EXHIBIT 99.2

CONTINENTAL BANK HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

Unaudited

 

		September 30,				December 31,
(dollars in thousands, except share data)		2014				2013
Assets
Cash and due from banks		$	40,802			$	19,518
Federal funds sold			501				—
Cash and cash equivalents			41,303				19,518
Investment securities available for sale, at fair value			189,788				199,191
Investment securities, held to maturity			19,615				19,791
Loans held for sale			—				4,028
Portfolio loans and leases			414,362				384,226
Less: Allowance for loan and lease losses			(5,385	)			(4,929	)
Net portfolio loans and leases			408,977				379,297
Premises and equipment, net			9,052				9,693
Foreclosed assets			440				205
Accrued interest receivable			2,294				2,276
Bank owned life insurance			11,961				11,679
Restricted bank stocks, at cost			6,285				5,593
Other assets			8,084				7,356
Total assets		$	697,799			$	658,627
Liabilities
Deposits:
Non-interest-bearing		$	100,396			$	72,238
Interest-bearing			391,948				388,166
Total deposits			492,344				460,404
Securities sold under agreements to repurchase			11,958				27,606
Short-term borrowings			106,623				85,000
FHLB advances and other borrowings			19,645				20,015
Accrued interest payable			296				351
Other liabilities			2,847				5,579
Total liabilities			633,713				598,955
Shareholders’ equity
Preferred stock, $0.10 par value; authorized 5,000,000 shares:
Series A Preferred stock, issued and outstanding: 6,062 shares; liquidation value $6,062,000, as of both September 30, 2014 and December 30, 2013		$	1			$	1
Series B Preferred stock, issued and outstanding: 1,204,797 shares; stated value $8,434,000 as of both September 30, 2014 and December 30, 2013			120				120
Common stock, par value $0.01; authorized 30,000,000 shares; issued and outstanding 6,551,450 and 6,520,950 shares as of September 30, 2014 and December 31, 2013, respectively			655				652
Paid-in capital in excess of par value			67,371				67,118
Unearned compensation on restricted stock			(122	)			—
Accumulated other comprehensive loss, net of tax benefit			(1,619	)			(4,471	)
Accumulated deficit			(2,320	)			(3,748	)
Total shareholders’ equity			64,086				59,672
Total liabilities and shareholders’ equity		$	697,799			$	658,627

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

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CONTINENTAL BANK HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF INCOME

Unaudited

 

		Nine Months Ended September 30,
(dollars in thousands, except per share data)		2014				2013
Interest income:
Interest and fees on loans and leases		$	13,400			$	11,926
Interest on federal funds solds			2				2
Other interest			30				23
Interest on investment securities:
Taxable			3,641				3,344
Non-taxable			449				457
Total interest income			17,522				15,752
Interest expense on:
Deposits			1,656				1,991
Securities sold under agreement to repurchase			117				118
FHLB advances and other borrowings			440				318
Total interest expense			2,213				2,427
Net interest income			15,309				13,325
Provision for loan and lease losses			857				1,275
Net interest income after provision for loan and lease losses			14,452				12,050
Non-interest income:
Customer service fees			977				885
Net gain on sale of loans			892				997
Net gain on sale of investment securities available for sale			3				450
Other-than-temporary impairments			(874	)			—
Portion recognized in other comprehensive income before taxes			220				—
Net impairment of investment securities			(654	)			—
Bank owned life insurance income			283				281
Mortgage banking and related services			219				4,182
Other (loss) income			(199	)			679
Total non-interest income			1,521				7,474
Non-interest expenses:
Compensation and employee benefits			5,764				8,178
Occupancy and equipment			2,686				2,686
Advertising			125				385
Insurance			142				148
Data processing			1,006				947
Foreclosed assets, net			99				160
Professional fees			1,515				864
Other operating expenses			1,815				3,690
Total non-interest expenses			13,152				17,058
Income before income taxes			2,821				2,466
Income tax expense			1,075				615
Net income		$	1,746			$	1,851

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

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CONTINENTAL BANK HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Unaudited

 

		Nine Months Ended September 30,
(dollars in thousands)		2014				2013
Net income		$	1,746			$	1,851
Other comprehensive income (loss):
Net change in unrealized gains (losses) on investment securities available for sale:
Net unrealized gains (losses) arising during the period, net of tax expense (benefit) of $1,,247 and $(2,800), respectively			3,669				(5,733	)
Net credit-related impairment of securities not expected to be sold, net of tax benefit of $223 and $0, respectively			(431	)			—
Less: reclassification adjustment for net (gains) losses on sales realized in net income, net of tax expense (benefit) of $1 and $153, respectively			(2	)			(297	)
Net change in net unrealized holding losses on investment securities held to maturity:
Reclassification adjustment for net unrealized holding losses on securities transferred, net of tax benefit of $0 and $308, respectively			—				(598	)
Less: amortization of net unrealized holding losses to income, net of tax benefit of $30 and $9, respectively			57				16
Net change in fair value of derivative used for cash flow hedge:
Change in fair value of hedging instruments, net of tax benefit of $229 and $0, respectively			(441	)			—
Total other comprehensive income (loss)			2,852				(6,612	)
Total comprehensive income (loss)		$	4,598			$	(4,761	)

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

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CONTINENTAL BANK HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

 

