Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2014

OR

 

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

For the transition period from                      to                     

Commission file number 001-36586

 

 

FCB FINANCIAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		001-36586		27-0775699
(State or other jurisdiction of incorporation)		(Commission file number)		(IRS Employer Identification Number)

2500 Weston Road, Suite 300

Weston, Florida 33331

(Address of principal executive offices)

(954) 984-3313

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		x		Smaller reporting company		¨

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

As of September 12, 2014, there were 34,467,913 shares of Class A Common Stock and 6,941,785 shares of Class B Non-voting Common Stock outstanding.

 

 

 

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FCB FINANCIAL HOLDINGS, INC.

FORM 10-Q

INDEX

 

				Page
PART I.		FINANCIAL INFORMATION
Item 1.		Consolidated Financial Statements (Unaudited)
		Consolidated Balance Sheets			3
		Consolidated Statements of Income			4
		Consolidated Statements of Comprehensive Income (Loss)			5
		Consolidated Statements of Changes In Stockholders’ Equity			6
		Consolidated Statements of Cash Flows			7
		Notes to Consolidated Financial Statements			8
Item 2.		Management’s Discussion and Analysis of Financial Condition and  Results of Operations			46
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			76
Item 4.		Controls and Procedures			79
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings			80
Item 1A.		Risk Factors			80
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			80
Item 3.		Default Upon Senior Securities			80
Item 4.		Mine Safety Disclosures			80
Item 5.		Other Information			80
Item 6.		Exhibits			80
Signatures					81

 

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FCB FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except share and per share data)

 

		June 30, 2014				December 31, 2013
Assets:
Cash and due from banks		$	29,976			$	28,819
Interest-earning deposits in other banks			100,634				210,398
Investment securities:
Held to maturity securities (fair value of $0 and $364, respectively)			—				365
Available for sale securities, at fair value			1,724,702				1,145,771
Federal Home Loan Bank and other bank stock, at cost			56,328				36,187
Total investment securities			1,781,030				1,182,323
Loans held for sale			1,492				—
Loans:
New loans			2,306,337				1,770,711
Acquired loans ($326,523 and $359,255 covered by FDIC loss share, respectively)			957,315				488,073
Allowance for loan losses			(17,884	)			(14,733	)
Loans, net			3,245,768				2,244,051
FDIC Loss share indemnification asset			74,853				87,229
Due from Federal Deposit Insurance Corporation (“FDIC”)			969				3,659
Premises and equipment, net			42,122				40,992
Other real estate owned ($29,840 and $27,299 of foreclosed property covered by FDIC loss share, respectively)			80,988				34,682
Goodwill and other intangible assets			89,466				39,369
Deferred tax assets, net (including valuation allowance of $9,151 and $0, respectively)			35,439				5,828
Bank-owned life insurance			117,113				75,257
Other assets			41,858				20,763
Total assets		$	5,641,708			$	3,973,370
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Transaction accounts:
Noninterest bearing		$	435,055			$	291,658
Interest bearing			2,090,290				1,336,679
Total transaction accounts			2,525,345				1,628,337
Time deposits			1,432,921				1,165,196
Total deposits			3,958,266				2,793,533
Total borrowings (including FHLB advances of $770,205 and $431,013, respectively)			855,300				435,866
Investment securities purchased not yet settled			41,601				—
Other liabilities			47,093				27,857
Total liabilities			4,902,260				3,257,256
Commitments and contingencies (Note 16)
Stockholders’ Equity:
Class A common stock, par value $0.001 per share; 100 million shares authorized; 29,060,813, 28,992,314 issued and 28,133,501, 28,065,002 outstanding, respectively			29				29
Class B common stock, par value $0.001 per share; 50 million shares authorized; 7,950,785, 8,019,284 issued and 7,758,653, 7,827,152 outstanding, respectively			8				8
Additional paid-in capital			724,519				723,631
Retained earnings			25,466				12,772
Accumulated other comprehensive income (loss)			8,177				(1,575	)
Treasury stock, at cost; 927,312 Class A and 192,132 Class B common shares			(18,751	)			(18,751	)
Total stockholders’ equity			739,448				716,114
Total liabilities and stockholders’ equity		$	5,641,708			$	3,973,370

The accompanying notes are an integral part of these consolidated financial statements

 

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FCB FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except share and per share data)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
Interest income:
Interest and fees on loans		$	37,833			$	26,297			$	72,685			$	51,815
Interest and dividends on investment securities			10,566				9,817				20,564				18,725
Other interest income			53				40				121				71
Total interest income			48,452				36,154				93,370				70,611
Interest expense:
Interest on deposits			5,833				4,644				11,142				8,956
Interest on borrowings			1,466				1,038				2,730				2,096
Total interest expense			7,299				5,682				13,872				11,052
Net interest income			41,153				30,472				79,498				59,559
Provision for loan losses			3,236				473				4,326				1,569
Net interest income after provision for loan losses			37,917				29,999				75,172				57,990
Noninterest income:
Service charges and fees			707				554				1,445				1,071
Loan and other fees			2,569				1,436				3,285				2,142
Bank-owned life insurance income			1,038				—				1,856				—
FDIC loss share indemnification loss			(5,247	)			(4,729	)			(10,239	)			(8,518	)
Income from resolution of acquired assets			1,692				4,116				2,729				5,915
Gain (loss) on sales of other real estate owned			(359	)			(442	)			72				1,000
Gain on investment securities			4,448				1,710				6,943				3,096
Other noninterest income			1,842				1,015				3,147				1,638
Total noninterest income			6,690				3,660				9,238				6,344
Noninterest expense:
Salaries and employee benefits			13,411				12,057				29,831				23,357
Occupancy and equipment expenses			3,777				2,571				7,210				5,012
Other real estate and acquired assets resolution related expenses			3,338				6,094				7,099				11,785
Professional services			1,352				1,498				3,184				3,504
Data processing and network			2,357				1,807				5,567				3,439
Regulatory assessments and insurance			1,920				1,278				3,694				2,566
Amortization of intangibles			443				380				859				792
Other operating expenses			4,146				1,770				7,766				3,527
Total noninterest expense			30,744				27,455				65,210				53,982
Income before income tax provision expense			13,863				6,204				19,200				10,352
Income tax provision expense			4,697				1,927				6,506				3,577
Net income		$	9,166			$	4,277			$	12,694			$	6,775
Earnings per share:
Basic		$	0.26			$	0.12			$	0.35			$	0.18
Diluted		$	0.26			$	0.12			$	0.35			$	0.18
Weighted average shares outstanding:
Basic			35,892,154				37,011,598				35,892,154				37,011,598
Diluted			35,896,207				37,015,889				35,896,257				37,014,579

The accompanying notes are an integral part of these consolidated financial statements

 

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FCB FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(Dollars in thousands)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
Net income		$	9,166			$	4,277			$	12,694			$	6,775
Other comprehensive income (loss):
Unrealized net holding gains (losses) on investment securities available for sale, net of taxes of $(4,404), $4,590, $(6,397) and $2,960, respectively			7,008				(7,308	)			10,183				(4,714	)
Reclassification adjustment for (gains) losses on investment securities available for sale included in net income, net of taxes of $658, $726, $271 and $1,172, respectively			(1,047	)			(1,155	)			(431	)			(1,866	)
Total other comprehensive income (loss)			5,961				(8,463	)			9,752				(6,580	)
Total comprehensive income (loss)		$	15,127			$	(4,186	)		$	22,446			$	195

The accompanying notes are an integral part of these consolidated financial statements

 

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FCB FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

Six Months Ended June 30, 2014 and 2013

(Dollars in thousands, except for share data)

 

		Common Stock Shares Outstanding								Common Stock Issued								Additional Paid in Capital				Retained Earnings (Deficit)				Treasury Stock				Accumulated Other Comprehensive Income (Loss)				Total Stockholders’ Equity
		Class A				Class B				Class A				Class B
Balance as of January 1, 2013			28,992,314				8,019,284			$	29			$	8			$	720,996			$	(4,399	)		$	—			$	11,540			$	728,174
Net income			—				—				—				—				—				6,775				—				—				6,775
Stock-based compensation			—				—				—				—				1,540				—				—				—				1,540
Other comprehensive income/(loss)			—				—				—				—				—				—				—				(6,580	)			(6,580	)
Balance as of June 30, 2013			28,992,314				8,019,284			$	29			$	8			$	722,536			$	2,376			$	—			$	4,960			$	729,909
Balance as of January 1, 2014			28,065,002				7,827,152			$	29			$	8			$	723,631			$	12,772			$	(18,751	)		$	(1,575	)		$	716,114
Net income			—				—				—				—				—				12,694				—				—				12,694
Exchange of B shares to A shares			68,499				(68,499	)			—				—				—				—				—				—				—
Stock-based compensation			—				—				—				—				888				—				—				—				888
Other comprehensive income/(loss)			—				—				—				—				—				—				—				9,752				9,752
Balance as of June 30, 2014			28,133,501				7,758,653			$	29			$	8			$	724,519			$	25,466			$	(18,751	)		$	8,177			$	739,448

