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 September 30, 2015

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

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

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.:

 

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 November 2, 2015

COMMON STOCK NO PAR VALUE PER SHARE: 14,407,148 SHARES


INDEX

PART I.

FINANCIAL INFORMATION

 

     Page Number  

ITEM 1 – Financial Statements

  

Consolidated Balance Sheets – September 30, 2015 (unaudited) and December 31, 2014 (audited)

     1   

Consolidated Statements of Income – Three months ended September 30, 2015 and 2014 (unaudited)

     2   

Consolidated Statements of Income – Nine months ended September 30, 2015 and 2014 (unaudited)

     3   

Consolidated Statements of Comprehensive Income – Three and nine months ended September  30, 2015 and 2014 (unaudited)

     4   

Consolidated Statements of Cash Flows – Nine months ended September 30, 2015 and 2014 (unaudited)

     5   

Notes to Consolidated Financial Statements

     6   

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

     25   

ITEM 3 – Quantitative and Qualitative Disclosures about Market Risk

     34   

ITEM 4 – Controls and Procedures

     35   
PART II.   
OTHER INFORMATION   

ITEM 1 – Legal Proceedings

     36   

ITEM 1A – Risk Factors

     36   

ITEM 6 – Exhibits

     36   

Signatures

     37   


Forward-Looking Statements

This quarterly report on Form 10-Q 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 our 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; (xvi) other economic, competitive, governmental or technological factors affecting our operations, markets, products, services and prices; and (xvii) our success at managing the foregoing items. Some of these and other factors are discussed in our annual and quarterly reports filed with the Securities and Exchange Commission (“SEC”). 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)        
     September 30,     December 31,  
     2015     2014  
ASSETS   

Cash and due from banks

   $ 23,054      $ 24,520   

Interest bearing deposits with other banks

     4,364        3,408   
  

 

 

   

 

 

 

Total cash and cash equivalents

     27,418        27,928   

Interest bearing time deposits with other banks

     225        225   

Securities available for sale

     587,333        685,720   

Trading securities

     4,489        4,505   

Loans held for sale

     551        887   

Loans

     1,520,519        1,359,596   

Less: unearned discount

     (4,398     (4,307

Less: allowance for loan losses

     (17,236     (17,373
  

 

 

   

 

 

 

Net loans

     1,498,885        1,337,916   

FHLB and other equity interests

     13,438        6,695   

Premises and equipment, net

     38,493        35,378   

Bank owned life insurance

     40,698        39,845   

Mortgage servicing rights

     867        856   

Goodwill

     27,194        27,194   

Core deposit intangible

     2,626        3,403   

Accrued interest receivable and other assets

     17,505        18,661   
  

 

 

   

 

 

 

Total Assets

   $ 2,259,722      $ 2,189,213   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY   

Non-interest bearing deposits

   $ 270,816      $ 244,743   

Interest bearing deposits

     1,576,876        1,602,336   
  

 

 

   

 

 

 

Total deposits

     1,847,692        1,847,079   

FHLB and other long-term borrowings

     75,526        75,715   

Other short-term borrowings

     90,504        35,980   

Subordinated debentures

     20,620        20,620   

Accrued interest payable and other liabilities

     25,529        21,271   
  

 

 

   

 

 

 

Total liabilities

     2,059,871        2,000,665   
  

 

 

   

 

 

 

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

     0        0   

Additional paid in capital

     77,677        78,022   

Retained earnings

     120,170        110,619   

Treasury stock, at cost (67,001 shares at September 30, 2015 and 69,066 shares at December 31, 2014)

     (1,146     (1,152

Accumulated other comprehensive income

     3,150        1,059   
  

 

 

   

 

 

 

Total shareholders’ equity

     199,851        188,548   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 2,259,722      $ 2,189,213   
  

 

 

   

 

 

 

 

 

See Notes to Consolidated Financial Statements

 

1


CONSOLIDATED STATEMENTS OF INCOME (unaudited)

Dollars in thousands, except per share data

 

 

     Three months ended  
     September 30,  
     2015     2014  

INTEREST AND DIVIDEND INCOME:

    

Loans including fees

   $ 18,459      $ 17,146   

Securities:

    

Taxable

     2,692        3,340   

Tax-exempt

     972        941   

Dividends

     114        105   
  

 

 

   

 

 

 

Total interest and dividend income

     22,237        21,532   
  

 

 

   

 

 

 

INTEREST EXPENSE:

    

Deposits

     2,169        2,081   

Borrowed funds

     841        825   

Subordinated debentures (includes $95 and $96 accumulated other comprehensive income reclassification for change in fair value of interest rate swap agreements in 2015 and 2014, respectively)

     189        186   
  

 

 

   

 

 

 

Total interest expense

     3,199        3,092   
  

 

 

   

 

 

 

NET INTEREST INCOME

     19,038        18,440   

PROVISION FOR LOAN LOSSES

     463        1,038   
  

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     18,575        17,402   
  

 

 

   

 

 

 

NON-INTEREST INCOME:

    

Wealth and asset management fees

     711        710   

Service charges on deposit accounts

     1,171        1,198   

Other service charges and fees

     838        762   

Net realized gains on available-for-sale securities (includes $73 and $41 accumulated other comprehensive income reclassifications for net realized gains on available-for-sale securities in 2015 and 2014, respectively)

     73        41   

Net realized and unrealized losses on trading securities

     (260     (59

Mortgage banking

     164        144   

Bank owned life insurance

     288        222   

Other

     430        478   
  

 

 

   

 

 

 

Total non-interest income

     3,415        3,496   
  

 

 

   

 

 

 

NON-INTEREST EXPENSES:

    

Salaries and benefits

     7,572        6,562   

Net occupancy expense

     1,764        1,695   

Amortization of core deposit intangible

     259        302   

Data processing

     1,095        999   

State and local taxes

     474        461   

Legal, professional, and examination fees

     438        409   

Advertising

     414        368   

FDIC insurance premiums

     338        342   

Other

     2,073        2,012   
  

 

 

   

 

 

 

Total non-interest expenses

     14,427        13,150   
  

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     7,563        7,748   

INCOME TAX EXPENSE (includes ($7) and ($20) income tax expense from reclassification items in 2015 and 2014, respectively)

     2,041        2,200   
  

 

 

   

 

 

 

NET INCOME

   $ 5,522      $ 5,548   
  

 

 

   

 

 

 

EARNINGS PER SHARE:

    

Basic

   $ 0.38      $ 0.39   

Diluted

   $ 0.38      $ 0.39   

DIVIDENDS PER SHARE:

    

Cash dividends per share

   $ 0.165      $ 0.165   

 

 

See Notes to Consolidated Financial Statements

 

2


CONSOLIDATED STATEMENTS OF INCOME (unaudited)

