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EX-32.2 - EX-32.2 - ACNB CORPa16-17136_1ex32d2.htm
EX-32.1 - EX-32.1 - ACNB CORPa16-17136_1ex32d1.htm
EX-31.2 - EX-31.2 - ACNB CORPa16-17136_1ex31d2.htm
EX-31.1 - EX-31.1 - ACNB CORPa16-17136_1ex31d1.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, 2016

 

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 28, 2016, was 6,061,062.

 

 

 



 

PART I - FINANCIAL INFORMATION

 

ACNB CORPORATION

ITEM 1 - FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)

 

 

 

September 30,

 

September 30,

 

December 31,

 

 Dollars in thousands, except per share data

 

 

2016

 

2015

 

2015

 

 

 

 

 

 

 

 

 

 ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

 $

13,705

 

 $

13,013

 

 $

13,468

 

Interest bearing deposits with banks

 

41,686

 

33,076

 

5,289

 

 

 

 

 

 

 

 

 

Total Cash and Cash Equivalents

 

55,391

 

46,089

 

18,757

 

 

 

 

 

 

 

 

 

Securities available for sale

 

143,940

 

108,708

 

125,693

 

Securities held to maturity, fair value $58,566; $74,069; $71,363

 

57,562

 

73,507

 

71,542

 

Loans held for sale

 

1,877

 

1,229

 

1,835

 

Loans, net of allowance for loan losses $14,488; $14,762; $14,747

 

857,535

 

810,490

 

838,213

 

Premises and equipment

 

18,224

 

17,952

 

18,044

 

Restricted investment in bank stocks

 

4,191

 

4,078

 

4,414

 

Investment in bank-owned life insurance

 

40,476

 

39,366

 

39,642

 

Investments in low-income housing partnerships

 

3,003

 

3,457

 

3,345

 

Goodwill

 

6,308

 

6,308

 

6,308

 

Intangible assets

 

774

 

1,118

 

1,033

 

Foreclosed assets held for resale

 

309

 

599

 

580

 

Other assets

 

19,279

 

19,642

 

18,519

 

 

 

 

 

 

 

 

 

Total Assets

 

 $

1,208,869

 

 $

1,132,543

 

 $

1,147,925

 

 

 

 

 

 

 

 

 

 LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 LIABILITIES

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Non-interest bearing

 

 $

186,035

 

 $

156,962

 

 $

166,224

 

Interest bearing

 

779,512

 

738,407

 

746,756

 

 

 

 

 

 

 

 

 

Total Deposits

 

965,547

 

895,369

 

912,980

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

35,503

 

37,724

 

35,202

 

Long-term borrowings

 

76,500

 

75,500

 

76,500

 

Other liabilities

 

10,565

 

9,405

 

8,528

 

 

 

 

 

 

 

 

 

Total Liabilities

 

1,088,115

 

1,017,998

 

1,033,210

 

 

 

 

 

 

 

 

 

 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; 6,123,662, 6,097,235 and 6,102,324 shares issued; 6,061,062, 6,034,635 and 6,039,724 shares outstanding

 

15,310

 

15,243

 

15,256

 

Treasury stock, at cost (62,600 shares)

 

(728)

 

(728)

 

(728)

 

Additional paid-in capital

 

10,849

 

10,290

 

10,387

 

Retained earnings

 

99,196

 

92,881

 

94,526

 

Accumulated other comprehensive loss

 

(3,873)

 

(3,141)

 

(4,726)

 

 

 

 

 

 

 

 

 

Total Stockholders’ Equity

 

120,754

 

114,545

 

114,715

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders’ Equity

 

 $

1,208,869

 

 $

1,132,543

 

 $

1,147,925

 

 

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

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

 INTEREST INCOME

 

 

 

 

 

 

 

 

 

Loans, including fees

 

 $

9,150

 

 $

8,699

 

 $

27,054

 

 $

26,256

 

Securities:

 

 

 

 

 

 

 

 

 

Taxable

 

770

 

743

 

2,360

 

2,337

 

Tax-exempt

 

156

 

208

 

496

 

660

 

Dividends

 

53

 

44

 

159

 

258

 

Other

 

52

 

23

 

86

 

62

 

 

 

 

 

 

 

 

 

 

 

Total Interest Income

 

10,181

 

9,717

 

30,155

 

29,573

 

 

 

 

 

 

 

 

 

 

 

 INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

Deposits

 

