STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2012
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to ____________
Commission File Number: 0-19065
SANDY SPRING BANCORP, INC.
(Exact name of registrant as specified in its charter)
Maryland | 52-1532952 | ||
(State of incorporation) | (I.R.S. Employer Identification Number) |
17801 Georgia Avenue, Olney, Maryland | 20832 |
(Address of principal executive office) | (Zip Code) |
301-774-6400
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes ¨ No x
The number of outstanding shares of common stock outstanding as of May 7, 2012.
Common stock, $1.00 par value – 24,148,626 shares
SANDY SPRING BANCORP, INC.
TABLE OF CONTENTS
Page | ||
PART I - FINANCIAL INFORMATION | ||
ITEM 1. | FINANCIAL STATEMENTS | 4 |
Condensed Consolidated Statements of Condition - Unaudited at March 31, 2012 and December 31, 2011 | 4 | |
Condensed Consolidated Statements of Income - Unaudited for the Three Months Ended March 31, 2012 and 2011 | 5 | |
Condensed Consolidated Statements of Comprehensive Income – Unaudited for the Three Months Ended March 31, 2012 and 2011 | 6 | |
Condensed Consolidated Statements of Cash Flows – Unaudited for the Three Months Ended March 31, 2012 and 2011 | 7 | |
Condensed Consolidated Statements of Changes in Stockholders’ Equity – Unaudited for the Three Months Ended March 31, 2012 and 2011 | 8 | |
Notes to Condensed Consolidated Financial Statements | 9 | |
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 33 |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 55 |
ITEM 4. | CONTROLS AND PROCEDURES | 55 |
PART II - OTHER INFORMATION | ||
ITEM 1. | LEGAL PROCEEDINGS | 55 |
ITEM 1A. | RISK FACTORS | 55 |
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 55 |
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | 55 |
ITEM 4. | MINE SAFETY DISCLOSURES | 56 |
ITEM 5. | OTHER INFORMATION | 56 |
ITEM 6. | EXHIBITS | 56 |
SIGNATURES | 57 |
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 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. We do not undertake to update forward-looking statements to reflect circumstances or events that occur after the date of this report or to reflect the occurrence of unanticipated events except as required by federal securities laws.
3 |
Part I
Item 1. FINANCIAL STATEMENTS
Sandy spring bancorp, inc. and subsidiaries
CONDENSED Consolidated STATEMENTS OF CONDITION – UNAUDITED
March 31, | December 31, | |||||||
(Dollars in thousands) | 2012 | 2011 | ||||||
Assets | ||||||||
Cash and due from banks | $ | 43,149 | $ | 49,832 | ||||
Federal funds sold | 1,012 | 1,006 | ||||||
Interest-bearing deposits with banks | 58,144 | 21,476 | ||||||
Cash and cash equivalents | 102,305 | 72,314 | ||||||
Residential mortgage loans held for sale (at fair value) | 18,126 | 25,341 | ||||||
Investments available-for-sale (at fair value) | 878,365 | 951,301 | ||||||
Investments held-to-maturity — fair value of $157,745 and $184,167 at March 31, 2012 and December 31, 2011, respectively | 153,544 | 178,465 | ||||||
Other equity securities | 35,553 | 34,933 | ||||||
Total loans and leases | 2,271,392 | 2,239,692 | ||||||
Less: allowance for loan and lease losses | (45,061 | ) | (49,426 | ) | ||||
Net loans and leases | 2,226,331 | 2,190,266 | ||||||
Premises and equipment, net | 48,748 | 48,483 | ||||||
Other real estate owned | 4,834 | 4,431 | ||||||
Accrued interest receivable | 12,424 | 12,898 | ||||||
Goodwill | 76,816 | 76,816 | ||||||
Other intangible assets, net | 4,272 | 4,734 | ||||||
Other assets | 106,955 | 111,388 | ||||||
Total assets | $ | 3,668,273 | $ | 3,711,370 | ||||
Liabilities | ||||||||
Noninterest-bearing deposits | $ | 685,770 | $ | 650,377 | ||||
Interest-bearing deposits | 1,995,305 | 2,006,143 | ||||||
Total deposits | 2,681,075 | 2,656,520 | ||||||
Securities sold under retail repurchase agreements and federal funds purchased | 73,130 | 143,613 | ||||||
Advances from FHLB | 405,321 | 405,408 | ||||||
Subordinated debentures | 35,000 | 35,000 | ||||||
Accrued interest payable and other liabilities | 21,830 | 24,720 | ||||||
Total liabilities | 3,216,356 | 3,265,261 | ||||||
Stockholders' Equity | ||||||||
Common stock — par value $1.00; shares authorized 50,000,000; shares issued and outstanding 24,143,985 and 24,091,042 at March 31, 2012 and December 31, 2011, respectively | 24,144 | 24,091 | ||||||
Additional paid in capital | 177,949 | 177,828 | ||||||
Retained earnings | 236,986 | 230,942 | ||||||
Accumulated other comprehensive income | 12,838 | 13,248 | ||||||
Total stockholders' equity | 451,917 | 446,109 | ||||||
Total liabilities and stockholders' equity | $ | 3,668,273 | $ | 3,711,370 |
The accompanying notes are an integral part of these statements
4 |
Sandy Spring Bancorp, Inc. and Subsidiaries
CONDENSED Consolidated Statements of IncomE – UNAUDITED
Three Months Ended March 31, | ||||||||
(Dollars in thousands, except per share data) | 2012 | 2011 | ||||||
Interest Income: | ||||||||
Interest and fees on loans and leases | $ | 27,129 | $ | 26,990 | ||||
Interest on loans held for sale | 149 | 122 | ||||||
Interest on deposits with banks | 21 | 18 | ||||||
Interest and dividends on investment securities: | ||||||||
Taxable | 4,943 | 5,440 | ||||||
Exempt from federal income taxes | 2,373 | 2,179 | ||||||
Interest on federal funds sold | - | 1 | ||||||
Total interest income | 34,615 | 34,750 | ||||||
Interest Expense: | ||||||||
Interest on deposits | 2,013 | 2,913 | ||||||
Interest on retail repurchase agreements and federal funds purchased | 61 | 53 | ||||||
Interest on advances from FHLB | 3,587 | 3,551 | ||||||
Interest on subordinated debt | 249 | 223 | ||||||
Total interest expense | 5,910 | 6,740 | ||||||
Net interest income | 28,705 | 28,010 | ||||||
Provision for loan and lease losses | 664 | 1,515 | ||||||
Net interest income after provision for loan and lease losses | 28,041 | 26,495 | ||||||
Non-interest Income: | ||||||||
Investment securities gains | 73 | 20 | ||||||
Total other-than-temporary impairment ("OTTI") losses | (64 | ) | (100 | ) | ||||
Portion of OTTI losses recognized in other comprehensive income, before taxes | - | 59 | ||||||
Net OTTI recognized in earnings | (64 | ) | (41 | ) | ||||
Service charges on deposit accounts | 2,200 | 2,252 | ||||||
Mortgage banking activities | 1,025 | 455 | ||||||
Wealth management income | 4,057 | 3,645 | ||||||
Insurance agency commissions | 1,202 | 1,180 | ||||||
Income from bank owned life insurance | 634 | 646 | ||||||
Visa check fees | 898 | 834 | ||||||
Other income | 949 | 1,001 | ||||||
Total non-interest income | 10,974 | 9,992 | ||||||
Non-interest Expenses: | ||||||||
Salaries and employee benefits | 15,701 | 14,624 | ||||||
Occupancy expense of premises | 2,846 | 3,143 | ||||||
Equipment expenses | 1,190 | 1,142 | ||||||
Marketing | 495 | 485 | ||||||
Outside data services | 1,279 | 995 | ||||||
FDIC insurance | 652 | 1,044 | ||||||
Amortization of intangible assets | 461 | 461 | ||||||
Other expenses | 4,059 | 4,168 | ||||||
Total non-interest expenses | 26,683 | 26,062 | ||||||
Income before income taxes | 12,332 | 10,425 | ||||||
Income tax expense | 3,856 | 3,134 | ||||||
Net income | $ | 8,476 | $ | 7,291 | ||||
Net Income Per Share Amounts: | ||||||||
Basic net income per share | $ | 0.35 | $ | 0.30 | ||||
Diluted net income per share | $ | 0.35 | $ | 0.30 | ||||
Dividends declared per share | $ | 0.10 | $ | 0.08 |
5 |
Sandy Spring Bancorp, Inc. and Subsidiaries
CONDENSED Consolidated Statements of OTHER COMPREHENSIVE INCOME - UNAUDITED
Three Months Ended March 31, | ||||||||
(In thousands) | 2012 | 2011 | ||||||
Net income | $ | 8,476 | $ | 7,291 | ||||
Other comprehensive income: | ||||||||
Investments available-for-sale: | ||||||||
Net change in unrealized gains (losses) on investments available-for-sale | (1,103 | ) | 263 | |||||
Related income tax benefit (expense) | 439 | (105 | ) | |||||
Net investment gains reclassified into earnings | 73 | 20 | ||||||
Related income tax expense | (29 | ) | (8 | ) | ||||
Net effect on other comprehensive income (loss) for the period | (620 | ) | 170 | |||||
Defined benefit pension plan: | ||||||||
Recognition of unrealized gain | 350 | 317 | ||||||
Related income tax expense | (140 | ) | (127 | ) | ||||
Net effect on other comprehensive income for the period | 210 | 190 | ||||||
Total other comprehensive income (loss) | (410 | ) | 360 | |||||
Comprehensive income | $ | 8,066 | $ | 7,651 |
