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Eagle Bancorp 10-Q 2016

Documents found in this filing:

  1. 10-Q
  2. Ex-21
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.2
  7. Ex-32.2
egbn20160823_10q.htm Table Of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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, 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 Number 0-25923

 

Eagle Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

             Maryland

 

52-2061461

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

7830 Old Georgetown Road, Third Floor, Bethesda, Maryland 

20814

         (Address of principal executive offices)

(Zip Code)

 

 

                    

(301) 986-1800

(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes☒ 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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒

Accelerated filer ☐

Non-accelerated filer ☐ 

Smaller Reporting Company ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act

Yes ☐     No ☒

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

As of October 31, 2016, the registrant had 33, 632, 710 shares of Common Stock outstanding.

 

     

EAGLE BANCORP, INC.

TABLE OF CONTENTS

 

PART I.

FINANCIAL INFORMATION

 
     

Item 1.

Financial Statements (Unaudited) 

 
 

Consolidated Balance Sheets

 
 

Consolidated Statements of Operations

 
 

Consolidated Statements of Comprehensive Income

 
 

Consolidated Statements of Changes in Shareholders’ Equity

 
 

Consolidated Statements of Cash Flows

 
 

Notes to Consolidated Financial Statements

 
     

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 
     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 
     

Item 4.

Controls and Procedures

 
     

PART II.

OTHER INFORMATION

 
     

Item 1.

Legal Proceedings

 
     

Item 1A.

Risk Factors

 
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 
     

Item 3.

Defaults Upon Senior Securities

 
     

Item 4.

Mine Safety Disclosures

 
     

Item 5.

Other Information

 
     

Item 6.

Exhibits

 
     

Signatures

   

 

 

 

Item 1 – Financial Statements (Unaudited)


 

EAGLE BANCORP, INC.

Consolidated Balance Sheets (Unaudited)

(dollars in thousands, except per share data)

 

 

 

September 30, 2016

   

December 31, 2015

   

September 30, 2015

 
Assets                        

Cash and due from banks

  $ 10,615     $ 10,270     $ 10,080  

Federal funds sold

    5,262       3,791       4,076  

Interest bearing deposits with banks and other short-term investments

    503,150       284,302       291,898  

Investment securities available-for-sale, at fair value

    430,668       487,869       524,326  

Federal Reserve and Federal Home Loan Bank stock

    19,920       16,903       16,865  

Loans held for sale

    78,118       47,492       35,713  

Loans

    5,481,975       4,998,368       4,776,965  

Less allowance for credit losses

    (56,864 )     (52,687 )     (50,320 )

Loans, net

    5,425,111       4,945,681       4,726,645  

Premises and equipment, net

    19,370       18,254       17,070  

Deferred income taxes

    41,065       40,311       35,426  

Bank owned life insurance

    59,747       58,682       58,284  

Intangible assets, net

    107,694       108,542       109,498  

Other real estate owned

    5,194       5,852       9,952  

Other assets

    56,218       47,628       48,022  

Total Assets

  $ 6,762,132     $ 6,075,577     $ 5,887,855  
                         

Liabilities and Shareholders' Equity

                       

Liabilities

                       

Deposits:

                       

Noninterest bearing demand

  $ 1,668,271     $ 1,405,067     $ 1,402,447  

Interest bearing transaction

    297,973       178,797       207,716  

Savings and money market

    2,802,519       2,835,325       2,514,310  

Time, $100,000 or more

    452,015       406,570       439,248  

Other time

    337,371       332,685       362,867  

Total deposits

    5,558,149       5,158,444       4,926,588  

Customer repurchase agreements

    71,642       72,356       64,893  

Other short-term borrowings

    50,000       -       -  

Long-term borrowings

    216,419       68,928       68,897  

Other liabilities

    50,283       37,248       41,408  

Total Liabilities

    5,946,493       5,336,976       5,101,786  
                         

Shareholders' Equity

                       

Preferred stock, par value $.01 per share, shares authorized 1,000,000,

                       

Series B, $1,000 per share liquidation preference, shares issued and outstanding -0- at September 30, 2016 and December 31, 2015, and 56,600 at September 30, 2015; Series C, $1,000 per share liquidation preference, shares issued and outstanding -0- at September 30, 2016 and December 31, 2015, and 15,300 at September 30, 2015

    -       -       71,900  

Common stock, par value $.01 per share; shares authorized 100,000,000, shares issued and outstanding 33,590,880, 33,467,893 and 33,405,510 respectively

    333       331       330  

Warrant

    946       946       946  

Additional paid in capital

    509,706       503,529       500,334  

Retained earnings

    305,594       233,604       211,318  

Accumulated other comprehensive (loss) income

    (940 )     191       1,241  

Total Shareholders' Equity

    815,639       738,601       786,069  

Total Liabilities and Shareholders' Equity

  $ 6,762,132     $ 6,075,577     $ 5,887,855  

 

See notes to consolidated financial statements.

