Form 10-K 2007 (00310308.DOC;1)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

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

 

For the Quarterly Period Ended March 31, 2015

 

OR

 

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

 

For the transition period from                          to ____________

 

Commission File Number: 0-19065 

 

 

SANDY SPRING BANCORP, INC.

 

(Exact name of registrant as specified in its charter)

 

Maryland                                   52-1532952 

(State of incorporation)           (I.R.S. Employer Identification Number)

 

                                          17801 Georgia Avenue, Olney, Maryland          20832

                                                     (Address of principal executive office)             (Zip Code)

 

301-774-6400

(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 filing requirements for the past 90 days.

Yes  X        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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  X        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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  X   Non-accelerated filer         Smaller reporting company         

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes            No   X                                                                     

 

The number of outstanding shares of common stock outstanding as of May 4, 2015

 

Common stock, $1.00 par value – 24,671,932 shares

  

 

 

 


 

SANDY SPRING BANCORP, INC.

TABLE OF CONTENTS

 

 

 

                                                                                                                            

 

Page

PART I - FINANCIAL INFORMATION

 

 

 

 

  Item1. FINANCIAL STATEMENTS

 

 

 

 

Condensed Consolidated Statements of Condition - Unaudited at

 

 

March 31, 2015 and December 31, 2014

4

 

 

 

 

Condensed Consolidated Statements of Income - Unaudited for the Three  Months

 

 

Ended March 31, 2015 and 2014

5

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income – Unaudited for

 

 

the Three Months Ended March 31, 2015 and 2014

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows – Unaudited for the Three

 

 

Months Ended March 31, 2015 and 2014

7

 

 

 

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity – Unaudited for the

 

 

Three Months Ended March 31, 2015 and 2014

8

 

 

 

 

Notes to Condensed Consolidated Financial Statements

9

 

 

 

  Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF

 

 

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

33

 

 

 

  Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES

 

 

ABOUT MARKET RISK

52

 

 

 

  Item 4. CONTROLS AND PROCEDURES

52

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

  Item 1.    LEGAL PROCEEDINGS

52

 

 

 

  Item 1A. RISK FACTORS

52

 

 

 

  Item 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

52

 

 

 

  Item 3.    DEFAULTS UPON SENIOR SECURITIES

53

 

 

 

  Item 4.    MINE SAFETY DISCLOSURES

53

 

 

 

  Item 5.    OTHER INFORMATION

53

 

 

 

  Item 6.    EXHIBITS

53

 

 

 

  SIGNATURES

54

2


 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q, as well as other periodic reports filed with the Securities and Exchange Commission, and written or oral communications made from time to time by or on behalf of Sandy Spring Bancorp and its subsidiaries (the “Company”), may contain statements relating to future events or future results of the Company that are considered “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by the use of words such as “believe,” “expect,” “anticipate,”  “plan,” “estimate,” “intend” and “potential,” or words of similar meaning, or future or conditional verbs such as “should,” “could,” or “may.”  Forward-looking statements include statements of our goals, intentions and expectations; statements regarding our business plans, prospects, growth and operating strategies; statements regarding the quality of our loan and investment portfolios; and estimates of our risks and future costs and benefits.

 

Forward-looking statements reflect our expectation or prediction of future conditions, events or results based on information currently available. These forward-looking statements are subject to significant risks and uncertainties that may cause actual results to differ materially from those in such statements.  These risk and uncertainties include, but are not limited to, the risks identified in Item 1A of the Company’s 2014 Annual Report on Form 10-K, Item 1A of Part II of this report and the following:

 

·       general business and economic conditions nationally or in the markets that the Company serves could adversely affect, among other things, real estate prices, unemployment levels, and consumer and business confidence, which could lead to decreases in the demand for loans, deposits and other financial services that we provide and increases in loan delinquencies and defaults;

·       changes or volatility in the capital markets and interest rates may adversely impact the value of securities, loans, deposits and other financial instruments and the interest rate sensitivity of our balance sheet as well as our liquidity;

·       our liquidity requirements could be adversely affected by changes in our assets and liabilities;

·       our investment securities portfolio is subject to credit risk, market risk, and liquidity risk as well as changes in the estimates we use to value certain of the securities in our portfolio;

·       the effect of legislative or regulatory developments including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial services industry;

·       competitive factors among financial services companies, including product and pricing pressures and our ability to attract, develop and retain qualified banking professionals;

·       the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board, the Securities and Exchange Commission, the Public Company Accounting Oversight Board and other regulatory agencies; and

·       the effect of fiscal and governmental policies of the United States federal government.

 

Forward-looking statements speak only as of the date of this report.  The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date of this report or to reflect the occurrence of unanticipated events except as required by federal securities laws.

  

3


 

Part I

Item 1. FINANCIAL STATEMENTS

Sandy Spring Bancorp, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CONDITION - UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

(Dollars in thousands)

 

2015

 

2014

Assets

 

 

 

 

 

 

 

Cash and due from banks

 

$

46,771

 

$

52,804

 

Federal funds sold

 

 

473

 

 

473

 

Interest-bearing deposits with banks

 

 

33,906

 

 

42,940

 

 

Cash and cash equivalents

 

 

81,150

 

 

96,217

 

Residential mortgage loans held for sale (at fair value)

 

 

13,899

 

 

10,512

 

Investments available-for-sale (at fair value)

 

 

657,709

 

 

672,209

 

Investments held-to-maturity -- fair value of $221,687 and $222,260 at March 31, 2015

 

 

 

 

 

 

 

 

and December 31, 2014, respectively

 

 

217,557

 

 

219,973

 

Other equity securities

 

 

37,299

 

 

41,437

 

Total loans and leases

 

 

3,164,706

 

 

3,127,392

 

 

Less: allowance for loan and lease losses

 

 

(37,475)

 

 

(37,802)

 

Net loans and leases

 

 

3,127,231

 

 

3,089,590

 

Premises and equipment, net

 

 

51,299

 

 

49,402

 

Other real estate owned

 

 

3,227

 

 

3,195

 

Accrued interest receivable

 

 

12,505

 

 

12,634

 

Goodwill

 

 

84,171

 

 

84,171

 

Other intangible assets, net    

 

 

403

 

 

510

 

Other assets

 

 

114,930

 

 

117,282

Total assets

 

$

4,401,380

 

$

4,397,132

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

$

1,017,566

 

$

993,737

 

Interest-bearing deposits

 

 

2,092,326

 

 

2,072,772

 

 

Total deposits

 

 

3,109,892

 

 

3,066,509

 

Securities sold under retail repurchase agreements and federal funds purchased

 

 

101,640

 

 

74,432

 

Advances from FHLB

 

 

590,000

 

 

655,000

 

Subordinated debentures

 

 

35,000

 

 

35,000

 

Accrued interest payable and other liabilities

 

 

43,080

 

 

44,440

 

 

Total liabilities

 

 

3,879,612

 

 

3,875,381

 

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

Common stock -- par value $1.00; shares authorized 50,000,000; shares

 

 

 

 

 

 

 

 

issued and outstanding 24,733,868 and 25,044,877 at March 31, 2015 and

 

 

 

 

 

 

 

 

December 31, 2014, respectively

 

 

24,734

 

 

25,045

 

Additional paid in capital

 

 

186,342

 

 

194,647

 

Retained earnings

 

 

308,546

 

 

302,882

 

Accumulated other comprehensive income (loss)

 

 

2,146

 

 

(823)

 

 

Total stockholders' equity

 

 

521,768

 

 

521,751

Total liabilities and stockholders' equity

 

$

4,401,380

 

$

4,397,132

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements

 

4


 

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

 

 

 

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(Dollars in thousands, except per share data)

 

2015

 

2014

Interest Income:

 

 

 

 

 

 

 

Interest and fees on loans and leases

 

$

32,139

 

$

29,734

 

Interest on loans held for sale

 

 

76

 

 

59

 

Interest on deposits with banks

 

 

22

 

 

20

 

Interest and dividends on investment securities:

 

 

 

 

 

 

 

 

Taxable

 

 

3,577

 

 

4,116

 

 

Exempt from federal income taxes

 

 

2,258

 

 

2,321

 

 

 

Total interest income

 

 

38,072

 

 

36,250

Interest Expense:

 

 

 

 

 

 

Interest on deposits

 

 

1,194

 

 

1,184

Interest on retail repurchase agreements and federal funds purchased

 

 

50

 

 

38

Interest on advances from FHLB

 

 

3,236

 

 

3,218

Interest on subordinated debt

 

 

219

 

 

218

 

 

 

Total interest expense

 

 

4,699

 

 

4,658

Net interest income

 

 

33,373

 

 

31,592

Provision (credit) for loan and lease losses

 

 

597

 

 

(982)

 

 

 

Net interest income after provision (credit) for loan and lease losses

 

 

32,776

 

 

32,574

Non-interest Income:

 

 

 

 

 

 

 

Investment securities gains

 

 

-

 

 

-

 

Service charges on deposit accounts

 

 

1,882

 

 

1,972

 

Mortgage banking activities

 

 

1,178

 

 

316

 

Wealth management income

 

 

4,916

 

 

4,466

 

Insurance agency commissions

 

 

1,618

 

 

1,640

 

Income from bank owned life insurance

 

 

713

 

 

598

 

Visa check fees

 

 

1,057

 

 

978

 

Other income

 

 

1,795

 

 

1,279

 

 

 

Total non-interest income

 

 

13,159

 

 

11,249

Non-interest Expenses:

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

17,299

 

 

16,355

 

Occupancy expense of premises

 

 

3,489

 

 

3,472

 

Equipment expenses

 

 

1,373

 

 

1,256

 

Marketing

 

 

531

 

 

542

 

Outside data services

 

 

1,261

 

 

1,216

 

FDIC insurance

 

 

631

 

 

520

 

Amortization of intangible assets

 

 

107

 

 

370

 

Litigation expenses

 

 

200

 

 

-

 

Other expenses

 

 

4,353

 

 

3,818

 

 

 

Total non-interest expenses

 

 

29,244

 

 

27,549

Income before income taxes

 

 

16,691

 

 

16,274

Income tax expense

 

 

5,466

 

 

5,346

 

Net income

 

$

11,225

 

$

10,928

 

 

 

 

 

 

 

 

 

 

Net Income Per Share Amounts:

 

 

 

 

 

 

Basic net income per share

 

$

0.45

 

$

0.44

Diluted net income per share

 

$

0.45

 

$

0.43

Dividends declared per common share

 

$

0.22

 

$

0.18

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements

5


 

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months ended March 31,

(In thousands)

 

2015

 

2014

Net income

 

$

11,225

 

$

10,928

 

Other comprehensive income:

 

 

 

 

 

 

 

Investments available-for-sale:

 

 

 

 

 

 

 

 

Net change in unrealized gains on investments available-for-sale

 

 

4,634

 

 

7,132

 

 

 

Related income tax expense

 

 

(1,841)

 

 

(2,823)

 

 

Net investment gains reclassified into earnings

 

 

-

 

 

-

 

 

 

Related income tax expense

 

 

-

 

 

-

 

 

 

Net effect on other comprehensive income for the period

 

 

2,793

 

 

4,309

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plan:

 

 

 

 

 

 

 

 

Recognition of unrealized gain

 

 

292

 

 

48

 

 

 

Related income tax expense

 

 

(116)

 

 

(37)

 

 

 

Net effect on other comprehensive income for the period

 

 

176

 

 

11

 

Total other comprehensive income

 

 

2,969

 

 

4,320

Comprehensive income

 

$

14,194

 

$

15,248

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements

6


 

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(Dollars in thousands)

2015

 

2014

Operating activities:

 

 

 

 

 

Net income

$

11,225

 

$

10,928

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

 

 

 

 

 

 

 

Depreciation and amortization

 

1,683

 

 

1,915

 

 

Provision (credit) for loan and lease losses

 

597

 

 

(982)

 

 

Share based compensation expense

 

422

 

 

395

 

 

Deferred income tax expense

 

669

 

 

740

 

 

Origination of loans held for sale

 

(44,128)

 

 

(23,379)

 

 

Proceeds from sales of loans held for sale

 

41,336

 

 

29,062

 

 

Gains on sales of loans held for sale

 

(595)

 

 

(397)

 

 

Net decrease in accrued interest receivable

 

129

 

 

244

 

 

Net increase in other assets

 

(1,763)

 

 

(5,994)

 

 

Net increase (decrease) in accrued expenses and other liabilities

 

(334)

 

 

7,906

 

 

Other – net

 

1,054

 

 

1,318

 

 

 

Net cash provided by operating activities

 

10,295

 

 

21,756

Investing activities:

 

 

 

 

 

 

Purchases of other equity securities

 

4,138

 

 

3,120

 

Proceeds from maturities, calls and principal payments of investments held-to-maturity

 

2,195

 

 

671

 

Proceeds from maturities, calls and principal payments of investments available-for-sale

 

18,628

 

 

21,118

 

Net increase in loans and leases

 

(38,270)

 

 

(48,587)

 

Expenditures for premises and equipment

 

(3,045)

 

 

(856)

 

 

 

Net cash used in investing activities

 

(16,354)

 

 

(24,534)

Financing activities:

 

 

 

 

 

 

Net increase in deposits

 

43,383

 

 

81,970

 

Net increase in retail repurchase agreements and federal funds purchased

 

27,208

 

 

13,196

 

Proceeds from advances from FHLB

 

569,000

 

 

530,000

 

Repayment of advances from FHLB

 

(634,000)

 

 

(576,000)

 

Proceeds from issuance of common stock

 

(146)

 

 

(79)

 

Tax benefits associated with share based compensation

 

146

 

 

-

 

Repurchase of common stock

 

(9,038)

 

 

-

 

Dividends paid

 

(5,561)

 

 

(4,541)

 

 

 

Net cash (used) provided by financing activities

 

(9,008)

 

 

44,546

Net increase (decrease) in cash and cash equivalents

 

(15,067)

 

 

41,768

Cash and cash equivalents at beginning of period

 

96,217

 

 

74,427

Cash and cash equivalents at end of period

$

81,150

 

$

116,195

 

 

 

 

 

 

 

 

 

Supplemental Disclosures:

 

 

 

 

 

 

Interest payments

$

4,746

 

$

4,712

 

Income tax payments

 

4,360

 

 

10

 

Transfers from loans to other real estate owned

 

32

 

 

281

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements

7


 

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED

 

`

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Total

 

 

 

Common

 

Paid-In

 

Retained

 

Comprehensive

 

Stockholders’

(Dollars in thousands, except per share data)

 

Stock

 

Capital

 

Earnings

 

Income (Loss)

 

Equity

Balances at January 1, 2015

 

$

25,045

 

$

194,647

 

$

302,882

 

$

(823)

 

$

521,751

 

Net income

 

 

-

 

 

-

 

 

11,225

 

 

-

 

 

11,225

 

Other comprehensive income, net of tax

 

 

-

 

 

-

 

 

-

 

 

2,969

 

 

2,969

Common stock dividends -  $0.22 per share

 

 

-

 

 

-

 

 

(5,561)

 

 

-

 

 

(5,561)

Stock compensation expense

 

 

-

 

 

422

 

 

-

 

 

-

 

 

422

Common stock issued pursuant to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock option plan - 5,752 shares

 

 

6

 

 

68

 

 

-

 

 

-

 

 

74

 

Employee stock purchase plan - 6,663 shares

 

 

6

 

 

163

 

 

-

 

 

-

 

 

169

 

Restricted stock - 27,945 shares

 

 

28

 

 

(271)

 

 

-

 

 

-

 

 

(243)

Purchase of treasury shares - 351,369 shares

 

 

(351)

 

 

(8,687)

 

 

-

 

 

-

 

 

(9,038)

Balances at March 31, 2015

 

$

24,734

 

$

186,342

 

$

308,546

 

$

2,146

 

$

521,768

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2014

 

$

24,990

 

$

193,445

 

$

283,898

 

$

(2,970)

 

$

499,363

 

Net income

 

 

-

 

 

-

 

 

10,928

 

 

-

 

 

10,928

 

Other comprehensive income, net of tax

 

 

-

 

 

-

 

 

-

 

 

4,320

 

 

4,320

Common stock dividends -  $0.18 per share

 

 

-

 

 

-

 

 

(4,541)

 

 

-

 

 

(4,541)

Stock compensation expense

 

 

-

 

 

395

 

 

-

 

 

-

 

 

395

Common stock issued pursuant to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock option plan - 6,671 shares

 

 

7

 

 

83

 

 

-

 

 

-

 

 

90

 

Employee stock purchase plan - 5,650 shares

 

 

5

 

 

116

 

 

-

 

 

-

 

 

121

 

Restricted stock - 41,140 shares

 

 

41

 

 

(331)

 

 

-

 

 

-

 

 

(290)

Balances at March 31, 2014

 

$

25,043

 

$

193,708

 

$

290,285

 

$

1,350

 

$

510,386

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements

8


 

Sandy Spring Bancorp, Inc. and Subsidiaries

Notes to the CONDENSED Consolidated Financial Statements - UNAUDITED

 

Note 1 – Significant Accounting Policies  

Nature of Operations

Sandy Spring Bancorp (the “Company”), a Maryland corporation, is the bank holding company for Sandy Spring Bank (the “Bank”), which conducts a full-service commercial banking, mortgage banking and trust business. Services to individuals and businesses include accepting deposits, extending real estate, consumer and commercial loans and lines of credit, general insurance, personal trust, and investment and wealth management services. The Company operates in the  Maryland counties of Anne Arundel, Carroll, Frederick, Howard, Montgomery, and Prince George's, and in Arlington, Fairfax and Loudoun counties in Virginia. The Company offers investment and wealth management services through the Bank’s subsidiary, West Financial Services.  Insurance products are available to clients through Sandy Spring Insurance, and Neff & Associates, which are agencies of Sandy Spring Insurance Corporation.

 

Basis of Presentation

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and prevailing practices within the financial services industry for interim financial information and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and notes required for complete financial statements and prevailing practices within the banking industry.  The following summary of significant accounting policies of the Company is presented to assist the reader in understanding the financial and other data presented in this report.  Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for any future periods or for the year ending December 31, 2015. In the opinion of management, all adjustments (comprising only normal recurring accruals) necessary for a fair presentation of the results of the interim periods have been included. Certain reclassifications have been made to prior period amounts, as necessary, to conform to the current period presentation.  The Company has evaluated subsequent events through the date of the issuance of its financial statements.

 

These statements should be read in conjunction with the financial statements and accompanying notes included in the Company’s 2014 Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on March 6, 2015.  There have been no significant changes to the Company’s accounting policies as disclosed in the 2014 Annual Report on Form 10-K. 

 

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Sandy Spring Bank and its subsidiaries, Sandy Spring Insurance Corporation and West Financial Services, Inc. Consolidation has resulted in the elimination of all intercompany accounts and transactions. 

 

Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and affect the reported amounts of revenues earned and expenses incurred during the reporting period. Actual results could differ from those estimates. Estimates that could change significantly relate to the provision for loan and lease losses and the related allowance, determination of impaired loans and the related measurement of impairment, potential impairment of goodwill or other intangible assets, valuation of investment securities and the determination of whether impaired securities are other-than-temporarily impaired, valuation of other real estate owned, prepayment rates, valuation of share-based compensation, the assessment that a liability should be recognized with respect to any matters under litigation, the calculation of current and deferred income taxes and the actuarial projections related to pension expense and the related liability.

 

Cash Flows

For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, federal funds sold and interest-bearing deposits with banks (items with stated original maturity of three months or less).

 

9


 

Pending Accounting Pronouncements

The FASB issued a standard in May 2014 that provides accounting guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to customers.  The guidance also provides for a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial assets, such as property and equipment, including real estate.  This standard may affect an entity’s financial statements, business processes and internal control over financial reporting.  The guidance is effective for the first interim or annual period beginning after December 15, 2016.  The guidance must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach.  The Company is assessing this guidance to determine its impact on the Company’s financial position, results of operations and cash flows.

