Form 10-Q
Table of Contents

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, 2016

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 1, 2016

COMMON STOCK NO PAR VALUE PER SHARE: 14,465,942 SHARES


Table of Contents

INDEX

PART I.

FINANCIAL INFORMATION

 

     Page Number  

ITEM 1 – Financial Statements

  

Consolidated Balance Sheets – September 30, 2016 (unaudited) and December 31, 2015 (audited)

     1   

Consolidated Statements of Income – Three months ended September 30, 2016 and 2015 (unaudited)

     2   

Consolidated Statements of Income – Nine months ended September 30, 2016 and 2015 (unaudited)

     3   

Consolidated Statements of Comprehensive Income – Three and nine months ended September  30, 2016 and 2015 (unaudited)

     4   

Consolidated Statements of Cash Flows – Nine months ended September 30, 2016 and 2015 (unaudited)

     5   

Notes to Consolidated Financial Statements

     6   

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

     28   

ITEM 3 – Quantitative and Qualitative Disclosures about Market Risk

     37   

ITEM 4 – Controls and Procedures

     38   

PART II.

OTHER INFORMATION

  

  

ITEM 1 – Legal Proceedings

     39   

ITEM 1A – Risk Factors

     39   

ITEM 6 – Exhibits

     39   

Signatures

     40   


Table of Contents

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


Table of Contents

Part I Financial Information

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

Dollars in thousands, except share data

 

 

     (unaudited)        
     September 30,     December 31,  
     2016     2015  
ASSETS   

Cash and due from banks

   $ 34,787      $ 23,302   

Interest bearing deposits with other banks

     2,117        3,959   
  

 

 

   

 

 

 

Total cash and cash equivalents

     36,904        27,261   

Securities available for sale

     506,744        546,043   

Trading securities

     4,644        4,576   

Loans held for sale

     2,814        1,381   

Loans

     1,804,472        1,582,354   

Less: unearned discount

     (3,614     (4,556

Less: allowance for loan losses

     (15,703     (16,737
  

 

 

   

 

 

 

Net loans

     1,785,155        1,561,061   

FHLB and other equity interests

     18,334        15,921   

Premises and equipment, net

     46,335        39,370   

Bank owned life insurance

     43,998        41,039   

Mortgage servicing rights

     1,052        962   

Goodwill

     38,967        27,194   

Core deposit intangible

     3,200        2,395   

Accrued interest receivable and other assets

     51,797        17,933   
  

 

 

   

 

 

 

Total Assets

   $ 2,539,944      $ 2,285,136   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY   

Non-interest bearing deposits

   $ 293,049      $ 263,639   

Interest bearing deposits

     1,730,732        1,551,414   
  

 

 

   

 

 

 

Total deposits

     2,023,781        1,815,053   

FHLB and other long-term borrowings

     129,202        104,243   

Other short-term borrowings

     76,000        116,272   

Subordinated debentures

     70,620        20,620   

Accrued interest payable and other liabilities

     24,852        27,035   
  

 

 

   

 

 

 

Total liabilities

     2,324,455        2,083,223   
  

 

 

   

 

 

 

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

     0        0   

Additional paid in capital

     77,543        77,827   

Retained earnings

     131,643        123,301   

Treasury stock, at cost (8,272 shares at September 30, 2016 and 65,052 shares at December 31, 2015)

     (163     (1,114

Accumulated other comprehensive income

     6,466        1,899   
  

 

 

   

 

 

 

Total shareholders’ equity

     215,489        201,913   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 2,539,944      $ 2,285,136   
  

 

 

   

 

 

 

 

 

See Notes to Consolidated Financial Statements

 

1


Table of Contents

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

Dollars in thousands, except per share data

 

 

     Three months ended  
     September 30,  
     2016      2015  

INTEREST AND DIVIDEND INCOME:

     

Loans including fees

   $ 21,749       $ 18,459   

Securities:

     

Taxable

     2,257         2,692   

Tax-exempt

     825         972   

Dividends

     127         114   
  

 

 

    

 

 

 

Total interest and dividend income

     24,958         22,237   
  

 

 

    

 

 

 

INTEREST EXPENSE:

     

Deposits

     2,195         2,169   

Borrowed funds

     633         841   

Subordinated debentures (includes $84 and $95 accumulated other comprehensive income reclassification for change in fair value of interest rate swap agreements in 2016 and 2015, respectively)

     197         189   
  

 

 

    

 

 

 

Total interest expense

     3,025         3,199   
  

 

 

    

 

 

 

NET INTEREST INCOME

     21,933         19,038   

PROVISION FOR LOAN LOSSES

     622         463   
  

 

 

    

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     21,311         18,575   
  

 

 

    

 

 

 

NON-INTEREST INCOME:

     

Wealth and asset management fees

     795         711   

Service charges on deposit accounts

     1,162         1,171   

Other service charges and fees

     653         838   

Net realized gains on available-for-sale securities (includes $0 and $73 accumulated other comprehensive income reclassifications for net realized gains on available-for-sale securities in 2016 and 2015, respectively)

     0         73   

Net realized and unrealized gains (losses) on trading securities

     235         (260

Mortgage banking

     388         164   

Bank owned life insurance

     281         288   

Card processing and interchange income

     876         873   

Other

     81         136   
  

 

 

    

 

 

 

Total non-interest income

     4,471         3,994   
  

 

 

    

 

 

 

NON-INTEREST EXPENSES:

     

Salaries and benefits

     8,506         7,572   

Net occupancy expense

     2,212         1,764   

Amortization of core deposit intangible

     347         259   

Data processing

     1,022         1,095   

State and local taxes

     595         474   

Legal, professional, and examination fees

     464         438   

Advertising

     427         414   

FDIC insurance premiums

     387         338   

Core processing conversion costs

     42         0   

Merger costs

     266         0   

Card processing and interchange expenses

     587         579   

Other

     2,241         2,073   
  

 

 

    

 

 

 

Total non-interest expenses

     17,096         15,006   
  

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     8,686         7,563   

INCOME TAX EXPENSE (includes ($28) and ($7) income tax expense from reclassification items in 2016 and 2015, respectively)

