Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10 - Q

 

 

 

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

For the quarterly period ended June 30, 2014

or

 

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

For the transition period from              to             

Commission File Number 000-13396

 

 

CNB FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Pennsylvania   25-1450605
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
incorporation or organization)  

1 South Second Street

P.O. Box 42

Clearfield, Pennsylvania 16830

(Address of principal executive offices)

Registrant’s telephone number, including area code, (814) 765-9621

 

 

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.     x  Yes    ¨   No

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     x  Yes     ¨   No

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

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨      Smaller reporting company   ¨

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

The number of shares outstanding of the issuer’s common stock as of August 4, 2014

COMMON STOCK NO PAR VALUE PER SHARE: 14,367,220 SHARES

 

 

 


INDEX

PART I.

FINANCIAL INFORMATION

 

     Page Number  

ITEM 1 – Financial Statements

  

Consolidated Balance Sheets – June 30, 2014 (unaudited) and December 31, 2013 (audited)

     2   

Consolidated Statements of Income – Three months ended June 30, 2014 and 2013 (unaudited)

     3   

Consolidated Statements of Income – Six months ended June 30, 2014 and 2013 (unaudited)

     4   

Consolidated Statements of Comprehensive Income (Loss) – Three and six months ended June  30, 2014 and 2013 (unaudited)

     5   

Consolidated Statements of Cash Flows – Six months ended June 30, 2014 and 2013 (unaudited)

     6   

Notes to Consolidated Financial Statements

     7   

ITEM  2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

     28   

ITEM 3 – Quantitative and Qualitative Disclosures about Market Risk

     37   

ITEM 4 – Controls and Procedures

     38   

PART II.
OTHER INFORMATION

  

ITEM 1 – Legal Proceedings

     39   

ITEM 1A – Risk Factors

     39   

ITEM 2 – Unregistered Sales of Equity Securities and Use of Proceeds

     39   

ITEM 6 – Exhibits

     39   

Signatures

     40   


Forward-Looking Statements

The information below includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to the financial condition, liquidity, results of operations, future performance and our business. These forward-looking statements are intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that are not historical facts. Forward-looking statements include statements with respect to beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors (some of which are beyond our control). Forward-looking statements often include the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future conditional verbs such as “may,” “will,” “should,” “would” and “could.” Such known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from the statements, include, but are not limited to, (i) changes in general business, industry or economic conditions or competition; (ii) changes in any applicable law, rule, regulation, policy, guideline or practice governing or affecting financial holding companies and their subsidiaries or with respect to tax or accounting principles or otherwise; (iii) adverse changes or conditions in capital and financial markets; (iv) changes in interest rates; (v) higher than expected costs or other difficulties related to integration of combined or merged businesses; (vi) the inability to realize expected cost savings or achieve other anticipated benefits in connection with business combinations and other acquisitions; (vii) changes in the quality or composition of our loan and investment portfolios; (viii) adequacy of loan loss reserves; (ix) increased competition; (x) loss of certain key officers; (xi) continued relationships with major customers; (xii) deposit attrition; (xiii) rapidly changing technology; (xiv) unanticipated regulatory or judicial proceedings and liabilities and other costs; (xv) changes in the cost of funds, demand for loan products or demand for financial services; and (xvi) other economic, competitive, governmental or technological factors affecting our operations, markets, products, services and prices. Some of these and other factors are discussed in our annual and quarterly reports filed with the Securities and Exchange Commission. Such factors could have an adverse impact on our financial position and our results of operations.

The forward-looking statements contained herein are based upon management’s beliefs and assumptions. Any forward-looking statement made herein speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.


Part I Financial Information

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

Dollars in thousands, except share data

 

 

     (unaudited)        
     June 30,     December 31,  
     2014     2013  

ASSETS

    

Cash and due from banks

   $ 31,358      $ 25,769   

Interest bearing deposits with other banks

     2,993        3,864   
  

 

 

   

 

 

 

Total cash and cash equivalents

     34,351        29,633   

Interest bearing time deposits with other banks

     225        275   

Securities available for sale

     695,419        685,991   

Trading securities

     4,429        4,127   

Loans held for sale

     942        487   

Loans

     1,312,379        1,299,259   

Less: unearned discount

     (4,048     (3,896

Less: allowance for loan losses

     (17,415     (16,234
  

 

 

   

 

 

 

Net loans

     1,290,916        1,279,129   

FHLB and other equity interests

     9,040        7,533   

Premises and equipment, net

     32,758        31,589   

Bank owned life insurance

     34,283        33,804   

Mortgage servicing rights

     939        904   

Goodwill

     27,194        27,194   

Core deposit intangible

     3,979        4,583   

Accrued interest receivable and other assets

     22,190        26,040   
  

 

 

   

 

 

 

Total Assets

   $ 2,156,665      $ 2,131,289   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Non-interest bearing deposits

   $ 225,366      $ 221,293   

Interest bearing deposits

     1,625,681        1,614,021   
  

 

 

   

 

 

 

Total deposits

     1,851,047        1,835,314   

FHLB and other long-term borrowings

     75,838        75,000   

Other short-term borrowings

     9,770        12,950   

Subordinated debentures

     20,620        20,620   

Accrued interest payable and other liabilities

     22,204        22,494   
  

 

 

   

 

 

 

Total liabilities

     1,979,479        1,966,378   
  

 

 

   

 

 

 

Common stock, $0 par value; authorized 50,000,000 shares; issued 14,473,482 shares

     0        0   

Additional paid in capital

     77,766        77,923   

Retained earnings

     103,075        97,066   

Treasury stock, at cost (101,499 shares at June 30, 2014 and 45,702 shares at December 31, 2013)

     (1,671     (633

Accumulated other comprehensive loss

     (1,984     (9,445
  

 

 

   

 

 

 

Total shareholders’ equity

     177,186        164,911   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 2,156,665      $ 2,131,289   
  

 

 

   

 

 

 

 

 

See Notes to Consolidated Financial Statements

 

2


CONSOLIDATED STATEMENTS OF INCOME (unaudited)

Dollars in thousands, except per share data

 

 

     Three months ended  
     June 30,  
     2014      2013  

INTEREST AND DIVIDEND INCOME:

     

Loans including fees

   $ 17,069       $ 12,281   

Securities:

     

Taxable

     3,350         3,474   

Tax-exempt

     927         965   

Dividends

     72         38   
  

 

 

    

 

 

 

Total interest and dividend income

     21,418         16,758   
  

 

 

    

 

 

 

INTEREST EXPENSE:

     

Deposits

     2,077         1,955   

Borrowed funds

     713         779   

Subordinated debentures (includes $94 and $105 accumulated other comprehensive income reclassification for change in fair value of interest rate swap agreements in 2014 and 2013, respectively)

     185         198   
  

 

 

    

 

 

 

Total interest expense

     2,975         2,932   
  

 

 

    

 

 

 

NET INTEREST INCOME

     18,443         13,826   

PROVISION FOR LOAN LOSSES

     1,501         3,115   
  

 

 

    

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     16,942         10,711   
  

 

 

    

 

 

 

NON-INTEREST INCOME:

     

Wealth and asset management fees

     753         538   

Service charges on deposit accounts

     1,145         1,019   

Other service charges and fees

     670         524   

Net realized gains on available-for-sale securities (includes $138 and $252 accumulated other comprehensive income reclassifications for net realized gains on available-for-sale securities in 2014 and 2013, respectively)

     138         252   

Net realized and unrealized gains on trading securities

     99         28   

Mortgage banking

     183         271   

Bank owned life insurance

     239         815   

Other

     287         324   
  

 

 

    

 

 

 

Total non-interest income

     3,514         3,771   
  

 

 

    

 

 

 

NON-INTEREST EXPENSES:

     

Salaries and benefits

     6,443         5,332   

Net occupancy expense

     1,760         1,281   

Amortization of core deposit intangible

     301         0   

Data processing

     841         798   

State and local taxes

     454         436   

Legal, professional, and examination fees

     302         253   

Advertising

     431         246   

FDIC insurance premiums

     344         319   

Merger costs

     0         539   

Other

     1,732         1,589   
  

 

 

    

 

 

 

Total non-interest expenses

     12,608         10,793   
  

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     7,848         3,689   

INCOME TAX EXPENSE (includes $15 and $51 income tax expense from reclassification items in 2014 and 2013, respectively)

     2,231         738   
  

 

 

    

 

 

 

NET INCOME

   $ 5,617       $ 2,951   
  

 

 

    

 

 

 

EARNINGS PER SHARE:

     

Basic

   $ 0.39       $ 0.24   

Diluted

   $ 0.39       $ 0.24   

DIVIDENDS PER SHARE:

     

Cash dividends per share

   $ 0.165       $ 0.165   

 

 

See Notes to Consolidated Financial Statements

 

3


CONSOLIDATED STATEMENTS OF INCOME (unaudited)

Dollars in thousands, except per share data

 

 

     Six months ended  
     June 30,  
     2014      2013  

INTEREST AND DIVIDEND INCOME:

     

Loans including fees

   $ 34,154       $ 24,583   

Securities:

     

Taxable

     6,690         6,883   

Tax-exempt

     1,836         1,922   

Dividends

     175         74   
  

 

 

    

 

 

 

Total interest and dividend income

     42,855         33,462   
  

 

 

    

 

 

 

INTEREST EXPENSE:

     

Deposits

     4,149         4,189   

Borrowed funds

     1,611         1,608   

Subordinated debentures (includes $191 and $202 accumulated other comprehensive income reclassification for change in fair value of interest rate swap agreements in 2014 and 2013, respectively)

     372         388   
  

 

 

    

 

 

 

Total interest expense

     6,132         6,185   
  

 

 

    

 

 

 

NET INTEREST INCOME

     36,723         27,277   

PROVISION FOR LOAN LOSSES

     2,520         4,045   
  

 

 

    

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     34,203         23,232   
  

 

 

    

 

 

 

NON-INTEREST INCOME:

     

Wealth and asset management fees

     1,425         1,112   

Service charges on deposit accounts

     2,186         1,961   

Other service charges and fees

     1,238         954   

Net realized gains on available-for-sale securities (includes $204 and $328 accumulated other comprehensive income reclassifications for net realized gains on available-for-sale securities in 2014 and 2013, respectively)

     204         328   

Net realized and unrealized gains on trading securities

     74         331   

Mortgage banking

     358         526   

Bank owned life insurance

     479         1,077   

Other

     755         553   
  

 

 

    

 

 

 

Total non-interest income

     6,719         6,842   
  

 

 

    

 

 

 

NON-INTEREST EXPENSES:

     

Salaries and benefits

     13,278         10,529   

Net occupancy expense

     3,521         2,598   

Amortization of core deposit intangible

     604         0   

Data processing

     1,944         1,565   

State and local taxes

     1,016         875   

Legal, professional, and examination fees

     744         653   

Advertising

     742         492   

FDIC insurance premiums

     684         598   

Merger costs

     0         913   

Other

     3,336         2,252   
  

 

 

    

 

 

 

Total non-interest expenses

     25,869         20,475   
  

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     15,053         9,599   

INCOME TAX EXPENSE (includes $5 and $44 income tax expense from reclassification items in 2014 and 2013, respectively)

     4,270         2,351   
  

 

 

    

 

 

 

NET INCOME

   $ 10,783       $ 7,248   
  

 

 

    

 

 

 

EARNINGS PER SHARE:

     

Basic

   $ 0.75       $ 0.58   

Diluted

   $ 0.75       $ 0.58   

DIVIDENDS PER SHARE:

     

Cash dividends per share

   $ 0.33       $ 0.33   

 

 

See Notes to Consolidated Financial Statements

 

4


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

Dollars in thousands

 

 

     Three months ended     Six months ended  
     June 30,     June 30,  
     2014     2013     2014     2013  

NET INCOME

   $ 5,617      $ 2,951      $ 10,783      $ 7,248   

Other comprehensive income (loss), net of tax:

        

Net change in fair value of interest rate swap agreements designated as cash flow hedges:

        

Unrealized gain (loss) on interest rate swaps, net of tax of $37 and ($95) for the three months ended June 30, 2014 and 2013, and $58 and ($101) for the six months ended June 30, 2014 and 2013

     (68     177        (107     188   

Reclassification adjustment for losses recognized in earnings, net of tax of ($33) and ($37) for the three months ended June 30, 2014 and 2013, and ($67) and ($71) for the six months ended June 30, 2014 and 2013

     61        68        124        131   
  

 

 

   

 

 

   

 

 

   

 

 

 
     (7     245        17        319   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized gains on securities available for sale:

        

Unrealized gains on other-than-temporarily securities available for sale:

        

Unrealized gains arising during the period, net of tax of $0 and ($25) for the three months ended June 30, 2014 and 2013, and ($48) and ($11) for the six months ended June 30, 2014 and 2013

     0        47        89        20   
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) on other securities available for sale:

        

Unrealized gains (losses) arising during the period, net of tax of $(1,726) and $8,762 for the three months ended June 30, 2014 and 2013, and $9,627 and $(4,032) and $9,627 for the six months ended June 30, 2014 and 2013

     3,205        (16,273     7,488        (17,878

Reclassification adjustment for realized gains included in net income, net of tax of $48 and $88 for the three months ended June 30, 2014 and 2013, and $71 and $115 for the six months ended June 30, 2014 and 2013

     (90     (164     (133     (213
  

 

 

   

 

 

   

 

 

   

 

 

 
     3,115        (16,437     7,355        (18,091
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     3,108        (16,145     7,461        (17,752
  

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME (LOSS)

   $ 8,725      $ (13,194   $ 18,244      $ (10,504
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

See Notes to Consolidated Financial Statements

 

5


CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Dollars in thousands

 

 

     Six months ended  
     June 30,  
     2014     2013  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 10,783      $ 7,248   

Adjustments to reconcile net income to net cash provided by operations:

    

Provision for loan losses

     2,520        4,045   

Depreciation and amortization of premises and equipment, core deposit intangible, and mortgage servicing rights

     2,063        1,120   

Amortization and accretion of securities premiums and discounts, deferred loan fees and costs, net yield and credit mark on acquired loans, and unearned income

     153        2,117   

Net realized gains on sales of available-for-sale securities

     (204     (328

Net realized and unrealized (gains) losses on trading securities

     (74     (331

Proceeds from sale of trading securities

     0        3,818   

Purchase of trading securities

     (210     (3,803

Gain on sale of loans

     (257     (504

Net losses (gains) on dispositions of premises and equipment and foreclosed assets

     130        (77

Proceeds from sale of loans

     3,563        18,116   

Origination of loans held for sale

     (3,942     (15,392

Income on bank owned life insurance

     (479     (1,077

Stock-based compensation expense

     327        186   

Contribution of treasury stock

     60        60   

Changes in:

    

Accrued interest receivable and other assets

     3,571        (141

Accrued interest payable and other liabilities

     (4,272     (3,526
  

 

 

   

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

     13,732        11,531   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Net (increase) decrease in interest bearing time deposits with other banks

     50        (52

Proceeds from maturities, prepayments and calls of available-for-sale securities

     34,335        63,596   

Proceeds from sales of available-for-sale securities

     29,128        33,672   

Purchase of available-for-sale securities

     (62,868     (113,998

Loan origination and payments, net

     (13,006     (57,734

Purchase of bank owned life insurance

     0        (2,000

Purchase of FHLB and other equity interests

     (1,507     (881

Purchase of premises and equipment

     (2,482     (1,738

Proceeds from the sale of premises and equipment and foreclosed assets

     301        429   
  

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     (16,049     (78,706
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net change in:

    

Checking, money market and savings accounts

     80,563        75,382   

Certificates of deposit

     (64,830     (13,839

Proceeds from sale of treasury stock

     0        2   

Purchase of treasury stock

     (1,582     0   

Cash dividends paid

     (4,774     (4,128

Repayment of long-term borrowings

     (112     (94

Proceeds from long-term borrowings

     950        900   

Net change in short-term borrowings

     (3,180     1,865   
  

 

 

   

 

 

 

NET CASH PROVIDED BY USED IN FINANCING ACTIVITIES

     7,035        60,088   
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     4,718        (7,087

CASH AND CASH EQUIVALENTS, Beginning

     29,633        31,881   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, Ending

   $ 34,351      $ 24,794   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

    

Cash paid during the period for:

    

Interest

   $ 6,197      $ 6,326   

Income taxes

   $ 4,076      $ 1,862   

SUPPLEMENTAL NONCASH DISCLOSURES:

    

Transfers to other real estate owned

   $ 161      $ 204   

Grant of restricted stock awards from treasury stock

   $ 609      $ 539   

 

 

See Notes to Consolidated Financial Statements

 

6


CNB FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

 

1. BASIS OF PRESENTATION

The accompanying consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”) and in compliance with accounting principles generally accepted in the United States of America (“GAAP”). Because this report is based on an interim period, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted.

