Item 2.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction
with Access National Corporation’s (“Corporation”, “we”, “us”) consolidated financial
statements, and notes thereto, included in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December
31, 2015. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results
for the year ending December 31, 2016 or any future period.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on
Form 10-Q contains forward-looking statements. For this purpose, any statements contained herein, including documents incorporated
by reference, that are not statements of historical fact may be deemed to be forward-looking statements. Examples of forward-looking
statements include discussions as to our expectations, beliefs, plans, goals, objectives and future financial or other performance
or assumptions concerning matters discussed in this document. Forward-looking statements often use words such as “believes,”
“expects,” “plans,” “may,” “will,” “should,” “projects,”
“contemplates,” “ anticipates,” “forecasts,” “intends” or other words of similar
meaning. Forward-looking statements in this Quarterly Report on Form 10-Q include, without limitation, statements regarding the
Corporation’s beliefs regarding the future strength of the economy and labor markets and anticipated interest rates and
the effect of such rates on the Corporation’s performance and net interest margin and the volume of future mortgage refinancing,
as well as the Corporation’s expectations concerning operating losses and the profitability of its mortgage segment. You
can also identify them by the fact that they do not relate strictly to historical or current facts. Forward-looking statements
are subject to numerous assumptions, risks and uncertainties, and actual results could differ materially from historical results
or those anticipated by such statements. Factors that could have a material adverse effect on the operations and future prospects
of the Corporation include, but are not limited to, changes in: collateral values, especially in the real estate market; continued
challenging economic conditions or deterioration in general business and economic conditions and in the financial markets; mergers
and acquisitions, including merger integration risk in connection with the Corporation’s pending merger with Middleburg
such as potential deposit attrition, higher than expected costs, customer loss and business disruption associated with the integration
of Middleburg, including, without limitation, potential difficulties in maintaining relationships with key personnel and other
integration related-matters; the impact of any laws, regulations, policies or programs implemented pursuant to the Dodd-Frank
Act or other legislation or regulation; unemployment levels; branch expansion plans; interest rates; general economic conditions;
monetary and fiscal policies of the U.S. Government, including policies of the Office of the Comptroller of the Currency (“Comptroller”),
the U.S. Department of the Treasury and the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of Richmond;
the economy of Northern Virginia, including governmental spending and real estate markets; the quality or composition of the loan
or investment portfolios; demand for loan products; deposit flows; competition; the liquidity of the Corporation; and accounting
principles, policies and guidelines. These risks and uncertainties should be considered in evaluating the forward-looking statements
contained herein, and readers are cautioned not to place undue reliance on such statements. Any forward-looking statement speaks
only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events
or circumstances after the date on which it is made.
For additional discussion of risk factors that may cause our actual
future results to differ materially from the results indicated within forward looking statements, please see “Item 1A –
Risk Factors” of the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
CRITICAL ACCOUNTING POLICIES
The Corporation’s consolidated financial statements have
been prepared in accordance with GAAP. In preparing the Corporation’s financial statements management makes estimates and
judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. Management believes that the most significant
subjective judgments that it makes include the following:
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that
may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) FASB ASC 450-10, which
requires that losses be accrued when they are probable of occurring and can be estimated, and (ii) FASB ASC 310-10, which requires
that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values
that are observable in the secondary market and the loan balance. An allowance for loan losses is established through a provision
for loan losses based upon industry standards, known risk characteristics, management’s evaluation of the risk inherent
in the loan portfolio, and changes in the nature and volume of loan activity. Such evaluation considers, among other factors,
the estimated market value of the underlying collateral and current economic conditions. For further information about our practices
with respect to allowance for loan losses, please see Note 4 to the consolidated financial statements.
Other Than Temporary Impairment of Securities
Securities in the Corporation’s securities portfolio are
classified as either available-for-sale or held-to-maturity. At September 30, 2016, there were no non-agency mortgage backed securities
or trust preferred securities in the portfolio. The estimated fair value of the portfolio fluctuates due to changes in market
interest rates and other factors. Changes in estimated fair value are recorded in shareholders’ equity as a component of
other comprehensive income. Securities are monitored to determine whether a decline in their value is other than temporary. Management
evaluates the securities portfolio on a quarterly basis to determine the collectability of amounts due per the contractual terms
of each security. A decline in the fair value of an investment below its amortized cost attributable to factors that indicate
the decline will not be recovered over the anticipated holding period of the investment will cause the security to be considered
other than temporarily impaired. Other than temporary impairments result in reducing the security’s carrying value by the
amount of the estimated credit loss. The credit component of the other than temporary impairment loss is realized through the
statement of income and the remainder of the loss remains in other comprehensive income. At September 30, 2016, there were no
securities with other than temporary impairment.
Income Taxes
The Corporation uses the liability method of accounting for income
taxes. This method results in the recognition of deferred tax assets and liabilities that are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
The deferred provision for income taxes is the result of the net change in the deferred tax asset and deferred tax liability balances
during the year. This amount combined with the current taxes payable or refundable results in the income tax expense for the current
year. The Corporation’s evaluation of the deductibility or taxability of items included in the Corporation’s tax returns
has not resulted in the identification of any material, uncertain tax positions.
Fair Value
Fair values of financial instruments are estimated using relevant
market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding
interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes
in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on and off-balance
sheet financial instruments do not include the value of anticipated future business or the values of assets and liabilities not
considered financial instruments. For additional information about our financial assets carried at fair value, please see
Note
9 to the consolidated financial statements.
Pending Acquisition
of Middleburg Financial Corporation
On October 24, 2016, the Corporation announced
the signing of a definitive agreement and plan of reorganization, dated as of October 21, 2016, pursuant to which the Corporation
and Middleburg will merge. Under the terms of the merger agreement, Middleburg shareholders will receive a fixed exchange ratio
of 1.3314 Corporation shares for each share of Middleburg common stock owned. For more information on this pending acquisition
refer to Note 12 to the consolidated financial statements and the Corporation’s Current Report on Form 8-K filed with the
SEC on October 24, 2016.
