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EX-32.1 - EXHIBIT 32.1 - ACCESS NATIONAL CORPancx063017ex-321.htm
EX-31.2 - EXHIBIT 31.2 - ACCESS NATIONAL CORPancx063017ex-312.htm
EX-31.1 - EXHIBIT 31.1 - ACCESS NATIONAL CORPancx063017ex-311.htm
EX-10.16 - EXHIBIT 10.16 - ACCESS NATIONAL CORPancx-063017exx1016.htm
EX-10.15 - EXHIBIT 10.15 - ACCESS NATIONAL CORPancx-063017exx1015.htm
EX-10.14 - EXHIBIT 10.14 - ACCESS NATIONAL CORPancx-063017exx1014.htm
EX-10.13 - EXHIBIT 10.13 - ACCESS NATIONAL CORPancx-063017exx1013.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 June 30, 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. 20,391,994 shares of Common Stock as of August 10, 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)
 
 
 
 
 
June 30,
 
December 31,
 
2017
 
2016
 
(Unaudited)
 
 
ASSETS
 
 
 
Cash and due from banks
$
19,772

 
$
9,186

Interest-bearing balances and federal funds sold
46,889

 
81,873

Total cash and cash equivalents
66,661

 
91,059

Investment securities:
 
 
 
Available-for-sale, at fair value
402,557

 
194,090

Held-to-maturity, at amortized cost (fair value of $16,449 and $9,293, respectively)
15,786

 
9,200

Total investment securities
418,343

 
203,290

Restricted stock, at amortized cost
8,742

 
10,092

Loans held for sale, at fair value
34,954

 
35,676

Loans held for investment, net of allowance for loan losses of $14,671 and $16,008, respectively
1,913,674

 
1,033,690

Premises, equipment and land, net
29,363

 
7,084

Goodwill and intangible assets
184,194

 
1,833

Other assets
101,059

 
47,984

Total assets
$
2,756,990

 
$
1,430,708

LIABILITIES AND SHAREHOLDERS' EQUITY
 

 
 

LIABILITIES
 
 
 
Noninterest-bearing deposits
$
660,481

 
$
362,036

Interest-bearing demand deposits
454,675

 
126,189

Savings and money market deposits
611,708

 
314,396

Time deposits
460,342

 
251,706

Total deposits
2,187,206

 
1,054,327

Short-term borrowings
55,429

 
186,009

Long-term borrowings
80,000

 
60,000

Trust preferred debentures
3,843

 

Other liabilities and accrued expenses
15,644

 
9,842

Total liabilities
2,342,122

 
1,310,178

SHAREHOLDERS' EQUITY
 

 
 

Common stock $0.835 par value; 60,000,000 shares authorized; 20,378,994 and 10,636,242 issued and outstanding, respectively
17,016

 
8,881

Additional paid in capital
303,997

 
21,779

Retained earnings
94,664

 
91,439

Accumulated other comprehensive loss, net
(809
)
 
(1,569
)
Total shareholders' equity
414,868

 
120,530

Total liabilities and shareholders' equity
$
2,756,990

 
$
1,430,708

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

3


ACCESS NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except for Share and Per Share Data)
(Unaudited)
 
 
 
 
 
For the Three Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
INTEREST AND DIVIDEND INCOME
 
 
 
 
 
 
 
Interest and fees on loans
$
23,746

 
$
11,354

 
$
35,945

 
$
22,230

Interest on federal funds sold and bank balances
221

 
96

 
352

 
166

Interest and dividends on securities
3,172

 
886

 
4,396

 
1,921

Total interest and dividend income
27,139

 
12,336

 
40,693

 
24,317

INTEREST EXPENSE
 

 
 

 
 
 
 
Interest on deposits
2,419

 
1,274

 
3,921

 
2,425

Interest on other borrowings
545

 
301

 
907

 
581

Total interest expense
2,964

 
1,575

 
4,828

 
3,006

Net interest income
24,175

 
10,761

 
35,865

 
21,311

Provision for loan losses
900

 
120

 
2,300

 
120

Net interest income after provision for loan losses
23,275

 
10,641

 
33,565

 
21,191

NONINTEREST INCOME
 

 
 

 
 
 
 
