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, 2015

 

Commission file number 0-11783

 

ACNB CORPORATION

(Exact name of Registrant as specified in its charter)

 

Pennsylvania

 

23-2233457

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

16 Lincoln Square, Gettysburg, Pennsylvania

 

17325

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (717) 334-3161

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $2.50 par value per share

 

The NASDAQ Stock Market, LLC

 

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

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  Yes x No o

 

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company 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 x

 

The number of shares of the Registrant’s Common Stock outstanding on October 30, 2015, was 6,034,635.

 

 

 



 

PART I - FINANCIAL INFORMATION

 

ACNB CORPORATION

ITEM 1 - FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)

 

Dollars in thousands, except per share data

 

September 30,
2015

 

September 30,
2014

 

December 31,
2014

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

13,013

 

$

14,338

 

$

13,502

 

Interest bearing deposits with banks

 

33,076

 

9,670

 

6,171

 

 

 

 

 

 

 

 

 

Total Cash and Cash Equivalents

 

46,089

 

24,008

 

19,673

 

 

 

 

 

 

 

 

 

Securities available for sale

 

108,708

 

122,064

 

118,000

 

Securities held to maturity, fair value $74,069; $74,338; $73,057

 

73,507

 

75,407

 

73,346

 

Loans held for sale

 

1,229

 

1,482

 

1,623

 

Loans, net of allowance for loan losses $14,762; $15,421; $15,172

 

810,490

 

750,920

 

784,100

 

Premises and equipment

 

17,952

 

16,871

 

17,725

 

Restricted investment in bank stocks

 

4,078

 

5,239

 

4,216

 

Investment in bank-owned life insurance

 

39,366

 

37,667

 

37,942

 

Investments in low-income housing partnerships

 

3,457

 

3,974

 

3,793

 

Goodwill

 

6,308

 

6,308

 

6,308

 

Intangible assets

 

1,118

 

1,359

 

1,196

 

Foreclosed assets held for resale

 

599

 

1,688

 

1,617

 

Other assets

 

19,642

 

20,544

 

20,269

 

 

 

 

 

 

 

 

 

Total Assets

 

$

1,132,543

 

$

1,067,531

 

$

1,089,808

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Non-interest bearing

 

$

156,962

 

$

142,696

 

$

144,987

 

Interest bearing

 

738,407

 

681,316

 

699,889

 

 

 

 

 

 

 

 

 

Total Deposits

 

895,369

 

824,012

 

844,876

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

37,724

 

53,824

 

45,699

 

Long-term borrowings

 

75,500

 

69,505

 

80,937

 

Other liabilities

 

9,405

 

8,482

 

8,274

 

 

 

 

 

 

 

 

 

Total Liabilities

 

1,017,998

 

955,823

 

979,786

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Preferred stock, $2.50 par value; 20,000,000 shares authorized; no shares outstanding

 

 

 

 

Common stock, $2.50 par value; 20,000,000 shares authorized; 6,097,235, 6,073,929 and 6,078,250 shares issued; 6,034,635, 6,011,329 and 6,015,650 shares outstanding

 

15,243

 

15,185

 

15,196

 

Treasury stock, at cost (62,600 shares)

 

(728

)

(728

)

(728

)

Additional paid-in capital

 

10,290

 

9,959

 

9,948

 

Retained earnings

 

92,881

 

87,069

 

88,329

 

Accumulated other comprehensive (loss) income

 

(3,141

)

223

 

(2,723

)

 

 

 

 

 

 

 

 

Total Stockholders’ Equity

 

114,545

 

111,708

 

110,022

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders’ Equity

 

$

1,132,543

 

$

1,067,531

 

$

1,089,808

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

2



 

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

Dollars in thousands, except per share data

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

INTEREST INCOME

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

8,699

 

$

8,199

 

$

26,256

 

$

24,222

 

Securities:

 

 

 

 

 

 

 

 

 

Taxable

 

743

 

843

 

2,337

 

2,805

 

Tax-exempt

 

208

 

260

 

660

 

800

 

Dividends

 

44

 

55

 

258

 

144

 

Other

 

23

 

19

 

62

 

49

 

 

 

 

 

 

 

 

 

 

 

Total Interest Income

 

9,717

 

9,376

 

29,573

 

28,020

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

Deposits

 

545

 

460

 

1,577

 

1,326

 

Short-term borrowings

 

5

 

12

 

33

 

46

 

Long-term borrowings

 

409

 

439

 

1,308

 

1,346

 

 

 

 

 

 

 

 

 

 

 

Total Interest Expense

 

959

 

911

 

2,918

 

2,718

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income

 

8,758

 

8,465

 

26,655

 

25,302

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR LOAN LOSSES

 

 

 

 

150

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income after Provision for Loan Losses

 

8,758

 

8,465

 

26,655

 

25,152

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

624

 

550

 

1,734

 

1,548

 

Income from fiduciary activities

 

410

 

337

 

1,150

 

1,074

 

Earnings on investment in bank-owned life insurance

 

