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 September 30, 2014

 

OR

 

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

 

For the transition period from ____________ to ____________

 

Commission File Number: 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 October 31, 2014

 

Common stock, $1.00 par value – 25,040,890 shares

 

 

 

 
 

 

SANDY SPRING BANCORP, INC.

 

TABLE OF CONTENTS

  

  Page
PART I - FINANCIAL INFORMATION  
     
Item 1. FINANCIAL STATEMENTS  
     
  Condensed Consolidated Statements of Condition at September 30, 2014 and December 31, 2013 4
     
  Condensed Consolidated Statements of Income - Unaudited for the Three and Nine Months Ended September 30, 2014 and 2013 5
     
  Condensed Consolidated Statements of Comprehensive Income – Unaudited for   the Three and Nine Months Ended September 30, 2014 and 2013 6
     
  Condensed Consolidated Statements of Cash Flows – Unaudited for the Nine Months Ended September 30, 2014 and 2013 7
     
  Condensed Consolidated Statements of Changes in Stockholders’ Equity – Unaudited for the   Nine Months Ended September 30, 2014 and 2013 8
     
  Notes to Condensed Consolidated Financial Statements 9
     
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 35
     
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 58
     
Item 4. CONTROLS AND PROCEDURES 58
     
PART II - OTHER INFORMATION  
     
Item 1. LEGAL PROCEEDINGS 59
     
Item 1A. RISK FACTORS 59
     
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 59
     
Item 3. DEFAULTS UPON SENIOR SECURITIES 59
     
Item 4. MINE SAFETY DISCLOSURES 59
     
Item 5. OTHER INFORMATION 59
     
Item 6 EXHIBITS 59
     
SIGNATURES 60
     

 

 

 

 

 

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 Company 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 the Company’s 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 2013 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 the Company’s liquidity;

  

·the Company’s liquidity requirements could be adversely affected by changes in our assets and liabilities;

 

·the Company’s investment securities portfolio is subject to credit risk, market risk, and liquidity risk as well as changes in the estimates the Company uses to value certain of the securities in the 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 the Company’s 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

 

 

 

         
         
   September 30,   December 31, 
(Dollars in thousands)  2014   2013 
Assets          
  Cash and due from banks  $48,665   $46,755 
  Federal funds sold   474    475 
  Interest-bearing deposits with banks   42,820    27,197 
     Cash and cash equivalents   91,959    74,427 
  Residential mortgage loans held for sale (at fair value)   6,656    8,365 
  Investments available-for-sale (at fair value)   692,107    751,284 
  Investments held-to-maturity -- fair value of $223,130 and $216,007 at September 30, 2014 and December 31, 2013, respectively   221,690    224,638 
  Other equity securities   37,072    40,687 
  Total loans and leases   2,975,912    2,784,266 
     Less: allowance for loan and lease losses   (37,574)   (38,766)
  Net loans and leases   2,938,338    2,745,500 
  Premises and equipment, net   45,841    45,916 
  Other real estate owned   1,762    1,338 
  Accrued interest receivable   12,277    12,532 
  Goodwill   84,171    84,171 
  Other intangible assets, net   622    1,330 
  Other assets   116,236    115,912 
Total assets  $4,248,731   $4,106,100 
           
Liabilities          
  Noninterest-bearing deposits  $986,549   $836,198 
  Interest-bearing deposits   2,042,239    2,041,027 
     Total deposits   3,028,788    2,877,225 
  Securities sold under retail repurchase agreements and federal funds purchased   71,384    53,842 
  Advances from FHLB   558,000    615,000 
  Subordinated debentures   35,000    35,000 
  Accrued interest payable and other liabilities   33,155    25,670 
     Total liabilities   3,726,327    3,606,737 
           
Stockholders' Equity          
  Common stock -- par value $1.00; shares authorized 50,000,000; shares issued and outstanding 25,076,794 and 24,990,021 at September 30, 2014 and December 31, 2013, respectively   25,077    24,990 
  Additional paid in capital   194,899    193,445 
  Retained earnings   298,796    283,898 
  Accumulated other comprehensive income (loss)   3,632    (2,970)
     Total stockholders' equity   522,404    499,363 
Total liabilities and stockholders' equity  $4,248,731   $4,106,100 

 

 

