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 June 30, 2017

 

Commission file number 1-35015

 

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, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

Accelerated filer x

 

 

Non-accelerated filer o (Do not check if a smaller reporting company)

 

 

 

Smaller reporting company o

 

 

 

 

 

Emerging growth company o

 

 

 

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 August 4, 2017, was 7,015,259.

 

 

 



 

PART I - FINANCIAL INFORMATION

 

ACNB CORPORATION

ITEM 1 - FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)

 

Dollars in thousands, except per share data

 

June 30,
2017

 

June 30,
2016

 

December 31,
2016

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

17,384

 

$

14,299

 

$

13,796

Interest bearing deposits with banks

 

8,896

 

31,919

 

5,135

 

 

 

 

 

 

 

Total Cash and Cash Equivalents

 

26,280

 

46,218

 

18,931

 

 

 

 

 

 

 

Securities available for sale

 

133,719

 

117,001

 

142,990

Securities held to maturity, fair value $50,000; $60,897; $55,425

 

50,088

 

59,681

 

55,568

Loans held for sale

 

1,278

 

955

 

1,770

Loans, net of allowance for loan losses $14,148; $14,636; $14,194

 

955,527

 

852,196

 

893,716

Premises and equipment

 

18,170

 

18,965

 

18,153

Restricted investment in bank stocks

 

4,899

 

4,351

 

4,349

Investment in bank-owned life insurance

 

41,273

 

40,200

 

40,742

Investments in low-income housing partnerships

 

2,690

 

3,120

 

2,899

Goodwill

 

6,308

 

6,308

 

6,308

Intangible assets

 

526

 

859

 

688

Foreclosed assets held for resale

 

63

 

730

 

256

Other assets

 

21,115

 

18,526

 

19,950

 

 

 

 

 

 

 

Total Assets

 

$

1,261,936

 

$

1,169,110

 

$

1,206,320

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Non-interest bearing

 

$

190,572

 

$

177,366

 

$

180,593

Interest bearing

 

809,582

 

744,861

 

787,028

 

 

 

 

 

 

 

Total Deposits

 

1,000,154

 

922,227

 

967,621

 

 

 

 

 

 

 

Short-term borrowings

 

30,837

 

36,190

 

34,590

Long-term borrowings

 

95,850

 

80,500

 

74,250

Other liabilities

 

11,251

 

10,916

 

9,798

 

 

 

 

 

 

 

Total Liabilities

 

1,138,092

 

1,049,833

 

1,086,259

 

 

 

 

 

 

 

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; 6,139,499, 6,119,406 and 6,126,738 shares issued; 6,076,899, 6,056,806 and 6,064,138 shares outstanding

 

15,349

 

15,299

 

15,317

Treasury stock, at cost (62,600 shares)

 

(728)

 

(728)

 

(728)

Additional paid-in capital

 

11,287

 

10,746

 

10,941

Retained earnings

 

103,488

 

97,638

 

100,555

Accumulated other comprehensive loss

 

(5,552)

 

(3,678)

 

(6,024)

 

 

 

 

 

 

 

Total Stockholders’ Equity

 

123,844

 

119,277

 

120,061

 

 

 

 

 

 

 

Total Liabilities and Stockholders’ Equity

 

$

1,261,936

 

$

1,169,110

 

$

1,206,320

 

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

 

2



 

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

Dollars in thousands, except per share data

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

INTEREST INCOME

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

9,964

 

$

8,983

 

$

19,494

 

$

17,904

 

Securities:

 

 

 

 

 

 

 

 

 

Taxable

 

784

 

782

 

1,584

 

1,590

 

Tax-exempt

 

117

 

161

 

267

 

340

 

Dividends

 

64

 

55

 

113

 

106

 

Other

 

33

 

29

 

37

 

34

 

 

 

 

 

 

 

 

 

 

 

Total Interest Income

 

10,962

 

10,010

 

21,495

 

19,974

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

Deposits

 

687

 

570

 

1,322

 

1,128

 

Short-term borrowings

 

15

 

12

 

60

 

28

 

Long-term borrowings

 

429

 

398

 

816

 

781

 

 

 

 

 

 

 

 

 

 

 

