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EX-32 - EXHIBIT 32 - ACCESS NATIONAL CORPv423237_ex32.htm
EX-31.2 - EXHIBIT 31.2 - ACCESS NATIONAL CORPv423237_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - ACCESS NATIONAL CORPv423237_ex31-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 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 November 6, 2015 was 10,544,126 shares.

 

 

 

 

Table of Contents

ACCESS NATIONAL CORPORATION

FORM 10-Q

 

INDEX

 

PART I FINANCIAL INFORMATION
 
Item 1. Financial Statements (Unaudited)
  Consolidated Balance Sheets, September 30, 2015 and December 31, 2014 Page 2
  Consolidated Statements of Income, three and nine months ended September 30, 2015 and 2014 Page 3
  Consolidated Statements of Comprehensive Income, three and nine months ended September 30, 2015 and 2014 Page 4
  Consolidated Statements of Changes in Shareholders' Equity, nine months ended September 30, 2015 and 2014 Page 5
  Consolidated Statements of Cash Flows, nine months ended September 30, 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 35
Item 3. Quantitative and Qualitative Disclosures About Market Risk Page 50
Item 4. Controls and Procedures Page 51
 
PART II OTHER INFORMATION  
     
Item 1. Legal Proceedings Page 52
Item1A. Risk Factors Page 52
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Page 52
Item 3. Defaults Upon Senior Securities Page 52
Item 4. Mine Safety Disclosures Page 52
Item 5. Other Information Page 52
Item 6. Exhibits Page 53
     
  Signatures Page 54

 

 1 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ACCESS NATIONAL CORPORATION

Consolidated Balance Sheets

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

 

   September 30,   December 31, 
   2015   2014 
   (Unaudited)     
ASSETS          
           
Cash and due from banks  $11,085   $9,804 
Interest-bearing balances and federal funds sold   33,781    46,225 
Investment securities:          
Available-for-sale, at fair value   141,572    125,080 
Held-to-maturity, at amortized cost (fair value of $14,487 and $14,378)   14,293    14,309 
Total investment securities   155,865    139,389 
           
Restricted stock, at amortized cost   4,071    8,961 
Loans held for sale - at fair value   35,904    45,026 
Loans   849,037    776,603 
Allowance for loan losses   (13,474)   (13,399)
Net loans   835,563    763,204 
Premises, equipment and land, net   6,811    6,926 
Accrued interest receivable   3,004    2,907 
Other assets   32,145    30,438 
Total assets  $1,118,229   $1,052,880 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Deposits          
Noninterest-bearing deposits  $334,225   $252,875 
Savings and interest-bearing deposits   278,050    233,773 
Time deposits   319,160    268,795 
Total deposits   931,435    755,443 
Other liabilities          
Short-term borrowings   59,699    185,635 
Long-term borrowings   10,000    - 
Other liabilities and accrued expenses   9,466    12,898 
Total liabilities  $1,010,600   $953,976 
           
SHAREHOLDERS' EQUITY          
Common stock $0.835 par value; 60,000,000 authorized; issued and outstanding, 10,521,317 and 10,469,569 shares, respectively  $8,785   $8,742 
Additional paid in capital   19,588    18,538 
Retained earnings   79,048    72,168 
Accumulated other comprehensive income (loss), net   208    (544)
Total shareholders' equity   107,629    98,904 
Total liabilities and shareholders' equity  $1,118,229   $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 September 30,   Nine Months Ended September 30, 
   2015   2014   2015   2014 
Interest and Dividend Income                    
Interest and fees on loans  $10,254   $9,133   $29,659   $26,446 
Interest on federal funds sold and bank balances   34    27    95    72 
Interest and dividends on securities   868    755    2,465    1,844 
Total interest and dividend income   11,156    9,915    32,219    28,362 
                     
Interest Expense                    
Interest on deposits   990    757    2,590    2,272 
Interest on short-term borrowings   37    74    219    202 
Interest on long-term borrowings   32    -    64    - 
Total interest expense   1,059    831    2,873    2,474 
                     
Net interest income   10,097    9,084    29,346    25,888 
Provision for loan losses   -    -    150    - 
Net interest income after provision for loan losses   10,097    9,084    29,196    25,888 
                     
Noninterest Income                    
Service charges and fees   236    167    651    525 
Gain on sale of loans   5,834    4,799    15,110    10,314 
Other income   342    247    4,037    2,946 
Total noninterest income   6,412    5,213    19,798    13,785 
                     
Noninterest Expense                    
Salaries and benefits   6,703    5,860    20,419    16,699 
Occupancy and equipment   751    715    2,247    2,082 
Other operating expenses   3,025    108    8,713    4,777 
Total noninterest expense   10,479    6,683    31,379    23,558 
                     
Income before income taxes   6,030    7,614    17,615    16,115 
                     
Income tax expense   2,086    2,682    6,114    5,705 
NET INCOME  $3,944   $4,932   $11,501   $10,410 
                     
Earnings per common share:                    
Basic  $0.37   $0.47   $1.09   $0.99 
Diluted  $0.37   $0.47   $1.09   $0.99 
                     
Average outstanding shares:                    
Basic   10,519,954    10,440,986    10,504,086    10,414,384 
Diluted   10,593,415    10,476,050    10,567,173    10,459,283 

 

See accompanying notes to consolidated financial statements (unaudited).

 

 3 

 

 

ACCESS NATIONAL CORPORATION

Consolidated Statements of Comprehensive Income

(In Thousands)

(Unaudited)

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2015   2014   2015   2014 
Net income  $3,944   $4,932   $11,501   $10,410 
                     
Other comprehensive income (loss):                    
Unrealized gains (losses) on securities                    
Unrealized holding gains (losses) arising during period   1,177    (344)   1,337    1,491 
Less: reclassification adjustment for gains included in net income   (180)   (57)   (180)   (45)
Tax effect   (348)   141    (405)   (506)
Net of tax amount   649    (260)   752    940 
                     
Comprehensive income  $4,593   $4,672   $12,253   $11,350 

 

See accompanying notes to consolidated financial statements (unaudited).

 

 4 

 

 

ACCESS NATIONAL CORPORATION

Consolidated Statements of Changes in Shareholders' Equity

(In Thousands, Except for Share and Per 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   -    -    11,501    -    11,501 
Other comprehensive income   -    -    -    752    752 
Stock options exercised (6,541 shares)   6    65    -    -    71 
Issuance of restricted common stock (7,500 shares)   6    122    -    -    128 
DRSPP shares issued from reserve (37,707)   31    607    -    -    638 
Cash dividend ($0.44 per share)   -    -    (4,621)   -    (4,621)
Stock-based compensation expense recognized in earnings   -    256    -    -    256 
                          
Balance, September 30, 2015  $8,785   $19,588   $79,048   $208   $107,629 
                          
Balance, December 31, 2013  $8,659   $17,320   $67,121   $(1,966)  $91,134 
Net income   -    -    10,410    -    10,410 
Other comprehensive income   -    -    -    940    940 
Stock options exercised (55,382 shares)   46    398    -    -    444 
Issuance of restricted common stock (24,017 shares)   20    365    -    -    385 
Cash dividend ($0.36 per share)   -    -    (3,750)   -    (3,750)
Stock-based compensation expense recognized in earnings   -    177    -    -    177 
                          
Balance, September 30, 2014  $8,725   $18,260   $73,781   $(1,026)  $99,740 

 

See accompanying notes to consolidated financial statements (unaudited).