FINANCIAL CONDITION
Executive Summary
At September 30, 2016, the Corporation’s assets totaled $1.36
billion and grew $184.3 million when compared to December 31, 2015. The increase in assets was primarily due to a growth in loans
held for investment of $79.0 million, a $25.0 million increase in investment securities, a $26.9 million growth in loans held
for sale, and $43.2 million of growth in interest-bearing balances. The first nine months of 2016 reflected growth in all categories
of loans held for investment from December 31, 2015 with the exception of consumer loans. The $79.0 million increase in loans
held for investment as compared to December 31, 2015 is primarily attributable to a $26.8 million or 18.13% growth in commercial
real estate – non-owner occupied loans, a $18.3 million or 8.34% increase in commercial real estate – owner occupied
loans, a $13.6 million or 20.63% increase in real estate construction loans, and a $22.3 million or 9.18% increase in commercial
loans. Overall, the portfolio of loans held for investment grew at an annualized rate of 11.9%. At September 30, 2016, loans secured
by real estate collateral comprised 71.89% of our total loan portfolio, with loans secured by commercial real estate contributing
42.69% of our total loan portfolio, loans secured by residential real estate contributing 20.96% and real estate construction
loans contributing 8.24%. Loans held for sale totaled $71.0 million at September 30, 2016, compared to $44.1 million at December
31, 2015. Loans held for sale fluctuates with the volume of loans originated during any given month and the length of time the
loans are held prior to selling them in the secondary market. Deposits totaled $1.115 billion at September 30, 2016, compared
to $913.7 million at December 31, 2015, an increase of $201.3 million. Noninterest-bearing deposits increased $101.8 million from
$307.8 million at December 31, 2015 to $409.6 million at September 30, 2016. Savings and interest-bearing deposits increased $143.2
million from $293.7 million at December 31, 2015 to $436.9 million at September 30, 2016. Non-wholesale time deposits increased
from $136.0 million at December 31, 2015 to $163.7 million at September 30, 2016, an increase of $27.7 million, while wholesale
funding time deposits saw a net decrease of $71.0 million, from $176.4 million at December 31, 2015 to $105.4 million at September
30, 2016.
Net income for the third quarter of 2016 totaled $4.4 million compared
to $3.9 million for the same period in 2015. Earnings per diluted share were $0.41 for the third quarter of 2016, compared to
$0.37 per diluted share in the same period of 2015. Third quarter 2016 pretax earnings increased $879 thousand or 14.58% when
compared to third quarter 2015 pretax earnings.
The banking segment had a decrease in pre-tax earnings when compared
to the third quarter 2015 of $210 thousand, driven by an increase in our provision for loan loss of $750 thousand. The banking
segment’s interest income increased $1.6 million when compared to third quarter 2015 which was partially offset by an increase
in salaries and benefits and interest expense of $444 thousand and $577 thousand, respectively. The mortgage segment had an increase
in gains on the sale of loans of $2.5 million that resulted from an increase in the secondary margins on mortgage loans held for
sale over third quarter 2015.
Net income for the nine months ended September 30, 2016 totaled
$13.4 million compared to $11.5 million for the same period in 2015. Earnings per diluted share were $1.26 for the first nine
months of 2016, compared to $1.09 per diluted share in the same period of 2015. For the nine month period ended September 30,
2016, the banking segment saw an increase in pretax income of $989 thousand when compared to the nine months ended September 30,
2015 due to an increase in net interest income of $3.1 million and an increase in non-interest income of $648 thousand which was
partially offset by an increase in salaries and employee benefits of $2.0 million due to continued staffing expansion. When comparing
the nine month period ended September 30, 2016 to the same period in 2015, the mortgage segment saw a pretax earnings increase
of $2.1 million. The mortgage segment had an increase in gains on the sale of loans of $4.3 million when comparing the nine months
ended September 30, 2016 to the same period in 2015 due to an increase in the secondary margins on mortgage loans held for sale,
the increase was offset by a $1.6 million increase in salaries and employee benefits.
Non-performing assets (“NPAs”) totaled $5.8 million,
or 0.43%, of total assets at September 30, 2016, down from $7.4 million, or 0.63% of total assets as of December 31, 2015. The
Bank did not have other real estate owned at September 30, 2016. During the third quarter 2016, Access Real Estate sold its other
real estate owned property with a carrying value of $500 thousand for $463 thousand. The allowance for loan loss was $14.7 million
and $13.6 million at September 30, 2016 and December 31, 2015, respectively, and represented 1.52% and 1.53% of total loans held
for investment at September 30, 2016 and December 31, 2015, respectively.
The unemployment rate for Fairfax County, Virginia was at 3.2%
as of July 2016 and still well below the 4.0% unemployment rate for the state of Virginia at the end of September 2016 and 5.0%
for the nation at the end of September 2016. Information reviewed at the Federal Open Market Committee’s (FOMC) November
2016 meeting indicated the labor market strengthened and economic activity has picked up from the modest pace seen in the first
half of the year with solid job gains. The FOMC reaffirmed its view that the current target rate for the federal funds rate remains
accommodative to support further improvement in labor market conditions and a return to 2% inflation. The historically low interest
rate environment continues to negatively impact yields of variable loans and the securities portfolio. The Corporation’s
net interest margin for the three months ended September 30, 2016 decreased to 3.49% from the three months ended September 30,
2015 percentage of 3.70%. While there is no certainty to the magnitude of any impact, the continued extended period of low short-term
interest rates, as presently forecasted by the Federal Reserve, will continue to have an adverse effect on the net interest margin.
The latest Case-Shiller Home Price data available shows home prices
increased 5.3% for the twelve months ended August 2016. The Consumer Confidence Index increased in August 2016, to 101.1, up from
96.7 in July 2016. Retail sales for August 2016 were 1.9% greater than a year earlier. As such, we remain cautious and have generally
retained more cautious loan underwriting criteria established during the financial crisis period of 2007 – 2009. In spite
of these challenges, we are proactive in seeking new client relationships driven by our target market profile: business-to-business
and business-to-government companies with annual revenue of $1 million to $100 million and the various banking services needed
by the business and the professionals associated with the businesses. The Corporation is optimistic with a strong capital base
and being positioned for continued growth.
Securities
The Corporation’s securities portfolio is comprised of U.S.
government agency securities, mortgage backed securities, corporate bonds, a CRA mutual fund, certificates of deposit, and asset
backed securities as well as municipal bonds. The portfolio does not have any non-agency mortgage backed securities or trust preferred
securities.
At September 30, 2016 the fair value of the securities portfolio
totaled $199.7 million, compared to $174.5 million at December 31, 2015. Included in the fair value totals are held-to-maturity
securities with an amortized cost of $9.2 million (fair value of $9.5 million) and $14.3 million (fair value of $14.3 million)
at September 30, 2016 and December 31, 2015, respectively. Securities classified as available-for-sale are accounted for at fair
market value with unrealized gains and losses recorded directly to a separate component of shareholders' equity, net of associated
tax effect while held-to-maturity securities are carried at amortized cost. Investment securities are used to provide liquidity,
to generate income, and to temporarily supplement loan growth as needed.
Restricted Stock
Restricted stock consists of FHLB stock and FRB stock. These stocks
are classified as restricted stocks because their ownership is restricted to certain types of entities and they lack a market.
