LION 9.30.2014 10Q

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 __________________________________________________________________
FORM 10-Q
 __________________________________________________________________
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended September 30, 2014
Commission file number 001-34981
 __________________________________________________________________
Fidelity Southern Corporation
(Exact name of registrant as specified in its charter)
 __________________________________________________________________
 
Georgia
 
58-1416811
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
3490 Piedmont Road, Suite 1550,
Atlanta GA
 
30305
(Address of principal executive offices)
 
(Zip Code)

(404) 639-6500
(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  ý  No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  ý  No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
  
Accelerated filer
 
ý
 
Non-accelerated filer
 
o
 
Smaller reporting company
 
o
 
 
 
  
 
 
 
 
(Do not check if 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  ý
As of October 31, 2014 (the most recent practicable date), the Registrant had outstanding approximately 21,327,806 shares of Common Stock.



FIDELITY SOUTHERN CORPORATION AND SUBSIDIARIES
Report on Form 10-Q
September 30, 2014


TABLE OF CONTENTS
 
 
 
 
Page
Part I.
 
 
 
 
 
 
 
Item l.
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
Part II.
 
 
 
 
 
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 



Table of Contents

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FIDELITY SOUTHERN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
 
($ in thousands)
September 30,
2014
 
December 31,
2013
Assets
 
 
 
Cash and due from banks
$
11,276

 
$
17,599

Interest-bearing deposits with banks
79,407

 
95,555

Federal funds sold
882

 
3,405

Cash and cash equivalents
91,565

 
116,559

Investment securities available-for-sale
156,331

 
168,865

Investment securities held-to-maturity
7,588

 
4,051

Loans held-for-sale (includes loans at fair value of $161,775 and $127,850, respectively)
324,442

 
187,366

Loans (includes covered loans of $37,706 and $58,365, respectively)
2,073,803

 
1,893,037

Allowance for loan losses
(28,297
)
 
(33,684
)
Loans, net of allowance for loan losses
2,045,506

 
1,859,353

Premises and equipment, net
59,650

 
44,555

Other real estate, net (includes covered assets of $8,508 and $6,191, respectively)
26,999

 
30,982

Bank owned life insurance
34,279

 
33,855

Servicing rights
62,196

 
53,202

Other assets
53,109

 
65,380

Total assets
$
2,861,665

 
$
2,564,168

Liabilities
 
 
 
Deposits
 
 
 
Noninterest-bearing demand deposits
$
639,471

 
$
488,224

Interest-bearing deposits
1,819,820

 
1,714,228

Total deposits
2,459,291

 
2,202,452

Other borrowings
76,402

 
59,233

Subordinated debt
46,393

 
46,393

Other liabilities
21,416

 
19,860

Total liabilities
2,603,502

 
2,327,938

Shareholders’ equity
 
 
 
Preferred stock, no par value. Authorized 10,000,000; zero issued

 

Common stock, no par value. Authorized 50,000,000; issued and outstanding 21,324,486
 and 21,342,549, respectively
161,527

 
158,153

Accumulated other comprehensive income, net of tax
2,367

 
968

Retained earnings
94,269

 
77,109

Total shareholders’ equity
258,163

 
236,230

Total liabilities and shareholders’ equity
$
2,861,665

 
$
2,564,168

See accompanying notes to unaudited consolidated financial statements.

1

Table of Contents

FIDELITY SOUTHERN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
($ in thousands, except per share data)
2014
 
2013
 
2014
 
2013
Interest income:
 
 
 
 
 
 
 
Loans, including fees
$
24,690

 
$
23,900

 
$
71,282

 
$
70,793

Investment securities
1,183

 
978

 
3,676

 
2,916

Federal funds sold and bank deposits
18

 
53

 
76

 
71

Total interest income
25,891

 
24,931

 
75,034

 
73,780

Interest expense:
 
 
 
 
 
 
 
Deposits
2,282

 
2,601

 
7,098

 
7,828

Other borrowings
163

 
84

 
276

 
763

Subordinated debt
282

 
716

 
834

 
2,451

Total interest expense
2,727

 
3,401

 
8,208

 
11,042

Net interest income
23,164

 
21,530

 
66,826

 
62,738

Provision for loan losses
1,859

 
1,121

 
(25
)
 
5,167

Net interest income after provision for loan losses
21,305

 
20,409

 
66,851

 
57,571

Noninterest income:
 
 
 
 
 
 
 
Service charges on deposit accounts
1,141

 
1,075

 
3,209

 
3,044

Other fees and charges
1,140

 
997

 
3,160

 
2,859

Mortgage banking activities
16,135

 
17,809

 
40,292

 
55,762

Indirect lending activities
6,303

 
2,583

 
14,610

 
7,010

SBA lending activities
1,479

 
647

 
3,682

 
3,148

Bank owned life insurance
313

 
326

 
1,369

 
965

Other
1,397

 
2,407

 
4,287

 
6,343

Total noninterest income
27,908

 
25,844

 
70,609

 
79,131

Noninterest expense:
 
 
 