6 |
Sandy Spring Bancorp, Inc. and Subsidiaries
CONDENSED Consolidated Statements of Cash Flows - UNAUDITED
Three Months Ended March 31, | ||||||||
(Dollars in thousands) | 2012 | 2011 | ||||||
Operating activities: | ||||||||
Net income | $ | 8,476 | $ | 7,291 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 1,936 | 1,840 | ||||||
Net OTTI recognized in earnings | 64 | 41 | ||||||
Provision for loan and lease losses | 664 | 1,515 | ||||||
Share based compensation expense | 325 | 249 | ||||||
Deferred income tax expense | 1,641 | 1,286 | ||||||
Origination of loans held for sale | (55,278 | ) | (43,836 | ) | ||||
Proceeds from sales of loans held for sale | 63,474 | 56,485 | ||||||
Gains on sales of loans held for sale | (981 | ) | (824 | ) | ||||
Loss on sales of other real estate owned | 334 | 327 | ||||||
Investment securities gains | (73 | ) | (20 | ) | ||||
Gains on sales of premises and equipment | (93 | ) | (14 | ) | ||||
Net (increase) decrease in accrued interest receivable | 474 | (323 | ) | |||||
Net decrease in other assets | 1,923 | 857 | ||||||
Net increase (decrease) in accrued expenses and other liabilities | (2,104 | ) | 10,798 | |||||
Other – net | 1,717 | 2,275 | ||||||
Net cash provided by operating activities | 22,499 | 37,947 | ||||||
Investing activities: | ||||||||
Purchases of other equity securities | (620 | ) | - | |||||
Purchases of investments held-to-maturity | (11,032 | ) | (8,819 | ) | ||||
Purchases of investments available-for-sale | (46,331 | ) | (117,891 | ) | ||||
Proceeds from sales of investment available-for-sale | 28,519 | - | ||||||
Proceeds from maturities, calls and principal payments of investments held-to-maturity | 35,920 | 21,639 | ||||||
Proceeds from maturities, calls and principal payments of investments available-for-sale | 88,220 | 59,390 | ||||||
Net (increase) decrease in loans and leases | (38,396 | ) | 362 | |||||
Proceeds from the sales of other real estate owned | 1,110 | 1,669 | ||||||
Expenditures for premises and equipment | (1,301 | ) | (973 | ) | ||||
Net cash provided by (used in) investing activities | 56,089 | (44,623 | ) | |||||
Financing activities: | ||||||||
Net increase in deposits | 24,555 | 49,762 | ||||||
Net decrease in retail repurchase agreements and federal funds purchased | (70,483 | ) | (20,727 | ) | ||||
Repayment of advances from FHLB | (87 | ) | (87 | ) | ||||
Redemption of stock warrant | - | (4,449 | ) | |||||
Proceeds from issuance of common stock | (225 | ) | (6 | ) | ||||
Tax benefits associated with shared based compensation | 74 | - | ||||||
Dividends paid | (2,431 | ) | (1,938 | ) | ||||
Net cash provided by (used) in financing activities | (48,597 | ) | 22,555 | |||||
Net increase in cash and cash equivalents | 29,991 | 15,879 | ||||||
Cash and cash equivalents at beginning of period | 72,314 | 63,117 | ||||||
Cash and cash equivalents at end of period | $ | 102,305 | $ | 78,996 | ||||
Supplemental Disclosures: | ||||||||
Interest payments | $ | 5,940 | $ | 6,784 | ||||
Income tax payments | 1,356 | 2,210 | ||||||
Transfers from loans to other real estate owned | 1,667 | 1,089 |
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 | ||||||||||||||||||||||||||
Preferred | Common | Paid-In | Retained | Comprehensive | Stockholders’ | |||||||||||||||||||||||
(Dollars in thousands, except per share data) | Stock | Stock | Warrants | Capital | Earnings | Income (Loss) | Equity | |||||||||||||||||||||
Balances at January 1, 2012 | $ | - | $ | 24,091 | $ | - | $ | 177,828 | $ | 230,942 | $ | 13,248 | $ | 446,109 | ||||||||||||||
Comprehensive Income: | ||||||||||||||||||||||||||||
Net income | - | - | - | - | 8,476 | - | 8,476 | |||||||||||||||||||||
Other comprehensive income, net of tax | - | - | - | - | - | (410 | ) | (410 | ) | |||||||||||||||||||
Common stock dividends - $0.10 per share | - | - | - | - | (2,432 | ) | - | (2,432 | ) | |||||||||||||||||||
Stock compensation expense | - | - | - | 399 | - | - | 399 | |||||||||||||||||||||
Common stock issued pursuant to: | ||||||||||||||||||||||||||||
Employee stock purchase plan - 7,953 shares | - | 8 | - | 113 | - | - | 121 | |||||||||||||||||||||
Restricted stock - 44,990 shares | - | 45 | - | (391 | ) | - | - | (346 | ) | |||||||||||||||||||
Balances at March 31, 2012 | $ | - | $ | 24,144 | $ | - | $ | 177,949 | $ | 236,986 | $ | 12,838 | $ | 451,917 | ||||||||||||||
Balances at January 1, 2011 | $ | - | $ | 24,047 | $ | 3,699 | $ | 177,344 | $ | 205,099 | $ | (2,620 | ) | $ | 407,569 | |||||||||||||
Comprehensive Income: | ||||||||||||||||||||||||||||
Net income | - | - | - | - | 7,291 | - | 7,291 | |||||||||||||||||||||
Other comprehensive income, net of tax: | - | - | - | - | - | 360 | 360 | |||||||||||||||||||||
Common stock dividends - $0.08 per share | - | - | - | - | (1,938 | ) | - | (1,938 | ) | |||||||||||||||||||
Stock compensation expense | - | - | - | 249 | - | - | 249 | |||||||||||||||||||||
Stock warrant redemption | - | - | (3,699 | ) | (750 | ) | - | - | (4,449 | ) | ||||||||||||||||||
Common stock issued pursuant to: | ||||||||||||||||||||||||||||
Stock option plan - 1,765 shares | - | 2 | - | 19 | - | - | 21 | |||||||||||||||||||||
Employee stock purchase plan - 7,608 shares | - | 8 | - | 116 | - | - | 124 | |||||||||||||||||||||
Restricted stock - 28,423 shares | - | 28 | - | (179 | ) | - | - | (151 | ) | |||||||||||||||||||
Balances at March 31, 2011 | $ | - | $ | 24,085 | $ | - | $ | 176,799 | $ | 210,452 | $ | (2,260 | ) | $ | 409,076 |
The accompanying notes are an integral part of these statements
8 |
Sandy Spring Bancorp, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - UNAUDITED
Note 1 – Significant Accounting Policies
Nature of Operations
Sandy Spring Bancorp (the “Company”), a Maryland corporation, is the bank holding company for Sandy Spring Bank (the “Bank”), which conducts a full-service commercial banking, mortgage banking and trust business. Services to individuals and businesses include accepting deposits, extending real estate, consumer and commercial loans and lines of credit, equipment leasing, general insurance, personal trust, and investment and wealth management services. The Company operates in the six Maryland counties of Anne Arundel, Carroll, Frederick, Howard, Montgomery, and Prince George's, and in Arlington Fairfax and Loudoun counties in Virginia. The Company offers investment and wealth management services through the Bank’s subsidiary, West Financial Services. Insurance products are available to clients through Sandy Spring Insurance, and Neff & Associates, which are agencies of Sandy Spring Insurance Corporation.
Basis of Presentation
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and prevailing practices within the financial services industry for interim financial information and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required for complete financial statements and prevailing practices within the banking industry. The following summary of significant accounting policies of the Company is presented to assist the reader in understanding the financial and other data presented in this report. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for any future periods or for the year ending December 31, 2012. 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 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 2011 Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on March 15, 2012. There have been no significant changes to the Company’s accounting policies as disclosed in the 2011 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 significant 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 an original maturity of three months or less).
9 |
Adopted Accounting Pronouncements
In June 2011, the FASB issued a standard that requires comprehensive income to be reported in either a single statement or two consecutive statements reporting net income and other comprehensive income. The guidance does not alter the items that are reported in other comprehensive income or require reclassification of items from other comprehensive income to net income. This guidance should be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company has opted to present comprehensive income in two consecutive statements. This guidance did not have any impact on the financial position, results of operations or cash flows of the Company as it only affects the presentation of the information in the financial statements.
