NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Eagle Bancorp, Inc. and its subsidiaries (the “Company”), EagleBank (the “Bank”), Eagle Commercial Ventures, LLC (“ECV”), Eagle Insurance Services, LLC, and Bethesda Leasing, LLC, with all significant intercompany transactions eliminated.
The consolidated financial statements of the Company included herein are unaudited. The consolidated financial statements reflect all adjustments, consisting of normal recurring accruals that in the opinion of management, are necessary to present fairly the results for the periods presented. The amounts as of and for the year ended December 31, 2013 were derived from audited consolidated financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. There have been no significant changes to the Company’s Accounting Policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The Company believes that the disclosures are adequate to make the information presented not misleading. Certain reclassifications have been made to amounts previously reported to conform to the current period presentation.
These statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results
of operations to be expected for the remainder of the year, or for any other period.
Nature of Operations
The Company, through the Bank, conducts a full service community banking business, primarily in Montgomery County, Maryland, Washington, D.C., and Northern Virginia. The primary financial services offered by the Bank include real estate, commercial and consumer lending, as well as traditional deposit and repurchase agreement products. The Bank is also active in the origination and sale of residential mortgage loans and the origination of small business loans. The guaranteed portion of small business loans, guaranteed by the Small Business Administration (“SBA”), is typically sold to third party investors in a transaction apart from the loan’s origination. As of March 31, 2014, the Bank offers its products and services through eighteen banking offices and various electronic capabilities, including remote deposit services and mobile banking services. Eagle Insurance Services, LLC, a subsidiary of the Bank, offers access to insurance products and services through a referral program with a third party insurance broker. Eagle Commercial Ventures, LLC, a direct subsidiary of the Company, provides subordinated financing for the acquisition, development and construction of real estate projects. These transactions involve higher levels of risk, together with commensurate higher returns. Refer to Higher Risk Lending – Revenue Recognition below.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results may differ from those estimates and such differences could be material to the financial statements.
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 other banks which have an original maturity of three months or less.
Loans Held for Sale
The Company engages in sales of residential mortgage loans and the guaranteed portion of SBA loans originated by the Bank. Loans held for sale are carried at the lower of aggregate cost or fair value. Fair value is derived from secondary market quotations for similar instruments. Gains and losses on sales of these loans are recorded as a component of noninterest income in the consolidated statements of operations.
The Company’s current practice is to sell residential mortgage loans on a servicing released basis, and, therefore, it has no intangible asset recorded for the value of such servicing as of March 31, 2014, December 31, 2013 and March 31, 2013. The sale of the guaranteed portion of SBA loans on a servicing retained basis gives rise to an Excess Servicing Asset, which is computed on a loan by loan basis with the unamortized amount being included in Intangible assets in the consolidated balance sheets. This Excess Servicing Asset is being amortized on a straight-line basis (with adjustment for prepayments) as an offset to servicing fees collected and is included in Other income in the consolidated statement of operations.
The Company enters into commitments to originate residential mortgage loans whereby the interest rate on the loan is determined prior to funding (i.e. rate lock commitments). Such rate lock commitments on mortgage loans to be sold in the secondary market are considered to be derivatives but are effectively offset by whole loan purchase commitments from various investors. The period of time between issuance of a loan commitment to the customer and closing and sale of the loan to an investor generally ranges from 30 to 90 days under current market conditions. The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the investor commits to purchase a loan at a price representing a premium on the day the borrower commits to an interest rate with the intent that the buyer/investor has assumed the interest rate risk on the loan. As a result, the Company is not generally exposed to losses on loans sold nor will it realize gains, related to rate lock commitments due to changes in interest rates.
The market values of rate lock commitments and best efforts contracts are not readily ascertainable with precision because rate lock commitments and best efforts contracts are not actively traded. Because of the high correlation between rate lock commitments and best efforts contracts, no gain or loss should occur on the rate lock commitments.
In circumstances where the Company does not deliver the whole loan to an investor, but rather elects to retain the loan in its portfolio, the loan is transferred from held for sale at fair value.
Investment Securities
The Company has no securities classified as trading, or as held to maturity. Marketable equity securities and debt securities not classified as held to maturity or trading are classified as available-for-sale. Securities available-for-sale are acquired as part of the Company’s asset/liability management strategy and may be sold in response to changes in interest rates, current market conditions, loan demand, changes in prepayment risk and other factors. Securities available-for-sale are carried at fair value, with unrealized gains or losses being reported as accumulated other comprehensive income/(loss), a separate component of shareholders’ equity, net of deferred income tax. Realized gains and losses, using the specific identification method, are included as a separate component of noninterest income in the consolidated statements of operations.
Premiums and discounts on investment securities are amortized/accreted to the earlier of call or maturity based on expected lives, which lives are adjusted based on prepayment assumptions and call optionality if any. Declines in the fair value of individual available-for-sale securities below their cost that are other-than-temporary in nature result in write-downs of the individual securities to their fair value. Factors affecting the determination of whether other-than-temporary impairment has occurred include a downgrading of the security by a rating agency, a significant deterioration in the financial condition of the issuer, or a change in management’s intent and ability to hold a security for a period of time sufficient to allow for any anticipated recovery in fair value. Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include (1) duration and magnitude of the decline in value, (2) the financial condition of the issuer or issuers and (3) structure of the security.
The entire amount of an impairment loss is recognized in earnings only when (1) the Company intends to sell the security, or (2) it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis, or (3) the Company does not expect to recover the entire amortized cost basis of the security. In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in shareholders’ equity as comprehensive income, net of deferred taxes.
Loans
Loans are stated at the principal amount outstanding, net of unamortized deferred costs and fees. Interest income on loans is accrued at the contractual rate on the principal amount outstanding. It is the Company’s policy to discontinue the accrual of interest when circumstances indicate that collection is doubtful. Deferred fees and costs are being amortized on the interest method over the term of the loan.
Management considers loans impaired when, based on current information, it is probable that the Company will not collect all principal and interest payments according to contractual terms. Loans are evaluated for impairment in accordance with the Company’s portfolio monitoring and ongoing risk assessment procedures.
Management considers the financial condition of the borrower, cash flow of the borrower, payment status of the loan, and the value of the collateral, if any, securing the loan. Generally, impaired loans do not include large groups of smaller balance homogeneous loans such as residential real estate and consumer type loans which are evaluated collectively for impairment and are generally placed on nonaccrual when the loan becomes 90 days past due as to principal or interest. Loans specifically reviewed for impairment are not considered impaired during periods of “minimal delay” in payment (ninety days or less) provided eventual collection of all amounts due is expected. The impairment of a loan is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if repayment is expected to be provided solely by the collateral. In appropriate circumstances, interest income on impaired loans may be recognized on the cash basis.
Higher Risk Lending – Revenue Recognition
T
he Company has occasionally made higher risk acquisition, development, and construction (“ADC”) loans that entail higher risks than ADC loans made following normal underwriting practices (“higher risk loan transactions”). These higher risk loan transactions are currently made through the Company’s subsidiary, ECV. This activity is limited as to individual transaction amount and total exposure amounts based on capital levels and is carefully monitored. The loans are carried on the balance sheet at amounts outstanding and meet the loan classification requirements of the Accounting Standards Executive Committee (“AcSEC”) guidance reprinted from the CPA Letter, Special Supplement, dated February 10, 1986 (also referred to as Exhibit 1 to AcSEC Practice Bulletin No. 1). Additional interest earned on certain of these higher risk loan transactions (as defined in the individual loan agreements) is recognized as realized under the provisions contained in AcSEC’s guidance reprinted from the CPA Letter, Special Supplement, dated February 10, 1986 (also referred to as Exhibit 1 to AcSEC Practice Bulletin No.1) and Staff Accounting Bulletin No. 101 (Revenue Recognition in Financial Statements). Such additional interest may be included as a component of noninterest income. ECV recorded no additional interest on higher risk transactions during 2014 and 2013 (although normal interest income was recorded). ECV had six higher risk lending transactions with balances outstanding at March 31, 2014 and five such transactions outstanding at December 31, 2013, amounting to $8.0 million and $7.4 million, respectively.
Allowance for Credit Losses
The allowance for credit losses represents an amount which in management’s judgment, is adequate to absorb probable losses on existing loans and other extensions of credit that may become uncollectible. The adequacy of the allowance for credit losses is determined through careful and continuous review and evaluation of the loan portfolio and involves the balancing of a number of factors to establish a prudent level of allowance. Among the factors considered in evaluating the adequacy of the allowance for credit losses are lending risks associated with growth and entry into new markets, loss allocations for specific credits, the level of the allowance to nonperforming loans, historical loss experience, economic conditions, portfolio trends and credit concentrations, changes in the size and character of the loan portfolio, and management’s judgment with respect to current and expected economic conditions and their impact on the existing loan portfolio. Allowances for impaired loans are generally determined based on collateral values. Loans or any portion thereof 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 credit losses, which is recorded as a current period operating expense. The allowance for credit losses consists of allocated and unallocated components.
The components of the allowance for credit losses represent an estimation done pursuant to Accounting
Standards Codification (“ASC”) Topic 450,
“Contingencies,”
or
ASC Topic 310,
“Receivables.”
Specific allowances are established in cases where management has identified significant conditions or circumstances related to a specific credit that management believes indicate the probability that a loss may be incurred. For potential problem credits for which specific allowance amounts have not been determined, the Company establishes allowances according to the application of credit risk factors. These factors are set by management and approved by the appropriate Board Committee to reflect its assessment of the relative level of risk inherent in each risk grade. A third component of the allowance computation, termed a nonspecific or environmental factors allowance, is based upon management’s evaluation of various environmental conditions that are not directly measured in the determination of either the specific allowance or formula allowance. Such conditions include general economic and business conditions affecting key lending areas, credit quality trends (including trends in delinquencies and nonperforming loans expected to result from existing conditions), loan volumes and concentrations, specific industry conditions within portfolio categories, recent loss experience in particular loan categories, duration of the current business cycle, bank regulatory examination results, findings of outside review consultants, and management’s judgment with respect to various other conditions including credit administration and management and the quality of risk identification systems. Executive management reviews these environmental conditions quarterly, and documents the rationale for all changes.
Management believes that the allowance for credit losses is adequate; however, determination of the allowance is inherently subjective and requires significant estimates. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. Evaluation of the potential effects of these factors on estimated losses involves a high degree of uncertainty, including the strength and timing of economic cycles and concerns over the effects of a prolonged economic downturn in the current cycle. In addition, various regulatory agencies, as an integral part of their examination process, and independent consultants engaged by the Bank periodically review the Bank’s loan portfolio and allowance for credit losses. Such review may result in recognition of adjustments to the allowance based on their judgments of information available to them at the time of their examination.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization computed using the straight-line method for financial reporting purposes. Premises and equipment are depreciated over the useful lives of the assets, which generally range
from five to seven years for furniture, fixtures and equipment, to three to five years for computer software and hardware, and to ten to forty years for buildings and building improvements. Leasehold improvements are amortized over the terms of the respective leases, which may include renewal options where management has the positive intent to exercise such options, or the estimated useful lives of the improvements, whichever is shorter. The costs of major renewals and betterments are capitalized, while the costs of ordinary maintenance and repairs are expensed as incurred. These costs are included as a component of premises and equipment expenses on the consolidated statements of operations.