Service charges and fees
669

 
239

 
949

 
499

Gain on sale of loans
6,046

 
7,273

 
9,391

 
11,103

Other income
2,170

 
1,661

 
4,548

 
4,390

Total noninterest income
8,885

 
9,173

 
14,888

 
15,992

NONINTEREST EXPENSE
 

 
 

 
 
 
 
Salaries and benefits
12,660

 
8,407

 
20,700

 
16,075

Occupancy and equipment
1,981

 
749

 
2,801

 
1,510

Other operating expenses
11,585

 
3,147

 
14,920

 
5,847

Total noninterest expense
26,226

 
12,303

 
38,421

 
23,432

Income before income taxes
5,934

 
7,511

 
10,032

 
13,751

Income tax expense
2,088

 
2,633

 
3,579

 
4,778

NET INCOME
$
3,846

 
$
4,878

 
$
6,453

 
$
8,973

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.19

 
$
0.46

 
$
0.42

 
$
0.85

Diluted
$
0.19

 
$
0.46

 
$
0.41

 
$
0.84

Average outstanding shares:
 
 
 
 
 
 
 
Basic
20,335,070

 
10,576,516

 
15,529,934

 
10,564,833

Diluted
20,453,991

 
10,639,167

 
15,655,613

 
10,622,763


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
June 30,
 
For the Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
3,846

 
$
4,878

 
$
6,453

 
$
8,973

Other comprehensive income:
 
 
 
 
 
 
 
Unrealized holding gains arising during the period
1,103

 
1,288

 
1,169

 
4,326

Reclassification adjustment for gains included in net income

 
(51
)
 

 
(109
)
Unrealized losses on interest rate swaps
(4
)
 

 
(4
)
 

Tax effect
(382
)
 
(433
)
 
(405
)
 
(1,476
)
Total other comprehensive income
717

 
804

 
760

 
2,741

Total comprehensive income
$
4,563

 
$
5,682

 
$
7,213

 
$
11,714


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

 

 
8,973

 

 
8,973

Other comprehensive income

 

 

 
2,741

 
2,741

Cash dividends ($0.30 per share)

 

 
(3,170
)
 

 
(3,170
)
Exercise of stock options (32,638 shares)
27

 
381

 

 

 
408

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

 
123

 

 

 
128

Stock-based compensation

 
168

 

 

 
168

Balance June 30, 2016
$
8,837

 
$
20,625

 
$
87,188

 
$
1,736

 
$
118,386

 
 
 
 
 
 
 
 
 
 
Balance December 31, 2016
$
8,881

 
$
21,779

 
$
91,439

 
$
(1,569
)
 
$
120,530

Net income

 

 
6,453

 

 
6,453

Other comprehensive income

 

 

 
760

 
760

Cash dividends ($0.30 per share)

 

 
(3,228
)
 

 
(3,228
)
Exercise of stock options (126,899 shares)
106

 
1,688

 

 

 
1,794

Dividend reinvestment plan shares issued from reserve (95,207 shares)
79

 
2,475

 

 

 
2,554

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

 
125

 

 

 
129

Issuance of common stock (9,516,097 shares)
7,946

 
277,727

 

 

 
285,673

Stock-based compensation

 
203

 

 

 
203

Balance June 30, 2017
$
17,016

 
$
303,997

 
$
94,664

 
$
(809
)
 
$
414,868

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


6



ACCESS NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
 
For the Six Months Ended
 
June 30,
 
2017
 
2016
Cash Flows From Operating Activities
 
 
 
Net income
$
6,453

 
$
8,973

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 

Depreciation and amortization
1,500

 
254

Provision for loan losses
2,300

 
120

Originations of loans held for sale
(211,458
)
 
(260,511
)
Proceeds from sales of loans held for sale
221,571

 
260,633

Gain on sale of loans
(9,391
)
 
(11,103
)
Gains on sales of securities available-for-sale

 
(109
)
Valuation allowance on derivatives
203

 
(14
)
Amortization (accretion) on securities, net
1,150

 
946

Stock-based compensation
203

 
168

(Gains) losses on sale of other real estate owned, net
52

 

Income from bank owned life insurance
(527
)
 