Restricted stock is carried at cost on the Corporation’s financial statements. Dividends are paid semiannually on FRB stock
and quarterly on FHLB stock.
Loans
The loan portfolio constitutes the largest component of earning
assets and is comprised of commercial real estate – owner occupied, commercial real estate – non-owner occupied, residential
real estate, commercial, real estate construction, and consumer loans. All lending activities of the Bank and its subsidiaries
are subject to the regulations and supervision of the Comptroller. The loan portfolio does not have any pay option adjustable
rate mortgages, loans with teaser rates or subprime loans or any other loans considered “high risk loans”. Loans totaled
$966.5 million at September 30, 2016 compared to $887.5 million at December 31, 2015, an increase of $79.0 million or 8.9%. Comprising
the growth, commercial real estate – owner occupied loans increased $18.3 million, commercial loans increased $22.3 million,
real estate construction loans increased $13.6 million, residential real estate loans increased $1.1 million, and commercial real
estate – non-owner occupied increased $26.8 million. Offsetting the growth was a decrease in consumer loans of $3.1 million.
The overall increase in loans reflects results from our marketing outreach as well as continued improvement in loan demand by
local businesses. Please see Note 4 to the consolidated financial statements for a table that summarizes the composition of the
Corporation’s loan portfolio. The following is a summary of the loan portfolio at September 30, 2016.
Commercial Real Estate Loans – Owner Occupied:
This
category of loans represented the second largest segment of the loan portfolio and was comprised of owner occupied loans secured
by the commercial property, totaling $238.2 million, representing 24.65% of the loan portfolio at September 30, 2016. Commercial
real estate loans are secured by the subject property and underwritten to policy standards. Policy standards approved by the Board
of Directors from time to time set forth, among other considerations, loan-to-value limits, cash flow coverage ratios, and the
general creditworthiness of the obligors.
Commercial Real Estate Loans – Non-Owner Occupied:
This category of loans represented the fourth largest segment of the loan portfolio and was comprised of loans secured by income
producing commercial property, totaling $174.3 million and representing 18.04% of the loan portfolio at September 30, 2016. Commercial
real estate loans are secured by the subject property and underwritten to policy standards as listed above.
Residential Real Estate Loans:
This category represented
the third largest segment of the loan portfolio and included loans secured by first or second mortgages on one to four family
residential properties. This segment totaled $202.6 million and comprised 20.96% of the loan portfolio as of September 30, 2016.
Of this amount, the following sub-categories existed as a percentage of the whole residential real estate loan portfolio as of
September 30, 2016: home equity lines of credit, 21.7%; first trust mortgage loans, 71.4%; and junior trust loans, 6.9%.
Home equity lines of credit are extended to borrowers in our target
market. Real estate equity is often the largest component of consumer wealth in our marketplace. Once approved, this consumer
finance tool allows the borrowers to access the equity in their homes or investment properties and use the proceeds for virtually
any purpose. Home equity lines of credit are most frequently secured by a second lien on residential property. The proceeds of
first trust mortgage loans are used to acquire or refinance the primary financing on owner occupied and residential investment
properties. Junior trust loans are loans to consumers wherein the proceeds have been used for a stated consumer purpose. Examples
of consumer purposes are education, refinancing debt, or purchasing consumer goods. The loans are generally extended in a single
disbursement and repaid over a specified period of time. Loans in the residential real estate portfolio are underwritten to standards
within a traditional consumer framework that is periodically reviewed and updated by management and the Board of Directors and
takes into consideration repayment source and capacity, value of the underlying property, credit history, savings pattern, and
stability.
Commercial Loans:
Commercial loans represented the largest
segment of the loan portfolio, totaling $264.8 million and representing 27.40% of the loan portfolio as of September 30, 2016.
These loans are made to businesses or individuals within our target market for business purposes. Typically the loan proceeds
are used to support working capital and the acquisition of fixed assets of an operating business. We underwrite these loans based
upon our assessment of the obligor(s)’ ability to generate operating cash flows in the future necessary to repay the loan.
To address the risks associated with the uncertainties of future cash flows, these loans are generally well secured by assets
owned by the business or its principal shareholders/owners and the principal shareholders/owners are typically required to guarantee
the loan.
Real Estate Construction Loans:
Real estate construction
loans, also known as construction and land development loans represented the fifth largest segment of the loan portfolio and totaled
$79.6 million and represented 8.24% of the loan portfolio as of September 30, 2016. These loans generally fall into one of three
categories: first, loans to individuals that are ultimately used to acquire property and construct an owner occupied residence;
second, loans to builders for the purpose of acquiring property and constructing homes for sale to consumers; and third, loans
to developers for the purpose of acquiring land that is developed into finished lots for the ultimate construction of residential
or commercial buildings. Loans of these types are generally secured by the subject property within limits established by the Board
of Directors based upon an assessment of market conditions
and updated from time to time. The loans typically carry recourse
to principal owners. In addition to the repayment risk associated with loans to individuals and businesses, loans in this category
carry construction completion risk. To address this additional risk, loans of this type are subject to additional administration
procedures designed to verify and ensure progress of the project in accordance with allocated funding, project specifications
and time frames.
Consumer Loans:
Consumer loans, the smallest segment of
the loan portfolio, totaled $7.0 million and represented 0.71% of the loan portfolio as of September 30, 2016. Most loans in this
category are well secured with assets other than real estate, such as marketable securities or automobiles. Very few consumer
loans are unsecured. As a matter of operation, management discourages unsecured lending. Loans in this category are underwritten
to standards within a traditional consumer framework that is periodically reviewed and updated by management and the Board of
Directors and takes into consideration repayment capacity, collateral value, savings pattern, credit history, and stability.
Loans Held for Sale (“LHFS”)
LHFS are residential mortgage loans originated by the Mortgage
Division of the Bank to consumers and underwritten in accordance with standards set forth by an institutional investor to whom
we expect to sell the loans for a profit. Loan proceeds are used for the purchase or refinance of the property securing the loan.
Loans are sold with the servicing released to the investor. At September 30, 2016, LHFS at fair value totaled $71.0 million compared
to $44.1 million at December 31, 2015.
The LHFS are closed by the Mortgage Division and held on average
fifteen to thirty days pending their sale to government sponsored entities as well as mortgage banking subsidiaries of large financial
institutions. During the third quarter of 2016 we originated $168.8 million of loans processed in this manner, compared to $120.0
million for the third quarter of 2015. Loans are sold without recourse and subject to industry standard representations and warranties
that may require the repurchase by the Bank of loans previously sold. The repurchase risks associated with this activity center
around early payment defaults and borrower fraud.