Other Real Estate Owned (OREO)
Assets acquired through loan foreclosure are held for sale and are initially recorded at the lower of cost or fair value less estimated selling costs when acquired, establishing a new cost basis. The new basis is supported by appraisals that are no more than twelve months old. Costs after acquisition are generally expensed. If the fair value of the asset declines, a write-down is recorded through noninterest expense. The valuation of foreclosed assets is subjective in nature and may be adjusted in the future because of changes in market conditions or appraised values.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets are subject to impairment testing at least annually, or when events or changes in circumstances indicate the assets might be impaired. Intangible assets (other than goodwill) are amortized to expense using accelerated or straight-line methods over their respective estimated useful lives. The Company’s testing of potential goodwill impairment (which is performed annually) at December 31, 2013, resulted in no impairment being recorded.
Customer Repurchase Agreements
The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same securities. Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, securities sold under agreements to repurchase are accounted for as collateralized financing arrangements and not as a sale and subsequent repurchase of securities. The agreements are entered into primarily as accommodations for large commercial deposit customers. The obligation to repurchase the securities is reflected as a liability in the Company’s consolidated balance of sheets, while the securities underlying the securities sold under agreements to repurchase remain in the respective assets accounts and are delivered to and held as collateral by third party trustees.
Marketing and Advertising
Marketing and advertising costs are generally expensed as incurred.
Income Taxes
The Company employs the liability method of accounting for income taxes as required by ASC Topic 740, “
Income Taxes
.” Under the liability method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities (i.e., temporary timing differences) and are measured at the enacted rates that will be in effect when these differences reverse. The Company utilizes statutory requirements for its income tax accounting, and avoids risks associated with potentially problematic tax positions that may incur challenge upon audit, where an adverse outcome is more likely than not. Therefore, no provisions are made for either uncertain tax positions nor accompanying potential tax penalties and interest for underpayments of income taxes in the Company’s tax reserves. In accordance with ASC Topic 740, the Company may establish a reserve against deferred tax assets in those cases where realization is less than certain, although no such reserves exist at March 31, 2014, December 31, 2013, or March 31, 2013.
Transfer of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. In certain cases, the recourse to the Bank to repurchase assets may exist but is deemed immaterial based on the specific facts and circumstances.
Earnings per Common Share
Basic net income per common share is derived by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period measured. Diluted earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period measured including the potential dilutive effects of common stock equivalents. Earnings per share amounts for periods ending prior to June 30, 2013 have been adjusted to reflect a 10% stock dividend paid on June 14, 2013.
Stock-Based Compensation
I
n accordance with ASC Topic 718,
“Compensation,”
the Company records as compensation expense an amount equal to the amortization (over the remaining service period) of the fair value computed at the date of grant. Compensation expense on variable stock option grants (i.e. performance based grants) is recorded based on the probability of achievement of the goals underlying the performance grant. Refer to Note 6 for a description of stock-based compensation awards, activity and expense.
New Authoritative Accounting Guidance
In January 2014, the FASB issued ASU No. 2014-01, "Accounting for Investments in Qualified Affordable Housing Projects." ASU No. 2014-01 permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognize the net investment performance in the income statement as a component of income tax expense. This new guidance also requires new disclosures for all investors in these projects. ASU No. 2014-01 is effective for interim and annual reporting periods beginning after December 15, 2014. Upon adoption, the guidance must be applied retrospectively to all periods presented. However, entities that use the effective yield method to account for investments in these projects before adoption may continue to do so for these pre-existing investments. The Company currently accounts for such investments using the effective yield method and plans to continue to do so for these pre-existing investments after adopting ASU No. 2014-01 on January 1, 2015. The Company expects investments made after January 1, 2015 to meet the criteria required for the proportional amortization method and plans to make such an accounting policy election. The adoption of ASU No. 2014-01 is not expected to have a material impact on the Company's consolidated financial statements.
In January 2014, the FASB issued ASU No. 2014-04, "Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure." The objective of this guidance is to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU No. 2014-04 states that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, ASU No. 2014-04 requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of ASU No. 2014-04 is not expected to have a material impact on the Company's consolidated financial statements.
Note
2. Cash and Due from Banks
Regulation D of the Federal Reserve Act requires that banks maintain noninterest reserve balances with the Federal Reserve Bank based principally on the type and amount of their deposits. During 2014, the Bank maintained balances at the Federal Reserve (in addition to vault cash) to meet the reserve requirements as well as balances to partially compensate for services. Late in 2008, the Federal Reserve in connection with the Emergency Economic Stabilization Act of 2008 began paying a nominal amount of interest on balances held, which interest on excess reserves was increased under provisions of the Dodd Frank Wall Street Reform and Consumer Protection Act passed in July 2010. Additionally, the Bank maintains interest-bearing balances with the Federal Home Loan Bank of Atlanta and noninterest bearing balances with six domestic correspondent banks as compensation for services they provide to the Bank.
Note 3. Investment Securities Available-for-Sale
Amortized cost and estimated fair value of securities available-for-sale are summarized as follows:
March 31, 2014
|
|
Amortized
|
|
|
Gross Unrealized
|
|
|
Gross
Unrealized
|
|
|
Estimated
Fair
|
|
(dollars in thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
U. S. Government agency securities
|
|
$
|
48,797
|
|
|
$
|
687
|
|
|
$
|
127
|
|
|
$
|
49,357
|
|
Residential mortgage backed securities
|
|
|
232,001
|
|
|
|
1,292
|
|
|
|
4,682
|
|
|
|
228,611
|
|
Municipal bonds
|
|
|
107,434
|
|
|
|
3,136
|
|
|
|
1,165
|
|
|
|
109,405
|
|
Other equity investments
|
|
|
396
|
|
|
|
21
|
|
|
|
-
|
|
|
|
417
|
|
|
|
$
|
388,628
|
|
|
$
|
5,136
|
|
|
$
|
5,974
|
|
|
$
|
387,790
|
|
December 31, 2013
|
|
Amortized
|
|
|
Gross
Unrealized
|
|
|
Gross
Unrealized
|
|
|
Estimated
Fair
|
|
(dollars in thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
U. S. Government agency securities
|
|
$
|
46,640
|
|
|
$
|
843
|
|
|
$
|
148
|
|
|
$
|
47,335
|
|
Residential mortgage backed securities
|
|
|
234,206
|
|
|
|
1,143
|
|
|
|
6,675
|
|
|
|
228,674
|
|
Municipal bonds
|
|
|
102,423
|
|
|
|
2,017
|
|
|
|
2,700
|
|
|
|
101,740
|
|
Other equity investments
|
|
|
396
|
|
|
|
-
|
|
|
|
12
|
|
|
|
384
|
|
|
|
$
|
383,665
|
|
|
$
|
4,003
|
|
|
$
|
9,535
|
|
|
$
|
378,133
|
|
Gross unrealized losses and fair value by length of time that the individual available-for-sale securities have been in a continuous unrealized loss position are as follows:
|
|
Less than
|
|
|
12 Months
|
|
|
|
|
|
|
|
|
|
|
|
12 Months
|
|
|
or Greater
|
|
|
Total
|
|
|
|
Estimated
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
March 31, 2014
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
(dollars in thousands)
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
U. S. Government agency securities
|
|
$
|
8,624
|
|
|
$
|
127
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,624
|
|
|
$
|
127
|
|
Residential mortgage backed securities
|
|
|
129,067
|
|
|
|
3,548
|
|
|
|
31,128
|
|
|
|
1,134
|
|
|
|
160,195
|
|
|
|
4,682
|
|
Municipal bonds
|
|
|
26,547
|
|
|
|
794
|
|
|
|
8,076
|
|
|
|
371
|
|
|
|
34,623
|
|
|
|
1,165
|
|
|
|
$
|
164,238
|
|
|
$
|
4,469
|
|
|
$
|
39,204
|
|
|
$
|
1,505
|
|
|
$
|
203,442
|
|
|
$
|
5,974
|
|
|
|
Less than
|
|
|
12 Months
|
|
|
|
|
|
|
|
|
|
|
|
12 Months
|
|
|
or Greater
|
|
|
Total
|
|
|
|
Estimated
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
December 31, 2013
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
(dollars in thousands)
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
U. S. Government agency securities
|
|
$
|
4,782
|
|
|
$
|
148
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,782
|
|
|
$
|
148
|
|
Residential mortgage backed securities
|
|
|
155,475
|
|
|
|
5,992
|
|
|
|
15,658
|
|
|
|
683
|
|
|
|
171,133
|
|
|
|
6,675
|
|
Municipal bonds
|
|
|
50,450
|
|
|
|
2,512
|
|
|
|
3,196
|
|
|
|
188
|
|
|
|
53,646
|
|
|
|
2,700
|
|
Other equity investments
|
|
|
-
|
|
|
|
-
|
|
|
|
165
|
|
|
|
12
|
|
|
|
165
|
|
|
|
12
|
|
|
|
$
|
210,707
|
|
|
$
|
8,652
|
|
|
$
|
19,019
|
|
|
$
|
883
|
|
|
$
|
229,726
|
|
|
$
|
9,535
|
|
The unrealized losses that exist are generally the result of changes in market interest rates and interest spread relationships since original purchases. The weighted average duration of debt securities, which comprise 99.9% of total investment securities, is relatively short at 4.1 years. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. The Company does not believe that the investment securities that were in an unrealized loss position as of March 31, 2014 represent an other-than-temporary impairment for the reasons noted. The Company does not intend to sell the investments and it is more likely than not that the Company will not have to sell the securities before recovery of its amortized cost basis, which may be maturity. In addition, at March 31, 2014, the Company held $10.6 million in equity securities in a combination of Federal Reserve Bank (“FRB”) and Federal Home Loan Bank (“FHLB”) stocks, which are required to be held for regulatory purposes and are not marketable.
The amortized cost and estimated fair value of investments available-for-sale by contractual maturity are shown in the table below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
|
|
Amortized
|
|
|
Estimated
|
|
|
Amortized
|
|
|
Estimated
|
|
(dollars in thousands)
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
U. S. Government agency securities maturing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
19,012
|
|
|
$
|
19,063
|
|
|
$
|
19,025
|
|
|
$
|
19,133
|
|
After one year through five years
|
|
|
27,321
|
|
|
|
27,781
|
|
|
|
27,615
|
|
|
|
28,202
|
|
Five years through ten years
|
|
|
2,464
|
|
|
|
2,513
|
|
|
|
-
|
|
|
|
-
|
|
Residential mortgage backed securities
|
|
|
232,001
|
|
|
|
228,611
|
|
|
|
234,206
|
|
|
|
228,674
|
|
Municipal bonds maturing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After one year through five years
|
|
|
31,725
|
|
|
|
32,598
|
|
|
|
25,718
|
|
|
|
26,008
|
|
Five years through ten years
|
|
|
75,709
|
|
|
|
76,807
|
|
|
|
76,705
|
|
|
|
75,732
|
|
Other equity investments
|
|
|
396
|
|
|
|
417
|
|
|
|
396
|
|
|
|
384
|
|
|
|
$
|
388,628
|
|
|
$
|
387,790
|
|
|
$
|
383,665
|
|
|
$
|
378,133
|
|
The carrying value of securities pledged as collateral for certain government deposits, securities sold under agreements to repurchase, and certain lines of credit with correspondent banks at March 31, 2014 was $276.2 million. As of March 31, 2014 and December 31, 2013, there were no holdings of securities of any one issuer, other than the U.S. Government and U.S. Government agency securities that exceeded ten percent of shareholders’ equity.