(226
)
Changes in assets and liabilities:
 
 
 
Increase in other assets
(2,701
)
 
(4,082
)
Decrease in other liabilities
(4,404
)
 
(250
)
Net cash used in operating activities
$
4,951

 
$
(5,201
)
Cash Flows from Investing Activities
 
 
 

Proceeds from maturities, calls, principal repayments and sales of securities available-for-sale
$
192,989

 
$
17,332

Purchases of securities available-for-sale
(168,609
)
 
(27,290
)
Proceeds from sales, maturities and calls of securities held-to-maturity
4,273

 
5,000

Redemption of restricted stock, net
5,469

 
100

Purchases of premises, equipment and land, net
(412
)
 
(367
)
Purchase of bank owned life insurance

 
(2,500
)
Increase in loans, net
(66,467
)
 
(55,230
)
Proceeds from sale of other real estate owned
2,072

 

Cash paid in business combination
(608
)
 

Cash acquired in business combination
90,940

 

Net cash provided by (used in) investing activities
$
59,647

 
$
(62,955
)
Cash Flows from Financing Activities
 

 
 

Increase in demand, interest-bearing demand and savings deposits
$
78,092

 
$
156,426

Increase in time deposits
(1,832
)
 
(25,624
)
Increase (decrease) in securities sold under agreements to repurchase
7,478

 
(9,366
)
Decrease in short-term borrowings
(193,983
)
 
(25,000
)
Increase in long-term borrowings
20,000

 
20,000

Payment of dividends on common stock
(3,228
)
 
(3,170
)
Proceeds from issuance of common stock
4,477

 
536

Net cash (used in) provided by financing activities
$
(88,996
)
 
$
113,802

Increase (decrease) in cash and cash equivalents
(24,398
)
 
45,646

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

 
35,889

Cash and cash equivalents at end of the period
$
66,661

 
$
81,535


7


ACCESS NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
 
For the Six Months Ended
 
June 30,
 
2017
 
2016
Supplemental Disclosures of Cash Flow Information
 
 
 

Interest paid
$
4,499

 
$
2,981

Income taxes
$
2,410

 
$
4,828

Supplemental Disclosure of Non-Cash Transactions
 
 
 

Unrealized gains (losses) on securities available for sale
$
1,169

 
$
4,217

Change in fair value of interest rate swaps
$
(4
)
 
$

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

 
$
129

Transfer of other real estate owned to other assets due to FHA receivable

 
$
(129
)
Transactions Related to Business Combination
 
 
 
Increase in assets and liabilities:
 
 
 
Loans
$
(815,817
)
 
$

Securities
(243,679
)
 

Other Assets
(258,306
)
 

Noninterest bearing deposits
282,752

 

Interest bearing deposits
773,867

 

Trust preferred debentures
3,824

 

Borrowings
55,925

 

Other liabilities
10,206

 


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

8



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 and Middleburg Investment Group, which is a non-bank holding company chartered under Virginia law. 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 and six months ended June 30, 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 six months of 2017, the Corporation granted 128,100 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 six month periods ended June 30, 2017 and 2016 was $203 thousand and $168 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 June 30, 2017 was $1.07 million. The cost is expected to be recognized over a weighted average period of 1.42 years.

A summary of stock option activity under the Plan for the six months ended June 30, 2017 and 2016 is presented as follows:
 
For the Six Months Ended June 30,
 
2017
 
2016
Expected life of options granted, in years
4.66

 
4.58

Risk-free interest rate
1.49
%
 
1.26
%
Expected volatility of stock
29.65
%
 
30.39
%
Annual expected dividend yield
3.00
%
 
3.00
%
Fair value of granted options
$
792,766

 
$
433,479

Non-vested options
314,821

 
303,914



9


The following table summarizes options outstanding under the Plan for the six months ended June 30, 2017 and 2016:  
 
June 30, 2017
 
Number of Options
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value
Outstanding at beginning of period
481,381

 
$
16.52

 
2.50
 
$
5,412,143

Granted
128,100

 
27.80

 
4.66
 

Exercised
(126,899
)
 
14.14

 
1.07
 
1,651,541

Lapsed or canceled
(3,493
)
 