 

 

  

EAGLE BANCORP, INC.

Consolidated Statements of Operations (Unaudited)

(dollars in thousands, except per share data)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2016

   

2015

   

2016

   

2015

 

Interest Income

                               

Interest and fees on loans

  $ 69,869     $ 61,006     $ 202,002     $ 178,063  

Interest and dividends on investment securities

    2,177       2,745       7,121       7,189  

Interest on balances with other banks and short-term investments

    376       228       856       604  

Interest on federal funds sold

    9       2       31       13  

Total interest income

    72,431       63,981       210,010       185,869  

Interest Expense

                               

Interest on deposits

    4,840       3,739       13,513       10,668  

Interest on customer repurchase agreements

    39       33       115       94  

Interest on short-term borrowings

    383       -       727       54  

Interest on long-term borrowings

    2,441       1,124       4,515       3,687  

Total interest expense

    7,703       4,896       18,870       14,503  

Net Interest Income

    64,728       59,085       191,140       171,366  

Provision for Credit Losses

    2,288       3,262       9,219       10,043  

Net Interest Income After Provision For Credit Losses

    62,440       55,823       181,921       161,323  
                                 

Noninterest Income

                               

Service charges on deposits

    1,431       1,374       4,303       3,990  

Gain on sale of loans

    3,009       2,483       8,464       9,364  

Gain on sale of investment securities

    1       60       1,123       2,224  

Loss on early extinguishment of debt

    -       -       -       (1,130 )

Increase in the cash surrender value of bank owned life insurance

    391       395       1,171       1,191  

Other income

    1,573       1,787       5,209       4,497  

Total noninterest income

    6,405       6,099       20,270       20,136  

Noninterest Expense

                               

Salaries and employee benefits

    17,130       15,383       49,157       45,772  

Premises and equipment expenses

    3,786       3,974       11,419       12,056  

Marketing and advertising

    857       762       2,551       2,182  

Data processing

    1,879       1,976       5,716       5,598  

Legal, accounting and professional fees

    771       1,063       2,845       2,915  

FDIC insurance

    629       794       2,193       2,348  

Merger expenses

    -       2       -       139  

Other expenses

    3,786       3,451       11,354       11,066  

Total noninterest expense

    28,838       27,405       85,235       82,076  

Income Before Income Tax Expense

    40,007       34,517       116,956       99,383  

Income Tax Expense

    15,484       13,054       44,966       37,564  

Net Income

    24,523       21,463       71,990       61,819  

Preferred Stock Dividends

    -       180       -       539  

Net Income Available to Common Shareholders

  $ 24,523     $ 21,283     $ 71,990     $ 61,280  
                                 

Earnings Per Common Share

                               

Basic

  $ 0.73     $ 0.64     $ 2.14     $ 1.88  

Diluted

  $ 0.72     $ 0.63     $ 2.11     $ 1.84  

 

See notes to consolidated financial statements.

 

 

 

EAGLE BANCORP, INC.

Consolidated Statements of Comprehensive Income (Unaudited)

(dollars in thousands)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2016

   

2015

   

2016

   

2015

 
                                 

Net Income

  $ 24,523     $ 21,463     $ 71,990     $ 61,819  
                                 

Other comprehensive (loss) income, net of tax:

                               

Unrealized (loss) gain on securities available for sale

    (907 )     2,107       4,110       1,995  

Reclassification adjustment for net gains included in net income

    (1 )     (36 )     (674 )     (1,334 )

Total unrealized (loss) gain

    (906 )     2,071       3,436       661  
                                 

Unrealized gain (loss) on derivatives

    1,756       (3,976 )     (5,478 )     (2,067 )

Reclassification adjustment for losses included in net income

    466       -       911       -  

Total unrealized gain (loss)

    1,290       (3,976 )     (4,567 )     (2,067 )
                                 

Other comprehensive income (loss)

    384       (1,905 )     (1,131 )     (1,406 )

Comprehensive Income

  $ 24,907     $ 19,558     $ 70,859     $ 60,413  

 

See notes to consolidated financial statements.

  

 

   

EAGLE BANCORP, INC.

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(dollars in thousands except share data)

   

   

Preferred

   

Common

           

Additional Paid

   

Retained

   

Accumulated

Other

Comprehensive

   

Total

Shareholders'

 
   

Shares

   

Amount

   

Shares

   

Amount

   

Warrant

   

in Capital

   

Earnings

   

Income (Loss)

   

Equity

 

Balance January 1, 2016

    -     $ -       33,467,893     $ 331     $ 946     $ 503,529     $ 233,604     $ 191     $ 738,601  

Net Income

    -       -       -       -       -       -       71,990       -       71,990  

Other comprehensive loss, net of tax

    -       -       -       -       -       -       -       (1,131 )     (1,131 )

Stock-based compensation

    -       -       -       -       -       5,159       -       -       5,159  

Issuance of common stock related to options exercised,  net of shares withheld for payroll taxes