     2,270         2,041   
  

 

 

    

 

 

 

NET INCOME

   $ 6,416       $ 5,522   
  

 

 

    

 

 

 

EARNINGS PER SHARE:

     

Basic

   $ 0.44       $ 0.38   

Diluted

   $ 0.44       $ 0.38   

DIVIDENDS PER SHARE:

     

Cash dividends per share

   $ 0.165       $ 0.165   

 

 

See Notes to Consolidated Financial Statements

 

2


Table of Contents

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

Dollars in thousands, except per share data

 

 

     Nine months ended  
     September 30,  
     2016      2015  

INTEREST AND DIVIDEND INCOME:

     

Loans including fees

   $ 59,478       $ 53,294   

Securities:

     

Taxable

     7,026         8,542   

Tax-exempt

     2,575         2,859   

Dividends

     418         489   
  

 

 

    

 

 

 

Total interest and dividend income

     69,497         65,184   
  

 

 

    

 

 

 

INTEREST EXPENSE:

     

Deposits

     6,288         6,381   

Borrowed funds

     2,341         2,464   

Subordinated debentures (includes $260 and $284 accumulated other comprehensive income reclassification for change in fair value of interest rate swap agreements in 2016 and 2015, respectively)

     590         560   
  

 

 

    

 

 

 

Total interest expense

     9,219         9,405   
  

 

 

    

 

 

 

NET INTEREST INCOME

     60,278         55,779   

PROVISION FOR LOAN LOSSES

     2,038         1,892   
  

 

 

    

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     58,240         53,887   
  

 

 

    

 

 

 

NON-INTEREST INCOME:

     

Wealth and asset management fees

     2,298         2,228   

Service charges on deposit accounts

     3,149         3,282   

Other service charges and fees

     1,837         2,223   

Net realized gains on available-for-sale securities (includes $1,005 and $564 accumulated other comprehensive income reclassifications for net realized gains on available-for-sale securities in 2016 and 2015, respectively)

     1,005         564   

Net realized and unrealized gains (losses) on trading securities

     265         (321

Mortgage banking

     706         484   

Bank owned life insurance

     807         853   

Card processing and interchange income

     2,499         2,542   

Other

     501         523   
  

 

 

    

 

 

 

Total non-interest income

     13,067         12,378   
  

 

 

    

 

 

 

NON-INTEREST EXPENSES:

     

Salaries and benefits

     23,905         21,710   

Net occupancy expense

     5,932         5,357   

Amortization of core deposit intangible

     779         777   

Data processing

     3,395         3,223   

State and local taxes

     1,645         1,498   

Legal, professional, and examination fees

     1,202         1,088   

Advertising

     1,306         1,167   

FDIC insurance premiums

     1,049         957   

Prepayment penalties – long-term borrowings

     1,506         0   

Core processing conversion costs

     1,597         0   

Merger costs

     481         0   

Card processing and interchange income

     1,670         1,725   

Other

     6,196         5,864   
  

 

 

    

 

 

 

Total non-interest expenses

     50,663         43,366   
  

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     20,644         22,899   

INCOME TAX EXPENSE (includes $262 and $98 income tax expense from reclassification items in 2016 and 2015, respectively)

     5,144         6,210   
  

 

 

    

 

 

 

NET INCOME

   $ 15,500       $ 16,689   
  

 

 

    

 

 

 

EARNINGS PER SHARE:

     

Basic

   $ 1.07       $ 1.16   

Diluted

   $ 1.07       $ 1.16   

DIVIDENDS PER SHARE:

     

Cash dividends per share

   $ 0.495       $ 0.495   

 

 

See Notes to Consolidated Financial Statements

 

3


Table of Contents

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

Dollars in thousands

 

 

     Three months ended     Nine months ended  
     September 30,     September 30,  
     2016      2015     2016     2015  

NET INCOME

   $ 6,416       $ 5,522      $ 15,500      $ 16,689   

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 ($17) and $44 for the three months ended September 30, 2016 and 2015, and $42 and $86 for the nine months ended September 30, 2016 and 2015

     32         (81     (77     (160

Reclassification adjustment for losses recognized in earnings, net of tax of ($29) and ($33) for the three months ended September 30, 2016 and 2015, and ($91) and ($99) for the nine months ended September 30, 2016 and 2015

     55         62        169        185   
  

 

 

    

 

 

   

 

 

   

 

 

 
     87         (19     92        25   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net change in unrealized gains on securities available for sale:

         

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

         

Unrealized gains (losses) arising during the period, net of tax of $0 and $0 for the three months ended September 30, 2016 and 2015, and $276 and ($90) for the nine months ended September 30, 2016 and 2015

     0         0        (513     165   

Reclassification adjustment for realized gains included in net income, net of tax of $0 and $0 for the three months ended September 30, 2016 and 2015, and $323 and $0 for the nine months ended September 30, 2016 and 2015

     0         0        (599     —     
  

 

 

    

 

 

   

 

 

   

 

 

 
     0         0        (1,112     165   
  

 

 

    

 

 

   

 

 

   

 

 

 

Unrealized gains on other securities available for sale:

         

Unrealized gains arising during the period, net of tax of ($103) and ($2,059) for the three months ended September 30, 2016 and 2015, and ($3,039) and ($1,221) for the nine months ended September 30, 2016 and 2015

     187         3,822        5,641        2,268   

Reclassification adjustment for realized gains included in net income, net of tax of $0 and $26 for the three months ended September 30, 2016 and 2015, and $29 and $197 for the nine months ended September 30, 2016 and 2015

     0         (47     (54     (367
  

 

 

    

 

 

   

 

 

   

 

 

 
     187         3,775        5,587        1,901   
  

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income

     274         3,756        4,567        2,091   
  

 

 

    

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $ 6,690       $ 9,278      $ 20,067      $ 18,780   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

 

See Notes to Consolidated Financial Statements

 

4


Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Dollars in thousands

 

 

     Nine months ended  
     September 30,  
     2016     2015  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 15,500      $ 16,689   

