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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 March 31, 2015

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______________to______________________

 

 

Commission file number: 333-90273

 

FIDELITY D & D BANCORP, INC.

 

STATE OF INCORPORATION:  IRS EMPLOYER IDENTIFICATION NO:

PENNSYLVANIA                                     23-3017653

 

 

Address of principal executive offices:

BLAKELY & DRINKER ST.

DUNMORE, PENNSYLVANIA 18512

 

TELEPHONE:

570-342-8281

 

 

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 subjected 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      [X] YES [  ] NO

 

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

 

 

 

 

 

 

 

Large accelerated filer [  ]                                             

 Accelerated filer [  ]

Non-accelerated filer   [  ]                  

 Smaller reporting company [X]

                                                                                                                                            (Do not check if a 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 outstanding shares of Common Stock of Fidelity D & D Bancorp, Inc. on April 30, 2015, the latest practicable date, was 2,439,905 shares.

 

 


 

FIDELITY D & D BANCORP, INC.

 

Form 10-Q March 31, 2015

 

Index

 

 

 

 

 

Part I.  Financial Information 

 

Page

Item 1.

Financial Statements (unaudited):

 

 

Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014

3

 

Consolidated Statements of Income for the three months ended March 31, 2015 and 2014

4

 

Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and 2014

5

   

Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2015 and 2014

6

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014

7

 

Notes to Consolidated Financial Statements (Unaudited)

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

41

Item 4.

Controls and Procedures

46

 

 

 

Part II.  Other Information 

 

 

Item 1.

Legal Proceedings

47

Item 1A.

Risk Factors

47

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

47

Item 3.

Defaults upon Senior Securities

47

Item 4.

Mine Safety Disclosures

47

Item 5.

Other Information

47

Item 6.

Exhibits

47

Signatures 

 

49

Exhibit index 

 

50

 

 

 

 

 

2


 

PART I – Financial Information

Item 1: Financial Statements

 

 

 

 

 

 

 

 

Fidelity D & D Bancorp, Inc. and Subsidiary

 

 

 

 

 

 

Consolidated Balance Sheets

 

 

 

 

 

 

(Unaudited)

 

 

 

(dollars in thousands)

 

March 31, 2015

 

December 31, 2014

Assets:

 

 

 

 

 

 

Cash and due from banks

 

$

14,157 

 

$

11,808 

Interest-bearing deposits with financial institutions

 

 

4,826 

 

 

14,043 

Total cash and cash equivalents

 

 

18,983 

 

 

25,851 

Available-for-sale securities

 

 

126,481 

 

 

97,896 

Held-to-maturity securities (fair value of $0 in 2015, $0 in 2014)

 

 

 -

 

 

 -

Federal Home Loan Bank stock

 

 

1,291 

 

 

1,306 

Loans and leases, net (allowance for loan losses of

 

 

 

 

 

 

$9,208 in 2015; $9,173 in 2014)

 

 

510,488 

 

 

506,327 

Loans held-for-sale (fair value $1,181 in 2015, $1,186 in 2014)

 

 

1,159 

 

 

1,161 

Foreclosed assets held-for-sale

 

 

1,433 

 

 

1,972 

Bank premises and equipment, net

 

 

14,931 

 

 

14,846 

Cash surrender value of bank owned life insurance

 

 

10,825 

 

 

10,741 

Accrued interest receivable

 

 

2,089 

 

 

2,086 

Other assets

 

 

14,827 

 

 

14,299 

Total assets

 

$

702,507 

 

$

676,485 

Liabilities:

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Interest-bearing

 

$

467,896 

 

$

457,574 

Non-interest-bearing

 

 

133,846 

 

 

129,370 

Total deposits

 

 

601,742 

 

 

586,944 

Accrued interest payable and other liabilities

 

 

3,470 

 

 

3,353 

Short-term borrowings

 

 

13,773 

 

 

3,969 

Long-term debt

 

 

10,000 

 

 

10,000 

Total liabilities

 

 

628,985 

 

 

604,266 

Shareholders' equity:

 

 

 

 

 

 

Preferred stock authorized 5,000,000 shares with no par value; none issued

 

 

 -

 

 

 -

Capital stock, no par value (10,000,000 shares authorized; shares issued and outstanding; 2,439,905 in 2015; and 2,427,767 in 2014)

 

 

26,461 

 

 

26,272 

Retained earnings

 

 

44,164 

 

 

43,204 

Accumulated other comprehensive income

 

 

2,897 

 

 

2,743 

Total shareholders' equity

 

 

73,522 

 

 

72,219 

Total liabilities and shareholders' equity

 

$

702,507 

 

$

676,485 

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

 

 

 

 

 

 

3


 

 

 

 

 

 

 

 

 

 

Fidelity D & D Bancorp, Inc. and Subsidiary

 

 

 

 

 

Consolidated Statements of Income

 

 

 

 

 

(Unaudited)

Three months ended

(dollars in thousands except per share data)

March 31, 2015

 

March 31, 2014

Interest income:

 

 

 

 

 

Loans and leases:

 

 

 

 

 

Taxable

$

5,499 

 

$

5,276 

Nontaxable

 

139 

 

 

131 

Interest-bearing deposits with financial institutions

 

16 

 

 

Investment securities:

 

 

 

 

 

U.S. government agency and corporations

 

260 

 

 

245 

States and political subdivisions (nontaxable)

 

313 

 

 

321 

Other securities

 

77 

 

 

22 

Total interest income

 

6,304 

 

 

6,002 

Interest expense:

 

 

 

 

 

Deposits

 

557 

 

 

489 

Securities sold under repurchase agreements

 

 

 

Other short-term borrowings and other

 

 

 

 -

Long-term debt

 

131 

 

 

210 

Total interest expense

 

697 

 

 

707 

Net interest income

 

5,607 

 

 

5,295 

Provision for loan losses

 

150 

 

 

300 

Net interest income after provision for loan losses

 

5,457 

 

 

4,995 

Other income:

 

 

 

 

 

Service charges on deposit accounts

 

415 

 

 

423 

Interchange fees

 

302 

 

 

305 

Fees from trust fiduciary activities

 

217 

 

 

164 

Fees from financial services

 

127 

 

 

139 

Service charges on loans

 

176 

 

 

117 

Fees and other revenue

 

196 

 

 

171 

Earnings on bank-owned life insurance

 

85 

 

 

83 

Gain on sale or disposal of:

 

 

 

 

 

Loans

 

229 

 

 

128 

Investment securities

 

 

 

207 

Premises and equipment

 

 

 

Total other income

 

1,750 

 

 

1,738 

Other expenses:

 

 

 

 

 

Salaries and employee benefits

 

2,653 

 

 

2,476 

Premises and equipment

 

941 

 

 

917 

Advertising and marketing

 

387 

 

 

332 

Professional services

 

338 

 

 

318 

FDIC assessment

 

107 

 

 

99 

Loan collection

 

30 

 

 

47 

Other real estate owned

 

99 

 

 

65 

Office supplies and postage

 

101 

 

 

107 

Automated transaction processing

 

120 

 

 

151 

Other

 

311 

 

 

273 

Total other expenses

 

5,087 

 

 

4,785 

Income before income taxes

 

2,120 

 

 

1,948 

Provision for income taxes

 

547 

 

 

492 

Net income

$

1,573 

 

$

1,456 

Per share data:

 

 

 

 

 

Net income - basic

$

0.65 

 

$

0.61 

Net income - diluted

$

0.64 

 

$

0.61 

Dividends

$

0.25 

 

$

0.25 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

 

 

 

 

 

 

 

 

4


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fidelity D & D Bancorp, Inc. and Subsidiary

 

 

 

 

 

Consolidated Statements of Comprehensive Income

Three months ended

(Unaudited)

March 31,

(dollars in thousands)

2015

 

2014

 

 

 

 

 

 

Net income

$

1,573 

 

$

1,456 

 

 

 

 

 

 

Other comprehensive income, before tax:

 

 

 

 

 

Unrealized holding gain on available-for-sale securities

 

235 

 

 

1,015 

Reclassification adjustment for net gains realized in income

 

(2)

 

 

(207)

Net unrealized gain

 

233 

 

 

808 

Tax effect

 

(79)

 

 

(274)

Unrealized gain, net of tax

 

154 

 

 

534 

Other comprehensive income, net of tax

 

154 

 

 

534 

Total comprehensive income, net of tax

$

1,727 

 

$

1,990 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

 

 

 

 

 

 

5


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fidelity D & D Bancorp, Inc. and Subsidiary

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Changes in Shareholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2015 and 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

 

 

 

Capital stock

 

Retained

 

comprehensive

 

 

 

(dollars in thousands)

Shares

 

Amount

 

earnings

 

income

 

Total

Balance, December 31, 2013

 

2,391,617 

 

$

25,302 

 

$

39,519 

 

$

1,239 

 

$

66,060 

Net income

 

 

 

 

 

 

 

1,456 

 

 

 

 

 

1,456 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

534 

 

 

534 

Issuance of common stock through Employee Stock Purchase Plan

 

4,373 

 

 

80 

 

 

 

 

 

 

 

 

80 

Issuance of common stock through Dividend Reinvestment Plan

 

10,427 

 

 

249 

 

 

 

 

 

 

 

 

249 

Issuance of common stock from vested restricted share grants through stock compensation plans

 

5,250 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

72 

 

 

 

 

 

 

 

 

72 

Cash dividends declared

 

 

 

 

 

 

 

(602)

 

 

 

 

 

(602)

Balance, March 31, 2014

 

2,411,667 

 

$

25,703 

 

$

40,373 

 

$

1,773 

 

$

67,849 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2014

 

2,427,767 

 

$

26,272 

 

$

43,204 

 

$

2,743 

 

$

72,219 

Net income

 

 

 

 

 

 

 

1,573 

 

 

 

 

 

1,573 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

154 

 

 

154 

Issuance of common stock through Employee Stock Purchase Plan

 

4,358 

 

 

102 

 

 

 

 

 

 

 

 

102 

Issuance of common stock from vested restricted share grants through stock compensation plans

 

7,780 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

87 

 

 

 

 

 

 

 

 

87 

Cash dividends declared

 

 

 

 

 

 

 

(613)

 

 

 

 

 

(613)

Balance, March 31, 2015

 

2,439,905 

 

$

26,461 

 

$

44,164 

 

$

2,897 

 

$

73,522 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

 

 

 

 

 

 

 

 

 

 

 

 

 

6


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fidelity D & D Bancorp, Inc. and Subsidiary

 

 

 

 

 

 

Consolidated Statements of Cash Flows

 

 

 

 

 

 

(Unaudited)

 

Three months ended March 31,

(dollars in thousands)

 

2015

 

2014

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income 

 

$

1,573 

 

$

1,456 

Adjustments to reconcile net income to net cash provided by

 

 

 

 

 

 

operating activities:

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 

806 

 

 

767 

Provision for loan losses

 

 

150 

 

 

300 

Deferred income tax expense (benefit)

 

 

588 

 

 

(16)

Stock-based compensation expense

 

 

87 

 

 

72 

Proceeds from sale of loans held-for-sale

 

 

10,318 

 

 

7,065 

Originations of loans held-for-sale

 

 

(10,227)

 

 

(6,563)

Earnings from bank-owned life insurance

 

 

(85)

 

 

(83)

Net gain from sales of loans

 

 

(229)

 

 

(128)

Net gain from sales of investment securities

 

 

(2)

 

 

(207)

Net loss (gain) from sale and write-down of foreclosed assets held-for-sale

 

 

36 

 

 

(48)

Change in:

 

 

 

 

 

 

Accrued interest receivable

 

 

(4)

 

 

38 

Other assets

 

 

(954)

 

 

(530)

Accrued interest payable and other liabilities

 

 

117 

 

 

(535)

Net cash provided by operating activities

 

 

2,174 

 

 

1,588 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Held-to-maturity securities:

 

 

 

 

 

 

Proceeds from sales

 

 

 -

 

 

187 

Proceeds from maturities, calls and principal pay-downs

 

 

 -

 

 

Available-for-sale securities:

 

 

 

 

 

 

Proceeds from sales

 

 

3,573 

 

 

2,751 

Proceeds from maturities, calls and principal pay-downs

 

 

6,772 

 

 

3,580 

Purchases

 

 

(39,025)

 

 

(10,612)

Decrease in FHLB stock

 

 

15 

 

 

464 

Net increase in loans and leases

 

 

(4,725)

 

 

(7,892)

Acquisition of bank premises and equipment

 

 

(664)

 

 

(433)

Proceeds from sale of foreclosed assets held-for-sale

 

 

921 

 

 

766 

Net cash used in investing activities

 

 

(33,133)

 

 

(11,186)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Net increase in deposits

 

 

14,798 

 

 

25,067 

Net increase in short-term borrowings

 

 

9,804 

 

 

3,685 

Proceeds from employee stock purchase plan participants

 

 

102 

 

 

80 

Dividends paid, net of dividends reinvested

 

 

(613)

 

 

(395)

Proceeds from dividend reinvestment plan participants

 

 

 -

 

 

42 

Net cash provided by financing  activities

 

 

24,091 

 

 

28,479 

Net (decrease) increase in cash and cash equivalents

 

 

(6,868)

 

 

18,881 

Cash and cash equivalents, beginning

 

 

25,851 

 

 

13,218 

 

 

 

 

 

 

 

Cash and cash equivalents, ending

 

$

18,983 

 

$

32,099 

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

 

 

 

 

 

 

 

7


 

 

FIDELITY D & D BANCORP, INC.

 

Notes to  Consolidated Financial Statements

(Unaudited)

1.   Nature of operations and critical accounting policies

Nature of operations

Fidelity Deposit and Discount Bank (the Bank) is a commercial bank chartered under the law of the Commonwealth of Pennsylvania and a wholly-owned subsidiary of Fidelity D & D Bancorp, Inc. (collectively, the Company).  Having commenced operations in 1903, the Bank is committed to provide superior customer service, while offering a full range of banking products and financial and trust services to both our consumer and commercial customers from our main office located in Dunmore and other branches located throughout Lackawanna and Luzerne Counties.

Principles of consolidation

The accompanying unaudited consolidated financial statements of the Company and the Bank have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to this Form 10-Q and Rule 8-03 of Regulation S-X.  Accordingly, they do not include all of the information and footnote disclosures required by GAAP for complete financial statements.  In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial condition and results of operations for the periods have been included.  All significant inter-company balances and transactions have been eliminated in consolidation.

For additional information and disclosures required under GAAP, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

Management is responsible for the fairness, integrity and objectivity of the unaudited financial statements included in this report.  Management prepared the unaudited financial statements in accordance with GAAP.  In meeting its responsibility for the financial statements, management depends on the Company's accounting systems and related internal controls.  These systems and controls are designed to provide reasonable but not absolute assurance that the financial records accurately reflect the transactions of the Company, the Company’s assets are safeguarded and that the financial statements present fairly the financial condition and results of operations of the Company.

In the opinion of management, the consolidated balance sheets as of March 31, 2015 and December 31, 2014 and the related consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of changes in shareholders’ equity and consolidated statements of cash flows for the three months ended March 31, 2015 and 2014 present fairly the financial condition and results of operations of the Company.  All material adjustments required for a fair presentation have been made.  These adjustments are of a normal recurring nature.  Certain reclassifications have been made to the 2014 financial statements to conform to the 2015 presentation. 

In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred after March 31, 2015 through the date these consolidated financial statements were issued.

This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2014, and the notes included therein, included within the Company’s Annual Report filed on Form 10-K.

Critical accounting policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods.  Actual results could differ from those estimates.

A material estimate that is particularly susceptible to significant change relates to the determination of the allowance for loan losses.  Management believes that the allowance for loan losses at March 31, 2015 is adequate and reasonable.  Given the subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make different assumptions and could, therefore, calculate a materially different allowance value.  While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in the future.  In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses.  Such agencies may require the Company to recognize adjustments to the allowance based on their judgment of information available to them at the time of their examination.

Another material estimate is the calculation of fair values of the Company’s investment securities.  Fair values of investment securities are determined by pricing provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions.  Based on experience, management is aware that estimated fair values of investment securities tend to vary among valuation services.  Accordingly, when selling investment securities, price quotes may be obtained from more than one source.  The majority of the Company’s investment securities are classified as available-for-sale (AFS).  AFS securities are carried at fair value

8


 

on the consolidated balance sheets, with unrealized gains and losses, net of income tax, reported separately within shareholders’ equity as a component of accumulated other comprehensive income (loss) (OCI).

The fair value of residential mortgage loans, classified as held-for-sale (HFS), is obtained from the Federal National Mortgage Association (FNMA) or the Federal Home Loan Bank (FHLB).  Generally, the market to which the Company sells residential mortgages it originates for sale is restricted and price quotes from other sources are not typically obtained.  On occasion, the Company may transfer loans from the loan portfolio to loans HFS.  Under these circumstances, pricing may be obtained from other entities and the loans are transferred at the lower of cost or market value and simultaneously sold.  As of March 31, 2015 and December 31, 2014, loans classified as HFS consisted of residential mortgage loans. 

Financing of automobiles, provided to customers under lease arrangements of varying terms, are accounted for as direct finance leases.  Interest income on automobile direct finance leasing is determined using the interest method.  Generally, the interest method is used to arrive at a level effective yield over the life of the lease.

Foreclosed assets held-for-sale includes other real estate acquired through foreclosure (ORE) and may, from time-to-time, include repossessed assets such as automobiles.  ORE is carried at the lower of cost (principal balance at date of foreclosure) or fair value less estimated cost to sell.  Any write-downs at the date of foreclosure or within a reasonable period of time after foreclosure are charged to the allowance for loan losses.  Expenses incurred to maintain ORE properties, subsequent write downs to the asset’s fair value, any rental income received and gains or losses on disposal are included as components of other real estate owned expense in the consolidated statements of income.   

For purposes of the consolidated statements of cash flows, cash and cash equivalents includes cash on hand, amounts due from banks and interest-bearing deposits with financial institutions.  For each of the three months ended March 31, 2015 and 2014, the Company paid interest of $0.7 million.  The Company did not make an income tax payment in the first quarters of 2015 and 2014.  Transfers from loans to foreclosed assets held-for-sale amounted to $0.4 million and $1.2 million during the three months ended March 31, 2015 and 2014, respectively.  During the same respective periods, transfers from loans to loans HFS amounted to $0 for both periods and from loans to bank premises and equipment amounted to $0 million and $1.0 million.  Expenditures for construction in process, a component of other assets in the consolidated balance sheets, are included in acquisition of bank premises and equipment.

 

2.  New accounting pronouncements

In an exposure draft issued in the fourth quarter of 2012, the Financial Accounting Standards Board (FASB) proposed changes to the accounting guidance related to the impairment of financial assets and the recognition of credit losses.  The FASB proposal would require financial institutions to reserve for losses for the duration of the credit exposure as opposed to reserving for probable losses.  The new methodology would be known as the “current expected credit losses” (CECL) methodology.  The FASB is currently in the process of re-deliberating significant issues raised through feedback received from comment letters and outreach activities.  Among other things, the guidance in the proposed update regarding an entity’s estimate of expected credit losses will be clarified as follows:

·

An entity should revert to a historical average loss experience for the future periods beyond which the entity is able to make or obtain reasonable and supportable forecasts;

·

An entity should consider all contractual cash flows over the life of the related financial assets;

·

When determining the contractual cash flows and the life of the related financial assets:

o

An entity should consider expected prepayments;

o

An entity should not consider expected extensions, renewals, and modifications unless the entity reasonably expects that it will execute a troubled debt restructuring with a borrower;

·

An entity’s estimate of expected credit losses should always reflect the risk of loss, even when that risk is remote. However, an entity would not be required to recognize a loss on a financial asset in which the risk of nonpayment is greater than zero yet the amount of loss would be zero;

·

In addition to using a discounted cash flow model to estimate expected credit losses, an entity would not be prohibited from developing an estimate of credit losses using loss-rate methods, probability-of-default methods or a provision matrix using loss factors;

·

The final guidance on expected credit losses will include implementation guidance describing the factors that an entity should consider to adjust historical loss experience for current conditions and reasonable and supportable forecast.

FASB expects to issue this proposed accounting standard update in late 2015.  An effective date has yet to be discussed.  Upon adoption, the change in this accounting guidance could result in an increase in the Company's allowance for loan losses and require the Company to record loan losses more rapidly.  Upon final issuance of the standard, the Company will be able to better evaluate the potential impact of this new standard on its consolidated financial statements.

In August 2014, the FASB issued an accounting standard update (ASU 2014-14) related to; Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40) Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.  The update requires that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) The loan has a government guarantee that is not separable from the loan before foreclosure; (2) At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; (3) At the time of foreclosure, any amount of the claim that is

9


 

determined on the basis of the fair value of the real estate is fixed.  Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor.  The amendments in the update are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014.  The Company adopted this accounting standard during the first quarter of 2015 and it did not have a material impact on its consolidated financial statements.