    -       -       23,614       -       -       282       -       -       282  

Tax benefits realized from stock compensation

    -       -       -       -       -       166       -       -       166  

Vesting of restricted stock awards issued at date of grant, net of shares withheld for payroll taxes

    -       -       (17,556 )     2       -       (2 )     -       -       -  

Restricted stock awards

    -       -       104,775       -       -       -       -       -       -  

Issuance of common stock related to employee stock purchase plan

    -       -       12,154       -       -       572       -       -       572  

Balance September 30, 2016

    -     $ -       33,590,880     $ 333     $ 946     $ 509,706     $ 305,594     $ (940 )   $ 815,639  
                                                                         

Balance January 1, 2015

    71,900     $ 71,900       30,139,396     $ 296     $ 946     $ 394,933     $ 150,037     $ 2,647     $ 620,759  

Net Income

    -       -       -       -       -       -       61,819       -       61,819  

Other comprehensive loss, net of tax

    -       -       -       -       -       -       -       (1,406 )     (1,406 )

Stock-based compensation

    -       -       -       -       -       3,660       -       -       3,660  

Issuance of common stock related to options exercised,  net of shares withheld for payroll taxes

    -       -       373,027       4       -       4,636       -       -       4,640  

Tax benefits realized from stock compensation

    -       -       -       -       -       1,945       -       -       1,945  

Vesting of restricted stock awards issued at date of grant, net of shares withheld for payroll taxes

    -       -       (17,877 )     2       -       (2 )     -       -       -  

Restricted stock awards

    -       -       78,070       -       -       -       -       -       -  

Shares issued in public offering, net of issuance costs of $5,302

    -       -       2,816,900       28       -       94,605       -       -       94,633  

Issuance of common stock related to employee stock purchase plan

    -       -       15,994       -       -       561       1       -       562  

Cash paid in lieu of fractional shares upon merger with Virginia Heritage

    -       -       -       -       -       (4 )     -       -       (4 )

Preferred stock dividends

    -       -       -       -       -       -       (539 )     -       (539 )

Balance September 30, 2015

    71,900     $ 71,900       33,405,510     $ 330     $ 946     $ 500,334     $ 211,318     $ 1,241     $ 786,069  

 

See notes to consolidated financial statements.

 

   

EAGLE BANCORP, INC.

Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands)

 

   

Nine Months Ended September 30,

 
   

2016

   

2015

 

Cash Flows From Operating Activities:

               

Net Income

  $ 71,990     $ 61,819  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

               

Provision for credit losses

    9,219       10,043  

Depreciation and amortization

    4,628       8,117  

Gains on sale of loans

    (8,464 )     (9,364 )

Securities premium amortization (discount accretion), net

    3,412       2,304  

Origination of loans held for sale

    (606,213 )     (726,230 )

Proceeds from sale of loans held for sale

    584,051       744,198  

Net increase in cash surrender value of BOLI

    (1,171 )     (1,191 )

Increase in deferred income taxes

    (754 )     (2,915 )

Decrease in value of other real estate owned

    200       750  

Net (gain) loss on sale of other real estate owned

    (657 )     209  

Net gain on sale of investment securities

    (1,123 )     (2,224 )

Loss on early extinguishment of debt

    -       1,130  

Stock-based compensation expense

    5,159       3,660  

Tax benefits realized from stock compensation

    (166 )     (1,945 )

Increase in other assets

    (8,590 )     (4,149 )

Increase in other liabilities

    13,035       5,475  

Net cash provided by operating activities

    64,556       89,687  

Cash Flows From Investing Activities:

               

Decrease in interest bearing deposits with other banks and short-term investments

    784       374  

Purchases of available for sale investment securities

    (106,163 )     (241,280 )

Proceeds from maturities of available for sale securities

    65,727       32,021  

Proceeds from sale/call of available for sale securities

    94,217       65,790  

Purchases of Federal Reserve and Federal Home Loan Bank stock

    (3,017 )     (2,405 )

Proceeds from redemption of Federal Reserve and Federal Home Loan Bank stock

    -       8,100  

Net increase in loans

    (491,720 )     (472,089 )

Proceeds from sale of other real estate owned

    3,614       1,846  

Purchases of BOLI

    -       (499 )

Purchases of annuities

    -       (992 )

Bank premises and equipment acquired

    (4,836 )     (2,053 )

Net cash used in investing activities

    (441,394 )     (611,187 )

Cash Flows From Financing Activities:

               

Increase in deposits

    399,705       615,820  

(Decrease) increase in customer repurchase agreements

    (714 )     3,773  

Issuance of common stock

    -       94,633  

Increase (decrease) in short-term borrowings

    50,000       (100,000 )

Increase (decrease) in long-term borrowings

    147,491       (49,300 )

Payment of dividends on preferred stock

    -       (539 )

Proceeds from exercise of stock options

    282       4,640  

Tax benefits realized from stock compensation

    166       1,945  

Payment in lieu of fractional shares

    -       (4 )

Proceeds from employee stock purchase plan

    572       562  

Net cash provided by financing activities

    597,502       571,530  

Net Increase In Cash and Cash Equivalents

    220,664       50,030  

Cash and Cash Equivalents at Beginning of Period

    298,363       256,025  

Cash and Cash Equivalents at End of Period

  $ 519,027     $ 306,055  

Supplemental Cash Flows Information:

               

Interest paid

  $ 18,196     $ 15,800  

Income taxes paid

  $ 47,950     $ 38,550  

Non-Cash Investing Activities

               

Transfers from loans to other real estate owned

  $ 2,500     $ 1,725  

Transfers from other real estate owned to loans

  $ -     $ 2,192  

 

See notes to consolidated financial statements.