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

    

Provision for loan losses

     2,038        1,892   

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

     3,246        3,051   

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

     (1,051     202   

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

     (1,005     (564

Net realized and unrealized losses (gains) on trading securities

     (265     321   

Proceeds from sale of trading securities

     468        618   

Purchase of trading securities

     (271     (923

Gain on sale of loans

     (516     (402

Net losses on dispositions of premises and equipment and foreclosed assets

     117        16   

Proceeds from sale of loans

     22,329        11,222   

Origination of loans held for sale

     (23,335     (10,704

Income on bank owned life insurance

     (807     (853

Stock-based compensation expense

     628        474   

Contribution of treasury stock

     106        84   

Changes in:

    

Accrued interest receivable and other assets

     (31,192     898   

Accrued interest payable and other liabilities

     (7,085     3,097   
  

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

     (21,095     25,118   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

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

     44,360        59,935   

Proceeds from sales of available-for-sale securities

     4,420        86,554   

Purchase of available-for-sale securities

     (2,221     (46,542

Net cash paid for Lake National Bank acquisition

     (2,866     0   

Loan origination and payments, net

     (102,014     (161,300

Purchase of FHLB and other equity interests

     (1,776     (6,743

Purchase of premises and equipment

     (6,082     (5,182

Proceeds from the sale of premises and equipment and foreclosed assets

     466        708   
  

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     (65,713     (72,570
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net change in:

    

Checking, money market and savings accounts

     70,678        (19,375

Certificates of deposit

     (1,733     19,988   

Purchase of treasury stock

     (23     (868

Cash dividends paid

     (7,158     (7,138

Repayment of long-term borrowings

     (55,041     (189

Proceeds from long-term borrowings

     80,000        0   

Proceeds from issuance of subordinated debtentures

     50,000        0   

Net change in short-term borrowings

     (40,272     54,524   
  

 

 

   

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

     96,451        46,942   
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     9,643        (510

CASH AND CASH EQUIVALENTS, Beginning

     27,261        27,928   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, Ending

   $ 36,904      $ 27,418   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

    

Cash paid during the period for:

    

Interest

   $ 9,506      $ 9,291   

Income taxes

   $ 3,966      $ 5,431   

SUPPLEMENTAL NONCASH DISCLOSURES:

    

Transfers to other real estate owned

   $ 49      $ 484   

Grant of restricted stock awards from treasury stock

   $ 875      $ 821   

Net assets acquired from Lake National Bank, excluding cash and cash equivalents

   $ 2,866        0   

 

 

See Notes to Consolidated Financial Statements

 

5


Table of Contents

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, 2016 and for the three and nine month periods ended September 30, 2016 and 2015 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, 2016 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, 2015. 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. BUSINESS COMBINATION

On July 15, 2016, the Corporation completed its previously announced acquisition of Lake National Bank (“LNB”) of Mentor, Ohio for $22.50 per share in cash, resulting in consideration paid to LNB shareholders of $24.75 million. Following completion of the merger, the two branches of LNB in Mentor, Ohio are operating as part of the ERIEBANK division of CNB Bank.

As disclosed in the accompanying consolidated statements of income, the Corporation incurred merger costs of $266 thousand and $481 thousand for the three and nine months ended September 30, 2016. All merger costs have been expensed as incurred.

The following table summarizes the consideration paid for LNB and the amounts of the assets acquired and liabilities assumed that were recognized at the acquisition date:

 

Consideration paid:

  

Cash

   $ 24,750   
  

 

 

 

Recognized amounts of identifiable assets acquired and liabilities assumed:

  

Cash and cash equivalents

     21,884   

Securities available for sale

     450   

Loans

     122,036   

FHLB and other equity interests

     637   

Premises and equipment

     3,242   

Bank owned life insurance

     2,152   

Mortgage servicing rights

     109   

Core deposit intangible

     1,583   

Accrued interest receivable and other assets

     3,301   
  

 

 

 

Total assets acquired

     155,394   
  

 

 

 

Demand deposits

     81,472   

Time deposits

     58,311   

Accrued interest payable and other liabilities

     2,634   
  

 

 

 

Total liabilities assumed

     142,417   
  

 

 

 

Total identifiable net assets

     12,977   
  

 

 

 

Goodwill

   $ 11,773   
  

 

 

 

 

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Valuation of some assets acquired or created including, but not limited to, goodwill are preliminary and could be subject to change.

Included in accrued interest receivable and other assets is a deferred tax asset of $249 which represents the tax effect of temporary differences between the tax basis and fair values assigned to the assets and liabilities.

Acquired loans were recorded at fair value with no carryover of the related allowance for loan losses. Determining the fair value of loans involved estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. The Corporation acquired $126,134 of gross loans and recognized a net combined yield and credit mark of $4,098.

Goodwill of $11,773 arising from the acquisition consisted largely of synergies and the cost savings resulting from the combining of the operations of the Corporation and Lake National Bank. None of the goodwill is expected to be deductible for income tax purposes.

 

3. 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, 2016, 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, 2016 and 2015.

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 $216 and $628 for the three and nine months ended September 30, 2016 and $169 and $474 for the three and nine months ended September 30, 2015. As of September 30, 2016, there was $1,359 of total unrecognized compensation cost related to unvested restricted stock awards to be recognized over the next five years.

 

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A summary of changes in nonvested restricted stock awards for the three months ended September 30, 2016 follows:

 

           

Per Share

Weighted
Average

 
     Shares      Grant Date
Fair Value
 

Nonvested at beginning of period

     103,228       $ 17.35   

Granted

     750         18.40   

Vested

     (150      17.80   
  

 

 

    

 

 

 

Nonvested at end of period

     103,828       $ 17.35   
  

 

 

    

 

 

 

A summary of changes in nonvested restricted stock awards for the nine months ended September 30, 2016 follows:

 

           

Per Share

Weighted
Average

 
     Shares      Grant Date
Fair Value
 

Nonvested at beginning of period

     84,600       $ 17.01   

Granted

     52,250         17.65   

Vested

     (33,022      16.92   
  

 

 

    

 

 

 

Nonvested at end of period

     103,828       $ 17.35   
  

 

 

    

 

 

 

The fair value of shares vested was $3 and $559 during the three and nine month periods ended September 30, 2016.

