UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
(Mark One)
x Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly
period ended June 30, 2015
or
¨ Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition
period from _______ to __________
Commission File
Number: 000-49929
ACCESS NATIONAL
CORPORATION
(Exact name of registrant
as specified in its charter)
Virginia
(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 August 6, 2015 was 10,519,442 shares.
Table of Contents
ACCESS NATIONAL CORPORATION
FORM 10-Q
INDEX
PART
I |
FINANCIAL INFORMATION |
|
|
|
|
Item
1. |
Financial Statements (Unaudited) |
|
|
Consolidated Balance Sheets, June 30, 2015 and December 31, 2014 |
Page
2 |
|
Consolidated Statements of Income, three and six months ended June 30, 2015 and 2014 |
Page
3 |
|
Consolidated Statements of Comprehensive Income, three and six months ended June 30, 2015 and 2014 |
Page
4 |
|
Consolidated Statements of Changes in Shareholders' Equity, six months ended June 30, 2015 and 2014 |
Page
5 |
|
Consolidated Statements of Cash Flows, six months ended June 30, 2015 and 2014 |
Page
6 |
|
Notes to Consolidated Financial Statements (Unaudited) |
Page
7 |
Item
2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
Page
35 |
Item
3. |
Quantitative and Qualitative Disclosures About Market Risk |
Page
50 |
Item
4. |
Controls and Procedures |
Page
51 |
|
|
|
PART
II |
OTHER INFORMATION |
|
|
|
|
Item
1. |
Legal Proceedings |
Page
51 |
Item 1A. |
Risk Factors |
Page
52 |
Item
2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
Page
52 |
Item
3. |
Defaults Upon Senior Securities |
Page
52 |
Item
4. |
Mine Safety Disclosures |
Page
52 |
Item
5. |
Other Information |
Page
52 |
Item
6. |
Exhibits |
Page
53 |
|
|
|
|
Signatures |
Page
54 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ACCESS NATIONAL CORPORATION
Consolidated Balance Sheets
(In Thousands, Except for Share and Per
Share Data)
| |
June 30, | | |
December 31, | |
| |
2015 | | |
2014 | |
| |
(Unaudited) | | |
| |
ASSETS | |
| | | |
| | |
Cash and due from banks | |
$ | 12,314 | | |
$ | 9,804 | |
Interest-bearing balances and federal funds sold | |
| 79,186 | | |
| 46,225 | |
Investment securities: | |
| | | |
| | |
Available-for-sale, at fair value | |
| 138,617 | | |
| 125,080 | |
Held-to-maturity, at amortized cost (fair value of $14,331 and $14,378) | |
| 14,299 | | |
| 14,309 | |
Total investment securities | |
| 152,916 | | |
| 139,389 | |
| |
| | | |
| | |
Restricted stock, at amortized cost | |
| 7,471 | | |
| 8,961 | |
Loans held for sale - at fair value | |
| 50,297 | | |
| 45,026 | |
Loans | |
| 834,242 | | |
| 776,603 | |
Allowance for loan losses | |
| (13,509 | ) | |
| (13,399 | ) |
Net loans | |
| 820,733 | | |
| 763,204 | |
Premises, equipment and land, net | |
| 6,909 | | |
| 6,926 | |
Accrued interest receivable | |
| 2,952 | | |
| 2,907 | |
Other assets | |
| 33,344 | | |
| 30,438 | |
Total assets | |
$ | 1,166,122 | | |
$ | 1,052,880 | |
| |
| | | |
| | |
LIABILITIES AND SHAREHOLDERS' EQUITY | |
| | | |
| | |
Deposits | |
| | | |
| | |
Noninterest-bearing deposits | |
$ | 339,266 | | |
$ | 252,875 | |
Savings and interest-bearing deposits | |
| 240,060 | | |
| 233,773 | |
Time deposits | |
| 326,076 | | |
| 268,795 | |
Total deposits | |
| 905,402 | | |
| 755,443 | |
Other liabilities | |
| | | |
| | |
Short-term borrowings | |
| 138,079 | | |
| 185,635 | |
Long-term borrowings | |
| 10,000 | | |
| - | |
Other liabilities and accrued expenses | |
| 8,126 | | |
| 12,898 | |
Total liabilities | |
$ | 1,061,607 | | |
$ | 953,976 | |
| |
| | | |
| | |
SHAREHOLDERS' EQUITY | |
| | | |
| | |
Common stock $0.835 par value; 60,000,000 authorized; issued and outstanding, 10,519,376 and 10,469,569 shares, respectively | |
$ | 8,783 | | |
$ | 8,742 | |
Additional paid in capital | |
| 19,491 | | |
| 18,538 | |
Retained earnings | |
| 76,682 | | |
| 72,168 | |
Accumulated other comprehensive loss, net | |
| (441 | ) | |
| (544 | ) |
Total shareholders' equity | |
| 104,515 | | |
| 98,904 | |
Total liabilities and shareholders' equity | |
$ | 1,166,122 | | |
$ | 1,052,880 | |
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 June 30, | | |
Six Months Ended June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Interest and Dividend Income | |
| | | |
| | | |
| | | |
| | |
Interest and fees on loans | |
$ | 9,971 | | |
$ | 8,854 | | |
$ | 19,405 | | |
$ | 17,313 | |
Interest on federal funds sold and bank balances | |
| 34 | | |
| 27 | | |
| 61 | | |
| 45 | |
Interest and dividends on securities | |
| 782 | | |
| 621 | | |
| 1,597 | | |
| 1,089 | |
Total interest and dividend income | |
| 10,787 | | |
| 9,502 | | |
| 21,063 | | |
| 18,447 | |
| |
| | | |
| | | |
| | | |
| | |
Interest Expense | |
| | | |
| | | |
| | | |
| | |
Interest on deposits | |
| 867 | | |
| 787 | | |
| 1,600 | | |
| 1,515 | |
Interest on short-term borrowings | |
| 83 | | |
| 52 | | |
| 182 | | |
| 128 | |
Interest on long-term borrowings | |
| 30 | | |
| - | | |
| 32 | | |
| - | |
Total interest expense | |
| 980 | | |
| 839 | | |
| 1,814 | | |
| 1,643 | |
| |
| | | |
| | | |
| | | |
| | |
Net interest income | |
| 9,807 | | |
| 8,663 | | |
| 19,249 | | |
| 16,804 | |
Provision for loan losses | |
| 150 | | |
| - | | |
| 150 | | |
| - | |
Net interest income after provision for loan losses | |
| 9,657 | | |
| 8,663 | | |
| 19,099 | | |
| 16,804 | |
| |
| | | |
| | | |
| | | |
| | |
Noninterest Income | |
| | | |
| | | |
| | | |
| | |
Service charges and fees | |
| 218 | | |
| 181 | | |
| 415 | | |
| 358 | |
Gain on sale of loans | |
| 5,705 | | |
| 3,787 | | |
| 9,276 | | |
| 5,515 | |
Other income | |
| 1,158 | | |
| 1,348 | | |
| 3,695 | | |
| 2,699 | |
Total noninterest income | |
| 7,081 | | |
| 5,316 | | |
| 13,386 | | |
| 8,572 | |
| |
| | | |
| | | |
| | | |
| | |
Noninterest Expense | |
| | | |
| | | |
| | | |
| | |
Salaries and benefits | |
| 6,999 | | |
| 5,952 | | |
| 13,716 | | |
| 10,839 | |
Occupancy and equipment | |
| 742 | | |
| 660 | | |
| 1,496 | | |
| 1,367 | |
Other operating expenses | |
| 2,913 | | |
| 2,606 | | |
| 5,688 | | |
| 4,669 | |
Total noninterest expense | |
| 10,654 | | |
| 9,218 | | |
| 20,900 | | |
| 16,875 | |
| |
| | | |
| | | |
| | | |
| | |
Income before income taxes | |
| 6,084 | | |
| 4,761 | | |
| 11,585 | | |
| 8,501 | |
| |
| | | |
| | | |
| | | |
| | |
Income tax expense | |
| 2,100 | | |
| 1,697 | | |
| 4,028 | | |
| 3,023 | |
NET INCOME | |
$ | 3,984 | | |
$ | 3,064 | | |
$ | 7,557 | | |
$ | 5,478 | |
| |
| | | |
| | | |
| | | |
| | |
Earnings per common share: | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | 0.38 | | |
$ | 0.29 | | |
$ | 0.72 | | |
$ | 0.52 | |
Diluted | |
$ | 0.38 | | |
$ | 0.29 | | |
$ | 0.72 | | |
$ | 0.52 | |
| |
| | | |
| | | |
| | | |
| | |
Average outstanding shares: | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 10,518,939 | | |
| 10,411,085 | | |
| 10,496,152 | | |
| 10,401,083 | |
Diluted | |
| 10,590,882 | | |
| 10,454,712 | | |
| 10,554,052 | | |
| 10,450,899 | |
See accompanying notes to consolidated financial statements
(unaudited).
ACCESS NATIONAL CORPORATION
Consolidated Statements of Comprehensive
Income
(In Thousands)
(Unaudited)
| |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Net income | |
$ | 3,984 | | |
$ | 3,064 | | |
$ | 7,557 | | |
$ | 5,478 | |
| |
| | | |
| | | |
| | | |
| | |
Other comprehensive income: | |
| | | |
| | | |
| | | |
| | |
Unrealized gains (losses) on securities | |
| | | |
| | | |
| | | |
| | |
Unrealized holding gains (losses) arising during period | |
| (915 | ) | |
| 857 | | |
| 160 | | |
| 1,859 | |
Less: reclassification adjustment for gains included in net income | |
| - | | |
| (12 | ) | |
| - | | |
| (12 | ) |
Tax effect | |
| 320 | | |
| (296 | ) | |
| (57 | ) | |
| (647 | ) |
Net of tax amount | |
| (595 | ) | |
| 549 | | |
| 103 | | |
| 1,200 | |
| |
| | | |
| | | |
| | | |
| | |
Comprehensive income | |
$ | 3,389 | | |
$ | 3,613 | | |
$ | 7,660 | | |
$ | 6,678 | |
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 | | |
| |
| |
| | |
| | |
| | |
Other | | |
| |
| |
| | |
Additional | | |
| | |
Compre- | | |
| |
| |
Common | | |
Paid in | | |
Retained | | |
hensive | | |
| |
| |
Stock | | |
Capital | | |
Earnings | | |
Income (Loss) | | |
Total | |
Balance, December 31, 2014 | |
$ | 8,742 | | |
$ | 18,538 | | |
$ | 72,168 | | |
$ | (544 | ) | |
$ | 98,904 | |
Net income | |
| - | | |
| - | | |
| 7,557 | | |
| - | | |
| 7,557 | |
Other comprehensive income | |
| - | | |
| - | | |
| - | | |
| 103 | | |
| 103 | |
Stock options exercised (4,600 shares) | |
| 4 | | |
| 46 | | |
| - | | |
| - | | |
| 50 | |
Issuance of restricted common stock (7,500 shares) | |
| 6 | | |
| 122 | | |
| - | | |
| - | | |
| 128 | |
DRSPP shares issued from reserve (37,707) | |
| 31 | | |
| 607 | | |
| - | | |
| - | | |
| 638 | |
Cash dividend ($0.29 per share) | |
| - | | |
| - | | |
| (3,043 | ) | |
| - | | |
| (3,043 | ) |
Stock-based compensation expense recognized in earnings | |
| - | | |
| 178 | | |
| - | | |
| - | | |
| 178 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, June 30, 2015 | |
$ | 8,783 | | |
$ | 19,491 | | |
$ | 76,682 | | |
$ | (441 | ) | |
$ | 104,515 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, December 31, 2013 | |
$ | 8,659 | | |
$ | 17,320 | | |
$ | 67,121 | | |
$ | (1,966 | ) | |
$ | 91,134 | |
Net income | |
| - | | |
| - | | |
| 5,478 | | |
| - | | |
| 5,478 | |
Other comprehensive income | |
| - | | |
| - | | |
| - | | |
| 1,200 | | |
| 1,200 | |
Stock options exercised (28,887 shares) | |
| 44 | | |
| 556 | | |
| - | | |
| - | | |
| 600 | |
Cash dividend ($0.23 per share) | |
| - | | |
| - | | |
| (2,394 | ) | |
| - | | |
| (2,394 | ) |
Stock-based compensation expense recognized in earnings | |
| - | | |
| 118 | | |
| - | | |
| - | | |
| 118 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, June 30, 2014 | |
$ | 8,703 | | |
$ | 17,994 | | |
$ | 70,205 | | |
$ | (766 | ) | |
$ | 96,136 | |
See accompanying notes to consolidated financial statements
(unaudited).
ACCESS NATIONAL CORPORATION
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
| |
Six Months Ended June 30, | |
| |
2015 | | |
2014 | |
Cash Flows from Operating Activities | |
| | | |
| | |
Net income | |
$ | 7,557 | | |
$ | 5,478 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |
| | | |
| | |
Provision for loan losses | |
| 150 | | |
| - | |
Provision for off balance sheet losses | |
| 25 | | |
| - | |
Income from bank-owned life insurance | |
| 231 | | |
| - | |
Gain on sale of securities | |
| - | | |
| 12 | |
Deferred tax benefit | |
| (12 | ) | |
| (7 | ) |
Stock-based compensation | |
| 178 | | |
| 118 | |
(Increase) decrease in valuation allowance on derivatives | |
| (758 | ) | |
| 87 | |
Net amortization on securities | |
| 467 | | |
| 313 | |
Depreciation and amortization | |
| 249 | | |
| 240 | |
Loss on disposal of assets | |
| - | | |
| 1 | |
Changes in assets and liabilities: | |
| | | |
| | |
Decrease (increase) in valuation of loans held for sale carried at fair value | |
| 487 | | |
| (1,350 | ) |
Increase in loans held for sale | |
| (5,758 | ) | |
| (25,298 | ) |
Increase in other assets | |
| (2,638 | ) | |
| (2,706 | ) |
(Decrease) increase in other liabilities | |
| (4,644 | ) | |
| 199 | |
Net cash used in operating activities | |
| (4,466 | ) | |
| (22,913 | ) |
Cash Flows from Investing Activities | |
| | | |
| | |
Proceeds from maturities, calls, and prepayments of securities available for sale | |
| 7,201 | | |
| 3,009 | |
Proceeds from sale of securities | |
| - | | |
| 13,730 | |
Purchases of securities available for sale | |
| (21,035 | ) | |
| (52,890 | ) |
Proceeds from maturities and calls of securities held to maturity | |
| - | | |
| 5,000 | |
Purchase of securities held to maturity | |
| - | | |
| (1,138 | ) |
Purchases of Federal Reserve and Federal Home Loan Bank stock | |
| (4,918 | ) | |
| (10,350 | ) |
Proceeds from redemption of Federal Reserve and Federal Home Loan Bank stock | |
| 6,408 | | |
| 13,548 | |
Purchase of bank owned life insurance | |
| - | | |
| (15,000 | ) |
Net increase in loans | |
| (57,679 | ) | |
| (52,995 | ) |
Purchases of premises and equipment | |
| (215 | ) | |
| (185 | ) |
Net cash used in investing activities | |
| (70,238 | ) | |
| (97,271 | ) |
Cash Flows from Financing Activities | |
| | | |
| | |
Net increase in demand, interest-bearing demand and savings deposits | |
| 92,678 | | |
| 116,826 | |
Net increase in time deposits | |
| 57,281 | | |
| 101,956 | |
Net decrease in securities sold under agreement to repurchase | |
| (7,557 | ) | |
| (7,402 | ) |
Net decrease in other short-term borrowings | |
| (40,000 | ) | |
| (65,000 | ) |
Net increase in long-term borrowings | |
| 10,000 | | |
| - | |
Proceeds from issuance of common stock | |
| 816 | | |
| 600 | |
Dividends paid | |
| (3,043 | ) | |
| (2,394 | ) |
Net cash provided by financing activities | |
| 110,175 | | |
| 144,586 | |
| |
| | | |
| | |
Increase in cash and cash equivalents | |
| 35,471 | | |
| 24,402 | |
Cash and Cash Equivalents | |
| | | |
| | |
Beginning | |
| 56,029 | | |
| 23,419 | |
Ending | |
$ | 91,500 | | |
$ | 47,821 | |
Supplemental Disclosures of Cash Flow Information | |
| | | |
| | |
Cash payments for interest | |
$ | 1,804 | | |
$ | 1,613 | |
Cash payments for income taxes | |
$ | 476 | | |
$ | 2,791 | |
Supplemental Disclosures of Noncash Investing Activities | |
| | | |
| | |
Unrealized gain on securities available for sale | |
$ | 160 | | |
$ | 1,846 | |
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 owns all of the stock of
its subsidiary, Access National Bank (the “Bank”), which is an independent commercial bank chartered under federal
laws as a national banking association. The Bank has three active wholly owned subsidiaries: Access Real Estate LLC (“Access
Real Estate”), a real estate company; ACME Real Estate LLC, a real estate holding company of foreclosed property; and Access
Capital Management Holding LLC (“ACM”), a holding company for Capital Fiduciary Advisors, L.L.C., Access Investment
Services, L.L.C. and Access Insurance Group, L.L.C.
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
for interim financial information and with rules and regulations of the Securities and Exchange Commission (“SEC”).
The statements do not include all of the information and footnotes required by GAAP for complete financial statements. All adjustments
have been made which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods
presented. Such adjustments are all of a normal and recurring nature. All significant inter-company accounts and transactions
have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation.
The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results that
may be expected for the entire year ending December 31, 2015. These consolidated financial statements should be read in conjunction
with the Corporation’s audited financial statements and the notes thereto as of December 31, 2014, included in the Corporation’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2014.
