egbn20150331_10q.htm Table Of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 ( X ) 

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

 

 OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2015

 

OR

 

 (   ) 

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

 

 OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                    to_________

 

Commission File Number 0-25923

 

Eagle Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 Maryland   

 52-2061461

 (State or other jurisdiction of 

 (I.R.S. Employer 

 incorporation or organization)

 Identification No.)

 

 

 7830 Old Georgetown Road, Third Floor, Bethesda, Maryland

 20814 

 Address of principal executive offices

  (Zip Code) 

       

(301) 986-1800

(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

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 such filing requirements for the past 90 days. Yes ☒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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes☒ 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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒

Accelerated filer ☐

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 ☒

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

As of April 23, 2015, the registrant had 33,359,716 shares of Common Stock outstanding.

 

 
1

Table Of Contents
 

  

EAGLE BANCORP, INC.

TABLE OF CONTENTS

 

PART I.

FINANCIAL INFORMATION

   
       

Item 1.

Financial Statements (Unaudited) 

   3
 

Consolidated Balance Sheets

   3
 

Consolidated Statements of Operations

   4
  Consolidated Statements of Comprehensive Income    5
 

Consolidated Statements of Changes in Shareholders’ Equity

   6
 

Consolidated Statements of Cash Flows

    7
 

Notes to Consolidated Financial Statements

    8
       

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    39
       

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

    66
       

Item 4.

Controls and Procedures

    66
       

PART II.

OTHER INFORMATION

    67
       

Item 1.

Legal Proceedings

    67
       

Item 1A.

Risk Factors

    67
       

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

    67
       

Item 3.

Defaults Upon Senior Securities

    67
       

Item 4.

Mine Safety Disclosures

    67
       

Item 5.

Other Information

    67
       

Item 6.

Exhibits

    67
        

Signatures

      70

 

 
2

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Item 1 – Financial Statements (Unaudited)


 

EAGLE BANCORP, INC.

Consolidated Balance Sheets (Unaudited)

(dollars in thousands, except per share data)

 

    March 31, 2015     December 31, 2014     March 31, 2014  

Assets

 

 

   

 

   

 

 

Cash and due from banks

  $ 9,997     $ 9,097     $ 8,982  

Federal funds sold

    2,700       3,516       8,468  

Interest bearing deposits with banks and other short-term investments

    402,964       243,412       213,501  

Investment securities available for sale, at fair value

    333,531       382,343       387,790  

Federal Reserve and Federal Home Loan Bank stock

    16,793       22,560       10,599  

Loans held for sale

    62,758       44,317       21,862  

Loans

    4,444,893       4,312,399       3,063,975  

Less allowance for credit losses

    (47,779 )     (46,075 )     (42,018 )

Loans, net

    4,397,114       4,266,324       3,021,957  

Premises and equipment, net

    18,185       19,099       17,181  

Deferred income taxes

    32,089       32,511       27,146  

Bank owned life insurance

    56,983       56,594       40,052  

Intangible assets, net

    109,617       109,908       3,482  

Other real estate owned

    12,338       13,224       8,809  

Other assets

    45,271       44,975       34,123  

Total Assets

  $ 5,500,340     $ 5,247,880     $ 3,803,952  
                         

Liabilities and Shareholders' Equity

                       

Liabilities

                       

Deposits:

                       

Noninterest bearing demand

  $ 1,196,165     $ 1,175,799     $ 886,623  

Interest bearing transaction

    178,291       143,628       106,645  

Savings and money market

    2,405,435       2,302,600       1,861,355  

Time, $100,000 or more

    412,691       393,132       196,238  

Other time

    391,783       295,609       222,828  

Total deposits

    4,584,365       4,310,768       3,273,689  

Customer repurchase agreements

    58,589       61,120       66,437  

Other short-term borrowings

    -       100,000       -  

Long-term borrowings

    79,300       119,300       39,300  

Other liabilities

    36,556       35,933       14,144  

Total Liabilities

    4,758,810       4,627,121       3,393,570  
                         

Shareholders' Equity

                       

Preferred stock, par value $.01 per share, shares authorized 1,000,000, Series B, $1,000 per share liquidation preference, shares issued andoutstanding 56,600 at March 31, 2015, December 31, 2014 and March 31, 2014; Series C, $1,000 per share liquidation preference, shares issued and outstanding 15,300 at March 31, 2015, December 31, 2014 and -0- at March 31, 2014

     71,900        71,900        56,600  

Common stock, par value $.01 per share; shares authorized 50,000,000, shares issued and outstanding 33,303,467, 30,139,396 and 25,975,186 respectively

    329       296       255  

Warrant

    946       946       946  

Additional paid in capital

    495,784       394,933       244,332  

Retained earnings

    169,291       150,037       108,751  

Accumulated other comprehensive income (loss)

    3,280       2,647       (502 )

Total Shareholders' Equity

    741,530       620,759       410,382  

Total Liabilities and Shareholders' Equity

  $ 5,500,340     $ 5,247,880     $ 3,803,952  

 

See notes to consolidated financial statements.

 

 
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EAGLE BANCORP, INC.

Consolidated Statements of Operations (Unaudited)

(dollars in thousands, except per share data)

 

   

Three Months Ended March 31,

 
   

2015

   

2014

 

Interest Income

               

Interest and fees on loans

  $ 57,179     $ 40,363  

Interest and dividends on investment securities

    2,139       2,333  

Interest on balances with other banks and short-term investments

    138       138  

Interest on federal funds sold

    9       3  

Total interest income

    59,465       42,837  

Interest Expense

               

Interest on deposits

    3,242       2,412  

Interest on customer repurchase agreements

    27       38  

Interest on short-term borrowings

    54       -  

Interest on long-term borrowings

    1,411       380  

Total interest expense

    4,734       2,830  

Net Interest Income

    54,731       40,007  

Provision for Credit Losses

    3,310       1,934  

Net Interest Income After Provision For Credit Losses

    51,421       38,073  
                 

Noninterest Income

               

Service charges on deposits

    1,333       1,192  

Gain on sale of loans

    3,587       1,843  

Gain on sale of investment securities

    2,164       8  

Loss on early extinguishment of debt

    (1,130 )     -  

Increase in the cash surrender value of bank owned life insurance

    390       314  

Other income

    1,460       1,106  

Total noninterest income

    7,804       4,463  

Noninterest Expense

               

Salaries and employee benefits

    15,706       13,608  

Premises and equipment expenses

    4,010       3,089  

Marketing and advertising

    685       462  

Data processing

    1,784       1,588  

Legal, accounting and professional fees

    982       974  

FDIC insurance

    771       544  

Merger expenses

    111       -  

Other expenses

    4,024       2,833  

Total noninterest expense

    28,073       23,098  

Income Before Income Tax Expense

    31,152       19,438  

Income Tax Expense

    11,734       6,939  

Net Income

    19,418       12,499  

Preferred Stock Dividends

    180       141  

Net Income Available to Common Shareholders

  $ 19,238     $ 12,358  
                 

Earnings Per Common Share

               

Basic

  $ 0.62     $ 0.48  

Diluted

  $ 0.61     $ 0.47  

 

See notes to consolidated financial statements.

 

 
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EAGLE BANCORP, INC.

Consolidated Statements of Comprehensive Income (Unaudited)

(dollars in thousands)

 

   

Three Months Ended March 31,

 
   

2015

   

2014

 
                 

Net Income

  $ 19,418     $ 12,499  
                 

Other comprehensive income (loss), net of tax:

               

Net unrealized gain (loss) on securities available for sale

    1,931       2,822  

Reclassification adjustment for net gains included in net income

    (1,298 )     (5 )

Net change in unrealized (loss) gains on securities

    633       2,817  

Comprehensive Income

  $ 20,051     $ 15,316  

 

See notes to consolidated financial statements.

 

 
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EAGLE BANCORP, INC.

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(dollars in thousands except share data)

 

                                                   

Accumulated

                 
   

Preferred

   

Common

           

Additional Paid

   

Other Retained

 

Total Comprehensive

   

Total Shareholders'

 
   

Shares

   

Stock

   

Shares

   

Stock

   

Warrant

   

in Capital

   

Earnings

   

Income (Loss)

   

Equity

 

Balance January 1, 2015

    71,900     $ 71,900       30,139,396     $ 296     $ 946     $ 394,933     $ 150,037     $ 2,647     $ 620,759  

Net Income

    -       -       -       -       -       -       19,418       -       19,418  

Net change in other comprehensive income, net of tax

    -       -       -       -       -       -       -       633       633  

Stock-based compensation

    -       -       -       -       -       1,148       -       -       1,148  

Issuance of common stock related to options exercised

    -       -       279,373       3       -       3,435       -       -       3,438  

Tax benefit on non-qualified options exercised

    -       -       -       -       -       1,450       -       -       1,450  

Issuance of common stock upon vesting of restricted stock awards, net of shares withheld for payroll taxes

    -       -       (15,039 )     2       -       (2 )     -       -       -  

Restricted stock awards granted

    -       -       78,070       -       -       -       -       -       -  

Shares issued in public offering, net of issuance costs of $5,302

    -       -       2,816,900       28       -       94,670       -       -       94,698  

Issuance of common stock related to employee stock purchase plan

    -       -       4,767       -       -       154       -       -       154  

Cash paid in lieu of fractional shares upon merger with Virginia Heritage

    -       -       -       -       -       (4 )     -       -       (4 )

Preferred stock dividends

    -       -       -       -       -       -       (164 )     -       (164 )

Balance March 31, 2015

    71,900     $ 71,900       33,303,467     $ 329     $ 946     $ 495,784     $ 169,291     $ 3,280     $ 741,530  
                                                                         

Balance January 1, 2014

    56,600     $ 56,600       25,885,863     $ 253     $ 946     $ 242,990     $ 96,393     $ (3,319 )   $ 393,863  

Net Income

    -       -       -       -       -       -       12,499       -       12,499  

Net change in other comprehensive income, net of tax

    -       -       -       -       -       -       -       2,817       2,817  

Stock-based compensation

    -       -       -       -       -       892       -       -       892  

Issuance of common stock related to options exercised

    -       -       19,027       -       -       250       -       -       250  

Tax benefit on non-qualified options exercised

    -       -       -       -       -       75       -       -       75  

Issuance of common stock upon vesting of restricted stock awards, net of shares withheld for payroll taxes

    -       -       (13,110 )     2       -       (2 )     -       -       -  

Restricted stock awards granted

    -       -       78,947       -       -       -       -       -       -  

Issuance of common stock related to employee stock purchase plan

    -       -       4,459       -       -       127       -       -       127  

Preferred stock dividends

    -       -       -       -       -       -       (141 )     -       (141 )

Balance March 31, 2014

    56,600     $ 56,600       25,975,186     $ 255     $ 946     $ 244,332     $ 108,751     $ (502 )   $ 410,382  

 

See notes to consolidated financial statements.

  

 
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EAGLE BANCORP, INC.

Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands)

 

    Three Months Ended March 31,  
   

2015

   

2014

 

Cash Flows From Operating Activities:

               

Net Income

  $ 19,418     $ 12,499  

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

               

Provision for credit losses

    3,310       1,934  

Depreciation and amortization

    2,931       1,119  

Gains on sale of loans

    (3,587 )     (1,843 )

Securities premium amortization (discount accretion), net

    683       861  

Origination of loans held for sale

    (279,612 )     (98,321 )

Proceeds from sale of loans held for sale

    264,758       120,332  

Net increase in cash surrender value of BOLI

    (390 )     (314 )

Decrease in deferred income taxes

    422       1,803  

Decrease in fair value of other real estate owned

    750       453  

Net loss on sale of other real estate owned

    17       100  

Net gain on sale of investment securities

    (2,164 )     (8 )

Loss on early extinguishment of debt

    1,130       -  

Stock-based compensation expense

    1,148       892  

Excess tax benefits from stock-based compensation

    (1,450 )     (75 )

Increase in other assets

    (296 )     (3,411 )

Increase (decrease) in other liabilities

    623       (18,311 )

Net cash provided by operating activities

    7,691       17,710  

Cash Flows From Investing Activities:

               

Decrease (increase) in interest bearing deposits with other banks and short-term investments

    295       (5 )

Purchases of available for sale investment securities

    (26,885 )     (18,564 )

Proceeds from maturities of available for sale securities

    12,110       4,384  

Proceeds from sale/call of available for sale securities

    65,701       6,487  

Purchases of Federal Reserve and Federal Home Loan Bank stock

    (2,322 )     (26 )

Proceeds from redemption of Federal Reserve and Federal Home Loan Bank stock

    8,100       699  

Net increase in loans

    (134,100 )     (119,871 )

Proceeds from sale of other real estate owned

    153       108  

Purchases of BOLI

    (389 )     -  

Purchases of annuities

    (992 )     -  

Bank premises and equipment acquired

    (348 )     (1,483 )

Net cash used in investing activities

    (78,677 )     (128,271 )

Cash Flows From Financing Activities:

               

Increase in deposits

    273,597       48,275  

Decrease in customer repurchase agreements

    (2,531 )     (14,034 )

Issuance of common stock

    94,698       -  

Decrease in short-term borrowings

    (100,000 )      -  

Decrease in long-term borrowings

    (40,000 )      -  

Payment of dividends on preferred stock

    (164 )     (141 )

Proceeds from exercise of stock options

    3,439       250  

Excess tax benefits from stock-based compensation

    1,450       75  

Payment in lieu of fractional shares

    (4 )     -  

Proceeds from employee stock purchase plan

    153       127  

Net cash provided by financing activities

    230,622       34,552  

Net Increase (Decrease) In Cash and Cash Equivalents

    159,636       (76,009 )

Cash and Cash Equivalents at Beginning of Period

    256,025       306,960  

Cash and Cash Equivalents at End of Period

  $ 415,661     $ 230,951  

Supplemental Cash Flows Information:

               

Interest paid

  $ 6,045     $ 3,022  

Income taxes paid

  $ 8,350     $ 7,550  

Non-Cash Investing Activities

               

Transfers from loans to other real estate owned

  $ -     $ 245  

 

See notes to consolidated financial statements.

 

 
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EAGLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 1. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The consolidated financial statements include the accounts of Eagle Bancorp, Inc. and its subsidiaries (the “Company”), EagleBank (the “Bank”), Eagle Commercial Ventures, LLC (“ECV”), Eagle Insurance Services, LLC, and Bethesda Leasing, LLC, with all significant intercompany transactions eliminated.

 

The consolidated financial statements of the Company included herein are unaudited. The consolidated financial statements reflect all adjustments, consisting of normal recurring accruals that in the opinion of management, are necessary to present fairly the results for the periods presented. The amounts as of and for the year ended December 31, 2014 were derived from audited consolidated financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. There have been no significant changes to the Company’s Accounting Policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The Company believes that the disclosures are adequate to make the information presented not misleading. Certain reclassifications have been made to amounts previously reported to conform to the current period presentation.

 

These statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results of operations to be expected for the remainder of the year, or for any other period.

 

Nature of Operations

 

The Company, through the Bank, conducts a full service community banking business, primarily in Northern Virginia, Montgomery County, Maryland, and Washington, D.C. The primary financial services offered by the Bank include real estate, commercial and consumer lending, as well as traditional deposit and repurchase agreement products. The Bank is also active in the origination and sale of residential mortgage loans and the origination of small business loans. The guaranteed portion of small business loans, guaranteed by the Small Business Administration (“SBA”), is typically sold to third party investors in a transaction apart from the loan’s origination. As of March 31, 2015, the Bank offers its products and services through twenty two banking offices, four lending centers and various electronic capabilities, including remote deposit services and mobile banking services. Eagle Insurance Services, LLC, a subsidiary of the Bank, offers access to insurance products and services through a referral program with a third party insurance broker. Eagle Commercial Ventures, LLC, a direct subsidiary of the Company, provides subordinated financing for the acquisition, development and construction of real estate projects. These transactions involve higher levels of risk, together with commensurate higher returns. Refer to Higher Risk Lending – Revenue Recognition below.

 

Business Combinations

 

Business combinations are accounted for by applying the acquisition method in accordance with Accounting Standards Codification (“ASC”) 805, “Business Combinations.” Under the acquisition method, identifiable assets acquired and liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date are measured at their fair values as of that date, and are recognized separately from goodwill. Results of operations of the acquired entities are included in the consolidated statement of income from the date of acquisition.

 

 
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On October 31, 2014, the Company completed its acquisition of Virginia Heritage Bank (“Virginia Heritage”). The acquisition of Virginia Heritage was effected through the merger (the “Merger”) of Virginia Heritage with and into EagleBank, in accordance with the Agreement and Plan of Reorganization (the “Merger Agreement”) among the Company, EagleBank and Virginia Heritage, dated June 9, 2014. The acquisition added approximately $800 million in loans, $3 million in loans held for sale, $645 million in deposits, and $95 million in borrowings. An identified intangible related to core deposits was recorded for $4.6 million, which is being amortized over its estimated useful life of approximately 6 years and an initial intangible for goodwill was recorded for approximately $102.3 million. Additionally, in connection with the transaction, the Company recorded a fair value credit mark on the loan portfolio for approximately $12.5 million.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results may differ from those estimates and such differences could be material to the financial statements.

 

Cash Flows

 

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

 

Loans Held for Sale

 

The Company engages in sales of residential mortgage loans and the guaranteed portion of SBA loans originated by the Bank. Loans held for sale are carried at the lower of aggregate cost or fair value. Fair value is derived from secondary market quotations for similar instruments. Gains and losses on sales of these loans are recorded as a component of noninterest income in the consolidated statements of operations.

 

The Company’s current practice is to sell residential mortgage loans on a servicing released basis, and, therefore, it has no intangible asset recorded for the value of such servicing as of March 31, 2015, December 31, 2014 and March 31, 2014. The sale of the guaranteed portion of SBA loans on a servicing retained basis gives rise to an Excess Servicing Asset, which is computed on a loan by loan basis with the unamortized amount being included in Intangible assets in the consolidated balance sheets. This Excess Servicing Asset is being amortized on a straight-line basis (with adjustment for prepayments) as an offset to servicing fees collected and is included in Other income in the consolidated statement of operations.

 

The Company enters into commitments to originate residential mortgage loans whereby the interest rate on the loan is determined prior to funding (i.e. interest rate lock commitments). Such interest rate lock commitments on mortgage loans to be sold in the secondary market are considered to be derivatives. To protect against the price risk inherent in residential mortgage loan commitments, the Company utilizes both “best efforts” and “mandatory delivery” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Under a “best efforts” contract, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor and the investor commits to a price that it will purchase the loan from the Company if the loan to the underlying borrower closes. The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the investor commits to purchase a loan at a price representing a premium on the day the borrower commits to an interest rate with the intent that the buyer/investor has assumed the interest rate risk on the loan. As a result, the Company is not generally exposed to losses on loans sold utilizing best efforts. Nor will it realize gains related to interest rate lock commitments due to changes in interest rates. The market values of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because interest rate lock commitments and best efforts contracts are not actively traded. Because of the high correlation between interest rate lock commitments and best efforts contracts, no gain or loss should occur on the interest rate lock commitments. Under a “mandatory delivery” contract, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Company fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay the investor a “pair-off” fee, based on then-current market prices, to compensate the investor for the shortfall. The interest rate lock commitments on mortgage loans to be sold in the secondary market are considered to be derivatives. The Company manages the interest rate risk on interest rate lock commitments by entering into forward sale contracts of mortgage backed securities, whereby the Company obtains the right to deliver securities to investors in the future at a specified price. Such contracts are accounted for as derivatives and are recorded at fair value in derivative assets or liabilities, with changes in fair value recorded in other income. The period of time between issuance of a loan commitment to the customer and closing and sale of the loan to an investor generally ranges from 30 to 90 days under current market conditions.

 

 
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In circumstances where the Company does not deliver the whole loan to an investor, but rather elects to retain the loan in its portfolio, the loan is transferred from held for sale at fair value.

 

Investment Securities

 

The Company has no securities classified as trading, or as held to maturity. Marketable equity securities and debt securities not classified as held to maturity or trading are classified as available-for-sale. Securities available-for-sale are acquired as part of the Company’s asset/liability management strategy and may be sold in response to changes in interest rates, current market conditions, loan demand, changes in prepayment risk and other factors. Securities available-for-sale are carried at fair value, with unrealized gains or losses being reported as accumulated other comprehensive income/(loss), a separate component of shareholders’ equity, net of deferred income tax. Realized gains and losses, using the specific identification method, are included as a separate component of noninterest income in the consolidated statements of operations.