Dollars in thousands, except per share data

 

 

     Nine months ended  
     September 30,  
     2015     2014  

INTEREST AND DIVIDEND INCOME:

    

Loans including fees

   $ 53,294      $ 51,300   

Securities:

    

Taxable

     8,542        10,030   

Tax-exempt

     2,859        2,777   

Dividends

     489        280   
  

 

 

   

 

 

 

Total interest and dividend income

     65,184        64,387   
  

 

 

   

 

 

 

INTEREST EXPENSE:

    

Deposits

     6,381        6,230   

Borrowed funds

     2,464        2,436   

Subordinated debentures (includes $284 and $287 accumulated other comprehensive income reclassification for change in fair value of interest rate swap agreements in 2015 and 2014, respectively)

     560        558   
  

 

 

   

 

 

 

Total interest expense

     9,405        9,224   
  

 

 

   

 

 

 

NET INTEREST INCOME

     55,779        55,163   

PROVISION FOR LOAN LOSSES

     1,892        3,558   
  

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     53,887        51,605   
  

 

 

   

 

 

 

NON-INTEREST INCOME:

    

Wealth and asset management fees

     2,228        2,135   

Service charges on deposit accounts

     3,282        3,384   

Other service charges and fees

     2,223        2,000   

Net realized gains on available-for-sale securities (includes $564 and $245 accumulated other comprehensive income reclassifications for net realized gains on available-for-sale securities in 2015 and 2014, respectively)

     564        245   

Net realized and unrealized (losses) gains on trading securities

     (321     15   

Mortgage banking

     484        502   

Bank owned life insurance

     853        701   

Other

     1,340        1,233   
  

 

 

   

 

 

 

Total non-interest income

     10,653        10,215   
  

 

 

   

 

 

 

NON-INTEREST EXPENSES:

    

Salaries and benefits

     21,710        19,840   

Net occupancy expense

     5,357        5,216   

Amortization of core deposit intangible

     777        906   

Data processing

     3,223        2,943   

State and local taxes

     1,498        1,477   

Legal, professional, and examination fees

     1,088        1,153   

Advertising

     1,167        1,110   

FDIC insurance premiums

     957        1,026   

Merger costs

     0        0   

Other

     5,864        5,348   
  

 

 

   

 

 

 

Total non-interest expenses

     41,641        39,019   
  

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     22,899        22,801   

INCOME TAX EXPENSE (includes $98 and ($14) income tax expense from reclassification items in 2015 and 2014, respectively)

     6,210        6,470   
  

 

 

   

 

 

 

NET INCOME

   $ 16,689      $ 16,331   
  

 

 

   

 

 

 

EARNINGS PER SHARE:

    

Basic

   $ 1.16      $ 1.13   

Diluted

   $ 1.16      $ 1.13   

DIVIDENDS PER SHARE:

    

Cash dividends per share

   $ 0.495      $ 0.495   

 

 

See Notes to Consolidated Financial Statements

 

3


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

Dollars in thousands

 

 

     Three months ended     Nine months ended  
     September 30,     September 30,  
     2015     2014     2015     2014  

NET INCOME

   $ 5,522      $ 5,548      $ 16,689      $ 16,331   

Other comprehensive income, 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 $44 and and ($20) for the three months ended September 30, 2015 and 2014, and $86 and $37 for the nine months ended September 30, 2015 and 2014

     (81     37        (160     (70

Reclassification adjustment for losses recognized in earnings, net of tax of ($33) and ($34) for the three months ended September 30, 2015 and 2014, and ($99) and ($100) for the nine months ended September 30, 2015 and 2014

     62        62        185        187   
  

 

 

   

 

 

   

 

 

   

 

 

 
     (19     99        25        117   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized gains on securities available for sale:

        

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

        

Unrealized gains arising during the period, net of tax of $0 and ($26) for the three months ended September 30, 2015 and 2014, and ($90) and ($74) for the nine months ended September 30, 2015 and 2014

     —          48        165        137   
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains on other securities available for sale:

        

Unrealized gains arising during the period, net of tax of $(2,059) and ($552) for the three months ended September 30, 2015 and 2014, and ($1,221) and ($4,441) for the nine months ended September 30, 2015 and 2014

     3,822        1,079        2,268        8,567   

Reclassification adjustment for realized gains included in net income, net of tax of $26 and $14 for the three months ended September 30, 2015 and 2014, and $197 and $85 for the nine months ended September 30, 2015 and 2014

     (47     (27     (367     (160
  

 

 

   

 

 

   

 

 

   

 

 

 
     3,775        1,052        1,901        8,407   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     3,756        1,199        2,091        8,661   
  

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $ 9,278      $ 6,747      $ 18,780      $ 24,992   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

See Notes to Consolidated Financial Statements

 

4


CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Dollars in thousands

 

 

     Nine months ended  
     September 30,  
     2015     2014  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 16,689      $ 16,331   

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

    

Provision for loan losses

     1,892        3,558   

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

     3,051        3,115   

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

     202        697   

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

     (564     (245

Net realized and unrealized losses (gains) on trading securities

     321        (15

Proceeds from sale of trading securities

     618        641   

Purchase of trading securities

     (923     (930

Gain on sale of loans

     (402     (354

Net losses on dispositions of premises and equipment and foreclosed assets

     16        162   

Proceeds from sale of loans

     11,222        6,347   

Origination of loans held for sale

     (10,704     (7,007

Income on bank owned life insurance

     (853     (701

Stock-based compensation expense

     474        445   

Contribution of treasury stock

     84        90   

Changes in:

    

Accrued interest receivable and other assets

     898        4,260   

Accrued interest payable and other liabilities

     3,097        (6,920
  

 

 

   

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

     25,118        19,474   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Net decrease in interest bearing time deposits with other banks

     0        50   

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

     59,935        59,021   

Proceeds from sales of available-for-sale securities

     86,554        38,826   

Purchase of available-for-sale securities

     (46,542     (100,250

Loan origination and payments, net

     (161,300     (31,669

Purchase of FHLB and other equity interests

     (6,743     (958

Purchase of premises and equipment

     (5,182     (3,891

Proceeds from the sale of premises and equipment and foreclosed assets

     708        505   
  

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     (72,570     (38,366
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net change in:

    

Checking, money market and savings accounts

     (19,375     111,876   

Certificates of deposit

     19,988        (80,327

Purchase of treasury stock

     (868     (1,675

Cash dividends paid

     (7,138     (7,145

Repayment of long-term borrowings

     (189     (173

Proceeds from long-term borrowings

     0        950   

Net change in short-term borrowings

     54,524        (4,850
  

 

 

   

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

     46,942        18,656   
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (510     (236

CASH AND CASH EQUIVALENTS, Beginning

     27,928        29,633   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, Ending

   $ 27,418      $ 29,397   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

    

Cash paid during the period for:

    

Interest

   $ 9,291      $ 9,288   

Income taxes

   $ 5,431      $ 6,411   

SUPPLEMENTAL NONCASH DISCLOSURES:

    

Transfers to other real estate owned

   $ 484      $ 420   

Grant of restricted stock awards from treasury stock

   $ 821      $ 609   

 

 

See Notes to Consolidated Financial Statements

 

5


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 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 September 30, 2015 and for the three and nine month periods ended September 30, 2015 and 2014 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 nine month periods ended September 30, 2015 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, 2014 (the “2014 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 on the fourth anniversary of the grant date. 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 on the third anniversary of the grant date.

