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EX-31.1 - EXHIBIT 31.1 - STEWARDSHIP FINANCIAL CORPssfn_2016630xex31-1.htm
EX-32.1 - EXHIBIT 32.1 - STEWARDSHIP FINANCIAL CORPssfn_2016630xex32-1.htm
EX-31.2 - EXHIBIT 31.2 - STEWARDSHIP FINANCIAL CORPssfn_2016630xex31-2.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016
o
TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________
 
Commission file number 1-33377
Stewardship Financial Corporation
(Exact name of registrant as specified in its charter)
 
 
New Jersey
22-3351447
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
 
630 Godwin Avenue, Midland Park, NJ
07432
(Address of principal executive offices)
(Zip Code)
 
 
(201) 444-7100
(Registrant's telephone number, including area code)
 
 
 
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 the 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 o
  Non-accelerated filer o  (Do not check if a smaller reporting company)
Smaller reporting company x
 
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 outstanding, net of treasury stock, of the Registrant’s Common Stock, no par value, as of August 5, 2016 was 6,114,585.




Stewardship Financial Corporation 
INDEX
 
 
PAGE
 
NUMBER
 
 
 
 
 
 
1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Financial Condition

 
June 30,
2016
 
December 31, 2015
 
(Unaudited)
 
 
Assets
 

 
 

Cash and due from banks
$
13,471,000

 
$
10,731,000

Other interest-earning assets
430,000

 
179,000

Cash and cash equivalents
13,901,000

 
10,910,000

 
 
 
 
Securities available-for-sale
98,533,000

 
93,354,000

Securities held to maturity; estimated fair value of $66,772,000 (2016)
 

 
 

and $61,281,000 (2015)
65,666,000

 
60,738,000

Federal Home Loan Bank of New York stock, at cost
2,650,000

 
2,608,000

Loans held for sale
581,000

 
1,522,000

Loans, net of allowance for loan losses of $8,388,000 (at June 30, 2016)
 

 
 

and $8,823,000 (at December 31, 2015)
529,225,000

 
517,556,000

Premises and equipment, net
6,678,000

 
6,799,000

Accrued interest receivable
1,912,000

 
1,967,000

Other real estate owned, net
834,000

 
880,000

Bank owned life insurance
16,320,000

 
14,111,000

Other assets
6,287,000

 
7,443,000

Total assets
$
742,587,000

 
$
717,888,000

 
 
 
 
Liabilities and Shareholders' equity
 

 
 

 
 
 
 
Liabilities
 

 
 

Deposits:
 

 
 

Noninterest-bearing
$
160,461,000

 
$
147,828,000

Interest-bearing
466,008,000

 
456,925,000

Total deposits
626,469,000

 
604,753,000

 
 
 
 
Federal Home Loan Bank of New York advances
40,000,000

 
40,000,000

Subordinated Debentures and Subordinated Notes
23,219,000

 
23,186,000

Accrued interest payable
782,000

 
791,000

Accrued expenses and other liabilities
1,431,000

 
1,585,000

Total liabilities
691,901,000

 
670,315,000

 
 
 
 
Shareholders' equity
 

 
 

Common stock, no par value; 10,000,000 shares authorized;
 

 
 

6,113,030 and 6,085,528 shares issued and outstanding
 

 
 

at June 30, 2016, and December 31, 2015, respectively
41,571,000

 
41,410,000

Retained earnings
8,972,000

 
7,008,000

Accumulated other comprehensive income (loss), net
143,000

 
(845,000
)
Total Shareholders' equity
50,686,000

 
47,573,000

Total liabilities and Shareholders' equity
$
742,587,000

 
$
717,888,000


See accompanying notes to consolidated financial statements.      




1


Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Income (Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Interest income:
 

 
 

 
 
 
 
Loans
$
6,116,000

 
$
5,623,000

 
$
11,768,000

 
$
11,069,000

Securities held to maturity:
 

 
 

 


 


Taxable
298,000

 
227,000

 
568,000

 
440,000

Nontaxable
100,000

 
119,000

 
203,000

 
249,000

Securities available-for-sale:
 

 
 

 


 


Taxable
409,000

 
342,000

 
786,000

 
704,000

Nontaxable
6,000

 
6,000

 
12,000

 
12,000

FHLB dividends
31,000

 
33,000

 
63,000

 
63,000

Other interest-earning assets
19,000

 
10,000

 
28,000

 
17,000

Total interest income
6,979,000

 
6,360,000

 
13,428,000

 
12,554,000

Interest expense:
 

 
 

 
 
 
 
