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, 2013

 

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 November 1, 2013, was 5,986,661.

 

 

 



 

PART I - FINANCIAL INFORMATION

 

ACNB CORPORATION

ITEM 1 - FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)

 

 

Dollars in thousands, except per share data

 

September 30,
2013

 

September 30,
2012

 

December 31,
2012

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

  $

16,371

 

  $

12,338

 

  $

19,078

Interest bearing deposits with banks

 

2,856

 

52,165

 

32,307

 

 

 

 

 

 

 

Total Cash and Cash Equivalents

 

19,227

 

64,503

 

51,385

 

 

 

 

 

 

 

Securities available for sale

 

135,163

 

175,889

 

165,790

Securities held to maturity, fair value $94,667; $48,971; $50,980

 

96,255

 

48,016

 

50,159

Loans held for sale

 

603

 

3,618

 

6,687

Loans, net of allowance for loan losses $16,797; $15,993; $16,825

 

701,251

 

686,082

 

691,311

Premises and equipment

 

15,545

 

14,529

 

15,131

Restricted investment in bank stocks

 

4,189

 

5,887

 

5,318

Investment in bank-owned life insurance

 

32,003

 

30,876

 

31,122

Investments in low-income housing partnerships

 

5,233

 

5,562

 

5,440

Goodwill

 

6,308

 

6,308

 

6,308

Intangible assets

 

1,928

 

2,570

 

2,409

Foreclosed assets held for resale

 

1,608

 

4,901

 

4,247

Other assets

 

15,217

 

14,282

 

14,688

 

 

 

 

 

 

 

Total Assets

 

  $

1,034,530

 

  $

1,063,023

 

  $

1,049,995

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Non-interest bearing

 

  $

130,110

 

  $

119,086

 

  $

119,297

Interest bearing

 

689,121

 

712,265

 

714,879

 

 

 

 

 

 

 

Total Deposits

 

819,231

 

831,351

 

834,176

 

 

 

 

 

 

 

Short-term borrowings

 

57,418

 

52,926

 

47,303

Long-term borrowings

 

47,767

 

70,015

 

59,954

Other liabilities

 

7,094

 

7,054

 

7,298

 

 

 

 

 

 

 

Total Liabilities

 

931,510

 

961,346

 

948,731

 

 

 

 

 

 

 

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; 6,049,261, 6,023,320 and 6,027,968 shares issued; 5,986,661, 5,960,720 and 5,965,368 shares outstanding

 

15,123

 

15,058

 

15,070

Treasury stock, at cost (62,600 shares)

 

(728)

 

(728)

 

(728)

Additional paid-in capital

 

9,557

 

9,183

 

9,246

Retained earnings

 

81,532

 

76,802

 

77,888

Accumulated other comprehensive (loss) income

 

(2,464)

 

1,362

 

(212)

 

 

 

 

 

 

 

Total Stockholders’ Equity

 

103,020

 

101,677

 

101,264

 

 

 

 

 

 

 

Total Liabilities and Stockholders’ Equity

 

  $

1,034,530

 

  $

1,063,023

 

  $

1,049,995

 

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

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

INTEREST INCOME

 

 

 

 

 

 

 

 

Loans, including fees

 

  $

7,840

 

  $

8,484

 

  $

24,074

 

  $

25,551

Securities:

 

 

 

 

 

 

 

 

Taxable

 

1,078

 

1,158

 

3,166

 

3,758

Tax-exempt

 

280

 

393

 

922

 

1,130

Dividends

 

6

 

4

 

16

 

11

Other

 

16

 

28

 

64

 

51

 

 

 

 

 

 

 

 

 

Total Interest Income

 

9,220

 

10,067

 

28,242

 

30,501

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

Deposits

 

500

 

864

 

1,721

 

2,652

Short-term borrowings

 

17

 

19

 

44

 

60

Long-term borrowings

 

419

 

643

 

1,321

 

2,040

 

 

 

 

 

 

 

 

 

Total Interest Expense

 

936

 

