The Company recorded net income of $5.1 million during the second quarter of 2015 versus $3.8 million in the comparable year ago period. The 35.7% improvement in second quarter 2015 net income resulted from a $2.3 million increase in net interest income and a $250 thousand reduction in the provision for loan losses in 2015 versus the comparable 2014 period. Partially offsetting these improvements was a $628 thousand reduction in non-interest income in 2015 versus 2014. The Company's effective tax rate increased to 23.6% in 2015 from 21.7% a year ago.

The $2.3 million or 14.7% improvement in second quarter 2015 net interest income resulted from a $184 million increase in average total interest-earning assets along with an eight basis point widening of the Company's net interest margin to 4.21% in 2015 from 4.13% in 2014. The Company's second quarter 2015 average total interest-earning asset yield was 4.38% versus 4.29% in the comparable 2014 quarterly period. The improvement in the interest-earning asset yield in 2015 was due in part to the receipt of $967 thousand in interest income on loans previously on non-accrual status.  Adjusting for the impact of net non-accrual interest received in each period, the Company's core net interest margin was 3.99% in the second quarter of 2015 versus 4.05% in the second quarter of 2014.  The Company's average balance sheet mix continued to improve as average loans increased by $269 million (23.5%) versus second quarter 2014 and low-yielding overnight interest-bearing deposits, federal funds sold and securities purchased under agreements to resell declined by $29 million (59.5%) during the same period. Federal funds sold, securities purchased under agreements to resell and interest-bearing deposits represented 1% of average total interest-earning assets in the second quarter of 2015 versus 3% a year ago. The average securities portfolio decreased by $59 million to $348 million in the second quarter of 2015 versus the comparable 2014 period.  The average yield on the investment portfolio was 3.77% in the second quarter of 2015 versus 3.71% a year ago. At June 30, 2015, tax-exempt municipal securities, at 39%, made up the largest component of the Company's investment portfolio. The available for sale securities portfolio had an unrealized pre-tax gain of $3.5 million and the entire securities portfolio had an estimated weighted average life of 4.7 years at June 30, 2015.

The Company's average cost of total interest-bearing liabilities increased by two basis points to 0.30% in the second quarter of 2015 versus 0.28% in the second quarter of 2014. The Company's total cost of funds, among the lowest in the industry, increased nominally to 0.18% in the second quarter of 2015 versus 0.16% a year ago. Average core deposits increased $118 million to $1.4 billion during the second quarter of 2015 versus the comparable 2014 period, with average demand deposits representing 44% of second quarter 2015 average total deposits. Total deposits increased by $150 million or 9.6% to $1.7 billion at June 30, 2015 versus June 30, 2014. Core deposit balances, which represented 86% of total deposits at June 30, 2015, grew by $137 million or 10.2% during the same period. Average borrowings increased $64 million during the second quarter of 2015 compared to 2014 and were used, in part, to fund the growth in the Company's loan portfolio, which increased by $269 million on average during that same period.

A nominal $22 thousand increase in total operating expenses in the second quarter of 2015 versus 2014 was principally the result of a $279 thousand expense credit recorded in 2014 related to prior period branch closures. Excluding this credit, total operating expenses declined by $257 thousand or 1.9% in the second quarter of 2015 versus the comparable 2014 period. The Company's core operating efficiency ratio improved to 66.3% in the second quarter of 2015 from 70.7% a year ago.

Primarily as a result of recording $726 thousand in net recoveries, the Company did not record a provision for loan losses during the second quarter of 2015. The Company recorded a provision for loan losses of $250 thousand in the second quarter of 2014.

Non-interest income declined by $628 thousand or 23.5% in the second quarter of 2015 versus the comparable 2014 period.  This reduction was due to several factors, most notably reductions in fiduciary fees (down $280 thousand), other service charges, commissions and fees (down $212 thousand), service charges on deposits (down $121 thousand) and net gain on sale of premises and equipment (down $110 thousand). Fiduciary fees declined as a result of the Company's decision to exit the wealth management market during the fourth quarter of 2014 through the sale of its wealth management business. Other service charges, commissions and fees were lower than the comparable 2014 period principally due to a reduction in income from the sale of investment products through the Company's branch network. Deposit service charges declined due to a reduction in overdraft fees in 2015. The reduction in net gain on the sale of premises and equipment resulted from a $104 thousand pre-tax gain recorded in 2014 on the sale of a Company-owned parking lot adjacent to the main office. Excluding the impact of the wealth management sale and the gain on the

