Consolidated Average Balances, Interest Yields And Rates (Unaudited)
|
|
Three Months Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Yield/Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Yield/Rate
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits with other banks and other short-term investments
|
|
$
|
346,409
|
|
|
$
|
209
|
|
|
|
0.24
|
%
|
|
$
|
218,990
|
|
|
$
|
137
|
|
|
|
0.25
|
%
|
Loans held for sale (1)
|
|
|
179,476
|
|
|
|
1,485
|
|
|
|
3.31
|
%
|
|
|
120,098
|
|
|
|
1,071
|
|
|
|
3.57
|
%
|
Loans (1) (2)
|
|
|
2,480,862
|
|
|
|
34,539
|
|
|
|
5.65
|
%
|
|
|
2,086,511
|
|
|
|
29,653
|
|
|
|
5.72
|
%
|
Investment securities available for sale (2)
|
|
|
316,752
|
|
|
|
1,696
|
|
|
|
2.17
|
%
|
|
|
340,025
|
|
|
|
1,694
|
|
|
|
2.00
|
%
|
Federal funds sold
|
|
|
8,431
|
|
|
|
4
|
|
|
|
0.19
|
%
|
|
|
19,123
|
|
|
|
14
|
|
|
|
0.29
|
%
|
Total interest earning assets
|
|
|
3,331,930
|
|
|
|
37,933
|
|
|
|
4.62
|
%
|
|
|
2,784,747
|
|
|
|
32,569
|
|
|
|
4.70
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest earning assets
|
|
|
84,383
|
|
|
|
|
|
|
|
|
|
|
|
75,935
|
|
|
|
|
|
|
|
|
|
Less: allowance for credit losses
|
|
|
37,951
|
|
|
|
|
|
|
|
|
|
|
|
29,989
|
|
|
|
|
|
|
|
|
|
Total noninterest earning assets
|
|
|
46,432
|
|
|
|
|
|
|
|
|
|
|
|
45,946
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
3,378,362
|
|
|
|
|
|
|
|
|
|
|
$
|
2,830,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing transaction
|
|
$
|
104,798
|
|
|
$
|
83
|
|
|
|
0.32
|
%
|
|
$
|
76,845
|
|
|
$
|
71
|
|
|
|
0.37
|
%
|
Savings and money market
|
|
|
1,421,035
|
|
|
|
1,526
|
|
|
|
0.44
|
%
|
|
|
1,089,626
|
|
|
|
1,672
|
|
|
|
0.62
|
%
|
Time deposits
|
|
|
524,515
|
|
|
|
1,331
|
|
|
|
1.03
|
%
|
|
|
538,542
|
|
|
|
1,726
|
|
|
|
1.29
|
%
|
Total interest bearing deposits
|
|
|
2,050,348
|
|
|
|
2,940
|
|
|
|
0.58
|
%
|
|
|
1,705,013
|
|
|
|
3,469
|
|
|
|
0.82
|
%
|
Customer repurchase agreements
|
|
|
96,015
|
|
|
|
69
|
|
|
|
0.29
|
%
|
|
|
103,927
|
|
|
|
96
|
|
|
|
0.37
|
%
|
Long-term borrowings
|
|
|
39,300
|
|
|
|
415
|
|
|
|
4.22
|
%
|
|
|
49,300
|
|
|
|
534
|
|
|
|
4.29
|
%
|
Total interest bearing liabilities
|
|
|
2,185,663
|
|
|
|
3,424
|
|
|
|
0.64
|
%
|
|
|
1,858,240
|
|
|
|
4,099
|
|
|
|
0.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand
|
|
|
813,957
|
|
|
|
|
|
|
|
|
|
|
|
688,400
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
18,883
|
|
|
|
|
|
|
|
|
|
|
|
9,130
|
|
|
|
|
|
|
|
|
|
Total noninterest bearing liabilities
|
|
|
832,840
|
|
|
|
|
|
|
|
|
|
|
|
697,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
359,859
|
|
|
|
|
|
|
|
|
|
|
|
274,923
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$
|
3,378,362
|
|
|
|
|
|
|
|
|
|
|
$
|
2,830,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
34,509
|
|
|
|
|
|
|
|
|
|
|
$
|
28,470
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.98
|
%
|
|
|
|
|
|
|
|
|
|
|
3.81
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
4.20
|
%
|
|
|
|
|
|
|
|
|
|
|
4.11
|
%
|
(1)
|
Loans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled $1.9 million and $1.2 million
for the three months ended March 31, 2013 and 2012, respectively.
|
(2)
|
Interest and fees on loans and investments exclude tax equivalent adjustments.
|
Provision for Credit Losses
The provision for credit losses represents the amount of expense charged to current earnings to fund the allowance for credit losses. The amount of the allowance for credit losses is based on many factors which reflect management’s assessment of the risk in the loan portfolio. Those factors include historical losses, economic conditions and trends, the value and adequacy of collateral, volume and mix of the portfolio, performance of the portfolio, and internal loan processes of the Company and Bank.
Management has developed a comprehensive analytical process to monitor the adequacy of the allowance for credit losses. This process and guidelines were developed utilizing, among other factors, the guidance from federal banking regulatory agencies. The results of this process, in combination with conclusions of the Bank’s outside loan review consultant, support management’s assessment as to the adequacy of the allowance at the balance sheet date. Please refer to the discussion under the caption “Critical Accounting Policies” for an overview of the methodology management employs on a quarterly basis to assess the adequacy of the allowance and the provisions charged to expense.
During the first three months of 2013, the allowance for credit losses increased $1.3 million, reflecting $3.4 million in provision for credit losses and $2.0 million in net charge-offs during the period. The provision for credit losses was $3.4 million for the three months ended March 31, 2013 as compared to $4.0 million for the three months ended March 31, 2012. At March 31, 2013, the allowance for credit losses represented 1.52% of loans outstanding, compared to 1.50% at December 31, 2012 and 1.46% at March 31, 2012. The lower provisioning in the first quarter of 2013, as compared to the first quarter of 2012, is due to a combination of lower loan growth, and changes in loan mix, offset somewhat by higher net charge-offs. Net charge-offs of $2.0 million represented 0.33% of average loans, excluding loans held for sale, in the first three months of 2013, as compared to $1.7 million or 0.34% of average loans, excluding loans held for sale, for the same period of 2012.
As part of its comprehensive loan review process, the Bank’s Board of Directors and Loan Committee or Credit Review Committee carefully evaluate loans which are past-due 30 days or more. The Committees make a thorough assessment of the conditions and circumstances surrounding each delinquent loan. The Bank’s loan policy requires that loans be placed on nonaccrual if they are ninety days past-due, unless they are well secured and in the process of collection. Additionally, Credit Administration specifically analyzes the status of development and construction projects, sales activities and utilization of interest reserves in order to carefully and prudently assess potential increased levels of risk requiring additional reserves.
The maintenance of a high quality loan portfolio, with an adequate allowance for possible credit losses, will continue to be a primary management objective for the Company.
