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Section 1: 10-Q (FAUQUIER BANKSHARES, INC)

 
UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q
(Mark One)

       Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2016

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 No.: 000-25805

Fauquier Bankshares, Inc.
(Exact name of registrant as specified in its charter)

10 Courthouse Square, Warrenton, Virginia
 
20186
(Address of principal executive offices)
 
(Zip Code)

(540) 347-2700
(Registrant's telephone number, including area code)

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 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 (Section 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 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. (Check one):

Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company

Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)  Yes No

The registrant had 3,753,486 shares of common stock outstanding as of November 3, 2016.




FAUQUIER BANKSHARES, INC.
INDEX




Part I.       FINANCIAL INFORMATION
 
   
Page
Item 1.
Financial Statements
 2
     
 
Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015
 2
     
 
Consolidated Statements of Income (unaudited) for the Three Months Ended September 30, 2016 and 2015
 3
     
 
Consolidated Statements of Income (unaudited) for the Nine Months Ended September 30, 2016 and 2015
4
     
 
Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30, 2016 and  2015
 5 
     
 
Consolidated Statements of Changes in Shareholders' Equity (unaudited) for the Nine Months Ended September 30, 2016 and 2015
 6
     
 
Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2016 and 2015
7
     
 
Notes to Consolidated Financial Statements
8
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
23
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
36
     
Item 4.
Controls and Procedures
36
     
Part II.     OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
37
     
Item 1A.
Risk Factors
37
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
37
     
Item 3.
Defaults Upon Senior Securities
37
     
Item 4.
Mine Safety Disclosures
37
     
Item 5.
Other Information
37
     
Item 6.
Exhibits
38
     
SIGNATURES
39
   
1


Part I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets
 
 
September 30,
   
December 31,
 
 
 
2016
   
2015
 
(In thousands, except share and per share data) 
 
(Unaudited)
   
(Audited)
 
Assets
           
Cash and due from banks
 
$
4,653
   
$
5,235
 
Interest-bearing deposits in other banks
   
70,808
     
47,971
 
Federal funds sold
   
7
     
9
 
Securities available for sale
   
46,177
     
55,224
 
Restricted investments
   
1,782
     
1,286
 
Loans
   
457,291
     
446,862
 
   Allowance for loan losses
   
(4,417
)
   
(4,193
)
Net loans
   
452,874
     
442,669
 
Bank premises and equipment, net
   
19,662
     
20,461
 
Accrued interest receivable
   
1,499
     
1,462
 
Other real estate owned, net of allowance
   
1,356
     
1,356
 
Bank-owned life insurance
   
12,782
     
12,511
 
Other assets
   
12,277
     
13,216
 
Total assets
 
$
623,877
   
$
601,400
 
 
               
Liabilities
               
Deposits:
               
Noninterest-bearing
 
$
113,877
   
$
97,015
 
Interest-bearing:
               
  Checking
   
227,258
     
223,154
 
  Savings and money market accounts
   
136,819
     
140,173
 
  Time deposits
   
67,448
     
63,952
 
Total interest-bearing
   
431,525
     
427,279
 
  Total deposits
   
545,402
     
524,294
 
 
               
Federal Home Loan Bank advances
   
12,954
     
13,007
 
Junior subordinated debt
   
4,124
     
4,124
 
Other liabilities
   
7,139
     
7,342
 
Total liabilities
   
569,619
     
548,767
 
 
               
Shareholders' Equity
               
Common stock, par value, $3.13; authorized 8,000,000 shares; issued and outstanding: 2016: 3,753,486 shares including 17,612 non-vested shares; 2015: 3,744,562 shares including 33,267 non-vested shares
   
11,693
     
11,616
 
Retained earnings
   
43,073
     
41,477
 
Accumulated other comprehensive (loss), net
   
(508
)
   
(460
)
Total shareholders' equity
   
54,258
     
52,633
 
Total liabilities and shareholders' equity
 
$
623,877
   
$
601,400
 

See accompanying Notes to Consolidated Financial Statements.

2


Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
For the Three Months Ended September 30, 2016 and 2015

(In thousands, except per share data) 
 
2016
   
2015
 
Interest Income
           
Interest and fees on loans
 
$
5,020
   
$
5,075
 
Interest and dividends on securities available for sale:
               
