XNAS:SASR Sandy Spring Bancorp Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the Quarterly Period Ended March 31, 2012

 

OR

 

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

 

For the transition period from to ____________

 

Commission File Number: 0-19065

 

SANDY SPRING BANCORP, INC.

 

(Exact name of registrant as specified in its charter)

 

  Maryland 52-1532952  
  (State of incorporation) (I.R.S. Employer Identification Number)  

 

17801 Georgia Avenue, Olney, Maryland 20832
(Address of principal executive office) (Zip Code)

 

301-774-6400

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.

Yes  x      No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  x      No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨   Smaller reporting company ¨

 

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

Yes  ¨      No x

 

The number of outstanding shares of common stock outstanding as of May 7, 2012.

 

Common stock, $1.00 par value – 24,148,626 shares

 

 
 

 

SANDY SPRING BANCORP, INC.

TABLE OF CONTENTS

 

    Page
PART I - FINANCIAL INFORMATION  
     
ITEM 1. FINANCIAL STATEMENTS 4
     
  Condensed Consolidated Statements of Condition - Unaudited at March 31, 2012 and December 31, 2011 4
     
  Condensed Consolidated Statements of Income - Unaudited for the Three Months Ended March 31, 2012 and 2011 5
     
  Condensed Consolidated Statements of Comprehensive Income – Unaudited for the Three Months Ended March 31, 2012 and 2011 6
     
  Condensed Consolidated Statements of Cash Flows – Unaudited for the Three Months Ended March 31, 2012 and 2011 7
     
  Condensed Consolidated Statements of Changes in Stockholders’ Equity – Unaudited for the Three Months Ended March 31, 2012 and 2011 8
     
  Notes to Condensed Consolidated Financial Statements 9
     
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 33
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 55
     
ITEM 4. CONTROLS AND PROCEDURES 55
     
PART II - OTHER INFORMATION  
     
ITEM 1. LEGAL PROCEEDINGS 55
     
ITEM 1A.  RISK FACTORS 55
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 55
     
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 55
     
ITEM 4. MINE SAFETY DISCLOSURES 56
     
ITEM 5. OTHER INFORMATION 56
     
ITEM 6. EXHIBITS  56
     
SIGNATURES 57

 

2
 

 

 

Forward-Looking Statements

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

3
 

 

Part I

Item 1. FINANCIAL STATEMENTS

Sandy spring bancorp, inc. and subsidiaries

CONDENSED Consolidated STATEMENTS OF CONDITION – UNAUDITED

 

   March 31,   December 31, 
(Dollars in thousands)  2012   2011 
Assets          
Cash and due from banks  $43,149   $49,832 
Federal funds sold   1,012    1,006 
Interest-bearing deposits with banks   58,144    21,476 
Cash and cash equivalents   102,305    72,314 
Residential mortgage loans held for sale (at fair value)   18,126    25,341 
Investments available-for-sale (at fair value)   878,365    951,301 
Investments held-to-maturity — fair value of $157,745 and $184,167 at March 31, 2012 and December 31, 2011, respectively   153,544    178,465 
Other equity securities   35,553    34,933 
Total loans and leases   2,271,392    2,239,692 
Less: allowance for loan and lease losses   (45,061)   (49,426)
Net loans and leases   2,226,331    2,190,266 
Premises and equipment, net   48,748    48,483 
Other real estate owned   4,834    4,431 
Accrued interest receivable   12,424    12,898 
Goodwill   76,816    76,816 
Other intangible assets, net   4,272    4,734 
Other assets   106,955    111,388 
Total assets  $3,668,273   $3,711,370 
           
Liabilities          
Noninterest-bearing deposits  $685,770   $650,377 
Interest-bearing deposits   1,995,305    2,006,143 
Total deposits   2,681,075    2,656,520 
Securities sold under retail repurchase agreements and federal funds purchased   73,130    143,613 
Advances from FHLB   405,321    405,408 
Subordinated debentures   35,000    35,000 
Accrued interest payable and other liabilities   21,830    24,720 
Total liabilities   3,216,356    3,265,261 
           
Stockholders' Equity          
Common stock — par value $1.00; shares authorized 50,000,000; shares issued and outstanding 24,143,985 and 24,091,042 at March 31, 2012 and December 31, 2011, respectively   24,144    24,091 
Additional paid in capital   177,949    177,828 
Retained earnings   236,986    230,942 
Accumulated other comprehensive income   12,838    13,248 
Total stockholders' equity   451,917    446,109 
Total liabilities and stockholders' equity  $3,668,273   $3,711,370 

 

The accompanying notes are an integral part of these statements

 

4
 

 

Sandy Spring Bancorp, Inc. and Subsidiaries

CONDENSED Consolidated Statements of IncomE – UNAUDITED

 

   Three Months Ended March 31, 
(Dollars in thousands, except per share data)  2012   2011 
Interest Income:          
Interest and fees on loans and leases  $27,129   $26,990 
Interest on loans held for sale   149    122 
Interest on deposits with banks   21    18 
Interest and dividends on investment securities:          
Taxable   4,943    5,440 
Exempt from federal income taxes   2,373    2,179 
Interest on federal funds sold   -    1 
Total interest income   34,615    34,750 
Interest Expense:          
Interest on deposits   2,013    2,913 
Interest on retail repurchase agreements and federal funds purchased   61    53 
Interest on advances from FHLB   3,587    3,551 
Interest on subordinated debt   249    223 
Total interest expense   5,910    6,740 
Net interest income   28,705    28,010 
Provision for loan and lease losses   664    1,515 
Net interest income after provision for loan and lease losses   28,041    26,495 
Non-interest Income:          
Investment securities gains   73    20 
Total other-than-temporary impairment ("OTTI") losses   (64)   (100)
Portion of OTTI losses recognized in other comprehensive income, before taxes   -    59 
Net OTTI recognized in earnings   (64)   (41)
Service charges on deposit accounts   2,200    2,252 
Mortgage banking activities   1,025    455 
Wealth management income   4,057    3,645 
Insurance agency commissions   1,202    1,180 
Income from bank owned life insurance   634    646 
Visa check fees   898    834 
Other income   949    1,001 
Total non-interest income   10,974    9,992 
Non-interest Expenses:          
Salaries and employee benefits   15,701    14,624 
Occupancy expense of premises   2,846    3,143 
Equipment expenses   1,190    1,142 
Marketing   495    485 
Outside data services   1,279    995 
FDIC insurance   652    1,044 
Amortization of intangible assets   461    461 
Other expenses   4,059    4,168 
Total non-interest expenses   26,683    26,062 
Income before income taxes   12,332    10,425 
Income tax expense   3,856    3,134 
Net income  $8,476   $7,291 
           
