREO population that is covered by the loss sharing agreement. The FDIC loss share receivable represents the present value of the estimated losses on covered assets to be reimbursed by the FDIC. Pursuant to the terms of our loss share agreements, the FDIC is obligated to reimburse the Bank based on its loss share agreement percentage of all eligible losses with respect to covered assets, beginning with the first dollar of loss incurred. The Bank has a corresponding obligation to reimburse the FDIC based on its loss share agreement percentage of eligible recoveries with respect to covered assets.
40
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
The following table shows changes in the carrying value of the FDIC loss share receivable for loss share agreements relating to covered loans and OREO for the years ended December 31, 2013 and 2012:
| First National Bank of Georgia | Appalachain Community Bank | Bank of Ellijay | The Peoples Bank of Winder | First Commerce Community Bank | Georgia Trust Bank | First Cherokee State Bank | Total | |||||||||||||||||||||||||
Carrying value of FDIC loss share receivable, at January 1, 2012 | $ | 86,307 | $ | 147,133 | $ | 20,699 | $ | 28,733 | $ | 36,282 | $ | — | $ | — | $ | 319,154 | ||||||||||||||||
Additions resulting from: | ||||||||||||||||||||||||||||||||
Charge-offs, write-downs, and other losses | 9,729 | 18,690 | 350 | 2,198 | 2,905 | 11,212 | 32,003 | 77,087 | ||||||||||||||||||||||||
Allowable external expenses | 5,578 | 7,566 | 1,414 | 2,077 | 1,603 | 200 | 406 | 18,844 | ||||||||||||||||||||||||
Decreases in expected loan cash flows | (573 | ) | 1,354 | 581 | 787 | 899 | — | — | 3,048 | |||||||||||||||||||||||
Reductions resulting from: | ||||||||||||||||||||||||||||||||
Amortization | (7,884 | ) | (8,327 | ) | (2,530 | ) | (3,413 | ) | (3,924 | ) | 114 | 328 | (25,636 | ) | ||||||||||||||||||
Payments received | (35,336 | ) | (78,165 | ) | (7,981 | ) | (19,352 | ) | (15,263 | ) | — | — | (156,097 | ) | ||||||||||||||||||
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| |||||||||||||||||
Carrying value of FDIC loss share receivable, at December 31, 2012 | $ | 57,821 | $ | 88,251 | $ | 12,533 | $ | 11,030 | $ | 22,502 | $ | 11,526 | $ | 32,737 | $ | 236,400 | ||||||||||||||||
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| |||||||||||||||||
Carrying value of FDIC loss share receivable, at January 1, 2012 | $ | 57,821 | $ | 88,251 | $ | 12,533 | $ | 11,030 | $ | 22,502 | $ | 11,526 | $ | 32,737 | $ | 236,400 | ||||||||||||||||
Additions resulting from: | — | |||||||||||||||||||||||||||||||
Charge-offs, write-downs, and other losses | 1,751 | 4,485 | 2,673 | 81 | 1,753 | 449 | (217 | ) | 10,975 | |||||||||||||||||||||||
Allowable external expenses | 2,758 | 2,915 | 211 | 414 | 422 | 391 | 190 | 7,301 | ||||||||||||||||||||||||
Decreases in expected loan cash flows | (4,127 | ) | (1,658 | ) | (229 | ) | (310 | ) | (354 | ) | 199 | 567 | (5,912 | ) | ||||||||||||||||||
Reductions resulting from: | — | |||||||||||||||||||||||||||||||
Amortization | (10,502 | ) | (7,870 | ) | (2,103 | ) | (2,794 | ) | (3,186 | ) | (454 | ) | (1,292 | ) | (28,201 | ) | ||||||||||||||||
Payments received | (16,779 | ) | (45,840 | ) | (7,033 | ) | (5,972 | ) | (8,522 | ) | (6,359 | ) | (21,791 | ) | (112,296 | ) | ||||||||||||||||
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| |||||||||||||||||
Carrying value of FDIC loss share receivable, at December 31, 2013 | $ | 30,922 | $ | 40,283 | $ | 6,052 | $ | 2,449 | $ | 12,615 | $ | 5,752 | $ | 10,194 | $ | 108,267 | ||||||||||||||||
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| 9. | Goodwill and Other Intangible Assets |
The following table provides details of the Company’s goodwill by acquisition for the years ended December 31, 2013 and 2012:
| 2013 | 2012 | |||||||
First National Bank of Georgia | $ | 7,801 | $ | 7,801 | ||||
The People’s Bank of Winder | 2,227 | 2,227 | ||||||
Ameris Woodstock Branch | 122 | — | ||||||
Essex Branches | 1,590 | — | ||||||
|
|
|
| |||||
Total Goodwill | $ | 11,740 | $ | 10,028 | ||||
|
|
|
| |||||
Other intangible assets consist of core deposit intangibles and are amortized straight-line over a range of seven to ten years. At December 31, 2013 and 2012, other intangibles consisted of the following:
| As of December 31, 2013 | ||||||||||||
| Gross Carrying Value | Accumulated Amortization | Net Carrying Amount | ||||||||||
Core deposit intangible | $ | 16,154 | $ | (7,600 | ) | $ | 8,554 | |||||
41
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
| As of December 31, 2012 | ||||||||||||
| Gross Carrying Value | Accumulated Amortization | Net Carrying Amount | ||||||||||
Core deposit intangible | $ | 14,820 | $ | (5,429 | ) | $ | 9,391 | |||||
Amortization expense recognized on intangible assets for 2013 and 2012 was $2,172 and $2,000, respectively.