1,526

 

3,086

 

4,752

 

 

 

 

 

 

 

 

 

Net Interest Income

 

8,284

 

8,541

 

25,156

 

25,749

 

 

 

 

 

 

 

 

 

PROVISION FOR LOAN LOSSES

 

150

 

1,125

 

1,300

 

3,375

 

 

 

 

 

 

 

 

 

Net Interest Income after Provision for Loan Losses

 

8,134

 

7,416

 

23,856

 

22,374

 

 

 

 

 

 

 

 

 

OTHER INCOME

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

596

 

648

 

1,682

 

1,803

Income from fiduciary activities

 

333

 

288

 

976

 

932

Earnings on investment in bank-owned life insurance

 

246

 

255

 

741

 

735

Gain on life insurance proceeds

 

 

63

 

 

63

Net gains on sales or calls of securities

 

 

 

 

7

Service charges on ATM and debit card transactions

 

376

 

323

 

1,051

 

955

Commissions from insurance sales

 

1,079

 

1,133

 

3,609

 

3,633

Other

 

217

 

262

 

873

 

725

 

 

 

 

 

 

 

 

 

Total Other Income

 

2,847

 

2,972

 

8,932

 

8,853

 

 

 

 

 

 

 

 

 

OTHER EXPENSES

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

4,546

 

4,527

 

14,158

 

13,772

Net occupancy

 

463

 

487

 

1,471

 

1,477

Equipment

 

727

 

573

 

2,177

 

1,855

Other tax

 

199

 

221

 

669

 

614

Professional services

 

232

 

186

 

667

 

628

Supplies and postage

 

127

 

141

 

443

 

468

Marketing and corporate relations

 

81

 

67

 

293

 

257

FDIC and regulatory

 

191

 

189

 

592

 

640

Intangible assets amortization

 

160

 

160

 

481

 

481

Foreclosed real estate expenses

 

503

 

116

 

410

 

346

Other operating

 

817

 

825

 

2,458

 

2,334

 

 

 

 

 

 

 

 

 

Total Other Expenses

 

8,046

 

7,492

 

23,819

 

22,872

 

 

 

 

 

 

 

 

 

Income before Income Taxes

 

2,935

 

2,896

 

8,969

 

8,355

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

627

 

592

 

1,921

 

1,687

 

 

 

 

 

 

 

 

 

Net Income

 

  $

2,308

 

  $

2,304

 

  $

7,048

 

  $

6,668

 

 

 

 

 

 

 

 

 

PER SHARE DATA

 

 

 

 

 

 

 

 

Basic earnings

 

  $

0.39

 

  $

0.39

 

  $

1.18

 

  $

1.12

Cash dividends declared

 

  $

0.19

 

  $

0.19

 

  $

0.57

 

  $

0.57

 

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

 

3



 

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

Dollars in thousands

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

NET INCOME

 

  $

2,308

 

  $

2,304

 

  $

7,048

 

  $

6,668

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE (LOSS) INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SECURITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains arising during the period, net of income taxes of $(82), $208, $(1,336) and $196, respectively

 

(159)

 

407

 

(2,595)

 

386

 

 

 

 

 

 

 

 

 

Reclassification adjustment for net gains included in net income, net of income taxes of $0, $0, $0 and $(2), respectively (A) (C)

 

 

 

 

(5)

 

 

 

 

 

 

 

 

 

PENSION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in plan assets and benefit obligations, net of income taxes of $58, $56, $176 and $170, respectively (B) (C)

 

115

 

109

 

343

 

326

 

 

 

 

 

 

 

 

 

TOTAL OTHER COMPREHENSIVE (LOSS) INCOME

 

(44)

 

516

 

(2,252)

 

707

 

 

 

 

 

 

 

 

 

TOTAL COMPREHENSIVE INCOME

 

  $

2,264

 

  $

2,820

 

  $

4,796

 

  $

7,375

 

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

 

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

 

(B) 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, 2013 and 2012

 

 

Dollars in thousands

 