In the opinion of management of the registrant, the accompanying consolidated financial statements as of June 30, 2014 and for the three and six month periods ended June 30, 2014 and 2013 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition and the results of operations for the periods presented. The financial performance reported for CNB Financial Corporation (the “Corporation”) for the three and six month period ended June 30, 2014 is not necessarily indicative of the results to be expected for the full year. This information should be read in conjunction with the Corporation’s Annual Report on Form 10-K for the period ended December 31, 2013 (the “2013 Form 10-K”). All dollar amounts are stated in thousands, except share and per share data and other amounts as indicated. Certain prior period amounts have been reclassified to conform to the current period presentation.

 

2. STOCK COMPENSATION

The Corporation has a stock incentive plan for key employees and independent directors. The stock incentive plan, which is administered by a committee of the Board of Directors, provides for aggregate grants of up to 500,000 shares of common stock in the form of nonqualified options or restricted stock. For key employees, the plan vesting is one-fourth of the granted options or restricted stock per year beginning one year after the grant date, with 100% vested by the fourth anniversary of the grant. For independent directors, the vesting schedule is one-third of the granted options or restricted stock per year beginning one year after the grant date, with 100% vested by the third anniversary of the grant.

At June 30, 2014, there was no unrecognized compensation cost related to nonvested stock options granted under this plan and no stock options were granted during the three and six month periods ended June 30, 2014 and 2013. At June 30, 2014 and December 31, 2013, the Corporation had 35,500 stock options that were fully vested and exercisable.

Compensation expense for the restricted stock awards is recognized over the requisite service period noted above based on the fair value of the shares at the date of grant. Nonvested restricted stock awards are recorded as a reduction of additional paid-in-capital in shareholders’ equity until earned. Compensation expense resulting from these restricted stock awards was $75 and $283 for the three and six months ended June 30, 2014, and $103 and $186 for the three and six months ended June 30, 2013. As of June 30, 2014, there was $992 of total unrecognized compensation cost related to unvested restricted stock awards.

A summary of changes in nonvested restricted stock awards for the three months ended June 30, 2014 follows:

 

           

Per Share

Weighted Average

 
     Shares      Grant Date Fair Value  

Nonvested at beginning of period

     70,061       $ 16.80   

Granted

     0         0   

Vested

     0         0   
  

 

 

    

 

 

 

Nonvested at end of period

     70,061       $ 16.80   
  

 

 

    

 

 

 

 

7


A summary of changes in nonvested restricted stock awards for the six months ended June 30, 2014 follows:

 

          

Per Share

Weighted Average

 
     Shares     Grant Date Fair Value  

Nonvested at beginning of period

     62,076      $ 16.25   

Granted

     35,400        17.19   

Vested

     (27,415     16.05   
  

 

 

   

 

 

 

Nonvested at end of period

     70,061      $ 16.80   
  

 

 

   

 

 

 

 

3. FAIR VALUE

Fair Value Measurement

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy has also been established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The following three levels of inputs are used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values of most trading securities and securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

The Corporation’s structured pooled trust preferred security is priced using Level 3 inputs. The decline in the level of observable inputs and market activity in this class of investments by the measurement date has been significant and resulted in unreliable external pricing. Broker pricing and bid/ask spreads, when available, vary widely, and the once-active market has become comparatively inactive. The Corporation engaged a third party consultant who has developed a model for pricing this security. Information such as historical and current performance of the underlying collateral, deferral and default rates, collateral coverage ratios, break in yield calculations, cash flow projections, liquidity and credit premiums required by a market participant, and financial trend analysis with respect to the individual issuing financial institutions and insurance companies are utilized in determining the security valuation. Due to the current market conditions as well as the limited trading activity of these types of securities, the market value of the Corporation’s structured pooled trust preferred security is highly sensitive to assumption changes and market volatility.

The Corporation’s derivative instrument is an interest rate swap that is similar to those that trade in liquid markets and its fair value has accordingly been determined using Level 2 inputs which are generally verifiable and do not typically involved significant management judgments.

 

8


Assets and liabilities measured at fair value on a recurring basis are as follows at June 30, 2014 and December 31, 2013:

 

           Fair Value Measurements at June 30, 2014 Using  

Description

   Total     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable  Inputs

(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 

Assets:

         

Securities Available For Sale:

         

U.S. Government sponsored entities

   $ 167,176      $ 0       $ 167,176      $ 0   

States and political subdivisions

     183,212        0         183,212        0   

Residential and multi-family mortgage

     262,901        0         262,901        0   

Commercial mortgage

     188        0         188        0   

Corporate notes and bonds

     14,484        0         14,484        0   

Pooled trust preferred

     798        0         0        798   

Pooled SBA

     65,658        0         65,658        0   

Other securities

     1,002        1,002         0        0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Securities Available For Sale

   $ 695,419      $ 1,002       $ 695,419      $ 798   
  

 

 

   

 

 

    

 

 

   

 

 

 

Trading Securities:

         

Corporate equity securities

   $ 2,990      $ 2,990       $ 0      $ 0   

Mutual funds

     978        978         0        0   

Certificates of deposit

     254        254         0        0   

Corporate notes and bonds

     153        0         153        0   

U.S. Government sponsored entities

     54        0         54        0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Trading Securities

   $       4,429      $     4,222       $       207      $           0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities:

         

Interest rate swaps

   $ (1,089   $ 0       $ (1,089   $ 0   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

           Fair Value Measurements at December 31, 2013 Using  

Description

   Total     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 

Assets:

         

Securities Available For Sale:

         

U.S. Government sponsored entities

   $ 181,625      $ 0       $ 181,625      $ 0   

States and political subdivisions

     177,943        0         177,943        0   

Residential and multi-family mortgage

     242,607        0         242,607        0   

Commercial mortgage

     374        0         374        0   

Corporate notes and bonds

     14,075        0         14,075        0   

Pooled trust preferred

     661        0         0        661   

Pooled SBA

     67,721        0         67,721        0   

Other securities

     985        985         0        0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Securities Available For Sale

   $ 685,991      $ 985       $ 684,345      $ 661   
  

 

 

   

 

 

    

 

 

   

 

 

 

Trading Securities:

         

Corporate equity securities

   $ 2,705      $ 2,705       $ 0      $ 0   

Mutual funds

     965        965         0        0   

Certificates of deposit

     253        253         0        0   

Corporate notes and bonds

     152        0         152        0   

U.S. Government sponsored entities

     52        0         52        0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Trading Securities

   $ 4,127      $ 3,923       $ 204      $ 0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities:

         

Interest rate swaps

   $ (1,116   $ 0       $ (1,116   $ 0   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

9


The table below presents a reconciliation of the fair value of securities available for sale measured on a recurring basis using significant unobservable inputs (Level 3) for the three months ended June 30, 2014:

 

     Pooled
trust
preferred
 

Balance, April 1, 2014

   $ 798   

Total gains or (losses):

  

Included in other comprehensive income (unrealized)

     0   
  

 

 

 

Balance, June 30, 2014

   $ 798   
  

 

 

 

The table below presents a reconciliation of the fair value of securities available for sale measured on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2014:

 

     Pooled
Trust
Preferred
 

Balance, January 1, 2014

   $ 661   

Total gains or (losses):

  

Included in other comprehensive income (unrealized)

     137   
  

 

 

 

Balance, June 30, 2014

   $ 798   
  

 

 

 

The table below presents a reconciliation of the fair value of securities available for sale measured on a recurring basis using significant unobservable inputs (Level 3) for the three months ended June 30, 2013:

 

     Corporate
notes and
bonds
    Pooled
trust
preferred
 

Balance, April 1, 2013

   $ 2,067      $ 558   

Total gains or (losses):

    

Included in other comprehensive income

     (116     72   

Included in realized gains on available-for-sale securities

     58        0   

Sale of available-for-sale securities

     (2,009     0   
  

 

 

   

 

 

 

Balance, June 30, 2013

   $ 0      $ 630   
  

 

 

   

 

 

 

The table below presents a reconciliation of the fair value of securities available for sale measured on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2013:

 

     Corporate
notes and
bonds
    Pooled
trust
preferred
 

Balance, January 1, 2013

   $ 1,980      $ 600   

Total gains or (losses):

    

Included in other comprehensive income

     (29     30   

Included in realized gains on available-for-sale securities

     58        0   

Sale of available-for-sale securities

     (2,009     0   
  

 

 

   

 

 

 

Balance, June 30, 2013

   $ 0      $ 630   
  

 

 

   

 

