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 September 30, 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 November 2, 2015

 

Common stock, $1.00 par value – 24,361,582 shares

  


 

SANDY SPRING BANCORP, INC.

 

TABLE OF CONTENTS

 

 

 

 

                                                                                                                            

Page

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

  Item1. FINANCIAL STATEMENTS

 

 

 

 

 

Condensed Consolidated Statements of Condition - Unaudited at

 

 

 

September 30, 2015 and December 31, 2014

4

 

 

 

 

 

Condensed Consolidated Statements of Income - Unaudited for the Three and Nine  Months

 

 

 

Ended September 30, 2015 and 2014

5

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income – Unaudited for

 

 

 

the Three and Nine Months Ended September 30, 2015 and 2014

6

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows – Unaudited for the Nine

 

 

 

Months Ended September 30, 2015 and 2014

7

 

 

 

 

 

 

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

 

 

 

Nine Months Ended September 30, 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

35

 

 

 

 

 

  Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES

 

 

 

ABOUT MARKET RISK

60

 

 

 

 

 

  Item 4. CONTROLS AND PROCEDURES

60

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

  Item 1.    LEGAL PROCEEDINGS

60

 

 

 

 

 

  Item 1A. RISK FACTORS

60

 

 

 

 

 

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

60

 

 

 

 

 

  Item 3.    DEFAULTS UPON SENIOR SECURITIES

60

 

 

 

 

 

  Item 4.    MINE SAFETY DISCLOSURES

60

 

 

 

 

 

  Item 5.    OTHER INFORMATION

60

 

 

 

 

 

  Item 6.    EXHIBITS

61

 

 

 

 

 

  SIGNATURES

62

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

(Dollars in thousands)

 

2015

 

2014

Assets

 

 

 

 

 

 

 

Cash and due from banks

 

$

42,322

 

$

52,804

 

Federal funds sold

 

 

472

 

 

473

 

Interest-bearing deposits with banks

 

 

53,637

 

 

42,940

 

 

Cash and cash equivalents

 

 

96,431

 

 

96,217

 

Residential mortgage loans held for sale (at fair value)

 

 

10,418

 

 

10,512

 

Investments available-for-sale (at fair value)

 

 

607,619

 

 

672,209

 

Investments held-to-maturity -- fair value of $220,223 and $222,260 at September 30, 2015

 

 

 

 

 

 

 

 

and December 31, 2014, respectively

 

 

216,642

 

 

219,973

 

Other equity securities

 

 

38,148

 

 

41,437

 

Total loans and leases

 

 

3,412,439

 

 

3,127,392

 

 

Less: allowance for loan and lease losses

 

 

(39,661)

 

 

(37,802)

 

Net loans and leases

 

 

3,372,778

 

 

3,089,590

 

Premises and equipment, net

 

 

52,573

 

 

49,402

 

Other real estate owned

 

 

2,619

 

 

3,195

 

Accrued interest receivable

 

 

13,102

 

 

12,634

 

Goodwill

 

 

84,171

 

 

84,171

 

Other intangible assets, net    

 

 

190

 

 

510

 

Other assets

 

 

116,343

 

 

117,282

Total assets

 

$

4,611,034

 

$

4,397,132

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

$

1,068,299

 

$

993,737

 

Interest-bearing deposits

 

 

2,207,369

 

 

2,072,772

 

 

Total deposits

 

 

3,275,668

 

 

3,066,509

 

Securities sold under retail repurchase agreements and federal funds purchased

 

 

121,378

 

 

74,432

 

Advances from FHLB

 

 

610,000

 

 

655,000

 

Subordinated debentures

 

 

35,000

 

 

35,000

 

Accrued interest payable and other liabilities

 

 

45,394

 

 

44,440

 

 

Total liabilities

 

 

4,087,440

 

 

3,875,381

 

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

issued and outstanding 24,424,944 and 25,044,877 at September 30, 2015 and

 

 

 

 

 

 

 

 

December 31, 2014, respectively

 

 

24,425

 

 

25,045

 

Additional paid in capital

 

 

178,429

 

 

194,647

 

Retained earnings

 

 

318,939

 

 

302,882

 

Accumulated other comprehensive income (loss)

 

 

1,801

 

 

(823)

 

 

Total stockholders' equity

 

 

523,594

 

 

521,751

Total liabilities and stockholders' equity

 

$

4,611,034

 

$

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

 

Nine Months Ended

 

 

 

 

 

September 30,

 

September 30,

(Dollars in thousands, except per share data)

 

2015

 

2014

 

2015

 

2014

Interest Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans and leases

 

$

34,484

 

$

31,030

 

$

99,654

 

$

91,470

 

Interest on loans held for sale

 

 

214

 

 

81

 

 

422

 

 

211

 

Interest on deposits with banks

 

 

25

 

 

24

 

 

69

 

 

66

 

Interest and dividends on investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

3,597

 

 

3,712

 

 

11,024

 

 

11,704

 

 

Exempt from federal income taxes

 

 

1,996

 

 

2,303

 

 

6,068

 

 

6,940

 

Interest on federal funds sold

 

 

1

 

 

-

 

 

1

 

 

-

 

 

 

Total interest income

 

 

40,317

 

 

37,150

 

 

117,238

 

 

110,391

Interest Expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest on deposits

 

 

1,632

 

 

1,208

 

 

4,193

 

 

3,585

Interest on retail repurchase agreements and federal funds purchased

 

 

69

 

 

42

 

 

179

 

 

117

Interest on advances from FHLB

 

 

3,272

 

 

3,258

 

 

9,774

 

 

9,709

Interest on subordinated debt

 

 

228

 

 

222

 

 

670

 

 

659

 

 

 

Total interest expense

 

 

5,201

 

 

4,730

 

 

14,816

 

 

14,070

Net interest income

 

 

35,116

 

 

32,420

 

 

102,422

 

 

96,321

Provision (credit) for loan and lease losses

 

 

1,706

 

 

(192)

 

 

3,521

 

 

(1,016)

 

 

 

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

 

 

33,410

 

 

32,612

 

 

98,901

 

 

97,337

Non-interest Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities gains

 

 

1

 

 

8

 

 

20

 

 

8

 

Service charges on deposit accounts

 

 

1,936

 

 

2,226

 

 

5,657

 

 

6,287

 

Mortgage banking activities

 

 

566

 

 

596

 

 

2,566

 

 

1,482

 

Wealth management income

 

 

4,963

 

 

4,974

 

 

15,040

 

 

14,181

 

Insurance agency commissions

 

 

1,648

 

 

1,410

 

 

4,147

 

 

4,011

 

Income from bank owned life insurance

 

 

618

 

 

611

 

 

1,937

 

 

1,817

 

Visa check fees

 

 

1,198

 

 

1,148

 

 

3,475

 

 

3,295

 

Other income

 

 

1,460

 

 

1,617

 

 

4,816

 

 

4,452

 

 

 

Total non-interest income

 

 

12,390

 

 

12,590

 

 

37,658

 

 

35,533

Non-interest Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

17,733

 

 

16,765

 

 

52,566

 

 

49,594

 

Occupancy expense of premises

 

 

3,086

 

 

3,032

 

 

9,748

 

 

9,778

 

Equipment expenses

 

 

1,600

 

 

1,337

 

 

4,463

 

 

3,855

 

Marketing

 

 

688

 

 

744

 

 

2,161

 

 

2,088

 

Outside data services

 

 

1,329

 

 

1,231

 

 

3,692

 

 

3,663

 

FDIC insurance

 

 

565

 

 

594

 

 

1,850

 

 

1,687

 

Amortization of intangible assets

 

 

107

 

 

115

 

 

320

 

 

709

 

Litigation expenses

 

 

155

 

 

236

 

 

517

 

 

6,364

 

Other expenses

 

 

4,367

 

 

4,578

 

 

13,034

 

 

12,584

 

 

 

Total non-interest expenses

 

 

29,630

 

 

28,632

 

 

88,351

 

 

90,322

Income before income taxes

 

 

16,170

 

 

16,570

 

 

48,208

 

 

42,548

Income tax expense

 

 

5,175

 

 

5,428

 

 

15,655

 

 

13,496

 

 

 

Net income

 

$

10,995

 

$

11,142

 

$

32,553

 

$

29,052

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income Per Share Amounts:

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

$

0.45

 

$

0.44

 

$

1.32

 

$

1.16

Diluted net income per share

 

$

0.45

 

$

0.44

 

$

1.31

 

$

1.16

Dividends declared per share

 

$

0.22

 

$

0.20

 

$

0.66

 

$

0.56

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

2015

 

2014

 

2015

 

2014

Net income

 

$

10,995

 

$

11,142

 

$

32,553

 

$

29,052

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized gains (losses) on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  available-for-sale

 

 

3,727

 

 

(2,714)

 

 

3,542

 

 

10,779

 

 

 

Related income tax (expense) benefit

 

 

(1,472)

 

 

1,061

 

 

(1,398)

 

 

(4,284)

 

 

Net investment gains reclassified into earnings

 

 

1

 

 

8

 

 

20

 

 

8

 

 

 

Related income tax expense

 

 

-

 

 

(3)

 

 

(8)

 

 

(3)

 

 

 

Net effect on other comprehensive income (loss) for the period

 

 

2,256

 

 

(1,648)

 

 

2,156

 

 

6,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plan:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recognition of unrealized gain

 

 

240

 

 

67

 

 

791

 

 

183

 

 

 

Related income tax expense

 

 

(103)

 

 

(20)

 

 

(323)

 

 

(81)

 

 

 

Net effect on other comprehensive income for the period

 

 

137

 

 

47

 

 

468

 

 

102

 

Total other comprehensive income (loss)

 

 

2,393

 

 

(1,601)

 

 

2,624

 

 

6,602

Comprehensive income

 

$

13,388

 

$

9,541

 

$

35,177

 

$

35,654

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

2015

 

2014

Operating activities:

 

 

 

 

 

Net income

$

32,553

 

$

29,052

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

 

 

 

 

 

 

 

Depreciation and amortization

 

5,422

 

 

5,415

 

 

Provision (credit) for loan and lease losses

 

3,521

 

 

(1,016)

 

 

Share based compensation expense

 

1,450

 

 

1,101

 

 

Deferred income tax expense

 

1,412

 

 

1,119

 

 

Origination of loans held for sale

 

(150,686)

 

 

(90,531)

 

 

Proceeds from sales of loans held for sale

 

153,020

 

 

93,554

 

 

Gains on sales of loans held for sale

 

(2,240)

 

 

(1,314)

 

 

Loss on sales of other real estate owned

 

224

 

 

162

 

 

Investment securities gains

 

(20)

 

 

(8)

 

 

Net (increase) decrease in accrued interest receivable

 

(468)

 

 

255

 

 

Net increase in other assets

 

(2,772)

 

 

(7,319)

 

 

Net increase (decrease) in accrued expenses and other liabilities

 

(176)

 

 

7,683

 

 

Other – net

 

3,063

 

 

3,256

 

 

 

Net cash provided by operating activities

 

44,303

 

 

41,409

Investing activities:

 

 

 

 

 

 

Purchases of investments held-to-maturity

 

(2,100)

 

 

-

 

Redemption of other equity securities

 

3,289

 

 

3,615

 

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

 

4,791

 

 

2,293

 

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

 

66,727

 

 

67,700

 

Net increase in loans and leases

 

(288,233)

 

 

(192,794)

 

Proceeds from the sales of other real estate owned

 

1,855

 

 

465

 

Expenditures for premises and equipment

 

(6,739)

 

 

(3,547)

 

 

 

Net cash used in investing activities

 

(220,410)

 

 

(122,268)

Financing activities:

 

 

 

 

 

 

Net increase in deposits

 

209,159

 

 

151,563

 

Net increase in retail repurchase agreements and federal funds purchased

 

46,946

 

 

17,542

 

Proceeds from advances from FHLB

 

1,649,000

 

 

1,330,000

 

Repayment of advances from FHLB

 

(1,694,000)

 

 

(1,387,000)

 

Proceeds from issuance of common stock

 

581

 

 

440

 

Repurchase of common stock

 

(18,869)

 

 

-

 

