UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20142017
or
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¨ | 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: 001-34292
ORRSTOWN FINANCIAL SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
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Pennsylvania (State or Other Jurisdiction of Incorporation or Organization) | | 23-2530374 (I.R.S. Employer Identification No.) |
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77 East King Street, P. O. Box 250, Shippensburg, Pennsylvania (Address of Principal Executive Offices) | | 17257 (Zip Code) |
Registrant’s Telephone Number, Including Area Code: (717) 532-6114
Securities registered pursuant to Section 12(b) of the Act:
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| Title of Each Class | | Name of Each Exchange on Which Registered |
| Common Stock, No Par Value | | The NASDAQ Capital Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website,Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232,405232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨x
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 “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. |
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| Large accelerated filer | | ¨ | | Accelerated filer | | x |
| Non-accelerated filer | | ¨ (Do not check if a smaller reporting company) | | Smaller reporting company | | ¨ |
| | | | Emerging growth company | | ¨ |
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.). Yes ¨ No x
The aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the common stock was last sold as of the last business day of the Registrant’s most recently completed second fiscal quarter, was approximately $113$180.9 million. For purposes of this calculation, the term “affiliate” refers to all directors and executive officers of the registrant, and all persons beneficially owning more than 5% of the registrant’s common stock.
Number of shares outstanding of the registrant’s Common Stockcommon stock as of March 2, 2015: 8,291,683.February 28, 2018: 8,412,247.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 20152018 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K.
ORRSTOWN FINANCIAL SERVICES, INC.
FORM 10-K
INDEX
Glossary of Defined Terms
The following terms may be used throughout this Report, including the consolidated financial statements and related notes.
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| Term | Definition |
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| ALL | Allowance for loan losses |
| AFS | Available for sale |
| AOCI | Accumulated other comprehensive income (loss) |
| ASC | Accounting Standards Codification |
| ASU | Accounting Standards Update |
| Bank | Orrstown Bank, the commercial banking subsidiary of Orrstown Financial Services, Inc. |
| CET1 | Common Equity Tier 1 |
| CMO | Collateralized mortgage obligation |
| Company | Orrstown Financial Services, Inc. and subsidiaries (interchangeable with "Orrstown” below) |
| EPS | Earnings per common share |
| ERM | Enterprise risk management |
| Exchange Act | Securities Exchange Act of 1934, as amended |
| FASB | Financial Accounting Standards Board |
| FDIC | Federal Deposit Insurance Corporation |
| FHLB | Federal Home Loan Bank |
| FRB | Board of Governors of the Federal Reserve System |
| GAAP | Accounting principles generally accepted in the United States of America |
| GSE | United States government-sponsored enterprise |
| IRC | Internal Revenue Code of 1986, as amended |
| LHFS | Loans held for sale |
| MBS | Mortgage-backed securities |
| MPF Program | Mortgage Partnership Finance Program |
| MSR | Mortgage servicing right |
| NIM | Net interest margin |
| OCI | Other comprehensive income (loss) |
| OFA | Orrstown Financial Advisors, a division of the Bank that provides investment and brokerage services |
| OREO | Other real estate owned (foreclosed real estate) |
| Orrstown | Orrstown Financial Services, Inc. and subsidiaries |
| OTTI | Other-than-temporary impairment |
| Parent Company | Orrstown Financial Services, Inc., the parent company of Orrstown Bank and Wheatland Advisors, Inc. |
| 2011 Plan | 2011 Orrstown Financial Services, Inc. Incentive Stock Plan |
| Repurchase Agreements | Securities sold under agreements to repurchase |
| SEC | Securities and Exchange Commission |
| Securities Act | Securities Act of 1933, as amended |
| TDR | Troubled debt restructuring |
| U.S. | United States of America |
| Wheatland | Wheatland Advisors, Inc., the Registered Investment Advisor subsidiary of Orrstown Financial Services, Inc. |
| Unless the context otherwise requires, the terms “Orrstown,” “we,” “us,” “our,” and “Company” refer to Orrstown Financial Services, Inc. and its subsidiaries. |
PART I
Forward-Looking Statements:
From time to time, Orrstown has made and may continue to make written or oral forward-looking statements regarding our outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels, asset quality, financial position and other matters regarding or affecting Orrstown and its future business and operations or the impact of legal, regulatory or supervisory matters on our business operations or performance. This Annual Report on Form 10-K also includes forward-looking statements. With respect to all such forward-looking statements, you should review our Risk Factors discussion in Item 1A, our Critical Accounting Policies and Cautionary Statement About Forward-Looking Statements sections included in Item 7, and Note 19, Contingencies, in the Notes To Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. We encourage readers of this report to understand forward-looking statements to be strategic objectives rather than absolute targets of future performance. Forward-looking statements speak only as of the date they are made. We do not intend to update publicly any forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.
ITEM 1 – BUSINESS
Orrstown Financial Services, Inc. (the “Company”), a Pennsylvania corporation, is the holding company for its wholly-owned subsidiaries Orrstown Bank (the “Bank”).and Wheatland Advisors, Inc. The Company’s principal executive offices are located at 77 East King Street, Shippensburg, Pennsylvania, 17257.17257, with additional executive and administrative offices at 4750 Lindle Road, Harrisburg, Pennsylvania, 17111. The Parent Company was organized on November 17, 1987, for the purpose of acquiring the Bank and such other banks and bank relatedbank-related activities as are permitted by law and desirable. The BankCompany provides banking and bank relatedbank-related services through 22 offices,branches located in South Centralsouth central Pennsylvania, principally in Berks, Cumberland, Dauphin, Franklin, Lancaster, and Perry Counties and in Washington County, Maryland. Wheatland was acquired in December 2016 and provides services as a registered investment advisor through its office in Lancaster County, Pennsylvania.
The Company files periodic reports with the Securities and Exchange Commission (“SEC”)SEC in the form of quarterly reports on Form 10-Q, annual reports on Form 10-K, annual proxy statements and current reports on Form 8-K for any significant events that may arise during the year. Copies of these reports, and any amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), may be obtained free of charge through the SEC’s internetInternet site at www.sec.gov or by accessing the Company’s website at www.orrstown.com as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Information on our website shall not be considered a part of this Annual Report on Form 10-K.
Business
The Bank was originally organized in 1919 as a state-chartered bank. On March 8, 1988, in a bank holding company reorganization transaction, the Parent Company acquired 100% ownership of the Bank, issuing 131,455 shares of the Company’s common stock to the former shareholders of the Bank.
The Parent Company’s primary activity consists of owning and supervising its subsidiary,subsidiaries, the Bank. The day-to-dayBank and Wheatland. Day-to-day management of the Company is conducted by its officers, who are also Bank officers. The Parent Company has historically derived most of its income through dividends from the Bank, however, the Bank is prohibited from paying such dividends under an existing enforcement agreement (as more fully discussed below). As ofBank. At December 31, 2014,2017, the Company on a consolidated basis, had total assets of $1,190,443,000,$1,558,849,000, total shareholders’ equity of $127,265,000$144,765,000 and total deposits of $949,704,000.$1,219,515,000.
The Parent Company has no employees. Its sevennine officers are employees of the Bank. On December 31, 2014,2017, the Bank and Wheatland combined had 296321 full-time and 1617 part-time employees.
The Bank is engaged in commercial banking and trust business as authorized by the Pennsylvania Banking Code of 1965. This involves accepting demand, time and savings deposits, and granting loans. The Bank grantsholds commercial, residential, consumer and agribusiness loans primarily in its market areas of Cumberland, Dauphin, Franklin, Lancaster and Perry Counties in PennsylvaniaPennsylvania; Washington County, Maryland; and in Washington County, Maryland.contiguous counties. The concentrations of credit by type of loan are set forthincluded in Note 4, “Loans ReceivableLoans and Allowance for Loan Losses” filed herewith inLosses, to the Consolidated Financial Statements under Part II, Item 8, “Financial"Financial Statements and Supplementary Data.”" The Bank maintains a diversified loan portfolio and evaluates each customer’s credit-worthinesscreditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon the extension of credit, is based on management’s credit evaluation of the customer pursuant to collateral standards established in the Bank’s credit policies and procedures.
Wheatland was acquired to supplement the Bank's trust and wealth management group and to provide opportunities for future growth in these areas.
Lending
All secured loans are supported with appraisals or evaluations of collateral. Business equipment and machinery, inventories, accounts receivable, and farm equipment are considered appropriate security, provided they meet acceptable standards for liquidity and marketability. Loans secured by real estate generally do not exceed 90% of the appraised value of the property. Loan to collateral values are monitored as part of the loan review process, and appraisals are updated as deemed appropriate under the circumstances.
Commercial Lending
A majority of the Company’s loan assets are loans for business purpose.purposes. Approximately 65%63% of the loan portfolio is comprised of commercial loans. The Bank makes commercial real estate, equipment, working capital and other commercial purpose loans as required by the broad range of borrowers across the Bank’s various markets.
The Bank’s credit policy dictates the underwriting requirements for the various types of loans the Bank would extend to borrowers. The policy covers such requirements as debt coverage ratios, advance rate against different forms of collateral, loan-to-value ratioratios (“LTV”) and maximum term.
Consumer Lending
The Bank provides home equity loans, home equity lines of credit and other consumer loans primarily through its branch network.network and customer call center. A large majority of the consumer loans are secured by either a first or second lien position on the borrower’s primary residential real estate. The Bank requires a LTV of no greater than 90% of the value of the real estate being taken as collateral. The Bank’s underwriting standards typically require that a borrower’s debtWe also, at times, purchase consumer loans to income ratio generally cannot exceed 43%.help diversify credit risk in our loan portfolio.
Residential Lending
The Bank provides residential mortgages throughout its various markets through a network of mortgage loan officers. A majority of the residential mortgages originated are sold to secondary market investors, primarily Wells Fargo, Fannie Mae and the Federal Home Loan BankFHLB of Pittsburgh. All mortgages, regardless of being sold or held in the Bank’s portfolio, are generally underwritten to secondary market industry standards for prime mortgages. The Bank generally requires aan LTV of no greater than 80% of the value of the real estate being taken as collateral, without the borrower obtaining private mortgage insurance.
Loan Review
The Bank has a loan review policy and program which is designed to identify and mitigatemonitor risk in the lending function. The Enterprise Risk Management (“ERM”)ERM Committee, comprised of executive officers and loan department personnel, is charged with the oversight of overall credit quality and risk exposure of the Bank’s loan portfolio. This includes the monitoring of the lending activities of all Bank personnel with respect to underwriting and processing new loans and the timely follow-up and corrective action for loans showing signs of deterioration in quality. The loan review program provides the Bank with an independent review of the Bank’s loan portfolio on an ongoing basis. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as extended delinquencies, bankruptcy, repossession, or death of the borrower occurs, which heightens awareness as to a possible negative credit event.
Internal loan reviews are completed annually on all commercial relationships with a committed loan balance in excess of $1,000,000,$500,000, which include aincludes confirmation of the risk rating by Credit Administration.an independent credit officer. In addition, all relationships greater than $250,000 rated Substandard, Doubtful or Loss are reviewed quarterly and corresponding risk ratings are reaffirmed by the ERMBank's Problem Loan Committee, on a quarterly basis, with reaffirmation ofsubsequent reporting to the rating as approved by the Bank’s Loan Work OutERM Committee.
The Bank outsources its independent loan review to a third partythird-party provider, which monitors and evaluates loan customers on a quarterly basis utilizing risk-rating criteria established in the credit policy in order to identify deteriorating trends and detect conditions which might indicate potential problem loans. The third partythird-party loan review firm reports the results of the loan reviews quarterly to the ERM Committee for approval. The loan ratings provide the basis for evaluating the adequacy of the allowance for loan losses.ALL.
Orrstown Financial Advisors (“OFA”)
Investment Services
Through its trust department, the Bank renders services as trustee, executor, administrator, guardian, managing agent, custodian, investment advisor, and other fiduciary activities authorized by law under the trade name “Orrstown"Orrstown Financial Advisors.”" OFA offers retail brokerage services through a third partythird-party broker/dealer arrangement with Financial Network Investment Company (“FNIC”). As ofCetera Advisor Networks LLC. Wheatland also offers investment advisor services as a registered investment advisor. At December 31, 2014, trust2017, assets under management were $1,017,013,000.by OFA and Wheatland totaled $1,370,950,000.
Regulation and Supervision
The Parent Company is a bank holding company registered with the Board of Governors of the Federal Reserve System (the “FRB”)FRB and has elected status as a financial holding company.company ("FHC"). As a registered bank holding company and financial holding company,FHC, the Company is subject to regulation under the Bank Holding Company Act of 1956 (the “BHC Act”) and to inspection, examination, and supervision by the Federal Reserve Bank of Philadelphia (the “Federal(“Federal Reserve Bank”).
The Bank is a Pennsylvania-chartered commercial bank and a member of the Federal Reserve System. As such, theFRB. The operations of the Bank are subject to federal and state statutes applicable to banks chartered under Pennsylvania law, to FRB member banks and to banks whose deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”).FDIC. The Bank’s operations are also subject to regulations of the Pennsylvania Department of Banking and Securities, (“PDB”), the FRB and the FDIC.
Wheatland is subject to periodic examination by the SEC.
Several of the more significant regulatory provisions applicable to banks and bank holding companies and banks to which the Company and the Bank are subject are discussed below, along with certain regulatory matters concerning the Company and the Bank. To the extent that the following information describes statutory or regulatory provisions, such information is qualified in
its entirety by reference to the particular statutes or regulations. Any change in applicable law or regulation may have a material effect on the business and prospects of the Company and the Bank.
Enforcement
On March 22, 2012, the Company and the Bank entered into a Written Agreement with the Federal Reserve Bank and the Bank entered into a Consent Order with the PDB. The Consent Order with the PDB was subsequently terminated in April 2014, and replaced with a Memorandum of Understanding ("MOU"). On February 6, 2015, the Bank was released from the MOU, thereby terminating all enforcement actions imposed on the Bank by the PDB.
Pursuant to the Written Agreement, the Company and the Bank agreed to, among other things: (i) adopt and implement a plan, acceptable to the Federal Reserve Bank, to strengthen oversight of management and operations; (ii) adopt and implement a plan, acceptable to the Federal Reserve Bank, to reduce the Bank’s interest in criticized and classified assets; (iii) adopt a plan, acceptable to the Federal Reserve Bank, to strengthen the Bank’s credit risk management practices; (iv) adopt and implement a program, acceptable to the Federal Reserve Bank, for the maintenance of an adequate allowance for loan and lease losses; (v) adopt and implement a written plan, acceptable to the Federal Reserve Bank, to maintain sufficient capital on a consolidated basis for the Company and on a stand-alone basis for the Bank; and (vi) revise the Bank’s loan underwriting and credit administration policies. The Bank and the Company also agreed not to declare or pay any dividend without prior approval from the Federal Reserve Bank, and the Company agreed not to incur or increase debt or to redeem any outstanding shares without prior Federal Reserve Bank approval.
The Company and the Bank have developed and continues to implement strategies and action plans to meet the requirements of the Written Agreement. As part of its efforts on complying with the terms of the Written Agreement, the Bank has filed a capital plan with the Federal Reserve Bank.
The Written Agreement will continue until terminated by the Federal Reserve Bank. The foregoing description of the Written Agreement is qualified in its entirety by reference to the actual agreement which is attached as Exhibit 10.13, and incorporated herein by this reference.
Additional regulatory restrictions require prior approval before appointing or changing the responsibilities of directors and executive officers, entering into any employment agreement or other agreement or plan providing for the payment of a “golden parachute payment” or the making of any golden parachute payment.
Financial and Bank Holding Company Activities
As an FHC, we are permitted to engage, directly or through subsidiaries, in a wide variety of activities that are financial in nature or are incidental or complementary to a financial activity, in addition to all of the activities otherwise allowed to us.
As an FHC, the Company is generally subject to the same regulation as other bank holding companies, including the reporting, examination, supervision and consolidated capital requirements of the FRB. To preserve our FHC status, we must remain well-capitalized and well-managed and ensure that the Bank remains well-capitalized and well-managed for regulatory purposes and earns “satisfactory” or better ratings on its periodic Community Reinvestment Act (“CRA”) examinations. An FHC ceasing to meet these standards is subject to a variety of restrictions, depending on the circumstances.
If the Parent Company or the Bank are either not well-capitalized or not well-managed, the Parent Company or the Bank must promptly notify the FRB. Until compliance is restored, the FRB has broad discretion to impose appropriate limitations on an FHC’s activities. If compliance is not restored within 180 days, the FRB may ultimately require the FHC to divest its depository institutions or in the alternative, to discontinue or divest any activities that are permitted only to non-FHC bank holding companies.
If the FRB determines that an FHC or its subsidiaries do not satisfy the CRA requirements, the potential restrictions are different. In general,that case, until all the subsidiary institutions are restored to at least “satisfactory” CRA rating status, the FHC may not engage, directly or through a subsidiary, in any of the additional activities permissible under the BHC Act and the FRB’s regulations limit the nonbanking activities permissible for bank holding companies to those activities that the FRB has determined to be so closely related to banking or managing or controlling banks to be a proper incident thereto. A bank holding company that elects to be treated as a financial holding company, such as the Company, however, may engage in, and acquirenor make additional acquisitions of companies engaged in the additional activities. However, completed acquisitions and additional activities thatand affiliations previously begun are considered “financialleft undisturbed, as the BHC Act does not require divestiture for this type of situation.
Federal Financial Regulatory Reform
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted in nature,” as defined by2010, substantially increased regulatory oversight and enforcement and imposed additional costs and risks on the Gramm-Leach-Bliley Act and FRB regulations. For a bank holding company to be eligible to elect financial holding company status, the holding company must be both “well capitalized” or “well managed” under applicable regulatory standards and alloperations of its subsidiary banks must be “well-capitalized” and “well-managed” and must have received at least a satisfactory rating on such institution’s most recent examination under the Community Reinvestment Act of 1977 (the “CRA”). A financial holding company that continues to meet all of such requirements may engage directly or indirectly in activities considered financial in nature, either de novo or by acquisition, as long as it gives the FRB after-the-fact notice of the new activities. If a financial holding company fails to continue to meet any of the prerequisites for financial holding company status after engaging in activities not permissible for bank holding companies that have not elected to be treated as financial holding companies and banks.
The Dodd-Frank Act materially changed the company must enter into an agreement with the FRB that it will comply with all applicable capitalregulation of financial institutions and management requirements. If the financial holding company does not return to compliance within 180 days, or such longer period as agreed to byservices industry and created a framework for regulatory reform. The Dodd-Frank Act and the FRB,regulations thereunder, some of which are still being drafted and implemented,include provisions affecting large and small financial institutions alike, including several provisions that affect the FRB may order the company to discontinue existing activities that are not generally permissible forregulation of community banks and bank holding companies or divest the company’s investments in companies engaged in such activities. In addition, if any banking subsidiary of a financial holding company receives a CRA rating of less than satisfactory, the company would be prohibited from engaging in any additional activities other than those permissible for bank holding companies that are not financial holding companies.
The Dodd-Frank Act, among other things, imposed new capital requirements on bank holding companies; changed the base for FDIC Insuranceinsurance assessments to a bank’s average consolidated total assets minus average tangible equity, rather than upon its deposit base; permanently raised the current standard deposit insurance limit to $250,000; and Assessmentsexpanded the FDIC’s authority to raise insurance premiums. The legislation also called for the FDIC to raise its ratio of reserves to deposits from 1.15% to 1.35% for deposit insurance purposes by September 30, 2020 and to “offset the effect” of increased assessments on insured depository institutions with assets of less than $10 billion.
The Dodd-Frank Act also included provisions that affect corporate governance and executive compensation at all publicly-traded companies and allows financial institutions to pay interest on business checking accounts. The legislation also restricts proprietary trading by banking organizations, places restrictions on the owning or sponsoring of hedge and private equity funds, and regulates the derivatives activities of banks and their affiliates. The Dodd-Frank Act established the Financial Stability Oversight Council to identify threats to the financial stability of the U.S., promote market discipline, and respond to emerging threats to the stability of the U.S. financial system.
The Dodd-Frank Act also established the Consumer Financial Protection Bureau (the "CFPB") as an independent entity funded by the FRB. The CFPB has broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans and credit cards. The CFPB’s rules contain provisions on mortgage-related matters such as steering incentives, and determinations as to a borrower’s ability to repay, loan servicing, and prepayment penalties. The CFPB has primary examination and enforcement authority over banks with over $10 billion in assets as to consumer financial products.
One of the announced goals of the CFPB is to bring greater consumer protection to the mortgage servicing market. The CFPB has defined a “qualified mortgage” for purposes of the Dodd-Frank Act, and set standards for mortgage lenders to determine whether a consumer has the ability to repay the mortgage. It has also issued regulations affording safe harbor legal protections for lenders making qualified loans that are not “higher priced.” The CFPB's regulations contain new mortgage servicing rules applicable to the Bank, which took effect in 2014. Changes affect notices to be given to consumers as to delinquency, foreclosure alternatives, modification applications, interest rate adjustments and options for avoiding “force-placed” insurance. Servicers are prohibited from processing foreclosures when a loan modification is pending, and must wait until a loan is more than 120 days delinquent before initiating a foreclosure action.
The servicer must provide direct and ongoing access to its personnel, and provide prompt review of any loss mitigation application. Servicers must maintain accurate and accessible mortgage records for the life of a loan and until one year after the loan is paid off or transferred.
The Bank presently services 5,000 or fewer mortgage loans which it owns or originated, so it is considered a “Small Servicer” and is exempt from certain parts of the mortgage servicing rules. The mortgage servicing requirements applicable to the Bank’s servicing operations under the new mortgage servicing rules are: adjustable rate mortgage interest rate adjustment notices; prompt payment crediting and payoff statements; limits on force-placed insurance; responses to written information requests and complaints of errors; and loss mitigation with regard to the first notice or filing for a foreclosure and no foreclosure proceedings if a borrower is performing pursuant to the terms of a loss mitigation agreement.
Federal Deposit Insurance
The Bank’s deposits are insured to applicable limits by the FDIC. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), theThe maximum deposit insurance amount was permanently increased from $100,000 to $250,000.is $250,000 under the Dodd-Frank Act.
The FDIC has adoptedis required by the Dodd-Frank Act to return its insurance reserve ratio to 1.35% no later than September 30, 2020. Once the fund reaches 1.15%, banks larger than $10 billion in assets will be required to assume the burden of bringing the fund to 1.35%.
On June 30, 2016, the Federal Deposit Insurance Fund reached the 1.15% ratio. As required by the Dodd-Frank Act, the FDIC changed its calculation of FDIC insurance premiums. Institutions are now assigned a risk-based premium system that provides for quarterly assessments based on an insured institution’s ranking in one of four risk categories based onbase rate using their examination ratings, and capital ratios. Within its risk category, an institution is assigned an initial base assessment which is then adjusted to determine its final assessment rate based on their leverage ratio, net income before taxes to total assets ratio, nonperforming loans and leases to gross assets ratio, other real estate owned to gross assets ratio, loan mix index, and one-year asset growth rate. The result is then further adjusted to reflect its level of unsecured debt issued, the level of unsecured depository institution debt it owns, and the level of brokered deposits secured liabilities and unsecured debt.(excluding reciprocal deposits) it has issued above regulatory minimums.
The Dodd-Frank Act required the FDIC to take such steps as necessary to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by 2020. In setting the assessments,If the FDIC is required to offset the effect of the higher reserve ratio against insured depository institutions with total consolidated assets of less than $10 billion. The Dodd-Frank Act also broadened the base for FDIC insurance assessments so that assessments will be based on the average consolidated total assets less average tangible equity capitalappointed conservator or receiver of a financial institution rather than on its insured deposits. The FDIC has adopted a restoration plan to increasebank upon the reserve ratio to 1.15% by September 30, 2020 with additional rulemaking scheduled regardingbank’s insolvency or the method to be used to achieve a 1.35% reserve ratio by that date and offset the effect on institutions with less than $10 billion in assets.
Pursuant to these requirements,occurrence of other events, the FDIC adopted new assessment regulations effective April 1, 2011 that redefinedmay sell some, part or all of a bank’s assets and liabilities to another bank or repudiate or disaffirm most types of contracts to which the assessment basebank was a party if the FDIC believes such contracts are burdensome. In resolving the estate of a failed bank, the FDIC as average consolidated assets less average tangible equity. Insured banks with more than $1.0 billion in assets must calculate quarterly average assets based on daily balances while smaller banksreceiver will first satisfy its own administrative expenses, and newly chartered banks may use weekly averages. Average assets would be reduced by goodwill andthe claims of holders of U.S. deposit liabilities also have priority over those of other intangibles. Average tangible equity equals Tier 1 capital. For institutions with more than $1.0 billion in assets, average tangible equity is calculated on a weekly basis while smaller institutions may use the quarter-end balance. The base assessment rate for insured institutions in Risk Category I will range between 5 to 9 basis points and for institutions in Risk Categories II, III, and IV will be 14, 23 and 35 basis points. An institution’s assessment rate will be reduced based on the amount of its outstandinggeneral unsecured long-term debt and for institutions in Risk Categories II, III and IV may be increased based on their brokered deposits.creditors.
Liability for Banking Subsidiaries
Under the Dodd-Frank Act and applicable FRB policy, a bank holding company such as the Company is expected to act as a source of financial and managerial strength to each of its subsidiary banks and to commit resources to their support. This support may be required at times when the bank holding company may not have the resources to provide it. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act (the “FDIA”), the FDIC can hold any FDIC-insured depository institution liable for any loss suffered or anticipated by the FDIC in connection with (1) the “default” of a commonly controlled FDIC-insured depository institution; or (2) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution “in danger of default.”
Pennsylvania Banking Law
The Pennsylvania Banking Code (“Banking Code”) contains detailed provisions governing the organization, location of offices, rights and responsibilities of directors, officers, and employees, as well as corporate powers, savings and investment operations and other aspects of the Bank and its affairs. The Banking Code delegates extensive rule-making power and administrative discretion to the PDB so that the supervision and regulation of state chartered banks may be flexible and readily responsive to changes in economic conditions and in savings and lending practices.
The FDIA, however, prohibits state chartered banks from making new investments, loans, or becoming involved in activities as principal and equity investments which are not permitted for national banks unless (1) the FDIC determines the activity or investment does not pose a significant risk of loss to the Deposit Insurance FundFund; and (2) the bank meets all applicable capital requirements. Accordingly, the additional operating authority provided to the Bank by the Banking Code is significantly restricted by the FDIA.
Dividend Restrictions
The Parent Company’s funding for cash distributions to its shareholders is derived from a variety of sources, including cash and temporary investments. One of the principal sources of those funds has historically been dividends received from the Bank. Various federal and state laws limit the amount of dividends the Bank can pay to the Parent Company without regulatory approval. In addition, federal bank regulatory agencies have authority to prohibit the Bank from engaging in an unsafe or unsound practice in conducting its business. The payment of dividends, depending upon the financial condition of the bank in question, could be deemed to constitute an unsafe or unsound practice. The ability of the Bank to pay dividends in the future is currently, and couldmay be further, influenced by bank regulatory policies and capital guidelines. Additional information concerning the Company and the Bank with respect to dividends is incorporated by reference from the risk factors entitled “The Company is subject to restrictions and conditions of a formal agreement issued by the Federal Reserve Bank of Philadelphia. Failure to comply with this formal agreement could result in additional enforcement action against us, including the imposition of monetary penalties” and “The Company discontinued its quarterly cash dividend and suspended the stock repurchase program based on regulatory requirements” included under Item 1A of this report and Note 15, “Restrictions on Dividends, Loans and Advances,” of the “Notes to Consolidated Financial Statements” included under Item 8 of this report, and the “Capital Adequacy and Regulatory Matters” section of “Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations,” included under Item 7 of this report.
Regulatory Capital Requirements
Information concerning the compliance ofCompliance by the Company and the Bank with respect to capital requirements is incorporated by reference from Note 14, “Shareholders’13, Shareholders' Equity and Regulatory Capital,” of to the “Notes to Consolidated Financial Statements” includedStatements under Part II, Item 8, of this report,"Financial Statements and Supplementary Data," and from the “CapitalCapital Adequacy and Regulatory Matters”Matters section of theItem 7, “Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations,Operations.” included under Item 7 of this report.
Basel III Capital Rules
In July 2013,Effective January 1, 2015, the Company and Bank’s primary federal regulator, the FRB, approved final rules (the “BaselBank became subject to the Basel III Capital Rules”) establishing a new comprehensiveRules, which substantially revised risk-based capital framework for U.S. banking organizations, including community banks, which also incorporate provisions of the Dodd-Frank Act.requirements. The Basel III Capital Rules substantially reviserevised the risk-based capital requirements applicable to bank holding companiesdefinitions and depository institutions, including the Company and Bank, compared to existing U.S. risk-based capital rules. The Basel III Capital Rules define the components of regulatory capital, and addressaddressed other issues affecting the numerator in banking institutions’ regulatory capital ratios, addressesasset risk weights and other issuesmatters affecting the denominator in banking institutions’ regulatory capital ratios and replacereplaced the currentexisting general risk-weighting approach. The Basel III Capital Rules are effective for the Company and Bank on January 1, 2015 (subject to a phase-in period).
The Basel III Capital Rules among other things, (i) introduceintroduced a new capital measure called “CommonCommon Equity Tier 1” (“CET1”), (ii) specify that Tier 1 capital consist of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments toa related regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expand the scope of the deductions/adjustments from capital as compared to existing regulations.
When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Company and Bank to maintain (i) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5%assets; increased the minimum requirements for Tier 1 Capital ratio as well as the minimum levels to be considered well capitalized under prompt corrective action; and introduced the “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer, is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets.
The aforementioned capital conservation buffer is” designed to absorb losses during periods of economic stress. Banking institutionsInstitutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) may faceare subject to constraints on dividends, equity repurchases and discretionary bonuses to executive officers based on the amount of the shortfall.
Under the Basel III Capital Rules, the initial minimum capital ratios as of When fully phased-in on January 1, 2015 are as follows:
4.5%2019, the capital standards applicable to the Parent Company and the Bank will include an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios inclusive of the capital conservation buffer of (i) CET1 to risk-weighted assets;
6.0%at least 7%, (ii) Tier 1 capital to risk-weighted assets;assets of at least 8.5%, and
8.0% (iii) Total capital to risk-weighted assets.assets of at least 10.5%.
The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable incomearising from temporary differences that could not be realized from net operating loss carrybacks and significant investments in non-consolidatedunconsolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories, in the aggregate, exceed 15% of CET1. Under previously effective capital standards, the effects of accumulated other comprehensive income items included in capital were excluded for the purposes of determining regulatory capital ratios.
Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive income items are not excluded;excluded from regulatory capital, including unrealized gains or losses on certain securities available for sale; however, the Company and Bank, maycertain banking organizations were able to make a one-time permanent election with the first filing of reports under the Basel III Capital Rules to continue to exclude these items. The Parent Company anticipates itand Bank made this one-time permanent election, with the result that most AOCI items will take advantage of the election.be excluded from regulatory capital.
Implementation of the deductions and other adjustments to CET1 began on January 1, 2015were phased in and will be phased-in over a 4-year period (beginning at 40% onfully implemented beginning January 1, 2015 and an additional 20% per year thereafter until fully phased-in at January 1, 2018). The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).2018.
With respect to the Bank, the Basel III Capital Rules also revise the “prompt corrective action” regulations pursuant to Section 38 of the FDIA, by (i) introducing a CET1 ratio requirement at each level (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category (other than critically undercapitalized), with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to the current 6%), and (iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately capitalized. The Basel III Capital Rules do not change the total risk-based capital requirement for any prompt corrective action category.
The Basel III Capital Rules prescribe a standardized approach for risk weightings that expands the risk-weighting categories from the four categories of the previous capital standards (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories than previously used, depending on the nature of the assets,assets. These categories generally rangingrange from 0%, for U.S. government and agency securities, to 600%, for certain equity exposures, and resultingresult in higher risk weights for a variety of asset categories. Significant changes to the previously effective capital rules that will impact the Company’s determination of risk-weighted assets include, among other things:
Greater restrictions on the amount of deferred tax assets that can be included in CET1 capital with assets relating to net operating loss and credit carry forwards being excluded, and a 10% - 15% limitation on deferred tax assets arising from temporary differences that cannot be realized through net operating loss carry backs.
Applying a 150% risk weight for certain high volatility commercial real estate acquisition, development and construction loans, compared to 100% risk weight previously in place;
Assigning a 150% risk weight to exposures (other than residential mortgage exposures) that are 90 days past due or in nonaccrual status, compared to 100% risk weight previously in place; and
Providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable, compared to 0% previously in place.
Management is currently evaluating the impact that the Basel III Capital Rules, on a fully phased-in basis, will have on our capital levels. Management anticipates that it will be in compliance with the phased in rules.
Consumer Financial Protection Bureau
The Dodd-Frank Act created an independent regulatory body, the Consumer Financial Protection Bureau (“Bureau”), with authority and responsibility to set rules and regulations for most consumer protection laws applicable to all banks, including the Company. The Bureau has responsibility for mortgage reform and enforcement, as well as broad new powers over consumer financial activities which could impact what consumer financial services would be available and how they are provided.
In late 2012, the Bureau formed a Community Bank Advisory Council. Representatives were drawn from small-to-medium-sized community banks to engage in discussions on how smaller institutions help level the playing field for consumers experiencing difficulty in managing their money and what opportunities and challenges exist in mortgage lending for small institutions. The Bureau has developed prototype designs for various disclosures and agreements and invited the public and financial industry to review and comment on what works. Their website (www.consumerfinance.gov) serves as a public
information resource on laws and regulations, assistance with financial questions, participation with projects or initiatives, and submission of complaints. The Bureau has positioned itself to serve as a resource for submission of complaints and to provide help to consumers with complaints regarding credit cards, mortgages, student loans, checking accounts, savings accounts, credit reporting, bank services, and other consumer loans. Guidance and consumer tips on various financial topics have been issued since 2012 in blogs on the Bureau’s website.
Significant final mortgage rules were issued by the Bureau in January 2013 most with mandatory effective dates in January 2014. These rules were mandated by the Dodd-Frank Act provisions enacted in response to the breakdown in the mortgage lending markets and to provide for consumer protections. The following rules are intended to address problems consumers face in the three major steps in buying a home – shopping for a mortgage, closing on a mortgage, and paying off a mortgage.
Ability-to-Repay (“ATR”) and Qualified Mortgage (“QM”) rules were designed to address concerns that residential mortgage borrowers received loans for which they had no ability to repay. The ATR final rule requires a creditor to make “a reasonable and good faith determination at or before closing that the consumer will have a reasonable ability, at the time of consummation, to repay the loan, according to its terms, including any mortgage-related obligations.” The ATR standards require consideration of eight specific underwriting factors. Information used must be documented and verified using reasonably reliable third-party records. The ATR rule provides for a wide variety of documents and sources of information that can be used and relied on to determine ATR. In addition, the ATR rules included provisions that create a legal advantage for lenders for loans that are qualified mortgages. A QM must have a fully amortizing payment, have a term of 30 years or less, and not have points and fees that exceed certain thresholds depending on the total loan amount. Safe Harbor QM loans are lower priced loans that meet QM requirements. Loans satisfying the QM requirements will be entitled to liability protection from damage claims and defenses by borrowers based on an asserted failure to meet ATR requirements. Rebuttable Presumption QM loans are higher-priced loans that meet QM requirements and provide liability protection to a lesser degree from damage claims and defense by borrowers based on asserted failure to meet ATR requirements.
Loan servicing has become a key focus, especially when loan workouts and modifications are involved. New mortgage servicing rules effective in January 2014 implement new provisions regarding servicing standards. These new standards seek to ensure similar borrowers who default or become delinquent are treated in a similar, consistent manner. The Bank presently services 5,000 or fewer mortgage loans which it owns or originated, so it is considered a “Small Servicer” and is exempt from certain parts of the Mortgage Servicing Rules. The mortgage servicing requirements applicable to the Bank’s servicing operations under the new mortgage servicing rules are as follows: 1) adjustable rate mortgage interest rate adjustment notices; 2) prompt payment crediting and payoff statements; 3) limits on force-placed insurance; 4) responses to written information requests and complaints of errors; and 5) loss mitigation with regard to the first notice or filing for a foreclosure and no foreclosure proceedings if a borrower is performing pursuant to the terms of a loss mitigation agreement.
Other Federal Laws and Regulations
The Company’s operations are subject to additional federal laws and regulations applicable to financial institutions, including, without limitation:
Privacy provisions of the Gramm-Leach-Bliley Act (the "GLB Act") and related regulations, which require us to maintain privacy policies intended to safeguard customer financial information, to disclose the policies to our customers and to allow customers to “opt out” of having their financial service providers disclose their confidential financial information to non-affiliated third parties, subject to certain exceptions;
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
Consumer protection rules for the sale of insurance products by depository institutions, adopted pursuant to the requirements of the Gramm-Leach-BlileyGLB Act; and the
the USA PATRIOT Act, which requires financial institutions to take certain actions to help prevent, detect and prosecute international money laundering and the financing of terrorism.
Future Legislation and Regulation
Changes to thein federal laws and regulations, as well as laws and regulations in the states where the Parent Company and the Bank do business, can affect the operating environment of both the Company and the Bank in substantial and unpredictable ways. The CompanyWe cannot accurately predict whether those changes in laws and regulations will occur, and, if those changesthey occur, the ultimate effect they would have upon
the financial condition or results of operations of the Company. This is also true of federal legislation, particularly given the current challenging economic environment.
NASDAQ Capital Market
The Company’s common stock is listed on The NASDAQ Capital Market under the trading symbol “ORRF” and is subject to NASDAQ’s rules for listed companies.
Forward Looking Statements
Additional information concerning the Company and the Bank with respect to forward looking statements is incorporated by reference from the “Caution About Forward Looking Statements” section of the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in this report under Item 7.
Competition
The Bank’s principal market area consists of Berks County, Cumberland County, Dauphin County, Franklin County, Lancaster County, and Perry County, Pennsylvania, and Washington County, Maryland. The Bank servicesserves a substantial number of depositors in this market area and contiguous counties, with the greatest concentration in Chambersburg, Shippensburg, and Carlisle, Pennsylvania and the surrounding areas.
The Bank, likeWe are subject to robust competition in our market areas. Like other depository institutions, has been subjected to competition fromwe compete with less heavily regulated entities such as credit unions, brokerage firms, money market funds, consumer finance and credit card companies, and with other commercial banks, many of which are larger than the Bank. The principal methods of competing effectively in the
financial services industry include improving customer service through the quality and range of services provided, improving efficiencies and pricing services competitively. The Bank is competitive with the financial institutions in its service areas with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans.
The Bank continuesWe continue to implement strategic initiatives focused on expanding our core businesses and to explore, on an ongoing basis, acquisition, divestiture, and joint venture opportunities to the extent permitted by our regulators. We analyze each of our products and businesses in the context of shareholder return, customer demands, competitive advantages, industry dynamics, and growth potential. We believe our market area will support growth in assets and deposits in the future, which we expect to contribute to our ability to maintain or grow profitability.
ITEM 1A – RISK FACTORS
OurAn investment in our common stock is subject to risks inherent in our business. The material risks and uncertainties that management believes affect us are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations. This report is qualified in its entirety by these risk factors.
If any of the following risks actually occur, our business, financial condition and results of operations may be adversely affected by various factors, many of which are beyond our control. These risk factors include the following:
The Company is subject to restrictions and conditions of a formal agreement issued by the Federal Reserve Bank of Philadelphia. Failure to comply with this formal agreement could result in additional enforcement action against us, including the imposition of monetary penalties.
In March 2012, the Company entered into a Written Agreement with the Federal Reserve Bank of Philadelphia, which requires the Company to discontinue a number of practices and to take a number of actions. In particular, we agreed with the Federal Reserve Bank to, among other things, prepare and submit plans regarding: (i) strengthening of credit risk management practices and underwriting, (ii) the repayment or disposition of properties classified as OREO and nonperforming or criticized assets, (iii) the allowance for loan loss methodology, (iv) capital, and (v) a management review. This formal agreement also restricts the ability of the Company and the Bank to pay dividends, to repurchase stock or to incur indebtedness without prior regulatory approval. We intend to fully comply with the formal agreement. However, if we fail to comply, the Federal Reserve Bank could take additional enforcement action against the Company. Possible enforcement actions could include the issuance of a cease and desist order that could be judicially enforced,materially and adversely affected. If this were to happen, the imposition of civil monetary penalties, the issuance of directives to increase capital or to enter into a strategic transaction, whether by merger or otherwise, with a third party, the appointment of a conservator or receiver, the termination of insurance of deposits, the issuance of removal and prohibition orders against institution-affiliated parties and the enforcement of such actions through injunctions or restraining orders. Any remedial measure or further enforcement action, whether formal or informal, could impose restrictions on our ability to operate our business, harm our reputation and our ability to retain and attract customers, adversely affect our business, prospects, financial condition or results of operations and impact the tradingmarket price of our common stock.
We have incurredstock could decline significantly, and expect to continue to incur additional regulatory compliance expense in connection with these formal agreements. Such additional regulatory compliance costsyou could have an adverse impact on our resultslose all or part of operations and
financial condition. In addition, deviations from our business plan will likely have to be approved by the regulators, which could limit our ability to make any changes to our business. This could negatively impact the scope and flexibility of our business activities.your investment.
The Company may not be ableRisks Related to pay any cash dividends or conduct any stock repurchases for the foreseeable future.Credit
The Company is a bank holding company regulated by the FRB. In October 2011, the Company announced it had discontinued its quarterly dividend. Due to subsequent regulatory restrictions included in the formal agreement withIf our regulator discussed above, the Company is restricted from paying any dividends or repurchasing any stock without prior regulatory approval. Accordingly, we do not anticipate being able to pay any cash dividends or conducting any stock repurchases until such time as the agreement is lifted.
The Company is a holding company dependent for liquidity on payments from the Bank, its sole subsidiary, which is subject to restrictions.
The Company is a holding company and depends on dividends, distributions and other payments from the Bank to fund dividend payments, if permitted, and to fund all payments on obligations. The Bank is subject to laws that restrict dividend payments or authorize regulatory bodies to block or reduce the flow of funds from it to us. Pursuant to the terms of the formal agreement we entered into with the Federal Reserve Bank in March 2012, as discussed above, any dividend or similar payment from the Bank to us may only be made with prior regulatory approval. In 2014, the Bank received regulatory approval to dividend up to $1,000,000 to the Company as circumstances warrant. In addition, our right to participate in a distribution of assets upon the Bank’s liquidation or reorganization is subject to the prior claims of the Bank’s creditors.
The Company may be required to make further increases in the provisionsallowance for loan losses andis not sufficient to charge off additional loans in the future, which could materially adversely affect it.cover actual losses, our earnings would decrease.
There is no precise method of predicting loan losses and thelosses. The required level of reserves, and the related provision for loan losses, can fluctuate from year to year, based on charge-offs (recoveries),and/or recoveries, loan volumes,volume, credit administration practices, and local and national economic conditions, among other factors. For 2014,In 2017, we recorded a negative provision for loan losses of $3,900,000.$1,000,000 compared with a provision expense totaling $250,000 in 2016. The Company recorded net charge-offs of $2,318,000$979,000 in 20142017 compared towith net loan recoveriescharge-offs of $949,000$1,043,000 in 2013.2016. Risk elements, including nonperforming loans, troubled debt restructurings still accruing, loans greater than 90 days past due still accruing, and other real estate owned totaled $16,464,000$11,987,000 at December 31, 2014.2017 compared with $8,319,000 at December 31, 2016. The allowance for loan losses,ALL, which is a reserve established through a provision for loan losses charged to expense, represents management’s best estimate of probable incurred losses within the existing portfolio of loans. The level of the allowance reflects management’s evaluation of, among other factors, the status of specific impaired loans, trends in historical loss experience, delinquency, credit concentrations and economic conditions within our market area. The determination of the appropriate level of the allowance for loan lossesALL inherently involves a high degree of subjectivity and judgment and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require us to increase our allowance for loan losses.ALL.
In addition, bank regulatory agencies periodically review our allowance for loan lossesALL and may require us to increase the provision for loan losses or to recognize further loan charge-offs, based on judgments that differ from those of management. If loan charge-offs in future periods exceed the allowance for loan losses,ALL, there couldwould be a need to record additional provisions to increase our allowance for loan losses.ALL. Furthermore, growth in the loan portfolio would generally lead to an increase in the provision for loan losses. Generally, increases in our allowance for loan lossesALL will result in a decrease in net income and stockholders’ equity, and may have a material adverse effect on the financial condition of the Company, results of operations and cash flows.
The allowance for loan lossesALL was 2.09%1.27% of total loans and 95%116% of nonaccrual and restructured loans still accruing at December 31, 2014,2017, compared to 3.12%with 1.45% of total loans and 83%160% of nonaccrual and restructured loans still accruing at December 31, 2013. Material additions to the allowance could materially decrease our net income.2016. In addition, at December 31, 2014,2017, the top 25 lending relationships individually had commitments in excess of $220,000,000,$86,506,000, and aan aggregate total outstanding loan balance of nearly $182,097,000,$182,950,000, or 26%18% of the loan portfolio. The deterioration of one or more of these loansloan relationships could result in a significant increase in the nonperforming loans and the provisions for loan losses, which would negatively impact our results of operations.
Our business strategy involves making loans secured by commercial real estate. These types of loans generally have higher risk-adjusted returns and shorter maturities than other loans. Loans secured by commercial real estate properties are generally for larger amounts and may involve a greater degree of risk than other loans. Payments on loans secured by these properties are often dependent on the income produced by the underlying properties which, in turn, depends on the successful operation and management of the properties. Accordingly, repayment of these loans is subject to conditions in the real estate market or the local economy. In challenging economic conditions, these loans represent higher risk and could result in an increase in our total net charge-offs, requiring us to increase our ALL, which could have a material adverse effect on our financial condition or results of operations. While we seek to minimize these risks in a variety of ways, there can be no assurance that these measures will protect against credit-related losses.
Commercial and industrial loans comprise 11% of our loan portfolio. The credit risk related to these types of loans is greater than the risk related to residential loans.
Our commercial and industrial loan portfolio grew by $27,198,000, or 31%, during the year ended December 31, 2017 to $115,663,000. Commercial and industrial loans generally carry larger loan balances and involve a greater degree of risk of nonpayment or late payment than home equity loans or residential mortgage loans.
Commercial and industrial loans include advances to local and regional businesses for general commercial purposes and include permanent and short-term working capital, machinery and equipment financing, and may be either in the form of lines of credit or term loans. Although commercial and industrial loans may be unsecured to our highest rated borrowers, the majority of these loans are secured by the borrower’s accounts receivable, inventory and machinery and equipment. In a significant number of these loans, the collateral also includes the business real estate or the business owner’s personal real estate or assets. Commercial and industrial loans are more susceptible to risk of loss during a downturn in the economy, as borrowers may have greater difficulty in meeting their debt service requirements and the value of the collateral may decline. We attempt to mitigate this risk through our underwriting standards, including evaluating the creditworthiness of the borrower and, to the extent available, credit ratings on the business. Additionally, monitoring of the loans through annual renewals and meetings with the borrowers are typical. However, these procedures cannot eliminate the risk of loss associated with commercial and industrial lending.
Our commercial and industrial lending operations are located primarily in south central Pennsylvania and in Washington County, Maryland. Our borrowers’ ability to repay these loans depends largely on economic conditions in these and surrounding areas. A deterioration in the economic conditions in these market areas could materially adversely affect our operations and increase loan delinquencies, increase problem assets and foreclosures, increase claims and lawsuits, decrease the demand for our products and services and decrease the value of collateral securing loans.
Risks Related to Interest Rates and Investments
Changes in interest rates could adversely impact the Company’s financial condition and results of operations.
Our operations are subject to risks and uncertainties surrounding our exposure to changes in the interest rate environment. Operating income, net income and liquidity depend to a great extent on our net interest margin, i.e., the difference between the interest yields we receive on interest-earning assets, such as loans and securities, and the interest rates we pay on interest-bearing liabilities, such as deposits and borrowings. These rates are highly sensitive to many factors beyond our control, including competition; general economic conditions; and monetary and fiscal policies of various governmental and regulatory authorities, including the FRB. If the rate of interest we pay on our interest-bearing liabilities increases more than the rate of interest we receive on our interest-earning assets, our net interest income, and therefore our earnings, and liquidity could be materially adversely affected. Our earnings and liquidity could also be materially adversely affected if the rates on interest-earning assets fall more quickly than those on our interest-bearing liabilities.
Changes in interest rates also can affect our ability to originate loans; the ability of borrowers to repay adjustable or variable rate loans; our ability to obtain and retain deposits in competition with other available investment alternatives; and the value of interest-earning assets, which would negatively impact stockholders’ equity, and the ability to realize gains from the sale of such assets. Based on our interest rate sensitivity analyses, an increase in the general level of interest rates will negatively affect the market value of the investment portfolio because of the relatively higher duration of certain securities included in the investment portfolio.
Risks Related to Competition and to Our Business Strategy
Difficult economic and market conditions have adversely affected the financial services industry and may continue to materially and adversely affect the Company.
WeOur operations are operating in a challengingsensitive to general business and economic environment, including generally uncertain global, national and local conditions. Additional concerns from some of the countries in the European Union, Russian Federation, and elsewhere have also strained the financial markets both abroad and domestically. Although there has been some improvement in the overall global macroeconomic conditions in 2014, financial institutions continue to be affected by conditions in the U.S. If the growth of the U.S. economy slows, or if the economy worsens or enters into a recession, our growth and profitability could be constrained. In addition, economic conditions in foreign countries can affect the stability of global financial markets, which could impact the U.S. economy and financial markets. Weak economic conditions are characterized by deflation, fluctuations in debt and equity capital markets, including a lack of liquidity and/or depressed prices in the secondary market for mortgage loans, increased delinquencies on mortgage, consumer and commercial loans, residential and commercial real estate marketprice declines and lower home sales and commercial activity. All of these factors are detrimental to our business. Our business is significantly affected by monetary and related policies of the constrainedU.S. federal government, its agencies and government-sponsored entities. Changes in any of these policies could have a material adverse effect on our business, financial markets. In recent years, declines in the housing market, increases in unemployment and under-employment have negatively impacted the credit performance of loans and resulted in significant write-downs of asset values by financial institutions, including the Bank. Reflecting concern over economic conditions, many lenders and institutional investors have reduced or ceased providing funding to borrowers. While the Company saw continued improvement in 2014, there continued to be stress on the Bank’s portfolio. A worsening of economic conditions, or a prolonged inconsistent recovery, may further impact the Bank’sposition, results of operations and financial condition. cash flows.
In particular, we may face the following risks in connection with these events:volatility in the economic environment:
Loan delinquencies could increase further;increase;
Problem assets and foreclosures could increase further;increase;
Demand for our products and services could decline; and
Collateral for loans made by us, especially real estate, could decline further in value, in turn reducing a customer’scustomers' borrowing power, and reducing the value of assets and collateral associated with our loans.
Because our business is concentrated in south central Pennsylvania and Washington County, Maryland, our financial performance could be materially adversely affected by economic conditions and real estate values in these market areas.
Our operations and the properties securing our loans are primarily located in south central Pennsylvania and in Washington County, Maryland. Our operating results depend largely on economic conditions and real estate valuations in these and surrounding areas. A deterioration in the economic conditions in these market areas could materially adversely affect our operations and increase loan delinquencies, increase problem assets and foreclosures, increase claims and lawsuits, decrease the demand for our products and services and decrease the value of collateral securing loans, especially real estate, in turn reducing customers’ borrowing power, the value of assets associated with nonperforming loans and collateral coverage.
Competition from other banks and financial institutions in originating loans, attracting deposits and providing other financial services may adversely affect our profitability and liquidity.
We experience substantial competition in originating loans, both commercial and consumer loans, in our market area. This competition comes principally from other banks, savings institutions, credit unions, mortgage banking companies and other lenders. Some of our competitors enjoy advantages, including greater financial resources, and higher lending limits, a wider geographic presence, more accessible branch office locations, the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs. This competition could reduce our net income and liquidity by decreasing the number and size of loans that we originate and the interest rates we are able to charge on these loans.
As these conditionswe expand our on-line lending capabilities, we will face competition, particularly in residential mortgage lending, from non-bank lenders (financial institutions that only make loans and do not offer deposit accounts such as a savings account or similar ones continuechecking account) and financial technology companies (that use new technology and innovation with available resources in order to existcompete in the marketplace of traditional financial institutions and intermediaries in the delivery of financial services). This competition could similarly reduce our net income and liquidity.
In attracting business and consumer deposits, we face substantial competition from other insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Some of our competitors enjoy advantages, including more aggressive marketing campaigns, better brand recognition and more branch locations. These competitors may offer higher interest rates than we do, which could decrease the deposits that we attract or worsen,require us to increase our rates to retain existing deposits or attract new deposits. Increased deposit competition could materially adversely affect our ability to generate the funds necessary for lending operations. As a result, we may experience continuing or increased adverse effects onneed to seek other sources of funds that may be more expensive to obtain and could increase our cost of funds.
The Company’s business strategy includes the continuation of moderate growth plans, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.
Loans grew $126,621,000, or 14% from $883,391,000 at December 31, 2016, to $1,010,012,000 at December 31, 2017, due to organic growth through increases in consumer, commercial and commercial real estate loans. Over the long term, we expect to continue to experience growth in loans and total assets, the level of our deposits and the scale of our operations. Achieving our growth targets requires us to successfully execute our business strategies, which includes continuing to grow our loan portfolio. Our ability to successfully grow will also depend on the continued availability of loan opportunities that meet underwriting standards. In addition, our asset quality metrics have improved sufficiently that we may consider the acquisition of other financial institutions and branches within or outside of our market area to the extent permitted by our regulators. The success of any such acquisition will depend on a number of factors, including our ability to integrate the acquired institutions or branches into the current operations of the Company; our ability to limit the outflow of deposits held by customers of the acquired institution or branch locations; our ability to control the incremental increase in noninterest expense arising from any acquisition; and our ability to retain and integrate the appropriate personnel of the acquired institution or branches. We believe we have the resources and internal systems in place to successfully achieve and manage our future growth. If we do not manage our growth effectively, we may not be able to achieve our business plan and our business and prospects could be harmed.