 

Note 2 – Investments

Investments available-for-sale

The amortized cost and estimated fair values of investments available-for-sale at the dates indicated are presented in the following table:

 

 

 

 

 

 

March 31, 2015

 

December 31, 2014

 

 

 

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

(In thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

Cost

 

Gains

 

Losses

 

Value

U.S. government agencies

 

$

144,519

 

$

253

 

$

(877)

 

$

143,895

 

$

144,497

 

$

-

 

$

(2,818)

 

$

141,679

State and municipal

 

 

155,964

 

 

9,822

 

 

-

 

 

165,786

 

 

157,603

 

 

9,453

 

 

(4)

 

 

167,052

Mortgage-backed

 

 

337,351

 

 

10,481

 

 

(1,529)

 

 

346,303

 

 

354,631

 

 

9,824

 

 

(2,936)

 

 

361,519

Trust preferred

 

 

1,111

 

 

-

 

 

(109)

 

 

1,002

 

 

1,348

 

 

-

 

 

(112)

 

 

1,236

 

Total debt securities

 

 

638,945

 

 

20,556

 

 

(2,515)

 

 

656,986

 

 

658,079

 

 

19,277

 

 

(5,870)

 

 

671,486

Marketable equity securities

 

 

723

 

 

-

 

 

-

 

 

723

 

 

723

 

 

-

 

 

-

 

 

723

 

 

Total investments available-for-sale

 

$

639,668

 

$

20,556

 

$

(2,515)

 

$

657,709

 

$

658,802

 

$

19,277

 

$

(5,870)

 

$

672,209

 

Any unrealized losses in the U.S. government agencies, state and municipal, mortgage-backed or corporate debt investment securities at March 31, 2015 are not the result of credit related events but due to changes in interest rates.   These declines are considered temporary in nature and are expected to decline over time and recover as these securities approach maturity.

 

The mortgage-backed securities portfolio at March 31, 2015 is composed entirely of either the most senior tranches of GNMA, FNMA or FHLMC collateralized mortgage obligations ($160.8 million), or GNMA, FNMA or FHLMC mortgage-backed securities ($185.5 million).  The Company does not intend to sell these securities and has sufficient liquidity to hold these securities for an adequate period of time, which may be maturity, to allow for any anticipated recovery in fair value. 

 

At March 31, 2015 the trust preferred portfolio consisted of one pooled trust preferred security.  The pooled trust preferred security, which is backed by debt issued by banks and thrifts, totals $1.1 million with a fair value of $1.0 million.  The fair value of this security was determined by management through the use of a third party valuation specialist due to the limited trading activity for this security. 

 

The income valuation approach technique (present value) used maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs.  The methodology and significant assumptions employed by the specialist to determine fair value included:

·         Evaluation of the structural terms as established in the indenture;

·         Detailed credit and structural evaluation for each piece of issuer collateral in the pool;

·         Overall default (.62%), recovery and prepayment (2%)/amortization probabilities by issuers in the pool;

·         Identification  of adverse conditions specifically related to the security, industry and geographical area;

·         Projection of estimated cash flows that incorporate default expectations and loss severities;

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

·         Evaluation of credit risk concentrations;

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

·         A discount rate of 11.9% was established using credit adjusted financial institution spreads for comparably rated institutions and a liquidity adjustment that considered the previously noted characteristics.

 

10


 

As a result of this evaluation, it was determined that the pooled trust preferred security had not incurred any credit-related other-than-temporary impairment (“OTTI”) for the quarter ended March 31, 2015.  Non-credit related OTTI on this security, which is not expected to be sold and which the Company has the ability to hold until maturity, was $0.1 million at March 31, 2015.  This non-credit related OTTI was recognized in other comprehensive income (“OCI”) at March 31, 2015. 

 

The methodology and significant inputs used to measure the amount related to credit loss consisted of the following:

 

·         Default rates were developed based on the financial condition of the trust preferred issuers in the pool and the payment or deferral status.  Conditional default rates were estimated based on the payment characteristics of the security and the financial condition of the issuers in the pool.  Near term and future defaults are estimated using third party industry data in addition to a review of key financial ratios and other pertinent data on the financial stability of the underlying issuer;

·         Loss severity is forecasted based on the type of impairment using research performed by third parties; 

·         The security contains one level of subordination below the senior tranche, with the senior tranche receiving the spread from the subordinate bonds.  Given recent performance, it is not expected that the senior tranche will receive its full interest and principal at the bond’s maturity date;

·         Credit ratings of the underlying issuers are reviewed in conjunction with the development of the default rates applied to determine the credit amounts related to the credit loss; and

·         Potential prepayments are estimated based on terms and rates of the underlying trust preferred securities to determine the impact of excess spread on the credit enhancement, the removal of the strongest institutions from the underlying pool and any impact that prepayments might have on diversity and concentration.

 

The following table provides the activity of OTTI on investment securities due to credit losses recognized in earnings for the period indicated:

(In thousands)

 

 

OTTI Losses

Cumulative credit losses on investment securities, through December 31, 2014

 

$

531

 

 

 

 

Additions for credit losses not previously recognized

 

 

-

 

 

 

 

Cumulative credit losses on investment securities, through March 31, 2015

 

$

531

 

 

 

 

11


 

Gross unrealized losses and fair value by length of time that the individual available-for-sale securities have been in an unrealized loss position at the dates indicated are presented in the following table:

 

 

 

 

March 31, 2015

 

 

 

 

 

 

 

 

 

Continuous Unrealized

 

 

 

 

 

 

 

 

 

 

 

Losses Existing for:

 

 

 

 

Number

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

of

 

 

 

 

Less than

 

More than

 

Unrealized

(Dollars in thousands)

 

securities

 

Fair Value

 

12 months

 

12 months

 

Losses

U.S. government agencies

 

 

9

 

$

94,083

 

$

244

 

$

633

 

$

877

Mortgage-backed

 

 

17

 

 

99,760

 

 

96

 

 

1,433

 

 

1,529

Trust preferred

 

 

1

 

 

1,002

 

 

-

 

 

109

 

 

109

 

Total

 

 

27

 

$

194,845

 

$

340

 

$

2,175

 

$

2,515

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

Continuous Unrealized

 

 

 

 

 

 

 

 

 

 

 

Losses Existing for:

 

 

 

 

Number

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

of

 

 

 

 

Less than

 

More than

 

Unrealized

(Dollars in thousands)

 

securities

 

Fair Value

 

12 months

 

12 months

 

Losses

U.S. government agencies

 

 

14

 

$

141,679

 

$

60

 

$

2,758

 

$

2,818

State and municipal

 

 

2

 

 

1,409

 

 

4

 

 

-

 

 

4

Mortgage-backed

 

 

20

 

 

108,902

 

 

58

 

 

2,878

 

 

2,936

Trust preferred

 

 

1

 

 

1,236

 

 

-

 

 

112

 

 

112

 

Total

 

 

37

 

$

253,226

 

$

122

 

$

5,748

 

$

5,870

 

The amortized cost and estimated fair values of debt securities available-for-sale by contractual maturity at the dates indicated are provided in the following table.  The Company has allocated mortgage-backed securities into the four maturity groupings reflected in the following table using the expected average life of the individual securities based on statistics provided by independent third party industry sources.  Expected maturities will differ from contractual maturities as borrowers may have the right to prepay obligations with or without prepayment penalties.

 

 

 

 

March 31, 2015

 

December 31, 2014

 

 

 

 

 

 

Estimated

 

 

 

 

Estimated

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

(In thousands)

 

Cost

 

Value

 

Cost

 

Value

Due in one year or less

 

$

691

 

$

708

 

$

691

 

$

714

Due after one year through five years

 

 

73,069

 

 

75,408

 

 

47,900

 

 

49,385

Due after five years through ten years

 

 

304,330

 

 

314,650

 

 

332,841

 

 

340,852

Due after ten years

 

 

260,855

 

 

266,220

 

 

276,647

 

 

280,535

 

Total debt securities available for sale

 

$

638,945

 

$

656,986

 

$

658,079

 

$

671,486

 

At March 31, 2015 and December 31, 2014, investments available-for-sale with a book value of $217.2 million and $212.9 million, respectively, were pledged as collateral for certain government deposits and for other purposes as required or permitted by law. The outstanding balance of no single issuer, except for U.S. Agencies securities, exceeded ten percent of stockholders' equity at March 31, 2015 and December 31, 2014.

12


 

Investments held-to-maturity    

The amortized cost and estimated fair values of investments held-to-maturity at the dates indicated are presented in the following table:

 

 

 

 

March 31, 2015

 

December 31, 2014

 

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

(In thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

Cost

 

Gains

 

Losses

 

Value

U.S. government agencies

 

$

64,514

 

$

13

 

$

(697)

 

$

63,830

 

$

64,512

 

$

-

 

$

(1,734)

 

$

62,778

State and municipal

 

 

152,849

 

 

4,968

 

 

(184)

 

 

157,633

 

 

155,261

 

 

4,321

 

 

(325)

 

 

159,257

Mortgage-backed

 

 

194

 

 

30

 

 

-

 

 

224

 

 

200

 

 

25

 

 

-

 

 

225

 

Total investments held-to-maturity

 

$

217,557

 

$

5,011

 

$

(881)

 

$

221,687

 

$

219,973

 

$

4,346

 

$

(2,059)

 

$

222,260

 

Gross unrealized losses and fair value by length of time that the individual held-to-maturity securities have been in a continuous unrealized loss position at the dates indicated are presented in the following tables:

 

 

 

 

March 31, 2015

 

 

 

 

 

 

 

 

 

Continuous Unrealized

 

 

 

 

 

 

 

 

 

 

 

Losses Existing for:

 

 

 

 

Number

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

of

 

 

 

 

Less than

 

More than

 

Unrealized

(Dollars in thousands)

 

securities

 

Fair Value

 

12 months

 

12 months

 

Losses

U.S. government agencies

 

 

5

 

$

45,766

 

$

178

 

$

519

 

$

697

State and municipal

 

 

20

 

 

18,242

 

 

26

 

 

158

 

 

184

 

Total

 

 

25

 

$

64,008

 

$

204

 

$

677

 

$

881

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

Continuous Unrealized

 

 

 

 

 

 

 

 

 

 

 

Losses Existing for:

 

 

 

 

Number

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

of

 

 

 

 

Less than

 

More than

 

Unrealized

(Dollars in thousands)

 

securities

 

Fair Value

 

12 months

 

12 months

 

Losses

U.S. government agencies

 

 

8

 

$

62,778

 

$

-

 

$

1,734

 

$

1,734

State and municipal

 

 

41

 

 

32,027

 

 

18

 

 

307

 

 

325

 

Total

 

 

49

 

$

94,805

 

$

18

 

$

2,041

 

$

2,059

 

The Company intends to hold these securities until they reach maturity.

 

The amortized cost and estimated fair values of debt securities held-to-maturity by contractual maturity at the dates indicated are reflected in the following table. Expected maturities will differ from contractual maturities as borrowers may have the right to prepay obligations with or without prepayment penalties.

 

 

 

 

March 31, 2015

 

December 31, 2014

 

 

 

 

 

 

Estimated

 

 

 

 

Estimated

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

(In thousands)

 

Cost

 

Value

 

Cost

 

Value

Due in one year or less

 

$

-

 

$

-

 

$

1,690

 

$

1,694

Due after one year through five years

 

 

6,980

 

 

7,161

 

 

6,763

 

 

6,938

Due after five years through ten years

 

 

164,343

 

 

167,489

 

 

163,252

 

 

164,787

Due after ten years

 

 

46,234

 

 

47,037

 

 

48,268

 

 

48,841

 

Total debt securities held-to-maturity

 

$

217,557

 

$

221,687

 

$

219,973

 

$

222,260

 

13


 

At March 31, 2015 and December 31, 2014, investments held-to-maturity with a book value of $188.7 million and $202.4 million, respectively, were pledged as collateral for certain government deposits and for other purposes as required or permitted by law.  The outstanding balance of no single issuer, except for U.S. Agency securities, exceeded ten percent of stockholders' equity at March 31, 2015 and December 31, 2014.

 

Equity securities

Other equity securities at the dates indicated are presented in the following table:

(In thousands)

 

March 31, 2015

 

December 31, 2014

Federal Reserve Bank stock

 

$

8,269

 

$

8,269

Federal Home Loan Bank of Atlanta stock

 

 

29,030

 

 

33,168

 

Total equity securities

 

$

37,299

 

$

41,437

               

 

Note 3 – Loans and Leases

Outstanding loan balances at March 31, 2015 and December 31, 2014 are net of unearned income including net deferred loan costs of $0.6 million and $0.5 million, respectively.  The loan portfolio segment balances at the dates indicated are presented in the following table:

 

(In thousands)

 

March 31, 2015

 

December 31, 2014

Residential real estate:

 

 

 

 

 

 

 

Residential mortgage

 

$

728,858

 

$

717,886

 

Residential construction

 

 

130,321

 

 

136,741

Commercial real estate:

 

 

 

 

 

 

 

Commercial owner occupied real estate

 

 

618,846

 

 

611,061

 

Commercial investor real estate

 

 

668,931

 

 

640,193

 

Commercial acquisition, development and construction

 

 

203,731

 

 

205,124

Commercial Business

 

 

385,452

 

 

390,781

Leases

 

 

36

 

 

54

Consumer

 

 

428,531

 

 

425,552

 

Total loans and leases

 

$

3,164,706

 

$

3,127,392

 

Note 4 – CREDIT QUALITY ASSESSMENT

Allowance for Loan and Lease Losses

Summary information on the allowance for loan and lease loss activity for the period indicated is provided in the following table:

 

 

 

 

Three Months Ended March 31,

(In thousands)

 

2015

 

2014

Balance at beginning of year

 

$

37,802

 

$

38,766

 

Provision for loan and lease losses

 

 

597

 

 

(982)

 

Loan and lease charge-offs

 

 

(1,114)

 

 

(717)

 

Loan and lease recoveries

 

 

190

 

 

959

 

 

Net charge-offs

 

 

(924)

 

 

242

Balance at period end

 

$

37,475

 

$

38,026

14


 

The following tables provide information on the activity in the allowance for loan and lease losses by the respective loan portfolio segment for the period indicated:

 

 

 

 

For the Three Months Ended March 31, 2015

 

 

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Residential Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

Commercial

 

Commercial

 

Owner

 

 

 

 

 

 

 

Residential

 

Residential

 

 

 

(Dollars in thousands)

 

Business

 

AD&C

 

Investor R/E

 

Occupied R/E

 

Leasing

 

Consumer

 

Mortgage

 

Construction

 

Total

Balance at beginning of year

 

$

5,852

 

$

4,267

 

$

9,784

 

$

7,143

 

$

9

 

$

3,592

 

$

6,232

 

$

923

 

$

37,802

Provision (credit)

 

 

(312)

 

 

(112)

 

 

261

 

 

328

 

 

-

 

 

318

 

 

143

 

 

(29)

 

 

597

Charge-offs

 

 

(19)

 

 

(706)

 

 

-

 

 

(213)

 

 

-

 

 

(99)

 

 

(77)

 

 

-

 

 

(1,114)

Recoveries

 

 

108

 

 

-

 

 

5

 

 

1

 

 

-

 

 

56

 

 

12

 

 

8

 

 

190

 

Net charge-offs

 

 

89

 

 

(706)

 

 

5

 

 

(212)

 

 

-

 

 

(43)

 

 

(65)

 

 

8

 

 

(924)

Balance at end of period

 

$

5,629

 

$

3,449

 

$

10,050

 

$

7,259

 

$

9

 

$

3,867

 

$

6,310

 

$

902

 

$

37,475

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans and leases

 

$

385,452

 

$

203,731

 

$

668,931

 

$

618,846

 

$

36

 

$

428,531

 

$

728,858

 

$

130,321

 

$

3,164,706

Allowance for loans and leases to total loans and leases ratio

 

 

1.46%

 

 

1.69%

 

 

1.50%

 

 

1.17%

 

 

25.02%

 

 

0.90%

 

 

0.87%

 

 

0.69%

 

 

1.18%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance of loans specifically evaluated for impairment

 

$

4,860

 

$

1,363

 

$

12,194

 

$

8,974

 

$

na.

 

$

na.

 

$

3,813

 

$

na.

 

$

31,204

Allowance for loans specifically evaluated for impairment

 

$

1,058

 

$

48

 

$

545

 

$

999

 

$

na.

 

$

na.

 

$

-

 

$

na.

 

$

2,650

Specific allowance to specific loans ratio

 

 

21.77%

 

 

3.52%

 

 

4.47%

 

 

11.13%

 

 

na.

 

 

na.

 

 

na.

 

 

na.

 

 

8.49%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance of loans collectively evaluated

 

$

380,592

 

$

202,368

 

$

656,737

 

$

609,872

 

$

36

 

$

428,531

 

$

725,045

 

$

130,321

 

$

3,133,502

Allowance for loans collectively evaluated

 

$

4,571

 

$

3,401

 

$

9,505

 

$

6,260

 

$

9

 

$

3,867

 

$

6,310

 

$

902

 

$

34,825

Collective allowance to collective loans ratio

 

 

1.20%

 

 

1.68%

 

 

1.45%

 

 

1.03%

 

 

25.02%

 

 

0.90%

 

 

0.87%

 

 

0.00%

 

 

1.11%

 

 

 

 

For the Year Ended December 31,2014

 

 

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Residential Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

Commercial

 

Commercial

 

Owner

 

 

 

 

 

 

 

Residential

 

Residential

 

 

 

(Dollars in thousands)

 

Business

 

AD&C

 

Investor R/E

 

Occupied R/E

 

Leasing

 

Consumer

 

Mortgage

 

Construction

 

Total

Balance at beginning of year

 

$

6,308

 

$

3,754

 

$

9,263

 

$

6,308

 

$

16

 

$

4,142

 

$

7,819

 

$

1,156

 

$

38,766

Provision (credit)

 

 

(1,204)

 

 

1,042

 

 

486

 

 

1,094

 

 

(7)

 

 

119

 

 

(1,385)

 

 

(308)

 

 

(163)

Charge-offs

 

 

(729)

 

 

(529)

 

 

(3)

 

 

(265)

 

 

-

 

 

(834)

 

 

(323)

 

 

(4)

 

 

(2,687)

Recoveries

 

 

1,477

 

 

-

 

 

38

 

 

6

 

 

-

 

 

165

 

 

121

 

 

79

 

 

1,886

 

Net charge-offs

 

 

748

 

 

(529)

 

 

35

 

 

(259)

 

 

-

 

 

(669)

 

 

(202)

 

 

75

 

 

(801)

Balance at end of period

 

$

5,852

 

$

4,267

 

$

9,784

 

$

7,143

 

$

9

 

$

3,592

 

$

6,232

 

$

923

 

$

37,802

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans and leases

 

$

390,781

 

$

205,124

 

$

640,193

 

$

611,061

 

$

54

 

$

425,552

 

$

717,886

 

$

136,741

 

$

3,127,392

Allowance for loans and leases to total loans and leases ratio

 

 

1.50%

 

 

2.08%

 

 

1.53%

 

 

1.17%

 

 

16.80%

 

 

0.84%

 

 

0.87%

 

 

0.67%

 

 

1.21%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance of loans specifically evaluated for impairment

 

$

3,894

 

$

2,464

 

$

10,279

 

$

8,941

 

$

na.

 

$

na.

 

$

3,535

 

$

306

 

$

29,419

Allowance for loans specifically evaluated for impairment

 

$

788

 

$

741

 

$

541

 

$

824

 

$

na.

 

$

na.

 

$

-

 

$

-

 

$

2,894

Specific allowance to specific loans ratio

 

 

20.24%

 

 

30.07%

 

 

5.26%

 

 

9.22%

 

 

na.

 

 

na.

 

 

na.

 

 

na.