The estimated amortization expense of other intangible assets is as follows:
| Amortization Expense | ||||
2014 | $ | 2,256 | ||
2015 | 2,256 | |||
2016 | 2,256 | |||
2017 | 743 | |||
2018 | 340 | |||
Thereafter | 703 | |||
|
| |||
| $ | 8,554 | |||
|
| |||
| 10. | Deposits |
Deposits at December 31, 2013 and 2012 are summarized as follows:
| 2013 | 2012 | |||||||
Noninterest-bearing demand | $ | 279,795 | $ | 244,437 | ||||
Interest-bearing demand | 378,382 | 402,358 | ||||||
Money market | 484,749 | 499,003 | ||||||
Savings | 78,454 | 63,567 | ||||||
Time | 1,018,574 | 800,035 | ||||||
|
|
|
| |||||
Total deposits | $ | 2,239,954 | $ | 2,009,400 | ||||
|
|
|
| |||||
Time deposits with a minimum denomination of $100 totaled $532,412 and $409,773 at December 31, 2013 and 2012, respectively.
At December 31, 2013, the scheduled maturities of time deposits were:
2014 | $ | 585,204 | ||
2015 | 315,973 | |||
2016 | 80,100 | |||
2017 | 24,642 | |||
2018 and thereafter | 12,655 | |||
|
| |||
Total time deposits | $ | 1,018,574 | ||
|
|
42
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
| 11. | Other Borrowings |
Other borrowings include securities sold under a Repurchase Agreement and advances from the FHLBA. The Company had unused credit lines allowing access to overnight borrowings of up to $80,000 on an unsecured basis from three correspondent banks, at December 31, 2013 and 2012.
The Company has a borrowing capacity with the FHLBA in the amount of $400,560 and $376,740 at December 31, 2013 and 2012, respectively. This is 15 percent of total qualified assets as measured by the FHLBA.
The Repurchase Agreement in the principal amount of $10,000 at December 31, 2013 and 2012 is secured by investment securities with a carrying value of $12,669 and $12,607 at December 31, 2013 and 2012, respectively.
At December 31, 2013 and 2012, the Company had advances outstanding to the FHLBA in the principal amount of $82,000 and $97,000, respectively, secured by the Company’s stock in the FHLBA and a blanket lien on the loan portfolio. At December 31, 2013 and 2012, the Company had FHLBA stock in the amount of $6,785 and $7,981, respectively, pledged to the FHLBA.
Other borrowings at December 31, 2013 and 2012 are as follows:
| 2013 | 2012 | |||||||
Repurchase agreement (inclusive of unamortized premium of | ||||||||
$256 and $616, for December 31, 2013 and 2012, respectively) | $ | 10,256 | $ | 10,616 | ||||
Advances payable to the FHLBA with contractual rates ranging from 2.88 percent to 4.39 percent and maturities ranging from | ||||||||
February 2014 to March 2018 (inclusive of unamortized premium of $2,927 and $4,190 for December 31, 2013 and 2012) | 84,927 | 101,190 | ||||||
|
|
|
| |||||
Total other borrowings | $ | 95,183 | $ | 111,806 | ||||
|
|
|
| |||||
Other borrowings maturing in each of the five years subsequent to December 31, 2013 include:
Maturity | Amount | Weighted-Average Interest Rate | ||||||
2014 | $ | 30,353 | 3.79 | % | ||||
2015 | 7,281 | 3.85 | % | |||||
2016 | 15,420 | 4.35 | % | |||||
2017 | 16,127 | 3.40 | % | |||||
2018 | 26,002 | 3.07 | % | |||||
Thereafter | — | 0.00 | % | |||||
|
| |||||||
Total other borrowings | $ | 95,183 | 3.62 | % | ||||
|
| |||||||
| 12. | Estimated Fair Values |
Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, US GAAP establishes a fair value hierarchy that distinguishes between market participant assumptions based on
43
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
market data obtained from sources independent of the reporting entity (observable inputs that are classified within Level 1 and 2 of the hierarchy) and reporting entity’s own assumptions developed based on the best information available in the circumstances (unobservable inputs classified within Level 3 of the hierarchy).
Fair Value Hierarchy
Level 1
Valuation is based on inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2
Valuation is based on inputs, other than quoted prices included within Level 1, that are observable for the asset and liability, either directly or indirectly, such as interest rates, yield curves observable at commonly quoted intervals, and other market-corroborated inputs.
Level 3
Valuation inputs are unobservable inputs for the asset or liability, which shall be used to measure fair value to the extent that observable inputs are not available. The inputs shall reflect the Company’s own assumptions that market participants would use in pricing the asset or liability.