The Corporation has evaluated subsequent events for potential
recognition and/or disclosure in this Quarterly Report on Form 10-Q through the date these consolidated financial statements were
issued.
NOTE 2 – STOCK-BASED COMPENSATION PLANS
During the first six months of 2015,
the Corporation granted 121,434 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 six months of 2015 and 2014 was $178 thousand and
$118 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 June 30, 2015 was $620,710. The
cost is expected to be recognized over a weighted average period of 1.34 years.
NOTE 2 – STOCK-BASED COMPENSATION PLANS (continued)
A summary of stock option activity
under the Plan for the six months ended June 30, 2015 and 2014 is presented as follows:
| |
Six Months Ended | | |
| | |
| | |
| |
| |
June
30, 2015 | | |
| | |
| | |
| |
| |
| | |
| | |
| | |
| |
Expected life
of options granted, in years | |
| 4.56 | | |
| | | |
| | | |
| | |
Risk-free interest rate | |
| 1.06 | % | |
| | | |
| | | |
| | |
Expected volatility of
stock | |
| 30 | % | |
| | | |
| | | |
| | |
Annual expected dividend
yield | |
| 3 | % | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Fair Value of Granted Options | |
$ | 342,570 | | |
| | | |
| | | |
| | |
Non-Vested Options | |
| 308,031 | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
| |
| | |
| | |
Weighted Avg. | | |
| |
| |
Number of | | |
Weighted Avg. | | |
Remaining Contractual | | |
Aggregate Intrinsic | |
| |
Options | | |
Exercise Price | | |
Term, in years | | |
Value | |
| |
| | |
| | |
| | |
| |
Outstanding
at beginning of year | |
| 316,423 | | |
$ | 14.02 | | |
| 3.20 | | |
$ | 917,215 | |
Granted | |
| 121,434 | | |
| 17.95 | | |
| 4.56 | | |
| - | |
Exercised | |
| (4,600 | ) | |
| 10.76 | | |
| 1.91 | | |
$ | 35,310 | |
Lapsed or Canceled | |
| (1,325 | ) | |
$ | 15.32 | | |
| 2.73 | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | |
Outstanding at June 30, 2015 | |
| 431,932 | | |
$ | 15.16 | | |
| 3.24 | | |
$ | 1,849,746 | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable at June
30, 2015 | |
| 123,901 | | |
$ | 13.29 | | |
| 2.46 | | |
$ | 761,942 | |
| |
| | | |
| | | |
| | | |
| | |
| |
Six Months Ended | | |
| | |
| | |
| |
| |
June
30, 2014 | | |
| | |
| | |
| |
| |
| | |
| | |
| | |
| |
Expected life
of options granted, in years | |
| 4.57 | | |
| | | |
| | | |
| | |
Risk-free interest rate | |
| 0.69 | % | |
| | | |
| | | |
| | |
Expected volatility of
stock | |
| 36 | % | |
| | | |
| | | |
| | |
Annual expected dividend
yield | |
| 3 | % | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Fair value of granted options | |
$ | 302,331 | | |
| | | |
| | | |
| | |
Non-vested options | |
| 281,264 | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
| |
| | |
| | |
Weighted Avg. | | |
| |
| |
Number of | | |
Weighted Avg. | | |
Remaining Contractual | | |
Aggregate Intrinsic | |
| |
Options | | |
Exercise
Price | | |
Term,
in years | | |
Value | |
| |
| | |
| | |
| | |
| |
Outstanding
at beginning of year | |
| 281,380 | | |
$ | 11.77 | | |
| 3.20 | | |
$ | 951,526 | |
Granted | |
| 121,500 | | |
| 15.96 | | |
| 4.57 | | |
| - | |
Exercised | |
| (28,887 | ) | |
| 7.44 | | |
| 0.71 | | |
$ | 219,365 | |
Lapsed
or canceled | |
| (7,844 | ) | |
$ | 13.67 | | |
| 3.47 | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | |
Outstanding at June
30, 2014 | |
| 366,149 | | |
$ | 13.46 | | |
| 3.46 | | |
$ | 746,126 | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable at June
30, 2014 | |
| 84,885 | | |
$ | 11.04 | | |
| 2.44 | | |
$ | 357,210 | |
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 June 30, 2015 and December 31, 2014. Held-to-maturity
securities are carried at amortized cost, which reflects historical cost, adjusted for amortization of premiums and accretion
of discounts. Available-for-sale securities are carried at estimated fair value with net unrealized gains or losses reported on
an after tax basis as a component of accumulated other comprehensive income in shareholders’ equity. The estimated fair
value of available-for-sale securities is impacted by interest rates, credit spreads, market volatility, and liquidity.
NOTE 3 – SECURITIES (continued)
| |
June 30, 2015 | |
| |
Amortized Cost | | |
Gross Unrealized Gains | | |
Gross Unrealized (Losses) | | |
Estimated Fair Value | |
| |
| | |
(In Thousands) | | |
| |
Available-for-sale: | |
| | | |
| | | |
| | | |
| | |
U.S. Government agencies | |
$ | 18,998 | | |
$ | - | | |
$ | (327 | ) | |
$ | 18,671 | |
Mortgage backed securities | |
| 63,937 | | |
| 182 | | |
| (395 | ) | |
| 63,724 | |
Corporate bonds | |
| 13,140 | | |
| 83 | | |
| (15 | ) | |
| 13,208 | |
Asset backed securities | |
| 37,688 | | |
| 76 | | |
| (182 | ) | |
| 37,582 | |
Municipals - nontaxable | |
| 4,031 | | |
| 7 | | |
| (29 | ) | |
| 4,009 | |
CRA Mutual fund | |
| 1,500 | | |
| - | | |
| (77 | ) | |
| 1,423 | |
| |
$ | 139,294 | | |
$ | 348 | | |
$ | (1,025 | ) | |
$ | 138,617 | |
| |
| | | |
| | | |
| | | |
| | |
Held-to-maturity: | |
| | | |
| | | |
| | | |
| | |
U.S. Government agencies | |
$ | 9,986 | | |
$ | 77 | | |
$ | (48 | ) | |
$ | 10,015 | |
Municipals | |
| 2,621 | | |
| 39 | | |
| (12 | ) | |
| 2,648 | |
Municipals - nontaxable | |
| 1,692 | | |
| - | | |
| (24 | ) | |
| 1,668 | |
| |
$ | 14,299 | | |
$ | 116 | | |
$ | (84 | ) | |
$ | 14,331 | |
| |
| | | |
| | | |
| | | |
| | |
| |
December 31, 2014 | |
| |
Amortized Cost | | |
Gross Unrealized Gains | | |
Gross Unrealized (Losses) | | |
Estimated Fair Value | |
| |
| | |
(In Thousands) | | |
| |
Available-for-sale: | |
| | | |
| | | |
| | | |
| | |
U.S. Government agencies | |
$ | 18,998 | | |
$ | - | | |
$ | (473 | ) | |
$ | 18,525 | |
Mortgage backed securities | |
| 70,001 | | |
| 136 | | |
| (439 | ) | |
| 69,698 | |
Corporate bonds | |
| 13,304 | | |
| 95 | | |
| (27 | ) | |
| 13,372 | |
Asset backed securities | |
| 18,072 | | |
| 83 | | |
| (172 | ) | |
| 17,983 | |
Municipals - nontaxable | |
| 4,042 | | |
| 24 | | |
| (1 | ) | |
| 4,065 | |
CRA Mutual fund | |
| 1,500 | | |
| - | | |
| (63 | ) | |
| 1,437 | |
| |
$ | 125,917 | | |
$ | 338 | | |
$ | (1,175 | ) | |
$ | 125,080 | |
| |
| | | |
| | | |
| | | |
| | |
Held-to-maturity: | |
| | | |
| | | |
| | | |
| | |
U.S. Government agencies | |
$ | 9,985 | | |
$ | 46 | | |
| (25 | ) | |
$ | 10,006 | |
Municipals | |
| 2,627 | | |
| 41 | | |
| - | | |
| 2,668 | |
Municipals - nontaxable | |
| 1,697 | | |
| 10 | | |
| (3 | ) | |
| 1,704 | |
| |
$ | 14,309 | | |
$ | 97 | | |
$ | (28 | ) | |
$ | 14,378 | |
NOTE 3 – SECURITIES (continued)
The amortized cost and estimated fair value of securities available-for-sale
and held-to-maturity as of June 30, 2015 and December 31, 2014 by contractual maturity are shown below. Actual maturities may
differ from contractual maturities because some of the securities may be called or prepaid without any penalties.
| |
June 30, 2015 | | |
December 31, 2014 | |
| |
| | |
Estimated | | |
| | |
Estimated | |
| |
Amortized | | |
Fair | | |
Amortized | | |
Fair | |
| |
Cost | | |
Value | | |
Cost | | |
Value | |
| |
(In Thousands) | |
Available-for-sale: | |
| | | |
| | | |
| | | |
| | |
US Government agencies: | |
| | | |
| | | |
| | | |
| | |
Due after one through five years | |
$ | 4,000 | | |
$ | 3,947 | | |
$ | - | | |
$ | - | |
Due after five through ten years | |
| 14,998 | | |
| 14,724 | | |
| 18,998 | | |
| 18,525 | |
Mortgage backed securities: | |
| | | |
| | | |
| | | |
| | |
Due after one through five years | |
| 1,989 | | |
| 2,001 | | |
| - | | |
| - | |
Due after five through ten years | |
| 4,325 | | |
| 4,276 | | |
| 6,533 | | |
| 6,481 | |
Due after ten through fifteen years | |
| 37,516 | | |
| 37,306 | | |
| 39,311 | | |
| 39,115 | |
Due after fifteen years | |
| 20,107 | | |
| 20,141 | | |
| 24,157 | | |
| 24,102 | |
Corporate bonds: | |
| | | |
| | | |
| | | |
| | |
Due in one year or less | |
| 1,999 | | |
| 2,008 | | |
| 1,998 | | |
| 2,023 | |
Due after one through five years | |
| 11,141 | | |
| 11,200 | | |
| 11,306 | | |
| 11,349 | |
Asset backed securities: | |
| | | |
| | | |
| | | |
| | |
Due after five through ten years | |
| 20,356 | | |
| 20,345 | | |
| 6,134 | | |
| 6,199 | |
Due after fifteen years | |
| 17,332 | | |
| 17,237 | | |
| 11,938 | | |
| 11,784 | |
Municipals - nontaxable: | |
| | | |
| | | |
| | | |
| | |
Due after five through ten years | |
| 401 | | |
| 409 | | |
| 404 | | |
| 413 | |
Due after ten through fifteen years | |
| 1,362 | | |
| 1,358 | | |
| 1,366 | | |
| 1,381 | |
Due after fifteen years | |
| 2,268 | | |
| 2,242 | | |
| 2,272 | | |
| 2,271 | |
| |
| | | |
| | | |
| | | |
| | |
CRA Mutual fund | |
| 1,500 | | |
| 1,423 | | |
| 1,500 | | |
| 1,437 | |
Total | |
$ | 139,294 | | |
$ | 138,617 | | |
$ | 125,917 | | |
$ | 125,080 | |
| |
| | | |
| | | |
| | | |
| | |
Held-to-maturity: | |
| | | |
| | | |
| | | |
| | |
US Government agencies: | |
| | | |
| | | |
| | | |
| | |
Due after one through five years | |
$ | 5,000 | | |
$ | 5,077 | | |
$ | 5,000 | | |
$ | 5,046 | |
Due after ten through fifteen years | |
| 4,986 | | |
| 4,938 | | |
| 4,985 | | |
| 4,960 | |
Municipals: | |
| | | |
| | | |
| | | |
| | |
Due after five through ten years | |
| 1,487 | | |
| 1,498 | | |
| 428 | | |
| 444 | |
Due after ten through fifteen years | |
| 1,134 | | |
| 1,150 | | |
| 1,638 | | |
| 1,666 | |
Due after fifteen years | |
| - | | |
| - | | |
| 561 | | |
| 558 | |
Municipals - nontaxable: | |
| | | |
| | | |
| | | |
| | |
Due after ten through fifteen years | |
| 1,409 | | |
| 1,390 | | |
| 1,414 | | |
| 1,421 | |
Due after fifteen years | |
| 283 | | |
| 278 | | |
| 283 | | |
| 283 | |
Total | |
$ | 14,299 | | |
$ | 14,331 | | |
$ | 14,309 | | |
$ | 14,378 | |
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 $103.3 million
at June 30, 2015 and $102.6 million at December 31, 2014.
NOTE 3 – SECURITIES (continued)
Securities available-for-sale and held-to-maturity that have
an unrealized loss position at June 30, 2015 and December 31, 2014 are as follows:
| |
Securities in a
loss | | |
Securities in a
loss | | |
| | |
| |
| |
Position for less
than | | |
Position for 12
Months | | |
| | |
| |
| |
12 Months | | |
or Longer | | |
Total | |
June 30, 2015 | |
Estimated | | |
| | |
Estimated | | |
| | |
Estimated | | |
| |
| |
Fair | | |
Unrealized | | |
Fair | | |
Unrealized | | |
Fair | | |
Unrealized | |
| |
Value | | |
Losses | | |
Value | | |
Losses | | |
Value | | |
Losses | |
| |
(In Thousands) | |
Investment
securities available-for-sale: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Mortgage backed
securities | |
$ | 14,359 | | |
$ | (98 | ) | |
$ | 13,217 | | |
$ | (297 | ) | |
$ | 27,576 | | |
$ | (395 | ) |
U.S. Government agencies | |
| 14,724 | | |
| (274 | ) | |
| 3,947 | | |
| (53 | ) | |
| 18,671 | | |
| (327 | ) |
Municipals - nontaxable | |
| 3,600 | | |
| (29 | ) | |
| - | | |
| - | | |
| 3,600 | | |
| (29 | ) |
Corporate bonds | |
| 4,402 | | |
| (15 | ) | |
| - | | |
| - | | |
| 4,402 | | |
| (15 | ) |
Asset backed securities | |
| 5,166 | | |
| (99 | ) | |
| 2,877 | | |
| (83 | ) | |
| 8,043 | | |
| (182 | ) |
CRA
Mutual fund | |
| - | | |
| - | | |
| 1,423 | | |
| (77 | ) | |
| 1,423 | | |
| (77 | ) |
Total | |
$ | 42,251 | | |
$ | (515 | ) | |
$ | 21,464 | | |
$ | (510 | ) | |
$ | 63,715 | | |
$ | (1,025 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Investment
securities held-to-maturity: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S. Government agencies | |
$ | 4,938 | | |
$ | (48 | ) | |
$ | - | | |
$ | - | | |
$ | 4,938 | | |
$ | (48 | ) |
Municipals Taxable | |
| 1,606 | | |
| (12 | ) | |
| - | | |
| - | | |
| 1,606 | | |
| (12 | ) |
Municipals
- nontaxable | |
| 1,668 | | |
| (24 | ) | |
| - | | |
| - | | |
| 1,668 | | |
| (24 | ) |
Total | |
$ | 8,212 | | |
$ | (84 | ) | |
$ | - | | |
$ | - | | |
$ | 8,212 | | |
$ | (84 | ) |
| |
| | |
| | |
| | |
| |
| |
Securities in a
loss | | |
Securities in a
loss | | |
| | |
| |
| |
Position for less
than | | |
Position for 12
Months | | |
| | |
| |
| |
12 Months | | |
or Longer | | |
Total | |
December 31, 2014 | |
Estimated | | |
| | |
Estimated | | |
| | |
Estimated | | |
| |
| |
Fair | | |
Unrealized | | |
Fair | | |
Unrealized | | |
Fair | | |
Unrealized | |
| |
Value | | |
Losses | | |
Value | | |
Losses | | |
Value | | |
Losses | |
| |
(In Thousands) | |
Investment
securities available-for-sale: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Mortgage backed
securities | |
$ | 19,252 | | |
$ | (74 | ) | |
$ | 17,141 | | |
$ | (365 | ) | |
$ | 36,393 | | |
$ | (439 | ) |
U.S. Government agencies | |
| - | | |
| - | | |
| 18,525 | | |
| (473 | ) | |
| 18,525 | | |
| (473 | ) |
Municipals - nontaxable | |
| 2,271 | | |
| (1 | ) | |
| - | | |
| - | | |
| 2,271 | | |
| (1 | ) |
Corporate bonds | |
| 4,480 | | |
| (27 | ) | |
| - | | |
| - | | |
| 4,480 | | |
| (27 | ) |
Asset backed securities | |
| 6,289 | | |
| (71 | ) | |
| 2,995 | | |
| (101 | ) | |
| 9,284 | | |
| (172 | ) |
CRA
Mutual fund | |
| - | | |
| - | | |
| 1,437 | | |
| (63 | ) | |
| 1,437 | | |
| (63 | ) |
Total | |
$ | 32,292 | | |
$ | (173 | ) | |
$ | 40,098 | | |
$ | (1,002 | ) | |
$ | 72,390 | | |
$ | (1,175 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Investment
securities held-to-maturity: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S. Government agencies | |
$ | - | | |
$ | - | | |
$ | 4,960 | | |
$ | (25 | ) | |
$ | 4,960 | | |
$ | (25 | ) |
Municipals
- nontaxable | |
| 842 | | |
| (3 | ) | |
| - | | |
| - | | |
| 842 | | |
| (3 | ) |
Total | |
$ | 842 | | |
$ | (3 | ) | |
$ | 4,960 | | |
$ | (25 | ) | |
$ | 5,802 | | |
$ | (28 | ) |
The Corporation evaluates securities for other than temporary
impairment (“OTTI”) on a quarterly basis and more frequently when economic or market conditions warrant such evaluation.