 

 

 

10


The following table presents quantitative information about Level 3 fair value measurements at June 30, 2014:

 

    

Fair
value

    

Valuation
Technique

  

Unobservable

Inputs

   Input
Utilized

Pooled trust preferred

   $ 798      

Discounted

cash flow

   Collateral default rate    1.5% in 2014; 1.0% in
2015; 0.5% in 2016 and
thereafter
        

Yield

Prepayment speed

   12%

2.0% constant prepayment
rate in 2014 and thereafter

The following table presents quantitative information about Level 3 fair value measurements at December 31, 2013:

 

     Fair
value
     Valuation
Technique
   Unobservable
Inputs
   Input
Utilized

Pooled trust preferred

   $ 661       Discounted

cash flow

   Collateral default rate    2% in 2014; 1.5% in
2015; 1.0% in 2016; 0.5% in
2017 and thereafter
         Yield

Prepayment speed

   15%

2.0% constant prepayment
rate in 2014 and thereafter

At June 30, 2014 and December 31, 2013, the significant unobservable inputs used in the fair value measurement of the Corporation’s pooled trust preferred security are collateral default rate, yield, and prepayment speed. Significant increases in specific-issuer default assumptions or decreases in specific-issuer recovery assumptions would result in a significantly lower fair value measurement. Conversely, decreases in specific-issuer default assumptions or increases in specific-issuer recovery assumptions would result in a higher fair value measurement.

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals prepared by third-parties. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Management also adjusts appraised values based on the length of time that has passed since the appraisal date and other factors. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Assets and liabilities measured at fair value on a non-recurring basis are as follows at June 30, 2014 and December 31, 2013:

 

            Fair Value Measurements at June 30, 2014 Using  

Description

   Total      Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets:

           

Impaired loans:

           

Commercial mortgages

   $ 3,067         0         0       $ 3,067   

Commercial, industrial, and agricultural

     3,360         0         0         3,360   

 

11


            Fair Value Measurements at December 31, 2013 Using  

Description

   Total      Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets:

           

Impaired loans:

           

Commercial mortgages

   $ 3,000         0         0       $ 3,000   

Commercial, industrial, and agricultural

     3,706         0         0         3,706   

Impaired loans, which are measured for impairment using the fair value of collateral for collateral dependent loans, had a recorded investment of $8,547 with a valuation allowance of $2,120 as of June 30, 2014, resulting in an additional provision for loan losses of $280 and $630 for the corresponding three and six month period ended June 30, 2014. Impaired loans had a recorded investment of $8,161 with a valuation allowance of $1,455 as of December 31, 2013, and an additional provision for loan losses of $2,328 and $2,529 was recorded for the three and six months ended June 30, 2013.

The estimated fair values of impaired collateral dependent loans such as commercial or residential mortgages are determined primarily by using third-party appraisals. When a collateral dependent loan, such as a commercial or residential mortgage loan, becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal, and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral and a further reduction for estimated costs to sell the property is applied, which results in an amount that is considered to be the estimated fair value. If a loan becomes impaired and management determines an updated appraisal is not necessary, an appropriate adjustment factor is applied based on experience with current valuations of similar collateral in determining the loan’s estimated fair value and resulting allowance for loan losses. Third-party appraisals are not customarily obtained in respect of unimpaired loans, unless in management’s view changes in circumstances warrant obtaining an updated appraisal.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2014:

 

     Fair
value
     Valuation Technique    Unobservable
Inputs
   Range
(Weighted Average)

Impaired loans – commercial mortgages

   $ 3,067       Sales comparison
approach
   Adjustment for differences
between the comparable sales
   13% - 61% (35%)

Impaired loans – commercial, industrial, and agricultural

   $ 3,360       Sales comparison
approach
   Adjustment for differences
between the comparable sales
   9% - 28% (9%)

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2013:

 

     Fair
value
     Valuation Technique    Unobservable Inputs    Range
(Weighted Average)

Impaired loans – commercial mortgages

   $ 3,000       Sales comparison
approach
   Adjustment for differences
between the comparable sales
   17% - 61% (22%)

Impaired loans – commercial, industrial, and agricultural

   $ 3,274       Sales comparison
approach
   Adjustment for differences
between the comparable sales
   9%

Impaired loans – commercial, industrial, and agricultural

   $ 432       Income approach    Adjustment for differences in
net operating income
   2%

 

12


Fair Value of Financial Instruments

The following table presents the carrying amount and fair value of financial instruments at June 30, 2014:

 

     Carrying     Fair Value Measurement Using:     Total  
     Amount     Level 1     Level 2     Level 3     Fair Value  

ASSETS

          

Cash and cash equivalents

   $ 34,351      $ 34,351      $ 0      $ 0      $ 34,351   

Interest bearing time deposits with other banks

     225        0        225        0        225   

Securities available for sale

     695,419        1,002        693,619        798        695,419   

Trading securities

     4,429        4,222        207        0        4,429   

Loans held for sale

     942        0        942        0        942   

Net loans

     1,290,916        0        0        1,290,449        1,290,449   

FHLB and other equity interests

     9,040        n/a        n/a        n/a        n/a   

Accrued interest receivable

     7,533        5        3,607        3,921        7,533   

LIABILITIES

          

Deposits

   $ (1,851,047   $ (1,650,115   $ (200,558   $ 0      $ (1,850,673

FHLB and other borrowings

     (85,608     0        (85,703     0        (85,703

Subordinated debentures

     (20,620     0        (11,275     0        (11,275

Interest rate swaps

     (1,089     0        (1,089     0        (1,089

Accrued interest payable

     (800     (332     (453     (15     (800

The following table presents the carrying amount and fair value of financial instruments at December 31, 2013:

 

     Carrying     Fair Value Measurement Using:     Total  
     Amount     Level 1     Level 2     Level 3     Fair Value  

ASSETS

          

Cash and cash equivalents

   $ 29,633      $ 29,633      $ 0      $ 0      $ 29,633   

Interest bearing time deposits with other banks

     275        0        274        0        274   

Securities available for sale

     685,991        985        684,345        661        685,991   

Trading securities

     4,127        3,923        204        0        4,127   

Loans held for sale

     487        0        507        0        507   

Net loans

     1,279,129        0        0        1,276,622        1,276,622   

FHLB and other equity interests

     7,533        n/a        n/a        n/a        n/a   

Accrued interest receivable

     8,032        368        3,302        4,362        8,032   

LIABILITIES

          

Deposits

   $ (1,835,314   $ (1,569,552   $ (265,237   $ 0      $ (1,834,789

FHLB and other borrowings

     (87,950     0        (87,833     0        (87,833

Subordinated debentures

     (20,620     0        (11,178     0        (11,178

Interest rate swaps

     (1,116     0        (1,116     0        (1,116

Accrued interest payable

     (868     (200     (653     (15     (868

The methods and assumptions, not otherwise presented, used to estimate fair values are described as follows:

Cash and cash equivalents: The carrying amounts of cash and cash equivalents approximate fair values and are classified as Level 1.

Interest bearing time deposits with other banks: The fair value of interest bearing time deposits with other banks is estimated using a discounted cash flow calculation that applies interest rates currently being offered to a schedule of aggregated expected monthly maturities, resulting in a Level 2 classification.

 

13


Loans held for sale: The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

Loans: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values, resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality, resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

FHLB and other equity interests: It is not practical to determine the fair value of Federal Home Loan Bank stock and other equity interests due to restrictions placed on the transferability of these instruments.

Accrued interest receivable: The carrying amount of accrued interest receivable approximates fair value resulting in a classification that is consistent with the asset with which it is associated.

Deposits: The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amount), resulting in a Level 1 classification. Fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits, resulting in a Level 2 classification.

FHLB and other borrowings: The fair values of the Corporation’s FHLB and other borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements, resulting in a Level 2 classification.

Subordinated debentures: The fair value of the Corporation’s subordinated debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of arrangements, resulting in a Level 2 classification.

Accrued interest payable: The carrying amount of accrued interest payable approximates fair value resulting in a classification that is consistent with the liability with which it is associated.

While estimates of fair value are based on management’s judgment of the most appropriate factors as of the balance sheet date, there is no assurance that the estimated fair values would have been realized if the assets had been disposed of or the liabilities settled at that date, since market values may differ depending on various circumstances. The estimated fair values would also not apply to subsequent dates.

In addition, other assets and liabilities that are not financial instruments, such as premises and equipment, are not included in the disclosures. Also, non-financial assets such as, among other things, the estimated earnings power of core deposits, the earnings potential of trust accounts, the trained workforce, and customer goodwill, which typically are not recognized on the balance sheet, may have value but are not included in the fair value disclosures.

