Item 1. Financial Statements
ACCESS NATIONAL
CORPORATION
Consolidated Balance
Sheets
(In Thousands, Except
for Share and Per Share Data)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
14,109
|
|
|
$
|
11,291
|
|
Interest-bearing balances and
federal funds sold
|
|
|
67,801
|
|
|
|
24,598
|
|
Total cash and cash equivalents
|
|
|
81,910
|
|
|
|
35,889
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
Available-for-sale, at fair value
|
|
|
190,265
|
|
|
|
160,162
|
|
Held-to-maturity, at amortized
cost (fair value of $9,475 and $14,314)
|
|
|
9,214
|
|
|
|
14,287
|
|
Total investment securities
|
|
|
199,479
|
|
|
|
174,449
|
|
|
|
|
|
|
|
|
|
|
Restricted stock, at amortized cost
|
|
|
6,309
|
|
|
|
7,259
|
|
Loans held for sale, at fair value
|
|
|
70,998
|
|
|
|
44,135
|
|
Loans
|
|
|
966,545
|
|
|
|
887,478
|
|
Allowance for loan losses
|
|
|
(14,696
|
)
|
|
|
(13,563
|
)
|
Net loans
|
|
|
951,849
|
|
|
|
873,915
|
|
Premises, equipment and land, net
|
|
|
6,875
|
|
|
|
6,689
|
|
Accrued interest receivable
|
|
|
3,481
|
|
|
|
3,290
|
|
Other assets
|
|
|
41,937
|
|
|
|
32,922
|
|
Total assets
|
|
$
|
1,362,838
|
|
|
$
|
1,178,548
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
$
|
409,558
|
|
|
$
|
307,797
|
|
Savings and interest-bearing deposits
|
|
|
436,865
|
|
|
|
293,711
|
|
Time deposits
|
|
|
268,630
|
|
|
|
312,236
|
|
Total deposits
|
|
|
1,115,053
|
|
|
|
913,744
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
41,336
|
|
|
|
91,129
|
|
Long-term borrowings
|
|
|
75,000
|
|
|
|
55,000
|
|
Other liabilities and accrued
expenses
|
|
|
10,118
|
|
|
|
9,537
|
|
Total liabilities
|
|
$
|
1,241,507
|
|
|
$
|
1,069,410
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Common stock $0.835 par value; 60,000,000 authorized;
issued and outstanding, 10,610,279 and 10,544,751 shares, respectively
|
|
$
|
8,860
|
|
|
$
|
8,805
|
|
Additional paid in capital
|
|
|
21,159
|
|
|
|
19,953
|
|
Retained earnings
|
|
|
90,026
|
|
|
|
81,385
|
|
Accumulated other comprehensive
income (loss), net
|
|
|
1,286
|
|
|
|
(1,005
|
)
|
Total shareholders’ equity
|
|
|
121,331
|
|
|
|
109,138
|
|
Total liabilities and shareholders’
equity
|
|
$
|
1,362,838
|
|
|
$
|
1,178,548
|
|
See accompanying notes to consolidated financial statements
(unaudited).
ACCESS NATIONAL
CORPORATION
Consolidated Statements
of Income
(In Thousands, Except
for Share and Per Share Data)
(Unaudited)
|
|
Three Months Ended September
30,
|
|
|
Nine Months Ended September
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Interest and Dividend Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
11,647
|
|
|
$
|
10,254
|
|
|
$
|
33,877
|
|
|
$
|
29,659
|
|
Interest on federal funds sold and bank balances
|
|
|
98
|
|
|
|
34
|
|
|
|
264
|
|
|
|
95
|
|
Interest and dividends on securities
|
|
|
1,033
|
|
|
|
868
|
|
|
|
2,954
|
|
|
|
2,465
|
|
Total interest and dividend income
|
|
|
12,778
|
|
|
|
11,156
|
|
|
|
37,095
|
|
|
|
32,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits
|
|
|
1,349
|
|
|
|
990
|
|
|
|
3,774
|
|
|
|
2,590
|
|
Interest on short-term borrowings
|
|
|
73
|
|
|
|
37
|
|
|
|
291
|
|
|
|
219
|
|
Interest on long-term borrowings
|
|
|
213
|
|
|
|
32
|
|
|
|
576
|
|
|
|
64
|
|
Total interest expense
|
|
|
1,635
|
|
|
|
1,059
|
|
|
|
4,641
|
|
|
|
2,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
11,143
|
|
|
|
10,097
|
|
|
|
32,454
|
|
|
|
29,346
|
|
Provision for loan losses
|
|
|
750
|
|
|
|
-
|
|
|
|
870
|
|
|
|
150
|
|
Net interest income after provision
for loan losses
|
|
|
10,393
|
|
|
|
10,097
|
|
|
|
31,584
|
|
|
|
29,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and fees
|
|
|
249
|
|
|
|
236
|
|
|
|
748
|
|
|
|
651
|
|
Gain on sale of loans
|
|
|
8,316
|
|
|
|
5,834
|
|
|
|
19,419
|
|
|
|
15,110
|
|
Other income
|
|
|
120
|
|
|
|
342
|
|
|
|
4,510
|
|
|
|
4,037
|
|
Total noninterest income
|
|
|
8,685
|
|
|
|
6,412
|
|
|
|
24,677
|
|
|
|
19,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
8,208
|
|
|
|
6,703
|
|
|
|
24,283
|
|
|
|
20,419
|
|
Occupancy and equipment
|
|
|
768
|
|
|
|
751
|
|
|
|
2,278
|
|
|
|
2,247
|
|
Other operating expenses
|
|
|
3,193
|
|
|
|
3,025
|
|
|
|
9,040
|
|
|
|
8,713
|
|
Total noninterest expense
|
|
|
12,169
|
|
|
|
10,479
|
|
|
|
35,601
|
|
|
|
31,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
6,909
|
|
|
|
6,030
|
|
|
|
20,660
|
|
|
|
17,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
2,484
|
|
|
|
2,086
|
|
|
|
7,262
|
|
|
|
6,114
|
|
NET INCOME
|
|
$
|
4,425
|
|
|
$
|
3,944
|
|
|
$
|
13,398
|
|
|
$
|
11,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.42
|
|
|
$
|
0.37
|
|
|
$
|
1.27
|
|
|
$
|
1.09
|
|
Diluted
|
|
$
|
0.41
|
|
|
$
|
0.37
|
|
|
$
|
1.26
|
|
|
$
|
1.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average outstanding shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,595,599
|
|
|
|
10,519,954
|
|
|
|
10,575,088
|
|
|
|
10,504,086
|
|
Diluted
|
|
|
10,689,167
|
|
|
|
10,593,415
|
|
|
|
10,644,897
|
|
|
|
10,567,173
|
|
See accompanying notes to consolidated financial statements
(unaudited).
ACCESS NATIONAL
CORPORATION
Consolidated Statements
of Comprehensive Income
(In Thousands)
(Unaudited)
|
|
Three Months Ended September
30,
|
|
|
Nine Months Ended September
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net
income
|
|
$
|
4,425
|
|
|
$
|
3,944
|
|
|
$
|
13,398
|
|
|
$
|
11,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising during period
|
|
|
(692
|
)
|
|
|
1,177
|
|
|
|
3,634
|
|
|
|
1,337
|
|
Reclassification adjustment for gains included in
net income
|
|
|
-
|
|
|
|
(180
|
)
|
|
|
(109
|
)
|
|
|
(180
|
)
|
Tax effect
|
|
|
242
|
|
|
|
(348
|
)
|
|
|
(1,234
|
)
|
|
|
(405
|
)
|
Net of tax amount
|
|
|
(450
|
)
|
|
|
649
|
|
|
|
2,291
|
|
|
|
752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
3,975
|
|
|
$
|
4,593
|
|
|
$
|
15,689
|
|
|
$
|
12,253
|
|
See accompanying notes to consolidated financial statements
(unaudited).
ACCESS NATIONAL
CORPORATION
Consolidated Statements
of Changes in Shareholders’ Equity
(In Thousands, Except
for Share and Per Share Data)
(Unaudited)
|
|
Common Stock
|
|
|
Additional Paid in
Capital
|
|
|
Retained Earnings
|
|
|
Accumulated Other
Comprehensive Income (Loss)
|
|
|
Total
|
|
Balance, December 31, 2015
|
|
$
|
8,805
|
|
|
$
|
19,953
|
|
|
$
|
81,385
|
|
|
$
|
(1,005
|
)
|
|
$
|
109,138
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
13,398
|
|
|
|
-
|
|
|
|
13,398
|
|
Other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,291
|
|
|
|
2,291
|
|
Stock options exercised (41,351 shares)
|
|
|
35
|
|
|
|
468
|
|
|
|
-
|
|
|
|
-
|
|
|
|
503
|
|
Issuance of restricted common stock (6,205 shares)
|
|
|
5
|
|
|
|
123
|
|
|
|
-
|
|
|
|
-
|
|
|
|
128
|
|
DRSPP shares issued from reserve (17,972)
|
|
|
15
|
|
|
|
364
|
|
|
|
-
|
|
|
|
-
|
|
|
|
379
|
|
Cash dividend ($0.45 per share)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,757
|
)
|
|
|
-
|
|
|
|
(4,757
|
)
|
Stock-based compensation expense
recognized in earnings
|
|
|
-
|
|
|
|
251
|
|
|
|
-
|
|
|
|
-
|
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2016
|
|
$
|
8,860
|
|
|
$
|
21,159
|
|
|
$
|
90,026
|
|
|
$
|
1,286
|
|
|
$
|
121,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2014
|
|
$
|
8,742
|
|
|
$
|
18,538
|
|
|
$
|
72,168
|
|
|
$
|
(544
|
)
|
|
$
|
98,904
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
11,501
|
|
|
|
-
|
|
|
|
11,501
|
|
Other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
752
|
|
|
|
752
|
|
Stock options exercised (6,541 shares)
|
|
|
6
|
|
|
|
65
|
|
|
|
-
|
|
|
|
-
|
|
|
|
71
|
|
Issuance of restricted common stock (7,500 shares)
|
|
|
6
|
|
|
|
122
|
|
|
|
-
|
|
|
|
-
|
|
|
|
128
|
|
DRSPP shares issued from reserve (37,707)
|
|
|
31
|
|
|
|
607
|
|
|
|
-
|
|
|
|
-
|
|
|
|
638
|
|
Cash dividend ($0.44 per share)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,621
|
)
|
|
|
-
|
|
|
|
(4,621
|
)
|
Stock-based compensation expense
recognized in earnings
|
|
|
-
|
|
|
|
256
|
|
|
|
-
|
|
|
|
-
|
|
|
|
256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2015
|
|
$
|
8,785
|
|
|
$
|
19,588
|
|
|
$
|
79,048
|
|
|
$
|
208
|
|
|
$
|
107,629
|
|
See accompanying notes to consolidated financial statements
(unaudited).
ACCESS NATIONAL
CORPORATION
Consolidated Statements
of Cash Flows
(In Thousands)
(Unaudited)
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,398
|
|
|
$
|
11,501
|
|
Adjustments to reconcile net income to net cash used
in operating activities:
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
870
|
|
|
|
150
|
|
Provision for off balance sheet losses
|
|
|
-
|
|
|
|
109
|
|
Loss on the sale of other real estate owned
|
|
|
35
|
|
|
|
-
|
|
Income from bank-owned life insurance
|
|
|
(338
|
)
|
|
|
(345
|
)
|
Gain on sale of securities
|
|
|
(109
|
)
|
|
|
(89
|
)
|
Deferred tax benefit
|
|
|
(692
|
)
|
|
|
(2
|
)
|
Stock-based compensation
|
|
|
251
|
|
|
|
256
|
|
Increase in valuation allowance on derivatives
|
|
|
(88
|
)
|
|
|
(344
|
)
|
Net amortization on securities
|
|
|
1,459
|
|
|
|
758
|
|
Depreciation and amortization
|
|
|
384
|
|
|
|
380
|
|
Purchases of loans held for sale
|
|
|
(429,285
|
)
|
|
|
(379,619
|
)
|
Sales of loans held for sale
|
|
|
403,688
|
|
|
|
388,320
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in valuation of loans held for
sale carried at fair value
|
|
|
(1,266
|
)
|
|
|
421
|
|
Increase in other assets
|
|
|
(1,966
|
)
|
|
|
(1,268
|
)
|
(Increase) decrease in other liabilities
|
|
|
201
|
|
|
|
(3,640
|
)
|
Net cash (used in) provided
by operating activities
|
|
|
(13,458
|
)
|
|
|
16,588
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Proceeds from maturities, calls, and prepayments of
securities available-for-sale
|
|
|
12,444
|
|
|
|
11,586
|
|
Proceeds from sale of securities
|
|
|
13,200
|
|
|
|
31,057
|
|
Purchases of securities available-for-sale
|
|
|
(53,500
|
)
|
|
|
(58,809
|
)
|
Proceeds from maturities and calls of securities held
to maturity
|
|
|
5,000
|
|
|
|
-
|
|
Purchases of Federal Reserve and Federal Home Loan
Bank stock
|
|
|
(4,703
|
)
|
|
|
(7,043
|
)
|
Proceeds from redemption of Federal Reserve and Federal
Home Loan Bank stock
|
|
|
5,653
|
|
|
|
11,933
|
|
Purchase of bank owned life insurance
|
|
|
(7,500
|
)
|
|
|
-
|
|
Net increase in loans
|
|
|
(78,805
|
)
|
|
|
(72,510
|
)
|
Proceeds from the settlement of other real estate
owned
|
|
|
463
|
|
|
|
-
|
|
Purchases of premises and equipment
|
|
|
(541
|
)
|
|
|
(237
|
)
|
Net cash used in investing activities
|
|
|
(108,289
|
)
|
|
|
(84,023
|
)
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Net increase in demand, interest-bearing demand and
savings deposits
|
|
|
244,915
|
|
|
|
125,627
|
|
Net (decrease) increase in time deposits
|
|
|
(43,606
|
)
|
|
|
50,365
|
|
Decrease in securities sold under agreement to repurchase
|
|
|
(4,794
|
)
|
|
|
(5,936
|
)
|
Decrease in other short-term borrowings
|
|
|
(45,000
|
)
|
|
|
(120,000
|
)
|
Increase in long-term borrowings
|
|
|
20,000
|
|
|
|
10,000
|
|
Proceeds from issuance of common stock
|
|
|
1,010
|
|
|
|
837
|
|
Dividends paid
|
|
|
(4,757
|
)
|
|
|
(4,621
|
)
|
Net cash provided by financing
activities
|
|
|
167,768
|
|
|
|
56,272
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
46,021
|
|
|
|
(11,163
|
)
|
Cash and Cash Equivalents
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
35,889
|
|
|
|
56,029
|
|
Ending
|
|
$
|
81,910
|
|
|
$
|
44,866
|
|
Supplemental Disclosures of Cash
Flow Information
|
|
|
|
|
|
|
|
|
Cash payments for interest
|
|
$
|
2,981
|
|
|
$
|
2,841
|
|
Cash payments for income taxes
|
|
$
|
4,828
|
|
|
$
|
6,517
|
|
Supplemental Disclosures of Noncash
Investing Activities
|
|
|
|
|
|
|
|
|
Unrealized gain on securities available-for-sale
|
|
$
|
4,217
|
|
|
$
|
1,157
|
|
Transfers of loans held for investment to other real
estate owned
|
|
$
|
129
|
|
|
$
|
-
|
|
Transfers of other real estate owned to other assets
due to FHA receivable
|
|
$
|
(129
|
)
|
|
$
|
-
|
|
See accompanying notes to consolidated financial statements
(unaudited).
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1 – BASIS OF PRESENTATION
Access National Corporation (the “Corporation”)
is a bank holding company incorporated under the laws of the Commonwealth of Virginia. The Corporation owns all of the stock of
its subsidiary, Access National Bank (the “Bank”), which is an independent commercial bank chartered under federal
laws as a national banking association. The Bank has three active wholly owned subsidiaries: Access Real Estate LLC (“Access
Real Estate”), a real estate company; ACME Real Estate LLC, a real estate holding company of foreclosed property; and Access
Capital Management Holding LLC (“ACM”), a holding company for Capital Fiduciary Advisors, L.L.C., Access Investment
Services, L.L.C., and Access Insurance Group, L.L.C.
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
for interim financial information and with rules and regulations of the Securities and Exchange Commission (“SEC”).
The statements do not include all of the information and footnotes required by GAAP for complete financial statements. All adjustments
have been made which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods
presented. Such adjustments are all of a normal and recurring nature. All significant inter-company accounts and transactions
have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation.
The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results
that may be expected for the entire year ending December 31, 2016. These consolidated financial statements should be read in conjunction
with the Corporation’s audited financial statements and the notes thereto as of December 31, 2015, included in the Corporation’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
The Corporation has evaluated subsequent events for potential
recognition and/or disclosure in this Quarterly Report on Form 10-Q through the date these consolidated financial statements were
issued.
NOTE 2 – STOCK-BASED COMPENSATION PLANS
During the first nine months of 2016,
the Corporation granted 122,050 stock options to officers, directors, and employees under the 2009 Stock Option Plan (the “Plan”).
Options granted under the Plan have an exercise price equal to the fair market value as of the grant date. Options granted vest
over various periods ranging from two and one-half years to four years and expire one year after the full vesting date. Stock–based
compensation expense recognized in other operating expense during the first nine months of 2016 and 2015 was $251 thousand and
$256 thousand, respectively. The fair value of options is estimated on the date of grant using a Black Scholes option-pricing
model with the assumptions noted below.
The total unrecognized compensation
cost related to non-vested share based compensation arrangements granted under the Plan as of September 30, 2016 was $605,953.
The cost is expected to be recognized over a weighted average period of 1.25 years.
NOTE 2 – STOCK-BASED COMPENSATION PLANS (continued)
A summary of stock option activity
under the Plan for the nine months ended September 30, 2016 and 2015 is presented as follows:
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life of options granted, in years
|
|
|
4.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
1.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility of stock
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual expected dividend yield
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Granted Options
|
|
$
|
433,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Vested Options
|
|
|
303,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Avg.
|
|
|
|
|
|
|
Number of
|
|
|
Weighted Avg.
|
|
|
Remaining Contractual
|
|
|
Aggregate Intrinsic
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Term, in years
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year
|
|
|
407,832
|
|
|
$
|
15.33
|
|
|
|
2.81
|
|
|
$
|
2,091,196
|
|
Granted
|
|
|
122,050
|
|
|
|
18.39
|
|
|
|
4.33
|
|
|
|
-
|
|
Exercised
|
|
|
(41,351
|
)
|
|
|
12.18
|
|
|
|
1.02
|
|
|
|
301,198
|
|
Lapsed or Canceled
|
|
|
(8,700
|
)
|
|
$
|
16.16
|
|
|
|
2.59
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
|
479,831
|
|
|
$
|
16.37
|
|
|
|
2.72
|
|
|
$
|
3,614,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2016
|
|
|
176,292
|
|
|
$
|
14.43
|
|
|
|
1.67
|
|
|
$
|
1,669,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life of options granted, in years
|
|
|
4.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
1.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility of stock
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual expected dividend yield
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of granted options
|
|
$
|
344,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested options
|
|
|
298,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Avg.
|
|
|
|
|
|
|
Number of
|
|
|
Weighted Avg.
|
|
|
Remaining Contractual
|
|
|
Aggregate Intrinsic
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Term, in years
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year
|
|
|
316,423
|
|
|
$
|
14.02
|
|
|
|
3.20
|
|
|
$
|
917,215
|
|
Granted
|
|
|
121,934
|
|
|
|
17.96
|
|
|
|
4.31
|
|
|
|
-
|
|
Exercised
|
|
|
(6,541
|
)
|
|
|
10.62
|
|
|
|
1.59
|
|
|
|
53,679
|
|
Lapsed or canceled
|
|
|
(4,050
|
)
|
|
$
|
16.40
|
|
|
|
2.76
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2015
|
|
|
427,766
|
|
|
$
|
15.17
|
|
|
|
2.99
|
|
|
$
|
2,223,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2015
|
|
|
129,323
|
|
|
$
|
13.03
|
|
|
|
2.14
|
|
|
$
|
949,542
|
|
NOTE 3 – SECURITIES
The following table provides the amortized cost and fair value
for the categories of available-for-sale securities and held-to-maturity securities at September 30, 2016 and December 31, 2015.