Net Income Per Share Amounts:          
Basic net income per share  $0.35   $0.30 
Diluted net income per share  $0.35   $0.30 
Dividends declared per share  $0.10   $0.08 

 

5
 

 

Sandy Spring Bancorp, Inc. and Subsidiaries

CONDENSED Consolidated Statements of OTHER COMPREHENSIVE INCOME - UNAUDITED

 

   Three Months Ended March 31, 
(In thousands)  2012   2011 
Net income  $8,476   $7,291 
Other comprehensive income:          
Investments available-for-sale:          
Net change in unrealized gains (losses) on investments available-for-sale   (1,103)   263 
Related income tax benefit (expense)   439    (105)
Net investment gains reclassified into earnings   73    20 
Related income tax expense   (29)   (8)
Net effect on other comprehensive income (loss) for the period   (620)   170 
           
Defined benefit pension plan:          
Recognition of unrealized gain   350    317 
Related income tax expense   (140)   (127)
Net effect on other comprehensive income for the period   210    190 
Total other comprehensive income (loss)   (410)   360 
Comprehensive income  $8,066   $7,651 

 

6
 

 

Sandy Spring Bancorp, Inc. and Subsidiaries

CONDENSED Consolidated Statements of Cash Flows - UNAUDITED

   Three Months Ended March 31, 
(Dollars in thousands)  2012   2011 
Operating activities:          
Net income  $8,476   $7,291 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   1,936    1,840 
Net OTTI recognized in earnings   64    41 
Provision for loan and lease losses   664    1,515 
Share based compensation expense   325    249 
Deferred income tax expense   1,641    1,286 
Origination of loans held for sale   (55,278)   (43,836)
Proceeds from sales of loans held for sale   63,474    56,485 
Gains on sales of loans held for sale   (981)   (824)
Loss on sales of other real estate owned   334    327 
Investment securities gains   (73)   (20)
Gains on sales of premises and equipment   (93)   (14)
Net (increase) decrease in accrued interest receivable   474    (323)
Net decrease in other assets   1,923    857 
Net increase (decrease) in accrued expenses and other liabilities   (2,104)   10,798 
Other – net   1,717    2,275 
Net cash provided by operating activities   22,499    37,947 
Investing activities:          
Purchases of other equity securities   (620)   - 
Purchases of investments held-to-maturity   (11,032)   (8,819)
Purchases of investments available-for-sale   (46,331)   (117,891)
Proceeds from sales of investment available-for-sale   28,519    - 
Proceeds from maturities, calls and principal payments of investments held-to-maturity   35,920    21,639 
Proceeds from maturities, calls and principal payments of investments available-for-sale   88,220    59,390 
Net (increase) decrease in loans and leases   (38,396)   362 
Proceeds from the sales of other real estate owned   1,110    1,669 
Expenditures for premises and equipment   (1,301)   (973)
Net cash provided by (used in) investing activities   56,089    (44,623)
Financing activities:          
Net increase in deposits   24,555    49,762 
Net decrease in retail repurchase agreements and federal funds purchased   (70,483)   (20,727)
Repayment of advances from FHLB   (87)   (87)
Redemption of stock warrant   -    (4,449)
Proceeds from issuance of common stock   (225)   (6)
Tax benefits associated with shared based compensation   74    - 
Dividends paid   (2,431)   (1,938)
Net cash provided by (used) in financing activities   (48,597)   22,555 
Net increase in cash and cash equivalents   29,991    15,879 
Cash and cash equivalents at beginning of period   72,314    63,117 
Cash and cash equivalents at end of period  $102,305   $78,996 
           
Supplemental Disclosures:          
Interest payments  $5,940   $6,784 
Income tax payments   1,356    2,210 
Transfers from loans to other real estate owned   1,667    1,089 

 

The accompanying notes are an integral part of these statements

 

7
 

 

Sandy Spring Bancorp, Inc. and Subsidiaries

CONDENSED Consolidated Statements of changes in stockholders’ equity - UNAUDITED

 

                       Accumulated     
               Additional       Other   Total 
   Preferred   Common       Paid-In   Retained   Comprehensive   Stockholders’ 
(Dollars in thousands, except per share data)  Stock   Stock   Warrants   Capital   Earnings   Income (Loss)   Equity 
Balances at January 1, 2012  $-   $24,091   $-   $177,828   $230,942   $13,248   $446,109 
Comprehensive Income:                                   
Net income   -    -    -    -    8,476    -    8,476 
Other comprehensive income, net of tax   -    -    -    -    -    (410)   (410)
Common stock dividends -  $0.10 per share   -    -    -    -    (2,432)   -    (2,432)
Stock compensation expense   -    -    -    399    -    -    399 
Common stock issued pursuant to:                                   
Employee stock purchase plan - 7,953 shares   -    8    -    113    -    -    121 
Restricted stock - 44,990 shares   -    45    -    (391)   -    -    (346)
Balances at March 31, 2012  $-   $24,144   $-   $177,949   $236,986   $12,838   $451,917 
                                    
Balances at January 1, 2011  $-   $24,047   $3,699   $177,344   $205,099   $(2,620)  $407,569 
Comprehensive Income:                                   
Net income   -    -    -    -    7,291    -    7,291 
Other comprehensive income, net of tax:   -    -    -    -    -    360    360 
Common stock dividends -  $0.08 per share   -    -    -    -    (1,938)   -    (1,938)
Stock compensation expense   -    -    -    249    -    -    249 
Stock warrant redemption   -    -    (3,699)   (750)   -    -    (4,449)
Common stock issued pursuant to:                                   
Stock option plan - 1,765 shares   -    2    -    19    -    -    21 
Employee stock purchase plan - 7,608 shares   -    8    -    116    -    -    124 
Restricted stock - 28,423 shares   -    28    -    (179)   -    -    (151)
Balances at March 31, 2011  $-   $24,085   $-   $176,799   $210,452   $(2,260)  $409,076 

 

The accompanying notes are an integral part of these statements

 

8
 

  

Sandy Spring Bancorp, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - UNAUDITED

 

Note 1 – Significant Accounting Policies

Nature of Operations

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

 

Basis of Presentation

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and prevailing practices within the financial services industry for interim financial information and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required for complete financial statements and prevailing practices within the banking industry. The following summary of significant accounting policies of the Company is presented to assist the reader in understanding the financial and other data presented in this report. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for any future periods or for the year ending December 31, 2012. In the opinion of management, all adjustments (comprising only normal recurring accruals) necessary for a fair presentation of the results of the interim periods have been included. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. The Company has evaluated subsequent events through the date of the issuance of its financial statements.

 

These statements should be read in conjunction with the financial statements and accompanying notes included in the Company’s 2011 Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on March 15, 2012. There have been no significant changes to the Company’s accounting policies as disclosed in the 2011 Annual Report on Form 10-K.