 

4. 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 securities are 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 these securities. 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

 

8


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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 securities are highly sensitive to assumption changes and market volatility.

The Corporation’s derivative instruments are interest rate swaps that are 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).

Assets and liabilities measured at fair value on a recurring basis are as follows at September 30, 2016 and December 31, 2015:

 

           Fair Value Measurements at September 30, 2016 Using  
           Quoted Prices in            Significant  
           Active Markets for      Significant Other     Unobservable  
           Identical Assets      Observable Inputs     Inputs  

Description

   Total     (Level 1)      (Level 2)     (Level 3)  

Assets:

         

Securities Available For Sale:

         

U.S. Government sponsored entities

   $ 139,902      $ 0       $ 139,902      $ 0   

States and political subdivisions

     161,210        0         161,210        0   

Residential and multi-family mortgage

     139,022        0         139,022        0   

Corporate notes and bonds

     17,279        0         17,279        0   

Pooled trust preferred

     1,702        0         0        1,702   

Pooled SBA

     46,635        0         46,635        0   

Other equity securities

     994        994         0        0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Securities Available For Sale

   $ 506,744      $ 994       $ 504,048      $ 1,702   
  

 

 

   

 

 

    

 

 

   

 

 

 

Interest rate swaps

   $ 766      $ 0       $ 766      $ 0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Trading Securities:

         

Corporate equity securities

   $ 3,148      $ 3,148       $ 0      $ 0   

Mutual funds

     964        964         0        0   

Certificates of deposit

     255        255         0        0   

Corporate notes and bonds

     221        221         0        0   

U.S. Government sponsored entities

     55        0         55        0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Trading Securities

   $ 4,644      $ 4,589       $ 55      $ 0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities,

         

Interest rate swaps

   $ (1,361   $ 0       $ (1,361   $ 0   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

           Fair Value Measurements at December 31, 2015 Using  
           Quoted Prices in            Significant  
           Active Markets for      Significant Other     Unobservable  
           Identical Assets      Observable Inputs     Inputs  

Description

   Total     (Level 1)      (Level 2)     (Level 3)  

Assets:

         

Securities Available For Sale:

         

U.S. Government sponsored entities

   $ 141,751      $ 0       $ 141,751      $ 0   

States and political subdivisions

     171,819        0         171,819        0   

Residential and multi-family mortgage

     157,982        0         157,982        0   

Corporate notes and bonds

     18,688        0         18,688        0   

Pooled trust preferred

     3,413        0         0        3,413   

Pooled SBA

     51,409        0         51,409        0   

Other equity securities

     981        981         0        0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Securities Available For Sale

   $ 546,043      $ 981       $ 541,649      $ 3,413   
  

 

 

   

 

 

    

 

 

   

 

 

 

Interest rate swaps

   $ 131      $ 0       $ 131      $ 0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Trading Securities:

         

Corporate equity securities

   $ 3,389      $ 3,389       $ 0      $ 0   

Mutual funds

     750        750         0        0   

Certificates of deposit

     253        253         0        0   

Corporate notes and bonds

     130        130         0        0   

U.S. Government sponsored entities

     54        0         54        0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Trading Securities

   $ 4,576      $ 4,522       $ 54      $ 0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities,

         

Interest rate swaps

   $ (867   $ 0       $ (867   $ 0   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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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, 2016 and September 30, 2015:

 

     2016      2015  

Balance, July 1

   $ 1,702       $ 1,160   

Proceeds from sale of securities

     0         0   

Total gains or (losses):

     

Included in other comprehensive income (unrealized)

     0         0   
  

 

 

    

 

 

 

Balance, September 30

   $ 1,702       $ 1,160   
  

 

 

    

 

 

 

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, 2016 and September 30, 2015:

 

     2016      2015  

Balance, January 1

   $ 3,413       $ 905   

Proceeds from sale of securities

     (922      0   

Total gains or (losses):

     

Included in other comprehensive income (unrealized)

     (789      255   
  

 

 

    

 

 

 

Balance, September 30

   $ 1,702       $ 1,160   
  

 

 

    

 

 

 

The following table presents quantitative information about Level 3 fair value measurements at September 30, 2016:

 

    

Fair

value

    

Valuation
Technique

    

Unobservable

Inputs

  

Input

Utilized

Pooled trust preferred

   $ 1,702        

 

Discounted

cash flow

  

  

   Collateral default rate    0.5% in 2016 and thereafter
        

Yield (weighted average)

Prepayment speed

  

10.0%

2.0% constant prepayment rate in 2016 and thereafter

The following table presents quantitative information about Level 3 fair value measurements at December 31, 2015:

 

    

Fair
value

    

Valuation
Technique

  

Unobservable

Inputs

  

Input

Utilized

Pooled trust preferred

   $ 3,413       Discounted

cash flow

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

Yield (weighted average)

Prepayment speed

  

9.0%

2.0% constant prepayment rate in 2015 and thereafter

 

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At September 30, 2016 and December 31, 2015, the significant unobservable inputs used in the fair value measurement of the Corporation’s pooled trust preferred securities 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 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.