Dividends paid

 

(16,496)

 

 

(14,154)

 

 

 

Net cash provided by financing activities

 

176,321

 

 

98,391

Net increase (decrease) in cash and cash equivalents

 

214

 

 

17,532

Cash and cash equivalents at beginning of period

 

96,217

 

 

74,427

Cash and cash equivalents at end of period

$

96,431

 

$

91,959

 

 

 

 

 

 

 

 

 

Supplemental Disclosures:

 

 

 

 

 

 

Interest payments

$

14,779

 

$

15,031

 

Income tax payments

 

14,825

 

 

12,470

 

Transfers from loans to other real estate owned

 

1,524

 

 

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, 2015

 

$

25,045

 

$

194,647

 

$

302,882

 

$

(823)

 

$

521,751

 

Net income

 

 

-

 

 

-

 

 

32,553

 

 

-

 

 

32,553

 

Other comprehensive income, net of tax

 

 

-

 

 

-

 

 

-

 

 

2,624

 

 

2,624

Common stock dividends -  $0.66 per share

 

 

-

 

 

-

 

 

(16,496)

 

 

-

 

 

(16,496)

Stock compensation expense

 

 

-

 

 

1,450

 

 

-

 

 

-

 

 

1,450

Common stock issued pursuant to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock option plan - 35,039 shares

 

 

35

 

 

474

 

 

-

 

 

-

 

 

509

 

Directors stock purchase plan - 837 shares

 

 

1

 

 

21

 

 

-

 

 

-

 

 

22

 

Employee stock purchase plan - 19,377 shares

 

 

19

 

 

412

 

 

-

 

 

-

 

 

431

 

Restricted stock - 53,746 shares

 

 

54

 

 

(435)

 

 

-

 

 

-

 

 

(381)

Purchase of treasury shares - 728,932 shares

 

 

(729)

 

  

(18,140)

 

  

-

 

  

-

 

  

(18,869)

Balances at September 30, 2015

 

$

24,425

 

$

178,429

 

$

318,939

 

$

1,801

 

$

523,594

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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”). The Bank offers a broad range of commercial banking, retail banking, mortgage and trust services throughout central Maryland, Northern Virginia and the greater Washington, D.C. market through its operation of 44 community offices and six financial centers across the region.  The Bank also offers a comprehensive menu of insurance and wealth management services through its subsidiaries, Sandy Spring Insurance Corporation and West Financial Services, Inc.

 

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, 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, 2017.  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, 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

 

$

139,566

 

$

347

 

$

(106)

 

$

139,807

 

$

144,497

 

$

-

 

$

(2,818)

 

$

141,679

State and municipal

 

 

152,914

 

 

9,066

 

 

-

 

 

161,980

 

 

157,603

 

 

9,453

 

 

(4)

 

 

167,052

Mortgage-backed

 

 

296,369

 

 

8,691

 

 

(946)

 

 

304,114

 

 

354,631

 

 

9,824

 

 

(2,936)

 

 

361,519

Trust preferred

 

 

1,078

 

 

-

 

 

(83)

 

 

995

 

 

1,348

 

 

-

 

 

(112)

 

 

1,236

 

Total debt securities

 

 

589,927

 

 

18,104

 

 

(1,135)

 

 

606,896

 

 

658,079

 

 

19,277

 

 

(5,870)

 

 

671,486

Marketable equity securities

 

 

723

 

 

-

 

 

-

 

 

723

 

 

723

 

 

-

 

 

-

 

 

723

 

 

Total investments available-for-sale

 

$

590,650

 

$

18,104

 

$

(1,135)

 

$

607,619

 

$

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 September 30, 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 September 30, 2015 is composed entirely of either the most senior tranches of GNMA, FNMA or FHLMC collateralized mortgage obligations ($142.0 million), or GNMA, FNMA or FHLMC mortgage-backed securities ($162.1 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, 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. 

 

 

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, 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 September 30, 2015.  This non-credit related OTTI was recognized in other comprehensive income (“OCI”) at September 30, 2015. 

  

 

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

10


 

(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 September 30, 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:

 

 

 

 

September 30, 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

 

 

3

 

$

39,871

 

$

17

 

$

89

 

$

106

Mortgage-backed

 

 

17

 

 

80,532

 

 

16

 

 

930

 

 

946

Trust preferred

 

 

1

 

 

995

 

 

-

 

 

83

 

 

83

 

Total

 

 

21

 

$

121,398

 

$

33

 

$

1,102

 

$

1,135

 

 

 

 

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.

 

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

 

 

 

Estimated

 

 

 

 

Estimated

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

(In thousands)

 

Cost

 

Value

 

Cost

 

Value

Due in one year or less

 

$

992

 

$

1,004

 

$

691

 

$

714

Due after one year through five years

 

 

127,163

 

 

130,361

 

 

47,900

 

 

49,385

Due after five years through ten years

 

 

229,704

 

 

238,574

 

 

332,841

 

 

340,852

Due after ten years

 

 

232,068

 

 

236,957

 

 

276,647

 

 

280,535

 

Total debt securities available for sale

 

$

589,927

 

$

606,896

 

$

658,079

 

$

671,486

 

At September 30, 2015 and December 31, 2014, investments available-for-sale with a book value of $243.1 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 September 30, 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:

 

 

 

 

September 30, 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

 

$

64,517

 

$

6

 

$

(410)

 

$

64,113

 

$

64,512

 

$

-

 

$

(1,734)

 

$

62,778

State and municipal

 

 

149,849

 

 

4,283

 

 

(323)

 

 

153,809

 

 

155,261

 

 

4,321

 

 

(325)

 

 

159,257

Mortgage-backed

 

 

176

 

 

25

 

 

-

 

 

201

 

 

200

 

 

25

 

 

-

 

 

225

Corporate debt

 

 

2,100

 

 

-

 

 

-

 

 

2,100

 

 

-

 

 

-

 

 

-

 

 

-

 

Total investments held-to-maturity

 

$

216,642

 

$

4,314

 

$

(733)

 

$

220,223

 

$

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:

 

 

 

 

September 30, 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

 

$

51,050

 

$

208

 

$

202

 

$

410

State and municipal

 

 

29

 

 

24,960

 

 

137

 

 

186

 

 

323

 

Total

 

 

34

 

$

76,010

 

$

345

 

$

388

 

$

733

 

 

 

 

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.

 

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

 

 

 

Estimated

 

 

 

 

Estimated

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

(In thousands)

 

Cost

 

Value

 

Cost

 

Value

Due in one year or less

 

$

846

 

$

860

 

$

1,690

 

$

1,694

Due after one year through five years

 

 

13,098

 

 

13,656

 

 

6,763

 

 

6,938

Due after five years through ten years

 

 

170,411

 

 

173,352

 

 

163,252

 

 

164,787

Due after ten years

 

 

32,287

 

 

32,355

 

 

48,268

 

 

48,841

 

Total debt securities held-to-maturity

 

$

216,642

 

$

220,223

 

$

219,973

 

$

222,260

 

13


 

At September 30, 2015 and December 31, 2014, investments held-to-maturity with a book value of $193.1 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 September 30, 2015 and December 31, 2014.

 

Equity securities

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

(In thousands)

 

September 30, 2015

 

December 31, 2014

Federal Reserve Bank stock

 

$

8,269

 

$

8,269

Federal Home Loan Bank of Atlanta stock

 

 

29,879

 

 

33,168

 

Total equity securities

 

$

38,148

 

$

41,437

               

 

Note 3 – Loans and Leases

Outstanding loan balances at September 30, 2015 and December 31, 2014 are net of unearned income including net deferred loan costs of $1.0 million and $0.5 million, respectively.  The loan portfolio segment balances at the dates indicated are presented in the following table:

 

(In thousands)

 

September 30, 2015

 

December 31, 2014

Residential real estate:

 

 

 

 

 

 

 

Residential mortgage

 

$

773,889

 

$

717,886

 

Residential construction

 

 

139,492

 

 

136,741

Commercial real estate:

 

 

 

 

 

 

 

Commercial owner occupied real estate

 

 

680,601

 

 

611,061

 

Commercial investor real estate

 

 

710,694

 

 

640,193

 

Commercial acquisition, development and construction

 

 

239,160

 

 

205,124

Commercial Business

 

 

423,855

 

 

390,781

Leases

 

 

19

 

 

54

Consumer

 

 

444,729

 

 

425,552

 

Total loans and leases

 

$

3,412,439

 

$

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:

 

 

 

 

Nine Months Ended September 30,

(In thousands)

 

2015

 

2014

Balance at beginning of year

 

$

37,802

 

$

38,766

 

Provision for loan and lease losses

 

 

3,521

 

 

(1,016)

 

Loan and lease charge-offs

 

 

(2,753)

 

 

(1,541)

 

Loan and lease recoveries

 

 

1,091

 

 

1,365

 

 

Net (charge-offs) recoveries

 

 

(1,662)

 

 

(176)

Balance at period end

 

$

39,661

 

$

37,574

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 Nine Months Ended September 30, 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)

 

 

139

 

 

293

 

 

68

 

 

1,218

 

 

-

 

 

881

 

 

919

 

 

3

 

 

3,521

Charge-offs

 

 

(185)

 

 

(739)

 

 

(90)

 

 

(317)

 

 

-

 

 

(930)

 

 

(492)

 

 

-

 

 

(2,753)

Recoveries

 

 

226

 

 

580

 

 

15

 

 

2

 

 

-

 

 

144

 

 

103

 

 

21

 

 

1,091

 

Net charge-offs

 

 

41

 

 

(159)

 

 

(75)

 

 

(315)

 

 

-

 

 

(786)

 

 

(389)

 

 

21

 

 

(1,662)

Balance at end of period

 

$

6,032

 

$

4,401

 

$

9,777

 

$

8,046

 

$

9

 

$

3,687

 

$

6,762

 

$

947

 

$

39,661

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans and leases

 

$

423,855

 

$

239,160

 

$

710,694

 

$

680,601

 

$

19

 

$

444,729

 

$

773,889

 

$

139,492

 

$

3,412,439

Allowance for loans and leases to total loans and leases ratio

 

 

1.42%

 

 

1.84%

 

 

1.38%

 

 

1.18%

 

 

47.37%

 

 

0.83%

 

 

0.87%

 

 

0.68%

 

 

1.16%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance of loans specifically evaluated for impairment

 

$

5,360

 

$

194

 

$

10,697

 

$

8,172

 

$

na.

 

$

na.

 

$

6,482

 

$

na.

 

$

30,905

Allowance for loans specifically evaluated for impairment

 

$

1,278

 

$

57

 

$

709

 

$

958

 

$

na.

 

$

na.

 

$

-

 

$

na.

 

$

3,002

Specific allowance to specific loans ratio

 

 

23.84%

 

 

29.38%

 

 

6.63%

 

 

11.72%

 

 

na.

 

 

na.

 

 

na.

 

 

na.

