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EX-32.2 - EX-32.2 - ACNB CORPa14-19805_1ex32d2.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

Commission file number 0-11783

 

ACNB CORPORATION

(Exact name of Registrant as specified in its charter)

 

Pennsylvania

 

23-2233457

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

16 Lincoln Square, Gettysburg, Pennsylvania

 

17325

(Address of principal executive offices)

 

(Zip Code)

 

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

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $2.50 par value per share

 

The NASDAQ Stock Market, LLC

 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

The number of shares of the Registrant’s Common Stock outstanding on October 31, 2014, was 6,011,329.

 

 

 



 

PART I - FINANCIAL INFORMATION

 

ACNB CORPORATION

ITEM 1 - FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)

 

Dollars in thousands, except per share data

 

September 30,
 2014

 

September 30,
 2013

 

December 31,
 2013

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

14,338

 

$

16,371

 

$

13,963

 

Interest bearing deposits with banks

 

9,670

 

2,856

 

4,153

 

 

 

 

 

 

 

 

 

Total Cash and Cash Equivalents

 

24,008

 

19,227

 

18,116

 

 

 

 

 

 

 

 

 

Securities available for sale

 

122,064

 

135,163

 

129,983

 

Securities held to maturity, fair value $74,338; $94,667; $92,082

 

75,407

 

96,255

 

94,373

 

Loans held for sale

 

1,482

 

603

 

496

 

Loans, net of allowance for loan losses $15,421; $16,797; $16,091

 

750,920

 

701,251

 

712,557

 

Premises and equipment

 

16,871

 

15,545

 

15,991

 

Restricted investment in bank stocks

 

5,239

 

4,189

 

6,861

 

Investment in bank-owned life insurance

 

37,667

 

32,003

 

32,237

 

Investments in low-income housing partnerships

 

3,974

 

5,233

 

4,687

 

Goodwill

 

6,308

 

6,308

 

6,308

 

Intangible assets

 

1,359

 

1,928

 

1,845

 

Foreclosed assets held for resale

 

1,688

 

1,608

 

1,762

 

Other assets

 

20,544

 

15,217

 

20,831

 

 

 

 

 

 

 

 

 

Total Assets

 

$

1,067,531

 

$

1,034,530

 

$

1,046,047

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Non-interest bearing

 

$

142,696

 

$

130,110

 

$

128,011

 

Interest bearing

 

681,316

 

689,121

 

672,632

 

 

 

 

 

 

 

 

 

Total Deposits

 

824,012

 

819,231

 

800,643

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

53,824

 

57,418

 

49,052

 

Long-term borrowings

 

69,505

 

47,767

 

82,703

 

Other liabilities

 

8,482

 

7,094

 

6,847

 

 

 

 

 

 

 

 

 

Total Liabilities

 

955,823

 

931,510

 

939,245

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

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

 

 

 

 

Common stock, $2.50 par value; 20,000,000 shares authorized; 6,073,929, 6,049,261 and 6,053,911 shares issued; 6,011,329, 5,986,661 and 5,991,311 shares outstanding

 

15,185

 

15,123

 

15,135

 

Treasury stock, at cost (62,600 shares)

 

(728

)

(728

)

(728

)

Additional paid-in capital

 

9,959

 

9,557

 

9,628

 

Retained earnings

 

87,069

 

81,532

 

82,661

 

Accumulated other comprehensive income (loss)

 

223

 

(2,464

)

106

 

 

 

 

 

 

 

 

 

Total Stockholders’ Equity

 

111,708

 

103,020

 

106,802

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders’ Equity

 

$

1,067,531

 

$

1,034,530

 

$

1,046,047

 

 

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

 

2



 

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

Dollars in thousands, except per share data

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

INTEREST INCOME

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

8,199

 

$

7,840

 

$

24,222

 

$

24,074

 

Securities:

 

 

 

 

 

 

 

 

 

Taxable

 

843

 

1,078

 

2,805

 

3,166

 

Tax-exempt

 

260

 

280

 

800

 

922

 

Dividends

 

55

 

6

 

144

 

16

 

Other

 

19

 

16

 

49

 

64

 

 

 

 

 

 

 

 

 

 

 

Total Interest Income

 

9,376

 

9,220

 

28,020

 

28,242

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

Deposits

 

460

 

500

 

1,326

 

1,721

 

Short-term borrowings

 

12

 

17

 

46

 

44

 

Long-term borrowings

 

439

 

419

 

1,346

 

1,321

 