At September 30, 2015, 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 nine month periods ended September 30, 2015 and 2014.

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 $169 and $474 for the three and nine months ended September 30, 2015, and $118 and $445 for the three and nine months ended September 30, 2014. As of September 30, 2015, there was $1,148 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 September 30, 2015 follows:

 

           

Per Share

Weighted Average

 
     Shares      Grant Date Fair Value  

Nonvested at beginning of period

     89,850       $ 17.00   

Granted

     0         0   

Vested

     (1,500      17.00   
  

 

 

    

 

 

 

Nonvested at end of period

     88,350       $ 17.00   
  

 

 

    

 

 

 

 

6


A summary of changes in nonvested restricted stock awards for the nine months ended September 30, 2015 follows:

 

           

Per Share

Weighted Average

 
     Shares      Grant Date Fair Value  

Nonvested at beginning of period

     68,210       $ 16.82   

Granted

     48,300         17.00   

Vested

     (28,160      16.56   
  

 

 

    

 

 

 

Nonvested at end of period

     88,350       $ 17.00   
  

 

 

    

 

 

 

 

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. As such, significant fair value inputs can generally be verified and do not typically involve significant management judgments (Level 2 inputs).

 

7


Assets and liabilities measured at fair value on a recurring basis are as follows at September 30, 2015 and December 31, 2014:

 

           Fair Value Measurements at September 30, 2015 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

   $ 147,009      $ 0       $ 147,009      $ 0   

States and political subdivisions

     180,429        0         180,429        0   

Residential and multi-family mortgage

     184,347        0         184,347        0   

Corporate notes and bonds

     19,036        0         19,036        0   

Pooled trust preferred

     1,160        0         0        1,160   

Pooled SBA

     54,359        0         54,359        0   

Other securities

     993        993         0        0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Securities Available For Sale

   $ 587,333      $ 993       $ 585,180      $ 1,160   
  

 

 

   

 

 

    

 

 

   

 

 

 

Trading Securities:

         

Corporate equity securities

   $ 2,997      $ 2,997       $ 0      $ 0   

Mutual funds

     1,028        1,028         0        0   

Certificates of deposit

     254        254         0        0   

Corporate notes and bonds

     155        0         155        0   

U.S. Government sponsored entities

     55        0         55        0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Trading Securities

   $ 4,489      $ 4,279       $ 210      $ 0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities,

         

Interest rate swaps

   $ (908   $ 0       $ (908   $ 0   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

           Fair Value Measurements at December 31, 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

   $ 155,564      $ 0       $ 155,564      $ 0   

States and political subdivisions

     181,002        0         181,002        0   

Residential and multi-family mortgage

     265,164        0         265,164        0   

Corporate notes and bonds

     19,430        0         19,430        0   

Pooled trust preferred

     905        0         0        905   

Pooled SBA

     62,653        0         62,653        0   

Other securities

     1,002        1,002         0        0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Securities Available For Sale

   $ 685,720      $ 1,002       $ 683,813      $ 905   
  

 

 

   

 

 

    

 

 

   

 

 

 

Trading Securities:

         

Corporate equity securities

   $ 3,044      $ 3,044       $ 0      $     

Mutual funds

     997        997         0        0   

Certificates of deposit

     253        253         0        0   

Corporate notes and bonds

     157        0         157        0   

U.S. Government sponsored entities

     54        0         54        0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Trading Securities

   $ 4,505      $ 4,294       $ 211      $ 0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities,

         

Interest rate swaps

   $ (946   $ 0       $ (946   $ 0   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

8


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 September 30, 2015 and September 30, 2014:

 

     2015      2014  

Balance, July 1

   $ 1,160       $ 798   

Total gains or (losses):

     

Included in other comprehensive income (unrealized)

     0         73   
  

 

 

    

 

 

 

Balance, September 30

   $ 1,160       $ 871   
  

 

 

    

 

 

 

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 nine months ended September 30, 2015 and September 30, 2014:

 

     2015      2014  

Balance, January 1

   $ 905       $ 661   

Total gains or (losses):

     

Included in other comprehensive income (unrealized)

     255         210   
  

 

 

    

 

 

 

Balance, September 30

   $ 1,160       $ 871   
  

 

 

    

 

 

 

The following table presents quantitative information about Level 3 fair value measurements at September 30, 2015:

 

    

Fair
value

    

Valuation
Technique

  

Unobservable

Inputs

  

Input

Utilized

Pooled trust preferred

   $ 1,160      

Discounted

cash flow

   Collateral default rate    0.63% and declining to 0.5% over the remainder of 2015 and thereafter
        

Yield

Prepayment speed

  

9%

2.0% constant prepayment rate in 2015 and thereafter

The following table presents quantitative information about Level 3 fair value measurements at December 31, 2014:

 

    

Fair
value

    

Valuation
Technique

  

Unobservable

Inputs

  

Input

Utilized

Pooled trust preferred

   $ 905      

Discounted

cash flow

   Collateral default rate    1% in 2015; 0.5% in 2016 and thereafter
        

Yield

Prepayment speed

  

11%

2.0% constant prepayment rate in 2015 and thereafter

At September 30, 2015 and December 31, 2014, 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.

 

9


Assets and liabilities measured at fair value on a non-recurring basis are as follows at September 30, 2015 and December 31, 2014:

 

            Fair Value Measurements at September 30, 2015 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

   $ 2,426         0         0       $ 2,426   

Commercial, industrial, and agricultural

   $ 2,824         0         0       $ 2,824   

 

            Fair Value Measurements at December 31, 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

   $ 2,353         0         0       $ 2,353   

Commercial, industrial, and agricultural

   $ 2,820         0         0       $ 2,820   

Impaired loans, which, if collateral dependent, are measured for impairment using the fair value of collateral, had a recorded investment of $7,004 with a valuation allowance of $1,754 as of September 30, 2015, resulting in an additional provision for loan losses of ($361) and ($298) for the corresponding three and nine month period ended September 30, 2015. Impaired loans had a recorded investment of $7,423 with a valuation allowance of $2,250 as of December 31, 2014. Additional provision for loan losses were incurred of ($69) and $51 for the three and nine months ended September 30, 2014.