 

 5 

 

 

ACCESS NATIONAL CORPORATION

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

 

   Nine Months Ended September 30, 
   2015   2014 
Cash Flows from Operating Activities          
Net income  $11,501   $10,410 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:          
Provision for loan losses   150    - 
Release of provision for losses on mortgage loans sold   -    (3,250)
Provision for off balance sheet losses   109    - 
Write down of other real estate owned   -    707 
Income from bank-owned life insurance   345    217 
Gain on sale of securities   89    47 
Deferred tax (benefit) expense   (2)   1,190 
Stock-based compensation   256    177 
Purchases of loans held for sale   (379,619)   (294,748)
Sales of loans held for sale   388,320    277,575 
Increase in valuation allowance on derivatives   (344)   (108)
Net amortization on securities   758    557 
Depreciation and amortization   380    363 
Loss on disposal of assets   -    1 
Changes in assets and liabilities:          
Decrease (increase) in valuation of loans held for sale carried at fair value   421    (758)
Increase in other assets   (2,136)   (3,590)
(Decrease) increase in other liabilities   (3,640)   577 
Net cash provided by (used in) operating activities   16,588    (10,633)
Cash Flows from Investing Activities          
Proceeds from maturities, calls, and prepayments of securities available for sale   11,586    5,979 
Proceeds from sale of securities   31,057    24,606 
Purchases of securities available for sale   (58,809)   (80,596)
Proceeds from maturities and calls of securities held to maturity   -    5,000 
Purchase of securities held to maturity   -    (3,055)
Purchases of Federal Reserve and Federal Home Loan Bank stock   (7,043)   (13,950)
Proceeds from redemption of Federal Reserve and Federal Home Loan Bank stock   11,933    14,223 
Purchase of bank owned life insurance   -    (15,000)
Net increase in loans   (72,510)   (39,949)
Purchases of premises and equipment   (237)   (253)
Net cash used in investing activities   (84,023)   (102,995)
Cash Flows from Financing Activities          
Net increase in demand, interest-bearing demand and savings deposits   125,627    124,609 
Net increase in time deposits   50,365    34,491 
Decrease in securities sold under agreement to repurchase   (5,936)   (7,263)
(Decrease) increase in other short-term borrowings   (120,000)   10,000 
Increase in long-term borrowings   10,000    - 
Proceeds from issuance of common stock   837    829 
Dividends paid   (4,621)   (3,750)
Net cash provided by financing activities   56,272    158,916 
           
Increase (decrease) in cash and cash equivalents   (11,163)   45,288 
Cash and Cash Equivalents          
Beginning   56,029    23,419 
Ending  $44,866   $68,707 
Supplemental Disclosures of Cash Flow Information          
Cash payments for interest  $2,841   $2,343 
Cash payments for income taxes  $6,517   $4,361 
Supplemental Disclosures of Noncash Investing Activities          
Unrealized gain on securities available for sale  $1,157   $1,446 

 

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 and nine months ended September 30, 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 nine months of 2015, the Corporation granted 121,934 stock options to officers, directors, and employees under the 2009 Stock Option Plan (the “Plan”). Options granted under the Plan have an exercise price equal to the fair market value as of the grant date. Options granted vest over various periods ranging from two and one-half years to four years and expire one year after the full vesting date. Stock–based compensation expense recognized in other operating expense during the first nine months of 2015 and 2014 was $256 thousand and $177 thousand, respectively. The fair value of options is estimated on the date of grant using a Black Scholes option-pricing model with the assumptions noted below.

 

The total unrecognized compensation cost related to non-vested share based compensation arrangements granted under the Plan as of September 30, 2015 was $540,301. The cost is expected to be recognized over a weighted average period of 1.25 years.

 

 7 

 

 

NOTE 2 – STOCK-BASED COMPENSATION PLANS (continued)

 

A summary of stock option activity under the Plan for the nine months ended September 30, 2015 and 2014 is presented as follows:

 

   Nine Months Ended 
   September 30, 2015 
     
Expected life of options granted, in years   4.31 
Risk-free interest rate   1.06%
Expected volatility of stock   30%
Annual expected dividend yield   3%
      
Fair Value of Granted Options  $344,039 
Non-Vested Options   298,443 

 

           Weighted Avg.     
   Number of   Weighted Avg.   Remaining Contractual   Aggregate Intrinsic 
   Options   Exercise Price   Term, in years   Value 
                 
Outstanding at beginning of year   316,423   $14.02    3.20   $917,215 
Granted   121,934    17.96    4.31    - 
Exercised   (6,541)   10.62    1.59   $53,679 
Lapsed or Canceled   (4,050)  $16.40    2.76   $- 
                     
Outstanding at September 30, 2015   427,766   $15.17    2.99   $2,223,049 
                     
Exercisable at September 30, 2015   129,323   $13.03    2.14   $949,542 

 

   Nine Months Ended 
   September 30, 2014 
     
Expected life of options granted, in years   4.33 
Risk-free interest rate   0.69%
Expected volatility of stock   36%
Annual expected dividend yield   3%
      
Fair value of granted options  $305,143 
Non-vested options   273,101 

 

           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   123,000    15.96    4.33    - 
Exercised   (55,382)   8.03    0.77   $407,183 
Lapsed or canceled   (11,325)  $13.25    3.03   $- 
                     
Outstanding at September 30, 2014   337,673   $13.86    3.41   $799,612 
                     
Exercisable at September 30, 2014   64,572   $11.74    2.73   $290,248 

 

NOTE 3 – SECURITIES

 

The following table provides the amortized cost and fair value for the categories of available-for-sale securities and held-to-maturity securities at September 30, 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)

 

   September 30, 2015 
   Amortized Cost   Gross
Unrealized
Gains
   Gross
Unrealized
(Losses)
   Estimated
Fair Value
 
      (In Thousands)     
Available-for-sale:                    
U.S. Government agencies  $18,998   $11   $(57)  $18,952 
Mortgage backed securities   83,704    672    (188)   84,188 
Corporate bonds   9,051    51    (10)   9,092 
Asset backed securities   16,378    18    (189)   16,207 
Municipals   2,313    31    -    2,344 
Municipals - nontaxable   9,308    77    (19)   9,366 
CRA Mutual fund   1,500    -    (77)   1,423 
   $141,252   $860   $(540)  $141,572 
                     
Held-to-maturity:                    
U.S. Government agencies  $9,986   $143   $-   $10,129 
Municipals   2,618    70    (7)   2,681 
Municipals - nontaxable   1,689    -    (12)   1,677 
   $14,293   $213   $(19)  $14,487 

 

   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 September 30, 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.