277

 

281

 

824

 

825

 

Net gains on sales or calls of securities

 

158

 

2

 

259

 

54

 

Service charges on ATM and debit card transactions

 

359

 

391

 

1,113

 

1,150

 

Commissions from insurance sales

 

1,223

 

1,124

 

3,503

 

3,721

 

Other

 

239

 

245

 

739

 

552

 

 

 

 

 

 

 

 

 

 

 

Total Other Income

 

3,290

 

2,930

 

9,322

 

8,924

 

 

 

 

 

 

 

 

 

 

 

OTHER EXPENSES

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

5,118

 

4,776

 

15,706

 

14,485

 

Net occupancy

 

511

 

470

 

1,635

 

1,544

 

Equipment

 

758

 

731

 

2,223

 

2,051

 

Other tax

 

269

 

184

 

666

 

555

 

Professional services

 

197

 

158

 

621

 

732

 

Supplies and postage

 

175

 

156

 

493

 

429

 

Marketing and corporate relations

 

88

 

150

 

293

 

451

 

FDIC and regulatory

 

175

 

183

 

504

 

582

 

Intangible assets amortization

 

84

 

162

 

251

 

487

 

Foreclosed real estate expenses

 

112

 

135

 

220

 

252

 

Other operating

 

773

 

874

 

2,413

 

2,313

 

 

 

 

 

 

 

 

 

 

 

Total Other Expenses

 

8,260

 

7,979

 

25,025

 

23,881

 

 

 

 

 

 

 

 

 

 

 

Income before Income Taxes

 

3,788

 

3,416

 

10,952

 

10,195

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

976

 

792

 

2,787

 

2,368

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

2,812

 

$

2,624

 

$

8,165

 

$

7,827

 

 

 

 

 

 

 

 

 

 

 

PER SHARE DATA

 

 

 

 

 

 

 

 

 

Basic earnings

 

$

0.47

 

$

0.44

 

$

1.36

 

$

1.30

 

Cash dividends declared

 

$

0.20

 

$

0.19

 

$

0.60

 

$

0.57

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

3



 

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

Dollars in thousands

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

2,812

 

$

2,624

 

$

8,165

 

$

7,827

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE (LOSS) INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SECURITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains arising during the period, net of income taxes of $(16), $(181), $(256) and $62, respectively

 

(34

)

(352

)

(497

)

122

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for net gains included in net income, net of income taxes of $(54), $(1), $(88) and $(18), respectively (A) (C)

 

(104

)

(1

)

(171

)

(36

)

 

 

 

 

 

 

 

 

 

 

PENSION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of pension net loss, transition liability, and prior service cost, net of income taxes of $43, $5, $129 and $15, respectively (B) (C)

 

84

 

10

 

250

 

31

 

 

 

 

 

 

 

 

 

 

 

TOTAL OTHER COMPREHENSIVE (LOSS) INCOME

 

(54

)

(343

)

(418

)

117

 

 

 

 

 

 

 

 

 

 

 

TOTAL COMPREHENSIVE INCOME

 

$

2,758

 

$

2,281

 

$

7,747

 

$

7,944

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 


(A) Gross amounts are included in net gains on sales or calls of securities on the Consolidated Statements of Income in total other income.

 

(B) Gross amounts are included in the computation of net periodic benefit cost and are included in salaries and employee benefits on the Consolidated Statements of Income in total other expenses.

 

(C) Income tax amounts are included in the provision for income taxes on the Consolidated Statements of Income.

 

4



 

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

Nine Months Ended September 30, 2015 and 2014

 

Dollars in thousands

 

Common
Stock

 

Treasury
Stock

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Total
Stockholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE — JANUARY 1, 2014

 

$

15,135

 

$

(728

)

$

9,628

 

$

82,661

 

$

106

 

$

106,802

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

7,827

 

 

7,827

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of taxes

 

 

 

 

 

117

 

117

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock shares issued (20,018 shares)

 

50

 

 

331

 

 

 

381

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared

 

 

 

 

(3,419

)

 

(3,419

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE — SEPTEMBER 30, 2014

 

$

15,185

 

$

(728

)

$

9,959

 

$

87,069

 

$

223

 

$

111,708

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE — JANUARY 1, 2015

 

$

15,196

 

$

(728

)

$

9,948

 

$

88,329

 

$

(2,723

)

$

110,022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

8,165

 

 

8,165

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss, net of taxes

 

 

 

 

 

(418

)

(418

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock shares issued (18,985 shares)

 

47

 

 

342

 

 

 

389

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared

 

 

 

 

(3,613

)

 

(3,613

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE — SEPTEMBER 30, 2015

 

$

15,243

 

$

(728

)

$

10,290

 

$

92,881

 

$

(3,141

)

$

114,545

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

5



 

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

 

Nine Months Ended September 30,

 

Dollars in thousands

 

2015

 

2014

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

8,165

 

$

7,827

 

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

 

 

 

 

 

Gain on sales of loans originated for sale

 