In June 2014, the FASB issued ASU 2014-12, Compensation – Stock Compensation (Topic 718) Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, an amendment to the stock compensation accounting guidance to clarify that a performance target that affects vesting of a share-based payment and that could be achieved after the requisite service period be treated as a performance condition.  As such, the performance target should not be reflected in estimating the grant-date fair value of the award.  Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered.  This amendment is effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2015.  Early adoption is permitted.  Entities may apply the amendments in this update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter.  The Company does not expect this amendment to have a material impact on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services.  ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP:  identify the contract(s) with a customer; identify the performance obligations in the contract; determine the transaction price; allocate the transaction price to the performance obligations in the contract; recognize revenue when (or as) the entity satisfies a performance obligation.  The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).  The Company is evaluating the impact of the adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined the method by which it will adopt the standard effective in the first quarter of 2017.

In January 2014, the FASB issued ASU 2014-04 related to; Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40) Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.  The update applies to all creditors who obtain physical possession of residential real estate property collateralizing a consumer mortgage loan in satisfaction of a receivable.  The amendments in this update clarify when an in-substance repossession or foreclosure occurs and requires disclosure of both (1) the amount of foreclosed residential real estate property held by a creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.  The amendments in the update are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014.  The Company adopted this accounting standard during the first quarter of 2015 and it did not have a material impact on its consolidated financial statements. 

3.  Accumulated other comprehensive income

The following tables illustrate the changes in accumulated other comprehensive income by component and the details about the components of accumulated other comprehensive income as of and for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

As of  and for the three months ended March 31, 2015

 

 

 

 

 

 

 

Unrealized gains

 

 

 

 

on available-for-

 

 

 

(dollars in thousands)

sale securities

 

Total

Beginning balance

$

2,743 

 

$

2,743 

 

 

 

 

 

 

Other comprehensive income before reclassifications, net of tax

 

155 

 

 

155 

Amounts reclassified from accumulated other comprehensive income, net of tax

 

(1)

 

 

(1)

Net current-period other comprehensive income

 

154 

 

 

154 

Ending balance

$

2,897 

 

$

2,897 

10


 

 

 

 

 

 

 

 

As of and for the three months ended March 31, 2014

 

 

 

 

 

 

 

Unrealized gains

 

 

 

 

on available-for-

 

 

 

(dollars in thousands)

sale securities

 

Total

Beginning balance

$

1,239 

 

$

1,239 

 

 

 

 

 

 

Other comprehensive income before reclassifications, net of tax

 

671 

 

 

671 

Amounts reclassified from accumulated other comprehensive income, net of tax

 

(137)

 

 

(137)

Net current-period other comprehensive income

 

534 

 

 

534 

Ending balance

$

1,773 

 

$

1,773 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Details about accumulated other

 

 

 

 

 

 

 

comprehensive income components

 

 

 

 

 

 

Affected line item in the statement

(dollars in thousands)

 

 

 

 

 

 

where net income is presented

 

For the three months ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

Unrealized gains on AFS securities

$

 

$

207 

 

Gain on sale of investment securities

 

 

(1)

 

 

(70)

 

Provision for income taxes

Total reclassifications for the period

$

 

$

137 

 

Net income

 

 

4. Investment securities

Agency – Government-sponsored enterprise (GSE) and MBS - GSE residential

Agency – GSE and MBS – GSE residential securities consist of short- to long-term notes issued by Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA), Federal Home Loan Bank (FHLB) and Government National Mortgage Association (GNMA).  These securities have interest rates that are fixed and adjustable, have varying short- to long-term maturity dates and have contractual cash flows guaranteed by the U.S. government or agencies of the U.S. government.

Obligations of states and political subdivisions

The municipal securities are bank qualified or bank eligible, general obligation and revenue bonds rated as investment grade by various credit rating agencies and have fixed rates of interest with mid- to long-term maturities.  Fair values of these securities are highly driven by interest rates.  Management performs ongoing credit quality reviews on these issues.

The amortized cost and fair value of investment securities at March 31, 2015 and December 31, 2014 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

unrealized

 

unrealized

 

Fair

(dollars in thousands)

 

cost

 

gains

 

losses

 

value

March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

MBS - GSE residential

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

Agency - GSE

 

$

18,514 

 

$

133 

 

$

10 

 

$

18,637 

Obligations of states and political subdivisions

 

 

35,867 

 

 

2,539 

 

 

43 

 

 

38,363 

MBS - GSE residential

 

 

67,416 

 

 

1,582 

 

 

81 

 

 

68,917 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt securities

 

 

121,797 

 

 

4,254 

 

 

134 

 

 

125,917 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities - financial services

 

 

294 

 

 

270 

 

 

 -

 

 

564 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale securities

 

$

122,091 

 

$

4,524 

 

$

134 

 

$

126,481 

11


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

unrealized

 

unrealized

 

Fair

(dollars in thousands)

 

cost

 

gains

 

losses

 

value

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

MBS - GSE residential

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

Agency - GSE

 

$

14,380 

 

$

29 

 

$

11 

 

$

14,398 

Obligations of states and political subdivisions

 

 

34,609 

 

 

2,444 

 

 

20 

 

 

37,033 

MBS - GSE residential

 

 

44,455 

 

 

1,438 

 

 

23 

 

 

45,870 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt securities

 

 

93,444 

 

 

3,911 

 

 

54 

 

 

97,301 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities - financial services

 

 

295 

 

 

300 

 

 

 -

 

 

595 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale securities

 

$

93,739 

 

$

4,211 

 

$

54 

 

$

97,896 

 

The amortized cost and fair value of debt securities at March 31, 2015 by contractual maturity are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

Fair

(dollars in thousands)

 

cost

 

value

Held-to-maturity securities:

 

 

 

 

 

 

MBS - GSE residential

 

$

 -

 

$

 -

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

Due in one year or less

 

$

201 

 

$

203 

Due after one year through five years

 

 

17,446 

 

 

17,564 

Due after five years through ten years

 

 

3,216 

 

 

3,446 

Due after ten years

 

 

33,518 

 

 

35,787 

 

 

 

 

 

 

 

Total debt securities

 

 

54,381 

 

 

57,000 

 

 

 

 

 

 

 

MBS - GSE residential

 

 

67,416 

 

 

68,917 

 

 

 

 

 

 

 

Total available-for-sale debt securities

 

$

121,797 

 

$

125,917 

 

Actual maturities will differ from contractual maturities because issuers and borrowers may have the right to call or repay obligations with or without call or prepayment penalty.  Agency – GSE and municipal securities are included based on their original stated maturity.  MBS – GSE residential, which are based on weighted-average lives and subject to monthly principal pay-downs, are listed in total.  Most of the securities have fixed rates or have predetermined scheduled rate changes, and many have call features that allow the issuer to call the security at par before its stated maturity, without penalty.

12


 

The following table presents the fair value and gross unrealized losses of investment securities aggregated by investment type, the length of time and the number of securities that have been in a continuous unrealized loss position as of March 31, 2015 and December 31, 2014:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

More than 12 months

 

Total

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

(dollars in thousands)

 

value

 

losses

 

value

 

losses

 

value

 

losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency - GSE

 

$

2,040 

 

$

10 

 

$

 -

 

$

 -

 

$

2,040 

 

$

10 

Obligations of states and political subdivisions

 

 

3,519 

 

 

43 

 

 

 -

 

 

 -

 

 

3,519 

 

 

43 

MBS - GSE residential

 

 

19,776 

 

 

81 

 

 

 -

 

 

 -

 

 

19,776 

 

 

81 

Total

 

$

25,335 

 

$

134 

 

$

 -

 

$

 -

 

$

25,335 

 

$

134 

Number of securities

 

 

17 

 

 

 

 

 

 -

 

 

 

 

 

17 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency - GSE

 

$

4,100 

 

$

11 

 

$

1,024 

 

$

 -

 

$

5,124 

 

$

11 

Obligations of states and political subdivisions

 

 

1,767 

 

 

11 

 

 

670 

 

 

 

 

2,437 

 

 

20 

MBS - GSE residential

 

 

3,761 

 

 

23 

 

 

 -

 

 

 -

 

 

3,761 

 

 

23 

Total

 

$

9,628 

 

$

45 

 

$

1,694 

 

$

 

$

11,322 

 

$

54 

Number of securities

 

 

 

 

 

 

 

 

 

 

 

 

12 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management believes the cause of the unrealized losses is related to changes in interest rates, instability in the capital markets or the limited trading activity due to illiquid conditions in the debt market and is not directly related to credit quality.  Quarterly, management conducts a formal review of investment securities for the presence of other-than-temporary impairment (OTTI).  The accounting guidance related to OTTI requires the Company to assess whether OTTI is present when the fair value of a debt security is less than its amortized cost as of the balance sheet date.  Under those circumstances, OTTI is considered to have occurred if: (1) the entity has intent to sell the security; (2) more likely than not the entity will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost.    The accounting guidance requires that credit-related OTTI be recognized in earnings while non-credit-related OTTI on securities not expected to be sold be recognized in other comprehensive income (loss) (OCI).  Non-credit-related OTTI is based on other factors affecting market value, including illiquidity.

The Company’s OTTI evaluation process also follows the guidance set forth in topics related to debt and equity securities.  The guidance set forth in the pronouncements require the Company to take into consideration current market conditions, fair value in relationship to cost, extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, current analysts’ evaluations, all available information relevant to the collectability of debt securities, the ability and intent to hold investments until a recovery of fair value which may be to maturity and other factors when evaluating for the existence of OTTI.  The guidance requires that credit-related OTTI be recognized as a realized loss through earnings when there has been an adverse change in the holder’s expected cash flows such that the full amount (principal and interest) will probably not be received.  This requirement is consistent with the impairment model in the guidance for accounting for debt and equity securities.

For all security types, as of March 31, 2015, the Company applied the criteria provided in the recognition and presentation guidance related to OTTI.  That is, management has no intent to sell the securities and no conditions were identified by management that more likely than not would require the Company to sell the securities before recovery of their amortized cost basis.  The results indicated there was no presence of OTTI in the Company’s security portfolio.    In addition, management believes the change in fair value is attributable to changes in interest rates.

13


 

 

5.  Loans and leases

The classifications of loans and leases at March 31, 2015 and December 31, 2014 are summarized as follows:

 

 

 

 

 

 

 

 

 

(dollars in thousands)

March 31, 2015

 

December 31, 2014

 

 

 

 

 

 

Commercial and industrial

$

80,819 

 

$

80,301 

Commercial real estate:

 

 

 

 

 

Non-owner occupied

 

92,417 

 

 

94,771 

Owner occupied

 

97,132 

 

 

95,780 

Construction

 

6,572 

 

 

5,911 

Consumer:

 

 

 

 

 

Home equity installment

 

32,649 

 

 

32,819 

Home equity line of credit

 

42,900 

 

 

42,188 

Auto loans and leases

 

28,051 

 

 

27,972 

Other

 

6,078 

 

 

6,501 

Residential:

 

 

 

 

 

Real estate

 

124,804 

 

 

119,154 

Construction

 

8,478 

 

 

10,298 

Total

 

519,900 

 

 

515,695 

Less:

 

 

 

 

 

Allowance for loan losses

 

(9,208)

 

 

(9,173)

Unearned lease revenue

 

(204)

 

 

(195)

 

 

 

 

 

 

Loans and leases, net

$

510,488 

 

$

506,327 

 

Net deferred loan costs of $1.4 million have been added to the carrying values of loans at March 31, 2015 and December 31, 2014, respectively.

Unearned lease revenue represents the difference between the lessor’s investment in the property and the gross investment in the lease.  Unearned revenue accretes over the life of the lease using the effective income method.

The Company services real estate loans for investors in the secondary mortgage market which are not included in the accompanying consolidated balance sheets.  The approximate amount of mortgages serviced amounted to $256.2 million as of March 31, 2015 and $256.8 million as of December 31, 2014.  Mortgage servicing rights amounted to $1.0 million as of both March 31, 2015 and December 31, 2014, respectively.

Management is responsible for conducting the Company’s credit risk evaluation process, which includes credit risk grading of individual commercial and industrial and commercial real estate loans. Commercial and industrial and commercial real estate loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or reaffirmed as the case may be. The credit risk grades may be changed at any time management feels an upgrade or downgrade may be warranted.  The Company utilizes an external independent loan review firm that reviews and validates the credit risk program on at least an annual basis. Results of these reviews are presented to management and the board of directors. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

Non-accrual loans

The decision to place loans on non-accrual status is made on an individual basis after considering factors pertaining to each specific loan.  Commercial and industrial and commercial real estate loans are placed on non-accrual status when management has determined that payment of all contractual principal and interest is in doubt or the loan is past due 90 days or more as to principal and interest, unless well-secured and in the process of collection.  Consumer loans secured by real estate and residential mortgage loans are placed on non-accrual status at 120 days past due as to principal and interest and unsecured consumer loans are charged off when the loan is 90 days or more past due as to principal and interest. The Company considers all non-accrual loans to be impaired loans.

14


 

Non-accrual loans, segregated by class, at March 31, 2015 and December 31, 2014, were as follows:

 

 

 

 

 

 

 

 

(dollars in thousands)

March 31, 2015

 

December 31, 2014

 

 

 

 

 

 

Commercial and industrial

$

19 

 

$

27 

Commercial real estate:

 

 

 

 

 

Non-owner occupied

 

520 

 

 

620 

Owner occupied

 

1,724 

 

 

2,013 

Construction

 

251 

 

 

256 

Consumer:

 

 

 

 

 

Home equity installment

 

231 

 

 

312 

Home equity line of credit

 

483 

 

 

417 

Auto loans and leases

 

 

 

Other

 

20 

 

 

20 

Residential:

 

 

 

 

 

Real estate

 

567 

 

 

549 

Total

$

3,816 

 

$

4,215 

 

Troubled Debt Restructuring

A modification of a loan constitutes a troubled debt restructuring (TDR) when a borrower is experiencing financial difficulty and the modification constitutes a concession.  The Company considers all TDRs to be impaired loans.  The Company offers various types of concessions when modifying a loan, however, forgiveness of principal is rarely granted.  Commercial and industrial (C&I) loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans.  Additional collateral, a co-borrower, or a guarantor is often requested. Commercial real estate (CRE) loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor.  Commercial real estate construction loans modified in a TDR may also involve extending the interest-only payment period.  Residential mortgage loans modified in a TDR are primarily comprised of loans where monthly payments are lowered to accommodate the borrowers’ financial needs for an extended period of time.  After the lowered monthly payment period ends, the borrower would revert back to paying principal and interest pursuant to the original terms with the maturity date adjusted accordingly.  Consumer loan modifications are typically not granted and therefore standard modification terms do not exist for loans of this type.

Loans modified in a TDR may or may not be placed on non-accrual status.  As of March 31, 2015, total TDRs amounted to $3.2 million (consisting of 5 CRE loans and 3 C&I loans to 5 unrelated borrowers), of which one with a balance of $0.9 million was on non-accrual status, compared to $1.6 million (consisting of 4 CRE loans and 1 C&I loan to 3 unrelated borrowers) and $0.9 million, respectively, as of December 31, 2014.  Of the TDRs outstanding as of March 31, 2015 and December 31, 2014, when modified, the concessions granted consisted of temporary interest-only payments or a reduction in the rate of interest to a below-market rate for a contractual period of time.  Other than the TDR that was on non-accrual status, the TDRs were performing in accordance with their modified terms.

The following presents by class, information related to loans modified in a TDR:

 

 

 

 

 

 

 

 

 

   Loans modified as TDRs for the:

(dollars in thousands)

Three months ended March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

Recorded

 

Increase in

 

 

Number of

 

investment

 

allowance

 

 

contracts

 

(as of period end)

 

(as of period end)

Commercial and industrial

 

$

749 

$

251 

Commercial real estate - owner occupied

 

 

858 

 

331 

Total

 

$

1,607 

$

582 

 

 

 

 

 

 

 

In the above table, the period end balances are inclusive of all partial pay downs and charge-offs since the modification date.

Loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default.  If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment.  There were no loans modified as a TDR within the previous twelve months that subsequently defaulted during the three months ended March 31, 2015.

The allowance for loan losses (allowance) may be increased, adjustments may be made in the allocation of the allowance or partial charge offs may be taken to further write-down the carrying value of the loan.  An allowance for impaired loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate

15


 

or the loan’s observable market price.  If the loan is collateral dependent, the estimated fair value of the collateral, less any selling costs, is used to establish the allowance.

Past due loans

Loans are considered past due when the contractual principal and/or interest is not received by the due date.  An aging analysis of past due loans, segregated by class of loans, as of the period indicated is as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded

 

 

 

 

 

 

 

Past due

 

 

 

 

 

 

 

 

 

investment  past

 

30 - 59 Days

 

60 - 89 Days

 

90 days

 

Total

 

 

 

 

Total

 

due ≥ 90 days

March 31, 2015

past due

 

past due

 

 or more (1)

 

past due

 

Current

 

loans (3)

 

and accruing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

158 

 

$

17 

 

$

19 

 

$

194 

 

$

80,625 

 

$

80,819 

 

$

 -

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-owner occupied

 

528 

 

 

 -

 

 

866 

 

 

1,394 

 

 

91,023 

 

 

92,417 

 

 

346 

Owner occupied

 

79 

 

 

363 

 

 

1,724 

 

 

2,166 

 

 

94,966 

 

 

97,132 

 

 

 -

Construction

 

 -

 

 

 -

 

 

251 

 

 

251 

 

 

6,321 

 

 

6,572 

 

 

 -

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity installment

 

301 

 

 

33 

 

 

231 

 

 

565 

 

 

32,084 

 

 

32,649 

 

 

 -

Home equity line of credit

 

28 

 

 

 -

 

 

483 

 

 

511 

 

 

42,389 

 

 

42,900 

 

 

 -

Auto loans and leases

 

321 

 

 

 

 

31 

 

 

354 

 

 

27,493 

 

 

27,847 

(2)

 

30 

Other

 

 

 

 

 

20 

 

 

30 

 

 

6,048 

 

 

6,078 

 

 

 -

Residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

295 

 

 

 -

 

 

696 

 

 

991 

 

 

123,813 

 

 

124,804 

 

 

129 

Construction

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

8,478 

 

 

8,478 

 

 

 -

Total

$

1,711 

 

$

424 

 

$

4,321 

 

$

6,456 

 

$

513,240 

 

$

519,696 

 

$

505 

(1) Includes $3.8 million of non-accrual loans.  (2) Net of unearned revenue of $0.2 million. (3) Includes net deferred loan costs of $1.4 million.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded

 

 

 

 

 

 

 

Past due

 

 

 

 

 

 

 

 

 

investment  past

 

30 - 59 Days

 

60 - 89 Days

 

90 days

 

Total

 

 

 

 

Total

 

due ≥ 90 days

December 31, 2014

past due

 

past due

 

 or more (1)

 

past due

 

Current

 

loans (3)

 

and accruing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

34 

 

$

76 

 

$

55 

 

$

165 

 

$

80,136 

 

$

80,301 

 

$

28 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-owner occupied

 

624 

 

 

126 

 

 

719 

 

 

1,469 

 

 

93,302 

 

 

94,771 

 

 

99 

Owner occupied

 

366 

 

 

292 

 

 

2,113 

 

 

2,771 

 

 

93,009 

 

 

95,780 

 

 

100 

Construction

 

 -

 

 

 -

 

 

256 

 

 

256 

 

 

5,655 

 

 

5,911 

 

 

 -

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity installment

 

170 

 

 

142 

 

 

767 

 

 

1,079 

 

 

31,740 

 

 

32,819 

 

 

455 

Home equity line of credit

 

13 

 

 

 -

 

 

417 

 

 

430 

 

 

41,758 

 

 

42,188 

 

 

 -

Auto loans and leases

 

545 

 

 

111 

 

 

16 

 

 

672 

 

 

27,105 

 

 

27,777 

(2)

 

15 

Other

 

38 

 

 

147 

 

 

40 

 

 

225 

 

 

6,276 

 

 

6,501 

 

 

20 

Residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

700 

 

 

548 

 

 

892 

 

 

2,140 

 

 

117,014 

 

 

119,154 

 

 

343 

Construction

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

10,298 

 

 

10,298 

 

 

 -

Total

$

2,490 

 

$

1,442 

 

$

5,275 

 

$

9,207 

 

$

506,293 

 

$

515,500 

 

$

1,060 

(1) Includes $4.2 million of non-accrual loans.  (2) Net of unearned revenue of $0.2 million. (3) Includes net deferred loan costs of $1.4 million.