Held-to-maturity securities are carried at amortized cost, which reflects historical cost, adjusted for amortization of premiums
and accretion of discounts. Available-for-sale securities are carried at estimated fair value with net unrealized gains or losses
reported on an after tax basis as a component of accumulated other comprehensive income in shareholders’ equity. The estimated
fair value of available-for-sale securities is impacted by interest rates, credit spreads, market volatility, and liquidity.
NOTE 3 – SECURITIES (continued)
|
|
September 30, 2016
|
|
|
|
Amortized Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
(Losses)
|
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
5,111
|
|
|
$
|
119
|
|
|
$
|
-
|
|
|
$
|
5,230
|
|
Mortgage backed securities
|
|
|
124,439
|
|
|
|
1,649
|
|
|
|
(368
|
)
|
|
|
125,720
|
|
Corporate bonds
|
|
|
8,716
|
|
|
|
76
|
|
|
|
-
|
|
|
|
8,792
|
|
Asset backed securities
|
|
|
13,251
|
|
|
|
19
|
|
|
|
(194
|
)
|
|
|
13,076
|
|
Certificates of deposit
|
|
|
1,976
|
|
|
|
64
|
|
|
|
-
|
|
|
|
2,040
|
|
Municipals - nontaxable
|
|
|
33,294
|
|
|
|
845
|
|
|
|
(157
|
)
|
|
|
33,982
|
|
CRA Mutual fund
|
|
|
1,500
|
|
|
|
-
|
|
|
|
(75
|
)
|
|
|
1,425
|
|
|
|
$
|
188,287
|
|
|
$
|
2,772
|
|
|
$
|
(794
|
)
|
|
$
|
190,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
5,000
|
|
|
$
|
89
|
|
|
$
|
-
|
|
|
$
|
5,089
|
|
Municipals
|
|
|
2,606
|
|
|
|
135
|
|
|
|
-
|
|
|
|
2,741
|
|
Municipals - nontaxable
|
|
|
1,608
|
|
|
|
37
|
|
|
|
-
|
|
|
|
1,645
|
|
|
|
$
|
9,214
|
|
|
$
|
261
|
|
|
$
|
-
|
|
|
$
|
9,475
|
|
|
|
December 31, 2015
|
|
|
|
Amortized Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
(Losses)
|
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
19,124
|
|
|
$
|
5
|
|
|
$
|
(225
|
)
|
|
$
|
18,904
|
|
Mortgage backed securities
|
|
|
97,270
|
|
|
|
31
|
|
|
|
(1,224
|
)
|
|
|
96,077
|
|
Corporate bonds
|
|
|
8,967
|
|
|
|
20
|
|
|
|
(28
|
)
|
|
|
8,959
|
|
Asset backed securities
|
|
|
14,312
|
|
|
|
18
|
|
|
|
(299
|
)
|
|
|
14,031
|
|
Certificates of deposit
|
|
|
1,976
|
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
1,967
|
|
Municipals - nontaxable
|
|
|
18,559
|
|
|
|
287
|
|
|
|
(32
|
)
|
|
|
18,814
|
|
CRA Mutual fund
|
|
|
1,500
|
|
|
|
-
|
|
|
|
(90
|
)
|
|
|
1,410
|
|
|
|
$
|
161,708
|
|
|
$
|
361
|
|
|
$
|
(1,907
|
)
|
|
$
|
160,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
9,987
|
|
|
$
|
50
|
|
|
$
|
(33
|
)
|
|
$
|
10,004
|
|
Municipals
|
|
|
2,615
|
|
|
|
43
|
|
|
|
(14
|
)
|
|
|
2,644
|
|
Municipals - nontaxable
|
|
|
1,685
|
|
|
|
-
|
|
|
|
(19
|
)
|
|
|
1,666
|
|
|
|
$
|
14,287
|
|
|
$
|
93
|
|
|
$
|
(66
|
)
|
|
$
|
14,314
|
|
NOTE 3 – SECURITIES (continued)
The amortized cost and estimated fair value of securities available-for-sale
and held-to-maturity as of September 30, 2016 and December 31, 2015 by contractual maturity are shown below. Actual maturities
may differ from contractual maturities because some of the securities may be called or prepaid without any penalties.
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
(In Thousands)
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one through five years
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,000
|
|
|
$
|
4,006
|
|
Due after five through ten years
|
|
|
5,111
|
|
|
|
5,230
|
|
|
|
15,124
|
|
|
|
14,898
|
|
Mortgage backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one through five years
|
|
|
24,001
|
|
|
|
24,512
|
|
|
|
10,913
|
|
|
|
10,845
|
|
Due after five through ten years
|
|
|
25,067
|
|
|
|
25,902
|
|
|
|
41,313
|
|
|
|
40,902
|
|
Due after ten through fifteen years
|
|
|
14,634
|
|
|
|
14,682
|
|
|
|
14,796
|
|
|
|
14,511
|
|
Due after fifteen years
|
|
|
60,737
|
|
|
|
60,624
|
|
|
|
30,248
|
|
|
|
29,819
|
|
Corporate bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one through five years
|
|
|
8,716
|
|
|
|
8,792
|
|
|
|
8,967
|
|
|
|
8,959
|
|
Asset backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after five through ten years
|
|
|
3,085
|
|
|
|
3,008
|
|
|
|
3,101
|
|
|
|
3,002
|
|
Due after fifteen years
|
|
|
10,166
|
|
|
|
10,068
|
|
|
|
11,211
|
|
|
|
11,029
|
|
Certificate of deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one through five years
|
|
|
1,976
|
|
|
|
2,040
|
|
|
|
1,976
|
|
|
|
1,967
|
|
Municipals - nontaxable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one through five years
|
|
|
2,657
|
|
|
|
2,730
|
|
|
|
-
|
|
|
|
-
|
|
Due after five through ten years
|
|
|
5,043
|
|
|
|
5,183
|
|
|
|
3,607
|
|
|
|
3,633
|
|
Due after ten through fifteen years
|
|
|
13,097
|
|
|
|
13,598
|
|
|
|
7,209
|
|
|
|
7,363
|
|
Due after fifteen years
|
|
|
12,497
|
|
|
|
12,471
|
|
|
|
7,743
|
|
|
|
7,818
|
|
CRA Mutual fund
|
|
|
1,500
|
|
|
|
1,425
|
|
|
|
1,500
|
|
|
|
1,410
|
|
Total
|
|
$
|
188,287
|
|
|
$
|
190,265
|
|
|
$
|
161,708
|
|
|
$
|
160,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one through five years
|
|
$
|
5,000
|
|
|
$
|
5,089
|
|
|
$
|
5,000
|
|
|
$
|
5,050
|
|
Due after five through ten years
|
|
|
-
|
|
|
|
-
|
|
|
|
4,987
|
|
|
|
4,954
|
|
Municipals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after five through ten years
|
|
|
2,050
|
|
|
|
2,182
|
|
|
|
1,486
|
|
|
|
1,499
|
|
Due after ten through fifteen years
|
|
|
556
|
|
|
|
559
|
|
|
|
1,129
|
|
|
|
1,145
|
|
Municipals - nontaxable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one through five years
|
|
|
1,608
|
|
|
|
1,645
|
|
|
|
-
|
|
|
|
-
|
|
Due after ten through fifteen years
|
|
|
-
|
|
|
|
-
|
|
|
|
1,404
|
|
|
|
1,387
|
|
Due after fifteen years
|
|
|
-
|
|
|
|
-
|
|
|
|
281
|
|
|
|
279
|
|
Total
|
|
$
|
9,214
|
|
|
$
|
9,475
|
|
|
$
|
14,287
|
|
|
$
|
14,314
|
|
The estimated fair value of securities pledged to secure public
funds, securities sold under agreements to repurchase, credit lines with the Federal Reserve Bank (“FRB”), and debtor-in-possession
accounts amounted to $170.5 million at September 30, 2016 and $147.9 million at December 31, 2015.
NOTE 3 – SECURITIES (continued)
Securities available-for-sale and held-to-maturity that had
an unrealized loss position at September 30, 2016 and December 31, 2015 are as follows:
|
|
Securities in a loss
|
|
|
Securities in a loss
|
|
|
|
|
|
|
|
|
|
Position for less than
|
|
|
Position for 12 Months
|
|
|
|
|
|
|
|
|
|
12 Months
|
|
|
or Longer
|
|
|
Total
|
|
September 30, 2016
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In Thousands)
|
|
Investment securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities
|
|
$
|
42,729
|
|
|
$
|
(354
|
)
|
|
$
|
9,272
|
|
|
$
|
(14
|
)
|
|
$
|
52,001
|
|
|
$
|
(368
|
)
|
Municipals - nontaxable
|
|
|
13,697
|
|
|
|
(157
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
13,697
|
|
|
|
(157
|
)
|
Asset backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
7,249
|
|
|
|
(194
|
)
|
|
|
7,249
|
|
|
|
(194
|
)
|
CRA Mutual fund
|
|
|
-
|
|
|
|
-
|
|
|
|
1,425
|
|
|
|
(75
|
)
|
|
|
1,425
|
|
|
|
(75
|
)
|
Total
|
|
$
|
56,426
|
|
|
$
|
(511
|
)
|
|
$
|
17,946
|
|
|
$
|
(283
|
)
|
|
$
|
74,372
|
|
|
$
|
(794
|
)
|
|
|
Securities in a loss
|
|
|
Securities in a loss
|
|
|
|
|
|
|
|
|
|
Position for less than
|
|
|
Position for 12 Months
|
|
|
|
|
|
|
|
|
|
12 Months
|
|
|
or Longer
|
|
|
Total
|
|
December 31, 2015
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In Thousands)
|
|
Investment securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities
|
|
$
|
63,327
|
|
|
$
|
(774
|
)
|
|
$
|
29,375
|
|
|
$
|
(450
|
)
|
|
$
|
92,702
|
|
|
$
|
(1,224
|
)
|
U.S. Government agencies
|
|
|
5,040
|
|
|
|
(85
|
)
|
|
|
9,858
|
|
|
|
(140
|
)
|
|
|
14,898
|
|
|
|
(225
|
)
|
Municipals - nontaxable
|
|
|
3,696
|
|
|
|
(32
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
3,696
|
|
|
|
(32
|
)
|
Corporate bonds
|
|
|
-
|
|
|
|
-
|
|
|
|
7,066
|
|
|
|
(28
|
)
|
|
|
7,066
|
|
|
|
(28
|
)
|
Asset backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
9,531
|
|
|
|
(299
|
)
|
|
|
9,531
|
|
|
|
(299
|
)
|
Certificate of deposits
|
|
|
1,967
|
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,967
|
|
|
|
(9
|
)
|
CRA Mutual fund
|
|
|
-
|
|
|
|
-
|
|
|
|
1,410
|
|
|
|
(90
|
)
|
|
|
1,410
|
|
|
|
(90
|
)
|
Total
|
|
$
|
74,030
|
|
|
$
|
(900
|
)
|
|
$
|
57,240
|
|
|
$
|
(1,007
|
)
|
|
$
|
131,270
|
|
|
$
|
(1,907
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,954
|
|
|
$
|
(33
|
)
|
|
$
|
4,954
|
|
|
$
|
(33
|
)
|
Municipals - nontaxable
|
|
|
1,666
|
|
|
|
(19
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,666
|
|
|
|
(19
|
)
|
Municipals
|
|
|
1,600
|
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,600
|
|
|
|
(14
|
)
|
Total
|
|
$
|
3,266
|
|
|
$
|
(33
|
)
|
|
$
|
4,954
|
|
|
$
|
(33
|
)
|
|
$
|
8,220
|
|
|
$
|
(66
|
)
|
The Corporation evaluates securities for other than temporary
impairment (“OTTI”) on a quarterly basis and more frequently when economic or market conditions warrant such evaluation.
Consideration is given to various factors in determining whether the Corporation anticipates a recovery in fair value such as:
the length of time and extent to which the fair value has been less than cost, and the financial condition and underlying credit
quality of the issuer. When analyzing an issuer’s financial condition, the Corporation may consider whether the securities
are issued by the federal government or its agencies, the sector or industry trends affecting the issuer, and whether any recent
downgrades by bond rating agencies have occurred.
NOTE 3 – SECURITIES (continued)
Mortgage backed securities
The Corporation’s unrealized losses on mortgage backed
securities were caused by interest rate fluctuations. At September 30, 2016, nineteen securities had unrealized losses of $368
thousand. As these securities are Ginnie Mae and government sponsored entity securities backed by the United States Government,
the Corporation’s intent to hold these securities until a market price recovery or maturity, and the determination that
it is more likely than not that the Corporation will not be required to sell these securities before their anticipated recoveries,
the Corporation does not consider these investments other than temporarily impaired.
Asset backed securities
The Corporation’s unrealized losses on its asset backed
securities were caused by interest rate fluctuations. At September 30, 2016, four securities had unrealized losses of $194 thousand.
Based on the credit quality of the issuers, the Corporation’s intent to hold these securities until a market price recovery,
and the determination that it is more likely than not that the Corporation will not be required to sell the securities before
their anticipated recovery, the Corporation does not consider these investments other than temporarily impaired.
Mutual fund
The Corporation’s unrealized loss on its mutual fund
investment was caused by interest rate fluctuations. At September 30, 2016, this one security had an unrealized loss of $75 thousand.
Based on the credit quality of the issuer, the Corporation’s intent to hold this security until a market price recovery,
and the determination that it is more likely than not that the Corporation will not be required to sell this security before its
anticipated recovery, the Corporation does not consider this investment other than temporarily impaired.
Municipal
The Corporation’s unrealized losses on its municipal
investments were caused by interest rate fluctuations. At September 30, 2016, eleven available-for-sale municipal investments
had unrealized losses of $157 thousand. Based on the credit quality of the issuers, the Corporation’s intent to hold these
securities until a market price recovery, and the determination that it is more likely than not that the Corporation will not
be required to sell these securities before their anticipated recovery, the Corporation does not consider these investments other
than temporarily impaired.
NOTE 3 – SECURITIES (continued)
Restricted Stock
The Corporation’s restricted stock consists of Federal
Home Loan Bank of Atlanta (“FHLB”) stock and FRB stock. The amortized costs of the restricted stock as of September
30, 2016 and December 31, 2015 are as follows:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
(In Thousands)
|
|
Restricted Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FRB stock
|
|
$
|
999
|
|
|
$
|
999
|
|
|
|
|
|
|
|
|
|
|
FHLB stock
|
|
|
5,310
|
|
|
|
6,260
|
|
|
|
$
|
6,309
|
|
|
$
|
7,259
|
|
Securities Sold Under Agreements to Repurchase (Repurchase
Agreements)
The Corporation enters into agreements under which it sells
securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Corporation may
transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates
the Corporation to repurchase the assets. As a result, these repurchase agreements are accounted for as collateralized financing
agreements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase
the securities is reflected as a liability in the Corporation’s consolidated balance sheets, while the securities underlying
the repurchase agreements remain in the respective investment securities asset accounts. In other words, there is no offsetting
or netting of the investment securities assets with the repurchase agreement liabilities. In addition, as the Corporation does
not enter into reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements.
The right of setoff for a repurchase agreement resembles a
secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Corporation
be in default (e.g., fails to make an interest payment to the counterparty). The collateral is held by a third-party financial
institution in the Corporation’s custodial account. The Corporation has the right to sell or repledge the investment securities.
The risks and rewards associated with the investment securities pledged as collateral (e.g. a decline or rise in the fair value
of the investments) remains with the Corporation. As of September 30, 2016 and December 31, 2015, the obligations outstanding
under these repurchase agreements totaled $16.3 million and $21.1 million, respectively, and were comprised of overnight sweep
accounts. The fair value of the securities pledged in connection with these repurchase agreements at September 30, 2016 was $19.7
million in total and consisted of $4.9 million in municipal securities, $4.9 in mortgage backed securities, $6.0 million in corporate
bonds, $2.5 million in asset backed securities, and $1.4 million in mutual funds. The fair value of the securities pledged in
connection with these repurchase agreements at December 31, 2015 was $24.3 million in total and consisted of $6.7 million in municipal
securities, $4.9 million in mortgage backed securities, $6.2 million in corporate bonds, and $6.5 million in asset backed securities.
NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES
The following table presents the composition of the loans held
for investment portfolio at September 30, 2016 and December 31, 2015:
|
|
Composition of Loan Portfolio
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Amount
|
|
|
Percentage of
Total
|
|
|
Amount
|
|
|
Percentage of
Total
|
|
|
|
(Dollars In Thousands)
|
|
Commercial real estate-owner occupied
|
|
$
|
238,224
|
|
|
|
24.65
|
%
|
|
$
|
219,877
|
|
|
|
24.77
|
%
|
Commercial real estate-non-owner occupied
|
|
|
174,342
|
|
|
|
18.04
|
|
|
|
147,580
|
|
|
|
16.63
|
|
Residential real estate
|
|
|
202,605
|
|
|
|
20.96
|
|
|
|
201,447
|
|
|
|
22.70
|
|
Commercial
|
|
|
264,794
|
|
|
|
27.40
|
|
|
|
242,527
|
|
|
|
27.33
|
|
Real estate construction
|
|
|
79,621
|
|
|
|
8.24
|
|
|
|
66,003
|
|
|
|
7.44
|
|
Consumer
|
|
|
6,959
|
|
|
|
0.71
|
|
|
|
10,044
|
|
|
|
1.13
|
|
Total loans
|
|
$
|
966,545
|
|
|
|
100.00
|
%
|
|
$
|
887,478
|
|
|
|
100.00
|
%
|
Less allowance for loan losses
|
|
|
14,696
|
|
|
|
|
|
|
|
13,563
|
|
|
|
|
|
|
|
$
|
951,849
|
|
|
|
|
|
|
$
|
873,915
|
|
|
|
|
|
Unearned income and net deferred loan fees and costs totaled
$2.1 million and $2.0 million at September 30, 2016 and December 31, 2015, respectively. Loans pledged to secure borrowings at
the FHLB totaled $263.0 million and $247.9 million at September 30, 2016 and December 31, 2015, respectively.
Allowance for Loan Losses
The allowance for loan losses totaled $14.7 million at September
30, 2016 compared to $13.6 million at year end December 31, 2015. The allowance for loan losses was equivalent to 1.52% and 1.53%
of total loans held for investment at September 30, 2016 and December 31, 2015, respectively. Adequacy of the allowance is assessed
and the allowance is increased by provisions for loan losses charged to expense no less than quarterly. Charge-offs are taken
when a loan is identified as uncollectible.
The methodology by which we systematically determine the amount
of our allowance is set forth by the Board of Directors in our Loan Policy and implemented by management. The results of the analysis
are documented, reviewed, and approved by the Board of Directors no less than quarterly.
The level of the allowance for loan losses is determined by
management through an ongoing, detailed analysis of historical loss rates and risk characteristics. During each quarter, management
evaluates the collectability of all loans in the portfolio and ensures an accurate risk rating is assigned to each loan. The risk
rating scale and definitions commonly adopted by the Federal Banking Agencies is contained within the framework prescribed by
the Bank’s Loan Policy. Any loan that is deemed to have potential or well defined weaknesses that may jeopardize collection
in full is then analyzed to ascertain its level of weakness. If appropriate, the loan may be charged-off or a specific reserve
may be assigned if the loan is deemed to be impaired.
During the risk rating verification process, each loan identified
as inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged is considered
impaired and is placed on non-accrual status. On these loans, management analyzes the potential impairment of the individual loan
and may set aside a specific reserve. Any amounts deemed uncollectible during that analysis are charged-off.
NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES
(continued)
For the remaining loans in each segment, the Bank calculates
the probability of loss as a group using the risk rating for each of the following loan types: Commercial Real Estate - Owner
Occupied, Commercial Real Estate - Non-Owner Occupied, Residential Real Estate, Commercial, Real Estate Construction, and Consumer.