 

 

  

EAGLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The Consolidated Financial Statements include the accounts of Eagle Bancorp, Inc. and its subsidiaries (the “Company”), EagleBank (the “Bank”), Eagle Commercial Ventures, LLC (“ECV”), Eagle Insurance Services, LLC, and Bethesda Leasing, LLC, with all significant intercompany transactions eliminated.

 

The Consolidated Financial Statements of the Company included herein are unaudited. The Consolidated Financial Statements reflect all adjustments, consisting of normal recurring accruals that in the opinion of management, are necessary to present fairly the results for the periods presented. The amounts as of and for the year ended December 31, 2015 were derived from audited Consolidated Financial Statements. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. There have been no significant changes to the Company’s Accounting Policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The Company believes that the disclosures are adequate to make the information presented not misleading. Certain reclassifications have been made to amounts previously reported to conform to the current period presentation.

 

These statements should be read in conjunction with the audited Consolidated Financial Statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results of operations to be expected for the remainder of the year, or for any other period.

 

Nature of Operations

 

The Company, through the Bank, conducts a full service community banking business, primarily in Northern Virginia, Montgomery County, Maryland, and Washington, D.C. The primary financial services offered by the Bank include real estate, commercial and consumer lending, as well as traditional deposit and repurchase agreement products. The Bank is also active in the origination and sale of residential mortgage loans and the origination of small business loans. The guaranteed portion of small business loans, guaranteed by the Small Business Administration (“SBA”), is typically sold to third party investors in a transaction apart from the loan’s origination. The Bank offers its products and services through twenty-one banking offices, five lending centers and various electronic capabilities, including remote deposit services and mobile banking services. Eagle Insurance Services, LLC, a subsidiary of the Bank, offers access to insurance products and services through a referral program with a third party insurance broker. Eagle Commercial Ventures, LLC, a direct subsidiary of the Company, provides subordinated financing for the acquisition, development and construction of real estate projects; these transactions involve higher levels of risk, together with commensurate higher returns. Refer to Higher Risk Lending – Revenue Recognition below.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results may differ from those estimates and such differences could be material to the financial statements.

 

Cash Flows

 

For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, federal funds sold, and interest bearing deposits with other banks which have an original maturity of three months or less.

 

 

  

Loans Held for Sale

 

The Company regularly engages in sales of residential mortgage loans and the guaranteed portion of SBA loans originated by the Bank. The Company has elected to carry loans held for sale at fair value. Fair value is derived from secondary market quotations for similar instruments. Gains and losses on sales of these loans are recorded as a component of noninterest income in the Consolidated Statements of Operations.

 

The Company’s current practice is to sell residential mortgage loans on a servicing released basis, and, therefore, it has no intangible asset recorded for the value of such servicing as of September 30, 2016, December 31, 2015 and September 30, 2015. The sale of the guaranteed portion of SBA loans on a servicing retained basis gives rise to an excess servicing asset, which is computed on a loan by loan basis with the unamortized amount being included in intangible assets in the Consolidated Balance Sheets. This excess servicing asset is being amortized on a straight-line basis (with adjustment for prepayments) as an offset to servicing fees collected and is included in other income in the Consolidated Statement of Operations.

 

The Company enters into commitments to originate residential mortgage loans whereby the interest rate on the loan is determined prior to funding (i.e. interest rate lock commitments). Such interest rate lock commitments on mortgage loans to be sold in the secondary market are considered to be derivatives. To protect against the price risk inherent in residential mortgage loan commitments, the Company utilizes both “best efforts” and “mandatory delivery” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Under a “best efforts” contract, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor and the investor commits to a price that it will purchase the loan from the Company if the loan to the underlying borrower closes. The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the investor commits to purchase a loan at a price representing a premium on the day the borrower commits to an interest rate with the intent that the buyer/investor has assumed the interest rate risk on the loan. As a result, the Bank is not generally exposed to losses on loans sold utilizing best efforts, nor will it realize gains related to rate lock commitments due to changes in interest rates. The market values of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because rate lock commitments and best efforts contracts are not actively traded. Because of the high correlation between rate lock commitments and best efforts contracts, no gain or loss should occur on the interest rate lock commitments. Under a “mandatory delivery” contract, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Company fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay the investor a “pair-off” fee, based on then-current market prices, to compensate the investor for the shortfall. The Company manages the interest rate risk on interest rate lock commitments by entering into forward sale contracts of mortgage-backed securities, whereby the Company obtains the right to deliver securities to investors in the future at a specified price. Such contracts are accounted for as derivatives and are recorded at fair value in derivative assets or liabilities, carried on the Consolidated Balance Sheet within other assets or other liabilities with changes in fair value recorded in other income within the Consolidated Statement of Income. The period of time between issuance of a loan commitment to the customer and closing and sale of the loan to an investor generally ranges from 30 to 90 days under current market conditions. The gross gains on loan sales are recognized based on new loan commitments with adjustment for price and pair-off activity. Commission expenses on loans held for sale are recognized based on loans closed.