Impaired loans 

A loan is considered impaired when, based on current information and events; it is probable that the Company will be unable to collect the scheduled payments in accordance with the contractual terms of the loan.  Factors considered in determining impairment include payment status, collateral value and the probability of collecting payments when due.  The significance of payment delays and/or shortfalls is determined on a case-by-case basis.  All circumstances surrounding the loan are taken into account.  Such factors include the length of the delinquency, the underlying reasons and the borrower’s prior payment record.  Impairment is measured on these loans on a loan-by-loan basis.  Impaired loans include non-accrual loans, TDRs and other loans deemed to be impaired based on the aforementioned factors.

At March 31, 2015, impaired loans consisted of accruing TDRs totaling $2.3 million, $3.8 million of non-accrual loans and a $1.2 million accruing loan.  At December 31, 2014, impaired loans consisted of accruing TDRs totaling $0.7 million, $4.2 million of non-accrual loans and a $1.2 million accruing loan.  As of March 31, 2015 and December 31, 2014, the non-accrual loans included non-

16


 

accruing TDRs of $0.9 million for both periods, respectively.  Payments received from non-accruing impaired loans are first applied against the outstanding principal balance, then to the recovery of any charged-off amounts.  Any excess is treated as a recovery of interest income.  Payments received from accruing impaired loans are applied to principal and interest, as contractually agreed upon.

Impaired loans, segregated by class, as of the period indicated are detailed below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded

 

Recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash basis

 

Unpaid

 

investment

 

investment

 

Total

 

 

 

 

Average

 

Interest

 

interest

 

principal

 

with

 

with no

 

recorded

 

Related

 

recorded

 

income

 

income

(dollars in thousands)

balance

 

allowance

 

allowance

 

investment

 

allowance

 

investment

 

recognized

 

recognized

March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

1,081 

 

$

500 

 

$

293 

 

$

793 

 

$

331 

 

$

206 

 

$

 

$

 -

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-owner occupied

 

2,354 

 

 

1,754 

 

 

443 

 

 

2,197 

 

 

454 

 

 

1,596 

 

 

14 

 

 

 -

Owner occupied

 

2,869 

 

 

1,092 

 

 

1,749 

 

 

2,841 

 

 

302 

 

 

2,174 

 

 

13 

 

 

 -

Construction

 

352 

 

 

 -

 

 

251 

 

 

251 

 

 

 -

 

 

265 

 

 

 -

 

 

 -

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity installment

 

332 

 

 

15 

 

 

216 

 

 

231 

 

 

 

 

326 

 

 

 -

 

 

 -

Home equity line of credit

 

534 

 

 

180 

 

 

303 

 

 

483 

 

 

19 

 

 

428 

 

 

 

 

 -

Auto loans and leases

 

 

 

 -

 

 

 

 

 

 

 -

 

 

 

 

 -

 

 

 -

Other

 

20 

 

 

 

 

13 

 

 

20 

 

 

 

 

22 

 

 

 -

 

 

 -

Residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

558 

 

 

301 

 

 

266 

 

 

567 

 

 

32 

 

 

605 

 

 

 -

 

 

 -

Construction

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Total

$

8,101 

 

$

3,849 

 

$

3,535 

 

$

7,384 

 

$

1,143 

 

$

5,623 

 

$

34 

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded

 

Recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash basis

 

Unpaid

 

investment

 

investment

 

Total

 

 

 

 

Average

 

Interest

 

interest

 

principal

 

with

 

with no

 

recorded

 

Related

 

recorded

 

income

 

income

(dollars in thousands)

balance

 

allowance

 

allowance

 

investment

 

allowance

 

investment

 

recognized

 

recognized

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

326 

 

$

 -

 

$

52 

 

$

52 

 

$

 -

 

$

67 

 

$

 

$

 -

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-owner occupied

 

2,494 

 

 

1,949 

 

 

355 

 

 

2,304 

 

 

547 

 

 

1,557 

 

 

27 

 

 

 -

Owner occupied

 

2,375 

 

 

447 

 

 

1,825 

 

 

2,272 

 

 

87 

 

 

1,996 

 

 

15 

 

 

 -

Construction

 

350 

 

 

 -

 

 

256 

 

 

256 

 

 

 -

 

 

342 

 

 

 -

 

 

 -

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity installment

 

466 

 

 

 -

 

 

312 

 

 

312 

 

 

 -

 

 

358 

 

 

11 

 

 

 -

Home equity line of credit

 

469 

 

 

128 

 

 

289 

 

 

417 

 

 

 

 

382 

 

 

20 

 

 

 -

Auto

 

 

 

 -

 

 

 

 

 

 

 -

 

 

 

 

 -

 

 

 -

Other

 

33 

 

 

 -

 

 

20 

 

 

20 

 

 

 -

 

 

22 

 

 

 -

 

 

 -

Residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

612 

 

 

304 

 

 

245 

 

 

549 

 

 

35 

 

 

762 

 

 

 

 

 -

Construction

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Total

$

7,126 

 

$

2,828 

 

$

3,355 

 

$

6,183 

 

$

670 

 

$

5,488 

 

$

81 

 

$

 -

 

Credit Quality Indicators

Commercial and industrial and commercial real estate

The Company utilizes a loan grading system and assigns a credit risk grade to its loans in the commercial and industrial and commercial real estate portfolios.  The grading system provides a means to measure portfolio quality and aids in the monitoring of the credit quality of the overall loan portfolio.  The credit risk grades are arrived at using a risk rating matrix to assign a grade to each of the loans in the commercial and industrial and commercial real estate portfolios.    

The following is a description of each risk rating category the Company uses to classify each of its commercial and industrial and commercial real estate loans:

Pass

Loans in this category have an acceptable level of risk and are graded in a range of one to five.  Secured loans generally have good

17


 

collateral coverage.  Current financial statements reflect acceptable balance sheet ratios, sales and earnings trends.  Management is considered to be competent, and a reasonable succession plan is evident.  Payment experience on the loans has been good with minor or no delinquency experience.  Loans with a grade of one are of the highest quality in the range.  Those graded five are of marginally acceptable quality.

Special Mention

Loans in this category are graded a six and may be protected but are potentially weak.  They constitute a credit risk to the Company, but have not yet reached the point of adverse classification.  Some of the following conditions may exist: little or no collateral coverage; lack of current financial information; delinquency problems; highly leveraged; available financial information reflects poor balance sheet ratios and profit and loss statements reflect uncertain trends; and document exceptions.  Cash flow may not be sufficient to support total debt service requirements. 

Substandard

Loans in this category are graded a seven and have a well-defined weakness which may jeopardize the ultimate collectability of the debt.  The collateral pledged may be lacking in quality or quantity.  Financial statements may indicate insufficient cash flow to service the debt; and/or do not reflect a sound net worth.  The payment history indicates chronic delinquency problems.  Management is considered to be weak.  There is a distinct possibility that the Company may sustain a loss.  All loans on non-accrual are rated substandard.  Other loans that are included in the substandard category can be accruing, as well as loans that are current or past due.  Loans 90 days or more past due, unless otherwise fully supported, are classified substandard. Also, borrowers that are bankrupt or have loans categorized as troubled debt restructures can be graded substandard.    

Doubtful

Loans in this category are graded an eight and have a better than 50% possibility of the Company sustaining a loss, but the loss cannot be determined because of specific reasonable factors which may strengthen credit in the near-term.  Many of the weaknesses present in a substandard loan exist.  Liquidation of collateral, if any, is likely.  Any loan graded lower than an eight is considered to be uncollectible and charged-off.

Consumer and residential

The consumer and residential loan segments are regarded as homogeneous loan pools and as such are not risk rated.  For these portfolios, the Company utilizes payment activity, history and recency of payment in assessing performance.  Non-performing loans are considered to be loans past due 90 days or more and accruing and non-accrual loans.  All loans not classified as non-performing are considered performing.

The following table presents loans including $1.4 million of deferred costs in both periods, segregated by class, categorized into the appropriate credit quality indicator category as of the period indicated:

Commercial credit exposure

Credit risk profile by creditworthiness category

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate -

 

Commercial real estate -

 

Commercial real estate -

 

Commercial and industrial

 

non-owner occupied

 

owner occupied

 

construction

(dollars in thousands)

3/31/2015

 

12/31/2014

 

3/31/2015

 

12/31/2014

 

3/31/2015

 

12/31/2014

 

3/31/2015

 

12/31/2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

$

77,319 

 

$

76,902 

 

$

80,991 

 

$

83,387 

 

$

89,582 

 

$

88,256 

 

$

5,521 

 

$

5,073 

Special mention

 

2,200 

 

 

2,202 

 

 

3,046 

 

 

3,611 

 

 

3,257 

 

 

2,933 

 

 

715 

 

 

502 

Substandard

 

1,300 

 

 

1,197 

 

 

8,380 

 

 

7,773 

 

 

4,293 

 

 

4,591 

 

 

336 

 

 

336 

Doubtful

 

                -

 

 

 -

 

 

                -

 

 

 -

 

 

                -

 

 

 -

 

 

                 -

 

 

                -

Total

$

80,819 

 

$

80,301 

 

$

92,417 

 

$

94,771 

 

$

97,132 

 

$

95,780 

 

$

6,572 

 

$

5,911 

 

Consumer credit exposure

Credit risk profile based on payment activity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity installment

 

Home equity line of credit

 

Auto loans and leases

 

Other

(dollars in thousands)

3/31/2015

 

12/31/2014

 

3/31/2015

 

12/31/2014

 

3/31/2015

 

12/31/2014

 

3/31/2015

 

12/31/2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

$

32,418 

 

$

32,052 

 

$

42,417 

 

$

41,771 

 

$

27,816 

 

$

27,761 

 

$

6,058 

 

$

6,461 

Non-performing

 

231 

 

 

767 

 

 

483 

 

 

417 

 

 

31 

 

 

16 

 

 

20 

 

 

40 

Total

$

32,649 

 

$

32,819 

 

$

42,900 

 

$

42,188 

 

$

27,847 

(1)

$

27,777 

(1)

$

6,078 

 

$

6,501 

(1)Net of unearned revenue of $0.2 million.

18


 

Mortgage lending credit exposure

Credit risk profile based on payment activity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

 

Residential construction

(dollars in thousands)

 

 

 

 

 

 

 

 

3/31/2015

 

12/31/2014

 

3/31/2015

 

12/31/2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

 

 

 

 

 

 

 

 

 

 

 

$

124,108 

 

$

118,262 

 

$

8,478 

 

$

10,298 

Non-performing

 

 

 

 

 

 

 

 

 

 

 

 

 

696 

 

 

892 

 

 

 -

 

 

 -

Total

 

 

 

 

 

 

 

 

 

 

 

 

$

124,804 

 

$

119,154 

 

$

8,478 

 

$

10,298 

 

Allowance for loan losses

Management continually evaluates the credit quality of the Company’s loan portfolio and performs a formal review of the adequacy of the allowance for loan losses (the allowance) on a quarterly basis.  The allowance reflects management’s best estimate of the amount of credit losses in the loan portfolio.  Management’s judgment is based on the evaluation of individual loans, past experience, the assessment of current economic conditions and other relevant factors including the amounts and timing of cash flows expected to be received on impaired loans.  Those estimates may be susceptible to significant change.  Loan losses are charged directly against the allowance when loans are deemed to be uncollectible.  Recoveries from previously charged-off loans are added to the allowance when received.

Management applies two primary components during the loan review process to determine proper allowance levels.  The two components are a specific loan loss allocation for loans that are deemed impaired and a general loan loss allocation for those loans not specifically allocated.  The methodology to analyze the adequacy of the allowance for loan losses is as follows:

§

identification of specific impaired loans by loan category;

§

identification of specific loans that are not impaired, but have an identified potential for loss;

§

calculation of specific allowances where required for the impaired loans based on collateral and other objective and quantifiable evidence;

§

determination of loans with similar credit characteristics within each class of the loan portfolio segment and eliminating the impaired loans;

§

application of historical loss percentages to pools to determine the allowance allocation;

§

application of qualitative factor adjustment percentages to historical losses for trends or changes in the loan portfolio.

§

Qualitative factor adjustments include:

o

levels of and trends in delinquencies and non-accrual loans;

o

levels of and trends in charge-offs and recoveries;

o

trends in volume and terms of loans;

o

changes in risk selection and underwriting standards;

o

changes in lending policies, procedures and practices;

o

experience, ability and depth of lending management;

o

national and local economic trends and conditions; and

o

changes in credit concentrations.

Allocation of the allowance for different categories of loans is based on the methodology as explained above.  A key element of the methodology to determine the allowance is the Company’s credit risk evaluation process, which includes credit risk grading of individual commercial and industrial and commercial real estate loans.  Commercial and industrial and commercial real estate loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement.  That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower.  Upon review, the commercial loan credit risk grade is revised or reaffirmed as the case may be.  The credit risk grades may be changed at any time management feels an upgrade or downgrade may be warranted.  The credit risk grades for the commercial and industrial and commercial real estate loan portfolios are taken into account in the reserve methodology and loss factors are applied based upon the credit risk grades.  The loss factors applied are based upon the Company’s historical experience and environmental factors.  Historical experience reveals there is a direct correlation between the credit risk grades and loan charge-offs.  The changes in allocations in the commercial and industrial and commercial real estate loan portfolio from period to period are based upon the credit risk grading system and from periodic reviews of the loan portfolio.      

Each quarter, management performs an assessment of the allowance for loan losses.  The Company’s Special Assets Committee meets monthly and the applicable lenders discuss each relationship under review and reach a consensus on the appropriate estimated loss amount, if applicable, based on current accounting guidance.  The Special Assets Committee’s focus is on ensuring the pertinent facts are considered regarding not only loans considered for specific reserves, but also the collectability of loans that may be past due in payment.  The assessment process also includes the review of all loans on a non-accruing basis as well as a review of certain loans to which the lenders or the Company’s Credit Administration function have assigned a criticized or classified risk rating.    

19


 

The Company’s policy is to charge off unsecured consumer loans when they become 90 days or more past due as to principal and interest.  In the other portfolio segments, amounts are charged off at the point in time when the Company deems the balance, or a portion thereof, to be uncollectible.

Information related to the change in the allowance for loan losses and the Company’s recorded investment in loans by portfolio segment as of the period indicated is as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the three months ended March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial &

 

Commercial

 

 

 

 

Residential

 

 

 

 

 

 

(dollars in thousands)

industrial

 

real estate

 

Consumer

 

real estate

 

Unallocated

 

Total

Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

1,052 

 

$

4,672 

 

$

1,519 

 

$

1,316 

 

$

614 

 

$

9,173 

Charge-offs

 

24 

 

 

67 

 

 

92 

 

 

 -

 

 

 -

 

 

183 

Recoveries

 

 

 

 

 

24 

 

 

28 

 

 

 -

 

 

68 

Provision

 

177 

 

 

(97)

 

 

62 

 

 

(1)

 

 

 

 

150 

Ending balance

$

1,214 

 

$

4,515 

 

$

1,513 

 

$

1,343 

 

$

623 

 

$

9,208 

Ending balance: individually evaluated for impairment

$

331 

 

$

756 

 

$

24 

 

$

32 

 

$

 -

 

$

1,143 

Ending balance: collectively evaluated for impairment

$

883 

 

$

3,759 

 

$

1,489 

 

$

1,311 

 

$

623 

 

$

8,065 

Loans Receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance (2)

$

80,819 

 

$

196,121 

 

$

109,474 

(1)

$

133,282 

 

$

 -

 

$

519,696 

Ending balance: individually evaluated for impairment

$

793 

 

$

5,289 

 

$

735 

 

$

567 

 

$

 -

 

$

7,384 

Ending balance: collectively evaluated for impairment

$

80,026 

 

$

190,832 

 

$

108,739 

 

$

132,715 

 

$

 -

 

$

512,312 

(1) Net of unearned revenue of $0.2 million.    (2) Includes $1.4 million of net deferred loan costs.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the year ended December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial &

 

Commercial

 

 

 

Residential

 

 

 

 

 

 

(dollars in thousands)

industrial

 

real estate

 

Consumer

 

real estate

 

Unallocated

 

Total

Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

944 

 

$

4,253 

 

$

1,482 

 

$

1,613 

 

$

636 

 

$

8,928 

Charge-offs

 

309 

 

 

239 

 

 

361 

 

 

93 

 

 

 -

 

 

1,002 

Recoveries

 

32 

 

 

91 

 

 

30 

 

 

34 

 

 

 -

 

 

187 

Provision

 

385 

 

 

567 

 

 

368 

 

 

(238)

 

 

(22)

 

 

1,060 

Ending balance

$

1,052 

 

$

4,672 

 

$

1,519 

 

$

1,316 

 

$

614 

 

$

9,173 

Ending balance: individually evaluated for impairment

$

 -

 

$

634 

 

$

 

$

35 

 

$

 -

 

$

670 

Ending balance: collectively evaluated for impairment

$

1,052 

 

$

4,038 

 

$

1,518 

 

$

1,281 

 

$

614 

 

$

8,503 

Loans Receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance (2)

$

80,301 

 

$

196,462 

 

$

109,285 

(1)

$

129,452 

 

$

 -

 

$

515,500 

Ending balance: individually evaluated for impairment

$

52 

 

$

4,832 

 

$

750 

 

$

549 

 

$

 -

 

$

6,183 

Ending balance: collectively evaluated for impairment

$

80,249 

 

$

191,630 

 

$

108,535 

 

$

128,903 

 

$

 -

 

$

509,317 

(1) Net of unearned revenue of $0.2 million.    (2) Includes $1.4 million of net deferred loan costs.

Information related to the change in the allowance for loan losses as of and for the three months ended March 31, 2014 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the three months ended March 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial &

 

Commercial

 

 

 

 

Residential

 

 

 

 

 

 

(dollars in thousands)

industrial

 

real estate

 

Consumer

 

real estate

 

Unallocated

 

Total

Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

944 

 

$

4,253 

 

$

1,482 

 

$

1,613 

 

$

636 

 

$

8,928 

Charge-offs

 

28 

 

 

152 

 

 

118 

 

 

59 

 

 

 -

 

 

357 

Recoveries

 

11 

 

 

 

 

16 

 

 

 -

 

 

 -

 

 

28 

Provision

 

35 

 

 

215 

 

 

137 

 

 

(30)

 

 

(57)

 

 

300 

Ending balance

$

962 

 

$

4,317 

 

$

1,517 

 

$

1,524 

 

$

579 

 

$

8,899 

 

 

 

 

20


 

6.  Earnings per share

Basic earnings per share (EPS) is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period.  Diluted EPS is computed in the same manner as basic EPS but also reflects the potential dilution that could occur from the grant of stock-based compensation awards.  The Company maintains two active share-based compensation plans that may generate additional potentially dilutive common shares.  For granted and unexercised stock options, dilution would occur if Company-issued stock options were exercised and converted into common stock.  As of the three months ended March 31, 2015 and 2014, there were 2,545 and 15 potentially dilutive shares related to issued and unexercised stock options.  For restricted stock, dilution would occur from the Company’s previously granted but unvested shares.  There were 3,887 and 3,283 potentially dilutive shares related to unvested restricted share grants as of the three months ended March 31, 2015 and 2014, respectively. 

In the computation of diluted EPS, the Company uses the treasury stock method to determine the dilutive effect of its granted but unexercised stock options and unvested restricted stock.  Under the treasury stock method, the assumed proceeds, as defined, received from shares issued in a hypothetical stock option exercise or restricted stock grant, are assumed to be used to purchase treasury stock.  Proceeds include: amounts received from the exercise of outstanding stock options; compensation cost for future service that the Company has not yet recognized in earnings; and any windfall tax benefits that would be credited directly to shareholders’ equity when the grant generates a tax deduction (or a reduction in proceeds if there is a charge to equity).  The Company does not consider awards from share-based grants in the computation of basic EPS.

The following table illustrates the data used in computing basic and diluted EPS for the periods indicated: 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

2015

 

2014

(dollars in thousands except per share data)

 

 

 

 

 

Basic EPS:

 

 

 

 

 

Net income available to common shareholders

$

1,573 

 

$

1,456 

Weighted-average common shares outstanding

 

2,435,884 

 

 

2,398,731 

Basic EPS

$

0.65 

 

$

0.61 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

Net income available to common shareholders

$

1,573 

 

$

1,456 

Weighted-average common shares outstanding

 

2,435,884 

 

 

2,398,731 

Potentially dilutive common shares

 

6,432 

 

 

3,298 

Weighted-average common and potentially dilutive shares outstanding

 

2,442,316 

 

 

2,402,029 

Diluted EPS

$

0.64 

 

$

0.61 

 

7.  Stock plans

The Company has two stock-based compensation plans (the stock compensation plans) from which it can grant stock-based compensation awards, and applies the fair value method of accounting for stock-based compensation provided under current accounting guidance.  The guidelines require the cost of share-based payment transactions (including those with employees and non-employees) be recognized in the financial statements.  The Company’s stock compensation plans were shareholder-approved and permit the grant of share-based compensation awards to its employees and directors.  The Company believes that the stock-based compensation plans will advance the development, growth and financial condition of the Company by providing incentives through participation in the appreciation in the value of the Company’s common stock.  In return, the Company hopes to secure, retain and motivate the employees and directors who are responsible for the operation and the management of the affairs of the Company by aligning the interest of its employees and directors with the interest of its shareholders.  In the stock compensation plans, employees and directors are eligible to be awarded stock-based compensation grants which can consist of stock options (qualified and non-qualified), stock appreciation rights (SARs) and restricted stock.

