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 September 30, 2014
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 20191
(Address of principal
executive offices) (Zip Code)
(703) 871-2100
(Registrant's telephone
number, including area code)
N/A
(Former
name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes x
No ¨
Indicate by check mark whether
the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes x
No ¨
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨ |
Accelerated
filer x |
Non-accelerated
filer ¨ (Do not
check if a smaller reporting company) |
Smaller
reporting company ¨ |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨
No x
The number of shares outstanding of Access National Corporation’s
common stock, par value $0.835, as of November 7, 2014 was 10,452,194 shares.
ACCESS NATIONAL CORPORATION
FORM 10-Q
INDEX
PART
I |
FINANCIAL
INFORMATION |
|
Item
1. |
Financial
Statements (Unaudited) |
|
Consolidated
Balance Sheets, September 30, 2014 and December 31, 2013 |
Page
2 |
|
Consolidated
Statements of Income, three and nine months ended September 30, 2014 and 2013 |
Page 3 |
|
Consolidated
Statements of Comprehensive Income, three and nine months ended September 30, 2014 and 2013 |
Page 4 |
|
Consolidated
Statements of Changes in Shareholders' Equity, nine months ended September 30, 2014 and 2013 |
Page 5 |
|
Consolidated
Statements of Cash Flows, nine months ended September 30, 2014 and 2013 |
Page 6 |
|
Notes
to Consolidated Financial Statements (Unaudited) |
Page 7 |
Item
2. |
Management's
Discussion and Analysis of Financial Condition and Results of Operations |
Page 34 |
Item
3. |
Quantitative
and Qualitative Disclosures About Market Risk |
Page 51 |
Item
4. |
Controls
and Procedures |
Page 52 |
|
PART
II |
OTHER
INFORMATION |
|
|
|
|
Item
1. |
Legal
Proceedings |
Page 52 |
Item1A. |
Risk
Factors |
Page 53 |
Item
2. |
Unregistered
Sales of Equity Securities and Use of Proceeds |
Page 53 |
Item
3. |
Defaults
Upon Senior Securities |
Page 54 |
Item
4. |
Mine
Safety Disclosures |
Page 54 |
Item
5. |
Other
Information |
Page 54 |
Item
6. |
Exhibits |
Page 55 |
|
|
|
|
Signatures |
Page 56 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ACCESS NATIONAL
CORPORATION
Consolidated Balance Sheets
(In Thousands, Except for Share and Per
Share Data)
| |
September 30, | | |
December 31, | |
| |
2014 | | |
2013 | |
| |
(Unaudited) | | |
| |
ASSETS | |
| | | |
| | |
Cash and due from banks | |
$ | 8,227 | | |
$ | 8,117 | |
Interest-bearing deposits in other banks and federal funds sold | |
| 60,480 | | |
| 15,302 | |
Securities: | |
| | | |
| | |
Securities available-for-sale, at fair value | |
| 127,422 | | |
| 76,552 | |
Securities held-to-maturity, at amortized cost (fair
value of $14,153 and $15,659) | |
| 14,315 | | |
| 16,277 | |
Total investment securities | |
| 141,737 | | |
| 92,829 | |
| |
| | | |
| | |
Restricted stock | |
| 8,286 | | |
| 8,559 | |
Loans held for sale, at fair value | |
| 42,283 | | |
| 24,353 | |
Loans | |
| 727,112 | | |
| 687,055 | |
Allowance for loan losses | |
| (13,244 | ) | |
| (13,136 | ) |
Net loans | |
| 713,868 | | |
| 673,919 | |
Premises and equipment, net | |
| 7,036 | | |
| 8,389 | |
Accrued interest receivable | |
| 2,747 | | |
| 2,491 | |
Other assets | |
| 30,429 | | |
| 13,223 | |
Total assets | |
$ | 1,015,093 | | |
$ | 847,182 | |
| |
| | | |
| | |
LIABILITIES AND SHAREHOLDERS' EQUITY | |
| | | |
| | |
Deposits | |
| | | |
| | |
Noninterest-bearing deposits | |
$ | 271,251 | | |
$ | 189,908 | |
Savings and interest-bearing deposits | |
| 243,259 | | |
| 200,196 | |
Time deposits | |
| 217,561 | | |
| 182,868 | |
Total deposits | |
| 732,071 | | |
| 572,972 | |
Other liabilities | |
| | | |
| | |
Short-term borrowings | |
| 175,592 | | |
| 172,855 | |
Other liabilities and accrued expenses | |
| 7,690 | | |
| 10,221 | |
Total liabilities | |
$ | 915,353 | | |
$ | 756,048 | |
| |
| | | |
| | |
SHAREHOLDERS' EQUITY | |
| | | |
| | |
Common stock, par value, $0.835; authorized, 60,000,000 shares; issued
and outstanding, 10,448,819 shares at September 30, 2014 and 10,369,420 shares at December 31, 2013 | |
$ | 8,725 | | |
$ | 8,659 | |
Additional paid in capital | |
| 18,260 | | |
| 17,320 | |
Retained earnings | |
| 73,781 | | |
| 67,121 | |
Accumulated other comprehensive
loss, net | |
| (1,026 | ) | |
| (1,966 | ) |
Total shareholders' equity | |
| 99,740 | | |
| 91,134 | |
Total liabilities and shareholders' equity | |
$ | 1,015,093 | | |
$ | 847,182 | |
See accompanying notes to consolidated financial statements
(Unaudited).
ACCESS NATIONAL
CORPORATION
Consolidated Statements of Income
(In Thousands, Except for Share and Per
Share Data)
(Unaudited)
| |
Three
Months Ended September 30, | | |
Nine
Months Ended September 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
Interest and Dividend Income | |
| | | |
| | | |
| | | |
| | |
Interest and fees
on loans | |
$ | 9,133 | | |
$ | 8,262 | | |
$ | 26,446 | | |
$ | 25,468 | |
Interest on deposits in other
banks | |
| 27 | | |
| 22 | | |
| 72 | | |
| 76 | |
Interest
and dividends on securities | |
| 755 | | |
| 457 | | |
| 1,844 | | |
| 1,439 | |
Total
interest and dividend income | |
| 9,915 | | |
| 8,741 | | |
| 28,362 | | |
| 26,983 | |
| |
| | | |
| | | |
| | | |
| | |
Interest Expense | |
| | | |
| | | |
| | | |
| | |
Interest on deposits | |
| 757 | | |
| 799 | | |
| 2,272 | | |
| 2,766 | |
Interest on short-term borrowings | |
| 74 | | |
| 34 | | |
| 202 | | |
| 62 | |
Interest
on subordinated debentures | |
| - | | |
| (3 | ) | |
| - | | |
| 103 | |
Total
interest expense | |
| 831 | | |
| 830 | | |
| 2,474 | | |
| 2,931 | |
| |
| | | |
| | | |
| | | |
| | |
Net interest income | |
| 9,084 | | |
| 7,911 | | |
| 25,888 | | |
| 24,052 | |
Provision
for loan losses | |
| - | | |
| 450 | | |
| - | | |
| 675 | |
Net interest
income after provision for loan losses | |
| 9,084 | | |
| 7,461 | | |
| 25,888 | | |
| 23,377 | |
| |
| | | |
| | | |
| | | |
| | |
Noninterest Income | |
| | | |
| | | |
| | | |
| | |
Service fees on deposit accounts | |
| 167 | | |
| 188 | | |
| 525 | | |
| 495 | |
Gain on sale of loans | |
| 4,799 | | |
| 3,179 | | |
| 10,314 | | |
| 18,180 | |
Mortgage broker fee income | |
| 43 | | |
| 16 | | |
| 63 | | |
| 63 | |
Other income | |
| 204 | | |
| 1,696 | | |
| 2,883 | | |
| 5,208 | |
Total
noninterest income | |
| 5,213 | | |
| 5,079 | | |
| 13,785 | | |
| 23,946 | |
| |
| | | |
| | | |
| | | |
| | |
Noninterest Expense | |
| | | |
| | | |
| | | |
| | |
Salaries and employee benefits | |
| 5,860 | | |
| 5,672 | | |
| 16,699 | | |
| 20,540 | |
Occupancy and equipment | |
| 715 | | |
| 641 | | |
| 2,082 | | |
| 1,961 | |
Other operating
expenses | |
| 108 | | |
| 2,324 | | |
| 4,777 | | |
| 9,324 | |
Total
noninterest expense | |
| 6,683 | | |
| 8,637 | | |
| 23,558 | | |
| 31,825 | |
| |
| | | |
| | | |
| | | |
| | |
Income before income taxes | |
| 7,614 | | |
| 3,903 | | |
| 16,115 | | |
| 15,498 | |
| |
| | | |
| | | |
| | | |
| | |
Income tax expense | |
| 2,682 | | |
| 1,098 | | |
| 5,705 | | |
| 5,485 | |
NET INCOME | |
$ | 4,932 | | |
$ | 2,805 | | |
$ | 10,410 | | |
$ | 10,013 | |
| |
| | | |
| | | |
| | | |
| | |
Earnings per common share: | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | 0.47 | | |
$ | 0.27 | | |
$ | 0.99 | | |
$ | 0.97 | |
Diluted | |
$ | 0.47 | | |
$ | 0.27 | | |
$ | 0.99 | | |
$ | 0.96 | |
| |
| | | |
| | | |
| | | |
| | |
Average outstanding shares: | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 10,440,986 | | |
| 10,306,865 | | |
| 10,414,384 | | |
| 10,312,017 | |
Diluted | |
| 10,476,050 | | |
| 10,389,064 | | |
| 10,459,283 | | |
| 10,402,178 | |
See accompanying notes to consolidated financial statements
(Unaudited).
ACCESS NATIONAL
CORPORATION
Consolidated Statements of Comprehensive
Income
(In Thousands)
(Unaudited)
| |
Three
Months Ended September 30, | | |
Nine
Months Ended September 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
Net
income | |
$ | 4,932 | | |
$ | 2,805 | | |
$ | 10,410 | | |
$ | 10,013 | |
| |
| | | |
| | | |
| | | |
| | |
Other comprehensive income: | |
| | | |
| | | |
| | | |
| | |
Unrealized gains (losses) on securities | |
| | | |
| | | |
| | | |
| | |
Unrealized holding gains (losses)
arising during period | |
| (344 | ) | |
| (181 | ) | |
| 1,491 | | |
| (2,448 | ) |
Less: reclassification adjustment
for gains included in net income | |
| (57 | ) | |
| - | | |
| (45 | ) | |
| - | |
Tax effect | |
| 141 | | |
| 63 | | |
| (506 | ) | |
| 857 | |
Net of tax
amount | |
| (260 | ) | |
| (118 | ) | |
| 940 | | |
| (1,591 | ) |
| |
| | | |
| | | |
| | | |
| | |
Comprehensive
income | |
$ | 4,672 | | |
$ | 2,687 | | |
$ | 11,350 | | |
$ | 8,422 | |
See accompanying notes to consolidated financial statements
(unaudited).
ACCESS
NATIONAL CORPORATION
Consolidated Statements
of Changes in Shareholders' Equity
(In Thousands, Except
for Share Data)
(Unaudited)
| |
| | |
| | |
| | |
Accumulated | | |
| |
| |
| | |
Additional | | |
| | |
Other | | |
| |
| |
Common | | |
Paid in | | |
Retained | | |
Comprehensive | | |
| |
| |
Stock | | |
Capital | | |
Earnings | | |
Income
(Loss) | | |
Total | |
Balance, December 31, 2013 | |
$ | 8,659 | | |
$ | 17,320 | | |
$ | 67,121 | | |
$ | (1,966 | ) | |
$ | 91,134 | |
Net income | |
| - | | |
| - | | |
| 10,410 | | |
| - | | |
| 10,410 | |
Other comprehensive income | |
| - | | |
| - | | |
| - | | |
| 940 | | |
| 940 | |
Stock option exercises (55,382
shares) | |
| 46 | | |
| 398 | | |
| - | | |
| - | | |
| 444 | |
Issuance of restricted common
stock (24,017 shares) | |
| 20 | | |
| 365 | | |
| - | | |
| - | | |
| 385 | |
Cash dividend | |
| - | | |
| - | | |
| (3,750 | ) | |
| - | | |
| (3,750 | ) |
Stock-based
compensation expense recognized in earnings | |
| - | | |
| 177 | | |
| - | | |
| - | | |
| 177 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, September 30, 2014 | |
$ | 8,725 | | |
$ | 18,260 | | |
$ | 73,781 | | |
$ | (1,026 | ) | |
$ | 99,740 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, December 31, 2012 | |
$ | 8,615 | | |
$ | 17,155 | | |
$ | 65,404 | | |
$ | 93 | | |
$ | 91,267 | |
Net income | |
| - | | |
| - | | |
| 10,013 | | |
| - | | |
| 10,013 | |
Other comprehensive income | |
| - | | |
| - | | |
| - | | |
| (1,591 | ) | |
| (1,591 | ) |
Stock
option exercises (65,545 shares) | |
| 55 | | |
| 377 | | |
| - | | |
| - | | |
| 432 | |
Repurchased
under share repurchase program (61,454 shares) | |
| (51 | ) | |
| (715 | ) | |
| - | | |
| - | | |
| (766 | ) |
Excess tax benefits from stock
based payment arrangements | |
| - | | |
| 6 | | |
| - | | |
| - | | |
| 6 | |
Cash dividend | |
| - | | |
| - | | |
| (3,093 | ) | |
| - | | |
| (3,093 | ) |
Stock-based
compensation expense recognized in earnings | |
| - | | |
| 150 | | |
| - | | |
| - | | |
| 150 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, September 30, 2013 | |
$ | 8,619 | | |
$ | 16,973 | | |
$ | 72,324 | | |
$ | (1,498 | ) | |
$ | 96,418 | |
See accompanying notes to consolidated financial statements
(Unaudited).
ACCESS
NATIONAL CORPORATION
Consolidated Statements
of Cash Flows
(In Thousands)
(Unaudited)
| |
Nine Months Ended September 30 | |
| |
2014 | | |
2013 | |
Cash Flows from Operating Activities | |
| | | |
| | |
Net income | |
$ | 10,410 | | |
$ | 10,013 | |
Adjustments to reconcile net income to net cash provided
by (used in) operating activities: | |
| | | |
| | |
Provision for loan losses | |
| - | | |
| 675 | |
Provision for losses (release of provision) on mortgage loans sold | |
| (3,250 | ) | |
| 388 | |
Provision for off balance sheet losses | |
| - | | |
| 153 | |
Writedown of other real estate owned | |
| 707 | | |
| - | |
Gain on sale of securities | |
| 47 | | |
| - | |
Excess tax benefits | |
| - | | |
| 6 | |
Deferred tax benefit | |
| 1,190 | | |
| 187 | |
Stock-based compensation | |
| 177 | | |
| 150 | |
Valuation allowance on derivatives | |
| (108 | ) | |
| 492 | |
Net amortization on securities | |
| 557 | | |
| 297 | |
Depreciation and amortization | |
| 363 | | |
| 356 | |
Gain (loss) on disposal of assets | |
| 1 | | |
| (1 | ) |
Changes in assets and liabilities: | |
| | | |
| | |
Increase (decrease) in valuation of loans held for sale carried at fair
value | |
| (758 | ) | |
| 4,153 | |
(Increase) decrease in loans held for sale | |
| (17,173 | ) | |
| 91,012 | |
(Increase) decrease in other assets | |
| (3,373 | ) | |
| 1,605 | |
Increase (decrease) in other liabilities | |
| 577 | | |
| (2,422 | ) |
Net cash (used in) provided by operating activities | |
| (10,633 | ) | |
| 107,064 | |
Cash Flows from Investing Activities | |
| | | |
| | |
Proceeds from maturities and calls of securities available for sale | |
| 20,202 | | |
| 27,635 | |
Proceeds from sale of securities | |
| 24,606 | | |
| - | |
Purchases of securities available for sale | |
| (94,546 | ) | |
| (66,925 | ) |
Proceeds from maturities and calls of securities held to maturity | |
| 5,000 | | |
| 30,000 | |
Purchase of securities held to maturity | |
| (3,055 | ) | |
| (889 | ) |
Purchase of bank owned life insurance | |
| (15,000 | ) | |
| - | |
Net increase in loans | |
| (39,949 | ) | |
| (37,979 | ) |
Proceeds from sale of equipment | |
| - | | |
| 10 | |
Purchases of premises and equipment | |
| (253 | ) | |
| (234 | ) |
Net cash used in investing activities | |
| (102,995 | ) | |
| (48,382 | ) |
Cash Flows from Financing Activities | |
| | | |
| | |
Net increase in demand, interest-bearing demand and savings deposits | |
| 124,609 | | |
| 76,857 | |
Net (decrease) increase in time deposits | |
| 34,491 | | |
| (73,030 | ) |
Decrease in securities sold under agreement to repurchase | |
| (7,263 | ) | |
| (14,060 | ) |
Net (decrease) increase in other short-term borrowings | |
| 10,000 | | |
| (5,000 | ) |
Net (decrease) increase in long-term borrowings | |
| - | | |
| (6,186 | ) |
Proceeds from issuance of common stock | |
| 829 | | |
| 432 | |
Repurchase of common stock | |
| - | | |
| (766 | ) |
Dividends paid | |
| (3,750 | ) | |
| (3,093 | ) |
Net cash (used in) provided by financing activities | |
| 158,916 | | |
| (24,846 | ) |
| |
| | | |
| | |
Increase in cash and cash equivalents | |
| 45,288 | | |
| 33,836 | |
Cash and Cash Equivalents | |
| | | |
| | |
Beginning | |
| 23,419 | | |
| 37,941 | |
Ending | |
$ | 68,707 | | |
$ | 71,777 | |
Supplemental Disclosures of Cash Flow Information | |
| | | |
| | |
Cash payments for interest | |
$ | 2,343 | | |
$ | 2,844 | |
Cash payments for income taxes | |
$ | 4,361 | | |
$ | 6,881 | |
Supplemental Disclosures of Noncash Investing Activities | |
| | | |
| | |
Unrealized gain (loss) on securities available for sale | |
$ | 1,446 | | |
$ | (2,448 | ) |
See accompanying notes to consolidated financial statements
(Unaudited).
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
Access National Corporation (the “Corporation”)
is a bank holding company incorporated under the laws of the Commonwealth of Virginia. The Corporation has two wholly-owned subsidiaries,
Access National Bank (the “Bank”), which is an independent commercial bank chartered under federal laws as a national
banking association, and Access National Capital Trust II, which was formed for the purpose of issuing redeemable capital securities.
The Bank has two active subsidiaries, Access Real Estate LLC (“Access Real Estate”) and Access Capital Management
Holding LLC (“ACM”).
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
for interim financial information and with rules and regulations of the Securities and Exchange Commission (“SEC”).
The statements do not include all of the information and footnotes required by GAAP for complete financial statements. All adjustments
have been made which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods
presented. Such adjustments are all of a normal and recurring nature. All significant inter-company accounts and transactions
have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation.
The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results
that may be expected for the entire year ending December 31, 2014. These consolidated financial statements should be read in conjunction
with the Corporation’s audited financial statements and the notes thereto as of December 31, 2013, included in the Corporation’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
The Corporation has evaluated subsequent events for potential
recognition and/or disclosure in this Quarterly Report on Form 10-Q through the date these consolidated financial statements were
issued.
NOTE 2 – STOCK-BASED COMPENSATION PLANS
During the first nine months of 2014,
the Corporation granted 123,000 stock options to officers, directors, and employees under the 2009 Stock Option Plan (the “Plan”).
Options granted under the Plan have an exercise price equal to the fair market value as of the grant date. Options granted vest
over various periods ranging from two and one-half years to four years and expire one year after the full vesting date. Stock–based
compensation expense recognized in other operating expense during the first nine months of 2014 and 2013 was $177 thousand and
$150 thousand, respectively. The fair value of options is estimated on the date of grant using a Black Scholes option-pricing
model with the assumptions noted below.