 

   September 30, 2015   December 31, 2014 
       Estimated       Estimated 
   Amortized   Fair   Amortized   Fair 
   Cost   Value   Cost   Value 
  (In Thousands) 
Available-for-sale:    
US Government agencies:                    
Due after one through five years  $4,000   $4,008   $-   $- 
Due after five through ten years   14,998    14,944    18,998    18,525 
Mortgage backed securities:                    
Due after one through five years   9,837    9,950    -    - 
Due after five through ten years   39,745    40,087    6,533    6,481 
Due after ten through fifteen years   18,387    18,337    39,311    39,115 
Due after fifteen years   15,735    15,814    24,157    24,102 
Corporate bonds:                    
Due in one year or less   -    -    1,998    2,023 
Due after one through five years   9,051    9,092    11,306    11,349 
Asset backed securities:                    
Due after one through five years   1,976    1,971    -    - 
Due after five through ten years   3,107    3,012    6,134    6,199 
Due after fifteen years   11,295    11,224    11,938    11,784 
Municipals:                    
Due after ten through fifteen years   1,143    1,166    -    - 
Due after fifteen years   1,170    1,178    -    - 
Municipals - nontaxable:                    
Due after five through ten years   2,148    2,182    404    413 
Due after ten through fifteen years   4,895    4,938    1,366    1,381 
Due after fifteen years   2,265    2,246    2,272    2,271 
                     
CRA Mutual fund   1,500    1,423    1,500    1,437 
Total  $141,252   $141,572   $125,917   $125,080 
                     
Held-to-maturity:                    
US Government agencies:                    
Due after one through five years  $5,000   $5,106   $5,000   $5,046 
Due after ten through fifteen years   4,986    5,023    4,985    4,960 
Municipals:                    
Due after five through ten years   1,487    1,520    428    444 
Due after ten through fifteen years   1,131    1,161    1,638    1,666 
Due after fifteen years   -    -    561    558 
Municipals - nontaxable:                    
Due after ten through fifteen years   1,407    1,397    1,414    1,421 
Due after fifteen years   282    280    283    283 
Total  $14,293   $14,487   $14,309   $14,378 

 

The estimated fair value of securities pledged to secure public funds, securities sold under agreements to repurchase, credit lines with the Federal Reserve Bank (“FRB”), and debtor-in-possession accounts amounted to $136.1 million at September 30, 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 September 30, 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 
September 30, 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  $5,719   $(12)  $12,788   $(176)  $18,507   $(188)
U.S. Government agencies   9,941    (57)   -    -    9,941    (57)
Municipals - nontaxable   2,246    (19)   -    -    2,246    (19)
Corporate bonds   4,361    (10)   -    -    4,361    (10)
Asset backed securities   8,929    (146)   2,778    (43)   11,707    (189)
CRA Mutual fund   -    -    1,423    (77)   1,423    (77)
Total  $31,196   $(244)  $16,989   $(296)  $48,185   $(540)
                               
Investment securities held-to-maturity:                              
                               
Municipals Taxable  $551   $(7)  $-   $-   $551   $(7)
Municipals - nontaxable   1,677    (12)   -    -    1,677    (12)
Total  $2,228   $(19)  $-   $-   $2,228   $(19)

 

   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. At September 30, 2015, two available-for-sale securities had unrealized losses of $57 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 securities

The Corporation’s unrealized losses on mortgage backed securities were caused by interest rate fluctuations. At September 30, 2015, six securities had unrealized losses of $188 thousand. As these securities are Ginnie Mae and government sponsored entity securities backed by the United States Government, the Corporation’s intent to hold these securities until a market price recovery or maturity, and the determination that it is more likely than not that the Corporation will not be required to sell these securities before their anticipated recoveries, the Corporation does not consider these investments other than temporarily impaired.

 

Asset backed securities

The Corporation’s unrealized losses on its asset backed securities were caused by interest rate fluctuations. At September 30, 2015, thirteen securities had unrealized losses of $189 thousand. Based on the credit quality of the issuers, the Corporation’s intent to hold these securities until a market price recovery, and the determination that it is more likely than not that the Corporation will not be required to sell the securities before their anticipated recovery, the Corporation does not consider these investments other than temporarily impaired.

 

Mutual fund

The Corporation’s unrealized loss on its mutual fund investment was caused by interest rate fluctuations. At September 30, 2015, this one security had an unrealized loss of $77 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.

 

Corporate bonds

The Corporation’s unrealized loss on a corporate obligation was caused by interest rate fluctuations. At September 30, 2015, one security had an unrealized loss of $10 thousand. Based on the credit quality of the issuer, the Corporation’s intent to hold this security 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 the security before its anticipated recovery, the Corporation does not consider this investment other than temporarily impaired.

 

Municipal

The Corporation’s unrealized losses on its municipal investments were caused by interest rate fluctuations. At September 30, 2015, three held-to-maturity securities had unrealized losses of $19 thousand while one available-for-sale municipal investments had unrealized losses of $19 thousand. Based on the credit quality of the issuers, the Corporation’s intent to hold these securities until a market price recovery, and the determination that it is more likely than not that the Corporation will not be required to sell these securities before their anticipated recovery, the Corporation does not consider these investments other than temporarily impaired.

 

 12 

 

 

NOTE 3 – SECURITIES (continued)

 

Restricted Stock

 

The Corporation’s restricted stock consists of Federal Home Loan Bank of Atlanta (“FHLB”) stock and FRB stock. The amortized costs of the restricted stock as of September 30, 2015 and December 31, 2014 are as follows:

 

   September 30, 2015   December 31, 2014 
   (In Thousands) 
Restricted Stock:          
           
FRB stock  $999   $999 
           
FHLB stock   3,072    7,962 
   $4,071   $8,961 

 

Securities Sold Under Agreements to Repurchase (Repurchase Agreements)

 

The Corporation enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Corporation may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Corporation to repurchase the assets. As a result, these repurchase agreements are accounted for as collateralized financing agreements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability in the Corporation’s consolidated balance sheets, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts. In other words, there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. In addition, as the Corporation does not enter into reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements.

