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EX-32.1 - EXHIBIT 32.1 - ACCESS NATIONAL CORPancx033117ex-321.htm
EX-31.2 - EXHIBIT 31.2 - ACCESS NATIONAL CORPancx033117ex-312.htm
EX-31.1 - EXHIBIT 31.1 - ACCESS NATIONAL CORPancx033117ex-311.htm
 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2017
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
(State or other jurisdiction of incorporation or organization) 
82-0545425
(I.R.S. Employer Identification No.)
1800 Robert Fulton Drive, Suite 300, Reston, Virginia
(Address of principal executive offices)
20191
(Zip Code)
(703) 871-2100
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed from 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  þ
No  o
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  þ
No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one:)
Large accelerated filer
o
 
Accelerated filer
þ
Non-accelerated filer
(Do not check if a smaller reporting company)
o
 
Smaller reporting company  
o
Emerging growth company
o
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o
No  þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 20,306,337 shares of Common Stock as of May 19, 2017.
 
 




ACCESS NATIONAL CORPORATION
FORM 10-Q

INDEX

Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


ITEM 1.
FINANCIAL STATEMENTS

PART I

ACCESS NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except for Share and Per Share Data)
 
 
 
 
 
March 31,
 
December 31,
 
2017
 
2016
 
(Unaudited)
 
 
ASSETS
 
 
 
Cash and due from banks
$
11,740

 
$
9,186

Interest-bearing balances and federal funds sold
31,866

 
81,873

Total cash and cash equivalents
43,606

 
91,059

Investment securities:
 
 
 
Available-for-sale, at fair value
190,129

 
194,090

Held-to-maturity, at amortized cost (fair value of $9,273 and $9,293, respectively)
9,186

 
9,200

Total investment securities
199,315

 
203,290

Restricted stock, at amortized cost
6,324

 
10,092

Loans held for sale, at fair value
36,299

 
35,676

Loans held for investment, net of allowance for loan losses of $13,727 and $16,008, respectively
1,059,064

 
1,033,690

Premises, equipment and land, net
7,097

 
7,084

Other assets
49,642

 
49,817

Total assets
$
1,401,347

 
$
1,430,708

LIABILITIES AND SHAREHOLDERS' EQUITY
 

 
 

LIABILITIES
 
 
 
Noninterest-bearing demand deposits
$
376,674

 
$
362,036

Savings and interest-bearing deposits
472,105

 
440,585

Time deposits
308,211

 
251,706

Total deposits
1,156,990

 
1,054,327

Short-term borrowings
61,827

 
186,009

Long-term borrowings
50,000

 
60,000

Other liabilities and accrued expenses
8,358

 
9,842

Total liabilities
1,277,175

 
1,310,178

SHAREHOLDERS' EQUITY
 

 
 

Common stock $0.835 par value; 60,000,000 shares authorized; 10,787,490 and 10,636,242 issued and outstanding, respectively
9,008

 
8,881

Additional paid-in capital
24,254

 
21,779

Retained earnings
92,436

 
91,439

Accumulated other comprehensive loss, net
(1,526
)
 
(1,569
)
Total shareholders' equity
124,172

 
120,530

Total liabilities and shareholders' equity
$
1,401,347

 
$
1,430,708

 
See accompanying notes to the consolidated financial statements (unaudited).


3


ACCESS NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except for Share and Per Share Data)
(Unaudited)
 
For the Three Months Ended
March 31,
 
2017
 
2016
INTEREST AND DIVIDEND INCOME
 
 
 
Interest and fees on loans
$
12,199

 
$
10,876

Interest on federal funds sold and bank balances
131

 
70

Interest and dividends on securities
1,224

 
1,035

Total interest and dividend income
13,554

 
11,981

INTEREST EXPENSE
 

 
 

Interest on deposits
1,502

 
1,150

Interest on other borrowings
362

 
281

Total interest expense
1,864

 
1,431

Net interest income
11,690

 
10,550

Provision for loan losses
1,400

 

Net interest income after provision for loan losses
10,290

 
10,550

NONINTEREST INCOME
 

 
 

Service charges and fees
280

 
260

Gains on sales of loans held for sale
3,345

 
3,830

Other income
2,378

 
2,729

Total noninterest income
6,003

 
6,819

NONINTEREST EXPENSE
 

 
 