The Company may be adversely affected by technological advances.
Technological advances impact our business. The banking industry undergoes technological change with frequent introductions of new technology-driven products and services. In addition to improving customer services, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success may depend, in part, on our ability to address the needs of our current and prospective customers by using technology to provide products and services that will satisfy demands for convenience as well as to create additional efficiencies in operations.
The Company may not be able to attract and retain skilled people.
The Company’s success depends, in large part, on our ability to attract and retain skilled people. We have, at times, experienced turnover among our senior officers. Competition for the best people in most activities engaged in by us can be intense, and we may not be able to attract and hire sufficiently skilled people to fill open and newly created positions or to retain current or future employees. An inability to attract and retain individuals with the necessary skills to fill open positions, or the unexpected loss of services of one or more of our key personnel, could have a material adverse impact on our business due to the loss of their skills, knowledge of our markets, years of industry experience or the difficulty of promptly finding qualified replacement personnel.
An interruption or breach in security with respect to our information systems, or our outsourced service providers, could adversely impact the Company’s reputation and have an adverse impact on our financial condition or results of operations.
Information systems are critical to our business. We use various technological systems to manage our customer relationships, general ledger, securities investments, deposits and loans. We rely on software, communication, and information exchange on a variety of computing platforms and networks and over the internet. We have established policies and procedures to prevent or limit the effect of system failures, business interruptions and security breaches, but we cannot be certain that all of our systems are entirely free from vulnerability to attack or other technological difficulties or failures. In addition, any compromise of our systems could deter customers from using our products and services. Although we rely on security systems to provide security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from security breaches.
We rely on the services of a variety of vendors to meet our data processing and communication needs. If these third-party providers encounter difficulties, or if we have difficulty communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.
If information security is breached or other technology difficulties or failures occur, information may be lost or misappropriated, services and operations may be interrupted and we could be exposed to claims from customers. Any of these results could have a material adverse effect on our financial condition, results of operations or liquidity.
We could be adversely affected by failure in our internal controls.
A failure in our internal controls could have a significant negative impact not only on our earnings, but also on the perception that customers, regulators and investors may have of us. We continue to devote a significant amount of effort and resources to continually strengthening our controls and ensuring compliance with complex accounting standards and banking regulations. However, these efforts may not be effective in preventing a breach in our controls.
Negative public opinion could damage our reputation and adversely affect our earnings.
Reputational risk, or the risk to the Company's earnings and capital from negative public opinion, is inherent in our business. Negative public opinion can result from the actual or perceived manner in which we conduct our business activities, including banking operations and trust and investment operations, our management of actual or potential conflicts of interest and ethical issues, and our protection of confidential client information. Negative public opinion can adversely affect the Company's ability to keep and attract customers and can expose the Company to litigation and regulatory action. Although we take steps to minimize reputation risk in the way we conduct our business activities and deal with our customers, communities and vendors, these steps may not be effective.
Risks Related to Regulatory Compliance and Legal Matters
Governmental regulation and regulatory actions against us may impair our operations or restrict our growth.
The Company is subject to regulation and supervision under federal and state laws and regulations. The requirements and limitations imposed by such laws and regulations limit the manner in which we conduct our business, undertake new investments and activities and obtain financing. These regulations are designed primarily for the protection of the deposit insurance funds and consumers and not to benefit our shareholders. Financial institution regulation has been the subject of significant legislation in recent years and may be the subject of further significant legislation in the future, none of which is within our control. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied or enforced. The Company cannot predict the substance or impact of pending or future legislation, regulation or the application thereof. Compliance with such current and potential regulation and scrutiny may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital and limit our ability to pursue business opportunities in an efficient manner. Bank regulations can hinder our ability to compete with financial services companies that are not regulated in the same manner or are subject to less regulation.
The Dodd-Frank Wall Street Reform and Consumer Protection Act may affect the Company’s financial condition, results of operations, liquidity and stock price.
On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act includes provisions affecting large and small financial institutions, including several provisions that will profoundly affect how community banks and bank holding companies will be regulated in the future. Among other things, these provisions relax rules regarding interstate branching,branching; allow financial institutions to pay interest on business checking accounts,accounts; change the scope of federal deposit insurance coveragecoverage; and impose new capital requirements on bank holding companies. Many of the requirements called for in the Dodd-Frank Act will be implemented over time and most will be subject to implementingimplementation regulations developed over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on our operations is unclear.not certain.
The Dodd-Frank Act also created the Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection BureauCFPB which has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection BureauCFPB has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets will beare examined by their applicable bank regulators.
The Company may be required to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements under the Dodd-Frank Act. Failure to comply with the new requirements may negatively impact our results of operations and financial condition. While the Company cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on us, these changes could be materially adverse to our investors.
Changes in interest rates could adversely impact the Company’s financial condition and results of operations.
Operating income, net income and liquidity depend to a great extent on our net interest margin, i.e., the difference between the interest yields we receive on loans, securities and other interest earning assets and the interest rates we pay on interest-bearing deposits, borrowings and other liabilities. These rates are highly sensitive to many factors beyond our control, including competition, general economic conditions and monetary and fiscal policies of various governmental and regulatory authorities, including the Board of Governors of the FRB. If the rate of interest we pay on our interest-bearing deposits, borrowings and other liabilities increases more than the rate of interest we receive on loans, securities and other interest earning assets, our net interest income, and therefore our earnings, and liquidity could be materially adversely affected. Our earnings and liquidity could also be materially adversely affected if the rates on our loans, securities and other investments fall more quickly than those on our deposits, borrowings and other liabilities. Our operations are subject to risks and uncertainties surrounding our exposure to changes in the interest rate environment.
Additionally, based on an analysis of the interest rate sensitivity of the Company’s assets, an increase in the general level of interest rates will negatively affect the market value of the investment portfolio because of the relatively long duration of certain securities included in the investment portfolio.
Changes in interest rates also can affect: (1) the ability to originate loans; (2) the value of interest-earning assets, which would negatively impact stockholders’ equity, and the ability to realize gains from the sale of such assets; (3) the ability to obtain and retain deposits in competition with other available investment alternatives; and (4) the ability of borrowers to repay adjustable or variable rate loans.
Increases in FDIC insurance premiums may have a material adverse effect on our results of operations.
Market developments significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits. As a result,the fund continues to recover, the Company may be required to pay significantly higher premiums or additional special assessments or taxes that could adversely affect earnings. We are generally unable to control the amount of premiums that are required to be paid for FDIC insurance. If there are additional bank or financial institution failures, the Company may be required to pay even higher FDIC premiums than the levels currently imposed. Any future increases or required prepayments in FDIC insurance premiums may materially adversely affect the results of operations.
Because our business is concentrated in South Central PennsylvaniaLegislative, regulatory and Washington County, Maryland, our financial performance could be materially adversely affected by economic conditionslegal developments involving income and real estate values in these market areas.
Our operations and the properties securing our loans are primarily located in South Central Pennsylvania and in Washington County, Maryland. Our operating results depend largely on economic conditions and real estate valuations in these and surrounding areas. A further deterioration in the economic conditions in these market areasother taxes could materially adversely affect ourthe Company’s results of operations and increase loan delinquencies, increase problem assets and foreclosures, increase claims and lawsuits, decrease the demand for our products and services and decrease the value of collateral securing loans, especially real estate, in turn reducing customers’ borrowing power, the value of assets associated with nonperforming loans and collateral coverage.
Commercial real estate lending may expose us to a greater risk of loss and impact our earnings and profitability.cash flows.
Our business strategy involves making loans secured by commercial real estate. These types of loans generally have higher risk-adjusted returns and shorter maturities than other loans. Loans secured by commercial real estate properties are generally for larger amounts and may involve a greater degree of risk than other loans. Payments on loans secured by these properties are often dependent on the income produced by the underlying properties which, in turn, depends on the successful operation and management of the properties. Accordingly, repayment of these loans
The Company is subject to conditionsU.S. federal and U.S. state income, payroll, property, sales and use, and other types of taxes including the Pennsylvania Bank Shares Tax. Significant judgment is required in determining the Company's provisions for
income taxes. Changes in tax rates, enactments of new tax laws, revisions of tax regulations, and claims or litigation with taxing authorities could result in substantially higher taxes, and therefore, could have a significant adverse effect on the Company's results of operations, financial condition and liquidity. Increases in the real estate market orassessment rate for the local economy. BecausePennsylvania Bank Shares Tax, which is calculated on the outstanding equity of the current challenging economic environment, these loans represent higher risk,Bank, may also materially adversely affect results of operations.
Any U.S. federal tax reform that lowers corporate tax rates could resulthave a significant non-cash adverse effect on results of operations as the Company's net deferred tax asset would be impacted, resulting in an increase in tax expense. In December 2017, U.S. federal tax reform was enacted that, among other things, lowered our statutory tax rate to 21% effective January 1, 2018. As described more fully in Note 7, Income Taxes, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data," the Company was required to remeasure its net deferred tax asset at the date the tax reform was enacted and incurred a $2,635,000 expense, which is included in total net-charge offs andtax expense for 2017. We are unable to predict if, or when, any additional changes or proposals could require us to increase our allowance for loan losses, which could have a material adverse effect on our financial condition or results of operations. While we seek to minimize these risks in a variety of ways, there can be no assurance that these measures will protect against credit-related losses.enacted.
The Company is required to make a number of judgmentsuse judgment in applying accounting policies and different estimates and assumptions in the application of these policies could result in a decrease in capital and/or other material changes to the reports of financial condition and results of operations. Also, changes in accounting standards can be difficult to predict and can materially impact how the Company records and reports our financial condition and results of operations.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses,ALL, accounting for income taxes and the ability to recognize the deferred tax asset,assets, and the fair value of certain financial instruments, in particularparticularly securities. While we have identified those accounting policies that are consideredwe consider critical and have procedures in place to facilitate the associated judgments, different assumptions in the application of these policies could result in a decrease to net income and, possibly, capital and may have a material adverse effect on our financial condition and results of operations.
OurChanges in accounting policies and methods are fundamental to how we record and report ourstandards could impact the Company's financial condition and results of operations. From time to time, the
The Financial Accounting Standards Board changes(the "FASB"), the SEC and other regulatory bodies periodically change financial accounting and reporting standards that govern the preparation of ourthe Company’s consolidated financial statements. These changes, including the use of an expected loss impairment methodology in the determination of the ALL which will be effective for the Company beginning January 1, 2020, can be hard to predict and can materially impact how we recordthe Company records and report ourreports its financial condition and results of operations.
Competition from other banks and financial institutions in originating loans, attracting deposits and providing various financial services may adversely affect profitability and liquidity.
We have substantial competition in originating loans, both commercial and consumer loans, in our market area. This competition comes principally from other banks, savings institutions, credit unions, mortgage banking companies and other lenders. Some of our competitors enjoy advantages, including greater financial resources, and higher lending limits, a wider geographic presence, more accessible branch office locations, In some cases, the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs. This competition could reduce our net income and liquidity by decreasing the number and size of loans that we originate and the interest rates we may charge on these loans.
In attracting business and consumer deposits, we face substantial competition from other insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Some of our competitors enjoy advantages, more aggressive marketing campaigns, better brand recognition and more branch locations. These competitors may offer higher interest rates than we do, which could decrease the deposits that we attract or require us to increase our rates to retain existing deposits or attract new deposits. Increased deposit competition could materially adversely affect our ability to generate the funds necessary for lending operations. As a result, we may need to seek other sources of funds that may be more expensive to obtain and could increase our cost of funds.
The Company’s business strategy includes the continuation of moderate growth plans, and our financial condition and results of operationsCompany could be negatively affected if we failrequired to growapply new or fail to manage our growth effectively.
In 2014, loans grew $33,909,000, or 5.1% from $671,037,000 at January 1, 2014, to $704,946,000 at December 31, 2014, due to organic growth through increases in consumer lending and commercial real estate loans. Over the long term, we expect to continue to experience growth in loans and total assets, the level of our deposits and the scale of our operations. Achieving our growth targets requires us to successfully execute our business strategies,revised guidance retrospectively, which include continuing to grow our loan portfolio. Our ability to successfully grow will also depend on the continued availability of loan opportunities that meet underwriting standards. In addition, since our asset quality metrics have returned closer to historical levels, we may consider the acquisition of other financial institutions and branches within or outside of our market area to the extent permitted by our regulators, the success of which will depend on a number of factors, including our ability to integrate the acquired branches into the current operations of the Company, our ability to limit the outflow of deposits held by customers of the acquired institution or branch locations, our ability to control the incremental increase in non-interest expense arising from any acquisition and our
ability to retain and integrate the appropriate personnel of the acquired institution or branches. We believe we have the resources and internal systems in place to successfully achieve and manage our future growth. If we do not manage our growth effectively, we may not be able to achieve our business plan, and our business and prospects could be harmed.
If the Company wants to, or is compelled to, raise additional capitalresult in the future, that capital may not be available when it is needed and on terms favorablerevision of prior financial statements by material amounts. The implementation of new or revised guidance could result in material adverse effects to current shareholders.
Federal banking regulators require us and our banking subsidiaries to maintain adequate levels of capital to support our operations. These capital levels are determined and dictated by law, regulation and bankingreported regulatory agencies. In addition, capital levels are also determined by our management and board of directors based on capital levels that, they believe, are necessary to support our business operations. At December 31, 2014, all three capital ratios for us and our banking subsidiary were above regulatory minimum levels to be deemed “well capitalized” under current bank regulatory guidelines. To be “well capitalized,” banking companies generally must maintain a tier 1 leverage ratio of at least 5%, a Tier 1 risk-based capital ratio of at least 6%, and a total risk-based capital ratio of at least 10%.
The Company’s ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside of our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital on terms and time frames acceptable to us or to raise additional capital at all. Additionally, the inability to raise capital in sufficient amounts may adversely affect our operations, financial condition and results of operations. Our ability to borrow could also be impaired by factors that are nonspecific to us, such as severe disruption of the financial markets or negative news and expectations about the prospects for the financial services industry as a whole as evidenced by recent turmoil in the domestic and worldwide credit markets. If we raise capital through the issuance of additional shares of our common stock or other securities, we would likely dilute the ownership interests of current investors and the price at which we issue additional shares of stock could be less than the current market price of our common stock and, thus, could dilute the per share book value and earnings per share of our common stock. Furthermore, a capital raise through the issuance of additional shares may have an adverse impact on our stock price.capital.
The short-term and long-term impact of the changing regulatory capital requirements and new capital rules is uncertain.
In July 2013, the Company and Bank’s primary federal regulator, the Federal Reserve Bank, approved finalThe Basel III Capital Rules establishingwhich became effective for the Company and Bank on January 1, 2015, established a new comprehensive capital framework for U.S. banking organizations, including community banks, which also incorporate provisions of the Dodd-Frank Act.banks. The Basel III Capital Rules substantially reviserevised the risk-based capital requirements applicable to bank holding companies and depository institutions, including the Company and Bank, compared to existing U.S. risk-based capital rules.institutions. The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratios, addressesas well as address risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and replace the current risk-weighting approach. The Basel III Capital Rules are effective for the Company and Bank on January 1, 2015 (subject to a phase-in period).
The Basel III Capital Rules, among other things, (i) introduce a new capital measure called CET1, (ii) specify that Tier 1 capital consist of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expand the scope of the deductions/adjustments from capital as compared to existing regulations. When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Company and Bank to maintain (i) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets.ratios.
The application of more stringent capital requirements to the Company and the Bank could, among other things, result in lower returns on invested capital, result in the need for additional capital, and result in regulatory actions if we were to be unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term of our funding, restructurerestructuring our business models, and/or increaseincreasing our holdings of liquid assets. Implementation of changes to asset risk weightings for risk basedrisk-based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its business strategy and could limit our ability to make distributions, including paying out dividends or buying back shares.
As more fully described in Note 19, Contingencies, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statement and Supplementary Data," of this Annual Report on Form 10-K, the allegations of Southeastern Pennsylvania Transportation Authority's ("SEPTA") proposed second amended complaint disclosed the existence of a confidential, non-public, fact-finding inquiry regarding the Company being conducted by the SEC. On September 27, 2016, the Company entered into a settlement agreement with the SEC resolving the investigation of accounting and related matters at the Company for the periods ended June 30, 2010 to December 31, 2011. As part of the settlement agreement, the Company agreed to pay a civil money penalty of $1 million. On January 31, 2017, the Court entered a Case Management Order establishing the schedule for the litigation. The Case Management Order, among other things, sets the deadlines for the completion of discovery, the filing of motions and various pre-trial conferences. The trial is scheduled to begin on January 7, 2019.
The Company maybelieves that the allegations of SEPTA's second amended complaint are without merit and intends to vigorously defend itself against those claims. It is not possible at this time to estimate losses, if any, with the litigation. However, there can be no assurances that the Company will not incur any losses associated with this litigation or that any losses that are incurred will not be material.
Indemnification costs associated with litigation and legal proceedings could adversely affectedimpact the Company and its financial condition and results of operations.
We are generally required, to the extent permitted by technological advances.
Technological advances impact our business. The banking industry is undergoing technological changes with frequent introductions of new technology-driven products and services. In additionPennsylvania law, to improving customer services, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success may depend, in part, on our ability to address the needs ofindemnify our current and prospective customers by using technologyformer directors and officers who are named as defendants in lawsuits. We also have certain contractual indemnification obligations to provide productsthird parties regarding litigation. Generally, insurance coverage is not available for such indemnification costs we could incur to third parties. Current or future litigation could result in indemnification expenses that could have a materially adverse impact on our financial condition and servicesresults of operations.
Risks Related to Liquidity
The Parent Company is a holding company dependent for liquidity on payments from its bank subsidiary, which is subject to restrictions.
The Parent Company is a holding company and depends on dividends, distributions and other payments from the Bank to fund dividend payments and stock repurchases, if permitted, and to fund all payments on obligations. The Bank is subject to laws that will satisfy demands for convenience as well asrestrict dividend payments or authorize regulatory bodies to create additional efficienciesblock or reduce the flow of funds from it to us. In addition, our right to participate in operations.a distribution of assets upon the Bank’s liquidation or reorganization is subject to the prior claims of the Bank’s creditors.
The soundness of other financial institutions could adversely affect the Company.
Our ability to engage in routine funding and other transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have historically led to market-wide liquidity problems, losses of depositor, creditor and counterparty confidence and could lead to losses or defaults by us or by other institutions. We could experience increases in deposits and assets as a result of other banks’ difficulties or failure, which would increase the capital we need to support such growth.
An interruptionRisks Related to Owning our Stock
If the Company wants to, or breachis compelled to, raise additional capital in security with respectthe future, that capital may not be available when it is needed and on terms favorable to current shareholders.
Federal banking regulators require us and our information system,banking subsidiary to maintain adequate levels of capital to support our operations. These capital levels are determined and dictated by law, regulation and banking regulatory agencies. In addition, capital levels are also determined by our management and board of directors based on capital levels that, they believe, are necessary to support our business operations. At December 31, 2017, all four capital ratios for us and our banking subsidiary were above regulatory minimum levels to be deemed “well capitalized” under current bank regulatory guidelines. To be “well capitalized,” banking companies generally must maintain a tier 1 leverage ratio of at least 5.0%, CET1 capital ratio of 6.5%, Tier 1 risk-based capital ratio of at least 8.0%, and a total risk-based capital ratio of at least 10.0%. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).
The Company’s ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside of our control, and on our financial performance. Accordingly, we cannot provide assurance of our ability to raise additional capital on terms and time frames acceptable to us or to raise additional capital at all. Additionally, the inability to raise capital in sufficient amounts may adversely affect our outsourced service providers,operations, financial condition and results of operations. Our ability to borrow could adversely impactalso be impaired by factors that are nonspecific to us, such as severe disruption of the Company’s reputationfinancial markets or negative news and expectations about the prospects for the financial services industry as a whole. If we raise capital through the issuance of additional shares of our common stock or other securities, we would likely dilute the ownership interests of current investors and the price at which we issue additional shares of stock could be less than the current market price of our common stock and, thus, could dilute the per share book value and earnings per share of our common stock. Furthermore, a capital raise through the issuance of additional shares may have an adverse impact on our financial condition or results of operations.stock price.
We rely on software, communication, and information exchange on a variety of computing platforms and networks and over the Internet. Despite numerous safeguards, we cannot be certain that all of our systems are entirely free from vulnerability to attack or other technological difficulties or failures. We rely on the services of a variety of vendors to meet our data processing and communication needs. If information security is breached or other technology difficulties or failures occur, information may be lost or misappropriated, services and operations may be interrupted and we could be exposed to claims from customers. Any of these results could have a material adverse effect on our financial condition, results of operations or liquidity.
Pending litigation and legal proceedings and the impact of any finding of liability or damages could adversely impact the Company and its financial condition and results of operations.
We have been named, from time to time, as a defendant in various legal actions or other proceedings arising in connection with our activities as a financial services institution. Certain of these actions include and future actual or threatened legal actions may include claims for substantial and indeterminate amounts of damages, or may result in other outcomes adverse to us. Legal liability could materially adversely affect our business, financial condition or results of operations or cause us reputational harm, which could harm our business. For more information regarding legal proceedings in which we are involved, see “Legal Proceedings” in Part I, Item 3 herein.
The Company may not be able to attract and retain skilled people.
The Company’s success depends, in large part, on our ability to attract and retain skilled people. We recently experienced significant turnover among our senior officers and salary increases, bonuses, and other compensation for our senior executives has been frozen in recent years. Competition for the best people in most activities engaged in by us can be intense, and we may not be able to attract and hire sufficiently skilled people to fill open and newly created positions or to retain current or future employees. An inability to attract and retain individuals with the necessary skills to fill open positions, or the unexpected loss of services of one or more of our key personnel, could have a material adverse impact on our business due to the loss of their skills, knowledge of our markets, years of industry experience or the difficulty of promptly finding qualified replacement personnel.
The market price of our common stock has been subject to volatility.
The market price of the Company’s common stock has been subject to fluctuations in response to numerous factors, many of which are beyond our control. These factors include actual or anticipated variations in our operational results and cash flows, changes in financial estimates by securities analysts, trading volume, large purchases or sales of our common stock, market conditions within the banking industry, the general state of the securities markets and the market for stocks of financial institutions, as well as general economic conditions.
The Parent Company's primary source of income is dividends received from its bank subsidiary.
15The Parent Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders. The Company also has repurchased shares of its common stock. The Company’s primary source of income is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid from the Bank to the Company without prior approval of regulatory agencies. Restrictions on the Bank’s ability to dividend funds to the Company are included in Note 14, Restrictions on Dividends, Loans and Advances, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data."
ITEM 1B – UNRESOLVED STAFF COMMENTS
None.
ITEM 2 – PROPERTIES
TheOur principal executive offices are located at 77 East King Street, Shippensburg, Pennsylvania, with additional executive and administrative offices at 4750 Lindle Road, Harrisburg, Pennsylvania. These facilities are owned by the Bank, ownswhich also maintains its principal and leases propertiesadditional executive and administrative offices at those locations.
We own or lease other premises for use in conducting our business activities, including bank branches, an operations center, and offices in Berks, Cumberland, Dauphin, Franklin, Lancaster, and Perry Counties, Pennsylvania and Washington County, Maryland asMaryland. We believe that the properties currently owned and leased are adequate for present levels of operation. We are constantly evaluating the best and most efficient mix of branch banking officeslocations to service our customers due to evolving trends in our industry and an operations center. The Company and the Bank maintain headquarters at the Bank’s King Street Office in Shippensburg, Pennsylvania. A summary of these properties is as follows:increased engagement through digital channels.
|
| | | | |
| Office and Address | Acquired/Built | | Office and Address | Acquired/Built |
| | | | | |
| Properties Owned | | | Properties Owned (continued) | |
| | | | | |
| Orrstown Office | 1919 | | Lincoln Way East Office | 2004 |
| 3580 Orrstown Road | | | 1725 Lincoln Way East | |
| Orrstown, PA 17244 | | | Chambersburg, PA 17202 | |
| | | | | |
| Lurgan Avenue Office | 1981 | | Duncannon Office | 2006 |
| 121 Lurgan Avenue | | | 403 North Market Street | |
| Shippensburg, PA 17257 | | | Duncannon, PA 17020 | |
| | | | | |
| King Street Office | 1986 | | Greencastle Office | 2006 |
| 77 E. King Street | | | 308 Carolle Street | |
| Shippensburg, PA 17257 | | | Greencastle, PA 17225 | |
| | | | | |
| Stonehedge Office | 1994 | | New Bloomfield Office | 2006 |
| 427 Village Drive | | | 1 South Carlisle Street | |
| Carlisle, PA 17015 | | | New Bloomfield, PA 17068 | |
| | | | | |
| Path Valley Office | 1995 | | Newport Office | 2006 |
| 16400 Path Valley Road | | | Center Square | |
| Spring Run, PA 17262 | | | Newport, PA 17074 | |
| | | | | |
| Norland Avenue Office | 1997 | | Red Hill Office | 2006 |
| 625 Norland Avenue | | | 18 Newport Plaza | |
| Chambersburg, PA 17201 | | | Newport, PA 17074 | |
| | | | | |
| Silver Spring Office | 2000 | | Simpson Street Office | 2006 |
| 3 Baden Powell Lane | | | 1110 East Simpson Street | |
| Mechanicsburg, PA 17050 | | | Mechanicsburg, PA 17055 | |
| | | | | |
| North Middleton Office (land lease) | 2002 | | North Pointe Operations Center | 2007 |
| 2250 Spring Road | | | Orrstown Operations Center | |
| Carlisle, PA 17013 | | | 2695 Philadelphia Avenue | |
| | | | Chambersburg, PA 17201 | |
| | | | | |
| Orchard Drive Office (land lease) | 2003 | | Eastern Blvd. Office | 2008 |
| 1355 Orchard Drive | | | 1020 Professional Court | |
| Chambersburg, PA 17201 | | | Hagerstown, MD 21740 | |
| | | | | |
| Seven Gables Office | 2003 | | | |
| 1 Giant Lane | | | | |
| Carlisle, PA 17013 | | | | |
|
| | | | |
| Office and Address | Acquired/Built | | Office and Address | Acquired/Built |
| | | | | |
| Properties Leased | | | Properties Leased (continued) | |
| | | | | |
| Hanover Street | 1997 | | Carlisle Fairgrounds | 2011 |
| 22 S. Hanover St. | | | 1000 Bryn Mawr Road | |
| Carlisle, PA 17013 | | | Carlisle, PA 17103 | |
| | | | | |
| Camp Hill | 2005 | | Lancaster Financial Center | 2013 |
| 3045 Market St. | | | 2098 Spring Valley Road | |
| Camp Hill, PA 17011 | | | Lancaster, PA 17601 | |
ITEM 3 – LEGAL PROCEEDINGS
The nature of the Company’s business generates a certain amount of litigation involving matters arising out of the ordinary course of business. Except as describedInformation regarding legal proceedings is included in Note 20, “Contingencies” in the Notes19, Contingencies, to the Consolidated Financial Statements which information is incorporated herein by reference, in the opinion of management, there are no legal proceedings that are expected to have a material effect on the results of operations, liquidity, or the financial position of the Company at this time.under Part II, Item 8, "Financial Statement and Supplementary Data."
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock began tradingis traded on the NASDAQ Capital Market under the symbol “ORRF” as of April 28, 2009, and continues to be listed there as of the date hereof.“ORRF.” At the close of business on March 2, 2015,February 28, 2018, there were approximately 3,0592,700 shareholders of record.
The following table sets forth for the fiscal periods indicated,each quarter of 2017 and 2016 the high and low sales prices per share of our common stock forand the two most recent fiscal years.cash dividends declared. Trading prices are based on published financial sources.
| | | | 2014 | | 2013 | 2017 | | 2016 |
| | Market Price | | Quarterly Dividend | | Market Price | | Quarterly Dividend | Market Price | | Quarterly Dividend | | Market Price | | Quarterly Dividend |
| | High | | Low | | High | | Low | | High | | Low | | High | | Low | |
| | | | | | | | | | | | | | | | | | | | | | | |
| First quarter | $ | 17.50 |
| | $ | 15.35 |
| | $ | 0.00 |
| | $ | 15.15 |
| | $ | 9.49 |
| | $ | 0.00 |
| $ | 23.40 |
| | $ | 20.00 |
| | $ | 0.10 |
| | $ | 18.11 |
| | $ | 16.60 |
| | $ | 0.08 |
|
| Second quarter | 16.95 |
| | 15.85 |
| | 0.00 |
| | 16.20 |
| | 12.52 |
| | 0.00 |
| 23.00 |
| | 19.05 |
| | 0.10 |
| | 19.95 |
| | 17.05 |
| | 0.09 |
|
| Third quarter | 17.00 |
| | 15.33 |
| | 0.00 |
| | 18.00 |
| | 12.79 |
| | 0.00 |
| 26.55 |
| | 22.15 |
| | 0.10 |
| | 23.73 |
| | 17.59 |
| | 0.09 |
|
| Fourth quarter | 17.21 |
| | 15.50 |
| | 0.00 |
| | 17.78 |
| | 15.45 |
| | 0.00 |
| 26.95 |
| | 24.15 |
| | 0.12 |
| | 23.75 |
| | 18.05 |
| | 0.09 |
|
| | | | | | $ | 0.00 |
| | | | | | $ | 0.00 |
| | | | | $ | 0.42 |
| | | | | | $ | 0.35 |
|
In October 2011, the Company announced that it had discontinued its quarterly dividend. In March 2012, the Company and the Bank entered into a Written Agreement with the Federal Reserve Bank. Due
Our management is currently committed to the regulatory restrictions included in the Written Agreement, the Company is restricted from paying any dividends. Accordingly,continuing to pay regular cash dividends; however, there can be no assurance that we will payas to future dividends because they are dependent on our future earnings, capital requirements and financial condition. Restrictions on the payment of dividends are discussed in Note 14, Restrictions on Dividends, Loans and Advances, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data." On January 24, 2018, the Board declared a cash dividend in the near future.of $0.12 per common share, which was paid on February 9, 2018.
Issuer Purchases of Equity Securities
OnIn September 23, 2010,2015, the Board of Directors of the Company announced an extensionauthorized a share repurchase program under which the Company may repurchase up to 5% of its original Stock Repurchase Plan authorizing the repurchase of 150,000Company's outstanding shares of its common stock.stock, or approximately 416,000 shares, in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. When and if appropriate, repurchases may be made in open market or privately negotiated transactions, depending on market conditions, regulatory requirements and other corporate considerations, as determined by management. Share repurchases may not occur and may be discontinued at any time.
No shares were repurchased from October 1, 2017 to December 31, 2017. At December 31, 2017, 82,725 shares had been repurchased under the program at a total cost of $1,438,000, or $17.38 per share. The maximum number of shares that may yet be purchased under the plan is 146,693333,275 shares at December 31, 2014.
For the quarter ended December 31, 2014, there were no repurchases of common equity securities by the Company under the Stock Repurchase Plan. In connection with the formal written agreement entered into with the Federal Reserve Bank, the Company’s Stock Repurchase Plan was suspended, and the Company does not expect to repurchase shares in the foreseeable future.2017.
PERFORMANCE GRAPH
The followingperformance graph shows a five-year comparison ofbelow compares the cumulative total shareholder return on the Company’sour common stock as compared towith other indexes: the SNL index of banks with assets between $1 billion and $5 billion, the S&P 500 Index, and the NASDAQ Composite index. The graph assumes an investment of $100 on December 31, 2012 and reinvestment of dividends on the date of payment without commissions. Shareholder returns on the Company’sour common stock are based upon trades on the NASDAQ Stock Market. The shareholder returns shown in theperformance graph arerepresents past performance and should not necessarily indicativebe considered to be an indication of future performance.
|
| | | | | | | | | | | | | | | | | |
| | Period Ending |
| Index | 12/31/09 | | 12/31/10 | | 12/31/11 | | 12/31/12 | | 12/31/13 | | 12/31/14 |
| Orrstown Financial Services, Inc. | 100.00 |
| | 81.34 |
| | 25.27 |
| | 29.52 |
| | 50.07 |
| | 52.06 |
|
| SNL Bank $1B-$5B | 100.00 |
| | 113.35 |
| | 103.38 |
| | 127.47 |
| | 185.36 |
| | 193.81 |
|
| S&P 500 | 100.00 |
| | 115.06 |
| | 117.49 |
| | 136.30 |
| | 180.44 |
| | 205.14 |
|
| NASDAQ Composite | 100.00 |
| | 118.15 |
| | 117.22 |
| | 138.02 |
| | 193.47 |
| | 222.16 |
|
|
| | | | | | | | | | | | | | | | | |
| | Period Ending |
| Index | 12/31/12 | | 12/31/13 | | 12/31/14 | | 12/31/15 | | 12/31/16 | | 12/31/17 |
| Orrstown Financial Services, Inc. | 100.00 |
| | 169.61 |
| | 176.35 |
| | 187.42 |
| | 239.80 |
| | 275.16 |
|
| SNL Bank $1B-$5B Index | 100.00 |
| | 145.41 |
| | 152.04 |
| | 170.20 |
| | 244.85 |
| | 261.04 |
|
| S&P 500 Index | 100.00 |
| | 132.39 |
| | 150.51 |
| | 152.59 |
| | 170.84 |
| | 208.14 |
|
| NASDAQ Composite Index | 100.00 |
| | 140.12 |
| | 160.78 |
| | 171.97 |
| | 187.22 |
| | 242.71 |
|
Source : S&P Global Market Intelligence © 2017
In accordance with the rules of the SEC, this section captioned “Performance Graph” shall not be incorporated by reference into any of our future filings made under the Exchange Act or the Securities Act of 1933, as amended (the “Securities Act”).Act. The Performance Graph and its accompanying table are not deemed to be soliciting material or to be filed under the Exchange Act or the Securities Act.
Recent Sales of Unregistered Securities
The Company has not sold any securities within the past three years which were not registered under the Securities Act.
ITEM 6 – SELECTED FINANCIAL DATA
| | | | Year Ended December 31, | At or For The Year Ended December 31, |
| (Dollars in thousands) | 2014 | | 2013 | | 2012 | | 2011 | | 2010 | |
| (Dollars in thousands except per share information) | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Summary of Operations | | | | | | | | | | | | | | | | | | |
| Interest income | $ | 38,183 |
| | $ | 37,098 |
| | $ | 45,436 |
| | $ | 60,361 |
| | $ | 58,423 |
| |
| Interest and dividend income | | $ | 51,015 |
| | $ | 41,962 |
| | $ | 38,635 |
| | $ | 38,183 |
| | $ | 37,098 |
|
| Interest expense | 4,159 |
| | 5,011 |
| | 7,548 |
| | 10,754 |
| | 12,688 |
| 7,644 |
| | 5,417 |
| | 4,301 |
| | 4,159 |
| | 5,011 |
|
| Net interest income | 34,024 |
| | 32,087 |
| | 37,888 |
| | 49,607 |
| | 45,735 |
| 43,371 |
| | 36,545 |
| | 34,334 |
| | 34,024 |
| | 32,087 |
|
| Provision for loan losses | (3,900 | ) | | (3,150 | ) | | 48,300 |
| | 58,575 |
| | 8,925 |
| 1,000 |
| | 250 |
| | (603 | ) | | (3,900 | ) | | (3,150 | ) |
| Net interest income after provision for loan losses | 37,924 |
| | 35,237 |
| | (10,412 | ) | | (8,968 | ) | | 36,810 |
| 42,371 |
| | 36,295 |
| | 34,937 |
| | 37,924 |
| | 35,237 |
|
| Securities gains | 1,935 |
| | 332 |
| | 4,824 |
| | 6,224 |
| | 3,636 |
| |
| Other noninterest income | 16,919 |
| | 17,476 |
| | 18,438 |
| | 20,396 |
| | 19,340 |
| |
| Goodwill impairment charge | 0 |
| | 0 |
| | 0 |
| | 19,447 |
| | 0 |
| |
| Other noninterest expenses (excluding goodwill impairment charge) | 43,768 |
| | 43,247 |
| | 43,349 |
| | 41,032 |
| | 36,735 |
| |
| Income (loss) before income taxes (benefit) | 13,010 |
| | 9,798 |
| | (30,499 | ) | | (42,827 | ) | | 23,051 |
| |
| Investment securities gains | | 1,190 |
| | 1,420 |
| | 1,924 |
| | 1,935 |
| | 332 |
|
| Noninterest income | | 19,197 |
| | 18,319 |
| | 17,254 |
| | 16,919 |
| | 17,476 |
|
| Noninterest expenses | | 50,330 |
| | 48,140 |
| | 44,607 |
| | 43,768 |
| | 43,247 |
|
| Income before income tax expense (benefit) | | 12,428 |
| | 7,894 |
| | 9,508 |
| | 13,010 |
| | 9,798 |
|
| Income tax expense (benefit) | (16,132 | ) | | (206 | ) | | 7,955 |
| | (10,863 | ) | | 6,470 |
| 4,338 |
| | 1,266 |
| | 1,634 |
| | (16,132 | ) | | (206 | ) |
| Net income (loss) | $ | 29,142 |
| | $ | 10,004 |
| | $ | (38,454 | ) | | $ | (31,964 | ) | | $ | 16,581 |
| |
| Per Common Share Data | | | | | | | | | | |
| Net income (loss) | $ | 3.59 |
| | $ | 1.24 |
| | $ | (4.77 | ) | | $ | (3.98 | ) | | $ | 2.18 |
| |
| Diluted net income (loss) | 3.59 |
| | 1.24 |
| | (4.77 | ) | | (3.98 | ) | | 2.17 |
| |
| Cash dividend paid | 0.00 |
| | 0.00 |
| | 0.00 |
| | 0.69 |
| | 0.89 |
| |
| Net income | | $ | 8,090 |
| | $ | 6,628 |
| | $ | 7,874 |
| | $ | 29,142 |
| | $ | 10,004 |
|
| Per Share Information | | | | | | | | | | |
| Basic earning per share | | $ | 1.00 |
| | $ | 0.82 |
| | $ | 0.97 |
| | $ | 3.59 |
| | $ | 1.24 |
|
| Diluted earnings per share | | 0.98 |
| | 0.81 |
| | 0.97 |
| | 3.59 |
| | 1.24 |
|
| Dividends per share | | 0.42 |
| | 0.35 |
| | 0.22 |
| | 0.00 |
| | 0.00 |
|
| Book value at December 31 | 15.40 |
| | 11.28 |
| | 10.85 |
| | 15.92 |
| | 20.10 |
| 17.34 |
| | 16.28 |
| | 16.08 |
| | 15.40 |
| | 11.28 |
|
| Average shares outstanding – basic | 8,110,344 |
| | 8,093,306 |
| | 8,066,148 |
| | 8,017,307 |
| | 7,609,933 |
| |
| Average shares outstanding – diluted | 8,116,054 |
| | 8,093,306 |
| | 8,066,148 |
| | 8,026,726 |
| | 7,637,824 |
| |
| Weighted average shares outstanding – basic | | 8,070,472 |
| | 8,059,412 |
| | 8,106,438 |
| | 8,110,344 |
| | 8,093,306 |
|
| Weighted average shares outstanding – diluted | | 8,226,261 |
| | 8,145,456 |
| | 8,141,600 |
| | 8,116,054 |
| | 8,093,306 |
|
| Stock Price Statistics | | | | | | | | | | | | | | | | | | |
| Close | $ | 17.00 |
| | $ | 16.35 |
| | $ | 9.64 |
| | $ | 8.25 |
| | $ | 27.41 |
| $ | 25.25 |
| | $ | 22.40 |
| | $ | 17.84 |
| | $ | 17.00 |
| | $ | 16.35 |
|
| High | 17.50 |
| | 18.00 |
| | 11.29 |
| | 29.50 |
| | 36.50 |
| 26.95 |
| | 23.75 |
| | 18.45 |
| | 17.50 |
| | 18.00 |
|
| Low | 15.33 |
| | 9.49 |
| | 7.45 |
| | 7.90 |
| | 20.00 |
| 19.05 |
| | 16.60 |
| | 15.10 |
| | 15.33 |
| | 9.49 |
|
| Price earnings ratio at close | 4.7 |
| | 13.2 |
| | (2.0 | ) | | (2.1 | ) | | 12.6 |
| 25.3 |
| | 27.3 |
| | 18.4 |
| | 4.7 |
| | 13.2 |
|
| Diluted price earnings ratio at close | 4.7 |
| | 13.2 |
| | (2.0 | ) | | (2.1 | ) | | 12.6 |
| 25.8 |
| | 27.7 |
| | 18.4 |
| | 4.7 |
| | 13.2 |
|
| Price to book at close | 1.1 |
| | 1.4 |
| | 0.9 |
| | 0.5 |
| | 1.4 |
| 1.5 |
| | 1.4 |
| | 1.1 |
| | 1.1 |
| | 1.4 |
|
| Year-End Balance Sheet Data | | | | | | | | | | |
| Year-End Information | | | | | | | | | | |
| Total assets | $ | 1,190,443 |
| | $ | 1,177,812 |
| | $ | 1,232,668 |
| | $ | 1,444,097 |
| | $ | 1,511,722 |
| $ | 1,558,849 |
| | $ | 1,414,504 |
| | $ | 1,292,816 |
| | $ | 1,190,443 |
| | $ | 1,177,812 |
|
| Loans | 704,946 |
| | 671,037 |
| | 703,739 |
| | 965,440 |
| | 964,293 |
| 1,010,012 |
| | 883,391 |
| | 781,713 |
| | 704,946 |
| | 671,037 |
|
| Total investment securities | 384,549 |
| | 416,864 |
| | 311,774 |
| | 322,123 |
| | 440,570 |
| 425,305 |
| | 408,124 |
| | 402,844 |
| | 384,549 |
| | 416,864 |
|
| Deposits – noninterest bearing | 116,302 |
| | 116,371 |
| | 121,090 |
| | 111,930 |
| | 104,646 |
| |
| Deposits – interest bearing | 833,402 |
| | 884,019 |
| | 963,949 |
| | 1,104,972 |
| | 1,083,731 |
| |
| Deposits – noninterest-bearing | | 162,343 |
| | 150,747 |
| | 131,390 |
| | 116,302 |
| | 116,371 |
|
| Deposits – interest-bearing | | 1,057,172 |
| | 1,001,705 |
| | 900,777 |
| | 833,402 |
| | 884,019 |
|
| Total deposits | 949,704 |
| | 1,000,390 |
| | 1,085,039 |
| | 1,216,902 |
| | 1,188,377 |
| 1,219,515 |
| | 1,152,452 |
| | 1,032,167 |
| | 949,704 |
| | 1,000,390 |
|
| Repurchase agreements | 21,742 |
| | 9,032 |
| | 9,650 |
| | 15,013 |
| | 87,850 |
| 43,576 |
| | 35,864 |
| | 29,156 |
| | 21,742 |
| | 9,032 |
|
| Borrowed money | 79,812 |
| | 66,077 |
| | 37,470 |
| | 73,798 |
| | 65,178 |
| 133,815 |
| | 76,163 |
| | 84,495 |
| | 79,812 |
| | 66,077 |
|
| Total shareholders’ equity | 127,265 |
| | 91,439 |
| | 87,694 |
| | 128,197 |
| | 160,484 |
| 144,765 |
| | 134,859 |
| | 133,061 |
| | 127,265 |
| | 91,439 |
|
| Trust assets under management – market value | 1,017,013 |
| | 1,085,216 |
| | 992,378 |
| | 947,273 |
| | 929,327 |
| |
| Performance Statistics | | | | | | | | | | |
| Assets under management – market value | | 1,370,950 |
| | 1,174,143 |
| | 966,362 |
| | 1,017,013 |
| | 1,085,216 |
|
| Financial Ratios | | | | | | | | | | |
| Average equity / average assets | 8.63 | % | | 7.45 | % | | 8.07 | % | | 10.36 | % | | 10.76 | % | 9.49 | % | | 10.41 | % | | 10.66 | % | | 8.63 | % | | 7.45 | % |
| Return on average equity | 28.78 | % | | 11.30 | % | | (35.22 | )% | | (20.33 | )% | | 11.22 | % | 5.73 | % | | 4.80 | % | | 5.99 | % | | 28.78 | % | | 11.30 | % |
| Return on average assets | 2.48 | % | | 0.84 | % | | (2.84 | )% | | (2.11 | )% | | 1.21 | % | 0.54 | % | | 0.50 | % | | 0.64 | % | | 2.48 | % | | 0.84 | % |
ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is a discussion ofintended to assist readers in understanding the consolidated financial condition and results of operations for each of the three years ended December 31, 2014, 2013Orrstown and 2012. The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and Notes to Consolidated Financial Statements presentednotes thereto included in this report to assist in the evaluation of the Company’s 2014 performance.Annual Report on Form 10-K. Certain prior period amounts presented in this discussion and analysis have been reclassified to conform to current period classifications. It should also be read in conjunction with the “Caution About Forward Looking Statements” section at the end of this discussion.
Overview
The U.S. economy is in its fifth yearresults of recovery from one of its longestour operations are highly dependent on economic conditions and most severe economic recessions in recent history.market interest rates. The strength of the recovery has been modest by historical standards with GDP growth struggling to sustain momentum above 2.0%. Unemployment had been slow to decline until 2014, when it experienced its best employment growth in over a decade adding over three million new jobs. While the economic outlook finally appears strong enough that the Federal Reserve is expected to begin raising interest rates in mid-2015, most of the rest of the world's economies appear to be in recession or experiencing decelerating growth. As a result, the dollar has strengthened significantly and commodity prices have fallen precipitously. It remains to be seen if the U.S. economy will remain strong enough to allow the Federal Reserve to raise interest rates while the rest of the world's major economies struggle.
The Company returned toCompany's profitability for the years ended December 31, 20142017, 2016 and 2013, recording net income of $29,142,0002015 was influenced by its continued organic growth and $10,004,000 after posting lossesongoing expansion into targeted markets, while it maintained improvement in the two previous years, including $38,454,000 in 2012. The Company was able to return to profitability as asset quality issues have improved significantly in the past two years, from their elevated levels, allowing for significant reductions in the provision for loan losses in 2014prior years. These and 2013 compared to 2012. The provision for loan losses was a negative $3,900,000 and $3,150,000 for the years ended December 31, 2014 and 2013, compared to $48,300,000 in 2012.other matters are discussed more fully below.
The results of operation of the Company was also influenced by the establishment of a deferred tax asset valuation allowance reserve totaling $20,235,000 in 2012 due primarily to the cumulative losses posted in 2011 and 2012. As a result of sustained profitability for the last nine quarters, strengthened asset quality metrics and regulatory capital, the valuation allowance was recaptured in the fourth quarter of 2014, and an income tax benefit of $16,204,000 was recorded.
Critical Accounting Policies
The Company’sCompany's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”)GAAP and follow general practices within the financial services industry in which it operates. Management, in order to prepareindustry. Application of these principles involves complex judgments and estimates by management that have a material impact on the Company’s consolidated financial statements, is required to makecarrying value of certain assets and liabilities. The judgments and estimates assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgmentswe used are based on information available ashistorical experiences and other factors, which we believe are reasonable under the circumstances. Because of the balance sheet date throughnature of the date the financial statements are filed with the SEC. As this information changes, the consolidated financial statementsjudgments and estimates that we have made, actual results could reflect differentdiffer from these judgments and estimates, assumptions, and judgments. Certain policies inherentlywhich could have a greater reliancematerial impact on the usecarrying values of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources.results of our operations.
The most significant accounting policies followed by the Company are presented in Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements.Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data." These policies, along with the disclosures presented in the other consolidated financial statement notes, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, the Company has identified the adequacy of the allowance for loan lossesALL and accounting for income taxes as critical accounting policies.
The allowance for loan lossesALL represents management’s estimate of probable incurred credit losses inherent in the loan portfolio.portfolio at the balance sheet date. Determining the amount of the allowance for loan lossesALL is considered a criticalcomplex accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of
current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated balance sheet.sheets.
The Company recognizes deferred tax assets and liabilities for the future effects of temporary differences and tax credits. Enacted tax rates are applied to cumulative temporary differences based on expected taxable income in the periods in which the deferred tax asset or liability is anticipated to be realized. Future tax rate changes could occur that would require the recognition of income or expense in the statement of operationsincome in the period in which they are enacted. DeferredThe Company records deferred tax assets mustto the extent the Company believes these assets will more likely than not be reduced byrealized, utilizing a valuation allowance if in management’s judgment it is “more likely than not” that someall or a portion of the asset willdeferred tax assets is not so considered to be realized. In making this determination, the Company considers all available evidence, including future reversals of existing deferred tax liabilities, projected future taxable income, feasible and prudent tax planning strategies and recent financial operating results. In the event the Company was to determine that it would be able to realize deferred tax assets in the future in excess of their net recorded amount, an adjustment to the valuation allowance would be made that would impact income tax expense. Management may need to modify their judgmentsits judgment in this regard, from one period to another, should a material change occur in the business environment, tax legislation, or in any other business factor that could impair the Company’s ability to benefit from the asset in the future. Based upon
On December 22, 2017, federal tax reform legislation, commonly referred to as the Company’s prior cumulative taxable losses, projections for future taxableTax Cuts and Jobs Act of 2017 (the "Tax Act"), was enacted. Among other things, the Tax Act reduced the Company's statutory federal tax rate from 34% to 21% effective January 1, 2018. As a result, we were required to remeasure, through income tax expense, certain deferred tax assets and other available evidence, management determined that there was not sufficient positive evidenceliabilities using the enacted rate at which we expect them to outweigh the cumulative loss, and concluded it was not more likely than not that thebe recovered or settled. The remeasurement of our net deferred tax asset wouldresulted in additional federal deferred tax expense of $2,635,000, which is included in total tax expense for 2017. The Company's deferred tax assets related to low-income housing credit and alternative minimum tax credit carryforwards were not impacted by the change in statutory tax rate, as they are treated as payments on future federal income taxes due and are not subject to remeasurement. However, the Tax Act did change alternative minimum tax credit carryforwards to be realized forrefundable credits. To reflect this change, the quarters ended September 30, 2012 through September 30, 2014. Accordingly a full valuation allowance was recorded for each of these quarters. However,Company reclassed its alternative minimum tax credit carryforwards, totaling $5,343,000 at December 31, 2014, management noted the Company’s profitable operations over the past nine quarters, improvements in asset quality, strengthened capital position, reduced regulatory risk, as well as improvement in economic conditions. Based on this analysis, management determined that a full valuation allowance was no longer necessary, and the full amount was recaptured as of December 31, 2014. The ultimate realization of2017, from deferred tax assets is dependent upon existence, or generation, of taxable incometo other assets in the periods when those temporary differences and net operating loss and credit carryforwards are deductible. Management considered projected future taxable income, length of time needed for carryforwards to reverse, available tax planning strategies, and other factors in making its assessment that it was more likely than not the net deferred tax assets would be realized, and recaptured the full valuation allowance at December 31, 2014.consolidated balance sheets.
Readers of the consolidated financial statements should be aware that the estimates and assumptions used in the Company’s current financial statements may need to be updated in future financial presentations for changes in circumstances, business or economic conditions in order to fairly represent the condition of the Company at that time.
Corporate Profile and Significant Developments
The Company is a bank holding company (that has elected status as a financial holding company with the FRB) headquartered in Shippensburg, Pennsylvania with consolidated assets of $1,190,443,000 at December 31, 2014. The consolidated financial information presented herein reflects the Company and its wholly-owned commercial bank subsidiary, the Bank.
The Bank, with total assets of $1,190,114,000 at December 31, 2014, is a Pennsylvania chartered commercial bank with 22 offices. The Bank’s deposit services include a variety of checking, savings, time and money market deposits along with related debit card and merchant services. Lending services include commercial loans, residential loans, commercial mortgages and various forms of consumer lending. Orrstown Financial Advisors, a division of the Bank, offers a diverse line of financial services to our customers, including, but not limited to, brokerage, mutual funds, trusts, estate planning, investments and insurance products. At December 31, 2014, Orrstown Financial Advisors had approximately $1,017,013,000 of assets under management.
Economic Climate, Inflation and Interest Rates
The pace of U.S. economy appearseconomic growth has recently increased above the modest two percent average of the recent expansion. The passage of tax cuts, a federal budget with significantly increased government spending, and the possibility of an infrastructure bill all contribute to be recovering from onea more positive consensus outlook for 2018. This expansion is now within 14 months of itsbecoming the longest expansion since World War II. There are signs that this expansion is reaching maturity: credit spreads are near their historical lows, the unemployment rate has approached four percent, and most severe economic recessions in history. The recovery has been much weaker than past recoveries resulting in poor loan demand and continued credit quality challenges. This pattern remained in place throughout 2014.the yield curve is flatter.
The majority of the assets and liabilities of a financial institution are monetary in nature, and therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an impact on the growth of total assets and on noninterest expenses, which tend to rise during periods of general inflation. Inflationary pressures over the last threeseveral years have been modest, however, with the current unemployment rate and althoughfiscal stimulus on the FRB has been monetizingway, concerns that inflation may increase faster than the debt, which has historically ledlast several years are starting to increased inflation, the outlook for inflation appears modest for the foreseeable future.make their way into economic forecasts and may pressure interest rates higher.