The following table sets forth activity in the allowance for credit losses for the periods indicated.
|
|
Three Months Ended
March 31,
|
|
(dollars in thousands)
|
|
2013
|
|
|
2012
|
|
Balance at beginning of year
|
|
$
|
37,492
|
|
|
$
|
29,653
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1,184
|
|
|
|
773
|
|
Investment - commercial real estate
|
|
|
109
|
|
|
|
291
|
|
Owner occupied - commercial real estate
|
|
|
-
|
|
|
|
-
|
|
Real estate mortgage - residential
|
|
|
-
|
|
|
|
300
|
|
Construction - commercial and residential
|
|
|
719
|
|
|
|
240
|
|
Construction - C&I (owner occupied)
|
|
|
-
|
|
|
|
-
|
|
Home equity
|
|
|
29
|
|
|
|
244
|
|
Other consumer
|
|
|
42
|
|
|
|
5
|
|
Total charge-offs
|
|
|
2,083
|
|
|
|
1,853
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
26
|
|
|
|
7
|
|
Investment - commercial real estate
|
|
|
-
|
|
|
|
2
|
|
Owner occupied - commercial real estate
|
|
|
-
|
|
|
|
-
|
|
Real estate mortgage - residential
|
|
|
-
|
|
|
|
-
|
|
Construction - commercial and residential
|
|
|
6
|
|
|
|
94
|
|
Construction - C&I (owner occupied)
|
|
|
-
|
|
|
|
-
|
|
Home equity
|
|
|
-
|
|
|
|
1
|
|
Other consumer
|
|
|
5
|
|
|
|
1
|
|
Total recoveries
|
|
|
37
|
|
|
|
105
|
|
Net charge-offs
|
|
|
2,046
|
|
|
|
1,748
|
|
|
|
|
|
|
|
|
|
|
Additions charged to operations
|
|
|
3,365
|
|
|
|
3,970
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
38,811
|
|
|
$
|
31,875
|
|
|
|
|
|
|
|
|
|
|
Annualized ratio of net charge-offs during the period to average loans outstanding during the period
|
|
|
0.33
|
%
|
|
|
0.34
|
%
|
The following table reflects the allocation of the allowance for credit losses at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future losses or charge-offs and does not restrict the use of the allowance to absorb losses in any category.
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
March 31, 2012
|
|
(dollars in thousands)
|
|
Amount
|
|
|
|
%(1)
|
|
|
Amount
|
|
|
|
%(1)
|
|
|
Amount
|
|
|
|
%(1)
|
|
Commercial
|
|
$
|
11,075
|
|
|
|
23
|
%
|
|
$
|
9,412
|
|
|
|
22
|
%
|
|
$
|
8,537
|
|
|
|
23
|
%
|
Investment - commercial real estate
|
|
|
9,007
|
|
|
|
36
|
%
|
|
|
9,148
|
|
|
|
37
|
%
|
|
|
8,145
|
|
|
|
38
|
%
|
Owner occupied - commercial real estate
|
|
|
2,804
|
|
|
|
12
|
%
|
|
|
2,781
|
|
|
|
12
|
%
|
|
|
2,146
|
|
|
|
13
|
%
|
Real estate mortgage - residential
|
|
|
877
|
|
|
|
3
|
%
|
|
|
659
|
|
|
|
3
|
%
|
|
|
-
|
|
|
|
2
|
%
|
Construction - commercial and residential
|
|
|
12,176
|
|
|
|
21
|
%
|
|
|
12,671
|
|
|
|
21
|
%
|
|
|
10,941
|
|
|
|
19
|
%
|
Construction - C&I (owner occupied)
|
|
|
769
|
|
|
|
1
|
%
|
|
|
720
|
|
|
|
1
|
%
|
|
|
719
|
|
|
|
1
|
%
|
Home equity
|
|
|
1,752
|
|
|
|
4
|
%
|
|
|
1,730
|
|
|
|
4
|
%
|
|
|
1,329
|
|
|
|
4
|
%
|
Other consumer
|
|
|
351
|
|
|
|
-
|
|
|
|
371
|
|
|
|
-
|
|
|
|
58
|
|
|
|
-
|
|
Unallocated
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total loans
|
|
$
|
38,811
|
|
|
|
100
|
%
|
|
$
|
37,492
|
|
|
|
100
|
%
|
|
$
|
31,875
|
|
|
|
100
|
%
|
(1) Represents the percent of loans in each category to total loans.
As shown in the table below, the Company’s level of nonperforming assets, which are comprised of loans delinquent 90 days or more, nonaccrual loans, which includes the nonperforming portion of troubled debt restructurings (“TDRs”) and other real estate owned, totaled $37.4 million at March 31, 2013, representing 1.12% of total assets, as compared to $36.0 million of nonperforming assets, or 1.06% of total assets, at December 31, 2012 and $39.7 million of nonperforming assets, or 1.41% of total assets, at March 31, 2012. The Company had no accruing loans 90 days or more past due at March 31, 2013, December 31, 2012 or March 31, 2012. Management remains attentive to early signs of deterioration in borrowers’ financial conditions and to taking the appropriate action to mitigate risk. Furthermore, the Company is diligent in placing loans on nonaccrual status and believes, based on its loan portfolio risk analysis, that its allowance for credit losses, at 1.52% of total loans at March 31, 2013, is adequate to absorb potential credit losses within the loan portfolio at that date.
Included in nonperforming assets are loans that the Company considers impaired. Impaired loans are defined as those which we believe it is probable that we will not collect all amounts due according to the contractual terms of the loan agreement, as well as those loans whose terms have been modified in a troubled debt restructuring ("TDR") which have not shown a period of performance as required under applicable accounting standards. Valuation allowances for those loans determined to be impaired are evaluated in accordance with ASC Topic 310—“
Receivables,
” and updated quarterly. For collateral dependent impaired loans, the carrying amount of the loan is determined by current appraised value less estimated costs to sell the underlying collateral, which may be adjusted downward under certain circumstances for actual events and/or changes in market conditions. For example, current average actual selling prices less average actual closing costs on an impaired multi-unit real estate project may indicate the need for an adjustment in the appraised valuation of the project, which in turn could increase the associated ASC Topic 310 specific reserve for the loan. Generally, all appraisals associated with impaired loans are updated on a not less than annual basis.
Loans are considered to have been modified in a TDR when, due to a borrower's financial difficulties, the Company makes unilateral concessions to the borrower that it would not otherwise consider. Concessions could include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Alternatively, management, from time-to-time and in the ordinary course of business, implements renewals, modifications, extensions, and/or changes in terms of loans to borrowers who have the ability to repay on reasonable market-based terms, as circumstances may warrant. Such modifications are not considered to be TDRs, as the accommodation of a borrower's request does not rise to the level of a concession and/or the borrower is not experiencing financial difficulty. For example: (1) adverse weather conditions may create a short term cash flow issue for an otherwise profitable retail business which suggests a temporary interest only period on an amortizing loan; (2) there may be delays in absorption on a real estate project which reasonably suggests extension of the loan maturity at market terms; or (3) there may be maturing loans to borrowers with demonstrated repayment ability who are not in a position at the time of maturity to obtain alternate long-term financing. The most common change in terms provided by the Company is an extension of an interest only term. The determination of whether a restructured loan is a TDR requires consideration of all of the facts and circumstances surrounding the change in terms, and the exercise of prudent business judgment. The Company had eight TDRs totaling $16.5 million at March 31, 2013, of which five loans totaling approximately $14.8 million were performing TDRs. During the first quarter of 2013, there was one default totaling approximately $495 thousand on a restructured loan, as compared to the first three months of 2012, during which there were two TDRs totaling approximately $1.2 million defaulted on their restructured loans. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual. The one nonperforming TDR was reclassified to nonperforming loans as of March 31, 2013. 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, 2013 and March 31, 2012.
Total nonperforming loans amounted to $28.2 million at March 31, 2013 (1.11% of total loans), compared to $30.7 million at December 31, 2012 (1.23% of total loans) and $36.7 million at March 31, 2012 (1.68% of total loans). The decrease in the ratio of nonperforming loans to total loans at March 31, 2013 as compared to March 31, 2012, is due to both a decrease in the amount of nonperforming loans and to an increase in the total loan portfolio.
Included in nonperforming assets at March 31, 2013 were $9.2 million of OREO, consisting of thirteen foreclosed properties. The Company had eleven foreclosed properties with a net carrying value of $5.3 million at December 31, 2012 and ten foreclosed properties with a net carrying value of $3.0 million at March 31, 2012. OREO properties are carried at the lower of cost or appraised value less estimated costs to sell. It is the Company's policy to obtain third party appraisals prior to foreclosure, and to obtain updated third party appraisals on OREO properties not less frequently than annually. Generally, the Company would obtain updated appraisals or evaluations where it has reason to believe, based upon market indications (such as comparable sales, legitimate offers below carrying value, broker indications and similar factors), that the current appraisal does not accurately reflect current value. During the first three months of 2013, there were no sales of OREO property.