 

PRESS RELEASE July 22, 2015 Page 5 of 17

 

 

PRESS RELEASE July 22, 2015 Page 7 of 17

 

This discussion includes non-GAAP financial measures of the Company's TCE ratio, tangible common equity, tangible assets, core net income, core FTE net interest income, core FTE net interest margin, core operating expenses, core non-interest income, core FTE non-interest income and core operating efficiency ratio. A non-GAAP financial measure is a numerical measure of historical or future financial performance, financial position or cash flows that excludes or includes amounts that are required to be disclosed in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"). The Company believes that these non-GAAP financial measures provide both management and investors a more complete understanding of the underlying operational results and trends and the Company's marketplace performance. The presentation of this additional information is not meant to be considered in isolation or as a substitute for the numbers prepared in accordance with U.S. GAAP and may not be comparable to similarly titled measures used by other financial institutions.

With respect to the calculations of core net income, core FTE net interest income and core FTE net interest margin for the periods presented in this discussion, reconciliations to the most comparable U.S. GAAP measures are provided in the following tables. Such reconciliations for the TCE ratio, tangible common equity, tangible assets, core operating expenses, core non-interest income, core FTE non-interest income and core operating efficiency ratio are provided elsewhere herein.

 

		Three Months Ended June 30,								Six Months Ended June 30,
(in thousands)		2015				2014				2015				2014
CORE NET INCOME:
Net income, as reported		$	5,118			$	3,771			$	9,127			$	7,491
Less:
Gain on sale of branch building and parking lot			-				(104	)			-				(746	)
Branch consolidation credits			-				(279	)			-				(449	)
Net non-accrual interest adjustment			(967	)			(331	)			(974	)			(672	)
Total adjustments, before income taxes			(967	)			(714	)			(974	)			(1,867	)
Adjustment for reported effective income tax rate			(228	)			(155	)			(230	)			(418	)
Total adjustments, after income taxes			(739	)			(559	)			(744	)			(1,449	)
Core net income		$	4,379			$	3,212			$	8,383			$	6,042

 

		Three Months Ended June 30,																Six Months Ended June 30,
($ in thousands)		2015								2014								2015								2014
CORE NET INTEREST INCOME/MARGIN:
Net interest income/margin (FTE)		$	18,760				4.21	%		$	16,522				4.13	%		$	36,255				4.11	%		$	32,795				4.17	%
Net non-accrual interest adjustment			(967	)			(0.22	%)			(331	)			(0.08	%)			(974	)			(0.11	%)			(672	)			(0.09	%)
Core net interest income/margin (FTE)		$	17,793				3.99	%		$	16,191				4.05	%		$	35,281				4.00	%		$	32,123				4.08	%

 

 

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Certain statements contained in this discussion are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These can include remarks about the Company, the banking industry, the economy in general, expectations of the business environment in which the Company operates, projections of future performance, and potential future credit experience. These remarks are based upon current management expectations, and may, therefore, involve risks and uncertainties that cannot be predicted or quantified, that are beyond the Company's control and that could cause future results to vary materially from the Company's historical performance or from current expectations. These remarks may be identified by such forward-looking statements as "should," "expect," "believe," "view," "opportunity," "allow," "continues," "reflects," "typically," "usually," "anticipate," or similar statements or variations of such terms. Factors that could affect the Company include particularly, but are not limited to: increased capital requirements mandated by the Company's regulators; the Company's ability to raise capital; competitive factors, including price competition; changes in interest rates; increases or decreases in retail and commercial economic activity in the Company's market area; variations in the ability and propensity of consumers and businesses to borrow, repay, or deposit money, or to use other banking and financial services; results of regulatory examinations or changes in law, regulations or regulatory practices; the Company's ability to attract and retain key management and staff; any failure by the Company to maintain effective internal control over financial reporting; larger-than-expected losses from the sale of assets; and the potential that net charge-offs are higher than expected or for further increases in our provision for loan losses. Further, it could take the Company longer than anticipated to implement its strategic plans to increase revenue and manage non-interest expense, or it may not be possible to implement those plans at all. Finally, new and unanticipated legislation, regulation, or accounting standards may require the Company to change its practices in ways that materially change the results of operations. We have no obligation to update any forward-looking statements to reflect events or circumstances after the date of this document. For more information, see the risk factors described in the Company's Annual Report on Form 10-K and other filings with the Securities and Exchange Commission.

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