 

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FCB FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

		Six Months Ended June 30,
		2014				2013
Cash Flows From Operating Activities:
Net income		$	12,694			$	6,775
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			4,326				1,569
Amortization of intangible assets			859				792
Depreciation of premises and equipment			1,871				1,403
Accretion of discount on loans			(16,306	)			(15,785	)
Net amortization (accretion) of premium (discount) on investment securities			1,113				1,406
Net amortization (accretion) related to time deposits, FHLB advances and other borrowings			(1,391	)			491
Impairment of other real estate owned			732				2,907
FDIC loss share indemnification loss			10,239				8,518
Gain on investment securities			(6,943	)			(3,096	)
Gain on sale of loans			(562	)			(383	)
Gain on sale of other real estate			(72	)			(1,000	)
Loss on sale of premises and equipment			18				7
Stock-based compensation expense			888				1,540
Increase in cash surrender value of BOLI			(1,856	)			—
Net change in operating assets and liabilities:
Net change in loans held for sale			(1,492	)			—
Net change in other assets			(14,615	)			(13,427	)
Net change in other liabilities			54,518				34,302
Net cash provided by operating activities			44,021				26,019
Cash Flows From Investing Activities:
Purchase of investment securities available for sale			(882,054	)			(603,827	)
Sales of investment securities available for sale			473,518				305,395
Paydown and maturities of investment securities held to maturity			372				200
Paydown and maturities of investment securities available for sale			128,945				346,625
Purchase of FHLB and other bank stock			(39,785	)			(2,664	)
Sales of FHLB and other bank stock			19,644				3,935
Net cash paid in acquisition			(14,073	)			—
Collection from FDIC on loss share indemnification asset			5,597				23,396
Net change in loans			(404,740	)			(329,259	)
Purchase of loans			(72,504	)			—
Proceeds from sale of loans			23,329				30,490
Purchase of bank-owned life insurance			(40,000	)			—
Proceeds from sale of other real estate owned			20,988				26,919
Purchase of premises and equipment			(443	)			(773	)
Proceeds from the sale of premises and equipment			—				108
Net cash used in investing activities			(781,206	)			(199,455	)
Cash Flows From Financing Activities:
Net change in deposits			301,594				275,796
Net change in FHLB advances and other borrowings			328,485				(4,000	)
Net change in repurchase agreements			(1,166	)			1,684
Other financing costs			(335	)			—
Net cash provided by financing activities			628,578				273,480
Net Change in Cash and Cash Equivalents			(108,607	)			100,044
Cash and Cash Equivalents at Beginning of Period			239,217				96,220
Cash and Cash Equivalents at End of Period		$	130,610			$	196,264
Supplemental Disclosures of Cash Flow Information:
Interest paid		$	13,191			$	10,517
Income taxes paid			5,816				3,055
Supplemental disclosure of noncash investing and financing activities:
Transfer of loans to other real estate owned		$	12,869			$	15,773
Fair value of assets acquired			957,324				—
Goodwill recorded			47,355				—
Liabilities assumed			962,194				—

The accompanying notes are an integral part of these consolidated financial statements

 

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FCB FINANCIAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

General

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all information and notes to the consolidated financial statements necessary for a complete presentation of financial position, results of operations, comprehensive income and cash flows in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and should be read in conjunction with the Company’s consolidated financial statements and the notes thereto appearing in FCB’s prospectus filed pursuant to Rule 424(b) under the Securities Act (File No. 333-196935) on August 4, 2014 forming part of the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-196935), originally filed on June 20, 2014 (the “Prospectus”). In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or for any other interim period.

Nature of Operations

FCB Financial Holdings, Inc. (the “Company” or “FCB”), formerly known as Bond Street Holdings, Inc., is a national bank holding company with one wholly-owned national bank subsidiary, Florida Community Bank, National Association (“Florida Community Bank” or the “Bank), headquartered in Weston, Florida, provides a full range of banking and related services to individual and corporate customers through 54 banking centers located in Florida at June 30, 2014.

On June 13, 2014, Bond Street Holdings, Inc. changed its legal name to FCB Financial Holdings, Inc.

On July 31, 2014, the Securities and Exchange Commission declared effective the Company’s registration statement on Form S-1 registering the shares of the Company’s Class A common stock. The Class A common stock was authorized for trading on the New York Stock Exchange (“NYSE”) under the symbol “FCB.” On August 6, 2014, the Company completed the initial public offering of 7,520,000 shares of Class A common stock for $22.00 per share. Of the 7,520,000 shares sold, 4,554,045 shares were sold by the Company and 2,965,955 shares were sold by certain selling shareholders. In addition, on September 3, 2014, the Company sold an additional 720,000 shares of Class A common stock to cover the exercise of the underwriters’ over-allotment option. The Company received net proceeds of approximately $104.0 million from the offering, after deducting the underwriting discounts and commissions and estimated offering expenses. The Company did not receive any proceeds from the sale of shares by the selling shareholders.

Reclassifications

In certain instances, amounts reported in prior periods consolidated financial statements have been reclassified to conform to the current period presentation. Such reclassifications had no effect on previously reported cash flows, stockholders’ equity or net income.

Use of Estimates

The preparation of financial statements in conformity with U.S GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates that are susceptible to significant change in the near term are the allowance for credit losses, valuation of and accounting for loans covered by loss sharing arrangements with the FDIC and the related loss share receivable, valuation of and accounting for acquired loans, determination of fair value of financial instruments, valuation of goodwill, intangible assets and other purchase accounting adjustments.

 

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NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Recent Accounting Pronouncements

In June 2014, the Financial Accounting Standard Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-12, “Compensation- Stock Compensation (Topic 718)—Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period”. This update provides specific guidance on whether to treat a performance target that could be achieved after the requisite service period as a performance condition that affects vesting or as a nonvesting condition that affects the grant-date fair value of an award. This ASU is effective for fiscal years and interim periods beginning after December 15, 2015. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In June 2014, the FASB issued ASU No. 2014-11, “Transfers and Servicing (topic 860)—Repurchase-to-Maturity Transactions, Repurchase Financing, and Disclosures”. This update changes the accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements. The amendments also require two new disclosures. The first disclosure requires an entity to disclose information on transfers accounted for as sales in transactions that are economically similar to repurchase agreements. The second disclosure provides increased transparency about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and interim periods beginning after December 15, 2015. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific revenue recognition guidance throughout the Accounting Standards Codification. The amendments in this update affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts, including leases and insurance contracts, are within the scope of other standards. The amendments establish a core principle requiring the recognition of revenue to depict the transfer of promised goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for such goods or services. The amendments also require expanded disclosures concerning the nature, amount, timing and uncertainty of revenues and cash flows arising from contracts with customers. For public entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and must be applied retrospectively. Early application is not permitted. The Company is currently evaluating the impact of adoption.

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360)—“Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. The amendments in this update change the definition of a discontinued operation and, thus, limit the circumstances under which a disposal may be reported as a discontinued operation. Under the amendments, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

 

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Updates to Significant Accounting Policies

Loans Held for Sale

Certain residential fixed rate and adjustable rate mortgage loans originated by the Company with the intent to sell in the secondary market are carried at the lower of cost or fair value, as determined by outstanding commitments from investors. These loans are generally sold on a non-recourse basis with servicing released. Gains and losses on the sale of loans recognized in earnings are measured based on the difference between proceeds received and the carrying amount of the loans, inclusive of deferred origination fees and costs, if any.

NOTE 3. BUSINESS ACQUISITIONS

On January 31, 2014, the Bank acquired all the outstanding common stock in Great Florida Bank (“GFB” or “Great Florida”). GFB had total assets of $957.3 million and total liabilities of $962.2 million at fair value as of January 31, 2014. Holders of GFB common stock received $3.24 per share in cash for each common share owned resulting in total cash purchase price of $42.5 million. At the time of acquisition, GFB had 25 banking locations within Southeast Florida and the Miami metropolitan area. The Company contributed capital of $125 million to the Bank at the time of the GFB acquisition.