 

 

 

 

 

 

 

 

 

 

Total Interest Expense

 

911

 

936

 

2,718

 

3,086

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income

 

8,465

 

8,284

 

25,302

 

25,156

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR LOAN LOSSES

 

 

150

 

150

 

1,300

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income after Provision for Loan Losses

 

8,465

 

8,134

 

25,152

 

23,856

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

550

 

596

 

1,548

 

1,682

 

Income from fiduciary activities

 

337

 

333

 

1,074

 

976

 

Earnings on investment in bank-owned life insurance

 

281

 

246

 

825

 

741

 

Net gains on sales or calls of securities

 

2

 

 

54

 

 

Service charges on ATM and debit card transactions

 

391

 

376

 

1,150

 

1,051

 

Commissions from insurance sales

 

1,124

 

1,079

 

3,721

 

3,609

 

Other

 

245

 

217

 

552

 

873

 

 

 

 

 

 

 

 

 

 

 

Total Other Income

 

2,930

 

2,847

 

8,924

 

8,932

 

 

 

 

 

 

 

 

 

 

 

OTHER EXPENSES

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

4,776

 

4,546

 

14,485

 

14,158

 

Net occupancy

 

470

 

463

 

1,544

 

1,471

 

Equipment

 

731

 

727

 

2,051

 

2,177

 

Other tax

 

184

 

199

 

555

 

669

 

Professional services

 

158

 

232

 

732

 

667

 

Supplies and postage

 

156

 

127

 

429

 

443

 

Marketing and corporate relations

 

150

 

81

 

451

 

293

 

FDIC and regulatory

 

183

 

191

 

582

 

592

 

Intangible assets amortization

 

162

 

160

 

487

 

481

 

Foreclosed real estate expenses

 

135

 

503

 

252

 

410

 

Other operating

 

874

 

817

 

2,313

 

2,458

 

 

 

 

 

 

 

 

 

 

 

Total Other Expenses

 

7,979

 

8,046

 

23,881

 

23,819

 

 

 

 

 

 

 

 

 

 

 

Income before Income Taxes

 

3,416

 

2,935

 

10,195

 

8,969

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

792

 

627

 

2,368

 

1,921

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

2,624

 

$

2,308

 

$

7,827

 

$

7,048

 

 

 

 

 

 

 

 

 

 

 

PER SHARE DATA

 

 

 

 

 

 

 

 

 

Basic earnings

 

$

0.44

 

$

0.39

 

$

1.30

 

$

1.18

 

Cash dividends declared

 

$

0.19

 

$

0.19

 

$

0.57

 

$

0.57

 

 

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

 

3



 

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

Dollars in thousands

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

2,624

 

$

2,308

 

$

7,827

 

$

7,048

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE (LOSS) INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SECURITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains arising during the period, net of income taxes of $(181), $(82), $62 and $(1,336), respectively

 

(352

)

(159

)

122

 

(2,595

)

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for net gains included in net income, net of income taxes of $(1), $0, $(18) and $0, respectively (A) (C)

 

(1

)

 

(36

)

 

 

 

 

 

 

 

 

 

 

 

PENSION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of pension net loss, transition liability, and prior service cost, net of income taxes of $5, $58, $15 and $176, respectively (B) (C)

 

10

 

115

 

31

 

343

 

 

 

 

 

 

 

 

 

 

 

TOTAL OTHER COMPREHENSIVE (LOSS) INCOME

 

(343

)

(44

)

117

 

(2,252

)

 

 

 

 

 

 

 

 

 

 

TOTAL COMPREHENSIVE INCOME

 

$

2,281

 

$

2,264

 

$

7,944

 

$

4,796

 

 

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

 


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

 

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

 

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

 

4



 

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

Nine Months Ended September 30, 2014 and 2013

 

Dollars in thousands

 

Common
Stock

 

Treasury
Stock

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Total
Stockholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE — JANUARY 1, 2013

 

$

15,070

 

$

(728

)

$

9,246

 

$

77,888

 

$

(212

)

$

101,264

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

7,048

 

 

7,048

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss, net of taxes

 

 

 

 

 

(2,252

)

(2,252

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock shares issued (21,293 shares)

 

53

 

 

311

 

 

 

364

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared

 

 

 

 

(3,404

)

 

(3,404

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE — SEPTEMBER 30, 2013

 

$

15,123

 

$

(728

)

$

9,557

 

$

81,532

 

$

(2,464

)