The FASB issued a standard in April 2011 that removed from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee, as the criterion is not a determining factor of effective control. This guidance is effective for the first interim or annual period beginning on or after December 15, 2011. This guidance did not have a material impact on the financial position, results of operations or cash flows of the Company.
In May 2011, the FASB issued guidance on fair value that applies to all entities that measure assets, liabilities or instruments classified in stockholders’ equity at fair value or provide fair value disclosures for items not recorded at fair value. The guidance clarifies how a principal market is determined, addresses the fair value measurement of instruments with offsetting market or counterparty credit risk and the concept of valuation premise and highest and best use, extends the prohibition of blockage factors to all three levels of the fair value hierarchy, and requires additional disclosures. This guidance is effective for interim and annual periods beginning after December 15, 2011. Differences in fair value measurement resulting from the application of the guidance will be recognized in income in the period of adoption as a change in estimate. Disclosure requirements will be recognized prospectively. Changes in valuation techniques and related inputs as a result of the application of the guidance in addition to an estimate of the total effect of the changes, if practicable, will be disclosed in the period of adoption. The application of this guidance did not have a significant impact on the financial position, results of operations or cash flows of the Company.
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:
At March 31, 2012 | At December 31, 2011 | |||||||||||||||||||||||||||||||
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 | $ | 175,202 | $ | 1,843 | $ | (213 | ) | $ | 176,832 | $ | 197,816 | $ | 2,436 | $ | - | $ | 200,252 | |||||||||||||||
State and municipal | 160,290 | 10,864 | (4 | ) | 171,150 | 160,657 | 12,456 | (2 | ) | 173,111 | ||||||||||||||||||||||
Mortgage-backed | 503,301 | 19,806 | (24 | ) | 523,083 | 551,518 | 18,639 | (13 | ) | 570,144 | ||||||||||||||||||||||
Corporate debt | 2,000 | - | (3 | ) | 1,997 | 2,000 | - | (22 | ) | 1,978 | ||||||||||||||||||||||
Trust preferred | 5,228 | 400 | (425 | ) | 5,203 | 5,936 | 260 | (480 | ) | 5,716 | ||||||||||||||||||||||
Total debt securities | 846,021 | 32,913 | (669 | ) | 878,265 | 917,927 | 33,791 | (517 | ) | 951,201 | ||||||||||||||||||||||
Marketable equity securities | 100 | - | - | 100 | 100 | - | - | 100 | ||||||||||||||||||||||||
Total investments available-for-sale | $ | 846,121 | $ | 32,913 | $ | (669 | ) | $ | 878,365 | $ | 918,027 | $ | 33,791 | $ | (517 | ) | $ | 951,301 |
Any unrealized losses in the U.S. government agencies, state and municipal, mortgage-backed or corporate debt investment securities at March 31, 2012 are the result of changes in interest rates and are not considered credit related. These declines are considered temporary in nature and will decline over time and recover as these securities approach maturity.
The mortgage-backed portfolio at March 31, 2012 is composed entirely of either the most senior tranches of GNMA collateralized mortgage obligations ($210.8 million), or GNMA, FNMA or FHLMC mortgage-backed securities ($312.3 million). The Company does not intend to sell these securities and has sufficient liquidity to hold these securities for an adequate period of time, which may be maturity, to allow for any anticipated recovery in fair value.
At March 31, 2012, the trust preferred portfolio consisted of one security backed by a single financial institution issuer and one pooled trust preferred security. The fair value of the single issue security was $3.4 million as determined using broker quotations. The pooled trust preferred security is backed by debt issued by banks and thrifts, which totals $2.2 million, with a fair value of $1.8 million. The fair value of this security was determined by a third party valuation specialist due to the limited trading activity for this security in the marketplace.
10 |
The specialist used an income valuation approach technique (present value) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs. The methodology and significant assumptions employed by the specialist to determine fair value included:
· | Evaluation of the structural terms as established in the indenture; |
· | Detailed credit and structural evaluation for each piece of issuer collateral in the pool; |
· | Overall default (.32%), recovery and prepayment (2%)/amortization probabilities by issuers in the pool; |
· | Identification of adverse conditions specifically related to the security, industry and geographical area; |
· | Projection of estimated cash flows that incorporate default expectations and loss severities; |
· | Review of historical and implied volatility of the fair value of the security; |
· | Evaluation of credit risk concentrations; |
· | Evaluation of the length of time and the extent to which the fair value has been less than the amortized cost; and |
· | A discount rate of 12.7% was established using credit adjusted financial institution spreads for comparably rated institutions and a liquidity adjustment that considered the previously noted characteristics. |
As a result of this evaluation, it was determined that the pooled trust preferred security incurred credit-related other-than-temporary impairment (“OTTI”) of $64 thousand, which was recognized in earnings for the quarter ended March 31, 2012. Non-credit related OTTI on this security, which is not expected to be sold and that the Company has the ability to hold until maturity, was $0.4 million for the quarter ended March 31, 2012. This non-credit related OTTI was recognized in other comprehensive income (“OCI”) at March 31, 2012.
The methodology and significant inputs used to measure the amount related to credit loss consisted of the following:
· | Default rates were developed based on the financial condition of the trust preferred issuers in the pool and the payment or deferral status. Conditional default rates were estimated based on the payment characteristics of the security and the financial condition of the issuers in the pool. Near term and future defaults are estimated using third party industry data in addition to a review of key financial ratios and other pertinent data on the financial stability of the underlying issuer; |
· | Loss severity is forecasted based on the type of impairment using research performed by third parties; |
· | The security contains one level of subordination below the senior tranche, with the senior tranche receiving the spread from the subordinate bonds. Given recent performance, it is not expected that the senior tranche will receive its full interest and principal at the bond’s maturity date; |
· | Credit ratings of the underlying issuers are reviewed in conjunction with the development of the default rates applied to determine the credit amounts related to the credit loss; and |
· | Potential prepayments are estimated based on terms and rates of the underlying trust preferred securities to determine the impact of excess spread on the credit enhancement, the removal of the strongest institutions from the underlying pool and any impact that prepayments might have on diversity and concentration. |
The following table provides the activity of OTTI on investment securities due to credit losses recognized in earnings for the period indicated:
(In thousands) | OTTI Losses | |||
Cumulative credit losses on investment securities, through December 31, 2011 | $ | 422 | ||
Additions for credit losses not previously recognized | 64 | |||
Cumulative credit losses on investment securities, through March 31, 2012 | $ | 486 |
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:
At March 31, 2012 | ||||||||||||||||||||
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 | $ | 38,903 | $ | 213 | $ | - | $ | 213 | |||||||||||
State and municipal | 1 | 393 | 4 | - | 4 | |||||||||||||||
Mortgage-backed | 2 | 2,221 | 24 | - | 24 | |||||||||||||||
Corporate debt | 1 | 1,997 | 3 | - | 3 | |||||||||||||||
Trust preferred | 2 | 1,815 | - | 425 | 425 | |||||||||||||||
Total | 11 | $ | 45,329 | $ | 244 | $ | 425 | $ | 669 |
At December 31, 2011 | ||||||||||||||||||||
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 | 1 | $ | 397 | $ | 2 | $ | - | $ | 2 | |||||||||||
State and municipal | 3 | 5,081 | 13 | - | 13 | |||||||||||||||
Mortgage-backed | 1 | 3,326 | 22 | - | 22 | |||||||||||||||
Trust preferred | 1 | 2,467 | - | 480 | 480 | |||||||||||||||
Total | 6 | $ | 11,271 | $ | 37 | $ | 480 | $ | 517 |
The amortized cost and estimated fair values of investment 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.
At March 31, 2012 | At December 31, 2011 | |||||||||||||||
Estimated | Estimated | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
(In thousands) | Cost | Value | Cost | Value | ||||||||||||
Due in one year or less | $ | 25,361 | $ | 25,592 | $ | 65,569 | $ | 65,972 | ||||||||
Due after one year through five years | 62,916 | 64,369 | 62,993 | 64,656 | ||||||||||||
Due after five years through ten years | 349,029 | 360,083 | 342,813 | 354,238 | ||||||||||||
Due after ten years | 408,715 | 428,221 | 446,552 | 466,335 | ||||||||||||
Total debt securities available for sale | $ | 846,021 | $ | 878,265 | $ | 917,927 | $ | 951,201 |
At March 31, 2012 and December 31, 2011, investments available-for-sale with a book value of $238.4 million and $255.4 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. Agencies securities, exceeded ten percent of stockholders' equity at March 31, 2012 and December 31, 2011.