The Company determined that the acquisition of Great Florida Bank constitutes a business combination as defined by the FASB ASC topic 805, “Business Combinations”. Accordingly, the assets acquired and liabilities assumed were recorded at their fair values on the date of acquisition. Fair values were determined in accordance with the guidance provided in FASB ASC Topic 820, “Fair Value Measurements”. In many cases the determination of the fair values required 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. The Company utilized the assistance of third-party advisors in the determination of fair values for loans, other real estate owned and deferred tax assets acquired.

The following table presents a summary of the assets acquired and liabilities assumed in the Great Florida Bank acquisition recorded at fair value.

 

		(Dollars in thousands)
Consideration paid:
Cash		$	42,485
Fair value of assets acquired:
Cash and cash equivalents			28,412
Investment securities			277,639
Loans			548,129
Other real estate owned			55,085
Core deposit intangible			3,601
Fixed assets			2,576
Deferred tax asset			35,736
Other assets			6,146
Total identifiable assets acquired			957,324
Fair value of liabilities assumed:
Deposits			863,976
FHLB advances and other borrowings			92,669
Other liabilities			5,549
Total liabilities assumed			962,194
Fair value of net assets acquired			(4,870	)
Goodwill resulting from acquisition		$	47,355

The following is a description of the methods used to determine the fair values of significant assets and liabilities presented above:

 

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Cash and Cash Equivalents:

These assets are carried at amounts that approximate fair value due to their short-term nature and generally negligible credit risk.

Investment Securities:

Fair value measurement is based upon quoted market prices for similar securities in active or inactive markets (Level 2). Federal Home Loan Bank of Atlanta (“FHLB”) and other bank stock are carried at par, which has historically represented the redemption price and is therefore considered to approximate fair value.

Loans:

Acquired loans are recorded at their fair value at the date of acquisition. Fair value for acquired loans is based on a discounted cash flow methodology that considers factors including the type of loan and related collateral type, delinquency and credit classification status, fixed or variable interest rate, term of loan, whether or not the loan was amortizing, and current discount rates. Additional assumptions used include default rates, loss severity, loss curves and prepayment speeds. Discounts due to credit quality are included in the determination of fair value; therefore an allowance for loan losses is not recorded at the acquisition date. The discount rates used for the cash flow methodology are based on market rates for new originations of comparable loans at the time of acquisition and include adjustments for liquidity concerns. The fair value is determined from the discounted cash flows for each individual loan, and for ASC 310-30 loans are then aggregated at the unit of account, or pool level.

The following is a summary of the acquired loans accounted for under ASC 310-30 as well as those excluded from ASC 310-30, or Non-ASC 310-30 acquired loans, in connection with the acquisition of Great Florida Bank:

 

		(Dollars in thousands)
Acquired loans accounted for under ASC 310-30:
Contractual cash flows		$	426,116
Contractual cash flows not expected to be collected (non-accretable difference)			102,581
Expected cash flows			323,535
Excess of the expected undiscounted cash flows over the carrying value (accretable discount)			40,444
Fair value at acquisition		$	283,091
Acquired loans not accounted for under ASC 310-30 (Non-ASC 310-30 loans):
Unpaid principal balance		$	275,772
Fair value discount			(10,734	)
Fair value at acquisition			265,038
Total fair value at acquisition		$	548,129

The Company acquired loans with a fair value of $265.0 million that are classified as Non-ASC 310-30 loans as these specific loans did not exhibit deteriorated credit quality since origination or were loans to borrowers that had revolving privileges at acquisition date. The acquired Non-ASC 310-30 loans with revolving privileges had a total unpaid principal balance of $71.5 million and a fair value of $60.6 million at acquisition. The acquired Non-ASC 310-30 loans without revolving privileges had a total unpaid principal balance of $204.3 million and a fair value of $204.4 million at acquisition.

Other Real Estate Owned (“OREO”):

The fair value of acquired OREO is based on the fair value of the property, less estimated cost to sell. Fair value of OREO is typically based on third party real estate appraisals which utilize market and income valuation techniques.

 

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Deferred Tax Asset:

Deferred tax assets represent acquired loss and credit carryforwards and the net tax-affected differences between the book basis and tax basis of certain assets and liabilities, including investment securities, loans, OREO, fixed assets, core deposit intangible assets, time deposits, FHLB advances and other borrowings. The deferred tax assets are evaluated for certain carryover limitations at the acquisition date, such as Section 382 limitations, and whether it is more likely than not that the benefit from certain net operating loss carryforwards can be realized.

As part of the acquisition of Great Florida Bank, the Bank recorded $35.7 million in deferred tax assets, net of $9.2 million in valuation allowance, at acquisition. Upon acquisition, Great Florida Bank incurred a Section 382 ownership change. As such, the Company’s ability to benefit from the use of Great Florida Bank’s pre-ownership change net operating loss and tax credit carry forwards, as well as the potential deductibility of certain of its built-in losses, will be limited to approximately $1.5 million per year, putting at risk the utilization of associated deferred tax assets before they expire. The Company estimates that it is more likely than not that the benefit from certain net operating loss carryforwards will not be realized. In recognition of this risk, a valuation allowance of $9.2 million was established against the deferred tax assets associated with Great Florida Bank’s pre-ownership change net operating loss carryforwards.

Deposits:

The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the acquisition date. The fair value of fixed-maturity certificates of deposit is estimated using discounted cash flow analysis and using the rates currently offered for deposits of similar remaining maturities.

Advances from the FHLB and Other Borrowings:

The fair value of advances from the FHLB and other borrowings are estimated by discounting the future cash flows using the current rate at which similar borrowings with similar remaining maturities could be obtained.

The Great Florida Bank acquisition resulted in goodwill of $47.4 million as the estimated fair value of liabilities assumed and consideration paid exceeded the estimated fair value of assets acquired. The goodwill is included within “Goodwill and other intangible assets” in the consolidated balance sheets. None of the goodwill resulting from the Great Florida Bank acquisition is deductible for tax purposes.

The acquisition of Great Florida Bank is expected to benefit the Company through revenue and expense synergies in addition to the further expansion into the Miami metropolitan area. Management believes the Great Florida Bank acquisition will create opportunities through commercial lending and access to core deposits through a larger branch network.

The core deposit intangible is being amortized on straight line basis over the estimated life, currently expected to be 10 years.

For the six months ended June 30, 2014, the Company incurred $5.0 million of bank acquisition, legal fees, accounting advisory, data conversion, retention payments and severance expenses related to the acquisition of Great Florida Bank which is recorded in noninterest expenses in the consolidated statement of income.

The provisional amounts recorded for the Great Florida Bank acquisition may be updated if better information is obtained about the initial assumptions used to determine fair value amounts or if new information is obtained regarding the facts and circumstances that existed at the date of acquisition. The provisional amounts may be adjusted through the completion of the measurement period, which does not exceed one year from the date of acquisition. Fair values are preliminary estimates for deferred tax assets.

 

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NOTE 4. INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses and approximate fair values of securities available for sale and held to maturity are as follows:

 

		Amortized Cost				Unrealized								Fair Value
June 30, 2014						Gains				Losses
		(Dollars in thousands)
Held to maturity:
Foreign bonds		$	—			$	—			$	—			$	—
Available for sale:
U.S. Government agencies and sponsored enterprises obligations		$	79,896			$	594			$	392			$	80,098
U.S. Government agencies and sponsored enterprises mortgage-backed securities			575,101				5,132				1,191				579,042
State and municipal obligations			2,039				198				—				2,237
Asset-backed securities			443,972				3,790				1,126				446,636
Corporate bonds and other debt securities			544,041				7,230				20				551,251
Preferred Stock			66,340				149				1,051				65,438
Total available for sale		$	1,711,389			$	17,093			$	3,780			$	1,724,702

 

		Amortized Cost				Unrealized								Fair Value
December 31, 2013						Gains				Losses
		(Dollars in thousands)
Held to maturity:
Foreign bonds		$	365			$	—			$	1			$	364
Available for sale:
U.S. Government agencies and sponsored enterprises obligations		$	51,553			$	58			$	456			$	51,155
U.S. Government agencies and sponsored enterprises mortgage-backed securities			243,062				1,071				2,495				241,638
State and municipal obligations			2,039				85				—				2,124
Asset-backed securities			385,979				3,267				1,281				387,965
Corporate bonds and other debt securities			375,373				4,453				601				379,225
Preferred Stock			90,330				205				6,871				83,664
Total available for sale		$	1,148,336			$	9,139			$	11,704			$	1,145,771

As part of the Company’s liquidity management strategy, the Company pledges loans and securities to secure borrowings from the FHLB. The Company also pledges securities to collateralize public deposits. The carrying value of all pledged securities totaled $946.5 million and $437.4 million at June 30, 2014 and December 31, 2013, respectively.