 

Premiums and discounts on investment securities are amortized / accreted to the earlier of call or maturity based on expected lives, which lives are adjusted based on prepayment assumptions and call optionality if any. Declines in the fair value of individual available-for-sale securities below their cost that are other-than-temporary in nature result in write-downs of the individual securities to their fair value. Factors affecting the determination of whether other-than-temporary impairment has occurred include a downgrading of the security by a rating agency, a significant deterioration in the financial condition of the issuer, or a change in management’s intent and ability to hold a security for a period of time sufficient to allow for any anticipated recovery in fair value. Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include (1) duration and magnitude of the decline in value, (2) the financial condition of the issuer or issuers and (3) structure of the security.

 

The entire amount of an impairment loss is recognized in earnings only when (1) the Company intends to sell the security, or (2) it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis, or (3) the Company does not expect to recover the entire amortized cost basis of the security. In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in shareholders’ equity as comprehensive income, net of deferred taxes.

 

Loans

 

Loans are stated at the principal amount outstanding, net of unamortized deferred costs and fees. Interest income on loans is accrued at the contractual rate on the principal amount outstanding. It is the Company’s policy to discontinue the accrual of interest when circumstances indicate that collection is doubtful. Deferred fees and costs are being amortized on the interest method over the term of the loan.

 

Management considers loans impaired when, based on current information, it is probable that the Company will not collect all principal and interest payments according to contractual terms. Loans are evaluated for impairment in accordance with the Company’s portfolio monitoring and ongoing risk assessment procedures.  Management considers the financial condition of the borrower, cash flow of the borrower, payment status of the loan, and the value of the collateral, if any, securing the loan. Generally, impaired loans do not include large groups of smaller balance homogeneous loans such as residential real estate and consumer type loans which are evaluated collectively for impairment and are generally placed on nonaccrual when the loan becomes 90 days past due as to principal or interest. Loans specifically reviewed for impairment are not considered impaired during periods of “minimal delay” in payment (ninety days or less) provided eventual collection of all amounts due is expected.  The impairment of a loan is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if repayment is expected to be provided solely by the collateral.  In appropriate circumstances, interest income on impaired loans may be recognized on a cash basis.

 

 
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Higher Risk Lending – Revenue Recognition

 

The Company has occasionally made higher risk acquisition, development, and construction (“ADC”) loans that entail higher risks than ADC loans made following normal underwriting practices (“higher risk loan transactions”). These higher risk loan transactions are currently made through the Company’s subsidiary, ECV. This activity is limited as to individual transaction amount and total exposure amounts, based on capital levels, and is carefully monitored. The loans are carried on the balance sheet at amounts outstanding and meet the loan classification requirements of the Accounting Standard Executive Committee (“AcSEC”) guidance reprinted from the CPA Letter, Special Supplement, dated February 10, 1986 (also referred to as Exhibit 1 to AcSEC Practice Bulletin No. 1). Additional interest earned on these higher risk loan transactions (as defined in the individual loan agreements) is recognized as realized under the provisions contained in AcSEC’s guidance reprinted from the CPA Letter, Special Supplement, dated February 10, 1986 (also referred to as Exhibit 1 to AcSEC Practice Bulletin No.1) and Staff Accounting Bulletin No. 101 (Revenue Recognition in Financial Statements). Certain additional interest is included as a component of noninterest income.  ECV had six higher risk lending transactions outstanding as of March 31, 2015, as compared to four higher risk lending transactions outstanding as of December 31, 2014, amounting to $12.0 million and $6.2 million, respectively.

 

Allowance for Credit Losses

 

The allowance for credit losses represents an amount which, in management’s judgment, is adequate to absorb probable losses on existing loans and other extensions of credit that may become uncollectible. The adequacy of the allowance for credit losses is determined through careful and continuous review and evaluation of the loan portfolio and involves the balancing of a number of factors to establish a prudent level of allowance. Among the factors considered in evaluating the adequacy of the allowance for credit losses are lending risks associated with growth and entry into new markets, loss allocations for specific credits, the level of the allowance to nonperforming loans, historical loss experience, economic conditions, portfolio trends and credit concentrations, changes in the size and character of the loan portfolio, and management’s judgment with respect to current and expected economic conditions and their impact on the existing loan portfolio. Allowances for impaired loans are generally determined based on collateral values. Loans or any portion thereof deemed uncollectible are charged against the allowance, while recoveries are credited to the allowance. Management adjusts the level of the allowance through the provision for credit losses, which is recorded as a current period operating expense. The allowance for credit losses consists of allocated and unallocated components.

 

The components of the allowance for credit losses represent an estimation done pursuant to ASC Topic 450, “Contingencies,” or ASC Topic 310, “Receivables.” Specific allowances are established in cases where management has identified significant conditions or circumstances related to a specific credit that management believes indicate the probability that a loss may be incurred. For potential problem credits for which specific allowance amounts have not been determined, the Company establishes allowances according to the application of credit risk factors. These factors are set by management and approved by the appropriate Board committee to reflect its assessment of the relative level of risk inherent in each risk grade. A third component of the allowance computation, termed a nonspecific or environmental factors allowance, is based upon management’s evaluation of various environmental conditions that are not directly measured in the determination of either the specific allowance or formula allowance. Such conditions include general economic and business conditions affecting key lending areas, credit quality trends (including trends in delinquencies and nonperforming loans expected to result from existing conditions), loan volumes and concentrations, specific industry conditions within portfolio categories, recent loss experience in particular loan categories, duration of the current business cycle, bank regulatory examination results, findings of outside review consultants, and management’s judgment with respect to various other conditions including credit administration and management and the quality of risk identification systems. Executive management reviews these environmental conditions quarterly, and documents the rationale for all changes.

 

 
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Management believes that the allowance for credit losses is adequate; however, determination of the allowance is inherently subjective and requires significant estimates. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. Evaluation of the potential effects of these factors on estimated losses involves a high degree of uncertainty, including the strength and timing of economic cycles and concerns over the effects of a prolonged economic downturn in the current cycle. In addition, various regulatory agencies, as an integral part of their examination process, and independent consultants engaged by the Bank, periodically review the Bank’s loan portfolio and allowance for credit losses. Such review may result in recognition of additions to the allowance based on their judgments of information available to them at the time of their examination.

 

Premises and Equipment

 

Premises and equipment are stated at cost less accumulated depreciation and amortization computed using the straight-line method for financial reporting purposes. Premises and equipment are depreciated over the useful lives of the assets, which generally range from five to seven years for furniture, fixtures and equipment, to three to five years for computer software and hardware, and to ten to forty years for buildings and building improvements. Leasehold improvements are amortized over the terms of the respective leases, which may include renewal options where management has the positive intent to exercise such options, or the estimated useful lives of the improvements, whichever is shorter. The costs of major renewals and betterments are capitalized, while the costs of ordinary maintenance and repairs are expensed as incurred. These costs are included as a component of premises and equipment expenses on the consolidated statements of operations.

 

Other Real Estate Owned (OREO)

 

Assets acquired through loan foreclosure are held for sale and are initially recorded at the lower of cost or fair value less estimated selling costs when acquired, establishing a new cost basis. The new basis is supported by appraisals that are no more than twelve months old. Costs after acquisition are generally expensed. If the fair value of the asset declines, a write-down is recorded through noninterest expense. The valuation of foreclosed assets is subjective in nature and may be adjusted in the future because of changes in market conditions or appraised values.

 

Goodwill and Other Intangible Assets

 

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights. Intangible assets that have finite lives, such as core deposit intangibles are amortized over their estimated useful lives and subject to periodic impairment testing. Intangible assets (other than goodwill) are amortized to expense using accelerated or straight-line methods over their respective estimated useful lives.

 

Goodwill and other intangibles are subject to impairment testing at the reporting unit level, which must be conducted at least annually. The Company performs impairment testing during the fourth quarter of each year or when events or changes in circumstances indicate the assets might be impaired.

 

The Company performs a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing updated qualitative factors, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it does not have to perform the two-step goodwill impairment test. Determining the fair value of a reporting unit under the first step of the goodwill impairment test and determining the fair value of individual assets and liabilities of a reporting unit under the second step of the goodwill impairment test are judgmental and often involve the use of significant estimates and assumptions. Similarly, estimates and assumptions are used in determining the fair value of other intangible assets. Estimates of fair value are primarily determined using discounted cash flows, market comparisons and recent transactions. These approaches use significant estimates and assumptions including projected future cash flows, discount rates reflecting the market rate of return, projected growth rates and determination and evaluation of appropriate market comparables. Based on the results of quantitative assessments of all reporting units, the Company concluded that no impairment existed at December 31, 2014. However, future events could cause the Company to conclude that goodwill or other intangibles have become impaired, which would result in recording an impairment loss. Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations.

 

 
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Customer Repurchase Agreements

 

The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same securities. Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, securities sold under agreements to repurchase are accounted for as collateralized financing arrangements and not as a sale and subsequent repurchase of securities. The agreements are entered into primarily as accommodations for large commercial deposit customers. The obligation to repurchase the securities is reflected as a liability in the Company’s consolidated balance of sheets, while the securities underlying the securities sold under agreements to repurchase remain in the respective assets accounts and are delivered to and held as collateral by third party trustees.

 

Marketing and Advertising

 

Marketing and advertising costs are generally expensed as incurred.

 

Income Taxes

 

The Company employs the liability method of accounting for income taxes as required by ASC Topic 740, “Income Taxes.” Under the liability method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities (i.e., temporary timing differences) and are measured at the enacted rates that will be in effect when these differences reverse. The Company utilizes statutory requirements for its income tax accounting, and avoids risks associated with potentially problematic tax positions that may incur challenge upon audit, where an adverse outcome is more likely than not. Therefore, no provisions are made for either uncertain tax positions nor accompanying potential tax penalties and interest for underpayments of income taxes in the Company’s tax reserves. In accordance with ASC Topic 740, the Company may establish a reserve against deferred tax assets in those cases where realization is less than certain, although no such reserves exist at March 31, 2015, December 31, 2014, or March 31, 2014.

 

Transfer of Financial Assets

 

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. In certain cases, the recourse to the Bank to repurchase assets may exist but is deemed immaterial based on the specific facts and circumstances.

 

Earnings per Common Share

 

Basic net income per common share is derived by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period measured. Diluted earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period measured including the potential dilutive effects of common stock equivalents.

 

Stock-Based Compensation

 

In accordance with ASC Topic 718, “Compensation,” the Company records as compensation expense an amount equal to the amortization (over the remaining service period) of the fair value computed at the date of grant. Compensation expense on variable stock option grants (i.e. performance based grants) is recorded based on the probability of achievement of the goals underlying the performance grant. Refer to Note 8 for a description of stock-based compensation awards, activity and expense.

 

 
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New Authoritative Accounting Guidance

 

In January 2014, the FASB issued ASU No. 2014-01, "Accounting for Investments in Qualified Affordable Housing Projects." ASU No. 2014-01 permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received, and recognize the net investment performance in the income statement as a component of income tax expense. This new guidance also requires new disclosures for all investors in these projects. The Company adopted ASU No. 2014-01 effective January 1, 2015. Upon adoption, the guidance must be applied retrospectively to all periods presented. However, entities that used the effective yield method to account for investments in these projects before adoption may continue to do so for these pre-existing investments. Prior to adoption of ASU No. 2014-01, the Company accounted for such investments using the effective yield method and continued to do so for these pre-existing investments after adopting ASU No. 2014-01. The Company expects future investments to meet the criteria required for the proportional amortization method and plans to make such an accounting policy election. There were no new investments made since the adoption of ASU No. 2014-01 on January 1, 2015, and therefore, the adoption of ASU No. 2014-01 did not have a material impact on the Company's Consolidated Financial Statements.

 

In January 2014, the FASB issued ASU No. 2014-04, "Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure." The objective of this guidance is to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU No. 2014-04 states that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (1) The creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (2) The borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, ASU No. 2014-04 requires interim and annual disclosure of both: (1) The amount of foreclosed residential real estate property held by the creditor; and (2) The recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The Company adopted ASU No. 2014-04 effective January 1, 2015. The adoption of ASU No. 2014-04 did not have a material impact on the Company's Consolidated Financial Statements.

 

In August 2014, the FASB issued ASU No. 2014-14, “Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.” The objective of this guidance is to reduce diversity in practice related to how creditors classify government-guaranteed mortgage loans, including FHA or VA guaranteed loans, upon foreclosure. Some creditors reclassify those loans to real estate consistent with other foreclosed loans that do not have guarantees; others reclassify the loans to other receivables. The amendments in this guidance require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) The loan has a government guarantee that is not separable from the loan before foreclosure; (2) At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (3) At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The Company adopted ASU No. 2014-14 effective January 1, 2015. The adoption of ASU No. 2014-14 did not have a material impact on the Company's Consolidated Financial Statements.

 

In April 2015, the FASB issued ASU No. 2015-03, “Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The update simplifies the presentation of debt issuance costs by requiring that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. This update will be effective for interim and annual periods beginning after December 15, 2015, and is to be applied retrospectively. Early adoption is permitted. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements, but does not expect the guidance to have a material impact.

 

 
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Note 2. Cash and Due from Banks

 

Regulation D of the Federal Reserve Act requires that banks maintain noninterest reserve balances with the Federal Reserve Bank based principally on the type and amount of their deposits. For the first quarter of 2015, the Bank maintained balances at the Federal Reserve sufficient to meet reserve requirements, as well as significant excess reserves. Late in 2008, the Federal Reserve in connection with the Emergency Economic Stabilization Act of 2008 began paying a nominal amount of interest on balances held, which interest on excess reserves was increased under provisions of the Dodd Frank Wall Street Reform and Consumer Protection Act passed in July 2010.

 

Additionally, the Bank maintains interest-bearing balances with the Federal Home Loan Bank of Atlanta and noninterest bearing balances with six domestic correspondent banks as compensation for services they provide to the Bank.

 

Note 3. Investment Securities Available-for-Sale

 

Amortized cost and estimated fair value of securities available-for-sale are summarized as follows:

 

           

Gross

     

Gross

   

Estimated

 

March 31, 2015

 

Amortized

   

Unrealized

     

Unrealized

   

Fair

 

(dollars in thousands)

 

Cost

   

Gains

     

Losses

   

Value

 

U. S. Government agency securities

  $ 29,433     $ 686  

 

  $ -     $ 30,119  

Residential mortgage backed securities

    233,127       2,183         1,159       234,151  

Municipal bonds

    65,109       3,737         49       68,797  

Other equity investments

    396       68         -       464  
    $ 328,065     $ 6,674       $ 1,208     $ 333,531  

 

           

Gross

     

Gross

   

Estimated

 

December 31, 2014

 

Amortized

   

Unrealized

     

Unrealized

   

Fair

 

(dollars in thousands)

 

Cost

   

Gains

     

Losses

   

Value

 

U. S. Government agency securities

  $ 29,434     $ 500  

 

  $ 40     $ 29,894  

Residential mortgage backed securities

    241,120       1,716         2,516       240,320  

Municipal bonds

    106,983       4,850         121       111,712  

Other equity investments

    396       21         -       417  
    $ 377,933     $ 7,087       $ 2,677     $ 382,343  

 

 

Gross unrealized losses and fair value by length of time that the individual available-for-sale securities have been in a continuous unrealized loss position are as follows:

 

 
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Less than

   

12 Months

                 
   

12 Months

   

or Greater

   

Total

 
   

Estimated

             

Estimated

           

Estimated

         

March 31, 2015

 

Fair

     

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 

(dollars in thousands)

 

Value

     

Losses

   

Value

   

Losses

   

Value

   

Losses

 

Residential mortgage backed securities

  13,798  

 

  35     76,319     1,124     90,117     1,159  

Municipal bonds

    5,620         49       -       -       5,620       49  
    $ 19,418       $ 84     $ 76,319     $ 1,124     $ 95,737     $ 1,208  

 

   

Less than

   

12 Months

                 
   

12 Months

   

or Greater

   

Total

 
   

Estimated

             

Estimated

           

Estimated

         

December 31, 2014

 

Fair

     

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 

(dollars in thousands)

 

Value

     

Losses

   

Value

   

Losses

   

Value

   

Losses

 

U. S. Government agency securities

  $ 2,001       $ 7     $ 1,750     $ 33     $ 3,751     $ 40  

Residential mortgage backed securities

    49,644  

 

    221       86,028       2,295       135,672       2,516  

Municipal bonds

    4,974         14       10,915       107       15,889       121  
    $ 56,619       $ 242     $ 98,693     $ 2,435     $ 155,312     $ 2,677  

 

 

The unrealized losses that exist are generally the result of changes in market interest rates and interest spread relationships since original purchases. The weighted average duration of debt securities, which comprise 99.9% of total investment securities, is relatively short at 3.8 years. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. The Company does not believe that the investment securities that were in an unrealized loss position as of March 31, 2015 represent an other-than-temporary impairment for the reasons noted. The Company does not intend to sell the investments and it is more likely than not that the Company will not have to sell the securities before recovery of its amortized cost basis, which may be maturity. In addition, at March 31, 2015, the Company held $16.8 million in equity securities in a combination of Federal Reserve Bank (“FRB”) and Federal Home Loan Bank (“FHLB”) stocks, which are required to be held for regulatory purposes, and are not marketable.

 

The amortized cost and estimated fair value of investments available-for-sale by contractual maturity are shown in the table below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   

March 31, 2015

   

December 31, 2014

 
   

Amortized

   

Estimated

   

Amortized

   

Estimated

 

(dollars in thousands)

 

Cost

   

Fair Value

   

Cost

   

Fair Value

 

U. S. Government agency securities maturing:

                               

One year or less

  $ 2,999     $ 3,040     $ 2,998     $ 3,051  

After one year through five years

    19,940       20,381       19,947       20,276  

Five years through ten years

    6,494       6,698       6,489       6,567  

Residential mortgage backed securities

    233,127       234,151       241,120       240,320  

Municipal bonds maturing:

                               

One year or less

    1,530       1,535       2,410       2,438  

After one year through five years

    33,513       36,084       47,038       49,607  

Five years through ten years

    27,505       28,373       54,983       56,927  

After ten years

    2,561       2,805       2,552       2,740  

Other equity investments

    396       464       396       417  
    $ 328,065     $ 333,531     $ 377,933     $ 382,343  

 

The carrying value of securities pledged as collateral for certain government deposits, securities sold under agreements to repurchase, and certain lines of credit with correspondent banks at March 31, 2015 was $256.6 million, which is well in excess of required amounts in order to operationally provide significant reserve amounts for new business. As of March 31, 2015 and December 31, 2014, there were no holdings of securities of any one issuer, other than the U.S. Government and U.S. Government agency securities, which exceeded ten percent of shareholders’ equity.

 

 
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Note 4. Derivatives

 

As part of its mortgage banking activities, the Bank enters into interest rate lock commitments, which are commitments to originate loans where the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The Bank then commits the specific loan for sale with an investor if and only if settlement occurs (“best efforts”) or alternatively commits to deliver the locked loan in a binding (“mandatory”) delivery program with an investor. Certain loans under interest rate lock commitments are covered under forward sales contracts of mortgage backed securities (“MBS”) which provides a hedge against interest rate changes between the time the individual loan interest rate is locked with the borrower and the time the loan is sold to the investor. Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in noninterest income. Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. The Bank determines the fair value of interest rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates, taking into consideration the probability that the interest rate lock commitments will close or will be funded.

 

Certain additional risks arise from forward delivery contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. The Bank does not expect any counterparty to any MBS to fail to meet its obligation. Additional risks inherent in mandatory delivery programs include the risk that, if the Bank does not close the loans subject to interest rate risk lock commitments, it may have a mismatch in its hedged position which could negatively impact earnings.

 

The fair value of the derivatives is recorded as a freestanding asset or liability with the change in value being recognized in current earnings during the period of change.

 

At March 31, 2015 the Bank had derivative financial instruments with a notional value of $62.4 million related to its forward contracts. The net fair value of these derivative instruments at March 31, 2015 was $219 thousand, which is included in other assets and $140 thousand included in other liabilities. There were no derivative instruments outstanding during the first quarter of 2014.

