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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

Quarterly Report Under Section 13 or 15 (d)

of the Securities and Exchange Act of 1934.

For Quarter ended June 30, 2014

Commission File Number 1-35746

 

 

Bryn Mawr Bank Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Pennsylvania   23-2434506

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

identification No.)

801 Lancaster Avenue, Bryn Mawr, Pennsylvania   19010
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (610) 525-1700

Not Applicable

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

 

 

Indicate by checkmark whether the registrant (1) has filed all reports 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  ¨

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  ¨

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  Yes  ¨    No  x

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

 

Class

 

Outstanding at August 5, 2014

Common Stock, par value $1   13,728,436

 

 

 


Table of Contents

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

FORM 10-Q

QUARTER ENDED June 30, 2014

Index

 

PART I -

  FINANCIAL INFORMATION   

ITEM 1.

  Financial Statements (unaudited)   
  Consolidated Financial Statements      Page 3   
  Notes to Consolidated Financial Statements      Page 8   

ITEM 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      Page 35   

ITEM 3.

  Quantitative and Qualitative Disclosures About Market Risk      Page 49   

ITEM 4.

  Controls and Procedures      Page 49   

PART II -

  OTHER INFORMATION      Page 50   

ITEM 1.

  Legal Proceedings      Page 50   

ITEM 1A.

  Risk Factors      Page 50   

ITEM 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      Page 50   

ITEM 3.

  Defaults Upon Senior Securities      Page 50   

ITEM 4.

  Mine Safety Disclosures      Page 50   

ITEM 5.

  Other Information      Page 50   

ITEM 6.

  Exhibits      Page 51   


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets—Unaudited

 

(dollars in thousands)    (unaudited)
June 30,
2014
    December 31,
2013
 

Assets

    

Cash and due from banks

   $ 17,018      $ 13,453   

Interest bearing deposits with banks

     85,946        67,618   
  

 

 

   

 

 

 

Cash and cash equivalents

     102,964        81,071   

Investment securities available for sale, at fair value (amortized cost of $264,039 and $287,127 as of June 30, 2014 and December 31, 2013 respectively)

     266,402        285,808   

Investment securities, trading

     3,597        3,437   

Loans held for sale

     1,631        1,350   

Portfolio loans and leases

     1,615,542        1,547,185   

Less: Allowance for loan and lease losses

     (15,470     (15,515
  

 

 

   

 

 

 

Net portfolio loans and leases

     1,600,072        1,531,670   

Premises and equipment, net

     32,679        31,796   

Accrued interest receivable

     5,526        5,728   

Deferred income taxes

     5,984        8,690   

Mortgage servicing rights

     4,760        4,750   

Bank owned life insurance

     20,375        20,220   

Federal Home Loan Bank stock

     12,775        11,654   

Goodwill

     32,843        32,843   

Intangible assets

     18,092        19,365   

Other investments

     4,507        4,437   

Other assets

     19,018        18,846   
  

 

 

   

 

 

 

Total assets

   $ 2,131,225      $ 2,061,665   
  

 

 

   

 

 

 

Liabilities

    

Deposits:

    

Non-interest-bearing

   $ 436,739      $ 426,640   

Interest-bearing

     1,183,193        1,164,707   
  

 

 

   

 

 

 

Total deposits

     1,619,932        1,591,347   
  

 

 

   

 

 

 

Short-term borrowings

     13,320        10,891   

FHLB advances and other borrowings

     233,132        205,644   

Accrued interest payable

     835        841   

Other liabilities

     20,635        23,044   
  

 

 

   

 

 

 

Total liabilities

     1,887,854        1,831,767   
  

 

 

   

 

 

 

Shareholders’ equity

    

Common stock, par value $1; authorized 100,000,000 shares; issued 16,670,884 and 16,596,869 shares as of June 30, 2014 and December 31, 2013, respectively, and outstanding of 13,719,337 and 13,650,354 as of June 30, 2014 and December 31, 2013, respectively

     16,671        16,597   

Paid-in capital in excess of par value

     97,967        95,673   

Less: Common stock in treasury at cost—2,951,547 and 2,946,515 shares as of June 30, 2014 and December 31, 2013, respectively

     (31,017     (30,764

Accumulated other comprehensive loss, net of tax benefit

     (3,548     (5,565

Retained earnings

     163,298        153,957   
  

 

 

   

 

 

 

Total shareholders’ equity

     243,371        229,898   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 2,131,225      $ 2,061,665   
  

 

 

   

 

 

 

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

 

Page 3


Table of Contents

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income—Unaudited

 

     Three Months Ended June 30,     Six Months Ended June 30,  
(dollars in thousands, except per share data)    2014     2013     2014     2013  

Interest income:

        

Interest and fees on loans and leases

   $ 19,876      $ 18,219      $ 38,918      $ 36,030   

Interest on cash and cash equivalents

     44        41        81        110   

Interest on investment securities:

        

Taxable

     891        829        1,842        1,687   

Non-taxable

     101        98        204        182   

Dividends

     29        30        57        63   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     20,941        19,217        41,102        38,072   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense on:

        

Deposits

     713        694        1,402        1,469   

Short-term borrowings

     5        4        8        7   

FHLB advances and other borrowings

     781        596        1,527        1,264   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     1,499        1,294        2,937        2,740   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     19,442        17,923        38,165        35,332   

Provision for loan and lease losses

     (100     1,000        650        1,804   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan and lease losses

     19,542        16,923        37,515        33,528   

Non-interest income:

        

Fees for wealth management services

     9,499        9,094        18,412        17,443   

Service charges on deposits

     656        596        1,257        1,180   

Loan servicing and other fees

     428        448        874        899   

Net gain on sale of residential mortgage loans

     537        1,492        861        3,010   

Net gain on sale of investment securities available for sale

     85        —          81        2   

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

     220        (141     220        (193

Bank owned life insurance (“BOLI”) income

     74        85        155        198   

Other operating income

     1,258        1,369        2,036        2,194   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     12,757        12,943        23,896        24,733   

Non-interest expenses:

        

Salaries and wages

     9,694        9,086        18,134        17,896   

Employee benefits

     1,809        2,212        3,788        4,537   

Net gain on curtailment of nonqualified pension plan

     —          (120     —          (690

Occupancy and bank premises

     1,683        1,728        3,616        3,478   

Furniture, fixtures, and equipment

     1,089        1,221        2,072        2,040   

Advertising

     455        380        794        792   

Amortization of mortgage servicing rights

     128        218        242        430   

Net recovery of mortgage servicing rights

     (3     (91     (11     (20

Amortization of intangible assets

     636        660        1,273        1,321   

FDIC insurance

     242        275        514        533   

Due diligence and merger-related expenses

     377        688        641        1,402   

Early extinguishment of debt—costs and premiums

     —          —          —          347   

Professional fees

     914        664        1,507        1,239   

Pennsylvania bank shares tax

     412        366        780        530   

Other operating expenses

     3,190        3,237        6,175        6,924   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expenses

     20,626        20,524        39,525        40,759   

Income before income taxes

     11,673        9,342        21,886        17,502   

Income tax expense

     4,069        3,090        7,593        5,930   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 7,604      $ 6,252      $ 14,293      $ 11,572   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

   $ 0.56      $ 0.47      $ 1.06      $ 0.87   

Diluted earnings per common share

   $ 0.55      $ 0.46      $ 1.03      $ 0.86   

Dividends declared per share

   $ 0.18      $ 0.17      $ 0.36      $ 0.34   

Weighted-average basic shares outstanding

     13,531,155        13,280,624        13,508,311        13,243,289   

Dilutive shares

     304,998        227,150        304,913        228,782   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted weighted-average diluted shares

     13,836,153        13,507,774        13,813,224        13,472,071   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

Page 4


Table of Contents

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income—Unaudited

 

     Three Months Ended June 30,     Six Months Ended June 30,  
(dollars in thousands)    2014     2013     2014     2013  

Net income

   $ 7,604      $ 6,252      $ 14,293      $ 11,572   

Other comprehensive income (loss):

        

Net change in unrealized gains (losses) on investment securities available for sale:

        

Net unrealized gains (losses) arising during the period, net of tax expense (benefit) of $702, $(1,761), $1,317 and $(1,769), respectively

     1,303        (3,270     2,445        (3,286

Less: reclassification adjustment for net (gains) losses on sales realized in net income, net of tax expense (benefit) of $30, $0, $28 and $1, respectively

     (55     —          (52     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized investment gains (losses), net of tax expense (benefit) of $672, $(1,761), $1,289 and $(1,768), respectively

     1,248        (3,270     2,393        (3,287

Net change in fair value of derivative used for cash flow hedge:

        

Change in fair value of hedging instruments, net of tax (benefit) expense of $(130), $260, $(253) and $324, respectively

     (242     482        (469     601   

Net change in unfunded pension liability:

        

Change in unfunded pension liability related to unrealized loss, prior service cost and transition obligation, net of tax expense of $24, $133, $50 and $267, respectively

     47        248        93        494   

Change in unfunded pension liability related to curtailment, net of tax expense of $0, $0, $0 and $627, respectively

     —          —          —          1,165   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total change in unfunded pension liability, net of tax expense of $25, $133, $50 and $894, respectively

     47        248        93        1,659   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     1,053        (2,540     2,017        (1,027

Total comprehensive income

   $ 8,657      $ 3,712      $ 16,310      $ 10,545   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

Page 5


Table of Contents

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows—Unaudited

 

     Six Months Ended June 30,  
(dollars in thousands)    2014     2013  

Operating activities:

    

Net Income

   $ 14,293      $ 11,572   

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

    

Provision for loan and lease losses

     650        1,804   

Depreciation of fixed assets

     1,606        1,400   

Net amortization of investment premiums and discounts

     1,212        2,282   

Net gain on sale of investment securities available for sale

     (81     (2

Net gain on sale of residential mortgage loans

     (861     (3,010

Stock based compensation cost

     609        469   

Amortization and net impairment of mortgage servicing rights

     231        410   

Net accretion of fair value adjustments

     (1,719     (1,628

Amortization of intangible assets

     1,273        1,321   

Net (gain) loss on sale of OREO

     (220     193   

Net increase in cash surrender value of bank owned life insurance (“BOLI”)