$

103,020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE — JANUARY 1, 2014

 

$

15,135

 

$

(728

)

$

9,628

 

$

82,661

 

$

106

 

$

106,802

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

7,827

 

 

7,827

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of taxes

 

 

 

 

 

117

 

117

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock shares issued (20,018 shares)

 

50

 

 

331

 

 

 

381

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared

 

 

 

 

(3,419

)

 

(3,419

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE — SEPTEMBER 30, 2014

 

$

15,185

 

$

(728

)

$

9,959

 

$

87,069

 

$

223

 

$

111,708

 

 

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

 

5



 

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

 

Nine Months Ended September 30,

 

Dollars in thousands

 

2014

 

2013

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

7,827

 

$

7,048

 

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

 

 

 

 

 

Gain on sales of loans originated for sale

 

(138

)

(417

)

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

 

(42

)

173

 

Earnings on investment in bank-owned life insurance

 

(825

)

(741

)

Gain on sales or calls of securities

 

(54

)

 

Depreciation and amortization

 

1,530

 

1,500

 

Provision for loan losses

 

150

 

1,300

 

Net amortization of investment securities premiums

 

625

 

739

 

Decrease in accrued interest receivable

 

139

 

226

 

Decrease in accrued interest payable

 

(301

)

(419

)

Mortgage loans originated for sale

 

(10,192

)

(18,882

)

Proceeds from sales of loans originated for sale

 

9,344

 

25,383

 

Decrease in other assets

 

581

 

861

 

Increase in other liabilities

 

1,984

 

734

 

 

 

 

 

 

 

Net Cash Provided by Operating Activities

 

10,628

 

17,505

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Proceeds from maturities of investment securities held to maturity

 

18,600

 

7,223

 

Proceeds from maturities of investment securities available for sale

 

13,747

 

33,202

 

Proceeds from sales of investment securities available for sale

 

1,862

 

 

Purchase of investment securities held to maturity

 

 

(53,689

)

Purchase of investment securities available for sale

 

(7,765

)

(6,875

)

Net increase in loans

 

(39,363

)

(11,741

)

Redemption of restricted investment in bank stocks

 

1,622

 

1,129

 

Investment in low-income housing partnerships

 

 

(249

)

Purchase of bank-owned life insurance

 

(4,605

)

(140

)

Capital expenditures

 

(1,924

)

(1,433

)

Proceeds from sale of low-income housing partnerships

 

219

 

 

Proceeds from sale of foreclosed real estate

 

966

 

2,967

 

 

 

 

 

 

 

Net Cash Used in Investing Activities

 

(16,641

)

(29,606

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Net increase in demand deposits

 

14,685

 

10,813

 

Net increase (decrease) in time certificates of deposits and interest bearing deposits

 

8,684

 

(25,758

)

Net increase in short-term borrowings

 

4,772

 

10,115

 

Dividends paid

 

(3,419

)

(3,404

)

Common stock issued

 

381

 

364

 

Proceeds from long-term borrowings

 

10,000

 

2,000

 

Repayments on long-term borrowings

 

(23,198

)

(14,187

)

 

 

 

 

 

 

Net Cash Provided by (Used in) Financing Activities

 

11,905

 

(20,057

)

 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

5,892

 

(32,158

)

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS — BEGINNING

 

18,116

 

51,385

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS — ENDING

 

$

24,008

 

$

19,227

 

 

 

 

 

 

 

Interest paid

 

$

3,019

 

$

3,505

 

Income taxes paid

 

$

1,600

 

$

2,225

 

Loans transferred to foreclosed assets held for resale

 

$

850

 

$

501

 

 

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

 

6



 

ACNB CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.              Basis of Presentation

 

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

 

RIG is a full-service insurance agency based in Westminster, Maryland. The agency offers a broad range of property and casualty, life, and health insurance to both commercial and individual clients. In 2008, as part of an agency acquisition, a second location of RIG was established in Germantown, Maryland.

 

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

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly ACNB Corporation’s financial position and the results of operations, comprehensive income, changes in stockholders’ equity, and cash flows. All such adjustments are of a normal recurring nature.

 

The accounting policies followed by the Corporation are set forth in Note A to the Corporation’s consolidated financial statements in the 2013 ACNB Corporation Annual Report on Form 10-K, filed with the SEC on March 7, 2014. It is suggested that the consolidated financial statements contained herein be read in conjunction with the consolidated financial statements and notes included in the Corporation’s Annual Report on Form 10-K. The results of operations for the three and nine month periods ended September 30, 2014, are not necessarily indicative of the results to be expected for the full year.