Management calculates the historical loss rate in each group by risk rating using a period of at least six years. This historical
loss rate may then be adjusted based on management’s assessment of internal and external environmental factors. While management
may consider other factors, the analysis generally includes factors such as unemployment, office vacancy rates, and any concentrations
that exist within the portfolio. This adjustment is meant to account for changes between the historical economic environment and
current conditions and for changes in the ongoing management of the portfolio which affects the loans’ potential losses.
Once complete, management compares the condition of the portfolio
using several different characteristics, as well as its experience, to the experience of other banks in its peer group in order
to determine if it is directionally consistent with others’ experience in our area and line of business. Based on that analysis,
management aggregates the probabilities of loss of the remaining portfolio based on the specific and general allowances and may
provide additional amounts to the allowance for loan losses as needed. Since this process involves estimates, the allowance for
loan losses may also contain an amount that is non-material which is not allocated to a specific loan or to a group of loans but
is deemed necessary to absorb additional losses in the portfolio.
Management and the Board of Directors subject the reserve adequacy
and methodology to a review on a regular basis by internal auditors, external auditors and bank regulators, and such reviews have
not resulted in any material adjustment to the allowance.
NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES
(continued)
The following tables provide detailed information about the
allowance for loan losses as of and for the periods indicated.
|
|
Allowance for Loan Losses
|
|
|
|
|
|
Three months ended September 30, 2016
|
|
Commercial
real
estate - owner
occupied
|
|
|
Commercial
real
estate - non-owner
occupied
|
|
|
Residential
real estate
|
|
|
Commercial
|
|
|
Real
estate
construction
|
|
|
Consumer
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
$
|
3,142
|
|
|
$
|
1,969
|
|
|
$
|
2,854
|
|
|
$
|
4,574
|
|
|
$
|
1,178
|
|
|
$
|
117
|
|
|
$
|
13,834
|
|
Charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Recoveries
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
|
|
103
|
|
|
|
-
|
|
|
|
-
|
|
|
|
112
|
|
Provisions
|
|
|
(141
|
)
|
|
|
171
|
|
|
|
(229
|
)
|
|
|
909
|
|
|
|
73
|
|
|
|
(33
|
)
|
|
|
750
|
|
Ending Balance
|
|
$
|
3,001
|
|
|
$
|
2,140
|
|
|
$
|
2,634
|
|
|
$
|
5,586
|
|
|
$
|
1,251
|
|
|
$
|
84
|
|
|
$
|
14,696
|
|
Nine months ended September 30, 2016
|
|
Commercial
real
estate - owner
occupied
|
|
|
Commercial
real
estate - non-owner
occupied
|
|
|
Residential
real estate
|
|
|
Commercial
|
|
|
Real
estate
construction
|
|
|
Consumer
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
$
|
3,042
|
|
|
$
|
1,862
|
|
|
$
|
2,862
|
|
|
$
|
4,612
|
|
|
$
|
1,056
|
|
|
$
|
129
|
|
|
$
|
13,563
|
|
Charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Recoveries
|
|
|
-
|
|
|
|
-
|
|
|
|
30
|
|
|
|
233
|
|
|
|
-
|
|
|
|
-
|
|
|
|
263
|
|
Provisions
|
|
|
(41
|
)
|
|
|
278
|
|
|
|
(258
|
)
|
|
|
741
|
|
|
|
195
|
|
|
|
(45
|
)
|
|
|
870
|
|
Ending Balance
|
|
$
|
3,001
|
|
|
$
|
2,140
|
|
|
$
|
2,634
|
|
|
$
|
5,586
|
|
|
$
|
1,251
|
|
|
$
|
84
|
|
|
$
|
14,696
|
|
|
|
Allowance for Loan Losses
|
|
|
|
|
|
Three months ended September 30, 2015
|
|
Commercial
real
estate - owner
occupied
|
|
|
Commercial
real
estate - non-owner
occupied
|
|
|
Residential
real estate
|
|
|
Commercial
|
|
|
Real
estate
construction
|
|
|
Consumer
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
$
|
3,358
|
|
|
$
|
1,859
|
|
|
$
|
3,174
|
|
|
$
|
4,333
|
|
|
$
|
665
|
|
|
$
|
120
|
|
|
$
|
13,509
|
|
Charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(72
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(72
|
)
|
Recoveries
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
25
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37
|
|
Provisions
|
|
|
(90
|
)
|
|
|
(42
|
)
|
|
|
(236
|
)
|
|
|
245
|
|
|
|
123
|
|
|
|
-
|
|
|
|
-
|
|
Ending Balance
|
|
$
|
3,268
|
|
|
$
|
1,817
|
|
|
$
|
2,950
|
|
|
$
|
4,531
|
|
|
$
|
788
|
|
|
$
|
120
|
|
|
$
|
13,474
|
|
Nine months ended September 30, 2015
|
|
Commercial
real
estate - owner
occupied
|
|
|
Commercial
real
estate - non-owner
occupied
|
|
|
Residential
real estate
|
|
|
Commercial
|
|
|
Real
estate
construction
|
|
|
Consumer
|
|
|
Total
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
$
|
3,229
|
|
|
$
|
1,894
|
|
|
$
|
3,308
|
|
|
$
|
4,284
|
|
|
$
|
596
|
|
|
$
|
88
|
|
|
$
|
13,399
|
|
Charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(186
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(186
|
)
|
Recoveries
|
|
|
-
|
|
|
|
-
|
|
|
|
50
|
|
|
|
61
|
|
|
|
-
|
|
|
|
-
|
|
|
|
111
|
|
Provisions
|
|
|
39
|
|
|
|
(77
|
)
|
|
|
(408
|
)
|
|
|
372
|
|
|
|
192
|
|
|
|
32
|
|
|
|
150
|
|
Ending Balance
|
|
$
|
3,268
|
|
|
$
|
1,817
|
|
|
$
|
2,950
|
|
|
$
|
4,531
|
|
|
$
|
788
|
|
|
$
|
120
|
|
|
$
|
13,474
|
|
|
|
Recorded Investment in
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
Commercial
real
estate - owner
occupied
|
|
|
Commercial
real
estate - non-owner
occupied
|
|
|
Residential
real estate
|
|
|
Commercial
|
|
|
Real
estate
construction
|
|
|
Consumer
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
Allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance:
|
|
$
|
3,001
|
|
|
$
|
2,140
|
|
|
$
|
2,634
|
|
|
$
|
5,586
|
|
|
$
|
1,251
|
|
|
$
|
84
|
|
|
$
|
14,696
|
|
Ending
balance: individually evaluated for impairment
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,490
|
|
|
$
|
284
|
|
|
$
|
-
|
|
|
$
|
1,774
|
|
Ending
balance: collectively evaluated for impairment
|
|
$
|
3,001
|
|
|
$
|
2,140
|
|
|
$
|
2,634
|
|
|
$
|
4,096
|
|
|
$
|
967
|
|
|
$
|
84
|
|
|
$
|
12,922
|
|
Ending
balance: loans acquired with deteriorated credit quality
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
238,224
|
|
|
$
|
174,342
|
|
|
$
|
202,605
|
|
|
$
|
264,794
|
|
|
$
|
79,621
|
|
|
$
|
6,959
|
|
|
$
|
966,545
|
|
Ending
balance: individually evaluated for impairment
|
|
$
|
550
|
|
|
$
|
-
|
|
|
$
|
176
|
|
|
$
|
5,272
|
|
|
$
|
1,001
|
|
|
$
|
-
|
|
|
$
|
6,999
|
|
Ending
balance: collectively evaluated for impairment
|
|
$
|
237,674
|
|
|
$
|
174,342
|
|
|
$
|
202,429
|
|
|
$
|
259,522
|
|
|
$
|
78,620
|
|
|
$
|
6,959
|
|
|
$
|
959,546
|
|
Ending
balance: loans acquired with deteriorated credit quality
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
December 31, 2015
|
|
Commercial
real
estate - owner
occupied
|
|
|
Commercial
real
estate - non-owner
occupied
|
|
|
Residential
real estate
|
|
|
Commercial
|
|
|
Real
estate
construction
|
|
|
Consumer
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
Allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance:
|
|
$
|
3,042
|
|
|
$
|
1,862
|
|
|
$
|
2,862
|
|
|
$
|
4,612
|
|
|
$
|
1,056
|
|
|
$
|
129
|
|
|
$
|
13,563
|
|
Ending
balance: individually evaluated for impairment
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
200
|
|
|
$
|
-
|
|
|
$
|
200
|
|
Ending
balance: collectively evaluated for impairment
|
|
$
|
3,042
|
|
|
$
|
1,862
|
|
|
$
|
2,862
|
|
|
$
|
4,612
|
|
|
$
|
856
|
|
|
$
|
129
|
|
|
$
|
13,363
|
|
Ending
balance: loans acquired with deteriorated credit quality
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
$
|
219,877
|
|
|
$
|
147,580
|
|
|
$
|
201,447
|
|
|
$
|
242,527
|
|
|
$
|
66,003
|
|
|
$
|
10,044
|
|
|
$
|
887,478
|
|
Ending
balance: individually evaluated for impairment
|
|
$
|
349
|
|
|
$
|
5,487
|
|
|
$
|
346
|
|
|
$
|
1,389
|
|
|
$
|
1,046
|
|
|
$
|
-
|
|
|
$
|
8,617
|
|
Ending
balance: collectively evaluated for impairment
|
|
$
|
219,528
|
|
|
$
|
142,093
|
|
|
$
|
201,101
|
|
|
$
|
241,138
|
|
|
$
|
64,957
|
|
|
$
|
10,044
|
|
|
$
|
878,861
|
|
Ending
balance: loans acquired with deteriorated credit quality
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES
(continued)
Identifying and Classifying Portfolio Risks by Risk Rating
At origination, loans are categorized into risk categories
based upon original underwriting. Subsequent to origination, management evaluates the collectability of all loans in the portfolio
and assigns a proprietary risk rating. Ratings range from the highest to lowest quality based on factors including measurements
of ability to pay, collateral type and value, borrower stability, management experience, and credit enhancements. These ratings
are consistent with the bank regulatory rating system.
A loan may have portions of its balance in one rating and other
portions in a different rating. The Bank may use these “split ratings” when factors cause loan loss risk to exist
for part but not all of the principal balance. Split ratings may also be used where cash collateral or a government agency has
provided a guaranty that partially covers a loan.
For clarity of presentation, the Corporation’s loan portfolio
is profiled below in accordance with the risk rating framework that has been commonly adopted by the federal banking agencies.
The definitions of the various risk rating categories are as follows:
Pass - The condition of the borrower and the performance of
the loan is satisfactory or better.
Special mention - A special mention asset has one or more potential
weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration
of the repayment prospects for the asset or in the institution’s credit position at some future date.
Substandard - A substandard asset is inadequately protected
by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must
have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct
possibility that the bank will sustain some loss if the deficiencies are not corrected.
Doubtful - An asset classified doubtful has all the weaknesses
inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full,
on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loss - Assets classified loss are considered uncollectible
and their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no
recovery or salvage value, and a partial recovery may be effected in the future.
The Bank did not have any loans classified as loss at September
30, 2016 or December 31, 2015. It is the Bank’s policy to charge-off any loan once the risk rating is classified as loss.
NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES
(continued)
The profile of the loan portfolio, as indicated by risk rating,
as of September 30, 2016 and December 31, 2015 is shown below.
|
|
September 30, 2016
|
|
Credit Risk Profile by Risk Rating
|
|
Pass
|
|
|
Special Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Loss
|
|
|
Unearned
Income
|
|
|
Total Loans
|
|
|
|
(In Thousands)
|
|
Commercial real estate - owner occupied
|
|
$
|
233,957
|
|
|
$
|
1,224
|
|
|
$
|
3,567
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(524
|
)
|
|
$
|
238,224
|
|
Commercial real estate - non-owner occupied
|
|
|
174,625
|
|
|
|
303
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(586
|
)
|
|
|
174,342
|
|
Residential real estate
|
|
|
201,350
|
|
|
|
1,413
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(158
|
)
|
|
|
202,605
|
|
Commercial
|
|
|
239,894
|
|
|
|
3,108
|
|
|
|
22,252
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(460
|
)
|
|
|
264,794
|
|
Real estate construction
|
|
|
79,040
|
|
|
|
-
|
|
|
|
1,001
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(420
|
)
|
|
|
79,621
|
|
Consumer
|
|
|
6,959
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,959
|
|
Total
|
|
$
|
935,825
|
|
|
$
|
6,048
|
|
|
$
|
26,820
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(2,148
|
)
|
|
$
|
966,545
|
|
|
|
December 31, 2015
|
|
Credit Risk Profile by Risk Rating
|
|
Pass
|
|
|
Special Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Loss
|
|
|
Unearned
Income
|
|
|
Total Loans
|
|
|
|
(In Thousands)
|
|
Commercial real estate - owner occupied
|
|
$
|
214,613
|
|
|
$
|
2,506
|
|
|
$
|
3,245
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(487
|
)
|
|
$
|
219,877
|
|
Commercial real estate - non-owner occupied
|
|
|
142,146
|
|
|
|
316
|
|
|
|
5,487
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(369
|
)
|
|
|
147,580
|
|
Residential real estate
|
|
|
201,308
|
|
|
|
-
|
|
|
|
346
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(207
|
)
|
|
|
201,447
|
|
Commercial
|
|
|
213,559
|
|
|
|
11,653
|
|
|
|
17,732
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(417
|
)
|
|
|
242,527
|
|
Real estate construction
|
|
|
65,476
|
|
|
|
-
|
|
|
|
1,046
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(519
|
)
|
|
|
66,003
|
|
Consumer
|
|
|
10,042
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
10,044
|
|
Total
|
|
$
|
847,144
|
|
|
$
|
14,475
|
|
|
$
|
27,856
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1,997
|
)
|
|
$
|
887,478
|
|
Loans listed as non-performing are also placed on non-accrual
status. The accrual of interest is discontinued at the time a loan is 90 days delinquent or when the credit deteriorates and there
is doubt that the credit will be paid as agreed, unless the credit is well-secured and in process of collection. Once the loan
is on non-accrual status, all accrued but unpaid interest is also charged-off, and all payments are used to reduce the principal
balance. Once the principal balance is repaid in full, additional payments are taken into income. A loan may be returned to accrual
status if the borrower shows renewed willingness and ability to repay under the term of the loan agreement. The risk profile based
upon payment activity is shown below.
NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES
(continued)
|
|
For the Period Ended, September 30, 2016
|
|
Credit Risk Profile Based on Payment Activity
|
|
Performing
|
|
|
Non-Performing
|
|
|
Total Loans
|
|
|
|
(In Thousands)
|
|
Commercial real estate - owner occupied
|
|
$
|
238,011
|
|
|
$
|
213
|
|
|
$
|
238,224
|
|
Commercial real estate - non-owner occupied
|
|
|
174,342
|
|
|
|
-
|
|
|
|
174,342
|
|
Residential real estate
|
|
|
202,605
|
|
|
|
-
|
|
|
|
202,605
|
|
Commercial
|
|
|
260,163
|
|
|
|
4,631
|
|
|
|
264,794
|
|
Real estate construction
|
|
|
78,620
|
|
|
|
1,001
|
|
|
|
79,621
|
|
Consumer
|
|
|
6,959
|
|
|
|
-
|
|
|
|
6,959
|
|
Total
|
|
$
|
960,700
|
|
|
$
|
5,845
|
|
|
$
|
966,545
|
|
|
|
For the Period Ended, December 31, 2015
|
|
Credit Risk Profile Based on Payment Activity
|
|
Performing
|
|
|
Non-Performing
|
|
|
Total Loans
|
|
|
|
(In Thousands)
|
|
Commercial real estate - owner occupied
|
|
$
|
219,877
|
|
|
$
|
-
|
|
|
$
|
219,877
|
|
Commercial real estate - non-owner occupied
|
|
|
142,094
|
|
|
|
5,486
|
|
|
|
147,580
|
|
Residential real estate
|
|
|
201,284
|
|
|
|
163
|
|
|
|
201,447
|
|
Commercial
|
|
|
241,805
|
|
|
|
722
|
|
|
|
242,527
|
|
Real estate construction
|
|
|
64,957
|
|
|
|
1,046
|
|
|
|
66,003
|
|
Consumer
|
|
|
10,044
|
|
|
|
-
|
|
|
|
10,044
|
|
Total
|
|
$
|
880,061
|
|
|
$
|
7,417
|
|
|
$
|
887,478
|
|
Loans are considered past due if a contractual payment is not
made by the calendar day after the payment is due. However, for reporting purposes loans past due 1 to 29 days are excluded from
loans past due and are included in the total for current loans in the table below. The delinquency status of the loans in the
portfolio is shown below as of September 30, 2016 and December 31, 2015. Loans that were on non-accrual status are not included
in any past due amounts.
|
|
Age Analysis of Past Due Loans
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
Greater than
90 Days
|
|
|
Total Past
Due
|
|
|
Non-accrual
Loans
|
|
|
Current
Loans
|
|
|
Total
Loans
|
|
|
|
(In Thousands)
|
|
Commercial real estate - owner occupied
|
|
$
|
308
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
308
|
|
|
$
|
213
|
|
|
$
|
237,703
|
|
|
$
|
238,224
|
|
Commercial real estate - non-owner occupied
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
174,342
|
|
|
|
174,342
|
|
Residential real estate
|
|
|
-
|
|
|
|
98
|
|
|
|
-
|
|
|
|
98
|
|
|
|
-
|
|
|
|
202,507
|
|
|
|
202,605
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,631
|
|
|
|
260,163
|
|
|
|
264,794
|
|
Real estate construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,001
|
|
|
|
78,620
|
|
|
|
79,621
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,959
|
|
|
|
6,959
|
|
Total
|
|
$
|
308
|
|
|
$
|
98
|
|
|
$
|
-
|
|
|
$
|
406
|
|
|
$
|
5,845
|
|
|
$
|
960,294
|
|
|
$
|
966,545
|
|
|
|
December 31, 2015
|
|
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
Greater than
90 Days
|
|
|
Total Past
Due
|
|
|
Non-accrual
Loans
|
|
|
Current
Loans
|
|
|
Total
Loans
|
|
|
|
(In Thousands)
|
|
Commercial real estate - owner occupied
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
219,877
|
|
|
$
|
219,877
|
|
Commercial real estate - non-owner occupied
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,486
|
|
|
|
142,094
|
|
|
|
147,580
|
|
Residential real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
163
|
|
|
|
201,284
|
|
|
|
201,447
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
722
|
|
|
|
241,805
|
|
|
|
242,527
|
|
Real estate construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,046
|
|
|
|
64,957
|
|
|
|
66,003
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,044
|
|
|
|
10,044
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,417
|
|
|
$
|
880,061
|
|
|
$
|
887,478
|
|
NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES
(continued)
Troubled Debt Restructurings
A troubled debt restructuring (“TDR”) is a formal
restructure of a loan when the Bank, for economic or legal reasons related to the borrower’s financial difficulties, grants a
concession to a borrower. The Bank classifies these transactions as a TDR if the transaction meets the following conditions: an
existing credit agreement must be formally renewed, extended and/or modified; the borrower must be experiencing financial difficulty;
and the Bank has granted a concession that it would not otherwise consider.
Once identified as a TDR, a loan is considered to be impaired,
and an impairment analysis is performed for the loan individually, rather than under a general loss allowance based on the loan
type and risk rating. Any resulting shortfall is charged-off. This method is used consistently for all segments of the portfolio.
Normally, loans identified as TDRs would be placed on non-accrual
status and considered non-performing until sufficient history of timely collection or payment has occurred that allows them to
return to performing status, generally 6 months.
One loan with a balance of $500 thousand was modified in connection
with a troubled debt restructuring during the nine month period ended September 30, 2016. One real estate construction loan was
modified during the nine months ended September 30, 2015 with an outstanding balance at September 30, 2016 of $1.0 million.
Impaired Loans
A loan is classified as impaired when it is deemed probable
by management’s analysis that the Bank will be unable to collect all amounts due according to the contractual terms of the
loan agreement, or the recorded investment in the impaired loan is greater than the present value of expected future cash flows,
discounted at the loan’s effective interest rate. In the case of an impaired loan, management conducts an analysis which identifies
if a quantifiable potential loss exists, and takes the necessary steps to record that loss when it has been identified as uncollectible.
