PART I
General
Middleburg Financial Corporation (the “Company”) is a bank holding company that was incorporated under Virginia law in 1993. The Company conducts its primary operations through two wholly owned subsidiaries, Middleburg Bank and Middleburg Investment Group, Inc., both of which are chartered under Virginia law. The Company has one other wholly owned subsidiary, MFC Capital Trust II, which is a Delaware Business Trust that the Company formed in connection with the issuance of trust preferred debt in December 2003. This trust is an unconsolidated subsidiary of the Company and its principal assets are $5.2 million of the Company's subordinated debt securities (referred to herein as "subordinated notes") that are reported as liabilities of the Company.
Middleburg Bank has one wholly owned subsidiary, Middleburg Bank Service Corporation, incorporated under the laws of the Commonwealth of Virginia, which is a partner in two limited liability companies, Bankers Title Shenandoah, LLC, which sells title insurance through its members, and Bankers Insurance, LLC, which acts as a broker for insurance sales for its member banks.
The Company operates in a decentralized manner in three principal business activities: (1) commercial and retail banking services through Middleburg Bank, (2) wealth management services through Middleburg Investment Group, Inc. and (3) mortgage banking services. The following general business discussion focuses on the activities within each of these segments. Refer to Note 22 "Segment Reporting", included in the Company's consolidated financial statements for additional discussion.
Middleburg Bank and the Company have assets in custody with Middleburg Trust Company and accordingly pay Middleburg Trust Company a monthly fee. Middleburg Bank also pays interest to Middleburg Trust Company on deposit accounts it has with Middleburg Bank.
Merger between the Company and Access National Corporation ("Access")
On October 24, 2016, the Company and Access National Corporation (“Access”) announced a definitive agreement to combine in a strategic merger (the “Merger Agreement”) pursuant to which the Company will merge with and into Access (the “Merger”). Upon consummation of the Merger, the holders of shares of the Company's common stock will receive 1.3314 shares of Access common stock for each share of the Company's common stock held immediately prior to the effective date of the Merger. The transaction is expected to be completed in the second quarter of 2017, subject to approval of both companies' shareholders, regulatory approvals and other customary closing conditions.
Commercial and Retail Banking Services
Middleburg Bank opened for business on July 1, 1924 and has continuously offered banking products and services to surrounding communities since that date. Middleburg Bank has twelve full service facilities. The main office is located at 111 West Washington Street, Middleburg, Virginia 20117. Middleburg Bank has two full service facilities in Leesburg, Virginia. Other full service facilities are located in Ashburn, Gainesville, Marshall, Purcellville, Reston, Richmond, Warrenton, and Williamsburg, Virginia.
Middleburg Bank serves the Virginia counties of Loudoun, Fairfax, Fauquier and western Prince William as well as the City of Williamsburg and the City of Richmond.
Loudoun, Fairfax, Fauquier and western Prince William counties are located in northwestern Virginia and included in the Washington-Baltimore metropolitan statistical area. The local economy of these counties is driven by service industries, including but not limited to, professional and technical services requiring a high skill level; federal, state and local government; construction; agriculture and retail trade. According to the latest available U.S. Census Bureau data, the estimated population in these counties was:
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Loudoun County - 375,629
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Fairfax County - 1,142,234
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Fauquier County - 68,782
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Prince William County - 451,721
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The City of Williamsburg is located in the Tidewater region of Virginia and has an estimated population of 15,052 according to the U.S. Census Bureau, while the surrounding area (James City County) has an estimated population of 73,147.
The City of Richmond has an estimated population of 220,289 according to the U.S. Census Bureau while the Richmond metropolitan statistical area has a population of 1,269,129.
Revenue from commercial and retail banking activities consists primarily of interest earned on loans and investment securities and service charges on deposit accounts. At December 31, 2016, assets of the commercial and retail banking segment totaled $1.4 billion. For the year ended December 31, 2016, the net income for this segment totaled $7.1 million.
Wealth Management Services
Middleburg Investment Group is a non-bank holding company that was formed in 2005. It has one wholly-owned subsidiary, Middleburg Trust Company.
Middleburg Trust Company is chartered under Virginia law and opened for business in January 1994. Its main office is located at 1600 Forest Avenue, Henrico, Virginia 23229. Middleburg Trust Company serves the greater Richmond area including the counties of Henrico, Chesterfield, Hanover, Goochland and Powhatan. In 2008, Middleburg Trust Company opened an office in Williamsburg, Virginia. Middleburg Trust Company also serves the counties of Fairfax, Fauquier and Loudoun with staff available in several of Middleburg Bank's financial service centers.
Revenue from wealth management activities is comprised mostly of fees based upon the market value of the accounts under administration as well as commissions on investment transactions. The wealth management services are conducted by Middleburg Trust Company. At December 31, 2016, assets of the wealth management services segment totaled $12.5 million. For the year ended December 31, 2016, the net income for this segment totaled $1.0 million.
Mortgage Banking Services
On May 15, 2014, Middleburg Financial Corporation, through its banking subsidiary, Middleburg Bank, sold all of its majority interest in Southern Trust Mortgage LLC, which originated and sold mortgages secured by personal residences primarily in the southeastern United States.
Prior to the date of sale, mortgage banking activities were conducted through a business arrangement with Southern Trust Mortgage whereby the Bank acted as an investor in purchasing loans originated by Southern Trust Mortgage. Subsequent to the sale date, mortgage banking activity for the Company is included with the results of the retail banking segment.
Products and Services
The Company, through its subsidiaries, offers a wide range of banking, fiduciary and investment management services to both individuals and small businesses. Middleburg Bank’s services include various types of checking and savings deposit accounts, and the origination of business, real estate, development, mortgage, home equity, automobile and other installment, demand and term loans. Also, Middleburg Bank offers ATMs at twelve facilities and at two off-site locations. Additional banking services available to the Company’s clients include, but are not limited to, ACH, Internet banking, safe deposit box rentals, notary public and wire services.
Middleburg Investment Group offers wealth management services through Middleburg Trust Company and through the investment services department of Middleburg Bank. Middleburg Trust Company provides a variety of investment management and fiduciary services including trust and estate settlement. Middleburg Trust Company can also serve as escrow agent, attorney-in-fact, and guardian of property or trustee of Individual Retirement Accounts (IRA). Middleburg Investment Services provides investment brokerage services for the Company’s clients.
Employees
As of December 31, 2016, the Company and its subsidiaries had a total of 189 full time equivalent employees. The Company considers relations with its employees to be excellent. The Company’s employees are not represented by a collective bargaining unit.
U.S. Securities and Exchange Commission Filings
The Company maintains an Internet website at
www.middleburgbank.com
. Shareholders of the Company and the public may access the Company’s periodic and current reports (including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports) filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, through the “Shareholder Relations” section of the Company’s website. The reports are made available on this website as soon as practical following the filing of the reports with the SEC. The information is free of charge and may be reviewed, downloaded and printed from the website at any time.
Competition
The Company’s commercial and retail banking segment faces significant competition for both loans and deposits. Competition for loans comes from commercial banks, savings and loan associations and savings banks, mortgage banking subsidiaries of regional commercial banks, subsidiaries of national mortgage bankers, insurance companies, and other institutional lenders. Its most direct competition for deposits comes from commercial banks, credit unions, savings banks, savings and loan associations and other financial institutions. Based upon total deposits at June 30, 2016, as reported to the Federal Deposit Insurance Corporation (the “FDIC”), the Company had:
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13.19% of the nearly $6.1 billion in deposits in Loudoun County.
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1.24% of the nearly $5.0 billion in deposits in the Reston market.
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6.55% of the nearly $1.5 billion in deposits in Fauquier County.
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3.81% of the nearly $1.3 billion in deposits in James City County.
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0.52% of the nearly $4.3 billion in deposits in Prince William County.
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0.09% of the nearly $19.2 billion in deposits in the City of Richmond.
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The Company also faces competition for deposits from short-term money market mutual funds and other corporate and government securities funds.
The Company’s wealth management segment faces competition on several fronts. Middleburg Trust Company competes for clients and accounts with banks, other financial institutions and money managers. Even though many of these institutions have been engaged in the trust or investment management business for a considerably longer period of time than Middleburg Trust Company and have significantly greater resources, Middleburg Trust Company has grown through its commitment to providing quality trust and investment management services and a community focused approach to business.
Competition for the Company’s mortgage banking business was largely from other mortgage banking entities. Traditional financial institutions, investment banking companies and Internet sources for mortgages also add to the competitive market for mortgages.
Lending Activities
Credit Policies
The principal risk associated with each of the categories of loans in Middleburg Bank’s portfolio is the creditworthiness of its borrowers, which can vary depending on prevailing economic conditions, market employment levels, consumer confidence, fluctuations in the value of real estate and other conditions that affect the ability of borrowers to repay indebtedness.
In an effort to manage risk, Middleburg Bank has written policies and procedures, which include approval limits assigned to individual loan officers based on their position and level of experience. Middleburg Bank also utilizes an outside third party loan review process that includes regular portfolio reviews to assess exposure to loan losses and to ascertain compliance with Middleburg Bank’s loan policy.
Middleburg Bank has three levels of lending authority. Individual loan officers are the first level and are limited to their lending authority. The second level is the Officers Loan Committee, which is composed of five senior officers of Middleburg Bank. The Officers Loan Committee approves loans that exceed the individual loan officers’ lending authority and reviews loans to be presented to the Directors Loan Committee. The Directors Loan Committee is composed of six Directors, of which four are independent Directors. The Directors Loan Committee approves new, modified and renewed credits that exceed Officer Loan Committee lending authorities. A quorum is reached when four committee members are present, of which at least three must be independent Directors. The approval of an application will be met with a majority of the members present, but no less than three votes. In addition, the Directors Loan Committee reports all new loans that were reviewed and approved to Middleburg Bank’s Board of Directors on a monthly basis. Monthly reports provided to the Directors Loan Committee include, but are not limited to, all new credits in excess of $12,500 or which had been extended; a watch list including names, current balances, risk rating and payment status; nonaccruals and recommended charge-offs and a list of overdrafts in excess of $1,500 which have been overdrawn for more than five days. The Directors Loan Committee also reviews lending policies that are proposed by management.
Construction Lending
The Company originates local construction loans, primarily residential, and land acquisition and development loans. The construction loans are primarily secured by units under construction and the underlying land for which the loan was obtained. The average life of a typical construction loan is approximately twelve months and will reprice monthly to meet the market, generally the Wall Street Journal prime rate plus one percent. Because the interest rate charged on these loans floats with the market, these loans help the Company in managing its interest rate risk. Construction lending entails significant additional risks, compared with residential mortgage lending. Construction loans often involve larger loan balances concentrated with single borrowers or groups
of related borrowers. Another risk involved in construction lending is attributable to loan funds being advanced upon the security of the land or home under construction, which value is estimated prior to the completion of construction. Thus, it is more difficult to evaluate accurately the funds that are required to complete a project and related loan-to-value ratios. To mitigate the risks associated with construction lending, the Company generally limits loan amounts to 75% to 85% of appraised value, in addition to analyzing the creditworthiness of its borrowers. The Company also obtains a first lien on the property as security for its construction loans and typically requires personal guarantees from the borrowing entity’s principal owners.
Commercial Business Loans
Commercial business loans generally have a higher degree of risk than residential mortgage loans, but have higher yields. To manage these risks, the Company generally obtains appropriate collateral and personal guarantees from the borrowing entity’s principal owners and monitors the financial condition of its business borrowers. Commercial business loans typically are made on the basis of the borrower’s ability to make repayment from cash flow from its business and are secured by business assets, such as accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of commercial business loans is substantially dependent on the success of the business itself. Furthermore, the collateral for commercial business loans may depreciate over time and generally cannot be appraised with as much precision as residential real estate.
Commercial Real Estate Lending
Commercial real estate loans are secured by various types of commercial real estate in the Company's market area, including multi-family residential buildings, commercial buildings and offices, small shopping centers and churches.
In its underwriting of commercial real estate, the Company may lend, in accordance with internal policy, up to 80% of the secured property’s appraised value. Commercial real estate lending entails significant additional risk, as compared to residential mortgage lending. Commercial real estate loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Additionally, the payment experience on loans secured by income producing properties is typically dependent on the successful operation of a business or a real estate project and thus may be subject, to a greater extent, to adverse conditions in the real estate market or in the economy. The Company's commercial real estate loan underwriting criteria require an examination of debt service coverage ratios and the borrower’s creditworthiness, prior credit history and reputation. The Company also evaluates the location of the security property and typically requires personal guarantees or endorsements of the borrowing entity’s principal owners.
1 - 4 Family Residential Real Estate Lending
Residential lending activity may be generated by loan originator solicitation, referrals by real estate professionals, existing or new clients and purchases of whole loans. As part of the loan application process, information is gathered on income, employment and credit history of the applicant. Loan originations are underwritten using Middleburg Bank’s underwriting guidelines. Security for the majority of residential lending is in the form of owner occupied 1- 4 family dwellings. The valuation of residential collateral is provided by independent appraisers who have been approved by the Company's Board of Directors. In connection with residential real estate loans, the Company requires title insurance, hazard insurance and, if required, flood insurance. Flood determination letters with life of loan tracking are obtained on all federally related transactions with improvements serving as security for the transaction.
Consumer Lending
The Company offers various secured and unsecured consumer loans, including unsecured personal loans and lines of credit, automobile loans, deposit account loans, installment and demand loans. The Company currently originates all of its consumer loans in its geographic market area. Most of the consumer loans are tied to the Wall Street Journal prime rate and reprice monthly.
Consumer loans may entail greater risk than residential mortgage loans, particularly in the case of loans which are unsecured, such as lines of credit, or secured by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. Consumer loan delinquencies often increase over time as the loans age.
The underwriting standards for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of the applicant's ability to meet existing obligations and payments on the proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment, and additionally from any verifiable secondary income. Although creditworthiness of the applicant is of primary consideration, the underwriting process also includes an analysis of the value of the security in relation to the proposed loan amount.
Supervision and Regulation
General
As a bank holding company, the Company is subject to regulation under the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and the examination and reporting requirements of the Board of Governors of the Federal Reserve System (the "Federal Reserve"). As a state-chartered commercial bank, Middleburg Bank is subject to regulation, supervision and examination by the Virginia State Corporation Commission’s Bureau of Financial Institutions. It is also subject to regulation, supervision and examination by the Federal Reserve. Other federal and state laws, including various consumer and compliance laws, govern the activities of Middleburg Bank, the investments that it makes and the aggregate amount of loans that it may grant to one borrower.
The following description summarizes the significant federal and state laws applicable to the Company and its subsidiaries. To the extent that statutory or regulatory provisions are described, the description is qualified in its entirety by reference to that particular statutory or regulatory provision.
The Bank Holding Company Act
Under the Bank Holding Company Act, the Company is subject to periodic examination by the Federal Reserve and is required to file periodic reports regarding its operations and any additional information that the Federal Reserve may require. The Bank Holding Company Act limits activities at the bank holding company level to:
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banking and managing or controlling banks;
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furnishing services to or performing services for its subsidiaries; and
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engaging in other activities that the Federal Reserve has determined by regulation or order to be so closely related to banking as to be a proper incident to these activities.
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Some of the activities that the Federal Reserve Board has determined by regulation to be proper incidents to the business of a bank holding company include making or servicing loans and specific types of leases, performing specific data processing services and acting in some circumstances as a fiduciary, investment, or financial adviser.
With some limited exceptions, the Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before:
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acquiring substantially all the assets of any bank;
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acquiring direct or indirect ownership or control of any voting shares of any bank if after such acquisition it would own or control more than 5% of the voting shares of such bank (unless it already owns or controls the majority of such shares); or
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merging or consolidating with another bank holding company.
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In addition, and subject to some exceptions, the Bank Holding Company Act and the Change in Bank Control Act, together with their regulations, require Federal Reserve approval prior to any person or company acquiring 25% or more of any class of voting securities of a bank or bank holding company. Prior notice to the Federal Reserve is required if a person acquires 10% or more, but less than 25%, of any class of voting securities of a bank or bank holding company and either the institution has registered securities under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”) or no other person owns a greater percentage of that class of voting securities immediately after the transaction.
Payment of Dividends
The Company is a legal entity separate and distinct from its banking and non-banking subsidiaries. The majority of the Company’s revenues are from dividends paid to the Company by its subsidiaries. The Company and Middleburg Bank are subject to laws and regulations that limit the amount of dividends it can pay, including requirements to maintain capital at or above regulatory minimums. Banking regulators have indicated that banking organizations should generally pay dividends only if the organization’s net income available to common shareholders is sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. The Company does not expect that any of these laws, regulations or policies will materially affect the ability of Middleburg Bank to pay dividends. During the year ended December 31, 2016, Middleburg Bank and Middleburg Investment Group paid $5.9 million and $1.0 million, respectively, in dividends to the Company.
The FDIC has the general authority to limit the dividends paid by insured banks if the payment is deemed an unsafe and unsound practice. The FDIC has indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice.
Insurance of Accounts, Assessments and Regulation by the FDIC
The deposits of Middleburg Bank are insured by the FDIC up to the limits set forth under applicable law. Middleburg Bank pays deposit insurance assessments of the Deposit Insurance Fund (“DIF”) of the FDIC.
The FDIC has implemented a risk-based deposit insurance assessment system under which the assessment rate for an insured institution may vary according to regulatory capital levels of the institution and other factors, including supervisory evaluations. In addition to being influenced by the risk profile of the particular depository institution, FDIC premiums are also influenced by the size of the FDIC insurance fund in relation to total deposits in FDIC insured banks. An institution’s assessment base is its consolidated total assets less its average tangible equity as defined by the FDIC. The FDIC has authority to impose special assessments from time to time.
The FDIC is authorized to prohibit any DIF-insured institution from engaging in any activity that the FDIC determines by regulation or order to pose a serious threat to the respective insurance fund. Also, the FDIC may initiate enforcement actions against banks, after first giving the institution’s primary regulatory authority an opportunity to take such action. The FDIC may terminate the deposit insurance of any depository institution if it determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed in writing by the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If deposit insurance is terminated, the deposits at the institution at the time of termination, less subsequent withdrawals, shall continue to be insured for a period from six months to two years, as determined by the FDIC. The Company is not aware of any existing circumstances that could result in termination of any of Middleburg Bank’s deposit insurance.
Capital Requirements
The Federal Reserve Board and the FDIC have adopted rules to implement the Basel III capital framework as outlined by the Basel Committee on Banking Supervision and standards for calculating risk-weighted assets and risk-based capital measurements (collectively, the Basel III Final Rules) that apply to banking organizations they supervise. For the purposes of these capital rules, (i) common equity tier 1 capital (CET1) consists principally of common stock (including surplus) and retained earnings; (ii) Tier 1 capital consists principally of CET1 plus non-cumulative preferred stock and related surplus, and certain grandfathered cumulative preferred stocks and trust preferred securities; and (iii) Tier 2 capital consists principally of Tier 1 capital plus qualifying subordinated debt and preferred stock, and limited amounts of the allowance for loan losses. Each regulatory capital classification is subject to certain adjustments and limitations, as implemented by the Basel III Final Rules. The Basel III Final Rules also establish risk weightings that are applied to many classes of assets held by community banks, importantly including applying higher risk weightings to certain commercial real estate loans.
The Basel III Final Rules were effective January 1, 2015, and the Basel III Final Rules capital conservation buffer will be phased in from 2015 to 2019.
When fully phased in, the Basel III Final Rules require banks to maintain (i) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7%), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total (that is, Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter).
The Basel III Final Rules provide deductions from and adjustments to regulatory capital measures, primarily to CET1, including deductions and adjustments that were not applied to reduce CET1 under historical regulatory capital rules. For example, mortgage servicing rights, deferred tax assets, dependent upon future taxable income, and significant investments in non-consolidated financial entities must be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. These deductions from and adjustments to regulatory capital will generally be phased in beginning in 2015 through 2018.
The Basel III Final Rules permanently includes in Tier 1 capital trust preferred securities issued prior to May 19, 2010 by bank holding companies with less than $15 billion in total assets, subject to a limit of 25% of Tier 1 capital. The Company expects that its trust preferred securities will be included in Tier 1 capital until their maturity.
The Basel III Final Rules also implement a “countercyclical capital buffer,” generally designed to absorb losses during periods of economic stress and to be imposed when national regulators determine that excess aggregate credit growth becomes associated with a buildup of systemic risk. This buffer is a CET1 add-on to the capital conservation buffer in the range of 0% to 2.5% when fully implemented (potentially resulting in total buffers of between 2.5% and 5%).
Other Safety and Soundness Regulations
There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance funds in the event that the depository institution is insolvent or is in danger of becoming insolvent. For example, under the requirements of the Federal Reserve Board with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so otherwise. In addition, the “cross-guarantee” provisions of federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by the FDIC as a result of the insolvency of commonly controlled insured depository institutions or for any assistance provided by the FDIC to commonly controlled insured depository institutions in danger of failure. The FDIC may decline to enforce the cross-guarantee provision if it determines that a waiver is in the best interests of the deposit insurance funds. The FDIC’s claim for reimbursement under the cross guarantee provisions is superior to claims of shareholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and non-affiliated holders of subordinated debt of the commonly controlled insured depository institutions.
Monetary Policy
The commercial banking business is affected not only by general economic conditions but also by the monetary policies of the Federal Reserve Board. The instruments of monetary policy employed by the Federal Reserve Board include open market operations in United States government securities, changes in the discount rate on member bank borrowings and changes in reserve requirements against deposits held by all federally insured banks. The Federal Reserve Board’s monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. In view of changing conditions in the national and international economy and in the money markets, as well as the effect of actions by monetary fiscal authorities, including the Federal Reserve Board, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand of Middleburg Bank or the business and earnings of the Company.
Federal Reserve System
In 1980, Congress enacted legislation that imposed reserve requirements on all depository institutions that maintain transaction accounts or non-personal time deposits. NOW accounts, money market deposit accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to these reserve requirements, as are any non-personal time deposits at an institution. For net transaction accounts for final weekly reporting period in the year ended December 31, 2016, the first $15.2 million will be exempt from reserve requirements. A 3% reserve ratio will be assessed on net transaction accounts over $15.2 million up to and including $95.0 million. A 10% reserve ratio will be applied above $95.0 million. These percentages are subject to adjustment by the Federal Reserve Board. Because required reserves must be maintained in the form of vault cash or in a non-interest-bearing account at, or on behalf of, a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of the institution’s interest-earning assets.
Transactions with Affiliates
Transactions between banks and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any bank or entity that controls, is controlled by or is under common control with such bank. Generally, Sections 23A and 23B:
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limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such institution’s capital stock and surplus, and maintain an aggregate limit on all such transactions with affiliates to an amount equal to 20% of such capital stock and surplus; and
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require that all such transactions be on terms substantially the same, or at least as favorable, to the association or subsidiary as those provided to a non-affiliate.
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The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and similar other types of transactions.