 

The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Corporation be in default (e.g., fails to make an interest payment to the counterparty). The collateral is held by a third-party financial institution in the Corporation’s custodial account. The Corporation has the right to sell or repledge the investment securities. The risks and rewards associated with the investment securities pledged as collateral (e.g. a decline or rise in the fair value of the investments) remains with the Corporation. As of September 30, 2015 and December 31, 2014, the obligations outstanding under these repurchase agreements totaled $19.7 million and $25.6 million, respectively, and were comprised of overnight sweep accounts. The fair value of the securities pledged in connection with these repurchase agreements at September 30, 2015 was $24.6 million in total and consisted of $6.7 million in municipal securities, $5.0 in mortgage-backed securities, $6.3 million in corporate bonds, and $6.6 million in asset-backed securities. The fair value of the securities pledged in connection with these repurchase agreements at December 31, 2014 was $26.1 million in total and consisted of $16.4 million in mortgage backed securities, $4.5 million in corporate bonds, and $5.2 million in asset-backed securities.

 

 13 

 

 

NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES

 

The following table presents the composition of the loans held for investment portfolio at September 30, 2015 and December 31, 2014:

 

   Composition of Loan Portfolio 
                 
   September 30, 2015   December 31, 2014 
   Amount   Percentage of
Total
   Amount   Percentage of
Total
 
   (Dollars In Thousands) 
Commercial real estate-owner occupied  $223,801    26.36%  $199,442    25.68%
Commercial real estate-non owner occupied   137,081    16.15    125,442    16.15 
Residential real estate   196,580    23.15    194,213    25.01 
Commercial   225,147    26.52    210,278    27.08 
Real estate construction   57,664    6.79    41,080    5.29 
Consumer   8,764    1.03    6,148    0.79 
Total loans  $849,037    100.00%  $776,603    100.00%
Less allowance for loan losses   13,474         13,399      
   $835,563        $763,204      

 

Unearned income and net deferred loan fees and costs totaled $1.9 million and $1.6 million at September 30, 2015 and December 31, 2014, respectively. Loans pledged to secure borrowings at the FHLB totaled $250.1 million and $215.8 million at September 30, 2015 and December 31, 2014, respectively.

 

Allowance for Loan Losses

 

The allowance for loan losses totaled $13.5 million at September 30, 2015 compared to $13.4 million at year end December 31, 2014. The allowance for loan losses was equivalent to 1.59% and 1.73% of total loans held for investment at September 30, 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.

 

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.

 

 14 

 

 

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

 

For the remaining loans in each segment, the Bank calculates the probability of loss as a group using the risk rating for each of the following loan types: Commercial Real Estate - Owner Occupied, Commercial Real Estate - Non-Owner Occupied, Residential Real Estate, Commercial, Real Estate Construction, and Consumer. Management calculates the historical loss rate in each group by risk rating using a period of at least six years. This historical loss rate may then be adjusted based on management’s assessment of internal and external environmental factors. While management may consider other factors, the analysis generally includes factors such as unemployment, office vacancy rates, and any concentrations that exist within the portfolio. This adjustment is meant to account for changes between the historical economic environment and current conditions and for changes in the ongoing management of the portfolio which affects the loans’ potential losses.

 

Once complete, management compares the condition of the portfolio using several different characteristics, as well as its experience, to the experience of other banks in its peer group in order to determine if it is directionally consistent with others’ experience in our area and line of business. Based on that analysis, management aggregates the probabilities of loss of the remaining portfolio based on the specific and general allowances and may provide additional amounts to the allowance for loan losses as needed. Since this process involves estimates, the allowance for loan losses may also contain an amount that is non-material which is not allocated to a specific loan or to a group of loans but is deemed necessary to absorb additional losses in the portfolio.

 

Management and the Board of Directors subject the reserve adequacy and methodology to a review on a regular basis by internal auditors, external auditors and bank regulators, and such reviews have not resulted in any material adjustment to the allowance.

 

 15 

 

 

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

 

The following tables provide detailed information about the allowance for loan losses as of and for the periods indicated.

 

   Allowance for Loan Losses 
     
Three months ended September 30, 2015  Commercial real
estate - owner
occupied
   Commercial real
estate - non-owner
occupied
   Residential
real estate
   Commercial   Real estate
construction
   Consumer   Total 
   (In Thousands) 
Allowance for credit losses:                                   
Beginning Balance  $3,358   $1,859   $3,174   $4,333   $665   $120   $13,509 
Charge-offs   -    -    -    (72)   -    -    (72)
Recoveries   -    -    12    25    -    -    37 
Provisions   (90)   (42)   (236)   245    123    -    - 
Ending Balance  $3,268   $1,817   $2,950   $4,531   $788   $120   $13,474 

 

Nine months ended September 30, 2015  Commercial real
estate - owner
occupied
   Commercial real
estate - non-owner
occupied
   Residential
real estate
   Commercial   Real estate
construction
   Consumer   Total 
   (In Thousands) 
Allowance for credit losses:                                   
Beginning Balance  $3,229   $1,894   $3,308   $4,284   $596   $88   $13,399 
Charge-offs   -    -    -    (186)   -         (186)
Recoveries   -    -    50    61    -    -    111 
Provisions   39    (77)   (408)   372    192    32    150 
Ending Balance  $3,268   $1,817   $2,950   $4,531   $788   $120   $13,474 

 

   Allowance for Loan Losses 
     
Three months ended September 30, 2014  Commercial real
estate - owner
occupied
   Commercial real
estate - non-owner
occupied
   Residential
real estate
   Commercial   Real estate
construction
   Consumer   Total 
   (In Thousands) 
Allowance for credit losses:                                   
Beginning Balance  $3,163   $1,896   $3,090   $4,299   $670   $93   $13,211 
Charge-offs   -    -    -    (6)   -    -    (6)
Recoveries   -    -    18    21    -    -    39 
Provisions   391    207    383    (913)   (97)   29    - 
Ending Balance  $3,554   $2,103   $3,491   $3,401   $573   $122   $13,244 
                                    
Nine months ended September 30, 2014                                   
Allowance for credit losses:                                   
Beginning Balance  $3,763   $1,734   $3,320   $3,484   $743   $92   $13,136 
Charge-offs   -    -    (21)   (22)   -    -    (43)
Recoveries   -    -    79    72    -    -    151 
Provisions   (209)   369    113    (133)   (170)   30    - 
Ending Balance  $3,554   $2,103   $3,491   $3,401   $573   $122   $13,244 

 

   Recorded Investment in Loans 
                             
September 30, 2015  Commercial real
estate - owner
occupied
   Commercial real
estate - non-owner
occupied
   Residential
real estate
   Commercial  

Real estate

construction

   Consumer   Total 
   (In Thousands) 
Allowance                                   
Ending balance:  $3,268   $1,817   $2,950   $4,531   $788   $120   $13,474 
Ending balance: individually evaluated for impairment  $-   $-   $-        $-   $-   $- 
Ending balance: collectively evaluated for impairment  $3,268   $1,817   $2,950   $4,531   $788   $120   $13,474 
Ending balance: loans acquired with deteriorated credit quality  $-   $-   $-   $-   $-   $-   $- 
                                    
Loans                                   
Ending balance  $223,801   $137,081   $196,580   $225,147   $57,664   $8,764   $849,037 
Ending balance: individually evaluated for impairment  $351   $5,653   $348   $1,476   $1,096   $-   $8,924 
Ending balance: collectively evaluated for impairment  $223,450   $131,428   $196,232   $223,671   $56,568   $8,764   $840,113 
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  $-   $-   $-   $-   $-   $-   $- 

 

 16 

 

 

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

 

Identifying and Classifying Portfolio Risks by Risk Rating

 

At origination, loans are categorized into risk categories based upon original underwriting. Subsequent to origination, management evaluates the collectability of all loans in the portfolio and assigns a proprietary risk rating. Ratings range from the highest to lowest quality based on factors including measurements of ability to pay, collateral type and value, borrower stability, management experience, and credit enhancements. These ratings are consistent with the bank regulatory rating system.