602

 

545

 

1,730

 

1,577

 

Short-term borrowings

 

10

 

5

 

38

 

33

 

Long-term borrowings

 

384

 

409

 

1,165

 

1,308

 

 

 

 

 

 

 

 

 

 

 

Total Interest Expense

 

996

 

959

 

2,933

 

2,918

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income

 

9,185

 

8,758

 

27,222

 

26,655

 

 

 

 

 

 

 

 

 

 

 

 PROVISION FOR LOAN LOSSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income after Provision for Loan Losses

 

9,185

 

8,758

 

27,222

 

26,655

 

 

 

 

 

 

 

 

 

 

 

 OTHER INCOME

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

631

 

624

 

1,734

 

1,734

 

Income from fiduciary activities

 

416

 

410

 

1,244

 

1,150

 

Earnings on investment in bank-owned life insurance

 

276

 

277

 

834

 

824

 

Net gains on sales or calls of securities

 

 

158

 

 

259

 

Gain on sales of premises and equipment

 

 

 

449

 

 

Service charges on ATM and debit card transactions

 

381

 

359

 

1,127

 

1,113

 

Commissions from insurance sales

 

1,269

 

1,223

 

3,700

 

3,503

 

Other

 

328

 

239

 

896

 

739

 

 

 

 

 

 

 

 

 

 

 

Total Other Income

 

3,301

 

3,290

 

9,984

 

9,322

 

 

 

 

 

 

 

 

 

 

 

 OTHER EXPENSES

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

5,580

 

5,118

 

16,609

 

15,706

 

Net occupancy

 

481

 

511

 

1,553

 

1,635

 

Equipment

 

740

 

758

 

2,212

 

2,223

 

Other tax

 

201

 

269

 

591

 

666

 

Professional services

 

217

 

197

 

670

 

621

 

Supplies and postage

 

178

 

175

 

491

 

493

 

Marketing and corporate relations

 

123

 

88

 

391

 

293

 

FDIC and regulatory

 

181

 

175

 

532

 

504

 

Intangible assets amortization

 

85

 

84

 

259

 

251

 

Foreclosed real estate expenses

 

72

 

112

 

112

 

220

 

Other operating

 

922

 

773

 

2,681

 

2,413

 

 

 

 

 

 

 

 

 

 

 

Total Other Expenses

 

8,780

 

8,260

 

26,101

 

25,025

 

 

 

 

 

 

 

 

 

 

 

Income before Income Taxes

 

3,706

 

3,788

 

11,105

 

10,952

 

 

 

 

 

 

 

 

 

 

 

 PROVISION FOR INCOME TAXES

 

938

 

976

 

2,808

 

2,787

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 $

2,768

 

 $

2,812

 

 $

8,297

 

 $

8,165

 

 

 

 

 

 

 

 

 

 

 

 PER SHARE DATA

 

 

 

 

 

 

 

 

 

Basic earnings

 

 $

0.46

 

 $

0.47

 

 $

1.37

 

 $

1.36

 

Cash dividends declared

 

 $

0.20

 

 $

0.20

 

 $

0.60

 

 $

0.60

 

 

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

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

 NET INCOME

 

 $

2,768

 

 $

2,812

 

 $

8,297

 

 $

8,165

 

 

 

 

 

 

 

 

 

 

 

 OTHER COMPREHENSIVE (LOSS) INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 SECURITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains arising during the period, net of income taxes of $(158), $(16), $265 and $(256), respectively

 

(308)

 

(34)

 

515

 

(497)

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for net gains included in net income, net of income taxes of $0, $(54), $0 and $(88), respectively (A) (C)

 

 

(104)

 

 

(171)

 

 

 

 

 

 

 

 

 

 

 

 PENSION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of pension net loss and prior service cost, net of income taxes of $59, $43, $175 and $129, respectively (B) (C)

 

113

 

84

 

338

 

250

 

 

 

 

 

 

 

 

 

 

 

TOTAL OTHER COMPREHENSIVE (LOSS) INCOME

 

(195)

 

(54)

 

853

 

(418)

 

 

 

 

 

 

 

 

 

 

 

TOTAL COMPREHENSIVE INCOME

 

 $

2,573

 

 $

2,758

 

 $

9,150

 

 $

7,747

 

 

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

 

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

 

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

 

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

 

4



 

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

Nine Months Ended September 30, 2016 and 2015

 