 

Principles of Consolidation

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

 

Use of Estimates

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

 

Cash Flows

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

 

9
 

 

Adopted Accounting Pronouncements

In June 2011, the FASB issued a standard that requires comprehensive income to be reported in either a single statement or two consecutive statements reporting net income and other comprehensive income. The guidance does not alter the items that are reported in other comprehensive income or require reclassification of items from other comprehensive income to net income. This guidance should be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company has opted to present comprehensive income in two consecutive statements. This guidance did not have any impact on the financial position, results of operations or cash flows of the Company as it only affects the presentation of the information in the financial statements.

 

The FASB issued a standard in April 2011 that removed from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee, as the criterion is not a determining factor of effective control. This guidance is effective for the first interim or annual period beginning on or after December 15, 2011. This guidance did not have a material impact on the financial position, results of operations or cash flows of the Company. 

 

In May 2011, the FASB issued guidance on fair value that applies to all entities that measure assets, liabilities or instruments classified in stockholders’ equity at fair value or provide fair value disclosures for items not recorded at fair value. The guidance clarifies how a principal market is determined, addresses the fair value measurement of instruments with offsetting market or counterparty credit risk and the concept of valuation premise and highest and best use, extends the prohibition of blockage factors to all three levels of the fair value hierarchy, and requires additional disclosures. This guidance is effective for interim and annual periods beginning after December 15, 2011. Differences in fair value measurement resulting from the application of the guidance will be recognized in income in the period of adoption as a change in estimate. Disclosure requirements will be recognized prospectively. Changes in valuation techniques and related inputs as a result of the application of the guidance in addition to an estimate of the total effect of the changes, if practicable, will be disclosed in the period of adoption. The application of this guidance did not have a significant impact on the financial position, results of operations or cash flows of the Company.

 

Note 2 – Investments

Investments available-for-sale

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

 

   At March 31, 2012   At December 31, 2011 
       Gross   Gross   Estimated       Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Fair   Amortized   Unrealized   Unrealized   Fair 
(In thousands)  Cost   Gains   Losses   Value   Cost   Gains   Losses   Value 
U.S. government agencies  $175,202   $1,843   $(213)  $176,832   $197,816   $2,436   $-   $200,252 
State and municipal   160,290    10,864    (4)   171,150    160,657    12,456    (2)   173,111 
Mortgage-backed   503,301    19,806    (24)   523,083    551,518    18,639    (13)   570,144 
Corporate debt   2,000    -    (3)   1,997    2,000    -    (22)   1,978 
Trust preferred   5,228    400    (425)   5,203    5,936    260    (480)   5,716 
Total debt securities   846,021    32,913    (669)   878,265    917,927    33,791    (517)   951,201 
Marketable equity securities   100    -    -    100    100    -    -    100 
Total investments available-for-sale  $846,121   $32,913   $(669)  $878,365   $918,027   $33,791   $(517)  $951,301 

 

Any unrealized losses in the U.S. government agencies, state and municipal, mortgage-backed or corporate debt investment securities at March 31, 2012 are the result of changes in interest rates and are not considered credit related. These declines are considered temporary in nature and will decline over time and recover as these securities approach maturity.

 

The mortgage-backed portfolio at March 31, 2012 is composed entirely of either the most senior tranches of GNMA collateralized mortgage obligations ($210.8 million), or GNMA, FNMA or FHLMC mortgage-backed securities ($312.3 million). The Company does not intend to sell these securities and has sufficient liquidity to hold these securities for an adequate period of time, which may be maturity, to allow for any anticipated recovery in fair value.

 

At March 31, 2012, the trust preferred portfolio consisted of one security backed by a single financial institution issuer and one pooled trust preferred security. The fair value of the single issue security was $3.4 million as determined using broker quotations. The pooled trust preferred security is backed by debt issued by banks and thrifts, which totals $2.2 million, with a fair value of $1.8 million. The fair value of this security was determined by a third party valuation specialist due to the limited trading activity for this security in the marketplace.

 

10
 

 

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

·Evaluation of the structural terms as established in the indenture;
·Detailed credit and structural evaluation for each piece of issuer collateral in the pool;
·Overall default (.32%), recovery and prepayment (2%)/amortization probabilities by issuers in the pool;
·Identification of adverse conditions specifically related to the security, industry and geographical area;
·Projection of estimated cash flows that incorporate default expectations and loss severities;
·Review of historical and implied volatility of the fair value of the security;
·Evaluation of credit risk concentrations;
·Evaluation of the length of time and the extent to which the fair value has been less than the amortized cost; and
·A discount rate of 12.7% was established using credit adjusted financial institution spreads for comparably rated institutions and a liquidity adjustment that considered the previously noted characteristics.

 

As a result of this evaluation, it was determined that the pooled trust preferred security incurred credit-related other-than-temporary impairment (“OTTI”) of $64 thousand, which was recognized in earnings for the quarter ended March 31, 2012. Non-credit related OTTI on this security, which is not expected to be sold and that the Company has the ability to hold until maturity, was $0.4 million for the quarter ended March 31, 2012. This non-credit related OTTI was recognized in other comprehensive income (“OCI”) at March 31, 2012.

 

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

 

·Default rates were developed based on the financial condition of the trust preferred issuers in the pool and the payment or deferral status. Conditional default rates were estimated based on the payment characteristics of the security and the financial condition of the issuers in the pool. Near term and future defaults are estimated using third party industry data in addition to a review of key financial ratios and other pertinent data on the financial stability of the underlying issuer;
·Loss severity is forecasted based on the type of impairment using research performed by third parties;
·The security contains one level of subordination below the senior tranche, with the senior tranche receiving the spread from the subordinate bonds. Given recent performance, it is not expected that the senior tranche will receive its full interest and principal at the bond’s maturity date;
·Credit ratings of the underlying issuers are reviewed in conjunction with the development of the default rates applied to determine the credit amounts related to the credit loss; and
·Potential prepayments are estimated based on terms and rates of the underlying trust preferred securities to determine the impact of excess spread on the credit enhancement, the removal of the strongest institutions from the underlying pool and any impact that prepayments might have on diversity and concentration.