 

Included in other noninterest income for the three months ended March 31, 2015 was a gain of $30 thousand, relating to derivative instruments. The amount included in other noninterest income for the three months ended March 31, 2015 pertaining to its hedging activities was a gain of $171 thousand. There were no derivative instruments or hedging activities outstanding during the first quarter of 2014.

 

Note 5. Loans and Allowance for Credit Losses

 

The Bank makes loans to customers primarily in the Washington, DC metropolitan area and surrounding communities. A substantial portion of the Bank’s loan portfolio consists of loans to businesses secured by real estate and other business assets.

 

 
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Loans, net of unamortized net deferred fees, at March 31, 2015, December 31, 2014, and March 31, 2014 are summarized by type as follows:

 

   

March 31, 2015

   

December 31, 2014

   

March 31, 2014

 

(dollars in thousands)

 

Amount

   

%

   

Amount

   

%

   

Amount

   

%

 

Commercial

  $ 933,715       21 %   $ 916,226       21 %   $ 704,386       23 %

Income producing - commercial real estate

    1,739,483       40 %     1,703,172       40 %     1,196,405       40 %

Owner occupied - commercial real estate

    493,003       11 %     461,581       11 %     320,994       10 %

Real estate mortgage - residential

    147,871       3 %     148,018       3 %     97,846       3 %

Construction - commercial and residential

    862,013       19 %     793,432       18 %     593,967       19 %

Construction - C&I (owner occupied)

    49,558       1 %     58,032       1 %     35,480       1 %

Home equity

    120,543       3 %     122,536       3 %     108,839       4 %

Other consumer

    98,707       2 %     109,402       3 %     6,058       -  

Total loans

    4,444,893       100 %     4,312,399       100 %     3,063,975       100 %

Less: Allowance for Credit Losses

    (47,779 )             (46,075 )             (42,018 )        

Net loans

  $ 4,397,114             $ 4,266,324             $ 3,021,957          

 

Unamortized net deferred fees amounted to $15.8 million, $15.6 million, and $13.6 million at March 31, 2015, December 31, 2014, and March 31, 2014, respectively. 

 

As of March 31, 2015 and December 31, 2014, the Bank serviced $67.7 million and $67.9 million, respectively, of SBA loans which are not reflected as loan balances on the consolidated balance sheets.

 

Loan Origination / Risk Management

 

The Company’s goal is to mitigate risks in the event of unforeseen threats to the loan portfolio as a result of economic downturn or other negative influences. Plans for mitigating inherent risks in managing loan assets include: carefully enforcing loan policies and procedures, evaluating each borrower’s business plan during the underwriting process and throughout the loan term, identifying and monitoring primary and alternative sources for loan repayment, and obtaining collateral to mitigate economic loss in the event of liquidation. Specific loan reserves are established based upon credit and/or collateral risks on an individual loan basis. A risk rating system is employed to proactively estimate loss exposure and provide a measuring system for setting general and specific reserve allocations.

 

The composition of the Company’s loan portfolio is heavily weighted toward commercial real estate, both owner occupied and investment real estate. The combination of owner occupied commercial real estate and owner occupied commercial real estate construction represents 12% of the loan portfolio. At March 31, 2015, the combination of commercial real estate and real estate construction loans represents approximately 71% of the loan portfolio. When owner occupied commercial real estate and owner occupied commercial construction loans are excluded, the percentage of commercial real estate and construction loans to total loans decreases to 59%. These loans are underwritten to mitigate lending risks typical of this type of loan such as declines in real estate values, changes in borrower cash flow and general economic conditions. The Bank’s policy requires a maximum loan to value of 80% and minimum cash flow debt service coverage of 1.15 to 1.00. Personal guarantees are generally required, but may be limited.  In making real estate commercial mortgage loans, the Bank generally requires that interest rates adjust not less frequently than five years.

 

The Company is also an active traditional commercial lender providing loans for a variety of purposes, including working capital, equipment and account receivable financing. This loan category represents approximately 21% of the loan portfolio at March 31, 2015 and was generally variable or adjustable rate. Commercial loans meet reasonable underwriting standards, including appropriate collateral and cash flow necessary to support debt service. Personal guarantees are generally required, but may be limited. SBA loans represent 1% of the commercial loan category of loans. In originating SBA loans, the Company assumes the risk of non-payment on the unguaranteed portion of the credit. The Company generally sells the guaranteed portion of the loan generating noninterest income from the gains on sale, as well as servicing income on the portion participated. SBA loans are subject to the same cash flow analyses as other commercial loans. SBA loans are subject to a maximum loan size established by the SBA.

 

 
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Approximately 5% of the loan portfolio at March 31, 2015 consists of home equity loans and lines of credit and other consumer loans, consisting primarily of indirect automobile loans acquired in the Merger. These credits, while making up a smaller portion of the loan portfolio, demand the same emphasis on underwriting and credit evaluation as other types of loans advanced by the Bank.

 

Approximately 3% of the loan portfolio consists of residential mortgage loans. These are typically loans underwritten to shorter terms, generally less than 10 years.

 

Loans are secured primarily by duly recorded first deeds of trust. In some cases, the Bank may accept a recorded junior trust position. In general, borrowers will have a proven ability to build, lease, manage and/or sell a commercial or residential project and demonstrate satisfactory financial condition. Additionally, an equity contribution toward the project is customarily required.

 

Construction loans require that the financial condition and experience of the general contractor and major subcontractors be satisfactory to the Bank. Guaranteed, fixed price contracts are required whenever appropriate, along with payment and performance bonds or completion bonds for larger scale projects.

 

Loans intended for residential land acquisition, lot development and construction are made on the premise that the land: 1) is or will be developed for building sites for residential structures, and; 2) will ultimately be utilized for construction or improvement of residential zoned real properties, including the creation of housing. Residential development and construction loans will finance projects such as single family subdivisions, planned unit developments, townhouses, and condominiums. Residential land acquisition, development and construction loans generally are underwritten with a maximum term of 36 months, including extensions approved at origination.

 

Commercial land acquisition and construction loans are secured by real property where loan funds will be used to acquire land and to construct or improve appropriately zoned real property for the creation of income producing or owner user commercial properties. Borrowers are generally required to put equity into each project at levels determined by the appropriate Loan Committee. Commercial land acquisition and construction loans generally are underwritten with a maximum term of 24 months.

 

Substantially all construction draw requests must be presented in writing on American Institute of Architects documents and certified either by the contractor, the borrower and/or the borrower’s architect. Each draw request shall also include the borrower’s soft cost breakdown certified by the borrower or its Chief Financial Officer. Prior to an advance, the Bank or its contractor inspects the project to determine that the work has been completed, to justify the draw requisition.

 

Commercial permanent loans are secured by improved real property which is generating income in the normal course of operation. Debt service coverage, assuming stabilized occupancy, must be satisfactory to support a permanent loan. The debt service coverage ratio is ordinarily at least 1.15 to 1.00. As part of the underwriting process, debt service coverage ratios are stress tested assuming a 200 basis point increase in interest rates from their current levels.

 

Commercial permanent loans generally are underwritten with a term not greater than 10 years or the remaining useful life of the property, whichever is lower. The preferred term is between 5 to 7 years, with amortization to a maximum of 25 years.

 

The Company’s loan portfolio includes ADC real estate loans including both investment and owner occupied projects. ADC loans amounted to $912 million at March 31, 2015. A portion of the ADC portfolio, both speculative and non-speculative, includes loan funded interest reserves at origination. ADC loans containing loan funded interest reserves represent approximately 37% of the outstanding ADC loan portfolio at March 31, 2015. The decision to establish a loan-funded interest reserve is made upon origination of the ADC loan and is based upon a number of factors considered during underwriting of the credit including: (i) the feasibility of the project; (ii) the experience of the sponsor; (iii) the creditworthiness of the borrower and guarantors; (iv) borrower equity contribution; and (v) the level of collateral protection. When appropriate, an interest reserve provides an effective means of addressing the cash flow characteristics of a properly underwritten ADC loan. The Company does not significantly utilize interest reserves in other loan products. The Company recognizes that one of the risks inherent in the use of interest reserves is the potential masking of underlying problems with the project and/or the borrower’s ability to repay the loan. In order to mitigate this inherent risk, the Company employs a series of reporting and monitoring mechanisms on all ADC loans, whether or not an interest reserve is provided, including: (i) construction and development timelines which are monitored on an ongoing basis which track the progress of a given project to the timeline projected at origination; (ii) a construction loan administration department independent of the lending function; (iii) third party independent construction loan inspection reports; (iv) monthly interest reserve monitoring reports detailing the balance of the interest reserves approved at origination and the days of interest carry represented by the reserve balances as compared to the then current anticipated time to completion and/or sale of speculative projects; and (v) quarterly commercial real estate construction meetings among senior Company management, which includes monitoring of current and projected real estate market conditions. If a project has not performed as expected, it is not the customary practice of the Company to increase loan funded interest reserves.

 

 
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From time to time the Company may make loans for its own portfolio or through its higher risk loan affiliate, ECV. Such loans, which are made to finance projects (which may also be financed at the Bank level), may have higher risk characteristics than loans made by the Bank, such as lower priority interests and/or higher loan to value ratios. The Company seeks an overall financial return on these transactions commensurate with the risks and structure of each individual loan. Certain transactions may bear current interest at a rate with a significant premium to normal market rates. Other loan transactions may carry a standard rate of current interest, but also earn additional interest based on a percentage of the profits of the underlying project or a fixed accrued rate of interest.

 

 

 
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The following tables detail activity in the allowance for credit losses by portfolio segment for the three months ended March 31, 2015 and 2014. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

           

Income

   

Owner

   

Real

   

Construction

                         
           

Producing Commercial

   

Occupied Commercial

   

Estate Mortgage

   

Commercial and

   

Home

   

Other

         

(dollars in thousands)

 

Commercial

   

Real Estate

   

Real Estate

   

Residential

   

Residential

   

Equity

   

Consumer

   

Total

 

For the three months ended March 31, 2015

                                                               

Allowance for credit losses:

                                                               

Balance at beginning of period

  $ 13,222     $ 11,442     $ 2,954     $ 1,259     $ 15,625     $ 1,469     $ 104     $ 46,075  

Loans charged-off

    (998 )     (318 )     -       -       -       (419 )     (71 )     (1,806 )

Recoveries of loans previously charged-off

    51       -       1       2       95       2       49       200  

Net loans charged-off

    (947 )     (318 )     1       2       95       (417 )     (22 )     (1,606 )

Provision for credit losses

    1,502       528       172       (206 )     663       457       194       3,310  

Ending balance

  $ 13,777     $ 11,652     $ 3,127     $ 1,055     $ 16,383     $ 1,509     $ 276     $ 47,779  

For the period ended March 31, 2015

                                                               

Allowance for credit losses:

                                                               

Individually evaluated for impairment

  $ 5,771     $ 568     $ 400     $ -     $ 550     $ 289     $ 5     $ 7,583  

Collectively evaluated for impairment

    8,006       11,084       2,727       1,055       15,833       1,220       271       40,196  

Ending balance

  $ 13,777     $ 11,652     $ 3,127     $ 1,055     $ 16,383     $ 1,509     $ 276     $ 47,779  
                                                                 
                                                                 

 

           

Income

   

Owner

   

Real

   

Construction

                         
           

Producing Commercial

   

Occupied Commercial

   

Estate Mortgage

   

Commercial and

   

Home

   

Other

         

(dollars in thousands)

 

Commercial

   

Real Estate

   

Real Estate

   

Residential

   

Residential

   

Equity

   

Consumer

   

Total

 

For the three months ended March 31, 2014

                                                               

Allowance for credit losses:

                                                               

Balance at beginning of period

  $ 9,780     $ 10,359     $ 3,899     $ 944     $ 13,934     $ 1,871     $ 134     $ 40,921  

Loans charged-off

    (273 )     -       (35 )     (62 )     (581 )     (149 )     (25 )     (1,125 )

Recoveries of loans previously charged-off

    211       -       -       -       65       5       7       288  

Net loans charged-off

    (62 )     -       (35 )     (62 )     (516 )     (144 )     (18 )     (837 )

Provision for credit losses

    1,702       231       (669 )     (128 )     761       (220 )     257       1,934  

Ending balance

  $ 11,420     $ 10,590     $ 3,195     $ 754     $ 14,179     $ 1,507     $ 373     $ 42,018  

For the period ended March 31, 2014

                                                               

Allowance for credit losses:

                                                               

Individually evaluated for impairment

  $ 3,810     $ 732     $ 1,105     $ 30     $ 1,775     $ 378     $ 58     $ 7,888  

Collectively evaluated for impairment

    7,610       9,858       2,090       724       12,404       1,129       315       34,130  

Ending balance

  $ 11,420     $ 10,590     $ 3,195     $ 754     $ 14,179     $ 1,507     $ 373     $ 42,018  

 

 
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The Company’s recorded investments in loans as of March 31, 2015, December 31, 2014 and March 31, 2014 related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology was as follows:

 

           

Income Producing

   

Owner occupied

   

Real Estate

   

Construction

                         
           

Commercial

   

Commercial

   

Mortgage

   

Commercial and

   

Home

   

Other

         

(dollars in thousands)

 

Commercial

   

Real Estate

   

Real Estate

   

Residential

   

Residential

   

Equity

   

Consumer

   

Total

 
                                                                 

March 31, 2015

                                                               

Recorded investment in loans:

                                                               

Individually evaluated for impairment

  $ 16,981     $ 4,601     $ 6,840     $ -     $ 14,000     $ 889     $ 10     $ 43,321  

Collectively evaluated for impairment

    919,493       1,737,174       490,154       147,871       897,571       119,654       98,697       4,410,614  

Ending balance

  $ 933,715     $ 1,739,483     $ 493,003     $ 147,871     $ 911,571     $ 120,543     $ 98,707     $ 4,444,893  
                                                                 

December 31, 2014

                                                               

Recorded investment in loans:

                                                               

Individually evaluated for impairment

  $ 17,612     $ 5,109     $ 6,891     $ -     $ 14,241     $ 1,398     $ 59     $ 45,310  

Collectively evaluated for impairment

    898,614       1,698,063       454,690       148,018       837,223       121,138       109,343       4,267,089  

Ending balance

  $ 916,226     $ 1,703,172     $ 461,581     $ 148,018     $ 851,464     $ 122,536     $ 109,402     $ 4,312,399  
                                                                 

March 31, 2014

                                                               

Recorded investment in loans:

                                                               

Individually evaluated for impairment

  $ 27,327     $ 2,508     $ 7,323     $ 113     $ 19,159     $ 756     $ 60     $ 57,246  

Collectively evaluated for impairment

    677,059       1,193,897       313,671       97,733       610,288       108,083       5,998       3,006,729  

Ending balance

  $ 704,386     $ 1,196,405     $ 320,994     $ 97,846     $ 629,447     $ 108,839     $ 6,058     $ 3,063,975  

 

At March 31, 2015, the nonperforming loans acquired have a carrying value of $3.4 million and an unpaid principal balance of $4.6 million, respectively, and were evaluated separately in accordance with ASC Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” The various impaired loans were recorded at estimated fair value with any excess being charged-off or treated as a non-accretable discount. Subsequent downward adjustments to the valuation of impaired loans acquired will result in additional loan loss provisions and related allowance for credit losses. Subsequent upward adjustments to the valuation of impaired loans acquired will result in accretable discount. No adjustments have been made to the fair value amounts of impaired loans subsequent to the allowable period of adjustment from the date of acquisition.

 

Credit Quality Indicators

 

The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company's primary credit quality indicators are to use an internal credit risk rating system that categorizes loans into pass, watch, special mention, or classified categories. Credit risk ratings are applied individually to those classes of loans that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans to businesses or individuals in the classes which comprise the commercial portfolio segment. Groups of loans that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk rated and monitored collectively. These are typically loans to individuals in the classes which comprise the consumer portfolio segment.

 

The following are the definitions of the Company's credit quality indicators:

 

 

Pass:

Loans in all classes that comprise the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes that there is a low likelihood of loss related to those loans that are considered pass.

 

Watch:

Loan paying as agreed with generally acceptable asset quality; however the obligor’s performance has not met expectations. Balance sheet and/or income statement has shown deterioration to the point that the obligor could not sustain any further setbacks. Credit is expected to be strengthened through improved obligor performance and/or additional collateral within a reasonable period of time.

 

 
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Table Of Contents
 

 

Special Mention:

Loans in the classes that comprise the commercial portfolio segment that have potential weaknesses that deserve management's close attention. If not addressed, these potential weaknesses may result in deterioration of the repayment prospects for the loan. The special mention credit quality indicator is not used for classes of loans that comprise the consumer portfolio segment. Management believes that there is a moderate likelihood of some loss related to those loans that are considered special mention.

 

Classified:

Classified (a) Substandard - Loans inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the company will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual loans classified substandard.

 

 

 

 Classified (b) Doubtful - Loans that have all the weaknesses inherent in a loan classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the assets, its classification as an estimated loss is deferred until its more exact status may be determined.

 

 

 
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Table Of Contents
 

 

The Company's credit quality indicators are updated generally on a quarterly basis, but no less frequently than annually. The following table presents by class and by credit quality indicator, the recorded investment in the Company's loans and leases as of March 31, 2015, December 31, 2014 and March 31, 2014.

 

           

Watch and

                   

Total

 

(dollars in thousands)

 

Pass

   

Special Mention

   

Substandard

   

Doubtful

   

Loans

 
                                         

March 31, 2015

                                       

Commercial

  $ 891,850     $ 24,884     $ 16,981     $ -     $ 933,715  

Income producing - commercial real estate

    1,719,982       14,900       4,601       -       1,739,483  

Owner occupied - commercial real estate

    478,486       7,677       6,840       -       493,003  

Real estate mortgage – residential

    147,121       750       -       -       147,871  

Construction - commercial and residential

    889,346       8,225       14,000       -       911,571  

Home equity

    117,936       1,718       889       -       120,543  

Other consumer

    98,697       -       10       -       98,707  

Total

  $ 4,343,418     $ 58,154     $ 43,321     $ -     $ 4,444,893  
                                         

December 31, 2014

                                       

Commercial

  $ 875,102     $ 23,512     $ 17,612     $ -     $ 916,226  

Income producing - commercial real estate

    1,679,101       18,962       5,109       -       1,703,172  

Owner occupied - commercial real estate

    445,013       9,677       6,891       -       461,581  

Real estate mortgage – residential

    147,262       756       -       -       148,018  

Construction - commercial and residential

    827,503       9,720       14,241       -       851,464  

Home equity

    119,420       1,718       1,398       -       122,536  

Other consumer

    109,343       -       59       -       109,402  

Total

  $ 4,202,744     $ 64,345     $ 45,310     $ -     $ 4,312,399  
                                         

March 31, 2014

                                       

Commercial

  $ 661,432     $ 15,627     $ 27,327     $ -     $ 704,386  

Investment - commercial real estate

    1,167,621       26,276       2,508       -       1,196,405  

Owner occupied - commercial real estate

    298,968       14,703       7,323       -       320,994  

Real estate mortgage – residential

    96,947       786       113       -       97,846  

Construction - commercial and residential

    601,711       8,577       19,159       -       629,447  

Home equity

    106,170       1,913       756       -       108,839  

Other consumer

    5,998       -       60       -       6,058  

Total

  $ 2,938,847     $ 67,882     $ 57,246     $ -     $ 3,063,975  

 

 

Nonaccrual and Past Due Loans

 

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

 
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The following presents by class of loan, information related to nonaccrual loans as of the periods ended March 31, 2015, December 31, 2014 and March 31, 2014.

 

(dollars in thousands)

 

March 31, 2015

   

December 31, 2014

   

March 31, 2014

 
                         

Commercial

  $ 11,257     $ 12,975     $ 17,646  

Income producing - commercial real estate

    2,152       2,645       2,271  

Owner occupied - commercial real estate

    1,314       1,324       7,323  

Real estate mortgage - residential

    342       346       771  

Construction - commercial and residential

    3,608       3,697       7,658  

Home equity

    889       1,398       598  

Other consumer

    10       58       60  

Total nonaccrual loans (1)(2)

  $ 19,572     $ 22,443     $ 36,327  

 

 

 

(1)

Excludes troubled debt restructurings (“TDRs”) that were performing under their restructured terms totaling $13.4 million at March 31, 2015, $13.5 million at December 31, 2014 and $7.9 million at March 31, 2014.