Fair value estimates are made at a specific point in time based upon relevant market information and information about each asset and liability. Where information regarding the fair value of an asset or liability is available, those values are used, as is the case with investment securities and residential mortgage loans. In these cases, an open market exists in which these assets are actively traded.
Because no market exists for many assets and liabilities, fair value estimates are based upon judgments regarding future expected loss experience, current economic conditions, risk characteristics and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. For those assets or liabilities with a fixed interest rate, an analysis of the related cash flows was the basis for estimating fair values. The expected cash flows were then discounted to the valuation date using an appropriate discount rate. The discount rates used represent the rates under which similar transactions would be currently negotiated. For assets or liabilities with fixed and variable rates, fair value estimates also consider the impact of liquidity discounts appropriate as of the measurement date.
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The Company evaluates fair value measurement inputs on an ongoing basis in order to determine if there is a change of sufficient significance to warrant a transfer between levels. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s valuation process. There were no transfers between levels during 2013 and 2012.
44
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
Fair Value of Financial Instruments Measured on a Recurring Basis
The following methods and assumptions were used by the Company in estimating the fair value of its financial assets on a recurring basis:
Investment Securities
Investment securities classified as available-for-sale are recorded at fair value on a recurring basis. The Company’s investment portfolio primarily consists of U.S. government agency mortgage-backed securities, non-agency mortgage-backed securities, U.S. government securities, corporate bonds and municipal securities. The fair values for equity securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1). The fair value of other securities classified as available-for-sale are determined using widely accepted valuation techniques including matrix pricing and broker-quote-based applications (Level 2). Inputs may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other relevant items. The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. From time to time, the Company validates the appropriateness of the valuations provided by the independent pricing service to prices obtained from an additional third party or prices derived using internal models.
The following tables summarize the financial assets and liabilities measured at fair value on a recurring basis at December 31, 2013 and 2012:
| As of December 31, 2013 | ||||||||||||||||
| Description | Fair Value | Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) Inputs | Quoted Prices for Similar Assets and Liabilities (Level 2) Inputs | Significant Unobservable Inputs (Level 3) Inputs | ||||||||||||
Investment securities available-for-sale | ||||||||||||||||
U.S. government | $ | 28,370 | $ | — | $ | 28,370 | $ | — | ||||||||
FNMA, GNMA, FHLMC mortgage-backed securities | 210,920 | — | 210,920 | — | ||||||||||||
Asset backed securities | 19,405 | — | 19,405 | — | ||||||||||||
Collateralized mortgage obligations | 159,049 | — | 159,049 | — | ||||||||||||
Corporate bonds | 15,102 | — | 15,102 | — | ||||||||||||
Equity securities | 191 | — | 191 | — | ||||||||||||
|
|
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| |||||||||
| $ | 433,037 | $ | — | $ | 433,037 | $ | — | |||||||||
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| |||||||||
45
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
| As of December 31, 2012 | ||||||||||||||||
| Description | Fair Value | Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) Inputs | Quoted Prices for Similar Assets and Liabilities (Level 2) Inputs | Significant Unobservable Inputs (Level 3) Inputs | ||||||||||||
Investment securities available-for-sale | ||||||||||||||||
U.S. government | $ | 25,149 | $ | — | $ | 25,149 | $ | — | ||||||||
FNMA, GNMA, FHLMC mortgage-backed securities | 122,175 | — | 122,175 | — | ||||||||||||
Asset backed securities | 16,687 | — | 16,687 | — | ||||||||||||
Collateralized mortgage obligations | 179,930 | — | 179,930 | — | ||||||||||||
State, county and municipal | 1,088 | — | 1,088 | — | ||||||||||||
Corporate bonds | 15,175 | — | 15,175 | — | ||||||||||||
Equity securities | 1,492 | 1,492 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
| $ | 361,696 | $ | 1,492 | $ | 360,204 | $ | — | |||||||||
|
|
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|
|
|
|
| |||||||||
Fair Value of Financial Instruments Measured on a Nonrecurring Basis
The following methods and assumptions were used by the Company in estimating the fair value of its financial assets on a nonrecurring basis:
Impaired Loans
Loans are considered impaired when it is determined to be probable that all amounts due under the contractual terms of the loans will not be collected when due. Loans considered individually impaired are evaluated and a specific allowance is established if required based on the underlying collateral value of the impaired loans or the estimated discounted cash flows for such loans. A specific allowance is required if the fair value of the expected repayments or the fair value of the collateral is less than the recorded investment in the loan. The Company records impaired loans as nonrecurring level 3.
Loans Held for Sale
Level 1 loans held for sale consist of conforming residential mortgage loans accounted for at lower of cost or market. Fair value is determined based upon pricing assigned on a loan-by-loan basis, at the time a loan is locked with the borrower, through correspondent relationships that the Company maintains in order to sell loans held for sale.