 

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The amortized cost and estimated fair value of securities available for sale and held to maturity, by contractual maturity, are as follows:

 

		June 30, 2014								December 31, 2013
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
		(Dollars in thousands)
Held to maturity:
Due in one year or less		$	—			$	—			$	365			$	364
Total held to maturity		$	—			$	—			$	365			$	364
Available for sale:
Due in one year or less		$	19,337			$	19,538			$	10,085			$	10,212
Due after one year through five years			403,194				407,426				305,317				309,064
Due after five years through ten years			85,262				84,966				10,735				10,665
Due after ten years			118,183				121,656				51,913				52,044
U.S. Government agencies and sponsored enterprises mortgage-backed securities and asset-backed securities			1,019,073				1,025,678				679,956				680,122
Preferred Stock			66,340				65,438				90,330				83,664
Total available for sale		$	1,711,389			$	1,724,702			$	1,148,336			$	1,145,771

For purposes of the maturity table, mortgage-backed securities and asset-backed securities, the principal of which are repaid periodically, are presented as a single amount. The expected lives of these securities will differ from contractual maturities because borrowers may have the right to prepay the underlying loans with or without prepayment penalties.

The following tables present the estimated fair values and gross unrealized losses on investment securities available for sale, aggregated by investment category and length of time individual securities have been in a continuous unrealized loss position for the periods presented:

 

		Less than 12 Months								12 Months or More								Total
June 30, 2014		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
		(Dollars in thousands)
Available for sale:
U.S. Government agencies and sponsored enterprises obligations		$	23,305			$	129			$	19,866			$	263			$	43,171			$	392
U.S. Government agencies and sponsored enterprises mortgage-backed securities			23,444				130				56,826				1,061				80,270				1,191
State and municipal obligations			—				—				—				—				—				—
Asset-backed securities			118,831				1,113				2,500				13				121,331				1,126
Corporate bonds and other debt securities			32,130				20				—				—				32,130				20
Preferred stock			12,951				59				36,251				992				49,202				1,051
Total available for sale		$	210,661			$	1,451			$	115,443			$	2,329			$	326,104			$	3,780

 

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		Less than 12 Months								12 Months or More								Total
December 31, 2013		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
		(Dollars in thousands)
Available for sale:
U.S. Government agencies and sponsored enterprises obligations		$	41,276			$	456			$	—			$	—			$	41,276			$	456
U.S. Government agencies and sponsored enterprises mortgage-backed securities			141,304				2,494				636				1				141,940				2,495
State and municipal obligations			—				—				—				—				—				—
Asset-backed securities			161,879				1,233				11,949				48				173,828				1,281
Corporate bonds and other debt securities			58,596				601				—				—				58,596				601
Preferred stock			65,061				6,871				—				—				65,061				6,871
Total available for sale		$	468,116			$	11,655			$	12,585			$	49			$	480,701			$	11,704

At June 30, 2014, the Company’s security portfolio consisted of 307 securities, of which 63 securities were in an unrealized loss position. A total of 35 were in an unrealized loss position for less than 12 months. The unrealized losses for these securities resulted primarily from changes in interest rates. All securities available for sale at June 30, 2014 and December 31, 2013 are investment grade based on ratings from recognized rating agencies.

The Company monitors its investment securities for other than temporary impairment (“OTTI”). Impairment is evaluated on an individual security basis considering numerous factors, and its relative significance varies depending on the situation. The Company has evaluated the nature of unrealized losses in the investment securities portfolio to determine if OTTI exists. The unrealized losses relate to changes in market interest rates and specific market conditions that do not represent credit-related impairments. Furthermore, the Company does not intend to sell nor is it more likely than not that it will be required to sell these investments before the recovery of their amortized cost basis. Management has completed an assessment of each security in an unrealized loss position for credit impairment, including securities with existing characteristics that are covered under the Volcker Rule, and has determined that no individual security was other than temporarily impaired at June 30, 2014 or December 31, 2013. The following describes the basis under which the Company has evaluated OTTI:

U.S. Government Agencies and Sponsored Enterprises Obligations and Mortgage-Backed Securities (“MBS”):

The unrealized losses associated with U.S. Government agencies and sponsored enterprises obligations and MBS are primarily driven by changes in interest rates. These securities have either an explicit or implicit U.S. government guarantee.

Corporate Bonds and Asset Backed Securities:

Securities were generally underwritten in accordance with the Company’s own investment standards prior to the decision to purchase, without relying on a bond issuer’s guarantee in making the investment decision. These investments are investment grade and will continue to be monitored as part of the Company’s ongoing impairment analysis, but are expected to perform in accordance with their terms.

Preferred Stock:

The unrealized losses associated with preferred stock investments in large U.S. financial institutions are primarily driven by changes in interest rates. These securities were generally underwritten in accordance with the Company’s own investment standards prior to the decision to purchase. These investments are investment grade and will continue to be monitored as part of the Company’s ongoing impairment analysis, but are expected to perform in accordance with their terms.

 

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Gross realized gains and losses on the sale of securities available for sale are shown below. The cost of securities sold is based on the specific identification method.

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
		(Dollars in thousands)
Proceeds from sales		$	241,400			$	193,036			$	493,162			$	309,330
Gross realized gains		$	5,203			$	1,757			$	7,897			$	2,566
Gross realized losses			(824	)			(92	)			(1,012	)			(92	)
Net realized gains (losses) on sales		$	4,379			$	1,665			$	6,885			$	2,474

NOTE 5. LOANS, NET

The Company’s loan portfolio consists of new and acquired loans. The Company classifies originated loans and purchased loans not acquired through business combinations as new loans (“New” loans). The Company classifies loans acquired through business combinations as acquired loans (“Acquired” loans). The acquired loan portfolio is segmented into “Covered Loans”, loans subject to loss sharing with the FDIC, and “Non-Covered Loans”, acquired loans without loss share reimbursement. Additionally, the new loan portfolio is classified as “Non-Covered Loans”. A portion of the acquired loan portfolio, both Covered and Non-Covered Loans, exhibited evidence of deterioration in credit quality since origination, and are accounted for under ASC 310-30. The remaining portfolio of acquired loans consists of loans that were not considered ASC 310-30 loans at acquisition and are classified as Non-ASC 310-30 loans. Approximately 10.0% and 15.9% of total portfolio loans are covered by loss sharing agreements with the FDIC as of June 30, 2014 and December 31, 2013, respectively.

The following tables summarize the Company’s loans by portfolio segment as of the periods presented, net of deferred fees:

 

		Covered Loans								Non-Covered Loans
June 30, 2014		ASC 310-30 Loans				Non-ASC 310-30 Loans				ASC 310-30 Loans				Non-ASC 310-30 Loans				New Loans (1)				Total
		(Dollars in thousands)
Real estate loans:
Commercial real estate (2)		$	185,097			$	9,207			$	228,057			$	81,454			$	892,999			$	1,396,814
1-4 single family residential			41,813				7,952				56,989				103,104				523,987				733,845
Construction, land and development			23,057				—				53,153				8,077				123,169				207,456
Home equity loans and lines of credit			—				10,835				—				46,091				9,631				66,557
Total real estate loans		$	249,967			$	27,994			$	338,199			$	238,726			$	1,549,786			$	2,404,672
Other loans:
Commercial and industrial		$	43,293			$	4,377			$	38,151			$	12,142			$	753,984			$	851,947
Consumer			850				42				2,495				1,079				2,567				7,033
Total other loans			44,143				4,419				40,646				13,221				756,551				858,980
Total loans held in portfolio		$	294,110			$	32,413			$	378,845			$	251,947			$	2,306,337			$	3,263,652
Allowance for loan losses																							(17,884	)
Loans held in portfolio, net																						$	3,245,768

 

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		Covered Loans								Non-Covered Loans
December 31, 2013		ASC 310-30 Loans				Non-ASC 310-30 Loans				ASC 310-30 Loans				Non-ASC 310-30 Loans				New Loans (1)				Total
		(Dollars in thousands)
Real estate loans:
Commercial real estate (2)		$	195,672			$	10,175			$	78,475			$	2,530			$	669,711			$	956,563
1-4 single family residential			46,461				8,029				10,284				2,145				359,818				426,737
Construction, land and development			36,727				—				19,209				—				75,666				131,602
Home equity loans and lines of credit			—				10,773				—				1,225				19,303				31,301
Total real estate loans		$	278,860			$	28,977			$	107,968			$	5,900			$	1,124,498			$	1,546,203
Other loans:
Commercial and industrial		$	46,184			$	4,286			$	10,863			$	754			$	645,037			$	707,124
Consumer			902				46				3,090				243				1,176				5,457
Total other loans			47,086				4,332				13,953				997				646,213				712,581
Total loans held in portfolio		$	325,946			$	33,309			$	121,921			$	6,897			$	1,770,711			$	2,258,784
Allowance for loan losses																							(14,733	)
Loans held in portfolio, net																						$	2,244,051

 

(1)	Balance includes $6.7 million and $6.4 million of net deferred fees and unamortized premiums as of June 30, 2014 and December 31, 2013, respectively.