 

(2)

Gross interest income of $310 thousand would have been recorded in 2015 if nonaccrual loans shown above had been current and in accordance with their original terms, while interest actually recorded on such loans was zero. See Note 1 to the consolidated financial statements for a description of the Company’s policy for placing loans on nonaccrual status.

 

 

The following table presents by class, an aging analysis and the recorded investments in loans past due as of March 31, 2015 and December 31, 2014. 

 

   

Loans

   

Loans

   

Loans

                   

Total Recorded

 
   

30-59 Days

   

60-89 Days

   

90 Days or

   

Total Past

   

Current

   

Investment in

 

(dollars in thousands)

 

Past Due

   

Past Due

   

More Past Due

   

Due Loans

   

Loans

   

Loans

 
                                                 

March 31, 2015

                                               

Commercial

  $ 3,356     $ 2,259     $ 11,257     $ 16,872     $ 916,843     $ 933,715  

Income producing - commercial real estate

    2,425       5,577       2,152       10,154       1,729,329       1,739,483  

Owner occupied - commercial real estate

    1,808       -       1,314       3,122       489,881       493,003  

Real estate mortgage – residential

    444       -       342       786       147,085       147,871  

Construction - commercial and residential

    -       -       3,608       3,608       907,963       911,571  

Home equity

    850       641       889       2,380       118,163       120,543  

Other consumer

    172       123       10       305       98,402       98,707  

Total

  $ 9,055     $ 8,600     $ 19,572     $ 37,227     $ 4,407,666     $ 4,444,893  
                                                 

December 31, 2014

                                               

Commercial

  $ 1,505     $ 4,032     $ 12,975     $ 18,512     $ 897,714     $ 916,226  

Income producing - commercial real estate

    1,825       5,376       2,645       9,846       1,693,326       1,703,172  

Owner occupied - commercial real estate

    1,089       214       1,324       2,627       458,954       461,581  

Real estate mortgage – residential

    -       -       346       346       147,672       148,018  

Construction - commercial and residential

    -       -       3,697       3,697       847,767       851,464  

Home equity

    -       1,365       1,398       2,763       119,773       122,536  

Other consumer

    284       81       58       423       108,979       109,402  

Total

  $ 4,703     $ 11,068     $ 22,443     $ 38,214     $ 4,274,185     $ 4,312,399  

  

 
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Impaired Loans

 

Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

 

The following table presents by class, information related to impaired loans for the periods ended March 31, 2015, December 31, 2014 and March 31, 2014.

 

   

 

   

 

   

 

                                 
   

Unpaid

   

Recorded

   

Recorded

   

 

           

Year To Date

 
   

Contractual Principal

   

Investment  With No

   

Investment  With

   

Recorded Total

   

Related

   

Average Recorded

   

Interest Income

 

(dollars in thousands)

 

Balance

   

Allowance

   

Allowance

   

Investment

   

Allowance

   

Investment

   

Recognized

 
                                                         

March 31, 2015

                                                       

Commercial

  $ 13,080     $ 1,464     $ 9,793     $ 11,257     $ 5,771     $ 12,116     $ -  

Income producing - commercial real estate

    10,668       8,753       1,222       9,975       568       10,235       35  

Owner occupied - commercial real estate

    1,867       1,025       842       1,867       400       1,878       -  

Real estate mortgage – residential

    342       342       -       342       -       344       -  

Construction - commercial and residential

    8,671       8,071       600       8,671       550       8,728       99  

Home equity

    889       118       771       889       289       1,144       -  

Other consumer

    10       -       10       10       5       34       -  

Total

  $ 35,527     $ 19,773     $ 13,238     $ 33,011     $ 7,583     $ 34,479     $ 134  
                                                         

December 31, 2014

                                                       

Commercial

  $ 14,075     $ 1,603     $ 11,372     $ 12,975     $ 5,334     $ 13,681     $ 251  

Income producing - commercial real estate

    10,869       8,952       1,542       10,494       751       7,021       203  

Owner occupied - commercial real estate

    1,889       1,038       851       1,889       577       3,986       6  

Real estate mortgage – residential

    346       346       -       346       -       529       -  

Construction - commercial and residential

    8,785       8,176       609       8,785       927       10,967       1,147  

Home equity

    1,398       339       1,059       1,398       430       747       36  

Other consumer

    58       -       58       58       45       30       7  

Total

  $ 37,420     $ 20,454     $ 15,491     $ 35,945     $ 8,064     $ 36,961     $ 1,650  
                                                         

March 31, 2014

                                                       

Commercial

  $ 17,646     $ 6,409     $ 11,237     $ 17,646     $ 3,810     $ 12,213     $ -  

Investment - commercial real estate

    6,016       1,106       4,535       5,641       732       5,771       35  

Owner occupied - commercial

    7,323       4,191       3,132       7,323       1,105       6,388       -  

Real estate mortgage – residential

    771       658       113       771       30       829       -  

Construction - commercial and residential

    13,098       4,783       7,442       12,225       1,775       12,580       503  

Home equity

    598       125       473       598       378       611       -  

Other consumer

    60       -       60       60       58       65       -  

Total

  $ 45,512     $ 17,272     $ 26,992     $ 44,264     $ 7,888     $ 38,457     $ 538  

 

 
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Modifications

 

A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company offers various types of concessions when modifying a loan. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only payment period.

 

Loans modified in a TDR for the Company may have the financial effect of increasing the specific allowance associated with the loan. An allowance for impaired consumer and commercial loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates.

 

The following table presents by class, the recorded investment of loans modified in TDRs held by the Company during the periods ended March 31, 2015 and December 31, 2014.

 

   

Number of

   

TDRs Performing

   

TDRs Not Performing

   

Total

 

(dollars in thousands)

 

Contracts

   

to Modified Terms

   

to Modified Terms

   

TDRs

 
                                 

March 31, 2015

                               

Commercial

    1     $ -     $ 223     $ 223  

Income producing - commercial real estate

    3       7,823       -       7,823  

Owner occupied - commercial real estate

    1       553       -       553  

Construction - commercial and residential

    1       5,063       -       5,063  

Total

    6     $ 13,439     $ 223     $ 13,662  
                                 

December 31, 2014

                               

Commercial

    1     $ -     $ 227     $ 227  

Income producing - commercial real estate

    3       7,849       -       7,849  

Owner occupied - commercial real estate

    1       565       -       565  

Construction - commercial and residential

    1       5,088       -       5,088  

Total

    6     $ 13,502     $ 227     $ 13,729  

 

 

There were no TDR defaults during the three months ended March 31, 2015 and 2014. A default is considered to have occurred once the TDR is past due 90 days or more, or it has been placed on nonaccrual. Commercial and consumer loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan. There were no loans modified in a TDR during the three months ended March 31, 2015 and 2014.

 

 
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Note 6. Other Real Estate Owned

 

The activity within Other Real Estate Owned (“OREO”) for the three months ended March 31, 2015 and 2014 is presented in the table below. For the three months ended March 31, 2015, proceeds on sale of OREO were $153 thousand and net loss on sale was $17 thousand. For the three months ended March 31, 2014, proceeds on sale of OREO were $50 thousand and net loss was $100 thousand.

 

   

Three Months Ended

 

(dollars in thousands)

 

March 31, 2015

   

March 31, 2014

 
                 

Balance beginning of period

  $ 13,224     $ 9,225  

Real estate acquired from borrowers

    -       245  

Valuation allowance

    (750 )     (611 )

Properties sold

    (136 )     (50 )

Balance end of period

  $ 12,338     $ 8,809  

 

 

Note 7. Net Income per Common Share

 

The calculation of net income per common share for the three months ended March 31, 2015 and 2014 was as follows.

 

   

Three Months Ended March 31,

 

(dollars and shares in thousands, except per share data)

 

2015

   

2014

 

Basic:

               

Net income available to common shareholders

  $ 19,238     $ 12,358  

Average common shares outstanding

    31,083       25,928  

Basic net income per common share

  $ 0.62     $ 0.48  
                 

Diluted:

               

Net income available to common shareholders

  $ 19,238     $ 12,358  

Average common shares outstanding

    31,083       25,928  

Adjustment for common share equivalents

    693       647  

Average common shares outstanding-diluted

    31,776       26,575  

Diluted net income per common share

  $ 0.61     $ 0.47  
                 

Anti-dilutive shares

    13,000       21,000  

 

 

Note 8. Stock-Based Compensation

 

The Company maintains the 1998 Stock Option Plan (“1998 Plan”), the 2006 Stock Plan (“2006 Plan”) and the 2011 Employee Stock Purchase Plan (“2011 ESPP”).

 

In connection with the acquisition of Fidelity, the Company assumed the Fidelity 2004 Long Term Incentive Plan and the 2005 Long Term Incentive Plan (the “Fidelity Plans”).

 

In connection with the acquisition of Virginia Heritage, the Company assumed the Virginia Heritage 2006 Stock Option Plan and the 2010 Long Term Incentive Plan (the “Virginia Heritage Plans”).

 

 
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No additional options may be granted under the 1998 Plan, the Fidelity Plans or the Virginia Heritage Plans.

 

The 2006 Plan provides for the issuance of awards of incentive stock options, non-qualifying stock options, restricted stock and stock appreciation rights to selected key employees and members of the Board. As amended, 1,996,500 shares of common stock are subject to issuance pursuant to awards under the 2006 Plan. Stock options and restricted stock awards are made with an exercise price equal to the average of the high and low price of the Company’s shares at the date of grant.

 

For awards that are service based, compensation expense is being recognized over the service (vesting) period based on fair value, which for stock option grants is computed using the Black-Scholes model, and for restricted stock awards is based on the average of the high and low stock price of the Company’s shares on the date of grant. For awards that are performance-based, compensation expense is recorded based on the probability of achievement of the goals underlying the grant. No performance-based awards are outstanding at March 31, 2015.

 

In February 2015, the Company awarded 77,370 shares of restricted stock to senior officers, directors and employees. The shares vest in three substantially equal installments beginning on the first anniversary of the date of grant.

 

In March 2015, the Company awarded 700 shares of restricted stock to an employee. The shares vest in five substantially equal installments beginning on the first anniversary of the date of grant.

 

Below is a summary of changes in shares pursuant to our equity compensation plans for the three months ended March 31, 2015 and 2014. The information excludes restricted stock units and awards.

 

   

Three Months Ended March 31,

 
   

2015

   

2014

 
   

Shares

   

Weighted-Average Exercise Price

   

Shares

   

Weighted-Average Exercise Price

 
                                 

Beginning balance

    757,183     $ 11.31       501,334     $ 10.34  

Issued

    -       -       21,000       32.77  

Exercised

    (280,425 )     12.40       (19,027 )     13.13  

Forfeited

    -       -       (110 )     5.76  

Expired

    (8,007 )     16.90       (408 )     9.37  

Ending balance

    468,751     $ 10.57       502,789     $ 11.18  

 

 
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The following summarizes information about stock options outstanding at March 31, 2015. The information excludes restricted stock units and awards.

 

                                 

Weighted-Average

 
 

Outstanding:

           

Stock Options

   

Weighted-Average

   

Remaining

 
 

Range of Exercise Prices

   

Outstanding

   

Exercise Price

   

Contractual Life

 
  $ 5.76     $ 9.21       225,479     $ 5.76       3.78  
  $ 9.22     $ 15.47       173,907       11.83       2.83  
  $ 15.48     $ 22.66       37,774       19.11       8.29  
  $ 22.67     $ 32.36       31,591       27.69       4.26  
                    468,751     $ 10.57       3.82  

 

 

 

Exercisable:

           

Stock Options

   

Weighted-Average

 
 

Range of Exercise Prices

           

Exercisable

   

Exercise Price

 
  $ 5.76     $ 9.21       168,569     $ 5.76  
  $ 9.22     $ 15.47       166,467       11.88  
  $ 15.48     $ 22.66       32,494       19.43  
  $ 22.67     $ 32.36       21,191       25.40  
                    388,721     $ 10.59  

 

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model with the assumptions as shown in the table below used for grants during the years ended December 31, 2014 and 2013. There were no grants of stock options for the three months ended March 31, 2015.

 

   

Three Months Ended

   

Years Ended December 31,

 
   

2015

   

2014

   

2013

 

Expected volatility

 

N/A

      34.25 %     34.12 %

Weighted-Average volatility

 

N/A

      34.25 %     34.12 %

Expected dividends

    0.0 %     0.0 %     0.0 %

Expected term (in years)

 

N/A

      9.4       7.5  

Risk-free rate

 

N/A

      2.26 %     1.31 %

Weighted-average fair value (grant date)

 

N/A

    $ 13.49     $ 7.83  

 

The expected lives are based on the “simplified” method allowed by ASC Topic 718 “Compensation,” whereby the expected term is equal to the midpoint between the vesting period and the contractual term of the award.

 

The total intrinsic value of outstanding stock options and outstanding exercisable stock options was $10.8 million at March 31, 2015. The total intrinsic value of stock options exercised during the three months ended March 31, 2015 and 2014 was $6.0 million and $401 thousand, respectively. The total fair value of stock options vested was $79 thousand and $123 thousand for the three months ended March 31, 2015 and 2014, respectively. Unrecognized stock-based compensation expense related to stock options totaled $300 thousand at March 31, 2015. At such date, the weighted-average period over which this unrecognized stock option expense is expected to be recognized was 3.47 years.

 

 
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The Company has unvested restricted stock award grants of 393,984 shares under the 2006 Plan at March 31, 2015. Unrecognized stock based compensation expense related to restricted stock awards totaled $9.3 million at March 31, 2015. At such date, the weighted-average period over which this unrecognized expense was expected to be recognized was 2.10 years. The following table summarizes the unvested restricted stock awards at March 31, 2015 and 2014.

 

   

Three Months Ended March 31,

 
   

2015

   

2014

 
   

Shares

   

Weighted-Average Grant Date Fair Value

   

Shares

   

Weighted-Average Grant Date Fair Value

 
                                 

Unvested at beginning

    509,336     $ 21.58       614,580     $ 18.71  

Issued

    78,070       36.06       78,947       33.24  

Forfeited

    (84 )     25.91       (434 )     15.67  

Vested

    (193,338 )     20.66       (181,967 )     17.59  

Unvested at end

    393,984     $ 24.90       511,126     $ 21.36  

 

 

Approved by shareholders in May 2011, the 2011 ESPP reserved 550,000 shares of common stock (as adjusted for stock dividends) for issuance to employees. Whole shares are sold to participants in the plan at 85% of the lower of the stock price at the beginning or end of each quarterly offering period. The 2011 ESPP is available to all eligible employees who have completed at least one year of continuous employment, work at least 20 hours per week and at least five months a year. Participants may contribute a minimum of $10 per pay period to a maximum of $6,250 per offering period or $25,000 annually (not to exceed more than 10% of compensation per pay period). At March 31, 2015, the 2011 ESPP had 447,453 shares remaining for issuance.

 

Included in salaries and employee benefits the Company recognized $1.1 million and $892 thousand in stock-based compensation expense for the three months ended March 31, 2015 and 2014, respectively. Stock-based compensation expense is recognized ratably over the requisite service period for all awards.

 

Note 9Other Comprehensive Income

 

The following table presents the components of other comprehensive income (loss) for the three months ended March 31, 2015 and 2014.

 

(dollars in thousands)

 

Before Tax

   

Tax Effect

   

Net of Tax

 
                         

Three months ended March 31, 2015

                       

Net unrealized gain on securities available-for-sale

  $ 3,218     $ 1,287     $ 1,931  

Less: Reclassification adjustment for net gains included in net income

    (2,164 )     (866 )     (1,298 )

Other Comprehensive Income

  $ 1,054     $ 421     $ 633  
                         

Three months ended March 31, 2014

                       

Net unrealized loss on securities available-for-sale

  $ 4,703     $ 1,881     $ 2,822  

Less: Reclassification adjustment for net gains included in net income

    (8 )     (3 )     (5 )

Other Comprehensive Income

  $ 4,695     $ 1,878     $ 2,817  

 

 
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The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax, for the three months ended March 31, 2015 and 2014.

 

   

Accumulated Other

(dollars in thousands)

 

Comprehensive Income (Loss)

     

Three months ended March 31, 2015

   

Balance at beginning of period

 

$ 2,647

Other comprehensive income before reclassifications

 

                                         1,931

Amounts reclassified from accumulated other comprehensive income

 

                                        (1,298)

Net other comprehensive income during period

 

                                            633

Balance at end of period

 

$ 3,280

     

Three months ended March 31, 2014

   

Balance at beginning of period

 

$ (3,319)

Other comprehensive income before reclassifications

 

                                         2,822

Amounts reclassified from accumulated other comprehensive income

 

                                               (5)

Net other comprehensive income during period

 

                                         2,817

Balance at end of period

 

$ (502)

 

 

The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three months ended March 31, 2015 and 2014.

 

   

Amount Reclassified from

 

Affected Line Item in

Details about Accumulated Other

 

Accumulated Other

 

the Statement Where

Comprehensive Income Components (dollars in thousands)

 

Comprehensive (Loss) Income

 

Net Income is Presented

   

Three months ended March 31,

   
   

2015

   

2014

   

Realized gain on sale of investment securities

  $ 2,164     $ 8  

Gain on sale of investment securities

      (866 )     (3 )

Tax Expense

Total Reclassifications for the Period

  $ 1,298     $ 5  

Net of Tax

 

 

Note 10 Fair Value Measurements

 

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

 

 

Level 1

Quoted prices in active exchange markets for identical assets or liabilities; also includes certain U.S. Treasury and other U.S. Government and agency securities actively traded in over-the-counter markets.

 

 

Level 2

Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data.  This category generally includes certain U.S. Government and agency securities, corporate debt securities, derivative instruments, and residential mortgage loans held for sale.

 

 
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Level 3

Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for single dealer nonbinding quotes not corroborated by observable market data. This category generally includes certain private equity investments, retained interests from securitizations, and certain collateralized debt obligations.

 

Assets and Liabilities Recorded as Fair Value on a Recurring Basis

 

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014.

 

(dollars in thousands)

 

Quoted Prices

(Level 1)

   

Significant Other Observable Inputs

(Level 2)

   

Significant Other Unobservable Inputs (Level 3)

   

Total

(Fair Value)

 

March 31, 2015

                               

Investment securities available for sale:

                               

U. S. Government agency securities

  $ -     $ 30,119     $ -     $ 30,119  

Residential mortgage backed securities

    -       234,151       -       234,151  

Municipal bonds

    -       68,797       -       68,797  

Other equity investments

    245       -       219       464  

Residential mortgage loans held for sale

    -       62,758       -       62,758  

Derivative assets

    -       -       219       219  

Total assets measured at fair value on a recurring basis as of March 31, 2015

  $ 245     $ 395,825     $ 438     $ 396,508  

 

(dollars in thousands)

 

Quoted Prices

(Level 1)

   

Significant Other Observable Inputs

(Level 2)

   

Significant Other Unobservable Inputs (Level 3)

   

Total

(Fair Value)

 

December 31, 2014

                               

Investment securities available for sale:

                               

U. S. Government agency securities

  $ -     $ 29,894     $ -     $ 29,894  

Residential mortgage backed securities

    -       240,320       -       240,320  

Municipal bonds

    -       111,712       -       111,712  

Other equity investments

    198       -       219       417  

Residential mortgage loans held for sale

    -       44,317       -       44,317  

Derivative assets

    -       -       146       146  

Total assets measured at fair value on a recurring basis as of December 31, 2014

  $ 198     $ 426,243     $ 365     $ 426,806  

 

 

Investment Securities Available-for-Sale

 

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include U.S. Government agency debt securities, mortgage backed securities issued by government sponsored entities and municipal bonds. Securities classified as Level 3 include securities in less liquid markets, the carrying amount approximate the fair value.

 

The Company’s residential loans held for sale are reported on an aggregate basis at the lower of cost or fair value.