Dollars in thousands

 

Common
Stock

 

Treasury
Stock

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Loss

 

Total
Stockholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE – JANUARY 1, 2015

 

 $

15,196

 

 $

(728)

 

 $

9,948

 

 $

88,329

 

 $

(2,723)

 

 $

110,022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

8,165

 

 

8,165

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss, net of taxes

 

 

 

 

 

(418)

 

(418)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock shares issued (18,985 shares)

 

47

 

 

342

 

 

 

389

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared

 

 

 

 

(3,613)

 

 

(3,613)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE – SEPTEMBER 30, 2015

 

 $

15,243

 

 $

(728)

 

 $

10,290

 

 $

92,881

 

 $

(3,141)

 

 $

114,545

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE – JANUARY 1, 2016

 

 $

15,256

 

 $

(728)

 

 $

10,387

 

 $

94,526

 

 $

(4,726)

 

 $

114,715

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

8,297

 

 

8,297

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of taxes

 

 

 

 

 

853

 

853

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock shares issued (13,903 shares)

 

35

 

 

303

 

 

 

338

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock grants (7,435 shares)

 

19

 

 

100

 

 

 

119

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock compensation expense

 

 

 

59

 

 

 

59

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared

 

 

 

 

(3,627)

 

 

(3,627)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE – SEPTEMBER 30, 2016

 

 $

15,310

 

 $

(728)

 

 $

10,849

 

 $

99,196

 

 $

(3,873)

 

 $

120,754

 

 

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

 

2016

 

2015

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

 $

8,297

 

 $

8,165

 

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

 

 

 

 

 

Gain on sales of loans originated for sale

 

(477)

 

(337)

 

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

 

(28)

 

(36)

 

Gain on sale of premises and equipment

 

(449)

 

 

Earnings on investment in bank-owned life insurance

 

(834)

 

(824)

 

Gain on sales or calls of securities

 

 

(259)

 

Restricted stock compensation expense

 

59

 

 

Depreciation and amortization

 

1,324

 

1,308

 

Provision for loan losses

 

 

 

Net amortization of investment securities premiums

 

391

 

510

 

Decrease in accrued interest receivable

 

29

 

76

 

Decrease in accrued interest payable

 

(10)

 

(8)

 

Mortgage loans originated for sale

 

(29,761)

 

(22,192)

 

Proceeds from sales of loans originated for sale

 

30,196

 

22,923

 

(Increase) decrease in other assets

 

(887)

 

1,102

 

Increase in other liabilities

 

966

 

1,518

 

 

 

 

 

 

 

Net Cash Provided by Operating Activities

 

8,816

 

11,946

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Proceeds from maturities of investment securities held to maturity

 

13,809

 

7,581

 

Proceeds from maturities of investment securities available for sale

 

22,334

 

18,516

 

Proceeds from sales of investment securities available for sale

 

 

2,933

 

Purchase of investment securities available for sale

 

(39,127)

 

(13,118)

 

Purchase of investment securities held to maturity

 

 

(8,044)

 

Redemption of restricted investment in bank stocks

 

223

 

138

 

Net increase in loans

 

(19,660)

 

(27,520)

 

Purchase of bank-owned life insurance

 

 

(600)

 

Purchase of book of business

 

 

(174)

 

Capital expenditures

 

(2,025)

 

(1,283)

 

Proceeds from sales of premises and equipment

 

1,929

 

 

Proceeds from sales of foreclosed real estate

 

637

 

2,184

 

 

 

 

 

 

 

Net Cash Used in Investing Activities

 

(21,880)

 

(19,387)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Net increase in demand deposits

 

19,811

 

11,975

 

Net increase in time certificates of deposits and interest bearing deposits

 

32,756

 

38,518

 

Net increase (decrease) in short-term borrowings

 

301

 

(7,975)

 

Proceeds from long-term borrowings

 

9,000

 

11,000

 

Repayments on long-term borrowings

 

(9,000)

 

(16,437)

 

Dividends paid

 

(3,627)

 

(3,613)

 

Common stock issued

 

457

 

389

 

 

 

 

 

 

 

Net Cash Provided by Financing Activities

 

49,698

 

33,857

 

 

 

 

 

 

 

Net Increase in Cash and Cash Equivalents

 

36,634

 

26,416

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS — BEGINNING

 

18,757

 

19,673

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS — ENDING

 

 $

55,391

 

 $

46,089

 

 

 

 

 

 

 

Interest paid

 

 $

2,943

 

 $

2,926

 

Income taxes paid

 

 $

3,200

 

 $

975

 

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

 

 $

338

 

 $

1,130

 

 

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-two retail banking office locations in Adams, Cumberland, Franklin and York Counties, Pennsylvania. There is also a loan production office situated in York County, Pennsylvania.