 

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

 

(In thousands)  OTTI Losses 
Cumulative credit losses on investment securities, through December 31, 2011  $422 
Additions for credit losses not previously recognized   64 
Cumulative credit losses on investment securities, through March 31, 2012  $486 

 

11
 

 

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

 

   At March 31, 2012 
           Continuous Unrealized     
           Losses Existing for:     
   Number               Total 
   of       Less than   More than   Unrealized 
(Dollars in thousands)  securities   Fair Value   12 months   12 months   Losses 
U.S. government agencies   5   $38,903   $213   $-   $213 
State and municipal   1    393    4    -    4 
Mortgage-backed   2    2,221    24    -    24 
Corporate debt   1    1,997    3    -    3 
Trust preferred   2    1,815    -    425    425 
Total   11   $45,329   $244   $425   $669 

 

   At December 31, 2011 
           Continuous Unrealized     
           Losses Existing for:     
   Number               Total 
   of       Less than   More than   Unrealized 
(Dollars in thousands)  securities   Fair Value   12 months   12 months   Losses 
U.S. government agencies   1   $397   $2   $-   $2 
State and municipal   3    5,081    13    -    13 
Mortgage-backed   1    3,326    22    -    22 
Trust preferred   1    2,467    -    480    480 
Total   6   $11,271   $37   $480   $517 

 

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

   At March 31, 2012   At December 31, 2011 
       Estimated       Estimated 
   Amortized   Fair   Amortized   Fair 
(In thousands)  Cost   Value   Cost   Value 
Due in one year or less  $25,361   $25,592   $65,569   $65,972 
Due after one year through five years   62,916    64,369    62,993    64,656 
Due after five years through ten years   349,029    360,083    342,813    354,238 
Due after ten years   408,715    428,221    446,552    466,335 
Total debt securities available for sale  $846,021   $878,265   $917,927   $951,201 

 

At March 31, 2012 and December 31, 2011, investments available-for-sale with a book value of $238.4 million and $255.4 million, respectively, were pledged as collateral for certain government deposits and for other purposes as required or permitted by law. The outstanding balance of no single issuer, except for U.S. Agencies securities, exceeded ten percent of stockholders' equity at March 31, 2012 and December 31, 2011.

 

12
 

 

Investments held-to-maturity

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

 

   At March 31, 2012   At December 31, 2011 
       Gross   Gross   Estimated       Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Fair   Amortized   Unrealized   Unrealized   Fair 
(In thousands)  Cost   Gains   Losses   Value   Cost   Gains   Losses   Value 
U.S. government agencies  $34,986   $127   $-   $35,113   $54,983   $406   $-   $55,389 
State and municipal   118,171    4,362    (338)   122,195    123,075    5,244    (1)   128,318 
Mortgage-backed   387    50    -    437    407    53    -    460 
Total investments held-to-maturity  $153,544   $4,539   $(338)  $157,745   $178,465   $5,703   $(1)  $184,167 

 

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

 

   At March 31, 2012 
           Continuous Unrealized     
           Losses Existing for:     
   Number               Total 
   of       Less than   More than   Unrealized 
(Dollars in thousands)  securities   Fair Value   12 months   12 months   Losses 
State and municipal  13   $12,676   $338   $-   $338 
Total  13   $12,676   $338   $-   $338 

 

   At December 31, 2011 
           Continuous Unrealized     
           Losses Existing for:     
   Number               Total 
   of       Less than   More than   Unrealized 
(Dollars in thousands)  securities   Fair Value   12 months   12 months   Losses 
State and municipal   1   $541   $1   $-   $1 
Total   1   $541   $1   $-   $1 

 

The Company does not intend to sell these securities and has sufficient liquidity to hold these securities for an adequate period of time, which may be maturity, to allow for any anticipated recovery in fair value, and substantiates that the unrealized losses in the held-to-maturity portfolio are considered temporary in nature.

 

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

 

   At March 31, 2012   At December 31, 2011 
       Estimated       Estimated 
   Amortized   Fair   Amortized   Fair 
(In thousands)  Cost   Value   Cost   Value 
Due in one year or less  $12,485   $12,693   $18,860   $19,203 
Due after one year through five years   6,401    6,583    6,937    7,144 
Due after five years through ten years   79,081    81,261    98,428    101,008 
Due after ten years   55,577    57,208    54,240    56,812 
Total debt securities held-to-maturity  $153,544   $157,745   $178,465   $184,167 

 

13
 

 

At March 31, 2012 and December 31, 2011, investments held-to-maturity with a book value of $120.0 million and $58.7 million, respectively, were pledged as collateral for certain government deposits and for other purposes as required or permitted by law. The outstanding balance of no single issuer, except for U.S. Agency securities, exceeded ten percent of stockholders' equity at March 31, 2012 and December 31, 2011.

 

Equity securities

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

 

(In thousands)  March 31, 2012   December 31, 2011 
Federal Reserve Bank stock  $7,530   $7,530 
Federal Home Loan Bank of Atlanta stock   27,948    27,328 
Atlantic Central Bank stock   75    75 
Total equity securities  $35,553   $34,933 

 

Note 3 – Loans and Leases

Outstanding loan balances at March 31, 2012 and December 31, 2011 are net of unearned income including net deferred loan costs of $2.2 million and $2.0 million, respectively. The loan portfolio segment balances at the dates indicated are presented in the following table:

 

(In thousands)  March 31, 2012   December 31, 2011 
Residential real estate:          
Residential mortgage  $465,204   $448,662 
Residential construction   122,841    108,699 
Commercial real estate:          
Commercial owner occupied real estate   525,022    522,076 
Commercial investor real estate   392,626    371,948 
Commercial acquisition, development and construction   149,814    160,946 
Commercial Business   253,827    260,327 
Leases   5,843    6,954 
Consumer   356,215    360,080 
Total loans and leases  $2,271,392   $2,239,692 

 

Note 4 – CREDIT QUALITY ASSESSMENT

Allowance for Loan and Lease Losses

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

 

   Three Months Ended March 31, 
(In thousands)  2012   2011 
Balance at beginning of year  $49,426   $62,135 
Provision for loan and lease losses   664    1,515 
Loan and lease charge-offs   (5,298)   (5,198)
Loan and lease recoveries   269    466 
Net charge-offs   (5,029)   (4,732)
Balance at period end  $45,061   $58,918 

 

14
 

 

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

   For the Three Months Ended March 31, 2012 
       Commercial Real Estate           Residential Real Estate     
               Commercial                     
   Commercial   Commercial   Commercial   Owner           Residential   Residential     
(Dollars in thousands)  Business   AD&C   Investor R/E   Occupied R/E   Leasing   Consumer   Mortgage   Construction   Total 
Balance at beginning of year  $6,727   $6,664   $8,248   $7,329   $795   $4,873   $10,583   $4,207   $49,426 
Provision (credit)   (1,268)   254    3,081    (878)   (130)   (70)   340    (665)   664 
Charge-offs   (102)   (1,076)   (3,219)   -    (6)   (440)   (455)   -    (5,298)
Recoveries   141    -    -    -    1    92    35    -    269 
Net charge-offs   39    (1,076)   (3,219)   -    (5)   (348)   (420)   -    (5,029)
Balance at end of period  $5,498   $5,842   $8,110   $6,451   $660   $4,455   $10,503   $3,542   $45,061 
                                              