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   Nine Months Ended 
   September 30,   September 30, 
(Dollars in thousands, except per share data)  2014   2013   2014   2013 
Interest Income:                    
Interest and fees on loans and leases  $31,030   $33,079   $91,470   $91,937 
Interest on loans held for sale   81    176    211    838 
Interest on deposits with banks   24    22    66    65 
Interest and dividends on investment securities:                    
    Taxable   3,712    4,558    11,704    12,411 
    Exempt from federal income taxes   2,303    2,345    6,940    6,987 
     Total interest income   37,150    40,180    110,391    112,238 
Interest Expense:                    
Interest on deposits   1,208    1,358    3,585    4,209 
Interest on retail repurchase agreements and federal funds purchased   42    39    117    126 
Interest on advances from FHLB   3,258    3,255    9,709    9,667 
Interest on subordinated debt   222    222    659    672 
     Total interest expense   4,730    4,874    14,070    14,674 
Net interest income   32,420    35,306    96,321    97,564 
Provision (credit) for loan and lease losses   (192)   1,128    (1,016)   (1,670)
     Net interest income after provision (credit) for loan
     and lease losses
   32,612    34,178    97,337    99,234 
Non-interest Income:                    
 Investment securities gains   8    -    8    118 
 Service charges on deposit accounts   2,226    2,171    6,287    6,390 
 Mortgage banking activities   596    (26)   1,482    2,738 
 Wealth management income   4,974    4,503    14,181    13,077 
 Insurance agency commissions   1,410    1,193    4,011    3,578 
 Income from bank owned life insurance   611    629    1,817    1,864 
 Bank card fees   1,148    1,077    3,295    3,113 
 Other income   1,617    1,676    4,452    4,979 
     Total non-interest income   12,590    11,223    35,533    35,857 
Non-interest Expenses:                    
 Salaries and employee benefits   16,765    16,382    49,594    48,891 
 Occupancy expense of premises   3,032    3,149    9,778    9,327 
 Equipment expenses   1,337    1,200    3,855    3,676 
 Marketing   744    713    2,088    1,983 
 Outside data services   1,231    1,152    3,663    3,418 
 FDIC insurance   594    678    1,687    1,855 
 Amortization of intangible assets   115    462    709    1,384 
 Litigation expenses   236    -    6,364    - 
 Other expenses   4,578    3,157    12,584    11,690 
     Total non-interest expenses   28,632    26,893    90,322    82,224 
Income before income taxes   16,570    18,508    42,548    52,867 
Income tax expense   5,428    6,419    13,496    18,058 
     Net income  $11,142   $12,089   $29,052   $34,809 
                     
Net Income Per Share Amounts:                    
Basic net income per share  $0.44   $0.48   $1.16   $1.40 
Diluted net income per share  $0.44   $0.48   $1.16   $1.39 
Dividends declared per share  $0.20   $0.16   $0.56   $0.46 

 

 

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 September 30,   Nine Months Ended September 30, 
(In thousands)  2014   2013   2014   2013 
Net income  $11,142   $12,089   $29,052   $34,809 
  Other comprehensive income (loss):                    
   Investments available-for-sale:                    
     Net change in unrealized gains (losses) on
     investments available-for-sale
   (2,714)   (1,032)   10,779    (24,925)
         Related income tax (expense) benefit   1,061    407    (4,284)   9,935 
     Net investment gains reclassified into earnings   8    -    8    118 
        Related income tax expense   (3)   -    (3)   (47)
       Net effect on other comprehensive income (loss)
       for the period
   (1,648)   (625)   6,500    (14,919)
                     
   Defined benefit pension plan:                    
     Recognition of unrealized gain   67    249    183    1,176 
        Related income tax benefit   (20)   (91)   (81)   (461)
     Net effect on other comprehensive income (loss)
     for the period
   48    158    102    715 
  Total other comprehensive income (loss)   (1,600)   (467)   6,602    (14,204)
Comprehensive income  $9,541   $11,622   $35,654   $20,605 

 

 

 The accompanying notes are an integral part of these statements

 

6
 

 

Sandy Spring Bancorp, Inc. and Subsidiaries

CONDENSED Consolidated Statements of Cash Flows – UNAUDITED

 

 

   Nine Months Ended September 30, 
(Dollars in thousands)   2014    2013 
Operating activities:          
 Net income  $29,052   $34,809 
 Adjustments to reconcile net income to net cash provided by operating activities:          
   Depreciation and amortization   5,415    6,033 
   Credit for loan and lease losses   (1,016)   (1,670)
   Share based compensation expense   1,101    1,307 
   Deferred income tax expense   1,119    2,945 
   Origination of loans held for sale   (90,531)   (219,153)
   Proceeds from sales of loans held for sale   93,554    248,907 
   Gains on sales of loans held for sale   (1,314)   (4,147)
   Loss on sales of other real estate owned   162    1,072 
   Investment securities gains   (8)   (118)
   Net decrease (increase) in accrued interest receivable   255    (72)
   Net (increase) decrease in other assets   (7,319)   6,441 
   Net increase in accrued expenses and other liabilities   7,683    2,010 
   Other – net   3,256    3,706 
      Net cash provided by operating activities   41,409    82,070 
Investing activities:          
 Purchases of other equity securities   -    (2,776)
 Purchases of investments held-to-maturity   -    (20,666)
 Purchases of investments available-for-sale   -    (161,379)
 Proceeds from other equity securities   3,615    - 
 Proceeds from maturities, calls and principal payments of investments held-to-maturity   2,293    9,959 
 Proceeds from maturities, calls and principal payments of investments available-for-sale   67,700    143,220 
 Net increase in loans and leases   (192,794)   (135,100)
 Proceeds from the sales of other real estate owned   465    7,137 
 Expenditures for premises and equipment   (3,547)   (1,883)
     Net cash used in investing activities   (122,268)   (161,488)
Financing activities:          
 Net increase in deposits   151,563    3,432 
 Net increase (decrease) in retail repurchase agreements and federal funds purchased   17,542    (33,752)
 Proceeds from advances from FHLB   1,330,000    745,000 
 Repayment of advances from FHLB   (1,387,000)   (630,058)
 Proceeds from issuance of common stock   440    48 
 Dividends paid   (14,154)   (11,590)
     Net cash provided by financing activities   98,391    73,080 
Net increase (decrease) in cash and cash equivalents   17,532    (6,338)
Cash and cash equivalents at beginning of period   74,427    86,406 
Cash and cash equivalents at end of period  $91,959   $80,068 
           