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:
At March 31, 2012 | At December 31, 2011 | |||||||||||||||||||||||||||||||
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 | $ | 34,986 | $ | 127 | $ | - | $ | 35,113 | $ | 54,983 | $ | 406 | $ | - | $ | 55,389 | ||||||||||||||||
State and municipal | 118,171 | 4,362 | (338 | ) | 122,195 | 123,075 | 5,244 | (1 | ) | 128,318 | ||||||||||||||||||||||
Mortgage-backed | 387 | 50 | - | 437 | 407 | 53 | - | 460 | ||||||||||||||||||||||||
Total investments held-to-maturity | $ | 153,544 | $ | 4,539 | $ | (338 | ) | $ | 157,745 | $ | 178,465 | $ | 5,703 | $ | (1 | ) | $ | 184,167 |
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:
At March 31, 2012 | ||||||||||||||||||||
Continuous Unrealized | ||||||||||||||||||||
Losses Existing for: | ||||||||||||||||||||
Number | Total | |||||||||||||||||||
of | Less than | More than | Unrealized | |||||||||||||||||
(Dollars in thousands) | securities | Fair Value | 12 months | 12 months | Losses | |||||||||||||||
State and municipal | 13 | $ | 12,676 | $ | 338 | $ | - | $ | 338 | |||||||||||
Total | 13 | $ | 12,676 | $ | 338 | $ | - | $ | 338 |
At December 31, 2011 | ||||||||||||||||||||
Continuous Unrealized | ||||||||||||||||||||
Losses Existing for: | ||||||||||||||||||||
Number | Total | |||||||||||||||||||
of | Less than | More than | Unrealized | |||||||||||||||||
(Dollars in thousands) | securities | Fair Value | 12 months | 12 months | Losses | |||||||||||||||
State and municipal | 1 | $ | 541 | $ | 1 | $ | - | $ | 1 | |||||||||||
Total | 1 | $ | 541 | $ | 1 | $ | - | $ | 1 |
The Company does not intend to sell these securities and has sufficient liquidity to hold these securities for an adequate period of time, which may be maturity, to allow for any anticipated recovery in fair value, and substantiates that the unrealized losses in the held-to-maturity portfolio are considered temporary in nature.
The amortized cost and estimated fair values of debt securities held-to-maturity by contractual maturity at the dates indicated are reflected in the following table. Expected maturities will differ from contractual maturities as borrowers may have the right to prepay obligations with or without prepayment penalties.
At March 31, 2012 | At December 31, 2011 | |||||||||||||||
Estimated | Estimated | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
(In thousands) | Cost | Value | Cost | Value | ||||||||||||
Due in one year or less | $ | 12,485 | $ | 12,693 | $ | 18,860 | $ | 19,203 | ||||||||
Due after one year through five years | 6,401 | 6,583 | 6,937 | 7,144 | ||||||||||||
Due after five years through ten years | 79,081 | 81,261 | 98,428 | 101,008 | ||||||||||||
Due after ten years | 55,577 | 57,208 | 54,240 | 56,812 | ||||||||||||
Total debt securities held-to-maturity | $ | 153,544 | $ | 157,745 | $ | 178,465 | $ | 184,167 |
13 |
At March 31, 2012 and December 31, 2011, investments held-to-maturity with a book value of $120.0 million and $58.7 million, respectively, were pledged as collateral for certain government deposits and for other purposes as required or permitted by law. The outstanding balance of no single issuer, except for U.S. Agency securities, exceeded ten percent of stockholders' equity at March 31, 2012 and December 31, 2011.
Equity securities
Other equity securities at the dates indicated are presented in the following table:
(In thousands) | March 31, 2012 | December 31, 2011 | ||||||
Federal Reserve Bank stock | $ | 7,530 | $ | 7,530 | ||||
Federal Home Loan Bank of Atlanta stock | 27,948 | 27,328 | ||||||
Atlantic Central Bank stock | 75 | 75 | ||||||
Total equity securities | $ | 35,553 | $ | 34,933 |
Note 3 – Loans and Leases
Outstanding loan balances at March 31, 2012 and December 31, 2011 are net of unearned income including net deferred loan costs of $2.2 million and $2.0 million, respectively. The loan portfolio segment balances at the dates indicated are presented in the following table:
(In thousands) | March 31, 2012 | December 31, 2011 | ||||||
Residential real estate: | ||||||||
Residential mortgage | $ | 465,204 | $ | 448,662 | ||||
Residential construction | 122,841 | 108,699 | ||||||
Commercial real estate: | ||||||||
Commercial owner occupied real estate | 525,022 | 522,076 | ||||||
Commercial investor real estate | 392,626 | 371,948 | ||||||
Commercial acquisition, development and construction | 149,814 | 160,946 | ||||||
Commercial Business | 253,827 | 260,327 | ||||||
Leases | 5,843 | 6,954 | ||||||
Consumer | 356,215 | 360,080 | ||||||
Total loans and leases | $ | 2,271,392 | $ | 2,239,692 |
Note 4 – CREDIT QUALITY ASSESSMENT
Allowance for Loan and Lease Losses
Summary information on the allowance for loan and lease loss activity for the period indicated is provided in the following table:
Three Months Ended March 31, | ||||||||
(In thousands) | 2012 | 2011 | ||||||
Balance at beginning of year | $ | 49,426 | $ | 62,135 | ||||
Provision for loan and lease losses | 664 | 1,515 | ||||||
Loan and lease charge-offs | (5,298 | ) | (5,198 | ) | ||||
Loan and lease recoveries | 269 | 466 | ||||||
Net charge-offs | (5,029 | ) | (4,732 | ) | ||||
Balance at period end | $ | 45,061 | $ | 58,918 |
14 |
The following tables provide information on the activity in the allowance for loan and lease losses by the respective loan portfolio segment for the period indicated:
For the Three Months Ended March 31, 2012 | ||||||||||||||||||||||||||||||||||||
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 | $ | 6,727 | $ | 6,664 | $ | 8,248 | $ | 7,329 | $ | 795 | $ | 4,873 | $ | 10,583 | $ | 4,207 | $ | 49,426 | ||||||||||||||||||
Provision (credit) | (1,268 | ) | 254 | 3,081 | (878 | ) | (130 | ) | (70 | ) | 340 | (665 | ) | 664 | ||||||||||||||||||||||
Charge-offs | (102 | ) | (1,076 | ) | (3,219 | ) | - | (6 | ) | (440 | ) | (455 | ) | - | (5,298 | ) | ||||||||||||||||||||
Recoveries | 141 | - | - | - | 1 | 92 | 35 | - | 269 | |||||||||||||||||||||||||||
Net charge-offs | 39 | (1,076 | ) | (3,219 | ) | - | (5 | ) | (348 | ) | (420 | ) | - | (5,029 | ) | |||||||||||||||||||||
Balance at end of period | $ | 5,498 | $ | 5,842 | $ | 8,110 | $ | 6,451 | $ | 660 | $ | 4,455 | $ | 10,503 | $ | 3,542 | $ | 45,061 | ||||||||||||||||||
Total loans and leases | $ | 253,827 | $ | 149,814 | $ | 392,626 | $ | 525,022 | $ | 5,843 | $ | 356,215 | $ | 465,204 | $ | 122,841 | $ | 2,271,392 | ||||||||||||||||||
Allowance for loans and leases to total loans and leases ratio | 2.17 | % | 3.90 | % | 2.07 | % | 1.23 | % | 11.30 | % | 1.25 | % | 2.26 | % | 2.88 | % | 1.98 | % | ||||||||||||||||||
Balance of loans specifically evaluated for impairment | $ | 9,060 | $ | 14,303 | $ | 13,893 | $ | 18,033 | na. | $ | 34 | $ | 5,782 | $ | 750 | $ | 61,855 | |||||||||||||||||||
Allowance for loans specifically evaluated for impairment | $ | 948 | $ | - | $ | 389 | $ | 1,255 | na. | na. | $ | 1,712 | $ | 163 | $ | 4,467 | ||||||||||||||||||||
Specific allowance to specific loans ratio | 10.46 | % | 0.00 | % | 2.80 | % | 6.96 | % | na. | na. | 29.61 | % | 21.73 | % | 7.22 | % | ||||||||||||||||||||
Balance of loans collectively evaluated | $ | 244,767 | $ | 135,511 | $ | 378,733 | $ | 506,989 | $ | 5,843 | $ | 356,181 | $ | 459,422 | $ | 122,091 | $ | 2,209,537 | ||||||||||||||||||
Allowance for loans collectively evaluated | $ | 4,550 | $ | 5,842 | $ | 7,721 | $ | 5,196 | $ | 660 | $ | 4,455 | $ | 8,791 | $ | 3,379 | $ | 40,594 | ||||||||||||||||||