Transactions with Insiders
The Federal Reserve Act and related regulations impose specific restrictions on loans to directors, executive officers and principal shareholders of banks. Under Section 22(h) of the Federal Reserve Act, loans to a director, an executive officer and to a principal shareholder of a bank, and some affiliated entities of any of the foregoing, may not exceed, together with all other outstanding loans to such person and affiliated entities, the bank’s loan-to-one borrower limit. Loans in the aggregate to insiders and their
related interests as a class may not exceed two times the bank’s unimpaired capital and unimpaired surplus until the bank’s total assets equal or exceed $100 million, at which time the aggregate is limited to the bank’s unimpaired capital and unimpaired surplus. Section 22(h) also prohibits loans, above amounts prescribed by the appropriate federal banking agency, to directors, executive officers and principal shareholders of a bank or bank holding company, and their respective affiliates, unless such loan is approved in advance by a majority of the board of directors of the bank with any “interested” director not participating in the voting. The FDIC has prescribed the loan amount, which includes all other outstanding loans to such person, as to which such prior board of director approval is required, as being the greater of $25,000 or 5% of capital and surplus (up to $500,000). Section 22(h) requires that loans to directors, executive officers and principal shareholders be made on terms and underwriting standards substantially the same as offered in comparable transactions to other persons.
Community Reinvestment Act
Under the Community Reinvestment Act and related regulations, depository institutions have an affirmative obligation to assist in meeting the credit needs of their market areas, including low and moderate-income areas, consistent with safe and sound banking practices. The Community Reinvestment Act requires the adoption by each institution of a Community Reinvestment Act statement for each of its market areas describing the depository institution’s efforts to assist in its community’s credit needs. Depository institutions are periodically examined for compliance with the Community Reinvestment Act and are periodically assigned ratings in this regard. Banking regulators consider a depository institution’s Community Reinvestment Act rating when reviewing applications to establish new branches, undertake new lines of business, and/or acquire part or all of another depository institution. An unsatisfactory rating can significantly delay or even prohibit regulatory approval of a proposed transaction by a bank holding company or its depository institution subsidiaries.
The Gramm-Leach-Bliley Act ("GLBA") and federal bank regulators have made various changes to the Community Reinvestment Act. Among other changes, Community Reinvestment Act agreements with private parties must be disclosed and annual reports must be made to a bank’s primary federal regulator. A bank holding company will not be permitted to become a financial holding company and no new activities authorized under the GLBA may be commenced by a holding company or by a bank financial subsidiary if any of its bank subsidiaries received less than a “satisfactory” rating in its latest Community Reinvestment Act examination.
Fair Lending; Consumer Laws
In addition to the Community Reinvestment Act, other federal and state laws regulate various lending and consumer aspects of the banking business. Governmental agencies, including the Department of Housing and Urban Development, the Federal Trade Commission and the Department of Justice, have become concerned that prospective borrowers experience discrimination in their efforts to obtain loans from depository and other lending institutions. These agencies have brought litigation against depository institutions alleging discrimination against borrowers. Many of these suits have been settled, in some cases for material sums, short of a full trial.
These governmental agencies have clarified what they consider to be lending discrimination and have specified various factors that they will use to determine the existence of lending discrimination under the Equal Credit Opportunity Act and the Fair Housing Act, including evidence that a lender discriminated on a prohibited basis, evidence that a lender treated applicants differently based on prohibited factors in the absence of evidence that the treatment was the result of prejudice or a conscious intention to discriminate, and evidence that a lender applied an otherwise neutral non-discriminatory policy uniformly to all applicants, but the practice had a discriminatory effect, unless the practice could be justified as a business necessity.
Banks and other depository institutions also are subject to numerous consumer-oriented laws and regulations. These laws, which include the Truth in Lending Act, the Truth in Savings Act, the Real Estate Settlement Procedures Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act, and the Fair Housing Act, require compliance by depository institutions with various disclosure requirements and requirements regulating the availability of funds after deposit or the making of some loans to customers.
Gramm-Leach-Bliley Act of 1999
The GLBA covers a broad range of issues, including a repeal of most of the restrictions on affiliations among depository institutions, securities firms and insurance companies. The following description summarizes some of its significant provisions.
The GLBA permits unrestricted affiliations between banks and securities firms. It also permits bank holding companies to elect to become financial holding companies. A financial holding company may engage in or acquire companies that engage in a broad range of financial services, including securities activities such as underwriting, dealing, investment, merchant banking, insurance underwriting, sales and brokerage activities. In order to become a financial holding company, a bank holding company and all of its affiliated depository institutions must be well-capitalized, well-managed and have at least a satisfactory Community Reinvestment Act rating.
The GLBA provides that the states continue to have the authority to regulate insurance activities, but prohibits the states in most instances from preventing or significantly interfering with the ability of a bank, directly or through an affiliate, to engage in insurance sales, solicitations or cross-marketing activities. Although the states generally must regulate bank insurance activities in a nondiscriminatory manner, the states may continue to adopt and enforce rules that specifically regulate bank insurance activities in specific areas identified under the law. Under the new law, the federal bank regulatory agencies adopted insurance consumer protection regulations that apply to sales practices, solicitations, advertising and disclosures.
The GLBA adopts a system of functional regulation under which the Federal Reserve Board is designated as the umbrella regulator for financial holding companies, but financial holding company affiliates are principally regulated by functional regulators such as the FDIC for state nonmember bank affiliates, the SEC for securities affiliates, and state insurance regulators for insurance affiliates. It repeals the broad exemption of banks from the definitions of “broker” and “dealer” for purposes of the Exchange Act, as amended. It also identifies a set of specific activities, including traditional bank trust and fiduciary activities, in which a bank may engage without being deemed a “broker,” and a “dealer.” Additionally, the new law makes conforming changes in the definitions of “broker” and “dealer” for purposes of the Investment Company Act of 1940, as amended, and the Investment Advisers Act of 1940, as amended.
The GLBA contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to its customers, both at the inception of the customer relationship and on an annual basis, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. The law provides that, except for specific limited exceptions, an institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. An institution may not disclose to a non-affiliated third party, other than to a consumer reporting agency, customer account numbers or other similar account identifiers for marketing purposes. The GLBA also provides that the states may adopt customer privacy protections that are stricter than those contained in the Act.
Bank Secrecy Act
Under the Bank Secrecy Act, a financial institution is required to have systems in place to detect certain transactions, based on the size and nature of the transaction. Financial institutions are generally required to report cash transactions involving more than $10,000 to the United States Treasury. In addition, financial institutions are required to file suspicious activity reports for transactions that involve more than $5,000 and which the financial institution knows, suspects or has reason to suspect, the transactions involves illegal funds, is designed to evade the requirements of the BSA or has no lawful purpose. The USA PATRIOT Act of 2001, enacted in response to the September 11, 2001 terrorist attacks, requires bank regulators to consider a financial institution’s compliance with the BSA when reviewing applications from a financial institution. As part of its BSA program, the USA PATRIOT Act also requires a financial institution to follow customer identification procedures when opening accounts for new customers and to review lists of individuals who and entities which are prohibited from opening accounts at financial institutions.
Dodd-Frank Act
The Dodd-Frank Act implemented far-reaching changes across the financial regulatory landscape, including changes that have affected or may affect all bank holding companies and banks, including the Company and the Bank. Provisions that significantly affect the business of the Company and the Bank include the following:
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Insurance of Deposit Accounts.
The Dodd-Frank Act changed the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital. The Dodd-Frank Act also made permanent the $250,000 limit for federal deposit insurance and increased the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000.
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Payment of Interest on Demand Deposits.
The Dodd-Frank Act repealed the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.
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Creation of the Consumer Financial Protection Bureau.
The Dodd-Frank Act centralized significant aspects of consumer financial protection by creating a new agency, the CFPB, which is discussed in more detail below.
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Debit Card Interchange Fees.
The Dodd-Frank Act amended the Electronic Fund Transfer Act (EFTA) to, among other things, require that debit card interchange fees be reasonable and proportional to the actual cost incurred by the issuer with respect to the transaction. The Federal Reserve Board adopted regulations setting the maximum permissible interchange fee as the sum of $0.21 per transaction and 5 basis points multiplied by the value of the transaction, with an additional adjustment of up to $0.01 per transaction if the issuer implements additional fraud-prevention standards. Although issuers that have assets of less than $10 billion are exempt from the Federal Reserve Board’s regulations that set maximum interchange fees, these regulations could significantly affect the interchange fees that financial institutions with less than $10 billion in assets are able to collect.
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In addition, the Dodd-Frank Act implements other far-reaching changes to the financial regulatory landscape, including provisions that:
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Restrict the preemption of state law by federal law and disallow subsidiaries and affiliates of national banks from availing themselves of such preemption.
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Impose comprehensive regulation of over-the-counter derivatives market, subject to significant rulemaking processes, which would include certain provisions that would effectively prohibit insured depository institutions from conducting certain derivatives businesses in the institution itself.
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Require depository institutions with total consolidated assets of more than $10 billion to conduct regular stress tests and require large, publicly traded bank holding companies to create a risk committee responsible for the oversight of enterprise risk management.
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Require loan originators to retain 5% of any loan sold or securitized, unless it is a “qualified residential mortgage,” subject to certain exceptions.
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Prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (the Volcker Rule).
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Implement corporate governance revisions that apply to all public companies not just financial institutions.
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Many aspects of the Dodd-Frank Act remain subject to future rulemaking, making it difficult to anticipate the overall financial impact on the Company, its subsidiaries, its customers or the financial industry more generally. Some of the rules that have been proposed and, in some cases, adopted to comply with the Dodd-Frank Act's mandates are discussed further below.
Consumer Protection
The Dodd-Frank Act created the CFPB, a federal regulatory agency that is responsible for implementing, examining and enforcing compliance with federal consumer financial laws for institutions with more than $10 billion of assets and, to a lesser extent, smaller institutions. The Dodd-Frank Act gives the CFPB authority to supervise and regulate providers of consumer financial products and services, and establishes the CFPB’s power to act against unfair, deceptive or abusive practices, and gives the CFPB rulemaking authority in connection with numerous federal consumer financial protection laws (for example, but not limited to, the Truth-in-Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA)).
As a smaller institution (i.e., with assets of $10 billion or less), most consumer protection aspects of the Dodd-Frank Act will continue to be applied to the Company and to the Bank by the Federal Reserve Board. However, the CFPB may include its own examiners in regulatory examinations by a small institution’s principal regulators and may require smaller institutions to comply with certain CFPB reporting requirements. In addition, regulatory positions taken by the CFPB and administrative and legal precedents established by CFPB enforcement activities, including in connection with supervision of larger bank holding companies, could influence how the Federal Reserve Board apply consumer protection laws and regulations to financial institutions that are not directly supervised by the CFPB. The precise effect of the CFPB’s consumer protection activities on the Company and the Bank cannot be determined with certainty.
Mortgage Lending
The CFPB implemented certain sections of the Dodd-Frank Act requiring creditors to make a reasonable, good faith determination of a consumer’s ability to repay any closed-end consumer credit transaction secured by a 1-4 family dwelling. The rule also established certain protections from liability under this requirement to ensure a borrower’s ability to repay for loans that meet the definition of “qualified mortgage.” Loans that satisfy this “qualified mortgage” safe harbor will be presumed to have complied with the new ability-to-repay standard.
Volcker Rule
The Volcker Rule generally would prohibit banking entities from:
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engaging in short-term proprietary trading of securities, derivatives, commodity futures and options on these instruments for their own account;
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owning, sponsoring, or having certain relationships with hedge funds or private equity funds, referred to as “covered funds”.
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On January 14, 2014, an adjustment to the final rule was made allowing banks to keep certain collateralized debt obligations (“CDOs”) acquired before the Volcker Rule was finalized, if the CDO was established before May 2010 and is backed primarily by trust preferred securities issued by banks with less than $15 billion in assets. The final rules were effective April 1, 2014; however, the Federal Reserve Board has extended the conformance period until July 21, 2017. We believe that we are in full compliance with the Rule.
Future Regulatory Uncertainty
Because federal regulation of financial institutions changes regularly and is the subject of constant legislative debate, the Company cannot forecast how federal regulation of financial institutions may change in the future and impact its operations. Although Congress, in recent years, has sought to reduce the regulatory burden on financial institutions with respect to the approval of specific transactions, the Company fully expects that the financial institution industry will remain heavily regulated in the near future and additional laws or regulations may be adopted further regulating specific banking practices.
Middleburg Trust Company
Middleburg Trust Company is subject to supervision and regulation by the Virginia State Corporation Commission’s Bureau of Financial Institutions and the Federal Reserve Board.
State and federal regulators have substantial discretion and latitude in the exercise of their supervisory and regulatory authority over Middleburg Trust Company, including the statutory authority to promulgate regulations affecting the conduct of its business and operations of Middleburg Trust Company. They also have the ability to exercise substantial remedial powers with respect to Middleburg Trust Company in the event that it determines that Middleburg Trust Company is not in compliance with applicable laws, orders or regulations governing its operations, is operating in an unsafe or unsound manner, or is engaging in any irregular practices.
The Company is subject to various risks, including the risks described below. The Company’s (“We” or “Our”) operations, financial condition, performance and, the market value of our securities could be materially adversely affected by any of these risks or additional risks not presently known or risks that we currently deem immaterial.
Risks Related to the Merger with Access National Corporation
Combining Access and the Company may be more difficult, costly or time-consuming than we expect.
The success of the Merger will depend, in part, on the ability of Access to realize the anticipated benefits and cost savings from combining the businesses of Access and the Company in a manner that permits growth opportunities and cost savings to be realized without materially disrupting the existing customer relationships of the Company or decreasing revenues due to loss of customers. However, to realize these anticipated benefits and cost savings, Access must successfully combine the businesses of Access and the Company. If Access is not able to achieve these objectives, the anticipated benefits and cost savings of the Merger may not be realized fully or at all or may take longer to realize than expected.
Access and the Company have operated, and, until the completion of the Merger, will continue to operate, independently. The success of the Merger will depend, in part, on the ability of Access to successfully combine the businesses of Access and the Company. To realize these anticipated benefits, after the completion of the Merger, Access expects to integrate the Company’s business into its own. The integration process in the Merger could result in the loss of key employees, the disruption of each party’s ongoing business, inconsistencies in standards, controls, procedures and policies that affect adversely either party’s ability to maintain relationships with customers and employees or achieve the anticipated benefits of the Merger. The loss of key employees could adversely affect the ability of Access to successfully conduct its business in the markets in which the Company now operates, which could have an adverse effect on the financial results of Access and to the value of its common stock. If Access experiences difficulties with the integration process, the anticipated benefits of the Merger may not be realized fully or at all, or may take longer to realize than expected. As with any merger of financial institutions, there also may be disruptions that cause Access and the Company to lose customers or cause customers to withdraw their deposits, or other unintended consequences that could have a material adverse effect on Access’s results of operations or financial condition after the Merger. These integration matters could have an adverse effect on the Company during this transition period and on Access for an undetermined period after consummation of the Merger.
The Merger may distract management of the Company from its other responsibilities.
The Merger could cause the management of the Company to focus its time and energies on matters related to the Merger that otherwise would be directed to its business and operations. Any such distraction on the part of the Company’s management, if significant, could affect its ability to service existing business and develop new business and adversely affect the business and earnings of the Company before the Merger, or the business and earnings of Access after the Merger.
Termination of the Merger Agreement could negatively impact the Company.
Each of the Company’s and Access’s obligation to consummate the Merger remains subject to a number of conditions, and there can be no assurance that all of the conditions will be satisfied, or that the Merger will be completed on the proposed terms, within the expected time frame, or at all. Any delay in completing the Merger could cause us not to realize some or all of the benefits
that we expect to achieve if the Merger is successfully completed within its expected time frame. If the Merger Agreement is terminated, the Company’s business may be impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the Merger, without realizing any of the anticipated benefits of completing the Merger. Additionally, if the Merger Agreement is terminated, the market price of the Company’s common stock could decline to the extent that the current market prices reflect a market assumption that the Merger will be completed. If the Merger Agreement is terminated under certain circumstances, including circumstances involving a change in recommendation by the Company's board of directors, the Company may be required to pay to Access a termination fee of $9.9 million.
In addition, the Company has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the Merger Agreement. If the Merger is not completed, we would have to recognize these expenses and our management would have committed substantial time and resources without realizing the expected benefits of the Merger. Additionally, failure to consummate the Merger may result in negative reactions from the financial markets or from our customers, vendors and employees. If the Merger is not completed, these risks may materialize and could have a material adverse effect on our stock price, business and cash flows, financial condition and results of operations.
The Merger Agreement limits the ability of the Company to pursue alternatives to the Merger.
The Merger Agreement contains “no-shop” provisions that, with limited exceptions, limit the ability of the Company to discuss, facilitate or commit to competing third-party proposals to acquire all or a significant part of the Company. In addition, under certain circumstances, if the Merger Agreement is terminated and the Company, subject to certain restrictions, consummates a similar transaction other than the Merger, the Company must pay to Access a termination fee of $9.9 million. These provisions might discourage a potential competing acquiror who might have an interest in acquiring all or a significant part of the Company from considering or proposing the acquisition even if it were prepared to pay consideration, with respect to the Company, a higher share price than that proposed in the Merger.
The Company will be subject to business uncertainties and contractual restrictions while the Merger is pending.
Uncertainty about the effect of the Merger on employees and customers may have an adverse effect on the Company. These uncertainties may impair the Company’s ability to attract, retain and motivate key personnel until the Merger is completed, and could cause customers and others that deal with the Company to seek to change existing business relationships with the Company. Retention of certain employees by the Company may be challenging while the Merger is pending, as certain employees may experience uncertainty about their future roles with the Company or the combined company following the Merger. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire to not remain with the Company or the combined company following the Merger, the Company’s business, or the business of the combined company following the Merger, could be harmed. In addition, the Company has agreed to operate its business in the ordinary course prior to the closing of the Merger and from taking certain specified actions until the Merger is completed, and the merger agreement restricts us from taking other specified actions until the Merger occurs without the consent of Access. These restrictions may prevent us from pursuing attractive business opportunities that may arise prior to the completion of the merger.
Our ability to complete the Merger with Access is subject to the receipt of consents and approvals from regulatory agencies which may impose conditions that could adversely affect us or cause the Merger to be abandoned.
Before the Merger may be completed, we must obtain various approvals or consents from the Federal Reserve Board and various bank regulatory and other authorities. These regulators may impose conditions on the completion of the Merger or require changes to the terms of the Merger. Although Access and the Company do not currently expect that any such conditions or changes would be imposed, there can be no assurance that they will not be, and such conditions or changes could have the effect of delaying completion of the Merger or imposing additional costs on or limiting the revenues of Access following the Merger. There can be no assurance as to whether the regulatory approvals will be received, the timing of those approvals, or whether any conditions will be imposed.
Fluctuations in market prices of Access common stock will affect the value that our shareholders receive for their shares of our common stock.
Under the terms of the Merger, each share of the Company's common stock will be converted into the right to receive 1.3314 shares of Access common stock (such ratio, the "Exchange Ratio"), the value of which will depend upon the price of Access common stock at the effective date of the Merger. The market price of Access common stock as of the effective date of the Merger may vary from its price at the date the fixed Exchange Ratio was established. Such variations in the market price of Access common stock may result from changes in the business, operations or prospects of Access, regulatory considerations, general market and economic conditions, and other factors. At the time of the special meetings, shareholders of Access and the Company will not know the exact value of the consideration to be paid by Access when the Merger is completed.
We may not be able to successfully manage our growth or implement our growth strategies, which may adversely affect our results of operations and financial condition.
A key aspect of our business strategy is our continued growth and expansion. Our ability to continue to grow depends, in part, is based upon our ability to:
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open new financial service centers;
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attract deposits to those locations; and
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identify attractive loan and investment opportunities.
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We may not be able to successfully implement our growth strategy if we are unable to identify attractive markets, locations or opportunities to expand in the future. Our ability to manage our growth successfully also will depend on whether we can maintain capital levels adequate to support our growth, maintain cost controls and asset quality and successfully integrate any new financial service centers into our organization.
As we continue to implement our growth strategy by opening new financial service centers, we expect to incur construction costs and increased personnel, occupancy and other operating expenses. We generally must absorb those higher expenses while we begin to generate new deposits, and there is a further time lag involved in redeploying new deposits into attractively priced loans and other higher yielding earning assets. Thus, our plans to grow could depress our earnings in the short run, even if we efficiently execute this growth.
Our future success is dependent on our ability to compete effectively in the highly competitive banking industry.
Our banking subsidiary faces vigorous competition from banks and other financial institutions, including savings and loan associations, savings banks, finance companies and credit unions for deposits, loans and other financial services in our market area. A number of these banks and other financial institutions are significantly larger than we are and have substantially greater access to capital and other resources, as well as larger lending limits and branch systems, and offer a wider array of banking services. Our non-banking subsidiary faces competition from money managers and investment brokerage firms.
To a limited extent, our banking subsidiary also competes with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies, insurance companies and governmental organizations which may offer more favorable financing than we can. Many of our non-bank competitors are not subject to the same extensive regulations that govern us. As a result, these non-bank competitors have advantages over us in providing certain services. This competition may reduce or limit our margins and our market share and may adversely affect our results of operations and financial condition.
CFPB regulations could restrict our ability to originate loans.
Pursuant to the Dodd-Frank Act, the CFPB rules requiring mortgage lenders to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms, or to originate “qualified mortgages” that meet specific requirements with respect to terms, pricing and fees. The rule also contains disclosure requirements at origination and in monthly statements. These requirements require significant personnel resources and could have a material adverse effect on our operations.
We may incur losses if we are unable to successfully manage interest rate risk.
Our profitability will depend upon the spread between the interest rates earned on investments and loans and interest rates paid on deposits and other interest-bearing liabilities. Changes in interest rates will affect our operating performance and financial condition in diverse ways including the pricing of securities, loans and deposits, the volume of loan originations and the value we can recognize on the sale of mortgage and home equity loans in the secondary market. We attempt to minimize our exposure to interest rate risk, but we will be unable to eliminate it. Our net interest spread will depend on many factors that are partly or entirely outside of our control, including competition, federal economic, monetary and fiscal policies, and economic conditions generally.
New regulations could adversely impact our earnings due to, among other things, increased compliance costs or costs due to noncompliance.
The CFPB issued a rule designed to clarify for lenders how they can avoid monetary damages under the Dodd-Frank Act, which would hold lenders accountable for ensuring a borrower’s ability to repay a mortgage. Loans that satisfy this “qualified mortgage” safe-harbor will be presumed to have complied with the ability-to-repay standard. Under the CFPB’s rule, a “qualified mortgage” must not contain certain specified features, including but not limited to:
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excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime loans);
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interest-only payments;
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negative-amortization; and
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terms longer than 30 years.
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Also, to qualify as a “qualified mortgage,” a borrower’s total monthly debt-to-income ratio may not exceed 43%. Lenders must also verify and document the income and financial resources relied upon to qualify the borrower for the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments. The CFPB’s rule on qualified mortgages could limit our ability or desire to make certain types of loans or loans to certain borrowers, or could make it more expensive and/or time consuming to make these loans, which could adversely impact our growth or profitability.
Our concentration in loans secured by real estate may increase our credit losses, which would negatively affect our financial results.
We offer a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity, consumer and other loans. Many of our loans are secured by real estate (both residential and commercial) in our market area. A major change in the real estate market, such as deterioration in the value of collateral, or in the local or national economy, could adversely affect our clients’ ability to repay these loans, which in turn could negatively impact us. While we are in one of the fastest growing real estate markets in the United States, risk of loan defaults and foreclosures are unavoidable in the banking industry, and we try to limit our exposure to this risk by monitoring our extensions of credit carefully. We cannot fully eliminate credit risk, and as a result credit losses may occur in the future.
We may be adversely affected by deterioration of economic conditions in our market area.