Total Interest Expense

 

1,131

 

980

 

2,198

 

1,937

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income

 

9,831

 

9,030

 

19,297

 

18,037

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR LOAN LOSSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income after Provision for Loan Losses

 

9,831

 

9,030

 

19,297

 

18,037

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

617

 

575

 

1,187

 

1,103

 

Income from fiduciary activities

 

478

 

434

 

920

 

828

 

Earnings on investment in bank-owned life insurance

 

276

 

290

 

531

 

558

 

Gain on sales of premises and equipment

 

 

449

 

 

449

 

Service charges on ATM and debit card transactions

 

381

 

391

 

739

 

746

 

Commissions from insurance sales

 

1,564

 

1,328

 

2,718

 

2,431

 

Other

 

212

 

344

 

515

 

568

 

 

 

 

 

 

 

 

 

 

 

Total Other Income

 

3,528

 

3,811

 

6,610

 

6,683

 

 

 

 

 

 

 

 

 

 

 

OTHER EXPENSES

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

5,934

 

5,604

 

11,682

 

11,029

 

Net occupancy

 

496

 

502

 

1,033

 

1,072

 

Equipment

 

844

 

761

 

1,627

 

1,472

 

Other tax

 

168

 

193

 

379

 

390

 

Professional services

 

344

 

198

 

583

 

453

 

Supplies and postage

 

168

 

122

 

337

 

313

 

Marketing and corporate relations

 

138

 

151

 

202

 

268

 

FDIC and regulatory

 

140

 

174

 

279

 

351

 

Merger expenses

 

208

 

 

370

 

 

Intangible assets amortization

 

82

 

86

 

162

 

174

 

Foreclosed real estate (income) expenses

 

(14)

 

39

 

16

 

40

 

Other operating

 

1,126

 

982

 

1,964

 

1,759

 

 

 

 

 

 

 

 

 

 

 

Total Other Expenses

 

9,634

 

8,812

 

18,634

 

17,321

 

 

 

 

 

 

 

 

 

 

 

Income before Income Taxes

 

3,725

 

4,029

 

7,273

 

7,399

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

1,003

 

1,047

 

1,914

 

1,870

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

2,722

 

$

2,982

 

$

5,359

 

$

5,529

 

 

 

 

 

 

 

 

 

 

 

PER SHARE DATA

 

 

 

 

 

 

 

 

 

Basic earnings

 

$

0.45

 

$

0.49

 

$

0.88

 

$

0.91

 

Cash dividends declared

 

$

0.20

 

$

0.20

 

$

0.40

 

$

0.40

 

 

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

 

3



 

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

Dollars in thousands

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

2,722

 

$

2,982

 

$

5,359

 

$

5,529

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SECURITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains arising during the period, net of income taxes of $52, $77, $131 and $423, respectively

 

95

 

153

 

252

 

823

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PENSION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of pension net loss, transition liability, and prior service cost, net of income taxes of $59, $58, $118 and $116, respectively (B) (C)

 

110

 

112

 

220

 

225

 

 

 

 

 

 

 

 

 

 

 

TOTAL OTHER COMPREHENSIVE INCOME

 

205

 

265

 

472

 

1,048

 

 

 

 

 

 

 

 

 

 

 

TOTAL COMPREHENSIVE INCOME

 

$

2,927

 

$

3,247

 

$

5,831

 

$

6,577

 

 

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)

Six Months Ended June 30, 2017 and 2016

 

Dollars in thousands

 

Common
Stock

 

Treasury
Stock

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Loss

 

Total
Stockholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE – JANUARY 1, 2016

 

$

15,256

 

$

(728)

 

$

10,387

 

$

94,526

 

$

(4,726)

 

$

114,715

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

5,529

 

 

5,529

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of taxes

 

 

 

 

 

1,048

 

1,048

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock shares issued (9,647 shares)

 

24

 

 

200

 

 

 

224

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock grants (7,435 shares)

 

19

 

 

100

 

 

 

119

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock compensation expense

 

 

 

59

 

 

 

59

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared

 

 

 

 

(2,417)

 

 

(2,417)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE – JUNE 30, 2016

 

$

15,299

 

$

(728)