The total unrecognized compensation
cost related to non-vested share based compensation arrangements granted under the Plan as of September 30, 2014 was $511,062.
The cost is expected to be recognized over a weighted average period of 1.30 years.
NOTE 2 – STOCK-BASED COMPENSATION PLANS (continued)
A summary of stock option activity
under the Plan for the nine months ended September 30, 2014 and 2013 is presented as follows:
| |
Nine Months Ended | |
| |
September 30, 2014 | |
| |
| |
Expected life of options granted, in years | |
| 4.33 | |
Risk-free interest rate | |
| 0.69 | % |
Expected volatility of stock | |
| 36 | % |
Annual expected dividend yield | |
| 3 | % |
| |
| | |
Fair Value of Granted Options | |
$ | 305,143 | |
Non-Vested Options | |
| 273,101 | |
| |
| | |
| | |
Weighted Avg. | | |
| |
| |
Number of | | |
Weighted Avg. | | |
Remaining Contractual | | |
Aggregate Intrinsic | |
| |
Options | | |
Exercise Price | | |
Term, in years | | |
Value | |
| |
| | |
| | |
| | |
| |
Outstanding at beginning of year, in years | |
| 281,380 | | |
$ | 11.77 | | |
| 3.20 | | |
$ | 951,526 | |
Granted | |
| 123,000 | | |
| 15.96 | | |
| 4.33 | | |
| - | |
Exercised | |
| (55,382 | ) | |
| 8.03 | | |
| 0.77 | | |
| 407,183 | |
Lapsed or Canceled | |
| (11,325 | ) | |
$ | 13.25 | | |
| 3.03 | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Outstanding at September 30, 2014 | |
| 337,673 | | |
$ | 13.86 | | |
| 3.41 | | |
$ | 799,612 | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable at September 30, 2014 | |
| 64,572 | | |
$ | 11.74 | | |
| 2.73 | | |
$ | 290,248 | |
| |
Nine Months Ended | |
| |
September 30, 2013 | |
| |
| |
Expected life of options granted, in years | |
| 4.36 | |
Risk-free interest rate | |
| 0.36 | % |
Expected volatility of stock | |
| 42 | % |
Annual expected dividend yield | |
| 3 | % |
| |
| | |
Fair value of granted options | |
$ | 435,035 | |
Non-vested options | |
| 233,477 | |
| |
| | |
| | |
Weighted Avg. | | |
| |
| |
Number of | | |
Weighted Avg. | | |
Remaining Contractual | | |
Aggregate Intrinsic | |
| |
Options | | |
Exercise Price | | |
Term, in years | | |
Value | |
| |
| | |
| | |
| | |
| |
Outstanding at beginning of year, in years | |
| 274,800 | | |
$ | 7.72 | | |
| 2.59 | | |
$ | 1,450,016 | |
Granted | |
| 141,584 | | |
| 15.31 | | |
| 4.36 | | |
| - | |
Exercised | |
| (65,545 | ) | |
| 6.58 | | |
| 0.72 | | |
| 499,741 | |
Lapsed or canceled | |
| (16,654 | ) | |
$ | 8.51 | | |
| 1.98 | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Outstanding at September 30, 2013 | |
| 334,185 | | |
$ | 11.12 | | |
| 3.14 | | |
$ | 1,200,435 | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable at September 30, 2013 | |
| 100,708 | | |
$ | 7.30 | | |
| 1.44 | | |
$ | 701,250 | |
NOTE 3 – SECURITIES
The following table provides the amortized cost and fair value
for the categories of available-for-sale securities and held-to-maturity securities at September 30, 2014 and December 31, 2013.
Held-to-maturity securities are carried at amortized cost, which reflects historical cost, adjusted for amortization of premiums
and accretion of discounts. Available-for-sale securities are carried at estimated fair value with net unrealized gains or losses
reported on an after tax basis as a component of accumulated other comprehensive income in shareholders’ equity. The estimated
fair value of available-for-sale securities is impacted by interest rates, credit spreads, market volatility, and liquidity.
NOTE 3 – SECURITIES (continued)
| |
September 30, 2014 | |
| |
Amortized Cost | | |
Gross Unrealized
Gains | | |
Gross Unrealized
(Losses) | | |
Estimated Fair Value | |
| |
| | |
(In Thousands) | | |
| |
Available-for-sale: | |
| | | |
| | | |
| | |
|
|
|
|
U.S. Government agencies | |
$ | 18,998 | | |
$ | - | | |
$ | (652 | ) | |
$ | 18,346 | |
Mortgage backed securities | |
| 70,843 | | |
| 52 | | |
| (842 | ) | |
| 70,053 | |
Corporate bonds | |
| 15,394 | | |
| 103 | | |
| (58 | ) | |
| 15,439 | |
Asset Backed Securities | |
| 18,219 | | |
| 49 | | |
| (190 | ) | |
| 18,078 | |
Municipals - nontaxable | |
| 4,047 | | |
| 31 | | |
| - | | |
| 4,078 | |
CRA Mutual fund | |
| 1,500 | | |
| - | | |
| (72 | ) | |
| 1,428 | |
| |
$ | 129,001 | | |
$ | 235 | | |
$ | (1,814 | ) | |
$ | 127,422 | |
| |
| | | |
| | | |
| | | |
| | |
Held-to-maturity: | |
| | | |
| | | |
| | | |
| | |
U.S. Government agencies | |
$ | 9,985 | | |
$ | 2 | | |
$ | (171 | ) | |
$ | 9,816 | |
Municipals | |
| 2,629 | | |
| 23 | | |
| (20 | ) | |
| 2,632 | |
Municipals - nontaxable | |
| 1,701 | | |
| 5 | | |
| (1 | ) | |
| 1,705 | |
| |
$ | 14,315 | | |
$ | 30 | | |
$ | (192 | ) | |
$ | 14,153 | |
| |
December 31, 2013 | |
| |
Amortized Cost | | |
Gross Unrealized
Gains | | |
Gross Unrealized
(Losses) | | |
Estimated Fair Value | |
| |
| | |
(In Thousands) | | |
| |
Available-for-sale: | |
| | | |
| | | |
| | |
|
|
|
|
U.S. Government agencies | |
$ | 35,928 | | |
$ | - | | |
$ | (1,796 | ) | |
$ | 34,132 | |
Mortgage backed securities | |
| 28,770 | | |
| 53 | | |
| (1,171 | ) | |
| 27,652 | |
Corporate bonds | |
| 6,018 | | |
| 113 | | |
| (112 | ) | |
| 6,019 | |
Asset Backed Securities | |
| 6,657 | | |
| | | |
| (14 | ) | |
| 6,643 | |
Municipals - nontaxable | |
| 705 | | |
| - | | |
| (10 | ) | |
| 695 | |
CRA Mutual fund | |
| 1,500 | | |
| - | | |
| (89 | ) | |
| 1,411 | |
| |
$ | 79,578 | | |
$ | 166 | | |
$ | (3,192 | ) | |
$ | 76,552 | |
| |
| | | |
| | | |
| | | |
| | |
Held-to-maturity: | |
| | | |
| | | |
| | | |
| | |
U.S. Government agencies | |
$ | 14,983 | | |
$ | 9 | | |
$ | (568 | ) | |
$ | 14,424 | |
Municipals | |
| 426 | | |
| - | | |
| (48 | ) | |
| 378 | |
Municipals - nontaxable | |
| 868 | | |
| - | | |
| (11 | ) | |
| 857 | |
| |
$ | 16,277 | | |
$ | 9 | | |
$ | (627 | ) | |
$ | 15,659 | |
NOTE 3 – SECURITIES (continued)
The amortized cost and estimated fair value of securities available-for-sale
and held-to-maturity as of September 30, 2014 and December 31, 2013 by contractual maturity are shown below. Actual maturities
may differ from contractual maturities because some of the securities may be called or prepaid without any penalties.
| |
September
30, 2014 | | |
December
31, 2013 | |
| |
| | |
Estimated | | |
| | |
Estimated | |
| |
Amortized | | |
Fair | | |
Amortized | | |
Fair | |
| |
Cost | | |
Value | | |
Cost | | |
Value | |
| |
(In Thousands) | | |
(In Thousands) | |
Available-for-sale: | |
| | | |
| | | |
| | | |
| | |
US Government agencies: | |
| | | |
| | | |
| | | |
| | |
Due after one through
five years | |
$ | - | | |
$ | - | | |
$ | 4,379 | | |
$ | 4,329 | |
Due after five through ten years | |
| 18,998 | | |
| 18,346 | | |
| 23,998 | | |
| 22,532 | |
Due after ten through fifteen
years | |
| - | | |
| - | | |
| 4,121 | | |
| 4,085 | |
Due after fifteen years | |
| - | | |
| - | | |
| 3,430 | | |
| 3,186 | |
Mortgage backed securities: | |
| | | |
| | | |
| | | |
| | |
Due after five through ten years | |
| 6,640 | | |
| 6,497 | | |
| 8,440 | | |
| 8,219 | |
Due after ten through fifteen
years | |
| 41,062 | | |
| 40,531 | | |
| 17,022 | | |
| 16,212 | |
Due after fifteen years | |
| 23,141 | | |
| 23,025 | | |
| 3,308 | | |
| 3,221 | |
Corporate bonds: | |
| | | |
| | | |
| | | |
| | |
Due in one year or less | |
| 1,997 | | |
| 2,032 | | |
| - | | |
| - | |
Due after one through five years | |
| 9,412 | | |
| 9,452 | | |
| 4,010 | | |
| 4,123 | |
Due after five through ten years | |
| 3,985 | | |
| 3,955 | | |
| 2,008 | | |
| 1,896 | |
Asset backed securities: | |
| | | |
| | | |
| | | |
| | |
Due after five through ten years | |
| 6,140 | | |
| 6,189 | | |
| 1,000 | | |
| 1,000 | |
Due after fifteen years | |
| 12,079 | | |
| 11,889 | | |
| 5,657 | | |
| 5,643 | |
Municipals - nontaxable: | |
| | | |
| | | |
| | | |
| | |
Due after five through ten years | |
| 405 | | |
| 414 | | |
| 705 | | |
| 695 | |
Due after ten through fifteen
years | |
| 1,367 | | |
| 1,384 | | |
| - | | |
| - | |
Due after fifteen years | |
| 2,275 | | |
| 2,280 | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
CRA Mutual fund | |
| 1,500 | | |
| 1,428 | | |
| 1,500 | | |
| 1,411 | |
Total | |
$ | 129,001 | | |
$ | 127,422 | | |
$ | 79,578 | | |
$ | 76,552 | |
| |
| | | |
| | | |
| | | |
| | |
Held-to-maturity: | |
| | | |
| | | |
| | | |
| | |
US Government Agencies: | |
| | | |
| | | |
| | | |
| | |
Due after one through five years | |
$ | 5,000 | | |
$ | 5,002 | | |
$ | 9,999 | | |
$ | 9,974 | |
Due after ten through fifteen
years | |
| 4,985 | | |
| 4,814 | | |
| 4,984 | | |
| 4,450 | |
Municipals: | |
| | | |
| | | |
| | | |
| | |
Due after five through ten years | |
| 427 | | |
| 438 | | |
| 426 | | |
| 415 | |
Due after ten through fifteen
years | |
| 2,202 | | |
| 1,641 | | |
| - | | |
| - | |
Due after fifteen years | |
| - | | |
| 553 | | |
| | | |
| | |
Municipals - nontaxable: | |
| | | |
| | | |
| | | |
| | |
Due after ten through fifteen
years | |
| 1,417 | | |
| 1,422 | | |
| 868 | | |
| 820 | |
Due after
fifteen years | |
| 284 | | |
| 283 | | |
| - | | |
| - | |
Total | |
$ | 14,315 | | |
$ | 14,153 | | |
$ | 16,277 | | |
$ | 15,659 | |
The estimated fair value of securities pledged to secure public
funds, credit lines with the Federal Reserve Bank (“FRB”), and debtor-in-possession accounts amounted to $63.8 million
at September 30, 2014 and $39.6 million at December 31, 2013.
NOTE 3 – SECURITIES (continued)
Securities available-for-sale and held-to-maturity that have
an unrealized loss position at September 30, 2014 and December 31, 2013 are as follows:
| |
Securities
in a loss | | |
Securities
in a loss | | |
| | |
| |
| |
Position
for less than | | |
Position
for 12 Months | | |
| | |
| |
| |
12
Months | | |
or
Longer | | |
Total | |
September 30,
2014 | |
Estimated | | |
| | |
Estimated | | |
| | |
Estimated | | |
| |
| |
Fair | | |
Unrealized | | |
Fair | | |
Unrealized | | |
Fair | | |
Unrealized | |
| |
Value | | |
Losses | | |
Value | | |
Losses | | |
Value | | |
Losses | |
| |
(In Thousands) | |
Investment
securities available-for-sale: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Mortgage
backed securities | |
$ | 43,695 | | |
$ | (223 | ) | |
$ | 20,083 | | |
$ | (619 | ) | |
$ | 63,778 | | |
$ | (842 | ) |
U.S. Government agencies | |
| - | | |
| - | | |
| 18,346 | | |
| (652 | ) | |
| 18,346 | | |
| (652 | ) |
Corporate bonds | |
| 6,500 | | |
| (31 | ) | |
| 1,979 | | |
| (27 | ) | |
| 8,479 | | |
| (58 | ) |
Asset backed securities | |
| 9,583 | | |
| (46 | ) | |
| 2,952 | | |
| (144 | ) | |
| 12,535 | | |
| (190 | ) |
CRA
Mutual fund | |
| - | | |
| - | | |
| 1,428 | | |
| (72 | ) | |
| 1,428 | | |
| (72 | ) |
Total | |
$ | 59,778 | | |
$ | (300 | ) | |
$ | 44,788 | | |
$ | (1,514 | ) | |
$ | 104,566 | | |
$ | (1,814 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Investment
securities held-to-maturity: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S. Government agencies | |
$ | - | | |
$ | - | | |
$ | 4,814 | | |
$ | (171 | ) | |
$ | 4,814 | | |
$ | (171 | ) |
Municipals Taxable | |
| 1,604 | | |
| (20 | ) | |
| - | | |
| - | | |
| 1,604 | | |
| (20 | ) |
Municipals
- nontaxable | |
| 283 | | |
| (1 | ) | |
| - | | |
| - | | |
| 283 | | |
| (1 | ) |
Total | |
$ | 1,887 | | |
$ | (21 | ) | |
$ | 4,814 | | |
$ | (171 | ) | |
$ | 6,701 | | |
$ | (192 | ) |
| |
Securities
in a loss | | |
Securities
in a loss | | |
| | |
| |
| |
Position
for less than | | |
Position
for 12 Months | | |
| | |
| |
| |
12
Months | | |
or
Longer | | |
Total | |
December 31,
2013 | |
Estimated | | |
| | |
Estimated | | |
| | |
Estimated | | |
| |
| |
Fair | | |
Unrealized | | |
Fair | | |
Unrealized | | |
Fair | | |
Unrealized | |
| |
Value | | |
Losses | | |
Value | | |
Losses | | |
Value | | |
Losses | |
| |
(In
Thousands) | |
Investment
securities available-for-sale: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Mortgage
backed securities | |
$ | 19,641 | | |
$ | (987 | ) | |
$ | 4,945 | | |
$ | (184 | ) | |
$ | 24,586 | | |
$ | (1,171 | ) |
U.S. Government agencies | |
| 34,132 | | |
| (1,796 | ) | |
| - | | |
| - | | |
| 34,132 | | |
| (1,796 | ) |
Municipals - nontaxable | |
| 695 | | |
| (10 | ) | |
| - | | |
| - | | |
| 695 | | |
| (10 | ) |
Corporate bonds | |
| 1,895 | | |
| (112 | ) | |
| - | | |
| - | | |
| 1,895 | | |
| (112 | ) |
Asset backed securities | |
| 5,643 | | |
| (14 | ) | |
| - | | |
| - | | |
| 5,643 | | |
| (14 | ) |
CRA
Mutual fund | |
| - | | |
| - | | |
| 1,411 | | |
| (89 | ) | |
| 1,411 | | |
| (89 | ) |
Total | |
$ | 62,006 | | |
$ | (2,919 | ) | |
$ | 6,356 | | |
$ | (273 | ) | |
$ | 68,362 | | |
$ | (3,192 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Investment
securities held-to-maturity: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S. Government agencies | |
$ | 9,416 | | |
$ | (568 | ) | |
$ | - | | |
$ | - | | |
$ | 9,416 | | |
$ | (568 | ) |
Municipals - nontaxable | |
| 820 | | |
| (48 | ) | |
| - | | |
| - | | |
| 820 | | |
| (48 | ) |
Municipals | |
| 415 | | |
| (11 | ) | |
| - | | |
| - | | |
| 415 | | |
| (11 | ) |
Total | |
$ | 10,651 | | |
$ | (627 | ) | |
$ | - | | |
$ | - | | |
$ | 10,651 | | |
$ | (627 | ) |
The Corporation evaluates securities for other than temporary
impairment (“OTTI”) on a quarterly basis and more frequently when economic or market conditions warrant such evaluation.
Consideration is given to various factors in determining whether the Corporation anticipates a recovery in fair value such as:
the length of time and extent to which the fair value has been less than cost, and the financial condition and underlying credit
quality of the issuer. When analyzing an issuer’s financial condition, the Corporation may consider whether the securities
are issued by the federal government or its agencies, the sector or industry trends affecting the issuer, and whether any recent
downgrades by bond rating agencies have occurred.
NOTE 3 – SECURITIES (continued)
U.S. Government agencies
The Corporation’s unrealized losses on U.S. Government
Agency obligations were caused by interest rate fluctuations. At September 30, 2014, one held-to-maturity security had an unrealized
loss of $171 thousand while four available-for-sale securities had unrealized losses of $652 thousand. The severity and duration
of these unrealized losses will fluctuate with interest rates in the economy. As the securities are obligations of government
agencies, it is the Corporation’s intent to hold these securities until a market price recovery or maturity, and it is more
likely than not that the Corporation will not be required to sell the securities before their anticipated recovery, the Corporation
does not consider these investments other than temporarily impaired.
Corporate bonds
The Corporation’s unrealized losses on corporate obligations
were caused by interest rate fluctuations. At September 30, 2014, three securities had unrealized losses of $58 thousand. Based
on the credit quality of the issuers, the Corporation’s intent to hold these securities until a market price recovery or
maturity, and the determination that it is more likely than not that the Corporation will not be required to sell these securities
before their anticipated recovery, the Corporation does not consider these investments other than temporarily impaired.
Mortgage-backed
The Corporation’s unrealized losses on mortgage backed
securities were caused by interest rate fluctuations. At September 30, 2014, twenty-six securities had unrealized losses of $842
thousand. As these securities are Ginnie Mae and government sponsored entity securities backed by the United States Government,
the Corporation’s intent to hold these securities until a market price recovery or maturity, and the determination that
it is more likely than not that the Corporation will not be required to sell these securities before their anticipated recoveries,
the Corporation does not consider these investments other than temporarily impaired.
Mutual fund
The Corporation’s unrealized loss on its mutual fund
investment was caused by interest rate fluctuations. At September 30, 2014, this one security had an unrealized loss of $72 thousand.
Based on the credit quality of the issuer, the Corporation’s intent to hold this security until a market price recovery,
and the determination that it is more likely than not that the Corporation will not be required to sell this security before its
anticipated recovery, the Corporation does not consider this investment other than temporarily impaired.
Asset backed securities
The Corporation’s unrealized losses on its asset backed
securities were caused by interest rate fluctuations. At September 30, 2014, six securities had unrealized losses of $190 thousand.
Based on the credit quality of the issuers, the Corporation’s intent to hold these securities until a market price recovery,
and the determination that it is more likely than not that the Corporation will not be required to sell the securities before
their anticipated recovery, the Corporation does not consider these investments other than temporarily impaired.