 

The Corporation has evaluated events and transactions occurring subsequent to the statement of condition date of September 30, 2014, for items that should potentially be recognized or disclosed in the consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

 

2.              Earnings Per Share

 

The Corporation has a simple capital structure. Basic earnings per share of common stock is computed based on 5,998,925 and 5,973,418 weighted average shares of common stock outstanding for the nine months ended September 30, 2014 and 2013, respectively, and 6,006,321 and 5,981,936 for the three months ended September 30, 2014 and 2013, respectively. The Corporation does not have dilutive securities outstanding.

 

7



 

3.              Retirement Benefits

 

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

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

In thousands

 

2014

 

2013

 

2014

 

2013

 

Service cost

 

$

172

 

$

194

 

$

516

 

$

582

 

Interest cost

 

259

 

223

 

777

 

669

 

Expected return on plan assets

 

(578

)

(489

)

(1,734

)

(1,467

)

Amortization of net loss

 

5

 

163

 

16

 

489

 

Amortization of prior service cost

 

10

 

10

 

30

 

30

 

 

 

 

 

 

 

 

 

 

 

Net Periodic Benefit (Income) Cost

 

$

(132

)

$

101

 

$

(395

)

$

303

 

 

The Corporation previously disclosed in its consolidated financial statements for the year ended December 31, 2013, that it had not yet determined the amount the Bank planned on contributing to the defined benefit plan in 2014. As of September 30, 2014, this contribution amount had still not been determined. Effective April 1, 2012, no inactive or former participant in the plan is eligible to again participate in the plan, and no employee hired after March 31, 2012, is eligible to participate in the plan. As of the last annual census, ACNB Bank had a combined 368 active, vested, terminated and retired persons in the plan.

 

4.              Guarantees

 

The Corporation does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are written conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Corporation generally holds collateral and/or personal guarantees supporting these commitments. The Corporation had $5,742,000 in standby letters of credit as of September 30, 2014. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The current amount of the liability, as of September 30, 2014, for guarantees under standby letters of credit issued is not material.

 

5.              Accumulated Other Comprehensive Income (Loss)

 

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

 

In thousands

 

Unrealized
Gains on
Securities

 

Pension
Liability

 

Accumulated Other
Comprehensive
Income (Loss)

 

BALANCE — SEPTEMBER 30, 2014

 

$

2,658

 

$

(2,435

)

$

223

 

BALANCE DECEMBER 31, 2013

 

$

2,572

 

$

(2,466

)

$

106

 

BALANCE SEPTEMBER 30, 2013

 

$

3,019

 

$

(5,483

)

$

(2,464

)

 

6.              Segment Reporting

 

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

 

8



 

Segment information for the nine month periods ended September 30, 2014 and 2013, is as follows:

 

In thousands

 

Banking

 

Insurance

 

Total

 

2014

 

 

 

 

 

 

 

Net interest income and other income from external customers

 

$

30,370

 

$

3,856

 

$

34,226

 

Income before income taxes

 

9,566

 

629

 

10,195

 

Total assets

 

1,058,774

 

8,757

 

1,067,531

 

Capital expenditures

 

1,924

 

 

1,924

 

 

 

 

 

 

 

 

 

2013

 

 

 

 

 

 

 

Net interest income and other income from external customers

 

$

30,786

 

$

3,302

 

$

34,088

 

Income before income taxes

 

8,470

 

499

 

8,969

 

Total assets

 

1,024,946

 

9,584

 

1,034,530

 

Capital expenditures

 

1,426

 

7

 

1,433

 

 

Segment information for the three month periods ended September 30, 2014 and 2013, is as follows:

 

In thousands

 

Banking

 

Insurance

 

Total

 

2014

 

 

 

 

 

 

 

Net interest income and other income from external customers

 

$

10,141

 

$

1,254

 

$

11,395

 

Income before income taxes

 

3,269

 

147

 

3,416

 

Total assets

 

1,058,774

 

8,757

 

1,067,531

 

Capital expenditures

 

918

 

 

918

 

 

 

 

 

 

 

 

 

2013

 

 

 

 

 

 

 

Net interest income and other income from external customers

 

$

10,343

 

$

788

 

$

11,131

 

Income before income taxes

 

2,813

 

122

 

2,935

 

Total assets

 

1,024,946

 

9,584

 

1,034,530

 

Capital expenditures

 

