Operating Results

Net interest margin for the second quarter of 2014 was 3.66%, compared to 3.68% for the prior quarter, and 3.70% for the second quarter of 2013.   During the second quarter of 2014, our average interest-earning assets increased by $40.3 million; however, the yield on our interest-earning assets declined by six basis points.  In comparison, our average interest-bearing liabilities increased by $16.8 million during the second quarter of 2014, with the respective cost declining by two basis points.  

Noninterest income was $1.5 million and $878 thousand for the three months ended June 30, 2014 and 2013, respectively.  For the six months ended June 30, 2014 and 2013, noninterest income was $2.5 million and $1.8 million, respectively.  The increase in noninterest income during the three and six month periods ended June 30, 2014 relates primarily to increases in loan fee income and other income, as well as a $229 thousand gain on sale of investment securities.  A significant portion of our loan fee income relates to income derived from mortgage originations which was $576 thousand and $880 thousand for the three and six months ended June 30, 2014, respectively. Comparatively, mortgage origination income was $222 thousand and $459 thousand for the three and six months ended June 30, 2013 respectively.

Noninterest expense was $6.3 million and $5.3 million for the three months ended June 30, 2014 and 2013, respectively, and $12.1 million and $10.5 million for the six months ended June 30, 2014 and 2013, respectively.  The increase in noninterest expense during the 2014 period relates primarily to increases in salaries and benefits, professional fees, and other noninterest expense. Included in professional fees and other noninterest expense for the three and six months ended June 30, 2014, was $336 thousand and $377 thousand, respectively, of litigation costs related to a lawsuit which was resolved during the second quarter of 2014.

During the second quarter of 2014, we recorded total credit costs of $958 thousand compared to $736 thousand during the second quarter of 2013.  The $958 thousand in credit costs during the second quarter of 2014 related primarily to the $950 thousand provision for loan losses, combined with expenses of $8 thousand related to the sale and management of other real estate owned.  In addition, net loan charge-offs for the second quarter of 2014 were $560 thousand, or 0.28% of average loans on an annual basis, and related primarily to two commercial loans.  Comparatively, the $736 thousand in credit costs during the second quarter of 2013 related primarily to the provision for loan losses, partially offset by a net gain of $14 thousand on the sale and management of other real estate owned.  For the six months ended June 30, 2014, total credit costs were $2.0 million, consisting of $2.0 million provision for loan losses and expenses of $21 thousand for the sale and management of other real estate owned.  For the six months ended June 30, 2013, total credit costs were $1.9 million, consisting of $1.9 million provision for loan losses and net loss of $6 thousand from the sale and management of other real estate owned.  Our allowance for loan losses was $11.1 million, or 1.37% of loans, at June 30, 2014 which provides approximately 90% coverage of nonaccrual loans, compared to $9.6 million, or 1.39% of loans, at June 30, 2013.

Nonperforming assets were $13.6 million, or 1.40% of total assets, as of June 30, 2014.  Comparatively, nonperforming assets were $10.0 million, or 1.07%, at March 31, 2014, and $6.9 million, or 0.82%, at June 30, 2013.  The $3.6 million increase in nonperforming assets during the second quarter of 2014 relates to four commercial loans which were put on nonaccrual status during the quarter. Of the $13.6 million in total nonperforming assets as of June 30, 2014, nonperforming loans represent $12.3 million and other real estate owned represents $1.3 million.  Classified assets improved to 26% of tier 1 capital plus the allowance for loan losses at June 30, 2014, compared to 34% at June 30, 2013.

Gross loans were $812.8 million as of June 30, 2014, compared to $733.7 million at December 31, 2013, and $685.6 million at June 30, 2013.  Core deposits, which exclude out-of-market deposits and time deposits of $100,000 or more, increased to $536.2 million at June 30, 2014 compared to $482.0 million at December 31, 2013, and $474.3 million at June 30, 2013.  

Shareholders’ equity totaled $71.9 million as of June 30, 2014, compared to $65.7 million at December 31, 2013, and $63.6 million at June 30, 2013. As of June 30, 2014, our capital ratios continue to exceed the regulatory requirements for a “well capitalized” institution.

As previously disclosed, on June 6, 2014, we obtained a $10 million revolving line of credit with another financial institution.  The line of credit bears interest at LIBOR plus 2.90%, with a floor of 3.25% and a ceiling of 5.15%, and matures 36 months from the closing date.  

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