Collective allowance to collective loans ratio | 1.86 | % | 4.31 | % | 2.04 | % | 1.02 | % | 11.30 | % | 1.25 | % | 1.91 | % | 2.77 | % | 1.84 | % |
For the Year Ended December 31, 2011 | ||||||||||||||||||||||||||||||||||||
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 | $ | 12,870 | $ | 18,241 | $ | 4,793 | $ | 8,177 | $ | 667 | $ | 4,231 | $ | 10,396 | $ | 2,760 | $ | 62,135 | ||||||||||||||||||
Provision (credit) | (4,252 | ) | (11,035 | ) | 4,320 | (361 | ) | 1,182 | 3,173 | 5,144 | 3,257 | 1,428 | ||||||||||||||||||||||||
Charge-offs | (2,565 | ) | (1,780 | ) | (868 | ) | (487 | ) | (1,072 | ) | (2,740 | ) | (5,178 | ) | (1,815 | ) | (16,505 | ) | ||||||||||||||||||
Recoveries | 674 | 1,238 | 3 | - | 18 | 209 | 221 | 5 | 2,368 | |||||||||||||||||||||||||||
Net charge-offs | (1,891 | ) | (542 | ) | (865 | ) | (487 | ) | (1,054 | ) | (2,531 | ) | (4,957 | ) | (1,810 | ) | (14,137 | ) | ||||||||||||||||||
Balance at end of year | $ | 6,727 | $ | 6,664 | $ | 8,248 | $ | 7,329 | $ | 795 | $ | 4,873 | $ | 10,583 | $ | 4,207 | $ | 49,426 | ||||||||||||||||||
Total loans and leases | $ | 260,327 | $ | 160,946 | $ | 371,948 | $ | 522,076 | $ | 6,954 | $ | 360,080 | $ | 448,662 | $ | 108,699 | $ | 2,239,692 | ||||||||||||||||||
Allowance for loans and leases to total loans and leases ratio | 2.58 | % | 4.14 | % | 2.22 | % | 1.40 | % | 11.43 | % | 1.35 | % | 2.36 | % | 3.87 | % | 2.21 | % | ||||||||||||||||||
Balance of loans specifically evaluated for impairment | $ | 9,092 | $ | 18,701 | $ | 16,964 | $ | 15,416 | na. | $ | 35 | $ | 5,108 | $ | 2,259 | $ | 67,575 | |||||||||||||||||||
Allowance for loans specifically evaluated for impairment | $ | 1,037 | $ | 7 | $ | 3,380 | $ | 1,772 | na. | na. | $ | 769 | $ | 826 | $ | 7,791 | ||||||||||||||||||||
Specific allowance to specific loans ratio | 11.41 | % | 0.04 | % | 19.92 | % | 11.49 | % | na. | na. | 15.05 | % | 36.56 | % | 11.53 | % | ||||||||||||||||||||
Balance of loans collectively evaluated | $ | 251,235 | $ | 142,245 | $ | 354,984 | $ | 506,660 | $ | 6,954 | $ | 360,045 | $ | 443,554 | $ | 106,440 | $ | 2,172,117 | ||||||||||||||||||
Allowance for loans collectively evaluated | $ | 5,690 | $ | 6,657 | $ | 4,868 | $ | 5,557 | $ | 795 | $ | 4,873 | $ | 9,814 | $ | 3,381 | $ | 41,635 | ||||||||||||||||||
Collective allowance to collective loans ratio | 2.26 | % | 4.68 | % | 1.37 | % | 1.10 | % | 11.43 | % | 1.35 | % | 2.21 | % | 3.18 | % | 1.92 | % |
15 |
The following table provides summary information regarding impaired loans at the dates indicated and for the periods then ended:
March 31, | December 31, | |||||||
(In thousands) | 2012 | 2011 | ||||||
Impaired loans with a valuation allowance | $ | 17,927 | $ | 36,742 | ||||
Impaired loans without a valuation allowance | 43,928 | 30,833 | ||||||
Total impaired loans | $ | 61,855 | $ | 67,575 | ||||
Allowance for loan and lease losses related to impaired loans | $ | 4,467 | $ | 7,791 | ||||
Allowance for loan and lease losses related to loans collectively evaluated | 40,594 | 41,635 | ||||||
Total allowance for loan and lease losses | $ | 45,061 | $ | 49,426 | ||||
Average impaired loans for the period | $ | 64,715 | $ | 68,377 | ||||
Contractual interest income due on impaired loans during the period | $ | 1,332 | $ | 4,973 | ||||
Interest income on impaired loans recognized on a cash basis | $ | 511 | $ | 1,523 | ||||
Interest income on impaired loans recognized on an accrual basis | $ | 116 | $ | 325 |
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:
At March 31, 2012 | ||||||||||||||||||||||||
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 | $ | 1,019 | $ | - | $ | 1,392 | $ | 5,935 | $ | 1,092 | $ | 9,438 | ||||||||||||
Restructured accruing | 1,553 | - | - | 704 | 3,463 | 5,720 | ||||||||||||||||||
Restructured non-accruing | 199 | - | 182 | 2,007 | 381 | 2,769 | ||||||||||||||||||
Balance | $ | 2,771 | $ | - | $ | 1,574 | $ | 8,646 | $ | 4,936 | $ | 17,927 | ||||||||||||
Allowance | $ | 948 | $ | - | $ | 389 | $ | 1,255 | $ | 1,875 | $ | 4,467 | ||||||||||||
Impaired loans without a specific allowance | ||||||||||||||||||||||||
Non-accruing | $ | 3,314 | $ | 5,770 | $ | 11,268 | $ | 6,257 | $ | - | $ | 26,609 | ||||||||||||
Restructured accruing | 965 | - | - | 1,034 | 828 | 2,827 | ||||||||||||||||||
Restructured non-accruing | 2,010 | 8,533 | 1,051 | 2,096 | 802 | 14,492 | ||||||||||||||||||
Balance | $ | 6,289 | $ | 14,303 | $ | 12,319 | $ | 9,387 | $ | 1,630 | $ | 43,928 | ||||||||||||
Total impaired loans | ||||||||||||||||||||||||
Non-accruing | $ | 4,333 | $ | 5,770 | $ | 12,660 | $ | 12,192 | $ | 1,092 | $ | 36,047 | ||||||||||||
Restructured accruing | 2,518 | - | - | 1,738 | 4,291 | 8,547 | ||||||||||||||||||
Restructured non-accruing | 2,209 | 8,533 | 1,233 | 4,103 | 1,183 | 17,261 | ||||||||||||||||||
Balance | $ | 9,060 | $ | 14,303 | $ | 13,893 | $ | 18,033 | $ | 6,566 | $ | 61,855 | ||||||||||||
Unpaid principal balance in total impaired loans | $ | 11,425 | $ | 33,792 | $ | 17,559 | $ | 19,648 | $ | - | $ | 82,424 |
16 |
For the Three Months Ended March 31, 2012 | ||||||||||||||||||||||||
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 | $ | 9,076 | $ | 16,502 | $ | 15,429 | $ | 16,725 | $ | 6,984 | $ | 64,715 | ||||||||||||
Contractual interest income due on impaired loans during the period | $ | 141 | $ | 350 | $ | 311 | $ | 358 | $ | 172 | ||||||||||||||
Interest income on impaired loans recognized on a cash basis | $ | 70 | $ | 95 | $ | 22 | $ | 232 | $ | 92 | ||||||||||||||
Interest income on impaired loans recognized on an accrual basis | $ | 38 | $ | - | $ | - | $ | 29 | $ | 49 |
At December 31, 2011 | ||||||||||||||||||||||||
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 | $ | 1,110 | $ | - | $ | 13,812 | $ | 4,091 | $ | 1,093 | $ | 20,106 | ||||||||||||
Restructured accruing | 1,346 | - | - | 707 | 3,475 | 5,528 | ||||||||||||||||||
Restructured non-accruing | 307 | 6,504 | 628 | 3,282 | 387 | 11,108 | ||||||||||||||||||
Balance | $ | 2,763 | $ | 6,504 | $ | 14,440 | $ | 8,080 | $ | 4,955 | $ | 36,742 | ||||||||||||
Allowance | $ | 1,037 | $ | 7 | $ | 3,380 | $ | 1,772 | $ | 1,595 | $ | 7,791 | ||||||||||||
Impaired loans without a specific allowance | ||||||||||||||||||||||||
Non-accruing | $ | 3,416 | $ | 7,798 | $ | 1,883 | $ | 6,464 | $ | 800 | $ | 20,361 | ||||||||||||
Restructured accruing | 520 | - | - | - | 833 | 1,353 | ||||||||||||||||||
Restructured non-accruing | 2,393 | 4,399 | 641 | 872 | 814 | 9,119 | ||||||||||||||||||
Balance | $ | 6,329 | $ | 12,197 | $ | 2,524 | $ | 7,336 | $ | 2,447 | $ | 30,833 | ||||||||||||
Total impaired loans | ||||||||||||||||||||||||
Non-accruing | $ | 4,526 | $ | 7,798 | $ | 15,695 | $ | 10,555 | $ | 1,893 | $ | 40,467 | ||||||||||||
Restructured accruing | 1,866 | - | - | 707 | 4,308 | 6,881 | ||||||||||||||||||
Restructured non-accruing | 2,700 | 10,903 | 1,269 | 4,154 | 1,200 | 20,227 | ||||||||||||||||||
Balance | $ | 9,092 | $ | 18,701 | $ | 16,964 | $ | 15,416 | $ | 7,402 | $ | 67,575 | ||||||||||||
Unpaid principal balance in total impaired loans | $ | 11,303 | $ | 37,442 | $ | 17,389 | $ | 16,466 | $ | - | $ | 82,600 |
For the Year Ended December 31, 2011 | ||||||||||||||||||||||||
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 | $ | 9,800 | $ | 27,005 | $ | 11,409 | $ | 13,942 | $ | 6,221 | $ | 68,377 | ||||||||||||
Contractual interest income due on impaired loans during the period | $ | 583 | $ | 1,743 | $ | 830 | $ | 800 | $ | 1,017 | ||||||||||||||