As the ultimate collectability of the total principal of an
impaired loan is in doubt, the loan is placed on nonaccrual status with all payments applied to principal under the cost-recovery
method. As the Bank does not utilize the cash-basis method of accounting for impaired loans, the Bank did not recognize interest
income in association with its impaired loans during 2016.
NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES
(continued)
The table below shows the results of management’s analysis
of impaired loans as of September 30, 2016 and December 31, 2015.
|
|
Impaired Loans
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Recorded
investment
|
|
|
Unpaid principal
balance
|
|
|
Related
allowance
|
|
|
Recorded
investment
|
|
|
Unpaid principal
balance
|
|
|
Related
allowance
|
|
|
|
(In Thousands)
|
|
With no specific related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate - owner occupied
|
|
$
|
213
|
|
|
$
|
214
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Commercial real estate - non-owner occupied
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,486
|
|
|
|
5,783
|
|
|
|
-
|
|
Residential real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
163
|
|
|
|
163
|
|
|
|
-
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
722
|
|
|
|
1,743
|
|
|
|
-
|
|
Real estate construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
With a specific related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate - owner occupied
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Commercial real estate - non-owner occupied
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial
|
|
|
4,631
|
|
|
|
5,745
|
|
|
|
1,490
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real estate construction
|
|
|
1,001
|
|
|
|
1,027
|
|
|
|
284
|
|
|
|
1,046
|
|
|
|
1,046
|
|
|
|
200
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate - owner occupied
|
|
$
|
213
|
|
|
$
|
214
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Commercial real estate - non-owner occupied
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,486
|
|
|
|
5,783
|
|
|
|
-
|
|
Residential real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
163
|
|
|
|
163
|
|
|
|
-
|
|
Commercial
|
|
|
4,631
|
|
|
|
5,745
|
|
|
|
1,490
|
|
|
|
722
|
|
|
|
1,743
|
|
|
|
-
|
|
Real estate construction
|
|
|
1,001
|
|
|
|
1,027
|
|
|
|
284
|
|
|
|
1,046
|
|
|
|
1,046
|
|
|
|
200
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
5,845
|
|
|
$
|
6,986
|
|
|
$
|
1,774
|
|
|
$
|
7,417
|
|
|
$
|
8,735
|
|
|
$
|
200
|
|
The table below shows the average recorded investment in impaired
loans for the periods presented.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
|
Average Recorded
Investment
|
|
|
Average Recorded
Investment
|
|
|
Average Recorded
Investment
|
|
|
Average Recorded
Investment
|
|
|
|
(In Thousands)
|
|
Commercial real estate - owner occupied
|
|
$
|
67
|
|
|
$
|
352
|
|
|
$
|
23
|
|
|
$
|
354
|
|
Commercial real estate - non-owner occupied
|
|
|
-
|
|
|
|
5,737
|
|
|
|
2,423
|
|
|
|
3,955
|
|
Residential real estate
|
|
|
23
|
|
|
|
391
|
|
|
|
45
|
|
|
|
377
|
|
Commercial
|
|
|
4,969
|
|
|
|
2,564
|
|
|
|
4,970
|
|
|
|
2,601
|
|
Real estate construction
|
|
|
1,003
|
|
|
|
1,102
|
|
|
|
1,022
|
|
|
|
1,118
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
6,062
|
|
|
$
|
10,146
|
|
|
$
|
8,483
|
|
|
$
|
8,405
|
|
NOTE 5 – SEGMENT REPORTING
The Corporation has three reportable segments: traditional
commercial banking, mortgage banking, and wealth management. Revenues from commercial banking operations consist primarily of
interest earned on loans and securities and fees from deposit services. Mortgage banking operating revenues consist principally
of interest earned on mortgage loans held for sale, gains on sales of loans in the secondary mortgage market, and loan origination
fee income. Wealth management operating revenues consist principally of transactional fees charged to clients as well as fees
for portfolio asset management.
NOTE 5 – SEGMENT REPORTING (continued)
The commercial banking segment provides the mortgage banking
segment (“Mortgage Division”) with the short-term funds needed to originate mortgage loans through a warehouse line
of credit and charges the mortgage banking segment interest based on the prime rate. These transactions are eliminated in the
consolidation process.
The “Other” column in the following table includes
the operations of the Corporation and Access Real Estate. The primary source of income for the Corporation is derived from dividends
from the Bank and its primary expense relates to costs incurred by the Corporation in connection with its annual audits and directors
fees. The primary source of income for Access Real Estate is derived from rents received from the Bank.
The following table presents segment information as of and
for the three months ended September 30, 2016 and 2015:
|
|
Commercial
|
|
|
Mortgage
|
|
|
Wealth
|
|
|
|
|
|
|
|
|
Consolidated
|
|
September 30, 2016
|
|
Banking
|
|
|
Banking
|
|
|
Management
|
|
|
Other
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
(In Thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
12,531
|
|
|
$
|
574
|
|
|
$
|
-
|
|
|
$
|
5
|
|
|
$
|
(332
|
)
|
|
$
|
12,778
|
|
Gain on sale of loans
|
|
|
-
|
|
|
|
8,316
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,316
|
|
Other revenues
|
|
|
682
|
|
|
|
(1,060
|
)
|
|
|
773
|
|
|
|
289
|
|
|
|
(315
|
)
|
|
|
369
|
|
Total revenues
|
|
|
13,213
|
|
|
|
7,830
|
|
|
|
773
|
|
|
|
294
|
|
|
|
(647
|
)
|
|
|
21,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
1,640
|
|
|
|
261
|
|
|
|
-
|
|
|
|
66
|
|
|
|
(332
|
)
|
|
|
1,635
|
|
Salaries and employee benefits
|
|
|
3,977
|
|
|
|
3,664
|
|
|
|
567
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,208
|
|
Other expenses
|
|
|
2,578
|
|
|
|
1,491
|
|
|
|
233
|
|
|
|
724
|
|
|
|
(315
|
)
|
|
|
4,711
|
|
Total operating expenses
|
|
|
8,195
|
|
|
|
5,416
|
|
|
|
800
|
|
|
|
790
|
|
|
|
(647
|
)
|
|
|
14,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
5,018
|
|
|
$
|
2,414
|
|
|
$
|
(27
|
)
|
|
$
|
(496
|
)
|
|
$
|
-
|
|
|
$
|
6,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,290,518
|
|
|
$
|
74,195
|
|
|
$
|
2,894
|
|
|
$
|
18,420
|
|
|
$
|
(23,189
|
)
|
|
$
|
1,362,838
|
|
|
|
Commercial
|
|
|
Mortgage
|
|
|
Wealth
|
|
|
|
|
|
|
|
|
Consolidated
|
|
September 30, 2015
|
|
Banking
|
|
|
Banking
|
|
|
Management
|
|
|
Other
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
(In Thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
10,909
|
|
|
$
|
417
|
|
|
$
|
-
|
|
|
$
|
3
|
|
|
$
|
(173
|
)
|
|
$
|
11,156
|
|
Gain on sale of loans
|
|
|
-
|
|
|
|
5,834
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,834
|
|
Other revenues
|
|
|
809
|
|
|
|
(954
|
)
|
|
|
701
|
|
|
|
337
|
|
|
|
(315
|
)
|
|
|
578
|
|
Total revenues
|
|
|
11,718
|
|
|
|
5,297
|
|
|
|
701
|
|
|
|
340
|
|
|
|
(488
|
)
|
|
|
17,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
1,063
|
|
|
|
98
|
|
|
|
-
|
|
|
|
71
|
|
|
|
(173
|
)
|
|
|
1,059
|
|
Salaries and employee benefits
|
|
|
3,533
|
|
|
|
2,706
|
|
|
|
464
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,703
|
|
Other expenses
|
|
|
1,894
|
|
|
|
1,294
|
|
|
|
273
|
|
|
|
630
|
|
|
|
(315
|
)
|
|
|
3,776
|
|
Total operating expenses
|
|
|
6,490
|
|
|
|
4,098
|
|
|
|
737
|
|
|
|
701
|
|
|
|
(488
|
)
|
|
|
11,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
5,228
|
|
|
$
|
1,199
|
|
|
$
|
(36
|
)
|
|
$
|
(361
|
)
|
|
$
|
-
|
|
|
$
|
6,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,081,026
|
|
|
$
|
38,246
|
|
|
$
|
1,228
|
|
|
$
|
16,386
|
|
|
$
|
(18,657
|
)
|
|
$
|
1,118,229
|
|
NOTE 5 – SEGMENT REPORTING (continued)
The following table presents segment information as of and
for the nine months ended September 30, 2016 and 2015:
|
|
Commercial
|
|
|
Mortgage
|
|
|
Wealth
|
|
|
|
|
|
|
|
|
Consolidated
|
|
September 30, 2016
|
|
Banking
|
|
|
Banking
|
|
|
Management
|
|
|
Other
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
(In Thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
36,379
|
|
|
$
|
1,355
|
|
|
$
|
-
|
|
|
$
|
15
|
|
|
$
|
(654
|
)
|
|
$
|
37,095
|
|
Gain on sale of loans
|
|
|
-
|
|
|
|
19,419
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,419
|
|
Other revenues
|
|
|
2,908
|
|
|
|
53
|
|
|
|
2,269
|
|
|
|
978
|
|
|
|
(950
|
)
|
|
|
5,258
|
|
Total revenues
|
|
|
39,287
|
|
|
|
20,827
|
|
|
|
2,269
|
|
|
|
993
|
|
|
|
(1,604
|
)
|
|
|
61,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
4,656
|
|
|
|
439
|
|
|
|
-
|
|
|
|
200
|
|
|
|
(654
|
)
|
|
|
4,641
|
|
Salaries and employee benefits
|
|
|
12,065
|
|
|
|
10,563
|
|
|
|
1,655
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,283
|
|
Other expenses
|
|
|
6,285
|
|
|
|
4,127
|
|
|
|
783
|
|
|
|
1,943
|
|
|
|
(950
|
)
|
|
|
12,188
|
|
Total operating expenses
|
|
|
23,006
|
|
|
|
15,129
|
|
|
|
2,438
|
|
|
|
2,143
|
|
|
|
(1,604
|
)
|
|
|
41,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
16,281
|
|
|
$
|
5,698
|
|
|
$
|
(169
|
)
|
|
$
|
(1,150
|
)
|
|
$
|
-
|
|
|
$
|
20,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,290,518
|
|
|
$
|
74,195
|
|
|
$
|
2,894
|
|
|
$
|
18,420
|
|
|
$
|
(23,189
|
)
|
|
$
|
1,362,838
|
|
|
|
Commercial
|
|
|
Mortgage
|
|
|
Wealth
|
|
|
|
|
|
|
|
|
Consolidated
|
|
September 30, 2015
|
|
Banking
|
|
|
Banking
|
|
|
Management
|
|
|
Other
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
(In Thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
31,522
|
|
|
$
|
1,343
|
|
|
$
|
-
|
|
|
$
|
10
|
|
|
$
|
(656
|
)
|
|
$
|
32,219
|
|
Gain on sale of loans
|
|
|
-
|
|
|
|
15,110
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,110
|
|
Other revenues
|
|
|
2,260
|
|
|
|
392
|
|
|
|
1,925
|
|
|
|
1,043
|
|
|
|
(932
|
)
|
|
|
4,688
|
|
Total revenues
|
|
|
33,782
|
|
|
|
16,845
|
|
|
|
1,925
|
|
|
|
1,053
|
|
|
|
(1,588
|
)
|
|
|
52,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
2,884
|
|
|
|
434
|
|
|
|
-
|
|
|
|
211
|
|
|
|
(656
|
)
|
|
|
2,873
|
|
Salaries and employee benefits
|
|
|
10,028
|
|
|
|
8,914
|
|
|
|
1,477
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,419
|
|
Other expenses
|
|
|
5,578
|
|
|
|
3,903
|
|
|
|
740
|
|
|
|
1,821
|
|
|
|
(932
|
)
|
|
|
11,110
|
|
Total operating expenses
|
|
|
18,490
|
|
|
|
13,251
|
|
|
|
2,217
|
|
|
|
2,032
|
|
|
|
(1,588
|
)
|
|
|
34,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
15,292
|
|
|
$
|
3,594
|
|
|
$
|
(292
|
)
|
|
$
|
(979
|
)
|
|
$
|
-
|
|
|
$
|
17,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,081,026
|
|
|
$
|
38,246
|
|
|
$
|
1,228
|
|
|
$
|
16,386
|
|
|
$
|
(18,657
|
)
|
|
$
|
1,118,229
|
|
NOTE 6 – EARNINGS PER SHARE
The following table shows the calculation of both basic and
diluted earnings per share (“EPS”) for the three and nine months ended September 30, 2016 and 2015, respectively.
The numerator of both the basic and diluted EPS is equivalent to net income. The weighted average number of shares outstanding
used as the denominator for diluted EPS is increased over the denominator used for basic EPS by the effect of potentially dilutive
common stock options utilizing the treasury stock method.
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
|
(In Thousands, Except for Share and Per Share Data)
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER SHARE:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,425
|
|
|
$
|
3,944
|
|
Weighted average shares outstanding
|
|
|
10,595,599
|
|
|
|
10,519,954
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.42
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,425
|
|
|
$
|
3,944
|
|
Weighted average shares outstanding
|
|
|
10,595,599
|
|
|
|
10,519,954
|
|
Dilutive stock options
|
|
|
93,568
|
|
|
|
73,461
|
|
Weighted average diluted shares outstanding
|
|
|
10,689,167
|
|
|
|
10,593,415
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.41
|
|
|
$
|
0.37
|
|
|
|
Nine Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
|
(In Thousands, Except for Share and Per Share Data)
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER SHARE:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,398
|
|
|
$
|
11,501
|
|
Weighted average shares outstanding
|
|
|
10,575,088
|
|
|
|
10,504,086
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.27
|
|
|
$
|
1.09
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,398
|
|
|
$
|
11,501
|
|
Weighted average shares outstanding
|
|
|
10,575,088
|
|
|
|
10,504,086
|
|
Dilutive stock options
|
|
|
69,809
|
|
|
|
63,087
|
|
Weighted average diluted shares outstanding
|
|
|
10,644,897
|
|
|
|
10,567,173
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
1.26
|
|
|
$
|
1.09
|
|
NOTE 7 – COMMITMENTS AND CONTINGENT LIABILITIES
As part of its mortgage banking activities, the Mortgage Division
enters into interest rate lock commitments, which are commitments to originate loans where the interest rate on the loan is determined
prior to funding and the customers have locked into that interest rate. The Mortgage Division then locks in the loan and interest
rate with an investor and commits to deliver the loan if settlement occurs (“best efforts”) or commits to deliver
the locked loan in a binding (“mandatory”) delivery program with an investor. Certain loans under interest rate lock
commitments are covered under forward sales contracts of mortgage backed securities (“MBS”). Forward sales contracts
of MBS are recorded at fair value with changes in fair value recorded in noninterest income. Interest rate lock commitments and
commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best
efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. The
Mortgage Division determines the fair value of interest rate lock commitments and delivery contracts by measuring the fair value
of the underlying asset, which is impacted by current interest rates, taking into consideration the probability that the interest
rate lock commitments will close or will be funded.
Certain additional risks arise from these forward delivery
contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. The Mortgage Division
does not expect any counterparty to any MBS to fail to meet its obligation. Additional risks inherent in mandatory delivery programs
include the risk that, if the Mortgage Division does not close the loans subject to interest rate risk lock commitments, it will
still be obligated to deliver MBS to the counterparty under the forward sales agreement. Should this be required, the Mortgage
Division could incur significant costs in acquiring replacement loans or MBS and such costs could have an adverse effect on mortgage
banking operations.
Since the Mortgage Division’s derivative instruments
are not designated as hedging instruments, the fair value of the derivatives are recorded as a freestanding asset or liability
with the change in value being recognized in current earnings during the period of change. The Corporation has not elected to
apply hedge accounting to the Mortgage Division’s derivative instruments as provided in Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging.
At September 30, 2016 and December 31, 2015, the Mortgage Division
had open forward contracts with a notional value of $83.0 million and $49.0 million, respectively. At September 30, 2016 and December
31, 2015, the Mortgage Division did not have any open mandatory delivery contracts. The open forward delivery contracts are composed
of forward sales of MBS. The fair value of these open forward contracts was ($345) thousand and ($54) thousand at September 30,
2016 and December 31, 2015, respectively.
Interest rate lock commitments totaled $51.6 million and $26.6
million at September 30, 2016 and December 31, 2015, respectively, and included $6.2 million that were made on a best efforts
basis at September 30, 2016 and December 31, 2015. Fair values of these best efforts commitments were $54 thousand and $53 thousand
at September 30, 2016 and December 31, 2015, respectively. The remaining hedged interest rate lock commitments totaling $45.4
million and $20.4 million at September 30, 2016 and December 31, 2015 had a fair value of $652 thousand and $275 thousand, respectively.
Included in other noninterest income for the nine months ended
September 30, 2016 and September 30, 2015 was a net gain of $655 thousand and a net gain of $245 thousand, respectively, relating
to derivative instruments. The amount included in other noninterest income for the nine months ended September 30, 2016 and September
30, 2015 pertaining to its hedging activities was a net realized loss of $2.5 million and a net realized loss of $873 thousand,
respectively.
NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU 2014-09, “Revenue from
Contracts with Customers: Topic 606”. This ASU supersedes the revenue recognition requirements in Topic 605, “Revenue
Recognition” as well as most industry-specific guidance. The amendments also create a new Subtopic 340-40 “Other Assets
and Deferred Costs – Contracts with Customers”. In summary, entities are to recognize revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services. The provisions of ASU 2014-09 are effective for annual periods beginning after December
15, 2017 and interim periods within 2018. The adoption of this guidance should not have a material effect on the Corporation’s
financial condition or results of operations.
NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS (continued)
In June 2014, the FASB issued ASU 2014-12, “Compensation
– Stock Compensation (Topic 718)”. The amendments in this ASU require a performance target that affects vesting and
that could be achieved after the requisite service period be treated as a performance condition. The performance target should
not be reflected in estimating the grant-date fair value of the award, and compensation cost should be recognized in the period
in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable
to the period(s) for which the requisite service has already been rendered. The amendments in the ASU are effective for annual
periods beginning after December 15, 2015. The adoption of this guidance did not have a material effect on the Corporation’s
financial condition or results of operations.
In January 2015, the FASB issued ASU 2015-01, “Income
Statement – Extraordinary and Unusual Items (Subtopic 225-20)”. This ASU eliminates extraordinary items from US GAAP
and will align more closely with International Accounting Standards 1, “Presentation of Financial Statements”. The
amendments in the ASU are effective beginning after December 15, 2015. The adoption of this guidance did not have a material effect
on the Corporation’s financial condition or results of operations.
In February 2015, the FASB issued ASU 2015-02, “Consolidation
(Topic 810)”. This ASU focuses on the consolidation evaluation for reporting organizations that are required to evaluate
consolidation of certain legal entities by reducing the number of consolidation models from four to two and is intended to improve
current GAAP. In October 2016, the FASB further issued ASU 2016-17, “Consolidation (Topic 810): Interests Held Through Related
Parties That Are Under Common Control.” This ASU changed the evaluation of whether a reporting entity is the primary beneficiary
of a variable interest entity (VIE) by changing how a reporting entity that is a single decision maker of a VIE treat indirect
interests in the entity held through related parties that are under common control with the reporting entity. The amendments in
both these ASUs are effective beginning after December 15, 2016. The adoption of both ASUs should not have a material effect on
the Corporation’s financial condition or results of operations.
In April 2015, the FASB issued ASU 2015-03, “Interest
– Imputation of Interest (Subtopic 835-30)”. This ASU requires debt issuance costs be presented in the balance sheet
as a direct deduction from the carrying amount of debt liability. The amendments in the ASU are effective beginning after December
15, 2015. The adoption of this guidance did not have a material effect on the Corporation’s financial condition or results
of operations.
In August 2015, the FASB issued ASU 2015-15, “Interest
- Imputation of Interest (Subtopic 835-30)”. This ASU adds language clarifying the Securities and Exchange Commission’s
views regarding the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements.
