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Section 1: 10-Q (10-Q)

Document

 

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 March 31, 2018
or
[   ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the transition period from ____________ to _____________

Commission File Number:  000-49929
ACCESS NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Virginia
(State or other jurisdiction of incorporation or organization) 
82-0545425
(I.R.S. Employer Identification No.)
1800 Robert Fulton Drive, Suite 300, Reston, Virginia
(Address of principal executive offices)
20191
(Zip Code)
(703) 871-2100
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed from last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  þ
No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  þ
No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one:)
Large accelerated filer
o
 
Accelerated filer
þ
Non-accelerated filer
(Do not check if a smaller reporting company)
o
 
Smaller reporting company  
o
Emerging growth company
o
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o
No  þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date 20,701,471 shares of Common Stock as of May 8, 2018.
 
 




ACCESS NATIONAL CORPORATION
FORM 10-Q

INDEX

Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



ITEM 1.
FINANCIAL STATEMENTS

PART I

ACCESS NATIONAL CORPORATION
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except for Share and Per Share Data)
 
 
 
 
 
March 31, 2018
 
December 31, 2017
 
 
 
 
ASSETS
 
 
 
Cash and due from banks
$
17,084

 
$
29,855

Interest-bearing balances and federal funds sold
127,280

 
92,458

Total cash and cash equivalents
144,364

 
122,313

Investment securities:
 
 
 
Available-for-sale, at fair value
401,411

 
406,067

Marketable equity, at fair value
1,351

 
1,379

Held-to-maturity, at amortized cost (fair value of $15,657 and $16,379, respectively)
15,676

 
15,721

Total investment securities
418,438

 
423,167

Restricted stock, at amortized cost
16,502

 
16,572

Loans held for sale, at fair value
30,008

 
31,999

Loans held for investment, net of allowance for loan losses of $15,928 and $15,805, respectively
1,908,983

 
1,963,104

Premises, equipment and land, net
28,111

 
27,797

Goodwill and intangibles
185,646

 
185,161

Other real estate owned, net of valuation allowance
1,903

 
643

Bank owned life insurance
51,953

 
51,632

Other assets
47,940

 
51,506

Total assets
$
2,833,848

 
$
2,873,894

LIABILITIES AND SHAREHOLDERS' EQUITY
 

 
 

LIABILITIES
 
 
 
Noninterest-bearing deposits
$
706,128

 
$
744,960

Interest-bearing demand deposits
511,850

 
496,677

Savings and money market deposits
659,615

 
623,889

Time deposits
319,335

 
368,622

Total deposits
2,196,928

 
2,234,148

Short-term borrowings
143,413

 
145,993

Long-term borrowings
40,000

 
40,000

Trust preferred debentures
3,903

 
3,883

Other liabilities and accrued expenses
22,951

 
28,246

Total liabilities
2,407,195

 
2,452,270

SHAREHOLDERS' EQUITY
 

 
 

Common stock $0.835 par value; 60,000,000 shares authorized; 20,695,946 and 20,534,163 issued and outstanding, respectively
17,281

 
17,146

Additional paid in capital
311,675

 
307,670

Retained earnings
103,834

 
98,584

Accumulated other comprehensive loss, net
(6,137
)
 
(1,776
)
Total shareholders' equity
426,653

 
421,624

Total liabilities and shareholders' equity
$
2,833,848

 
$
2,873,894

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

3



ACCESS NATIONAL CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except for Share and Per Share Data)
 
 
 
For the Three Months Ended
March 31,
 
2018
 
2017
INTEREST AND DIVIDEND INCOME
 
 
 
Interest and fees on loans
$
23,411

 
$
12,199

Interest on federal funds sold and bank balances
517

 
131

Interest and dividends on securities
2,680

 
1,224

Total interest and dividend income
26,608

 
13,554

INTEREST EXPENSE
 

 
 

Interest on deposits
2,798

 
1,502

Interest on other borrowings
565

 
362

Total interest expense
3,363

 
1,864

Net interest income
23,245

 
11,690

Provision for loan losses
750

 
1,400

Net interest income after provision for loan losses
22,495

 
10,290

NONINTEREST INCOME
 

 
 

Service charges and fees
477

 
280

Gain on sale of loans
2,792

 
3,345

Other income
4,126

 
2,378

Total noninterest income
7,395

 
6,003

NONINTEREST EXPENSE
 

 
 

Salaries and benefits
11,728

 
8,040

Occupancy and equipment
2,241

 
820

Other operating expenses
6,005

 
3,335

Total noninterest expense
19,974

 
12,195

Income before income taxes
9,916

 
4,098

Income tax expense
1,830

 
1,491

NET INCOME
$
8,086

 
$
2,607

Earnings per common share:
 
 
 
Basic
$
0.39

 
$
0.24

Diluted
$
0.39

 
$
0.24

Average outstanding shares:
 
 
 
Basic
20,619,817

 
10,724,798

Diluted
20,715,188

 
10,857,235


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

4



ACCESS NATIONAL CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
 
 
 
 
 