 

4. SECURITIES

Securities available for sale at June 30, 2014 and December 31, 2013 are as follows:

 

     June 30, 2014      December 31, 2013  
     Amortized      Unrealized     Fair      Amortized      Unrealized     Fair  
     Cost      Gains      Losses     Value      Cost      Gains      Losses     Value  

U.S. Gov’t sponsored entities

   $ 168,144       $ 4,279       $ (5,247   $ 167,176       $ 185,205       $ 2,894       $ (6,474   $ 181,625   

State & political subdivisions

     178,078         5,849         (715     183,212         176,490         3,770         (2,317     177,943   

Residential & multi-family mortgage

     264,882         2,432         (4,413     262,901         248,017         2,410         (7,820     242,607   

Commercial mortgage

     193         0         (5     188         385         0         (11     374   

Corporate notes & bonds

     15,748         116         (1,380     14,484         15,744         65         (1,734     14,075   

Pooled trust preferred

     800         0         (2     798         800         0         (139     661   

Pooled SBA

     66,851         836         (2,029     65,658         70,077         688         (3,044     67,721   

Other securities

     1,020         0         (18     1,002         1,020         0         (35     985   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 695,716       $ 13,512       $ (13,809   $ 695,419       $ 697,738       $ 9,827       $ (21,574   $ 685,991   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

14


At June 30, 2014, there were no holdings of securities of any one issuer, other than the U.S. Government sponsored entities, in an amount greater than 10% of shareholders’ equity. The Corporation’s residential and multi-family mortgage securities are issued by government sponsored entities, and the Corporation holds one commercial mortgage security that is private label.

Trading securities at June 30, 2014 and December 31, 2013 are as follows:

 

     June 30,
2014
     December 31,
2013
 

Corporate equity securities

   $ 2,990       $ 2,705   

Mutual funds

     978         965   

Certificates of deposit

     254         253   

Corporate notes and bonds

     153         152   

U.S. Government sponsored entities

     54         52   
  

 

 

    

 

 

 

Total

   $ 4,429       $ 4,127   
  

 

 

    

 

 

 

Securities with unrealized losses at June 30, 2014 and December 31, 2013, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows (in thousands):

June 30, 2014

 

     Less than 12 Months     12 Months or More     Total  

Description of Securities

   Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 

U.S. Gov’t sponsored entities

   $ 4,857       $ (1,604   $ 97,377       $ (3,643   $ 102,234       $ (5,247

State & political subdivisions

     8,527         (34     23,517         (681     32,044         (715

Residential & multi-family mortgage

     61,870         (779     101,485         (3,634     163,355         (4,413

Commercial mortgage

     0         0        188         (5     188         (5

Corporate notes & bonds

     0         0        8,020         (1,380     8,020         (1,380

Pooled trust preferred

     0         0        798         (2     798         (2

Pooled SBA

     1,991         (9     39,753         (2,020     41,744         (2,029

Other securities

     1,002         (18     0         0        1,002         (18
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 78,247       $ (2,444   $ 271,138       $ (11,365   $ 349,385       $ (13,809
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     Less than 12 Months     12 Months or More     Total  
     Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 
December 31, 2013           

U.S. Gov’t sponsored entities

   $ 95,677       $ (5,394   $ 17,964       $ (1,080   $ 113,641       $ (6,474

State & political subdivisions

     57,526         (2,192     5,324         (125     62,850         (2,317

Residential and multi-family mortgage

     150,229         (6,806     16,608         (1,014     166,837         (7,820

Commercial mortgage

     374         (11     0         0        374         (11

Corporate notes & bonds

     0         0        9,662         (1,734     9,662         (1,734

Pooled trust preferred

     0         0        661         (139     661         (139

Pooled SBA

     36,842         (2,296     8,277         (748     45,119         (3,044

Other securities

     985         (35     0         0        985         (35
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 341,633       $ (16,734   $ 58,496       $ (4,840   $ 400,129       $ (21,574
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The Corporation evaluates securities for other-than-temporary impairment on a quarterly basis, or more frequently when economic or market conditions warrant such an evaluation.

At June 30, 2014, the Corporation held one structured pooled trust preferred security with an adjusted amortized cost of $800 and a fair value of $798. The Corporation evaluated this security for other-than-temporary impairment by estimating the cash

 

15


flows expected to be received, taking into account future estimated levels of deferrals and defaults by the underlying issuers, and discounting those cash flows at the appropriate accounting yield. For the three and six months ended June 30, 2014, and June 30, 2013, no other-than-temporary impairment was required to be realized in earnings. At June 30, 2014 and December 31, 2013, the Corporation held four structured pooled trust preferred securities with an adjusted amortized cost and fair value of zero.

A roll-forward of the other-than-temporary impairment amount related to credit losses for the three and six months ended June 30, 2014 and 2013 is as follows:

 

Balance of credit losses on debt securities for which a portion of other-than-temporary impairment was recognized in earnings, beginning of period

   $ 4,054   

Additional credit loss for which other-than-temporary impairment was not previously recognized

     0   

Additional credit loss for which other-than-temporary impairment was previously recognized

     0   
  

 

 

 

Balance of credit losses on debt securities for which a portion of other-than-temporary impairment was recognized in earnings, end of period

   $ 4,054   
  

 

 

 

Due to the insignificance of the adjusted amortized cost balance, no further disclosures are required with respect to the Corporation’s structured pooled trust preferred securities.

For the securities that comprise corporate notes and bonds and the securities that are issued by state and political subdivisions, management monitors publicly available financial information, such as filings with the Securities and Exchange Commission, in order to evaluate the securities for other-than-temporary impairment. For financial institution issuers, management monitors information from quarterly “call” report filings that are used to generate Uniform Bank Performance Reports. All other securities that were in an unrealized loss position at the balance sheet date were reviewed by management, and issuer-specific documents were reviewed, as appropriate given the following considerations. When reviewing securities for other-than-temporary impairment, management considers the financial condition and near-term prospects of the issuer and whether downgrades by bond rating agencies have occurred. Management also considers the length of time and extent to which fair value has been less than cost, and whether management does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery.

As of June 30, 2014 and December 31, 2013, management concluded that the securities described in the previous paragraph were not other-than-temporarily impaired for the following reasons:

 

   

There is no indication of any significant deterioration of the creditworthiness of the institutions that issued the securities.

 

   

All contractual interest payments on the securities have been received as scheduled, and no information has come to management’s attention through the processes previously described which would lead to a conclusion that future contractual payments will not be timely received.

The Corporation does not intend to sell and it is not more likely than not that it will be required to sell the securities in an unrealized loss position before recovery of its amortized cost basis.

Information pertaining to security sales is as follows:

 

     Proceeds      Gross Gains      Gross Losses  

Three months ended June 30, 2014

   $ 16,177       $ 138       $ 0   

Six months ended June 30, 2014

     29,128         287         (83

Three months ended June 30, 2013

     32,348         746         (494

Six months ended June 30, 2013

     33,672         822         (494

 

16


The following is a schedule of the contractual maturity of securities available for sale, excluding equity securities, at June 30, 2014:

 

     Amortized
Cost
     Fair Value  

1 year or less

   $ 29,494       $ 29,090   

1 year – 5 years

     149,072         151,616   

5 years – 10 years

     145,065         146,310   

After 10 years

     39,139         38,654   
  

 

 

    

 

 

 
     362,770         365,670   

Residential and multi-family mortgage

     264,882         262,901   

Pooled SBA

     66,851         65,658   

Commercial mortgage

     193         188   
  

 

 

    

 

 

 

Total debt securities

   $ 694,696       $ 694,417   
  

 

 

    

 

 

 

Mortgage and asset backed securities and pooled SBA securities are not due at a single date; periodic payments are received based on the payment patterns of the underlying collateral.

On June 30, 2014 and December 31, 2013, securities carried at $332,626 and $353,102, respectively, were pledged to secure public deposits and for other purposes as provided by law.

 

5. LOANS

Total net loans at June 30, 2014 and December 31, 2013 are summarized as follows:

 

     June 30,
2014
    December 31,
2013
 

Commercial, industrial, and agricultural

   $ 422,399      $ 427,715   

Commercial mortgages

     342,048        343,465   

Residential real estate

     477,186        459,114   

Consumer

     65,314        63,491   

Credit cards

     5,115        5,065   

Overdrafts

     317        409   

Less: unearned discount

     (4,048     (3,896

allowance for loan losses

     (17,415     (16,234
  

 

 

   

 

 

 

Loans, net

   $ 1,290,916      $ 1,279,129   
  

 

 

   

 

 

 

At June 30, 2014 and December 31, 2013, net unamortized loan costs of $830 and $911, respectively, have been included in the carrying value of loans.