 
 
 
 
Salaries and employee benefits
17,022

 
14,424

 
49,080

 
42,984

Commissions
5,363

 
6,019

 
14,443

 
20,388

Occupancy
3,467

 
2,844

 
9,477

 
7,542

Communication
1,009

 
754

 
2,958

 
2,319

Other
8,849

 
10,061

 
26,151

 
26,552

Total noninterest expense
35,710

 
34,102

 
102,109

 
99,785

Income before income tax expense
13,503

 
12,151

 
35,351

 
36,917

Income tax expense
4,701

 
4,298

 
12,528

 
13,140

Net income
8,802

 
7,853

 
22,823

 
23,777

Preferred stock dividends and accretion of discount

 
(817
)
 

 
(2,463
)
Net income available to common equity
$
8,802

 
$
7,036

 
$
22,823

 
$
21,314

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.41

 
$
0.33

 
$
1.07

 
$
1.20

Diluted
$
0.38

 
$
0.30

 
$
0.97

 
$
1.07

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.09

 
$

 
$
0.21

 
$

 
 
 
 
 
 
 
 
Net income
$
8,802

 
$
7,853

 
$
22,823

 
$
23,777

Other comprehensive income (loss):


 
 
 
 
 
 
Change in net unrealized gains/(losses) on securities for the period
(705
)
 
400

 
2,256

 
(2,939
)
Less: Income tax expense (benefit) related to items of other comprehensive income
(268
)
 
152

 
857

 
(1,117
)
Other comprehensive income (loss), net of tax
(437
)
 
248

 
1,399

 
(1,822
)
Total comprehensive income
$
8,365

 
$
8,101

 
$
24,222

 
$
21,955

See accompanying notes to unaudited consolidated financial statements.

2

Table of Contents

FIDELITY SOUTHERN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Nine Months Ended September 30,
 
2014
 
2013
(in thousands)
 
 
 
Operating activities:
 
 
 
Net income
$
22,823

 
$
23,777

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
 
 
Provision for loan losses
(25
)
 
5,167

Depreciation and amortization of premises and equipment
3,197

 
2,470

Other amortization, net
5,310

 
6,024

Impairment of other real estate
2,111

 
3,474

Share-based compensation
491

 
998

Gain on loan sales, including origination of servicing rights
(43,202
)
 
(60,570
)
Net gain on sale of other real estate
(2,486
)
 
(3,930
)
Net income on bank owned life insurance
(1,292
)
 
(882
)
Change in assets and liabilities which (used) provided cash:
 
 
 
Net (increase) decrease in loans originated for resale
(94,885
)
 
120,245

Net payments received from FDIC under loss-share agreements
5,028

 
5,188

Other assets
(7,687
)
 
260

Other liabilities
564

 
8,600

Net cash (used in) provided by operating activities
(110,053
)
 
110,821

Investing activities:
 
 
 
Purchases of investment securities available-for-sale
(5,006
)
 
(56,552
)
Purchases of investment securities held-to-maturity
(4,334
)
 

Purchase of FHLB stock
(10,575
)
 
(5,355
)
Maturities and calls of investment securities available-for-sale
19,860

 
37,615

Maturities and calls of investment securities held-to-maturity
796

 
1,694

Redemption of FHLB stock
10,564

 
6,566

Net proceeds from sales of loans
52,211

 

Net increase in loans
(245,120
)
 
(80,917
)
Proceeds from bank owned life insurance
868

 

Proceeds from sale of other real estate
14,443

 
26,470

Purchases of premises and equipment
(11,052
)
 
(6,765
)
Net proceeds received from deposit assumption and branch acquisition transaction
162,033



Net cash used in investing activities
(15,312
)
 
(77,244
)
Financing activities:
 
 
 
Net increase in noninterest-bearing demand deposits
130,101

 
64,528

Net (decrease) increase in interest-bearing deposits
(44,119
)
 
35,023

Net increase (decrease) in other borrowings
17,169

 
(37,238
)
Subordinated debt redemption

 
(21,500
)
Common stock dividends paid
(4,470
)
 
(434
)
Proceeds from the issuance of common stock
1,690

 
67,702

Preferred stock redemption


(48,200
)
Preferred stock dividends paid

 
(1,607
)
Net cash provided by financing activities
100,371

 
58,274

Net (decrease) increase in cash and cash equivalents
(24,994
)
 
91,851

Cash and cash equivalents, beginning of period
116,559

 
49,020

Cash and cash equivalents, end of period
$
91,565

 
$
140,871


3

Table of Contents

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
8,363

 
$
12,176

Income taxes
$
3,639

 
$
10,250

Supplemental disclosures of noncash investing and financing activities:
 
 
 
Noncash transfers to other real estate
$
10,086

 
$
20,407

Accretion on preferred stock
$

 
$
856

Deposit assumption and branch acquisition
 
 
 
     Assets acquired
$
9,119

 
$

     Liabilities assumed
$
170,994

 
$

See accompanying notes to unaudited consolidated financial statements.