The amendments in the ASU are effective beginning after December 15, 2015. The adoption of this guidance did not have a material
effect on the Corporation’s financial condition or results of operations.
In September 2015, the FASB issued ASU 2015-16, “Business
Combinations (Topic 805)”. This ASU requires an acquirer retrospectively adjust provisional amounts recognized in a business
combination during the measurement period, in the reporting period in which the adjustment is determined as well as present separately
on the face of the income statement or as a disclosure in the notes to the financial statements the portion of the amount recorded
in current period earnings that would have been recorded in previous reporting periods if the adjustment to the provisional amounts
had been recognized as of the acquisition date. The amendments in the ASU are effective beginning after December 15, 2015. The
adoption of this guidance did not have a material effect on the Corporation’s financial condition or results of operations.
NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS (continued)
In January 2016, the FASB issued ASU 2016-01, “Financial
Instruments – Overall (Subtopic 825-10)”. This ASU requires all equity investments to be measured at fair value with
changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those
that result in consolidation of the investee). The amendments in this update also require an entity to present separately in other
comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific
credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial
instruments. The amendments in the ASU are effective beginning after December 15, 2017. The adoption of this guidance should not
have a material effect on the Corporation’s financial condition or results of operations.
In February 2016, the FASB issued ASU 2016-02, “Leases
(Topic 842)”. This ASU specifies the accounting for leases in an effort to increase transparency and comparability among
organizations. The amendments in the ASU are effective beginning after December 15, 2018. While the adoption of this guidance
should not have a material effect on the Corporation’s financial condition or results of operations, management has yet
to quantify the impact of this ASU.
In March 2016, the FASB issued ASU 2016-05,“Derivatives
and Hedging (Topic 815) Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” This ASU clarifies
that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under ASC Topic
815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria
continue to be met. The amendments in the ASU are effective beginning after December 15, 2016 and for interim periods within that
year. The adoption of this guidance should not have a material effect on the Corporation’s financial condition or results
of operations.
In March 2016, the FASB issued ASU 2016-07,
“Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.”
The amendments affect all entities that have an investment that becomes qualified for the equity method of accounting as a result
of an increase in the level of ownership interest or degree of influence. This ASU simplifies the transition to the equity
method of accounting by eliminating retroactive adjustment of the investment when an investment qualifies for use of the equity
method, among other things. The amendments in the ASU are effective beginning after December 15, 2016 and for interim periods
within that year. The adoption of this guidance should not have a material effect on the Corporation’s financial condition
or results of operations.
In March 2016, the FASB issued ASU 2016-08,
“Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus
Net).” This ASU was issued to clarify certain principal versus agent considerations within the implementation guidance
of ASC Topic 606, “Revenue from Contracts with Customers.” The effective date and transition of ASU 2016-08
is the same as the effective date and transition of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), as discussed
above. We are currently evaluating the potential impact of ASU 2016-08 on our financial statements.
In March 2016, the FASB issued ASU 2016-09,
“Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” Under this
ASU all excess tax benefits and tax deficiencies related to share-based payment awards should be recognized as income tax
expense or benefit in the income statement during the period in which they occur. Previously, such amounts were recorded in the
pool of excess tax benefits included in additional paid-in capital, if such pool was available. Because excess tax benefits are
no longer recognized in additional paid-in capital, the assumed proceeds from applying the treasury stock method when computing
earnings per share should exclude the amount of excess tax benefits that would have previously been recognized in additional paid-in
capital. Additionally, excess tax benefits should be classified along with other income tax cash flows as an operating activity
rather than a financing activity, as was previously the case. ASU 2016-09 also provides that an entity can make an entity-wide
accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures
when they occur. ASU 2016-09 changes the threshold to qualify for equity classification (rather than as a liability) to permit
withholding up to the maximum statutory tax rates (rather than the minimum as was previously the case) in the applicable jurisdictions.
The amendments in the ASU are effective beginning after December 15, 2016 and for interim periods within that year. The adoption
of this guidance should not have a material effect on the Corporation’s financial condition or results of operations.
NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS (continued)
In April 2016, the FASB issued ASU No. 2016-10, “Revenue
from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.” This ASU was issued
to clarify ASC Topic 606, “Revenue from Contracts with Customers” related to (i) identifying performance
obligations; and (ii) the licensing implementation guidance. The effective date and transition of ASU 2016-10 is the
same as the effective date and transition of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),”
as discussed above. We are currently evaluating the potential impact of ASU 2016-10 on our financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial
Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU amends guidance
on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities by eliminating the probable
initial recognition threshold (incurred loss methodology) and requiring entities to reflect its current estimate of all expected
credit losses. The amendments in the ASU are effective beginning after December 15, 2019 and for interim periods within that year.
Early adoption is permitted beginning after December 15, 2018. Entities will apply the amendments in this ASU through a cumulative-effect
adjustment to retained earnings in the first period effective. Management is currently evaluating the potential impact of ASU 2016-13
on its financial statements.
In August 2016, the FASB issued ASU No.
2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This ASU
was issued to reduce diversity in how certain cash receipts and cash payments are being presented and classified in the statement
of cash flows. Guidance provided in the ASU are specific to eight cash flow issues being: debt prepayment or debt extinguishment
costs; settlement of zero-coupon debt or other debt instruments with interest rates that are insignificant to the effective interest
rate of the borrowing; contingent consideration payments made after a business combination; proceeds received from the settlement
of life insurance claims; proceeds received from the settlement of bank-owned life insurance policies; distributions received
from equity method investees; beneficial interests in securitization transactions; and application of the predominance principle.
The amendments in the ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal
years. Early adoption is permitted. The amendments should be applied using a retrospective transition method to each period presented.
The adoption of this guidance should not have a material effect on the Corporation’s financial condition or results of operations.
In October 2016, the FASB issued ASU No.
2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” Under current GAAP, recognition
of current and deferred income taxes for an intra-entity asset transfer is prohibited until the asset has been sold to a third
party. The amendments in this ASU eliminate the exception for an intra-entity transfer of an asset other than inventory thereby
requiring an entity to recognize the income tax consequences when the transfer occurs. The amendments in the ASU are effective
beginning after December 15, 2017 and for interim periods within that year. Early adoption is permitted. Entities will apply the
amendments in this ASU through a cumulative-effect adjustment to retained earnings in the first period effective. The adoption
of this guidance should not have a material effect on the Corporation’s financial condition or results of operations.
NOTE 9 – FAIR VALUE
Fair value pursuant to FASB ASC 820-10, Fair Value
Measurements and Disclosures, is the exchange price, in an orderly transaction that is not a forced liquidation or distressed
sale, between market participants to sell an asset or transfer a liability in the market in which the reporting entity would
transact for the asset or liability, that is, the principal or most advantageous market for the asset or
liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the
measurement date, considered from the perspective of a market participant that holds the asset or liability. FASB ASC 820-10
provides a consistent definition of fair value which focuses on exit price and prioritizes, within a measurement of fair
value, the use of market-based inputs over entity specific inputs. In addition, FASB ASC 820-10 provides a
framework for measuring fair value and establishes a three-level hierarchy for fair value measurements based upon the
transparency of inputs to the valuation of an asset or liability as of the measurement date. Transfers between levels of the
fair value hierarchy are recognized on the actual dates of the event or circumstances that caused the transfer, which
generally coincides with the Corporation’s monthly and/or quarterly valuation process.
NOTE 9 – FAIR VALUE (continued)
The standard describes three levels of inputs that may be used
to measure fair values:
Level 1 - Quoted prices (unadjusted) for identical assets
or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 - Significant other observable inputs other than Level
1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs
that are observable or can be corroborated by observable market data.
Level 3 - Significant unobservable inputs that reflect a company’s
own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Corporation used the following methods to determine the
fair value of each type of financial instrument:
Investment securities
: Fair values for securities available-for-sale
are obtained from an independent pricing service. The prices are not adjusted. The independent pricing service uses industry-standard
models to price U.S. Government agency obligations and mortgage backed securities that consider various assumptions, including
time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual
prices for the underlying financial instruments, as well as other relevant economic measures. Securities of obligations of state
and political subdivisions are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the
treasury rate based on credit rating.
Substantially all assumptions used by the independent
pricing service are observable in the marketplace, can be derived from observable data, or are supported by observable levels
at which transactions are executed in the marketplace (Level 2).
Residential loans held for sale
: The fair value of loans
held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2).
Derivative financial instruments
: Derivative instruments
are used to hedge residential mortgage loans held for sale and the related interest-rate lock commitments and include forward
commitments to sell mortgage loans and mortgage backed securities as further described in Note 7. The fair values of derivative
financial instruments are based on derivative market data inputs as of the valuation date and the underlying value of mortgage
loans for interest rate lock commitments (Level 3).
Impaired loans
: The fair values of impaired loans are
measured on a nonrecurring basis as the fair value of the loan’s collateral for collateral-dependent loans. Collateral
may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The use
of discounted cash flow models and management’s best judgment are significant inputs in arriving at the fair value measure
of the underlying collateral (Level 3).
Other real estate owned
: The fair value of other real
estate owned, which consists of real estate that has been foreclosed, is recorded at the lower of fair value less selling expenses
or the book balance prior to foreclosure. Write downs are provided for subsequent declines in value and are recorded in other
operating expenses (Level 2).
NOTE 9 – FAIR VALUE (continued)
Assets and liabilities measured at fair value under FASB ASC
820-10 on a recurring and non-recurring basis, including financial assets and liabilities for which the Corporation has elected
the fair value option as of September 30, 2016 and December 31, 2015, are summarized below:
|
|
Fair Value Measurement
|
|
|
|
at September 30, 2016 Using
|
|
Description
|
|
Carrying
Value
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
|
Other
Observable
Inputs (Level 2)
|
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
|
|
(In Thousands)
|
|
Financial Assets-Recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
5,230
|
|
|
$
|
-
|
|
|
$
|
5,230
|
|
|
$
|
-
|
|
Mortgage backed securities
|
|
|
125,720
|
|
|
|
-
|
|
|
|
125,720
|
|
|
|
-
|
|
Corporate bonds
|
|
|
8,792
|
|
|
|
-
|
|
|
|
8,792
|
|
|
|
-
|
|
Asset backed securities
|
|
|
13,075
|
|
|
|
-
|
|
|
|
13,075
|
|
|
|
-
|
|
Certificate of deposits
|
|
|
2,040
|
|
|
|
-
|
|
|
|
2,040
|
|
|
|
-
|
|
Municipals
|
|
|
16,969
|
|
|
|
-
|
|
|
|
16,969
|
|
|
|
-
|
|
Municipals - nontaxable
|
|
|
17,014
|
|
|
|
-
|
|
|
|
17,014
|
|
|
|
-
|
|
CRA Mutual fund
|
|
|
1,425
|
|
|
|
-
|
|
|
|
1,425
|
|
|
|
-
|
|
Total available-for-sale investment securities
|
|
|
190,265
|
|
|
|
-
|
|
|
|
190,265
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential loans held for sale
|
|
|
70,998
|
|
|
|
-
|
|
|
|
70,998
|
|
|
|
-
|
|
Derivative assets
|
|
|
993
|
|
|
|
-
|
|
|
|
-
|
|
|
|
993
|
|
Total Financial Assets-Recurring
|
|
$
|
262,256
|
|
|
$
|
-
|
|
|
$
|
261,263
|
|
|
$
|
993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities-Recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
631
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
631
|
|
Total Financial Liabilities-Recurring
|
|
$
|
631
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets-Non-Recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
(1)
|
|
$
|
5,845
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,845
|
|
Total Financial Assets-Non-Recurring
|
|
$
|
5,845
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Represents the carrying value of loans for which adjustments
are based on the appraised value of the collateral, if collateral dependent, or the present value of expected future cash
flows, discounted at the loan’s effective interest rate.
|
|
|
Fair Value Measurement
|
|
|
|
at December 31, 2015 Using
|
|
Description
|
|
Carrying
Value
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
|
Other
Observable
Inputs (Level 2)
|
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
|
|
(In Thousands)
|
|
Financial Assets-Recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government agency
|
|
$
|
18,904
|
|
|
$
|
-
|
|
|
$
|
18,904
|
|
|
$
|
-
|
|
Mortgage backed
|
|
|
96,077
|
|
|
|
-
|
|
|
|
96,077
|
|
|
|
-
|
|
Corporate bonds
|
|
|
8,959
|
|
|
|
-
|
|
|
|
8,959
|
|
|
|
-
|
|
Asset Backed Securities
|
|
|
14,031
|
|
|
|
-
|
|
|
|
14,031
|
|
|
|
-
|
|
Certificate of deposit
|
|
|
1,967
|
|
|
|
-
|
|
|
|
1,967
|
|
|
|
-
|
|
Municipals - nontaxable
|
|
|
12,005
|
|
|
|
-
|
|
|
|
12,005
|
|
|
|
-
|
|
Municipals
|
|
|
6,809
|
|
|
|
-
|
|
|
|
6,809
|
|
|
|
-
|
|
CRA Mutual fund
|
|
|
1,410
|
|
|
|
-
|
|
|
|
1,410
|
|
|
|
-
|
|
Total available-for-sale investment securities
|
|
|
160,162
|
|
|
|
-
|
|
|
|
160,162
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential loans held for sale
|
|
|
44,135
|
|
|
|
-
|
|
|
|
44,135
|
|
|
|
-
|
|
Derivative assets
|
|
|
523
|
|
|
|
-
|
|
|
|
-
|
|
|
|
523
|
|
Total Financial Assets-Recurring
|
|
$
|
204,820
|
|
|
$
|
-
|
|
|
$
|
204,297
|
|
|
$
|
523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities-Recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
250
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
250
|
|
Total Financial Liabilities-Recurring
|
|
$
|
250
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets-Non-Recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
(1)
|
|
$
|
7,417
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,417
|
|
Total Financial Assets-Non-Recurring
|
|
$
|
7,417
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,417
|
|
|
(1)
Represents the carrying value of loans for which adjustments are based on the appraised
value of the collateral, if collateral dependent, or the present value of expected future cash flows, discounted at the loan’s
effective interest rate.
|
NOTE 9 – FAIR VALUE (continued)
It is the Corporation’s policy to recognize transfers
between levels as of the actual date of the event or change in circumstances that caused the transfer. There were no transfers
between Level 1 and Level 2 during the nine month periods ended September 30, 2016 and 2015.
The changes in Level 3 net derivatives measured at fair value
on a recurring basis are summarized as follows:
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In Thousands)
|
|
Balance, beginning of period
|
|
$
|
287
|
|
|
$
|
648
|
|
Realized and unrealized gains (losses) included in earnings
|
|
|
75
|
|
|
|
(414
|
)
|
Unrealized gains (losses) included in other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
Purchases, settlements, paydowns, and maturities
|
|
|
-
|
|
|
|
-
|
|
Transfer into Level 3
|
|
|
-
|
|
|
|
-
|
|
Balance, end of period
|
|
$
|
362
|
|
|
$
|
234
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In Thousands)
|
|
Balance, beginning of period
|
|
$
|
273
|
|
|
$
|
(110
|
)
|
Realized and unrealized gains (losses) included in earnings
|
|
|
89
|
|
|
|
344
|
|
Unrealized gains (losses) included in other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
Purchases, settlements, paydowns, and maturities
|
|
|
-
|
|
|
|
-
|
|
Transfer into Level 3
|
|
|
-
|
|
|
|
-
|
|
Balance, end of period
|
|
$
|
362
|
|
|
$
|
234
|
|
NOTE 9 – FAIR VALUE (Continued)
The following tables present qualitative information about
level 3 fair value measurements for financial instruments measured at fair value for September 30, 2016 and December 31, 2015:
|
|
September 30, 2016
|
Description
|
|
Fair Value
Estimate
|
|
|
Valuation Techniques
|
|
Unobservable Input
|
|
Range (Weighted Average)
|
|
|
(In Thousands)
|
Financial Assets - Recurring
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
$
|
993
|
|
|
Market pricing (3)
|
|
Estimated pullthrough
|
|
75% - 90% (89.0%)
|
Derivative liabilities
|
|
$
|
631
|
|
|
Market pricing (3)
|
|
Estimated pullthrough
|
|
75% - 90% (89.0%)
|
|
|
|
.
|
|
|
|
|
|
|
|
Financial Assets - Non-recurring
|
|
|
|
|
|
|
|
|
|
|
Impaired loans - Real estate secured
|
|
$
|
1,214
|
|
|
Appraisal of collateral (1)
|
|
Liquidation expenses (2)
|
|
0% - 20% (10%)
|
Impaired loans - Non-real estate secured
|
|
$
|
4,631
|
|
|
Cash flow basis
|
|
Liquidation expenses (2)
|
|
0% - 10% (6%)
|
(1)
|
Fair
value is generally determined through independent appraisals of the underlying collateral on real estate secured loans, which
generally include various level 3 inputs which are not identifiable.
|
(2)
|
Valuations
of impaired loans may be adjusted by management for qualitative factors such as liquidation expenses. The range
and weighted average of liquidation expense adjustments are presented as a percent of the appraisal.
|
(3)
|
Market
pricing on derivative assets and liabilities is adjusted by management for the anticipated percent of derivative assets and
liabilities that will create a realized gain or loss. The range and weighted average of estimated pull-through
is presented
|
|
|
December 31, 2015
|
Description
|
|
Fair Value
Estimate
|
|
|
Valuation Techniques
|
|
Unobservable Input
|
|
Range (Weighted Average)
|
|
|
(In Thousands)
|
Financial Assets - Recurring
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
$
|
523
|
|
|
Market pricing (3)
|
|
Estimated pullthrough
|
|
75% - 90% (86.2%)
|
Derivative liabilities
|
|
$
|
250
|
|
|
Market pricing (3)
|
|
Estimated pullthrough
|
|
75% - 90% (86.2%)
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets - Non-recurring
|
|
|
|
|
|
|
|
|
|
|
Impaired loans - Real estate secured
|
|
$
|
6,695
|
|
|
Appraisal of collateral (1)
|
|
Liquidation expenses (2)
|
|
0% - 15% (14%)
|
Impaired loans - Non-real estate secured
|
|
$
|
722
|
|
|
Cash flow basis
|
|
Liquidation expenses (2)
|
|
0% - 10% (4%)
|
(1)
|
Fair
value is generally determined through independent appraisals of the underlying collateral on real estate secured loans, which
generally include various level 3 inputs which are not identifiable.
|
(2)
|
Valuations
of impaired loans may be adjusted by management for qualitative factors such as liquidation expenses. The range
and weighted average of liquidation expense adjustments are presented as a percent of the appraisal.
|
(3)
|
Market
pricing on derivative assets and liabilities is adjusted by management for the anticipated percent of derivative assets and
liabilities that will create a realized gain or loss. The range and weighted average of estimated pull-through
is presented
|
NOTE 9 – FAIR VALUE (Continued)
Financial instruments recorded using FASB ASC 825-10
Under FASB ASC 825-10, Financial Instruments, the Corporation
may elect to report most financial instruments and certain other items at fair value on an instrument-by-instrument basis with
changes in fair value reported in net income. After the initial adoption the election is made at the acquisition of an eligible
financial asset, financial liability or firm commitment or when certain specified reconsideration events occur. The fair value
election, with respect to an item, may not be revoked once an election is made.
The following table reflects the differences between the fair
value carrying amount of residential mortgage loans held for sale at September 30, 2016, measured at fair value under FASB ASC
825-10, and the aggregate unpaid principal amount the Corporation is contractually entitled to receive at maturity.
(In Thousands)
|
|
Aggregate
Fair Value
|
|
|
Difference
|
|
|
Contractual
Principal
|
|
Residential mortgage loans held for sale
|
|
$
|
70,998
|
|
|
$
|
2,940
|
|
|
$
|
68,058
|
|
The Corporation has elected to account for residential loans
held for sale at fair value to eliminate the mismatch that would occur by recording changes in market value on derivative instruments
used to hedge loans held for sale while carrying the loans at the lower of cost or market.
The following methods and assumptions not previously presented
were used in estimating the fair value of financial assets and financial liabilities that are not measured and reported at fair
value on a recurring basis or non-recurring basis:
Cash and Short-Term Investments
For those short-term instruments, the carrying amount is a
reasonable estimate of fair value. As such they are classified as Level 1 for noninterest-bearing deposits and Level 2 for interest-bearing
deposits due from banks or federal funds sold.