At the 2012 annual shareholders’ meeting, the Company’s shareholders approved and the Company adopted the 2012 Omnibus Stock Incentive Plan and the 2012 Director Stock Incentive Plan (collectively, the 2012 stock incentive plans).  The 2012 stock incentive plans replaced both the expired 2000 Independent Directors Stock Option Plan and the 2000 Stock Incentive Plan (collectively, the 2000 stock incentive plans).  Unless terminated by the Company’s board of directors, the 2012 stock incentive plans will expire on, and no stock-based awards shall be granted after the year 2022.

In each of the 2012 stock incentive plans, the Company has reserved 500,000 shares of its no-par common stock for future issuance.  The Company recognizes share-based compensation expense over the requisite service or vesting period.    

21


 

The following table summarizes the weighted-average fair value and vesting of restricted stock grants awarded during the three months ended March 31, 2015 and 2014 under the 2012 stock incentive plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

 

 

 

Weighted-

 

 

 

 

 

Weighted-

 

 

 

Shares

 

average grant

 

Vesting

 

Shares

 

average grant

 

Vesting

 

granted

 

date fair value

 

period

 

granted

 

date fair value

 

period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Director plan

3,200 

 

$

32.25 

 

1 year

 

2,000 

 

$

27.00 

 

1 year

Omnibus plan

3,300 

 

 

32.25 

 

4 yrs - 25% per year

 

2,120 

 

 

27.00 

 

4 yrs - 25% per year

Omnibus plan

50 

 

 

32.50 

 

1 year

 

 -

 

 

 -

 

 

Total

6,550 

 

$

32.25 

 

 

 

4,120 

 

$

27.00 

 

 

 

A summary of the status of the Company’s restricted stock grants as of and changes during the periods indicated are presented in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012 Stock incentive plans

 

Director

 

Omnibus

 

Total

Balance at December 31, 2014

6,000 

 

5,870 

 

11,870 

Granted

3,200 

 

3,350 

 

6,550 

Vested

(6,000)

 

(1,780)

 

(7,780)

Balance at March 31, 2015

3,200 

 

7,440 

 

10,640 

 

 

 

 

 

 

 

For restricted stock, intrinsic value represents the closing price of the underlying stock at the end of the period.  As of March 31, 2015, the intrinsic value of the Company’s restricted stock under the Director and Omnibus plans was $36.00 per share. 

Share-based compensation expense is included as a component of salaries and employee benefits in the consolidated statements of income.  The following tables illustrate stock-based compensation expense recognized during the three months ended March 31, 2015 and 2014 and the unrecognized stock-based compensation expense as of March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31,

(dollars in thousands)

 

2015

 

2014

Stock-based compensation expense:

 

 

 

 

 

 

Director plan

 

$

28 

 

$

30 

Omnibus plan

 

 

15 

 

 

Total stock-based compensation expense

 

$

43 

 

$

39 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

(dollars in thousands)

March 31, 2015

 

 

Unrecognized stock-based compensation expense:

 

 

 

 

 

 

Director plan

 

$

86 

 

 

 

Omnibus plan

 

 

192 

 

 

 

Total unrecognized stock-based compensation expense

 

$

278 

 

 

 

The unrecognized stock-based compensation expense as of March 31, 2015 will be recognized ratably over the periods ended January 2016 and January 2019 for the Director Plan and the Omnibus Plan, respectively.

In addition to the 2012 stock incentive plans, the Company established the 2002 Employee Stock Purchase Plan (the ESPP) and reserved 110,000 shares of its un-issued capital stock for issuance under the plan.  The ESPP was designed to promote broad-based employee ownership of the Company’s stock and to motivate employees to improve job performance and enhance the financial results of the Company.  Under the ESPP, participation is voluntary whereby employees use automatic payroll withholdings to purchase the Company’s capital stock at a discounted price based on the fair market value of the capital stock as measured on either the commencement or termination dates, as defined.  As of March 31, 2015,  38,687 shares have been issued under the ESPP.  The ESPP is considered a compensatory plan and is required to comply with the provisions of current accounting guidance.  The Company recognizes compensation expense on its ESPP on the date the shares are purchased.  For the three months ended March 31, 2015 and 2014, compensation expense related to the ESPP approximated $44 thousand and $33 thousand, respectively, and is included as a component of salaries and employee benefits in the consolidated statements of income.

22


 

 

8.  Fair value measurements

The accounting guidelines establish a framework for measuring and disclosing information about fair value measurements.  The guidelines of fair value reporting instituted a valuation hierarchy for disclosure of the inputs used to measure fair value.  This hierarchy prioritizes the inputs into three broad levels as follows:

Level 1 - inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; 

Level 2 - inputs are quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument;

Level 3 - inputs are unobservable and are based on the Company’s own assumptions to measure assets and liabilities at fair value.  Level 3 pricing for securities may also include unobservable inputs based upon broker-traded transactions.

A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The Company uses fair value to measure certain assets and, if necessary, liabilities on a recurring basis when fair value is the primary measure for accounting.  Thus, the Company uses fair value for AFS securities.  Fair value is used on a non-recurring basis to measure certain assets when adjusting carrying values to market values, such as impaired loans,  other real estate owned (ORE) and other repossessed assets.

The following table represents the carrying amount and estimated fair value of the Company’s financial instruments as of the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015

 

 

 

 

 

 

 

Quoted prices

 

Significant

 

Significant

 

 

 

 

 

 

 

in active

 

other

 

other

 

Carrying

 

Estimated

 

markets

 

observable inputs

 

unobservable inputs

(dollars in thousands)

amount

 

fair value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

18,983 

 

$

18,983 

 

$

18,983 

 

$

 -

 

$

 -

Available-for-sale securities

 

126,481 

 

 

126,481 

 

 

564 

 

 

125,917 

 

 

 -

Loans and leases, net

 

510,488 

 

 

510,676 

 

 

 -

 

 

 -

 

 

510,676 

Loans held-for-sale

 

1,159 

 

 

1,181 

 

 

 -

 

 

1,181 

 

 

 -

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposit liabilities

 

601,742 

 

 

601,604 

 

 

 -

 

 

601,604 

 

 

 -

Short-term borrowings

 

13,773 

 

 

13,773 

 

 

 -

 

 

13,773 

 

 

 -

Long-term debt

 

10,000 

 

 

10,676 

 

 

 -

 

 

10,676 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

Quoted prices

 

Significant

 

Significant

 

 

 

 

 

 

 

in active

 

other

 

other

 

Carrying

 

Estimated

 

markets

 

observable inputs

 

unobservable inputs

(dollars in thousands)

amount

 

fair value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

25,851 

 

$

25,851 

 

$

25,851 

 

$

 -

 

$

 -

Available-for-sale securities

 

97,896 

 

 

97,896 

 

 

595 

 

 

97,301 

 

 

 -

Loans and leases, net

 

506,327 

 

 

505,387 

 

 

 -

 

 

 -

 

 

505,387 

Loans held-for-sale

 

1,161 

 

 

1,186 

 

 

 -

 

 

1,186 

 

 

 -

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposit liabilities

 

586,944 

 

 

586,756 

 

 

 -

 

 

586,756 

 

 

 -

Short-term borrowings

 

3,969 

 

 

3,969 

 

 

 -

 

 

3,969 

 

 

 -

Long-term debt

 

10,000 

 

 

10,758 

 

 

 -

 

 

10,758 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23


 

The carrying value of short-term financial instruments, as listed below, approximates their fair value.  These instruments generally have limited credit exposure, no stated or short-term maturities, carry interest rates that approximate market and generally are recorded at amounts that are payable on demand :

·

Cash and cash equivalents;

·

Non-interest bearing deposit accounts;

·

Savings, interest-bearing checking and money market accounts and

·

Short-term borrowings.

Securities:  Fair values on investment securities are determined by prices provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions. 

Loans:  The fair value of loans is estimated by the net present value of the future expected cash flows discounted at current offering rates for similar loans.  Current offering rates consider, among other things, credit risk.  The carrying value that fair value is compared to is net of the allowance for loan losses and since there is significant judgment included in evaluating credit quality, loans are classified within Level 3 of the fair value hierarchy.

Loans held-for-sale:  The fair value of loans held-for-sale is estimated using rates currently offered for similar loans and is typically obtained from the Federal National Mortgage Association (FNMA) or the Federal Home Loan Bank of Pittsburgh (FHLB). 

Certificates of deposit:  The fair value of certificates of deposit is based on discounted cash flows using rates which approximate market rates for deposits of similar maturities. 

Long-term debt:  Fair value is estimated using the rates currently offered for similar borrowings.

The following tables illustrate the financial instruments measured at fair value on a recurring basis segregated by hierarchy fair value levels as of the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted prices

 

 

 

 

 

 

 

 

 

 

in active

 

Significant other

 

Significant other

 

Total carrying value

 

markets

 

observable inputs

 

unobservable inputs

(dollars in thousands)

March 31, 2015

 

(Level 1)

 

(Level 2)

 

(Level 3)

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

Agency - GSE

$

18,637 

 

$

 -

 

$

18,637 

 

$

 -

Obligations of states and political subdivisions

 

38,363 

 

 

 -

 

 

38,363 

 

 

 -

MBS - GSE residential

 

68,917 

 

 

 -

 

 

68,917 

 

 

 -

Equity securities - financial services

 

564 

 

 

564 

 

 

 -

 

 

 -

Total available-for-sale securities

$

126,481 

 

$

564 

 

$

125,917 

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted prices

 

 

 

 

 

 

 

 

 

 

in active

 

Significant other

 

Significant other

 

Total carrying value

 

markets

 

observable inputs

 

unobservable inputs

(dollars in thousands)

December 31, 2014

 

(Level 1)

 

(Level 2)

 

(Level 3)

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

Agency - GSE

$

14,398 

 

$

 -

 

$

14,398 

 

$

 -

Obligations of states and political subdivisions

 

37,033 

 

 

 -

 

 

37,033 

 

 

 -

MBS - GSE residential

 

45,870 

 

 

 -

 

 

45,870 

 

 

 -

Equity securities - financial services

 

595 

 

 

595 

 

 

 -

 

 

 -

Total available-for-sale securities

$

97,896 

 

$

595 

 

$

97,301 

 

$

 -

 

Equity securities in the AFS portfolio are measured at fair value using quoted market prices for identical assets and are classified within Level 1 of the valuation hierarchy.  Debt securities in the AFS portfolio are measured at fair value using market quotations provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions.  Assets classified as Level 2 use valuation techniques that are common to bond valuations.  That is, in active markets whereby bonds of similar characteristics frequently trade, quotes for similar assets are obtained.  For the three months ended March 31, 2015 and the year ended December 31, 2014, there were no transfers to or from Level 1 and Level 2 fair value measurements for financial assets

24


 

measured on a recurring basis.

There were no changes in Level 3 financial instruments measured at fair value on a recurring basis as of and for the periods ending March 31, 2015 and December 31, 2014. 

 

The following table illustrates the financial instruments measured at fair value on a non-recurring basis segregated by hierarchy fair value levels as of the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted prices in

 

Significant other

 

Significant other

 

Total carrying value

 

active markets

 

observable inputs

 

unobservable inputs

(dollars in thousands)

at March 31, 2015

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

$

2,706 

 

$

 -

 

$

 -

 

$

2,706 

Other real estate owned

 

1,241 

 

 

 -

 

 

 -

 

 

1,241 

Other repossessed assets

 

22 

 

 

 -

 

 

 -

 

 

22 

Total

$

3,969 

 

$

 -

 

$

 -

 

$

3,969 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted prices in

 

Significant other

 

Significant other

 

Total carrying value

 

active markets

 

observable inputs

 

unobservable inputs

(dollars in thousands)

at December 31, 2014

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

$

2,158 

 

$

 -

 

$

 -

 

$

2,158 

Other real estate owned

 

1,506 

 

 

 -

 

 

 -

 

 

1,506 

Total

$

3,664 

 

$

 -

 

$

 -

 

$

3,664 

 

From time-to-time, the Company may be required to record at fair value financial instruments on a non-recurring basis, such as impaired loans, ORE and other repossessed assets. These non-recurring fair value adjustments involve the application of lower-of-cost-or-market accounting on write downs of individual assets.

The following describes valuation methodologies used for financial instruments measured at fair value on a non-recurring basis.

Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves, a component of the allowance for loan losses, and as such are carried at the lower of net recorded investment or the estimated fair value.

Estimates of fair value of the collateral are determined based on a variety of information, including available valuations from certified appraisers for similar assets, present value of discounted cash flows and inputs that are estimated based on commonly used and generally accepted industry liquidation advance rates and estimates and assumptions developed by management.  

Valuation techniques for impaired loans are typically determined through independent appraisals of the underlying collateral or may be determined through present value of discounted cash flows.  Both techniques include various Level 3 inputs which are not identifiable.  The valuation technique may be adjusted by management for estimated liquidation expenses and qualitative factors such as economic conditions.  If real estate is not the primary source of repayment, present value of discounted cash flows and estimates using generally accepted industry liquidation advance rates and other factors may be utilized to determine fair value.     

At March 31, 2015 and December 31, 2014, the range of liquidation expenses and other valuation adjustments applied to impaired loans ranged from -19.96% to -87.57% and from -19.96% to -42.41% respectively.  The weighted-average of liquidation expenses and other valuation adjustments applied to impaired loans amounted to -34.53% and -27.26% as of March 31, 2015 and December 31, 2014, respectively.  Due to the multitude of assumptions, many of which are subjective in nature, and the varying inputs and techniques used to determine fair value, the Company recognizes that valuations could differ across a wide spectrum of techniques employed.  Accordingly, fair value estimates for impaired loans are classified as Level 3.

For ORE, fair value is generally determined through independent appraisals of the underlying properties which generally include various Level 3 inputs which are not identifiable.  Appraisals form the basis for determining the net realizable value from these properties.  Net realizable value is the result of the appraised value less certain costs or discounts associated with liquidation which occurs in the normal course of business.  Management’s assumptions may include consideration of the location and occupancy of the property, along with current economic conditions.  Subsequently, as these properties are actively marketed, the estimated fair values may be periodically adjusted through incremental subsequent write-downs.  These write-downs usually reflect decreases in estimated values resulting from sales price observations as well as changing economic and market conditions.  At March 31, 2015 and December 31, 2014, the discounts applied to the appraised values of ORE ranged from -9.07% to -99.00% and from -19.00% to -99.00%,  

25


 

respectively.  As of March 31, 2015 and December 31, 2014, the weighted-average of discount to the appraisal values of ORE amounted to -34.53% and -27.23%, respectively.

Item 2:  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is management's discussion and analysis of the significant changes in the consolidated financial condition of the Company as of March 31, 2015 compared to December 31, 2014 and a comparison of the results of operations for the three months ended March 31, 2015 and 2014.  Current performance may not be indicative of future results.  This discussion should be read in conjunction with the Company’s 2014 Annual Report filed on Form 10-K.

Forward-looking statements

Certain of the matters discussed in this Annual Report on Form 10-K may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.  The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” and similar expressions are intended to identify such forward-looking statements.

The Company’s actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation:

§

the effects of economic conditions on current customers, specifically the effect of the economy on loan customers’ ability to repay loans;

§

the costs and effects of litigation and of unexpected or adverse outcomes in such litigation;

§

the impact of new or changes in existing laws and regulations, including the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the regulations promulgated there under;

§

impacts of the new capital and liquidity requirements of the Basel III standards and other regulatory pronouncements, regulations and rules;

§

governmental monetary and fiscal policies, as well as legislative and regulatory changes;

§

effects of short- and long-term federal budget and tax negotiations and their effect on economic and business conditions;

§

the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Financial Accounting Standards Board and other accounting standard setters;

§

the risks of changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral, securities and interest rate protection agreements, as well as interest rate risks;

§

the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating locally, regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the internet;

§

technological changes;

§

the interruption or breach in security of our information systems resulting in failures or disruptions in customer account management, general ledger processing and loan or deposit updates;

§

acquisitions and integration of acquired businesses;

§

the failure of assumptions underlying the establishment of reserves for loan losses and estimations of values of collateral and various financial assets and liabilities;

§

volatilities in the securities markets;

§

acts of war or terrorism; and

§

disruption of credit and equity markets;

§

the risk that our analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.

The Company cautions readers not to place undue reliance on forward-looking statements, which reflect analyses only as of the date of this document.  The Company has no obligation to update any forward-looking statements to reflect events or circumstances after the date of this document.

Readers should review the risk factors described in other documents that we file or furnish, from time to time, with the Securities and Exchange Commission, including Annual Reports to Shareholders, Annual Reports filed on Form 10-K and other current reports filed or furnished on Form 8-K.

Executive Summary

The Company is a Pennsylvania corporation and is a bank holding company, whose wholly-owned state chartered commercial bank is The Fidelity Deposit and Discount Bank.  The Company is headquartered in Dunmore, Pennsylvania.  We consider Lackawanna and Luzerne Counties our primary marketplace.

26


 

As a leading Northeastern Pennsylvania community bank, our goals are to enhance shareholder value while continuing to build a full-service community bank.  We focus on growing our core business of retail and business lending and deposit gathering while maintaining strong asset quality and controlling operating expenses.  We continue to implement strategies to diversify earning assets and to increase low cost core deposits.  These strategies include a greater level of commercial lending and the ancillary business products and services supporting our commercial customers’ needs as well as residential lending strategies and an array of consumer products.  We focus on developing a full banking relationship with existing, as well as new, small- and middle-sized business prospects.  In addition, we explore opportunities to selectively expand our physical presence, consisting presently of our 11-branch network, with construction of a new branch underway to improve our footprint in Luzerne County.

We are impacted by both national and regional economic factors, with commercial, commercial real estate and residential mortgage loans concentrated in Northeastern Pennsylvania.  Although the U.S. economy has shown signs of modest improvement, the general operating environment and our local market area continue to remain challenging.  Interest rates have been at or near historical lows and we expect them to remain low in the near-term, but slowly rise with an accelerated pace of rate increases occurring late in 2015.  A rising rate environment positions the Company to improve its net interest income performance, but will continue to pressure the interest-rate yield and margin.  Long-term interest rates receded in 2014 and into 2015, with the ten-year U.S. Treasury rate decreasing from 2.17% at the end of December 2014 to 1.94% at the end of March 2015, 79 basis points lower than the rate from one year ago.  The national unemployment rate for March 2015 was 5.5%, down from 5.6% at December 2014 with new job growth in 2015 continuing at its slow pace.  However, in our region (Scranton, Wilkes-Barre Metropolitan Statistical Area), the unemployment rate has increased to 6.5% at March 31, 2015 from 5.6% as of December 31, 2014 and down, however, from 8.0% at March 31, 2014.  Despite an increase in the unemployment rate in the first quarter of 2015, more people are entering the labor force than were in December which is a positive sign for the local economy.  The median home values in the region declined 6.5% from a year ago, and according to Zillow, an online database advertising firm providing access to its real estate search engines to various media outlets, values will fall 0.1% within the next year.  Below average temperatures and large accumulations of snow stifled the real estate market and spring is historically the busy season for real estate transactions.  Despite the decline in home values, we believe market conditions are slowly improving in our region and that the second quarter will offer a better measure of the local housing market.  In light of these statistics, we will continue to monitor the economic climate in our region and scrutinize growth prospects with credit quality as a principal consideration.

In addition to the challenging economic environment in which we compete, the regulation and oversight of our business has changed significantly in recent years.  As described more fully in Part I, Item 1A, “Risk Factors,” and in the “Supervisory and Regulation” section of management’s discussion and analysis of financial condition and results of operations in our 2014 Annual Report filed on Form 10-K, certain aspects of the Dodd-Frank Wall Street Reform Act (Dodd-Frank Act) continue to have a significant impact on us.  In addition, final rules to implement Basel III regulatory capital reform, approved by the federal bank regulatory agencies in 2013, subject many banks including the Company, to capital requirements which will be phased in.  The initial provisions effective for us began on January 1, 2015.  The rules also revise the minimum risk-based and leverage capital ratio requirements applicable to the Company and revise the calculation of risk-weighted assets to enhance their risk sensitivity.  We will continue to prepare for the impacts that the Dodd-Frank Act and the Basel III capital standards, and related rulemaking will have on our business, financial condition and results of operations.