 

 

9.71%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance of loans collectively evaluated

 

$

418,495

 

$

238,966

 

$

699,997

 

$

672,429

 

$

19

 

$

444,729

 

$

767,407

 

$

139,492

 

$

3,381,534

Allowance for loans collectively evaluated

 

$

4,754

 

$

4,344

 

$

9,068

 

$

7,088

 

$

9

 

$

3,687

 

$

6,762

 

$

947

 

$

36,659

Collective allowance to collective loans ratio

 

 

1.14%

 

 

1.82%

 

 

1.30%

 

 

1.05%

 

 

47.37%

 

 

0.83%

 

 

0.88%

 

 

0.68%

 

 

1.08%

 

 

 

 

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)

 

September 30, 2015

 

December 31, 2014

Impaired loans with a specific allowance

 

$

9,654

 

$

11,411

Impaired loans without a specific allowance

 

 

21,251

 

 

18,008

 

Total impaired loans

 

$

30,905

 

$

29,419

 

 

 

 

 

 

 

 

Allowance for loan and lease losses related to impaired loans

 

$

3,002

 

$

2,894

Allowance for loan and lease losses related to loans collectively evaluated

 

 

36,659

 

 

34,908

 

Total allowance for loan and lease losses

 

$

39,661

 

$

37,802

 

 

 

 

 

 

 

 

Average impaired loans for the period

 

$

30,055

 

$

34,331

Contractual interest income due on impaired loans during the period

 

$

2,016

 

$

2,339

Interest income on impaired loans recognized on a cash basis

 

$

745

 

$

773

Interest income on impaired loans recognized on an accrual basis

 

$

239

 

$

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:

 

 

 

 

September 30, 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

 

$

1,140

 

$

57

 

$

2,589

 

$

4,139

 

$

-

 

$

7,925

 

 

Restructured accruing

 

 

863

 

 

-

 

 

-

 

 

-

 

 

-

 

 

863

 

 

Restructured non-accruing

 

 

162

 

 

-

 

 

65

 

 

639

 

 

-

 

 

866

 

Balance

 

$

2,165

 

$

57

 

$

2,654

 

$

4,778

 

$

-

 

$

9,654

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance

 

$

1,278

 

$

57

 

$

709

 

$

958

 

$

-

 

$

3,002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans without a specific allowance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-accruing

 

$

999

 

$

-

 

$

5,955

 

$

1,741

 

$

2,750

 

$

11,445

 

 

Restructured accruing

 

 

616

 

 

-

 

 

2,088

 

 

240

 

 

2,612

 

 

5,556

 

 

Restructured non-accruing

 

 

1,580

 

 

137

 

 

-

 

 

1,413

 

 

1,120

 

 

4,250

 

Balance

 

$

3,195

 

$

137

 

$

8,043

 

$

3,394

 

$

6,482

 

$

21,251

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-accruing

 

$

2,139

 

$

57

 

$

8,544

 

$

5,880

 

$

2,750

 

$

19,370

 

 

Restructured accruing

 

 

1,479

 

 

-

 

 

2,088

 

 

240

 

 

2,612

 

 

6,419

 

 

Restructured non-accruing

 

 

1,742

 

 

137

 

 

65

 

 

2,052

 

 

1,120

 

 

5,116

 

Balance

 

$

5,360

 

$

194

 

$

10,697

 

$

8,172

 

$

6,482

 

$

30,905

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance in total impaired loans

 

$

7,483

 

$

4,456

 

$

15,355

 

$

10,076

 

$

7,184

 

$

44,554

16


 

 

September 30, 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

 

$

4,574

 

$

1,054

 

$

11,322

 

$

8,628

 

$

4,477

 

$

30,055

Contractual interest income due on impaired loans during the period

 

$

353

 

$

231

 

$

685

 

$

543

 

$

204

 

 

 

Interest income on impaired loans recognized on a cash basis

 

$

197

 

$

11

 

$

132

 

$

283

 

$

122

 

 

 

Interest income on impaired loans recognized on an accrual basis

 

$

73

 

$

-

 

$

81

 

$

9

 

$

76

 

 

 

 

 

 

 

 

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:

 

 

 

 

September 30, 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

 

$

3,881

 

$

194

 

$

8,609

 

$

7,932

 

$

-

 

$

1,621

 

$

7,488

 

$

770

 

$

30,495

 

Loans and leases 90 days past due

 

 

-

 

 

-

 

 

-

 

 

-

 

 

1

 

 

-

 

 

-

 

 

-

 

 

1

 

Restructured loans and leases

 

 

1,479

 

 

-

 

 

2,088

 

 

240

 

 

-

 

 

-

 

 

2,612

 

 

-

 

 

6,419

Total non-performing loans and leases

 

 

5,360

 

 

194

 

 

10,697

 

 

8,172

 

 

1

 

 

1,621

 

 

10,100

 

 

770

 

 

36,915

 

Other real estate owned

 

 

39

 

 

365

 

 

38

 

 

-

 

 

-

 

 

690

 

 

1,487

 

 

-

 

 

2,619

Total non-performing assets

 

$

5,399

 

$

559

 

$

10,735

 

$

8,172

 

$

1

 

$

2,311

 

$

11,587

 

$

770

 

$

39,534

 

 

 

 

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

 

 

 

 

 

September 30, 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

 

$

55

 

$

-

 

$

29

 

$

401

 

$

-

 

$

1,973

 

$

5,672

 

$

-

 

$

8,130

 

61-90 days

 

 

425

 

 

-

 

 

1,415

 

 

454

 

 

-

 

 

393

 

 

3,208

 

 

-

 

 

5,895

 

> 90 days

 

 

-

 

 

-

 

 

-

 

 

-

 

 

1

 

 

-

 

 

-

 

 

-

 

 

1

 

Total past due

 

 

480

 

 

-

 

 

1,444

 

 

855

 

 

1

 

 

2,366

 

 

8,880

 

 

-

 

 

14,026

 

Non-accrual loans and leases

 

 

3,881

 

 

194

 

 

8,609

 

 

7,932

 

 

-

 

 

1,621

 

 

7,488

 

 

770

 

 

30,495

 

 Loans acquired with deteriorated credit quality

 

568

 

 

-

 

 

-

 

 

1,003

 

 

-

 

 

-

 

 

-

 

 

-

 

 

1,571

 

Current loans

 

 

418,926

 

 

238,966

 

 

700,641

 

 

670,811

 

 

18

 

 

440,742

 

 

757,521

 

 

138,722

 

 

3,366,347

 

 

Total loans and leases

 

$

423,855

 

$

239,160

 

$

710,694

 

$

680,601

 

$

19

 

$

444,729

 

$

773,889

 

$

139,492

 

$

3,412,439

 


 

 

 

 

 

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

 

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

 

 

 

 

September 30, 2015

 

 

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

Commercial

 

Commercial

 

Owner

 

 

 

(In thousands)

 

Commercial

 

AD&C

 

Investor R/E

 

Occupied R/E

 

Total

 

Pass

 

$

404,966

 

$

238,965

 

$

697,533

 

$

659,219

 

$

2,000,683

 

Special Mention

 

 

814

 

 

-

 

 

1,861

 

 

1,910

 

 

4,585

 

Substandard

 

 

18,075

 

 

195

 

 

11,300

 

 

19,472

 

 

49,042

 

Doubtful

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

Total

 

$

423,855

 

$

239,160

 

$

710,694

 

$

680,601

 

$

2,054,310

 

 

 

 

December 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

19


 

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, 2015

 

 

 

 

 

 

 

 

 

 

Residential Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

Residential

 

 

 

(In thousands)

 

Leasing

 

Consumer

 

Mortgage

 

Construction

 

Total

 

Performing

 

$

18

 

$

443,108

 

$

763,789

 

$

138,722

 

$

1,345,637

 

Non-performing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90 days past due

 

 

1

 

 

-

 

 

-

 

 

-

 

 

1

 

 

Non-accruing

 

 

-

 

 

1,621

 

 

7,488

 

 

770

 

 

9,879

 

 

Restructured loans and leases

 

 

-

 

 

-

 

 

2,612

 

 

-

 

 

2,612

 Total  

 

$

19

 

$

444,729

 

$

773,889

 

$

139,492

 

$

1,358,129

 

 

 

 

 

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

 

During the nine months ended September 30, 2015, the Company restructured $2.3 million in loans.  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 $0.4 million at September 30, 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 September 30, 2015 and December 31, 2014 amounted to $0.5 million and $0.1 million, respectively.

 

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

 

 

 

For the Nine Months Ended September 30, 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

 

$

875

 

$

-

 

$

-

 

$

240

 

$

-

 

$

1,115

 

Restructured non-accruing

 

 

543

 

 

-

 

 

-

 

 

639

 

 

-

 

 

1,182

Balance

 

$

1,418

 

$

-

 

$

-

 

$

879

 

$

-

 

$

2,297

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specific allowance

 

$

272

 

$

-

 

$

-

 

$

149

 

$

-

 

$

421

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructured and subsequently defaulted

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

20


 

 

 

 

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 $2.6 million and $3.2 million at September 30, 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:

 

 

 

 

September 30, 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

 

$

(8,433)

 

$

190

 

 

1.9 years

 

$

8,623

 

$

(8,113)

 

$

510

 

 

1.7 years

 

Total amortizing intangible assets

 

$

8,623

 

$

(8,433)

 

$

190

 

 

 

 

$

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

 

$

52

2016

 

 

94

2017

 

 

16

2018

 

 

16

Thereafter

 

 

12

 

Total amortizing intangible assets

 

$

190

         

21


 

Note 6 – Deposits

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

(In thousands)

 

September 30, 2015

 

December 31, 2014

Noninterest-bearing deposits

 

$

1,068,299

 

$

993,737

Interest-bearing deposits:

 

 

 

 

 

 

 

Demand

 

 

530,092

 

 

534,605

 

Money market savings

 

 

891,474

 

 

828,494

 

Regular savings

 

 

275,452

 

 

264,751

 

Time deposits of less than $100,000

 

 

249,187

 

 

239,857

 

Time deposits of $100,000 or more

 

 

261,164

 

 

205,065

 

 

Total interest-bearing deposits

 

 

2,207,369

 

 

2,072,772

 

 

 

Total deposits

 

$

3,275,668

 

$

3,066,509

                   

 

Note 7 – Stockholders’ Equity

The Company re-approved a stock repurchase program in August 2015 that permits the repurchase of up to 5% of the Company’s outstanding shares of common stock at the date the plan was approved or approximately 1.2 million 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 nine months of 2015, the Company repurchased 728,932 shares at an average cost of $25.89 per share or a total of $18.9 million. 

 

Note 8 – Share Based Compensation

At September 30, 2015, the Company had two share based compensation plans in existence, the 2005 Omnibus Stock Plan (“Omnibus Stock Plan”) and the 2015 Omnibus Incentive Plan (“Omnibus Incentive Plan”).  The Omnibus Stock Plan expired during the second quarter of 2015 but has outstanding options that may still be exercised.  The Omnibus Incentive Plan is described in the following paragraph. 

 

The Company’s Omnibus Incentive Plan was approved on May 6, 2015 and provides for the granting of non-qualifying stock options to the Company’s directors, and incentive and non-qualifying stock options, stock appreciation rights, restricted stock grants, RSU’s and performance awards to selected key employees on a periodic basis at the discretion of the board.  The Omnibus Incentive Plan authorizes the issuance of up to 1,500,000 shares of common stock, all of which are available for issuance at September 30, 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 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.  At September 30, 2015, no stock options or awards had been granted from this plan.

 

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,

 

 

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.

 

22


 

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 $0.5 million and $0.4 million for the three months ended September 30, 2015 and 2014, respectively, related to the awards of stock options and restricted stock grants.  Compensation expense of $1.4 million and $1.3 million was recognized for the nine months ended September 30, 2015 and 2014, respectively.  The intrinsic value of stock options exercised in the nine months ended September 30, 2015 and 2014 was $0.4 million and $0.1 million, respectively.  The total of unrecognized compensation cost related to stock options was approximately $0.2 million as of September 30, 2015.  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 $4.3 million as of September 30, 2015.  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, 2015 and 2014, was $0.2 million and $0.2 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:

 

 

 

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

 

(35,039)

 

$

14.55

 

 

 

$

417

Forfeited or expired

 

(71,708)

 

$

27.96

 

 

 

 

 

Balance at September 30, 2015

 

138,879

 

$

19.68

 

3.5

 

$

903

 

 

 

 

 

 

 

 

 

 

 

Exercisable at September 30, 2015

 

98,078

 

$

17.55

 

2.5

 

$

847

 

 

 

 

 

 

 

 

 

 

 

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:

 

 

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

 

(79,845)

 

$

19.85

Forfeited

 

(5,512)

 

$

22.97

Restricted stock at September 30, 2015

 

221,374

 

$

23.31

 

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.

