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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

(Mark One)

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2015

 

or

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from _______ to __________

 

Commission File Number: 000-49929

 

ACCESS NATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Virginia 82-0545425
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

 

1800 Robert Fulton Drive, Suite 300, Reston, Virginia 20191

(Address of principal executive offices) (Zip Code)

 

(703) 871-2100

(Registrant's telephone number, including area code)

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer x
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

The number of shares outstanding of Access National Corporation’s common stock, par value $0.835, as of May 7, 2015 was 10,519,376 shares.

 

 
 

 

Table of Contents

ACCESS NATIONAL CORPORATION

FORM 10-Q

 

INDEX

 

PART I FINANCIAL INFORMATION
 
Item 1. Financial Statements (Unaudited)
  Consolidated Balance Sheets, March 31, 2015 and December 31, 2014 Page 2
  Consolidated Statements of Income, three months ended March 31, 2015 and 2014 Page 3
  Consolidated Statements of Comprehensive Income, three months ended March 31, 2015 and 2014 Page 4
  Consolidated Statements of Changes in Shareholders' Equity, three months ended March 31, 2015 and 2014 Page 5
  Consolidated Statements of Cash Flows, three months ended March 31, 2015 and 2014 Page 6
  Notes to Consolidated Financial Statements (Unaudited) Page 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Page 30
Item 3. Quantitative and Qualitative Disclosures About Market Risk Page 42
Item 4. Controls and Procedures Page 43
 
PART II OTHER INFORMATION  
     
Item 1. Legal Proceedings Page 43
Item1A. Risk Factors Page 44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Page 44
Item 3. Defaults Upon Senior Securities Page 44
Item 4. Mine Safety Disclosures Page 44
Item 5. Other Information Page 44
Item 6. Exhibits Page 44
     
  Signatures Page 46

 

- 1 -
 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ACCESS NATIONAL CORPORATION

Consolidated Balance Sheets

(In Thousands, Except for Share and Per Share Data)

 

   March 31,   December 31, 
   2015   2014 
   (Unaudited)     
ASSETS          
Cash and due from banks  $11,324   $9,804 
Interest-bearing deposits in other banks and federal funds sold   33,602    46,225 
Securities:          
Securities available-for-sale, at fair value   122,027    125,080 
Securities held-to-maturity, at amortized cost (fair value of $14,524 and $14,378)   14,304    14,309 
Total investment securities   136,331    139,389 
           
Restricted stock   8,321    8,961 
Loans held for sale, at fair value   57,151    45,026 
Loans   794,214    776,603 
Allowance for loan losses   (13,331)   (13,399)
Net loans   780,883    763,204 
Premises and equipment, net   6,889    6,926 
Accrued interest receivable   2,907    2,907 
Other assets   31,794    30,438 
Total assets  $1,069,202   $1,052,880 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Deposits          
Noninterest-bearing deposits  $290,294   $252,875 
Savings and interest-bearing deposits   246,806    233,773 
Time deposits   249,219    268,795 
Total deposits   786,319    755,443 
Other liabilities          
Short-term borrowings   160,529    185,635 
Long-term borrowings   10,000    - 
Other liabilities and accrued expenses   9,764    12,898 
Total liabilities  $966,612   $953,976 
           
SHAREHOLDERS' EQUITY          
Common stock, par value, $0.835; authorized, 60,000,000 shares; issued and outstanding, 10,517,876 shares at March 31, 2015 and 10,469,569 shares at December 31, 2014  $8,782   $8,742 
Additional paid in capital   19,378    18,538 
Retained earnings   74,276    72,168 
Accumulated other comprehensive income (loss), net   154    (544)
Total shareholders' equity   102,590    98,904 
Total liabilities and shareholders' equity  $1,069,202   $1,052,880 

 

See accompanying notes to consolidated financial statements (unaudited).

 

- 2 -
 

 

ACCESS NATIONAL CORPORATION

Consolidated Statements of Income

(In Thousands, Except for Share and Per Share Data)

(Unaudited)

 

    Three Months Ended March 31,  
   2015   2014 
Interest and Dividend Income          
Interest and fees on loans  $9,434   $8,459 
Interest on deposits in other banks   27    18 
Interest and dividends on securities   815    468 
Total interest and dividend income   10,276    8,945 
           
Interest Expense          
Interest on deposits   733    728 
Interest on short-term borrowings   99    71 
Interest on long-term borrowings   2    - 
Total interest expense   834    799 
           
Net interest income   9,442    8,146 
Provision for loan losses   -    - 
Net interest income after provision for loan losses   9,442    8,146 
           
Noninterest Income          
Service fees on deposit accounts   197    177 
Gain on sale of loans   3,571    1,728 
Other income   2,537    1,351 
Total noninterest income   6,305    3,256 
           
Noninterest Expense          
Salaries and employee benefits   6,717    4,887 
Occupancy and equipment   754    707 
Other operating expenses   2,775    2,068 
Total noninterest expense   10,246    7,662 
           
Income before income taxes   5,501    3,740 
           
Income tax expense   1,928    1,326 
NET INCOME  $3,573   $2,414 
           
Earnings per common share:          
Basic  $0.34   $0.23 
Diluted  $0.34   $0.23 
           
Average outstanding shares:          
Basic   10,473,366    10,391,080 
Diluted   10,517,222    10,447,085 

 

See accompanying notes to consolidated financial statements (unaudited).

 

- 3 -
 

 

ACCESS NATIONAL CORPORATION

Consolidated Statements of Comprehensive Income

(In Thousands)

(Unaudited)

 

    Three Months Ended March 31,  
   2015   2014 
Net income  $3,573   $2,414 
           
Other comprehensive income:          
Unrealized gains (losses) on securities          
Unrealized holding gains (losses) arising during period   1,075    1,002 
Less: reclassification adjustment for gains included in net income   -    - 
Tax effect   (377)   (351)
Net of tax amount   698    651 
           
Comprehensive income  $4,271   $3,065 

 

See accompanying notes to consolidated financial statements (unaudited).

 

- 4 -
 

 

ACCESS NATIONAL CORPORATION

Consolidated Statements of Changes in Shareholders' Equity

(In Thousands, Except for Share Data)

(Unaudited)

 

               Accumulated     
               Other     
       Additional       Compre-     
   Common   Paid in   Retained   hensive     
   Stock   Capital   Earnings   Income (Loss)   Total 
Balance, December 31, 2014  $8,742   $18,538   $72,168   $(544)  $98,904 
Net income   -    -    3,573    -    3,573 
Other comprehensive income   -    -    -    698    698 
Stock options exercised (3,100 shares)   3    33    -    -    36 
Issuance of restricted common stock (7,500 shares)   6    122    -    -    128 
DRSPP shares issued from reserve (37,707)   31    607    -    -    638 
Cash dividend ($0.14 per share)   -    -    (1,465)   -    (1,465)
Stock-based compensation expense recognized in earnings   -    78    -    -    78 
                          
Balance, March 31, 2015  $8,782   $19,378   $74,276   $154   $102,590 
                          
Balance, December 31, 2013  $8,659   $17,320   $67,121   $(1,966)  $91,134 
Net income   -    -    2,414    -    2,414 
Other comprehensive income   -    -    -    651    651 
Stock options exercised (8,887 shares)   7    70    -    -    77 
Issuance of restricted common stock (24,017 shares)   20    365    -    -    385 
Cash dividend ($0.11 per share)   -    -    (1,143)   -    (1,143)
Stock-based compensation expense recognized in earnings   -    59    -    -    59 
                          
Balance, March 31, 2014  $8,686   $17,814   $68,392   $(1,315)  $93,577 

 

See accompanying notes to consolidated financial statements (unaudited).