Our banking operations are located primarily in the Virginia counties of Loudoun, Fairfax, Fauquier and Prince William and also in the City of Williamsburg and the City of Richmond. Because our lending is concentrated in this market, we will be affected by the general economic conditions in these areas. Changes in the economy may influence the growth rate of our loans and deposits, the quality of the loan portfolio and loan and deposit pricing. A decline in general economic conditions caused by inflation, recession, unemployment or other factors beyond our control would impact the demand for banking products and services generally, which could negatively affect our financial condition and performance.
A loss of our senior officers could impair our relationship with our customers and adversely affect our business.
Many community banks attract customers based on the personal relationships that the banks’ officers and customers establish with each other and the confidence that the customers have in the officers. We depend on the performance of our senior officers. These officers have many years of experience in the banking industry and have numerous contacts in our market area. The loss of the services of any of our senior officers, or the failure of any of them to perform management functions in the manner anticipated by our board of directors, could have a material adverse effect on our business. Our success will be dependent upon the board’s ability to attract and retain quality personnel, including these individuals. We do not carry key man life insurance on our senior officers.
If we need additional capital in the future to continue our growth, we may not be able to obtain it on terms that are favorable.
Our business strategy calls for continued growth. We anticipate that we will be able to support this growth through the generation of additional deposits at new branch locations as well as investment opportunities. However, we may need to raise additional capital in the future to support our continued growth and to maintain our capital levels. Our ability to raise capital through the sale of additional securities will depend primarily upon our financial condition and the condition of financial markets at that time. We may not be able to obtain additional capital in the amounts or on terms satisfactory to us. Our growth may be constrained if we are unable to raise additional capital as needed. This could negatively affect our performance and the value of our common stock.
Our profitability and the value of your investment may suffer because of rapid and unpredictable changes in the highly regulated environment in which we operate.
We are subject to extensive supervision by several governmental regulatory agencies at the federal and state levels. Recently enacted, proposed and future banking legislation and regulations have had, and will continue to have, or may have a significant impact on the financial services industry. These regulations, which are intended to protect depositors and not our shareholders, and the interpretation and application of them by federal and state regulators, are beyond our control, may change rapidly and unpredictably and can be expected to influence our earnings and growth. Our success depends on our continued ability to maintain compliance with these regulations. Some of these regulations may increase our costs and thus place other financial institutions that are not subject to similar regulation in stronger, more favorable competitive positions.
Banking regulators have broad enforcement power, but regulations are meant to protect depositors, and not investors.
Bank regulations, and the interpretation and application of them by regulators, are beyond our control, may change rapidly and unpredictably and can be expected to influence earnings and growth. In addition, these regulations may limit the Company’s growth and the return to investors by restricting activities such as the payment of dividends, mergers with, or acquisitions by, other institutions, investments, loans and interest rates, interest rates paid on depositors and the creation of financial service centers. Information on the regulations that impact the Company are included in Item 1., “Business – Supervision and
Regulation”. Although these regulations impose costs on the Company, they are intended to protect depositors, and should not be assumed to protect the interest of shareholders. The regulations to which we are subject may not always be in the best interest of investors.
Trading in our common stock has been sporadic and volume has been light.
Although our common stock trades on the Nasdaq Capital Market and a number of brokers offer to make a market in common stock on a regular basis, trading volume to date has been limited and there can be no assurance that an active and liquid market for the common stock will develop. As a result, shareholders may not be able to quickly and easily sell their common stock.
Our directors and officers have significant voting power.
Our directors and executive officers beneficially own approximately 5.00% of our common stock and may purchase additional shares of our common stock by exercising vested stock options. By voting against a proposal submitted to shareholders, the directors and officers may be able to make approval more difficult for proposals requiring the vote of shareholders such as mergers, share exchanges, asset sales and amendment to the Company’s articles of incorporation.
Significant sales of our common stock, or the perception that significant sales may occur in the future, could adversely affect the market price for our common stock.
The sale of substantial amounts of our common stock could adversely affect the price of these securities. Sales of substantial amounts of our common stock in the public market, and the availability of shares for future sale, could cause the market price of our common stock to be lower.
As of January 17, 2017, one of our shareholders owned 29.19% of our outstanding common stock, of which 6.3% of our outstanding shares are covered by a resale registration statement with the SEC. In addition, these shares may be sold in certain private transactions or, subject to certain volume limitations, pursuant to Rule 144 under the Securities Act. If a large amount of our common stock was sold in a short period of time, or other investors perceive such sales to be imminent, the market price of our common stock could drop. The existence of this “market overhang” could have a negative impact on the market for our common stock.
The Company depends on the accuracy and completeness of information about clients and counterparties, and its financial condition could be adversely affected if it relies on misleading information.
In deciding whether to extend credit or to enter into other transactions with clients and counterparties, the Company may rely on information furnished to it by or on behalf of clients and counterparties, including financial statements and other financial information, which the Company does not independently verify. The Company also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to clients, the Company may assume that a customer’s audited financial statements conform to GAAP and present fairly, in all material respects, the financial condition, results of operations, and cash flows of the customer. The Company’s financial condition and results of operations could be negatively impacted to the extent it relies on financial statements that do not comply with GAAP or are materially misleading.
An inadequate allowance for loan losses would reduce our earnings.
Our earnings are significantly affected by our ability to properly originate, underwrite and service loans. We maintain an allowance for loan losses based upon many factors, including the following:
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actual loan loss history;
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volume, growth, and composition of the loan portfolio;
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the amount of nonperforming loans and the value of their related collateral;
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the effect of changes in the local real estate market on collateral values;
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the effect of current economic conditions on a borrower’s ability to pay; and
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other factors deemed relevant by management.
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These determinations are based upon estimates that are inherently subjective, and their accuracy depends on the outcome of future events; therefore, realized losses may differ from current estimates. Changes in economic, operating, and other conditions, including changes in interest rates, which are generally beyond our control, could increase actual loan losses significantly. As a result, actual losses could exceed our current allowance estimate. We cannot provide assurance that our allowance for loan losses is sufficient to cover actual loan losses should such losses differ significantly from the current estimates.
In addition, there can be no assurance that our methodology for assessing our asset quality will succeed in properly identifying impaired loans or calculating an appropriate loan loss allowance. We could sustain losses if we incorrectly assess the creditworthiness of our borrowers or fail to detect or respond to deterioration in asset quality in a timely manner. If our assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb losses, or if bank regulatory authorities
require us to increase the allowance for loan losses as a part of their examination process, our earnings and capital could be significantly and adversely affected.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due us. There is no assurance that any such losses would not materially and adversely affect our results of operations.
Government measures to regulate the financial industry, including the Dodd-Frank Act, subject us to increased regulation and could aversely affect us.
As a financial institution, we are heavily regulated at the state and federal levels. As a result of the financial crisis and related global economic downturn that began in 2007, we have faced, and expect to continue to face, increased public and legislative scrutiny as well as stricter and more comprehensive regulation of our financial services practices. The Dodd-Frank Act includes significant changes in the financial regulatory landscape and will impact all financial institutions, including the Company and the Bank. Because the ultimate impact of the Dodd-Frank Act will depend on future regulatory rulemaking and interpretation, we cannot predict the full effect of this legislation on our businesses, financial condition or results of operations. Among other things, the Dodd-Frank Act and the regulations implemented thereunder limit debit card interchange fees, restrict ownership of covered funds, increase FDIC assessments, impose new requirements on mortgage lending, and establish more stringent capital requirements on bank holding companies. As a result of these and other provisions in the Dodd-Frank Act, we will experience additional costs, restrictions on allowable investments, as well as limitations on the products and services we offer and on our ability to efficiently pursue business opportunities, which may adversely affect our businesses, financial condition or results of operations.
The Basel III capital framework will require higher levels of capital and liquid assets, which could adversely affect the Company's net income and return on equity.
The Basel III capital framework represents the most comprehensive overhaul of the U.S. banking capital framework in over two decades. This new capital framework and related changes to the standardized calculations of risk-weighted assets are complex and create additional compliance burdens, especially for community banks. The Basel III Capital Rules require bank holding companies and their subsidiaries, to maintain significantly more capital and adopted more demanding regulatory capital risk weightings and calculations. As a result of the Basel III Capital Rules, many community banks could be forced to limit banking operations and activities, and growth of loan portfolios, in order to focus on retention of earnings to improve capital levels. The Company believes that it maintains sufficient levels of Tier 1 and Common Equity Tier 1 capital to comply with the Basel III Final Rules. However, increased capital requirements imposed by the Basel III Capital Rules may require the Company to limit its banking operations, retain net income or reduce dividends to improve regulatory capital levels, which could negatively affect our business, financial condition and results of operations.
Our ability to pay dividends is limited and we may be unable to pay future dividends.
Our ability to pay dividends is limited by regulatory restrictions and the need to maintain sufficient capital in the Company and in our subsidiaries. The ability of our bank subsidiary to pay dividends to us is limited by the bank’s obligations to maintain sufficient capital, earnings and liquidity and by other restrictions on their dividends under federal and state bank regulatory requirements. We cannot be certain as to when, if ever, the dividend may be increased, nor can we be certain that future reductions of the dividend will not be made.
In addition, as a bank holding company, our ability to declare and pay dividends is subject to the guidelines of the Board of Governors of the Federal Reserve System regarding capital adequacy and dividends. The Federal Reserve guidelines require us to review the effects of the cash payment of dividends on common stock and other Tier 1 capital instruments (i.e., perpetual preferred stock and trust preferred debt) on our financial condition. These guidelines also require that we review our net income and our projected rate of earnings retention.
Under the Federal Reserve’s policy, the board of directors of a bank holding company should also consider different factors to ensure that its dividend level is prudent relative to the organization’s financial position and is not based on overly optimistic earnings scenarios such as any potential events that may occur before the payment date that could affect its ability to pay while still maintaining a strong financial position. As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should consult with the Federal Reserve and eliminate, defer, or significantly reduce the bank holding
company’s dividends if: (i) its net income available to shareholders for the current period is not sufficient to fully fund the dividends; (ii) its prospective rate of earnings retention is not consistent with the its capital needs and overall current and prospective financial condition; or (iii) it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. If we do not satisfy these regulatory requirements or the Federal Reserve’s policies, we will be unable to pay dividends on our common stock.
The Basel III rules require us to maintain a capital conservation buffer above well capitalized capital levels. If we fail to maintain the capital conservation buffer, we may be subject to restrictions on discetionary payouts including the payment of dividends.
Further, we cannot pay any dividends on the common stock, or acquire any shares of common stock, if any distributions on our trust preferred securities are in arrears.
Increases in FDIC insurance premiums may cause our earnings to decrease.
The FDIC has implemented a new methodology by which it will assess deposit insurance premium amounts. The FDIC adopted a final rule in 2011, to change the FDIC’s assessment rates as well as providing that the assessment base will be the institution’s average consolidated total assets less its average tangible equity. Although the burden of replenishing the DIF will be placed primarily on institutions with assets greater than $10 billion, we expect higher annual deposit insurance assessments than we historically incurred before the financial crisis began several years ago. Any future increases in required deposit insurance premiums or special assessments could have a significant adverse impact on our financial condition and results of operations.
The Company’s operations may be adversely affected by cyber security risks.
In the ordinary course of business, the Company collects and stores sensitive data, including proprietary business information and personally identifiable information of its customers and employees in systems and on networks. The secure processing, maintenance and use of this information is critical to operations and the Company’s business strategy. The Company has invested in accepted technologies, and continually reviews processes and practices that are designed to protect its networks, computers and data from damage or unauthorized access. Despite these security measures, the Company’s computer systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. A breach of any kind could compromise systems and the information stored there could be accessed, damaged or disclosed. A breach in security could result in legal claims, regulatory penalties, disruption in operations, and damage to the Company’s reputation, which could adversely affect our business.
We could be subject to changes in tax laws, regulations and interpretations or challenges to our income tax provision.
We compute our income tax provision based on enacted tax rates in the jurisdictions in which we operate. Any change in enacted tax laws, rules or regulatory or judicial interpretations, or any change in the pronouncements relating to accounting for income taxes could adversely affect our effective tax rate, tax payments and results of operations. The taxing authorities in the jurisdictions in which we operate may challenge our tax positions, which could increase our effective tax rate and harm our financial position and results of operations. We are subject to audit and review by U.S. federal and state tax authorities. Any adverse outcome of such a review or audit could have a negative effect on our financial position and results of operations. In addition, changes in enacted tax laws, such as adoption of a lower income tax rate in any of the jurisdictions in which we operate, could impact our ability to obtain the future tax benefits represented by our deferred tax assets and our investments in low income housing tax credits. In addition, the determination of our provision for income taxes and other liabilities requires significant judgment by management. Although we believe that our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and could have a material adverse effect on our financial results in the period or periods for which such determination is made.
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ITEM 1B.
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UNRESOLVED STAFF COMMENTS
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None.
The Company’s corporate headquarters, and that of Middleburg Bank, is located at 111 West Washington Street, Middleburg, Virginia 20117. The Company’s subsidiaries own or lease various other offices in the counties and municipalities in which they operate. At December 31, 2016, Middleburg Bank operated twelve branches in the Virginia communities of Ashburn, Gainesville, Leesburg, Marshall, Middleburg, Purcellville, Reston, Richmond, Warrenton and Williamsburg. All of the offices of Middleburg Trust Company are leased. Additionally, Middleburg Bank owns an operations center building located at 106 Catoctin Circle, SE, Leesburg, Virginia 20175. See Note 1 “Nature of Banking Activities and Significant Accounting Policies” and Note 5 “Premises and Equipment, Net” in the “Notes to the Consolidated Financial Statements” of this Form 10-K for information with respect to the amounts at which bank premises and equipment are carried and commitments under long-term leases.
All of the Company’s properties are well maintained, are in good operating condition and are adequate for the Company’s present and anticipated future needs.
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ITEM 3.
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LEGAL PROCEEDINGS
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There are no material pending legal proceedings to which the Company is a party or of which the property of the Company is subject.
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ITEM 4.
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MINE SAFETY DISCLOSURES
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Not applicable.
Notes to Consolidated Financial Statements
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Note 1.
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Nature of Banking Activities and Significant Accounting Policies
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Middleburg Financial Corporation (the “Company”) is a bank holding company and through its banking subsidiary, Middleburg Bank, grants commercial, financial, agricultural, residential and consumer loans to customers principally in Loudoun County, Fauquier County and Fairfax County, Virginia as well as the City of Williamsburg and the City of Richmond. The loan portfolio is well diversified and generally is collateralized by assets of the borrowers. The loans are expected to be repaid from cash flow or proceeds from the sale of selected assets of the borrowers. Middleburg Trust Company is a non-banking subsidiary of Middleburg Financial Corporation which offers a comprehensive range of fiduciary and investment management services to individuals and businesses. On May 15, 2014, Middleburg Financial Corporation, through its banking subsidiary, Middleburg Bank, sold all of its majority interest in Southern Trust Mortgage LLC, which originated and sold mortgages secured by personal residences primarily in the southeastern United States.
The accounting and reporting policies of the Company conform to U. S. generally accepted accounting principles and to accepted practices within the banking industry.
Pending Merger with Access National Corporation
On October 24, 2016, the Company and Access National Corporation (“Access”) announced a definitive agreement to combine in a strategic merger (the “Merger Agreement”) pursuant to which the Company will merge with and into Access (the “Merger”). As a result of the Merger, the holders of shares of the Company's common stock will receive
1.3314
shares of Access common stock for each share of the Company's common stock held immediately prior to the effective date of the Merger. The transaction is expected to be completed in the second quarter of 2017, subject to approval of both companies' shareholders, regulatory approvals and other customary closing conditions.
Principles of Consolidation
The consolidated financial statements of Middleburg Financial Corporation and its wholly owned subsidiaries, Middleburg Bank, Middleburg Investment Group, Inc., Middleburg Trust Company and Middleburg Bank Service Corporation include the accounts of all companies. Through May 15, 2014, the Company owned
62.3%
of the issued and outstanding membership interest units of Southern Trust Mortgage, through its subsidiary, Middleburg Bank. Accounting Standards Codification Topic 810,
Consolidation
, requires that the Company no longer eliminate through consolidation the equity investment in MFC Capital Trust II, which was
$155,000
at
December 31, 2016
and
2015
. The subordinated debt of the trust preferred entity is reflected as a liability of the Company. All material intercompany balances and transactions have been eliminated in consolidation.
Securities
Certain debt securities that management has the positive intent and ability to hold until maturity are classified as "held-to-maturity" and recorded at amortized cost. Securities not classified as held-to-maturity, including equity securities with readily determinable fair values, are classified as "available-for-sale" and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss). Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
Equity investments in the Federal Home Loan Bank of Atlanta ("FHLB") and the Federal Reserve Bank of Richmond ("FRB") are separately classified as restricted securities and are carried at cost.
Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (i) the intent is to sell the security or (ii) it is more likely than not that it will be necessary to sell the security prior to recovery of its amortized cost. If, however, management’s intent is not to sell the security and it is not more than likely that management will be required to sell the security before recovery, management must determine what portion of the impairment is attributable to credit loss, which occurs when the amortized cost of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income (loss).
For equity securities carried at cost as restricted securities, impairment is considered to be other-than-temporary based on our ability and intent to hold the investment until a recovery of fair value. Other-than-temporary impairment of an equity security
results in a write-down that must be included in income. We regularly review each security for other-than-temporary impairment based on criteria that includes the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, our best estimate of the present value of cash flows expected to be collected from debt securities, the intention with regards to holding the security to maturity and the likelihood that we would be required to sell the security before recovery.
Loans
The Company grants mortgage, commercial, and consumer loans to clients. The loan portfolio is segmented into commercial loans, real estate loans, and consumer loans. Real estate loans are further divided into the following classes: construction; farmland; 1-4 family residential; and other real estate loans. Descriptions of the Company’s loan classes are as follows:
Commercial Loans:
Commercial loans are typically secured with non-real estate commercial property. The Company makes commercial loans primarily to middle market businesses located within our market area.
Real Estate Loans – Construction:
The Company originates construction loans for the acquisition and development of land and construction of condominiums, townhomes, and 1-4 family residences. This class also includes acquisition, development and construction loans for retail and other commercial purposes, primarily in our market areas.
Real Estate Loans- Farmland:
Loans secured by agricultural property and not included in Real Estate – Other.
Real Estate Loans – 1-4 Family:
This class of loans includes loans secured by 1-4 family homes. The Company’s general practice is to sell the majority of its newly originated fixed-rate residential real estate loans in the secondary mortgage market, and to hold in its portfolio adjustable rate residential real estate loans and loans in close proximity to its financial service centers.
Real Estate Loans – Other:
This loan class consists primarily of loans secured by multi-unit residential property and owner and non-owner occupied commercial and industrial property. This class also includes loans secured by real estate which do not fall into other classifications.
Consumer Loans:
Consumer loans include all loans made to individuals for consumer or personal purposes. They include new and used auto loans, unsecured loans, and lines of credit.
The ability of the debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area.
For all classes of loans, the Company considers loans to be past due when a payment is not received by the payment due date according to the contractual terms of the loan. The Company monitors past due loans according to the following categories: less than 30 days past due, 30 – 59 days past due, 60 – 89 days past due, and 90 days or greater past due. The accrual of interest on all classes of loans is discontinued at the time the loans are 90 days delinquent unless they are well-secured and in the process of collection.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Deferred fees and costs include discounts and premiums on syndicated and guaranteed loans purchased. Interest income is accrued on the unpaid principal balance. Loan origination and commitment fees, net of certain direct loan origination costs, are deferred and recognized as an adjustment of the loan yield over the life of the related loan.
All interest accrued but not collected for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses
The allowance for loan losses reflects management’s judgment of probable loan losses inherent in the portfolio at the balance sheet date. Management uses a disciplined process and methodology to establish the allowance for loan losses each quarter. To determine the total allowance for loan losses, the Company estimates the reserves needed for each segment of the portfolio, including loans analyzed individually and loans analyzed on a pooled basis. The allowance for loan losses consists of amounts applicable to: (i) the commercial loan portfolio; (ii) the real estate portfolio; and (iii) the consumer loan portfolio.
To determine the allowance for loan losses, loans are pooled by portfolio segment and losses are modeled using historical experience, and quantitative and other mathematical techniques over the loss emergence period. Each class of loan requires exercising significant judgment to determine the estimation that fits the credit risk characteristics of its portfolio segment. The Company
uses internally developed models in this process. Management must use judgment in establishing additional input metrics for the modeling processes. The models and assumptions used to determine the allowance are reviewed to ensure that their theoretical foundation, assumptions, data integrity, computational processes, reporting practices, and end user controls are appropriate and properly documented.
The establishment of the allowance for loan losses relies on a consistent process that requires multiple layers of management review and judgment and responds to changes in economic conditions, customer behavior, and collateral value, among other influences. From time to time, events or economic factors may affect the loan portfolio, causing management to provide additional amounts to or release balances from the allowance for loan losses. Qualitative factors considered in the allowance for loan losses evaluation include the levels and trends in delinquencies and nonperforming loans, trends in volume and terms of loans, the effects of any changes in lending policies, the experience, ability, and depth of management, national and local economic trends and conditions, concentrations of credit, the quality of the Company’s loan review system, competition and regulatory requirements. The Company’s allowance for loan losses is sensitive to risk ratings, economic assumptions and delinquency trends driving statistically modeled reserves. Individual loan risk ratings are evaluated based on each situation by experienced senior credit officers.
Management monitors differences between estimated and actual incurred loan losses. This monitoring process includes periodic assessments by senior management of loan portfolios and the models used to estimate incurred losses in those portfolios. Additions to the allowance for loan losses are made by charges to the provision for loan losses. Credit exposures deemed to be uncollectible are charged against the allowance for loan losses. Recoveries of previously charged-off amounts are credited to the allowance for loans losses.
Loan Charge-off Policies
Commercial and consumer loans are generally charged off when:
•
they are 90 days past due;
•
the collateral is repossessed; or
•
the borrower has filed bankruptcy.
All classes of real estate loans are charged down to the net realizable value when the Company determines that the sole source of repayment is liquidation of the collateral.
Impaired Loans
For all classes of loans, a loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
For all classes of loans, impairment is measured on a loan-by-loan basis by comparing the loan balance to either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Any variance in values is charged-off when determined.
Troubled Debt Restructurings
A troubled debt restructuring ("TDR") occurs in situations where, for economic or legal reasons related to a borrower’s financial condition, management may grant a concession to the borrower that it would not otherwise consider. Management strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on the restructuring as noted above for impaired loans. All identified TDRs are considered to be impaired loans.
Management considers troubled debt restructurings and subsequent defaults of restructured loans in the determination of the adequacy of the Company's allowance for loan losses. When identified as a TDR, a loan is evaluated for potential loss as noted above for impaired loans. Loans identified as TDRs frequently are on nonaccrual status at the time of the restructuring and, in some cases, partial charge-offs may have already been taken against the loan and a specific reserve may have already been established for the loan. As a result of any modification as a TDR, the specific reserve associated with the loan may be increased.
Additionally, loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future defaults. If loans modified in a TDR subsequently default, the Company evaluates them for possible further impairment. As a result, any specific reserve may be increased, adjustments may be made in the allocation of the total allowance balance, or partial charge-offs may be taken to further write-down the carrying value of the loan. Management exercises significant judgment in developing estimates for potential losses associated with TDRs.
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of aggregate cost or fair value. The fair value of mortgage loans held for sale is determined using current secondary market prices for loans with similar coupons, maturities, and credit quality and fair value of loans committed at year-end.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation of property and equipment is computed principally on the straight-line method over the following estimated useful lives:
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Years
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Buildings and improvements
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10-40
|
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Furniture and equipment
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3-15
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Maintenance and repairs of property and equipment are charged to operations and major improvements are capitalized. Upon retirement, sale, or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the accounts and gain or loss is included in income.