For the Three Months Ended
March 31,
 
2018
 
2017
Net income
$
8,086

 
$
2,607

Other comprehensive income (loss):
 
 
 
Unrealized holding gains (losses) arising during the period
(5,277
)
 
66

Unrealized gains (losses) on interest rate swaps
61

 

Tax effect
1,108

 
(23
)
Total other comprehensive (loss) income
(4,108
)
 
43

Total comprehensive income
$
3,978

 
$
2,650


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




5



ACCESS NATIONAL CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands, Except for Share and Per Share Data)

 
Common Stock
 
Capital Surplus
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total
Balance January 1, 2018
$
17,146

 
$
307,670

 
$
98,584

 
$
(1,776
)
 
$
421,624

Net income

 

 
8,086

 

 
8,086

Other comprehensive loss

 

 

 
(4,108
)
 
(4,108
)
Cash dividends ($0.15 per share)

 

 
(3,089
)
 

 
(3,089
)
Reclassification of the Income Tax Effects of the Tax Cuts and Jobs Act from AOCI

 

 
374

 
(374
)
 

Amounts reclassified as cumulative effect of adoption of new accounting pronouncement

 

 
(121
)
 
121

 

Dividend reinvestment plan shares issued from reserve (101,245 shares)
85

 
2,982

 

 

 
3,067

Exercise of stock options (60,538 shares)
50

 
911

 

 

 
961

Stock-based compensation

 
112

 

 

 
112

Balance March 31, 2018
$
17,281

 
$
311,675

 
$
103,834

 
$
(6,137
)
 
$
426,653

 
 
 
 
 
 
 
 
 
 
Balance January 1, 2017
$
8,881

 
$
21,779

 
$
91,439

 
$
(1,569
)
 
$
120,530

Net income

 

 
2,607

 

 
2,607

Other comprehensive income

 

 

 
43

 
43

Cash dividends ($0.15 per share)

 

 
(1,610
)
 

 
(1,610
)
Exercise of stock options (118,693 shares)
99

 
1,560

 

 

 
1,659

Dividend reinvestment plan shares issued from reserve (28,006 shares)
24

 
695

 

 

 
719

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

 
125

 

 

 
129

Stock-based compensation

 
95

 

 

 
95

Balance March 31, 2017
$
9,008

 
$
24,254

 
$
92,436

 
$
(1,526
)
 
$
124,172

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


6



ACCESS NATIONAL CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
 
For the Three Months Ended
 
March 31,
 
2018
 
2017
Cash Flows From Operating Activities
 
 
 
Net income
$
8,086

 
$
2,607

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 

Depreciation and amortization
518

 
145

Provision for loan losses
750

 
1,400

Originations of loans held for sale
(84,411
)
 
(94,500
)
Proceeds from sales of loans held for sale
86,299

 
94,406

Amortization of intangibles
899

 
15

Amortization on purchase accounting discounts
52

 

(Increase) decrease in valuation of loans held for sale carried at fair value
103

 
(529
)
Deferred tax (benefit) expense
(20
)
 
550

Decrease in valuation allowance on derivatives
344

 
220

Loss on sale of assets, net
(49
)
 

Amortization of securities discounts and premiums, net
926

 
569

   Accretion of unfavorable lease liability
(101
)
 

Stock-based compensation
112

 
95

Accretion of purchase accounting credit marks
(774
)
 

Income from bank owned life insurance
(321
)
 
(184
)
Changes in assets and liabilities:
 
 
 
Decrease (increase) in other assets
1,394

 
(547
)
Decrease in other liabilities
(4,187
)
 
(1,408
)
Net cash provided by operating activities
$
9,620

 
$
2,839

Cash Flows from Investing Activities
 
 
 

Proceeds from maturities, calls, principal repayments and sales of securities available-for-sale
$
10,158

 
$
3,458

Purchases of securities available-for-sale
(11,641
)
 

Proceeds from sales, maturities and calls of securities held-to-maturity
37

 
14

Redemption of restricted stock, net
70

 
3,768

Purchases of premises, equipment and land, net
(120
)
 
(136
)
Decrease (increase) in loans, net
52,821

 
(26,774
)
Net cash provided by (used in) investing activities
$
51,325

 
$
(19,670
)
Cash Flows from Financing Activities
 

 
 

Increase in demand, interest-bearing demand and savings deposits
$
12,067

 
$
46,158

(Decrease) increase in time deposits
(49,304
)
 
56,505

Increase (decrease) in securities sold under agreements to repurchase
2,404

 
(182
)
Decrease in short-term borrowings
(5,000
)
 
(124,000
)
Decrease in long-term borrowings

 
(10,000
)
Payment of dividends on common stock
(3,089
)
 
(1,610
)
Proceeds from issuance of common stock
4,028

 
2,507

Net cash used in financing activities
$
(38,894
)
 
$
(30,622
)
Increase (decrease) in cash and cash equivalents
22,051

 
(47,453
)
Cash and cash equivalents at beginning of the period
122,313

 
91,059

Cash and cash equivalents at end of the period
$
144,364

 
$
43,606

Supplemental Disclosures of Cash Flow Information
 
 
 