4

Table of Contents

FIDELITY SOUTHERN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements include the accounts of Fidelity Southern Corporation ("FSC" or "Fidelity") and its wholly-owned subsidiaries. FSC owns 100% of Fidelity Bank (the “Bank”) and LionMark Insurance Company, an insurance agency offering consumer credit related insurance products. FSC also owns three subsidiaries established to issue trust preferred securities, which are not consolidated for financial reporting purposes in accordance with current accounting guidance, as FSC is not the primary beneficiary. The “Company” or "our", as used herein, includes FSC and its subsidiaries, unless the context otherwise requires.
These unaudited consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles followed within the financial services industry for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required for complete financial statements.
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the periods. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the calculations of and the amortization of capitalized servicing rights, valuation of deferred income taxes, the valuation of loans held-for-sale and certain derivatives, the valuation of real estate or other assets acquired in connection with foreclosures or in satisfaction of loans, purchase accounting-related adjustments, and the Federal Deposit Insurance Corporation ("FDIC") receivable for loss share agreements. The Company principally operates in one business segment, which is community banking.
In the opinion of management, all adjustments considered necessary for a fair presentation of the financial position and results of operations for the interim periods have been included. All such adjustments are normal recurring accruals. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts have been reclassified to conform to current year presentation. These reclassifications had no impact on previously reported net income and shareholders’ equity.
The Company’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in the 2013 Annual Report on Form 10-K/A filed with the Securities and Exchange Commission. There were no new accounting policies or changes to existing policies adopted in the first nine months of 2014, which had a significant effect on the results of operations or statement of financial condition. For interim reporting purposes, the Company follows the same basic accounting policies and considers each interim period as an integral part of an annual period.
Operating results for the three and nine-month periods ended September 30, 2014, are not necessarily indicative of the results that may be expected for the year ended December 31, 2014. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/A and Annual Report to Shareholders for the year ended December 31, 2013.
Recent Accounting Pronouncements
In January 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-04 "Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure." The amendments clarify when an in substance repossession or foreclosure occurs, such that the loan should be derecognized and real estate property should be recognized. The amendments will be effective for entities during annual reporting periods beginning after December 15, 2014, and interim reporting periods therein and those requirements should be applied prospectively. Early adoption is permitted. The adoption of this ASU is not expected to have a significant impact on the Company’s Consolidated Financial Statements.
In May 2014, the FASB issued ASU 2014-09 "Revenue from Contracts with Customers." The amendments in this guidance indicate that entities should recognize revenue to reflect the transfers of goods or services to customers in an amount equal to the consideration the entity receives or expects to receive. The amendments will be effective for entities during annual reporting periods beginning after December 15, 2016, and interim reporting periods therein and those requirements should be applied retrospectively. Early adoption is not permitted. The adoption of this ASU is not expected to have a significant impact on the Company's Consolidated Financial Statements.


5

Table of Contents

In June 2014, the FASB issued ASU 2014-11 "Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures." The new guidance requires entities to account for repurchase-to-maturity transactions as secured borrowings, eliminates accounting guidance on linked repurchase financing transactions, and expands disclosure requirements for certain transfers of financial assets that are accounted for as sales and certain transfers accounted for as secured borrowings. The amendments are effective for entities during annual reporting periods beginning after December 15, 2014, and interim reporting periods therein. The guidance should be applied by making a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption for any transactions outstanding on the effective date. Early adoption is not permitted. The adoption of this ASU is not expected to have a significant impact on the Company's Consolidated Financial Statements.
In August 2014, the FASB issued ASU 2014-14 "Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure." The amendments in this guidance provide specific guidance on how to classify or measure foreclosed mortgage loans that are government guaranteed. The amendments will be effective for public entities during annual reporting periods beginning after December 15, 2014, and interim reporting periods therein and those requirements should be applied retrospectively. Early adoption is not permitted. The adoption of this ASU is not expected to have a significant impact on the Company's Consolidated Financial Statements.
In August 2014, the FASB issued ASU 2014-15 "Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern." The amendments in this standard provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments will be effective for public entities during annual reporting periods beginning after December 15, 2016, and interim reporting periods therein and those requirements should be applied retrospectively. Early adoption is not permitted. The adoption of this ASU is not expected to have a significant impact on the Company's Consolidated Financial Statements.
Other accounting standards that have been issued or proposed by the FASB or other standard-settings bodies are not expected to have a material impact on the Company financial position, results of operations or cash flows.
Contingencies
Due to the nature of their activities, the Company and its subsidiaries are at times engaged in various legal proceedings that arise in the course of normal business, some of which were outstanding as of September 30, 2014. While it is difficult to predict or determine the outcome of these proceedings, it is the opinion of management, after consultation with its legal counsel, that there is not a reasonable possibility that the ultimate liabilities, if any, would have a material adverse impact on the Company’s consolidated results of operations, financial position, or cash flows.
2. DEPOSIT ASSUMPTION AND BRANCH ACQUISITION
On September 19, 2014, the Company announced the completion of a previously announced transaction in which the Company assumed the deposits of six branches of Center State Bank of Florida, N.A. and acquired five of those branches pursuant to a definitive agreement entered into on June 5, 2014. No loans were acquired in the transaction.     
Net cash proceeds of approximately $162.0 million were received in the transaction, representing the deposit balances assumed at closing, net of amounts paid for real and personal property acquired and a 1.50% premium on deposits. Customer deposit balances assumed were recorded at $170.9 million, real and personal property was recorded at $7.2 million, core deposit intangible of $1.8 million was recognized, and approximately $100,000 in other accrued liabilities, net were recorded in the transaction. The amount allocated to goodwill was insignificant.
The assets acquired and liabilities assumed in the transaction were recorded at fair value in accordance with ASC 805, "Business Combinations." The effects of the acquired assets and liabilities have been included in the consolidated financial statements since the acquisition date. Pro forma results have not been disclosed as those amounts are not significant to the unaudited financial statements.