Note 4. Loans and Allowance for Credit Losses
The Bank makes loans to customers primarily in the Washington, DC metropolitan area and surrounding communities. A substantial portion of the Bank’s loan portfolio consists of loans to businesses secured by real estate and other business assets.
Loans, net of unamortized net deferred fees, at March 31, 2014, December 31, 2013, and March 31, 2013 are summarized by type as follows:
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
|
March 31, 2013
|
|
(dollars in thousands)
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Commercial
|
|
$
|
704,386
|
|
|
|
23
|
%
|
|
$
|
694,350
|
|
|
|
24
|
%
|
|
$
|
579,618
|
|
|
|
23
|
%
|
Investment - commercial real estate
|
|
|
1,196,405
|
|
|
|
40
|
%
|
|
|
1,119,800
|
|
|
|
38
|
%
|
|
|
910,829
|
|
|
|
36
|
%
|
Owner occupied - commercial real estate
|
|
|
320,994
|
|
|
|
10
|
%
|
|
|
317,491
|
|
|
|
11
|
%
|
|
|
303,561
|
|
|
|
12
|
%
|
Real estate mortgage - residential
|
|
|
97,846
|
|
|
|
3
|
%
|
|
|
90,418
|
|
|
|
3
|
%
|
|
|
69,256
|
|
|
|
3
|
%
|
Construction - commercial and residential
|
|
|
593,967
|
|
|
|
19
|
%
|
|
|
574,167
|
|
|
|
19
|
%
|
|
|
538,071
|
|
|
|
21
|
%
|
Construction - C&I (owner occupied)
|
|
|
35,480
|
|
|
|
1
|
%
|
|
|
34,659
|
|
|
|
1
|
%
|
|
|
34,002
|
|
|
|
1
|
%
|
Home equity
|
|
|
108,839
|
|
|
|
4
|
%
|
|
|
110,242
|
|
|
|
4
|
%
|
|
|
108,570
|
|
|
|
4
|
%
|
Other consumer
|
|
|
6,058
|
|
|
|
-
|
|
|
|
4,031
|
|
|
|
-
|
|
|
|
4,117
|
|
|
|
-
|
|
Total loans
|
|
|
3,063,975
|
|
|
|
100
|
%
|
|
|
2,945,158
|
|
|
|
100
|
%
|
|
|
2,548,024
|
|
|
|
100
|
%
|
Less: Allowance for Credit Losses
|
|
|
(42,018
|
)
|
|
|
|
|
|
|
(40,921
|
)
|
|
|
|
|
|
|
(38,811
|
)
|
|
|
|
|
Net loans
|
|
$
|
3,021,957
|
|
|
|
|
|
|
$
|
2,904,237
|
|
|
|
|
|
|
$
|
2,509,213
|
|
|
|
|
|
Unamortized net deferred fees amounted to $13.6 million, $12.7 million, and $9.1 million at March 31, 2014, December 31, 2013, and March 31, 2013, respectively.
As of March 31, 2014 and December 31, 2013, the Bank serviced $74.1 million and $67.6 million, respectively, of SBA loans which are not reflected as loan balances on the consolidated balance sheets.
Loan Origination / Risk Management
The Company’s goal is to mitigate risks in the event of unforeseen threats to the loan portfolio as a result of economic downturn or other negative influences. Plans for mitigating inherent risks in managing loan assets include: carefully enforcing loan policies and procedures, evaluating each borrower’s business plan during the underwriting process and throughout the loan term, identifying and monitoring primary and alternative sources for loan repayment, and obtaining collateral to mitigate economic loss in the event of liquidation. Specific loan reserves are established based upon credit and/or collateral risks on an individual loan basis. A risk rating system is employed to proactively estimate loss exposure and provide a measuring system for setting general and specific reserve allocations.
The composition of the Company’s loan portfolio is heavily weighted toward commercial real estate, both owner occupied and investment real estate. The combination of owner occupied commercial real estate and owner occupied commercial real estate construction represent 11% of the loan portfolio. When owner occupied commercial real estate and owner occupied commercial construction loans are excluded, the percentage of commercial real estate and construction loans to total loans decreases to 59%. At March 31, 2014, the combination of commercial real estate and real estate construction loans represent approximately 70% of the loan portfolio. These loans are underwritten to mitigate lending risks typical of this type of loan such as declines in real estate values, changes in borrower cash flow and general economic conditions. The Bank typically requires a maximum loan to value of 80% and minimum cash flow debt service coverage of 1.15 to 1.00. Personal guarantees are generally required, but may be limited. In making real estate commercial mortgage loans, the Bank generally requires that interest rates adjust not less frequently than five years.
The Company is also an active traditional commercial lender providing loans for a variety of purposes, including working capital, equipment and account receivable financing. This loan category represents approximately 23% of the loan portfolio at March 31, 2014 and was generally variable or adjustable rate. Commercial loans meet reasonable underwriting standards, including appropriate collateral and cash flow necessary to support debt service. Personal guarantees are generally required, but may be limited. SBA loans represent 1% of the commercial loan category of loans. In originating SBA loans, the Company assumes the risk of non-payment on the unguaranteed portion of the credit. The Company generally sells the guaranteed portion of the loan generating noninterest income from the gains on sale, as well as servicing income on the portion participated. SBA loans are subject to the same cash flow analyses as other commercial loans. SBA loans are subject to a maximum loan size established by the SBA.
Approximately 4% of the loan portfolio at March 31, 2014 consists of home equity loans and lines of credit and other consumer loans. These credits, while making up a smaller portion of the loan portfolio, demand the same emphasis on underwriting and credit evaluation as other types of loans advanced by the Bank.
The remaining 3% of the loan portfolio consists of residential mortgage loans. These are typically loans underwritten for shorter terms, generally less than 5 years.
Loans are secured primarily by duly recorded first deeds of trust. In some cases, the Bank may accept a recorded junior trust position. In general, borrowers will have a proven ability to build, lease, manage and/or sell a commercial or residential project and demonstrate satisfactory financial condition. Additionally, an equity contribution toward the project is customarily required.
Construction loans require that the financial condition and experience of the general contractor and major subcontractors be satisfactory to the Bank. Guaranteed, fixed price contracts are required whenever appropriate, along with payment and performance bonds or completion bonds for larger scale projects.
Loans intended for residential land acquisition, lot development and construction are made on the premise that the land: 1) is or will be developed for building sites for residential structures, and; 2) will ultimately be utilized for construction or improvement of residential zoned real properties, including the creation of housing. Residential development and construction loans will finance projects such as single-family subdivisions, planned unit developments, townhouses, and condominiums. Residential land acquisition, development and construction loans generally are underwritten with a maximum term of 36 months, including extensions approved at origination.
Commercial land acquisition and construction loans are secured by real property where loan funds will be used to acquire land and to construct or improve appropriately zoned real property for the creation of income producing or owner user commercial properties. Borrowers are generally required to put equity into each project at levels determined by the appropriate Loan Committee. Commercial land acquisition and construction loans generally are underwritten with a maximum term of 24 months.
Substantially all construction draw requests must be presented in writing on American Institute of Architects documents and certified either by the contractor, the borrower and/or the borrower’s architect. Each draw request shall also include the borrower’s soft cost breakdown certified by the borrower or its Chief Financial Officer. Prior to an advance, the Bank has an employee or its contractor inspects the project to determine that the work has been completed, to justify the draw requisition.
Commercial permanent loans are secured by improved real property, which is generating income in the normal course of operation. Debt service coverage, assuming stabilized occupancy, must be satisfactory to support a permanent loan. The debt service coverage ratio is ordinarily at least 1.15 to 1.00. As part of the underwriting process, debt service coverage ratios are stress tested assuming a 200 basis point increase in interest rates from their current levels.
Commercial permanent loans generally are underwritten with a term not greater than 10 years or the remaining useful life of the property, whichever is lower. The preferred term is between 5 to 7 years, with amortization to a maximum of 25 years.
The Company’s loan portfolio includes loans made for real estate Acquisition, Development and Construction (“ADC”) purposes, including both investment and owner occupied projects. ADC loans amounted to $629.4 million at March 31, 2014. A portion of the ADC portfolio, both speculative and non-speculative, includes loan funded interest reserves at origination. ADC loans containing loan funded interest reserves represent approximately 48% of the outstanding ADC loan portfolio at March 31, 2014. The decision to establish a loan-funded interest reserve is made upon origination of the ADC loan and is based upon a number of factors considered during underwriting of the credit including: (i) the feasibility of the project; (ii) the experience of the sponsor; (iii) the creditworthiness of the borrower and guarantors; (iv) borrower equity contribution; and (v) the level of collateral protection. When appropriate, an interest reserve provides an effective means of addressing the cash flow characteristics of a properly underwritten ADC loan. The Company does not significantly utilize interest reserves in other loan products. The Company recognizes that one of the risks inherent in the use of interest reserves is the potential masking of underlying problems with the project and/or the borrower’s ability to repay the loan. In order to mitigate this inherent risk, the Company employs a series of reporting and monitoring mechanisms on all ADC loans, whether or not an interest reserve is provided, including: (i) construction and development timelines which are monitored on an ongoing basis which track the progress of a given project to the timeline projected at origination; (ii) a construction loan administration department independent of the lending function; (iii) third party independent construction loan inspection reports; (iv) monthly interest reserve monitoring reports detailing the balance of the interest reserves approved at origination and the days of interest carry represented by the reserve balances as compared to the then current anticipated time to completion and/or sale of speculative projects; and (v) quarterly commercial real estate construction meetings among senior Company management, which includes monitoring of current and projected real estate market conditions. If a project has not performed as expected, it is not the customary practice of the Company to increase loan funded interest reserves.
From time to time the Company may make loans for its own portfolio or through its higher risk loan affiliate, ECV. Such loans, which are made to finance projects (which may also be financed at the Bank level), may have higher risk characteristics than loans made by the Bank, such as lower priority interests and/or higher loan to value ratios. The Company seeks an overall financial return on these transactions commensurate with the risks and structure of each individual loan. Certain transactions may bear current interest at a rate with a significant premium to normal market rates. Other loan transactions may carry a standard rate of current interest, but also earn additional interest based on a percentage of the profits of the underlying project or a fixed accrued rate of interest.