(337

)

(138

)

Gain on sales of foreclosed assets held for resale, including writedowns

 

(36

)

(42

)

Earnings on investment in bank-owned life insurance

 

(824

)

(825

)

Gain on sales or calls of securities

 

(259

)

(54

)

Depreciation and amortization

 

1,308

 

1,530

 

Provision for loan losses

 

 

150

 

Net amortization of investment securities premiums

 

510

 

625

 

Decrease in accrued interest receivable

 

76

 

139

 

Decrease in accrued interest payable

 

(8

)

(301

)

Mortgage loans originated for sale

 

(22,192

)

(10,192

)

Proceeds from sales of loans originated for sale

 

22,923

 

9,344

 

Decrease in other assets

 

1,102

 

581

 

Increase in other liabilities

 

1,518

 

1,984

 

 

 

 

 

 

 

Net Cash Provided by Operating Activities

 

11,946

 

10,628

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Proceeds from maturities of investment securities held to maturity

 

7,581

 

18,600

 

Proceeds from maturities of investment securities available for sale

 

18,516

 

13,747

 

Proceeds from sales of investment securities available for sale

 

2,933

 

1,862

 

Purchase of investment securities available for sale

 

(13,118

)

(7,765

)

Purchase of investment securities held to maturity

 

(8,044

)

 

Redemption of restricted investment in bank stocks

 

138

 

1,622

 

Net increase in loans

 

(27,520

)

(39,363

)

Proceeds from sale of low-income housing partnerships

 

 

219

 

Purchase of bank-owned life insurance

 

(600

)

(4,605

)

Purchase of book of business

 

(174

)

 

Capital expenditures

 

(1,283

)

(1,924

)

Proceeds from sale of foreclosed real estate

 

2,184

 

966

 

 

 

 

 

 

 

Net Cash Used in Investing Activities

 

(19,387

)

(16,641

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Net increase in demand deposits

 

11,975

 

14,685

 

Net increase in time certificates of deposits and interest bearing deposits

 

38,518

 

8,684

 

Net (decrease) increase in short-term borrowings

 

(7,975

)

4,772

 

Proceeds from long-term borrowings

 

11,000

 

10,000

 

Repayments on long-term borrowings

 

(16,437

)

(23,198

)

Dividends paid

 

(3,613

)

(3,419

)

Common stock issued

 

389

 

381

 

 

 

 

 

 

 

Net Cash Provided by Financing Activities

 

33,857

 

11,905

 

 

 

 

 

 

 

Net Increase in Cash and Cash Equivalents

 

26,416

 

5,892

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS — BEGINNING

 

19,673

 

18,116

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS — ENDING

 

$

46,089

 

$

24,008

 

 

 

 

 

 

 

Interest paid

 

$

2,926

 

$

3,019

 

Income taxes paid

 

$

975

 

$

1,600

 

Loans transferred to foreclosed assets held for resale and other foreclosed transactions

 

$

1,130

 

$

850

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

6



 

ACNB CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.              Basis of Presentation

 

ACNB Corporation (the Corporation or ACNB), headquartered in Gettysburg, Pennsylvania, provides banking, insurance, and financial services to businesses and consumers through its wholly-owned subsidiaries, ACNB Bank (Bank) and Russell Insurance Group, Inc. (RIG). The Bank engages in full-service commercial and consumer banking and trust services through its twenty-one retail banking office locations in Adams, Cumberland, Franklin and York Counties, Pennsylvania. There is also a loan production office situated in York County, Pennsylvania.

 

RIG is a full-service insurance agency based in Westminster, Maryland with a second location in Germantown, Maryland. The agency offers a broad range of property and casualty, life, and health insurance to both commercial and individual clients.

 

The Corporation’s primary source of revenue is interest income on loans and investment securities and fee income on its products and services. Expenses consist of interest expense on deposits and borrowed funds, provisions for loan losses, and other operating expenses.

 

The accompanying unaudited 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 the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly ACNB Corporation’s financial position and the results of operations, comprehensive income, changes in stockholders’ equity, and cash flows. All such adjustments are of a normal recurring nature.

 

The accounting policies followed by the Corporation are set forth in Note A to the Corporation’s consolidated financial statements in the 2014 ACNB Corporation Annual Report on Form 10-K, filed with the SEC on March 6, 2015. It is suggested that the consolidated financial statements contained herein be read in conjunction with the consolidated financial statements and notes included in the Corporation’s Annual Report on Form 10-K. The results of operations for the three and nine month periods ended September 30, 2015, are not necessarily indicative of the results to be expected for the full year.

 

The Corporation has evaluated events and transactions occurring subsequent to the statement of condition date of September 30, 2015, for items that should potentially be recognized or disclosed in the consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

 

2.              Earnings Per Share

 

The Corporation has a simple capital structure. Basic earnings per share of common stock is computed based on 6,023,090 and 5,995,165 weighted average shares of common stock outstanding for the nine months ended September 30, 2015 and 2014, respectively, and 6,030,846 and 5,997,999 for the three months ended September 30, 2015 and 2014, respectively. The Corporation does not have dilutive securities outstanding.