6

Table of Contents

3. INVESTMENT SECURITIES
The amortized cost and fair value of debt securities are categorized in the table below by contractual maturity. Securities not due at a single maturity (i.e., mortgage-backed securities) are shown separately.
 
September 30, 2014
 
December 31, 2013
 (in thousands)
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Available-for-sale:
 
 
 
 
 
 
 
Obligations of U.S. Government sponsored enterprises:
 
 
 
 
 
 
 
Due five years through ten years
$
24,687

 
$
24,970

 
$
19,605

 
$
19,553

Due after ten years
1,506

 
1,541

 
1,518

 
1,486

Municipal securities:
 
 
 
 
 
 
 
Due within one year
820

 
824

 

 

Due after one year through five years
886

 
903

 
1,716

 
1,745

Due five years through ten years
689

 
728

 
691

 
700

Due after ten years
12,274

 
12,833

 
12,292

 
12,324

Residential mortgage-backed securities
111,651

 
114,532

 
131,481

 
133,057

Total available-for-sale
$
152,513

 
$
156,331

 
$
167,303

 
$
168,865

Held-to-maturity:
 
 
 
 
 
 
 
Residential mortgage-backed securities
$
3,290

 
$
3,655

 
$
4,051

 
$
4,437

Commercial mortgage-backed securities
4,298

 
4,298

 

 

Total held-to-maturity
$
7,588

 
$
7,953

 
$
4,051

 
$
4,437

The Bank did not sell any investment securities during the three and nine months ended September 30, 2014 or September 30, 2013.
The following table summarizes the amortized cost and fair value of debt securities and the related gross unrealized gains and losses at September 30, 2014 and December 31, 2013.
 
September 30, 2014
 (in thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Other than
Temporary
Impairment
 
Fair Value
Available-for-sale:
 
 
 
 
 
 
 
 
 
Obligations of U.S. Government sponsored enterprises
$
26,193

 
$
318

 
$

 
$

 
$
26,511

Municipal securities
14,669

 
620

 
(1
)
 

 
15,288

Mortgage-backed securities
111,651

 
2,951

 
(70
)
 

 
114,532

 
$
152,513

 
$
3,889

 
$
(71
)
 
$

 
$
156,331

Held-to-maturity:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities
$
3,290

 
$
365

 
$

 
$

 
$
3,655

Commercial mortgage-backed securities
4,298

 

 

 

 
4,298

 
$
7,588

 
$
365

 
$

 
$

 
$
7,953


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Table of Contents

 
December 31, 2013
 (in thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Other than
Temporary
Impairment
 
Fair Value
Available-for-sale:
 
 
 
 
 
 
 
 
 
Obligations of U.S. Government sponsored enterprises:
$
21,123

 
$
4

 
$
(88
)
 
$

 
$
21,039

Municipal securities
14,699

 
240

 
(170
)
 

 
14,769

Residential mortgage-backed securities
131,481

 
2,049

 
(473
)
 

 
133,057

 
$
167,303

 
$
2,293

 
$
(731
)
 
$

 
$
168,865

Held-to-maturity:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities
$
4,051

 
$
386

 
$

 
$

 
$
4,437

At September 30, 2014, four securities had gross unrealized losses of $70,000, of which three securities had been in a loss position for greater than twelve months. These securities consist of two mortgage-backed securities with an aggregate fair value of $3.3 million and unrealized losses of $66,000 and one municipal security with a fair value of $1.0 million and an unrealized loss of approximately $1,000. At December 31, 2013, all securities in an unrealized loss position had been in a loss position for less than twelve months.
Management believes that the impairment is the result of fluctuations in interest rates and not credit-related issues. Management does not intend to sell these securities and it is not more likely than not that the Company will be required to sell the investments before recovery of the amortized cost basis. Accordingly, as of September 30, 2014, management believes the impairment detailed in the prior table is temporary and no impairment loss has been recognized in the Company’s Consolidated Statements of Comprehensive Income.
Investment securities with a carrying value aggregating $109.4 million and $124.7 million at September 30, 2014 and December 31, 2013, were pledged as collateral for public deposits and overnight repurchase agreements.
4. LOANS HELD-FOR-SALE
Loans held-for-sale at September 30, 2014 and December 31, 2013 totaled $324.4 million and $187.4 million, respectively, and are shown in the table below:
(in thousands)
September 30,
2014
 