     (155     (198

Other, net

     (3,099     377   

Loans originated for resale

     (24,672     (97,492

Proceeds from loans sold

     25,011        100,998   

Provision for deferred income taxes

     1,620        1,123   

Change in income taxes payable/receivable

     (187     293   

Change in accrued interest receivable

     202        (142

Change in accrued interest payable

     (6     (318
  

 

 

   

 

 

 

Net cash provided by operating activities

     15,707        19,452   
  

 

 

   

 

 

 

Investing activities:

    

Purchases of investment securities available for sale

     (21,827     (70,362

Proceeds from maturity of investment securities and paydowns of mortgage-related securities

     18,159        33,417   

Proceeds from sale of investment securities available for sale

     4,125        496   

Net change in FHLB stock

     (1,121     (2,267

Proceeds from calls of investment securities

     21,500        22,512   

Net change in other investments

     (70     (32

Net portfolio loan and lease originations

     (68,225     (33,417

Purchases of premises and equipment

     (2,545     (1,233

Capitalize OREO costs

     —          (485

Proceeds from sale of OREO

     1,097        488   
  

 

 

   

 

 

 

Net cash used in investing activities

     (48,907     (50,883
  

 

 

   

 

 

 

Financing activities:

    

Change in deposits

     28,598        (84,738

Change in short-term borrowings

     2,429        62,365   

Dividends paid

     (4,888     (4,498

Change in FHLB advances and other borrowings

     27,548        (8,583

Payment of contingent consideration for business combinations

     —          (1,050

Excess tax benefit from stock-based compensation

     240        148   

Proceeds from sale of treasury stock from deferred compensation plans

     —          365   

Net purchase of treasury stock

     (243     —     

Proceeds from issuance of common stock

     32        107   

Proceeds from exercise of stock options

     1,377        1,740   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     55,093        (34,144
  

 

 

   

 

 

 

Change in cash and cash equivalents

     21,893        (65,575

Cash and cash equivalents at beginning of period

     81,071        175,686   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 102,964      $ 110,111   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash paid during the year for:

    

Income taxes

   $ 5,921      $ 4,366   

Interest

     2,943        3,058   

Non-cash information:

    

Change in other comprehensive loss

   $ 2,017      $ (1,027

Change in deferred tax due to change in comprehensive income

     1,086        (552

Transfer of loans to other real estate owned

     875        495   

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

 

Page 6


Table of Contents

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes In Shareholders’ Equity—Unaudited

 

     For the Six Months Ended June 30, 2014  
(dollars in thousands, except per share
information)
   Shares of
Common
Stock Issued
     Common Stock      Paid-in Capital      Treasury Stock     Accumulated
Other
Comprehensive
Loss
    Retained
Earnings
    Total
Shareholders’
Equity
 

Balance December 31, 2013

     16,596,869         16,597         95,673         (30,764     (5,565     153,957        229,898   

Net income

     —           —           —           —          —          14,293        14,293   

Dividends declared, $0.36 per share

     —           —           —           —          —          (4,952     (4,952

Other comprehensive income, net of tax expense of $1,086

     —           —           —           —          2,017        —          2,017   

Stock based compensation

     —           —           609         —          —          —          609   

Tax benefit from stock-based compensation

     —           —           240         —          —          —          240   

Net purchase of treasury stock from stock award and deferred compensation plans

     —           —           45         (288     —          —          (243

Common stock issued:

                 

Dividend Reinvestment and Stock Purchase Plan

     1,159         1         31         —          —          —          32   

Share-based awards and options exercises

     72,856         73         1,369         35        —          —          1,477   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2014

     16,670,884       $ 16,671       $ 97,967       $ (31,017   $ (3,548   $ 163,298      $ 243,371   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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

 

Page 7


Table of Contents

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 - Basis of Presentation

The unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). In the opinion of Bryn Mawr Bank Corporation’s (the “Corporation”) management, all adjustments necessary for a fair presentation of the consolidated financial position and the results of operations for the interim periods presented have been included. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Corporation’s Annual Report on Form 10-K for the twelve months ended December 31, 2013 (the “2013 Annual Report”).

The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results to be expected for the full year.

Note 2 - Earnings Per Common Share

Basic earnings per common share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per common share takes into account the potential dilution computed pursuant to the treasury stock method that could occur if stock options were exercised and converted into common stock, as well as the effect of restricted and performance shares becoming unrestricted common stock. The effects of stock options are excluded from the computation of diluted earnings per share in periods in which the effect would be anti-dilutive. All weighted average shares, actual shares and per share information in the financial statements have been adjusted retroactively for the effect of stock dividends and splits.

 

    

Three Months Ended

June 30,

    

Six Months Ended

June 30,

 

(dollars in thousands except per share data)

   2014      2013      2014      2013  

Numerator:

           

Net income available to common shareholders

   $ 7,604       $ 6,252       $ 14,293       $ 11,572   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator for basic earnings per share – weighted average shares outstanding

     13,531,155         13,280,624         13,508,311         13,243,289   

Effect of dilutive common shares

     304,998         227,150         304,913         228,782   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator for diluted earnings per share – adjusted weighted average shares outstanding

     13,836,153         13,507,774         13,813,224         13,472,071   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.56       $ 0.47       $ 1.06       $ 0.87   

Diluted earnings per share

   $ 0.55       $ 0.46       $ 1.03       $ 0.86   

Antidilutive shares excluded from computation of average dilutive earnings per share

     —           114,713         —           116,138   

Note 3 - Investment Securities

The amortized cost and fair value of investment securities available for sale are as follows:

As of June 30, 2014

 

(dollars in thousands)    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

U.S. Treasury securities

   $ 102       $ —         $ (1   $ 101   

Obligations of U.S. government agency securities

     63,623         198         (484     63,337   

Obligations of state & political subdivisions

     35,864         195         (67     35,992   

Mortgage-backed securities

     109,045         2,167         (208     111,004   

Collateralized mortgage obligations

     39,674         406         (245     39,835   

Other investments

     15,731         405         (3     16,133   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 264,039       $ 3,371       $ (1,008   $ 266,402   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

As of December 31, 2013

 

(dollars in thousands)    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

U.S. Treasury securities

   $ 102       $ —         $ (3   $ 99   

Obligations of the U.S. government and agencies

     71,097         149         (1,678     69,568   

Obligations of state and political subdivisions

     37,140         141         (304     36,977   

Mortgage-backed securities

     119,044         1,392         (1,073     119,363   

Collateralized mortgage obligations

     44,463         273         (493     44,243   

Other investments

     15,281         301         (24     15,558   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 287,127       $ 2,256       $ (3,575   $ 285,808   
  

 

 

    

 

 

    

 

 

   

 

 

 

The following tables detail the amount of investment securities available for sale that were in an unrealized loss position as of the dates indicated:

As of June 30, 2014

 

    

Less than 12

Months

   

12 Months

or Longer

    Total  
(dollars in thousands)   

Fair

Value

    

Unrealized

Losses

   

Fair

Value

    

Unrealized

Losses

   

Fair

Value

    

Unrealized

Losses

 

U.S. Treasury securities

   $ —         $ —        $ 101       $ (1 )   $ 101       $ (1

Obligations of the U.S. government and agencies

     5,492         (5     28,063         (479     33,555         (484

Obligations of state and political subdivisions

     4,343         (13     4,913         (54     9,256         (67

Mortgage-backed securities

     6,112         (13     15,248         (195     21,360         (208

Collateralized mortgage obligations

     5,383         (34     8,403         (211     13,786         (245

Other investments

     193         (3     —           —          193         (3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 21,523       $ (68   $ 56,728       $ (940   $ 78,251       $ (1,008
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

As of December 31, 2013

 

    

Less than 12

Months

   

12 Months

or Longer

    Total  
(dollars in thousands)    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

U.S. Treasury securities

   $ 99       $ (3   $ —         $ —        $ 99       $ (3

Obligations of the U.S. government and agencies

     41,201         (1,391     5,774         (287     46,975         (1,678

Obligations of state and political subdivisions

     13,020         (233     4,543         (71     17,563         (304

Mortgage-backed securities

     55,672         (972     2,302         (101     57,974         (1,073

Collateralized mortgage obligations

     26,395         (493     —           —          26,395         (493

Other investments

     1,494         (24     —           —          1,494         (24
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 137,881       $ (3,116   $ 12,619       $ (459   $ 150,500       $ (3,575
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Management evaluates the Corporation’s investment securities available for sale that are in an unrealized loss position in order to determine if the decline in market value is other than temporary. The available for sale investment portfolio includes debt securities issued by U.S. government agencies, U.S. government-sponsored agencies, state and local municipalities and other issuers. All fixed income investment securities in the Corporation’s available for sale investment portfolio are rated as investment grade. Factors considered in the evaluation include the current economic climate, the length of time and the extent to which the fair value has been

 

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below cost, interest rates and the bond rating of each security. The unrealized losses presented in the tables above are temporary in nature and are primarily related to market interest rates rather than the underlying credit quality of the issuers. The Corporation does not believe that these unrealized losses are other-than-temporary. The Corporation does not have the intent to sell these securities prior to their maturity or the recovery of their cost bases and believes that it is more likely than not that it will not have to sell these securities prior to their maturity or the recovery of their cost bases.

As of June 30, 2014 and December 31, 2013, securities having fair values of $92.8 million and $94.9 million, respectively, were specifically pledged as collateral for public funds, trust deposits, the Federal Reserve Bank of Philadelphia discount window program, Federal Home Loan Bank of Pittsburgh (“FHLB”) borrowings and other purposes. The FHLB has a blanket lien on non-pledged, mortgage-related loans and securities as part of the Bank’s borrowing agreement with the FHLB.