 

- 5 -
 

 

ACCESS NATIONAL CORPORATION

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

 

   Three Months Ended March 31, 
   2015   2014 
Cash Flows from Operating Activities          
Net income  $3,573   $2,414 
Adjustments to reconcile net income to net cash provided by (used in)          
operating activities:          
Provision for off balance sheet losses   10    - 
Income from bank-owned life insurance   117    - 
Deferred tax benefit   (6)   (3)
Stock-based compensation   78    59 
Valuation allowance on derivatives   (302)   10 
Net amortization (accretion) on securities   235    (203)
Depreciation and amortization   119    118 
Changes in assets and liabilities:          
Increase in valuation of loans held for sale carried at fair value   (325)   (246)
Increase in loans held for sale   (11,800)   (2,618)
Increase in other assets   (1,251)   (1,380)
Decrease in other liabilities   (3,441)   (53)
Net cash used in operating activities   (12,993)   (1,902)
Cash Flows from Investing Activities          
Proceeds from maturities, calls, and prepayments of securities available for sale   3,897    1,680 
Proceeds from sale of securities   -    9,379 
Purchases of securities available for sale   -    (23,892)
Proceeds from maturities and calls of securities held to maturity   -    5,000 
Purchases of Federal Reserve and Federal Home Loan Bank stock   (1,985)   (1,575)
Proceeds from redemption of Federal Reserve and Federal Home Loan Bank stock   2,625    8,373 
Purchase of bank owned life insurance   -    (5,000)
Net increase in loans   (17,680)   (29,767)
Purchases of premises and equipment   (75)   (107)
Net cash used in investing activities   (13,218)   (35,909)
Cash Flows from Financing Activities          
Net increase in demand, interest-bearing demand and savings deposits   50,453    78,750 
Net (decrease) increase in time deposits   (19,576)   153,702 
Decrease in securities sold under agreement to repurchase   (5,106)   (10,209)
Net decrease in other short-term borrowings   (20,000)   (145,000)
Net increase in long-term borrowings   10,000    - 
Proceeds from issuance of common stock   802    462 
Dividends paid   (1,465)   (1,143)
Net cash provided by financing activities   15,108    76,562 
           
(Decrease) increase in cash and cash equivalents   (11,103)   38,751 
Cash and Cash Equivalents          
Beginning   56,029    23,419 
Ending  $44,926   $62,170 
Supplemental Disclosures of Cash Flow Information          
Cash payments for interest  $786   $785 
Cash payments for income taxes  $393   $16 
Supplemental Disclosures of Noncash Investing Activities          
Unrealized gain on securities available for sale  $1,075   $1,002 

 

See accompanying notes to consolidated financial statements (unaudited).

 

- 6 -
 

 

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 months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2015. These consolidated financial statements should be read in conjunction with the Corporation’s audited financial statements and the notes thereto as of December 31, 2014, included in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

 

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 three months of 2015, the Corporation granted 121,434 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 three months of 2015 and 2014 was $78 thousand and $59 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 March 31, 2015 was $671,165. The cost is expected to be recognized over a weighted average period of 1.43 years.

 

- 7 -
 

 

NOTE 2 – STOCK-BASED COMPENSATION PLANS (continued)

 

A summary of stock option activity under the Plan for the three months ended March 31, 2015 and 2014 is presented as follows:

 

   Three Months Ended 
   March 31, 2015 
     
Expected life of options granted, in years   4.81 
Risk-free interest rate   1.06%
Expected volatility of stock   30%
Annual expected dividend yield   3%
      
Fair Value of Granted Options  $342,570 
Non-Vested Options   310,344 

 

           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   121,434    17.95    4.81    - 
Exercised   (3,100)   11.50    2.32    20,771 
Lapsed or Canceled   (450)  $15.55    3.27   $- 
                     
Outstanding at March 31, 2015   434,307   $15.14    3.48   $1,564,733 
                     
Exercisable at March 31, 2015   123,963   $13.26    2.70   $679,184 

 

   Three Months Ended 
   March 31, 2014 
     
Expected life of options granted, in years   4.82 
Risk-free interest rate   0.69%
Expected volatility of stock   36%
Annual expected dividend yield   3%
      
Fair value of granted options  $300,152 
Non-vested options   287,965 

 

           Weighted Avg.     
   Number of   Weighted Avg.   Remaining Contractual   Aggregate Intrinsic 
   Options   Exercise Price   Term, in years   Value 
                 
Outstanding at beginning of year   281,380   $11.77    3.20   $951,526 
Granted   120,500    15.96    4.82    - 
Exercised   (8,887)   8.72    1.97    65,010 
Lapsed or canceled   (250)  $6.68    0.32   $- 
                     
Outstanding at March 31, 2014   392,743   $13.13    3.55   $1,210,095 
                     
Exercisable at March 31, 2014   104,778   $10.23    2.25   $627,082 

 

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 March 31, 2015 and December 31, 2014. 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.

 

- 8 -
 

NOTE 3 – SECURITIES (continued)

 

   March 31, 2015 
   Amortized Cost   Gross
Unrealized
Gains
   Gross
Unrealized
(Losses)
   Estimated
Fair Value
 
       (In Thousands)     
Available-for-sale:            
U.S. Government agencies  $18,998   $-   $(135)  $18,863 
Mortgage backed securities   67,267    439    (208)   67,498 
Corporate bonds   13,223    160    -    13,383 
Asset backed Securities   16,766    92    (101)   16,757 
Municipals - nontaxable   4,037    47    -    4,084 
CRA Mutual fund   1,500    -    (58)   1,442 
   $121,791   $738   $(502)  $122,027 
                     
Held-to-maturity:                    
U.S. Government agencies  $9,986   $130   $-   $10,116 
Municipals   2,624    83    -    2,707 
Municipals - nontaxable   1,694    7    -    1,701 
   $14,304   $220   $-   $14,524 

 

   December 31, 2014 
   Amortized Cost   Gross
Unrealized
Gains
   Gross
Unrealized
(Losses)
   Estimated
Fair Value
 
       (In Thousands)     
Available-for-sale:            
U.S. Government agencies  $18,998   $-   $(473)  $18,525 
Mortgage backed securities   70,001    136    (439)   69,698 
Corporate bonds   13,304    95    (27)   13,372 
Asset backed Securities   18,072    83    (172)   17,983 
Municipals - nontaxable   4,042    24    (1)   4,065 
CRA Mutual fund   1,500    -    (63)   1,437 
   $125,917   $338   $(1,175)  $125,080 
                     
Held-to-maturity:                    
U.S. Government agencies  $9,985   $46    (25)  $10,006 
Municipals   2,627    41    -    2,668 
Municipals - nontaxable   1,697    10    (3)   1,704 
   $14,309   $97   $(28)  $14,378 

 

- 9 -
 

 

NOTE 3 – SECURITIES (continued)

 

The amortized cost and estimated fair value of securities available-for-sale and held-to-maturity as of March 31, 2015 and December 31, 2014 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.