As the Company’s balance sheet consists primarily of financial instruments, interest income and interest expense isare greatly influenced by the level of interest rates and the slope of the interest rateyield curve. During the first two of the three years presented in this financial statement review, interest rates have remainedwere near all-time lows. Because of the low level ofThe FRB began raising short term interest rates we have notin December 2015 and raised the Fed Funds rate 25 basis points four more times between December of 2016 and December of 2017. The yield curve shifted upward with the increase in the Fed Funds rate with short term rates increasing further than long term rates resulting in a flatter yield curve. The Company has been able to lowergrow its net interest income by $9,037,000 from 2015 to 2017, through the rate we paygrowth of loans and higher yielding securities in combination with slower increases in its funding costs. Competition for interest bearing non-maturity depositsquality lending opportunities remains intense, which, together with a flattening yield curve, will continue to the same extent that has been experienced in the rates we have been ablechallenge our ability to earn ongrow our interest earning assets. As a result, the Company’s net interest margin has been negatively impacted.and to leverage our overhead expenses.
Despite the challenging economic conditions during 2012 - 2014, the Company believes it is positioned to withstand these conditions through its improving capital and liquidity positions, high quality debt securities portfolios and recent improvement in asset quality through continuing efforts to manage credit and interest rate risk.
Results of Operations
Summary
For the years ended December 31, 2014 and 2013, theThe Company recorded net income of $29,142,000$8,090,000, $6,628,000 and $10,004,000, compared$7,874,000 for 2017, 2016 and 2015. Diluted earnings per share totaled $0.98, $0.81 and $0.97 for 2017, 2016 and 2015.
Net interest income totaled $43,371,000, $36,545,000 and $34,334,000 for 2017, 2016 and 2015, principally reflecting our organic growth in loans from an expanded sales force and efforts to expand our geographic footprint while taking advantage of market opportunities. A higher interest rate environment each year contributed to increased yields on loans and investments, and, to a net losslesser extent, costs of $38,454,000interest-bearing liabilities.
Favorable historical charge-off data and management's emphasis on loan quality have impacted our results, as the allowance for the same period in 2012. Diluted earnings (loss) per share were $3.59, $1.24 and ($4.77) for the years ended December 31, 2014, 2013 and 2012.
Each of the three years had events and circumstances that affect the comparability of the information for the periods presented, and reflects the impact that asset quality had on the results of our operations. In 2012, the Company continued to identify troubledloan losses has remained stable as loans and due to the aggressive manner in which these assets were handled, a $48,300,000have increased. The provision for loan losses was recorded. Improvements were notedtotaled $1,000,000 and $250,000 in asset quality beginning in 2013,2017 and with some success in remediation and workout efforts, it was determined that no2016. In 2015, a negative provision for loan losses was needed for 2013 and 2014, and that aor recovery of amounts previously provided for or charged off would becharged-off totaling $(603,000) was recognized. This resulted in a negative provision of $3,900,000 and $3,150,000 for the years ended December 31, 2014 and 2013.
Noninterest expenses in total, remained relatively consistent,totaled $50,330,000, $48,140,000 and totaled $43,768,000, $43,247,000$44,607,000 for 2017, 2016 and $43,349,000 for the years ended December 31, 2014, 2013 and 2012. Although the total was relatively flat, the2015. The changes in certain components of noninterest expenses between the three periodsyears are reflective of the Company's asset quality remediation efforts, and focus on investing in additional talent and technologylocations to better serve the needs of our customers and efforts to develop new relationships. Collection, problem loan, and real estate owned expenses decreased from $3,131,000 for the year ended December 31, 2012 to $811,000 and $1,029,000 for the years ended December 31, 2013 and 2014.relationships by taking advantage of market opportunities created by consolidation of other banks. Salaries and employee benefits increased $2,314,000 from $19,864,0002015 to 2016 and $3,775,000 from 2016 to 2017. Occupancy and furniture and fixture costs increased $544,000 from 2015 to 2016 and $414,000 from 2016 to 2017.
Income tax expense totaled $4,338,000, $1,266,000 and $1,634,000 for 2017, 2016 and 2015, or an effective tax rate of 34.9%, 16.0% and 17.2% respectively. In 2017, we remeasured our net deferred tax asset due to the year ended December 31, 2012 to $22,954,000 and $23,658,000 for the years ended December 31, 2013 and 2014.
For the year ended December 31, 2014, net income benefited from the recaptureenactment of the valuation allowance onTax Act in December 2017. The Tax Act lowered our statutory tax rate from 34% to 21% effective January 1, 2018. Remeasurement of our net deferred tax assetsasset at the lower rate resulted in an expense of $16,204,000, that was established and charged to income$2,635,000, which is included in total tax expense in 2012, and negatively impacted results of operation by $20,235,000 in that year. As a result of the recapture of the full valuation that was established in 2012, an income tax benefit of $16,132,000 was recorded in 2014, despite pre-tax income of $9,798,000.for 2017.
Net Interest Income
Net interest income which is the difference between interest income and fees on interest-earning assets and interest expense on interest-bearing liabilities, is the primary component of the Company’sCompany's revenue. Interest-earning assets include loans, securities and federal funds sold. Interest bearingInterest-bearing liabilities include deposits and borrowed funds. To compare the tax-exempt yields to taxable yields, amounts are adjusted to pretax equivalents based on a 35% federal corporate tax rate.
Net interest income is affected by changes in interest rates, volumes of interest-earning assets and interest-bearing liabilities and the composition of those assets and liabilities. The “net“Net interest spread” and “net interest margin” are two common statistics related to changes in net interest income. The net interest spread represents the difference between the yields earned on interest-earning assets and the rates paid for interest-bearing liabilities. The net interest margin is defined as the ratio of net interest income to average earning assets.asset balances. Through the use of noninterest-bearing demand deposits and stockholders’shareholders' equity, the net interest margin exceeds the net interest spread, as these funding sources are non-interest bearing.noninterest-bearing.
The “AnalysisFederal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. Our loan portfolio is affected by changes in the prime interest rate. The prime interest rate, which is the rate offered on loans to borrowers with strong credit, remained at 3.25% during most of 2015. In December 2015, the prime rate increased 25 basis points to 3.50% and remained at that level through most of 2016. In December 2016, the prime rate increased 25 basis points to end the year at 3.75%. During 2017, the prime rate increased 75 basis points (25 basis points in each of March, June and December) to end the year at 4.50%.
Core deposits are deposits that are stable, lower cost and generally reprice more slowly than other deposits when interest rates change. Core deposits are typically funds of local customers who also have a borrowing or other relationship with the Bank. We are primarily funded by core deposits, with noninterest-bearing demand deposits historically being a significant source of funds. This lower-cost funding base is expected to have a positive impact on our net interest income and net interest margin in a rising interest rate environment.
Net Interest Income”interest income totaled $43,371,000, $36,545,000 and $34,334,000 in 2017, 2016 and 2015. The following table presents net interest income, on a fully taxable equivalent basis, net interest spread and net interest margin for the years ending December 31, 2014, 2013 and 2012. The “Changes in Taxable Equivalent Net Interest Income” table below analyzes the changes in net interest income for the same periods broken down by their rate and volume components.
2014 versus 2013
For the year ended December 31, 2014, net interest income, measured on a taxable-equivalent basis for 2017, 2016 and 2015. Taxable-equivalent adjustments are the result of increasing income from tax-free loans and investments by an amount equal to the taxes that would be paid if the income were fully taxable based on a 34% federal corporate tax equivalent basis, increased $1,612,000, or 4.8%,rate for 2017 and 2016 and 35% for 2015, reflecting our statutory tax rates for those years.
Effective January 1, 2018, the Tax Act changed our statutory tax rate to $35,494,000 from $33,882,000 for the same period in 2013. The primary reason for the increase in net interest income was the investment of excess liquidity, previously kept in interest bearing bank balances, into higher yielding securities and the loan portfolio. Expansion in net interest margin from 3.03% for the year ended December 31, 2013 to 3.20% for the same period in 2014 reflects the investments in the higher yielding securities and loans. This shift in investment philosophy was made possible as21%. As a result of this lower tax rate, taxable-equivalent adjustments in future years will be less than if the sustained improvement2017 tax rate had remained in the Company's asset quality and earnings performance, beginning in the fourth quarter of 2013, which allowed for increased liquidity available at our correspondent banks, and decreasing the amount of liquidity we needed on hand. Average earning assets decreased nominally from $1,118,612,000 for the year ended December 31, 2013 to $1,111,087,000 for the same period in 2014.
The largest contributor to the increase in net interest income was the investment of excess liquidity into the securities portfolio. Interest income on securities increased from $5,940,000 for the year ended December 31, 2013 to $8,899,000 for the year ended December 31, 2014. The average securities balance increased to $413,072,000 for the year ended December 31, 2014, compared to $368,208,000 for the same period in 2013. The average yield on the securities portfolio improved from 1.61% for the year ended December 31, 2013 to 2.15% for the same period in 2014. The change in interest income due to the increase in the average yield on investment securities resulted in additional interest income of $3,039,000 and was the primary contributor to the $2,959,000 increase in the interest income earned on securities in 2014 compared to 2013.
Interest income earned on a tax equivalent basis on loans decreased in 2014 and totaled $30,719,000 for the year ended December 31, 2014, a decrease of $2,060,000 compared to the $32,779,000 for the same period in 2013. Although the average balance of loans has increased marginally from $683,272,000 for the year ended December 31, 2013 to $683,878,000 for the same period in 2014, the volume increase was not enough to offset the decrease in rates earned on loans, which declined from an average tax equivalent yield of 4.80% in 2013 to 4.49% in 2014.
Interest expense on deposits and borrowings for the year ended December 31, 2014 was $4,159,000, a decrease of $852,000, from $5,011,000 for the same period in 2013. The average balance of interest bearing liabilities decreased 3.30% from $968,797,000 for the year ended December 31, 2013 to $936,831,000 for the same period in 2014. In addition, the Company’s cost of funds on interest bearing liabilities declined to 0.44% for the year ended December 31, 2014 from 0.52% for the same period in 2013. As time deposits matured, we have been able to replace the funds at lower rates.
During the year ended December 31, 2014, the Company utilized short-term borrowings as a temporary funding source of funds, rather than utilizing more expensive time deposits and long-term borrowings. As a result, the average balance of short-term borrowings increased $27,610,000 during the year, and averaged $51,922,000. In addition, the average rate paid on short-term borrowings for 2014 was 0.29% an increase of 4 basis points from that paid in 2013. The increase in average balances and rates paid resulted in an increase in interest expense on short-term borrowings from $61,000 for the year ended December 31, 2013 to $148,000 in 2014. Conversely, the Company allowed its long-term borrowings to run off without full replacement, resulting in a lower average balance of $17,773,000 for the year ended December 31, 2014 compared to $28,752,000 in 2013. This was a reason that interest expense on long-term debt decreased by $172,000, from $505,000 for the year ended December 31, 2013 to $333,000. Offsetting the lower average balances were higher average rates paid, which increased from 1.76% in 2013 to 1.87% in 2014, as some of the maturing long-term debt had rates below the average of the total.
The Company’s net interest spread of 3.13% increased 17 basis points for the year ended December 31, 2014 as compared to the same period in 2013. Net interest margin for the year ended December 31, 2014 was 3.20%, a 17 basis point improvement from 3.03% for the year ended December 31, 2013.
2013 versus 2012
For the year ended December 31, 2013, net interest income, measured on a fully tax equivalent basis, decreased $6,271,000, or 15.6%, to $33,882,000 from $40,153,000 for 2012. The primary reason for the decrease in net interest income was a decrease in average earning assets from $1,284,864,000 for the year ended December 31, 2012 to $1,118,612,000 for 2013. Compression in net interest margin from 3.12% for the year ended December 31, 2012 to 3.03% for 2013 also contributed to the decline in net interest income.
The largest contributor to the decrease in average earning assets was the decline in the loan portfolio. Interest income on loans decreased from $40,994,000 for the year ended December 31, 2012 to $32,779,000 for the year ended December 31, 2013. The average loan balance declined to $683,272,000 for the year ended December 31, 2013, compared to $859,985,000 for 2012. Two large sales of criticized loans in 2012 resulted in lower average balances, as did management’s workout efforts and scheduled amortization of loans exceeding new loan originations during the year. Partially offsetting the loan volume
variance was an increase in average rates earned on loans from 4.77% for the year ended December 31, 2012 to 4.80% for 2013, as the Company has been able to reduce its nonaccrual loan balance.
Securities interest income also declined in 2013 and totaled $5,940,000 for the year ended December 31, 2013, a decrease of $480,000 compared to the $6,420,000 for 2012. Although the average balance of securities has increased from $315,581,000 for the year ended December 31, 2012 to $368,208,000 for 2013, the volume increase was not enough to offset the decrease in rates earned on securities, which declined from a tax equivalent yield of 2.03% in 2012 to 1.61% in 2013. The low interest rate environment experienced during the first half of 2013 resulted in increased refinancing activity and accelerated prepayments on mortgage backed securities and collateralized mortgage obligations, many of which have premiums associated with them. Furthermore, the proceeds from the sales or maturities of securities had been reinvested at lower interest rates, also negatively impacting the yield earned on securities.
Interest expense on deposits and borrowings for the year ended December 31, 2013 was $5,011,000, a decrease of $2,537,000, from $7,548,000 for 2012. The average balance of interest bearing liabilities decreased 13.2% from $1,115,644,000 for the year ended December 31, 2012 to $968,797,000 for 2013. In addition, the Company’s cost of funds on interest bearing liabilities declined to 0.52% for the year ended December 31, 2013 from 0.68% for 2012. The interest rate environment allowed the Company to lower the rates offered on its demand deposits, including interest bearing demand, money market and savings in 2013 compared to 2012, and as time deposits mature, replacement funds were at slightly lower rates. The rate paid on long-term debt had increased from 1.64% for the year ended December 31, 2012 to 1.76% for 2013, a direct result of the maturity of lower cost borrowings.
The Company’s net interest spread of 2.96% declined 7 basis points for the year ended December 31, 2013 as compared to 2012. Net interest margin for the year ended December 31, 2013 was 3.03%, a 9 basis point decline from 3.12% for the year ended December 31, 2012.effect.
ANALYSIS OF NET INTEREST INCOME
The following table presents interest income on a fully taxable equivalent basis, net-interest spread and net interest margin for the years ended December 31:
| | | | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| (Dollars in thousands) | Average Balance | | Tax Equivalent Interest | | Tax Equivalent Rate | | Average Balance | | Tax Equivalent Interest | | Tax Equivalent Rate | | Average Balance | | Tax Equivalent Interest | | Tax Equivalent Rate | Average Balance | | Taxable- Equivalent Interest | | Taxable- Equivalent Rate | | Average Balance | | Taxable- Equivalent Interest | | Taxable- Equivalent Rate | | Average Balance | | Taxable- Equivalent Interest | | Taxable- Equivalent Rate |
| Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal funds sold and interest bearing bank balances | $ | 14,137 |
| | $ | 35 |
| | 0.25 | % | | $ | 67,132 |
| | $ | 174 |
| | 0.26 | % | | $ | 109,298 |
| | $ | 287 |
| | 0.26 | % | |
| Federal funds sold and interest-bearing bank balances | | $ | 15,487 |
| | $ | 218 |
| | 1.41 | % | | $ | 31,452 |
| | $ | 208 |
| | 0.66 | % | | $ | 18,901 |
| | $ | 81 |
| | 0.43 | % |
| Taxable securities | 399,014 |
| | 8,051 |
| | 2.02 |
| | 339,750 |
| | 4,300 |
| | 1.27 |
| | 270,170 |
| | 3,798 |
| | 1.41 |
| 326,900 |
| | 7,478 |
| | 2.29 |
| | 303,124 |
| | 6,012 |
| | 1.98 |
| | 348,613 |
| | 6,697 |
| | 1.92 |
|
| Tax-exempt securities | 14,058 |
| | 848 |
| | 6.03 |
| | 28,458 |
| | 1,640 |
| | 5.76 |
| | 45,411 |
| | 2,622 |
| | 5.77 |
| 93,683 |
| | 4,748 |
| | 5.07 |
| | 57,231 |
| | 2,767 |
| | 4.83 |
| | 33,055 |
| | 1,629 |
| | 4.93 |
|
| Total securities | 413,072 |
| | 8,899 |
| | 2.15 |
| | 368,208 |
| | 5,940 |
| | 1.61 |
| | 315,581 |
| | 6,420 |
| | 2.03 |
| 420,583 |
| | 12,226 |
| | 2.91 |
| | 360,355 |
| | 8,779 |
| | 2.44 |
| | 381,668 |
| | 8,326 |
| | 2.18 |
|
| Taxable loans | 620,701 |
| | 27,368 |
| | 4.41 |
| | 619,929 |
| | 29,290 |
| | 4.72 |
| | 796,873 |
| | 37,145 |
| | 4.66 |
| 893,555 |
| | 38,568 |
| | 4.32 |
| | 774,984 |
| | 32,036 |
| | 4.13 |
| | 687,079 |
| | 28,787 |
| | 4.19 | % |
| Tax-exempt loans | 63,177 |
| | 3,351 |
| | 5.30 |
| | 63,343 |
| | 3,489 |
| | 5.51 |
| | 63,112 |
| | 3,849 |
| | 6.10 |
| 50,797 |
| | 2,450 |
| | 4.82 |
| | 58,281 |
| | 2,848 |
| | 4.89 |
| | 59,600 |
| | 3,094 |
| | 5.19 |
|
| Total loans | 683,878 |
| | 30,719 |
| | 4.49 |
| | 683,272 |
| | 32,779 |
| | 4.80 |
| | 859,985 |
| | 40,994 |
| | 4.77 |
| 944,352 |
| | 41,018 |
| | 4.34 |
| | 833,265 |
| | 34,884 |
| | 4.19 |
| | 746,679 |
| | 31,881 |
| | 4.27 |
|
| Total interest-earning assets | 1,111,087 |
| | 39,653 |
| | 3.57 |
| | 1,118,612 |
| | 38,893 |
| | 3.48 |
| | 1,284,864 |
| | 47,701 |
| | 3.71 |
| 1,380,422 |
| | 53,462 |
| | 3.87 |
| | 1,225,072 |
| | 43,871 |
| | 3.58 |
| | 1,147,248 |
| | 40,288 |
| | 3.51 |
|
| Cash and due from banks | 14,161 |
| | | | | | 13,166 |
| | | | | | 14,597 |
| | | | | 20,391 |
| | | | | | 20,803 |
| | | | | | 19,155 |
| | | | |
| Bank premises and equipment | 25,921 |
| | | | | | 26,496 |
| | | | | | 27,043 |
| | | | | 35,055 |
| | | | | | 31,413 |
| | | | | | 24,386 |
| | | | |
| Other assets | 41,499 |
| | | | | | 52,179 |
| | | | | | 62,856 |
| | | | | 65,293 |
| | | | | | 61,391 |
| | | | | | 56,894 |
| | | | |
| Allowance for loan losses | (19,268 | ) | | | | | | (21,912 | ) | | | | | | (37,133 | ) | | | | | (12,738 | ) | | | | | | (13,529 | ) | | | | | | (14,134 | ) | | | | |
| Total | $ | 1,173,400 |
| | | | | | $ | 1,188,541 |
| | | | | | $ | 1,352,227 |
| | | | | $ | 1,488,423 |
| | | | | | $ | 1,325,150 |
| | | | | | $ | 1,233,549 |
| | | | |
| Liabilities and Shareholders’ Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest bearing demand deposits | $ | 491,046 |
| | 823 |
| | 0.17 |
| | $ | 484,114 |
| | 785 |
| | 0.16 |
| | $ | 511,800 |
| | 1,236 |
| | 0.24 |
| |
| Interest-bearing demand deposits | | $ | 648,174 |
| | 2,148 |
| | 0.33 |
| | $ | 565,524 |
| | 1,195 |
| | 0.21 |
| | $ | 500,474 |
| | 908 |
| | 0.18 |
|
| Savings deposits | 83,941 |
| | 135 |
| | 0.16 |
| | 78,714 |
| | 129 |
| | 0.16 |
| | 74,180 |
| | 124 |
| | 0.17 |
| 94,815 |
| | 150 |
| | 0.16 |
| | 90,272 |
| | 144 |
| | 0.16 |
| | 85,068 |
| | 136 |
| | 0.16 |
|
| Time deposits | 292,149 |
| | 2,720 |
| | 0.93 |
| | 352,905 |
| | 3,531 |
| | 1.00 |
| | 455,507 |
| | 5,352 |
| | 1.17 |
| 292,616 |
| | 3,836 |
| | 1.31 |
| | 289,574 |
| | 3,472 |
| | 1.20 |
| | 263,414 |
| | 2,562 |
| | 0.97 |
|
| Short-term borrowings | 51,922 |
| | 148 |
| | 0.29 |
| | 24,312 |
| | 61 |
| | 0.25 |
| | 30,581 |
| | 120 |
| | 0.39 |
| 97,814 |
| | 784 |
| | 0.80 |
| | 56,387 |
| | 187 |
| | 0.33 |
| | 85,262 |
| | 295 |
| | 0.35 |
|
| Long-term debt | 17,773 |
| | 333 |
| | 1.87 |
| | 28,752 |
| | 505 |
| | 1.76 |
| | 43,576 |
| | 716 |
| | 1.64 |
| 36,336 |
| | 726 |
| | 2.00 |
| | 24,335 |
| | 419 |
| | 1.72 |
| | 22,522 |
| | 400 |
| | 1.78 |
|
| Total interest bearing liabilities | 936,831 |
| | 4,159 |
| | 0.44 |
| | 968,797 |
| | 5,011 |
| | 0.52 |
| | 1,115,644 |
| | 7,548 |
| | 0.68 |
| |
| Demand deposits | 123,224 |
| | | | | | 119,146 |
| | | | | | 116,930 |
| | | | | |
| Total interest-bearing liabilities | | 1,169,755 |
| | 7,644 |
| | 0.65 |
| | 1,026,092 |
| | 5,417 |
| | 0.53 |
| | 956,740 |
| | 4,301 |
| | 0.45 |
|
| Noninterest-bearing demand deposits | | 161,917 |
| | | | | | 147,473 |
| | | | | | 134,040 |
| | | | |
| Other | 12,095 |
| | | | | | 12,051 |
| | | | | | 10,469 |
| | | | | 15,450 |
| | | | | | 13,612 |
| | | | | | 11,316 |
| | | | |
| Total Liabilities | 1,072,150 |
| | | | | | 1,099,994 |
| | | | | | 1,243,043 |
| | | | | 1,347,122 |
| | | | | | 1,187,177 |
| | | | | | 1,102,096 |
| | | | |
| Shareholders’ Equity | 101,250 |
| | | | | | 88,547 |
| | | | | | 109,184 |
| | | | | 141,301 |
| | | | | | 137,973 |
| | | | | | 131,453 |
| | | | |
| Total | $ | 1,173,400 |
| | | | | | $ | 1,188,541 |
| | | | | | $ | 1,352,227 |
| | | | | $ | 1,488,423 |
| | | | | | $ | 1,325,150 |
| | | | | | $ | 1,233,549 |
| | | | |
| Net interest income (FTE)/net interest spread | | | 35,494 |
| | 3.13 | % | | | | 33,882 |
| | 2.96 | % | | | | 40,153 |
| | 3.03 | % | |
| Net interest margin | | | | | 3.20 | % | | | | | | 3.03 | % | | | | | | 3.12 | % | |
| Tax-equivalent adjustment | | | (1,470 | ) | | | | | | (1,795 | ) | | | | | | (2,265 | ) | | | |
| Taxable-equivalent net interest income / net interest spread | | | | 45,818 |
| | 3.22 | % | | | | 38,454 |
| | 3.05 | % | | | | 35,987 |
| | 3.06 | % |
| Taxable-equivalent net interest margin | | | | | | 3.32 | % | | | | | | 3.14 | % | | | | | | 3.14 | % |
| Taxable-equivalent adjustment | | | | (2,447 | ) | | | | | | (1,909 | ) | | | | | | (1,653 | ) | | |
| Net interest income | | | $ | 34,024 |
| | | | | | $ | 32,087 |
| | | | | | $ | 37,888 |
| | | | | $ | 43,371 |
| | | | | | $ | 36,545 |
| | | | | | $ | 34,334 |
| | |
|
| |
| Note: | Yields and interest income on tax-exempt assets have been computed on a fully taxable equivalenttaxable-equivalent basis assuming a |
| 34% tax rate in 2017 and 2016, and 35% tax rate.in 2015. For yield comparisoncalculation purposes, nonaccruing loans are included in the average loan balance. |
26
CHANGES IN TAXABLE EQUIVALENT NET INTEREST INCOME
The following table analyzes thepresents changes in tax equivalent net interest income on a taxable-equivalent basis for the periods presented, broken down2017, 2016 and 2015 by their rate and volume components:components.
| | | | 2014 Versus 2013 Increase (Decrease)
Due to Change in | | 2013 Versus 2012 Increase (Decrease)
Due to Change in | 2017 Versus 2016 Increase (Decrease)
Due to Change in | | 2016 Versus 2015 Increase (Decrease)
Due to Change in |
| (Dollars in thousands) | Average Volume | | Average Rate | | Total Increase (Decrease) | | Average Volume | | Average Rate | | Total Increase (Decrease) | Average Volume | | Average Rate | | Total | | Average Volume | | Average Rate | | Total |
| Interest Income | | | | | | | | | | | | | | | | | | | | | | |
| Federal funds sold & interest bearing deposits | $ | (137 | ) | | $ | (2 | ) | | $ | (139 | ) | | $ | (111 | ) | | $ | (2 | ) | | $ | (113 | ) | |
| Federal funds sold and interest-bearing bank balances | | $ | (106 | ) | | $ | 116 |
| | $ | 10 |
| | $ | 54 |
| | $ | 73 |
| | $ | 127 |
|
| Taxable securities | 750 |
| | 3,001 |
| | 3,751 |
| | 978 |
| | (476 | ) | | 502 |
| 472 |
| | 994 |
| | 1,466 |
| | (874 | ) | | 189 |
| | (685 | ) |
| Tax-exempt securities | (830 | ) | | 38 |
| | (792 | ) | | (979 | ) | | (3 | ) | | (982 | ) | 1,762 |
| | 219 |
| | 1,981 |
| | 1,191 |
| | (53 | ) | | 1,138 |
|
| Taxable loans | 36 |
| | (1,958 | ) | | (1,922 | ) | | (8,248 | ) | | 393 |
| | (7,855 | ) | 4,901 |
| | 1,631 |
| | 6,532 |
| | 3,683 |
| | (434 | ) | | 3,249 |
|
| Tax-exempt loans | (9 | ) | | (129 | ) | | (138 | ) | | 14 |
| | (374 | ) | | (360 | ) | (366 | ) | | (32 | ) | | (398 | ) | | (68 | ) | | (178 | ) | | (246 | ) |
| Total interest income | (190 | ) | | 950 |
| | 760 |
| | (8,346 | ) | | (462 | ) | | (8,808 | ) | 6,663 |
| | 2,928 |
| | 9,591 |
| | 3,986 |
| | (403 | ) | | 3,583 |
|
| Interest Expense | | | | | | | | | | | | | | | | | | | | | | |
| Interest bearing demand deposits | 11 |
| | 27 |
| | 38 |
| | (67 | ) | | (384 | ) | | (451 | ) | |
| Interest-bearing demand deposits | | 175 |
| | 778 |
| | 953 |
| | 118 |
| | 169 |
| | 287 |
|
| Savings deposits | 9 |
| | (3 | ) | | 6 |
| | 8 |
| | (3 | ) | | 5 |
| 7 |
| | (1 | ) | | 6 |
| | 8 |
| | 0 |
| | 8 |
|
| Time deposits | (608 | ) | | (203 | ) | | (811 | ) | | (1,206 | ) | | (615 | ) | | (1,821 | ) | 36 |
| | 328 |
| | 364 |
| | 254 |
| | 656 |
| | 910 |
|
| Short-term borrowings | 69 |
| | 18 |
| | 87 |
| | (25 | ) | | (34 | ) | | (59 | ) | 137 |
| | 460 |
| | 597 |
| | (100 | ) | | (8 | ) | | (108 | ) |
| Long-term debt | (193 | ) | | 21 |
| | (172 | ) | | (244 | ) | | 33 |
| | (211 | ) | 207 |
| | 100 |
| | 307 |
| | 32 |
| | (13 | ) | | 19 |
|
| Total interest expense | (712 | ) | | (140 | ) | | (852 | ) | | (1,534 | ) | | (1,003 | ) | | (2,537 | ) | 562 |
| | 1,665 |
| | 2,227 |
| | 312 |
| | 804 |
| | 1,116 |
|
| Net Interest Income | $ | 522 |
| | $ | 1,090 |
| | $ | 1,612 |
| | $ | (6,812 | ) | | $ | 541 |
| | $ | (6,271 | ) | $ | 6,101 |
| | $ | 1,263 |
| | $ | 7,364 |
| | $ | 3,674 |
| | $ | (1,207 | ) | | $ | 2,467 |
|
|
| |
| Note: | The change attributed to volume is calculated by taking the average change in average balance times the prior year's |
| average rate and the remainder is attributable to rate. |
2017 versus 2016
In 2017, net interest income, on a taxable-equivalent basis, increased $7,364,000, or 19.2%, compared with 2016. The Company’s net interest spread increased 17 basis point to 3.22% for 2017 compared with 2016.
Interest income on a taxable-equivalent basis on loans increased $6,134,000, or 17.6%, from 2016 to 2017. The increase resulted from an increase in both average loan volume and yield, with average loans increasing $111,087,000, or 13.3%, and yield increasing 15 basis points from 4.19% in 2016 to 4.34% in 2017. The Company's geographic expansion and sales efforts with additional loan officers continued to drive loan growth in 2017 across most loan classes. Increases in prime lending rates during the year contributed to the increased yield, but a flattening yield curve partially offset the benefit of the rate increases.
Interest income earned on a taxable-equivalent basis on securities increased $3,447,000, or 39.3%, from 2016 to 2017, with both average volume and yield increasing. Average securities increased $60,228,000, or 16.7%, and yield increased from 2.44% in 2016 to 2.91% in 2017. Contributing to the increase in interest income on securities was the higher rate environment in 2017, a higher composition of tax free securities with accompanying higher taxable-equivalent yields and strategic moves within the portfolio as the interest rate environment changed.
Interest expense on deposits and borrowings increased $2,227,000 from 2016 to 2017, as the average balance of interest-bearing liabilities increased $143,663,000, or 14.00%. Generally, the cost of interest-bearing liabilities has increased at a slower pace than yields earned on interest-earning assets in 2017, as the market for interest-bearing liabilities was initially slower to respond to interest rate changes.
Our ability to attract new deposits in all categories, but in particular interest-bearing demand deposits, resulted in an increase in average interest-bearing deposits totaling $82,650,000, or 14.6%, in 2017. Interest expense for these deposits increased $953,000, with the cost of funds increasing from 0.21% in 2016 to 0.33% in 2017.
We also increased our short-term and long-term borrowings in 2017 to partially fund loan and investment portfolio growth. Borrowings generally have higher interest rates associated with them. Interest expense on borrowings increased $904,000 in 2017, with average balances increasing $41,427,000 for short-term borrowings and $12,001,000 for long-term
borrowings. The average rate paid on short-term borrowings increased from 0.33% in 2016 to 0.80% in 2017 and the average rate paid on long-term borrowings increased from 1.72% in 2016 to 2.00% in 2017.
2016 versus 2015
Net interest income, on a taxable-equivalent basis, increased $2,467,000, or 6.9%, from 2015 to 2016. The Company’s net interest spread decreased 1 basis point to 3.05% for 2016 compared with 2015. Despite higher average balances in loans during 2016 compared with 2015 and a 25 basis point increase in the prime lending rate between the years, a flattening yield curve as the market reacted to slowing economic growth negatively impacted the yields on loans and caused funding costs to increase. Payments on and maturities of existing loans were reinvested at lower rates due to competitive market conditions. An increase in securities yields helped increase the average yield earned on interest-earning assets for 2016 compared with 2015 and helped maintain the net interest margin at the same 3.14% as in 2015. The average interest rate increased as the Company was able to invest a large portion of the additional funds at rates above the FRB's target for the Fed Funds rate.
Interest income on a taxable-equivalent basis on loans increased $3,003,000, or 9.4%, from 2015 to 2016. The increase in interest income on loans was primarily a result of an increase in average loan volume, offset partially by a decrease in yield, which decreased eight basis points from 4.27% for 2015 to 4.19% for 2016. Average loans increased $86,586,000 from 2015 to 2016 and reflected successful sales efforts across most loan classes. Favorable market conditions and the addition of several seasoned loan officers contributed to loan growth. However, new loans added were generally at lower rates than the existing portfolio.
Interest income earned on a taxable-equivalent basis on securities increased $453,000, or 5.4%, from 2015 to 2016. The average balance of securities decreased $21,313 from 2015 to 2016, with funds obtained from maturing and prepaying securities used to fund a portion of the Company's loan growth. Contributing to the increase in interest income on securities was a higher composition of tax free securities, and the higher tax-equivalent yields associated with them. The Company sold its portfolio of GSE CMOs in February 2016 and it took longer to deploy the funds into new loans than originally anticipated.
Interest expense on deposits and borrowings increased $1,116,000 from 2015 to 2016, as the average balance of interest-bearing liabilities increased $69,352,000, or 7.25%. Our cost of funds on interest-bearing liabilities also increased, from 0.45% for 2015 to 0.53% for 2016. The $910,000 increase, or 23 basis points, in interest expense on time deposits from 2015 to 2016 was the primary contributor to the overall increase.
Our ability to attract new deposits in all categories, but in particular interest-bearing demand deposits, resulted in an increase in average interest-bearing deposits. The Company has been able to gather both noninterest-bearing and interest-bearing deposit relationships from enhanced cash management offerings as it increases its commercial relationships. The cost of interest-bearing liabilities is influenced by changes in short-term interest rates. We also paid a higher rate on certain intermediate-term brokered deposits to help protect earnings from a rising rate environment and incurred $108,000 of accelerated interest expense on the call of brokered certificates of deposits in 2016.
The increase in deposits enabled us to decrease our use of short-term borrowings, which generally have higher interest rates associated with them. The average balance of short-term borrowings decreased $28,875,000 from 2015 to 2016. The average rate paid on short-term borrowings decreased 2 basis points from 2015 to 2016. We added to our long-term borrowings during 2016, with an average balance increase of $1,813,000 from 2015 to 2016, with an associated increase in expense of $19,000.
Provision for Loan Losses
The Company recorded a provision for loan losses of $1,000,000 and $250,000 in 2017 and 2016, and a negative provision for loan losses, or a reversal of amounts previously provided, of $3,900,000$(603,000) in 2015. In calculating the provision for loan losses, both quantitative and $3,150,000 forqualitative factors, including favorable historical charge-off data and stable economic and market conditions,were considered in the years ended December 31, 2014determination of the adequacy of the ALL. Net charge-offs and 2013, comparedloan growth resulted in the determination that a provision expense was required in 2017 and 2016. The provision expense in 2017 principally reflected a charge-off on one commercial loan that was downgraded to an expense of $48,300,000 for 2012.nonaccrual status in the fourth quarter. The negative provision recorded in 20142015 was the result of several factors, including: 1) favorable recoveries of loan amounts previously charged off; 2) successful resolution ofa recovery on a loan in workout with a smaller charge-off than the reserve established for it; and 3)prior charge-offs totaling this amount, as well as significant improvement in asset quality metrics. Recent favorablemetrics from prior years. Favorable charge-off data, combined with relatively stable economic and market conditions, resulted in the determination that a negative provision could be recorded in 20142015 despite net charge-offs for the period,periods, as allowance for loan lossesALL coverage metrics remainremained strong.
During 2013, the Company received payments on classified loans with partial charge-offs previously recorded. As payments received on these classified loans exceeded the carrying value of these loans, the excess was included in recoveries of loan amounts previously charged off. Favorable charge-off history during the year ended December 31, 2013 combined with improvements in average levels of impaired loans resulted in no additional provision for loan losses being required during the period, as the reserve balance at the beginning of 2013 was sufficient to absorb net charge-offs. In connection with the quarterly evaluation of the adequacy of the allowance for loan losses during 2013, it was determined that large recoveries specific to loans in one customer relationship were not needed to replenish the reserve, and were taken as a negative provision for loan losses.
The elevated provisioning level for the year ended December 31, 2012 was reflective of the asset quality issues the Company was facing at that time, and the aggressive manner in which the Company was working through its classified assets in order to improve its overall asset quality and balance sheet. Remediation efforts in 2012 included two separate sales of distressed assets, in order to reduce the level of loan losses in future periods.
See further discussion in the “Asset Quality” and “Credit Risk Management” sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Noninterest Income
The following provides information regardingtable compares noninterest income changes over the past three years.for 2017, 2016 and 2015.
| | | (Dollars in thousands) | 2014 | | 2013 | | 2012 | | % Change | 2017 | | 2016 | | 2015 | | $ Change | | % Change |
| 2014-2013 | | 2013-2012 | 2017-2016 | | 2016-2015 | | 2017-2016 | | 2016-2015 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Service charges on deposit accounts | $ | 5,415 |
| | $ | 5,716 |
| | $ | 6,227 |
| | (5.3 | )% | | (8.2 | )% | $ | 5,675 |
| | $ | 5,445 |
| | $ | 5,226 |
| | $ | 230 |
| | $ | 219 |
| | 4.2 | % | | 4.2 | % |
| Other service charges, commissions and fees | 1,033 |
| | 1,070 |
| | 1,275 |
| | (3.5 | )% | | (16.1 | )% | 1,008 |
| | 994 |
| | 1,223 |
| | 14 |
| | (229 | ) | | 1.4 | % | | (18.7 | )% |
| Trust department income | 4,687 |
| | 4,770 |
| | 4,575 |
| | (1.7 | )% | | 4.3 | % | |
| Trust and investment management income | | 6,400 |
| | 5,091 |
| | 4,598 |
| | 1,309 |
| | 493 |
| | 25.7 | % | | 10.7 | % |
| Brokerage income | 2,150 |
| | 1,911 |
| | 1,478 |
| | 12.5 | % | | 29.3 | % | 1,896 |
| | 1,933 |
| | 2,025 |
| | (37 | ) | | (92 | ) | | (1.9 | )% | | (4.5 | )% |
| Mortgage banking activities | 2,207 |
| | 3,053 |
| | 3,393 |
| | (27.7 | )% | | (10.0 | )% | 2,919 |
| | 3,412 |
| | 2,747 |
| | (493 | ) | | 665 |
| | (14.4 | )% | | 24.2 | % |
| Earnings on life insurance | 950 |
| | 963 |
| | 1,018 |
| | (1.3 | )% | | (5.4 | )% | 1,109 |
| | 1,099 |
| | 1,025 |
| | 10 |
| | 74 |
| | 0.9 | % | | 7.2 | % |
| Merchant processing revenue | 0 |
| | 0 |
| | 149 |
| | 0.0 | % | | (100.0 | )% | |
| Other income (loss) | 477 |
| | (7 | ) | | 323 |
| | (6,914.3 | )% | | (102.2 | )% | |
| Other income | | 190 |
| | 345 |
| | 410 |
| | (155 | ) | | (65 | ) | | (44.9 | )% | | (15.9 | )% |
| Subtotal before securities gains | 16,919 |
| | 17,476 |
| | 18,438 |
| | (3.2 | )% | | (5.2 | )% | 19,197 |
| | 18,319 |
| | 17,254 |
| | 878 |
| | 1,065 |
| | 4.8 | % | | 6.2 | % |
| Investment securities gains | 1,935 |
| | 332 |
| | 4,824 |
| | 482.8 | % | | (93.1 | )% | 1,190 |
| | 1,420 |
| | 1,924 |
| | (230 | ) | | (504 | ) | | (16.2 | )% | | (26.2 | )% |
| Total noninterest income | $ | 18,854 |
| | $ | 17,808 |
| | $ | 23,262 |
| | 5.9 | % | | (23.4 | )% | $ | 20,387 |
| | $ | 19,739 |
| | $ | 19,178 |
| | $ | 648 |
| | $ | 561 |
| | 3.3 | % | | 2.9 | % |
2014 v. 2013’s Results2017 versus 2016
Noninterest income increased $648,000 from 2016 to $18,854,000 for the year ended December 31, 2014, as compared2017. The following factors contributed to $17,808,000 for the year ended December 31, 2013. Excluding the increase in securities gains of $1,603,000 in 2014 compared to 2013, noninterest income decreased $557,000 or 3.2%.that net increase.
Service charges on deposit accounts continued to increase in 2017 as a result of new product offerings and increased activity associated with deposit growth.
Increased trust department income was realized throughout 2017 from favorable market conditions and the addition of an office in Berks County, Pennsylvania. Wheatland, which was acquired in December 2016, contributed approximately 39% of this increased revenue category in 2017.
The decrease in mortgage banking activities reflects a combination of overall decreased refinance activity as interest rates have increased, some slight compression in sales profit margins that the Company has experienced and the portion of mortgage production retained for the Company's loan portfolio.
Other income decreased in 2017 principally due to lower gains on sales of other servicesreal estate owned.
In both 2017 and 2016, asset/liability management strategies resulted in net gains on sales of securities, as market and interest rate conditions presented opportunities to accelerate earnings on securities, while meeting funding requirements of the Company. In 2017, the Company repositioned a part of its investment portfolio at a gain to improve responsiveness of the portfolio to increases in short-term interest rates.
2016 versus 2015
Noninterest income increased $561,000 from 2015 to 2016. The following factors contributed to that net increase.
Service charges on deposit accounts increased due principally to revenues generated from new cash management product offerings and higher interchange fees associated with increased usage by our customers
Other service charges, commissions and fees totaled $5,415,000decreased in comparing 2016 with 2015. In 2015, these revenues were favorably impacted by gains on sale of Small Business Administration and $1,033,000 for the year ended December 31, 2014, declinesU.S. Department of 5.3% and 3.5% from 2013’s totals, and continued trends noted in prior years. The Company has experienced a decline in overdraft charges and other fee related charges, as consumers have been more conservative in their spending habits.Agriculture loans.
Trust, departmentinvestment management and brokerage income increased $401,000 for 2016 compared with 2015. Trust and brokerage income in total,2016 included increased $156,000, or 2.3%, to $6,837,000 for the year ended December 31, 2014 compared to $6,681,000 earned in 2013. Favorable market conditions and new brokerage accounts led to an increase inestate fees partially offset by lower brokerage income. Also, the Company’s ability to promoteThe addition of Wheatland as an investment manager had a modest impact on 2016 revenues as that acquisition occurred in December 2016.
Favorable interest rate conditions supported increased new productshome purchases and attract accounts and customers contributed to the increase.
Mortgage banking revenue for the year ended December 31, 2014 totaled $2,207,000, a 27.7% decline from the $3,053,000 earned for the year ended December 31, 2013. During the past several quarters, there has been a reductionrefinancing activity resulting in the number of customers refinancing their residential mortgages and new home sale mortgage opportunities remain flat. These events have resulted in an $846,000 declineincrease in mortgage banking revenues to $2,207,000 for the year ended December 31, 2014 compared to 2013. The generally higher interest rates in 2013 compared to 2012 resulted in decreased loan origination volumes and refinancing activity, which slowed pre-payment speeds on loans serviced for others. This rate environment positively impacted 2013's results as the fair value of our mortgage servicing rights improved and allowed for the recovery of $638,000 of the impairment reserve during 2013, compared to a slight charge of $22,000 in 2014.revenue.
Other income of $477,000 for the year ended December 31, 2014 was a $484,000 improvement on the $7,000 loss reported for 2013. The primary reason for the increase was due to $299,000reflected, in part, decreased gains on sales of other real estate owned for the year ended December 31, 2014, comparedas well as changes due to $149,000 in losses recorded in 2013.customary business activities.
Security gains totaled $1,935,000 for the year ended December 31, 2014 compared to $332,000 in 2013. For both years, asset/liability management strategies and interest rate conditions resulted in gains on sales of securities, as market conditions presented opportunities to reduce interest rate risk while maintainingaccelerate earnings for our securities portfolio.
2013 v. 2012’s Results
Noninterest income decreased to $17,808,000 for the year ended December 31, 2013, as compared to $23,262,000 in the same prior year period. Excluding the decrease in securities gains of $4,492,000 in 2013 compared to 2012, noninterest income decreased $962,000 or 5.2%.
Service charges on deposit accounts and other services charges, commissions and fees totaled $5,716,000 and $1,070,000 for the year ended December 31, 2013, both declines of 8.2% and 16.1% from 2012’s totals. The Company experienced a decline in overdraft charges and other fee related charges, as consumers have developed more conservative spending habits.
Trust department and brokerage income, in total, increased $628,000, or 10.4%, to $6,681,000 for the year ended December 31, 2013 compared to $6,053,000 earned in 2012. Favorable market conditions and the Company’s ability to promote new products attracted accounts and customers and contributed to the increase.
Mortgage banking revenue for the year ended December 31, 2013 totaled $3,053,000, a 10.0% decline from the $3,393,000 earned for the year ended December 31, 2012. Despite interest rates favorably impacting mortgage banking revenues during the first half of 2013, the rise in interest rates in the second half of the year reduced refinancing volumes, resulting in mortgage banking revenue being lower in 2013 than 2012. The higher interest rates resulted in decreased loan origination volumes and refinancing activity, which slowed the pre-payment speed on loans serviced for others. This slower prepayment speed favorably impacted the fair value of our mortgage servicing rights, and allowed for a recovery of $638,000 of its impairment reserve during the year ended December 31, 2013, compared to an additional charge of $360,000 in 2012.
The loss recorded in other income (loss) for the year ended December 31, 2013 was principally the result of losses on sales of real estate owned of $149,000, compared to gains of $28,000 recorded in 2012.
The Company had limited gains on securities available for salethrough gains, while also meeting the funding requirements of $332,000 for the year ended December 31, 2013, which resulted from management investment strategies given interest rate conditions. In 2012, gains of $4,824,000 were recorded, as asset/liability strategic considerations as well as maintaining capital levels factored into the decision as to the extentcurrent and timing of security gains taken during the year.anticipated lending activity.
Noninterest Expenses
The following provides information regardingtable compares noninterest expense over the past three years.
expenses for 2017, 2016 and 2015.
| | | | | | | | | | % Change | | | | | | | $ Change | | % Change |
| (Dollars in thousands) | 2014 | | 2013 | | 2012 | | 2014-2013 | | 2013-2012 | 2017 | | 2016 | | 2015 | | 2017-2016 | | 2016-2015 | | 2017-2016 | | 2016-2015 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Salaries and employee benefits | $ | 23,658 |
| | $ | 22,954 |
| | $ | 19,864 |
| | 3.1 | % | | 15.6 | % | $ | 30,145 |
| | $ | 26,370 |
| | $ | 24,056 |
| | $ | 3,775 |
| | $ | 2,314 |
| | 14.3 | % | | 9.6 | % |
| Occupancy expense | 2,251 |
| | 2,055 |
| | 1,975 |
| | 9.5 | % | | 4.1 | % | |
| Occupancy | | 2,806 |
| | 2,491 |
| | 2,221 |
| | 315 |
| | 270 |
| | 12.6 | % | | 12.2 | % |
| Furniture and equipment | 3,328 |
| | 3,446 |
| | 2,913 |
| | (3.4 | )% | | 18.3 | % | 3,434 |
| | 3,335 |
| | 3,061 |
| | 99 |
| | 274 |
| | 3.0 | % | | 9.0 | % |
| Data processing | 1,679 |
| | 542 |
| | 574 |
| | 209.8 | % | | (5.6 | )% | 2,271 |
| | 2,378 |
| | 2,026 |
| | (107 | ) | | 352 |
| | (4.5 | )% | | 17.4 | % |
| Telephone and communication | | 647 |
| | 740 |
| | 692 |
| | (93 | ) | | 48 |
| | (12.6 | )% | | 6.9 | % |
| Automated teller machine and interchange fees | 865 |
| | 1,054 |
| | 989 |
| | (17.9 | )% | | 6.6 | % | 767 |
| | 748 |
| | 798 |
| | 19 |
| | (50 | ) | | 2.5 | % | | (6.3 | )% |
| Advertising and bank promotions | 1,195 |
| | 1,251 |
| | 1,411 |
| | (4.5 | )% | | (11.3 | )% | 1,600 |
| | 1,717 |
| | 1,564 |
| | (117 | ) | | 153 |
| | (6.8 | )% | | 9.8 | % |
| FDIC insurance | 1,621 |
| | 2,577 |
| | 2,727 |
| | (37.1 | )% | | (5.5 | )% | 606 |
| | 775 |
| | 859 |
| | (169 | ) | | (84 | ) | | (21.8 | )% | | (9.8 | )% |
| Professional services | 2,285 |
| | 2,255 |
| | 3,076 |
| | 1.3 | % | | (26.7 | )% | |
| Legal | | 802 |
| | 850 |
| | 1,440 |
| | (48 | ) | | (590 | ) | | (5.6 | )% | | (41.0 | )% |
| Other professional services | | 1,571 |
| | 1,332 |
| | 1,262 |
| | 239 |
| | 70 |
| | 17.9 | % | | 5.5 | % |
| Directors' compensation | | 996 |
| | 969 |
| | 737 |
| | 27 |
| | 232 |
| | 2.8 | % | | 31.5 | % |
| Collection and problem loan | 729 |
| | 674 |
| | 2,297 |
| | 8.2 | % | | (70.7 | )% | 186 |
| | 238 |
| | 447 |
| | (52 | ) | | (209 | ) | | (21.8 | )% | | (46.8 | )% |
| Real estate owned | 300 |
| | 137 |
| | 834 |
| | 119.0 | % | | (83.6 | )% | 69 |
| | 239 |
| | 162 |
| | (170 | ) | | 77 |
| | (71.1 | )% | | 47.5 | % |
| Taxes other than income | 562 |
| | 939 |
| | 888 |
| | (40.1 | )% | | 5.7 | % | 866 |
| | 767 |
| | 916 |
| | 99 |
| | (149 | ) | | 12.9 | % | | (16.3 | )% |
| Intangible asset amortization | 208 |
| | 210 |
| | 209 |
| | (1.0 | )% | | 0.5 | % | |
| Regulatory settlement | | 0 |
| | 1,000 |
| | 0 |
| | (1,000 | ) | | 1,000 |
| | (100.0 | )% | | 100.0 | % |
| Other operating expenses | 5,087 |
| | 5,153 |
| | 5,592 |
| | (1.3 | )% | | (7.9 | )% | 3,564 |
| | 4,191 |
| | 4,366 |
| | (627 | ) | | (175 | ) | | (15.0 | )% | | (4.0 | )% |
| Total noninterest expenses | $ | 43,768 |
| | $ | 43,247 |
| | $ | 43,349 |
| | 1.2 | % | | (0.2 | )% | $ | 50,330 |
| | $ | 48,140 |
| | $ | 44,607 |
| | $ | 2,190 |
| | $ | 3,533 |
| | 4.5 | % | | 7.9 | % |
2014 v. 2013’s Results2017 versus 2016
Noninterest expenses amountedincreased $2,190,000 from 2016 to $43,768,000 for the year ended December 31, 2014 compared to $43,247,000 for the prior year, an increase of $521,000, or 1.2%.2017. The following factors contributed to thethat net increase in noninterest expenses.increase.
SalariesThe salaries and employee benefits totaled $23,658,000increase includes the impact in 2017 of additional employees, including new customer-facing employees in targeted expansion markets, throughout 2016 and 2017. Higher costs in 2017 also include annual merit increases awarded in 2017, increased medical benefit costs for the year ended December 31, 2014, comparedexpanded workforce and increased claim activity, incentive compensation increases and additional share-based awards granted in 2017.
Occupancy and furniture and equipment expenses reflect a full period of expense for new facilities acquired in 2016 in Berks, Cumberland, Dauphin and Lancaster counties, Pennsylvania, as well as increases attributable to $22,954,000new facilities acquired in 2013, an increase2017 in Lancaster County, Pennsylvania.
Advertising and bank promotion expense in 2016 included higher expenses related to expansion activities.
The FDIC reached its 1.15% of $704,000, or 3.1%. The net increaseinsured funds target in June 2016, resulting in lower assessments. FDIC insurance expense in 2017 benefited from that lower assessment applied to our increased deposit base.
Resolution of the SEC administrative proceedings in 2016 generally resulted in lower legal fees incurred in 2017. However, the Company incurred certain indemnification costs totaling $645,000, which is included in legal fees, with several professional service providers in 2017 in connection with previously disclosed outstanding litigation. Additional costs may be incurred as the result of several factors. Stafflitigation progresses.
In 2016, the Company agreed to pay a $1,000,000 civil money penalty to the Securities and Exchange Commission to settle administrative proceedings.
Principal contributors to lower other operating expenses in 2017 were hireddecreases in provision expense for off-balance sheet reserves on loans that have been committed to borrowers, but not funded, resulting from changes in qualitative factors similar to those used in the latter part of 2013, which allowed for enhanced risk management processes and practices and greater depth in information technology. The outsourcingdetermination of the core processing ledprovision for loan losses, and reduced consumer fraud expenses.
Other line items within noninterest expenses reflect are generally attributable to a reductionnormal fluctuations in work force,the conduct of business.
2016 versus 2015
Noninterest expenses increased $3,533,000 from 2015 to 2016. The following factors contributed to that net increase.
The increase in salaries and employee benefits reflects the impact of adding new customer-facing employees in markets targeted for expansion as well as merit increases. Other drivers were additional medical expense incurred for new employees and increased claim activity, increased expense associated with supplemental executive compensation and compensation related to share-based awards granted in 2016.
Consistent with our growth strategy in which partially offset the increase for the additional risk managementnew facilities were acquired in Berks, Cumberland, Dauphin and information technology employees. Additionally, as the Company returned to sustained profitability, incentive based compensation awards were earnedLancaster counties, we experienced increases in occupancy, furniture and awarded to employees.