Interest paid
$
3,381

 
$
1,860

Income taxes
$
(702
)
 
$
12

Supplemental Disclosure of Non-Cash Transactions
 
 
 

Unrealized gains (losses) on securities available for sale
$
(5,277
)
 
$
66

Change in fair value of interest rate swaps
$
79

 
$

Transfer of loans held for investment to other real estate owned
$
1,610

 
$


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

7

ACCESS NATIONAL CORPORATION
Notes to Consolidated Financial Statements



Note 1.        Basis of Presentation

Access National Corporation (the “Corporation”) is a bank holding company incorporated under the laws of the Commonwealth of Virginia. The Corporation owns all of the stock of its three active wholly-owned subsidiaries: Access National Bank (the “Bank”), which is an independent commercial bank chartered under federal laws as a national banking association; Middleburg Investment Group ("MIG"), which was formed in 2005 and acquired by the Corporation on April 1, 2017 in its merger with Middleburg Financial Corporation ("Middleburg") and is a non-bank holding company chartered under Virginia law; and MFC Capital Trust II formed in 2003 for the purpose of issuing redeemable capital securities and acquired by Access on April 1, 2017 in its merger with Middleburg. 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. MIG has one active wholly-owned subsidiary being Middleburg Trust Company.

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with rules and regulations of the Securities and Exchange Commission (“SEC”). The statements do not include all of the information and footnotes required by GAAP for complete financial statements. All adjustments have been made which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. Such adjustments are all of a normal and recurring nature. All significant inter-company accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation. No reclassifications were significant and there was no effect on net income. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the full year. These consolidated financial statements should be read in conjunction with the Corporation’s audited financial statements and the notes thereto as of December 31, 2017, included in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

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.        Share Based Compensation Plans

The Access National Corporation 2009 Stock Option Plan (the "2009 Plan"), which was approved by shareholders on May 19, 2009, reserved 975,000 shares of the Corporation's common stock, $0.835 par value, for issuance under the 2009 Plan. The 2009 Plan allowed for stock options to be granted with an exercise price equal to the fair market value at the grant date. The expiration dates on options granted under the 2009 Plan were generally five years from the grant date.

In August 2017, the Corporation established the Access National Corporation 2017 Equity Compensation Plan (the “2017 Plan”) which was approved by shareholders on October 26, 2017. The 2017 Plan provides for the grant to key employees, non-employee directors, consultants and advisors of awards that may include one or more of the following: stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance cash awards. No awards may be granted under the 2017 Plan after October 25, 2027. Awards previously granted under the 2009 Plan will remain outstanding and valid in accordance with their terms, but no new awards will be granted under the 2009 Plan after October 26, 2017. The 2017 Plan reserves 1.5 million shares of the Corporation's common stock, $0.835 par value, for issuance under the 2017 Plan.

During the first three months of 2018, the Corporation granted 126,302 stock options to officers, directors, and employees under the 2017 Plan. For the first three months of 2017, the Corporation granted 120,600 stock options under the 2009 Stock Option Plan. Options granted under the 2017 Plan and the 2009 Stock Option Plan have an exercise price equal to the fair market value as of the grant date. Options granted under the 2017 Plan vest over 4.0 years and expire one year after the full vesting date. Stock-based compensation expense recognized in other operating expense during the three month periods ended March 31, 2018 and 2017 was $112 thousand and $95 thousand, respectively. The fair value of options is estimated on the grant date using a Black Scholes option-pricing model with the assumptions noted below.

Total unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under all active plans as of March 31, 2018 was $1.77 million. The cost is expected to be recognized over a weighted average period of 1.45 years.


8

ACCESS NATIONAL CORPORATION
Notes to Consolidated Financial Statements


A summary of stock option activity under all active plans, which include the 2009 Plan and the 2017Plan, for the three months ended March 31, 2018 and 2017 is presented as follows:
 
For the Three Months Ended March 31,
 
2018
 
2017
Expected life of options granted, in years
4.96

 
4.90

Risk-free interest rate
2.36
%
 
1.48
%
Expected volatility of stock
27.86
%
 
29.65
%
Annual expected dividend yield
2.00
%
 
3.00
%
Fair value of granted options
$
844,295

 
$
746,577

Non-vested options
377,637

 
310,821


The following table summarizes options outstanding under all active plans for the three months ended March 31, 2018 and 2017:  
 
March 31, 2018
 
Number of Options
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value
Outstanding at beginning of period
507,492

 
$
21.26

 
2.83
 
$
3,352,772

Granted
126,302

 
29.50

 
4.96
 

Exercised
(60,538
)
 
15.88

 
0.55
 
793,587

Lapsed or canceled
(4,500
)
 
15.21

 
0.00
 

Outstanding March 31, 2018
568,756

 
$
23.71

 
3.36
 
$
2,864,758

Exercisable at March 31, 2018
191,119

 
$
19.02

 
2.07
 
$
1,816,592


 
March 31, 2017
 
Number of Options
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value
Outstanding at beginning of period
481,381

 
$
16.52

 
2.50
 
$
5,412,143

Granted
120,600

 
27.82

 
4.90
 

Exercised
(118,693
)
 
13.99

 
1.20
 
1,552,993

Lapsed or canceled
(993
)
 
13.28

 
1.53
 

Outstanding March 31, 2017
482,295

 
$
19.97

 
3.20
 
$
4,845,236

Exercisable at March 31, 2017
171,474

 
$
16.48

 
1.97
 
$
2,322,399


Note 3.        Securities

The following tables provide the amortized cost and fair value of securities held-to-maturity at March 31, 2018 and December 31, 2017. Held-to-maturity securities are carried at amortized cost, which reflects historical cost, adjusted for amortization of premium and accretion of discounts.

