Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2015

 

or

 

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

 

For the transition period from               to              

 

Commission file number 001-31567

 

 

CENTRAL PACIFIC FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

Hawaii

 

99-0212597

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

220 South King Street, Honolulu, Hawaii 96813

(Address of principal executive offices) (Zip Code)

 

(808) 544-0500

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate 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 x  No o

 

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

 

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

Smaller reporting company o

 

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

 

The number of shares outstanding of registrant’s common stock, no par value, on July 29, 2015 was 31,359,533 shares.

 

 

 



Table of Contents

 

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

 

Table of Contents

 

 

Page

Part I.

Financial Information

3

 

 

 

Item I.

Financial Statements (Unaudited)

 

 

 

 

 

Consolidated Balance Sheets June 30, 2015 and December 31, 2014

4

 

 

 

 

Consolidated Statements of Income Three and six months ended June 30, 2015 and 2014

5

 

 

 

 

Consolidated Statements of Comprehensive Income Three and six months ended June 30, 2015 and 2014

6

 

 

 

 

Consolidated Statements of Changes in Equity Six months ended June 30, 2015 and 2014

7

 

 

 

 

Consolidated Statements of Cash Flows Six months ended June 30, 2015 and 2014

8

 

 

 

 

Notes to Consolidated Financial Statements

9

 

 

 

Item 2.

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

41

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

68

 

 

 

Item 4.

Controls and Procedures

69

 

 

 

Part II.

Other Information

70

 

 

 

Item 1A.

Risk Factors

70

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

70

 

 

 

Item 6.

Exhibits

71

 

 

 

Signatures

 

72

 

 

 

Exhibit Index

 

73

 

2



Table of Contents

 

PART I.   FINANCIAL INFORMATION

 

Forward-Looking Statements

 

This document may contain forward-looking statements concerning projections of revenues, income/loss, earnings/loss per share, capital expenditures, dividends, capital structure, net interest margin or other financial items, concerning plans and objectives of management for future operations, concerning future economic performance, or concerning any of the assumptions underlying or relating to any of the foregoing. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts, and may include the words “believes,” “plans,” “intends,” “expects,” “anticipates,” “forecasts,” “hopes,” “should,” “estimates” or words of similar meaning. While we believe that our forward-looking statements and the assumptions underlying them are reasonably based, such statements and assumptions are by their nature subject to risks and uncertainties, and thus could later prove to be inaccurate or incorrect. Accordingly, actual results could materially differ from projections for a variety of reasons, to include, but not be limited to: an increase in inventory or adverse conditions in the Hawaii and California real estate markets and deterioration in the construction industry; adverse changes in the financial performance and/or condition of our borrowers and, as a result, increased loan delinquency rates, deterioration in asset quality, and losses in our loan portfolio; the impact of local, national, and international economies and events (including natural disasters such as wildfires, tsunamis, storms and earthquakes) on the Company’s business and operations and on tourism, the military, and other major industries operating within the Hawaii market and any other markets in which the Company does business; deterioration or malaise in domestic economic conditions, including any further destabilization in the financial industry and deterioration of the real estate market, as well as the impact of declining levels of consumer and business confidence in the state of the economy in general and in financial institutions in particular; changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act, changes in capital standards, other regulatory reform, including but not limited to regulations promulgated by the Consumer Financial Protection Bureau, government-sponsored enterprise reform, and any related rules and regulations on our business operations and competitiveness; the costs and effects of legal and regulatory developments, including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews; ability to successfully implement our initiatives to lower our efficiency ratio; the effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, securities market and monetary fluctuations; negative trends in our market capitalization and adverse changes in the price of the Company’s common stock; political instability; acts of war or terrorism; changes in consumer spending, borrowings and savings habits; failure to maintain effective internal control over financial reporting or disclosure controls and procedures; technological changes; changes in the competitive environment among financial holding companies and other financial service providers; the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; our ability to attract and retain key personnel; changes in our organization, compensation and benefit plans; and our success at managing the risks involved in the foregoing items. For further information on factors that could cause actual results to materially differ from projections, please see the Company’s publicly available Securities and Exchange Commission filings, including the Company’s Form 10-K for the last fiscal year and, in particular, the discussion of “Risk Factors” set forth therein. The Company does not update any of its forward-looking statements except as required by law.