December 31,
2013
SBA
$
17,667

 
$
9,516

Residential mortgage
161,775

 
127,850

Indirect automobile
145,000

 
50,000

Total loans held-for-sale
$
324,442

 
$
187,366

5. LOANS
Loans outstanding, by class, are summarized in the following table and are presented net of deferred fees and costs of $5.9 million and $5.3 million at September 30, 2014 and December 31, 2013, respectively. Non-covered loans represent existing portfolio loans prior to the FDIC-assisted transactions, loans acquired but not covered under the Loss Share Agreements, and additional loans originated subsequent to the FDIC-assisted transactions.
 
Non-covered
 
Covered
 (in thousands)
September 30,
2014
 
December 31, 2013
 
September 30,
2014
 
December 31,
2013
Commercial
$
501,492

 
$
493,093

 
$
22,926

 
$
37,885

SBA
142,674

 
134,221

 
628

 
603

Total commercial loans
644,166

 
627,314

 
23,554

 
38,488

Construction loans
103,962

 
92,929

 
4,862

 
8,769

Indirect automobile
1,087,710

 
975,223

 

 

Installment
14,705

 
13,876

 
942

 
1,486

Total consumer loans
1,102,415

 
989,099

 
942

 
1,486

Residential mortgage
117,538

 
59,075

 
1,754

 
1,853

Home equity lines of credit
68,016

 
66,255

 
6,594

 
7,769

Total mortgage loans
185,554

 
125,330

 
8,348

 
9,622

Total loans
$
2,036,097

 
$
1,834,672

 
$
37,706

 
$
58,365


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Table of Contents


Loans in nonaccrual status that are not covered under loss share agreements totaling approximately $37.2 million, and $40.9 million at September 30, 2014 and December 31, 2013, respectively, are presented by class of loans in the following table.
 (in thousands)
September 30,
2014
 
December 31,
2013
Commercial
$
10,575

 
$
10,890

SBA
13,985

 
15,385

Total commercial loans
24,560

 
26,275

Construction
7,241

 
9,093

Indirect automobile
795

 
2,362

Installment
936

 
601

Total consumer loans
1,731

 
2,963

Residential mortgage
2,436

 
1,886

Home equity lines of credit
1,272

 
727

Total mortgage loans
3,708

 
2,613

Total loans
$
37,240

 
$
40,944


Accruing loans delinquent 30-89 days and troubled debt restructured loans ("TDRs") accruing interest, presented by class of loans at September 30, 2014 and December 31, 2013, were as follows:
 
September 30, 2014
 
December 31, 2013
 (in thousands)
Accruing Loans
Delinquent
30-89 Days
 
TDRs
Accruing Interest
 
Accruing Loans
Delinquent
30-89 Days
 
TDRs
Accruing Interest
Commercial
$
325

 
$
7,055

 
$
1,620

 
$
7,242

SBA
175

 
2,791

 
169

 
2,520

Construction

 
451

 

 
1,662

Indirect automobile
1,573

 

 
1,561

 

Installment
430

 
18

 
305

 

Residential mortgage
64

 
636

 
1,314

 
647

Home equity lines of credit
318

 

 
163

 

     Total loans
$
2,885

 
$
10,951

 
$
5,132

 
$
12,071

There were no loans 90 days or more past due and still accruing at September 30, 2014 or December 31, 2013.
TDR Loans
TDRs are loans in which the borrower is experiencing financial difficulty and the Company has granted an economic concession to the borrower. Prior to modifying a borrower’s loan terms, the Company performs an evaluation of the borrower’s financial condition and ability to service the loan under the potential modified loan terms.
The types of concessions granted are generally interest rate reductions or term extensions. If a loan is accruing at the time of modification, the loan remains on accrual status and is subject to the Company’s charge-off and nonaccrual policies. If a loan is on nonaccrual status before it is determined to be a TDR, then the loan remains on nonaccrual status. TDRs may be returned to accrual status if there has been at least a six-month sustained period of repayment performance by the borrower. Interest income recognition on impaired loans is dependent upon nonaccrual status.
During the nine months ended September 30, 2014 and 2013, certain loans were modified, resulting in TDRs. The modification of the terms of such loans included one or a combination of the following modifications: a reduction of the stated interest rate of the loan or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk.