 

In circumstances where the Company does not deliver the whole loan to an investor, but rather elects to retain the loan in its portfolio, the loan is transferred from held for sale to loans at fair value at date of transfer.

 

Investment Securities

 

The Company has no securities classified as trading, or as held to maturity. Marketable equity securities and debt securities not classified as held to maturity or trading are classified as available-for-sale. Securities available-for-sale are acquired as part of the Company’s asset/liability management strategy and may be sold in response to changes in interest rates, current market conditions, loan demand, changes in prepayment risk and other factors. Securities available-for-sale are carried at fair value, with unrealized gains or losses being reported as accumulated other comprehensive income/(loss), a separate component of shareholders’ equity, net of deferred income tax. Realized gains and losses, using the specific identification method, are included as a separate component of noninterest income in the Consolidated Statements of Operations.

 

 

 

Premiums and discounts on investment securities are amortized/accreted to the earlier of call or maturity based on expected lives, which lives are adjusted based on prepayment assumptions and call optionality if any. Declines in the fair value of individual available-for-sale securities below their cost that are other-than-temporary in nature result in write-downs of the individual securities to their fair value. Factors affecting the determination of whether other-than-temporary impairment has occurred include a downgrading of the security by a rating agency, a significant deterioration in the financial condition of the issuer, or a change in management’s intent and ability to hold a security for a period of time sufficient to allow for any anticipated recovery in fair value. Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include (1) duration and magnitude of the decline in value, (2) the financial condition of the issuer or issuers and (3) structure of the security.

 

The entire amount of an impairment loss is recognized in earnings only when (1) the Company intends to sell the security, or (2) it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis, or (3) the Company does not expect to recover the entire amortized cost basis of the security. In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in shareholders’ equity as comprehensive income, net of deferred taxes.

 

Loans

 

Loans are stated at the principal amount outstanding, net of unamortized deferred costs and fees. Interest income on loans is accrued at the contractual rate on the principal amount outstanding. It is the Company’s policy to discontinue the accrual of interest when circumstances indicate that collection is doubtful. Deferred fees and costs are being amortized on the interest method over the term of the loan.

 

Management considers loans impaired when, based on current information, it is probable that the Company will not collect all principal and interest payments according to contractual terms. Loans are evaluated for impairment in accordance with the Company’s portfolio monitoring and ongoing risk assessment procedures.  Management considers the financial condition of the borrower, cash flow of the borrower, payment status of the loan, and the value of the collateral, if any, securing the loan. Generally, impaired loans do not include large groups of smaller balance homogeneous loans such as residential real estate and consumer type loans which are evaluated collectively for impairment and are generally placed on nonaccrual when the loan becomes 90 days past due as to principal or interest. Loans specifically reviewed for impairment are not considered impaired during periods of “minimal delay” in payment (90 days or less) provided eventual collection of all amounts due is expected.  The impairment of a loan is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if repayment is expected to be provided solely by the collateral.  In appropriate circumstances, interest income on impaired loans may be recognized on a cash basis.

 

Higher Risk Lending – Revenue Recognition

 

The Company has occasionally made higher risk acquisition, development, and construction (“ADC”) loans that entail higher risks than ADC loans made following normal underwriting practices (“higher risk loan transactions”). These higher risk loan transactions are currently made through the Company’s subsidiary, ECV. This activity is limited as to individual transaction amount and total exposure amounts, based on capital levels, and is carefully monitored. The loans are carried on the balance sheet at amounts outstanding and meet the loan classification requirements of the Accounting Standard Executive Committee (“AcSEC”) guidance reprinted from the CPA Letter, Special Supplement, dated February 10, 1986 (also referred to as Exhibit 1 to AcSEC Practice Bulletin No. 1). Additional interest earned on these higher risk loan transactions (as defined in the individual loan agreements) is recognized as realized under the provisions contained in AcSEC’s guidance reprinted from the CPA Letter, Special Supplement, dated February 10, 1986 (also referred to as Exhibit 1 to AcSEC Practice Bulletin No.1) and Staff Accounting Bulletin No. 101 (Revenue Recognition in Financial Statements). Certain additional interest is included as a component of noninterest income.  ECV had three higher risk loan transactions outstanding as of September 30, 2016, as compared to four higher risk loan transactions outstanding as of December 31, 2015, amounting to $9.2 million and $9.2 million, respectively.