Occupancy expense totaled $2,251,000 for the year ended December 31, 2014, an increase of $196,000, or 9.5%, compared to $2,055,000 in 2013. In the fourth quarter of 2013, the Company opened its financial services facility office in Lancaster, Pennsylvania, resulting in a full twelve months of occupancy charges in 2014, with only three months of expense in 2013.equipment expenses.
DataIncreases in data processing charges were $1,679,000 for the year ended December 31, 2014, a 209.8% increase from 2013. In December 2013, the Company outsourced its core processing system to a third party provider, to capitalize on additional products and services that the outsourced solution offered.telephone and communication expenses reflect our volume and physical growth and costs associated with more sophisticated product and service offerings.
FDIC insurance expenses totaled $1,621,000 for the period ended December 31, 2014, a 37.1% reduction,Advertising and bank promotion increased principally due to $100,000 of incremental Educational Improvement Tax Credit contributions (a component of Pennsylvania tax credits) made in 2016 and increased expenditures related to brand marketing and expansion in new markets.
The Company benefited from the $2,577,000 incurred in 2013, primarily because of a lower assessment rate as the Company’s risk profile improved.FDIC reached its 1.15% of insured funds target on June 20, 2016.
RealLegal fees decreased as the Company had higher than normal legal expenses in 2015 as it attended to legal matters, including outstanding litigation against the Company and an investigation with the SEC which began in the second quarter of 2015 and concluded in the third quarter of 2016. Although certain legal matters were ongoing, the legal expenses associated with them in 2016 were less than the levels in 2015.
The increase in directors' compensation includes fees associated with two new directors added to the Board of Directors in 2016 and increased expense in 2016 for share-based compensation. In 2015, share-based compensation was only in effect for seven months of the year.
Collection and problem loan expense decreased as a result of a lower level of classified loans that were being worked out by the Company. Partially offsetting this expense benefit was an increase in real estate owned expenses totaled $300,000 forexpense of $77,000 from 2015 to 2016.
A significant portion of the year ended December 31, 2014, compared to $137,000decrease in 2013. This unfavorable variance is principally related to obtaining updated appraisals on several properties, and the resulting $170,000 in write downs that were required based on this updated information, for the year ended December 31, 2014 compared to $46,000 in 2013.
Taxes,taxes, other than income, decreasedrelates to incremental Educational Improvement Tax Credit contribution credits for qualifying contributions made in 2016 versus 2015, and which largely offset the related increase in advertising and bank promotions noted above.
The Company incurred and paid a civil money penalty of $1,000,000 to the SEC in 2016 to settle administrative proceedings against the Company.
Other line items within noninterest expenses reflect modest changes from $939,0002015 to 2016 and are generally attributable to normal fluctuations in the conduct of business.
Income Taxes
Income tax expense totaled $4,338,000, $1,266,000 and $1,634,000 for 2017, 2016 and 2015. As described more fully in Note 7, Income Taxes, to the year ended December 31, 2013 to $562,000 in 2014,Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data," due to tax reform enacted in 2017 the Company was required to remeasure its net deferred tax asset and incurred a changetax expense of $2,635,000, which is included in the assessmenttotal tax expense for 2017.
Note 7 also includes a reconciliation of our federal statutory tax rate to our effective tax rate, which is a meaningful comparison between years and methodology for state bank shares tax.
Other operating expenses decreased $66,000, or 1.2%, for the year ended December 31, 2014, from $5,153,000 in 2013 to $5,087,000 in 2014.
In order to better understand how noninterest expenses change in relation to related changes in revenue, operating expense levels are often measured in the financial services industry by the efficiency ratio, which expresses non-interestmeasures income tax expense as a percentage of tax-equivalent netpretax income. The effective tax rate for 2017 was 34.9% compared with 16.0% for 2016 and 17.2% for 2015. Generally, our effective tax rate is lower than the federal statutory tax rate principally due to nontaxable interest incomeearned on tax-free loans and noninterest income, excluding securities gains, goodwill impairment, and other non-recurring items. The Company’s efficiency ratio forearnings on the twelve months ended December 31, 2014cash surrender value of life insurance policies, offset partially by nondeductible expenses. In 2017, our higher effective tax rate was 83.0%, comparedprincipally impacted by the tax expense incurred due to 83.3% in 2013.
2013 v. 2012’s Results
Noninterest expenses amounted to $43,247,000 for the year ended December 31, 2013 compared to $43,349,000 for the corresponding prior year period, a decrease of $102,000, or 0.2%. The following factors contributed to the net decrease in noninterest expenses.
Salaries and employee benefits totaled $22,954,000 for the year ended December 31, 2013, compared to $19,864,000 in 2012, an increase of $3,090,000. A large component of the increase pertained to an increase in the Company’s number of full-time equivalents, which increased as we enhanced our enterprise risk management area, placed less reliance on outside consultants, and enhanced our technology and delivery channels to meet the changing needs of our customers. An additional factor contributing to the increase in salaries and benefit expense was the restoration of certain incentive based employee benefits as a result of the Company’s return to profitability, which totaled $565,000 for the year ended December 31, 2013, with no similar expenses recorded in 2012.
In 2013,enacted tax reform. Effective January 1, 2016, the Company made increased investments in technology in orderchanged its statutory federal tax rate from 35% to enhance our enterprise risk management practices, and34% to provide our customers with a better customer experience when utilizing our automated delivery channels. As a result, the Company saw an increase in furniture and equipment expense, which increased from $2,913,000 for the year ended December 31, 2012 to $3,446,000 in 2013. Additionally, we promoted the usage of debit cards to our customers for point of sale purchases and to withdraw funds from automated teller machines. These related fees charged to the Bank increased from $989,000 for the year ended December 31, 2012 to $1,054,000 in 2013, an increase of 6.6%.
Advertising and bank promotions expense decreased $160,000 to $1,251,000 for the year ended December 31, 2013 compared to $1,411,000 for the year ended December 31, 2012. This reduction in expense related to the timing of promotions and charitable contributions, and the discretionary nature of the expense which the Company controlled during 2013.
FDIC insurance decreased $150,000 to $2,577,000 for the year ended December 31, 2013 compared to $2,727,000 in 2012. A reduction in the Bank’s assets and deposits offset an increase in the quarterly deposit insurance assessment rate that went into effect in the second quarter of 2012 and resulted from an increased risk rating.
Professional services expenses totaled $2,255,000 for the year ended December 31, 2013, compared to $3,076,000 in 2012, a decrease of $821,000, or 26.7%. Professional services expenses include costs associated with third party loan review assistance, regulatory consulting, and legal and accounting services. The Company reduced its reliance on outside service providers as it hired additional employees with enterprise risk management expertise, which resulted in lower professional service fees in 2013 as compared to 2012.
Asset quality related costs, including collection and problem loan and real estate owned expenses, decreased significantly in 2013 compared to 2012. Collection and problem loan expense totaled $674,000 for the year ended December 31, 2013, a 70.7% reduction from the $2,297,000 of expense recorded in 2012. Real estate owned expenses were down 83.6%, from $834,000 for the year ended December 31, 2012 to $137,000 for the same period in 2013. Significant reductions in nonperforming assets, and the monitoring, legal and other costs associated with them, led to the significant reduction in asset quality-related costs.
Other operating expenses decreased $439,000 for the year ended December 31, 2013, from $5,592,000 in 2012 to $5,153,000 in 2013. The primary reason for this fluctuation is a significant reduction in Regulation E losses that the Bank experienced in 2013, which totaled $62,000 for the year ended December 31, 2013 compared to $544,000 in 2012. As a result of the losses experienced in 2012, the Company enhanced its Regulation E policies and operating procedures, including the purchase of software to assist in the identification of potential fraudulent transactions, which lowered the instances and magnitude of losses in 2013.
The Company’s efficiency ratio for the twelve months ended December 31, 2013 was 83.3%, compared to 72.2% in 2012. The higher, or less favorable, ratio was the result of declines in net interest and noninterest income between the two periods, which more than offset the lower noninterest expenses recorded in 2013 compared to 2012.
Federal Income Taxes
The Company recorded an income tax benefit of $16,132,000 and $206,000 for the years ended December 31, 2014 and 2013, compared to income tax expense of $7,955,000 for the year ended December 31, 2012. The income tax expense, or benefit, recorded during the year was impacted by a valuation allowance on the Company's net deferred tax asset.
In assessing whether or not some or all of our deferred tax asset is more likely than not to be realized in the future, management considers all positive and negative evidence, including projected future taxable income, tax planning strategies and recent financial operating results. Based upon our evaluation of both positive and negative evidence, a full valuation on the net deferred tax assets was established as of September 30, 2012, totaling $20,235,000. Specifically, it was determined that the negative evidence, which included recent cumulative history of operating losses, deterioration in asset quality and resulting impact on profitability, and that we had exhausted our carryback availability, outweighed the positive evidence, and the reserve was established.
Each subsequent quarter-end, the Company has continued to weigh both positive and negative evidence and re-analyzed its position that a valuation allowance was required. At December 31, 2014, management noted the Company’s profitable operations over the past nine quarters, improvements in asset quality, strengthened capital position, reduced regulatory risk, as well as improvement in economic conditions. Based on this analysis, management determined that a full valuation allowance was no longer necessary, and the full amount was recaptured as of December 31, 2014. The ultimate realization of deferred tax assets is dependent upon existence, or generation, of taxable income in the periods when those temporary differences and net operating loss and credit carryforwards are deductible. Management considered projected future taxable income, length of time
needed for carryforwards to reverse, available tax planning strategies, and other factors in makingreflect its assessment that it was more likely thanwill not be in the deferredhigher tax assets would be realized and recaptured the full valuation allowance at December 31, 2014.
A meaningful comparison is the effective tax rate,bracket. As a measurement ofresult, income tax expense as a percent of pretax income, which is less than the 35% federal statutory rate, primarilyfor 2016 increased $185,000 due to tax-exempt loan and security income, life insurance earnings and tax credits associated with low-income housing and historic projects, offset by certain non-deductible expenses and state income taxes. See “Note 8 – Income Taxes” in the Notes to the Consolidated Financial Statements for a reconciliationapplication of the federal statutorynew rate of 35% to the effective tax rate for each of the years ended December 31, 2014, 2013 and 2012.existing deferred balances.
Financial Condition
AManagement devotes substantial amount of time is devoted by management to overseeing the investment of funds in loans and securities and the formulation of policies directed toward the profitability and minimizationmanagement of riskthe risks associated with suchthese investments.
Securities Available for Sale
The Company utilizes securities available for sale as a tool for managingto manage interest rate risk, enhancingto enhance income through interest and dividend income, to provide liquidity and to provide collateral for certain deposits and borrowings. As of December 31, 2014, securities available for sale were $376,199,000, a $30,744,000 decrease from the December 31, 2013 balance of $406,943,000.
The Company has established investment policies and an asset management policy to assist in administering its investment portfolio. Decisions to purchase or sell these securities are based on economic conditions and management’s strategy to respond to changes in interest rates, liquidity, securitization ofpledges to secure deposits and Repurchase Agreements and other factors while trying to maximize return on the investments. Under GAAP, theThe Company may segregate its investment portfolio into three categories: “securities held to maturity”,maturity,” “trading securities” and “securities available for sale.” Management has classified the entire securities portfolio as available for sale. Securities available for sale, which are to be accounted for at their current market value with unrealized gains and losses on such securities to be excluded from earnings and reported as a net amount in other comprehensive income.income, net of income taxes.
The Company’s securities available for sale includeportfolio includes debt and equity instrumentsinvestments that are subject to varying degrees of credit and market risk. This risk arisesrisks, which arise from general market conditions, factors impacting specific industries, as well as news that may impact specific issues. Management continuously monitors its debt securities, including updates of credit ratings, monitoring market, industry and segment news, as well as volatility in market prices. The Company usesusing various indicators in determining whether a debt security is other-than- temporarily-impaired,other-than-temporarily impaired, including the extent of time the security has been in an unrealized loss position, and the extent of the unrealized loss. In addition, management assesses whether it is likely the Company will have to sell the security prior to recovery, or if it is able to hold the security until the price recovers. For those debt securities in which management concludes the security is other than temporarilyother-than-temporarily impaired, it will recognizerecognizes the credit component of an other-than-temporary impairment in earnings and the remaining portion in other comprehensive income. Given the strong asset quality of the debt security portfolio, management hasthe Company did not had to take anrecord any other-than-temporary impairment chargeexpense in 2014, 20132017, 2016 or 2012.2015.
For equity securities, when the Company has decided to sell an impaired available-for-saleavailable for sale security and does not expect the fair value of the security to fully recover before the expected time of sale, the security is deemed other-than-temporarily impaired in the period in which the decision to sell is made. The Company recognizes an impairment loss when the impairment is deemed other than temporaryother-than-temporary even if a decision to sell has not been made. The Company recorded no other than temporaryother-than-temporary impairment expense on equity securities for the years ended December 31, 2014, 20132017, 2016 and 2012.2015.
The following table shows thesummarizes fair value of securities available for sale at December 31:31.
| | | (Dollars in thousands) | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| | | | | | | | | | | |
| U.S. Treasury | $ | 0 |
| | $ | 0 |
| | $ | 26,010 |
| |
| U.S. Government Agencies | 23,958 |
| | 25,451 |
| | 0 |
| $ | 0 |
| | $ | 39,592 |
| | $ | 47,227 |
|
| U.S. Government Sponsored Enterprises (GSE) | 0 |
| | 13,714 |
| | 44,762 |
| |
| States and political subdivisions | 52,401 |
| | 71,544 |
| | 38,909 |
| 159,458 |
| | 164,282 |
| | 125,961 |
|
| GSE residential mortgage-backed securities | 175,596 |
| | 198,619 |
| | 116,854 |
| 49,530 |
| | 116,944 |
| | 132,349 |
|
| GSE commercial mortgage-backed securities | 0 |
| | 0 |
| | 24 |
| |
| GSE residential collateralized mortgage obligations (CMOs) | 58,705 |
| | 40,532 |
| | 43,945 |
| |
| GSE residential CMOs | | 111,119 |
| | 69,383 |
| | 15,843 |
|
| GSE commercial CMOs | 65,472 |
| | 57,014 |
| | 31,397 |
| 0 |
| | 4,856 |
| | 63,770 |
|
| Private label residential CMOs | | 1,003 |
| | 5,006 |
| | 8,901 |
|
| Private label commercial CMOs | | 7,653 |
| | 0 |
| | 0 |
|
| Asset-backed | | 86,431 |
| | 0 |
| | 0 |
|
| Total debt securities | 376,132 |
| | 406,874 |
| | 301,901 |
| 415,194 |
| | 400,063 |
| | 394,051 |
|
| Equity securities | 67 |
| | 69 |
| | 69 |
| 114 |
| | 91 |
| | 73 |
|
| Totals | $ | 376,199 |
| | $ | 406,943 |
| | $ | 301,970 |
| $ | 415,308 |
| | $ | 400,154 |
| | $ | 394,124 |
|
The Company increased its investment portfolio in 2017 to generate additional interest income, with the average balance of securities availableincreasing from $360,355,000 for sale portfolio decreased $30,744,000, or 7.6%, from $406,943,000 atthe year ended December 31, 20132016 to $376,199,000 at$420,583,000 for the year ended December 31, 2014. The decrease in the securities portfolio during 2014 was the result of increased loan demand and2017.
In early 2017, the Company usingliquidated its U.S. Government Agencies investments in anticipation of a flattening yield curve, with funds reinvested in fixed rate CMOs. The Company also took advantage of historically wide spreads and higher interest rates to add modestly to its holdings of longer-term fixed rate securities issued by states and political subdivisions. In the second half of 2017, the Company reduced its holdings of seasoned GSE residential mortgage-backed securities and intermediate maturity taxable securities issued by states and political subdivisions and reinvested the proceeds fromin floating rate asset-backed securities repayments, maturities and sales to fund this loan demand during the year. During 2013, the Company’s access to off-balance sheet liquidity improvedin anticipation of further increases in short-term interest rates.
In 2016, as substantial progress was made in addressing loan quality issues experienced in 2012. As the Company’s access to off-balance sheet liquidity improved, it allowed for the investment of funds previously held at the Federal Reserve Bank and included in interest bearing deposits with banks, into higher yielding, longer duration, securities available for sale. The growth experienced in the securities portfolio from $301,970,000 at December 31, 2012 to $406,943,000 at December 31, 2013 is a result of interest rate market conditions, the shiftCompany liquidated its GSE commercial CMOs portfolio during the first quarter of 2016 at a net gain of $1,420,000. The proceeds from carrying balances at correspondent banksthe sale were used to investing infund loan growth, reduce short-term borrowings and maintain liquidity for the first half of 2016. In the third quarter of 2016, the Company elected to reduce liquidity and enhance interest income through the purchase of securities, portfolio.primarily GSE residential CMOs.
As it is anticipatedManagement anticipates the loan portfolio will continue to grow in 2015, purchases that took place in 2014 were primarily in mortgage2018. Asset backed securities, or collateralized mortgage-backed obligations, as these instrumentsMBSs and CMOs provide monthly cash flows that will allow the Companymay be used, in part, to meet somethis anticipated loan demand. An additional consideration that factored into our investment strategy was to reduce holdings in state and political subdivisions. We currently have a net operating loss for tax purposes, and the benefit from tax-exempt securities is less given this tax position, resulting in tax-free holdings.
The following table shows the maturities of investment securities at book value as ofat December 31, 2014,2017, and weighted average yields of such securities. Yields are shown on a tax equivalent basis, assuming a 35%34% federal income tax rate.
| | | (Dollars in thousands) | Within 1 year | | After 1 year but within 5 years | | After 5 years but within 10 years | | After 10 years | | Total | Within 1 year | | After 1 year but within 5 years | | After 5 years but within 10 years | | After 10 years | | Total |
| U. S. Government Agencies | | | | | | | | | | |
| Book value | $ | 0 |
| | $ | 0 |
| | $ | 1,418 |
| | $ | 22,492 |
| | $ | 23,910 |
| |
| Yield | 0.00 | % | | 0.00 | % | | 0.85 | % | | 1.36 | % | | 1.33 | % | |
| Average maturity (years) | 0.0 |
| | 0.0 |
| | 8.7 |
| | 23.0 |
| | 22.1 |
| |
| States and political subdivisions | | | | | | | | | | | | | | | | | | |
| Book value | 0 |
| | 380 |
| | 21,011 |
| | 31,187 |
| | 52,578 |
| $ | 0 |
| | $ | 8,712 |
| | $ | 49,958 |
| | $ | 95,133 |
| | $ | 153,803 |
|
| Yield | 0.00 | % | | 4.98 | % | | 3.22 | % | | 3.51 | % | | 3.40 | % | 0.00 | % | | 3.29 | % | | 3.82 | % | | 4.56 | % | | 4.25 | % |
| Average maturity (years) | 0.0 |
| | 1.5 |
| | 8.5 |
| | 11.3 |
| | 10.1 |
| 0.0 |
| | 3.9 |
| | 8.0 |
| | 16.4 |
| | 12.9 |
|
| GSE residential mortgage-backed securities | | | | | | | | | | | | | | | | | | |
| Book value | 0 |
| | 1,442 |
| | 11,569 |
| | 161,209 |
| | 174,220 |
| 0 |
| | 0 |
| | 0 |
| | 48,600 |
| | 48,600 |
|
| Yield | 0.00 | % | | 2.80 | % | | 2.74 | % | | 1.65 | % | | 1.73 | % | 0.00 | % | | 0.00 | % | | 0.00 | % | | 2.57 | % | | 2.57 | % |
| Average maturity (years) | 0.0 |
| | 3.9 |
| | 8.4 |
| | 45.4 |
| | 42.6 |
| 0.0 |
| | 0.0 |
| | 0.0 |
| | 46.0 |
| | 46.0 |
|
| GSE residential collateralized mortgage obligations (CMO) | | | | | | | | | | |
| GSE residential CMOs | | | | | | | | | | |
| Book value | 0 |
| | 0 |
| | 0 |
| | 57,976 |
| | 57,976 |
| 0 |
| | 0 |
| | 0 |
| | 113,658 |
| | 113,658 |
|
| Yield | 0.00 | % | | 0.00 | % | | 0.00 | % | | 3.06 | % | | 2.06 | % | 0.00 | % | | 0.00 | % | | 0.00 | % | | 2.07 | % | | 2.07 | % |
| Average maturity (years) | 0.0 |
| | 0.0 |
| | 0.0 |
| | 20.9 |
| | 20.9 |
| 0.0 |
| | 0.0 |
| | 0.0 |
| | 28.6 |
| | 28.6 |
|
| GSE commercial CMOs | | | | | | | | | | |
| Private label residential CMOs | | | | | | | | | | |
| Book value | | 0 |
| | 0 |
| | 0 |
| | 999 |
| | 999 |
|
| Yield | | 0.00 | % | | 0.00 | % | | 0.00 | % | | 2.34 | % | | 2.34 | % |
| Average maturity (years) | | 0.0 |
| | 0.0 |
| | 0.0 |
| | 18.1 |
| | 18.1 |
|
| Private label commercial CMOs | | | | | | | | | | |
| Book value | | 0 |
| | 0 |
| | 0 |
| | 7,809 |
| | 7,809 |
|
| Yield | | 0.00 | % | | 0.00 | % | | 0.00 | % | | 2.75 | % | | 2.75 | % |
| Average maturity (years) | | 0.0 |
| | 0.0 |
| | 0.0 |
| | 17.4 |
| | 17.4 |
|
| Asset-backed | | | | | | | | | | |
| Book value | 0 |
| | 5,555 |
| | 49,001 |
| | 10,485 |
| | 65,041 |
| 0 |
| | 0 |
| | 3,808 |
| | 82,979 |
| | 86,787 |
|
| Yield | 0.00 | % | | 1.96 | % | | 2.63 | % | | 1.64 | % | | 2.42 | % | 0.00 | % | | 0.00 | % | | 2.30 | % | | 2.31 | % | | 2.31 | % |
| Average maturity (years) | 0.0 |
| | 4.2 |
| | 7.8 |
| | 30.6 |
| | 11.1 |
| 0.0 |
| | 0.0 |
| | 8.4 |
| | 23.1 |
| | 16.9 |
|
| Total | | | | | | | | | | | | | | | | | | |
| Book value | $ | 0 |
| | $ | 7,377 |
| | $ | 82,999 |
| | $ | 283,349 |
| | $ | 373,725 |
| $ | 0 |
| | $ | 8,712 |
| | $ | 53,766 |
| | $ | 349,178 |
| | $ | 411,656 |
|
| Yield | 0.00 | % | | 2.28 | % | | 2.80 | % | | 1.92 | % | | 2.12 | % | 0.00 | % | | 3.29 | % | | 3.72 | % | | 2.89 | % | | 3.01 | % |
| Average maturity (years) | 0.0 |
| | 4.0 |
| | 8.1 |
| | 34.3 |
| | 28.0 |
| 0.0 |
| | 3.9 |
| | 8.0 |
| | 26.1 |
| | 23.3 |
|
The average maturity is based on the contractual terms of the debt or mortgage backedmortgage-backed securities, and does not factor intoin required repayments or anticipated prepayments that may exist. As ofprepayments. At December 31, 2014,2017, the weighted average estimated life of theis 5.1 years for mortgage-backed and collateralized mortgage obligationCMO securities, is less than 4.7and 8.3 years for asset-backed securities, based on current interest rates and anticipated prepayment speeds.
Loan Portfolio
The Company offers variousa variety of products to meet the credit needs of our borrowers, principally consisting of commercial real estate loans, commercial and industrial loans, and retail loans consisting of loans secured by residential properties, and to a lesser extent, installment loans. No loans are extended to non-domestic borrowers or governments.
With certain exceptions,Generally, we are permitted under applicable law to make loans to single borrowers (including certain related persons and entities) in aggregate amounts of up to 15% of the sum of total capital and the allowance for loan losses.ALL. The Company’s legal lending limit to one borrower was approximately $18,700,000$22,100,000 at December 31, 2014.2017. No borrower had an outstanding exposure exceeding the limit at year-end.
The risks associated with lending activities differ among the various loan classes and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans and general economic conditions. AllAny of these factors may adversely impact thea borrower’s ability to repay its loans, and also impact the associated collateral. For aA further discussion on the typesclasses of loans
the Company makes and related risks please seeis included in Note 1, Summary of Significant Accounting Policies, and Note 4, – “Loans ReceivableLoans and Allowance for Loan Losses” in the NotesLosses, to the Consolidated Financial Statements which is incorporated herein by reference.under Part II, Item 8, "Financial Statements and Supplementary Data."
The following table presents the loan portfolio, excluding residential loans held for sale, broken outLHFS, by segments and classes as ofat December 31 is as follows:31.
| | | (Dollars in thousands) | December 31, 2014 | | December 31, 2013 | | December 31, 2012 | | December 31, 2011 | | December 31, 2010 | December 31, 2017 | | December 31, 2016 | | December 31, 2015 | | December 31, 2014 | | December 31, 2013 |
| Commercial real estate: | | | | | | | | | | | | | | | | | | |
| Owner-occupied | $ | 100,859 |
| | $ | 111,290 |
| | $ | 144,290 |
| | $ | 199,646 |
| | $ | 172,000 |
| $ | 116,811 |
| | $ | 112,295 |
| | $ | 103,578 |
| | $ | 100,859 |
| | $ | 111,290 |
|
| Non-owner occupied | 144,301 |
| | 135,953 |
| | 120,930 |
| | 141,037 |
| | 143,372 |
| 244,491 |
| | 206,358 |
| | 145,401 |
| | 144,301 |
| | 135,953 |
|
| Multi-family | 27,531 |
| | 22,882 |
| | 21,745 |
| | 27,327 |
| | 24,649 |
| 53,634 |
| | 47,681 |
| | 35,109 |
| | 27,531 |
| | 22,882 |
|
| Non-owner occupied residential | 49,315 |
| | 55,272 |
| | 66,381 |
| | 147,027 |
| | 153,467 |
| 77,980 |
| | 62,533 |
| | 54,175 |
| | 49,315 |
| | 55,272 |
|
| Acquisition and development: | | | | | | | | | | | | | | | | | | |
| 1-4 family residential construction | 5,924 |
| | 3,338 |
| | 2,850 |
| | 7,098 |
| | 29,297 |
| 11,730 |
| | 4,663 |
| | 9,364 |
| | 5,924 |
| | 3,338 |
|
| Commercial and land development | 24,237 |
| | 19,440 |
| | 30,375 |
| | 77,564 |
| | 88,105 |
| 19,251 |
| | 26,085 |
| | 41,339 |
| | 24,237 |
| | 19,440 |
|
| Commercial and industrial | 48,995 |
| | 33,446 |
| | 39,340 |
| | 71,084 |
| | 72,334 |
| 115,663 |
| | 88,465 |
| | 73,625 |
| | 48,995 |
| | 33,446 |
|
| Municipal | 61,191 |
| | 60,996 |
| | 68,018 |
| | 59,789 |
| | 38,142 |
| 42,065 |
| | 53,741 |
| | 57,511 |
| | 61,191 |
| | 60,996 |
|
| Residential mortgage: | | | | | | | | | | | | | | | | | | |
| First lien | 126,491 |
| | 124,728 |
| | 108,601 |
| | 104,327 |
| | 119,450 |
| 162,509 |
| | 139,851 |
| | 126,022 |
| | 126,491 |
| | 124,728 |
|
| Home equity – term | 20,845 |
| | 20,131 |
| | 14,747 |
| | 37,513 |
| | 40,818 |
| 11,784 |
| | 14,248 |
| | 17,337 |
| | 20,845 |
| | 20,131 |
|
| Home equity – lines of credit | 89,366 |
| | 77,377 |
| | 79,448 |
| | 80,951 |
| | 71,547 |
| 132,192 |
| | 120,353 |
| | 110,731 |
| | 89,366 |
| | 77,377 |
|
| Installment and other loans | 5,891 |
| | 6,184 |
| | 7,014 |
| | 12,077 |
| | 11,112 |
| 21,902 |
| | 7,118 |
| | 7,521 |
| | 5,891 |
| �� | 6,184 |
|
| | $ | 704,946 |
| | $ | 671,037 |
| | $ | 703,739 |
| | $ | 965,440 |
| | $ | 964,293 |
| $ | 1,010,012 |
| | $ | 883,391 |
| | $ | 781,713 |
| | $ | 704,946 |
| | $ | 671,037 |
|
The loan portfolio at December 31, 2017 increased $126,621,000, or 14.3%, from December 31, 2016. Loan growth was experienced in most loan classes. We have hired and anticipate hiring additional lenders as we continue to grow in both core markets and in new markets, such as Lancaster and Dauphin counties, Pennsylvania, through expansion of our sales force and by capitalizing on continued disruption caused by the acquisition of some of our competitors by larger institutions. Commercial real estate experienced the largest dollar increase and grew by $64,049,000, or 14.9%. The residential mortgage loan segment grew $32,033,000, or 11.7%. Commercial and industrial loans grew $27,198,000, or 30.7%, and reflected management's additional emphasis in 2017 on growing this segment to increase portfolio diversification. In 2017, we also purchased approximately $15,000,000 of automobile financing loans, which are included in installment and other loans, at returns higher than comparable cash flows in the investment portfolio.
Competition for new business opportunities remains strong, which may temper loan growth in future quarters.
In addition to the Company monitoring itsour loan portfolio as segregated by loan class as noted above, itwe also monitorsmonitor concentrations by industry. The Bank’s lending policy defines an industry concentration as one that exceeds 25% of the Bank’s total risk-based capital (RBC)("RBC"). The following industries meet the concentrationmet this criteria defined by the Bank’s Lending Policy at December 31, 2014:2017:
|
| | | | | |
| (Dollars in thousands) | Balance | | % of Total Loans | | % of Total RBC |
| | | | | | |
| Office Space | $58,100 | | 8.2% | | 49.0% |
| Hotels (except casinos) | 29,900 | | 4.2% | | 25.2% |
|
| | | | | |
| (Dollars in thousands) | Balance | | % of Total Loans | | % of Total RBC |
| | | | | | |
| Office space | $88,159 | | 8.7% | | 59.2% |
| Strip retail shopping centers | 41,929 | | 4.2% | | 28.1% |
The following table presents expected maturities of certain loan portfolioclasses by fixed rate or adjustable rate categories at December 31, 2014 of $704,946,000 increased $33,909,000 from $671,037,000 at December 31, 2013, which was below the $965,440,000 at December 31, 2011 that represents the Company’s highest balance for the years presented. The Company’s desire to improve its asset quality resulted in its disposal of a portion of its distressed asset portfolio, with an aggregate carrying balance of $73,820,000 during 2012. In addition, elevated charge-off levels were experienced in the commercial loan portfolio during 2012, primarily in the non-owner occupied, owner-occupied and commercial and land development portfolios. Given the softness in the economy within the Company’s market area, management felt this was a prudent course of action in order to rehabilitate its loan portfolio. As a result of improved asset quality in 2013, the Company, in the second half of the year, again solicited current customers for new lending opportunities, as well as broadened its relationships within existing markets, and entered new markets. In 2014, growth was achieved in the loan portfolio despite active loan collection efforts, in which the Company collected approximately $21,800,000 in pay downs/payoffs, charge-offs, loan sales or foreclosure on nonaccrual loans.
Growth was experienced in the residential mortgage portfolio segment, which totaled $236,702,000 at December 31, 2014, a 6.5% increase over $222,236,000 at December 31, 2013. In 2013, the Company elected to retain in its loan portfolio a small portion of its shorter maturity (10 – 15 years) mortgage loans to provide a greater yield than what alternate investments could provide. Additionally, active promotion of home equity products led to increased balances during the year.
Presented below are the expected maturities of the loans by type, and whether they are fixed-rate or adjustable rate loans as of December 31, 2014.2017.
| | | | Due In | | | Due In | | |
| (Dollars in thousands) | One Year or Less | | One Year Through Five Years | | After Five Years | | Total | One Year or Less | | One Year Through Five Years | | After Five Years | | Total |
| Acquisition and development: | | | | | | | | | | | | | | |
| 1-4 family residential construction | | | | | | | | | | | | | | |
| Fixed rate | $ | 1,338 |
| | $ | 0 |
| | $ | 1,071 |
| | $ | 2,409 |
| $ | 0 |
| | $ | 0 |
| | $ | 6,138 |
| | $ | 6,138 |
|
| Adjustable and floating rate | 364 |
| | 0 |
| | 3,151 |
| | 3,515 |
| 4,734 |
| | 0 |
| | 858 |
| | 5,592 |
|
| | 1,702 |
| | 0 |
| | 4,222 |
| | 5,924 |
| 4,734 |
| | 0 |
| | 6,996 |
| | 11,730 |
|
| Commercial and land development | | | | | | | | | | | | | | |
| Fixed rate | 11 |
| | 1,631 |
| | 2,963 |
| | 4,605 |
| 574 |
| | 713 |
| | 3,360 |
| | 4,647 |
|
| Adjustable and floating rate | 2,412 |
| | 20 |
| | 17,200 |
| | 19,632 |
| 1,639 |
| | 374 |
| | 12,591 |
| | 14,604 |
|
| | 2,423 |
| | 1,651 |
| | 20,163 |
| | 24,237 |
| 2,213 |
| | 1,087 |
| | 15,951 |
| | 19,251 |
|
| Commercial and industrial | | | | | | | | | | | | | | |
| Fixed rate | 196 |
| | 5,180 |
| | 9,529 |
| | 14,905 |
| 757 |
| | 36,428 |
| | 16,064 |
| | 53,249 |
|
| Adjustable and floating rate | 14,762 |
| | 5,589 |
| | 13,739 |
| | 34,090 |
| 40,053 |
| | 8,174 |
| | 14,187 |
| | 62,414 |
|
| | 14,958 |
| | 10,769 |
| | 23,268 |
| | 48,995 |
| 40,810 |
| | 44,602 |
| | 30,251 |
| | 115,663 |
|
| | $ | 19,083 |
| | $ | 12,420 |
| | $ | 47,653 |
| | $ | 79,156 |
| $ | 47,757 |
| | $ | 45,689 |
| | $ | 53,198 |
| | $ | 146,644 |
|
The final maturity is used in the determination of maturity of acquisition and development loans that convert from construction to permanent status. Variable rate loans shown above include semi-fixed loans that contractually will adjust with prime or LIBOR after the interest lock period, which may be up to 10 years. At December 31, 2014, there were approximately $25,993,000 of such loans.2017, these semi-fixed loans totaled $17,479,000.
Asset Quality
Risk Elements
The Company’s loan portfolios areportfolio is subject to varying degrees of credit risk. Credit risk is mitigated through the Company’sour underwriting standards, on-going credit review,reviews, and monitoring of asset quality measures. Additionally, loan portfolio diversification, limitingwhich limits exposure to a single industry or borrower, and requiring collateral requirements also mitigate the Company’sour risk of credit loss.
The following table presents the Company’s loan portfolio is principally to borrowers in south central Pennsylvaniarisk elements and Washington County, Maryland. As the majorityrelevant asset quality ratios at December 31.
|
| | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | | | | | | | | | |
| Nonaccrual loans (cash basis) | $ | 9,843 |
| | $ | 7,043 |
| | $ | 16,557 |
| | $ | 14,432 |
| | $ | 19,347 |
|
| Other real estate owned (OREO) | 961 |
| | 346 |
| | 710 |
| | 932 |
| | 987 |
|
| Total nonperforming assets | 10,804 |
| | 7,389 |
| | 17,267 |
| | 15,364 |
| | 20,334 |
|
| Restructured loans still accruing | 1,183 |
| | 930 |
| | 793 |
| | 1,100 |
| | 5,988 |
|
| Loans past due 90 days or more and still accruing | 0 |
| | 0 |
| | 24 |
| | 0 |
| | 0 |
|
| Total nonperforming and other risk assets | $ | 11,987 |
| | $ | 8,319 |
| | $ | 18,084 |
| | $ | 16,464 |
| | $ | 26,322 |
|
| | | | | | | | | | |
| Loans 30-89 days past due | $ | 5,277 |
| | $ | 1,218 |
| | $ | 2,532 |
| | $ | 1,612 |
| | $ | 3,963 |
|
| Ratio of: | | | | | | | | | |
| Total nonperforming loans to loans | 0.97 | % | | 0.80 | % | | 2.12 | % | | 2.05 | % | | 2.88 | % |
| Total nonperforming assets to assets | 0.69 | % | | 0.52 | % | | 1.34 | % | | 1.29 | % | | 1.73 | % |
| Total nonperforming assets to total loans and OREO | 1.07 | % | | 0.84 | % | | 2.21 | % | | 2.18 | % | | 3.03 | % |
| Total risk assets to total loans and OREO | 1.19 | % | | 0.94 | % | | 2.31 | % | | 2.33 | % | | 3.92 | % |
| Total risk assets to total assets | 0.77 | % | | 0.59 | % | | 1.40 | % | | 1.38 | % | | 2.23 | % |
| Allowance for loan losses to total loans | 1.27 | % | | 1.45 | % | | 1.74 | % | | 2.09 | % | | 3.12 | % |
| Allowance for loan losses to nonperforming loans | 130.00 | % | | 181.39 | % | | 81.95 | % | | 102.18 | % | | 108.36 | % |
| Allowance for loan losses to nonperforming loans and restructured loans still accruing | 116.05 | % | | 160.23 | % | | 78.20 | % | | 94.95 | % | | 82.75 | % |
The following table provides detail of impaired loans are concentrated in this geographic region, a substantial portion of the debtor’s ability to honor their obligations may be affected by the level of economic activity in the market area.at December 31, 2017 and 2016.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| (Dollars in thousands) | Nonaccrual Loans | | Restructured Loans Still Accruing | | Total | | Nonaccrual Loans | | Restructured Loans Still Accruing | | Total |
| Commercial real estate: | | | | | | | | | | | |
| Owner occupied | $ | 1,185 |
| | $ | 52 |
| | $ | 1,237 |
| | $ | 1,070 |
| | $ | 0 |
| | $ | 1,070 |
|
| Non-owner occupied | 4,065 |
| | 0 |
| | 4,065 |
| | 736 |
| | 0 |
| | 736 |
|
| Multi-family | 165 |
| | 0 |
| | 165 |
| | 199 |
| | 0 |
| | 199 |
|
| Non-owner occupied residential | 381 |
| | 0 |
| | 381 |
| | 452 |
| | 0 |
| | 452 |
|
| Acquisition and development | | | | | | | | | | | |
| 1-4 family residential construction | 492 |
| | 0 |
| | 492 |
| | 0 |
| | 0 |
| | 0 |
|
| Commercial and land development | 0 |
| | 0 |
| | 0 |
| | 1 |
| | 0 |
| | 1 |
|
| Commercial and industrial | 350 |
| | 0 |
| | 350 |
| | 595 |
| | 0 |
| | 595 |
|
| Residential mortgage: | | | | | | | | | | | |
| First lien | 2,734 |
| | 1,102 |
| | 3,836 |
| | 3,396 |
| | 896 |
| | 4,292 |
|
| Home equity – term | 22 |
| | 0 |
| | 22 |
| | 93 |
| | 34 |
| | 127 |
|
| Home equity – lines of credit | 438 |
| | 29 |
| | 467 |
| | 495 |
| | 0 |
| | 495 |
|
| Installment and other loans | 11 |
| | 0 |
| | 11 |
| | 6 |
| | 0 |
| | 6 |
|
| | $ | 9,843 |
| | $ | 1,183 |
| | $ | 11,026 |
| | $ | 7,043 |
| | $ | 930 |
| | $ | 7,973 |
|
Nonperforming assets include nonaccrual loans and foreclosed real estate. In addition, loans past due 90 days or more and restructured loans still accruing are also deemed to be risk assets. For all loan classes, the accrual of interest income ceases when principal or interest is past due 90 days or more and collateral is inadequate to cover principal and interest or immediately if, in the opinion of management, full collection is unlikely. Interest will continue to accrue on loans past due 90 days or more if the collateral is adequate to cover principal and interest, and the loan is in the process of collection. Interest accrued, but not collected, as of the date of placement on nonaccrual status, is generally reversed and charged against interest income, unless fully collateralized. Subsequent payments received are either applied to the outstanding principal balance or recorded as interest income, depending on management’s assessment of the ultimate collectability of principal. Loans are returned to accrual status, for all loan classes, when all the principal and interest amounts contractually due are brought current, the loans have performed in accordance with the contractual terms of the note for a reasonable period of time, generally six months, and the ultimate collectability of the total contractual principal and interest is reasonably assured. Past due status is based on contract terms of the loan.
Loans, the terms ofRisk assets, which are modified, are classified as troubled debt restructurings if a concession was granted, for legal or economic reasons, related to a debtor’s financial difficulties. Concessions granted under a troubled debt restructuring typically involve a temporary deferral of scheduled loan payments, an extension of a loan’s stated maturity date, temporary reduction in interest rates, or below market rates given the risk of the transaction. If a modification occurs while the loan is on accruing status, it will continue to accrue interest under the modified terms. Nonaccrual troubled debt restructurings may be
restored to accrual status if scheduled principal and interest payments, under the modified terms, are current for six months after modification, and the borrower continues to demonstrate its ability to meet the modified terms. Troubled debt restructurings are evaluated individually for impairment if they have been restructured during the most recent calendar year, or if they are not performing according to their modified terms.
The following table presents the Company’s risk elements, including information concerning the aggregate balances of nonaccrual, restructured, loans past due 90 days or more, and foreclosed real estate as of December 31. Relevant asset quality ratios are also presented.
|
| | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | 2014 | | 2013 | | 2012 | | 2011 | | 2010 |
| | | | | | | | | | |
| Nonaccrual loans (cash basis) | $ | 14,432 |
| | $ | 19,347 |
| | $ | 17,943 |
| | $ | 83,697 |
| | $ | 13,896 |
|
| Other real estate owned (OREO) | 932 |
| | 987 |
| | 1,876 |
| | 2,165 |
| | 1,112 |
|
| Total nonperforming assets | 15,364 |
| | 20,334 |
| | 19,819 |
| | 85,862 |
| | 15,008 |
|
| Restructured loans still accruing | 1,100 |
| | 5,988 |
| | 3,092 |
| | 27,917 |
| | 1,180 |
|
| Loans past due 90 days or more and still accruing | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 2,248 |
|
| Total nonperforming and other risk assets | $ | 16,464 |
| | $ | 26,322 |
| | $ | 22,911 |
| | $ | 113,779 |
| | $ | 18,436 |
|
| | | | | | | | | | |
| Loans 30-89 days past due | $ | 1,612 |
| | $ | 3,963 |
| | $ | 3,578 |
| | $ | 6,723 |
| | $ | 5,335 |
|
| Ratio of: | | | | | | | | | |
| Total nonperforming loans to loans | 2.05 | % | | 2.88 | % | | 2.55 | % | | 8.67 | % | | 1.44 | % |
| Total nonperforming assets to assets | 1.29 | % | | 1.73 | % | | 1.61 | % | | 5.95 | % | | 0.99 | % |
| Total nonperforming assets to total loans and OREO | 2.18 | % | | 3.03 | % | | 2.81 | % | | 8.87 | % | | 1.55 | % |
| Total risk assets to total loans and OREO | 2.33 | % | | 3.92 | % | | 3.25 | % | | 11.76 | % | | 1.91 | % |
| Total risk assets to total assets | 1.38 | % | | 2.23 | % | | 1.86 | % | | 7.88 | % | | 1.22 | % |
| Allowance for loan losses to total loans | 2.09 | % | | 3.12 | % | | 3.29 | % | | 4.53 | % | | 1.66 | % |
| Allowance for loan losses to nonperforming loans | 102.18 | % | | 108.36 | % | | 129.11 | % | | 52.23 | % | | 115.28 | % |
| Allowance for loan losses to nonperforming loans and restructured loans still accruing | 94.95 | % | | 82.75 | % | | 110.13 | % | | 39.17 | % | | 106.26 | % |
A further breakdown of impaired loans at December 31, 2014 and 2013 is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2014 | | 2013 |
| (Dollars in thousands) | Nonaccrual Loans | | Restructured Loans Still Accruing | | Total | | Nonaccrual Loans | | Restructured Loans Still Accruing | | Total |
| Commercial real estate: | | | | | | | | | | | |
| Owner occupied | $ | 3,288 |
| | $ | 0 |
| | $ | 3,288 |
| | $ | 4,362 |
| | $ | 200 |
| | $ | 4,562 |
|
| Non-owner occupied | 1,680 |
| | 0 |
| | 1,680 |
| | 2,849 |
| | 4,268 |
| | 7,117 |
|
| Multi-family | 320 |
| | 0 |
| | 320 |
| | 322 |
| | 0 |
| | 322 |
|
| Non-owner occupied residential | 1,500 |
| | 0 |
| | 1,500 |
| | 4,493 |
| | 0 |
| | 4,493 |
|
| Acquisition and development | | | | | | | | | | | |
| Commercial and land development | 123 |
| | 287 |
| | 410 |
| | 2,106 |
| | 1,071 |
| | 3,177 |
|
| Commercial and industrial | 2,437 |
| | 0 |
| | 2,437 |
| | 2,001 |
| | 0 |
| | 2,001 |
|
| Residential mortgage: | | | | | | | | | | | |
| First lien | 4,509 |
| | 813 |
| | 5,322 |
| | 2,926 |
| | 449 |
| | 3,375 |
|
| Home equity – term | 70 |
| | 0 |
| | 70 |
| | 107 |
| | 0 |
| | 107 |
|
| Home equity – lines of credit | 479 |
| | 0 |
| | 479 |
| | 181 |
| | 0 |
| | 181 |
|
| Installment and other loans | 26 |
| | 0 |
| | 26 |
| | 0 |
| | 0 |
| | 0 |
|
| | $ | 14,432 |
| | $ | 1,100 |
| | $ | 15,532 |
| | $ | 19,347 |
| | $ | 5,988 |
| | $ | 25,335 |
|
In the second quarter of 2011, the Company began to experience deterioration in asset quality as a result of the continued softness in economic conditions and collateral values. Subsequent to the highs levels ofincorporate nonperforming assets and restructured loans recorded in 2011, the Company continued to actively identify and monitor nonperforming assets and other risk assets, and has acted aggressively to address the credit quality issues. Risk assets, defined as nonaccrual loans, restructured and loans past due 90 days or more and still accruing, and real estate owned, declined from the high of $113,779,000totaled $11,987,000 at December 31, 2011, to $16,464,0002017, an increase of $3,668,000, or 44.1%, from $8,319,000 at December 31, 2014. One strategy employed by the Company in 2012 to reduce its level of non-performing2016. Nonaccrual loans included two bulk sales of distressed assets. The bulk sales allowed the Company to sell nearly 240 loans with an aggregate carrying balance of $73,820,000 to third parties, which netted the Company $51,753,000 in cash proceeds. The difference between the carrying balance of the loans sold and the cash received, or $22,067,000, was recorded as a charge to the allowance for loan losses.
Risk assetstotaled $9,843,000 at December 31, 2014 totaled $16,464,000, a 37.5% decrease2017, an increase of $2,800,000 from December 31, 2013’s balance2016. Both measures principally reflect the addition of $26,322,000. The decrease in nonaccrual loans during 2014 was principally due to successful remediation efforts resulting in principal paydowns totaling $14,020,000, sales of nonaccrual loans of $1,982,000, and charge-offs of $3,086,000, offset by loans movedone commercial loan downgraded to nonaccrual status in the fourth quarter of $16,882,000. Restructured2017. The overall reduction of risk assets and
nonaccrual loans still accruing were $1,100,000 atfrom December 31, 2014, a decrease of $4,888,000, from the prior year end, which2015 to December 31, 2016 was primarily the result ofdue principally to the sale of a note receivable onloan with a restructured loan,carrying balance of $5,946,000 to a third party. Cash proceeds totaled $5,100,000 with the $846,000 difference recorded as well as other remediation efforts.a charge-off to the ALL in 2016.
The allowance for loan lossesALL totaled $14,747,000$12,796,000 at December 31, 2014,2017, a $6,218,000 decrease$21,000 increase from $20,965,000$12,775,000 at December 31, 2013, principally due to2016, resulting from net charge-offs of $979,000 and a negative provision for loan losses of $3,900,000 recorded in 2014, combined with net chargeoffs$1,000,000 for 2017. While the ALL is lower as a percentage of $2,318,000 for the year. Despite the reduction in the allowance fortotal loan losses balance, allowance coverage metrics remain strong, with the allowance for loan losses to total loans ratio at 2.09%portfolio at December 31, 2014,2017 than in prior years, management believes its coverage ratios are adequate for the risk profile of the loan portfolio given ongoing monitoring of the portfolio and the allowance for loan losses to nonaccrual loans coverage ratio at 102.2%, compared to 3.12% and 108.4%, respectively,its analysis performed at December 31, 2013. The Company's ratio of classified loans to Tier 1 capital and the allowance for loans losses totaled 23.2%, the lowest this key ratio has been since 2010. A priority of the Company is to continue to work through its nonaccrual loans and other risk elements, in an attempt to reduce the levels of these underperforming assets, and to the extent possible, recover amounts previously charged-off.2017. As new information is learned about borrowers or updated appraisals on real estate with lower fair values are obtained, the Company may continue to experience additional impaired loans.
For the yearyears ended December 31, 2013,2017, 2016, and 2015 recoveries of $6,676,000 had been$287,000, $679,000 and $926,000 were credited to the allowance for loan losses, with recoveries on two large relationships contributing $5,639,000 of the total.ALL. These recoveries on previously charged-off relationships are the result of successful loan monitoring and workout solutions. Although recoveriesRecoveries are difficult to predict, and any additional recoveries that the Company receives will be used to replenish the allowance for loan losses. The recoveries received in 2013 alsoALL. Recoveries favorably impactedimpact historical charge-off factors, which contributedand contribute to changes in quantitative andas well as qualitative factors used during 2014, and additionalin our allowance adequacy analysis. In 2015, a negative provisions. Future negativeprovision for loan losses was recorded. However, as the loan portfolio continues to grow, future provisions could result if it is determined that the reserve is adequate at the time of recovery.
As of December 31, 2014, the Company had 94 lending relationships that had loans that were considered impaired, and were included in the impairedfor loan balance of $15,532,000, compared to 68 lending relationships with an impaired loan balance of $25,335,000 at December 31, 2013. The exposure to these borrowers with impaired loans is summarized in the following table, along with the partial charge-offs taken to date and the specific reserves established on the relationships at December 31, 2014 and 2013.
|
| | | | | | | | | | | | | | |
| (Dollars in thousands) | # of Loans | | Recorded Investment | | Partial Charge-offs to Date | | Specific Reserves at December 31, 2014 |
| December 31, 2014 | | | | | | | |
| Relationships greater than $1,000,000 | 2 |
| | $ | 3,687 |
| | $ | 0 |
| | $ | 0 |
|
| Relationships greater than $500,000 but less than $1,000,000 | 2 |
| | 1,156 |
| | 0 |
| | 0 |
|
| Relationships greater than $250,000 but less than $500,000 | 11 |
| | 3,558 |
| | 804 |
| | 0 |
|
| Relationships less than $250,000 | 79 |
| | 7,131 |
| | 3,421 |
| | 188 |
|
| | 94 |
| | $ | 15,532 |
| | $ | 4,225 |
| | $ | 188 |
|
| December 31, 2013 | | | | | | | |
| Relationships greater than $1,000,000 | 6 |
| | $ | 13,014 |
| | $ | 543 |
| | $ | 0 |
|
| Relationships greater than $500,000 but less than $1,000,000 | 6 |
| | 3,664 |
| | 120 |
| | 0 |
|
| Relationships greater than $250,000 but less than $500,000 | 11 |
| | 4,083 |
| | 913 |
| | 455 |
|
| Relationships less than $250,000 | 45 |
| | 4,574 |
| | 1,050 |
| | 158 |
|
| | 68 |
| | $ | 25,335 |
| | $ | 2,626 |
| | $ | 613 |
|
The Company takes partial charge-offs on collateral dependentcollateral-dependent loans whosewhen carrying value exceeded theirexceeds estimated fair value, as determined by the most recent appraisal adjusted for current (within the quarter) conditions, less costs to dispose. ASC 310 impairmentImpairment reserves remain in those situations in whichplace if updated appraisals are pending, and represent management’s estimate of potential loss.
The following table presents exposure to relationships with an impaired loan balance, partial charge-offs taken to date and specific reserves established on the relationships at December 31, 2017 and 2016. Of the relationships deemed to be impaired at December 31, 2014, two have outstanding book balances2017, one had a recorded balance in excess of $1,000,000 totaling $3,687,000and 62, or 23.7% of the total impaired loan balance. Seventy-nine of the relationships, or 84.1% of the total number of impaired relationships, have91.2%, had recorded balances less than $250,000, which reduces the likelihood of significant loss from one particular loan.$250,000.