Total loans and leases  $253,827   $149,814   $392,626   $525,022   $5,843   $356,215   $465,204   $122,841   $2,271,392 
Allowance for loans and leases to total loans and leases ratio   2.17%   3.90%   2.07%   1.23%   11.30%   1.25%   2.26%   2.88%   1.98%
                                              
Balance of loans specifically evaluated for impairment  $9,060   $14,303   $13,893   $18,033    na.   $34   $5,782   $750   $61,855 
Allowance for loans specifically evaluated for impairment  $948   $-   $389   $1,255    na.    na.   $1,712   $163   $4,467 
Specific allowance to specific loans ratio   10.46%   0.00%   2.80%   6.96%   na.    na.    29.61%   21.73%   7.22%
                                              
Balance of loans collectively evaluated  $244,767   $135,511   $378,733   $506,989   $5,843   $356,181   $459,422   $122,091   $2,209,537 
Allowance for loans collectively evaluated  $4,550   $5,842   $7,721   $5,196   $660   $4,455   $8,791   $3,379   $40,594 
Collective allowance to collective loans ratio   1.86%   4.31%   2.04%   1.02%   11.30%   1.25%   1.91%   2.77%   1.84%

  

   For the Year Ended December 31, 2011 
       Commercial Real Estate           Residential Real Estate     
               Commercial                     
   Commercial   Commercial   Commercial   Owner           Residential   Residential     
(Dollars in thousands)  Business   AD&C   Investor R/E   Occupied R/E   Leasing   Consumer   Mortgage   Construction   Total 
Balance at beginning of year  $12,870   $18,241   $4,793   $8,177   $667   $4,231   $10,396   $2,760   $62,135 
Provision (credit)   (4,252)   (11,035)   4,320    (361)   1,182    3,173    5,144    3,257    1,428 
Charge-offs   (2,565)   (1,780)   (868)   (487)   (1,072)   (2,740)   (5,178)   (1,815)   (16,505)
Recoveries   674    1,238    3    -    18    209    221    5    2,368 
Net charge-offs   (1,891)   (542)   (865)   (487)   (1,054)   (2,531)   (4,957)   (1,810)   (14,137)
Balance at end of year  $6,727   $6,664   $8,248   $7,329   $795   $4,873   $10,583   $4,207   $49,426 
                                              
Total loans and leases  $260,327   $160,946   $371,948   $522,076   $6,954   $360,080   $448,662   $108,699   $2,239,692 
Allowance for loans and leases to total loans and leases ratio   2.58%   4.14%   2.22%   1.40%   11.43%   1.35%   2.36%   3.87%   2.21%
                                              
Balance of loans specifically evaluated for impairment  $9,092   $18,701   $16,964   $15,416    na.   $35   $5,108   $2,259   $67,575 
Allowance for loans specifically evaluated for impairment  $1,037   $7   $3,380   $1,772    na.    na.   $769   $826   $7,791 
Specific allowance to specific loans ratio   11.41%   0.04%   19.92%   11.49%   na.    na.    15.05%   36.56%   11.53%
                                              
Balance of loans collectively evaluated  $251,235   $142,245   $354,984   $506,660   $6,954   $360,045   $443,554   $106,440   $2,172,117 
Allowance for loans collectively evaluated  $5,690   $6,657   $4,868   $5,557   $795   $4,873   $9,814   $3,381   $41,635 
Collective allowance to collective loans ratio   2.26%   4.68%   1.37%   1.10%   11.43%   1.35%   2.21%   3.18%   1.92%

 

15
 

 

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

 

   March 31,   December 31, 
(In thousands)  2012   2011 
Impaired loans with a valuation allowance  $17,927   $36,742 
Impaired loans without a valuation allowance   43,928    30,833 
Total impaired loans  $61,855   $67,575 
           
Allowance for loan and lease losses related to impaired loans  $4,467   $7,791 
Allowance for loan and lease losses related to loans collectively evaluated   40,594    41,635 
Total allowance for loan and lease losses  $45,061   $49,426 
           
Average impaired loans for the period  $64,715   $68,377 
Contractual interest income due on impaired loans during the period  $1,332   $4,973 
Interest income on impaired loans recognized on a cash basis  $511   $1,523 
Interest income on impaired loans recognized on an accrual basis  $116   $325 

 

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

 

   At March 31, 2012 
       Commercial Real Estate       Total Recorded 
               Commercial   All   Investment in 
       Commercial   Commercial   Owner   Other   Impaired 
(In thousands)  Commercial   AD&C   Investor R/E   Occupied R/E   Loans   Loans 
Impaired loans with a specific allowance                              
Non-accruing  $1,019   $-   $1,392   $5,935   $1,092   $9,438 
Restructured accruing   1,553    -    -    704    3,463    5,720 
Restructured non-accruing   199    -    182    2,007    381    2,769 
Balance  $2,771   $-   $1,574   $8,646   $4,936   $17,927 
                               
Allowance  $948   $-   $389   $1,255   $1,875   $4,467 
                               
Impaired loans without a specific allowance                              
Non-accruing  $3,314   $5,770   $11,268   $6,257   $-   $26,609 
Restructured accruing   965    -    -    1,034    828    2,827 
Restructured non-accruing   2,010    8,533    1,051    2,096    802    14,492 
Balance  $6,289   $14,303   $12,319   $9,387   $1,630   $43,928 
                               
Total impaired loans                              
Non-accruing  $4,333   $5,770   $12,660   $12,192   $1,092   $36,047 
Restructured accruing   2,518    -    -    1,738    4,291    8,547 
Restructured non-accruing   2,209    8,533    1,233    4,103    1,183    17,261 
Balance  $9,060   $14,303   $13,893   $18,033   $6,566   $61,855 
                               
Unpaid principal balance in total impaired loans  $11,425   $33,792   $17,559   $19,648   $-   $82,424 

 

16
 

 

   For the Three Months Ended March 31, 2012 
       Commercial Real Estate       Total Recorded
               Commercial   All   Investment in 
       Commercial   Commercial   Owner   Other   Impaired 
(In thousands)  Commercial   AD&C   Investor R/E   Occupied R/E   Loans   Loans 
Average impaired loans for the period  $9,076   $16,502   $15,429   $16,725   $6,984   $64,715 
Contractual interest income due on impaired loans during the period  $141   $350   $311   $358   $172    
Interest income on impaired loans recognized on a cash basis  $70   $95   $22   $232   $92    
Interest income on impaired loans recognized on an accrual basis  $38   $-   $-   $29   $49    

  

   At December 31, 2011 
       Commercial Real Estate       Total Recorded 
               Commercial   All   Investment in 
       Commercial   Commercial   Owner   Other   Impaired 
(In thousands)  Commercial   AD&C   Investor R/E   Occupied R/E   Loans   Loans 
Impaired loans with a specific allowance                              
Non-accruing  $1,110   $-   $13,812   $4,091   $1,093   $20,106 
Restructured accruing   1,346    -    -    707    3,475    5,528 
Restructured non-accruing   307    6,504    628    3,282    387    11,108 
Balance  $2,763   $6,504   $14,440   $8,080   $4,955   $36,742 
                               