Allowance for Loan Losses
The allowance for loan losses totaled $14.7 million at September
30, 2016 compared to $13.6 million at December 31, 2015. The allowance for loan losses was equivalent to 1.52% and 1.53% of total
loans held for investment at September 30, 2016 and December 31, 2015, respectively. Adequacy of the allowance is assessed and
increased by provisions for loan losses charged to expense no less than quarterly. Charge-offs are taken when a loan is identified
as uncollectible. For additional information about the allowance for loan losses, please see Note 4 to the consolidated financial
statements.
Non-performing Assets
At September 30, 2016 and December 31, 2015, the Bank had non-performing
assets totaling $5.8 million and $7.4 million, respectively. Non-performing assets consist of non-accrual loans. All non-performing
loans are carried at the expected liquidation value of the underlying collateral.
The following table is a summary of our non-performing assets at
September 30, 2016 and December 31, 2015.
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
(Dollars In Thousands)
|
|
|
Non-accrual loans :
|
|
|
|
|
|
|
|
|
|
Commercial real estate - owner occupied
|
|
$
|
213
|
|
|
$
|
-
|
|
|
Commercial real estate - non-owner occupied
|
|
|
-
|
|
|
|
5,486
|
|
|
Residential real estate
|
|
|
-
|
|
|
|
163
|
|
|
Commercial
|
|
|
4,631
|
|
|
|
722
|
|
|
Real estate construction
|
|
|
1,001
|
|
|
|
1,046
|
|
|
Total non-accrual loans
|
|
|
5,845
|
|
|
|
7,417
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned ("OREO")
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
5,845
|
|
|
$
|
7,417
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured loans included above in non-accrual loans
|
|
$
|
1,501
|
|
|
$
|
1,046
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of non-performing assets to:
|
|
|
|
|
|
|
|
|
|
Total loans plus OREO
|
|
|
0.60
|
%
|
|
|
0.84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
0.43
|
%
|
|
|
0.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Accruing Past due loans:
|
|
|
|
|
|
|
|
|
|
90 or more days past due
|
|
$
|
-
|
|
|
$
|
-
|
|
During 2014, Access Real Estate LLC (ARE)
transferred an undeveloped commercial lot that was originally purchased for possible future banking center expansion to other
assets available-for-sale when management listed the property for sale. The land, originally purchased for $1.2 million, was recorded
at its appraised value less costs to sell estimated to be $500 thousand. The property was sold in the third quarter of 2016 for
$463 thousand.
At September 30, 2016 and December 31, 2015, the Bank had no loans
past due 90 days or more and still accruing interest.
Deposits
Deposits are the primary sources of funding loan growth. At September
30, 2016, deposits totaled $1.12 billion compared to $913.7 million on December 31, 2015, an increase of $201.3 million or 22.03%.
Noninterest-bearing deposits increased $101.8 million or 33.06% from $307.8 million at December 31, 2015 to $409.6 million at
September 30, 2016. Savings and interest-bearing deposits increased $143.2 million or 48.74% from $293.7 million at December 31,
2015 to $436.9 million at September 30, 2016. Non-wholesale time deposits increased from $136.0 million at December 31, 2015 to
$163.7 million at September 30, 2016, an increase of $27.7 million or 20.38%, while wholesale funding deposits saw a net decrease
of $40.3 million or 21.02%, from $191.9 million at December 31, 2015 to $151.6 million at September 30, 2016.
Shareholders’ Equity
Shareholders’ equity totaled $121.3 million at September
30, 2016 compared to $109.1 million at December 31, 2015. The increase in shareholders’ equity is due mainly to retained
earnings net of dividends paid. Banking regulators have defined minimum regulatory capital ratios that the Corporation and the
Bank are required to maintain. These risk based capital guidelines take into consideration risk factors, as defined by the banking
regulators, associated with various categories of assets, both on and off the balance sheet. Both the Corporation and Bank are
classified as well capitalized, which is the highest rating.
Beginning January 1, 2015, the Corporation calculates its regulatory
capital under the Basel III Final Rules which modified the definition of “well capitalized” and implemented changes
in the risk weights of assets. The following table outlines the regulatory components of the Corporation’s capital and risk
based capital ratios under these new rules.
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
Tier 1 Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
$
|
8,860
|
|
|
$
|
8,805
|
|
|
|
|
|
|
Capital surplus
|
|
|
21,159
|
|
|
|
19,953
|
|
|
|
|
|
|
Retained earnings
|
|
|
90,026
|
|
|
|
81,385
|
|
|
|
|
|
|
Less: Net unrealized loss on available for sale equity securities
|
|
|
(49
|
)
|
|
|
(1,380
|
)
|
|
|
|
|
|
Less: Disallowed goodwill and intangibles net of associated deferred tax liabilities
|
|
|
(1,730
|
)
|
|
|
(280
|
)
|
|
|
|
|
|
Total Tier 1 capital
|
|
|
118,266
|
|
|
|
108,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
13,507
|
|
|
|
12,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk based capital
|
|
$
|
131,773
|
|
|
$
|
120,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk weighted assets
|
|
$
|
1,078,593
|
|
|
$
|
973,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly average assets
|
|
$
|
1,324,511
|
|
|
$
|
1,161,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory
|
|
|
Risk-Based Capital Ratios:
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
Common equity tier 1 capital ratio
|
|
|
10.96
|
%
|
|
|
11.14
|
%
|
|
|
5.125
|
%
|
|
Tier 1 capital ratio
|
|
|
10.96
|
%
|
|
|
11.14
|
%
|
|
|
6.625
|
%
|
|
Total capital ratio
|
|
|
12.22
|
%
|
|
|
12.39
|
%
|
|
|
8.625
|
%
|
|
Leverage Capital Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage ratio
|
|
|
8.93
|
%
|
|
|
9.34
|
%
|
|
|
4.000
|
%
|
RESULTS OF OPERATIONS
Summary
Net income for the third quarter of 2016 totaled $4.4 million compared
to $3.9 million for the same period in 2015. Earnings per diluted share were $0.41 for the third quarter of 2016, compared to
$0.37 per diluted share in the same period of 2015. Third quarter 2016 pretax earnings increased $879 thousand or 14.58% when
compared to third quarter 2015 pretax earnings. The banking segment had a decrease in pre-tax earnings when compared to the third
quarter 2015 of $210 thousand, driven by an increase in the provision for loan loss over third quarter 2015 of $750 thousand.
The banking segment’s interest income increased $1.6 million when compared to third quarter 2015 which was partially offset
by an increase in salaries and employee benefits and interest expense of $444 thousand and $577 thousand, respectively. The mortgage
segment had an increase in gains on the sale of loans of $2.5 million that resulted from an increase in the secondary margins
on mortgage loans held for sale over third quarter 2015.