15.67

 
1.67
 

Outstanding June 30, 2017
479,089

 
$
20.17

 
3.01
 
$
3,208,165

Exercisable at June 30, 2017
164,268

 
$
16.50

 
1.74
 
$
1,646,702


 
June 30, 2016
 
Number of Options
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value
Outstanding at beginning of period
407,832

 
$
15.33

 
2.81
 
$
2,091,196

Granted
122,050

 
18.39

 
4.58
 

Exercised
(32,638
)
 
12.53

 
1.33
 
208,208

Lapsed or canceled
(7,650
)
 
16.16

 
2.92
 

Outstanding June 30, 2016
489,594

 
$
16.27

 
2.93
 
$
1,591,210

Exercisable at June 30, 2016
185,680

 
$
14.27

 
1.87
 
$
973,639


Note 3.        Securities

The following tables provide the amortized costs and fair values of securities held-to-maturity at June 30, 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.
 
June 30, 2017
(In Thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated Fair
Value
Held-to-maturity
 
 
 
 
 
 
 
U.S. Government agencies
$
5,000

 
$
27

 
$

 
$
5,027

Municipals
10,786

 
655

 
(19
)
 
11,422

Total
$
15,786

 
$
682

 
$
(19
)
 
$
16,449


 
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



10


The amortized cost and fair value of securities held-to-maturity as of June 30, 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. 
 
June 30, 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

 
$
5,027

 
$
5,000

 
$
5,046

Municipals:
 
 
 
 
 
 
 
Due after one year through five years
2,007

 
2,046

 
2,028

 
2,062

Due after five years through ten years
1,611

 
1,644

 
1,617

 
1,649

Due after ten years through fifteen years
7,168

 
7,732

 
555

 
536

Total
$
15,786

 
$
16,449

 
$
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.
 
June 30, 2017
(In Thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated Fair
Value
Available-for-sale
 
 
 
 
 
 
 
U.S. Government agencies
$
27,377

 
$
39

 
$
(109
)
 
$
27,307

Municipals
101,881

 
1,103

 
(730
)
 
102,254

Mortgage backed securities
253,335

 
616

 
(1,700
)
 
252,251

Asset backed securities
8,955

 

 
(279
)
 
8,676

Corporate bonds
8,612

 
74

 

 
8,686

Certificates of deposit
1,976

 
19

 

 
1,995

CRA mutual fund
1,500

 

 
(112
)
 
1,388

Total
$
403,636

 
$
1,851

 
$
(2,930
)
 
$
402,557


 
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



11


The amortized cost and fair value of securities available-for-sale as of June 30, 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.
 
June 30, 2017
 
December 31, 2016
 
Amortized
Cost
 
Estimated Fair
Value
 
Amortized
Cost
 
Estimated Fair
Value
 
(In Thousands)
Available-for-sale:
 
 
 
 
 
 
 
U.S. Government agencies:
 
 
 
 
 
 
 
Due in one year or less
$
50

 
$
50

 
$

 
$

Due after one year through five years
5,096

 
5,071

 
5,106

 
4,994

Due after ten years through fifteen years
7,523

 
7,466

 

 

Due after fifteen years
14,708

 
14,720

 

 

Municipals:
 
 
 
 
 
 
 
Due in one year or less
692

 
703

 

 

Due after one year through five years
7,805

 
7,788

 
3,442

 
3,500

Due after five years through ten years
8,380

 
8,352

 
5,025

 
4,888

Due after ten years through fifteen years
23,904

 
24,414

 
20,463

 
20,300

Due after fifteen years
61,100

 
60,997

 
16,462

 
15,671

Mortgage backed securities:
 
 
 
 
 
 
 
Due after one year through five years
32,200

 
32,298

 
24,959

 
24,916

Due after five years through ten years
114,219

 
113,891

 
24,996

 
24,895

Due after ten years through fifteen years
5,027

 
4,936

 
12,861

 
12,555

Due after fifteen years
101,889

 
101,126

 
57,978

 
57,441

Asset backed securities:
 
 
 
 
 
 
 
Due after five years through ten years
3,070

 
3,070

 
3,080

 
3,001

Due after fifteen years
5,885

 
5,606

 
10,025

 
9,863

Corporate bonds:
 
 
 
 
 
 
 
Due in one year or less
50

 
50

 
4,141

 
4,144

Due after one year through five years
8,562

 
8,636

 
4,490

 
4,522

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

 
1,995

 
1,976

 
2,009

CRA mutual fund
1,500

 
1,388

 
1,500

 
1,391

Total
$
403,636

 
$
402,557

 
$
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 $299.7 million and $178.7 million at June 30, 2017 and December 31, 2016, respectively.