The Corporation’s outstanding loans and related unfunded commitments are primarily concentrated within Central and Western Pennsylvania and Central Ohio. The Bank attempts to limit concentrations within specific industries by utilizing dollar limitations to single industries or customers, and by entering into participation agreements with third parties. Collateral requirements are established based on management’s assessment of the customer. The Corporation maintains lending policies to control the quality of the loan portfolio. These policies delegate the authority to extend loans under specific guidelines and underwriting standards. These policies are prepared by the Corporation’s management and reviewed and ratified annually by the Corporation’s Board of Directors.

All relevant documentation, such as the loan application, financial statements and tax returns, required under the lending policies is summarized and provided to management and/or the Corporation’s Board of Directors in connection with the loan approval process. Such documentation is subsequently electronically archived in the Corporation’s document management system. Pursuant to the Corporation’s lending policies, management considers a variety of factors when determining whether

 

17


to extend credit to a customer, including loan-to-value ratios, FICO scores, quality of the borrower’s financial statements, and the ability to obtain personal guarantees.

Commercial, industrial, and agricultural loans comprised 33% of the Corporation’s total loan portfolio at June 30, 2014 and December 31, 2013. Commercial mortgage loans comprised 27% of the Corporation’s total loan portfolio at June 30, 2014 and December 31, 2013. Management assigns a risk rating to all commercial loans in excess of $250,000. The loan-to-value policy guidelines for commercial, industrial, and agricultural loans are generally a maximum of 80% of the value of business equipment, a maximum of 75% of the value of accounts receivable, and a maximum of 60% of the value of business inventory. The loan-to-value policy guideline for commercial mortgage loans is generally a maximum of 85% of the appraised value of the real estate.

Residential real estate loans comprised 37% and 36% of the Corporation’s total loan portfolio at June 30, 2014 and December 31, 2013, respectively. The loan-to-value policy guidelines for residential real estate loans vary depending on the collateral position and the specific type of loan. Higher loan-to-value terms may be approved with the appropriate private mortgage insurance coverage. The Corporation also originates and prices loans for sale into the secondary market through Freddie Mac. Loans so originated are classified as loans held for sale and are excluded from residential real estate loans reported above. The rationale for these sales is to mitigate interest rate risk associated with holding lower rate, long-term residential mortgages in the loan portfolio and to generate fee revenue from sales and servicing the loan. The Corporation also offers a variety of unsecured and secured consumer loan and credit card products which represent less than 10% of the total loan portfolio at both June 30, 2014 and December 31, 2013. Terms and collateral requirements vary depending on the size and nature of the loan.

The Corporation has not underwritten any hybrid loans, payment option loans, or low documentation/no documentation loans. Variable rate loans are generally underwritten at the fully indexed rate. Loan underwriting policies and procedures have not changed materially between any periods presented.

During the first quarter of 2014, management reviewed its loan portfolio segments resulting in the reclassification of approximately $66 million into Commercial, Industrial and Agricultural. $54 million was reclassified out of Commercial Mortgages and $12 million was reclassified out of Residential Real Estate. During the second quarter of 2014, management further identified a reclassification of approximately $70 million into the Commercial, Industrial and Agricultural segment from the Commercial Mortgage segment. Accordingly, the December 31, 2013 loan portfolio segment balances were reclassified to conform to the June 30, 2014 presentation. The effect of this reclassification was not considered material to the overall allowance for loan losses, did not change the total loan balances, and is not considered material to the consolidated financial statements taken as a whole.

Transactions in the allowance for loan losses for the three months ended June 30, 2014 were as follows:

 

     Commercial,            Residential                          
     Industrial, and     Commercial      Real           Credit              
     Agricultural     Mortgages      Estate     Consumer     Cards     Overdrafts     Total  

Allowance for loan losses, April 1, 2014

   $ 8,278      $ 3,704       $ 2,455      $ 1,972      $ 68      $ 197      $ 16,674   

Charge-offs

     (319     0         (76     (369     (2     (64     (830

Recoveries

     1        10         0        31        1        27        70   

Provision for loan losses

     136        867         88        362        21        27        1,501   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, June 30, 2014

   $ 8,096      $ 4,581       $ 2,467      $ 1,996      $ 88      $ 187      $ 17,415   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transactions in the allowance for loan losses for the six months ended June 30, 2014 were as follows:

 

     Commercial,           Residential                          
     Industrial, and     Commercial     Real           Credit              
     Agricultural     Mortgages     Estate     Consumer     Cards     Overdrafts     Total  

Allowance for loan losses, January 1, 2014

   $ 8,212      $ 3,536      $ 2,450      $ 1,763      $ 66      $ 207      $ 16,234   

Charge-offs

     (319     (50     (198     (768     (23     (122     (1,480

Recoveries

     1        10        19        53        3        55        141   

Provision for loan losses

     202        1,085        196        948        42        47        2,520   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, June 30, 2014

   $ 8,096      $ 4,581      $ 2,467      $ 1,996      $ 88      $ 187      $ 17,415   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


Transactions in the allowance for loan losses for the three months ended June 30, 2013 were as follows:

 

     Commercial,           Residential                          
     Industrial, and     Commercial     Real           Credit              
     Agricultural     Mortgages     Estate     Consumer     Cards     Overdrafts     Total  

Allowance for loan losses, April 1, 2013

   $ 5,271      $ 4,299      $ 2,395      $ 1,707      $ 77      $ 148      $ 13,897   

Charge-offs

     (84     (923     (169     (346     (17     (44     (1,583

Recoveries

     7        2        3        33        8        18        71   

Provision (benefit) for loan losses

     144        2,518        279        161        (13     26        3,115   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, June 30, 2013

   $ 5,338      $ 5,896      $ 2,508      $ 1,555      $ 55      $ 148      $ 15,500   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transactions in the allowance for loan losses for the six months ended June 30, 2013 were as follows:

 

     Commercial,           Residential                          
     Industrial, and     Commercial     Real           Credit              
     Agricultural     Mortgages     Estate     Consumer     Cards     Overdrafts     Total  

Allowance for loan losses, January 1, 2013

   $ 4,940      $ 4,697      $ 2,466      $ 1,699      $ 83      $ 175      $ 14,060   

Charge-offs

     (84     (1,530     (341     (677     (29     (91     (2,752

Recoveries

     7        3        4        74        10        49        147   

Provision (benefit) for loan losses

     475        2,726        379        459        (9     15        4,045   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, June 30, 2013

   $ 5,338      $ 5,896      $ 2,508      $ 1,555      $ 55      $ 148      $ 15,500   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and is based on the Corporation’s impairment method as of June 30, 2014 and December 31, 2013. The recorded investment in loans excludes accrued interest and unearned discounts due to their insignificance.

June 30, 2014

 

     Commercial,
Industrial, and
Agricultural
     Commercial
Mortgages
     Residential
Real

Estate
     Consumer      Credit
Cards
     Overdrafts      Total  

Allowance for loan losses:

                    

Ending allowance balance attributable to loans:

                    

Individually evaluated for impairment

   $ 352       $ 307       $ 204       $ 0       $ 0       $ 0       $ 863   

Collectively evaluated for impairment

     7,632         2,603         2,263         1,996         88         187         14,769   

Acquired with deteriorated credit quality

     0         0         0         0         0         0         0   

Modified in a troubled debt restructuring

     112         1,671         0         0         0         0         1,783   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 8,096       $ 4,581       $ 2,467       $ 1,996       $ 88       $ 187       $ 17,415   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Individually evaluated for impairment

   $ 4,537       $ 2,467       $ 400       $ 0       $ 0       $ 0       $ 7,404   

Collectively evaluated for impairment

     416,163         327,306         476,786         65,314         5,115         317         1,291,001   

Acquired with deteriorated credit quality

     0         2,227         0         0         0         0         2,227   

Modified in a troubled debt restructuring

     1,699         10,048         0         0         0         0         11,747   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 422,399       $ 342,048       $ 477,186       $ 65,314       $ 5,115       $ 317       $ 1,312,379   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

 

     Commercial,
Industrial, and
Agricultural
     Commercial
Mortgages
     Residential
Real Estate
     Consumer      Credit
Cards
     Overdrafts      Total  