 

 

9.84%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance of loans collectively evaluated

 

$

386,887

 

$

202,660

 

$

629,914

 

$

602,120

 

$

54

 

$

425,552

 

$

714,351

 

$

136,435

 

$

3,097,973

Allowance for loans collectively evaluated

 

$

5,064

 

$

3,526

 

$

9,243

 

$

6,319

 

$

9

 

$

3,592

 

$

6,232

 

$

923

 

$

34,908

Collective allowance to collective loans ratio

 

 

1.31%

 

 

1.74%

 

 

1.47%

 

 

1.05%

 

 

16.80%

 

 

0.84%

 

 

0.87%

 

 

0.68%

 

 

1.13%

15


 

The following table provides summary information regarding impaired loans at the dates indicated and for the periods then ended:

 

(In thousands)

 

March 31, 2015

 

December 31, 2014

Impaired loans with a specific allowance

 

$

10,587

 

$

11,411

Impaired loans without a specific allowance

 

 

20,617

 

 

18,008

 

Total impaired loans

 

$

31,204

 

$

29,419

 

 

 

 

 

 

 

 

Allowance for loan and lease losses related to impaired loans

 

$

2,650

 

$

2,894

Allowance for loan and lease losses related to loans collectively evaluated

 

 

34,825

 

 

34,908

 

Total allowance for loan and lease losses

 

$

37,475

 

$

37,802

 

 

 

 

 

 

 

 

Average impaired loans for the period

 

$

30,312

 

$

34,331

Contractual interest income due on impaired loans during the period

 

$

698

 

$

2,339

Interest income on impaired loans recognized on a cash basis

 

$

190

 

$

773

Interest income on impaired loans recognized on an accrual basis

 

$

66

 

$

280

 

The following tables present the recorded investment with respect to impaired loans, the associated allowance by the applicable portfolio segment and the principal balance of the impaired loans prior to amounts charged-off at the dates indicated:

 

 

 

 

March 31, 2015

 

 

 

 

 

 

 

Commercial Real Estate

 

 

 

 

Total Recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

All

 

Investment in

 

 

 

 

 

 

 

Commercial

 

Commercial

 

Owner

 

Other

 

Impaired

(In thousands)

 

Commercial

 

AD&C

 

Investor R/E

 

Occupied R/E

 

Loans

 

Loans

Impaired loans with a specific allowance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-accruing

 

$

1,459

 

$

48

 

$

2,328

 

$

5,138

 

$

-

 

$

8,973

 

 

Restructured accruing

 

 

675

 

 

-

 

 

-

 

 

-

 

 

-

 

 

675

 

 

Restructured non-accruing

 

 

224

 

 

-

 

 

73

 

 

642

 

 

-

 

 

939

 

Balance

 

$

2,358

 

$

48

 

$

2,401

 

$

5,780

 

$

-

 

$

10,587

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance

 

$

1,058

 

$

48

 

$

545

 

$

999

 

$

-

 

$

2,650

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans without a specific allowance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-accruing

 

$

1,126

 

$

563

 

$

7,682

 

$

1,731

 

$

-

 

$

11,102

 

 

Restructured accruing

 

 

19

 

 

-

 

 

2,111

 

 

-

 

 

2,641

 

 

4,771

 

 

Restructured non-accruing

 

 

1,357

 

 

752

 

 

-

 

 

1,463

 

 

1,172

 

 

4,744

 

Balance

 

$

2,502

 

$

1,315

 

$

9,793

 

$

3,194

 

$

3,813

 

$

20,617

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-accruing

 

$

2,585

 

$

611

 

$

10,010

 

$

6,869

 

$

-

 

$

20,075

 

 

Restructured accruing

 

 

694

 

 

-

 

 

2,111

 

 

-

 

 

2,641

 

 

5,446

 

 

Restructured non-accruing

 

 

1,581

 

 

752

 

 

73

 

 

2,105

 

 

1,172

 

 

5,683

 

Balance

 

$

4,860

 

$

1,363

 

$

12,194

 

$

8,974

 

$

3,813

 

$

31,204

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance in total impaired loans

 

$

6,354

 

$

6,662

 

$

16,851

 

$

10,808

 

$

4,117

 

$

44,792

16


 

 

 

March 31, 2015

 

 

 

 

 

Commercial Real Estate

 

 

 

 

Total Recorded

 

 

 

 

 

 

 

 

 

Commercial

 

All

 

Investment in

 

 

 

 

 

Commercial

 

Commercial

 

Owner

 

Other

 

Impaired

(In thousands)

 

Commercial

 

AD&C

 

Investor R/E

 

Occupied R/E

 

Loans

 

Loans

Average impaired loans for the period

 

$

4,377

 

$

1,914

 

$

11,237

 

$

8,958

 

$

3,827

 

$

30,312

Contractual interest income due on impaired loans during the period

 

$

135

 

$

87

 

$

220

 

$

199

 

$

57

 

 

 

Interest income on impaired loans recognized on a cash basis

 

$

54

 

$

-

 

$

11

 

$

103

 

$

22

 

 

 

Interest income on impaired loans recognized on an accrual basis

 

$

14

 

$

-

 

$

27

 

$

-

 

$

25

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

Commercial Real Estate

 

 

 

 

Total Recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

All

 

Investment in

 

 

 

 

 

 

 

Commercial

 

Commercial

 

Owner

 

Other

 

Impaired

(In thousands)

 

Commercial

 

AD&C

 

Investor R/E

 

Occupied R/E

 

Loans

 

Loans

Impaired loans with a specific allowance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-accruing

 

$

473

 

$

1,330

 

$

2,288

 

$

5,013

 

$

-

 

$

9,104

 

 

Restructured accruing

 

 

687

 

 

-

 

 

-

 

 

-

 

 

-

 

 

687

 

 

Restructured non-accruing

 

 

308

 

 

-

 

 

76

 

 

1,236

 

 

-

 

 

1,620

 

Balance

 

$

1,468

 

$

1,330

 

$

2,364

 

$

6,249

 

$

-

 

$

11,411

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance

 

$

788

 

$

741

 

$

541

 

$

824

 

$

-

 

$

2,894

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans without a specific allowance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-accruing

 

$

1,115

 

$

-

 

$

5,792

 

$

1,769

 

$

-

 

$

8,676

 

 

Restructured accruing

 

 

23

 

 

-

 

 

2,123

 

 

-

 

 

2,664

 

 

4,810

 

 

Restructured non-accruing

 

 

1,288

 

 

1,134

 

 

-

 

 

923

 

 

1,177

 

 

4,522

 

Balance

 

$

2,426

 

$

1,134

 

$

7,915

 

$

2,692

 

$

3,841

 

$

18,008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-accruing

 

$

1,588

 

$

1,330

 

$

8,080

 

$

6,782

 

$

-

 

$

17,780

 

 

Restructured accruing

 

 

710

 

 

-

 

 

2,123

 

 

-

 

 

2,664

 

 

5,497

 

 

Restructured non-accruing

 

 

1,596

 

 

1,134

 

 

76

 

 

2,159

 

 

1,177

 

 

6,142

 

Balance

 

$

3,894

 

$

2,464

 

$

10,279

 

$

8,941

 

$

3,841

 

$

29,419

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance in total impaired loans

 

$

5,360

 

$

7,044

 

$

14,926

 

$

10,729

 

$

4,126

 

$

42,185

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Real Estate

 

 

 

 

Total Recorded

 

 

 

 

 

 

 

 

 

Commercial

 

All

 

Investment in

 

 

 

 

 

Commercial

 

Commercial

 

Owner

 

Other

 

Impaired

(In thousands)

 

Commercial

 

AD&C

 

Investor R/E

 

Occupied R/E

 

Loans

 

Loans

Average impaired loans for the period

 

$

5,308

 

$

3,651

 

$

9,327

 

$

8,963

 

$

7,082

 

$

34,331

Contractual interest income due on impaired loans during the period

 

$

311

 

$

352

 

$

730

 

$

859

 

$

87

 

 

 

Interest income on impaired loans recognized on a cash basis

 

$

252

 

$

39

 

$

78

 

$

344

 

$

60

 

 

 

Interest income on impaired loans recognized on an accrual basis

 

$

63

 

$

-

 

$

111

 

$

-

 

$

106

 

 

 

17


 

Credit Quality

The following tables provide information on the credit quality of the loan portfolio by segment at the dates indicated:

 

 

 

 

March 31, 2015

 

 

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Residential Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

Commercial

 

Commercial

 

Owner

 

 

 

 

 

 

 

Residential

 

Residential

 

 

 

(In thousands)

 

Commercial

 

AD&C

 

Investor R/E

 

Occupied R/E

 

Leasing

 

Consumer

 

Mortgage

 

Construction

 

Total

Non-performing loans and assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-accrual loans and leases

 

$

4,166

 

$

1,363

 

$

10,083

 

$

8,974

 

$

-

 

$

1,962

 

$

3,235

 

$

788

 

$

30,571

 

Loans and leases 90 days past due

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

Restructured loans and leases

 

 

694

 

 

-

 

 

2,111

 

 

-

 

 

-

 

 

-

 

 

2,641

 

 

-

 

 

5,446

Total non-performing loans and leases

 

 

4,860

 

 

1,363

 

 

12,194

 

 

8,974

 

 

-

 

 

1,962

 

 

5,876

 

 

788

 

 

36,017

 

Other real estate owned

 

 

39

 

 

365

 

 

-

 

 

-

 

 

-

 

 

-

 

 

1,440

 

 

1,383

 

 

3,227

Total non-performing assets

 

$

4,899

 

$

1,728

 

$

12,194

 

$

8,974

 

$

-

 

$

1,962

 

$

7,316

 

$

2,171

 

$

39,244

 

 

 

 

December 31, 2014

 

 

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Residential Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

Commercial

 

Commercial

 

Owner

 

 

 

 

 

 

 

Residential

 

Residential

 

 

 

(In thousands)

 

Commercial

 

AD&C

 

Investor R/E

 

Occupied R/E

 

Leasing

 

Consumer

 

Mortgage

 

Construction

 

Total

Non-performing loans and assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-accrual loans and leases

 

$

3,184

 

$

2,464

 

$

8,156

 

$

8,941

 

$

-

 

$

1,668

 

$

3,012

 

$

1,105

 

$

28,530

 

Loans and leases 90 days past due

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

Restructured loans and leases

 

 

710

 

 

-

 

 

2,123

 

 

-

 

 

-

 

 

-

 

 

2,664

 

 

-

 

 

5,497

Total non-performing loans and leases

 

 

3,894

 

 

2,464

 

 

10,279

 

 

8,941

 

 

-

 

 

1,668

 

 

5,676

 

 

1,105

 

 

34,027

 

Other real estate owned

 

 

39

 

 

365

 

 

-

 

 

-

 

 

-

 

 

-

 

 

1,408

 

 

1,383

 

 

3,195

Total non-performing assets

 

$

3,933

 

$

2,829

 

$

10,279

 

$

8,941

 

$

-

 

$

1,668

 

$

7,084

 

$

2,488

 

$

37,222

 

 

 

 

 

March 31, 2015

 

 

 

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Residential Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

Commercial

 

Commercial

 

Owner

 

 

 

 

 

 

 

Residential

 

Residential

 

 

 

(In thousands)

 

Commercial

 

AD&C

 

Investor R/E

 

Occupied R/E

 

Leasing

 

Consumer

 

Mortgage

 

Construction

 

Total

Past due loans and leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31-60 days

 

$

435

 

$

711

 

$

1,352

 

$

1,373

 

$

3

 

$

605

 

$

4,604

 

$

-

 

$

9,083

 

61-90 days

 

 

-

 

 

-

 

 

-

 

 

207

 

 

2

 

 

266

 

 

3,402

 

 

-

 

 

3,877

 

> 90 days

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

Total past due

 

 

435

 

 

711

 

 

1,352

 

 

1,580

 

 

5

 

 

871

 

 

8,006

 

 

-

 

 

12,960

 

Non-accrual loans and leases

 

 

4,166

 

 

1,363

 

 

10,083

 

 

8,974

 

 

-

 

 

1,962

 

 

3,235

 

 

788

 

 

30,571

 

 Loans acquired with deteriorated credit quality

 

1,213

 

 

-

 

 

-

 

 

1,712

 

 

-

 

 

-

 

 

-

 

 

-

 

 

2,925

 

Current loans

 

 

379,638

 

 

201,657

 

 

657,496

 

 

606,580

 

 

31

 

 

425,698

 

 

717,617

 

 

129,533

 

 

3,118,250

 

 

Total loans and leases

 

$

385,452

 

$

203,731

 

$

668,931

 

$

618,846

 

$

36

 

$

428,531

 

$

728,858

 

$

130,321

 

$

3,164,706

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Residential Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

Commercial

 

Commercial

 

Owner

 

 

 

 

 

 

 

Residential

 

Residential

 

 

 

(In thousands)

 

Commercial

 

AD&C

 

Investor R/E

 

Occupied R/E

 

Leasing

 

Consumer

 

Mortgage

 

Construction

 

Total

Past due loans and leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31-60 days

 

$

759

 

$

-

 

$

2,374

 

$

2,658

 

$

11

 

$

797

 

$

3,064

 

$

-

 

$

9,663

 

61-90 days

 

 

995

 

 

320

 

 

1,493

 

 

156

 

 

-

 

 

179

 

 

836

 

 

-

 

 

3,979

 

> 90 days

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

Total past due

 

 

1,754

 

 

320

 

 

3,867

 

 

2,814

 

 

11

 

 

976

 

 

3,900

 

 

-

 

 

13,642

 

Non-accrual loans and leases

 

 

3,184

 

 

2,464

 

 

8,156

 

 

8,941

 

 

-

 

 

1,668

 

 

3,012

 

 

1,105

 

 

28,530

 

 Loans acquired with deteriorated credit quality

 

1,238

 

 

-

 

 

-

 

 

1,773

 

 

-

 

 

-

 

 

-

 

 

-

 

 

3,011

 

Current loans

 

 

384,605

 

 

202,340

 

 

628,170

 

 

597,533

 

 

43

 

 

422,908

 

 

710,974

 

 

135,636

 

 

3,082,209

 

 

Total loans and leases

 

$

390,781

 

$

205,124

 

$

640,193

 

$

611,061

 

$

54

 

$

425,552

 

$

717,886

 

$

136,741

 

$

3,127,392

 

18


 

The following tables provide information by credit risk rating indicators for each segment of the commercial loan portfolio at the dates indicated:

 

 

 

 

March 31, 2015

 

 

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

Commercial

 

Commercial

 

Owner

 

 

 

(In thousands)

 

Commercial

 

AD&C

 

Investor R/E

 

Occupied R/E

 

Total

 

Pass

 

$

360,219

 

$

201,375

 

$

654,005

 

$

591,308

 

$

1,806,907

 

Special Mention

 

 

8,212

 

 

698

 

 

1,857

 

 

6,431

 

 

17,198

 

Substandard

 

 

17,021

 

 

1,658

 

 

13,069

 

 

21,107

 

 

52,855

 

Doubtful

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

Total

 

$

385,452

 

$

203,731

 

$

668,931

 

$

618,846

 

$

1,876,960

 

 

 

 

Decemeber 31, 2014

 

 

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

Commercial

 

Commercial

 

Owner

 

 

 

(In thousands)

 

Commercial

 

AD&C

 

Investor R/E

 

Occupied R/E

 

Total

 

Pass

 

$

366,367

 

$

201,642

 

$

621,511

 

$

581,575

 

$

1,771,095

 

Special Mention

 

 

8,835

 

 

698

 

 

3,931

 

 

7,669

 

 

21,133

 

Substandard

 

 

15,579

 

 

2,784

 

 

14,751

 

 

21,817

 

 

54,931

 

Doubtful

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

Total

 

$

390,781

 

$

205,124

 

$

640,193

 

$

611,061

 

$

1,847,159

 

Homogeneous loan pools do not have individual loans subjected to internal risk ratings therefore, the credit indicator applied to these pools is based on their delinquency status. The following tables provide information by credit risk rating indicators for those remaining segments of the loan portfolio at the dates indicated:

 

 

 

 

 

March 31, 2015

 

 

 

 

 

 

 

 

 

 

Residential Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

Residential

 

 

 

(In thousands)

 

Leasing

 

Consumer

 

Mortgage

 

Construction

 

Total

 

Performing

 

$

36

 

$

426,569

 

$

722,982

 

$

129,533

 

$

1,279,120

 

Non-performing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90 days past due

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

Non-accruing

 

 

-

 

 

1,962

 

 

3,235

 

 

788

 

 

5,985

 

 

Restructured loans and leases

 

 

-

 

 

-

 

 

2,641

 

 

-

 

 

2,641

 Total  

 

$

36

 

$

428,531

 

$

728,858

 

$

130,321

 

$

1,287,746

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

Residential Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

Residential

 

 

 

(In thousands)

 

Leasing

 

Consumer

 

Mortgage

 

Construction

 

Total

 

Performing

 

$

54

 

$

423,884

 

$

712,210

 

$

135,636

 

$

1,271,784

 

Non-performing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90 days past due

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

Non-accruing

 

 

-

 

 

1,668

 

 

3,012

 

 

1,105

 

 

5,785

 

 

Restructured loans and leases

 

 

-

 

 

-

 

 

2,664

 

 

-

 

 

2,664

 Total  

 

$

54

 

$

425,552

 

$

717,886

 

$

136,741

 

$

1,280,233

 

19


 

During the three months ended March 31, 2015, the Company restructured a $0.6 million loan.  No modifications resulted in the reduction of the principal in the associated loan balances.  Restructured loans are subject to periodic credit reviews to determine the necessity and adequacy of a specific loan loss allowance based on the collectability of the recorded investment in the restructured loan.  Loans restructured during 2015 have specific reserves of $0.2 million at March 31, 2015.  For the year ended December 31, 2014, the Company restructured $1.6 million in loans.  Modifications consisted principally of interest rate concessions and no modifications resulted in the reduction of the recorded investment in the associated loan balances.  Loans restructured during 2014 had specific reserves of $0.1 million at December 31, 2014.  Commitments to lend additional funds on loans that have been restructured at March 31, 2015 and December 31, 2014 amounted to $0.1 million and $0.1 million, respectively.

 

The following table provides the amounts of the restructured loans at the date of restructuring for specific segments of the loan portfolio during the period indicated:

 

 

 

For the Three Months Ended March 31, 2015

 

 

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

All

 

 

 

 

 

 

 

 

 

Commercial

 

Commercial

 

Owner

 

Other

 

 

 

(In thousands)

 

Commercial

 

AD&C

 

Investor R/E

 

Occupied R/E

 

Loans

 

Total

Troubled debt restructurings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructured accruing

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

Restructured non-accruing

 

 

-

 

 

-

 

 

-

 

 

642

 

 

-

 

 

642

Balance

 

$

-

 

$

-

 

$

-

 

$

642

 

$

-

 

$

642

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specific allowance

 

$

-

 

$

-

 

$

-

 

$

152

 

$

-

 

$

152

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructured and subsequently defaulted

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

 

 

 

For the Year Ended December 31, 2014

 

 

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

All

 

 

 

 

 

 

 

 

 

Commercial

 

Commercial

 

Owner

 

Other

 

 

 

(In thousands)

 

Commercial

 

AD&C

 

Investor R/E

 

Occupied R/E

 

Loans

 

Total

Troubled debt restructurings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructured accruing

 

$

75

 

$

-

 

$

1,284

 

$

-

 

$

-

 

$

1,359

 

Restructured non-accruing

 

 

92

 

 

192

 

 

-

 

 

-

 

 

-

 

 

284

Balance

 

$

167

 

$

192

 

$

1,284

 

$

-

 

$

-

 

$

1,643

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specific allowance

 

$

99

 

$

-

 

$

-

 

$

-

 

$

-

 

$

99

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructured and subsequently defaulted

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

Other Real Estate Owned

Other real estate owned totaled $3.2 million and $3.2 million at March 31, 2015 and December 31, 2014, respectively.

 

Note 5 – Goodwill and Other Intangible Assets

The gross carrying amounts and accumulated amortization of intangible assets and goodwill are presented at the dates indicated in the following table:

 

20


 

 

 

 

March 31, 2015

 

Weighted

 

December 31, 2014

 

Weighted

 

 

 

Gross

 

 

 

 

Net

 

Average

 

Gross

 

 

 

 

Net

 

Average

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Remaining

 

Carrying

 

Accumulated

 

Carrying

 

Remaining

(Dollars in thousands)

 

Amount

 

Amortization

 

Amount

 

Life

 

Amount

 

Amortization

 

Amount

 

Life

Amortizing intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other identifiable intangibles

 

$

8,623

 

$

(8,220)

 

$

403

 

 

1.6 years

 

$

8,623

 

$

(8,113)

 

$

510

 

 

1.7 years

 

Total amortizing intangible assets

 

$

8,623

 

$

(8,220)

 

$

403

 

 

 

 

$

8,623

 

$

(8,113)

 

$

510

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

84,171

 

 

 

 

$

84,171

 

 

 

 

$

84,171

 

 

 

 

$

84,171

 

 

 

The following table presents the estimated future amortization expense for amortizing intangible assets within the years ending December 31:

(In thousands)

 

Amount

2015

 

$

265

2016

 

 

94

2017

 

 

16

2018

 

 

16

Thereafter

 

 

12

 

Total amortizing intangible assets

 

$

403

         

 

Note 6 – Deposits

The following table presents the composition of deposits at the dates indicated:

(In thousands)

 

March 31, 2015

 

December 31, 2014

Noninterest-bearing deposits

 

$

1,017,566

 

$

993,737

Interest-bearing deposits:

 

 

 

 

 

 

 

Demand

 

 

527,801

 

 

534,605

 

Money market savings

 

 

836,548

 

 

828,494

 

Regular savings

 

 

277,230

 

 

264,751

 

Time deposits of less than $100,000

 

 

241,084

 

 

239,857

 

Time deposits of $100,000 or more

 

 

209,663

 

 

205,065

 

 

Total interest-bearing deposits

 

 

2,092,326

 

 

2,072,772

 

 

 

Total deposits

 

$

3,109,892

 

$

3,066,509

                   

 

Note 7 – Stockholders’ Equity

The Company re-approved a stock repurchase program in August 2013 that permits the repurchase of up to 5% of the Company’s outstanding shares of common stock or approximately 1,260,000 shares.  Repurchases, which will be conducted through open market purchases or privately negotiated transactions, will be made depending on market conditions and other factors.  During the first quarter of 2015, the Company repurchased 351,369 shares at an average cost of $25.72 per share or a total of $9.0 million. 