The following tables detail activity in the allowance for credit losses by portfolio segment for the three months ended March 31, 2014 and 2013. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
|
|
|
|
|
|
Income Producing
|
|
|
Owner Occupied
|
|
|
Real Estate
|
|
|
Construction
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Mortgage
|
|
|
and
|
|
|
Home
|
|
|
Other
|
|
|
|
|
|
(dollars in thousands)
|
|
Commercial
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Residential
|
|
|
Residential
|
|
|
Equity
|
|
|
Consumer
|
|
|
Total
|
|
For the Period Ended March 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
9,780
|
|
|
$
|
10,359
|
|
|
$
|
3,899
|
|
|
$
|
944
|
|
|
$
|
13,934
|
|
|
$
|
1,871
|
|
|
$
|
134
|
|
|
$
|
40,921
|
|
Loans charged-off
|
|
|
(273
|
)
|
|
|
-
|
|
|
|
(35
|
)
|
|
|
(62
|
)
|
|
|
(581
|
)
|
|
|
(149
|
)
|
|
|
(25
|
)
|
|
|
(1,125
|
)
|
Recoveries of loans previously charged-off
|
|
|
211
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
65
|
|
|
|
5
|
|
|
|
7
|
|
|
|
288
|
|
Net loans charged-off
|
|
|
(62
|
)
|
|
|
-
|
|
|
|
(35
|
)
|
|
|
(62
|
)
|
|
|
(516
|
)
|
|
|
(144
|
)
|
|
|
(18
|
)
|
|
|
(837
|
)
|
Provision for (recovery of) credit losses
|
|
|
1,702
|
|
|
|
231
|
|
|
|
(669
|
)
|
|
|
(128
|
)
|
|
|
761
|
|
|
|
(220
|
)
|
|
|
257
|
|
|
|
1,934
|
|
Ending balance
|
|
$
|
11,420
|
|
|
$
|
10,590
|
|
|
$
|
3,195
|
|
|
$
|
754
|
|
|
$
|
14,179
|
|
|
$
|
1,507
|
|
|
$
|
373
|
|
|
$
|
42,018
|
|
For the Period Ended March 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
3,810
|
|
|
$
|
732
|
|
|
$
|
1,105
|
|
|
$
|
30
|
|
|
$
|
1,775
|
|
|
$
|
378
|
|
|
$
|
58
|
|
|
$
|
7,888
|
|
Collectively evaluated for impairment
|
|
|
7,610
|
|
|
|
9,858
|
|
|
|
2,090
|
|
|
|
724
|
|
|
|
12,404
|
|
|
|
1,129
|
|
|
|
315
|
|
|
|
34,130
|
|
Ending balance
|
|
$
|
11,420
|
|
|
$
|
10,590
|
|
|
$
|
3,195
|
|
|
$
|
754
|
|
|
$
|
14,179
|
|
|
$
|
1,507
|
|
|
$
|
373
|
|
|
$
|
42,018
|
|
|
|
|
|
|
|
Income Producing
|
|
|
Owner Occupied
|
|
|
Real Estate
|
|
|
Construction
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Mortgage
|
|
|
and
|
|
|
Home
|
|
|
Other
|
|
|
|
|
|
(dollars in thousands)
|
|
Commercial
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Residential
|
|
|
Residential
|
|
|
Equity
|
|
|
Consumer
|
|
|
Total
|
|
For the Period Ended March 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
9,412
|
|
|
$
|
9,148
|
|
|
$
|
2,781
|
|
|
$
|
659
|
|
|
$
|
13,391
|
|
|
$
|
1,730
|
|
|
$
|
371
|
|
|
$
|
37,492
|
|
Loans charged-off
|
|
|
(1,184
|
)
|
|
|
(109
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(719
|
)
|
|
|
(29
|
)
|
|
|
(42
|
)
|
|
|
(2,083
|
)
|
Recoveries of loans previously charged-off
|
|
|
26
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
|
|
5
|
|
|
|
37
|
|
Net loans charged-off
|
|
|
(1,158
|
)
|
|
|
(109
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(713
|
)
|
|
|
(29
|
)
|
|
|
(37
|
)
|
|
|
(2,046
|
)
|
Provision for (recovery of) credit losses
|
|
|
2,821
|
|
|
|
(32
|
)
|
|
|
23
|
|
|
|
218
|
|
|
|
267
|
|
|
|
51
|
|
|
|
17
|
|
|
|
3,365
|
|
Ending balance
|
|
$
|
11,075
|
|
|
$
|
9,007
|
|
|
$
|
2,804
|
|
|
$
|
877
|
|
|
$
|
12,945
|
|
|
$
|
1,752
|
|
|
$
|
351
|
|
|
$
|
38,811
|
|
For the Period Ended March 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
2,360
|
|
|
$
|
818
|
|
|
$
|
704
|
|
|
$
|
-
|
|
|
$
|
3,358
|
|
|
$
|
218
|
|
|
$
|
-
|
|
|
$
|
7,458
|
|
Collectively evaluated for impairment
|
|
|
8,715
|
|
|
|
8,189
|
|
|
|
2,100
|
|
|
|
877
|
|
|
|
9,587
|
|
|
|
1,534
|
|
|
|
351
|
|
|
|
31,353
|
|
Ending balance
|
|
$
|
11,075
|
|
|
$
|
9,007
|
|
|
$
|
2,804
|
|
|
$
|
877
|
|
|
$
|
12,945
|
|
|
$
|
1,752
|
|
|
$
|
351
|
|
|
$
|
38,811
|
|
The Company’s recorded investments in loans as of March 31, 2014, December 31, 2013, and March 31, 2013 related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology was as follows:
|
|
|
|
|
|
Investment
|
|
|
Owner occupied
|
|
|
Real Estate
|
|
|
Construction
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Mortgage
|
|
|
and
|
|
|
Home
|
|
|
Other
|
|
|
|
|
|
(dollars in thousands)
|
|
Commercial
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Residential
|
|
|
Residential
|
|
|
Equity
|
|
|
Consumer
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment in loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
27,327
|
|
|
$
|
2,508
|
|
|
$
|
7,323
|
|
|
$
|
113
|
|
|
$
|
19,159
|
|
|
$
|
756
|
|
|
$
|
60
|
|
|
$
|
57,246
|
|
Collectively evaluated for impairment
|
|
|
677,059
|
|
|
|
1,193,897
|
|
|
|
313,671
|
|
|
|
97,733
|
|
|
|
610,288
|
|
|
|
108,083
|
|
|
|
5,998
|
|
|
|
3,006,729
|
|
Ending balance
|
|
$
|
704,386
|
|
|
$
|
1,196,405
|
|
|
$
|
320,994
|
|
|
$
|
97,846
|
|
|
$
|
629,447
|
|
|
$
|
108,839
|
|
|
$
|
6,058
|
|
|
$
|
3,063,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment in loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
9,614
|
|
|
$
|
2,682
|
|
|
$
|
7,574
|
|
|
$
|
113
|
|
|
$
|
13,862
|
|
|
$
|
682
|
|
|
$
|
70
|
|
|
$
|
34,597
|
|
Collectively evaluated for impairment
|
|
|
684,736
|
|
|
|
1,117,118
|
|
|
|
309,917
|
|
|
|
90,305
|
|
|
|
594,964
|
|
|
|
109,560
|
|
|
|
3,961
|
|
|
|
2,910,561
|
|
Ending balance
|
|
$
|
694,350
|
|
|
$
|
1,119,800
|
|
|
$
|
317,491
|
|
|
$
|
90,418
|
|
|
$
|
608,826
|
|
|
$
|
110,242
|
|
|
$
|
4,031
|
|
|
$
|
2,945,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment in loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
14,395
|
|
|
$
|
5,564
|
|
|
$
|
6,449
|
|
|
$
|
-
|
|
|
$
|
30,972
|
|
|
$
|
538
|
|
|
$
|
-
|
|
|
$
|
57,918
|
|
Collectively evaluated for impairment
|
|
|
565,223
|
|
|
|
905,265
|
|
|
|
297,112
|
|
|
|
69,256
|
|
|
|
541,101
|
|
|
|
108,032
|
|
|
|
4,117
|
|
|
|
2,490,106
|
|
Ending balance
|
|
$
|
579,618
|
|
|
$
|
910,829
|
|
|
$
|
303,561
|
|
|
$
|
69,256
|
|
|
$
|
572,073
|
|
|
$
|
108,570
|
|
|
$
|
4,117
|
|
|
$
|
2,548,024
|
|
At March 31, 2014, the nonperforming loans acquired from Fidelity have a carrying value of $1.8 million and an unpaid principal balance of $11.4 million and were evaluated separately in accordance with ASC Topic 310-30,
“Loans and Debt Securities Acquired with Deteriorated Credit Quality
.” The
various impaired loans were recorded at estimated fair value with any excess being charged-off or treated as a non-accretable discount. Subsequent downward adjustments to the valuation of impaired loans acquired will result in additional loan loss provisions and related allowance for credit losses. Subsequent upward adjustments to the valuation of impaired loans acquired will result in accretable discount. No adjustments have been made to the fair value amounts of impaired loans subsequent to the allowable period of adjustment from the date of acquisition.
Credit Quality Indicators
The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company's primary credit quality indicators are to use an internal credit risk rating system that categorizes loans into pass, watch, special mention, or classified categories. Credit risk ratings are applied individually to those classes of loans that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans to businesses or individuals in the classes which comprise the commercial portfolio segment. Groups of loans that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk rated and monitored collectively. These are typically loans to individuals in the classes which comprise the consumer portfolio segment.
The following are the definitions of the Company's credit quality indicators:
Pass:
|
Loans in all classes that comprise the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes that there is a low likelihood of loss related to those loans that are considered pass.
|
Watch:
|
Loan paying as agreed with generally acceptable asset quality; however the obligor’s performance has not met expectations. Balance sheet and/or income statement has shown deterioration to the point that the obligor could not sustain any further setbacks. Credit is expected to be strengthened through improved obligor performance and/or additional collateral within a reasonable period of time.
|
Special Mention:
|
Loans in the classes that comprise the commercial portfolio segment that have potential weaknesses that deserve management's close attention. If not addressed, these potential weaknesses may result in deterioration of the repayment prospects for the loan. The special mention credit quality indicator is not used for classes of loans that comprise the consumer portfolio segment. Management believes that there is a moderate likelihood of some loss related to those loans that are considered special mention.
|
Classified:
|
Classified (a) Substandard
- Loans inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the company will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual loans classified substandard.
|
|
|
|
Classified (b) Doubtful
- Loans that have all the weaknesses inherent in a loan classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the assets, its classification as an estimated loss is deferred until its more exact status may be determined.
|
The Company's credit quality indicators are updated generally on a quarterly basis, but no less frequently than annually. The following table presents by class and by credit quality indicator, the recorded investment in the Company's loans and leases as of March 31, 2014, December 31, 2013, and March 31, 2013.