The majority of the increase in OREO at March 31, 2013, is due to the migration from nonperforming loans.
The following table shows the amounts of nonperforming assets at the dates indicated.
|
|
March 31,
|
|
|
December 31, 2012
|
|
(dollars in thousands)
|
|
2013
|
|
|
2012
|
|
|
2012
|
|
Nonaccrual Loans:
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
4,039
|
|
|
$
|
3,565
|
|
|
$
|
4,799
|
|
Investment - commercial real estate
|
|
|
3,269
|
|
|
|
7,013
|
|
|
|
3,458
|
|
Owner occupied - commercial real estate
|
|
|
2,368
|
|
|
|
277
|
|
|
|
2,578
|
|
Real estate mortgage - residential
|
|
|
691
|
|
|
|
731
|
|
|
|
699
|
|
Construction - commercial and residential
|
|
|
17,318
|
|
|
|
24,591
|
|
|
|
18,594
|
|
Construction - C&I (owner occupied)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Home equity
|
|
|
481
|
|
|
|
530
|
|
|
|
513
|
|
Other consumer
|
|
|
-
|
|
|
|
8
|
|
|
|
43
|
|
Accrual loans-past due 90 days:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Investment - commercial real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total nonperforming loans (1)
|
|
|
28,166
|
|
|
|
36,715
|
|
|
|
30,684
|
|
Other real estate owned
|
|
|
9,199
|
|
|
|
3,014
|
|
|
|
5,299
|
|
Total nonperforming assets
|
|
$
|
37,365
|
|
|
$
|
39,729
|
|
|
$
|
35,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coverage ratio, allowance for credit losses to total nonperforming loans
|
|
|
137.80
|
%
|
|
|
86.82
|
%
|
|
|
122.19
|
%
|
Ratio of nonperforming loans to total loans
|
|
|
1.11
|
%
|
|
|
1.68
|
%
|
|
|
1.23
|
%
|
Ratio of nonperforming assets to total assets
|
|
|
1.12
|
%
|
|
|
1.41
|
%
|
|
|
1.06
|
%
|
(1)
|
Excludes performing TDRs totaling $14.8 million at March 31, 2013, $15.3 million at December 31, 2012 and
$11.4 million at March 31, 2012.
|
Significant variation in the amount of nonperforming loans may occur from period to period because the amount of nonperforming loans depends largely on the condition of a relatively small number of individual credits and borrowers relative to the total loan portfolio.
At March 31, 2013, there were $30.4 million of performing loans considered potential problem loans, defined as loans which are not included in the 90 day past due, nonaccrual or restructured categories, but for which known information about possible credit problems causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms which may in the future result in disclosure in the past due, nonaccrual or restructured loan categories. The $30.4 million in potential problem loans at March 31, 2013 compared to $42.4 million at December 31, 2012, and $12.9 million at March 31, 2012. The Company has taken a conservative posture with respect to risk rating its loan portfolio. Based upon their status as potential problem loans, these loans receive heightened scrutiny and ongoing intensive risk management. Additionally, the Company's loan loss allowance methodology incorporates increased reserve factors for certain loans considered potential problem loans as compared to the general portfolio. See “Provision for Credit Losses” for a description of the allowance methodology.
Total noninterest income includes service charges on deposits, gain on sale of loans, gain on sale of investment securities, income from bank owned life insurance (“BOLI”) and other income.
Total noninterest income for the three months ended March 31, 2013 increased to $8.1 million from $6.0 million for the three months ended March 31, 2012, a 35% increase. This increase was due primarily to an increase of $1.5 million in gains on sales of residential mortgage loans in the first quarter of 2013 as compared to the first quarter of 2012, resulting primarily from higher volumes of residential mortgage refinancing activity. Other income increased $416 thousand in the first quarter of 2013 as compared to the first quarter of 2012, a 65% increase due substantially to higher loan fee income. Investment securities gains amounted to $23 thousand for the first quarter of 2013, as compared to investment gains of $153 thousand for the first quarter of 2012. Excluding investment securities gains, total noninterest income was $8.1 million for the first quarter of 2013, as compared to $5.9 million for the first quarter of 2012, an increase of 38%.
For the three months ended March 31, 2013, service charges on deposit accounts increased $306 thousand, an increase of 31% from the same three month period in 2012. The increase for the three month period was due primarily to growth in the number of accounts and fees collected related to surety bonds purchased to provide additional coverage to certain depositors following the expiration of unlimited noninterest bearing deposit insurance coverage.
The Company originates residential mortgage loans on a pre-sold basis, servicing released. Sales of these mortgage loans yielded gains of $5.6 million for the three months ended March 31, 2013 compared to $3.9 million in the same period in 2012, due to the 2012 expansion of the residential mortgage origination and sales division and to higher refinancing volume due to lower market interest rates. Loans sold are subject to repurchase in circumstances where documentation is deficient or the underlying loan becomes delinquent or pays off within a specified period following loan funding and sale. The Bank considers these potential recourse provisions to be a minimal risk, but has established a reserve under generally accepted accounting principles for possible repurchases. There were no repurchases due to fraud by the borrower during the three months ended March 31, 2013. The reserve amounted to $223 thousand at March 31, 2013 and is included in other liabilities on the Consolidated Balance Sheets. The Bank does not originate “sub-prime” loans and has no exposure to this market segment.
The Company is an originator of SBA loans and its current practice is to sell the insured portion of those loans at a premium. Income from this source was $7 thousand and $258 thousand for the three months ended March 31, 2013 and 2012, respectively. Activity in SBA loan sales to secondary markets can vary widely from quarter to quarter.
Other income totaled $1.1 million for the three months ended March 31, 2013 as compared to $644 thousand for the same period in 2012, an increase of 65%. ATM fees increased from $216 thousand for the three months ended March 31, 2012 to $236 thousand for the same period in 2013, a 10% increase. SBA servicing fees decreased from $68 thousand for the three months ended March 31, 2012 to $25 thousand for the same period in 2013, a 63% decrease. Noninterest loan fees increased from $256 thousand for the three months ended March 31, 2012 to $690 thousand for the same period in 2013, a 170% increase. Other noninterest fee income was $109 thousand for the three months ended March 31, 2013 compared to $105 thousand for the same period in 2012, a 2% increase.
Total noninterest expense consists of salaries and employee benefits, premises and equipment expenses, marketing and advertising, data processing, legal, accounting and professional fees, FDIC insurance and other expenses.
Total noninterest expenses totaled $20.7 million for the three months ended March 31, 2013, as compared to $18.6 million for the three months ended March 31, 2012, a 12% increase.
Salaries and employee benefits were $11.2 million for the three months ended March 31, 2013, as compared to $10.4 million for 2012, a 7% increase. Cost increases for salaries and benefits were $776 thousand, due to staffing increases primarily as a result of growth since March 31, 2012 in residential lending, as well as additional commercial lending and bank administration personnel, merit and benefit cost increases, and increases in incentive pay. At March 31, 2013, the Company’s full time equivalent staff numbered 380, as compared to 393 at December 31, 2012 and 354 at March 31, 2012.
Premises and equipment expenses amounted to $2.8 million for the three months ended March 31, 2013 as compared to $2.5 million for the same period in 2012, a 12% increase. The increase in expense was due to the cost of two new branch offices, normal increases in leasing costs and the acceleration of amortization for leasehold improvements. Additionally, for the three months ended March 31, 2013 and 2012, the Company recognized $20 thousand and $24 thousand of sublease revenue, respectively. The sublease revenue is a direct offset of premises and equipment expenses.
Marketing and advertising expenses increased from $286 thousand for the three months ended March 31, 2012 to $347 thousand for the same period in 2013, a 21% increase. The primary reasons for the increase was due to additional advertising expenses incurred in 2013 for general branding purposes, such as online advertisements, as well as increased print advertising for residential mortgage lending and other business lines.