Municipal
The Corporation’s unrealized losses on its held-to-maturity
municipal investments were caused by interest rate fluctuations. At September 30, 2014, three securities had unrealized losses
of $21 thousand and there were not any available-for-sale securities with unrealized losses. Based on the credit quality of the
issuers, the Corporation’s intent to hold these securities until a market price recovery, and the determination that it
is more likely than not that the Corporation will not be required to sell these securities before their anticipated recovery,
the Corporation does not consider these investments other than temporarily impaired.
NOTE 3 – SECURITIES (continued)
Restricted Stock
The Corporation’s restricted stock consists of Federal
Home Loan Bank of Atlanta (“FHLB”) stock and FRB stock. The amortized costs of the restricted stock as of September
30, 2014 and December 31, 2013 are as follows:
| |
September 30, 2014 | | |
December 31, 2013 | |
| |
(In Thousands) | |
Restricted Stock: | |
| | | |
| | |
| |
| | | |
| | |
Federal Reserve Bank stock | |
$ | 999 | | |
$ | 999 | |
| |
| | | |
| | |
FHLB stock | |
| 7,287 | | |
| 7,560 | |
| |
$ | 8,286 | | |
$ | 8,559 | |
Securities Sold Under Agreements to Repurchase (Repurchase
Agreements)
The Corporation enters into agreements under which it sells
securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Corporation may
transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates
the Corporation to repurchase the assets. As a result, these repurchase agreements are accounted for as collateralized financing
agreements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase
the securities is reflected as a liability in the Corporation’s consolidated balance sheets, while the securities underlying
the repurchase agreements remain in the respective investment securities asset accounts. In other words, there is no offsetting
or netting of the investment securities assets with the repurchase agreement liabilities. In addition, as the Corporation does
not enter into reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements.
The right of setoff for a repurchase agreement resembles a
secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Corporation
be in default (e.g., fails to make an interest payment to the counterparty). The collateral is held by a third-party financial
institution in the Corporation’s custodial account. The Corporation has the right to sell or repledge the investment securities.
As of September 30, 2014 and December 31, 2013, the obligations outstanding under these repurchase agreements totaled $20.6 million
and $27.9 million, respectively, while the fair value of the securities pledged in connection with these repurchase agreements
was $26.0 million and $32.7 million at September 30, 2014 and December 31, 2013, respectively.
NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES
The following table presents the composition of the loans held
for investment portfolio at September 30, 2014 and December 31, 2013:
| |
Composition of Loan Portfolio | |
| |
| | |
| | |
| | |
| |
| |
September 30, 2014 | | |
December 31, 2013 | |
| |
Amount | | |
Percentage of Total | | |
Amount | | |
Percentage of Total | |
| |
(Dollars In Thousands) | |
Commercial real estate-owner occupied | |
$ | 195,104 | | |
| 26.83 | % | |
$ | 196,804 | | |
| 28.65 | % |
Commercial real estate-non owner occupied | |
| 115,488 | | |
| 15.88 | | |
| 90,676 | | |
| 13.20 | |
Residential real estate | |
| 191,658 | | |
| 26.36 | | |
| 173,639 | | |
| 25.27 | |
Commercial | |
| 186,715 | | |
| 25.68 | | |
| 182,220 | | |
| 26.52 | |
Real estate construction | |
| 31,463 | | |
| 4.33 | | |
| 38,842 | | |
| 5.65 | |
Consumer | |
| 6,684 | | |
| 0.92 | | |
| 4,874 | | |
| 0.71 | |
Total loans | |
$ | 727,112 | | |
| 100.00 | % | |
$ | 687,055 | | |
| 100.00 | % |
Less allowance for loan losses | |
| 13,244 | | |
| | | |
| 13,136 | | |
| | |
| |
$ | 713,868 | | |
| | | |
$ | 673,919 | | |
| | |
Unearned income and net deferred loan fees and costs totaled
$1.5 million at September 30, 2014 and December 31, 2013. Loans pledged to secure borrowings at the FHLB totaled $218.1 million
and $226.4 million at September 30, 2014 and December 31, 2013, respectively.
Allowance for Loan Losses
The allowance for loan losses totaled $13.2 million at September
30, 2014 compared to $13.1 million at year end December 31, 2013. The allowance for loan losses was equivalent to 1.82% and 1.91%
of total loans held for investment at September 30, 2014 and December 31, 2013,respectively. Adequacy of the allowance is assessed
and the allowance is increased by provisions for loan losses charged to expense no less than quarterly. Charge-offs are taken
when a loan is identified as uncollectible.
The methodology by which we systematically determine the amount
of our allowance is set forth by the Board of Directors in our Loan Policy and implemented by management. The results of the analysis
are documented, reviewed, and approved by the Board of Directors no less than quarterly.
The level of the allowance for loan losses is determined by
management through an ongoing, detailed analysis of historical loss rates and risk characteristics. During each quarter, management
evaluates the collectability of all loans in the portfolio and ensures an accurate risk rating is assigned to each loan. The risk
rating scale and definitions commonly adopted by the Federal Banking Agencies is contained within the framework prescribed by
the Bank’s Loan Policy. Any loan that is deemed to have potential or well defined weaknesses that may jeopardize collection
in full is then analyzed to ascertain its level of weakness. If appropriate, the loan may be charged-off or a specific reserve
may be assigned if the loan is deemed to be impaired.
During the risk rating verification process, each loan identified
as inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged is considered
impaired and is placed on non-accrual status. On these loans, management analyzes the potential impairment of the individual loan
and may set aside a specific reserve. Any amounts deemed uncollectible during that analysis are charged-off.
NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES
(continued)
For the remaining loans in each segment, the Bank calculates
the probability of loss as a group using the risk rating for each of the following loan types: Commercial Real Estate - Owner
Occupied, Commercial Real Estate - Non-Owner Occupied, Residential Real Estate, Commercial, Real Estate Construction, and Consumer.
Management calculates the historical loss rate in each group by risk rating using a period of at least six years. This historical
loss rate may then be adjusted based on management’s assessment of internal and external environmental factors. While management
may consider other factors, the analysis generally includes factors such as unemployment, office vacancy rates, and any concentrations
that exist within the portfolio. This adjustment is meant to account for changes between the historical economic environment and
current conditions and for changes in the ongoing management of the portfolio which affects the loans’ potential losses.
Once complete, management compares the condition of the portfolio
using several different characteristics, as well as its experience, to the experience of other banks in its peer group in order
to determine if it is directionally consistent with others’ experience in our area and line of business. Based on that analysis,
management aggregates the probabilities of loss of the remaining portfolio based on the specific and general allowances and may
provide additional amounts to the allowance for loan losses as needed. Since this process involves estimates, the allowance for
loan losses may also contain an amount that is non-material which is not allocated to a specific loan or to a group of loans but
is deemed necessary to absorb additional losses in the portfolio.
Management and the Board of Directors subject the reserve adequacy
and methodology to a review on a regular basis by internal auditors, external auditors and bank regulators, and such reviews have
not resulted in any material adjustment to the allowance.
NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES
(continued)
The following tables provide detailed information about the
allowance for loan losses as of and for the periods indicated.
| |
Allowance for Loan Losses | |
| |
| |
| |
Commercial
real estate – owner occupied | | |
Commercial
real estate - non-owner occupied | | |
Residential
real estate | | |
Commercial | | |
Real
estate construction | | |
Consumer | | |
Total | |
| |
(In Thousands) | |
Three months ended September 30, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Allowance for credit losses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Beginning Balance | |
$ | 3,163 | | |
$ | 1,896 | | |
$ | 3,090 | | |
$ | 4,299 | | |
$ | 670 | | |
$ | 93 | | |
| 13,211 | |
Charge-offs | |
| - | | |
| - | | |
| - | | |
| (6 | ) | |
| - | | |
| - | | |
| (6 | ) |
Recoveries | |
| - | | |
| - | | |
| 18 | | |
| 21 | | |
| - | | |
| - | | |
| 39 | |
Provisions | |
| 391 | | |
| 207 | | |
| 383 | | |
| (913 | ) | |
| (97 | ) | |
| 29 | | |
| - | |
Ending Balance | |
$ | 3,554 | | |
$ | 2,103 | | |
$ | 3,491 | | |
$ | 3,401 | | |
$ | 573 | | |
$ | 122 | | |
$ | 13,244 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Nine months ended September 30, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Allowance for credit losses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Beginning Balance | |
$ | 3,763 | | |
$ | 1,734 | | |
$ | 3,320 | | |
$ | 3,484 | | |
$ | 743 | | |
$ | 92 | | |
| 13,136 | |
Charge-offs | |
| - | | |
| - | | |
| (21 | ) | |
| (22 | ) | |
| - | | |
| - | | |
| (43 | ) |
Recoveries | |
| - | | |
| - | | |
| 79 | | |
| 72 | | |
| - | | |
| - | | |
| 151 | |
Provisions | |
| (209 | ) | |
| 369 | | |
| 113 | | |
| (133 | ) | |
| (170 | ) | |
| 30 | | |
| - | |
Ending Balance | |
$ | 3,554 | | |
$ | 2,103 | | |
$ | 3,491 | | |
$ | 3,401 | | |
$ | 573 | | |
$ | 122 | | |
$ | 13,244 | |
| |
Commercial
real estate – owner occupied | | |
Commercial
real estate - non-owner occupied | | |
Residential
real estate | | |
Commercial | | |
Real
estate construction | | |
Consumer | | |
Total | |
| |
(In Thousands) | |
Three months ended September 30, 2013 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Allowance for credit losses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Beginning Balance | |
$ | 4,074 | | |
$ | 1,824 | | |
$ | 3,220 | | |
$ | 3,048 | | |
$ | 790 | | |
$ | 51 | | |
$ | 13,007 | |
Charge-offs | |
| - | | |
| - | | |
| (46 | ) | |
| (430 | ) | |
| - | | |
| - | | |
| (476 | ) |
Recoveries | |
| - | | |
| 23 | | |
| 17 | | |
| 4 | | |
| - | | |
| - | | |
| 44 | |
Provisions | |
| (256 | ) | |
| 43 | | |
| 123 | | |
| 562 | | |
| (69 | ) | |
| 47 | | |
| 450 | |
Ending Balance | |
$ | 3,818 | | |
$ | 1,890 | | |
$ | 3,314 | | |
$ | 3,184 | | |
$ | 721 | | |
$ | 98 | | |
$ | 13,025 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Nine months ended September 30, 2013 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Allowance for credit losses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Beginning Balance | |
$ | 3,701 | | |
$ | 2,173 | | |
$ | 2,924 | | |
$ | 3,028 | | |
$ | 610 | | |
$ | 64 | | |
$ | 12,500 | |
Charge-offs | |
| - | | |
| - | | |
| (46 | ) | |
| (430 | ) | |
| | | |
| | | |
| (476 | ) |
Recoveries | |
| - | | |
| 194 | | |
| 95 | | |
| 24 | | |
| - | | |
| 13 | | |
| 326 | |
Provisions | |
| 117 | | |
| (477 | ) | |
| 341 | | |
| 562 | | |
| 111 | | |
| 21 | | |
| 675 | |
Ending Balance | |
$ | 3,818 | | |
$ | 1,890 | | |
$ | 3,314 | | |
$ | 3,184 | | |
$ | 721 | | |
$ | 98 | | |
$ | 13,025 | |
| |
Recorded Investment in Loans | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
September 30, 2014 | |
Commercial
real estate – owner occupied | | |
Commercial
real estate - non-owner occupied | | |
Residential
real estate | | |
Commercial | | |
Real
estate construction | | |
Consumer | | |
Total | |
| |
(In Thousands) | |
Allowance | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ending balance: | |
$ | 3,554 | | |
$ | 2,103 | | |
$ | 3,491 | | |
$ | 3,401 | | |
$ | 573 | | |
$ | 122 | | |
$ | 13,244 | |
Ending balance: individually evaluated for
impairment | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 117 | | |
$ | - | | |
$ | - | | |
$ | 117 | |
Ending balance: collectively evaluated for
impairment | |
$ | 3,554 | | |
$ | 2,103 | | |
$ | 3,491 | | |
$ | 3,284 | | |
$ | 573 | | |
$ | 122 | | |
$ | 13,127 | |
Ending balance: loans acquired with deteriorated
credit quality | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ending balance | |
$ | 195,104 | | |
$ | 115,488 | | |
$ | 191,658 | | |
$ | 186,715 | | |
$ | 31,463 | | |
$ | 6,684 | | |
$ | 727,112 | |
Ending balance: individually evaluated for
impairment | |
$ | 358 | | |
$ | - | | |
$ | 321 | | |
$ | 1,729 | | |
$ | - | | |
$ | - | | |
$ | 2,408 | |
Ending balance: collectively evaluated for
impairment | |
$ | 194,746 | | |
$ | 115,488 | | |
$ | 191,337 | | |
$ | 184,986 | | |
$ | 31,463 | | |
$ | 6,684 | | |
$ | 724,704 | |
Ending balance: loans acquired with deteriorated
credit quality | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
December 31, 2013 | |
Commercial
real estate – owner occupied | | |
Commercial
real estate - non-owner occupied | | |
Residential
real estate | | |
Commercial | | |
Real
estate construction | | |
Consumer | | |
Total | |
| |
(In Thousands) | |
Allowance | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ending balance: | |
$ | 3,763 | | |
$ | 1,734 | | |
$ | 3,320 | | |
$ | 3,484 | | |
$ | 743 | | |
$ | 92 | | |
$ | 13,136 | |
Ending balance: individually evaluated for
impairment | |
$ | 51 | | |
$ | - | | |
$ | 88 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 139 | |
Ending balance: collectively evaluated for
impairment | |
$ | 3,712 | | |
$ | 1,734 | | |
$ | 3,232 | | |
$ | 3,484 | | |
$ | 743 | | |
$ | 92 | | |
$ | 12,997 | |
Ending balance: loans acquired with deteriorated
credit quality | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ending balance: | |
$ | 196,804 | | |
$ | 90,676 | | |
$ | 173,639 | | |
$ | 182,220 | | |
$ | 38,842 | | |
$ | 4,874 | | |
$ | 687,055 | |
Ending balance: individually evaluated for
impairment | |
$ | 363 | | |
$ | - | | |
$ | 871 | | |
$ | 1,724 | | |
$ | - | | |
$ | - | | |
$ | 2,958 | |
Ending balance: collectively evaluated for
impairment | |
$ | 196,441 | | |
$ | 90,676 | | |
$ | 172,768 | | |
$ | 180,496 | | |
$ | 38,842 | | |
$ | 4,874 | | |
$ | 684,097 | |
Ending balance: loans acquired with deteriorated
credit quality | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES
(continued)
Identifying and Classifying Portfolio Risks by Risk Rating
At origination, loans are categorized into risk categories
based upon original underwriting. Subsequent to origination, management evaluates the collectability of all loans in the portfolio
and assigns a proprietary risk rating. Ratings range from the highest to lowest quality based on factors including measurements
of ability to pay, collateral type and value, borrower stability, management experience, and credit enhancements. These ratings
are consistent with the bank regulatory rating system.
A loan may have portions of its balance in one rating and other
portions in a different rating. The Bank may use these “split ratings” when factors cause loan loss risk to exist
for part but not all of the principal balance. Split ratings may also be used where cash collateral or a government agency has
provided a guaranty that partially covers a loan.
For clarity of presentation, the Corporation’s loan portfolio
is profiled below in accordance with the risk rating framework that has been commonly adopted by the federal banking agencies.
The definitions of the various risk rating categories are as follows:
Pass - The condition of the borrower and the performance of
the loan is satisfactory or better.
Special mention - A special mention asset has one or more potential
weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration
of the repayment prospects for the asset or in the institution’s credit position at some future date.
Substandard - A substandard asset is inadequately protected
by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must
have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct
possibility that the bank will sustain some loss if the deficiencies are not corrected.
Doubtful - An asset classified doubtful has all the weaknesses
inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full,
on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loss - Assets classified loss are considered uncollectible
and their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no
recovery or salvage value, and a partial recovery may be effected in the future.
The Bank did not have any loans classified as loss at September
30, 2014 or December 31, 2013. It is the Bank’s policy to charge-off any loan once the risk rating is classified as loss.
NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES
(continued)
The profile of the loan portfolio, as indicated by risk rating,
as of September 30, 2014 and December 31, 2013 is shown below.
| |
For the
Period Ended, September 30, 2014 | |
| |
(In Thousands) | |
Credit Risk
Profile by Risk Rating | |
Pass | | |
Special
Mention | | |
Substandard | | |
Doubtful | | |
Loss | | |
Unearned
Income | | |
Total
Loans | |
Commercial real estate - owner
occupied | |
$ | 190,149 | | |
$ | 1,701 | | |
$ | 3,681 | | |
$ | - | | |
$ | - | | |
$ | (426 | ) | |
$ | 195,104 | |
Commercial real estate - non-owner occupied | |
| 98,903 | | |
| 4,825 | | |
| 12,044 | | |
| - | | |
| - | | |
| (285 | ) | |
| 115,488 | |
Residential Real Estate | |
| 189,379 | | |
| 1,558 | | |
| 960 | | |
| - | | |
| - | | |
| (239 | ) | |
| 191,658 | |
Commercial | |
| 167,642 | | |
| 13,494 | | |
| 5,949 | | |
| - | | |
| - | | |
| (370 | ) | |
| 186,715 | |
Real Estate Construction | |
| 31,594 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (130 | ) | |
| 31,463 | |
Consumer | |
| 6,684 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 6,684 | |
Total | |
$ | 684,350 | | |
$ | 21,577 | | |
$ | 22,634 | | |
$ | - | | |
$ | - | | |
$ | (1,450 | ) | |
$ | 727,112 | |
| |
For the
Period Ended, December 31, 2013 | |
| |
(In Thousands) | |
Credit Risk
Profile by Risk Rating | |
Pass | | |
Special
Mention | | |
Substandard | | |
Doubtful | | |
Loss | | |
Unearned
Income | | |
Total
Loans | |
Commercial real estate - owner
occupied | |
$ | 180,637 | | |
$ | 5,125 | | |
$ | 11,476 | | |
$ | - | | |
$ | - | | |
$ | (434 | ) | |
$ | 196,804 | |
Commercial real estate - non-owner occupied | |
| 83,723 | | |
| 1,919 | | |
| 5,302 | | |
| - | | |
| - | | |
| (268 | ) | |
| 90,676 | |
Residential Real Estate | |
| 168,493 | | |
| 3,530 | | |
| 1,834 | | |
| - | | |
| - | | |
| (218 | ) | |
| 173,639 | |
Commercial | |
| 171,353 | | |
| 4,034 | | |
| 7,216 | | |
| - | | |
| - | | |
| (383 | ) | |
| 182,220 | |
Real Estate Construction | |
| 39,013 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (171 | ) | |
| 38,842 | |
Consumer | |
| 4,874 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| | | |
| 4,874 | |
Total | |
$ | 648,093 | | |
$ | 14,608 | | |
$ | 25,828 | | |
$ | - | | |
$ | - | | |
$ | (1,474 | ) | |
$ | 687,055 | |
Loans listed as non-performing are also placed on non-accrual
status. The accrual of interest is discontinued at the time a loan is 90 days delinquent or when the credit deteriorates and there
is doubt that the credit will be paid as agreed, unless the credit is well-secured and in process of collection. Once the loan
is on non-accrual status, all accrued but unpaid interest is also charged-off, and all payments are used to reduce the principal
balance. Once the principal balance is repaid in full, additional payments are taken into income. A loan may be returned to accrual
status if the borrower shows renewed willingness and ability to repay under the term of the loan agreement. The risk profile based
upon payment activity is shown below.