 

7



 

3.              Retirement Benefits

 

The components of net periodic benefit income related to the non-contributory, defined benefit pension plan for the three and nine month periods ended September 30 were as follows:

 

 

 

Three Months Ended September 30,

 

Nine months Ended September 30,

 

In thousands

 

2015

 

2014

 

2015

 

2014

 

Service cost

 

$

220

 

$

172

 

$

660

 

$

516

 

Interest cost

 

260

 

259

 

780

 

777

 

Expected return on plan assets

 

(635

)

(578

)

(1,906

)

(1,734

)

Amortization of net loss

 

120

 

5

 

360

 

16

 

Amortization of prior service cost

 

6

 

10

 

19

 

30

 

 

 

 

 

 

 

 

 

 

 

Net Periodic Benefit Income

 

$

(29

)

$

(132

)

$

(87

)

$

(395

)

 

The Corporation previously disclosed in its consolidated financial statements for the year ended December 31, 2014, that it had not yet determined the amount the Bank planned on contributing to the defined benefit plan in 2015. As of September 30, 2015, this contribution amount had still not been determined. Effective April 1, 2012, no inactive or former participant in the plan is eligible to again participate in the plan, and no employee hired after March 31, 2012, is eligible to participate in the plan. As of the last annual census, ACNB Bank had a combined 379 active, vested, terminated and retired persons in the plan.

 

4.              Guarantees

 

The Corporation does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are written conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Corporation generally holds collateral and/or personal guarantees supporting these commitments. The Corporation had $4,984,000 in standby letters of credit as of September 30, 2015. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The current amount of the liability, as of September 30, 2015, for guarantees under standby letters of credit issued is not material.

 

5.              Accumulated Other Comprehensive (Loss) Income

 

The components of accumulated other comprehensive (loss) income, net of taxes, are as follows:

 

In thousands

 

Unrealized
Gains on
Securities

 

Pension
Liability

 

Accumulated Other
Comprehensive
(Loss) Income

 

BALANCE — SEPTEMBER 30, 2015

 

$

1,902

 

$

(5,043

)

$

(3,141

)

BALANCE — DECEMBER 31, 2014

 

$

2,570

 

$

(5,293

)

$

(2,723

)

BALANCE — SEPTEMBER 30, 2014

 

$

2,658

 

$

(2,435

)

$

223

 

 

6.              Segment Reporting

 

The Corporation has two reporting segments, the Bank and RIG. RIG is managed separately from the banking segment, which includes the Bank and related financial services that the Corporation offers through its banking subsidiary. RIG offers a broad range of property and casualty, life, and health insurance to both commercial and individual clients.

 

8



 

Segment information for the nine month periods ended September 30, 2015 and 2014, is as follows:

 

In thousands

 

Banking

 

Insurance

 

Total

 

2015

 

 

 

 

 

 

 

Net interest income and other income from external customers

 

$

32,331

 

$

3,646

 

$

35,977

 

Income before income taxes

 

10,354

 

598

 

10,952

 

Total assets

 

1,122,465

 

10,078

 

1,132,543

 

Capital expenditures

 

1,263

 

20

 

1,283

 

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

Net interest income and other income from external customers

 

$

30,370

 

$

3,856

 

$

34,226

 

Income before income taxes

 

9,566

 

629

 

10,195

 

Total assets

 

1,058,774

 

8,757

 

1,067,531

 

Capital expenditures

 

1,924

 

 

1,924

 

 

Segment information for the three month periods ended September 30, 2015 and 2014, is as follows:

 

In thousands

 

Banking

 

Insurance

 

Total

 

2015

 

 

 

 

 

 

 

Net interest income and other income from external customers

 

$

10,687

 

$

1,361

 

$

12,048

 

Income before income taxes

 

3,557

 

231

 

3,788

 

Total assets

 

1,122,465

 

10,078

 

1,132,543

 

Capital expenditures

 

637

 

 

637

 

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

Net interest income and other income from external customers

 

$

10,141

 

$

1,254

 

$

11,395

 

Income before income taxes

 

3,269

 

147

 

3,416

 

Total assets

 

1,058,774

 

8,757

 

1,067,531

 

Capital expenditures

 

918

 

 

918

 

 

Intangible assets, representing customer lists, are amortized over 10 years on a straight line basis. Goodwill is not amortized, but rather is analyzed annually for impairment. If certain events occur which might indicate goodwill has been impaired, the goodwill is tested for impairment when such events occur. Tax amortization of goodwill and the intangible assets is deductible for tax purposes.

 

7.              Securities

 

Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported, net of tax, in other comprehensive income (loss).