Supplemental Disclosures:          
  Interest payments  $14,066   $15,031 
  Income tax payments   11,908    12,470 
  Transfers from loans to other real estate owned   971    2,353 

 

 

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, 2014  $24,990   $193,445   $283,898   $(2,970)  $499,363 
Net income             29,052         29,052 
Other comprehensive income, net of tax                  6,602    6,602 
Common stock dividends -  $0.56 per share             (14,154)        (14,154)
Stock compensation expense        1,318              1,318 
Common stock issued pursuant to:                       - 
    Stock option plan - 13,834 shares   14    176              190 
    Employee stock purchase plan - 18,404 shares   18    365              383 
    Restricted stock - 54,535 shares   55    (405)             (350)
Balances at September 30, 2014  $25,077   $194,899    298,796   $3,632   $522,404 
                          
Balances at January 1, 2013  $24,905   $191,689   $255,606   $11,312   $483,512 
Net income             34,809         34,809 
Other comprehensive loss, net of tax                  (14,204)   (14,204)
Common stock dividends -  $0.46 per share             (11,590)        (11,590)
Stock compensation expense        1,307              1,307 
Common stock issued pursuant to:                       - 
Stock option plan - 10,964 shares   11    128              139 
    Employee stock purchase plan - 19,971 shares   20    336              356 
    Restricted stock - 48,819 shares   49    (496)             (447)
Balances at September 30, 2013  $24,985   $192,964   $278,825   $(2,892)  $493,882 
                          

 

 

 

 

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, equipment leasing, 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 and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for any future periods or for the year ending December 31, 2014. 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 2013 Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on March 14, 2014. There have been no significant changes to the Company’s accounting policies as disclosed in the 2013 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).

 

Loans Acquired with Deteriorated Credit Quality

Acquired loans are evaluated for evidence of credit deterioration since their origination as of the date of the acquisition are recorded at their initial fair value. Credit deterioration is determined based on the probability of collection of all contractually required principal and interest payments. The historical allowance for loan and lease losses related to the purchased loans is not carried over to the Company. The determination of credit quality deterioration as of the purchase date may include parameters such as past due and non-accrual status, commercial risk ratings, cash flow projections, type of loan and collateral, collateral value and recent loan-to-value ratios or appraised values. For loans acquired with no evidence of credit deterioration, the fair value discount or premium is amortized over the contractual life of the loan as an adjustment to yield. For loans acquired with evidence of credit deterioration, the Company determines at the acquisition date the excess of the loan’s contractually required payments over all cash flows expected to be collected as an amount that should not be accreted into interest income (nonaccretable difference). The remaining amount representing the difference in the expected cash flows of acquired loans and the initial investment in the acquired loans is accreted into interest income over the remaining life of the loan or pool of loans (accretable yield). The present value of any decreases in expected cash flows after the purchase date is recognized as an impairment through a charge to the provision for loan losses. Increases in the present value of expected cash flows after the purchase date are recognized as an adjustment to the accretable yield. Subsequent to the purchase date, the methods utilized to estimate the required allowance for loan and lease losses (“ALLL”) are similar to originated loans. Loans carried at fair value, mortgage loans held for sale and loans under revolving credit agreements are excluded from the scope of this guidance on loans acquired with deteriorated credit quality.