| |
September 30, 2014 | |
| |
(In Thousands) | |
Credit Risk Profile Based on Payment Activity | |
Performing | | |
Non-Performing | | |
Total Loans | |
Commercial real estate - owner occupied | |
$ | 195,104 | | |
$ | - | | |
$ | 195,104 | |
Commercial real estate - non-owner occupied | |
| 115,488 | | |
| - | | |
| 115,488 | |
Residential Real Estate | |
| 191,529 | | |
| 129 | | |
| 191,658 | |
Commercial | |
| 185,018 | | |
| 1,697 | | |
| 186,715 | |
Real Estate Construction | |
| 31,463 | | |
| - | | |
| 31,463 | |
Consumer | |
| 6,684 | | |
| - | | |
| 6,684 | |
Total | |
$ | 725,286 | | |
$ | 1,826 | | |
$ | 727,112 | |
| |
December 31, 2013 | |
| |
(In Thousands) | |
Credit Risk Profile Based on Payment Activity | |
Performing | | |
Non-Performing | | |
Total Loans | |
Commercial real estate - owner occupied | |
$ | 196,804 | | |
$ | - | | |
$ | 196,804 | |
Commercial real estate - non-owner occupied | |
| 90,676 | | |
| - | | |
| 90,676 | |
Residential Real Estate | |
| 172,768 | | |
| 871 | | |
| 173,639 | |
Commercial | |
| 180,556 | | |
| 1,664 | | |
| 182,220 | |
Real Estate Construction | |
| 38,842 | | |
| - | | |
| 38,842 | |
Consumer | |
| 4,874 | | |
| - | | |
| 4,874 | |
Total | |
$ | 684,520 | | |
$ | 2,535 | | |
$ | 687,055 | |
NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES
(continued)
Loans are considered past due if a contractual payment is not
made by the calendar day after the payment is due. However, for reporting purposes loans past due 1 to 29 days are excluded from
loans past due and are included in the total for current loans in the table below. The delinquency status of the loans in the
portfolio is shown below as of September 30, 2014 and December 31, 2013. Loans that were on non-accrual status are not included
in any past due amounts.
| |
Age Analysis of Past Due Loans | |
| |
September 30, 2014 | |
| |
30-59
Days Past Due | | |
60-89
Days Past Due | | |
Greater
than 90 Days | | |
Total
Past Due | | |
Non-accrual
Loans | | |
Current
Loans | | |
Total
Loans | |
| |
(In Thousands) | |
Commercial real estate - owner occupied | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 195,104 | | |
$ | 195,104 | |
Commercial real estate - non-owner occupied | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 115,488 | | |
| 115,488 | |
Residential real estate | |
| - | | |
| - | | |
| - | | |
| - | | |
| 129 | | |
| 191,529 | | |
| 191,658 | |
Commercial | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1,697 | | |
| 185,018 | | |
| 186,715 | |
Real estate construction | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 31,463 | | |
| 31,463 | |
Consumer | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 6,684 | | |
| 6,684 | |
Total | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 1,826 | | |
$ | 725,286 | | |
$ | 727,112 | |
| |
December 31, 2013 | |
| |
30-59
Days Past Due | | |
60-89
Days Past Due | | |
Greater
than 90 Days | | |
Total
Past Due | | |
Non-accrual
Loans | | |
Current
Loans | | |
Total
Loans | |
| |
(In Thousands) | |
Commercial real estate - owner occupied | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 196,804 | | |
$ | 196,804 | |
Commercial real estate - non-owner occupied | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 90,676 | | |
| 90,676 | |
Residential real estate | |
| - | | |
| - | | |
| - | | |
| - | | |
| 871 | | |
| 172,768 | | |
| 173,639 | |
Commercial | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1,664 | | |
| 180,556 | | |
| 182,220 | |
Real estate construction | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 38,842 | | |
| 38,842 | |
Consumer | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 4,874 | | |
| 4,874 | |
Total | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 2,535 | | |
$ | 684,520 | | |
$ | 687,055 | |
Troubled Debt Restructurings
A troubled debt restructuring ("TDR") is a formal
restructure of a loan when the Bank, for economic or legal reasons related to the borrower's financial difficulties, grants a
concession to a borrower. The Bank classifies these transactions as a TDR if the transaction meets the following conditions: an
existing credit agreement must be formally renewed, extended and/or modified; the borrower must be experiencing financial difficulty;
and the Bank has granted a concession that it would not otherwise consider.
Once identified as a TDR, a loan is considered to be impaired,
and an impairment analysis is performed for the loan individually, rather than under a general loss allowance based on the loan
type and risk rating. Any resulting shortfall is charged-off. This method is used consistently for all segments of the portfolio.
Normally, loans identified as TDRs would be placed on non-accrual
status and considered non-performing until sufficient history of timely collection or payment has occurred that allows them to
return to performing status, generally six months.
No loans were modified in connection with a troubled debt restructuring
during the nine months ended September 30, 2014.
One residential real estate loan totaling $206 thousand was
modified in connection with a troubled debt restructuring during the nine month period ended September 30, 2013. The modification
granted the borrower reduced payments for a period of one year. There were no material financial effects as a direct result of
this modification. No loans were modified in connection with a troubled debt restructuring during the three month period ended
September 30, 2013.
NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES
(continued)
Impaired Loans
A loan is classified as impaired when it is deemed probable
by management’s analysis that the Bank will be unable to collect all amounts due according to the contractual terms of the
loan agreement, or the recorded investment in the impaired loan is greater than the present value of expected future cash flows,
discounted at the loan's effective interest rate. In the case of an impaired loan, management conducts an analysis which identifies
if a quantifiable potential loss exists, and takes the necessary steps to record that loss when it has been identified as uncollectible.
As the ultimate collectability of the total principal of an
impaired loan is in doubt, the loan is placed on nonaccrual status with all payment applied to principal under the cost-recovery
method. As such, the Bank did not recognize any interest income on its impaired loans for the three and nine month periods ended
September 30, 2014 and 2013.
The table below shows the results of management’s analysis
of impaired loans as of September 30, 2014 and December 31, 2013.
| |
Impaired Loans | |
| |
September 30, 2014 | | |
December 31, 2013 | |
| |
Recorded
investment | | |
Unpaid principal
balance | | |
Related
allowance | | |
Recorded
investment | | |
Unpaid principal
balance | | |
Related
allowance | |
| |
(In Thousands) | |
With no specific related
allowance recorded: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial real estate - owner occupied | |
$ | 358 | | |
$ | 358 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
Commercial real estate - non-owner occupied | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Residential real estate | |
| 321 | | |
| 363 | | |
| - | | |
| 332 | | |
| 382 | | |
| - | |
Commercial | |
| 1,612 | | |
| 2,116 | | |
| - | | |
| 1,724 | | |
| 2,175 | | |
| - | |
Real estate construction | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Consumer | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
With a specific related allowance recorded: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial real estate - owner occupied | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 363 | | |
$ | 363 | | |
$ | 51 | |
Commercial real estate - non-owner occupied | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Residential real estate | |
| - | | |
| - | | |
| - | | |
| 539 | | |
| 662 | | |
| 88 | |
Commercial | |
| 117 | | |
| 120 | | |
| 117 | | |
| - | | |
| - | | |
| - | |
Real estate construction | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Consumer | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Total: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial real estate - owner occupied | |
$ | 358 | | |
$ | 358 | | |
$ | - | | |
$ | 363 | | |
$ | 363 | | |
$ | 51 | |
Commercial real estate - non-owner occupied | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Residential real estate | |
| 321 | | |
| 363 | | |
| - | | |
| 871 | | |
| 1,044 | | |
| 88 | |
Commercial | |
| 1,729 | | |
| 2,236 | | |
| 117 | | |
| 1,724 | | |
| 2,175 | | |
| - | |
Real estate construction | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Consumer | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| |
$ | 2,408 | | |
$ | 2,957 | | |
$ | 117 | | |
$ | 2,958 | | |
$ | 3,582 | | |
$ | 139 | |
The table below shows the average recorded investment in impaired
loans for the periods presented.
| |
Three
Months Ended | | |
Nine
Months Ended | |
| |
September
30, 2014 | | |
September
30, 2013 | | |
September
30, 2014 | | |
September
30, 2013 | |
| |
Average
Recorded
Investment | | |
Average
Recorded
Investment | | |
Average
Recorded
Investment | | |
Average
Recorded
Investment | |
| |
(In Thousands) | | |
(In Thousands) | |
Commercial real estate - owner occupied | |
$ | 359 | | |
$ | 365 | | |
$ | 360 | | |
$ | 367 | |
Commercial real estate - non-owner occupied | |
| - | | |
| - | | |
| - | | |
| - | |
Residential real estate | |
| 364 | | |
| 1,399 | | |
| 368 | | |
| 1,406 | |
Commercial | |
| 2,033 | | |
| 2,070 | | |
| 1,979 | | |
| 2,129 | |
Real estate construction | |
| - | | |
| - | | |
| - | | |
| - | |
Consumer | |
| - | | |
| - | | |
| - | | |
| - | |
| |
$ | 2,756 | | |
$ | 3,834 | | |
$ | 2,707 | | |
$ | 3,902 | |
NOTE 5 – SEGMENT REPORTING
The Corporation has three reportable segments: traditional
commercial banking, mortgage banking, and wealth management. Revenues from commercial banking operations consist primarily of
interest earned on loans and securities and fees from deposit services. Mortgage banking operating revenues consist principally
of interest earned on mortgage loans held for sale, gains on sales of loans in the secondary mortgage market, and loan origination
fee income. Wealth management operating revenues consist principally of advisory fees related to its wealth management services.
The commercial banking segment provides the mortgage banking
segment with the short-term funds needed to originate mortgage loans through a warehouse line of credit and charges the mortgage
banking segment interest based on the prime rate. These transactions are eliminated in the consolidation process.
The “Other” column in the following table includes
the operations of the Corporation and Access Real Estate. The primary source of income for the Corporation is derived from dividends
from the Bank and its primary expense relates to costs incurred by the Corporation in connection with its annual audits and directors
fees. The primary source of income for Access Real Estate is derived from rents received from the Bank and other tenants.
The following table presents segment information as of
and for the three months ended September 30, 2014 and 2013:
| |
Commercial | | |
Mortgage | | |
Wealth | | |
| | |
| | |
Consolidated | |
September
30, 2014 | |
Banking | | |
Banking | | |
Management | | |
Other | | |
Eliminations | | |
Totals | |
| |
(In Thousands) | |
Revenues: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest
income | |
$ | 9,702 | | |
$ | 410 | | |
$ | - | | |
$ | 3 | | |
$ | (200 | ) | |
$ | 9,915 | |
Gain
on sale of loans | |
| - | | |
| 4,799 | | |
| - | | |
| - | | |
| - | | |
| 4,799 | |
Other
revenues | |
| 753 | | |
| (873 | ) | |
| 536 | | |
| 299 | | |
| (301 | ) | |
| 414 | |
Total
revenues | |
| 10,455 | | |
| 4,336 | | |
| 536 | | |
| 302 | | |
| (501 | ) | |
| 15,128 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Expenses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest
expense | |
| 829 | | |
| 123 | | |
| 6 | | |
| 73 | | |
| (200 | ) | |
| 831 | |
Salaries
and employee benefits | |
| 3,002 | | |
| 2,443 | | |
| 415 | | |
| - | | |
| - | | |
| 5,860 | |
Other
expenses | |
| 1,558 | | |
| (1,962 | ) | |
| 223 | | |
| 1,305 | | |
| (301 | ) | |
| 823 | |
Total
operating expenses | |
| 5,389 | | |
| 604 | | |
| 644 | | |
| 1,378 | | |
| (501 | ) | |
| 7,514 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income
(loss) before income taxes | |
$ | 5,066 | | |
$ | 3,732 | | |
$ | (108 | ) | |
$ | (1,076 | ) | |
$ | - | | |
$ | 7,614 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total
assets | |
$ | 971,294 | | |
$ | 44,179 | | |
$ | 1,671 | | |
$ | 15,225 | | |
$ | (17,276 | ) | |
$ | 1,015,093 | |
| |
Commercial | | |
Mortgage | | |
Wealth | | |
| | |
| | |
Consolidated | |
September
30, 2013 | |
Banking | | |
Banking | | |
Management | | |
Other | | |
Eliminations | | |
Totals | |
| |
(In Thousands) | |
Revenues: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest
income | |
$ | 8,630 | | |
$ | 264 | | |
$ | - | | |
$ | 2 | | |
$ | (155 | ) | |
$ | 8,741 | |
Gain
on sale of loans | |
| 926 | | |
| 2,253 | | |
| - | | |
| - | | |
| - | | |
| 3,179 | |
Other
revenues | |
| 546 | | |
| 1,041 | | |
| 282 | | |
| 396 | | |
| (365 | ) | |
| 1,900 | |
Total
revenues | |
| 10,102 | | |
| 3,558 | | |
| 282 | | |
| 398 | | |
| (520 | ) | |
| 13,820 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Expenses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest
expense | |
| 833 | | |
| 54 | | |
| - | | |
| 98 | | |
| (155 | ) | |
| 830 | |
Salaries
and employee benefits | |
| 2,774 | | |
| 2,622 | | |
| 276 | | |
| - | | |
| - | | |
| 5,672 | |
Other
expenses | |
| 2,127 | | |
| 932 | | |
| 172 | | |
| 549 | | |
| (365 | ) | |
| 3,415 | |
Total
operating expenses | |
| 5,734 | | |
| 3,608 | | |
| 448 | | |
| 647 | | |
| (520 | ) | |
| 9,917 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income
(loss) before income taxes | |
$ | 4,368 | | |
$ | (50 | ) | |
$ | (166 | ) | |
$ | (249 | ) | |
$ | - | | |
$ | 3,903 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total
assets | |
$ | 819,143 | | |
$ | 28,325 | | |
$ | 1,108 | | |
$ | 13,329 | | |
$ | (15,341 | ) | |
$ | 846,564 | |
In the third quarter 2014, the mortgage division
recorded a $3.25 million release in its reserves for potential losses on mortgage loans sold, which is included in other
expenses. Refer to Note 10 for further information regarding the reserve release.
NOTE 5 – SEGMENT REPORTING (continued)
The following table presents segment information for the nine
months ended September 30, 2014 and 2013:
| |
Commercial | | |
Mortgage | | |
Wealth | | |
| | |
| | |
Consolidated | |
September
30, 2014 | |
Banking | | |
Banking | | |
Management | | |
Other | | |
Eliminations | | |
Totals | |
| |
(In Thousands) | |
Revenues: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest
income | |
$ | 27,891 | | |
$ | 909 | | |
$ | - | | |
$ | 9 | | |
$ | (447 | ) | |
$ | 28,362 | |
Gain
on sale of loans | |
| - | | |
| 10,314 | | |
| - | | |
| - | | |
| - | | |
| 10,314 | |
Other
revenues | |
| 1,855 | | |
| 9 | | |
| 1,584 | | |
| 917 | | |
| (894 | ) | |
| 3,471 | |
Total
revenues | |
| 29,746 | | |
| 11,232 | | |
| 1,584 | | |
| 926 | | |
| (1,341 | ) | |
| 42,147 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Expenses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest
expense | |
| 2,467 | | |
| 179 | | |
| 16 | | |
| 259 | | |
| (447 | ) | |
| 2,474 | |
Salaries
and employee benefits | |
| 8,737 | | |
| 6,827 | | |
| 1,135 | | |
| - | | |
| - | | |
| 16,699 | |
Other
expenses | |
| 4,591 | | |
| (92 | ) | |
| 697 | | |
| 2,557 | | |
| (894 | ) | |
| 6,859 | |
Total
operating expenses | |
| 15,795 | | |
| 6,914 | | |
| 1,848 | | |
| 2,816 | | |
| (1,341 | ) | |
| 26,032 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income
(loss) before income taxes | |
$ | 13,951 | | |
$ | 4,318 | | |
$ | (264 | ) | |
$ | (1,890 | ) | |
$ | - | | |
$ | 16,115 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total
assets | |
$ | 971,294 | | |
$ | 44,179 | | |
$ | 1,671 | | |
$ | 15,225 | | |
$ | (17,276 | ) | |
$ | 1,015,093 | |
| |
Commercial | | |
Mortgage | | |
Wealth | | |
| | |
| | |
Consolidated | |
September
30, 2013 | |
Banking | | |
Banking | | |
Management | | |
Other | | |
Eliminations | | |
Totals | |
| |
(In Thousands) | |
Revenues: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest
income | |
$ | 26,528 | | |
$ | 1,308 | | |
$ | - | | |
$ | 9 | | |
$ | (862 | ) | |
$ | 26,983 | |
Gain
on sale of loans | |
| 926 | | |
| 17,254 | | |
| - | | |
| - | | |
| - | | |
| 18,180 | |
Other
revenues | |
| 1,931 | | |
| 3,199 | | |
| 737 | | |
| 1,087 | | |
| (1,188 | ) | |
| 5,766 | |
Total
revenues | |
| 29,385 | | |
| 21,761 | | |
| 737 | | |
| 1,096 | | |
| (2,050 | ) | |
| 50,929 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Expenses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest
expense | |
| 2,836 | | |
| 556 | | |
| - | | |
| 401 | | |
| (862 | ) | |
| 2,931 | |
Salaries
and employee benefits | |
| 8,552 | | |
| 11,220 | | |
| 768 | | |
| - | | |
| - | | |
| 20,540 | |
Other
expenses | |
| 5,604 | | |
| 5,340 | | |
| 532 | | |
| 1,672 | | |
| (1,188 | ) | |
| 11,960 | |
Total
operating expenses | |
| 16,992 | | |
| 17,116 | | |
| 1,300 | | |
| 2,073 | | |
| (2,050 | ) | |
| 35,431 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income
(loss) before income taxes | |
$ | 12,393 | | |
$ | 4,645 | | |
$ | (563 | ) | |
$ | (977 | ) | |
$ | - | | |
$ | 15,498 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total
assets | |
$ | 819,143 | | |
$ | 28,325 | | |
$ | 1,108 | | |
$ | 13,329 | | |
$ | (15,341 | ) | |
$ | 846,564 | |
NOTE 6 – EARNINGS PER SHARE
The following table shows the calculation of both basic and
diluted earnings per share (“EPS”) for the three and nine months ended September 30, 2014 and 2013, respectively.
The numerator of both the basic and diluted EPS is equivalent to net income. The weighted average number of shares outstanding
used as the denominator for diluted EPS is increased over the denominator used for basic EPS by the effect of potentially dilutive
common stock options utilizing the treasury stock method.
| |
Three Months | | |
Three Months | |
| |
Ended | | |
Ended | |
| |
September 30, 2014 | | |
September 30, 2013 | |
| |
(In Thousands, Except for Share and Per Share Data) | |
| |
| | |
| |
BASIC EARNINGS PER SHARE: | |
| | | |
| | |
Net income | |
$ | 4,932 | | |
$ | 2,805 | |
Weighted average shares outstanding | |
| 10,440,986 | | |
| 10,306,865 | |
| |
| | | |
| | |
Basic earnings per share | |
$ | 0.47 | | |
$ | 0.27 | |
| |
| | | |
| | |
DILUTED EARNINGS PER SHARE: | |
| | | |
| | |
Net income | |
$ | 4,932 | | |
$ | 2,805 | |
Weighted average shares outstanding | |
| 10,440,986 | | |
| 10,306,865 | |
Dilutive stock options | |
| 35,064 | | |
| 82,199 | |
Weighted average diluted shares outstanding | |
| 10,476,050 | | |
| 10,389,064 | |
| |
| | | |
| | |
Diluted earnings per share | |
$ | 0.47 | | |
$ | 0.27 | |
| |
Nine Months | | |
Nine Months | |
| |
Ended | | |
Ended | |
| |
September 30, 2014 | | |
September 30, 2013 | |
| |
(In Thousands, Except for Share and Per Share Data) | |
| |
| | |
| |
BASIC EARNINGS PER SHARE: | |
| | | |
| | |
Net income | |
$ | 10,410 | | |
$ | 10,013 | |
Weighted average shares outstanding | |
| 10,414,384 | | |
| 10,312,017 | |
| |
| | | |
| | |
Basic earnings per share | |
$ | 0.99 | | |
$ | 0.97 | |
| |
| | | |
| | |
DILUTED EARNINGS PER SHARE: | |
| | | |
| | |
Net income | |
$ | 10,410 | | |
$ | 10,013 | |
Weighted average shares outstanding | |
| 10,414,384 | | |
| 10,312,017 | |
Dilutive stock options | |
| 44,899 | | |
| 90,161 | |
Weighted average diluted shares outstanding | |
| 10,459,283 | | |
| 10,402,178 | |
| |
| | | |
| | |
Diluted earnings per share | |
$ | 0.99 | | |
$ | 0.96 | |
NOTE 7 - DERIVATIVES
As part of its mortgage banking activities, the Bank enters
into interest rate lock commitments, which are commitments to originate loans where the interest rate on the loan is determined
prior to funding and the customers have locked into that interest rate. The Bank then locks in the loan and interest rate with
an investor and commits to deliver the loan if settlement occurs (“best efforts”) or commits to deliver the locked
loan in a binding (“mandatory”) delivery program with an investor. Certain loans under interest rate lock commitments
are covered under forward sales contracts of mortgage backed securities (“MBS”). Forward sales contracts of MBS are
recorded at fair value with changes in fair value recorded in noninterest income. Interest rate lock commitments and commitments
to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts
contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. The Bank determines
the fair value of interest rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which
is impacted by current interest rates, taking into consideration the probability that the interest rate lock commitments will
close or will be funded.