 

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses on debt securities, management considers (1) whether management intends to sell the security, or (2) if it is more likely than not that management will be required to sell the security before recovery, or (3) if management does not expect to recover the entire amortized cost basis. In assessing potential other-than-temporary impairment for equity securities, consideration is given to management’s intention and ability to hold the securities until recovery of unrealized losses. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

 

9



 

Amortized cost and fair value of securities at September 30, 2015, and December 31, 2014, were as follows:

 

In thousands

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

 

 

 

 

 

 

 

 

 

 

SECURITIES AVAILABLE FOR SALE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SEPTEMBER 30, 2015

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

23,929

 

$

296

 

$

 

$

24,225

 

Mortgage-backed securities, residential

 

44,333

 

1,770

 

 

46,103

 

State and municipal

 

28,818

 

726

 

1

 

29,543

 

Corporate bonds

 

7,000

 

44

 

 

7,044

 

CRA mutual fund

 

1,044

 

19

 

 

1,063

 

Stock in other banks

 

702

 

52

 

24

 

730

 

 

 

$

105,826

 

$

2,907

 

$

25

 

$

108,708

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2014

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

16,980

 

$

337

 

$

 

$

17,317

 

Mortgage-backed securities, residential

 

51,076

 

2,187

 

1

 

53,262

 

State and municipal

 

34,378

 

1,072

 

5

 

35,445

 

Corporate bonds

 

10,001

 

82

 

 

10,083

 

CRA mutual fund

 

1,044

 

14

 

 

1,058

 

Stock in other banks

 

627

 

208

 

 

835

 

 

 

$

114,106

 

$

3,900

 

$

6

 

$

118,000

 

 

 

 

 

 

 

 

 

 

 

SECURITIES HELD TO MATURITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SEPTEMBER 30, 2015

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

31,059

 

$

155

 

$

21

 

$

31,193

 

Mortgage-backed securities, residential

 

42,448

 

507

 

79

 

42,876

 

 

 

$

73,507

 

$

662

 

$

100

 

$

74,069

 

DECEMBER 31, 2014

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

24,497

 

$

11

 

$

348

 

$

24,160

 

Mortgage-backed securities, residential

 

48,849

 

305

 

257

 

48,897

 

 

 

$

73,346

 

$

316

 

$

605

 

$

73,057

 

 

10



 

The following table shows the Corporation’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2015, and December 31, 2014:

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

In thousands

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SECURITIES AVAILABLE FOR SALE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SEPTEMBER 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal

 

$

 

$

 

$

156

 

$

1

 

$

156

 

$

1

 

Stock in other banks

 

180

 

24

 

 

 

180

 

24

 

 

 

$

180

 

$

24

 

$

156

 

$

1

 

$

336

 

$

25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities, residential

 

$

2,038

 

$

1

 

$

 

$

 

$

2,038

 

$

1

 

State and municipal

 

 

 

1,059

 

5

 

1,059

 

5

 

 

 

$

2,038

 

$

1

 

$

1,059

 

$

5

 

$

3,097

 

$

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SECURITIES HELD TO MATURITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SEPTEMBER 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

 

$

 

$

6,979

 

$

21

 

$

6,979

 

$

21

 

Mortgage-backed securities, residential

 

 

 

16,121

 

79

 

16,121

 

79

 

 

 

$

 

$

 

$

23,100

 

$

100

 

$

23,100

 

$

100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

 

$

 

$

21,149

 

$

348

 

$

21,149

 

$

348

 

Mortgage-backed securities, residential

 

 

 

21,666

 

257

 

21,666

 

257

 

 

 

$

 

$

 

$

42,815

 

$

605

 

$

42,815

 

$

605

 

 

All mortgage-backed security investments are government sponsored enterprise (GSE) pass-through instruments issued by the Federal National Mortgage Association (FNMA), Government National Mortgage Association (GNMA) or Federal Home Loan Mortgage Corporation (FHLMC), which guarantee the timely payment of principal on these investments.

 

At September 30, 2015, one available for sale state and municipal bond had an unrealized loss that did not exceed 1% of amortized cost. This security has been in a continuous loss position for 12 months or more. This unrealized loss relates principally to changes in interest rates subsequent to the acquisition of the security.

 

At September 30, 2015, one available for sale Stock in other banks had an unrealized loss that did not exceed 12% of amortized cost. This security has not been in a continuous loss position for 12 months or more. This unrealized loss relates principally to changes in interest rates subsequent to the acquisition of the security.

 

At September 30, 2015, three held to maturity U.S. Government and agency securities had unrealized losses that individually did not exceed 1% of amortized cost. All of these securities have been in a continuous loss position for 12 months or more. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

 

At September 30, 2015, thirteen held to maturity residential mortgage-backed securities had unrealized losses that individually did not exceed 2% of amortized cost. All of these securities have been in a continuous loss position for 12 months or more. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

 

11



 

In analyzing the issuer’s financial condition, management considers industry analysts’ reports, financial performance, and projected target prices of investment analysts within a one-year time frame. Based on the above information, management has determined that none of these investments are other-than-temporarily impaired.

 

The fair values of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2) which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the security’s relationship to other benchmark quoted prices. The Corporation uses independent service providers to provide matrix pricing.