 

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: 

 

                                 
   September 30, 2014   December 31, 2013 
       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  $144,473   $-   $(3,757)  $140,716   $147,688   $-   $(8,222)  $139,466 
State and municipal   157,854    9,731    -    167,585    159,524    6,060    (156)   165,428 
Mortgage-backed   374,326    9,995    (4,417)   379,904    439,054    10,188    (6,992)   442,250 
Corporate debt   2,000    2    -    2,002    2,000    4    -    2,004 
Trust preferred   1,349    -    (172)   1,177    1,701    -    (288)   1,413 
Total debt securities   680,002    19,728    (8,346)   691,384    749,967    16,252    (15,658)   750,561 
Marketable equity securities   723    -    -    723    723    -    -    723 
Total investments available-for-sale  $680,725   $19,728   $(8,346)  $692,107   $750,690   $16,252   $(15,658)  $751,284 

 

Any unrealized losses in the U.S. government agencies, state and municipal, mortgage-backed or corporate debt investment securities at September 30, 2014 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 September 30, 2014 is composed entirely of either the most senior tranches of GNMA, FNMA or FHLMC collateralized mortgage obligations ($176.2 million), or GNMA, FNMA or FHLMC mortgage-backed securities ($203.7 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 September 30, 2014, 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 $1.3 million with a fair value of $1.2 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.

 

10
 

 

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 (.52%), 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 11.8% was established using credit adjusted financial institution spreads for comparably rated institutions and a liquidity adjustment that considered the previously noted characteristics.

 

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 September 30, 2014. Non-credit related decline in fair value 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 September 30, 2014. This non-credit related decline in fair value was recognized in other comprehensive income (“OCI”) at September 30, 2014.

 

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;
·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, 2013  $531 
Additions for credit losses not previously recognized   - 
Cumulative credit losses on investment securities, through September 30, 2014  $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:

 

 

   September 30, 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   $140,716   $-   $3,757   $3,757 
Mortgage-backed   26    140,189    341    4,076    4,417 
Trust preferred   1    1,177    -    172    172 
   Total   41   $282,082   $341   $8,005   $8,346 
                          
                          
   December 31, 2013 
           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   15   $139,466   $8,222   $-   $8,222 
State and municipal   12    11,680    156    -    156 
Mortgage-backed   30    169,377    6,865    127    6,992 
Trust preferred   1    1,413    -    288    288 
   Total   58   $321,936   $15,243   $415   $15,658 

  

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. 

 

   September 30, 2014   December 31, 2013 
       Estimated       Estimated 
   Amortized   Fair   Amortized   Fair 
(In thousands)  Cost   Value   Cost   Value 
Due in one year or less  $2,000   $2,002   $2,080   $2,085 
Due after one year through five years   43,148    44,500    12,766    13,285 
Due after five years through ten years   341,678    348,934    392,389    392,339 
Due after ten years   293,176    295,948    342,732    342,852 
   Total debt securities available for sale  $680,002   $691,384   $749,967   $750,561 

 

At September 30, 2014 and December 31, 2013, investments available-for-sale with a book value of $200.2 million and $186.6 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 September 30, 2014 and December 31, 2013.

 

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:

 

 

   September 30, 2014   December 31, 2013 
       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  $64,510   $-   $(1,984)  $62,526   $64,505   $-   $(4,827)  $59,678 
State and municipal   156,971    4,121    (724)   160,368    159,889    1,920    (5,753)   156,056 
Mortgage-backed   209    27    -    236    244    29    -    273 
   Total investments held-to-maturity  $221,690   $4,148   $(2,708)  $223,130   $224,638   $1,949   $(10,580)  $216,007 

 

 

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: 

 

   September 30, 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   $62,526   $-   $1,984   $1,984 
State and municipal   57    52,941    55    669    724 
   Total   65   $115,467   $55   $2,653   $2,708 
                          
                          
   December 31, 2013 
           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   $59,678   $4,827   $-   $4,827 
State and municipal   113    94,243    5,366    387    5,753 
   Total   121   $153,921   $10,193   $387   $10,580 

 

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, and considers the unrealized losses in the held-to-maturity portfolio temporary in nature.

 

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.

 

13
 

 

   September 30, 2014   December 31, 2013 
       Estimated       Estimated 
   Amortized   Fair   Amortized   Fair 
(In thousands)  Cost   Value   Cost   Value 
Due in one year or less  $3,099   $3,112   $1,720   $1,725 
Due after one year through five years   4,563    4,618    3,249    3,269 
Due after five years through ten years   154,865    163,345    139,033    135,074 
Due after ten years   59,163    52,055    80,636    75,939 
   Total debt securities held-to-maturity  $221,690   $223,130   $224,638   $216,007 

 

At September 30, 2014 and December 31, 2013, investments held-to-maturity with a book value of $206.6 million and $165.8 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 September 30, 2014 and December 31, 2013.