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 September 30, 2015:

 

     Fair
value
     Valuation Technique   

Unobservable

Inputs

   Range
(Weighted Average)

Impaired loans – commercial

mortgages

   $ 2,426       Sales comparison
approach
   Adjustment for differences between the comparable sales    24% - 100% (40%)

Impaired loans – commercial,

industrial, and agricultural

   $ 2,824       Sales comparison
approach
   Adjustment for differences between the comparable sales    4%

 

10


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, 2014:

 

     Fair
value
     Valuation Technique     

Unobservable

Inputs

   Range
(Weighted Average)

Impaired loans – commercial

mortgages

   $ 2,353       Sales comparison
approach
     Adjustment for differences between the comparable sales    34% - 100% (44%)

Impaired loans – commercial,

industrial, and agricultural

   $ 2,820       Sales comparison
approach
     Adjustment for differences between the comparable sales    8% - 49% (13%)

Fair Value of Financial Instruments

The following table presents the carrying amount and fair value of financial instruments at September 30, 2015:

 

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

ASSETS

          

Cash and cash equivalents

   $ 27,418      $ 27,418      $ 0      $ 0      $ 27,418   

Interest bearing time deposits with other banks

     225        0        225        0        225   

Securities available for sale

     587,333        993        585,180        1,160        587,333   

Trading securities

     4,489        4,279        210        0        4,489   

Loans held for sale

     551        0        572        0        572   

Net loans

     1,498,885        0        0        1,498,395        1,498,395   

FHLB and other equity interests

     13,438        n/a        n/a        n/a        n/a   

Accrued interest receivable

     7,872        6        3,680        4,186        7,872   

LIABILITIES

          

Deposits

   $ (1,847,692   $ (1,650,797   $ (197,034   $ 0      $ (1,847,831

FHLB and other borrowings

     (166,030     0        (165,265     0        (165,265

Subordinated debentures

     (20,620     0        (11,524     0        (11,524

Interest rate swaps

     (908     0        (908     0        (908

Accrued interest payable

     (918     (357     (545     (16     (918

The following table presents the carrying amount and fair value of financial instruments at December 31, 2014:

 

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

ASSETS

          

Cash and cash equivalents

   $ 27,928      $ 27,928      $ 0      $ 0      $ 27,928   

Interest bearing time deposits with other banks

     225        0        224        0        224   

Securities available for sale

     685,720        1,002        683,813        905        685,720   

Trading securities

     4,505        4,296        209        0        4,505   

Loans held for sale

     887        0        938        0        938   

Net loans

     1,337,916        0        0        1,337,537        1,337,537   

FHLB and other equity interests

     6,695        n/a        n/a        n/a        n/a   

Accrued interest receivable

     7,441        5        3,503        3,933        7,441   

LIABILITIES

          

Deposits

   $ (1,847,079   $ (1,670,172   $ (176,036   $ 0      $ (1,846,208

FHLB and other borrowings

     (111,695     0        (111,821     0        (111,821

Subordinated debentures

     (20,620     0        (11,395     0        (11,395

Interest rate swaps

     (946     0        (946     0        (946

Accrued interest payable

     (804     (358     (430     (16     (804

 

11


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.

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 re-price 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 (“FHLB”) 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. The Level classification of accrued interest receivable is matched to the corresponding Level of 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 earning 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.

 

12


4. SECURITIES

Securities available for sale at September 30, 2015 and December 31, 2014 are as follows:

 

     September 30, 2015      December 31, 2014  
     Amortized      Unrealized     Fair      Amortized      Unrealized     Fair  
     Cost      Gains      Losses     Value      Cost      Gains      Losses     Value  

U.S. Gov’t sponsored entities

   $ 145,440       $ 2,102       $ (533   $ 147,009       $ 155,482       $ 2,301       $ (2,219   $ 155,564   

State & political subdivisions

     174,367         6,291         (229     180,429         174,600         6,804         (402     181,002   

Residential & multi-family mortgage

     184,471         1,825         (1,949     184,347         265,678         2,291         (2,805     265,164   

Corporate notes & bonds

     19,793         179         (936     19,036         20,791         139         (1,500     19,430   

Pooled trust preferred

     800         360         0        1,160         800         105         0        905   

Pooled SBA

     53,987         1,021         (649     54,359         63,139         1,074         (1,560     62,653   

Other securities

     1,020         0         (27     993         1,020         0         (18     1,002   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 579,878       $ 11,778       $ (4,323   $ 587,333       $ 681,510       $ 12,714       $ (8,504   $ 685,720   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

At September 30, 2015 and December 31, 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.

Trading securities at September 30, 2015 and December 31, 2014 are as follows:

 

     September 30,
2015
     December 31,
2014
 

Corporate equity securities

   $ 2,997       $ 3,044   

Mutual funds

     1,028         997   

Certificates of deposit

     254         253   

Corporate notes and bonds

     155         157   

U.S. Government sponsored entities

     55         54   
  

 

 

    

 

 

 

Total

   $ 4,489       $ 4,505   
  

 

 

    

 

 

 

Securities with unrealized losses at September 30, 2015 and December 31, 2014, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows (in thousands):

September 30, 2015

 

     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

   $ 44,488       $ (263   $ 37,250       $ (270   $ 84,738       $ (533

State & political subdivisions

     19,065         (167     3,134         (62     22,199         (229

Residential & multi-family mortgage

     69,507         (881     50,734         (1,068     120,241         (1,949

Corporate notes & bonds

     0         0        8,477         (936     8,477         (936

Pooled SBA

     0         0        28,500         (649     28,500         (649

Other securities

     0         0        993         (27     993         (27
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 136,060       $ (1,311   $ 129,088       $ (3,012   $ 265,148       $ (4,323
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

13


December 31, 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

   $ 26,069       $ (149   $ 85,016       $ (2,070   $ 111,085       $ (2,219

State & political subdivisions

     16,398         (179     12,363         (223     28,761         (402

Residential & multi-family mortgage

     70,360         (603     99,397         (2,202     169,757         (2,805

Corporate notes & bonds

     5,008         (30     7,935         (1,470     12,943         (1,500

Pooled SBA

     0         (0     34,608         (1,560     34,608         (1,560

Other securities

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 117,835       $ (961   $ 240,321       $ (7,543   $ 358,156       $ (8,504
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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.

A roll-forward of the other-than-temporary impairment amount related to credit losses for the three and nine months ended September 30, 2015 and 2014 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 September 30, 2015 and December 31, 2014, 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.