		Nine Months Ended September 30,
(dollars in thousands)		2014				2013
Operating activities:
Net Income		$	1,746			$	1,851
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses			857				1,275
Depreciation of fixed assets			700				734
Net amortization of investment premiums and discounts			987				1,422
Net gain on sale of investment securities available for sale			(3	)			(450	)
Net other-than-temporary-impairment of investment securities			654				—
Net gain on sale of loans			(1,552	)			(997	)
Stock based compensation cost			130				3
Amortization and net impairment of mortgage servicing rights			100				139
Net amortization of deferred loan costs			324				401
Net gain on sale of repossessed assets			—				(63	)
Net increase in cash surrender value of bank owned life insurance			(283	)			(281	)
Other, net			(35	)			77
Loans originated for resale			(13,085	)			(134,210	)
Proceeds from sales of SBA loans originated for sale			7,577				9,549
Proceeds from sales of mortgage loans			9,712				138,799
(Benefit) provision for deferred income taxes			(446	)			127
Change in accrued interest receivable			(18	)			(583	)
Change in accrued interest payable			(55	)			(36	)
Change in other assets			(1,752	)			1,003
Change in other liabilities			380				(3,923	)
Net cash provided by operating activities			5,938				14,837
Investing activities:
Purchases of investment securities available for sale			(15,460	)			(79,156	)
Purchases of investment securities held to maturity			—				(1,510	)
Proceeds from maturity of investment securities available for sale			8,445				13,608
Proceeds from maturity of investment securities held to maturity			133				2,384
Proceeds from sale of investment securities available for sale			16,493				21,230
Net investment in correspondent bank stock			(692	)			(1,463	)
Net portfolio loan and lease originations			(30,256	)			(66,568	)
Purchases of premises and equipment			(59	)			(502	)
Purchases of bank owned life insurance			—				(1,000	)
Proceeds from sale of foreclosed assets			12				675
Net cash used in investing activities			(21,384	)			(112,302	)
Financing activities:
Net increase in deposits			31,940				23,332
Net (decrease) increase in securities sold under agreements repurchase			(15,648	)			8,118
Net increase in short-term borrowings			21,623				25,000
Proceeds from issuance of long-term debt			65,564				9,425
Repayment of long-term debt			(65,934	)			(870	)
Proceeds from issuance of common stock			4				—
Dividends on preferred stock			(318	)			(318	)
Net cash provided by financing activities			37,231				64,687
Change in cash and cash equivalents			21,785				(32,778	)
Cash and cash equivalents at beginning of period			19,518				55,093
Cash and cash equivalents at end of period		$	41,303			$	22,315
Supplemental cash flow information:
Cash paid during the year for:
Income taxes		$	1,153			$	825
Interest			2,268				2,463
Available for sale securities purchased, not settled		$	—			$	3,113
Transfer of loans to other real estate owned			247				266
Transfer of investment securities from available for sale to held to maturity			—				19,866

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

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CONTINENTAL BANK HOLDINGS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS” EQUITY

Unaudited

 

		Shares of Common Stock				Series A Preferred Stock				Series B Preferred Stock				Common Stock				Additional Paid-In Capital				Unearned Stock- Based Compensation				Accumulated Other Comprehensive Loss (Income)				Accunmulated Deficit				Total Shareholders’ Equity
(dollars in thousands)
Balance, December 31, 2013			6,520,950			$	1			$	120			$	652			$	67,118			$	—			$	(4,471	)		$	(3,748	)		$	59,672
Net income			—				—				—				—				—				—				—				1,746				1,746
Cash dividend declared on preferred stock 7%			—				—				—				—				—				—				—				(318	)			(318	)
Share awards and option exercises			30,500				—				—				3				211				(210	)			—				—				4
Other comprehensive income, net of tax expense of $1,469			—				—				—				—				—				—				2,852				—				2,852
Stock based compensation			—				—				—				—				42				88				—				—				130
Balance, September 30, 2014			6,551,450			$	1			$	120			$	655			$	67,371			$	(122	)		$	(1,619	)		$	(2,320	)		$	64,086

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

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR CONTINENTAL BANK HOLDINGS, INC.

Note 1 - Basis of Presentation

The unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). In the opinion of the management of Continental Bank Holding, Incorporated (the “Company”), all adjustments necessary for a fair presentation of the consolidated financial position and the results of operations for the interim periods presented have been included. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Company’s audited consolidated financial statements for the twelve months ended December 31, 2013, filed with the SEC on Form S-4 by Bryn Mawr Bank Corporation on June 20, 2014.

The results of operations for the nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the full year.

Note 2 - Investment Securities

During 2013, we transferred securities with a total amortized cost of $20,773,000, and a corresponding fair value of $19,866,000, from available for sale to held to maturity. The net unrealized loss, net of taxes, on these securities at the dates of the transfers was $598,000. The unrealized holding loss at the time of transfer continues to be reported in accumulated other comprehensive income, net of tax and is amortized over the remaining lives of the securities as an adjustment of the yield. The amortization of the unamortized holding loss reported in accumulated other comprehensive income will offset the effect on interest income of the discount for the transferred securities. The remaining unamortized balance of the losses for the securities transferred from available for sale to held to maturity, net of tax, was $467,000 at September 30, 2014 and $562,000 at December 31, 2013.

The amortized costs, adjusted carrying values, and fair values of securities, with gross unrealized gains and losses, at September 30, 2014 and December 31, 2013 were as follows:

 

		September 30, 2014
(dollars in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Available-for-sale securities
Asset-backed securities		$	31,867			$	95			$	(1,223	)		$	30,739
State and municipal bonds			8,503				179				(96	)			8,586
Trust preferred securities			8,665				543				—				9,208
Corporate debt securities			7,572				381								7,953
Mortgage-backed securities			134,372				957				(2,027	)			133,302
		$	190,979			$	2,155			$	(3,346	)		$	189,788

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		September 30, 2014
(dollars in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Held-to-maturity securities
State and municipal bonds		$	13,035			$	475			$	(546	)		$	12,964
Corporate debt securities			1,426				68				—				1,494
Mortgage-backed securities			5,154				353				(230	)			5,277
		$	19,615			$	896			$	(776	)		$	19,735

 

		December 31, 2013
(dollars in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Available-for-sale securities
Asset-backed securities		$	41,655			$	55			$	(2,058	)		$	39,652
State and municipal bonds			10,749				16				(571	)			10,194
Trust preferred securities			9,291				197				(115	)			9,373
Corporate debt securities			11,823				354				(304	)			11,873
Mortgage-backed securities			131,769				789				(4,459	)			128,099
		$	205,287			$	1,411			$	(7,507	)		$	199,191

 

		December 31, 2013
(dollars in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Held-to-maturity securities
State and municipal bonds		$	13,035			$	48			$	(1,347	)		$	11,736
Corporate debt securities			1,438				—				(39	)			1,399
Mortgage-backed securities			5,318				—				(59	)			5,259
		$	19,791			$	48			$	(1,445	)		$	18,394

Securities with a fair value of approximately $100 million and $66 million were pledged as collateral for deposits and borrowings at September 30, 2014 and December 31, 2013, respectively.