 

A loan may have portions of its balance in one rating and other portions in a different rating. The Bank may use these “split ratings” when factors cause loan loss risk to exist for part but not all of the principal balance. Split ratings may also be used where cash collateral or a government agency has provided a guaranty that partially covers a loan.

 

For clarity of presentation, the Corporation’s loan portfolio is profiled below in accordance with the risk rating framework that has been commonly adopted by the federal banking agencies. The definitions of the various risk rating categories are as follows:

 

Pass - The condition of the borrower and the performance of the loan is satisfactory or better.

 

Special mention - A special mention asset has one or more potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date.

 

Substandard - A substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

 

Doubtful - An asset classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

Loss - Assets classified loss are considered uncollectible and their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, and a partial recovery may be effected in the future.

 

The Bank did not have any loans classified as loss at September 30, 2015 or December 31, 2014. It is the Bank’s policy to charge-off any loan once the risk rating is classified as loss.

 

 17 

 

 

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

 

The profile of the loan portfolio, as indicated by risk rating, as of September 30, 2015 and December 31, 2014 is shown below.

 

   September 30, 2015 
Credit Risk Profile by Risk Rating  Pass   Special Mention   Substandard   Doubtful   Loss   Unearned
Income
   Total Loans 
   (In Thousands) 
Commercial real estate - owner occupied  $220,456   $351   $3,495   $-   $-   $(501)  $223,801 
Commercial real estate - non-owner occupied   129,968    775    6,661    -    -    (323)   137,081 
Residential real estate   196,607    -    163    -    -    (190)   196,580 
Commercial   202,811    6,629    15,994    -    -    (287)   225,147 
Real estate construction   57,160    -    1,096    -    -    (591)   57,664 
Consumer   8,762    -    -    -    -    2    8,764 
Total  $815,763   $7,755   $27,409   $-   $-   $(1,890)  $849,037 

 

   December 31, 2014 
Credit Risk Profile by Risk Rating  Pass   Special Mention   Substandard   Doubtful   Loss   Unearned
Income
   Total Loans 
   (In Thousands) 
Commercial real estate - owner occupied  $194,007   $2,115   $3,767   $-   $-   $(447)  $199,442 
Commercial real estate - non-owner occupied   111,301    2,627    11,751    -    -    (237)   125,442 
Residential real estate   191,512    2,100    936    -    -    (335)   194,213 
Commercial   194,585    10,519    5,540    -    -    (366)   210,278 
Real estate construction   41,253    -    -    -    -    (173)   41,080 
Consumer   6,148    -    -    -    -         6,148 
Total  $738,806   $17,361   $21,994   $-   $-   $(1,558)  $776,603 

 

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.

 

 18 

 

 

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

 

   For the Period Ended, September 30, 2015 
Credit Risk Profile Based on Payment Activity  Performing   Non-Performing   Total Loans 
Commercial real estate - owner occupied  $223,801   $-   $223,801 
Commercial real estate - non-owner occupied   131,428    5,653    137,081 
Residential real estate   196,417    163    196,580 
Commercial   224,347    800    225,147 
Real estate construction   57,664    -    57,664 
Consumer   8,764    -    8,764 
Total  $842,421   $6,616   $849,037 

 

   For the Period Ended, December 31, 2014 
Credit Risk Profile Based on Payment Activity  Performing   Non-Performing   Total Loans 
Commercial real estate - owner occupied  $199,442   $-   $199,442 
Commercial real estate - non-owner occupied   125,442    -    125,442 
Residential real estate   194,084    129    194,213 
Commercial   208,785    1,493    210,278 
Real estate construction   41,080    -    41,080 
Consumer   6,148    -    6,148 
Total  $774,981   $1,622   $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 September 30, 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 
     
   September 30, 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  $-   $-   $115   $115   $-   $223,686  $223,801 
Commercial real estate - non-owner occupied   -    -    1,007    1,007    5,653    130,421    137,081 
Residential real estate   297    -         297    163    196,120    196,580 
Commercial   -    -    -    -    800    224,347    225,147 
Real estate construction   -    -    -    -    -    57,664    57,664 
Consumer   -    -    -    -    -    8,764    8,764 
Total  $297   $-   $1,122   $1,419   $6,616   $841,002   $849,037 

 

   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 

 

 19 

 

 

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 nine month period ended September 30, 2015 and September 30, 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 and nine month periods ended September 30, 2015 and 2014.

 

 20 

 

 

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

 

The table below shows the results of management’s analysis of impaired loans as of September 30, 2015 and December 31, 2014.

 

   Impaired Loans 
                         
   September 30, 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  $351   $351   $-   $356   $356   $- 
Commercial real estate - non-owner occupied   5,653    5,847    -    -    -    - 
Residential real estate   348    390    -    320    362    - 
Commercial   1,476    2,988    -    1,401    1,913    - 
Real estate construction   1,096    1,096    -    -    -    - 
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  $351   $351   $-   $356   $356      
Commercial real estate - non-owner occupied   5,653    5,847    -    -    -    - 
Residential real estate   348    390    -    320    362      
Commercial   1,476    2,988    -    1,515    2,033    115 
Real estate construction   1,096    1,096    -    -    -    - 
Consumer   -    -    -    -    -    - 
   $8,924   $10,672   $-   $2,191   $2,751   $115 

 

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

 

   Three Months Ended   Nine Months Ended 
   September 30, 2015   September 30, 2014   September 30, 2015   September 30, 2014 
   Average Recorded
Investment
   Average Recorded
Investment
   Average Recorded
Investment
   Average Recorded
Investment
 
   (In Thousands) 
Commercial real estate - owner occupied  $352   $359   $354   $360 
Commercial real estate - non-owner occupied   5,737    -    3,955    - 
Residential real estate   391    364    377    368 
Commercial   2,564    2,033    2,601    1,979 
Real estate construction   1,102    -    1,118    - 
Consumer   -    -    -    - 
   $10,146   $2,756   $8,405   $2,707 

 

 

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.