Net income for the nine months ended September 30, 2016 totaled
$13.4 million compared to $11.5 million for the same period in 2015. Earnings per diluted share were $1.26 for the first nine
months of 2016, compared to $1.09 per diluted share in the same period of 2015. For the nine month period ended September 30,
2016, the banking segment saw an increase in pretax income of $989 thousand when compared to the nine months ended September 30,
2015 due to increases in net interest income of $3.1 million and non-interest income of $648 thousand which was partially offset
by an increase in salaries and employee benefits of $2.0 million, due to continued staffing expansion, as well as an increase
of $750 thousand in the provision for loan loss. When comparing the nine month period ended September 30, 2016 to the same period
in 2015, the mortgage segment saw a pretax earnings increase of $2.1 million. The mortgage segment had an increase in gains on
the sale of loans of $4.3 million when comparing the nine months ended September 30, 2016 to the same period in 2015 due to an
increase in the secondary margins on mortgage loans held for sale, the increase was offset by a $1.6 million increase in salaries
and employee benefits.
Net Interest Income
Net interest income, the principal source of earnings, is the amount
of income generated by earning assets (primarily loans and investment securities) less the interest expense incurred on interest-bearing
liabilities (primarily deposits) used to fund earning assets. Net interest income before the provision for loan losses totaled
$11.1 million for the three months ended September 30, 2016 compared to $10.1 million for the same period in 2015. The annualized
yield on earning assets was 4.01% for the quarter ended September 30, 2016 compared to 4.08% for the same period in 2015. The
cost of interest-bearing deposits and borrowings increased to 0.81% for the quarter ended September 30, 2016 compared to the quarter
ended September 30, 2015 at 0.61%. Net interest margin was 3.49% for the quarter ended September 30, 2016 compared to 3.70% for
the same period in 2015.
Net interest income before the provision for loan losses totaled
$32.5 million for the first nine months of 2016 compared to $29.3 million for the same period in 2015. The annualized yield on
earning assets for the first nine months of 2016 was 4.04% compared to 4.06% for the same period in 2015. The cost of interest-bearing
deposits and borrowings for the first nine months of 2016 was 0.78% compared to 0.56% for the same period in 2015. Net interest
margin was 3.54% for the first nine months of 2016 compared to 3.69% for the same period in 2015.
Volume and Rate Analysis
The following tables present the dollar amount of changes in interest
income and interest expense for each category of interest earning assets and interest-bearing liabilities.
|
|
|
Three Months Ended September 30,
|
|
|
|
|
2016 compared to 2015
|
|
|
|
|
Change Due To:
|
|
|
|
|
Increase /
|
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
Volume
|
|
|
Rate
|
|
|
|
|
(In Thousands)
|
|
|
Interest Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
165
|
|
|
$
|
175
|
|
|
$
|
(10
|
)
|
|
Loans held for sale
|
|
|
157
|
|
|
|
214
|
|
|
|
(57
|
)
|
|
Loans
|
|
|
1,236
|
|
|
|
1,333
|
|
|
|
(97
|
)
|
|
Interest-bearing deposits
|
|
|
64
|
|
|
|
10
|
|
|
|
54
|
|
|
Total increase (decrease) in interest income
|
|
|
1,622
|
|
|
|
1,732
|
|
|
|
(110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
|
64
|
|
|
|
15
|
|
|
|
49
|
|
|
Money market deposit accounts
|
|
|
183
|
|
|
|
60
|
|
|
|
123
|
|
|
Savings accounts
|
|
|
27
|
|
|
|
29
|
|
|
|
(2
|
)
|
|
Time deposits
|
|
|
85
|
|
|
|
(152
|
)
|
|
|
237
|
|
|
Total interest-bearing deposits
|
|
|
359
|
|
|
|
(48
|
)
|
|
|
407
|
|
|
FHLB Short-term borrowings
|
|
|
37
|
|
|
|
(14
|
)
|
|
|
51
|
|
|
Securities sold under agreements to repurchase
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
1
|
|
|
FHLB Long-term borrowings
|
|
|
181
|
|
|
|
185
|
|
|
|
(4
|
)
|
|
Total increase (decrease) in interest expense
|
|
|
576
|
|
|
|
121
|
|
|
|
455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net interest income
|
|
$
|
1,046
|
|
|
$
|
1,611
|
|
|
$
|
(565
|
)
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2016 compared to 2015
|
|
|
|
|
Change Due To:
|
|
|
|
|
Increase /
|
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
Volume
|
|
|
Rate
|
|
|
|
|
(In Thousands)
|
|
|
Interest Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
489
|
|
|
$
|
535
|
|
|
$
|
(46
|
)
|
|
Loans held for sale
|
|
|
12
|
|
|
|
58
|
|
|
|
(46
|
)
|
|
Loans
|
|
|
4,206
|
|
|
|
3,962
|
|
|
|
244
|
|
|
Interest-bearing deposits
|
|
|
169
|
|
|
|
37
|
|
|
|
132
|
|
|
Total increase (decrease) in interest income
|
|
|
4,876
|
|
|
|
4,592
|
|
|
|
284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
|
170
|
|
|
|
32
|
|
|
|
138
|
|
|
Money market deposit accounts
|
|
|
339
|
|
|
|
129
|
|
|
|
210
|
|
|
Savings accounts
|
|
|
100
|
|
|
|
93
|
|
|
|
7
|
|
|
Time deposits
|
|
|
575
|
|
|
|
(17
|
)
|
|
|
592
|
|
|
Total interest-bearing deposits
|
|
|
1,184
|
|
|
|
237
|
|
|
|
947
|
|
|
FHLB Short-term borrowings
|
|
|
77
|
|
|
|
(136
|
)
|
|
|
213
|
|
|
Securities sold under agreements to repurchase
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
-
|
|
|
FHLB Long-term borrowings
|
|
|
512
|
|
|
|
521
|
|
|
|
(9
|
)
|
|
Total increase (decrease) in interest expense
|
|
|
1,768
|
|
|
|
617
|
|
|
|
1,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net interest income
|
|
$
|
3,108
|
|
|
$
|
3,975
|
|
|
$
|
(867
|
)
|
Average Balances, Net Interest Income, Yields Earned and
Rates Paid
The following tables present for the periods indicated the total
dollar amount of interest income from average interest earning assets and the resultant yields, as well as the interest expense
on average interest-bearing liabilities, expressed in dollars and rates.