9

Table of Contents

The following tables presents loans, by class, which were modified as TDRs that occurred during the three and nine months ended September 30, 2014 and 2013 along with the type of modification:

 
Troubled Debt Restructured
During the Three Months Ended
 
Troubled Debt Restructured
During the Three Months Ended
 
September 30, 2014
 
September 30, 2013
 (in thousands)
Interest Rate
 
Term
 
Interest Rate
 
Term
Commercial
$

 
$
22

 
$

 
$
1,873

SBA

 

 

 

Construction

 

 

 

Indirect automobile

 
275

 

 
338

Installment

 
42

 

 

Residential mortgage

 

 

 
141

Home equity lines of credit

 

 

 

     Total loans
$

 
$
339

 
$

 
$
2,352

 
 
 
 
 
 
 
 
 
Troubled Debt Restructured
During the Nine Months Ended
 
Troubled Debt Restructured
During the Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 (in thousands)
Interest Rate
 
Term
 
Interest Rate
 
Term
Commercial
$

 
$
22

 
$
214

 
$
1,873

SBA

 

 

 

Construction

 

 

 

Indirect automobile

 
657

 

 
1,040

Installment
127

 
60

 


 

Residential mortgage
155

 

 
127

 
217

Home equity lines of credit

 
217

 

 
140

     Total loans
$
282

 
$
956

 
$
341

 
$
3,270

The following tables present the amount of TDRs that were restructured in the previous twelve months ended September 30, 2014 and 2013 and subsequently redefaulted during the three and nine months ended September 30, 2014 and September 30, 2013:
 
Troubled Debt Restructured
during the last twelve months and subsequently
redefaulting during the three months ended (1)
(in thousands)
September 30, 2014
 
September 30, 2013
Commercial
$
22

 
$

SBA

 

Construction

 

Indirect automobile

 

Installment
42

 

Residential mortgage

 
141

Home equity lines of credit

 

     Total loans
$
64

 
$
141


10

Table of Contents

 
Troubled Debt Restructured
during the last twelve months and subsequently
redefaulting during the nine months ended (1)
(in thousands)
September 30, 2014
 
September 30, 2013
Commercial
$
22

 
$
1,312

SBA

 

Construction

 
772

Indirect automobile

 
401

Installment
187

 

Residential mortgage
155

 
344

Home equity lines of credit
217

 

     Total loans
$
581

 
$
2,829

(1)    Subsequently redefaulting is defined as a payment default (i.e., 30 days contractually past due) within 12 months of the restructuring date
The Company had TDRs with a balance of $19.9 million and $25.6 million at September 30, 2014 and December 31, 2013, respectively. There were charge-offs of TDR loans of $1.9 million for the nine months ended September 30, 2014 and $20,000 for the nine months ended September 30, 2013. Charge-offs on such loans are factored into the rolling historical loss rate, which is one of the considerations used in establishing the allowance for loan losses. The Company was not committed to lend additional amounts as of September 30, 2014 or December 31, 2013 to customers with outstanding loans that are classified as TDRs.
Impaired Loans
Impaired loans are evaluated based on the present value of expected future cash flows discounted at each loan’s original effective interest rate, or at the loan’s observable market price, or the fair value of the collateral, if the loan is collateral-dependent.
The following tables present by class the unpaid principal balance, amortized cost and related allowance for impaired loans at September 30, 2014 and December 31, 2013.
 
September 30, 2014
 
December 31, 2013
(in thousands)
Unpaid
Principal Balance
 
Recorded Investment(1)
 
Related
Allowance
 
Unpaid
Principal Balance
 
Recorded Investment(1)
 
Related
Allowance
Impaired loans with allowance
 
 
 
 
 
 
 
 
 
 
 
    Commercial
$
10,857

 
$
10,792

 
$
3,781

 
$
9,501

 
$
9,381

 
$
4,037

    SBA
4,644

 
3,624

 
264

 
9,762

 
8,079

 
607

    Construction
451

 
451

 
253

 
15,408

 
10,500

 
625

    Indirect automobile
2,384

 
1,976

 
9

 
2,364

 
2,362

 
13

    Installment
1,785

 
467

 
300

 
461

 
431

 
302

    Residential mortgage
2,260

 
2,260

 
651

 
2,270

 
2,270

 
805

    Home equity lines of credit
852

 
741

 
687

 
879

 
789

 
735

Total impaired loans with allowance
$
23,233

 
$
20,311

 
$
5,945

 
$
40,645

 
$
33,812

 
$
7,124

 
September 30, 2014
 
December 31, 2013
(in thousands)
Unpaid
Principal Balance
 
Recorded Investment (1)
 
Unpaid
Principal Balance
 
Recorded Investment (1)
Impaired loans with no allowance
 
 
 
 
 
 
 
    Commercial
$
17,123

 
$
14,722

 
$
12,495

 
$
11,522

    SBA
21,232

 
17,840

 
12,706

 
10,545

    Construction
9,460

 
7,241

 
2,758

 
1,266

    Indirect automobile

 

 

 

    Installment
65

 
53

 
1,461

 
170

    Residential mortgage
1,096

 
1,096

 
725

 
725

    Home equity lines of credit
205

 
185

 
62

 
56

Total impaired loans with no allowance
$
49,181

 
$
41,137

 
$
30,207

 
$
24,284


11

Table of Contents

(1)The primary difference between the unpaid principal balance and recorded investment represents charge offs previously taken; it excludes accrued interest receivable due to materiality

Average impaired loans and interest income recognized for the three and nine months ended September 30, 2014 and September 30, 2013, by class, are summarized in the tables below. Interest income recognized during the periods on a cash basis was de minimis.
 