Common
Stock

 

Treasury
Stock

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Total
Stockholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE – JANUARY 1, 2012

 

  $

15,021

 

  $

(728)

 

  $

9,000

 

  $

73,526

 

  $

655

 

  $

97,474

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

6,668

 

 

6,668

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of taxes

 

 

 

 

 

707

 

707

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock shares issued (14,911 shares)

 

37

 

 

183

 

 

 

220

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared

 

 

 

 

(3,392)

 

 

(3,392)

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE – SEPTEMBER 30, 2012

 

  $

15,058

 

  $

(728)

 

  $

9,183

 

  $

76,802

 

  $

1,362

 

  $

101,677

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE – JANUARY 1, 2013

 

  $

15,070

 

  $

(728)

 

  $

9,246

 

  $

77,888

 

  $

(212)

 

  $

101,264

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

7,048

 

 

7,048

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss, net of taxes

 

 

 

 

 

(2,252)

 

(2,252)

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock shares issued (21,293 shares)

 

53

 

 

311

 

 

 

364

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared

 

 

 

 

(3,404)

 

 

(3,404)

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE – SEPTEMBER 30, 2013

 

  $

15,123

 

  $

(728)

 

  $

9,557

 

  $

81,532

 

  $

(2,464)

 

  $

103,020

 

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

 

2013

 

2012

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

Net income

 

  $

7,048

 

  $

6,668

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

 

 

 

 

Gain on sales of loans

 

(417)

 

(192)

Loss on sales of assets held for resale, including writedowns

 

173

 

143

Earnings on investment in bank-owned life insurance

 

(741)

 

(735)

Gain on life insurance proceeds

 

 

(63)

Gain on sales or calls of securities

 

 

(7)

Depreciation and amortization

 

1,500

 

1,527

Provision for loan losses

 

1,300

 

3,375

Net amortization of investment securities premiums

 

739

 

657

Decrease in accrued interest receivable

 

226

 

87

Decrease in accrued interest payable

 

(419)

 

(109)

Mortgage loans originated for sale

 

(18,882)

 

(19,534)

Proceeds from sales of loans originated for sale

 

25,383

 

16,445

Decrease in other assets

 

861

 

1,594

Increase in other liabilities

 

734

 

257

 

 

 

 

 

Net Cash Provided by Operating Activities

 

17,505

 

10,113

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

Proceeds from maturities of investment securities held to maturity

 

7,223

 

1,576

Proceeds from maturities of investment securities available for sale

 

33,202

 

51,695

Purchase of investment securities held to maturity

 

(53,689)

 

(39,651)

Purchase of investment securities available for sale

 

(6,875)

 

(18,341)

Net increase in loans

 

(11,741)

 

(12,283)

Redemption of restricted investment in bank stocks

 

1,129

 

1,259

Investment in low-income housing project

 

(249)

 

(2,106)

Purchase of bank-owned life insurance

 

(140)

 

(1,940)

Capital expenditures

 

(1,433)

 

(1,092)

Proceeds from life insurance death benefits

 

 

273

Proceeds from sale of foreclosed real estate

 

2,967

 

1,205

 

 

 

 

 

Net Cash Used in Investing Activities

 

(29,606)

 

(19,405)

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

Net increase in demand deposits

 

10,813

 

6,839

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

 

(25,758)

 

41,717

Net increase in short-term borrowings

 

10,115

 

6,964

Dividends paid

 

(3,404)

 

(3,392)

Common stock issued

 

364

 

220

Proceeds from long-term borrowings

 

2,000

 

10,000

Repayments on long-term borrowings

 

(14,187)

 

(11,176)

 

 

 

 

 

Net Cash (Used in) Provided by Financing Activities

 

(20,057)

 

51,172

 

 

 

 

 

Net (Decrease) Increase in Cash and Cash Equivalents

 

(32,158)

 

41,880

 

 

 

 

 

CASH AND CASH EQUIVALENTS — BEGINNING

 

51,385

 

22,623

 

 