Yield on Average Earning Assets and Rates
on Average Interest-Bearing Liabilities
Three Months Ended
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
|
|
Average
|
|
|
Income /
|
|
|
Yield /
|
|
|
Average
|
|
|
Income /
|
|
|
Yield /
|
|
|
(Dollars In Thousands)
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
$
|
191,794
|
|
|
$
|
1,033
|
|
|
|
2.15
|
%
|
|
$
|
159,450
|
|
|
$
|
868
|
|
|
|
2.18
|
%
|
|
Loans held for sale
|
|
|
63,667
|
|
|
|
574
|
|
|
|
3.61
|
%
|
|
|
40,465
|
|
|
|
417
|
|
|
|
4.12
|
%
|
|
Loans
(1)
|
|
|
947,622
|
|
|
|
11,073
|
|
|
|
4.67
|
%
|
|
|
833,341
|
|
|
|
9,837
|
|
|
|
4.72
|
%
|
|
Interest-bearing balances and federal funds sold
|
|
|
72,680
|
|
|
|
98
|
|
|
|
0.54
|
%
|
|
|
59,216
|
|
|
|
34
|
|
|
|
0.23
|
%
|
|
Total interest-earning assets
|
|
|
1,275,763
|
|
|
|
12,778
|
|
|
|
4.01
|
%
|
|
|
1,092,472
|
|
|
|
11,156
|
|
|
|
4.08
|
%
|
|
Noninterest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
13,251
|
|
|
|
|
|
|
|
|
|
|
|
10,765
|
|
|
|
|
|
|
|
|
|
|
Premises, land and equipment
|
|
|
6,819
|
|
|
|
|
|
|
|
|
|
|
|
6,893
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
42,642
|
|
|
|
|
|
|
|
|
|
|
|
32,470
|
|
|
|
|
|
|
|
|
|
|
Less: allowance for loan losses
|
|
|
(13,964
|
)
|
|
|
|
|
|
|
|
|
|
|
(13,526
|
)
|
|
|
|
|
|
|
|
|
|
Total noninterest-earning assets
|
|
|
48,748
|
|
|
|
|
|
|
|
|
|
|
|
36,602
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,324,511
|
|
|
|
|
|
|
|
|
|
|
$
|
1,129,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
137,387
|
|
|
$
|
127
|
|
|
|
0.37
|
%
|
|
$
|
112,776
|
|
|
$
|
63
|
|
|
|
0.22
|
%
|
|
Money market deposit accounts
|
|
|
224,548
|
|
|
|
257
|
|
|
|
0.46
|
%
|
|
|
141,821
|
|
|
|
74
|
|
|
|
0.21
|
%
|
|
Savings accounts
|
|
|
37,892
|
|
|
|
47
|
|
|
|
0.50
|
%
|
|
|
14,845
|
|
|
|
20
|
|
|
|
0.54
|
%
|
|
Time deposits
|
|
|
277,014
|
|
|
|
918
|
|
|
|
1.33
|
%
|
|
|
331,412
|
|
|
|
833
|
|
|
|
1.01
|
%
|
|
Total interest-bearing deposits
|
|
|
676,841
|
|
|
|
1,349
|
|
|
|
0.80
|
%
|
|
|
600,854
|
|
|
|
990
|
|
|
|
0.66
|
%
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB short-term borrowings
|
|
|
38,043
|
|
|
|
69
|
|
|
|
0.73
|
%
|
|
|
58,207
|
|
|
|
32
|
|
|
|
0.22
|
%
|
|
Securities sold under agreements to repurchase and federal funds purchased
|
|
|
14,881
|
|
|
|
4
|
|
|
|
0.11
|
%
|
|
|
21,928
|
|
|
|
5
|
|
|
|
0.09
|
%
|
|
FHLB long-term borrowings
|
|
|
75,000
|
|
|
|
213
|
|
|
|
1.14
|
%
|
|
|
10,000
|
|
|
|
32
|
|
|
|
1.28
|
%
|
|
Total borrowings
|
|
|
127,924
|
|
|
|
286
|
|
|
|
0.89
|
%
|
|
|
90,135
|
|
|
|
69
|
|
|
|
0.31
|
%
|
|
Total interest-bearing deposits and borrowings
|
|
|
804,765
|
|
|
|
1,635
|
|
|
|
0.81
|
%
|
|
|
690,989
|
|
|
|
1,059
|
|
|
|
0.61
|
%
|
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
390,997
|
|
|
|
|
|
|
|
|
|
|
|
324,763
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
10,095
|
|
|
|
|
|
|
|
|
|
|
|
8,753
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,205,857
|
|
|
|
|
|
|
|
|
|
|
|
1,024,505
|
|
|
|
|
|
|
|
|
|
|
Shareholders' Equity
|
|
|
118,654
|
|
|
|
|
|
|
|
|
|
|
|
104,569
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders' Equity
|
|
$
|
1,324,511
|
|
|
|
|
|
|
|
|
|
|
$
|
1,129,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Spread
(2)
|
|
|
|
|
|
|
|
|
|
|
3.19
|
%
|
|
|
|
|
|
|
|
|
|
|
3.47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin
(3)
|
|
|
|
|
|
$
|
11,143
|
|
|
|
3.49
|
%
|
|
|
|
|
|
$
|
10,097
|
|
|
|
3.70
|
%
|
(1)
Loans placed on nonaccrual status are included in
loan balances.
(2)
Interest spread is the average yield earned on earning
assets, less the average rate incurred on interest-bearing liabilities.
(3)
Net interest margin is net interest income, expressed
as a percentage of average earning assets.