Taxable interest income
   
225
     
275
 
Interest income exempt from federal income taxes
   
53
     
53
 
Dividends
   
30
     
31
 
Interest on deposits in other banks
   
95
     
26
 
Total interest income
   
5,423
     
5,460
 
                 
Interest Expense
               
Interest on deposits
   
326
     
309
 
Interest on federal funds purchased
   
-
     
7
 
Interest on Federal Home Loan Bank advances
   
81
     
82
 
Junior subordinated debt
   
51
     
50
 
Total interest expense
   
458
     
448
 
                 
Net interest income
   
4,965
     
5,012
 
                 
Provision for loan losses
   
425
     
100
 
                 
Net interest income after provision for loan losses
   
4,540
     
4,912
 
                 
Other Income
               
Trust and estate income
   
352
     
482
 
Brokerage income
   
30
     
42
 
Service charges on deposit accounts
   
533
     
598
 
Other service charges, commissions and income
   
375
     
759
 
Gain on sale and call of securities
   
1
     
3
 
Total other income
   
1,291
     
1,884
 
                 
Other Expenses
               
Salaries and benefits
   
2,622
     
2,750
 
Occupancy expense of premises
   
560
     
567
 
Furniture and equipment
   
274
     
280
 
Marketing expense
   
119
     
172
 
Legal, audit and consulting expense
   
299
     
290
 
Data processing expense
   
301
     
293
 
Federal Deposit Insurance Corporation expense
   
129
     
101
 
(Gain) loss on sale, impairment and expense of other real estate owned, net
   
5
     
(26
)
Other operating expenses
   
708
     
785
 
Total other expenses
   
5,017
     
5,212
 
                 
Income before income taxes
   
814
     
1,584
 
                 
Income tax expense
   
116
     
238
 
                 
Net Income
 
$
698
   
$
1,346
 
                 
Earnings per Share, basic
 
$
0.19
   
$
0.36
 
                 
Earnings per Share, assuming dilution
 
$
0.19
   
$
0.36
 
                 
Dividends per Share
 
$
0.12
   
$
0.12
 
See accompanying Notes to Consolidated Financial Statements.
3

Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
For the Nine Months Ended September 30, 2016 and 2015
(In thousands, except per share data)
 
2016
   
2015
 
Interest Income
           
Interest and fees on loans
 
$
14,813
   
$
15,071
 
Interest and dividends on securities available for sale:
               
Taxable interest income
   
721
     
855
 
Interest income exempt from federal income taxes
   
158
     
166
 
Dividends
   
78
     
67
 
Interest on deposits in other banks
   
235
     
99
 
Total interest income
   
16,005
     
16,258
 
                 
Interest Expense
               
Interest on deposits
   
961
     
1,125
 
Interest on federal funds purchased
   
-
     
7
 
Interest on Federal Home Loan Bank advances
   
243
     
243
 
Junior subordinated debt
   
150
     
149
 
Total interest expense
   
1,354
     
1,524
 
                 
Net interest income
   
14,651
     
14,734
 
                 
Provision for (recovery of) loan losses
   
(508
)
   
200
 
                 
Net interest income after provision for (recovery of) loan losses
   
15,159
     
14,534
 
                 
Other Income
               
Trust and estate income
   
1,052
     
1,435
 
Brokerage income
   
141
     
187
 
Service charges on deposit accounts
   
1,583
     
1,728
 
Other service charges, commissions and income
   
1,237
     
1,502
 
Gain on sale of securities
   
1
     
3
 
Total other income
   
4,014
     
4,855
 
                 
Other Expenses
               
Salaries and benefits
   
7,879
     
8,012
 
Occupancy expense of premises
   
1,752
     
1,744
 
Furniture and equipment
   
973
     
919
 
Marketing expense
   
408
     
456
 
Legal, audit and consulting expense
   
898
     
852
 
Data processing expense
   
928
     
944
 
Federal Deposit Insurance Corporation expense
   
424
     
294
 
(Gain) loss on sale or impairment and expense of other real estate owned, net
   
16
     
(12
)
Other operating expenses
   
2,290
     
2,368
 
Total other expenses
   
15,568
     
15,577
 
                 
Income before income taxes
   
3,605
     
3,812
 
                 
Income tax expense
   
739
     
674
 
                 
Net Income
 
$
2,866
   
$
3,138
 
                 
Earnings per Share, basic
 
$
0.76
   
$
0.84
 
                 
Earnings per Share, assuming dilution
 
$
0.76
   
$
0.84
 
                 
Dividends per Share
 
$
0.36
   
$
0.36
 
See accompanying Notes to Consolidated Financial Statements.
4


Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
For the Three Months Ended September 30, 2016 and 2015

(In thousands)
 
2016
   
2015
 
Net Income
 
$
698
   
$
1,346
 
Other comprehensive income, net of tax:
               
Interest rate swap, net of tax effect of $(8) in 2016 and $24 in 2015
   
15
     
(47
)
Change in fair value of securities available for sale, net of tax effect of $(32) in 2016 and $(58) in 2015
   
63
     
113
 
Total other comprehensive income, net of tax effect of $(40) in 2016 and $(34) in 2015
   
78
     
66
 
Comprehensive Income
 
$
776
   
$
1,412
 
              

For the Nine Months Ended September 30, 2016 and 2015

(In thousands)
 
2016
   
2015
 
Net Income
 
$
2,866
   
$
3,138
 
Other comprehensive income (loss), net of tax:
               
Interest rate swap, net of tax effect of $45 in 2016 and $20 in 2015
   
(87
)
   
(39
)
Change in fair value of securities available for sale, net of tax effect of $(20) in 2016 and $3 in 2015
   
39
     
(6
)
Total other comprehensive (loss), net of tax effect of $25 in 2016 and $23 in 2015
   
(48
)
   
(45
)
Comprehensive Income
 
$
2,818
   
$
3,093
 

See accompanying Notes to Consolidated Financial Statements.