 

23


 

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 September 30,

 

Nine Months Ended September 30,

(In thousands)

 

2015

 

2014

 

2015

 

2014

Interest cost on projected benefit obligation

 

$

406

 

$

403

 

$

1,223

 

$

1,197

Expected return on plan assets

 

 

(405)

 

 

(493)

 

 

(1,217)

 

 

(1,480)

Recognized net actuarial loss

 

 

240

 

 

67

 

 

791

 

 

183

 

Net periodic benefit cost

 

$

241

 

$

(23)

 

$

797

 

$

(100)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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:

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

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

 

2015

 

2014

 

2015

 

2014

 Net income

 

$

10,995

 

$

11,142

 

$

32,553

 

$

29,052

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average EPS shares

 

 

24,526

 

 

25,074

 

 

24,692

 

 

25,045

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

$

0.45

 

$

0.44

 

$

1.32

 

$

1.16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average EPS shares

 

 

24,526

 

 

25,074

 

 

24,692

 

 

25,045

Dilutive common stock equivalents

 

 

77

 

 

78

 

 

87

 

 

90

 

Dilutive EPS shares

 

 

24,603

 

 

25,152

 

 

24,779

 

 

25,135

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per share

 

$

0.45

 

$

0.44

 

$

1.31

 

$

1.16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Anti-dilutive shares

 

 

7

 

 

64

 

 

8

 

 

59

24


 

NOTE 11 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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-owner 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

 

 

2,144

 

 

-

 

 

2,144

 

Reclassifications from accumulated other comprehensive income, net of tax

 

 

12

 

 

468

 

 

480

Current period change in other comprehensive income, net of tax

 

 

2,156

 

 

468

 

 

2,624

Balance at September 30, 2015

 

$

10,234

 

$

(8,433)

 

$

1,801

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

6,495

 

 

-

 

 

6,495

 

Reclassifications from accumulated other comprehensive income, net of tax

 

 

5

 

 

102

 

 

107

Current period change in other comprehensive income, net of tax

 

 

6,500

 

 

102

 

 

6,602

Balance at September 30, 2014

 

$

6,858

 

$

(3,226)

 

$

3,632

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

For the Nine Months Ended September 30,

(In thousands)

 

2015

2014

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

 

 

 

 

 

 

 

Affected line item in the Statements of Income:

 

 

 

 

 

 

 

Investment securities gains

 

$

20

 

$

8

 

Income before taxes

 

 

20

 

 

8

 

Tax expense

 

 

8

 

 

3

 

Net income

 

$

12

 

$

5

 

 

 

 

 

 

 

 

 

 

Amortization of defined benefit pension plan items

 

 

 

 

 

 

 

Affected line item in the Statements of Income:

 

 

 

 

 

 

 

 

Recognized actuarial loss (1)

 

$

791

 

$

183

 

 

 

Income before taxes

 

 

791

 

 

183

 

 

 

Tax expense

 

 

323

 

 

81

 

 

 

Net income

 

$

468

 

$

102

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

 

25


 

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 $20.1 million with a fair value of $1.5 million as of September 30, 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 $0.5 million in legal expenses have been accrued in the first nine months 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.

 

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. 

 

 

 

26


 

 

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.


 

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:

 

 

 

 

 

September 30, 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

 

$

-

 

$

10,418

 

$

-

 

$

10,418

 

Investments available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

 

-

 

 

139,807

 

 

-

 

 

139,807

 

 

State and municipal

 

 

-

 

 

161,980

 

 

-

 

 

161,980

 

 

Mortgage-backed

 

 

-

 

 

304,114

 

 

-

 

 

304,114

 

 

Trust preferred

 

 

-

 

 

-

 

 

995

 

 

995

 

 

Marketable equity securities

 

 

-

 

 

723

 

 

-

 

 

723

 

Interest rate swap agreements

 

 

-

 

 

1,488

 

 

-

 

 

1,488

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

$

-

 

$

(1,488)

 

$

-

 

$

(1,488)

 

 

 

 

 

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)

28


 

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

 

 

(270)

 

 

Total unrealized losses included in other comprehensive income (loss)

 

 

29

 

Balance at September 30, 2015

 

$

995

 

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:

 

 

 

 

September 30, 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

 

$

-

 

$

-

 

$

9,592

 

$

9,592

 

$

10,586

Other real estate owned

 

 

-

 

 

-

 

 

2,619

 

 

2,619

 

 

(181)

    

Total

 

$

-

 

$

-

 

$

12,211

 

$

12,211

 

$

10,405

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 2015, impaired loans totaling $30.9 million were written down to fair value of $27.9 million as a result of specific loan loss allowances of $3.0 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.

29


 

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.

30


 

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

 

 

September 30, 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

 

$

254,790

 

$

258,371

 

$

-

 

$

258,371

 

$

-

Loans, net of allowance

 

 

3,372,778

 

 

3,402,884

 

 

-

 

 

-

 

 

3,402,884

Other assets

 

 

90,232

 

 

90,232

 

 

-

 

 

90,232

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time Deposits

 

$

510,351

 

$

510,046

 

$

-

 

$

510,046

 

$

-

Securities sold under retail repurchase agreements and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

federal funds purchased

 

 

121,378

 

 

121,378

 

 

-

 

 

121,378

 

 

-

Advances from FHLB

 

 

610,000

 

 

635,257

 

 

-

 

 

635,257

 

 

-

Subordinated debentures

 

 

35,000

 

 

13,430

 

 

-

 

 

-

 

 

13,430

 

 

 

 

 

 

 

 

 

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

 

$

444,921

 

$

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 September 30, 2015 and December 31, 2014 as determined by the each insurance carrier. 

 


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 was not significant for the three and nine months ended September 30, 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 and nine months ended September 30, 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 $1.0 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 and nine months ended September 30, 2015 and 2014, respectively.

32


 

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 September 30, 2015

 

 

Community

 

 

 

 

Investment

 

Inter-Segment

 

 

 

(In thousands)

 

Banking

 

Insurance

 

Mgmt.

 

Elimination

 

Total

Interest income

 

$

40,318

 

$

-

 

$

1

 

$

(2)

 

$

40,317

Interest expense

 

 

5,203

 

 

-

 

 

-

 

 

(2)

 

 

5,201

Provision for loan and lease losses

 

 

1,706

 

 

-

 

 

-

 

 

-

 

 

1,706

Noninterest income

 

 

9,106

 

 

1,716

 

 

1,749

 

 

(181)

 

 

12,390

Noninterest expenses

 

 

27,318

 

 

1,480

 

 

1,013

 

 

(181)

 

 

29,630

Income before income taxes

 

 

15,197

 

 

236

 

 

737

 

 

-

 

 

16,170

Income tax expense

 

 

4,786

 

 

101

 

 

288

 

 

-

 

 

5,175

Net income

 

$

10,411

 

$

135

 

$

449

 

$

-

 

$

10,995

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

$

4,612,413

 

$

5,788

 

$

11,135

 

$

(18,302)

 

$

4,611,034

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2014

 

 

Community

 

 

 

 

Investment

 

Inter-Segment

 

 

 

(In thousands)

 

Banking

 

Insurance

 

Mgmt.

 

Elimination

 

Total

Interest income

 

$

37,150

 

$

1

 

$

1

 

$

(2)

 

$

37,150

Interest expense

 

 

4,732

 

 

-

 

 

-

 

 

(2)

 

 

4,730

Provision for loan and lease losses

 

 

(192)

 

 

-

 

 

-

 

 

-

 

 

(192)

Non-interest income

 

 

9,545

 

 

1,498

 

 

1,722

 

 

(175)

 

 

12,590

Non-interest expenses

 

 

26,632

 

 

1,226

 

 

949

 

 

(175)

 

 

28,632

Income before income taxes

 

 

15,523

 

 

273

 

 

774

 

 

-

 

 

16,570

Income tax expense

 

 

5,014

 

 

110

 

 

304

 

 

-

 

 

5,428

Net income

 

$

10,509

 

$

163

 

$

470

 

$

-

 

$

11,142

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

$

4,250,103

 

$

6,053

 

$

11,409

 

$

(18,834)

 

$

4,248,731

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2015

 

 

Community

 

 

 

 

Investment

 

Inter-Segment

 

 

 

(In thousands)

 

Banking

 

Insurance

 

Mgmt.

 

Elimination

 

Total

Interest income

 

$

117,238

 

$

1

 

$

4

 

$

(5)

 

$

117,238

Interest expense

 

 

14,821

 

 

-

 

 

-

 

 

(5)

 

 

14,816

Provision for loan and lease losses

 

 

3,521

 

 

-

 

 

-

 

 

-

 

 

3,521

Noninterest income

 

 

43,887

 

 

4,394

 

 

5,313

 

 

(15,936)

 

 

37,658

Noninterest expenses

 

 

97,294

 

 

4,032

 

 

2,961

 

 

(15,936)

 

 

88,351

Income before income taxes

 

 

45,489

 

 

363

 

 

2,356

 

 

-

 

 

48,208

Income tax expense

 

 

14,583

 

 

153

 

 

919

 

 

-

 

 

15,655

Net income

 

$

30,906

 

$

210

 

$

1,437

 

$

-

 

$

32,553

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

$

4,612,413

 

$

5,788

 

$

11,135

 

$

(18,302)

 

$

4,611,034

 

33


 

 

 

Nine Months Ended September 30, 2014

 

 

Community

 

 

 

 

Investment

 

Inter-Segment

 

 

 

(In thousands)

 

Banking

 

Insurance

 

Mgmt.

 

Elimination

 

Total

Interest income

 

$

110,391

 

$

6

 

$

10

 

$

(16)

 

$

110,391

Interest expense

 

 

14,086

 

 

-

 

 

-

 

 

(16)

 

 

14,070

Provision (credit) for loan and lease losses

 

 

(1,016)

 

 

-

 

 

-

 

 

-

 

 

(1,016)

Non-interest income

 

 

29,669

 

 

4,273

 

 

5,117

 

 

(3,526)

 

 

35,533

Non-interest expenses

 

 

87,550

 

 

3,542

 

 

2,756

 

 

(3,526)

 

 

90,322

Income before income taxes

 

 

39,440

 

 

737

 

 

2,371

 

 

-

 

 

42,548

Income tax expense

 

 

12,272

 

 

298

 

 

926

 

 

-

 

 

13,496

Net income

 

$

27,168

 

$

439

 

$

1,445

 

$

-

 

$

29,052

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

$

4,250,103

 

$

6,053

 

$

11,409

 

$

(18,834)

 

$

4,248,731

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

34


 

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"). Independent and community oriented, the Bank offers a broad range of commercial banking, retail banking, mortgage and trust services from 44 community offices and six financial centers located throughout central Maryland, Northern Virginia, and the greater Washington D. C. market. Through its subsidiaries, Sandy Spring Insurance Corporation and West Financial Services, Inc., the Bank also offers a comprehensive menu of insurance and wealth management services. 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 $4.6 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.

 

Overview

Net income for the Company for the third quarter of 2015 totaled $11.0 million ($0.45 per diluted share) as compared to net income of $11.1 million ($0.44 per diluted share) for the third quarter of 2014. For the first nine months of 2015, net income totaled $32.6 million ($1.31 per diluted share), compared to net income of $29.1 million ($1.16 per diluted share), for the first nine months of 2014. These results reflect the following events:

 

·         Average total loans for the third quarter of 2015 increased 13% compared to the third quarter of 2014 due to organic growth in each of the three major portfolio segments.

·         Combined noninterest-bearing and interest-bearing transaction account balances increased 11% to $1.6 billion at September 30, 2015 as compared to $1.4 billion at September 30, 2014.

·         The provision for loan and lease losses was a charge of $1.7 million for the third quarter of 2015 as compared to a credit of $0.2 million for the third quarter of 2014 and a charge of $1.2 million for the second quarter of 2015. The increase in the provision for the third quarter of 2015 was driven primarily by loan growth over the prior year period.

·         The net interest margin was 3.43% in the third quarter of 2015, compared to 3.42% for both the third quarter of 2014 and the second quarter of 2015. The stability of the margin compared to the prior year’s quarter was due to higher rates on an increased level of interest-earning assets and growth in noninterest-bearing deposits that exceeded the effect of higher rates on deposits.

·         The non-GAAP efficiency ratio improved to 59.73% for the third quarter of 2015, compared to 61.09% for the third quarter of the 2014 due to higher net interest income resulting from strong loan growth over the prior year quarter.

·         During the first nine months of 2015, the Company repurchased 728,932 shares of its common stock at an average price of $25.88 per share as part of its existing share repurchase program.