Deposits
561,000

 
506,000

 
1,118,000

 
958,000

FHLB-NY Borrowings
201,000

 
211,000

 
404,000

 
427,000

Subordinated Debentures and Subordinated Notes
362,000

 
125,000

 
775,000

 
250,000

Total interest expense
1,124,000

 
842,000

 
2,297,000

 
1,635,000

Net interest income before provision for loan losses
5,855,000

 
5,518,000

 
11,131,000

 
10,919,000

Provision for loan losses
(450,000
)
 
(600,000
)
 
(800,000
)
 
(700,000
)
Net interest income after provision for loan losses
6,305,000

 
6,118,000

 
11,931,000

 
11,619,000

Noninterest income:
 

 
 

 
 
 
 
Fees and service charges
530,000

 
557,000

 
1,059,000

 
1,036,000

Bank owned life insurance
107,000

 
101,000

 
208,000

 
197,000

Gain on calls and sales of securities, net
32,000

 

 
56,000

 
152,000

Gain on sales of mortgage loans
19,000

 
55,000

 
37,000

 
65,000

Gain on sale of other real estate owned
6,000

 

 
6,000

 
53,000

Miscellaneous
138,000

 
169,000

 
285,000

 
297,000

Total noninterest income
832,000

 
882,000

 
1,651,000

 
1,800,000

Noninterest expenses:
 

 
 

 
 
 
 
Salaries and employee benefits
2,742,000

 
2,688,000

 
5,457,000

 
5,396,000

Occupancy, net
404,000

 
423,000

 
802,000

 
890,000

Equipment
148,000

 
165,000

 
298,000

 
321,000

Data processing
477,000

 
459,000

 
949,000

 
912,000

Advertising
157,000

 
258,000

 
308,000

 
470,000

FDIC insurance premium
90,000

 
117,000

 
196,000

 
230,000

Charitable contributions
90,000

 
70,000

 
160,000

 
140,000

Stationery and supplies
47,000

 
43,000

 
80,000

 
60,000

Legal
46,000

 
105,000

 
90,000

 
193,000

Bank-card related services
150,000

 
131,000

 
281,000

 
254,000

Other real estate owned
28,000

 
75,000

 
102,000

 
161,000

Miscellaneous
620,000

 
571,000

 
1,178,000

 
1,127,000

Total noninterest expenses
4,999,000

 
5,105,000

 
9,901,000

 
10,154,000

Income before income tax expense
2,138,000

 
1,895,000

 
3,681,000

 
3,265,000

Income tax expense
776,000

 
673,000

 
1,328,000

 
1,126,000

Net income
1,362,000

 
1,222,000

 
2,353,000

 
2,139,000

Dividends on preferred stock

 
171,000

 

 
342,000

Net income available to common shareholders
$
1,362,000

 
$
1,051,000

 
$
2,353,000

 
$
1,797,000

Basic and diluted earnings per common share
$
0.22

 
$
0.17

 
$
0.39

 
$
0.30

Weighted average number of basic and diluted common shares outstanding
6,111,729

 
6,086,474

 
6,102,040

 
6,066,191


See accompanying notes to consolidated financial statements. 

2


Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Comprehensive Income
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
1,362,000

 
$
1,222,000

 
$
2,353,000

 
$
2,139,000

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in unrealized holding gains (losses) on securities available-for-sale
244,000

 
(325,000
)
 
916,000

 
138,000

Reclassification adjustment for gains in net income
(20,000
)
 

 
(35,000
)
 
(91,000
)
Accretion of loss on securities reclassified to held to maturity
25,000

 
34,000

 
70,000

 
121,000

Change in fair value of interest rate swap

 
37,000

 
37,000

 
71,000

Total other comprehensive income (loss)
249,000

 
(254,000
)
 
988,000

 
239,000

Total comprehensive income
$
1,611,000

 
$
968,000

 
$
3,341,000

 
$
2,378,000

 
See accompanying notes to consolidated financial statements.


3


Stewardship Financial Corporation and Subsidiary
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
 
Six Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
Accumulated
Other
Comprehensive
 
 
 
Preferred
 
Common Stock
 
Retained
 
Income
 
 
 
Stock
 
Shares
 
Amount
 
Earnings
 
(Loss), Net
 
Total
Balance -- December 31, 2015
$

 
6,085,528

 
$
41,410,000

 
$
7,008,000

 
$
(845,000
)
 
$
47,573,000

Cash dividends declared on common stock

 

 

 
(305,000
)
 

 
(305,000
)
Payment of discount on dividend reinvestment plan

 

 
(2,000
)
 

 

 
(2,000
)
Common stock issued under dividend reinvestment plan

 
6,700

 
36,000

 

 

 
36,000

Common stock issued under stock plans

 
1,761

 
10,000

 