 

3



Table of Contents

 

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(Dollars in thousands)

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

66,715

 

$

72,316

 

Interest-bearing deposits in other banks

 

14,775

 

13,691

 

Investment securities:

 

 

 

 

 

Available for sale, at fair value

 

1,274,312

 

1,229,018

 

Held to maturity, at amortized cost (fair value of $259,150 at June 30, 2015 and $235,597 at December 31, 2014)

 

262,778

 

238,287

 

Total investment securities

 

1,537,090

 

1,467,305

 

 

 

 

 

 

 

Loans held for sale

 

22,917

 

9,683

 

 

 

 

 

 

 

Loans and leases

 

3,006,055

 

2,932,198

 

Allowance for loan and lease losses

 

(66,924

)

(74,040

)

Net loans and leases

 

2,939,131

 

2,858,158

 

 

 

 

 

 

 

Premises and equipment, net

 

47,681

 

49,214

 

Accrued interest receivable

 

14,021

 

13,584

 

Investment in unconsolidated subsidiaries

 

6,720

 

7,246

 

Other real estate

 

5,278

 

2,948

 

Other intangible assets

 

27,278

 

29,697

 

Bank-owned life insurance

 

153,015

 

152,283

 

Federal Home Loan Bank stock

 

12,129

 

43,932

 

Other assets

 

121,101

 

132,930

 

Total assets

 

$

4,967,851

 

$

4,852,987

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Deposits:

 

 

 

 

 

Noninterest-bearing demand

 

$

1,080,428

 

$

1,034,146

 

Interest-bearing demand

 

807,851

 

788,272

 

Savings and money market

 

1,261,180

 

1,242,598

 

Time

 

1,032,863

 

1,045,284

 

Total deposits

 

4,182,322

 

4,110,300

 

 

 

 

 

 

 

Short-term borrowings

 

157,000

 

38,000

 

Long-term debt

 

92,785

 

92,785

 

Other liabilities

 

46,897

 

43,861

 

Total liabilities

 

4,479,004

 

4,284,946

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Preferred stock, no par value, authorized 1,100,000 shares, issued and outstanding none at June 30, 2015 and December 31, 2014, respectively

 

 

 

Common stock, no par value, authorized 185,000,000 shares, issued and outstanding 31,501,633 and 35,233,674 shares at June 30, 2015 and December 31, 2014, respectively

 

552,527

 

642,205

 

Surplus

 

79,373

 

79,716

 

Accumulated deficit

 

(142,267

)

(157,039

)

Accumulated other comprehensive income (loss)

 

(786

)

3,159

 

Total equity

 

488,847

 

568,041

 

Total liabilities and equity

 

$

4,967,851

 

$

4,852,987

 

 

See accompanying notes to consolidated financial statements.

 

4



Table of Contents

 

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(Amounts in thousands, except per share data)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

 

 

 

Interest and fees on loans and leases

 

$

29,572

 

$

28,040

 

$

58,174

 

$

54,923

 

Interest and dividends on investment securities:

 

 

 

 

 

 

 

 

 

Taxable interest

 

8,277

 

8,476

 

16,427

 

17,972

 

Tax-exempt interest

 

1,010

 

1,000

 

2,008

 

1,994

 

Dividends

 

8

 

1

 

17

 

2

 

Interest on deposits in other banks

 

11

 

8

 

22

 

15

 

Dividends on Federal Home Loan Bank stock

 

18

 

11

 

29

 

23

 

Total interest income

 

38,896

 

37,536

 

76,677

 

74,929

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Interest on deposits:

 

 

 

 

 

 

 

 

 

Demand

 

99

 

91

 

194

 

181

 

Savings and money market

 

225

 

223

 

448

 

447

 

Time

 

549

 

621

 

1,097

 

1,251

 

Interest on short-term borrowings

 

79

 

55

 

122

 

72

 

Interest on long-term debt

 

650

 

640

 

1,287

 

1,276

 

Total interest expense

 

1,602

 

1,630

 

3,148

 

3,227

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

37,294

 

35,906

 

73,529

 

71,702

 

Provision (credit) for loan and lease losses

 

(7,319

)

1,995

 

(10,066

)

679

 

Net interest income after credit for loan and lease losses

 

44,613

 

33,911

 

83,595

 

71,023

 

 

 

 

 

 

 

 

 

 

 

Other operating income:

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

1,915

 

1,989

 

3,883

 

3,982

 

Loan servicing fees

 

1,427

 

1,448

 

2,850

 

2,892

 

Other service charges and fees

 

2,781

 

3,083

 

5,886

 

6,026

 

Income from fiduciary activities

 

830

 

828

 

1,664

 

1,890

 