General

The Company’s earnings depend primarily on net interest income.  Net interest income is the difference between interest income and interest expense.  Interest income is generated from yields earned on interest-earning assets, which consist principally of loans and investment securities.  Interest expense is incurred from rates paid on interest-bearing liabilities, which consist of deposits and borrowings.  Net interest income is determined by the Company’s interest rate spread (the difference between the yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities.  Interest rate spread is significantly impacted by: changes in interest rates and market yield curves and their related impact on cash flows; the composition and characteristics of interest-earning assets and interest-bearing liabilities; differences in the maturity and re-pricing characteristics of assets compared to the maturity and re-pricing characteristics of the liabilities that fund them and by the competition in the marketplace. 

The Company’s earnings are also affected by the level of its non-interest income and expenses and by the provisions for loan losses and income taxes.  Non-interest income consists of: service charges on the Company’s loan and deposit products; interchange fees; trust and asset management service fees; increases in the cash surrender value of the bank owned life insurance and from net gains or losses from sales of loans and securities.  Non-interest expense consists of: compensation and related employee benefit costs; occupancy; equipment; data processing; advertising and marketing; FDIC insurance premiums; professional fees; loan collection; net other real estate owned (ORE) expenses; supplies and other operating overhead.

Comparison of the results of operations

Three months ended March 31, 2015 and 2014

Overview

Net income for the first quarter of 2015 increased $0.1 million, or 8%, to $1.6 million, or $0.64 per diluted share, compared to $1.5 million, or $0.61 per diluted share, in the same 2014 quarter.    The increase was due to higher net interest income combined with a

27


 

50% lower provision for loan losses partially offset by higher non-interest expenses. Non-interest expense increased $0.3 million, or 6%, in the current quarter compared to the 2014 like period mostly due to higher salary and employee benefit costs and advertising and marketing expenses.

Return on average assets (ROA) and return on average shareholders’ equity (ROE) were 0.91% and 8.74% for the three months ended March 31, 2015, and 0.92%  and 8.80% for the three months ended March 31, 2014, respectively.  ROA and ROE both decreased because of the large increase in average assets in the first quarter of 2015.

Net interest income and interest sensitive assets / liabilities

Net interest income increased $0.3 million, or 6%, from $5.3 million for the quarter ended March 31, 2014 to $5.6 million for the quarter ended March 31, 2015,  because of higher total interest incomeTotal average interest-earning assets increased $53.4 million and helped offset a nineteen basis point net reduction in their yields – the negative impact stemming from the loan portfolio.  The loan portfolio increased $35.6 million on average, which boosted its earnings by $0.2 million despite a 14 basis point reduction in yield.  Though all loan portfolios showed more interest income from average growth, the mortgage loan portfolio had the most accretive impact from the Company’s “originate and hold” strategy of shorter-termed secondary-market compliant mortgages held for portfolio.  The primary cause for the increase in interest income was a $57 thousand bonus dividend on FHLB stock and also a $4.5 million larger average balance of investment securities.  The decrease in interest expense stemmed from $79 thousand less interest paid on borrowed funds due to the $6.0 million paydown of long-term debt that occurred in the fourth quarter of 2014. The decrease was partially offset by an increase of $68 thousand in interest expense on deposits mostly due to higher average balances of $60.3 million in interest-bearing checking and money market accounts from successful relationship-building efforts, promotions, cross-selling, transfers from unpopular certificates of deposit, or CDs, and contractual and negotiated rates. 

The fully-taxable equivalent (FTE) net interest rate spread and margin both decreased by twelve and fifteen basis points, respectively, for the three months ended March 31, 2015 compared to the three months ended March 31, 2014.  The decrease in the interest rate spread was caused by a more rapid decline of yields of interest-earning assets than the cost reductions of lower rates paid on interest-bearing liabilities.  The decrease in net interest margin was due mostly to the larger balances of average interest-earning assets.  The overall cost of funds, which includes the impact of non-interest bearing deposits, was reduced by five basis points for the quarter ended March 31, 2015 compared to the same period in 2014 because of lower rates paid notwithstanding higher balances of average interest-bearing liabilities and the average balance growth of $4.6 million of non-interest bearing deposits.

During 2015, the Company expects to continue to operate in a low but increasing interest rate environment, with rates slowly rising, likely occurring during the second half of the year.  A rate environment with rising long-term interest rates positions the Company to improve its interest income performance from new and maturing long-term earning assets.  Until there is a sustained period of yield curve steepening, with rates rising more sharply at the long end, the interest rate margin may continue to experience compression. However for 2015, the Company anticipates net interest income to improve as growth in interest-earning assets would help mitigate an adverse impact of rate movements.  The Federal Open Market Committee (FOMC) has not adjusted the short-term federal funds rate upward but is expected to do so during the second half of 2015, pressuring rates paid on funding sources.  Continued growth in the loan portfolios complemented with investment security growth is the Company’s strategy for 2015, and when coupled with a proactive approach to deposit cost setting strategies should help grow net interest income and contain the interest rate margin at acceptable levels.  

The Company’s cost of interest-bearing liabilities was 58 basis points for the three months ended March 31, 2015 or seven basis points less than the cost for the three months ended March 31, 2014, respectivelyThe reduction was due to the $6.0 million fourth quarter of 2014 pay down of an FHLB advance which decreased the average balance of long-term debt.  Other than retaining maturing long-term CDs, further reductions in deposit rates from the current historic low levels would have an insignificant cost-savings impact.  As noted, interest rates along the treasury yield curve have been volatile with stability existing only at the short end.  Competition could pressure banks to increase deposit rates.  On the asset side, the prime interest rate, the benchmark rate that banks use as a base rate for adjustable rate loans, is not expected to rise in the near-term thereby further pressuring net interest income should deposit rates begin to steadily rise.  To help mitigate the impact of the imminent change to the economic landscape, the Company has successfully developed and expects to continue to strengthen its association with existing customers, develop new business relationships, generate new loan volumes, retain and generate higher levels of average non-interest bearing deposit balances.  Strategically deploying no- and low-cost deposits into interest earning-assets is an effective margin-enhancing strategy that the Company expects to continue to pursue and expand to help stabilize net interest margin.

The Company’s Asset Liability Management (ALM) team meets regularly to discuss among other things,  interest rate risk and when deemed necessary adjusts interest rates.  ALM also discusses revenue enhancing strategies to help combat the potential for a decline in net interest income. The Company’s marketing department, together with ALM, lenders and deposit gatherers, continue to develop prudent strategies that will grow the loan portfolio and accumulate low-cost deposits to improve net interest income performance.

The tables that follow set forth a comparison of average balances of assets and liabilities and their related net tax equivalent yields and rates for the periods indicated.  Interest income was adjusted to a tax-equivalent basis (FTE), using the corporate federal tax rate of 34% to recognize the income from tax-exempt interest-earning assets as if the interest was taxable.  This treatment allows a

28


 

uniform comparison among yields on interest-earning assets.  Loans include loans HFS and non-accrual loans but exclude the allowance for loan losses.  Net deferred loan cost amortization of $93.0 thousand and $64.3 thousand for the first quarters of 2015 and 2014, respectively, are included in interest income from loans.  The one-time FHLB bonus dividend of $57 thousand awarded in the first quarter of 2015 was removed from the annualized yield calculation and then added back to interest income.  Average balances are based on amortized cost and do not reflect net unrealized gains or losses.  Net interest margin is calculated by dividing annualized net interest income - FTE by total average interest-earning assets.  Cost of funds includes the effect of average non-interest bearing deposits as a funding source:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

(dollars in thousands)

March 31, 2015

 

March 31, 2014

 

Average

 

 

 

Yield /

 

Average

 

 

 

Yield /

Assets

balance

 

Interest

 

rate

 

balance

 

Interest

 

rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

$

24,679 

 

$

16 

 

0.25 

%

 

$

11,792 

 

$

 

0.25 

%

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency - GSE

 

15,746 

 

 

50 

 

1.29 

 

 

 

15,597 

 

 

54 

 

1.40 

 

MBS - GSE residential

 

53,135 

 

 

210 

 

1.60 

 

 

 

49,080 

 

 

191 

 

1.58 

 

State and municipal

 

34,691 

 

 

495 

 

5.78 

 

 

 

33,456 

 

 

499 

 

6.05 

 

Other

 

1,613 

 

 

79 

 

5.46 

 

 

 

2,551 

 

 

24 

 

3.86 

 

Total investments

 

105,185 

 

 

834 

 

3.00 

 

 

 

100,684 

 

 

768 

 

3.09 

 

Loans and leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

275,082 

 

 

3,072 

 

4.53 

 

 

 

262,673 

 

 

3,033 

 

4.68 

 

Consumer

 

66,897 

 

 

911 

 

5.52 

 

 

 

62,197 

 

 

848 

 

5.53 

 

Residential real estate

 

174,513 

 

 

1,727 

 

4.01 

 

 

 

156,005 

 

 

1,595 

 

4.15 

 

Total loans and leases

 

516,492 

 

 

5,710 

 

4.48 

 

 

 

480,875 

 

 

5,476 

 

4.62 

 

Federal funds sold

 

419 

 

 

   -

 

0.26 

 

 

 

40 

 

 

 -

 

0.30 

 

Total interest-earning assets

 

646,775 

 

 

6,560 

 

4.08 

%

 

 

593,391 

 

 

6,251 

 

4.27 

%

Non-interest earning assets

 

51,980 

 

 

 

 

 

 

 

 

47,700 

 

 

 

 

 

 

Total assets

$

698,755 

 

 

 

 

 

 

 

$

641,091 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings

$

110,291 

 

$

50 

 

0.18 

%

 

$

109,496 

 

$

55 

 

0.20 

%

Interest-bearing checking

 

128,575 

 

 

73 

 

0.23 

 

 

 

101,162 

 

 

42 

 

0.17 

 

MMDA

 

119,332 

 

 

193 

 

0.66 

 

 

 

86,412 

 

 

115 

 

0.54 

 

CDs < $100,000

 

61,319 

 

 

125 

 

0.83 

 

 

 

71,193 

 

 

166 

 

0.95 

 

CDs > $100,000

 

42,862 

 

 

115 

 

1.09 

 

 

 

40,534 

 

 

111 

 

1.11 

 

Clubs

 

1,470 

 

 

 

0.17 

 

 

 

1,388 

 

 

 -

 

0.14 

 

Total interest-bearing deposits

 

463,849 

 

 

557 

 

0.49 

 

 

 

410,185 

 

 

489 

 

0.48 

 

Repurchase agreements

 

15,793 

 

 

 

0.20 

 

 

 

16,104 

 

 

 

0.21 

 

Borrowed funds

 

10,001 

 

 

132 

 

5.35 

 

 

 

16,399 

 

 

210 

 

5.21 

 

Total interest-bearing liabilities

 

489,643 

 

 

697 

 

0.58 

%

 

 

442,688 

 

 

707 

 

0.65 

%

Non-interest bearing deposits

 

132,327 

 

 

 

 

 

 

 

 

127,736 

 

 

 

 

 

 

Non-interest bearing liabilities

 

3,811 

 

 

 

 

 

 

 

 

3,595 

 

 

 

 

 

 

Total liabilities

 

625,781 

 

 

 

 

 

 

 

 

574,019 

 

 

 

 

 

 

Shareholders' equity

 

72,974 

 

 

 

 

 

 

 

 

67,072 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

$

698,755 

 

 

 

 

 

 

 

$

641,091 

 

 

 

 

 

 

Net interest income - FTE

 

 

 

$

5,863 

 

 

 

 

 

 

 

$

5,544 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

 

 

 

 

 

3.50 

%

 

 

 

 

 

 

 

3.62 

%

Net interest margin

 

 

 

 

 

 

3.64 

%

 

 

 

 

 

 

 

3.79 

%

Cost of funds

 

 

 

 

 

 

0.45 

%

 

 

 

 

 

 

 

0.50 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30


 

 

Provision for loan losses

The provision for loan losses represents the necessary amount to charge against current earnings, the purpose of which is to increase the allowance for loan losses (the allowance) to a level that represents management’s best estimate of known and inherent losses in the Company’s loan portfolio.  Loans determined to be uncollectible are charged off against the allowance. The required amount of the provision for loan losses, based upon the adequate level of the allowance, is subject to the ongoing analysis of the loan portfolio.  The Company’s Special Assets Committee meets periodically to review problem loans.  The committee is comprised of management, including credit administration officers, loan officers, loan workout officers and collection personnel.  The committee reports quarterly to the Credit Administration Committee of the board of directors.

Management continuously reviews the risks inherent in the loan portfolio.  Specific factors used to evaluate the adequacy of the loan loss provision during the formal process include:

specific loans that could have loss potential;

levels of and trends in delinquencies and non-accrual loans;

levels of and trends in charge-offs and recoveries;

trends in volume and terms of loans;

changes in risk selection and underwriting standards;

changes in lending policies, procedures and practices;

experience, ability and depth of lending management;

national and local economic trends and conditions; and

changes in credit concentrations.

For the three months ended March 31, 2015, the Company recorded a provision for loan losses of $150 thousand, a 50% decrease, compared to a $0.3 million provision recorded during the three months ended March 31, 2014.  This decrease occurred despite management’s recognition of several new TDRs totaling $1.6 million, a $4.1 million increase in the total loan portfolio, and $0.6 million in additional non-performing loans.  Provision expense decreased despite the above factors because additional reserves needed from the new TDRs were offset by a  decreased implied reserve resulting from new methodology.  Furthermore, reserves on the additional non-performing loans were previously accounted for while the new loan growth resulted mainly in the low risk residential mortgage segment.  For a discussion on the allowance for loan losses, see “Allowance for loan losses,” located in the comparison of financial condition section of management’s discussion and analysis contained herein.

Other income

For the three months ended March 31, 2015, non-interest income amounted to $1.8 million, a less than 1% increase from the three months ended March 31, 2014.   More activity in the loan portfolio caused gains from sales of loans to increase by $0.1 million during the first quarter of 2015 in conjunction with an increase of $59 thousand in service charges on a larger loan portfolio.    These increases fully offset the $0.2 million fewer gains on investment securities recognized for the 2015 quarter compared to the same period of 2014.    

Other operating expenses

For the three months ended March 31, 2015, total other operating expenses increased $0.3 million, or 6%, compared to the three months ended March 31, 2014. Salary and employee benefits increased $0.2 million, or 7%, in the first quarter of 2015 compared to the first quarter of 2014.  The basis of the increase includes annual merit increases, higher accruals for bonuses and group insurance, an increase in stock awards and higher mortgage loan payroll origination fees due to a rise in mortgage originations, partially offset by lower unemployment tax.    Advertising and marketing expenses increased $55 thousand, or 16%, in the 2015 first quarter compared with the same period in 2014 due to additional marketing efforts focused around the product promotion of checking accounts and certificates of deposits.  Total other real estate owned (ORE) expense increased $34 thousand during the first quarter of 2015 compared to the same 2014 quarter. Contributing to the increase was $30 thousand in write downs and losses recognized on the sale of ORE in the first quarter of 2015 compared to $52 thousand of gains recognized on sales of ORE properties in the 2014 like period.  These two components were partially offset by a $54 thousand decrease in ORE expense due to a large real estate tax bill that was paid in March 2014 and a smaller number of properties in ORE in 2015.  All of these items were partially offset by a $31 thousand decrease in ATM expense during the three months ended March 31, 2015 compared to the 2014 like period due to a renegotiated contract at lower rates.

 

Comparison of financial condition at

March 31, 2015 and December 31, 2014

Overview

Consolidated assets increased $26.0 million, or 4%, to $702.5 million as of March 31, 2015 from $676.5 million at December 31, 2014.  The increase in assets was funded through growth in deposits of $14.8 million, short-term borrowings of $9.8 million and a $1.3 million increase in shareholders’ equity.  Net income of $1.6 million,  $0.2 million in other comprehensive income, and $0.1

31


 

million of shares issued through the employee stock purchase plan partially offset by $0.6 million of dividends declared drove equity growth.  The increase in the funding sources was used to fund loan and investment growth.  

Funds Deployed:

Investment securities

At the time of purchase, management classifies investment securities into one of three categories: trading, available-for-sale (AFS) or held-to-maturity (HTM).  To date, management has not purchased any securities for trading purposes.  Most of the securities the Company purchases are classified as AFS even though there is no immediate intent to sell them.  The AFS designation affords management the flexibility to sell securities and position the balance sheet in response to capital levels, liquidity needs or changes in market conditions.  Securities AFS are carried at fair value on the consolidated balance sheets with unrealized gains and losses, net of deferred income taxes, reported separately within shareholders’ equity as a component of accumulated other comprehensive income (OCI).  Securities designated as HTM are carried at amortized cost and represent debt securities that the Company has the ability and intent to hold until maturity.

As of March 31, 2015, the carrying value of investment securities amounted to $126.5 million, or 18% of total assets, compared to $97.9 million, or 14% of total assets, at December 31, 2014.  On March 31, 2015,  55% of the carrying value of the investment portfolio was comprised of U.S. Government Sponsored Enterprise residential mortgage-backed securities (MBS – GSE residential or mortgage-backed securities) that amortize and provide monthly cash flow that the Company can use for reinvestment, loan demand, unexpected deposit outflow, facility expansion or operations.

Investment securities were comprised of AFS securities as of March 31, 2015.  The AFS securities were recorded with a net unrealized gain of $4.4 million as of March 31, 2015 compared to a net unrealized gain of $4.2 million as of December 31, 2014, or a net improvement of $0.2 million during the first quarter of 2015.  The direction and magnitude of the change in value of the Company’s investment portfolio is attributable to the direction and magnitude of the change in interest rates along the treasury yield curve.  Generally, the values of debt securities move in the opposite direction of the changes in interest rates.  As interest rates along the treasury yield curve fall, especially at the intermediate and long end, the values of debt securities tend to increase.  Whether or not the value of the Company’s investment portfolio will continue to exceed its amortized cost will be largely dependent on the direction and magnitude of interest rate movements and the duration of the debt securities within the Company’s investment portfolio.  When interest rates rise, the market values of the Company’s debt securities portfolio could be subject to market value declines.

Quarterly, management performs a review of the investment portfolio to determine the causes of declines in the fair value of each security.  The Company uses inputs provided by independent third parties to determine the fair value of its investment securities portfolio.  Inputs provided by the third parties are reviewed and corroborated by management.  Evaluations of the causes of the unrealized losses are performed to determine whether impairment exists and whether the impairment is temporary or other-than-temporary.  Considerations such as the Company’s intent and ability to hold the securities to maturity, recoverability of the invested amounts over the intended holding period, the length of time and the severity in pricing decline below cost, the interest rate environment, the receipt of amounts contractually due and whether or not there is an active market for the securities, for example, are applied, along with an analysis of the financial condition of the issuer for management to make a realistic judgment of the probability that the Company will be unable to collect all amounts (principal and interest) due in determining whether a security is other-than-temporarily impaired.  If a decline in value is deemed to be other-than-temporary, the amortized cost of the security is reduced by the credit impairment amount and a corresponding charge to current earnings is recognized.  During the three months ended March 31, 2015 and 2014, the Company did not incur other-than-temporary impairment charges from its investment securities portfolio.

During the first three months of 2015, the carrying value of total investments increased $28.6 million, or 29%.  The Company attempts to maintain a well-diversified and proportionately level investment portfolio that is structured to complement the strategic direction of the Company.  Its growth typically supplements the lending activities but also considers the current and forecasted economic conditions, the Company’s liquidity needs and interest rate risk profile. At the end of 2014, the Company began to restructure its investment portfolio by selling mortgage-backed securities with the longest duration and lowest coupon rates as well as intermediate term agency bonds.  The proceeds were used to reduce the Company’s long-term debt with the balance retained in cash that was reinvested along with additional cash holdings during the first quarter of 2015.  The Company expects to grow the portfolio and increase its size relative to total assets with a bias toward mortgage-backed securities.  If rates rise, the strategy will provide a good source of cash flow to reinvest into higher yielding interest-sensitive assets.

32


 

A comparison of investment securities at March 31, 2015 and December 31, 2014 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015

December 31, 2014

(dollars in thousands)

Amount

 

%

Amount

 

%

 

 

 

 

 

 

 

 

 

 

 

MBS - GSE residential

$

68,917 

 

54.6 

%

$

45,870 

 

46.9 

%

State & municipal subdivisions

 

38,363 

 

30.3 

 

 

37,033 

 

37.8 

 

Agency - GSE

 

18,637 

 

14.7 

 

 

14,398 

 

14.7 

 

Equity securities - financial services

 

564 

 

0.4 

 

 

595 

 

0.6 

 

Total

$

126,481 

 

100.0 

%

$

97,896 

 

100.0 

%

 

Federal Home Loan Bank Stock

Investment in Federal Home Loan Bank (FHLB) stock is required for membership in the organization and is carried at cost since there is no market value available.  The amount the Company is required to invest is dependent upon the relative size of outstanding borrowings the Company has with the FHLB of Pittsburgh.  Excess stock is repurchased from the Company at par if the amount of borrowings decline to a predetermined level.  In addition, the Company earns a return or dividend based on the amount invested.  The dividends received from the FHLB totaled $74 thousand, which included a $57 thousand one-time bonus dividend, and $15 thousand for the three months ended March 31, 2015 and 2014, respectively.  The balance in FHLB stock was $1.3 million both as of March 31, 2015 and December 31, 2014, respectively.