5


Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
For the Nine Months Ended September 30, 2016 and 2015
 
(In thousands)
 
Common
Stock
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Total
 
Balance, December 31, 2014
 
$
11,568
   
$
43,690
   
$
(101
)
 
$
55,157
 
Net income
           
3,138
             
3,138
 
Other comprehensive income (loss) net of tax effect of $23
                   
(45
)
   
(45
)
Cash dividends ($0.36 per share)
           
(1,349
)
           
(1,349
)
Amortization of unearned compensation, restricted stock awards
           
122
             
122
 
Issuance of common stock - non-vested shares  (11,925 shares)
   
37
     
(37
)
           
-
 
Issuance of common stock - vested shares  (3,458 shares)
   
11
     
49
             
60
 
Balance, September 30, 2015
 
$
11,616
   
$
45,613
   
$
(146
)
 
$
57,083
 
 
                               
Balance, December 31, 2015
 
$
11,616
   
$
41,477
   
$
(460
)
 
$
52,633
 
Net income
           
2,866
             
2,866
 
Other comprehensive income net of tax effect of $25
                   
(48
)
   
(48
)
Cash dividends ($0.36 per share)
           
(1,352
)
           
(1,352
)
Amortization of unearned compensation, restricted stock awards
           
146
             
146
 
Issuance of common stock - non-vested shares (23,704 shares)
   
74
     
(74
)
           
-
 
Issuance of common stock - vested shares (4,536 shares)
   
14
     
54
             
68
 
Repurchase of common stock (3,661 shares)
   
(11
)
   
(44
)
           
(55
)
Balance, September 30, 2016
 
$
11,693
   
$
43,073
   
$
(508
)
 
$
54,258
 
 
See accompanying Notes to Consolidated Financial Statements.

6


Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended September 30, 2016 and 2015
 
(In thousands)
 
2016
   
2015
 
Cash Flows from Operating Activities
           
Net income
 
$
2,866
   
$
3,138
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
1,088
     
1,068
 
Loss on disposal of obsolete assets
   
-
     
23
 
Provision for (recovery of) loan losses
   
(508
)
   
200
 
(Gain) on sale of other real estate owned
   
-
     
(34
)
(Gain) loss on interest rate swaps
   
10
     
(20
)
(Gain) on sale and call of securities
   
(1
)
   
(3
)
Amortization of security premiums, net
   
61
     
40
 
Amortization of unearned compensation, net of forfeiture
   
171
     
170
 
Issuance of vested restricted stock
   
68
     
60
 
Changes in assets and liabilities:
               
  Decrease in other assets
   
654
     
597
 
  (Decrease) in other liabilities
   
(561
)
   
(39
)
Net cash provided by operating activities
   
3,848
     
5,200
 
 
               
Cash Flows from Investing Activities
               
Proceeds from maturities, calls and principal payments of securities available for sale
   
12,107
     
9,256
 
Purchase of securities available for sale
   
(3,062
)
   
(7,399
)
Purchase of premises and equipment
   
(289
)
   
(649
)
(Issuance) redemptions of restricted securities, net
   
(496
)
   
8
 
Net (increase) in loans
   
(9,503
)
   
(26,274
)
Proceeds from sale of other real estate owned
   
-
     
499
 
Net cash (used in) investing activities
   
(1,243
)
   
(24,559
)
 
               
Cash Flows from Financing Activities
               
Net increase in demand deposits, NOW accounts and savings accounts
   
17,612
     
6,741
 
Net increase (decrease) in certificates of deposit
   
3,496
     
(20,875
)
(Decrease) in FHLB advances
   
(53
)
   
(50
)
Cash dividends paid on common stock
   
(1,352
)
   
(1,349
)
Repurchase of common stock
   
(55
)
   
-
 
Net cash provided by (used in) financing activities
   
19,648
     
(15,533
)
 
               
Increase (decrease) in cash and cash equivalents
   
22,253
     
(34,892
)
 
               
Cash and Cash Equivalents
               
Beginning
   
53,215
     
64,376
 
 
               
Ending
 
$
75,468
   
$
29,484
 
 
               
Supplemental Disclosures of Cash Flow Information
               
Cash payments for:
               
Interest
 
$
1,353
   
$
1,600
 
Income taxes
 
$
-
   
$
260
 
 
               