 

$

10,746

 

$

97,638

 

$

(3,678)

 

$

119,277

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE – JANUARY 1, 2017

 

$

15,317

 

$

(728)

 

$

10,941

 

$

100,555

 

$

(6,024)

 

$

120,061

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

5,359

 

 

5,359

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of taxes

 

 

 

 

 

472

 

472

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock shares issued (6,568 shares)

 

17

 

 

121

 

 

 

138

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock grants (6,193 shares)

 

15

 

 

105

 

 

 

120

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock compensation expense

 

 

 

120

 

 

 

120

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared

 

 

 

 

(2,426)

 

 

(2,426)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE – JUNE 30, 2017

 

$

15,349

 

$

(728)

 

$

11,287

 

$

103,488

 

$

(5,552)

 

$

123,844

 

 

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

 

5



 

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

 

Six Months Ended June 30,

 

Dollars in thousands

 

2017

 

2016

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

5,359

 

$

5,529

 

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

 

 

 

 

 

Gain on sales of loans originated for sale

 

(206)

 

(296)

 

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

 

(36)

 

(23)

 

Gain on sale of premises and equipment

 

 

(449)

 

Earnings on investment in bank-owned life insurance

 

(531)

 

(558)

 

Restricted stock compensation expense

 

120

 

59

 

Depreciation and amortization

 

942

 

873

 

Provision for loan losses

 

 

 

Net amortization of investment securities premiums

 

264

 

263

 

(Increase) decrease in accrued interest receivable

 

(103)

 

144

 

Increase (decrease) in accrued interest payable

 

103

 

(50)

 

Mortgage loans originated for sale

 

(12,102)

 

(18,017)

 

Proceeds from sales of loans originated for sale

 

12,800

 

19,193

 

Increase in other assets

 

(1,102)

 

(467)

 

Increase in other liabilities

 

1,688

 

912

 

 

 

 

 

 

 

Net Cash Provided by Operating Activities

 

7,196

 

7,113

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Proceeds from maturities of investment securities held to maturity

 

5,438

 

11,732

 

Proceeds from maturities of investment securities available for sale

 

13,456

 

14,323

 

Purchase of investment securities available for sale

 

(4,024)

 

(4,052)

 

(Purchase) redemption of restricted investment in bank stocks

 

(550)

 

63

 

Net increase in loans

 

(61,811)

 

(14,321)

 

Capital expenditures

 

(803)

 

(1,699)

 

Proceeds from sales of premises and equipment

 

6

 

1,929

 

Proceeds from sales of foreclosed real estate

 

229

 

212

 

 

 

 

 

 

 

Net Cash (Used in) Provided by Investing Activities

 

(48,059)

 

8,187

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Net increase in demand deposits

 

9,979

 

11,142

 

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

 

22,554

 

(1,895)

 

Net (decrease) increase in short-term borrowings

 

(3,753)

 

988

 

Proceeds from long-term borrowings

 

24,600

 

9,000

 

Repayments on long-term borrowings

 

(3,000)

 

(5,000)

 

Dividends paid

 

(2,426)

 

(2,417)

 

Common stock issued

 

258

 

343

 

 

 

 

 

 

 

Net Cash Provided by Financing Activities

 

48,212

 

12,161

 

 

 

 

 

 

 

Net Increase in Cash and Cash Equivalents

 

7,349

 

27,461

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS — BEGINNING

 

18,931

 

18,757

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS — ENDING

 

$

26,280

 

$

46,218

 

 

 

 

 

 

 

Interest paid

 

$

2,095

 

$

1,987

 

Income taxes paid

 

$

1,750

 

$

2,000

 

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

 

$

 

$

338

 

 

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

 

6


 


 

ACNB CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.              Basis of Presentation and Nature of Operations

 