 

Note 8 – Share Based Compensation

At March 31, 2015, the Company had one share based compensation plans in existence, the 2005 Omnibus Stock Plan, which is described in the following paragraph. 

 

The Company’s 2005 Omnibus Stock Plan (“Omnibus Plan”) provides for the granting of non-qualifying stock options to the Company’s directors, and incentive and non-qualifying stock options, stock appreciation rights and restricted stock grants to selected key employees on a periodic basis at the discretion of the board.  The Omnibus Plan authorizes the issuance of up to 1,800,000 shares of common stock of which 988,673 are available for issuance at March 31, 2015, has a term of ten years, and is administered by a committee of at least three directors appointed by the board of directors.  Options granted under the plan have an exercise price which may not be less than 100% of the fair market value of the common stock on the date of the grant and must be exercised within seven to ten years from the date of grant.  The exercise price of stock options must be paid for in full in cash or shares of common stock, or a combination of both.  The board committee has the discretion when making a grant of stock options to impose restrictions on the shares to be purchased upon the exercise of such options.    The Company generally issues authorized but previously unissued shares to satisfy option exercises.

21


 

 

The fair values of all of the options granted for the periods indicated have been estimated using a binomial option-pricing model with the weighted-average assumptions for the periods shown are presented in the following table:

 

 

 

Three Months Ended March 31,

 

 

2015

 

2014

Dividend yield

 

3.40

%

 

3.04

%

Weighted average expected volatility

 

42.98

%

 

46.78

%

Weighted average risk-free interest rate

 

1.42

%

 

1.56

%

Weighted average expected lives (in years)

 

5.42

 

 

5.08

 

Weighted average grant-date fair value

 

$7.63

 

 

$8.05

 

 

The dividend yield is based on estimated future dividend yields.  The risk-free rate for periods within the contractual term of the share option is based on the U.S. Treasury yield curve in effect at the time of the grant.  Expected volatilities are generally based on historical volatilities.  The expected term of share options granted is generally derived from historical experience.

 

Compensation expense is recognized on a straight-line basis over the vesting period of the respective stock option or restricted stock grant. The Company recognized compensation expense of $0.4 million and $0.4 million for the three months ended March 31, 2015 and 2014, respectively, related to the awards of stock options and restricted stock grants.  The intrinsic value of stock options exercised in the three months ended March 31, 2015 and 2014 was $0.1 million and $0.1 million, respectively.  The total of unrecognized compensation cost related to stock options was approximately $0.3 million as of March 31, 2015.  That cost is expected to be recognized over a weighted average period of approximately 2.4 years.  The total of unrecognized compensation cost related to restricted stock was approximately $5.3 million as of March 31, 2015.  That cost is expected to be recognized over a weighted average period of approximately 3.7 years.  The fair value of the options vested during the three months ended March 31, 2015 and 2014, was $0.1 million and $0.1 million, respectively.

 

In the first quarter of 2015, 21,245 stock options were granted, subject to a three year vesting schedule with one third of the options vesting on April 1st of each year.  Additionally, 79,860 shares of restricted stock were granted, subject to a five year vesting schedule with one fifth of the shares vesting on April 1st of each year.

 

A summary of share option activity for the period indicated is reflected in the following table:

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Number

 

Weighted

 

Average

 

Aggregate

 

 

 

of

 

Average

 

Contractual

 

Intrinsic

 

 

 

Common

 

Exercise

 

Remaining

 

Value

 

 

 

Shares

 

Share Price

 

Life(Years)

 

(in thousands)

Balance at January 1, 2015

 

224,381

 

$

20.88

 

 

 

$

1,300

Granted

 

21,245

 

$

26.20

 

 

 

 

 

Exercised

 

(5,752)

 

$

12.81

 

 

 

$

76

Forfeited or expired

 

(71,721)

 

$

27.86

 

 

 

 

 

Balance at March 31, 2015

 

168,153

 

$

18.85

 

3.7

 

$

1,241

 

 

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2015

 

113,747

 

$

16.26

 

2.5

 

$

1,134

 

 

 

 

 

 

 

 

 

 

 

Weighted average fair value of options

 

 

 

 

 

 

 

 

 

 

 

granted during the year

 

 

 

$

7.63

 

 

 

 

 

 

A summary of the activity for the Company’s restricted stock for the period indicated is presented in the following table:

22


 

 

 

Number

 

Weighted

 

 

of

 

Average

 

 

Common

 

Grant-Date

(In dollars, except share data):

 

Shares

 

Fair Value

Restricted stock  at January 1, 2015

 

226,871

 

$

21.07

Granted

 

79,860

 

$

26.20

Vested

 

(42,815)

 

$

17.63

Forfeited

 

(691)

 

$

20.88

Restricted stock at March 31, 2015

 

263,225

 

$

23.19

 

Note 9 – Pension, Profit Sharing, and Other Employee Benefit Plans

Defined Benefit Pension Plan

The Company has a qualified, noncontributory, defined benefit pension plan (the “Plan”) covering substantially all employees. Benefits after January 1, 2005, are based on the benefit earned as of December 31, 2004, plus benefits earned in future years of service based on the employee’s compensation during each such year. All benefit accruals for employees were frozen as of December 31, 2007 based on past service and thus salary increases and additional years of service after such date  no longer affect the defined benefit provided by the plan although additional vesting may continue to occur.

 

The Company's funding policy is to contribute amounts to the plan sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended. In addition, the Company contributes additional amounts as it deems appropriate based on benefits attributed to service prior to the date of the plan freeze. The Plan invests primarily in a diversified portfolio of managed fixed income and equity funds.

 

The components of net periodic benefit cost for the periods indicated are presented in the following table:

 

 

 

 

Three Months Ended March 31,

(In thousands)

 

2015

 

2014

Interest cost on projected benefit obligation

 

$

410

 

$

391

Expected return on plan assets

 

 

(406)

 

 

(494)

Recognized net actuarial loss

 

 

292

 

 

48

 

Net periodic benefit cost

 

$

296

 

$

(55)

 

 

 

 

 

 

 

 

 

Contributions

The decision as to whether or not to make a plan contribution and the amount of any such contribution is dependent on a number of factors. Such factors include the investment performance of the plan assets in the current economy and, since the plan is currently frozen, the remaining investment horizon of the plan.  Given these uncertainties, management continues to monitor the funding level of the pension plan and may make contributions as necessary during 2015.

 

Note 10 – Net Income per Common Share

The calculation of net income per common share for the periods indicated is presented in the following table:

 

23


 

 

 

 

 

Three Months Ended March 31,

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

 

2015

 

2014

Net income

 

$

11,225

 

$

10,928

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

Basic weighted average EPS shares

 

 

24,928

 

 

24,999

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

$

0.45

 

$

0.44

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

Basic weighted average EPS shares

 

 

24,928

 

 

24,999

Dilutive common stock equivalents

 

 

121

 

 

125

 

Dilutive EPS shares

 

 

25,049

 

 

25,124

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per share

 

$

0.45

 

$

0.43

 

 

 

 

 

 

 

 

 

Anti-dilutive shares

 

 

9

 

 

47

 

NOTE 11 – OTHER COMPREHENSIVE INCOME

Comprehensive income is defined as net income plus transactions and other occurrences that are the result of non-owner changes in equity.  For condensed financial statements presented for the Company, non-equity changes are comprised of unrealized gains or losses on available-for-sale debt securities and any minimum pension liability adjustments.  These do not have an impact on the Company’s net income.  The following table presents the activity in net accumulated other comprehensive income (loss) and the components of the activity for the periods indicated:

 

 

 

 

Unrealized Gains

 

 

 

 

 

 

 

 

 

(Losses) on

 

 

 

 

 

 

 

 

 

Investments

 

Defined Benefit

 

 

 

(In thousands)

 

Available-for-Sale

 

Pension Plan

 

Total

Balance at January 1, 2015

 

$

8,078

 

$

(8,901)

 

$

(823)

 

Other comprehensive income before reclassification, net of tax

 

 

2,793

 

 

-

 

 

2,793

 

Reclassifications from accumulated other comprehensive income, net of tax

 

 

-

 

 

176

 

 

176

Current period change in other comprehensive income, net of tax

 

 

2,793

 

 

176

 

 

2,969

Balance at March 31, 2015

 

$

10,871

 

$

(8,725)

 

$

2,146

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gains

 

 

 

 

 

 

 

 

 

(Losses) on

 

 

 

 

 

 

 

 

 

Investments

 

Defined Benefit

 

 

 

(In thousands)

 

Available-for-Sale

 

Pension Plan

 

Total

Balance at January 1, 2014

 

$

358

 

$

(3,328)

 

$

(2,970)

 

Other comprehensive income before reclassification, net of tax

 

 

4,309

 

 

-

 

 

4,309

 

Reclassifications from accumulated other comprehensive income, net of tax

 

 

-

 

 

11

 

 

11

Current period change in other comprehensive income, net of tax

 

 

4,309

 

 

11

 

 

4,320

Balance at March 31, 2014

 

$

4,667

 

$

(3,317)

 

$

1,350

 

 

 

 

 

 

 

 

 

 

 

 

The following table provides the information on the reclassification adjustments out of accumulated other comprehensive income for the periods indicated:

 

24


 

 

 

 

 

 

For the three months ended March 31,

(In thousands)

 

2015

2014

Unrealized gains/(losses) on investments available-for-sale

 

 

 

 

 

 

 

Affected line item in the Statements of Income:

 

 

 

 

 

 

 

Investment securities gains

 

$

-

 

$

-

 

Income before taxes

 

 

-

 

 

-

 

Tax expense

 

 

-

 

 

-

 

Net income

 

$

-

 

$

-

 

 

 

 

 

 

 

 

 

 

Amortization of defined benefit pension plan items

 

 

 

 

 

 

 

Affected line item in the Statements of Income:

 

 

 

 

 

 

 

 

Recognized actuarial loss (1)

 

$

292

 

$

48

 

 

 

Income before taxes

 

 

292

 

 

48

 

 

 

Tax expense

 

 

116

 

 

37

 

 

 

Net income

 

$

176

 

$

11

(1)  This amount is included in the computation of net periodic benefit cost, see Note 9

 

Note 12 – Financial Instruments with Off-balance Sheet Risk and Derivatives

The Company has entered into interest rate swaps (“swaps”) to facilitate customer transactions and meet their financing needs. These swaps qualify as derivatives, but are not designated as hedging instruments. Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty or customer owes the Company, and results in credit risk to the Company. When the fair value of a derivative instrument contract is negative, the Company owes the customer or counterparty and therefore, has no credit risk.  The notional value of commercial loan swaps outstanding was $20.6 million with a fair value of $1.6 million as of March 31, 2015 compared to $20.9 million with a fair value of $1.5 million as of December 31, 2014.  The offsetting nature of the swaps results in a neutral effect on the Company’s operations.  Fair values of the swaps are carried as both gross assets and gross liabilities in the condensed consolidated statements of condition.  The associated net gains and losses on the swaps are recorded in other non-interest income.

 

Note 13 – Litigation

The Company and its subsidiaries are subject in the ordinary course of business to various pending or threatened legal proceedings in which claims for monetary damages are asserted.  During 2014, the Company accrued $6.5 million for litigation expenses as a result of an adverse jury verdict rendered in the second quarter of 2014 associated with the actions of a former employee of CommerceFirst Bank, which was acquired in 2012.  The Company is currently in the process of appealing the decision.  As a result of the appeal process, an additional $0.2 million in legal expenses have been accrued in the first quarter of 2015.

 

After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of  any other legal matters will have a material adverse effect on the Company's financial condition, operating results or liquidity.

 

Note 14 – Fair Value

Generally accepted accounting principles provide entities the option to measure eligible financial assets, financial liabilities and commitments at fair value (i.e. the fair value option), on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards.  The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability or upon entering into a commitment.  Subsequent changes in fair value must be recorded in earnings.  The Company applies the fair value option on residential mortgage loans held for sale.  The fair value option on residential mortgage loans allows the recognition of gains on sale of mortgage loans to more accurately reflect the timing and economics of the transaction.

  

The standard for fair value measurement establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy are described below.

 

25


 

Basis of Fair Value Measurement:

Level 1- Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2- Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3- Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).  Changes to interest rates may result in changes in the cash flows due to prepayments or extinguishments.  Accordingly, this could result in higher or lower measurements of the fair values.

 

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. 

 

Assets and Liabilities

Mortgage loans held for sale

Mortgage loans held for sale are valued based on quotations from the secondary market for similar instruments and are classified as Level 2 of the fair value hierarchy. 

 

Investments available-for-sale

U.S. government agencies, mortgage-backed securities and corporate debt

Valuations are based on active market data and use of evaluated broker pricing models that vary based by asset class and includes available trade, bid, and other market information.  Generally, the methodology includes broker quotes, proprietary models, descriptive terms and conditions databases coupled with extensive quality control programs.  Multiple quality control evaluation processes review available market, credit and deal level information to support the evaluation of the security.  If there is a lack of objectively verifiable information available to support the valuation, the evaluation of the security is discontinued.  Additionally, proprietary models and pricing systems, mathematical tools, actual transacted prices, integration of market developments and experienced evaluators are used to determine the value of a security based on a hierarchy of market information regarding a security or securities with similar characteristics.  The Company does not adjust the quoted price for such securities.  Such instruments are generally classified within Level 2 of the fair value hierarchy.

 

State and municipal securities

Proprietary valuation matrices are used for valuing all tax-exempt municipals that can incorporate changes in the municipal market as they occur.  Market evaluation models include the ability to value bank qualified municipals and general market municipals that can be broken down further according to insurer, credit support, state of issuance and rating to incorporate additional spreads and municipal curves.  Taxable municipals are valued using a third party model that incorporates a methodology that captures the trading nuances associated with these bonds.  Such instruments are generally classified within Level 2 of the fair value hierarchy.

 

Trust preferred securities

In active markets, these types of instruments are valued based on quoted market prices that are readily accessible at the measurement date and are classified within Level 1 of the fair value hierarchy. Positions that are not traded in active markets or are subject to transfer restrictions are valued or adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence.  In the absence of such evidence, management uses a process that employs certain assumptions to determine the present value. For further information, refer to Note 2 – Investments. Positions that are not traded in active markets or are subject to transfer restrictions are classified within Level 3 of the fair value hierarchy. 

 

Interest rate swap agreements

Interest rate swap agreements are measured by alternative pricing sources with reasonable levels of price transparency in markets that are not active.  Based on the complex nature of interest rate swap agreements, the markets these instruments trade in are not as efficient and are less liquid than that of the more mature Level 1 markets.  These markets do however have comparable, observable inputs in which an alternative pricing source values these assets in order to arrive at a fair market value.  These characteristics classify interest rate swap agreements as Level 2.

26


 

Assets Measured at Fair Value on a Recurring Basis

The following tables set forth the Company’s financial assets and liabilities at the dates indicated that were accounted for or disclosed at fair value.  Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:

 

 

 

 

 

March 31, 2015

 

 

 

 

Quoted Prices in

 

 

 

 

Significant

 

 

 

 

 

 

 

Active Markets for

 

Significant Other

 

Unobservable

 

 

 

 

 

 

 

Identical Assets

 

Observable Inputs

 

  Inputs

 

 

 

(In thousands)

 

   (Level 1)

 

 (Level 2)

 

(Level 3)

 

Total

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage loans held for sale

 

$

-

 

$

13,899

 

$

-

 

$

13,899

 

Investments available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

 

-

 

 

143,895

 

 

-

 

 

143,895

 

 

State and municipal

 

 

-

 

 

165,786

 

 

-

 

 

165,786

 

 

Mortgage-backed

 

 

-

 

 

346,303

 

 

-

 

 

346,303

 

 

Trust preferred

 

 

-

 

 

-

 

 

1,002

 

 

1,002

 

 

Marketable equity securities

 

 

-

 

 

723

 

 

-

 

 

723

 

Interest rate swap agreements

 

 

-

 

 

1,561

 

 

-

 

 

1,561

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

$

-

 

$

(1,561)

 

$

-

 

$

(1,561)

 

 

 

 

 

December 31, 2014

 

 

 

 

Quoted Prices in

 

 

 

 

Significant

 

 

 

 

 

 

 

Active Markets for

 

Significant Other

 

Unobservable

 

 

 

 

 

 

 

Identical Assets

 

Observable Inputs

 

  Inputs

 

 

 

(In thousands)

 

   (Level 1)

 

 (Level 2)

 

(Level 3)

 

Total

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage loans held for sale

 

$

-

 

$

10,512

 

$

-

 

$

10,512

 

Investments available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

 

-

 

 

141,679

 

 

-

 

 

141,679

 

 

State and municipal

 

 

-

 

 

167,052

 

 

-

 

 

167,052

 

 

Mortgage-backed

 

 

-

 

 

361,519

 

 

-

 

 

361,519

 

 

Trust preferred

 

 

-

 

 

-

 

 

1,236

 

 

1,236

 

 

Marketable equity securities

 

 

-

 

 

723

 

 

-

 

 

723

 

Interest rate swap agreements

 

 

-

 

 

1,501

 

 

-

 

 

1,501

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

$

-

 

$

(1,501)

 

$

-

 

$

(1,501)

27


 

The following table provides unrealized losses included in assets measured in the Condensed Consolidated Statements of Condition at fair value on a recurring basis for the period indicated:

 

 

 

 

Significant

 

 

 

 

Unobservable

 

 

 

 

Inputs

(In thousands)

 

(Level 3)

Investments available-for-sale:

 

 

 

 

Balance at January 1, 2015

 

$

1,236

 

 

Principal redemption

 

 

(234)

 

Balance at March 31, 2015

 

$

1,002

 

Assets Measured at Fair Value on a Nonrecurring Basis

The following table sets forth the Company’s financial assets subject to fair value adjustments (impairment) on a nonrecurring basis at the date indicated that are valued at the lower of cost or market.  Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:

 

 

 

 

March 31, 2015

 

 

 

Quoted Prices in 

 

Significant

 

 

 

 

 

 

 

 

 

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

 

 

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

 

 

 

 

 

(In thousands)

 

Assets  (Level 1)

 

Inputs (Level 2)

 

Inputs (Level 3)

 

Total

 

Total Losses

Impaired loans

 

$

-

 

$

-

 

$

8,005

 

$

8,005

 

$

15,606

Other real estate owned

 

 

-

 

 

-

 

 

3,227

 

 

3,227

 

 

(247)

    

Total

 

$

-

 

$

-

 

$

11,232

 

$

11,232

 

$

15,359

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

Quoted Prices in 

 

Significant

 

 

 

 

 

 

 

 

 

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

 

 

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

 

 

 

 

 

(In thousands)

 

Assets  (Level 1)

 

Inputs (Level 2)

 

Inputs (Level 3)

 

Total

 

Total Losses

Impaired loans

 

$

-

 

$

-

 

$

7,819

 

$

7,819

 

$

13,893

Other real estate owned

 

 

-

 

 

-

 

 

3,195

 

 

3,195

 

 

(247)

    

Total

 

$

-

 

$

-

 

$

11,014

 

$

11,014

 

$

13,646

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At March 31, 2015, impaired loans totaling $31.2 million were written down to fair value of $28.5 million as a result of specific loan loss allowances of $2.7 million associated with the impaired loans which was included in the allowance for loan losses.  Impaired loans totaling $29.4 million were written down to fair value of $26.5 million at December 31, 2014 as a result of specific loan loss allowances of $2.9 million associated with the impaired loans.