OREO
The fair value of OREO is determined when the asset is transferred to foreclosed assets. The assets are carried at the lower of the carrying value or fair value less estimated costs to sell. Fair value is based upon appraised values of the collateral or management’s estimation of the value of the collateral. Management requires a new appraisal at the time of foreclosure or repossession of the underlying collateral. Updated appraisals are obtained on at least an annual basis on all OREO and are considered to contain Level 3 inputs. Management has also determined, in some cases, that fair value of collateral is further impaired based upon real estate market trends and declining foreclosed property pricing. Therefore, all OREO is recorded as a nonrecurring Level 3 hierarchy.
46
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
For assets and liabilities carried at fair value on a nonrecurring basis, the following table provides fair value information as of December 31, 2013 and 2012:
| As of December 31, 2013 | ||||||||||||||||
| Description | Fair Value | Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) Inputs | Quoted Prices for Similar Assets and Liabilities (Level 2) Inputs | Significant Unobservable Inputs (Level 3) Inputs | ||||||||||||
Impaired loans | $ | 1,690 | $ | — | $ | — | $ | 1,690 | ||||||||
Loans held for sale | 1,967 | 1,967 | — | — | ||||||||||||
OREO | 47,793 | — | — | 47,793 | ||||||||||||
| As of December 31, 2012 | ||||||||||||||||
| Description | Fair Value | Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) Inputs | Quoted Prices for Similar Assets and Liabilities (Level 2) Inputs | Significant Unobservable Inputs (Level 3) Inputs | ||||||||||||
Impaired loans | $ | 5,114 | $ | — | $ | — | $ | 5,114 | ||||||||
Loans held for sale | 24,146 | 24,146 | — | — | ||||||||||||
OREO | 122,826 | — | — | 122,826 | ||||||||||||
The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at December 31, 2013:
As of December 31, 2013 | ||||||||||
Financial Instrument | Fair Value | Valuation Technique | Unobservable Input | Range of Inputs | ||||||
Impaired loans | $ | 1,690 | Discounted cash flow analysis and/or third party appraisal | 1) Loss given default 2) Probability of default 3) Management discount for property type and recent market volatility | 1) 20% – 50% 2) 19% – 50% 3) 0% – 90% | |||||
OREO | $ | 47,793 | Third party appraisal | Management discount for property type, recent market volatility and time on the market | 0% – 40% | |||||
As of December 31, 2012 | ||||||||||
Financial Instrument | Fair Value | Valuation Technique | Unobservable Input | Range of Inputs | ||||||
Impaired loans | $ | 5,114 | Discounted cash flow analysis and/or third party appraisal | 1) Loss given default 2) Probability of default 3) Management discount for property type and recent market volatility | 1) 1% – 14% 2) 10% – 15% 3) 0% – 54% | |||||
OREO | $ | 122,826 | Third party appraisal | Management discount for property type and recent market volatility | 0% – 40% | |||||
47
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
Fair Value of Financial Instruments
The following table includes the estimated fair value of the Company’s financial assets and financial liabilities. The methodologies for estimating the fair value of financial assets and financial liabilities measured on a recurring and nonrecurring basis are discussed above. The methodologies for estimating the fair value for other financial assets and financial liabilities are discussed below. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data in order to develop the estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation techniques may have a material effect on the estimated fair value amounts at December 31, 2013 and December 31, 2012.
| 2013 | 2012 | |||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
Cash and due from banks | $ | 217,071 | $ | 217,071 | $ | 214,489 | $ | 214,489 | ||||||||
Investment securities available-for-sale | 433,037 | 433,037 | 361,696 | 361,696 | ||||||||||||
Investment securities held-to-maturity | 75,680 | 77,527 | 66,550 | 72,084 | ||||||||||||
Loans held for sale | 1,967 | 2,017 | 24,146 | 24,571 | ||||||||||||
Originated loans, net | 1,339,801 | 1,366,837 | 854,145 | 851,930 | ||||||||||||
Acquired loans, net | 392,301 | 392,301 | 528,350 | 528,350 | ||||||||||||
FDIC loss share receivable | 108,267 | 108,267 | 236,400 | 236,400 | ||||||||||||
BOLI | 58,999 | 58,999 | 57,561 | 57,561 | ||||||||||||
FHLBA stock | 6,785 | 6,785 | 7,981 | 7,981 | ||||||||||||
Accrued interest receivable | 6,914 | 6,914 | 6,092 | 6,092 | ||||||||||||
Deposits | 2,239,954 | 2,233,237 | 2,009,400 | 2,008,028 | ||||||||||||
Other borrowings | 95,183 | 97,831 | 111,806 | 114,359 | ||||||||||||
Accrued interest payable | 1,265 | 1,265 | 1,303 | 1,303 | ||||||||||||
Cash and Due From Banks
The carrying amount approximates fair value for these instruments.
Loans Held For Sale
Loans held for sale are carried at the lower of cost or fair value. These loans currently consist of one-to-four family residential real estate loans originated for sale to qualified third parties. Fair value is based upon the contractual price to be received from these third parties, which may be different than cost (Level 2).