Yield on Average Earning Assets
and Rates on Average Interest-Bearing Liabilities
Nine Months Ended
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
|
|
Average
|
|
|
Income /
|
|
|
Yield /
|
|
|
Average
|
|
|
Income /
|
|
|
Yield /
|
|
|
(Dollars In Thousands)
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
$
|
183,182
|
|
|
$
|
2,954
|
|
|
|
2.15
|
%
|
|
$
|
149,831
|
|
|
$
|
2,465
|
|
|
|
2.19
|
%
|
|
Loans held for sale
|
|
|
47,935
|
|
|
|
1,355
|
|
|
|
3.77
|
%
|
|
|
45,903
|
|
|
|
1,343
|
|
|
|
3.90
|
%
|
|
Loans
(1)
|
|
|
922,821
|
|
|
|
32,522
|
|
|
|
4.70
|
%
|
|
|
810,096
|
|
|
|
28,316
|
|
|
|
4.66
|
%
|
|
Interest-bearing balances and federal funds sold
|
|
|
69,860
|
|
|
|
264
|
|
|
|
0.50
|
%
|
|
|
53,402
|
|
|
|
95
|
|
|
|
0.24
|
%
|
|
Total interest-earning assets
|
|
|
1,223,798
|
|
|
|
37,095
|
|
|
|
4.04
|
%
|
|
|
1,059,232
|
|
|
|
32,219
|
|
|
|
4.06
|
%
|
|
Noninterest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
12,493
|
|
|
|
|
|
|
|
|
|
|
|
10,642
|
|
|
|
|
|
|
|
|
|
|
Premises, land and equipment
|
|
|
6,782
|
|
|
|
|
|
|
|
|
|
|
|
6,921
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
38,142
|
|
|
|
|
|
|
|
|
|
|
|
32,731
|
|
|
|
|
|
|
|
|
|
|
Less: allowance for loan losses
|
|
|
(13,733
|
)
|
|
|
|
|
|
|
|
|
|
|
(13,438
|
)
|
|
|
|
|
|
|
|
|
|
Total noninterest-earning assets
|
|
|
43,684
|
|
|
|
|
|
|
|
|
|
|
|
36,856
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,267,482
|
|
|
|
|
|
|
|
|
|
|
$
|
1,096,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
131,859
|
|
|
$
|
360
|
|
|
|
0.36
|
%
|
|
$
|
114,885
|
|
|
$
|
190
|
|
|
|
0.22
|
%
|
|
Money market deposit accounts
|
|
|
185,839
|
|
|
|
522
|
|
|
|
0.37
|
%
|
|
|
121,478
|
|
|
|
183
|
|
|
|
0.20
|
%
|
|
Savings accounts
|
|
|
35,047
|
|
|
|
137
|
|
|
|
0.52
|
%
|
|
|
10,956
|
|
|
|
37
|
|
|
|
0.45
|
%
|
|
Time deposits
|
|
|
296,099
|
|
|
|
2,755
|
|
|
|
1.24
|
%
|
|
|
298,383
|
|
|
|
2,180
|
|
|
|
0.97
|
%
|
|
Total interest-bearing deposits
|
|
|
648,844
|
|
|
|
3,774
|
|
|
|
0.78
|
%
|
|
|
545,702
|
|
|
|
2,590
|
|
|
|
0.63
|
%
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB short-term borrowings
|
|
|
58,467
|
|
|
|
280
|
|
|
|
0.64
|
%
|
|
|
113,469
|
|
|
|
203
|
|
|
|
0.24
|
%
|
|
Securities sold under agreements to repurchase and federal funds purchased
|
|
|
15,433
|
|
|
|
11
|
|
|
|
0.10
|
%
|
|
|
22,373
|
|
|
|
16
|
|
|
|
0.10
|
%
|
|
FHLB long-term borrowings
|
|
|
71,332
|
|
|
|
576
|
|
|
|
1.08
|
%
|
|
|
6,886
|
|
|
|
64
|
|
|
|
1.24
|
%
|
|
Total borrowings
|
|
|
145,232
|
|
|
|
867
|
|
|
|
0.80
|
%
|
|
|
142,728
|
|
|
|
283
|
|
|
|
0.26
|
%
|
|
Total interest-bearing deposits and borrowings
|
|
|
794,076
|
|
|
|
4,641
|
|
|
|
0.78
|
%
|
|
|
688,430
|
|
|
|
2,873
|
|
|
|
0.56
|
%
|
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
349,339
|
|
|
|
|
|
|
|
|
|
|
|
296,490
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
9,229
|
|
|
|
|
|
|
|
|
|
|
|
8,526
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,152,644
|
|
|
|
|
|
|
|
|
|
|
|
993,446
|
|
|
|
|
|
|
|
|
|
|
Shareholders' Equity
|
|
|
114,838
|
|
|
|
|
|
|
|
|
|
|
|
102,642
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders' Equity
|
|
$
|
1,267,482
|
|
|
|
|
|
|
|
|
|
|
$
|
1,096,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Spread
(2)
|
|
|
|
|
|
|
|
|
|
|
3.26
|
%
|
|
|
|
|
|
|
|
|
|
|
3.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin
(3)
|
|
|
|
|
|
$
|
32,454
|
|
|
|
3.54
|
%
|
|
|
|
|
|
$
|
29,346
|
|
|
|
3.69
|
%
|
(1)
Loans placed on nonaccrual status are included in
loan balances.
(2)
Interest spread is the average yield earned on earning
assets, less the average rate incurred on interest-bearing liabilities.
(3)
Net interest margin is net interest income, expressed
as a percentage of average earning assets.
Noninterest Income
Noninterest income consists of revenue generated from financial
services and activities other than lending and investing. The mortgage segment provides the most significant contributions to
noninterest income. Total noninterest income was $8.7 million for the third quarter of 2016 compared to $6.4 million for the same
period in 2015. Gains on the sale of loans originated by the Banks’s mortgage segment are the largest component of noninterest
income. Gains on the sale of loans totaled $8.3 million for the three month period ended September 30, 2016, compared to $5.8
million for the same period of 2015. Gains on the sale of loans fluctuate with the volume of mortgage loans originated. During
the three months ended September 30, 2016, the Bank’s mortgage segment originated $168.8 million in mortgage and brokered
loans, up from $120.0 million for the same period in 2015.
Noninterest income was $24.7 million for the first nine months
of 2016 compared to $19.8 million for the same period in 2015. Gains on the sale of loans totaled $19.4 million for the nine month
period ended September 30, 2016, compared to $15.1 million for the same period of 2015. During the nine months ended September
30, 2016, the Bank’s mortgage segment originated $429.4 million in mortgage and brokered loans, up from $379.8 million for
the same period in 2015. For the nine months ended September 30, 2016, other income reflected an increase of $570 thousand over
the nine months ended September 30, 2015 of which $270 thousand was attributable to recovered costs upon the settlement of a non-accrual
loan.
Noninterest Expense
Noninterest expense totaled $12.2 million for the three months
ended September 30, 2016, compared to $10.5 million for the same period in 2015, an increase of $1.7 million. Salaries and employee
benefits totaled $8.2 million for the three months ended September 30, 2016, compared to $6.7 million for the same period last
year due to an expansion in staffing. Other operating expenses totaled $3.2 million for the three months ended September 30, 2016,
compared to $3.0 million for the same period in 2015.
Noninterest expense totaled $35.6 million for the nine months ended
September 30, 2016, compared to $31.4 million for the same period in 2015, an increase of $4.2 million. Salaries and employee
benefits totaled $24.3 million for the nine months ended September 30, 2016, compared to $20.4 million for the same period last
year due to an expansion in staffing. Other operating expenses totaled $9.0 million for the nine months ended September 30, 2016,
compared to $8.7 million for the same period in 2015.
The table below provides the composition of other operating expenses.