 

In the first nine months of 2015, the Mid-Atlantic region in which the Company operates continued to show economic improvement. While the national economy slowly improved during the first nine months of the year, international economic concerns together with volatile stock 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 suppressed economic activity. Slowing economic growth and stock market declines in China together with continuing unrest in the Middle East and its effect on the European Union countries have served as underlying volatility factors in financial markets. Together with state and municipal budget challenges across the country, these factors have caused some economic uncertainty, particularly among individual consumers and small and medium-sized businesses, to suppress confidence and thus constrain the pace of economic expansion. 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.

 

35


 

The Company’s non-performing assets decreased to $39.5 million at September 30, 2015 from $45.4 million at September 30, 2014. This decrease was due primarily to problem loan pay-offs during the period. Non-performing assets represented 0.86% of total assets at September 30, 2015 compared to 1.07% at September 30, 2014.  The ratio of net charge-offs to average loans and leases was 0.09% for the third quarter of 2015, compared to 0.03% for the prior year quarter.

 

Non-interest income decreased 2% in the third quarter of 2015 compared to the third quarter of 2014. This decrease was due primarily to decreases in service charges on deposit accounts and other non-interest income, which were somewhat offset by an increase in insurance agency commissions.

 

Non-interest expenses increased 3% in the third quarter of 2015 compared to the prior year quarter due mainly to higher salary and benefits expenses.

 

Total assets at September 30, 2015 increased 5% compared to December 31, 2014. Loan balances increased 9% compared to the prior year end due to growth of 11% in commercial loans, 7% in mortgage loans and 5% in consumer loans. Customer funding sources, which include deposits plus other short-term borrowings from core customers, increased 8% compared to balances at December 31, 2014. The increase in customer funding sources was driven primarily by increases of 15% in certificates of deposit, 5% in noninterest-bearing and interest-bearing transaction accounts and 4% in regular savings accounts. Retail repurchase agreements also increased 63% as the Company increased its emphasis on the sale of cash management services.  The Company continued to manage its net interest margin, primarily by utilizing cash flows from investment portfolio calls and maturities, together with growth in deposits and retail repurchase agreements, to fund loans during this extended period of historically low interest rates.  During the same period, stockholders’ equity increased $2 million to $524 million as net income essentially equaled the payment of dividends and repurchases of stock under the Company’s share repurchase program during the period. 

36


 

Sandy Spring Bancorp, Inc. and Subsidiaries

CONSOLIDATED AVERAGE BALANCES, YIELDS AND RATES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

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

 

$

737,655

 

$

18,625

 

3.37

%

 

$

654,261

 

$

16,874

 

3.44

%

 

Residential construction loans

 

 

134,714

 

 

3,729

 

3.70

 

 

 

142,709

 

 

3,988

 

3.74

 

 

Commercial ADC loans

 

 

217,409

 

 

7,464

 

4.59

 

 

 

170,365

 

 

6,450

 

5.06

 

 

Commercial investor real estate loans

 

 

672,920

 

 

23,703

 

4.71

 

 

 

570,176

 

 

20,881

 

4.90

 

 

Commercial owner occupied real estate loans

 

 

630,985

 

 

23,266

 

4.93

 

 

 

583,044

 

 

21,304

 

5.05

 

 

Commercial business loans

 

 

398,418

 

 

13,107

 

4.40

 

 

 

355,242

 

 

12,268

 

4.62

 

 

Leasing

 

 

30

 

 

1

 

2.97

 

 

 

374

 

 

16

 

5.54

 

 

Consumer loans

 

 

433,788

 

 

10,807

 

3.35

 

 

 

390,749

 

 

9,689

 

3.34

 

 

  Total loans and leases (2)

 

 

3,225,919

 

 

100,702

 

4.17

 

 

 

2,866,920

 

 

91,470

 

4.30

 

 

Loans held for sale

 

 

14,118

 

 

422

 

3.98

 

 

 

6,567

 

 

211

 

4.28

 

 

Taxable securities

 

 

605,719

 

 

11,464

 

2.52

 

 

 

687,359

 

 

12,786

 

2.48

 

 

Tax-exempt securities (3)

 

 

291,868

 

 

9,396

 

4.29

 

 

 

302,148

 

 

9,767

 

4.31

 

 

Interest-bearing deposits with banks

 

 

36,688

 

 

69

 

0.25

 

 

 

35,004

 

 

66

 

0.25

 

 

Federal funds sold

 

 

473

 

 

1

 

0.22

 

 

 

474

 

 

-

 

0.22

 

 

  Total interest-earning assets

 

 

4,174,785

 

 

122,054

 

3.91

 

 

 

3,898,472

 

 

114,300

 

3.94

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less:  allowance for loan and lease losses

 

 

(38,256)

 

 

 

 

 

 

 

 

(38,645)

 

 

 

 

 

 

 

Cash and due from banks

 

 

46,067

 

 

 

 

 

 

 

 

45,380

 

 

 

 

 

 

 

Premises and equipment, net

 

 

51,500

 

 

 

 

 

 

 

 

45,845

 

 

 

 

 

 

 

Other assets

 

 

216,105

 

 

 

 

 

 

 

 

210,325

 

 

 

 

 

 

 

   Total assets

 

$

4,450,201

 

 

 

 

 

 

 

$

4,161,377

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

 

$

528,683

 

 

312

 

0.08

%

 

$

475,459

 

 

306

 

0.09

%

 

Regular savings deposits

 

 

275,433

 

 

108

 

0.05

 

 

 

258,224

 

 

131

 

0.07

 

 

Money market savings deposits

 

 

849,469

 

 

983

 

0.15

 

 

 

871,399

 

 

839

 

0.13

 

 

Time deposits

 

 

472,065

 

 

2,790

 

0.79

 

 

 

460,548

 

 

2,309

 

0.67

 

 

   Total interest-bearing deposits

 

 

2,125,650

 

 

4,193

 

0.26

 

 

 

2,065,630

 

 

3,585

 

0.23

 

 

Other borrowings

 

 

105,945

 

 

179

 

0.23

 

 

 

68,301

 

 

117

 

0.23

 

 

Advances from FHLB

 

 

592,509

 

 

9,774

 

2.21

 

 

 

556,663

 

 

9,709

 

2.33

 

 

Subordinated debentures

 

 

35,000

 

 

670

 

2.55

 

 

 

35,000

 

 

659

 

2.51

 

 

  Total interest-bearing liabilities

 

 

2,859,104

 

 

14,816

 

0.69

 

 

 

2,725,594

 

 

14,070

 

0.69

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

 

1,024,692

 

 

 

 

 

 

 

 

894,508

 

 

 

 

 

 

 

Other liabilities

 

 

47,447

 

 

 

 

 

 

 

 

30,184

 

 

 

 

 

 

 

Stockholders' equity

 

 

518,958

 

 

 

 

 

 

 

 

511,091

 

 

 

 

 

 

 

  Total liabilities and stockholders' equity

 

$

4,450,201

 

 

 

 

 

 

 

$

4,161,377

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income and spread

 

 

 

 

$

107,238

 

3.22

%

 

 

 

 

$

100,230

 

3.25

%

 

  Less: tax-equivalent adjustment

 

 

 

 

 

4,816

 

 

 

 

 

 

 

 

3,909

 

 

 

 

Net interest income

 

 

 

 

$

102,422

 

 

 

 

 

 

 

$

96,321

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income/earning assets

 

 

 

 

 

 

 

3.91

%

 

 

 

 

 

 

 

3.94

%

 

Interest expense/earning assets

 

 

 

 

 

 

 

0.48

 

 

 

 

 

 

 

 

0.48

 

 

  Net interest margin

 

 

 

 

 

 

 

3.43

%

 

 

 

 

 

 

 

3.46

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 $4.8 million and $3.9 million in 2015 and 2014, respectively.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

37


 

Results of Operations

For the Nine Months Ended September 30, 2015 Compared to the Nine Months Ended September 30, 2014

 

Net income for the Company for the first nine months of 2015 totaled $32.6 million ($1.31 per diluted share) compared to net income of $29.1 million ($1.16 per diluted share) for the first nine 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 nine months of 2015 was $102.4 million compared to $96.3 million for the first nine months of 2014. On a tax-equivalent basis, net interest income for the first nine months of 2015 was $107.2 million compared to $100.2 million for the first nine months of 2014, an increase of 7%. The preceding table provides an analysis of net interest income performance that reflects a net interest margin that decreased to 3.43% for the first nine months of 2015 compared to 3.46% for the prior year period.  Year-to-date 2015 average interest-earning assets increased by 7% while average interest-bearing liabilities increased 5% compared to the year ago period.  Average noninterest-bearing deposits increased 15% in the first nine months of 2015 while the percentage of average noninterest-bearing deposits to total deposits increased to 33% for the first nine months of 2015 compared to 30% for the first nine months of 2014. The decrease in the net interest margin was driven by the overall decline in the yield on interest-earning assets.  The impact on the net interest margin by the increases in the average balances of interest-bearing liabilities was substantially offset by 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

 

$

9,232

 

$

11,903

 

$

(2,671)

 

$

(467)

 

$

9,357

 

$

(9,824)

 

Loans held for sale

 

 

211

 

 

226

 

 

(15)

 

 

(627)

 

 

(785)

 

 

158

 

Securities

 

 

(1,693)

 

 

(2,129)

 

 

436

 

 

(812)

 

 

(1,706)

 

 

894

 

Other earning assets

 

 

4

 

 

4

 

 

-

 

 

1

 

 

1

 

 

-

Total interest income

 

 

7,754

 

 

10,004

 

 

(2,250)

 

 

(1,905)

 

 

6,867

 

 

(8,772)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense on funding of earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

 

 

6

 

 

40

 

 

(34)

 

 

26

 

 

35

 

 

(9)

 

Regular savings deposits

 

 

(23)

 

 

9

 

 

(32)

 

 

(28)

 

 

13

 

 

(41)

 

Money market savings deposits

 

 

144

 

 

(21)

 

 

165

 

 

(292)

 

 

(12)

 

 

(280)

 

Time deposits

 

 

481

 

 

59

 

 

422

 

 

(330)

 

 

(188)

 

 

(142)

Total borrowings

 

 

138

 

 

1,105

 

 

(967)

 

 

20

 

 

1,401

 

 

(1,381)

 

Total interest expense

 

 

746

 

 

1,192

 

 

(446)

 

 

(604)

 

 

1,249

 

 

(1,853)

 

 

Net interest income

 

$

7,008

 

$

8,812

 

$

(1,804)

 

$

(1,301)

 

$

5,618

 

$

(6,919)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* 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.

38


 

Interest Income

The Company's total tax-equivalent interest income for the first nine months of 2015 increased 7% compared to the first nine months of 2014 as 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 increased 13% for the first nine months of 2015 compared to the prior year period. Growth in all three major loan portfolios was driven by organic loan growth as the regional economy improved and clients sought to lock in borrowings at historically low rates prior to potential Federal Reserve action to increase rates. The yield on average loans and leases decreased by 13 basis points due to the pay-off of higher rate loans and the origination of new loans at comparatively lower rates. The decline in the portfolio yield was driven primarily by a decrease of 21 basis points in the yield on the commercial loan portfolio.

 

The average yield on total investment securities increased 6 basis points while the average balance of the portfolio decreased 9% for the first nine months of 2015 compared to the first nine months of 2014. The increase in the yield on investments was due primarily to a change in the mix of the overall portfolio as principal amortization reduced the relative size of the lower-yielding mortgage-backed securities while the balance of the higher-yielding tax-exempt securities experienced a much smaller reduction in size.

 

Interest Expense

Interest expense increased 5% in the first nine months of 2015 compared to the first nine months of 2014. The increase in the expense was due to the cost of interest-bearing deposits increasing primarily due to growth in the average balances together with higher rates offered on certificates of deposit, while the increase in the average balances of Federal Home Loan Bank advances was largely offset by a 12 basis point decrease in the average rates paid. Average deposits increased 6% in the first nine months of 2015 compared to the prior year period. This increase was primarily due to increases of $183 million or 13% in average noninterest-bearing and interest-bearing checking accounts together with an increase of $17 million or 7% in regular savings accounts and an increase in average certificates of deposit of $12 million or 3% as the Company offered higher rates on certificates of deposit and clients sought to preserve liquidity.  This growth was partially offset by a decline in average money market savings accounts of $22 million or 3% in the first nine months of 2015 compared to the prior year-to-date.