Certain additional risks arise from these forward delivery
contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. The Bank does not expect
any counterparty to any MBS to fail to meet its obligation. Additional risks inherent in mandatory delivery programs include the
risk that, if the Bank does not close the loans subject to interest rate risk lock commitments, it will still be obligated to
deliver MBS to the counterparty under the forward sales agreement. Should this be required, the Bank could incur significant costs
in acquiring replacement loans or MBS and such costs could have an adverse effect on mortgage banking operations.
Since the Bank’s derivative instruments are not designated
as hedging instruments, the fair value of the derivatives are recorded as a freestanding asset or liability with the change in
value being recognized in current earnings during the period of change. The Bank has not elected to apply hedge accounting to
its derivative instruments as provided in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 815, Derivatives and Hedging.
At September 30, 2014 and December 31, 2013, the Bank had derivative
financial instruments with a notional value of $49.0 million and $16.0 million, respectively, related to its forward contracts.
Derivative financial instruments related to over the counter written options totaled $38.3 million and $22.4 million at September
30, 2014 and December 31, 2013, respectively. The net fair value of these derivative instruments at September 30, 2014 and December
31, 2013 was $203 thousand and $95 thousand, respectively, and was included in other assets and other liabilities.
Included in other noninterest income for the nine months ended
September 30, 2014 and September 30, 2013 was a net gain of $1.5 million and a net loss of $995 thousand, respectively, relating
to derivative instruments. The amount included in other noninterest income for the nine months ended September 30, 2014 and September
30, 2013 pertaining to its hedging activities was a net realized loss of $1.6 million and a net realized gain of $4.1 million,
respectively.
NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS
In January 2014, the FASB issued ASU 2014-01, “Investments
– Equity Method and Joint Ventures: Accounting for Investments in Qualified Affordable Housing Projects”. This ASU
applies to all reporting entities that invest in qualified affordable housing projects through limited liability entities that
are flow through entities for tax purposes. The amendments in the ASU eliminate the effective yield election and permit reporting
entities to make an accounting policy election to account for their investments in qualified affordable housing projects using
the proportional amortization method if certain conditions are met. Those not electing the proportional amortization method would
account for the investment using the equity method or cost method. The amendments in this ASU are effective for public business
entities for annual periods beginning after December 15, 2014. The adoption of this guidance should not have a material effect
on the Corporation’s financial condition or results of operations.
NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS (continued)
In January 2014, the FASB issued ASU 2014-04, “Receivables
– Troubled Debt Restructurings by Creditors”. ASU 2014-04 clarifies when a creditor should be considered to have received
physical possession of residential real estate property during a foreclosure. ASU 2014-04 establishes a loan receivable should
be derecognized and the real estate property recognized upon the creditor obtaining legal title to the residential real estate
property upon completion of foreclosure or the borrower conveying all interest in the residential real estate property to the
creditor to satisfy the loan. The provisions of ASU 2014-04 are effective for annual periods beginning after December 15, 2014.
The adoption of this guidance should not have a material effect on the Corporation’s financial condition or results of operations.
In May 2014, the FASB issued ASU 2014-09, “Revenue from
Contracts with Customers: Topic 606”. This ASU supersedes the revenue recognition requirements in Topic 605, “Revenue
Recognition” as well as most industry-specific guidance. The amendments also create a new Subtopic 340-40 “Other Assets
and Deferred Costs – Contracts with Customers”. In summary, entities are to recognize revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services. The provisions of ASU 2014-09 are effective for annual periods beginning after December
15, 2016 and interim periods within 2017. The adoption of this guidance should not have a material effect on the Corporation’s
financial condition or results of operations.
In June 2014, the FASB issued ASU 2014-11, “Transfers
and Servicing (Topic 860)” which changes the accounting for repurchase financing arrangements. It also requires additional
disclosures about repurchase agreements and other similar transactions. Under this ASU, transactions would all be accounted for
as secured borrowings as the guidance eliminates sale accounting for repurchase-to-maturity transactions. The amendments in the
ASU require new disclosures for transactions that are economically similar to repurchase agreements in which the transferor retains
substantially all of the exposure to the economic return on the transferred financial assets throughout the transaction term as
well as expanded disclosures on the nature of pledged collateral in repurchase agreements. The provisions of ASU 2014-11 are effective
for annual periods beginning after December 15, 2014. The adoption of this guidance should not have a material effect on the Corporation’s
financial condition or results of operations.
In June 2014, the FASB issued ASU 2014-12, “Compensation
– Stock Compensation (Topic 718)”. The amendments in this ASU require a performance target that affects vesting and
that could be achieved after the requisite service period be treated as a performance condition. The performance target should
not be reflected in estimating the grant-date fair value of the award, and compensation cost should be recognized in the period
in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable
to the period(s) for which the requisite service has already been rendered. The amendments in the ASU are effective for annual
periods beginning after December 15, 2015. The adoption of this guidance should not have a material effect on the Corporation’s
financial condition or results of operations.
NOTE 9 - FAIR VALUE
Fair value pursuant to FASB ASC 820-10, Fair Value Measurements
and Disclosures, is the exchange price, in an orderly transaction that is not a forced liquidation or distressed sale, between
market participants to sell an asset or transfer a liability in the market in which the reporting entity would transact for the
asset or liability, that is, the principal or most advantageous market for the asset or liability. The transaction
to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective
of a market participant that holds the asset or liability. FASB ASC 820-
10 provides a consistent definition of fair value which focuses
on exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over entity specific inputs. In
addition, FASB ASC 820-10 provides a framework for measuring fair value and establishes a three-level hierarchy for fair value
measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The standard
describes three levels of inputs that may be used to measure fair values:
Level 1 - Quoted prices (unadjusted) for identical assets
or liabilities in active markets that the entity has the ability to access as of the measurement date.
NOTE 9 - FAIR VALUE (continued)
Level 2 - Significant other observable inputs other than Level
1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs
that are observable or can be corroborated by observable market data.
Level 3 - Significant unobservable inputs that reflect a company’s
own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Corporation used the following methods to determine the
fair value of each type of financial instrument:
Securities: Fair values for securities available-for-sale
are obtained from an independent pricing service. The prices are not adjusted. The independent pricing service uses industry-standard
models to price U.S. Government agency obligations and mortgage backed securities that consider various assumptions, including
time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual
prices for the underlying financial instruments, as well as other relevant economic measures. Securities of obligations of state
and political subdivisions are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the
treasury rate based on credit rating. Substantially all assumptions used by the independent pricing service are observable in
the marketplace, can be derived from
observable data, or are supported by observable levels at which
transactions are executed in the marketplace (Level 2).
Residential loans held for sale: The fair value of loans
held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2).
Derivative financial instruments: Derivative instruments
are used to hedge residential mortgage loans held for sale and the related interest-rate lock commitments and include forward
commitments to sell mortgage loans and mortgage-backed securities as further described in Note 7. The fair values of derivative
financial instruments are based on derivative market data inputs as of the valuation date and the underlying value of mortgage
loans for interest rate lock commitments (Level 3).
Impaired loans: The fair values of impaired loans are
measured on a nonrecurring basis as the fair value of the loan’s collateral for collateral-dependent loans. Collateral
may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The use
of discounted cash flow models and management’s best judgment are significant inputs in arriving at the fair value measure
of the underlying collateral (Level 3).
Other real estate owned: The fair value of other real
estate owned, which consists of real estate that has been foreclosed, is recorded at the lower of fair value less selling expenses
or the book balance prior to foreclosure. Write downs are provided for subsequent declines in value and are recorded in other
operating expenses (Level 2).
NOTE 9 - FAIR VALUE (continued)
Assets and liabilities measured at fair value under FASB ASC
820-10 on a recurring and non-recurring basis, including financial assets and liabilities for which the Corporation has elected
the fair value option as of September 30, 2014 and December 31, 2013, are summarized below:
| |
Fair Value Measurement | |
| |
at September 30, 2014 Using | |
Description | |
Carrying Value | | |
Quoted Prices in
Active Markets for Identical Assets (Level 1) | | |
Other Observable
Inputs (Level 2) | | |
Significant Unobservable
Inputs (Level 3) | |
Financial Assets-Recurring | |
(In Thousands) | |
Available-for-sale investment securities | |
| | | |
| | | |
| | | |
| | |
US Government agency | |
$ | 18,346 | | |
$ | - | | |
$ | 18,346 | | |
$ | - | |
Mortgage backed securities | |
| 70,053 | | |
| - | | |
| 70,053 | | |
| - | |
Corporate bonds | |
| 15,439 | | |
| - | | |
| 15,439 | | |
| - | |
Asset backed securities | |
| 18,078 | | |
| - | | |
| 18,078 | | |
| - | |
Municipals - nontaxable | |
| 4,078 | | |
| - | | |
| 4,078 | | |
| - | |
CRA Mutual fund | |
| 1,428 | | |
| - | | |
| 1,428 | | |
| - | |
Total available-for-sale investment securities | |
| 127,422 | | |
| - | | |
| 127,422 | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Residential loans held for sale | |
| 42,283 | | |
| - | | |
| 42,283 | | |
| - | |
Derivative assets | |
| 469 | | |
| - | | |
| - | | |
| 469 | |
Total Financial Assets-Recurring | |
$ | 170,174 | | |
$ | - | | |
$ | 169,705 | | |
$ | 469 | |
| |
| | | |
| | | |
| | | |
| | |
Financial Liabilities-Recurring | |
| | | |
| | | |
| | | |
| | |
Derivative liabilities | |
$ | 266 | | |
$ | - | | |
$ | - | | |
$ | 266 | |
Total Financial Liabilities-Recurring | |
$ | 266 | | |
$ | - | | |
$ | - | | |
$ | 266 | |
| |
| | | |
| | | |
| | | |
| | |
Financial Assets-Non-Recurring | |
| | | |
| | | |
| | | |
| | |
Impaired loans (1) | |
$ | 2,183 | | |
$ | - | | |
$ | - | | |
$ | 2,183 | |
Other real estate
owned (2) | |
| 500 | | |
| - | | |
| 500 | | |
| - | |
Total Financial Assets-Non-Recurring | |
$ | 2,683 | | |
$ | - | | |
$ | 500 | | |
$ | 2,183 | |
(1) Represents
the carrying value of loans for which adjustments are based on the appraised value of the collateral. |
(2)
Represents appraised value and realtor comparables less estimated selling expenses. |
|
NOTE 9 - FAIR VALUE (continued)
| |
Fair Value Measurement | |
| |
at December 31, 2013 Using | |
Description | |
Carrying Value | | |
Quoted Prices in
Active Markets for Identical Assets (Level 1) | | |
Other Observable
Inputs (Level 2) | | |
Significant Unobservable
Inputs (Level 3) | |
Financial Assets-Recurring | |
(In Thousands) | |
Available-for-sale investment securities | |
| | | |
| | | |
| | | |
| | |
US Government agency | |
$ | 34,132 | | |
$ | - | | |
$ | 34,132 | | |
$ | - | |
Mortgage backed | |
| 27,652 | | |
| - | | |
| 27,652 | | |
| - | |
Corporate bonds | |
| 6,019 | | |
| - | | |
| 6,019 | | |
| - | |
Asset Backed Securities | |
| 6,643 | | |
| - | | |
| 6,643 | | |
| - | |
Municipals - nontaxable | |
| 695 | | |
| - | | |
| 695 | | |
| - | |
CRA Mutual fund | |
| 1,411 | | |
| - | | |
| 1,411 | | |
| - | |
Total available-for-sale investment securities | |
| 76,552 | | |
| - | | |
| 76,552 | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Residential loans held for sale | |
| 24,353 | | |
| - | | |
| 24,353 | | |
| - | |
Derivative assets | |
| 219 | | |
| - | | |
| - | | |
| 219 | |
Total Financial Assets-Recurring | |
$ | 101,124 | | |
$ | - | | |
$ | 100,905 | | |
$ | 219 | |
| |
| | | |
| | | |
| | | |
| | |
Financial Liabilities-Recurring | |
| | | |
| | | |
| | | |
| | |
Derivative liabilities | |
$ | 124 | | |
$ | - | | |
$ | - | | |
$ | 124 | |
Total Financial Liabilities-Recurring | |
$ | 124 | | |
$ | - | | |
$ | - | | |
$ | 124 | |
| |
| | | |
| | | |
| | | |
| | |
Financial Assets-Non-Recurring | |
| | | |
| | | |
| | | |
| | |
Impaired loans (1) | |
$ | 2,958 | | |
$ | - | | |
$ | - | | |
$ | 2,958 | |
Total Financial Assets-Non-Recurring | |
$ | 2,958 | | |
$ | - | | |
$ | - | | |
$ | 2,958 | |
(1) Represents
the carrying value of loans for which adjustments are based on the appraised value of the collateral. |
It is the Corporation’s policy to recognize transfers
between levels as of the actual date of the event or change in circumstances that caused the transfer. There were no transfers
between Level 1 and Level 2 during the nine month periods ended September 30, 2014 and 2013.
The changes in Level 3 net derivatives measured at fair value
on a recurring basis are summarized as follows:
| |
Three Months Ended September
30, | |
| |
2014 | | |
2013 | |
| |
(In Thousands) | |
Balance, beginning of period | |
$ | 7 | | |
$ | 795 | |
Realized and unrealized gains (losses) included in earnings | |
| 196 | | |
| (822 | ) |
Unrealized gains (losses) included in other comprehensive income | |
| - | | |
| - | |
Purchases, settlements, paydowns, and maturities | |
| - | | |
| - | |
Transfer into Level 3 | |
| - | | |
| - | |
Balance, end of period | |
$ | 203 | | |
$ | (27 | ) |
NOTE 9 - FAIR VALUE (Continued)
| |
Nine
Months Ended September 30, | |
| |
2014 | | |
2013 | |
| |
(In Thousands) | |
Balance, beginning of period | |
$ | 95 | | |
$ | 465 | |
Realized and unrealized gains (losses) included in
earnings | |
| 108 | | |
| (492 | ) |
Unrealized gains (losses) included in other comprehensive
income | |
| - | | |
| - | |
Purchases, settlements, paydowns, and maturities
| |
| - | | |
| - | |
Transfer into Level 3
| |
| - | | |
| - | |
Balance, end of period
| |
$ | 203 | | |
$ | (27 | ) |
The following table presents qualitative information about
level 3 fair value measurements for financial instruments measured at fair value at September 30, 2014:
Description | |
Fair Value Estimate | | |
Valuation Techniques | |
Unobservable Input | |
Range (Weighted Average) | |
| |
(In Thousands) | |
Financial Assets - Recurring | |
| | | |
| |
| |
| | |
Derivative assets | |
$ | 469 | | |
Market pricing (3) | |
Estimated pullthrough | |
| 75%
- 90% | |
Derivative liabilities | |
$ | 266 | | |
Market pricing (3) | |
Estimated pullthrough | |
| 75%
- 90% | |
| |
| | | |
| |
| |
| | |
Financial Assets - Non-recurring | |
| | | |
| |
| |
| | |
Impaired loans - Real estate secured | |
$ | 487 | | |
Appraisal of collateral (1) | |
Liquidation expenses (2) | |
| 20%
- 30% | |
Impaired loans - Non-real estate secured | |
$ | 1,696 | | |
Cash flow basis | |
Liquidation expenses (2) | |
| 10%
- 20% | |
(1) |
Fair
value is generally determined through independent appraisals of the underlying collateral on real estate secured loans, which
generally include various level 3 inputs which are not identifiable. |
(2) |
Valuations
of impaired loans may be adjusted by management for qualitative factors such as liquidation expenses. The range
and weighted average of liquidation expense adjustments are presented as a percent of the appraisal. |
(3) |
Market pricing
on derivative assets and liabilities is adjusted by management for the anticipated percent of derivative assets and liabilities
that will create a realized gain or loss. The range and weighted average of estimated pull-through is presented |
Financial instruments recorded using FASB ASC 825-10
Under FASB ASC 825-10, Financial Instruments, the Corporation
may elect to report most financial instruments and certain other items at fair value on an instrument-by-instrument basis with
changes in fair value reported in net income. After the initial adoption the election is made at the acquisition of an eligible
financial asset, financial liability or firm commitment or when certain specified reconsideration events occur. The fair value
election, with respect to an item, may not be revoked once an election is made.
NOTE 9 - FAIR VALUE (Continued)
The following table reflects the differences between the fair
value carrying amount of residential mortgage loans held for sale at September 30, 2014, measured at fair value under FASB ASC
825-10, and the aggregate unpaid principal amount the Corporation is contractually entitled to receive at maturity.
(In Thousands) | |
Aggregate Fair Value | | |
Difference | | |
Contractual Principal | |
Residential mortgage loans held for sale | |
$ | 42,283 | | |
$ | 1,461 | | |
$ | 40,822 | |
The Corporation has elected to account for residential loans
held for sale at fair value to eliminate the mismatch that would occur by recording changes in market value on derivative instruments
used to hedge loans held for sale while carrying the loans at the lower of cost or market.
The following methods and assumptions not previously presented
were used in estimating the fair value of financial assets and financial liabilities that are not measured and reported at fair
value on a recurring basis or non-recurring basis:
Cash and Short-Term Investments
For those short-term instruments, the carrying amount is a
reasonable estimate of fair value. As such they are classified as Level 1 for noninterest-bearing deposits and Level 2 for interest-bearing
deposits due from banks or federal funds sold.
Restricted Stock
It is not practical to determine the fair value of restricted
stock due to the restrictions placed on its transferability.
Loans, Net of Allowance
For certain homogeneous categories of loans, such as some residential
mortgages, and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans,
adjusted for differences in loan characteristics resulting in a Level 3 classification. The fair value of other types of loans
is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities resulting in a Level 3 classification.
Accrued Interest
The carrying amounts of accrued interest approximate fair value
resulting in a Level 2 or Level 3 classification depending upon the level of the asset or liability, with which, the accrual is
associated.
Deposits and Borrowings
The fair value of demand deposits, savings accounts, and certain
money market deposits is the amount payable on demand at the reporting date resulting in a Level 1 classification. The fair value
of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities
also resulting in a Level 1 classification. The fair value of all other deposits and borrowings is determined using the discounted
cash flow method thereby resulting in a Level 2 classification. The discount rate was equal to the rate currently offered on similar
products.
NOTE 9 - FAIR VALUE (Continued)
Off-Balance-Sheet Financial Instruments
The fair value of commitments to extend credit is estimated
using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the
present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed interest rates. The fair value of stand-by letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the
counterparties at the reporting date.
At September 30, 2014 and December 31, 2013, the majority of
off-balance-sheet items are variable rate instruments or convert to variable rate instruments if drawn upon. Therefore, the fair
value of these items is largely based on fees, which are nominal and immaterial.