 

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

 

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

 

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

 

The accounting policies followed by the Corporation are set forth in Note A to the Corporation’s consolidated financial statements in the 2015 ACNB Corporation Annual Report on Form 10-K, filed with the SEC on March 4, 2016. 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, 2016, are not necessarily indicative of the results to be expected for the full year. Fixed assets held for sale is measured at the lower of its carrying amount or fair value less cost to sell.

 

The Corporation has evaluated events and transactions occurring subsequent to the statement of condition date of September 30, 2016, 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 and Restricted Stock Plan

 

The Corporation has a simple capital structure. Basic earnings per share of common stock is computed based on 6,048,216 and 6,023,090 weighted average shares of common stock outstanding for the nine months ended September 30, 2016 and 2015, respectively, and 6,057,508 and 6,030,846 for the three months ended September 30, 2016 and 2015, respectively. All outstanding unvested restricted stock awards that contain rights to nonforfeitable dividends are considered participating securities for this calculation.

 

The Corporation has a Restricted Stock plan available to selected officers and employees of the Bank to advance the best interest of the Corporation and its shareholders. The plan provides those persons who have responsibility for its growth with additional incentive by allowing them to acquire ownership in the Corporation and thereby encouraging them to contribute to the success of the Corporation. To date, 7,435 shares were issued under this plan, which resulted in $59,000 of compensation expense. Of the 7,435 shares issued under the plan, 2,478 shares are fully vested and 4,957 will vest over the next two years.

 

7



 

3.              Retirement Benefits

 

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

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30

 

In thousands

 

2016

 

2015

 

2016

 

2015

 

Service cost

 

 $

199

 

 $

220

 

 $

597

 

 $

660

 

Interest cost

 

284

 

260

 

852

 

780

 

Expected return on plan assets

 

(609)

 

(635)

 

(1,824)

 

(1,906)

 

Amortization of net loss

 

172

 

120

 

513

 

360

 

Amortization of prior service cost

 

 

6

 

 

19

 

 

 

 

 

 

 

 

 

 

 

Net Periodic Benefit Expense (Income)

 

 $

46

 

 $

(29)

 

 $

138

 

 $

(87)

 

 

The Corporation previously disclosed in its consolidated financial statements for the year ended December 31, 2015, that it had not yet determined the amount the Bank planned on contributing to the defined benefit plan in 2016. As of September 30, 2016, it was determined that no contribution would be made for 2016. 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 375 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 $5,719,000 in standby letters of credit as of September 30, 2016. 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, 2016, for guarantees under standby letters of credit issued is not material.

 

5.              Accumulated Other Comprehensive Loss

 

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

 

In thousands

 

Unrealized
Gains on
Securities

 

Pension
Liability

 

Accumulated Other
Comprehensive
Loss

 

BALANCE — SEPTEMBER 30, 2016

 

 $

1,679

 

 $

(5,552)

 

 $

(3,873)

 

BALANCE DECEMBER 31, 2015

 

 $

1,164

 

 $

(5,890)

 

 $

(4,726)

 

BALANCE — SEPTEMBER 30, 2015

 

 $

1,902

 

 $

(5,043)

 

 $

(3,141)

 

 

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, 2016 and 2015, is as follows:

 

In thousands

 

Banking

 

Insurance

 

Total

 

2016

 

 

 

 

 

 

 

Net interest income and other income from external customers

 

 $

33,871

 

 $

3,349

 

 $

37,220

 

Income before income taxes

 

10,424

 

681

 

11,105

 

Total assets

 

1,199,365

 

9,504

 

1,208,869

 

Capital expenditures

 

2,013

 

12

 

2,025

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

Net interest income and other income from external customers

 

 $

32,331

 

 $

3,646

 

 $

35,977

 

Income before income taxes

 

10,354

 

598

 

10,952

 

Total assets

 

1,122,465

 

10,078

 

1,132,543

 

Capital expenditures

 

1,263

 

20

 

1,283

 

 