Assets and liabilities measured at fair value on a non-recurring basis are as follows at September 30, 2016 and December 31, 2015:

 

            Fair Value Measurements at September 30, 2016 Using  
            Quoted Prices in             Significant  
            Active Markets for      Significant Other      Unobservable  
            Identical Assets      Observable Inputs      Inputs  

Description

   Total      (Level 1)      (Level 2)      (Level 3)  

Assets:

           

Impaired loans:

           

Commercial mortgages

   $ 2,002         0         0         $2,002   
            Fair Value Measurements at December 31, 2015 Using  
            Quoted Prices in             Significant  
            Active Markets for      Significant Other      Unobservable  
            Identical Assets      Observable Inputs      Inputs  

Description

   Total      (Level 1)      (Level 2)      (Level 3)  

Assets:

           

Impaired loans:

           

Commercial mortgages

   $ 2,247         0         0         $2,247   

Impaired loans, measured for impairment using the fair value of collateral for collateral dependent loans, had a recorded investment of $3,202 with a valuation allowance of $1,200 as of September 30, 2016, resulting in an additional negative provision for loan losses of $(95) and $(42) for the corresponding three and nine month period ended September 30, 2016. Impaired loans had a recorded investment of $3,489 with a valuation allowance of $1,242 as of December 31, 2015. Impaired loans carried at fair value resulted in an additional provision for loan losses of $(361) and $(298) for the corresponding three and nine month period ended September 30, 2015.

The estimated fair values of impaired collateral dependent loans such as commercial or residential mortgages are determined primarily through 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 the appraisal of related loan collateral is outdated, management applies an appropriate adjustment factor based on its 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.

 

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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, 2016:

 

     Fair
value
    

Valuation Technique

  

Unobservable

Inputs

   Range
(Weighted Average)

Impaired loans – commercial

mortgages

     $2,002       Sales comparison approach    Adjustment for differences between the comparable sales    19% - 99% (37%)

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, 2015:

 

     Fair
value
    

Valuation Technique

  

Unobservable

Inputs

   Range
(Weighted Average)

Impaired loans – commercial

mortgages

     $2,247       Sales comparison approach    Adjustment for differences between the comparable sales    25% - 69% (36%)

Fair Value of Financial Instruments

The following table presents the carrying amount and fair value of financial instruments at September 30, 2016:

 

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

ASSETS

           

Cash and cash equivalents

   $ 36,904      $ 36,904      $ 0      $ 0       $ 36,904   

Securities available for sale

     506,744        994        504,048        1,702         506,744   

Trading securities

     4,644        4,589        55        0         4,644   

Loans held for sale

     2,814        0        2,829        0         2,829   

Net loans

     1,785,155        0        0        1,783,814         1,783,814   

FHLB and other equity interests

     18,334        n/a        n/a        n/a         n/a   

Interest rate swaps

     766        0        766        0         766   

Accrued interest receivable

     8,387        6        3,105        5,276         8,387   

LIABILITIES

           

Deposits

   $ (2,023,781   $ (1,783,037   $ (240,275   $ 0       $ (2,023,312

FHLB and other borrowings

     (205,202     0        (204,314     0         (204,314

Subordinated debentures

     (70,620     0        (61,432     0         (61,432

Interest rate swaps

     (1,361     0        (1,361     0         (1,361

Accrued interest payable

     (479     0        (479     0         (479

The following table presents the carrying amount and fair value of financial instruments at December 31, 2015:

 

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

ASSETS

           

Cash and cash equivalents

   $ 27,261      $ 27,261      $ 0      $ 0       $ 27,261   

Securities available for sale

     546,043        981        541,649        3,413         546,043   

Trading securities

     4,576        4,522        54        0         4,576   

Loans held for sale

     1,381        0        1,438        0         1,438   

Net loans

     1,561,061        0        0        1,554,502         1,554,502   

FHLB and other equity interests

     15,921        n/a        n/a        n/a         n/a   

Interest rate swaps

     131        0        131        0         131   

Accrued interest receivable

     7,312        5        2,875        4,432         7,312   

LIABILITIES

           

Deposits

   $ (1,815,053   $ (1,630,888   $ (183,028   $ 0         (1,813,916

FHLB and other borrowings

     (220,515     0        (218,808     0         (218,808

Subordinated debentures

     (20,620     0        (11,761     0         (11,761

Interest rate swaps

     (867     0        (867     0         (867

Accrued interest payable

     (766     (344     (422     0         (766

 

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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.

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

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

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

Accrued interest receivable: The carrying amount of accrued interest receivable approximates fair value. 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.

 

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5. SECURITIES

Securities available for sale at September 30, 2016 and December 31, 2015 are as follows:

 

     September 30, 2016      December 31, 2015  
     Amortized      Unrealized     Fair      Amortized      Unrealized     Fair  
     Cost      Gains      Losses     Value      Cost      Gains      Losses     Value  

U.S. Gov’t sponsored entities

   $ 136,945       $ 2,958       $ (1   $ 139,902       $ 141,300       $ 1,579       $ (1,128   $ 141,751   

State & political subdivisions

     153,762         7,643         (195     161,210         165,828         6,234         (243     171,819   

Residential & multi-family mortgage

     137,639         1,894         (511     139,022         160,316         1,060         (3,394     157,982   

Corporate notes & bonds

     18,299         177         (1,197     17,279         19,794         165         (1,271     18,688   

Pooled trust preferred

     800         902         0        1,702         800         2,613         0        3,413   

Pooled SBA

     45,964         793         (122     46,635         51,556         760         (907     51,409   

Other equity securities

     1,020         0         (26     994         1,020         0         (39     981   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 494,429       $ 14,367       $ (2,052   $ 506,744       $ 540,614       $ 12,411       $ (6,982   $ 546,043   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

At September 30, 2016 and December 31, 2015, 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, 2016 and December 31, 2015 are as follows:

 

     September 30,
2016
     December 31,
2015
 

Corporate equity securities

   $ 3,148       $ 3,389   

Mutual funds

     965         750   

Certificates of deposit

     255         253   

Corporate notes and bonds

     221         130   

U.S. Government sponsored entities

     55         54   
  

 

 

    

 

 

 

Total

   $ 4,644       $ 4,576   
  

 

 

    

 

 

 

Securities with unrealized losses at September 30, 2016 and December 31, 2015, 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, 2016

 

     Less than 12 Months     12 Months or More     Total  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  