 

   March 31, 2015   December 31, 2014 
       Estimated       Estimated 
   Amortized   Fair   Amortized   Fair 
   Cost   Value   Cost   Value 
   (In Thousands)         
Available-for-sale:            
US Government agencies:                    
Due after five through ten years  $18,998   $18,863   $18,998   $18,525 
Mortgage backed securities:                    
Due after five through ten years   6,428    6,462    6,533    6,481 
Due after ten through fifteen years   37,758    37,860    39,311    39,115 
Due after fifteen years   23,081    23,176    24,157    24,102 
Corporate bonds:                    
Due in one year or less   1,999    2,017    1,998    2,023 
Due after one through five years   11,224    11,366    11,306    11,349 
Asset backed securities:                    
Due after five through ten years   5,098    5,172    6,134    6,199 
Due after fifteen years   11,668    11,585    11,938    11,784 
Municipals - nontaxable:                    
Due after five through ten years   403    417    404    413 
Due after ten through fifteen years   1,364    1,381    1,366    1,381 
Due after fifteen years   2,270    2,286    2,272    2,271 
                     
CRA Mutual fund   1,500    1,442    1,500    1,437 
Total  $121,791   $122,027   $125,917   $125,080 
                     
Held-to-maturity:                    
US Government agencies:                    
Due after one through five years  $5,000   $5,099   $5,000   $5,046 
Due after ten through fifteen years   4,986    5,017    4,985    4,960 
Municipals:                    
Due after five through ten years   428    449    428    444 
Due after ten through fifteen years   2,196    2,258    1,638    1,666 
Due after fifteen years   -    -    561    558 
Municipals - nontaxable:                    
Due after ten through fifteen years   1,411    1,418    1,414    1,421 
Due after fifteen years   283    283    283    283 
Total  $14,304   $14,524   $14,309   $14,378 

 

The estimated fair value of securities pledged to secure public funds, securities sold under agreements to repurchase, and for other purposes amounted to $106.0 million at March 31, 2015 and $102.6 million at December 31, 2014.

 

- 10 -
 

 

NOTE 3 – SECURITIES (continued)

 

Securities available-for-sale and held-to-maturity that have an unrealized loss position at March 31, 2015 and December 31, 2014 are as follows:

 

   Securities in a loss   Securities in a loss         
   Position for less than    Position for 12 Months          
   12 Months   or Longer   Total 
March 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  $5,974   $(25)  $13,945   $(183)  $19,919   $(208)
U.S. Government agencies   14,890    (108)   3,973    (27)   18,863    (135)
Asset backed securities   4,192    (32)   2,893    (69)   7,085    (101)
CRA Mutual fund   -    -    1,442    (58)   1,442    (58)
Total  $25,056   $(165)  $22,253   $(337)  $47,309   $(502)

 

   Securities in a loss   Securities in a loss         
   Position for less than    Position for 12 Months          
   12 Months   or Longer   Total 
December 31, 2014  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  $19,252   $(74)  $17,141   $(365)  $36,393   $(439)
U.S. Government agencies   -    -    18,525    (473)   18,525    (473)
Municipals - nontaxable   2,271    (1)   -    -    2,271    (1)
Corporate bonds   4,480    (27)   -    -    4,480    (27)
Asset backed securities   6,289    (71)   2,995    (101)   9,284    (172)
CRA Mutual fund   -    -    1,437    (63)   1,437    (63)
Total  $32,292   $(173)  $40,098   $(1,002)  $72,390   $(1,175)
                               
Investment securities held-to-maturity:                              
                               
U.S. Government agencies  $-   $-   $4,960   $(25)  $4,960   $(25)
Municipals - nontaxable   842    (3)   -    -    842    (3)
Total  $842   $(3)  $4,960   $(25)  $5,802   $(28)

 

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.

 

- 11 -
 

 

NOTE 3 – SECURITIES (continued)

 

U.S. Government agencies

The Corporation’s unrealized losses on U.S. Government Agency obligations were caused by interest rate fluctuations. On March 31, 2015, there were four available-for-sale securities had unrealized losses of $135 thousand. The severity and duration of these unrealized losses will fluctuate with interest rates in the economy. As the securities are obligations of government agencies, it is the Corporation’s intent to hold these securities until a market price recovery or maturity, and 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.

 

Mortgage-backed

The Corporation’s unrealized losses on mortgage backed securities were caused by interest rate fluctuations. At March 31, 2015, eight securities had unrealized losses of $208 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 loss on its other investments was caused by interest rate fluctuations. At March 31, 2015, four securities had unrealized losses of $101 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 recoveries, 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 March 31, 2015, this one security had an unrealized loss of $58 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.

 

Restricted Stock

 

The Corporation’s restricted stock consists of Federal Home Loan Bank of Atlanta (“FHLB”) stock and Federal Reserve Bank (“FRB”) stock. The amortized costs of the restricted stock as of March 31, 2015 and December 31, 2014 are as follows:

 

   March 31, 2015   December 31, 2014 
Restricted Stock:  (In Thousands) 
         
Federal Reserve Bank stock  $999   $999 
           
FHLB stock   7,322    7,962 
   $8,321   $8,961 

 

- 12 -
 

 

NOTE 3 – SECURITIES (continued)

 

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 March 31, 2015 and December 31, 2014, the obligations outstanding under these repurchase agreements totaled $20.5 million and $25.6 million, respectively, while the fair value of the securities pledged in connection with these repurchase agreements was $24.8 million and $26.1 million at March 31, 2015 and December 31, 2014, respectively.

 

NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES

 

The following table presents the composition of the loans held for investment portfolio at March 31, 2015 and December 31, 2014:

 

   March 31, 2015   December 31, 2014 
   Amount   Percentage of Total   Amount   Percentage of Total 
   (Dollars In Thousands) 
Commercial real estate-owner occupied  $210,131    26.46%  $199,442    25.68%
Commercial real estate-non owner occupied   123,387    15.54    125,442    16.15 
Residential real estate   191,914    24.16    194,213    25.01 
Commercial   219,623    27.65    210,278    27.08 
Real estate construction   43,290    5.45    41,080    5.29 
Consumer   5,869    0.74    6,148    0.79 
Total loans  $794,214    100.00%  $776,603    100.00%
Less allowance for loan losses   13,331         13,399      
   $780,883        $763,204      

 

Unearned income and net deferred loan fees and costs totaled $1.6 million at March 31, 2015 and December 31, 2014. Loans pledged to secure borrowings at the FHLB totaled $209.6 million and $215.8 million at March 31, 2015 and December 31, 2014, respectively.

 

Allowance for Loan Losses

 

The allowance for loan losses totaled $13.3 million at March 31, 2015 compared to $13.4 million at year end December 31, 2014. The allowance for loan losses was equivalent to 1.68% and 1.73% of total loans held for investment at March 31, 2015 and December 31, 2014, 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.

 

- 13 -
 

 

NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES (continued)

 

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.

 

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.

 

- 14 -
 

 

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.