Allowance  $1,037   $7   $3,380   $1,772   $1,595   $7,791 
                               
Impaired loans without a specific allowance                              
Non-accruing  $3,416   $7,798   $1,883   $6,464   $800   $20,361 
Restructured accruing   520    -    -    -    833    1,353 
Restructured non-accruing   2,393    4,399    641    872    814    9,119 
Balance  $6,329   $12,197   $2,524   $7,336   $2,447   $30,833 
                               
Total impaired loans                              
Non-accruing  $4,526   $7,798   $15,695   $10,555   $1,893   $40,467 
Restructured accruing   1,866    -    -    707    4,308    6,881 
Restructured non-accruing   2,700    10,903    1,269    4,154    1,200    20,227 
Balance  $9,092   $18,701   $16,964   $15,416   $7,402   $67,575 
                               
Unpaid principal balance in total impaired loans  $11,303   $37,442   $17,389   $16,466   $-   $82,600 

 

   For the Year Ended December 31, 2011 
       Commercial Real Estate       Total Recorded 
               Commercial   All   Investment in 
       Commercial   Commercial   Owner   Other   Impaired 
(In thousands)  Commercial   AD&C   Investor R/E   Occupied R/E   Loans   Loans 
Average impaired loans for the period  $9,800   $27,005   $11,409   $13,942   $6,221   $68,377 
Contractual interest income due on impaired loans during the period  $583   $1,743   $830   $800   $1,017    
Interest income on impaired loans recognized on a cash basis  $267   $487   $93   $471   $205    
Interest income on impaired loans recognized on an accrual basis  $114   $-   $-   $45   $166    

 

17
 

 

Credit Quality

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

   March 31, 2012 
       Commercial Real Estate           Residential Real Estate     
               Commercial                     
       Commercial   Commercial   Owner           Residential   Residential     
(In thousands)  Commercial   AD&C   Investor R/E   Occupied R/E   Leasing   Consumer   Mortgage   Construction   Total 
Non-performing loans and assets:                                             
Non-accrual loans and leases  $6,542   $14,303   $13,893   $16,295   $858   $1,700   $4,818   $4,929   $63,338 
Loans and leases 90 days past due   40    -    -    -    -    89    167    -    296 
Restructured loans and leases   2,518    -    -    1,738    -    34    4,257    -    8,547 
Total non-performing loans and leases   9,100    14,303    13,893    18,033    858    1,823    9,242    4,929    72,181 
Other real estate owned   70    -    462    -    -    -    3,422    880    4,834 
Total non-performing assets  $9,170   $14,303   $14,355   $18,033   $858   $1,823   $12,664   $5,809   $77,015 

 

   December 31, 2011 
       Commercial Real Estate           Residential Real Estate     
               Commercial                     
       Commercial   Commercial   Owner           Residential   Residential     
(In thousands)  Commercial   AD&C   Investor R/E   Occupied R/E   Leasing   Consumer   Mortgage   Construction   Total 
Non-performing loans and assets:                                             
Non-accrual loans and leases  $7,226   $18,702   $16,963   $14,709   $853   $1,786   $5,722   $5,719   $71,680 
Loans and leases 90 days past due   -    -    -    -    2    165    167    243    577 
Restructured loans and leases   1,866    -    -    707    -    35    3,579    694    6,881 
Total non-performing loans and leases   9,092    18,702    16,963    15,416    855    1,986    9,468    6,656    79,138 
Other real estate owned   100    -    462    273    -    -    3,395    201    4,431 
Total non-performing assets  $9,192   $18,702   $17,425   $15,689   $855   $1,986   $12,863   $6,857   $83,569 

 

   March 31, 2012 
       Commercial Real Estate           Residential Real Estate     
               Commercial                     
       Commercial   Commercial   Owner           Residential   Residential     
(In thousands)  Commercial   AD&C   Investor R/E   Occupied R/E   Leasing   Consumer   Mortgage   Construction   Total 
Past due loans and leases                                             
31-60 days  $1,989   $342   $8,338   $795   $9   $941   $5,065   $640   $18,119 
61-90 days   113    -    1,954    -    2    8    1,446    -    3,523 
> 90 days   40    -    -    -    -    89    167    -    296 
Total past due   2,142    342    10,292    795    11    1,038    6,678    640    21,938 
Non-accrual loans and leases   6,542    14,303    13,893    16,295    858    1,700    4,818    4,929    63,338 
Current loans   245,143    135,169    368,441    507,932    4,974    353,477    453,708    117,272    2,186,116 
Total loans and leases  $253,827   $149,814   $392,626   $525,022   $5,843   $356,215   $465,204   $122,841   $2,271,392 

 

   December 31, 2011 
       Commercial Real Estate           Residential Real Estate     
               Commercial                     
       Commercial   Commercial   Owner           Residential   Residential     
(In thousands)  Commercial   AD&C   Investor R/E   Occupied R/E   Leasing   Consumer   Mortgage   Construction   Total 
Past due loans and leases                                             
31-60 days  $1,467   $717   $10,723   $1,677   $7   $467   $5,246   $1,732   $22,036 
61-90 days   62    -    -    2,537    -    20    1,639    -    4,258 
> 90 days   -    -    -    -    2    165    167    243    577 
Total past due   1,529    717    10,723    4,214    9    652    7,052    1,975    26,871 
Non-accrual loans and leases   7,226    18,702    16,963    14,709    853    1,786    5,722    5,719    71,680 
Current loans   251,572    141,527    344,262    503,153    6,092    357,642    435,888    101,005    2,141,141 
Total loans and leases  $260,327   $160,946   $371,948   $522,076   $6,954   $360,080   $448,662   $108,699   $2,239,692 

 

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

   March 31, 2012 
       Commercial Real Estate     
               Commercial     
       Commercial   Commercial   Owner     
(In thousands)  Commercial   AD&C   Investor R/E   Occupied R/E   Total 
Risk Free to Marginally Acceptable  $214,694   $130,479   $351,098   $470,103   $1,166,374 
Special Mention   11,309    1,059    11,539    29,983    53,890 
Substandard   26,740    18,276    29,989    24,936    99,941 
Doubtful   1,084    -    -    -    1,084 
Total  $253,827   $149,814   $392,626   $525,022   $1,321,289 

 