 

 

 

CASH AND CASH EQUIVALENTS — ENDING

 

  $

19,227

 

  $

64,503

 

 

 

 

 

Interest paid

 

  $

3,505

 

  $

4,861

Incomes taxes paid

 

  $

2,225

 

  $

250

Loans transferred to foreclosed assets held for resale

 

  $

501

 

  $

1,812

 

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

 

6



 

ACNB CORPORATION

ITEM 1 — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.              Basis of Presentation

 

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

 

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

 

The Corporation, along with seven other banks, entered into a joint venture to form BankersRe Insurance Group, SPC (formerly Pennbanks Insurance Co., SPC), an offshore reinsurance company. Each participating entity owned an insurance cell through which its premiums and losses from credit life, disability, and accident insurance are funded.  Each entity was responsible for the activity in its respective cell. The financial activity for the Corporation’s insurance cell has been included in the consolidated financial statements and is not material to the consolidated financial statements. The segregated portfolio was novated to a third party during 2012.

 

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 2012 ACNB Corporation Annual Report on Form 10-K, filed with the SEC on March 15, 2013. 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, 2013, are not necessarily indicative of the results to be expected for the full year.

 

The Corporation has evaluated events and transactions occurring subsequent to the statement of condition date of September 30, 2013, for items that should potentially be recognized or disclosed in the consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

 

2.              Earnings Per Share

 

The Corporation has a simple capital structure. Basic earnings per share of common stock is computed based on 5,973,418 and 5,951,102 weighted average shares of common stock outstanding for the nine months ended September 30, 2013 and 2012, respectively, and 5,981,936 and 5,956,380 for the three months ended September 30, 2013 and 2012, respectively. The Corporation does not have dilutive securities outstanding.

 

7



 

3.              Retirement Benefits

 

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

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

In thousands

 

2013

 

2012

 

2013

 

2012

Service cost

 

 $

194

 

 $

163

 

 $

582

 

 $

488

Interest cost

 

223

 

231

 

669

 

694

Expected return on plan assets

 

(489)

 

(443)

 

(1,467)

 

(1,329)

Amortization of net loss

 

163

 

153

 

489

 

459

Amortization of transition obligation

 

 

2

 

 

7

Amortization of prior service cost

 

10

 

10

 

30

 

30

 

 

 

 

 

 

 

 

 

Net Periodic Benefit Cost

 

 $

101

 

 $

116

 

 $

303

 

 $

349

 

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

 

4.              Guarantees

 

The Corporation does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are written conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Corporation generally holds collateral and/or personal guarantees supporting these commitments. The Corporation had  $4,285,000 in standby letters of credit as of September 30, 2013. 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, 2013, for guarantees under standby letters of credit issued is not material.

 

5.              Accumulated Other Comprehensive Income (Loss)

 

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

 

 

In thousands

 

Unrealized
Gains on
Securities

 

Pension
Liability

 

Accumulated Other
Comprehensive
Income (Loss)

BALANCE — SEPTEMBER 30, 2013

 

 $

3,019

 

 $

(5,483)

 

 $

(2,464)

BALANCE DECEMBER 31, 2012

 

 $

5,614

 

 $

(5,826)

 

 $

(212)

BALANCE SEPTEMBER 30, 2012

 

 $

6,377

 

 $

(5,015)

 

 $

1,362

 

6.              Segment Reporting

 

Russell Insurance Group, Inc. (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, 2013 and 2012, is as follows:

 

 

In thousands

 

Banking

 

Insurance

 

Total

2013

 

 

 

 

 

 

Net interest income and other income from external customers

 

 $

30,786

 

 $

3,302

 

 $

34,088

Income before income taxes

 

8,470

 

499

 

8,969

Total assets

 

1,024,946

 

9,584

 

1,034,530

Capital expenditures

 

1,426

 

7

 

1,433

 

 

 

 

 

 

 

2012

 

 

 

 

 

 

Net interest income and other income from external customers

 

 $

31,117

 

 $

3,485

 