ACNB Corporation (the Corporation or ACNB), headquartered in Gettysburg, Pennsylvania, provides banking, trust, insurance, and other 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 2016 ACNB Corporation Annual Report on Form 10-K, filed with the SEC on March 15, 2017. 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 six month periods ended June 30, 2017, 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 June 30, 2017, 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 6,066,675 and 6,043,522 weighted average shares of common stock outstanding for the six months ended June 30, 2017 and 2016, respectively, and 6,068,673 and 6,046,489 for the three months ended June 30, 2017 and 2016, 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. Plan expense is recognized over the vesting period of the stock issued under the plan. As of June 30, 2017, 19,301 shares were issued under this plan, of which 12,693 were fully vested. 2,064 shares vested during the three months ended June 30, 2017; the remaining 6,608 will vest over the next year. $61,000 of compensation expenses related to the grants were recognized during the three months ended June 30, 2017, and $120,000 of compensation expenses related to the grants were recognized during the six months ended June 30, 2017. $59,000 of compensation expenses related to the grants were recognized during the three and six months ended June 30, 2016.

 

7



 

3.              Retirement Benefits

 

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

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30

In thousands

 

2017

 

2016

 

2017

 

2016

Service cost

 

$

 210

 

$

 199

 

$

 420

 

$

 398

Interest cost

 

284

 

284

 

568

 

568

Expected return on plan assets

 

(630)

 

(607)

 

(1,260)

 

(1,215)

Amortization of net loss

 

169

 

170

 

338

 

341

 

 

 

 

 

 

 

 

 

Net Periodic Benefit Expense

 

$

 33

 

$

 46

 

$

 66

 

$

 92

 

The Corporation previously disclosed in its consolidated financial statements for the year ended December 31, 2016, that it had not yet determined the amount the Bank planned on contributing to the defined benefit plan in 2017. As of June 30, 2017, this contribution amount had still not been determined. Effective April 1, 2012, no inactive or former participant in the plan is eligible to again participate in the plan, and no employee hired after March 31, 2012, is eligible to participate in the plan. As of the last annual census, ACNB Bank had a combined 358 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 $5,437,000 in standby letters of credit as of June 30, 2017. 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 June 30, 2017, 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
(Losses) Gains on
Securities

 

Pension
Liability

 

Accumulated Other
Comprehensive
Loss

BALANCE — JUNE 30, 2017

 

$

(13)

 

$

(5,539)

 

$

(5,552)

BALANCE DECEMBER 31, 2016

 

$

(266)

 

$

(5,758)

 

$

(6,024)

BALANCE — JUNE 30, 2016

 

$

1,987

 

$

(5,665)

 

$

(3,678)

 

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 six month periods ended June 30, 2017 and 2016, is as follows:

 

 

In thousands

 

Banking

 

Insurance

 

Total

2017

 

 

 

 

 

 

Net interest income and other income from external customers

 

$

23,215

 

$

2,692

 

$

25,907

Income before income taxes

 

6,675

 

598

 

7,273

Total assets

 

1,252,723

 

9,213

 

1,261,936

Capital expenditures

 

803

 

 

803

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

Net interest income and other income from external customers

 

$

22,289

 

$

2,431

 

$

24,720

Income before income taxes

 

6,939

 

460

 

7,399

Total assets

 

1,159,662

 

9,448

 

1,169,110

Capital expenditures

 

1,687

 

12

 

1,699

 

 

Segment information for the three month periods ended June 30, 2017 and 2016, is as follows:

 

 

In thousands

 

Banking

 

Insurance

 

Total

2017

 

 

 

 

 

 

Net interest income and other income from external customers

 

$

11,821

 

$

1,538

 

$

13,359

Income before income taxes

 

3,237

 

488

 

3,725

Total assets

 

1,252,723

 

9,213

 

1,261,936

Capital expenditures

 

436

 

 

436

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

Net interest income and other income from external customers

 

$

11,513

 

$

1,328

 

$

12,841

Income before income taxes

 

3,720

 

309

 

4,029

Total assets

 

1,159,662

 

9,448

 

1,169,110

Capital expenditures

 

924

 

 

924

 

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 June 30, 2017, and December 31, 2016, were as follows:

 

 

In thousands

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

 

 

 

 

 

 

 

 

SECURITIES AVAILABLE FOR SALE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

JUNE 30, 2017

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

83,914

 

$

33

 

$

1,063

 

$

82,884

Mortgage-backed securities, residential

 

27,022

 

687

 

44

 

27,665

State and municipal

 

16,261

 

185

 

22

 