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
Management fees
|
|
$
|
935
|
|
|
$
|
951
|
|
|
Business and franchise tax
|
|
|
717
|
|
|
|
654
|
|
|
Data processing
|
|
|
669
|
|
|
|
661
|
|
|
Consulting fees
|
|
|
584
|
|
|
|
356
|
|
|
Advertising and promotional
|
|
|
541
|
|
|
|
547
|
|
|
Investor fees
|
|
|
541
|
|
|
|
455
|
|
|
FDIC insurance
|
|
|
475
|
|
|
|
463
|
|
|
Accounting and auditing
|
|
|
460
|
|
|
|
459
|
|
|
Telephone
|
|
|
281
|
|
|
|
252
|
|
|
Director fees
|
|
|
279
|
|
|
|
333
|
|
|
Stock option
|
|
|
251
|
|
|
|
256
|
|
|
Publication and subscription
|
|
|
218
|
|
|
|
177
|
|
|
Early payoff
|
|
|
215
|
|
|
|
63
|
|
|
Regulatory examinations
|
|
|
207
|
|
|
|
188
|
|
|
Credit report
|
|
|
199
|
|
|
|
166
|
|
|
Insurance
|
|
|
188
|
|
|
|
152
|
|
|
Disaster recovery
|
|
|
151
|
|
|
|
147
|
|
|
Education and training
|
|
|
151
|
|
|
|
124
|
|
|
Office supplies-stationary print
|
|
|
149
|
|
|
|
174
|
|
|
Travel
|
|
|
125
|
|
|
|
114
|
|
|
FRB and bank analysis charges
|
|
|
123
|
|
|
|
109
|
|
|
Verification fees
|
|
|
118
|
|
|
|
81
|
|
|
Legal fees
|
|
|
117
|
|
|
|
312
|
|
|
SBA guarantee fee
|
|
|
112
|
|
|
|
125
|
|
|
Business development and meals
|
|
|
83
|
|
|
|
76
|
|
|
Common stock
|
|
|
81
|
|
|
|
82
|
|
|
Postage
|
|
|
69
|
|
|
|
68
|
|
|
Dues and memberships
|
|
|
67
|
|
|
|
73
|
|
|
Courier
|
|
|
42
|
|
|
|
45
|
|
|
Automotive
|
|
|
41
|
|
|
|
35
|
|
|
Appraisal fee
|
|
|
30
|
|
|
|
46
|
|
|
Other
|
|
|
821
|
|
|
|
969
|
|
|
|
|
$
|
9,040
|
|
|
$
|
8,713
|
|
Liquidity Management
Liquidity is the ability of the Corporation to meet current and
future cash flow requirements. The liquidity of a financial institution reflects its ability to convert assets into cash or cash
equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining
the Corporation’s ability to meet the daily cash flow requirements of both depositors and borrowers. Management monitors
liquidity through a regular review of asset and liability maturities, funding sources, and loan and deposit forecasts. Asset and
liability management functions not only serve to assure adequate liquidity in order to meet the needs of the Corporation’s
customers, but also to maintain an appropriate balance between interest sensitive assets and interest sensitive liabilities so
that the Corporation can earn an appropriate return for its shareholders.
The asset portion of the balance sheet provides liquidity primarily
through loan principal repayments and maturities of investment securities. Other short-term investments such as federal funds
sold and interest-bearing deposits with other banks provide an additional source of liquidity funding. At September 30, 2016,
overnight interest-bearing balances totaled $67.8 million and unpledged available-for-sale investment securities totaled approximately
$29.0 million.
The Bank proactively manages a portfolio of short-term time deposits
issued to local municipalities and wholesale depositors in order to fund loans held for sale and short-term investments. As of
September 30, 2016, the portfolio of CDARS deposits, Insured Cash Sweep (ICS) deposits, and wholesale time deposits totaled $151.6
million compared to $191.9 million at December 31, 2015, respectively.
The liability portion of the balance sheet provides liquidity through
various interest-bearing and noninterest-bearing deposit accounts, federal funds purchased, securities sold under agreement to
repurchase and other short-term borrowings. At September 30, 2016, the Bank had a line of credit with the FHLB totaling $391.3
million and had outstanding a $25 million short-term loan at a fixed rate of 0.74%, $75 million in long-term loans at fixed rates
ranging from 0.72% to 1.54%, and a $35 million public deposit letter of credit from the Commonwealth of Virginia Treasury Board.
In addition to the line of credit at the FHLB, the Bank issues repurchase agreements. As of September 30, 2016, outstanding repurchase
agreements totaled $16.3 million. The interest rates on these instruments are variable and subject to change daily. The Bank also
maintains federal funds lines of credit with its correspondent banks and, at September 30, 2016, these lines totaled $62.4 million
and were available as an additional funding source.
The following table presents the composition of borrowings at September
30, 2016 and December 31, 2015 as well as the average balances for the nine months ended September 30, 2016 and the twelve months
ended December 31, 2015.
Borrowed Funds Distribution
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
(Dollars In Thousands)
|
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
At Period End
|
|
|
|
|
|
|
|
|
|
FHLB short-term borrowings
|
|
$
|
25,000
|
|
|
$
|
70,000
|
|
|
Securities sold under agreements to repurchase
|
|
|
16,336
|
|
|
|
21,129
|
|
|
FHLB long-term borrowings
|
|
|
75,000
|
|
|
|
55,000
|
|
|
Total at period end
|
|
$
|
116,336
|
|
|
$
|
146,129
|
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
(Dollars In Thousands)
|
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
Average Balances
|
|
|
|
|
|
|
|
|
|
FHLB short-term borrowings
|
|
$
|
58,467
|
|
|
$
|
91,992
|
|
|
Securities sold under agreements to repurchase
|
|
|
15,433
|
|
|
|
21,853
|
|
|
FHLB long-term borrowings
|
|
|
71,332
|
|
|
|
18,890
|
|
|
Federal funds purchased
|
|
|
-
|
|
|
|
164
|
|
|
Total average balance
|
|
$
|
145,232
|
|
|
$
|
132,899
|
|
|
|
|
|
|
|
|
|
|
|
|
Average rate paid on all borrowed funds
|
|
|
0.80
|
%
|
|
|
0.35
|
%
|
Management believes the Corporation is well positioned with liquid
assets, the ability to generate liquidity through liability funding and the availability of borrowed funds, to meet the liquidity
needs of depositors and customers’ borrowing needs. The Corporation’s ability to maintain sufficient liquidity may
be affected by numerous factors, including economic conditions nationally and in our markets. Depending on the Corporation’s
liquidity levels, its capital position, conditions in the capital markets and other factors, the Corporation may from time to
time consider the issuance of debt, equity or other securities, or other possible capital markets transactions, the proceeds of
which could provide additional liquidity for its operations.
Contractual Obligations
There have been no material changes outside the ordinary
course of business to the contractual obligations disclosed in the Corporation’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2015.