 

Equity securities

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

 

 

(In thousands)  September 30, 2014   December 31, 2013 
Federal Reserve Bank stock  $8,269   $8,269 
Federal Home Loan Bank of Atlanta stock   28,803    32,418 
   Total equity securities  $37,072   $40,687 

 

Note 3 – Loans and Leases

Outstanding loan balances at September 30, 2014 and December 31, 2013 are net of unearned income including net deferred loan costs of $0.1 million and $0.7 million, respectively. The loan portfolio segment balances at the dates indicated are presented in the following table: 

 

(In thousands)  September 30, 2014   December 31, 2013 
Residential real estate:          
   Residential mortgage  $698,925   $618,381 
   Residential construction   141,883    129,177 
Commercial real estate:          
   Commercial owner occupied real estate   584,964    592,823 
   Commercial investor real estate   575,984    552,178 
   Commercial acquisition, development and construction   194,666    160,696 
Commercial Business   368,611    356,651 
Leases   156    703 
Consumer   410,723    373,657 
   Total loans and leases  $2,975,912   $2,784,266 

 

 

14
 

 

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: 

 

   Nine Months Ended September 30, 
(In thousands)  2014   2013 
Balance at beginning of year  $38,766   $42,957 
   Provision (credit) for loan and lease losses   (1,016)   (1,670)
   Loan and lease charge-offs   (1,541)   (9,639)
   Loan and lease recoveries   1,365    7,774 
     Net charge-offs   (176)   (1,865)
Balance at period end  $37,574   $39,422 

 

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 Nine Months Ended September 30, 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)   (1,119)   799    (681)   630    (6)   41    (355)   (325)   (1,016)
Charge-offs   (225)   -    (4)   (265)   -    (720)   (324)   (3)   (1,541)
Recoveries   1,023    -    34    -    -    134    105    69    1,365 
   Net recoveries (charge-offs)   798    -    30    (265)   -    (586)   (219)   66    (176)
Balance at end of period  $5,987   $4,553   $8,612   $6,673   $10   $3,597   $7,245   $897   $37,574 
                                              
Total loans and leases  $368,611   $194,666   $575,984   $584,964   $156   $410,723   $698,925   $141,883   $2,975,912 
Allowance for loans and leases to total loans and leases ratio   1.62%   2.34%   1.50%   1.14%   6.42%   0.88%   1.04%   0.63%   1.26%
                                              
Balance of loans specifically evaluated for impairment  $5,943   $3,792   $10,352   $10,742    na.   $27   $6,039   $1,689   $38,584 
Allowance for loans specifically evaluated for impairment  $1,406   $1,188   $399   $794    na.    na.   $557   $-   $4,344 
Specific allowance to specific loans ratio   23.66%   31.33%   3.85%   7.39%   na.    na.    9.22%   na.    11.26%
                                              
Balance of loans collectively evaluated  $362,668   $190,874   $565,632   $574,222   $156   $410,696   $692,886   $140,194   $2,937,328 
Allowance for loans collectively evaluated  $4,581   $3,365   $8,213   $5,879   $10   $3,597   $6,688   $897   $33,230 
Collective allowance to collective loans ratio   1.26%   1.76%   1.45%   1.02%   6.42%   0.88%   0.97%   0.64%   1.13%
                                              

 

 

15
 

 

   For the Year Ended December 31, 2013 
       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  $6,495   $4,737   $9,583   $6,997   $332   $3,846   $8,522   $2,445   $42,957 
Provision (credit)   1,910    (3,978)   1,100    (874)   (326)   1,951    329    (1,196)   (1,084)
Charge-offs   (2,915)   (85)   (4,774)   (240)   -    (1,853)   (1,194)   (104)   (11,165)
Recoveries   818    3,080    3,354    425    10    198    162    11    8,058 
   Net recoveries (charge-offs )   (2,097)   2,995    (1,420)   185    10    (1,655)   (1,032)   (93)   (3,107)
Balance at end of period  $6,308   $3,754   $9,263   $6,308   $16   $4,142   $7,819   $1,156   $38,766 
                                              
Total loans and leases  $356,651   $160,696   $552,178   $592,823   $703   $373,657   $618,381   $129,177   $2,784,266 
Allowance for loans and leases to total loans and leases ratio   1.77%   2.34%   1.68%   1.06%   2.28%   1.11%   1.26%   0.89%   1.39%
                                              
Balance of loans specifically evaluated for impairment  $5,608   $4,128   $7,654   $7,111   $na.   $29   $6,141   $1,852   $32,523 
Allowance for loans specifically evaluated for impairment  $849   $1,031   $126   $426   $na.   $na.   $626   $-   $3,058 
Specific allowance to specific loans ratio   15.14%   24.98%   1.65%   5.99%  $na.    na.    10.19%   na.    9.40%
                                              
Balance of loans collectively evaluated  $351,043   $156,568   $544,524   $585,712   $703   $373,628   $612,240   $127,325   $2,751,743 
Allowance for loans collectively evaluated  $5,459   $2,723   $9,137   $5,882   $16   $4,142   $7,193   $1,156   $35,708 
Collective allowance to collective loans ratio   1.56%   1.74%   1.68%   1.00%   2.28%   1.11%   1.17%   0.91%   1.30%
                                              

 

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

 

(In thousands)  September 30, 2014   December 31, 2013 
Impaired loans with a specific allowance  $15,608   $12,217 
Impaired loans without a specific allowance   22,976    20,306 
   Total impaired loans  $38,584   $32,523 
           