Salaries and employee benefits
8,040

 
7,668

Occupancy and equipment
820

 
761

Other operating expenses
3,335

 
2,700

Total noninterest expense
12,195

 
11,129

Income before income taxes
4,098

 
6,240

Income tax expense
1,491

 
2,145

NET INCOME
$
2,607

 
$
4,095

Earnings per common share:
 
 
 
Basic
$
0.24

 
$
0.39

Diluted
$
0.24

 
$
0.39

Average outstanding shares:
 
 
 
Basic
10,724,798

 
10,553,150

Diluted
10,857,235

 
10,606,359


See accompanying notes to the consolidated financial statements (unaudited). 

4


ACCESS NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
(Unaudited)
 
For the Three Months Ended
March 31,
 
2017
 
2016
 
 
 
 
Net income
$
2,607

 
$
4,095

Other comprehensive income:
 
 
 
Unrealized holding gains arising during the period
66

 
3,037

Reclassification adjustment for gains included in net income

 
(57
)
Tax effect
(23
)
 
(1,043
)
Total other comprehensive income
43

 
1,937

Total comprehensive income
$
2,650

 
$
6,032


See accompanying notes to the consolidated financial statements (unaudited).




5


ACCESS NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands, Except for Share and Per Share Data)
 (Unaudited)
 
 
 
 
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Balance December 31, 2015
$
8,805

 
$
19,953

 
$
81,385

 
$
(1,005
)
 
$
109,138

 
 
 
 
 
 
 
 
 
 
Net income

 

 
4,095

 

 
4,095

Other comprehensive income

 

 

 
1,937

 
1,937

Cash dividends ($0.15 per share)

 

 
(1,583
)
 

 
(1,583
)
Exercise of stock options (19,100 shares)
16

 
226

 

 

 
242

Issuance of restricted common stock (6,205 shares)
5

 
123

 

 

 
128

Stock-based compensation

 
84

 

 

 
84

Balance March 31, 2016
$
8,826

 
$
20,386

 
$
83,897

 
$
932

 
$
114,041

 
 
 
 
 
 
 
 
 
 
Balance December 31, 2016
$
8,881

 
$
21,779

 
$
91,439

 
$
(1,569
)
 
$
120,530

 
 

 
 

 
 

 
 

 
 

Net income

 

 
2,607

 

 
2,607

Other comprehensive income

 

 

 
43

 
43

Cash dividends ($0.15 per share)

 

 
(1,610
)
 

 
(1,610
)
Exercise of stock options (118,693 shares)
99

 
1,560

 

 

 
1,659

Dividend reinvestment plan shares issued from reserve (28,006 shares)
24

 
695

 

 

 
719

Issuance of restricted common stock (4,549 shares)
4

 
125

 

 

 
129

Stock-based compensation

 
95

 

 

 
95

Balance March 31, 2017
$
9,008

 
$
24,254

 
$
92,436

 
$
(1,526
)
 
$
124,172

 
See accompanying notes to the consolidated financial statements (unaudited).


6



ACCESS NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
 
 
 
For the Three Months Ended
 
March 31,
(In Thousands)
2017
 
2016
Cash Flows From Operating Activities
 
 
 
Net income
$
2,607

 
$
4,095

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 

Depreciation and amortization
145

 
120

Provision for loan losses
1,400

 

Originations of loans held for sale
(94,500
)
 
(106,489
)
Proceeds from sales of loans held for sale
94,406

 
101,054

Increase in valuation of loans held for sale
(529
)
 
(407
)
Gains on sales of securities available-for-sale

 
(57
)
Deferred tax benefit
550

 
(9
)
Valuation allowance on derivatives
220

 
(256
)
Amortization (accretion) on securities, net
569

 
(137
)
Stock-based compensation
95

 
84

Income from bank owned life insurance
(184
)
 
(114
)
Changes in assets and liabilities:
 
 
 
Increase in other assets
(532
)
 
(2,195
)
Increase (decrease) in other liabilities
(1,408
)
 
64

Net cash provided by (used in) operating activities
$
2,839

 
$
(4,247
)
Cash Flows from Investing Activities
 
 
 