 

Three months ended March 31, 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:  (In Thousands) 
Beginning Balance  $3,229   $1,894   $3,308   $4,284   $596   $88   $13,399 
Charge-offs   -    -    -    (114)   -    -    (114)
Recoveries   -    -    24    22    -    -    46 
Provisions   109    (143)   (150)   146    40    (2)   - 
Ending Balance  $3,338   $1,751   $3,182   $4,338   $636   $86   $13,331 

 

Three months ended March 31, 2014  Commercial real
estate – owner
occupied 
   Commercial real
estate - non-owner
occupied 
   Residential
real estate 
   Commercial    Real estate
construction 
   Consumer    Total  
Allowance for credit losses:  (In Thousands) 
Beginning Balance  $3,763   $1,734   $3,320   $3,484   $743   $92   $13,136 
Charge-offs   -    -    -    (16)   -    -    (16)
Recoveries   -    -    40    11    -    -    51 
Provisions   (2)   (19)   (109)   66    43    21    - 
Ending Balance  $3,761   $1,715   $3,251   $3,545   $786   $113   $13,171 

 

   Recorded Investment in Loans 
                             
March 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:  $3,338   $1,751   $3,182   $4,338   $636   $86   $13,331 
Ending balance: individually evaluated for impairment  $-   $-   $-        $-   $-   $- 
Ending balance: collectively evaluated for impairment  $3,338   $1,751   $3,182   $4,338   $636   $86   $13,331 
Ending balance: loans acquired with deteriorated credit quality  $-   $-   $-   $-   $-   $-   $- 
                                    
Loans                                   
Ending balance  $210,131   $123,387   $191,914   $219,623   $43,290   $5,869   $794,214 
Ending balance: individually evaluated for impairment  $355   $6,040   $318   $1,321   $-   $-   $8,034 
Ending balance: collectively evaluated for impairment  $209,776   $117,347   $191,596   $218,302   $43,290   $5,869   $786,180 
Ending balance: loans acquired with deteriorated credit quality  $-   $-   $-   $-   $-   $-   $- 
                                    

 

December 31, 2014   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:  $3,229   $1,894   $3,308   $4,284   $596   $88   $13,399 
Ending balance: individually evaluated for impairment  $-   $-   $-   $115   $-   $-   $115 
Ending balance: collectively evaluated for impairment  $3,229   $1,894   $3,308   $4,169   $596   $88   $13,284 
Ending balance: loans acquired with deteriorated credit quality  $-   $-   $-   $-   $-   $-   $- 
                                    
Loans                                   
Ending balance:  $199,442   $125,442   $194,213   $210,278   $41,080   $6,148   $776,603 
Ending balance: individually evaluated for impairment  $356   $-   $320   $1,515   $-   $-   $2,191 
Ending balance: collectively evaluated for impairment  $199,086   $125,442   $193,893   $208,763   $41,080   $6,148   $774,412 
Ending balance: loans acquired with deteriorated credit quality  $-   $-   $-   $-   $-   $-   $- 

 

- 15 -
 

 

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 March 31, 2015 or December 31, 2014. It is the Bank’s policy to charge-off any loan once the risk rating is classified as loss.

 

The profile of the loan portfolio, as indicated by risk rating, as of March 31, 2015 and December 31, 2014 is shown below.

 

Credit Risk Profile by Risk Rating                                            
                                                         
   Commercial real estate -
owner occupied
   Commercial real estate -
non-owner occupied
   Residential real estate   Commercial   Real estate construction   Consumer   Totals 
   3/31/15   12/31/14   3/31/15   12/31/14   3/31/15   12/31/14   3/31/15   12/31/14   3/31/15   12/31/14   3/31/15   12/31/14   3/31/15   12/31/14 
   (In Thousands) 
Pass  $204,900   $194,007   $112,159   $111,301   $189,840   $191,512   $203,939   $194,585   $43,489   $41,253   $5,869   $6,148   $760,196   $738,806 
Special mention   1,996    2,115    -    2,627    1,932    2,100    13,054    10,519    -    -    -    -    16,982    17,361 
Substandard   3,742    3,767    11,564    11,751    342    936    2,959    5,540    -    -    -    -    18,607    21,994 
Doubtful   -    -    -    -    -    -    -    -    -    -    -    -    -    - 
Loss   -    -    -    -    -    -    -    -    -    -    -    -    -    - 
Unearned income   (507)   (447)   (336)   (237)   (200)   (335)   (329)   (366)   (199)   (173)   -    -    (1,571)   (1,558)
Total  $210,131   $199,442   $123,387   $125,442   $191,914   $194,213   $219,623   $210,278   $43,290   $41,080   $5,869   $6,148   $794,214   $776,603 

 

- 16 -
 

NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES (continued)

 

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.

 

Credit Risk Profile Based on Payment Activity                                             
                                                         
   Commercial real estate -
owner occupied
   Commercial real estate -
non-owner occupied
    Residential real estate    Commercial   Real estate construction   Consumer   Totals 
   3/31/15   12/31/14   3/31/15   12/31/14   3/31/15   12/31/14   3/31/15   12/31/14   3/31/15   12/31/14   3/31/15   12/31/14   3/31/15   12/31/14 
   (In Thousands)                                                 
Performing  $210,131   $199,442   $117,347   $125,442   $191,785   $194,084   $219,008   $208,785   $43,290   $41,080   $5,869   $6,148   $787,430   $774,981 
Non-performing   -    -    6,040    -    129    129    615    1,493    -    -    -    -    6,784    1,622 
Total  $210,131   $199,442   $123,387   $125,442   $191,914   $194,213   $219,623   $210,278   $43,290   $41,080   $5,869   $6,148   $794,214   $776,603 

 

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 March 31, 2015 and December 31, 2014. Loans that were on non-accrual status are not included in any past due amounts.

 

    Age Analysis of Past Due Loans  
     
   March 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  $-   $-   $-   $-   $-   $210,131   $210,131 
Commercial real estate - non-owner occupied   -    -    -    -    6,040    117,347    123,387 
Residential real estate   -    -    -    -    129    191,785    191,914 
Commercial   796    -    -    796    615    218,212    219,623 
Real estate construction   -    -    -    -    -    43,290    43,290 
Consumer   -    -    -    -    -    5,869    5,869 
Total  $796   $-   $-   $796   $6,784   $786,634   $794,214 

 

   December 31, 2014 
    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  $-   $-   $-   $-   $-   $199,442   $199,442 
Commercial real estate - non-owner occupied   -    -    -    -    -    125,442    125,442 
Residential real estate   -    217    -    217    129    193,867    194,213 
Commercial   -    -    -    -    1,493    208,785    210,278 
Real estate construction   -    -    -    -    -    41,080    41,080 
Consumer   -    -    -    -    -    6,148    6,148 
Total  $-   $217   $-   $217   $1,622   $774,764   $776,603 

 

During the first quarter of 2015, one $6 million loan was added to non-accrual status increasing the total of non-accrual loans to $6.8 million from $1.6 million at December 31, 2014.

 

- 17 -
 

 

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.

 

No loans were modified in connection with a troubled debt restructuring during the three month periods ended March 31, 2015 and March 31, 2014.

 

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 payment applied to principal under the cost-recovery method. As such, the Bank did not recognize any interest income on its impaired loans for the three month periods ended March 31, 2015 and 2014.