Three Months Ended September 30,
 
2014
 
2013
(in thousands)
Average
Balance
 
Interest Income
Recognized
 
Average
Balance
 
Interest Income
Recognized
Commercial
$
23,776

 
$
232

 
$
21,444

 
$
295

SBA
22,477

 
837

 
22,479

 
264

Construction
7,894

 
10

 
10,882

 
55

Indirect automobile
1,981

 
42

 
2,511

 
40

Installment
502

 
42

 
723

 
47

Residential mortgage
3,222

 
10

 
3,275

 
9

Home equity lines of credit
932

 
116

 
1,758

 
13

    Total
$
60,784

 
$
1,289

 
$
63,072

 
$
723

 
Nine Months Ended September 30,
 
2014
 
2013
 (in thousands)
Average
Balance
 
Interest Income
Recognized
 
Average
Balance
 
Interest Income
Recognized
Commercial
$
22,758

 
$
834

 
$
25,262

 
$
728

SBA
21,683

 
1,626

 
24,231

 
798

Construction
9,413

 
223

 
12,766

 
132

Indirect automobile
2,087

 
135

 
3,011

 
109

Installment
524

 
174

 
648

 
139

Residential mortgage
3,010

 
28

 
3,403

 
35

Home equity lines of credit
951

 
211

 
2,020

 
41

   Total
$
60,426

 
$
3,231

 
$
71,341

 
$
1,982

Credit Quality Indicators
The Company uses an asset quality ratings system to assign a numeric indicator of the credit quality and level of existing credit risk inherent in a loan. These ratings are adjusted periodically as the Company becomes aware of changes in the credit quality of the underlying loans.
Indirect automobile loans typically receive a risk rating only when being downgraded to an adverse rating. The Company uses a number of factors, including FICO scoring, to help evaluate the likelihood consumer borrowers will pay their credit obligations as agreed. The weighted-average FICO score for the indirect automobile portfolio was 751 at September 30, 2014 and 733 at December 31, 2013.
The following are definitions of the asset rating categories.
Pass – These categories include loans rated satisfactory with high, good, average or acceptable business and credit risk.
Special Mention – A special mention asset has potential weaknesses that deserve management’s close attention.
Substandard – A substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. A substandard asset has a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt.
Doubtful – Doubtful assets have all the weaknesses inherent in assets classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loss – Loss assets are considered uncollectable and of such little value that their continuance as recorded assets is not warranted.

12

Table of Contents

The following tables present the recorded investment in loans, by loan rating category, as of September 30, 2014 and December 31, 2013:
 
 
September 30, 2014
 
 
Asset Rating
 
Commercial
 
SBA
 
Construction
 
Indirect Automobile
 
Installment
 
Residential Mortgage
 
Home Equity Lines of Credit
 
Total
Pass
 
$
476,971

 
$
120,230

 
$
97,675

 
$

 
$
13,236

 
$
115,572

 
$
72,817

 
$
896,501

Special Mention
 
18,340

 
5,110

 
209

 

 
520

 
172

 
82

 
24,433

Substandard
 
29,107

 
16,542

 
10,940

 
2,962

 
1,891

 
3,548

 
1,711

 
66,701

Doubtful
 

 
1,420

 

 

 

 

 

 
1,420

Loss
 

 

 

 

 

 

 

 

 
 
524,418

 
143,302

 
108,824

 
2,962

 
15,647

 
119,292

 
74,610

 
989,055

Ungraded Performing
 

 

 

 
1,084,748

 

 

 

 
1,084,748

Total
 
$
524,418

 
$
143,302

 
$
108,824

 
$
1,087,710

 
$
15,647

 
$
119,292

 
$
74,610

 
$
2,073,803


 
 
December 31, 2013
 
 
Asset Rating
 
Commercial
 
SBA
 
Construction
 
Indirect Automobile
 
Installment
 
Residential Mortgage
 
Home Equity Lines of Credit
 
Total
Pass
 
$
463,400

 
$
111,107

 
$
73,374

 
$

 
$
12,463

 
$
57,151

 
$
71,558

 
$
789,053

Special Mention
 
30,075

 
5,487

 
10,897

 

 
711

 
175

 
741

 
48,086

Substandard
 
37,503

 
18,230

 
17,427

 
3,021

 
2,188

 
3,602

 
1,725

 
83,696

Doubtful
 

 

 

 

 

 

 

 

Loss
 

 

 

 

 

 

 

 

 
 
530,978

 
134,824

 
101,698

 
3,021

 
15,362

 
60,928

 
74,024

 
920,835

Ungraded Performing
 

 

 

 
972,202

 

 

 

 
972,202

Total
 
$
530,978

 
$
134,824

 
$
101,698

 
$
975,223

 
$
15,362

 
$
60,928

 
$
74,024

 
$
1,893,037

Purchased Credit Impaired ("PCI") Loans
The carrying amount of PCI loans at September 30, 2014 and December 31, 2013 follows.
(in thousands)
 