Equity in earnings of unconsolidated subsidiaries

 

229

 

359

 

325

 

411

 

Fees on foreign exchange

 

98

 

119

 

226

 

233

 

Investment securities gains (losses)

 

(1,866

)

240

 

(1,866

)

240

 

Income from bank-owned life insurance

 

461

 

766

 

1,135

 

1,436

 

Loan placement fees

 

225

 

178

 

372

 

321

 

Net gain on sales of residential loans

 

1,630

 

1,227

 

3,224

 

2,466

 

Net gain on sales of foreclosed assets

 

94

 

582

 

127

 

744

 

Other

 

300

 

1,185

 

1,488

 

1,507

 

Total other operating income

 

8,124

 

12,004

 

19,314

 

22,148

 

 

 

 

 

 

 

 

 

 

 

Other operating expense:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

15,176

 

16,550

 

32,341

 

33,984

 

Net occupancy

 

3,403

 

3,734

 

6,904

 

7,324

 

Equipment

 

933

 

945

 

1,842

 

1,741

 

Amortization of other intangible assets

 

1,559

 

1,318

 

3,664

 

2,558

 

Communication expense

 

942

 

874

 

1,766

 

1,768

 

Legal and professional services

 

1,642

 

2,228

 

3,861

 

4,040

 

Computer software expense

 

2,382

 

1,575

 

4,478

 

2,933

 

Advertising expense

 

449

 

678

 

1,084

 

1,364

 

Foreclosed asset expense

 

257

 

(17

)

329

 

88

 

Other

 

5,715

 

5,003

 

10,207

 

9,018

 

Total other operating expense

 

32,458

 

32,888

 

66,476

 

64,818

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

20,279

 

13,027

 

36,433

 

28,353

 

Income tax expense

 

7,944

 

3,877

 

13,703

 

9,395

 

Net income

 

$

12,335

 

$

9,150

 

$

22,730

 

$

18,958

 

 

 

 

 

 

 

 

 

 

 

Per common share data:

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.39

 

$

0.25

 

$

0.69

 

$

0.49

 

Diluted earnings per share

 

0.39

 

0.25

 

0.68

 

0.48

 

Cash dividends declared

 

0.12

 

0.08

 

0.24

 

0.16

 

 

 

 

 

 

 

 

 

 

 

Shares used in computation:

 

 

 

 

 

 

 

 

 

Basic shares

 

31,525

 

36,117

 

33,167

 

39,000

 

Diluted shares

 

31,953

 

36,656

 

33,588

 

39,405

 

 

See accompanying notes to consolidated financial statements.

 

5



Table of Contents

 

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

12,335

 

$

9,150

 

$

22,730

 

$

18,958

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

Net change in unrealized gain (loss) on investment securities

 

(11,370

)

10,310

 

(4,461

)

19,886

 

Minimum pension liability adjustment

 

256

 

190

 

516

 

377

 

Other comprehensive income (loss), net of tax

 

(11,114

)

10,500

 

(3,945

)

20,263

 

Comprehensive income

 

$

1,221

 

$

19,650

 

$

18,785

 

$

39,221

 

 

See accompanying notes to consolidated financial statements.

 

6



Table of Contents

 

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Common

 

 

 

 

 

 

 

 

 

Other

 

Non-

 

 

 

 

 

Shares

 

Preferred

 

Common

 

 

 

Accumulated

 

Comprehensive

 

Controlling

 

 

 

 

 

Outstanding

 

Stock

 

Stock

 

Surplus

 

Deficit

 

Income (Loss)

 

Interests

 

Total

 

 

 

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2014

 

35,233,674

 

$

 

$

642,205

 

$

79,716

 

$

(157,039

)

$

3,159

 

$

 

$

568,041

 

Net income

 

 

 

 

 

22,730

 

 

 

22,730

 

Other comprehensive income

 

 

 

 

 

 

(3,945

)

 

(3,945

)

Cash dividends ($0.24 per share)

 

 

 

 

 

(7,958

)

 

 

(7,958

)

8,159 net shares of common stock sold by directors’ deferred compensation plan

 

 

 

(154

)

 

 

 

 

(154

)

3,950,781 shares of common stock repurchased and other related costs

 

(3,950,781

)

 

(89,524

)

 

 

 

 

(89,524

)

Share-based compensation

 

218,740

 

 

 

(343

)

 

 

 

(343

)

Balance at June 30, 2015

 

31,501,633

 

$

 

$

552,527

 

$

79,373

 

$

(142,267

)