Restricted Stock
It is not practical to determine the fair value of restricted
stock due to the restrictions placed on its transferability.
Loans, Net of Allowance
For certain homogeneous categories of loans, such as some residential
mortgages, and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans,
adjusted for differences in loan characteristics resulting in a Level 3 classification. The fair value of other types of loans
is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities resulting in a Level 3 classification.
Accrued Interest
The carrying amounts of accrued interest approximate fair value
resulting in a Level 2 or Level 3 classification depending upon the level of the asset or liability, with which, the accrual is
associated.
Deposits and Borrowings
The fair value of demand deposits, savings accounts, and certain
money market deposits is the amount payable on demand at the reporting date resulting in a Level 1 classification. The fair value
of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities
also resulting in a Level 1 classification. The fair value of all other deposits and borrowings is determined using the discounted
cash flow method thereby resulting in a Level 2 classification. The discount rate was equal to the rate currently offered on similar
products.
NOTE 9 – FAIR VALUE (Continued)
Off-Balance-Sheet Financial Instruments
The fair value of commitments to extend credit is estimated
using the fees currently charged to enter 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 interest rates. The fair value of stand-by 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 September 30, 2016 and December 31, 2015, the majority of
off-balance-sheet items are variable rate instruments or convert to variable rate instruments if drawn upon. Therefore, the fair
value of these items is largely based on fees, which are nominal and immaterial.
The carrying amounts and estimated fair values of financial
instruments at September 30, 2016 and December 31, 2015 were as follows:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
(In Thousands)
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and short-term investments
|
|
$
|
81,910
|
|
|
$
|
81,910
|
|
|
$
|
35,889
|
|
|
$
|
35,889
|
|
Securities available-for-sale
|
|
|
190,265
|
|
|
|
190,265
|
|
|
|
160,162
|
|
|
|
160,162
|
|
Securities held-to-maturity
|
|
|
9,214
|
|
|
|
9,475
|
|
|
|
14,287
|
|
|
|
14,314
|
|
Restricted stock
|
|
|
6,309
|
|
|
|
6,309
|
|
|
|
7,259
|
|
|
|
7,259
|
|
Loans, net of allowance
|
|
|
1,022,847
|
|
|
|
1,033,844
|
|
|
|
918,050
|
|
|
|
936,679
|
|
Derivatives
|
|
|
993
|
|
|
|
993
|
|
|
|
523
|
|
|
|
523
|
|
Total financial assets
|
|
$
|
1,311,538
|
|
|
$
|
1,322,796
|
|
|
$
|
1,136,170
|
|
|
$
|
1,154,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
1,115,053
|
|
|
$
|
1,109,776
|
|
|
$
|
913,744
|
|
|
$
|
909,479
|
|
Short-term borrowings
|
|
|
41,336
|
|
|
|
41,104
|
|
|
|
91,129
|
|
|
|
90,269
|
|
Long-term borrowings
|
|
|
75,000
|
|
|
|
74,304
|
|
|
|
55,000
|
|
|
|
54,324
|
|
Derivatives
|
|
|
631
|
|
|
|
631
|
|
|
|
250
|
|
|
|
250
|
|
Total financial liabilities
|
|
$
|
1,232,020
|
|
|
$
|
1,225,815
|
|
|
$
|
1,060,123
|
|
|
$
|
1,054,322
|
|
NOTE 10 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET
RISK
The Corporation 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. These financial instruments consist primarily
of commitments to extend credit. These instruments involve, to varying degrees, elements of credit 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 Corporation
has in particular classes of financial instruments.
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 by the customer. 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 Corporation
evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral, if any, deemed necessary by
the Corporation upon extension of credit is based on management’s credit evaluation of the counterparty. Collateral normally
consists of real property, liquid assets or business assets. The Corporation had $46.4 million and $53.2 million in outstanding
commitments at September 30, 2016 and December 31, 2015, respectively.
The Corporation’s exposure to credit loss in the event
of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual
notional amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments. The Corporation had $296.8 million and $304.9 million in unfunded lines of credit
whose contract amounts represent credit risk at September 30, 2016 and December 31, 2015, respectively.
Standby letters of credit are conditional commitments issued
by the Corporation to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to
support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year.
The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to
customers. The Corporation generally holds collateral supporting those commitments if deemed necessary. The Corporation had standby
letters of credit outstanding in the amount of $9.3 million and $7.6 million at September 30, 2016 and December 31, 2015, respectively.
The Bank maintains a reserve for potential off-balance sheet
credit losses that is included in other liabilities on the balance sheet. At September 30, 2016 and December 31, 2015 the balance
in this reserve totaled $750 thousand.
In August 2016, the Bank entered into a letter of credit agreement
with the Commonwealth of Virginia Treasury Board pertaining to its public deposits program. Under the terms of the letters of
credit agreement, the Commonwealth of Virginia Treasury Board in accordance with the Security for Public Deposits Act has approved
the use of a letter of credit issued by the FHLB as collateral by the Bank. The maximum amount available under the letter of credit
is $35 million. The letter of credit expires in August 2017 with an automatic one year extension until August 2018.
The Mortgage Division of the Bank makes representations and
warranties that loans sold to investors meet its program’s guidelines and that the information provided by the borrowers
is accurate and complete. In the event of a default on a loan sold, the investor may make a claim for losses due to document deficiencies,
program compliance, early payment default, and fraud or borrower misrepresentations. The Mortgage Division maintains a reserve
in other liabilities for potential losses on mortgage loans sold. Management performs a quarterly analysis to determine the adequacy
of the reserve. At September 30, 2016 and December 31, 2015, the balance in this reserve totaled $1.0 million.
NOTE 10 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET
RISK
(Continued)
The following table shows the changes to the allowance for
losses on mortgage loans sold.
|
|
Nine Months ended September 30,
|
|
|
Year ended
|
|
|
|
2016
|
|
|
2015
|
|
|
December 31, 2015
|
|
|
|
(In Thousands)
|
|
Allowance for losses on mortgage loans sold -beginning of period
|
|
$
|
1,029
|
|
|
$
|
1,198
|
|
|
$
|
1,198
|
|
Provision released from operating expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Recoveries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Charge-offs
|
|
|
-
|
|
|
|
(19
|
)
|
|
|
(169
|
)
|
Allowance for losses on mortgage loans sold - end of period
|
|
$
|
1,029
|
|
|
$
|
1,179
|
|
|
$
|
1,029
|
|
NOTE 11 – BANK-OWNED LIFE INSURANCE POLICIES
The Corporation had $23.6 million and $15.8 million in bank-owned
life insurance (“BOLI”) at September 30, 2016 and December 31, 2015, respectively. The Corporation recognized interest
income, which is included in other noninterest income, of $338 thousand and $345 for the nine months ended September 30, 2016
and September 30, 2015, respectively.
NOTE 12 – SUBSEQUENT EVENTS
On October 24, 2016, the Corporation announced the
signing of a definitive agreement and plan of reorganization, dated October 21, 2016 (the “Middleburg Merger
Agreement”), to acquire Middleburg Financial Corporation (“Middleburg”), and its wholly-owned subsidiaries,
Middleburg Bank and Middleburg Investment Group, Inc. Middleburg Bank is a Virginia-based bank with twelve financial service
centers and one limited service facility primarily servicing Northern Virginia. The Middleburg Merger Agreement and the
transactions pursuant thereto have been unanimously approved by the Boards of Directors of the Corporation and Middleburg and
the merger is expected to close in the second quarter of 2017, subject to customary closing conditions, including the receipt
of required regulatory approvals and the approval of each company’s shareholders. At September 30, 2016, Middleburg had
total assets of $1.34 billion, gross loans of $845.89 million, and total deposits of $1.09 billion. Under the terms of the
Middleburg Merger Agreement, Middleburg shareholders will receive 1.3314 shares of the Corporation’s common stock for
each share of Middleburg common stock held immediately prior to the effective date of the merger. As a result of the merger,
each option to purchase shares of Middleburg common stock granted under a Middleburg equity-based compensation plan that is
outstanding immediately prior to the effective date of the merger will be cancelled for a cash payment equal to the product
of (i) the difference between the closing sale price of Middleburg common stock on the trading day immediately preceding the
effective date of the merger and the per share exercise price of the stock option, and (ii) the number of shares of
Middleburg common stock subject to such stock option. Each restricted share of Middleburg common stock granted under a
Middleburg equity compensation plan that is outstanding immediately prior to the effective date of the merger will, pursuant
to the terms of each such grant, vest in full immediately prior to the effective date of the merger and be converted into
unrestricted shares of the Corporation’s common stock based on the exchange ratio. Each outstanding warrant to purchase
shares of Middleburg common stock will, pursuant to the terms of each such warrant, convert into a warrant to purchase shares
of the Corporation’s common stock.
Item 2.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction
with Access National Corporation’s (“Corporation”, “we”, “us”) consolidated financial
statements, and notes thereto, included in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December
31, 2015. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results
for the year ending December 31, 2016 or any future period.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In addition
to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements. For this purpose,
any statements contained herein, including documents incorporated by reference, that are not statements of historical fact
may be deemed to be forward-looking statements. Examples of forward-looking statements include discussions as to our
expectations, beliefs, plans, goals, objectives and future financial or other performance or assumptions concerning matters
discussed in this document. Forward-looking statements often use words such as “believes,”
“expects,” “plans,” “may,” “will,” “should,”
“projects,” “contemplates,” ” anticipates,” “forecasts,”
“intends” or other words of similar meaning. Forward-looking statements in this Quarterly Report on Form 10-Q
include, without limitation, statements regarding the Corporation’s beliefs regarding the future strength of the
economy and labor markets and anticipated interest rates and the effect of such rates on the Corporation’s performance
and net interest margin and the volume of future mortgage refinancing, as well as the Corporation’s expectations
concerning operating losses and the profitability of its mortgage segment. You can also identify them by the fact that they
do not relate strictly to historical or current facts. Forward-looking statements are subject to numerous assumptions, risks
and uncertainties, and actual results could differ materially from historical results or those anticipated by such
statements. Factors that could have a material adverse effect on the operations and future prospects of the Corporation
include, but are not limited to, changes in: collateral values, especially in the real estate market; continued challenging
economic conditions or deterioration in general business and economic conditions and in the financial markets; mergers and
acquisitions, including merger integration risk in connection with the Corporation’s pending merger with Middleburg such
as potential deposit attrition, higher than expected costs, customer loss and business disruption associated with the
integration of Middleburg, including, without limitation, potential difficulties in maintaining relationships with key
personnel and other integration related matters; the impact of any laws, regulations, policies or programs implemented
pursuant to
the Dodd-Frank Act or other legislation or
regulation; unemployment levels; branch expansion plans; interest rates; general economic conditions; monetary and fiscal
policies of the U.S. Government, including policies of the Office of the Comptroller of the Currency
(“Comptroller”), the U.S. Department of the Treasury and the Board of Governors of the Federal Reserve System and
the Federal Reserve Bank of Richmond; the economy of Northern Virginia, including governmental spending and real estate
markets; the quality or composition of the loan or investment portfolios; demand for loan products; deposit flows;
competition; the liquidity of the Corporation; and accounting principles, policies and guidelines. These risks
and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are
cautioned not to place undue reliance on such statements. Any forward-looking statement speaks only as of the date on which
it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after
the date on which it is made.
For additional discussion of risk factors that may cause our
actual future results to differ materially from the results indicated within forward looking statements, please see “Item
1A – Risk Factors” of the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
CRITICAL ACCOUNTING POLICIES
The Corporation’s consolidated financial statements have
been prepared in accordance with GAAP. In preparing the Corporation’s financial statements management makes estimates and
judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. Management believes that the most significant
subjective judgments that it makes include the following:
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses
that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) FASB ASC 450-10,
which requires that losses be accrued when they are probable of occurring and can be estimated, and (ii) FASB ASC 310-10, which
requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or
values that are observable in the secondary market and the loan balance. An allowance for loan losses is established through a
provision for loan losses based upon industry standards, known risk characteristics, management’s evaluation of the risk
inherent in the loan portfolio, and changes in the nature and volume of loan activity. Such evaluation considers, among other
factors, the estimated market value of the underlying collateral and current economic conditions. For further information about
our practices with respect to allowance for loan losses, please see Note 4 to the consolidated financial statements.
Other Than Temporary Impairment of Securities
Securities in the Corporation’s securities portfolio
are classified as either available-for-sale or held-to-maturity. At September 30, 2016, there were no non-agency mortgage backed
securities or trust preferred securities in the portfolio. The estimated fair value of the portfolio fluctuates due to changes
in market interest rates and other factors. Changes in estimated fair value are recorded in shareholders’ equity as a component
of other comprehensive income. Securities are monitored to determine whether a decline in their value is other than temporary.
Management evaluates the securities portfolio on a quarterly basis to determine the collectability of amounts due per the contractual
terms of each security. A decline in the fair value of an investment below its amortized cost attributable to factors that indicate
the decline will not be recovered over the anticipated holding period of the investment will cause the security to be considered
other than temporarily impaired. Other than temporary impairments result in reducing the security’s carrying value by the
amount of the estimated credit loss. The credit component of the other than temporary impairment loss is realized through the
statement of income and the remainder of the loss remains in other comprehensive income. At September 30, 2016, there were no
securities with other than temporary impairment.
Income Taxes
The Corporation uses the liability method of accounting for
income taxes. This method results in the recognition of deferred tax assets and liabilities that are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled.
As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income
taxes. The deferred provision for income taxes is the result of the net change in the deferred tax asset and deferred tax liability
balances during the year. This amount combined with the current taxes payable or refundable results in the income tax expense
for the current year. The Corporation’s evaluation of the deductibility or taxability of items included in the Corporation’s
tax returns has not resulted in the identification of any material, uncertain tax positions.
Fair Value
Fair values of financial instruments are estimated using relevant
market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding
interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes
in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on and off-balance
sheet financial instruments do not include the value of anticipated future business or the values of assets and liabilities not
considered financial instruments. For additional information about our financial assets carried at fair value, please see
Note
9 to the consolidated financial statements.
PENDING ACQUISITION OF MIDDLEBURG FINANCIAL CORPORATION
On October 24, 2016, the Corporation announced the signing of
a definitive agreement and plan of reorganization, dated as of October 21, 2016, pursuant to which the Corporation and Middleburg
will merge. Under the terms of the merger agreement, Middleburg shareholders will receive a fixed exchange ratio of 1.3314 Corporation
shares for each share of Middleburg common stock owned. For more information on this pending acquisition refer to Note 12 to the
consolidated financial statements and the Corporation’s Current Report on Form 8-K filed with the SEC on October 24, 2016.
FINANCIAL CONDITION
Executive Summary
At September 30, 2016, the Corporation’s assets totaled
$1.36 billion and grew $184.3 million when compared to December 31, 2015. The increase in assets was primarily due to a growth
in loans held for investment of $79.0 million, a $25.0 million increase in investment securities, a $26.9 million growth in loans
held for sale, and $43.2 million of growth in interest-bearing balances. The first nine months of 2016 reflected growth in all
categories of loans held for investment from December 31, 2015 with the exception of consumer loans. The $79.0 million increase
in loans held for investment as compared to December 31, 2015 is primarily attributable to a $26.8 million or 18.13% growth in
commercial real estate – non-owner occupied loans, a $18.3 million or 8.34% increase in commercial real estate – owner
occupied loans, a $13.6 million or 20.63% increase in real estate construction loans, and a $22.3 million or 9.18% increase in
commercial loans. Overall, the portfolio of loans held for investment grew at an annualized rate of 11.9%. At September 30, 2016,
loans secured by real estate collateral comprised 71.89% of our total loan portfolio, with loans secured by commercial real estate
contributing 42.69% of our total loan portfolio, loans secured by residential real estate contributing 20.96% and real estate
construction loans contributing 8.24%. Loans held for sale totaled $71.0 million at September 30, 2016, compared to $44.1 million
at December 31, 2015. Loans held for sale fluctuates with the volume of loans originated during any given month and the length
of time the loans are held prior to selling them in the secondary market. Deposits totaled $1.115 billion at September 30, 2016,
compared to $913.7 million at December 31, 2015, an increase of $201.3 million. Noninterest-bearing deposits increased $101.8
million from $307.8 million at December 31, 2015 to $409.6 million at September 30, 2016. Savings and interest-bearing deposits
increased $143.2 million from $293.7 million at December 31, 2015 to $436.9 million at September 30, 2016. Non-wholesale time
deposits increased from $136.0 million at December 31, 2015 to $163.7 million at September 30, 2016, an increase of $27.7 million,
while wholesale funding time deposits saw a net decrease of $71.0 million, from $176.4 million at December 31, 2015 to $105.4
million at September 30, 2016.
Net income for the third quarter of 2016 totaled $4.4 million
compared to $3.9 million for the same period in 2015. Earnings per diluted share were $0.41 for the third quarter of 2016, compared
to $0.37 per diluted share in the same period of 2015. Third quarter 2016 pretax earnings increased $879 thousand or 14.58% when
compared to third quarter 2015 pretax earnings.
The banking segment had a decrease in pre-tax earnings when
compared to the third quarter 2015 of $210 thousand, driven by an increase in our provision for loan loss of $750 thousand. The
banking segment’s interest income increased $1.6 million when compared to third quarter 2015 which was partially offset
by an increase in salaries and benefits and interest expense of $444 thousand and $577 thousand, respectively. The mortgage segment
had an increase in gains on the sale of loans of $2.5 million that resulted from an increase in the secondary margins on mortgage
loans held for sale over third quarter 2015.
Net income for the nine months ended September 30, 2016 totaled
$13.4 million compared to $11.5 million for the same period in 2015. Earnings per diluted share were $1.26 for the first nine
months of 2016, compared to $1.09 per diluted share in the same period of 2015. For the nine month period ended September 30,
2016, the banking segment saw an increase in pretax income of $989 thousand when compared to the nine months ended September 30,
2015 due to an increase in net interest income of $3.1 million and an increase in non-interest income of $648 thousand which was
partially offset by an increase in salaries and employee benefits of $2.0 million due to continued staffing expansion. When comparing
the nine month period ended September 30, 2016 to the same period in 2015, the mortgage segment saw a pretax earnings increase
of $2.1 million. The mortgage segment had an increase in gains on the sale of loans of $4.3 million when comparing the nine months
ended September 30, 2016 to the same period in 2015 due to an increase in the secondary margins on mortgage loans held for sale,
the increase was offset by a $1.6 million increase in salaries and employee benefits.
Non-performing assets (“NPAs”) totaled $5.8 million,
or 0.43%, of total assets at September 30, 2016, down from $7.4 million, or 0.63% of total assets as of December 31, 2015. The
Bank did not have other real estate owned at September 30, 2016. During the third quarter 2016, Access Real Estate sold its other
real estate owned property with a carrying value of $500 thousand for $463 thousand. The allowance for loan loss was $14.7 million
and $13.6 million at September 30, 2016 and December 31, 2015, respectively, and represented 1.52% and 1.53% of total loans held
for investment at September 30, 2016 and December 31, 2015, respectively.
The unemployment rate for Fairfax County, Virginia was at 2.9%
as of May 2016 and still well below the 3.7% unemployment rate for the state of Virginia at the end of June 2016 and 4.9% for
the nation at the end of June 2016. Information reviewed at the Federal Open Market Committee’s (FOMC) June 2016 meeting
indicated the labor market strengthened and economic activity continues to expand at a moderate rate. Labor market indicators
point to an increase in labor utilization in recent months as well. The FOMC reaffirmed its view that the current target rate
for the federal funds rate remains accommodative to support further improvement in labor market conditions and a return to 2%
inflation. The historically low interest rate environment continues to negatively impact yields of variable loans and the securities
portfolio. The Corporation’s net interest margin for the three months ended June 30, 2016 decreased to 3.51% from the three
months ended June 30, 2015 percentage of 3.67%. While there is no certainty to the magnitude of any impact, the continued extended
period of low short-term interest rates, as presently forecasted by the Federal Reserve, will continue to have an adverse effect
on the net interest margin.