Description of Securities

   Value      Loss     Value      Loss     Value      Loss  

U.S. Gov’t sponsored entities

   $ 0       $ 0      $ 3,001       $ (1   $ 3,001       $ (1

State & political subdivisions

     1,669         (2     272         (193     1,941         (195

Residential & multi-family mortgage

     10,975         (78     40,280         (433     51,255         (511

Corporate notes & bonds

     1,977         (23     8,251         (1,174     10,228         (1,197

Pooled SBA

     0         0        22,441         (122     22,441         (122

Other equity securities

     0         0        994         (26     994         (26
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 14,621       $ (103   $ 75,239       $ (1,949   $ 89,860       $ (2,052
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

December 31, 2015

 

     Less than 12 Months     12 Months or More     Total  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  

Description of Securities

   Value      Loss     Value      Loss     Value      Loss  

U.S. Gov’t sponsored entities

   $ 65,675       $ (640   $ 31,923       $ (488   $ 97,598       $ (1,128

State & political subdivisions

     9,103         (234     2,478         (9     11,581         (243

Residential & multi-family mortgage

     69,631         (1,562     50,351         (1,832     119,982         (3,394

Corporate notes & bonds

     5,027         (2     8,144         (1,269     13,171         (1,271

Pooled SBA

     2,908         (28     27,127         (879     30,035         (907

Other equity securities

     0         0        981         (39     981         (39
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 152,344       $ (2,466   $ 121,004       $ (4,516   $ 273,348       $ (6,982
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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, 2016 and 2015 is as follows:

 

     2016      2015  

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       $ 4,054   

Credit losses previously recognized on securities sold during the period

     (1,983      0   

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

     0         0   

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

     0         0   
  

 

 

    

 

 

 

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

   $ 2,071       $ 4,054   
  

 

 

    

 

 

 

During the quarter ended June 30, 2016 the Corporation sold two structured pooled trust preferred securities which had been charged off in their entirety in prior periods. The original cost basis of these securities was $1,983 and the proceeds received totaled $922, which is reported in net realized gains on available-for-sale securities for the three and nine months ended September 30, 2016. Due to the insignificance of the Corporation’s adjusted amortized cost balance of the remaining structured pooled trust securities, no further disclosures are required.

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, 2016 and December 31, 2015, 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.

 

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Table of Contents

Information pertaining to security sales on available for sale securities is as follows:

 

     Proceeds      Gross Gains      Gross Losses  

Three months ended September 30, 2016

   $ 0       $ 0       $ 0   

Nine months ended September 30, 2016

     4,420         1,005         0   

Three months ended September 30, 2015

     38,025         244         (171

Nine months ended September 30, 2015

     86,554         852         (288

The following is a schedule of the contractual maturity of securities available for sale, excluding equity securities, at September 30, 2016:

 

     Amortized      Fair  
     Cost      Value  

1 year or less

   $ 41,920       $ 41,532   

1 year – 5 years

     179,919         186,380   

5 years – 10 years

     70,832         73,920   

After 10 years

     17,135         18,261   
  

 

 

    

 

 

 
     309,806         320,093   

Residential and multi-family mortgage

     137,639         139,022   

Pooled SBA

     45,964         46,635   
  

 

 

    

 

 

 

Total debt securities

   $ 493,409       $ 505,750   
  

 

 

    

 

 

 

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, 2016 and December 31, 2015, securities carried at $347,196 and $312,669, respectively, were pledged to secure public deposits and for other purposes as provided by law.

 

6. LOANS

Total net loans at September 30, 2016 and December 31, 2015 are summarized as follows:

 

     September 30,
2016
     December 31,
2015
 

Commercial, industrial, and agricultural

   $ 569,267       $ 475,364   

Commercial mortgages

     507,340         448,179   

Residential real estate

     644,545         574,225   

Consumer

     77,405         78,345   

Credit cards

     5,842         5,201   

Overdrafts

     73         1,040   

Less: unearned discount

     (3,614      (4,556

allowance for loan losses

     (15,703      (16,737
  

 

 

    

 

 

 

Loans, net

   $ 1,785,155       $ 1,561,061   
  

 

 

    

 

 

 

At September 30, 2016 and December 31, 2015, net unamortized loan fees of $(824) and $(636), respectively, have been included in the carrying value of loans.

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.

 

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Table of Contents

All relevant documentation, such as the loan application, financial statements and tax returns, required under the lending policies is summarized and provided to management and/or the Corporation’s Board of Directors in connection with the loan approval process. Such documentation is subsequently electronically archived in the Corporation’s document management system. Pursuant to the Corporation’s lending policies, management considers a variety of factors when determining whether 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 32% and 30% of the Corporation’s total loan portfolio at September 30, 2016 and December 31, 2015. Commercial mortgage loans comprised 28% of the Corporation’s total loan portfolio at September 30, 2016 and December 31, 2015. Management assigns a risk rating to all commercial loans at loan origination. 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 36% of the Corporation’s total loan portfolio at September 30, 2016 and December 31, 2015. 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, 2016 and December 31, 2015. 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, 2016 were as follows:

 

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

Allowance for loan losses, July 1, 2016

   $ 5,218      $ 6,207       $ 2,299      $ 2,066      $ 50      $ 148      $ 15,988   

Charge-offs

     (86     0         (95     (709     (17     (86     (993

Recoveries

     37        2         10        20        3        14        86   

Provision (benefit) for loan losses

     (24     27         (65     545        36        103        622   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, September 30, 2016

   $ 5,145      $ 6,236       $ 2,149      $ 1,922      $ 72      $ 179      $ 15,703   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transactions in the allowance for loan losses for the nine months ended September 30, 2016 were as follows:

 

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

Allowance for loan losses, January 1, 2016

   $ 6,035      $ 5,605      $ 2,475      $ 2,371      $ 90      $ 161      $ 16,737   

Charge-offs

     (519     (20     (244     (2,397     (54     (167     (3,401

Recoveries

     84        7        72        94        18        54        329   

Provision (benefit) for loan losses

     (455     644        (154     1,854        18        131        2,038   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, September 30, 2016

   $ 5,145      $ 6,236      $ 2,149      $ 1,922      $ 72      $ 179      $ 15,703   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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

 

     Commercial,           Residential                          
     Industrial, and     Commercial     Real           Credit              
     Agricultural     Mortgages     Estate     Consumer     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,            Residential                          
     Industrial, and     Commercial      Real           Credit              
     Agricultural     Mortgages      Estate     Consumer     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   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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, 2016 and December 31, 2015. The recorded investment in loans excludes accrued interest and unearned discounts due to their insignificance.