Supplemental Disclosures of Noncash Investing Activities
               
Unrealized gain (loss) on securities available for sale, net of tax effect
 
$
39
   
$
(6
)
Unrealized (loss) on interest rate swap, net of taxes
 
$
(87
)
 
$
(39
)
Loans transferred to other real estate owned
 
$
-
   
$
583
 

See accompanying Notes to Consolidated Financial Statements.
7


FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 1.  General

The consolidated financial statements include the accounts of Fauquier Bankshares, Inc. ("the Company") and its wholly-owned subsidiary, The Fauquier Bank ("the Bank"), and the Bank's wholly-owned subsidiaries, Fauquier Bank Services, Inc., Specialty Properties Acquisitions, LLC and Specialty Properties Acquisitions - VA, LLC. Specialty Properties Acquisitions, LLC and Specialty Properties Acquisitions - VA, LLC were formed with the sole purpose of holding foreclosed properties. The consolidated financial statements do not include the accounts of Fauquier Statutory Trust II, a wholly-owned subsidiary of the Company. In consolidation, significant intercompany financial balances and transactions have been eliminated.  In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial positions as of September 30, 2016 and December 31, 2015 and the results of operations for the three and nine months ended September 30, 2016 and 2015.  The notes included herein should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company's 2015 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC").

The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results expected for the full year or any other interim period.

Recent Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-15, "Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern."  This update is intended to provide guidance about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures.  Management is required under the new guidance to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date the financial statements are issued when preparing financial statements for each interim and annual reporting period.  If conditions or events are identified, the ASU specifies the process that must be followed by management and also clarifies the timing and content of going concern footnote disclosures in order to reduce diversity in practice.  The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. Early adoption is permitted.  The Company does not expect the adoption of ASU 2014-15 to have a material impact on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." The amendments in ASU 2016-01, among other things: (1) Require equity investments (expect those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (2) Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (3) Require separate presentation of financial assets and liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables); and (4) Eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact that ASU 2016-01 will have on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact that ASU 2016-02 will have on its consolidated financial statements.

During March 2016, the FASB issued ASU No. 2016-05, "Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships." The amendments in this ASU clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria remain intact. The amendments are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-05 to have a material impact on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-07, "Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting." The amendments in this ASU eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required.  In addition, the amendments in this ASU require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Early adoption is permitted. The Company does not expect the adoption of ASU 2016-07 to have a material impact on its consolidated financial statements.

8

During March 2016, the FASB issued ASU No. 2016-09, "Compensation – Stock Compensation (Topic 718): Improvements to Employee Shares-Based Payment Accounting." The amendments in this ASU simplify several aspects of the accounting for share-based payment award transactions including: (1) income tax consequences; (2) classification of awards as either equity or liabilities; and (3) classification on the statement of cash flows. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently assessing the impact that ASU 2016-09 will have on its consolidated financial statements.

During June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for SEC filers for years, and interim periods within those fiscal years, beginning after December 15, 2019. For public companies that are not SEC filers, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements.

During August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments", to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments should be applied using a retrospective transition method to each period presented. If retrospective application is impractical for some of the issues addressed by the update, the amendments for those issues would be applied prospectively as of the earliest date practicable. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements.

Note 2.  Securities

The amortized cost and fair value of securities available for sale, with unrealized gains and losses follows:

   
September 30, 2016
 
   
Amortized
   
Gross Unrealized
   
Gross Unrealized
   
Fair
 
(In thousands)
 
Cost
   
Gains
   
(Losses)
   
Value
 
Obligations of U.S. Government corporations and agencies
 
$
36,444
   
$
699
   
$
(14
)
 
$
37,129
 
Obligations of states and political subdivisions
   
5,920
     
185
     
-
     
6,105
 
Corporate bonds
   
3,725
     
-
     
(1,165
)
   
2,560
 
Mutual funds
   
375
     
8
     
-
     
383
 
   
$
46,464
   
$
892
   
(1,179
)
 
$
46,177
 

   
December 31, 2015
 
   
Amortized
   
Gross Unrealized
   
Gross Unrealized
   
Fair
 
(In thousands)
 
Cost
   
Gains
   
(Losses)
   
Value
 
Obligations of U.S. Government corporations and agencies
 
$
45,605
   
$
352
   
$
(165
)
 
$
45,792
 
Obligations of states and political subdivisions
   
5,924
     
276
     
-
     
6,200
 
Corporate bonds
   
3,671
     
-
     
(811
)
   
2,860
 
Mutual funds
   
370
     
2
     
-
     
372
 
   
$
55,570
   
$
630
   
$
(976
)
 
$
55,224
 

The amortized cost and fair value of securities available for sale, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.