 

14


Information pertaining to the sale of available for sale securities is as follows:

 

     Proceeds      Gross Gains      Gross Losses  

Three months ended September 30, 2015

   $ 38,025       $ 244       $ (171

Nine months ended September 30, 2015

     86,554         852         (288

Three months ended September 30, 2014

     9,698         41         0   

Nine months ended September 30, 2014

     38,826         328         (83

The following is a schedule of the contractual maturity of securities available for sale, excluding equity securities, at September 30, 2015:

 

     Amortized
Cost
     Fair Value  

1 year or less

   $ 25,281       $ 25,501   

1 year – 5 years

     190,387         195,612   

5 years – 10 years

     94,600         95,971   

After 10 years

     30,132         30,550   
  

 

 

    

 

 

 
     340,400         347,634   

Residential and multi-family mortgage

     184,471         184,347   

Pooled SBA

     53,987         54,359   
  

 

 

    

 

 

 

Total debt securities

   $ 578,858       $ 586,340   
  

 

 

    

 

 

 

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 September 30, 2015 and December 31, 2014, securities carried at $344,036 and $325,799, respectively, were pledged to secure public deposits and for other purposes as provided by law.

 

5. LOANS

Total net loans at September 30, 2015 and December 31, 2014 are summarized as follows:

 

     September 30,
2015
     December 31,
2014
 

Commercial, industrial, and agricultural

   $ 450,969       $ 428,458   

Commercial mortgages

     421,799         352,752   

Residential real estate

     566,045         502,317   

Consumer

     75,126         69,648   

Credit cards

     5,037         5,233   

Overdrafts

     1,543         1,188   

Less: unearned discount

     (4,398      (4,307

allowance for loan losses

     (17,236      (17,373
  

 

 

    

 

 

 

Loans, net

   $ 1,498,885       $ 1,337,916   
  

 

 

    

 

 

 

At September 30, 2015 and December 31, 2014, net unamortized loan fees and costs of $(160) and $483, 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.

 

15


All relevant documentation, such as the loan application, financial statements and tax returns, required under the lending policies is summarized and provided to management 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 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 30% and 32% of the Corporation’s total loan portfolio at September 30, 2015 and December 31, 2014, respectively. Commercial mortgage loans comprised 28% and 26% of the Corporation’s total loan portfolio at September 30, 2015 and December 31, 2014, respectively. 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 37% of the Corporation’s total loan portfolio at September 30, 2015 and December 31, 2014, 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 originated for sale into the secondary market 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 September 30, 2015 and December 31, 2014. Terms and collateral requirements vary depending on the size and nature of the loan.

CNB 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.

Transactions in the allowance for loan losses for the three months ended September 30, 2015 were as follows:

 

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

Allowance for loan losses, July 1, 2015

   $ 6,598      $ 5,928      $ 2,612      $ 2,118      $ 98      $ 150      $ 17,504   

Charge-offs

     (80     0        (191     (448     (17     (54     (790

Recoveries

     12        1        4        21        3        18        59   

Provision (benefit) for loan losses

     89        (384     115        585        14        44        463   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, September 30, 2015

   $ 6,619      $ 5,545      $ 2,540      $ 2,276      $ 98      $ 158      $ 17,236   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transactions in the allowance for loan losses for the nine months ended September 30, 2015 were as follows:

 

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

Allowance for loan losses, January 1, 2015

   $ 7,114      $ 5,310       $ 2,479      $ 2,205      $ 71      $ 194      $ 17,373   

Charge-offs

     (219     0         (347     (1,448     (103     (159     (2,276

Recoveries

     39        51         5        76        8        68        247   

Provision (benefit) for loan losses

     (315     184         403        1,443        122        55        1,892   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, September 30, 2015

   $ 6,619      $ 5,545       $ 2,540      $ 2,276      $ 98      $ 158      $ 17,236   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

16


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

 

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

Allowance for loan losses, July 1, 2014

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

Charge-offs

     (60     (92     (17     (415     (16     (75     (675

Recoveries

     0        0        18        25        4        18        65   

Provision for loan losses

     690        (291     93        467        3        76        1,038   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, September 30, 2014

   $ 8,726      $ 4,198      $ 2,561      $ 2,073      $ 79      $ 206      $ 17,843   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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

Allowance for loan losses, January 1, 2014

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

Charge-offs

     (379     (142     (215     (1,183     (39     (197     (2,155

Recoveries

     1        10        37        78        7        73        206   

Provision for loan losses

     892        794        289        1,415        45        123        3,558   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, September 30, 2014

   $ 8,726      $ 4,198      $ 2,561      $ 2,073      $ 79      $ 206      $ 17,843   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 September 30, 2015 and December 31, 2014. The recorded investment in loans excludes accrued interest and unearned discounts due to their insignificance.

September 30, 2015

 

     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

   $ 371       $ 486       $ 186       $ 0       $ 0       $ 0       $ 1,043   

Collectively evaluated for impairment

     5,288         3,121         2,354         2,276         98         158         13,295   

Acquired with deteriorated credit quality

     0         0         0         0         0         0         0   

Modified in a troubled debt restructuring

     960         1,938         0         0         0         0         2,898   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 6,619       $ 5,545       $ 2,540       $ 2,276       $ 98       $ 158       $ 17,236   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Individually evaluated for impairment

   $ 4,056       $ 486       $ 400       $ 0       $ 0       $ 0       $ 4,942   

Collectively evaluated for impairment

     443,035         410,555         565,645         75,126         5,037         1,543         1,500,941   

Acquired with deteriorated credit quality

     0         695         0         0         0         0         695   

Modified in a troubled debt restructuring

     3,878         10,063         0         0         0         0         13,941   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 450,969       $ 421,799       $ 566,045       $ 75,126       $ 5,037       $ 1,543       $ 1,520,519   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 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

   $ 254       $ 294       $ 197       $ 0       $ 0       $ 0       $ 745   

Collectively evaluated for impairment

     6,703         2,503         2,282         2,205         71         194         13,958   

Acquired with deteriorated credit quality

     0         0         0         0         0         0         0   

Modified in a troubled debt restructuring

     157         2,513         0         0         0         0         2,670   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 7,114       $ 5,310       $ 2,479       $ 2,205       $ 71       $ 194       $ 17,373   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

17


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

Loans:

                    

Individually evaluated for impairment

   $ 3,394       $ 494       $ 657       $ 0       $ 0       $ 0       $ 4,545   

Collectively evaluated for impairment

     421,144         336,801         501,660         69,648         5,233         1,188         1,335,674   

Acquired with deteriorated credit quality

     0         719         0         0         0         0         719   

Modified in a troubled debt restructuring

     3,920         14,738         0         0         0         0         18,658   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 428,458       $ 352,752       $ 502,317       $ 69,648       $ 5,233       $ 1,188       $ 1,359,596   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following tables present information related to loans individually evaluated for impairment, including loans modified in troubled debt restructurings, by portfolio segment as of September 30, 2015 and December 31, 2014 and for the three and nine months ended September 30, 2015 and 2014:

September 30, 2015

 

      Unpaid Principal
Balance
     Recorded
Investment
     Allowance for Loan
Losses Allocated
 

With an allowance recorded:

        

Commercial, industrial, and agricultural

   $ 6,520       $ 6,520       $ 1,331   

Commercial mortgage

     6,716         5,926         2,424   

Residential real estate

     400         400         186   

With no related allowance recorded:

        

Commercial, industrial, and agricultural

     2,305         1,414         0   

Commercial mortgage

     4,624         4,623         0   

Residential real estate

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Total

   $ 20,565       $ 18,883       $ 3,941   
  

 

 

    

 

 

    

 

 

 

December 31, 2014

 

      Unpaid Principal
Balance
     Recorded
Investment
     Allowance for Loan
Losses Allocated
 

With an allowance recorded:

        

Commercial, industrial, and agricultural

   $ 5,737       $ 5,737       $ 411   

Commercial mortgage

     10,651         10,212         2,807   

Residential real estate

     400         400         197   

With no related allowance recorded:

        

Commercial, industrial, and agricultural

     2,530         1,577         0   

Commercial mortgage

     5,020         5,020         0   

Residential real estate

     319         257         0   
  

 

 

    

 

 

    

 

 

 

Total

   $ 24,657       $ 23,203       $ 3,415   
  

 

 

    

 

 

    

 

 

 

 

     Three Months Ended September 30, 2015      Nine Months Ended September 30, 2015  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Cash Basis
Interest
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
     Cash Basis
Interest
Recognized
 

With an allowance recorded:

                 

Commercial, industrial, and agricultural

   $ 6,463       $ 0       $ 0       $ 6,129       $ 42       $ 42   

Commercial mortgage

     7,474         0         0         8,069         0         0   

Residential real estate

     400         5         5         400         18         18   

With no related allowance recorded:

                 

Commercial, industrial, and agricultural

     1,549         0         0         1,496         10         10   

Commercial mortgage

     4,656         0         0         4,822         0         0   

Residential real estate

     0         0         0         129         6         6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20,542       $ 5       $ 5       $ 21,045       $ 76       $ 76   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

18


     Three Months Ended September 30, 2014      Nine Months Ended September 30, 2014  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Cash Basis
Interest
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
     Cash Basis
Interest
Recognized
 

With an allowance recorded:

                 

Commercial, industrial, and agricultural

   $ 4,023       $ 62       $ 62       $ 4,342       $ 64       $ 64   

Commercial mortgage

     5,511         18         18         5,415         18         18   

Residential real estate

     400         45         45         200         56         56   

With no related allowance recorded:

                 

Commercial, industrial, and agricultural

     2,012         32         32         2,071         32         32   

Commercial mortgage

     6,288         22         22         6,080         22         22   

Residential real estate

     76         0         0         38         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,310       $ 179       $ 179       $ 18,146       $ 192       $ 192   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 September 30, 2015 and December 31, 2014:

 

     September 30, 2015      December 31, 2014  
     Nonaccrual      Past Due
Over 90  Days
Still on Accrual
     Nonaccrual      Past Due
Over 90  Days
Still on Accrual
 

Commercial, industrial, and agricultural

   $ 3,346       $ 0       $ 796       $ 0   

Commercial mortgages

     4,176         0         4,323         0   

Residential real estate

     3,715         104         3,026         213   

Consumer

     924         89         1,045         0   

Credit cards

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 12,161       $ 193       $ 9,190       $ 213   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 September 30, 2015 and December 31, 2014 by class of loans.

September 30, 2015

 

                   Greater Than                       
     30-59 Days      60-89 Days      90 Days      Total      Loans Not         
     Past Due      Past Due      Past Due      Past Due      Past Due      Total  

Commercial, industrial, and agricultural

   $ 823       $ 428       $ 286       $ 1,537       $ 449,432       $ 450,969   

Commercial mortgages

     137         0         4,176         4,313         417,486         421,799   

Residential real estate

     856         685         3,819         5,360         560,685         566,045   

Consumer

     190         93         1,013         1,296         73,830         75,126   

Credit cards

     0         0         0         0         5,037         5,037   

Overdrafts

     0         0         0         0         1,543         1,543   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,006       $ 1,206       $ 9,294       $ 12,506       $ 1,508,013       $ 1,520,519   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

19


December 31, 2014

 

                   Greater Than                       
     30-59 Days      60-89 Days      90 Days      Total      Loans Not         
     Past Due      Past Due      Past Due      Past Due      Past Due      Total  

Commercial, industrial, and agricultural

   $ 888       $ 588       $ 294       $ 1,770       $ 426,688       $ 428,458   

Commercial mortgages

     20         1,351         4,323         5,694         347,058         352,752   

Residential real estate

     2,719         1,191         3,239         7,149         495,168         502,317   

Consumer

     265         122         1,045         1,432         68,216         69,648   

Credit cards

     0         83         0         83         5,150         5,233   

Overdrafts

     0         0         0         0         1,188         1,188   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,083       $ 2,144       $ 8,901       $ 16,128       $ 1,343,468       $ 1,359,596   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 September 30, 2015 and December 31, 2014.

 

     September 30, 2015      December 31, 2014  
     Number of
Loans
     Loan
Balance
     Specific
Reserve
     Number of
Loans
     Loan
Balance
     Specific
Reserve
 

Commercial, industrial, and agricultural

     7       $ 3,878       $ 960         7       $ 4,076       $ 179   

Commercial mortgages

     8         10,063         1,938         8         14,582         2,491   

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

     15       $ 13,941       $ 2,898         15       $ 18,658       $ 2,670   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no loans modified as troubled debt restructurings during the three or nine months ended September 30, 2015 and September 30, 2014.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. All loans modified in troubled debt restructurings are performing in accordance with their modified terms as of September 30, 2015 and December 31, 2014 and no principal balances were forgiven in connection with the loan restructurings.

In order to determine whether a borrower is experiencing financial difficulty, the Corporation performs an evaluation using its internal underwriting policies of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without a loan modification. 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.

 

20


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.

September 30, 2015

 

     Pass      Special
Mention
     Substandard      Doubtful      Total  

Commercial, industrial, and agricultural

   $ 423,173       $ 4,438       $ 23,134       $ 224       $ 450,969   

Commercial mortgages

     405,251         0         16,120         428         421,799   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 828,424       $ 4,438       $ 39,254       $ 652       $ 872,768   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

 

     Pass      Special
Mention
     Substandard      Doubtful      Total  

Commercial, industrial, and agricultural

   $ 402,923       $ 6,703       $ 18,525       $ 307       $ 428,458   

Commercial mortgages

     328,614         0         23,699         439         352,752   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 731,537       $ 6,703       $ 42,224       $ 746       $ 781,210   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 September 30, 2015 and December 31, 2014:

 

     September 30, 2015      December 31, 2014  
     Residential
Real Estate
     Consumer      Credit
Cards
     Residential
Real Estate
     Consumer      Credit
Cards
 

Performing

   $ 562,226       $ 74,113       $ 5,037       $ 499,078       $ 68,603       $ 5,233   

Non-performing

     3,819         1,013         0         3,239         1,045         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 566,045       $ 75,126       $ 5,037       $ 502,317       $ 69,648       $ 5,233   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Corporation’s portfolio of residential real estate and consumer loans maintained within Holiday Financial Services Corporation (“Holiday”) is considered to be subprime. Holiday is 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.