Proceeds from prepayments of securities available-for-sale
$
3,458

 
$
1,747

Proceeds from sales of available-for-sale securities

 
8,033

Purchases of securities available-for-sale

 
(9,171
)
Proceeds from maturities and calls of securities held-to-maturity
14

 
5,000

(Purchases) redemption of restricted stock, net
3,768

 
100

Purchases of premises, equipment and land, net
(136
)
 
(274
)
Increase in loans, net
(26,774
)
 
(27,282
)
Net cash used in investing activities
$
(19,670
)
 
$
(21,847
)
Cash Flows from Financing Activities
 

 
 

Increase in demand, interest-bearing demand and savings deposits
$
46,158

 
$
42,696

Increase in time deposits
56,505

 
4,016

Increase (decrease) in securities sold under agreements to repurchase
(182
)
 
(8,662
)
Decrease in short-term borrowings
(124,000
)
 
(5,000
)
Decrease in long-term borrowings
(10,000
)
 

Payment of dividends on common stock
(1,610
)
 
(1,583
)
Proceeds from issuance of common stock
2,507

 
370

Net cash provided by financing activities
$
(30,622
)
 
$
31,837

Increase (decrease) in cash and cash equivalents
(47,453
)
 
5,743

Cash and cash equivalents at beginning of the period
91,059

 
35,889

Cash and cash equivalents at end of the period
$
43,606

 
$
41,632

Supplemental Disclosures of Cash Flow Information
 
 
 

Interest paid
$
1,860

 
$
1,409

Income taxes
$
12

 
$
237

Supplemental Disclosure of Non-Cash Transactions
 
 
 

Unrealized gains (losses) on securities available for sale
$
66

 
$
2,980

Transfer of loans held for investment to other real estate owned
$

 
$
129


See accompanying notes to the consolidated financial statements (unaudited).

7


ACCESS NATIONAL CORPORATION
Notes to Consolidated Financial Statements

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. No reclassifications were significant and there was no effect on net income. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the full year. These consolidated financial statements should be read in conjunction with the Corporation’s audited financial statements and the notes thereto as of December 31, 2016, included in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

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 Plan

During the first three months of 2017, the Corporation granted 120,600 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 2.5 years to 4.0 years and expire one year after the full vesting date. Stock-based compensation expense recognized in other operating expense during the first three months of 2017 and 2016 was $95 thousand and $84 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.

Total unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the Plan as of March 31, 2017 was $1.1 million. The cost is expected to be recognized over a weighted average period of 1.37 years.

A summary of stock option activity under the Plan for the three months ended March 31, 2017 and 2016 is presented as follows:
 
For the Three Months Ended March 31,
 
2017
 
2016
Expected life of options granted, in years
4.90

 
4.81

Risk-free interest rate
1.48
%
 
1.28
%
Expected volatility of stock
30.00
%
 
30.00
%
Annual expected dividend yield
3.00
%
 
3.00
%
Fair value of granted options
$
746,577

 
$
405,646

Non-vested options
310,821

 
298,976



8


The following table summarizes options outstanding under the for the three months ended March 31, 2017 and 2016:  
 
March 31, 2017
 
Number of Options
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value
Outstanding at beginning of year
481,381

 
$
16.52

 
2.50
 
$
5,412,143

Granted
120,600

 
27.82

 
4.90
 

Exercised
(118,693
)
 
13.99

 
1.20
 
1,552,993

Lapsed or canceled
(993
)
 
13.28

 
1.53
 

Outstanding March 31, 2017
482,295

 
$
19.97

 
3.20
 
$
4,845,236

Exercisable at March 31, 2017
171,474

 
$
16.48

 
1.97
 
$
2,322,399


 
March 31, 2016
 
Number of Options
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value
Outstanding at beginning of year
407,832

 
$
15.33

 
2.81
 
$
2,091,196

Granted
115,050

 
18.32

 
4.81
 

Exercised
(19,100
)
 
12.70

 
1.63
 
(98,889
)
Lapsed or canceled
(7,650
)
 
16.16

 
3.16
 

Outstanding March 31, 2016
496,132

 
$
16.12

 
3.11
 
$
1,845,492

Exercisable at March 31, 2016
197,156

 
$
14.14

 
2.08
 
$
1,120,324


Note 3.        Securities

The following tables provide the amortized costs and fair values of securities held-to-maturity at March 31, 2017 and December 31, 2016. Held-to-maturity securities are carried at amortized cost, which reflects historical cost, adjusted for amortization of premium and accretion of discounts.
 