$

(786

)

$

 

$

488,847

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

 

42,107,633

 

$

 

$

784,547

 

$

75,498

 

$

(184,087

)

$

(15,845

)

$

61

 

$

660,174

 

Net income

 

 

 

 

 

18,958

 

 

 

18,958

 

Other comprehensive income

 

 

 

 

 

 

20,263

 

 

20,263

 

Cash dividends ($0.16 per share)

 

 

 

 

 

(6,251

)

 

 

(6,251

)

1,118 net shares of common stock sold by directors’ deferred compensation plan

 

 

 

(11

)

 

 

 

 

(11

)

6,369,266 shares of common stock repurchased and other related costs

 

(6,369,266

)

 

(129,391

)

 

 

 

 

(129,391

)

Share-based compensation

 

162,713

 

 

74

 

813

 

 

 

 

887

 

Non-controlling interests

 

 

 

 

 

 

 

(61

)

(61

)

Balance at June 30, 2014

 

35,901,080

 

$

 

$

655,219

 

$

76,311

 

$

(171,380

)

$

4,418

 

$

 

$

564,568

 

 

See accompanying notes to consolidated financial statements.

 

7



Table of Contents

 

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2015

 

2014

 

 

 

(Dollars in thousands)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

22,730

 

$

18,958

 

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

 

 

 

 

 

Provision (credit) for loan and lease losses

 

(10,066

)

679

 

Depreciation and amortization

 

2,954

 

2,909

 

Write down of other real estate, net of gain on sale

 

140

 

(457

)

Amortization of other intangible assets

 

3,664

 

2,558

 

Net amortization of investment securities

 

4,584

 

4,160

 

Share-based compensation

 

(343

)

813

 

Net (gain) loss on investment securities

 

1,866

 

(240

)

Net gain on sales of residential loans

 

(3,224

)

(2,466

)

Proceeds from sales of loans held for sale

 

201,059

 

177,204

 

Originations of loans held for sale

 

(211,071

)

(170,832

)

Equity in earnings of unconsolidated subsidiaries

 

(325

)

(411

)

Increase in cash surrender value of bank-owned life insurance

 

(1,455

)

(1,638

)

Deferred income taxes

 

12,853

 

9,438

 

Net change in other assets and liabilities

 

4,206

 

(5,119

)

Net cash provided by operating activities

 

27,572

 

35,556

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Proceeds from maturities of and calls on investment securities available for sale

 

81,536

 

66,804

 

Proceeds from sales of investment securities available for sale

 

117,496

 

162,470

 

Purchases of investment securities available for sale

 

(257,793

)

(18,989

)

Proceeds from maturities of and calls on investment securities held to maturity

 

12,159

 

7,098

 

Purchases of investment securities held to maturity

 

(37,043

)

(2,443

)

Net loan originations

 

(54,491

)

(143,303

)

Purchase of loan portfolio

 

(28,109

)

(22,690

)

Proceeds from sales of loans originated for investment

 

6,658

 

 

Proceeds from sale of other real estate

 

2,567

 

1,884

 

Proceeds from bank-owned life insurance

 

723

 

 

Purchases of premises and equipment

 

(1,421

)

(2,573

)

Net return of capital from unconsolidated subsidiaries

 

286

 

862

 

Net proceeds from redemption of FHLB stock

 

31,803

 

1,182

 

Net cash provided by (used in) investing activities

 

(125,629

)

50,302

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net increase in deposits

 

72,022

 

66,405

 

Repayments of long-term debt

 

 

(9

)

Net increase in short-term borrowings

 

119,000

 

20,985

 

Cash dividends paid on common stock

 

(7,958

)

(6,251

)

Repurchases of common stock and other related costs

 

(89,524

)

(129,391

)

Net proceeds from issuance of common stock and stock option exercises

 

 

74

 

Net cash provided by (used in) financing activities

 

93,540

 

(48,187

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(4,517

)

37,671

 

Cash and cash equivalents at beginning of period

 

86,007

 

49,348

 

Cash and cash equivalents at end of period

 

$

81,490

 

$

87,019

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

3,239

 

$

3,283

 

Income taxes

 

880

 

 

Cash received during the period for:

 

 

 

 

 

Income taxes

 

 

79

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

Net change in common stock held by directors’ deferred compensation plan

 

$

154

 

$

11

 

Net reclassification of loans to other real estate

 

5,037

 

1,511

 

Net transfer of loans to loans held for sale

 

6,648

 

 

 

See accompanying notes to consolidated financial statements.