The amortized cost and fair value of investment securities available for sale as of June 30, 2014 and December 31, 2013, by contractual maturity, are shown below:

 

     June 30, 2014      December 31, 2013  
(dollars in thousands)   

Amortized

Cost

    

Fair

Value

    

Amortized

Cost

    

Fair

Value

 

Investment securities1:

           

Due in one year or less

   $ 16,417       $ 16,458       $ 7,859       $ 7,869   

Due after one year through five years

     52,182         52,290         49,790         49,721   

Due after five years through ten years

     32,149         31,809         51,793         50,117   

Due after ten years

     743         774         797         824   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     101,491         101,331         110,239         108,531   

Mortgage-related securities2

     148,719         150,839         163,507         163,606   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 250,210       $ 252,170       $ 273,746       $ 272,137   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

1 Included in the investment portfolio, but not in the table above, are mutual funds with a fair value, as of both June 30, 2014 and December 31, 2013, of $14.2 million and $13.7 million, respectively, which have no stated maturity.
2 Expected maturities of mortgage-related securities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

As of June 30, 2014 and December 31, 2013, the Corporation’s investment securities held in trading accounts were comprised of a deferred compensation trust which is invested in marketable securities whose diversification is at the discretion of the deferred compensation plan participants.

Note 4 - Loans and Leases

A. Loans and leases outstanding are detailed by category as follows:

 

     June 30,
2014
     December 31,
2013
 

Loans held for sale

   $ 1,631       $ 1,350   
  

 

 

    

 

 

 

Real estate loans:

     

Commercial mortgage

   $ 666,924       $ 625,341   

Home equity lines and loans

     185,593         189,571   

Residential mortgage

     310,491         300,243   

Construction

     55,051         46,369   
  

 

 

    

 

 

 

Total real estate loans

     1,218,059         1,161,524   

Commercial and industrial

     334,474         328,459   

Consumer

     18,907         16,926   

Leases

     44,102         40,276   
  

 

 

    

 

 

 

Total portfolio loans and leases

     1,615,542         1,547,185   
  

 

 

    

 

 

 

Total loans and leases

   $ 1,617,173       $ 1,548,535   
  

 

 

    

 

 

 

Loans with predetermined rates

   $ 896,505       $ 850,168   

Loans with adjustable or floating rates

     720,668         698,367   
  

 

 

    

 

 

 

Total loans and leases

   $ 1,617,173       $ 1,548,535   
  

 

 

    

 

 

 

Net deferred loan origination costs included in the above loan table

   $ 157       $ 222   
  

 

 

    

 

 

 

 

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B. Components of the net investment in leases are detailed as follows:

 

(dollars in thousands)    June 30,
2014
    December 31,
2013
 

Minimum lease payments receivable

   $ 50,171      $ 45,866   

Unearned lease income

     (8,219     (7,534

Initial direct costs and deferred fees

     2,150        1,944   
  

 

 

   

 

 

 

Total

   $ 44,102      $ 40,276   
  

 

 

   

 

 

 

C. Non-Performing Loans and Leases(1)

 

(dollars in thousands)    June 30,
2014
     December 31,
2013
 

Non-accrual loans and leases:

     

Commercial mortgage

   $ 296       $ 478   

Home equity lines and loans

     1,210         1,262   

Residential mortgage

     3,633         4,377   

Construction

     469         830   

Commercial and industrial

     2,729         3,539   

Consumer

     —           20   

Leases

     51         24   
  

 

 

    

 

 

 

Total

   $ 8,388       $ 10,530   
  

 

 

    

 

 

 

 

(1)  Purchased credit-impaired loans, which have been recorded at their fair values at acquisition, and which are performing, are excluded from this table, with the exception of $143 thousand and $238 thousand of purchased credit-impaired loans as of June 30, 2014 and December 31, 2013, respectively, which became non-performing subsequent to acquisition.

D. Purchased Credit-Impaired Loans

The outstanding principal balance and related carrying amount of credit-impaired loans, for which the Bank applies ASC 310-30, Accounting for Purchased Loans with Deteriorated Credit Quality, to account for the interest earned, as of the dates indicated, are as follows:

 

(dollars in thousands)    June 30,
2014
     December 31,
2013
 

Outstanding principal balance

   $ 12,975       $ 14,293   

Carrying amount(1)

   $ 9,076       $ 9,880   

 

(1)  Includes $188 thousand and $293 thousand purchased credit-impaired loans as of June 30, 2014 and December 31, 2013, respectively, for which the Bank could not estimate the timing or amount of expected cash flows to be collected at acquisition, and for which no accretable yield is recognized. Additionally, the table above includes $143 thousand and $238 thousand of purchased credit-impaired loans as of June 30, 2014 and December 31, 2013, respectively, which became non-performing subsequent to acquisition, which are disclosed in Note 4C, above, and which also have no accretable yield.

The following table presents changes in the accretable discount on purchased credit-impaired loans, for which the Bank applies ASC 310-30, for the six months ended June 30, 2014:

 

(dollars in thousands)    Accretable
Discount
 

Balance, December 31, 2013

   $ 6,134   

Accretion

     (834

Reclassifications from nonaccretable difference

     930   

Additions/adjustments

     (123

Disposals

     (2
  

 

 

 

Balance, June 30, 2014

   $ 6,105   
  

 

 

 

 

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E. Age Analysis of Past Due Loans and Leases

The following tables present an aging of the Corporation’s loan and lease portfolio as of the dates indicated:

 

     Accruing Loans and Leases      Nonaccrual
Loans and
Leases
     Total Loans
and Leases
 
(dollars in thousands)    30 – 59
Days
Past Due
     60 – 89
Days
Past Due
     Over 89
Days
Past Due
     Total
Past Due
     Current      Total
Accruing
Loans and
Leases
       

As of June 30, 2014

                       

Commercial mortgage

   $ —         $ 402       $ —         $ 402       $ 666,226       $ 666,628       $ 296       $ 666,924   

Home equity lines and loans

     86         35         —           121         184,262         184,383         1,210         185,593   

Residential mortgage

     2,973         —           —           2,973         303,885         306,858         3,633         310,491   

Construction

     —           —           —           —           54,582         54,582         469         55,051   

Commercial and industrial

     27         —           —           27         331,718         331,745         2,729         334,474   

Consumer

     —           1         —           1         18,906         18,907         —           18,907   

Leases

     122         98         —           220         43,831         44,051         51         44,102   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,208       $ 536       $ —         $ 3,744       $ 1,603,410       $ 1,607,154       $ 8,388       $ 1,615,542   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Accruing Loans and Leases      Nonaccrual
Loans and
Leases
     Total Loans
and Leases
 
(dollars in thousands)    30 – 59
Days
Past Due
     60 – 89
Days
Past Due
     Over 89
Days
Past Due
     Total
Past Due
     Current      Total
Accruing
Loans and
Leases
       

As of December 31, 2013

                       

Commercial mortgage

   $ 241       $ —         $ —         $ 241       $ 624,622       $ 624,863       $ 478       $ 625,341   

Home equity lines and loans

     209         —           —           209         188,100         188,309         1,262         189,571   

Residential mortgage

     773         35         —           808         295,058         295,866         4,377         300,243   

Construction

     —           —           —           —           45,539         45,539         830         46,369   

Commercial and industrial

     334         —           —           334         324,586         324,920         3,539         328,459   

Consumer

     2         4         —           6         16,900         16,906         20         16,926   

Leases

     60         60         —           120         40,132         40,252         24         40,276   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,619       $ 99       $ —         $ 1,718       $ 1,534,937       $ 1,536,655       $ 10,530       $ 1,547,185   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

F. Allowance for Loan and Lease Losses (the “Allowance”)

The following tables detail the roll-forward of the Corporation’s Allowance for the three and six months ended June 30, 2014:

 

(dollars in thousands)    Commercial
Mortgage
   

Home Equity

Lines and
Loans

   

Residential

Mortgage

     Construction      Commercial
and
Industrial
    Consumer     Leases     Unallocated      Total  

Balance, March 31, 2014

   $ 3,971      $ 2,129      $ 2,318       $ 867       $ 5,356      $ 286      $ 615      $ 228       $ 15,770   

Charge-offs

     —          (57     —           —           (168     (39     (40        (304

Recoveries

     —          2        8         —           53        3        38           104   

Provision for loan and lease losses

     (140     520        61         133         (583     11        (172     70         (100
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, June 30, 2014

   $ 3,831      $ 2,594      $ 2,387       $ 1,000       $ 4,658      $ 261      $ 441      $ 298       $ 15,470   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(dollars in thousands)    Commercial
Mortgage
    Home Equity
Lines and
Loans
    Residential
Mortgage
    Construction      Commercial
and
Industrial
    Consumer     Leases     Unallocated     Total  

Balance, December 31, 2013

   $ 3,797      $ 2,204      $ 2,446      $ 845       $ 5,011      $ 259      $ 604      $ 349      $ 15,515   

Charge-offs

     (20     (443     (17     —           (169     (71     (122       (842

Recoveries

     1        2        12        —           54        6        72          147   

Provision for loan and lease losses

     53        831        (54     155         (238     67        (113     (51     650   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2014

   $ 3,831      $ 2,594      $ 2,387      $ 1,000       $ 4,658      $ 261      $ 441      $ 298      $ 15,470   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following table details the roll-forward of the Corporation’s Allowance for the three and six months ended June 30, 2013:

 

(dollars in thousands)    Commercial
Mortgage
     Home Equity
Lines and
Loans
    Residential
Mortgage
    Construction     Commercial
and
Industrial
    Consumer     Leases     Unallocated      Total  

Balance, March 31, 2013

   $ 4,106       $ 2,030      $ 1,829      $ 1,051      $ 4,437      $ 211      $ 525      $ 258       $ 14,447   

Charge-offs

     —           (292     —          (550     (183     (32     (107        (1,164

Recoveries

     —           —          4        18        41        2        96           161   

Provision for loan and lease losses

     375         371        (60     134        —          37        37        106         1,000   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, June 30, 2013

   $ 4,481       $ 2,109      $ 1,773      $ 653      $ 4,295      $ 218      $ 551      $ 364       $ 14,444   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(dollars in thousands)    Commercial
Mortgage
     Home Equity
Lines and
Loans
    Residential
Mortgage
    Construction     Commercial
and
Industrial
    Consumer     Leases     Unallocated      Total  

Balance, December 31, 2012

   $ 3,907       $ 1,857      $ 2,024      $ 1,019      $ 4,637      $ 189      $ 493      $ 299       $ 14,425   