   December 31, 2011 
       Commercial Real Estate     
               Commercial     
       Commercial   Commercial   Owner     
(In thousands)  Commercial   AD&C   Investor R/E   Occupied R/E   Total 
Risk Free to Marginally Acceptable  $225,048   $137,181   $331,095   $469,309   $1,162,633 
Special Mention   8,551    2,207    9,592    22,103    42,453 
Substandard   25,720    21,558    31,261    30,664    109,203 
Doubtful   1,008    -    -    -    1,008 
Total  $260,327   $160,946   $371,948   $522,076   $1,315,297 

 

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

   March 31, 2012 
           Residential Real Estate     
           Residential   Residential     
(In thousands)  Leasing   Consumer   Mortgage   Construction   Total 
Performing  $4,985   $354,392   $455,962   $117,912   $933,252 
Non-performing:                         
90 days past due   -    89    167    -    256 
Non-accruing   858    1,700    4,818    4,929    12,305 
Restructured loans and leases   -    34    4,257    -    4,291 
Total  $5,843   $356,215   $465,204   $122,841   $950,104 

 

   December 31, 2011 
           Residential Real Estate     
           Residential   Residential     
(In thousands)  Leasing   Consumer   Mortgage   Construction   Total 
Performing  $6,099   $358,094   $439,194   $102,043   $905,430 
Non-performing:                       - 
90 days past due   2    165    167    243    577 
Non-accruing   853    1,786    5,722    5,719    14,080 
Restructured loans and leases   -    35    3,579    694    4,308 
Total  $6,954   $360,080   $448,662   $108,699   $924,395 

 

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During the three months ended March 31, 2012, the Company restructured $1.9 million in loans. Modifications consisted principally of interest rate concessions. No modifications resulted in the reduction of the recorded investment in the associated loan balances. Restructured loans are subject to periodic credit reviews to determine the necessity and adequacy of a specific loan loss allowance based on the collectability of the recorded investment in the restructured loan. Loans restructured during 2012 have specific reserves of $64 thousand at March 31, 2012. For the year ended December 31, 2011, the Company restructured $10.3 million in loans. Modifications consisted principally of interest rate concessions and no modifications resulted in the reduction of the recorded investment in the associated loan balances. Loans restructured during 2011 had specific reserves of 1.9 million at December 31, 2011.

 

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

 

   For the Three Months Ended March 31, 2012 
        Commercial Real Estate          
                   Commercial    All      
         Commercial    Commercial    Owner    Other      
(In thousands)   Commercial    AD&C    Investor R/E    Occupied R/E    Loans    Total 
Troubled debt restructurings                              
    Restructured accruing  $760   $-   $-   $1,033   $-   $1,793 
    Restructured non-accruing   150    -    -    -    -    150 
Balance  $910   $-   $-   $1,033   $-   $1,943 
                               
Specific allowance  $64   $-   $-   $-   $-   $64 
                               
Restructured and subsequently defaulted  $-   $-   $-   $-   $-   $- 

 

 

   For the Year Ended December 31, 2011 
        Commercial Real Estate           
                   Commercial    All      
         Commercial    Commercial    Owner    Other      
(In thousands)   Commercial    AD&C    Investor R/E    Occupied R/E    Loans    Total 
Troubled debt restructurings                              
    Restructured accruing  $1,696   $-   $-   $-   $3,590   $5,286 
    Restructured non-accruing   469    -    1,269    2,475    763    4,976 
Balance  $2,165   $-   $1,269   $2,475   $4,353   $10,262 
                               
Specific allowance  $254   $-   $93   $509   $1,027   $1,883 
                               
Restructured and subsequently defaulted  $-   $-   $-   $-   $509   $509 

  

Other Real Estate Owned

Other real estate owned totaled $4.8 million and $4.4 million at March 31, 2012 and December 31, 2011.

 

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Note 5 – Goodwill and Other Intangible Assets

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

 

   At March 31, 2012   Weighted   At December 31, 2011   Weighted 
   Gross       Net   Average   Gross       Net   Average 
   Carrying   Accumulated   Carrying   Remaining   Carrying   Accumulated   Carrying   Remaining 
(Dollars in thousands)  Amount   Amortization   Amount   Life   Amount   Amortization   Amount   Life 
Amortized intangible assets:                                        
Core deposit intangibles  $9,716   $(6,923)  $2,793    2.0 years   $9,716   $(6,575)  $3,141    2.3 years 
Other identifiable intangibles   8,301    (6,822)   1,479    3.2 years    8,301    (6,708)   1,593    3.5 years 
Total amortized intangible assets  $18,017   $(13,745)  $4,272        $18,017   $(13,283)  $4,734      
                                         
Goodwill  $76,816        $76,816        $76,816        $76,816      

 

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

 

(In thousands)  Amount 
2013  $1,778 
2014   752 
2015   303 
2016   56 
Total amortizing intangibles  $2,889 

 

Note 6 – Deposits

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

 

   March 31,   December 31, 
(In thousands)  2012   2011 
Noninterest-bearing deposits  $685,770   $650,377 
Interest-bearing deposits:          
Demand   374,680    367,682 
Money market savings   845,067    858,732 
Regular savings   208,646    195,408 
Time deposits of less than $100,000   307,459    316,058 
Time deposits of $100,000 or more   259,453    268,263 
Total interest-bearing deposits   1,995,305    2,006,143 
Total deposits  $2,681,075   $2,656,520 

 

Note 7 – Stockholders’ Equity

The Company approved a stock repurchase program in August 2011 that permits the repurchase of up to 3% of the Company’s outstanding shares of common stock or approximately 730,000 shares. Repurchases, which will be conducted through open market purchases or privately negotiated transactions, will be made depending on market conditions and other factors. The Company repurchased 23,592 shares of common stock at an average price of $14.16 per share during the year ended December 31, 2011. No shares have been repurchased during 2012.

 

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Note 8 – Share Based Compensation

At March 31, 2012, the Company had two share based compensation plans in existence, the 1999 Stock Option Plan (expired but having outstanding options that may still be exercised) and the 2005 Omnibus Stock Plan, which is described below.

 

The Company’s 2005 Omnibus Stock Plan (“Omnibus Plan”) provides for the granting of non-qualifying stock options to the Company’s directors, and incentive and non-qualifying stock options, stock appreciation rights and restricted stock grants to selected key employees on a periodic basis at the discretion of the board. The Omnibus Plan authorizes the issuance of up to 1,800,000 shares of common stock of which 949,852 are available for issuance at March 31, 2012, has a term of ten years, and is administered by a committee of at least three directors appointed by the board of directors. Options granted under the plan have an exercise price which may not be less than 100% of the fair market value of the common stock on the date of the grant and must be exercised within seven to ten years from the date of grant. The exercise price of stock options must be paid for in full in cash or shares of common stock, or a combination of both. The Stock Option Committee has the discretion when making a grant of stock options to impose restrictions on the shares to be purchased upon the exercise of such options. Options granted under the expired 1999 Stock Option Plan remain outstanding until exercised or they expire. The Company generally issues authorized but previously unissued shares to satisfy option exercises.