 

 
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The following is a reconciliation of activity for assets measured at fair value based on Significant Other Unobservable Inputs (Level 3):

 

   

Other Equity

   

Derivative

         

(dollars in thousands)

 

Investments

   

Assets/(Liability)

   

Total

 

Assets:

                       

Beginning balance at December 31, 2014

  $ 219     $ 146     $ 365  

Realized gain (loss) included in earnings - net derivatives

    -       73       73  

Principal redemption

    -       -       -  

Ending balance at March 31, 2015

  $ 219     $ 219     $ 438  
                         

Liabilities:

                       

Beginning balance at December 31, 2014

  $ -     $ (250 )   $ (250 )

Realized gain (loss) included in earnings - net derivatives

    -       110       110  

Principal redemption

    -       -       -  

Ending balance at March 31, 2015

  $ -     $ (140 )   $ (140 )

 

   

Other Equity

   

Derivative

         

(dollars in thousands)

 

Investments

   

Assets/(Liability)

   

Total

 

Assets:

                       

Beginning balance at December 31, 2013

  $ 219     $ -     $ 219  

Realized gain (loss) included in earnings - net derivatives

    -       146       146  

Ending balance at December 31, 2014

  $ 219     $ 146     $ 365  
                         

Liabilities:

                       

Beginning balance at December 31, 2013

  $ -     $ -     $ -  

Realized gain (loss) included in earnings - net derivatives

    -       (250 )     (250 )

Ending balance at December 31, 2014

  $ -     $ (250 )   $ (250 )

 

Securities classified as Level 3 include securities in less liquid markets, the carrying amount approximate the fair value. The securities consist of equity investments in the form of common stock of two local banking companies which are not publicly traded.

 

The Corporation relies on a third-party pricing service to value its derivative financial assets and liabilities. The external valuation model estimates the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale, which includes grouping the interest rate lock commitments by interest rate and terms, applying an estimated pull-through rate based on historical experience, and then multiplying by quoted investor prices determined to be reasonably applicable to the loan commitment groups based on interest rate, terms, and rate lock expiration dates of the loan commitment groups. The Corporation also relies on an external valuation model to estimate the fair value of its forward commitments to sell residential mortgage loans (i.e., an estimate of what the Corporation would receive or pay to terminate the forward delivery contract based on market prices for similar financial instruments), which includes matching specific terms and maturities of the forward commitments against applicable investor pricing available.

 

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

 

The Company measures certain assets at fair value on a nonrecurring basis and the following is a general description of the methods used to value such assets.

 

Loans held for sale: Loans held for sale are carried at the lower of cost or market value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies loans subjected to nonrecurring fair value adjustments as Level 2 valuation.

 

Impaired loans: The Company considers a loan impaired when it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the note agreement, including both principal and interest. Management has determined that nonaccrual loans and loans that have had their terms restructured in a troubled debt restructuring meet this impaired loan definition. For individually evaluated impaired loans, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the estimated fair value of the underlying collateral for collateral-dependent loans, which the Company classifies as a Level 3 valuation.

 

 
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Other real estate owned: Other real estate owned is initially recorded at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral, which the Company classifies as a Level 3 valuation. Assets measured at fair value on a nonrecurring basis are included in the table below:

 

(dollars in thousands)

 

Quoted Prices (Level 1)

   

Significant Other Observable Inputs (Level 2)

   

Significant Other Unobservable Inputs (Level 3)

   

Total

(Fair Value)

 

March 31, 2015

                               

Impaired loans:

                               

Commercial

  $ -     $ 1,934     $ 6,278     $ 8,212  

Income producing - commercial real estate

    -       1,272       450       1,722  

Owner occupied - commercial real estate

    -       724       590       1,314  

Real estate mortgage - residential

    -       -       342       342  

Construction - commercial and residential

    -       -       3,058       3,058  

Home equity

    -       130       565       695  

Other consumer

    -       -       5       5  

Other real estate owned

    -       9,214       3,124       12,338  

Derivative liabilities

    -       -       140       140  

Total assets measured at fair value on a nonrecurring basis as of March 31, 2015

  $ -     $ 13,274     $ 14,552     $ 27,826  
                                 

(dollars in thousands)

 

Quoted Prices (Level 1)

   

Significant Other Observable Inputs (Level 2)

   

Significant Other Unobservable Inputs (Level 3)

   

Total

(Fair Value)

 

December 31, 2014

                               

Impaired loans:

                               

Commercial

  $ -     $ 781     $ 7,171     $ 7,952  

Income producing - commercial real estate

    -       703       1,199       1,902  

Owner occupied - commercial real estate

    -       -       824       824  

Real estate mortgage - residential

    -       -       346       346  

Construction - commercial and residential

    -       -       3,297       3,297  

Home equity

    -       5       963       968  

Other consumer

    -       -       13       13  

Other real estate owned

    -       9,184       4,040       13,224  

Derivative liabilities

    -       -       250       250  

Total assets measured at fair value on a nonrecurring basis as of December 31, 2014

  $ -     $ 10,673     $ 18,103     $ 28,776  

 

Loans

 

The Company does not record loans at fair value on a recurring basis; however, from time to time, a loan is considered impaired and an allowance for loan loss is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC Topic 310, “Receivables. The fair value of impaired loans is estimated using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring a specific allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At March 31, 2015, substantially all of the totally impaired loans were evaluated based upon the fair value of the collateral. In accordance with ASC Topic 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3.

 

Fair Value of Financial Instruments

 

The Company discloses fair value information about financial instruments for which it is practicable to estimate the value, whether or not such financial instruments are recognized on the balance sheet. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by quoted market price, if one exists.

 

 
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Quoted market prices, if available, are shown as estimates of fair value. Because no quoted market prices exist for a portion of the Company’s financial instruments, the fair value of such instruments has been derived based on management’s assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the net realizable value could be materially different from the estimates presented below. In addition, the estimates are only indicative of individual financial instrument values and should not be considered an indication of the fair value of the Company taken as a whole.     

 

The following methods and assumptions were used to estimate the fair value of each category of financial instrument for which it is practicable to estimate value:

 

Cash due from banks and federal funds sold: For cash and due from banks and federal funds sold the carrying amount approximates fair value.

 

Interest bearing deposits with other banks: Values are estimated by discounting the future cash flows using the current rates at which similar deposits would be earning.

 

Investment securities: For these instruments, fair values are based upon quoted prices, if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.

 

Federal Reserve and Federal Home Loan Bank stock: The carrying amount approximate the fair values at the reporting date.

 

Loans held for sale: Fair values are at the carrying value (lower of cost or market) since such loans are typically committed to be sold (servicing released) at a profit.

 

Loans: For variable rate loans that re-price on a scheduled basis, fair values are based on carrying values. The fair value of the remaining loans are estimated by discounting the estimated future cash flows using the current interest rate at which similar loans would be made to borrowers with similar credit ratings and for the same remaining term.

 

Bank owned life insurance: The fair value of bank owned life insurance is the current cash surrender value, which is the carrying value.

 

Annuity investment: The fair value of the annuity investments is the carrying amount at the reporting date.

 

Derivative financial instruments: Derivative instruments are used to hedge residential mortgage loans held for sale that utilize mandatory delivery and the related interest rate lock commitments and include forward commitments to sell those loans. The fair values of derivative financial instruments are based on derivative market data inputs as of the valuation date and the underlying value of mortgage loans for interest rate lock commitments.

 

Noninterest bearing deposits: The fair value of these deposits is the amount payable on demand at the reporting date, since generally accepted accounting standards do not permit an assumption of core deposit value.

 

Interest bearing deposits: The fair value of interest bearing transaction, savings, and money market deposits with no defined maturity is the amount payable on demand at the reporting date, since generally accepted accounting standards do not permit an assumption of core deposit value.

 

Certificates of deposit: The fair value of certificates of deposit is estimated by discounting the future cash flows using the current rates at which similar deposits with remaining maturities would be accepted.

 

 
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Customer repurchase agreements and federal funds purchased: The carrying amount approximate the fair values at the reporting date.

 

Borrowings: The carrying amount for variable rate borrowings approximate the fair values at the reporting date. The fair value of fixed rate FHLB advances and the subordinated notes are estimated by computing the discounted value of contractual cash flows payable at current interest rates for obligations with similar remaining terms. The fair value of variable rate FHLB advances is estimated to be carrying value since these liabilities are based on a spread to a current pricing index.

 

Off-balance sheet items: Management has reviewed the unfunded portion of commitments to extend credit, as well as standby and other letters of credit, and has determined that the fair value of such instruments is equal to the fee, if any, collected and unamortized for the commitment made.

 

 
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The estimated fair values of the Company’s financial instruments at March 31, 2015 and December 31, 2014 are as follows:

 

                   

Fair Value Measurements

 
                   

Quoted Prices in Active Markets for Identical Assets or Liabilities

   

Significant Other Observable Inputs

   

Significant Unobservable Inputs

 

(dollars in thousands)

 

Carrying Value

   

Fair Value

   

(Level 1)

   

(Level 2)

   

(Level 3)

 

March 31, 2015

                                       

Assets

                                       

Cash and due from banks

  $ 9,997     $ 9,997     $ -     $ 9,997     $ -  

Federal funds sold

    2,700       2,700       -       2,700       -  

Interest bearing deposits with other banks

    402,964       402,964       -       402,964       -  

Investment securities

    333,531       333,531       245       333,067       219  
                                         

Federal Reserve and Federal Home Loan Bank stock

    16,793       16,793       -       16,793       -  

Loans held for sale

    62,758       63,074       -       63,074       -  

Loans

    4,444,893       4,447,182       -       4,060       4,443,122  

Bank owned life insurance

    56,983       56,983       -       56,983       -  

Annuity investment

    12,269       12,269       -       12,269       -  

Derivative assets

    219       219       -       219       -  
                                         

Liabilities

                                       

Noninterest bearing deposits

    1,196,165       1,196,165       -       1,196,165       -  

Interest bearing deposits

    3,388,200       3,387,995       -       3,387,995       -  

Borrowings

    137,889       138,386       -       138,386       -  

Derivative liabilities

    140       140       -       -       140  
                                         
                                         

December 31, 2014

                                       

Assets

                                       

Cash and due from banks

  $ 9,097     $ 9,097     $ -     $ 9,097     $ -  

Federal funds sold

    3,516       3,516       -       3,516       -  

Interest bearing deposits with other banks

    243,412       243,412       -       243,412       -  

Investment securities

    382,343       382,343       198       381,926       219  
                                         

Federal Reserve and Federal Home Loan Bank stock

    22,560       22,560       -       22,560       -  

Loans held for sale

    44,317       44,669       -       44,669       -  

Loans

    4,312,399       4,314,618       -       1,489       4,313,129  

Bank owned life insurance

    56,594       56,594       -       56,594       -  

Annuity investment

    11,277       11,277       -       11,277       -  

Derivative assets

    146       146       -       146       -  
                                         

Liabilities

                                       

Noninterest bearing deposits

    1,175,799       1,175,799       -       1,175,799       -  

Interest bearing deposits

    3,134,969       3,134,295       -       3,134,295       -  

Borrowings

    280,420       281,958       -       281,958       -  

Derivative liabilities

    250       250       -       -       250  

 

 
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Note 11Supplemental Executive Retirement Plan

 

In February 2013, the Compensation Committee authorized Supplemental Executive Retirement and Death Benefit Agreements (the “SERP Agreements”) with each of the Bank’s executive officers other than Mr. Paul, which upon the executive’s retirement, will provide for a stated monthly payment for such executive’s lifetime, subject to certain death benefits described below. The retirement benefit is computed as a percentage of each executive’s projected average base salary over the five years preceding retirement, assuming retirement at age 67. The SERP Agreements provide that (a) the benefits vest ratably over six years of service to the Bank, with the executive receiving credit for years of service prior to entering into the SERP Agreement, (b) death, disability and change-in-control shall result in immediate vesting, and (c) the monthly amount will be reduced if retirement occurs earlier than age 67 for any reason other than death, disability or change-in-control. The SERP Agreements further provide for a death benefit in the event the retired executive dies prior to receiving 180 monthly installments, paid either in a lump sum payment or continued monthly installment payments, such that the executive’s beneficiary has received payment(s) sufficient to equate to a cumulative 180 monthly installments.

 

The SERP Agreements are unfunded arrangements maintained primarily to provide supplemental retirement benefits and comply with Section 409A of the Internal Revenue Code. The Bank financed the retirement benefits by purchasing fixed annuity contracts with four insurance carriers totaling $11.4 million that have been designed to provide a future source of funds for the lifetime retirement benefits of the SERP Agreements. The primary impetus for utilizing fixed annuities is a substantial savings in compensation expenses for the Bank as opposed to a traditional SERP Agreement. The cash surrender value of the annuity contracts was $12.3 million at March 31, 2015 and is included in other assets on the consolidated balance sheet. For the three months ended March 31, 2015, the Company recorded benefit expense accruals of $255 thousand for this post retirement benefit.

 

Upon death of an executive, the annuity contract related to such executive terminates. The Bank has purchased additional bank owned life insurance contracts, which would effectively fund payments (up to a 15 year certain amount) to the executives’ named beneficiaries.

 

 

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion provides information about the results of operations, and financial condition, liquidity, and capital resources of the Company and its subsidiaries as of the dates and periods indicated. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and Notes thereto, appearing elsewhere in this report and the Management Discussion and Analysis in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

This report contains forward looking statements within the meaning of the Securities Exchange Act of 1934, as amended, including statements of goals, intentions, and expectations as to future trends, plans, events or results of Company operations and policies and regarding general economic conditions. In some cases, forward- looking statements can be identified by use of such words as “may,” “will,” “anticipate,” “believes,” “expects,” “plans,” “estimates,” “potential,” “continue,” “should,” and similar words or phrases. These statements are based upon current and anticipated economic conditions, nationally and in the Company’s market, interest rates and interest rate policy, competitive factors and other conditions, which by their nature are not susceptible to accurate forecast, and are subject to significant uncertainty. For details on factors that could affect these expectations, see the risk factors and other cautionary language included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 and in other periodic and current reports filed by the Company with the Securities and Exchange Commission. Because of these uncertainties and the assumptions on which this discussion and the forward-looking statements are based, actual future operations and results in the future may differ materially from those indicated herein. Readers are cautioned against placing undue reliance on any such forward looking statements.

 

 
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GENERAL


 

The Company is a growth oriented, one-bank holding company headquartered in Bethesda, Maryland, which is currently celebrating seventeen years of successful operations. The Company provides general commercial and consumer banking services through the Bank, its wholly owned banking subsidiary, a Maryland chartered bank which is a member of the Federal Reserve System. The Company was organized in October 1997, to be the holding company for the Bank. The Bank was organized in 1998 as an independent, community oriented, full service banking alternative to the super regional financial institutions, which dominate the primary market area. The Company’s philosophy is to provide superior, personalized service to its customers. The Company focuses on relationship banking, providing each customer with a number of services and becoming familiar with and addressing customer needs in a proactive, personalized fashion. As of March 31, 2015 the Bank has a total of twenty-two branch offices, including ten in Northern Virginia, seven in Montgomery County, Maryland, and five in Washington, D.C.

 

The Bank offers a broad range of commercial banking services to its business and professional clients as well as full service consumer banking services to individuals living and/or working primarily in the Bank’s market area. The Bank emphasizes providing commercial banking services to sole proprietors, small, medium sized businesses, non-profit organizations and associations, and investors living and working in and near the primary service area. These services include the usual deposit functions of commercial banks, including business and personal checking accounts, “NOW” accounts and money market and savings accounts, business, construction, and commercial loans, residential mortgages and consumer loans, and cash management services. The Bank is also active in the origination and sale of residential mortgage loans and the origination of SBA loans. The residential mortgage loans are originated for sale to third-party investors, generally large mortgage and banking companies, under best efforts and mandatory delivery commitments with the investors to purchase the loans subject to compliance with pre-established criteria. The Bank generally sells the guaranteed portion of the SBA loans in a transaction apart from the loan origination generating noninterest income from the gains on sale, as well as servicing income on the portion participated. Bethesda Leasing, LLC, a subsidiary of the Bank, holds title to and manages Other Real Estate Owned (“OREO”) assets. Eagle Insurance Services, LLC, a subsidiary of the Bank, offers access to insurance products and services through a referral program with a third party insurance broker. Additionally, the Bank offers investment advisory services through referral programs with two third parties. ECV, a subsidiary of the Company, provides subordinated financing for the acquisition, development and/or construction of real estate projects. ECV lending involves higher levels of risk, together with commensurate expected returns.

 

CRITICAL ACCOUNTING POLICIES


 

The Company’s consolidated financial statements are prepared in accordance with GAAP and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the consolidated financial statements; accordingly, as this information changes, the consolidated financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or a valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility.

 

The fair values and the information used to record valuation adjustments for investment securities available-for-sale are based either on quoted market prices or are provided by other third-party sources, when available. The Company’s investment portfolio is categorized as available-for-sale with unrealized gains and losses net of income tax being a component of shareholders’ equity and accumulated other comprehensive (loss) income.

 

 
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The allowance for credit losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two principles of accounting: (a) ASC Topic 450, “Contingencies,” which requires that losses be accrued when they are probable of occurring and are estimable and (b) ASC Topic 310, “Receivables,” which requires that losses be accrued when it is probable that the Company will not collect all principal and interest payments according to the contractual terms of the loan. The loss, if any, can be determined by the difference between the loan balance and the value of collateral, the present value of expected future cash flows, or values observable in the secondary markets.

 

Three components comprise our allowance for credit losses: a specific allowance, a formula allowance and a nonspecific or environmental factors allowance. Each component is determined based on estimates that can and do change when actual events occur.

 

The specific allowance allocates a reserve to identified impaired loans. Impaired loans are assigned specific reserves based on an impairment analysis. Under ASC Topic 310, “Receivables,” a loan for which reserves are individually allocated may show deficiencies in the borrower’s overall financial condition, payment record, support available from financial guarantors and for the fair market value of collateral. When a loan is identified as impaired, a specific reserve is established based on the Company’s assessment of the loss that may be associated with the individual loan.

 

The formula allowance is used to estimate the loss on internally risk rated loans, exclusive of those identified as requiring specific reserves. The portfolio of unimpaired loans is stratified by loan type and risk assessment. Allowance factors relate to the type of loan and level of the internal risk rating, with loans exhibiting higher risk and loss experience receiving a higher allowance factor.

 

The environmental allowance is also used to estimate the loss associated with pools of non-classified loans. These non-classified loans are also stratified by loan type, and environmental allowance factors are assigned by management based upon a number of conditions, including delinquencies, loss history, changes in lending policy and procedures, changes in business and economic conditions, changes in the nature and volume of the portfolio, management expertise, concentrations within the portfolio, quality of internal and external loan review systems, competition, and legal and regulatory requirements.

 

The allowance captures losses inherent in the loan portfolio, which have not yet been recognized. Allowance factors and the overall size of the allowance may change from period to period based upon management’s assessment of the above described factors, the relative weights given to each factor, and portfolio composition.

 

Management has significant discretion in making the judgments inherent in the determination of the provision and allowance for credit losses, including in connection with the valuation of collateral, a borrower’s prospects of repayment, and in establishing allowance factors on the formula and environmental components of the allowance. The establishment of allowance factors involves a continuing evaluation, based on management’s ongoing assessment of the global factors discussed above and their impact on the portfolio. The allowance factors may change from period to period, resulting in an increase or decrease in the amount of the provision or allowance, based upon the same volume and classification of loans. Changes in allowance factors can have a direct impact on the amount of the provision, and a related after tax effect on net income. Errors in management’s perception and assessment of the global factors and their impact on the portfolio could result in the allowance not being adequate to cover losses in the portfolio, and may result in additional provisions or charge-offs. Alternatively, errors in management’s perception and assessment of the global factors and their impact on the portfolio could result in the allowance being in excess of amounts necessary to cover losses in the portfolio, and may result in lower provisions in the future. For additional information regarding the provision for credit losses, refer to the discussion under the caption “Provision for Credit Losses” below.

 

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights. Intangible assets that have finite lives, such as core deposit intangibles are amortized over their estimated useful lives and subject to periodic impairment testing. Intangible assets (other than goodwill) are amortized to expense using accelerated or straight-line methods over their respective estimated useful lives.

 

 
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Goodwill and other intangibles are subject to impairment testing at the reporting unit level, which must be conducted at least annually. The Company performs impairment testing during the fourth quarter of each year or when events or changes in circumstances indicate the assets might be impaired.