9

ACCESS NATIONAL CORPORATION
Notes to Consolidated Financial Statements


 
March 31, 2018
(In Thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Held-to-maturity
 
 
 
 
 
 
 
U.S. Government agencies
$
5,000

 
$

 
$
(11
)
 
$
4,989

Municipals
10,676

 
36

 
(44
)
 
10,668

Total
$
15,676

 
$
36

 
$
(55
)
 
$
15,657


 
December 31, 2017
(In Thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Held-to-maturity
 
 
 
 
 
 
 
U.S. Government agencies
$
5,000

 
$
9

 
$

 
$
5,009

Municipals
10,721

 
675

 
(26
)
 
11,370

Total
$
15,721

 
$
684

 
$
(26
)
 
$
16,379


The amortized cost and fair value of securities held-to-maturity as of March 31, 2018 and December 31, 2017 by contractual maturities are shown below. Actual maturities may differ from contractual maturities because some of the securities may be called or prepaid without any penalties. 
 
March 31, 2018
 
December 31, 2017
(In Thousands)
Amortized
Cost
 
 Fair
Value
 
Amortized
Cost
 
Fair
Value
Held-to-maturity
 
 
 
 
 
 
 
U.S. Government agencies:
 
 
 
 
 
 
 
Due in one year or less
$
5,000

 
$
4,989

 
$
5,000

 
$
5,009

Municipals:
 
 
 
 
 
 
 
Due after one year through five years
433

 
437

 
1,985

 
2,004

Due after five years through ten years
2,884

 
2,895

 
1,606

 
1,639

Due after ten years through fifteen years
807

 
786

 
552

 
529

Due after fifteen years
6,552

 
6,550

 
6,578

 
7,198

Total
$
15,676

 
$
15,657

 
$
15,721

 
$
16,379



10

ACCESS NATIONAL CORPORATION
Notes to Consolidated Financial Statements


The following tables provide the amortized cost and fair value of debt securities available-for-sale. Non-equity available-for-sale securities are carried at fair value with net unrealized gains or losses reported on an after tax basis as a component of accumulated other comprehensive income (loss) in shareholders' equity.
 
March 31, 2018
(In Thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Available-for-sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
1,968

 
$

 
$
(2
)
 
$
1,966

U.S. Government agencies
5,082

 

 
(152
)
 
4,930

Mortgage backed securities
267,971

 
1

 
(5,848
)
 
262,124

Corporate bonds
4,547

 

 
(28
)
 
4,519

Asset backed securities
33,110

 
11

 
(621
)
 
32,500

Certificates of deposit
1,976

 

 
(13
)
 
1,963

Municipals
94,717

 
289

 
(1,597
)
 
93,409

Total
$
409,371

 
$
301

 
$
(8,261
)
 
$
401,411



 
December 31, 2017
(In Thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Available-for-sale Debt Securities:
 
 
 
 
 
 
 
U.S. Treasury securities
$
50

 
$

 
$

 
$
50

U.S. Government agencies
5,086

 

 
(21
)
 
5,065

Mortgage backed securities
263,004

 
66

 
(2,615
)
 
260,455

Corporate bonds
4,486

 
5

 
(9
)
 
4,482

Asset backed securities
34,092

 
19

 
(511
)
 
33,600

Certificates of deposit
1,976

 
5

 

 
1,981

Municipals
100,081

 
1,586

 
(1,233
)
 
100,434

 
408,775

 
1,681

 
(4,389
)
 
406,067

Available-for-sale Equity Securities:
 
 
 
 
 
 
 
CRA mutual fund
1,500

 

 
(121
)
 
1,379

Total
$
410,275

 
$
1,681

 
$
(4,510
)
 
$
407,446


As of December 31, 2017, a marketable equity security with a fair value of $1.4 million was recorded within investment securities available-for-sale with unrealized losses recorded through comprehensive income and accumulated other comprehensive income. On January 1, 2018, the Corporation adopted ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” and reclassified its marketable equity security from investments available-for-sale into a separate component of investment securities. The ASU requires marketable equity securities to be reported at fair value with changes recorded through earnings. As a result of the adoption, the Corporation reclassified $121 thousand in net unrealized losses included in accumulated other comprehensive loss as of December 31, 2017 to retained earnings on January 1, 2018. Equity investment securities measured at fair value at March 31, 2018, consisted of one mutual fund in the amount of $1.4 million. During the three months ended March 31, 2018, the Corporation did not recognize any unrealized losses related to this equity security in the consolidated statements of income.