Other Real Estate Owned and Repossessed Assets
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs to sell at the date of foreclosure. Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets based on updated appraisals, general market conditions, recent sales of like properties, length of time the properties have been held, and our ability and intention with regard to continued ownership of the properties. The Company may incur additional write-downs of foreclosed assets to fair value less costs to sell if valuations indicate a further deterioration in market conditions. Revenue and expenses from operations and changes in the property valuations are included in net expenses from foreclosed assets and improvements are capitalized.
Goodwill and Intangible Assets
With the adoption of Accounting Standards Update (ASU) 2011-08, "Intangible-Goodwill and Other-Testing Goodwill for Impairment", the Company is no longer required to perform a test for impairment unless, based on an assessment of qualitative factors related to goodwill, the Company determines that it is more likely than not that the fair value is less than its carrying amount. If the likelihood of impairment is more than 50%, the Company must perform a test for impairment and may be required to record impairment charges.
Additionally, acquired intangible assets (customer relationships) are separately recognized and amortized over their useful life of
15
years.
Bank-Owned Life Insurance
The Company owns insurance on the lives of a certain group of key employees. The policies were purchased to help offset increases in the costs of various fringe benefit plans, including healthcare. The cash surrender value of these policies is included as an asset on the consolidated balance sheets, and any increase in cash surrender value is recorded as non-interest income on the consolidated statements of income. In the event of the death of an insured individual under these policies, the Company would receive a death benefit which would be recorded as other income.
Income Taxes
Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination,
including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured, as described above, is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the consolidated statements of income. No liabilities for unrecognized tax benefits have been recognized as of
December 31, 2016
or
2015
.
Trust Company Assets
Securities and other properties held by Middleburg Trust Company in a fiduciary or agency capacity are not assets of the Company and are not included in the accompanying consolidated financial statements.
Earnings Per Share
Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Nonvested restricted shares are included in basic earnings per share because of dividend participation rights. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. As of December 31, 2016 potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from other banks and federal funds sold. Generally, federal funds are sold and purchased for
one
-day periods.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, impairment of goodwill and intangible assets, valuation of other real estate owned, and other-than-temporary impairment of securities.
Advertising Costs
The Company follows the policy of charging the costs of advertising to expense as incurred.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, and changes in the fair value of interest rate swaps, are reported as a separate component of the equity section of the consolidated balance sheets, such items, along with net income, are components of comprehensive income.
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. The Company does not account for repurchase agreement transactions as sales. All repurchase agreement transactions entered into by the Company are accounted for as collateralized financings. The Company may be required to provide additional collateral based on the fair value of the underlying securities.
Derivative Financial Instruments
The Company utilizes derivative financial instruments as a part of its asset-liability management program to control exposure to interest rate changes and fluctuations in market values and cash flows associated with certain financial instruments. The Company accounts for derivatives in accordance with ASC 815, "Derivatives and Hedging"
.
Under current guidance, derivative transactions are classified as either cash flow hedges or fair value hedges or they are not designated as hedging instruments. The Company designates each transaction at its inception.
The Company documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair value hedges or cash flow hedges to specific assets or liabilities on the balance sheet. The Company also formally assesses, both
at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are effective in offsetting changes in fair values or cash flows of hedged items.
As of
December 31, 2016
, the Company had both fair value and cash flow hedges on its balance sheet as well as derivative financial instruments that have not been designated as hedging instruments. The derivatives are reported at fair value as of each balance sheet date. For designated cash flow hedges, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income (loss) and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings as are changes in market value of derivatives not designated as hedging instruments.
Information concerning each of the Company's categories of derivatives as of
December 31, 2016
and
2015
is presented in Note 24 to the consolidated financial statements.
Reclassifications
Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. No reclassifications were significant and there was no effect on net income.
Transfers 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.
Share-Based Employee Compensation Plan
At
December 31, 2016
, the Company had a share-based employee compensation plan which is described more fully in Note 8 to the consolidated financial statements. Compensation cost relating to share-based payment transactions is recognized in the consolidated financial statements. That cost is measured based on the fair value of the equity instruments issued and recognized over the applicable vesting period. The Company recognized
$925,000
,
$605,000
, and
$426,000
in compensation expense during
2016
,
2015
, and
2014
, respectively.
Recent Accounting Pronouncements
In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This update is intended to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management is required under the new guidance to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued when preparing financial statements for each interim and annual reporting period. If conditions or events are identified, the ASU specifies the process that must be followed by management and also clarifies the timing and content of going concern footnote disclosures in order to reduce diversity in practice. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-15 to have a material impact on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU 2016-01, among other things: 1) Requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. 2) Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 3) Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). 4) Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact that ASU 2016-01 will have on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured
on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact that ASU 2016-02 will have on its consolidated financial statements.
During March 2016, the FASB issued ASU No. 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” The amendments in this ASU clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria remain intact. The amendments are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-05 to have a material impact on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-07, “Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” The amendments in this ASU eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. In addition, the amendments in this ASU require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income (loss) at the date the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Early adoption is permitted. The Company does not expect the adoption of ASU 2016-07 to have a material impact on its consolidated financial statements.
During March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The amendments in this ASU simplify several aspects of the accounting for share-based payment award transactions including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently assessing the impact that ASU 2016-09 will have on its consolidated financial statements.
During June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements.
During August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments should be applied using a retrospective transition method to each period presented. If retrospective application is impractical for some of the issues addressed by the update, the amendments for those issues would be applied prospectively as of the earliest date practicable. Early adoption is permitted, including adoption
in an interim period. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements.
During January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business-inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs. The amendments in this ASU provide a screen to determine when a set is not a business. If the screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The ASU provides a framework to assist entities in evaluating whether both an input and a substantive process are present. The amendments in this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The amendments in this ASU should be applied prospectively on or after the effective date. No disclosures are required at transition. The Company does not expect the adoption of ASU 2017-01 to have a material impact on its consolidated financial statements.
During January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Public business entities that are U.S. Securities and Exchange Commission (SEC) filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Public business entities that are not SEC filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.
Amortized costs and fair values of securities being held to maturity as of
December 31, 2016
and
2015
, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
(Dollars in thousands)
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Held to Maturity
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
$
|
6,433
|
|
|
$
|
—
|
|
|
$
|
(594
|
)
|
|
$
|
5,839
|
|
|
Corporate securities
|
4,250
|
|
|
21
|
|
|
(15
|
)
|
|
4,256
|
|
|
Total
|
$
|
10,683
|
|
|
$
|
21
|
|
|
$
|
(609
|
)
|
|
$
|
10,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
(Dollars in thousands)
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Held to Maturity
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
$
|
1,457
|
|
|
$
|
—
|
|
|
$
|
(38
|
)
|
|
$
|
1,419
|
|
|
Corporate securities
|
2,750
|
|
|
24
|
|
|
(30
|
)
|
|
2,744
|
|
|
Total
|
$
|
4,207
|
|
|
$
|
24
|
|
|
$
|
(68
|
)
|
|
$
|
4,163
|
|
The amortized cost and fair value of securities being held to maturity as of
December 31, 2016
, by contractual maturity are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
(Dollars in thousands)
|
Amortized Cost
|
|
Fair Value
|
|
Held to Maturity
|
|
|
|
|
Due after five years through ten years
|
$
|
4,250
|
|
|
$
|
4,256
|
|
|
Due after ten years
|
6,433
|
|
|
5,839
|
|
|
Total
|
$
|
10,683
|
|
|
$
|
10,095
|
|
Amortized costs and fair values of securities available for sale as of
December 31, 2016
and
2015
, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
(Dollars in thousands)
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
$
|
73,546
|
|
|
$
|
209
|
|
|
$
|
(571
|
)
|
|
$
|
73,184
|
|
|
Obligations of states and political subdivisions
|
62,896
|
|
|
1,019
|
|
|
(542
|
)
|
|
63,373
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
Agency
|
98,549
|
|
|
646
|
|
|
(1,144
|
)
|
|
98,051
|
|
|
Non-agency
|
9,991
|
|
|
16
|
|
|
(74
|
)
|
|
9,933
|
|
|
Other asset backed securities
|
41,860
|
|
|
361
|
|
|
(616
|
)
|
|
41,605
|
|
|
Corporate securities
|
16,648
|
|
|
—
|
|
|
(1,227
|
)
|
|
15,421
|
|
|
Total
|
$
|
303,490
|
|
|
$
|
2,251
|
|
|
$
|
(4,174
|
)
|
|
$
|
301,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
(Dollars in thousands)
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
$
|
79,005
|
|
|
$
|
315
|
|
|
$
|
(380
|
)
|
|
$
|
78,940
|
|
|
Obligations of states and political subdivisions
|
74,071
|
|
|
1,956
|
|
|
(434
|
)
|
|
75,593
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
Agency
|
129,360
|
|
|
3,046
|
|
|
(745
|
)
|
|
131,661
|
|
|
Non-agency
|
12,782
|
|
|
33
|
|
|
(38
|
)
|
|
12,777
|
|
|
Other asset backed securities
|
58,958
|
|
|
426
|
|
|
(603
|
)
|
|
58,781
|
|
|
Corporate securities
|
17,557
|
|
|
22
|
|
|
(760
|
)
|
|
16,819
|
|
|
Total
|
$
|
371,733
|
|
|
$
|
5,798
|
|
|
$
|
(2,960
|
)
|
|
$
|
374,571
|
|
The amortized cost and fair value of securities available for sale as of
December 31, 2016
, by contractual maturity are shown below. Maturities may differ from contractual maturities in corporate and mortgage-backed securities because the securities and mortgages underlying the securities may be called or repaid without any penalties. Therefore, these securities are not included in the maturity categories in the following maturity summary.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
(Dollars in thousands)
|
Amortized Cost
|
|
Fair Value
|
|
Available for Sale
|
|
|
|
|
Due in one year or less
|
$
|
777
|
|
|
$
|
777
|
|
|
Due after one year through five years
|
9,020
|
|
|
9,219
|
|
|
Due after five years through ten years
|
25,004
|
|
|
24,174
|
|
|
Due after ten years
|
118,289
|
|
|
117,808
|
|
|
Mortgage-backed securities
|
108,540
|
|
|
107,984
|
|
|
Other asset backed securities
|
41,860
|
|
|
41,605
|
|
|
Total
|
$
|
303,490
|
|
|
$
|
301,567
|
|
Proceeds from sales of securities available for sale during
2016
,
2015
, and
2014
were
$79.3 million
,
$11.6 million
, and
$58.9 million
, respectively. Proceeds from calls and principal repayments of securities available for sale during
2016
,
2015
, and
2014
were
$76.2 million
,
$89.9 million
and
$73.4 million
, respectively. Gross gains on sales and calls of securities available for sale were
$1.5 million
, and
$49,000
in 2016, respectively,
$172,000
and
$5,000
in 2015, respectively and
$770,000
and
none
in 2014, respectively. Gross losses on sales and calls of securities available for sale were
$28,000
, and
$9,000
in 2016, respectively,
$37,000
and
none
in 2015, respectively and
$584,000
and
none
in 2014 respectively. There were
no
losses recognized for impaired securities in
2016
,
2015
, and
2014
. The tax expense applicable to these net realized gains amounted to
$528,000
,
$48,000
, and
$63,000
, for 2016, 2015 and 2014, respectively.
The carrying value of securities pledged to qualify for fiduciary powers, to secure public monies and for other purposes as required by law amounted to
$115.7 million
and
$113.1 million
at
December 31, 2016
and
2015
, respectively.
At
December 31, 2016
and
2015
, investments in an unrealized loss position that are temporarily impaired are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Less than Twelve Months
|
|
Twelve Months or Greater
|
|
Total
|
|
2016
|
|
Fair Value
|
|
Gross
Unrealized Losses
|
|
Fair Value
|
|
Gross
Unrealized Losses
|
|
Fair Value
|
|
Gross
Unrealized Losses
|
|
Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
5,839
|
|
|
$
|
(594
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,839
|
|
|
$
|
(594
|
)
|
|
Corporate securities
|
|
1,485
|
|
|
(15
|
)
|
|
—
|
|
|
—
|
|
|
1,485
|
|
|
(15
|
)
|
|
Total
|
|
$
|
7,324
|
|
|
$
|
(609
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,324
|
|
|
$
|
(609
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
46,700
|
|
|
$
|
(495
|
)
|
|
$
|
7,174
|
|
|
$
|
(76
|
)
|
|
$
|
53,874
|
|
|
$
|
(571
|
)
|
|
Obligations of states and political subdivisions
|
|
12,670
|
|
|
(257
|
)
|
|
6,968
|
|
|
(285
|
)
|
|
19,638
|
|
|
(542
|
)
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
51,018
|
|
|
(634
|
)
|
|
13,020
|
|
|
(510
|
)
|
|
64,038
|
|
|
(1,144
|
)
|
|
Non-agency
|
|
5,379
|
|
|
(68
|
)
|
|
1,944
|
|
|
(6
|
)
|
|
7,323
|
|
|
(74
|
)
|
|
Other asset backed securities
|
|
7,007
|
|
|
(284
|
)
|
|
16,388
|
|
|
(332
|
)
|
|
23,395
|
|
|
(616
|
)
|
|
Corporate securities
|
|
5,912
|
|
|
(241
|
)
|
|
9,262
|
|
|
(986
|
)
|
|
15,174
|
|
|
(1,227
|
)
|
|
Total
|
|
$
|
128,686
|
|
|
$
|
(1,979
|
)
|
|
$
|
54,756
|
|
|
$
|
(2,195
|
)
|
|
$
|
183,442
|
|
|
$
|
(4,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Less than Twelve Months
|
|
Twelve Months or Greater
|
|
Total
|
|
2015
|
|
Fair Value
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Gross Unrealized Losses
|
|
Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
1,419
|
|
|
$
|
(38
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,419
|
|
|
$
|
(38
|
)
|
|
Corporate securities
|
|
1,970
|
|
|
(30
|
)
|
|
—
|
|
|
—
|
|
|
1,970
|
|
|
(30
|
)
|
|
Total
|
|
$
|
3,389
|
|
|
$
|
(68
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,389
|
|
|
$
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
46,000
|
|
|
$
|
(304
|
)
|
|
$
|
4,223
|
|
|
$
|
(76
|
)
|
|
$
|
50,223
|
|
|
$
|
(380
|
)
|
|
Obligations of states and political subdivisions
|
|
16,559
|
|
|
(324
|
)
|
|
1,082
|
|
|
(110
|
)
|
|
17,641
|
|
|
(434
|
)
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
27,627
|
|
|
(402
|
)
|
|
9,911
|
|
|
(343
|
)
|
|
37,538
|
|
|
(745
|
)
|
|
Non-agency
|
|
7,842
|
|
|
(37
|
)
|
|
671
|
|
|
(1
|
)
|
|
8,513
|
|
|
(38
|
)
|
|
Other asset backed securities
|
|
25,399
|
|
|
(276
|
)
|
|
12,037
|
|
|
(327
|
)
|
|
37,436
|
|
|
(603
|
)
|
|
Corporate securities
|
|
10,740
|
|
|
(378
|
)
|
|
4,866
|
|
|
(382
|
)
|
|
15,606
|
|
|
(760
|
)
|
|
Total
|
|
$
|
134,167
|
|
|
$
|
(1,721
|
)
|
|
$
|
32,790
|
|
|
$
|
(1,239
|
)
|
|
$
|
166,957
|
|
|
$
|
(2,960
|
)
|
A total of
256
securities have been identified by the Company as temporarily impaired at
December 31, 2016
. Of the
256
securities,
251
are investment grade and
five
are speculative grade. Market prices change daily and are affected by conditions beyond the control of the Company. Although the Company has the ability to hold these securities until the temporary loss is recovered, decisions by management may necessitate a sale before the loss is fully recovered.
No
such sales were anticipated or required as of
December 31, 2016
. Investment decisions reflect the strategic asset/liability objectives of the Company. The investment portfolio is analyzed frequently by the Company and managed to provide an overall positive impact to the Company’s income statement and balance sheet.
Other-than-temporary impairment losses
At
December 31, 2016
, the Company evaluated the investment portfolio for possible other-than-temporary impairment losses and concluded that no adverse change in cash flows occurred and did not consider any portfolio securities to be other-than-temporarily impaired. Based on this analysis and because the Company does not intend to sell securities in an unrealized loss position and it is more likely than not the Company will not be required to sell any securities before recovery of amortized cost basis, which may be at maturity, the Company does not consider any portfolio securities to be other-than-temporarily impaired. For debt securities related to corporate securities, the Company determined that there was no other adverse change in the cash flows as viewed by a market participant; therefore, the Company does not consider the investments in these assets to be other-than-temporarily impaired at
December 31, 2016
. However, there is a risk that the Company’s continuing reviews could result in recognition of other-than-temporary impairment charges in the future. For the years ended
December 31, 2016
,
2015
, and
2014
,
no
credit related impairment losses were recognized by the Company.
Restricted securities
The Company’s investment in FHLB stock totaled
$2.8 million
and
$4.7 million
at
December 31, 2016
and
2015
, respectively. FHLB stock is generally viewed as a long-term investment and as a restricted security which is carried at cost because there is no market for the stock other than the FHLB or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Company does not consider this investment to be other-than-temporarily impaired at
December 31, 2016
, and no impairment has been recognized. FHLB stock is shown in restricted securities on the consolidated balance sheets and is not part of the available for sale portfolio.
The Company also had an investment in FRB stock which totaled
$1.7 million
at
December 31, 2016
and
2015
, respectively. The investment in FRB stock is a required investment and is carried at cost since there is no ready market. The Company does not consider this investment to be other-than-temporarily impaired at
December 31, 2016
and no impairment has been recognized. FRB stock is shown in the restricted securities line item on the consolidated balance sheets and is not part of the available for sale securities portfolio.
The Company segregates its loan portfolio into
three
primary loan segments: Real Estate Loans, Commercial Loans, and Consumer Loans. Real estate loans are further segregated into the following classes: construction loans, loans secured by farmland, loans secured by 1-4 family residential real estate, and other real estate loans. Other real estate loans include commercial real estate loans. The consolidated loan portfolio was composed of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
(Dollars in thousands)
|
Outstanding
Balance
|
|
Percent of
Total Portfolio
|
|
Outstanding
Balance
|
|
Percent of
Total Portfolio
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
Construction
|
$
|
35,627
|
|
|
4.1
|
%
|
|
$
|
39,673
|
|
|
4.9
|
%
|
|
Secured by farmland
|
16,768
|
|
|
2.0
|
|
|
19,062
|
|
|
2.4
|
|
|
Secured by 1-4 family residential
|
314,045
|
|
|
36.5
|
|
|
280,096
|
|
|
34.8
|
|
|
Other real estate loans
|
283,613
|
|
|
33.0
|
|
|
258,035
|
|
|
32.0
|
|
|
Commercial loans
|
190,767
|
|
|
22.2
|
|
|
190,482
|
|
|
23.6
|
|
|
Consumer loans
|
19,277
|
|
|
2.2
|
|
|
18,333
|
|
|
2.3
|
|
|
Total Gross Loans
(1)
|
860,097
|
|
|
100.0
|
%
|
|
805,681
|
|
|
100.0
|
%
|
|
Less allowance for loan losses
|
11,404
|
|
|
|
|
|
11,046
|
|
|
|
|
Net loans
|
$
|
848,693
|
|
|
|
|
|
$
|
794,635
|
|
|
|
|
|
|
|
(1)
|
Includes net deferred loan costs and premiums of
$3.3 million
and
$3.5 million
, respectively.
|
The Company had
no
mortgages held for sale at
December 31, 2016
and
2015
.
During the year ended
December 31, 2016
, net proceeds received on the sale of
$4.3 million
in
four
problem loans totaled
$4.4 million
, resulting in a net recovery of
$127,000
of amounts previously charged-off related to those loans. These loans were sold on a non-recourse basis. Of this amount,
$1.2 million
were on nonaccrual status, as well as
28
loans with no outstanding recorded investment as they had been fully charged-off in prior periods. There were
$339,000
in specific reserves associated with these loans. During the year ended
December 31, 2015
, the Company received net proceeds of
$1.1 million
on the sale of
$1.0 million
in portfolio loans on a non-recourse basis, resulting in a net recovery of
$100,000
of amounts previously charged-off related to those loans. Of this amount,
$1.0 million
were on nonaccrual status and were classified as TDRs. There were
no
specific reserves associated with these loans.
The following tables present a contractual aging of the recorded investment in past due loans by class of loans as of
December 31, 2016
and
December 31, 2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
(Dollars in thousands)
|
30-59 Days Past Due
|
|
60-89 Days Past Due
|
|
90 Days Or Greater
|
|
Total Past Due
|
|
Current
|
|
Total Loans
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
35,627
|
|
|
$
|
35,627
|
|
|
Secured by farmland
|
—
|
|
|
199
|
|
|
—
|
|
|
199
|
|
|
16,569
|
|
|
16,768
|
|
|
Secured by 1-4 family residential
|
—
|
|
|
—
|
|
|
514
|
|
|
514
|
|
|
313,531
|
|
|
314,045
|
|
|
Other real estate loans
|
312
|
|
|
—
|
|
|
2,104
|
|
|
2,416
|
|
|
281,197
|
|
|
283,613
|
|
|
Commercial loans
|
146
|
|
|
10
|
|
|
2,518
|
|
|
2,674
|
|
|
188,093
|
|
|
190,767
|
|
|
Consumer loans
|
88
|
|
|
4
|
|
|
1,871
|
|
|
1,963
|
|
|
17,314
|
|
|
19,277
|
|
|
Total
|
$
|
546
|
|
|
$
|
213
|
|
|
$
|
7,007
|
|
|
$
|
7,766
|
|
|
$
|
852,331
|
|
|
$
|
860,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
(Dollars in thousands)
|
30-59 Days Past Due
|
|
60-89 Days Past Due
|
|
90 Days Or Greater
|
|
Total Past Due
|
|
Current
|
|
Total Loans
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
$
|
69
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
69
|
|
|
$
|
39,604
|
|
|
$
|
39,673
|
|
|
Secured by farmland
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
19,062
|
|
|
19,062
|
|
|
Secured by 1-4 family residential
|
259
|
|
|
—
|
|
|
1,117
|
|
|
1,376
|
|
|
278,720
|
|
|
280,096
|
|
|
Other real estate loans
|
325
|
|
|
—
|
|
|
248
|
|
|
573
|
|
|
257,462
|
|
|
258,035
|
|
|
Commercial loans
|
1,242
|
|
|
15
|
|
|
31
|
|
|
1,288
|
|
|
189,194
|
|
|
190,482
|
|
|
Consumer loans
|
4
|
|
|
17
|
|
|
—
|
|
|
21
|
|
|
18,312
|
|
|
18,333
|
|
|
Total
|
$
|
1,899
|
|
|
$
|
32
|
|
|
$
|
1,396
|
|
|
$
|
3,327
|
|
|
$
|
802,354
|
|
|
$
|
805,681
|
|
The following table presents the recorded investment in nonaccrual loans and loans past due
ninety
days or more and still accruing by class of loans as of
December 31, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
(Dollars in thousands)
|
Nonaccrual
|
|
Past due 90 days or more and still accruing
|
|
Nonaccrual
|
|
Past due 90 days or more and still accruing
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
Construction
|
$
|
29
|
|
|
$
|
—
|
|
|
$
|
204
|
|
|
$
|
—
|
|
|
Secured by 1-4 family residential
|
296
|
|
|
303
|
|
|
4,460
|
|
|
—
|
|
|
Other real estate loans
|
1,976
|
|
|
128
|
|
|
1,186
|
|
|
248
|
|
|
Commercial loans
|
4,187
|
|
|
350
|
|
|
1,036
|
|
|
30
|
|
|
Consumer loans
|
1,871
|
|
|
—
|
|
|
1,898
|
|
|
—
|
|
|
Total
|
$
|
8,359
|
|
|
$
|
781
|
|
|
$
|
8,784
|
|
|
$
|
278
|
|
If interest on nonaccrual loans had been accrued, such income would have approximated
$362,000
,
$342,000
, and
$544,000
for the years ended
December 31, 2016
,
2015
, and
2014
, respectively. The Company sold
$4.3 million
and
$1.0 million
in loans during
2016
and
2015
, respectively, of which,
$1.2 million
and
$1.0 million
were on nonaccrual status, respectively.