 

 21 

 

 

NOTE 5 – SEGMENT REPORTING (continued)

 

The commercial banking segment provides the mortgage banking segment (“Mortgage Division”) with the short-term funds needed to originate mortgage loans through a warehouse line of credit and charges the mortgage banking segment interest based on the prime rate. These transactions are eliminated in the consolidation process.

 

The “Other” column in the following table includes the operations of the Corporation and Access Real Estate. The primary source of income for the Corporation is derived from dividends from the Bank and its primary expense relates to costs incurred by the Corporation in connection with its annual audits and directors fees. The primary source of income for Access Real Estate is derived from rents received from the Bank.

 

The following table presents segment information as of and for the three months ended September 30, 2015 and 2014:

 

   Commercial   Mortgage   Wealth           Consolidated 
September 30, 2015  Banking   Banking   Management   Other   Eliminations   Totals 
   (In Thousands) 
Revenues:                              
Interest income  $10,909   $417   $-   $3   $(173)  $11,156 
Gain on sale of loans   -    5,834    -    -    -    5,834 
Other revenues   809    (954)   701    337    (315)   578 
Total revenues   11,718    5,297    701    340    (488)   17,568 
                               
Expenses:                              
Interest expense   1,063    98    -    71    (173)   1,059 
Salaries and employee benefits   3,533    2,706    464    -    -    6,703 
Other expenses   1,894    1,294    273    630    (315)   3,776 
Total operating expenses   6,490    4,098    737    701    (488)   11,538 
                               
Income (loss) before income taxes  $5,228   $1,199   $(36)  $(361)  $-   $6,030 
                               
Total assets  $1,081,026   $38,246   $1,228   $16,386   $(18,657)  $1,118,229 

 

   Commercial   Mortgage   Wealth           Consolidated 
September 30, 2014  Banking   Banking   Management   Other   Eliminations   Totals 
   (In Thousands) 
Revenues:                              
Interest income  $9,702   $410   $-   $3   $(200)  $9,915 
Gain on sale of loans   -    4,799    -    -    -    4,799 
Other revenues   753    (873)   536    299    (301)   414 
Total revenues   10,455    4,336    536    302    (501)   15,128 
                               
Expenses:                              
Interest expense   829    123    6    73    (200)   831 
Salaries and employee benefits   3,002    2,443    415    -    -    5,860 
Other expenses   1,558    (1,962)   223    1,305    (301)   823 
Total operating expenses   5,389    604    644    1,378    (501)   7,514 
                               
Income (loss) before income taxes  $5,066   $3,732   $(108)  $(1,076)  $-   $7,614 
                               
Total assets  $971,294   $44,179   $1,671   $15,225   $(17,276)  $1,015,093 

 

 22 

 

 

NOTE 5 – SEGMENT REPORTING (continued)

 

The following table presents segment information as of and for the nine months ended September 30, 2015 and 2014:

 

   Commercial   Mortgage   Wealth           Consolidated 
September 30, 2015  Banking   Banking   Management   Other   Eliminations   Totals 
   (In Thousands) 
Revenues:                              
Interest income  $31,522   $1,343   $-   $10   $(656)  $32,219 
Gain on sale of loans   -    15,110    -    -    -    15,110 
Other revenues   2,260    392    1,925    1,043    (932)   4,688 
Total revenues   33,782    16,845    1,925    1,053    (1,588)   52,017 
                               
Expenses:                              
Interest expense   2,884    434    -    211    (656)   2,873 
Salaries and employee benefits   10,028    8,914    1,477    -    -    20,419 
Other expenses   5,578    3,903    740    1,821    (932)   11,110 
Total operating expenses   18,490    13,251    2,217    2,032    (1,588)   34,402 
                               
Income (loss) before income taxes  $15,292   $3,594   $(292)  $(979)  $-   $17,615 
                               
Total assets  $1,081,026   $38,246   $1,228   $16,386   $(18,657)  $1,118,229 

 

   Commercial   Mortgage   Wealth           Consolidated 
September 30, 2014  Banking   Banking   Management   Other   Eliminations   Totals 
   (In Thousands) 
Revenues:                              
Interest income  $27,891   $909   $-   $9   $(447)  $28,362 
Gain on sale of loans   -    10,314    -    -    -    10,314 
Other revenues   1,855    9    1,584    917    (894)   3,471 
Total revenues   29,746    11,232    1,584    926    (1,341)   42,147 
                               
Expenses:                              
Interest expense   2,467    179    16    259    (447)   2,474 
Salaries and employee benefits   8,737    6,827    1,135    -    -    16,699 
Other expenses   4,591    (92)   697    2,557    (894)   6,859 
Total operating expenses   15,795    6,914    1,848    2,816    (1,341)   26,032 
                               
Income (loss) before income taxes  $13,951   $4,318   $(264)  $(1,890)  $-   $16,115 
                               
Total assets  $971,294   $44,179   $1,671   $15,225   $(17,276)  $1,015,093 

 

 23 

 

 

NOTE 6 – EARNINGS PER SHARE

 

The following table shows the calculation of both basic and diluted earnings per share (“EPS”) for the three and nine months ended September 30, 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 
   September 30, 2015   September 30, 2014 
   (In Thousands, Except for Share and Per Share Data) 
         
BASIC EARNINGS PER SHARE:          
Net income  $3,944   $4,932 
Weighted average shares outstanding   10,519,954    10,440,986 
           
Basic earnings per share  $0.37   $0.47 
           
DILUTED EARNINGS PER SHARE:          
Net income  $3,944   $4,932 
Weighted average shares outstanding   10,519,954    10,440,986 
Dilutive stock options   73,461    35,064 
Weighted average diluted shares outstanding   10,593,415    10,476,050 
           
Diluted earnings per share  $0.37   $0.47 

 

   Nine Months   Nine Months 
   Ended   Ended 
   September 30, 2015   September 30, 2014 
   (In Thousands, Except for Share and Per Share Data) 
         
BASIC EARNINGS PER SHARE:          
Net income  $11,501   $10,410 
Weighted average shares outstanding   10,504,086    10,414,384 
           
Basic earnings per share  $1.09   $0.99 
           
DILUTED EARNINGS PER SHARE:          
Net income  $11,501   $10,410 
Weighted average shares outstanding   10,504,086    10,414,384 
Dilutive stock options   63,087    44,899 
Weighted average diluted shares outstanding   10,567,173    10,459,283 
           
Diluted earnings per share  $1.09   $0.99 

 

 24 

 

 

NOTE 7 – COMMITMENTS AND CONTINGENT LIABILITIES

 

As part of its mortgage banking activities, the Mortgage Division enters into interest rate lock commitments, which are commitments to originate loans where the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The Mortgage Division then locks in the loan and interest rate with an investor and commits to deliver the loan if settlement occurs (“best efforts”) or commits to deliver the locked loan in a binding (“mandatory”) delivery program with an investor. Certain loans under interest rate lock commitments are covered under forward sales contracts of mortgage backed securities (“MBS”). Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in noninterest income. Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. The Mortgage Division determines the fair value of interest rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates, taking into consideration the probability that the interest rate lock commitments will close or will be funded.