 $

34,602

Income before income taxes

 

7,857

 

498

 

8,355

Total assets

 

1,052,755

 

10,268

 

1,063,023

Capital expenditures

 

1,020

 

72

 

1,092

 

Segment information for the three month periods ended September 30, 2013 and 2012, is as follows:

 

 

In thousands

 

Banking

 

Insurance

 

Total

2013

 

 

 

 

 

 

Net interest income and other income from external customers

 

 $

10,343

 

 $

788

 

 $

11,131

Income before income taxes

 

2,813

 

122

 

2,935

Total assets

 

1,024,946

 

9,584

 

1,034,530

Capital expenditures

 

734

 

 

734

 

 

 

 

 

 

 

2012

 

 

 

 

 

 

Net interest income and other income from external customers

 

 $

10,512

 

 $

1,001

 

 $

11,513

Income before income taxes

 

2,809

 

87

 

2,896

Total assets

 

1,052,755

 

10,268

 

1,063,023

Capital expenditures

 

148

 

 

148

 

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

 

7.              Securities

 

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

 

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

 

9



 

Amortized cost and fair value of securities at September 30, 2013, and December 31, 2012, were as follows:

 

 

In thousands

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

 

 

 

 

 

 

 

 

SECURITIES AVAILABLE FOR SALE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SEPTEMBER 30, 2013

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

 $

21,127

 

 $

642

 

 $

 

 $

21,769

Mortgage-backed securities, residential

 

55,282

 

2,646

 

46

 

57,882

State and municipal

 

41,508

 

1,209

 

268

 

42,449

Corporate bonds

 

11,004

 

205

 

49

 

11,160

CRA mutual fund

 

1,044

 

4

 

 

1,048

Stock in other banks

 

627

 

228

 

 

855

 

 

 $

130,592

 

 $

4,934

 

 $

363

 

 $

135,163

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2012

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

 $

23,225

 

 $

1,016

 

 $

 

 $

24,241

Mortgage-backed securities, residential

 

75,816

 

4,767

 

 

80,583

State and municipal

 

49,568

 

2,246

 

10

 

51,804

Corporate bonds

 

7,008

 

286

 

8

 

7,286

CRA mutual fund

 

1,044

 

52

 

 

1,096

Stock in other banks

 

627

 

153

 

 

780

 

 

 $

157,288

 

 $

8,520

 

 $

18

 

 $

165,790

 

 

 

 

 

 

 

 

 

SECURITIES HELD TO MATURITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SEPTEMBER 30, 2013

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

 $

37,539

 

 $

221

 

 $

742

 

 $

37,018

Mortgage-backed securities, residential

 

58,716

 

71

 

1,138

 

57,649

 

 

 $

96,255

 

 $

292

 

 $

1,880

 

 $

94,667

DECEMBER 31, 2012

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

 $

30,115

 

 $

536

 

 $

6

 

 $

30,645

Mortgage-backed securities, residential

 

20,044

 

298

 

7

 

20,335

 

 

 $

50,159

 

 $

834

 

 $

13

 

 $

50,980

 

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, 2013, and December 31, 2012:

 

 

 

 

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, 2013

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities, residential

 

 $

5,466

 

 $

46

 

 $

 

 $

 

 $

5,466

 

 $

46

State and municipal

 

11,350

 

268

 

 

 

11,350

 

268

Corporate bonds

 

4,951

 

49

 

 

 

4,951

 

49

 

 

 $

21,767

 

 $

363

 

 $

 

 $

 

 $

21,767

 

 $

363

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal

 

 $

1,975

 

 $

10

 

 $

 

 $

 

 $

1,975

 

 $

10

Corporate bond

 

992

 

8

 

 

 

992

 

8

 

 

 $

2,967

 

 $

18

 

 $

 

 $

 

 $

2,967

 

 $

18

 

 

 

 

 

 

 

 

 

 

 

 

 

SECURITIES HELD TO MATURITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SEPTEMBER 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

 $

23,830

 