March 31, 2017
(In Thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated Fair
Value
Held-to-maturity
 
 
 
 
 
 
 
U.S. Government agencies
$
5,000

 
$
39

 
$

 
$
5,039

Municipals
4,186

 
67

 
(19
)
 
4,234

Total
$
9,186

 
$
106

 
$
(19
)
 
$
9,273


 
December 31, 2016
(In Thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated Fair
Value
Held-to-maturity
 
 
 
 
 
 
 
U.S. Government agencies
$
5,000

 
$
46

 
$

 
$
5,046

Municipals
4,200

 
66

 
(19
)
 
4,247

Total
$
9,200

 
$
112

 
$
(19
)
 
$
9,293



9


The amortized cost and fair value of securities held-to-maturity as of March 31, 2017 and December 31, 2016 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because some of the securities may be called or prepaid without any penalties. 
 
March 31, 2017
 
December 31, 2016
(In Thousands)
Amortized
Cost
 
Estimated Fair
Value
 
Amortized
Cost
 
Estimated Fair
Value
Held-to-maturity
 
 
 
 
 
 
 
U.S. Government agencies:
 
 
 
 
 
 
 
Due after one year through five years
$
5,000

 
$
5,039

 
$
5,000

 
$
5,046

Municipals:
 
 
 
 
 
 
 
Due after one year through five years
2,018

 
2,058

 
2,028

 
2,062

Due after five years through ten years
1,614

 
1,641

 
1,617

 
1,649

Due after ten years through fifteen years
554

 
535

 
555

 
536

Total
$
9,186

 
$
9,273

 
$
9,200

 
$
9,293


The following tables provide the amortized costs and fair values of securities available-for-sale. 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.
 
March 31, 2017
(In Thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated Fair
Value
Available-for-sale
 
 
 
 
 
 
 
U.S. Government agencies
$
5,101

 
$

 
$
(52
)
 
$
5,049

Municipals
45,267

 
253

 
(1,125
)
 
44,395

Mortgage backed securities
117,284

 
131

 
(1,117
)
 
116,298

Asset backed securities
12,803

 

 
(386
)
 
12,417

Corporate bonds
8,546

 
38

 

 
8,584

Certificate of deposit
1,976

 
24

 

 
2,000

CRA mutual fund
1,500

 

 
(114
)
 
1,386

Total
$
192,477

 
$
446

 
$
(2,794
)
 
$
190,129


 
December 31, 2016
(In Thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated Fair
Value
Available-for-sale
 
 
 
 
 
 
 
U.S. Government agencies
$
5,106

 
$

 
$
(112
)
 
$
4,994

Municipals
45,392

 
172

 
(1,205
)
 
44,359

Mortgage backed securities
120,794

 
177

 
(1,164
)
 
119,807

Asset backed securities
13,105

 
17

 
(258
)
 
12,864

Corporate bonds
8,631

 
35

 

 
8,666

Certificates of deposit
1,976

 
33

 

 
2,009

CRA mutual fund
1,500

 

 
(109
)
 
1,391

Total
$
196,504

 
$
434

 
$
(2,848
)
 
$
194,090



10


The amortized cost and fair value of securities available-for-sale as of March 31, 2017 and December 31, 2016 by contractual maturity, are shown below.  Actual maturities may differ from contractual maturities because some of the securities may be called or prepaid without any penalties.
 
March 31, 2017
 
December 31, 2016
 
Amortized
Cost
 
Estimated Fair
Value
 
Amortized
Cost
 
Estimated Fair
Value
 
(In Thousands)
Available-for-sale:
 
 
 
 
 
 
 
U.S. Government agencies:
 
 
 
 
 
 
 
Due after one year through five years
$
5,101

 
$
5,049

 
$
5,106

 
$
4,994

Municipals:
 
 
 
 
 
 
 
Due after one year through five years
3,421

 
3,489

 
3,442

 
3,500

Due after five years through ten years
7,320

 
7,081

 
5,025

 
4,888

Due after ten years through fifteen years
18,094

 
18,181

 
20,463

 
20,300

Due after fifteen years
16,432

 
15,644

 
16,462

 
15,671

Mortgage backed securities:
 