734

 

 

734

 

 

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

 

7.              Securities

 

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

 

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

 

9



 

Amortized cost and fair value of securities at September 30, 2014, and December 31, 2013, were as follows:

 

In thousands

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

 

 

 

 

 

 

 

 

 

 

SECURITIES AVAILABLE FOR SALE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SEPTEMBER 30, 2014

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

19,007

 

$

399

 

$

 

$

19,406

 

Mortgage-backed securities, residential

 

49,762

 

2,137

 

16

 

51,883

 

State and municipal

 

37,599

 

1,300

 

17

 

38,882

 

Corporate bonds

 

10,002

 

132

 

 

10,134

 

CRA mutual fund

 

1,044

 

5

 

 

1,049

 

Stock in other banks

 

627

 

83

 

 

710

 

 

 

$

118,041

 

$

4,056

 

$

33

 

$

122,064

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2013

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

21,094

 

$

557

 

$

 

$

21,651

 

Mortgage-backed securities, residential

 

51,541

 

2,322

 

123

 

53,740

 

State and municipal

 

40,780

 

1,117

 

375

 

41,522

 

Corporate bonds

 

11,004

 

192

 

31

 

11,165

 

CRA mutual fund

 

1,044

 

 

11

 

1,033

 

Stock in other banks

 

627

 

245

 

 

872

 

 

 

$

126,090

 

$

4,433

 

$

540

 

$

129,983

 

 

 

 

 

 

 

 

 

 

 

SECURITIES HELD TO MATURITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SEPTEMBER 30, 2014

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

24,502

 

$

 

$

460

 

$

24,042

 

Mortgage-backed securities, residential

 

50,905

 

100

 

709

 

50,296

 

 

 

$

75,407

 

$

100

 

$

1,169

 

$

74,338

 

DECEMBER 31, 2013

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

37,528

 

$

142

 

$

923

 

$

36,747

 

Mortgage-backed securities, residential

 

56,845

 

40

 

1,550

 

55,335

 

 

 

$

94,373

 

$

182

 

$

2,473

 

$

92,082

 

 

10



 

The following table shows the Corporation’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2014, and December 31, 2013:

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

In thousands

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SECURITIES AVAILABLE FOR SALE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SEPTEMBER 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities, residential

 

$

3,790

 

$

11

 

$

792

 

$

5

 

$

4,582

 

$

16

 

State and municipal

 

 

 

2,454

 

17

 

2,454

 

17

 

 

 

$

3,790

 

$

11

 

$

3,246

 

$

22

 

$

7,036

 

$

33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities, residential

 

$

6,944

 

$

123

 

$

 

$

 

$

6,944

 

$

123

 

State and municipal

 

11,107

 

340

 

1,070

 

35

 

12,177

 

375

 

Corporate bond

 

4,969

 

31

 

 

 

4,969

 

31

 

CRA mutual fund

 

1,033

 

11

 

 

 

1,033

 

11

 

 

 

$

24,053

 

$

505

 

$

1,070

 

$

35

 

$

25,123

 

$

540

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SECURITIES HELD TO MATURITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SEPTEMBER 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

 

$

 

$

24,042

 

$

460

 

$

24,042

 

$

460

 

Mortgage-backed securities, residential

 

10,133

 

32

 

24,963

 

677

 

35,096

 

709

 

 

 

$

10,133

 

$

32

 

$

49,005

 

$

1,137

 

$

59,138

 

$

1,169

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

22,710

 

$

812

 

$

2,889

 

$

111

 

$

25,599

 

$

923

 

Mortgage-backed security, residential

 

45,891

 

1,446

 

1,755

 

104

 

47,646

 

1,550

 

 

 

$

68,601

 

$

2,258

 

$

4,644

 

$

215

 

$

73,245

 

$

2,473

 

 

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

 

At September 30, 2014, four available for sale residential mortgage-backed securities had unrealized losses that individually did not exceed 2% of amortized cost. Two of these securities have been in a continuous loss position for 12 months or more. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

 

At September 30, 2014, six available for sale state and municipal bonds had unrealized losses that individually did not exceed 2% of amortized cost. All of these securities have been in a continuous loss position for 12 months or more. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

 

At September 30, 2014, sixteen held to maturity U.S. Government and agency securities had unrealized losses that individually did not exceed 5% of amortized cost. All of these securities have been in a continuous loss position for 12 months or more. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

 

11



 