Charge-offs

     —           (352     —          (720     (718     (70     (134        (1,994

Recoveries

     —           —          8        18        45        4        134           209   

Provision for loan and lease losses

     574         604        (259     336        331        95        58        65         1,804   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, June 30, 2013

   $ 4,481       $ 2,109      $ 1,773      $ 653      $ 4,295      $ 218      $ 551      $ 364       $ 14,444   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

The following table details the allocation of the Allowance by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of June 30, 2014 and December 31, 2013:

 

(dollars in thousands)    Commercial
Mortgage
     Home Equity
Lines and
Loans
     Residential
Mortgage
     Construction      Commercial
and
Industrial
     Consumer      Leases      Unallocated      Total  

As of June 30, 2014

                          

Allowance on loans and leases:

                          

Individually evaluated for impairment

   $ —         $ 249       $ 634       $ —         $ 843       $ 33       $ —         $ —         $ 1,759   

Collectively evaluated for impairment

     3,747         2,345         1,753         1,000         3,815         228         441         298         13,627   

Purchased credit-impaired(1)

     84         —           —           —           —           —           —           —           84   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,831       $ 2,594       $ 2,387       $ 1,000       $ 4,658       $ 261       $ 441       $ 298       $ 15,470   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2013

                          

Allowance on loans and leases:

                          

Individually evaluated for impairment

   $ —         $ 121       $ 814       $ —         $ 532       $ 52       $ —         $ —         $ 1,519   

Collectively evaluated for impairment

     3,797         2,083         1,632         845         4,479         207         604         349         13,996   

Purchased credit-impaired(1)

     —           —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,797       $ 2,204       $ 2,446       $ 845       $ 5,011       $ 259       $ 604       $ 349       $ 15,515   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  Purchased credit-impaired loans are evaluated for impairment on an individual basis.

 

Page 13


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The following table details the carrying value for loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of June 30, 2014 and December 31, 2013:

 

(dollars in thousands)   Commercial
Mortgage
    Home Equity
Lines and
Loans
    Residential
Mortgage
    Construction     Commercial
and
Industrial
    Consumer     Leases     Total  

As of June 30, 2014

               

Carrying value of loans and leases:

               

Individually evaluated for impairment

  $ 153      $ 1,434      $ 9,453      $ 693      $ 3,892      $ 33      $ —        $ 15,658   

Collectively evaluated for impairment

    658,101        184,145        301,006        54,333        330,247        18,874        44,102        1,590,808   

Purchased credit-impaired(1)

    8,670        14        32        25        335        —          —          9,076   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 666,924      $ 185,593      $ 310,491      $ 55,051      $ 334,474      $ 18,907      $ 44,102      $ 1,615,542   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2013

               

Carrying value of loans and leases:

               

Individually evaluated for impairment

  $ 236      $ 1,428      $ 9,860      $ 1,172      $ 4,758      $ 52      $ —        $ 17,506   

Collectively evaluated for impairment

    616,077        188,128        290,345        44,715        323,384        16,874        40,276        1,519,799   

Purchased credit-impaired(1)

    9,028        15        38        482        317        —          —          9,880   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 625,341      $ 189,571      $ 300,243      $ 46,369      $ 328,459      $ 16,926      $ 40,276      $ 1,547,185   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Purchased credit-impaired loans are evaluated for impairment on an individual basis.

As part of the process of determining the Allowance for the different segments of the loan and lease portfolio, Management considers certain credit quality indicators. For the commercial mortgage, construction and commercial and industrial loan segments, periodic reviews of the individual loans are performed by both in-house staff as well as external loan reviewers. The result of these reviews is reflected in the risk grade assigned to each loan. These internally assigned grades are as follows:

 

  Pass – Loans considered satisfactory with no indications of deterioration.

 

  Special mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

 

  Substandard – Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

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

In addition, for the remaining segments of the loan and lease portfolio, which include residential mortgage, home equity lines and loans, consumer, and leases, the credit quality indicator used to determine this component of the Allowance is based on performance status.

The following tables detail the carrying value of loans and leases by portfolio segment based on the credit quality indicators used to determine the Allowance as of June 30, 2014 and December 31, 2013:

Credit Risk Profile by Internally Assigned Grade

 

     Commercial Mortgage      Construction      Commercial and Industrial      Total  
(dollars in thousands)    June 30,
2014
     December 31,
2013
     June 30,
2014
     December 31,
2013
     June 30,
2014
     December 31,
2013
     June 30,
2014
     December 31,
2013
 

Pass

   $ 664,729       $ 620,227       $ 54,583       $ 43,812       $ 327,875       $ 320,211       $ 1,047,187       $ 984,250   

Special Mention

     —           2,793         —           —           110         387         110         3,180   

Substandard

     2,195         2,321         468         2,557         6,489         7,861         9,152         12,739   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 666,924       $ 625,341       $ 55,051       $ 46,369       $ 334,474       $ 328,459       $ 1,056,449       $ 1,000,169   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Credit Risk Profile by Payment Activity

 

    Residential Mortgage     Home Equity Lines
and Loans
    Consumer     Leases      Total  
(dollars in thousands)   June 30,
2014
    December 31,
2013
    June 30,
2014
    December 31,
2013
    June 30,
2014
    December 31,
2013
    June 30,
2014
    December 31,
2013
     June 30,
2014
     December 31,
2013
 

Performing

  $ 306,858      $ 295,866      $ 184,383      $ 188,309      $ 18,907      $ 16,906      $ 44,051      $ 40,252       $ 554,199       $ 541,333   

Non-performing

    3,633        4,377        1,210        1,262        —          20        51        24         4,894         5,683   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total

  $ 310,491      $ 300,243      $ 185,593      $ 189,571      $ 18,907      $ 16,926      $ 44,102      $ 40,276       $ 559,093       $ 547,016   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

G. Troubled Debt Restructurings (“TDRs”):

The restructuring of a loan is considered a “troubled debt restructuring” if both of the following conditions are met: (i) the borrower is experiencing financial difficulties, and (ii) the creditor has granted a concession. The most common concessions granted include one or more modifications to the terms of the debt, such as (a) a reduction in the interest rate for the remaining life of the debt, (b) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (c) a temporary period of interest-only payments, (d) a reduction in the contractual payment amount for either a short period or remaining term of the loan, and (e) for leases, a reduced lease payment. A less common concession granted is the forgiveness of a portion of the principal.

The determination of whether a borrower is experiencing financial difficulties takes into account not only the current financial condition of the borrower, but also the potential financial condition of the borrower, were a concession not granted. Similarly, the determination of whether a concession has been granted is very subjective in nature. For example, simply extending the term of a loan at its original interest rate or even at a higher interest rate could be interpreted as a concession unless the borrower could readily obtain similar credit terms from a different lender.

The following table presents the balance of TDRs as of the indicated dates:

 

(dollars in thousands)    June 30,
2014
     December 31,
2013
 

TDRs included in nonperforming loans and leases

   $ 1,597       $ 1,699   

TDRs in compliance with modified terms

     7,487         7,277   
  

 

 

    

 

 

 

Total TDRs

   $ 9,084       $ 8,976   
  

 

 

    

 

 

 

The following tables present information regarding loan and lease modifications categorized as TDRs for the three and six months ended June 30, 2014:

 

     For the Three Months Ended June 30, 2014  
(dollars in thousands)    Number of
Contracts
     Pre-Modification
Outstanding Recorded
Investment
     Post-Modification
Outstanding Recorded
Investment
 

Commercial and industrial

     1       $ 246       $ 255   
  

 

 

    

 

 

    

 

 

 

Total

     1       $ 246       $ 255   
  

 

 

    

 

 

    

 

 

 

 

     For the Six Months Ended June 30, 2014  
(dollars in thousands)    Number of
Contracts
     Pre-Modification
Outstanding Recorded
Investment
     Post-Modification
Outstanding Recorded
Investment
 

Residential mortgage

     2       $ 392       $ 394   

Home equity lines and loans

     1         70         70   

Commercial and industrial

     1         246         255   
  

 

 

    

 

 

    

 

 

 

Total

     4       $ 708       $ 719   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following tables present information regarding the types of loan and lease modifications made for the three and six months ended June 30, 2014:

 

     Number of Contracts for the Three Months Ended June 30, 2014  
     Interest Rate
Change
     Loan Term
Extension
     Interest Rate
Change and
Term Extension
     Interest Rate
Change and/or
Interest-Only
Period
     Contractual
Payment
Reduction
(Leases only)
     Forgiveness
of Interest
 

Commercial and industrial

     —           —           1         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —           —           1         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Number of Contracts for the Six Months Ended June 30, 2014  
     Interest Rate
Change
     Loan Term
Extension
     Interest Rate
Change and
Term Extension
     Interest Rate
Change and/or
Interest-Only
Period
     Contractual
Payment
Reduction
(Leases only)
     Forgiveness
of Interest
 

Residential mortgage

     —           —           2         —           —           —     

Home equity lines and loans

     —           1         —           —           —           —     

Commercial and industrial

     —           —           1         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —           1         3         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

During the three and six months ended June 30, 2014, there were no defaults of loans or leases that had been previously modified to troubled debt restructurings.

H. Impaired Loans

The following tables detail the recorded investment and principal balance of impaired loans by portfolio segment, their related Allowance and interest income recognized as of the dates or for the periods indicated:

 

(dollars in thousands)    Recorded
Investment(2)
     Principal
Balance
     Related
Allowance
     Average
Principal
Balance
     Interest
Income
Recognized
     Cash-Basis
Interest
Income
Recognized
 

As of or for the three months ended June 30, 2014

                 

Impaired loans with related Allowance:

                 

Home equity lines and loans

   $ 501       $ 560       $ 249       $ 581       $ 2       $ —     

Residential mortgage

     4,638         4,652         634         4,711         31         —     

Commercial and industrial

     3,172         3,448         843         3,484         3         —     

Consumer

     32         33         33         33         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,343       $ 8,693       $ 1,759       $ 8,809       $ 36       $ —     

Impaired loans without related Allowance(1) (3):

                 

Commercial mortgage

   $ 153       $ 154       $ —         $ 190       $ —         $ —     

Home equity lines and loans

     933         943         —           1,018         1         —     

Residential mortgage

     4,815         5,166         —           5,467         42         —     

Construction

     693         1,654         —           1,697         2         —     

Commercial and industrial

     721         725         —           742         2      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,315       $ 8,642       $ —         $ 9,114       $ 47       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Grand total

   $ 15,658       $ 17,335       $ 1,759       $ 17,923       $ 83       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  The table above does not include the recorded investment of $74 thousand of impaired leases without a related Allowance.
(2)  Recorded investment equals principal balance less partial charge-offs and interest payments on non-performing loans that have been applied to principal.
(3)  This table excludes all purchased credit-impaired loans, which are discussed in Note 4D, above.