 

 
10,000

Issuance of restricted stock

 
34,332

 
198,000

 
(198,000
)
 

 

Amortization of restricted stock, net

 
(15,291
)
 
(86,000
)
 
114,000

 

 
28,000

Tax benefit from restricted stock vesting

 

 
5,000

 

 

 
5,000

Net income

 

 

 
2,353,000

 

 
2,353,000

Other comprehensive income

 

 

 

 
988,000

 
988,000

Balance -- June 30, 2016
$

 
6,113,030

 
$
41,571,000

 
$
8,972,000

 
$
143,000

 
$
50,686,000


 
Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
Accumulated
Other
Comprehensive
 
 
 
Preferred
 
Common Stock
 
Retained
 
Income
 
 
 
Stock
 
Shares
 
Amount
 
Earnings
 
(Loss), Net
 
Total
Balance -- December 31, 2014
$
14,984,000

 
6,034,933

 
$
41,125,000

 
$
3,817,000

 
$
(957,000
)
 
$
58,969,000

Cash dividends declared on common stock

 

 

 
(242,000
)
 

 
(242,000
)
Payment of discount on dividend reinvestment plan

 

 
(2,000
)
 

 

 
(2,000
)
Cash dividends declared on preferred stock

 

 

 
(342,000
)
 

 
(342,000
)
Common stock issued under dividend reinvestment plan

 
5,635

 
30,000

 

 

 
30,000

Common stock issued under stock plans

 
4,219

 
21,000

 

 

 
21,000

Issuance of restricted stock

 
50,974

 
279,000

 
(279,000
)
 

 

Amortization of restricted stock, net

 
(7,062
)
 
(38,000
)
 
75,000

 

 
37,000

Tax benefit from restricted stock vesting

 

 
3,000

 

 

 
3,000

Amortization of issuance costs
5,000

 

 

 
(5,000
)
 

 

Net income

 

 

 
2,139,000

 

 
2,139,000

Other comprehensive income

 

 

 

 
239,000

 
239,000

Balance -- June 30, 2015
$
14,989,000

 
6,088,699

 
$
41,418,000

 
$
5,163,000

 
$
(718,000
)
 
$
60,852,000


See accompanying notes to consolidated financial statements.

4


Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended
 
June 30,
 
2016
 
2015
Cash flows from operating activities:
 

 
 

Net income
$
2,353,000

 
$
2,139,000

Adjustments to reconcile net income to
 

 
 

net cash provided by operating activities:
 

 
 

Depreciation and amortization of premises and equipment
185,000

 
186,000

Amortization of premiums and accretion of discounts, net
285,000

 
338,000

Amortization of restricted stock
28,000

 
37,000

Amortization of subordinated debenture issuance costs
33,000

 

Accretion of deferred loan fees
34,000

 
42,000

Provision for loan losses
(800,000
)
 
(700,000
)
Originations of mortgage loans held for sale
(2,825,000
)
 
(5,653,000
)
Proceeds from sale of mortgage loans
3,803,000

 
4,302,000

Gain on sales of mortgage loans
(37,000
)
 
(65,000
)
Gain on calls and sales of securities
(56,000
)
 
(152,000
)
Gain on sale of other real estate owned
(6,000
)
 
(53,000
)
Deferred income tax expense
248,000

 
210,000

Increase in accrued interest receivable
55,000

 
88,000

Increase (decrease) in accrued interest payable
(9,000
)
 
58,000

Earnings on bank owned life insurance
(208,000
)
 
(197,000
)
Decrease in other assets
339,000

 
801,000

Decrease in other liabilities
(117,000
)
 
(2,053,000
)
Net cash provided by (used in) operating activities
3,305,000

 
(672,000
)
Cash flows from investing activities:
 

 
 

Purchase of securities available-for-sale
(21,288,000
)
 
(57,000
)
Proceeds from maturities and principal repayments on securities available-for-sale
6,305,000

 
6,258,000

Proceeds from sales and calls on securities available-for-sale
11,050,000

 
27,845,000

Purchase of securities held to maturity
(24,898,000
)
 
(13,182,000
)
Proceeds from maturities and principal repayments on securities held to maturity
3,464,000

 
4,921,000

Proceeds from calls on securities held to maturity
16,570,000

 
5,100,000

Sale (purchase) of FHLB-NY stock
(42,000
)
 
944,000

Net increase in loans
(11,055,000
)
 
(29,317,000
)
Proceeds from sale of other real estate owned
184,000

 
1,149,000

Purchase of bank owned life insurance
(2,000,000
)
 

Additions to premises and equipment
(64,000
)
 
(584,000
)
Net cash provided by (used in) investing activities
(21,774,000
)
 