Segment information for the three month periods ended September 30, 2016 and 2015, is as follows:

 

In thousands

 

Banking

 

Insurance

 

Total

 

2016

 

 

 

 

 

 

 

Net interest income and other income from external customers

 

 $

11,581

 

 $

919

 

 $

12,500

 

Income before income taxes

 

3,485

 

221

 

3,706

 

Total assets

 

1,199,365

 

9,504

 

1,208,869

 

Capital expenditures

 

326

 

 

326

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

Net interest income and other income from external customers

 

 $

10,687

 

 $

1,361

 

 $

12,048

 

Income before income taxes

 

3,557

 

231

 

3,788

 

Total assets

 

1,122,465

 

10,078

 

1,132,543

 

Capital expenditures

 

637

 

 

637

 

 

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

 

7.              Securities

 

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

 

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

 

9



 

Amortized cost and fair value of securities at September 30, 2016, and December 31, 2015, were as follows:

 

In thousands

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

 

 

 

 

 

 

 

 

 

 

SECURITIES AVAILABLE FOR SALE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SEPTEMBER 30, 2016

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

 $

75,709

 

 $

587

 

 $

60

 

 $

76,236

 

Mortgage-backed securities, residential

 

33,735

 

1,480

 

 

35,215

 

State and municipal

 

25,206

 

464

 

7

 

25,663

 

Corporate bonds

 

5,000

 

45

 

 

5,045

 

CRA mutual fund

 

1,044

 

24

 

 

1,068

 

Stock in other banks

 

702

 

24

 

13

 

713

 

 

 

 $

141,396

 

 $

2,624

 

 $

80

 

 $

143,940

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2015

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

 $

46,218

 

 $

124

 

 $

313

 

 $

46,029

 

Mortgage-backed securities, residential

 

41,528

 

1,336

 

25

 

42,839

 

State and municipal

 

27,437

 

642

 

1

 

28,078

 

Corporate bonds

 

7,000

 

20

 

65

 

6,955

 

CRA mutual fund

 

1,044

 

9

 

 

1,053

 

Stock in other banks

 

702

 

49

 

12

 

739

 

 

 

 $

123,929

 

 $

2,180

 

 $

416

 

 $

125,693

 

 

 

 

 

 

 

 

 

 

 

SECURITIES HELD TO MATURITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SEPTEMBER 30, 2016

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

 $

23,020

 

 $

198

 

 $

2

 

 $

23,216

 

Mortgage-backed securities, residential

 

34,542

 

808

 

 

35,350

 

 

 

 $

57,562

 

 $

1,006

 

 $

2

 

 $

58,566

 

DECEMBER 31, 2015

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

 $

31,044

 

 $

27

 

 $

176

 

 $

30,895

 

Mortgage-backed securities, residential

 

40,498

 

232

 

262

 

40,468

 

 

 

 $

71,542

 

 $

259

 

 $

438

 

 $

71,363

 

 

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, 2016, and December 31, 2015:

 

 

 

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, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

 $

19,365

 

 $

60

 

 $

 

 $

 

 $

19,365

 

 $

60

 

State and municipal

 

1,181

 

7

 

 

 

1,181

 

7

 

Stock in other banks

 

 

 

191

 

13

 

191

 

13

 

 

 

 $

20,546

 

 $

67

 

 $

191

 

 $

13

 

 $

20,737

 

 $

80

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

 $

31,992

 

 $

313

 

 $

 

 $

 

 $

31,992

 

 $

313

 

Mortgage-backed securities, residential

 

4,855

 

25

 

 

 

4,855

 

25

 

State and municipal

 

909

 

1

 

 

 

909

 

1

 

Corporate bond

 

4,935

 

65

 

 

 

4,935

 

65

 

Stock in other banks

 

191

 

12

 

 

 

191

 

12

 

 

 

 $

42,882

 

 $

416

 

 $

 

 $

 

 $

42,882

 

 $

416

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SECURITIES HELD TO MATURITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SEPTEMBER 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

 $

1,998

 

 $

2

 

 $

 

 $

 

 $

1,998

 

 $

2

 

 

 

 $

1,998

 

 $

2

 

 $

 

 $

 

 $

1,998

 

 $

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

 $

18,959

 

 $

83

 

 $

6,907

 

 $

93

 

 $

25,866

 

 $

176

 

Mortgage-backed securities, residential

 

3,109

 

13

 

15,420

 

249

 

18,529

 

262

 

 

 

 $

22,068

 

 $

96

 

 $

22,327

 

 $

342

 

 $

44,395

 

 $

438

 

 

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, 2016, eleven available for sale U.S. Government and agency securities had unrealized losses that individually did not exceed 1% of amortized cost. These securities have not 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, 2016, five available for sale state and municipal securities had unrealized losses that individually did not exceed 2% of amortized cost. These securities have not 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, 2016, one available for sale stock in other banks had an unrealized loss that did not exceed 7% of amortized cost. This security has been in a continuous loss position for 12 months or more. This unrealized loss relates principally to daily market changes.