 

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Table of Contents
(dollars in thousands)    Recorded
Investment(2)
     Principal
Balance
     Related
Allowance
     Average
Principal
Balance
     Interest
Income
Recognized
     Cash-Basis
Interest
Income
Recognized
 

As of or for the six months ended June 30, 2014

                 

Impaired loans with related Allowance:

                 

Home equity lines and loans

   $ 501       $ 560       $ 249       $ 584       $ 4       $ —     

Residential mortgage

     4,638         4,652         634         4,713         62         —     

Commercial and industrial

     3,172         3,448         843         3,503         7         —     

Consumer

     32         33         33         33         1         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,343       $ 8,693       $ 1,759       $ 8,833       $ 74       $ —     

Impaired loans without related Allowance(1) (3):

                 

Commercial mortgage

   $ 153       $ 154       $ —         $ 190       $ —         $ —     

Home equity lines and loans

     933         943         —           1,020         2         —     

Residential mortgage

     4,815         5,166         —           5,468         83         —     

Construction

     693         1,654         —           1,710         3         —     

Commercial and industrial

     721         725         —           750         4         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,315       $ 8,642       $ —         $ 9,138       $ 92       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Grand total

   $ 15,658       $ 17,335       $ 1,759       $ 17,971       $ 166       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  The table above does not include the recorded investment of $74 thousand of impaired leases without a related Allowance.
(2)  Recorded investment equals principal balance less partial charge-offs and interest payments on non-performing loans that have been applied to principal.
(3)  This table excludes all purchased credit-impaired loans, which are discussed in Note 4D, above.

 

(dollars in thousands)    Recorded
Investment(2)
     Principal
Balance
     Related
Allowance
     Average
Principal
Balance
     Interest
Income
Recognized
     Cash-Basis
Interest
Income
Recognized
 

As of or for the three months ended June 30, 2013

                 

Impaired loans with related Allowance:

                 

Commercial mortgage

   $ 181       $ 190       $ 25       $ 192       $ —         $ —     

Home equity lines and loans

     715         762         207         767         7         —     

Residential mortgage

     4,454         4,430         388         4,234         29         —     

Commercial and industrial

     2,560         2,639         466         2,670         15         —     

Consumer

     5         5         5         7         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,915       $ 8,026       $ 1,091       $ 7,870       $ 51       $ —     

Impaired loans without related Allowance(1) (3):

                 

Commercial mortgage

   $ 342       $ 347       $ —         $ 377       $ 6       $ —     

Home equity lines and loans

     1,230         1,228         —           1,328         10         —     

Residential mortgage

     4,696         4,747         —           5,026         50         —     

Construction

     2,418         3,380         —           3,536         8         —     

Commercial and industrial

     1,663         1,863         —           1,863         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,349       $ 11,565       $ —         $ 12,130       $ 74       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Grand total

   $ 18,264       $ 19,591       $ 1,091       $ 20,000       $ 125       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  The table above does not include the recorded investment of $80 thousand of impaired leases without a related Allowance.
(2)  Recorded investment equals principal balance less partial charge-offs and interest payments on non-performing loans that have been applied to principal.
(3) This table excludes all purchased credit-impaired loans, which are discussed in Note 4D, above.

 

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Table of Contents
(dollars in thousands)    Recorded
Investment(2)
     Principal
Balance
     Related
Allowance
     Average
Principal
Balance
     Interest
Income
Recognized
     Cash-Basis
Interest
Income
Recognized
 

As of or for the six months ended June 30, 2013

                 

Impaired loans with related Allowance:

                 

Commercial mortgage

   $ 181       $ 190       $ 25       $ 192       $ —         $ —     

Home equity lines and loans

     715         762         207         777         14         —     

Residential mortgage

     4,454         4,430         388         4,339         59         —     

Commercial and industrial

     2,560         2,639         466         2,677         33         —     

Consumer

     5         5         5         8         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,915       $ 8,026       $ 1,091       $ 7,993       $ 106       $ —     

Impaired loans without related Allowance(1) (3):

                 

Commercial mortgage

   $ 342       $ 347       $ —         $ 379       $ 12       $ —     

Home equity lines and loans

     1,230         1,228         —           1,331         22         —     

Residential mortgage

     4,696         4,747         —           5,025         122         —     

Construction

     2,418         3,380         —           3,679         18         —     

Commercial and industrial

     1,663         1,863         —           1,863         1         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,349       $ 11,565       $ —         $ 12,277       $ 175       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Grand total

   $ 18,264       $ 19,591       $ 1,091       $ 20,270       $ 281       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  The table above does not include the recorded investment of $80 thousand of impaired leases without a related Allowance.
(2)  Recorded investment equals principal balance less partial charge-offs and interest payments on non-performing loans that have been applied to principal.
(3)  This table excludes all purchased credit-impaired loans, which are discussed in Note 4D, above.

 

(dollars in thousands)    Recorded
Investment(2)
     Principal
Balance
     Related
Allowance
 

As of December 31, 2013

        

Impaired loans with related allowance:

        

Home equity lines and loans

   $ 277       $ 279       $ 121   

Residential mortgage

     5,297         5,312         814   

Commercial and industrial

     2,985         3,100         532   

Consumer

     52         54         52   
  

 

 

    

 

 

    

 

 

 

Total

     8,611         8,745         1,519   

Impaired loans(1),(3) without related allowance:

        

Commercial mortgage

     236         237         —     

Home equity lines and loans

     1,151         1,159         —     

Residential mortgage

     4,563         4,911         —     

Construction

     1,172         2,134         —     

Commercial and industrial

     1,773         1,954         —     
  

 

 

    

 

 

    

 

 

 

Total

     8,895         10,395         —     
  

 

 

    

 

 

    

 

 

 

Grand total

   $ 17,506       $ 19,140       $ 1,519   
  

 

 

    

 

 

    

 

 

 

 

(1)  The table above does not include the recorded investment of $63 thousand of impaired leases without a related Allowance.
(2)  Recorded investment equals principal balance less partial charge-offs and interest payments on non-performing loans that have been applied to principal.
(3)  This table excludes all purchased credit-impaired loans, which are discussed in Note 4D, above.

 

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Table of Contents

Note 5 - Deposits

The following table details the components of deposits:

 

(dollars in thousands)    June 30, 2014      December 31,
2013
 

Savings accounts

   $ 145,312       $ 135,240   

Interest-bearing checking accounts

     263,247         266,787   

Market-rate accounts

     559,070         544,310   

Wholesale non-maturity deposits

     41,840         42,936   

Wholesale time deposits

     50,152         34,640   

Time deposits

     123,572         140,794   
  

 

 

    

 

 

 

Total interest-bearing deposits

     1,183,193         1,164,707   

Non-interest-bearing deposits

     436,739         426,640   
  

 

 

    

 

 

 

Total deposits

   $ 1,619,932       $ 1,591,347   
  

 

 

    

 

 

 

Note 6 - Borrowings

A. Short-term borrowings

The Corporation’s short-term borrowings (original maturity of one year or less), which consist of a revolving line of credit with a correspondent bank, funds obtained from overnight repurchase agreements with commercial customers, FHLB advances with original maturities of one year or less and overnight fed funds, are detailed below.

A summary of short-term borrowings is as follows:

 

(dollars in thousands)    June 30, 2014      December 31,
2013
 

Overnight fed funds

   $ —         $ —     

Revolving line of credit

     —           —     

Short-term FHLB advances

     —           —     

Repurchase agreements

     13,320         10,891   
  

 

 

    

 

 

 

Total short-term borrowings

   $ 13,320       $ 10,891   
  

 

 

    

 

 

 

The following table sets forth information concerning short-term borrowings:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
(dollars in thousands)    2014     2013     2014     2013  

Balance at period-end

   $ 13,320      $ 71,768      $ 13,320      $ 71,768   

Maximum amount outstanding at any month-end

     28,017        71,768        28,017        71,768   

Average balance outstanding during the period

     17,220        13,358        15,167        12,672   

Weighted-average interest rate:

        

As of period-end

     0.10     0.23     0.10     0.23

Paid during the period

     0.12     0.12     0.11     0.13

B. Long-term FHLB Advances and Other Borrowings

The Corporation’s long-term FHLB advances and other borrowings consist of advances from the FHLB with original maturities of greater than one year and an adjustable-rate commercial loan from a correspondent bank.

The following table presents the remaining periods until maturity of the long-term FHLB advances and other borrowings:

 

(dollars in thousands)    June 30, 2014      December 31,
2013
 

Within one year

   $ 18,675       $ 3,917   

Over one year through five years

     209,457         196,727   

Over five years through ten years

     5,000         5,000   
  

 

 

    

 

 

 

Total

   $ 233,132       $ 205,644   
  

 

 

    

 

 

 

 

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The following table presents rate and maturity information on long-term FHLB advances and other borrowings:

 

(dollars in thousands)    Maturity Range(1)      Weighted
Average
Rate
    Coupon Rate     Balance  

Description

   From      To        From     To     June 30, 2014      December 31,
2013
 

Fixed amortizing

     04/09/15         04/09/15         3.57     3.57     3.57   $ 1,325       $ 2,102   

Adjustable amortizing

     12/31/16         12/31/16         3.25     3.25     3.25     5,375         7,050   

Bullet maturity – fixed rate

     03/23/15         05/20/20         1.41     0.58     2.41     160,000         140,000   

Bullet maturity – variable rate

     06/25/15         11/28/17         0.40     0.25     0.54     45,000         35,000   

Convertible-fixed(2)

     01/03/18         08/20/18         2.95     2.58     3.50     21,432         21,492   
              

 

 

    

 

 

 

Total

               $ 233,132       $ 205,644   
              

 

 

    

 

 

 

 

(1)  Maturity range refers to June 30, 2014 balances.
(2) FHLB advances whereby the FHLB has the option, at predetermined times, to convert the fixed interest rate to an adjustable interest rate indexed to the London Interbank Offered Rate (“LIBOR”). The Corporation has the option to prepay these advances, without penalty, if the FHLB elects to convert the interest rate to an adjustable rate. As of June 30, 2014, substantially all the FHLB advances with this convertible feature are subject to conversion in fiscal 2014. These advances are included in the maturity ranges in which they mature, rather than the period in which they are subject to conversion.