12



Securities available-for-sale and held-to-maturity that had an unrealized loss position at June 30, 2017 and December 31, 2016 are as follow:
(In Thousands)
 
Less than Twelve Months
 
Twelve Months or Greater
 
Total
June 30, 2017
 
Estimated Fair Value
 
Gross
Unrealized Losses
 
Estimated Fair Value
 
Gross
Unrealized Losses
 
Estimated Fair Value
 
Gross
Unrealized Losses
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
 
Municipals
 
$
534

 
$
(19
)
 
$

 
$

 
$
534

 
$
(19
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies
 
$
9,473

 
$
(51
)
 
$
2,492

 
$
(58
)
 
$
11,965

 
$
(109
)
Municipals
 
28,411

 
(730
)
 

 

 
28,411

 
(730
)
Mortgage backed securities
 
170,303

 
(1,070
)
 
18,047

 
(630
)
 
188,350

 
(1,700
)
Asset backed securities
 

 

 
5,605

 
(279
)
 
5,605

 
(279
)
CRA mutual funds
 

 

 
1,388

 
(112
)
 
1,388

 
(112
)
Total
 
$
208,187

 
$
(1,851
)
 
$
27,532

 
$
(1,079
)
 
$
235,719

 
$
(2,930
)

(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 June 30, 2017, there were 78 available-for-sale securities with unrealized losses totaling $2.93 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 $6.0 million and $9.1 million at June 30, 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 June 30, 2017, and no impairment has been recognized.  FHLB stock is shown in restricted stock on the consolidated balance sheets.

13



The Corporation also has an investment in FRB stock which totaled $2.7 million and $1.0 million at June 30, 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 June 30, 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 has the right to sell or re-pledge 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 June 30, 2017 and December 31, 2016, the obligations outstanding under these repurchase agreements totaled $50.5 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 June 30, 2017 was $42.6 million in total and consisted of $11.6 million in municipal securities, $26.6 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 June 30, 2017 and December 31, 2016:
 
June 30, 2017
 
December 31, 2016
(In Thousands)
Outstanding
Amount
 
Percent of
Total Portfolio
 
Outstanding
Amount
 
Percent of
Total Portfolio
Commercial real estate - owner occupied
$
401,853

 
20.84
%
 
$
250,440

 
23.87
%
Commercial real estate - nonowner occupied
377,037

 
19.55

 
184,688

 
17.59

Real estate construction
124,186

 
6.44

 
91,822

 
8.75

Residential real estate
525,649

 
27.26

 
204,413

 
19.47

Commercial
476,055

 
24.69

 
311,486

 
29.67

Consumer
23,565

 
1.22

 
6,849

 
0.65

Total loans
$
1,928,345

 
100.00
%
 
$
1,049,698

 
100.00
%
Less allowance for loan losses
14,671

 
 

 
16,008

 
 
Net loans
$
1,913,674

 
 

 
$
1,033,690

 
 


Unearned income and net deferred loan fees and costs totaled $2.8 million and $2.4 million at June 30, 2017 and December 31, 2016, respectively. Loans pledged to secure borrowings at the FHLB totaled $444.2 million and $266.6 million at June 30, 2017 and December 31, 2016, respectively.

Loans acquired in a transfer, including in business combinations, where there is evidence of credit deterioration since origination and it is probable at the date of acquisition that the Corporation will not collect all contractually required principal and interest payments, are accounted for as purchased impaired loans. Purchased impaired loans are initially recorded at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, the historical allowance for credit losses related to these loans is not carried over.