|
|
|
|
|
|
Watch and
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
(dollars in thousands)
|
|
Pass
|
|
|
Special Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
661,432
|
|
|
$
|
15,627
|
|
|
$
|
27,327
|
|
|
$
|
-
|
|
|
$
|
704,386
|
|
Investment - commercial real estate
|
|
|
1,167,621
|
|
|
|
26,276
|
|
|
|
2,508
|
|
|
|
-
|
|
|
|
1,196,405
|
|
Owner occupied - commercial real estate
|
|
|
298,968
|
|
|
|
14,703
|
|
|
|
7,323
|
|
|
|
-
|
|
|
|
320,994
|
|
Real estate mortgage – residential
|
|
|
96,947
|
|
|
|
786
|
|
|
|
113
|
|
|
|
-
|
|
|
|
97,846
|
|
Construction - commercial and residential
|
|
|
601,711
|
|
|
|
8,577
|
|
|
|
19,159
|
|
|
|
-
|
|
|
|
629,447
|
|
Home equity
|
|
|
106,170
|
|
|
|
1,913
|
|
|
|
756
|
|
|
|
-
|
|
|
|
108,839
|
|
Other consumer
|
|
|
5,998
|
|
|
|
-
|
|
|
|
60
|
|
|
|
-
|
|
|
|
6,058
|
|
Total
|
|
$
|
2,938,847
|
|
|
$
|
67,882
|
|
|
$
|
57,246
|
|
|
$
|
-
|
|
|
$
|
3,063,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
655,409
|
|
|
$
|
29,327
|
|
|
$
|
9,614
|
|
|
$
|
-
|
|
|
$
|
694,350
|
|
Investment - commercial real estate
|
|
|
1,095,285
|
|
|
|
21,833
|
|
|
|
2,682
|
|
|
|
-
|
|
|
|
1,119,800
|
|
Owner occupied - commercial real estate
|
|
|
294,337
|
|
|
|
15,580
|
|
|
|
7,574
|
|
|
|
-
|
|
|
|
317,491
|
|
Real estate mortgage – residential
|
|
|
89,501
|
|
|
|
804
|
|
|
|
113
|
|
|
|
-
|
|
|
|
90,418
|
|
Construction - commercial and residential
|
|
|
575,321
|
|
|
|
19,643
|
|
|
|
13,862
|
|
|
|
-
|
|
|
|
608,826
|
|
Home equity
|
|
|
107,415
|
|
|
|
2,145
|
|
|
|
682
|
|
|
|
-
|
|
|
|
110,242
|
|
Other consumer
|
|
|
3,961
|
|
|
|
-
|
|
|
|
70
|
|
|
|
-
|
|
|
|
4,031
|
|
Total
|
|
$
|
2,821,229
|
|
|
$
|
89,332
|
|
|
$
|
34,597
|
|
|
$
|
-
|
|
|
$
|
2,945,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
532,391
|
|
|
$
|
32,832
|
|
|
$
|
14,395
|
|
|
$
|
-
|
|
|
$
|
579,618
|
|
Investment - commercial real estate
|
|
|
886,172
|
|
|
|
19,093
|
|
|
|
5,564
|
|
|
|
-
|
|
|
|
910,829
|
|
Owner occupied - commercial real estate
|
|
|
281,632
|
|
|
|
15,480
|
|
|
|
6,449
|
|
|
|
-
|
|
|
|
303,561
|
|
Real estate mortgage – residential
|
|
|
68,521
|
|
|
|
735
|
|
|
|
-
|
|
|
|
-
|
|
|
|
69,256
|
|
Construction - commercial and residential
|
|
|
523,535
|
|
|
|
17,566
|
|
|
|
30,972
|
|
|
|
-
|
|
|
|
572,073
|
|
Home equity
|
|
|
105,857
|
|
|
|
2,175
|
|
|
|
538
|
|
|
|
-
|
|
|
|
108,570
|
|
Other consumer
|
|
|
4,106
|
|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,117
|
|
Total
|
|
$
|
2,402,214
|
|
|
$
|
87,892
|
|
|
$
|
57,918
|
|
|
$
|
-
|
|
|
$
|
2,548,024
|
|
Nonaccrual and Past Due Loans
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
The following presents by class of loan, information related to nonaccrual loans as of the periods ended March 31, 2014, December 31, 2013 and March 31, 2013.
(dollars in thousands)
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
|
March 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
17,646
|
|
|
$
|
6,779
|
|
|
$
|
4,039
|
|
Investment - commercial real estate
|
|
|
2,271
|
|
|
|
2,525
|
|
|
|
3,269
|
|
Owner occupied - commercial real estate
|
|
|
7,323
|
|
|
|
5,452
|
|
|
|
2,368
|
|
Real estate mortgage - residential
|
|
|
771
|
|
|
|
887
|
|
|
|
691
|
|
Construction - commercial and residential
|
|
|
7,658
|
|
|
|
8,366
|
|
|
|
17,318
|
|
Home equity
|
|
|
598
|
|
|
|
623
|
|
|
|
481
|
|
Other consumer
|
|
|
60
|
|
|
|
70
|
|
|
|
-
|
|
Total nonaccrual loans (1)(2)
|
|
$
|
36,327
|
|
|
$
|
24,702
|
|
|
$
|
28,166
|
|
|
(1)
|
Excludes troubled debt restructurings (“TDRs”) that were performing under their restructured terms totaling $7.9 million at March 31, 2014, and December 31, 2013, and $14.8 million at March 31, 2013.
|
|
(2)
|
Gross interest income that would have been recorded in 2014 if nonaccrual loans shown above had been current and in accordance with their original terms was $549 thousand, while interest actually recorded on such loans was $461 thousand. See Note 1 to the consolidated financial statements for a description of the Company’s policy for placing loans on nonaccrual status.
|
The following table presents by class, an aging analysis and the recorded investments in loans past due as of March 31, 2014 and December 31, 2013.
|
|
Loans
|
|
|
Loans
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
Total Recorded
|
|
|
|
30-59 Days
|
|
|
60-89 Days
|
|
|
90 Days or
|
|
|
Total Past
|
|
|
Current
|
|
|
Investment in
|
|
(dollars in thousands)
|
|
Past Due
|
|
|
Past Due
|
|
|
More Past Due
|
|
|
Due Loans
|
|
|
Loans
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
635
|
|
|
$
|
3,943
|
|
|
$
|
17,646
|
|
|
$
|
22,224
|
|
|
$
|
682,162
|
|
|
$
|
704,386
|
|
Investment - commercial real estate
|
|
|
1,305
|
|
|
|
70
|
|
|
|
2,271
|
|
|
|
3,646
|
|
|
|
1,192,759
|
|
|
|
1,196,405
|
|
Owner occupied - commercial real estate
|
|
|
1,951
|
|
|
|
-
|
|
|
|
7,323
|
|
|
|
9,274
|
|
|
|
311,720
|
|
|
|
320,994
|
|
Real estate mortgage – residential
|
|
|
-
|
|
|
|
-
|
|
|
|
771
|
|
|
|
771
|
|
|
|
97,075
|
|
|
|
97,846
|
|
Construction - commercial and residential
|
|
|
-
|
|
|
|
917
|
|
|
|
7,658
|
|
|
|
8,575
|
|
|
|
620,872
|
|
|
|
629,447
|
|
Home equity
|
|
|
769
|
|
|
|
872
|
|
|
|
598
|
|
|
|
2,239
|
|
|
|
106,600
|
|
|
|
108,839
|
|
Other consumer
|
|
|
3
|
|
|
|
-
|
|
|
|
60
|
|
|
|
63
|
|
|
|
5,995
|
|
|
|
6,058
|
|
Total
|
|
$
|
4,663
|
|
|
$
|
5,802
|
|
|
$
|
36,327
|
|
|
$
|
46,792
|
|
|
$
|
3,017,183
|
|
|
$
|
3,063,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,698
|
|
|
$
|
11,146
|
|
|
$
|
6,779
|
|
|
$
|
19,623
|
|
|
$
|
674,727
|
|
|
$
|
694,350
|
|
Investment - commercial real estate
|
|
|
818
|
|
|
|
-
|
|
|
|
2,525
|
|
|
|
3,343
|
|
|
|
1,116,457
|
|
|
|
1,119,800
|
|
Owner occupied - commercial real estate
|
|
|
360
|
|
|
|
2,121
|
|
|
|
5,452
|
|
|
|
7,933
|
|
|
|
309,558
|
|
|
|
317,491
|
|
Real estate mortgage – residential
|
|
|
-
|
|
|
|
-
|
|
|
|
887
|
|
|
|
887
|
|
|
|
89,531
|
|
|
|
90,418
|
|
Construction - commercial and residential
|
|
|
-
|
|
|
|
-
|
|
|
|
8,366
|
|
|
|
8,366
|
|
|
|
600,460
|
|
|
|
608,826
|
|
Home equity
|
|
|
626
|
|
|
|
359
|
|
|
|
623
|
|
|
|
1,608
|
|
|
|
108,634
|
|
|
|
110,242
|
|
Other consumer
|
|
|
-
|
|
|
|
15
|
|
|
|
70
|
|
|
|
85
|
|
|
|
3,946
|
|
|
|
4,031
|
|
Total
|
|
$
|
3,502
|
|
|
$
|
13,641
|
|
|
$
|
24,702
|
|
|
$
|
41,845
|
|
|
$
|
2,903,313
|
|
|
$
|
2,945,158
|
|
Impaired Loans
Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
The following table presents by class, information related to impaired loans for the periods ended March 31, 2014, December 31, 2013 and March 31, 2013.
|
|
Unpaid
|
|
|
Recorded
|
|
|
Recorded
|
|
|
|
|
|
|
|
|
|
|
Average Recorded
|
|
|
Interest Income
|
|
|
|
Contractual
|
|
|
Investment
|
|
|
Investment
|
|
|
Total
|
|
|
|
|
|
|
Investment
|
|
|
Recognized
|
|
|
|
Principal
|
|
|
With No
|
|
|
With
|
|
|
Recorded
|
|
|
Related
|
|
|
Year
|
|
|
Year
|
|
(dollars in thousands)
|
|
Balance
|
|
|
Allowance
|
|
|
Allowance
|
|
|
Investment
|
|
|
Allowance
|
|
|
To Date
|
|
|
To Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
17,646
|
|
|
$
|
6,409
|
|
|
$
|
11,237
|
|
|
$
|
17,646
|
|
|
$
|
3,810
|
|
|
$
|
12,213
|
|
|
$
|
-
|
|
Investment - commercial real estate
|
|
|
6,016
|
|
|
|
1,106
|
|
|
|
4,535
|
|
|
|
5,641
|
|
|
|
732
|
|
|
|
5,771
|
|
|
|
35
|
|
Owner occupied - commercial
|
|
|
7,323
|
|
|
|
4,191
|
|
|
|
3,132
|
|
|
|
7,323
|
|
|
|
1,105
|
|
|
|
6,388
|
|
|
|
-
|
|
Real estate mortgage – residential
|
|
|
771
|
|
|
|
658
|
|
|
|
113
|
|
|
|
771
|
|
|
|
30
|
|
|
|
829
|
|
|
|
-
|
|
Construction - commercial and residential
|
|
|
13,098
|
|
|
|
4,783
|
|
|
|
7,442
|
|
|
|
12,225
|
|
|
|
1,775
|
|
|
|
12,580
|
|
|
|
503
|
|
Home equity
|
|
|
598
|
|
|
|
125
|
|
|
|
473
|
|
|
|
598
|
|
|
|
378
|
|
|
|
611
|
|
|
|
-
|
|
Other consumer
|
|
|
60
|
|
|
|
-
|
|
|
|
60
|
|
|
|
60
|
|
|
|
58
|
|
|
|
65
|
|
|
|
-
|
|
Total
|
|
$
|
45,512
|
|
|
$
|
17,272
|
|
|
$
|
26,992
|
|
|
$
|
44,264
|
|
|
$
|
7,888
|
|
|
$
|
38,457
|
|
|
$
|
538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
6,779
|
|
|
$
|
2,327
|
|
|
$
|
4,452
|
|
|
$
|
6,779
|
|
|
$
|
1,323
|
|
|
$
|
8,877
|
|
|
$
|
131
|
|
Investment - commercial real estate
|
|
|
5,902
|
|
|
|
1,322
|
|
|
|
4,580
|
|
|
|
5,902
|
|
|
|
1,098
|
|
|
|
5,755
|
|
|
|
175
|
|
Owner occupied - commercial
|
|
|
5,452
|
|
|
|
111
|
|
|
|
5,341
|
|
|
|
5,452
|
|
|
|
1,853
|
|
|
|
6,285
|
|
|
|
108
|
|
Real estate mortgage – residential
|
|
|
887
|
|
|
|
774
|
|
|
|
113
|
|
|
|
887
|
|
|
|
27
|
|
|
|
792
|
|
|
|
2
|
|
Construction - commercial and residential
|
|
|
13,233
|
|
|
|
5,358
|
|
|
|
7,575
|
|
|
|
12,933
|
|
|
|
1,625
|
|
|
|
17,298
|
|
|
|
169
|
|
Home equity
|
|
|
623
|
|
|
|
-
|
|
|
|
623
|
|
|
|
623
|
|
|
|
526
|
|
|
|
508
|
|
|
|
4
|
|
Other consumer
|
|
|
70
|
|
|
|
-
|
|
|
|
70
|
|
|
|
70
|
|
|
|
68
|
|
|
|
34
|
|
|
|
2
|
|
Total
|
|
$
|
32,946
|
|
|
$
|
9,892
|
|
|
$
|
22,754
|
|
|
$
|
32,646
|
|
|
$
|
6,520
|
|
|
$
|
39,549
|
|
|
$
|
591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
8,493
|
|
|
$
|
4,821
|
|
|
$
|
3,172
|
|
|
$
|
7,993
|
|
|
$
|
2,360
|
|
|
$
|
8,621
|
|
|
$
|
42
|
|
Investment - commercial real estate
|
|
|
5,407
|
|
|
|
3,821
|
|
|
|
1,586
|
|
|
|
5,407
|
|
|
|
818
|
|
|
|
5,504
|
|
|
|
37
|
|
Owner occupied - commercial
|
|
|
6,449
|
|
|
|
5,538
|
|
|
|
911
|
|
|
|
6,449
|
|
|
|
704
|
|
|
|
6,554
|
|
|
|
56
|
|
Real estate mortgage – residential
|
|
|
691
|
|
|
|
691
|
|
|
|
-
|
|
|
|
691
|
|
|
|
-
|
|
|
|
695
|
|
|
|
-
|
|
Construction - commercial and residential
|
|
|
21,959
|
|
|
|
13,611
|
|
|
|
8,348
|
|
|
|
21,959
|
|
|
|
3,358
|
|
|
|
22,597
|
|
|
|
42
|
|
Home equity
|
|
|
481
|
|
|
|
132
|
|
|
|
349
|
|
|
|
481
|
|
|
|
218
|
|
|
|
497
|
|
|
|
-
|
|
Other consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
|
|
-
|
|
Total
|
|
$
|
43,480
|
|
|
$
|
28,614
|
|
|
$
|
14,366
|
|
|
$
|
42,980
|
|
|
$
|
7,458
|
|
|
$
|
44,490
|
|
|
$
|
177
|
|
Modifications
A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company offers various types of concessions when modifying a loan. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only payment period.