 

- 18 -
 

 

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 March 31, 2015 and December 31, 2014.

 

   Impaired Loans 
                         
   March 31, 2015   December 31, 2014 
    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  $355   $355   $-   $356   $356   $- 
Commercial real estate - non-owner occupied   6,040    6,040    -    -    -    - 
Residential real estate   318    360    -    320    362    - 
Commercial   1,321    1,421    -    1,401    1,913    - 
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   -    -    -    114    120    115 
Real estate construction   -    -    -    -    -    - 
Consumer   -    -    -    -    -    - 
Total:                              
Commercial real estate - owner occupied   355    355    -    356    356    - 
Commercial real estate - non-owner occupied   6,040    6,040    -    -    -    - 
Residential real estate   318    360    -    320    362    - 
Commercial   1,321    1,421    -    1,515    2,033    115 
Real estate construction   -    -    -    -    -    - 
Consumer   -    -    -    -    -    - 
   $8,034   $8,176   $-   $2,191   $2,751   $115 

 

The table below shows the average recorded investment in impaired loans for the periods presented.

 

    Three Months Ended  
   March 31, 2015    March 31, 2014  
    Average Recorded
Investment 
    Average Recorded
Investment 
 
         
Commercial real estate - owner occupied  $355   $362 
Commercial real estate - non-owner occupied   6,101    - 
Residential real estate   403    850 
Commercial   1,534    2,036 
Real estate construction   -    - 
Consumer   -    - 
Total  $8,393   $3,248 

 

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.

 

- 19 -
 

 

NOTE 5 – SEGMENT REPORTING (continued)

 

The commercial banking segment provides the mortgage banking segment 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 expenses relate 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 March 31, 2015 and 2014:

 

   Commercial   Mortgage   Wealth           Consolidated 
March 31, 2015  Banking   Banking   Management   Other   Eliminations   Totals 
   (In Thousands) 
Revenues:                              
Interest income  $10,080   $362   $-   $3   $(169)  $10,276 
Gain on sale of loans   -    3,571    -    -    -    3,571 
Other revenues   719    1,425    545    346    (301)   2,734 
Total revenues   10,799    5,358    545    349    (470)   16,581 
                               
Expenses:                              
Interest expense   838    95    6    64    (169)   834 
Salaries and employee benefits   3,227    3,026    464    -    -    6,717 
Other expenses   1,804    1,225    207    594    (301)   3,529 
Total operating expenses   5,869    4,346    677    658    (470)   11,080 
                               
Income (loss) before income taxes  $4,930   $1,012   $(132)  $(309)  $-   $5,501 
                               
Total assets  $1,010,045   $60,042   $1,284   $15,741   $(17,910)  $1,069,202 

 

   Commercial   Mortgage   Wealth           Consolidated 
March 31, 2014  Banking   Banking   Management   Other   Eliminations   Totals 
   (In Thousands) 
Revenues:                              
Interest income  $8,848   $202   $-   $3   $(108)  $8,945 
Gain on sale of loans   -    1,728    -    -    -    1,728 
Other revenues   483    549    509    287    (300)   1,528 
Total revenues   9,331    2,479    509    290    (408)   12,201 
                               
Expenses:                              
Interest expense   802    10    0    95    (108)   799 
Salaries and employee benefits   2,800    1,800    287    -    -    4,887 
Other expenses   1,548    666    230    631    (300)   2,775 
Total operating expenses   5,150    2,476    517    726    (408)   8,461 
                               
Income (loss) before income taxes  $4,181   $3   $(8)  $(436)  $-   $3,740 
                               
 Total assets  $893,580   $33,461   $1,895   $14,354   $(16,490)  $926,800 

 

- 20 -
 

 

NOTE 6 – EARNINGS PER SHARE

 

The following table shows the calculation of both basic and diluted earnings per share (“EPS”) for the three months ended March 31, 2015 and 2014, 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 
   March 31, 2015   March 31, 2014 
   (In Thousands, Except for Share and Per Share Data) 
         
BASIC EARNINGS PER SHARE:          
Net income  $3,573   $2,414 
Weighted average shares outstanding   10,473,366    10,391,080 
           
Basic earnings per share  $0.34   $0.23 
           
DILUTED EARNINGS PER SHARE:          
Net income  $3,573   $2,414 
Weighted average shares outstanding   10,473,366    10,391,080 
Dilutive stock options   43,856    56,005 
Weighted average diluted shares outstanding   10,517,222    10,447,085 
           
Diluted earnings per share  $0.34   $0.23 

 

NOTE 7 - DERIVATIVES

 

As part of its mortgage banking activities, the Bank enters into interest rate lock commitments, which are commitments to originate loans where the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The Bank then 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 Bank determines the fair value of interest rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates, taking into consideration the probability that the interest rate lock commitments will close or will be funded.

 

Certain additional risks arise from these forward delivery contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. The Bank does not expect any counterparty to any MBS to fail to meet its obligation. Additional risks inherent in mandatory delivery programs include the risk that, if the Bank does not close the loans subject to interest rate risk lock commitments, it will still be obligated to deliver MBS to the counterparty under the forward sales agreement. Should this be required, the Bank could incur significant costs in acquiring replacement loans or MBS and such costs could have an adverse effect on mortgage banking operations in future periods.

 

Since the Bank’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 Bank has not elected to apply hedge accounting to its derivative instruments as provided in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging.

 

- 21 -
 

 

NOTE 7 – DERIVATIVES (continued)

 

At March 31, 2015 and December 31, 2014, the Bank had open forward contracts with a notional value of $77.3 million and $45.3 million, respectively. At March 31, 2015 and December 31, 2014, 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 ($557) thousand and ($349) thousand at March 31, 2015 and December 31, 2014, respectively.

 

Interest rate lock commitments totaled $57.7 million and $23.5 million at March 31, 2015 and December 31, 2014, respectively, and included $9.0 million and $5.3 million that were made on a best efforts basis at March 31, 2015 and December 31, 2014, respectively. Fair values of these best efforts commitments were $70 thousand and $39 thousand at March 31, 2015 and December 31, 2014, respectively. The remaining hedged interest rate lock commitments totaling $48.7 million and $18.2 million at March 31, 2015 and December 31, 2014 had a fair value of $679 thousand and $200 thousand, respectively.

 

Included in other noninterest income for the three months ended March 31, 2015 and March 31, 2014 was a net gain of $439 thousand and a net loss of $25 thousand, respectively, relating to derivative instruments. The amount included in other noninterest income for the three months ended March 31, 2015 and March 31, 2014 pertaining to its hedging activities was a net realized loss of $513 thousand and a net realized loss of $343 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, 2016 and interim periods within 2017. The adoption of this guidance should not have a material effect on the Corporation’s financial condition or results of operations.

 

In June 2014, the FASB issued ASU 2014-11, “Transfers and Servicing (Topic 860)” which changes the accounting for repurchase financing agreements. It also requires additional disclosures about repurchase agreements and other similar transactions. Under this ASU, transactions would all be accounted for as secured borrowings as the guidance eliminates sale accounting for repurchase-to-maturity transactions. The amendments in the ASU require new disclosures for transactions that are economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the transaction term as well as expanded disclosures on the nature of pledged collateral in repurchase agreements. The provisions of ASU 2014-11 are effective for annual periods beginning after December 15, 2014. The adoption of this guidance should not have a material effect on the Corporation’s financial condition or results of operations.