The following table shows gross unrealized losses and fair value of investments that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2014 and December 31, 2013:

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		September 30, 2014
		Less than 12 Months								12 Months or Longer								Total
(dollars in thousands)		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
Available-for-sale securities
Asset-backed securities		$	1,729			$	(10	)		$	26,719			$	(1,213	)		$	28,448			$	(1,223	)
State and municipal bonds			—				—				4,067				(96	)			4,067				(96	)
Mortgage-backed securities			15,679				(84	)			59,954				(1,943	)			75,633				(2,027	)
		$	17,408			$	(94	)		$	90,740			$	(3,252	)		$	108,148			$	(3,346	)

 

		September 30, 2014
		Less than 12 Months								12 Months or Longer								Total
(dollars in thousands)		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
Held to Maturity securities
State and municipal bonds		$	—			$	—			$	9,613			$	(546	)		$	9,613			$	(546	)
Mortgage-backed securities			—				—				5,277				(230	)			5,277				(230	)
		$	—			$	—			$	14,890			$	(776	)		$	14,890			$	(776	)

 

		December 31, 2013
		Less than 12 Months								12 Months or Longer								Total
(dollars in thousands)		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
Available-for-sale securities
Asset-backed securities		$	28,459			$	(1,500	)		$	6,170			$	(557	)		$	34,629			$	(2,057	)
State and municipal bonds			8,409				(522	)			463				(49	)			8,872				(571	)
Trust preferred securities			2,360				(36	)			840				(80	)			3,200				(116	)
Corporate debt securities			1,494				(7	)			3,931				(297	)			5,425				(304	)
Mortgage-backed securities			72,054				(3,077	)			14,527				(1,382	)			86,581				(4,459	)
		$	112,776			$	(5,142	)		$	25,931			$	(2,365	)		$	138,707			$	(7,507	)

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		December 31, 2013
		Less than 12 Months								12 Months or Longer								Total
(dollars in thousands)		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
Held to Maturity securities
State and municipal bonds		$	6,179			$	(911	)		$	3,282			$	(436	)		$	9,461			$	(1,347	)
Corporate debt securities			1,398				(39	)			—				—				1,398				(39	)
Mortgage-backed securities			5,259				(59	)			—				—				5,259				(59	)
		$	12,836			$	(1,009	)		$	3,282			$	(436	)		$	16,118			$	(1,445	)

The Company evaluates all securities with unrealized losses quarterly to determine whether the loss is an other than temporary impairment (“OTTI”). At September 30, 2014, the Company had 81 securities in an unrealized loss position. The decline in fair value is due in large part to changes in market credit spreads.

The Company follows fair value measurement guidance that clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management must assess whether (a) we have the intent to sell the security; (b) it is more likely than not that we will be required to sell the security prior to its anticipated recovery; or (c) the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis.

In instances when a determination is made that an OTTI exists but we do not intend to sell the debt security and it is not more likely than not that we will be required to sell the debt security prior to its anticipated recovery, the OTTI is separated into (a) the amount of the total OTTI related to a decrease in cash flows expected to be collected from the debt security (“the credit loss”) and (b) the amount related to all other factors. The amount of the OTTI related to the credit loss is recognized in earnings and the amount of the OTTI related to all other factors is recognized in other comprehensive income.

For all securities held in the portfolio, for which unrealized losses have existed for a period of time, we do not have the intention to sell and believe we will not be required to sell the securities prior to their recovery or maturity for contractual, regulatory or liquidity reasons as of the reporting date.

Based on management’s assessment at September 30, 2014, with the exception of the securities described below, the Company does not believe that the decreased market prices associated with its available-for-sale securities constitute an OTTI.

During 2014, the Company received notification of default of an impaired pooled trust preferred security. The pool collateral was to be liquidated and net proceed remitted to the bondholders. As a result of the anticipated liquidation, the Company determined that an additional loss of $654,000 would be realized which was recognized through earnings through September 30, 2014. A loss of $1,080,000 had previously been recognized on this security. The Company has also evaluated another pooled trust preferred security. Realized losses of $930,000 had previously been recognized on this security. No additional credit-related losses were realized during 2014. Management does not currently intend to sell the securities and believes it is not likely that the Company will be required to sell the securities before recovery of its amortized cost.

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The Company considers the following factors for determining whether a credit loss exists: bond ratings, collateral, pool factor, default rates, weighted average coupon, weighted average maturity, weighted average loan age, loan to value, credit scores, geographical concentration and prepayment rates. When consideration of the previous factors indicates that a credit loss may occur, the Company utilized cash flow models to present value any credit loss.

The valuation model captures the composition of the underlying collateral and the cash flow structure of the security. Significant inputs to the model include delinquencies, collateral types and related contractual features, estimated rates of default, loss severity and prepayment assumptions.

The following roll forward reflects the amount related to other-than-temporary credit losses recognized in earnings for the nine months ended September 30, 2013 and 2014:

 

(dollars in thousands)		2014				2013
Beginning balance, January 1		$	2,009			$	2,009
Amount related to a credit loss for which an other-than-temporary impairment was not previously recognized			654				0
Ending balance, September 30		$	2,663			$	2,009

The amortized costs and fair value of debt securities available-for-sale by contractual maturity at September 30, 2014 was as follows:

 

		Available-for-Sale as of September 30, 2014
(dollars in thousands)		Amortized Cost				Fair Value
Within 1 year		$	—			$	—
Over 1 year through 5 years			15,101				15,351
Over 5 years through 10 years			29,044				28,317
Over 10 years			12,460				12,818
			56,605				56,486
Mortgage-backed securities			134,372				133,302
		$	190,977			$	189,788

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The amortized costs and fair value of debt securities held-to-maturity by contractual maturity at September 30, 2014 was as follows:

 

		Held-to-Maturity As of September 30, 2014
(dollars in thousands)		Amortized Cost				Fair Value
Within 1 year		$	—			$	—
Over 1 year through 5 years			—				—
Over 5 years through 10 years			14,461				14,457
Over 10 years			—				—
			14,461				14,457
Mortgage-backed securities			5,154				5,277
		$	19,615			$	19,734

The components of realized gains and losses on sales of securities during the nine months ended September 30, 2014 and 2013 were:

 

(dollars in thousands)		2014				2013
Gross gains		$	187			$	450
Gross losses			(184	)			0
Net realized gains on available-for-sale securities		$	3			$	450

Note 3 - Loans and Allowance for Loan Losses

The composition of loans at September 30, 2014 and December 31, 2013 is as follows:

 

(dollars in thousands)		September 30, 2014				December 31, 2013
Commercial and industrial		$	103,478			$	106,275
Commercial real estate			175,838				145,712
Commercial real estate, construction			17,792				10,428
Residential mortgages			71,640				74,624
Home equity			30,020				29,523
Other consumer			14,029				14,805
Indirect automobile			728				1,930
Total loans			413,525				383,297
Net deferred loan costs			837				929
Allowance for loan losses			(5,385	)			(4,929	)
Net loans		$	408,977			$	379,297

The Company originates and sells loans guaranteed by the Small Business Administration. The Company retains the unguaranteed portion of the loan and the servicing on the loans sold and receives a fee based upon the principal balance outstanding. During the nine months ended September 30, 2014 and 2013, the Company sold loans for total proceeds of $7,577,000 and $3,837,000, respectively. The loan sales resulted in realized gains of $862,000 and $412,000 for the nine months ended September 30, 2014 and 2013, respectively.

