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Section 1: 10-Q (10-Q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 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 Website, 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.
Large accelerated filer
o
 
Accelerated filer
þ
Non-accelerated filer
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 20,932,887 shares of Common Stock as of November 7, 2018.
 
 




ACCESS NATIONAL CORPORATION
FORM 10-Q

INDEX

Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



ITEM 1.
FINANCIAL STATEMENTS

PART I

ACCESS NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except for Share and Per Share Data)
 
 
 
 
 
September 30, 2018
 
December 31, 2017
 
(Unaudited)
 
 
ASSETS
 
 
 
Cash and due from banks
$
14,062

 
$
29,855

Interest-bearing balances and federal funds sold
110,308

 
92,458

Total cash and cash equivalents
124,370

 
122,313

Investment securities:
 
 
 
Available-for-sale, at fair value
424,445

 
406,067

Marketable equity, at fair value

 
1,379

Held-to-maturity, at amortized cost (fair value of $28,278 and $28,940, respectively)
28,353

 
28,272

Total investment securities
452,798

 
435,718

Restricted stock, at amortized cost
21,192

 
16,572

Loans held for sale, at fair value
36,600

 
31,999

Loans held for investment, net of allowance for loan losses of $17,349 and $15,805, respectively
2,076,921

 
1,950,553

Premises, equipment and land, net
27,768

 
27,797

Goodwill and intangibles
184,028

 
185,161

Other real estate owned, net of valuation allowance
643

 
643

Bank owned life insurance
52,604

 
51,632

Other assets
44,399

 
51,506

Total assets
$
3,021,323

 
$
2,873,894

LIABILITIES AND SHAREHOLDERS' EQUITY
 

 
 

LIABILITIES
 

 
 

Noninterest-bearing deposits
$
757,900

 
$
744,960

Interest-bearing demand deposits
481,676

 
496,677

Savings and money market deposits
711,262

 
623,889

Time deposits
344,026

 
368,622

Total deposits
2,294,864

 
2,234,148

Short-term borrowings
212,561

 
145,993

Long-term borrowings
45,000

 
40,000

Trust preferred debentures
3,942

 
3,883

Other liabilities and accrued expenses
23,013

 
28,246

Total liabilities
2,579,380

 
2,452,270

SHAREHOLDERS' EQUITY
 

 
 

Common stock $0.835 par value; 60,000,000 shares authorized; 20,920,262 and 20,534,163 issued and outstanding, respectively
17,468

 
17,146

Additional paid in capital
317,626

 
307,670

Retained earnings
115,973

 
98,584

Accumulated other comprehensive loss, net
(9,124
)
 
(1,776
)
Total shareholders' equity
441,943

 
421,624

Total liabilities and shareholders' equity
$
3,021,323

 
$
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 September 30,
 
For the Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
INTEREST AND DIVIDEND INCOME
 
 
 
 
 
 
 
Interest and fees on loans
$
25,687

 
$
24,306

 
$
73,241

 
$
60,251

Interest on federal funds sold and bank balances
578

 
394

 
1,532

 
746

Interest and dividends on securities
3,047

 
2,992

 
8,369

 
7,388

Total interest and dividend income
29,312

 
27,692

 
83,142

 
68,385

INTEREST EXPENSE
 

 
 

 
 
 
 
Interest on deposits
3,902

 
2,639

 
9,717

 
6,560

Interest on other borrowings
1,345

 
459

 
3,100

 
1,366

Total interest expense
5,247

 
3,098

 
12,817

 
7,926

Net interest income
24,065

 
24,594

 
70,325

 
60,459

Provision for loan losses
700

 
900

 
2,102

 
3,200

Net interest income after provision for loan losses
23,365

 
23,694

 
68,223

 
57,259

NONINTEREST INCOME
 

 
 

 
 
 
 
Service charges and fees
485

 
560

 
1,456

 
1,509

Gain on sale of loans
4,465

 
5,594

 
11,453

 
14,985

Other income
2,494

 
2,369

 
11,020

 
6,917

Total noninterest income
7,444

 
8,523

 
23,929

 
23,411

NONINTEREST EXPENSE
 

 
 

 
 
 
 