3,077,000

Cash flows from financing activities:
 

 
 

Net increase in noninterest-bearing deposits
12,633,000

 
16,825,000

Net increase in interest-bearing deposits
9,083,000

 
12,698,000

Net decrease in short term borrowings

 
(21,700,000
)
Cash dividends paid on common stock
(305,000
)
 
(242,000
)
Cash dividends paid on preferred stock

 
(342,000
)
Payment of discount on dividend reinvestment plan
(2,000
)
 
(2,000
)
Issuance of common stock for cash
46,000

 
51,000

Tax benefit from restricted stock vesting
5,000

 
3,000

Net cash provided by financing activities
21,460,000

 
7,291,000

Net increase in cash and cash equivalents
2,991,000

 
9,696,000

Cash and cash equivalents - beginning
10,910,000

 
10,086,000

Cash and cash equivalents - ending
$
13,901,000

 
$
19,782,000


5



Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows (continued)
(Unaudited)
 
 
Six Months Ended
 
June 30,
 
2016
 
2015
Supplemental disclosures of cash flow information:
 

 
 

Cash paid during the period for interest
$
2,306,000

 
$
1,578,000

Cash paid during the period for income taxes
$
746,000

 
$
1,024,000

Transfers from loans to other real estate owned
$
152,000

 
$

 
See accompanying notes to consolidated financial statements.  


6


Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
June 30, 2016
(Unaudited)
 
Note 1. Summary of Significant Accounting Policies
 
Certain information and note disclosures normally included in the unaudited consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Stewardship Financial Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the SEC on March 24, 2016 (the “2015 Annual Report”).
 
The interim unaudited consolidated financial statements included herein have been prepared in accordance with instructions for Form 10-Q and the rules and regulations of the SEC and, therefore, do not include information or footnotes necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with GAAP. However, all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary for a fair presentation of the interim consolidated financial statements, have been included. The results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of the results which may be expected for the entire year.
 
Principles of consolidation
 
The consolidated financial statements include the accounts of Stewardship Financial Corporation and its wholly-owned subsidiary, Atlantic Stewardship Bank (the “Bank”), together referred to as “the Corporation”. The Bank includes its wholly-owned subsidiaries, Stewardship Investment Corporation, Stewardship Realty LLC, Atlantic Stewardship Insurance Company, LLC and several other subsidiaries formed to hold title to properties acquired through foreclosure or deed in lieu of foreclosure. The Bank’s subsidiaries have an insignificant impact on the Bank’s daily operations. All intercompany accounts and transactions have been eliminated in the consolidated financial statements.
 
The consolidated financial statements of the Corporation have been prepared in conformity with GAAP. In preparing the consolidated financial statements, management is required to make estimates and assumptions, based on available information, that affect the amounts reported in the consolidated financial statements and disclosures provided. Actual results could differ significantly from those estimates.
 
Material estimates
 
Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses and deferred income taxes. Management believes the Corporation’s policies with respect to the methodology for the determination of the allowance for loan losses and the evaluation of deferred income taxes involves a higher degree of complexity and requires management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. These critical policies and their application are periodically reviewed with the Audit Committee and the Board of Directors.
 
Adoption of New Accounting Standards
 
In April 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2015-03, “Interest – Imputation of Interest (Subtopic 835-30) – Simplifying the Presentation of Debt Issuance Costs.” This ASU is part of the FASB’s initiative to reduce complexity in accounting standards. To simplify presentation of debt issuance costs, the amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments in ASU 2015-03 are effective for fiscal years, including interim periods, beginning after December 15, 2015. The adoption of the amendments in this standard did not have a material impact on the Corporation’s consolidated financial statements.


7


In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Liabilities." This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This amendment supersedes the guidance to classify equity securities with readily determinable fair values into different categories, requires equity securities to be measured at fair value with changes in the fair value recognized through net income, and simplifies the impairment assessment of equity investments without readily determinable fair values. The amendment requires public business entities that are required to disclose the fair value of financial instruments measured at amortized cost on the balance sheet to measure that fair value using the exit price notion. The amendment requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option. The amendment requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements. The amendment reduces diversity in current practice by clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets. This amendment is effective for fiscal years, including interim periods, beginning after December 15, 2017. Entities should apply the amendment by means of a cumulative-effect adjustment as of the beginning of the fiscal year of adoption, with the exception of the amendment related to equity securities without readily determinable fair values, which should be applied prospectively to equity investments that exist as of the date of adoption. The Corporation intends to adopt the accounting standard during the first quarter of 2018, and is currently evaluating the impact that the adoption of the guidance will have on the Corporation's consolidated financial statements.
 