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Loans serviced for others are not included in the accompanying balance sheet. The risks inherent in the servicing assets relate primarily to changes in prepayments that result from shifts in interest rates. The unpaid principal balances of loans serviced for others were $71,450,000 at September 30, 2014 and $68,376,000 at December 31, 2013. The following summarizes the activity pertaining to servicing rights using the amortization method for the nine months ended September 30, 2014 and 2013:

 

(dollars in thousands)		2014				2013
Balance, January 1		$	529			$	501
Additions			185				198
Disposals			(20	)			(31	)
Amortization			(100	)			(139	)
Balance, September 30		$	594			$	529

During 2010, the Company also commenced the origination of residential mortgages for sale in the secondary market. The loans and servicing rights are sold and the Company receives origination and processing income. During the nine months ended September 30, 2014 and 2013, the Company originated $2,901,000 and $103,626,000 in residential mortgage loans, respectively, resulting in $30,000 and $585,000, respectively, of realized gains on loans sold.

The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of September 30, 2014 and December 31, 2013:

 

		September 30, 2014
(dollars in thousands)		Pass				Special Mention				Substandard				Doubtful				Total
Commercial and Industrial		$	101,119			$	806			$	1,553			$	—			$	103,478
Commercial Real Estate			166,520				3,559				5,759				—				175,838
Commercial Real Estate Construction			13,221				2,184				2,387				—				17,792
Residential Mortgages			71,026				299				315				—				71,640
Home Equity			28,964				—				1,056				—				30,020
Consumer, Other			13,735				143				151				—				14,029
Indirect Automobile			721				7				—				—				728
		$	395,306			$	6,998			$	11,221			$	—			$	413,525

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		December 31, 2013
(dollars in thousands)		Pass				Special Mention				Substandard				Doubtful				Total
Commercial and Industrial		$	101,960			$	1,673			$	2,642			$	—			$	106,275
Commercial Real Estate			140,106				523				5,083				—				145,712
Commercial Real Estate Construction			6,075				3,901				452				—				10,428
Residential Mortgages			73,664				306				654				—				74,624
Home Equity			28,130				—				1,393				—				29,523
Consumer, Other			13,840				186				779				—				14,805
Indirect Automobile			1,923				7				—				—				1,930
		$	365,698			$	6,596			$	11,003			$	—			$	383,297

The following tables summarize information in regards to impaired loans by loan portfolio class as of September 30, 2014 and December 31, 2013:

 

		September 30, 2014
(dollars in thousands)		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
With no related allowance recorded
Commercial and industrial		$	815			$	689			$	—			$	703			$	22
Commercial real estate			2,178				2,178				—				2,188				65
Commercial real estate, construction			2,387				2,387				—				2,440				73
Residential mortgages			315				315				—				277				—
Home equity			547				547				—				549				—
Consumer			151				151				—				153				—
			6,393				6,267				—				6,310				160
With an allowance recorded
Commercial and industrial			235				416				237				367				—
Commercial real estate			1,262				1,286				118				1,242				60
Home Equity			509				509				148				530				—
Consumer			24				—				24				24				—
			2,030				2,211				527				2,163				60
Total
Commercial and industrial			1,050				1,105				237				1,070				22
Commercial real estate			3,440				3,464				118				3,430				125
Commercial real estate, construction			2,387				2,387				—				2,440				73
Residential mortgages			315				315				—				277				—
Home equity			1,056				1,056				148				1,079				—
Consumer			175				151				24				177				—
		$	8,423			$	8,478			$	527			$	8,473			$	220

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		December 31, 2013
(dollars in thousands)		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
With no related allowance recorded
Commercial and industrial		$	1,177			$	1,539			$	—			$	1,136			$	97
Commercial real estate			—				—				—				—				—
Commercial real estate, construction			2,558				3,667				—				4,048				254
Residential mortgages			654				654				—				564				—
Home equity			1,204				1,242				—				929				29
Consumer			730				782				—				255				23
			6,323				7,884				—				6,932				403
With an allowance recorded
Commercial and industrial			235				235				139				95				6
Commercial real estate			1,547				1,547				31				1,165				44
Consumer			49				49				49				12				—
			1,831				1,831				219				1,272				50
Total
Commercial and industrial			1,412				1,774				139				1,231				103
Commercial real estate			1,547				1,547				31				1,165				44
Commercial real estate, construction			2,558				3,667				—				4,048				254
Residential mortgages			654				654				—				564				—
Home equity			1,204				1,242				—				929				29
Consumer			779				831				49				267				23
		$	8,154			$	9,715			$	219			$	8,204			$	453

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the past due status as of September 30, 2014 and December 31, 2013:

 

		September 30, 2014
(dollars in thousands)		30-59 Days Past due				60-89 Days Past Due				Greater Than 90 Days Past Due				Total Past Due				Current				Total Loans Receivables				Loans Receivable Over 90 Days Past Due and Accruing
Commercial and industrial		$	—			$	50			$	1,054			$	1,104			$	102,374			$	103,478			$	240
Commercial real estate			—				—				22				22				175,816				175,838				—
Commercial real estate, construction			—				—				79				79				17,713				17,792				—
Residential mortgages			158				141				315				614				71,026				71,640				—
Home equity			—				—				862				862				29,158				30,020				—
Consumer			79				63				151				293				13,736				14,029				—
Indirect automobile			7				—				—				7				721				728				—
		$	244			$	254			$	2,483			$	2,981			$	410,544			$	413,525			$	240

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		December 31, 2013
(dollars in thousands)		30-59 Days Past due				60-89 Days Past Due				Greater Than 90 Days Past Due				Total Past Due				Current				Total Loans Receivables				Loans Receivable Over 90 Days Past Due and Accruing
Commercial and industrial		$	846			$	38			$	1,036			$	1,920			$	104,355			$	106,275			$	50
Commercial real estate			84				—				—				84				145,628				145,712				—
Commercial real estate, construction			—				—				209				209				10,219				10,428				—
Residential mortgages			305				—				654				959				73,665				74,624				—
Home equity			130				—				1,003				1,133				28,390				29,523				—
Consumer			211				—				779				990				13,815				14,805				—
Indirect automobile			7				—				—				7				1,923				1,930				—
		$	1,583			$	38			$	3,681			$	5,302			$	377,995			$	383,297			$	50