Salaries and benefits
11,113

 
11,100

 
35,370

 
31,800

Occupancy and equipment
2,000

 
3,019

 
5,881

 
5,820

Other operating expenses
5,853

 
8,674

 
18,115

 
23,594

Total noninterest expense
18,966

 
22,793

 
59,366

 
61,214

Income before income taxes
11,843

 
9,424

 
32,786

 
19,456

Income tax expense
2,233

 
2,422

 
6,128

 
6,001

NET INCOME
$
9,610

 
$
7,002

 
$
26,658

 
$
13,455

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.46

 
$
0.34

 
$
1.28

 
$
0.77

Diluted
$
0.46

 
$
0.34

 
$
1.28

 
$
0.77

Average outstanding shares:
 
 
 
 
 
 
 
Basic
20,847,319

 
20,409,696

 
20,734,621

 
17,156,521

Diluted
20,925,247

 
20,508,875

 
20,821,096

 
17,273,367


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 September 30,
 
For the Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
9,610

 
$
7,002

 
$
26,658

 
$
13,455

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period
(2,514
)
 
(616
)
 
(9,019
)
 
553

Unrealized gains (losses) on interest rate swaps
(2
)
 
22

 
87

 
18

Tax effect
532

 
211

 
1,837

 
(194
)
Total other comprehensive (loss) income
(1,984
)
 
(383
)
 
(7,095
)
 
377

Total comprehensive income
$
7,626

 
$
6,619

 
$
19,563

 
$
13,832


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

 

 
26,658

 

 
26,658

Other comprehensive loss

 

 

 
(7,095
)
 
(7,095
)
Cash dividends ($0.46 per share)

 

 
(9,522
)
 

 
(9,522
)
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 (298,699 shares)
249

 
8,142

 

 

 
8,391

Exercise of stock options (87,400 shares)
73

 
1,355

 

 

 
1,428

Stock-based compensation

 
459

 

 

 
459

Balance September 30, 2018
$
17,468

 
$
317,626

 
$
115,973

 
$
(9,124
)
 
$
441,943

 
 
 
 
 
 
 
 
 
 
Balance January 1, 2017
$
8,881

 
$
21,779

 
$
91,439

 
$
(1,569
)
 
$
120,530

Net income

 

 
13,455

 

 
13,455

Other comprehensive income

 

 

 
377

 
377

Cash dividends ($0.45 per share)

 

 
(6,287
)
 

 
(6,287
)
Exercise of stock options (143,092 shares)
120

 
1,940

 

 

 
2,060

Dividend reinvestment plan shares issued from reserve (149,758 shares)
125

 
3,801

 

 

 
3,926

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

 
125

 

 

 
129

Issuance of common stock (9,516,097 shares)
7,946

 
277,727

 

 

 
285,673

Stock-based compensation

 
310

 

 

 
310

Balance September 30, 2017
$
17,076

 
$
305,682

 
$
98,607

 
$
(1,192
)
 
$
420,173

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


6



ACCESS NATIONAL CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
 
 
For the Nine Months Ended
 
 
September 30,
 
 
2018
 
2017
 
Cash Flows From Operating Activities
 
 
 
 
 
Net income
 
$
26,658

 
$
13,455

 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
 
1,241

 
2,011

 
Provision for loan losses
 
2,102

 
3,200

 
Provision for off balance sheet losses
 
210

 
50

 
Originations of loans held for sale
 
(292,655
)
 
(319,164
)
 
Proceeds from sales of loans held for sale
 
287,933

 
328,587

 
Amortization of intangibles
 
2,517

 
1,642

 
Amortization on purchase accounting discounts
 
(2,219
)
 
(2,977
)
 
Decrease in valuation of loans held for sale carried at fair value
 
121

 
19

 
Deferred tax expense
 
(182
)
 
120

 
Decrease in valuation allowance on derivatives
 
6

 
258

 
Loss on sale of available-for-sale equity security
 
9

 

 
Amortization of securities discounts and premiums, net
 
3,659

 
1,984

 
   Accretion of unfavorable lease liability
 
(303
)
 

 
Stock-based compensation
 
459

 
310

 
Losses on sale of other real estate owned, net
 
16

 

 
Impairment of other real estate owned
 
310

 

 
Income from bank owned life insurance
 
(972
)
 
(869
)
 
Changes in assets and liabilities:
 
 
 
 
 
Decrease (increase) in other assets
 
6,332

 
(6,475
)
 
(Decrease) increase in other liabilities
 
(5,105
)
 
2,645

 
Net cash provided by operating activities
 
$
30,137

 
$
24,796

 
Cash Flows from Investing Activities
 
 
 
 
 
Proceeds from maturities, calls, principal repayments and sales of securities available-for-sale
 
28,230

 
188,716

 
Proceeds from sale of available-for-sale equity security
 
1,331

 