In February 2016, the FASB issued ASU 2016-02, “Leases (Subtopic 842).” This ASU requires all lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. Lessor accounting remains largely unchanged under the new guidance. The amendments in ASU 2016-02 are effective for fiscal years, including interim periods, beginning after December 15, 2018. Early adoption of ASU 2016-02 is permitted. The Corporation is currently assessing the impact that the adoption of the guidance will have on the Corporation's consolidated financial statements.
 
In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The objective of this ASU is to simplify accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under ASU 2016-09, all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. An entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current accounting) or account for forfeitures when they occur. Within the Cash Flow Statement, excess tax benefits should be classified along with other income tax cash flows as an operating activity, and cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity. The amendments in ASU 2016-09 are effective for fiscal years, including interim periods, beginning after December 15, 2016. Early adoption of ASU 2016-09 is permitted. The Corporation is currently assessing the impact that the adoption of the guidance will have on the Corporation's consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments by a reporting entity at each reporting date. The amendments in this ASU require financial assets measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses would represent a valuation account that would be deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The income statement would reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses would be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity will be required to use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The amendments in ASU

8


2016-13 are effective for fiscal years, including interim periods, beginning after December 15, 2019. Early adoption of ASU 2016-09 is permitted for fiscal years beginning after December 15, 2018. The Corporation is currently evaluating the potential impact that the adoption of the guidance will have on the Corporation's consolidated financial statements.

Note 2. Securities – Available-for-Sale and Held to Maturity
 
The fair value of the available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:
 
 
June 30, 2016
 
Amortized
 
Gross Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
U.S. government-sponsored agencies
$
28,426,000

 
$
164,000

 
$
20,000

 
$
28,570,000

Obligations of state and political
 

 
 

 
 

 
 

subdivisions
1,406,000

 
26,000

 

 
1,432,000

Mortgage-backed securities - residential
50,648,000

 
670,000

 
32,000

 
51,286,000

Asset-backed securities (a)
9,291,000

 

 
205,000

 
9,086,000

Corporate debt
4,500,000

 
10,000

 
85,000

 
4,425,000

 
 
 
 
 
 
 
 
Total debt securities
94,271,000

 
870,000

 
342,000

 
94,799,000

Other equity investments
3,832,000

 

 
98,000

 
3,734,000

 
 
 
 
 
 
 
 
 
$
98,103,000

 
$
870,000

 
$
440,000

 
$
98,533,000

 
 
December 31, 2015
 
Amortized
 
Gross Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
U.S. government-sponsored agencies
$
31,266,000

 
$
81,000

 
$
393,000

 
$
30,954,000

Obligations of state and political
 

 
 

 
 

 
 

subdivisions
1,409,000

 
2,000

 
1,000

 
1,410,000

Mortgage-backed securities - residential
45,520,000

 
213,000

 
496,000

 
45,237,000

Asset-backed securities (a)
9,877,000

 

 
176,000

 
9,701,000

Corporate debt
2,500,000

 

 
81,000

 
2,419,000

 
 
 
 
 
 
 
 
Total debt securities
90,572,000

 
296,000

 
1,147,000

 
89,721,000

Other equity investments
3,778,000

 

 
145,000

 
3,633,000

 
 
 
 
 
 
 
 
 
$
94,350,000

 
$
296,000

 
$
1,292,000

 
$
93,354,000

 
(a) Collateralized by student loans
 
Cash proceeds realized from sales and calls of securities available-for-sale for the three and six months ended June 30, 2016 were $9,000,000 and $11,050,000, respectively. There were no cash proceeds realized from sales and calls of securities available-for-sale for the three months ended June 30, 2015. Cash proceeds realized from sales and calls of securities available-for-sale for the six months ended June 30, 2015 were $27,845,000. There were gross gains totaling $7,000 and no gross losses realized on sales and calls during the three and six months ended June 30, 2016. While there were no gross gains and no gross losses realized on sales or calls during the three months ended June 30, 2015, gross gains and gross losses realized on sales and calls during the six months ended June 30, 2015 totaled $213,000 and $61,000, respectively.