 

 

  

Allowance for Credit Losses

 

The allowance for credit losses represents an amount which, in management’s judgment, is adequate to absorb probable losses on loans and other extensions of credit that may become uncollectible. The adequacy of the allowance for credit losses is determined through careful and continuous review and evaluation of the loan portfolio and involves the balancing of a number of factors to establish a prudent level of allowance. Among the factors considered in evaluating the adequacy of the allowance for credit losses are lending risks associated with growth and entry into new markets, loss allocations for specific credits, the level of the allowance to nonperforming loans, historical loss experience, economic conditions, portfolio trends and credit concentrations, changes in the size and character of the loan portfolio, and management’s judgment with respect to current and expected economic conditions and their impact on the existing loan portfolio. Allowances for impaired loans are generally determined based on collateral values. Loans or any portion thereof deemed uncollectible are charged against the allowance, while recoveries are credited to the allowance. Management adjusts the level of the allowance through the provision for credit losses, which is recorded as a current period operating expense. The allowance for credit losses consists of allocated and unallocated components.

 

The components of the allowance for credit losses represent an estimation done pursuant to Accounting Standards Codification (“ASC”) Topic 450, “Contingencies,” or ASC Topic 310, “Receivables.” Specific allowances are established in cases where management has identified significant conditions or circumstances related to a specific credit that management believes indicate the probability that a loss may be incurred. For potential problem credits for which specific allowance amounts have not been determined, the Company establishes allowances according to the application of credit risk factors. These factors are set by management and approved by the appropriate Board committee to reflect its assessment of the relative level of risk inherent in each risk grade. A third component of the allowance computation, termed a nonspecific or environmental factors allowance, is based upon management’s evaluation of various environmental conditions that are not directly measured in the determination of either the specific allowance or formula allowance. Such conditions include general economic and business conditions affecting key lending areas, credit quality trends (including trends in delinquencies and nonperforming loans expected to result from existing conditions), loan volumes and concentrations, specific industry conditions within portfolio categories, recent loss experience in particular loan categories, duration of the current business cycle, bank regulatory examination results, findings of outside review consultants, and management’s judgment with respect to various other conditions including credit administration and management and the quality of risk identification systems. Executive management reviews these environmental conditions quarterly, and documents the rationale for all changes.

 

Management believes that the allowance for credit losses is adequate; however, determination of the allowance is inherently subjective and requires significant estimates. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. Evaluation of the potential effects of these factors on estimated losses involves a high degree of uncertainty, including the strength and timing of economic cycles and concerns over the effects of a prolonged economic downturn in the current cycle. In addition, various banking agencies, as an integral part of their examination process, and independent consultants engaged by the Bank, periodically review the Bank’s loan portfolio and allowance for credit losses. Such review may result in recognition of additions to the allowance based on their judgments of information available to them at the time of their examination.

 

Premises and Equipment

 

Premises and equipment are stated at cost less accumulated depreciation and amortization computed using the straight-line method for financial reporting purposes. Premises and equipment are depreciated over the useful lives of the assets, which generally range from three to seven years for furniture, fixtures and equipment, to three to five years for computer software and hardware, and to five to twenty years for building improvements. Leasehold improvements are amortized over the terms of the respective leases, which may include renewal options where management has the positive intent to exercise such options, or the estimated useful lives of the improvements, whichever is shorter. The costs of major renewals and betterments are capitalized, while the costs of ordinary maintenance and repairs are expensed as incurred. These costs are included as a component of premises and equipment expenses on the Consolidated Statements of Operations.

 

 

  

Other Real Estate Owned (OREO)

 

Assets acquired through loan foreclosure are held for sale and are recorded at fair value less estimated selling costs when acquired, establishing a new cost basis. The new basis is supported by appraisals that are generally no more than twelve months old. Costs after acquisition are generally expensed. If the fair value of the asset declines, a write-down is recorded through noninterest expense. The valuation of foreclosed assets is subjective in nature and may be adjusted in the future because of changes in market conditions or appraised values.

 

Goodwill and Other Intangible Assets

 

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights. Intangible assets that have finite lives, such as core deposit intangibles, are amortized over their estimated useful lives and subject to periodic impairment testing. Intangible assets (other than goodwill) are amortized to expense using accelerated or straight-line methods over their respective estimated useful lives.

 

Goodwill and other intangibles are subject to impairment testing at the reporting unit level, which must be conducted at least annually. The Company performs impairment testing during the fourth quarter of each year or when events or changes in circumstances indicate the assets might be impaired.