 

The Company performs a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing updated qualitative factors, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it does not have to perform the two-step goodwill impairment test. Determining the fair value of a reporting unit under the first step of the goodwill impairment test and determining the fair value of individual assets and liabilities of a reporting unit under the second step of the goodwill impairment test are judgmental and often involve the use of significant estimates and assumptions. Similarly, estimates and assumptions are used in determining the fair value of other intangible assets. Estimates of fair value are primarily determined using discounted cash flows, market comparisons and recent transactions. These approaches use significant estimates and assumptions including projected future cash flows, discount rates reflecting the market rate of return, projected growth rates and determination and evaluation of appropriate market comparables. Based on the results of quantitative assessments of all reporting units, the Company concluded that no impairment existed at December 31, 2014. However, future events could cause the Company to conclude that goodwill or other intangibles have become impaired, which would result in recording an impairment loss. Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations.

 

The Company follows the provisions of ASC Topic 718, “Compensation,” which requires the expense recognition for the fair value of share based compensation awards, such as stock options, restricted stock awards, and performance based shares. This standard allows management to establish modeling assumptions as to expected stock price volatility, option terms, forfeiture rates and dividend rates which directly impact estimated fair value. The accounting standard also allows for the use of alternative option pricing models which may impact fair value as determined. The Company’s practice is to utilize reasonable and supportable assumptions.

 

RESULTS OF OPERATIONS

 

Earnings Summary


 

For the three months ended March 31, 2015, the Company reported net income of $19.4 million, a 55% increase over the $12.5 million net income for the three months ended March 31, 2014. Net income available to common shareholders for the three months ended March 31, 2015 increased 56% to $19.2 million ($0.62 per basic common share and $0.61 per diluted common share) as compared to $12.4 million ($0.48 per basic common share and $0.47 per diluted common share) for the same period in 2014.

 

As of October 31, 2014, the Company completed a Merger with Virginia Heritage, which added approximately $800 million in loans, $645 million in deposits and 35 full time salaried employees.

 

The increase in net income for the three months ended March 31, 2015 can be attributed primarily to an increase in total revenue (i.e. net interest income plus noninterest income) of 41% over the same period in 2014. Net interest income growth in the first three months of 2015 as compared to the same period in 2014 of 37% and was due to average earning asset growth of 38%.

 

For the three months ended March 31, 2015, the Company reported an annualized return on average assets (“ROAA”) of 1.49% as compared to 1.36% for the three months ended March 31, 2014, while the annualized return on average common equity (“ROAE”) was 13.24% as compared to 14.38% for the same three months of 2014. The higher ROAA ratio for three months of 2015 as compared to 2014 was due primarily to an increase in the level of noninterest income attributable primarily to higher levels of residential mortgage refinancing activity and gains on the sale of investment securities. The lower ROAE ratio for the three months of 2015 as compared to 2014 was due primarily to higher average stockholders' equity in the first quarter of 2015 owing to a highly successful public offering of common stock completed in March 2015.

 

 
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The net interest margin, which measures the difference between interest income and interest expense (i.e. net interest income) as a percentage of earning assets, decreased 4 basis points from 4.45% for the three months ended March 31, 2014 to 4.41% for the three months ended March 31, 2015. For the first three months in 2015, the Company has been able to maintain its loan portfolio yields relatively close to 2014 levels (5.26% versus 5.45%) due to disciplined loan pricing practices, while maintaining a favorable deposit mix, largely resulting from ongoing efforts to increase and expand client relationships. Average earning assets yields were higher by 3 basis points (4.79% versus 4.76%) in the first quarter of 2015 as compared to the same quarter in 2014. This increase in average earning asset yields compares to an increase of 10 basis points (from 0.46% to 0.56%) in the cost of interest bearing liabilities. A higher mix of average loans as a percentage of total earning assets (from 82% to 87%) during the three months ended March 31, 2015, as compared to the same period in 2014, was the primary contributor to the increase in average earning asset yields in the first three months of 2015 versus 2014.

 

The net interest spread decreased by 7 basis points for the first three months in 2015 (4.23% versus 4.30%) as compared to 2014, as the Company has managed its cost of funds aggressively and been extremely disciplined in setting new loan rates. The benefit of noninterest sources funding earning assets increased by 3 basis points from 15 basis points to 18 basis points for the three months ended March 31, 2015 and 2014. The combination of a 7 basis point decrease in the net interest spread and a 3 basis point increase in the value of noninterest sources resulted in the 4 basis point decrease in the net interest margin for the first three months of 2015 as compared to the same period in 2014.

 

The Company believes it has effectively managed its net interest margin and net interest income over the past twelve months as average market interest rates have remained relatively low. This factor has been significant to overall earnings performance over the past twelve months as net interest income represents 88% of the Company’s total revenue.

 

For the first quarter of 2015, total loans grew 3% over December 31, 2014, and were 45% higher at March 31, 2015 as compared to March 31, 2014. For the first quarter of 2015, total deposits increased 6% over December 31, 2014, and were 40% higher at March 31, 2015 than at March 31, 2014. Growth in loans and deposits over the last twelve months was in part due to the Merger with Virginia Heritage. Excluding balances acquired in the Merger, organic loan and deposit growth over the last twelve months was 19% for loans and 20% for deposits.

 

In order to fund growth in average loans of 47% over the three months ended March 31, 2015 as compared to the same period in 2014, as well as sustain significant liquidity, the Company has relied on both core deposit growth and brokered or wholesale deposits. The major component of the growth in core deposits has been growth in money market accounts primarily as a result of effectively building new and enhanced client relationships. Growth in average time deposits has derived primarily from alternative or brokered deposit sources, which are both readily available and cost effective. Average total deposits grew by 35% for the three months of 2015 as compared to the same period in 2014.

 

In terms of the average asset composition or mix, loans, which generally have higher yields than securities and other earning assets, increased from 82% of average earning assets in the first three months of 2014 to 87% of average earning assets in the first three months of 2015. For the first three months of 2015, as compared to the same period in 2014, average loans, excluding loans held for sale, increased $1.4 billion, a 47% increase. The increase in average loans in the first three months of 2015 as compared to the first three months of 2014 is primarily attributable to growth in both construction – commercial and residential, and investment commercial real estate loans. Average investment securities for the three month periods ended March 31, 2015 and 2014 amounted to 7% and 11% of average earning assets, respectively. The combination of federal funds sold, interest bearing deposits with other banks and loans held for sale averaged 6% of average earning assets in the first three months of 2015 as compared to 7% for the same period in 2014.

 

As noted above, increases in average deposits in the first three months of 2015, as compared to the first three months of 2014, is attributable to both growth in money market accounts as well as noninterest bearing deposits accounts growth and to growth in time deposits, primarily attributable to brokered sources. Growth in average borrowed funds was due to greater use of both short-term and longer-term FHLB advances and to a $70 million subordinated debenture raise in August 2015, which qualifies as Tier 2 capital.

 

 
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The provision for credit losses was $3.3 million for the three months ended March 31, 2015 as compared to $1.9 million for the three months ended March 31, 2014. The higher provisioning in the first quarter of 2015, as compared to the first quarter of 2014, is due to both higher loan growth and higher net charge-offs. Net charge-offs of $1.6 million in the first quarter of 2015 represented an annualized 0.15% of average loans, excluding loans held for sale, as compared to $837 thousand or an annualized 0.11% of average loans, excluding loans held for sale, in the first quarter of 2014. Net charge-offs in the first quarter of 2015 were attributable primarily to commercial and industrial loans ($947 thousand), home equity and other consumer ($439 thousand), and owner occupied-commercial real estate loans ($318 thousand), offset by a recovery in land development and construction loans ($95 thousand).

 

At March 31, 2015 the allowance for credit losses represented 1.07% of loans outstanding, as compared to 1.07% at December 31, 2014, and 1.37% at March 31, 2014. The decrease in the allowance for credit losses as a percentage of total loans at March 31, 2014, as compared to March 31, 2015, from 1.37% to 1.07%, is due to loans acquired in the Merger with Virginia Heritage being accounted for at fair value in accordance with GAAP. The allowance for credit losses represented 244% of nonperforming loans at March 31, 2015, as compared to 116% at March 31, 2014 and 205% at December 31, 2014.

 

Total noninterest income for the three months ended March 31, 2015 increased to $7.8 million from $4.5 million for the three months ended March 31, 2014, a 75% increase. This increase was primarily due to an increase of $2.0 million in gains on the sale of residential mortgage loans due to higher origination and sales volumes and to gains realized on the sale of investment securities of $2.2 million. Residential mortgage loans closed were $285 million for the first quarter in 2015 versus $96 million for the first quarter of 2014. Investment gains were realized to take advantage of market conditions in February 2015. Net investment gains were $2.2 million for the three months ended March 31, 2015 compared to $8 thousand for the same period in 2014. A $1.1 million loss on the early extinguishment of debt was recorded in March of 2015 due to the early payoff of FHLB advances. This decision was made in light of deposit growth in the quarter and expected benefits to the cost of funds going forward. Excluding investment securities gains and the loss on early extinguishment of debt, total noninterest income was $6.8 million for the three months ended March 31, 2015, as compared to $4.5 million for the same period in 2014, a 52% increase.

 

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 44.89% for the first quarter of 2015, as compared to 51.94% for the first quarter of 2014. Noninterest expenses totaled $28.1 million for the three months ended March 31, 2015, as compared to $23.1 million for the three months ended March 31, 2014, a 22% increase. Cost increases for salaries and benefits were $2.1 million, due primarily to increased staff from the Merger, merit increases, employee benefit expense increases and incentive compensation. Premises and equipment expenses were $921 thousand higher, due to costs of additional branches and office space acquired in the Merger and to increases in leasing costs. Marketing and advertising expense increased by $223 thousand primarily due to costs associated with a new online publication. Data processing expense increased $196 thousand primarily due to increased accounts and transaction volume primarily arising out of the Merger and to higher network expenses. Higher FDIC expenses were due to higher deposit levels. Merger related expenses attributable to the Merger with Virginia Heritage were $111 thousand for the quarter. Other expenses increased $1.2 million due to expenses and valuations associated with other real estate owned.

 

The ratio of common equity to total assets increased from 9.30% at March 31, 2014 to 12.17% at March 31, 2015, due to the public offering of common stock completed during the first quarter of 2015 and to the issuance of common stock to consummate the Merger with Virginia Heritage. As discussed later in “Capital Resources and Adequacy,” the regulatory capital ratios of the Bank and Company remain above well capitalized levels.

 

 
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Net Interest Income and Net Interest Margin


 

Net interest income is the difference between interest income on earning assets and the cost of funds supporting those assets. Earning assets are composed primarily of loans and investment securities. The cost of funds represents interest expense on deposits, customer repurchase agreements and other borrowings. Noninterest bearing deposits and capital are other components representing funding sources (refer to discussion above under Results of Operations). Changes in the volume and mix of assets and funding sources, along with the changes in yields earned and rates paid, determine changes in net interest income.

 

For the first three months of 2015, net interest income increased 37% over the same period for 2014. Average loans increased $1.4 billion and average deposits increased by $1.1 billion. The net interest margin was 4.41% for the three months of 2015, as compared to 4.45% for the three months of 2014. The Company has been able to maintain its loan yields in 2015 close to 2014 levels due to loan pricing practices while maintaining a favorable deposit mix; much of which has occurred from sales efforts to increase and expand client relationships. The Company believes its net interest margin remains favorable compared to peer banking companies.

 

The table below presents the average balances and rates of the major categories of the Company’s assets and liabilities for the three months ended March 31, 2015 and 2014. Included in the table is a measurement of interest rate spread and margin. Interest rate spread is the difference (expressed as a percentage) between the interest rate earned on earning assets less the interest rate paid on interest bearing liabilities. While the interest rate spread provides a quick comparison of earnings rates versus cost of funds, management believes that margin provides a better measurement of performance. The net interest margin (as compared to net interest spread) includes the effect of noninterest bearing sources in its calculation and is net interest income expressed as a percentage of average earning assets.

 

 
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Eagle Bancorp, Inc.

Consolidated Average Balances, Interest Yields And Rates (Unaudited)

(dollars in thousands)

 

   

Three Months Ended March 31,

 
   

2015

   

2014

 
   

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

  $ 239,313     $ 138       0.23 %   $ 230,272     $ 138       0.24 %

Loans held for sale (1)

    46,728       431       3.69 %     26,592       266       4.00 %

Loans (1) (2)

    4,376,248       56,749       5.26 %     2,981,917       40,097       5.45 %

Investment securities available for sale (2)

    362,345       2,139       2.39 %     401,096       2,333       2.36 %

Federal funds sold

    14,794       9       0.25 %     7,428       3       0.16 %

Total interest earning assets

    5,039,428       59,466       4.79 %     3,647,305       42,837       4.76 %
                                                 

Total noninterest earning assets

    279,147                       134,570                  

Less: allowance for credit losses

    47,092                       41,650                  

Total noninterest earning assets

    232,055                       92,920                  

TOTAL ASSETS

  $ 5,271,483                     $ 3,740,225                  
                                                 

LIABILITIES AND SHAREHOLDERS' EQUITY

                                               

Interest bearing liabilities:

                                               

Interest bearing transaction

  $ 151,933     $ 50       0.13 %   $ 113,984     $ 63       0.22 %

Savings and money market

    2,275,985       1,874       0.33 %     1,838,306       1,493       0.33 %

Time deposits

    739,762       1,318       0.72 %     429,595       856       0.81 %

Total interest bearing deposits

    3,167,680       3,242       0.41 %     2,381,885       2,412       0.41 %

Customer repurchase agreements

    54,231       27       0.19 %     62,846       38       0.25 %

Other short-term borrowings

    83,389       54       0.26 %     -       -       -  

Long-term borrowings

    113,078       1,411       4.99 %     39,300       380       3.87 %

Total interest bearing liabilities

    3,418,378       4,734       0.56 %     2,484,031       2,830       0.46 %
                                                 

Noninterest bearing liabilities:

                                               

Noninterest bearing demand

    1,162,723                       836,031                  

Other liabilities

    29,018                       15,042                  

Total noninterest bearing liabilities

    1,191,741                       851,073                  
                                                 

Shareholders’ equity

    661,364                       405,121                  

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

  $ 5,271,483                     $ 3,740,225                  
                                                 
            $ 54,731                     $ 40,007          

Net interest income

                    4.23 %                     4.30 %

Net interest spread

                    4.41 %                     4.45 %

Net interest margin

                                               

 

(1) Loans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled $2.8 million and $2.4 million for the three months ended March 31, 2015 and 2014, respectively.

(2) Interest and fees on loans and investments exclude tax equivalent adjustments.

 

 
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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 2015, the allowance for credit losses increased $1.7 million, reflecting $3.3 million in provision for credit losses and $1.6 million in net charge-offs during the period. The provision for credit losses was $3.3 million for the three months ended March 31, 2015 as compared to $1.9 million for the three months ended March 31, 2014. At March 31, 2015, the allowance for credit losses represented 1.07% of loans outstanding, compared to 1.07% at December 31, 2014 and 1.37% at March 31, 2014. The higher provisioning in the first three months of 2015, as compared to the first three months of 2014, is due to a combination of higher loan growth and higher net charge-offs. Net charge-offs of $1.6 million represented an annualized 0.15% of average loans, excluding loans held for sale, in the first three months of 2015, as compared to $837 thousand or an annualized 0.11% of average loans, excluding loans held for sale, for the same period of 2014.

 

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.

 

 
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The following table sets forth activity in the allowance for credit losses for the periods indicated.

 

   

Three Months Ended

 
   

March 31,

 

(dollars in thousands)

 

2015

   

2014

 

Balance at beginning of year

  $ 46,075     $ 40,921  

Charge-offs:

               

Commercial

    998       273  

Investment - commercial real estate

    318       -  

Owner occupied - commercial real estate

    -       35  

Real estate mortgage - residential

    -       62  

Construction - commercial and residential

    -       581  

Construction - C&I (owner occupied)

    -       -  

Home equity

    419       149  

Other consumer

    71       25  

Total charge-offs

    1,806       1,125  
                 

Recoveries:

               

Commercial

    51       211  

Investment - commercial real estate

    -       -  

Owner occupied - commercial real estate

    1       -  

Real estate mortgage - residential

    2       -  

Construction - commercial and residential

    95       65  

Construction - C&I (owner occupied)

    -       -  

Home equity

    2       5  

Other consumer

    49       7  

Total recoveries

    200       288  

Net charge-offs

    1,606       837  

Additions charged to operations

    3,310       1,934  

Balance at end of period

  $ 47,779     $ 42,018  
                 

Annualized ratio of net charge-offs during the period to average loans outstanding during the period

    0.15 %     0.11 %

 

 
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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, 2015

   

December 31, 2014

   

March 31, 2014

 

(dollars in thousands)

 

Amount

   

% (1)

   

Amount

   

% (1)

   

Amount

   

% (1)

 

Commercial

  $ 13,777       21 %   $ 13,222       21 %   $ 11,420       23 %

Investment - commercial real estate

    11,652       40 %     11,442       40 %     10,590       40 %

Owner occupied - commercial real estate

    3,127       11 %     2,954       11 %     3,195       10 %

Real estate mortgage - residential

    1,055       3 %     1,259       3 %     754       3 %

Construction - commercial and residential

    15,492       19 %     14,982       18 %     13,380       19 %

Construction - C&I (owner occupied)

    891       1 %     643       1 %     799       1 %

Home equity

    1,509       3 %     1,469       3 %     1,507       4 %

Other consumer

    276       2 %     104       3 %     373       -  

Total loans

  $ 47,779       100 %   $ 46,075       100 %   $ 42,018       100 %

 

(1) Represents the percent of loans in each category to total loans.

 

 

Nonperforming Assets


 

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 $31.9 million at March 31, 2015 representing 0.58% of total assets, as compared to $35.7 million of nonperforming assets, or 0.68% of total assets, at December 31, 2014 and $45.1 million of nonperforming assets, or 1.19% of total assets, at March 31, 2014. The Company had no accruing loans 90 days or more past due at March 31, 2015, December 31, 2014 or March 31, 2014. 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 1.07% of total loans at March 31, 2015, is adequate to absorb potential credit losses within the loan portfolio at that date.

 

Included in nonperforming assets are loans that the Company considers to be impaired. Impaired loans are defined as those as to 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 TDR that 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.

 

 
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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 if the modified transaction is at market rates and terms 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 six TDR’s at March 31, 2015 totaling approximately $13.7 million. Five of these loans, totaling approximately $13.4 million, have demonstrated a period of at least six months of performance under the modified terms, and as a result are not disclosed in the table below. During the first quarter of 2015 and 2014, there were no defaults on 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.  There were no nonperforming TDRs reclassified to nonperforming loans as of March 31, 2015 and 2014. 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, 2015 and 2014.

 

Total nonperforming loans amounted to $19.6 million at March 31, 2015 (0.44% of total loans), compared to $22.4 million at December 31, 2014 (0.52% of total loans) and $36.3 million at March 31, 2014 (1.19% of total loans). The decrease in the ratio of nonperforming loans to total loans at March 31, 2015 as compared to March 31, 2014 was due to a decline in the level of nonperforming loans and portfolio delinquencies, and to loan growth.

 

Included in nonperforming assets at March 31, 2015 was $12.3 million of OREO, consisting of nine foreclosed properties. The Company had ten foreclosed properties with a net carrying value of $13.2 million at December 31, 2014 and seven foreclosed properties with a net carrying value of $8.8 million at March 31, 2014. 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 2015, one foreclosed property with a net carrying value of $136 thousand was sold for a net loss of $17 thousand. The decrease in OREO at March 31, 2015, is due to the sale of one OREO property and to a write down of one OREO property totaling $750 thousand.

 

 
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The following table shows the amounts of nonperforming assets at the dates indicated.

 

   

March 31,

   

December 31,

 

(dollars in thousands)

 

2015

   

2014

   

2014

 

Nonaccrual Loans:

                       

Commercial

  $ 11,257     $ 17,646     $ 12,975  

Investment - commercial real estate

    2,152       2,271       2,645  

Owner occupied - commercial real estate

    1,314       7,323       1,324  

Real estate mortgage - residential

    342       771       346  

Construction - commercial and residential

    3,608       7,658       3,697  

Construction - C&I (owner occupied)

    -       -       -  

Home equity

    889       598       1,398  

Other consumer

    10       60       58  

Accrual loans-past due 90 days

    -       -       -  

Total nonperforming loans (1)

    19,572       36,327       22,443  

Other real estate owned

    12,338       8,809       13,224  

Total nonperforming assets

  $ 31,910     $ 45,136     $ 35,667  
                         

Coverage ratio, allowance for credit losses to total nonperforming loans

    244.12 %     115.67 %     205.30 %

Ratio of nonperforming loans to total loans

    0.44 %     1.19 %     0.52 %

Ratio of nonperforming assets to total assets

    0.58 %     1.19 %     0.68 %

 

(1)

Nonaccrual loans reported in the table above include loans that migrated from performing troubled debt restructuring. There were no loans that migrated from performing troubled debt restructuring during the three months ended March 31, 2015 and 2014.