 

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

   Three Months Ended March 31, 
   2012   2011 
Dividend yield   2.17%   1.72%
Weighted average expected volatility   50.90%   46.87%
Weighted average risk-free interest rate   1.14%   2.58%
Weighted average expected lives (in years)   5.35    5.70 
Weighted average grant-date fair value  $7.85   $7.76 

 

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

 

Compensation expense is recognized on a straight-line basis over the vesting period of the respective stock option or restricted stock grant. The Company recognized compensation expense of $0.3 million and $0.2 million for the three months ended March 31, 2012 and 2011, respectively, related to the awards of stock options and restricted stock grants. No stock options were exercised in the three months ended March 31, 2012 and 2011, respectively, resulting in no intrinsic value for stock options exercised during these periods. The total of unrecognized compensation cost related to stock options was approximately $0.4 million as of March 31, 2012. That cost is expected to be recognized over a weighted average period of approximately 2.2 years. The total of unrecognized compensation cost related to restricted stock was approximately $4.0 million as of March 31, 2012. That cost is expected to be recognized over a weighted average period of approximately 3.7 years. The fair value of the options vested during the three months ended March 31, 2012 and 2011, was $0.2 million and $0.9 million, respectively.

 

In the first quarter of 2012, 21,633 stock options were granted, subject to a three year vesting schedule with one third of the options vesting each year on the anniversary date of the grant. Additionally, 83,493 shares of restricted stock were granted, subject to a five year vesting schedule with one fifth of the shares vesting each year on the grant date anniversary.

 

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

           Weighted     
   Number   Weighted   Average   Aggregate 
   of   Average   Contractual   Intrinsic 
   Common   Exercise   Remaining   Value 
   Shares   Share Price   Life(Years)   (in thousands) 
Balance at January 1, 2012   635,197   $31.42        $406 
Granted   21,633   $19.02        $- 
Exercised   -   $-        $- 
Forfeited or expired   (7,752)  $31.05        $5 
Balance at March 31, 2012   649,078   $31.01    2.5   $459 
                     
Exercisable at March 31, 2012   591,781   $32.27    2.2   $422 
                     
Weighted average fair value of options granted during the year       $7.85           

 

A summary of the activity for the Company’s non-vested options for the period indicated is presented in the following table:

 

       Weighted 
       Average 
   Number   Grant-Date 
(In dollars, except share data):  of Shares   Fair Value 
Non-vested options at January 1, 2012   79,640   $6.33 
Granted   21,633   $7.85 
Vested   (42,147)  $5.44 
Forfeited or expired   (1,829)  $6.26 
Non-vested options at March 31, 2012   57,297   $7.56 

 

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

       Weighted 
       Average 
   Number   Grant-Date 
(In dollars, except share data):  of Shares   Fair Value 
Restricted stock  at January 1, 2012   206,313   $16.37 
Granted   83,493   $19.02 
Vested   (57,829)  $16.12 
Forfeited or expired   (2,537)  $16.32 
Restricted stock at March 31, 2012   229,440   $17.40 

 

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

Defined Benefit Pension Plan

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

 

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

 

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

   Three Months Ended March 31, 
(In thousands)  2012   2011 
Interest cost on projected benefit obligation  $388   $386 
Expected return on plan assets   (327)   (265)
Recognized net actuarial loss   350    317 
Net periodic benefit cost  $411   $438 

 

Contributions

The decision as to whether or not to make a plan contribution and the amount of any such contribution is dependent on a number of factors. Such factors include the investment performance of the plan assets in the current economy and, since the plan is currently frozen, the remaining investment horizon of the plan. Given these uncertainties, management continues to monitor the funding level of the pension plan and may make contributions as necessary during 2012.

 

Note 10 – Net Income per Common Share

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

   Three Months Ended March 31, 
(Dollars and amounts in thousands, except per share data)  2012   2011 
Net income  $8,476   $7,291 
           
Basic:          
Basic weighted average EPS shares   24,098    24,053 
           
Basic net income per share  $0.35   $0.30 
           
Diluted:          
Basic weighted average EPS shares   24,098    24,053 
Dilutive common stock equivalents   83    63 
Dilutive EPS shares   24,181    24,116 
           
Diluted net income per share  $0.35   $0.30 
           
Anti-dilutive shares   641    679 

 

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NOTE 11 – OTHER COMPREHENSIVE INCOME (LOSS)

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

 

(In thousands)

  Unrealized Gains
(Losses) on
Investments
Available-for-Sale
  

 

 

Defined Benefit

Pension Plan

  

 

 

 

Total

 
Balance at January 1, 2012  $20,006   $(6,758)  $13,248 
Period change, net of tax   (620)   210    (410)
Balance at March 31, 2012  $19,386   $(6,548)  $12,838 

 

(In thousands)  Unrealized Gains
(Losses) on
Investments
Available-for-Sale
  

 

Defined Benefit

Pension Plan

  

 

 

Total

 
Balance at January 1, 2011  $3,764   $(6,384)  $(2,620)
Period change, net of tax   170    190    360 
Balance at March 31, 2011  $3,934   $(6,194)  $(2,260)

  

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

The Company has entered into interest rate swaps (“swaps”) to facilitate customer transactions and meet their financing needs. These swaps qualify as derivatives, but are not designated as hedging instruments. Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty or customer owes the Company, and results in credit risk to the Company. When the fair value of a derivative instrument contract is negative, the Company owes the customer or counterparty and therefore, has no credit risk. The notional value of commercial loan swaps outstanding was $53.0 million with a fair value of $1.4 million as of March 31, 2012 compared to $54 million with a fair value of $1.5 million as of December 31, 2011. The offsetting nature of the swaps results in a neutral effect on the Company’s operations. Fair values of the swaps are carried as both gross assets and gross liabilities in the condensed consolidated statements of condition. The associated net gains and losses on the swaps are recorded in other non-interest income.

 

Note 13 – Fair Value

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

 

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

 

Basis of Fair Value Measurement:

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

 

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

 

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

 

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

 

Assets and Liabilities

Mortgage loans held for sale

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

 

Investments available-for-sale

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

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

 

State and municipal securities

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

 

Trust preferred securities

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

 

Interest rate swap agreements

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

 

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Assets Measured at Fair Value on a Recurring Basis

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

   At March 31, 2012 

 

 

 

(In thousands)

  Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  

 

Significant Other

Observable Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

  

 

 

 

Total

 
Assets                    
Residential mortgage loans held for sale  $-   $18,126   $-   $18,126 
Investments available-for-sale:                    
U.S. government agencies   -    176,832    -    176,832 
State and municipal   -    171,150    -    171,150 
Mortgage-backed   -    523,083    -    523,083 
Corporate debt