Data processing expenses increased $283 thousand, or 23%, from $1.3 million for the three months ended March 31, 2012 to $1.5 million in the same period in 2013. The increase in expense for the three month period was due to system enhancements and expanded customer transaction costs.
Legal, accounting and professional fees decreased from $1.1 million for the three months ended March 31, 2012 to $893 thousand in the same period in 2013, a 19% decrease. The decrease in expense was primarily due to the decline in collection costs related to the resolution of problem loans.
FDIC insurance premiums were $582 thousand for the three months ended March 31, 2013, as compared to $489 thousand in 2012, a 19% increase. The increase is due to the increase in average assets which is a key driver in calculating the amount of insurance premiums.
For the three months ended March 31, 2013, other expenses amounted to $3.3 million as compared to $2.5 million for the same period in 2012, an increase of 34%. The major components of cost in this category include regulatory assessments, deposit fees, OREO expenses and other losses. The increase for the three month period ended March 31, 2013 compared to the same period in 2012, was primarily due to $533 thousand of other losses related to establishing a contingency reserve and $195 thousand of expense related to surety bonds purchased to provide additional coverage to certain fiduciary depositors following the expiration of unlimited noninterest bearing deposit insurance coverage.
The Company’s ratio of income tax expense to pre-tax income (“effective tax rate”) increased to 37.6% for the three months ended March 31, 2013 as compared to 36.1% for the same period in 2012. The higher effective tax rate for the three months ended March 31, 2013 relates to a higher marginal tax rate resulting from a higher level of taxable income relative to income exempt from taxation.
FINANCIAL CONDITION
At March 31, 2013, total assets were $3.32 billion, compared to $2.82 billion at March 31, 2012, an 18% increase. As compared to December 31, 2012, total assets at March 31, 2013 decreased by $85 million, a 3% decrease. Total loans (excluding loans held for sale) were $2.55 billion at March 31, 2013 compared to $2.19 billion at March 31, 2012, a 17% increase. As compared to December 31, 2012, total loans at March 31, 2013 increased by $55 million, a 2% increase. Total deposits were $2.81 billion at March 31, 2013, compared to deposits of $2.37 billion at March 31, 2012, a 19% increase. As compared to December 31, 2012, total deposits at March 31, 2013 decreased by $84 million, a 3% decrease, resulting from the loss of one trustee relationship due to the expiration of unlimited deposit insurance after December 31, 2012. Loans held for sale amounted to $132.7 million at March 31, 2013 as compared to $87.5 million at March 31, 2012, a 52% increase. As compared to December 31, 2012 loans held for sale decreased by $94 million, a 42% decrease. The investment portfolio totaled $318.4 million at March 31, 2013, an 8% decrease from the $345.0 million balance at March 31, 2012. As compared to December 31, 2012, the investment portfolio at March 31, 2013 increased by $18.6 million, a 6% increase. Total borrowed funds (excluding customer repurchase agreements) were $39.3 million at March 31, 2013 compared to $49.3 million at March 31, 2012, a 20% decrease due to the early payoff of Federal Home Loan Bank advances. As compared to December 31, 2012, total borrowed funds at March 31, 2013 remained constant at $39.3 million. Total shareholders’ equity increased to $361.9 million at March 31, 2013, compared to $276.0 million and $350.0 million at March 31, 2012 and December 31, 2012, respectively, reflecting capital raising activities during 2012 and increased retained earnings.
Loans, net of amortized deferred fees and costs, at March 31, 2013, December 31, 2012 and March 31, 2012 by major category are summarized below.
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
March 31, 2012
|
|
(dollars in thousands)
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Commercial
|
|
$
|
579,618
|
|
|
|
23
|
%
|
|
$
|
545,070
|
|
|
|
22
|
%
|
|
$
|
492,824
|
|
|
|
23
|
%
|
Investment - commercial real estate (1)
|
|
|
910,829
|
|
|
|
36
|
%
|
|
|
914,638
|
|
|
|
37
|
%
|
|
|
829,984
|
|
|
|
38
|
%
|
Owner occupied - commercial real estate
|
|
|
303,561
|
|
|
|
12
|
%
|
|
|
297,857
|
|
|
|
12
|
%
|
|
|
275,723
|
|
|
|
13
|
%
|
Real estate mortgage - residential
|
|
|
69,256
|
|
|
|
3
|
%
|
|
|
61,871
|
|
|
|
3
|
%
|
|
|
43,057
|
|
|
|
2
|
%
|
Construction - commercial and residential (1)
|
|
|
538,071
|
|
|
|
21
|
%
|
|
|
533,722
|
|
|
|
21
|
%
|
|
|
417,346
|
|
|
|
19
|
%
|
Construction - C&I (owner occupied) (1)
|
|
|
34,002
|
|
|
|
1
|
%
|
|
|
28,808
|
|
|
|
1
|
%
|
|
|
27,412
|
|
|
|
1
|
%
|
Home equity
|
|
|
108,570
|
|
|
|
4
|
%
|
|
|
106,844
|
|
|
|
4
|
%
|
|
|
95,437
|
|
|
|
4
|
%
|
Other consumer
|
|
|
4,117
|
|
|
|
-
|
|
|
|
4,285
|
|
|
|
-
|
|
|
|
5,157
|
|
|
|
-
|
|
Total loans
|
|
|
2,548,024
|
|
|
|
100
|
%
|
|
|
2,493,095
|
|
|
|
100
|
%
|
|
|
2,186,940
|
|
|
|
100
|
%
|
Less: Allowance for Credit Losses
|
|
|
(38,811
|
)
|
|
|
|
|
|
|
(37,492
|
)
|
|
|
|
|
|
|
(31,875
|
)
|
|
|
|
|
Net loans
|
|
$
|
2,509,213
|
|
|
|
|
|
|
$
|
2,455,603
|
|
|
|
|
|
|
$
|
2,155,065
|
|
|
|
|
|
(1) Includes loans for land acquisition and development.
In its lending activities, the Company seeks to develop and expand relationships with clients whose businesses and individual banking needs will grow with the Bank. Superior customer service, local decision making, and accelerated turnaround time from application to closing have been significant factors in growing the loan portfolio, and meeting the lending needs in the markets served, while maintaining sound asset quality.
Loans outstanding reached $2.55 billion at March 31, 2013, an increase of $55 million or 2% as compared to $2.50 billion at December 31, 2012, and increased $361 million or 17% as compared to $2.19 billion at March 31, 2012. Competition for quality loans remains significant in the market. The loan growth in the first quarter of 2013 was predominantly in the Commercial segment of the portfolio. Commercial real estate in the Bank’s market area has remained solid, with values generally stable to increasing. Well located Multi-family properties in a number of sub-markets within the Bank’s market area are experiencing stable to declining vacancy rates. Construction loans increased year over year as demand for new construction loans has increased, and the Bank is selectively evaluating projects.
The Bank has a significant concentration in real estate in its loan portfolio, with 3% residential mortgages, 13%owner occupied commercial mortgages and construction loans, and 57% investment commercial real estate. Real estate also serves as collateral for loans made for other purposes, resulting in 80% of loans being secured by real estate.
Deposits and Other Borrowings
The principal sources of funds for the Bank are core deposits, consisting of demand deposits, NOW accounts, money market accounts and savings accounts. Additionally, the Bank obtains certificates of deposits from the local market areas surrounding the
Bank’s offices. The deposit base includes transaction accounts, time and savings accounts and accounts which customers use for cash management and which provide the Bank with a source of fee income and cross-marketing opportunities, as well as an attractive source of lower cost funds. To meet funding needs during periods of high loan demand and seasonal variations in core deposits, the Bank utilizes alternative funding sources such as secured borrowings from the FHLB, federal funds purchased lines of credit from correspondent banks and brokered deposits from regional and national brokerage firms and Promontory Interfinancial Network, LLC.