 
 
 
 
 
 
Due after one year through five years
40,733

 
40,725

 
24,959

 
24,916

Due after five years through ten years
14,733

 
14,629

 
24,996

 
24,895

Due after ten years through fifteen years
12,218

 
11,963

 
12,861

 
12,555

Due after fifteen years
49,600

 
48,981

 
57,978

 
57,441

Asset backed securities:
 
 
 
 
 
 
 
Due after five years through ten years
3,075

 
3,056,000

 
3,080

 
3,001

Due after ten years through fifteen years
1,204

 
1,166

 
 
 
 
Due after fifteen years
8,524

 
8,195

 
10,025

 
9,863

Corporate bonds:
 
 
 
 
 
 
 
Due in one year or less
4,094

 
4,096

 
4,141

 
4,144

Due after one year through five years
4,452

 
4,488

 
4,490

 
4,522

Certificates of deposit:
 
 
 
 
 
 
 
Due after one year through five years
1,976

 
2,000

 
1,976

 
2,009

 
 
 
 
 
 
 
 
CRA mutual fund
1,500

 
1,386

 
1,500

 
1,391

Total
$
192,477

 
$
190,129

 
$
196,504

 
$
194,090


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 $140.8 million and $178.7 million at March 31, 2017 and December 31, 2016, respectively.

Securities available-for-sale and held-to-maturity that had an unrealized loss position at March 31, 2017 and December 31, 2016 are as follow:
(In Thousands)
 
Less than Twelve Months
 
Twelve Months or Greater
 
Total
March 31, 2017
 
Estimated Fair Value
 
Gross
Unrealized Losses
 
Estimated Fair Value
 
Gross
Unrealized Losses
 
Estimated Fair Value
 
Gross
Unrealized Losses
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
 
Municipals
 
$
535

 
$
(19
)
 
$

 
$

 
$
535

 
$
(19
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies
 
$
5,049

 
$
(52
)
 
$

 
$

 
$
5,049

 
$
(52
)
Municipals
 
24,735

 
(1,125
)
 

 

 
24,735

 
(1,125
)
Mortgage backed securities
 
60,544

 
(496
)
 
18,738

 
(621
)
 
79,282

 
(1,117
)
Asset backed securities
 
5,422

 
(266
)
 
6,995

 
(120
)
 
12,417

 
(386
)
CRA mutual funds
 

 

 
1,386

 
(114
)
 
1,386

 
(114
)
Total
 
$
95,750

 
$
(1,939
)
 
$
27,119

 
$
(855
)
 
$
122,869

 
$
(2,794
)


11


(In Thousands)
 
Less than Twelve Months
 
Twelve Months or Greater
 
Total
December 31, 2016
 
Estimated Fair Value
 
Gross Unrealized Losses
 
Estimated Fair Value
 
Gross Unrealized Losses
 
Estimated Fair Value
 
Gross Unrealized Losses
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
 
Municipals
 
$
536

 
$
(19
)
 
$

 
$

 
$
536

 
$
(19
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies
 
$
4,994

 
$
(112
)
 
$

 
$

 
$
4,994

 
$
(112
)
Municipals
 
28,147

 
(1,205
)
 

 

 
28,147

 
(1,205
)
Mortgage backed securities
 
62,145

 
(541
)
 
19,768

 
(623
)
 
81,913

 
(1,164
)
Asset backed securities
 
1,286

 
(37
)
 
7,077

 
(221
)
 
8,363

 
(258
)
CRA mutual fund
 

 

 
1,391

 
(109
)
 
1,391

 
(109
)
Total
 
$
96,572

 
$
(1,895
)
 
$
28,236

 
$
(953
)
 
$
124,808

 
$
(2,848
)

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 for 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.

At March 31, 2017, there were 62 available-for-sale securities with unrealized losses totaling $2.8 million and one held-to-maturity security with an unrealized loss of $19 thousand.  The Corporation evaluated the investment portfolio for possible other-than-temporary impairment losses and concluded the unrealized losses were caused by interest rate fluctuations with no adverse change in cash flows noted. Based on this analysis and because the Corporation does not intend to sell securities in an unrealized loss position and it is more likely than not the Corporation will not be required to sell any securities before recovery of amortized cost basis, which may be at maturity, the Corporation does not consider any portfolio securities to be other-than-temporarily impaired.