Loans modified in a TDR for the Company may have the financial effect of increasing the specific allowance associated with the loan. An allowance for impaired consumer and commercial loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates.
The following table presents by class, information related to loans modified in a TDR held by the Company during the periods ended March 31, 2014 and December 31, 2013.
|
|
Number of
|
|
|
TDRs Performing
|
|
|
TDRs Not Performing
|
|
|
Total
|
|
(dollars in thousands)
|
|
Contracts
|
|
|
to Modified Terms
|
|
|
to Modified Terms
|
|
|
TDRs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1
|
|
|
$
|
-
|
|
|
$
|
1,947
|
|
|
$
|
1,947
|
|
Investment - commercial real estate
|
|
|
2
|
|
|
|
3,370
|
|
|
|
-
|
|
|
|
3,370
|
|
Owner occupied - commercial real estate
|
|
|
1
|
|
|
|
-
|
|
|
|
4,081
|
|
|
|
4,081
|
|
Construction - commercial and residential
|
|
|
2
|
|
|
|
4,567
|
|
|
|
912
|
|
|
|
5,479
|
|
Total
|
|
|
6
|
|
|
$
|
7,937
|
|
|
$
|
6,940
|
|
|
$
|
14,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
3
|
|
|
$
|
-
|
|
|
$
|
4,042
|
|
|
$
|
4,042
|
|
Investment - commercial real estate
|
|
|
3
|
|
|
|
3,377
|
|
|
|
217
|
|
|
|
3,594
|
|
Owner occupied - commercial real estate
|
|
|
1
|
|
|
|
-
|
|
|
|
4,081
|
|
|
|
4,081
|
|
Construction - commercial and residential
|
|
|
2
|
|
|
|
4,567
|
|
|
|
912
|
|
|
|
5,479
|
|
Total
|
|
|
9
|
|
|
$
|
7,944
|
|
|
$
|
9,252
|
|
|
$
|
17,196
|
|
During the quarter ended March 31, 2014, three nonperforming TDRs totaling $2.3 million migrated from nonperforming loans. One nonperforming TDRs totaling approximately $2.0 million was reclassified to OREO after the Company took possession of the underlying collateral. The Company was paid off on the second TDR totaling $217 thousand. The third TDR totaling $95 thousand was charged-off during the quarter. There were no TDR defaults during the first three months of 2014, as compared to the three months ended 2013 which had one TDR default totaling approximately $495 thousand. A default is considered to have occurred once the TDR is past due 90 days or more, or it has been placed on nonaccrual. Commercial and consumer loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan. There were no loans modified in a TDR during the three months ended March 31, 2014 and 2013.
Note 5. Net Income per Common Share
The calculation of net income per common share for the nine and three months ended March 31, 2014 and 2013 was as follows.
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(dollars and shares in thousands, except per share data)
|
|
2014
|
|
|
2013
|
|
Basic:
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
12,358
|
|
|
$
|
11,431
|
|
Average common shares outstanding
|
|
|
25,928
|
|
|
|
25,519
|
|
Basic net income per common share
|
|
$
|
0.48
|
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
12,358
|
|
|
$
|
11,431
|
|
Average common shares outstanding
|
|
|
25,928
|
|
|
|
25,519
|
|
Adjustment for common share equivalents
|
|
|
647
|
|
|
|
703
|
|
Average common shares outstanding-diluted
|
|
|
26,575
|
|
|
|
26,222
|
|
Diluted net income per common share
|
|
$
|
0.47
|
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares
|
|
|
21,000
|
|
|
|
101,466
|
|
The Company declared a 10% stock divided payable on June 14, 2013. Per share amounts and the number of outstanding shares for periods ended prior to June 30, 2013 have been adjusted to give effect to the 10% common stock dividend.
Note 6. Stock-Based Compensation
The following discussion includes the effects of changes in stock options and restricted stock shares and exercise prices resulting from the 10% common stock dividend paid on June 14, 2013.
The Company maintains the 1998 Stock Option Plan (“1998 Plan”), the 2006 Stock Plan (“2006 Plan”) and the 2011 Employee Stock Purchase Plan (“2011 ESPP”). In connection with the acquisition of Fidelity, the Company assumed the Fidelity 2004 Long Term Incentive Plan and 2005 Long Term Incentive Plan (the “Fidelity Plans”). No additional options may be granted under the 1998 Plan or the Fidelity Plans.
The 2006 Plan provides for the issuance of awards of incentive stock options, non-qualifying stock options, restricted stock and stock appreciation rights to selected key employees and members of the Board. As amended, 1,996,500 shares of common stock are subject to issuance pursuant to awards under the 2006 Plan. Stock options and restricted stock awards are made with an exercise price equal to the average of the high and low price of the Company’s shares at the date of grant.
For awards that are service based, compensation expense is being recognized over the service (vesting) period based on fair value, which for stock option grants is computed using the Black-Scholes model, and for restricted stock awards is based on the average of the high and low stock price of the Company’s shares on the date of grant. For awards that are performance-based, compensation expense is recorded based on the probability of achievement of the goals underlying the grant. No performance-based awards are outstanding at March 31, 2014.
In February 2014, the Company awarded three employees stock options to purchase 21,000 shares which have a ten-year term and vest in five substantially equal installments beginning on the first anniversary of the date of grant.
In February 2014, the Company awarded 58,187 shares of restricted stock to senior officers and employees. The shares vest in three substantially equal installments beginning on the first anniversary of the date of grant.
In March 2014, the Company awarded 20,760 shares of restricted stock to directors. The shares vest in three substantially equal installments beginning on the first anniversary of the date of grant.
Below is a summary of changes in shares pursuant to our equity compensation plans for the three months ended March 31, 2014 and 2013. The information excludes restricted stock units and awards.
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
Shares
|
|
|
Weighted-Average Exercise Price
|
|
|
Shares
|
|
|
Weighted-Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
|
501,334
|
|
|
$
|
10.34
|
|
|
|
722,155
|
|
|
$
|
10.18
|
|
Issued
|
|
|
21,000
|
|
|
|
32.77
|
|
|
|
3,300
|
|
|
|
20.03
|
|
Exercised
|
|
|
(19,027
|
)
|
|
|
13.13
|
|
|
|
(52,480
|
)
|
|
|
8.91
|
|
Forfeited
|
|
|
(110
|
)
|
|
|
5.76
|
|
|
|
(330
|
)
|
|
|
5.76
|
|
Expired
|
|
|
(408
|
)
|
|
|
9.37
|
|
|
|
(15,640
|
)
|
|
|
10.79
|
|
Ending Balance
|
|
|
502,789
|
|
|
$
|
11.18
|
|
|
|
657,005
|
|
|
$
|
10.32
|
|
The following summarizes information about stock options outstanding at March 31, 2014. The information excludes restricted stock units and awards.
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
Outstanding:
|
|
|
Stock Options
|
|
|
Weighted-Average
|
|
|
Remaining
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
$5.76
|
|
$8.00
|
|
|
|
237,969
|
|
|
$
|
5.76
|
|
|
|
4.78
|
|
$8.01
|
|
$10.00
|
|
|
|
64,450
|
|
|
|
9.72
|
|
|
|
0.73
|
|
$10.01
|
|
$20.00
|
|
|
|
109,994
|
|
|
|
12.55
|
|
|
|
3.54
|
|
$20.01
|
|
$33.44
|
|
|
|
90,376
|
|
|
|
24.79
|
|
|
|
3.60
|
|
|
|
|
|
|
|
502,789
|
|
|
$
|
11.18
|
|
|
|
3.78
|
|
Exercisable:
|
|
Stock Options
|
|
|
Weighted-Average
|
|
|
|
|
|
Range of Exercise Prices
|
|
Exercisable
|
|
|
Exercise Price
|
|
|
|
|
|
$5.76
|
0
|
$8.00
|
|
|
|
181,059
|
|
|
$
|
5.76
|
|
|
|
|
|
$8.01
|
|
$10.00
|
|
|
|
64,450
|
|
|
|
9.72
|
|
|
|
|
|
$10.01
|
|
$20.00
|
|
|
|
88,116
|
|
|
|
12.74
|
|
|
|
|
|
$20.01
|
|
$33.44
|
|
|
|
66,736
|
|
|
|
22.47
|
|
|
|
|
|
|
|
|
|
|
|
400,361
|
|
|
$
|
10.72
|
|
|
|
|
|
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model with the assumptions as shown in the table below used for grants during the three months ended March 31, 2014 and the years ended December 31, 2013 and 2012.
|
|
Three Months Ended
|
|
|
Years Ended December 31,
|
|
|
|
March 31, 2014
|
|
|
2013
|
|
|
2012
|
|
Expected Volatility
|
|
|
34.25
|
%
|
|
|
34.12
|
%
|
|
|
36.64
|
%
|
Weighted-Average Volatility
|
|
|
34.24
|
%
|
|
|
34.12
|
%
|
|
|
36.64
|
%
|
Expected Dividends
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected Term (In years)
|
|
|
7.5
|
|
|
|
7.5
|
|
|
|
7.5
|
|
Risk-Free Rate
|
|
|
2.11
|
%
|
|
|
1.31
|
%
|
|
|
1.13
|
%
|
Weighted-Average Fair Value (Grant date)
|
|
$
|
13.49
|
|
|
$
|
7.83
|
|
|
$
|
6.35
|
|
The expected lives are based on the “simplified” method allowed by ASC Topic 718
“Compensation,”
whereby the expected term is equal to the midpoint between the vesting period and the contractual term of the award.