14


Accounting for purchased impaired loans involves estimating fair value, at acquisition, using the principal and interest cash flows expected to be collected discounted at the prevailing market rate of interest. The excess of cash flows expected to be collected over the estimated fair value at the acquisition date is referred to as the accretable yield and is recognized in interest income using an effective yield method over the remaining life of the loans. The difference between contractually required payments and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference. Any decreases in cash flows expected to be collected (other than due to decreases in interest rate indices and changes in prepayment assumptions) will be charged to the provision for loan losses, resulting in an increase to the allowance for loan losses.

The following table presents the changes in the accretable yield for purchased impaired loans for three and six month periods ended June 30, 2017:
 
For the Three and Six Months Ended
(In Thousands)
June 30, 2017
Accretable yield, beginning of period
$

Additions
557

Accretion
(91
)
Reclassification from (to) nonaccretable difference

Other changes, net

Accretable yield, end of period
$
466


At June 30, 2017, none of the purchased impaired loans were classified as nonperforming assets. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all purchased loans.

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 June 30, 2017 and December 31, 2016. Loans that were on non-accrual status are not included in any past due amounts.
 
June 30, 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
$
70

 
$

 
$

 
$
70

 
$
194

 
$
401,589

 
$
401,853

Commercial real estate -
nonowner occupied

 

 

 

 
1,002

 
376,035

 
377,037

Real estate construction
57

 

 

 
57

 
952

 
123,177

 
124,186

Residential real estate
392

 
209

 
430

 
1,031

 
1,321

 
523,297

 
525,649

Commercial
46

 

 

 
46

 
3,033

 
472,976

 
476,055

Consumer
45

 
19

 
104

 
168

 
3

 
23,394

 
23,565

Total
$
610

 
$
228

 
$
534

 
$
1,372

 
$
6,505

 
$
1,920,468

 
$
1,928,345

 
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



15


The following table includes an aging analysis of the recorded investment of purchased impaired loans included in the table above:
 
June 30, 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
$

 
$

 
$

 
$

 
$

 
$
1,366

 
$
1,366

Commercial real estate -
nonowner occupied

 

 

 

 

 
920

 
920

Real estate construction

 

 

 

 

 

 

Residential real estate

 

 
171

 
171

 

 
2,283

 
2,454

Commercial
46

 

 

 
46

 

 
92

 
138

Consumer

 
3

 
1

 
4

 

 
59

 
63

Total
$
46

 
$
3

 
$
172

 
$
221

 
$

 
$
4,720

 
$
4,941


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.
 
June 30, 2017
 
December 31, 2016
(In Thousands)
Non-performing
 
Performing
 
Total Loans
 
Non-performing
 
Performing
 
Total Loans
Commercial real estate - owner occupied
$
194

 
$
401,659

 
$
401,853

 
$

 
$
250,440

 
$
250,440

Commercial real estate - nonowner occupied
1,002

 
376,035

 
377,037

 

 
184,688

 
184,688

Real estate construction
952

 
123,234

 
124,186

 
940

 
90,882

 
91,822

Residential real estate
1,321

 
524,328

 
525,649

 
431

 
203,982

 
204,413

Commercial
3,033

 
473,022

 
476,055

 
5,551

 
305,935

 
311,486

Consumer
3

 
23,562

 
23,565

 

 
6,849

 
6,849

Total
$
6,505

 
$
1,921,840

 
$
1,928,345

 
$
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.

16


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:
June 30, 2017
(In Thousands)
Real Estate Construction
 
Commercial Real Estate
Owner Occupied
 
Commercial Real Estate
Non-Owner Occupied
 
Residential Real Estate
 
Commercial
 
Consumer
 
Total
Pass
$
123,684

 
$
398,741

 
$
376,476

 
$
523,498

 
$
460,237

 
$
23,562

 
$
1,906,198

Special Mention

 
776

 
289

 

 
2,077

 

 
3,142

Substandard
952

 
2,746

 
1,002

 
1,937

 
14,475

 

 
21,112

Doubtful

 
194

 

 
358

 
131

 
3

 
686

Loss

 

 

 

 

 

 

Unearned income
(450
)
 
(604
)
 
(730
)
 
(144
)
 
(865
)
 

 
(2,793
)
Ending Balance
$
124,186

 
$
401,853

 
$
377,037

 
$
525,649

 
$
476,055

 
$
23,565

 
$
1,928,345