Consideration is given to various factors in determining whether the Corporation anticipates a recovery in fair value such as:
the length of time and extent to which the fair value has been less than cost, and the financial condition and underlying credit
quality of the issuer. When analyzing an issuer’s financial condition, the Corporation may consider whether the securities
are issued by the federal government or its agencies, the sector or industry trends affecting the issuer, and whether any recent
downgrades by bond rating agencies have occurred.
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 June 30, 2015, one held-to-maturity security had an unrealized
loss of $48 thousand while four available-for-sale securities had unrealized losses of $327 thousand. The severity and duration
of these unrealized losses will fluctuate with interest rates in the economy. As the securities are obligations of government
agencies, it is the Corporation’s intent to hold these securities until a market price recovery or maturity, and it is more
likely than not that the Corporation will not be required to sell the securities before their anticipated recovery, the Corporation
does not consider these investments other than temporarily impaired.
Mortgage backed securities
The Corporation’s unrealized losses on mortgage backed
securities were caused by interest rate fluctuations. At June 30, 2015, eleven securities had unrealized losses of $395 thousand.
As these securities are Ginnie Mae and government sponsored entity securities backed by the United States Government, the Corporation’s
intent to hold these securities until a market price recovery or maturity, and the determination that it is more likely than not
that the Corporation will not be required to sell these securities before their anticipated recoveries, the Corporation does not
consider these investments other than temporarily impaired.
Asset backed securities
The Corporation’s unrealized losses on its asset backed
securities were caused by interest rate fluctuations. At June 30, 2015, four securities had unrealized losses of $182 thousand.
Based on the credit quality of the issuers, the Corporation’s intent to hold these securities until a market price recovery,
and the determination that it is more likely than not that the Corporation will not be required to sell the securities before
their anticipated recovery, the Corporation does not consider these investments other than temporarily impaired.
Mutual fund
The Corporation’s unrealized loss on its mutual fund
investment was caused by interest rate fluctuations. At June 30, 2015, this one security had an unrealized loss of $77 thousand.
Based on the credit quality of the issuer, the Corporation’s intent to hold this security until a market price recovery,
and the determination that it is more likely than not that the Corporation will not be required to sell this security before its
anticipated recovery, the Corporation does not consider this investment other than temporarily impaired.
Corporate bonds
The Corporation’s unrealized loss on a corporate obligation
was caused by interest rate fluctuations. At June 30, 2015, one security had an unrealized loss of $15 thousand. Based on the
credit quality of the issuer, the Corporation’s intent to hold this security until a market price recovery or maturity,
and the determination that it is more likely than not that the Corporation will not be required to sell the security before its
anticipated recovery, the Corporation does not consider this investment other than temporarily impaired.
Municipal
The Corporation’s unrealized losses on its
municipal investments were caused by interest rate fluctuations. At June 30, 2015, four held-to-maturity securities
had unrealized losses of $36 thousand while three available-for-sale municipal investments had unrealized losses of $29
thousand. Based on the credit quality of the issuers, the Corporation’s intent to hold these securities until a market
price recovery, and the determination that it is more likely than not that the Corporation will not be required to sell
these securities before their anticipated recovery, the Corporation does not consider these investments other than
temporarily impaired.
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 June 30,
2015 and December 31, 2014 are as follows:
| |
June 30, 2015 | | |
December 31, 2014 | |
| |
(In Thousands) | |
Restricted Stock: | |
| | | |
| | |
| |
| | | |
| | |
FRB stock | |
$ | 999 | | |
$ | 999 | |
| |
| | | |
| | |
FHLB stock | |
| 6,472 | | |
| 7,962 | |
| |
$ | 7,471 | | |
$ | 8,961 | |
Securities Sold Under Agreements to Repurchase (Repurchase
Agreements)
The Corporation enters into agreements under which it sells
securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Corporation may
transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates
the Corporation to repurchase the assets. As a result, these repurchase agreements are accounted for as collateralized financing
agreements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase
the securities is reflected as a liability in the Corporation’s consolidated balance sheets, while the securities underlying
the repurchase agreements remain in the respective investment securities asset accounts. In other words, there is no offsetting
or netting of the investment securities assets with the repurchase agreement liabilities. In addition, as the Corporation does
not enter into reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements.
The right of setoff for a repurchase agreement resembles a
secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should
the Corporation be in default (e.g., fails to make an interest payment to the counterparty). The collateral is held by
a third-party financial institution in the Corporation’s custodial account. The Corporation has the right to sell
or repledge the investment securities. The risks and rewards associated with the investment securities pledged as
collateral (e.g. a decline or rise in the fair value of the investments) remains with the Corporation. As of June 30, 2015
and December 31, 2014, the obligations outstanding under these repurchase agreements totaled $18.1 million and $25.6
million, respectively, and were comprised of overnight sweep accounts. The fair value of the securities pledged in connection
with these repurchase agreements at June 30, 2015 was $18.5 million in total and consisted of $5.5 million in municipal
securities, $8.4 million in corporate bonds, and $4.6 million in asset-backed securities. The fair value of the securities
pledged in connection with these repurchase agreements at December 31, 2014 was $26.1 million in total and consisted of $16.4
million in mortgage backed securities, $4.5 million in corporate bonds, and $5.2 million in asset-backed securities.
NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES
The following table presents the composition of the loans held
for investment portfolio at June 30, 2015 and December 31, 2014:
| |
Composition of Loan Portfolio | |
| |
June 30, 2015 | | |
December 31, 2014 | |
| |
Amount | | |
Percentage of Total | | |
Amount | | |
Percentage of Total | |
| |
(Dollars In Thousands) | |
Commercial real estate-owner occupied | |
$ | 222,012 | | |
| 26.61 | % | |
$ | 199,442 | | |
| 25.68 | % |
Commercial real estate-non owner occupied | |
| 134,585 | | |
| 16.13 | | |
| 125,442 | | |
| 16.15 | |
Residential real estate | |
| 198,418 | | |
| 23.79 | | |
| 194,213 | | |
| 25.01 | |
Commercial | |
| 223,756 | | |
| 26.82 | | |
| 210,278 | | |
| 27.08 | |
Real estate construction | |
| 47,037 | | |
| 5.64 | | |
| 41,080 | | |
| 5.29 | |
Consumer | |
| 8,434 | | |
| 1.01 | | |
| 6,148 | | |
| 0.79 | |
Total loans | |
$ | 834,242 | | |
| 100.00 | % | |
$ | 776,603 | | |
| 100.00 | % |
Less allowance for loan losses | |
| 13,509 | | |
| | | |
| 13,399 | | |
| | |
| |
$ | 820,733 | | |
| | | |
$ | 763,204 | | |
| | |
Unearned income and net deferred loan fees and costs totaled
$1.6 million at June 30, 2015 and December 31, 2014. Loans pledged to secure borrowings at the FHLB totaled $262.0 million and
$215.8 million at June 30, 2015 and December 31, 2014, respectively.
Allowance for Loan Losses
The allowance for loan losses totaled $13.5 million at June
30, 2015 compared to $13.4 million at year end December 31, 2014. The allowance for loan losses was equivalent to 1.62% and 1.73%
of total loans held for investment at June 30, 2015 and December 31, 2014, respectively. Adequacy of the allowance is assessed
and the allowance is increased by provisions for loan losses charged to expense no less than quarterly. Charge-offs are taken
when a loan is identified as uncollectible.
The methodology by which we systematically determine the amount
of our allowance is set forth by the Board of Directors in our Loan Policy and implemented by management. The results of the analysis
are documented, reviewed, and approved by the Board of Directors no less than quarterly.
The level of the allowance for loan losses is determined by
management through an ongoing, detailed analysis of historical loss rates and risk characteristics. During each quarter, management
evaluates the collectability of all loans in the portfolio and ensures an accurate risk rating is assigned to each loan. The risk
rating scale and definitions commonly adopted by the Federal Banking Agencies is contained within the framework prescribed by
the Bank’s Loan Policy. Any loan that is deemed to have potential or well defined weaknesses that may jeopardize collection
in full is then analyzed to ascertain its level of weakness. If appropriate, the loan may be charged-off or a specific reserve
may be assigned if the loan is deemed to be impaired.
During the risk rating verification process, each loan identified
as inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged is considered
impaired and is placed on non-accrual status. On these loans, management analyzes the potential impairment of the individual loan
and may set aside a specific reserve. Any amounts deemed uncollectible during that analysis are charged-off.
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 | |
| |
| |
Three months ended June 30, 2015 | |
Commercial
real estate
- owner occupied | | |
Commercial
real estate
- non-owner occupied | | |
Residential real
estate | | |
Commercial | | |
Real
estate construction | | |
Consumer | | |
Total | |
| |
(In Thousands) | |
Allowance for credit losses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Beginning
Balance | |
$ | 3,338 | | |
$ | 1,751 | | |
$ | 3,182 | | |
$ | 4,338 | | |
$ | 636 | | |
$ | 86 | | |
$ | 13,331 | |
Charge-offs | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Recoveries | |
| - | | |
| - | | |
| 14 | | |
| 14 | | |
| - | | |
| - | | |
| 28 | |
Provisions | |
| 20 | | |
| 108 | | |
| (22 | ) | |
| (19 | ) | |
| 29 | | |
| 34 | | |
| 150 | |
Ending Balance | |
$ | 3,358 | | |
$ | 1,859 | | |
$ | 3,174 | | |
$ | 4,333 | | |
$ | 665 | | |
$ | 120 | | |
$ | 13,509 | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Six months ended June 30, 2015 | |
Commercial
real estate
- owner occupied | | |
Commercial
real estate
- non-owner occupied | | |
Residential real
estate | | |
Commercial | | |
Real
estate construction | | |
Consumer | | |
Total | |
| |
(In Thousands) | |
Allowance for credit losses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Beginning
Balance | |
$ | 3,229 | | |
$ | 1,894 | | |
$ | 3,308 | | |
$ | 4,284 | | |
$ | 596 | | |
$ | 88 | | |
$ | 13,399 | |
Charge-offs | |
| - | | |
| - | | |
| - | | |
| (114 | ) | |
| - | | |
| - | | |
| (114 | ) |
Recoveries | |
| - | | |
| - | | |
| 38 | | |
| 36 | | |
| - | | |
| - | | |
| 74 | |
Provisions | |
| 129 | | |
| (35 | ) | |
| (172 | ) | |
| 127 | | |
| 69 | | |
| 32 | | |
| 150 | |
Ending Balance | |
$ | 3,358 | | |
$ | 1,859 | | |
$ | 3,174 | | |
$ | 4,333 | | |
$ | 665 | | |
$ | 120 | | |
$ | 13,509 | |
| |
| |
| |
Allowance for Loan Losses | |
| |
| |
Three months ended June 30, 2014 | |
Commercial
real estate
- owner occupied | | |
Commercial
real estate
- non-owner occupied | | |
Residential real
estate | | |
Commercial | | |
Real
estate construction | | |
Consumer | | |
Total | |
| |
(In Thousands) | |
Allowance for credit losses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Beginning
Balance | |
$ | 3,761 | | |
$ | 1,715 | | |
$ | 3,251 | | |
$ | 3,545 | | |
$ | 786 | | |
$ | 113 | | |
| 13,171 | |
Charge-offs | |
| - | | |
| - | | |
| (21 | ) | |
| - | | |
| - | | |
| - | | |
| (21 | ) |
Recoveries | |
| - | | |
| - | | |
| 21 | | |
| 40 | | |
| - | | |
| - | | |
| 61 | |
Provisions | |
| (598 | ) | |
| 181 | | |
| (161 | ) | |
| 714 | | |
| (116 | ) | |
| (20 | ) | |
| - | |
Ending Balance | |
$ | 3,163 | | |
$ | 1,896 | | |
$ | 3,090 | | |
$ | 4,299 | | |
$ | 670 | | |
$ | 93 | | |
$ | 13,211 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Six months ended
June 30, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Allowance
for credit losses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Beginning Balance | |
$ | 3,763 | | |
$ | 1,734 | | |
$ | 3,320 | | |
$ | 3,484 | | |
$ | 743 | | |
$ | 92 | | |
| 13,136 | |
Charge-offs | |
| - | | |
| - | | |
| (21 | ) | |
| (16 | ) | |
| - | | |
| - | | |
| (37 | ) |
Recoveries | |
| - | | |
| - | | |
| 61 | | |
| 51 | | |
| - | | |
| - | | |
| 112 | |
Provisions | |
| (600 | ) | |
| 162 | | |
| (270 | ) | |
| 780 | | |
| (73 | ) | |
| 1 | | |
| - | |
Ending Balance | |
$ | 3,163 | | |
$ | 1,896 | | |
$ | 3,090 | | |
$ | 4,299 | | |
$ | 670 | | |
$ | 93 | | |
$ | 13,211 | |
| |
| |
| |
Recorded Investment in
Loans | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
June 30, 2015 | |
Commercial
real estate
- owner occupied | | |
Commercial
real estate
- non-owner occupied | | |
Residential real
estate | | |
Commercial | | |
Real
estate construction | | |
Consumer | | |
Total | |
| |
(In Thousands) | |
Allowance | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ending
balance: | |
$ | 3,358 | | |
$ | 1,859 | | |
$ | 3,174 | | |
$ | 4,333 | | |
$ | 665 | | |
$ | 120 | | |
$ | 13,509 | |
Ending
balance: individually evaluated for impairment | |
$ | - | | |
$ | - | | |
$ | - | | |
| | | |
$ | - | | |
$ | - | | |
$ | - | |
Ending
balance: collectively evaluated for impairment | |
$ | 3,358 | | |
$ | 1,859 | | |
$ | 3,174 | | |
$ | 4,333 | | |
$ | 665 | | |
$ | 120 | | |
$ | 13,509 | |
Ending
balance: loans acquired with deteriorated credit quality | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ending balance | |
$ | 222,012 | | |
$ | 134,585 | | |
$ | 198,418 | | |
$ | 223,756 | | |
$ | 47,037 | | |
$ | 8,434 | | |
$ | 834,242 | |
Ending
balance: individually evaluated for impairment | |
$ | 762 | | |
$ | 5,819 | | |
$ | 350 | | |
$ | 1,367 | | |
$ | 1,106 | | |
$ | - | | |
$ | 9,404 | |
Ending
balance: collectively evaluated for impairment | |
$ | 221,250 | | |
$ | 128,766 | | |
$ | 198,068 | | |
$ | 222,389 | | |
$ | 45,931 | | |
$ | 8,434 | | |
$ | 824,838 | |
Ending
balance: loans acquired with deteriorated credit quality | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
December 31, 2014 | |
Commercial
real estate
- owner occupied | | |
Commercial
real estate
- non-owner occupied | | |
Residential real
estate | | |
Commercial | | |
Real
estate construction | | |
Consumer | | |
Total | |
| |
(In Thousands) | |
Allowance | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ending
balance: | |
$ | 3,229 | | |
$ | 1,894 | | |
$ | 3,308 | | |
$ | 4,284 | | |
$ | 596 | | |
$ | 88 | | |
$ | 13,399 | |
Ending
balance: individually evaluated for impairment | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 115 | | |
$ | - | | |
$ | - | | |
$ | 115 | |
Ending
balance: collectively evaluated for impairment | |
$ | 3,229 | | |
$ | 1,894 | | |
$ | 3,308 | | |
$ | 4,169 | | |
$ | 596 | | |
$ | 88 | | |
$ | 13,284 | |
Ending
balance: loans acquired with deteriorated credit quality | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ending balance: | |
$ | 199,442 | | |
$ | 125,442 | | |
$ | 194,213 | | |
$ | 210,278 | | |
$ | 41,080 | | |
$ | 6,148 | | |
$ | 776,603 | |
Ending
balance: individually evaluated for impairment | |
$ | 356 | | |
$ | - | | |
$ | 320 | | |
$ | 1,515 | | |
$ | - | | |
$ | - | | |
$ | 2,191 | |
Ending
balance: collectively evaluated for impairment | |
$ | 199,086 | | |
$ | 125,442 | | |
$ | 193,893 | | |
$ | 208,763 | | |
$ | 41,080 | | |
$ | 6,148 | | |
$ | 774,412 | |
Ending
balance: loans acquired with deteriorated credit quality | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
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 June
30, 2015 or December 31, 2014. It is the Bank’s policy to charge-off any loan once the risk rating is classified as loss.
NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES
(continued)
The profile of the loan portfolio, as indicated by risk rating,
as of June 30, 2015 and December 31, 2014 is shown below.
| |
June 30, 2015 | |
Credit Risk Profile by
Risk Rating | |
Pass | | |
Special
Mention | | |
Substandard | | |
Doubtful | | |
Loss | | |
Unearned Income | | |
Total
Loans | |
| |
(In Thousands) | |
Commercial
real estate - owner occupied | |
$ | 217,811 | | |
$ | 1,955 | | |
$ | 2,755 | | |
$ | - | | |
$ | - | | |
$ | (509 | ) | |
$ | 222,012 | |
Commercial real estate
- non-owner occupied | |
| 127,301 | | |
| - | | |
| 7,610 | | |
| - | | |
| - | | |
| (326 | ) | |
| 134,585 | |
Residential real estate | |
| 196,333 | | |
| 1,922 | | |
| 370 | | |
| - | | |
| - | | |
| (208 | ) | |
| 198,418 | |
Commercial | |
| 208,793 | | |
| 12,596 | | |
| 2,694 | | |
| - | | |
| - | | |
| (327 | ) | |
| 223,756 | |
Real estate construction | |
| 46,199 | | |
| - | | |
| 1,106 | | |
| - | | |
| - | | |
| (268 | ) | |
| 47,037 | |
Consumer | |
| 8,431 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 3 | | |
| 8,434 | |
Total | |
$ | 804,868 | | |
$ | 16,473 | | |
$ | 14,535 | | |
$ | - | | |
$ | - | | |
$ | (1,635 | ) | |
$ | 834,242 | |
| |
| |
| |
December 31, 2014 | |
Credit Risk Profile by
Risk Rating | |
Pass | | |
Special
Mention | | |
Substandard | | |
Doubtful | | |
Loss | | |
Unearned Income | | |
Total
Loans | |
| |
(In Thousands) | |
Commercial
real estate - owner occupied | |
$ | 194,007 | | |
$ | 2,115 | | |
$ | 3,767 | | |
$ | - | | |
$ | - | | |
$ | (447 | ) | |
$ | 199,442 | |
Commercial real estate
- non-owner occupied | |
| 111,301 | | |
| 2,627 | | |
| 11,751 | | |
| - | | |
| - | | |
| (237 | ) | |
| 125,442 | |
Residential real estate | |
| 191,512 | | |
| 2,100 | | |
| 936 | | |
| - | | |
| - | | |
| (335 | ) | |
| 194,213 | |
Commercial | |
| 194,585 | | |
| 10,519 | | |
| 5,540 | | |
| - | | |
| - | | |
| (366 | ) | |
| 210,278 | |
Real estate construction | |
| 41,253 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (173 | ) | |
| 41,080 | |
Consumer | |
| 6,148 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| | | |
| 6,148 | |
Total | |
$ | 738,806 | | |
$ | 17,361 | | |
$ | 21,994 | | |
$ | - | | |
$ | - | | |
$ | (1,558 | ) | |
$ | 776,603 | |
Loans listed as non-performing are also placed on non-accrual
status. The accrual of interest is discontinued at the time a loan is 90 days delinquent or when the credit deteriorates and there
is doubt that the credit will be paid as agreed, unless the credit is well-secured and in process of collection. Once the loan
is on non-accrual status, all accrued but unpaid interest is also charged-off, and all payments are used to reduce the principal
balance. Once the principal balance is repaid in full, additional payments are taken into income. A loan may be returned to accrual
status if the borrower shows renewed willingness and ability to repay under the term of the loan agreement. The risk profile based
upon payment activity is shown below.
NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES
(continued)
| |
For the Period Ended, June 30, 2015 | |
Credit Risk Profile Based on Payment Activity | |
Performing | | |
Non-Performing | | |
Total Loans | |
| |
(In Thousands) | |
Commercial real estate - owner occupied | |
$ | 221,250 | | |
$ | 762 | | |
$ | 222,012 | |
Commercial real estate - non-owner occupied | |
| 128,765 | | |
| 5,820 | | |
| 134,585 | |
Residential real estate | |
| 198,255 | | |
| 163 | | |
| 198,418 | |
Commercial | |
| 223,074 | | |
| 682 | | |
| 223,756 | |
Real estate construction | |
| 47,037 | | |
| - | | |
| 47,037 | |
Consumer | |
| 8,434 | | |
| - | | |
| 8,434 | |
Total | |
$ | 826,815 | | |
$ | 7,427 | | |
$ | 834,242 | |
| |
| |
| |
For the Period Ended, December 31, 2014 | |
Credit Risk Profile Based on Payment Activity | |
Performing | | |
Non-Performing | | |
Total Loans | |
| |
(In Thousands) | |
Commercial real estate - owner occupied | |
$ | 199,442 | | |
$ | - | | |
$ | 199,442 | |
Commercial real estate - non-owner occupied | |
| 125,442 | | |
| - | | |
| 125,442 | |
Residential real estate | |
| 194,084 | | |
| 129 | | |
| 194,213 | |
Commercial | |
| 208,785 | | |
| 1,493 | | |
| 210,278 | |
Real estate construction | |
| 41,080 | | |
| - | | |
| 41,080 | |
Consumer | |
| 6,148 | | |
| - | | |
| 6,148 | |
Total | |
$ | 774,981 | | |
$ | 1,622 | | |
$ | 776,603 | |
Loans are considered past due if a contractual payment is not
made by the calendar day after the payment is due. However, for reporting purposes loans past due 1 to 29 days are excluded from
loans past due and are included in the total for current loans in the table below. The delinquency status of the loans in the
portfolio is shown below as of June 30, 2015 and December 31, 2014. Loans that were on non-accrual status are not included in
any past due amounts.
| |
Age Analysis of
Past Due Loans | |
| |
| |
| |
June 30, 2015 | |
| |
30-59
Days Past
Due | | |
60-89
Days Past
Due | | |
Greater
than 90
Days | | |
Total
Past Due | | |
Non-accrual Loans | | |
Current Loans | | |
Total Loans | |
| |
(In Thousands) | |
Commercial
real estate - owner occupied | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 762 | | |
$ | 221,250 | | |
$ | 222,012 | |
Commercial real estate
- non-owner occupied | |
| - | | |
| - | | |
| - | | |
| - | | |
| 5,820 | | |
| 128,765 | | |
| 134,585 | |
Residential real estate | |
| - | | |
| - | | |
| - | | |
| - | | |
| 163 | | |
| 198,255 | | |
| 198,418 | |
Commercial | |
| - | | |
| - | | |
| - | | |
| - | | |
| 682 | | |
| 223,074 | | |
| 223,756 | |
Real estate construction | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 47,037 | | |
| 47,037 | |
Consumer | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 8,434 | | |
| 8,434 | |
Total | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 7,427 | | |
$ | 826,815 | | |
$ | 834,242 | |
| |
| |
| |
December 31, 2014 | |
| |
30-59
Days Past
Due | | |
60-89
Days Past
Due | | |
Greater
than 90
Days | | |
Total
Past Due | | |
Non-accrual Loans | | |
Current Loans | | |
Total Loans | |
| |
(In Thousands) | |
Commercial
real estate - owner occupied | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 199,442 | | |
$ | 199,442 | |
Commercial real estate
- non-owner occupied | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 125,442 | | |
| 125,442 | |
Residential real estate | |
| - | | |
| 217 | | |
| - | | |
| 217 | | |
| 129 | | |
| 193,867 | | |
| 194,213 | |
Commercial | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1,493 | | |
| 208,785 | | |
| 210,278 | |
Real estate construction | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 41,080 | | |
| 41,080 | |
Consumer | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 6,148 | | |
| 6,148 | |
Total | |
$ | - | | |
$ | 217 | | |
$ | - | | |
$ | 217 | | |
$ | 1,622 | | |
$ | 774,764 | | |
$ | 776,603 | |
NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES
(continued)
Troubled Debt Restructurings
A troubled debt restructuring ("TDR") is a formal
restructure of a loan when the Bank, for economic or legal reasons related to the borrower's financial difficulties, grants a
concession to a borrower. The Bank classifies these transactions as a TDR if the transaction meets the following conditions: an
existing credit agreement must be formally renewed, extended and/or modified; the borrower must be experiencing financial difficulty;
and the Bank has granted a concession that it would not otherwise consider.
Once identified as a TDR, a loan is considered to be impaired,
and an impairment analysis is performed for the loan individually, rather than under a general loss allowance based on the loan
type and risk rating. Any resulting shortfall is charged-off. This method is used consistently for all segments of the portfolio.
Normally, loans identified as TDRs would be placed on non-accrual
status and considered non-performing until sufficient history of timely collection or payment has occurred that allows them to
return to performing status, generally 6 months.
No loans were modified in connection with a troubled debt restructuring
during the six month periods ended June 30, 2015 and June 30, 2014.
Impaired Loans
A loan is classified as impaired when it is deemed probable
by management’s analysis that the Bank will be unable to collect all amounts due according to the contractual terms of the
loan agreement, or the recorded investment in the impaired loan is greater than the present value of expected future cash flows,
discounted at the loan's effective interest rate. In the case of an impaired loan, management conducts an analysis which identifies
if a quantifiable potential loss exists, and takes the necessary steps to record that loss when it has been identified as uncollectible.
As the ultimate collectability of the total principal of an
impaired loan is in doubt, the loan is placed on nonaccrual status with all payment applied to principal under the cost-recovery
method. As such, the Bank did not recognize any interest income on its impaired loans for the three and six month periods ended
June 30, 2015 and 2014.
NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES
(continued)
The table below shows the results of management’s analysis
of impaired loans as of June 30, 2015 and December 31, 2014.
| |
Impaired Loans | |
| |
June 30, 2015 | | |
December 31, 2014 | |
| |
Recorded
investment | | |
Unpaid principal
balance | | |
Related
allowance | | |
Recorded
investment | | |
Unpaid principal
balance | | |
Related
allowance | |
| |
(In Thousands) | |
With no specific related allowance recorded: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial
real estate - owner occupied | |
$ | 1,115 | | |
$ | 1,115 | | |
$ | - | | |
$ | 356 | | |
$ | 356 | | |
$ | - | |
Commercial real estate
- non-owner occupied | |
| 5,820 | | |
| 5,902 | | |
| - | | |
| - | | |
| - | | |
| - | |
Residential real estate | |
| 350 | | |
| 392 | | |
| - | | |
| 320 | | |
| 362 | | |
| - | |
Commercial | |
| 1,367 | | |
| 2,033 | | |
| - | | |
| 1,401 | | |
| 1,913 | | |
| - | |
Real estate construction | |
| 1,105 | | |
| 1,105 | | |
| - | | |
| - | | |
| - | | |
| - | |
Consumer | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
With a specific related allowance recorded: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial real estate
- owner occupied | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Commercial real estate
- non-owner occupied | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Residential real estate | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Commercial | |
| - | | |
| | | |
| - | | |
| 114 | | |
| 120 | | |
| 115 | |
Real estate construction | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Consumer | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Total: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial real estate
- owner occupied | |
| 1,115 | | |
| 1,115 | | |
| - | | |
| 356 | | |
| 356 | | |
| | |
Commercial real estate
- non-owner occupied | |
| 5,820 | | |
| 5,902 | | |
| - | | |
| - | | |
| - | | |
| - | |
Residential real estate | |
| 350 | | |
| 392 | | |
| - | | |
| 320 | | |
| 362 | | |
| | |
Commercial | |
| 1,367 | | |
| 2,033 | | |
| - | | |
| 1,515 | | |
| 2,033 | | |
| 115 | |
Real estate construction | |
| 1,105 | | |
| 1,105 | | |
| - | | |
| - | | |
| - | | |
| - | |
Consumer | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| |
$ | 9,757 | | |
$ | 10,547 | | |
$ | - | | |
$ | 2,191 | | |
$ | 2,751 | | |
$ | 115 | |
The table below shows the average recorded investment in impaired
loans for the periods presented.
| |
Three Months Ended | | |
Six Months Ended | |
| |
June 30, 2015 | | |
June 30, 2014 | | |
June 30, 2015 | | |
June 30, 2014 | |
| |
Average Recorded
Investment | | |
Average Recorded
Investment | | |
Average Recorded
Investment | | |
Average Recorded
Investment | |
| |
(In Thousands) | |
Commercial real estate - owner occupied | |
$ | 1,115 | | |
$ | 361 | | |
$ | 1,116 | | |
$ | 362 | |
Commercial real estate - non-owner occupied | |
| 5,966 | | |
| - | | |
| 6,033 | | |
| - | |
Residential real estate | |
| 393 | | |
| 540 | | |
| 394 | | |
| 597 | |
Commercial | |
| 2,048 | | |
| 1,796 | | |
| 2,073 | | |
| 1,755 | |
Real estate construction | |
| 1,121 | | |
| - | | |
| 1,127 | | |
| - | |
Consumer | |
| - | | |
| - | | |
| - | | |
| - | |
| |
$ | 10,643 | | |
$ | 2,697 | | |
$ | 10,743 | | |
$ | 2,714 | |
NOTE 5 – SEGMENT REPORTING
The Corporation has three reportable segments: traditional
commercial banking, mortgage banking, and wealth management. Revenues from commercial banking operations consist primarily of
interest earned on loans and securities and fees from deposit services. Mortgage banking operating revenues consist principally
of interest earned on mortgage loans held for sale, gains on sales of loans in the secondary mortgage market, and loan origination
fee income. Wealth management operating revenues consist principally of transactional fees charged to clients as well as fees
for portfolio asset management.
NOTE 5 – SEGMENT REPORTING (continued)
The commercial banking segment provides the
mortgage banking segment (“Mortgage Division”) with the short-term funds needed to originate mortgage loans
through a warehouse line of credit and charges the mortgage banking segment interest based on the prime rate. These
transactions are eliminated in the consolidation process.
The “Other” column in the following table includes
the operations of the Corporation and Access Real Estate. The primary source of income for the Corporation is derived from dividends
from the Bank and its primary expense relates to costs incurred by the Corporation in connection with its annual audits and directors
fees. The primary source of income for Access Real Estate is derived from rents received from the Bank.
The following table presents segment information as of and
for the three months ended June 30, 2015 and 2014:
| |
Commercial | | |
Mortgage | | |
Wealth | | |
| | |
| | |
Consolidated | |
June 30, 2015 | |
Banking | | |
Banking | | |
Management | | |
Other | | |
Eliminations | | |
Totals | |
| |
(In Thousands) | |
Revenues: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest income | |
$ | 10,533 | | |
$ | 564 | | |
$ | - | | |
$ | 4 | | |
$ | (314 | ) | |
$ | 10,787 | |
Gain on sale of loans | |
| - | | |
| 5,705 | | |
| - | | |
| - | | |
| - | | |
| 5,705 | |
Other revenues | |
| 732 | | |
| (79 | ) | |
| 679 | | |
| 360 | | |
| (316 | ) | |
| 1,376 | |
Total revenues | |
| 11,265 | | |
| 6,190 | | |
| 679 | | |
| 364 | | |
| (630 | ) | |
| 17,868 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Expenses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest expense | |
| 983 | | |
| 241 | | |
| (6 | ) | |
| 76 | | |
| (314 | ) | |
| 980 | |
Salaries and employee benefits | |
| 3,268 | | |
| 3,182 | | |
| 549 | | |
| - | | |
| - | | |
| 6,999 | |
Other expenses | |
| 1,880 | | |
| 1,384 | | |
| 260 | | |
| 597 | | |
| (316 | ) | |
| 3,805 | |
Total operating expenses | |
| 6,131 | | |
| 4,807 | | |
| 803 | | |
| 673 | | |
| (630 | ) | |
| 11,784 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income (loss) before income taxes | |
$ | 5,134 | | |
$ | 1,383 | | |
$ | (124 | ) | |
$ | (309 | ) | |
$ | - | | |
$ | 6,084 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total assets | |
$ | 1,113,304 | | |
$ | 53,884 | | |
$ | 1,290 | | |
$ | 16,095 | | |
$ | (18,451 | ) | |
$ | 1,166,122 | |
| |
Commercial | | |
Mortgage | | |
Wealth | | |
| | |
| | |
Consolidated | |
June 30, 2014 | |
Banking | | |
Banking | | |
Management | | |
Other | | |
Eliminations | | |
Totals | |
| |
(In Thousands) | |
Revenues: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest income | |
$ | 9,341 | | |
$ | 297 | | |
$ | - | | |
$ | 3 | | |
$ | (139 | ) | |
$ | 9,502 | |
Gain on sale of loans | |
| - | | |
| 3,787 | | |
| - | | |
| - | | |
| - | | |
| 3,787 | |
Other revenues | |
| 619 | | |
| 333 | | |
| 539 | | |
| 331 | | |
| (293 | ) | |
| 1,529 | |
Total revenues | |
| 9,960 | | |
| 4,417 | | |
| 539 | | |
| 334 | | |
| (432 | ) | |
| 14,818 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Expenses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest expense | |
| 836 | | |
| 46 | | |
| 5 | | |
| 91 | | |
| (139 | ) | |
| 839 | |
Salaries and employee benefits | |
| 2,935 | | |
| 2,584 | | |
| 433 | | |
| - | | |
| - | | |
| 5,952 | |
Other expenses | |
| 1,485 | | |
| 1,204 | | |
| 249 | | |
| 621 | | |
| (293 | ) | |
| 3,266 | |
Total operating expenses | |
| 5,256 | | |
| 3,834 | | |
| 687 | | |
| 712 | | |
| (432 | ) | |
| 10,057 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income (loss) before income taxes | |
$ | 4,704 | | |
$ | 583 | | |
$ | (148 | ) | |
$ | (378 | ) | |
$ | - | | |
$ | 4,761 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total assets | |
$ | 945,351 | | |
$ | 54,011 | | |
$ | 1,694 | | |
$ | 14,573 | | |
$ | (16,442 | ) | |
$ | 999,187 | |
NOTE 5 – SEGMENT REPORTING (continued)
The following table presents segment information as of and
for the six months ended June 30, 2015 and 2014:
| |
Commercial | | |
Mortgage | | |
Wealth | | |
| | |
| | |
Consolidated | |
June 30, 2015 | |
Banking | | |
Banking | | |
Management | | |
Other | | |
Eliminations | | |
Totals | |
| |
(In Thousands) | |
Revenues: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest income | |
$ | 20,613 | | |
$ | 926 | | |
$ | - | | |
$ | 7 | | |
$ | (483 | ) | |
$ | 21,063 | |
Gain on sale of loans | |
| - | | |
| 9,276 | | |
| - | | |
| - | | |
| - | | |
| 9,276 | |
Other revenues | |
| 1,451 | | |
| 1,346 | | |
| 1,224 | | |
| 706 | | |
| (617 | ) | |
| 4,110 | |
Total revenues | |
| 22,064 | | |
| 11,548 | | |
| 1,224 | | |
| 713 | | |
| (1,100 | ) | |
| 34,449 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Expenses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest expense | |
| 1,821 | | |
| 336 | | |
| - | | |
| 140 | | |
| (483 | ) | |
| 1,814 | |
Salaries and
employee benefits | |
| 6,495 | | |
| 6,208 | | |
| 1,013 | | |
| - | | |
| - | | |
| 13,716 | |
Other expenses | |
| 3,684 | | |
| 2,609 | | |
| 467 | | |
| 1,191 | | |
| (617 | ) | |
| 7,334 | |
Total
operating expenses | |
| 12,000 | | |
| 9,153 | | |
| 1,480 | | |
| 1,331 | | |
| (1,100 | ) | |
| 22,864 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income (loss) before income
taxes | |
$ | 10,064 | | |
$ | 2,395 | | |
$ | (256 | ) | |
$ | (618 | ) | |
$ | - | | |
$ | 11,585 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total
assets | |
$ | 1,113,304 | | |
$ | 53,884 | | |
$ | 1,290 | | |
$ | 16,095 | | |
$ | (18,451 | ) | |
$ | 1,166,122 | |
| |
Commercial | | |
Mortgage | | |
Wealth | | |
| | |
| | |
Consolidated | |
June 30, 2014 | |
Banking | | |
Banking | | |
Management | | |
Other | | |
Eliminations | | |
Totals | |
| |
(In Thousands) | |
Revenues: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest income | |
$ | 18,189 | | |
$ | 499 | | |
$ | - | | |
$ | 6 | | |
$ | (247 | ) | |
$ | 18,447 | |
Gain on sale of loans | |
| - | | |
| 5,515 | | |
| - | | |
| - | | |
| - | | |
| 5,515 | |
Other revenues | |
| 1,102 | | |
| 882 | | |
| 1,048 | | |
| 618 | | |
| (593 | ) | |
| 3,057 | |
Total revenues | |
| 19,291 | | |
| 6,896 | | |
| 1,048 | | |
| 624 | | |
| (840 | ) | |
| 27,019 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Expenses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest expense | |
| 1,638 | | |
| 56 | | |
| 10 | | |
| 186 | | |
| (247 | ) | |
| 1,643 | |
Salaries and
employee benefits | |
| 5,735 | | |
| 4,384 | | |
| 720 | | |
| - | | |
| - | | |
| 10,839 | |
Other expenses | |
| 3,033 | | |
| 1,870 | | |
| 474 | | |
| 1,252 | | |
| (593 | ) | |
| 6,036 | |
Total
operating expenses | |
| 10,406 | | |
| 6,310 | | |
| 1,204 | | |
| 1,438 | | |
| (840 | ) | |
| 18,518 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income (loss) before income
taxes | |
$ | 8,885 | | |
$ | 586 | | |
$ | (156 | ) | |
$ | (814 | ) | |
$ | - | | |
$ | 8,501 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total
assets | |
$ | 945,351 | | |
$ | 54,011 | | |
$ | 1,694 | | |
$ | 14,573 | | |
$ | (16,442 | ) | |
$ | 999,187 | |
NOTE 6 – EARNINGS PER SHARE
The following table shows the calculation of both basic and
diluted earnings per share (“EPS”) for the three and six months ended June 30, 2015 and 2014, respectively. The numerator
of both the basic and diluted EPS is equivalent to net income. The weighted average number of shares outstanding used as the denominator
for diluted EPS is increased over the denominator used for basic EPS by the effect of potentially dilutive common stock options
utilizing the treasury stock method.