9



The following is a summary of the held to maturity securities and related gross unrealized gains and losses:

 
June 30, 2016
 
Amortized
 
Gross Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
U.S. Treasury
$
999,000

 
$
20,000

 
$

 
$
1,019,000

U.S. government-sponsored agencies
24,129,000

 
131,000

 
10,000

 
24,250,000

Obligations of state and political
 

 
 

 
 

 
 

subdivisions
10,223,000

 
167,000

 

 
10,390,000

Mortgage-backed securities - residential
30,315,000

 
798,000

 

 
31,113,000

 
 
 
 
 
 
 
 
 
$
65,666,000

 
$
1,116,000

 
$
10,000

 
$
66,772,000

 
 
December 31, 2015
 
Amortized
 
Gross Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
U.S. Treasury
$
999,000

 
$

 
$
11,000

 
$
988,000

U.S. government-sponsored agencies
15,109,000

 
132,000

 
24,000

 
15,217,000

Obligations of state and political
 

 
 

 
 

 
 

subdivisions
11,219,000

 
268,000

 

 
11,487,000

Mortgage-backed securities - residential
33,411,000

 
295,000

 
117,000

 
33,589,000

 
 
 
 
 
 
 
 
 
$
60,738,000

 
$
695,000

 
$
152,000

 
$
61,281,000

 
Cash proceeds realized from calls of securities held to maturity for the three and six months ended June 30, 2016 were $10,230,000 and $16,570,000, respectively. Cash proceeds realized from calls of securities held to maturity for the three and six months ended June 30, 2015 were $2,000,000 and $5,100,000, respectively. There were gross gains totaling $25,000 and no gross losses realized on calls during the three months ended June 30, 2016. There were gross gains totaling $49,000 and no gross losses realized on calls during the six months ended June 30, 2016. There were no gross gains and no gross losses realized on calls during the three and six months ended June 30, 2015.
 
Mortgage-backed securities are a type of asset-backed security secured by a mortgage or collection of mortgages, purchased by government agencies such as the Government National Mortgage Association and government sponsored agencies such as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, which then issue securities that represent claims on the principal and interest payments made by borrowers on the loans in the pool.
 
Issuers may have the right to call or prepay obligations with or without call or prepayment penalties. This might cause actual maturities to differ from the contractual maturities.

10



The following table presents the amortized cost and fair value of the debt securities portfolio by contractual maturity. As issuers may have the right to call or prepay obligations with or without call or prepayment premiums, the actual maturities may differ from contractual maturities. Securities not due at a single maturity date, such as mortgage-backed securities and asset-backed securities, are shown separately.
 
 
June 30, 2016
 
Amortized
Cost
 
Fair
Value
Available-for-sale
 

 
 

Within one year
$
500,000

 
$
502,000

After one year, but within five years
9,778,000

 
9,798,000

After five years, but within ten years
17,923,000

 
18,009,000

After ten years
6,131,000

 
6,118,000

Mortgage-backed securities - residential
50,648,000

 
51,286,000

Asset-backed securities
9,291,000

 
9,086,000

 
 
 
 
Total
$
94,271,000

 
$
94,799,000

 
 
 
 
Held to maturity
 

 
 

Within one year
$
3,137,000

 
$
3,155,000

After one year, but within five years
8,586,000

 
8,787,000

After five years, but within ten years
21,676,000

 
21,716,000

After ten years
1,952,000

 
2,001,000

Mortgage-backed securities - residential
30,315,000

 
31,113,000

 
 
 
 
Total
$
65,666,000

 
$
66,772,000

 
The following tables summarize the fair value and unrealized losses of those investment securities which reported an unrealized loss at June 30, 2016 and December 31, 2015, and if the unrealized loss position was continuous for the twelve months prior to June 30, 2016 and December 31, 2015.
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
June 30, 2016
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
U.S. government- sponsored agencies
$
1,994,000

 
$
(8,000
)
 
$
6,118,000

 
$
(12,000
)
 
$
8,112,000

 
$
(20,000
)
Obligations of state and political subdivisions

 

 

 

 

 

Mortgage-backed securities - residential
6,094,000

 
(11,000
)
 
3,888,000

 
(21,000
)
 
9,982,000

 
(32,000
)
Asset-backed securities
6,197,000

 
(69,000
)
 
2,889,000

 
(136,000
)
 
9,086,000

 
(205,000
)
Corporate debt
999,000

 
(1,000
)
 
1,416,000

 
(84,000
)
 
2,415,000

 
(85,000
)
Other equity investments

 

 
3,674,000

 
(98,000
)
 
3,674,000

 
(98,000
)
 
 

 
 

 
 

 
 

 
 

 
 

Total temporarily impaired securities
$
15,284,000

 
$
(89,000
)
 
$
17,985,000

 
$
(351,000
)
 
$
33,269,000

 
$
(440,000
)


11


December 31, 2015
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
U.S. government- sponsored agencies
$
18,396,000

 
$
(183,000
)
 
$
7,296,000

 
$
(210,000
)
 
$
25,692,000

 
$
(393,000
)
Obligations of state and political subdivisions
984,000

 
(1,000
)
 

 