September 30, 2016

 

     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

   $ 193       $ 0       $ 0       $ 0       $ 0       $ 0       $ 193   

Collectively evaluated for impairment

     4,824         3,811         2,149         1,922         72         179         12,957   

Acquired with deteriorated credit quality

     0         0         0         0         0         0         0   

Modified in a troubled debt restructuring

     128         2,425         0         0         0         0         2,553   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 5,145       $ 6,236       $ 2,149       $ 1,922       $ 72       $ 179       $ 15,703   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Individually evaluated for impairment

   $ 820       $ 0       $ 0       $ 0       $ 0       $ 0       $ 820   

Collectively evaluated for impairment

     565,737         497,318         644,545         77,405         5,842         73         1,790,920   

Acquired with deteriorated credit quality

     0         660         0         0         0         0         660   

Modified in a troubled debt restructuring

     2,710         9,362         0         0         0         0         12,072   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 569,267       $ 507,340       $ 644,545       $ 77,405       $ 5,842       $ 73       $ 1,804,472   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 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

   $ 239       $ 0       $ 39       $ 0       $ 0       $ 0       $ 278   

Collectively evaluated for impairment

     4,909         3,580         2,436         2,371         90         161         13,547   

Acquired with deteriorated credit quality

     0         0         0         0         0         0         0   

Modified in a troubled debt restructuring

     887         2,025         0         0         0         0         2,912   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 6,035       $ 5,605       $ 2,475       $ 2,371       $ 90       $ 161       $ 16,737   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Loans:

                    

Individually evaluated for impairment

   $ 1,196       $ 393       $ 248       $ 0       $ 0       $ 0       $ 1,837   

Collectively evaluated for impairment

     469,128         437,200         573,977         78,345         5,201         1,040         1,564,891   

Acquired with deteriorated credit quality

     0         685         0         0         0         0         685   

Modified in a troubled debt restructuring

     5,040         9,901         0         0         0         0         14,941   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 475,364       $ 448,179       $ 574,225       $ 78,345       $ 5,201       $ 1,040       $ 1,582,354   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2016 and December 31, 2015 and for the three and nine months ended September 30, 2016 and 2015:

September 30, 2016

 

     Unpaid Principal
Balance
     Recorded
Investment
     Allowance for Loan
Losses Allocated
 

With an allowance recorded:

        

Commercial, industrial, and agricultural

   $ 1,689       $ 1,689       $ 321   

Commercial mortgage

     10,148         9,362         2,425   

Residential real estate

     0         0         0   

With no related allowance recorded:

        

Commercial, industrial, and agricultural

     2,763         1,841         0   

Commercial mortgage

     0         0         0   

Residential real estate

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Total

   $ 14,600       $ 12,892       $ 2,746   
  

 

 

    

 

 

    

 

 

 

December 31, 2015

 

     Unpaid Principal
Balance
     Recorded
Investment
     Allowance for Loan
Losses Allocated
 

With an allowance recorded:

        

Commercial, industrial, and agricultural

   $ 3,448       $ 3,448       $ 1,126   

Commercial mortgage

     5,985         5,343         2,025   

Residential real estate

     351         248         39   

With no related allowance recorded:

        

Commercial, industrial, and agricultural

     3,716         2,788         0   

Commercial mortgage

     5,001         4,951         0   

Residential real estate

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Total

   $ 18,501       $ 16,778       $ 3,190   
  

 

 

    

 

 

    

 

 

 

 

     Three Months Ended September 30, 2016      Nine Months Ended September 30, 2016  
     Average      Interest      Cash Basis      Average      Interest      Cash Basis  
     Recorded      Income      Interest      Recorded      Income      Interest  
     Investment      Recognized      Recognized      Investment      Recognized      Recognized  

With an allowance recorded:

                 

Commercial, industrial, and agricultural

   $ 2,340       $ 34       $ 34       $ 2,859       $ 36       $ 36   

Commercial mortgage

     7,253         57         57         6,331         61         61   

Residential real estate

     0         0         0         83         6         6   

With no related allowance recorded:

                 

Commercial, industrial, and agricultural

     2,148         24         24         2,420         26         26   

Commercial mortgage

     2,214         17         17         3,467         20         20   

Residential real estate

     0         0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,955       $ 132       $ 132       $ 15,160       $ 149       $ 149   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

With an allowance recorded:

                 

Commercial, industrial, and agricultural

   $ 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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2016 and December 31, 2015:

 

     September 30, 2016      December 31, 2015  
     Nonaccrual      Past Due
Over 90 Days
Still on Accrual
     Nonaccrual      Past Due
Over 90 Days
Still on Accrual
 

Commercial, industrial, and agricultural

   $ 2,830       $ 0       $ 3,560       $ 3   

Commercial mortgages

     5,592         0         3,651         0   

Residential real estate

     5,733         27         3,671         87   

Consumer

     1,170         15         1,277         15   

Credit cards

     0         28         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,325       $ 70       $ 12,159       $ 105   
  

 

 

    

 

 

    

 

 

    

 

 

 

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, 2016 and December 31, 2015 by class of loans.

September 30, 2016

 

                   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

   $ 1,641       $ 269       $ 1,910       $ 3,820       $ 565,447       $ 569,267   

Commercial mortgages

     2         727         2,043         2,772         504,568         507,340   

Residential real estate

     1,680         354         2,451         4,485         640,060         644,545   

Consumer

     286         150         1,185         1,621         75,784         77,405   

Credit cards

     24         39         28         91         5,751         5,842   

Overdrafts

     0         0         0         0         73         73   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,633       $ 1,539       $ 7,617       $ 12,789       $ 1,791,683       $ 1,804,472   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

December 31, 2015

 

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

Commercial, industrial, and agricultural

   $ 131       $ 622       $ 698       $ 1,451       $ 473,913       $ 475,364   

Commercial mortgages

     7         343         3,651         4,001         444,178         448,179   

Residential real estate

     2,834         378         3,001         6,213         568,012         574,225   

Consumer

     216         179         1,292         1,687         76,658         78,345   

Credit cards

     0         0         0         0         5,201         5,201   

Overdrafts

     0         0         0         0         1,040         1,040   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,188       $ 1,522       $ 8,642       $ 13,352       $ 1,569,002       $ 1,582,354   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2016 and December 31, 2015.