 

Loan impairment is measured using the present value of expected cash flows, the loan’s observable market price or the fair value of the collateral (less selling costs) if the loans are collateral dependent.  Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable.  The value of business equipment, inventory and accounts receivable collateral is based on net book value on the business’ financial statements and, if necessary, discounted based on management’s review and analysis. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business.  Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the factors identified above. Valuation techniques are consistent with those techniques applied in prior periods.

28


 

Other real estate owned (“OREO”) is adjusted to fair value upon transfer of the loans to OREO.  Subsequently, OREO is carried at the lower of carrying value or fair value.  The estimated fair value for other real estate owned included in Level 3 is determined by independent market based appraisals and other available market information, less cost to sell, that may be reduced further based on market expectations or an executed sales agreement.  If the fair value of the collateral deteriorates subsequent to initial recognition, the Company records the OREO as a non-recurring Level 3 adjustment.  Valuation techniques are consistent with those techniques applied in prior periods.

 

Fair Value of Financial Instruments

The Company discloses fair value information about financial instruments for which it is practicable to estimate the value, whether or not such financial instruments are recognized on the balance sheet.  Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by a quoted market price, if one exists.

 

Quoted market prices, where available, are shown as estimates of fair market values. Because no quoted market prices are available for a significant portion of the Company's financial instruments, the fair value of such instruments has been derived based on the amount and timing of future cash flows and estimated discount rates.

 

Present value techniques used in estimating the fair value of many of the Company's financial instruments are significantly affected by the assumptions used. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate cash settlement of the instrument. Additionally, the accompanying estimates of fair values are only representative of the fair values of the individual financial assets and liabilities, and should not be considered an indication of the fair value of the Company.

29


 

The carrying amounts and fair values of the Company’s financial instruments at the dates indicated are presented in the following table:

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

 

March 31, 2015

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

Active Markets for

 

Significant Other

 

Significant

 

 

Carrying

 

Fair

 

Identical Assets

 

Observable Inputs

 

Unobservable Inputs

(In thousands)

 

Amount

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments held-to-maturity and other equity securities

 

$

254,856

 

$

258,986

 

$

-

 

$

258,986

 

$

-

Loans, net of allowance

 

 

3,127,231

 

 

3,155,845

 

 

-

 

 

-

 

 

3,155,845

Other assets

 

 

89,011

 

 

89,011

 

 

-

 

 

89,011

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time Deposits

 

$

450,747

 

$

451,591

 

$

-

 

$

451,591

 

$

-

Securities sold under retail repurchase agreements and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

federal funds purchased

 

 

101,640

 

 

101,640

 

 

-

 

 

101,640

 

 

-

Advances from FHLB

 

 

590,000

 

 

616,141

 

 

-

 

 

616,141

 

 

-

Subordinated debentures

 

 

35,000

 

 

13,721

 

 

-

 

 

-

 

 

13,721

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

 

December 31, 2014

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

Active Markets for

 

Significant Other

 

Significant

 

 

Carrying

 

Fair

 

Identical Assets

 

Observable Inputs

 

Unobservable Inputs

(In thousands)

 

Amount

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments held-to-maturity and other equity securities

 

$

261,410

 

$

263,697

 

$

-

 

$

263,697

 

$

-

Loans, net of allowance

 

 

3,089,590

 

 

3,118,635

 

 

-

 

 

-

 

 

3,118,635

Other assets

 

 

88,657

 

 

88,657

 

 

-

 

 

88,657

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time Deposits

 

$

444,922

 

$

444,729

 

$

-

 

$

444,729

 

$

-

Securities sold under retail repurchase agreements and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

federal funds purchased

 

 

74,432

 

 

74,432

 

 

-

 

 

74,432

 

 

-

Advances from FHLB

 

 

655,000

 

 

679,163

 

 

-

 

 

679,163

 

 

-

Subordinated debentures

 

 

35,000

 

 

13,276

 

 

-

 

 

-

 

 

13,276

 

The following methods and assumptions were used to estimate the fair value of each category of financial instruments for which it is practicable to estimate that value:

 

Cash and Temporary Investments:  The carrying amounts of cash and cash equivalents approximate their fair value and have been excluded from the table above.

 

Investments:  The fair value of marketable securities is based on quoted market prices, prices quoted for similar instruments, and prices obtained from independent pricing services.

 

Loans: For certain categories of loans, such as mortgage, installment and commercial loans, the fair value is estimated by discounting the expected future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and similar remaining maturities.  Expected cash flows were projected based on contractual cash flows, adjusted for estimated prepayments.

 

Accrued interest receivable:  The carrying value of accrued interest receivable approximates fair value due to the short-term duration and has been excluded from the table above.

 

Other assets:  The investment in bank-owned life insurance represents the cash surrender value of the policies at March 31, 2015 and December 31, 2014 as determined by the each insurance carrier.  The carrying value of accrued interest receivable approximates fair values due to the short-term duration.

 

30


 

Deposits:  The fair value of demand, money market savings and regular savings deposits, which have no stated maturity, were considered equal to their carrying amount, representing the amount payable on demand. While management believes that the Bank’s core deposit relationships provide a relatively stable, low-cost funding source that has a substantial intangible value separate from the value of the deposit balances, these estimated fair values do not include the intangible value of core deposit relationships, which comprise a significant portion of the Bank’s deposit base.

 

Short-term borrowings:  The carrying values of short-term borrowings, including overnight, securities sold under agreements to repurchase and federal funds purchased approximates the fair values due to the short maturities of those instruments.

 

Long-term borrowings: The fair value of the Federal Home Loan Bank of Atlanta (“FHLB”) advances and subordinated debentures was estimated by computing the discounted value of contractual cash flows payable at current interest rates for obligations with similar remaining terms.  The Company's credit risk is not material to calculation of fair value because the FHLB borrowings are collateralized. The Company classifies advances from the Federal Home Loan Bank of Atlanta within Level 2 of the fair value hierarchy since the fair value of such borrowings is based on rates currently available for borrowings with similar terms and remaining maturities. Subordinated debentures are classified as Level 3 in the fair value hierarchy due to the lack of market activity of such instruments.

 

Accrued interest payable: The carrying value of accrued interest payable approximates fair value due to the short-term duration and has been excluded from the previous table.

 

Note 15 - Segment Reporting

Currently, the Company conducts business in three operating segments—Community Banking, Insurance and Investment Management.  Each of the operating segments is a strategic business unit that offers different products and services.  The Insurance and Investment Management segments were businesses that were acquired in separate transactions where management of acquisition was retained.  The accounting policies of the segments are the same as those of the Company.  However, the segment data reflect inter-segment transactions and balances.

 

The Community Banking segment is conducted through Sandy Spring Bank and involves delivering a broad range of financial products and services, including various loan and deposit products to both individuals and businesses.  Parent company income is included in the Community Banking segment, as the majority of effort of these functions is related to this segment.  Major revenue sources include net interest income, gains on sales of mortgage loans, trust income, fees on sales of investment products and service charges on deposit accounts.  Expenses include personnel, occupancy, marketing, equipment and other expenses.  Non-cash charges associated with amortization of intangibles related to the acquired entities amounted to $0.1 million and $0.3 million in for the three months ended March 31, 2015 and 2014, respectively.

 

The Insurance segment is conducted through Sandy Spring Insurance Corporation, a subsidiary of the Bank, and offers annuities as an alternative to traditional deposit accounts.  Sandy Spring Insurance Corporation operates Sandy Spring Insurance, a general insurance agency located in Annapolis, Maryland, and Neff and Associates, located in Ocean City, Maryland.  Major sources of revenue are insurance commissions from commercial lines, personal lines, and medical liability lines.  Expenses include personnel and support charges.  Non-cash charges associated with amortization of intangibles related to the acquired entities was not significant for the three ended March 31, 2015 and 2014, respectively. 

 

The Investment Management segment is conducted through West Financial Services, Inc., a subsidiary of the Bank.  This asset management and financial planning firm, located in McLean, Virginia, provides comprehensive investment management and financial planning to individuals, families, small businesses and associations including cash flow analysis, investment review, tax planning, retirement planning, insurance analysis and estate planning.  West Financial currently has approximately $1.1 billion in assets under management.  Major revenue sources include non-interest income earned on the above services.  Expenses include personnel and support charges.  Non-cash charges associated with amortization of intangibles related to the acquired entities was not significant for the three ended March 31, 2015 and 2014, respectively.

31


 

Information for the operating segments and reconciliation of the information to the condensed consolidated financial statements for the periods indicated is presented in the following tables:

 

 

 

Three Months Ended March 31, 2015

 

 

Community

 

 

 

 

Investment

 

Inter-Segment

 

 

 

(In thousands)

 

Banking

 

Insurance

 

Mgmt.

 

Elimination

 

Total

Interest income

 

$

38,071

 

$

1

 

$

1

 

$

(1)

 

$

38,072

Interest expense

 

 

4,700

 

 

-

 

 

-

 

 

(1)

 

 

4,699

Provision for loan and lease losses

 

 

597

 

 

-

 

 

-

 

 

-

 

 

597

Noninterest income

 

 

9,836

 

 

1,694

 

 

1,810

 

 

(181)

 

 

13,159

Noninterest expenses

 

 

27,017

 

 

1,383

 

 

1,025

 

 

(181)

 

 

29,244

Income before income taxes

 

 

15,593

 

 

312

 

 

786

 

 

-

 

 

16,691

Income tax expense

 

 

5,034

 

 

126

 

 

306

 

 

-

 

 

5,466

Net income

 

$

10,559

 

$

186

 

$

480

 

$

-

 

$

11,225

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

$

4,403,060

 

$

5,948

 

$

13,763

 

$

(21,391)

 

$

4,401,380

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2014

 

 

Community

 

 

 

 

Investment

 

Inter-Segment

 

 

 

(In thousands)

 

Banking

 

Insurance

 

Mgmt.

 

Elimination

 

Total

Interest income

 

$

36,250

 

$

2

 

$

4

 

$

(6)

 

$

36,250

Interest expense

 

 

4,664

 

 

-

 

 

-

 

 

(6)

 

 

4,658

Provision (credit) for loan and lease losses

 

 

(982)

 

 

-

 

 

-

 

 

-

 

 

(982)

Non-interest income

 

 

8,015

 

 

1,731

 

 

1,678

 

 

(175)

 

 

11,249

Non-interest expenses

 

 

25,612

 

 

1,192

 

 

920

 

 

(175)

 

 

27,549

Income before income taxes

 

 

14,971

 

 

541

 

 

762

 

 

-

 

 

16,274

Income tax expense

 

 

4,831

 

 

218

 

 

297

 

 

-

 

 

5,346

Net income

 

$

10,140

 

$

323

 

$

465

 

$

-

 

$

10,928

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

$

4,206,353

 

$

14,461

 

$

19,928

 

$

(71,744)

 

$

4,168,998

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32


 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The Company

Sandy Spring Bancorp, Inc. (the “Company") is the bank holding company for Sandy Spring Bank (the "Bank"). The Company is registered as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended (the "Holding Company Act"). As such, the Company is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve"). The Company began operating in 1988. The Bank traces its origin to 1868, making it among the oldest institutions in the region. The Bank is independent, community oriented, and conducts a full-service commercial banking business through 44 community offices located in Central Maryland and Northern Virginia. The Bank is a state chartered bank subject to supervision and regulation by the Federal Reserve and the State of Maryland. The Bank's deposit accounts are insured by the Deposit Insurance Fund administered by the Federal Deposit Insurance Corporation (the "FDIC") to the maximum permitted by law. The Bank is a member of the Federal Reserve System and is an Equal Housing Lender. The Company, the Bank, and its other subsidiaries are Affirmative Action/Equal Opportunity Employers.

 

With $4.4 billion in assets, the Company is a community banking organization that focuses its lending and other services on businesses and consumers in the local market area. Through its subsidiaries, Sandy Spring Insurance Corporation and West Financial Services, Inc., Sandy Spring Bank  offers a comprehensive menu of insurance and investment management services.

 

Overview

Net income for the Company for the first quarter of 2015 totaled $11.2 million ($0.45 per diluted share) as compared to net income of $10.9 million ($0.43 per diluted share) for the first quarter of 2014.

These results reflect the following events:

 

·         Average total loans for the first quarter of 2015 increased 12% compared to the first quarter of 2014 due primarily to organic growth which was 10% or better in each of the three major portfolio segments. Overall, the entire portfolio grew $334 million over the prior year period.

·         Combined noninterest-bearing and interest-bearing transaction account balances increased 13% to $1.5 billion at March 31, 2015 as compared to $1.4 billion at March 31,2014.

·         The provision for loan and lease losses was a charge of $0.6 million for the first quarter of 2015 as compared to a credit of $1.0 million for the first quarter of 2014 and a charge of $0.9 million for the fourth quarter of 2014. The increase in the provision for the first quarter of 2015 compared to the first quarter of 2014 was driven primarily by loan growth over the last twelve months together with an increase in non-performing loans and loan charge-offs during the quarter.

·         The net interest margin was 3.44% in the first quarter of 2015, compared to 3.47% for the first quarter of 2014 and 3.44% for the fourth quarter of 2014. The decrease compared to the prior year’s quarter was the result of declining loan yields, primarily in the commercial loan portfolio.

·         Non-interest income increased $1.9 million or 17% for the first quarter of 2015 compared to the first quarter of 2014 due largely to increases in wealth management income and income from mortgage banking activities.

·         During the first quarter of 2015, the Company repurchased 351,369 shares at an average price of $25.72 per share as part of its existing share repurchase program.

 

In the first quarter of 2015, the Mid-Atlantic region in which the Company operates continued to show limited economic improvement. While the national economy improved throughout the year, international economic concerns together with rapidly declining oil prices impeded both the regional and national economic outlook. Positive trends in housing, consumer spending and unemployment have been offset by concerns over a lack of wage growth and the strength of the dollar compared to other major currencies. These factors have caused uncertainty on the part of both large and small businesses and have thus restricted economic expansion. Slowing economic growth in China combined with growing recessionary conditions in Europe continue to be underlying volatility factors. Together with state and municipal budget challenges across the country, these factors have caused enough economic uncertainty, particularly among individual consumers and small and medium-sized businesses, to suppress confidence and thus constrain the pace of economic expansion and lending. Despite this challenging business environment, the Company has emphasized the fundamentals of community banking as it has maintained strong levels of liquidity and capital while overall credit quality has continued to improve.

 

Liquidity remained strong due to the borrowing lines with the Federal Home Loan Bank of Atlanta and the Federal Reserve and the size and composition of the investment portfolio.

33


 

 

The Company’s non-performing assets decreased to $39.2 million at March 31, 2015 from $40.3 million at March 31, 2014. This decrease was due primarily to loan pay-offs and a reduction in restructured loans as such loans have performed sufficiently to allow them to no longer be classified as non-performing. Non-performing assets represented 0.89% of total assets at March 31, 2015 compared to 0.97% at March 31, 2014.  The ratio of net charge-offs to average loans and leases was 0.12% for the first quarter of 2015, compared to (0.04%) for the prior year quarter.

 

Non-interest income increased 17% in the first quarter of 2015 compared to the first quarter of 2014. This increase was driven by a 10% increase in wealth management income due primarily to higher assets under management. Income from mortgage banking activities increased for the quarter due primarily to higher volumes of loan originations.

 

Non-interest expenses increased 6% in the first quarter of 2015 compared to the first quarter of 2014 due mainly to higher salaries and benefits, professional fees and other non-interest expenses.

 

Total assets at March 31, 2015 remained virtually level compared to December 31, 2014. Loan balances increased 1% compared to the prior year end due to growth in commercial loans while consumer and residential mortgage loans remained even with the prior year end. Customer funding sources, which include deposits plus other short-term borrowings from core customers, increased 2% compared to balances at December 31, 2014. The increase in customer funding sources was driven primarily by increases of 1% in noninterest-bearing and interest-bearing transaction accounts and 5% in regular savings accounts. Retail repurchase agreements also increased 37% as the Company increased its emphasis on the sale of such cash management services. Certificates of deposit and money market accounts remained relatively level compared to the balances at December 31, 2014.  The Company continued to manage its net interest margin, primarily by utilizing short-term FHLB borrowings during this extended period of historically low interest rates.  During the same period, stockholders’ equity remained level at $522 million as the effect of net income during the quarter was offset by the payment of dividends and repurchase of stock under the Company’s share repurchase program.

34


 

Sandy Spring Bancorp, Inc. and Subsidiaries

CONSOLIDATED AVERAGE BALANCES, YIELDS AND RATES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

  Annualized

 

 

 

 

 

 

 

 

  Annualized

 

 

 

 

Average

 

(1)

 

Average

 

 

Average

 

(1)

 

Average

 

 

(Dollars in thousands and tax-equivalent)

 

Balances

 

Interest

 

Yield/Rate

 

 

Balances

 

Interest

 

Yield/Rate

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage loans (2)

 

$

731,301

 

$

6,200

 

3.39

%

 

$

633,160

 

$

5,506

 

3.48

%

 

Residential construction loans

 

 

132,456

 

 

1,221

 

3.74

 

 

 

134,261

 

 

1,254

 

3.79

 

 

Commercial ADC loans

 

 

206,105

 

 

2,337

 

4.60

 

 

 

162,544

 

 

2,073

 

5.17

 

 

Commercial investor real estate loans

 

 

645,163

 

 

7,579

 

4.76

 

 

 

557,168

 

 

6,733

 

4.90

 

 

Commercial owner occupied real estate loans

 

 

611,722

 

 

7,165

 

4.99

 

 

 

584,155

 

 

7,067

 

5.08

 

 

Commercial business loans

 

 

383,111

 

 

4,212

 

4.38

 

 

 

349,734

 

 

4,037

 

4.64

 

 

Leasing

 

 

44

 

 

1

 

5.19

 

 

 

567

 

 

6

 

4.53

 

 

Consumer loans

 

 

425,434

 

 

3,500

 

3.36

 

 

 

377,822

 

 

3,117

 

3.37

 

 

  Total loans and leases (3)

 

 

3,135,336

 

 

32,215

 

4.19

 

 

 

2,799,411

 

 

29,793

 

4.34

 

 

Taxable securities

 

 

629,266

 

 

3,936

 

2.54

 

 

 

710,246

 

 

4,452

 

2.51

 

 

Tax-exempt securities (4)

 

 

296,417

 

 

3,170

 

4.34

 

 

 

302,455

 

 

3,267

 

4.32

 

 

Interest-bearing deposits with banks

 

 

36,155

 

 

22

 

0.25

 

 

 

32,925

 

 

20

 

0.25

 

 

Federal funds sold

 

 

474

 

 

-

 

0.22

 

 

 

476

 

 

-

 

0.22

 

 

  Total interest-earning assets

 

 

4,097,648

 

 

39,343

 

3.90

 

 

 

3,845,513

 

 

37,532

 

3.96

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less:  allowance for loan and lease losses

 

 

(37,444)

 

 

 

 

 

 

 

 

(39,393)

 

 

 

 

 

 

 

Cash and due from banks

 

 

46,430

 

 

 

 

 

 

 

 

45,553

 

 

 

 

 

 

 

Premises and equipment, net

 

 

50,658

 

 

 

 

 

 

 

 

45,879

 

 

 

 

 

 

 

Other assets

 

 

215,696

 

 

 

 

 

 

 

 

207,662

 

 

 

 

 

 

 

   Total assets

 

$

4,372,988

 

 

 

 

 

 

 

$

4,105,214

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

 

$

524,059

 

 

106

 

0.08

%

 

$

460,245

 

 

92

 

0.08

%

 

Regular savings deposits

 

 

270,198

 

 

34

 

0.05

 

 

 

249,185

 

 

48

 

0.08

 

 

Money market savings deposits

 

 

831,707

 

 

273

 

0.13

 

 

 

877,864

 

 

273

 

0.13

 

 

Time deposits

 

 

443,534

 

 

781

 

0.71

 

 

 

463,379

 

 

771

 

0.67

 

 

   Total interest-bearing deposits

 

 

2,069,498

 

 

1,194

 

0.23

 

 

 

2,050,673

 

 

1,184

 

0.23

 

 

Other borrowings

 

 

90,188

 

 

50

 

0.22

 

 

 

62,864

 

 

38

 

0.24

 

 

Advances from FHLB

 

 

622,889

 

 

3,236

 

2.11

 

 

 

600,922

 

 

3,218

 

2.17

 

 

Subordinated debentures

 

 

35,000

 

 

219

 

2.50

 

 

 

35,000

 

 

218

 

2.49

 

 

  Total interest-bearing liabilities

 

 

2,817,575

 

 

4,699

 

0.68

 

 

 

2,749,459

 

 

4,658

 

0.69

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

 

986,688

 

 

 

 

 

 

 

 

825,968

 

 

 

 

 

 

 

Other liabilities

 

 

47,379

 

 

 

 

 

 

 

 

25,936

 

 

 

 

 

 

 

Stockholders' equity

 

 

521,346

 

 

 

 

 

 

 

 

503,851

 

 

 

 

 

 

 

  Total liabilities and stockholders' equity

 

$

4,372,988

 

 

 

 

 

 

 

$

4,105,214

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income and spread

 

 

 

 

$

34,644

 

3.22

%

 

 

 

 

$

32,874

 

3.27

%

 

  Less: tax-equivalent adjustment

 

 

 

 

 

1,271

 

 

 

 

 

 

 

 

1,282

 

 

 

 

Net interest income

 

 

 

 

$

33,373

 

 

 

 

 

 

 

$

31,592

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income/earning assets

 

 

 

 

 

 

 

3.90

%

 

 

 

 

 

 

 

3.96

%

 

Interest expense/earning assets

 

 

 

 

 

 

 

0.46

 

 

 

 

 

 

 

 

0.49

 

 

  Net interest margin

 

 

 

 

 

 

 

3.44

%

 

 

 

 

 

 

 

3.47

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Tax-equivalent income has been adjusted using the combined marginal federal and state rate of 39.88% for 2015 and  2014. The annualized taxable-equivalent

       adjustments utilized in the above table to compute yields aggregated to $1.3 million and $1.3 million in 2015 and 2014, respectively.