 
Purchases of securities available-for-sale
 
(58,979
)
 
(162,623
)
 
Proceeds from sales, maturities and calls of securities held-to-maturity
 
49

 
4,273

 
(Purchase) redemption of restricted stock, net
 
(4,620
)
 
3,052

 
Purchases of premises, equipment and land, net
 
(460
)
 
(1,263
)
 
Increase in loans, net
 
(127,470
)
 
(123,353
)
 
Proceeds from sale of other real estate owned
 
1,169

 
2,258

 
Cash paid in business combination
 

 
(608
)
 
Cash acquired in business combination
 

 
90,940

 
Net cash provided by (used in) investing activities
 
$
(160,750
)
 
$
1,392

 
Cash Flows from Financing Activities
 
 
 
 
 
Increase in demand, interest-bearing demand and savings deposits
 
85,313

 
178,531

 
Decrease in time deposits
 
(24,556
)
 
(3,266
)
 
Increase in securities sold under agreements to repurchase
 
(13,480
)
 
(2,407
)
 
Increase (decrease) in short-term borrowings
 
80,096

 
(160,000
)
 
Increase in long-term borrowings
 
5,000

 

 
Payment of dividends on common stock
 
(9,522
)
 
(6,287
)
 
Proceeds from issuance of common stock
 
9,819

 
6,115

 
Net cash provided by financing activities
 
$
132,670

 
$
12,686

 
Increase in cash and cash equivalents
 
2,057

 
38,874

 
Cash and cash equivalents at beginning of the period
 
122,313

 
91,059

 
Cash and cash equivalents at end of the period
 
$
124,370

 
$
129,933

 

7



ACCESS NATIONAL CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
 
 
For the Nine Months Ended
 
 
September 30,
 
 
2018
 
2017
 
Cash Flows From Operating Activities
 
 
 
 
 
Supplemental Disclosures of Cash Flow Information
 
 
 
 
 
Interest paid
 
12,775

 
6,338

 
Income taxes
 
(4,340
)
 
5,561

 
Supplemental Disclosure of Non-Cash Transactions
 
 
 
 
 
Unrealized gains (losses) on securities available for sale
 
(9,019
)
 
364

 
Change in fair value of interest rate swaps
 
87

 
18

 
Transfer of loans held for investment to other real estate owned
 
1,180

 

 
Transfer of bank owned property to other real estate owned
 
315

 

 
Common stock issued for acquisition
 

 
285,673

 
Transactions related to bank acquisitions
 
 
 
 
 
Increase in assets and liabilities:
 
 
 
 
 
Loans
 
$

 
$
(815,817
)
 
Securities
 

 
(243,679
)
 
Other Assets
 

 
(258,306
)
 
Noninterest bearing deposits
 

 
282,752

 
Interest bearing deposits
 

 
773,867

 
Borrowings
 

 
3,824

 
Trust preferred debentures
 

 
55,925

 
Other liabilities
 

 
10,206

 

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

8

ACCESS NATIONAL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



Note 1.        Basis of Presentation

Access National Corporation (the “Corporation”) is a bank holding company incorporated under the laws of the Commonwealth of Virginia. The Corporation owns all of the stock of its 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., Middleburg 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. An approximate $12.6 million reclassification adjustment has been made to the Consolidated Balance Sheet for pools of SBA guaranteed loans now classified as investment debt securities - held to maturity for the fiscal year ended December 31, 2017. This reclassification had no material impact on the reported results of operations as there was no change in overall interest income reported. The results of operations for the three and nine months ended September 30, 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.

During the third quarter of 2018, the Corporation evaluated the accounting for its low income housing tax credits as well as investments in small business investment company funds ("SBICs") and elected to change the policy for these investments. The Corporation believes the changes better reflect the economic interest in these investments. Management believes the results of these changes are immaterial to the results of operations. As such, the adjustments were recorded through the current period as a one-time after-tax gain of $882 thousand. This includes $608 thousand ($445 thousand pre-tax credit to income with a $163 thousand credit to income tax provision) related to low income housing tax credits and a $466 thousand pre-tax gain related to equity investments. These amounts were the impact of the change in accounting principles and the correction of immaterial errors that were identified during the evaluation of the change in accounting principles.



9

ACCESS NATIONAL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)


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 nine months of 2018, the Corporation granted 161,625 stock options to officers, directors, and employees under the 2017 Plan. For the first nine months of 2017, the Corporation granted 130,600 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 nine month periods ended September 30, 2018 and 2017 was $459 thousand and $310 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 September 30, 2018 was $1.60 million. The cost is expected to be recognized over a weighted average period of 1.57 years.