| |
Three Months | | |
Three Months | |
| |
Ended | | |
Ended | |
| |
June 30, 2015 | | |
June 30, 2014 | |
| |
(In Thousands, Except for Share and Per Share Data) | |
| |
| | |
| |
BASIC EARNINGS PER SHARE: | |
| | | |
| | |
Net income | |
$ | 3,984 | | |
$ | 3,064 | |
Weighted average shares outstanding | |
| 10,518,939 | | |
| 10,411,085 | |
| |
| | | |
| | |
Basic earnings per share | |
$ | 0.38 | | |
$ | 0.29 | |
| |
| | | |
| | |
DILUTED EARNINGS PER SHARE: | |
| | | |
| | |
Net income | |
$ | 3,984 | | |
$ | 3,064 | |
Weighted average shares outstanding | |
| 10,518,939 | | |
| 10,411,085 | |
Dilutive stock options | |
| 71,943 | | |
| 43,627 | |
Weighted average diluted shares outstanding | |
| 10,590,882 | | |
| 10,454,712 | |
| |
| | | |
| | |
Diluted earnings per share | |
$ | 0.38 | | |
$ | 0.29 | |
| |
Six Months | | |
Six Months | |
| |
Ended | | |
Ended | |
| |
June
30, 2015 | | |
June
30, 2014 | |
| |
(In Thousands, Except for Share and Per Share Data) | |
| |
| | |
| |
BASIC EARNINGS PER SHARE: | |
| | | |
| | |
Net income | |
$ | 7,557 | | |
$ | 5,478 | |
Weighted average shares outstanding | |
| 10,496,152 | | |
| 10,401,083 | |
| |
| | | |
| | |
Basic earnings per share | |
$ | 0.72 | | |
$ | 0.52 | |
| |
| | | |
| | |
DILUTED EARNINGS PER SHARE: | |
| | | |
| | |
Net income | |
$ | 7,557 | | |
$ | 5,478 | |
Weighted average shares outstanding | |
| 10,496,152 | | |
| 10,401,083 | |
Dilutive stock options | |
| 57,900 | | |
| 49,816 | |
Weighted average diluted shares outstanding | |
| 10,554,052 | | |
| 10,450,899 | |
| |
| | | |
| | |
Diluted earnings per share | |
$ | 0.72 | | |
$ | 0.52 | |
NOTE 7 – COMMITMENTS AND CONTINGENT LIABILITIES
As part of its mortgage banking activities, the Mortgage Division
enters into interest rate lock commitments, which are commitments to originate loans where the interest rate on the loan is determined
prior to funding and the customers have locked into that interest rate. The Mortgage Division then locks in the loan and interest
rate with an investor and commits to deliver the loan if settlement occurs (“best efforts”) or commits to deliver
the locked loan in a binding (“mandatory”) delivery program with an investor. Certain loans under interest rate lock
commitments are covered under forward sales contracts of mortgage backed securities (“MBS”). Forward sales contracts
of MBS are recorded at fair value with changes in fair value recorded in noninterest income. Interest rate lock commitments and
commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best
efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. The
Mortgage Division determines the fair value of interest rate lock commitments and delivery contracts by measuring the fair value
of the underlying asset, which is impacted by current interest rates, taking into consideration the probability that the interest
rate lock commitments will close or will be funded.
Certain additional risks arise from these forward delivery
contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. The Mortgage Division
does not expect any counterparty to any MBS to fail to meet its obligation. Additional risks inherent in mandatory delivery programs
include the risk that, if the Mortgage Division does not close the loans subject to interest rate risk lock commitments, it will
still be obligated to deliver MBS to the counterparty under the forward sales agreement. Should this be required, the Mortgage
Division could incur significant costs in acquiring replacement loans or MBS and such costs could have an adverse effect on mortgage
banking operations.
Since the Mortgage Division’s derivative
instruments are not designated as hedging instruments, the fair value of the derivatives are recorded as a freestanding asset
or liability with the change in value being recognized in current earnings during the period of change. The Corporation has
not elected to apply hedge accounting to the Mortgage Division’s derivative instruments as provided in Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815, Derivatives and
Hedging.
At June 30, 2015 and December 31, 2014, the Mortgage Division
had open forward contracts with a notional value of $75.3 million and $45.3 million, respectively. At June 30, 2015 and December
31, 2014, the Mortgage Division did not have any open mandatory delivery contracts. The open forward delivery contracts are composed
of forward sales of MBS. The fair value of these open forward contracts was $273 thousand and ($349) thousand at June 30, 2015
and December 31, 2014, respectively.
Interest rate lock commitments totaled $50.6 million and $23.5
million at June 30, 2015 and December 31, 2014, respectively, and included $9.6 million and $5.3 million that were made on a best
efforts basis at June 30, 2015 and December 31, 2014, respectively. Fair values of these best efforts commitments were $88 thousand
and $39 thousand at June 30, 2015 and December 31, 2014, respectively. The remaining hedged interest rate lock commitments totaling
$41.1 million and $18.2 million at June 30, 2015 and December 31, 2014 had a fair value of $287 thousand and $200 thousand, respectively.
Included in other noninterest income for the six months ended
June 30, 2015 and June 30, 2014 was a net gain of $328 thousand and a net gain of $350 thousand, respectively, relating to derivative
instruments. The amount included in other noninterest income for the six months ended June 30, 2015 and June 30, 2014 pertaining
to its hedging activities was a net realized loss of $259 thousand and a net realized loss of $1.1 million, respectively.
NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU 2014-09, “Revenue from
Contracts with Customers: Topic 606”. This ASU supersedes the revenue recognition requirements in Topic 605, “Revenue
Recognition” as well as most industry-specific guidance. The amendments also create a new Subtopic 340-40 “Other Assets
and Deferred Costs – Contracts with Customers”. In summary, entities are to recognize revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services. The provisions of ASU 2014-09 are effective for annual periods beginning after December
15, 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 did not have a material effect on the Corporation’s
financial condition or results of operations.
In June 2014, the FASB issued ASU 2014-12, “Compensation
– Stock Compensation (Topic 718)”. The amendments in this ASU require a performance target that affects vesting and
that could be achieved after the requisite service period be treated as a performance condition. The performance target should
not be reflected in estimating the grant-date fair value of the award, and compensation cost should be recognized in the period
in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable
to the period(s) for which the requisite service has already been rendered. The amendments in the ASU are effective for annual
periods beginning after December 15, 2015. The adoption of this guidance should not have a material effect on the Corporation’s
financial condition or results of operations.
In January 2015, the FASB issued ASU 2015-01, “Income
Statement – Extraordinary and Unusual Items (Subtopic 225-20)”. This ASU eliminates extraordinary items from US GAAP
and will align more closely with International Accounting Standards 1, “Presentation of Financial Statements”. The
amendments in the ASU are effective beginning after December 15, 2015. The adoption of this guidance should not have a material
effect on the Corporation’s financial condition or results of operations.
In February 2015, the FASB issued ASU 2015-02, “Consolidation
(Topic 810)”. This ASU focuses on the consolidation evaluation for reporting organizations that are required to evaluate
consolidation of certain legal entities by reducing the number of consolidation models from four to two and is intended to improve
current GAAP. The amendments in the ASU are effective beginning after December 15, 2016. The adoption of this guidance should
not have a material effect on the Corporation’s financial condition or results of operations.
In April 2015, the FASB issued ASU 2015-03, “Interest
– Imputation of Interest (Subtopic 835-30)”. This ASU requires debt issuance costs be presented in the balance sheet
as a direct deduction from the carrying amount of debt liability. The amendments in the ASU are effective beginning after December
15, 2015. The adoption of this guidance should not have a material effect on the Corporation’s financial condition or results
of operations.
NOTE 9 - FAIR VALUE
Fair value pursuant to FASB ASC 820-10, Fair Value Measurements
and Disclosures, is the exchange price, in an orderly
transaction that is not a forced liquidation or distressed
sale, between market participants to sell an asset or transfer a liability in the market in which the reporting entity would transact
for the asset or liability, that is, the principal or most advantageous market for the asset or liability. The transaction
to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective
of a market participant that holds the asset or liability. FASB ASC 820-10 provides a consistent definition of fair value which
focuses on exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over entity specific
inputs. In addition, FASB ASC 820-10 provides a framework for measuring fair value and establishes a three-level hierarchy
for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement
date. Transfers between levels of the fair value hierarchy are recognized on the actual dates of the event or circumstances that
caused the transfer, which generally coincides with the Corporation’s monthly and/or quarterly valuation process.
The standard describes three levels of inputs that may be used
to measure fair values:
Level 1 - Quoted prices (unadjusted) for identical assets
or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 - Significant other observable inputs other than Level
1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs
that are observable or can be corroborated by observable market data.
Level 3 - Significant unobservable inputs that reflect a company’s
own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Corporation used the following methods to determine the
fair value of each type of financial instrument:
Investment securities: Fair values for securities available-for-sale
are obtained from an independent pricing service. The prices are not adjusted. The independent pricing service uses industry-standard
models to price U.S. Government agency obligations and mortgage backed securities that consider various assumptions, including
time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual
prices for the underlying financial instruments, as well as other relevant economic measures. Securities of obligations of state
and political subdivisions are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the
treasury rate based on credit rating.
Substantially all assumptions used by the independent pricing
service are observable in the marketplace, can be derived from
observable data, or are supported by observable levels at which
transactions are executed in the marketplace (Level 2).
Residential loans held for sale: The fair value of loans
held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2).
Derivative financial instruments: Derivative instruments
are used to hedge residential mortgage loans held for sale and the related interest-rate lock commitments and include forward
commitments to sell mortgage loans and mortgage-backed securities as further described in Note 7. The fair values of derivative
financial instruments are based on derivative market data inputs as of the valuation date and the underlying value of mortgage
loans for interest rate lock commitments (Level 3).
Impaired loans: The fair values of impaired loans are
measured on a nonrecurring basis as the fair value of the loan’s collateral for collateral-dependent loans. Collateral
may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The use
of discounted cash flow models and management’s best judgment are significant inputs in arriving at the fair value measure
of the underlying collateral (Level 3).
NOTE 9 - FAIR VALUE (continued)
Other real estate owned: The fair value of other real
estate owned, which consists of real estate that has been foreclosed, is recorded at the lower of fair value less selling expenses
or the book balance prior to foreclosure. Write downs are provided for subsequent declines in value and are recorded in other
operating expenses (Level 2).
Assets and liabilities measured at fair value under FASB ASC
820-10 on a recurring and non-recurring basis, including financial assets and liabilities for which the Corporation has elected
the fair value option as of June 30, 2015 and December 31, 2014, are summarized below:
| |
Fair Value Measurement | |
| |
at June 30, 2015 Using | |
Description | |
Carrying
Value | | |
Quoted Prices in
Active Markets for Identical
Assets (Level 1) | | |
Other
Observable Inputs (Level 2) | | |
Significant
Unobservable Inputs (Level 3) | |
| |
(In Thousands) | |
Financial Assets-Recurring | |
| | | |
| | | |
| | | |
| | |
Available-for-sale investment securities | |
| | | |
| | | |
| | | |
| | |
US Government agency | |
$ | 18,671 | | |
$ | - | | |
$ | 18,671 | | |
$ | - | |
Mortgage backed securities | |
| 63,724 | | |
| - | | |
| 63,724 | | |
| - | |
Corporate bonds | |
| 13,208 | | |
| - | | |
| 13,208 | | |
| - | |
Asset backed securities | |
| 37,582 | | |
| - | | |
| 37,582 | | |
| - | |
Municipals - nontaxable | |
| 4,009 | | |
| - | | |
| 4,009 | | |
| - | |
CRA Mutual fund | |
| 1,423 | | |
| - | | |
| 1,423 | | |
| - | |
Total available-for-sale investment securities | |
| 138,617 | | |
| - | | |
| 138,617 | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Residential loans held for sale | |
| 50,297 | | |
| - | | |
| 50,297 | | |
| - | |
Derivative assets | |
| 935 | | |
| - | | |
| - | | |
| 935 | |
Total Financial
Assets-Recurring | |
$ | 189,849 | | |
$ | - | | |
$ | 188,914 | | |
$ | 935 | |
| |
| | | |
| | | |
| | | |
| | |
Financial Liabilities-Recurring | |
| | | |
| | | |
| | | |
| | |
Derivative liabilities | |
$ | 287 | | |
$ | - | | |
$ | - | | |
$ | 287 | |
Total Financial
Liabilities-Recurring | |
$ | 287 | | |
$ | - | | |
$ | - | | |
$ | 287 | |
| |
| | | |
| | | |
| | | |
| | |
Financial Assets-Non-Recurring | |
| | | |
| | | |
| | | |
| | |
Impaired loans (1) | |
$ | 9,757 | | |
$ | - | | |
$ | - | | |
$ | 9,757 | |
Total Financial
Assets-Non-Recurring | |
$ | 9,757 | | |
$ | - | | |
$ | - | | |
$ | 9,757 | |
(1) Represents the carrying
value of loans for which adjustments are based on the appraised value of the collateral, if collateral dependent, or the present
value of expected future cash flows, discounted at the loan's effective interest rate.