At September 30, 2014, twenty-five held to maturity residential mortgage-backed securities had unrealized losses that individually did not exceed 4% of amortized cost. Eighteen of these securities have been in a continuous loss position for 12 months or more. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

 

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

 

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

 

Management routinely sells securities from its available for sale portfolio in an effort to manage and allocate the portfolio. At September 30, 2014, management had not identified any securities with an unrealized loss that it intends to sell or will be required to sell. In estimating other-than-temporary impairment losses on debt securities, management considers (1) whether management intends to sell the security, or (2) if it is more likely than not that management will be required to sell the security before recovery, or (3) if management does not expect to recover the entire amortized cost basis. In assessing potential other-than-temporary impairment for equity securities, consideration is given to management’s intention and ability to hold the securities until recovery of unrealized losses.

 

Amortized cost and fair value at September 30, 2014, by contractual maturity, where applicable, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay with or without penalties.

 

 

 

Available for Sale

 

Held to Maturity

 

In thousands

 

Amortized
Cost

 

Fair
Value

 

Amortized
Cost

 

Fair
Value

 

 

 

 

 

 

 

 

 

 

 

1 year or less

 

$

9,549

 

$

9,671

 

$

 

$

 

Over 1 year through 5 years

 

29,593

 

30,650

 

17,049

 

16,779

 

Over 5 years through 10 years

 

25,250

 

25,793

 

7,453

 

7,263

 

Over 10 years

 

2,216

 

2,308

 

 

 

Mortgage-backed securities, residential

 

49,762

 

51,883

 

50,905

 

50,296

 

CRA mutual fund

 

1,044

 

1,049

 

 

 

Stock in other banks

 

627

 

710

 

 

 

 

 

$

118,041

 

$

122,064

 

$

75,407

 

$

74,338

 

 

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

 

At September 30, 2014, and December 31, 2013, securities with a carrying value of $130,885,000 and $139,966,000, respectively, were pledged as collateral as required by law on public and trust deposits, repurchase agreements, and for other purposes.

 

8.              Loans

 

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

 

12



 

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

 

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

 

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

 

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

 

Allowance for Credit Losses

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

13



 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

14



 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

15



 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

16



 

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

 

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

 

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard, and doubtful within the Corporation’s internal risk rating system as of September 30, 2014, and December 31, 2013:

 

In thousands

 

Pass

 

Special
Mention

 

Substandard

 

Doubtful

 

Total

 

SEPTEMBER 30, 2014

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

59,818

 

$

2,364

 

$

3,723

 

$

 

$

65,905

 

Commercial real estate

 

221,647

 

27,465

 

15,501

 

 

264,613

 

Commercial real estate construction

 

7,675

 

3,360

 

582

 

 

11,617

 

Residential mortgage

 

348,149

 

4,571

 

2,055

 

 

354,775

 

Home equity lines of credit

 

53,190

 

777

 

35

 

 

54,002

 

Consumer

 

15,429

 

 

 

 

15,429

 

 

 

$

705,908

 

$

38,537

 

$

21,896

 

$

 

$

766,341

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2013

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

53,316

 

$

2,364

 

$

3,537

 

$

 

$

59,217

 

Commercial real estate

 

193,162

 

29,655

 

16,369

 

 

239,186

 

Commercial real estate construction

 

5,123

 

5,018

 

1,055

 

 

11,196

 

Residential mortgage

 

344,847

 

2,551

 

3,611

 

 

351,009

 

Home equity lines of credit

 

53,021

 

608

 

223

 

 

53,852

 

Consumer

 

14,188

 

 

 

 

14,188

 

 

 

$

663,657

 

$

40,196

 

$

24,795

 

$

 

$

728,648

 

 

17



 

The following table summarizes information relative to impaired loans by loan portfolio class as of September 30, 2014, and December 31, 2013:

 

 

 

Impaired Loans with
Allowance

 

Impaired Loans with
No Allowance

 

In thousands

 

Recorded
Investment

 

Unpaid
Principal
Balance

 

Related
Allowance

 

Recorded
Investment

 

Unpaid
Principal
Balance

 

SEPTEMBER 30, 2014

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

 

$

 

$

 

$

1,785

 

$

2,900

 

Commercial real estate

 

 

 

 

10,472

 

10,671

 

Commercial real estate construction

 

 

 

 

368

 

642

 

Residential mortgage

 

238

 

275

 

42

 

830

 

1,056

 

 

 

$

238

 

$

275

 

$

42

 

$

13,455

 

$

15,269

 

 

 

&nb