 

8



Table of Contents

 

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.   BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements of Central Pacific Financial Corp. and Subsidiaries (herein referred to as the “Company,” “we,” “us” or “our”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These interim condensed consolidated financial statements and notes should be read in conjunction with the Company’s consolidated financial statements and notes thereto filed on Form 10-K for the fiscal year ended December 31, 2014. In the opinion of management, all adjustments necessary for a fair presentation have been made and include all normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year.

 

Certain prior period amounts in the consolidated financial statements and the notes thereto have been reclassified to conform to the current period presentation. Such reclassifications had no effect on net income or shareholders’ equity for any periods presented.

 

2.   RECENT ACCOUNTING PRONOUNCEMENTS

 

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-01, “Investments — Equity Method and Joint Ventures: Accounting for Investments in Qualified Affordable Housing Projects.” The provisions of ASU 2014-01 provide guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The ASU permits entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The Company did not elect the use of the proportional amortization method of ASU 2014-01 on January 1, 2015, which has no material impact on our consolidated financial statements.

 

In January 2014, the FASB issued ASU 2014-04, “Receivables — Troubled Debt Restructurings by Creditors — Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” The provisions of ASU 2014-04 provide guidance on when an in substance repossession or foreclosure occurs, which is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate property recognized. Additionally, the amendments in this update require interim and annual disclosure of both: 1) the amount of foreclosed residential real estate property held by the creditor and 2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The Company adopted the prospective transition method of ASU 2014-04 on January 1, 2015, and the adoption did not have a material impact on our consolidated financial statements.

 

In June 2014, the FASB issued ASU 2014-11, “Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” ASU 2014-11 requires two accounting changes. First, the amendments change the accounting for repurchase-to-maturity transactions to secured borrowings. Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. ASU 2014-11 requires disclosures for certain transactions comprising a transfer of a financial asset accounted for as a sale, and an agreement with the same transferee entered into in contemplation of the initial transfer which results in the transferor retaining substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. ASU 2014-11 also requires additional disclosures for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions that are accounted for as secured borrowings. The adoption of ASU 2014-11 on January 1, 2015 did not have a material impact on our consolidated financial statements.

 

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Table of Contents

 

In August 2014, the FASB issued ASU 2014-14, “Receivables — Troubled Debt Restructurings by Creditors Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.”  ASU 2014-14 requires that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: 1) the loan has a government guarantee that is not separable from the loan before foreclosure; 2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and 3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed.  Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance expected to be recovered from the guarantor. The adoption of ASU 2014-14 on January 1, 2015 did not have a material impact on our consolidated financial statements.

 

3.   INVESTMENT SECURITIES

 

A summary of available for sale and held to maturity investment securities are as follows:

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

(Dollars in thousands)

 

At June 30, 2015:

 

 

 

 

 

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

Residential - U.S. Government sponsored entities

 

$

166,200

 

$

111

 

$

(3,081

)

$

163,230

 

Commercial - U.S. Government sponsored entities

 

96,578

 

 

(658

)

95,920

 

Total

 

$

262,778

 

$

111

 

$

(3,739

)

$

259,150

 

 

 

 

 

 

 

 

 

 

 

Available for Sale:

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

188,899

 

$

2,169

 

$

(2,811

)

$

188,257

 

Corporate securities

 

98,454

 

1,262

 

(154

)

99,562

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

Residential - U.S. Government sponsored entities

 

776,223

 

7,559

 

(5,715

)

778,067

 

Residential - Non-government agencies

 

69,603

 

1,273

 

(519

)

70,357

 

Commercial - Non-government agencies

 

135,535

 

2,566

 

(950

)

137,151

 

Other

 

817

 

101

 

 

918

 

Total

 

$

1,269,531

 

$

14,930

 

$

(10,149

)

$

1,274,312

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2014:

 

 

 

 

 

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

Residential - U.S. Government sponsored entities

 

$

140,741

 

$

196

 

$

(2,150

)

$

138,787

 

Commercial - U.S. Government sponsored entities

 

97,546

 

 

(736

)

96,810

 

Total

 

$

238,287

 

$

196

 

$

(2,886

)

$

235,597

 

 

 

 

 

 

 

 

 

 

 

Available for Sale:

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

191,280

 

$

2,054

 

$

(1,689

)

$

191,645

 

Corporate securities

 

99,237

 

1,492

 

(125

)

100,604

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

Residential - U.S. Government sponsored entities

 

744,527

 