The two
|
| | | | | | | | | | | | | | |
| (Dollars in thousands) | # of Relationships | | Recorded Investment | | Partial Charge-offs to Date | | Specific Reserves |
| December 31, 2017 | | | | | | | |
| Relationships greater than $1,000,000 | 1 |
| | $ | 4,065 |
| | $ | 791 |
| | $ | 0 |
|
| Relationships greater than $500,000 but less than $1,000,000 | 1 |
| | 518 |
| | 145 |
| | 0 |
|
| Relationships greater than $250,000 but less than $500,000 | 4 |
| | 1,501 |
| | 120 |
| | 0 |
|
| Relationships less than $250,000 | 62 |
| | 4,942 |
| | 1,160 |
| | 51 |
|
| | 68 |
| | $ | 11,026 |
| | $ | 2,216 |
| | $ | 51 |
|
| December 31, 2016 | | | | | | | |
| Relationships greater than $1,000,000 | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
| Relationships greater than $500,000 but less than $1,000,000 | 2 |
| | 1,327 |
| | 620 |
| | 0 |
|
| Relationships greater than $250,000 but less than $500,000 | 2 |
| | 640 |
| | 120 |
| | 0 |
|
| Relationships less than $250,000 | 75 |
| | 6,006 |
| | 1,184 |
| | 43 |
|
| | 79 |
| | $ | 7,973 |
| | $ | 1,924 |
| | $ | 43 |
|
Internal loan reviews are completed annually on all commercial relationships with impaireda committed loan balance in excess of $500,000, which includes confirmation of risk rating by an independent credit officer. Credit Administration also reviews loans exceeding $1,000,000in excess of $1,000,000. In addition, all relationships greater than $250,000 rated Substandard, Doubtful or Loss are reviewed and corresponding risk ratings are reaffirmed by the Bank's Problem Loan Committee, with subsequent reporting to commercial enterprises, with one being a commercial lessor. The decision to move the loans to nonaccrual status was made, despite the loans being current as to both principal and interest, as a result of declining cash flows, and the potential for further reduction in cash available to service debt in the near future. The Company believes it is well secured on each of these loans, and does not anticipate that a loss will be incurred on them.ERM Committee.
In all impaired relationships,its individual loan impairment analysis, the Company determines the extent of any full or partial charge-offs that may be required, or any reserves that may be needed. The determination as to whether a charge-offof the Company’s charge-offs or impairment reserve is required includesinclude an evaluation of the outstanding loan balance and the related collateral securing the credit. Through a combination of collateral securing the loans and partial charge-offs taken to date, the Company believes that it has adequately provided for the potential losses that it may incur on these relationships as ofat December 31, 2014.2017. However, over time, additional information may become known that could
result in increased reserve allocations or, alternatively, it may be deemed that the reserve allocations exceed those that are needed.
The Company’s foreclosed real estate balance consisted of $932,000 consists of nine properties owned by the Company, three of which weretwo commercial properties and totaled $569,000, and six residential properties that totaled $363,000. One commercial property is a commercial land parcel with a carrying value of $246,000. A second commercial property with a carrying value of$254,000 was land originally purchased by the Company for future expansion purposes. During 2011, it was determined that this property was no longer in the Company’s strategic plans, and as such, the Company re-designated the property as held for sale. The remaining properties have carrying values less than $125,000 and are also carriedtotaling $961,000 at the lower of cost or fair value, less costs to dispose.
As of December 31, 2014, the2017. The Company believes the value of foreclosed assetsreal estate represents theirits fair values,value, but if the real estate market remains challenging,values decline, additional charges may be needed. During 2014,2017, no expense was recorded for writedown of other real estate owned properties totaled $170,000.properties.
Credit Risk Management
Allowance for Loan Losses
The Company maintains the allowance for loan lossesALL at a level believeddeemed adequate by management for probable incurred credit losses inherent in the portfolio.losses. The allowanceALL is established and maintained through a provision for loan losses charged to earnings. Quarterly, management assesses the adequacy of the allowance for loan lossesALL utilizing a defined methodology which considers specific credit evaluation of impaired loans, past loan loss historical experience and qualitative factors. Management believes the approach properly addresses the requirements of ASC Section 310-10-35 for loans individually identified as impaired, and ASC Subtopic 450-20 for loans collectively evaluated for impairment, and other bank regulatory guidance.guidance in its assessment.
The allowance for loan lossesALL is evaluated on a regular basis by management and is based upon management’s periodicon review of the collectability of the loans in light of historical experience,experience; the nature and volume of the loan portfolio,portfolio; adverse situations that may affect thea borrower’s ability to repay,repay; estimated value of any underlying collateralcollateral; and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. See Note 4, “Loans Receivable and Allowance for Loan Losses” in the Notes to the Consolidated Financial Statements for aA description of the methodology for establishing the allowance and provision for loan losses and related procedures in establishing the appropriate level of reserve which information is incorporated herein by reference.
In order to monitor ongoing risk associated with its loan portfolioincluded in Note 4, Loans and specific credits within the segments, management uses an internal grading system. The first several rating categories, representing the lowest riskAllowance for Loan Losses, to the Bank, are combinedConsolidated Financial Statements under Part II, Item 8, "Financial Statements and given a “Pass” rating. Management generally follows regulatory definitions in assigning criticized ratings to loans, including special mention, substandard, doubtful or loss. The “Special Mention” category includes loans that have potential weaknesses that may, if not monitored or corrected, weaken the asset or inadequately protect the Bank’s position at some future date. These assets pose elevated risk, but their weakness does not yet justify a more severe, or classified rating. “Substandard” loans are classified as they have a well-defined weakness, or weaknesses that jeopardize liquidation of the debt. These loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. “Substandard” loans include loans that management has determined not to be impaired, as well as loans considered to be impaired. A “Doubtful” loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset; its classification of loss is deferred. “Loss” assets are considered uncollectible, as the underlying borrowers are often in bankruptcy, have suspended debt repayments, or ceased business operations. Once a loan is classified as “Loss”, there is little prospect of collecting the loan’s principal or interest and it is generally written off.Supplementary Data."
The Bank has a loan review policy and program which is designed to mitigate risk in the lending function. The ERM Committee, comprised of executive officers and loan department personnel, is charged with oversight of the overall credit quality and risk exposure of the Bank’s loan portfolio. This includes the monitoring of the lending activities of all Bank personnel with respect to underwriting and processing new loans and the timely follow-up and corrective action for loans showing signs of deterioration in quality. The loan review program provides the Bank with an independent review of the Bank’s loan portfolio on an ongoing basis. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as extended delinquencies, bankruptcy, repossession or death of the borrower occurs, which heightens awareness as to a possible credit event.
Internal loan reviews are completed annually on all commercial relationships with a committed loan balance in excess of $1,000,000, which include a confirmation of the risk rating by Credit Administration. In addition, all relationships greater than $250,000 rated Substandard, Doubtful or Loss are reviewed by the ERM Committee on a quarterly basis, with reaffirmation of the rating as approved by the Bank’s Loan Work Out Committee.
The following table summarizes the Bank’s ratings based on itsCompany’s internal risk rating system as ofratings at December 31:31.
| | | (Dollars in thousands) | Pass | | Special Mention | | Non-Impaired Substandard | | Impaired - Substandard | | Doubtful | | Total | Pass | | Special Mention | | Non-Impaired Substandard | | Impaired - Substandard | | Doubtful | | Total |
| December 31, 2014 | | | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | | | |
| Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | |
| Owner-occupied | $ | 89,815 |
| | $ | 2,686 |
| | $ | 5,070 |
| | $ | 3,288 |
| | $ | 0 |
| | $ | 100,859 |
| $ | 113,240 |
| | $ | 413 |
| | $ | 1,921 |
| | $ | 1,237 |
| | $ | 0 |
| | $ | 116,811 |
|
| Non-owner occupied | 120,829 |
| | 20,661 |
| | 1,131 |
| | 1,680 |
| | 0 |
| | 144,301 |
| 235,919 |
| | 0 |
| | 4,507 |
| | 4,065 |
| | 0 |
| | 244,491 |
|
| Multi-family | 24,803 |
| | 1,086 |
| | 1,322 |
| | 320 |
| | 0 |
| | 27,531 |
| 48,603 |
| | 4,113 |
| | 753 |
| | 165 |
| | 0 |
| | 53,634 |
|
| Non-owner occupied residential | 43,020 |
| | 2,968 |
| | 1,827 |
| | 1,500 |
| | 0 |
| | 49,315 |
| 76,373 |
| | 142 |
| | 1,084 |
| | 381 |
| | 0 |
| | 77,980 |
|
| Acquisition and development: | | | | | | | | | | | | | | | | | | | | | | |
| 1-4 family residential construction | 5,924 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 5,924 |
| 11,238 |
| | 0 |
| | 0 |
| | 492 |
| | 0 |
| | 11,730 |
|
| Commercial and land development | 22,261 |
| | 233 |
| | 1,333 |
| | 410 |
| | 0 |
| | 24,237 |
| 18,635 |
| | 5 |
| | 611 |
| | 0 |
| | 0 |
| | 19,251 |
|
| Commercial and industrial | 43,794 |
| | 850 |
| | 1,914 |
| | 2,437 |
| | 0 |
| | 48,995 |
| 113,162 |
| | 2,151 |
| | 0 |
| | 350 |
| | 0 |
| | 115,663 |
|
| Municipal | 61,191 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 61,191 |
| 42,065 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 42,065 |
|
| Residential mortgage: | | | | | | | | | | | | | | | | | | | | | | |
| First lien | 121,160 |
| | 9 |
| | 0 |
| | 5,290 |
| | 32 |
| | 126,491 |
| 158,673 |
| | 0 |
| | 0 |
| | 3,836 |
| | 0 |
| | 162,509 |
|
| Home equity – term | 20,775 |
| | 0 |
| | 0 |
| | 70 |
| | 0 |
| | 20,845 |
| 11,762 |
| | 0 |
| | 0 |
| | 22 |
| | 0 |
| | 11,784 |
|
| Home equity – lines of credit | 88,164 |
| | 630 |
| | 93 |
| | 479 |
| | 0 |
| | 89,366 |
| 131,585 |
| | 80 |
| | 60 |
| | 467 |
| | 0 |
| | 132,192 |
|
| Installment and other loans | 5,865 |
| | 0 |
| | 0 |
| | 26 |
| | 0 |
| | 5,891 |
| 21,891 |
| | 0 |
| | 0 |
| | 11 |
| | 0 |
| | 21,902 |
|
| | $ | 647,601 |
| | $ | 29,123 |
| | $ | 12,690 |
| | $ | 15,500 |
| | $ | 32 |
| | $ | 704,946 |
| $ | 983,146 |
| | $ | 6,904 |
| | $ | 8,936 |
| | $ | 11,026 |
| | $ | 0 |
| | $ | 1,010,012 |
|
| December 31, 2013 | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | | |
| Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | |
| Owner-occupied | $ | 92,063 |
| | $ | 3,305 |
| | $ | 11,360 |
| | $ | 4,107 |
| | $ | 455 |
| | $ | 111,290 |
| $ | 103,652 |
| | $ | 5,422 |
| | $ | 2,151 |
| | $ | 1,070 |
| | $ | 0 |
| | $ | 112,295 |
|
| Non-owner occupied | 107,113 |
| | 6,904 |
| | 14,819 |
| | 7,117 |
| | 0 |
| | 135,953 |
| 190,726 |
| | 4,791 |
| | 10,105 |
| | 736 |
| | 0 |
| | 206,358 |
|
| Multi-family | 20,091 |
| | 2,132 |
| | 337 |
| | 322 |
| | 0 |
| | 22,882 |
| 42,473 |
| | 4,222 |
| | 787 |
| | 199 |
| | 0 |
| | 47,681 |
|
| Non-owner occupied residential | 42,007 |
| | 4,982 |
| | 3,790 |
| | 4,493 |
| | 0 |
| | 55,272 |
| 59,982 |
| | 949 |
| | 1,150 |
| | 452 |
| | 0 |
| | 62,533 |
|
| Acquisition and development: | | | | | | | | | | | | | | | | | | | | | | |
| 1-4 family residential construction | 3,292 |
| | 0 |
| | 46 |
| | 0 |
| | 0 |
| | 3,338 |
| 4,560 |
| | 103 |
| | 0 |
| | 0 |
| | 0 |
| | 4,663 |
|
| Commercial and land development | 14,118 |
| | 1,433 |
| | 712 |
| | 3,177 |
| | 0 |
| | 19,440 |
| 25,435 |
| | 10 |
| | 639 |
| | 1 |
| | 0 |
| | 26,085 |
|
| Commercial and industrial | 28,933 |
| | 2,129 |
| | 383 |
| | 1,878 |
| | 123 |
| | 33,446 |
| 87,588 |
| | 251 |
| | 32 |
| | 594 |
| | 0 |
| | 88,465 |
|
| Municipal | 60,996 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 60,996 |
| 53,741 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 53,741 |
|
| Residential mortgage: | | | | | | | | | | | | | | | | | | | | | | |
| First lien | 121,353 |
| | 0 |
| | 0 |
| | 3,327 |
| | 48 |
| | 124,728 |
| 135,558 |
| | 0 |
| | 0 |
| | 4,293 |
| | 0 |
| | 139,851 |
|
| Home equity – term | 20,024 |
| | 0 |
| | 0 |
| | 94 |
| | 13 |
| | 20,131 |
| 14,155 |
| | 0 |
| | 0 |
| | 93 |
| | 0 |
| | 14,248 |
|
| Home equity – lines of credit | 77,187 |
| | 0 |
| | 9 |
| | 181 |
| | 0 |
| | 77,377 |
| 119,681 |
| | 82 |
| | 61 |
| | 529 |
| | 0 |
| | 120,353 |
|
| Installment and other loans | 6,184 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 6,184 |
| 7,112 |
| | 0 |
| | 0 |
| | 6 |
| | 0 |
| | 7,118 |
|
| | $ | 593,361 |
| | $ | 20,885 |
| | $ | 31,456 |
| | $ | 24,696 |
| | $ | 639 |
| | $ | 671,037 |
| $ | 844,663 |
| | $ | 15,830 |
| | $ | 14,925 |
| | $ | 7,973 |
| | $ | 0 |
| | $ | 883,391 |
|
Potential problem loans are defined as performing loans which have characteristics that cause management to have concerns as toconcern over the ability of the borrower to perform under present loan repayment terms and which may result in the reporting of these loans as non-performingnonperforming loans in the future. Generally, management feels that “Substandard”Substandard loans that are currently performing and not considered impaired result in some doubt as to the borrower’s ability to continue to perform under the terms of the loan, and represent potential problem loans. Additionally, the “Special Mention”Special Mention classification is intended to be a temporary classification and is reflective of loans that have potential weaknesses that may, if not monitored or corrected, weaken the asset or inadequately protect the Bank’sCompany’s position at some future date. “Special Mention”Special Mention loans represent an elevated risk, but their weakness does not yet justify a more severe, or classified, rating. These loans require follow-upinquiry by lenders on the information that may cause of the potential weakness and, once resolved,analyzed, the loan classification may be downgraded to “Substandard,”Substandard or, alternatively, could be upgraded to “Pass.”Pass.
The following summarizestables summarize the average recorded investment in impaired loans and related interest income recognized, on loans deemed impaired on a cash basis, and interest income earned but not recognized for the years ended December 31, 2014, 2013, 2012, and 2011:31.
|
| | | | | | | | | | | |
| (Dollars in thousands) | Average Impaired Balance | | Interest Income Recognized | | Interest Earned But Not Recognized |
| December 31, 2017 | | | | | |
| Commercial real estate: | | | | | |
| Owner-occupied | $ | 1,000 |
| | $ | 6 |
| | $ | 114 |
|
| Non-owner occupied | 392 |
| | 0 |
| | 10 |
|
| Multi-family | 182 |
| | 0 |
| | 19 |
|
| Non-owner occupied residential | 418 |
| | 0 |
| | 35 |
|
| Acquisition and development: | | | | | |
| 1-4 family residential construction | 154 |
| | 0 |
| | 7 |
|
| Commercial and industrial | 413 |
| | 0 |
| | 25 |
|
| Residential mortgage: | | | | | |
| First lien | 4,012 |
| | 58 |
| | 136 |
|
| Home equity – term | 61 |
| | 0 |
| | 1 |
|
| Home equity – lines of credit | 488 |
| | 2 |
| | 26 |
|
| Installment and other loans | 10 |
| | 0 |
| | 3 |
|
| | $ | 7,130 |
| | $ | 66 |
| | $ | 376 |
|
| December 31, 2016 | | | | | |
| Commercial real estate: | | | | | |
| Owner-occupied | $ | 1,758 |
| | $ | 0 |
| | $ | 124 |
|
| Non-owner occupied | 6,831 |
| | 0 |
| | 326 |
|
| Multi-family | 216 |
| | 0 |
| | 17 |
|
| Non-owner occupied residential | 645 |
| | 0 |
| | 35 |
|
| Acquisition and development: | | | | | |
| Commercial and land development | 3 |
| | 0 |
| | 1 |
|
| Commercial and industrial | 575 |
| | 0 |
| | 25 |
|
| Residential mortgage: | | | | | |
| First lien | 4,525 |
| | 33 |
| | 175 |
|
| Home equity – term | 98 |
| | 0 |
| | 6 |
|
| Home equity – lines of credit | 455 |
| | 0 |
| | 19 |
|
| Installment and other loans | 12 |
| | 0 |
| | 3 |
|
| | $ | 15,118 |
| | $ | 33 |
| | $ | 731 |
|
| December 31, 2015 | | | | | |
| Commercial real estate: | | | | | |
| Owner-occupied | $ | 2,613 |
| | $ | 0 |
| | $ | 177 |
|
| Non-owner occupied | 3,470 |
| | 0 |
| | 256 |
|
| Multi-family | 402 |
| | 0 |
| | 15 |
|
| Non-owner occupied residential | 1,020 |
| | 0 |
| | 56 |
|
| Acquisition and development: | | | | | |
| Commercial and land development | 266 |
| | 137 |
| | 2 |
|
| Commercial and industrial | 1,208 |
| | 0 |
| | 28 |
|
| Residential mortgage: | | | | | |
| First lien | 4,644 |
| | 37 |
| | 167 |
|
| Home equity – term | 130 |
| | 0 |
| | 3 |
|
| Home equity – lines of credit | 571 |
| | 0 |
| | 29 |
|
| Installment and other loans | 22 |
| | 0 |
| | 3 |
|
| | $ | 14,346 |
| | $ | 174 |
| | $ | 736 |
|
|
| | | | | | | | | | | |
| (Dollars in thousands) | Average Impaired Balance | | Interest Income Recognized | | Interest Earned But Not Recognized |
| December 31, 2014 | | | | | |
| Commercial real estate: | | | | | |
| Owner-occupied | $ | 3,740 |
| | $ | 20 |
| | $ | 179 |
|
| Non-owner occupied | 6,711 |
| | 143 |
| | 156 |
|
| Multi-family | 274 |
| | 2 |
| | 6 |
|
| Non-owner occupied residential | 2,095 |
| | 13 |
| | 62 |
|
| Acquisition and development: | | | | | |
| Commercial and land development | 1,250 |
| | 34 |
| | 59 |
|
| Commercial and industrial | 1,700 |
| | 5 |
| | 19 |
|
| Residential mortgage: | | | | | |
| First lien | 4,226 |
| | 53 |
| | 196 |
|
| Home equity – term | 85 |
| | 0 |
| | 5 |
|
| Home equity – lines of credit | 111 |
| | 3 |
| | 25 |
|
| Installment and other loans | 9 |
| | 1 |
| | 1 |
|
| | $ | 20,201 |
| | $ | 274 |
| | $ | 708 |
|
| December 31, 2013 | | | | | |
| Commercial real estate: | | | | | |
| Owner-occupied | $ | 3,528 |
| | $ | 147 |
| | $ | 192 |
|
| Non-owner occupied | 4,307 |
| | 145 |
| | 44 |
|
| Multi-family | 135 |
| | 16 |
| | 6 |
|
| Non-owner occupied residential | 4,799 |
| | 77 |
| | 180 |
|
| Acquisition and development: | | | | | |
| 1-4 family residential construction | 481 |
| | 0 |
| | 0 |
|
| Commercial and land development | 3,009 |
| | 49 |
| | 127 |
|
| Commercial and industrial | 1,780 |
| | 45 |
| | 46 |
|
| Residential mortgage: | | | | | |
| First lien | 2,697 |
| | 140 |
| | 103 |
|
| Home equity – term | 59 |
| | 8 |
| | 2 |
|
| Home equity – lines of credit | 305 |
| | 6 |
| | 2 |
|
| Installment and other loans | 1 |
| | 0 |
| | 0 |
|
| | $ | 21,101 |
| | $ | 633 |
| | $ | 702 |
|
The following table summarizes activity in the ALL for years ended December 31.
|
| | | | | | | | | | | |
| (Dollars in thousands) | Average Impaired Balance | | Interest Income Recognized | | Interest Earned But Not Recognized |
| December 31, 2014 | | | | | |
| Commercial real estate: | | | | | |
| Owner-occupied | $ | 3,740 |
| | $ | 20 |
| | $ | 179 |
|
| Non-owner occupied | 6,711 |
| | 143 |
| | 156 |
|
| Multi-family | 274 |
| | 2 |
| | 6 |
|
| Non-owner occupied residential | 2,095 |
| | 13 |
| | 62 |
|
| Acquisition and development: | | | | | |
| Commercial and land development | 1,250 |
| | 34 |
| | 59 |
|
| Commercial and industrial | 1,700 |
| | 5 |
| | 19 |
|
| Residential mortgage: | | | | | |
| First lien | 4,226 |
| | 53 |
| | 196 |
|
| Home equity – term | 85 |
| | 0 |
| | 5 |
|
| Home equity – lines of credit | 111 |
| | 3 |
| | 25 |
|
| Installment and other loans | 9 |
| | 1 |
| | 1 |
|
| | $ | 20,201 |
| | $ | 274 |
| | $ | 708 |
|
| December 31, 2013 | | | | | |
| Commercial real estate: | | | | | |
| Owner-occupied | $ | 3,528 |
| | $ | 147 |
| | $ | 192 |
|
| Non-owner occupied | 4,307 |
| | 145 |
| | 44 |
|
| Multi-family | 135 |
| | 16 |
| | 6 |
|
| Non-owner occupied residential | 4,799 |
| | 77 |
| | 180 |
|
| Acquisition and development: | | | | | |
| 1-4 family residential construction | 481 |
| | 0 |
| | 0 |
|
| Commercial and land development | 3,009 |
| | 49 |
| | 127 |
|
| Commercial and industrial | 1,780 |
| | 45 |
| | 46 |
|
| Residential mortgage: | | | | | |
| First lien | 2,697 |
| | 140 |
| | 103 |
|
| Home equity – term | 59 |
| | 8 |
| | 2 |
|
| Home equity – lines of credit | 305 |
| | 6 |
| | 2 |
|
| Installment and other loans | 1 |
| | 0 |
| | 0 |
|
| | $ | 21,101 |
| | $ | 633 |
| | $ | 702 |
|
| December 31, 2012 | | | | | |
| Commercial real estate: | | | | | |
| Owner-occupied | $ | 8,374 |
| | $ | 20 |
| | $ | 131 |
|
| Non-owner occupied | 14,372 |
| | 69 |
| | 260 |
|
| Multi-family | 3,940 |
| | 0 |
| | 10 |
|
| Non-owner occupied residential | 20,284 |
| | 61 |
| | 288 |
|
| Acquisition and development: | | | | | |
| 1-4 family residential construction | 1,542 |
| | 26 |
| | 16 |
|
| Commercial and land development | 12,652 |
| | 252 |
| | 168 |
|
| Commercial and industrial | 2,691 |
| | 43 |
| | 55 |
|
| Residential mortgage: | | | | | |
| First lien | 2,700 |
| | 61 |
| | 73 |
|
| Home equity – term | 156 |
| | 2 |
| | 4 |
|
| Home equity - lines of credit | 467 |
| | 15 |
| | 5 |
|
| Installment and other loans | 8 |
| | 0 |
| | 0 |
|
| | $ | 67,186 |
| | $ | 549 |
| | $ | 1,010 |
|
|
| | | | | | | | | | | |
| (Dollars in thousands) | Average Impaired Balance | | Interest Income Recognized | | Interest Earned But Not Recognized |
| December 31, 2011 | | | | | |
| Commercial real estate: | | | | | |
| Owner-occupied | $ | 4,530 |
| | $ | 369 |
| | $ | 187 |
|
| Non-owner occupied | 6,820 |
| | 702 |
| | 297 |
|
| Multi-family | 2,080 |
| | 125 |
| | 103 |
|
| Non-owner occupied residential | 22,820 |
| | 1,559 |
| | 267 |
|
| Acquisition and development: | | | | | |
| 1-4 family residential construction | 489 |
| | 102 |
| | 1 |
|
| Commercial and land development | 7,456 |
| | 617 |
| | 375 |
|
| Commercial and industrial | 5,355 |
| | 75 |
| | 82 |
|
| Residential mortgage: | | | | | |
| First lien | 639 |
| | 19 |
| | 15 |
|
| Home equity – term | 685 |
| | 69 |
| | 1 |
|
| | $ | 50,874 |
| | $ | 3,637 |
| | $ | 1,328 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Commercial | | Consumer | | | | |
| (Dollars in thousands) | Commercial Real Estate | | Acquisition and Development | | Commercial and Industrial | | Municipal | | Total | | Residential Mortgage | | Installment and Other | | Total | | Unallocated | | Total |
| December 31, 2017 | | | | | | | | | | | | | | | | | | | |
| Balance, beginning of year | $ | 7,530 |
| | $ | 580 |
| | $ | 1,074 |
| | $ | 54 |
| | $ | 9,238 |
| | $ | 2,979 |
| | $ | 144 |
| | $ | 3,123 |
| | $ | 414 |
| | $ | 12,775 |
|
| Provision for loan losses | 38 |
| | (167 | ) | | 333 |
| | 30 |
| | 234 |
| | 531 |
| | 174 |
| | 705 |
| | 61 |
| | 1,000 |
|
| Charge-offs | (835 | ) | | 0 |
| | (85 | ) | | 0 |
| | (920 | ) | | (180 | ) | | (166 | ) | | (346 | ) | | 0 |
| | (1,266 | ) |
| Recoveries | 30 |
| | 4 |
| | 124 |
| | 0 |
| | 158 |
| | 70 |
| | 59 |
| | 129 |
| | 0 |
| | 287 |
|
| Balance, end of year | $ | 6,763 |
| | $ | 417 |
| | $ | 1,446 |
| | $ | 84 |
| | $ | 8,710 |
| | $ | 3,400 |
| | $ | 211 |
| | $ | 3,611 |
| | $ | 475 |
| | $ | 12,796 |
|
| December 31, 2016 | | | | | | | | | | | | | | | | | | | |
| Balance, beginning of year | $ | 7,883 |
| | $ | 850 |
| | $ | 1,012 |
| | $ | 58 |
| | $ | 9,803 |
| | $ | 2,870 |
| | $ | 121 |
| | $ | 2,991 |
| | $ | 774 |
| | $ | 13,568 |
|
| Provision for loan losses | 107 |
| | (270 | ) | | 129 |
| | (4 | ) | | (38 | ) | | 532 |
| | 116 |
| | 648 |
| | (360 | ) | | 250 |
|
| Charge-offs | (872 | ) | | 0 |
| | (79 | ) | | 0 |
| | (951 | ) | | (577 | ) | | (194 | ) | | (771 | ) | | 0 |
| | (1,722 | ) |
| Recoveries | 412 |
| | 0 |
| | 12 |
| | 0 |
| | 424 |
| | 154 |
| | 101 |
| | 255 |
| | 0 |
| | 679 |
|
| Balance, end of year | $ | 7,530 |
| | $ | 580 |
| | $ | 1,074 |
| | $ | 54 |
| | $ | 9,238 |
| | $ | 2,979 |
| | $ | 144 |
| | $ | 3,123 |
| | $ | 414 |
| | $ | 12,775 |
|
| December 31, 2015 | | | | | | | | | | | | | | | | | | | |
| Balance, beginning of year | $ | 9,462 |
| | $ | 697 |
| | $ | 806 |
| | $ | 183 |
| | $ | 11,148 |
| | $ | 2,262 |
| | $ | 119 |
| | $ | 2,381 |
| | $ | 1,218 |
| | $ | 14,747 |
|
| Provision for loan losses | (1,020 | ) | | (440 | ) | | 249 |
| | (125 | ) | | (1,336 | ) | | 1,122 |
| | 55 |
| | 1,177 |
| | (444 | ) | | (603 | ) |
| Charge-offs | (711 | ) | | (22 | ) | | (115 | ) | | 0 |
| | (848 | ) | | (592 | ) | | (62 | ) | | (654 | ) | | 0 |
| | (1,502 | ) |
| Recoveries | 152 |
| | 615 |
| | 72 |
| | 0 |
| | 839 |
| | 78 |
| | 9 |
| | 87 |
| | 0 |
| | 926 |
|
| Balance, end of year | $ | 7,883 |
| | $ | 850 |
| | $ | 1,012 |
| | $ | 58 |
| | $ | 9,803 |
| | $ | 2,870 |
| | $ | 121 |
| | $ | 2,991 |
| | $ | 774 |
| | $ | 13,568 |
|
| December 31, 2014 | | | | | | | | | | | | | | | | | | | |
| Balance, beginning of year | $ | 13,215 |
| | $ | 670 |
| | $ | 864 |
| | $ | 244 |
| | $ | 14,993 |
| | $ | 3,780 |
| | $ | 124 |
| | $ | 3,904 |
| | $ | 2,068 |
| | $ | 20,965 |
|
| Provision for loan losses | (1,674 | ) | | 92 |
| | (554 | ) | | (61 | ) | | (2,197 | ) | | (960 | ) | | 107 |
| | (853 | ) | | (850 | ) | | (3,900 | ) |
| Charge-offs | (2,637 | ) | | (70 | ) | | (270 | ) | | 0 |
| | (2,977 | ) | | (587 | ) | | (177 | ) | | (764 | ) | | 0 |
| | (3,741 | ) |
| Recoveries | 558 |
| | 5 |
| | 766 |
| | 0 |
| | 1,329 |
| | 29 |
| | 65 |
| | 94 |
| | 0 |
| | 1,423 |
|
| Balance, end of year | $ | 9,462 |
| | $ | 697 |
| | $ | 806 |
| | $ | 183 |
| | $ | 11,148 |
| | $ | 2,262 |
| | $ | 119 |
| | $ | 2,381 |
| | $ | 1,218 |
| | $ | 14,747 |
|
| December 31, 2013 | | | | | | | | | | | | | | | | | | | |
| Balance, beginning of year | $ | 13,719 |
| | $ | 3,502 |
| | $ | 1,635 |
| | $ | 223 |
| | $ | 19,079 |
| | $ | 2,275 |
| | $ | 85 |
| | $ | 2,360 |
| | $ | 1,727 |
| | $ | 23,166 |
|
| Provision for loan losses | 4,109 |
| | (6,087 | ) | | (3,478 | ) | | 21 |
| | (5,435 | ) | | 1,845 |
| | 99 |
| | 1,944 |
| | 341 |
| | (3,150 | ) |
| Charge-offs | (4,767 | ) | | (193 | ) | | (132 | ) | | 0 |
| | (5,092 | ) | | (491 | ) | | (144 | ) | | (635 | ) | | 0 |
| | (5,727 | ) |
| Recoveries | 154 |
| | 3,448 |
| | 2,839 |
| | 0 |
| | 6,441 |
| | 151 |
| | 84 |
| | 235 |
| | 0 |
| | 6,676 |
|
| Balance, end of year | $ | 13,215 |
| | $ | 670 |
| | $ | 864 |
| | $ | 244 |
| | $ | 14,993 |
| | $ | 3,780 |
| | $ | 124 |
| | $ | 3,904 |
| | $ | 2,068 |
| | $ | 20,965 |
|
The following table summarizes the average recorded investment in impaired loans and related interest income recognized for the period indicated for the year ending December 31:
|
| | | |
| (Dollars in thousands) | 2010 |
| | |
| Average investment in impaired loans | $ | 26,066 |
|
| Interest income recognized on a cash basis on impaired loans | 82 |
|
| Interest income earned but not recognized on impaired loans | 458 |
|
Activity in the allowance for loan losses for the years ended December 31, 2014, 2013, 2012, 2011 and 2010 is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Commercial | | Consumer | | | | |
| (Dollars in thousands) | Commercial Real Estate | | Acquisition and Development | | Commercial and Industrial | | Municipal | | Total | | Residential Mortgage | | Installment and Other | | Total | | Unallocated | | Total |
| December 31, 2014 | | | | | | | | | | | | | | | | | | | |
| Balance, beginning of period | $ | 13,215 |
| | $ | 670 |
| | $ | 864 |
| | $ | 244 |
| | $ | 14,993 |
| | $ | 3,780 |
| | $ | 124 |
| | $ | 3,904 |
| | $ | 2,068 |
| | $ | 20,965 |
|
| Provision for loan losses | (1,674 | ) | | 92 |
| | (554 | ) | | (61 | ) | | (2,197 | ) | | (960 | ) | | 107 |
| | (853 | ) | | (850 | ) | | (3,900 | ) |
| Charge-offs | (2,637 | ) | | (70 | ) | | (270 | ) | | 0 |
| | (2,977 | ) | | (587 | ) | | (177 | ) | | (764 | ) | | 0 |
| | (3,741 | ) |
| Recoveries | 558 |
| | 5 |
| | 766 |
| | 0 |
| | 1,329 |
| | 29 |
| | 65 |
| | 94 |
| | 0 |
| | 1,423 |
|
| Balance, end of period | $ | 9,462 |
| | $ | 697 |
| | $ | 806 |
| | $ | 183 |
| | $ | 11,148 |
| | $ | 2,262 |
| | $ | 119 |
| | $ | 2,381 |
| | $ | 1,218 |
| | $ | 14,747 |
|
| December 31, 2013 | | | | | | | | | | | | | | | | | | | |
| Balance, beginning of period | $ | 13,719 |
| | $ | 3,502 |
| | $ | 1,635 |
| | $ | 223 |
| | $ | 19,079 |
| | $ | 2,275 |
| | $ | 85 |
| | $ | 2,360 |
| | $ | 1,727 |
| | $ | 23,166 |
|
| Provision for loan losses | 4,109 |
| | (6,087 | ) | | (3,478 | ) | | 21 |
| | (5,435 | ) | | 1,845 |
| | 99 |
| | 1,944 |
| | 341 |
| | (3,150 | ) |
| Charge-offs | (4,767 | ) | | (193 | ) | | (132 | ) | | 0 |
| | (5,092 | ) | | (491 | ) | | (144 | ) | | (635 | ) | | 0 |
| | (5,727 | ) |
| Recoveries | 154 |
| | 3,448 |
| | 2,839 |
| | 0 |
| | 6,441 |
| | 151 |
| | 84 |
| | 235 |
| | 0 |
| | 6,676 |
|
| Balance, end of period | $ | 13,215 |
| | $ | 670 |
| | $ | 864 |
| | $ | 244 |
| | $ | 14,993 |
| | $ | 3,780 |
| | $ | 124 |
| | $ | 3,904 |
| | $ | 2,068 |
| | $ | 20,965 |
|
| December 31, 2012 | | | | | | | | | | | | | | | | | | | |
| Balance, beginning of period | $ | 29,559 |
| | $ | 9,708 |
| | $ | 1,085 |
| | $ | 789 |
| | $ | 41,141 |
| | $ | 933 |
| | $ | 75 |
| | $ | 1,008 |
| | $ | 1,566 |
| | $ | 43,715 |
|
| Provision for loan losses | 34,681 |
| | 9,408 |
| | 1,879 |
| | (566 | ) | | 45,402 |
| | 2,602 |
| | 135 |
| | 2,737 |
| | 161 |
| | 48,300 |
|
| Charge-offs | (53,492 | ) | | (17,721 | ) | | (1,624 | ) | | 0 |
| | (72,837 | ) | | (1,279 | ) | | (143 | ) | | (1,422 | ) | | 0 |
| | (74,259 | ) |
| Recoveries | 2,971 |
| | 2,107 |
| | 295 |
| | 0 |
| | 5,373 |
| | 19 |
| | 18 |
| | 37 |
| | 0 |
| | 5,410 |
|
| Balance, end of period | $ | 13,719 |
| | $ | 3,502 |
| | $ | 1,635 |
| | $ | 223 |
| | $ | 19,079 |
| | $ | 2,275 |
| | $ | 85 |
| | $ | 2,360 |
| | $ | 1,727 |
| | $ | 23,166 |
|
| December 31, 2011 | | | | | | | | | | | | | | | | | | | |
| Balance, beginning of period | $ | 7,875 |
| | $ | 1,766 |
| | $ | 3,870 |
| | $ | 374 |
| | $ | 13,885 |
| | $ | 1,864 |
| | $ | 106 |
| | $ | 1,970 |
| | $ | 165 |
| | $ | 16,020 |
|
| Provision for loan losses | 31,407 |
| | 18,557 |
| | 7,037 |
| | 415 |
| | 57,416 |
| | (254 | ) | | 12 |
| | (242 | ) | | 1,401 |
| | 58,575 |
|
| Charge-offs | (9,748 | ) | | (10,615 | ) | | (9,827 | ) | | 0 |
| | (30,190 | ) | | (680 | ) | | (62 | ) | | (742 | ) | | 0 |
| | (30,932 | ) |
| Recoveries | 25 |
| | 0 |
| | 5 |
| | 0 |
| | 30 |
| | 3 |
| | 19 |
| | 22 |
| | 0 |
| | 52 |
|
| Balance, end of period | $ | 29,559 |
| | $ | 9,708 |
| | $ | 1,085 |
| | $ | 789 |
| | $ | 41,141 |
| | $ | 933 |
| | $ | 75 |
| | $ | 1,008 |
| | $ | 1,566 |
| | $ | 43,715 |
|
| December 31, 2010 | | | | | | | | | | | | | | | | | | | |
| Balance, beginning of period | $ | 4,328 |
| | $ | 2,703 |
| | $ | 507 |
| | $ | 749 |
| | $ | 8,287 |
| | $ | 1,422 |
| | $ | 96 |
| | $ | 1,518 |
| | $ | 1,262 |
| | $ | 11,067 |
|
| Provision for loan losses | 5,857 |
| | 281 |
| | 3,332 |
| | (207 | ) | | 9,263 |
| | 718 |
| | 41 |
| | 759 |
| | (1,097 | ) | | 8,925 |
|
| Charge-offs | (2,312 | ) | | (1,218 | ) | | (32 | ) | | (168 | ) | | (3,730 | ) | | (283 | ) | | (54 | ) | | (337 | ) | | 0 |
| | (4,067 | ) |
| Recoveries | 2 |
| | 0 |
| | 63 |
| | 0 |
| | 65 |
| | 7 |
| | 23 |
| | 30 |
| | 0 |
| | 95 |
|
| Balance, end of period | $ | 7,875 |
| | $ | 1,766 |
| | $ | 3,870 |
| | $ | 374 |
| | $ | 13,885 |
| | $ | 1,864 |
| | $ | 106 |
| | $ | 1,970 |
| | $ | 165 |
| | $ | 16,020 |
|
A summary of relevant asset quality ratios for the five years ended December 31, 2014 is as follows:
| | | | 2014 | | 2013 | | 2012 | | 2011 | | 2010 | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | | | | | | | | | | | | | | | | | | |
| Ratio of net charge-offs (recoveries) to average loans outstanding | 0.34 | % | | (0.14 | )% | | 8.01 | % | | 3.11 | % | | 0.44 | % | 0.10 | % | | 0.13 | % | | 0.08 | % | | 0.34 | % | | (0.14 | )% |
| Provision for loan losses to net charge-offs (recoveries) | (168.25 | )% | | 331.93 | % | | 70.15 | % | | 189.69 | % | | 224.70 | % | 102.15 | % | | 23.97 | % | | (104.69 | )% | | (168.25 | )% | | 331.93 | % |
| Ratio of reserve to gross loans outstanding at December 31 | 2.09 | % | | 3.12 | % | | 3.29 | % | | 4.53 | % | | 1.66 | % | |
| Ratio of ALL to total loans outstanding at December 31 | | 1.27 | % | | 1.45 | % | | 1.74 | % | | 2.09 | % | | 3.12 | % |
DueIn 2011, the Company experienced significant deterioration in asset quality due to the trends in the national and local economies, as well as declines in real estate values in the Company’s market area, the allowance for loan losses grew for the period from 2010 througharea. In 2012, subsequent to high levels of nonperforming assets and restructured loans recorded in 2011, consistent with the increase in the ratio of net charge-offs to average loans outstanding. As the Company worked through its risk assets, including the two loan sales in 2012, the allowance for loan losses decreased from $43,715,000 at December 31, 2011continued to $23,166,000 at December 31, 2012.actively identify and monitor nonperforming assets. The Company continued to focus on working through its risk assets and, based on favorable trends in net charge-offs itand improving asset quality ratios, was able to further reduce the allowanceALL over the following years to its current level.
The Company recorded a provision for loan losses to $20,965,000 at December 31,expense of $1,000,000 and $250,000 for 2017 and 2016, and negative provisions, or reversals of amounts previously provided, of $603,000, $3,900,000 and $3,150,000 for 2015, 2014 and 2013. During 2013, the Company experienced net recoveries of $949,000 compared to net charge-offs of $68,849,000 for the year ended December 31, 2012, with the majorityFor each of the 2012 charge-offs occurringyears in the commercial real estate and commercial and land development loan portfolios. In 2014, the Company's workout and remediation efforts, resulted in net charge-offs of $2,318,000, and the amount of its classified assets decreased by $28,569,000. The significantly different net charge-offs (recoveries) between periods results in similar variances in the ratios presented.
The Company recordedwhich a negative provision for loan losses or a reversalwas recorded, it was due to recovery of amounts previously provided, of $3,900,000 and $3,150,000loans with prior charge-offs, allowing for the years ended December 31, 2014 and 2013, compared to expense of $48,300,000 for the year ended December 31, 2012. The negative provision of $3,900,000 for the year ended December 31, 2014 is the result of several factors including: 1) favorable recoveries of loan amounts previously charged off; 2) successful resolution of a loan workoutrecovery. In addition, in certain cases loans were successfully worked out with a smaller charge-offcharge-offs than the reserve established for it;on them. For 2013 through 2016, favorable historical charge-off data combined with relatively stable economic and 3) significant improvementmarket conditions resulted in asset quality metrics. During 2013, the Company received payments on classified loans with partialconclusion that a negative or modest provision could be recorded despite net charge-offs previously recorded. As payments received during the periods exceeded the carrying value of these loans, the excess was included in recoveries of amounts previously charged-off. In connection with the quarterly evaluation of the adequacy of the allowance for loan losses, it was2017, management determined that large recoveries specific to loans in one customer relationship were not needed to replenish the reserve, and were taken into income during 2013 through a negative provision for loan losses. The provision for loan lossesexpense that offset net charge-offs for the year ended December 31, 2012 of $48,300,000 reflectedwould maintain an adequate ALL, principally due to a charge-off in connection with one commercial credit downgraded to nonaccrual status during the level needed to address the credit deterioration that took placeyear. The significant variations in net charge-offs (recoveries) and provision expense resulted in the loan portfolio during that year.fluctuations in the ratios as presented in the tables above.
See further discussion in the “Provision for Loan Losses” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following table shows the allocation of the allowance forALL by loan losses,class, as well as the percent of each loan typeclass in relation to the total loan balance as ofat December 31, is as follows:31.
| | | | 2014 | | 2013 | | 2012 | | 2011 | | 2010 | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | Amount | | % of Loan Type to Total Loans | | Amount | | % of Loan Type to Total Loans | | Amount | | % of Loan Type to Total Loans | | Amount | | % of Loan Type to Total Loans | | Amount | | % of Loan Type to Total Loans | Amount | | % of Loan Type to Total Loans | | Amount | | % of Loan Type to Total Loans | | Amount | | % of Loan Type to Total Loans | | Amount | | % of Loan Type to Total Loans | | Amount | | % of Loan Type to Total Loans |
| Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Owner-occupied | $ | 2,059 |
| | 14 | % | | $ | 3,583 |
| | 17 | % | | $ | 2,504 |
| | 21 | % | | $ | 3,063 |
| | 21 | % | | $ | 1,852 |
| | 18 | % | $ | 1,488 |
| | 12 | % | | $ | 1,591 |
| | 13 | % | | $ | 1,998 |
| | 13 | % | | $ | 2,059 |
| | 14 | % | | $ | 3,583 |
| | 17 | % |
| Non-owner occupied | 4,887 |
| | 20 | % | | 6,024 |
| | 20 | % | | 5,022 |
| | 17 | % | | 8,579 |
| | 14 | % | | 3,034 |
| | 15 | % | 4,059 |
| | 24 | % | | 4,380 |
| | 23 | % | | 4,033 |
| | 19 | % | | 4,887 |
| | 20 | % | | 6,024 |
| | 20 | % |
| Multi-family | 1,231 |
| | 4 | % | | 1,699 |
| | 3 | % | | 2,944 |
| | 3 | % | | 2,222 |
| | 3 | % | | 438 |
| | 3 | % | 444 |
| | 5 | % | | 604 |
| | 5 | % | | 709 |
| | 5 | % | | 1,231 |
| | 4 | % | | 1,699 |
| | 3 | % |
| Non-owner occupied residential | 1,285 |
| | 7 | % | | 1,909 |
| | 8 | % | | 3,249 |
| | 9 | % | | 15,695 |
| | 15 | % | | 2,551 |
| | 16 | % | 772 |
| | 8 | % | | 955 |
| | 7 | % | | 1,143 |
| | 7 | % | | 1,285 |
| | 7 | % | | 1,909 |
| | 8 | % |
| Acquisition and development: | | | | | | | | | | | | | | | | | | | |
| | | |
| | | |
| | | |
| | | |
| | |
| 1-4 family residential construction | 222 |
| | 1 | % | | 196 |
| | 0 | % | | 198 |
| | 0 | % | | 1,404 |
| | 1 | % | | 314 |
| | 3 | % | 169 |
| | 1 | % | | 102 |
| | 1 | % | | 236 |
| | 1 | % | | 222 |
| | 1 | % | | 196 |
| | 0 | % |
| Commercial and land development | 475 |
| | 3 | % | | 474 |
| | 3 | % | | 3,304 |
| | 4 | % | | 8,304 |
| | 8 | % | | 1,453 |
| | 9 | % | 248 |
| | 2 | % | | 478 |
| | 3 | % | | 614 |
| | 5 | % | | 475 |
| | 3 | % | | 474 |
| | 3 | % |
| Commercial and industrial | 806 |
| | 7 | % | | 864 |
| | 5 | % | | 1,635 |
| | 6 | % | | 1,085 |
| | 8 | % | | 3,870 |
| | 8 | % | 1,446 |
| | 12 | % | | 1,074 |
| | 10 | % | | 1,012 |
| | 10 | % | | 806 |
| | 7 | % | | 864 |
| | 5 | % |
| Municipal | 183 |
| | 9 | % | | 244 |
| | 9 | % | | 223 |
| | 10 | % | | 789 |
| | 6 | % | | 374 |
| | 4 | % | 84 |
| | 4 | % | | 54 |
| | 6 | % | | 58 |
| | 7 | % | | 183 |
| | 9 | % | | 244 |
| | 9 | % |
| Residential mortgage: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| First lien | 1,295 |
| | 18 | % | | 1,682 |
| | 19 | % | | 957 |
| | 16 | % | | 317 |
| | 11 | % | | 1,033 |
| | 12 | % | 1,855 |
| | 16 | % | | 1,624 |
| | 16 | % | | 1,667 |
| | 16 | % | | 1,295 |
| | 18 | % | | 1,682 |
| | 19 | % |
| Home equity - term | 206 |
| | 3 | % | | 465 |
| | 3 | % | | 252 |
| | 2 | % | | 335 |
| | 4 | % | | 345 |
| | 4 | % | 119 |
| | 1 | % | | 151 |
| | 1 | % | | 184 |
| | 2 | % | | 206 |
| | 3 | % | | 465 |
| | 3 | % |
| Home equity - lines of credit | 761 |
| | 13 | % | | 1,633 |
| | 12 | % | | 1,066 |
| | 11 | % | | 281 |
| | 8 | % | | 485 |
| | 7 | % | 1,426 |
| | 13 | % | | 1,204 |
| | 14 | % | | 1,019 |
| | 14 | % | | 761 |
| | 13 | % | | 1,633 |
| | 12 | % |
| Installment and other loans | 119 |
| | 1 | % | | 124 |
| | 1 | % | | 85 |
| | 1 | % | | 75 |
| | 1 | % | | 106 |
| | 1 | % | 211 |
| | 2 | % | | 144 |
| | 1 | % | | 121 |
| | 1 | % | | 119 |
| | 1 | % | | 124 |
| | 1 | % |
| Unallocated | 1,218 |
| | | | 2,068 |
| | | | 1,727 |
| | | | 1,566 |
| | | | 165 |
| | | 475 |
| | | | 414 |
| | | | 774 |
| | | | 1,218 |
| | | | 2,068 |
| | |
| | $ | 14,747 |
| | 100 | % | | $ | 20,965 |
| | 100 | % | | $ | 23,166 |
| | 100 | % | | $ | 43,715 |
| | 100 | % | | $ | 16,020 |
| | 100 | % | $ | 12,796 |
| | 100 | % | | $ | 12,775 |
| | 100 | % | | $ | 13,568 |
| | 100 | % | | $ | 14,747 |
| | 100 | % | | $ | 20,965 |
| | 100 | % |
The following table summarizes the ending loan balance individually or collectively evaluated for impairment based uponby loan type, as well asclass and the allowance for loan lossALL allocation for each at December 31.
| | | | Commercial | | Consumer | | | | | Commercial | | Consumer | | | | |
| (Dollars in thousands) | Commercial Real Estate | | Acquisition and Development | | Commercial and Industrial | | Municipal | | Total | | Residential Mortgage | | Installment and Other | | Total | | Unallocated | | Total | Commercial Real Estate | | Acquisition and Development | | Commercial and Industrial | | Municipal | | Total | | Residential Mortgage | | Installment and Other | | Total | | Unallocated | | Total |
| December 31, 2014 | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | | | | | | | | | | | |
| Loans allocated by: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Individually evaluated for impairment | $ | 6,788 |
| | $ | 410 |
| | $ | 2,437 |
| | $ | 0 |
| | $ | 9,635 |
| | $ | 5,871 |
| | $ | 26 |
| | $ | 5,897 |
| | $ | 0 |
| | $ | 15,532 |
| $ | 5,848 |
| | $ | 492 |
| | $ | 350 |
| | $ | 0 |
| | $ | 6,690 |
| | $ | 4,325 |
| | $ | 11 |
| | $ | 4,336 |
| | $ | 0 |
| | $ | 11,026 |
|
| Collectively evaluated for impairment | 315,218 |
| | 29,751 |
| | 46,558 |
| | 61,191 |
| | 452,718 |
| | 230,831 |
| | 5,865 |
| | 236,696 |
| | 0 |
| | 689,414 |
| 487,068 |
| | 30,489 |
| | 115,313 |
| | 42,065 |
| | 674,935 |
| | 302,160 |
| | 21,891 |
| | 324,051 |
| | 0 |
| | 998,986 |
|
| | $ | 322,006 |
| | $ | 30,161 |
| | $ | 48,995 |
| | $ | 61,191 |
| | $ | 462,353 |
| | $ | 236,702 |
| | $ | 5,891 |
| | $ | 242,593 |
| | $ | 0 |
| | $ | 704,946 |
| $ | 492,916 |
| | $ | 30,981 |
| | $ | 115,663 |
| | $ | 42,065 |
| | $ | 681,625 |
| | $ | 306,485 |
| | $ | 21,902 |
| | $ | 328,387 |
| | $ | 0 |
| | $ | 1,010,012 |
|
| Allowance for loan losses allocated by: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Individually evaluated for impairment | $ | 2 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 2 |
| | $ | 173 |
| | $ | 13 |
| | $ | 186 |
| | $ | 0 |
| | $ | 188 |
| $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 42 |
| | $ | 9 |
| | $ | 51 |
| | $ | 0 |
| | $ | 51 |
|
| Collectively evaluated for impairment | 9,460 |
| | 697 |
| | 806 |
| | 183 |
| | 11,146 |
| | 2,089 |
| | 106 |
| | 2,195 |
| | 1,218 |
| | 14,559 |
| 6,763 |
| | 417 |
| | 1,446 |
| | 84 |
| | 8,710 |
| | 3,358 |
| | 202 |
| | 3,560 |
| | 475 |
| | 12,745 |
|
| | $ | 9,462 |
| | $ | 697 |
| | $ | 806 |
| | $ | 183 |
| | $ | 11,148 |
| | $ | 2,262 |
| | $ | 119 |
| | $ | 2,381 |
| | $ | 1,218 |
| | $ | 14,747 |
| $ | 6,763 |
| | $ | 417 |
| | $ | 1,446 |
| | $ | 84 |
| | $ | 8,710 |
| | $ | 3,400 |
| | $ | 211 |
| | $ | 3,611 |
| | $ | 475 |
| | $ | 12,796 |
|
| December 31, 2013 | | | | | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | | | | | | | | | | |
| Loans allocated by: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Individually evaluated for impairment | $ | 16,494 |
| | $ | 3,177 |
| | $ | 2,001 |
| | $ | 0 |
| | $ | 21,672 |
| | $ | 3,663 |
| | $ | 0 |
| | $ | 3,663 |
| | $ | 0 |
| | $ | 25,335 |
| $ | 2,457 |
| | $ | 1 |
| | $ | 594 |
| | $ | 0 |
| | $ | 3,052 |
| | $ | 4,915 |
| | $ | 6 |
| | $ | 4,921 |
| | $ | 0 |
| | $ | 7,973 |
|
| Collectively evaluated for impairment | 308,903 |
| | 19,601 |
| | 31,445 |
| | 60,996 |
| | 420,945 |
| | 218,573 |
| | 6,184 |
| | 224,757 |
| | 0 |
| | 645,702 |
| 426,410 |
| | 30,747 |
| | 87,871 |
| | 53,741 |
| | 598,769 |
| | 269,537 |
| | 7,112 |
| | 276,649 |
| | 0 |
| | 875,418 |
|
| | $ | 325,397 |
| | $ | 22,778 |
| | $ | 33,446 |
| | $ | 60,996 |
| | $ | 442,617 |
| | $ | 222,236 |
| | $ | 6,184 |
| | $ | 228,420 |
| | $ | 0 |
| | $ | 671,037 |
| $ | 428,867 |
| | $ | 30,748 |
| | $ | 88,465 |
| | $ | 53,741 |
| | $ | 601,821 |
| | $ | 274,452 |
| | $ | 7,118 |
| | $ | 281,570 |
| | $ | 0 |
| | $ | 883,391 |
|
| Allowance for loan losses allocated by: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Individually evaluated for impairment | $ | 552 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 552 |
| | $ | 61 |
| | $ | 0 |
| | $ | 61 |
| | $ | 0 |
| | $ | 613 |
| $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 43 |
| | $ | 0 |
| | $ | 43 |
| | $ | 0 |
| | $ | 43 |
|
| Collectively evaluated for impairment | 12,663 |
| | 670 |
| | 864 |
| | 244 |
| | 14,441 |
| | 3,719 |
| | 124 |
| | 3,843 |
| | 2,068 |
| | 20,352 |
| 7,530 |
| | 580 |
| | 1,074 |
| | 54 |
| | 9,238 |
| | 2,936 |
| | 144 |
| | 3,080 |
| | 414 |
| | 12,732 |
|
| | $ | 13,215 |
| | $ | 670 |
| | $ | 864 |
| | $ | 244 |
| | $ | 14,993 |
| | $ | 3,780 |
| | $ | 124 |
| | $ | 3,904 |
| | $ | 2,068 |
| | $ | 20,965 |
| $ | 7,530 |
| | $ | 580 |
| | $ | 1,074 |
| | $ | 54 |
| | $ | 9,238 |
| | $ | 2,979 |
| | $ | 144 |
| | $ | 3,123 |
| | $ | 414 |
| | $ | 12,775 |
|
The allowance for loan losses allocations presented above represent the reserve allocations on loan balances outstanding at December 31 of the respective years. In addition to the reserve allocations on impaired loans noted above, 3119 loans, with outstanding general ledger principal balances of $3,702,000,$6,342,000, have had cumulative partial charge-offs to the allowance for loan losses recordedALL totaling $4,225,000.$2,215,000. As updated appraisals were received on collateral-dependent loans, partial charge-offs were taken to the extent the loans’ principal balance exceeded their fair value.