The following table presents nonaccrual loans by classes of the loan portfolio as of September 30, 2014 and December 31, 2013:

 

(dollars in thousands)		September 30, 2014				December 31, 2013
Commercial and industrial		$	1,067			$	1,357
Commercial real estate			678				—
Commercial real estate, construction			79				209
Residential mortgages			315				654
Home equity			1,056				1,202
Consumer			151				779
		$	3,346			$	4,201

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The following tables summarize the activity in the allowance for loan losses by loan class for the nine months ended September 30, 2014 and year ended December 31, 2013, and information in regards to the allowance for loan losses:

 

		Nine Months Ended September 30, 2014
(dollars in thousands)		Beginning Balance				Charge- Offs				Recoveries				Provisions				Ending Balance				Ending Balance Individually Evaluated for Impairment				Ending Balance Collectively Evaluated for Impairment
Commercial and industrial		$	1,299			$	(300	)		$	26			$	220			$	1,245			$	237			$	1,008
Commercial real estate			1,759				—				—				76				1,835				118				1,717
Commercial real estate, construction			593				—				167				(112	)			648				—				648
Residential mortgages			356				(89	)			—				(49	)			316				—				316
Home equity			252				(180	)			—				529				601				148				453
Consumer			519				(25	)			—				73				567				24				543
Indirect automobile			11				—				—				9				20				—				20
Unallocated			140				—				—				13				153				—				153
		$	4,929			$	(594	)		$	193			$	857			$	5,385			$	527			$	4,858

 

		Nine Months Ended September 30, 2013
(dollars in thousands)		Beginning Balance				Charge- Offs				Recoveries				Provisions				Ending Balance				Ending Balance Individually Evaluated for Impairment				Ending Balance Collectively Evaluated for Impairment
Commercial and industrial		$	1,087			$	(331	)		$	12			$	299			$	1067			$	—			$	1067
Commercial real estate			1,421				(98	)			23				526				1,872				4				1,868
Commercial real estate, construction			596				(150	)			42				87				575				—				575
Residential mortgages			601				(28	)			—				127				700				—				700
Home equity			120				—				—				20				140				—				140
Consumer			355				(54	)			—				158				459				—				459
Indirect automobile			26				—				—				58				84				—				84
Unallocated			—				—				—												—
		$	4,206			$	(661	)		$	77			$	1,275			$	4,929			$	4			$	4,925

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The following table summarizes impairment valuation information by loan class as of September 30, 2014 and December 31, 2013:

 

		September 30, 2014
(dollars in thousands)		Ending Balance				Ending Balance: Individually Evaluated for Impairment				Ending Balance: Collectively Evaluated for Impairment
Commercial		$	103,478			$	1,050			$	102,428
Commercial real estate			175,838				3,440				172,398
Commercial real estate, construction			17,792				2,387				15,405
Residential mortgages			71,640				315				71,325
Home equity			30,020				1,056				28,964
Consumer			14,029				175				13,854
Indirect automobile			728				—				728
		$	413,525			$	8,423			$	405,102

 

		December 31, 2013
(dollars in thousands)		Ending Balance				Ending Balance: Individually Evaluated for Impairment				Ending Balance: Collectively Evaluated for Impairment
Commercial		$	106,275			$	1,412			$	104,863
Commercial real estate			145,712				1,547				144,165
Commercial real estate, construction			10,428				2,558				7,870
Residential mortgages			74,624				654				73,970
Home equity			29,523				1,204				28,319
Consumer			14,805				779				14,026
Indirect automobile			1,930				—				1,930
		$	383,297			$	8,154			$	375,143

The Company may grant a concession or modification for economic or legal reasons related to a borrower’s financial condition that it would not otherwise consider resulting in a modified loan which is then identified as a troubled debt restructuring (TDR). The Company may modify loans through rate reductions, extensions of maturity, interest only payments, or payment modifications to better match the timing of cash flows due under the modified terms with the cash flows from the borrowers’ operations. Loan modifications are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. TDRs are considered impaired loans for purposes of calculating the Company’s allowance for loan losses.

The Company identifies loans for potential restructure primarily through direct communication with the borrower and evaluation of the borrower’s financial statements, revenue projections, tax returns, and credit reports. Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions, and negative trends may result in a payment default in the near future.

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The following table reflects information regarding the Company’s troubled debt restructurings for the nine months ended September 30, 2014.

 

For the Nine Months Ended September 30, 2014
		Number of Contracts				Pre-Modification Outstanding Recorded Investments				Post-Modification Outstanding Recorded Investments
(dollars in thousands)
Troubled debt restructurings:
Commercial			1			$	238			$	238
Commercial real estate, construction			2				656				656
			3			$	894			$	894

No troubled debt restructurings that occurred during the nine months ended September 30, 2014 have subsequently defaulted. There were no troubled debt restructurings during the twelve months ended December 31, 2013.

Note 4 - Fair Value of Financial Instruments

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year end.

Determination of Fair Value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Topic 820, “Fair Value Measurements and Disclosures”, fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instruments.

The recent fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

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Fair Value Hierarchy

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 - Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 - Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on 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 for substantially the full term of the asset or liability.

Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2014 and December 31, 2013 are as follows:

 

		September 30, 2014
Description		Total				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(Dollars in thousands)
Assets:
Securities available-for-sale
Asset-backed securities		$	30,739			$	—			$	30,739			$	—
State and municipal bonds			8,586				—				8,586				—
Trust preferred securities			9,208				—				8,297				911
Corporate debt securities			7,953				—				7,953				—
Mortgage-backed securities			133,302				—				133,302				—
			189,788				—				188,877				911
Loans held for sale			—				—				—				—
Interest rate swaps			—				—				—				—
Derivative instruments			—				—				—				—
Interest rate lock commitments			—				—				—				—
Total Assets at Fair Value		$	189,788			$	—			$	188,877			$	911
Liabilities:
Derivative instruments			—				—				—				—
Interest rate lock commitments			—				—				—				—
Interest Rate Swaps			496								496
Total Liabilities at Fair Value		$	496			$	—			$	496			$	—

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		December 31, 2013
Description		Total				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(dollars in thousands)
Assets:
Securities available-for-sale
Asset-backed securities		$	39,652			$	—			$	39,652			$	—
State and municipal bonds			10,194				—				10,194				—
Trust preferred securities			9,373				—				7,858				1,515
Corporate debt securities			11,873				—				11,873				—
Mortgage-backed securities			128,099				—				128,099				—
			199,191				—				197,676				1,515
Loans held for sale			4,028				—				4,028				—
Interest rate swaps			174				—				174				—
Derivative instruments			2				—				2				—
Interest rate lock commitments			72				—				72				—
Total Assets at Fair Value		$	203,467			$	—			$	201,952			$	1,515
Liabilities:
Derivative instruments		$	—			$	—			$	—			$	—
Interest rate lock commitments			—				—				—				—
Total Liabilities at Fair Value		$	—			$	—			$	—			$	—

The following table presents a reconciliation of the securities available-for-sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2014 and 2013:

 

		Fair Value Measurements Using Significant Unobservable Inputs
(dollars in thousands)		2014				2013
Securities available-for-sale
Balance, January 1		$	1,270			$	1,000
Total gains or losses (realized/unrealized):
Included in earnings			(654	)			—
Included in other comprehensive income			295				270
Transfers in and/or out of Level 3			—				—
Balance, September 30		$	911				1,270

The following valuation techniques were used to measure fair value of assets in the tables above:

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Trust preferred securities—As of September 30, 2014 and December 31, 2013, two pooled trust preferred securities were deemed OTTI, which had a book value of $836,000 and $1,490,000, respectively, and a fair value of $911,000 and $1,515,000, respectively. One of the securities was in default and was scheduled for liquidation. The fair value for this security as of September 30, 2014 was determined by estimating the market value of the underlying collateral and expected proceeds under the deal structure. The fair value of the second security as of September 30, 2014 and fair values as of December 31, 2013 were determined by discounting the expected cash flow over the life of the security. The discount rate was determined by deriving a discount rate from current yields on similarly rated issues to determine the decline in the collateral value associated with the market increase in credit spreads. To this estimated discount rate, additions were made for increased credit risk as well as assessing the risks in the security, such as default risk and loss severity risk.

Loans Held for Sale

Loans held for sale are classified within Level 2 of the valuation hierarchy.

For Level Two Mortgage loans held for sale (“MLHS”), fair value is estimated through a market approach by using either: (i) the fair value of securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value of a whole mortgage loan, including the value attributable to servicing rights and credit risk, (ii) current commitments to purchase loans or (iii) recent observable market trades for similar loans, adjusted for credit risk and other individual loan characteristics. The Agency mortgage-backed security market is a highly liquid and active secondary market for conforming conventional loans whereby quoted prices exist for securities at the pass-through level, which are published on a regular basis. The Company has the ability to access this market and it is the market into which conforming mortgage loans are typically sold.

There were no loans held for sale as of September 30, 2014. As of December 31, 2013 loans held for sale were recorded at fair value.

The following table reflects the difference between the carrying amount of loans held for sale, measured at fair value and the aggregate unpaid principal amount that the Company is contractually entitled to receive at maturity as of December 31, 2013:

 

		December 31, 2013
		Carrying Amount				Aggregate Unpaid Principal Balance				Excess Aggregate Unpaid Principal Balance Under Carrying Amount
		(In Thousands)
Loans held for sale		$	4,028			$	3,921			$	107

The Company did not have any loans held for sale recorded at fair value that were 90 or more days past due and on non-accrual at December 31, 2013.

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For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2014 and December 31, 2013 are as follows:

 

		September 30, 2014
Description		Total				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(dollars in thousands)
Impaired loans		$	1,554			$	—			$	—			$	1,554
Other real estate owned		$	355			$	—			$	—			$	355

 

		December 31, 2013
Description		Total				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(dollars in thousands)
Impaired loans		$	2,674			$	—			$	—			$	2,674
Other real estate owned		$	—			$	—			$	—			$	—

Impaired loans - Impaired loans are those loans in which the Company has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements. At September 30, 2014 and December 31, 2013, fair value consists of the loan balances of $2,081,000 and $2,893,000, respectively, net of valuation allowances of $527,000 and $220,000, respectively.

Quantitative information about Level 3 Fair Value Measurements at September 30, 2014 is included in the table below:

 

Quantitative Information about Level 3 Fair Value Measurements

Fair Value Estimate

Valuation Techniques

Unobservable Inputs

Estimated Range (Weighted Average)

(dollars In thousands)

Impaired loans

$

1,554

Appraisal of collateral

Appraisal adjustments

0.0%-10.0% (.2%)

Costs to Sell

8.0%-8.0% (8.0%)

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Quantitative information about Level 3 Fair Value Measurements at December 31, 2013 is included in the table below:

 

Quantitative Information about Level3 Fair Value Measurements

Fair Value Estimate

Valuation Techniques

Unobservable Inputs

Estimated Range (Weighted Average)

(Dollars In Thousands)

Impaired loans

$

2,674

Appraisal of collateral

Appraisal adjustments

0.0%-10.0% (.2%)

Costs to Sell

8.0%-8.0% (8.0%)

Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, management is concerned that there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at September 30, 2014 and December 31, 2013:

Cash and Cash Equivalents

The carrying amounts reported in the balance sheet for cash and short-term instruments approximate fair value.

Securities

The fair value of securities available-for-sale (carried at fair value) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices, or by using pricing models, discounted cash flow methodologies or similar techniques (Level 3).

Loans Receivable

The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Restricted Investment in Bank Stocks

The carrying amount of restricted investments in bank stocks approximate fair value, and consider the limited marketability of such securities.

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Servicing Asset (Carried at Lower of Cost or Fair Value)

The fair value of servicing right is based on a valuation model that calculates the present value of estimated net servicing income. The valuation incorporates assumptions that market participants would use in estimating future net servicing income. The Company is able to compare the valuation model inputs and results to widely available published industry data for reasonableness.

Derivative Instruments (Carried at Fair Value)

Interest Rate Lock Commitments—Interest rate lock commitments (“IRLCs”) are classified within Level Three of the valuation hierarchy. IRLCs represent an agreement to extend credit to a mortgage loan applicant, or an agreement to purchase a loan from a third-party originator, whereby the interest rate on the loan is set prior to funding. The fair value of IRLCs is based upon the estimated fair value of the underlying mortgage loan, including the expected net future cash flows related to servicing the mortgage loan, adjusted for: (i) estimated costs to complete and originate the loan and (ii) an adjustment to reflect the estimated percentage of IRLCs that will result in a closed mortgage loan (or “pullthrough”). The estimate of pullthrough is based on changes in pricing and actual borrower behavior. The average pullthrough percentage used in measuring the fair value of IRLCs was 74% as of December 31, 2013.