 

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

 

Since the Mortgage Division’s derivative instruments are not designated as hedging instruments, the fair value of the derivatives are recorded as a freestanding asset or liability with the change in value being recognized in current earnings during the period of change. The Corporation has not elected to apply hedge accounting to the Mortgage Division’s derivative instruments as provided in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging.

 

At September 30, 2015 and December 31, 2014, the Mortgage Division had open forward contracts with a notional value of $51.0 million and $45.3 million, respectively. At September 30, 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 ($373) thousand and ($349) thousand at September 30, 2015 and December 31, 2014, respectively.

 

Interest rate lock commitments totaled $47.1 million and $23.5 million at September 30, 2015 and December 31, 2014, respectively, and included $15.6 million and $5.3 million that were made on a best efforts basis at September 30, 2015 and December 31, 2014, respectively. Fair values of these best efforts commitments were $130 thousand and $39 thousand at September 30, 2015 and December 31, 2014, respectively. The remaining hedged interest rate lock commitments totaling $31.5 million and $18.2 million at September 30, 2015 and December 31, 2014 had a fair value of $478 thousand and $200 thousand, respectively.

 

Included in other noninterest income for the nine months ended September 30, 2015 and September 30, 2014 was a net gain of $245 thousand and a net gain of $397 thousand, respectively, relating to derivative instruments. The amount included in other noninterest income for the nine months ended September 30, 2015 and September 30, 2014 pertaining to its hedging activities was a net realized loss of $873 thousand and a net realized loss of $1.6 million, respectively.

 

NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers: Topic 606”. This ASU supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition” as well as most industry-specific guidance. The amendments also create a new Subtopic 340-40 “Other Assets and Deferred Costs – Contracts with Customers”. In summary, entities are to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The provisions of ASU 2014-09 are effective for annual periods beginning after December 15, 2017 and interim periods within 2018. The adoption of this guidance should not have a material effect on the Corporation’s financial condition or results of operations.

 

 25 

 

 

NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS (continued)

 

In June 2014, the FASB issued ASU 2014-11, “Transfers and Servicing (Topic 860)” which changes the accounting for repurchase financing arrangements. 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 did 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 value of the award, and compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in the ASU are effective for annual periods beginning after December 15, 2015. The adoption of this guidance 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.

 

In August 2015, the FASB issued ASU 2015-15, “Interest - Imputation of Interest (Subtopic 835-30)”. This ASU adds language clarifying the Securities and Exchange Commission’s views regarding the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. The amendments in the ASU are effective beginning after December 15, 2015. The adoption of this guidance should not have a material effect on the Corporation’s financial condition or results of operations.

 

In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805)”. This ASU requires an acquirer retrospectively adjust provisional amounts recognized in a business combination during the measurement period, in the reporting period in which the adjustment is determined as well as present separately on the face of the income statement or as a disclosure in the notes to the financial statements the portion of the amount recorded in current period earnings that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The amendments in the ASU are effective beginning after December 15, 2015. The adoption of this guidance should not have a material effect on the Corporation’s financial condition or results of operations.

 

 26 

 

 

NOTE 9 - FAIR VALUE

 

Fair value pursuant to FASB ASC 820-10, Fair Value Measurements and Disclosures, is the exchange price, in an orderly transaction that is not a forced liquidation or distressed sale, between market participants to sell an asset or transfer a liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability.  The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or liability. FASB ASC 820-10 provides a consistent definition of fair value which focuses on exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over entity specific inputs.  In addition, FASB ASC 820-10 provides a framework for measuring fair value and establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Transfers between levels of the fair value hierarchy are recognized on the actual dates of the event or circumstances that caused the transfer, which generally coincides with the Corporation’s monthly and/or quarterly valuation process.

 

The standard describes three levels of inputs that may be used to measure fair values:

 

Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

Level 2 - Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

 

Level 3 - Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

The Corporation used the following methods to determine the fair value of each type of financial instrument:

 

Investment securities: Fair values for securities available-for-sale are obtained from an independent pricing service. The prices are not adjusted. The independent pricing service uses industry-standard models to price U.S. Government agency obligations and mortgage backed securities that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Securities of obligations of state and political subdivisions are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating.

 

Substantially all assumptions used by the independent pricing service are observable in the marketplace, can be derived from

observable data, or are supported by observable levels at which transactions are executed in the marketplace (Level 2).

 

Residential loans held for sale: The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2).

 

Derivative financial instruments: Derivative instruments are used to hedge residential mortgage loans held for sale and the related interest-rate lock commitments and include forward commitments to sell mortgage loans and mortgage-backed securities as further described in Note 7. The fair values of derivative financial instruments are based on derivative market data inputs as of the valuation date and the underlying value of mortgage loans for interest rate lock commitments (Level 3).

 

Impaired loans: The fair values of impaired loans are measured on a nonrecurring basis as the fair value of the loan’s collateral for collateral-dependent loans.  Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable.  The use of discounted cash flow models and management’s best judgment are significant inputs in arriving at the fair value measure of the underlying collateral (Level 3).

 

 27 

 

 

NOTE 9 - FAIR VALUE (continued)

 

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 September 30, 2015 and December 31, 2014, are summarized below:

 

   Fair Value Measurement 
   at September 30, 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                    
U.S. Government agencies  $18,952   $-   $18,952   $- 
Mortgage backed securities   84,188    -    84,188    - 
Corporate bonds   9,092    -    9,092    - 
Asset backed securities   16,207    -    16,207    - 
Municipals   2,344    -    2,344    - 
Municipals - nontaxable   9,366    -    9,366    - 
CRA Mutual fund   1,423    -    1,423    - 
Total available-for-sale investment securities   141,572    -    141,572    - 
                     
Residential loans held for sale   35,904    -    35,904    - 
Derivative assets   773    -    -    773 
Total Financial Assets-Recurring  $178,249   $-   $177,476   $773 
                     
Financial Liabilities-Recurring                    
Derivative liabilities  $539   $-   $-   $539 
Total Financial Liabilities-Recurring  $539   $-   $-   $539 
                     
Financial Assets-Non-Recurring                    
Impaired loans (1)  $8,924   $-   $-   $8,924 
Total Financial Assets-Non-Recurring  $8,924   $-   $-   $8,924 

 

(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.