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ACCESS NATIONAL CORPORATION
Notes to Consolidated Financial Statements




The amortized cost and fair value of debt securities available-for-sale as of March 31, 2018 and December 31, 2017 by contractual maturities, are shown below.  Actual maturities may differ from contractual maturities because some of the securities may be called or prepaid without any penalties.
 
March 31, 2018
 
December 31, 2017
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
(In Thousands)
Available-for-sale:
 
 
 
 
 
 
 
U.S. Treasury and Agencies:
 
 
 
 
 
 
 
Due in one year or less
$

 
$

 
$
50

 
$
50

Due after one year through five years
7,050

 
6,896

 
5,086

 
5,066

Mortgage backed securities:
 
 
 
 
 
 
 
Due after one year through five years
69,053

 
67,640

 
60,082

 
59,911

Due after five years through ten years
85,754

 
83,032

 
90,107

 
89,165

Due after ten years through fifteen years
4,203

 
4,042

 
4,424

 
4,314

Due after fifteen years
108,961

 
107,410

 
108,391

 
107,065

Corporate bonds:
 
 
 
 
 
 
 
Due in one year or less
50

 
50

 

 

Due after one year through five years
4,497

 
4,469

 
4,486

 
4,482

Asset backed securities:
 
 
 
 
 
 
 
Due after one year through five years
9,086

 
8,976

 

 

Due after five years through ten years
18,907

 
18,634

 
3,064

 
3,079

Due after ten years through fifteen years
1,886

 
1,807

 
11,557

 
11,410

Due after fifteen years
3,231

 
3,083

 
19,471

 
19,111

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

 
1,963

 
1,976

 
1,981

Municipals:
 
 
 
 
 
 
 
Due in one year or less
236

 
236

 
723

 
729

Due after one year through five years
71

 
71

 
7,587

 
7,482

Due after five years through ten years
9,558

 
9,338

 
8,784

 
8,758

Due after ten years through fifteen years
35,143

 
34,740

 
29,641

 
30,146

Due after fifteen years
49,709

 
49,024

 
53,346

 
53,318

Total
$
409,371

 
$
401,411

 
$
408,775

 
$
406,067


The fair value of securities pledged to secure public funds, securities sold under agreements to repurchase, credit lines with the Federal Reserve Bank ("FRB"), and debtor-in-possession accounts amounted to $376.9 million and $351.8 million at March 31, 2018 and December 31, 2017, respectively.

12

ACCESS NATIONAL CORPORATION
Notes to Consolidated Financial Statements



Securities available-for-sale and held-to-maturity that had an unrealized loss position at March 31, 2018 and December 31, 2017 are as follow:
(In Thousands)
 
Less than Twelve Months
 
Twelve Months or Greater
 
Total
March 31, 2018
 
Fair Value
 
Gross
Unrealized Losses
 
Fair Value
 
Gross
Unrealized Losses
 
Fair Value
 
Gross
Unrealized Losses
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies
 
$
4,989

 
$
(11
)
 
$

 
$

 
$
4,989

 
$
(11
)
Municipals
 
6,348

 
(22
)
 
526

 
(22
)
 
6,874

 
(44
)
Total
 
$
11,337

 
$
(33
)
 
$
526

 
$
(22
)
 
$
11,863

 
$
(55
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury Securities
 
$
1,966

 
$
(2
)
 
$

 
$

 
$
1,966

 
$
(2
)
U.S. Government agencies
 
4,930

 
(152
)
 

 

 
4,930

 
(152
)
Mortgage backed securities
 
207,023

 
(4,676
)
 
40,806

 
(1,172
)
 
247,829

 
(5,848
)
Corporate bonds
 
4,269

 
(28
)
 

 

 
4,269

 
(28
)
Asset backed securities
 
20,972

 
(244
)
 
8,454

 
(377
)
 
29,426

 
(621
)
Certificates of deposit
 
1,963

 
(13
)
 

 

 
1,963

 
(13
)
Municipals
 
46,922

 
(705
)
 
14,613

 
(892
)
 
61,535

 
(1,597
)
Total
 
$
288,045

 
$
(5,820
)
 
$
63,873

 
$
(2,441
)
 
$
351,918

 
$
(8,261
)

(In Thousands)
 
Less than Twelve Months
 
Twelve Months or Greater
 
Total
December 31, 2017
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
 
Municipals
 
$
1,043

 
$
(3
)
 
$
529

 
$
(23
)
 
$
1,572

 
$
(26
)
Total
 
$
1,043

 
$
(3
)
 
$
529

 
$
(23
)
 
$
1,572

 
$
(26
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies
 
$
5,066

 
$
(21
)
 
$

 
$

 
$
5,066

 
$
(21
)
Mortgage backed securities
 
193,844

 
(1,531
)
 
43,190

 
(1,084
)
 
237,034

 
(2,615
)
Corporate bonds
 
2,630

 
(9
)
 

 

 
2,630

 
(9
)
Asset backed securities
 
13,299

 
(200
)
 