Forward Sales Commitments—Forward sales commitments are classified within Level 2 of the valuation hierarchy. Forward sales commitments fix the forward sales price that will be realized upon the sale of mortgage loans into the secondary market. The fair value of forward sales commitments is primarily based upon the current agency mortgage-backed security market to-be-announced pricing specific to the forward loan program, delivery coupon and delivery date of the trade.

Interest Rate Swaps – Interest rate swaps are classified within Level 2 of the valuation hierarchy.

Accrued Interest Receivable and Payable

The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.

Deposit Liabilities

The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Securities Sold Under Agreement to Repurchase

The carrying amounts of short-term repurchase agreements approximate fair value. The fair value of long term repurchase agreements are estimated using discounted cash flow analysis based on the quoted market price for a current agreement with similar credit risk characteristics, terms and remaining maturity. These prices obtained from an active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.

Short-Term Borrowings

The carrying amounts of short-term borrowings approximate fair value.

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Long-Term Debt

Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.

Off-Balance Sheet Financial Instruments

Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.

At September 30, 2014 and December 31, 2013, the estimated fair values of the Company’s financial instruments were as follows:

 

		September 30, 2014								December 31, 2013
(dollars in thousands)		Carrying Amount				Fair Value				Carrying Amount				Fair Value
Financial assets
Cash and cash equivalents		$	41,303			$	41,303			$	19,518			$	19,518
Securities available-for-sale			189,788				189,788				199,191				199,191
Securities held-to-maturity			19,615				19,735				19,791				18,394
Loans held for sale			—				—				4,028				4,028
Loans, net			408,977				421,058				379,297				389,739
Restricted bank stocks			6,285				6,285				5,593				5,593
Servicing asset			594				884				529				837
Interest rate swaps			—				—				174				174
Derivative instruments			—				—				2				2
Interest rate lock commitments			—				—				72				72
Accrued interest receivable			2,294				2,294				2,276				2,276
Financial liabilities
Deposits			492,344				493,024				460,404				461,270
Securities sold under agreement to repurchase			11,958				12,161				27,606				27,918
Short-term borrowings			106,623				106,623				85,000				85,000
Long-term debt			19,645				19,542				20,015				20,091
Interest rate swaps			496
Derivative instruments			—				—				—				—
Interest rate lock commitments			—				—				—				—
Accrued interest payable			296				296				351				351
Off-balance sheet
Commitments to extend credit			—				—				—				—
Unfunded commitment under lines of credit			—				—				—				—
Standby letters of credit			—				—				—				—

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Note 5 - Income Taxes

The components of income tax expense for the nine months ended September 30, 2014 and 2013 are as follows:

 

(dollars in thousands)		2014				2013
Current federal		$	1,518			$	610
Current state			3				5
Deferred federal			(446	)			—
		$	1,075			$	615

Reconciliation of the statutory income tax expense computed at 34% to the income tax expense included in the statements of income is as follows at September 30, 2014 and 2013:

 

(dollars in thousands)		2014				2013
Computed statutory tax expense		$	959			$	837
Stock based compensation on expense			14				1
Net tax free interest income			(144	)			(152	)
Bank owned life insurance income			(96	)			(96	)
Merger-related expenses			314				—
State tax, net of federal benefit			2				3
Other			26				22
		$	1,075			$	615

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Deferred income taxes are provided for the temporary differences between the financial reporting and the tax basis of the Company’s assets and liabilities. The components of the net deferred asset (liability) at September 30, 2014 and December 31, 2013 are as follows:

 

(dollars in thousands)		September 30, 2014				December 31, 2013
Deferred tax assets
Allowance for loan losses		$	1,870			$	1,741
Other-than-temporary credit impairment losses on debt securities			905				682
Non-accrual interest			113				106
Premises and equipment			253				113
Other real estate owned valuation			6				6
Net unrealized loss on securities			1,425				2,362
Fair value of hedging instruments			169				—
Total deferred tax assets			4,741				5,010
Deferred tax liabilities
Prepaid expenses			(207	)			(177	)
Net unrealized gain on securities available-for-sale			(760	)			—
Loan servicing rights			(196	)			(174	)
Fair value of hedging instruments			—				(59	)
Other			(29	)			(28	)
Total deferred tax liabilities			(1,192	)			(438	)
Net deferred asset		$	3,549			$	4,572

Note 6 - Stock Incentive Plan

The Company adopted the 2013 Stock Incentive Plan (the “Incentive Plan”). The Incentive Plan was approved by shareholders on April 25, 2013. The Incentive Plan authorizes the Board of Directors to grant shares or options up to an aggregate of 243,000 shares to officers, other employees and directors of the Company. The Company adopted the 2005 Stock Incentive Plan (the “Incentive Plan”). The Incentive Plan was approved by shareholders on November 15, 2005. The Incentive Plan authorizes the Board of Directors to grant shares or options up to an aggregate of 432,000 shares to officers, other employees and directors of the Company. In December 2007, the Board amended the authorized plan shares to 627,282. The options granted under the Incentive Plans to officers and other employees are intended to be “incentive stock options” and are subject to the limitations under Section 422 of the Internal Revenue Code. Shares subject to options under the Incentive Plans may be either from authorized but unissued shares of the Company, treasury shares, or shares purchased by the Company on the open market or from private sources for use under the plan.

The exercise price of the options granted shall be the fair market value of a share of common stock at the time of grant.

For the nine months ended September 30, 2014 and 2013, the Company recognized $43,000 and $3,000, respectively, in compensation expense for stock options. At September 30, 2014 and December 31, 2013, there was $140,000 and $2,000 of unrecognized compensation expense related to options granted, which is expected to be recognized over the options vesting period.

The term of these options are 10 years and the options vest over terms ranging from immediately through three years.