   
September 30, 2016
 
(In thousands)
 
Amortized Cost
   
Fair Value
 
Due in one year or less
 
$
4,941
   
$
5,002
 
Due after one year through five years
   
5,142
     
5,248
 
Due after five years through ten years
   
4,416
     
4,589
 
Due after ten years
   
31,590
     
30,955
 
Equity securities
   
375
     
383
 
   
$
46,464
   
$
46,177
 

There were no impairment losses on securities during the nine months ended September 30, 2016 and 2015.

During the nine months ended September 30, 2016, no securities were sold and four securities totaling $4.5 million were called. Over the same period, two securities totaling $3.1 million were purchased. During the nine months ended September 30, 2015, no securities were sold, three securities totaling $4.6 million were called and seven securities totaling $7.4 million were purchased.

9

The following table shows the Company securities with gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2016 and December 31, 2015, respectively.

(In thousands)
 
Less than 12 Months
   
12 Months or More
   
Total
 
September 30, 2016
 
Fair Value
   
Unrealized
(Losses)
   
Fair Value
   
Unrealized
(Losses)
   
Fair Value
   
Unrealized
(Losses)
 
                                     
Obligations of U.S. Government, corporations and agencies
 
$
-
   
$
-
   
$
1,674
   
$
(14
)
 
$
1,674
   
$
(14
)
Corporate bonds
   
440
     
(193
)
   
2,120
     
(972
)
   
2,560
     
(1,165
)
Total temporary impaired securities
 
$
440
   
$
(193
)
 
$
3,794
   
$
(986
)
 
$
4,234
   
$
(1,179
)

(In thousands)
 
Less than 12 Months
   
12 Months or More
   
Total
 
December 31, 2015
 
Fair Value
   
Unrealized
(Losses)
   
Fair Value
   
Unrealized
(Losses)
   
Fair Value
   
Unrealized
(Losses)
 
                                     
Obligations of U.S. Government, corporations and agencies
 
$
14,357
   
$
(76
)
 
$
3,645
   
$
(89
)
 
$
18,002
   
$
(165
)
Corporate bonds
   
560
     
(58
)
   
2,531
     
(753
)
   
3,091
     
(811
)
Total temporary impaired securities
 
$
14,917
   
$
(134
)
 
$
6,176
   
$
(842
)
 
$
21,093
   
$
(976
)

At September 30, 2016 there were three obligations of U.S. Government, corporations, and agencies that were in a loss position due to market conditions, primarily interest rates, and not due to credit concerns.

The nature of securities which were temporarily impaired at September 30, 2016 consisted of three corporate bonds with a cost basis net of other-than-temporary impairment ("OTTI") totaling $3.7 million and a temporary loss of approximately $1.2 million. The value of these corporate bonds is based on quoted market prices for similar assets. They are the "Class B" or subordinated "mezzanine" tranche of pooled trust preferred securities. The trust preferred securities are collateralized by the interest and principal payments made on trust preferred capital offerings by a geographically diversified pool of approximately 56 different financial institutions per bond. They have an estimated maturity of 18 years. These bonds could have been called at par on the five year anniversary date of issuance, which has already passed for all the bonds. The bonds reprice every three months at a fixed rate index above the three-month London Interbank Offered Rate ("LIBOR"). These bonds have sufficient collateralization and cash flow projections to satisfy their valuation based on the cash flow portion of the OTTI test under authoritative accounting guidance as of September 30, 2016. The bonds, totaling $2.6 million at fair value, are projected to repay the full outstanding interest and principal and are now classified as performing corporate bond investments. During the nine months ended September 30, 2016, $84,000 of interest income was recorded.

Additional information regarding each of the pooled trust preferred securities as of September 30, 2016 follows:

(Dollars in thousands)
Cost, net of
OTTI loss
   
Fair Value(1)
   
Percent of
Underlying
Collateral
Performing
   
Percent of
Underlying
Collateral in
Deferral
   
Percent of
Underlying
Collateral in
Default
   
Cumulative
Amount of
OTTI Loss
   
Cumulative Other
Comprehensive
Loss (Income),
net of tax benefit
 
$
1,668
   
$
1,020
     
83.5
%
   
0.0
%
   
16.5
%
 
$
289
   
$
428
 
 
1,424
     
1,100
     
86.6
%
   
4.0
%
   
9.4
%
   
576
     
214
 
 
633
     
440
     
90.0
%
   
2.5
%
   
7.5
%
   
367
     
127
 
$
3,725
   
$
2,560
                           
$
1,232
   
$
769
 

(1)
Current Moody's Ratings range from B2 to Caa3.

The Company monitors these pooled trust preferred securities in its portfolio as to collateral, issuer defaults and deferrals, which as a general rule, indicate that additional impairment may have occurred. Due to the continued stress on banks in general, and the issuer banks in particular, as a result of overall economic conditions, the Company acknowledges that it may have to recognize additional impairment in future periods; however the extent, timing, and probability of any additional impairment cannot be reasonably estimated at this time.