The carrying amounts and estimated fair values of financial
instruments at September 30, 2014 and December 31, 2013 were as follows:
| |
September 30, 2014 | | |
December 31, 2013 | |
| |
| | |
Estimated | | |
| | |
Estimated | |
| |
Carrying | | |
Fair | | |
Carrying | | |
Fair | |
| |
Amount | | |
Value | | |
Amount | | |
Value | |
| |
(In Thousands) | |
Financial assets: | |
| |
Cash and short-term | |
| | | |
| | | |
| | | |
| | |
investments | |
$ | 68,707 | | |
$ | 68,707 | | |
$ | 23,419 | | |
$ | 23,419 | |
Securities available-for-sale | |
| 127,422 | | |
| 127,422 | | |
| 76,552 | | |
| 76,552 | |
Securities held-to-maturity | |
| 14,315 | | |
| 14,153 | | |
| 16,277 | | |
| 15,659 | |
Restricted stock | |
| 8,286 | | |
| 8,286 | | |
| 8,559 | | |
| 8,559 | |
Loans, net of allowance | |
| 756,151 | | |
| 775,381 | | |
| 698,272 | | |
| 696,298 | |
Derivatives | |
| 469 | | |
| 469 | | |
| 219 | | |
| 219 | |
Total financial assets | |
$ | 975,350 | | |
$ | 994,418 | | |
$ | 823,298 | | |
$ | 820,706 | |
| |
| | | |
| | | |
| | | |
| | |
Financial liabilities: | |
| | | |
| | | |
| | | |
| | |
Deposits | |
$ | 732,071 | | |
$ | 729,543 | | |
$ | 572,972 | | |
$ | 552,735 | |
Short-term borrowings | |
| 175,592 | | |
| 175,482 | | |
| 172,855 | | |
| 172,787 | |
Derivatives | |
| 266 | | |
| 266 | | |
| 124 | | |
| 124 | |
Total financial liabilities | |
$ | 907,929 | | |
$ | 905,291 | | |
$ | 745,951 | | |
$ | 725,646 | |
NOTE 10 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET
RISK
The Corporation is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily
of commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount
recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Corporation
has in particular classes of financial instruments.
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee by the customer. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation
evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral, if any, deemed necessary by
the Corporation upon extension of credit is based on management’s credit evaluation of the counterparty. Collateral normally
consists of real property, liquid assets or business assets. The Corporation had $12.1 million and $5.1 million in outstanding
commitments at September 30, 2014 and December 31, 2013, respectively.
The Corporation’s exposure to credit loss in the event
of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual
notional amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments. The Corporation had $260.6 million and $227.3 million in unfunded lines of credit
whose contract amounts represent credit risk at September 30, 2014 and December 31, 2013, respectively.
Standby letters of credit are conditional commitments issued
by the Corporation to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to
support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year.
The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to
customers. The Corporation generally holds collateral supporting those commitments if deemed necessary. The Corporation had standby
letters of credit outstanding in the amount of $4.5 million and $4.1 million at September 30, 2014 and December 31, 2013, respectively.
The Bank maintains a reserve for potential off-balance sheet
credit losses that is included in other liabilities on the balance sheet. At September 30, 2014 and December 31, 2013 the balance
in this reserve totaled $636 thousand.
The mortgage division of the Bank makes
representations and warranties that loans sold to investors meet its program’s guidelines and that the information
provided by the borrowers is accurate and complete. In the event of a default on a loan sold, the investor may make a claim
for losses due to document deficiencies, program compliance, early payment default, and fraud or borrower misrepresentations.
The mortgage division maintains a reserve in other liabilities for potential losses on mortgage loans sold. During the third
quarter of 2014, management obtained updated information and performed an analysis on this reserve balance. The analysis
along with current industry events such as court rulings upholding states’ statutes on time limitations on put back of
mortgage loans, modifications to the government sponsored entities’ payment performance standards, continued decline in
foreclosure and loss upon liquidation statistics in our markets, and a reduction in the amount of loans originated prior to
the mortgage industry financial crisis, led management to determine a reserve release of $3.25 million was appropriate. The
$3.25 million reserve release is included in other expenses on the Consolidated Statements of Income. At September 30, 2014
and December 31, 2013, the balance in this reserve totaled $1.2 million and $4.6 million respectively.
NOTE 10 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET
RISK
The following table shows the changes to the Allowance for
Losses on Mortgage Loans Sold.
| |
Nine Months ended September
30, | | |
Year ended | |
| |
2014 | | |
2013 | | |
December 31, 2013 | |
| |
(In Thousands) | |
Allowance for losses on mortgage loans sold -beginning of period | |
$ | 4,645 | | |
$ | 4,376 | | |
$ | 4,376 | |
Provision (release) charged to operating expense | |
| (3,250 | ) | |
| 388 | | |
| 388 | |
Recoveries | |
| - | | |
| - | | |
| - | |
Charge-offs | |
| (202 | ) | |
| (119 | ) | |
| (119 | ) |
Allowance for losses on mortgage loans sold - end of period | |
$ | 1,193 | | |
$ | 4,645 | | |
$ | 4,645 | |
NOTE 11 – BANK-OWNED LIFE INSURANCE POLICIES
The Bank purchased $15 million in bank-owned life insurance
policies (“BOLI”) during the first nine months of 2014. There are no post-retirement benefits associated with the
BOLI policies owned by the Bank.
NOTE 12 – IMPAIRMENT OF LONG-LIVED ASSET
In 2007, Access Real Estate purchased land valued at $1.2 million
as a site for a potential banking center. In 2014, management’s intent changed and the land was prepared for sale. In the
third quarter of 2014, management received an appraisal on the land and deemed the property impaired. The asset was written down
to its fair value less costs to sell of $500 thousand and is being reflected in OREO.
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, 2013. Operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results
for the year ending December 31, 2014 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 renewed deterioration
in general business and economic conditions and in the financial markets; the impact of any laws, regulations, policies or
programs implemented pursuant to the Dodd-Frank Act, the
Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009, or other acts;
branch expansion plans; interest rates; monetary and fiscal policies of the U.S. Government, including policies of the Office
of the Comptroller of the Currency (“Comptroller”), the U.S. Department of the Treasury and the Board of
Governors of the Federal Reserve System and the Federal Reserve Bank of Richmond; the economy of Northern Virginia, including
governmental spending and commercial and residential real estate markets; the quality or composition of the loan or
investment portfolios; demand for loan products; deposit flows; competition; the liquidity of the Corporation; and accounting
principles, policies and guidelines. These risks and uncertainties should be considered in evaluating the forward-looking
statements contained herein, and readers are cautioned not to place undue reliance on such statements. Any forward-looking
statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which it is made.
For additional discussion of risk factors that may cause our
actual future results to differ materially from the results indicated within forward looking statements, please see “Item
1A – Risk Factors” of the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
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, 2014, there were no non-agency mortgage backed
securities or trust preferred securities in the portfolio. The estimated fair value of the portfolio fluctuates due to changes
in market interest rates and other factors. Changes in estimated fair value are recorded in shareholders’ equity as a component
of other comprehensive income. Securities are monitored to determine whether a decline in their value is other than temporary.
Management evaluates the securities portfolio on a quarterly basis to determine the collectability of amounts due per the contractual
terms of each security. Once a decline in value is determined to be other than temporary, the value of the security is reduced
and a corresponding charge to net income is recognized. At September 30, 2014, 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.
FINANCIAL CONDITION
Executive Summary
At September 30, 2014, the Corporation’s assets totaled
$1.02 billion, compared to $847.2 million at December 31, 2013, an increase of $167.9 million. The increase in assets was primarily
due to a growth in loans held for investment of $40.0 million, an increase in interest-bearing balances of $45.2 million, an increase
in investment securities of $48.9 million, an increase in loans held for sale of $17.9 million, and the purchase of bank-owned
life insurance (BOLI) in the amount of $15 million which accounted for the majority of the $17.2 million increase in other assets.
The increase in loans held for investment at September 30, 2014 in comparison with December 31, 2013 is primarily attributable
to a $24.8 million or 27.4% growth in commercial real estate-non owner occupied loans and a $18.0 million or 10.4% increase in
residential real estate loans. At September 30, 2014, loans secured by real estate collateral comprised 73.4% of our total loan
portfolio, with loans secured by commercial real estate contributing 42.7% of our total loan portfolio, loans secured by residential
real estate contributing 26.4% and real estate construction loans contributing 4.3%. Loans held for sale totaled $42.3 million
at September 30, 2014, compared to $24.4 million at December 31, 2013. 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 $732.1 million at September 30, 2014, compared to $573.0 million at December 31, 2013, an increase of $159.1 million.
Noninterest-bearing deposits increased $81.3 million from $189.9 million at December 31, 2013 to $271.2 million at September 30,
2014. Savings and interest-bearing deposits increased from $200.2 million at December 31, 2013 to $243.3 million at September
30, 2014, an increase of $43.1 million. Our time deposits grew from $182.9 million at December 31, 2013 to $217.6 million at September
30, 2014, an increase of $34.7 million.
Third quarter 2014 pretax earnings
were impacted by two nonrecurring items, one being a $3.25 million release in the mortgage segment’s loan loss reserve
while the other was a $707 thousand impairment recorded in connection with land held by Access Real Estate (ARE). The net
impact of these two items created an increase in pretax earnings of $2.5 million and added $0.15 to the after-tax earnings
per common share. The release in reserves was in connection with management’s on-going analysis of reserve requirements
as well as information obtained by management during the third quarter of 2014 which led management to determine the amount
of reserves on hand for the repurchase of mortgage loans sold in the secondary market was over funded. Refer to Note 10 for
further discussion on the mortgage reserve release. The write-down of the ARE property was in response to management’s
intent to sell land that had originally been bought back in 2007 as a site for a potential banking center. The impairment was
effective upon receipt of an appraisal received in the third quarter of 2014. Refer to Note 12 for further information.
Net income before taxes increased $2.1 million to $4.9
million from $2.8 million when comparing the three months ended September 30, 2014 to the same period in 2013. And excluding
the release of mortgage reserves and the write-down of the ARE property, net income before taxes increased $1.2 million when
comparing the three months ended September 30, 2014 to the same period in 2013. This is the result of an increase in the
banking segment pretax earnings of $698 thousand and an increase in mortgage segment pretax earnings of $532 thousand,
excluding the release of mortgage reserves. The increase in the banking segment was due mainly to an increase in net interest
income after provision for loan losses of $1.1 million when comparing the three month period ended September 30, 2014 to the
same period in 2013. This increase in net interest income was offset by a decrease of $719 thousand in noninterest income due
mainly to the gain on sale of SBA loans of $926 thousand that occurred in the third quarter 2013. The mortgage segment
recorded pretax earnings of $3.7 million in the third quarter of 2014 compared to a loss of $50 thousand in the third quarter
of 2013; excluding the mortgage reserve release, the mortgage segment’s pretax earnings were $482 thousand in the third
quarter of 2014 compared to near breakeven performance in the third quarter of
2013.
Net income for the nine months ended September 30, 2014 totaled
$10.4 million compared to $10.0 million for the same period in 2013. Earnings per diluted share were $0.99 for the first nine
months of 2014, compared to $0.96 per diluted share in the same period of 2013. For the nine month period ended September 30,
2014, the banking segment saw an increase in pretax income of $1.6 million when compared to the nine months ended September 30,
2013 due to an increase in net interest income of $1.7 million as well as a $675 thousand reduction in the provision for loan
losses. The mortgage segment saw a reduction of $197.0 million in loan origination volume for the nine month period ended September
30, 2014 in comparison with the same period in 2013. This decreased volume as well as a reduction in the secondary market pricing
led to the $6.9 million decrease in gain on sale of loans when comparing the nine month period ending September 2014 to the same
period ending September 2013.
Non-performing loans totaled $1.8 million, or 0.18%, of total
assets at September 30, 2014, down from $2.5 million, or 0.30%, of total assets at December 31, 2013. In addition to the non-performing
loans, the impairment of land owned by Access Real Estate during the third quarter 2014 added an additional $500 thousand in non-performing
assets (NPAs) for total NPAs of $2.3 million or 0.23% of total assets at September 30, 2014.
The unemployment rate for Fairfax County, Virginia decreased
slightly from 4.4% in June 2014 to 4.2% in September 2014, still remaining below the 5.5% for the state of Virginia at the end
of September 2014 and 5.9% for the nation at the end of September 2014. Information reviewed at the Federal Open Market Committee’s
(FOMC) October 2014 meeting suggested economic activity expanding at a moderate pace during the third quarter 2014 while labor
market indicators suggested that underutilization of labor resources is gradually diminishing. The FOMC believes there has been
substantial improvement in the labor market outlook, enough so that it concluded its asset purchase program in October 2014. To
support continued progress in price stability and maximum employment, the FOMC reaffirmed its view that the current low federal
funds rate remains appropriate. This 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 nine months ended September 30, 2014 decreased
to 3.78% from the September 30, 2013 percentage of 3.83% due mainly to the declining yield on the loans held for investment portfolio.
While there is no certainty to the magnitude of any impact, the continued extended period of low short-term interest rates, as
presently forecasted by the Federal Reserve, will continue to have an adverse effect on the net interest margin.
While we continue to see price appreciation in the local residential
real estate market, there is no guarantee that these positive trends will continue, and contrasting the real estate market price
appreciation are mixed results in the labor markets. As such, we remain cautious as to the macro-economic risks, many openly identified
by the Federal Open Market Committee, including persistently high rates of unemployment and underemployment. As a consequence,
we have generally retained more cautious loan underwriting criteria established during the financial crisis period of 2007 –
2009. In spite of these challenges, we are proactive in seeking new client relationships driven by our target market profile:
business-to-business and business-to-government companies with annual revenue of $1 million to $100 million and the various banking
services needed by the business and the professionals associated with the businesses. The Corporation is optimistic with a strong
capital base and being positioned for continued growth.
Securities
The Corporation’s securities portfolio is comprised of
U.S. government agency securities, mortgage backed securities, corporate bonds, a CRA mutual fund, and other asset backed securities
as well as municipal bonds. The portfolio does not have any non-agency mortgage backed securities or trust preferred securities.
At September 30, 2014 the fair value of the securities portfolio
totaled $141.6 million, compared to $92.2 million at December 31, 2013. Included in the fair value totals are held-to-maturity
securities with an amortized cost of $14.3 million (fair value of $14.2 million) and $16.3 million (fair value of $15.7 million)
at September 30, 2014 and December 31, 2013, 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
$727.1 million at September 30, 2014 compared to $687.1 million at December 31, 2013, an increase of $40.0 million or 5.8%. Comprising
the majority of the growth, commercial real estate-non owner occupied loans increased $24.8 million and residential real estate
increased $18.0 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, 2014.
Commercial Real Estate Loans – Owner Occupied:
This category of loans represented the largest segment of the loan portfolio and was comprised of owner occupied loans secured
by the commercial property, totaling $195.1 million, representing 26.83% of the loan portfolio at September 30, 2014. 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 $115.5 million and representing 15.88% of the loan portfolio at September 30, 2014.
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 second largest segment of the loan portfolio and included loans secured by first or second mortgages on one to four family
residential properties. This segment totaled $191.7 million and comprised 26.36% of the loan portfolio as of September 30, 2014.
Of this amount, the following sub-categories existed as a percentage of the whole residential real estate loan portfolio as of
September 30, 2014: home equity lines of credit, 17.2%; first trust mortgage loans, 75.0%; and junior trust loans, 7.8%.
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 third
largest segment of the loan portfolio, totaling $186.7 million and representing 25.68% of the loan portfolio as of September 30,
2014. 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
$31.5 million and represented 4.33% of the loan portfolio as of September 30, 2014. These loans generally fall into one of three
categories: first, loans to individuals that are ultimately used to acquire property and construct an owner occupied residence;
second, loans to builders for the purpose of acquiring property and constructing homes for sale to consumers; and third, loans
to developers for the purpose of acquiring land that is developed into finished lots for the ultimate construction of residential
or commercial buildings. Loans of these types are generally secured by the subject property within limits established by the Board
of Directors based upon an assessment of market conditions and updated from time to time. The loans typically carry recourse
to principal owners. In addition to the repayment risk associated with loans to individuals and businesses, loans in this category
carry construction completion risk. To address this additional risk, loans of this type are subject to additional administration
procedures designed to verify and ensure progress of the project in accordance with allocated funding, project specifications
and time frames.
Consumer Loans: Consumer loans, which were the smallest
segment of the loan portfolio, totaled $6.7 million and represented 0.92% of the loan portfolio as of September 30, 2014. 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, 2014, LHFS at fair value totaled $42.3 million compared
to $24.4 million at December 31, 2013.
The LHFS loans are closed by the Bank and held on average fifteen
to thirty days pending their sale to government sponsored entities as well as mortgage banking subsidiaries of large financial
institutions. During the third quarter of 2014 we originated $115.3 million of loans processed in this manner, compared to $109.3
million in the second quarter of 2014 and $103.1 million for the third quarter of 2013. Loans are sold without recourse and subject
to industry standard representations and warranties that may require the repurchase by the Bank of loans previously sold. The
repurchase risks associated with this activity center around early payment defaults and borrower fraud.
Allowance for Loan Losses
The allowance for loan losses totaled $13.2 million at September
30, 2014 compared to $13.1 million at December 31, 2013. The allowance for loan losses was equivalent to 1.82% and 1.91% of total
loans held for investment at September 30, 2014 and December 31, 2013, 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, 2014 and December 31, 2013, the Bank had
non-performing loans totaling $1.8 million and $2.5 million, respectively. Non-performing loans consist of non-accrual and
restructured loans. All non-performing loans are carried at the expected liquidation value of the underlying collateral. At
September 30, 2014, Access Real Estate had a non-performing asset totaling $500 thousand due to impairment of a long-lived
asset: purchased land. This asset is carried at its fair value less costs to sell.
The following table is a summary of our non-performing assets
at September 30, 2014 and December 31, 2013.
| |
September 30, 2014 | | |
December 31, 2013 | |
| |
(Dollars In Thousands) | |
Non-accrual loans : | |
| | | |
| | |
Commercial real estate - owner occupied | |
$ | - | | |
$ | - | |
Commercial real estate - non-owner occupied | |
| - | | |
| - | |
Residential real estate | |
| 129 | | |
| 871 | |
Commercial | |
| 1,697 | | |
| 1,664 | |
Real estate construction | |
| - | | |
| - | |
Consumer | |
| - | | |
| - | |
Total non-accrual loans | |
$ | 1,826 | | |
$ | 2,535 | |
| |
| | | |
| | |
Other real estate owned ("OREO") | |
| 500 | | |
| - | |
| |
| | | |
| | |
Total non-performing assets | |
$ | 2,326 | | |
$ | 2,535 | |
| |
| | | |
| | |
Restructured loans included above in non-accrual loans | |
$ | 706 | | |
$ | 931 | |
| |
| | | |
| | |
Ratio of non-performing assets to: | |
| | | |
| | |
Total loans plus OREO | |
| 0.32 | % | |
| 0.37 | % |
| |
| | | |
| | |
Total Assets | |
| 0.23 | % | |
| 0.30 | % |
| |
| | | |
| | |
Accruing Past due loans: | |
| | | |
| | |
90 or more days past due | |
$ | - | | |
$ | - | |
At September 30, 2014 and December 31, 2013, 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, 2014, deposits totaled $732.1 million compared to $573.0 million on December 31, 2013, an increase of $159.1 million
or 27.77%. Noninterest-bearing deposits increased $81.3 million, or 42.83%, from $189.9 million at December 31, 2013 to $271.2
million at September 30, 2014. Savings and interest-bearing deposits increased to $243.3 million at September 30, 2014 from $200.2
million at December 31, 2013, an increase of $43.1 million, or 21.51%. Time deposits grew from $182.9 million at December 31,
2013 to $217.6 million, an increase of $34.7 million, or 18.97%. The growth in noninterest-bearing accounts is attributable to
new accounts opened during the first nine months of 2014 as a result of our outreach to operating businesses and positive balance
fluctuations of existing commercial accounts.