C. Other Borrowings Information

As of June 30, 2014 the Corporation had a maximum borrowing capacity with the FHLB of approximately $866.5 million, of which the unused capacity was $624.2 million. In addition, there were unused capacities of $64.0 million in overnight federal funds line, $84.0 million of Federal Reserve Discount Window borrowings and $3.0 million in a revolving line of credit from a correspondent bank as of June 30, 2014. In connection with its FHLB borrowings, the Corporation is required to hold the capital stock of the FHLB. The amount of FHLB capital stock held was $12.8 million at June 30, 2014, and $11.7 million at December 31, 2013. The carrying amount of the FHLB capital stock approximates its redemption value.

Note 7 - Derivatives and Hedging Activities

In December, 2012, the Corporation entered into a forward-starting interest rate swap to hedge the cash flows of a $15 million floating-rate FHLB borrowing. The interest rate swap involves the exchange of the Corporation’s floating rate interest payments on the underlying principal amount. This swap was designated, and qualified, for cash-flow hedge accounting. The term of the swap begins November 30, 2015 and ends November 28, 2022. For derivative instruments that are designated and qualify as hedging instruments, the effective portion of gains or losses is reported as a component of other comprehensive income, and is subsequently reclassified into earnings as an adjustment to interest expense in the periods in which the hedged forecasted transaction affects earnings.

The following table details the Corporation’s derivative positions as of the balance sheet dates indicated:

As of June 30, 2014:

 

(dollars in thousands)                                          
Notional Amount     Trade Date     Effective
Date
    Maturity
Date
    Receive (Variable)
Index
  Current
Projected
Receive Rate
    Pay Fixed
Swap Rate
    Fair Value of
Asset
(Liability)
 
$ 15,000        12/13/2012        11/30/2015        11/28/2022      US 3-Month LIBOR     2.828     2.376   $ 420   

As of December 31, 2013:

 

(dollars in thousands)                                          
      Trade Date     Effective
Date
    Maturity
Date
    Receive (Variable)
Index
  Current
Projected
Receive Rate
    Pay Fixed
Swap Rate
    Fair Value of
Asset
(Liability)
 
Notional Amount                
$ 15,000        12/13/2012        11/30/2015        11/28/2022      US 3-Month LIBOR     3.597     2.376   $ 1,142   

For each of the three and six month periods ended June 30, 2014 and 2013, there were no reclassifications of the interest-rate swap’s fair value from other comprehensive income to earnings.

 

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Note 8 - Stock-Based Compensation

A. General Information

The Corporation permits the issuance of stock options, dividend equivalents, performance awards, stock appreciation rights, restricted stock and/or restricted stock units to employees and directors of the Corporation under several plans. The terms and conditions of awards under the plans are determined by the Corporation’s Compensation Committee.

Prior to April 25, 2007, all shares authorized for grant as stock-based compensation were limited to grants of stock options. On April 25, 2007, the shareholders approved the Corporation’s “2007 Long-Term Incentive Plan” (the “2007 LTIP”) under which a total of 428,996 shares of the Corporation’s common stock were made available for award grants. On April 28, 2010, the shareholders approved the Corporation’s “2010 Long Term Incentive Plan” (“2010 LTIP”) under which a total of 445,002 shares of the Corporation’s common stock were made available for award grants.

The equity awards granted under the 2007 and 2010 LTIPs were authorized to be in the form of, among others, options to purchase the Corporation’s common stock, restricted stock awards or units (“RSA”s or “RSU”s) and performance stock awards or units (“PSA”s or “PSU”s).

RSAs and RSUs have a restriction based on the passage of time and may also have a restriction based on non-market-related performance criteria. The fair value of the RSAs and RSUs is based on the closing price on the day preceding the date of the grant.

The PSAs and PSUs have a restriction based on the passage of time, but also have a restriction based on performance criteria related to the Corporation’s total shareholder return relative to the performance of the community bank index for the respective period. The amount of PSAs or PSUs earned will not exceed 100% of the PSAs or PSUs awarded. The fair value of the PSAs and PSUs is calculated using the Monte Carlo Simulation method.

B. Stock Options

Stock-based compensation cost is measured at the grant date, based on the fair value of the award and is recognized as an expense over the vesting period. The fair value of stock option grants is determined using the Black-Scholes pricing model. The assumptions necessary for the calculation of the fair value are expected life of options, annual volatility of stock price, risk-free interest rate and annual dividend yield.

The following table provides information about options outstanding for the three months ended June 30, 2014:

 

     Shares     Weighted
Average
Exercise Price
     Weighted
Average Grant
Date Fair
Value
 

Options outstanding, March 31, 2014

     585,196      $ 20.77       $ 4.70   

Granted

     —        $ —         $ —     

Forfeited

     —        $ —         $ —     

Expired

     —        $ —         $ —     

Exercised

     (63,310   $ 20.14       $ 4.43   
  

 

 

      

Options outstanding, June 30, 2014

     521,886      $ 20.84       $ 4.73   
  

 

 

      

The following table provides information about options outstanding for the six months ended June 30, 2014:

 

     Shares     Weighted
Average
Exercise Price
     Weighted
Average Grant
Date Fair
Value
 

Options outstanding, December 31, 2013

     591,086      $ 20.73       $ 4.70   

Granted

     —        $ —         $ —     

Forfeited

     —        $ —         $ —     

Expired

     —        $ —         $ —     

Exercised

     (69,200   $ 19.90       $ 4.43   
  

 

 

      

Options outstanding, June 30, 2014

     521,886      $ 20.84       $ 4.73   
  

 

 

      

 

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The following table provides information about unvested options for the three months ended June 30, 2014:

 

     Shares      Weighted
Average
Exercise Price
     Weighted
Average Grant
Date Fair
Value
 

Unvested options, March 31, 2014

     30,146       $ 18.27       $ 4.42   

Granted

     —         $ —         $ —     

Vested

     —         $ —         $ —     

Forfeited

     —         $ —         $ —     
  

 

 

       

Unvested options, June 30, 2014

     30,146       $ 18.27       $ 4.42   
  

 

 

       

The following table provides information about unvested options for the six months ended June 30, 2014:

 

     Shares      Weighted
Average
Exercise Price
     Weighted
Average Grant
Date Fair
Value
 

Unvested options, December 31, 2013

     30,146       $ 18.27       $ 4.42   

Granted

     —         $ —         $ —     

Vested

     —         $ —         $ —     

Forfeited

     —         $ —         $ —     
  

 

 

       

Unvested options, June 30, 2014

     30,146       $ 18.27       $ 4.42   
  

 

 

       

For the three and six months ended June 30, 2014, the Corporation recognized $25 thousand and $50 thousand, respectively, of expense related to stock options. As of June 30, 2014, the total not-yet-recognized compensation expense of unvested stock options was $14 thousand. This expense will be recognized over a weighted average period of 0.1 years.

Proceeds, related tax benefits realized from options exercised and intrinsic value of options exercised during the three and six months ended June 30, 2014 and 2013 are detailed below:

 

(dollars in thousands)    Three Months Ended June 30,      Six Months Ended June 30,  
   2014      2013      2014      2013  

Proceeds from exercise of stock options

   $ 1,274       $ 510       $ 1,377       $ 1,740   

Related tax benefit recognized

     152         28         174         144   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net proceeds of options exercised

   $ 1,426       $ 538       $ 1,551       $ 1,884   
  

 

 

    

 

 

    

 

 

    

 

 

 

Intrinsic value of options exercised

   $ 510       $ 113       $ 577       $ 447   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table provides information about options outstanding and exercisable at June 30, 2014:

 

(dollars in thousands, except exercise price)    Outstanding      Exercisable  

Number of shares

     521,886         491,740   

Weighted average exercise price

   $ 20.84       $ 21.00   

Aggregate intrinsic value

   $ 4,319       $ 3,992   

Weighted average contractual term in years

     3.0         2.8   

C. Restricted Stock Awards and Performance Stock Awards

The Corporation has granted RSAs, PSAs and PSUs under the 2007 LTIP and 2010 LTIP.

RSAs and RSUs

The compensation expense for the RSAs and RSUs is measured based on the market price of the stock on the day prior to the grant date and is recognized on a straight line basis over the vesting period.

For the three and six months ended June 30, 2014, the Corporation recognized $81 thousand and $162 thousand, respectively of expense related to the Corporation’s RSAs and RSUs. As of June 30, 2014, there was $313 thousand of unrecognized compensation cost related to RSAs and RSUs. This cost will be recognized over a weighted average period of 1.3 years.

 

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The following table details the unvested RSAs and RSUs for the three and six months ended June 30, 2014:

 

     Three Months Ended
June 30, 2014
     Six Months Ended
June 30, 2014
 
     Number of
Shares
    Weighted
Average
Grant Date
Fair Value
     Number of
Shares
    Weighted
Average
Grant Date
Fair Value
 

Beginning balance

     41,500      $ 19.93         54,156      $ 19.36   

Granted

     —          —           —          —     

Vested

     (6,135     20.38         (18,791     18.44   

Forfeited

     —          —           —          —     
  

 

 

      

 

 

   

Ending balance

     35,365      $ 19.85         35,365      $ 19.85   
  

 

 

      

 

 

   

For the three and six months ended June 30, 2014, the Corporation recorded a tax benefit of $16 thousand and $66 thousand related to the vesting of RSAs.