 

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 values 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 should 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 should 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. The amendments in the ASU are effective beginning after December 15, 2016. The adoption of this guidance 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 should not have a material effect on the Corporation’s financial condition or results of operations.

 

- 22 -
 

 

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. 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).

 

- 23 -
 

 

NOTE 9 - FAIR VALUE (continued)

 

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).

 

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 March 31, 2015 and December 31, 2014, are summarized below:

 

   Fair Value Measurement  
   at March 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  $18,863   $-   $18,863   $- 
Mortgage backed securities   67,498    -    67,498    - 
Corporate bonds   13,383    -    13,383    - 
Asset backed securities   16,757    -    16,757    - 
Municipals - nontaxable   4,084    -    4,084    - 
CRA Mutual fund   1,442    -    1,442    - 
Total available-for-sale investment securities   122,027    -    122,027    - 
                     
Residential loans held for sale   57,151    -    57,151    - 
Derivative assets   929    -    -    929 
Total Financial Assets-Recurring  $180,107   $-   $179,178   $929 
                     
Financial Liabilities-Recurring                    
Derivative liabilities  $737   $-   $-   $737 
Total Financial Liabilities-Recurring  $737   $-   $-   $737 
                     
Financial Assets-Non-Recurring                    
Impaired loans (1)  $8,034   $-   $-   $8,034 
Total Financial Assets-Non-Recurring  $8,034   $-   $-   $8,034 

 

(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.

 

- 24 -
 

 

NOTE 9 - FAIR VALUE (continued)

 

   Fair Value Measurement 
   at December 31, 2014 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  $18,525   $-   $18,525   $- 
Mortgage backed   69,698    -    69,698    - 
Corporate bonds   13,372    -    13,372    - 
Asset backed securities   17,983    -    17,983    - 
Municipals - nontaxable   4,065    -    4,065    - 
CRA Mutual fund   1,437    -    1,437    - 
Total available-for-sale investment securities   125,080    -    125,080    - 
                     
Residential loans held for sale   45,026    -    45,026    - 
Derivative assets   330    -    -    330 
Total Financial Assets-Recurring  $170,436   $-   $170,106   $330 
                     
Financial Liabilities-Recurring                    
Derivative liabilities  $440   $-   $-   $440 
Total Financial Liabilities-Recurring  $440   $-   $-   $440 
                     
Financial Assets-Non-Recurring                    
Impaired loans (1)  $2,191   $-   $-   $2,191 
Total Financial Assets-Non-Recurring  $2,191   $-   $-   $2,191 
                     
(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 rate.

 

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 three month periods ended March 31, 2015 and 2014.

 

The changes in Level 3 net derivatives measured at fair value on a recurring basis are summarized as follows:

 

   Three Months Ended March 31, 
   2015   2014 
   (In Thousands) 
Balance, beginning of period  $(110)  $95 
Realized and unrealized gains (losses) included in earnings   302    (10)
Unrealized gains (losses) included in other comprehensive income   -    - 
Purchases, settlements, paydowns, and maturities   -    - 
Transfer into Level 3   -    - 
Balance, end of period  $192   $85 

 

- 25 -
 

 

NOTE 9 - FAIR VALUE (Continued)

 

The following table presents qualitative information about level 3 fair value measurements for financial instruments measured at fair value at March 31, 2015 and December 31, 2014:

 

Description  Fair Value Estimate   Valuation Techniques  Unobservable Input  Range (Weighted Average) 
   (In Thousands) 
Financial Assets - Recurring                
Derivative assets  $929   Market pricing (3)  Estimated pullthrough   75% - 90% (85.7%) 
Derivative liabilities  $737   Market pricing (3)  Estimated pullthrough   75% - 90% (85.7%) 
                 
Financial Assets - Non-recurring                
Impaired loans - Real estate secured  $6,713   Appraisal of collateral (1)  Liquidation expenses (2)   0% - 20% (14%) 
Impaired loans - Non-real estate secured  $1,321   Cash flow basis  Liquidation expenses (2)   0% - 10% (0%) 

 

(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, 2014 
Description  Fair Value Estimate   Valuation Techniques  Unobservable Input  Range (Weighted Average) 
   (In Thousands) 
Financial Assets - recurring               
Derivative assets  $330   Market pricing (3)  Estimated pullthrough   75% - 90% (84.5%) 
Derivative liabilities  $440   Market pricing (3)  Estimated pullthrough   75% - 90% (84.5%) 
                 
Financial Assets - Non-recurring                
Impaired loans - Real estate secured  $ 676   Appraisal of collateral (1)  Liquidation expenses (2)   0% - 20% (8%) 
Impaired loans - Non-real estate secured  $1,515   Cash flow basis  Liquidation expenses (2)   0% - 10% (0%) 

 

(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.

 

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 March 31, 2015, 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  $57,151   $2,239   $54,912 

 

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:

 

- 26 -
 

 

NOTE 9 - FAIR VALUE (Continued)

 

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.

 

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 March 31, 2015 and December 31, 2014, 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.

 

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NOTE 9 - FAIR VALUE (Continued)

 

The carrying amounts and estimated fair values of financial instruments at March 31, 2015 and December 31, 2014 were as follows:

 

   March 31, 2015   December 31, 2014 
       Estimated       Estimated 
   Carrying   Fair   Carrying   Fair 
   Amount   Value   Amount   Value 
   (In Thousands) 
Financial assets:                       
Cash and short-term investments  $44,926   $44,926   $56,029   $56,029 
Securities available-for-sale   122,027    122,027    125,080    125,080 
Securities held-to-maturity   14,304    14,524    14,309    14,378 
Restricted stock   8,321    8,321    8,961    8,961 
Loans, net of allowance   838,034    865,339    808,230    837,937 
Derivatives   929    929    330    330 
Total financial assets  $1,028,541   $1,056,066   $1,012,939   $1,042,715 
                     
Financial liabilities:                    
Deposits  $786,319   $784,659   $755,443   $753,675 
Short-term borrowings   160,529    160,313    185,635    185,396 
Long-term borrowings   10,000    9,985    -    - 
Derivatives   737    737    440    440 
Total financial liabilities  $957,585   $955,694   $941,518   $939,511 

 

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 $13.8 million and $16.8 million in outstanding commitments at March 31, 2015 and December 31, 2014, 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 $245.3 million and $249.4 million in unfunded lines of credit whose contract amounts represent credit risk at March 31, 2015 and December 31, 2014, respectively.

 

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NOTE 10 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued)

 

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 $4.1 million and $4.2 million at March 31, 2015 and December 31, 2014, respectively.

 

The Bank maintains a reserve for potential off-balance sheet credit losses that is included in other liabilities on the balance sheet. At March 31, 2015 and December 31, 2014 the balance in this account totaled $651 thousand and $641 thousand, respectively.

 

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. At March 31, 2015 and December 31, 2014, the balance in this reserve totaled $1.2 million.

 

The following table shows the changes to the allowance for losses on mortgage loans sold.