8,945

 
(311
)
 
22,244

 
(511
)
Municipals
 
15,096

 
(693
)
 
15,031

 
(540
)
 
30,127

 
(1,233
)
CRA mutual fund
 

 

 
1,379

 
(121
)
 
1,379

 
(121
)
Total
 
$
229,935

 
$
(2,454
)
 
$
68,545

 
$
(2,056
)
 
$
298,480

 
$
(4,510
)




The Corporation evaluates securities for other-than-temporary impairment ("OTTI") on a quarterly basis and more frequently when economic or market conditions warrant such evaluation. Consideration is given to various factors in determining whether the Corporation anticipates a recovery in fair value such as: the length of time and extent to which the fair value has been less than cost, and the financial condition and underlying credit quality for the issuer. When analyzing an issuer's financial condition, the Corporation may consider whether the securities are issued by the federal government or its agencies, the sector or industry trends affecting the issuer, and whether any recent downgrades by bond rating agencies have occurred.

At March 31, 2018, there were 152 available-for-sale securities with unrealized losses totaling $8.4 million and five held-to-maturity securities with unrealized losses of $55 thousand.  The Corporation evaluated the investment portfolio for possible other-

13

ACCESS NATIONAL CORPORATION
Notes to Consolidated Financial Statements


than-temporary impairment losses and concluded the unrealized losses were caused by interest rate fluctuations with no adverse change in cash flows noted. Based on this analysis and because the Corporation does not intend to sell securities in an unrealized loss position and it is more likely than not the Corporation will not be required to sell any securities before recovery of amortized cost basis, which may be at maturity, the Corporation does not consider any portfolio securities to be other-than-temporarily impaired.

Restricted stock
The Corporation’s investment in the Federal Home Loan Bank of Atlanta ("FHLB") stock totaled $8.1 million and $8.2 million at March 31, 2018 and December 31, 2017, respectively.  FHLB stock is generally viewed as a long-term investment and as a restricted security which is carried at cost because there is no market for the stock other than the FHLB or member institutions.  Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.  The Corporation does not consider this investment to be other-than-temporarily impaired at March 31, 2018, and no impairment has been recognized.  FHLB stock is shown in restricted stock on the consolidated balance sheets.

The Corporation also has an investment in FRB stock which totaled $8.4 million at March 31, 2018 and December 31, 2017. The investment in FRB stock is a required investment and is carried at cost since there is no ready market. The Corporation does not consider this investment to be other-than-temporarily impaired at March 31, 2018, and no impairment has been recognized. FRB stock is shown in restricted stock on the consolidated balance sheets.
 
Securities Sold Under Agreements to Repurchase (Repurchase Agreements)
The Corporation enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Corporation may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Corporation to repurchase the assets. As a result, these repurchase agreements are accounted for as collateralized financing agreements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is classified as a short-term borrowing in the Corporation’s consolidated balance sheets, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts. In other words, there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. In addition, as the Corporation does not enter into reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements.

The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Corporation be in default (e.g., fails to make an interest payment to the counterparty). The collateral is held by a third-party financial institution in the Corporation’s custodial account. The Corporation has the right to sell or re-pledge the investment securities. The risks and rewards associated with the investment securities pledged as collateral (e.g. a decline or rise in the fair value of the investments) remains with the Corporation. As of March 31, 2018 and December 31, 2017, the obligations outstanding under these repurchase agreements totaled $53.5 million and $51.1 million, respectively, and were comprised of overnight sweep accounts. The fair value of the securities pledged in connection with these repurchase agreements at March 31, 2018 was $63.3 million in total and consisted of $15.6 million in municipal securities, $43.4 million in mortgage backed securities, $1.7 million in corporate bonds, $1.2 million in certificates of deposit, and $1.4 million in the CRA mutual fund. The fair value of the securities pledged in connection with these repurchase agreements at December 31, 2017 was $63.3 million in total and consisted of $11.6 million in municipal securities, $47.4 million in mortgage backed securities, $1.7 million in corporate bonds, $1.2 million in asset backed securities and $1.4 million in the CRA mutual fund.


14

ACCESS NATIONAL CORPORATION
Notes to Consolidated Financial Statements


Note 4.        Loans

The following table presents the composition of the loans held for investment portfolio at March 31, 2018 and December 31, 2017:
 
March 31, 2018
 
December 31, 2017
(In Thousands)
Outstanding
Amount
 
Percent of
Total Portfolio
 
Outstanding
Amount
 
Percent of
Total Portfolio
Commercial real estate - owner occupied
$
462,298

 
24.02
%
 
$
467,082

 
23.60
%
Commercial real estate - nonowner occupied
419,139

 
21.77

 
436,083

 
22.04

Residential real estate
476,366

 
24.75

 
489,669

 
24.74

Commercial
437,287

 
22.72

 
463,652

 
23.43

Real estate construction
104,528

 
5.43

 
97,481

 
4.93

Consumer
25,293

 
1.31

 
24,942

 
1.26

Total loans
$
1,924,911

 
100.00
%
 
$
1,978,909

 
100.00
%
Less allowance for loan losses
15,928

 
 

 
15,805

 
 
Net loans
$
1,908,983

 
 

 
$
1,963,104

 
 


Unearned income and net deferred loan fees and costs totaled $3.2 million and $3.1 million at March 31, 2018 and December 31, 2017, respectively. Loans pledged to secure borrowings at the FHLB totaled $481.3 million and $492.2 million at March 31, 2018 and December 31, 2017, respectively.