(2)	Balance includes $230.5 million and $155.0 million of owner occupied commercial real estate loans as of June 30, 2014 and December 31, 2013, respectively.

At June 30, 2014 and December 31, 2013, the UPB of ASC 310-30 loans were $890.0 million and $628.5 million, respectively. At June 30, 2014 and December 31, 2013, the Company had pledged loans as collateral for FHLB advances with a carrying amount of $895.9 million and $741.9 million, respectively. The recorded investments of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process as of June 30, 2014 totaled $9.8 million. The Company held $505.7 million and $481.0 million of syndicated national loans as of June 30, 2014 and December 31, 2013, respectively.

During the three and six months ended June 30, 2014, the Company purchased approximately $71.2 million in residential mortgage loans from a third party. There were no residential mortgage loan purchases during the three or six months ended June 30, 2013.

During the three and six months ended June 30, 2014, the Company sold approximately $23.0 million in residential mortgage loans to a third party. There were no residential mortgage loan sales during the three or six months ended June 30, 2013.

 

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The accretable discount on ASC 310-30 loans represents the amount by which the undiscounted expected cash flows on such loans exceed their carrying value. The increase in expected cash flow for certain ASC 310-30 loan pools resulted in the reclassification of $13.0 million and $11.5 million in non-accretable difference to accretable discount during the six months ended June 30, 2014 and 2013, respectively. Changes in accretable discount for ASC 310-30 loans for the six months ended June 30, 2014 and 2013 were as follows:

 

		Six Months Ended June 30,
		2014				2013
		(Dollars in thousands)
Balance at January 1,		$	148,501			$	175,873
Additions to accretable discount from GFB acquisition			40,444				—
Accretion			(31,231	)			(32,643	)
Reclassifications from non-accretable difference			13,030				11,529
Balance at June 30,		$	170,744			$	154,759

NOTE 6. ALLOWANCE FOR LOAN LOSSES (“ALL”)

The ALL reflects management’s estimate of probable credit losses inherent in the loan portfolio. The computation of the ALL includes elements of judgment and high levels of subjectivity. Substantially all of the Company’s loans that were acquired in failed bank acquisitions were acquired at a substantial discount to their original book value and are covered by loss sharing agreements with the FDIC.

The Company’s accounting method for loans and the corresponding ALL differs depending on whether the loans are new or acquired. The Company therefore assesses and monitors credit risk and portfolio performance using distinct methodologies for acquired loans, both ASC 310-30 Loans and Non-ASC 310-30 Loans, and New loans. Within each class the Company further disaggregates the portfolios into the following segments: Commercial real estate, 1-4 single family residential, Construction, land and development, Home equity loans and lines of credit, Commercial and industrial and Consumer.

 

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Loans accounted for under ASC 310-30 are excluded from the following analysis because their related allowance is determined by loan pool performance. Changes in the ALL by loan class and portfolio segment for the three and six months ended June 30, 2014 and 2013 are as follows:

 

		Commercial Real Estate				1-4 Single Family Residential				Construction, Land and Development				Home Equity Loans and Lines of Credit				Commercial and Industrial				Consumer				Total
Balance at April 1, 2014		$	5,523			$	1,587			$	1,900			$	151			$	5,977			$	356			$	15,494
Provision (credit) for ASC 310-30 loans			191				212				(31	)			—				(539	)			(34	)			(201	)
Provision (credit) for non-ASC 310-30 loans			4				(45	)			—				89				16				32				96
Provision (credit) for New loans			1,351				702				499				(65	)			849				5				3,341
Total provision			1,546				869				468				24				326				3				3,236
Charge-offs for ASC 310-30 loans			—				(30	)			(444	)			—				(32	)			(4	)			(510	)
Charge-offs for non-ASC 310-30 loans			—				—				—				(62	)			—				(29	)			(91	)
Charge-offs for New loans			—				—				—				—				(348	)			—				(348	)
Total charge-offs			—				(30	)			(444	)			(62	)			(380	)			(33	)			(949	)
Recoveries for ASC 310-30 loans			91				—				11				—				1				—				103
Recoveries for non-ASC 310-30 loans			—				—				—				—				—				—				—
Recoveries for New loans			—				—				—				—				—				—				—
Total recoveries			91				—				11				—				1				—				103
Ending ALL balance
ASC 310-30 loans			2,883				207				660				—				1,359				298				5,407
Non-ASC 310-30 loans			15				7				—				32				6				3				63
New loans			4,262				2,212				1,275				81				4,559				25				12,414
Balance at June 30, 2014		$	7,160			$	2,426			$	1,935			$	113			$	5,924			$	326			$	17,884

 

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		Commercial Real Estate				1-4 Single Family Residential				Construction, Land and Development				Home Equity Loans and Lines of Credit				Commercial and Industrial				Consumer				Total
Balance at April 1, 2013		$	5,031			$	2,414			$	3,855			$	82			$	4,878			$	354			$	16,614
Provision (credit) for ASC 310-30 loans			572				(709	)			(72	)			—				257				399				447
Provision (credit) for non-ASC 310-30 loans			(3	)			(21	)			(2	)			(7	)			(190	)			—				(223	)
Provision (credit) for New loans			(35	)			15				(338	)			(25	)			632				—				249
Total provision			534				(715	)			(412	)			(32	)			699				399				473
Charge-offs for ASC 310-30 loans			—				(576	)			(232	)			—				(1	)			(455	)			(1,264	)
Charge-offs for non-ASC 310-30 loans			—				—				—				—				(64	)			—				(64	)
Charge-offs for New loans			—				—				(34	)			—				—				—				(34	)
Total charge-offs			—				(576	)			(266	)			—				(65	)			(455	)			(1,362	)
Recoveries for ASC 310-30 loans			26				2				2				—				—				1				31
Recoveries for non-ASC 310-30 loans			—				—				—				—				—				—				—
Recoveries for New loans			—				—				—				—				—				—				—
Total recoveries			26				2				2				—				—				1				31
Ending ALL balance
ASC 310-30 loans			4,163				595				2,167				—				3,066				279				10,270
Non-ASC 310-30 loans			14				11				1				38				8				4				76
New loans			1,414				519				1,011				12				2,438				16				5,410
Balance at June 30, 2013		$	5,591			$	1,125			$	3,179			$	50			$	5,512			$	299			$	15,756

 

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		Commercial Real Estate				1-4 Single Family Residential				Construction, Land and Development				Home Equity Loans and Lines of Credit				Commercial and Industrial				Consumer				Total
Balance at January 1, 2014		$	4,834			$	1,443			$	1,819			$	132			$	6,331			$	174			$	14,733
Provision (credit) for ASC 310-30 loans			191				152				133				—				(871	)			232				(163	)
Provision (credit) for non-ASC 310-30 loans			5				(45	)			—				129				(109	)			32				12
Provision (credit) for New loans			2,113				906				441				(45	)			1,054				8				4,477
Total provision			2,309				1,013				574				84				74				272				4,326
Charge-offs for ASC 310-30 loans			(74	)			(30	)			(1,245	)			—				(110	)			(91	)			(1,550	)
Charge-offs for non-ASC 310-30 loans			—				—				—				(103	)			(24	)			(29	)			(156	)
Charge-offs for New loans			—				—				—				—				(348	)			—				(348	)
Total charge-offs			(74	)			(30	)			(1,245	)			(103	)			(482	)			(120	)			(2,054	)
Recoveries for ASC 310-30 loans			91				—				787				—				1				—				879
Recoveries for non-ASC 310-30 loans			—				—				—				—				—				—				—
Recoveries for New loans			—				—				—				—				—				—				—
Total recoveries			91				—				787				—				1				—				879
Ending ALL balance
ASC 310-30 loans			2,883				207				660				—				1,359				298				5,407
Non-ASC 310-30 loans			15				7				—				32				6				3				63
New loans			4,262				2,212				1,275				81				4,559				25				12,414
Balance at June 30, 2014		$	7,160			$	2,426			$	1,935			$	113			$	5,924			$	326			$	17,884

 