 

 28 

 

 

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 interest 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 nine month periods ended September 30, 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 September 30, 
   2015   2014 
   (In Thousands) 
Balance, beginning of period  $648   $7 
Realized and unrealized gains (losses) included in earnings   (414)   196 
Unrealized gains (losses) included in other comprehensive income   -    - 
Purchases, settlements, paydowns, and maturities   -    - 
Transfer into Level 3   -    - 
Balance, end of period  $234   $203 

 

   Nine Months Ended September 30, 
   2015   2014 
   (In Thousands) 
Balance, beginning of period  $(110)  $95 
Realized and unrealized gains (losses) included in earnings   344    108 
Unrealized gains (losses) included in other comprehensive income   -    - 
Purchases, settlements, paydowns, and maturities   -    - 
Transfer into Level 3   -    - 
Balance, end of period  $234   $203 

 

 29 

 

 

NOTE 9 - FAIR VALUE (Continued)

 

The following tables presents qualitative information about level 3 fair value measurements for financial instruments measured at fair value at September 30, 2015 and December 31, 2014:

 

   September 30, 2015
Description  Fair Value Estimate   Valuation Techniques  Unobservable Input  Range (Weighted Average)
   (In Thousands)
Financial Assets - Recurring              
Derivative assets  $773   Market pricing (3)  Estimated pullthrough  75% - 90% (84.1%)
Derivative liabilities  $539   Market pricing (3)  Estimated pullthrough  75% - 90% (84.1%)
               
Financial Assets - Non-recurring              
Impaired loans - Real estate secured  $7,448   Appraisal of collateral (1)  Liquidation expenses (2)  0% - 20% (11%)
Impaired loans - Non-real estate secured  $1,476   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

 

 30 

 

 

NOTE 9 - FAIR VALUE (Continued)

 

Financial instruments recorded using FASB ASC 825-10

 

Under FASB ASC 825-10, Financial Instruments, the Corporation may elect to report most financial instruments and certain other items at fair value on an instrument-by-instrument basis with changes in fair value reported in net income. After the initial adoption the election is made at the acquisition of an eligible financial asset, financial liability or firm commitment or when certain specified reconsideration events occur. The fair value election, with respect to an item, may not be revoked once an election is made.

 

The following table reflects the differences between the fair value carrying amount of residential mortgage loans held for sale at September 30, 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  $35,904   $1,493   $34,411 

 

The Corporation has elected to account for residential loans held for sale at fair value to eliminate the mismatch that would occur by recording changes in market value on derivative instruments used to hedge loans held for sale while carrying the loans at the lower of cost or market.

 

The following methods and assumptions not previously presented were used in estimating the fair value of financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis:

 

Cash and Short-Term Investments

 

For those short-term instruments, the carrying amount is a reasonable estimate of fair value. As such they are classified as Level 1 for noninterest-bearing deposits and Level 2 for interest-bearing deposits due from banks or federal funds sold.

 

Restricted Stock

 

It is not practical to determine the fair value of restricted stock due to the restrictions placed on its transferability.

 

Loans, Net of Allowance

 

For certain homogeneous categories of loans, such as some residential mortgages, and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics resulting in a Level 3 classification. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities resulting in a Level 3 classification.

 

Accrued Interest

 

The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification depending upon the level of the asset or liability, with which, the accrual is associated.

 

Deposits and Borrowings

 

The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date resulting in a Level 1 classification. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities also resulting in a Level 1 classification. The fair value of all other deposits and borrowings is determined using the discounted cash flow method thereby resulting in a Level 2 classification. The discount rate was equal to the rate currently offered on similar products.

 

 31 

 

 

NOTE 9 - FAIR VALUE (Continued)

 

Off-Balance-Sheet Financial Instruments

 

The fair value of commitments to extend credit is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed interest rates. The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.

 

At September 30, 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.

 

The carrying amounts and estimated fair values of financial instruments at September 30, 2015 and December 31, 2014 were as follows:

 

   September 30, 2015   December 31, 2014 
       Estimated       Estimated 
   Carrying   Fair   Carrying   Fair 
   Amount   Value   Amount   Value 
   (In Thousands) 
Financial assets:                    
Cash and short-term investments  $44,866   $44,866   $56,029   $56,029 
Securities available-for-sale   141,572    141,572    125,080    125,080 
Securities held-to-maturity   14,293    14,487    14,309    14,378 
Restricted stock   4,071    4,071    8,961    8,961 
Loans, net of allowance   871,467    882,086    808,230    837,937 
Derivatives   773    773    330    330 
Total financial assets  $1,077,042   $1,087,855   $1,012,939   $1,042,715 
                     
Financial liabilities:                    
Deposits  $931,435   $931,559   $755,443   $753,675 
Short-term borrowings   59,699    59,600    185,635    185,396 
Long-term borrowings   10,000    9,983    -    - 
Derivatives   539    539    440    440 
Total financial liabilities  $1,001,673   $1,001,681   $941,518   $939,511 

 

 32 

 

 

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 $61.5 million and $16.8 million in outstanding commitments at September 30, 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 $298.2 million and $249.4 million in unfunded lines of credit whose contract amounts represent credit risk at September 30, 2015 and December 31, 2014, respectively.

 

Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation generally holds collateral supporting those commitments if deemed necessary. The Corporation had standby letters of credit outstanding in the amount of $4.8 million and $4.2 million at September 30, 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 September 30, 2015 and December 31, 2014 the balance in this reserve totaled $750 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. Management performs a quarterly analysis to determine the adequacy of the reserve. During the third quarter 2014, the analysis along with current industry events such as court rulings upholding states’ statutes on time limitations on put back of mortgage loans, modifications to the government sponsored entities’ payment performance standards, continued decline in foreclosure and loss upon liquidation statistics in our markets, and a reduction in the amount of loans originated prior to the mortgage industry financial crisis, led management to determine a reserve release of $3.25 million was appropriate. The $3.25 million reserve release is included in other expenses on the Consolidated Statements of Income. At September 30, 2015 and December 31, 2014, the balance in this reserve totaled $1.2 million. 

 

 33 

 

 

 

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

 

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

 

   Allowance for Losses on Mortgage Loans Sold 
     
   Nine Months ended September 30,   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 released from operating expense   -    (3,250)   (3,250)
Recoveries   -    -    5 
Charge-offs   (19)   (202)   (202)
Allowance for losses on mortgage loans sold - end of period  $1,179   $1,193   $1,198 

 

NOTE 11 – BANK-OWNED LIFE INSURANCE POLICIES

 

The Corporation had $15.7 million and $15.3 million in bank-owned life insurance (“BOLI”) at September 30, 2015 and December 31, 2014, respectively. The Corporation recognized interest income, which is included in other noninterest income, of $345 thousand and $217 for the nine months ended September 30, 2015 and September 30, 2014, respectively.

 

 34 

 

 

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 and nine months ended September 30, 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, beli