Restricted stock
The Corporation’s investment in the Federal Home Loan Bank of Atlanta ("FHLB") stock totaled $5.3 million and $9.1 million at March 31, 2017 and December 31, 2016, respectively.  FHLB stock is generally viewed as a long-term investment and as a restricted security which is carried at cost because there is no market for the stock other than the FHLB or member institutions.  Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.  The Corporation does not consider this investment to be other-than-temporarily impaired at March 31, 2017, and no impairment has been recognized.  FHLB stock is shown in restricted stock on the consolidated balance sheets.

The Corporation also has an investment in FRB stock which totaled $1.0 million at March 31, 2017 and December 31, 2016, respectively. The investment in FRB stock is a required investment and is carried at cost since there is no ready market. The Corporation does not consider this investment to be other-than-temporarily impaired at March 31, 2017, and no impairment has been recognized. FRB stock is shown in restricted stock on the consolidated balance sheets.
 
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 classified as a short-term borrowing 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

12


has the right to sell or repledge the investment securities. The risks and rewards associated with the investment securities pledged as collateral (e.g. a decline or rise in the fair value of the investments) remains with the Corporation. As of March 31, 2017 and December 31, 2016, the obligations outstanding under these repurchase agreements totaled $16.8 million and $17.0 million, respectively, and were comprised of overnight sweep accounts. The fair value of the securities pledged in connection with these repurchase agreements at March 31, 2017 was $22.4 million in total and consisted of $11.3 million in municipal securities, $6.7 million in mortgage backed securities, $1.8 million in corporate bonds, $1.2 million in certificates of deposit, and $1.4 million in the CRA mutual fund. The fair value of the securities pledged in connection with these repurchase agreements at December 31, 2016 was $21.4 million in total and consisted of $4.7 million in municipal securities, $6.9 million in mortgage backed securities, $5.9 million in corporate bonds, $2.5 million in asset backed securities and $1.4 million in the CRA mutual fund.

Note 4.        Loans

The following table presents the composition of the loans held for investment portfolio at March 31, 2017 and December 31, 2016:
 
March 31, 2017
 
December 31, 2016
(In Thousands)
Outstanding
Amount
 
Percent of
Total Portfolio
 
Outstanding
Amount
 
Percent of
Total Portfolio
Commercial real estate - owner occupied
$
262,431

 
24.46
%
 
$
250,440

 
23.87
%
Commercial real estate - nonowner occupied
205,452

 
19.15

 
184,688

 
17.59

Real estate construction
91,614

 
8.54

 
91,822

 
8.75

Residential real estate
212,007

 
19.76

 
204,413

 
19.47

Commercial
294,451

 
27.45

 
311,486

 
29.67

Consumer
6,836

 
0.64

 
6,849

 
0.65

Total loans
$
1,072,791

 
100.00
%
 
$
1,049,698

 
100.00
%
Less allowance for loan losses
13,727

 
 

 
16,008

 
 
Net loans
$
1,059,064

 
 

 
$
1,033,690

 
 


Unearned income and net deferred loan fees and costs totaled $2.6 million and $2.4 million at March 31, 2017 and December 31, 2016, respectively. Loans pledged to secure borrowings at the FHLB totaled $233.7 million and $266.6 million at March 31, 2017 and December 31, 2016, respectively.

Loans are considered past due if a contractual payment is not made by the calendar day after the payment is due. However, for reporting purposes loans past due 1 to 29 days are excluded from loans past due and are included in the total for current loans in the table below. The delinquency status of the loans in the portfolio is shown below as of March 31, 2017 and December 31, 2016. Loans that were on non-accrual status are not included in any past due amounts.