Interest income on impaired loans recognized on a cash basis | $ | 267 | $ | 487 | $ | 93 | $ | 471 | $ | 205 | ||||||||||||||
Interest income on impaired loans recognized on an accrual basis | $ | 114 | $ | - | $ | - | $ | 45 | $ | 166 |
17 |
Credit Quality
The following tables provide information on the credit quality of the loan portfolio by segment at the dates indicated:
March 31, 2012 | ||||||||||||||||||||||||||||||||||||
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 | $ | 6,542 | $ | 14,303 | $ | 13,893 | $ | 16,295 | $ | 858 | $ | 1,700 | $ | 4,818 | $ | 4,929 | $ | 63,338 | ||||||||||||||||||
Loans and leases 90 days past due | 40 | - | - | - | - | 89 | 167 | - | 296 | |||||||||||||||||||||||||||
Restructured loans and leases | 2,518 | - | - | 1,738 | - | 34 | 4,257 | - | 8,547 | |||||||||||||||||||||||||||
Total non-performing loans and leases | 9,100 | 14,303 | 13,893 | 18,033 | 858 | 1,823 | 9,242 | 4,929 | 72,181 | |||||||||||||||||||||||||||
Other real estate owned | 70 | - | 462 | - | - | - | 3,422 | 880 | 4,834 | |||||||||||||||||||||||||||
Total non-performing assets | $ | 9,170 | $ | 14,303 | $ | 14,355 | $ | 18,033 | $ | 858 | $ | 1,823 | $ | 12,664 | $ | 5,809 | $ | 77,015 |
December 31, 2011 | ||||||||||||||||||||||||||||||||||||
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 | $ | 7,226 | $ | 18,702 | $ | 16,963 | $ | 14,709 | $ | 853 | $ | 1,786 | $ | 5,722 | $ | 5,719 | $ | 71,680 | ||||||||||||||||||
Loans and leases 90 days past due | - | - | - | - | 2 | 165 | 167 | 243 | 577 | |||||||||||||||||||||||||||
Restructured loans and leases | 1,866 | - | - | 707 | - | 35 | 3,579 | 694 | 6,881 | |||||||||||||||||||||||||||
Total non-performing loans and leases | 9,092 | 18,702 | 16,963 | 15,416 | 855 | 1,986 | 9,468 | 6,656 | 79,138 | |||||||||||||||||||||||||||
Other real estate owned | 100 | - | 462 | 273 | - | - | 3,395 | 201 | 4,431 | |||||||||||||||||||||||||||
Total non-performing assets | $ | 9,192 | $ | 18,702 | $ | 17,425 | $ | 15,689 | $ | 855 | $ | 1,986 | $ | 12,863 | $ | 6,857 | $ | 83,569 |
March 31, 2012 | ||||||||||||||||||||||||||||||||||||
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 | $ | 1,989 | $ | 342 | $ | 8,338 | $ | 795 | $ | 9 | $ | 941 | $ | 5,065 | $ | 640 | $ | 18,119 | ||||||||||||||||||
61-90 days | 113 | - | 1,954 | - | 2 | 8 | 1,446 | - | 3,523 | |||||||||||||||||||||||||||
> 90 days | 40 | - | - | - | - | 89 | 167 | - | 296 | |||||||||||||||||||||||||||
Total past due | 2,142 | 342 | 10,292 | 795 | 11 | 1,038 | 6,678 | 640 | 21,938 | |||||||||||||||||||||||||||
Non-accrual loans and leases | 6,542 | 14,303 | 13,893 | 16,295 | 858 | 1,700 | 4,818 | 4,929 | 63,338 | |||||||||||||||||||||||||||
Current loans | 245,143 | 135,169 | 368,441 | 507,932 | 4,974 | 353,477 | 453,708 | 117,272 | 2,186,116 | |||||||||||||||||||||||||||
Total loans and leases | $ | 253,827 | $ | 149,814 | $ | 392,626 | $ | 525,022 | $ | 5,843 | $ | 356,215 | $ | 465,204 | $ | 122,841 | $ | 2,271,392 |
December 31, 2011 | ||||||||||||||||||||||||||||||||||||
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 | $ | 1,467 | $ | 717 | $ | 10,723 | $ | 1,677 | $ | 7 | $ | 467 | $ | 5,246 | $ | 1,732 | $ | 22,036 | ||||||||||||||||||
61-90 days | 62 | - | - | 2,537 | - | 20 | 1,639 | - | 4,258 | |||||||||||||||||||||||||||
> 90 days | - | - | - | - | 2 | 165 | 167 | 243 | 577 | |||||||||||||||||||||||||||
Total past due | 1,529 | 717 | 10,723 | 4,214 | 9 | 652 | 7,052 | 1,975 | 26,871 | |||||||||||||||||||||||||||
Non-accrual loans and leases | 7,226 | 18,702 | 16,963 | 14,709 | 853 | 1,786 | 5,722 | 5,719 | 71,680 | |||||||||||||||||||||||||||
Current loans | 251,572 | 141,527 | 344,262 | 503,153 | 6,092 | 357,642 | 435,888 | 101,005 | 2,141,141 | |||||||||||||||||||||||||||
Total loans and leases | $ | 260,327 | $ | 160,946 | $ | 371,948 | $ | 522,076 | $ | 6,954 | $ | 360,080 | $ | 448,662 | $ | 108,699 | $ | 2,239,692 |
18 |
The following tables provide information by credit risk rating indicators for each segment of the commercial loan portfolio for the dates indicated:
March 31, 2012 | ||||||||||||||||||||
Commercial Real Estate | ||||||||||||||||||||
Commercial | ||||||||||||||||||||
Commercial | Commercial | Owner | ||||||||||||||||||
(In thousands) | Commercial | AD&C | Investor R/E | Occupied R/E | Total | |||||||||||||||
Risk Free to Marginally Acceptable | $ | 214,694 | $ | 130,479 | $ | 351,098 | $ | 470,103 | $ | 1,166,374 | ||||||||||
Special Mention | 11,309 | 1,059 | 11,539 | 29,983 | 53,890 | |||||||||||||||
Substandard | 26,740 | 18,276 | 29,989 | 24,936 | 99,941 | |||||||||||||||
Doubtful | 1,084 | - | - | - | 1,084 | |||||||||||||||
Total | $ | 253,827 | $ | 149,814 | $ | 392,626 | $ | 525,022 | $ | 1,321,289 |
December 31, 2011 | ||||||||||||||||||||
Commercial Real Estate | ||||||||||||||||||||
Commercial | ||||||||||||||||||||
Commercial | Commercial | Owner | ||||||||||||||||||
(In thousands) | Commercial | AD&C | Investor R/E | Occupied R/E | Total | |||||||||||||||
Risk Free to Marginally Acceptable | $ | 225,048 | $ | 137,181 | $ | 331,095 | $ | 469,309 | $ | 1,162,633 | ||||||||||
Special Mention | 8,551 | 2,207 | 9,592 | 22,103 | 42,453 | |||||||||||||||
Substandard | 25,720 | 21,558 | 31,261 | 30,664 | 109,203 | |||||||||||||||
Doubtful | 1,008 | - | - | - | 1,008 | |||||||||||||||
Total | $ | 260,327 | $ | 160,946 | $ | 371,948 | $ | 522,076 | $ | 1,315,297 |
Homogeneous loan pools do not have individual loans subjected to internal risk ratings therefore, the credit indicator applied to these pools is based on their delinquency status. The following tables provide information by credit risk rating indicators for those remaining segments of the loan portfolio at the dates indicated:
March 31, 2012 | ||||||||||||||||||||
Residential Real Estate | ||||||||||||||||||||
Residential | Residential | |||||||||||||||||||
(In thousands) | Leasing | Consumer | Mortgage | Construction | Total | |||||||||||||||
Performing | $ | 4,985 | $ | 354,392 | $ | 455,962 | $ | 117,912 | $ | 933,252 | ||||||||||
Non-performing: | ||||||||||||||||||||
90 days past due | - | 89 | 167 | - | 256 | |||||||||||||||
Non-accruing | 858 | 1,700 | 4,818 | 4,929 | 12,305 | |||||||||||||||
Restructured loans and leases | - | 34 | 4,257 | - | 4,291 | |||||||||||||||
Total | $ | 5,843 | $ | 356,215 | $ | 465,204 | $ | 122,841 | $ | 950,104 |
December 31, 2011 | ||||||||||||||||||||
Residential Real Estate | ||||||||||||||||||||
Residential | Residential | |||||||||||||||||||
(In thousands) | Leasing | Consumer | Mortgage | Construction | Total | |||||||||||||||
Performing | $ | 6,099 | $ | 358,094 | $ | 439,194 | $ | 102,043 | $ | 905,430 | ||||||||||
Non-performing: | - | |||||||||||||||||||
90 days past due | 2 | 165 | 167 | 243 | 577 | |||||||||||||||
Non-accruing | 853 | 1,786 | 5,722 | 5,719 | 14,080 | |||||||||||||||
Restructured loans and leases | - | 35 | 3,579 | 694 | 4,308 | |||||||||||||||
Total | $ | 6,954 | $ | 360,080 | $ | 448,662 | $ | 108,699 | $ | 924,395 |
19 |
During the three months ended March 31, 2012, the Company restructured $1.9 million in loans. Modifications consisted principally of interest rate concessions. No modifications resulted in the reduction of the recorded investment 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 2012 have specific reserves of $64 thousand at March 31, 2012. For the year ended December 31, 2011, the Company restructured $10.3 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 2011 had specific reserves of 1.9 million at December 31, 2011.