Originated Loans
Fair values are estimated for portfolios of loans with similar financial characteristics if collateral-dependent. Loans are segregated by type. The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect observable market information incorporating the credit, liquidity, yield and other risks inherent in the loan. The estimate of maturity is based upon the Company’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of the current economic and lending conditions.
48
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
Fair value for significant non-performing loans is generally based upon recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information.
Acquired Loans
Fair values for acquired loans are valued based upon a discounted expected cash flow methodology that considers various factors including the type of loan and related collateral, credit quality, fixed or variable interest rate, term of loan and whether or not the loan was amortizing and a discount rate reflecting the Company’s assessment of risk inherent in the cash flow estimates. Acquired loans are grouped together according to common risk characteristics and are evaluated in aggregated pools when applying various valuation techniques. The Company estimated the gross cash flows expected to be collected on these loans based upon the expected remaining life of the underlying loans, which includes the effects of estimated prepayments. The carrying amounts of acquired loans approximate fair value.
FDIC Loss Share Receivable
The fair value of the FDIC loss share receivable is estimated using projected cash flows related to the loss sharing agreements based on the expected reimbursements for losses and the applicable loss sharing percentages. The cash flows are discounted to reflect the uncertainty of the time of receipt of the loss-sharing reimbursements from the FDIC. The carrying amount of the FDIC loss share receivable approximates fair value.
FHLBA
FHLBA stock is carried at its original cost basis, as cost approximates fair value and there is no ready market for such investments.
Deposits
The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings and money market and checking accounts, is equal to the amount payable on demand. The fair value of time deposits is based upon the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
Other Borrowings
The fair value of the Company’s FHLBA advances is estimated based upon the discounted value of contractual cash flows. The fair value of securities sold under agreements to repurchase approximates the carrying amount because of the short maturity of these borrowings. The discount rate is estimated using rates quoted for the same or similar issues or the current rates offered to the Company for debt of the same remaining maturities.
Commitments and Contingencies
For off-balance sheets commitments and contingencies, carrying amounts are reasonable estimates of the fair values for such financial instruments. Carrying amounts include unamortized fee income and, in some cases, reserves for any credit losses from those financial instruments. These amounts are not material to the Company’s financial position.
49
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
| 13. | Employee Benefit Plans |
The Company sponsors a defined contribution 401(k) profit sharing plan which covers substantially all employees. This plan is qualified under the Internal Revenue Code and employees are eligible to participate in the 401(k) profit sharing plan after 3 months of service through deferral of portions of their salary. Based upon the employee’s contribution, the Company matches up to 50 percent of the employee contribution up to 6 percent. The Company contributions to the 401(k) profit sharing plan are at the discretion of the Board of Directors. The Company made matching contributions of $454 and $328 during 2013 and 2012, respectively.
The Company also maintains an unfunded, noncontributory, nonqualified SERP that covers key executives of the Company. The plan provides defined benefits based upon a fixed payment schedule. The Company expensed $490 and $645 during 2013 and 2012 for the accrual of the retirement benefits, respectively.
| 14. | Noninterest Expense |
Other noninterest expense for the years ended December 31, 2013 and 2012 included the following:
| 2013 | 2012 | |||||||
Technology and data processing | $ | 7,896 | $ | 7,971 | ||||
Legal and professional services | 3,988 | 5,017 | ||||||
Printing and supplies | 827 | 1,083 | ||||||
Advertising | 1,355 | 2,510 | ||||||
Insurance expense | 1,155 | 1,124 | ||||||
Postage | 594 | 886 | ||||||
FDIC deposit insurance expense | 2,193 | 1,909 | ||||||
Other | 4,304 | 5,347 | ||||||
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Total other noninterest expense | $ | 22,312 | $ | 25,847 | ||||
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50
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
| 15. | Accumulated Other Comprehensive Income (AOCI) |
In addition to presenting the Consolidated Statements of Comprehensive Income herein, the following table shows the tax effects allocated to each component of AOCI for the years ended December 31, 2013 and 2012:
| December 31, 2013 | December 31, 2012 | |||||||||||||||||||||||
| Before-Tax Amount | Tax | Net-of-Tax Amount | Before-Tax Amount | Tax | Net-of-Tax Amount | |||||||||||||||||||
AOCI, beginning balance | $ | 11,074 | $ | (3,876 | ) | $ | 7,198 | 10,675 | $ | (3,628 | ) | $ | 7,047 | |||||||||||
Unrealized gains / (losses) on securities: | ||||||||||||||||||||||||
Net unrealized gains / (losses) arising during the period | (7,257 | ) | 2,566 | (4,691 | ) | 2,007 | (783 | ) | 1,224 | |||||||||||||||
Less: reclassification adjustment for gains included in net income | (2,532 | ) | 861 | (1,671 | ) | (1,440 | ) | 490 | (950 | ) | ||||||||||||||