For the three months ended March 31, 2013, noninterest bearing deposits decreased $125 million as compared to December 31, 2012, while interest bearing deposits increased by $41 million during the same period. As earlier noted, a large noninterest bearing trustee deposit relationship (which amounted to approximately $130 million) was withdrawn in the quarter ended March 31, 2013, related directly to expiration of unlimited deposit insurance after December 31, 2012. Average total deposits for the three months of 2013 were $2.86 billion, as compared to $2.39 billion for the same period in 2012, a 20% increase.
From time to time, when appropriate in order to fund strong loan demand, the Bank accepts brokered time deposits, generally in denominations of less than $100 thousand, from a regional brokerage firm, and other national brokerage networks, including the Promontory Interfinancial Network, LLC. Additionally, the Bank participates in the Certificates of Deposit Account Registry Service (“CDARS”) and the Insured Cash Sweep product (“ICS”), which provides for reciprocal (“two-way”) transactions among banks facilitated by the Promontory Interfinancial Network, LLC for the purpose of maximizing FDIC insurance. These reciprocal CDARS and ICS funds are classified as brokered deposits, although bank regulators have recognized that these reciprocal deposits have many characteristics of core deposits. At March 31, 2013, total deposits included $448.8 million of brokered deposits (excluding the CDARS and ICS two-way), which represented 16% of total deposits. At December 31, 2012, total deposits (excluding the CDARS and ICS two-way) included $474.2 million of brokered deposits, which represented 16% of total deposits. The CDARS and ICS two-way component represented $85.2 million, or 3% of total deposits and $92.5 million or 3% of total deposits at March 31, 2013 and December 31, 2012, respectively. These sources are believed by the Company to represent a reliable and cost efficient alternative funding source for the Bank.
At March 31, 2013, the Company had $756.2 million in noninterest bearing demand deposits, representing 27% of total deposits. This compared to $881.4 million of these deposits at December 31, 2012 or 30% of total deposits. These deposits are primarily business checking accounts on which the payment of interest was prohibited by regulations of the Federal Reserve. Since July 2011, banks are no longer prohibited from paying interest on demand deposits account, including those from businesses. To date, the Bank has elected not to pay interest on business checking accounts, nor is the payment of such interest a prevalent practice in the Bank’s market area at present. It is not clear over the long-term what effect the elimination of this prohibition will have on the Bank’s interest expense, allocation of deposits, deposit pricing, loan pricing, net interest margin, ability to compete, ability to establish and maintain customer relationships, or profitability. Payment of interest on these deposits could have a significant negative impact on the Company’s net interest income and net interest margin, net income, and the return on assets and equity, although no such effect is currently anticipated.
As an enhancement to the basic noninterest bearing demand deposit account, the Bank offers a sweep account, or “customer repurchase agreement,” allowing qualifying businesses to earn interest on short-term excess funds which are not suited for either a certificate of deposit or a money market account. The balances in these accounts were $92.7 million at March 31, 2013 compared to $101.3 million at December 31, 2012. Customer repurchase agreements are not deposits and are not insured by the FDIC, but are collateralized by U.S. government agency securities and / or U.S. agency backed mortgage backed securities. These accounts are particularly suitable to businesses with significant fluctuation in the levels of cash flows. Attorney and title company escrow accounts are an example of accounts which can benefit from this product, as are customers who may require collateral for deposits in excess of FDIC insurance limits but do not qualify for other pledging arrangements. This program requires the Bank to maintain a sufficient investment securities level to accommodate the fluctuations in balances which may occur in these accounts.
The Company had no outstanding balances under its federal funds purchase lines of credit provided by correspondent banks at March 31, 2013 and December 31, 2012. The Bank had $30.0 million of borrowings outstanding under its credit facility from the FHLB at March 31, 2013 and December 31, 2012. Outstanding FHLB advances are secured by collateral consisting of a blanket lien on qualifying loans in the Bank’s residential and commercial mortgage and home equity loan portfolios.
The Company has a credit facility with a regional bank, secured by a portion of the stock of the Bank, pursuant to which the Company may borrow, on a revolving basis, up to $40 million for working capital purposes, to finance capital contributions to the Bank and ECV. There were no amounts outstanding under this credit at March 31, 2013 or December 31, 2012. For additional information on this credit facility please refer to “Capital Resources and Adequacy” below.
The Company has issued an aggregate of $9.3 million of subordinated notes, due 2016. For additional information on the subordinated notes, please refer to “Capital Resources and Adequacy” below.
Liquidity is a measure of the Company’s and Bank’s ability to meet loan demand and to satisfy depositor withdrawal requirements in an orderly manner. The Bank’s primary sources of liquidity consist of cash and cash balances due from correspondent banks, loan repayments, federal funds sold and other short-term investments, maturities and sales of investment securities, income from operations and new core deposits into the Bank. The Bank’s investment portfolio of debt securities is held in an available-for-sale status which allows for flexibility, subject to holdings held as collateral for customer repurchase agreements, to generate cash from sales as needed to meet ongoing loan demand. These sources of liquidity are considered primary and are supplemented by the ability of the Company and Bank to borrow funds, which are termed secondary sources and which are substantial. The Company’s secondary sources of liquidity include a $40 million line of credit with a regional bank, secured by a portion of the stock of the Bank, against which there were no amounts outstanding at March 31, 2013. Additionally, the Bank can purchase up to $107.5 million in federal funds on an unsecured basis from its correspondents, against which there were no amounts outstanding at March 31, 2013 and can borrow unsecured funds under one-way CDARS brokered deposits in the amount of $496.4 million, against which there was $25.6 million outstanding at March 31, 2013. The Bank has a commitment at March 31, 2013 from the Promontory Interfinancial Network to place up to $300.0 million of brokered deposits from its Insured Network Deposit (“IND”) program with the Bank in amounts requested by the Bank, as compared to an actual balance of $147.2 million at March 31, 2013. At March 31, 2013, the Bank was also eligible to make advances from the FHLB up to $406.6 million based on collateral at the FHLB, of which $30.0 million was outstanding at March 31, 2013. The Bank may enter into repurchase agreements as well as obtain additional borrowing capabilities from the FHLB provided adequate collateral exists to secure these lending relationships. The Bank also has a back-up borrowing facility through the Discount Window at the Federal Reserve Bank of Richmond (“Federal Reserve Bank”). This facility, which amounts to approximately $277.0 million, is collateralized with specific loan assets identified to the Federal Reserve Bank. It is anticipated, except for periodic testing, that this facility would be utilized for contingency funding only.
The loss of deposits, through disintermediation, is one of the greater risks to liquidity. Disintermediation occurs most commonly when rates rise and depositors withdraw deposits seeking higher rates in alternative savings and investment sources than the Bank may offer. The Bank was founded under a philosophy of relationship banking and, therefore, believes that it has less of an exposure to disintermediation and resultant liquidity concerns than do many banks. There is, however, a risk that some deposits would be lost if rates were to increase and the Bank elected not to remain competitive with its deposit rates. Under those conditions, the Bank believes that it is well positioned to use other sources of funds such as FHLB borrowings, brokered deposits, repurchase agreements and correspondent banks’ lines of credit to offset a decline in deposits in the short run. Over the long-term, an adjustment in assets and change in business emphasis could compensate for a potential loss of deposits. The Bank also maintains a marketable investment portfolio to provide flexibility in the event of significant liquidity needs. The Asset Liability Committee of the Bank’s Board of Directors (“ALCO”) has adopted policy guidelines which emphasize the importance of core deposits, adequate asset liquidity and a contingency funding plan.
At March 31, 2013, under the Bank’s liquidity formula, it had $1.56 billion of primary and secondary liquidity sources. The amount is deemed adequate to meet current and projected funding needs.