The Company utilizes an internal asset classification system as a means of measuring and monitoring credit risk in the loan portfolio. Under the Company’s classification system, problem and potential problem loans are classified as “Special Mention”, “Substandard”, and “Doubtful”.
Special Mention:
Loans with potential weaknesses that deserve management’s close attention. If left uncorrected, the potential weaknesses may result in the deterioration of the repayment prospects for the credit.
Substandard:
Loans with well-defined weaknesses that jeopardize the liquidation of the debt. Either the paying capacity of the borrower or the value of the collateral may be inadequate to protect the Company from potential losses.
Doubtful:
Loans with a very high possibility of loss. However, because of important and reasonably specific pending factors, classification as a loss is deferred until a more exact status may be determined.
Loss:
Loans are deemed uncollectible and are charged off immediately.
The following tables present the recorded investment in loans by class of loan that have been classified according to the internal classification system as of
December 31, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
(Dollars in thousands)
|
Real Estate Construction
|
|
Real Estate Secured by Farmland
|
|
Real Estate Secured by 1-4 Family Residential
|
|
Other Real Estate Loans
|
|
Commercial
|
|
Consumer
|
|
Total
|
|
Pass
|
$
|
30,065
|
|
|
$
|
8,796
|
|
|
$
|
310,233
|
|
|
$
|
274,591
|
|
|
$
|
185,030
|
|
|
$
|
17,342
|
|
|
$
|
826,057
|
|
|
Special Mention
|
5,534
|
|
|
—
|
|
|
932
|
|
|
2,287
|
|
|
1,390
|
|
|
25
|
|
|
10,168
|
|
|
Substandard
|
28
|
|
|
7,972
|
|
|
2,584
|
|
|
4,759
|
|
|
2,179
|
|
|
1,909
|
|
|
19,431
|
|
|
Doubtful
|
—
|
|
|
—
|
|
|
125
|
|
|
1,976
|
|
|
2,168
|
|
|
—
|
|
|
4,269
|
|
|
Loss
|
—
|
|
|
—
|
|
|
171
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
172
|
|
|
Ending Balance
|
$
|
35,627
|
|
|
$
|
16,768
|
|
|
$
|
314,045
|
|
|
$
|
283,613
|
|
|
$
|
190,767
|
|
|
$
|
19,277
|
|
|
$
|
860,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
(Dollars in thousands)
|
Real Estate Construction
|
|
Real Estate Secured by Farmland
|
|
Real Estate Secured by 1-4 Family Residential
|
|
Other Real Estate Loans
|
|
Commercial
|
|
Consumer
|
|
Total
|
|
Pass
|
$
|
30,114
|
|
|
$
|
10,566
|
|
|
$
|
271,721
|
|
|
$
|
243,768
|
|
|
$
|
183,532
|
|
|
$
|
16,347
|
|
|
$
|
756,048
|
|
|
Special Mention
|
9,024
|
|
|
—
|
|
|
896
|
|
|
7,254
|
|
|
3,638
|
|
|
42
|
|
|
20,854
|
|
|
Substandard
|
535
|
|
|
8,496
|
|
|
6,818
|
|
|
5,827
|
|
|
2,301
|
|
|
1,943
|
|
|
25,920
|
|
|
Doubtful
|
—
|
|
|
—
|
|
|
661
|
|
|
1,186
|
|
|
1,011
|
|
|
—
|
|
|
2,858
|
|
|
Loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
Ending Balance
|
$
|
39,673
|
|
|
$
|
19,062
|
|
|
$
|
280,096
|
|
|
$
|
258,035
|
|
|
$
|
190,482
|
|
|
$
|
18,333
|
|
|
$
|
805,681
|
|
The following tables present loans individually evaluated for impairment by class of loan as of and for the year ended
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
(Dollars in thousands)
|
Recorded Investment
|
|
Unpaid Principal Balance
|
|
Related Allowance
|
|
Average Recorded Investment
|
|
Interest Income Recognized
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
Construction
|
$
|
28
|
|
|
$
|
28
|
|
|
$
|
—
|
|
|
$
|
28
|
|
|
$
|
—
|
|
|
Secured by farmland
|
7,972
|
|
|
7,972
|
|
|
—
|
|
|
7,951
|
|
|
239
|
|
|
Secured by 1-4 family residential
|
72
|
|
|
108
|
|
|
—
|
|
|
72
|
|
|
2
|
|
|
Other real estate loans
|
1,976
|
|
|
1,976
|
|
|
—
|
|
|
1,976
|
|
|
—
|
|
|
Commercial loans
|
585
|
|
|
3,585
|
|
|
—
|
|
|
706
|
|
|
16
|
|
|
Consumer loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total with no related allowance
|
$
|
10,633
|
|
|
$
|
13,669
|
|
|
$
|
—
|
|
|
$
|
10,733
|
|
|
$
|
257
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Secured by farmland
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Secured by 1-4 family residential
|
1,275
|
|
|
1,326
|
|
|
251
|
|
|
1,239
|
|
|
49
|
|
|
Other real estate loans
|
2,971
|
|
|
2,971
|
|
|
206
|
|
|
2,975
|
|
|
151
|
|
|
Commercial loans
|
4,019
|
|
|
4,019
|
|
|
2,539
|
|
|
5,088
|
|
|
—
|
|
|
Consumer loans
|
1,871
|
|
|
1,871
|
|
|
842
|
|
|
1,871
|
|
|
—
|
|
|
Total with a related allowance
|
$
|
10,136
|
|
|
$
|
10,187
|
|
|
$
|
3,838
|
|
|
$
|
11,173
|
|
|
$
|
200
|
|
|
Total
|
$
|
20,769
|
|
|
$
|
23,856
|
|
|
$
|
3,838
|
|
|
$
|
21,906
|
|
|
$
|
457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
(Dollars in thousands)
|
Recorded Investment
|
|
Unpaid Principal Balance
|
|
Related Allowance
|
|
Average Recorded Investment
|
|
Interest Income Recognized
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
Construction
|
$
|
100
|
|
|
$
|
100
|
|
|
$
|
—
|
|
|
$
|
106
|
|
|
$
|
—
|
|
|
Secured by farmland
|
7,903
|
|
|
7,903
|
|
|
—
|
|
|
7,903
|
|
|
237
|
|
|
Secured by 1-4 family residential
|
701
|
|
|
736
|
|
|
—
|
|
|
703
|
|
|
—
|
|
|
Other real estate loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial loans
|
458
|
|
|
493
|
|
|
—
|
|
|
490
|
|
|
17
|
|
|
Consumer loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total with no related allowance
|
$
|
9,162
|
|
|
$
|
9,232
|
|
|
$
|
—
|
|
|
$
|
9,202
|
|
|
$
|
254
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
$
|
103
|
|
|
$
|
103
|
|
|
$
|
53
|
|
|
$
|
109
|
|
|
$
|
—
|
|
|
Secured by farmland
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Secured by 1-4 family residential
|
4,426
|
|
|
4,478
|
|
|
1,120
|
|
|
4,547
|
|
|
27
|
|
|
Other real estate loans
|
4,196
|
|
|
4,196
|
|
|
464
|
|
|
4,224
|
|
|
157
|
|
|
Commercial loans
|
1,059
|
|
|
4,059
|
|
|
27
|
|
|
2,315
|
|
|
100
|
|
|
Consumer loans
|
1,898
|
|
|
1,898
|
|
|
1,000
|
|
|
2,449
|
|
|
—
|
|
|
Total with a related allowance
|
$
|
11,682
|
|
|
$
|
14,734
|
|
|
$
|
2,664
|
|
|
$
|
13,644
|
|
|
$
|
284
|
|
|
Total
|
$
|
20,844
|
|
|
$
|
23,966
|
|
|
$
|
2,664
|
|
|
$
|
22,846
|
|
|
$
|
538
|
|
The “Recorded Investment” amounts in the table above represent the outstanding principal balance net of charge-offs and nonaccrual payments of interest applied to principal on each loan represented in the table. The “Unpaid Principal Balance” represents the outstanding principal balance on each loan represented in the table plus any amounts that have been charged-off on each loan and nonaccrual payments applied to principal.
Included in certain loan categories of impaired loans are troubled debt restructurings (“TDRs”). The total balance of TDRs at
December 31, 2016
was
$14.4 million
of which
$2.0 million
were included in the Company’s nonaccrual loan totals at that date and
$12.4 million
represented loans performing as agreed according to the restructured terms. This compares with
$15.5 million
in total restructured loans at
December 31, 2015
. The amount of the valuation allowance related to TDRs was
$1.1 million
and
$1.6 million
as of
December 31, 2016
and
2015
respectively.
Loan modifications that were classified as TDRs during the years ended December 31, 2016 and 2015 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(Dollars in thousands)
|
|
2016
|
|
2015
|
|
Class of Loan
|
|
Number of Contracts
|
|
Pre-Modification Outstanding Recorded Investment
|
|
Post-Modification Outstanding Recorded Investment
|
|
Number of Contracts
|
|
Pre-Modification Outstanding Recorded Investment
|
|
Post-Modification Outstanding Recorded Investment
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
1
|
|
|
$
|
38
|
|
|
$
|
38
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Secured by farmland
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
7,903
|
|
|
7,903
|
|
|
Secured by 1-4 family residential
|
|
2
|
|
|
809
|
|
|
806
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other real estate loans
|
|
2
|
|
|
1,240
|
|
|
1,240
|
|
|
4
|
|
|
4,283
|
|
|
3,872
|
|
|
Total real estate loans
|
|
5
|
|
|
2,087
|
|
|
2,084
|
|
|
5
|
|
|
12,186
|
|
|
11,775
|
|
|
Commercial loans
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
50
|
|
|
46
|
|
|
Consumer loans
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
3,000
|
|
|
3,000
|
|
|
Total
|
|
5
|
|
|
$
|
2,087
|
|
|
$
|
2,084
|
|
|
7
|
|
|
$
|
15,236
|
|
|
$
|
14,821
|
|
The interest only payment terms were extended for
one
of the contracts and the maturity dates were extended for
four
of the contracts classified as TDRs during
2016
. There were no outstanding commitments to lend additional amounts to troubled debt restructured borrowers at
December 31, 2016
.
There were
no
TDR payment defaults as of
December 31, 2016
and
December 31, 2015
. For purposes of this disclosure, a TDR payment default occurs when, within
12
months of the original TDR modification, either a full or partial charge-off occurs or a TDR becomes
90
days or more past due.
|
|
|
|
Note 4.
|
Allowance for Loan Losses
|
The following table presents the total allowance for loan losses, the allowance by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment), the total loans and loans by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
(Dollars in thousands)
|
Real Estate Construction
|
|
Real Estate Secured by Farmland
|
|
Real Estate Secured by 1-4 Family Residential
|
|
Other Real Estate Loans
|
|
Commercial
|
|
Consumer
|
|
Total
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2015
|
$
|
905
|
|
|
$
|
192
|
|
|
$
|
3,341
|
|
|
$
|
3,761
|
|
|
$
|
1,706
|
|
|
$
|
1,141
|
|
|
$
|
11,046
|
|
|
Charge-offs
|
(388
|
)
|
|
—
|
|
|
(1,021
|
)
|
|
(126
|
)
|
|
(639
|
)
|
|
(20
|
)
|
|
(2,194
|
)
|
|
Recoveries
|
129
|
|
|
—
|
|
|
395
|
|
|
32
|
|
|
85
|
|
|
58
|
|
|
699
|
|
|
Provision
|
293
|
|
|
(65
|
)
|
|
(453
|
)
|
|
(500
|
)
|
|
2,781
|
|
|
(203
|
)
|
|
1,853
|
|
|
Balance December 31, 2016
|
$
|
939
|
|
|
$
|
127
|
|
|
$
|
2,262
|
|
|
$
|
3,167
|
|
|
$
|
3,933
|
|
|
$
|
976
|
|
|
$
|
11,404
|
|
|
Ending allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
251
|
|
|
$
|
206
|
|
|
$
|
2,539
|
|
|
$
|
842
|
|
|
$
|
3,838
|
|
|
Collectively evaluated for impairment
|
939
|
|
|
127
|
|
|
2,011
|
|
|
2,961
|
|
|
1,394
|
|
|
134
|
|
|
7,566
|
|
|
Total ending allowance balance
|
$
|
939
|
|
|
$
|
127
|
|
|
$
|
2,262
|
|
|
$
|
3,167
|
|
|
$
|
3,933
|
|
|
$
|
976
|
|
|
$
|
11,404
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
28
|
|
|
$
|
7,972
|
|
|
$
|
1,347
|
|
|
$
|
4,947
|
|
|
$
|
4,604
|
|
|
$
|
1,871
|
|
|
$
|
20,769
|
|
|
Collectively evaluated for impairment
|
35,599
|
|
|
8,796
|
|
|
312,698
|
|
|
278,666
|
|
|
186,163
|
|
|
17,406
|
|
|
839,328
|
|
|
Total ending loans balance
|
$
|
35,627
|
|
|
$
|
16,768
|
|
|
$
|
314,045
|
|
|
$
|
283,613
|
|
|
$
|
190,767
|
|
|
$
|
19,277
|
|
|
$
|
860,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
(Dollars in thousands)
|
Real Estate Construction
|
|
Real Estate Secured by Farmland
|
|
Real Estate Secured by 1-4 Family Residential
|
|
Other Real Estate Loans
|
|
Commercial
|
|
Consumer
|
|
Total
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2014
|
$
|
550
|
|
|
$
|
179
|
|
|
$
|
3,966
|
|
|
$
|
3,916
|
|
|
$
|
2,354
|
|
|
$
|
821
|
|
|
$
|
11,786
|
|
|
Charge-offs
|
—
|
|
|
—
|
|
|
(344
|
)
|
|
(9
|
)
|
|
(3,281
|
)
|
|
(57
|
)
|
|
(3,691
|
)
|
|
Recoveries
|
246
|
|
|
—
|
|
|
359
|
|
|
28
|
|
|
14
|
|
|
11
|
|
|
658
|
|
|
Provision
|
109
|
|
|
13
|
|
|
(640
|
)
|
|
(174
|
)
|
|
2,619
|
|
|
366
|
|
|
2,293
|
|
|
Balance at December 31, 2015
|
$
|
905
|
|
|
$
|
192
|
|
|
$
|
3,341
|
|
|
$
|
3,761
|
|
|
$
|
1,706
|
|
|
$
|
1,141
|
|
|
$
|
11,046
|
|
|
Ending allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
53
|
|
|
$
|
—
|
|
|
$
|
1,120
|
|
|
$
|
464
|
|
|
$
|
27
|
|
|
$
|
1,000
|
|
|
$
|
2,664
|
|
|
Collectively evaluated for impairment
|
852
|
|
|
192
|
|
|
2,221
|
|
|
3,297
|
|
|
1,679
|
|
|
141
|
|
|
8,382
|
|
|
Total ending allowance balance
|
$
|
905
|
|
|
$
|
192
|
|
|
$
|
3,341
|
|
|
$
|
3,761
|
|
|
$
|
1,706
|
|
|
$
|
1,141
|
|
|
$
|
11,046
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
203
|
|
|
$
|
7,903
|
|
|
$
|
5,127
|
|
|
$
|
4,196
|
|
|
$
|
1,517
|
|
|
$
|
1,898
|
|
|
$
|
20,844
|
|
|
Collectively evaluated for impairment
|
39,470
|
|
|
11,159
|
|
|
274,969
|
|
|
253,839
|
|
|
188,965
|
|
|
16,435
|
|
|
784,837
|
|
|
Total ending loans balance
|
$
|
39,673
|
|
|
$
|
19,062
|
|
|
$
|
280,096
|
|
|
$
|
258,035
|
|
|
$
|
190,482
|
|
|
$
|
18,333
|
|
|
$
|
805,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014
|
|
(Dollars in thousands)
|
Real Estate Construction
|
|
Real Estate Secured by Farmland
|
|
Real Estate Secured by 1-4 Family Residential
|
|
Other Real Estate Loans
|
|
Commercial
|
|
Consumer
|
|
Total
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
$
|
847
|
|
|
$
|
166
|
|
|
$
|
6,734
|
|
|
$
|
3,506
|
|
|
$
|
1,890
|
|
|
$
|
177
|
|
|
$
|
13,320
|
|
|
Adjustment for the sale of majority interest in consolidated subsidiary
|
—
|
|
|
—
|
|
|
(95
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(95
|
)
|
|
Charge-offs
|
(1,186
|
)
|
|
—
|
|
|
(1,380
|
)
|
|
(747
|
)
|
|
(959
|
)
|
|
(36
|
)
|
|
(4,308
|
)
|
|
Recoveries
|
258
|
|
|
—
|
|
|
342
|
|
|
110
|
|
|
104
|
|
|
95
|
|
|
909
|
|
|
Provision
|
631
|
|
|
13
|
|
|
(1,635
|
)
|
|
1,047
|
|
|
1,319
|
|
|
585
|
|
|
1,960
|
|
|
Balance at December 31, 2014
|
$
|
550
|
|
|
$
|
179
|
|
|
$
|
3,966
|
|
|
$
|
3,916
|
|
|
$
|
2,354
|
|
|
$
|
821
|
|
|
$
|
11,786
|
|
|
Ending allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
66
|
|
|
$
|
—
|
|
|
$
|
1,370
|
|
|
$
|
294
|
|
|
$
|
292
|
|
|
$
|
647
|
|
|
$
|
2,669
|
|
|
Collectively evaluated for impairment
|
484
|
|
|
179
|
|
|
2,596
|
|
|
3,622
|
|
|
2,062
|
|
|
174
|
|
|
9,117
|
|
|
Total ending allowance balance
|
$
|
550
|
|
|
$
|
179
|
|
|
$
|
3,966
|
|
|
$
|
3,916
|
|
|
$
|
2,354
|
|
|
$
|
821
|
|
|
$
|
11,786
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
246
|
|
|
$
|
7,903
|
|
|
$
|
5,613
|
|
|
$
|
4,531
|
|
|
$
|
846
|
|
|
$
|
3,019
|
|
|
$
|
22,158
|
|
|
Collectively evaluated for impairment
|
32,804
|
|
|
11,805
|
|
|
259,603
|
|
|
250,705
|
|
|
162,423
|
|
|
15,348
|
|
|
732,688
|
|
|
Total ending loans balance
|
$
|
33,050
|
|
|
$
|
19,708
|
|
|
$
|
265,216
|
|
|
$
|
255,236
|
|
|
$
|
163,269
|
|
|
$
|
18,367
|
|
|
$
|
754,846
|
|
|
|
|
|
Note 5.
|
Premises and Equipment, Net
|
Premises and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
2016
|
|
2015
|
|
Land
|
$
|
2,068
|
|
|
$
|
2,068
|
|
|
Facilities
|
22,873
|
|
|
22,849
|
|
|
Furniture, fixtures, and equipment
|
11,729
|
|
|
11,676
|
|
|
Construction in process and deposits on equipment and land
|
1,842
|
|
|
1,455
|
|
|
|
38,512
|
|
|
38,048
|
|
|
Less accumulated depreciation
|
(19,491
|
)
|
|
(18,517
|
)
|
|
Total
|
$
|
19,021
|
|
|
$
|
19,531
|
|
Depreciation expense was
$1.4 million
for the year ended
December 31, 2016
,
$1.3 million
for the year ended December 31,
2015
, and
$1.5 million
for the year ended
December 31, 2014
.
Pursuant to the terms of non-cancelable lease agreements in effect at
December 31, 2016
, pertaining to banking premises, future minimum rent commitments under various operating leases are as follows:
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
December 31, 2016
|
|
2017
|
$
|
1,666
|
|
|
2018
|
1,617
|
|
|
2019
|
1,624
|
|
|
2020
|
1,444
|
|
|
2021
|
1,408
|
|
|
Thereafter
|
13,388
|
|
|
|
$
|
21,147
|
|
Rent expense was
$1.8 million
,
$2.0 million
, and
$2.8 million
for the years ended
December 31, 2016
,
2015
, and
2014
, respectively, and is included in occupancy and equipment expense on the consolidated statements of income.
The Company has developed an interest bearing product that integrates the use of the cash within client accounts at Middleburg Trust Company for overnight funding at Middleburg Bank. The overall balance of this product was
$43.2 million
and
$34.0 million
at
December 31, 2016
and
2015
, respectively.
The aggregate amount of jumbo time deposits, each with a minimum denomination of
$250,000
, was approximately
$84.5 million
and
$91.0 million
at
December 31, 2016
and
2015
, respectively.
At
December 31, 2016
, the scheduled maturities of time deposits are as follows:
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
December 31, 2016
|
|
2017
|
$
|
151,293
|
|
|
2018
|
38,370
|
|
|
2019
|
25,494
|
|
|
2020
|
7,115
|
|
|
2021
|
3,368
|
|
|
|
$
|
225,640
|
|
At
December 31, 2016
and
2015
, overdraft demand deposits reclassified to loans totaled
$142,000
and
$358,000
, respectively.
Middleburg Bank obtains certain deposits through the efforts of third-party brokers. At
December 31, 2016
and
2015
, brokered deposits totaled
$36.5 million
and
$38.7 million
, respectively, and were included in time deposits.
As of
December 31, 2016
, Middleburg Bank had remaining credit availability in the amount of
$334.3 million
at the Federal Home Loan Bank of Atlanta ("FHLB"). This line may be utilized for short and/or long-term borrowing. Advances on the line are secured by all of the Company’s first lien residential real estate loans on 1-4 unit, single-family dwellings; home equity lines of credit; and eligible commercial real estate loans. The amount of the available credit is limited to a percentage of the estimated market value of the loans as determined periodically by the FHLB. Any borrowings in excess of the qualifying collateral require pledging of additional assets. As of
December 31, 2016
, Middleburg Bank also had a letter of credit in the amount of
$25.0 million
with the FHLB. This letter of credit was issued as collateral for public fund depository accounts and is reflected in the remaining credit availability.
The Company had
$39.5 million
of FHLB advances outstanding as of
December 31, 2016
. The interest rates on these advances ranged from
0.63%
to
0.93%
and the weighted-average rate was
0.78%
. The Company’s FHLB advances totaled
$85.0 million
at
December 31, 2015
. The weighted-average interest rate on these advances at
December 31, 2015
was
0.66%
.
The contractual maturities of the Company’s long-term debt are as follows:
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
December 31, 2016
|
|
Due in 2017
|
$
|
29,500
|
|
|
Due in 2018
|
10,000
|
|
|
Total
|
$
|
39,500
|
|
Securities sold under agreements to repurchase consist of secured transactions with customers which generally mature the day following the day sold totaling
$34.9 million
and
$26.9 million
at
December 31, 2016
and
December 31, 2015
, respectively.