Allowance for loan and lease losses related to impaired loans  $4,344   $3,058 
Allowance for loan and lease losses related to loans collectively evaluated   33,230    35,708 
   Total allowance for loan and lease losses  $37,574   $38,766 
           
Average impaired loans for the period  $35,559   $38,379 
Contractual interest income due on impaired loans during the period  $2,217   $2,612 
Interest income on impaired loans recognized on a cash basis  $665   $1,374 
Interest income on impaired loans recognized on an accrual basis  $281   $473 

 

 

16
 

 

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: 

 

   September 30, 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  $1,182   $1,437   $2,044   $5,051   $947   $10,661 
     Restructured accruing   793    -    -    -    779    1,572 
     Restructured non-accruing   230    1,211    78    1,245    611    3,375 
   Balance  $2,205   $2,648   $2,122   $6,296   $2,337   $15,608 
                               
   Allowance  $1,406   $1,188   $399   $794   $557   $4,344 
                               
Impaired loans without a specific allowance                              
     Non-accruing  $1,745   $-   $6,088   $1,808   $784   $10,425 
     Restructured accruing   999    -    2,142    -    2,669    5,810 
     Restructured non-accruing   994    1,144    -    2,638    1,965    6,741 
   Balance  $3,738   $1,144   $8,230   $4,446   $5,418   $22,976 
                               
Total impaired loans                              
     Non-accruing  $2,927   $1,437   $8,132   $6,859   $1,731   $21,086 
     Restructured accruing   1,792    -    2,142    -    3,448    7,382 
     Restructured non-accruing   1,224    2,355    78    3,883    2,576    10,116 
   Balance  $5,943   $3,792   $10,352   $10,742   $7,755   $38,584 
                               
Unpaid principal balance in total impaired loans  $7,752   $13,245   $14,998   $12,725   $7,908   $56,628 

 

 

       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  $5,662   $3,948   $9,089   $8,968   $7,892   $35,559 
Contractual interest income due on impaired loans during the period  $319   $512   $553   $694   $139      
Interest income on impaired loans recognized on a cash basis  $232   $68   $76   $250   $39      
Interest income on impaired loans recognized on an accrual basis  $98   $-   $83   $-   $100      

 

 

 

17
 

 

   December 31, 2013 
       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  $374   $1,360   $749   $2,022   $-   $4,505 
     Restructured accruing   790    -    -    1,174    2,365    4,329 
     Restructured non-accruing   349    1,122    -    1,274    638    3,383 
   Balance  $1,513   $2,482   $749   $4,470   $3,003   $12,217 
                               
   Allowance  $849   $1,031   $126   $426   $626   $3,058 
                               
Impaired loans without a specific allowance                              
     Non-accruing  $1,532   $382   $5,440   $646   $-   $8,000 
     Restructured accruing   1,417    -    852    -    2,861    5,130 
     Restructured non-accruing   1,146    1,264    613    1,995    2,158    7,176 
   Balance  $4,095   $1,646   $6,905   $2,641   $5,019   $20,306 
                               
Total impaired loans                              
     Non-accruing  $1,906   $1,742   $6,189   $2,668   $-   $12,505 
     Restructured accruing   2,207    -    852    1,174    5,226    9,459 
     Restructured non-accruing   1,495    2,386    613    3,269    2,796    10,559 
   Balance  $5,608   $4,128   $7,654   $7,111   $8,022   $32,523 
                               
Unpaid principal balance in total impaired loans  $7,943   $10,318   $12,351   $8,684   $8,650   $47,946 

   

 

   December 31, 2013 
       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  $7,153   $5,451   $10,605   $8,386   $6,784   $38,379 
Contractual interest income due on impaired loans during the period  $452   $654   $587   $692   $227      
Interest income on impaired loans recognized on a cash basis  $238   $253   $75   $725   $83      
Interest income on impaired loans recognized on an accrual basis  $133   $-   $30   $77   $233      

 

 

18
 

 

Credit Quality

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

 

   September 30, 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  $4,151   $3,792   $8,210   $10,742   $-   $1,830   $4,417   $2,497   $35,639 
  Loans and leases 90 days past due   -    -    -    649    -    6    -    -    655 
  Restructured loans and leases   1,792    -    2,142    -    -    -    3,448    -    7,382 
Total non-performing loans and leases   5,943    3,792    10,352    11,391    -    1,836    7,865    2,497    43,676 
  Other real estate owned   39    365    -    -    -    -    1,358    -    1,762 
Total non-performing assets  $5,982   $4,157   $10,352   $11,391   $-   $1,836   $9,223   $2,497   $45,438 

  