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		Commercial Real Estate				1-4 Single Family Residential				Construction, Land and Development				Home Equity Loans and Lines of Credit				Commercial and Industrial				Consumer				Total
Balance at January 1, 2013		$	4,107			$	3,049			$	5,239			$	67			$	6,054			$	433			$	18,949
Provision (credit) for ASC 310-30 loans			2,634				(1,153	)			463				—				(970	)			486				1,460
Provision (credit) for non-ASC 310-30 loans			(6	)			(31	)			(2	)			(24	)			(110	)			—				(173	)
Provision (credit) for New loans			(184	)			(103	)			(100	)			8				703				(42	)			282
Total provision			2,444				(1,287	)			361				(16	)			(377	)			444				1,569
Charge-offs for ASC 310-30 loans			(986	)			(689	)			(2,380	)			—				(6	)			(579	)			(4,640	)
Charge-offs for non-ASC 310-30 loans			—				—				—				(1	)			(159	)			—				(160	)
Charge-offs for New loans			—				—				(57	)			—				—				—				(57	)
Total charge-offs			(986	)			(689	)			(2,437	)			(1	)			(165	)			(579	)			(4,857	)
Recoveries for ASC 310-30 loans			26				52				16				—				—				1				95
Recoveries for non-ASC 310-30 loans			—				—				—				—				—				—				—
Recoveries for New loans			—				—				—				—				—				—				—
Total recoveries			26				52				16				—				—				1				95
Ending ALL balance
ASC 310-30 loans			4,163				595				2,167				—				3,066				279				10,270
Non-ASC 310-30 loans			14				11				1				38				8				4				76
New loans			1,414				519				1,011				12				2,438				16				5,410
Balance at June 30, 2013		$	5,591			$	1,125			$	3,179			$	50			$	5,512			$	299			$	15,756

Credit Quality Indicators

In evaluating credit risk, the Company looks at multiple factors including delinquencies. Management considers delinquency status to be the most meaningful indicator of the credit quality of one-to-four single family residential, home equity loans and lines of credit and consumer loans. Delinquency statistics are updated at least monthly.

 

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The following tables present an aging analysis of the recorded investment for delinquent loans by class and portfolio segment (excluding loans accounted for under ASC 310-30):

 

		Accruing
June 30, 2014		30 to 59 Days Past Due				60 to 89 Days Past Due				90 Days or More Past Due				Non- Accrual				Total
		(Dollars in thousands)
New Loans:
Real estate loans
Commercial real estate		$	—			$	—			$	—			$	—			$	—
1-4 single family residential			—				—				—				—				—
Construction, land and development			—				—				—				—				—
Home equity lines of credit			—				—				—				198				198
Total real estate loans			—				—				—				198				198
Other loans:
Commercial and industrial			—				—				—				—				—
Consumer			—				—				—				—				—
Total other loans			—				—				—				—				—
Total new loans		$	—			$	—			$	—			$	198			$	198
Acquired Loans:
Real estate loans
Commercial real estate		$	—			$	—			$	—			$	5,001			$	5,001
1-4 single family residential			—				831				—				618				1,449
Construction, land and development			—				—				—				1,716				1,716
Home equity lines of credit			1,023				537				—				5,142				6,702
Total real estate loans			1,023				1,368				—				12,477				14,868
Other loans:
Commercial and industrial			—				38				—				1,599				1,637
Consumer			—				—				—				—				—
Total other loans			—				38				—				1,599				1,637
Total acquired loans		$	1,023			$	1,406			$	—			$	14,076			$	16,505

 

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		Accruing
December 31, 2013		30 to 59 Days Past Due				60 to 89 Days Past Due				90 Days or More Past Due				Non- Accrual				Total
		(Dollars in thousands)
New Loans:
Real estate loans
Commercial real estate		$	—			$	—			$	—			$	—			$	—
1-4 single family residential			4,688				2,164				—				1,052				7,904
Construction, land and development			—				—				—				—				—
Home equity lines of credit			198				—				—				—				198
Total real estate loans			4,886				2,164				—				1,052				8,102
Other loans:
Commercial and industrial			—				—				—				24				24
Consumer			—				—				—				—				—
Total other loans			—				—				—				24				24
Total new loans		$	4,886			$	2,164			$	—			$	1,076			$	8,126
Acquired Loans:
Real estate loans
Commercial real estate		$	145			$	—			$	—			$	5,962			$	6,107
1-4 single family residential			923				—				—				144				1,067
Construction, land and development			—				—				—				—				—
Home equity lines of credit			96				218				—				1,996				2,310
Total real estate loans			1,164				218				—				8,102				9,484
Other loans:
Commercial and industrial			39				—				—				275				314
Consumer			—				—				—				29				29
Total other loans			39				—				—				304				343
Total acquired loans		$	1,203			$	218			$	—			$	8,406			$	9,827

Internal risk ratings are considered the most meaningful indicator of credit quality for Non-ASC 310-30 and new commercial, construction, land and development and commercial real estate loans. Internal risk ratings are updated on a continuous basis. Loans exhibiting potential credit weaknesses that deserve management’s close attention and that if left uncorrected may result in deterioration of the repayment capacity of the borrower are categorized as special mention. Loans with well-defined credit weaknesses including payment defaults, declining collateral values, frequent overdrafts, operating losses, increasing balance sheet leverage, inadequate cash flow, project cost overruns, unreasonable construction delays, past due real estate taxes or exhausted interest reserves are assigned an internal risk rating of substandard. A loan with a weakness so severe that collection in full is highly questionable or improbable will be assigned an internal risk rating of doubtful.

 

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The following table summarizes the Company’s Non-ASC 310-30 and New loans by key indicators of credit quality. Loans accounted for under ASC 310-30 are excluded from the following analysis because their related allowance is determined by loan pool performance:

 

June 30, 2014		Pass				Special Mention				Substandard				Doubtful
		(Dollars in thousands)
New loans
Commercial real estate		$	892,968			$	—			$	31			$	—
Construction, land and development			123,169				—				—				—
Commercial and industrial			753,984				—				—				—
Total new loans		$	1,770,121			$	—			$	31			$	—
Acquired loans:
Commercial real estate		$	83,964			$	887			$	5,810			$	—
Construction, land and development			6,361				—				1,716				—
Commercial and industrial			11,824				2,064				2,631				—
Total acquired loans		$	102,149			$	2,951			$	10,157			$	—

 

December 31, 2013		Pass				Special Mention				Substandard				Doubtful
		(Dollars in thousands)
New loans
Commercial real estate		$	669,546			$	14			$	151			$	—
Construction, land and development			75,666				—				—				—
Commercial and industrial			645,013				—				24				—
Total new loans		$	1,390,225			$	14			$	175			$	—
Acquired loans:
Commercial real estate		$	5,523			$	895			$	6,287			$	—
Construction, land and development			—				—				—				—
Commercial and industrial			3,119				19				1,902				—
Total acquired loans		$	8,642			$	914			$	8,189			$	—

Internal risk ratings are a key factor in identifying loans that are individually evaluated for impairment and impact management’s estimates of loss factors used in determining the amount of the ALL.

 

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The following table shows the Company’s investment in impaired loans disaggregated based on the method of evaluating impairment:

 

		Loans—Recorded Investment												Allowance for Credit Loss
June 30, 2014		Individually Evaluated for Impairment				Collectively Evaluated for Impairment				ASC 310- 30 Loans				Individually Evaluated for Impairment				Collectively Evaluated for Impairment				ASC 310- 30 Loans
		(Dollars in thousands)
New Loans:
Real estate loans
Commercial real estate		$	—			$	892,999			$	—			$	—			$	4,262			$	—
1-4 single family residential			—				523,987				—				—				2,212				—
Construction, land and development			—				123,169				—				—				1,275				—
Home equity loans and lines of credit			—				9,631				—				—				81				—
Total real estate loans		$	—			$	1,549,786			$	—			$	—			$	7,830			$	—
Other loans
Commercial and industrial		$	—			$	753,984			$	—			$	—			$	4,559			$	—
Consumer			—				2,567				—				—				25				—
Total other loans		$	—			$	756,551			$	—			$	—			$	4,584			$	—
Acquired Loans:
Real estate loans
Commercial real estate		$	4,666			$	85,995			$	413,154			$	—			$	15			$	2,883
1-4 single family residential			—				111,056				98,802				—				7				207
Construction, land and development			—				8,077				76,210				—				—				660
Home equity loans and lines of credit			184				56,742				—				—				32				—
Total real estate loans		$	4,850			$	261,870			$	588,166			$	—			$	54			$	3,750
Other loans
Commercial and industrial		$	—			$	16,519			$	81,444			$	—			$	6			$	1,359
Consumer			—				1,121				3,345				—				3				298
Total other loans		$	—			$	17,640			$	84,789			$	—			$	9			$	1,657