 

21


Holiday’s loan portfolio is summarized as follows at September 30, 2015 and December 31, 2014:

 

     September 30,      December 31,  
     2015      2014  

Consumer

   $ 28,790       $ 27,916   

Residential real estate

     1,184         1,270   

Less: unearned discount

     (4,398      (4,307
  

 

 

    

 

 

 

Total

   $ 25,576       $ 24,879   
  

 

 

    

 

 

 

6. DEPOSITS

Total deposits at September 30, 2015 and December 31, 2014 are summarized as follows (in thousands):

 

     Percentage
Change
    September 30,
2015
     December 31,
2014
 

Checking, non-interest bearing

     10.7   $ 270,816       $ 244,743   

Checking, interest bearing

     -2.2     443,144         453,102   

Savings accounts

     -3.7     936,837         972,327   

Certificates of deposit

     11.3     196,895         176,907   
  

 

 

   

 

 

    

 

 

 
     0.0   $ 1,847,692       $ 1,847,079   
  

 

 

   

 

 

    

 

 

 

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 nine months ended September 30, 2015, there were no outstanding stock options to include in the diluted earnings per share calculation.

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

 

22


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

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2015      2014      2015      2014  

Basic earnings per common share computation:

           

Net income per consolidated statements of income

   $ 5,522       $ 5,548       $ 16,689       $ 16,331   

Net earnings allocated to participating securities

     (30      (23      (92      (70
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings allocated to common stock

   $ 5,492       $ 5,525       $ 16,597       $ 16,261   
  

 

 

    

 

 

    

 

 

    

 

 

 

Distributed earnings allocated to common stock

   $ 2,363       $ 2,359       $ 7,095       $ 7,109   

Undistributed earnings allocated to common stock

     3,129         3,166         9,502         9,152   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings allocated to common stock

   $ 5,492       $ 5,525       $ 16,597       $ 16,261   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, including shares considered participating securities

     14,406         14,368         14,408         14,421   

Less: Average participating securities

     (71      (53      (72      (55
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares

     14,335         14,315         14,336         14,366   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 0.38       $ 0.39       $ 1.16       $ 1.13   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share computation:

           

Net earnings allocated to common stock

   $ 5,492       $ 5,525       $ 16,597       $ 16,261   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding for basic earnings per common share

     14,335         14,315         14,336         14,366   

Add: Dilutive effects of assumed exercises of stock options

     0         1         0         1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares and dilutive potential common shares

     14,335         14,316         14,336         14,367   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share

   $ 0.38       $ 0.39       $ 1.16       $ 1.13   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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 September 30, 2015, the variable rate on the subordinated debt was 1.84% (LIBOR plus 155 basis points) and the Corporation was paying 5.57% (4.02% fixed rate plus 155 basis points).

As of September 30, 2015 and December 31, 2014, 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.

 

23


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 September 30, 2015 and December 31, 2014 and for the three and nine months ended September 30, 2015 and 2014:

 

          Fair value as of  
     Balance Sheet    September 30,   December 31,  
     Location    2015   2014  

Interest rate contracts

   Accrued interest and

other liabilities

   ($908)   ($ 946

 

For the Three Months

          

Ended September 30, 2015

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

Interest rate contracts

   ($ 19   Interest expense –
subordinated debentures
  ($ 95   Other
income
  $ 0   

For the Nine Months

          

Ended September 30, 2015

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

Interest rate contracts

   $ 25      Interest expense –
subordinated debentures
  ($ 284   Other
income
  $ 0   

For the Three Months

          

Ended September 30, 2014

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

Interest rate contracts

   $ 99      Interest expense –
subordinated debentures
  ($ 96   Other
income
  $ 0   

For the Nine Months

          

Ended September 30, 2014

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

Interest rate contracts

   ($ 117   Interest expense –
subordinated debentures
  ($ 287   Other
income
  $ 0   

 

(a) Amount of Gain or (Loss) Recognized in Other Comprehensive Loss on Derivative (Effective Portion), net of tax
(b) Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)
(c) Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)
(d) Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
(e) Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)

Amounts reported in accumulated other comprehensive loss related to the interest rate swap will be reclassified to interest expense as interest payments are made on the subordinated debentures. Such amounts reclassified from accumulated other comprehensive loss to interest expense in the next twelve months are expected to be $381. As of September 30, 2015 and December 31, 2014, a cash collateral balance in the amount of $1,400 was maintained with a counterparty to the interest rate swaps. These balances are included in interest bearing deposits with other banks on the consolidated balance sheet.

 

24


9. RECENT ACCOUNTING PRONOUNCEMENTS

In January 2014, the FASB issued Accounting Standards Update 2014-04, “Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40)” (ASU 2014-04). The amendments in ASU 2014-04 clarify the circumstances under which an in substance repossession or foreclosure occurs and when a creditor is considered to have received physical possession of a residential real estate property collateralizing a residential real estate loan. The amendments in ASU 2014-04 also require interim and annual disclosure of the amount of foreclosed residential real estate property held by the creditor and the recorded investment in loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU 2014-04 is effective for reporting periods beginning after December 15, 2014. The effect of adopting ASU 2014-04 did not have a material effect on the Corporation’s financial statements.

In June 2014, the FASB issued ASU 2014-11 “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures”. The amendments in ASU 2014-11 change the accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements. The amendments also require two new disclosures. The first disclosure requires an entity to disclose information on transfers accounted for as sales in transactions that are economically similar to repurchase agreements. The second disclosure provides increased transparency about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. 2014-11 is effective for reporting periods beginning after December 15, 2014. The effect of adopting ASU 2014-11 did not have a material effect on the Corporation’s financial statements.

In June 2014, the FASB issued ASU 2014-12 “Compensation – Stock Compensation (Topic 718)”. ASU 2014-12 clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. Therefore, an entity would not record compensation expense (measured as of the grant date without taking into account the effect of the performance target) related to an award for which transfer to the employee is contingent on the entity’s satisfaction of a performance target until it becomes probable that the performance target will be met. No new disclosures are required under ASU 2014-12. The guidance is effective for reporting periods beginning after December 15, 2015. The effect of adopting ASU 2014-12 is not expected to have a material effect on the Corporation’s financial statements.