The following roll forward reflects the amount related to credit losses recognized in earnings (in accordance with FASB Accounting Standards Codification ("ASC") 320-10-35-34D):

(In thousands)
Beginning balance as of December 31, 2015
 
$
1,286
 
Add: Amount related to the credit loss for which an other-than-temporary impairment was not previously recognized
   
-
 
Add: Increases to the amount related to the credit loss for which an other-than temporary impairment was previously recognized
   
-
 
Less: Realized losses for securities sold
   
-
 
Less: Securities for which the amount previously recognized in other comprehensive income was recognized in earnings because the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis
   
-
 
Less: Increases in cash flows expected to be collected that are recognized over the remaining life of the security (See FASB ASC 320-10-35-35)
   
(54
)
Ending balance as of September 30, 2016
 
$
1,232
 

The carrying value of securities pledged to secure deposits and for other purposes amounted to $40.2 million and $44.5 million at September 30, 2016 and December 31, 2015, respectively.

10

Note 3.  Loans and Allowance for Loan Losses

Allowance for Loan Losses and Recorded Investment in Loans Receivable

   
As of and for the Nine Months Ended September 30, 2016
 
(In thousands)
 
Commercial
and Industrial
   
Commercial
Real Estate
   
Construction
and Land
   
Consumer
   
Student
   
Residential
Real Estate
   
Home Equity
Line of Credit
   
Unallocated
   
Total
 
Allowance for Loan Losses
                                                     
Beginning balance at 12/31/2015
 
$
526
   
$
1,162
   
$
924
   
$
13
   
$
117
   
$
886
   
$
356
   
$
209
   
$
4,193
 
Charge-offs
   
(184
)
   
(380
)
   
-
     
(35
)
   
(31
)
   
(36
)
   
-
     
-
     
(666
)
Recoveries
   
1,386
     
-
     
-
     
9
     
-
     
-
     
3
     
-
     
1,398
 
Provision (recovery)
   
(1,140
)
   
727
     
-
     
34
     
(7
)
   
118
     
(31
)
   
(209
)
   
(508
)
Ending balance at 9/30/2016
 
$
588
   
$
1,509
   
$
924
   
$
21
   
$
79
   
$
968
   
$
328
   
$
-
   
$
4,417
 
                                                                         
Ending balances individually evaluated for impairment
 
$
102
   
$
-
   
$
293
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
395
 
                                                                         
Ending balances collectively evaluated for impairment
 
$
486
   
$
1,509
   
$
631
   
$
21
   
$
79
   
$
968
   
$
328
   
$
-
   
$
4,022
 
                                                                         
Loans Receivable
                                                                       
Individually evaluated for impairment
 
$
193
   
$
4,080
   
$
3,468
   
$
-
   
$
-
   
$
412
   
$
70
           
$
8,223
 
Collectively evaluated for impairment
   
24,903
     
155,942
     
44,535
     
3,196
     
13,286
     
163,138
     
44,068
             
449,068
 
Ending balance at 9/30/2016
 
$
25,096
   
$
160,022
   
$
48,003
   
$
3,196
   
$
13,286
   
$
163,550
   
$
44,138
           
$
457,291
 
11


   
As of and for the Year Ended December 31, 2015
 
(In thousands)
 
Commercial
and Industrial
   
Commercial
Real Estate
   
Construction
and Land
   
Consumer
   
Student
   
Residential
Real Estate
   
Home Equity
Line of Credit
   
Unallocated
   
Total
 
Allowance for Loan Losses
                                                     
Beginning balance at 12/31/2014
 
$
516
   
$
1,943
   
$
699
   
$
37
   
$
72
   
$
1,424
   
$
296
   
$
404
   
$
5,391
 
Charge-offs
   
(8,525
)
   
(568
)
   
(17
)
   
(10
)
   
(50
)
   
(167
)
   
(50
)
   
-
     
(9,387
)
Recoveries
   
102
     
-
     
-
     
14
     
-
     
52
     
21
     
-
     
189
 
Provision
   
8,433
     
(213
)
   
242
     
(28
)
   
95
     
(423
)
   
89
     
(195
)
   