 

At September 30, 2016, one held to maturity U.S. Government and agency security had an unrealized loss that did not exceed 1% of amortized cost. This security has not been in a continuous loss position for 12 months or more. This unrealized loss relates principally to changes in interest rates subsequent to the acquisition of the specific security.

 

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, 2016, 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, 2016, 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

 

 $

8,937

 

 $

8,995

 

 $

2,995

 

 $

3,001

 

Over 1 year through 5 years

 

69,117

 

69,827

 

20,025

 

20,215

 

Over 5 years through 10 years

 

27,663

 

27,922

 

 

 

Over 10 years

 

198

 

200

 

 

 

Mortgage-backed securities, residential

 

33,735

 

35,215

 

34,542

 

35,350

 

CRA mutual fund

 

1,044

 

1,068

 

 

 

Stock in other banks

 

702

 

713

 

 

 

 

 

 $

141,396

 

 $

143,940

 

 $

57,562

 

 $

58,566

 

 

The Corporation did not realize any gross gains or losses on sales of securities available for sale during the three and nine months ended September 30, 2016. The Corporation realized $158,000 gross gains and $0 gross losses on sales of securities available for sale during the three month period ended September 30, 2015. The Corporation realized gross gains of $259,000 and $0 in gross losses on sales of securities available for sale during the nine month period ended September 30, 2015.

 

At September 30, 2016, and December 31, 2015, securities with a carrying value of $139,056,000 and $117,646,000, respectively, were pledged as collateral as required by law on public and trust deposits, repurchase agreements, and for other purposes.

 

12



 

8.              Loans

 

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

 

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

 

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

 

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

 

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

 

Allowance for Credit Losses

 

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

 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility 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, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

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

 

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

 

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

 

13



 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

15



 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Junior liens inherently have more credit risk by virtue of the fact that another financial institution may have a higher

 

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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 loans secured by savings deposits. These loans originate primarily within the Corporation’s market area or with customers primarily from the market area.

 

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

 

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

 

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard, and doubtful within the Corporation’s internal risk rating system as of September 30, 2016, and December 31, 2015:

 

 In thousands

 

Pass

 

Special 
Mention

 

Substandard

 

Doubtful

 

Total

 

 SEPTEMBER 30, 2016

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 $

116,305

 

 $

4,974

 

 $

1,647

 

 $

 

 $

122,926

 

Commercial real estate

 

278,468

 

20,466

 

10,227

 

 

309,161

 

Commercial real estate construction

 

11,571

 

1,259

 

413

 

 

13,243

 

Residential mortgage

 

342,036

 

3,553

 

833

 

 

346,422

 

Home equity lines of credit

 

64,984

 

578

 

127

 

 

65,689

 

Consumer

 

14,582

 

 

 

 

14,582

 

 

 

 $

827,946

 

 $

30,830

 

 $

13,247

 

 $

 

 $

872,023

 

 

 

 

 

 

 

 

 

 

 

 

 

 DECEMBER 31, 2015

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 $

112,037

 

 $

3,744

 

 $

1,911

 

 $

 

 $

117,692

 

Commercial real estate

 

252,071

 

23,421

 

14,407

 

 

289,899

 

Commercial real estate construction

 

11,087

 

1,968

 

374

 

 

13,429

 

Residential mortgage

 

350,537

 

5,548

 

1,143

 

 

357,228

 

Home equity lines of credit

 

58,856

 

1,138

 

130

 

 

60,124

 

Consumer

 

14,588

 

 

 

 

14,588

 

 

 

 $

799,176

 

 $

35,819

 

 $

17,965

 

 $

 

 $

852,960

 

 

17



 

The following table summarizes information relative to impaired loans by loan portfolio class as of September 30, 2016, and December 31, 2015:

 

 

 

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, 2016