 
984,000

 
(1,000
)
Mortgage-backed securities - residential
8,599,000

 
(69,000
)
 
16,278,000

 
(427,000
)
 
24,877,000

 
(496,000
)
Asset-backed securities
6,791,000

 
(56,000
)
 
2,910,000

 
(120,000
)
 
9,701,000

 
(176,000
)
Corporate debt

 

 
1,419,000

 
(81,000
)
 
1,419,000

 
(81,000
)
Other equity investments

 

 
3,573,000

 
(145,000
)
 
3,573,000

 
(145,000
)
 
 
 
 
 
 
 
 
 
 
 
 
Total temporarily impaired securities
$
34,770,000

 
$
(309,000
)
 
$
31,476,000

 
$
(983,000
)
 
$
66,246,000

 
$
(1,292,000
)
 
Held to Maturity
 
 
 
 
 
 
 
 
 
 
 
June 30, 2016
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
U.S. Treasury
$

 
$

 
$

 
$

 
$

 
$

U.S. government- sponsored agencies
1,891,000

 
(10,000
)
 

 

 
1,891,000

 
(10,000
)
Mortgage-backed securities - residential

 

 

 

 

 

 
 

 
 

 
 

 
 

 
 

 
 

Total temporarily impaired securities
$
1,891,000

 
$
(10,000
)
 
$

 
$

 
$
1,891,000

 
$
(10,000
)
 
December 31, 2015
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
U.S. Treasury
$
988,000

 
$
(11,000
)
 
$

 
$

 
$
988,000

 
$
(11,000
)
U.S. government- sponsored agencies
4,955,000

 
(24,000
)
 

 

 
4,955,000

 
(24,000
)
Mortgage-backed securities - residential
15,183,000

 
(90,000
)
 
1,066,000

 
(27,000
)
 
16,249,000

 
(117,000
)
 
 

 
 

 
 

 
 

 
 

 
 

Total temporarily impaired securities
$
21,126,000

 
$
(125,000
)
 
$
1,066,000

 
$
(27,000
)
 
$
22,192,000

 
$
(152,000
)
 
Other-Than-Temporary-Impairment
 
At June 30, 2016, there were available-for-sale investments comprising three U.S. government-sponsored agency securities, five mortgage-backed securities, one asset-backed security, two corporate debt securities, and one other equity investments security in a continuous loss position for twelve months or longer. Management has assessed the securities that were in an unrealized loss position at June 30, 2016 and December 31, 2015 and has determined that any decline in fair value below amortized cost primarily relates to changes in interest rates and market spreads and was temporary.

In making this determination management considered the following factors in estimating the cash flows expected to be collected from the security: the period of time the securities were in an unrealized loss position; the percentage decline in comparison to the securities’ amortized cost; any adverse conditions specifically related to the security, an

12


industry or a geographic area; the rating or changes to the rating by a credit rating agency; the financial condition of the issuer and guarantor and any recoveries or additional declines in fair value subsequent to the balance sheet date. Management expects to collect all amounts contractually due and none of the debt securities can be prepaid at less than the par values.
 
Management does not intend to sell these securities in an unrealized loss position and it is not more likely than not that we will be required to sell these securities before the recovery of their amortized cost bases, which may be at maturity.
 
Note 3. Loans and Allowance for Loan Losses
 
At June 30, 2016 and December 31, 2015, respectively, the loan portfolio consisted of the following:

 
June 30,
2016
 
December 31,
2015
Commercial:
 

 
 

Secured by real estate
$
35,632,000

 
$
37,993,000

Other
36,388,000

 
26,867,000

Commercial real estate
337,660,000

 
334,489,000

Commercial construction
7,097,000

 
4,609,000

Residential real estate
79,661,000

 
82,955,000

Consumer:
 

 
 

Secured by real estate
29,876,000

 
29,224,000

Other
522,000

 
580,000

Government Guaranteed Loans - guaranteed portion
10,734,000

 
9,626,000

Other
68,000

 
134,000

 
 
 
 
Total gross loans
537,638,000

 
526,477,000

 
 
 
 
Less: Deferred loan costs (fees), net
25,000

 
98,000

          Allowance for loan losses
8,388,000

 
8,823,000

 
8,413,000

 
8,921,000

 
 
 
 
Loans, net
$
529,225,000

 
$
517,556,000

 
The Corporation has purchased the guaranteed portion of several government guaranteed loans. Due to the guarantee of the principal amount of these loans, no allowance for loan losses is established for these government guaranteed loans.
 
At June 30, 2016 and December 31, 2015, loan participations sold by the Corporation to other lending institutions totaled approximately $8,749,000 and $8,527,000, respectively. These amounts are not included in the totals presented above.