 $

699

 

 $

1,957

 

 $

43

 

 $

25,787

 

 $

742

Mortgage-backed securities, residential

 

44,094

 

1,138

 

 

 

44,094

 

1,138

 

 

 $

67,924

 

 $

1,837

 

 $

1,957

 

 $

43

 

 $

69,881

 

 $

1,880

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

 $

2,994

 

 $

6

 

 $

 

 $

 

 $

2,994

 

 $

6

Mortgage-backed security, residential

 

2,046

 

7

 

 

 

2,046

 

7

 

 

 $

5,040

 

 $

13

 

 $

 

 $

 

 $

5,040

 

 $

13

 

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, 2013, five available for sale residential mortgage-backed securities had unrealized losses that individually did not exceed 3% 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, 2013, twenty-four available for sale state and municipal bonds had unrealized losses that individually did not exceed 6% 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, 2013, one available for sale corporate bond 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.

 

11



 

At September 30, 2013, seventeen held to maturity U.S. Government and agency securities had unrealized losses that individually did not exceed 6% of amortized cost. One of these securities has 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, 2013, twenty-eight held to maturity residential mortgage-backed securities had unrealized losses that individually did not exceed 6% 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.

 

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, 2013, management had not identified any securities with an unrealized loss that it intends 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, 2013, 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

 

 $

4,129

 

 $

4,190

 

 $

10,009

 

 $

10,229

Over 1 year through 5 years

 

35,039

 

36,402

 

14,067

 

13,875

Over 5 years through 10 years

 

30,813

 

31,021

 

13,463

 

12,914

Over 10 years

 

3,658

 

3,765

 

 

Mortgage-backed securities, residential

 

55,282

 

57,882

 

58,716

 

57,649

CRA mutual fund

 

1,044

 

1,048

 

 

Stock in other banks

 

627

 

855

 

 

 

 

 $

130,592

 

 $

135,163

 

 $

96,255

 

 $

94,667

 

The Corporation did not realize any gross gains or losses on sales or calls of securities available for sale during the third quarter of 2013 or 2012. For the nine month period ended September 30, 2013, the Corporation did not realize any gross gains or losses on sales or calls of securities available for sale. For the nine month period ended September 30, 2012, the Corporation realized gross gains of  $7,000 and  $0 in gross losses on sales or calls of securities available for sale.

 

At September 30, 2013, and December 31, 2012, securities with a carrying value of  $154,575,000 and  $147,923,000, respectively, were pledged as collateral as required by law on public and trust deposits, repurchase agreements, and for other purposes.

 

12



 

8.              Loans

 

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

 

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

 

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

 

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

 

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

 

Allowance for Credit Losses

 

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

 

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

 

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

 

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

 

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

 

13



 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

It is the policy of the Corporation to order an updated valuation on all real estate secured loans when the loan becomes 90 days past due and there has not been an updated valuation completed within the previous 12 months. In addition, the Corporation orders third party valuations on all impaired real estate collateralized loans within 30 days of the loan being classified as impaired. Until the valuations are completed, the Corporation utilizes the most recent independent third party real estate valuation to estimate the need for a specific allocation to be assigned to the loan. These existing valuations are discounted downward to account for such things as the age of the existing collateral valuation, a 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 asset, as provided by the most recent financial statements of the borrower, and discounts downward accordingly based on determinations made by management.

 

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

 

14



 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

15



 

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 ability to make monthly payments 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, 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.