8,000
 
Ending balance at 12/31/2015
 
$
526
   
$
1,162
   
$
924
   
$
13
   
$
117
   
$
886
   
$
356
   
$
209
   
$
4,193
 
                                                                         
Ending balances individually  evaluated for impairment
 
$
111
   
$
-
   
$
296
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
407
 
                                                                         
Ending balances collectively  evaluated for impairment
 
$
415
   
$
1,162
   
$
628
   
$
13
   
$
117
   
$
886
   
$
356
   
$
209
   
$
3,786
 
                                                                         
Loans Receivable
                                                                       
Individually evaluated for impairment
 
$
217
   
$
2,896
   
$
3,515
   
$
-
   
$
-
   
$
419
   
$
70
           
$
7,117
 
Collectively evaluated for impairment
   
23,488
     
157,140
     
46,340
     
3,160
     
15,518
     
150,156
     
43,943
             
439,745
 
Ending balance at 12/31/2015
 
$
23,705
   
$
160,036
   
$
49,855
   
$
3,160
   
$
15,518
   
$
150,575
   
$
44,013
           
$
446,862
 

The Company's allowance for loan losses at September 30, 2016 has two basic components: the specific allowance and the general allowance. The specific allowance is used to individually allocate an allowance for larger balance, non-homogeneous loans identified as impaired. The general allowance is used for estimating the loss on pools of smaller-balance, homogeneous loans; including 1-4 family mortgage loans, installment loans and other consumer loans. Also, the general allowance is used for the remaining pool of larger balance, non-homogeneous loans which were not identified as impaired.

Credit Quality Indicators

   
As of September 30, 2016
 
(In thousands)
 
Commercial
and Industrial
   
Commercial
Real Estate
   
Construction
and Land
   
Consumer
   
Student
   
Residential
Real Estate
   
Home Equity
Line of Credit
   
Total
 
Grade:
                                               
Pass
 
$
22,231
   
$
145,713
   
$
36,139
   
$
3,193
   
$
13,286
   
$
154,831
   
$
40,529
   
$
415,922
 
Special mention
   
1,134
     
5,906
     
7,403
     
3
     
-
     
1,908
     
891
     
17,245
 
Substandard
   
1,731
     
8,403
     
4,461
     
-
     
-
     
6,811
     
2,718
     
24,124
 
Doubtful
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Loss
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total
 
$
25,096
   
$
160,022
   
$
48,003
   
$
3,196
   
$
13,286
   
$
163,550
   
$
44,138
   
$
457,291
 

   
As of December 31, 2015
 
(In thousands)
 
Commercial
and Industrial
   
Commercial
Real Estate
   
Construction
and Land
   
Consumer
   
Student
   
Residential
Real Estate
   
Home Equity
Line of Credit
   
Total
 
Grade:
                                               
Pass
 
$
20,657
   
$
148,409
   
$
38,105
   
$
3,157
   
$
15,518
   
$
141,428
   
$
40,351
   
$
407,625
 
Special mention
   
1,120
     
6,678
     
7,542
     
3
     
-
     
2,318
     
854
     
18,515
 
Substandard
   
1,928
     
4,949
     
4,208
     
-
     
-
     
6,773
     
2,808
     
20,666
 
Doubtful
   
-
     
-
     
-
     
-
     
-
     
56
     
-
     
56
 
Loss
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total
 
$
23,705
   
$
160,036
   
$
49,855
   
$
3,160
   
$
15,518
   
$
150,575
   
$
44,013
   
$
446,862
 

12


Age Analysis of Past Due Loans Receivable

   
As of September 30, 2016
 
(In thousands)
 
30-59 Days
Past Due
   
60-89 Days
Past Due
   
90 Days or More Past Due
   
Total Past Due
   
Current
   
Total Financing
Receivables
   
Carrying
Amount > 90
Days and
Accruing
   
Nonaccruals
 
Commercial and industrial
 
$
430
   
$
53
   
$
49
   
$
532
   
$
24,564
   
$
25,096
   
$
-
   
$
148
 
Commercial real estate
   
970
     
655
     
1,278
     
2,903
     
157,119
     
160,022
     
-
     
1,278
 
Construction and land
   
512
     
2,983
     
1,448
     
4,943
     
43,060
     
48,003
     
-
     
1,448
 
Consumer
   
30
     
5
     
-
     
35
     
3,161
     
3,196
     
-
     
-
 
Student (U.S. Government guaranteed)
   
796
     
583
     
1,893
     
3,272
     
10,014
     
13,286
     
1,893
     
-
 
Residential real estate
   
378
     
190
     
345
     
913
     
162,637
     
163,550
     
-
     
345
 
Home equity line of credit
   
406
     
600
     
-
     
1,006
     
43,132
     
44,138
     
-
     
-
 
Total
 
$
3,522
   
$
5,069
   
$
5,013
   
$
13,604
   
$
443,687
   
$
457,291
   
$
1,893
   
$
3,219
 

   
As of December 31, 2015
 
(In thousands)
 
30-59 Days Past Due
   
60-89 Days Past Due
   
90 Days or More Past Due
   
Total Past Due
   
Current
   
Total Financing
Receivables
   
Carrying
Amount > 90
Days and
Accruing
   
Nonaccruals
 
Commercial and industrial
 
$
235
   
$
-
   
$
-
   
$
235
   
$
23,470
   
$
23,705
   
$
-
   
$
110
 
Commercial real estate
   
-
     
296
     
-
     
296
     
159,740
     
160,036
     
-
     
-
 
Construction and land
   
599
     
-
     
1,462
     
2,061
     
47,794
     
49,855
     
-
     
1,512
 
Consumer
   
-
     
26
     
-
     
26
     
3,134
     
3,160
     
-
     
-
 
Student (U.S. Government guaranteed)
   