PSAs and PSUs

The compensation expense for PSAs and PSUs is measured based on the grant date fair value as calculated using the Monte Carlo Simulation method.

For the three and six months ended June 30, 2014, the Corporation recognized $196 thousand and $397 thousand of expense related to the PSAs and PSUs. As of June 30, 2014, there was $1.1 million of unrecognized compensation cost related to PSAs. This cost will be recognized over a weighted average period of 1.8 years.

The following table details the unvested PSAs and PSUs for the three and six months ended June 30, 2014:

 

     Three Months Ended
June 30, 2014
     Six Months Ended
June 30, 2014
 
     Number of
Shares
    Weighted
Average
Grant Date
Fair Value
     Number of
Shares
    Weighted
Average
Grant Date

Fair Value
 

Beginning balance

     204,980      $ 11.90         204,980      $ 11.90   

Granted

     —          —           —          —     

Vested

     —          —           —          —     

Forfeited

     (1,000     12.09         (1,000     12.09   
  

 

 

      

 

 

   

Ending balance

     203,980      $ 11.90         203,980      $ 11.90   
  

 

 

      

 

 

   

Note 9 - Pension and Other Post-Retirement Benefit Plans

The Corporation has three defined benefit pension plans: the qualified defined-benefit plan (the “QDBP”) which covers all employees over age 20 1/2 who meet certain service requirements, and two non-qualified defined-benefit pension plans (“SERP I” and “SERP II”) which are restricted to certain senior officers of the Corporation.

SERP I provides each participant with the equivalent pension benefit provided by the QDBP on any compensation and bonus deferrals that exceed the IRS limit applicable to the QDBP.

On February 12, 2008, the Corporation amended the QDBP and SERP I to freeze further increases in the defined-benefit amounts to all participants, effective March 31, 2008.

On April 1, 2008, the Corporation added SERP II, a non-qualified defined-benefit plan which was restricted to certain senior officers of the Corporation. Effective January 1, 2013, the Corporation curtailed SERP II, as further increases to the defined-benefit amounts to over 20% of the participants have been frozen. As a result of the curtailment, for the three and six months ended June 30, 2013, the Corporation recorded a gain of $120 thousand and $690 thousand, respectively, which represented the reversal of previous amounts that had been expensed in anticipation of future service of the curtailed participants.

The Corporation also has a postretirement benefit plan (“PRBP”) that covers certain retired employees and a group of current employees. The PRBP was closed to new participants in 1994. In 2007, the Corporation amended the PRBP to allow for settlement of obligations to certain current and retired employees. Certain retired participant obligations were settled in 2007 and current employee obligations were settled in 2008.

 

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The following tables provide details of the components of the net periodic benefits cost (benefit) for the three and six months ended June 30, 2014 and 2013:

 

     Three Months Ended June 30,  
     SERP I and SERP II     QDBP     PRBP  
(dollars in thousands)    2014      2013     2014     2013     2014      2013  

Service cost

   $ 18       $ 18      $ —        $ —        $ —         $ —     

Interest cost

     45         39        410        371        7         7   

Expected return on plan assets

     —           —          (837     (745     —           —     

Amortization of transition obligation

     —           —          —          —          —           —     

Amortization of prior service costs

     4         4        —          —          —           —     

Amortization of net loss

     11         13        98        431        15         20   

Gain on curtailment

     —           (120     —          —          —           —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net periodic benefit cost

   $ 78       $ (46   $ (329   $ 57      $ 22       $ 27   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
     Six Months Ended June 30,  
     SERP I and SERP II     QDBP     PRBP  
(dollars in thousands)    2014      2013     2014     2013     2014      2013  

Service cost

   $ 36       $ 36      $ —        $ —        $ —         $ —     

Interest cost

     91         79        820        743        14         14   

Expected return on plan assets

     —           —          (1,674     (1,491     —           —     

Amortization of transition obligation

     —           —          —          —          —           —     

Amortization of prior service costs

     7         7        —          —          —           —     

Amortization of net loss

     22         26        196        862        30         39   

Gain on curtailment

     —           (690     —          —          —           —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net periodic benefit cost

   $ 156       $ (542   $ (658   $ 114      $ 44       $ 53   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

QDBP: No contributions to the QDBP were made for the three and six months ended June 30, 2014.

SERP I and SERP II: The Corporation contributed $37 thousand and $74 thousand during the three and six months ended June 30, 2014, respectively, and is expected to contribute an additional $74 thousand to the SERP I and SERP II plans for the remaining six months of 2014.

PRBP: In 2005, the Corporation capped the maximum annual payment under the PRBP at 120% of the 2005 benefit. This maximum was reached in 2008 and the cap is not expected to be increased above this level.

 

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Note 10 - Segment Information

The Corporation aggregates certain of its operations and has identified two segments as follows: Banking and Wealth Management.

The following tables detail segment information for the three and six months ended June 30, 2014 and 2013:

 

     Three Months Ended June 30, 2014     Three Months Ended June 30, 2013  
(dollars in thousands)    Banking     Wealth
Management
    Consolidated     Banking     Wealth
Management
    Consolidated  

Net interest income

   $ 19,441      $ 1      $ 19,442      $ 17,922      $ 1      $ 17,923   

Less: loan loss provision

     (100     —          (100     1,000        —          1,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after loan loss provision

     19,541        1        19,542        16,922        1        16,923   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income:

            

Fees for wealth management services

     —          9,499        9,499        —          9,094        9,094   

Service charges on deposit accounts

     656        —          656        596        —          596   

Loan servicing and other fees

     428        —          428        448        —          448   

Net gain on sale of loans

     537        —          537        1,492        —          1,492   

Net gain on sale of available for sale securities

     85        —          85        —          —          —     

Net loss on sale of other real estate owned

     220        —          220        (141     —          (141

BOLI income

     74        —          74        85        —          85   

Other operating income

     1,232        26        1,258        1,322        47        1,369   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

     3,232        9,525        12,757        3,802        9,141        12,943   

Other expenses:

            

Salaries & wages

     6,539        3,155        9,694        6,040        3,046        9,086   

Employee benefits

     1,057        752        1,809        1,463        749        2,212   

Occupancy & equipment

     1,308        375        1,683        1,354        374        1,728   

Amortization of intangible assets

     71        565        636        80        580        660   

Professional fees

     883        31        914        614        50        664   

Other operating expenses

     5,053        837        5,890        5,130        1,044        6,174   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses

     14,911        5,715        20,626        14,681        5,843        20,524   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment profit

     7,862        3,811        11,673        6,043        3,299        9,342   

Intersegment (revenues) expenses*

     (93     93        —          (152     152        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pre-tax segment profit after eliminations

   $ 7,769      $ 3,904      $ 11,673      $ 5,891      $ 3,451      $ 9,342   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of segment pre-tax profit after eliminations

     66.6     33.4     100.0     63.1     36.9     100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment assets (dollars in millions)

   $ 2,091      $ 40      $ 2,131      $ 1,967      $ 43      $ 2,010   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* Inter-segment revenues consist of rental payments, interest on deposits and management fees.

 

     Six Months Ended June 30, 2014     Six Months Ended June 30, 2013  
(dollars in thousands)    Banking     Wealth
Management
    Consolidated     Banking     Wealth
Management
    Consolidated  

Net interest income

   $ 38,164      $ 1      $ 38,165      $ 35,331      $ 1      $ 35,332   

Less: loan loss provision

     650        —          650        1,804        —          1,804   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after loan loss provision

     37,514        1        37,515        33,527        1        33,528   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income:

            

Fees for wealth management services

     —          18,412        18,412        —          17,443        17,443   

Service charges on deposit accounts

     1,257        —          1,257        1,180        —          1,180   

Loan servicing and other fees

     874        —          874        899        —          899   

Net gain on sale of loans

     861        —          861        3,010        —          3,010   

Net gain on sale of available for sale securities

     81        —          81        2        —          2   

Net loss on sale of other real estate owned

     220        —          220        (193     —          (193

BOLI income

     155        —          155        198        —          198   

Other operating income

     1,966        70        2,036        2,104        90        2,194   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

     5,414        18,482        23,896        7,200        17,533        24,733   

Other expenses:

            

Salaries & wages

     12,186        5,948        18,134        11,911        5,985        17,896   

Employee benefits

     2,270        1,519        3,788        3,040        1,497        4,537   

Occupancy & equipment

     2,882        734        3,616        2,728        750        3,478   

Amortization of intangible assets

     141        1,131        1,273        160        1,161        1,321   

Professional fees

     1,450        57        1,507        1,123        116        1,239   

Other operating expenses

     9,355        1,852        11,207        10,268        2,020        12,288   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses

     28,284        11,241        39,525        29,230        11,529        40,759   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment profit

     14,644        7,242        21,886        11,497        6,005        17,502   

Intersegment (revenues) expenses*

     (186     186        —          (304     304        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pre-tax segment profit after eliminations

   $ 14,458      $ 7,428      $ 21,886      $ 11,193      $ 6,309      $ 17,502   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of segment pre-tax profit after eliminations

     66.1     33.9     100.0     64.0     36.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment assets (dollars in millions)

   $ 2,091      $ 40      $ 2,131      $ 1,967      $ 43      $ 2,010   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* Inter-segment revenues consist of rental payments, interest on deposits and management fees.