Loans held-for-sale (HFS)

Upon origination, most residential mortgages and certain small business administration (SBA) guaranteed loans may be classified as held-for-sale (HFS).  In the event of market rate increases, fixed-rate loans and loans not immediately scheduled to re-price would no longer produce yields consistent with the current market.  In low interest rate environments, the Company would be exposed to prepayment risk and, as rates on adjustable-rate loans decrease, interest income would be negatively affected.  Consideration is given to the Company’s current liquidity position and projected future liquidity needs.  To better manage prepayment and interest rate risk, loans that meet these conditions may be classified as HFS.  The carrying value of loans HFS is based on the lower of cost or estimated fair value.  If the fair values of these loans decline below their original cost, the difference is written down and charged to current earnings.  Subsequent appreciation in the portfolio is credited to current earnings but only to the extent of previous write-downs.

As of March 31, 2015 and December 31, 2014, loans HFS consisted of residential mortgages with carrying amounts of $1.2 million in both periods, respectively, which approximated their fair values.  During the quarter ended March 31, 2015, residential mortgage loans with principal balances of $10.2 million were sold into the secondary market and the Company recognized net gains of $0.2 million, compared to $7.0 million and $0.1 million, respectively during the quarter ended March 31, 2014.  An increase in residential mortgage origination activities caused the increase in gains from loan sales in 2015 compared to 2014.    

The Company retains mortgage servicing rights (MSRs) on loans sold into the secondary market.  MSRs are retained so that the Company can foster personal relationships with its loyal customer base.  At March 31, 2015 and December 31, 2014, the servicing portfolio balance of sold residential mortgage loans was $256.2 million and $256.8 million, respectively.

Loans and leases

For the first quarter of 2015, the Bank saw an overall growth in the loan portfolio of $4.2 million, or 1%.  The majority of this growth was in the consumer and residential sector.  Our efforts continue to be focused on utilizing our relationship management process to grow new and existing relationships by providing the best customer service from our committed and skilled team of relationship managers and branch personnel. 

Commercial and industrial and commercial real estate

Compared to year-end 2014, the commercial and industrial (C&I) loan portfolio had a minimal increase of  $0.5 million, or 1%, from $80.3 million to $80.8 million and the commercial real estate (CRE) loan portfolio decreased $0.3 million, or less than 1%, from $196.5 million to $196.1 million as of March 31, 2015.  A greater number of payoffs occurred in the 1st quarter than previous quarters and a soft demand for credit facilities contributed to the modest growth.  Subsequent to quarter end, the Company had credits close that will put us on pace for an annual projected growth of between 3% and 4%.

Consumer

The consumer loan portfolio increased by $0.2 million, essentially flat from $109.5 million at December 31, 2014.  The slight increase in this portfolio occurred mainly from increased auto loans and leases and home equity lines of credit.  First quarter results were the result of a focus on maintaining relationships with auto dealers and an early season home equity campaign.

Residential

The residential loan portfolio grew $3.8 million, or 3%, from $129.5 million at December 31, 2014 to $133.3 million at March 31,

33


 

2015.  Loans available for sale increased by about $0.4 million from new loan originations while the held to maturity portfolio grew by roughly $3.4 million.  The held to maturity loan portfolio grew due to a mortgage loan modification program and incremental new loan originations. The majority of modifications were 20 years or less in maturity.    

The composition of the loan portfolio at March 31, 2015 and December 31, 2014, is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015

 

December 31, 2014

(dollars in thousands)

Amount

 

%

 

Amount

 

%

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

80,819 

 

15.5 

%

 

$

80,301 

 

15.6 

%

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

Non-owner occupied

 

92,417 

 

17.8 

 

 

 

94,771 

 

18.4 

 

Owner occupied

 

97,132 

 

18.7 

 

 

 

95,780 

 

18.5 

 

Construction

 

6,572 

 

1.3 

 

 

 

5,911 

 

1.1 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Home equity installment

 

32,649 

 

6.3 

 

 

 

32,819 

 

6.4 

 

Home equity line of credit

 

42,900 

 

8.3 

 

 

 

42,188 

 

8.2 

 

Auto and leases

 

28,051 

 

5.4 

 

 

 

27,972 

 

5.4 

 

Other

 

6,078 

 

1.2 

 

 

 

6,501 

 

1.3 

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

124,804 

 

24.0 

 

 

 

119,154 

 

23.1 

 

Construction

 

8,478 

 

1.6 

 

 

 

10,298 

 

2.0 

 

Gross loans

 

519,900 

 

100.0 

%

 

 

515,695 

 

100.0 

%

Less:

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

(9,208)

 

 

 

 

 

(9,173)

 

 

 

Unearned lease revenue

 

(204)

 

 

 

 

 

(195)

 

 

 

Net loans

$

510,488 

 

 

 

 

$

506,327 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held-for-sale

$

1,159 

 

 

 

 

$

1,161 

 

 

 

 

Allowance for loan losses

Management evaluates the credit quality of the Company’s loan portfolio and performs a formal review of the adequacy of the allowance for loan losses (the allowance) on a quarterly basis.  The allowance reflects management’s best estimate of the amount of credit losses in the loan portfolio.  Management’s judgment is based on the evaluation of individual loans, past experience, the assessment of current economic conditions and other relevant factors including the amounts and timing of cash flows expected to be received on impaired loans.  Those estimates may be susceptible to significant change.  The provision for loan losses represents the amount necessary to maintain an appropriate allowance.  Loan losses are charged directly against the allowance when loans are deemed to be uncollectible.  Recoveries from previously charged-off loans are added to the allowance when received.

Management applies two primary components during the loan review process to determine proper allowance levels.  The two components are a specific loan loss allocation for loans that are deemed impaired and a general loan loss allocation for those loans not specifically allocated.  The methodology to analyze the adequacy of the allowance for loan losses is as follows:

identification of specific impaired loans by loan category;

calculation of specific allowances where required for the impaired loans based on collateral and other objective and quantifiable evidence;

determination of loans with similar credit characteristics within each class of the loan portfolio segment and eliminating the impaired loans;

application of historical loss percentages (trailing twelve-quarter average) to pools to determine the allowance allocation;

application of qualitative factor adjustment percentages to historical losses for trends or changes in the loan portfolio, and/or current economic conditions.

Through December 31, 2014, allocation of the allowance for different categories of loans is based on the methodology as explained above.  A key element of the methodology to determine the allowance is the Company’s credit risk evaluation process, which includes credit risk grading of individual commercial loans.  Commercial loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement.  That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower.  Upon review, the commercial loan credit risk grade is revised or reaffirmed.  The credit risk grades may be changed at any time management determines an upgrade or downgrade may be warranted.  The credit risk grades for the commercial loan portfolio are taken into account in the reserve methodology and loss factors are applied based upon the credit risk grades.  The loss factors applied are based upon the Company’s historical experience as well as what

34


 

management believes to be best practices and within common industry standards.  Historical experience reveals there is a direct correlation between the credit risk grades and loan charge-offs.  The changes in allocations in the commercial loan portfolio from period-to-period are based upon the credit risk grading system and from periodic reviews of the loan portfolio.

In order to substantiate flat reserve allocations for certain risk ratings on a recurring basis, management analyzed historical loss experience in those risk rating pools.  Management considered peer or industry averages in support of flat rates. However, the lack of consistency in those allowance methodologies rendered flat rate correlation to be inapplicable.  As a result, commencing on January 1, 2015 and going forward, the Bank applied the following updates to the Allowance for Loan and Lease Losses calculation:

Pass-5 rated loans are included in the loan pools that do not include impaired loans.  The Bank reasoned that Pass-5 rated loans did not present any substantive difference in historic loss experience than loans of similar or less risk.  Previously, Pass-5 rated loans carried a flat 2% reserve allocation.  The impact of this change reduced the reserve requirement by about $179 thousand.

Special Mention – 6 rated loans were changed from a flat 5% reserve allocation.  Management evaluated historical losses for 6 rated loans based on the greater of either the three (3) year moving average of historical loss experience in the 6 rated loan category OR an adjusted charge-off method.   In the adjusted charge-off method, the bank will categorize any charge-off for any commercial loan in terms of what the risk rating on that charge-off (or charge-down) was in the same period 2 years prior.  Such loans will be compared against the appropriate pool of loans by assigning the charged-off loan in the appropriate pool in the current period depending upon its risk rating 2 years prior.  Each pool will then be calculated for each commercial loan type to develop a relative percentage.  These relative percentages will be quantified in rolling 12 quarter averages and applied against the appropriate risk rating class.  However, since Special Mention – 6 rated loans are by nature a transitional grade of risk rating, the actual losses incurred in this risk rating class was near 0%.  Therefore, management applied a loss factor that, in its opinion, fairly represents the actual risk of loss from loans so rated.  The impact of this change reduced the reserve requirement by about $72 thousand.

Substandard – 7 rated loans were changed from a flat 15% reserve allocation to pools that are based on historical losses.  Going forward, expected loss percentages will be based on the greater of either the three (3) year moving average of historical loss experience in the 7 rated loan category OR an adjusted charge-off method.   In the adjusted charge-off method, the bank will categorize any charge-off for any commercial loan in terms of what the risk rating on that charge-off (or charge-down) was in the same period 2 years prior.  Such loans will be compared against the appropriate pool of loans by assigning the charged-off loan in the appropriate pool in the current period depending upon its risk rating 2 years prior.  Each pool will then be calculated for each commercial loan type to develop a relative percentage.  These relative percentages will be quantified in rolling 12 quarter averages and applied against the appropriate risk rating class.  The impact of this change reduced the reserve requirement by about $312 thousand.

Qualitative factors will be universally applied to all loans in all loan pools. Previously, this was not done for Special Mention - 6 rated and Substandard – 7 rated loans.  The impact of this change increased the reserve requirement by about $138 thousand.

Each quarter, management performs an assessment of the allowance for loan losses.  The Company’s Special Assets Committee meets monthly and the applicable lenders discuss each relationship under review and reach a consensus on the appropriate estimated loss amount, if applicable, based on current accounting guidance.  The Special Assets Committee’s focus is on ensuring the pertinent facts are considered regarding not only loans considered for specific reserves, but also the collectability of loans that may be past due.  The assessment process also includes the review of all loans on non-accrual status as well as a review of certain loans to which the lenders or the Credit Administration function have assigned a criticized or classified risk rating.

Net charge-offs for the three months ending March 31, 2015 were $0.1 million compared to $0.3 million for the three months ending March 31, 2014, an improvement of $0.2 million.  The year-over-year improvement occurred from reduced commercial real estate and residential mortgage charge-offs combined with recoveries mainly from previously charged-off residential mortgages which were more than double the same period in 2014.  The overall improvement was the result of more accurate fair value recognition of underlying collateral values on loans as they became impaired as well as improved overall underwriting at origination.   During the period ended March 31, 2015, no specific loan class significantly underperformed as charge-offs were taken across a variety of consumer, commercial and commercial real estate loans.  For a discussion on the provision for loan losses, see the “Provision for loan losses,” located in the results of operations section of management’s discussion and analysis contained herein.

The allowance for loan losses was $9.2 million as of March 31, 2015 and $8.9 million as of March 31, 2014.  Management believes that the current balance in the allowance for loan losses is sufficient to withstand the identified potential credit quality issues that may arise and others unidentified but inherent to the portfolio.  Potential problem loans are those where there is known information that leads management to believe repayment of principal and/or interest is in jeopardy and the loans are currently neither on non-accrual status nor past due 90 days or more.  There could be additional instances which become identified in future periods that may require additional charge-offs and/or increases to the allowance due to continued sluggishness in the economy and pressure on property

35


 

values. In contrast, an abrupt significant increase in the U.S. Prime lending rate could adversely impact the debt service capacity of existing borrowers' ability to repay.

The following tables set forth the activity in the allowance for loan losses and certain key ratios for the period indicated:

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the

As of and for the

As of and for the

 

three months ended

twelve months ended

three months ended

(dollars in thousands)

March 31, 2015

December 31, 2014

March 31, 2014

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

9,173 

 

$

8,928 

 

$

8,928 

 

 

 

 

 

 

 

 

 

 

 

Charge-offs:

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

24 

 

 

309 

 

 

28 

 

Commercial real estate

 

67 

 

 

239 

 

 

152 

 

Consumer

 

92 

 

 

361 

 

 

118 

 

Residential

 

 -

 

 

93 

 

 

59 

 

Total

 

183 

 

 

1,002 

 

 

357 

 

 

 

 

 

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

 

32 

 

 

11 

 

Commercial real estate

 

 

 

91 

 

 

 

Consumer

 

24 

 

 

30 

 

 

16 

 

Residential

 

28 

 

 

34 

 

 

 -

 

Total

 

68 

 

 

187 

 

 

28 

 

Net charge-offs

 

115 

 

 

815 

 

 

329 

 

Provision for loan losses

 

150 

 

 

1,060 

 

 

300 

 

Balance at end of period

$

9,208 

 

$

9,173 

 

$

8,899 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses to total loans

 

1.77 

%

 

1.78 

%

 

1.84 

%

Net charge-offs (annualized) to average total loans outstanding

 

0.09 

%

 

0.16 

%

 

0.27 

%

Average total loans

$

516,492 

 

$

495,758 

 

$

480,875 

 

Loans 30 - 89 days past due and accruing

$

2,135 

 

$

3,932 

 

$

2,702 

 

Loans 90 days or more past due and accruing

$

505 

 

$

1,060 

 

$

20 

 

Non-accrual loans

$

3,816 

 

$

4,215 

 

$

3,709 

 

Allowance for loan losses to net charge-offs (annualized)

 

20.02 

x

 

11.26 

x

 

6.76 

x

Allowance for loan losses to loans 90 days or more past due and accruing

 

18.23 

x

 

8.65 

x

 

444.95 

x

Allowance for loan losses to non-accrual loans

 

2.41 

x

 

2.18 

x

 

2.40 

x

Allowance for loan losses to non-performing loans

 

2.13 

x

 

1.74 

x

 

2.39 

x

 

 

 

 

 

 

 

 

 

 

 

Non-performing assets

The Company defines non-performing assets as accruing loans past due 90 days or more, non-accrual loans, troubled debt restructured loans (TDRs), other real estate owned (ORE) and repossessed assets.  At March 31, 2015, non-performing assets represented 1.15% of total assets compared with 1.07% as of March 31, 2014.  This was a result of an increase in non-performing loans and TDRs.  This increase was offset by a decrease in ORE.  Most of the non-performing loans are collateralized, thereby mitigating the Company’s potential for loss.

36


 

The following table sets forth non-performing assets data as of the period indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

March 31, 2015

 

December 31, 2014

 

March 31, 2014

 

 

 

 

 

 

 

 

 

Loans past due 90 days or more and accruing

$

505 

 

$

1,060 

 

$

20 

Non-accrual loans *

 

3,816 

 

 

4,215 

 

 

3,709 

Total non-performing loans

 

4,321 

 

 

5,275 

 

 

3,729 

Troubled debt restructurings

 

2,358 

 

 

753 

 

 

763 

Other real estate owned and repossessed assets

 

1,433 

 

 

1,972 

 

 

2,511 

Total non-performing assets

$

8,112 

 

$

8,000 

 

$

7,003 

 

 

 

 

 

 

 

 

 

Total loans, including loans held-for-sale

$

520,855 

 

$

516,661 

 

$

484,015 

Total assets

$

702,507 

 

$

676,485 

 

$

654,429 

Non-accrual loans to total loans

 

0.73% 

 

 

0.82% 

 

 

0.77% 

Non-performing loans to total loans

 

0.83% 

 

 

1.02% 

 

 

0.77% 

Non-performing assets to total assets

 

1.15% 

 

 

1.18% 

 

 

1.07% 

* In the table above, the amount includes non-accrual TDRs of $0.9 million as of March 31, 2015, $0.9 million as of December 31, 2014 and $1.0 million as of March 31, 2014.

In the review of loans for both delinquency and collateral sufficiency, management concluded that there were a number of loans that lacked the ability to repay in accordance with contractual terms.  The decision to place loans on non-accrual status is made on an individual basis after considering factors pertaining to each specific loan.  Generally, commercial loans are placed on non-accrual status when management has determined that payment of all contractual principal and interest is in doubt or the loan is past due 90 days or more as to principal and interest, unless well-secured and in the process of collection.  Consumer loans secured by residential real estate and residential mortgage loans are placed on non-accrual status at 120 days past due as to principal and interest, and unsecured consumer loans are charged-off when the loan is 90 days or more past due as to principal and interest.  Uncollected interest income accrued on all loans placed on non-accrual is reversed and charged to interest income.

Non-performing loans, which consists of accruing loans that are over 90 days past due as well as all non-accrual loans, decreased $1.0 million, or 18%, from $5.3 million at December 31, 2014 to $4.3 million at March 31, 2015.  However, this category reflected a 16% increase, or $0.6 million, over the same period last year, increasing from $3.7 million as of March 31, 2014 to $4.3 million as of March 31, 2015.   At March 31, 2015, the portion of accruing loans that was over 90 days past due totaled $0.5 million and consisted of seven loans to six unrelated borrowers ranging from less than $1 thousand to $0.3 million. At December 31, 2014, the portion of accruing loans that was over 90 days past due totaled $1.1 million and consisted of eleven loans to seven unrelated borrowers ranging from $2 thousand to $0.4 million.  The Company seeks payments from all past due customers through an aggressive customer communication process.  A past due loan will be placed on non-accrual at the 90 day point when it is deemed that a customer is non-responsive and uncooperative to collection efforts.  

At December 31, 2014, there were 46 loans to 41 unrelated borrowers ranging from less than $1 thousand to $0.9 million in the non-accrual category.  At March 31, 2015 there were 47 loans to 41 unrelated borrowers on non-accrual ranging from less than $1 thousand to $0.9 million.  At December 31, 2014, non-accrual loans totaled $4.2 million compared with $3.8 million at March 31, 2015, a decrease of $0.4 million.  Non-accrual loans decreased during the period ending March 31, 2015 for the following reasons:  $0.3 million in new non-accrual loans plus capitalized expenditures on these loans were added; $0.2 million were paid down or paid off; $0.1 million were charged off; and $0.4 million were transferred to ORE.

37


 

The composition of non-performing loans as of March 31, 2015 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

Past due 90

Non-

Total non-

 

% of

 

loan

days or more

accrual

performing

 

gross

(dollars in thousands)

balances

and still accruing

loans

loans

 

loans

Commercial and industrial

$

80,819 

$

 -

$

19 

$

19 

 

0.02% 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

Non-owner occupied

 

92,417 

 

346 

 

520 

 

866 

 

0.94% 

Owner occupied

 

97,132 

 

 -

 

1,724 

 

1,724 

 

1.77% 

Construction

 

6,572 

 

 -

 

251 

 

251 

 

3.82% 

Consumer:

 

 

 

 

 

 

 

 

 

 

Home equity installment

 

32,649 

 

 -

 

231 

 

231 

 

0.71% 

Home equity line of credit

 

42,900 

 

 -

 

483 

 

483 

 

1.13% 

Auto loans and leases

 

27,847 

 

30 

 

 

31 

 

0.11% 

Other

 

6,078 

 

 -

 

20 

 

20 

 

0.33% 

Residential:

 

 

 

 

 

 

 

 

 

 

Real estate

 

124,804 

 

129 

 

567 

 

696 

 

0.56% 

Construction

 

8,478 

 

 -

 

 -

 

 -

 

 -

Loans held-for-sale

 

1,159 

 

 -

 

 -

 

 -

 

 -

 

 

 

 

 

 

 

 

 

 

 

Total

$

520,855 

$

505 

$

3,816 

$

4,321 

 

0.83% 

 

Payments received from non-accrual loans are recognized on a cash method.  Payments are first applied to the outstanding principal balance, then to the recovery of any charged-off loan amounts.  Any excess is treated as a recovery of interest income.  If the non-accrual loans that were outstanding as of March 31, 2015 had been performing in accordance with their original terms, the Company would have recognized interest income with respect to such loans of $61 thousand.