Management believes the allocation of the allowance for loan lossesALL between the various loan segmentsclasses adequately reflects the probable incurred credit losses in each portfolio and is based on the methodology outlined in “NoteNote 4, – Loans Receivable and Allowance for Loan Losses” included in the NotesLosses, to the Consolidated Financial Statements.Statements under Part II, Item 8, "Financial Statements and Supplementary Data." Management re-evaluates and makes certain enhancements to its methodology used to establish a reserve to better reflect the risks inherent in the different segments of the portfolio, particularly in light of increased charge-offs, with noticeable differences between the different loan segments.classes. Management believes these enhancements to the allowance for loan lossesALL methodology improve the accuracy of quantifying probable incurred credit losses presently inherent in the portfolio. Management charges actual loan losses to the reserve and bases the provision for loan losses on theits overall analysis taking the methodology into account.analysis.
The largest component of the reserveALL for the years presented has been allocated to the commercial real estate segment, and in particularparticularly the non-owner occupied loan classes. The higher allocations in these loans classes as compared towith the other loan classes is consistent with the inherent risk associated with thethese loans, as well as generally higher levels of impaired and criticized loans for the periods presented. At December 31, 2014,There has generally been a decrease in the total reserveALL allocated to the commercial real estate segment was $11,148,000, a decreaseportfolio, as the level of $3,845,000, or 25.7%. The factors contributing to this decline are a 65.5% reduction in classified assets has declined, and historical loss rates have improved as favorable charge-offs in the most recent year positively impacted quantitativea result of improving economic and qualitative loss factors.
The reserve allocation on the residential mortgage portfolio segment, in total, has decreased from $3,780,000 at December 31, 2013 to $2,262,000 at December 31, 2014. This decrease is consistent with improving residential real estate market conditions and stabilized historical charge-offs.conditions.
The unallocated portion of the allowance for loan lossesALL reflects estimated inherent losses within the portfolio that have not been detected. This reserve results due todetected, as well as the risk of error in the specific and general reserve allocation, other potential exposure in the loan portfolio, variances in management’s assessment of national and local economic conditions and other factors management believes appropriate at the time. The unallocated portion of the allowance has decreased in 2014increased from $2,068,000$414,000 at December 31, 20132016 to $1,218,000$475,000 at December 31, 20142017 and represents 8.3%3.7% of the entire allowance for loan losses balanceALL at December 31, 2014,2017, compared to 9.9%with 3.2% at December 31, 2013.2016. The Company monitors the unallocated portion of the allowance for loan losses,ALL, and by policy, has determined it cannotshould not exceed 15%6% of the total reserve. Future negative provisions for loan losses wouldmay result if the unallocated portion was to exceed 15% ofincrease, and management determined the total.
reserves were not required for the anticipated risk in the portfolio. As asset quality continued to improve through 2014, resulting inhas improved the last several years, management has determined a reduced risk of loss associated with the portfolio, as evidenced by lower classified loans and delinquencies, management determined that a lower unallocated reserve was justified, bothsustainable improvements in dollars and as a percent of the total allowance for loan losses balance.delinquencies.
While managementManagement believes the Company’s allowance for loan lossesALL is adequate based on information currently available, futureavailable. Future adjustments to the reserveALL and enhancements to the methodology may be necessary due to changes in economic conditions, regulatory guidance, or management’s assumptions as to future delinquencies or loss rates.
Deposit ProductsDeposits
On anThe following table presents average daily basis,deposits for years ended December 31.
|
| | | | | | | | | | | |
| (Dollars in thousands) | 2017 | | 2016 | | 2015 |
| | | | | | |
| Demand deposits | $ | 161,917 |
| | $ | 147,473 |
| | $ | 134,040 |
|
| Interest-bearing demand deposits | 648,174 |
| | 565,524 |
| | 500,474 |
|
| Savings deposits | 94,815 |
| | 90,272 |
| | 85,068 |
|
| Time deposits | 292,616 |
| | 289,574 |
| | 263,414 |
|
| Total deposits | $ | 1,197,522 |
| | $ | 1,092,843 |
| | $ | 982,996 |
|
Average total deposits were $990,360,000 in 2014, a decrease of 4.3%,increased $104,679,000, or $44,519,000,9.6% from 2013. In 2013, the average daily balance decreased 10.7% compared2016 to 2012. Despite a decline in total deposits during these two periods, the Company experienced growth in its non-interest bearing demand and savings deposit core funding sources. Interest bearing2017. Interest-bearing demand deposit account balances anotherwere the principal driver, increasing $82,650,000, or 14.6%. The Company has been able to gather both interest-bearing and noninterest-bearing deposit relationships from enhanced cash management offerings as we developed commercial relationships. We also grew core funding source, averaged $491,046,000 for the year ended December 31, 2014, an increase of 1.4% from the average balance of $484,114,000 in 2013. Growth in core funding deposits has been achieved through marketing campaigns and improvement in theour product delivery of our products with investments in technology.technology and increased sales efforts. We have also been able to increase interest-free funds as we expanded our commercial and industrial loan portfolio.
In 2017, the Company used deposit growth principally to fund loan growth. Average retail time deposits were $292,149,000 in 2014, a decrease of 17.2%, or $60,756,000, comparedless than $100,000 remained relatively steady at approximately $83,000,000 from 2016 to the2017 and average balance of $352,905,000 in 2013. This follows a 22.5% reduction in averageinstitutional time deposits that took place in 2013,excess of $100,000 decreased from the $455,507,000 average balance in 2012.$80,462,000 for 2016 to $60,450,000 for 2017. The Company chose to fund its loan growth through salescontinue not to pay increased interest rates on these deposit types, but rather use alternate funding sources to meet funding needs. One funding source the Company used was brokered deposits, which totaled $96,368,000 at December 31, 2017 compared with $85,994,000 at December 31, 2016, and paydowns of securities availableaveraged $94,165,000 for sale, rather than maintain its balances in time deposits,2017 compared with $72,282,000 for 2016. Given interest rate conditions and in particular, brokered time deposits. The average balance ofasset/liability strategies, we issued issued additional brokered time deposits, decreased from $53,196,000 forwhich have options that enable the year ended 2013Company to $17,108,000 in 2014, and is included in time deposits below.pay them off early.
Management continually evaluates its utilization of brokered deposits, and considerstaking into consideration the interest rate curve and regulatory views on non-core funding sources, and balances this funding source with its funding needs based on growth initiatives. The Company anticipates that as loan growth increases, it will be able to generate core deposit funding by offering competitive rates.
The average amounts of deposits are summarized below for the years ended December 31:
|
| | | | | | | | | | | |
| (Dollars in thousands) | 2014 | | 2013 | | 2012 |
| | | | | | |
| Demand deposits | $ | 123,224 |
| | $ | 119,146 |
| | $ | 116,930 |
|
| Interest bearing demand deposits | 491,046 |
| | 484,114 |
| | 511,800 |
|
| Savings deposits | 83,941 |
| | 78,714 |
| | 74,180 |
|
| Time deposits | 292,149 |
| | 352,905 |
| | 455,507 |
|
| Total deposits | $ | 990,360 |
| | $ | 1,034,879 |
| | $ | 1,158,417 |
|
The following is a breakdown oftable presents maturities of time deposits of $100,000$250,000 or more as ofat December 31, 2014.2017.
| | | (Dollars in thousands) | Total | Total |
| | | |
| Three months or less | $ | 50,424 |
| $ | 8,066 |
|
| Over three months through six months | 22,471 |
| 3,255 |
|
| Over six months through one year | 31,445 |
| 5,260 |
|
| Over one year | 10,828 |
| 5,307 |
|
| Total | $ | 115,168 |
| $ | 21,888 |
|
Short Term Borrowings
In addition to deposit products, the Company also uses short term borrowings as a funding source. A componentshort-term borrowing sources to meet liquidity needs and for temporary funding. Sources of short-term borrowings include securities sold under agreements to repurchase with deposit customers, in which the customer sweeps a portion of its deposit balance into a Repurchase Agreement, which is a secured borrowing as a pool of securities are pledged against the balances.
Information concerning securities sold under agreements to repurchase as of and for the years ended December 31 is as follows:
|
| | | | | | | | | | | |
| (Dollars in thousands) | 2014 | | 2013 | | 2012 |
| | | | | | |
| Balance at year end | $ | 21,742 |
| | $ | 9,032 |
| | $ | 9,650 |
|
| Weighted average interest rate at year-end | 0.20 | % | | 0.20 | % | | 0.24 | % |
| Average balance during the year | 19,186 |
| | 13,772 |
| | 19,072 |
|
| Average interest rate during the year | 0.20 | % | | 0.20 | % | | 0.38 | % |
| Maximum month-end balance during the year | $ | 32,861 |
| | $ | 19,105 |
| | $ | 33,752 |
|
| Fair value of securities underlying the agreements at year-end | 38,337 |
| | 52,024 |
| | 72,717 |
|
Additional short-term borrowing sources include borrowings from the Federal Home Loan BankFHLB of Pittsburgh, federal funds purchased, and to a lesser extent, the FRB discount window.
Information concerning Short-term borrowings also include securities sold under agreements to repurchase with deposit customers, in which a customer sweeps a portion of a deposit balance into a Repurchase Agreement, which is a secured borrowing with a pool of securities pledged against the use of these other short term borrowings as of and for the years ended December 31 is summarized as follows:
|
| | | | | | | | | | | |
| (Dollars in thousands) | 2014 | | 2013 | | 2012 |
| | | | | | |
| Balance at year end | $ | 65,000 |
| | $ | 50,000 |
| | $ | 0 |
|
| Weighted average interest rate at year-end | 0.36 | % | | 0.28 | % | | 0.00 | % |
| Average balance during the year | 32,736 |
| | 10,540 |
| | 11,509 |
|
| Average interest rate during the year | 0.34 | % | | 0.31 | % | | 0.40 | % |
| Maximum month-end balance during the year | $ | 65,000 |
| | $ | 50,000 |
| | $ | 20,000 |
|
In 2014 and 2013, the Company used short-term borrowings to meet the Company’s liquidity needs, and allowed for the temporary replacement funding of maturing brokered deposits and other long-term debt as the Company actively manages its funding base.
Long-Term Debtbalance.
The Company also utilizes long-term debt, consisting principally of Federal Home Loan BankFHLB fixed and amortizing advances to fund its balance sheet with original maturities greater than one year. As of December 31, 2014, long-term debt totaled $14,812,000 which was $1,265,000 less than 2013’s year-end balance of $16,077,000. The net decrease in long-term debt was the result of pay downs of $11,265,000 during the year and $10,000,000 of additional advances. At December 31, 2013, long-term debt declined by $21,393,000 from $37,470,000 at December 31, 2012. During the past two years, the Company’s reliance on long-term debt diminished. The decline in long-term commercial loans in 2013 reduced the Company’s need for longer-term funding. In 2014, given interest rate conditions, the Company allowed its short-term borrowings to increase modestly. The Company will continuecontinues to evaluate its funding needs, interest rate movements, the cost of options, and the availability of attractive structures in its evaluation as to the timing and extent of when it enters into long-term borrowings.
For additional information about borrowings, refer to Note 11, Short-Term Borrowings, and Note 12, Long-Term Debt to the Consolidated Financial Statements appearing in Part II, Item 8, "Financial Statements and Supplementary Data."
Shareholders' Equity
Total shareholders’ equity increased $9,906,000, or 7.3%, during 2017. Increases in equity included net income of $8,090,000, $1,523,000 from the issuance of common stock related to share-based compensation and an increase in the fair value of available for sale securities, net of taxes, of $3,781,000. Dividends paid to shareholders decreased equity by$3,488,000.
In February 2018, the FASB issued changes related to the accounting for the effects of the Tax Act on items in AOCI. The impact of tax rate changes is recorded in income and items accounted for in AOCI could be left with a 'stranded' tax effect that could have those items appear to not reflect the appropriate tax rate. The FASB's changes allow a reclassification from AOCI to retained earnings for stranded tax effects from the Tax Act to improve the usefulness of information reported to financial statement users. The changes are effective for years beginning after December 31, 2018, with early adoption permitted. We elected to adopt the changes in December 2017. The amount transferred from AOCI to retained earnings totaled $229,000 and represented the impact of the Tax Law rate change to 21% at the date of enactment for unrealized gains and losses accounted for in AOCI.
On January 19, 2016, the Company filed a shelf registration statement on Form S-3 with the SEC, covering up to an aggregate of $100,000,000 of securities, through the sale of common stock, preferred stock, warrants, debt securities, and units. To date, the Company has not issued any securities under this shelf registration statement.
On September 14, 2015, the Board of Directors of the Company authorized a stock repurchase program which is more fully described in Item 5 under Issuer Purchases of Equity Securities. The maximum number of shares that may yet be purchased under the plan is 333,275 shares at December 31, 2017.
The following table includes additional information for shareholders’ equity for the years ended December 31.
|
| | | | | | | | | | | |
| (Dollars in thousands) | 2017 | | 2016 | | 2015 |
| | | | | | |
| Average shareholders’ equity | $ | 141,301 |
| | $ | 137,973 |
| | $ | 131,453 |
|
| Net income | 8,090 |
| | 6,628 |
| | 7,874 |
|
| Cash dividends paid | 3,488 |
| | 2,898 |
| | 1,822 |
|
| Equity to asset ratio | 9.29 | % | | 9.53 | % | | 10.29 | % |
| Dividend payout ratio | 42.00 | % | | 42.68 | % | | 22.68 | % |
| Return on average equity | 5.73 | % | | 4.80 | % | | 5.99 | % |
Capital Adequacy and Regulatory Matters
Capital Resources. The management of capital in a regulated financial services industry must properly balance return on equity to its stockholdersshareholders while maintaining sufficient levels of capital and related risk-based regulatory capital ratios to satisfy statutory regulatory requirements. The Company’s capital management strategies have historically been developed to provide attractive rates of returns to its shareholders, while maintaining a “well capitalized” position of regulatory strength.
Total shareholders’ equity increased $35,826,000Under requirements of the Dodd-Frank Act and Basel III Capital Rules as described in Item 1 - Business, the Company and the Bank have been subject to increasingly stringent regulatory capital requirements. Significant provisions of the Basel III Capital Rules that have impacted the Company's and the Bank's capital calculations include:
Restricting the amount of deferred tax assets that can be included in CET1 capital with assets relating to net operating loss and credit carry forwards being excluded, and a 10% - 15% limitation on deferred tax assets arising from $91,439,000temporary differences that cannot be realized through net operating loss carry backs. At December 31, 2017 and 2016, $2,151,000 and $7,976,000 of the Company's deferred tax asset related to operating loss and tax credit carryforwards was deducted from our calculation of CET1;
Applying a 150% risk weight for certain high volatility commercial real estate acquisition, development and construction loans;
Assigning a 150% risk weight to exposures (other than residential mortgage exposures) that are 90 days past due or in nonaccrual status;
Providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable; and
The allowance for credit losses, including the ALL and reserve for off-balance sheet credit commitments, is included as Tier 2 capital to the extent it does not exceed 1.25% of risk weighted assets. The amount that exceeds 1.25% of risk weighted assets, is disallowed as Tier 2 capital, but also reduces the Company’s risk weighted assets. At December 31, 2017 and 2016, $0 and $1,559,000 of the allowance for credit losses was excluded from our calculation of Tier 2 capital. The lower disallowed amount in 2017 was the result of the higher balance of risk-weighted assets.
Management believes the Company and the Bank met all capital adequacy requirements to which they are subject at December 31, 2013 to $127,265,000 at2017 and December 31, 2014. The primary reason for the net increase in shareholders’ equity was the $29,142,000 net income recorded for the year ended2016. At December 31, 2014, combined with unrealized gains on securities available for sale, net of tax of $6,389,000.
The Company (on a consolidated basis) and2017, the Bank are subject to various regulatory capital requirements administered by the federalwas considered well capitalized under applicable banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial statements.regulations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Although applicable to the Bank, prompt corrective action provisions are not applicable to bank holding companies, including financial holding companies.
Capital Adequacy. InTables presenting the determination of Tier 1 and Total risk based capital, generally accumulated other comprehensive income (loss) is excluded from capital, as are intangible assets, a portion of mortgage servicing rights and deferred tax assets that are dependent on future taxable income greater than one year from the reporting date. As of December 31, 2014, $14,426,000 of the Company's deferred tax asset was disallowed for Tier 1 capital purposes as it exceeded the amount that was expected to be realized in 2015.
The allowance for credit losses, including the allowance for loan losses and reserve for off-balance sheet credit commitments, is included as Tier 2 capital to the extent it does not exceeds 1.25% of risk weighted assets. The amount that exceeds 1.25% of risk weighted assets, is disallowed as Tier 2 capital, but also reduces the Company’s risk weighted assets. As of December 31, 2014 and 2013, $6,269,000 and $12,598,000 of the allowance for credit losses was excluded from Tier 2 capital. The lower disallowed amount in 2014 was the result of the lower balance in the allowance for loan losses.
The Company and the Bank have been able to increase their capital ratios from December 31, 2013 levels due to net income earned during the year ended December 31, 2014, combined with a decrease in its risk weighted assets due to a shift in asset composition.
In March 2012, the Company and the Bank entered into a Written Agreement with the Federal Reserve Bank and the Bank entered into a Consent Order with the PDB. The Consent Order with the PDB had been terminated and replaced with an MOU in April 2014, and in February 2015, the Bank was released from the MOU, terminating all enforcement actions imposed on the Bank by the PDB. The Bank has filed a confidential Capital Plan with each of those banking regulators.
Regulatory Capital. As of December 31, 2014, the Bank was considered well capitalized under applicable banking regulations. The Company’s and the Bank’s capital amounts and ratios as ofat December 31, 20142017 and 2013 were as follows:2016 are included in Note 13, Shareholders' Equity and Regulatory Capital, to the Consolidated Financial Statements appearing in Part II, Item 8, "Financial Statements and Supplementary Data."
|
| | | | | | | | | | | | | | | | | | | | |
| | Actual | | Minimum Capital Requirement | | Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions |
| (Dollars in thousands) | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| December 31, 2014 | | | | | | | | | | | |
| Total capital to risk weighted assets | | | | | | | | | | | |
| Orrstown Financial Services, Inc. | $ | 119,713 |
| | 16.8 | % | | $ | 56,859 |
| | 8.0 | % | | n/a |
| | n/a |
|
| Orrstown Bank | 118,540 |
| | 16.7 | % | | 56,835 |
| | 8.0 | % | | $ | 71,043 |
| | 10.0 | % |
| Tier 1 capital to risk weighted assets | | | | | | | | | | | |
| Orrstown Financial Services, Inc. | 110,750 |
| | 15.6 | % | | 28,429 |
| | 4.0 | % | | n/a |
| | n/a |
|
| Orrstown Bank | 109,581 |
| | 15.4 | % | | 28,417 |
| | 4.0 | % | | 42,626 |
| | 6.0 | % |
| Tier 1 capital to average assets | | | | | | | | | | | |
| Orrstown Financial Services, Inc. | 110,750 |
| | 9.5 | % | | 46,496 |
| | 4.0 | % | | n/a |
| | n/a |
|
| Orrstown Bank | 109,581 |
| | 9.4 | % | | 46,518 |
| | 4.0 | % | | 58,148 |
| | 5.0 | % |
| December 31, 2013 | | | | | | | | | | | |
| Total capital to risk weighted assets | | | | | | | | | | | |
| Orrstown Financial Services, Inc. | $ | 104,637 |
| | 15.0 | % | | $ | 55,926 |
| | 8.0 | % | | n/a |
| | n/a |
|
| Orrstown Bank | 102,806 |
| | 14.7 | % | | 55,893 |
| | 8.0 | % | | $ | 69,866 |
| | 10.0 | % |
| Tier 1 capital to risk weighted assets | | | | | | | | | | | |
| Orrstown Financial Services, Inc. | 95,741 |
| | 13.7 | % | | 27,963 |
| | 4.0 | % | | n/a |
| | n/a |
|
| Orrstown Bank | 93,915 |
| | 13.4 | % | | 27,947 |
| | 4.0 | % | | 41,920 |
| | 6.0 | % |
| Tier 1 capital to average assets | | | | | | | | | | | |
| Orrstown Financial Services, Inc. | 95,741 |
| | 8.1 | % | | 47,058 |
| | 4.0 | % | | n/a |
| | n/a |
|
| Orrstown Bank | 93,915 |
| | 8.0 | % | | 47,077 |
| | 4.0 | % | | 58,846 |
| | 5.0 | % |
As noted above, the Bank’sThe Company and Bank's capital ratios exceedat December 31, 2017 have declined since December 31, 2016, despite an increase in consolidated capital, due primarily to consolidated risk-weighted assets increasing from $955,253,000 at December 31, 2016 to $1,146,378,000 at December 31, 2017 for the regulatory minimumsCompany and from $954,533,000 at December 31, 2016 to be considered well capitalized under applicable banking regulations. $1,143,207,000 at December 31, 2017 for the Bank. The increase in risk-weighted assets is principally due to the growth experienced in the loan portfolio.
The Company routinely evaluates its capital levels in light of its risk profile to assess its capital needs.
On January 8, 2013, the Company filed a shelf registration statement on Form S-3 with the SEC, covering up to an aggregate of $80,000,000, through the sale of common stock, preferred stock, and warrants. To date, the Company has not issued any securities under this shelf registration statement.
In October 2011, the Company announced it had discontinued its quarterly dividend, which was the result of regulatory guidance from the Federal Reserve Bank. Dueaddition to the regulatory restrictions includedminimum capital ratio requirement and minimum capital ratio to be well capitalized presented in the Written Agreement with the Federal Reserve Bank, the Company is restricted from paying any dividends or repurchasing any stock without prior regulatory approval. Accordingly, there can be no assurance that we will be permitted to pay a cash dividend or conduct any stock repurchasestables in the near future.
Additional relevant financial information pertaining to shareholders’ equity for the years ended December 31 is as follows:
|
| | | | | | | | | | | |
| (Dollars in thousands) | 2014 | | 2013 | | 2012 |
| | | | | | |
| Average shareholders’ equity | $ | 101,250 |
| | $ | 88,547 |
| | $ | 109,184 |
|
| Net income (loss) | 29,142 |
| | 10,004 |
| | (38,454 | ) |
| Cash dividends paid | 0 |
| | 0 |
| | 0 |
|
| Equity to asset ratio | 10.69 | % | | 7.76 | % | | 7.11 | % |
| Dividend payout ratio | 0.00 | % | | 0.00 | % | | 0.00 | % |
| Return on average equity | 28.78 | % | | 11.30 | % | | (35.22 | )% |
In July 2013,Note 13, the Company and Bank’s primary federal regulator, the FRB, approved final rules (the “Basel III Capital Rules”) establishingBank must maintain a new comprehensive capital framework for U.S. banking organizations, including community banks, which also incorporate provisions ofconservation buffer as noted in Item 1 - Business under the Dodd-Frank Act. Thetopic Basel III Capital Rules substantially reviseRules. At December 31, 2017, the risk-basedCompany's and the Bank's capital requirements applicable to bank holding companiesconservation buffer, based on the most restrictive capital ratio, was 5.3% and depository institutions, including5.0%, which is above the Company and Bank, compared to existing U.S. risk-based capital rules. The Basel III Capital Rules define the componentsphase in requirement of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratios, addresses risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and replace the current risk-weighting approach. The Basel III Capital Rules are effective for the Company and Bank on January 1, 2015 (subject to a phase-in period). Management anticipates that it will be in compliance with the phased in rules.
For further discussion, see “Basel III Capital Rules” under Item 1 – Business, in Part I of this Annual Report on Form 10-K.1.25% at December 31, 2017.
Liquidity and Rate Sensitivity
Liquidity. The primary function of asset/liability management is to ensure adequate liquidity and manage the Company’s sensitivity to changing interest rates. Liquidity management involves the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and
sales of investment securities, the sale of mortgage loans and borrowings from the Federal Home Loan BankFHLB of Pittsburgh. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management policy.
At December 31, 2014,2017, we had $193,834,000$352,960,000 in loan commitments outstanding, which included $14,145,000$56,012,000 in undisbursed loans, $100,897,000$139,281,000 in unused home equity lines of credit, and $71,483,000$145,394,000 in commercial lines of credit, and $7,309,000$12,273,000 in standby letters of credit. Time deposits due within one year of December 31, 20142017 totaled $174,597,000,$107,765,000, or 72%39% of time deposits. The large percentage of time deposits that mature within one year reflects customers’ hesitancypreference not to invest their funds for long periods in the current low interest rate environment. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other time deposits and lines of credit. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on time deposits due on or beforeoutstanding at December 31, 2015.2017. We believe, however, based on past experience that a significant portion of our time depositdeposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.we offer.
Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At December 31, 2014,2017, cash and cash equivalents totaled $31,409,000,$29,807,000, which decreased from $37,560,000approximated the total of $30,273,000 at December 31, 2013. The lower levels of cash and cash equivalents is due to the Company investing these funds in securities2016. Securities classified as available for sale, in order to earn a higher rate of interest than that earned on short-term investments. Securities classified as available-for-sale, net of pledging requirements, which provide additional sources of liquidity, totaled $115,165,000$95,401,000 at December 31, 2014.2017. In addition, at December 31, 2014,2017, we had the ability to borrow a total of approximately $526,683,000$517,257,000 from the Federal Home Loan BankFHLB of Pittsburgh, (FHLB), of which we had $79,812,000$135,365,000 in advances and $150,000 in letters of credit outstanding at December 31, 2014.outstanding. The Company’s ability to borrow from the FHLB
is dependent on having sufficient qualifying collateral, generally consisting of mortgage loans. In addition, the Company has $30,000,000up to $35,000,000 in two available unsecured lines of credit with its correspondentother banks.
The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders in the past.shareholders. The Company also has repurchased shares of its common stock. The Company’s primary source of income is dividends received from the Bank. For restrictionsRestrictions on the Bank’s ability to dividend funds to the Company seeare included in Note 15, “Restrictions14, Restrictions on Dividends, Loans and Advances,” to the Consolidated Financial Statements included inunder Part II, Item 8.8, "Financial Statements and Supplementary Data."
Interest Rate Sensitivity. Interest rate sensitivity management requires the maintenance of an appropriate balance between interest sensitive assets and liabilities. Management, through its asset/liability management process, attempts to manage the level of repricing and maturity mismatch so that fluctuations in net interest income isare maintained within policy limits in current and expected market conditions. For further discussion, see Part II, Item 7A, - Quantitative"Quantitative and Qualitative Disclosures About Market Risk."
Contractual Obligations
The Company enters into contractual obligations in itsthe normal course of business to fund loan growth, for asset/liability management purposes, to meet required capital needs and for other corporate purposes. The following table presents significant fixed and determinable contractual obligations of principal by payment date as ofat December 31, 2014.2017. Further discussion of the nature of each obligation is included in the referenced Note to the Consolidated Financial Statements under Part II, Item 8.8, "Financial Statements and Supplementary Data" referenced in the following table.
| | | | | | Payments Due | | | | | Payments Due | | |
| (Dollars in thousands) | Note Reference | | Less than 1 year | | 2-3 years | | 4-5 years | | More than 5 years | | Total | Note Reference | | Less than 1 year | | 2-3 years | | 4-5 years | | More than 5 years | | Total |
| | | | | | | | | | | | | | | | | | | | | |
| Time deposits | 11 | | $ | 174,597 |
| | $ | 55,141 |
| | $ | 9,541 |
| | $ | 3,954 |
| | $ | 243,233 |
| 10 | | $ | 107,765 |
| | $ | 159,177 |
| | $ | 6,269 |
| | $ | 877 |
| | $ | 274,088 |
|
| Short-term borrowings | 12 | | 86,742 |
| | 0 |
| | 0 |
| | 0 |
| | 86,742 |
| 11 | | 93,576 |
| | 0 |
| | 0 |
| | 0 |
| | 93,576 |
|
| Long-term debt | 13 | | 10,317 |
| | 680 |
| | 748 |
| | 3,067 |
| | 14,812 |
| 12 | | 365 |
| | 81,133 |
| | 862 |
| | 1,455 |
| | 83,815 |
|
| Operating lease obligations | 6 | | 398 |
| | 482 |
| | 187 |
| | 120 |
| | 1,187 |
| 6 | | 574 |
| | 1,024 |
| | 564 |
| | 474 |
| | 2,636 |
|
| Total | | $ | 272,054 |
| | $ | 56,303 |
| | $ | 10,476 |
| | $ | 7,141 |
| | $ | 345,974 |
| | $ | 202,280 |
| | $ | 241,334 |
| | $ | 7,695 |
| | $ | 2,806 |
| | $ | 454,115 |
|
The following discussion ofcontractual obligations table above does not include off-balance sheet commitments to extend credit is includedthat are detailed in Note 17 to the Consolidated Financial Statements, under Item 8. Because thesefollowing section. These commitments generally have fixed expiration dates and many will expire without being drawn upon, therefore the total commitment does not necessarily represent future cash requirements and are thereforeis excluded from the contractual obligations table discussed above.table.
Off-Balance Sheet Arrangements
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and to a lesser extent,standby letters of credit.
A schedule ofThe following table details significant commitments at December 31, 2014 is as follows:2017.
| | | (Dollars in thousands) | Contract or Notional Amount | Contract or Notional Amount |
| Commitments to fund: | | |
| Revolving, open ended home equity loans | $ | 100,897 |
| |
| Revolving, open-ended home equity loans | | $ | 139,281 |
|
| 1-4 family residential construction loans | 2,463 |
| 11,420 |
|
| Commercial real estate, construction and land development loans | 11,682 |
| 44,592 |
|
| Commercial, industrial and other loans | 71,483 |
| 145,394 |
|
| Standby letters of credit | 7,309 |
| 12,273 |
|
Please see Note 17 – “Financial Instruments with Off-Balance Sheet Risk” in the Notes to the Consolidated Financial Statements for aA discussion of the nature, business purpose, and guarantees that result from the Company’s off-balance sheet arrangements.arrangements is included in Note 16, Financial Instruments with Off-Balance Sheet Risk, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data."
New FinancialRecently Adopted and Recently Issued Accounting Standards
Recently adopted and recently issued accounting standards are included in Note 1, Summary of Significant Accounting Policies, to the consolidated financial statementsConsolidated Financial Statements under Part II, Item 8, discusses the expected impact on the Company’s financial condition or results of operations for recently issued or proposed accounting standards that have not been adopted as of December 31, 2014. To the extent we anticipate significant impact to the Company’s financial condition or results of operations appropriate discussion is included in the disclosure."Financial Statements and Supplementary Data."
Caution About Forward LookingForward-Looking Statements
This report contains statements that are considered “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. In addition, the Company may make other written and oral communications, from time to time, that contain such statements. Forward-looking statements, including statements that include projections, predictions, expectations or beliefs as to industry trends, future expectations and other matters that do not relate strictly to historical facts, are based on certain assumptions by management, and are often identified by words or phrases such as “anticipated,” “believe,” “expect,” “intend,” “seek,” “plan,” “objective,” “trend,”"may," "anticipate," "believe," "expect," "estimate," "intend," "seek," "plan," "objective," "trend," "goal." and “goal.”other similar terms. Forward-looking statements are subject to various assumptions, risks, and uncertainties, which change over time, and speak only as ofat the date they are made.
In addition to factors mentioned elsewhere in this Annual Report on Form 10-K or previously disclosed in our SEC reports (accessible on the SEC’s website at www.sec.gov or on our website at www.orrstown.com), the following factors, among others, could cause actual results to differ materially from forward-looking statements and future results could differ materially from historical performance:
We are subjectIf our ALL is not sufficient to restrictionscover actual losses, our earnings would decrease.
Commercial real estate lending may expose us to a greater risk of loss and conditionsimpact our earnings and profitability.
Commercial and industrial loans comprise 10% of a formal agreement issued byour loan portfolio. The credit risk related to these types of loans is greater than the Federal Reserve Bankrisk related to residential loans.
Changes in interest rates could adversely impact the Company’s financial condition and results of Philadelphia. Failure to comply with this formal agreement could result in additional enforcement action against us, including the imposition of monetary penalties.
We may not be able to pay any cash dividends or conduct any stock repurchases for the foreseeable future.
We are a holding company dependent for liquidity on payments from the Bank, our sole subsidiary, which are subject to restrictions.
We may be required to make further increases in our provisions for loan losses and to charge off additional loans in the future, which could materially adversely affect us.operations.
Difficult economic and market conditions have adversely affected ourthe financial services industry and may continue to materially and adversely affect us.
Governmental regulation and regulatory actions against us may impair our operations or restrict our growth.
The Dodd-Frank Wall Street Reform and Consumer Protection Act may affect our financial condition, results of operations, liquidity and stock price.
The repeal of federal prohibitions on the payment of interest on demand deposits could increase our interest expense and reduce our net interest margin.
Changes in interest rates could adversely impact our financial condition and results of operations.
Increases in FDIC insurance premiums may have a material adverse effect on our results of operations.Company.
Because our business is concentrated in South Centralsouth central Pennsylvania and Washington County, Maryland, our financial performance could be materially adversely affected by economic conditions and real estate values in these market areas.
Our commercial real estate lending may expose us to a greater risk of loss and impact our earnings and profitability.
Our construction loans and land development loans involve a higher degree of risk than other segments of our loan portfolio.
We are required to make a number of judgments in applying accounting policies and different estimates and assumptions in the application of these policies could result in a decrease in capital and/or other material changes to our reports of financial condition and results of operations. Also, changes in accounting standards can be difficult to predict and can materially impact how we record and report our financial condition and results of operations.
Competition from other banks and financial institutions in originating loans, attracting deposits and providing variousother financial services may adversely affect our profitability and liquidity.
OurThe Company’s business strategy includes the continuation of moderate growth plans, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.
If we want to, or are compelled to, raise additional capital in the future, that capital may not be available when it is needed and on terms favorable to current shareholders.
The short-term and long-term impact of the changing regulatory capital requirements and anticipated new capital rules is uncertain.
WeCompany may be adversely affected by technological advances.
The soundness of other financial institutions could adversely affect us.
WeCompany may not be requiredable to record impairment charges on our investmentsattract and FHLB stock if they suffer a decline in value that is considered other-than-temporary.retain skilled people.
An interruption or breach in security with respect to our information system,systems, or our outsourced service providers, could adversely impact ourthe Company’s reputation and have an adverse impact on our financial condition or results of operations.
We could be adversely affected by failure in our internal controls.
Negative public opinion could damage our reputation and adversely affect our earnings.
Governmental regulation and regulatory actions against us may impair our operations or restrict our growth.
The Dodd-Frank Act may affect the Company’s financial condition, results of operations, liquidity and stock price.
Increases in FDIC insurance premiums may have a material adverse effect on our results of operations.
Legislative, regulatory and legal developments involving income and other taxes could materially adversely affect the Company’s results of operations and cash flows.
The Company is required to use judgment in applying accounting policies and different estimates and assumptions in the application of these policies could result in a decrease in capital and/or other material changes to the reports of financial condition and results of operations.
Changes in accounting standards could impact the Company's financial condition and results of operations.
The short-term and long-term impact of the changing regulatory capital requirements and new capital rules is uncertain.
Pending litigation and legal proceedings and the impact of any finding of liability or damages could adversely impact the Company and its financial condition and results of operations.
WeIndemnification costs associated with litigation and legal proceedings could adversely impact the Company and its financial condition and results of operations.
The Parent Company is a holding company dependent for liquidity on payments from its bank subsidiary, which is subject to restrictions.
The soundness of other financial institutions could adversely affect the Company.
If the Company wants to, or is compelled to, raise additional capital in the future, that capital may not be ableavailable when it is needed and on terms favorable to attract and retain skilled people.current shareholders.
The market price of our common stock has been subject to extreme volatility.
The Parent Company's primary source of income is dividends received from its bank subsidiary.
Other risks and uncertainties.
ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is defined as thecomprises exposure to interest rate risk, foreign currency exchange rate risk, commodity price risk, and other relevant market rate or price risks. For domestic banks, including the Company, the majority of market risk is related to interest rate risk. Interest rate sensitivity management requires the maintenance of an appropriate balance between reward, in the form of net interest margin, and risk as measured by the amount of earnings and value at risk.
For the year ended December 31, 2014, the Company changed its method of presenting and measuring interest rate risk from GAP analysis to net interest income (NII) at risk and economic value of Equity (EVE) at risk. This change was made because management felt that NII and EVE produced a more comprehensive framework for understanding, measuring, and managing the Company's interest rate and market risk.
Interest Rate Risk
Interest rate risk is the exposure to fluctuations in the Company’s future earnings (earnings at risk) and value (value at risk) resulting from changes in interest rates. This exposure results from differences between the amounts of interest earninginterest-earning assets and interest bearinginterest-bearing liabilities that reprice within a specified time period as a result of scheduled maturities, scheduled and unscheduled repayments, the propensity of borrowers and depositors to react to changes in their economic interests, and security and contractual interest rate changes.
Management through its asset/liability management process, attempts to manage the level of repricing and maturity mismatch through its asset/liability management process so that fluctuations in net interest income isare maintained within policy limits across a range of market conditions while satisfying liquidity and capital requirements. Management recognizes that a certain amount of interest rate risk is inherent,
appropriate and necessary to ensure the Company’s profitability. Thus, the goal of interest rate risk management is to evaluate the amount of reward for taking risk and adjusting both the size and composition of the balance sheet relative to the level of reward available for taking risk.
Management endeavors to control the exposure to changes in interest rates by understanding, reviewing and making decisions based on its risk position. The Company primarily uses theits securities portfolio, FHLB advances and brokered deposits to manage its interest rate risk position. Additionally, pricing, promotion and product development activities are directed in an effort to emphasize the loan and deposit term or repricing characteristics that best meet current interest rate risk objectives. At present, there is nowe do not use of hedging instruments.instruments for risk management, but we do evaluate them and may use them in the future.
The asset/liability committee operates under management policies, definingapproved by the Board of Directors, which define guidelines and limits on the level of risk. These policies are approved by the Board of Directors.
The Company uses simulation analysis to assess earnings at risk and net present value analysis to assess value at risk. These methods allow management to regularly monitor both the direction and magnitude of the Company’s interest rate risk exposure. These modeling techniques involve assumptions and estimates that inherently cannot be measured with complete precision. Key assumptions in the analyses include maturity and repricing characteristics of assets and liabilities, prepayments on amortizing assets, non-maturity deposit sensitivity, and loan and deposit pricing. These assumptions are inherently uncertain due to the timing, magnitude and frequency of rate changes and changes in market conditions and management strategies, among other factors. However, the analyses are useful in quantifying risk and provideproviding a relative gauge of the Company’s interest rate risk position over time.
Earnings at Risk
Simulation analysis evaluates the effect of upward and downward changes in market interest rates on future net interest income. The analysis involves changing the interest rates used in determining net interest income over the next twelve months. The resulting percentage change in net interest income in various rate scenarios is an indication of the Company’s short-term interest rate risk. The analysis assumes recent trends in new loan and deposit volumes will continue while the amount of investment securities remains constant. Additional assumptions are applied to modify volumes and pricing under the various rate scenarios. These include prepayment assumptions on mortgage assets, sensitivity of non-maturity deposit rates, and other factors deemed significant.
The simulation analysis results are presented in Table 7a. These results, as ofthe Earnings at Risk table below. At December 31, 2014,2017, these results indicate that the Company would expect net interest income to decrease over the next twelve months by 1.5%6.5%, assuming a downward shock in market interest rates of 1.00%, and to decrease by 6.1%4.9% assuming an upward shock of 2.00%. This profile reflects an acceptable short-term interest rate risk position. However, aA decrease in interest rates of 1.00% would create an environment in which deposit rates could not practically decline further, thus decreasing net interest income.further.
EarningsThe simulation analysis results at risk simulations for December 31, 2013,2016 exhibited lessslightly greater sensitivity to both rising interest rates and similar sensitivity in a declining rate environment.
Value at Risk
The netNet present value analysis provides information on the risk inherent in the balance sheet that might not be taken into account in the simulation analysis due to the short time horizon used in that analysis. The net present value of the balance sheet is defined as the discounted present value of expected asset cash flows minus the discounted present value of the expected liability cash flows. The analysis involves changing the interest rates used in determining the expected cash flows and in discounting the cash flows. The resulting percentage change in net present value in various rate scenarios is an indication of the longer term repricing risk and options embedded in the balance sheet.
The net present value analysis results are presented in Table 7b. These results, as ofthe Value at Risk table below. At December 31, 2014,2017, these results indicate that the net present value would increase 2.2%decrease 7.2% assuming a downward shiftshock in market interest rates of 1.00% and decrease 6.8% if interest rates shifted up5.4% assuming an upward shock of 2.00% in the same manner..
|
| | | | | | | | | | | | | | | | |
| Table 7a - Earnings at Risk | | Table 7b - Value at Risk |
| | | % Change in Net Interest Income | | | | % Change in Net Interest Income |
| Change in Market Interest Rates | | December 31, 2014 | | December 31, 2013 | | Change in Market Interest Rates | | December 31, 2014 | | December 31, 2013 |
| | | | | | | | | | | |
| (100 | ) | | (1.5 | %) | | (3.9 | %) | | (100 | ) | | 2.2 | % | | 1.2 | % |
| 200 |
| | (6.1 | %) | | 2.6 | % | | 200 |
| | (6.8 | %) | | (7.8 | %) |
In 2014, the Company completed a core deposit study that resulted in an increase in the assumed repricing sensitivity of the Company's core deposits to changes in market rates. |
| | | | | | | | | | | | | | | | |
| Earnings at Risk | | Value at Risk |
| | | % Change in Net Interest Income | | | | % Change in Market Value |
| Change in Market Interest Rates | | December 31, 2017 | | December 31, 2016 | | Change in Market Interest Rates | | December 31, 2017 | | December 31, 2016 |
| | | | | | | | | | | |
| (100 | ) | | (6.5 | %) | | (3.3 | %) | | (100 | ) | | (7.2 | %) | | (1.0 | %) |
| 100 |
| | (1.3 | %) | | (1.5 | %) | | 100 |
| | (1.8 | %) | | (1.5 | %) |
| 200 |
| | (4.9 | %) | | (2.5 | %) | | 200 |
| | (5.4 | %) | | (2.9 | %) |
Further discussion related to the quantitative and qualitative disclosures about market risk is included under the heading of Liquidity and Rate Sensitivity in Item 7 of Management's Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SUMMARY OF QUARTERLY FINANCIAL DATA
The unaudited quarterly results of operations for the years ended December 31, are as follows:
| | | | 2014
Quarter Ended | | 2013
Quarter Ended | 2017
Quarter Ended | | 2016
Quarter Ended |
(Dollars in thousands, except per share data) | December | | September | | June | | March | | December | | September | | June | | March | |
(Dollars in thousands, except per share information) | | December | | September | | June | | March | | December | | September | | June | | March |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | $ | 9,520 |
| | $ | 9,477 |
| | $ | 9,585 |
| | $ | 9,601 |
| | $ | 9,643 |
| | $ | 8,982 |
| | $ | 8,989 |
| | $ | 9,484 |
| |
| Interest and dividend income | | $ | 13,619 |
| | $ | 13,098 |
| | $ | 12,468 |
| | $ | 11,830 |
| | $ | 11,075 |
| | $ | 10,654 |
| | $ | 10,272 |
| | $ | 9,961 |
|
| Interest expense | (959 | ) | | (1,030 | ) | | (1,085 | ) | | (1,085 | ) | | (1,130 | ) | | (1,216 | ) | | (1,288 | ) | | (1,377 | ) | 2,284 |
| | 2,017 |
| | 1,750 |
| | 1,593 |
| | 1,365 |
| | 1,420 |
| | 1,321 |
| | 1,311 |
|
| Net interest income | 8,561 |
| | 8,447 |
| | 8,500 |
| | 8,516 |
| | 8,513 |
| | 7,766 |
| | 7,701 |
| | 8,107 |
| 11,335 |
| | 11,081 |
| | 10,718 |
| | 10,237 |
| | 9,710 |
| | 9,234 |
| | 8,951 |
| | 8,650 |
|
| Provision for loan losses | 1,000 |
| | 2,900 |
| | 0 |
| | 0 |
| | 1,750 |
| | 0 |
| | 1,400 |
| | 0 |
| 800 |
| | 100 |
| | 100 |
| | 0 |
| | 0 |
| | 250 |
| | 0 |
| | 0 |
|
| Net interest income after provision for loan losses | 9,561 |
| | 11,347 |
| | 8,500 |
| | 8,516 |
| | 10,263 |
| | 7,766 |
| | 9,101 |
| | 8,107 |
| 10,535 |
| | 10,981 |
| | 10,618 |
| | 10,237 |
| | 9,710 |
| | 8,984 |
| | 8,951 |
| | 8,650 |
|
| Securities gains | 267 |
| | 469 |
| | 602 |
| | 597 |
| | 53 |
| | 157 |
| | 0 |
| | 122 |
| |
| Investment securities gains | | 0 |
| | 533 |
| | 654 |
| | 3 |
| | 0 |
| | 0 |
| | 0 |
| | 1,420 |
|
| Noninterest income | 4,259 |
| | 4,283 |
| | 4,536 |
| | 3,841 |
| | 4,060 |
| | 4,442 |
| | 4,664 |
| | 4,310 |
| 5,173 |
| | 4,723 |
| | 4,969 |
| | 4,332 |
| | 4,969 |
| | 4,568 |
| | 4,537 |
| | 4,245 |
|
| Noninterest expenses | (11,129 | ) | | (10,898 | ) | | (10,765 | ) | | (10,976 | ) | | (11,434 | ) | | (10,537 | ) | | (10,327 | ) | | (10,949 | ) | 12,680 |
| | 13,087 |
| | 12,417 |
| | 12,146 |
| | 12,476 |
| | 11,985 |
| | 12,558 |
| | 11,121 |
|
| Income before income taxes | 2,958 |
| | 5,201 |
| | 2,873 |
| | 1,978 |
| | 2,942 |
| | 1,828 |
| | 3,438 |
| | 1,590 |
| |
| Applicable (income taxes) benefit | 16,156 |
| | (24 | ) | | 0 |
| | 0 |
| | (15 | ) | | 281 |
| | (30 | ) | | (30 | ) | |
| Income before income tax expense | | 3,028 |
| | 3,150 |
| | 3,824 |
| | 2,426 |
| | 2,203 |
| | 1,567 |
| | 930 |
| | 3,194 |
|
| Income tax expense | | 3,022 |
| | 376 |
| | 516 |
| | 424 |
| | 275 |
| | 125 |
| | 252 |
| | 614 |
|
| Net income | $ | 19,114 |
| | $ | 5,177 |
| | $ | 2,873 |
| | $ | 1,978 |
| | $ | 2,927 |
| | $ | 2,109 |
| | $ | 3,408 |
| | $ | 1,560 |
| $ | 6 |
| | $ | 2,774 |
| | $ | 3,308 |
| | $ | 2,002 |
| | $ | 1,928 |
| | $ | 1,442 |
| | $ | 678 |
| | $ | 2,580 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Per Common Share Data | | | | | | | | | | | | | | | | |
| Net income | $ | 2.36 |
| | $ | 0.64 |
| | $ | 0.35 |
| | $ | 0.24 |
| | $ | 0.36 |
| | $ | 0.26 |
| | $ | 0.42 |
| | $ | 0.19 |
| |
| Diluted net income | 2.36 |
| | 0.64 |
| | 0.35 |
| | 0.24 |
| | 0.36 |
| | 0.26 |
| | 0.42 |
| | 0.19 |
| |
| Dividends | 0.00 |
| | 0.00 |
| | 0.00 |
| | 0.00 |
| | 0.00 |
| | 0.00 |
| | 0.00 |
| | 0.00 |
| |
| Per share information: | | | | | | | | | | | | | | | | |
| Basic earnings per share | | $ | 0.00 |
| | $ | 0.34 |
| | $ | 0.41 |
| | $ | 0.25 |
| | $ | 0.24 |
| | $ | 0.18 |
| | $ | 0.08 |
| | $ | 0.32 |
|
Diluted earnings per share (a) | | 0.00 |
| | 0.34 |
| | 0.40 |
| | 0.24 |
| | 0.24 |
| | 0.18 |
| | 0.08 |
| | 0.32 |
|
| Dividends per share | | 0.12 |
| | 0.10 |
| | 0.10 |
| | 0.10 |
| | 0.09 |
| | 0.09 |
| | 0.09 |
| | 0.08 |
|
| (a) Sum of the quarters may not equal the total year due to rounding. | | (a) Sum of the quarters may not equal the total year due to rounding. | | | | | | | | |
Index to Financial Statements and Supplementary Data
Management’s Report on Internal Control Over Financial Reporting
The management of Orrstown Financial Services, Inc. and, together with its wholly-owned subsidiaryconsolidated subsidiaries (the "Company"), has the responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting. Management maintains a comprehensive system of internal control to provide reasonable assurance of the proper authorization of transactions, the safeguarding of assets and the reliability of the financial records. The system of internal control provides for appropriate division of responsibility and is documented by written policies and procedures that are communicated to employees. Orrstown Financial Services, Inc. and its wholly-owned subsidiaryThe Company maintains an internal auditing program, under the supervision of the Audit Committee of the Board of Directors, which independently assesses the effectiveness of the system of internal control and recommends possible improvements.
Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of its internal control over financial reporting as ofat December 31, 2014,2017, using the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon this evaluation, management has concluded that, at December 31, 2014,2017, the Company’s internal control over financial reporting is effective based on the criteria established in Internal Control-Integrated Framework (2013).
The independent registered public accounting firm, Crowe Horwath LLP has issued an audit report onaudited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014. The accounting firm’s audit2017, as stated in their report on internal control over financial reporting is included in this financial report.dated March 9, 2018.
|
| | |
| /s/ Thomas R. Quinn, Jr. | | /s/ David P. Boyle |
| Thomas R. Quinn, Jr. | | David P. Boyle |
| President and Chief Executive Officer | | Executive Vice President and Chief Financial Officer |
| | | |
March 12, 20159, 2018 | | |
|
| |
| |
Crowe Horwath LLP Independent Member Crowe Horwath International |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report of Independent Registered Public Accounting Firm
Shareholders and the Board of Directors
of Orrstown Financial Services, Inc. and its wholly-owned subsidiary
Shippensburg, Pennsylvania
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheetsheets of Orrstown Financial Services, Inc. and its wholly-owned subsidiary(the "Company") as of December 31, 20142017 and 2016, the related consolidated statementstatements of operations,income, comprehensive income, (loss), changes in shareholders’ equity, and cash flows for each of the year then ended.years in the three-year period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). We also have audited Orrstown Financial Services, Inc. and its wholly-owned subsidiary’sthe Company’s internal control over financial reporting as of December 31, 2014,2017, based on criteria established in the 2013 Internal Control - Integrated FrameworkFramework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Orrstown Financial Services, Inc.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its wholly-owned subsidiary’scash flows for each of the years in the three-year period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework: (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control overOver Financial Reporting. Our responsibility is to express an opinion on thesethe Company’s financial statements and an opinion on the company’sCompany’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our auditaudits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Orrstown Financial Services, Inc. and its wholly-owned subsidiary as of December 31, 2014, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Orrstown Financial Services, Inc. and its wholly-owned subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in the 2013 Internal Control - Integrated Framework issued by the COSO.
/s/ Crowe Horwath LLP
We have served as the Company's auditor since 2014.
Cleveland, Ohio
March 12, 2015
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Orrstown Financial Services, Inc.9, 2018
We have audited the accompanying consolidated balance sheet of Orrstown Financial Services, Inc. and its wholly-owned subsidiary (“the Company”) as of December 31, 2013, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2013. Orrstown Financial Services, Inc. and its wholly-owned subsidiary’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Orrstown Financial Services, Inc. and its wholly-owned subsidiary as of December 31, 2013, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.