Amortization of unrealized gains on investment securities transferred from available-for-sale to held-to-maturity | (191 | ) | 65 | (126 | ) | (168 | ) | 45 | (123 | ) | ||||||||||||||
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AOCI, ending balance | 1,094 | (384 | ) | 710 | 11,074 | (3,876 | ) | 7,198 | ||||||||||||||||
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Reclassifications out of AOCI consisted of the following:
| Affected line item in the | ||||||||||
| Details about components of | December 31 | Consolidated Financial | ||||||||
AOCI | 2013 | 2012 | Statements | |||||||
Realized gains on AFS securities: | $ | (2,532 | ) | $ | (1,440 | ) | Securities gains | |||
| 861 | 490 | Income tax | ||||||||
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| $ | (1,671 | ) | $ | (950 | ) | |||||
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Amortization of unrealized gains on investment securities transferred from available-for-sale to held-to-maturity: | $ | (191 | ) | $ | (168 | ) | Investment securities available-for-sale | |||
| 65 | 45 | Income tax | ||||||||
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| $ | (126 | ) | $ | (123 | ) | |||||
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51
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
| 16. | Income Taxes |
At December 31, 2013 and 2012, the income tax expense and benefit consisted of the following components:
| 2013 | 2012 | |||||||
Current tax expense (benefit) | ||||||||
Federal | $ | 21,636 | $ | (6,739 | ) | |||
State | (519 | ) | — | |||||
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Total current tax expense (benefit) | 21,117 | (6,739 | ) | |||||
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Deferred tax expense (benefit) | ||||||||
Federal | (17,167 | ) | 7,764 | |||||
State | (138 | ) | (1,128 | ) | ||||
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Total deferred tax expense (benefit) | (17,305 | ) | 6,636 | |||||
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Total income tax expense (benefit) | $ | 3,812 | $ | (103 | ) | |||
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The Company’s effective tax rate for the years ended December 31, 2013 and 2012 was 22.42% and -0.83%, respectively which differed from the statutory rate of 35% and 35%, respectively, primarily as a result of the nontaxable bargain purchase gain and state income tax benefit.
The difference between the federal income tax rates, applied to income before income taxes and the effective rates were due to the following:
| 2013 | 2012 | |||||||
Income taxes at statutory rates (35% and 35%, respectively) | $ | 5,951 | $ | 4,512 | ||||
Increase (reduction) in income taxes resulting from | ||||||||
Nontaxable income on loans and investments, net of nondeductible expenses | (593 | ) | (578 | ) | ||||
Gain on acquisition | — | (2,547 | ) | |||||
State income taxes, net of federal benefit | (427 | ) | (734 | ) | ||||
Tax exempt income – BOLI | (1,063 | ) | (595 | ) | ||||
Tax credits | (166 | ) | (166 | ) | ||||
Meals and entertainment | 36 | 29 | ||||||
Other, net | 74 | (24 | ) | |||||
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Total income tax expense (benefit) | $ | 3,812 | $ | (103 | ) | |||
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52
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
The major components of the temporary differences that give rise to deferred tax assets and liabilities at December 31, 2013 and 2012 were as follows:
| 2013 | 2012 | |||||||
Deferred tax assets: | ||||||||
Covered assets | $ | 32,803 | $ | 241,925 | ||||
Goodwill | 5,098 | 5,017 | ||||||
FDIC clawback liability | 10,458 | 10,131 | ||||||
State carryforwards | 226 | 2,000 | ||||||
Stock -based compensation | 4,564 | 3,203 | ||||||
Allowance for loan loss | 7,177 | 4,587 | ||||||
Nonaccrual loan interest | 7,416 | |||||||
Other | 4,138 | 3,028 | ||||||
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Total deferred tax asset | 71,880 | 269,891 | ||||||
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Deferred tax liabilities: | ||||||||
Acquired subsidiary assets | — | (5,495 | ) | |||||
FDIC Loss Share Receivable | (42,116 | ) | (245,652 | ) | ||||
Deposit premiums | (2,477 | ) | (4,179 | ) | ||||
Available-for-sale securities | (382 | ) | (3,876 | ) | ||||
Tax gain on acquisitions | (7,324 | ) | (9,839 | ) | ||||
Other | (6,454 | ) | (8,787 | ) | ||||
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Total deferred tax (liability) | (58,753 | ) | (277,828 | ) | ||||
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Net deferred tax asset (liability) | $ | 13,127 | $ | (7,937 | ) | |||
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The Company has state tax credit carryforwards of $347 which expire in 2018.
At December 31, 2013 and 2012, the Company had no unrecognized tax benefits recorded. The Company does not expect the total amount of unrecognized tax benefits to significantly increase within the next twelve months.
The Company did not have any amounts accrued for interest and penalties at December 31, 2013 and 2012.
The Company and its subsidiaries are subject to U.S. federal income tax as well as state and local tax in several jurisdictions. Tax years since inception are still open to examinations by taxing authorities.
| 17. | Transactions with Related Persons |
In the ordinary course of business, loans may be made to officers, directors and affiliated companies at substantially the same terms as comparable transactions with other borrowers. At December 31, 2013 and 2012, related party loans were approximately $2,317 and $2,379, respectively. Repayments of loans made by the related parties were $62 and $58 for the years ended December 31, 2013 and 2012, respectively.
The Company held deposits of $1,974 and $1,241 from key officers, directors and affiliated companies at December 31, 2013 and 2012, respectively.