   December 31, 2013 
       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  $3,400   $4,127   $6,802   $5,936   $-   $2,259   $5,735   $2,315   $30,574 
  Loans and leases 90 days past due   -    -    -    -    -    1    -    -    1 
  Restructured loans and leases   2,207    -    852    1,174    -    29    5,197    -    9,459 
Total non-performing loans and leases   5,607    4,127    7,654    7,110    -    2,289    10,932    2,315    40,034 
  Other real estate owned   54    365    -    -    -    -    919    -    1,338 
Total non-performing assets  $5,661   $4,492   $7,654   $7,110   $-   $2,289   $11,851   $2,315   $41,372 

 

   September 30, 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  $564   $948   $169   $839   $-   $732   $4,014   $-   $7,266 
   61-90 days   403    -    2,009    -    -    20    162    -    2,594 
   > 90 days   -    -    -    649    -    6    -    -    655 
      Total past due   967    948    2,178    1,488    -    758    4,176    -    10,515 
  Non-accrual loans and leases   4,151    3,792    8,210    10,742    -    1,830    4,417    2,497    35,639 
  Loans aquired with deteriorated credit quality   1,267    -    53    1,814    -    -    -    -    3,134 
Current loans   362,226    189,926    565,543    570,920    156    408,135    690,332    139,386    2,926,624 
      Total loans and leases  $368,611   $194,666   $575,984   $584,964   $156   $410,723   $698,925   $141,883   $2,975,912 

 

19
 

 

  

   December 31, 2013 
       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  $382   $-   $5,826   $876   $4   $716   $4,119   $-   $11,923 
   61-90 days   1,142    -    -    2,540    -    176    208    -    4,066 
   > 90 days   -    -    -    -    -    1    -    -    1 
      Total past due   1,524    -    5,826    3,416    4    893    4,327    -    15,990 
  Non-accrual loans and leases   3,400    4,127    6,802    5,936    -    2,259    5,735    2,315    30,574 
  Loans aquired with deteriorated credit quality   1,363    -    571    2,366    -    -    -    -    4,300 
Current loans   350,364    156,569    538,979    581,105    699    370,505    608,319    126,862    2,733,402 
      Total loans and leases  $356,651   $160,696   $552,178   $592,823   $703   $373,657   $618,381   $129,177   $2,784,266 

 

 

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

 

   September 30, 2014 
       Commercial Real Estate     
               Commercial     
       Commercial   Commercial   Owner     
(In thousands)  Commercial   AD&C   Investor R/E   Occupied R/E   Total 
   Pass  $344,076   $189,604   $557,036   $553,795   $1,644,511 
   Special Mention   14,752    -    3,882    9,799    28,433 
   Substandard   9,783    5,062    15,066    21,370    51,281 
   Doubtful   -    -    -    -    - 
Total  $368,611   $194,666   $575,984   $584,964   $1,724,225 

 

 

   December 31, 2013 
       Commercial Real Estate     
               Commercial     
       Commercial   Commercial   Owner     
(In thousands)  Commercial   AD&C   Investor R/E   Occupied R/E   Total 
   Pass  $324,941   $154,869   $523,901   $553,604   $1,557,315 
   Special Mention   16,166    -    2,944    15,702    34,812 
   Substandard   15,274    5,827    25,333    23,517    69,951 
   Doubtful   270    -    -    -    270 
Total  $356,651   $160,696   $552,178   $592,823   $1,662,348 

  

20
 

 

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: 

 

   September 30, 2014 
           Residential Real Estate     
           Residential   Residential     
(In thousands)  Leasing   Consumer   Mortgage   Construction   Total 
   Performing  $156   $408,887   $691,060   $139,386   $1,239,489 
  Non-performing:                         
       90 days past due   -    6    -    -    6 
       Non-accruing   -    1,830    4,417    2,497    8,744 
        Restructured loans and leases   -    -    3,448    -    3,448 
Total  $156   $410,723   $698,925   $141,883   $1,251,687 

  

   December 31, 2013 
           Residential Real Estate     
           Residential   Residential     
(In thousands)  Leasing   Consumer   Mortgage   Construction   Total 
   Performing  $703   $371,368   $607,449   $126,862   $1,106,382 
  Non-performing:                         
       90 days past due   -    1    -    -    1 
       Non-accruing   -    2,259    5,735    2,315    10,309 
        Restructured loans and leases   -    29    5,197    -    5,226 
Total  $703   $373,657   $618,381   $129,177   $1,121,918 

  

During the nine months ended September 30, 2014, the Company restructured $1.7 million in loans that were designated as troubled debt restructurings. Modifications consisted principally of interest rate concessions. No modifications resulted in the reduction of the recorded 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 principal in the restructured loan. Loans restructured during 2014 did not require significant specific reserves at September 30, 2014. For the year ended December 31, 2013, the Company restructured $3.4 million in loans. Modifications consisted principally of interest rate concessions and no modifications resulted in the reduction of the recorded principal in the associated loan balances. Loans restructured during 2013 had specific reserves of $0.1 million at December 31, 2013. Commitments to lend additional funds on loans that have been restructured at September 30, 2014 and December 31, 2013 amounted to $5.4 million and $5.5 million, respectively.