September 30,
2014
 
December 31,
2013
Commercial
 
$
24,802


$
40,060

Construction
 
4,861


8,769

Consumer
 
1,974


3,050

Mortgage
 
8,800


9,997

     Total carrying amount
 
$
40,437


$
61,876

Total outstanding balance
 
$
46,877

 
$
72,910


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Table of Contents

Accretable yield, or income expected to be collected on PCI loans at September 30, 2014 and September 30, 2013, is as follows.
(in thousands)
 
September 30,
2014
 
September 30,
2013
Beginning balance, January 1
 
$
2,188


$
3,343

   Accretion of income
 
(2,295
)
 
(2,363
)
   Other activity, net
 
629


203

Ending balance
 
$
522


$
1,183

 

14

Table of Contents

6. ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are estimated to have occurred through a provision charged to operations. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is maintained at a level which, in management's opinion, is adequate to absorb credit losses inherent in the portfolio. The Company utilizes both peer group analysis, as well as a historical analysis of the Company's portfolio to validate the overall adequacy of the allowance for loan losses. In addition to these objective criteria, the Company subjectively assesses the adequacy of the allowance for loan losses with consideration given to current economic conditions, changes to loan policies, the volume and type of lending, composition of the portfolio, the level of classified and criticized credits, seasoning of the loan portfolio, payment status and other factors.
A summary of changes in the allowance for loan losses, by loan portfolio segment, for the three and nine months ended September 30, 2014 and 2013 is as follows:
 
Three Months Ended September 30, 2014
(in thousands)
Commercial
 
Construction
 
Consumer
 
Mortgage
 
Covered
 
Acquired, Non-covered
 
Unallocated
 
Total
Beginning balance
$
15,426

 
$
1,279

 
$
5,639

 
$
3,092

 
$
1,856

 
$
314

 
$
1,306

 
$
28,912

Charge-offs
(1,358
)
 

 
(1,005
)
 
(32
)
 
(156
)
 
(52
)
 

 
(2,603
)
Recoveries
21

 
41

 
391

 
28

 
79

 

 

 
560

Net(charge-offs)/recoveries
(1,337
)
 
41

 
(614
)
 
(4
)
 
(77
)
 
(52
)
 

 
(2,043
)
Decrease in FDIC indemnification asset

 

 

 

 
(431
)
 

 

 
(431
)
Provision for loan losses(1)
1,623

 
(76
)
 
587

 
91

 
(125
)
 
(141
)
 
(100
)
 
1,859

Ending balance
$
15,712

 
$
1,244

 
$
5,612

 
$
3,179

 
$
1,223

 
$
121

 
$
1,206

 
$
28,297

 
Three Months Ended September 30, 2013
(in thousands)
Commercial
 
Construction
 
Consumer
 
Mortgage
 
Covered
 
Acquired, Non-covered
 
Unallocated
 
Total
Beginning balance
$
15,551

 
$
4,119

 
$
6,135

 
$
3,291

 
$
2,374

 
$
528

 
$
1,311

 
$
33,309

Charge-offs
(477
)
 
(6
)
 
(1,376
)
 

 
(36
)
 
(10
)
 

 
(1,905
)
Recoveries
70

 
247

 
388

 
2

 

 

 

 
707

Net(charge-offs)/recoveries
(407
)
 
241

 
(988
)
 
2

 
(36
)
 
(10
)
 

 
(1,198
)
Increase in FDIC indemnification asset

 

 

 

 
429

 

 

 
429

Provision for loan losses(1)
1,069

 
(2,115
)
 
1,946

 
230

 
150

 
(110
)
 
(49
)
 
1,121

Ending balance
$
16,213

 
$
2,245

 
$
7,093

 
$
3,523

 
$
2,917

 
$
408

 
$
1,262

 
$
33,661

 
Nine Months Ended September 30, 2014
 (in thousands)
Commercial
 
Construction
 
Consumer
 
Mortgage
 
Covered
 
Acquired, Non-covered
 
Unallocated
 
Total
Beginning balance
$
17,348

 
$
2,044

 
$
6,410

 
$
3,376

 
$
3,331

 
$
278

 
$
897

 
$
33,684

Charge-offs
(3,201
)
 
(111
)
 
(3,051
)
 
(180
)
 
(652
)
 
(52
)
 

 
(7,247
)
Recoveries
33

 
1,818

 
1,071

 
58

 
288

 
16

 

 
3,284

Net (charge-offs)/recoveries
(3,168
)
 
1,707

 
(1,980
)
 
(122
)
 
(364
)
 
(36
)
 

 
(3,963
)
Decrease in FDIC indemnification asset

 

 

 

 
(1,399
)
 

 

 
(1,399
)
Provision for loan losses(1)
1,532

 
(2,507
)
 
1,182

 
(75
)
 
(345
)
 
(121
)
 
309

 
(25
)
Ending balance
$
15,712

 
$
1,244

 
$
5,612

 
$
3,179

 
$
1,223

 
$
121