The outstanding balances and related information for securities sold under agreements to repurchase are summarized as follows:
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Securities sold under agreements to repurchase
|
|
At December 31:
|
|
|
2016
|
$
|
34,864
|
|
|
2015
|
26,869
|
|
|
Weighted-average interest rate at year-end:
|
|
|
|
2016
|
0.01
|
%
|
|
2015
|
0.01
|
|
|
Maximum amount outstanding at any month's end:
|
|
|
|
2016
|
$
|
35,660
|
|
|
2015
|
34,253
|
|
|
Average amount outstanding during the year:
|
|
|
|
2016
|
$
|
31,076
|
|
|
2015
|
30,095
|
|
|
Weighted-average interest rate during the year:
|
|
|
|
2016
|
0.01
|
%
|
|
2015
|
0.21
|
|
The Company also has a line of credit with the Federal Reserve Bank of Richmond of
$33.4 million
of which there was
no
outstanding balance at
December 31, 2016
.
The Company has an additional
$45.0 million
in lines of credit available from other institutions at
December 31, 2016
.
|
|
|
|
Note 8.
|
Share-Based Compensation Plan
|
The Company sponsored
one
share-based compensation plan, the 2006 Equity Compensation Plan, which provided for the granting of stock options, stock appreciation rights, stock awards, performance share awards, incentive awards, and stock units. The 2006 Equity Compensation Plan was approved by the Company’s shareholders at the Annual Meeting held on April 26, 2006, and has succeeded the Company’s 1997 Stock Incentive Plan. The plan expired by its own terms in February 2016, before which, the Company granted share-based compensation to its directors, officers, employees, and other persons the Company determined to have contributed to the profits or growth of the Company. The number of shares reserved for issuance totaled
430,000
shares.
The Company granted
49,100
shares of restricted stock during 2016 to certain employees and executive officers. Of the
49,100
shares,
31,750
shares are in the form of performance-accelerated restricted stock and
17,350
shares are in the form of time-based restricted stock. During 2016, the Company's board of directors also awarded
11
directors
400
shares of restricted stock for a total of
4,400
restricted shares. These shares will vest at
100%
in April 2017.
For the performance-accelerated restricted stock granted to certain employees and executive officers, in order for a recipient to earn and have vested 100% of granted shares, the Company must achieve certain financial performance targets during predefined monitoring periods as compared to a selected peer group and the recipient must be employed by the Company or one of its subsidiaries at the end of the predefined vesting period. Vested shares are distributed to recipients immediately after performance targets are certified. Partial share vesting may be achieved for interim periods during the predefined monitoring periods, however no vesting may occur before the end of 2018. If any shares remain unvested,
50%
of the unvested shares will be forfeited. Any remaining shares vest at the end of the predefined monitoring period provided that the recipient remained employed by the Company or one of its subsidiaries over the entire performance and vesting period.
For the time-based restricted stock granted to certain employees and executive officers, in order for a recipient to earn and have vested 100% of the granted shares, the recipient must be employed by the Company or one of its subsidiaries at the time of vesting.
For the years ended
December 31, 2016
,
2015
, and
2014
, the Company recorded
$925,000
,
$605,000
, and
$426,000
, respectively, in share-based compensation expense related to restricted stock and option grants. The total income tax benefit related to share-based compensation was
$5,000
,
$117,000
, and
$63,000
in
2016
,
2015
, and
2014
, respectively.
The following table summarizes restricted stock awarded under the 2006 Equity Compensation Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
(Dollars in thousands)
|
Shares
|
|
Weighted-Average Grant Date Fair Value
|
|
Aggregate Value
|
|
Shares
|
|
Weighted-Average Grant Date Fair Value
|
|
Aggregate Value
|
|
Shares
|
|
Weighted-Average Grant Date Fair Value
|
|
Aggregate Value
|
|
Non-vested at the beginning of the year
|
153,399
|
|
|
$
|
17.17
|
|
|
|
|
134,108
|
|
|
$
|
16.66
|
|
|
|
|
119,250
|
|
|
$
|
16.39
|
|
|
|
|
Granted
|
53,500
|
|
|
20.76
|
|
|
|
|
36,150
|
|
|
18.50
|
|
|
|
|
41,533
|
|
|
17.65
|
|
|
|
|
Vested
|
(53,908
|
)
|
|
16.88
|
|
|
|
|
(16,359
|
)
|
|
15.91
|
|
|
|
|
(15,425
|
)
|
|
15.59
|
|
|
|
|
Forfeited or expired
|
(2,250
|
)
|
|
19.91
|
|
|
|
|
(500
|
)
|
|
18.07
|
|
|
|
|
(11,250
|
)
|
|
16.05
|
|
|
|
|
Non-vested at end of the year
|
150,741
|
|
|
$
|
18.50
|
|
|
$
|
5,238
|
|
|
153,399
|
|
|
$
|
17.17
|
|
|
$
|
2,835
|
|
|
134,108
|
|
|
$
|
16.66
|
|
|
$
|
2,415
|
|
The weighted-average remaining contractual term for non-vested grants at
December 31, 2016
,
2015
, and
2014
was
2.5
,
2.7
, and
3.5
years, respectively. As of
December 31, 2016
, there was
$1.6 million
of total unrecognized compensation expense related to the non-vested service awards granted under the 2006 Equity Compensation Plan.
Stock options may be granted periodically to certain officers and employees under the Company’s share-based compensation plan at prices equal to the market value of the stock on the date the options are granted. Options granted vest over a
three
-year time period over which
25%
vests on each of the first and second anniversaries of the grant and
50%
on the third anniversary of the grant. As of
December 31, 2016
, all outstanding option awards were vested and, accordingly, there was
no
unrecognized compensation expense related to unvested stock-based option awards. Shares issued in connection with stock option exercises may be issued from available treasury shares or from market purchases. There were
no
stock option awards granted during the years ended
December 31, 2016
,
2015
or
2014
.
The following table summarizes options outstanding under the 2006 Equity Compensation Plan at the end of the reportable periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Outstanding at beginning of year
|
30,012
|
|
|
$
|
14.00
|
|
|
30,012
|
|
|
$
|
14.00
|
|
|
58,513
|
|
|
$
|
15.30
|
|
|
Granted
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Exercised
|
(6,650
|
)
|
|
14.00
|
|
|
—
|
|
|
—
|
|
|
(25,501
|
)
|
|
14.00
|
|
|
Forfeited or expired
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,000
|
)
|
|
39.40
|
|
|
Outstanding at end of year
|
23,362
|
|
|
$
|
14.00
|
|
|
30,012
|
|
|
$
|
14.00
|
|
|
30,012
|
|
|
$
|
14.00
|
|
|
Options exercisable at year end
|
23,362
|
|
|
$
|
14.00
|
|
|
30,012
|
|
|
$
|
14.00
|
|
|
30,012
|
|
|
$
|
14.00
|
|
The total intrinsic value of options exercised was
$88,000
and
$126,500
during 2016 and
2014
, respectively. There were
no
options exercised during 2015. There was
$484,800
,
$134,500
, and
$120,300
aggregate intrinsic value of options outstanding at
December 31, 2016
,
2015
and
2014
, respectively.
The aggregate intrinsic value represents the amount by which the current market value of the underlying stock exceeds the exercise price. This amount changes based on changes in the market value of the Company’s common stock.
As of
December 31, 2016
, options outstanding and exercisable are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices
|
|
Options Outstanding
|
|
Weighted-Average Remaining Contractual Life (years)
|
|
Options Exercisable
|
|
$
|
14.00
|
|
|
18,362
|
|
|
2.22
|
|
18,362
|
|
|
$
|
14.00
|
|
|
5,000
|
|
|
2.85
|
|
5,000
|
|
|
$
|
14.00
|
|
|
23,362
|
|
|
2.36
|
|
23,362
|
|
|
|
|
|
Note 9.
|
Employee Benefit Plans
|
401(k) Plan
The Company has a 401(k) plan whereby a majority of employees participate in the plan. Employees may contribute up to
100%
of their compensation subject to certain limits based on federal tax laws. The Company makes matching contributions equal to
50%
of the first
6%
of an employee’s compensation contributed to the plan. Matching contributions vest to the employee equally over a
five
year period. For the years ended
December 31, 2016
,
2015
, and
2014
, expense attributable to the plan amounted to
$364,000
,
$351,000
and
$340,000
, respectively.
Money Purchase Pension Plan (MPPP)
The Middleburg Financial Corporation Defined Benefit Pension Plan was replaced by a Money Purchase Pension Plan effective on January 1, 2010. Employees who have attained age
21
and completed
one year
of service are eligible to participate in the plan as of the first day of the month following the completion of such eligibility provisions. Employees earn a year of service if they complete
one thousand
hours of service in a plan year. Service with Middleburg Financial Corporation and its subsidiaries prior to the effective date of the Plan counts toward a participant's initial eligibility to participate in the plan.
Each year, a participant receives an allocation of an employer contribution equal to
3.00%
of total compensation (up to the statutory maximum) plus an additional contribution of
2.75%
of compensation in excess of the Social Security taxable wage base (up to the statutory maximum). To receive an allocation, the participant must complete
one thousand
hours of service in the plan year and be employed on the last day of the plan year. The requirement to be employed on the last day of the plan year does not apply if a participant dies, retires, or becomes disabled during the plan year.
Participants become vested in their employer contributions according to a schedule which allows for graduated vesting and full vesting after
five years
of service. Service with Middleburg Financial Corporation and its subsidiaries prior to the effective date of the Plan count toward a participant's vested percentage.
Assets are held in a pooled investment account managed by Middleburg Trust Company, a wholly owned subsidiary of the Company. Distributions may be made upon termination of employment, death or disability.
The plan is administered by the Benefits Committee of the Company. The plan may be amended from time to time by the Board or its delegate and may be terminated by the Board at any time for any reason.
For the years ended
December 31, 2016
,
2015
, and
2014
expense attributable to the plan was
$545,000
,
$926,000
, and
$898,000
, respectively.
Deferred Compensation Plans
The Company has adopted several deferred compensation plans; including a defined benefit SERP, an elective deferral plan for the former Chairman, and a defined contribution SERP for certain executive officers. The
two
plans for the former Chairman made installment payouts in
2016
,
2015
and
2014
. The defined contribution SERP for executive officers includes a vesting schedule, and is currently credited at a rate using the
10
-year treasury plus
1.5%
. The deferred compensation expense for
2016
,
2015
, and
2014
, was
$245,000
,
$226,000
, and
$222,000
, respectively. The plans are unfunded; however, life insurance has been acquired on the life of the executive officers in amounts sufficient to help meet the costs of the obligations.
The Company files income tax returns in the U.S. federal jurisdiction and the state of Virginia and various other states. With few exceptions, the Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years prior to
2013
.
The Company believes it is more likely than not that the benefit of deferred tax assets will be realized. Consequently,
no
valuation allowance for deferred tax assets was deemed necessary at
December 31, 2016
and
2015
.
Net deferred tax assets consist of the following components as of
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
2016
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
Allowance for loan losses
|
$
|
3,877
|
|
|
$
|
3,756
|
|
|
Deferred compensation
|
687
|
|
|
647
|
|
|
Interest rate swap
|
67
|
|
|
99
|
|
|
Other real estate owned
|
288
|
|
|
257
|
|
|
Securities available for sale
|
654
|
|
|
—
|
|
|
Property and equipment
|
—
|
|
|
49
|
|
|
Other
|
1,427
|
|
|
2,028
|
|
|
Total deferred tax assets
|
$
|
7,000
|
|
|
$
|
6,836
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Deferred loan costs, net
|
$
|
526
|
|
|
$
|
317
|
|
|
Securities available for sale
|
—
|
|
|
965
|
|
|
Property and equipment
|
79
|
|
|
—
|
|
|
Total deferred tax liabilities
|
$
|
605
|
|
|
$
|
1,282
|
|
|
Net deferred tax assets
|
$
|
6,395
|
|
|
$
|
5,554
|
|
The provision for income taxes charged to operations for the years ended
December 31, 2016
,
2015
, and
2014
, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
2016
|
|
2015
|
|
2014
|
|
Current tax expense
|
$
|
2,067
|
|
|
$
|
2,606
|
|
|
$
|
1,160
|
|
|
Deferred tax expense
|
746
|
|
|
109
|
|
|
1,181
|
|
|
Total income tax expense
|
$
|
2,813
|
|
|
$
|
2,715
|
|
|
$
|
2,341
|
|
The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the years ended
December 31, 2016
,
2015
, and
2014
, due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
2016
|
|
2015
|
|
2014
|
|
Computed "expected" tax expense
|
$
|
3,698
|
|
|
$
|
3,585
|
|
|
$
|
3,374
|
|
|
Increase (decrease) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
Tax-exempt income
|
(796
|
)
|
|
(829
|
)
|
|
(959
|
)
|
|
Low income housing tax credits
|
(408
|
)
|
|
(120
|
)
|
|
(211
|
)
|
|
Merger related expenses
|
267
|
|
|
—
|
|
|
—
|
|
|
Other, net
|
52
|
|
|
79
|
|
|
137
|
|
|
|
$
|
2,813
|
|
|
$
|
2,715
|
|
|
$
|
2,341
|
|
|
|
|
|
Note 11.
|
Related Party Transactions
|
The Company’s commercial and retail banking segment has, and may be expected to have in the future, banking transactions in the ordinary course of business with principal owners, directors, principal officers, their immediate families and affiliated companies in which they are principal stockholders, commonly referred to as related parties. Any loans made to related parties were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time of origination for comparable loans with persons not related to the lender; and did not involve more than the normal risk of collectability or present other unfavorable features. Loans outstanding to directors and executive officers at
December 31, 2016
and
2015
were:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
2016
|
|
2015
|
|
Balance, January 1
|
$
|
1,369
|
|
|
$
|
3,804
|
|
|
Decrease due to status changes
|
—
|
|
|
(2,375
|
)
|
|
Principal additions
|
352
|
|
|
439
|
|
|
Principal payments
|
(130
|
)
|
|
(499
|
)
|
|
Balance, December 31
|
$
|
1,591
|
|
|
$
|
1,369
|
|
Additionally, unused commitments to extend credit to related parties were
$1.1 million
at
December 31, 2016
and
$2.3 million
at
December 31, 2015
.
Related party deposits totaled
$5.0 million
and
$5.9 million
at
December 31, 2016
and
2015
, respectively.
|
|
|
|
Note 12.
|
Contingent Liabilities and Commitments
|
In the normal course of business, there are various outstanding commitments and contingent liabilities, which are not reflected in the accompanying consolidated financial statements. The Company does not anticipate any material loss as a result of these transactions.
See Note 15 with respect to financial instruments with off-balance sheet risk.
The Company must maintain a reserve against its deposits in accordance with Regulation D of the Federal Reserve Act. For the final weekly reporting period in the years ended
December 31, 2016
and
2015
, the aggregate amount of gross daily average required reserves was approximately
$3.5 million
and
$3.1 million
, respectively.
|
|
|
|
Note 13.
|
Earnings Per Share
|
The following shows the weighted-average number of shares used in computing earnings per share and the effect on weighted-average number of shares of diluted potential common stock. Nonvested restricted shares are included in basic earnings per share because of dividend participation rights. Potential dilutive common stock had no effect on income available to common stockholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
Shares
|
|
Per Share Amount
|
|
Shares
|
|
Per Share Amount
|
|
Shares
|
|
Per Share Amount
|
|
Earnings per share, basic
|
7,107,403
|
|
|
$
|
1.13
|
|
|
7,147,390
|
|
|
$
|
1.10
|
|
|
7,106,171
|
|
|
$
|
1.07
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
11,461
|
|
|
|
|
|
6,805
|
|
|
|
|
|
6,939
|
|
|
|
|
|
Warrant (See note 23)
|
32,026
|
|
|
|
|
13,192
|
|
|
|
|
13,491
|
|
|
|
|
Earnings per share, diluted
|
7,150,890
|
|
|
$
|
1.13
|
|
|
7,167,387
|
|
|
$
|
1.09
|
|
|
7,126,601
|
|
|
$
|
1.06
|
|
In
2016
,
2015
, and
2014
, there were
no
shares that would have been considered anti-dilutive.
On September 15, 2015, the Company's Board of Directors authorized the repurchase of up to
$10 million
of the Company’s common stock. The repurchase program was effective immediately and runs through December 31, 2017. This program replaces the previous repurchase program adopted in 1999, pursuant to which the Company had
24,084
shares remaining eligible for repurchase. As of December 31, 2016, the Company had executed and settled transactions to repurchase
104,300
shares, totaling
$1.9 million
, for an average price of
$18.34
, of which
26,800
shares totaling
$489,000
were executed and settled during the first quarter of 2016 at an average price of
$18.29
.
|
|
|
|
Note 14.
|
Retained Earnings
|
Transfers of funds from the banking subsidiary to the Parent Company in the form of loans, advances, and cash dividends are restricted by federal and state regulatory authorities. Federal regulations limit the payment of dividends to the sum of a bank’s current net retained income and retained net income of the two prior years. As of
December 31, 2016
, the subsidiary bank had approximately
$12.9 million
in excess of regulatory limitations available for transfer to the Parent Company.
|
|
|
|
Note 15.
|
Financial Instruments With Off-Balance Sheet Risk and Credit Risk
|
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, and interest rate swaps. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. See Note 24 for more information regarding the Company’s use of derivatives.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
A summary of the contract amount of the Company's exposure to off-balance sheet risk as of
December 31, 2016
and
2015
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
2016
|
|
2015
|
|
Financial instruments whose contract amounts represent credit risk:
|
|
|
|
|
|
|
Commitments to extend credit
|
$
|
132,669
|
|
|
$
|
153,806
|
|
|
Standby letters of credit
|
4,998
|
|
|
3,718
|
|
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income producing commercial properties.
Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. Those lines of credit may not be drawn upon to the total extent to which the Company is committed.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds certificates of deposit, deposit accounts, and real estate as collateral supporting those commitments for which collateral is deemed necessary.
The Company had approximately
$3.4 million
in deposits in financial institutions in excess of amounts insured by the Federal Deposit Insurance Corporation (FDIC) at
December 31, 2016
.
|
|
|
|
Note 16.
|
Fair Value Measurements
|
The Company follows ASC 820, "Fair Value Measurements" to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. ASC 820 clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy under ASC 820 based on these two types of inputs are as follows:
|
|
|
|
Level I.
|
Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
|
|
|
|
|
Level II.
|
Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.
|
|
|
|
|
Level III.
|
Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
|
Measured on a recurring basis
The following describes the valuation techniques and inputs used by the Company in determining the fair value of certain assets recorded at fair value on a recurring basis in the financial statements.
Securities Available for Sale
The Company primarily values its investment portfolio using Level II fair value measurements, but may also use Level I or Level III measurements if required by the composition of the portfolio. If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the
fair value of identical or similar securities by using pricing models that consider observable market data (Level II). In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified as Level III of the valuation hierarchy.
Interest Rate Swaps and Interest Rate Cap
Interest rate swaps and cap are recorded at fair value based on third party vendors who compile prices from various sources and may determine fair value of identical or similar instruments by using pricing models that consider observable market data (Level II).
The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of
December 31, 2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
December 31, 2016
|
|
Description
|
|
Total
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
73,184
|
|
|
$
|
—
|
|
|
$
|
73,184
|
|
|
$
|
—
|
|
|
Obligations of states and political subdivisions
|
|
63,373
|
|
|
—
|
|
|
63,373
|
|
|
—
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
98,051
|
|
|
—
|
|
|
98,051
|
|
|
—
|
|
|
Non-agency
|
|
9,933
|
|
|
—
|
|
|
9,933
|
|
|
—
|
|
|
Other asset backed securities
|
|
41,605
|
|
|
—
|
|
|
41,605
|
|
|
—
|
|
|
Corporate securities
|
|
15,421
|
|
|
—
|
|
|
15,421
|
|
|
—
|
|
|
Interest rate swaps
|
|
44
|
|
|
—
|
|
|
44
|
|
|
—
|
|
|
Interest rate cap
|
|
9
|
|
|
—
|
|
|
9
|
|
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
242
|
|
|
—
|
|
|
242
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
December 31, 2015
|
|
Description
|
|
Total
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
78,940
|
|
|
$
|
—
|
|
|
$
|
78,940
|
|
|
$
|
—
|
|
|
Obligations of states and political subdivisions
|
|
75,593
|
|
|
—
|
|
|
75,593
|
|
|
—
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
131,661
|
|
|
—
|
|
|
131,661
|
|
|
—
|
|
|
Non-agency
|
|
12,777
|
|
|
—
|
|
|
12,777
|
|
|
—
|
|
|
Other asset backed securities
|
|
58,781
|
|
|
—
|
|
|
58,781
|
|
|
—
|
|
|
Corporate securities
|
|
16,819
|
|
|
—
|
|
|
16,819
|
|
|
—
|
|
|
Interest rate swaps
|
|
73
|
|
|
—
|
|
|
73
|
|
|
—
|
|
|
Interest rate cap
|
|
39
|
|
|
—
|
|
|
39
|
|
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
370
|
|
|
—
|
|
|
370
|
|
|
—
|
|
Measured on nonrecurring basis
The Company may be required, from time to time, to measure and recognize certain other assets at fair value on a nonrecurring basis in accordance with GAAP. The following describes the valuation techniques and inputs used by the Company in determining the fair value of certain assets recorded at fair value on a nonrecurring basis in the financial statements.
Impaired Loans
Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. Any given loan may have multiple types of collateral. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level II). However, if the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level III. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the
applicable business’ financial statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level III). Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of income.
Other Real Estate Owned ("OREO")
OREO is measured at fair value less estimated costs to sell, based on an appraisal conducted by an independent, licensed appraiser outside of the Company. If the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level III. The initial fair value of OREO is based on an appraisal done at the time of foreclosure. Subsequent fair value adjustments are recorded in the period incurred and included in non-interest expense on the consolidated statements of income.
Repossessed Assets
The value of repossessed assets is determined by the Company based on marketability and other factors and is considered Level III.
The following table summarizes the Company’s non-financial assets that were measured at fair value on a nonrecurring basis during the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
December 31, 2016
|
|
|
|
Total
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
6,298
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,298
|
|
|
Other real estate owned
|
|
$
|
5,073
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,073
|
|
|
Repossessed assets
|
|
$
|
843
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
843
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
December 31, 2015
|
|
|
|
Total
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
9,018
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,018
|
|
|
Other real estate owned
|
|
$
|
3,345
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,345
|
|
|
Repossessed assets
|
|
$
|
1,043
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,043
|
|
The following table presents quantitative information as of
December 31, 2016
and
2015
about Level III fair value measurements for assets measured at fair value on a nonrecurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
Fair Value
(in thousands)
|
|
Valuation Technique
|
|
Unobservable Inputs
|
|
Range
(Weighted Average)
|
|
Impaired loans
|
|
$
|
1,134
|
|
|
Appraisals
|
|
Discount to reflect current market conditions and estimated selling costs
|
|
0% - 100% (14%)
|
|
Impaired loans
|
|
$
|
5,164
|
|
|
Present value of cash flows
|
|
Discount rate
|
|
6% - 8% (6%)
|
|
Other real estate owned
|
|
$
|
5,073
|
|
|
Appraisals
|
|
Discount to reflect current market conditions and estimated selling costs
|
|
10%
|
|
Repossessed assets
|
|
$
|
843
|
|
|
Market analysis
|
|
Discount to reflect current market conditions and estimated selling costs
|
|
70%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
Fair Value
(in thousands)
|
|
Valuation Technique
|
|
Unobservable Inputs
|
|
Range
(Weighted Average)
|
|
Impaired loans
|
|
$
|
5,434
|
|
|
Appraisals
|
|
Discount to reflect current market conditions and estimated selling costs
|
|
0% - 100% (17%)
|
|
Impaired loans
|
|
$
|
3,584
|
|
|
Present value of cash flows
|
|
Discount rate
|
|
6% - 8% (7%)
|
|
Other real estate owned
|
|
$
|
3,345
|
|
|
Appraisals
|
|
Discount to reflect current market conditions and estimated selling costs
|
|
10%
|
|
Repossessed assets
|
|
$
|
1,043
|
|
|
Market analysis
|
|
Historical sales activity
|
|
50%
|
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are
no
quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. U.S. generally accepted accounting principles excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments (not previously described) for which it is practicable to estimate that value:
Cash and Cash Equivalents
For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.