 

21
 

 

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 Nine Months Ended September 30, 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  $185   $-   $1,290   $-   $-   $1,475 
     Restructured non-accruing   -    192    -    -    -    192 
Balance  $185   $192   $1,290   $-   $-   $1,667 
                               
Specific allowance  $-   $-   $-   $-   $-   $- 
                               
Restructured and subsequently defaulted  $-   $-   $-   $720   $-   $720 

  

   For the Year Ended December 31, 2013 
       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  $87   $-   $852   $-   $2,064   $3,003 
     Restructured non-accruing   425    -    -    -    -    425 
Balance  $512   $-   $852   $-   $2,064   $3,428 
                               
Specific allowance  $141   $-   $-   $-   $-   $141 
                               
Restructured and subsequently defaulted  $-   $-   $-   $-   $-   $- 

 

 

Other Real Estate Owned

Other real estate owned totaled $1.8 million and $1.3 million at September 30, 2014 and December 31, 2013.

 

22
 

 

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: 

 

   September 30, 2014   Weighted   December 31, 2013   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:                                        
Core deposit intangibles  $9,716   $(9,716)  $-    -   $9,716   $(9,352)  $364    0.3 years 
Other identifiable intangibles   8,623    (8,001)   622    1.4 years    8,623    (7,657)   966    2.1 years 
   Total amortizing intangible assets  $18,339   $(17,717)  $622        $18,339   $(17,009)  $1,330      
                                         
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 
2014   112 
2015   372 
2016   94 
2017   16 
Thereafter   28 
   Total amortizing intangible assets  $622 

 

 

Note 6 – Deposits

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

 

(In thousands)  September 30, 2014   December 31, 2013 
Noninterest-bearing deposits  $986,549   $836,198 
Interest-bearing deposits:          
   Demand   485,112    460,824 
   Money market savings   846,625    870,653 
   Regular savings   259,848    243,813 
   Time deposits of less than $100,000   244,085    263,636 
   Time deposits of $100,000 or more   206,569    202,101 
     Total interest-bearing deposits   2,042,239    2,041,027 
       Total deposits  $3,028,788   $2,877,225 

 

 

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. No shares were repurchased during the first nine months of 2014.

 

 

23
 

 

Note 8 – Share Based Compensation

At September 30, 2014, the Company had two share based compensation plans in existence, the 1999 Stock Option Plan (expired but having outstanding options that may still be exercised) and the 2005 Omnibus Stock Plan, which is described below.

 

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 1,015,421 are available for issuance at September 30, 2014, 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. Options granted under the expired 1999 Stock Option Plan remain outstanding until exercised or they expire. The Company generally issues authorized but previously unissued shares to satisfy option exercises.

 

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: 

 

   Nine Months Ended September 30, 
   2014   2013 
Dividend yield   3.04%   2.80%
Weighted average expected volatility   46.78%   53.87%
Weighted average risk-free interest rate   1.56%   0.83%
Weighted average expected lives (in years)   5.08    5.34 
Weighted average grant-date fair value  $8.05   $7.99 

  

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 September 30, 2014 and 2013, respectively, related to the awards of stock options and restricted stock grants. Compensation expense of $1.3 million and $1.2 million was recognized for the nine months ended September 30, 2014 and 2013, respectively. Stock options exercised were 13,834 and 10,964 for the nine months ended September 30, 2014 and 2013, respectively. The intrinsic value for the stock options exercised amounted to $0.1 million and $0.1 million for the nine months ended September 30, 2014 and 2013, respectively. The total of unrecognized compensation cost related to stock options was approximately $0.2 million as of September 30, 2014. That cost is expected to be recognized over a weighted average period of approximately 2.0 years. The total of unrecognized compensation cost related to restricted stock was approximately $4.0 million as of September 30, 2014. That cost is expected to be recognized over a weighted average period of approximately 3.3 years. The fair value of the options vested during the nine months ended September 30, 2014 and 2013, was $0.2 million and $0.2 million, respectively.

 

In the first quarter of 2014, 21,251 stock options were granted, subject to a three year vesting schedule with one third of the options vesting each year on the anniversary date of the grant. Additionally, 79,416 shares of restricted stock were granted, subject to a five year vesting schedule with one fifth of the shares vesting each year on the grant date anniversary. No shares were granted during the second or third quarter of 2014.

 

24
 

 

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, 2014   307,800   $25.23        $1,768 
Granted   21,251   $24.75           
Exercised   (13,834)  $13.72        $147 
Forfeited or expired   (2,500)   28.59           
Balance at September 30, 2014   312,717   $25.68    2.0   $848 
                     
Exercisable at September 30, 2014   271,580   $26.18    1.4   $787 
                     
Weighted average fair value of options