NOTE 9 - FAIR VALUE (continued)
| |
Fair Value Measurement | |
| |
at December 31, 2014 Using | |
Description | |
Carrying
Value | | |
Quoted Prices in
Active Markets for Identical
Assets (Level 1) | | |
Other
Observable Inputs (Level 2) | | |
Significant
Unobservable Inputs (Level 3) | |
| |
(In Thousands) | |
Financial Assets-Recurring | |
| | | |
| | | |
| | | |
| | |
Available-for-sale investment securities | |
| | | |
| | | |
| | | |
| | |
US Government agency | |
$ | 18,525 | | |
$ | - | | |
$ | 18,525 | | |
$ | - | |
Mortgage backed | |
| 69,698 | | |
| - | | |
| 69,698 | | |
| - | |
Corporate bonds | |
| 13,372 | | |
| - | | |
| 13,372 | | |
| - | |
Asset Backed Securities | |
| 17,983 | | |
| - | | |
| 17,983 | | |
| - | |
Municipals - nontaxable | |
| 4,065 | | |
| - | | |
| 4,065 | | |
| - | |
CRA Mutual fund | |
| 1,437 | | |
| - | | |
| 1,437 | | |
| - | |
Total available-for-sale investment securities | |
| 125,080 | | |
| - | | |
| 125,080 | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Residential loans held for sale | |
| 45,026 | | |
| - | | |
| 45,026 | | |
| - | |
Derivative assets | |
| 330 | | |
| - | | |
| - | | |
| 330 | |
Total Financial
Assets-Recurring | |
$ | 170,436 | | |
$ | - | | |
$ | 170,106 | | |
$ | 330 | |
| |
| | | |
| | | |
| | | |
| | |
Financial Liabilities-Recurring | |
| | | |
| | | |
| | | |
| | |
Derivative liabilities | |
$ | 440 | | |
$ | - | | |
$ | - | | |
$ | 440 | |
Total Financial
Liabilities-Recurring | |
$ | 440 | | |
$ | - | | |
$ | - | | |
$ | 440 | |
| |
| | | |
| | | |
| | | |
| | |
Financial Assets-Non-Recurring | |
| | | |
| | | |
| | | |
| | |
Impaired loans (1) | |
$ | 2,191 | | |
$ | - | | |
$ | - | | |
$ | 2,191 | |
Total Financial
Assets-Non-Recurring | |
$ | 2,191 | | |
$ | - | | |
$ | - | | |
$ | 2,191 | |
(1) Represents the carrying value of loans for which
adjustments are based on the appraised value of the collateral. collateral dependent, or the present value of expected future
cash flows, discounted at the loan's effective interest rate.
It is the Corporation’s policy to recognize transfers
between levels as of the actual date of the event or change in circumstances that caused the transfer. There were no transfers
between Level 1 and Level 2 during the six month periods ended June 30, 2015 and 2014.
The changes in Level 3 net derivatives measured at fair value
on a recurring basis are summarized as follows:
| |
Three
Months Ended June 30, | |
| |
2015 | | |
2014 | |
| |
(In Thousands) | |
Balance, beginning of period | |
$ | 192 | | |
$ | 85 | |
Realized and unrealized gains (losses) included in earnings | |
| 456 | | |
| (78 | ) |
Unrealized gains (losses) included in other comprehensive income | |
| - | | |
| - | |
Purchases, settlements, paydowns, and maturities | |
| - | | |
| - | |
Transfer into Level 3 | |
| - | | |
| - | |
Balance, end of period | |
$ | 648 | | |
$ | 7 | |
NOTE 9 - FAIR VALUE (Continued)
| |
Six
Months Ended June 30, | |
| |
2015 | | |
2014 | |
| |
(In Thousands) | |
Balance, beginning of period | |
$ | (110 | ) | |
$ | 95 | |
Realized and unrealized gains (losses) included in earnings | |
| 758 | | |
| (88 | ) |
Unrealized gains (losses) included in other comprehensive income | |
| - | | |
| - | |
Purchases, settlements, paydowns, and maturities | |
| - | | |
| - | |
Transfer into Level 3 | |
| - | | |
| - | |
Balance, end of period | |
$ | 648 | | |
$ | 7 | |
The following tables presents qualitative information about
level 3 fair value measurements for financial instruments measured at fair value at June 30, 2015 and December 31, 2014:
| |
June 30, 2015 |
Description | |
Fair Value Estimate | | |
Valuation Techniques | |
Unobservable Input | |
Range (Weighted Average) |
| |
(In Thousands) |
Financial Assets - Recurring | |
| | | |
| |
| |
|
Derivative assets | |
$ | 935 | | |
Market pricing (3) | |
Estimated pullthrough | |
75% - 90% (84.6%) |
Derivative liabilities | |
$ | 287 | | |
Market pricing (3) | |
Estimated pullthrough | |
75% - 90% (84.6%) |
| |
| | | |
| |
| |
|
Financial Assets - Non-recurring | |
| | | |
| |
| |
|
Impaired loans - Real estate secured | |
$ | 8,390 | | |
Appraisal of collateral (1) | |
Liquidation expenses (2) | |
0% - 20% (11%) |
Impaired loans - Non-real estate secured | |
$ | 1,367 | | |
Cash flow basis | |
Liquidation expenses (2) | |
0% - 10% (0%) |
| (1) | Fair value is generally determined through independent appraisals
of the underlying collateral on real estate secured loans, which generally include various
level 3 inputs which are not identifiable. |
| (2) | Valuations of impaired loans may be adjusted by management for
qualitative factors such as liquidation expenses. The range and weighted average of liquidation
expense adjustments are presented as a percent of the appraisal. |
| (3) | Market pricing on derivative assets and liabilities is adjusted
by management for the anticipated percent of derivative assets and liabilities that will
create a realized gain or loss. The range and weighted average of estimated pull-through
is presented |
| |
December 31, 2014 |
Description | |
Fair Value Estimate | | |
Valuation Techniques | |
Unobservable Input | |
Range (Weighted Average) |
| |
(In Thousands) |
Financial Assets - Recurring | |
| | | |
| |
| |
|
Derivative assets | |
$ | 330 | | |
Market pricing (3) | |
Estimated pullthrough | |
75% - 90% (84.5%) |
Derivative liabilities | |
$ | 440 | | |
Market pricing (3) | |
Estimated pullthrough | |
75% - 90% (84.5%) |
| |
| | | |
| |
| |
|
Financial Assets - Non-recurring | |
| | | |
| |
| |
|
Impaired loans - Real estate secured | |
$ | 676 | | |
Appraisal of collateral (1) | |
Liquidation expenses (2) | |
0% - 20% (8%) |
Impaired loans - Non-real estate secured | |
$ | 1,515 | | |
Cash flow basis | |
Liquidation expenses (2) | |
0% - 10% (0%) |
| (1) | Fair value is generally determined through independent appraisals
of the underlying collateral on real estate secured loans, which generally include various
level 3 inputs which are not identifiable. |
| (2) | Valuations of impaired loans may be adjusted by management for
qualitative factors such as liquidation expenses. The range and weighted average of liquidation
expense adjustments are presented as a percent of the appraisal. |
| (3) | Market pricing on derivative assets and liabilities is adjusted
by management for the anticipated percent of derivative assets and liabilities that will
create a realized gain or loss. The range and weighted average of estimated pull-through
is presented |
NOTE 9 - FAIR VALUE (Continued)
Financial instruments recorded using FASB ASC 825-10
Under FASB ASC 825-10, Financial Instruments, the Corporation
may elect to report most financial instruments and certain other items at fair value on an instrument-by-instrument basis with
changes in fair value reported in net income. After the initial adoption the election is made at the acquisition of an eligible
financial asset, financial liability or firm commitment or when certain specified reconsideration events occur. The fair value
election, with respect to an item, may not be revoked once an election is made.
The following table reflects the differences between the fair
value carrying amount of residential mortgage loans held for sale at June 30, 2015, measured at fair value under FASB ASC 825-10,
and the aggregate unpaid principal amount the Corporation is contractually entitled to receive at maturity.
(In Thousands) | |
Aggregate
Fair Value | | |
Difference | | |
Contractual
Principal | |
Residential mortgage loans held for sale | |
$ | 50,297 | | |
$ | 1,426 | | |
$ | 48,871 | |
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 June 30, 2015 and December 31, 2014, the majority of off-balance-sheet
items are variable rate instruments or convert to variable rate instruments if drawn upon. Therefore, the fair value of these
items is largely based on fees, which are nominal and immaterial.
The carrying amounts and estimated fair values of financial
instruments at June 30, 2015 and December 31, 2014 were as follows:
| |
June 30, 2015 | | |
December 31, 2014 | |
| |
| | |
Estimated | | |
| | |
Estimated | |
| |
Carrying | | |
Fair | | |
Carrying | | |
Fair | |
| |
Amount | | |
Value | | |
Amount | | |
Value | |
| |
(In Thousands) | |
Financial assets: | |
| |
Cash and short-term investments | |
$ | 91,500 | | |
$ | 91,500 | | |
$ | 56,029 | | |
$ | 56,029 | |
Securities available-for-sale | |
| 138,617 | | |
| 138,617 | | |
| 125,080 | | |
| 125,080 | |
Securities held-to-maturity | |
| 14,299 | | |
| 14,331 | | |
| 14,309 | | |
| 14,378 | |
Restricted stock | |
| 7,471 | | |
| 7,471 | | |
| 8,961 | | |
| 8,961 | |
Loans, net of allowance | |
| 871,030 | | |
| 896,694 | | |
| 808,230 | | |
| 837,937 | |
Derivatives | |
| 935 | | |
| 935 | | |
| 330 | | |
| 330 | |
Total financial assets | |
$ | 1,123,852 | | |
$ | 1,149,548 | | |
$ | 1,012,939 | | |
$ | 1,042,715 | |
| |
| | | |
| | | |
| | | |
| | |
Financial liabilities: | |
| | | |
| | | |
| | | |
| | |
Deposits | |
$ | 905,402 | | |
$ | 901,058 | | |
$ | 755,443 | | |
$ | 753,675 | |
Short-term borrowings | |
| 138,079 | | |
| 137,878 | | |
| 185,635 | | |
| 185,396 | |
Long-term borrowings | |
| 10,000 | | |
| 9,983 | | |
| — | | |
| —
| |
Derivatives | |
| 287 | | |
| 287 | | |
| 440 | | |
| 440 | |
Total financial liabilities | |
$ | 1,053,768 | | |
$ | 1,049,206 | | |
$ | 941,518 | | |
$ | 939,511 | |
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 $13.4 million and $16.8 million in outstanding
commitments at June 30, 2015 and December 31, 2014, respectively.
The Corporation’s exposure to credit loss in the event
of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual
notional amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments. The Corporation had $320.6 million and $249.4 million in unfunded lines of credit
whose contract amounts represent credit risk at June 30, 2015 and December 31, 2014, respectively.
Standby letters of credit are conditional commitments issued
by the Corporation to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to
support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year.
The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to
customers. The Corporation generally holds collateral supporting those commitments if deemed necessary. The Corporation had standby
letters of credit outstanding in the amount of $4.5 million and $4.2 million at June 30, 2015 and December 31, 2014, respectively.
The Bank maintains a reserve for potential off-balance sheet
credit losses that is included in other liabilities on the balance sheet. At June 30, 2015 and December 31, 2014 the balance in
this reserve totaled $666 thousand and $641 thousand, respectively.
The Mortgage Division of the Bank makes representations and
warranties that loans sold to investors meet its program’s guidelines and that the information provided by the borrowers
is accurate and complete. In the event of a default on a loan sold, the investor may make a claim for losses due to document deficiencies,
program compliance, early payment default, and fraud or borrower misrepresentations. The Mortgage Division maintains a reserve
in other liabilities for potential losses on mortgage loans sold. At June 30, 2015 and December 31, 2014, the balance in this
reserve totaled $1.2 million.
NOTE 10 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET
RISK
The following table shows the changes to the allowance for
losses on mortgage loans sold.
| |
Allowance for
Losses on Mortgage Loans Sold | |
| |
Six
Months ended June 30, | | |
Year
ended | |
| |
2015 | | |
2014 | | |
December 31,
2014 | |
| |
(In Thousands) | |
Allowance for losses on mortgage loans sold -beginning of period | |
$ | 1,198 | | |
$ | 4,645 | | |
$ | 4,645 | |
Provision charged to (released from) operating expense | |
| - | | |
| - | | |
| (3,250 | ) |
Recoveries | |
| - | | |
| - | | |
| 5 | |
Charge-offs | |
| (11 | ) | |
| (12 | ) | |
| (202 | ) |
Allowance for losses on mortgage loans sold - end of period | |
$ | 1,187 | | |
$ | 4,633 | | |
$ | 1,198 | |
NOTE 11 – BANK-OWNED LIFE INSURANCE POLICIES
The Corporation had $15.6 million and $15.3 million in bank-owned
life insurance (“BOLI”) at June 30, 2015 and December 31, 2014, respectively. The Corporation recognized interest
income, which is included in other noninterest income, of $231 thousand for the six months ended June 30, 2015. The Corporation
did not recognize any interest income in relation to its BOLI for the six months ended June 30, 2014.
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction
with Access National Corporation’s (“Corporation”, “we”, “us”) consolidated financial
statements, and notes thereto, included in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December
31, 2014. Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of the results for
the year ending December 31, 2015 or any future period.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical
information, this Quarterly Report on Form 10-Q contains forward-looking statements. For this purpose, any statements contained
herein, including documents incorporated by reference, that are not statements of historical fact may be deemed to be forward-looking
statements. Examples of forward-looking statements include discussions as to our expectations, beliefs, plans, goals, objectives
and future financial or other performance or assumptions concerning matters discussed in this document. Forward-looking statements
often use words such as “believes,” “expects,” “plans,” “may,” “will,”
“should,” “projects,” “contemplates,” “ anticipates,” “forecasts,”
“intends” or other words of similar meaning. Forward-looking statements in this Quarterly Report on Form 10-Q include,
without limitation, statements regarding the Corporation’s beliefs regarding the future strength of the economy and labor
markets and anticipated interest rates and the effect of such rates on the Corporation’s performance and net interest margin
and the volume of future mortgage refinancing, as well as the Corporation’s expectations concerning operating losses and
the profitability of its mortgage segment. You can also identify them by the fact that they do not relate strictly to historical
or current facts. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, and actual results
could differ materially from historical results or those anticipated by such statements. Factors that could have a material adverse
effect on the operations and future prospects of the Corporation include, but are not limited to, changes in: collateral values,
especially in the real estate market; continued challenging economic conditions or deterioration in general business and economic
conditions and in the financial markets; the impact of any laws, regulations, policies or programs implemented pursuant to
the Dodd-Frank Act or other legislation or regulation; unemployment levels;
branch expansion plans; interest rates; general economic conditions; monetary and fiscal policies of the U.S. Government, including
policies of the Office of the Comptroller of the Currency (“Comptroller”), the U.S. Department of the Treasury and
the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of Richmond; the economy of Northern Virginia,
including governmental spending and real estate markets; the quality or composition of the loan or investment portfolios; demand
for loan products; deposit flows; competition; the liquidity of the Corporation; and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers
are cautioned not to place undue reliance on such statements. Any forward-looking statement speaks only as of the date on which
it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the
date on which it is made.
For additional discussion of risk factors that may cause our
actual future results to differ materially from the results indicated within forward looking statements, please see “Item
1A – Risk Factors” of the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.
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 June 30, 2015, there were no non-agency mortgage backed securities
or trust preferred securities in the portfolio. The estimated fair value of the portfolio fluctuates due to changes in market
interest rates and other factors. Changes in estimated fair value are recorded in shareholders’ equity as a component of
other comprehensive income. Securities are monitored to determine whether a decline in their value is other than temporary. Management
evaluates the securities portfolio on a quarterly basis to determine the collectability of amounts due per the contractual terms
of each security. A decline in the fair value of an investment below its amortized cost attributable to factors that indicate
the decline will not be recovered over the anticipated holding period of the investment will cause the security to be considered
other than temporarily impaired. Other than temporary impairments result in reducing the security’s carrying value by the
amount of the estimated credit loss. The credit component of the other than temporary impairment loss is realized through the
statement of income and the remainder of the loss remains in other comprehensive income. At June 30, 2015, 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 June 30, 2015, the Corporation’s assets totaled
$1.2 billion, compared to $1.1 billion at December 31, 2014, an increase of $113.2 million. The increase in assets was
primarily due to a growth in loans held for investment of $57.5 million, an increase in interest-bearing balances of $33.0
million, an increase in investment securities of $13.5 million, and an increase in loans held for sale of $5.3 million. The
first half of 2015 reflected growth in all categories of loans held for investment from December 31, 2014. The $57.5
million increase in loans held for investment as compared to December 31, 2014 is primarily attributable to a $22.6 million
or 11.3% growth in commercial real estate – owner occupied loans, a $13.5 million or 6.4% increase in commercial
loans, and a $9.1 million or 7.3% increase in commercial real estate – non-owner occupied. Overall, the portfolio of
loans held for investment grew at an annualized rate of 14.8%. At June 30, 2015, loans secured by real estate collateral
comprised 72.1% 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 23.8% and real estate construction loans contributing
5.6%. Loans held for sale totaled $50.3 million at June 30, 2015, compared to $45.0 million at December 31, 2014. 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 $905.4 million at June 30, 2015, compared to $755.4 million
at December 31, 2014, an increase of $150.0 million. Noninterest-bearing deposits increased $86.4 million from $252.9 million
at December 31, 2014 to $339.3 million at June 30, 2015. Time deposits increased from $268.9 million at December 31, 2014
to $326.1 million at June 30, 2015, an increase of $57.3 million due largely to a deliberate increase in wholesale funding
of $42.4 million which was used to increase the securities portfolio as well as reduce short-term borrowings.
Net income for the second quarter of 2015 totaled $4.0 million
compared to $3.1 million for the same period in 2014. Earnings per diluted share were $0.38 for the second quarter of 2015, compared
to $0.29 per diluted share in the same period of 2014. Second quarter 2015 pretax earnings increased $1.3 million or 27.8% when
compared to second quarter 2014 pretax earnings. The increase was primarily due to increases in pretax income for both the banking
and mortgage segments from second quarter 2014 of $430 thousand and $800 thousand, respectively. The banking segment’s increase
was due to an increase in net interest income over second quarter 2014 of $1.0 million and was partially offset by an increase
in salaries and employee benefits of $334 thousand, an increase in the provision for loan losses of $150 thousand, and an increase
in other expenses of $222 thousand. The mortgage segment’s increase over second quarter 2015 was due to an increase in income
generated by mortgage loan originations of $36.0 million or 32.9%.