Securities held to maturity
Certain debt securities that management has the positive intent and ability to hold until maturity are recorded at amortized cost. Fair values are determined in a manner that is consistent with securities available for sale.
Restricted Securities
The restricted security category is comprised of FHLB and Federal Reserve Bank stock. These stocks are classified as restricted securities because their ownership is restricted to certain types of entities and they lack a market. When the FHLB or Federal Reserve Bank repurchases stock, they repurchase at the stock's book value. Therefore, the carrying amounts of restricted securities approximate fair value.
Loans, Net
For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. For fixed rate loans, the fair value is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality. Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were utilized as estimates for fair value. Fair value for impaired loans is described above.
Bank Owned Life Insurance
The carrying amount of bank owned life insurance is a reasonable estimate of fair value.
Accrued Interest Receivable and Payable
The carrying amounts of accrued interest approximate fair values.
Deposits
The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. For all other deposits, the fair value is determined using the discounted cash flow method. The discount rate is equal to the rate currently offered on similar products.
Securities Sold Under Agreements to Repurchase
The carrying amounts approximate fair values.
FHLB Borrowings and Subordinated Debt
For variable rate long-term debt, fair values are based on carrying values. For fixed rate debt, fair values are estimated based on observable market prices and discounted cash flow analysis using interest rates for borrowings of similar remaining maturities and characteristics. The fair values of the Company's Subordinated Debentures are estimated using discounted cash flow analysis based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.
Off-Balance Sheet Financial Instruments
The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At
December 31, 2016
and
2015
, the fair values of loan commitments and standby letters of credit were deemed immaterial; therefore, they have not been included in the tables below.
Fair Value of Financial Instruments
The estimated fair values, and related carrying amounts, of the Company's financial instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
December 31, 2016
|
|
|
|
|
|
|
Fair value measurements using:
|
|
|
Carrying
Amount
|
|
Total Fair Value
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
28,544
|
|
|
$
|
28,544
|
|
|
$
|
28,544
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Securities held to maturity
|
10,683
|
|
|
10,095
|
|
|
—
|
|
|
10,095
|
|
|
—
|
|
|
Securities available for sale
|
301,567
|
|
|
301,567
|
|
|
—
|
|
|
301,567
|
|
|
—
|
|
|
Loans, net
|
848,693
|
|
|
852,280
|
|
|
—
|
|
|
—
|
|
|
852,280
|
|
|
Bank owned life insurance
|
23,925
|
|
|
23,925
|
|
|
—
|
|
|
23,925
|
|
|
—
|
|
|
Accrued interest receivable
|
5,093
|
|
|
5,093
|
|
|
—
|
|
|
5,093
|
|
|
—
|
|
|
Interest rate swaps
|
44
|
|
|
44
|
|
|
—
|
|
|
44
|
|
|
—
|
|
|
Interest rate cap
|
9
|
|
|
9
|
|
|
—
|
|
|
9
|
|
|
—
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
|
1,053,058
|
|
|
$
|
1,051,245
|
|
|
$
|
—
|
|
|
$
|
1,051,245
|
|
|
$
|
—
|
|
|
Securities sold under agreements to repurchase
|
34,864
|
|
|
34,864
|
|
|
—
|
|
|
34,864
|
|
|
—
|
|
|
FHLB borrowings
|
39,500
|
|
|
39,530
|
|
|
—
|
|
|
39,530
|
|
|
—
|
|
|
Subordinated notes
|
5,155
|
|
|
5,159
|
|
|
—
|
|
|
5,159
|
|
|
—
|
|
|
Accrued interest payable
|
387
|
|
|
387
|
|
|
—
|
|
|
387
|
|
|
—
|
|
|
Interest rate swaps
|
242
|
|
|
242
|
|
|
—
|
|
|
242
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
December 31, 2015
|
|
|
|
|
|
|
Fair value measurements using:
|
|
|
Carrying
Amount
|
|
Total Fair Value
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
39,228
|
|
|
$
|
39,228
|
|
|
$
|
39,228
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Securities held to maturity
|
4,207
|
|
|
4,163
|
|
|
—
|
|
|
4,163
|
|
|
—
|
|
|
Securities available for sale
|
374,571
|
|
|
374,571
|
|
|
—
|
|
|
374,571
|
|
|
—
|
|
|
Loans, net
|
794,635
|
|
|
802,535
|
|
|
—
|
|
|
—
|
|
|
802,535
|
|
|
Bank owned life insurance
|
23,273
|
|
|
23,273
|
|
|
—
|
|
|
23,273
|
|
|
—
|
|
|
Accrued interest receivable
|
5,204
|
|
|
5,204
|
|
|
—
|
|
|
5,204
|
|
|
—
|
|
|
Interest rate swaps
|
73
|
|
|
73
|
|
|
—
|
|
|
73
|
|
|
—
|
|
|
Interest rate cap
|
39
|
|
|
39
|
|
|
—
|
|
|
39
|
|
|
—
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
|
1,040,800
|
|
|
$
|
1,040,016
|
|
|
$
|
—
|
|
|
$
|
1,040,016
|
|
|
$
|
—
|
|
|
Securities sold under agreements to repurchase
|
26,869
|
|
|
26,869
|
|
|
—
|
|
|
26,869
|
|
|
—
|
|
|
FHLB borrowings
|
85,000
|
|
|
85,033
|
|
|
—
|
|
|
85,033
|
|
|
—
|
|
|
Subordinated notes
|
5,155
|
|
|
5,157
|
|
|
—
|
|
|
5,157
|
|
|
—
|
|
|
Accrued interest payable
|
410
|
|
|
410
|
|
|
—
|
|
|
410
|
|
|
—
|
|
|
Interest rate swaps
|
370
|
|
|
370
|
|
|
—
|
|
|
370
|
|
|
—
|
|
The Company assumes interest rate risk as a result of its normal operations. As a result, the fair values of the Company's financial instruments will change when interest rate levels change, which may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company's overall interest rate risk.
|
|
|
|
Note 17.
|
Capital Requirements
|
The Company, on a consolidated basis, and Middleburg Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Middleburg Bank must meet specific capital guidelines that involve quantitative measures of the Company's and Middleburg Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and Middleburg Bank to maintain minimum amounts and ratios, as set forth in the table below. Management believes, as of
December 31, 2016
and
2015
, that the Company and Middleburg Bank meet all capital adequacy requirements to which they are subject.
As of
December 31, 2016
, the most recent notification from the Federal Reserve Bank categorized Middleburg Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum capital requirements as set forth in the table. There are
no
conditions or events since that notification that management believes have changed the institution's category.
The Company’s and Middleburg Bank’s actual capital amounts and ratios are also presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
Minimum Capital Requirement
|
|
Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
|
|
(Dollars in thousands)
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk- Weighted Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
$
|
139,419
|
|
|
17.9%
|
|
$
|
62,436
|
|
|
8.0%
|
|
N/A
|
|
|
N/A
|
|
Middleburg Bank
|
131,725
|
|
|
17.0%
|
|
61,994
|
|
|
8.0%
|
|
$
|
77,492
|
|
|
10.0%
|
|
Tier 1 Capital (to Risk- Weighted Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
$
|
129,642
|
|
|
16.6%
|
|
$
|
46,827
|
|
|
6.0%
|
|
N/A
|
|
|
N/A
|
|
Middleburg Bank
|
122,016
|
|
|
15.8%
|
|
46,495
|
|
|
6.0%
|
|
$
|
61,994
|
|
|
8.0%
|
|
Common Equity Tier 1 Capital (to Risk-Weighted Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
$
|
124,642
|
|
|
16.0%
|
|
$
|
35,121
|
|
|
4.5%
|
|
N/A
|
|
|
N/A
|
|
Middleburg Bank
|
122,016
|
|
|
15.8%
|
|
34,872
|
|
|
4.5%
|
|
$
|
50,370
|
|
|
6.5%
|
|
Tier 1 Capital (to Average Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
$
|
129,642
|
|
|
10.0%
|
|
$
|
52,142
|
|
|
4.0%
|
|
N/A
|
|
|
N/A
|
|
Middleburg Bank
|
122,016
|
|
|
9.4%
|
|
51,909
|
|
|
4.0%
|
|
$
|
64,886
|
|
|
5.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk- Weighted Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
$
|
132,481
|
|
|
17.5%
|
|
$
|
60,495
|
|
|
8.0%
|
|
N/A
|
|
|
N/A
|
|
Middleburg Bank
|
127,418
|
|
|
17.0%
|
|
60,055
|
|
|
8.0%
|
|
$
|
75,068
|
|
|
10.0%
|
|
Tier 1 Capital (to Risk- Weighted Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
$
|
123,008
|
|
|
16.3%
|
|
$
|
45,371
|
|
|
6.0%
|
|
N/A
|
|
|
N/A
|
|
Middleburg Bank
|
118,013
|
|
|
15.7%
|
|
45,041
|
|
|
6.0%
|
|
$
|
60,055
|
|
|
8.0%
|
|
Common Equity Tier 1 Capital (to Risk-Weighted Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
$
|
118,008
|
|
|
15.6%
|
|
$
|
34,028
|
|
|
4.5%
|
|
N/A
|
|
|
N/A
|
|
Middleburg Bank
|
118,013
|
|
|
15.7%
|
|
33,781
|
|
|
4.5%
|
|
$
|
48,794
|
|
|
6.5%
|
|
Tier 1 Capital (to Average Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
$
|
123,008
|
|
|
9.6%
|
|
$
|
51,301
|
|
|
4.0%
|
|
N/A
|
|
|
N/A
|
|
Middleburg Bank
|
118,013
|
|
|
9.2%
|
|
51,067
|
|
|
4.0%
|
|
$
|
63,834
|
|
|
5.0%
|
In addition to the minimum regulatory capital required for capital adequacy purposes included in the table above, the Company is required to maintain a minimum Capital Conservation Buffer, in the form of common equity, in order to avoid restrictions on capital distributions and discretionary bonuses. The required amount of the Capital Conservation Buffer was
0.625%
on January 1, 2016 and will increase by
0.625%
each year until it reaches
2.5%
on January 1, 2019. The Capital Conservation Buffer is applicable to all ratios except the leverage ratio, which is noted above as Tier 1 Capital to Average Assets.
On January 1, 2015, the Company and the Bank applied changes to the regulatory capital framework that were approved on July 9, 2013 by the federal banking agencies (the Basel III Final Rule). The regulatory risk-based capital amounts presented above include: (1) common equity tier 1 capital (CET1) which consists principally of common stock (including surplus) and retained earnings with adjustments for goodwill, intangible assets and deferred tax assets; (2) Tier 1 capital which consists principally of CET1 plus the Company’s “grandfathered” trust preferred securities; and (3) Tier 2 capital which consists principally of Tier 1 capital plus a limited amount of the allowance for loan losses. In addition, the Company has made the one-time irrevocable election to continue treating accumulated other comprehensive income (loss) under regulatory standards that were in place prior to the Basel III Final Rule in order to eliminate volatility of regulatory capital that can result from fluctuations in accumulated other comprehensive income (loss) and the inclusion of accumulated other comprehensive income (loss) in regulatory capital, as would otherwise be required under the Basel III Capital Rule. The table above also reflects the minimum regulatory and certain prompt corrective action capital levels that began on January 1, 2015.
|
|
|
|
Note 18.
|
Goodwill and Intangibles Assets
|
As of
December 31, 2016
and
2015
, goodwill and intangible assets relate to the Company’s acquisition of Middleburg Trust Company and Middleburg Investment Advisors. On May 15, 2014, the Company sold all of its majority interest in Southern Trust Mortgage and on this date the related goodwill was eliminated.
Goodwill is not amortized and the Company is no longer required to perform a test for impairment unless, based on an assessment of qualitative factors related to goodwill, the Company determines that it is more likely than not that the fair value is less than its carrying amount. If the likelihood of impairment is more than 50%, the Company must perform a test for impairment and may be required to record impairment charges.
Identifiable intangible assets are being amortized over the period of expected benefit, which is
15 years
.
Information concerning goodwill and intangible assets is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
(Dollars In thousands)
|
|
Gross Carrying Value
|
|
Accumulated Amortization
|
|
Gross Carrying Value
|
|
Accumulated Amortization
|
|
Identifiable intangibles
|
|
$
|
3,734
|
|
|
$
|
3,690
|
|
|
$
|
3,734
|
|
|
$
|
3,519
|
|
|
Unamortizable goodwill
|
|
3,421
|
|
|
—
|
|
|
3,421
|
|
|
—
|
|
Amortization expense of intangible assets for each of the
three
years ended
December 31, 2016
, and
2015
, and
2014
totaled
$171,000
. Estimated amortization expense of identifiable intangibles for the years ended
December 31
follows:
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2017
|
$
|
44
|
|
|
|
$
|
44
|
|
|
|
|
|
Note 19.
|
Subordinated Notes
|
On
December 12, 2003
, MFC Capital Trust II, a wholly owned subsidiary of the Company, was formed for the purpose of issuing redeemable Capital Securities. On
December 19, 2003
,
$5.0 million
of trust-preferred securities were issued through a pooled underwriting totaling approximately
$344 million
. The securities have a LIBOR-indexed floating rate of interest.
During
2016
, the interest rates ranged from
3.17%
to
3.74%
. For the year ended
December 31, 2016
, the weighted-average interest rate was
3.54%
. The securities have a mandatory redemption date of
January 23, 2034
, and are subject to varying call provisions beginning
January 23, 2009
. The principal asset of the trust is
$5.2 million
of the Company’s junior subordinated debt securities with like maturities and like interest rates to the Capital Securities. See Note 24 for information regarding an interest rate swap entered into by the Company to manage the cash flows associated with these trust preferred securities.
The trust preferred securities may be included in Tier 1 capital for regulatory capital adequacy determination purposes up to
25%
of Tier 1 Capital after its inclusion. The portion of the trust preferred securities not considered as Tier 1 Capital may be included in Tier 2 Capital. On
December 31, 2016
, all of the Company’s trust preferred securities are included in Tier I Capital.
The obligations of the Company with respect to the issuance of the Capital Securities constitute a full and unconditional guarantee by the Company of the trusts’ obligations with respect to the Capital Securities.
Subject to certain exceptions and limitations, the Company may elect from time to time to defer interest payments on the junior subordinated debt securities, which would result in a deferral of distribution payments on the related Capital Securities. There were
no
deferred interest payments on our junior subordinated debt securities at
December 31, 2016
,
2015
and
2014
.
|
|
|
|
Note 20.
|
Ownership of Southern Trust Mortgage
|
In
May 2008
, Middleburg Bank acquired the membership interest units of
one
of the partners of Southern Trust Mortgage for
$1.6 million
. As a result, the Company’s ownership interest exceeded
50%
of the issued and outstanding membership units. Prior to the sale, the Company owned
62.3%
of the issued and outstanding membership interest units of Southern Trust Mortgage, through its subsidiary, Middleburg Bank. On May 15, 2014, the Company sold
100%
of its ownership interest in Southern Trust Mortgage.
|
|
|
|
Note 21.
|
Condensed Financial Information – Parent Corporation Only
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SHEETS
|
|
|
December 31,
|
|
(Dollars in thousands)
|
2016
|
|
2015
|
|
ASSETS
|
|
|
|
|
Cash on deposit with subsidiary bank
|
$
|
2,154
|
|
|
$
|
1,403
|
|
|
Investment in subsidiaries
|
126,694
|
|
|
125,900
|
|
|
Other assets
|
3,199
|
|
|
1,686
|
|
|
TOTAL ASSETS
|
$
|
132,047
|
|
|
$
|
128,989
|
|
|
LIABILITIES
|
|
|
|
|
|
|
Subordinated notes
|
$
|
5,155
|
|
|
$
|
5,155
|
|
|
Other liabilities
|
213
|
|
|
280
|
|
|
TOTAL LIABILITIES
|
5,368
|
|
|
5,435
|
|
|
SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
Common stock
|
17,636
|
|
|
17,330
|
|
|
Capital surplus
|
45,688
|
|
|
44,155
|
|
|
Retained earnings
|
64,755
|
|
|
60,392
|
|
|
Accumulated other comprehensive income (loss), net
|
(1,400
|
)
|
|
1,677
|
|
|
TOTAL SHAREHOLDERS' EQUITY
|
126,679
|
|
|
123,554
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
|
$
|
132,047
|
|
|
$
|
128,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STATEMENTS OF INCOME
|
|
|
Year End December 31,
|
|
(Dollars in thousands)
|
2016
|
|
2015
|
|
2014
|
|
INCOME:
|
|
|
|
|
|
|
Dividends from subsidiaries
|
$
|
6,870
|
|
|
$
|
5,383
|
|
|
$
|
3,440
|
|
|
Interest and dividends from investments
|
—
|
|
|
—
|
|
|
15
|
|
|
Other income
|
2
|
|
|
17
|
|
|
—
|
|
|
Total income
|
6,872
|
|
|
5,400
|
|
|
3,455
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
1,240
|
|
|
919
|
|
|
746
|
|
|
Legal and advisory fees
|
1,506
|
|
|
164
|
|
|
91
|
|
|
Directors fees
|
352
|
|
|
274
|
|
|
280
|
|
|
Interest expense
|
280
|
|
|
279
|
|
|
279
|
|
|
Other
|
426
|
|
|
416
|
|
|
366
|
|
|
Total expenses
|
3,804
|
|
|
2,052
|
|
|
1,762
|
|
|
Income before allocated tax benefits and undistributed income of subsidiaries
|
3,068
|
|
|
3,348
|
|
|
1,693
|
|
|
Income tax benefit
|
(1,081
|
)
|
|
(715
|
)
|
|
(753
|
)
|
|
Income before equity in undistributed income of subsidiaries
|
4,149
|
|
|
4,063
|
|
|
2,446
|
|
|
Equity in undistributed income of subsidiaries
|
3,915
|
|
|
3,767
|
|
|
5,138
|
|
|
Net income
|
$
|
8,064
|
|
|
$
|
7,830
|
|
|
$
|
7,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STATEMENTS OF CASH FLOWS
|
|
|
December 31,
|
|
(Dollars in thousands)
|
2016
|
|
2015
|
|
2014
|
|
Cash Flows from Operating Activities
|
|
|
Net income
|
$
|
8,064
|
|
|
$
|
7,830
|
|
|
$
|
7,584
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Equity in undistributed earnings of subsidiaries
|
(3,915
|
)
|
|
(3,767
|
)
|
|
(5,138
|
)
|
|
Share-based compensation
|
925
|
|
|
605
|
|
|
426
|
|
|
(Increase) decrease in other assets
|
(1,469
|
)
|
|
957
|
|
|
(1,099
|
)
|
|
(Decrease) increase in other liabilities
|
(67
|
)
|
|
13
|
|
|
213
|
|
|
Net cash provided by operating activities
|
3,538
|
|
|
5,638
|
|
|
1,986
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
Proceeds from sales, calls and maturities of available for sale securities
|
—
|
|
|
—
|
|
|
44
|
|
|
Net cash provided by investing activities
|
—
|
|
|
—
|
|
|
44
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock
|
1,742
|
|
|
—
|
|
|
394
|
|
|
Cash dividends paid on common stock
|
(3,701
|
)
|
|
(3,292
|
)
|
|
(2,419
|
)
|
|
Repurchases of stock
|
(828
|
)
|
|
(1,506
|
)
|
|
(88
|
)
|
|
Net cash used in financing activities
|
(2,787
|
)
|
|
(4,798
|
)
|
|
(2,113
|
)
|
|
Increase (decrease) in cash and cash equivalents
|
751
|
|
|
840
|
|
|
(83
|
)
|
|
Cash and Cash Equivalents at beginning of year
|
1,403
|
|
|
563
|
|
|
646
|
|
|
Cash and Cash Equivalents at end of year
|
$
|
2,154
|
|
|
$
|
1,403
|
|
|
$
|
563
|
|
|
|
|
|
Note 22.
|
Segment Reporting
|
The Company operates its principal business activities of retail banking services and wealth management services in a decentralized fashion. Revenue from retail banking activity consists primarily of interest and fees earned on loans, including mortgage banking activity, interest earned on investment securities and service charges on deposit accounts. Revenue from the wealth management activities is comprised of fees based upon the market value of the accounts under administration as well as commissions on investment transactions.
Middleburg Bank and the Company have assets in custody with Middleburg Trust Company and accordingly pay Middleburg Trust Company a monthly fee. Middleburg Bank also pays interest to Middleburg Trust Company on deposit accounts with Middleburg Bank. Middleburg Trust Company pays rental and other miscellaneous occupancy expenses to Middleburg Bank. Transactions related to these relationships are eliminated to reach consolidated totals.
In 2014, revenue from the mortgage banking activities is comprised of interest earned on loans and fees received as a result of the mortgage origination process. The Company recognized gains on the sale of loans as part of other income. On May 15, 2014, the Company sold all of its majority interest in Southern Trust Mortgage and as a result, any mortgage banking activity for the Company subsequent to the sale date is included with the results of the retail banking segment. Mortgage banking activities for the twelve months ended December 31, 2014 are the result of Southern Trust Mortgage activity that was consolidated with the Company through the date of sale. In 2014, Middleburg Bank provided a warehouse line, office space, data processing and accounting services to Southern Trust Mortgage for which it received income. Transactions related to these relationships are eliminated to reach consolidated totals.