Allowance for loan losses:

                    

Ending allowance balance attributable to loans:

                    

Individually evaluated for impairment

   $ 372       $ 55       $ 0       $ 0       $ 0       $ 0       $ 427   

Collectively evaluated for impairment

     7,725         2,141         2,450         1,763         66         207         14,352   

Acquired with deteriorated credit quality

     0         0         0         0         0         0         0   

Modified in a troubled debt restructuring

     115         1,340         0         0         0         0         1,455   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 8,212       $ 3,536       $ 2,450       $ 1,763       $ 66       $ 207       $ 16,234   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Loans:

                    

Individually evaluated for impairment

   $ 4,923       $ 1,249       $ 0       $ 0       $ 0       $ 0       $ 6,172   

Collectively evaluated for impairment

     421,002         329,645         459,114         63,491         5,065         409         1,278,726   

Acquired with deteriorated credit quality

     0         2,225         0         0         0         0         2,225   

Modified in a troubled debt restructuring

     1,790         10,346         0         0         0         0         12,136   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 427,715       $ 343,465       $ 459,114       $ 63,491       $ 5,065       $ 409       $ 1,299,259   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following tables present information related to loans individually evaluated for impairment, including loans modified in troubled debt restructurings, by portfolio segment as of June 30, 2014 and December 31, 2013 and for the three and six months ended June 30, 2014 and 2013:

June 30, 2014

 

     Unpaid Principal
Balance
     Recorded
Investment
     Allowance for Loan
Losses Allocated
 

With an allowance recorded:

        

Commercial, industrial, and agricultural

   $ 4,045       $ 3,995       $ 465   

Commercial mortgage

     5,938         5,609         1,977   

Residential real estate

     400         400         204   

With no related allowance recorded:

        

Commercial, industrial, and agricultural

     4,579         2,242         0   

Commercial mortgage

     6,905         6,905         0   

Residential real estate

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Total

   $ 21,867       $ 19,151       $ 2,646   
  

 

 

    

 

 

    

 

 

 

December 31, 2013

 

     Unpaid Principal
Balance
     Recorded
Investment
     Allowance for Loan
Losses Allocated
 

With an allowance recorded:

        

Commercial, industrial, and agricultural

   $ 5,929       $ 4,679       $ 487   

Commercial mortgage

     5,646         5,443         1,395   

Residential real estate

     0         0         0   

With no related allowance recorded:

        

Commercial, industrial, and agricultural

     2,055         2,034         0   

Commercial mortgage

     6,178         6,152         0   

Residential real estate

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Total

   $ 19,808       $ 18,308       $ 1,882   
  

 

 

    

 

 

    

 

 

 

 

     Three Months Ended June 30, 2014      Six Months Ended June 30, 2014  
     Average      Interest      Cash Basis      Average      Interest      Cash Basis  
     Recorded      Income      Interest      Recorded      Income      Interest  
     Investment      Recognized      Recognized      Investment      Recognized      Recognized  

With an allowance recorded:

                 

Commercial, industrial, and agricultural

   $ 4,318       $ 1       $ 1       $ 4,438       $ 2       $ 2   

Commercial mortgage

     5,402         0         0         5,416         0         0   

Residential real estate

     200         3         3         133         11         11   

With no related allowance recorded:

                 

Commercial, industrial, and agricultural

     2,234         0         0         2,167         0         0   

Commercial mortgage

     6,249         0         0         6,217         0         0   

Residential real estate

     0         0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,403       $ 4       $ 4       $ 18,371       $ 13       $ 13   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

20


     Three Months Ended June 30, 2013      Six Months Ended June 30, 2013  
     Average      Interest      Cash Basis      Average      Interest      Cash Basis  
     Recorded      Income      Interest      Recorded      Income      Interest  
     Investment      Recognized      Recognized      Investment      Recognized      Recognized  

With an allowance recorded:

                 

Commercial, industrial, and agricultural

   $ 1,459       $ 1       $ 1       $ 1,621       $ 1       $ 1   

Commercial mortgage

     5,787         0         0         6,009         3         3   

Residential real estate

     62         2         2         191         3         3   

With no related allowance recorded:

                 

Commercial, industrial, and agricultural

     2,172         0         0         2,184         0         0   

Commercial mortgage

     14,637         0         0         15,270         0         0   

Residential real estate

     76         0         0         143         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 24,193       $ 3       $ 3       $ 25,418       $ 7       $ 7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still accruing interest by class of loans as of June 30, 2014 and December 31, 2013:

 

     June 30, 2014      December 31, 2013  
     Nonaccrual      Past Due Over
90 Days

Still on
Accrual
     Nonaccrual      Past Due Over
90 Days

Still on
Accrual
 

Commercial, industrial, and agricultural

   $  1,491       $ 319       $  1,006       $ 0   

Commercial mortgages

     4,553         0         7,236         0   

Residential real estate

     4,614         326         2,389         150   

Consumer

     1,009         7         942         170   

Credit cards

     0         53         0         24   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11,667       $ 705       $ 11,573       $ 344   
  

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual loans and loans past due over 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

The following table presents the aging of the recorded investment in past due loans as of June 30, 2014 and December 31, 2013 by class of loans.

June 30, 2014

 

     30-59 Days
Past Due
     60-89 Days
Past Due
     Greater Than
90 Days

Past Due
     Total Past
Due
     Loans Not
Past Due
     Total  

Commercial, industrial, and agricultural

   $ 442       $ 1,708       $ 1,643       $ 3,793       $ 418,606       $ 422,399   

Commercial mortgages

     1,213         129         4,553         5,895         336,153         342,048   

Residential real estate

     3,648         1,074         4,940         9,662         467,524         477,186   

Consumer

     153         50         251         454         64,860         65,314   

Credit cards

     0         103         53         156         4,959         5,115   

Overdrafts

     0         0         0         0         317         317   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,456       $ 3,064       $ 11,440       $ 19,960       $ 1,292,419       $ 1,312,379   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

21


December 31, 2013

 

     30-59 Days
Past Due
     60-89 Days
Past Due
     Greater Than
90 Days

Past Due
     Total Past
Due
     Loans Not
Past Due
     Total  

Commercial, industrial, and agricultural

   $ 211       $ 542       $ 855       $ 1,608       $ 426,107       $ 427,715   

Commercial mortgages

     1,258         713         7,236         9,207         334,258         343,465   

Residential real estate

     4,216         114         2,539         6,869         452,245         459,114   

Consumer

     334         1,049         1,112         2,495         60,996         63,491   

Credit cards

     0         29         24         53         5,012         5,065   

Overdrafts

     0         0         0         0         409         409   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,019       $ 2,447       $ 11,766       $ 20,232       $ 1,279,027       $ 1,299,259   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings

The terms of certain loans have been modified as troubled debt restructurings. The modification of the terms of such loans included either or both of the following: a reduction of the stated interest rate of the loan or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk.

The following table presents the number of loans, loan balances, and specific reserves for loans that have been restructured in a troubled debt restructuring as of June 30, 2014 and December 31, 2013.

 

     June 30, 2014      December 31, 2013  
     Number of
Loans
     Loan
Balance
     Specific
Reserve
     Number of
Loans
     Loan
Balance
     Specific
Reserve
 

Commercial, industrial, and agricultural

     5       $ 1,699       $ 112         5       $ 1,790       $ 115   

Commercial mortgages

     7         10,048         1,671         7         10,346         1,340   

Residential real estate

     0         0         0         0         0         0   

Consumer

     0         0         0         0         0         0   

Credit cards

     0         0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     12       $ 11,747       $ 1,783         12       $ 12,136       $ 1,455   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no loans modified as troubled debt restructurings during the three or six months ended June 30, 2014. The following table presents loans by class modified as troubled debt restructurings that occurred during the six months ended June 30, 2013. There were no loans modified as troubled debt restructurings during the three months ended June 30, 2013.

 

     Six Months Ended June 30, 2013  
     Number of
Loans
     Pre-Modification
Outstanding Recorded
Investment
     Post-Modification
Outstanding  Recorded
Investment
 

Commercial, industrial, and agricultural

     0       $ 0       $ 0   

Commercial mortgages

     1         346         403   

Residential real estate

     0         0         0   

Consumer

     0         0         0   

Credit cards

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Total

     1       $ 346       $ 403   
  

 

 

    

 

 

    

 

 

 

The troubled debt restructuring described above did not increase the allowance for loan losses during the three or six months ended June 30, 2013.

Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 4 to 15 years. Modifications involving an extension of the maturity date were for periods ranging from 4 to 18 years.