The following table provides the amounts of the restructured loans at the date of restructuring for specific segments of the loan portfolio during the period indicated:
For the Three Months Ended March 31, 2012 | ||||||||||||||||||||||||
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 | $ | 760 | $ | - | $ | - | $ | 1,033 | $ | - | $ | 1,793 | ||||||||||||
Restructured non-accruing | 150 | - | - | - | - | 150 | ||||||||||||||||||
Balance | $ | 910 | $ | - | $ | - | $ | 1,033 | $ | - | $ | 1,943 | ||||||||||||
Specific allowance | $ | 64 | $ | - | $ | - | $ | - | $ | - | $ | 64 | ||||||||||||
Restructured and subsequently defaulted | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - |
For the Year Ended December 31, 2011 | ||||||||||||||||||||||||
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 | $ | 1,696 | $ | - | $ | - | $ | - | $ | 3,590 | $ | 5,286 | ||||||||||||
Restructured non-accruing | 469 | - | 1,269 | 2,475 | 763 | 4,976 | ||||||||||||||||||
Balance | $ | 2,165 | $ | - | $ | 1,269 | $ | 2,475 | $ | 4,353 | $ | 10,262 | ||||||||||||
Specific allowance | $ | 254 | $ | - | $ | 93 | $ | 509 | $ | 1,027 | $ | 1,883 | ||||||||||||
Restructured and subsequently defaulted | $ | - | $ | - | $ | - | $ | - | $ | 509 | $ | 509 |
Other Real Estate Owned
Other real estate owned totaled $4.8 million and $4.4 million at March 31, 2012 and December 31, 2011.
20 |
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:
At March 31, 2012 | Weighted | At December 31, 2011 | 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 | ||||||||||||||||||||||||
Amortized intangible assets: | ||||||||||||||||||||||||||||||||
Core deposit intangibles | $ | 9,716 | $ | (6,923 | ) | $ | 2,793 | 2.0 years | $ | 9,716 | $ | (6,575 | ) | $ | 3,141 | 2.3 years | ||||||||||||||||
Other identifiable intangibles | 8,301 | (6,822 | ) | 1,479 | 3.2 years | 8,301 | (6,708 | ) | 1,593 | 3.5 years | ||||||||||||||||||||||
Total amortized intangible assets | $ | 18,017 | $ | (13,745 | ) | $ | 4,272 | $ | 18,017 | $ | (13,283 | ) | $ | 4,734 | ||||||||||||||||||
Goodwill | $ | 76,816 | $ | 76,816 | $ | 76,816 | $ | 76,816 |
The following table presents the estimated future amortization expense for amortizing intangibles within the years ending December 31:
(In thousands) | Amount | |||
2013 | $ | 1,778 | ||
2014 | 752 | |||
2015 | 303 | |||
2016 | 56 | |||
Total amortizing intangibles | $ | 2,889 |
Note 6 – Deposits
The following table presents the composition of deposits at the dates indicated:
March 31, | December 31, | |||||||
(In thousands) | 2012 | 2011 | ||||||
Noninterest-bearing deposits | $ | 685,770 | $ | 650,377 | ||||
Interest-bearing deposits: | ||||||||
Demand | 374,680 | 367,682 | ||||||
Money market savings | 845,067 | 858,732 | ||||||
Regular savings | 208,646 | 195,408 | ||||||
Time deposits of less than $100,000 | 307,459 | 316,058 | ||||||
Time deposits of $100,000 or more | 259,453 | 268,263 | ||||||
Total interest-bearing deposits | 1,995,305 | 2,006,143 | ||||||
Total deposits | $ | 2,681,075 | $ | 2,656,520 |
Note 7 – Stockholders’ Equity
The Company approved a stock repurchase program in August 2011 that permits the repurchase of up to 3% of the Company’s outstanding shares of common stock or approximately 730,000 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 Company repurchased 23,592 shares of common stock at an average price of $14.16 per share during the year ended December 31, 2011. No shares have been repurchased during 2012.
21 |
Note 8 – Share Based Compensation
At March 31, 2012, the Company had two share based compensation plans in existence, the 1999 Stock Option Plan (expired but having outstanding options that may still be exercised) and the 2005 Omnibus Stock Plan, which is described below.
The Company’s 2005 Omnibus Stock Plan (“Omnibus Plan”) provides for the granting of non-qualifying stock options to the Company’s directors, and incentive and non-qualifying stock options, stock appreciation rights and restricted stock grants to selected key employees on a periodic basis at the discretion of the board. The Omnibus Plan authorizes the issuance of up to 1,800,000 shares of common stock of which 949,852 are available for issuance at March 31, 2012, has a term of ten years, and is administered by a committee of at least three directors appointed by the board of directors. Options granted under the plan have an exercise price which may not be less than 100% of the fair market value of the common stock on the date of the grant and must be exercised within seven to ten years from the date of grant. The exercise price of stock options must be paid for in full in cash or shares of common stock, or a combination of both. The Stock Option Committee has the discretion when making a grant of stock options to impose restrictions on the shares to be purchased upon the exercise of such options. Options granted under the expired 1999 Stock Option Plan remain outstanding until exercised or they expire. The Company generally issues authorized but previously unissued shares to satisfy option exercises.
The fair values of all of the options granted for the periods indicated have been estimated using a binomial option-pricing model with the weighted-average assumptions for the periods shown are presented in the following table:
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Dividend yield | 2.17 | % | 1.72 | % | ||||
Weighted average expected volatility | 50.90 | % | 46.87 | % | ||||
Weighted average risk-free interest rate | 1.14 | % | 2.58 | % | ||||
Weighted average expected lives (in years) | 5.35 | 5.70 | ||||||
Weighted average grant-date fair value | $ | 7.85 | $ | 7.76 |
The dividend yield is based on estimated future dividend yields. The risk-free rate for periods within the contractual term of the share option is based on the U.S. Treasury yield curve in effect at the time of the grant. Expected volatilities are generally based on historical volatilities. The expected term of share options granted is generally derived from historical experience.
Compensation expense is recognized on a straight-line basis over the vesting period of the respective stock option or restricted stock grant. The Company recognized compensation expense of $0.3 million and $0.2 million for the three months ended March 31, 2012 and 2011, respectively, related to the awards of stock options and restricted stock grants. No stock options were exercised in the three months ended March 31, 2012 and 2011, respectively, resulting in no intrinsic value for stock options exercised during these periods. The total of unrecognized compensation cost related to stock options was approximately $0.4 million as of March 31, 2012. That cost is expected to be recognized over a weighted average period of approximately 2.2 years. The total of unrecognized compensation cost related to restricted stock was approximately $4.0 million as of March 31, 2012. That cost is expected to be recognized over a weighted average period of approximately 3.7 years. The fair value of the options vested during the three months ended March 31, 2012 and 2011, was $0.2 million and $0.9 million, respectively.
In the first quarter of 2012, 21,633 stock options were granted, subject to a three year vesting schedule with one third of the options vesting each year on the anniversary date of the grant. Additionally, 83,493 shares of restricted stock were granted, subject to a five year vesting schedule with one fifth of the shares vesting each year on the grant date anniversary.