1,331
     
987
     
2,814
     
5,132
     
10,386
     
15,518
     
2,814
     
-
 
Residential real estate
   
887
     
90
     
228
     
1,205
     
149,370
     
150,575
     
-
     
227
 
Home equity line of credit
   
291
     
-
     
-
     
291
     
43,722
     
44,013
     
-
     
-
 
Total
 
$
3,343
   
$
1,399
   
$
4,504
   
$
9,246
   
$
437,616
   
$
446,862
   
$
2,814
   
$
1,849
 

The Company began purchasing rehabilitated student loans under the Federal Rehabilitated Student Loan Program during the quarter ended December 31, 2012. The repayment of both principal and accrued interest are 98% guaranteed by the U.S. Department of Education. At September 30, 2016, $1.9 million of the student loans were 90 days or more past due and still accruing.

Impaired Loans Receivable

   
September 30, 2016
 
(In thousands)
 
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
With no specific allowance recorded:
                             
Commercial and industrial
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
Commercial real estate
   
4,080
     
4,460
     
-
     
4,333
     
142
 
Construction and land
   
1,639
     
1,645
     
-
     
1,649
     
28
 
Student (U.S. Government guaranteed)
   
-
     
-
     
-
     
-
     
-
 
Residential real estate
   
412
     
412
     
-
     
416
     
12
 
Home equity line of credit
   
70
     
70
     
-
     
70
     
3
 
Consumer
   
-
     
-
     
-
     
-
     
-
 
                                         
With an allowance recorded:
                                       
Commercial and industrial
 
$
193
   
$
212
   
$
102
   
$
205
   
$
3
 
Commercial real estate
   
-
     
-
     
-
     
-
     
-
 
Construction and land
   
1,829
     
1,833
     
293
     
1,842
     
46
 
Student (U.S. Government guaranteed)
   
-
     
-
     
-
     
-
     
-
 
Residential real estate
   
-
     
-
     
-
     
-
     
-
 
Home equity line of credit
   
-
     
-
     
-
     
-
     
-
 
Consumer
   
-
     
-
     
-
     
-
     
-
 
                                         
Total:
                                       
Commercial and industrial
 
$
193
   
$
212
   
$
102
   
$
205
   
$
3
 
Commercial real estate
   
4,080
     
4,460
     
-
     
4,333
     
142
 
Construction and land
   
3,468
     
3,478
     
293
     
3,491
     
74
 
Student (U.S. Government guaranteed)
   
-
     
-
     
-
     
-
     
-
 
Residential real estate
   
412
     
412
     
-
     
416
     
12
 
Home equity line of credit
   
70
     
70
     
-
     
70
     
3
 
Consumer
   
-
     
-
     
-
     
-
     
-
 
Total
 
$
8,223
   
$
8,632
   
$
395
   
$
8,515
   
$
234
 
13


   
December 31, 2015
 
(In thousands)
 
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
With no specific allowance recorded:
                             
Commercial and industrial
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
Commercial real estate
   
2,896
     
2,896
     
-
     
3,205
     
49
 
Construction and land
   
2,988
     
2,988
     
-
     
3,027
     
88
 
Student (U.S. Government guaranteed)
   
-
     
-
     
-
     
-
     
-
 
Residential real estate
   
419
     
419
     
-
     
428
     
18
 
Home equity line of credit
   
70
     
70
     
-
     
70
     
3
 
Consumer
   
-
     
-
     
-
     
-
     
-
 
                                         
With an allowance recorded:
                                       
Commercial and industrial
 
$
217
   
$
230
   
$
111
   
$
234
   
$
5
 
Commercial real estate
   
-
     
-
     
-
     
-
     
-
 
Construction and land
   
527
     
527
     
296
     
531
     
13
 
Student (U.S. Government guaranteed)
   
-
     
-
     
-
     
-
     
-
 
Residential real estate
   
-
     
-
     
-
     
-
     
-
 
Home equity line of credit
   
-
     
-
     
-
     
-
     
-
 
Consumer
   
-
     
-
     
-
     
-
     
-
 
                                         
Total:
                                       
Commercial and industrial
 
$
217
   
$
230
   
$
111
   
$
234
   
$
5
 
Commercial real estate
   
2,896
     
2,896
     
-
     
3,205
     
49
 
Construction and land
   
3,515
     
3,515
     
296
     
3,558
     
101
 
Student (U.S. Government guaranteed)
   
-
     
-
     
-
     
-
     
-
 
Residential real estate
   
419
     
419
     
-
     
428