A summary of stock option activity under all active plans, which include the 2009 Plan and the 2017 Plan, for the nine months ended September 30, 2018 and 2017 is presented as follows:
 
For the Nine Months Ended September 30,
 
2018
 
2017
Expected life of options granted, in years
4.52

 
4.42

Risk-free interest rate
2.42
%
 
1.49
%
Expected volatility of stock
27.25
%
 
29.64
%
Annual expected dividend yield
2.26
%
 
3.00
%
Fair value of granted options
$
1,056,185

 
$
806,422

Non-vested options
390,855

 
316,946


The following table summarizes options outstanding under all active plans for the nine months ended September 30, 2018 and 2017:  
 
September 30, 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
161,625

 
29.33

 
4.52
 

Exercised
(87,400
)
 
16.34

 
0.66
 
1,078,653.4

Lapsed or canceled
(23,150
)
 
23.97

 
2.70
 

Outstanding September 30, 2018
558,567

 
$
24.24

 
3.04
 
$
2,084,702.4

Exercisable at September 30, 2018
167,712

 
$
19.32

 
1.64
 
$
1,328,139.61



10

ACCESS NATIONAL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)


 
September 30, 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
130,600

 
27.76

 
4.42
 

Exercised
(143,092
)
 
14.40

 
0.95
 
1,815,112

Lapsed or canceled
(3,720
)
 
15.69

 
1.44
 

Outstanding September 30, 2017
465,169

 
$
20.34

 
2.82
 
$
3,872,525

Exercisable at September 30, 2017
148,223

 
$
16.51

 
1.51
 
$
1,801,644


Note 3.        Securities

The following tables provide the amortized cost and fair value of securities held-to-maturity at September 30, 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.
 
September 30, 2018
(In Thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Held-to-maturity
 
 
 
 
 
 
 
U.S. Government agencies
$
5,000

 
$

 
$
(5
)
 
$
4,995

Mortgage backed securities
12,039

 
75

 
(62
)
 
12,052

Municipals
11,314

 
13

 
(96
)
 
11,231

Total
$
28,353

 
$
88

 
$
(163
)
 
$
28,278


 
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

Mortgage backed securities
12,551

 
105

 
(95
)
 
12,561

Municipals
10,721

 
675

 
(26
)
 
11,370

Total
$
28,272

 
$
789

 
$
(121
)
 
$
28,940



11

ACCESS NATIONAL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)


The amortized cost and fair value of securities held-to-maturity as of September 30, 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 prior to their contractual maturities. 
 
September 30, 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

 
$
4,995

 
$
5,000

 
$
5,009

Mortgage backed securities:
 
 
 
 
 
 
 
Due after one year through five years
3,697

 
3,711

 
3,854

 
3,862

Due after five years through ten years
2,617

 
2,586

 
2,725

 
2,758

Due after ten years through fifteen years
5,725

 
5,755

 
5,972

 
5,941

Municipals:
 
 
 
 
 
 
 
Due after one year through five years
434

 
432

 
1,985

 
2,004

Due after five years through ten years
2,855

 
2,841

 
1,606

 
1,639

Due after ten years through fifteen years
791

 
771

 
552

 
529

Due after fifteen years
7,234

 
7,187

 
6,578

 
7,198

Total
$
28,353

 
$
28,278

 
$
28,272

 
$
28,940


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.
 
September 30, 2018
(In Thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Available-for-sale Debt Securities:
 
 
 
 
 
 
 
U.S. Treasury securities
$
4,435

 
$

 
$
(24
)
 
$
4,411

U.S. Government agencies
5,071

 

 
(184
)
 
4,887

Mortgage backed securities
296,662

 

 
(8,505
)
 
288,157

Corporate bonds
4,518

 

 
(25
)
 
4,493

Asset backed securities
32,936

 
3

 
(819
)
 
32,120

Certificates of deposit
1,976

 

 
(17
)
 
1,959

Municipals
90,573

 
73

 
(2,228
)
 
88,418

Total
$
436,171

 
$
76

 
$
(11,802
)
 
$
424,445




12

ACCESS NATIONAL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)


 
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. During the third quarter of 2018 one marketable equity security was sold for an $8 thousand loss.

13

ACCESS NATIONAL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)




The amortized cost and fair value of debt securities available-for-sale as of September 30, 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 prior to their contractual maturities.
 