Commitments and Contractual Obligations
Loan commitments outstanding and lines and letters of credit at March 31, 2013 are as follows:
(dollars in thousands)
|
|
|
|
Unfunded loan commitments
|
|
$
|
805,533
|
|
Unfunded lines of credit
|
|
|
78,373
|
|
Letters of credit
|
|
|
58,906
|
|
Total
|
|
$
|
942,812
|
|
Unfunded loan commitments are agreements whereby the Bank has made a commitment and the borrower has accepted the commitment to lend to a customer as long as there is no violation of the terms or conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee before the commitment period is extended. In many instances, borrowers are required to meet performance milestones in order to draw on a commitment as is the case in construction loans, or to have a required level of collateral in order to draw on a commitment, as is the case in asset based lending credit facilities. Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements.
Unfunded lines of credit are agreements to lend to a customer as long as there is no violation of the terms or conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements.
Letters of credit include standby and commercial letters of credit. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance by the Bank’s customer to a third party. Standby letters of credit generally become payable upon the failure of the customer to perform according to the terms of the underlying contract with the third party. Standby letters of credit are generally not drawn. Commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn when the underlying transaction is consummated between the customer and a third party. The contractual amount of these letters of credit represents the maximum potential future payments guaranteed by the Bank. The Bank has recourse against the customer for any amount it is required to pay to a third party under a letter of credit, and holds cash and or other collateral on those standby letters of credit for which collateral is deemed necessary.
Asset/Liability Management and Quantitative and Qualitative Disclosures about Market Risk
A fundamental risk in banking is exposure to market risk, or interest rate risk, since a bank’s net income is largely dependent on net interest income. The ALCO formulates and monitors the management of interest rate risk through policies and guidelines established by it and the full Board of Directors and through review of detailed reports discussed quarterly. In its consideration of risk limits, the ALCO considers the impact on earnings and capital, the level and direction of interest rates, liquidity, local economic conditions, outside threats and other factors. Banking is generally a business of managing the maturity and repricing mismatch inherent in its asset and liability cash flows and to provide net interest income growth consistent with the Company’s profit objectives. During the three months ended March 31, 2013, the Company was able to both manage its net interest income to a reasonable level and sustain its overall interest rate risk position.
The Company, through its ALCO, monitors the interest rate environment in which it operates and adjusts the rates and maturities of its assets and liabilities to remain competitive and to achieve its overall financial objectives subject to established risk limits. In the current and expected future interest rate environment, the Company has been maintaining its investment portfolio to (i) manage the balance between yield and prepayment risk in its portfolio of mortgage backed securities should rates remain at current levels and (ii) to mitigate extension risk should rates increase. Additionally, the percentage mix of municipal securities has been increased to 27%. In the first quarter of 2013, the investment portfolio balance increased as higher average liquidity was deployed to these assets. The mix of the portfolio was shifted to higher percentages of both structured government guaranteed mortgaged backed securities and high quality municipal securities. The duration of the investment portfolio increased to 4.2 years at March 31, 2013 from 3.8 years at December 31, 2012, due substantially to a higher mix of municipal securities.
In the loan portfolio, the re-pricing duration was 25 months at both March 31, 2013, and December 31, 2012, with fixed rate loans amounting to 42% of total loans at March 31, 2013, as compared to 43% at December 31, 2012 and 42% at March 31, 2012, and variable and adjustable rate loans comprising 58% of total loans at March 31, 2013, as compared to 57% at December 31, 2012 and 58% at March 31, 2012. Variable rate loans are indexed primarily to the Wall Street Journal prime interest rate, while adjustable rate loans are indexed primarily to the five year U.S. Treasury interest rate. In the deposit portfolio, the duration of the portfolio was 31 months at March 31, 2013, as compared to 38 months at December 31, 2012 and 37 months at March 31, 2012. The change since December 31, 2012 was due substantially to updating a decay rate analysis for non-maturing deposits. The growth of core deposits, which enhance franchise value and provide a stable funding source, added average liquidity and enhanced asset sensitivity to the balance sheet at March 31, 2013 as compared to March 31, 2012. Excluding the one trustee relationship lost after the expiration of unlimited deposit insurance, the Company experienced core deposit growth of $46 million in the three months ended March 31, 2013.
The Company has continued its emphasis on funding loans in its marketplace, and has been able to achieve favorable loan pricing, including interest rate floors on many loan originations, although competition for new loans has been increasing. A disciplined approach to loan pricing, together with loans floors existing in 51% of total loans (at March 31, 2013), has resulted in less pressure on loan yields over the past twelve months, as average loan yields have declined by just 7 basis points in the first quarter of 2013 as compared to the first quarter in 2012. Subject to floor interest rates, variable and adjustable rate loans provide additional income opportunities should interest rates rise from current levels.
The net unrealized gain before tax on the investment portfolio decreased to $7.5 million at March 31, 2013 from $9.1 million at December 31, 2012, with $23 thousand of realized net gains recorded for the quarter ended March 31, 2013. Gains of $115 thousand were realized during the first quarter of 2013 on the sales of U.S. Agency securities that would otherwise mature at par in the next few years. This gain was partially offset by losses of $91 thousand on the sale of higher coupon mortgage backed securities, which exhibited high prepayments and the potential for negative yields.
There can be no assurance that the Company will be able to successfully achieve its optimal asset liability mix, as a result of competitive pressures, customer preferences and the inability to perfectly forecast future interest rates and movements.
One of the tools used by the Company to manage its interest rate risk is a static GAP analysis presented below. The Company also employs an earnings simulation model on a quarterly basis to monitor its interest rate sensitivity and risk and to model its balance sheet cash flows and the related income statement effects in different interest rate scenarios. The model utilizes current balance sheet data and attributes and is adjusted for assumptions as to investment maturities (including prepayments), loan prepayments, interest rates, and the level of noninterest income and noninterest expense. The data is then subjected to a “shock test” which assumes a simultaneous change in interest rates up 100, 200, 300, and 400 basis points or down 100 and 200, along the entire yield curve, but not below zero. The results are analyzed as to the impact on net interest income, net income and the market equity over the next twelve and twenty-four month periods from March 31, 2013. In addition to, analysis of simultaneous changes in interest rates along the yield curve, changes based on interest rate “ramps” is also performed. This analysis represents the impact of a more gradual change in interest rates, as well as yield curve shape changes.
For the analysis presented below, at March 31, 2013, the simulation assumes a 50 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in a decreasing interest rate shock scenario with a floor of 10 basis points, and assumes a 70 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in an increasing interest rate shock scenario.
As quantified in the table below, the Company’s analysis at March 31, 2013 shows a moderate effect on net interest income (over the next 12 months) as well as to the economic value of equity when interest rates are shocked both down 100, and 200 basis points and up 100, 200, 300, and 400 basis points due substantially to the significant level of variable rate and repriceable assets and liabilities. The repricing duration of the investment portfolio at March 31, 2013 is 4.2 years, the loan portfolio 2.1 years, the interest bearing deposit portfolio 2.7 years and the borrowed funds portfolio 1.5 years.
The following table reflects the result of simulation analysis on the March 31, 2013 asset and liabilities balances:
Change in interest
rates (basis points)
|
|
|
Percentage change in
net interest income
|
|
|
Percentage change in
net income
|
|
|
Percentage change in
market value of
portfolio equity
|
|
|
+400
|
|
|
|
+8.5%
|
|
|
|
+4.7%
|
|
|
|
-9.4%
|
|
|
+300
|
|
|
|
+4.8%
|
|
|
|
-0.7%
|
|
|
|
-8.0%
|
|
|
+200
|
|
|
|
+1.1%
|
|
|
|
-5.8%
|
|
|
|
-6.3%
|
|
|
+100
|
|
|
|
-0.8%
|
|
|
|
-7.8%
|
|
|
|
-3.8%
|
|
|
0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-100
|
|
|
|
-2.8%
|
|
|
|
-5.2%
|
|
|
|
-6.8%
|
|
|
-200
|
|
|
|
-4.0%
|
|
|
|
-7.4%
|
|
|
|
-6.4%
|
|
The results of simulation are within the policy limits adopted by the Company. For net interest income, the Company has adopted a policy limit of 10% for a 100 basis point change, 12% for a 200 basis point change, 18% for a 300 basis point change and 24% for a 400 basis point change. For the market value of equity, the Company has adopted a policy limit of 12% for a 100 basis point change, 15% for a 200 basis point change, 20% for a 300 basis point change and 25% for a 400% basis point change. The changes in net interest income, net income and the economic value of equity in both a higher and lower interest rate shock scenario at March 31, 2013 are not considered to be excessive. The negative impact of -0.8% in net interest income and -7.8% in net income given a 100 basis point increase in market interest rates reflects in large measure the impact of floor interest rates in a substantial portion of the loan portfolio.