 

The Company performs a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing updated qualitative factors, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it does not have to perform the two-step goodwill impairment test. Determining the fair value of a reporting unit under the first step of the goodwill impairment test and determining the fair value of individual assets and liabilities of a reporting unit under the second step of the goodwill impairment test are judgmental and often involve the use of significant estimates and assumptions. Similarly, estimates and assumptions are used in determining the fair value of other intangible assets. Estimates of fair value are primarily determined using discounted cash flows, market comparisons and recent transactions. These approaches use significant estimates and assumptions including projected future cash flows, discount rates reflecting the market rate of return, projected growth rates and determination and evaluation of appropriate market comparables. Based on the results of quantitative assessments of all reporting units, the Company concluded that no impairment existed at December 31, 2015. However, future events could cause the Company to conclude that goodwill or other intangibles have become impaired, which would result in recording an impairment loss. Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations.

 

Interest Rate Swap Derivatives

 

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. With the exception of forward commitment contracts discussed above under Loans Held for Sale, the Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to certain variable rate deposits.

 

At the inception of a derivative contract, the Company designates the derivative as one of three types based on the Company’s intentions and belief as to likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation (“stand-alone derivative”). The Company has no fair value hedges or stand-alone derivatives, only cash flow hedges. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income (a Consolidated Balance Sheet component of shareholders’ equity) and is reclassified into earnings in the same period(s) during which the hedged transaction affects earnings (i.e. the period when cash flows are exchanged between counterparties). For both fair value and cash flow hedges, changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as noninterest income.

 

 

 

Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in noninterest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.

 

The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.

 

When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as noninterest income or expense. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.

 

Customer Repurchase Agreements

 

The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same securities. Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, securities sold under agreements to repurchase are accounted for as collateralized financing arrangements and not as a sale and subsequent repurchase of securities. The agreements are entered into primarily as accommodations for large commercial deposit customers. The obligation to repurchase the securities is reflected as a liability in the Company’s Consolidated Balance Sheets, while the securities underlying the securities sold under agreements to repurchase remain in the respective assets accounts and are delivered to and held as collateral by third party trustees.

 

Marketing and Advertising

 

Marketing and advertising costs are generally expensed as incurred.

 

Income Taxes

 

The Company employs the asset and liability method of accounting for income taxes as required by ASC Topic 740, “Income Taxes.” Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities (i.e., temporary timing differences) and are measured at the enacted rates that will be in effect when these differences reverse. The Company utilizes statutory requirements for its income tax accounting, and avoids risks associated with potentially problematic tax positions that may incur challenge upon audit, where an adverse outcome is more likely than not. Therefore, no provisions are necessary for either uncertain tax positions nor accompanying potential tax penalties and interest for underpayments of income taxes in the Company’s tax reserves. In accordance with ASC Topic 740, the Company may establish a reserve against deferred tax assets in those cases where realization is less than certain, although no such reserves exist at September 30, 2016, December 31, 2015, or September 30, 2015.   

 

 

  

Transfer of Financial Assets

 

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. In certain cases, the recourse to the Bank to repurchase assets may exist but is deemed immaterial based on the specific facts and circumstances.

 

Earnings per Common Share

 

Basic net income per common share is derived by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period measured. Diluted earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period measured including the potential dilutive effects of common stock equivalents.

 

Stock-Based Compensation

 

In accordance with ASC Topic 718, “Compensation,” the Company records as compensation expense an amount equal to the amortization (over the remaining service period) of the fair value of option and restricted stock awards computed at the date of grant. Compensation expense on variable stock option grants (i.e. performance based grant) is recorded based on the probability of achievement of the goals underlying the performance grant. Refer to Note 10 for a description of stock-based compensation awards, activity and expense.

 

New Authoritative Accounting Guidance

 

ASU 2014-09, “Revenue from Contracts with Customers (Topic 606). The amendments in ASU 2014-09 supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The general principle of the amendments require an entity to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance sets forth a five step approach to be utilized for revenue recognition. As amended, the new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating the provisions of ASU 2014-09 and will be closely monitoring developments and additional guidance to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements.

 

ASU 2016-13, “Measurement of Credit Losses on Financial Instruments (Topic 326).” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements.

 

 

 

ASU 2015-16, “Business Combinations (Topic 805) – Simplifying the Accounting for Measurement-Period Adjustments.” ASU 2015-16 requires that adjustments to provisional amounts that are identified during the measurement period of a business combination be recognized in the reporting period in which the adjustment amounts are determined. Furthermore, the income statement effects of such adjustments, if any, must be calculated as if the accounting had been completed at the acquisition date. The portion of the amount recorded in current-period earnings that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. Under previous guidance, adjustments to provisional amounts identified during the measurement period are to be recognized retrospectively. ASU 2015-16 was effective for the Company on January 1, 2016 and the initial adoption did not have a significant impact on its financial statements.

 

ASU 2016-01, "Financial Instruments—(Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except 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. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (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 on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. Early application is permitted as of the beginning of the fiscal year of adoption only for provisions (3) and (6) above. Early adoption of the other provisions mentioned above is not permitted. The Company has performed a preliminary evaluation of the provisions of ASU No. 2016-01. Based on this evaluation, the Company has determined that ASU No. 2016-01 is not expected to have a material impact on the Company's Consolidated Financial Statements; however, the Company will continue to closely monitor developments and additional guidance.