 

   Allowance for Losses on Mortgage Loans Sold 
     
   Three Months ended March 31,   Year ended  
   2015   2014   December 31, 2014 
   (In Thousands) 
             
Allowance for losses on mortgage loans sold -beginning of period  $1,198   $4,645   $4,645 
Provision charged to (released from) operating expense   -    -    (3,250)
Recoveries   -    -    5 
Charge-offs   (11)   -    (202)
Allowance for losses on mortgage loans sold - end of period  $1,187   $4,645   $1,198 

 

 

NOTE 11 – BANK-OWNED LIFE INSURANCE POLICIES

 

The Corporation had $15.4 million and $15.3 million in bank-owned life insurance (“BOLI”) at March 31, 2015 and December 31, 2014, respectively. The Corporation recognized interest income, which is included in other noninterest income, of $117 thousand for the three months ended March 31, 2015. The Corporation did not recognize any interest income in relation to its BOLI for the three months ended March 31, 2014.

 

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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, 2014. Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results for the year ending December 31, 2015 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; the impact of any laws, regulations, policies or programs implemented pursuant to the Dodd-Frank Act, the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009; branch expansion plans; interest rates; 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 commercial and residential 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, 2014.

 

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:

 

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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 March 31, 2015, 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. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to net income is recognized. At March 31, 2015, 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.

 

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FINANCIAL CONDITION

 

Executive Summary

 

At March 31, 2015, the Corporation’s assets remained steady at $1.1 billion from December 31, 2014. Loans held for investment increased by $17.6 million while loans held for sale increased by $12.1 million. These increases were offset by a decrease in interest-bearing balances of $12.6 million. The first quarter of 2015 reflected loan growth in the commercial real estate – owner occupied, commercial and real estate construction categories of the loans held for investment portfolio. Overall, the portfolio of loans held for investment grew at an annualized rate of 9.1%. At March 31, 2015, loans secured by real estate collateral comprised 71.6% of our total loan portfolio, with loans secured by commercial real estate contributing 42.0% of our total loan portfolio, loans secured by residential real estate contributing 24.2% and real estate construction loans contributing 5.4%. Loans held for sale totaled $57.2 million at March 31, 2015, compared to $45.0 million at December 31, 2014. 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 $786.3 million at March 31, 2015, compared to $755.4 million at December 31, 2014, an increase of $30.9 million. Noninterest-bearing deposits increased $37.4 million from $252.9 million at December 31, 2014 to $290.3 million at March 31, 2015. Savings and interest-bearing deposits increased to $246.8 million at March 31, 2015 from $233.8 million at December 31, 2014, an increase of $13.0 million. These increases were offset by a decrease in time deposits of $19.6 million due mainly to a decrease in Certificate of Deposit Account Registry Service (CDARS) deposits totaling $20.3 million.

 

Net income for the first quarter of 2015 totaled $3.6 million compared to $2.4 million for the same period in 2014. Earnings per diluted share were $0.34 for the first quarter of 2015, compared to $0.23 per diluted share in the same period of 2014. First quarter 2015 pretax earnings increased $1.8 million or 47.1% when compared to first quarter 2014 pretax earnings. The increase was primarily due to increases in pretax income for both the banking and mortgage segments from first quarter 2014 of $749 thousand and $1.0 million, respectively. The banking segment’s increase was due to an increase in net interest income over first quarter 2014 of $1.2 million and was partially offset by an increase in salaries and employee benefits of $427 thousand. The mortgage segment’s increase over first quarter 2014 was due to an increase in mortgage loan originations of $44.0 million or 62.3%.

 

Non-performing assets (“NPA”) totaled $6.8 million, or 0.63%, of total assets at March 31, 2015, up from 0.15% of total assets at December 31, 2014. This increase in NPAs was due to the addition of one $6 million loan to non-accrual status. NPAs are comprised solely of non-accrual loans at March 31, 2015.

 

The unemployment rate for Fairfax County, Virginia was at 4.0% as of February 2015 and still well below the 4.8% for the state of Virginia at the end of March 2015 and 5.5% for the nation at the end of March 2015. Information reviewed at the Federal Open Market Committee’s (FOMC) March 2015 meeting suggested economic growth has moderated since January 2015. Labor market indicators showed further improvement with strong gains and a lower unemployment rate suggesting underutilization of labor resources continues to diminish. The FOMC reaffirmed its view that the current target rate for the federal funds rate remains appropriate. 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 March 31, 2015 decreased to 3.72% from the March 31, 2014 percentage of 3.78%. 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.

 

While we continue to see price appreciation in the local residential real estate market, there is no guarantee that these positive trends will continue, and contrasting the real estate market price appreciation are mixed results in the labor markets. As such, we remain cautious as to the macro-economic risks, many openly identified by the Federal Open Market Committee, including persistently high rates of underemployment. As a consequence, we 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.

 

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Securities

 

The Corporation’s securities portfolio is comprised of U.S. government agency securities, mortgage backed securities, corporate bonds, a CRA mutual fund, and other asset backed securities as well as municipal bonds. The portfolio does not have any non-agency mortgage backed securities or trust preferred securities.

 

At March 31, 2015 the fair value of the securities portfolio totaled $136.6 million, compared to $139.5 million at December 31, 2014. Included in the fair value totals are held-to-maturity securities with an amortized cost of $14.3 million (fair value of $14.5 million) and $14.3 million (fair value of $14.4 million) at March 31, 2015 and December 31, 2014, 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 $794.2 million at March 31, 2015 compared to $776.6 million at December 31, 2014, an increase of $17.6 million or 2.3%. Comprising the majority of the growth, commercial real estate – owner occupied loans increased $10.7 million, commercial loans increased $9.3 million and real estate construction loans increased $2.2 million. These increases were offset by a decrease in commercial real estate – non-owner occupied of $2.1 million, a decrease in residential real estate loans of $2.3 million and a decrease in consumer loans of $279 thousand. 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 March 31, 2015.

 

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 $210.1 million, representing 26.46% of the loan portfolio at March 31, 2015. 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 $123.4 million and representing 15.54% of the loan portfolio at March 31, 2015. Commercial real estate loans are secured by the subject property and underwritten to policy standards as listed above.

 

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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 $191.9 million and comprised 24.16% of the loan portfolio at March 31, 2015. Of this amount, the following sub-categories existed as a percentage of the whole residential real estate loan portfolio as of March 31, 2015: home equity lines of credit, 19.3%; first trust mortgage loans, 72.5%; and junior trust loans, 8.2%.

 

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 $219.6 million and representing 27.65% of the loan portfolio at March 31, 2015. 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 $43.3 million and represented 5.45% of the loan portfolio at March 31, 2015. 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, which was the smallest segment of the loan portfolio, totaled $5.9 million and represented 0.74% of the loan portfolio at March 31, 2015. 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.

 

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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 March 31, 2015, LHFS at fair value totaled $57.2 million compared to $45.0 million at December 31, 2014.

 

The LHFS loans are closed by the Bank 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 first quarter of 2015 we originated $114.5 million of loans processed in this manner, compared to $70.6 million for the first quarter of 2014. 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 $13.3 million at March 31, 2015 compared to $13.4 million at December 31, 2014. The allowance for loan losses was equivalent to 1.68% and 1.73% of total loans held for investment at March 31, 2015 and December 31, 2014, 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 March 31, 2015 and December 31, 2014, the Bank had non-performing assets totaling $6.8 million and $1.6 million, respectively. This increase in NPAs since December 31, 2014 was due to the addition of one $6 million loan to non-accrual status. 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 the Bank’s non-performing assets at March 31, 2015 and December 31, 2014.