 

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, 2015, there were $24.1 million of performing loans considered potential problem loans, defined as loans that 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 $24.1 million in potential problem loans at March 31, 2015 compared to $23.9 million at December 31, 2014, and $21.7 million at March 31, 2014.  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.

 

Noninterest Income


 

Total noninterest income includes service charges on deposits, gain on sale of loans, gain on sale of investment securities, loss on extinguishment of debt, income from BOLI and other income.

 

Total noninterest income for the three months ended March 31, 2015 increased to $7.8 million from $4.5 million for the three months ended March 31, 2014, a 75% increase. This increase was primarily due to an increase of $1.7 million in gains on the sale of loans and investment gains of $2.2 million. This increase was partially offset by a $1.1 million loss on the early extinguishment of debt. Excluding investment securities gains and the loss on early extinguishment of debt, total noninterest income was $6.8 million for the three months ended March 31, 2015, as compared to $4.5 million for the same period in 2014, a 52% increase.

 

 
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For the three months ended March 31, 2015, service charges on deposit accounts increased $141 thousand, an increase of 12% from the same three month period in 2014. The increase for the three month period was primarily related to growth in the number of accounts.

 

The Company originates residential mortgage loans and utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to sell those loans, servicing released. Sales of these mortgage loans yielded gains of $3.2 million for the three months ended March 31, 2015 compared to $1.3 million in the same period in 2014, as refinancing activity increased beginning in the first quarter of 2015. 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, 2015. The reserve amounted to $112 thousand at March 31, 2015 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 guaranteed portion of those loans at a premium. Income from this source was $340 thousand and $548 thousand for the three months ended March 31, 2015 and March 31, 2014, respectively. Activity in SBA loan sales to secondary markets can vary widely from quarter to quarter.

 

A $1.1 million loss on the early extinguishment of debt was recorded in March of 2015 due to the early payoff of FHLB advances. This decision was made in light of deposit growth in the quarter and expected benefits to the cost of funds going forward.

 

Other income totaled $1.5 million for the three months ended March 31, 2015 as compared to $1.1 million for the same period in 2014, an increase of 32%. ATM fees increased from $260 thousand for the three months ended March 31, 2014 to $294 thousand for the same period in 2015, a 13% increase. Noninterest loan fees increased from $606 thousand for the three months ended March 31, 2014 to $682 thousand for the same period in 2015, a 12% increase. Annuity income increased from $41 thousand for the three months ended March 31, 2014 to $117 thousand for the same period in 2015, a 188% increase.

 

Noninterest Expense 


 

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 $28.1 million for the three months ended March 31, 2015, as compared to $23.1 million for the three months ended March 31, 2014, a 22% increase.

 

Salaries and employee benefits were $15.7 million for the three months ended March 31, 2015, as compared to $13.6 million for 2014, a 15% increase. Cost increases for salaries and benefits were $2.1 million, primarily due to increased staff resulting from the Merger, merit increases, employee benefit expense increases and incentive compensation. At March 31, 2015, the Company’s full time equivalent staff numbered 422, as compared to 427 at December 31, 2014 and 387 at March 31, 2014.

 

Premises and equipment expenses amounted to $4.0 million for the three months ended March 31, 2015 as compared to $3.1 million for the same period in 2014, a 30% increase. Premises and equipment expenses were $921 thousand higher due to costs of additional branches and office space acquired in the Merger and to increases in leasing costs. Additionally, for the three months ended March 31, 2015, the Company recognized $30 thousand of sublease revenue as compared to $24 thousand for the same period in 2014. The sublease revenue is accounted for as a reduction to premises and equipment expenses.

 

Marketing and advertising expenses increased from $462 thousand for the three months ended March 31, 2014 to $685 thousand for the same period in 2015, a 48% increase.  The reason for the increase was primarily due to costs associated with sponsorship of a new online publication and increases in print and digital advertisements related to product promotion and usage of new digital venues.

 

 
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Data processing expenses increased from $1.6 million for the three months ended March 31, 2014 to $1.8 million in the same period in 2015, a 12% increase. The increase in expense for three months ended March 31, 2015 as compared to March 31, 2014 was due to increased accounts and transaction volume primarily arising out of the Merger and to higher network expenses.

 

Legal, accounting and professional fees increased from $974 thousand for the three months ended March 31, 2014 to $982 thousand in the same period in 2015, a 1% increase. The increase in expense for the three month period ended March 31, 2015 was primarily due to a increase in collection costs related to problem loans.

 

FDIC insurance premiums were $771 thousand for the three months ended March 31, 2015, as compared to $544 thousand in 2014, a 42% increase. The increase for the three months ended March 31, 2015 as compared to March 31, 2014 was due to higher deposit levels and average asset growth which is a principal factor in the calculation of the amount of insurance premiums.

 

For the three months ended March 31, 2015, other expenses amounted to $4.0 million as compared to $2.8 million for the same period in 2014, an increase of 42%. The major components of cost in this category include core deposit intangible amortization, franchise taxes, director fees and expenses for the operations of OREO property, as well as valuation adjustment on one OREO property. The increase for the three month period ended March 31, 2015 compared to the same period in 2014 was primarily due to an increase of $282 thousand in expenses for the operations of OREO properties, $225 thousand in expense for the amortization of core deposit intangibles and $210 thousand in expense for franchise taxes.

 

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, improved to 44.89% for the first three months of 2015 as compared to 51.94% for the same period in 2014. As a percentage of average assets, total noninterest expense (annualized) improved to 2.13% for the first three months of 2015 as compared to 2.47% for the same period in 2014. Cost control remains a significant operating objective of the Company.

 

Income Tax Expense


 

The Company’s ratio of income tax expense to pre-tax income (“effective tax rate”) increased to 37.7% for the three months ended March 31, 2015 as compared to 35.7% for the same period in 2014. The higher effective tax rate for the three months ended March 31, 2015 relates to a relatively lower level of tax exempt income.

 

 

FINANCIAL CONDITION

 

Summary


 

Total assets at March 31, 2015 were $5.50 billion, a 45% increase as compared to $3.80 billion at March 31, 2014, and a 5% increase as compared to $5.25 billion at December 31, 2014. Total loans (excluding loans held for sale) were $4.44 billion at March 31, 2015, a 45% increase as compared to $3.06 billion at March 31, 2014, and a 3% increase as compared to $4.31 billion at December 31, 2014. Loans held for sale amounted to $62.8 million at March 31, 2015 as compared to $21.9 million at March 31, 2014, a 187% increase, and $44.3 million at December 31, 2014, a 42% increase. The investment portfolio totaled $333.5 million at March 31, 2015, a 14% decrease from the $387.8 million balance at March 31, 2014. As compared to December 31, 2014, the investment portfolio at March 31, 2015 decreased by $49 million.

 

Total deposits at March 31, 2015 were $4.58 billion compared to deposits of $3.27 billion at March 31, 2014, a 40% increase and $4.31 billion at December 31, 2014, a 6% increase. Total borrowed funds (excluding customer repurchase agreements) were $79.3 million at March 31, 2015 as compared to $39.3 million at March 31, 2014, a 102% increase, and $219.3 million at December 31, 2014, a 64% decrease. Included in borrowed funds at March 31, 2015 and December 31, 2014 is the $70 million of ten-year non-callable 5.75% subordinated debt issued in August 2014. The subordinated debt qualifies as Tier 2 capital for regulatory purposes at the Company. The decline in borrowed funds in the first quarter 2015 as compared to December 31, 2014 was the result of the payoff of all FHLB advances.

 

 
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Total shareholders’ equity at March 31, 2015 increased to $741.5 million, compared to shareholders’ equity of $410.4 million at March 31, 2014, an 81% increase and $620.8 million at December 31, 2014, a 19% increase. The increases are primarily due to retained earnings, the public offering of common stock completed during the first quarter of 2015, which netted approximately $94.7 million, and to the issuance of common stock to consummate the Merger with Virginia Heritage. The ratio of common equity to total assets was 12.17% at March 31, 2015 as compared to 9.30% at March 31, 2014 and 10.46% at December 31, 2014. The Company’s capital position remains substantially in excess of regulatory requirements for well capitalized status, with a total risk based capital ratio of 13.90% at March 31, 2015, as compared to 13.04% at March 31, 2014 and 12.97% at December 31, 2014. In addition, the tangible common equity ratio (tangible common equity to tangible assets) was 10.39% at March 31, 2015, compared to 9.22% at March 31, 2014 and 8.54% at December 31, 2014.

 

Effective January 1, 2015, the Company and the Bank became subject to new capital requirements. These new requirements create a new required ratio for common equity Tier 1 ("CETI") capital, increase the leverage and Tier 1 capital ratios, change the risk weight of certain assets for purposes of the risk-based capital ratios, create an additional capital conservation buffer over the required capital ratios and change what qualifies as capital for purposes of meeting these various capital requirements. Beginning in 2016, failure to maintain the required capital conservation buffer will limit the ability of the Company and the Bank to pay dividends, repurchase shares or pay discretionary bonuses. Under the new standards, in order to be considered well-capitalized, the Bank must have a CETI ratio of 6.5% (new), a Tier 1 ratio of 8.0% (increased from 6.0%), a total risk-based capital ratio of 10.0% (unchanged) and a leverage ratio of 5.0% (unchanged). The Company and the Bank meets all these new requirements, including the full capital conservation buffer.

 

Loans, net of amortized deferred fees and costs, at March 31, 2015, December 31, 2014 and March 31, 2014 by major category are summarized below.

 

   

March 31, 2015

   

December 31, 2014

   

March 31, 2014

 

(dollars in thousands)

 

Amount

   

%

   

Amount

   

%

   

Amount

   

%

 

Commercial

  $ 933,715       21 %   $ 916,226       21 %   $ 704,386       23 %

Investment - commercial real estate

    1,739,483       40 %     1,703,172       40 %     1,196,405       40 %

Owner occupied - commercial real estate

    493,003       11 %     461,581       11 %     320,994       10 %

Real estate mortgage - residential

    147,871       3 %     148,018       3 %     97,846       3 %

Construction - commercial and residential

    862,013       19 %     793,432       18 %     593,967       19 %

Construction - C&I (owner occupied)

    49,558       1 %     58,032       1 %     35,480       1 %

Home equity

    120,543       3 %     122,536       3 %     108,839       4 %

Other consumer

    98,707       2 %     109,402       3 %     6,058       -  

Total loans

    4,444,893       100 %     4,312,399       100 %     3,063,975       100 %

Less: Allowance for Credit Losses

    (47,779 )             (46,075 )             (42,018 )        

Net loans

  $ 4,397,114             $ 4,266,324             $ 3,021,957          

 

 

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 $4.44 billion at March 31, 2015, an increase of $133 million or 3% as compared to $4.31 billion at December 31, 2014, and increased $1.38 billion or 45% as compared to $3.06 billion at March 31, 2014. Growth in loans over the last twelve months was in part due to the Merger with Virginia Heritage completed October 31, 2014, which added approximately $800 million in loans. Excluding balances acquired in the Merger, organic loan growth over the last twelve months was 19%.

 

The loan growth during the first three months of 2015 was predominantly in the investment commercial real estate, owner occupied commercial real estate, and commercial segments, along with increases in the construction – commercial and residential. Despite an increased level of in-market competition for business, the Bank continued to experience strong organic loan growth across the portfolio. Multi-family commercial real estate leasing in the Bank’s market area has held up well, particularly for well located close in projects, while suburban office leasing softened somewhat.  Overall, commercial real estate values have generally held up well with upward price escalator in prime pockets. The housing market has remained stable to increasing, with well-located, Metro accessible properties garnering a premium.

 

 
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Owner occupied commercial real estate and owner occupied commercial real estate construction represent 12% of the loan portfolio. The Bank has a large portion of its loan portfolio related to real estate, with 71% consisting of commercial real estate and real estate construction loans. When owner occupied commercial real estate is excluded, the percentage of total loans represented by commercial real estate decreases to 59%. Real estate also serves as collateral for loans made for other purposes, resulting in 81% of all 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, money market accounts, NOW 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, 2015, noninterest bearing deposits increased $20 million as compared to December 31, 2014, while interest bearing deposits increased by $253 million during the same period. Average total deposits for the three months of 2015 were $4.33 billion, as compared to $3.22 billion for the same period in 2014, a 35% increase. Growth in deposits over the last twelve months was in part due to the Merger with Virginia Heritage completed October 31, 2014 which added approximately $645 million in deposits. Excluding balances acquired in the Merger, organic deposit growth over the last twelve months was 20%.

 

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, 2015, total deposits included $653.9 million of brokered deposits (excluding the CDARS and ICS two-way), which represented 14% of total deposits. At December 31, 2014, total deposits (excluding the CDARS and ICS two-way) included $506.5 million of brokered deposits, which represented 12% of total deposits. The CDARS and ICS two-way component represented $543.6 million, or 12% of total deposits and $391.3 million or 9% of total deposits at March 31, 2015 and December 31, 2014, respectively. These sources are believed by the Company to represent a reliable and cost efficient alternative funding source for the Bank. However, to the extent that the condition or reputation of the Company or Bank deteriorates, or to the extent that there are significant changes in market interest rates which the Company and Bank do not elect to match, we may experience an outflow of brokered deposits. In that event we would be required to obtain alternate sources for funding.

 

At March 31, 2015, the Company had $1.20 billion in noninterest bearing demand deposits, representing 26% of total deposits, compared to $1.18 billion of noninterest bearing demand deposits at December 31, 2014, or 27% 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.

 

 
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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 $58.6 million at March 31, 2015 compared to $61.1 million at December 31, 2014. 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, 2015 and December 31, 2014.

 

The Bank had no borrowings outstanding under its credit facility from the FHLB at March 31, 2015, $30.0 million of borrowings outstanding at March 31, 2014, and $140 million of borrowings outstanding at December 31, 2014. 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 $50 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, 2015 or December 31, 2014. 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 2021. For additional information on the subordinated notes, please refer to “Capital Resources and Adequacy” below.

 

On August 5, 2014, the Company completed the sale of $70.0 million of subordinated notes, due September 1, 2024. For additional information on the subordinated notes, please refer to “Capital Resources and Adequacy” below.

 

Liquidity Management


 

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 $50 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, 2015. Additionally, the Bank can purchase up to $137.5 million in federal funds on an unsecured basis from its correspondents, against which there were no amounts outstanding at March 31, 2015, and can obtain unsecured funds under one-way CDARS brokered deposits in the amount of $821.3 million, against which there was $7.9 million outstanding at March 31, 2015. The Bank has a commitment at March 31, 2015 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 $244.6 million at March 31, 2015. At March 31, 2015, the Bank was also eligible to make advances from the FHLB up to $576.8 million based on collateral at the FHLB, of which there were no amounts was outstanding at March 31, 2015. 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 $411.0 million, is collateralized with specific loan assets identified to the Federal Reserve Bank. It is anticipated that, except for periodic testing, this facility would be utilized for contingency funding only.

 

 
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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, 2015, under the Bank’s liquidity formula, it had $2.49 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, 2015 are as follows:

 

(dollars in thousands)

     

Unfunded loan commitments

  $ 1,625,957  

Unfunded lines of credit

    105,895  

Letters of credit

    75,615  

Total

  $ 1,807,467  

 

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 satisfaction 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.

 

 
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Asset/Liability Management and Quantitative and Qualitative Disclosures about Market


 

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 Bank’s 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 re-pricing 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 quarter ended March 31, 2015, as compared to the same three months in 2014, the Company was able to increase its net interest income (by 37%), produce a net interest spread of 4.23%, which was just 7 basis points lower than the 4.30% for the quarter ended 2014, and manage its overall interest rate risk position.

 

The Company, through its ALCO and ongoing financial management practices, 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 manage the balance between yield and prepayment risk in its portfolio of mortgage backed securities should interest rates remain at current levels. Further, the company has been managing the investment portfolio to mitigate extension risk and related declines in market values in that same portfolio should interest rates increase. Additionally, the Company has very limited call risk in its U.S. agency investment portfolio. During the three months ended March 31, 2015, average investment portfolio balances decreased as compared to balances at March 31, 2014, as the interest rate environment in February in managements’ opinion presented an opportunity to realize above average gains from the sale of $58.8 million securities, primarily municipal securities. This action resulted in a gain on sale being realized of $2.2 million. In addition to the gain on sale , cash flows from the sale provided additional liquidity for loan originations, at a time when liquidity was at a low ebb. As a result of the sale, the percentage mix of municipal securities decreased to 21% of total investments at March 31, 2015 from 28% at March 31, 2014.. , the portion of the portfolio invested in mortgage backed securities increased to 71% at March 31, 2015 from 60% at March 31, 2014, and the portion of the portfolio represented in U.S. Government agency investments declined to 9% at March 31, 2015 from 12% at March 31, 2014. Also resulting from the sale, the duration of the investment portfolio decreased to 3.8 years at March 31, 2015 from 4.6 years at March 31, 2014.

 

In the loan portfolio, the re-pricing duration was relatively stable at 27 months at March 31, 2015, versus 26 months at March 31, 2014, with fixed rate loans amounting to 41% of total loans at March 31, 2015 compared to 42% of total loans at March 31, 2014. Variable and adjustable rate loans comprised 59% of total loans at March 31, 2015, compared to 58% of total loans at March 31, 2014. Variable rate loans are generally indexed to either the Wall Street Journal prime interest rate, or the one month LIBOR interest rate, while adjustable rate loans are indexed primarily to the five year U.S. Treasury interest rate. The impact on the loan portfolio’s duration of adding loans from the Virginia Heritage merger was relatively minor.

 

In the deposit portfolio, the duration of the portfolio was also fairly stable at 33 months at March 31, 2015, as compared to 32 months at March 31, 2014. The change since December 31, 2014 was due substantially to a slight change in the mix and duration of time deposits.

 

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 persists. A disciplined approach to loan pricing, together with loans floors existing in 51% of total loans (at March 31, 2015), has resulted in a loan portfolio yield of 5.26% for the three months ended March 31, 2015 as compared to 5.45% for the same period in 2014. Subject to interest rate floors, variable and adjustable rate loans provide additional income opportunities should interest rates rise from current levels.

 

 
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The net unrealized gain before income tax on the investment portfolio was $5.4 million at March 31, 2015 as compared to a net unrealized gain before tax of $4.4 million at December 31, 2014, with $2.2 million of realized net gains recorded during the three months ended March 31, 2015. The higher net unrealized gain on the investment portfolio at March 31, 2015 as compared to March 31, 2014 was due primarily to lower interest rates around the 5 to 10 year part of the yield curve, which increased the fair market value of the portfolio, primarily municipal securities, at March 31, 2015. At March 31, 2015, the unrealized gain position represented 1.7% of the investment portfolio’s book value.

 

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, 2015. 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, 2015, 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, 2015 shows a moderate effect on net interest income (over the next 12 months) as well as a moderate effect on 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. This moderate impact is due substantially to the significant level of variable rate and re-priceable assets and liabilities and related shorter relative durations. The re-pricing duration of the investment portfolio at March 31, 2015 is 3.8 years, the loan portfolio 2.3 years; the interest bearing deposit portfolio 2.8 years and the borrowed funds portfolio 3.6 years.     

 

The following table reflects the result of simulation analysis on the March 31, 2015 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

   

+7.1%

   

+11.1%

      -5.1%  
 

+300

   

+4.0%

   

+5.4%

      -4.4%  
 

+200

   

+0.9%

      -0.3%       -3.7%  
 

+100

      -1.1%       -3.8%       -2.5%  
    0       -       -       -  
    -100       -0.9%       -1.7%       -5.1%  
    -200       -2.5%       -5.0%       -10.1%  

 

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, 25% for a 300 basis point change and 30% 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, 2015 are not considered to be excessive. The negative impact of -1.1% in net interest income and -3.8% 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 and to a lower level of expected residential mortgage sales activity.