The latest Case-Shiller Home Price data available shows home
prices increased 5.2% in 20 U.S. cities for the twelve months ended May 2016. The Consumer Confidence Index increased in June
2016, to 98.0, up from 92.4 in May 2016. Retail sales for June 2016 were 2.7% greater than a year earlier. As such, we remain
cautious and have generally retained more cautious loan underwriting criteria established during the financial crisis period of
2007 – 2009. In spite of these challenges, we are proactive in seeking new client relationships driven by our target market
profile: business-to-business and business-to-government companies with annual revenue of $1 million to $100 million and the various
banking services needed by the business and the professionals associated with the businesses. The Corporation is optimistic with
a strong capital base and being positioned for continued growth.
Securities
The Corporation’s securities portfolio is comprised of
U.S. government agency securities, mortgage backed securities, corporate bonds, a CRA mutual fund, certificates of deposit, and
asset backed securities as well as municipal bonds. The portfolio does not have any non-agency mortgage backed securities or trust
preferred securities.
At September 30, 2016 the fair value of the securities portfolio
totaled $199.7 million, compared to $174.5 million at December 31, 2015. Included in the fair value totals are held-to-maturity
securities with an amortized cost of $9.2 million (fair value of $9.5 million) and $14.3 million (fair value of $14.3 million)
at September 30, 2016 and December 31, 2015, respectively. Securities classified as available-for-sale are accounted for at fair
market value with unrealized gains and losses recorded directly to a separate component of shareholders’ equity, net of associated
tax effect while held-to-maturity securities are carried at amortized cost. Investment securities are used to provide liquidity,
to generate income, and to temporarily supplement loan growth as needed.
Restricted Stock
Restricted stock consists of FHLB stock and FRB stock. These
stocks are classified as restricted stocks because their ownership is restricted to certain types of entities and they lack a
market. Restricted stock is carried at cost on the Corporation’s financial statements. Dividends are paid semiannually on
FRB stock and quarterly on FHLB stock.
Loans
The loan portfolio constitutes the largest component of earning
assets and is comprised of commercial real estate – owner occupied, commercial real estate – non-owner occupied, residential
real estate, commercial, real estate construction, and consumer loans. All lending activities of the Bank and its subsidiaries
are subject to the regulations and supervision of the Comptroller. The loan portfolio does not have any pay option adjustable
rate mortgages, loans with teaser rates or subprime loans or any other loans considered “high risk loans”. Loans totaled
$966.5 million at September 30, 2016 compared to $887.5 million at December 31, 2015, an increase of $79.0 million or 8.9%. Comprising
the growth, commercial real estate – owner occupied loans increased $18.3 million, commercial loans increased $22.3 million,
real estate construction loans increased $13.6 million, residential real estate loans increased $1.1 million, and commercial real
estate – non-owner occupied increased $26.8 million. Offsetting the growth was a decrease in consumer loans of $3.1 million.
The overall increase in loans reflects results from our marketing outreach as well as continued improvement in loan demand by
local businesses. Please see Note 4 to the consolidated financial statements for a table that summarizes the composition of the
Corporation’s loan portfolio. The following is a summary of the loan portfolio at September 30, 2016.
Commercial Real Estate Loans – Owner Occupied:
This category of loans represented the second largest segment of the loan portfolio and was comprised of owner occupied loans
secured by the commercial property, totaling $238.2 million, representing 24.65% of the loan portfolio at September 30, 2016.
Commercial real estate loans are secured by the subject property and underwritten to policy standards. Policy standards approved
by the Board of Directors from time to time set forth, among other considerations, loan-to-value limits, cash flow coverage ratios,
and the general creditworthiness of the obligors.
Commercial Real Estate Loans – Non-Owner Occupied:
This category of loans represented the fourth largest segment of the loan portfolio and was comprised of loans secured by
income producing commercial property, totaling $174.3 million and representing 18.04% of the loan portfolio at September 30, 2016.
Commercial real estate loans are secured by the subject property and underwritten to policy standards as listed above.
Residential Real Estate Loans:
This category represented
the third largest segment of the loan portfolio and included loans secured by first or second mortgages on one to four family
residential properties. This segment totaled $202.6 million and comprised 20.96% of the loan portfolio as of September 30, 2016.
Of this amount, the following sub-categories existed as a percentage of the whole residential real estate loan portfolio as of
September 30, 2016: home equity lines of credit, 21.7%; first trust mortgage loans, 71.4%; and junior trust loans, 6.9%.
Home equity lines of credit are extended to borrowers in our
target market. Real estate equity is often the largest component of consumer wealth in our marketplace. Once approved, this consumer
finance tool allows the borrowers to access the equity in their homes or investment properties and use the proceeds for virtually
any purpose. Home equity lines of credit are most frequently secured by a second lien on residential property. The proceeds of
first trust mortgage loans are used to acquire or refinance the primary financing on owner occupied and residential investment
properties. Junior trust loans are loans to consumers wherein the proceeds have been used for a stated consumer purpose. Examples
of consumer purposes are education, refinancing debt, or purchasing consumer goods. The loans are generally extended in a single
disbursement and repaid over a specified period of time. Loans in the residential real estate portfolio are underwritten to standards
within a traditional consumer framework that is periodically reviewed and updated by management and the Board of Directors and
takes into consideration repayment source and capacity, value of the underlying property, credit history, savings pattern, and
stability.
Commercial Loans:
Commercial loans represented the largest
segment of the loan portfolio, totaling $264.8 million and representing 27.40% of the loan portfolio as of September 30, 2016.
These loans are made to businesses or individuals within our target market for business purposes. Typically the loan proceeds
are used to support working capital and the acquisition of fixed assets of an operating business. We underwrite these loans based
upon our assessment of the obligor(s)’ ability to generate operating cash flows in the future necessary to repay the loan.
To address the risks associated with the uncertainties of future cash flows, these loans are generally well secured by assets
owned by the business or its principal shareholders/owners and the principal shareholders/owners are typically required to guarantee
the loan.
Real Estate Construction Loans:
Real estate construction
loans, also known as construction and land development loans represented the fifth largest segment of the loan portfolio and totaled
$79.6 million and represented 8.24% of the loan portfolio as of September 30, 2016. These loans generally fall into one of three
categories: first, loans to individuals that are ultimately used to acquire property and construct an owner occupied residence;
second, loans to builders for the purpose of acquiring property and constructing homes for sale to consumers; and third, loans
to developers for the purpose of acquiring land that is developed into finished lots for the ultimate construction of residential
or commercial buildings. Loans of these types are generally secured by the subject property within limits established by the Board
of Directors based upon an assessment of market conditions
and updated from time to time. The loans typically carry recourse
to principal owners. In addition to the repayment risk associated with loans to individuals and businesses, loans in this category
carry construction completion risk. To address this additional risk, loans of this type are subject to additional administration
procedures designed to verify and ensure progress of the project in accordance with allocated funding, project specifications
and time frames.
Consumer Loans:
Consumer loans, the smallest segment
of the loan portfolio, totaled $7.0 million and represented 0.71% of the loan portfolio as of September 30, 2016. Most loans in
this category are well secured with assets other than real estate, such as marketable securities or automobiles. Very few consumer
loans are unsecured. As a matter of operation, management discourages unsecured lending. Loans in this category are underwritten
to standards within a traditional consumer framework that is periodically reviewed and updated by management and the Board of
Directors and takes into consideration repayment capacity, collateral value, savings pattern, credit history, and stability.
Loans Held for Sale (“LHFS”)
LHFS are residential mortgage loans originated by the Mortgage
Division of the Bank to consumers and underwritten in accordance with standards set forth by an institutional investor to whom
we expect to sell the loans for a profit. Loan proceeds are used for the purchase or refinance of the property securing the loan.
Loans are sold with the servicing released to the investor. At September 30, 2016, LHFS at fair value totaled $71.0 million compared
to $44.1 million at December 31, 2015.
The LHFS are closed by the Mortgage Division and held on average
fifteen to thirty days pending their sale to government sponsored entities as well as mortgage banking subsidiaries of large financial
institutions. During the third quarter of 2016 we originated $168.8 million of loans processed in this manner, compared to $120.0
million for the third quarter of 2015. Loans are sold without recourse and subject to industry standard representations and warranties
that may require the repurchase by the Bank of loans previously sold. The repurchase risks associated with this activity center
around early payment defaults and borrower fraud.
Allowance for Loan Losses
The allowance for loan losses totaled $14.7 million at September
30, 2016 compared to $13.6 million at December 31, 2015. The allowance for loan losses was equivalent to 1.52% and 1.53% of total
loans held for investment at September 30, 2016 and December 31, 2015, respectively. Adequacy of the allowance is assessed and
increased by provisions for loan losses charged to expense no less than quarterly. Charge-offs are taken when a loan is identified
as uncollectible. For additional information about the allowance for loan losses, please see Note 4 to the consolidated financial
statements.
Non-performing Assets
At September 30, 2016 and December 31, 2015, the Bank had non-performing
assets totaling $5.8 million and $7.4 million, respectively. Non-performing assets consist of non-accrual loans. All non-performing
loans are carried at the expected liquidation value of the underlying collateral.
The following table is a summary of our non-performing assets
at September 30, 2016 and December 31, 2015.
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
(Dollars In Thousands)
|
|
Non-accrual loans :
|
|
|
|
|
|
|
|
|
Commercial real estate - owner occupied
|
|
$
|
213
|
|
|
$
|
-
|
|
Commercial real estate - non-owner occupied
|
|
|
-
|
|
|
|
5,486
|
|
Residential real estate
|
|
|
-
|
|
|
|
163
|
|
Commercial
|
|
|
4,631
|
|
|
|
722
|
|
Real estate construction
|
|
|
1,001
|
|
|
|
1,046
|
|
Total non-accrual loans
|
|
|
5,845
|
|
|
|
7,417
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned (“OREO”)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
5,845
|
|
|
$
|
7,417
|
|
|
|
|
|
|
|
|
|
|
Restructured loans included above in non-accrual loans
|
|
$
|
1,501
|
|
|
$
|
1,046
|
|
|
|
|
|
|
|
|
|
|
Ratio of non-performing assets to:
|
|
|
|
|
|
|
|
|
Total loans plus OREO
|
|
|
0.60
|
%
|
|
|
0.84
|
%
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
0.43
|
%
|
|
|
0.63
|
%
|
|
|
|
|
|
|
|
|
|
Accruing Past due loans:
|
|
|
|
|
|
|
|
|
90 or more days past due
|
|
$
|
-
|
|
|
$
|
-
|
|
During 2014, Access Real Estate LLC (ARE)
transferred an undeveloped commercial lot that was originally purchased for possible future banking center expansion to other
assets available-for-sale when management listed the property for sale. The land, originally purchased for $1.2 million, was recorded
at its appraised value less costs to sell estimated to be $500 thousand. The property was sold in the third quarter of 2016 for
$463 thousand.
At September 30, 2016 and December 31, 2015, the Bank had no
loans past due 90 days or more and still accruing interest.
Deposits
Deposits are the primary sources of funding loan growth. At
September 30, 2016, deposits totaled $1.12 billion compared to $913.7 million on December 31, 2015, an increase of $201.3 million
or 22.03%. Noninterest-bearing deposits increased $101.8 million or 33.06% from $307.8 million at December 31, 2015 to $409.6
million at September 30, 2016. Savings and interest-bearing deposits increased $143.2 million or 48.74% from $293.7 million at
December 31, 2015 to $436.9 million at September 30, 2016. Non-wholesale time deposits increased from $136.0 million at December
31, 2015 to $163.7 million at September 30, 2016, an increase of $27.7 million or 20.38%, while wholesale funding deposits saw
a net decrease of $40.3 million or 21.02%, from $191.9 million at December 31, 2015 to $151.6 million at September 30, 2016.
Shareholders’ Equity
Shareholders’ equity totaled $121.3 million at September
30, 2016 compared to $109.1 million at December 31, 2015. The increase in shareholders’ equity is due mainly to retained
earnings net of dividends paid. Banking regulators have defined minimum regulatory capital ratios that the Corporation and the
Bank are required to maintain. These risk based capital guidelines take into consideration risk factors, as defined by the banking
regulators, associated with various categories of assets, both on and off the balance sheet. Both the Corporation and Bank are
classified as well capitalized, which is the highest rating.
Beginning January 1, 2015, the Corporation calculates its regulatory
capital under the Basel III Final Rules which modified the definition of “well capitalized” and implemented changes
in the risk weights of assets. The following table outlines the regulatory components of the Corporation’s capital and risk
based capital ratios under these new rules.
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
Tier 1 Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
$
|
8,837
|
|
|
$
|
8,805
|
|
|
|
|
|
Capital surplus
|
|
|
20,625
|
|
|
|
19,953
|
|
|
|
|
|
Retained earnings
|
|
|
87,188
|
|
|
|
81,385
|
|
|
|
|
|
Less: Net unrealized
loss on available for sale equity securities
|
|
|
(47
|
)
|
|
|
(1,380
|
)
|
|
|
|
|
Less:
Disallowed goodwill and intangibles net of associated deferred tax liabilities
|
|
|
(1,749
|
)
|
|
|
(280
|
)
|
|
|
|
|
Total Tier 1 capital
|
|
|
114,854
|
|
|
|
108,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
12,951
|
|
|
|
12,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk based
capital
|
|
$
|
127,805
|
|
|
$
|
120,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk weighted assets
|
|
$
|
1,034,456
|
|
|
$
|
973,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly average assets
|
|
$
|
1,268,504
|
|
|
$
|
1,161,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
Risk-Based Capital Ratios:
|
|
|
|
|
|
|
|
|
|
|
Common equity tier
1 capital ratio
|
|
|
11.10
|
%
|
|
|
11.14
|
%
|
|
|
5.125
|
%
|
Tier 1 capital ratio
|
|
|
11.10
|
%
|
|
|
11.14
|
%
|
|
|
6.625
|
%
|
Total capital ratio
|
|
|
12.35
|
%
|
|
|
12.39
|
%
|
|
|
8.625
|
%
|
Leverage Capital Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage ratio
|
|
|
9.05
|
%
|
|
|
9.34
|
%
|
|
|
4.000
|
%
|
RESULTS OF OPERATIONS
Summary
Net income for the third quarter of 2016 totaled $4.4 million
compared to $3.9 million for the same period in 2015. Earnings per diluted share were $0.41 for the third quarter of 2016, compared
to $0.37 per diluted share in the same period of 2015. Third quarter 2016 pretax earnings increased $879 thousand or 14.58% when
compared to third quarter 2015 pretax earnings. The banking segment had a decrease in pre-tax earnings when compared to the third
quarter 2015 of $210 thousand, driven by an increase in the provision for loan loss over third quarter 2015 of $750 thousand.
The banking segment’s interest income increased $1.6 million when compared to third quarter 2015 which was partially offset
by an increase in salaries and employee benefits and interest expense of $444 thousand and $577 thousand, respectively. The mortgage
segment had an increase in gains on the sale of loans of $2.5 million that resulted from an increase in the secondary margins
on mortgage loans held for sale over third quarter 2015.
Net income for the nine months ended September 30, 2016 totaled
$13.4 million compared to $11.5 million for the same period in 2015. Earnings per diluted share were $1.26 for the first nine
months of 2016, compared to $1.09 per diluted share in the same period of 2015. For the nine month period ended September 30,
2016, the banking segment saw an increase in pretax income of $989 thousand when compared to the nine months ended September 30,
2015 due to increases in net interest income of $3.1 million and non-interest income of $648 thousand which was partially offset
by an increase in salaries and employee benefits of $2.0 million, due to continued staffing expansion, as well as an increase
of $750 thousand in the provision for loan loss. When comparing the nine month period ended September 30, 2016 to the same period
in 2015, the mortgage segment saw a pretax earnings increase of $2.1 million. The mortgage segment had an increase in gains on
the sale of loans of $4.3 million when comparing the nine months ended September 30, 2016 to the same period in 2015 due to an
increase in the secondary margins on mortgage loans held for sale, the increase was offset by a $1.6 million increase in salaries
and employee benefits.
Net Interest Income
Net interest income, the principal source of earnings, is the
amount of income generated by earning assets (primarily loans and investment securities) less the interest expense incurred on
interest-bearing liabilities (primarily deposits) used to fund earning assets. Net interest income before the provision for loan
losses totaled $11.1 million for the three months ended September 30, 2016 compared to $10.1 million for the same period in 2015.
The annualized yield on earning assets was 4.01% for the quarter ended September 30, 2016 compared to 4.08% for the same period
in 2015. The cost of interest-bearing deposits and borrowings increased to 0.81% for the quarter ended September 30, 2016 compared
to the quarter ended September 30, 2015 at 0.61%. Net interest margin was 3.49% for the quarter ended September 30, 2016 compared
to 3.70% for the same period in 2015.
Net interest income before the provision for loan losses totaled
$32.5 million for the first nine months of 2016 compared to $29.3 million for the same period in 2015. The annualized yield on
earning assets for the first nine months of 2016 was 4.04% compared to 4.06% for the same period in 2015. The cost of interest-bearing
deposits and borrowings for the first nine months of 2016 was 0.78% compared to 0.56% for the same period in 2015. Net interest
margin was 3.54% for the first nine months of 2016 compared to 3.69% for the same period in 2015.
Volume and Rate Analysis
The following tables present the dollar amount of changes in
interest income and interest expense for each category of interest earning assets and interest-bearing liabilities.
|
|
Three Months Ended September 30,
|
|
|
|
2016 compared to 2015
|
|
|
|
Change Due To:
|
|
|
|
Increase /
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
Volume
|
|
|
Rate
|
|
|
|
(In Thousands)
|
|
Interest Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
165
|
|
|
$
|
175
|
|
|
$
|
(10
|
)
|
Loans held for sale
|
|
|
157
|
|
|
|
214
|
|
|
|
(57
|
)
|
Loans
|
|
|
1,236
|
|
|
|
1,333
|
|
|
|
(97
|
)
|
Interest-bearing deposits
|
|
|
64
|
|
|
|
10
|
|
|
|
54
|
|
Total increase (decrease) in interest income
|
|
|
1,622
|
|
|
|
1,732
|
|
|
|
(110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
|
64
|
|
|
|
15
|
|
|
|
49
|
|
Money market deposit accounts
|
|
|
183
|
|
|
|
60
|
|
|
|
123
|
|
Savings accounts
|
|
|
27
|
|
|
|
29
|
|
|
|
(2
|
)
|
Time deposits
|
|
|
85
|
|
|
|
(152
|
)
|
|
|
237
|
|
Total interest-bearing deposits
|
|
|
359
|
|
|
|
(48
|
)
|
|
|
407
|
|
FHLB Short-term borrowings
|
|
|
37
|
|
|
|
(14
|
)
|
|
|
51
|
|
Securities sold under agreements to repurchase
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
1
|
|
FHLB Long-term borrowings
|
|
|
181
|
|
|
|
185
|
|
|
|
(4
|
)
|
Total increase (decrease) in interest expense
|
|
|
576
|
|
|
|
121
|
|
|
|
455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net interest income
|
|
$
|
1,046
|
|
|
$
|
1,611
|
|
|
$
|
(565
|
)
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016 compared to 2015
|
|
|
|
Change Due To:
|
|
|
|
Increase /
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
Volume
|
|
|
Rate
|
|
|
|
(In Thousands)
|
|
Interest Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
489
|
|
|
$
|
535
|
|
|
$
|
(46
|
)
|
Loans held for sale
|
|
|
12
|
|
|
|
58
|
|
|
|
(46
|
)
|
Loans
|
|
|
4,206
|
|
|
|
3,962
|
|
|
|
244
|
|
Interest-bearing deposits
|
|
|
169
|
|
|
|
37
|
|
|
|
132
|
|
Total increase (decrease) in interest income
|
|
|
4,876
|
|
|
|
4,592
|
|
|
|
284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
|
170
|
|
|
|
32
|
|
|
|
138
|
|
Money market deposit accounts
|
|
|
339
|
|
|
|
129
|
|
|
|
210
|
|
Savings accounts
|
|
|
100
|
|
|
|
93
|
|
|
|
7
|
|
Time deposits
|
|
|
575
|
|
|
|
(17
|
)
|
|
|
592
|
|
Total interest-bearing deposits
|
|
|
1,184
|
|
|
|
237
|
|
|
|
947
|
|
FHLB Short-term borrowings
|
|
|
77
|
|
|
|
(136
|
)
|
|
|
213
|
|
Securities sold under agreements to repurchase
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
-
|
|
FHLB Long-term borrowings
|
|
|
512
|
|
|
|
521
|
|
|
|
(9
|
)
|
Total increase (decrease) in interest expense
|
|
|
1,768
|
|
|
|
617
|
|
|
|
1,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net interest income
|
|
$
|
3,108
|
|
|
$
|
3,975
|
|
|
$
|
(867
|
)
|
Average Balances, Net Interest Income, Yields Earned
and Rates Paid
The following tables present for the periods indicated the
total dollar amount of interest income from average interest earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed in dollars and rates.