(2) Includes residential mortgage loans held for sale. Home equity loans and lines are classified as consumer loans.

(3) Non-accrual loans are included in the average balances.

(4) Includes only investments that are exempt from federal taxes.

35


 

Results of Operations

For the Three Months Ended March 31, 2015 Compared to the Three Months Ended March 31, 2014

 

Net income for the Company for the first three months of 2015 totaled $11.2 million ($0.45 per diluted share) compared to net income of $10.9 million ($0.43 per diluted share) for the first three months of 2014.

 

Net Interest Income

The largest source of the Company’s operating revenue is net interest income, which is the difference between the interest earned on interest-earning assets and the interest paid on interest-bearing liabilities. For purposes of this discussion and analysis, the interest earned on tax-exempt investment securities has been adjusted to an amount comparable to interest subject to normal income taxes. The result is referred to as tax-equivalent interest income and tax-equivalent net interest income. The following discussion of net interest income should be considered in conjunction with the review of the information provided in the preceding table.

 

Net interest income for the first three months of 2015 was $33.4 million compared to $31.6 million for the first three months of 2014. On a tax-equivalent basis, net interest income for the first quarter of 2015 was $34.6 million compared to $32.9 million for the first quarter of 2014, an increase of 5%. The preceding table provides an analysis of net interest income performance that reflects a net interest margin that decreased to 3.44% for the first three months of 2015 compared to 3.47% for the first three months of 2014.  Average interest-earning assets increased by 7% while average interest-bearing liabilities increased 2% in the first quarter of 2015 compared to the first quarter of 2014.  Average noninterest-bearing deposits increased 19% in the first three months of 2015 while the percentage of average noninterest-bearing deposits to total deposits increased to 32% for the first three months of 2015 compared to 29% for the first three months of 2014.The decrease in the net interest margin was caused by the effect of lower rates on interest-earning assets that exceeded the benefit of lower rates on interest-bearing deposits and borrowings and the increase in noninterest-bearing deposits.

 

Effect of Volume and Rate Changes on Net Interest Income

The following table analyzes the reasons for the changes from year-to-year in the principal elements that comprise net interest income:

 

 

 

 

2015 vs. 2014

 

 

2014 vs. 2013

 

 

 

 

Increase

 

 

 

 

 

 

 

Increase

 

 

 

 

 

 

 

 

 

 

Or

 

Due to Change In Average:*

 

Or

 

Due to Change In Average:*

(Dollars in thousands and tax equivalent)

 

(Decrease)

 

Volume

 

Rate

 

(Decrease)

 

Volume

 

Rate

Interest income from earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and leases

 

$

2,422

 

$

3,469

 

$

(1,047)

 

$

(206)

 

$

2,300

 

$

(2,506)

 

Securities

 

 

(613)

 

 

(747)

 

 

134

 

 

147

 

 

(283)

 

 

430

 

Other earning assets

 

 

2

 

 

2

 

 

-

 

 

1

 

 

1

 

 

-

Total interest income

 

 

1,811

 

 

2,724

 

 

(913)

 

 

(58)

 

 

2,018

 

 

(2,076)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense on funding of earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

 

 

14

 

 

12

 

 

2

 

 

-

 

 

8

 

 

(8)

 

Regular savings deposits

 

 

(14)

 

 

4

 

 

(18)

 

 

-

 

 

3

 

 

(3)

 

Money market savings deposits

 

 

-

 

 

(9)

 

 

9

 

 

(138)

 

 

(7)

 

 

(131)

 

Time deposits

 

 

10

 

 

(36)

 

 

46

 

 

(133)

 

 

(84)

 

 

(49)

Total borrowings

 

 

31

 

 

235

 

 

(204)

 

 

(24)

 

 

717

 

 

(741)

 

Total interest expense

 

 

41

 

 

206

 

 

(165)

 

 

(295)

 

 

637

 

 

(932)

 

 

Net interest income

 

$

1,770

 

$

2,518

 

$

(748)

 

$

237

 

$

1,381

 

$

(1,144)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* Variances that are the combined effect of volume and rate, but cannot be separately identified,  are allocated to the volume and rate variances

 

based on their respective relative amounts.

36


 

Interest Income

The Company's total tax-equivalent interest income increased 5% for the first three months of 2015 compared to the prior year quarter. The previous table shows that, in 2015, the increase in average loans and leases more than offset  the decline in earning asset yields with respect to the loan portfolio.

 

The average balance of the loan portfolio, including residential mortgage loans held for sale, increased 12% for the first quarter of 2015 compared to the prior year period. This growth was primarily in the commercial investor real estate, commercial business, consumer and residential mortgage portfolios. These increases were driven by organic loan growth as the regional economy improved. The yield on average loans and leases decreased by 15 basis points due to the continued prevailing low interest rate environment as relatively higher rate loans were paid off and new loans were originated at comparatively lower rates. The decline in the portfolio yield was driven primarily by a decrease of 20 basis points in the yield on the commercial loan portfolio together with a decrease of 9 basis points in the yield in the residential mortgage portfolio.

 

The average yield on total investment securities increased 1 basis point while the average balance of the portfolio decreased 9% for the first three months of 2015 compared to the first three months of 2014. The increase in the yield on investments was due primarily to a decline in the relative size of the lower-yielding mortgage-backed securities portfolio and an increase in the relative size of the state and municipal portfolio as the size of the overall portfolio decreased to fund loan growth.

 

Interest Expense

Interest expense remained level in the first three months of 2015 compared to the first three months of 2014. The cost of interest-bearing deposits remained the same as the both the average balances and average rates paid were essentially unchanged while an increase in the average balances of Federal Home Loan Bank advances was largely offset by a 6 basis point decrease in the average rates paid. Average deposits increased 6% in the first three months of 2015 compared to the first three months of 2014. This increase was primarily due to increases of $225 million or 17% in average noninterest-bearing and interest-bearing checking accounts together with an increase of $21 million or 8% in regular savings accounts as clients kept funds in short-term instruments to preserve liquidity.  This growth was partially offset by a decrease in average certificates of deposit of $20 million or 4% in the first three months of 2015 compared to the prior year quarter. This decrease was primarily due to lower rates offered on maturing certificates compared to previously existing rates. Average balances of money market accounts decreased 5% in the first three months of 2015 compared to the first three months of 2014 as clients generally maintained liquidity.

 

Non-interest Income 

Non-interest income amounts and trends are presented in the following table for the years indicated:

 

 

 

 

 

Three Months Ended March 31,

 

2015/2014

2015/2014

 

(Dollars in thousands)

 

2015

 

2014

 

$ Change

 

% Change

 

 

Service charges on deposit accounts

 

$

1,882

 

$

1,972

 

$

(90)

 

(4.6)

 %  

 

Mortgage banking activities

 

 

1,178

 

 

316

 

 

862

 

272.8

 

 

Wealth management income

 

 

4,916

 

 

4,466

 

 

450

 

10.1

 

 

Insurance agency commissions

 

 

1,618

 

 

1,640

 

 

(22)

 

(1.3)

 

 

Income from bank owned life insurance

 

 

713

 

 

598

 

 

115

 

19.2

 

 

Bank card fees

 

 

1,057

 

 

978

 

 

79

 

8.1

 

 

Other income

 

 

1,795

 

 

1,279

 

 

516

 

40.3

 

 

 

Total non-interest income

 

$

13,159

 

$

11,249

 

$

1,910

 

17.0

 

37


 

Total non-interest income was $13.2 million for the first quarter of 2015 compared to $11.2 million for the first quarter of 2014. The primary drivers of non-interest income for the first quarter of 2015 were increases in wealth management income and income from mortgage banking activities. Further detail by type of non-interest income follows:

·         Wealth management income is comprised of income from trust and estate services, investment management fees earned by West Financial Services, the Company’s investment management subsidiary, and fees on sales on investment products and services. Trust services fees increased 16% for the first quarter compared to the prior year period due to an increase in assets under management and one-time estate fees.  Investment management fees in West Financial Services increased 8% for the first quarter of 2015 compared to the first quarter of 2014, also due to higher assets under management.  Fees on sales of investment products remained even for the first quarter compared to the prior year quarter. Overall total assets under management increased to $2.9 billion at March 31, 2015 compared to $2.6 billion at March 31, 2014 as a result of positive market movements and additions from new and existing clients.

·         Income from mortgage banking activities increased in the first three months of 2015 compared to the first three months of 2014 due primarily to higher loan origination volumes from refinancing activity as mortgage rates declined.

·         Other non-interest income increased during the first quarter of 2015 compared to the first quarter of 2014 due mainly to increases in loan prepayment fees and gains on sales of SBA loans.

·         Income from bank owned life insurance increased in the first three months of 2015 compared to the first three months of 2014 due primarily to policy proceeds recognized during the quarter.

·         Income from service charges on deposits, insurance agency commissions and Bank card fees remained level for the first quarter of  2015 compared to the first quarter of 2014.

  

 

Non-interest Expense

Non-interest expense amounts and trends are presented in the following table for the years indicated:

 

 

 

 

 

 

 

 

 

 

2015/2014

2015/2014

 

(Dollars in thousands)

 

2015

 

2014

 

$ Change

 

% Change

 

 Salaries and employee benefits

 

$

17,299

 

$

16,355

 

$

944

 

5.8

 %  

 Occupancy expense of premises

 

 

3,489

 

 

3,472

 

 

17

 

0.5

 

 Equipment expenses

 

 

1,373

 

 

1,256

 

 

117

 

9.3

 

 Marketing 

 

 

531

 

 

542

 

 

(11)

 

(2.0)

 

 Outside data services

 

 

1,261

 

 

1,216

 

 

45

 

3.7

 

 FDIC insurance

 

 

631

 

 

520

 

 

111

 

21.3

 

 Amortization of intangible assets

 

 

107

 

 

370

 

 

(263)

 

(71.1)

 

 Litigation Expenses

 

 

200

 

 

-

 

 

200

 

-

 

 Professional fees

 

 

1,209

 

 

914

 

 

295

 

32.3

 

 Other real estate owned

 

 

10

 

 

-

 

 

10

 

-

 

 Other expenses

 

 

3,134

 

 

2,904

 

 

230

 

7.9

 

 

Total non-interest expense

 

$

29,244

 

$

27,549

 

$

1,695

 

6.2

 

 

Non-interest expenses totaled $29.2 million in the first quarter of 2015 compared to $27.5 million in the first quarter of 2014, an increase of 6%. This increase in expenses was driven primarily by higher salaries and benefits, professional fees and other non-interest expenses, which were partially offset by a decrease in intangibles amortization.  Further detail by category of non-interest expense follows:

 

·         Salaries and employee benefits, the largest component of non-interest expenses, increased in the first quarter of 2015 due primarily to higher compensation expenses as a result of merit increases and increased health insurance expenses. In addition, pension expense increased over the first quarter of 2014 due to a change in actuarial assumptions.  The average number of full-time equivalent employees was 715 in the first quarter of 2015 compared to 720 in the first quarter of 2014.

·         Equipment expenses increased in 2015 compared to 2014 due to higher software amortization expense.

·         Outside data services expenses increased in 2015 compared to the prior year quarter due primarily to implementation of new systems.

·         FDIC expenses increased in 2015 compared to 2014 due to growth in assets.

·         Intangibles amortization decreased in 2015 due to the costs of prior year acquisitions being fully amortized during the period.

38


 

·         Litigation expense increased over the prior year quarter due to expenses relating to an adverse jury verdict rendered in the second quarter of 2014.

·         Other non-interest expenses increased in 2015 compared to the prior year quarter due mainly to an increase in fraudulent bankcard activity.

·         Expenses for marketing, occupancy and outside data services remained essentially level for 2015 compared to the prior year quarter. 

 

Operating Expense Performance

Management views the GAAP efficiency ratio as an important financial measure of expense performance and cost management.  The ratio expresses the level of non-interest expenses as a percentage of total revenue (net interest income plus total non-interest income).  Lower ratios indicate improved productivity.

 

Non-GAAP Financial Measures

The Company also uses a traditional efficiency ratio that is a non-GAAP financial measure of operating expense control and efficiency of operations.  Management believes that its traditional ratio better focuses attention on the operating performance of the Company over time than does a GAAP ratio, and is highly useful in comparing period-to-period operating performance of the Company’s core business operations.  It is used by management as part of its assessment of its performance in managing non-interest expenses.  However, this measure is supplemental, and is not a substitute for an analysis of performance based on GAAP measures.  The reader is cautioned that the non-GAAP efficiency ratio used by the Company may not be comparable to GAAP or non-GAAP efficiency ratios reported by other financial institutions.

 

In general, the efficiency ratio is non-interest expenses as a percentage of net interest income plus non-interest income.  Non-interest expenses used in the calculation of the non-GAAP efficiency ratio exclude goodwill impairment losses, the amortization of intangibles, and non-recurring expenses.  Income for the non-GAAP ratio includes the favorable effect of tax-exempt income, and excludes securities gains and losses, which vary widely from period to period without appreciably affecting operating expenses, and non-recurring gains.  The measure is different from the GAAP efficiency ratio, which also is presented in this report.  The GAAP measure is calculated using non-interest expense and income amounts as shown on the face of the Consolidated Statements of Income.  The GAAP and non-GAAP efficiency ratios are reconciled and provided in the following table. Both the GAAP and non-GAAP efficiency ratios improved in the first quarter of 2015 compared to the first quarter of 2014 due to increases in both net interest income and non-interest income.

 

In addition, the Company uses pre-tax, pre-provision income as a measure of the level of recurring income before taxes. Management believes this provides financial statement users with a useful metric of the run-rate of revenues and expenses which is readily comparable to other financial institutions. This measure is calculated by adding (subtracting) the provision (credit) for loan and lease losses, and the provision for income taxes back to net income. This metric increased in the first quarter of 2015 compared to the first quarter of 2014 due primarily to higher net interest income and non-interest income.

39


 

GAAP and Non-GAAP Efficiency Ratios

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

(Dollars in thousands)

 

2015

 

2014

Pre-tax pre-provision income:

 

 

 

 

 

 

Net income

 

$

11,225

 

$

10,928

 

Plus non-GAAP adjustment:

 

 

 

 

 

 

 

 

Litigation expenses

 

 

200

 

 

-

 

 

Income taxes

 

 

5,466

 

 

5,346

 

 

Provision (credit) for loan and lease losses

 

 

597

 

 

(982)

Pre-tax pre-provision income

 

$

17,488

 

$

15,292

 

 

 

 

 

 

 

 

 

 

Efficiency ratio - GAAP basis:

 

 

 

 

 

 

Non-interest expenses

 

$

29,244

 

$

27,549

 

 

 

 

 

 

 

 

 

 

Net interest income plus non-interest income

 

$

46,532

 

$

42,841

 

 

 

 

 

 

 

 

 

 

Efficiency ratio - GAAP basis:

 

 

62.85%

 

 

64.31%

 

 

 

 

 

 

 

 

 

 

Efficiency ratio - Non-GAAP basis:

 

 

 

 

 

 

Non-interest expenses

 

$

29,244

 

$

27,549

 

Less non-GAAP adjustment:

 

 

 

 

 

 

 

 

Amortization of intangible assets

 

 

107

 

 

370

 

 

Litigation expenses

 

 

200

 

 

-

Non-interest expenses -  as adjusted

 

$

28,937

 

$

27,179

  

 

 

 

 

 

 

 

 

 

Net interest income plus non-interest income 

 

$

46,532

 

$

42,841

 

Plus non-GAAP adjustment:

 

 

 

 

 

 

 

 

Tax-equivalent income

 

 

1,271

 

 

1,282

 

Less non-GAAP adjustments:

 

 

 

 

 

 

 

 

Securities gains

 

 

-

 

 

-

 

Net interest income plus non-interest income - as adjusted

 

$

47,803

 

$

44,123

 

 

 

 

 

 

 

 

 

 

Non-GAAP efficiency ratio

 

 

60.53%

 

 

61.60%

 

Income Taxes

The Company had income tax expense of $5.5 million in the first quarter of 2015, compared to income tax expense of $5.3 million in the first quarter of 2014. The resulting effective tax rates were 33% for the first quarter of both 2015 and 2014.  

 

FINANCIAL CONDITION

The Company's total assets were $4.4 billion at March 31, 2015 and December 31, 2014. Total loans increased 1% compared to the fourth quarter of 2014. This increase was offset by a decrease in the investment portfolio.

40


 

Analysis of Loans and Leases

A comparison of the loan portfolio at the dates indicated is presented in the following table:

 

 

 

 

March 31, 2015

 

December 31, 2014

 

Period-to-Period Change

(Dollars in thousands)

 

Amount

 

%

 

Amount

 

%

 

$ Change

 

% Change

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

$

728,858

 

23.0

%

 

$

717,886

 

22.9

%

 

$

10,972

 

1.5

%

 

Residential construction

 

 

130,321

 

4.1

 

 

 

136,741

 

4.4

 

 

 

(6,420)

 

(4.7)

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial owner occupied real estate

 

 

618,846

 

19.6

 

 

 

611,061

 

19.5

 

 

 

7,785

 

1.3

 

 

Commercial investor real estate

 

 

668,931

 

21.1

 

 

 

640,193

 

20.5

 

 

 

28,738

 

4.5

 

 

Commercial acquisition, development and construction

 

 

203,731

 

6.4

 

 

 

205,124

 

6.6

 

 

 

(1,393)

 

(0.7)

 

Commercial Business

 

 

385,452

 

12.2

 

 

 

390,781

 

12.5

 

 

 

(5,329)

 

(1.4)

 

Leases

 

 

36

 

-

 

 

 

54

 

-

 

 

 

(18)

 

(33.3)

 

Consumer

 

 

428,531

 

13.6

 

 

 

425,552

 

13.6

 

 

 

2,979

 

0.7

 

 

Total loans and leases

 

$

3,164,706

 

100.0

%

 

$

3,127,392

 

100.0

%

 

$

37,314

 

1.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans and leases, excluding loans held for sale, increased 1% at March 31, 2015 compared to December 31, 2014. The commercial loan portfolio increased 2% at March 31, 2015 compared to the prior year end. Investor real estate loans reflected a 4% increase, which was somewhat offset by declines in ADC and commercial business loans

 

The residential real estate portfolio, which is comprised of residential construction and permanent residential mortgage loans, remained relatively level at March 31, 2015 compared to December 31, 2014. Permanent residential mortgages, most of which are 1-4 family, reflected a small increase that was largely offset by a decrease in residential construction loans due to severe weather conditions and increased competition in the Company’s market area during the first quarter.