11,064

 

(4,033

)

751,558

 

Residential - Non-government agencies

 

45,275

 

1,510

 

(92

)

46,693

 

Commercial - Non-government agencies

 

135,630

 

2,946

 

(935

)

137,641

 

Other

 

757

 

120

 

 

877

 

Total

 

$

1,216,706

 

$

19,186

 

$

(6,874

)

$

1,229,018

 

 

10



Table of Contents

 

The amortized cost and estimated fair value of investment securities at June 30, 2015 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

June 30, 2015

 

 

 

Amortized
Cost

 

Estimated Fair
Value

 

 

 

(Dollars in thousands)

 

Held to Maturity

 

 

 

 

 

Mortage-backed securities:

 

 

 

 

 

Residential - U.S. Government sponsored entities

 

$

166,200

 

$

163,230

 

Commercial - U.S. Government sponsored entities

 

96,578

 

95,920

 

Total

 

$

262,778

 

$

259,150

 

 

 

 

 

 

 

Available for Sale

 

 

 

 

 

Due in one year or less

 

$

2,567

 

$

2,660

 

Due after one year through five years

 

76,206

 

77,321

 

Due after five years through ten years

 

96,501

 

96,678

 

Due after ten years

 

112,079

 

111,160

 

Mortage-backed securities:

 

 

 

 

 

Residential - U.S. Government sponsored entities

 

776,223

 

778,067

 

Residential - Non-government agencies

 

69,603

 

70,357

 

Commercial - Non-government agencies

 

135,535

 

137,151

 

Other

 

817

 

918

 

Total

 

$

1,269,531

 

$

1,274,312

 

 

During the three months ended June 30, 2015, we sold certain available for sale investment securities for gross proceeds of $117.5 million. Gross realized losses on the sales of the available for sale investment securities were $1.9 million during the three months ended June 30, 2015. We did not sell any available for sale securities during the first quarter of 2015. The specific identification method was used as the basis for determining the cost of all securities sold.

 

During the three months ended June 30, 2014, we sold certain available for sale investment securities for gross proceeds of $162.5 million. Gross realized gains and losses on the sales of the available for sale investment securities were $0.9 million and $0.7 million, respectively, during the three months ended June 30, 2014. We did not sell any available for sale securities during the first quarter of 2014. The specific identification method was used as the basis for determining the cost of all securities sold.

 

Investment securities of $959.0 million and $900.5 million at June 30, 2015 and December 31, 2014, respectively, were pledged to secure public funds on deposit and other long-term and short-term borrowings.

 

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Table of Contents

 

Provided below is a summary of the 216 and 195 investment securities which were in an unrealized loss position at June 30, 2015 and December 31, 2014, respectively.

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

 

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

 

Description of Securities

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

 

 

(Dollars in thousands)

 

At June 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

66,678

 

$

(1,558

)

$

22,780

 

$

(1,253

)

$

89,458

 

$

(2,811

)

Corporate securities

 

26,349

 

(154

)

 

 

26,349

 

(154

)

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential - U.S. Government sponsored entities

 

464,847

 

(6,464

)

87,126

 

(2,332

)

551,973

 

(8,796

)

Residential - Non-government agencies

 

30,478

 

(519

)

 

 

30,478

 

(519

)

Commercial - U.S. Government sponsored entities

 

95,920

 

(658

)

 

 

95,920

 

(658

)

Commercial - Non-government agencies

 

57,620

 

(794

)

4,653

 

(156

)

62,273

 

(950

)

Total temporarily impaired securities

 

$

741,892

 

$

(10,147

)

$

114,559

 

$

(3,741

)

$

856,451

 

$

(13,888

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

23,591

 

$

(145

)

$

68,622

 

$

(1,544

)

$

92,213

 

$

(1,689

)

Corporate securities

 

23,938

 

(125

)

 

 

23,938

 

(125

)

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential - U.S. Government sponsored entities

 

107,755

 

(487

)

318,571

 

(5,696

)

426,326

 

(6,183

)

Residential - Non-government agencies

 

15,895

 

(92

)

 

 

15,895

 

(92

)

Commercial - U.S. Government sponsored entities

 

11,455

 

(34

)

85,355

 

(702

)

96,810

 

(736

)

Commercial - Non-government agencies

 

4,962

 

(8

)

47,539

 

(927

)

52,501

 

(935

)

Total temporarily impaired securities

 

$

187,596

 

$

(891

)

$

520,087

 

$

(8,869

)

$

707,683

 