The total intrinsic value of outstanding stock options was $12.5 million at March 31, 2014. The total intrinsic value of stock options exercised during the three months ended March 31, 2014 and 2013 was $401 thousand and $538 thousand, respectively. The total fair value of stock options vested was $123 thousand and $119 thousand for the three months ended March 31, 2014 and 2013, respectively. Unrecognized stock-based compensation expense related to stock options totaled $400 thousand at March 31, 2014. At such date, the weighted-average period over which this unrecognized stock option expense is expected to be recognized was 4.47 years.
The Company has unvested restricted stock award grants of 511,126 shares under the 2006 Plan at March 31, 2014. Unrecognized stock based compensation expense related to restricted stock awards totaled $10.4 million at March 31, 2014. At such date, the weighted-average period over which this unrecognized expense was expected to be recognized was 2.72 years. The following table summarizes the unvested restricted stock awards at March 31, 2014 and 2013.
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
Shares
|
|
|
Weighted-Average Grant Date Fair Value
|
|
|
Shares
|
|
|
Weighted-Average Grant Date Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at Beginning
|
|
|
614,580
|
|
|
$
|
18.71
|
|
|
|
348,353
|
|
|
$
|
13.79
|
|
Issued
|
|
|
78,947
|
|
|
|
33.24
|
|
|
|
421,425
|
|
|
|
20.63
|
|
Forfeited
|
|
|
(434
|
)
|
|
|
15.67
|
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(181,967
|
)
|
|
|
17.59
|
|
|
|
(154,705
|
)
|
|
|
13.06
|
|
Unvested at End
|
|
|
511,126
|
|
|
$
|
21.36
|
|
|
|
615,073
|
|
|
$
|
18.66
|
|
Approved by shareholders in May 2011, the 2011 ESPP reserved 550,000 shares of common stock (as adjusted for stock dividends) for issuance to employees. Whole shares are sold to participants in the plan at 85% of the lower of the stock price at the beginning or end of each quarterly offering period. The 2011 ESPP is available to all eligible employees who have completed at least one year of continuous employment, work at least 20 hours per week and at least five months a year. Participants may contribute a minimum of $10 per pay period to a maximum of $6,250 per offering period or $25,000 annually (not to exceed more than 10% of compensation per pay period). At March 31, 2014, the 2011 ESPP had 468,269 shares remaining for issuance.
Included in salaries and employee benefits the Company recognized $892 thousand and $685 thousand in stock-based compensation expense for the three months ended March 31, 2014 and 2013, respectively. Stock-based compensation expense is recognized ratably over the requisite service period for all awards.
Note 7. Other Comprehensive Income
The following table presents the components of other comprehensive income (loss) for the three months ended March 31, 2014 and 2013.
(dollars in thousands)
|
|
Before Tax
|
|
|
Tax Effect
|
|
|
Net of Tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on securities available-for-sale
|
|
$
|
4,703
|
|
|
$
|
1,881
|
|
|
$
|
2,822
|
|
Less: Reclassification adjustment for net gains included in net income
|
|
|
(8
|
)
|
|
|
(3
|
)
|
|
|
(5
|
)
|
Other Comprehensive Loss
|
|
$
|
4,695
|
|
|
$
|
1,878
|
|
|
$
|
2,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on securities available-for-sale
|
|
$
|
(1,579
|
)
|
|
$
|
(635
|
)
|
|
$
|
(944
|
)
|
Less: Reclassification adjustment for net gains included in net income
|
|
|
(23
|
)
|
|
|
(10
|
)
|
|
|
(13
|
)
|
Other Comprehensive Income
|
|
$
|
(1,602
|
)
|
|
$
|
(645
|
)
|
|
$
|
(957
|
)
|
The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax, for the three months ended March 31, 2014 and 2013.
|
|
Securities
|
|
|
Accumulated Other
Comprehensive (Loss)
|
|
(dollars in thousands)
|
|
Available For Sale
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2014
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
$
|
(3,319
|
)
|
|
$
|
(3,319
|
)
|
Other comprehensive (loss) before reclassifications
|
|
|
2,822
|
|
|
|
2,822
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
(5
|
)
|
|
|
(5
|
)
|
Net other comprehensive (loss) during period
|
|
|
2,817
|
|
|
|
2,817
|
|
Balance at End of Period
|
|
$
|
(502
|
)
|
|
$
|
(502
|
)
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2013
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
$
|
5,465
|
|
|
$
|
5,465
|
|
Other comprehensive income before reclassifications
|
|
|
(944
|
)
|
|
|
(944
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
(13
|
)
|
|
|
(13
|
)
|
Net other comprehensive income during period
|
|
|
(957
|
)
|
|
|
(957
|
)
|
Balance at End of Period
|
|
$
|
4,508
|
|
|
$
|
4,508
|
|
The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three months ended March 31, 2014 and 2013.
|
|
Amount Reclassified from
|
|
|
|
|
|
Affected Line Item in
|
Details about Accumulated Other
|
|
Accumulated Other
|
|
|
|
|
|
the Statement Where
|
Comprehensive Income Components (dollars in thousands)
|
|
Comprehensive (Loss) Income
|
|
|
|
|
|
Net Income is Presented
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Realized gain on sale of investment securities
|
|
$
|
8
|
|
|
$
|
23
|
|
Gain on sale of investment securities
|
|
|
|
(3
|
)
|
|
|
(10
|
)
|
Tax Expense
|
Total Reclassifications for the Period
|
|
$
|
5
|
|
|
$
|
13
|
|
Net of Tax
|
Note 8. Fair Value Measurements
The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 820,
“Fair Value Measurements and Disclosures,”
establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
|
Level 1
|
Quoted prices in active exchange markets for identical assets or liabilities; also includes certain U.S. Treasury and other U.S. Government and agency securities actively traded in over-the-counter markets.
|
|
Level 2
|
Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency securities, corporate debt securities, derivative instruments, and residential mortgage loans held for sale.
|
|
Level 3
|
Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for single dealer nonbinding quotes not corroborated by observable market data. This category generally includes certain private equity investments, retained interests from securitizations, and certain collateralized debt obligations.
|
Assets and Liabilities Recorded as Fair Value on a Recurring Basis
The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis as of March 31, 2014 and December 31, 2013.
(dollars in thousands)
|
|
Quoted Prices (Level 1)
|
|
|
Significant Other Observable Inputs (Level 2)
|
|
|
Significant Other Unobservable Inputs (Level 3)
|
|
|
Total
(Fair Value)
|
|
March 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government agency securities
|
|
$
|
-
|
|
|
$
|
49,357
|
|
|
$
|
-
|
|
|
$
|
49,357
|
|
Residential mortgage backed securities
|
|
|
-
|
|
|
|
228,611
|
|
|
|
-
|
|
|
|
228,611
|
|
Municipal bonds
|
|
|
-
|
|
|
|
109,405
|
|
|
|
-
|
|
|
|
109,405
|
|
Other equity investments
|
|
|
198
|
|
|
|
-
|
|
|
|
219
|
|
|
|
417
|
|
Residential mortgage loans held for sale
|
|
|
-
|
|
|
|
21,862
|
|
|
|
-
|
|
|
|
21,862
|
|
Total assets measured at fair value on
a recurring basis as of March 31, 2014
|
|
$
|
198
|
|
|
$
|
409,235
|
|
|
$
|
219
|
|
|
$
|
409,652
|
|
(dollars in thousands)
|
|
Quoted Prices (Level 1)
|
|
|
Significant Other Observable Inputs (Level 2)
|
|
|
Significant Other Unobservable Inputs (Level 3)
|
|
|
Total
(Fair Value)
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government agency securities
|
|
$
|
-
|
|
|
$
|
47,335
|
|
|
$
|
-
|
|
|
$
|
47,335
|
|
Residential mortgage backed securities
|
|
|
-
|
|
|
|
228,674
|
|
|
|
-
|
|
|
|
228,674
|
|
Municipal bonds
|
|
|
-
|
|
|
|
101,740
|
|
|
|
-
|
|
|
|
101,740
|
|
Other equity investments
|
|
|
165
|
|
|
|
-
|
|
|
|
219
|
|
|
|
384
|
|
Residential mortgage loans held for sale
|
|
|
-
|
|
|
|
42,030
|
|
|
|
-
|
|
|
|
42,030
|
|
Total assets measured at fair value on
a recurring basis as of December 31, 2013
|
|
$
|
165
|
|
|
$
|
419,779
|
|
|
$
|
219
|
|
|
$
|
420,163
|
|
Investment Securities Available-for-Sale
Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include U.S. Government agency debt securities, mortgage backed securities issued by government sponsored entities and municipal bonds. Securities classified as Level 3 include securities in less liquid markets.
The Company’s residential loans held for sale are reported on an aggregate basis at the lower of cost or fair value.
The following is a reconciliation of activity for assets measured at fair value based on Significant Other Unobservable Inputs (Level 3):
|
|
Other Equity Investments
|
|
(dollars in thousands)
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
Balance, beginning of period
|
|
$
|
219
|
|
|
$
|
230
|
|
Realized gains included in other noninterest income
|
|
|
-
|
|
|
|
-
|
|
Principal redemption
|
|
|
-
|
|
|
|
(11
|
)
|
Balance, end of period
|
|
$
|
219
|
|
|
$
|
219
|
|
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
The Company may be required from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. There are no liabilities, which the Company measures at fair value on a nonrecurring basis. Assets measured at fair value on a nonrecurring basis are included in the table below.