/s/ Smith Elliott Kearns & Company, LLC
Chambersburg, Pennsylvania
March 14, 2014
Consolidated Balance Sheets
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
| | | | December 31, | December 31, |
| (Dollars in thousands, except per share data) | 2014 | | 2013 | 2017 | | 2016 |
| Assets | | | | | | |
| Cash and due from banks | $ | 18,174 |
| | $ | 12,995 |
| $ | 21,734 |
| | $ | 16,072 |
|
| Interest bearing deposits with banks | 13,235 |
| | 24,565 |
| |
| Interest-bearing deposits with banks | | 8,073 |
| | 14,201 |
|
| Cash and cash equivalents | 31,409 |
| | 37,560 |
| 29,807 |
| | 30,273 |
|
| Restricted investments in bank stocks | 8,350 |
| | 9,921 |
| 9,997 |
| | 7,970 |
|
| Securities available for sale | 376,199 |
| | 406,943 |
| 415,308 |
| | 400,154 |
|
| Loans held for sale | 3,159 |
| | 1,936 |
| 6,089 |
| | 2,768 |
|
| Loans | 704,946 |
| | 671,037 |
| 1,010,012 |
| | 883,391 |
|
| Less: Allowance for loan losses | (14,747 | ) | | (20,965 | ) | (12,796 | ) | | (12,775 | ) |
| Net loans | 690,199 |
| | 650,072 |
| 997,216 |
| | 870,616 |
|
| Premises and equipment, net | 24,800 |
| | 26,441 |
| 34,809 |
| | 34,871 |
|
| Cash surrender value of life insurance | 26,645 |
| | 25,850 |
| 33,570 |
| | 32,102 |
|
| Intangible assets | 414 |
| | 622 |
| |
| Accrued interest receivable | 3,097 |
| | 3,400 |
| 5,048 |
| | 4,672 |
|
| Other assets | 26,171 |
| | 15,067 |
| 27,005 |
| | 31,078 |
|
| Total assets | $ | 1,190,443 |
| | $ | 1,177,812 |
| $ | 1,558,849 |
| | $ | 1,414,504 |
|
| Liabilities | | | | | | |
| Deposits: | | | | | | |
| Non-interest bearing | $ | 116,302 |
| | $ | 116,371 |
| |
| Interest bearing | 833,402 |
| | 884,019 |
| |
| Noninterest-bearing | | $ | 162,343 |
| | $ | 150,747 |
|
| Interest-bearing | | 1,057,172 |
| | 1,001,705 |
|
| Total deposits | 949,704 |
| | 1,000,390 |
| 1,219,515 |
| | 1,152,452 |
|
| Short-term borrowings | 86,742 |
| | 59,032 |
| 93,576 |
| | 87,864 |
|
| Long-term debt | 14,812 |
| | 16,077 |
| 83,815 |
| | 24,163 |
|
| Accrued interest and other liabilities | 11,920 |
| | 10,874 |
| 17,178 |
| | 15,166 |
|
| Total liabilities | 1,063,178 |
| | 1,086,373 |
| 1,414,084 |
| | 1,279,645 |
|
| Shareholders’ Equity | | | | | | |
| Preferred Stock, $1.25 par value per share; 500,000 shares authorized; no shares issued or outstanding | 0 |
| | 0 |
| |
| Common stock, no par value—$0.05205 stated value per share 50,000,000 shares authorized; 8,264,554 and 8,107,274 shares issued; 8,263,743 and 8,106,463 shares outstanding | 430 |
| | 422 |
| |
| Preferred stock, $1.25 par value per share; 500,000 shares authorized; no shares issued or outstanding | | 0 |
| | 0 |
|
| Common stock, no par value—$0.05205 stated value per share 50,000,000 shares authorized; 8,347,856 and 8,343,435 shares issued; 8,347,039 and 8,285,733 shares outstanding | | 435 |
| | 437 |
|
| Additional paid—in capital | 123,392 |
| | 123,105 |
| 125,458 |
| | 124,935 |
|
| Retained earnings (accumulated deficit) | 1,887 |
| | (27,255 | ) | |
| Retained earnings | | 16,042 |
| | 11,669 |
|
| Accumulated other comprehensive income (loss) | 1,576 |
| | (4,813 | ) | 2,845 |
| | (1,165 | ) |
| Treasury stock—common, 811 shares, at cost | (20 | ) | | (20 | ) | |
| Treasury stock—common, 817 and 57,702 shares, at cost | | (15 | ) | | (1,017 | ) |
| Total shareholders’ equity | 127,265 |
| | 91,439 |
| 144,765 |
| | 134,859 |
|
| Total liabilities and shareholders’ equity | $ | 1,190,443 |
| | $ | 1,177,812 |
| $ | 1,558,849 |
| | $ | 1,414,504 |
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
Consolidated Statements of OperationsIncome
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
| | | | Years Ended December 31, | Years Ended December 31, |
| (Dollars in thousands, except per share data) | 2014 | | 2013 | | 2012 | |
| (Dollars in thousands, except per share information) | | 2017 | | 2016 | | 2015 |
| Interest and dividend income | | | | | | | | | | |
| Interest and fees on loans | $ | 29,546 |
| | $ | 31,558 |
| | $ | 39,647 |
| $ | 40,185 |
| | $ | 33,916 |
| | $ | 30,798 |
|
| Interest and dividends on investment securities | | | | | | | | | | |
| Taxable | 8,052 |
| | 4,300 |
| | 3,798 |
| 7,478 |
| | 6,012 |
| | 6,697 |
|
| Tax-exempt | 550 |
| | 1,066 |
| | 1,704 |
| 3,134 |
| | 1,826 |
| | 1,059 |
|
| Short term investments | 35 |
| | 174 |
| | 287 |
| 218 |
| | 208 |
| | 81 |
|
| Total interest and dividend income | 38,183 |
| | 37,098 |
| | 45,436 |
| 51,015 |
| | 41,962 |
| | 38,635 |
|
| Interest expense | | | | | | | | | | |
| Interest on deposits | 3,678 |
| | 4,445 |
| | 6,712 |
| 6,134 |
| | 4,811 |
| | 3,606 |
|
| Interest on short-term borrowings | 148 |
| | 61 |
| | 120 |
| 784 |
| | 187 |
| | 295 |
|
| Interest on long-term debt | 333 |
| | 505 |
| | 716 |
| 726 |
| | 419 |
| | 400 |
|
| Total interest expense | 4,159 |
| | 5,011 |
| | 7,548 |
| 7,644 |
| | 5,417 |
| | 4,301 |
|
| Net interest income | 34,024 |
| | 32,087 |
| | 37,888 |
| 43,371 |
| | 36,545 |
| | 34,334 |
|
| Provision for loan losses | (3,900 | ) | | (3,150 | ) | | 48,300 |
| 1,000 |
| | 250 |
| | (603 | ) |
| Net interest income after provision for loan losses | 37,924 |
| | 35,237 |
| | (10,412 | ) | 42,371 |
| | 36,295 |
| | 34,937 |
|
| Noninterest income | | | | | | | | | | |
| Service charges on deposit accounts | 5,415 |
| | 5,716 |
| | 6,227 |
| 5,675 |
| | 5,445 |
| | 5,226 |
|
| Other service charges, commissions and fees | 1,033 |
| | 1,070 |
| | 1,275 |
| 1,008 |
| | 994 |
| | 1,223 |
|
| Trust department income | 4,687 |
| | 4,770 |
| | 4,575 |
| |
| Trust and investment management income | | 6,400 |
| | 5,091 |
| | 4,598 |
|
| Brokerage income | 2,150 |
| | 1,911 |
| | 1,478 |
| 1,896 |
| | 1,933 |
| | 2,025 |
|
| Mortgage banking activities | 2,207 |
| | 3,053 |
| | 3,393 |
| 2,919 |
| | 3,412 |
| | 2,747 |
|
| Earnings on life insurance | 950 |
| | 963 |
| | 1,018 |
| 1,109 |
| | 1,099 |
| | 1,025 |
|
| Merchant processing revenue | 0 |
| | 0 |
| | 149 |
| |
| Other income (loss) | 477 |
| | (7 | ) | | 323 |
| |
| Other income | | 190 |
| | 345 |
| | 410 |
|
| Investment securities gains | 1,935 |
| | 332 |
| | 4,824 |
| 1,190 |
| | 1,420 |
| | 1,924 |
|
| Total noninterest income | 18,854 |
| | 17,808 |
| | 23,262 |
| 20,387 |
| | 19,739 |
| | 19,178 |
|
| Noninterest expenses | | | | | | | | | | |
| Salaries and employee benefits | 23,658 |
| | 22,954 |
| | 19,864 |
| 30,145 |
| | 26,370 |
| | 24,056 |
|
| Occupancy | 2,251 |
| | 2,055 |
| | 1,975 |
| 2,806 |
| | 2,491 |
| | 2,221 |
|
| Furniture and equipment | 3,328 |
| | 3,446 |
| | 2,913 |
| 3,434 |
| | 3,335 |
| | 3,061 |
|
| Data processing | 1,679 |
| | 542 |
| | 574 |
| 2,271 |
| | 2,378 |
| | 2,026 |
|
| Telephone and communication | | 647 |
| | 740 |
| | 692 |
|
| Automated teller and interchange fees | 865 |
| | 1,054 |
| | 989 |
| 767 |
| | 748 |
| | 798 |
|
| Advertising and bank promotions | 1,195 |
| | 1,251 |
| | 1,411 |
| 1,600 |
| | 1,717 |
| | 1,564 |
|
| FDIC insurance | 1,621 |
| | 2,577 |
| | 2,727 |
| 606 |
| | 775 |
| | 859 |
|
| Professional services | 2,285 |
| | 2,255 |
| | 3,076 |
| |
| Legal fees | | 802 |
| | 850 |
| | 1,440 |
|
| Other professional services | | 1,571 |
| | 1,332 |
| | 1,262 |
|
| Directors' compensation | | 996 |
| | 969 |
| | 737 |
|
| Collection and problem loan | 729 |
| | 674 |
| | 2,297 |
| 186 |
| | 238 |
| | 447 |
|
| Real estate owned | 300 |
| | 137 |
| | 834 |
| 69 |
| | 239 |
| | 162 |
|
| Taxes other than income | 562 |
| | 939 |
| | 888 |
| 866 |
| | 767 |
| | 916 |
|
| Intangible asset amortization | 208 |
| | 210 |
| | 209 |
| |
| Regulatory settlement | | 0 |
| | 1,000 |
| | 0 |
|
| Other operating expenses | 5,087 |
| | 5,153 |
| | 5,592 |
| 3,564 |
| | 4,191 |
| | 4,366 |
|
| Total noninterest expenses | 43,768 |
| | 43,247 |
| | 43,349 |
| 50,330 |
| | 48,140 |
| | 44,607 |
|
| Income (loss) before income tax expense (benefit) | 13,010 |
| | 9,798 |
| | (30,499 | ) | |
| Income tax expense (benefit) | (16,132 | ) | | (206 | ) | | 7,955 |
| |
| Net income (loss) | $ | 29,142 |
| | $ | 10,004 |
| | $ | (38,454 | ) | |
| Income before income tax expense | | 12,428 |
| | 7,894 |
| | 9,508 |
|
| Income tax expense | | 4,338 |
| | 1,266 |
| | 1,634 |
|
| Net income | | $ | 8,090 |
| | $ | 6,628 |
| | $ | 7,874 |
|
| | | | | | | | | | | |
| Per share information: | | | | | | | | | | |
| Basic earnings (loss) per share | $ | 3.59 |
| | $ | 1.24 |
| | $ | (4.77 | ) | |
| Diluted earnings (loss) per share | 3.59 |
| | 1.24 |
| | (4.77 | ) | |
| Basic earnings per share | | $ | 1.00 |
| | $ | 0.82 |
| | $ | 0.97 |
|
| Diluted earnings per share | | 0.98 |
| | 0.81 |
| | 0.97 |
|
| Dividends per share | 0.00 |
| | 0.00 |
| | 0.00 |
| 0.42 |
| | 0.35 |
| | 0.22 |
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
Consolidated Statements of Comprehensive Income (Loss)
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
| | | | Years Ended December 31, | Years Ended December 31, |
| (Dollars in thousands) | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| | | | | | | | | | | |
| Net income (loss) | $ | 29,142 |
| | $ | 10,004 |
| | $ | (38,454 | ) | |
| Net income | | $ | 8,090 |
| | $ | 6,628 |
| | $ | 7,874 |
|
| Other comprehensive income (loss), net of tax: | | | | | | | | | | |
| Unrealized holding gains (losses) on securities available for sale arising during the period | 11,764 |
| | (9,885 | ) | | 1,344 |
| 6,557 |
| | (2,190 | ) | | 1,345 |
|
| Reclassification adjustment for gains realized in net income (loss) | (1,935 | ) | | (332 | ) | | (4,824 | ) | |
| Reclassification adjustment for gains realized in net income | | (1,190 | ) | | (1,420 | ) | | (1,924 | ) |
| Net unrealized gains (losses) | 9,829 |
| | (10,217 | ) | | (3,480 | ) | 5,367 |
| | (3,610 | ) | | (579 | ) |
| Tax effect | (3,440 | ) | | 3,576 |
| | 1,219 |
| (1,586 | ) | | 1,246 |
| | 202 |
|
| Total other comprehensive income (loss), net of tax and reclassification adjustments | 6,389 |
| | (6,641 | ) | | (2,261 | ) | 3,781 |
| | (2,364 | ) | | (377 | ) |
| Total comprehensive income (loss) | $ | 35,531 |
| | $ | 3,363 |
| | $ | (40,715 | ) | |
| Total comprehensive income | | $ | 11,871 |
| | $ | 4,264 |
| | $ | 7,497 |
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
Consolidated Statements of Changes in Shareholders’ Equity
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, 2014, 2013, and 2012 |
| (Dollars in thousands, except per share data) | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total Shareholders’ Equity |
| | | | | | | | | | | | |
| Balance, January 1, 2012 | $ | 419 |
| | $ | 122,514 |
| | $ | 1,195 |
| | $ | 4,089 |
| | $ | (20 | ) | | $ | 128,197 |
|
| Net income (loss) | 0 |
| | 0 |
| | (38,454 | ) | | 0 |
| | 0 |
| | (38,454 | ) |
| Total other comprehensive income (loss), net of taxes | 0 |
| | 0 |
| | 0 |
| | (2,261 | ) | | 0 |
| | (2,261 | ) |
| Stock-based compensation plans: | | | | | | | | | | | |
| Issuance of stock (23,062 shares), including compensation expense of $23 | 2 |
| | 198 |
| | 0 |
| | 0 |
| | 0 |
| | 200 |
|
| Issuance of stock through dividend reinvestment plan (1,562 shares) | 0 |
| | 12 |
| | 0 |
| | 0 |
| | 0 |
| | 12 |
|
| Balance, December 31, 2012 | 421 |
| | 122,724 |
| | (37,259 | ) | | 1,828 |
| | (20 | ) | | 87,694 |
|
| Net income | 0 |
| | 0 |
| | 10,004 |
| | 0 |
| | 0 |
| | 10,004 |
|
| Total other comprehensive income (loss), net of taxes | 0 |
| | 0 |
| | 0 |
| | (6,641 | ) | | 0 |
| | (6,641 | ) |
| Stock-based compensation plans: | | | | | | | | | | | |
| Issuance of stock (26,610 shares, including 1 treasury), including compensation expense of $129 | 1 |
| | 377 |
| | 0 |
| | 0 |
| | 0 |
| | 378 |
|
| Issuance of stock through dividend reinvestment plan (254 shares) | 0 |
| | 4 |
| | 0 |
| | 0 |
| | 0 |
| | 4 |
|
| Balance, December 31, 2013 | 422 |
| | 123,105 |
| | (27,255 | ) | | (4,813 | ) | | (20 | ) | | 91,439 |
|
| Net income | 0 |
| | 0 |
| | 29,142 |
| | 0 |
| | 0 |
| | 29,142 |
|
| Total other comprehensive income, net of taxes | 0 |
| | 0 |
| | 0 |
| | 6,389 |
| | 0 |
| | 6,389 |
|
| Stock-based compensation plans: | | | | | | | | | | | |
| Issuance of stock (157,207 shares), including compensation expense of $190 | 8 |
| | 286 |
| | 0 |
| | 0 |
| | 0 |
| | 294 |
|
| Issuance of stock through dividend reinvestment plan (73 shares) | 0 |
| | 1 |
| | 0 |
| | 0 |
| | 0 |
| | 1 |
|
| Balance, December 31, 2014 | $ | 430 |
| | $ | 123,392 |
| | $ | 1,887 |
| | $ | 1,576 |
| | $ | (20 | ) | | $ | 127,265 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, 2017, 2016, and 2015 |
| (Dollars in thousands, except per share data) | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total Shareholders’ Equity |
| | | | | | | | | | | | |
| Balance, January 1, 2015 | $ | 430 |
| | $ | 123,392 |
| | $ | 1,887 |
| | $ | 1,576 |
| | $ | (20 | ) | | $ | 127,265 |
|
| Net income | 0 |
| | 0 |
| | 7,874 |
| | 0 |
| | 0 |
| | 7,874 |
|
| Total other comprehensive loss, net of taxes | 0 |
| | 0 |
| | 0 |
| | (377 | ) | | 0 |
| | (377 | ) |
| Cash dividends ($0.22 per share) | 0 |
| | 0 |
| | (1,822 | ) | | 0 |
| | 0 |
| | (1,822 | ) |
| Share-based compensation plans: | | | | | | | | | | | |
| Issuance of stock (50,686 shares), including compensation expense of $740 | 5 |
| | 835 |
| | 0 |
| | 0 |
| | 0 |
| | 840 |
|
| Issuance of stock through dividend reinvestment plan (5,239 shares) | 0 |
| | 90 |
| | 0 |
| | 0 |
| | 0 |
| | 90 |
|
| Acquisition of treasury stock (47,077 shares) | 0 |
| | 0 |
| | 0 |
| | 0 |
| | (809 | ) | | (809 | ) |
| Balance, December 31, 2015 | 435 |
| | 124,317 |
| | 7,939 |
| | 1,199 |
| | (829 | ) | | 133,061 |
|
| Net income | 0 |
| | 0 |
| | 6,628 |
| | 0 |
| | 0 |
| | 6,628 |
|
| Total other comprehensive loss, net of taxes | 0 |
| | 0 |
| | 0 |
| | (2,364 | ) | | 0 |
| | (2,364 | ) |
| Cash dividends ($0.35 per share) | 0 |
| | 0 |
| | (2,898 | ) | | 0 |
| | 0 |
| | (2,898 | ) |
| Share-based compensation plans: | | | | | | | | | | | |
| Issuance of stock (22,956 common shares and 25,834 treasury shares), including compensation expense of $958 | 2 |
| | 618 |
| | 0 |
| | 0 |
| | 443 |
| | 1,063 |
|
| Acquisition of treasury stock (35,648 shares) | 0 |
| | 0 |
| | 0 |
| | 0 |
| | (631 | ) | | (631 | ) |
| Balance, December 31, 2016 | 437 |
| | 124,935 |
| | 11,669 |
| | (1,165 | ) | | (1,017 | ) | | 134,859 |
|
| Net income | 0 |
| | 0 |
| | 8,090 |
| | 0 |
| | 0 |
| | 8,090 |
|
| Reclassification of disproportionate tax effects from accumulated other comprehensive income (loss) to retained earnings | 0 |
| | 0 |
| | (229 | ) | | 229 |
| | 0 |
| | 0 |
|
| Total other comprehensive income, net of taxes | 0 |
| | 0 |
| | 0 |
| | 3,781 |
| | 0 |
| | 3,781 |
|
| Cash dividends ($0.42 per share) | 0 |
| | 0 |
| | (3,488 | ) | |
| | 0 |
| | (3,488 | ) |
| Share-based compensation plans: | | | | | | | | | | | |
| Issuance of stock (4,421 net common shares and 56,885 treasury shares issued), including compensation expense of $1,386 | (2 | ) | | 523 |
| | 0 |
| | 0 |
| | 1,002 |
| | 1,523 |
|
| Balance, December 31, 2017 | $ | 435 |
| | $ | 125,458 |
| | $ | 16,042 |
| | $ | 2,845 |
| | $ | (15 | ) | | $ | 144,765 |
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
Consolidated Statements of Cash Flows
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
| | | | Years Ended December 31, | Years Ended December 31, |
| (Dollars in thousands) | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Cash flows from operating activities | | | | | | | | | | |
| Net income (loss) | $ | 29,142 |
| | $ | 10,004 |
| | $ | (38,454 | ) | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | |
| Net income | | $ | 8,090 |
| | $ | 6,628 |
| | $ | 7,874 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Amortization of premiums on securities available for sale | 6,429 |
| | 7,147 |
| | 6,948 |
| 4,034 |
| | 5,295 |
| | 6,033 |
|
| Depreciation and amortization | 2,838 |
| | 2,817 |
| | 2,613 |
| 3,265 |
| | 2,951 |
| | 2,907 |
|
| Provision for loan losses | (3,900 | ) | | (3,150 | ) | | 48,300 |
| 1,000 |
| | 250 |
| | (603 | ) |
| Stock based compensation | 190 |
| | 129 |
| | 23 |
| |
| Net change in loans held for sale | (1,223 | ) | | 5,926 |
| | (5,309 | ) | |
| Net (gain) loss on disposal of other real estate owned | (299 | ) | | 149 |
| | (28 | ) | |
| Share-based compensation | | 1,386 |
| | 958 |
| | 740 |
|
| Gain on sales of loans originated for sale | | (2,447 | ) | | (2,998 | ) | | (2,344 | ) |
| Mortgage loans originated for sale | | (104,512 | ) | | (108,632 | ) | | (85,995 | ) |
| Proceeds from sales of loans originated for sale | | 103,131 |
| | 114,139 |
| | 85,116 |
|
| Gain on sale of portfolio loans | | (32 | ) | | 0 |
| | 0 |
|
| Net gain on disposal of other real estate owned | | (18 | ) | | (182 | ) | | (234 | ) |
| Writedown of other real estate owned | 170 |
| | 46 |
| | 535 |
| 4 |
| | 183 |
| | 45 |
|
| Net loss on disposal of premises and equipment | 41 |
| | 0 |
| | 0 |
| |
| Deferred income taxes, including valuation allowance | (16,223 | ) | | 0 |
| | 20,384 |
| |
| Net (gain) loss on disposal of premises and equipment | | (18 | ) | | 147 |
| | 0 |
|
| Deferred income taxes | | 3,078 |
| | (232 | ) | | 797 |
|
| Investment securities gains | (1,935 | ) | | (332 | ) | | (4,824 | ) | (1,190 | ) | | (1,420 | ) | | (1,924 | ) |
| Earnings on cash surrender value of life insurance | (950 | ) | | (963 | ) | | (1,018 | ) | (1,109 | ) | | (1,099 | ) | | (1,025 | ) |
| (Increase) decrease in accrued interest receivable | 303 |
| | (212 | ) | | 1,360 |
| |
| Increase (decrease) in accrued interest payable and other liabilities | 1,046 |
| | (957 | ) | | 1,644 |
| |
| Increase in accrued interest receivable | | (376 | ) | | (827 | ) | | (748 | ) |
| Increase in accrued interest payable and other liabilities | | 2,012 |
| | 561 |
| | 2,017 |
|
| Other, net | 1,629 |
| | 12,356 |
| | (13,516 | ) | 52 |
| | (135 | ) | | (498 | ) |
| Net cash provided by operating activities | 17,258 |
| | 32,960 |
| | 18,658 |
| 16,350 |
| | 15,587 |
| | 12,158 |
|
| Cash flows from investing activities | | | | | | | | | | |
| Proceeds from sales of available for sale securities | 169,573 |
| | 74,273 |
| | 94,099 |
| 162,320 |
| | 64,742 |
| | 65,611 |
|
| Maturities, repayments and calls of available for sale securities | 41,520 |
| | 86,581 |
| | 85,481 |
| 28,768 |
| | 30,192 |
| | 32,251 |
|
| Purchases of available for sale securities | (175,014 | ) | | (282,859 | ) | | (176,788 | ) | (203,719 | ) | | (108,448 | ) | | (120,475 | ) |
| Net (purchases) redemptions of restricted investments in bank stocks | 1,571 |
| | (117 | ) | | 1,954 |
| (2,027 | ) | | 750 |
| | (370 | ) |
| Net (increase) decrease in loans | (44,222 | ) | | 30,682 |
| | 137,097 |
| |
| Net increase in loans | | (130,791 | ) | | (108,509 | ) | | (78,776 | ) |
| Proceeds from sales of portfolio loans | 5,743 |
| | 2,439 |
| | 51,753 |
| 2,195 |
| | 5,100 |
| | 0 |
|
| Investment in affordable housing limited partnerships | | 0 |
| | 0 |
| | (2,205 | ) |
| Purchases of bank premises and equipment | (859 | ) | | (1,868 | ) | | (1,603 | ) | (2,653 | ) | | (13,369 | ) | | (1,471 | ) |
| Improvements to other real estate owned | | (9 | ) | | 0 |
| | 0 |
|
| Proceeds from disposal of other real estate owned | 2,415 |
| | 1,188 |
| | 3,733 |
| 541 |
| | 1,090 |
| | 1,839 |
|
| Net cash provided by (used in) investing activities | 727 |
| | (89,681 | ) | | 195,726 |
| |
| Proceeds from disposal of bank premises and equipment | | 83 |
| | 0 |
| | 0 |
|
| Purchases of bank owned life insurance | | (600 | ) | | 0 |
| | (3,750 | ) |
| Other | | 0 |
| | (439 | ) | | 0 |
|
| Net cash used in investing activities | | (145,892 | ) | | (128,891 | ) | | (107,346 | ) |
| Cash flows from financing activities | | | | | | | | | | |
| Net decrease in deposits | (50,686 | ) | | (84,649 | ) | | (131,863 | ) | |
| Net increase (decrease) in short term borrowings | 27,710 |
| | 49,382 |
| | (25,363 | ) | |
| Net increase in deposits | | 67,063 |
| | 120,285 |
| | 82,463 |
|
| Net increase (decrease) in short-term borrowings | | 5,712 |
| | (1,292 | ) | | 2,414 |
|
| Proceeds from long-term debt | 10,000 |
| | 0 |
| | 0 |
| 80,000 |
| | 0 |
| | 20,000 |
|
| Payments on long-term debt | (11,265 | ) | | (21,393 | ) | | (16,328 | ) | (20,348 | ) | | (332 | ) | | (10,317 | ) |
| Dividends paid | 0 |
| | 0 |
| | 0 |
| (3,488 | ) | | (2,898 | ) | | (1,822 | ) |
| Net proceeds from issuance of common stock | 105 |
| | 253 |
| | 189 |
| 0 |
| | 105 |
| | 190 |
|
| Net cash used in financing activities | (24,136 | ) | | (56,407 | ) | | (173,365 | ) | |
| Acquisition of treasury stock | | 0 |
| | (631 | ) | | (809 | ) |
| Net proceeds from issuance of treasury stock | | 137 |
| | 0 |
| | 0 |
|
| Net cash provided by financing activities | | 129,076 |
| | 115,237 |
| | 92,119 |
|
| Net increase (decrease) in cash and cash equivalents | (6,151 | ) | | (113,128 | ) | | 41,019 |
| (466 | ) | | 1,933 |
| | (3,069 | ) |
| Cash and cash equivalents at beginning of year | 37,560 |
| | 150,688 |
| | 109,669 |
| 30,273 |
| | 28,340 |
| | 31,409 |
|
| Cash and cash equivalents at end of year | $ | 31,409 |
| | $ | 37,560 |
| | $ | 150,688 |
| $ | 29,807 |
| | $ | 30,273 |
| | $ | 28,340 |
|
| Supplemental disclosure of cash flow information: | | | | | | | | | | |
| Cash paid during the year for: | | | | | | | | | | |
| Interest | $ | 4,219 |
| | $ | 5,102 |
| | $ | 8,031 |
| $ | 7,586 |
| | $ | 5,346 |
| | $ | 4,208 |
|
| Income taxes | 0 |
| | 0 |
| | 1,267 |
| 1,638 |
| | 1,300 |
| | 800 |
|
| Supplemental schedule of noncash investing and financing activities: | | | | | | | | | | |
| Other real estate acquired in settlement of loans | 2,231 |
| | 494 |
| | 3,951 |
| 1,007 |
| | 688 |
| | 1,428 |
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
Notes to Consolidated Financial Statements
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
See the Glossary of Defined Terms at the beginning of this Report for terms used throughout the consolidated financial statements and related notes of this Form 10-K.
Nature of Operations – Orrstown Financial Services, Inc. (the “Company”)and subsidiaries is a bank holding company (that has elected status as a financial holding company with the Board of Governors of the Federal Reserve System (the “FRB”)) whose primary activity consists of supervising its wholly-owned subsidiary,that operates Orrstown Bank, (the “Bank”). The Company operates through its office in Shippensburg, Pennsylvania. The Bank provides services through its network of 22a commercial bank with banking and financial advisory offices in Berks, Cumberland, Dauphin, Franklin, Lancaster and Perry Counties of Pennsylvania and in Washington County, Maryland.Maryland and Wheatland Advisors, Inc., a registered investment advisor non-bank subsidiary, headquartered in Lancaster, Pennsylvania, and which was acquired in December 2016. The Bank engages in lending services foractivities including commercial, residential, commercial mortgages, construction, municipal, and various forms of consumer lending. Deposit services include checking, savings, time, and money market deposits. The Bank also provides investment and brokerage services through its Orrstown Financial AdvisorsOFA division. The Company and the Bank are subject to the regulation ofby certain federal and state agencies and undergo periodic examinations by such regulatory authorities.
Basis of Presentation – The consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). Theaccompanying consolidated financial statements include the accounts of Orrstown Financial Services, Inc. and its wholly owned subsidiaries, the Bank and Wheatland. The accounting and reporting policies of the Company conform to GAAP and, the Bank.where applicable, to accounting and reporting guidelines prescribed by bank regulatory authorities. All significant intercompany transactions and accounts have been eliminated. Certain reclassifications have been made to prior year amounts to conform with current year classifications. In December 2016, the Company acquired Wheatland. The results of operations or assets acquired and liabilities assumed are included only from the date of acquisition. Pro forma financial information for the acquisition has not been included because the acquisition was not material.
Use
The Company's management has evaluated all activity of Estimates –the Company and concluded that subsequent events are properly reflected in the Company's consolidated financial statements and notes as required by GAAP.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions based on available information. These estimates and assumptionsthat affect the reported amounts reported inof assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the disclosures provided,reported amounts of revenues and actualexpenses during the reporting periods. Actual results could differ.
Subsequent Events – GAAP establishes standards for accounting fordiffer from those estimates. Material estimates that are particularly susceptible to significant change include the determination of the ALL and disclosure of events that occur after the balance sheet date but before financial statements are issued. The subsequent events principle sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition in the financial statements, identifies the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and specifies the disclosures that should be made about events or transactions that occur after the balance sheet date.income taxes.
Concentration of Credit Risk – The Company grants commercial, residential, construction, municipal, and various forms of consumer lending to customers primarily in its market area.area of Berks, Cumberland, Dauphin, Franklin, Lancaster, and Perry Counties of Pennsylvania and in Washington County, Maryland. Therefore the Company's exposure to credit risk is significantly affected by changes in the economy in those areas. Although the Company maintains a diversified loan portfolio, a significant portion of its customers’ ability to honor their contracts is dependent upon economic sectors for commercial real estate, including office space, retail strip centers, multi-family and hospitality, residential building operators, sales finance, sub-dividers and developers.developers, and multi-family, hospitality, and residential building operators. Management evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if collateral is deemed necessary by the Company upon the extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies, but generally includes real estate and equipment.
The types of securities the Company invests in are included in Note 3, “SecuritiesSecurities Available for Sale”Sale, and the type of lending the Company engages in are included in Note 4, “Loans ReceivableLoans and Allowance for Loan Losses.”
Cash and Cash Equivalents – For purposes of the consolidated statements of cash flows, cashCash and cash equivalents include cash, balances due from banks, federal funds sold and interest bearing deposits due on demand, all of which have original maturities of 90 days or less. Net cash flows are reported for customer loan and deposit transactions, loans held for sale, and redemption (purchases) of restricted investments in bank stocks.stocks, and short-term borrowings.
Restricted Investments in Bank Stocks – Restricted investments in bank stocks which represents required investments in the common stockconsist of correspondent banks, is carried at cost as of December 31, 2014 and 2013, and consists of common stock of the Federal Reserve Bank of Philadelphia (“stock, FHLB of Pittsburgh stock and Atlantic Community Bankers Bank stock. Federal law requires a member institution of the district Federal Reserve Bank”),Bank and FHLB to hold stock according to predetermined formulas. Atlantic CentralCommunity Bankers Bank and the Federal Home Loan Bankrequires its correspondent banking institutions to hold stock as a condition of Pittsburgh (“FHLB”) stocks.
Management evaluates themembership. The restricted investment in bank stocks is carried at cost. Quarterly, management evaluates the bank stocks for impairment in accordance with Accounting Standard Codification (ASC) Topic 942, Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or Finance the Activities of Others. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the correspondent bank as compared to the capital stock amount for the correspondent bank and the length of time this situation has persisted, (2) commitments by the correspondent bank to make payments required by law or regulation and the level of such payments in relation to the operating performance, of the correspondent bank,liquidity, funding and (3) thecapital positions, stock repurchase history, dividend history and impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the correspondent bank.changes.
Management believes no impairment charge is necessary related to the restricted investments in bank stocks as of December 31, 2014. However, security impairment analysis is completed quarterly and the determination that no impairment had occurred as of December 31, 2014 is no assurance that impairment may not occur in the future.
Securities – CertainThe Company classifies debt and marketable equity securities that management hasas available for sale on the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. “Trading” securities are recorded at fair value with changes in fair value included in earnings. Asdate of purchase. At December 31, 20142017 and 20132016 the Company had no held to maturity or trading securities. Securities not classified as held to maturity or trading, including equityAFS securities with readily determinable fair values, are classified as “available for sale” and recordedreported at fair value, with unrealized gainsvalue. Interest income and losses excluded from earnings and reporteddividends are recognized in other comprehensive income.interest income on an accrual basis. Purchase premiums and discounts on debt securities are recognized inamortized to interest income using the interest method over the terms of the securities and approximate the level yield method. Gains
Changes in unrealized gains and losses, net of related deferred taxes, for AFS securities are recorded in AOCI. Realized gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.method and are included in noninterest income.
AFS securities include investments that management intends to use as part of its asset/liability management strategy. Securities may be sold in response to changes in interest rates, changes in prepayment rates and other factors. The Company does not have the intent to sell any of its AFS securities that are in an unrealized loss position and it is more likely than not that the Company will not be required to sell these securities before recovery of their amortized cost.
Management evaluates securities for other-than-temporary impairment (“OTTI”)OTTI on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2)components: OTTI related to other factors, which is recognized in other comprehensive income.OCI, and the remaining OTTI, which is recognized in earnings. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.
The Company had no debt securities it deemed to be other than temporarily impaired for the years ended December 31, 2014, 2013 or 2012.
The Company’s securities are exposed to various risks, such as interest rate risk, market risk, and credit risks.risk. Due to the level of risk associated with certain investments and the level of uncertainty related to changes in the value of investments, it is at least reasonably possible that changes in risks in the near term would materially affect investment assets reported in the consolidated financial statements.
Loans Held for Sale – Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value (LOCM).value. Gains and losses on loan sales (sales proceeds minus carrying value) are recorded in non-interestnoninterest income.
Loans – The Company grants commercial loans; residential, commercial mortgage,and construction mortgage loans; and various forms of consumer loans to its customers located principally in south-centralsouth central Pennsylvania and northern Maryland. The ability of the Company’s debtors to honor their contracts is dependent largely upon the real estate and general economic conditions in this area.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses,ALL, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and amortized as a yield adjustment over the respective term of the loan. For purchased loans that are not deemed impaired at the acquisition date, premiums and discounts are amortized or accreted as adjustments to interest income using the effective yield method.
For all classes of loans, the accrual of interest income on loans, including impaired loans, ceases when principal or interest is past due 90 days or more or immediately if, in the opinion of management, full collection is unlikely. Interest will continue to accrue on loans past due 90 days or more if the collateral is adequate to cover principal and interest, and the loan is in the process of collection. Interest accrued, but not collected, as ofat the date of placement on nonaccrual status, is reversed and charged against current interest income, unless fully collateralized. Subsequent payments received are either applied to the outstanding principal balance or recorded as interest income, depending upon management’s assessment of the ultimate collectability of principal. Loans are returned to accrual status, for all loan classes, when all the principal and interest amounts contractually due are brought current, the loan has performed in accordance with the contractual terms of the note for a reasonable period of time, generally six months, and the ultimate collectability of the total contractual principal and interest is reasonably assured. Past due status is based on contractual terms of the loan.
Loans, the terms of which are modified, are classified as troubled debt restructuringsTDRs if a concession was granted in connection with the modification, for legal or economic reasons, related to athe debtor’s financial difficulties. Concessions granted under a troubled debt restructuringTDR typically involve a temporary deferral of scheduled loan payments, an extension of a loan’s stated maturity date, a temporary reduction in interest rates, or granting of an interest rate below market rates given the risk of the transaction. If a modification occurs while the loan is on accruing status, it will continue to accrue interest under the modified terms. Nonaccrual troubled debt restructuringsTDRs may
be restored to accrual status if scheduled principal and interest payments, under the modified terms, are current for six months after modification, and the borrower continues to demonstrate its ability to meet the modified terms.
Troubled debt restructurings TDRs are evaluated individually for impairment if they have been restructured during the most recent calendar year, or if they are not performingon a quarterly basis including monitoring of performance according to their modified terms.
Allowance for Loan Losses – The allowanceALL is evaluated on a quarterly basis, as losses are estimated to be probable and incurred, and, if deemed necessary, is increased through a provision for loan losses is a valuation allowance for probable incurred credit losses.charged to earnings. Loan losses are charged against the allowanceALL when management believesdetermines that all or a portion of the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any,uncollectible. Recoveries on previously charged-off loans are credited to the allowance.
ALL when received. The allowance forALL is allocated to loan losses is evaluatedportfolio classes on a regularquarterly basis, by management andbut the entire balance is based upon management’s periodic reviewavailable to cover losses from any of the portfolio classes when those losses are confirmed.
Management uses internal policies and bank regulatory guidance in periodically evaluating loans for collectability of the loans in light ofand incorporates historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
See Note 4, “Loans ReceivableLoans and Allowance for Loan Losses,” for additional details.information.
Loan Commitments and Related Financial Instruments – Financial instruments include off-balance sheet credit instruments,commitments issued to meet customer financing needs, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs.credit. These financial instruments are recorded when they are funded. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.The Company maintains a reserve for probable losses on off-balance sheet commitments which is included in Other Liabilities.
Loans Serviced – The Bank administers secondary market mortgage programs available through the FHLB and the Federal National Mortgage Association and offers residential mortgage products and services to customers. The Bank originates single-family residential mortgage loans for immediate sale in the secondary market and retains the servicing of those loans. At December 31, 20142017 and 2013,2016, the balance of loans serviced for others was $315,239,000totaled $334,802,000 and $322,653,000.$328,701,000.
Transfers of Financial Assets – Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Cash Surrender Value of Life Insurance – The Company has purchased life insurance policies on certain employees. Company owned lifeLife insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Premises and Equipment – Buildings, improvements, equipment, furniture and fixtures are carried at cost less accumulated depreciation and amortization. Land is carried at cost. Depreciation and amortization has been provided generally on the straight-line method and is computed over the estimated useful lives of the various assets as follows: buildings and improvements, including leasehold improvements – 10 to 40 years; and furniture and equipment – 3 to 15 years. Leasehold improvements are amortized over the shorter of the lease term or the indicated life. Repairs and maintenance are charged to operations as incurred, while major additions and improvements are capitalized. Gain or loss on retirement or disposal of individual assets is recorded as income or expense in the period of retirement or disposal.
Goodwill and Other Intangible Assets – IntangibleGoodwill is calculated as the purchase premium, if any, after adjusting for the fair value of net assets acquired in purchase transactions. Goodwill is not amortized but is reviewed for potential impairment on at least an annual basis, with testing between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit. Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights. The Company’s other intangible assets have finite lives and are amortized on aeither the sum of the years digits or straight line basis,bases over their estimated lives, generally 10 years for deposit premiums and 10 to 15 years for customer lists.
Mortgage Servicing Rights – The estimated fair value of mortgage servicing rights (MSRs)MSRs related to loans sold and serviced by the Company is recorded as an asset upon the sale of such loan.loans. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are evaluated periodically for impairment by comparing the carrying amount to estimated fair value. Fair value is determined periodically through a discounted cash flows valuation performed by a third party. Significant inputs to the valuation include expected servicing income, net of expense, the discount rate and the expected life of the underlying loans. To the extent the amortized cost of the MSRs exceeds their estimated fair values, a valuation allowance is established for such impairment through a charge against servicing income on the consolidated statementstatements of operations.income. If the Company determines, based on subsequent valuations, that the impairment no longer exists or is reduced, the valuation
allowance is reduced through a credit to earnings. MSRs totaled $2,897,000 and $2,835,000 at December 31, 2017 and December 31, 2016, and are included in Other Assets.
Foreclosed Real Estate – Real estate propertiesproperty acquired through foreclosure or in lieu of, loan foreclosure are held for sale and areother means is initially recorded at fair value less estimated costs to sell the underlying collateral. Capitalized costs include any costs that significantly improve thefair value of the properties. After foreclosure, valuations are periodically performed by management and therelated real estate is carriedcollateral at the transfer date less estimated selling costs, and subsequently at the lower of its carrying amountvalue or fair value less estimated costs to sell. Fair value is usually determined based on an independent third party appraisal of the property or occasionally on a recent sales offer. Costs to maintain foreclosed real estate are expensed as incurred. Costs that significantly improve the value of the properties are capitalized. Foreclosed real estate totaled $932,000$961,000 and $987,000 as of$346,000 at December 31, 20142017 and 20132016 and is included in other assets.Other Assets.
Investments in Real Estate Partnerships – The Company currently has a 99% limited partner interest in several real estate partnerships in central Pennsylvania. These investments are affordable housing projects which entitle the Company to tax deductions and credits that expire through 2021.2025. The Company accounts for its investments in affordable housing projects under the proportional amortization method when criteria are met, which is limited to one investment entered into in 2015. Other investments are accounted for under the equity method of accounting, and recognizes tax credits when they become available.accounting. The recorded investment in these real estate partnerships, included in Other Assets, totaled $3,629,000$4,416,000 and $3,779,000 as of$4,909,000 at December 31, 20142017 and 20132016, of which $1,776,000 and $1,993,000 are included in other assets inaccounted for under the balance sheet. Losses of $150,000, $361,000proportional amortization method.
Equity method losses totaled $277,000, $350,000 and $349,000 were recorded$384,000 for the years ended December 31, 2014, 20132017, 2016 and 20122015 and are included in other operating expenses.noninterest income. Proportional amortization method losses totaled of $217,000, $191,000 and $22,000 for the years ended December 31, 2017, 2016 and 2015 and are included in income tax expense. During 2014, 20132017, 2016 and 2012,2015, the Company recognized federal tax credits from thethese projects totaling $1,010,000, $736,000 and $475,000, $475,000 and $475,000.which are included in income tax expense.
Advertising – The Company follows the policy of charging costs ofexpenses advertising to expense as incurred. Advertising expense was $540,000, $489,000totaled $631,000, $763,000 and $636,000,$723,000 for the years ended December 31, 2014, 20132017, 2016 and 2012.2015.
Securities Sold UnderRepurchase Agreements to Repurchase (“Repurchase Agreements”) – The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities which are included in short-term borrowings. Under these agreements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, these Repurchase Agreements are accounted for as collateralized financing arrangements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability in the Company’s consolidated balance sheet,sheets, while the securities underlying the Repurchase Agreements remainremaining are reflected in the respective investmentAFS securities. The repurchase obligation and underlying securities asset accounts. In other words, there is no offsettingare not offset or netting of the investment securities assets with the Repurchase Agreement liabilities. In addition, as thenetted. The Company does not enter into reverse Repurchase Agreements, so there is no such offsetting to be doneperformed with the Repurchase Agreements.
The right of setoff for a Repurchase Agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the Repurchase Agreement should the Company be in default (e.g., failsfail to make an interest payment to the counterparty). For the Repurchase Agreements, the collateral is held by the Company in a segregated custodial account under a third party agreement. Repurchase agreements are secured by GSE MBSs and mature overnight.
StockShare Compensation Plans – The Company has stockshare compensation plans that cover employees and non-employee directors. Stock compensation accounting guidance (FASB ASC 718, Compensation – Stock Compensation) requires that the compensation costexpense relating to share-based payment transactions be recognized in financial statements. That cost is measured based on the grant date fair value of the stockshare award, including a Black-Scholes model for stock options. Compensation costexpense for all stockshare awards areis calculated and recognized over the employees’ or non-employee directors' service period, generally defined as the vesting period.
Income Taxes – The Company accounts for income taxes in accordance with income tax accounting guidance (FASB ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-notmore likely than not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-notmore likely than not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.
Deferred tax assets are reduced by a valuation allowance if,when, based on the weight of available evidence, available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company recognizes interest and penalties, if any, on income taxes as a component of income tax expense.
Loss Contingencies – Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
Treasury Stock – Common stock shares repurchased are recorded as treasury stock at cost.
Earnings Per Share – Basic earnings per share represent netrepresents income available to common stockholders divided by the weighted-averageweighted average number of common shares outstanding during the period. Restricted stock awards are included in weighted average common shares outstanding as they are earned. Diluted earnings per share reflect theincludes additional common shares that
would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relatedrelate solely to outstanding stock options and restricted stock awards.awards and are determined using the treasury stock method.
Treasury shares are not deemed outstanding for earnings per share calculations.
Comprehensive Income (Loss) – Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive incomeOCI. OCI is limited to unrealized gains (losses) on securities available for sale for all years presented. The component of accumulated other comprehensive income, net of taxes, at December 31, 2014 and 2013 consisted of unrealizedUnrealized gains (losses) on securities available for sale, net of tax, was the sole component of AOCI at December 31, 2017 and 2016 and totaled $1,576,000$2,845,000 and $(4,813,000)$(1,165,000).
Fair Value of Financial Instruments – Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 18.17, Fair Value. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.
Segment Reporting – The Company only operates in one significant segment – Community Banking. The Company’s non-banking activities are insignificant to the consolidated financial statements.
Reclassifications – Certain amounts in the 2012 and 2013 consolidated financial statements have been reclassified to conform to the 2014 presentation.
Recent Accounting Pronouncements – In July 2013, the Financial Accounting Standard Board (the “FASB”) issued- ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The Company’s adoption of this standard on January 1, 2014 did not have a significant impact on the Company’s financial statements.
In January 2014, FASB issued ASU 2014-1, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. ASU 2014-1 permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments in ASU 2014-1 should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those pre-existing investments. ASU 2014-1 is effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The adoption of this ASU is not expected to have a significant impact on the Company’s financial statements.
In January 2014, the FASB issued ASU 2014-4, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. ASU 2014-4 clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the 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. ASU 2014-4 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity can elect to adopt the amendments in ASU 2014-4 using either a modified retrospective transition method or a prospective transition method. ASU 2014-4 is not expected to have a significant impact on the Company’s financial statements.
In May 2014, the FASB issued ASU 2014-9, 2014-09, Revenue from Contracts with Customers (Topic 606).. ASU 2014-9, creates2014-09 implements a new topic, Topic 606, to provide guidance oncommon revenue recognitionstandard that clarifies the principles for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets.recognizing revenue. The core principle of the guidanceASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. A substantial portion of the Company's revenue is generated from interest income related to loans and investment securities, which are not within the scope of ASU 2014-9 is2014-09. The Company's evaluation of the impact of changes for in-scope items within noninterest income, including service charges on deposit accounts and trust and investment management income, has not identified any significant impact on our consolidated financial statements. ASU 2014-09 was effective for annualthe Company on January 1, 2018 and did not have a significant impact on our consolidated financial statements.
ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (viii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. ASU 2016-01 was effective for the Company on January 1, 2018 and did not have a significant impact on our consolidated financial statements.
ASU 2016-02, Leases (Topic 842). ASU 2016-02 will, among other things, require lessees to recognize a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 will be effective for the Company on January 1, 2019 and will require transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Notwithstanding the foregoing, in January 2018, the FASB issued a proposal to provide an additional transition
method that would allow entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company anticipates that the impact on its consolidated balance sheet will result in an increase in assets and liabilities for its right of use assets and related lease liabilities for those leases that are outstanding at the date of adoption, however, it does not anticipate it will have a material impact on its results of operations. Management is evaluating other effects of this standard on the Company's consolidated financial position and regulatory capital.
ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting (Topic 718). ASU 2016-09 requires recognition of the income tax effects of share-based awards in the income statement when the awards vest or are settled, eliminating additional paid-in capital pools. The adoption of these changes by the Company on January 1, 2017 did not have a material impact on our financial position or results of operations.
ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting periods,date based on historical experience, current conditions, and interim reporting periods within those annual periods, beginning after December 15, 2016. Early adoption is not permitted. Managementreasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available for sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective on January 1, 2020. The Company is currently evaluating the potential impact of ASU 2016-13 on our consolidated financial statements. In that regard, the Company has formed a cross-functional working group, under the direction of the Chief Financial Officer and the Chief Risk Officer. The working group is comprised of individuals from various functional areas including credit, risk management, finance and information technology. We are currently developing an implementation plan to include, but not limited to, an assessment of processes, portfolio segmentation, model development, system requirements and the identification of data and resource needs. We have selected a third-party vendor solution to assist us in the application of ASU 2016-13. While the Company is currently unable to reasonably estimate the impact of adopting ASU 2016-13, we expect that the impact of adoption will be significantly influenced by the composition, characteristics and quality of the Company's loan and securities portfolios as well as the prevailing economic conditions and forecasts at the adoption date.
ASU 2016-15, Statement of this guidanceCash Flows (Topic 230) - Restricted Cash. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Company’sstatement of cash flows. ASU 2016-18 was effective for the Company on January 1, 2018 and did have a significant impact on our consolidated financial statements.
In June 2014,ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and DisclosuresTest for Goodwill Impairment. ASU 2014-11 changes2017-04 simplifies how all entities assess goodwill for impairment by eliminating Step 2 from the accountinggoodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting,the amount by which is consistent with the accounting for other repurchase agreements. The pronouncement also requires two new disclosures. The first disclosure requires an entity to disclose information on transfers accounted for as sales in transactions that are economically similar to repurchase agreements. The second disclosure provides increased transparency aboutcarrying amount exceeds the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings.reporting unit’s fair value. ASU 2014-11 is2017-04 will be effective for public business entities for annual periods,the Company on January 1, 2020, with earlier adoption permitted, and interim periods within those annual periods, beginning after December 15, 2014. Early adoption is not permitted. The adoption of this ASU is not expected to have a significantmaterial impact on the Company’sCompany's consolidated financial statements.
In August 2014, FASB issued ASU 2014-14, 2017-08, Receivables - Troubled Debt Restructurings by CreditorsNonrefundable Fees and Other Costs (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans Upon Foreclosure.310-20). ASU 2014-14 amends existing2017-08 shortens the amortization period of certain callable debt securities held at a premium to the earliest call date unless applicable guidance related to certain pools of securities is applied to consider estimated prepayments. Under prior guidance, entities were generally required to amortize premiums on individual, non-pooled callable debt securities as a yield adjustment over the classification of certain government-guaranteed mortgage loans, including those guaranteed by FHA and the VA, upon foreclosure. It requires that a mortgage loan be derecognized and 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 the 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; and 3) at the time of foreclosure, any amountcontractual life of the claim that is determined onsecurity. ASU 2017-08 does not change the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable shouldaccounting for callable debt securities held at a discount. ASU 2017-08 will be measured based on the amount of the loan balance, including principal and interest, expected to be recovered from the guarantor. These amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted if the amendments under ASU 2014-04, have been adopted. The amendments may be applied using a prospective transition method in which a reporting entity applies the guidance to foreclosures that occur after the date of adoption, or a modified retrospective transition using a cumulative-effect adjustment (through a reclassification to separate other receivable) as of the beginning of the annual period of adoption. Prior periods should not be adjusted. A reporting entity must apply the same method of transition as elected under ASU 2014-04. The Company’s adoption of this standardCompany on January 1, 2015 is2019, with early adoption permitted. Management does not expectedanticipate ASU 2017-08 will have a material impact on the Company's consolidated financial statements.
ASU 2017-09, Compensation - Stock Compensation (Topic 718). ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if all of the following are the same immediately before and after the change: (i) the award's fair value, (ii) the award's vesting conditions and (iii) the award's classification as an equity or liability instrument. ASU 2017-09 was effective for the Company on January 1, 2018 and did not have a significant impact on our consolidated financial statements.
ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 allows entities to reclassify from AOCI to retained earnings the Company’s operating results or'stranded' tax effects of accounting for income tax rate changes on items accounted for in AOCI which were impacted by tax reform enacted in December 2017. The impact of tax rate changes is recorded in income and items accounted for in AOCI could
be left with such a stranded tax effect that could have those items appear to not reflect the appropriate tax rate. The FASB's changes are intended to improve the usefulness of information reported to financial condition.statement users. The changes are effective for years beginning after December 31, 2018, with early adoption permitted. We elected to adopt the changes in December 2017. The amount transferred from AOCI to retained earnings totaled $229,000 and represented the impact of the Tax Law rate change to 21% at the date of enactment for the unrealized gains and losses on securities accounted for in AOCI.