 

Management routinely sells securities from its available for sale portfolio in an effort to manage and allocate the portfolio. At September 30, 2015, management had not identified any securities with an unrealized loss that it intends to sell or will be required to sell. In estimating other-than-temporary impairment losses on debt securities, management considers (1) whether management intends to sell the security, or (2) if it is more likely than not that management will be required to sell the security before recovery, or (3) if management does not expect to recover the entire amortized cost basis. In assessing potential other-than-temporary impairment for equity securities, consideration is given to management’s intention and ability to hold the securities until recovery of unrealized losses.

 

Amortized cost and fair value at September 30, 2015, by contractual maturity, where applicable, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay with or without penalties.

 

 

 

Available for Sale

 

Held to Maturity

 

In thousands

 

Amortized
Cost

 

Fair
Value

 

Amortized
Cost

 

Fair
Value

 

 

 

 

 

 

 

 

 

 

 

1 year or less

 

$

9,038

 

$

9,130

 

$

 

$

 

Over 1 year through 5 years

 

32,533

 

33,177

 

29,059

 

29,139

 

Over 5 years through 10 years

 

17,510

 

17,834

 

2,000

 

2,054

 

Over 10 years

 

666

 

671

 

 

 

Mortgage-backed securities, residential

 

44,333

 

46,103

 

42,448

 

42,876

 

CRA mutual fund

 

1,044

 

1,063

 

 

 

Stock in other banks

 

702

 

730

 

 

 

 

 

$

105,826

 

$

108,708

 

$

73,507

 

$

74,069

 

 

The Corporation realized $158,000 gross gains and $0 gross losses on sales of securities available for sale during the three month period ended September 30, 2015. The Corporation realized gross gains of $259,000 and $0 in gross losses on sales of securities available for sale during the nine month period ended September 30, 2015. The Corporation realized $2,000 in gross gains and $0 in gross losses on sales of securities available for sale during the three month period ended September 30, 2014. The Corporation realized gross gains of $54,000 and $0 in gross losses on sales of securities available for sale during the nine month period ended September 30, 2014.

 

At September 30, 2015, and December 31, 2014, securities with a carrying value of $141,544,000 and $128,710,000, respectively, were pledged as collateral as required by law on public and trust deposits, repurchase agreements, and for other purposes.

 

12



 

8.              Loans

 

The Corporation grants commercial, residential, and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans throughout southcentral Pennsylvania and northern Maryland. The ability of the Corporation’s debtors to honor their contracts is dependent upon the real estate values and general economic conditions in this area.

 

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

 

The loans receivable portfolio is segmented into commercial, residential mortgage, home equity lines of credit, and consumer loans. Commercial loans consist of the following classes: commercial and industrial, commercial real estate, and commercial real estate construction.

 

The accrual of interest on residential mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Consumer loans (consisting of home equity lines of credit and consumer loan classes) are typically charged off no later than 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

 

All interest accrued, but not collected, for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

Allowance for Credit Losses

 

The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses (the “allowance”) is established as losses are estimated to occur through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated statement of condition. The amount of the reserve for unfunded lending commitments is not material to the consolidated financial statements.

 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard, or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity, and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for the previous twelve quarters for each of these categories of loans, adjusted for qualitative risk factors. These qualitative risk factors include:

 

·                  lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices;

 

·                  national, regional and local economic and business conditions, as well as the condition of various market segments, including the impact on the value of underlying collateral for collateral dependent loans;

 

13



 

·                  the nature and volume of the portfolio and terms of loans;

 

·                  the experience, ability and depth of lending management and staff;

 

·                  the volume and severity of past due, classified and nonaccrual loans, as well as other loan modifications; and,

 

·                  the existence and effect of any concentrations of credit and changes in the level of such concentrations.

 

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.

 

The unallocated component of the allowance is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. It covers risks that are inherently difficult to quantify including, but not limited to, collateral risk, information risk, and historical charge-off risk.

 

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal and/or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and/or interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and commercial construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

 

A specific allocation within the allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of the Corporation’s impaired loans are measured based on the estimated fair value of the loan’s collateral or the discounted cash flows method.

 

It is the policy of the Corporation to order an updated valuation on all real estate secured loans when the loan becomes 90 days past due and there has not been an updated valuation completed within the previous 12 months. In addition, the Corporation orders third-party valuations on all impaired real estate collateralized loans within 30 days of the loan being classified as impaired. Until the valuations are completed, the Corporation utilizes the most recent independent third-party real estate valuation to estimate the need for a specific allocation to be assigned to the loan. These existing valuations are discounted downward to account for such things as the age of the existing collateral valuation, change in the condition of the real estate, change in local market and economic conditions, and other specific factors involving the collateral. Once the updated valuation is completed, the collateral value is updated accordingly.

 

For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging reports, equipment appraisals, or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

 

The Corporation actively monitors the values of collateral as well as the age of the valuation of impaired loans. Management believes that the Corporation’s market area is not as volatile as other areas throughout the United States, therefore valuations are ordered at least every 18 months, or more frequently if management believes that there is an indication that the fair value has declined.