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A summary of the status (shares in thousands) of the Company’s stock option plan is presented below:

 

		September 30, 2014								December 31, 2013
		Shares				Average Exercise Price				Shares				Average Exercise Price
Outstanding at beginning of year			402			$	7.98				414			$	7.98
Granted			70				8.25				10				7.00
Exercised			1				7.21				3				7.94
Forfeited			3				8.25				19				8.38
Outstanding at end of period			468			$	8.00				402			$	7.94
Options exercisable			392			$	7.96				392			$	7.96

Options outstanding at September 30, 2014 and December 31, 2013 are as follows (shares in thousands):

 

		September 30, 2014
		Options Outstanding												Options Exercisable
Exercise Price		Number Outstanding				Weighted Average Remaining Contractual Life (years)				Weighted Average Exercise Price				Number Exercisable				Weighted Average Exercise Price				Intrinsic Value
$6.97 - $10.48			468				3.40			$	8.00				392			$	7.96			$	1,878,000

 

		December 31, 2013
		Options Outstanding												Options Exercisable
Exercise Price		Number Outstanding				Weighted Average Remaining Contractual Life				Weighted Average Exercise Price				Number Exercisable				Weighted Average Exercise Price				Intrinsic Value
$6.97 - $10.48			402				3.16			$	7.94				392			$	7.96			$	3,000

 

		Number of Shares				Weighted Average Grant Date Fair Value
Non-vested options, December 31, 2013			10			$	0.44
Granted			70			$	2.57
Vested			4			$	0.58
Forfeited			3			$	2.57
Non-vested options, September 30, 2014			73			$	2.30

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The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for the nine months ended September 30, 2014:

 

Expected life			7.00 years
Expected volatility			24.00	%
Forfeiture rate			0.00	%
Dividend yield			0.00	%
Risk-free interest rate			2.28	%
Fair value		$	2.57

For the nine months ended September 30, 2014, there were 69,500 stock options granted. For the twelve months ended December 31, 2013, there were 9,500 stock options granted.

Restricted stock grants to directors and employees differ from stock options in that the individual need not pay any price to receive the grant once certain vesting requirements are met. A recipient is not entitled to receive any cash or stock dividends declared on the Common Stock with respect to any unvested share award. Additionally, a recipient is not entitled to any voting rights with respect to any unvested share award. Upon distribution, the Plan provides the ability to place restrictions on the sale or transfer of the shares in accordance with all then applicable federal and state securities laws and under such circumstances as deemed appropriated by the Board upon the advice of counsel.

During the nine months ended September 30, 2014, 30,000 shares of restricted stock were issued. No shares were granted during 2013. Shares granted were recorded at their fair market values on the date of grant with a corresponding charge to shareholders’ equity. The unearned portion is amortized as director compensation expense on a straight-line basis over the vesting period. Compensation expense related to these restricted stock grants was $88,000 and $0 for the nine months ended September 30, 2014 and 2013, respectively.

Note 7 - Derivatives and Risk Management Activities

Interest Rate Swaps

On April 29, 2014, the Company entered into a forward-starting interest rate swap to hedge the cash flows of a $15 million floating-rate FHLB borrowing. The interest rate swap involves the exchange of the Company’s floating rate interest payments on the underlying principal amount. This swap was designated, and qualified, for cash-flow hedge accounting. The term of the swap begins April 29, 2016, and ends April 29, 2021. In November 2013, the Corporation entered into a forward-starting interest rate swap to hedge the cash flows of a $15 million floating-rate FHLB borrowing. The interest rate swap involves the exchange of the Corporation’s floating rate interest payments on the underlying principal amount. This swap was designated, and qualified, for cash-flow hedge accounting. The term of the swap begins November 6, 2015 and ends November 6, 2020.

For derivative instruments that are designated and qualify as hedging instruments, the effective portion of gains or losses is reported as a component of other comprehensive income, and is subsequently reclassified into earnings as an adjustment to interest expense in the periods in which the hedged forecasted transaction affects earnings.

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The following table details the Company’s derivative positions as of the balance sheet dates indicated:

 

As of September 30, 2014
(dollars in thousands)
Notional Amount		Trade Date				Effective Date				Maturity Date				Receive (Variable) Index		Current Projected Receive Rate				Pay Fixed Swap Rate				Fair Value of Derivative Position
$15,000			11/06/2013				11/06/2015				11/06/2020			US 3-Month LIBOR			2.5172	%			2.905	%		$	(254	)
$15,000			4/29/2014				4/29/2016				4/29/2021			US 3-month LIBOR			2.7318	%			3.11	%		$	(242	)

 

As of December 31, 2013

(dollars in thousands)

Notional Amount

Trade Date

Effective Date

Maturity Date

Receive (Variable) Index

Current Projected Receive Rate

Pay Fixed Swap Rate

Fair Value of Derivative Position

$15,000

11/06/2013

11/06/2015

11/06/2020

US 3-Month LIBOR

3.164

%

2.905

%

$

174

There have been no reclassifications of the interest-rate swap’s fair value from other comprehensive income to earnings.

The following table summarizes the amounts recorded in the Company’s consolidated balance sheet for derivative instruments designated as hedging instruments as of September 30, 2014 and December 31, 2013:

 

September 30, 2014
		Asset Derivatives										Liability Derivatives
(dollars in thousands)		Balance Sheet Presentation		Fair Value				Notional Amount				Balance Sheet Presentation		Fair Value				Notional Amount
Interest rate lock commitments		Other assets		$	—			$	—			Other liabilities		$	—			$	—
Mandatory forward sales commitments on MLHS		Other assets			—				—			Other liabilities			—				—
Forward-starting interest rate swap		Other assets										Other liabilities			496				30,000
Net Fair Value of Derivative Instruments				$	—			$	—					$	496			$	30,000

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December 31, 2013
		Asset Derivatives												Liability Derivatives
(dollars in thousands)		Balance Sheet Presentation				Fair Value				Notional Amount				Balance Sheet Presentation				Fair Value				Notional Amount
Interest rate lock commitments			Other assets			$	72			$	3,152				Other liabilities			$	—			$	—
Mandatory forward sales commitments on MLHS			Other assets				2				1,000				Other liabilities				—				—
Forward-starting interest rate swap			Other assets				174				15,000				Other liabilities				—				—
Net Fair Value of Derivative Instruments						$	248			$	19,152							$	—			$	—

Note 9 - Subsequent Events

On January 1, 2015, the Company’s previously announced merger with and into Bryn Mawr Bank Corp. was completed.

Management is required to evaluate events or transactions that may occur or have occurred after the balance sheet date through the date the Company’s consolidated financial statements were issued or available to be issued. Subsequent events have been evaluated as of March 18, 2015, the date the Company’s consolidated financial statements were available to be issued.