The accounting and reporting policies of the Company conform with United States generally accepted accounting principles ("GAAP") and prevailing practices within the banking industry. The consolidated financial statements include the accounts of the Bank and the Company. The Company evaluates subsequent events through the date of filing of the consolidated financial statements with the Securities and Exchange Commission (“SEC”).

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, nonaccretable discounts, purchase accounting accretion adjustments, realization of deferred tax assets and the fair value of financial instruments and other accounts.

 

The Company, through the Bank, provides a broad range of financial services to individuals and companies. These services include personal, business and non-profit checking accounts, interest on lawyers trust accounts (“IOLTA”) accounts, individual retirement accounts, business and personal money market accounts, time deposits, overdraft protection, safe deposit boxes and online and mobile banking. Lending activities include a range of short-to medium-term commercial (including asset-based lending), real estate, construction, residential mortgage and home equity and consumer loans, as well as long-term residential mortgages. Wealth management activities include investment management, personal trust services, and investment brokerage services. Cash management activities include remote deposit capture, lockbox services, sweep accounts, purchasing cards, ACH and wire payments. Capital markets activities include interest rate and currency risk management products, loan syndications and debt placements. While the Company's decision makers monitor the revenue streams of the various financial products and services, operations are managed and financial performance is evaluated on an organization-wide basis. Accordingly, the Company's banking and finance operations are not considered by management to constitute more than reportable operating segment.

Certain amounts reported in the prior year financial statements have been reclassified to conform to the presentation. The reclassifications had no effect on net income, comprehensive income, total assets or shareholders’ equity as previously reported.

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Generally, acquisitions are accounted for under the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) . A business combination occurs when the Company acquires net assets that constitute a business, or acquires equity interests in or more other entities that are businesses and obtains control over those entities. Business combinations are effected through the transfer of consideration consisting of cash and/or common stock and are accounted for using the acquisition method. Accordingly, the assets and liabilities of the acquired entity are recorded at their respective fair values as of the closing date of the acquisition. Determining the fair value of assets and liabilities, especially the loan portfolio, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values.

Fair values are subject to refinement for up to year after the closing date of the acquisition as information relative to closing date fair values becomes available. The results of operations of an acquired entity are included in our consolidated results from the closing date of the merger, and prior periods are not restated. No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding future credit losses. Loans acquired are recorded at fair value exclusive of any loss share agreements with the FDIC. The fair value estimates associated with the acquired loans include estimates related to expected prepayments and the amount and timing of expected principal, interest and other cash flows.

 

 

 

Nonmarketable equity securities include the costs of the Company’s investments in the stock of the Federal Home Loan Bank of Atlanta (“FHLB”). As a condition of membership, the Bank is required to hold stock in the FHLB. These securities do not have a readily determinable fair value as their ownership is restricted and there is no market for these securities. The Bank carries these nonmarketable equity securities at cost and periodically evaluates them for impairment. Management considers these nonmarketable equity securities to be long-term investments. Accordingly, when evaluating these securities for impairment, management considers the ultimate recoverability of the par value rather than recognizing temporary declines in value. The primary factor supporting the carrying value of these securities is the commitment of the FHLB to perform its obligations, which includes providing credit and other services to the Bank. Upon request, the stock be sold back to the FHLB, at cost.

The Company also has invested in the stock of several unaffiliated financial institutions. The Company owns less than percent of the outstanding shares of each institution, and the stocks either have no quoted market value or are not readily marketable. Also included in nonmarketable equity securities is the investment in CSBC Statutory Trust I, Community Capital Corporation Statutory Trust I, Provident Community Bancshares Capital Trust I, Provident Community Bancshares Capital Trust II, and FCRV Statutory Trust I. See Note – Investments and Note – Borrowings.

–Loans originated by the Company and which management has the intent and ability to hold for the foreseeable future or until maturity are reported at their outstanding principal balances adjusted for any direct principal charge-offs, the allowance for loan losses and any deferred fees or costs on originated loans. Interest on originated loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. Loan origination fees are capitalized and recognized as an adjustment of the yield of the related loan. See Note – Loans and Allowance for Loan Losses.

 

 

 

 

 

– The allowance for loan losses is based upon management's ongoing evaluation of the loan portfolio and reflects an amount considered by management to be its best estimate of known and inherent losses in the portfolio as of the balance sheet date. The determination of the allowance for loan losses involves a high degree of judgment and complexity. In making the evaluation of the adequacy of the allowance for loan losses, management considers current economic and market conditions, independent loan reviews performed periodically by parties, portfolio trends and concentrations, delinquency information, management's internal review of the loan portfolio, internal historical loss rates and other relevant factors. While management uses the best information available to make evaluations, future adjustments to the allowance be necessary if conditions differ substantially from the assumptions used in making the evaluations. In addition, regulatory examiners require the Company to recognize changes to the allowance for loan losses based on their judgments about information available to them at the time of their examination. Although provisions have been established by loan segments based upon management's assessment of their differing inherent loss characteristics, the entire allowance for losses on loans, other than the portions related to PCI loans and specific reserves on impaired loans, is available to absorb further loan losses in any segment. Further information regarding the Company’s policies and methodology used to estimate the allowance for loan losses is presented in Note – Loans and Allowance for Loan Losses.