 

     September 30, 2016      December 31, 2015  
     Number of
Loans
     Loan
Balance
     Specific
Reserve
     Number of
Loans
     Loan
Balance
     Specific
Reserve
 

Commercial, industrial, and agricultural

     7       $ 2,710       $ 128         8       $ 5,040       $ 887   

Commercial mortgages

     8         9,362         2,425         8         9,901         2,025   

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       $ 12,072       $ 2,553         16       $ 14,941       $ 2,912   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table present loans by class modified as troubled debt restructurings that occurred during the nine months ended September 30, 2016. There was one loan modified as a troubled debt restructuring during the three and nine months ended September 30, 2016.

 

     Nine Months Ended September 30, 2016  
     Number of
Loans
     Pre-Modification
Outstanding Recorded
Investment
     Post-Modification
Outstanding Recorded
Investment
 

Commercial, industrial, and agricultural

     1       $ 109       $ 109   

Commercial mortgages

     0         0         0   

Residential real estate

     0         0         0   

Consumer

     0         0         0   

Credit cards

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Total

     1       $ 109       $ 109   
  

 

 

    

 

 

    

 

 

 

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

 

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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, 2016 and December 31, 2015 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.

Credit Quality Indicators

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

The Corporation uses the following definitions for risk ratings:

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

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

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

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

September 30, 2016

 

     Pass      Special
Mention
     Substandard      Doubtful      Total  

Commercial, industrial, and agricultural

   $ 530,168       $ 21,155       $ 17,936       $ 8       $ 569,267   

Commercial mortgages

     484,374         2,641         20,325         0         507,340   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,014,542       $ 23,796       $ 38,261       $ 8       $ 1,076,607   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

 

     Pass      Special
Mention
     Substandard      Doubtful      Total  

Commercial, industrial, and agricultural

   $ 447,449       $ 4,749       $ 22,943       $ 223       $ 475,364   

Commercial mortgages

     426,870         1,735         19,148         426         448,179   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 874,319       $ 6,484       $ 42,091       $ 649       $ 923,543   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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, 2016 and December 31, 2015:

 

     September 30, 2016      December 31, 2015  
     Residential             Credit      Residential             Credit  
     Real Estate      Consumer      Cards      Real Estate      Consumer      Cards  

Performing

   $ 638,785       $ 76,220       $ 5,814       $ 570,467       $ 77,053       $ 5,201   

Non-performing

     5,760         1,185         28         3,758         1,292         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 644,545       $ 77,405       $ 5,842       $ 574,225       $ 78,345       $ 5,201   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

Holiday’s loan portfolio is summarized as follows at September 30, 2016 and December 31, 2015:

 

     September 30,      December 31,  
     2016      2015  

Consumer

   $ 25,268       $ 30,001   

Residential real estate

     1,166         1,263   

Less: unearned discount

     (3,614      (4,556
  

 

 

    

 

 

 

Total

   $ 22,820       $ 26,708   
  

 

 

    

 

 

 

 

7. DEPOSITS

Total deposits at September 30, 2016 and December 31, 2015 are summarized as follows (in thousands):

 

     Percentage
Change
    September 30,
2016
     December 31,
2015
 

Checking, non-interest bearing

     11.2   $ 293,049       $ 263,639   

Checking, interest bearing

     20.1     528,728         440,174   

Savings accounts

     3.7     961,260         927,074   

Certificates of deposit

     30.7     240,744         184,166   
  

 

 

   

 

 

    

 

 

 
     11.5   $ 2,023,781       $ 1,815,053   
  

 

 

   

 

 

    

 

 

 

 

8. 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, 2016 and 2015, there were no outstanding stock options to include in the diluted earnings per share calculations.

 

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

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

 

     Three months ended      Nine months ended  
     September 30,      September 30,  
     2016      2015      2016      2015  

Basic earnings per common share computation:

           

Net income per consolidated statements of income

   $ 6,416       $ 5,522       $ 15,500       $ 16,689   

Net earnings allocated to participating securities

     (40      (30      (101      (92
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings allocated to common stock

   $ 6,376       $ 5,492       $ 15,399       $ 16,597   
  

 

 

    

 

 

    

 

 

    

 

 

 

Distributed earnings allocated to common stock

   $ 2,370       $ 2,363       $ 7,107       $ 7,095   

Undistributed earnings allocated to common stock

     4,006         3,129         8,292         9,502   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings allocated to common stock

   $ 6,376       $ 5,492       $ 15,399       $ 16,597   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, including shares considered participating securities

     14,464         14,406         14,453         14,408   

Less: Average participating securities

     (82      (71      (85      (72
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares

     14,382         14,335         14,368         14,336   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 0.44       $ 0.38       $ 1.07       $ 1.16   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share computation:

           

Net earnings allocated to common stock

   $ 6,376       $ 5,492       $ 15,399       $ 16,597   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares and dilutive potential common shares

     14,382         14,335         14,368         14,336   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share

   $ 0.44       $ 0.38       $ 1.07       $ 1.16   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

9. 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, 2016, the variable rate on the subordinated debt was 2.40% (LIBOR plus 155 basis points) and the Corporation was paying 5.57% (4.02% fixed rate plus 155 basis points).

As of September 30, 2016 and December 31, 2015, 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.

 

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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, 2016 and December 31, 2015 and for the three and nine months ended September 30, 2016 and 2015:

 

          Fair value as of
     Balance Sheet    September 30,   December 31,
     Location    2016   2015

Interest rate contracts

   Accrued interest and

other liabilities

   ($595)   ($736)