Shareholders’ Equity
Shareholders’ equity totaled $99.7 million at September
30, 2014 compared to $91.1 million at December 31, 2013. 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.
The following table outlines the regulatory components of the
Corporation’s capital and risk based capital ratios.
| |
September 30, | | |
December 31, | |
| |
2014 | | |
2013 | |
| |
(In Thousands) | |
Tier 1 Capital: | |
| | | |
| | |
Common stock | |
$ | 8,725 | | |
$ | 8,659 | |
Capital surplus | |
| 18,260 | | |
| 17,320 | |
Retained earnings | |
| 73,781 | | |
| 67,121 | |
Less: Net unrealized loss on equity securities | |
| (47 | ) | |
| (58 | ) |
Less: Disallowed goodwill | |
| (1,491 | ) | |
| - | |
Less: Dissallowed servicing assets | |
| (215 | ) | |
| (255 | ) |
Total Tier 1 capital | |
| 99,013 | | |
| 92,787 | |
| |
| | | |
| | |
Allowance for loan losses | |
| 10,328 | | |
| 9,680 | |
| |
| | | |
| | |
Total risk based capital | |
$ | 109,341 | | |
$ | 102,467 | |
| |
| | | |
| | |
Risk weighted assets | |
$ | 822,703 | | |
$ | 770,276 | |
| |
| | | |
| | |
Quarterly average assets | |
$ | 996,063 | | |
$ | 848,886 | |
| |
| | |
| | |
Regulatory | |
| |
| | |
| | |
Minimum | |
Capital Ratios: | |
| | | |
| | | |
| | |
Tier 1 risk based capital ratio | |
| 12.04 | % | |
| 12.05 | % | |
| 4.00 | % |
Total risk based capital ratio | |
| 13.29 | % | |
| 13.30 | % | |
| 8.00 | % |
Leverage ratio | |
| 9.94 | % | |
| 10.93 | % | |
| 4.00 | % |
RESULTS OF OPERATIONS
Summary
Net income for the third quarter of 2014 totaled $4.9 million
or $0.47 diluted earnings per share. This compares with $2.8 million or $0.27 diluted earnings per share for the same quarter
in 2013. The increase in net income for the three months ended September 30, 2014 as compared to the same period in 2013 is attributable
to the after tax impact of the reserve release by the mortgage division of $2.1 million. Positive increases in net interest income
were enough to offset the $707 thousand impairment charge taken by Access Real Estate during the third quarter 2014.
Net income for the nine months ended September 30, 2014 totaled
$10.4 million or $0.99 diluted earnings per share compared to $10.0 million or $0.96 diluted earnings per share for the same period
in 2013. The increase in earnings for the nine months ended September 30, 2014 is attributable to the after tax impact of the
reserve release by the mortgage division of $2.1 million which was sufficient to cover the decrease in the mortgage division’s
production for the nine months ended September 30, 2014 when compared to the nine months ended September 30, 2013.
Net Interest Income
Net interest income, the principal source of earnings, is the
amount of income generated by earning assets (primarily loans and investment securities) less the interest expense incurred on
interest-bearing liabilities (primarily deposits) used to fund earning assets. Net interest income before the provision for loan
losses totaled $9.1 million for the three months ended September 30, 2014 compared to $7.9 million for the same period in 2013.
The increase in net interest income is primarily due to lower funding costs and changes in the composition of earning assets.
The annualized yield on earning assets was 4.13% for the quarter ended September 30, 2014 when compared to 4.29% for the quarter
ended September 30, 2013. The increase in the third quarter income on earning assets of $1.2 million is attributable to increased
volumes in loans held for investment, loans held for sale, and securities. The cost of interest-bearing deposits and borrowings
decreased from 0.63% for the quarter ended September 30, 2013 to 0.52% for the quarter ended September 30, 2014. Net interest
margin was 3.78% for the quarter ended September 30, 2014 compared to 3.88% for the same period in 2013.
Net interest income before the provision for loan losses totaled
$25.9 million for the first nine months of 2014 compared to $24.1 million for the same period in 2013. The annualized yield on
earning assets for the first nine months of 2014 was 4.15% compared to 4.30% for the same period in 2013. The increase in year-to-date
income on earning assets of $1.4 million is attributable to volume increases in loans held for investment and securities which
was enough to offset the volume decrease in loans held for sale as well as the rate decrease in loans held for investment for
the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. The cost of interest-bearing deposits
and borrowings for the first nine months of 2014 was 0.54% compared to 0.69% for the same period in 2013. Net interest margin
was 3.78% for the first nine months of 2014 compared to 3.83% for the same period in 2013.
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, | |
| |
2014 compared to 2013 | |
| |
Change Due To: | |
| |
Increase / | | |
| | |
| |
| |
(Decrease) | | |
Volume | | |
Rate | |
| |
(In Thousands) | |
Interest Earning Assets: | |
| | | |
| | | |
| | |
Investments | |
$ | 298 | | |
$ | 246 | | |
$ | 52 | |
Loans held for sale | |
| 146 | | |
| 145 | | |
| 1 | |
Loans | |
| 725 | | |
| 864 | | |
| (139 | ) |
Interest-bearing deposits | |
| 5 | | |
| 6 | | |
| (1 | ) |
Total increase (decrease) in interest income | |
| 1,174 | | |
| 1,261 | | |
| (87 | ) |
| |
| | | |
| | | |
| | |
Interest-Bearing Liabilities: | |
| | | |
| | | |
| | |
Interest-bearing demand deposits | |
| 31 | | |
| 27 | | |
| 4 | |
Money market deposit accounts | |
| (1 | ) | |
| (2 | ) | |
| 1 | |
Savings accounts | |
| 3 | | |
| 1 | | |
| 2 | |
Time deposits | |
| (75 | ) | |
| 3 | | |
| (78 | ) |
Total interest-bearing deposits | |
| (42 | ) | |
| 29 | | |
| (71 | ) |
FHLB Advances | |
| 42 | | |
| 40 | | |
| 2 | |
Securities sold under agreements to repurchase | |
| (2 | ) | |
| (1 | ) | |
| (1 | ) |
Other short-term borrowings | |
| - | | |
| - | | |
| - | |
Long-term borrowings | |
| - | | |
| - | | |
| - | |
FDIC term note | |
| - | | |
| - | | |
| - | |
Subordinated debentures | |
| 3 | | |
| 2 | | |
| 1 | |
Total increase (decrease) in interest expense | |
| 1 | | |
| 70 | | |
| (69 | ) |
| |
| | | |
| | | |
| | |
Increase (decrease) in net interest income | |
$ | 1,173 | | |
$ | 1,191 | | |
$ | (18 | ) |
| |
Nine Months Ended September 30, | |
| |
2014 compared to 2013 | |
| |
Change Due To: | |
| |
Increase / | | |
| | |
| |
| |
(Decrease) | | |
Volume | | |
Rate | |
| |
(In Thousands) | |
Interest Earning Assets: | |
| | | |
| | | |
| | |
Investments | |
$ | 405 | | |
$ | 368 | | |
$ | 37 | |
Loans held for sale | |
| (399 | ) | |
| (623 | ) | |
| 224 | |
Loans | |
| 1,377 | | |
| 2,645 | | |
| (1,268 | ) |
Interest-bearing deposits | |
| (4 | ) | |
| (2 | ) | |
| (2 | ) |
Total increase (decrease) in interest income | |
| 1,379 | | |
| 2,388 | | |
| (1,009 | ) |
| |
| | | |
| | | |
| | |
Interest-Bearing Liabilities: | |
| | | |
| | | |
| | |
Interest-bearing demand deposits | |
| 84 | | |
| 62 | | |
| 22 | |
Money market deposit accounts | |
| (48 | ) | |
| (9 | ) | |
| (39 | ) |
Savings accounts | |
| 6 | | |
| 1 | | |
| 5 | |
Time deposits | |
| (536 | ) | |
| (502 | ) | |
| (34 | ) |
Total interest-bearing deposits | |
| (494 | ) | |
| (448 | ) | |
| (46 | ) |
FHLB Advances | |
| 144 | | |
| 143 | | |
| 1 | |
Securities sold under agreements to repurchase | |
| (4 | ) | |
| (3 | ) | |
| (1 | ) |
Other short-term borrowings | |
| - | | |
| - | | |
| - | |
Long-term borrowings | |
| - | | |
| - | | |
| - | |
FDIC term note | |
| - | | |
| - | | |
| - | |
Subordinated debentures | |
| (103 | ) | |
| (52 | ) | |
| (51 | ) |
Total increase (decrease) in interest expense | |
| (457 | ) | |
| (360 | ) | |
| (97 | ) |
| |
| | | |
| | | |
| | |
Increase (decrease) in net interest income | |
$ | 1,836 | | |
$ | 2,748 | | |
$ | (912 | ) |
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, 2014 | | |
September
30, 2013 | |
| |
Average | | |
Income / | | |
Yield / | | |
Average | | |
Income / | | |
Yield / | |
(Dollars
In Thousands) | |
Balance | | |
Expense | | |
Rate | | |
Balance | | |
Expense | | |
Rate | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest earning assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Securities | |
$ | 142,013 | | |
$ | 755 | | |
| 2.13 | % | |
$ | 94,993 | | |
$ | 457 | | |
| 1.92 | % |
Loans held for sale | |
| 40,780 | | |
| 410 | | |
| 4.02 | % | |
| 26,335 | | |
| 264 | | |
| 4.01 | % |
Loans(1) | |
| 726,985 | | |
| 8,723 | | |
| 4.80 | % | |
| 655,162 | | |
| 7,998 | | |
| 4.88 | % |
Interest-bearing balances
and federal funds sold | |
| 51,134 | | |
| 27 | | |
| 0.21 | % | |
| 39,337 | | |
| 22 | | |
| 0.22 | % |
Total interest earning assets | |
| 960,912 | | |
| 9,915 | | |
| 4.13 | % | |
| 815,827 | | |
| 8,741 | | |
| 4.29 | % |
Noninterest earning assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash and due from banks | |
| 9,499 | | |
| | | |
| | | |
| 8,602 | | |
| | | |
| | |
Premises, land and equipment | |
| 8,232 | | |
| | | |
| | | |
| 8,433 | | |
| | | |
| | |
Other assets | |
| 31,664 | | |
| | | |
| | | |
| 11,258 | | |
| | | |
| | |
Less: allowance for loan
losses | |
| (13,227 | ) | |
| | | |
| | | |
| (13,033 | ) | |
| | | |
| | |
Total
noninterest earning assets | |
| 36,168 | | |
| | | |
| | | |
| 15,260 | | |
| | | |
| | |
Total Assets | |
$ | 997,080 | | |
| | | |
| | | |
$ | 831,087 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Liabilities and Shareholders' Equity: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing deposits: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing demand deposits | |
$ | 121,737 | | |
$ | 69 | | |
| 0.23 | % | |
$ | 74,105 | | |
$ | 38 | | |
| 0.21 | % |
Money market deposit accounts | |
| 115,144 | | |
| 58 | | |
| 0.20 | % | |
| 118,330 | | |
| 59 | | |
| 0.20 | % |
Savings accounts | |
| 3,824 | | |
| 4 | | |
| 0.42 | % | |
| 2,341 | | |
| 1 | | |
| 0.17 | % |
Time deposits | |
| 259,262 | | |
| 626 | | |
| 0.97 | % | |
| 258,076 | | |
| 701 | | |
| 1.09 | % |
Total interest-bearing deposits | |
| 499,967 | | |
| 757 | | |
| 0.61 | % | |
| 452,852 | | |
| 799 | | |
| 0.71 | % |
Borrowings: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
FHLB Advances | |
| 121,141 | | |
| 69 | | |
| 0.23 | % | |
| 50,000 | | |
| 27 | | |
| 0.22 | % |
Securities sold under agreements to repurchase
and federal funds purchased | |
| 19,955 | | |
| 5 | | |
| 0.10 | % | |
| 23,378 | | |
| 7 | | |
| 0.12 | % |
FHLB Long-term borrowings | |
| - | | |
| - | | |
| 0.00 | % | |
| - | | |
| - | | |
| 0.00 | % |
FDIC Term Note | |
| - | | |
| - | | |
| 0.00 | % | |
| - | | |
| - | | |
| 0.00 | % |
Subordinated Debentures | |
| - | | |
| - | | |
| 0.00 | % | |
| 269 | | |
| (3 | ) | |
| -4.46 | % |
Total
borrowings | |
| 141,096 | | |
| 74 | | |
| 0.21 | % | |
| 73,647 | | |
| 31 | | |
| 0.17 | % |
Total interest-bearing deposits and borrowings | |
| 641,063 | | |
| 831 | | |
| 0.52 | % | |
| 526,499 | | |
| 830 | | |
| 0.63 | % |
Noninterest-bearing liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Demand deposits | |
| 247,814 | | |
| | | |
| | | |
| 200,881 | | |
| | | |
| | |
Other liabilities | |
| 11,341 | | |
| | | |
| | | |
| 9,171 | | |
| | | |
| | |
Total liabilities | |
| 900,218 | | |
| | | |
| | | |
| 736,551 | | |
| | | |
| | |
Shareholders' Equity | |
| 96,862 | | |
| | | |
| | | |
| 94,536 | | |
| | | |
| | |
Total Liabilities and
Shareholders' Equity: | |
$ | 997,080 | | |
| | | |
| | | |
$ | 831,087 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest Spread(2) | |
| | | |
| | | |
| 3.61 | % | |
| | | |
| | | |
| 3.66 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net Interest Margin(3) | |
| | | |
$ | 9,084 | | |
| 3.78 | % | |
| | | |
$ | 7,911 | | |
| 3.88 | % |
(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, 2014 | | |
September
30, 2013 | |
| |
Average | | |
Income / | | |
Yield / | | |
Average | | |
Income / | | |
Yield / | |
| |
Balance | | |
Expense | | |
Rate | | |
Balance | | |
Expense | | |
Rate | |
| |
(Dollars In Thousands) | |
Assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest earning assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Securities | |
$ | 123,301 | | |
$ | 1,844 | | |
| 1.99 | % | |
$ | 98,640 | | |
$ | 1,439 | | |
| 1.95 | % |
Loans held for sale | |
| 29,077 | | |
| 909 | | |
| 4.17 | % | |
| 50,128 | | |
| 1,308 | | |
| 3.48 | % |
Loans(1) | |
| 715,454 | | |
| 25,537 | | |
| 4.76 | % | |
| 642,543 | | |
| 24,160 | | |
| 5.01 | % |
Interest-bearing
balances and federal funds sold | |
| 44,190 | | |
| 72 | | |
| 0.22 | % | |
| 45,456 | | |
| 76 | | |
| 0.22 | % |
Total
interest earning assets | |
| 912,022 | | |
| 28,362 | | |
| 4.15 | % | |
| 836,767 | | |
| 26,983 | | |
| 4.30 | % |
Noninterest earning assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash and due from banks | |
| 8,784 | | |
| | | |
| | | |
| 10,629 | | |
| | | |
| | |
Premises, land and equipment | |
| 8,331 | | |
| | | |
| | | |
| 8,491 | | |
| | | |
| | |
Other assets | |
| 24,994 | | |
| | | |
| | | |
| 13,456 | | |
| | | |
| | |
Less:
allowance for loan losses | |
| (13,197 | ) | |
| | | |
| | | |
| (12,860 | ) | |
| | | |
| | |
Total
noninterest earning assets | |
| 28,912 | | |
| | | |
| | | |
| 19,716 | | |
| | | |
| | |
Total Assets | |
$ | 940,934 | | |
| | | |
| | | |
$ | 856,483 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Liabilities and Shareholders' Equity: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing deposits: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing demand deposits | |
$ | 112,443 | | |
$ | 189 | | |
| 0.22 | % | |
$ | 73,751 | | |
$ | 105 | | |
| 0.19 | % |
Money market deposit accounts | |
| 114,876 | | |
| 173 | | |
| 0.20 | % | |
| 119,906 | | |
| 221 | | |
| 0.25 | % |
Savings accounts | |
| 3,352 | | |
| 9 | | |
| 0.36 | % | |
| 2,428 | | |
| 3 | | |
| 0.16 | % |
Time
deposits | |
| 249,928 | | |
| 1,901 | | |
| 1.01 | % | |
| 315,924 | | |
| 2,437 | | |
| 1.03 | % |
Total
interest-bearing deposits | |
| 480,599 | | |
| 2,272 | | |
| 0.63 | % | |
| 512,009 | | |
| 2,766 | | |
| 0.72 | % |
Borrowings: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
FHLB Advances | |
| 104,707 | | |
| 186 | | |
| 0.24 | % | |
| 24,187 | | |
| 42 | | |
| 0.23 | % |
Securities sold under agreements
to repurchase and federal funds purchased | |
| 21,125 | | |
| 16 | | |
| 0.10 | % | |
| 25,652 | | |
| 20 | | |
| 0.10 | % |
Other short-term borrowings | |
| - | | |
| - | | |
| 0.00 | % | |
| - | | |
| - | | |
| 0.00 | % |
FHLB Long-term borrowings | |
| - | | |
| - | | |
| 0.00 | % | |
| - | | |
| - | | |
| 0.00 | % |
FDIC Term Note | |
| - | | |
| - | | |
| 0.00 | % | |
| - | | |
| - | | |
| 0.00 | % |
Subordinated
Debentures | |
| - | | |
| - | | |
| 0.00 | % | |
| 4,192 | | |
| 103 | | |
| 3.28 | % |
Total
borrowings | |
| 125,832 | | |
| 202 | | |
| 0.21 | % | |
| 54,031 | | |
| 165 | | |
| 0.41 | % |
Total interest-bearing deposits and borrowings | |
| 606,431 | | |
| 2,474 | | |
| 0.54 | % | |
| 566,040 | | |
| 2,931 | | |
| 0.69 | % |
Noninterest-bearing liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Demand deposits | |
| 229,478 | | |
| | | |
| | | |
| 187,067 | | |
| | | |
| | |
Other
liabilities | |
| 10,257 | | |
| | | |
| | | |
| 9,500 | | |
| | | |
| | |
Total
liabilities | |
| 846,166 | | |
| | | |
| | | |
| 762,607 | | |
| | | |
| | |
Shareholders'
Equity | |
| 94,768 | | |
| | | |
| | | |
| 93,876 | | |
| | | |
| | |
Total Liabilities and
Shareholders' Equity: | |
$ | 940,934 | | |
| | | |
| | | |
$ | 856,483 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest Spread(2) | |
| | | |
| | | |
| 3.60 | % | |
| | | |
| | | |
| 3.61 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net Interest Margin(3) | |
| | | |
$ | 25,888 | | |
| 3.78 | % | |
| | | |
$ | 24,052 | | |
| 3.83 | % |
(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 $5.2 million for the third quarter of 2014 compared to $5.1 million for the same
period in 2013. 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 $4.8 million for the three month period ended September 30, 2014, compared to $3.2
million for the same period of 2013. Gains on the sale of loans fluctuate with the volume of mortgage loans originated as well
as the spread on loans sold in the secondary market. During the three months ended September 30, 2014, the Bank’s mortgage
segment originated $115.3 million in mortgage and brokered loans, up from $103.1 million for the same period in 2013 and profited
from increased spreads on the secondary loans sold. For the three months ended September 30, 2014, other income reflected a gain
of $247 thousand, down from $1.7 million for the three months ended September 30, 2013 due mainly to the hedging impacts of loans
sold on the secondary market.