 

ITEM 2

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion and analysis of the consolidated financial statements of the Corporation is presented to provide insight into management’s assessment of financial results. The Corporation’s subsidiary, CNB Bank (the “Bank”), provides financial services to individuals and businesses primarily within its primary market area of the Pennsylvania counties of Blair, Cambria, Cameron, Centre, Clearfield, Crawford, Elk, Indiana, Jefferson, and McKean. As ERIEBANK, a division of CNB Bank, the Bank operates in the Pennsylvania counties of Crawford, Erie, and Warren, and the Ohio county of Ashtabula. As FCBank, a division of CNB Bank, the Bank operates in the Ohio counties of Crawford, Richland, Ashland, Wayne, Marion, Morrow, Knox, Holmes, Delaware, and Franklin.

The Bank is subject to regulation, supervision and examination by the Pennsylvania State Department of Banking as well as the Federal Deposit Insurance Corporation. The financial condition and results of operations of the Corporation and its consolidated subsidiaries are not necessarily indicative of future performance. CNB Securities Corporation is incorporated in Delaware and currently maintains investments in debt and equity securities. County Reinsurance Company is an Arizona corporation and provides credit life and disability insurance for customers of CNB Bank. CNB Insurance Agency, incorporated in Pennsylvania, provides for the sale of nonproprietary annuities and other insurance products. Holiday Financial Services Corporation (“Holiday”), incorporated in Pennsylvania, offers small balance unsecured loans and secured loans, primarily collateralized by automobiles and equipment, to borrowers with higher risk characteristics.

 

25


When we use the terms “we”, “us” and “our”, we mean CNB Financial Corporation and its subsidiaries. Management’s discussion and analysis should be read in conjunction with the Corporation’s consolidated financial statements and related notes.

The following discussion should be read in conjunction with the Corporation’s Consolidated Financial Statements and Notes thereto, for the year ended December 31, 2014, included in its 2014 Form 10-K, and in conjunction with the Consolidated Financial Statements and Notes thereto included in Item 1 of this report. Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results for the full year ending December 31, 2015, or any future period.

GENERAL OVERVIEW

Management uses return on average equity, earnings per share, asset quality, and other metrics to measure the performance of the Corporation. The interest rate environment will continue to play an important role in the future earnings of the Corporation. During the past several years, in order to address the historically low interest rates that are primarily tied to short-term rates, such as the Prime Rate, the Corporation has taken a variety of measures including instituting rate floors on our commercial lines of credit and home equity lines.

Non-interest costs are expected to increase with the growth of the Corporation; however, management’s growth strategies are expected to also result in an increase in earning assets as well as enhanced non-interest income which is expected to more than offset increases in non-interest expenses in 2015 and beyond. While past results are not an indication of future earnings, management believes the Corporation is well-positioned to sustain earnings during 2015.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents totaled $27.4 million at September 30, 2015 compared to $27.9 million at December 31, 2014. Cash and cash equivalents fluctuate based on the timing and amount of liquidity events that occur in the normal course of business.

Management believes the liquidity needs of the Corporation are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources, FHLB financing, and the portions of the securities and loan portfolios that mature within one year. The Corporation expects that these sources of funds will enable it to meet cash obligations and off-balance sheet commitments as they come due.

SECURITIES

Securities available for sale and trading securities decreased by $98.4 million, or 14.3% since December 31, 2014, and associated cash proceeds were used primarily to fund loan growth. The footnotes to the consolidated financial statements provide more detail concerning the composition of the Corporation’s securities portfolio, the process for evaluating securities for other-than-temporary impairment, and for valuation of structured pooled trust preferred securities.

The Corporation generally buys into the market over time and does not attempt to “time” its transactions. In doing this, the highs and lows of the market are averaged into the portfolio and the overall effect of different rate environments is minimized. The Corporation monitors the earnings performance and the effectiveness of the liquidity of the securities portfolio on a regular basis through meetings of the Asset/Liability Committee of the Corporation’s Board of Directors (“ALCO”). The ALCO also reviews and manages interest rate risk for the Corporation. Through active balance sheet management and analysis of the securities portfolio, a sufficient level of liquidity is maintained to satisfy depositor requirements and various credit needs of our customers.

 

26


LOANS

The Corporation experienced an increase in loans, net of unearned discount, of $160.8 million, or 11.9%, during the first nine months of 2015. Lending efforts consist principally of commercial and retail lending, which includes single family residential mortgages and other consumer loans. The Corporation views commercial lending as its competitive advantage and continues to focus on this area by hiring and retaining experienced loan officers and supporting them with quality credit analysis. Although loan balances increased only slightly in the first quarter, the increase in loan demand was more significant in the second and third quarters and the Corporation expects solid loan growth throughout the remainder of 2015 across all of its market areas.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is established by provisions for losses in the loan portfolio as well as overdrafts in deposit accounts. These provisions are charged against current income. Loans and overdrafts deemed not collectible are charged off against the allowance while any subsequent collections are recorded as recoveries and increase the allowance.

The table below shows activity within the allowance account for the specified periods (in thousands):

 

     Nine months ending
September  30, 2015
    Year ending
December 31, 2014
    Nine months ended
September  30, 2014
 

Balance at beginning of period

   $ 17,373      $ 16,234      $ 16,234   

Charge-offs:

      

Commercial, industrial, and agricultural

     (219     (618     (379

Commercial mortgages

     —          (50     (142

Residential real estate

     (347     (436     (215

Consumer

     (1,448     (1,744     (1,183

Credit cards

     (103     (78     (39

Overdrafts

     (159     (256     (197
  

 

 

   

 

 

   

 

 

 
     (2,276     (3,182     (2,155
  

 

 

   

 

 

   

 

 

 

Recoveries:

      

Commercial, industrial, and agricultural

     39        1        1   

Commercial mortgages

     51        210        10   

Residential real estate

     5        41        37   

Consumer

     76        93        78   

Credit cards

     8        25        7   

Overdraft deposit accounts

     68        111        73   
  

 

 

   

 

 

   

 

 

 
     247        481        206   
  

 

 

   

 

 

   

 

 

 

Net charge-offs

     (2,029     (2,701     (1,949
  

 

 

   

 

 

   

 

 

 

Provision for loan losses

     1,892        3,840        3,558   
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 17,236      $ 17,373      $ 17,843   
  

 

 

   

 

 

   

 

 

 

Loans, net of unearned

   $ 1,516,521      $ 1,355,289      $ 1,326,375   

Allowance to net loans

     1.14     1.28     1.35

Net charge-offs to average loans (annualized)

     0.19     0.18     0.19

Nonperforming assets

   $ 12,917      $ 10,209      $