 

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		Loans—Recorded Investment												Allowance for Credit Loss
December 31, 2013		Individually Evaluated for Impairment				Collectively Evaluated for Impairment				ASC 310- 30 Loans				Individually Evaluated for Impairment				Collectively Evaluated for Impairment				ASC 310- 30 Loans
		(Dollars in thousands)
New Loans:
Real estate loans
Commercial real estate		$	—			$	669,711			$	—			$	—			$	2,149			$	—
1-4 single family residential			—				359,818				—				—				1,306				—
Construction, land and development			—				75,666				—				—				834				—
Home equity loans and lines of credit			—				19,303				—				—				126				—
Total real estate loans		$	—			$	1,124,498			$	—			$	—			$	4,415			$	—
Other loans
Commercial and industrial		$	—			$	645,037			$	—			$	—			$	3,853			$	—
Consumer			—				1,176				—				—				17				—
Total other loans		$	—			$	646,213			$	—			$	—			$	3,870			$	—
Acquired Loans:
Real estate loans
Commercial real estate		$	5,134			$	7,571			$	274,147			$	—			$	10			$	2,675
1-4 single family residential			189				9,985				56,745				44				8				85
Construction, land and development			—				—				55,936				—				—				985
Home equity loans and lines of credit			386				11,612				—				105				34				—
Total real estate loans		$	5,709			$	29,168			$	386,828			$	149			$	52			$	3,745
Other loans
Commercial and industrial		$	—			$	5,040			$	57,047			$	—			$	6			$	2,339
Consumer			—				289				3,992				—				—				157
Total other loans		$	—			$	5,329			$	61,039			$	—			$	6			$	2,496

 

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The following tables set forth certain information regarding the Company’s impaired loans (excluding loans accounted for under ASC 310-30) that were evaluated for specific reserves:

 

		Impaired Loans—With Allowance												Impaired Loans—With no Allowance
June 30, 2014		Recorded Investment				Unpaid Principal Balance				Related Allowance				Recorded Investment				Unpaid Principal Balance
		(Dollars in thousands)
New Loans:
Real estate loans
Commercial real estate		$	—			$	—			$	—			$	—			$	—
1-4 single family residential			—				—				—				—				—
Construction, land and development			—				—				—				—				—
Home equity loans and lines of credit			—				—				—				—				—
Total real estate loans		$	—			$	—			$	—			$	—			$	—
Other loans
Commercial and industrial		$	—			$	—			$	—			$	—			$	—
Consumer			—				—				—				—				—
Total other loans		$	—			$	—			$	—			$	—			$	—
Acquired Loans:
Real estate loans
Commercial real estate		$	—			$	—			$	—			$	4,666			$	4,795
1-4 single family residential			—				—				—				—				—
Construction, land and development			—				—				—				—				—
Home equity loans and lines of credit			—				—				—				184				253
Total real estate loans		$	—			$	—			$	—			$	4,850			$	5,048
Other loans
Commercial and industrial		$	—			$	—			$	—			$	—			$	—
Consumer			—				—				—				—				—
Total other loans		$	—			$	—			$	—			$	—			$	—

 

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		Impaired Loans—With Allowance												Impaired Loans—With no Allowance
December 31, 2013		Recorded Investment				Unpaid Principal Balance				Related Allowance				Recorded Investment				Unpaid Principal Balance
		(Dollars in thousands)
New Loans:
Real estate loans
Commercial real estate		$	—			$	—			$	—			$	—			$	—
1-4 single family residential			—				—				—				—				—
Construction, land and development			—				—				—				—				—
Home equity loans and lines of credit			—				—				—				—				—
Total real estate loans		$	—			$	—			$	—			$	—			$	—
Other loans
Commercial and industrial		$	—			$	—			$	—			$	—			$	—
Consumer			—				—				—				—				—
Total other loans		$	—			$	—			$	—			$	—			$	—
Acquired Loans:
Real estate loans
Commercial real estate		$	—			$	—			$	—			$	5,134			$	5,218
1-4 single family residential			189				277				44				—				—
Construction, land and development			—				—				—				—				—
Home equity loans and lines of credit			386				500				105				—				—
Total real estate loans		$	575			$	777			$	149			$	5,134			$	5,218
Other loans
Commercial and industrial		$	—			$	—			$	—			$	—			$	—
Consumer			—				—				—				—				—
Total other loans		$	—			$	—			$	—			$	—			$	—

 

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		Three Months Ended June 30,
		2014								2013
		Average Recorded Investment				Interest Income Recognized				Average Recorded Investment				Interest Income Recognized
		(Dollars in thousands)
Impaired loans with no related allowance:
Real estate loans:
Commercial real estate		$	4,705			$	—			$	5,235			$	—
1-4 single family residential			—				—				—				—
Construction, land and development			—				—				—				—
Home equity loans and lines of credit			184				—				—				—
Total real estate loans		$	4,889			$	—			$	5,235			$	—
Other loans:
Commercial and industrial		$	—			$	—			$	263			$	—
Consumer			—				—				—				—
Total other loans		$	—			$	—			$	263			$	—
Impaired loans with an allowance:
Real estate loans:
Commercial real estate		$	—			$	—			$	—			$	—
1-4 single family residential			—				—				—				—
Construction, land and development			—				—				—				—
Home equity loans and lines of credit			—				—				—				—
Total real estate loans		$	—			$	—			$	—			$	—
Other loans:
Commercial and industrial		$	—			$	—			$	—			$	—
Consumer			—				—				—				—
Total other loans		$	—			$	—			$	—			$	—

 

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		Six Months Ended June 30,
		2014								2013
		Average Recorded Investment				Interest Income Recognized				Average Recorded Investment				Interest Income Recognized
		(Dollars in thousands)
Impaired loans with no related allowance:
Real estate loans:
Commercial real estate		$	4,718			$	—			$	5,252			$	—
1-4 single family residential			—				—				—				—
Land and development			—				—				—				—
Home equity loans and lines of credit			184				—				—				—
Total real estate loans		$	4,902			$	—			$	5,252			$	—
Other loans:
Commercial and industrial		$	—			$	—			$	269			$	—
Consumer			—				—				—				—
Total other loans		$	—			$	—			$	269			$	—
Impaired loans with an allowance:
Real estate loans:
Commercial real estate		$	—			$	—			$	—			$	—
1-4 single family residential			—				—				—				—
Land and development			—				—				—				—
Home equity loans and lines of credit			—				—				—				—
Total real estate loans		$	—			$	—			$	—			$	—
Other loans:
Commercial and industrial		$	—			$	—			$	—			$	—
Consumer			—				—				—				—
Total other loans		$	—			$	—			$	—			$	—

NOTE 7. COVERED ASSETS AND LOSS SHARING AGREEMENTS

In each of the 2010 and 2011 Acquisitions (except Sunshine State Community Bank and First Peoples Bank), the Bank and the FDIC entered into loss sharing agreements.

The following table summarizes the carrying value of assets covered by the loss sharing agreements:

 

		June 30, 2014				December 31, 2013
		(Dollars in thousands)
Loans, excluding allowance for loan losses		$	326,523			$	359,255
OREO			29,840				27,299
Total Covered Assets		$	356,363			$	386,554

When a provision for loan loss is required for a loan subsequent to acquisition that is covered under a loss sharing agreement, the Company records an increase in the loss share indemnification asset and an increase to noninterest income in the consolidated statement of income based on the applicable loss sharing ratio. Increases in the loss share indemnification asset of $0.6 million and $3.7 million were included in noninterest income for the six months ended June 30, 2014 and 2013, respectively, related to the provision for loan losses on Covered Loans, including both ASC 310-30 and Non-ASC 310-30 loans.

 

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Changes in the loss share indemnification for the periods presented were as follows:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
		(Dollars in thousands)
Balance at beginning of period		$	80,605			$	113,491			$	87,229			$	125,949
Reimbursable expenses			1,427				2,465				3,153				5,921
Amortization			(5,406	)			(5,629	)			(11,405	)			(12,459	)
Income resulting from impairment and charge-off of covered assets, net			456				2,694				1,206				5,980
Expense resulting from recoupment and disposition of covered assets, net			(1,260	)			(3,427	)			(2,423	)			(7,056	)
FDIC claims submissions			(969	)			(5,414	)			(2,907	)			(14,155	)
Balance at end of period		$	74,853			$	104,180			$	74,853			$	104,180

As of June 30, 2014 and December 31, 2013, the carrying value of loss share indemnification assets exceeded the total cash flow expected to be collected by $31.8 million and $29.8 million, respectively, and is being amortized using the effective interest method over the shorter of (1) the remaining expected term of the respective loans or (2) the remaining term of the loss sharing agreement.