Net income for the six months ended June 30, 2015 totaled $7.6
million compared to $5.5 million for the same period in 2014. Earnings per diluted share were $0.72 for the first six months of
2015, compared to $0.52 per diluted share in the same period of 2014. For the six month period ended June 30, 2015, the banking
segment saw an increase in pretax income of $1.2 million when compared to the six months ended June 30, 2014 due to an increase
in net interest income of $2.2 million which was partially offset by an increase in salaries and employee benefits of $1.3 million.
The mortgage segment had an increase in pretax income of $1.8 million due to an increase in loan origination volume of $80.0 million
when comparing the six month period ended June 30, 2015 to the same period in 2014. This increased volume as well as an increase
in the secondary market pricing led to a $3.8 million increase in gain on sale of loans when comparing the six month period ending
June 2015 to the same period in 2014. This increase was partially offset by an increase in non-interest expense of $2.6 million
for the six months ending June 2015 to the same period ending June 2014 due largely to costs related to the increased mortgage
production volume.
Non-performing assets (“NPAs”) totaled $7.4 million,
or 0.64%, of total assets at June 30, 2015, up from $1.6 million, or 0.15%, of total assets at December 31, 2014 due mainly to
the addition of one $6.0 million loan to nonaccrual status. NPAs were comprised solely of non-accrual loans at June 30, 2015.
The unemployment rate for Fairfax County, Virginia was at 4.0%
as of February 2015 and still well below the 4.8% unemployment rate for the state of Virginia at the end of March 2015 and 5.5%
for the nation at the end of March 2015. Information reviewed at the Federal Open Market Committee’s (FOMC) March 2015 meeting
suggested economic growth has moderated since January 2015. Labor market indicators showed further improvement with strong gains
[in _____] and a lower unemployment rate suggesting that underutilization of labor resources continues to diminish. The FOMC reaffirmed
its view that the current target rate for the federal funds rate remains appropriate. The historically low interest rate environment
continues to negatively impact yields of variable loans and the securities portfolio. The Corporation’s net interest margin
for the three months ended March 31, 2015 decreased to 3.72% from the March 31, 2014 percentage of 3.78%. 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 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 June 30, 2015 the fair value of the securities portfolio
totaled $152.9 million, compared to $139.5 million at December 31, 2014. Included in the fair value totals are held-to-maturity
securities with an amortized cost of $14.3 million (fair value of $14.3 million) and $14.3 million (fair value of $14.4 million)
at June 30, 2015 and December 31, 2014, 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
$834.2 million at June 30, 2015 compared to $776.6 million at December 31, 2014, an increase of $57.5 million or 7.4%. Comprising
the growth, commercial real estate – owner occupied loans increased $22.6 million, commercial loans increased $13.5 million,
commercial real estate – non-owner occupied increased $9.1 million, real estate construction loans increased $5.9 million,
residential real estate loans increased $4.2 million and consumer loans increased $2.2 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 June 30, 2015.
Commercial Real Estate Loans – Owner Occupied:
This category of loans represented the second largest segment of the loan portfolio and was comprised of owner occupied loans
secured by the commercial property, totaling $222.0 million, representing 26.61% of the loan portfolio at June 30, 2015. 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 $134.6 million and representing 16.13% of the loan portfolio at June 30, 2015.
Commercial real estate loans are secured by the subject property and underwritten to policy standards as listed above.
Residential Real Estate Loans: This category represented
the third largest segment of the loan portfolio and included loans secured by first or second mortgages on one to four family
residential properties. This segment totaled $198.4 million and comprised 23.79% of the loan portfolio as of June 30, 2015. Of
this amount, the following sub-categories existed as a percentage of the whole residential real estate loan portfolio as of June
30, 2015: home equity lines of credit, 19.6%; first trust mortgage loans, 71.9%; and junior trust loans, 8.5%.
Home equity lines of credit are extended to borrowers in our
target market. Real estate equity is often the largest component of consumer wealth in our marketplace. Once approved, this consumer
finance tool allows the borrowers to access the equity in their homes or investment properties and use the proceeds for virtually
any purpose. Home equity lines of credit are most frequently secured by a second lien on residential property. The proceeds of
first trust mortgage loans are used to acquire or refinance the primary financing on owner occupied and residential investment
properties. Junior trust loans are loans to consumers wherein the proceeds have been used for a stated consumer purpose. Examples
of consumer purposes are education, refinancing debt, or purchasing consumer goods. The loans are generally extended in a single
disbursement and repaid over a specified period of time. Loans in the residential real estate portfolio are underwritten to standards
within a traditional consumer framework that is periodically reviewed and updated by management and the Board of Directors and
takes into consideration repayment source and capacity, value of the underlying property, credit history, savings pattern, and
stability.
Commercial Loans: Commercial Loans represented the largest
segment of the loan portfolio, totaling $223.8 million and representing 26.82% of the loan portfolio as of June 30, 2015. 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
$47.0 million and represented 5.64% of the loan portfolio as of June 30, 2015. 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 $8.4 million and represented 1.01% of the loan portfolio as of June 30, 2015. 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 June 30, 2015, LHFS at fair value totaled $50.3 million compared
to $45.0 million at December 31, 2014.
The LHFS loans are closed by the Mortgage Division and held
on average fifteen to thirty days pending their sale to government sponsored entities as well as mortgage banking subsidiaries
of large financial institutions. During the second quarter of 2015 we originated $145.2 million of loans processed in this manner,
compared to $114.5 million in the first quarter of 2015 and $109.3 million for the second quarter of 2014. 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 $13.5 million at June
30, 2015 compared to $13.4 million at December 31, 2014. The allowance for loan losses was equivalent to 1.62% and 1.73% of total
loans held for investment at June 30, 2015 and December 31, 2014, 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 June 30, 2015 and December 31, 2014, the Bank had non-performing
assets totaling $7.4 million and $1.6 million, respectively. This increase in NPAs since December 31, 2014 was mainly due
to the addition of one $6 million loan to non-accrual status. Non-performing assets consist of non-accrual loans. All non-performing
loans are carried at the expected liquidation value of the underlying collateral.
The following table is a summary of our non-performing assets
at June 30, 2015 and December 31, 2014.
| |
June
30, 2015 | | |
December
31, 2014 | |
| |
(Dollars In Thousands) | |
Non-accrual loans : | |
| | | |
| | |
Commercial real estate - owner occupied | |
$ | 762 | | |
$ | - | |
Commercial real estate - non-owner occupied | |
| 5,820 | | |
| - | |
Residential real estate | |
| 163 | | |
| 129 | |
Commercial | |
| 682 | | |
| 1,493 | |
Total non-accrual loans | |
$ | 7,427 | | |
$ | 1,622 | |
| |
| | | |
| | |
Other real estate owned ("OREO") | |
| - | | |
| - | |
| |
| | | |
| | |
Total non-performing assets | |
$ | 7,427 | | |
$ | 1,622 | |
| |
| | | |
| | |
Restructured loans included above in non-accrual loans | |
$ | - | | |
$ | 698 | |
| |
| | | |
| | |
Ratio of non-performing assets to: | |
| | | |
| | |
Total loans plus OREO | |
| 0.89 | % | |
| 0.21 | % |
| |
| | | |
| | |
Total Assets | |
| 0.64 | % | |
| 0.15 | % |
| |
| | | |
| | |
Accruing Past due loans: | |
| | | |
| | |
90 or more days past due | |
$ | - | | |
$ | - | |
Not included in the table above is other
real estate owned in the amount of $500 thousand. During 2014, Access Real Estate LLC (ARE) transferred an undeveloped commercial
lot that was originally purchased for possible future banking center expansion to other assets available for sale when management
listed the property for sale. The land, originally purchased for $1.2 million, was recorded at its appraised value less costs
to sell.
At June 30, 2015 and December 31, 2014, 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 June 30, 2015, deposits totaled $905.4 million compared to $755.4 million on December 31, 2014, an increase of
$150.0 million or 19.85%. Noninterest-bearing deposits increased $86.4 million from $252.9 million at December 31, 2014 to
$339.3 million at June 30, 2015. Time deposits as of June 30, 2015 increased $57.3 million compared to December 31, 2014 due
mainly to an increase in brokered deposits of $100.1 million offset by a decrease in Certificate of Deposit Account
Registry Service (CDARS) deposits totaling $57.6 million.
Shareholders’ Equity
Shareholders’ equity totaled $104.5 million at June 30,
2015 compared to $98.9 million at December 31, 2014. The increase in shareholders’ equity is due mainly to retained earnings
net of dividends paid. Banking regulators have defined minimum regulatory capital ratios that the Corporation and the Bank are
required to maintain. These risk based capital guidelines take into consideration risk factors, as defined by the banking regulators,
associated with various categories of assets, both on and off the balance sheet. Both the Corporation and Bank are classified
as well capitalized, which is the highest rating. Beginning January 1, 2015, the Corporation calculates its regulatory capital
under the Basel III Final Rules which modified the definition of “well capitalized” and implemented changes in the
risk weights of assets. The following table outlines the regulatory components of the Corporation’s capital and risk based
capital ratios under these new rules.
| |
June
30, | | |
December
31, | | |
| |
| |
2015 | | |
2014 | | |
| |
| |
(In Thousands) | | |
| |
Tier 1 Capital: | |
| | | |
| | | |
| | |
Common stock | |
$ | 8,783 | | |
$ | 8,742 | | |
| | |
Capital surplus | |
| 19,491 | | |
| 18,538 | | |
| | |
Retained earnings | |
| 76,682 | | |
| 72,168 | | |
| | |
Less: Net unrealized loss on available for sale equity securities | |
| (50 | ) | |
| (41 | ) | |
| | |
Less: Disallowed goodwill and intangibles net of associated
deferred tax liabilities | |
| (1,513 | ) | |
| (1,694 | ) | |
| | |
Total Tier 1 capital | |
| 103,393 | | |
| 97,713 | | |
| | |
| |
| | | |
| | | |
| | |
Allowance for loan losses | |
| 11,679 | | |
| 10,980 | | |
| | |
| |
| | | |
| | | |
| | |
Total risk based capital | |
$ | 115,072 | | |
$ | 108,693 | | |
| | |
| |
| | | |
| | | |
| | |
Risk weighted assets | |
$ | 931,824 | | |
$ | 875,862 | | |
| | |
| |
| | | |
| | | |
| | |
Quarterly average assets | |
$ | 1,108,030 | | |
$ | 1,007,628 | | |
| | |
| |
| | | |
| | | |
Regulatory | |
| |
| | | |
| | | |
Minimum | |
Risk-Based Capital Ratios: | |
| | | |
| | | |
| |
Common equity tier 1 capital ratio | |
| 11.10 | % | |
| 11.16 | % | |
| 4.50 | % |
Tier 1 capital ratio | |
| 11.10 | % | |
| NA | | |
| 6.00 | % |
Total capital ratio | |
| 12.35 | % | |
| 12.41 | % | |
| 8.00 | % |
Leverage Capital Ratios: | |
| | | |
| | | |
| | |
Tier 1 leverage ratio | |
| 9.33 | % | |
| 9.70 | % | |
| 4.00 | % |
RESULTS OF OPERATIONS
Summary
Net income for the second quarter of 2015 totaled $4.0 million
or $0.38 diluted earnings per share. This compares with $3.1 million or $0.29 diluted earnings per share for the same quarter
in 2014. The increase in net income for the three months ended June 30, 2015 as compared to the same period in 2014 is attributable
to an increase in pretax income for both the banking and mortgage segments from second quarter 2014 of $430 thousand and $800,
respectively. The banking segment’s increase was due to an increase in net interest income over second quarter 2014 of $1.0
million and was partially offset by an increase in salaries and employee benefits of $334 thousand, an increase in the provision
for loan losses of $150 thousand, and an increase in other expenses of $222 thousand. The mortgage segment’s increase over
second quarter 2015 was due to an increase in income generated by mortgage loan originations of $36.0 million or 32.9%.
Net income for the six months ended June 30, 2015 totaled $7.6
million or $0.72 diluted earnings per share compared to $5.5 million or $0.52 diluted earnings per share for the same period in
2014. For the six month period ended June 30, 2015, the banking segment saw an increase in pretax income of $1.2 million when
compared to the six months ended June 30, 2014 due to an increase in net interest income of $2.2 million which was partially offset
by an increase in salaries and employee benefits of $1.3 million. The mortgage segment had an increase in pretax income of $1.8
million due to an increase in loan origination volume of $80.0 million when comparing the six month period ended June 30, 2015
to the same period in 2014. This increased volume as well as an increase in the secondary market pricing led to a $3.8 million
increase in gain on sale of loans when comparing the six month period ending June 2015 to the same period in 2014. This increase
was partially offset by an increase in non-interest expense of $2.6 million for the six months ending June 2015 to the same period
ending June 2014 due largely to costs related to the increased mortgage production volume.
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 $9.8 million for the three months ended June 30, 2015 compared to $8.7 million for the same period in 2014. The
annualized yield on earning assets was 4.03% for the quarter ended June 30, 2015 when compared to 4.16% for the quarter ended
June 30, 2014. The cost of interest-bearing deposits and borrowings remained unchanged for the quarter ended June 30, 2015 compared
to the quarter ended June 30, 2014 at 0.56%. Net interest margin was 3.67% for the quarter ended June 30, 2015 compared to 3.80%
for the same period in 2014.
Net interest income before the provision for loan losses totaled
$19.2 million for the first six months of 2015 compared to $16.8 million for the same period in 2014. The annualized yield on
earning assets for the first six months of 2015 was 4.04% compared to 4.16% for the same period in 2014. The cost of interest-bearing
deposits and borrowings for the first six months of 2015 was 0.53% compared to 0.56% for the same period in 2014. Net interest
margin was 3.69% for the first six months of 2015 compared to 3.79% for the same period in 2014.