The Company, on a regular basis, reviews changes to loans to determine if they meet the definition of a TDR. TDRs arise when a borrower experiences financial difficulty and the Company grants a concession that it would not otherwise grant based on current underwriting standards in order to maximize the Company’s recovery.  TDRs aggregated $3.2 million at March 31, 2015, an increase of $1.6 million from $1.6 million at December 31, 2014, due to the addition of three loans (1 CRE and 2 C&I) from two unrelated borrowers being classified as TDR’s. 

The following tables set forth the activity in TDRs as and for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the three months ended March 31, 2015

 

 

 

 

 

 

 

 

 

 

Accruing

 

Non-accruing

 

 

 

 

Commercial &

 

Commercial

 

Commercial

 

 

(dollars in thousands)

industrial

 

real estate

 

real estate

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

Troubled Debt Restructures:

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

25 

 

$

728 

 

$

875 

 

$

1,628 

Additions

 

749 

 

 

858 

 

 

 -

 

 

1,607 

Pay downs / payoffs

 

 -

 

 

(2)

 

 

(1)

 

 

(3)

Ending balance

$

774 

 

$

1,584 

 

$

874 

 

$

3,232 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the year ended December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

Accruing

 

Non-accruing

 

 

 

 

Commercial &

 

Commercial

 

Commercial

 

 

(dollars in thousands)

industrial

 

real estate

 

real estate

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

Troubled Debt Restructures:

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

35 

 

$

1,010 

 

$

967 

 

$

2,012 

Advance on balance

 

 -

 

 

 

 

 

 

Pay downs / payoffs

 

(10)

 

 

(283)

 

 

(93)

 

 

(386)

Ending balance

$

25 

 

$

728 

 

$

875 

 

$

1,628 

38


 

 

If applicable, a TDR loan classified as non-accrual would require a minimum of six months of payments before consideration for a return to accrual status.  The concessions granted consisted of temporary interest-only payments or a reduction in the rate of interest to a below-market rate for a contractual period of time.  The Company believes concessions have been made in the best interests of the borrower and the Company.  If loans characterized as a TDR perform according to the restructured terms for a satisfactory period of time, the TDR designation may be removed in a new calendar year if the loan yields a market rate of interest.

Foreclosed assets held-for-sale

Foreclosed assets held-for-sale aggregated $1.4 million at March 31, 2015 and $2.0 million at December 31, 2014.  The following table sets forth the activity in the ORE component of foreclosed assets held-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015

 

December 31, 2014

(dollars in thousands)

Amount

#

 

Amount

#

 

 

 

 

 

 

 

 

Balance at beginning of period

$

1,961 
12 

 

$

2,078 
15 

 

 

 

 

 

 

 

 

Additions

 

396 

 

 

1,109 

Pay downs

 

 -

 

 

 

(5)

 

Write downs

 

(25)

 

 

 

(155)

 

Sold

 

(921)
(3)

 

 

(1,066)
(10)

Balance at end of period

$

1,411 
15 

 

$

1,961 
12 

 

As of March 31, 2015, ORE consisted of fifteen properties from thirteen unrelated borrowers totaling $1.4 million.  Six of these properties ($0.4 million) were added in 2015; three were added in 2014 ($84 thousand); two were added in 2013 ($0.2 thousand); two were added in 2012 ($0.3 million); one was added in 2011 ($0.2 thousand) and one in 2010 ($0.3 million).  In addition, of the fifteen properties, eight ($1 million) were listed for sale, while the remaining properties (seven totaling $0.4 million) are either in litigation, awaiting closing, have disposition plans or undergoing eviction proceedings.

Other repossessed assets held-for-sale included two automobiles with a combined book value of $22 thousand at March 31, 2015. At December 31, 2014, other repossessed assets consisted of an automobile with a book value of $11 thousand which was sold during 2015.

Other assets

The $0.5 million increase in other assets was due mostly to progress payments on facility remodeling and branch relocation, residual values associated with recording new automobile leases, net of lease disposals, normal cyclical changes to prepaid expenses, amounts due from borrowers for their loan escrow accounts, partially offset by a decline in the net deferred tax asset.

Funds Provided:

Deposits

The Company is a community based commercial depository financial institution, member FDIC, which offers a variety of deposit products with varying ranges of interest rates and terms.  Generally, deposits are obtained from consumers, businesses and public entities within the communities that surround the Company’s 11 branch offices and all deposits are insured by the FDIC up to the full extent permitted by law.  Deposit products consist of transaction accounts including: savings; clubs; interest-bearing checking; money market and non-interest bearing checking (DDA).  The Company also offers short- and long-term time deposits or certificates of deposit (CDs). CDs are deposits with stated maturities which can range from seven days to ten years.  Deposit inflow and outflow are influenced by economic conditions, changes in the interest rate environment, pricing and competition.  To determine interest rates on its deposit products, the Company considers local competition, spreads to earning-asset yields, liquidity position and rates charged for alternative sources of funding such as short-term borrowings and FHLB advances.

39


 

The following table represents the components of deposits as of the date indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015

December 31, 2014

(dollars in thousands)

Amount

 

%

Amount

 

%

 

 

 

 

 

 

 

 

 

 

 

Money market

$

117,600 

 

19.6 

%

$

118,653 

 

20.3 

%

Interest-bearing checking

 

132,261 

 

22.0 

 

 

124,009 

 

21.1 

 

Savings and clubs

 

113,925 

 

18.9 

 

 

110,282 

 

18.8 

 

Certificates of deposit

 

104,110 

 

17.3 

 

 

104,630 

 

17.8 

 

Total interest-bearing

 

467,896 

 

77.8 

 

 

457,574 

 

78.0 

 

Non-interest bearing

 

133,846 

 

22.2 

 

 

129,370 

 

22.0 

 

Total deposits

$

601,742 

 

100.0 

%

$

586,944 

 

100.0 

%

 

Total deposits increased $14.8 million, or  3%, from $586.9 million at December 31, 2014 to $601.7 million at March 31, 2015.  Growth in savings and interest bearing accounts and DDA of $16.4 million, or 5%, offset declines in CDs and money market accountsThe increase in the checking accounts was driven by an increase of $9.9 million in public interest-bearing and non-interest bearing depositsThis was due to the timing of the receipts of public tax deposits.  Public deposits are usually received mid-quarter and retained for a short period of time with disbursements occurring shortly after they are received.  By offering periodic deposit promotions, the Company has had success in executing on its model of developing new and strengthening existing relationships. Money market deposits declined slightly in part due to the recent expiration of product promotion which granted higher rates for a specific amount of time. The promotional events create opportunities to cross-sell all of the banks financial products and provides communication channels for establishing trust and financial service relationships thereby creating a stronger bond with existing and creating bonds with potential customers.  The Company will continue to execute on its relationship development strategy, explore the demographics within its marketplace and develop creative programs for its customersThe Company expects moderate asset growth for the remainder of 2015 funded by deposit growth encompassing all product types. 

The market interest rate profile continues to be low.  Customers’ appetite for long-term deposit products continues to decrease albeit at a much slower pace than in previous periods.  The CD portfolio declined $0.5 million, or less than 1% from year-end 2014.  The Company has had a minor amount of success with CD promotions but the low rate environment has basically enticed customers to vacate the CD marketplace.  When rates begin to rise, demand for CDs may also increase thereby possibly increasing funding costs.  The Company will continue to pursue strategies to grow and retain retail and business customers including the development of creative CD campaigns with an emphasis on deepening and broadening existing and creating new relationships. 

The Company uses the Certificate of Deposit Account Registry Service (CDARS) reciprocal program to obtain FDIC insurance protection for customers who have large deposits that at times may exceed the FDIC maximum amount of $250,000 per person.  In the CDARS program, deposits with varying terms and interest rates, originated in the Company’s own markets, are exchanged for deposits of other financial institutions that are members in the CDARS network.  By placing the deposits in other participating institutions, the deposits of our customers are fully insured by the FDIC.  In return for deposits placed with network institutions, the Company receives from network institutions deposits that are approximately equal in amount and are comprised of terms similar to those placed for our customers.  Deposits the Company receives, or reciprocal deposits, from other institutions are considered brokered deposits by regulatory definitions.  As of March 31, 2015 and December 31, 2014, CDARS represented $7.7 million, or 1%, of total deposits.

Excluding CDARS, certificates of deposit accounts of $100,000 or more amounted to $43.2 million and  $43.1 million at March 31, 2015 and December 31, 2014,  respectively.  Certificates of deposit of $250,000 or more amounted to $19.8 million and $19.1 million as of March 31, 2015 and December 31, 2014, respectively.

Including CDARS, approximately 41% of the CDs, with a weighted-average interest rate of 0.73%, are scheduled to mature in 2015 and an additional 35%, with a weighted-average interest rate of 0.87%, are scheduled to mature in 2016.  Renewing CDs may re-price to lower or higher market rates depending on the rate on the maturing CD, the pace and direction of interest rate movements, the shape of the yield curve, competition, the rate profile of the maturing accounts and depositor preference for alternative, non-term products.  The widespread preference has been for customers with maturing CDs to hold their deposits in readily available transaction accounts.  The Company does not expect significant net CD growth during the remainder of 2015, but will continue to develop CD promotional programs when the Company deems that it is economically feasible to do so or when demand exists.  As with all promotions, the Company will consider the needs of the customers and simultaneously will be mindful of the liquidity levels and the interest rate sensitivity exposure of the Company. 

Borrowings

Borrowings are used as a complement to deposit generation as an alternative funding source whereby the Company will borrow under customer repurchase agreements in the local market, advances from the FHLB and other correspondent banks for asset growth and liquidity needs.

40


 

Repurchase agreements are non-insured interest-bearing liabilities that have a perfected security interest in qualified investments of the Company as required by the FDIC Depositor Protection Act of 2009.  Repurchase agreements are offered through a sweep product.  A sweep account is designed to ensure that on a daily basis, an attached DDA is adequately funded and excess funds are transferred, or swept, into an interest-bearing overnight repurchase agreement account.  Due to the constant inflow and outflow of funds of the sweep product, their balances tend to be somewhat volatile, similar to a DDA.  Customer liquidity is the typical cause for variances in repurchase agreements, which during the first three months of 2015 increased $9.8 million from year-end December 31, 2014.  In addition, short-term borrowings may include overnight balances which the Company may require to fund daily liquidity needs such as deposit and repurchase agreement cash outflow, loan demand and operations.  At March 31, 2015 and December 31, 2014,  the Company did not have balances in overnight borrowings. 

The following table represents the components of borrowings as of the date indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015

 

December 31, 2014

(dollars in thousands)

Amount

 

%

 

Amount

 

%

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold under repurchase agreements

$

13,773 

 

57.9 

%

 

$

3,969 

 

28.4 

%

Long-term FHLB advances

 

10,000 

 

42.1 

 

 

 

10,000 

 

71.6 

 

Total

$

23,773 

 

100.0 

%

 

$

13,969 

 

100.0 

%

 

 

 

Item 3.  Quantitative and Qualitative Disclosure About Market Risk

Management of interest rate risk and market risk analysis.

The adequacy and effectiveness of an institution’s interest rate risk management process and the level of its exposures are critical factors in the regulatory evaluation of an institution’s sensitivity to changes in interest rates and capital adequacy.  Management believes the Company’s interest rate risk measurement framework is sound and provides an effective means to measure, monitor, analyze, identify and control interest rate risk in the balance sheet.

The Company is subject to the interest rate risks inherent in its lending, investing and financing activities.  Fluctuations of interest rates will impact interest income and interest expense along with affecting market values of all interest-earning assets and interest-bearing liabilities, except for those assets or liabilities with a short term remaining to maturity.  Interest rate risk management is an integral part of the asset/liability management process.  The Company has instituted certain procedures and policy guidelines to manage the interest rate risk position.  Those internal policies enable the Company to react to changes in market rates to protect net interest income from significant fluctuations.  The primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on net interest income along with creating an asset/liability structure that maximizes earnings.

Asset/Liability Management.  One major objective of the Company when managing the rate sensitivity of its assets and liabilities is to stabilize net interest income.  The management of and authority to assume interest rate risk is the responsibility of the Company’s Asset/Liability Committee (ALCO), which is comprised of senior management and members of the board of directors.  ALCO meets quarterly to monitor the relationship of interest sensitive assets to interest sensitive liabilities.  The process to review interest rate risk is a regular part of managing the Company.  Consistent policies and practices of measuring and reporting interest rate risk exposure, particularly regarding the treatment of non-contractual assets and liabilities, are in effect.  In addition, there is an annual process to review the interest rate risk policy with the board of directors which includes limits on the impact to earnings from shifts in interest rates.

Interest Rate Risk Measurement.  Interest rate risk is monitored through the use of three complementary measures: static gap analysis, earnings at risk simulation and economic value at risk simulation.  While each of the interest rate risk measurements has limitations, collectively, they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Company and the distribution of risk along the yield curve, the level of risk through time and the amount of exposure to changes in certain interest rate relationships.

Static GapThe ratio between assets and liabilities re-pricing in specific time intervals is referred to as an interest rate sensitivity gap.  Interest rate sensitivity gaps can be managed to take advantage of the slope of the yield curve as well as forecasted changes in the level of interest rate changes.

To manage this interest rate sensitivity gap position, an asset/liability model commonly known as cumulative gap analysis is used to monitor the difference in the volume of the Company’s interest sensitive assets and liabilities that mature or re-price within given time intervals.  A positive gap (asset sensitive) indicates that more assets will re-price during a given period compared to liabilities, while a negative gap (liability sensitive) indicates the opposite effect.  The Company employs computerized net interest income simulation modeling to assist in quantifying interest rate risk exposure.  This process measures and quantifies the impact on net interest income through varying interest rate changes and balance sheet compositions.  The use of this model assists the ALCO to gauge the effects of the interest rate changes on interest-sensitive assets and liabilities in order to determine what impact these rate changes will have upon the net interest spread.  At March 31, 2015, the Company maintained a one-year cumulative gap of positive (asset sensitive) $46.6 

41


 

million, or 7%, of total assets.  The effect of this positive gap position provided a mismatch of assets and liabilities which may expose the Company to interest rate risk during periods of falling interest rates.  Conversely, in an increasing interest rate environment, net interest income could be positively impacted because more assets than liabilities will re-price upward during the one-year period.

Certain shortcomings are inherent in the method of analysis discussed above and presented in the next table.  Although certain assets and liabilities may have similar maturities or periods of re-pricing, they may react in different degrees to changes in market interest rates.  The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates.  Certain assets, such as adjustable-rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset.  In the event of a change in interest rates, prepayment and early withdrawal levels may deviate significantly from those assumed in calculating the table amounts.  The ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase.

The following table illustrates the Company’s interest sensitivity gap position at March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

More than three

More than

 

 

 

 

 

 

 

Three months

months to

one year

More than

 

 

 

(dollars in thousands)

or less

twelve months

to three years

three years

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

4,833 

 

$

 -

 

$

 -

 

$

14,150 

 

$

18,983 

Investment securities (1)(2)

 

4,203 

 

 

13,866 

 

 

35,038 

 

 

74,665 

 

 

127,772 

Loans and leases(2)

 

192,750 

 

 

74,654 

 

 

123,663 

 

 

120,580 

 

 

511,647 

Fixed and other assets

 

 -

 

 

10,825 

 

 

 -

 

 

33,280 

 

 

44,105 

Total assets

$

201,786 

 

$

99,345 

 

$

158,701 

 

$

242,675 

 

$

702,507 

Total cumulative assets

$

201,786 

 

$

301,131 

 

$

459,832 

 

$

702,507 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest-bearing transaction deposits (3)

$

 -

 

$

13,398 

 

$

36,781 

 

$

83,667 

 

$

133,846 

Interest-bearing transaction deposits (3)

 

149,684 

 

 

20,381 

 

 

129,662 

 

 

64,059 

 

 

363,786 

Certificates of deposit

 

16,614 

 

 

40,719 

 

 

32,812 

 

 

13,965 

 

 

104,110 

Repurchase agreements

 

13,773 

 

 

 -

 

 

 -

 

 

 -

 

 

13,773 

Long-term debt

 

 -

 

 

 -

 

 

10,000 

 

 

 -

 

 

10,000 

Other liabilities

 

 -

 

 

 -

 

 

 -

 

 

3,470 

 

 

3,470 

Total liabilities

$

180,071 

 

$

74,498 

 

$

209,255 

 

$

165,161 

 

$

628,985 

Total cumulative liabilities

$

180,071 

 

$

254,569 

 

$

463,824 

 

$

628,985 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest sensitivity gap

$

21,715 

 

$

24,847 

 

$

(50,554)

 

$

77,514 

 

 

 

Cumulative gap

$

21,715 

 

$

46,562 

 

$

(3,992)

 

$

73,522 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative gap to total assets

 

3.1% 

 

 

6.6% 

 

 

-0.6%

 

 

10.5% 

 

 

 

(1)   Includes FHLB stock and the net unrealized gains/losses on available-for-sale securities.

(2)   Investments and loans are included in the earlier of the period in which interest rates were next scheduled to adjust or the period in which they are due.  In addition, loans were included in the periods in which they are scheduled to be repaid based on scheduled amortization.  For amortizing loans and MBS – GSE residential, annual prepayment rates are assumed reflecting historical experience as well as management’s knowledge and experience of its loan products.

(3)  The Company’s demand and savings accounts were generally subject to immediate withdrawal.  However, management considers a certain amount of such accounts to be core accounts having significantly longer effective maturities based on the retention experiences of such deposits in changing interest rate environments.  The effective maturities presented are the recommended maturity distribution limits for non-maturing deposits based on historical deposit studies.

Earnings at Risk and Economic Value at Risk SimulationsThe Company recognizes that more sophisticated tools exist for measuring the interest rate risk in the balance sheet that extend beyond static re-pricing gap analysis.  Although it will continue to measure its re-pricing gap position, the Company utilizes additional modeling for identifying and measuring the interest rate risk in the overall balance sheet.  The ALCO is responsible for focusing on “earnings at risk” and “economic value at risk”, and how both relate to the risk-based capital position when analyzing the interest rate risk.

Earnings at RiskAn earnings at risk simulation measures the change in net interest income and net income should interest rates rise and fall.  The simulation recognizes that not all assets and liabilities re-price one-for-one with market rates (e.g., savings rate).  The ALCO looks at “earnings at risk” to determine income changes from a base case scenario under an increase and decrease of 200 basis points in interest rate simulation models.

42


 

Economic Value at Risk.  An earnings at risk simulation measures the short-term risk in the balance sheet.  Economic value (or portfolio equity) at risk measures the long-term risk by finding the net present value of the future cash flows from the Company’s existing assets and liabilities.  The ALCO examines this ratio quarterly utilizing an increase and decrease of 200 basis points in interest rate simulation models.  The ALCO recognizes that, in some instances, this ratio may contradict the “earnings at risk” ratio.

The following table illustrates the simulated impact of an immediate 200 basis points upward or downward movement in interest rates on net interest income, net income and the change in the economic value (portfolio equity).  This analysis assumed that interest-earning asset and interest-bearing liability levels at March 31, 2015 remained constant.  The impact of the rate movements was developed by simulating the effect of the rate change over a twelve-month period from the March 31, 2015 levels:

 

 

 

 

 

 

 

 

 

 

 

 

% change

 

Rates +200

Rates -200

Earnings at risk:

 

 

 

 

Net interest income

5.2 

%

(2.3)

%

Net income

13.6 

 

(6.0)

 

Economic value at risk:

 

 

 

 

Economic value of equity

(9.8)

 

(17.9)

 

Economic value of equity as a percent of total assets

(1.2)

 

(2.2)

 

 

Economic value has the most meaning when viewed within the context of risk-based capital.  Therefore, the economic value may normally change beyond the Company’s policy guideline for a short period of time as long as the risk-based capital ratio (after adjusting for the excess equity exposure) is greater than 10%.  At March 31, 2015, the Company’s risk-based capital ratio was 15.2%.

The table below summarizes estimated changes in net interest income over a twelve-month period beginning April 1, 2015, under alternate interest rate scenarios using the income simulation model described above:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest

 

$

 

%

(dollars in thousands)

income

 

variance

 

variance

Simulated change in interest rates

 

 

 

 

 

 

 

 

+200 basis points

$

24,378 

 

$

1,216 

 

5.2 

%

+100 basis points

 

23,696 

 

 

534 

 

2.3 

 

 Flat rate

 

23,162 

 

 

 -

 

 -

 

-100 basis points

 

22,896 

 

 

(266)

 

(1.1)

 

-200 basis points

 

22,621 

 

 

(541)

 

(2.3)

 

 

Simulation models require assumptions about certain categories of assets and liabilities.  The models schedule existing assets and liabilities by their contractual maturity, estimated likely call date or earliest re-pricing opportunity.  MBS – GSE residential securities and amortizing loans are scheduled based on their anticipated cash flow including estimated prepayments.  For investment securities, the Company uses a third-party service to provide cash flow estimates in the various rate environments.  Savings, money market and interest-bearing checking accounts do not have stated maturities or re-pricing terms and can be withdrawn or re-price at any time.  This may impact the margin if more expensive alternative sources of deposits are required to fund loans or deposit runoff.  Management projects the re-pricing characteristics of these accounts based on historical performance and assumptions that it believes reflect their rate sensitivity.  The model reinvests all maturities, repayments and prepayments for each type of asset or liability into the same product for a new like term at current product interest rates.  As a result, the mix of interest-earning assets and interest bearing-liabilities is held constant.