53
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
| 18. | Regulatory Requirements and Other Restrictions |
The Company (on a consolidated basis) and CSB are subject to various regulatory capital requirements administered by federal and state banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet minimum capital requirements results in certain discretionary and required actions by regulators that could have an effect on the Company’s operations.
Quantitative measures established by regulation to ensure capital adequacy require the Company and CSB to maintain minimum amounts and ratios (as defined by regulations and set forth in the table below) of Total and Tier 1 capital to risk-weighted assets and to average assets, respectively. Management believes, as of December 31, 2013, the Company and CSB meet all capital adequacy requirements to which it is subject. At December 31, 2013 and 2012, regulatory notifications categorized CSB as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Company and CSB must maintain minimum Total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There have been no conditions or events that would affect the Company’s and CSB’s well-capitalized status.
| As of December 31, 2013 | ||||||||||||||||||||||||
| Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
Total capital to risk-weighted assets | ||||||||||||||||||||||||
Consolidated | $ | 426,773 | 22.42 | % | $ | 152,284 | 8.00 | % | N/A | N/A | ||||||||||||||
CSB | $ | 359,517 | 18.89 | % | $ | 152,261 | 8.00 | % | $ | 190,326 | 10.00 | % | ||||||||||||
Tier 1 capital to risk-weighted assets | ||||||||||||||||||||||||
Consolidated | $ | 402,819 | 21.16 | % | $ | 76,142 | 4.00 | % | N/A | N/A | ||||||||||||||
CSB | $ | 335,566 | 17.63 | % | $ | 76,131 | 4.00 | % | $ | 114,196 | 6.00 | % | ||||||||||||
Tier 1 capital to average assets | ||||||||||||||||||||||||
Consolidated | $ | 402,819 | 14.71 | % | $ | 109,568 | 4.00 | % | N/A | N/A | ||||||||||||||
CSB | $ | 335,566 | 12.25 | % | $ | 109,568 | 4.00 | % | $ | 136,960 | 5.00 | % | ||||||||||||
| As of December 31, 2012 | ||||||||||||||||||||||||
| Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
Total capital to risk-weighted assets | ||||||||||||||||||||||||
Consolidated | $ | 405,621 | 29.02 | % | $ | 111,791 | 8.00 | % | N/A | N/A | ||||||||||||||
CSB | $ | 337,978 | 24.19 | % | $ | 111,807 | 8.00 | % | $ | 139,738 | 10.00 | % | ||||||||||||
Tier 1 capital to risk-weighted assets | ||||||||||||||||||||||||
Consolidated | $ | 387,677 | 27.74 | % | $ | 55,895 | 4.00 | % | N/A | N/A | ||||||||||||||
CSB | $ | 320,036 | 22.90 | % | $ | 55,904 | 4.00 | % | $ | 83,843 | 6.00 | % | ||||||||||||
Tier 1 capital to average assets | ||||||||||||||||||||||||
Consolidated | $ | 387,677 | 15.31 | % | $ | 101,273 | 4.00 | % | N/A | N/A | ||||||||||||||
CSB | $ | 320,036 | 12.64 | % | $ | 101,273 | 4.00 | % | $ | 126,591 | 5.00 | % | ||||||||||||
54
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
As a condition to the Department of Banking and Finance of the State of Georgia’s approval of CSB’s Article of Incorporation, CSB must maintain a Tier 1 capital to average assets of not less than 10 percent, a total capital to risk-weighted assets of not less than 12 percent and a Prompt Corrective Action category rating, as defined by regulators, of “Well Capitalized” for the later of the first three years of operations or until cumulative profitability is achieved. CSB is also required to comply with the provisions of the FDIC’sStatement of Policy on Qualifications for Failed Bank Acquisitions that requires CSB to maintain Tier 1 capital to average assets of at least 10 percent throughout the first three years following the commencement of banking operations.
The Company and CSB are subject to various requirements imposed by state and federal banking statutes and regulations, including regulations requiring the maintenance of noninterest-bearing reserve balances at the Federal Reserve Bank. Banks are allowed to reduce the required balances by the amount of vault cash. As of December 31, 2013 and 2012, the requirement for the Company was $6,736 and $19,128, respectively.
| 19. | Stock-Based Compensation |
The Company has a nonqualified stock option plan for certain key officers/employees and nonemployee directors. The 2010 Long-Term Incentive Plan provides stock awards up to 4,135,582 common shares of the Company and as of December 31, 2013 and 2012, there were 1,034,764 and 1,171,034 shares available for future grants under this plan, respectively. The Company initially had two types of options that were granted under this plan. The first set of granted options (“Type A”) were to certain key officers and nonemployee directors and vest monthly at a rate of 25% per year, except that key officers do not begin vesting until they have completed one year of service, at which time they immediately become 25% vested. Each option remains outstanding for 10 years after the initial grant date. There were 290,388 options granted during 2013 and no options granted in 2012 under this plan. The second set of granted options (“Type B”), were to certain key employees and the vesting of these options would depend on the performance of the Company’s equity at the end of the vesting performance period, which is measured at September 17, 2015 or a liquidity event, whichever is earlier. There were 92,500 options granted during 2013 and no options granted in 2012 under this plan. During 2013, there were 76,618 forfeited Type A options and 170,000 forfeited Type B options and during 2012, there were 130,000 forfeited Type B options.