 

   March 31, 2015   December 31, 2014 
   (Dollars In Thousands) 
Non-accrual loans :          
Commercial real estate - owner occupied  $-   $- 
Commercial real estate - non-owner occupied   6,040    - 
Residential real estate   129    129 
Commercial   615    1,493 
Real estate construction   -    - 
Consumer   -    - 
Total non-accrual loans  $6,784   $1,622 
           
Other real estate owned ("OREO")   -    - 
           
Total non-performing assets  $6,784   $1,622 
           
Restructured loans included above in non-accrual loans  $-   $698 
           
Ratio of non-performing assets to:          
Total loans plus OREO   0.85%   0.21%
           
Total Assets   0.63%   0.15%
           
Accruing Past due loans:          
90 or more days past due  $-   $- 

 

Not included in the table above is other real estate owned in the amount of $500 thousand. 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.

 

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At March 31, 2015 and December 31, 2014, 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 March 31, 2015, deposits totaled $786.3 million compared to $755.4 million on December 31, 2014, an increase of $30.9 million. Noninterest-bearing deposits increased $37.4 million from $252.9 million at December 31, 2014 to $290.3 million at March 31, 2015. Savings and interest-bearing deposits increased to $246.8 million at March 31, 2015 from $233.8 million at December 31, 2014, an increase of $13.0 million. Offsetting these increases was a decrease in time deposits of $19.6 million due mainly to a decrease in Certificate of Deposit Account Registry Service (CDARS) deposits totaling $20.3 million.

 

Shareholders’ Equity

 

Shareholders’ equity totaled $102.6 million at March 31, 2015 compared to $98.9 million at December 31, 2014. 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.

 

   March 31,   December 31,     
   2015   2014     
   (In Thousands)     
             
Tier 1 Capital:               
Common Stock  $8,782   $8,742      
Capital surplus   19,378    18.538      
Retained earnings   74,276    72,168      
Less: Disallowed goodwill and intangibles net of associated deferred tax liabilities   (1,526)   (1,694)     
Less: Net unrealized loss on available for sale equity securities   (58)   (41)     
Total Tier 1 capital   100,852    97,713      
                
Allowance for loan losses   10,924    10,980      
                
Total risk based capital  $111,776   $108,693      
                
Risk weighted assets  $870,841   $875,862      
                
Quarterly average assets  $1,050,484   $1,007,628      

           Regulatory 
           Minimum 
Risk- Based Capital Ratios:   11.58%   11.16%   4.50%
Common equity tier 1 capital ratio   11.58%   NA    6.00%
Tier 1 capital ratio   12.84%   12.41%   8.00%
Total capital ratio               
Leverage Capital Ratios:               
Tier 1 leverage ratio   9.60%   9.70%   4.00%

 

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RESULTS OF OPERATIONS

 

Summary

 

Net income for the first quarter of 2015 totaled $3.6 million or $0.34 diluted earnings per share. This compares to $2.4 million or $0.23 for the same quarter in 2014. The increase was primarily due to increases in pretax income for both the banking and mortgage segments from first quarter 2014 of $749 thousand and $1.0 million, respectively. The banking segment’s increase was due to an increase in net interest income over first quarter 2014 of $1.2 million and was partially offset by an increase in salaries and employee benefits of $427 thousand. The mortgage segment’s increase over first quarter 2014 was due to an increase in mortgage loan originations of $44.0 million or 62.3%.

 

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 $9.4 million for the three months ended March 31, 2015 and $8.1 million for the three months ended March 31, 2014. The annualized yield on earning assets was 4.05% for the quarter ended March 31, 2015 when compared to 4.15% for the quarter ended March 31, 2014. The cost of interest-bearing deposits and borrowings decreased from 0.55% for the quarter ended March 31, 2014 to 0.49% for the quarter ended March 31, 2015 due mainly to the decrease in interest rates for time deposits. Net interest margin was 3.72% for the quarter ended March 31, 2015 compared to 3.78% for the same period in 2014.

 

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 March 31, 
   2015 compared to 2014 
   Change Due To: 
   Increase /         
   (Decrease)   Volume   Rate 
   (In Thousands) 
Interest Earning Assets:               
Investments  $347   $220   $127 
Loans held for sale   160    187    (27)
Loans   815    973    (158)
Interest-bearing deposits   9    4    5 
Total increase (decrease) in interest income   1,331    1,384    (53)
                
Interest-Bearing Liabilities:               
Interest-bearing demand deposits   7    8    (1)
Money market deposit accounts   (3)   (2)   (1)
Savings accounts   5    4    1 
Time deposits   (4)   107    (111)
Total interest-bearing deposits   5    117    (112)
FHLB Advances   29    25    4 
Securities sold under agreements to repurchase   (1)   -    (1)
Long-term borrowings   2    2    - 
Total increase (decrease) in interest expense   35    144    (109)
                
Increase (decrease) in net interest income  $1,296   $1,240   $56 

 

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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

 

   March 31, 2015   March 31, 2014 
    Average     Income /    Yield /    Average     Income /    Yield / 
    Balance     Expense    Rate    Balance     Expense    Rate 
   (Dollars In Thousands) 
Assets:                              
Interest-earning assets:                              
Securities  $147,468   $815    2.21%  $104,782   $468    1.79%
Loans held for sale   38,065    362    3.80%   18,708    202    4.32%
Loans(1)   781,990    9,072    4.64%   698,429    8,257    4.73%
Interest-bearing balances and federal funds sold   46,828    27    0.23%   39,251    18    0.18%
Total interest-earning assets   1,014,351    10,276    4.05%   861,170    8,945    4.15%
Noninterest-earning assets:                              
Cash and due from banks   9,906              7,609           
Premises, land and equipment   6,898              8,379           
Other assets   32,478              16,007           
Less: allowance for loan losses   (13,337)             (13,181)          
Total noninterest-earning assets   35,945              18,814           
Total Assets  $1,050,296             $879,984           
                               
Liabilities and Shareholders' Equity:                              
Interest-bearing deposits:                              
Interest-bearing demand deposits  $120,685   $65    0.22%  $105,816   $58    0.22%
Money market deposit accounts   110,503    54    0.20%   114,119    57    0.20%
Savings accounts   7,848    7    0.36%   2,868    2    0.28%
Time deposits   260,431    607    0.93%   218,954    611    1.12%
Total interest-bearing deposits   499,467    733    0.59%   441,757    728    0.66%
Borrowings:                              
FHLB short-term borrowings   157,555    94    0.24%   115,944    65    0.22%
Securities sold under agreements to repurchase and federal funds purchased   22,695    5    0.09%   23,374    6    0.10%
FHLB long-term borrowings   556    2    1.44%   -    -    0.00%
Total borrowings   180,806    101    0.22%   139,318    71    0.20%
Total interest-bearing deposits and borrowings   680,273    834    0.49%   581,075    799    0.55%
Noninterest-bearing liabilities:                              
Demand deposits   260,638              196,454           
Other liabilities   8,631