 

- Real estate acquired through, or in lieu of, loan foreclosure is held for sale and is recorded at fair value less estimated selling costs when acquired, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and further write-downs are made based on these valuations. Revenue and expenses from operations are included in other expense.

 

 

Intangible assets consist primarily of goodwill and core deposit intangibles that result from the acquisition of other banks. Core deposit intangibles represent the value of long-term deposit relationships acquired in these transactions. Goodwill represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed. Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.

 

The goodwill impairment analysis is a -step test. The step, used to identify potential impairment, involves comparing the reporting unit’s estimated fair value to its carrying value, including goodwill. If the estimated fair value of a reporting unit is less than its carrying value, there is an indication of potential impairment and the step is performed to measure the amount of impairment of goodwill assigned to that reporting unit.

If required, the step involves calculating an implied fair value of goodwill for each reporting unit for which the step indicated impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of the goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis of goodwill.

 

In the FASB issued Accounting Standards Update (“ASU”) - which gives entities the option of performing a qualitative assessment to test goodwill for impairment on a reporting-unit-by-reporting-unit basis. If, after performing the qualitative assessment, an entity concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the entity would perform the -step goodwill impairment test described in ASC However, if, after applying the qualitative assessment, the entity concludes that it is not more likely than not that the fair value is less than the carrying amount, the -step goodwill impairment test is not required.

The Company performed the qualitative assessment as outlined in ASU - in assessing the carrying value of goodwill related to its acquisitions as of its annual test date, and determined that it was unlikely that the fair value was less than the carrying amount and that no further testing or impairment charge was necessary. Should the Company’s future earnings and cash flows decline and/or discount rates increase, an impairment charge to goodwill and other intangible assets be required. There have been no events subsequent to the evaluation that caused the Company to perform an interim review of the carrying value of goodwill related to any of its acquisitions.

 

Core deposit intangibles are amortized over the estimated useful lives of the deposit accounts acquired (generally years on a straight line basis).

 

– The Company sells certain securities under agreements to repurchase. The agreements are treated as collateralized financing transactions and the obligations to repurchase securities sold are reflected as a liability in the accompanying consolidated balance sheets. The dollar amount of the securities underlying the agreements remains in the asset accounts.

 

Advertising costs are expensed as incurred and advertising communication costs the time the advertising takes place. The Company establish accruals for advertising expenses within the course of a fiscal year.

 

- Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities (excluding deferred tax assets and liabilities related to components of other comprehensive income). Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets generally is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized. The Company is subject to U.S. Federal income tax as well as state and local income tax in several jurisdictions. Tax years through remain open to examination by the Federal and state taxing authorities as of Interest and penalties related to income taxes are recognized in the Consolidated Statements of Income as a component of noninterest expense.

- Basic earnings per common share is computed based on the weighted-average number of shares outstanding during each period. Diluted earnings per common share reflect the additional shares that would have been outstanding if diluted potential shares had been issued.

 

 

At there were stock options and restricted shares outstanding. Dilutive stock options and restricted shares totaled and at respectively. At there were stock options and restricted shares outstanding. Dilutive stock options and restricted shares totaled and respectively. At there were stock options and restricted shares outstanding. Dilutive stock options and restricted shares totaled and at respectively. See Note – Employee and Director Benefit Plans for more information.

 

 

The Company grant share-based compensation to employees, directors and other eligible parties in the form of stock options, restricted stock or other instruments. Share-based compensation expense is measured based on the fair value of the award at the date of grant and is charged to earnings on a straight-line basis over the requisite service period, which is currently up to years. The fair value of stock options is estimated at the date of grant using a Black-Scholes option pricing model and related assumptions. The amortization of share-based compensation is adjusted for actual forfeiture experience. The fair value of restricted stock awards, subject to share price performance vesting requirements, is estimated using a Monte Carlo simulation and related estimated assumptions for volatility and a risk free interest rate.

 

The compensation expense for share-based compensation plans was million, million and million for the years ended and respectively.

 

 

Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either a freestanding asset or liability, with a corresponding offset recorded in other comprehensive income within shareholders’ equity, net of tax. Amounts are reclassified from other comprehensive income to the income statement in the period or periods the hedged forecasted transaction affects earnings. Cash flows from cash flow hedges are classified in the same category as the cash flows from the items being hedged. Derivative gains and losses not effective in hedging the expected cash flows of the hedged item are recognized immediately in the income statement. At the hedge’s inception and at least quarterly thereafter, a formal assessment is performed to determine the effectiveness of the cash flow hedge. If it is determined that a derivative instrument has not been or will not continue to be highly effective as a hedge, hedge accounting is discontinued. See Note – Derivative Financial Instruments and Hedging Activities.