 

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

 

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

 

16



 

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

 

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

 

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

 

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard, and doubtful within the Corporation’s internal risk rating system as of September 30, 2013, and December 31, 2012:

 

 

In thousands

 

Pass

 

Special
Mention

 

Substandard

 

Doubtful

 

Total

SEPTEMBER 30, 2013

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 $

49,823

 

 $

2,088

 

 $

2,939

 

 $

 

 $

54,850

Commercial real estate

 

200,074

 

22,099

 

17,153

 

 

239,326

Commercial real estate construction

 

5,372

 

1,833

 

5,478

 

 

12,683

Residential mortgage

 

337,407

 

2,306

 

3,675

 

 

343,388

Home equity lines of credit

 

52,499

 

587

 

376

 

 

53,462

Consumer

 

14,339

 

 

 

 

14,339

 

 

 $

659,514

 

 $

28,913

 

 $

29,621

 

 $

 

 $

718,048

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2012

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 $

44,072

 

 $

2,491

 

 $

2,441

 

 $

 

 $

49,004

Commercial real estate

 

205,449

 

20,379

 

17,191

 

 

243,019

Commercial real estate construction

 

7,354

 

9,820

 

1,980

 

 

19,154

Residential mortgage

 

321,986

 

4,502

 

2,348

 

 

328,836

Home equity lines of credit

 

51,096

 

1,776

 

258

 

 

53,130

Consumer

 

14,993

 

 

 

 

14,993

 

 

 $

644,950

 

 $

38,968

 

 $

24,218

 

 $

 

 $

708,136

 

17



 

The following table summarizes information relative to impaired loans by loan portfolio class as of September 30, 2013, and December 31, 2012:

 

 

 

 

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, 2013

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 $

 

 $

 

 $

 

 $

179

 

 $

1,294

Commercial real estate

 

455

 

699

 

455

 

11,407

 

11,607

Commercial real estate construction

 

3,811

 

3,811

 

906

 

788

 

1,062

Residential mortgage

 

1,050

 

1,050

 

404

 

1,164

 

1,526

 

 

 $

5,316

 

 $

5,560

 

 $

1,765

 

 $

13,538

 

 $

15,489

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2012

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 $

146

 

 $

146

 

 $

29

 

 $

195

 

 $

1,310

Commercial real estate

 

237

 

276

 

7

 

8,772

 

9,216

Commercial real estate construction

 

 

 

 

854

 

1,128

Residential mortgage

 

 

 

 

938

 

1,263

 

 

 $

383

 

 $

422

 

 $

36

 

 $

10,759

 

 $

12,917

 

The following table summarizes information in regards to average of impaired loans and related interest income by loan portfolio class for the three months ended September 30, 2013 and 2012:

 

 

 

 

Impaired Loans with
Allowance

 

Impaired Loans with
No Allowance

In thousands

 

Average
Recorded
Investment

 

Interest
Income

 

Average
Recorded
Investment

 

Interest
Income

SEPTEMBER 30, 2013

 

 

 

 

 

 

 

 

Commercial and industrial

 

 $

 

 $

 

 $

183

 

 $

Commercial real estate

 

228

 

 

11,997

 

107

Commercial real estate construction

 

4,168

 

34

 

788

 

Residential mortgage

 

1,170

 

 

999

 

2

 

 

 $

5,566

 

 $

34

 

 $

13,967

 

 $

109

 

 

 

 

 

 

 

 

 

SEPTEMBER 30, 2012

 

 

 

 

 

 

 

 

Commercial and industrial

 

 $

 

 $

 

 $

215

 

 $

Commercial real estate

 

1,092

 

 

8,676

 

Commercial real estate construction

 

 

 

899

 

Residential mortgage

 

 

 

1,495

 

 

 

 $

1,092

 

 $

 

 $

11,285

 

 $

 

18



 

The following table summarizes information in regards to average of impaired loans and related interest income by loan portfolio class for the nine months ended September 30, 2013 and 2012:

 

 

 

Impaired Loans with
Allowance

 

 

Impaired Loans with
No Allowance

 

In thousands

 

 

Average
Recorded
Investment

 

 

Interest
Income

 

 

Average
Recorded
Investment

 

 

Interest
Income

 

SEPTEMBER 30, 2013

 

 

 

 

 

 

 

 

Commercial and industrial

 

 $

73

 

 $

 

 $

189

 

 $

Commercial real estate

 

232

 

 

11,133

 

466

Commercial real estate construction

 

3,430

 

169

 

821

 

Residential mortgage

 

935

 

 

967

 

8