13



Activity in the allowance for loan losses is summarized as follows:
 
 
For the three months ended June 30, 2016
 
Balance,
beginning
of period
 
Provision
charged
to operations
 
Loans
charged off
 
Recoveries
of loans
charged off
 
Balance,
end
of period
Commercial
$
3,720,000

 
$
(386,000
)
 
$
(1,000
)
 
$
340,000

 
$
3,673,000

Commercial real estate
4,413,000

 
(156,000
)
 
(64,000
)
 
31,000

 
4,224,000

Commercial construction
112,000

 
72,000

 

 

 
184,000

Residential real estate
106,000

 

 

 

 
106,000

Consumer
119,000

 
19,000

 
(7,000
)
 
1,000

 
132,000

Other loans
1,000

 
1,000

 
(2,000
)
 

 

Unallocated
69,000

 

 

 

 
69,000

 
 
 
 
 
 
 
 
 
 
Total
$
8,540,000

 
$
(450,000
)
 
$
(74,000
)
 
$
372,000

 
$
8,388,000

 
 
For the six months ended June 30, 2016
 
Balance,
beginning
of period
 
Provision
charged
to operations
 
Loans
charged off
 
Recoveries
of loans
charged off
 
Balance,
end
of period
Commercial
$
3,698,000

 
$
(402,000
)
 
$
(3,000
)
 
$
380,000

 
$
3,673,000

Commercial real estate
4,660,000

 
(431,000
)
 
(64,000
)
 
59,000

 
4,224,000

Commercial construction
114,000

 
70,000

 

 

 
184,000

Residential real estate
109,000

 
(3,000
)
 

 

 
106,000

Consumer
118,000

 
19,000

 
(7,000
)
 
2,000

 
132,000

Other loans
3,000

 
(1,000
)
 
(2,000
)
 

 

Unallocated
121,000

 
(52,000
)
 

 

 
69,000

 
 
 
 
 
 
 
 
 
 
Total
$
8,823,000

 
$
(800,000
)
 
$
(76,000
)
 
$
441,000

 
$
8,388,000

 
 
For the three months ended June 30, 2015
 
Balance,
beginning
of period
 
Provision
charged
to operations
 
Loans
charged off
 
Recoveries
of loans
charged off
 
Balance,
end
of period
Commercial
$
3,703,000

 
$
(503,000
)
 
$
(1,000
)
 
$
118,000

 
$
3,317,000

Commercial real estate
5,116,000

 
99,000

 

 
74,000

 
5,289,000

Commercial construction
106,000

 
(200,000
)
 

 
108,000

 
14,000

Residential real estate
146,000

 
(6,000
)
 

 

 
140,000

Consumer
151,000

 
(13,000
)
 

 
1,000

 
139,000

Other loans

 
4,000

 
(1,000
)
 

 
3,000

Unallocated
378,000

 
19,000

 

 

 
397,000

 
 
 
 
 
 
 
 
 
 
Total
$
9,600,000

 
$
(600,000
)
 
$
(2,000
)
 
$
301,000

 
$
9,299,000


14


 
For the six months ended June 30, 2015
 
Balance,
beginning
of period
 
Provision
charged
to operations
 
Loans
charged off
 
Recoveries
of loans
charged off
 
Balance,
end
of period
Commercial
$
3,704,000

 
$
(341,000
)
 
$
(272,000
)
 
$
226,000

 
$
3,317,000

Commercial real estate
5,017,000

 
171,000

 

 
101,000

 
5,289,000

Commercial construction
150,000

 
(477,000
)
 

 
341,000

 
14,000

Residential real estate
142,000

 
(2,000
)
 

 

 
140,000

Consumer
189,000

 
(52,000
)
 

 
2,000

 
139,000

Other loans
2,000

 
2,000

 
(1,000
)
 

 
3,000

Unallocated
398,000

 
(1,000
)
 

 

 
397,000

 
 
 
 
 
 
 
 
 
 
Total
$
9,602,000

 
$
(700,000
)
 
$
(273,000
)
 
$
670,000

 
$
9,299,000



 


 
 

 
 

 

 

 

 
 
 

 




15


The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of June 30, 2016 and December 31, 2015.


 
June 30, 2016
 
Commercial
 
Commercial
Real Estate
 
Commercial
Construction
 
Residential
Real Estate
 
Consumer
 
Government
Guaranteed
 
Other
Loans
 
Unallocated
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending allowance balance attributable to loans
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
79,000

 
$
613,000

 
$

 
$

 
$

 
$

 
$

 
$

 
$
692,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
3,594,000

 
3,611,000

 
184,000

 
106,000

 
132,000