 

For impaired loans secured by collateral other than real estate, the Corporation considers the net book value of the collateral, as recorded in the most recent financial statements of the borrower, and determines fair value based on estimates made by management.

 

14



 

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a troubled debt restructure.

 

Loans whose terms are modified are classified as troubled debt restructured loans if the Corporation grants such borrowers concessions that it would not otherwise consider and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate, a below market interest rate given the risk associated with the loan, or an extension of a loan’s stated maturity date. Nonaccrual troubled debt restructurings may be restored to accrual status if principal and interest payments, under the modified terms, are current for a sustained period of time and, based on a well-documented credit evaluation of the borrower’s financial condition, there is reasonable assurance of repayment. Loans classified as troubled debt restructurings are generally designated as impaired.

 

The allowance calculation methodology includes further segregation of loan classes into credit quality rating categories. The borrower’s overall financial condition, repayment sources, guarantors, and value of collateral, if appropriate, are generally evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments.

 

Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful, and loss. Loans classified special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.

 

In addition, federal and state regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses and may require the Corporation to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio and economic conditions, management believes the current level of the allowance for loan losses is adequate.

 

Commercial and Industrial Lending — The Corporation originates commercial and industrial loans primarily to businesses located in its primary market area and surrounding areas. These loans are used for various business purposes which include short-term loans and lines of credit to finance machinery and equipment purchases, inventory, and accounts receivable. Generally, the maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment. Most business lines of credit are written on demand and may be renewed annually.

 

Commercial and industrial loans are generally secured with short-term assets; however, in many cases, additional collateral such as real estate is provided as additional security for the loan. Loan-to-value maximum values have been established by the Corporation and are specific to the type of collateral. Collateral values may be determined using invoices, inventory reports, accounts receivable aging reports, collateral appraisals, etc.

 

In underwriting commercial and industrial loans, an analysis is performed to evaluate the borrower’s character and capacity to repay the loan, the adequacy of the borrower’s capital and collateral, as well as the conditions affecting the borrower. Evaluation of the borrower’s past, present and future cash flows is also an important aspect of the Corporation’s analysis.

 

Commercial loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions.

 

Commercial Real Estate Lending — The Corporation engages in commercial real estate lending in its primary market area and surrounding areas. The Corporation’s commercial loan portfolio is secured primarily by commercial retail space, office buildings, and hotels. Generally, commercial real estate loans have terms that do not exceed 20 years, have loan-to-value ratios of up to 80% of the appraised value of the property, and are typically secured by personal guarantees of the borrowers.

 

15



 

In underwriting these loans, the Corporation performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. Appraisals on properties securing commercial real estate loans originated by the Corporation are performed by independent appraisers.

 

Commercial real estate loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions and the complexities involved in valuing the underlying collateral.

 

Commercial Real Estate Construction Lending — The Corporation engages in commercial real estate construction lending in its primary market area and surrounding areas. The Corporation’s commercial real estate construction lending consists of commercial and residential site development loans, as well as commercial building construction and residential housing construction loans.

 

The Corporation’s commercial real estate construction loans are generally secured with the subject property. Terms of construction loans depend on the specifics of the project, such as estimated absorption rates, estimated time to complete, etc.

 

In underwriting commercial real estate construction loans, the Corporation performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the project using feasibility studies, market data, etc. Appraisals on properties securing commercial real estate construction loans originated by the Corporation are performed by independent appraisers.

 

Commercial real estate construction loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions and the uncertainties surrounding total construction costs.

 

Residential Mortgage Lending — One-to-four family residential mortgage loan originations, including home equity closed-end loans, are generated by the Corporation’s marketing efforts, its present customers, walk-in customers, and referrals. These loans originate primarily within the Corporation’s market area or with customers primarily from the market area.

 

The Corporation offers fixed-rate and adjustable-rate mortgage loans with terms up to a maximum of 30 years for both permanent structures and those under construction. The Corporation’s one-to-four family residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas. The majority of the Corporation’s residential mortgage loans originate with a loan-to-value of 80% or less. Loans in excess of 80% are required to have private mortgage insurance.

 

In underwriting one-to-four family residential real estate loans, the Corporation evaluates both the borrower’s financial ability to repay the loan as agreed and the value of the property securing the loan. Properties securing real estate loans made by the Corporation are appraised by independent appraisers. The Corporation generally requires borrowers to obtain an attorney’s title opinion or title insurance, as well as fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan. The Corporation has not engaged in subprime residential mortgage originations.

 

Residential mortgage loans present a moderate level of risk due primarily to general economic conditions, as well as a continued weak housing market.

 

Home Equity Lines of Credit Lending — The Corporation originates home equity lines of credit primarily within the Corporation’s market area or with customers primarily from the market area. Home equity lines of credit are generated by the Corporation’s marketing efforts, its present customers, walk-in customers, and referrals.