 
March 31, 2017
(In Thousands)
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days Or Greater
 
Total Past Due
 
Non-accrual loans
 
Current Loans
 
Total Loans
Commercial real estate -
owner occupied
$

 
$

 
$

 
$

 
$

 
$
262,431

 
$
262,431

Commercial real estate -
nonowner occupied

 

 

 

 

 
205,452

 
205,452

Real estate construction
270

 

 

 
270

 
940

 
90,404

 
91,614

Residential real estate
983

 

 

 
983

 
946

 
210,078

 
212,007

Commercial

 

 

 

 
3,358

 
291,093

 
294,451

Consumer

 

 

 

 

 
6,836

 
6,836

Total
$
1,253

 
$

 
$

 
$
1,253

 
$
5,244

 
$
1,066,294

 
$
1,072,791


13


 
December 31, 2016
(In Thousands)
30-59 Days Past Due
 
60-89 Days Past Due
 
Greater than 90 Days
 
Total Past Due
 
Non-accrual loans
 
Current Loans
 
Total Loans
Commercial real estate -
owner occupied
$

 
$

 
$

 

 
$

 
$
250,440

 
250,440

Commercial real estate -
non-owner occupied

 

 

 

 

 
184,688

 
184,688

Real estate construction

 

 

 

 
940

 
90,882

 
91,822

Residential real estate

 
97

 

 
97

 
431

 
203,885

 
204,413

Commercial
438

 

 

 
438

 
5,551

 
305,497

 
311,486

Consumer

 

 

 

 

 
6,849

 
6,849

Total
$
438

 
$
97

 
$

 
$
535

 
$
6,922

 
$
1,042,241

 
$
1,049,698


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 terms of the loan agreement. The risk profile based upon payment activity is shown below.

 
March 31, 2017
 
December 31, 2016
(In Thousands)
Non-performing
 
Performing
 
Total Loans
 
Non-performing
 
Performing
 
Total Loans
Commercial real estate - owner occupied
$

 
$
262,431

 
$
262,431

 
$

 
$
250,440

 
$
250,440

Commercial real estate - nonowner occupied

 
205,452

 
205,452

 

 
184,688

 
184,688

Real estate construction
940

 
90,674

 
91,614

 
940

 
90,882

 
91,822

Residential real estate
946

 
211,061

 
212,007

 
431

 
203,982

 
204,413

Commercial
3,358

 
291,093

 
294,451

 
5,551

 
305,935

 
311,486

Consumer

 
6,836

 
6,836

 

 
6,849

 
6,849

Total
$
5,244

 
$
1,067,547

 
$
1,072,791

 
$
6,922

 
$
1,042,776

 
$
1,049,698


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 are satisfactory or better.

Special Mention: Loans with one or more potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or in the borrower's credit position at some future date.

Substandard:  Loans are 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.


14


Doubtful:  Loans have 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: Loans 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. It is the Bank’s policy to charge-off any loan once the risk rating is classified as loss.
                                                                                                                                                                                                                                                                                                                                                                                    
The following tables present the recorded investment of loans that have been risk rated in accordance with the internal classification system:
March 31, 2017
(In Thousands)
Real Estate Construction
 
Commercial Real Estate
Owner Occupied
 
Commercial Real Estate
Non-Owner Occupied
 
Residential Real Estate
 
Commercial
 
Consumer
 
Total
Pass
$
91,056

 
$
259,123

 
$
205,862

 
$
210,086

 
$
276,262

 
$
6,835

 
$
1,049,224

Special Mention

 
785

 
295

 
2,043

 
3,584

 

 
6,707

Substandard
940

 
3,108

 

 

 
15,362

 

 
19,410

Doubtful

 

 

 

 

 

 

Loss

 

 

 

 

 

 

Unearned income
(382
)
 
(585
)
 
(705
)
 
(122
)
 
(757
)
 
1

 
(2,550
)
Ending Balance
$
91,614

 
$
262,431

 
$
205,452

 
$
212,007

 
$
294,451

 
$
6,836

 
$
1,072,791

December 31, 2016
(In Thousands)
Real Estate Construction
 
Commercial Real Estate
Owner Occupied
 
Commercial Real Estate
Non-Owner Occupied
 
Residential Real Estate
 
Commercial
 
Consumer
 
Total
Pass
$
91,296

 
$
247,001

 
$
185,020

 
$
202,762

 
$
287,978

 
$
6,848

 
$
1,020,905

Special Mention

 
1,213

 
300

 
932

 
4,544

 

 
6,989

Substandard
940

 
2,807

 

 
878

 
19,561

 

 
24,186

Doubtful

 

 

 

 

 

 

Loss

 

 

 

 

 

 

Unearned income
(414
)
 
(581
)
 
(632
)
 
(159
)
 
(597
)
 
1

 
(2,382
)
Ending Balance
$
91,822

 
$
250,440

 
$
184,688

 
$
204,413

 
$
311,486

 
$
6,849

 
$
1,049,698


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 non-accrual status with all payments applied to principal under the cost-recovery method. As the Bank does not utilize the cash-basis method of accounting for impaired loans, the Bank did not recognize interest income in association with its impaired loans during 2017.