 

The consumer loan portfolio also remained virtually level at March 31, 2015 compared to December 31, 2014.

 

Analysis of Investment Securities

The composition of investment securities at the periods indicated is presented in the following table:

 

 

 

 

 

March 31, 2015

 

December 31, 2014

 

Period-to-Period Change

(Dollars in thousands)

 

Amount

 

%

 

Amount

 

%

 

$Change

 

%

Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   U.S. government agencies and corporations  

U.S. government agencies and corporations  

 

$

143,895

 

15.8

%

 

$

141,679

 

15.2

%

 

$

2,216

 

1.6

%

   State and municipal

State and municipal

 

 

165,786

 

18.2

 

 

 

167,052

 

17.9

 

 

 

(1,266)

 

(0.8)

 

   Mortgage-backed

Mortgage-backed

 

 

346,303

 

37.9

 

 

 

361,519

 

38.7

 

 

 

(15,216)

 

(4.2)

 

   Trust preferred

Trust preferred

 

 

1,002

 

0.1

 

 

 

1,236

 

0.1

 

 

 

(234)

 

(18.9)

 

   Marketable equity securities

Marketable equity securities

 

 

723

 

0.1

 

 

 

723

 

0.1

 

 

 

-

 

-

 

 

 

Total available-for-sale securities

 

 

657,709

 

72.1

 

 

 

672,209

 

72.0

 

 

 

(14,500)

 

(2.2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-Maturity and Other Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   U.S. government agencies and corporations  

U.S. government agencies and corporations  

 

 

64,514

 

7.1

 

 

 

64,512

 

6.9

 

 

 

2

 

-

 

   State and municipal

State and municipal

 

 

152,849

 

16.7

 

 

 

155,261

 

16.6

 

 

 

(2,412)

 

(1.6)

 

   Mortgage-backed

Mortgage-backed

 

 

194

 

-

 

 

 

200

 

-

 

 

 

(6)

 

(3.0)

 

   Other equity securities

Other equity securities

 

 

37,299

 

4.1

 

 

 

41,437

 

4.5

 

 

 

(4,138)

 

(10.0)

 

 

 

Total held-to-maturity and other equity

 

 

254,856

 

27.9

 

 

 

261,410

 

28.0

 

 

 

(6,554)

 

(2.5)

 

Total Securities

 

$

912,565

 

100.0

%

 

$

933,619

 

100.0

%

 

$

(21,054)

 

(2.3)

 

 

Available-for-sale securities decreased 2% at March 31, 2015 compared to December 31, 2014 due to amortization of mortgage-backed securities and calls, while held-to-maturity and other equity securities decreased 3% due to calls and maturities and the redemption of FHLB stock.

 

41


 

The investment portfolio consists primarily of U.S. Agency securities, U.S. Agency mortgage-backed securities, U.S. Agency collateralized mortgage obligations and state and municipal securities. The duration of the portfolio was 3.0 years at March 31, 2015 and 3.4 years at December 31, 2014. The Company considers the duration of the portfolio to be adequate for liquidity purposes. This investment strategy has resulted in a portfolio with low credit risk that would provide the required liquidity needed to meet increased loan demand. The portfolio is monitored on a continuing basis with consideration given to interest rate trends and the structure of the yield curve and with constant assessment of economic projections and analysis.

 

At March 31, 2015, the trust preferred portfolio included one pooled trust preferred security backed by debt issued by banks and thrifts, which totaled $1.1 million, with a fair value of $1.0 million.  The fair value of this security was determined by a third party valuation specialist due to the limited trading activity for this security in the marketplace.  The specialist used an income valuation approach technique (present value) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs.  The methodology, observable inputs and significant assumptions employed by the specialist to determine fair value are provided in Note 2 – Investments in the Notes to the Condensed Consolidated Financial Statements.

 

As a result of this valuation, it was determined that the pooled trust preferred security had not incurred any credit-related OTTI for the three months ended March 31, 2015. Cumulative credit-related OTTI of $0.5 million has been recognized in earnings through March 31, 2015. Non-credit related OTTI on this security, which is not expected to be sold and which the Company has the ability to hold until maturity, was $0.2 million at March 31, 2015.  This non-credit related OTTI was recognized in accumulated other comprehensive income (“OCI”) at March 31, 2015. 

 

Other Earning Assets

Residential mortgage loans held for sale increased $3 million to $14 million as of March 31, 2015 from $11 million as of December 31, 2014 due to higher mortgage loan origination volumes resulting from low market interest rates.  The aggregate of federal funds sold and interest-bearing deposits with banks decreased $9 million to $34 million at March 31, 2015 compared to December 31, 2014.

 

Deposits

The composition of deposits at the periods indicated is presented in the following table:

 

 

 

 

 

March 31, 2015

 

December 31, 2014

 

Period-to-Period Change

(Dollars in thousands)

 

Amount

 

%

 

Amount

 

%

 

$ Change

 

% Change

Noninterest-bearing deposits

 

$

1,017,566

 

32.7

%

 

$

993,737

 

32.4

%

 

$

23,829

 

2.4

%

Interest-bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand

 

 

527,801

 

17.0

 

 

 

534,605

 

17.4

 

 

 

(6,804)

 

(1.3)

 

 

Money market savings

 

 

836,548

 

26.9

 

 

 

828,494

 

27.0

 

 

 

8,054

 

1.0

 

 

Regular savings

 

 

277,230

 

8.9

 

 

 

264,751

 

8.6

 

 

 

12,479

 

4.7

 

 

Time deposits of less than $100,000

 

 

241,084

 

7.8

 

 

 

239,857

 

7.8

 

 

 

1,227

 

0.5

 

 

Time deposits of $100,000 or more

 

 

209,663

 

6.7

 

 

 

205,065

 

6.8

 

 

 

4,598

 

2.2

 

 

 

Total interest-bearing deposits

 

 

2,092,326

 

67.3

 

 

 

2,072,772

 

67.6

 

 

 

19,554

 

0.9

 

Total deposits

 

$

3,109,892

 

100.0

%

 

$

3,066,509

 

100.0

%

 

$

43,383

 

1.4

 

 

Deposits and Borrowings

Total deposits increased $43 million or 1% at March 31, 2015 compared to December 31, 2014. This increase was due primarily to an increase in noninterest-bearing checking accounts compared to the prior year end. In addition, regular savings accounts increased 5% compared to December 31, 2014. Money market accounts and certificates of deposit also reflected increases of 1%. The activity in these deposit products can be attributed primarily to clients’ emphasis on safety and liquidity considering the current extended period of low interest rates and the volatility of alternative investments. Total borrowings decreased 5% at March 31, 2015 compared to December 31, 2014.

 

Capital Management

Management monitors historical and projected earnings, dividends and asset growth, as well as risks associated with the various types of on and off-balance sheet assets and liabilities, in order to determine appropriate capital levels. During the first quarter of 2015, total stockholders' equity was $522 million at both March 31, 2015 and December 31, 2014 as net income during the first quarter was offset by the payment of dividends and stock repurchases.  The ratio of average equity to average assets was 11.92% for the first quarter of 2015, as compared to 12.21% for the first quarter of 2014.

42


 

   

Bank holding companies and banks are required to maintain capital ratios in accordance with guidelines adopted by the federal bank regulators. These guidelines are commonly known as Risk-Based Capital guidelines. The actual regulatory ratios and required ratios for capital adequacy, in addition to the ratios required to be categorized as “well capitalized”, are summarized for the Company in the following table.

 

Risk-Based Capital Ratios

 

 

 

 

 

Minimum

 

Ratios at

 

Regulatory

 

March 31, 2015

 

December 31, 2014

 

Requirements

Total Capital to risk-weighted assets

15.14%

 

15.06%

 

8.00%

 

 

 

 

 

 

Tier 1 Capital to risk-weighted assets

14.03%

 

13.95%

 

6.00%

 

    

 

    

 

 

Common Equity Tier 1 Capital

12.99%

 

n.a.

 

4.50%

 

 

 

 

 

 

Tier 1 Leverage

11.00%

 

11.26%

 

4.00%

 

Tier 1 capital of $472 million and total qualifying capital of $509 million each included $35.0 million in trust preferred securities that are considered regulatory capital for purposes of determining the Company’s Tier 1 capital ratio.  As of March 31, 2015, the most recent notification from the Bank’s primary regulator categorized the Bank as a "well-capitalized" institution under the prompt corrective action rules of the Federal Deposit Insurance Act.  Designation as a well-capitalized institution under these regulations is not a recommendation or endorsement of the Company or the Bank by federal bank regulators.

 

 In July 2013, the Federal Reserve Board approved revisions to its capital adequacy guidelines and prompt corrective action rules that implement the revised standards of the Basel Committee on Banking Supervision, commonly called Basel III, and address relevant provisions of the Dodd-Frank Act. The rules include new risk-based capital and leverage ratios, which are effective January 1, 2015, and revise the definition of what constitutes “capital” for calculating those ratios. The new minimum capital level requirements applicable to the Company and the Bank will be: (1) a new common equity Tier 1 capital ratio of 4.5%; (2) a Tier 1 capital ratio of 6% (increased from 4%); (3) a total capital ratio of 8% (unchanged from current rules); and (4) a Tier 1 leverage ratio of 4%.  The rules eliminate the inclusion of certain instruments, such as trust preferred securities, from Tier 1 capital. Instruments issued prior to May 19, 2010 will be grandfathered for companies with consolidated assets of $15 billion or less. The rules also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. The new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase by that amount each year until fully implemented in January 2019. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses to executive officers if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such action. The Basel III capital rules became effective on January 1, 2015.

 

Tangible Common Equity

Tangible equity, tangible assets and tangible book value per share are non-GAAP financial measures calculated using GAAP amounts. Tangible common equity and tangible assets exclude the balances of goodwill and other intangible assets from stockholder’s equity and total assets, respectively. Management believes that this non-GAAP financial measure provides information to investors that may be useful in understanding our financial condition.  Because not all companies use the same calculation of tangible equity and tangible assets, this presentation may not be comparable to other similarly titled measures calculated by other companies.  A reconciliation of the non-GAAP ratio of tangible equity to tangible assets and tangible book value per share are provided in the following table.

43


 

Tangible Common Equity Ratio – Non-GAAP

 

(Dollars in thousands, except per share data)

March 31, 2015

 

December 31, 2014

Tangible common equity ratio:

 

 

 

 

 

Total stockholders' equity

$

521,768

 

$

521,751

 

Accumulated other comprehensive income (loss)

 

(2,146)

 

 

823

 

Goodwill

 

(84,171)

 

 

(84,171)

 

Other intangible assets, net

 

(403)

 

 

(510)

Tangible common equity

$

435,048

 

$

437,893

 

 

 

 

 

 

 

Total assets

$

4,401,380

 

$

4,397,132

 

Goodwill

 

(84,171)

 

 

(84,171)

 

Other intangible assets, net

 

(403)

 

 

(510)

Tangible assets

$

4,316,806

 

$

4,312,451

 

 

 

 

 

 

 

Tangible common equity ratio

 

10.08%

 

 

10.15%

 

 

 

 

 

 

 

Tangible book value per share

$

17.59

 

$

17.48

 

Credit Risk

 

The fundamental lending business of the Company is based on understanding, measuring and controlling the credit risk inherent in the loan portfolio.  The Company’s loan and lease portfolio is subject to varying degrees of credit risk.  Credit risk entails both general risks, which are inherent in the process of lending, and risk specific to individual borrowers.  The Company’s credit risk is mitigated through portfolio diversification, which limits exposure to any single customer, industry or collateral type.  Typically, each consumer and residential lending product has a generally predictable level of credit losses based on historical loss experience.  Home mortgage and home equity loans and lines generally have the lowest credit loss experience.  Loans secured by personal property, such as auto loans, generally experience medium credit losses.  Unsecured loan products, such as personal revolving credit, have the highest credit loss experience and for that reason, the Company has chosen not to engage in a significant amount of this type of lending.  Credit risk in commercial lending can vary significantly, as losses as a percentage of outstanding loans can shift widely during economic cycles and are particularly sensitive to changing economic conditions.  Generally, improving economic conditions result in improved operating results on the part of commercial customers, enhancing their ability to meet their particular debt service requirements.  Improvements, if any, in operating cash flows can be offset by the impact of rising interest rates that may occur during improved economic times.  Inconsistent economic conditions may have an adverse effect on the operating results of commercial customers, reducing their ability to meet debt service obligations. 

 

Current economic data has shown that while the Mid-Atlantic region remains one of the stronger markets in the nation, the Company is continuing to deal with the lingering impact of a slowly recovering economy and its resulting effects on its borrowers, particularly in the real estate sector. Total non-performing loans increased 6% to $36 million at March 31, 2015 compared to the balance at December 31, 2014. While the diversification of the lending portfolio among different commercial, residential and consumer product lines along with different market conditions of the D.C. suburbs, Northern Virginia and Baltimore metropolitan area has mitigated some of the risks in the portfolio, local economic conditions and levels of non-performing loans may continue to be influenced by the volatility being experienced in various business sectors of the economy on both a regional and national level.

 

To control and manage credit risk, management has a credit process in place to reasonably ensure that credit standards are maintained along with an in-house loan administration accompanied by oversight and review procedures.  The primary purpose of loan underwriting is the evaluation of specific lending risks and involves the analysis of the borrower’s ability to service the debt as well as the assessment of the value of the underlying collateral.  Oversight and review procedures include the monitoring of portfolio credit quality, early identification of potential problem credits and the aggressive management of problem credits.  As part of the oversight and review process, the Company maintains an allowance for loan and lease losses (the “allowance”).

  

44


 

The allowance represents an estimation of the losses that are inherent in the loan and lease portfolio.  The adequacy of the allowance is determined through careful and ongoing evaluation of the credit portfolio, and involves consideration of a number of factors, as outlined below, to establish an adequate allowance for loan losses.  Determination of the allowance is inherently subjective and requires significant estimates, including estimated losses on pools of homogeneous loans and leases based on historical loss experience and consideration of current economic trends, which may be susceptible to significant change.  Loans and leases deemed uncollectible are charged against the allowance, while recoveries are credited to the allowance.  Management adjusts the level of the allowance through the provision for loan and lease losses, which is recorded as a current period operating expense.

 

The methodology for assessing the appropriateness of the allowance includes:  (1) a general allowance that reflects historical losses, as adjusted, by credit category, and (2) a specific allowance for impaired credits on an individual or portfolio basis.  This methodology is further described in “Note 1 – Significant Accounting Policies” of the Notes to the Consolidated Financial Statements. The amount of the allowance is reviewed monthly and approved quarterly by the Risk Committee of the board of directors.

 

The Company recognizes a collateral dependent lending relationship as non-performing when either the loan becomes 90 days delinquent or as a result of factors (such as bankruptcy, interruption of cash flows, etc.) considered at the monthly credit committee meeting. When a commercial loan is placed on non-accrual status, it is considered to be impaired and all accrued but unpaid interest is reversed.  Classification as an impaired loan is based on a determination that the Company may not collect all principal and interest payments according to contractual terms. Impaired loans exclude large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment such as leases, residential real estate and consumer loans.  Typically, all payments received on non-accrual loans are applied to the remaining principal balance of the loans.  Integral to the assessment of the allowance process is an evaluation that is performed to determine whether a specific allowance on an impaired loan is warranted and, when losses are confirmed, a charge-off is taken to reduce the loan to its net realizable value. Any further collateral deterioration results in either further specific allowances being established or additional charge-offs.  At such time an action plan is agreed upon for the particular loan and an appraisal will be ordered depending on the time elapsed since the prior appraisal, the loan balance and/or the result of the internal evaluation.  A current appraisal on large loans is usually obtained if the appraisal on file is more than 12 months old and there has been a material change in market conditions, zoning, physical use or the adequacy of the collateral based on an internal evaluation.  The Company’s policy is to strictly adhere to regulatory appraisal standards.  If an appraisal is ordered, no more than a 30 day turnaround is requested from the appraiser, who is selected by Credit Administration from an approved appraiser list. After receipt of the updated appraisal, the assigned credit officer will recommend to the Chief Credit Officer whether a specific allowance or a charge-off should be taken. The Chief Credit Officer has the authority to approve a specific allowance or charge-off between monthly credit committee meetings to insure that there are no significant time lapses during this process.

 

The Company’s methodology for evaluating whether a loan is impaired begins with risk-rating credits on an individual basis and includes consideration of the borrower’s overall financial condition, payment record and available cash resources that may include the sufficiency of collateral value and, in a select few cases, verifiable support from financial guarantors.  In measuring impairment, the Company looks primarily to the discounted cash flows of the project itself or to the value of the collateral as the primary sources of repayment of the loan.  The Company may consider the existence of guarantees and the financial strength and wherewithal of the guarantors involved in any loan relationship. Guarantees may be considered as a source of repayment based on the guarantor’s financial condition and respective payment capacity.  Accordingly, absent a verifiable payment capacity, a guarantee alone would not be sufficient to avoid classifying the loan as impaired.

 

Management has established a credit process that dictates that structured procedures be performed to monitor these loans between the receipt of an original appraisal and the updated appraisal.  These procedures include the following:

 

·               An internal evaluation is updated quarterly to include borrower financial statements and/or cash flow projections.

·               The borrower may be contacted for a meeting to discuss an updated or revised action plan which may include a request for additional collateral.

·               Re-verification of the documentation supporting the Company’s position with respect to the collateral securing the loan.

·               At the monthly credit committee meeting the loan may be downgraded and a specific allowance may be decided upon in advance of the receipt of the appraisal.

45


 

·               Upon receipt of the updated appraisal (or based on an updated internal financial evaluation) the loan balance is compared to the appraisal and a specific allowance is decided upon for the particular loan, typically for the amount of the difference between the appraisal and the loan balance.

·               The Company will specifically reserve for or charge-off the excess of the loan amount over the amount of the appraisal net of closing costs. In certain cases the Company may establish a larger reserve due to knowledge of current market conditions or the existence of an offer for the collateral that will facilitate a more timely resolution of the loan.

 

If an updated appraisal is received subsequent to the preliminary determination of a specific allowance or partial charge-off, and it is less than the initial appraisal used in the initial charge-off, an additional specific allowance or charge-off is taken on the related credit. Partially charged-off loans are not written back up based on updated appraisals and always remain on non-accrual with any and all subsequent payments applied to the remaining balance of the loan as principal reductions. No interest income is recognized on loans that have been partially charged-off.

 

Loans that have their terms restructured (e.g., interest rates, loan maturity date, payment and amortization period, etc.) in circumstances that provide payment relief or other concessions, to a borrower experiencing financial difficulty are considered troubled debt restructured loans (TDR’s). All restructurings that constitute concessions to a borrower experiencing financial difficulties are considered impaired loans and may either be in accruing status or non-accruing status.  Non-accruing restructured loans may return to accruing status provided there is a sufficient period of payment performance in accordance with the restructure terms.  Loans may be removed from disclosure as an impaired loan if their revised loans terms are considered to be consistent with terms that can be obtained in the credit market for loans with comparable risk. 

 

The Company may extend the maturity of a performing or current loan that may have some inherent weakness associated with the loan. However, the Company generally follows a policy of not extending maturities on non-performing loans under existing terms. Maturity date extensions only occur under revised terms that clearly place the Company in a position to increase the likelihood of or assure full collection of the loan under the contractual terms and /or terms at the time of the extension that may eliminate or mitigate the inherent weakness in the loan.  These terms may incorporate, but are not limited to additional assignment of collateral, significant balance curtailments/liquidations and assignments of additional project cash flows.  Guarantees may be a consideration in the extension of loan maturities.  As a general matter, the Company does not view extension of a loan to be a satisfactory approach to resolving non-performing credits.  On an exception basis, certain performing loans that have displayed some inherent weakness in the underlying collateral values, an inability to comply with certain loan covenants which are not affecting the performance of the credit or other identified weakness may be extended.

 

Collateral values or estimates of discounted cash flows (inclusive of any potential cash flow from guarantees) are evaluated to estimate the probability and severity of potential losses. The actual occurrence and severity of losses involving impaired credits can differ substantially from estimates.

 

The determination of the allowance requires significant judgment, and estimates of probable losses in the loan and lease portfolio can vary significantly from the amounts actually observed.  While management uses available information to recognize probable losses, future additions to the allowance may be necessary based on changes in the credits comprising the portfolio and changes in the financial condition of borrowers, such as may result from changes in economic conditions. In addition, federal and state regulatory agencies, as an integral part of their examination process, and independent consultants engaged by the Bank, periodically review the loan and lease portfolio and the allowance.  Such reviews may result in adjustments to the allowance based upon their analysis of the information available at the time of each examination.