(dollars in thousands)
|
|
Quoted Prices (Level 1)
|
|
|
Significant Other Observable Inputs (Level 2)
|
|
|
Significant Other Unobservable Inputs (Level 3)
|
|
|
Total
(Fair Value)
|
|
March 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
-
|
|
|
$
|
5,608
|
|
|
$
|
8,228
|
|
|
$
|
13,836
|
|
Income producing - commercial real estate
|
|
|
-
|
|
|
|
134
|
|
|
|
4,774
|
|
|
|
4,908
|
|
Owner occupied - commercial real estate
|
|
|
-
|
|
|
|
4,327
|
|
|
|
1,891
|
|
|
|
6,218
|
|
Real estate mortgage - residential
|
|
|
-
|
|
|
|
113
|
|
|
|
628
|
|
|
|
741
|
|
Construction - commercial and residential
|
|
|
-
|
|
|
|
879
|
|
|
|
9,572
|
|
|
|
10,451
|
|
Home equity
|
|
|
-
|
|
|
|
125
|
|
|
|
95
|
|
|
|
220
|
|
Other consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
2
|
|
Other real estate owned
|
|
|
-
|
|
|
|
8,809
|
|
|
|
-
|
|
|
|
8,809
|
|
Total assets measured at fair value on
a nonrecurring basis as of March 31, 2014
|
|
$
|
-
|
|
|
$
|
19,995
|
|
|
$
|
25,190
|
|
|
$
|
45,185
|
|
(dollars in thousands)
|
|
Quoted Prices (Level 1)
|
|
|
Significant Other Observable Inputs (Level 2)
|
|
|
Significant Other Unobservable Inputs (Level 3)
|
|
|
Total
(Fair Value)
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
-
|
|
|
$
|
4,367
|
|
|
$
|
1,089
|
|
|
$
|
5,456
|
|
Income producing - commercial real estate
|
|
|
-
|
|
|
|
2,806
|
|
|
|
1,998
|
|
|
|
4,804
|
|
Owner occupied - commercial real estate
|
|
|
-
|
|
|
|
2,712
|
|
|
|
887
|
|
|
|
3,599
|
|
Real estate mortgage - residential
|
|
|
-
|
|
|
|
86
|
|
|
|
774
|
|
|
|
860
|
|
Construction - commercial and residential
|
|
|
-
|
|
|
|
4,228
|
|
|
|
7,080
|
|
|
|
11,308
|
|
Home equity
|
|
|
-
|
|
|
|
50
|
|
|
|
47
|
|
|
|
97
|
|
Other consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
2
|
|
Other real estate owned
|
|
|
-
|
|
|
|
9,225
|
|
|
|
-
|
|
|
|
9,225
|
|
Total assets measured at fair value on
a nonrecurring basis as of December 31, 2013
|
|
$
|
-
|
|
|
$
|
23,474
|
|
|
$
|
11,877
|
|
|
$
|
35,351
|
|
Loans
The Company does not record loans at fair value on a recurring basis, however, from time to time, a loan is considered impaired and an allowance for loan loss is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC Topic 310,
“Receivables.”
The fair value of impaired loans is estimated using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring a specific allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At March 31, 2014, substantially all of the totally impaired loans were evaluated based upon the fair value of the collateral. In accordance with ASC Topic 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3.
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 quoted market price, if one exists.
Quoted market prices, if available, are shown as estimates of fair value. Because no quoted market prices exist for a portion of the Company’s financial instruments, the fair value of such instruments has been derived based on management’s assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the net realizable value could be materially different from the estimates presented below. In addition, the estimates are only indicative of individual financial instrument values and should not be considered an indication of the fair value of the Company taken as a whole.
The following methods and assumptions were used to estimate the fair value of each category of financial instrument for which it is practicable to estimate value:
Cash due from banks and federal funds sold:
For cash and due from banks and federal funds sold the carrying amount approximates fair value.
Interest bearing deposits with other banks:
Values are estimated by discounting the future cash flows using the current rates at which similar deposits would be earning.
Investment securities:
For these instruments, fair values are based
upon quoted prices, if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.
Federal Reserve and Federal Home Loan Bank stock:
The carrying amount approximate the fair values at the reporting date.
Loans held for sale:
Fair values are at the carrying value (lower of cost or market) since such loans are typically committed to be sold (servicing released) at a profit.
Loans:
For variable rate loans that re-price on a scheduled basis, fair values are based on carrying values. The fair value of the remaining loans are estimated by discounting the estimated future cash flows using the current interest rate at which similar loans would be made to borrowers with similar credit ratings and for the same remaining term.
Bank owned life insurance:
The fair value of bank owned life insurance is the current cash surrender value, which is the carrying value.
Other earning assets:
The fair value of the annuity investments is the carrying amount at the reporting date.
Noninterest bearing deposits:
The fair value of these deposits is the amount payable on demand at the reporting date, since generally accepted accounting standards do not permit an assumption of core deposit value.
Interest bearing deposits:
The fair value of interest bearing transaction, savings, and money market deposits with no defined maturity is the amount payable on demand at the reporting date, since generally accepted accounting standards do not permit an assumption of core deposit value.
Certificates of deposit:
The fair value of certificates of deposit is estimated by discounting the future cash flows using the current rates at which similar deposits with remaining maturities would be accepted.
Customer repurchase agreements and federal funds purchased:
The carrying amount approximate the fair values at the reporting date.
Borrowings:
The carrying amount for variable rate borrowings approximate the fair values at the reporting date. The fair value of fixed rate FHLB advances and the subordinated notes are estimated by computing the discounted value of contractual cash flows payable at current interest rates for obligations with similar remaining terms. The fair value of variable rate FHLB advances is estimated to be carrying value since these liabilities are based on a spread to a current pricing index.
Off-balance sheet items:
Management has reviewed the unfunded portion of commitments to extend credit, as well as standby and other letters of credit, and has determined that the fair value of such instruments is equal to the fee, if any, collected and unamortized for the commitment made.
The estimated fair values of the Company’s financial instruments at March 31, 2014 and December 31, 2013 are as follows:
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical Assets or Liabilities
|
|
|
Significant Other Observable Inputs
|
|
|
Significant Unobservable Inputs
|
|
(dollars in thousands)
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
March 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
8,982
|
|
|
$
|
8,982
|
|
|
$
|
-
|
|
|
$
|
8,982
|
|
|
$
|
-
|
|
Federal funds sold
|
|
|
8,468
|
|
|
|
8,468
|
|
|
|
-
|
|
|
|
8,468
|
|
|
|
-
|
|
Interest bearing deposits with other banks
|
|
|
213,501
|
|
|
|
213,501
|
|
|
|
-
|
|
|
|
213,501
|
|
|
|
-
|
|
Investment securities
|
|
|
387,790
|
|
|
|
387,790
|
|
|
|
198
|
|
|
|
387,373
|
|
|
|
219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Reserve and Federal Home Loan Bank stock
|
|
|
10,599
|
|
|
|
10,599
|
|
|
|
-
|
|
|
|
10,599
|
|
|
|
-
|
|
Loans held for sale
|
|
|
21,862
|
|
|
|
21,862
|
|
|
|
-
|
|
|
|
21,862
|
|
|
|
-
|
|
Loans
|
|
|
3,063,975
|
|
|
|
3,097,497
|
|
|
|
-
|
|
|
|
11,186
|
|
|
|
3,086,311
|
|
Bank owned life insurance
|
|
|
40,052
|
|
|
|
40,052
|
|
|
|
-
|
|
|
|
40,052
|
|
|
|
-
|
|
Other earning assets
|
|
|
11,267
|
|
|
|
11,267
|
|
|
|
-
|
|
|
|
11,267
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing deposits
|
|
|
886,623
|
|
|
|
886,623
|
|
|
|
-
|
|
|
|
886,623
|
|
|
|
-
|
|
Interest bearing deposits
|
|
|
2,387,066
|
|
|
|
2,386,650
|
|
|
|
-
|
|
|
|
2,386,650
|
|
|
|
-
|
|
Borrowings
|
|
|
105,737
|
|
|
|
106,712
|
|
|
|
-
|
|
|
|
106,712
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
9,577
|
|
|
$
|
9,577
|
|
|
$
|
-
|
|
|
$
|
9,577
|
|
|
$
|
-
|
|
Federal funds sold
|
|
|
5,695
|
|
|
|
5,695
|
|
|
|
-
|
|
|
|
5,695
|
|
|
|
-
|
|
Interest bearing deposits with other banks
|
|
|
291,688
|
|
|
|
291,688
|
|
|
|
-
|
|
|
|
291,688
|
|
|
|
-
|
|
Investment securities
|
|
|
378,133
|
|
|
|
378,133
|
|
|
|
165
|
|
|
|
377,749
|
|
|
|
219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Reserve and Federal Home Loan Bank stock
|
|
|
11,272
|
|
|
|
11,272
|
|
|
|
-
|
|
|
|
11,272
|
|
|
|
-
|
|
Loans held for sale
|
|
|
42,030
|
|
|
|
42,030
|
|
|
|
-
|
|
|
|
42,030
|
|
|
|
-
|
|
Loans
|
|
|
2,945,158
|
|
|
|
2,979,180
|
|
|
|
-
|
|
|
|
14,249
|
|
|
|
2,964,931
|
|
Bank owned life insurance
|
|
|
39,738
|
|
|
|
39,738
|
|
|
|
-
|
|
|
|
39,738
|
|
|
|
-
|
|
Other earning assets
|
|
|
11,227
|
|
|
|
11,227
|
|
|
|
-
|
|
|
|
11,227
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing deposits
|
|
|
849,409
|
|
|
|
849,409
|
|
|
|
-
|
|
|
|
849,409
|
|
|
|
-
|
|
Interest bearing deposits
|
|
|
2,376,005
|
|
|
|
2,375,861
|
|
|
|
-
|
|
|
|
2,375,861
|
|
|
|
-
|
|
Borrowings
|
|
|
119,771
|
|
|
|
120,764
|
|
|
|
-
|
|
|
|
120,764
|
|
|
|
-
|
|
Note 9. Supplemental Executive Retirement Plan
In February 2013, the Compensation Committee authorized Supplemental Executive Retirement and Death Benefit Agreements (the “SERP Agreements”) with each of the Bank’s executive officers other than Mr. Paul, which upon the executive’s retirement, will provide for a stated monthly payment for such executive’s lifetime, subject to certain death benefits described below. The retirement benefit is computed as a percentage of each executive’s projected average base salary over the five years preceding retirement, assuming retirement at age 67. The SERP Agreements provide that (a) the benefits vest ratably over six years of service to the Bank, with the executive receiving credit for years of service prior to entering into the SERP Agreement (b) death, disability and change-in-control shall result in immediate vesting, and (c) the monthly amount will be reduced if retirement occurs earlier than age 67 for any reason other than death, disability or change-in-control. The SERP Agreements further provide for a death benefit in the event the retired executive dies prior to receiving 180 monthly installments, paid either in a lump sum payment or continued monthly installment payments, such that the executive’s beneficiary has received payment(s) sufficient to equate to a cumulative 180 monthly installments.
The SERP Agreements are unfunded arrangements maintained primarily to provide supplemental retirement benefits and comply with Section 409A of the Internal Revenue Code. The Bank has elected to finance the retirement benefits by purchasing fixed annuity contracts with three insurance carriers totaling $10.7 million that have been designed to provide a future source of funds for the lifetime retirement benefits of the SERP Agreements. The primary impetus for utilizing fixed annuities is a substantial savings in compensation expenses for the Bank as opposed to a traditional SERP Agreement. The annuity contracts accrued $41 thousand of income for the three months ended March 31, 2014, which is included in other noninterest income on the consolidated statement of operations. The cash surrender value of the annuity contracts is $11.3 million at March 31, 2014 and is included in other assets on the consolidated balance sheet. For the three months ended March 31, 2014, the Company recorded benefit expense accruals of $461 thousand for this post retirement benefit.
Upon death of an executive, the annuity contract related to such executive terminates. The Bank has purchased additional bank owned life insurance contracts, which would effectively fund payments (up to a 15 year certain amount) to the executives’ named beneficiaries.