The following table summarizes the changes in the clawback liability, included in Other Liabilities, for the periods presented:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
		(Dollars in thousands)
Balance at beginning of period		$	12,060			$	12,038			$	11,753			$	11,966
Amortization impact			181				187				357				368
Remeasurement impact			284				645				415				536
Balance at end of period		$	12,525			$	12,870			$	12,525			$	12,870

NOTE 8. GOODWILL AND INTANGIBLES

Goodwill and other intangible assets, which include core deposit intangibles are summarized as follows:

 

		June 30, 2014				December 31, 2013
		(Dollars in thousands)
Goodwill		$	81,104			$	33,749
Core deposit intangible			14,370				10,768
Total			95,474				44,517
Less: Accumulated amortization			(6,008	)			(5,148	)
Total, net		$	89,466			$	39,369

The amount of amortization expense for core deposit intangible assets to be recognized over the next five fiscal years at June 30, 2014 is as follows:

 

Type of intangibles		Remainder of 2014				2015				2016				2017				2018				Total
		(Dollars in thousands)
Core deposit intangible		$	851			$	1,630			$	1,189			$	1,023			$	1,023			$	5,716

 

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During the three months ended June 30, 2014 and 2013, the Company recognized $0.4 million and $0.4 million, respectively, of amortization expense related to intangible assets. During the six months ended June 30, 2014 and 2013, the Company recognized $0.9 million and $0.8 million, respectively, of amortization expense related to intangible assets.

NOTE 9. BANK-OWNED LIFE INSURANCE (“BOLI”)

Bank-owned life insurance policies are held in order to insure the key officers and employees of the Bank. Per ASC 325-30, “Investments in Insurance Contracts,” this policy is recorded at the cash surrender value adjusted for other charges or other amounts due that are probable at settlement, if applicable. As of June 30, 2014, the BOLI cash surrender value was $117.1 million resulting in other income for the three and six months ended June 30, 2014 of $1.0 million and $1.9 million and an annualized pre-tax yield of 3.57% and 3.55%, respectively. The total death benefit of the BOLI policies at June 30, 2014 totaled $379.7 million. The Bank did not hold BOLI policies during the three or six months ended June 30, 2013.

The following table summarizes the changes in the cash surrender value of BOLI for the periods presented:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
		(Dollars in thousands)
Balance at beginning of period		$	116,075			$	—			$	75,257			$	—
Additions from premium payments			—				—				40,000				—
Net gain in cash surrender value			1,038				—				1,856				—
Balance at end of period		$	117,113			$	—			$	117,113			$	—

NOTE 10. DERIVATIVES

The Company is a party to interest rate derivatives that are not designated as hedging instruments. These derivatives relate to interest rate swaps that the Company enters into with customers to allow customers to convert variable rate loans to a fixed rate. The Company pays interest to the customer at a floating rate on the notional amount and receives interest from the customer at a fixed rate for the same notional amount. At the same time the interest rate swap is entered into with the customer, an offsetting interest rate swap is entered into with another financial institution. The Company pays the other financial institution interest at the same fixed rate on the same notional amount as the swap entered into with the customer, and receives interest from the financial institution for the same floating rate on the same notional amount. The changes in the fair value of the swaps offset each other, except for any credit risk of the counterparties, which is determined by taking into consideration the risk rating, probability of default and loss of given default for all counterparties. Any fees received were recognized in earnings at the time of the transaction. The Company recorded $1.8 million and $0.8 million of customer swap fees in noninterest income in the accompanying statement of income for the three months ended June 30, 2014 and 2013, respectively and $2.2 million and $1.2 million for the six months ended June 30, 2014 and 2013, respectively.

All derivative positions held by the Company as of June 30, 2014 were not designated as hedging instruments under ASC 815-10. As of June 30, 2014, the Company has not recorded any credit adjustments related to the credit risk of the counterparties. There was no change in the fair value of derivative assets and derivative liabilities attributable to credit risk included in “Noninterest Expense” on the statements of income for the three or six months ended June 30, 2014.

 

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The following tables summarize the Company’s derivatives outstanding included in “Other Assets” and “Other Liabilities” in the accompanying consolidated balance sheet:

 

June 30, 2014		Derivative Assets								Derivative Liabilities
		Notional				Fair Value				Notional				Fair Value
		(Dollars in thousands)
Derivative not designated as hedging instruments under ASC 815-10
Interest rate contracts—pay floating, receive fixed		$	292,497			$	8,607			$	33,236			$	270
Interest rate contracts—pay fixed, receive floating			—				—				325,733				8,337
Total derivatives		$	292,497			$	8,607			$	358,969			$	8,607
December 31, 2013		Derivative Assets								Derivative Liabilities
		Notional				Fair Value				Notional				Fair Value
		(Dollars in thousands)
Derivative not designated as hedging instruments under ASC 815-10
Interest rate contracts—pay floating, receive fixed		$	126,011			$	2,660			$	43,539			$	1,488
Interest rate contracts—pay fixed, receive floating			—				—				169,551				1,172
Total derivatives		$	126,011			$	2,660			$	213,090			$	2,660

The Company has entered into transactions subject to an enforceable master netting arrangement with a financial institution. The following table summarizes the gross and net fair values of the Company’s derivatives outstanding with this counterparty included in “Other Liabilities” in the accompanying consolidated balance:

 

June 30, 2014		Gross amounts of recognized liabilities				Gross amounts offset in the consolidated balance sheets				Net amounts in the consolidated balance sheets
		(Dollars in thousands)
Offsetting derivative liabilities
Counterparty A—Interest rate contracts		$	8,607			$	(270	)		$	8,337
Total		$	8,607			$	(270	)		$	8,337
December 31, 2013		Gross amounts of recognized liabilities				Gross amounts offset in the consolidated balance sheets				Net amounts in the consolidated balance sheets
		(Dollars in thousands)
Offsetting derivative liabilities
Counterparty A—Interest rate contracts		$	2,660			$	(1,488	)		$	1,172
Total		$	2,660			$	(1,488	)		$	1,172

At June 30, 2014, the Company has pledged investment securities available for sale with a carrying amount of $9.3 million as collateral for these interest rate swaps in a liability position. The amount of collateral required to be posted by the Company varies based on the settlement value of outstanding swaps.

As of June 30, 2014 and December 31, 2013, substantially all of the floating rate terms within the interest rate contracts held by the Company were indexed to 1-month LIBOR.

The fair value of the derivative assets and liabilities are included in a table in Note 17 “Fair Value Measurements,” in the line items “Derivative assets” and “Derivative liabilities.”

 

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NOTE 11. DEPOSITS

The following table sets forth the Company’s deposits by category:

 

		June 30, 2014				December 31, 2013
		(Dollars in thousands)
Non-interest bearing demand deposits		$	435,055			$	291,658
Interest-bearing demand deposits			120,197				84,837
Savings and money market accounts			1,970,093				1,251,842
Time deposits			1,432,921				1,165,196
Total deposits		$	3,958,266			$	2,793,533
Time deposits $100,000 and greater		$	905,529			$	674,172
Time deposits $250,000 and greater			277,150				216,309

The aggregate amount of overdraft demand deposits that have been reclassified to loans was $0.3 million at June 30, 2014. The aggregate amount of maturities for time deposits for each of the five years following the latest balance sheet date totaled $943.2 million, $109.6 million, $183.1 million, $167.5 million and $28.3 million, respectively.

NOTE 12. ACCUMULATED OTHER COMPREHENSIVE INCOME (“AOCI”)

Changes in AOCI for the periods indicated are summarized as follows:

 

		Three Months Ended June 30,
		2014												2013
		Before Tax				Tax Effect				Net of Tax				Before Tax				Tax Effect				Net of Tax
		(Dollars in thousands)
Balance at beginning of period		$	3,606			$	(1,390	)		$	2,216			$	21,855			$	(8,432	)		$	13,423
Unrealized gain (loss) on investment securities available for sale:
Net unrealized holdings gain (loss) arising during the period			11,412				(4,404	)			7,008				(11,898	)			4,590				(7,308	)
Amounts reclassified to (gain) loss on investment securities			(1,705	)			658				(1,047	)			(1,881	)			726				(1,155	)
Balance at end of period		$	13,313			$	(5,136	)		$	8,177			$	8,076			$	(3,116	)		$	4,960
		Six Months Ended June 30,
		2014												2013
		Before Tax				Tax Effect				Net of Tax				Before Tax