$

(9,760

)

 

Other-Than-Temporary Impairment (“OTTI”)

 

Unrealized losses for all investment securities are reviewed to determine whether the losses are deemed “other-than-temporary.” Investment securities are evaluated for OTTI on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in their value below amortized cost is other-than-temporary. In conducting this assessment, we evaluate a number of factors including, but not limited to:

 

·                  The length of time and the extent to which fair value has been less than the amortized cost basis;

·                  Adverse conditions specifically related to the security, an industry, or a geographic area;

·                  The historical and implied volatility of the fair value of the security;

·                  The payment structure of the debt security and the likelihood of the issuer being able to make payments;

·                  Failure of the issuer to make scheduled interest or principal payments;

·                  Any rating changes by a rating agency; and

·                  Recoveries or additional declines in fair value subsequent to the balance sheet date.

 

The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value are not necessarily favorable, or that there is a general lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized for anticipated credit losses.

 

Because we have no intent to sell securities in an unrealized loss position and it is not more likely than not that we will be required to sell such securities before recovery of its amortized cost basis, we do not consider our investments to be other-than-temporarily impaired.

 

12



Table of Contents

 

4.   LOANS AND LEASES

 

Loans and leases, excluding loans held for sale, consisted of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

Commercial, financial and agricultural

 

$

499,078

 

$

463,070

 

Real estate:

 

 

 

 

 

Construction

 

83,833

 

115,023

 

Mortgage - residential

 

1,349,594

 

1,280,089

 

Mortgage - commercial

 

695,995

 

704,099

 

Consumer

 

373,588

 

365,662

 

Leases

 

2,589

 

3,140

 

 

 

3,004,677

 

2,931,083

 

Net deferred costs

 

1,378

 

1,115

 

Total loans and leases

 

$

3,006,055

 

$

2,932,198

 

 

During the six months ended June 30, 2015, we transferred the collateral in six portfolio loans with a carrying value of $1.6 million to other real estate and two portfolio loans to a single borrower with a carrying value of $6.6 million to the held-for-sale category. In June 2015, we purchased participation interest in auto loans totaling $28.1 million, which included a $1.0 million premium over the $27.1 million outstanding balance. At the time of purchase, the auto loans had a weighted average remaining term of 79 months. No portfolio loans were sold during the six months ended June 30, 2015.

 

During the six months ended June 30, 2014, we transferred three loans with a carrying value of $1.5 million to other real estate. We did not transfer any portfolio loans to the held-for-sale category and no portfolio loans were sold during the six months ended June 30, 2014. In May 2014, we purchased participation interest in auto loans totaling $11.2 million, which included a $0.3 million premium over the $10.9 million outstanding balance. At the time of purchase, the auto loans had a weighted average remaining term of 71 months. In May 2014, we also purchased participation interest in student loans totaling $11.5 million, which represented the outstanding balance at the time of purchase. At the time of purchase, the student loans had a weighted average remaining term of 123 months.

 

13



Table of Contents

 

Impaired Loans

 

The following table presents by class, the balance in the allowance for loan and lease losses and the recorded investment in loans and leases based on the Company’s impairment measurement method as of June 30, 2015 and December 31, 2014:

 

 

 

Commercial,

 

Real Estate

 

 

 

 

 

 

 

 

 

Financial &
Agricultural

 

Construction

 

Mortgage -Residential

 

Mortgage -Commercial

 

Consumer

 

Leases

 

Total

 

 

 

(Dollars in thousands)

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance attributable to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

58

 

$

 

$

 

$

 

$

 

$

 

$

58

 

Collectively evaluated for impairment

 

7,511

 

10,670

 

17,846

 

20,008

 

7,330

 

1

 

63,366

 

 

 

7,569

 

10,670

 

17,846

 

20,008

 

7,330

 

1

 

63,424

 

Unallocated

 

 

 

 

 

 

 

 

 

 

 

 

 

3,500

 

Total ending balance

 

$

7,569

 

$

10,670

 

$

17,846

 

$

20,008

 

$

7,330

 

$

1

 

$

66,924

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

3,513

 

$

4,474

 

$

26,654

 

$

14,850

 

$

 

$

 

$

49,491

 

Collectively evaluated for impairment

 

495,565

 

79,359

 

1,322,940

 

681,145

 

373,588

 

2,589

 

2,955,186

 

 

 

499,078

 

83,833

 

1,349,594

 

695,995

 

373,588

 

2,589

 

3,004,677

 

Net deferred costs (income)

 