 

22


A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. Except as discussed below, all loans modified in troubled debt restructurings are performing in accordance with their modified terms as of June 30, 2014 and December 31, 2013 and no principal balances were forgiven in connection with the loan restructurings.

In the first quarter of 2013, the Corporation recorded a partial chargeoff of $595 for a commercial mortgage loan with a balance of $1,660 that had defaulted under its restructured terms in 2012 and was placed on nonaccrual status. The Corporation recorded an additional provision for loan losses of $0 and $135 on this loan during the three and six months ended June 30, 2013.

During the year ended December 31, 2013, a commercial mortgage loan with a balance of $1,086 defaulted under its restructured terms in 2013 and was placed on nonaccrual status. The Corporation recorded an additional provision for loan losses of $615 on this loan during the year ended December 31, 2013.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without a loan modification. This evaluation is performed using the Corporation’s internal underwriting policies. The Corporation has no further loan commitments to customers whose loans are classified as a troubled debt restructuring.

Generally, non-performing troubled debt restructurings are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

Credit Quality Indicators

The Corporation classifies commercial, industrial, and agricultural loans and commercial mortgage loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Loans with outstanding balances greater than $1 million are analyzed at least semiannually and loans with outstanding balances of less than $1 million are analyzed at least annually.

The Corporation uses the following definitions for risk ratings:

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Corporation’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not rated as special mention, substandard, or doubtful are considered to be pass rated loans. All loans included in the following tables have been assigned a risk rating within 12 months of the balance sheet date.

June 30, 2014

 

     Pass      Special
Mention
     Substandard      Doubtful      Total  

Commercial, industrial, and agricultural

   $ 396,268       $ 4,233       $ 21,565       $ 333       $ 422,399   

Commercial mortgages

     297,995         2,857         40,752         444         342,048   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 694,263       $ 7,090       $ 62,317       $ 777       $ 764,447   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

23


December 31, 2013

 

            Special                       
     Pass      Mention      Substandard      Doubtful      Total  

Commercial, industrial, and agricultural

   $ 402,507       $ 5,509       $ 19,318       $ 381       $ 427,715   

Commercial mortgages

     281,421         16,623         44,936         485         343,465   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 683,928       $ 22,132       $ 64,254       $ 866       $ 771,180   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential real estate, consumer, and credit card loan classes, the Corporation also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in residential, consumer, and credit card loans based on payment activity as of June 30, 2014 and December 31, 2013:

 

     June 30, 2014      December 31, 2013  
     Residential             Credit      Residential             Credit  
     Real Estate      Consumer      Cards      Real Estate      Consumer      Cards  

Performing

   $ 472,246       $ 64,298       $ 5,062       $ 456,575       $ 62,379       $ 5,041   

Non-performing

     4,940         1,016         53         2,539         1,112         24   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 477,186       $ 65,314       $ 5,115       $ 459,114       $ 63,491       $ 5,065   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Corporation’s portfolio of residential real estate and consumer loans maintained within Holiday Financial Services Corporation (“Holiday”), a subsidiary that offers small balance unsecured and secured loans, primarily collateralized by automobiles and equipment, to borrowers with higher risk characteristics than are typical in the Bank’s consumer loan portfolio, are considered to be subprime loans.

Holiday’s loan portfolio is summarized as follows at June 30, 2014 and December 31, 2013:

 

     June 30,     December 31,  
     2014     2013  

Consumer

   $ 25,591      $ 24,891   

Residential real estate

     1,419        1,552   

Less: unearned discount

     (4,048     (3,896
  

 

 

   

 

 

 

Total

   $ 22,962      $ 22,547   
  

 

 

   

 

 

 

 

6. DEPOSITS

Total deposits at June 30, 2014 and December 31, 2013 are summarized as follows (in thousands):

 

     Percentage               
     Change     June 30, 2014      December 31, 2013  

Checking, non-interest bearing

     1.8   $ 225,366       $ 221,293   

Checking, interest bearing

     2.9     463,356         450,216   

Savings accounts

     7.1     961,393         898,043   

Certificates of deposit

     -24.4     200,932         265,762   
  

 

 

   

 

 

    

 

 

 
     0.9   $ 1,851,047       $ 1,835,314   
  

 

 

   

 

 

    

 

 

 

 

24


7. EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the applicable period, excluding outstanding participating securities. Diluted earnings per share is computed using the weighted average number of shares determined for the basic computation plus the dilutive effect of potential common shares issuable under certain stock compensation plans. For the three and six months ended June 30, 2013, 37,500 shares issuable pursuant to outstanding stock options were excluded from the diluted earnings per share calculations because the strike prices associated with the options exceeded the market price of the Corporation’s common stock thus making the shares anti-dilutive. There were no anti-dilutive shares outstanding during the three and six months ended June 30, 2014.

Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share pursuant to the two-class method. The Corporation has determined that its outstanding non-vested stock awards are participating securities.

The computation of basic and diluted earnings per share is shown below (in thousands except share and per share data):

 

     Three months ended     Six months ended  
     June 30,     June 30,  
     2014     2013     2014     2013  

Basic earnings per common share computation:

        

Net income per consolidated statements of income

   $ 5,617      $ 2,951      $ 10,783      $ 7,248   

Net earnings allocated to participating securities

     (25     (15     (46     (34
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings allocated to common stock

   $ 5,592      $ 2,936      $ 10,737      $ 7,214   
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributed earnings allocated to common stock

   $ 2,375      $ 2,053      $ 4,751      $ 4,107   

Undistributed earnings allocated to common stock

     3,217        883        5,986        3,107   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings allocated to common stock

   $ 5,592      $ 2,936      $ 10,737      $ 7,214   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding, including shares considered participating securities

     14,450        12,510        14,447        12,502   

Less: Average participating securities

     (60     (57     (56     (53
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares

     14,390        12,453        14,391        12,449   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

   $ 0.39      $ 0.24      $ 0.75      $ 0.58   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share computation:

        

Net earnings allocated to common stock

   $ 5,592      $ 2,936      $ 10,737      $ 7,214   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding for basic earnings per common share

     14,390        12,453        14,391        12,449   

Add: Dilutive effects of assumed exercises of stock options

     1        1        2        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares and dilutive potential common shares

     14,391        12,454        14,393        12,450   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

   $ 0.39      $ 0.24      $ 0.75      $ 0.58   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

8. DERIVATIVE INSTRUMENTS

On May 3, 2011, the Corporation executed an interest rate swap agreement with a 5 year term and an effective date of September 15, 2013 in order to hedge cash flows associated with $10 million of a subordinated note that was issued by the Corporation during 2007 and elected cash flow hedge accounting for the agreement. The Corporation’s objective in using this derivative is to add stability to interest expense and to manage its exposure to interest rate risk. The interest rate swap involves the receipt of variable-rate amounts in exchange for fixed-rate payments from September 15, 2013 to September 15, 2018 without exchange of the underlying notional amount. At June 30, 2014, the variable rate on the subordinated debt was 1.78% (LIBOR plus 155 basis points) and the Corporation was paying 5.57% (4.02% fixed rate plus 155 basis points).

 

25


On August 1, 2008, the Corporation executed an interest rate swap agreement with a 5 year term and an effective date of September 15, 2008 in order to hedge cash flows associated with $10 million of a subordinated note discussed above. The Corporation’s objective in using this derivative was to add stability to interest expense and to manage its exposure to interest rate risk. The interest rate swap involved the receipt of variable-rate amounts in exchange for fixed-rate payments from September 15, 2008 to the September 15, 2013 maturity date without exchange of the underlying notional amount.

As of June 30, 2014 and December 31, 2013, no derivatives were designated as fair value hedges or hedges of net investments in foreign operations. Additionally, the Corporation does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedges.

The following tables provide information about the amounts and locations of activity related to the interest rate swaps designated as cash flow hedges within the Corporation’s consolidated balance sheet and statement of income as of June 30, 2014 and December 31, 2013 and for the three and six months ended June 30, 2014 and 2013:

 

          Fair value as of  
     Balance Sheet    June 30,   December 31,  
     Location    2014   2013  

Interest rate contracts

   Accrued interest and

other liabilities

   ($1,089)   ($ 1,116

For the Three Months

          

Ended June 30, 2014

         (a)      (b)     (c)      (d)     (e)   

Interest rate contracts

   $ 17      Interest expense –
subordinated debentures
  ($ 94   Other
income
  $ 0   

For the Six Months

          

Ended June 30, 2014

         (a)      (b)     (c)  &nbs