Information about reportable segments and reconciliation to the consolidated financial statements follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
(Dollars in thousands)
|
Commercial & Retail Banking
|
|
Wealth Management
|
|
Mortgage Banking
|
|
Intercompany Eliminations
|
|
Consolidated
|
|
Revenues:
|
|
|
Interest income
|
$
|
43,365
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
43,375
|
|
|
Trust services income
|
—
|
|
|
4,806
|
|
|
—
|
|
|
(163
|
)
|
|
4,643
|
|
|
Other income
|
6,204
|
|
|
—
|
|
|
—
|
|
|
(109
|
)
|
|
6,095
|
|
|
Total operating income
|
49,569
|
|
|
4,816
|
|
|
—
|
|
|
(272
|
)
|
|
54,113
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
4,424
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,424
|
|
|
Salaries and employee benefits
|
16,473
|
|
|
2,284
|
|
|
—
|
|
|
—
|
|
|
18,757
|
|
|
Provision for loan losses
|
1,853
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,853
|
|
|
Other expense
|
17,556
|
|
|
918
|
|
|
—
|
|
|
(272
|
)
|
|
18,202
|
|
|
Total operating expenses
|
40,306
|
|
|
3,202
|
|
|
—
|
|
|
(272
|
)
|
|
43,236
|
|
|
Income before income taxes
|
9,263
|
|
|
1,614
|
|
|
—
|
|
|
—
|
|
|
10,877
|
|
|
Income tax expense
|
2,203
|
|
|
610
|
|
|
—
|
|
|
—
|
|
|
2,813
|
|
|
Net income
|
$
|
7,060
|
|
|
$
|
1,004
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,064
|
|
|
Total assets
|
$
|
1,270,222
|
|
|
$
|
6,693
|
|
|
$
|
—
|
|
|
$
|
(4,272
|
)
|
|
$
|
1,272,643
|
|
|
Capital expenditures
|
$
|
978
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
978
|
|
|
Goodwill and other intangibles
|
$
|
—
|
|
|
$
|
3,465
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
(Dollars in thousands)
|
Commercial & Retail Banking
|
|
Wealth Management
|
|
Mortgage Banking
|
|
Intercompany Eliminations
|
|
Consolidated
|
|
Revenues:
|
|
|
Interest income
|
$
|
42,270
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
42,281
|
|
|
Trust services income
|
—
|
|
|
4,951
|
|
|
—
|
|
|
(166
|
)
|
|
4,785
|
|
|
Other income
|
5,605
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,605
|
|
|
Total operating income
|
47,875
|
|
|
4,962
|
|
|
—
|
|
|
(166
|
)
|
|
52,671
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
4,207
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,207
|
|
|
Salaries and employee benefits
|
16,130
|
|
|
2,305
|
|
|
—
|
|
|
—
|
|
|
18,435
|
|
|
Provision for loan losses
|
2,293
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,293
|
|
|
Other expense
|
16,237
|
|
|
1,120
|
|
|
—
|
|
|
(166
|
)
|
|
17,191
|
|
|
Total operating expenses
|
38,867
|
|
|
3,425
|
|
|
—
|
|
|
(166
|
)
|
|
42,126
|
|
|
Income before income taxes
|
9,008
|
|
|
1,537
|
|
|
—
|
|
|
—
|
|
|
10,545
|
|
|
Income tax expense
|
2,131
|
|
|
584
|
|
|
—
|
|
|
—
|
|
|
2,715
|
|
|
Net income
|
$
|
6,877
|
|
|
$
|
953
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,830
|
|
|
Total assets
|
$
|
1,291,708
|
|
|
$
|
6,700
|
|
|
$
|
—
|
|
|
$
|
(3,545
|
)
|
|
$
|
1,294,863
|
|
|
Capital expenditures
|
$
|
2,137
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,137
|
|
|
Goodwill and other intangibles
|
$
|
—
|
|
|
$
|
3,636
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
(Dollars in thousands)
|
Commercial & Retail Banking
|
|
Wealth Management
|
|
Mortgage Banking
|
|
Intercompany Eliminations
|
|
Consolidated
|
|
Revenues:
|
|
|
Interest income
|
$
|
43,149
|
|
|
$
|
14
|
|
|
$
|
450
|
|
|
$
|
(288
|
)
|
|
$
|
43,325
|
|
|
Trust services income
|
—
|
|
|
4,516
|
|
|
—
|
|
|
(154
|
)
|
|
4,362
|
|
|
Other income
|
5,349
|
|
|
—
|
|
|
5,121
|
|
|
(46
|
)
|
|
10,424
|
|
|
Total operating income
|
48,498
|
|
|
4,530
|
|
|
5,571
|
|
|
(488
|
)
|
|
58,111
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
5,227
|
|
|
—
|
|
|
304
|
|
|
(288
|
)
|
|
5,243
|
|
|
Salaries and employee benefits
|
16,567
|
|
|
2,262
|
|
|
3,772
|
|
|
—
|
|
|
22,601
|
|
|
Provision for loan losses
|
1,926
|
|
|
—
|
|
|
34
|
|
|
—
|
|
|
1,960
|
|
|
Other expense
|
15,818
|
|
|
1,140
|
|
|
1,722
|
|
|
(200
|
)
|
|
18,480
|
|
|
Total operating expenses
|
39,538
|
|
|
3,402
|
|
|
5,832
|
|
|
(488
|
)
|
|
48,284
|
|
|
Income before income taxes and non-controlling interest
|
8,960
|
|
|
1,128
|
|
|
(261
|
)
|
|
—
|
|
|
9,827
|
|
|
Income tax expense
|
1,894
|
|
|
447
|
|
|
—
|
|
|
—
|
|
|
2,341
|
|
|
Net income
|
7,066
|
|
|
681
|
|
|
(261
|
)
|
|
—
|
|
|
7,486
|
|
|
Non-controlling interest in consolidated subsidiary
|
—
|
|
|
—
|
|
|
98
|
|
|
—
|
|
|
98
|
|
|
Net income attributable to Middleburg Financial Corporation
|
$
|
7,066
|
|
|
$
|
681
|
|
|
$
|
(163
|
)
|
|
$
|
—
|
|
|
$
|
7,584
|
|
|
Total assets
|
$
|
1,218,452
|
|
|
$
|
7,152
|
|
|
$
|
—
|
|
|
$
|
(2,747
|
)
|
|
$
|
1,222,857
|
|
|
Capital expenditures
|
$
|
911
|
|
|
$
|
6
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
920
|
|
|
Goodwill and other intangibles
|
$
|
—
|
|
|
$
|
3,807
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,807
|
|
|
|
|
|
Note 23.
|
Capital Purchase Program and Stock Warrant
|
On
January 30, 2009
, as part of the Capital Purchase Program established by the U.S. Department of the Treasury (the “Treasury”) under the Emergency Economic Stabilization Act of 2008, the Company entered into a Letter Agreement and Securities Purchase Agreement—Standard Terms (collectively, the “Purchase Agreement”) with the Treasury, pursuant to which the Company sold (i)
22,000
shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value
$2.50
per share, having a liquidation preference of
$1,000
per share (the “Preferred Stock”) and (ii) a warrant (the “Warrant”) to purchase
208,202
shares of the Company’s common stock, par value
$2.50
per share, at an initial exercise price of
$15.85
per share. As a result of the completion of a public stock offering in 2009, the number of shares of common stock underlying the Warrant was reduced by
one-half
to
104,101
and the Company redeemed all
22,000
shares of Preferred Stock pursuant to the Purchase Agreement. During 2011, the Warrant was sold by the U.S. Treasury at public auction and, on November 3, 2016, was exercised in full for a total cash consideration of
$1.65 million
.
The Company utilizes derivative instruments as a part of its asset-liability management program to control fluctuation of market values and cash flows to changes in interest rates associated with certain financial instruments. The Company accounts for derivatives in accordance with ASC 815, "Derivatives and Hedging". Under current guidance, derivative transactions are classified as either cash flow hedges or fair value hedges or they are not designated as hedging instruments. The Company designates each derivative instrument at the inception of the derivative transaction in accordance with this guidance. Information concerning each of the Company's categories of derivatives as of
December 31, 2016
and
2015
is presented below.
Derivatives designated as cash flow hedges
During 2010, the Company entered into an interest rate swap agreement as part of the interest rate risk management process. The swap was designated as a cash flow hedge intended to hedge the variability of cash flows associated with the Company’s trust preferred capital securities described in Note 19, “Subordinated Notes”. The swap hedges the cash flow associated with the trust preferred capital notes wherein the Company receives a floating rate based on LIBOR from a counterparty and pays a fixed rate of
2.59%
to the same counterparty. The swap is calculated on a notional amount of
$5.2 million
. The term of the swap is
10
years and commenced on
October 23, 2010
. The Company has cash collateral reserved for this swap in the amount of
$400,000
as of
December 31, 2016
and
2015
, respectively. The swap was entered into with a counterparty that met the Company’s credit standards and the agreement contains collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in the contract is not significant.
During 2013, the Company entered into an interest rate swap agreement as part of the interest rate risk management process. The swap has been designated as a cash flow hedge intended to hedge the variability of cash flows associated with the Company’s FHLB borrowings described in Note 7, “Borrowings”. The swap hedges the cash flows associated with the FHLB borrowings wherein the Company receives a floating rate based on LIBOR from a counterparty and pays a fixed rate of
1.43%
to the same counterparty. The swap is calculated on a notional amount of
$10 million
. The term of the swap is
5
years and commenced on
November 25, 2013
. The Company has cash collateral reserved for this swap in the amount of
$600,000
and
$300,000
as of
December 31, 2016
and
2015
, respectively. The swap was entered into with a counterparty that met the Company’s credit standards and the agreement contains collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in the contract is not significant.
Amounts receivable or payable are recognized as accrued under the terms of the agreement, with the effective portion of the derivative’s unrealized gain or loss recorded as a component of other comprehensive income (loss). The ineffective portion of the unrealized gain or loss, if any, would be recorded in other expense. The Company has assessed the effectiveness of the hedging relationship by comparing the changes in cash flows on the designated hedged item. As a result of this assessment, there was
no
hedge ineffectiveness identified during
2016
and 2015. At December 31, 2014,
$6,000
of hedge ineffectiveness identified for this interest rate swap and was classified as other operating expenses on the consolidated statements of income.
The amounts included in accumulated other comprehensive income (loss) as unrealized losses (market value net of tax) were
$130,000
and
$195,000
as of
December 31, 2016
and
2015
, respectively.
Information concerning the derivatives designated as a cash flow hedges at
December 31, 2016
and
2015
is presented in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
(Dollars in thousands)
|
Positions (#)
|
|
Notional Amount
|
|
Asset
|
|
Liability
|
|
Receive Rate
|
|
Pay Rate
|
|
Life (Years)
|
|
Pay fixed - receive floating interest rate swap
|
1
|
|
$
|
5,155
|
|
|
$
|
—
|
|
|
$
|
160
|
|
|
0.87
|
%
|
|
2.59
|
%
|
|
3.8
|
|
Pay fixed - receive floating interest rate swap
|
1
|
|
$
|
10,000
|
|
|
$
|
—
|
|
|
$
|
38
|
|
|
0.60
|
%
|
|
1.43
|
%
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
(Dollars in thousands)
|
Positions (#)
|
|
Notional Amount
|
|
Asset
|
|
Liability
|
|
Receive Rate
|
|
Pay Rate
|
|
Life (Years)
|
|
Pay fixed - receive floating interest rate swap
|
1
|
|
$
|
5,155
|
|
|
$
|
—
|
|
|
$
|
226
|
|
|
0.32
|
%
|
|
2.59
|
%
|
|
4.8
|
|
Pay fixed - receive floating interest rate swap
|
1
|
|
$
|
10,000
|
|
|
$
|
—
|
|
|
$
|
71
|
|
|
0.23
|
%
|
|
1.43
|
%
|
|
3.0
|
Derivatives not designated as hedging instruments
Two-way client loan swaps
During the fourth quarter of 2014 and 2012, the Company entered into certain interest rate swap contracts that are not designated as hedging instruments. These derivative contracts relate to transactions in which we enter into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each swap transaction, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on an identical notional amount at a fixed interest rate. At the same time, the Company agrees to pay the counterparty the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows our clients to effectively convert a variable rate loan into a fixed rate loan. Because the Company acts as an intermediary for our customers, changes in the fair value of the underlying derivatives contracts offset each other and do not significantly impact our results of operations. The Company had
no
undesignated interest rate swaps at
December 31, 2016
and
December 31, 2015
.
Certain additional risks arise from interest rate swap contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. We do not expect any counterparty to fail to meet its obligations.
Information concerning two-way client interest rate swaps not designated as either fair value or cash flow hedges is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
(Dollars in thousands)
|
Positions (#)
|
|
Notional Amount
|
|
Asset
|
|
Liability
|
|
Receive Rate
|
|
Pay Rate
|
|
Life (Years)
|
|
Pay fixed - receive floating interest rate swap
|
1
|
|
|
$
|
3,508
|
|
|
$
|
15
|
|
|
$
|
—
|
|
|
1 month LIBOR plus 200 BP
|
|
|
3.90
|
%
|
|
10.9
|
|
Pay fixed - receive floating interest rate swap
|
1
|
|
|
1,663
|
|
|
—
|
|
|
29
|
|
|
1 month LIBOR plus 180 BP
|
|
|
4.09
|
%
|
|
7.9
|
|
Pay floating - receive fixed interest rate swap
|
1
|
|
|
3,508
|
|
|
—
|
|
|
15
|
|
|
3.90
|
%
|
|
1 month LIBOR plus 200 BP
|
|
|
10.9
|
|
Pay floating - receive fixed interest rate swap
|
1
|
|
|
1,663
|
|
|
29
|
|
|
—
|
|
|
4.09
|
%
|
|
1 month LIBOR plus 180 BP
|
|
|
7.9
|
|
Total derivatives not designated
|
|
|
$
|
10,342
|
|
|
$
|
44
|
|
|
$
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
(Dollars in thousands)
|
Positions (#)
|
|
Notional Amount
(in thousands)
|
|
Asset
|
|
Liability
|
|
Receive Rate
|
|
Pay Rate
|
|
Life (Years)
|
|
Pay fixed - receive floating interest rate swap
|
1
|
|
|
$
|
3,760
|
|
|
$
|
—
|
|
|
$
|
21
|
|
|
1 month LIBOR plus 200 BP
|
|
|
3.90
|
%
|
|
11.9
|
|
Pay fixed - receive floating interest rate swap
|
1
|
|
|
1,706
|
|
|
—
|
|
|
52
|
|
|
1 month LIBOR plus 180 BP
|
|
|
4.09
|
%
|
|
8.9
|
|
Pay floating - receive fixed interest rate swap
|
1
|
|
|
3,760
|
|
|
21
|
|
|
—
|
|
|
3.90
|
%
|
|
1 month LIBOR plus 200 BP
|
|
|
11.9
|
|
Pay floating - receive fixed interest rate swap
|
1
|
|
|
1,706
|
|
|
52
|
|
|
—
|
|
|
4.09
|
%
|
|
1 month LIBOR plus 180 BP
|
|
|
8.9
|
|
Total derivatives not designated
|
|
|
$
|
10,932
|
|
|
$
|
73
|
|
|
$
|
73
|
|
|
|
|
|
|
|
Rate Cap Transaction
At
December 31, 2016
, the Company had one derivative instrument in the form of an interest rate cap agreement with a notional amount of
$10.0 million
. The notional amount of the financial derivative instrument does not represent exposure to credit loss. The Company is exposed to credit loss only to the extent the counterparty defaults in its responsibility to pay interest under the terms of the agreement. The credit risk in derivative instruments is mitigated by entering into transactions with highly-rated counterparties that management believes to be creditworthy and by limiting the amount of exposure to each counterparty. We do not expect any counterparty to fail to meet its obligations.
The details of the interest rate cap agreement as of
December 31, 2016
is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
(Dollars in thousands)
|
|
Notional Amount
|
|
Termination Date
|
|
3-Month LIBOR Strike Rate
|
|
Premium Paid
|
|
Unamortized Premium at December 31, 2016
|
|
Fair Value
December 31, 2016
|
|
Cumulative Cash Flows Received
|
|
$
|
10,000
|
|
|
September 8, 2018
|
|
2.00
|
%
|
|
$
|
70
|
|
|
$
|
70
|
|
|
$
|
9
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
(Dollars in thousands)
|
|
Notional Amount
|
|
Termination Date
|
|
3-Month LIBOR Strike Rate
|
|
Premium Paid
|
|
Unamortized Premium at December 31, 2015
|
|
Fair Value
December 31, 2015
|
|
Cumulative Cash Flows Received
|
|
$
|
10,000
|
|
|
September 8, 2018
|
|
2.00
|
%
|
|
$
|
70
|
|
|
$
|
70
|
|
|
$
|
39
|
|
|
—
|
|
In the third quarter of 2015, the interest rate cap agreement was purchased to limit the Company's exposure to rising interest rates. Under the terms of the agreement, the Company paid a premium of
$70,000
for the right to receive cash flow payments if 3-month LIBOR rises above the cap of
2.00%
, thus effectively ensuring interest expense is capped at a maximum rate of
2.00%
for the duration of the agreement. The interest rate cap agreement is a derivative not designated as a hedging instrument.
At
December 31, 2016
and
December 31, 2015
, the total fair value of the interest rate cap agreement was
$9,000
and
$39,000
, respectively. The fair value of the interest rate cap agreement is included in other assets on the Company's consolidated balance sheets. Changes in fair value are recorded in earnings in other operating expenses. During the years ended
December 31, 2016
and
December 31, 2015
,
$30,000
and
$31,000
was recognized in other operating expenses, respectively.
The premium paid on the interest rate cap agreement will be recognized as a decrease in interest income over the duration of the agreement using the caplet method. From the date of inception and through December 31, 2016, no premium amortization was required.
|
|
|
|
Note 25.
|
Accumulated Other Comprehensive Income (Loss), Net
|
The following table presents information on changes in accumulated other comprehensive income for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Unrealized Gains (Losses) on Securities
|
|
Cash Flow Hedges
|
|
Accumulated Other Comprehensive Income (Loss), Net
|
|
Balance December 31, 2013
|
$
|
261
|
|
|
$
|
(29
|
)
|
|
$
|
232
|
|
|
Unrealized holding gains (net of tax, $1,979)
|
3,841
|
|
|
—
|
|
|
3,841
|
|
|
Reclassification adjustment (net of tax, $63)
|
(123
|
)
|
|
—
|
|
|
(123
|
)
|
|
Unrealized gains on interest rate swaps (net of tax, $82)
|
—
|
|
|
(160
|
)
|
|
(160
|
)
|
|
Reclassification adjustment (net of tax, $2)
|
—
|
|
|
4
|
|
|
4
|
|
|
Balance December 31, 2014
|
3,979
|
|
|
(185
|
)
|
|
3,794
|
|
|
Unrealized holding losses (net of tax, $1,037)
|
(2,015
|
)
|
|
—
|
|
|
(2,015
|
)
|
|
Reclassification adjustment (net of tax, $48)
|
(92
|
)
|
|
—
|
|
|
(92
|
)
|
|
Unrealized gains on interest rate swaps (net of tax, $3)
|
—
|
|
|
(6
|
)
|
|
(6
|
)
|
|
Reclassification adjustment (net of tax, $2)
|
—
|
|
|
(4
|
)
|
|
(4
|
)
|
|
Balance December 31, 2015
|
1,872
|
|
|
(195
|
)
|
|
1,677
|
|
|
Unrealized holding losses (net of tax, $1,091)
|
(2,116
|
)
|
|
—
|
|
|
(2,116
|
)
|
|
Reclassification adjustment (net of tax, $528)
|
(1,026
|
)
|
|
—
|
|
|
(1,026
|
)
|
|
Unrealized losses on interest rate swaps (net of tax, ($34))
|
—
|
|
|
65
|
|
|
65
|
|
|
Balance December 31, 2016
|
$
|
(1,270
|
)
|
|
$
|
(130
|
)
|
|
$
|
(1,400
|
)
|
The following table presents information related to reclassifications from accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details about
Accumulated Other
Comprehensive Income (Loss)
|
Amount Reclassified from
Accumulated Other
Comprehensive Income (Loss)
|
Affected Line Item in the Consolidated Statements of Income
|
|
|
|
|
(Dollars in thousands)
|
2016
|
|
2015
|
|
2014
|
|
|
|
Securities available for sale
(1)
:
|
|
|
|
|
|
|
|
|
Net securities gains reclassified into earnings
|
$
|
(1,554
|
)
|
|
$
|
(140
|
)
|
|
$
|
(186
|
)
|
Gains on sales of securities available for sale, net
|
|
|
Related income tax expense
|
528
|
|
|
48
|
|
|
63
|
|
Income tax expense
|
|
|
Derivatives
(2)
:
|
|
|
|
|
|
|
|
|
(Gain) loss on interest rate swap ineffectiveness
|
—
|
|
|
(6
|
)
|
|
6
|
|
Other operating expense
|
|
|
Related income tax benefit
|
—
|
|
|
2
|
|
|
(2
|
)
|
Income tax expense
|
|
|
Net effect on accumulated other comprehensive income (loss) for the period
|
(1,026
|
)
|
|
(96
|
)
|
|
(119
|
)
|
Net of tax
|
|
|
Total reclassifications for the period
|
$
|
(1,026
|
)
|
|
$
|
(96
|
)
|
|
$
|
(119
|
)
|
Net of tax
|
(1)
For more information related to unrealized gains on securities available for sale, see Note 2, "Securities".
(2)
For more information related to unrealized losses on derivatives, see Note 24, "Derivatives".
|
|
|
|
Note 26.
|
Other Real Estate Owned ("OREO")
|
At
December 31, 2016
and
2015
, OREO balances were
$5.1 million
and
$3.3 million
, respectively. OREO is primarily comprised of residential properties and non-residential properties, and are located primarily in the state of Virginia. Changes in the balance for OREO, net of valuation allowances, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
December 31, 2016
|
|
December 31, 2015
|
|
Balance at the beginning of year, net
|
$
|
3,345
|
|
|
$
|
4,051
|
|
|
Transfers from loans, net
|
2,645
|
|
|
287
|
|
|
Purchased loans
|
40
|
|
|
—
|
|
|
Sales proceeds
|
(713
|
)
|
|
(814
|
)
|
|
Gain (loss) on disposition
|
66
|
|
|
(100
|
)
|
|
Less valuation adjustments
|
(310
|
)
|
|
(79
|
)
|
|
Balance at the end of year, net
|
$
|
5,073
|
|
|
$
|
3,345
|
|
Net expenses applicable to OREO, were
$363,000
,
$284,000
and
$256,000
as of
December 31, 2016
,
2015
and
2014
, respectively.
The major classifications of OREO in the consolidated balance sheets at
December 31, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
December 31, 2016
|
|
December 31, 2015
|
|
Real estate loans:
|
|
|
|
|
Construction
|
$
|
946
|
|
|
$
|
853
|
|
|
Secured by 1-4 family residential
|
3,767
|
|
|
1,958
|
|
|
Other real estate loans
|
360
|
|
|
534
|
|
|
Total real estate loans
|
$
|
5,073
|
|
|
$
|
3,345
|
|
At
December 31, 2016
, the Company had
no
consumer mortgage loan secured by residential real estate for which foreclosure was in process. At
December 31, 2015
, the Company had
one
consumer mortgage loan secured by residential real estate for which foreclosure was in process. The amount of this loan was
$533,000
at
December 31, 2015
.
|
|
|
|
Note 27.
|
Low Income Housing Tax Credits
|
The Company invested in
four
separate housing equity funds at
December 31, 2016
and
2015
, respectively. The general purpose of these funds is to encourage and assist participants in investing in low-income residential rental properties located in the Commonwealth of Virginia, develop and implement strategies to maintain projects as low-income housing, deliver Federal Low
Income Housing Credits to investors, allocate tax losses and other possible tax benefits to investors, and to preserve and protect project assets. The investments in these funds are accounted for using the equity method and are recorded as other assets on the consolidated balance sheets. These investments totaled
$8.4 million
and
$9.0 million
at
December 31, 2016
and
2015
, respectively. The expected terms of these investments and the related tax benefits run through 2033. The net benefit recognized as a component of income tax expense related to tax credits and other tax benefits during the years ended
December 31, 2016
,
2015
and 2014 were
$408,000
,
$120,000
and
$211,000
, respectively, related to these investments. Total projected tax credits to be received for 2016 are
$441,000
, which is based on the most recent quarterly estimates received from the funds. Additional capital calls expected for the funds totaled
$8.2 million
and
$9.3 million
at
December 31, 2016
and
2015
, respectively, and are included in other liabilities on the consolidated balance sheets.