 

ASU 2016-02, "Leases (Topic 842)." Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases): (1) a lease liability, which is the present value of a lessee's obligation to make lease payments, 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. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. They have the option to use certain relief; full retrospective application is prohibited. The Company is currently evaluating the provisions of ASU 2016-02 and will be closely monitoring developments and additional guidance to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements.

 

 

 

ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting (Topic 718).” ASU 2016-09 includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. Some of the key provisions of this new ASU include: (1) companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC pools will be eliminated. The guidance also eliminates the requirement that excess tax benefits be realized before companies can recognize them. In addition, the guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity; (2) increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. The new guidance will also require an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on its statement of cash flows (current guidance did not specify how these cash flows should be classified); and (3) permit companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated, as required today, or recognized when they occur. ASU No. 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted, but all of the guidance must be adopted in the same period. The Company is currently evaluating the provisions of ASU No. 2016-09 to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements.

 

ASU 2015-03, “Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs simplifies the presentation of debt issuance costs by requiring that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The Company adopted ASU 2015-03 as of the end of its fiscal year 2015, and applied its provisions retrospectively.

 

Note 2. Cash and Due from Banks

 

Regulation D of the Federal Reserve Act requires that banks maintain noninterest reserve balances with the Federal Reserve Bank based principally on the type and amount of their deposits. During 2016, the Bank maintained balances at the Federal Reserve sufficient to meet reserve requirements, as well as significant excess reserves. Late in 2008, the Federal Reserve in connection with the Emergency Economic Stabilization Act of 2008 began paying a nominal amount of interest on balances held, which interest on excess reserves was increased under provisions of the Dodd Frank Wall Street Reform and Consumer Protection Act passed in July 2010.

 

Additionally, the Bank maintains interest-bearing balances with the Federal Home Loan Bank of Atlanta and noninterest bearing balances with domestic correspondent banks as compensation for services they provide to the Bank.

 

 

 

Note 3. Investment Securities Available-for-Sale

 

Amortized cost and estimated fair value of securities available-for-sale are summarized as follows:

  

           

Gross

   

Gross

   

Estimated

 

September 30, 2016

 

Amortized

   

Unrealized

   

Unrealized

   

Fair

 

(dollars in thousands)

 

Cost

   

Gains

   

Losses

   

Value

 

U. S. agency securities

  $ 55,862     $ 638     $ 136     $ 56,364  

Residential mortgage backed securities

    264,101       2,284       350       266,035  

Municipal bonds

    94,923       4,954       -       99,877  

Corporate bonds

    8,009       68       23       8,054  

Other equity investments

    310       28       -       338  
    $ 423,205     $ 7,972     $ 509     $ 430,668  

 

           

Gross

   

Gross

   

Estimated

 

December 31, 2015

 

Amortized

   

Unrealized

   

Unrealized

   

Fair

 

(dollars in thousands)

 

Cost

   

Gains

   

Losses

   

Value

 

U. S. agency securities

  $ 56,775     $ 477     $ 277     $ 56,975  

Residential mortgage backed securities

    299,709       692       3,160       297,241  

Municipal bonds

    114,253       4,131       3       118,381  

Corporate bonds

    15,090       -       152       14,938  

Other equity investments

    307       27       -       334  
    $ 486,134     $ 5,327     $ 3,592     $ 487,869  

 

In addition, at September 30, 2016, the Company held $19.9 million in equity securities in a combination of Federal Reserve Bank (“FRB”) and Federal Home Loan Bank (“FHLB”) stocks, which are required to be held for regulatory purposes and which are not marketable, and therefore are carried at cost.

 

Gross unrealized losses and fair value by length of time that the individual available-for-sale securities have been in a continuous unrealized loss position are as follows:

  

           

Less than

   

12 Months

                 
           

12 Months

   

or Greater

   

Total

 
           

Estimated

           

Estimated

           

Estimated

         

September 30, 2016

 

Number of

   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 

(dollars in thousands)

 

Securities

   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 

U. S. agency securities

    14     $ 38,625     $ 107     $ 1,986     $ 29     $ 40,611     $ 136  

Residential mortgage backed securities

    38       57,588       162       20,789       188       78,377       350  

Corporate bonds

    2       4,986       23       -       -       4,986       23  
      54     $ 101,199     $ 292     $ 22,775     $ 217     $ 123,974     $ 509  

 

           

Less than

   

12 Months

                 
           

12 Months

   

or Greater

   

Total

 
           

Estimated

           

Estimated

           

Estimated

         

December 31, 2015

 

Number of

   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 

(dollars in thousands)

 

Securities

   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 

U. S. agency securities

    13     $ 32,927     $ 277     $ -     $ -     $ 32,927     $ 277  

Residential mortgage backed securities

    92       157,871       1,438       58,954       1,722       216,825       3,160