 

 
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In the first quarter of 2015, 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 higher level of asset liquidity at March 31, 2015 as compared to December 31, 2014, the interest rate risk position at March 31, 2015 was similar to the interest rate risk position at December 31, 2014. As compared to December 31, 2014, the sum of federal funds sold, interest bearing deposits with banks and other short-term investments and loans held for sale increased by $177.2 million at March 31, 2015. 

 

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 2015, average market interest rates increased modestly on the short end of the yield curve but decreased in the mid to long term segment of the curve. Starting at the five year point in the curve and out, as compared to the first quarter of 2014, the yield curve flattened.

 

As compared to the first quarter of 2014, the average two-year U.S. Treasury rate increased by 24 basis points from 0.36% to 0.60%, the average five year U.S. Treasury rate decreased by 14 basis points from 1.592% to 1.45% and the average ten year U.S. Treasury rate decreased by 78 basis points from 2.75% to 1.97%. In that environment, the Company was able to hold its net interest spread for the first quarter of 2015 at 4.23% compared to 4.30% for the first quarter of 2014, largely by maintaining a high mix of earning assets in loans. The Company believes that the change in the net interest spread in the most recent quarter as compared to 2014’s first quarter has been consistent with its risk analysis at December 31, 2014.

 

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 88% of the Company’s revenue for the first quarter of 2015, as compared to 90% of the Company’s revenue for the first quarter of 2014.

 

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, 2015, the Company had a positive GAP position of approximately $606.9 million or 11.0% of total assets out to three months and a positive cumulative GAP position of $577.3 million or 10.5% of total assets out to 12 months; as compared to a positive GAP position of approximately $362.6 million or 6.9% of total assets out to three months and a positive cumulative GAP position of approximately $347.1 million or 6.6% out to 12 months at December 31, 2014. The change in the positive GAP position at March 31, 2015, as compared to December 31, 2014, was due substantially to the higher amount of asset liquidity on the balance sheet. The change in the GAP position at March 31, 2015 as compared to December 31, 2014 is not judged material to the Company’s overall interest rate risk position, which relies more heavily on simulation analysis which captures the full optionality within the balance sheet. The current position is within guideline limits established by the ALCO.

 

 
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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, 2015

(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

  $ 31,511     $ 41,821     $ 83,261     $ 84,023     $ 109,708     $ 350,324                  

Loans (1)(2)

    2,144,663       364,365       951,470       890,664       156,489       4,507,651                  

Fed funds and other short-term investments

    405,664       -       -       -       -       405,664                  

Other earning assets

    56,983       -       -       -       -       56,983                  

Total

  $ 2,638,821     $ 406,186     $ 1,034,731     $ 974,687     $ 266,197     $ 5,320,622     $ 179,718     $ 5,500,340  
                                                                 

RATE SENSITIVE LIABILITIES:

                                                               

Noninterest bearing demand

  $ 48,804     $ 146,411     $ 389,950     $ 389,950     $ 221,050     $ 1,196,165                  

Interest bearing transaction

    128,920       -       24,686       24,685       -       178,291                  

Savings and money market

    1,679,688       -       362,872       362,875       -       2,405,435                  

Time deposits

    115,930       289,364       270,845       128,335       -       804,474                  

Customer repurchase agreements and fed funds purchased

    58,589       -       -       -       -       58,589                  

Other borrowings

    -       -       9,300       -       70,000       79,300                  

Total

  $ 2,031,931     $ 435,775     $ 1,057,653     $ 905,845     $ 291,050     $ 4,722,254     $ 36,556     $ 4,758,810  

GAP

  $ 606,890     $ (29,589 )   $ (22,922 )   $ 68,842     $ (24,853 )   $ 598,368                  

Cumulative GAP

  $ 606,890     $ 577,301     $ 554,379     $ 623,221     $ 598,368                          
                                                                 

Cumulative gap as percent of total assets

    11.03 %     10.50 %     10.08 %     11.33 %     10.88 %                        

 

    (1) Includes loans held for sale.

    (2) Nonaccrual loans are included in the over 60 months category.

 

 
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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. At March 31, 2015 non-owner-occupied commercial real estate loans (including construction, land and land development loans) represent 427% of total risk based capital. Construction, land and land development loans represent 142% 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. Monitoring practices include periodic stress testing analysis to evaluate changes to cash flows, owing to interest rate increases and declines in net operating income. Nevertheless, we may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, 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 $50 million for working capital purposes, to finance capital contributions to the Bank in whole and to ECV in part. The credit facility is secured by a first lien on a portion of the stock of the Bank, pursuant to which the Company may borrow, and bears interest at a floating rate equal to the Wall Street Journal Prime Rate minus 0.25% with a floor interest rate of 3.50%. Interest is payable on a monthly basis. The term of the credit facility expires on September 30, 2015. There were no amounts outstanding under this credit facility at March 31, 2015, December 31, 2014, or March 31, 2014.

 

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 ten dividend periods was one percent (1%). For the eleventh calendar quarter through four and one half years after issuance, the dividend rate will be fixed at one percent (1%) based upon the increase in QBSL as compared to the baseline. After four and one half years from issuance (i.e. January 2016), 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.

 

Pursuant to the Merger Agreement, each of the 15,300 shares of Virginia Heritage Series A Preferred Stock, was exchanged for one share of the Company’s Series C Preferred Stock, which ranks equally with and has substantially identical terms and conditions as the Company’s existing Series B Preferred Stock.

 

 
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On September 3, 2013 the Company amended the terms of the $9.3 million of subordinated notes dated August 30, 2010. Under the amendment, the maturity date is extended from September 30, 2016 to September 30, 2021 and the interest rate is changed from 10%, to a fixed interest rate of 8.5% until August 30, 2016 and thereafter at a fixed rate of interest equal to the then current yield on the 5 year U.S. Treasury Note plus 7.03%. These notes do not qualify for Tier 2 capital treatment under the recently adopted Basel III capital requirements, which became applicable to the Company on January 1, 2015. 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 adopted by the Federal Reserve Board pursuant to the Dodd-Frank Act. The Company has called the subordinated notes and expects full repayment by September 1, 2015.

 

On August 5, 2014, the Company completed the sale of $70.0 million of its noncallable 5.75% subordinated notes, due September 1, 2024. (the “Notes”). The Notes were sold to the public at par. The notes qualify as Tier 2 capital for regulatory purposes to the fullest extent permitted under capital regulations applicable under the Basel III Rule capital requirements which became applicable to the Company on January 1, 2015.

 

The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.

 

The prompt corrective action regulations provide five categories, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If a bank is only adequately capitalized, regulatory approval is required to, among other things, accept, renew or roll-over brokered deposits. If a bank is undercapitalized, capital distributions and growth and expansion are limited, and plans for capital restoration are required.

 

In July 2013, the Board of Governors of the Federal Reserve Board and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (commonly known as Basel III). Under the final rules, which became applicable to the Company and the Bank on January 1, 2015 and are subject to a phase-in period through January 1, 2019, minimum requirements will increase for both the quantity and quality of capital held by the Company and the Bank. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio (CET1 ratio) of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, which when fully phased-in, effectively results in a minimum CET1 ratio of 7.0%. Basel III raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5% when fully phased-in), effectively results in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and requires a minimum leverage ratio of 4.0%. Basel III also makes changes to risk weights for certain assets and off-balance-sheet exposures. Management expects that the capital ratios for the Company and the Bank under Basel III will continue to exceed the well capitalized minimum capital requirements.

 

In March 2015, the Company completed the public offering of $100 million of its common stock at $35.50 per share and received gross proceeds of sale of $100 million and net proceeds of sale of approximately $94.7 million. This additional capital will be used in part to redeem all the $71.9 million of SBLF preferred stock prior to the dividend rate on these funds increasing to 9.00% in January 2016. The remaining net proceeds will support the Company’s organic growth.

 

 
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The actual capital amounts and ratios for the Company and Bank as of March 31, 2015, December 31, 2014 and March 31, 2014 are presented in the table below.

 

   

Company

   

Bank

           

To Be Well Capitalized Under

 
   

Actual

   

Actual

   

Minimun Required For

   

Prompt Corrective Action

 

(dollars in thousands)

 

Amount

   

Ratio

   

Amount

   

Ratio

   

Capital Adequacy Purposes

   

Regulations *

 

As of March 31, 2015

                                               

CET1 capital (to risk weighted aseets

    557,161       10.37 %     549,985       10.31 %     4.50 %     6.5 %

Total capital (to risk weighted assets)

    746,983       13.90 %     597,666       11.20 %     8.00 %     10.0 %

Tier 1 capital (to risk weighted assets)

    629,061       11.71 %     549,985       10.31 %     6.00 %     8.0 %

Tier 1 capital (to average assets)

    629,061       12.19 %     549,985       10.69 %     4.00 %     5.0 %
                                                 

As of December 31, 2014

                                               

Total capital (to risk weighted assets)

    631,340       12.97 %     568,637       11.73 %     8.00 %     10.0 %

Tier 1 capital (to risk weighted assets)

    505,864       10.39 %     522,637       10.78 %     4.00 %     6.0 %

Tier 1 capital (to average assets)

    505,864       10.69 %     522,637       11.09 %     3.00 %     5.0 %
                                                 

As of March 31, 2014

                                               

Total capital (to risk weighted assets)

    455,863       13.04 %     419,309       12.06 %     8.00 %     10.0 %

Tier 1 capital (to risk weighted assets)

    404,487       11.57 %     377,409       10.86 %     4.00 %     6.0 %

Tier 1 capital (to average assets)

    404,487       10.83 %     377,409       10.16 %     3.00 %     5.0 %

 

* Applies to Bank only

 

 

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, 2015 the Bank could pay dividends to the parent to the extent of its earnings so long as it maintained required capital ratios.

 

 
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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 tables below provide 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.

 

Non-GAAP Reconciliation (Unaudited)

                       

(dollars in thousands except per share data)

                       
   

Three Months Ended

   

Twelve Months Ended

   

Three Months Ended

 
   

March 31, 2015

   

December 31, 2014

   

March 31, 2014

 

Common shareholders' equity

  $ 669,630     $ 548,859     $ 353,782  

Less: Intangible assets

    (109,617 )     (109,908 )     (3,482 )

Tangible common equity

  $ 560,013     $ 438,951     $ 350,300  
                         

Book value per common share

  $ 20.11     $ 18.21     $ 13.62  

Less: Intangible book value per common share

    (3.29 )     (3.65 )     (0.13 )

Tangible book value per common share

  $ 16.82     $ 14.56     $ 13.49  
                         

Total assets

  $ 5,500,340     $ 5,247,880     $ 3,803,952  

Less: Intangible assets

    (109,617 )     (109,908 )     (3,482 )

Tangible assets

  $ 5,390,723     $ 5,137,972     $ 3,800,470  

Tangible common equity ratio

    10.39 %     8.54 %     9.22 %

 

 
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Item 3. Quantitative and Qualitative Disclosures about Market Risk


 

Please refer to Item 2 of this report, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the caption “Asset/Liability Management and Quantitative and Qualitative Disclosure about Market Risk.”

 

 

Item 4. Controls and Procedures


 

The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated as of the last day of the period covered by this report the effectiveness of the operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-14 under the Securities and Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective. There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15 under the Securities Act of 1934) during the quarter ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 
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PART II - OTHER INFORMATION

 

 

Item 1 - Legal Proceedings

 

From time to time the Company may become involved in legal proceedings. At the present time there are no proceedings which the Company believes will have a material adverse impact on the financial condition or earnings of the Company.

 

 

Item 1A Risk Factors

 

There have been no material changes as of March 31, 2015 in the risk factors from those disclosed in the Company’s Annual Report on From 10-K for the year ended December 31, 2014.

 

 

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

 

 (a) Sales of Unregistered Securities. 

 None

 

 

 (b) Use of Proceeds. 

 Not Applicable

 

 

  (c) Issuer Purchases of Securities

 None

    

 

Item 3 - Defaults Upon Senior Securities     

  None

 

 

Item 4 - Mine Safety Disclosures 

 Not Applicable 

 

 

Item 5 - Other Information 

 

 

 

 (a) Required 8-K Disclosures   

 None

   
(b) Changes in Procedures for Director Nominations None

 

 

Item 6 - Exhibits 

 

3.1

Certificate of Incorporation of the Company, as amended (1)

3.2

Articles Supplementary to the Articles of Incorporation for the Series B Preferred Stock (2)

3.3

Bylaws of the Company (3)

3.4

Articles Supplementary to the Articles of Incorporation for the Series C Preferred Stock (4)

4.1

Warrant to Purchase Common Stock (5)

4.2

Form of Subordinated Note due 2021 (6)

4.3

Form of Amendment Agreement to Subordinated Note (7)

4.4

Subordinated Indenture, dated as of August 5, 2014, between the Company and Wilmington Trust, National Association, as Trustee (8)

4.5

First Supplemental Indenture, dated as of August 5, 2014, between the Company and Wilmington Trust, National Association, as Trustee (9)

4.6

Form of Global Note representing the 5.75% Subordinated Notes due September 1,2024 (included in Exhibit 4.5)

10.1

1998 Stock Option Plan (10)

10.2

2006 Stock Plan (11)

10.3

Amended and Restated Employment Agreement dated as of August 1, 2014, between EagleBank and James H. Langmead (12) 

 

 
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10.4

Amended and Restated Employment Agreement dated as of August 1, 2014, between EagleBank and Antonio F. Marquez  (13)

10.5

Amended and Restated Employment Agreement dated as of January 1, 2014, between Eagle Bancorp, Inc., EagleBank and Ronald D. Paul (14)

10.6

Amended and Restated Employment Agreement dated as of August 1, 2014, between EagleBank and Susan G. Riel (15)

10.7

Amended and Restated Employment Agreement dated as of August 1, 2014, between EagleBank and Janice L. Williams (16) 

10.8

Non-Compete Agreement dated as of August 1, 2014, between EagleBank and James H. Langmead (17)

10.9

Non-Compete Agreement dated as of August 1, 2014, between EagleBank and Antonio F. Marquez (18)

10.10 

Non-Compete Agreement dated as of August 1, 2014, between EagleBank and Ronald D. Paul (19)

10.11 

Non-Compete Agreement dated as of August 1, 2014, between EagleBank and Susan G. Riel (20)

10.12  

Non-Compete Agreement dated as of August 1, 2014, between EagleBank and Janice L. Williams (21) 

10.13

Amended and Restated Employment Agreement dated as of August 1, 2014 between EagleBank and Laurence E. Bensignor (22)

10.14

Amended and Restated Employment Agreement dated as of August 1, 2014 between EagleBank and Michael T. Flynn (23)

10.15

Amended and Restated Employment Agreement dated as of August 1, 2014 between EagleBank and Steven A. Reeder (24)

10.16

Vice Chairman Agreement dated as of June 1, 2014 between Eagle Bancorp, Inc., EagleBank and Robert Pincus (25)

10.17

Non-Compete Agreement dated as of August 1, 2014, between EagleBank and Laurence E. Bensignor (26)

10.18

Non-Compete Agreement dated as of August 1, 2014, between EagleBank and Michael T. Flynn (27)

10.19

Non-Compete Agreement dated as of August 1, 2014, between EagleBank and Steven A. Reeder (28)

10.20

Non-Compete Agreement dated as of August 1, 2014, between EagleBank and Robert Pincus (29)

10.22

Form of Supplemental Executive Retirement Plan Agreement (30)

10.23

Director Fee Agreement between Eagle Bancorp, Inc., Eagle Bank and David P. Summers (31)

10.24

2015 Senior Executive Incentive Plan (32)

10.25 Employment Agreement dated as of November 1, 2014 between EagleBank and Charles C. Brockett (33)
10.26 Side Letter to Employment Agreement dated as of November 1, 2014 between EagleBank and Charles C. Brockett (34)
10.27 Non-Compete Agreement dated as of November 1, 2014 between EagleBank and Charles C. Brockett (35)
10.28 Amended and Restated Employment Agreement dated as of December 15, 2014 between EagleBank and Lindsey S. Rheaume (36)
10.29 Non-Compete Agreement dated as of December 15, 2014, between EagleBank and Lindsey S. Rheaume (37)
   

11

Statement Regarding Computation of Per Share Income

 

See Note 7 of the Notes to Consolidated Financial Statements

   

21

Subsidiaries of the Registrant

31.1

Certification of Ronald D. Paul

31.2

Certification of James H. Langmead

32.1

Certification of Ronald D. Paul

32.2

Certification of James H. Langmead

 

 

101     

Interactive data files pursuant to Rule 405 of Regulation S-T:

 

 

  

 

(i)

Consolidated Balance Sheets at March 31, 2015, December 31, 2014 and March 31, 2014 

 

(ii)

Consolidated Statement of Operations for the three months ended March 31, 2015 and 2014

 

(iii)

Consolidated Statement of Comprehensive Income for the three months ended March 31, 2015 and 2014 

 

(iv)

Consolidated Statement of Changes in Shareholders’ Equity for three months ended March 31, 2015 and 2014

 

(v)

Consolidated Statement of Cash Flows for three months ended March 31, 2015 and 2014

 

(vi)

Notes to the Consolidated Financial Statements

 

 
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(1)

Incorporated by reference to the Exhibit of the same number to the Company’s Current Report on Form 8-K filed on July 16, 2008.

(2)

Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on July 15, 2011.

(3)

Incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on June 27, 2012.

(4)

Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on November 5, 2014.

(5)

Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on December 8, 2008.

(6)

Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 1, 2010.

(7)

Incorporated by reference to Exhibit 4 to the Company’s Form 10-Q for the Quarter ended September 30, 2013.

(8)

Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 5, 2014.

(9)

Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on August 5, 2014.

(10)

Incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 1998.

(11)

Incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form S-8 (No. 333-187713)

(12)

Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 15, 2014.

(13)

Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 15, 2014.

(14)

Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 15, 2014.

(15)

Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on December 15, 2014.

(16)

Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on December 15, 2014.

(17)

Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on December 15, 2014.

(18)

Incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on December 15, 2014.

(19)

Incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on December 15, 2014.

(20)

Incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on December 15, 2014.

(21)

Incorporated by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K filed on December 15, 2014.

(22)

Incorporated by reference to Exhibit 10.10 to the Company’s Current Report on Form 8-K filed on December 15, 2014.

(23)

Incorporated by reference to Exhibit 10.11 to the Company’s Current Report on Form 8-K filed on December 15, 2014.

(24)

Incorporated by reference to Exhibit 10.12 to the Company’s Current Report on Form 8-K filed on December 15, 2014.

(25)

Incorporated by reference to Exhibit 10.13 to the Company’s Current Report on Form 8-K filed on December 15, 2014.

(26)

Incorporated by reference to Exhibit 10.14 to the Company’s Current Report on Form 8-K filed on December 15, 2014.

(27)

Incorporated by reference to Exhibit 10.15 to the Company’s Current Report on Form 8-K filed on December 15, 2014.

(28)

Incorporated by reference to Exhibit 10.16 to the Company’s Current Report on Form 8-K filed on December 15, 2014.

(29)

Incorporated by reference to Exhibit 10.17 to the Company’s Current Report on Form 8-K filed on December 15, 2014.

(30)

Incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the Year ended December 31, 2013.

(31)

Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 5, 2014.

(32)

Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 26, 2015.

   
(33) Exhibit 33 to the Company’s Form 10-Q for the Quarter ended March 31, 2015.
(34) Exhibit 34 to the Company’s Form 10-Q for the Quarter ended March 31, 2015.
(35) Exhibit 35 to the Company’s Form 10-Q for the Quarter ended March 31, 2015.
(36) Exhibit 36 to the Company’s Form 10-Q for the Quarter ended March 31, 2015.
(37) Exhibit 37 to the Company’s Form 10-Q for the Quarter ended March 31, 2015.

 

 
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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 EAGLE BANCORP, INC.

 

 

 

 

 

 

 

 

 

 Date: May 11, 2015

By:

 /s/ Ronald D. Paul      

 

 

 

Ronald D. Paul, Chairman, President and Chief Executive Officer of the Company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Date: May 11, 2015  

By:

 /s/ James H. Langmead   

 

 

 

James H. Langmead, Executive Vice President and Chief Financial Officer of the Company

 

 

 

 

 

  

 

70