Other segment information is as follows:

Wealth Management Segment Information

 

     (dollars in millions)  
     June 30, 2014      December 31, 2013  

Assets under management, administration, supervision and brokerage:

   $ 7,569.8       $ 7,268.3   

 

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Note 11 - Mortgage Servicing Rights

The following tables summarize the Corporation’s activity related to mortgage servicing rights (“MSRs”) for the three and six months ended June 30, 2014 and 2013:

 

     Three Months Ended June 30,  
(dollars in thousands)    2014     2013  

Balance, beginning of period

   $ 4,734      $ 4,593   

Additions

     151        324   

Amortization

     (128     (218

Recovery

     3        91   

Impairment

     —          —     
  

 

 

   

 

 

 

Balance, end of period

   $ 4,760      $ 4,790   
  

 

 

   

 

 

 

Fair value

   $ 5,552      $ 5,621   
  

 

 

   

 

 

 

Loans serviced for others

   $ 622,808      $ 623,498   
  

 

 

   

 

 

 

 

     Six Months Ended June 30,  
(dollars in thousands)    2014     2013  

Balance, beginning of period

   $ 4,750      $ 4,491   

Additions

     241        709   

Amortization

     (242     (430

Recovery

     11        91   

Impairment

     —          (71
  

 

 

   

 

 

 

Balance, end of period

   $ 4,760      $ 4,790   
  

 

 

   

 

 

 

Fair value

   $ 5,552      $ 5,621   
  

 

 

   

 

 

 

Loans serviced for others

   $ 622,808      $ 623,498   
  

 

 

   

 

 

 

As of June 30, 2014 and December 31, 2013, key economic assumptions and the sensitivity of the current fair value of MSRs to immediate 10 and 20 percent adverse changes in those assumptions are as follows:

 

(dollars in thousands)    June 30, 2014     December 31, 2013  

Fair value amount of MSRs

   $ 5,552      $ 5,733   

Weighted average life (in years)

     6.4        6.3   

Prepayment speeds (constant prepayment rate)*

     10.4        11.1   

Impact on fair value:

    

10% adverse change

   $ (182   $ (206

20% adverse change

   $ (359   $ (402

Discount rate

     10.5     10.50

Impact on fair value:

    

10% adverse change

   $ (219   $ (231

20% adverse change

   $ (421   $ (445

 

* Represents the weighted average prepayment rate for the life of the MSR asset.

These assumptions and sensitivities are hypothetical and should be used with caution. Changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which could magnify or counteract the sensitivities.

 

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Note 12 - Goodwill and Other Intangibles

The Corporation’s goodwill and intangible assets related to the acquisitions of Lau Associates LLC (“Lau”) in July, 2008, First Keystone Financial, Inc. (“FKF”) in July, 2010, the Private Wealth Management Group of the Hershey Trust Company (“PWMG”) in May, 2011, and Davidson Trust Company (“DTC”) in May, 2012, and the First Bank of Delaware (“FBD”) transaction in November, 2012 are detailed below:

 

(dollars in thousands)    Balance
December 31,
2013
     Additions/
Adjustments
     Amortization     Balance
June 30,
2014
     Amortization
Period

Goodwill – Wealth segment

   $ 20,412       $ —         $ —        $ 20,412       Indefinite

Goodwill – Banking segment

     12,431         —           —          12,431       Indefinite
  

 

 

    

 

 

    

 

 

   

 

 

    

Total

   $ 32,843       $ —         $ —        $ 32,843      

Core deposit intangible

   $ 1,342       $ —         $ (142   $ 1,200       10 Years

Customer relationships

     13,595         —           (618     12,977       10 to 20 Years

Non-compete agreements

     3,218         —           (513     2,705       5 to 5 12 Years

Trade name

     1,210         —           —          1,210       Indefinite
  

 

 

    

 

 

    

 

 

   

 

 

    

Total

   $ 19,365       $ —         $ (1,273   $ 18,092      
  

 

 

    

 

 

    

 

 

   

 

 

    

Grand total

   $ 52,208       $ —         $ (1,273   $ 50,935      
  

 

 

    

 

 

    

 

 

   

 

 

    

The Corporation performed its annual review of goodwill and identifiable intangible assets as of December 31, 2013 in accordance with ASC 350, “Intangibles Goodwill and Other.” For the three and six months ended June 30, 2014, the Corporation determined there were no events that would necessitate impairment testing of goodwill and other intangible assets.

Note 13 - Accumulated Other Comprehensive Loss

The following tables detail the components of accumulated other comprehensive (loss) income for the three and six month periods ended June 30, 2014 and 2013:

 

(dollars in thousands)    Net Change in
Unrealized Gains
on Available-for-
Sale Investment
Securities
    Net Change in
Fair Value of
Derivative
Used for Cash
Flow Hedge
    Net Change in
Unfunded
Pension
Liability
    Accumulated
Other
Comprehensive
Loss
 

Balance, March 31, 2014

   $ 288      $ 516      $ (5,405   $ (4,601

Net change

     1,248        (242     47        1,053   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2014

   $ 1,536        274        (5,358     (3,548
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2013

   $ 3,147      $ 95      $ (11,807   $ (8,565

Net change

     (3,270     482        248        (2,540
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2013

   $ (123   $ 577      $ (11,559   $ (11,105
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(dollars in thousands)    Net Change in
Unrealized Gains
on Available-for-
Sale Investment
Securities
    Net Change in
Fair Value of
Derivative
Used for Cash
Flow Hedge
    Net Change in
Unfunded
Pension
Liability
    Accumulated
Other
Comprehensive
Loss
 

Balance, December 31, 2013

   $ (857   $ 743      $ (5,451   $ (5,565

Net change

     2,393        (469     93        2,017   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2014

   $ 1,536        274        (5,358     (3,548
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2012

   $ 3,164      $ (24   $ (13,218   $ (10,078

Net change

     (3,287     601        1,659        (1,027
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2013

   $ (123   $ 577      $ (11,559   $ (11,105
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following tables detail the amounts reclassified from each component of accumulated other comprehensive loss to each component’s applicable income statement line, for the three and six month periods ended June 30, 2014 and 2013:

 

Description of Accumulated Other
Comprehensive Loss Component

  Amount Reclassified from Accumulated
Other Comprehensive Loss
   

Affected Income Statement Category

  For The Three Months Ended June 30,    
    2014     2013      

Net unrealized gain on investment securities available for sale:

     

Realization of gain on sale of investment securities available for sale

  $ (85   $ —        Net gain on sale of available for sale investment securities
    30        —        Less: income tax expense
 

 

 

   

 

 

   
  $ (55   $ —        Net of income tax
 

 

 

   

 

 

   

Unfunded pension liability:

     

Amortization of net loss included in net periodic pension costs*

  $ 124      $ 464      Employee benefits

Amortization of prior service cost included in net periodic pension costs*

    4        4      Employee benefits

Amortization of transition obligation included in net periodic pension costs*

    —          —        Employee benefits

Gain on curtailment of SERP II

    —          (120   Net gain on curtailment of nonqualified pension plan
 

 

 

   

 

 

   
    128        348      Total expense before income tax benefit
    45        122      Less: income tax benefit
 

 

 

   

 

 

   
  $ 83      $ 226      Net of income tax
 

 

 

   

 

 

   

 

Description of Accumulated Other
Comprehensive Loss Component

  Amount Reclassified from Accumulated
Other Comprehensive Loss
   

Affected Income Statement Category

  For The Six Months Ended June 30,    
    2014     2013      

Net unrealized gain on investment securities available for sale:

     

Realization of gain on sale of investment securities available for sale

  $ (81   $ (2   Net gain on sale of available for sale investment securities
    29        (1   Less: income tax expense
 

 

 

   

 

 

   
  $ (52   $ (1   Net of income tax
 

 

 

   

 

 

   

Unfunded pension liability:

     

Amortization of net loss included in net periodic pension costs*

  $ 248      $ 927      Employee benefits

Amortization of prior service cost included in net periodic pension costs*

    7        7      Employee benefits

Amortization of transition obligation included in net periodic pension costs*

                Employee benefits

Gain on curtailment of SERP II

    —          (690   Net gain on curtailment of nonqualified pension plan
 

 

 

   

 

 

   
    255        244      Total expense before income tax benefit
    89        85      Less: income tax benefit
 

 

 

   

 

 

   
  $ 166      $ 159      Net of income tax
 

 

 

   

 

 

   

*Accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See Note 10—Pension and Other Post-Retirement Benefit Plans

 

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Note 14 - Shareholders’ Equity

Dividend

On July 24, 2014, the Corporation’s Board of Directors declared a regular quarterly dividend of $0.19 per share payable September 1, 2014 to shareholders of record as of August 5, 2014. During the second quarter of 2014, the Corporation declared and paid a regular quarterly dividend of $0.18 per share. This payment totaled $2.5 million, based on outstanding shares at May 13, 2014 of 13,780,630. During the first quarter of 2014, the Corporation declared and paid a regular quarterly dividend of $0.18 per share. This payment totaled $2.5 million, based on outstanding shares at February 10, 2014 of 13,649,305.

S-3 Shelf Registration Statement and Offerings Thereunder

In April 2012, the Corporation filed a shelf registration statement (the “Shelf Registration Statement”) to replace its 2009 Shelf Registration Statement, which was set to expire in June 2012. This new Shelf Registration Statement allows the Corporation to raise additional capital through offers and sales of registered securities consisting of common stock, debt securities, warrants to purchase common stock, stock purchase contracts and units or units consisting of any combination of the foregoing securities. Using the prospectus in the Shelf Registration Statement, together with applicable prospectus supplements, the Corporation may sell, from time to time, in one or more offerings, such securities in a dollar amount up to $150,000,000, in the aggregate.

The Corporation has in place under its Shelf Registration Statement a Dividend Reinvestment and Stock Purchase Plan (the “Plan”), which was amended and restated on April 27, 2012, primarily to increase the number of shares which can be issued by the Corporation from 850,000 to 1,500,000 shares of registered common stock. The Plan allows for the grant of a request for waiver (“RFW”) above the Plan’s maximum investment of $120 thousand per account per year. An RFW is granted based on a variety of factors, including the Corporation’s current and projected capital needs, prevailing market prices of the Corporation’s common stock and general economic and market conditions.

The Plan is intended to allow both existing shareholders and new investors to easily and conveniently increase their investment in the Corporation without incurring many of the fees and commissions normally associated with brokerage transactions. For the six months ended June 30, 2014, the Corporation issued 1,159 shares and raised $32 thousand through the Plan.

Options

In addition to shares issued through the Plan, the Corporation also issues shares through the exercise of stock options. During the six months ended June 30, 2014, 69,200 shares were issued pursuant to the exercise of stock options, increasing shareholders’ equity by $1.4 million.

Note 15 - Accounting for Uncertainty in Income Taxes

The Corporation recognizes the financial statement benefit of a tax position only after determining that the Corporation would be more likely than not to sustain the position following an examination. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statement