Noninterest income was $13.8 million for the first nine months
of 2014 compared to $24.0 million for the same period in 2013. Gains on the sale of loans totaled $10.3 million for the nine month
period ended September 30, 2014, compared to $18.2 million for the same period of 2013. During the nine months ended September
30, 2014, the Bank’s mortgage segment originated $295.2 million in mortgage and brokered loans, down from $492.2 million
for the same period in 2013. For the nine months ended September 30, 2014, other income reflected a gain of $2.9 million, as compared
to a $5.3 million gain for the nine months ended September 30, 2013. The decline was due to a $5.7 million decrease in the realized
gain on hedging activity in the mortgage segment when comparing the nine month period ended September 30, 2014 to 2013, which
was mitigated by a $2.5 million increase in the fair value adjustments on the mortgage loans held for sale as well as an increase
in revenue generated by the Wealth Management segment of $847 thousand when comparing the nine month periods ended September 30,
2014 to 2013.
Noninterest Expense
Noninterest expense totaled $6.7 million for the three months
ended September 30, 2014, compared to $8.6 million for the same period in 2013, a decrease of $1.9 million. Salaries and employee
benefits totaled $5.9 million for the three months ended September 30, 2014, compared to $5.7 million for the same period last
year. Other operating expenses totaled $100 thousand for the three months ended September 30, 2014, compared to $2.3 million for
the same period in 2013. This decrease of $2.2 million is due primarily to the $3.25 million release of provision for mortgage
loans sold and the offsetting $707 thousand impairment charge taken on the property owned by Access Real Estate.
Noninterest expense totaled $23.6 million for the nine
months ended September 30, 2014, compared to $31.8 million for the same period in 2013, a decrease of $8.2 million. Salaries
and employee benefits totaled $16.7 million for the nine months ended September 30, 2014, compared to $20.5 million for the
same period last year. The decrease in salary and employee benefits is attributable to the decrease in volume related
compensation in the mortgage banking segment. Other operating expenses totaled $4.8 million for the nine months ended
September 30, 2014, compared to $9.3 million for the same period in 2013. This decrease of $4.5 million is also due to volume
related expenses associated with a decrease in mortgage loan production as well as the $2.5 million net impact of the $3.25
million mortgage reserve release and the impairment charge taken on the property owned by Access Real Estate.
The table below provides the composition of other operating
expenses.
| |
Nine Months Ended September
30, | |
| |
2014 | | |
2013 | |
| |
(In Thousands) | |
| |
| | |
| |
Provision for losses (release of provision) on mortgage loans sold | |
$ | (3,250 | ) | |
$ | 388 | |
Impairment of long-lived asset | |
| 707 | | |
| - | |
Business and franchise tax | |
| 609 | | |
| 628 | |
Advertising and promotional | |
| 581 | | |
| 1,064 | |
Management fees | |
| 576 | | |
| 1,535 | |
Data processing | |
| 501 | | |
| 525 | |
Accounting and auditing | |
| 459 | | |
| 459 | |
Director fees | |
| 381 | | |
| 260 | |
Consulting fees | |
| 350 | | |
| 440 | |
FDIC insurance | |
| 330 | | |
| 335 | |
Investor fees | |
| 325 | | |
| 685 | |
Office supplies-stationary print | |
| 257 | | |
| 188 | |
Telephone | |
| 240 | | |
| 223 | |
Publication and subscription | |
| 203 | | |
| 221 | |
Disaster recovery | |
| 184 | | |
| 137 | |
Stock option | |
| 177 | | |
| 150 | |
Regulatory examinations | |
| 157 | | |
| 156 | |
Credit report | |
| 157 | | |
| 248 | |
Legal fees | |
| 156 | | |
| 151 | |
SBA guarantee fee | |
| 141 | | |
| 166 | |
Business development and meals | |
| 108 | | |
| 101 | |
Travel | |
| 96 | | |
| 123 | |
D&O liability insurance | |
| 95 | | |
| 78 | |
FRB and bank analysis charges | |
| 92 | | |
| 72 | |
Courier | |
| 77 | | |
| 106 | |
Dues and memberships | |
| 73 | | |
| 43 | |
Postage | |
| 73 | | |
| 107 | |
Common stock | |
| 70 | | |
| 64 | |
Verification fees | |
| 66 | | |
| 104 | |
Education and training | |
| 57 | | |
| 82 | |
Conventions and meetings | |
| 44 | | |
| 19 | |
Automotive | |
| 37 | | |
| 35 | |
Appraisal fee | |
| 35 | | |
| 46 | |
Early payoff | |
| 28 | | |
| 124 | |
Compliance/risk management | |
| 28 | | |
| 15 | |
Bank paid closing costs | |
| 27 | | |
| 16 | |
Settlement | |
| 24 | | |
| 32 | |
Other | |
| 506 | | |
| 198 | |
| |
$ | 4,777 | | |
$ | 9,324 | |
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, 2014,
overnight interest-bearing balances totaled $60.5 million and unpledged available-for-sale investment securities totaled approximately
$51.2 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, 2014, the portfolio of CDARS and wholesale time deposits totaled $123.7 million compared to $76.6 million
at December 31, 2013, 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, 2014, the Bank had a line of credit with the FHLB totaling $299.6
million and had outstanding $145 million in short term loans at fixed rates between 0.18% and 0.20% leaving $154.6 million available
on the line. In addition to the line of credit at the FHLB, the Bank issues repurchase agreements. As of September 30, 2014, outstanding
repurchase agreements totaled $20.6 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, 2014, these lines totaled
$60.5 million of which $50.5 million was available as an additional funding source.
The following table presents the composition of borrowings
at September 30, 2014 and December 31, 2013 and for the periods indicated.
Borrowed Funds Distribution |
| |
| | |
| |
| |
September 30, 2014 | | |
December 31, 2013 | |
| |
(Dollars In Thousands) | |
Borrowings: | |
| | | |
| | |
At Period End | |
| | | |
| | |
FHLB advances | |
$ | 145,000 | | |
$ | 145,000 | |
Securities sold under agreements to repurchase | |
| 20,592 | | |
| 27,855 | |
Federal funds purchased | |
| 10,000 | | |
| - | |
Total at period end | |
$ | 175,592 | | |
$ | 172,855 | |
| |
Nine Months Ended
September
30, 2014 | | |
Twelve Months Ended
December
31, 2013 | |
| |
(Dollars In Thousands) | |
Borrowings: | |
| | | |
| | |
Average Balances | |
| | | |
| | |
FHLB advances | |
$ | 104,707 | | |
$ | 43,077 | |
Securities sold under agreements to repurchase | |
| 21,084 | | |
| 25,524 | |
Subordinated debentures | |
| - | | |
| 3,135 | |
Federal funds purchased | |
| 41 | | |
| - | |
Total average balance | |
$ | 125,832 | | |
$ | 71,736 | |
| |
| | | |
| | |
Average rate paid on all borrowed funds | |
| 0.21 | % | |
| 0.32 | % |
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, 2013.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk
The Corporation’s market risk is composed primarily of
interest rate risk. The Funds Management Committee is responsible for reviewing the interest rate sensitivity position and establishes
policies to monitor and coordinate the Corporation’s sources, uses and pricing of funds.
Interest Rate Sensitivity Management
The Corporation uses a simulation model to analyze, manage
and formulate operating strategies that address net interest income sensitivity to movements in interest rates. The simulation
model projects net interest income based on various interest rate scenarios over a twelve month period. The model is based on
the actual maturity and re-pricing characteristics of rate sensitive assets and liabilities. The model incorporates certain assumptions
which management believes to be reasonable regarding the impact of changing interest rates and the prepayment assumption of certain
assets and liabilities. The table below reflects the outcome of these analyses at September 30, 2014 and December 31, 2013, assuming
budgeted growth in the balance sheet. According to the model run for the nine month period ended September 30, 2014, and projecting
forward over a twelve month period, an immediate 100 basis point increase in interest rates would result in an increase in net
interest income of 0.37%. Modeling for an immediate 100 basis point decrease in interest rates has been suspended due to the current
rate environment. While management carefully monitors the exposure to changes in interest rates and takes actions as warranted
to mitigate any adverse impact, there can be no assurance about the actual effect of interest rate changes on net interest income.
The following table reflects the Corporation’s earnings
sensitivity profile.
Increase in Federal Funds Target Rate | | |
Hypothetical Percentage Change in Earnings September
30, 2014 (1) | | |
Hypothetical Percentage Change in Earnings December
31, 2013 | |
| 3.00 | % | |
| 0.37 | % | |
| 8.20 | % |
| 2.00 | % | |
| 0.37 | % | |
| 5.50 | % |
| 1.00 | % | |
| 0.36 | % | |
| 2.41 | % |
The Corporation’s net interest income and the fair value
of its financial instruments are influenced by changes in the level of interest rates. The Corporation manages its exposure to
fluctuations in interest rates through policies established by its Funds Management Committee. The Funds Management Committee
meets periodically and has responsibility for formulating and implementing strategies to improve balance sheet positioning and
earnings and reviewing interest rate sensitivity.
(1) The model used for the September 30,
2014 simulation utilized standard industry assumptions rather than customized assumptions due to a transition in service
vendors during the quarter.
The Mortgage Division is party to mortgage rate lock commitments
to fund mortgage loans at interest rates previously agreed (locked) by both the Mortgage Division and the borrower for specified
periods of time. When the borrower locks his or her interest rate, the Mortgage Division effectively extends a put option to the
borrower, whereby the borrower is not obligated to enter into the loan agreement, but the Mortgage Division must honor the interest
rate for the specified time period. The Mortgage Division is exposed to interest rate risk during the accumulation of interest
rate lock commitments and loans prior to sale. The Mortgage Division utilizes either a best efforts sell forward or a mandatory
sell forward commitment to economically hedge the changes in fair value of the loan due to changes in market interest rates. Failure
to effectively monitor, manage, and hedge the interest rate risk associated with the mandatory commitments subjects the Mortgage
Division to potentially significant market risk.
Throughout the lock period the changes in the market value
of interest rate lock commitments, best efforts and mandatory sell forward commitments are recorded as unrealized gains and losses
and are included in the consolidated statement of income under other noninterest income. The Mortgage Division utilizes a third
party and its proprietary simulation model to assist in identifying and managing the risk associated with this activity.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Corporation’s management evaluated, with the participation
of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the Corporation’s disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)
as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Corporation’s disclosure controls and procedures are effective as of the end of the period covered
by this report to ensure that information required to be disclosed
in the reports that the Corporation files or submits under
the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to the Corporation’s management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that the Corporation’s disclosure
controls and procedures will detect or uncover every situation involving the failure of persons within the Corporation to disclose
material information required to be set forth in the Corporation’s periodic and current reports.
Changes in Internal Control over Financial Reporting
The Corporation’s management is also responsible for
establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange
Act). No changes in the Corporation’s internal control over financial reporting occurred during the last fiscal quarter
that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial
reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Corporation, and the Bank are from time to time parties
to legal proceedings arising in the ordinary course of business. Management is of the opinion that these legal proceedings will
not have a material adverse effect on the Corporation’s financial condition or results of operations. From time to time
the Bank and the Corporation may initiate legal actions against borrowers in connection with collecting defaulted loans. Such
actions are not considered material by management unless otherwise disclosed.
The Corporation was informed in July 2014 that the United States
Attorney's Office (the "U.S. Attorney's Office") for the Southern District of New York
is not taking further steps to investigate the Bank for the activities of the Mortgage Corporation in connection with the
subpoena issued by its Civil Frauds Unit in May 2011 and, based on information currently known, has no present intention of taking
any further action with respect to the matters covered by the subpoena.
As previously disclosed, the U.S. Attorney's Office had been
investigating potential violations by the Mortgage Corporation, prior to the discontinuation of its operations, of the statutes,
regulations, and rules governing the Federal Housing Administration's direct endorsement lender program and potential violations
of sections 215, 656, 657, 1005, 1006, 1007, 1014, or 1344 of Title 18 or section 287, 1001, 1032, 1341, or 1343 of Title 18 affecting
a federally insured financial institution. The subpoena required the Mortgage Corporation, through the Bank since the activities
of the Mortgage Corporation have been transitioned into an operating division of the Bank, to produce certain documents and designate
a knowledgeable witness to testify with respect to the matters set forth above. The Corporation and its subsidiaries cooperated
fully with this investigation.
Item 1A. Risk Factors
There have been no material changes
in the risk factors faced by the Corporation from those disclosed in the Corporation’s Annual Report on Form 10-K for the
year ended December 31, 2013.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
The following table details the Corporation’s purchases
of its common stock during the third quarter of 2014 pursuant to a Share Repurchase Program announced on March 20, 2007.
On June 22, 2010 the number of shares authorized for repurchase under the share repurchase program was increased from 2,500,000
to 3,500,000. The Share Repurchase Program does not have an expiration date.
Issuer Purchases of
Equity Securities |
| |
| | |
| | |
(c) Total Number of | | |
(d) Maximum Number | |
| |
| | |
| | |
Shares Purchased as | | |
of Shares that may | |
| |
(a) Total Number of | | |
(b) Average Price | | |
Part of Publicly | | |
yet be Purchased | |
Period | |
Shares Purchased | | |
Paid Per Share | | |
Announced Plan | | |
Under the Plan | |
| |
| | |
| | |
| | |
| |
July 1 - July 31, 2014 | |
| - | | |
$ | - | | |
| - | | |
| 768,781 | |
August 1 - August 31, 2014 | |
| - | | |
| - | | |
| - | | |
| 768,781 | |
September 1 - September 30, 2014 | |
| - | | |
| - | | |
| - | | |
| 768,781 | |
| |
| - | | |
$ | - | | |
| - | | |
| 768,781 | |
On January 31, 2014, an indirect, wholly-owned subsidiary
of the Corporation entered into an asset purchase agreement pursuant to which it acquired client accounts and certain other assets
from a local wealth management practice for an aggregate purchase price of $1.54 million, subject to adjustment, payable in four
installments: $770 thousand in connection with closing, $256.5 thousand on March 31, 2015, $256.5 thousand on March 31,
2016 and $257 thousand on March 31, 2017. Each installment of the purchase price is payable 50% in cash and 50% in common
stock of the Corporation. For the initial installment in connection with closing, the Corporation issued 24,017 restricted shares
of its common stock and the subsidiary agreed to pay up to $385 thousand in cash on three payment dates over 120 days, with the
total amount of cash payable in connection with closing subject to adjustment pursuant to the asset purchase agreement to reflect
the post-closing delivery of certain consents. For the payment installments in 2015, 2016 and 2017, the number of shares of common
stock of the Corporation to be issued will be determined by dividing (i) one-half of the consideration to be paid on the relevant
payment date by (ii) the average of the daily closing price per share of the common stock on the NASDAQ Global Market, as reported
by The Wall Street Journal, for the ten consecutive trading days prior to and including the December 31 immediately preceding
the applicable payment date (with any fraction of a share being rounded to the nearest whole number). All shares of common stock
issued pursuant to the asset purchase agreement will be restricted for three years from their date of issuance.
The shares have been and will be issued to a natural person
who was the sole shareholder of the seller of the assets in an unregistered transaction in reliance on Rule 506 of Regulation
D promulgated under the Securities Act of 1933, as amended. Such natural person represented to the Corporation that he is an “accredited
investor” as defined under Rule 501(a) of Regulation D. The transaction was privately negotiated and did not involve any
public offering of securities.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit
No. |
|
Description |
3.1 |
|
Amended
and Restated Articles of Incorporation of Access National Corporation (incorporated by reference to Exhibit 3.1 to Form 8-K
filed July 18, 2006 (file number 000-49929)) |
3.1.1 |
|
Articles
of Amendment to Amended and Restated Articles of Incorporation of Access National Corporation (incorporated by reference to
Exhibit 3.1.1 to Form 10-Q filed August 15, 2011 (file number 000-49929)) |
3.2 |
|
Amended
and Restated Bylaws of Access National Corporation (incorporated by reference to Exhibit 3.2 to Form 8-K filed October
24, 2007 (file number 000-49929)) |
|
|
Certain
instruments relating to long-term debt as to which the total amount of securities authorized thereunder does not exceed 10%
of Access National Corporation’s total assets have been omitted in accordance with Item 601(b)(4)(iii) of Regulation
S-K. The registrant will furnish a copy of any such instrument to the Securities and Exchange Commission upon its
request. |
10.5+ |
|
Annual
Compensation of Non-Employee Directors (incorporated by reference to Exhibit 10.5 to Form 10-K filed March 14, 2014 (file
number 000-49929)) |
10.6+ |
|
Base
Salaries for Named Executive Officers (incorporated by reference to Exhibit 10.6 to Form 10-K filed March 14, 2014 (file number
000-49929)) |
31.1* |
|
CEO
Certification Pursuant to Rule 13a-14(a) |
31.2* |
|
CFO
Certification Pursuant to Rule 13a-14(a) |
32* |
|
CEO/CFO
Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) |
101* |
|
The
following materials from Access National Corporation’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2014 formatted in XBRL (Extensible Business Reporting Language), furnished herewith: (i) Consolidated Balance Sheets (unaudited),
(ii) Consolidated Statements of Income (unaudited), (iii) Consolidated Statements of Comprehensive Income (unaudited), (iv)
Consolidated Statements of Changes in Shareholders’ Equity (unaudited), (v) Consolidated Statements of Cash Flows (unaudited),
and (vi) Notes to Consolidated Financial Statements (unaudited). |
101.INS* |
|
XBRL
Instance Document |
101.SCH* |
|
XBRL
Taxonomy Extension Schema |
101.CAL* |
|
XBRL
Taxonomy Extension Calculation Linkbase |
101.DEF* |
|
XBRL
Taxonomy Extension Definition Linkbase |
101.LAB* |
|
XBRL
Taxonomy Extension Label Linkbase |
101.PRE* |
|
XBRL
Taxonomy Extension Presentation Linkbase |
* filed herewith
+ indicates a management contract or compensatory
plan or arrangement
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
Access
National Corporation |
|
(Registrant) |
|
|
Date:
November 10, 2014 |
By: |
/s/
Michael W. Clarke |
|
|
Michael W. Clarke |
|
|
President and
Chief Executive Officer |
|
|
(Principal Executive
Officer) |
|
|
Date: November
10, 2014 |
By: |
/s/
Margaret M. Taylor |
|
|
Margaret M. Taylor |
|
|
Senior Vice President
and Chief Financial Officer |
|
|
(Principal Financial
& Accounting Officer) |
Exhibit 31.1
Certifications
I, Michael W. Clarke, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Access National Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and |
| (d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions): |
| (a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and |
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting. |
Date: November 10, 2014 |
|
|
|
/s/
Michael W. Clarke |
|
|
Michael W. Clarke |
|
|
President and Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
Exhibit 31.2
Certifications
I, Margaret M. Taylor, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Access National Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and |
| (d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions): |
| (a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and |
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting. |
Date: November 10, 2014 |
|
|
|
/s/ Margaret
M. Taylor |
|
|
Margaret M. Taylor |
|
|
Senior Vice President and Chief |
|
|
Financial Officer |
|
|
(Principal Financial & Accounting Officer) |
|
Exhibit 32
Certification Pursuant to 18 U.S.C. Section
1350
as Adopted Pursuant to Section 906 of
the
Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Access National Corporation
(the "Corporation") on Form 10-Q for the quarter ended September 30, 2014 as filed with the Securities and Exchange Commission
on the date hereof (the "Report"), the undersigned, Michael W. Clarke, President and Chief Executive Officer of the Corporation,
and Margaret M. Taylor, Senior Vice President and Chief Financial Officer of the Corporation, do hereby certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of their knowledge:
| 1. | The Report fully complies with the requirements of Section 15(d) of the Securities Exchange Act of 1934, as amended; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Corporation. |
It is not intended that this statement be deemed to be filed
for purposes of the Securities Exchange Act of 1934, as amended.
/s/ Michael
W. Clarke |
|
Michael W. Clarke |
|
President and Chief Executive Officer |
|
(Principal Executive Officer) |
|
November 10, 2014 |
|
|
|
/s/ Margaret
M. Taylor |
|
Margaret M. Taylor |
|
Senior Vice President and Chief Financial Officer |
|
(Principal Financial & Accounting Officer) |
|
November 10, 2014 |
|
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