 

Home equity lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of 90% and a maximum term of 20 years. In underwriting home equity lines of credit, the Corporation evaluates both the value of the property securing the loan and the borrower’s financial ability to repay the loan as agreed. The ability to repay is determined by the borrower’s employment history, current financial condition, and credit background.

 

Home equity lines of credit generally present a moderate level of risk due primarily to general economic conditions, as well as a continued weak housing market.

 

16



 

Junior liens inherently have more credit risk by virtue of the fact that another financial institution may have a higher security position in the case of foreclosure liquidation of collateral to extinguish the debt. Generally, foreclosure actions could become more prevalent if the real estate market continues to be weak and property values deteriorate.

 

Consumer Lending — The Corporation offers a variety of secured and unsecured consumer loans, including those for vehicles and mobile homes and those secured by savings deposits. These loans originate primarily within the Corporation’s market area or with customers primarily from the market area.

 

Consumer loan terms vary according to the type and value of collateral and the creditworthiness of the borrower. In underwriting consumer loans, a thorough analysis of the borrower’s financial ability to repay the loan as agreed is performed. The ability to repay is determined by the borrower’s employment history, current financial condition, and credit background.

 

Consumer loans may entail greater credit risk than residential mortgage loans or home equity lines of credit, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets such as automobiles or recreational equipment. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

 

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard, and doubtful within the Corporation’s internal risk rating system as of September 30, 2015, and December 31, 2014:

 

In thousands

 

Pass

 

Special
Mention

 

Substandard

 

Doubtful

 

Total

 

SEPTEMBER 30, 2015

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

98,834

 

$

2,448

 

$

1,963

 

$

 

$

103,245

 

Commercial real estate

 

241,244

 

22,499

 

15,871

 

 

279,614

 

Commercial real estate construction

 

12,296

 

2,347

 

414

 

 

15,057

 

Residential mortgage

 

345,587

 

5,969

 

1,095

 

 

352,651

 

Home equity lines of credit

 

58,324

 

1,184

 

131

 

 

59,639

 

Consumer

 

15,046

 

 

 

 

15,046

 

 

 

$

771,331

 

$

34,447

 

$

19,474

 

$

 

$

825,252

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2014

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

68,712

 

$

2,412

 

$

3,731

 

$

 

$

74,855

 

Commercial real estate

 

238,820

 

26,214

 

16,548

 

 

281,582

 

Commercial real estate construction

 

8,714

 

2,917

 

579

 

 

12,210

 

Residential mortgage

 

352,283

 

4,507

 

2,585

 

 

359,375

 

Home equity lines of credit

 

55,254

 

650

 

69

 

 

55,973

 

Consumer

 

15,277

 

 

 

 

15,277

 

 

 

$

739,060

 

$

36,700

 

$

23,512

 

$

 

$

799,272

 

 

17



 

The following table summarizes information relative to impaired loans by loan portfolio class as of September 30, 2015, and December 31, 2014:

 

 

 

Impaired Loans with
Allowance

 

Impaired Loans with
No Allowance

 

In thousands

 

Recorded
Investment

 

Unpaid
Principal
Balance

 

Related
Allowance

 

Recorded
Investment

 

Unpaid
Principal
Balance

 

SEPTEMBER 30, 2015

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

 

$

 

$

 

$

1,515

 

$

1,515

 

Commercial real estate

 

 

 

 

8,253

 

8,463

 

Commercial real estate construction

 

 

 

 

114

 

388

 

Residential mortgage

 

 

 

 

407

 

407

 

 

 

$

 

$

 

$

 

$

10,289

 

$

10,773

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2014

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

 

$

 

$

 

$

1,729

 

$

2,844

 

Commercial real estate

 

 

 

 

9,999

 

10,209

 

Commercial real estate construction

 

 

 

 

368

 

642

 

Residential mortgage

 

694

 

694

 

302

 

826

 

1,052

 

 

 

$

694

 

$

694

 

$

302

 

$

12,922

 

$

14,747

 

 

The following table summarizes information in regards to the average of impaired loans and related interest income by loan portfolio class for the three months ended September 30, 2015 and 2014:

 

 

 

Impaired Loans with
Allowance

 

Impaired Loans with
No Allowance

 

In thousands

 

Average
Recorded
Investment

 

Interest
Income

 

Average
Recorded
Investment

 

Interest
Income

 

SEPTEMBER 30, 2015

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

 

$

 

$

1,549

 

$

 

Commercial real estate

 

 

 

8,608

 

134

 

Commercial real estate construction

 

 

 

154

 

 

Residential mortgage

 

 

 

358

 

9

 

 

 

$

 

$

 

$

10,669

 

$

143

 

 

 

 

 

 

 

 

 

 

 

SEPTEMBER 30, 2014

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

 

$

 

$

1,048

 

$

2

 

Commercial real estate

 

 

 

10,468

 

58

 

Commercial real estate construction

 

 

 

539

 

 

Residential mortgage

 

601