Under a Board of Directors resolution, all options granted as Type B were converted to Type A in August of 2013 with credit given for time served to the 18 employees affected. As a result of this modification, the Company had to determine the additional incremental cost for the converted options in order to recognize this cost over the remaining vesting term of the options. This incremental value for the 1,534,000 options that were converted was $1,078 and will be recognized over the remaining vesting term, which was extended from 4 to 6 years for certain officers.
Annual stock option awards are recognized over the vesting period and reflected as salaries and employee benefits within the Consolidated Statements of Income, which was $3,497 and $3,252 for the years ending December 31, 2013 and 2012, respectively. Total unrecognized salaries and employee benefit expense related to nonvested share-based compensation was $3,517 and $4,680 at December 31, 2013 and 2012, respectively, and is expected to all be recognized by December 11, 2017 with a weighted-average period of 2.46 years.
55
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
Activity in the stock option plan for the years ended December 31, 2013 and 2012 is summarized as follows:
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | ||||||||||
Outstanding – January 1, 2012 | 3,094,548 | $ | 10.09 | 8.57 | ||||||||
Granted | — | — | — | |||||||||
Exercised | — | — | — | |||||||||
Forfeited | (130,000 | ) | 10.25 | — | ||||||||
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Outstanding – December 31, 2012 | 2,964,548 | 10.07 | 7.03 | |||||||||
Granted | 382,888 | 11.00 | — | |||||||||
Exercised | — | — | — | |||||||||
Forfeited | (246,618 | ) | 10.50 | — | ||||||||
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Outstanding – December 31, 2013 | 3,100,818 | $ | 10.15 | 5.77 | ||||||||
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The following table presents information on stock options that were excercisable as of December 31, 2013 and 2012:
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | ||||||||||
December 31, 2013 | 2,317,375 | $ | 10.04 | 6.33 | ||||||||
December 31, 2012 | 1,427,500 | $ | 10.04 | 7.26 | ||||||||
The Company has utilized the Black-Scholes valuation method to determine the fair value of its stock options for Type A. The valuation method require the use of the following assumptions: the stock price as of the grant date, the expected dividend yield and the expected stock price volatility based upon the historical volatility for a group of comparable publicly-traded companies as defined by the Company. Also, for a period approximating the expected life of the options, the risk-free rate based upon the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the options and the expected option life presented by the period of time the options are expected to be outstanding is based upon historical trends.
The estimated fair value of the options granted, as well as the weighted average and ranged assumptions used in the computations are as follows:
| Type A | ||||
Fair value of options granted | $ | 2.93 - $4.33 | ||
Expected dividend yield | — | |||
Expected volatility | 32% - 40% | |||
Risk-free interest rate | 0.83% - 0.99% | |||
Expected life (in years) | 4.0 - 6.1 | |||
56
Community & Southern Holdings, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(In thousands of dollars, except share data)
| 20. | Commitments and Contingencies |
In order to meet the financing needs of its customers, the Company has financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve elements of credit, interest rate and/or liquidity risk.
Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. Established credit standards control the credit-risk exposure associated with these commitments. The amount of collateral obtained, if deemed necessary upon extension of credit, is determined on a case by case basis by management through credit evaluation of the customer.
Standby letters of credit are commitments guaranteeing performance of a customer to a third party. These guarantees are issued primarily to support public and private borrowing arrangements. In order to minimize its exposure, the Company credit policies govern the issuance of standby letters of credit.
At December 31, 2013 and 2012, the Company had unused loan commitments and standby letters of credit amounting to the following:
| As of December 31, 2013 | As of December 31, 2012 | |||||||||||||||||||||||
| Fixed Rate | Variable Rate | Total | Fixed Rate | Variable Rate | Total | |||||||||||||||||||
Unused loan commitments | $ | 22,405 | $ | 439,703 | $ | 462,108 | $ | 104,004 | $ | 308,037 | $ | 412,041 | ||||||||||||
Standby letters of credit | 3,664 | 23,937 | 27,601 | 3,650 | 2,260 | 5,910 | ||||||||||||||||||
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| $ | 26,069 | $ | 463,640 | $ | 489,709 | $ | 107,654 | $ | 310,297 | $ | 417,951 | |||||||||||||
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The Company, on a case-by-case basis, establishes reserves for those legal claims in which it is probable that a loss will be incurred and the amount of such loss can be reasonably estimated. Based on current knowledge, management does not believe that loss contingencies, if any, arising from pending litigation and regulatory matters will have a material adverse effect on the consolidated financial position, results or liquidity of the Company.
| 21. | Subsequent Events |
Management has evaluated the effects of subsequent events that have occurred after December 31, 2013 and through March 25, 2014, the date the financial statements were issued. During this period, management has determined that no events occurred that require disclosure.
57