For the analysis at March 31, 2013 as compared to December 31, 2012, the Company shortened its assumption of the duration of demand deposit and money market accounts based on analysis of more recent experience. Additionally, the analysis at March 31, 2013 increased the discount rate used to value demand deposits to better assess the higher operating cost factor of these type deposits. The impact of these assumption changes is to lower the core deposit value, which negatively impacts the market value of equity.
In the first quarter of 2013, the Company continued to manage its interest rate sensitivity position to moderate levels of risk, as indicated in the simulation results above. Except for the lower level of asset liquidity at March 31, 2013 as compared to December 31, 2012, and accounting for the assumption changes in the analysis noted above, the interest rate risk position at March 31, 2013 was similar to the interest rate risk position at December 31, 2012. As compared to December 31, 2012, the sum of federal funds sold, interest bearing deposits with banks and other short-term investments and loans held for sale declined by $68 million at March 31, 2013.
Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or repricing periods, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that limit changes in interest rates on a short-term basis and over the life of the loan. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the tables. Finally, the ability of many borrowers to service their debt may decrease in the event of a significant interest rate increase.
During the first quarter of 2013, average market interest rates declined slightly as compared to the first quarter of 2012 and the yield curve flattened modestly. The average two year U.S. Treasury rate declined by 2 basis points from 0.28% to 0.26% and the average ten year U.S. Treasury rate declined by 9 basis points from 2.02% to 1.93%. In that environment, the Company was able to increase its net interest spread and margin for the first quarter of 2013 to 4.20% from 4.11% for the first quarter of 2012. The Company believes that the change in the net interest spread in the most recent quarter as compared to 2012’s first quarter has been consistent with its risk analysis at December 31, 2012.
GAP Position
Banks and other financial institutions earnings are significantly dependent upon net interest income, which is the difference between interest earned on earning assets and interest expense on interest bearing liabilities. This revenue represented 81% of the Company’s revenue for the first quarter of 2013, as compared to 83% of the Company’s revenue for the first quarter of 2012.
In falling interest rate environments, net interest income is maximized with longer term, higher yielding assets being funded by lower yielding short-term funds, or what is referred to as a negative mismatch or GAP. Conversely, in a rising interest rate environment, net interest income is maximized with shorter term, higher yielding assets being funded by longer-term liabilities or what is referred to as a positive mismatch or GAP.
The GAP position, which is a measure of the difference in maturity and repricing volume between assets and liabilities, is a means of monitoring the sensitivity of a financial institution to changes in interest rates. The chart below provides an indication of the sensitivity of the Company to changes in interest rates. A negative GAP indicates the degree to which the volume of repriceable liabilities exceeds repriceable assets in given time periods.
At March 31, 2013, the Company had a positive GAP position of approximately $517 million or 15.5% of total assets out to three months and a positive cumulative GAP position of $489 million or 14.7% of total assets out to 12 months; as compared to a positive GAP position of approximately $542 million or 15.9% of total assets out to three months and a positive cumulative GAP position of approximately $560 million or 16.4% out to 12 months at December 31, 2012. The change in the positive GAP position at March 31, 2013, as compared to December 2012, was due substantially to the lower amount of asset liquidity on the balance sheet. The change in the GAP position at March 31, 2013 as compared to December 31, 2012 is not judged material to the Company’s overall interest rate risk position, which relies more heavily on simulation analysis which captures the full optimality within the balance sheet. The current position is within guideline limits established by the ALCO.
While management believes that this overall position creates a reasonable balance in managing its interest rate risk and maximizing its net interest margin within plan objectives, there can be no assurance as to actual results.
Management has carefully considered its strategy to maximize interest income by reviewing interest rate levels, economic indicators and call features within its investment portfolio, as well as interest rate floors within its loan portfolio. These factors have been discussed with the ALCO and management believes that current strategies are appropriate to current economic and interest rate trends.
If interest rates increase by 100 basis points, the Company’s net interest income and net interest margin are expected to decrease modestly due to the impact of loan floors providing no additional interest income and the assumption of an increase in money market interest rates by 70% of the change in market interest rates.
If interest rates decline by 100 basis points, the Company’s net interest income and margin are expected to decline modestly as the impact of lower market rates on a large amount of liquid assets more than offsets the ability to lower interest rates on interest bearing liabilities.
Because competitive market behavior does not necessarily track the trend of interest rates but at times moves ahead of financial market influences, the change in the cost of liabilities may be different than anticipated by the GAP model. If this were to occur, the effects of a declining interest rate environment may not be in accordance with management’s expectations.
GAP Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repriceable in:
|
|
0-3 months
|
|
|
4-12
months
|
|
|
13-36
months
|
|
|
37-60
months
|
|
|
Over 60
months
|
|
|
Total Rate Sensitive
|
|
|
Non-
sensitive
|
|
|
Total
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RATE SENSITIVE ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
$
|
20,630
|
|
|
$
|
28,698
|
|
|
$
|
84,267
|
|
|
$
|
51,941
|
|
|
$
|
144,049
|
|
|
$
|
329,585
|
|
|
|
|
|
|
|
Loans
(1)(2)
|
|
|
1,516,945
|
|
|
|
236,307
|
|
|
|
498,026
|
|
|
|
290,141
|
|
|
|
139,303
|
|
|
|
2,680,722
|
|
|
|
|
|
|
|
Fed funds and other short-term investments
|
|
|
263,768
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
263,768
|
|
|
|
|
|
|
|
Other earning assets
|
|
|
14,229
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,229
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,815,572
|
|
|
$
|
265,005
|
|
|
$
|
582,293
|
|
|
$
|
342,082
|
|
|
$
|
283,352
|
|
|
$
|
3,288,304
|
|
|
$
|
36,561
|
|
|
$
|
3,324,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RATE SENSITIVE LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand
|
|
$
|
30,407
|
|
|
$
|
91,221
|
|
|
$
|
243,255
|
|
|
$
|
243,255
|
|
|
$
|
148,039
|
|
|
$
|
756,177
|
|
|
|
|
|
|
|
|
|
Interest bearing transaction
|
|
|
69,431
|
|
|
|
-
|
|
|
|
14,878
|
|
|
|
14,878
|
|
|
|
-
|
|
|
|
99,187
|
|
|
|
|
|
|
|
|
|
Savings and money market
|
|
|
1,019,422
|
|
|
|
-
|
|
|
|
218,448
|
|
|
|
218,448
|
|
|
|
-
|
|
|
|
1,456,318
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
87,065
|
|
|
|
201,017
|
|
|
|
153,746
|
|
|
|
59,420
|
|
|
|
-
|
|
|
|
501,248
|
|
|
|
|
|
|
|
|
|
Customer repurchase agreements and fed
funds purchased
|
|
|
92,664
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
92,664
|
|
|
|
|
|
|
|
|
|
Other borrowings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,300
|
|
|
|
20,000
|
|
|
|
39,300
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,298,989
|
|
|
$
|
292,238
|
|
|
$
|
630,327
|
|
|
$
|
555,301
|
|
|
$
|
168,039
|
|
|
$
|
2,944,894
|
|
|
$
|
18,119
|
|
|
$
|
2,963,013
|
|
GAP
|
|
$
|
516,583
|
|
|
$
|
(27,233
|
)
|
|
$
|
(48,034
|
)
|
|
$
|
(213,219
|
)
|
|
$
|
115,313
|
|
|
$
|
343,410
|
|
|
|
|
|
|
|
|
|
Cumulative GAP
|
|
$
|
516,583
|
|
|
$
|
489,350
|
|
|
$
|
441,316
|
|
|
$
|
228,097
|
|
|
$
|
343,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative gap as percent of total assets
|
|
|
15.54
|
%
|
|
|
14.72
|
%
|
|
|
13.27
|
%
|
|
|
6.86
|
%
|
|
|
10.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes loans held for sale.