 

Non-interest Income 

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

 

 

 

 

 

Nine Months Ended September 30,

 

2015/2014

2015/2014

 

(Dollars in thousands)

 

2015

 

2014

 

$ Change

 

% Change

 

 

Securities gains

 

$

20

 

$

8

 

$

12

 

150.0

 %  

 

Service charges on deposit accounts

 

 

5,657

 

 

6,287

 

 

(630)

 

(10.0)

 

 

Mortgage banking activities

 

 

2,566

 

 

1,482

 

 

1,084

 

73.1

 

 

Wealth management income

 

 

15,040

 

 

14,181

 

 

859

 

6.1

 

 

Insurance agency commissions

 

 

4,147

 

 

4,011

 

 

136

 

3.4

 

 

Income from bank owned life insurance

 

 

1,937

 

 

1,817

 

 

120

 

6.6

 

 

Bank card fees

 

 

3,475

 

 

3,295

 

 

180

 

5.5

 

 

Other income

 

 

4,816

 

 

4,452

 

 

364

 

8.2

 

 

 

Total non-interest income

 

$

37,658

 

$

35,533

 

$

2,125

 

6.0

 


 

Total non-interest income was $37.7 million for the first nine months of 2015 compared to $35.5 million for the first nine months of 2014. The primary drivers of non-interest income for the first nine months of 2015 were increases in wealth management income, income from mortgage banking activities and other non-interest income. 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 12% for the first nine months of 2015 compared to the prior year period due mainly to growth in one-time estate fees.  Investment management fees in West Financial Services increased 4% in 2015 compared to the first nine months of 2014, due to higher assets under management.  Fees on sales of investment products decreased 4% for the first nine months of 2015 compared to the prior year period, due to reduced sales of financial products. Overall total assets under management remained at $2.7 billion at both September 30, 2015 and September 30, 2014 as a result of negative market movements that somewhat offset additions from new and existing clients.

·      Income from mortgage banking activities increased in 2015 compared to 2014 due primarily to higher loan origination volumes as clients moved to lock in rates at historically low levels.

·      Other non-interest income increased during 2015 compared to 2014 due mainly to an increase in gains on sales of SBA loans.

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

·      Insurance agency commissions increased due primarily to an increase in physicians’ liability lines.

·      Income from bank card fees increased due to a higher volume of electronic transactions.

 

Non-interest Expense

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

 

 

 

 

Nine Months Ended September 30,

 

2015/2014

2015/2014

 

(Dollars in thousands)

 

2015

 

2014

 

$ Change

 

% Change

 

 Salaries and employee benefits

 

$

52,566

 

$

49,594

 

$

2,972

 

6.0

 %  

 Occupancy expense of premises

 

 

9,748

 

 

9,778

 

 

(30)

 

(0.3)

 

 Equipment expenses

 

 

4,463

 

 

3,855

 

 

608

 

15.8

 

 Marketing 

 

 

2,161

 

 

2,088

 

 

73

 

3.5

 

 Outside data services

 

 

3,692

 

 

3,663

 

 

29

 

0.8

 

 FDIC insurance

 

 

1,850

 

 

1,687

 

 

163

 

9.7

 

 Amortization of intangible assets

 

 

320

 

 

709

 

 

(389)

 

(54.9)

 

 Litigation expenses

 

 

517

 

 

6,364

 

 

(5,847)

 

(91.9)

 

 Professional fees

 

 

3,497

 

 

3,298

 

 

199

 

6.0

 

 Other real estate owned

 

 

62

 

 

49

 

 

13

 

26.5

 

 Other expenses

 

 

9,475

 

 

9,237

 

 

238

 

2.6

 

 

Total non-interest expense

 

$

88,351

 

$

90,322

 

$

(1,971)

 

(2.2)

 

 

Non-interest expenses totaled $88.4 million in the first nine months of 2015 compared to $90.3 million in the first nine months of 2014, a decrease of 2%. Excluding the litigation expenses accrued in both years, non-interest expenses increased 5% compared to the prior year period. This increase in expenses was driven primarily by higher salaries and benefits, equipment expenses 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 nine months of 2015 due primarily to higher compensation expenses as a result of higher compensation and pension costs together with increased health insurance expenses. The average number of full-time equivalent employees was 718 in both the first nine months of 2015 and 2014.

·         Equipment expenses increased in 2015 compared to 2014 due to the software amortization expense on new systems.

·         Marketing expenses increased in 2015 due to the timing of targeted advertising initiatives.

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

·         Other non-interest expenses increased in 2015 compared to the prior year-to-date due mainly to the cost of replacing bank cards with new technology.

 

40


 

Income Taxes

The Company had income tax expense of $15.7 million in the first nine months of 2015, compared to income tax expense of $13.5 million in the first nine months of 2014. The resulting effective tax rates were 32% for both the first nine months of 2015 and the first nine months of 2014.  

  

41


 

Results of Operations

For the Three Months Ended September 30, 2015 Compared to the Three Months Ended September 30, 2014

 

Net income for the Company for the third quarter of 2015 totaled $11.0 million ($0.45 per diluted share) compared to net income of $11.1 million ($0.44 per diluted share) for the third quarter of 2014.

 

Net Interest Income

Net interest income for the third quarter of 2015 was $35.1 million compared to $32.4 million for the third quarter of 2014. On a tax-equivalent basis, net interest income for the third quarter of 2015 was $36.8 million compared to $33.7 million for the third quarter of 2014, an increase of 9%. The following table provides an analysis of net interest income performance that reflects a net interest margin that increased to 3.43% for the third quarter of 2015 compared to 3.42% for the prior year period.  Quarterly average interest-earning assets increased by 8% and average interest-bearing liabilities increased 7% compared to the third quarter of 2014.  Average noninterest-bearing deposits increased 11% for the quarter compared to the same quarter of the prior year.  The percentage of average noninterest-bearing deposits to total deposits increased to 33% for the third quarter of 2015 compared to 32% for the third quarter of 2014. The increase in the net interest margin was caused by the effect of higher overall average rates on increased interest-earning assets and growth in noninterest-bearing deposits together with lower borrowing rates that exceeded the effect of higher rates on deposits.

42


 

Sandy Spring Bancorp, Inc. and Subsidiaries

CONSOLIDATED AVERAGE BALANCES, YIELDS AND RATES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

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

 

$

754,007

 

$

6,346

 

3.37

%

 

$

682,013

 

$

5,813

 

3.41

%

 

Residential construction loans

 

 

134,448

 

 

1,240

 

3.66

 

 

 

147,750

 

 

1,376

 

3.69

 

 

Commercial ADC loans

 

 

227,545

 

 

2,602

 

4.54

 

 

 

180,293

 

 

2,196

 

4.83

 

 

Commercial investor real estate loans

 

 

704,068

 

 

8,353

 

4.71

 

 

 

577,851

 

 

7,009

 

4.81

 

 

Commercial owner occupied real estate loans

 

 

656,337

 

 

8,065

 

4.88

 

 

 

585,014

 

 

7,091

 

4.98

 

 

Commercial business loans

 

 

413,300

 

 

4,600

 

4.42

 

 

 

367,203

 

 

4,177

 

4.53

 

 

Leasing

 

 

19

 

 

-

 

-

 

 

 

206

 

 

4

 

6.91

 

 

Consumer loans

 

 

441,740

 

 

3,701

 

3.35

 

 

 

404,062

 

 

3,364

 

3.32

 

 

  Total loans and leases (2)

 

 

3,331,464

 

 

34,907

 

4.16

 

 

 

2,944,392

 

 

31,030

 

4.22

 

 

Loans held for sale

 

 

21,070

 

 

214

 

4.05

 

 

 

7,518

 

 

81

 

4.30

 

 

Taxable securities

 

 

581,832

 

 

3,742

 

2.57

 

 

 

663,550

 

 

4,071

 

2.43

 

 

Tax-exempt securities (3)

 

 

287,629

 

 

3,091

 

4.30

 

 

 

301,656

 

 

3,240

 

4.26

 

 

Interest-bearing deposits with banks

 

 

39,472

 

 

25

 

0.25

 

 

 

37,268

 

 

24

 

0.25

 

 

Federal funds sold

 

 

472

 

 

1

 

0.22

 

 

 

474

 

 

-

 

0.22

 

 

  Total interest-earning assets

 

 

4,261,939

 

 

41,980

 

3.92

 

 

 

3,954,858

 

 

38,446

 

3.89

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less:  allowance for loan and lease losses

 

 

(39,090)

 

 

 

 

 

 

 

 

(38,213)

 

 

 

 

 

 

 

Cash and due from banks

 

 

44,893

 

 

 

 

 

 

 

 

45,600

 

 

 

 

 

 

 

Premises and equipment, net

 

 

52,233

 

 

 

 

 

 

 

 

45,959

 

 

 

 

 

 

 

Other assets

 

 

217,167

 

 

 

 

 

 

 

 

211,880

 

 

 

 

 

 

 

   Total assets

 

$

4,537,142

 

 

 

 

 

 

 

$

4,220,084

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

 

$

534,568

 

 

105

 

0.08

%

 

$

488,800

 

 

112

 

0.09

%

 

Regular savings deposits

 

 

277,819

 

 

37

 

0.05

 

 

 

263,255

 

 

34

 

0.05

 

 

Money market savings deposits

 

 

882,755

 

 

393

 

0.18

 

 

 

871,271

 

 

293

 

0.13

 

 

Time deposits

 

 

505,351

 

 

1,097

 

0.86

 

 

 

456,530

 

 

769

 

0.67

 

 

   Total interest-bearing deposits

 

 

2,200,493

 

 

1,632

 

0.29

 

 

 

2,079,856

 

 

1,208

 

0.23

 

 

Other borrowings

 

 

121,127

 

 

69

 

0.23

 

 

 

73,046

 

 

42

 

0.23

 

 

Advances from FHLB

 

 

549,728

 

 

3,272

 

2.36

 

 

 

523,304

 

 

3,258

 

2.47

 

 

Subordinated debentures

 

 

35,000

 

 

228

 

2.60

 

 

 

35,000

 

 

222

 

2.54

 

 

  Total interest-bearing liabilities

 

 

2,906,348

 

 

5,201

 

0.71

 

 

 

2,711,206

 

 

4,730

 

0.69

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

 

1,063,500

 

 

 

 

 

 

 

 

956,830

 

 

 

 

 

 

 

Other liabilities

 

 

48,675

 

 

 

 

 

 

 

 

34,514

 

 

 

 

 

 

 

Stockholders' equity

 

 

518,619

 

 

 

 

 

 

 

 

517,534

 

 

 

 

 

 

 

  Total liabilities and stockholders' equity

 

$

4,537,142

 

 

 

 

 

 

 

$

4,220,084

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income and spread

 

 

 

 

$

36,779

 

3.21

%

 

 

 

 

$

33,716

 

3.20

%

 

  Less: tax-equivalent adjustment

 

 

 

 

 

1,663

 

 

 

 

 

 

 

 

1,296

 

 

 

 

Net interest income

 

 

 

 

$

35,116

 

 

 

 

 

 

 

$

32,420

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income/earning assets

 

 

 

 

 

 

 

3.92

%

 

 

 

 

 

 

 

3.89

%

 

Interest expense/earning assets

 

 

 

 

 

 

 

0.49

 

 

 

 

 

 

 

 

0.47

 

 

  Net interest margin

 

 

 

 

 

 

 

3.43

%

 

 

 

 

 

 

 

3.42

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 $1.7 million and $1.3 million in 2015 and 2014, respectively.

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

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

43


 

Interest Income

The Company's total tax-equivalent interest income increased 9% for the third quarter of 2015 compared to the prior year quarter. The previous table shows that, in 2015, the impact on interest income of the increase in average loans and leases was greater than the effect of the decline in yields on overall loan portfolio.