September 30, 2018
 
December 31, 2017
 
Amortized
Cost
 
Estimated Fair
Value
 
Amortized
Cost
 
Estimated Fair
Value
 
(In Thousands)
Available-for-sale:
 
 
 
 
 
 
 
U.S. Treasury securities:
 
 
 
 
 
 
 
Due in one year or less
$

 
$

 
$
50

 
$
50

Due after one year through five years
4,435

 
4,411

 

 

U.S. Government agencies:
 
 
 
 
 
 
 
Due after one year through five years
5,071

 
4,887

 
5,086

 
5,066

Mortgage backed securities:
 
 
 
 
 
 
 
Due after one year through five years
70,200

 
68,255

 
60,082

 
59,911

Due after five years through ten years
90,525

 
86,707

 
90,107

 
89,165

Due after ten years through fifteen years
5,523

 
5,308

 
4,424

 
4,314

Due after fifteen years
130,414

 
127,887

 
108,391

 
107,065

Corporate bonds:
 
 
 
 
 
 
 
Due in one year or less
2,686

 
2,672

 

 

Due after one year through five years
1,832

 
1,821

 
4,486

 
4,482

Asset backed securities:
 
 
 
 
 
 
 
Due after one year through five years
3,055

 
3,059

 

 

Due after five years through ten years

 

 
3,064

 
3,079

Due after ten years through fifteen years
11,955

 
11,672

 
11,557

 
11,410

Due after fifteen years
17,926

 
17,389

 
19,471

 
19,111

Certificates of deposit:
 
 
 
 
 
 
 
Due in one year or less
494

 
492

 

 

Due after one year through five years
1,482

 
1,467

 
1,976

 
1,981

Municipals:
 
 
 
 
 
 
 
Due in one year or less
185

 
185

 
723

 
729

Due after one year through five years
1,018

 
1,033

 
7,587

 
7,482

Due after five years through ten years
11,965

 
11,685

 
8,784

 
8,758

Due after ten years through fifteen years
35,336

 
34,520

 
29,641

 
30,146

Due after fifteen years
42,069

 
40,995

 
53,346

 
53,318

Total
$
436,171

 
$
424,445

 
$
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 $362.6 million and $351.8 million at September 30, 2018 and December 31, 2017, respectively.

14

ACCESS NATIONAL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



Securities available-for-sale and held-to-maturity that had an unrealized loss position at September 30, 2018 and December 31, 2017 are as follow:
(In Thousands)
 
Less than Twelve Months
 
Twelve Months or Greater
 
Total
September 30, 2018
 
Estimated Fair Value
 
Gross
Unrealized Losses
 
Estimated Fair Value
 
Gross
Unrealized Losses
 
Estimated Fair Value
 
Gross
Unrealized Losses
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies
 
$
4,995

 
$
(5
)
 
$

 
$

 
$
4,995

 
$
(5
)
Mortgage backed securities
 
3,956

 
(62
)
 

 

 
3,956

 
(62
)
Municipals
 
7,286

 
(76
)
 
515

 
(20
)
 
7,801

 
(96
)
Total
 
$
16,237

 
$
(143
)
 
$
515

 
$
(20
)
 
$
16,752

 
$
(163
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury Securities
 
$
4,411

 
$
(24
)
 
$

 
$

 
$
4,411

 
$
(24
)
U.S. Government agencies
 

 

 
4,887

 
(184
)
 
4,887

 
(184
)
Mortgage backed securities
 
103,398

 
(1,369
)
 
184,747

 
(7,136
)
 
288,145

 
(8,505
)
Corporate bonds
 
4,292

 
(24
)
 
100

 
(1
)
 
4,392

 
(25
)
Asset backed securities
 
10,361

 
(148
)
 
18,700

 
(671
)
 
29,061

 
(819
)
Certificates of deposit
 
1,959

 
(17
)
 

 

 
1,959

 
(17
)
Municipals
 
53,633

 
(1,058
)
 
18,486

 
(1,170
)
 
72,119

 
(2,228
)
Total
 
$
178,054

 
$
(2,640
)
 
$
226,920

 
$
(9,162
)
 
$
404,974

 
$
(11,802
)

(In Thousands)
 
Less than Twelve Months
 
Twelve Months or Greater
 
Total
December 31, 2017
 
Estimated Fair Value
 
Gross Unrealized Losses
 
Estimated Fair Value
 
Gross Unrealized Losses
 
Estimated Fair Value
 
Gross Unrealized Losses
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage backed securities
 
$
4,124

 
$
(95
)
 
$

 
$

 
$
4,124

 
$
(95
)
Municipals
 
1,043

 
(3
)
 
529

 
(23
)
 
1,572

 
(26
)
Total
 
$
5,167

 
$
(98
)
 
$
529

 
$
(23
)
 
$
5,696

 
$
(121
)
 
 
 
 
 
 
 
 
 
 
 
 
 
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.