523

 

(278

)

2,368

 

(802

)

(433

)

 

1,378

 

Total ending balance

 

$

499,601

 

$

83,555

 

$

1,351,962

 

$

695,193

 

$

373,155

 

$

2,589

 

$

3,006,055

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance attributable to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

1,533

 

$

 

$

 

$

 

$

 

$

 

$

1,533

 

Collectively evaluated for impairment

 

7,421

 

14,969

 

17,927

 

20,869

 

7,314

 

7

 

68,507

 

 

 

8,954

 

14,969

 

17,927

 

20,869

 

7,314

 

7

 

70,040

 

Unallocated

 

 

 

 

 

 

 

 

 

 

 

 

 

4,000

 

Total ending balance

 

$

8,954

 

$

14,969

 

$

17,927

 

$

20,869

 

$

7,314

 

$

7

 

$

74,040

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

13,369

 

$

4,888

 

$

30,893

 

$

23,126

 

$

 

$

 

$

72,276

 

Collectively evaluated for impairment

 

449,701

 

110,135

 

1,249,196

 

680,973

 

365,662

 

3,140

 

2,858,807

 

 

 

463,070

 

115,023

 

1,280,089

 

704,099

 

365,662

 

3,140

 

2,931,083

 

Net deferred costs (income)

 

693

 

(469

)

2,235

 

(826

)

(518

)

 

1,115

 

Total ending balance

 

$

463,763

 

$

114,554

 

$

1,282,324

 

$

703,273

 

$

365,144

 

$

3,140

 

$

2,932,198

 

 

14



Table of Contents

 

The following table presents by class, impaired loans as of June 30, 2015 and December 31, 2014:

 

 

 

 

Unpaid Principal
Balance

 

Recorded
Investment

 

Allowance
Allocated

 

 

 

(Dollars in thousands)

 

June 30, 2015

 

 

 

 

 

 

 

Impaired loans with no related allowance recorded:

 

 

 

 

 

 

 

Commercial, financial & agricultural

 

$

1,303

 

$

1,192

 

$

 

Real estate:

 

 

 

 

 

 

 

Construction

 

10,820

 

4,474

 

 

Mortgage - residential

 

28,967

 

26,654

 

 

Mortgage - commercial

 

17,967

 

14,850

 

 

Total impaired loans with no related allowance recorded

 

59,057

 

47,170

 

 

Impaired loans with an allowance recorded:

 

 

 

 

 

 

 

Commercial, financial & agricultural

 

3,789

 

2,321

 

58

 

Total impaired loans with an allowance recorded

 

3,789

 

2,321

 

58

 

Total

 

$

62,846

 

$

49,491

 

$

58

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

Impaired loans with no related allowance recorded:

 

 

 

 

 

 

 

Commercial, financial & agricultural

 

$

738

 

$

738

 

$

 

Real estate:

 

 

 

 

 

 

 

Construction

 

11,275

 

4,888

 

 

Mortgage - residential

 

34,131

 

30,893

 

 

Mortgage - commercial

 

30,249

 

23,126

 

 

Total impaired loans with no related allowance recorded

 

76,393

 

59,645

 

 

Impaired loans with an allowance recorded:

 

 

 

 

 

 

 

Commercial, financial & agricultural

 

16,630

 

12,631

 

1,533

 

Total impaired loans with an allowance recorded

 

16,630

 

12,631

 

1,533

 

Total

 

$

93,023

 

$

72,276

 

$

1,533

 

 

The following table presents by class, the average recorded investment and interest income recognized on impaired loans for the three and six months ended June 30, 2015 and 2014:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

Average
Recorded
Investment

 

Interest Income
Recognized

 

Average
Recorded
Investment

 

Interest Income
Recognized

 

Average
Recorded
Investment

 

Interest Income
Recognized

 

Average
Recorded
Investment

 

Interest Income
Recognized

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

Commercial, financial & agricultural

 

$

6,911

 

$

5

 

$

17,300

 

$

6

 

$

10,278

 

$

10

 

$

12,858

 

$

11

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

4,518

 

26

 

5,225

 

44

 

4,608

 

112

 

6,024

 

76

 

Mortgage - residential

 

27,312

 

(7

)

33,419

 

274

 

28,134

 

(6

)

34,913

 

437

 

Mortgage - commercial

 

16,438

 

175

 

16,201

 

76

 

19,595

 

339

 

16,123

 

115

 

Total

 

$

55,179

 

$

199

 

$

72,145

 

$

400

 

$