16,424

Corporate bonds

 

5,000

 

104

 

 

5,104

CRA mutual fund

 

1,044

 

 

3

 

1,041

Stock in other banks

 

498

 

103

 

 

601

 

 

$

133,739

 

$

1,112

 

$

1,132

 

$

133,719

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2016

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

81,065

 

$

43

 

$

1,529

 

$

79,579

Mortgage-backed securities, residential

 

31,272

 

782

 

81

 

31,973

State and municipal

 

24,514

 

240

 

94

 

24,660

Corporate bonds

 

5,000

 

62

 

 

5,062

CRA mutual fund

 

1,044

 

 

9

 

1,035

Stock in other banks

 

498

 

183

 

 

681

 

 

$

143,393

 

$

1,310

 

$

1,713

 

$

142,990

 

 

 

 

 

 

 

 

 

SECURITIES HELD TO MATURITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

JUNE 30, 2017

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

21,009

 

$

30

 

$

57

 

$

20,982

Mortgage-backed securities, residential

 

29,079

 

150

 

211

 

29,018

 

 

$

50,088

 

$

180

 

$

268

 

$

50,000

DECEMBER 31, 2016

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

23,017

 

$

26

 

$

54

 

$

22,989

Mortgage-backed securities, residential

 

32,551

 

210

 

325

 

32,436

 

 

$

55,568

 

$

236

 

$

379

 

$

55,425

 

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 June 30, 2017, and December 31, 2016:

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

JUNE 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

70,784

 

$

1,063

 

$

 

$

 

$

70,784

 

$

1,063

Mortgage-backed securities, residential

 

3,109

 

44

 

 

 

3,109

 

44

State and municipal

 

2,408

 

22

 

 

 

2,408

 

22

CRA Mutual Fund

 

1,041

 

3

 

 

 

1,041

 

3

 

 

$

77,342

 

$

1,132

 

$

 

$

 

$

77,342

 

$

1,132

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

71,454

 

$

1,529

 

$

 

$

 

$

71,454

 

$

1,529

Mortgage-backed securities, residential

 

8,966

 

81

 

 

 

8,966

 

81

State and municipal

 

4,933

 

94

 

 

 

4,933

 

94

CRA Mutual Fund

 

1,035

 

9

 

 

 

1,035

 

9

 

 

$

86,388

 

$

1,713

 

$

 

$

 

$

86,388

 

$

1,713

 

 

 

 

 

 

 

 

 

 

 

 

 

SECURITIES HELD TO MATURITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

JUNE 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

16,952

 

$

57

 

$

 

$

 

$

16,952

 

$

57

Mortgage-backed securities, residential

 

17,620

 

211

 

 

 

17,620

 

211

 

 

$

34,572

 

$

268

 

$

 

$

 

$

34,572

 

$

268

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

12,946

 

$

54

 

$

 

$

 

$

12,946

 

$

54

Mortgage-backed securities, residential

 

12,956

 

325

 

 

 

12,956

 

325

 

 

$

25,902

 

$

379

 

$

 

$

 

$

25,902

 

$

379

 

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 June 30, 2017, thirty-nine available for sale U.S. Government and agency securities had unrealized losses that individually did not exceed 4% 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 June 30, 2017, four available for sale residential mortgage-backed 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.

 

At June 30, 2017, ten available for sale state and municipal securities had unrealized losses that individually did not

 

11



 

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 June 30, 2017, the CRA Mutual Fund 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.

 

At June 30, 2017, ten held to maturity 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 June 30, 2017, twenty held to maturity residential mortgage-backed 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.

 

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 June 30, 2017, 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 June 30, 2017, 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

 

$

2,101

 

$

2,103

 

$

4,009

 

$

4,001

Over 1 year through 5 years

 

87,739

 

86,994

 

17,000

 

16,981

Over 5 years through 10 years

 

15,335

 

15,315

 

 

Over 10 years

 

 

 

 

Mortgage-backed securities, residential

 

27,022

 

27,665

 

29,079

 

29,018

CRA mutual fund

 

1,044

 

1,041

 

 

Stock in other banks

 

498

 

601

 

 

 

 

$

133,739

 

$

133,719

 

$

50,088

 

$

50,000

 

The Corporation did not sell any securities available for sale during the three and six months ended June 30, 2017 and 2016.