 

The average balance of the loan portfolio increased 13% for the third quarter of 2015 compared to the third quarter of 2014. This growth was primarily in the commercial investor real estate, owner-occupied real estate and residential mortgage portfolios. These increases were driven by organic loan growth, as the regional economy improved and as clients acted to lock in borrowings at historically low rates in advance of possible Federal Reserve action to increase interest rates. The yield on average loans and leases decreased by 6 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 13 basis points in the yield on the commercial loan portfolio together with a decrease of 5 basis points in the yield in the residential mortgage portfolio.

 

The average yield on total investment securities increased 11 basis points while the average balance of the portfolio decreased 10% for the third quarter of 2015 compared to the third quarter of 2014. The increase in the yield on investments was due primarily to a change in the mix of the overall portfolio as principal amortization reduced the relative size of the lower-yielding mortgage-backed securities.

 

Interest Expense

Interest expense increased $0.5 million or 10% in the third quarter of 2015 compared to the third quarter of 2014 primarily due to growth in interest-bearing deposits together with an increase of 6 basis points in the cost of such deposits. The effect of higher average balances of Federal Home Loan Bank advances was largely offset by an 11 basis point decrease in the average rates paid on such borrowings as the company took advantage of low rates on short term advances. Average total deposits increased 7% in the third quarter of 2015 compared to the prior year quarter. This increase was primarily due to increases of $152 million or 11% in average noninterest-bearing and interest-bearing checking accounts together with an increase of $15 million or 6% in regular savings accounts.  Average certificates of deposit increased 11% in the third quarter of 2015 compared to the prior year quarter as the Company increased rates offered on selected products to maintain deposit balances as part of the Company’s liquidity management program. Average balances of money market accounts remained essentially level in the third quarter of 2015 compared to the third quarter 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 September 30,

 

2015/2014

2015/2014

 

(Dollars in thousands)

 

2015

 

2014

 

$ Change

 

% Change

 

 

Securities gains

 

$

1

 

$

8

 

$

(7)

 

87.5

 %  

 

Service charges on deposit accounts

 

 

1,936

 

 

2,226

 

 

(290)

 

(13.0)

 

 

Mortgage banking activities

 

 

566

 

 

596

 

 

(30)

 

(5.0)

 

 

Wealth management income

 

 

4,963

 

 

4,974

 

 

(11)

 

(0.2)

 

 

Insurance agency commissions

 

 

1,648

 

 

1,410

 

 

238

 

16.9

 

 

Income from bank owned life insurance

 

 

618

 

 

611

 

 

7

 

1.1

 

 

Bank card fees

 

 

1,198

 

 

1,148

 

 

50

 

4.4

 

 

Other income

 

 

1,460

 

 

1,617

 

 

(157)

 

(9.7)

 

 

 

Total non-interest income

 

$

12,390

 

$

12,590

 

$

(200)

 

(1.6)

 

44


 

Total non-interest income was $12.4 million for the third quarter of 2015 compared to $12.6 million for the third quarter of 2014. The primary drivers of non-interest income for the third quarter of 2015 were decreases in service charges on deposit accounts and other non-interest income which were somewhat offset by an increase in insurance agency commissions. Further detail by type of non-interest income follows:

·         With respect to wealth management income, trust services fees increased 6% for the third quarter compared to the prior year period due to one-time estate fees.  Investment management fees in West Financial Services increased 2% for the third quarter of 2015 compared to the third quarter of 2014, as higher assets under management were largely offset by lower average fees and market declines. Fees on sales of investment products decreased 18% for the third quarter compared to the prior year quarter, due to reduced sales activity while assets under management remained level. Overall total assets under management remained at $2.7 billion at September 30, 2015 compared to $2.7 billion at September 30, 2014 largely as a result of negative market movements that offset additions from new and existing clients.

·         Income from mortgage banking activities remained level in 2015 compared 2014 as higher loan origination volumes were offset by lower gains on sales.

·         Other non-interest income decreased during 2015 compared to 2014 due mainly to a decrease in loan prepayment fees.

·         Income from service charges on deposits decreased 13% in 2015 compared to 2014 due to a decline in return check charges.

  

 

Non-interest Expense

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

 

 

 

 

Three Months Ended September 30,

 

2015/2014

2015/2014

 

(Dollars in thousands)

 

2015

 

2014

 

$ Change

 

% Change

 

 Salaries and employee benefits

 

$

17,733

 

$

16,765

 

$

968

 

5.8

 %  

 Occupancy expense of premises

 

 

3,086

 

 

3,032

 

 

54

 

1.8

 

 Equipment expenses

 

 

1,600

 

 

1,337

 

 

263

 

19.7

 

 Marketing 

 

 

688

 

 

744

 

 

(56)

 

(7.5)

 

 Outside data services

 

 

1,329

 

 

1,231

 

 

98

 

8.0

 

 FDIC insurance

 

 

565

 

 

594

 

 

(29)

 

(4.9)

 

 Amortization of intangible assets

 

 

107

 

 

115

 

 

(8)

 

(7.0)

 

 Litigation expenses

 

 

155

 

 

236

 

 

(81)

 

(34.3)

 

 Professional fees

 

 

1,089

 

 

1,092

 

 

(3)

 

(0.3)

 

 Other real estate owned

 

 

48

 

 

40

 

 

8

 

20.0

 

 Other expenses

 

 

3,230

 

 

3,446

 

 

(216)

 

(6.3)

 

 

Total non-interest expense

 

$

29,630

 

$

28,632

 

$

998

 

3.5

 

 

Non-interest expenses totaled $29.6 million in the third quarter of 2015 compared to $28.6 million in the third quarter of 2014, an increase of 3%. This increase was driven primarily by higher salaries and benefits and equipment and marketing expenses.  Further detail by category of non-interest expense follows:

 

·         Salaries and employee benefits, the largest component of non-interest expenses, increased in 2015 due primarily to higher compensation expenses as a result of merit increases and higher incentive compensation. In addition, pension expense increased over 2014 due to a change in actuarial assumptions.  The average number of full-time equivalent employees was 720 in the third quarter of 2015 compared to 712 in the third quarter of 2014.

·         Equipment expenses increased in 2015 compared to 2014 due to software amortization expense on new systems.

·         Marketing expenses decreased in 2015 due to the timing of targeted advertising initiatives.

·         Other non-interest expenses decreased in 2015 due to accrued expense related to performance letters of credit recognized in 2014 and a decrease in losses from fraudulent bankcard activity.

 

Income Taxes

The Company had income tax expense of $5.2 million in the third quarter of 2015, compared to income tax expense of $5.4 million in the third quarter of 2014. The resulting effective tax rate was 32% for the third quarter of 2015 and 33% for the third quarter of 2014. The effective rate decreased in 2015 compared to 2014 due to tax exempt income comprising a higher proportion of income before taxes.

 

45


 

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 third quarter of 2015 compared to the third quarter of the 2014 due to an increase in net interest income resulting from loan growth.

 

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.

46


 

GAAP and Non-GAAP Efficiency Ratios

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

 

September 30,

 

September 30,

(Dollars in thousands)

 

2015

 

2014

 

2015

 

2014

Pre-tax pre-provision income:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,995

 

$

11,142

 

$

32,553

 

$

29,052

 

Plus non-GAAP adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Litigation expenses

 

 

155

 

 

236

 

 

517

 

 

6,364

 

 

Income taxes

 

 

5,175

 

 

5,428

 

 

15,655

 

 

13,496

 

 

Provision (credit) for loan and lease losses

 

 

1,706

 

 

(192)

 

 

3,521

 

 

(1,016)

Pre-tax pre-provision income

 

$

18,031

 

$

16,614

 

$

52,246

 

$

47,896

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Efficiency ratio - GAAP basis:

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest expenses

 

$

29,630

 

$

28,632

 

$

88,351

 

$

90,322

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income plus non-interest income

 

$

47,506

 

$

45,010

 

$

140,080

 

$

131,854

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Efficiency ratio - GAAP basis:

 

 

62.37%

 

 

63.61%

 

 

63.07%

 

 

68.50%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Efficiency ratio - Non-GAAP basis:

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest expenses

 

$

29,630

 

$

28,632

 

$

88,351

 

$

90,322

 

Less non-GAAP adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of intangible assets

 

 

107

 

 

115

 

 

320

 

 

709

 

 

Litigation expenses

 

 

155

 

 

236

 

 

517

 

 

6,364

Non-interest expenses -  as adjusted

 

$

29,368

 

$

28,281

 

$

87,514

 

$

83,249

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income plus non-interest income 

 

$

47,506

 

$

45,010

 

$

140,080

 

$

131,854

 

Plus non-GAAP adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax-equivalent income

 

 

1,663

 

 

1,296

 

 

4,816

 

 

3,909

 

Less non-GAAP adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities gains

 

 

1

 

 

8

 

 

20

 

 

8

 

Net interest income plus non-interest income - as adjusted

 

$

49,168

 

$

46,298

 

$

144,876

 

$

135,755

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP efficiency ratio

 

 

59.73%

 

 

61.09%

 

 

60.41%

 

 

61.32%

47


 

FINANCIAL CONDITION

The Company's total assets were $4.6 billion at September 30, 2015, an increase of $214 million or 5% compared to December 31, 2014. Total loans increased 9% compared to the end of 2014. This increase was funded by an 8% decrease in the investment portfolio and a 7% increase in deposits.

 

Analysis of Loans and Leases

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

 

 

 

 

September 30, 2015

 

December 31, 2014

 

Period-to-Period Change

(Dollars in thousands)

 

Amount

 

%

 

Amount

 

%

 

$ Change

 

% Change

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

$

773,889

 

22.7

%

 

$

717,886

 

22.9

%

 

$

56,003

 

7.8

%

 

Residential construction

 

 

139,492

 

4.1

 

 

 

136,741

 

4.4

 

 

 

2,751

 

2.0

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial owner occupied real estate

 

 

680,601

 

20.0

 

 

 

611,061

 

19.5

 

 

 

69,540

 

11.4

 

 

Commercial investor real estate

 

 

710,694

 

20.8

 

 

 

640,193

 

20.5

 

 

 

70,501

 

11.0

 

 

Commercial acquisition, development and construction

 

 

239,160

 

7.0

 

 

 

205,124

 

6.6

 

 

 

34,036

 

16.6

 

Commercial Business

 

 

423,855

 

12.4

 

 

 

390,781

 

12.5

 

 

 

33,074

 

8.5

 

Leases

 

 

19

 

-

 

 

 

54

 

-

 

 

 

(35)

 

(64.8)

 

Consumer

 

 

444,729

 

13.0

 

 

 

425,552

 

13.6

 

 

 

19,177

 

4.5

 

 

Total loans and leases

 

$

3,412,439

 

100.0

%

 

$

3,127,392

 

100.0

%

 

$

285,047

 

9.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans and leases, excluding loans held for sale, increased 9% at September 30, 2015 compared to December 31, 2014. The commercial loan portfolio increased 11% at September 30, 2015 compared to the prior year end due to increases in all categories of commercial lending.

 

The residential real estate portfolio, which is comprised of residential construction and permanent residential mortgage loans, increased 7% at September 30, 2015 compared to December 31, 2014. This increase was due to an 8% increase in permanent residential mortgages, most of which are loans on 1-4 family dwellings.

 

The consumer loan portfolio increased 5% at September 30, 2015 compared to December 31, 2014, primarily due to growth in home equity lines of credit.