22 |
A summary of share option activity for the period indicated is reflected in the following table:
Weighted | ||||||||||||||||
Number | Weighted | Average | Aggregate | |||||||||||||
of | Average | Contractual | Intrinsic | |||||||||||||
Common | Exercise | Remaining | Value | |||||||||||||
Shares | Share Price | Life(Years) | (in thousands) | |||||||||||||
Balance at January 1, 2012 | 635,197 | $ | 31.42 | $ | 406 | |||||||||||
Granted | 21,633 | $ | 19.02 | $ | - | |||||||||||
Exercised | - | $ | - | $ | - | |||||||||||
Forfeited or expired | (7,752 | ) | $ | 31.05 | $ | 5 | ||||||||||
Balance at March 31, 2012 | 649,078 | $ | 31.01 | 2.5 | $ | 459 | ||||||||||
Exercisable at March 31, 2012 | 591,781 | $ | 32.27 | 2.2 | $ | 422 | ||||||||||
Weighted average fair value of options granted during the year | $ | 7.85 |
A summary of the activity for the Company’s non-vested options for the period indicated is presented in the following table:
Weighted | ||||||||
Average | ||||||||
Number | Grant-Date | |||||||
(In dollars, except share data): | of Shares | Fair Value | ||||||
Non-vested options at January 1, 2012 | 79,640 | $ | 6.33 | |||||
Granted | 21,633 | $ | 7.85 | |||||
Vested | (42,147 | ) | $ | 5.44 | ||||
Forfeited or expired | (1,829 | ) | $ | 6.26 | ||||
Non-vested options at March 31, 2012 | 57,297 | $ | 7.56 |
A summary of the activity for the Company’s restricted stock for the period indicated is presented in the following table:
Weighted | ||||||||
Average | ||||||||
Number | Grant-Date | |||||||
(In dollars, except share data): | of Shares | Fair Value | ||||||
Restricted stock at January 1, 2012 | 206,313 | $ | 16.37 | |||||
Granted | 83,493 | $ | 19.02 | |||||
Vested | (57,829 | ) | $ | 16.12 | ||||
Forfeited or expired | (2,537 | ) | $ | 16.32 | ||||
Restricted stock at March 31, 2012 | 229,440 | $ | 17.40 |
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 future salary increases and additional years of service will no longer affect the defined benefit provided by the plan although additional vesting may continue to occur.
The Company's funding policy is to contribute amounts to the plan sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended. In addition, the Company contributes additional amounts as it deems appropriate based on benefits attributed to service prior to the date of the plan freeze. The Plan invests primarily in a diversified portfolio of managed fixed income and equity funds.
23 |
The components of net periodic benefit cost for the periods indicated are presented in the following table:
Three Months Ended March 31, | ||||||||
(In thousands) | 2012 | 2011 | ||||||
Interest cost on projected benefit obligation | $ | 388 | $ | 386 | ||||
Expected return on plan assets | (327 | ) | (265 | ) | ||||
Recognized net actuarial loss | 350 | 317 | ||||||
Net periodic benefit cost | $ | 411 | $ | 438 |
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 2012.
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 March 31, | ||||||||
(Dollars and amounts in thousands, except per share data) | 2012 | 2011 | ||||||
Net income | $ | 8,476 | $ | 7,291 | ||||
Basic: | ||||||||
Basic weighted average EPS shares | 24,098 | 24,053 | ||||||
Basic net income per share | $ | 0.35 | $ | 0.30 | ||||
Diluted: | ||||||||
Basic weighted average EPS shares | 24,098 | 24,053 | ||||||
Dilutive common stock equivalents | 83 | 63 | ||||||
Dilutive EPS shares | 24,181 | 24,116 | ||||||
Diluted net income per share | $ | 0.35 | $ | 0.30 | ||||
Anti-dilutive shares | 641 | 679 |
24 |
NOTE 11 – 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-equity changes are comprised of unrealized gains or losses on available-for-sale debt securities and any minimum pension liability adjustments. These do not have an impact on the Company’s net income. The following table presents the activity in net accumulated other comprehensive income (loss) for the periods indicated:
(In thousands) | Unrealized
Gains (Losses) on Investments Available-for-Sale |
Defined Benefit Pension Plan |
Total | |||||||||
Balance at January 1, 2012 | $ | 20,006 | $ | (6,758 | ) | $ | 13,248 | |||||
Period change, net of tax | (620 | ) | 210 | (410 | ) | |||||||
Balance at March 31, 2012 | $ | 19,386 | $ | (6,548 | ) | $ | 12,838 |
(In thousands) | Unrealized Gains (Losses) on Investments Available-for-Sale |
Defined Benefit Pension Plan |
Total | |||||||||
Balance at January 1, 2011 | $ | 3,764 | $ | (6,384 | ) | $ | (2,620 | ) | ||||
Period change, net of tax | 170 | 190 | 360 | |||||||||
Balance at March 31, 2011 | $ | 3,934 | $ | (6,194 | ) | $ | (2,260 | ) |
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 $53.0 million with a fair value of $1.4 million as of March 31, 2012 compared to $54 million with a fair value of $1.5 million as of December 31, 2011. 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 – 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;
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Level 2- Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
Level 3- Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity). Changes to interest rates may result in changes in the cash flows due to prepayments or extinguishments. Accordingly, this could result in higher or lower measurements of the fair values.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
Assets and Liabilities
Mortgage loans held for sale
Mortgage loans held for sale are valued based on quotations from the secondary market for similar instruments and are classified as Level 2 of the fair value hierarchy.
Investments available-for-sale
U.S. government agencies, mortgage-backed securities and corporate debt
Valuations are based on active market data and use of evaluated broker pricing models that vary based by asset class and includes available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, descriptive terms and conditions databases coupled with extensive quality control programs. Multiple quality control evaluation processes review available market, credit and deal level information to support the evaluation of the security. If there is a lack of objectively verifiable information available to support the valuation, the evaluation of the security is discontinued. Additionally, proprietary models and pricing systems, mathematical tools, actual transacted prices, integration of market developments and experienced evaluators are used to determine the value of a security based on a hierarchy of market information regarding a security or securities with similar characteristics. The Company does not adjust the quoted price for such securities. Such instruments are generally classified within Level 2 of the fair value hierarchy.
State and municipal securities
Proprietary valuation matrices are used for valuing all tax-exempt municipals that can incorporate changes in the municipal market as they occur. Market evaluation models include the ability to value bank qualified municipals and general market municipals that can be broken down further according to insurer, credit support, state of issuance and rating to incorporate additional spreads and municipal curves. Taxable municipals are valued using a third party model that incorporates a methodology that captures the trading nuances associated with these bonds. Such instruments are generally classified within Level 2 of the fair value hierarchy.
Trust preferred securities
In active markets, these types of instruments are valued based on quoted market prices that are readily accessible at the measurement date and are classified within Level 1 of the fair value hierarchy. Positions that are not traded in active markets or are subject to transfer restrictions are valued or adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management uses a process that employs certain assumptions to determine the present value. For further information, refer to Note 2 – Investments. Positions that are not traded in active markets or are subject to transfer restrictions are classified within Level 3 of the fair value hierarchy.
Interest rate swap agreements
Interest rate swap agreements are measured by alternative pricing sources with reasonable levels of price transparency in markets that are not active. Based on the complex nature of interest rate swap agreements, the markets these instruments trade in are not as efficient and are less liquid than that of the more mature Level 1 markets. These markets do however have comparable, observable inputs in which an alternative pricing source values these assets in order to arrive at a fair market value. These characteristics classify interest rate swap agreements as Level 2.
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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:
At March 31, 2012 | ||||||||||||||||
(In thousands) | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
Total | ||||||||||||
Assets | ||||||||||||||||
Residential mortgage loans held for sale | $ | - | $ | 18,126 | $ | - | $ | 18,126 | ||||||||
Investments available-for-sale: | ||||||||||||||||
U.S. government agencies | - | 176,832 | - | 176,832 | ||||||||||||
State and municipal | - | 171,150 | - | 171,150 | ||||||||||||
Mortgage-backed | - | 523,083 | - | 523,083 | ||||||||||||
Corporate debt | - | 1,997 | - | 1,997 | ||||||||||||
Trust preferred | 3,388 | - | 1,815 | 5,203 | ||||||||||||
Marketable equity securities | - | 100 | - | 100 | ||||||||||||
Interest rate swap agreements | - | 1,405 | - | 1,405 | ||||||||||||
Liabilities | ||||||||||||||||
Interest rate swap agreements | $ | - | $ | (1,405 | ) | $ | - | $ | (1,405 | ) |
At December 31, 2011 | ||||||||||||||||
(In thousands) | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
Total | ||||||||||||
Assets | ||||||||||||||||
Residential mortgage loans held for sale | $ | - | $ | 25,341 | $ | - | $ | 25,341 | ||||||||
Investments available-for-sale: | ||||||||||||||||
U.S. government agencies | - | 200,252 | - | 200,252 | ||||||||||||
State and municipal | - | 173,111 | - | 173,111 | ||||||||||||
Mortgage-backed | - | 570,144 | - | 570,144 | ||||||||||||
Corporate debt | - | 1,978 | - | 1,978 | ||||||||||||
Trust preferred | 3,249 | - | 2,467 | 5,716 | ||||||||||||
Marketable equity securities | - | 100 | - | 100 | ||||||||||||
Interest rate swap agreements | - | 1,529 | - | 1,529 | ||||||||||||
Liabilities | ||||||||||||||||
Interest rate swap agreements | $ | - | $ | (1,529 | ) | $ | - | $ | (1,529 | ) |
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The following table provides unrealized losses included in assets measured in the 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, 2012 | $ | 2,467 | ||
Total OTTI included in earnings | (64 | ) | ||
Principal redemption | (642 | ) | ||
Total unrealized losses included in other comprehensive income (loss) | 54 | |||
Balance at March 31, 2012 | $ | 1,815 |
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:
At March 31, 2012 | ||||||||||||||||||||
(In thousands) | Quoted Prices in Active Markets for Identical Assets |