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

Accounting for purchased impaired loans involves estimating fair value, at acquisition, using the principal and interest cash flows expected to be collected discounted at the prevailing market rate of interest. The excess of cash flows expected to be collected over the estimated fair value at the acquisition date is referred to as the accretable yield and is recognized in interest income using an effective yield method over the remaining life of the loans. The difference between contractually required payments and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference and is not recorded. Any decreases in cash flows expected to be collected (other than due to decreases in interest rate indices and changes in prepayment assumptions) will be charged to the provision for loan losses, resulting in an increase to the allowance for loan losses.

The following table presents the changes in the accretable yield for purchased impaired loans for the three month period ended March 31, 2018:
 
March 31, 2018
(In Thousands)
Three Months Ended
Accretable yield, beginning of period
$
244

Additions

Accretion
(53
)
Reclassification from (to) nonaccretable difference

Other changes, net

Accretable yield, end of period
$
191


At March 31, 2018, none of the purchased non-credit impaired loans were classified as nonperforming assets. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all purchased non-credit impaired loans.

Loans are considered past due if a contractual payment is not made by the calendar day after the payment is due. However, for reporting purposes loans past due 1 to 29 days are excluded from loans past due and are included in the total for current loans in

15

ACCESS NATIONAL CORPORATION
Notes to Consolidated Financial Statements


the table below. The delinquency status of the loans in the portfolio is shown below as of March 31, 2018 and December 31, 2017. Loans that were on non-accrual status are not included in any past due amounts.
 
March 31, 2018
(In Thousands)
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days Or Greater
 
Total Past Due
 
Non-accrual Loans
 
Current Loans
 
Total Loans
Commercial real estate -
owner occupied
$

 
$

 
$

 
$

 
$
1,439

 
$
460,859

 
$
462,298

Commercial real estate -
nonowner occupied

 

 

 

 

 
419,139

 
419,139

Residential real estate
106

 
270

 

 
376

 
1,005

 
474,985

 
476,366

Commercial
244

 
38

 

 
282

 
2,219

 
434,786

 
437,287

Real estate construction
748

 

 

 
748

 
835

 
102,945

 
104,528

Consumer
289

 
2

 
74

 
365

 
52

 
24,876

 
25,293

Total
$
1,387

 
$
310

 
$
74

 
$
1,771

 
$
5,550

 
$
1,917,590

 
$
1,924,911

 
December 31, 2017
(In Thousands)
30-59 Days Past Due
 
60-89 Days Past Due
 
Greater than 90 Days
 
Total Past Due
 
Non-accrual Loans
 
Current Loans
 
Total Loans
Commercial real estate -
owner occupied
$

 
$

 
$

 
$

 
$
1,066

 
$
466,016

 
$
467,082

Commercial real estate -
non-owner occupied

 

 

 

 

 
436,083

 
436,083

Residential real estate
655

 
140

 
213

 
1,008

 

 
488,661

 
489,669

Commercial
138

 
19

 

 
157

 
2,513

 
460,982

 
463,652

Real estate construction

 

 

 

 
865

 
96,616

 
97,481

Consumer
81

 
2

 

 
83

 
182

 
24,677

 
24,942

Total
$
874

 
$
161

 
$
213

 
$
1,248

 
$
4,626

 
$
1,973,035

 
$
1,978,909


The following table includes an aging analysis of the recorded investment of purchased impaired loans included in the table above:
 
March 31, 2018
(In Thousands)
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days Or Greater
 
Total Past Due
 
Non-accrual Loans
 
Current Loans
 
Total Loans
Commercial real estate -
owner occupied
$

 
$

 
$

 
$

 
$

 
$
1,461

 
$
1,461

Commercial real estate -
nonowner occupied

 

 

 

 

 
961

 
961

Residential real estate

 

 

 

 
394

 
1,664

 
2,058

Commercial

 
38

 

 
38

 
125

 
11

 
174

Real estate construction

 

 

 

 

 

 

Consumer

 

 

 

 

 
48

 
48

Total
$

 
$
38

 
$

 
$
38

 
$
519

 
$
4,145

 
$
4,702


Loans listed as non-performing are also placed on non-accrual status. The accrual of interest is discontinued at the time a loan is 90 days delinquent or when the credit deteriorates and there is doubt that the credit will be paid as agreed, unless the credit is well-secured and in process of collection. Once the loan is on non-accrual status, all accrued but unpaid interest is also charged-off, and all payments are used to reduce the principal balance. Once the principal balance is repaid in full, additional payments are taken into income. A loan may be returned to accrual status if the borrower shows renewed willingness and ability to repay under the terms of the loan agreement. The risk profile based upon payment activity is shown below.