 

12



 

At June 30, 2017, and December 31, 2016, securities with a carrying value of $134,882,000 and $134,763,000, respectively, were pledged as collateral as required by law on public and trust deposits, repurchase agreements, and for other purposes.

 

8.              Loans

 

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

 

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:

 

13



 

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

 

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

 

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

 

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

 

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

 

·                  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.

 

14



 

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

 

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

 

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

 

15



 

retail space, office buildings, and hotels. Generally, commercial real estate loans have terms that do not exceed 20 years, have loan-to-value ratios of up to 80% of the appraised value of the property, and are typically secured by personal guarantees of the borrowers.

 

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

 

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

 

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.

 

16



 

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

 

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

 

Consumer Lending — The Corporation offers a variety of secured and unsecured consumer loans, including those for vehicles and mobile homes and 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 June 30, 2017, and December 31, 2016:

 

In thousands

 

Pass

 

Special
Mention

 

Substandard

 

Doubtful

 

Total

 

JUNE 30, 2017

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

154,822

 

$

3,679

 

$

2,724

 

$

 

$

161,225

 

Commercial real estate

 

309,410

 

20,013

 

9,603

 

 

339,026

 

Commercial real estate construction

 

23,048

 

1,029

 

250

 

 

24,327

 

Residential mortgage

 

349,809

 

4,377

 

548

 

 

354,734

 

Home equity lines of credit

 

75,554

 

367

 

119

 

 

76,040

 

Consumer

 

14,323

 

 

 

 

14,323

 

 

 

$

926,966

 

$

29,465

 

$

13,244

 

$

 

$

969,675

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2016

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

134,088

 

$

2,355

 

$

3,901

 

$

 

$

140,344

 

Commercial real estate

 

291,762

 

17,376

 

9,842

 

 

318,980

 

Commercial real estate construction

 

13,606

 

1,202

 

463

 

 

15,271

 

Residential mortgage

 

344,048

 

3,617

 

874

 

 

348,539

 

Home equity lines of credit

 

69,190

 

756

 

126

 

 

70,072

 

Consumer

 

14,704

 

 

 

 

14,704

 

 

 

$

867,398

 

$

25,306

 

$

15,206

 

$

 

$

907,910

 

 

17



 

The following table summarizes information relative to impaired loans by loan portfolio class as of June 30, 2017, and December 31, 2016:

 

 

 

Impaired Loans with
Allowance

 

Impaired Loans with
No Allowance

 

In thousands

 

Recorded
Investment

 

Unpaid
Principal
Balance

 

Related
Allowance

 

Recorded
Investment

 

Unpaid
Principal
Balance

 

JUNE 30, 2017

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,368

 

$

1,368

 

$

711

 

$

1,078

 

$

1,078

 

Commercial real estate

 

832

 

832

 

117

 

7,671

 

7,671

 

Residential mortgage

 

379

 

379

 

342

 

101

 

101

 

 

 

$

2,579

 

$

2,579

 

$

1,170

 

$

8,850

 

$

8,850

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2016

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

948

 

$

948

 

$

599

 

$

1,178

 

$

1,178

 

Commercial real estate

 

 

 

 

8,764

 

8,965

 

Commercial real estate construction

 

 

 

 

300

 

300

 

Residential mortgage

 

376

 

376

 

333

 

379

 

379

 

 

 

$

1,324

 

$

1,324

 

$

932

 

$

10,621

 

$

10,822

 

 

The following table summarizes information in regards to the average of impaired loans and related interest income by loan portfolio class for the three months ended June 30, 2017 and 2016:

 

 

 

Impaired Loans with
Allowance

 

Impaired Loans with
No Allowance

 

In thousands

 

Average
Recorded
Investment

 

Interest
Income

 

Average
Recorded
Investment

 

Interest
Income

 

JUNE 30, 2017

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

 

1,156

 

$

 

 

$

 

1,101

 

$

 

 

Commercial real estate

 

416

 

 

8,144

 

123

 

Commercial real estate construction

 

 

 

 

 

Residential mortgage

 

377