 

The Company makes provisions for loan and lease losses in amounts necessary to maintain the allowance at an appropriate level, as established by use of the allowance methodology previously discussed. The provision for loan and lease losses was a charge of $0.6 million in the first quarter of 2015 compared to a credit of $1.0 million in the first quarter of 2014.   Historical net charge-offs represent a principal component in the application of the Company’s allowance methodology.  The charge to the provision in the first quarter of 2015 was driven by the increase in non-performing loans, higher net charge-offs and growth in the loan portfolio. The credit to the provision in the first quarter of 2014 was driven by a decline in historical losses, improvement in the overall credit quality of the loan portfolio and problem loan resolutions and recoveries whose impact more than offset the effect of loan growth.

 

46


 

Substantially all of the fixed-rate residential mortgage loans originated by the Company are sold in the secondary mortgage market. Concurrent with such sales, the Company is required to make customary representations and warranties to the purchasers about the mortgage loans and the manner in which they were originated. The related sale agreements grant the purchasers recourse back to the Company, which could require the Company to repurchase loans or to share in any losses incurred by the purchasers. This recourse exposure typically extends for a period of nine to eighteen months after the sale of the loan although the time frame for repurchase requests can extend for an indefinite period.  Such transactions could be due to a number of causes including borrower fraud or early payment default. The Company has seen a very limited number of repurchase and indemnity demands from purchasers for such events and routinely monitors its exposure in this regard. The Company maintains a liability of $0.5 million for probable losses due to repurchases. The Company believes that this reserve is adequate.

 

Allowance for Loan and Lease Losses

During the first quarter of 2015, there were no changes in the Company’s methodology for assessing the appropriateness of the allowance for loan and lease losses from the prior year. Variations can occur over time in the estimation of the allowance as a result of the credit performance of borrowers.  No portion of the allowance was unallocated at March 31, 2015 or December 31, 2014.   

 

At March 31, 2015, total non-performing loans and leases were $36.0 million, or 1.14% of total loans and leases, compared to $34.0 million, or 1.09% of total loans and leases, at December 31, 2014.  The allowance represented 104% of non-performing loans and leases at March 31, 2015 as compared to 111% at December 31, 2014. The decrease in this ratio was due primarily to the increase in non-performing loans and leases mentioned previously, higher loan charge-offs and growth in the loan portfolio. The allowance for loan and lease losses as a percent of total loans and leases was 1.18% at March 31, 2015 as compared to 1.21% at December 31, 2014. 

 

Continued analysis of the actual loss history on the problem credits in 2014 and 2015 provided an indication that the coverage of the inherent losses on the problem credits was adequate. The Company continues to monitor the impact of the economic conditions on our commercial customers, the reduced inflow of non-accruals and criticized loans in addition to the significant decline in early stage delinquencies.  The improvement in these credit metrics supports management’s outlook for continued improved credit quality performance.

 

The balance of impaired loans was $31.2 million, with specific allowances of $2.7 million against those loans at March 31, 2015, as compared to $29.4 million with allowances of $2.9 million, at December 31, 2014.

  

The Company's borrowers are concentrated in nine counties in Maryland, three counties in Virginia and in Washington D.C.  Commercial and residential mortgages, including home equity loans and lines, represented 77% of total loans and leases at March 31, 2015 as compared to 76% at December 31, 2014.  Certain loan terms may create concentrations of credit risk and increase the Company’s exposure to loss. These include terms that permit the deferral of principal payments or payments that are smaller than normal interest accruals (negative amortization); loans with high loan-to-value ratios; loans, such as option adjustable-rate mortgages, that may expose the borrower to future increases in repayments that are in excess of increases that would result solely from increases in market interest rates; and interest-only loans.  The Company does not make loans that provide for negative amortization or option adjustable-rate mortgages.

47


 

Summary of Loan and Lease Loss Experience

The following table presents the activity in the allowance for loan and lease losses for the periods

 

 

 

 

 

 

Three Months Ended

 

Year Ended

(Dollars in thousands)

 

March 31, 2015

 

December 31, 2014

Balance, January 1

 

$

37,802

 

$

38,766

Provision for loan and lease losses

 

 

597

 

 

(163)

Loan charge-offs:

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

Residential mortgage

 

 

(77)

 

 

(323)

 

Residential construction

 

 

-

 

 

(4)

Commercial real estate:

 

 

 

 

 

 

 

Commercial investor

 

 

-

 

 

(3)

 

Commercial owner occupied

 

 

(213)

 

 

(265)

 

Commercial AD&C

 

 

(706)

 

 

(529)

Commercial business

 

 

(19)

 

 

(729)

Leases

 

 

-

 

 

-

Consumer

 

 

(99)

 

 

(834)

 

Total charge-offs

 

 

(1,114)

 

 

(2,687)

Loan recoveries:

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

Residential mortgage

 

 

12

 

 

121

 

Residential construction

 

 

8

 

 

79

Commercial real estate:

 

 

 

 

 

 

 

Commercial investor

 

 

5

 

 

38

 

Commercial owner occupied

 

 

1

 

 

6

 

Commercial AD&C

 

 

-

 

 

-

Commercial business

 

 

108

 

 

1,477

Leases

 

 

-

 

 

-

Consumer

 

 

56

 

 

165

 

Total recoveries

 

 

190

 

 

1,886

 

Net charge-offs

 

 

(924)

 

 

(801)

 

 

Balance, period end

 

$

37,475

 

$

37,802

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net charge-offs to average loans and leases

 

 

0.12%

 

 

0.03%

Allowance for loan losses to loans

 

 

1.18%

 

 

1.21%

48


 

Analysis of Credit Risk

The following table presents information with respect to non-performing assets and 90-day delinquencies for the periods indicated:

 

(Dollars in thousands)

 

March 31, 2015

 

December 31, 2014

Non-accrual loans and leases:

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

Residential mortgage

 

$

3,235

 

$

3,012

 

Residential construction

 

 

788

 

 

1,105

Commercial real estate:

 

 

 

 

 

 

 

Commercial investor

 

 

10,083

 

 

8,156

 

Commercial owner occupied

 

 

8,974

 

 

8,941

 

Commercial AD&C

 

 

1,363

 

 

2,464

Commercial business

 

 

4,166

 

 

3,184

Leases

 

 

-

 

 

-

Consumer

 

 

1,962

 

 

1,668

 

 

Total non-accrual loans and leases

 

 

30,571

 

 

28,530

 

 

 

 

 

 

 

 

 

Loans and leases 90 days past due

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

Residential mortgage

 

 

-

 

 

-

 

Residential construction

 

 

-

 

 

-

Commercial real estate:

 

 

 

 

 

 

 

Commercial investor

 

 

-

 

 

-

 

Commercial owner occupied

 

 

-

 

 

-

 

Commercial AD&C

 

 

-

 

 

-

Commercial business

 

 

-

 

 

-

Leases

 

 

-

 

 

-

Consumer

 

 

-

 

 

-

 

Total 90 days past due loans and leases

 

 

-

 

 

-

 

 

 

 

 

 

 

 

 

Restructured loans and leases (accruing)

 

 

5,446

 

 

5,497

 

Total non-performing loansand leases

 

 

36,017

 

 

34,027

Other real estate owned, net

 

 

3,227

 

 

3,195

 

Total non-performing assets

 

$

39,244

 

$

37,222

 

 

 

 

 

 

 

 

 

 

Market Risk Management

The Company's net income is largely dependent on its net interest income.  Net interest income is susceptible to interest rate risk to the extent that interest-bearing liabilities mature or re-price on a different basis than interest-earning assets.  When interest-bearing liabilities mature or re-price more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income.  Similarly, when interest-earning assets mature or re-price more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income. Net interest income is also affected by changes in the portion of interest-earning assets that are funded by interest-bearing liabilities rather than by other sources of funds, such as noninterest-bearing deposits and stockholders' equity.

 

The Company’s interest rate risk management goals are (1) to increase net interest income at a growth rate consistent with the growth rate of total assets, and (2) to minimize fluctuations in net interest margin as a percentage of interest-earning assets.  Management attempts to achieve these goals by balancing, within policy limits, the volume of floating-rate liabilities with a similar volume of floating-rate assets; by keeping the average maturity of fixed-rate asset and liability contracts reasonably matched; by maintaining a pool of administered core deposits; and by adjusting pricing rates to market conditions on a continuing basis.

 

49


 

The Company’s board of directors has established a comprehensive interest rate risk management policy, which is administered by management’s Asset Liability Management Committee (“ALCO”). The policy establishes limits on risk, which are quantitative measures of the percentage change in net interest income (a measure of net interest income at risk) and the fair value of equity capital (a measure of economic value of equity or “EVE” at risk) resulting from a hypothetical change in U.S. Treasury interest rates for maturities from one day to thirty years. The Company measures the potential adverse impacts that changing interest rates may have on its short-term earnings, long-term value, and liquidity by employing simulation analysis through the use of computer modeling. The simulation model captures optionality factors such as call features and interest rate caps and floors imbedded in investment and loan portfolio contracts. As with any method of gauging interest rate risk, there are certain shortcomings inherent in the interest rate modeling methodology used by the Company. When interest rates change, actual movements in different categories of interest-earning assets and interest-bearing liabilities, loan prepayments, and withdrawals of time and other deposits, may deviate significantly from assumptions used in the model.  As an example, certain money market deposit accounts are assumed to reprice at 100% of the interest rate change in each of the up rate shock scenarios even though this is not a contractual requirement.  As a practical matter, management would likely lag the impact of any upward movement in market rates on these accounts as a mechanism to manage the bank’s net interest margin.  Finally, the methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan customers’ ability to service their debts, or the impact of rate changes on demand for loan, lease, and deposit products.

 

The Company prepares a current base case and eight alternative simulations at least once a quarter and reports the analysis to the board of directors.  In addition, more frequent forecasts are produced when interest rates are particularly uncertain or when other business conditions so dictate.

 

The statement of condition is subject to quarterly testing for eight alternative interest rate shock possibilities to indicate the inherent interest rate risk.  Average interest rates are shocked by +/- 100, 200, 300, and 400 basis points (“bp”), although the Company may elect not to use particular scenarios that it determines are impractical in a current rate environment.  It is management’s goal to structure the balance sheet so that net interest earnings at risk over a twelve-month period and the economic value of equity at risk do not exceed policy guidelines at the various interest rate shock levels.

 

The Company augments its quarterly interest rate shock analysis with alternative external interest rate scenarios on a monthly basis. These alternative interest rate scenarios may include non-parallel rate ramps and non-parallel yield curve twists.  If a measure of risk produced by the alternative simulations of the entire balance sheet violates policy guidelines, ALCO is required to develop a plan to restore the measure of risk to a level that complies with policy limits within two quarters.

 

Measures of net interest income at risk produced by simulation analysis are indicators of an institution’s short-term performance in alternative rate environments.  These measures are typically based upon a relatively brief period, usually one year.  They do not necessarily indicate the long-term prospects or economic value of the institution.

 

Estimated Changes in Net Interest Income

Change in Interest Rates:

+ 400 bp

+ 300 bp

+ 200 bp

+ 100 bp

- 100 bp

- 200 bp

-300 bp

-400 bp

Policy Limit

23.50%

17.50%

15.00%

10.00%

10.00%

15.00%

17.50%

23.50%

March 31, 2015

(4.40%)

(2.24%)

(0.50%)

(0.46%)

 N/A 

 N/A 

 N/A 

  N/A

December 31, 2014

(5.12%)

(2.62%)

(0.89%)

(0.52%)

 N/A 

 N/A 

 N/A 

  N/A

 

As shown above, measures of net interest income at risk improved from December 31, 2014 at all rising interest rate shock levels. All measures remained well within prescribed policy limits.

 

The decrease in the risk position with respect to net interest income from December 31, 2014 to March 31, 2015 was the result of a decline in short-term FHLB borrowings which will reduce the Company’s exposure to increases in interest rates.  The decline in short-term borrowings was partially offset by a modest increase in repurchase agreements.

 

The measures of equity value at risk indicate the ongoing economic value of the Company by considering the effects of changes in interest rates on all of the Company’s cash flows, and by discounting the cash flows to estimate the present value of assets and liabilities.  The difference between these discounted values of the assets and liabilities is the economic value of equity, which, in theory, approximates the fair value of the Company’s net assets.

50


 

Estimated Changes in Economic Value of Equity (EVE)

Change in Interest Rates:

+ 400 bp

+ 300 bp

+ 200 bp

+ 100 bp

- 100 bp

- 200 bp

-300 bp

-400 bp

Policy Limit

35.00%

25.00%

20.00%

10.00%

10.00%

20.00%

25.00%

35.00%

March 31, 2015

(7.22%)

(4.79%)

(2.37%)

(1.19%)

 N/A 

 N/A 

 N/A 

  N/A

December 31, 2014

(9.97%)

(6.75%)

(4.17%)

(1.97%)

 N/A 

 N/A 

 N/A 

  N/A

 

Measures of the economic value of equity (“EVE”) at risk improved from December 31, 2014 to March 31, 2015 in all rising shock scenarios. The positive impact in EVE was driven by longer durations on several deposit categories, especially noninterest-bearing checking accounts, resulting in increased market value premiums should rates increase.

 

Liquidity Management

Liquidity is measured by a financial institution's ability to raise funds through loan and lease repayments, maturing investments, deposit growth, borrowed funds, capital and the sale of highly marketable assets such as investment securities and residential mortgage loans. The Company's liquidity position, considering both internal and external sources available, exceeded anticipated short-term and long-term needs at March 31, 2015.  Management considers core deposits, defined to include all deposits other than time deposits of $100 thousand or more, to be a relatively stable funding source. Core deposits equaled 70% of total interest-earning assets at March 31, 2015. In addition, loan and lease payments, maturities, calls and pay downs of securities, deposit growth and earnings contribute a flow of funds available to meet liquidity requirements. In assessing liquidity, management considers operating requirements, the seasonality of deposit flows, investment, loan and deposit maturities and calls, expected funding of loans and deposit withdrawals, and the market values of available-for-sale investments, so that sufficient funds are available on short notice to meet obligations as they arise and to ensure that the Company is able to pursue new business opportunities.

 

Liquidity is measured using an approach designed to take into account, in addition to factors already discussed above, the Company’s growth and mortgage banking activities.  Also considered are changes in the liquidity of the investment portfolio due to fluctuations in interest rates.  Under this approach, implemented by the Funds Management Subcommittee of ALCO under formal policy guidelines, the Company’s liquidity position is measured weekly, looking forward at thirty day intervals from thirty (30) to three hundred sixty (360) days.  The measurement is based upon the projection of funds sold or purchased position, along with ratios and trends developed to measure dependence on purchased funds and core growth.  Resulting projections as of March 31, 2015, show short-term investments exceeding short-term borrowings by $24 million over the subsequent 360 days.  This projected excess of liquidity versus requirements provides the Company with flexibility in how it funds loans and other earning assets. 

 

The Company also has external sources of funds, which can be drawn upon when required.  The main sources of external liquidity are available lines of credit with the Federal Home Loan Bank of Atlanta and the Federal Reserve. The line of credit with the Federal Home Loan Bank of Atlanta totaled $1.3 billion, of which $1.1 billion was available for borrowing based on pledged collateral, with $590 million borrowed against it as of March 31, 2015. The line of credit at the Federal Reserve totaled $337 million, all of which was available for borrowing based on pledged collateral, with no borrowings against it as of March 31, 2015.  Other external sources of liquidity available to the Company in the form of unsecured lines of credit granted by correspondent banks totaled $55 million at March 31, 2015, against which there were no outstanding borrowings.  In addition, the Company had a secured line of credit with a correspondent bank of $20 million as of March 31, 2015. Based upon its liquidity analysis, including external sources of liquidity available, management believes the liquidity position was appropriate at March 31, 2015.

   

The parent company (“Bancorp”) is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, Bancorp is responsible for paying any dividends declared to its common shareholders and interest and principal on outstanding debt. Bancorp’s primary source of income is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to Bancorp in any calendar year, without the receipt of prior approval from the Federal Reserve, cannot exceed net income for that year to date plus retained net income (as defined) for the preceding two calendar years. Based on this requirement, as of March 31, 2015, the Bank could have declared a dividend of $54 million to Bancorp. At March 31, 2015, Bancorp had liquid assets of $4 million.

 

Arrangements to fund credit products or guarantee financing take the form of loan commitments (including lines of credit on revolving credit structures) and letters of credit.  Approvals for these arrangements are obtained in the same manner as loans.  Generally, cash flows, collateral value and risk assessment are considered when determining the amount and structure of credit arrangements.

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Commitments to extend credit in the form of consumer, commercial real estate and business at the dates indicated were as follows:

 

 

 

 

March 31,

 

December 31,

(In thousands)

 

2015

 

2014

Commercial

 

$

226,074

 

$

212,628

Real estate-development and construction

 

 

86,347

 

 

100,264

Real estate-residential mortgage

 

 

41,604

 

 

12,667

Lines of credit, principally home equity and business lines

 

 

838,371

 

 

810,552

Standby letters of credit

 

 

56,858

 

 

58,144

 

Total Commitments to extend credit and available credit lines

 

$

1,249,254

 

$

1,194,255

 

 

 

 

 

 

 

 

 

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

See “Financial Condition - Market Risk and Interest Rate Sensitivity” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, above, which is incorporated herein by reference. 

  

Item 4.  CONTROLS AND PROCEDURES

 

The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated as of the last day of the period covered by this report, the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15 under the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective. There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15 under the Securities Act of 1934) during the three months ended March 31, 2015, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

 

In the normal course of business, the Company becomes involved in litigation arising from the banking, financial and other activities it conducts.  Management, after consultation with legal counsel, does not anticipate that the ultimate liability, if any, arising from these matters will have a material effect on the Company’s financial condition, operating results or liquidity.

 

 

Item 1A. Risk Factors

 

There have been no material changes in the risk factors as discussed in the 2014 Annual Report on Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

                

The Company re-approved a stock repurchase program in August 2013 that permits the repurchase of up to 5% of the Company’s outstanding shares of common stock or approximately 1,260,000 shares.  Repurchases which will be conducted through open market purchases or privately negotiated transactions, will be made depending on market conditions and other factors.  The following table provides information regarding repurchase transactions executed during the quarter ended March 31, 2015.

 

52


 

 

 

 

Total number of Shares

Maximum Number that

 

 

 

Purchased as part of

May Yet Be Purchased

 

Total Number of

Average Price Paid

Publicly Announced Plans

Under the Plans or

Period

Shares Purchased

per Share

or Programs

Programs

January 1, 2015 through

 

 

 

 

January 31, 2015

56,686

$25.14

56,686

1,154,267

February 1, 2015 through

 

 

 

 

February 28, 2015

98,452

$25.61

98,452

1,055,815

March 1, 2015 through

 

 

 

 

March 31, 2015

196,231

$25.94

196,231

859,584

 

Item 3. Defaults Upon Senior Securities – None

 

Item 4.  Mine Safety Disclosures – Not applicable

 

Item 5. Other Information - None

 

Item 6. Exhibits

 

               Exhibit 31(a)                         Certification of Chief Executive Officer

               Exhibit 31(b)                         Certification of Chief Financial Officer

               Exhibit 32(a)                         Certification of Chief Executive Officer pursuant to 18 U.S. Section 1350

               Exhibit 32(b)                         Certification of Chief Financial Officer pursuant to 18 U.S. Section 1350

               Exhibit 101                            The following materials from the Sandy Spring Bancorp, Inc. Quarterly Report on Form 10-Q for the quarter end March 31, 2015 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Condition; (ii) The Condensed Consolidated Statements of Income; (iii) The Condensed Consolidated Statements of Comprehensive Income; (iv) The Condensed Consolidated Statements of Cash Flows; (v) The Condensed Consolidated Statements of Changes in Stockholders’ Equity; (vi) related notes.

53


 

Signatures

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

SANDY SPRING BANCORP, INC.

(Registrant)

 

By: /s/ Daniel J. Schrider                   

Daniel J. Schrider

President and Chief Executive Officer

 

Date: May 8, 2015

 

By: /s/ Philip J. Mantua                     

Philip J. Mantua

Executive Vice President and Chief Financial Officer

 

Date: May 8, 2015

54