16

ACCESS NATIONAL CORPORATION
Notes to Consolidated Financial Statements


 
March 31, 2018
 
December 31, 2017
(In Thousands)
Non-performing
 
Performing
 
Total Loans
 
Non-performing
 
Performing
 
Total Loans
Commercial real estate - owner occupied
$
1,439

 
$
460,859

 
$
462,298

 
$
1,066

 
$
466,016

 
$
467,082

Commercial real estate - nonowner occupied

 
419,139

 
419,139

 

 
436,083

 
436,083

Residential real estate
1,005

 
475,361

 
476,366

 

 
489,669

 
489,669

Commercial
2,219

 
435,068

 
437,287

 
2,513

 
461,139

 
463,652

Real estate construction
835

 
103,693

 
104,528

 
865

 
96,616

 
97,481

Consumer
52

 
25,241

 
25,293

 
182

 
24,760

 
24,942

Total
$
5,550

 
$
1,919,361

 
$
1,924,911

 
$
4,626

 
$
1,974,283

 
$
1,978,909


Identifying and Classifying Portfolio Risks by Risk Rating
At origination, loans are categorized into risk categories based upon original underwriting. Subsequent to origination, management evaluates the collectability of all loans in the portfolio and assigns a proprietary risk rating. Ratings range from the highest to lowest quality based on factors including measurements of ability to pay, collateral type and value, borrower stability, management experience, and credit enhancements. These ratings are consistent with the bank regulatory rating system.

A loan may have portions of its balance in one rating and other portions in a different rating. The Bank may use these “split ratings” when factors cause loan loss risk to exist for part, but not all of the principal balance. Split ratings may also be used where cash collateral or a government agency has provided a guaranty that partially covers a loan.

For clarity of presentation, the Corporation’s loan portfolio is profiled below in accordance with the risk rating framework that has been commonly adopted by the federal banking agencies. The definitions of the various risk rating categories are as follows:

Pass: The condition of the borrower and the performance of the loan are satisfactory or better.

Special Mention: Loans with one or more potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or in the borrower's credit position at some future date.

Substandard:  Loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful:  Loans have all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss: Loans are considered uncollectible and their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, and a partial recovery may be effected in the future. It is the Bank’s policy to charge-off any loan once the risk rating is classified as loss.


17

ACCESS NATIONAL CORPORATION
Notes to Consolidated Financial Statements


The following tables present the recorded investment of loans that have been risk rated in accordance with the internal classification system:
March 31, 2018
(In Thousands)
Commercial Real Estate
Owner Occupied
 
Commercial Real Estate
Non-Owner Occupied
 
Residential Real Estate
 
Commercial
 
Real Estate Construction
 
Consumer
 
Total
Pass
$
459,393

 
$
420,109

 
$
474,606

 
$
433,129

 
$
100,289

 
$
25,236

 
$
1,912,762

Special Mention
1,902

 

 
186

 
2,720

 
3,914

 

 
8,722

Substandard
1,796

 

 
1,723

 
2,105

 
835

 
51

 
6,510

Doubtful

 

 

 
125

 

 
1

 
126

Loss

 

 

 

 

 

 

Unearned income
(793
)
 
(970
)
 
(149
)
 
(792
)
 
(510
)
 
5

 
(3,209
)
Ending Balance
$
462,298

 
$
419,139

 
$
476,366

 
$
437,287

 
$
104,528

 
$
25,293

 
$
1,924,911

December 31, 2017
(In Thousands)
Commercial Real Estate
Owner Occupied
 
Commercial Real Estate
Non-Owner Occupied
 
Residential Real Estate
 
Commercial
 
Real Estate Construction
 
Consumer
 
Total
Pass
$
465,464

 
$
437,087

 
$
487,800

 
$
461,091

 
$
92,522

 
$
24,928

 
$
1,968,892

Special Mention
1,639

 

 
189

 
1,615

 
5,349

 

 
8,792

Substandard
758

 

 
1,835

 
1,750

 

 
10

 
4,353

Doubtful

 

 

 

 

 

 

Loss

 

 

 

 

 

 

Unearned income
(779
)
 
(1,004
)
 
(155
)
 
(804
)
 
(390
)
 
4

 
(3,128
)
Ending Balance
$
467,082

 
$
436,083

 
$
489,669

 
$
463,652

 
$
97,481

 
$
24,942

 
$
1,978,909


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 non-accrual status with all payments applied to principal under the cost-recovery method. As the Bank does not utilize the cash-basis method of accounting for impaired loans, the Bank did not recognize interest income in association with its impaired loans during the first three months of 2018 and 2017.


18

ACCESS NATIONAL CORPORATION
Notes to Consolidated Financial Statements


The table below shows the results of management’s analysis of impaired loans, excluding purchased impaired loans, as of March 31, 2018 and December 31, 2017:
 
March 31, 2018
(In Thousands)
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
With no specific related allowance recorded:
 
 
 
 
 
Commercial real estate - owner occupied
$
1,040

 
$
1,086

 
$

Commercial real estate - nonowner occupied

 

 

Residential real estate
841