 

Fair value hedges are accounted for under ASC Topic which requires that the method selected for assessing hedge effectiveness must be reasonable, be defined at the inception of the hedging relationship and be applied consistently throughout the hedging relationship. The Company uses the dollar-offset method for assessing effectiveness using the cumulative approach. The dollar-offset method compares the fair value of the hedging derivative with the fair value of the hedged exposure. The cumulative approach involves comparing the cumulative changes in the hedging derivative’s fair value to the cumulative changes in the hedged exposure’s fair value. The calculation of dollar offset is the change in clean fair value of the hedging derivative, divided by the change in fair value of the hedged exposure attributable to changes in the London InterBank Offered Rate (“LIBOR”) curve. To the extent that the cumulative change in fair value of the hedging derivative offsets from to of the cumulative change in fair value of the hedged exposure, the hedge will be deemed effective. The change in fair value of the hedging derivative and the change in fair value of the hedged exposure are recorded in earnings. Any hedge ineffectiveness is also reflected in current earnings. Cash flows from fair value hedges are classified in the same category as the cash flows from the items being hedged.

If a derivative instrument designated as a fair value hedge is terminated or the hedge designation removed, the difference between a hedged item’s then carrying amount and its face amount is recognized into income over the original hedge period. Likewise, if a derivative instrument designated as a cash flow hedge is terminated or the hedge designation removed, related amounts accumulated in other accumulated comprehensive income are reclassified into earnings over the original hedge period during which the hedged item affects income.

 

The following is a summary of recent authoritative pronouncements:

 

In the FASB issued ASU - “Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items” (“ASU - ASU - eliminated from U.S. GAAP the concept of an extraordinary item, which is an event or transaction that is both unusual in nature and infrequently occurring. The guidance became effective for the Company for interim and annual reporting periods beginning after The adoption of this standard had no effect on the Company’s financial statements.

 

In the FASB issued ASU - “Amendments to the Consolidation Analysis” (“ASU - ASU - amended the consolidation requirements in ASC Consolidation. The amendments change the consolidation analysis required under U.S. GAAP, and modify how variable interests held by a reporting entity’s related parties affect its consolidation conclusions. The amendments became effective for the Company for interim and annual reporting periods beginning after Adoption of this standard had no effect on the Company’s financial statements.

 

During the quarter of the Company also adopted ASU - “Interest- Imputation of Interest (Subtopic - Simplifying the Presentation of Debt Issuance Costs)” (“ASU - The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a deduction from the carrying amount of the debt liability, consistent with debt discounts. The guidance was effective for fiscal years beginning after and interim periods within that year. This guidance did not have a material effect on the Company’s financial statements.

 

During the quarter of the Company adopted ASU - “Simplifying the Accounting for Measurement Period Adjustments” (“ASU - ASU - simplifies the accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. The amendments in ASU - were effective for fiscal years beginning after This guidance did not have a material effect on the Company’s financial statements.

During the quarter of the Company early adopted, with an effective date of ASU - “Compensation- Stock Compensation (Topic Improvements to Employee Share-Based Payment Accounting” (“ASU - which is intended to improve accounting for share-based payment award transactions. ASU - simplifies share-based transactions including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. During the quarter, the Company recognized an income tax benefit of thousand, representing excess tax benefits that previously would have been recognized, under the former standard, in additional paid in capital. The early adoption favorably impacted both basic and diluted earnings per share by for the year; such amount was recorded in the quarter as the impact on prior quarters was not material.

 

In the FASB issued ASU - Revenue from Contracts with Customers, Topic (“ASU - The new standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under existing guidance. These include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In of the FASB issued ASU - Revenue from Contracts with Customers, Topic Deferral of the Effective Date, deferring the effective date of ASU - until annual reporting periods beginning after including interim periods within that reporting period. The standard can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this new guidance recognized at the date of initial application. Our revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU - and non-interest income. We are currently analyzing our noninterest income to determine the impact of this new standard; but we do not expect the changes will have a significant impact on our financial statements.

On the FASB issued ASU - “Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU - Changes to the current GAAP model primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The guidance will be effective in fiscal years beginning after including interim periods within those fiscal years. The Company is evaluating the impact of this update on its financial statements.

 

In the FASB issued ASU - Statement of Cash Flows (Topic Classification of Certain Cash Receipts and Cash Payments:  (“ASU - ASU - addresses classification issues related to the statement of cash flows.  The updated guidance is effective for interim and annual reporting periods beginning after   including interim periods within those fiscal years. Early adoption is permitted. Entities will apply the standard's provisions using a retrospective transition method to each period presented.  The Company does not believe this guidance will have a material impact on the Company’s consolidated financial statements.