(2) Non-accrual loans are included in the over 60 months category.
Although NOW and MMA accounts are subject to immediate repricing, the Bank’s GAP model has incorporated a repricing schedule to account for a lag in rate changes based on our experience, as measured by the amount of those deposit rate changes relative to the amount of rate change in assets.
Capital Resources and Adequacy
The assessment of capital adequacy depends on a number of factors such as asset quality and mix, liquidity, earnings performance, changing competitive conditions and economic forces, regulatory measures and policy, as well as the overall level of growth and complexity of the balance sheet. The adequacy of the Company’s current and future capital needs is monitored by management on an ongoing basis. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses.
The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced significant growth in its commercial real estate portfolio in recent years. Commercial real estate loans and construction, land and land development loans represent 390% and 147%, respectively of total risk based capital. Management has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightened risk management procedures, and strong underwriting criteria with respect to its commercial real estate portfolio. Nevertheless, we may be required to maintain higher levels of capital as a result of our commercial real estate concentration, which could require us to obtain additional capital, and may adversely affect shareholder returns.
The Company has a credit facility with a regional bank, pursuant to which the Company may borrow, on a revolving basis, up to $40 million for working capital purposes, to finance capital contributions to the Bank and to a more limited extent, finance capital contributions to ECV. The credit facility is secured by a first lien on a portion of the stock of the Bank, and bears interest at a floating rate equal to the Wall Street Journal Prime Rate minus 0.25% with a floor interest rate of 3.75%. Interest is payable on a monthly basis. There were no amounts outstanding under this credit at March 31, 2013 and December 31, 2012.
The Series B Preferred Stock is entitled to receive non-cumulative dividends, beginning October 1, 2011. The dividend rate, as a percentage of the liquidation amount, can fluctuate on a quarterly basis during the first ten quarters during which the Series B Preferred Stock is outstanding, based upon changes in the level of “Qualified Small Business Lending” or “QSBL” (as defined in the Purchase Agreement) by the Bank. The dividend rate for the first seven dividend periods was one percent (1%). For the eighth through ninth calendar quarters, the dividend rate may be adjusted to between one percent (1%) and five percent (5%) per annum, to reflect the amount of change if any, in the Bank’s level of QSBL. If the level of the Bank’s qualified small business loans declines so that the percentage increase in QSBL as compared to the baseline level is less than ten percent (10%), then the dividend rate payable on the Series B Preferred Stock would increase. For the tenth calendar quarter through four and one half years after issuance, the dividend rate will be fixed at between one percent (1%) and seven percent (7%) based upon the increase in QBSL as compared to the baseline. After four and one half years from issuance, the dividend rate will increase to nine percent (9%).
The Series B Preferred Stock may be redeemed at any time at the Company’s option, at a redemption price of 100% of the liquidation amount plus accrued but unpaid dividends to the date of redemption for the current period, subject to the approval of its federal banking regulator.
The Company has issued an aggregate of $9.3 million of subordinated notes, which bear interest at a fixed rate of 10.0% per year. The notes have a maturity of September 30, 2016 and are redeemable at the option of the Company, in whole or in part, on any interest payment date at the principal amount thereof, plus interest to the date of redemption. The notes are intended to qualify as Tier 2 capital for regulatory purposes to the fullest extent permitted. The payment of principal on the notes may only be accelerated upon the occurrence of certain bankruptcy or receivership related events relating to the Company or, to the extent permitted under capital rules to be adopted by the Federal Reserve Board pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, a major bank subsidiary of the Company.
Under current capital rules, the capital treatment of the notes must be phased out, at a rate of 20% of the original principal amount per year during the last five years of the term of the notes, commencing on October 1, 2011. Currently, $5.58 million of subordinated notes are includible as Tier 2 capital.
The actual capital amounts and ratios for the Company and Bank as of March 31, 2013, December 31, 2012 and March 31, 2012 are presented in the table below.
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For Capital
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To Be Well
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Company
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Bank
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Adequacy
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Capitalized Under
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Actual
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Actual
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Purposes
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Prompt Corrective Action
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(dollars in thousands)
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Amount
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Ratio
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Amount
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Ratio
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Ratio
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Provision Ratio *
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As of March 31, 2013
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Total capital (to risk weighted assets)
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$
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394,746
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12.50%
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$
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363,309
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11.56%
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8.0%
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10.0%
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Tier 1 capital (to risk weighted assets)
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350,132
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11.08%
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324,424
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10.32%
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4.0%
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6.0%
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Tier 1 capital (to average assets)
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350,132
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10.39%
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324,424
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9.66%
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3.0%
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5.0%
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As of December 31, 2012
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Total capital (to risk weighted assets)
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$
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381,808
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12.20%
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$
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350,609
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11.25%
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8.0%
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10.0%
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Tier 1 capital (to risk weighted assets)
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338,138
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10.80%
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312,974
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10.05%
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4.0%
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6.0%
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Tier 1 capital (to average assets)
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338,138
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10.44%
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312,974
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9.70%
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3.0%
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5.0%
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As of March 31, 2012
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Total capital (to risk weighted assets)
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$
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302,785
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11.59%
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$
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283,814
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10.92%
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8.0%
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10.0%
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Tier 1 capital (to risk weighted assets)
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263,337
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10.08%
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251,888
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9.69%
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4.0%
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6.0%
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Tier 1 capital (to average assets)
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263,337
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9.33%
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251,888
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8.96%
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3.0%
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5.0%
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Bank and holding company regulations, as well as Maryland law, impose certain restrictions on dividend payments by the Bank, as well as restricting extensions of credit and transfers of assets between the Bank and the Company. At March 31, 2013 the Bank could pay dividends to the parent to the extent of its earnings so long as it maintained required capital ratios.
Use of Non-GAAP Financial Measures
The Company considers the following non-GAAP measurements useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions. The table below provides a reconciliation of these non-GAAP financial measures with financial measures defined by GAAP.
Tangible common equity to tangible assets (the "tangible common equity ratio") and tangible book value per common share are non-GAAP financial measures derived from GAAP-based amounts. The Company calculates the tangible common equity ratio by excluding the balance of intangible assets from common shareholders' equity and dividing by tangible assets. The Company calculates tangible book value per common share by dividing tangible common equity by common shares outstanding, as compared to book value per common share, which the Company calculates by dividing common shareholders' equity by common shares outstanding. The Company considers this information important to shareholders' as tangible equity is a measure that is consistent with the calculation of capital for bank regulatory purposes, which excludes intangible assets from the calculation of risk based ratios.
GAAP Reconciliation (Unaudited)
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(dollars in thousands except per share data)
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Three Months Ended
March 31, 2013
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Twelve Months Ended
December 31, 2012
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Three Months Ended
March 31, 2012
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Common shareholders' equity
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$
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305,252
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$
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293,376
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$
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219,408
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Less: Intangible assets
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(3,659
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(3,785
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(4,066
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Tangible common equity
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$
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301,593
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$
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289,591
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$
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215,342
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Book value per common share
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$
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13.05
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$
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12.78
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$
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10.85
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Less: Intangible book value per common share
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(0.16
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(0.16
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(0.20
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Tangible book value per common share
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$
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12.89
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$
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12.62
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$
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10.65
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Total assets
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$
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3,324,865
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$
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3,409,441
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$
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2,815,549
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Less: Intangible assets
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(3,659
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(3,785
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(4,066
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Tangible assets
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$
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3,321,206
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$
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3,405,656
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$
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2,811,483
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Tangible common equity ratio
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9.08
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%
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8.50
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%
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7.66
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%
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