 

Analysis of Investment Securities

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

 

48


 

 

 

 

 

September 30, 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  

 

$

139,807

 

16.2

%

 

$

141,679

 

15.2

%

 

$

(1,872)

 

(1.3)

%

   State and municipal

State and municipal

 

 

161,980

 

18.8

 

 

 

167,052

 

17.9

 

 

 

(5,072)

 

(3.0)

 

   Mortgage-backed

Mortgage-backed

 

 

304,114

 

35.3

 

 

 

361,519

 

38.7

 

 

 

(57,405)

 

(15.9)

 

   Trust preferred

Trust preferred

 

 

995

 

0.1

 

 

 

1,236

 

0.1

 

 

 

(241)

 

(19.5)

 

   Marketable equity securities

Marketable equity securities

 

 

723

 

0.1

 

 

 

723

 

0.1

 

 

 

-

 

-

 

 

 

Total available-for-sale securities

 

 

607,619

 

70.5

 

 

 

672,209

 

72.0

 

 

 

(64,590)

 

(9.6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-Maturity and Other Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   U.S. government agencies and corporations  

U.S. government agencies and corporations  

 

 

64,517

 

7.5

 

 

 

64,512

 

6.9

 

 

 

5

 

-

 

   State and municipal

State and municipal

 

 

149,849

 

17.4

 

 

 

155,261

 

16.6

 

 

 

(5,412)

 

(3.5)

 

   Mortgage-backed

Mortgage-backed

 

 

176

 

-

 

 

 

200

 

-

 

 

 

(24)

 

(12.0)

 

 

Corporate debt

 

 

2,100

 

0.2

 

 

 

-

 

-

 

 

 

2,100

 

100.0

 

   Other equity securities

Other equity securities

 

 

38,148

 

4.4

 

 

 

41,437

 

4.5

 

 

 

(3,289)

 

(7.9)

 

 

 

Total held-to-maturity and other equity

 

 

254,790

 

29.5

 

 

 

261,410

 

28.0

 

 

 

(6,620)

 

(2.5)

 

Total Securities

 

$

862,409

 

100.0

%

 

$

933,619

 

100.0

%

 

$

(71,210)

 

(7.6)

 

 

Available-for-sale securities decreased 10% at September 30, 2015 compared to December 31, 2014 due to amortization of mortgage-backed securities and calls, while held-to-maturity and other equity securities decreased 2% due to calls and maturities and the redemption of FHLB stock.

 

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 2.8 years at September 30, 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.

 

   

 

Other Earning Assets

Residential mortgage loans held for sale decreased slightly to $10 million as of September 30, 2015 due to lower mortgage loan origination volumes.  The aggregate of federal funds sold and interest-bearing deposits with banks increased $11 million to $54 million at September 30, 2015 compared to December 31, 2014.

 

Deposits

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

 

 

 

 

 

September 30, 2015

 

December 31, 2014

 

Period-to-Period Change

(Dollars in thousands)

 

Amount

 

%

 

Amount

 

%

 

$ Change

 

% Change

Noninterest-bearing deposits

 

$

1,068,299

 

32.6

%

 

$

993,737

 

32.4

%

 

$

74,562

 

7.5

%

Interest-bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand

 

 

530,092

 

16.2

 

 

 

534,605

 

17.4

 

 

 

(4,513)

 

(0.8)

 

 

Money market savings

 

 

891,474

 

27.2

 

 

 

828,494

 

27.0

 

 

 

62,980

 

7.6

 

 

Regular savings

 

 

275,452

 

8.4

 

 

 

264,751

 

8.6

 

 

 

10,701

 

4.0

 

 

Time deposits of less than $100,000

 

 

249,187

 

7.6

 

 

 

239,857

 

7.8

 

 

 

9,330

 

3.9

 

 

Time deposits of $100,000 or more

 

 

261,164

 

8.0

 

 

 

205,065

 

6.8

 

 

 

56,099

 

27.4

 

 

 

Total interest-bearing deposits

 

 

2,207,369

 

67.4

 

 

 

2,072,772

 

67.6

 

 

 

134,597

 

6.5

 

Total deposits

 

$

3,275,668

 

100.0

%

 

$

3,066,509

 

100.0

%

 

$

209,159

 

6.8

 

 

Deposits and Borrowings

49


 

Total deposits increased $209 million or 7% at September 30, 2015 compared to December 31, 2014. This increase was due to increases of 8% in noninterest-bearing checking accounts and 6% in interest-bearing deposit accounts compared to the prior year end. Certificates of deposit increased 15% compared to December 31, 2014 as the company raised rates on certificates to maintain deposit balances. Money market accounts increased 8% and regular savings accounts increased 4% compared to December 31, 2014. 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. Total borrowings remained virtually level at September 30, 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 nine months of 2015, total stockholders' equity increased to $524 million at September 30, 2015 compared to $522 million at December 31, 2014 as net income exceeded the payment of dividends and stock repurchases during the period.  The ratio of average equity to average assets was 11.66% for the first nine months of 2015, as compared to 12.28% for the first nine months of 2014.

   

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

 

September 30, 2015

 

December 31, 2014

 

Requirements

Total Capital to risk-weighted assets

14.27%

 

15.06%

 

8.00%

 

 

 

 

 

 

Tier 1 Capital to risk-weighted assets

13.17%

 

13.95%

 

6.00%

 

    

 

    

 

 

Common Equity Tier 1 Capital

12.20%

 

n.a.

 

4.50%

 

 

 

 

 

 

Tier 1 Leverage

10.65%

 

11.26%

 

4.00%

 

Tier 1 capital of $474 million and total qualifying capital of $514 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 September 30, 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 were 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 are: (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 are 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 will 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.

 

50


 

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.

51


 

Tangible Common Equity Ratio – Non-GAAP

 

(Dollars in thousands, except per share data)

 

September 30, 2015

 

December 31, 2014

Tangible common equity ratio:

 

 

 

 

 

 

Total stockholders' equity

 

$

523,594

 

$

521,751

 

Accumulated other comprehensive income (loss)

 

 

(1,801)

 

 

823

 

Goodwill

 

 

(84,171)

 

 

(84,171)

 

Other intangible assets, net

 

 

(190)

 

 

(510)

Tangible common equity

 

$

437,432

 

$

437,893

 

 

 

 

 

 

 

 

Total assets

 

$

4,611,034

 

$

4,397,132

 

Goodwill

 

 

(84,171)

 

 

(84,171)

 

Other intangible assets, net

 

 

(190)

 

 

(510)

Tangible assets

 

$

4,526,673

 

$

4,312,451

 

 

 

 

 

 

 

 

Tangible common equity ratio

 

 

9.66%

 

 

10.15%

 

 

 

 

 

 

 

 

Tangible book value per share

 

$

17.91

 

$

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 a slowly growing economy and its resulting effects on its borrowers, particularly in the real estate sector. Total non-performing loans increased 8% to $37 million at September 30, 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 greater Washington D. C., Northern Virginia and central Maryland 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”).

  


 

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 included in the Company’s 2014 Annual Report on Form 10-K. 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.

53


 

·               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 $3.5 million for the first nine months of 2015 compared to a credit of $1.0 million for the first nine months 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 nine months of 2015 was driven primarily by growth in the loan portfolio and by charge-offs taken during the period. The credit to the provision in the first nine months 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.

 

54


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 third 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 September 30, 2015 or December 31, 2014.   

 

At September 30, 2015, total non-performing loans and leases were $36.9 million, or 1.08% 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 107% of non-performing loans and leases at September 30, 2015 as compared to 111% at December 31, 2014. The allowance for loan and lease losses as a percent of total loans and leases was 1.16% at September 30, 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 $30.9 million, with specific allowances of $3.0 million against those loans at September 30, 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 76% of total loans and leases at September 30, 2015 and 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.


 

Summary of Loan and Lease Loss Experience

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

 

 

 

 

 

 

Nine Months Ended

 

Year Ended

(Dollars in thousands)

 

September 30, 2015

 

December 31, 2014

Balance, January 1

 

$

37,802

 

$

38,766

Provision for loan and lease losses

 

 

3,521

 

 

(163)

Loan charge-offs:

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

Residential mortgage

 

 

(492)

 

 

(323)

 

Residential construction

 

 

-

 

 

(4)

Commercial real estate:

 

 

 

 

 

 

 

Commercial investor

 

 

(90)

 

 

(3)

 

Commercial owner occupied

 

 

(317)

 

 

(265)

 

Commercial AD&C

 

 

(739)

 

 

(529)

Commercial business

 

 

(185)

 

 

(729)

Leases

 

 

-

 

 

-

Consumer

 

 

(930)

 

 

(834)

 

Total charge-offs

 

 

(2,753)

 

 

(2,687)

Loan recoveries:

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

Residential mortgage

 

 

103

 

 

121

 

Residential construction

 

 

21

 

 

79

Commercial real estate:

 

 

 

 

 

 

 

Commercial investor

 

 

15

 

 

38

 

Commercial owner occupied

 

 

2

 

 

6

 

Commercial AD&C

 

 

580

 

 

-

Commercial business

 

 

226

 

 

1,477

Leases

 

 

-

 

 

-

Consumer

 

 

144

 

 

165

 

Total recoveries

 

 

1,091

 

 

1,886

 

Net charge-offs

 

 

(1,662)

 

 

(801)

 

 

Balance, period end

 

$

39,661

 

$

37,802

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net charge-offs to average loans and leases

 

 

0.07%

 

 

0.03%

Allowance for loan losses to loans

 

 

1.16%

 

 

1.21%

56


 

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)

 

September 30, 2015

 

December 31, 2014

Non-accrual loans and leases:

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

Residential mortgage

 

$

7,488

 

$

3,012

 

Residential construction

 

 

770

 

 

1,105

Commercial real estate:

 

 

 

 

 

 

 

Commercial investor

 

 

8,609

 

 

8,156

 

Commercial owner occupied

 

 

7,932

 

 

8,941

 

Commercial AD&C

 

 

194

 

 

2,464

Commercial business

 

 

3,881

 

 

3,184

Leases

 

 

-

 

 

-

Consumer

 

 

1,621

 

 

1,668

 

 

Total non-accrual loans and leases

 

 

30,495

 

 

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

 

 

1

 

 

-

Consumer

 

 

-

 

 

-

 

Total 90 days past due loans and leases

 

 

1

 

 

-

 

 

 

 

 

 

 

 

 

Restructured loans and leases (accruing)

 

 

6,419

 

 

5,497

 

Total non-performing loans and leases

 

 

36,915

 

 

34,027

Other real estate owned, net

 

 

2,619

 

 

3,195

 

Total non-performing assets

 

$

39,534

 

$

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.

 

57


 

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%

September 30, 2015

(4.32%)

(2.36%)

(0.79%)

(0.73%)

 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 September 30, 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 an 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.

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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%

September 30, 2015

(11.04%)

(6.81%)

(4.39%)

(2.43%)

 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 increased from December 31, 2014 to September 30, 2015 in all rising shock scenarios. The negative impact in EVE was driven by shorter durations on deposit, resulting in higher market value premiums should rates increase. In addition, an increase in fixed rate loans would cause lower market values as rates rise, thus contributing to additional risk.

 

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 September 30, 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 September 30, 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 September 30, 2015, show short-term investments exceeding short-term borrowings by $21 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 $1.4 billion, of which $1.3 billion was available for borrowing based on pledged collateral, with $610 million borrowed against it as of September 30, 2015. The line of credit at the Federal Reserve totaled $348 million, all of which was available for borrowing based on pledged collateral, with no borrowings against it as of September 30, 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 September 30, 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 September 30, 2015. Based upon its liquidity analysis, including external sources of liquidity available, management believes the liquidity position was appropriate at September 30, 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 funding stock repurchases and 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 September 30, 2015, the Bank could have declared a dividend of $45 million to Bancorp. At September 30, 2015, Bancorp had liquid assets of $13 million.

 

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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.

 

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

 

 

 

 

September 30,

 

December 31,

(In thousands)

 

2015

 

2014

Commercial

 

$

240,659

 

$

212,628

Real estate-development and construction

 

 

78,951

 

 

100,264

Real estate-residential mortgage

 

 

36,160

 

 

12,667

Lines of credit, principally home equity and business lines

 

 

891,479

 

 

810,552

Standby letters of credit

 

 

60,984

 

 

58,144

 

Total Commitments to extend credit and available credit lines

 

$

1,308,233

 

$

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 September 30, 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 2015 that permits the repurchase of up to 5% of the Company’s outstanding shares of common stock or approximately 1,200,000 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 September 30, 2015.

 

Item 3. Defaults Upon Senior Securities – None

 

Item 4.  Mine Safety Disclosures – Not applicable

 

Item 5. Other Information - None

 

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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  September 30, 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.

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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: November 5, 2015

 

By: /s/ Philip J. Mantua                      

Philip J. Mantua

Executive Vice President and Chief Financial Officer

 

Date: November 5, 2015

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