15


The table below shows the results of management’s analysis of impaired loans as of March 31, 2017 and December 31, 2016:
 
March 31, 2017
(In Thousands)
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
With no specific related allowance recorded:
 
 
 
 
 
Commercial real estate - owner occupied
$

 
$

 
$

Commerical real estate - nonowner occupied

 

 

Real estate construction

 

 

Residential real estate
528

 
528

 

Commercial
1,779

 
2,095

 

Consumer

 

 

Total with no specific related allowance
$
2,307

 
$
2,623

 
$

With a specific related allowance recorded:
 

 
 

 
 

Commercial real estate loans - owner occupied
$

 
$

 
$

Commercial real estate loans - nonowner occupied

 

 

Real estate construction
940

 
994

 
221

Residential real estate

 

 

Commercial loans
1,997

 
3,270

 
509

Consumer loans

 

 

Total with a specific related allowance
$
2,937

 
$
4,264

 
$
730

Total
$
5,244

 
$
6,887

 
$
730

 
 
December 31, 2016
(In Thousands)
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
With no specific related allowance recorded:
 
 
 
 
 
Commercial real estate - owner occupied
$

 
$

 
$

Commercial real estate - nonowner occupied

 

 

Real estate construction

 

 

Residential real estate
431

 
431

 

Commercial
2,748

 
3,771

 

Consumer

 

 

Total with no specific related allowance
$
3,179

 
$
4,202

 
$

With a specific related allowance recorded:
 

 
 

 
 

Commercial real estate - owner occupied
$

 
$

 
$

Commercial real estate - nonowner occupied

 

 

Real estate construction
940

 
994

 
221

Residential real estate

 

 

Commercial
2,803

 
2,900

 
2,805

Consumer

 

 

Total with a specific related allowance
$
3,743

 
$
3,894

 
$
3,026

Total
$
6,922

 
$
8,096

 
$
3,026










16


The table below shows the average recorded investment in impaired loans by class of loan:
 
Average Recorded Investment
 
March 31, 2017
 
December 31, 2016
(In Thousands)
 
 
 
Commercial real estate - owner occupied
$

 
$
59

Commercial real estate - nonowner occupied

 
2,099

Real estate construction
940

 
1,009

Residential real estate
440

 
120

Commercial
3,981

 
4,885

Consumer

 

Total
$
5,361

 
$
8,172


The “Recorded Investment” amounts in the table above represent the outstanding principal balance net of charge-offs and non-accrual payments to principal on each loan represented in the table.  The “Unpaid Principal Balance” represents the outstanding principal balance on each loan represented in the table plus any amounts that have been charged-off on each loan and non-accrual payments applied to principal.

Troubled Debt Restructurings ("TDR")
A 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 six months.

No loans were modified in connection with a TDR during the three month periods ended March 31, 2017 and 2016.

The total balance of TDRs at March 31, 2017 and December 31, 2016 was $2.1 million and $4.1 million, respectively.  The amount of the specific valuation allowance related to TDRs was $457 thousand and $2.2 million as of March 31, 2017 and December 31, 2016, respectively.  

There were no outstanding commitments to lend additional amounts to TDR borrowers at March 31, 2017 or December 31, 2016.

There were no TDR payment defaults during three months ended March 31, 2017 and 2016. For purposes of this disclosure, a TDR payment default occurs when, within twelve months of the original TDR modification, either a full or partial charge-off occurs or a TDR becomes 90 or more past due.

Note 5.        Allowance for Loan Losses

The allowance for loan losses totaled $13.7 million and $16.0 million at March 31, 2017 and December 31, 2016, respectively. The allowance for loan losses was equivalent to 1.28% and 1.53% of total loans held for investment at March 31, 2017 and December 31, 2016, 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