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 June 30, | |
| |
2015
compared to 2014 | |
| |
Change
Due To: | |
| |
Increase / | | |
| | |
| |
| |
(Decrease) | | |
Volume | | |
Rate | |
| |
(In Thousands) | |
Interest Earning Assets: | |
| | | |
| | | |
| | |
Investments | |
$ | 161 | | |
$ | 105 | | |
$ | 56 | |
Loans held for sale | |
| 267 | | |
| 305 | | |
| (38 | ) |
Loans | |
| 850 | | |
| 1,088 | | |
| (238 | ) |
Interest-bearing deposits | |
| 7 | | |
| 8 | | |
| (1 | ) |
Total increase (decrease) in interest
income | |
| 1,285 | | |
| 1,506 | | |
| (221 | ) |
| |
| | | |
| | | |
| | |
Interest-Bearing Liabilities: | |
| | | |
| | | |
| | |
Interest-bearing demand deposits | |
| - | | |
| 1 | | |
| (1 | ) |
Money market deposit accounts | |
| (3 | ) | |
| (2 | ) | |
| (1 | ) |
Savings accounts | |
| 7 | | |
| 7 | | |
| - | |
Time deposits | |
| 76 | | |
| 77 | | |
| (1 | ) |
Total interest-bearing
deposits | |
| 80 | | |
| 83 | | |
| (3 | ) |
FHLB Short-term borrowings | |
| 30 | | |
| 30 | | |
| - | |
Securities sold under agreements to repurchase | |
| 1 | | |
| 1 | | |
| - | |
FHLB Long-term borrowings | |
| 30 | | |
| 30 | | |
| - | |
Total increase (decrease) in interest
expense | |
| 141 | | |
| 144 | | |
| (3 | ) |
| |
| | | |
| | | |
| | |
Increase (decrease)
in net interest income | |
$ | 1,144 | | |
$ | 1,362 | | |
$ | (218 | ) |
| |
Six Months Ended
June 30, | |
| |
2015
compared to 2014 | |
| |
Change
Due To: | |
| |
Increase / | | |
| | |
| |
| |
(Decrease) | | |
Volume | | |
Rate | |
| |
(In Thousands) | |
Interest Earning Assets: | |
| | | |
| | | |
| | |
Investments | |
$ | 508 | | |
$ | 326 | | |
$ | 182 | |
Loans held for sale | |
| 427 | | |
| 492 | | |
| (65 | ) |
Loans | |
| 1,665 | | |
| 2,063 | | |
| (398 | ) |
Interest-bearing deposits | |
| 16 | | |
| 11 | | |
| 5 | |
Total increase (decrease) in interest
income | |
| 2,616 | | |
| 2,892 | | |
| (276 | ) |
| |
| | | |
| | | |
| | |
Interest-Bearing Liabilities: | |
| | | |
| | | |
| | |
Interest-bearing demand deposits | |
| 7 | | |
| 7 | | |
| - | |
Money market deposit accounts | |
| (6 | ) | |
| (4 | ) | |
| (2 | ) |
Savings accounts | |
| 12 | | |
| 11 | | |
| 1 | |
Time deposits | |
| 72 | | |
| 179 | | |
| (107 | ) |
Total interest-bearing
deposits | |
| 85 | | |
| 193 | | |
| (108 | ) |
FHLB Short-term borrowings | |
| 54 | | |
| 54 | | |
| - | |
FHLB Long-term borrowings | |
| 32 | | |
| 32 | | |
| - | |
Total increase (decrease) in interest
expense | |
| 171 | | |
| 279 | | |
| (108 | ) |
| |
| | | |
| | | |
| | |
Increase (decrease)
in net interest income | |
$ | 2,445 | | |
$ | 2,613 | | |
$ | (168 | ) |
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
| |
June
30, 2015 | | |
June
30, 2014 | |
| |
Average | | |
Income /
| | |
Yield / | | |
Average | | |
Income /
| | |
Yield / | |
| |
Balance
| | |
Expense
| | |
Rate | | |
Balance
| | |
Expense
| | |
Rate | |
| |
(Dollars In Thousands) | |
Assets: | |
| | |
| | |
| | |
| | |
| | |
| |
Interest-earning assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Securities | |
$ | 142,443 | | |
$ | 782 | | |
| 2.20 | % | |
$ | 122,698 | | |
$ | 621 | | |
| 2.02 | % |
Loans held for sale | |
| 59,154 | | |
| 564 | | |
| 3.81 | % | |
| 27,502 | | |
| 297 | | |
| 4.32 | % |
Loans(1) | |
| 814,393 | | |
| 9,407 | | |
| 4.62 | % | |
| 720,634 | | |
| 8,557 | | |
| 4.75 | % |
Interest-bearing balances and federal
funds sold | |
| 54,026 | | |
| 34 | | |
| 0.25 | % | |
| 42,055 | | |
| 27 | | |
| 0.26 | % |
Total
interest-earning assets | |
| 1,070,016 | | |
| 10,787 | | |
| 4.03 | % | |
| 912,889 | | |
| 9,502 | | |
| 4.16 | % |
Noninterest-earning assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash and due from banks | |
| 11,244 | | |
| | | |
| | | |
| 9,223 | | |
| | | |
| | |
Premises, land and equipment | |
| 6,971 | | |
| | | |
| | | |
| 8,383 | | |
| | | |
| | |
Other assets | |
| 33,246 | | |
| | | |
| | | |
| 27,140 | | |
| | | |
| | |
Less: allowance for loan losses | |
| (13,448 | ) | |
| | | |
| | | |
| (13,183 | ) | |
| | | |
| | |
Total
noninterest-earning assets | |
| 38,013 | | |
| | | |
| | | |
| 31,563 | | |
| | | |
| | |
Total Assets | |
$ | 1,108,029 | | |
| | | |
| | | |
$ | 944,452 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Liabilities and Shareholders' Equity: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing deposits: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing demand deposits | |
$ | 111,282 | | |
$ | 62 | | |
| 0.22 | % | |
$ | 109,602 | | |
$ | 62 | | |
| 0.23 | % |
Money market deposit accounts | |
| 111,765 | | |
| 55 | | |
| 0.20 | % | |
| 115,355 | | |
| 58 | | |
| 0.20 | % |
Savings accounts | |
| 10,098 | | |
| 10 | | |
| 0.40 | % | |
| 3,353 | | |
| 3 | | |
| 0.36 | % |
Time deposits | |
| 302,526 | | |
| 740 | | |
| 0.98 | % | |
| 271,125 | | |
| 664 | | |
| 0.98 | % |
Total
interest-bearing deposits | |
| 535,671 | | |
| 867 | | |
| 0.65 | % | |
| 499,435 | | |
| 787 | | |
| 0.63 | % |
Borrowings: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
FHLB short-term borrowings | |
| 125,736 | | |
| 77 | | |
| 0.24 | % | |
| 76,978 | | |
| 47 | | |
| 0.24 | % |
Securities sold under agreements to repurchase and federal funds purchased | |
| 22,506 | | |
| 6 | | |
| 0.11 | % | |
| 20,082 | | |
| 5 | | |
| 0.10 | % |
FHLB long-term borrowings | |
| 10,000 | | |
| 30 | | |
| 1.20 | % | |
| - | | |
| - | | |
| 0.00 | % |
Total
borrowings | |
| 158,242 | | |
| 113 | | |
| 0.29 | % | |
| 97,060 | | |
| 52 | | |
| 0.21 | % |
Total interest-bearing deposits and
borrowings | |
| 693,913 | | |
| 980 | | |
| 0.56 | % | |
| 596,495 | | |
| 839 | | |
| 0.56 | % |
Noninterest-bearing liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Demand deposits | |
| 303,364 | | |
| | | |
| | | |
| 243,602 | | |
| | | |
| | |
Other liabilities | |
| 8,192 | | |
| | | |
| | | |
| 9,555 | | |
| | | |
| | |
Total
liabilities | |
| 1,005,469 | | |
| | | |
| | | |
| 849,652 | | |
| | | |
| | |
Shareholders' Equity | |
| 102,560 | | |
| | | |
| | | |
| 94,800 | | |
| | | |
| | |
Total Liabilities
and Shareholders' Equity | |
$ | 1,108,029 | | |
| | | |
| | | |
$ | 944,452 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest Spread(2) | |
| | | |
| | | |
| 3.47 | % | |
| | | |
| | | |
| 3.60 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net Interest Margin(3) | |
| | | |
$ | 9,807 | | |
| 3.67 | % | |
| | | |
$ | 8,663 | | |
| 3.80 | % |
(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
Six Months Ended
| |
June
30, 2015 | | |
June
30, 2014 | |
| |
Average | | |
Income /
| | |
Yield / | | |
Average | | |
Income /
| | |
Yield / | |
| |
Balance
| | |
Expense
| | |
Rate | | |
Balance
| | |
Expense
| | |
Rate | |
| |
(Dollars In Thousands) | |
Assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-earning assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Securities | |
$ | 144,942 | | |
$ | 1,597 | | |
| 2.20 | % | |
$ | 113,789 | | |
$ | 1,089 | | |
| 1.91 | % |
Loans held for sale | |
| 48,667 | | |
| 926 | | |
| 3.81 | % | |
| 23,129 | | |
| 499 | | |
| 4.31 | % |
Loans(1) | |
| 798,281 | | |
| 18,479 | | |
| 4.63 | % | |
| 709,593 | | |
| 16,814 | | |
| 4.74 | % |
Interest-bearing balances and federal funds sold | |
| 50,447 | | |
| 61 | | |
| 0.24 | % | |
| 40,661 | | |
| 45 | | |
| 0.22 | % |
Total
interest-earning assets | |
| 1,042,337 | | |
| 21,063 | | |
| 4.04 | % | |
| 887,172 | | |
| 18,447 | | |
| 4.16 | % |
Noninterest-earning assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash and due from banks | |
| 10,579 | | |
| | | |
| | | |
| 8,420 | | |
| | | |
| | |
Premises, land and equipment | |
| 6,935 | | |
| | | |
| | | |
| 8,381 | | |
| | | |
| | |
Other assets | |
| 32,864 | | |
| | | |
| | | |
| 21,604 | | |
| | | |
| | |
Less: allowance for loan losses | |
| (13,393 | ) | |
| | | |
| | | |
| (13,182 | ) | |
| | | |
| | |
Total
noninterest-earning assets | |
| 36,985 | | |
| | | |
| | | |
| 25,223 | | |
| | | |
| | |
Total
Assets | |
$ | 1,079,322 | | |
| | | |
| | | |
$ | 912,396 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Liabilities
and Shareholders' Equity: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing
deposits: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing demand deposits | |
$ | 115,958 | | |
$ | 127 | | |
| 0.22 | % | |
$ | 107,719 | | |
$ | 120 | | |
| 0.22 | % |
Money market deposit accounts | |
| 111,137 | | |
| 109 | | |
| 0.20 | % | |
| 114,740 | | |
| 115 | | |
| 0.20 | % |
Savings accounts | |
| 8,979 | | |
| 17 | | |
| 0.38 | % | |
| 3,112 | | |
| 5 | | |
| 0.32 | % |
Time deposits | |
| 281,595 | | |
| 1,347 | | |
| 0.96 | % | |
| 245,184 | | |
| 1,275 | | |
| 1.04 | % |
Total
interest-bearing deposits | |
| 517,669 | | |
| 1,600 | | |
| 0.62 | % | |
| 470,755 | | |
| 1,515 | | |
| 0.64 | % |
Borrowings: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
FHLB short-term borrowings | |
| 141,558 | | |
| 171 | | |
| 0.24 | % | |
| 96,354 | | |
| 117 | | |
| 0.24 | % |
Securities sold under agreements to repurchase and federal
funds purchased | |
| 22,600 | | |
| 11 | | |
| 0.10 | % | |
| 21,719 | | |
| 11 | | |
| 0.10 | % |
FHLB long-term borrowings | |
| 5,304 | | |
| 32 | | |
| 1.21 | % | |
| - | | |
| - | | |
| 0.00 | % |
Total
borrowings | |
| 169,462 | | |
| 214 | | |
| 0.25 | % | |
| 118,073 | | |
| 128 | | |
| 0.22 | % |
Total
interest-bearing deposits and borrowings | |
| 687,131 | | |
| 1,814 | | |
| 0.53 | % | |
| 588,828 | | |
| 1,643 | | |
| 0.56 | % |
Noninterest-bearing
liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Demand deposits | |
| 282,119 | | |
| | | |
| | | |
| 220,158 | | |
| | | |
| | |
Other liabilities | |
| 8,410 | | |
| | | |
| | | |
| 9,707 | | |
| | | |
| | |
Total
liabilities | |
| 977,660 | | |
| | | |
| | | |
| 818,693 | | |
| | | |
| | |
Shareholders' Equity | |
| 101,662 | | |
| | | |
| | | |
| 93,703 | | |
| | | |
| | |
Total
Liabilities and Shareholders' Equity | |
$ | 1,079,322 | | |
| | | |
| | | |
$ | 912,396 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest
Spread(2) | |
| | | |
| | | |
| 3.51 | % | |
| | | |
| | | |
| 3.60 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net
Interest Margin(3) | |
| | | |
$ | 19,249 | | |
| 3.69 | % | |
| | | |
$ | 16,804 | | |
| 3.79 | % |
(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 $7.1 million for the second quarter of 2015 compared to $5.3 million for the
same period in 2014. 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 $5.7 million for the three month period ended June 30, 2015, compared to
$3.8 million for the same period of 2014. Gains on the sale of loans fluctuate with the volume of mortgage loans originated. During
the three months ended June 30, 2015, the Bank’s mortgage segment originated $145.2 million in mortgage and brokered loans,
up from $109.3 million for the same period in 2014. For the three months ended June 30, 2015, other income reflected a decrease
of $199 thousand over the three months ended June 30, 2014 due mainly to the hedging activity and fair value marks on the pipeline
and warehouse loans. Our hedging activities are designed to insulate the net gain on sale margins from movements of interest rates
during the mortgage loan origination and delivery process. When gains are recognized on instruments used to hedge interest rate
risk, the value of the loans being hedged decrease proportionately resulting in lower realized gains on sale income.
Noninterest income was $13.4 million for the first six months
of 2015 compared to $8.6 million for the same period in 2014. Gains on the sale of loans totaled $9.3 million for the six month
period ended June 30, 2015, compared to $5.5 million for the same period of 2014. During the six months ended June 30, 2015, the
Bank’s mortgage segment originated $259.8 million in mortgage and brokered loans, up from $179.8 million for the same period
in 2014. For the six months ended June 30, 2015, other income reflected an increase of $996 thousand over the six months ended
June 30, 2014 due mainly to the hedging activity and fair value marks on the pipeline and warehouse loans.
Noninterest Expense
Noninterest expense totaled $10.6 million for the three months
ended June 30, 2015, compared to $9.2 million for the same period in 2014, an increase of $1.4 million. Salaries and employee
benefits totaled $7.0 million for the three months ended June 30, 2015, compared to $6.0 million for the same period last year
due largely to the salary costs associated with the increase in mortgage production volume. Other operating expenses totaled $2.9
million for the three months ended June 30, 2015, compared to $2.6 million for the same period in 2014.
Noninterest expense totaled $20.9 million for the six months
ended June 30, 2014, compared to $16.9 million for the same period in 2014, an increase of $4.0 million. Salaries and employee
benefits totaled $13.7 million for the six months ended June 30, 2015, compared to $10.8 million for the same period last year
due largely to the salary costs associated with the increase in mortgage production volume. Other operating expenses totaled $5.7
million for the six months ended June 30, 2015, compared to $4.7 million for the same period in 2014.
The table below provides the composition of other operating
expenses.
| |
Six
Months Ended June 30, | |
| |
2015 | | |
2014 | |
| |
(In Thousands) | |
| |
| | |
| |
Management fees | |
$ | 599 | | |
$ | 287 | |
Business and franchise tax | |
| 432 | | |
| 411 | |
Data processing | |
| 391 | | |
| 334 | |
Advertising and promotional | |
| 377 | | |
| 364 | |
Accounting and auditing | |
| 306 | | |
| 306 | |
Investor fees | |
| 295 | | |
| 179 | |
FDIC insurance | |
| 294 | | |
| 211 | |
Legal fees | |
| 273 | | |
| 120 | |
Consulting fees | |
| 233 | | |
| 202 | |
Director fees | |
| 222 | | |
| 270 | |
Stock option | |
| 178 | | |
| 118 | |
Telephone | |
| 169 | | |
| 154 | |
Credit report | |
| 129 | | |
| 102 | |
Regulatory examinations | |
| 124 | | |
| 104 | |
Publication and subscription | |
| 121 | | |
| 133 | |
Office supplies-stationary print | |
| 105 | | |
| 185 | |
Disaster recovery | |
| 98 | | |
| 130 | |
SBA guarantee fee | |
| 84 | | |
| 92 | |
FRB and bank analysis charges | |
| 76 | | |
| 54 | |
Education and training | |
| 72 | | |
| 26 | |
Dues and memberships | |
| 54 | | |
| 50 | |
Verification fees | |
| 54 | | |
| 39 | |
Business development and meals | |
| 53 | | |
| 58 | |
D&O liability insurance | |
| 52 | | |
| 62 | |
Postage | |
| 47 | | |
| 25 | |
Travel | |
| 66 | | |
| 67 | |
Early payoff | |
| 40 | | |
| 24 | |
Appraisal fee | |
| 38 | | |
| 20 | |
Common stock | |
| 32 | | |
| 53 | |
Courier | |
| 29 | | |
| 55 | |
Automotive | |
| 23 | | |
| 25 | |
Conventions and meetings | |
| 22 | | |
| 25 | |
Bank paid closing costs | |
| 15 | | |
| 22 | |
License and permit | |
| 9 | | |
| 8 | |
Other | |
| 576 | | |
| 354 | |
| |
$ | 5,688 | | |
$ | 4,669 | |
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 June 30, 2015, overnight
interest-bearing balances totaled $79.2 million and unpledged available-for-sale investment securities totaled approximately $48.3
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 June 30, 2015, the portfolio of CDARS and wholesale time deposits totaled $219.6 million compared to $177.0 million at December
31, 2014, 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 June 30, 2015, the Bank had a line of credit with the FHLB totaling $320.6 million
and had outstanding $120 million in short term loans at fixed rates between 0.25% and 0.37% and $10 million in long term loans
at a fixed rate of 1.22% leaving $190.6 million available on the line. In addition to the line of credit at the FHLB, the Bank
issues repurchase agreements. As of June 30, 2015, outstanding repurchase agreements totaled $18.1 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 June 30, 2015, these lines totaled $60.4 million and were available as an additional funding source.
The following table presents the composition of borrowings
at June 30, 2015 and December 31, 2014 as well as the average balances for the six months ended June 30, 2015 and the twelve months
ended December 31, 2014.
Borrowed Funds Distribution
| |
June
30, 2015 | | |
December
31, 2014 | |
| |
(Dollars In Thousands) | |
Borrowings: | |
| | | |
| | |
At Period End | |
| | | |
| | |
FHLB short-term borrowings | |
$ | 120,000 | | |
$ | 160,000 | |
Securities sold under agreements to repurchase | |
| 18,079 | | |
| 25,635 | |
FHLB long-term borrowings | |
| 10,000 | | |
| - | |
Total at period end | |
$ | 148,079 | | |
$ | 185,635 | |
| |
June
30, 2015 | | |
December
31, 2014 | |
| |
(Dollars In Thousands) | |
Borrowings: | |
| | | |
| | |
Average Balances | |
| | | |
| | |
FHLB short-term borrowings | |
$ | 141,558 | | |
$ | 115,471 | |
Securities sold under agreements to repurchase | |
| 22,269 | | |
| 21,071 | |
FHLB long-term borrowings | |
| 5,304 | | |
| - | |
Federal funds purchased | |
| 331 | | |
| 58 | |
Total average balance | |
$ | 169,462 | | |
$ | 136,600 | |
| |
| | | |
| | |
Average rate paid on all borrowed funds | |
| 0.25 | % | |
| 0.21 | % |
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, 2014.
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 June 30, 2015 and December 31, 2014, assuming
budgeted growth in the balance sheet. According to the model run for the six month period ended June 30, 2015, 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 1.30%. 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 June 30, 2015 | | |
Hypothetical
Percentage Change in Earnings
December 31, 2014 | |
| 3.00 | % | |
| 3.30 | % | |
| 11.50 | % |
| 2.00 | % | |
| 2.70 | % | |
| 7.80 | % |
| 1.00 | % | |
| 1.30 | % | |
| 3.80 | % |
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.
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.
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,
2014.
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 second quarter of 2015 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 | |
| |
| | |
| | |
| | |
| |
April 1 - April 30, 2015 | |
| - | | |
$ | - | | |
| - | | |
| 768,781 | |
May 1 - May 31, 2015 | |
| - | | |
| - | | |
| - | | |
| 768,781 | |
June 1 - June 30, 2015 | |
| - | | |
| - | | |
| - | | |
| 768,781 | |
| |
| - | | |
$ | - | | |
| - | | |
| 768,781 | |
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. |
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 June 30, 2015 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: August
10, 2015 |
By: |
/s/
Michael W. Clarke |
|
|
Michael W. Clarke |
|
|
President and
Chief Executive Officer |
|
|
(Principal Executive
Officer) |
|
|
|
Date: August
10, 2015 |
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:
August 10, 2015 |
|
|
/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:
August 10, 2015 |
|
|
/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 June 30, 2015 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) |
|
August 10,
2015 |
|
|
|
/s/ Margaret
M. Taylor |
|
Margaret M.
Taylor |
|
Senior Vice
President and Chief Financial Officer |
|
(Principal
Financial & Accounting Officer) |
|
August 10,
2015 |
|
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