Liquidity

Liquidity management ensures that adequate funds will be available to meet customers’ needs for borrowings, deposit withdrawals and maturities, facility expansion and normal operating expenses.  Sources of liquidity are cash and cash equivalents, asset maturities and pay-downs within one year, loans HFS, investments AFS, growth of core deposits and repurchase agreements, utilization of borrowing capacities from the FHLB, correspondent banks, CDARs, the Discount Window of the Federal Reserve Bank of Philadelphia (FRB)  and proceeds from the issuance of capital stock.  Though regularly scheduled investment and loan payments are dependable sources of daily liquidity, sales of both loans HFS and investments AFS, deposit activity and investment and loan prepayments are significantly influenced by general economic conditions including the interest rate environment.  During low and declining interest rate environments, prepayments from interest-sensitive assets tend to accelerate and provide significant liquidity that can be used to invest in other interest-earning assets but at lower market rates.  Conversely, in periods of high or rising interest rates, prepayments from interest-sensitive assets tend to decelerate causing prepayment cash flows from mortgage loans and mortgage-backed securities to decrease.  Rising interest rates may also cause deposit inflow but priced at higher market interest rates or could also cause deposit outflow due to higher rates offered by the Company’s competition for similar products.  The Company closely

43


 

monitors activity in the capital markets and takes appropriate action to ensure that the liquidity levels are adequate for funding, investing and operating activities.

The Company’s contingency funding plan (CFP) sets a framework for handling liquidity issues in the event circumstances arise which the Company deems to be less than normal.  The Company established guidelines for identifying, measuring, monitoring and managing the resolution of potentially serious liquidity crises.  The CFP outlines required monitoring tools, acceptable alternative funding sources and required actions during various liquidity scenarios.  Thus, the Company has implemented a proactive means for the measurement and resolution for handling potentially significant adverse liquidity conditions.  At least quarterly, the CFP monitoring tools, current liquidity position and monthly projected liquidity sources and uses are presented and reviewed by the Company’s Asset/Liability Committee.  As of March 31, 2015, the Company had not experienced any adverse issues that would give rise to its inability to raise liquidity in an emergency situation.    

During the three months ended March 31, 2015, the Company used  $6.9 million of cash.  During the period, the Company’s operations provided approximately $2.2 million mostly from $6.0 million of net cash inflow from the components of net interest income; partially offset by net non-interest expense /income related payments of $3.6 million and a $0.2 million increase in the residual value from the Company’s automobile leasing activities.  Cash inflow from interest-earning assets, growth in deposits and short-term borrowings were used to fund loan growth, replace maturing and cash runoff of investment securities, reduce long- and short-term debt and net dividend payments.  The growth in the loan portfolio occurred in all sectors and the Company expects to continue growth in the loan portfolio sectors during 2015 funded by deposit growth.  The Company will use cash balances to grow the AFS investment portfolio.  The seasonal nature of deposits from municipalities and other public funding sources requires the Company to be prepared for the inherent volatility and the unpredictable timing of cash outflow from this customer base.  Accordingly, the use of short-term overnight borrowings could be used to fulfill funding gap needs.  The CFP is a tool to help the Company ensure that alternative funding sources are available to meet its liquidity needs.

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the financing needs of its customers and in connection with the overall interest rate management strategy.  These instruments involve, to a varying degree, elements of credit, interest rate and liquidity risk.  In accordance with GAAP, these instruments are either not recorded in the consolidated financial statements or are recorded in amounts that differ from the notional amounts.  Such instruments primarily include lending commitments and lease obligations.    

Lending commitments include commitments to originate loans and commitments to fund unused lines of credit.  Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

In addition to lending commitments, the Company has contractual obligations related to operating lease commitments.  Operating lease commitments are obligations under various non-cancelable operating leases on buildings and land used for office space and banking purposes. The Company’s position with respect to lending commitments and significant contractual lease obligations, both on a short- and long-term basis has not changed materially from December 31, 2014.  

As of March 31, 2015, the Company maintained $19.0 million in cash and cash equivalents and $127.6 million of investments AFS and loans HFS.  Also as of March 31 2015, the Company had approximately $182.7 million available to borrow from the FHLB, $21.0 million from correspondent banks, $29.0 million from the FRB and $35.1 million from the CDARS program.  The combined total of $414.4 million represented 59% of total assets at March 31, 2015.  Management believes this level of liquidity to be strong and adequate to support current operations.

Capital

During the three months ended March 31, 2015, total shareholders' equity increased $1.3 million, or 2%, due principally from the $1.6 million in net income added into retained earnings and to a lesser extent, the $0.2 million, after-tax improvement in the net unrealized gain position in the Company’s investment portfolio.  Capital was further enhanced by $0.1 million from investments in the Company’s common stock via the Employee Stock Purchase (ESPP) plan.  These items were partially offset by $0.6 million of cash dividends declared on the Company’s common stock.  The Company’s dividend payout ratio, defined as the rate at which current earnings is paid to shareholders, was 39% for the three months ended March 31, 2015.  The balance of earnings is retained to further strengthen the Company’s capital position.

As of March 31, 2015, the Company reported a net unrealized gain position of $2.9 million, net of tax, from the securities AFS portfolio compared to a net unrealized gain of $2.7 million as of December 31, 2014.  The improvement during 2015 was from all debt securities with agency securities contributing most to the increase.  Management believes that changes in fair value of the Company’s securities are due to changes in interest rates and not in the creditworthiness of the issuers.  Generally, when U.S. Treasury rates rise, investment securities’ pricing declines and fair values of investment securities also decline.  While volatility has existed in the yield curve within the past twelve months, a rising rate environment is inevitable and during the period of rising rates, the Company expects pricing in the bond portfolio to decline.  There is no assurance that future realized and unrealized losses will not be recognized from the Company’s portfolio of investment securities.  To help maintain a healthy capital position, the Company can issue stock to

44


 

participants in the DRP and ESPP plans.  The DRP affords the Company the option to acquire shares in open market purchases and/or issue shares directly from the Company to plan participants.  During 2015, the Company has acquired shares in open market purchases to fulfill the needs of the DRP.  Both the DRP and the ESPP plans have been a consistent source of capital from the Company’s loyal employees and shareholders and their participation in these plans will continue to help strengthen the Company’s balance sheet.  Beginning in 2009, the Company’s board of directors had allowed a benefit to its loyal shareholders as a discount on the purchase price for shares issued directly from the Company through the DRP and voluntary cash feature.  During the first quarter of 2014, the DRP was amended to discontinue a portion of the discount on the voluntary cash feature as the board of directors had determined that the Company’s capital position achieved sufficient levels.    

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.  The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors.  Prompt corrective action provisions are not applicable to bank holding companies.

Under these guidelines, assets and certain off-balance sheet items are assigned to broad risk categories, each with appropriate weights.  The resulting ratios represent capital as a percentage of total risk-weighted assets.  In July 2013, the federal bank regulatory agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.  Under the final rules, which became effective for the Company on January 1, 2015 and are subject to a phase-in period through January 1, 2019, minimum requirements will increase for both the quantity and quality of capital held by the Company. The rules require all banks and bank holding companies to maintain a new common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, raise the minimum ratio of Tier 1 capital to risk-weighted assets (Tier I capital) from 4.0% to 6.0%, require a minimum ratio of total risk-based capital to total risk-weighted assets (Total Risk Based Capital) of 8.0%, and require a minimum Tier I capital to average total assets (Leverage Ratio) of 4.0%. A new capital conservation buffer, comprised of common equity Tier I capital, is also established above the regulatory minimum capital requirements. The rule increases the minimum Tier 1 capital to risk-based assets requirement with a capital conservation buffer to 8.5% by 2019 and increases the minimum total capital requirement with a capital conservation buffer to 10.5% by 2019 and assigns higher risk-weightings to certain assets: certain past due and commercial real estate loans and some equity exposures.  As of March 31, 2015, the Company and the Bank exceeded all capital adequacy requirements to which it was subject.

The new rules also include a one-time opportunity to opt-out of the changes to treatment of accumulated other comprehensive income (“AOCI”) components. By making the election to opt-out, the institution may continue treating AOCI items in a manner consistent with risk-based capital rules in place prior to January 2015. The permanent opt-out election must be made on the Call Report for the first reporting period after January 1, 2015 and a parent holding company must make the same election as its subsidiary bank. If the institution does not elect to opt-out, the institution will not have an opportunity to change its methodology in future periods. The Company has made the election to opt out of the treatment of AOCI on the appropriate March 31, 2015 filings.

45


 

The Company continues to closely monitor and evaluate alternatives to enhance its capital ratios as the regulatory and economic environments change.  The following table depicts the capital amounts and ratios of the Company and the Bank as of March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

To be well capitalized

 

 

 

 

 

For capital

under prompt corrective

 

Actual

adequacy purposes

action provisions

(dollars in thousands)

Amount

 

Ratio

Amount

Ratio

Amount

Ratio

As of March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

$

77,130 

 

15.2% 

≥  

$

40,622 

≥  

8.0% 

 

 

N/A

 

N/A

Bank

$

76,601 

 

15.1% 

≥  

$

40,613 

≥  

8.0% 

≥  

$

50,766 

10.0% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 common equity (to risk-weighted assets)*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

$

70,625 

 

13.9%

≥  

$

22,850 

≥  

4.5% 

 

 

N/A

 

N/A

Bank

$

70,218 

 

13.8%

≥  

$

22,845 

≥  

4.5% 

 

32,998 

6.5% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

$

70,625 

 

13.9% 

≥  

$

41,902 

≥  

6.0% 

 

 

N/A

 

N/A

Bank

$

70,218 

 

13.8% 

≥  

$

41,902 

≥  

6.0% 

$

55,870 

8.0% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I capital (to average assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

$

70,625 

 

10.1% 

$

27,935 

4.0% 

 

 

N/A

 

N/A

Bank

$

70,218 

 

10.1% 

$

27,935 

4.0% 

$

34,919 

5.0% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*New ratio per Basel III.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

$

75,756 

 

15.3% 

≥  

$

39,730 

≥  

8.0% 

 

 

N/A

 

N/A

Bank

$

75,230 

 

15.2% 

≥  

$

39,728 

≥  

8.0% 

≥  

$

49,660 

10.0% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

$

69,376 

 

14.0% 

≥  

$

19,865 

≥  

4.0% 

 

 

N/A

 

N/A

Bank

$

68,985 

 

13.9% 

≥  

$

19,864 

≥  

4.0% 

$

29,796 

6.0% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I capital (to average assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

$

69,376 

 

10.0% 

$

27,679 

4.0% 

 

 

N/A

 

N/A

Bank

$

68,985 

 

10.0% 

$

27,658 

4.0% 

$

34,573 

5.0% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The new guidelines had no material effect between ratios reported at December 31, 2014 and those reported at March 31, 2015.

The Company advises readers to refer to the Supervision and Regulation section of Management’s Discussion and Analysis of Financial Condition and Results of Operation, of its 2014 Form 10-K for a discussion on the regulatory environment and recent legislation and rulemaking.

Item 4.  Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out by the Company’s management, with the participation of its President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934.  Based on such evaluation, the President and Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports the Company files or furnishes under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations, and are effective.  The Company made no changes in its internal controls over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect, these controls during the last fiscal quarter ended March 31, 2015.

46


 

PART II - Other Information

Item 1.  Legal Proceedings

The nature of the Company’s business generates some litigation involving matters arising in the ordinary course of business.  However, in the opinion of the Company after consultation with legal counsel, no legal proceedings are pending, which, if determined adversely to the Company or the Bank, would have a material adverse effect on the Company’s undivided profits or financial condition.  No legal proceedings are pending other than ordinary routine litigation incidental to the business of the Company and the Bank.  In addition, to management’s knowledge, no governmental authorities have initiated or contemplated any material legal actions against the Company or the Bank.

Item 1A.  Risk Factors

Management of the Company does not believe there have been any material changes to the risk factors that were disclosed in the 2014 Form 10-K filed with the Securities and Exchange Commission on March 17, 2015.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

                        None

Item 3.  Default Upon Senior Securities

None                                                                                               

Item 4.  Mine Safety Disclosures

                       Not applicable                                                                                               

Item 5.  Other Information

                       None                                                                                               

Item 6.  Exhibits

The following exhibits are filed herewith or incorporated by reference as a part of this Form 10-Q:

3(i) Amended and Restated Articles of Incorporation of Registrant. Incorporated by reference to Annex B of the Proxy Statement/Prospectus included in Registrant’s Amendment 4 to its Registration Statement No. 333-90273 on Form S-4, filed with the SEC on April 6, 2000.

3(ii) Amended and Restated Bylaws of Registrant. Incorporated by reference to Exhibit 3(ii) to Registrant’s Form 8-K filed with the SEC on November 21, 2007.

*10.1 Registrant’s 2012 Dividend Reinvestment and Stock Repurchase Plan.  Incorporated by reference to Exhibit 4.1 to Registrant’s Registration Statement No. 333-183216 on Form S-3 filed with the SEC on August 10, 2012 as amended February 3, 2014.

*10.2 Registrant’s 2000 Independent Directors Stock Option Plan.  Incorporated by reference to Exhibit 4.3 to Registrant’s Registration Statement No. 333-64356 on Form S-8 filed with the SEC on July 2, 2001.

*10.3 Amendment, dated October 2, 2007, to the Registrant’s 2000 Independent Directors Stock Option Plan.  Incorporated by reference to Exhibit 10.2 to Registrant’s Form 8-K filed with the SEC on October 4, 2007.

*10.4 Registrant’s 2000 Stock Incentive Plan.  Incorporated by reference to Exhibit 4.4 to Registrant’s Registration Statement No. 333-64356 on Form S-8 filed with the SEC on July 2, 2001.

*10.5 Amendment, dated October 2, 2007, to the Registrant’s 2000 Stock Incentive Plan.  Incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K filed with the SEC on October 4, 2007.

*10.6 Registrant’s 2002 Employee Stock Purchase Plan.  Incorporated by reference to Appendix A to Definitive proxy Statement filed with the SEC on March 28, 2002.

*10.7 Change of Control Agreement with Salvatore R. DeFrancesco, the Registrant and The Fidelity Deposit and Discount Bank, dated March 21, 2006.  Incorporated by reference to Exhibit 99.2 to Registrant’s Current Report on Form 8-K filed with the SEC on March 27, 2006.

*10.8 Amended and Restated Executive Employment Agreement between the Registrant, The Fidelity Deposit and Discount Bank and Daniel J. Santaniello, dated March 23, 2011.    Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the SEC on March 29, 2011.

*10.9 Amended and Restated Executive Employment Agreement between the Registrant, The Fidelity Deposit and Discount Bank and Timothy P. O’Brien, dated March 23, 2011.  Incorporated by reference to Exhibit 99.2 to Registrant’s Current Report on Form 8-K filed with the SEC on March 29, 2011.

*10.10 2012 Omnibus Stock Incentive Plan.  Incorporated by reference to Appendix A to Registrant’s Definitive Proxy Statement filed with the SEC on March 30, 2012.

47


 

*10.11 2012 Director Stock Incentive Plan.  Incorporated by reference to Appendix B to Registrant’s Definitive Proxy Statement filed with the SEC on March 30, 2012.

11 Statement regarding computation of earnings per share.  Included herein in Note No. 6, “Earnings per share,” contained within the Notes to Consolidated Financial Statements, and incorporated herein by reference.

31.1 Rule 13a-14(a) Certification of Principal Executive Officer, filed herewith.

31.2 Rule 13a-14(a) Certification of Principal Financial Officer, filed herewith.

32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350,

  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350,

  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

101 Interactive data files: The following, from Fidelity D&D Bancorp, Inc.’s. Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, is formatted in XBRL (eXtensible Business Reporting Language): Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014;  Consolidated Statements of Income for the three months ended March 31, 2015 and 2014; Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and 2014; Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2015 and 2014; Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 and the Notes to the Consolidated Financial Statements.

________________________________________________

   *   Management contract or compensatory plan or arrangement.

48


 

 

Signatures

 

 

FIDELITY D & D BANCORP, INC.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

Fidelity D & D Bancorp, Inc.

 

 

Date: May 13, 2015

/s/Daniel J. Santaniello

 

    Daniel J. Santaniello,

    President and Chief Executive Officer

 

 

 

Fidelity D & D Bancorp, Inc.

 

 

Date: May 13, 2015

/s/Salvatore R. DeFrancesco, Jr.

 

     Salvatore R. DeFrancesco, Jr.,

     Treasurer and Chief Financial Officer

 

 

 

49


 

EXHIBIT INDEX

 

 

 

 

3(i) Amended and Restated Articles of Incorporation of Registrant. Incorporated by reference to Annex B of the Proxy Statement/Prospectus included in Registrant’s Amendment 4 to its Registration Statement No. 333-90273 on Form S-4, filed with the SEC on April 6, 2000.

 

 

*

3(ii) Amended and Restated Bylaws of Registrant. Incorporated by reference to Exhibit 3(ii) to Registrant’s Form 8-K filed with the SEC on November 21, 2007.

 

*

 

 

10.1 Registrant’s Dividend Reinvestment and Stock Repurchase Plan.  Incorporated by reference to Exhibit 4.1 to Registrant’s Registration Statement No. 333-183216 on Form S-3 filed with the SEC on August 10, 2012 as amended February 3, 2014.

 

 

*

 

 

10.2 Registrant’s 2000 Independent Directors Stock Option Plan.  Incorporated by reference to Exhibit 4.3 to Registrant’s Registration Statement No. 333-64356 on Form S-8 filed with the SEC on July 2, 2001.

 

*

 

 

10.3 Amendment, dated October 2, 2007, to the Registrant’s 2000 Independent Directors Stock Option Plan.  Incorporated by reference to Exhibit 10.2 to Registrant’s Form 8-K filed with the SEC on October 4, 2007.

 

*

 

 

10.4 Registrant’s 2000 Stock Incentive Plan.  Incorporated by reference to Exhibit 4.4 to Registrant’s Registration Statement No. 333-64356 on Form S-8 filed with the SEC on July 2, 2001.

 

*

 

 

10.5 Amendment, dated October 2, 2007, to the Registrant’s 2000 Stock Incentive Plan.  Incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K filed with the SEC on October 4, 2007.

 

*

 

 

10.6 Registrant’s 2002 Employee Stock Purchase Plan. Incorporated by reference to Appendix A to Registrant’s Definitive Proxy Statement filed with the SEC on March 28, 2002.

 

*

 

 

10.7 Change of Control Agreement with Salvatore R. DeFrancesco, the Registrant and The Fidelity Deposit and Discount Bank, dated March 21, 2006.  Incorporated by reference to Exhibit 99.2 to Registrant’s Current Report on Form 8-K filed with the SEC on March 27, 2006.

 

 

*

 

 

10.8 Amended and Restated Executive Employment Agreement between the Registrant, The Fidelity Deposit and Discount Bank and Daniel J. Santaniello, dated March 23, 2011.    Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the SEC on March 29, 2011.

 

 

*

 

 

10.9 Amended and Restated Executive Employment Agreement between the Registrant, The Fidelity Deposit and Discount Bank and Timothy P. O’Brien, dated March 23, 2011.  Incorporated by reference to Exhibit 99.2 to Registrant’s Current Report on Form 8-K filed with the SEC on March 29, 2011.

 

 

*

 

 

10.10 2012 Omnibus Stock Incentive Plan.  Incorporated by reference to Appendix A to Registrant’s Definitive Proxy Statement filed with the SEC on March 30, 2012.

 

*

 

 

10.11 2012 Director Stock Incentive Plan.  Incorporated by reference to Appendix B to Registrant’s Definitive Proxy Statement filed with the SEC on March 30, 2012.

 

*

 

 

11 Statement regarding computation of earnings per share.

21

 

 

31.1 Rule 13a-14(a) Certification of Principal Executive Officer, filed herewith.

 

 

 

31.2 Rule 13a-14(a) Certification of Principal Financial Officer, filed herewith.

 

 

 

32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

 

 

 

 

50


 

 

 

32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

 

 

101 Interactive data files: The following, from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, is formatted in XBRL (eXtensible Business Reporting Language): Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014;  Consolidated Statements of Income for the three months ended March 31, 2015 and 2014; Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and 2014; Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2015 and 2014; Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 and the Notes to the Consolidated Financial Statements. **


* Incorporated by Reference

** Pursuant to Rule 406T of Regulation S-T, the interactive data files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. 

51