15

ACCESS NATIONAL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)



At September 30, 2018, there were 166 available-for-sale securities with unrealized losses totaling $11.8 million and thirteen held-to-maturity securities with unrealized losses of $163 thousand.  The Corporation evaluated the investment portfolio for possible other-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 $11.9 million and $8.2 million at September 30, 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 September 30, 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 $9.3 million and $8.4 million at September 30, 2018 and December 31, 2017, respectively. 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 September 30, 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 September 30, 2018 and December 31, 2017, the obligations outstanding under these repurchase agreements totaled $37.6 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 September 30, 2018 was $65.8 million in total and consisted of $19.4 million in municipal securities, $43.6 million in mortgage backed securities, $1.6 million in corporate bonds, and $1.2 million in certificates of deposit. 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.


16

ACCESS NATIONAL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)


Note 4.        Loans

The following table presents the composition of the loans held for investment portfolio at September 30, 2018 and December 31, 2017:
 
September 30, 2018
 
December 31, 2017
(In Thousands)
Outstanding
Amount
 
Percent of
Total Portfolio
 
Outstanding
Amount
 
Percent of
Total Portfolio
Commercial real estate - owner occupied
$
525,047

 
25.07
%
 
$
467,082

 
23.75
%
Commercial real estate - nonowner occupied
467,495

 
22.32

 
436,083

 
22.18

Residential real estate
459,989

 
21.96

 
489,669

 
24.90

Commercial
507,269

 
24.22

 
451,101

 
22.94

Real estate construction
113,790

 
5.43

 
97,481

 
4.96

Consumer
20,680

 
1.00

 
24,942

 
1.27

Total loans
$
2,094,270

 
100.00
%
 
$
1,966,358

 
100.00
%
Less allowance for loan losses
17,349

 
 

 
15,805

 
 
Net loans
$
2,076,921

 
 

 
$
1,950,553

 
 


Unearned income and net deferred loan fees and costs totaled $3.9 million and $3.1 million at September 30, 2018 and December 31, 2017, respectively. Loans pledged to secure borrowings at the FHLB totaled $448.5 million and $492.2 million at September 30, 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 and nine month periods ended September 30, 2018:
 
September 30, 2018
(In Thousands)
Three Months Ended
Nine Months Ended
Accretable yield, beginning of period
$
1,250

$
244

Additions


Accretion
(170
)
(306
)
Reclassification from (to) nonaccretable difference
9

748

Other changes, net
57

460

Accretable yield, end of period
$
1,146

$
1,146


At September 30, 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

17

ACCESS NATIONAL CORPORATION
Notes to Consolidated Financial Statements (Unaudited)


reporting purposes loans past due 1 to 29 days are excluded from loans past due and are included in the total for current loans in the table below. The delinquency status of the loans in the portfolio is shown below as of September 30, 2018 and December 31, 2017. Loans that were on non-accrual status are not included in any past due amounts.
 
September 30, 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
$
1,096

 
$

 
$

 
$
1,096

 
$
1,510

 
$
522,441

 
$
525,047

Commercial real estate -
nonowner occupied
311

 

 

 
311

 

 
467,184

 
467,495

Residential real estate
1,024

 

 

 
1,024

 
1,161

 
457,804

 
459,989

Commercial
1,408

 

 

 
1,408

 
2,160

 
503,701

 
507,269

Real estate construction

 

 

 

 
614

 
113,176

 
113,790

Consumer
4

 
32

 
66

 
102

 
18

 
20,560

 
20,680

Total
$
3,843

 
$
32

 
$
66

 
$
3,941

 
$
5,463

 
$
2,084,866

 
$
2,094,270

 
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

 
448,431

 
451,101

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

 
$
1,960,484

 
$
1,966,358


The following table includes an aging analysis of the recorded investment of purchased impaired loans included in the table above:
 
September 30, 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
$

 
$

 
$
349

 
$
349

 
$

 
$
1,089

 
$
1,438

Commercial real estate -
nonowner occupied

 

 

 

 

 
934

 
934

Residential real estate
128

 

 

 
128

 

 
1,900

 
2,028

Commercial
9

 

 

 
9

 
99