Yield on Average Earning Assets and
Rates on Average Interest-Bearing Liabilities
Three Months Ended
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
|
Average
|
|
|
Income /
|
|
|
Yield /
|
|
|
Average
|
|
|
Income /
|
|
|
Yield /
|
|
(Dollars In Thousands)
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
$
|
191,794
|
|
|
$
|
1,033
|
|
|
|
2.15
|
%
|
|
$
|
159,450
|
|
|
$
|
868
|
|
|
|
2.18
|
%
|
Loans held for sale
|
|
|
63,667
|
|
|
|
574
|
|
|
|
3.61
|
%
|
|
|
40,465
|
|
|
|
417
|
|
|
|
4.12
|
%
|
Loans
(1)
|
|
|
947,622
|
|
|
|
11,073
|
|
|
|
4.67
|
%
|
|
|
833,341
|
|
|
|
9,837
|
|
|
|
4.72
|
%
|
Interest-bearing balances and federal funds sold
|
|
|
72,680
|
|
|
|
98
|
|
|
|
0.54
|
%
|
|
|
59,216
|
|
|
|
34
|
|
|
|
0.23
|
%
|
Total interest-earning assets
|
|
|
1,275,763
|
|
|
|
12,778
|
|
|
|
4.01
|
%
|
|
|
1,092,472
|
|
|
|
11,156
|
|
|
|
4.08
|
%
|
Noninterest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
13,251
|
|
|
|
|
|
|
|
|
|
|
|
10,765
|
|
|
|
|
|
|
|
|
|
Premises, land and equipment
|
|
|
6,819
|
|
|
|
|
|
|
|
|
|
|
|
6,893
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
42,642
|
|
|
|
|
|
|
|
|
|
|
|
32,470
|
|
|
|
|
|
|
|
|
|
Less: allowance for loan losses
|
|
|
(13,964
|
)
|
|
|
|
|
|
|
|
|
|
|
(13,526
|
)
|
|
|
|
|
|
|
|
|
Total noninterest-earning assets
|
|
|
48,748
|
|
|
|
|
|
|
|
|
|
|
|
36,602
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,324,511
|
|
|
|
|
|
|
|
|
|
|
$
|
1,129,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
137,387
|
|
|
$
|
127
|
|
|
|
0.37
|
%
|
|
$
|
112,776
|
|
|
$
|
63
|
|
|
|
0.22
|
%
|
Money market deposit accounts
|
|
|
224,548
|
|
|
|
257
|
|
|
|
0.46
|
%
|
|
|
141,821
|
|
|
|
74
|
|
|
|
0.21
|
%
|
Savings accounts
|
|
|
37,892
|
|
|
|
47
|
|
|
|
0.50
|
%
|
|
|
14,845
|
|
|
|
20
|
|
|
|
0.54
|
%
|
Time deposits
|
|
|
277,014
|
|
|
|
918
|
|
|
|
1.33
|
%
|
|
|
331,412
|
|
|
|
833
|
|
|
|
1.01
|
%
|
Total interest-bearing deposits
|
|
|
676,841
|
|
|
|
1,349
|
|
|
|
0.80
|
%
|
|
|
600,854
|
|
|
|
990
|
|
|
|
0.66
|
%
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB short-term borrowings
|
|
|
38,043
|
|
|
|
69
|
|
|
|
0.73
|
%
|
|
|
58,207
|
|
|
|
32
|
|
|
|
0.22
|
%
|
Securities sold under agreements to repurchase and federal funds purchased
|
|
|
14,881
|
|
|
|
4
|
|
|
|
0.11
|
%
|
|
|
21,928
|
|
|
|
5
|
|
|
|
0.09
|
%
|
FHLB long-term borrowings
|
|
|
75,000
|
|
|
|
213
|
|
|
|
1.14
|
%
|
|
|
10,000
|
|
|
|
32
|
|
|
|
1.28
|
%
|
Total borrowings
|
|
|
127,924
|
|
|
|
286
|
|
|
|
0.89
|
%
|
|
|
90,135
|
|
|
|
69
|
|
|
|
0.31
|
%
|
Total interest-bearing deposits and borrowings
|
|
|
804,765
|
|
|
|
1,635
|
|
|
|
0.81
|
%
|
|
|
690,989
|
|
|
|
1,059
|
|
|
|
0.61
|
%
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
390,997
|
|
|
|
|
|
|
|
|
|
|
|
324,763
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
10,095
|
|
|
|
|
|
|
|
|
|
|
|
8,753
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,205,857
|
|
|
|
|
|
|
|
|
|
|
|
1,024,505
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity
|
|
|
118,654
|
|
|
|
|
|
|
|
|
|
|
|
104,569
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders’ Equity
|
|
$
|
1,324,511
|
|
|
|
|
|
|
|
|
|
|
$
|
1,129,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Spread
(2)
|
|
|
|
|
|
|
|
|
|
|
3.19
|
%
|
|
|
|
|
|
|
|
|
|
|
3.47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin
(3)
|
|
|
|
|
|
$
|
11,143
|
|
|
|
3.49
|
%
|
|
|
|
|
|
$
|
10,097
|
|
|
|
3.70
|
%
|
(1)
Loans placed on nonaccrual status are included
in loan balances.
(2)
Interest spread is the average yield earned
on earning assets, less the average rate incurred on interest-bearing liabilities.
(3)
Net interest margin is net interest income,
expressed as a percentage of average earning assets.
Yield on Average Earning Assets and
Rates on Average Interest-Bearing Liabilities
Nine Months Ended
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
|
Average
|
|
|
Income /
|
|
|
Yield /
|
|
|
Average
|
|
|
Income /
|
|
|
Yield /
|
|
(Dollars In Thousands)
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
$
|
183,182
|
|
|
$
|
2,954
|
|
|
|
2.15
|
%
|
|
$
|
149,831
|
|
|
$
|
2,465
|
|
|
|
2.19
|
%
|
Loans held for sale
|
|
|
47,935
|
|
|
|
1,355
|
|
|
|
3.77
|
%
|
|
|
45,903
|
|
|
|
1,343
|
|
|
|
3.90
|
%
|
Loans
(1)
|
|
|
922,821
|
|
|
|
32,522
|
|
|
|
4.70
|
%
|
|
|
810,096
|
|
|
|
28,316
|
|
|
|
4.66
|
%
|
Interest-bearing balances and federal funds sold
|
|
|
69,860
|
|
|
|
264
|
|
|
|
0.50
|
%
|
|
|
53,402
|
|
|
|
95
|
|
|
|
0.24
|
%
|
Total interest-earning assets
|
|
|
1,223,798
|
|
|
|
37,095
|
|
|
|
4.04
|
%
|
|
|
1,059,232
|
|
|
|
32,219
|
|
|
|
4.06
|
%
|
Noninterest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
12,493
|
|
|
|
|
|
|
|
|
|
|
|
10,642
|
|
|
|
|
|
|
|
|
|
Premises, land and equipment
|
|
|
6,782
|
|
|
|
|
|
|
|
|
|
|
|
6,921
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
38,142
|
|
|
|
|
|
|
|
|
|
|
|
32,731
|
|
|
|
|
|
|
|
|
|
Less: allowance for loan losses
|
|
|
(13,733
|
)
|
|
|
|
|
|
|
|
|
|
|
(13,438
|
)
|
|
|
|
|
|
|
|
|
Total noninterest-earning assets
|
|
|
43,684
|
|
|
|
|
|
|
|
|
|
|
|
36,856
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,267,482
|
|
|
|
|
|
|
|
|
|
|
$
|
1,096,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
131,859
|
|
|
$
|
360
|
|
|
|
0.36
|
%
|
|
$
|
114,885
|
|
|
$
|
190
|
|
|
|
0.22
|
%
|
Money market deposit accounts
|
|
|
185,839
|
|
|
|
522
|
|
|
|
0.37
|
%
|
|
|
121,478
|
|
|
|
183
|
|
|
|
0.20
|
%
|
Savings accounts
|
|
|
35,047
|
|
|
|
137
|
|
|
|
0.52
|
%
|
|
|
10,956
|
|
|
|
37
|
|
|
|
0.45
|
%
|
Time deposits
|
|
|
296,099
|
|
|
|
2,755
|
|
|
|
1.24
|
%
|
|
|
298,383
|
|
|
|
2,180
|
|
|
|
0.97
|
%
|
Total interest-bearing deposits
|
|
|
648,844
|
|
|
|
3,774
|
|
|
|
0.78
|
%
|
|
|
545,702
|
|
|
|
2,590
|
|
|
|
0.63
|
%
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB short-term borrowings
|
|
|
58,467
|
|
|
|
280
|
|
|
|
0.64
|
%
|
|
|
113,469
|
|
|
|
203
|
|
|
|
0.24
|
%
|
Securities sold under agreements to repurchase and federal funds purchased
|
|
|
15,433
|
|
|
|
11
|
|
|
|
0.10
|
%
|
|
|
22,373
|
|
|
|
16
|
|
|
|
0.10
|
%
|
FHLB long-term borrowings
|
|
|
71,332
|
|
|
|
576
|
|
|
|
1.08
|
%
|
|
|
6,886
|
|
|
|
64
|
|
|
|
1.24
|
%
|
Total borrowings
|
|
|
145,232
|
|
|
|
867
|
|
|
|
0.80
|
%
|
|
|
142,728
|
|
|
|
283
|
|
|
|
0.26
|
%
|
Total interest-bearing deposits and borrowings
|
|
|
794,076
|
|
|
|
4,641
|
|
|
|
0.78
|
%
|
|
|
688,430
|
|
|
|
2,873
|
|
|
|
0.56
|
%
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
349,339
|
|
|
|
|
|
|
|
|
|
|
|
296,490
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
9,229
|
|
|
|
|
|
|
|
|
|
|
|
8,526
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,152,644
|
|
|
|
|
|
|
|
|
|
|
|
993,446
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity
|
|
|
114,838
|
|
|
|
|
|
|
|
|
|
|
|
102,642
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders’ Equity
|
|
$
|
1,267,482
|
|
|
|
|
|
|
|
|
|
|
$
|
1,096,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Spread
(2)
|
|
|
|
|
|
|
|
|
|
|
3.26
|
%
|
|
|
|
|
|
|
|
|
|
|
3.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin
(3)
|
|
|
|
|
|
$
|
32,454
|
|
|
|
3.54
|
%
|
|
|
|
|
|
$
|
29,346
|
|
|
|
3.69
|
%
|
(1)
Loans placed on nonaccrual status are included
in loan balances.
(2)
Interest spread is the average yield earned
on earning assets, less the average rate incurred on interest-bearing liabilities.
(3)
Net interest margin is net interest income,
expressed as a percentage of average earning assets.
Noninterest Income
Noninterest income consists of revenue generated from financial
services and activities other than lending and investing. The mortgage segment provides the most significant contributions to
noninterest income. Total noninterest income was $8.7 million for the third quarter of 2016 compared to $6.4 million for the same
period in 2015. Gains on the sale of loans originated by the Banks’s mortgage segment are the largest component of noninterest
income. Gains on the sale of loans totaled $8.3 million for the three month period ended September 30, 2016, compared to $5.8
million for the same period of 2015. Gains on the sale of loans fluctuate with the volume of mortgage loans originated. During
the three months ended September 30, 2016, the Bank’s mortgage segment originated $168.8 million in mortgage and brokered
loans, up from $120.0 million for the same period in 2015.
Noninterest income was $24.7 million for the first nine months
of 2016 compared to $19.8 million for the same period in 2015. Gains on the sale of loans totaled $19.4 million for the nine month
period ended September 30, 2016, compared to $15.1 million for the same period of 2015. During the nine months ended September
30, 2016, the Bank’s mortgage segment originated $429.4 million in mortgage and brokered loans, up from $379.8 million for
the same period in 2015. For the nine months ended September 30, 2016, other income reflected an increase of $570 thousand over
the nine months ended September 30, 2015 of which $270 thousand was attributable to recovered costs upon the settlement of a non-accrual
loan.
Noninterest Expense
Noninterest expense totaled $12.2 million for the three months
ended September 30, 2016, compared to $10.5 million for the same period in 2015, an increase of $1.7 million. Salaries and employee
benefits totaled $8.2 million for the three months ended September 30, 2016, compared to $6.7 million for the same period last
year due to an expansion in staffing. Other operating expenses totaled $3.2 million for the three months ended September 30, 2016,
compared to $3.0 million for the same period in 2015.
Noninterest expense totaled $35.6 million for the nine months
ended September 30, 2016, compared to $31.4 million for the same period in 2015, an increase of $4.2 million. Salaries and employee
benefits totaled $24.3 million for the nine months ended September 30, 2016, compared to $20.4 million for the same period last
year due to an expansion in staffing. Other operating expenses totaled $9.0 million for the nine months ended September 30, 2016,
compared to $8.7 million for the same period in 2015.
The table below provides the composition of other operating
expenses.
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
Management fees
|
|
$
|
935
|
|
|
$
|
951
|
|
Business and franchise tax
|
|
|
717
|
|
|
|
654
|
|
Data processing
|
|
|
669
|
|
|
|
661
|
|
Consulting fees
|
|
|
584
|
|
|
|
356
|
|
Advertising and promotional
|
|
|
541
|
|
|
|
547
|
|
Investor fees
|
|
|
541
|
|
|
|
455
|
|
FDIC insurance
|
|
|
475
|
|
|
|
463
|
|
Accounting and auditing
|
|
|
460
|
|
|
|
459
|
|
Telephone
|
|
|
281
|
|
|
|
252
|
|
Director fees
|
|
|
279
|
|
|
|
333
|
|
Stock option
|
|
|
251
|
|
|
|
256
|
|
Publication and subscription
|
|
|
218
|
|
|
|
177
|
|
Early payoff
|
|
|
215
|
|
|
|
63
|
|
Regulatory examinations
|
|
|
207
|
|
|
|
188
|
|
Credit report
|
|
|
199
|
|
|
|
166
|
|
Insurance
|
|
|
188
|
|
|
|
152
|
|
Disaster recovery
|
|
|
151
|
|
|
|
147
|
|
Education and training
|
|
|
151
|
|
|
|
124
|
|
Office supplies-stationary print
|
|
|
149
|
|
|
|
174
|
|
Travel
|
|
|
125
|
|
|
|
114
|
|
FRB and bank analysis charges
|
|
|
123
|
|
|
|
109
|
|
Verification fees
|
|
|
118
|
|
|
|
81
|
|
Legal fees
|
|
|
117
|
|
|
|
312
|
|
SBA guarantee fee
|
|
|
112
|
|
|
|
125
|
|
Business development and meals
|
|
|
83
|
|
|
|
76
|
|
Common stock
|
|
|
81
|
|
|
|
82
|
|
Postage
|
|
|
69
|
|
|
|
68
|
|
Dues and memberships
|
|
|
67
|
|
|
|
73
|
|
Courier
|
|
|
42
|
|
|
|
45
|
|
Automotive
|
|
|
41
|
|
|
|
35
|
|
Appraisal fee
|
|
|
30
|
|
|
|
46
|
|
Other
|
|
|
821
|
|
|
|
969
|
|
|
|
$
|
9,040
|
|
|
$
|
8,713
|
|
Liquidity Management
Liquidity is the ability of the Corporation to meet current
and future cash flow requirements. The liquidity of a financial institution reflects its ability to convert assets into cash or
cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves
maintaining the Corporation’s ability to meet the daily cash flow requirements of both depositors and borrowers. Management
monitors liquidity through a regular review of asset and liability maturities, funding sources, and loan and deposit forecasts.
Asset and liability management functions not only serve to assure adequate liquidity in order to meet the needs of the Corporation’s
customers, but also to maintain an appropriate balance between interest sensitive assets and interest sensitive liabilities so
that the Corporation can earn an appropriate return for its shareholders.
The asset portion of the balance sheet provides liquidity primarily
through loan principal repayments and maturities of investment securities. Other short-term investments such as federal funds
sold and interest-bearing deposits with other banks provide an additional source of liquidity funding. At September 30, 2016,
overnight interest-bearing balances totaled $67.8 million and unpledged available-for-sale investment securities totaled approximately
$29.0 million.
The Bank proactively manages a portfolio of short-term time
deposits issued to local municipalities and wholesale depositors in order to fund loans held for sale and short-term investments.
As of September 30, 2016, the portfolio of CDARS deposits, Insured Cash Sweep (ICS) deposits, and wholesale time deposits totaled
$151.6 million compared to $191.9 million at December 31, 2015, respectively.
The liability portion of the balance sheet provides
liquidity through various interest-bearing and noninterest-bearing deposit accounts, federal funds purchased, securities sold
under agreement to repurchase and other short-term borrowings. At September 30, 2016, the Bank had a line of credit with the
FHLB totaling $391.3 million and had outstanding a $25 million short-term loan at a fixed rate of 0.74%, $75 million in
long-term loans at fixed rates ranging from 0.72% to 1.54%, and a $35 million public deposit letter of credit from the
Commonwealth of Virginia Treasury Board. In addition to the line of credit at the FHLB, the Bank issues repurchase agreements. As
of September 30, 2016, outstanding repurchase agreements totaled $16.3 million. The interest rates on these instruments
are variable and subject to change daily. The Bank also maintains federal funds lines of credit with its correspondent banks
and, at September 30, 2016, these lines totaled $62.4 million and were available as an additional funding source.
The following table presents the composition of borrowings
at September 30, 2016 and December 31, 2015 as well as the average balances for the nine months ended September 30, 2016 and the
twelve months ended December 31, 2015.
Borrowed Funds Distribution
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
(Dollars In Thousands)
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
At Period End
|
|
|
|
|
|
|
|
|
FHLB short-term borrowings
|
|
$
|
25,000
|
|
|
$
|
70,000
|
|
Securities sold under agreements to repurchase
|
|
|
16,336
|
|
|
|
21,129
|
|
FHLB long-term borrowings
|
|
|
75,000
|
|
|
|
55,000
|
|
Total at period end
|
|
$
|
116,336
|
|
|
$
|
146,129
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
(Dollars In Thousands)
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
Average Balances
|
|
|
|
|
|
|
|
|
FHLB short-term borrowings
|
|
$
|
58,467
|
|
|
$
|
91,992
|
|
Securities sold under agreements to repurchase
|
|
|
15,433
|
|
|
|
21,853
|
|
FHLB long-term borrowings
|
|
|
71,332
|
|
|
|
18,890
|
|
Federal funds purchased
|
|
|
-
|
|
|
|
164
|
|
Total average balance
|
|
$
|
145,232
|
|
|
$
|
132,899
|
|
|
|
|
|
|
|
|
|
|
Average rate paid on all borrowed funds
|
|
|
0.80
|
%
|
|
|
0.35
|
%
|
Management believes the Corporation is well positioned with
liquid assets, the ability to generate liquidity through liability funding and the availability of borrowed funds, to meet the
liquidity needs of depositors and customers’ borrowing needs. The Corporation’s ability to maintain sufficient liquidity
may be affected by numerous factors, including economic conditions nationally and in our markets. Depending on the Corporation’s
liquidity levels, its capital position, conditions in the capital markets and other factors, the Corporation may from time to
time consider the issuance of debt, equity or other securities, or other possible capital markets transactions, the proceeds of
which could provide additional liquidity for its operations.
Contractual Obligations
There
have been no material changes outside the ordinary course of business to the contractual obligations disclosed in the
Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.