NOTE 2. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Company maintains deposit balances at two correspondent banks which provide check collection and item processing services for the Company. The average balances that are to be maintained eitherCash on hand or on deposit with the Federal Reserve Bank or other correspondent banks, amounted to $600,000totaling $1,395,000 and $1,025,000$4,371,000 at December 31, 20142017 and 2013.2016, was required to meet regulatory reserve and clearing requirements.
The balancesBalances with these correspondent banks may, at times, exceed federally insured limits; however managementthe Company considers this to be a normal business risk. ManagementThe Company reviews the correspondent banks' financial condition on a quarterly basis.
NOTE 3. SECURITIES AVAILABLE FOR SALE
At December 31, 2014 and 2013 the investment securities portfolio was comprised of securities classified as available for sale, resulting in investment securities being carried at fair value. The following table summarizes amortized cost and fair valuesvalue of investmentAFS securities available for sale at December 31, were:2017 and 2016 and the corresponding amounts of gross unrealized gains and losses recognized in AOCI. At December 31, 2017 and 2016 all investment securities were classified as AFS.
| | | (Dollars in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| December 31, 2014 | | | | | | | | |
| U.S. Government Agencies | $ | 23,910 |
| | $ | 71 |
| | $ | 23 |
| | $ | 23,958 |
| |
| December 31, 2017 | | | | | | | | |
| States and political subdivisions | 52,578 |
| | 819 |
| | 996 |
| | 52,401 |
| $ | 153,803 |
| | $ | 6,133 |
| | $ | 478 |
| | $ | 159,458 |
|
| U.S. Government Sponsored Enterprises (GSE) residential mortgage-backed securities | 174,220 |
| | 1,573 |
| | 197 |
| | 175,596 |
| |
| GSE residential collateralized mortgage obligations (CMOs) | 57,976 |
| | 857 |
| | 128 |
| | 58,705 |
| |
| GSE commercial CMOs | 65,041 |
| | 1,017 |
| | 586 |
| | 65,472 |
| |
| GSE residential MBSs | | 48,600 |
| | 930 |
| | 0 |
| | 49,530 |
|
| GSE residential CMOs | | 113,658 |
| | 296 |
| | 2,835 |
| | 111,119 |
|
| Private label residential CMOs | | 999 |
| | 4 |
| | 0 |
| | 1,003 |
|
| Private label commercial CMOs | | 7,809 |
| | 0 |
| | 156 |
| | 7,653 |
|
| Asset-backed | | 86,787 |
| | 69 |
| | 425 |
| | 86,431 |
|
| Total debt securities | 373,725 |
| | 4,337 |
| | 1,930 |
| | 376,132 |
| 411,656 |
| | 7,432 |
| | 3,894 |
| | 415,194 |
|
| Equity securities | 50 |
| | 17 |
| | 0 |
| | 67 |
| 50 |
| | 64 |
| | 0 |
| | 114 |
|
| Totals | $ | 373,775 |
| | $ | 4,354 |
| | $ | 1,930 |
| | $ | 376,199 |
| $ | 411,706 |
| | $ | 7,496 |
| | $ | 3,894 |
| | $ | 415,308 |
|
| December 31, 2013 | | | | | | | | |
| December 31, 2016 | | | | | | | | |
| U.S. Government Agencies | $ | 25,610 |
| | $ | 34 |
| | $ | 193 |
| | $ | 25,451 |
| $ | 39,569 |
| | $ | 147 |
| | $ | 124 |
| | $ | 39,592 |
|
| U.S. Government Sponsored Enterprises (GSE) | 14,431 |
| | 5 |
| | 722 |
| | 13,714 |
| |
| States and political subdivisions | 75,494 |
| | 417 |
| | 4,367 |
| | 71,544 |
| 163,677 |
| | 1,782 |
| | 1,177 |
| | 164,282 |
|
| GSE residential mortgage-backed securities | 198,449 |
| | 895 |
| | 725 |
| | 198,619 |
| |
| GSE residential MBSs | | 116,022 |
| | 928 |
| | 6 |
| | 116,944 |
|
| GSE residential CMOs | 40,502 |
| | 251 |
| | 221 |
| | 40,532 |
| 72,411 |
| | 240 |
| | 3,268 |
| | 69,383 |
|
| GSE commercial CMOs | 59,812 |
| | 0 |
| | 2,798 |
| | 57,014 |
| 5,148 |
| | 0 |
| | 292 |
| | 4,856 |
|
| Private label residential CMOs | | 5,042 |
| | 0 |
| | 36 |
| | 5,006 |
|
| Total debt securities | 414,298 |
| | 1,602 |
| | 9,026 |
| | 406,874 |
| 401,869 |
| | 3,097 |
| | 4,903 |
| | 400,063 |
|
| Equity securities | 50 |
| | 19 |
| | 0 |
| | 69 |
| 50 |
| | 41 |
| | 0 |
| | 91 |
|
| Totals | $ | 414,348 |
| | $ | 1,621 |
| | $ | 9,026 |
| | $ | 406,943 |
| $ | 401,919 |
| | $ | 3,138 |
| | $ | 4,903 |
| | $ | 400,154 |
|
The following table shows grosssummarizes AFS securities with unrealized losses at December 31, 2017 and fair value of the Company’s available for sale securities that are not deemed to be other-than-temporarily impaired,2016, aggregated by investment categorymajor security type and length of time that individual securities have been in a continuous unrealized loss position at December 31:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Less Than 12 Months | | 12 Months or More | | Total |
| (Dollars in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| December 31, 2014 | | | | | | | | | | | |
| U.S. Government Agencies | $ | 0 |
| | $ | 0 |
| | $ | 9,012 |
| | $ | 23 |
| | $ | 9,012 |
| | $ | 23 |
|
| States and political subdivisions | 0 |
| | 0 |
| | 35,833 |
| | 996 |
| | 35,833 |
| | 996 |
|
| U.S. Government Sponsored Enterprises (GSE) residential mortgage-backed securities | 65,474 |
| | 197 |
| | 0 |
| | 0 |
| | 65,474 |
| | 197 |
|
| GSE residential collateralized mortgage obligations (CMOs) | 11,930 |
| | 128 |
| | 0 |
| | 0 |
| | 11,930 |
| | 128 |
|
| GSE commercial CMOs | 0 |
| | 0 |
| | 29,969 |
| | 586 |
| | 29,969 |
| | 586 |
|
| Total temporarily impaired securities | $ | 77,404 |
| | $ | 325 |
| | $ | 74,814 |
| | $ | 1,605 |
| | $ | 152,218 |
| | $ | 1,930 |
|
| December 31, 2013 | | | | | | | | | | | |
| U.S. Government Agencies | $ | 17,454 |
| | $ | 193 |
| | $ | 0 |
| | $ | 0 |
| | $ | 17,454 |
| | $ | 193 |
|
| U.S. Government Sponsored Enterprises (GSE) | 12,049 |
| | 722 |
| | 0 |
| | 0 |
| | 12,049 |
| | 722 |
|
| States and political subdivisions | 53,606 |
| | 4,367 |
| | 0 |
| | 0 |
| | 53,606 |
| | 4,367 |
|
| GSE residential mortgage-backed securities | 125,468 |
| | 716 |
| | 7,447 |
| | 9 |
| | 132,915 |
| | 725 |
|
| GSE residential CMOs | 14,033 |
| | 220 |
| | 44 |
| | 1 |
| | 14,077 |
| | 221 |
|
| GSE commercial CMOs | 38,298 |
| | 1,248 |
| | 18,716 |
| | 1,550 |
| | 57,014 |
| | 2,798 |
|
| Total temporarily impaired securities | $ | 260,908 |
| | $ | 7,466 |
| | $ | 26,207 |
| | $ | 1,560 |
| | $ | 287,115 |
| | $ | 9,026 |
|
The Company has 37 securities and 77 securities at December 31, 2014 and 2013 in which the amortized cost exceeds their values, as discussed below. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less Than 12 Months | | 12 Months or More | | Total |
| (Dollars in thousands) | # of Securities | | Fair Value | | Unrealized Losses | | # of Securities | | Fair Value | | Unrealized Losses | | # of Securities | | Fair Value | | Unrealized Losses |
| December 31, 2017 | | | | | | | | | | | | | | | | | |
| States and political subdivisions | 7 |
| | $ | 24,577 |
| | $ | 473 |
| | 1 |
| | $ | 5,585 |
| | $ | 5 |
| | 8 |
| | $ | 30,162 |
| | $ | 478 |
|
| GSE residential CMOs | 4 |
| | 25,155 |
| | 914 |
| | 5 |
| | 37,459 |
| | 1,921 |
| | 9 |
| | 62,614 |
| | 2,835 |
|
| Private label commercial CMOs | 2 |
| | 7,653 |
| | 156 |
| | 0 |
| | 0 |
| | 0 |
| | 2 |
| | 7,653 |
| | 156 |
|
| Asset-backed | 6 |
| | 60,006 |
| | 425 |
| | 0 |
| | 0 |
| | 0 |
| | 6 |
| | 60,006 |
| | 425 |
|
| Totals | 19 |
| | $ | 117,391 |
| | $ | 1,968 |
| | 6 |
| | $ | 43,044 |
| | $ | 1,926 |
| | 25 |
| | $ | 160,435 |
| | $ | 3,894 |
|
| December 31, 2016 | | | | | | | | | | | | | | | | | |
| U.S. Government Agencies | 6 |
| | $ | 10,710 |
| | $ | 23 |
| | 2 |
| | $ | 13,531 |
| | $ | 101 |
| | 8 |
| | $ | 24,241 |
| | $ | 124 |
|
| States and political subdivisions | 25 |
| | 58,924 |
| | 610 |
| | 1 |
| | 5,075 |
| | 567 |
| | 26 |
| | 63,999 |
| | 1,177 |
|
| GSE residential MBSs | 1 |
| | 5,034 |
| | 6 |
| | 0 |
| | 0 |
| | 0 |
| | 1 |
| | 5,034 |
| | 6 |
|
| GSE residential CMOs | 6 |
| | 59,534 |
| | 3,264 |
| | 1 |
| | 634 |
| | 4 |
| | 7 |
| | 60,168 |
| | 3,268 |
|
| GSE commercial CMOs | 1 |
| | 4,856 |
| | 292 |
| | 0 |
| | 0 |
| | 0 |
| | 1 |
| | 4,856 |
| | 292 |
|
| Private label residential CMOs | 0 |
| | 0 |
| | 0 |
| | 3 |
| | 5,005 |
| | 36 |
| | 3 |
| | 5,005 |
| | 36 |
|
| Totals | 39 |
| | $ | 139,058 |
| | $ | 4,195 |
| | 7 |
| | $ | 24,245 |
| | $ | 708 |
| | 46 |
| | $ | 163,303 |
| | $ | 4,903 |
|
U.S. Government Agencies and U.S. Government Sponsored Enterprises (GSE).GSE Securities. 21 U.S. Government Agencies and GSE securities, including mortgage-backed and collateralized mortgage obligations haveThe unrealized losses 13 GSE securities have amortized costs which exceed their fair values for less than 12 months, and eight have amortized costs which exceed their fair values for more than 12 months at December 31, 2014. At December 31, 2013, the Company had 46 GSE securities with unrealized losses, 38 of which werepresented in the less than 12 months category, and eight have amortized costs which exceed their fair values for more than 12 months. These unrealized lossestable above have been caused by a widening of spreads and/or a rise in interest rates from the time thethese securities were purchased. The contractual terms of those investmentsthese securities do not permit the issuer to settle the securities at a price less than theits par value bases of the investments.basis. Because the Company does not intend to sell the investmentsthese securities and it is not more likely than not that the Company will be required to sell the investmentsthem before recovery of their amortized cost bases,basis, which may be maturity, the Company does not consider these investmentssecurities to be other-than-temporarily impairedOTTI at December 31, 20142017 or 2013.at December 31, 2016.
State and Political Subdivisions. 16 state and political subdivision securities have an amortized cost which exceeds its fair value for more than 12 months at December 31, 2014. At December 31, 2013, 31 state and political subdivision security hadThe unrealized losses for less than 12 months. These unrealized lossespresented in the table above have been caused by a widening of spreads and/or a rise in interest rates from the time thethese securities were purchased. Management considers the investment rating, the state of the issuer of the security and other credit support in determining whether the security is other-than-temporarily impaired.OTTI. Because the Company does not intend to sell the investmentsthese securities and it is not more likely than not that the Company will be required to sell the investmentsthem before recovery of their amortized cost bases,basis, which may be maturity, the Company does not consider these investmentssecurities to be other-than-temporarily impairedOTTI at December 31, 20142017 or 2013at December 31, 2016.
Private Label Residential CMOs. .The unrealized losses presented in the table above have been caused by a widening of spreads and/or a rise in interest rates from the time the securities were purchased. Because the Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost basis, which may be maturity, the Company does not consider these securities to be OTTI at December 31, 2017 or at December 31, 2016.
The following table summarizes amortized cost and fair valuesvalue of AFS securities available for sale at December 31, 20142017 by contractual maturity are shown below. Contractualmaturity. Expected maturities willmay differ from expectedcontractual maturities becauseif borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
INVESTMENT PORTFOLIO Securities not due at a single maturity date are shown separately.
| | | | Available for Sale | Available for Sale |
| (Dollars in thousands) | Amortized Cost | | Fair Value | Amortized Cost | | Fair Value |
| | | | | | | |
| Due in one year or less | $ | 0 |
| | $ | 0 |
| $ | 0 |
| | $ | 0 |
|
| Due after one year through five years | 380 |
| | 381 |
| 8,712 |
| | 8,929 |
|
| Due after five years through ten years | 22,429 |
| | 22,392 |
| 49,958 |
| | 51,188 |
|
| Due after ten years | 53,679 |
| | 53,586 |
| 95,133 |
| | 99,341 |
|
| Mortgage-backed securities and collateralized mortgage obligations | 297,237 |
| | 299,773 |
| |
| MBSs and CMOs | | 171,066 |
| | 169,305 |
|
| Asset-backed | | 86,787 |
| | 86,431 |
|
| Total debt securities | 373,725 |
| | 376,132 |
| 411,656 |
| | 415,194 |
|
| Equity securities | 50 |
| | 67 |
| 50 |
| | 114 |
|
| | $ | 373,775 |
| | $ | 376,199 |
| |
| Totals | | $ | 411,706 |
| | $ | 415,308 |
|
ProceedsThe following table summarizes proceeds from sales of AFS securities available for saleand gross gains and gross losses for the years ended December 31, 2014, 20132017, 2016, and 2012 were $169,573,000, $74,273,000 and $94,099,000. Gross gains on the sales of2015.
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| (Dollars in thousands) | 2017 | | 2016 | | 2015 |
| | | | | | |
| Proceeds from sale of AFS securities | $ | 162,320 |
| | $ | 64,742 |
| | $ | 65,611 |
|
| Gross gains | 1,477 |
| | 1,468 |
| | 1,948 |
|
| Gross losses | 287 |
| | 48 |
| | 24 |
|
AFS securities were $2,301,000, $473,000 and $4,986,000 for the years ended December 31, 2014, 2013 and 2012. Gross losses on securities available for sale were $366,000, $141,000 and $162,000 for the years ended December 31, 2014, 2013 and 2012.
Securities with a fair value of $261,034,000$319,907,000 and $241,911,000$317,282,000 at December 31, 20142017 and 2013December 31, 2016 were pledged to secure public funds and for other purposes as required or permitted by law.
NOTE 4. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
The Company’s loan portfolio is broken downgrouped into segments to an appropriate level of disaggregationclasses to allow management to monitor the performance by the borrower and to monitor the yield on the portfolio. Consistent with ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Loan Losses, the segments wereare further broken down into classes to allow for differing risk characteristics within a segment.
The risks associated with lending activities differ among the various loan classes and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans, and general economic conditions. All of these factors may adversely impact both the borrower’s ability to repay its loans and impact the associated collateral.
The Company has various types of commercial real estate loans which have differing levels of credit risk associated with them.risk. Owner-occupied commercial real estate loans are generally dependent upon the successful operation of the borrower’s business, with the cash flows generated from the business being the primary source of repayment of the loan. If the business suffers a downturn in sales or profitability, the borrower’s ability to repay the loan could be in jeopardy.
Non-owner occupied and multi-family commercial real estate loans and non-owner occupied residential loans present a different credit risk to the Company than owner-occupied commercial real estate loans, as the repayment of the loan is dependent upon the borrower’s ability to generate a sufficient level of occupancy to produce rental income that exceeds debt service requirements and operating expenses. Lower occupancy or lease rates may result in a reduction in cash flows, which hinders the ability of the borrower to meet debt service requirements, and may result in lower collateral values. The Company generally recognizes that greater risk is inherent in these credit relationships as compared to owner occupiedowner-occupied loans mentioned above.
Acquisition and development loans consist of 1-4 family residential construction and commercial and land development loans. The risk of loss on these loans is largely dependent on the Company’s ability to assess the property’s value at the completion of the project, which should exceed the property’s construction costs. During the construction phase, a number of
factors could potentially negatively impact the collateral value, including cost overruns, delays in completing the project, competition, and real estate market conditions which may change based on the supply of similar properties in the area. In the event the collateral value at the completion of the project is not sufficient to cover the outstanding loan balance, the Company must rely upon other repayment sources, including the guarantors of the project or other collateral securing the loan.
Commercial and industrial loans include advances to local and regional businesses for general commercial purposes and include permanent and short-term working capital, machinery and equipment financing, and may be either in the form of lines of credit or term loans. Although commercial and industrial loans may be unsecured to our highest rated borrowers, the majority of these loans are secured by the borrower’s accounts receivable, inventory and machinery and equipment. In a significant number of these loans, the collateral also includes the business real estate or the business owner’s personal real estate or assets. Commercial and industrial loans present credit exposure to the Company, as they are more susceptible to risk of loss during a downturn in the economy as borrowers may have greater difficulty in meeting their debt service requirements and the value of the collateral may decline. The Company attempts to mitigate this risk through its underwriting standards, including evaluating the credit worthinesscreditworthiness of the borrower and, to the extent available, credit ratings on the business. Additionally, monitoring of the loans through annual renewals and meetings with the borrowers are typical. However, these procedures cannot eliminate the risk of loss associated with commercial and industrial lending.
Municipal loans consist of extensions of credit to municipalities and school districts within the Company’s market area. These loans generally present a lower risk than commercial and industrial loans, as they are generally secured by the municipality’s full taxing authority, by revenue obligations, or by its ability to raise assessments on its customers for a specific utility.
The Company originates loans to its retail customers, including fixed-rate and adjustable first lien mortgage loans with the underlying 1-4 family owner-occupied residential property securing the loan. The Company’s risk exposure is minimized in these types of loans through the evaluation of the credit worthinesscreditworthiness of the borrower, including credit scores and debt-to-income ratios, and underwriting standards which limit the loan-to-value ratio to generally no more than 80% upon loan origination, unless the borrower obtains private mortgage insurance.
Home equity loans, including term loans and lines of credit, present a slightly higher risk to the Company than 1-4 family first liens, as these loans can be first or second liens on 1-4 family owner occupied residential property, but can have loan-to-value ratios of no greater than 90% of the value of the real estate taken as collateral. The credit worthinesscreditworthiness of the borrower is considered including credit scores and debt-to-income ratios, which generally cannot exceed 43%.ratios.
Installment and other loans’ credit risk are mitigated through conservativeprudent underwriting standards, including the evaluation of the credit worthinesscreditworthiness of the borrower through credit scores and debt-to-income ratios and, if secured, the collateral value of the assets. As theseThese loans can be unsecured or secured by assets the value of which may depreciate quickly or may fluctuate, they typicallyand may present a greater risk to the Company than 1-4 family residential loans.
The following table presents the loan portfolio, excluding residential loans held for sale,LHFS, broken out by classes as ofat December 31, was as follows:2017 and December 31, 2016.
| | | (Dollars in thousands) | 2014 | | 2013 | 2017 | | 2016 |
| Commercial real estate: | | | | | | |
| Owner-occupied | $ | 100,859 |
| | $ | 111,290 |
| $ | 116,811 |
| | $ | 112,295 |
|
| Non-owner occupied | 144,301 |
| | 135,953 |
| 244,491 |
| | 206,358 |
|
| Multi-family | 27,531 |
| | 22,882 |
| 53,634 |
| | 47,681 |
|
| Non-owner occupied residential | 49,315 |
| | 55,272 |
| 77,980 |
| | 62,533 |
|
| Acquisition and development: | | | | | | |
| 1-4 family residential construction | 5,924 |
| | 3,338 |
| 11,730 |
| | 4,663 |
|
| Commercial and land development | 24,237 |
| | 19,440 |
| 19,251 |
| | 26,085 |
|
| Commercial and industrial | 48,995 |
| | 33,446 |
| 115,663 |
| | 88,465 |
|
| Municipal | 61,191 |
| | 60,996 |
| 42,065 |
| | 53,741 |
|
| Residential mortgage: | | | | | | |
| First lien | 126,491 |
| | 124,728 |
| 162,509 |
| | 139,851 |
|
| Home equity – term | 20,845 |
| | 20,131 |
| 11,784 |
| | 14,248 |
|
| Home equity – lines of credit | 89,366 |
| | 77,377 |
| 132,192 |
| | 120,353 |
|
| Installment and other loans | 5,891 |
| | 6,184 |
| 21,902 |
| | 7,118 |
|
| | $ | 704,946 |
| | $ | 671,037 |
| $ | 1,010,012 |
| | $ | 883,391 |
|
In order to monitor ongoing risk associated with its loan portfolio and specific loans within the segments, management uses an internal grading system. The first several rating categories, representing the lowest risk to the Bank, are combined and given a “Pass” rating. Management generally follows regulatory definitions in assigning criticized ratings to loans, including special mention, substandard, doubtful"Special Mention," "Substandard," "Doubtful" or loss."Loss." The “Special Mention”Special Mention category includes loans that have potential weaknesses that may, if not monitored or corrected, weaken the asset or inadequately protect the Bank’sBank's position at some future date. These assets pose elevated risk, but their weakness does not yet justify a more severe, or classified rating. “Substandard”Substandard loans are classified as they have a well-defined weakness, or weaknesses that jeopardize liquidation of the debt. These loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. “Substandard”Substandard loans include loans that management has determined not to be impaired, as well as loans considered to be impaired. A “Doubtful”Doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification of lossas Loss is deferred. “Loss” assetsLoss loans are considered uncollectible, as the underlying borrowers are often in bankruptcy, have suspended debt repayments, or have ceased business operations. Once a loan is classified as “Loss,”Loss, there is little prospect of collecting the loan’s principal or interest and it is generally written off.charged-off.
The BankCompany has a loan review policy and program which is designed to identify and mitigatemonitor risk in the lending function. The Enterprise Risk Management (“ERM”)ERM Committee, comprised of executive officers and loan department personnel, is charged with the oversight of overall credit quality and risk exposure of the Bank’sCompany's loan portfolio. This includes the monitoring of the lending activities of all BankCompany personnel with respect to underwriting and processing new loans and the timely follow-up and corrective action for loans showing signs of deterioration in quality. TheA loan review program provides the BankCompany with an independent review of the Bank’s loan portfolio on an ongoing basis. Generally, consumer and residential mortgage loans are included in the "Pass"Pass categories unless a specific action, such as extended delinquencies, bankruptcy, repossession or death of the borrower occurs, which heightens awareness as to a possible credit event.
Internal loan reviews are completed annually on all commercial relationships with a committed loan balance in excess of $1,000,000,$500,000, which includes confirmation of risk rating by Credit Administration.an independent credit officer. In addition, all relationships greater than $250,000 rated Substandard, Doubtful or Loss are reviewed quarterly and corresponding risk ratings are reaffirmed by the Company's Problem Loan Committee, with subsequent reporting to the ERM Committee on a quarterly basis, with reaffirmation of the rating as approved by the Bank’s Loan Work Out Committee.
The following summarizes the Bank’sCompany’s loan portfolio ratings based on its internal risk rating system as ofat December 31, 20142017 and 2013:2016:
| | | (Dollars in thousands) | Pass | | Special Mention | | Non-Impaired Substandard | | Impaired - Substandard | | Doubtful | | Total | Pass | | Special Mention | | Non-Impaired Substandard | | Impaired - Substandard | | Doubtful | | Total |
| December 31, 2014 | | | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | | | |
| Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | |
| Owner-occupied | $ | 89,815 |
| | $ | 2,686 |
| | $ | 5,070 |
| | $ | 3,288 |
| | $ | 0 |
| | $ | 100,859 |
| $ | 113,240 |
| | $ | 413 |
| | $ | 1,921 |
| | $ | 1,237 |
| | $ | 0 |
| | $ | 116,811 |
|
| Non-owner occupied | 120,829 |
| | 20,661 |
| | 1,131 |
| | 1,680 |
| | 0 |
| | 144,301 |
| 235,919 |
| | 0 |
| | 4,507 |
| | 4,065 |
| | 0 |
| | 244,491 |
|
| Multi-family | 24,803 |
| | 1,086 |
| | 1,322 |
| | 320 |
| | 0 |
| | 27,531 |
| 48,603 |
| | 4,113 |
| | 753 |
| | 165 |
| | 0 |
| | 53,634 |
|
| Non-owner occupied residential | 43,020 |
| | 2,968 |
| | 1,827 |
| | 1,500 |
| | 0 |
| | 49,315 |
| 76,373 |
| | 142 |
| | 1,084 |
| | 381 |
| | 0 |
| | 77,980 |
|
| Acquisition and development: | | | | | | | | | | | | | | | | | | | | | | |
| 1-4 family residential construction | 5,924 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 5,924 |
| 11,238 |
| | 0 |
| | 0 |
| | 492 |
| | 0 |
| | 11,730 |
|
| Commercial and land development | 22,261 |
| | 233 |
| | 1,333 |
| | 410 |
| | 0 |
| | 24,237 |
| 18,635 |
| | 5 |
| | 611 |
| | 0 |
| | 0 |
| | 19,251 |
|
| Commercial and industrial | 43,794 |
| | 850 |
| | 1,914 |
| | 2,437 |
| | 0 |
| | 48,995 |
| 113,162 |
| | 2,151 |
| | 0 |
| | 350 |
| | 0 |
| | 115,663 |
|
| Municipal | 61,191 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 61,191 |
| 42,065 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 42,065 |
|
| Residential mortgage: | | | | | | | | | | | | | | | | | | | | | | |
| First lien | 121,160 |
| | 9 |
| | 0 |
| | 5,290 |
| | 32 |
| | 126,491 |
| 158,673 |
| | 0 |
| | 0 |
| | 3,836 |
| | 0 |
| | 162,509 |
|
| Home equity – term | 20,775 |
| | 0 |
| | 0 |
| | 70 |
| | 0 |
| | 20,845 |
| 11,762 |
| | 0 |
| | 0 |
| | 22 |
| | 0 |
| | 11,784 |
|
| Home equity – lines of credit | 88,164 |
| | 630 |
| | 93 |
| | 479 |
| | 0 |
| | 89,366 |
| 131,585 |
| | 80 |
| | 60 |
| | 467 |
| | 0 |
| | 132,192 |
|
| Installment and other loans | 5,865 |
| | 0 |
| | 0 |
| | 26 |
| | 0 |
| | 5,891 |
| 21,891 |
| | 0 |
| | 0 |
| | 11 |
| | 0 |
| | 21,902 |
|
| | $ | 647,601 |
| | $ | 29,123 |
| | $ | 12,690 |
| | $ | 15,500 |
| | $ | 32 |
| | $ | 704,946 |
| $ | 983,146 |
| | $ | 6,904 |
| | $ | 8,936 |
| | $ | 11,026 |
| | $ | 0 |
| | $ | 1,010,012 |
|
| December 31, 2013 | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | | |
| Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | |
| Owner-occupied | $ | 92,063 |
| | $ | 3,305 |
| | $ | 11,360 |
| | $ | 4,107 |
| | $ | 455 |
| | $ | 111,290 |
| $ | 103,652 |
| | $ | 5,422 |
| | $ | 2,151 |
| | $ | 1,070 |
| | $ | 0 |
| | $ | 112,295 |
|
| Non-owner occupied | 107,113 |
| | 6,904 |
| | 14,819 |
| | 7,117 |
| | 0 |
| | 135,953 |
| 190,726 |
| | 4,791 |
| | 10,105 |
| | 736 |
| | 0 |
| | 206,358 |
|
| Multi-family | 20,091 |
| | 2,132 |
| | 337 |
| | 322 |
| | 0 |
| | 22,882 |
| 42,473 |
| | 4,222 |
| | 787 |
| | 199 |
| | 0 |
| | 47,681 |
|
| Non-owner occupied residential | 42,007 |
| | 4,982 |
| | 3,790 |
| | 4,493 |
| | 0 |
| | 55,272 |
| 59,982 |
| | 949 |
| | 1,150 |
| | 452 |
| | 0 |
| | 62,533 |
|
| Acquisition and development: | | | | | | | | | | | | | | | | | | | | | | |
| 1-4 family residential construction | 3,292 |
| | 0 |
| | 46 |
| | 0 |
| | 0 |
| | 3,338 |
| 4,560 |
| | 103 |
| | 0 |
| | 0 |
| | 0 |
| | 4,663 |
|
| Commercial and land development | 14,118 |
| | 1,433 |
| | 712 |
| | 3,177 |
| | 0 |
| | 19,440 |
| 25,435 |
| | 10 |
| | 639 |
| | 1 |
| | 0 |
| | 26,085 |
|
| Commercial and industrial | 28,933 |
| | 2,129 |
| | 383 |
| | 1,878 |
| | 123 |
| | 33,446 |
| 87,588 |
| | 251 |
| | 32 |
| | 594 |
| | 0 |
| | 88,465 |
|
| Municipal | 60,996 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 60,996 |
| 53,741 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 53,741 |
|
| Residential mortgage: | | | | | | | | | | | | | | | | | | | | | | |
| First lien | 121,353 |
| | 0 |
| | 0 |
| | 3,327 |
| | 48 |
| | 124,728 |
| 135,558 |
| | 0 |
| | 0 |
| | 4,293 |
| | 0 |
| | 139,851 |
|
| Home equity – term | 20,024 |
| | 0 |
| | 0 |
| | 94 |
| | 13 |
| | 20,131 |
| 14,155 |
| | 0 |
| | 0 |
| | 93 |
| | 0 |
| | 14,248 |
|
| Home equity – lines of credit | 77,187 |
| | 0 |
| | 9 |
| | 181 |
| | 0 |
| | 77,377 |
| 119,681 |
| | 82 |
| | 61 |
| | 529 |
| | 0 |
| | 120,353 |
|
| Installment and other loans | 6,184 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 6,184 |
| 7,112 |
| | 0 |
| | 0 |
| | 6 |
| | 0 |
| | 7,118 |
|
| | $ | 593,361 |
| | $ | 20,885 |
| | $ | 31,456 |
| | $ | 24,696 |
| | $ | 639 |
| | $ | 671,037 |
| $ | 844,663 |
| | $ | 15,830 |
| | $ | 14,925 |
| | $ | 7,973 |
| | $ | 0 |
| | $ | 883,391 |
|
Classified loans may also be evaluated for impairment. For commercial real estate, acquisition and development and commercial and industrial loans, a loan is considered impaired when, based on current information and events, it is probable that the BankCompany will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Generally, loans that are more than 90 days past due are deemed impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed to determine if
the loan should be placed on nonaccrual status. Nonaccrual loans in the commercial and
commercial real estate portfolios and any trouble debt restructuringsTDRs are, by definition, deemed to be impaired. Impairment is measured on a loan-by-loan basis for commercial, construction and restructured loans by either the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. For loans that are deemed to be impaired for extended periods of time, periodic updates on fair values are obtained, which may include updated appraisals. The updatedUpdated fair values will beare incorporated into the impairment analysis as ofin the next reporting period.
Loan charge-offs, which may include partial charge-offs, are taken on an impaired loan that is collateral dependent if the loan’s carrying balance exceeds its collateral’s appraised value; the loan has been identified as uncollectible; and it is deemed to be a confirmed loss. Typically, impaired loans with a charge-off or partial charge-off will continue to be considered impaired, unless the note is split into two, and management expects the performing note to continue to perform and is adequately secured. The second, or non-performing note, would be charged-off. Generally, an impaired loan with a partial charge-off may continue to have an impairment reserve on it after the partial charge-off, if factors warrant.
As ofAt December 31, 20142017 and 2013,2016, nearly all of the Company’s impaired loans’ extent of impairment waswere measured based on the estimated fair value of the collateral securing the loan, except for troubled debt restructurings.TDRs. By definition, troubled debt restructuringsTDRs are considered impaired. All restructured loans’ impairment waswere determined based on discounted cash flows for those loans classified as trouble debt restructurings but areTDRs and still accruing interest. For real estate loans, collateral generally consists of commercial real estate, but in the case of commercial and industrial loans, it wouldcould also consist of accounts receivable, inventory, equipment or other business assets. Commercial and industrial loans may also have real estate collateral.
According to policy, updatedUpdated appraisals are generally required annuallyevery 18 months for classified commercial loans in excess of $250,000. The “as is value”is" value provided in the appraisal is often used as the fair value of the collateral in determining impairment, unless circumstances, such as subsequent improvements, approvals, or other circumstances dictate that another value provided by the appraiser is more appropriate.
Generally, impaired commercial loans secured by real estate, wereother than performing TDRs, are measured at fair value using certified real estate appraisals that had been completed within the last year.18 months. Appraised values are further discounted for estimated costs to sell the property and other selling considerations to arrive at the property’s fair value. In those situations in which it is determined an updated appraisal is not required for loans individually evaluated for impairment, fair values are based on one or a combination of the following approaches. In those situations in which a combination of approaches is considered, the factor that carries the most consideration will be the one management believes is warranted. The approaches are as follows:are:
Original appraisal – if the original appraisal provides a strong loan-to-value ratio (generally 70% or lower) and, after consideration of market conditions and knowledge of the property and area, it is determined by the Credit Administration staff that there has not been a significant deterioration in the collateral value, the original certified appraised value may be used. Discounts as deemed appropriate for selling costs are factored into the appraised value in arriving at fair value.
Discounted cash flows – in limited cases, discounted cash flows may be used on projects in which the collateral is liquidated to reduce the borrowings outstanding, and is used to validate collateral values derived from other approaches.
Collateral on certain impaired loans is not limited to real estate, and may consist of accounts receivable, inventory, equipment or other business assets. Estimated fair values are determined based on borrowers’ financial statements, inventory ledgers, accounts receivable agings or appraisals from individuals with knowledge in the business. Stated balances are generally discounted for the age of the financial information or the quality of the assets. In determining fair value, liquidation discounts are applied to this collateral based on existing loan evaluation policies.
The Company distinguishes Substandard loans on both an impaired and non-impairednonimpaired basis, as it places less emphasis on a loan’s classification, and increased reliance on whether the loan was performing in accordance with the contractual terms. “Substandard”A Substandard classification does not automatically meet the definition of “impaired.” A substandard loan is one that is inadequately protected by current sound worth, paying capacity of the obligor or the collateral pledged, if any. Extensions of credit so classified have well-defined weaknesses which may jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.impaired. Loss potential, while existing in the aggregate amount of substandardSubstandard loans, does not have to exist in individual extensions of credit classified substandard.Substandard. As a result, the Company’s methodology includes an evaluation of certain accruing commercial real estate, acquisition and development and commercial and industrial loans rated “Substandard”Substandard to be collectively, evaluated for impairment as opposed to evaluating these loans individually, evaluated for impairment. Although we believethe Company believes these loans have well defined weaknesses and meet
the definition of “Substandard,”Substandard, they are generally performing and management has concluded that it is likely itwe will be able to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement.
Larger groups of smaller balance homogeneous loans are collectively evaluated for impairment. Generally, the BankCompany does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.
The following table summarizes impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not required as ofat December 31, 20142017 and 2013.2016. The recorded investment in loans excludes accrued interest receivable due to insignificance. AllowancesRelated allowances established generally pertain to those loans in which loan forbearance agreements were in the process of being negotiated or updated appraisals were pending, and thea partial charge-off will be recorded when final information is received.
| | | | Impaired Loans with a Specific Allowance | | Impaired Loans with No Specific Allowance | Impaired Loans with a Specific Allowance | | Impaired Loans with No Specific Allowance |
| (Dollars in thousands) | Recorded Investment (Book Balance) | | Unpaid Principal Balance (Legal Balance) | | Related Allowance | | Recorded Investment (Book Balance) | | Unpaid Principal Balance (Legal Balance) | Recorded Investment (Book Balance) | | Unpaid Principal Balance (Legal Balance) | | Related Allowance | | Recorded Investment (Book Balance) | | Unpaid Principal Balance (Legal Balance) |
| December 31, 2014 | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | |
| Commercial real estate: | | | | | | | | | | |
| Owner-occupied | | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 1,237 |
| | $ | 2,479 |
|
| Non-owner occupied | | 0 |
| | 0 |
| | 0 |
| | 4,065 |
| | 4,856 |
|
| Multi-family | | 0 |
| | 0 |
| | 0 |
| | 165 |
| | 352 |
|
| Non-owner occupied residential | | 0 |
| | 0 |
| | 0 |
| | 381 |
| | 669 |
|
| Acquisition and development: | | | | | | | | | | |
| 1-4 family residential construction | | 0 |
| | 0 |
| | 0 |
| | 492 |
| | 492 |
|
| Commercial and industrial | | 0 |
| | 0 |
| | 0 |
| | 350 |
| | 495 |
|
| Residential mortgage: | | | | | | | | | | |
| First lien | | 872 |
| | 872 |
| | 42 |
| | 2,964 |
| | 3,706 |
|
| Home equity—term | | 0 |
| | 0 |
| | 0 |
| | 22 |
| | 27 |
|
| Home equity—lines of credit | | 0 |
| | 0 |
| | 0 |
| | 467 |
| | 628 |
|
| Installment and other loans | | 9 |
| | 9 |
| | 9 |
| | 2 |
| | 33 |
|
| | | $ | 881 |
| | $ | 881 |
| | $ | 51 |
| | $ | 10,145 |
| | $ | 13,737 |
|
| December 31, 2016 | | | | | | | | | | |
| Commercial real estate: | | | | | | | | | | | | | | | | | | |
| Owner-occupied | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 3,288 |
| | $ | 4,558 |
| $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 1,070 |
| | $ | 2,236 |
|
| Non-owner occupied | 0 |
| | 0 |
| | 0 |
| | 1,680 |
| | 3,420 |
| 0 |
| | 0 |
| | 0 |
| | 736 |
| | 1,323 |
|
| Multi-family | 0 |
| | 0 |
| | 0 |
| | 320 |
| | 356 |
| 0 |
| | 0 |
| | 0 |
| | 199 |
| | 368 |
|
| Non-owner occupied residential | 198 |
| | 203 |
| | 2 |
| | 1,302 |
| | 1,570 |
| 0 |
| | 0 |
| | 0 |
| | 452 |
| | 706 |
|
| Acquisition and development: | | | | | | | | | | | | | | | | | | |
| Commercial and land development | 0 |
| | 0 |
| | 0 |
| | 410 |
| | 1,077 |
| 0 |
| | 0 |
| | 0 |
| | 1 |
| | 16 |
|
| Commercial and industrial | 0 |
| | 0 |
| | 0 |
| | 2,437 |
| | 2,500 |
| 0 |
| | 0 |
| | 0 |
| | 594 |
| | 715 |
|
| Residential mortgage: | | | | | | | | | | | | | | | | | | |
| First lien | 982 |
| | 982 |
| | 149 |
| | 4,340 |
| | 4,968 |
| 643 |
| | 643 |
| | 43 |
| | 3,650 |
| | 4,399 |
|
| Home equity—term | 0 |
| | 0 |
| | 0 |
| | 70 |
| | 71 |
| 0 |
| | 0 |
| | 0 |
| | 93 |
| | 103 |
|
| Home equity—lines of credit | 24 |
| | 40 |
| | 24 |
| | 455 |
| | 655 |
| 0 |
| | 0 |
| | 0 |
| | 529 |
| | 659 |
|
| Installment and other loans | 13 |
| | 13 |
| | 13 |
| | 13 |
| | 36 |
| 0 |
| | 0 |
| | 0 |
| | 6 |
| | 34 |
|
| | $ | 1,217 |
| | $ | 1,238 |
| | $ | 188 |
| | $ | 14,315 |
| | $ | 19,211 |
| $ | 643 |
| | $ | 643 |
| | $ | 43 |
| | $ | 7,330 |
| | $ | 10,559 |
|
| December 31, 2013 | | | | | | | | | | |
| Commercial real estate: | | | | | | | | | | |
| Owner-occupied | $ | 615 |
| | $ | 1,099 |
| | $ | 552 |
| | $ | 3,947 |
| | $ | 4,575 |
| |
| Non-owner occupied | 0 |
| | 0 |
| | 0 |
| | 7,117 |
| | 7,670 |
| |
| Multi-family | 0 |
| | 0 |
| | 0 |
| | 322 |
| | 415 |
| |
| Non-owner occupied residential | 0 |
| | 0 |
| | 0 |
| | 4,493 |
| | 4,836 |
| |
| Acquisition and development: | | | | | | | | | | |
| Commercial and land development | 0 |
| | 0 |
| | 0 |
| | 3,177 |
| | 3,812 |
| |
| Commercial and industrial | 0 |
| | 0 |
| | 0 |
| | 2,001 |
| | 2,143 |
| |
| Residential mortgage: | | | | | | | | | | |
| First lien | 48 |
| | 48 |
| | 48 |
| | 3,327 |
| | 3,619 |
| |
| Home equity—term | 13 |
| | 13 |
| | 13 |
| | 94 |
| | 96 |
| |
| Home equity—lines of credit | 0 |
| | 0 |
| | 0 |
| | 181 |
| | 183 |
| |
| | $ | 676 |
| | $ | 1,160 |
| | $ | 613 |
| | $ | 24,659 |
| | $ | 27,349 |
| |
The following table summarizes the average recorded investment in impaired loans and related recognized interest income recognized on loans deemed impaired for the yearyears ended December 31, 2014, 20132017, 2016 and 2012:2015:
| | | | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| (Dollars in thousands) | Average Impaired Balance | | Interest Income Recognized | | Average Impaired Balance | | Interest Income Recognized | | Average Impaired Balance | | Interest Income Recognized | Average Impaired Balance | | Interest Income Recognized | | Average Impaired Balance | | Interest Income Recognized | | Average Impaired Balance | | Interest Income Recognized |
| Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | |
| Owner-occupied | $ | 3,740 |
| | $ | 20 |
| | $ | 3,528 |
| | $ | 147 |
| | $ | 8,374 |
| | $ | 20 |
| $ | 1,000 |
| | $ | 6 |
| | $ | 1,758 |
| | $ | 0 |
| | $ | 2,613 |
| | $ | 0 |
|
| Non-owner occupied | 6,711 |
| | 143 |
| | 4,307 |
| | 145 |
| | 14,372 |
| | 69 |
| 392 |
| | 0 |
| | 6,831 |
| | 0 |
| | 3,470 |
| | 0 |
|
| Multi-family | 274 |
| | 2 |
| | 135 |
| | 16 |
| | 3,940 |
| | 0 |
| 182 |
| | 0 |
| | 216 |
| | 0 |
| | 402 |
| | 0 |
|
| Non-owner occupied residential | 2,095 |
| | 13 |
| | 4,799 |
| | 77 |
| | 20,284 |
| | 61 |
| 418 |
| | 0 |
| | 645 |
| | 0 |
| | 1,020 |
| | 0 |
|
| Acquisition and development: | | | | | | | | | | | | | | | | | | | | | | |
| 1-4 family residential construction | 0 |
| | 0 |
| | 481 |
| | 0 |
| | 1,542 |
| | 26 |
| 154 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Commercial and land development | 1,250 |
| | 34 |
| | 3,009 |
| | 49 |
| | 12,652 |
| | 252 |
| 0 |
| | 0 |
| | 3 |
| | 0 |
| | 266 |
| | 137 |
|
| Commercial and industrial | 1,700 |
| | 5 |
| | 1,780 |
| | 45 |
| | 2,691 |
| | 43 |
| 413 |
| | 0 |
| | 575 |
| | 0 |
| | 1,208 |
| | 0 |
|
| Residential mortgage: | | | | | | | | | | | | | | | | | | | | | | |
| First lien | 4,226 |
| | 53 |
| | 2,697 |
| | 140 |
| | 2,700 |
| | 61 |
| 4,012 |
| | 58 |
| | 4,525 |
| | 33 |
| | 4,644 |
| | 37 |
|
| Home equity – term | 85 |
| | 0 |
| | 59 |
| | 8 |
| | 156 |
| | 2 |
| 61 |
| | 0 |
| | 98 |
| | 0 |
| | 130 |
| | 0 |
|
| Home equity – lines of credit | 111 |
| | 3 |
| | 305 |
| | 6 |
| | 467 |
| | 15 |
| 488 |
| | 2 |
| | 455 |
| | 0 |
| | 571 |
| | 0 |
|
| Installment and other loans | 9 |
| | 1 |
| | 1 |
| | 0 |
| | 8 |
| | 0 |
| 10 |
| | 0 |
| | 12 |
| | 0 |
| | 22 |
| | 0 |
|
| | $ | 20,201 |
| | $ | 274 |
| | $ | 21,101 |
| | $ | 633 |
| | $ | 67,186 |
| | $ | 549 |
| $ | 7,130 |
| | $ | 66 |
| | $ | 15,118 |
| | $ | 33 |
| | $ | 14,346 |
| | $ | 174 |
|
The following table presents impaired loans that are troubled debt restructurings,TDRs, with the recorded investment as ofat December 31, 20142017 and December 31, 2013.2016.
| | | | 2014 | | 2013 | 2017 | | 2016 |
| (Dollars in thousands) | Number of Contracts | | Recorded Investment | | Number of Contracts | | Recorded Investment | Number of Contracts | | Recorded Investment | | Number of Contracts | | Recorded Investment |
| Accruing: | | | | | | | | | | | | | | |
| Commercial real estate: | | | | | | | | | | | | | | |
| Owner-occupied | 0 |
| | $ | 0 |
| | 1 |
| | $ | 200 |
| 1 |
| | $ | 52 |
| | 0 |
| | $ | 0 |
|
| Non-owner occupied | 0 |
| | 0 |
| | 2 |
| | 4,268 |
| |
| Acquisition and development: | | | | | | | | |
| Commercial and land development | 1 |
| | 287 |
| | 2 |
| | 1,071 |
| |
| Residential mortgage: | | | | | | | | | | | | | | |
| First lien | 8 |
| | 813 |
| | 1 |
| | 449 |
| 11 |
| | 1,102 |
| | 8 |
| | 896 |
|
| Total accruing | 9 |
| | 1,100 |
| | 6 |
| | 5,988 |
| |
| Home equity - lines of credit | | 1 |
| | 29 |
| | 1 |
| | 34 |
|
| | | 13 |
| | 1,183 |
| | 9 |
| | 930 |
|
| Nonaccruing: | | | | | | | | | | | | | | |
| Commercial real estate: | | | | | | | | | | | | | | |
| Owner-occupied | 0 |
| | 0 |
| | 1 |
| | 71 |
| 1 |
| | 57 |
| | 0 |
| | 0 |
|
| Non-owner occupied | 0 |
| | 0 |
| | 1 |
| | 694 |
| |
| Non-owner occupied residential | 0 |
| | 0 |
| | 1 |
| | 193 |
| |
| Commercial and industrial | 0 |
| | 0 |
| | 2 |
| | 310 |
| |
| Residential mortgage: | | | | | | | | | | | | | | |
| First lien | 13 |
| | 1,715 |
| | 1 |
| | 279 |
| 8 |
| | 715 |
| | 12 |
| | 1,035 |
|
| Consumer | 1 |
| | 13 |
| | 0 |
| | 0 |
| |
| Installment and other loans | | 1 |
| | 3 |
| | 1 |
| | 6 |
|
| | 14 |
| | 1,728 |
| | 6 |
| | 1,547 |
| 10 |
| | 775 |
| | 13 |
| | 1,041 |
|
| | 23 |
| | $ | 2,828 |
| | 12 |
| | $ | 7,535 |
| 23 |
| | $ | 1,958 |
| | 22 |
| | $ | 1,971 |
|
The following table presents
There were no restructured loans included in nonaccrual status, that were modified as troubled debt restructurings within the previous 12 months and for which there was a payment default subsequent to the modification for the years ended December 31, 2014, 2013,2017, 2016, and 2012.2015 that were modified as TDRs within the previous 12 months which were in payment default.
|
| | | | | | | | | | | | | | | | | | | | |
| | 2014 | | 2013 | | 2012 |
| (Dollars in thousands) | Number of Contracts | | Recorded Investment | | Number of Contracts | | Recorded Investment | | Number of Contracts | | Recorded Investment |
| | | | | | | | | | | | |
| Commercial real estate: | | | | | | | | | | | |
| Owner-occupied | 0 |
| | $ | 0 |
| | 0 |
| | $ | 0 |
| | 1 |
| | $ | 7 |
|
| Non-owner occupied | 1 |
| | 3,495 |
| | 0 |
| | 0 |
| | 4 |
| | 1,209 |
|
| Acquisition and development: | | | | | | | | | | | |
| Commercial and land development | 1 |
| | 544 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Commercial and industrial | 0 |
| | 0 |
| | 1 |
| | 199 |
| | 0 |
| | 0 |
|
| Residential mortgage: | | | | | | | | | | | |
| First lien | 2 |
| | 177 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| | 4 |
| | $ | 4,216 |
| | 1 |
| | $ | 199 |
| | 5 |
| | $ | 1,216 |
|
The following table presents the number of loans modified, and their pre-modification and post-modification investment balances for the twelve monthsyears ended December 31, 2014, 2013,2017, 2016, and 2012:2015:
|
| | | | | | | | | | |
| (Dollars in thousands) | Number of Contracts | | Pre- Modification Investment Balance | | Post- Modification Investment Balance |
| December 31, 2014 | | | | | |
| Residential mortgage: | | | | | |
| First lien | 19 |
| | $ | 1,876 |
| | $ | 1,810 |
|
| Installment and other loans | 1 |
| | 36 |
| | 14 |
|
| | 20 |
| | $ | 1,912 |
| | $ | 1,824 |
|
| December 31, 2013 | | | | | |
| Commercial real estate: | | | | | |
| Owner-occupied | 4 |
| | $ | 421 |
| | $ | 421 |
|
| Non-owner occupied | 2 |
| | 3,457 |
| | 3,457 |
|
| Acquisition and development: | | | | | |
| Commercial and land development | 2 |
| | 1,081 |
| | 1,081 |
|
| Commercial | 1 |
| | 217 |
| | 199 |
|
| | 9 |
| | $ | 5,176 |
| | $ | 5,158 |
|
| December 31, 2012 | | | | | |
| Residential mortgage: | | | | | |
| First lien | 1 |
| | $ | 300 |
| | $ | 300 |
|
| Home equity – lines of credit | 1 |
| | 36 |
| | 36 |
|
| | 2 |
| | $ | 336 |
| | $ | 336 |
|
|
| | | | | | | | | | |
| (Dollars in thousands) | Number of Contracts | | Pre- Modification Investment Balance | | Post- Modification Investment Balance |
| December 31, 2017 | | | | | |
| Commercial real estate: | | | | | |
| Owner occupied | 2 |
| | $ | 119 |
| | $ | 119 |
|
| | | | | | |
| December 31, 2016 | | | | | |
| Commercial real estate: | | | | | |
| Non-owner occupied | 1 |
| | $ | 6,095 |
| | $ | 6,095 |
|
| Residential mortgage: | | | | | |
| First lien | 2 |
| | 265 |
| | 265 |
|
| Home equity - lines of credit | 1 |
| | 34 |
| | 34 |
|
| | 4 |
| | $ | 6,394 |
| | $ | 6,394 |
|
| December 31, 2015 | | | | | |
| Residential mortgage: | | | | | |
| First lien | 1 |
| | $ | 59 |
| | $ | 59 |
|
The loans presented in the tablestable above were considered troubled debt restructurings asTDRs a result of the Company agreeing to below market interest rates forgiven the risk of the transaction,transaction; allowing the loan to remain on interest only status,status; or a reduction in interest rates, in order to give the borrowers an opportunity to improve their cash flows. For troubled debt restructuringsTDRs in default of their modified terms, impairment is generally determined on a collateral dependent approach, except for accruing residential mortgage trouble debt restructurings,TDRs, which are generally on the discounted cash flow approach. Certain loans modified during a period may no longer be outstanding at the end of the period if the loan was paid off.
No additional commitments have been made to borrowers whose loans are considered troubled debt restructurings.TDRs.
Management further monitors the performance and credit quality of the loan portfolio by analyzing the length of time a portfolio is past due, by aggregating loans based on its delinquencies. The following table presents the classes of loan portfolio summarized by aging categories of performing loans and nonaccrual loans as ofat December 31, 20142017 and 2013:2016:
| | | | | | Days Past Due | | | | | | | | | Days Past Due | | | | | | |
| Current | | 30-59 | | 60-89 | | 90+ (still accruing) | | Total Past Due | | Non- Accrual | | Total Loans | Current | | 30-59 | | 60-89 | | 90+ (still accruing) | | Total Past Due | | Non- Accrual | | Total Loans |
| December 31, 2014 | | | | | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | | | | | |
| Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Owner-occupied | $ | 97,571 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 3,288 |
| | $ | 100,859 |
| $ | 115,605 |
| | $ | 4 |
| | $ | 17 |
| | $ | 0 |
| | $ | 21 |
| | $ | 1,185 |
| | $ | 116,811 |
|
| Non-owner occupied | 142,621 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 1,680 |
| | 144,301 |
| 240,426 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 4,065 |
| | 244,491 |
|
| Multi-family | 27,211 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 320 |
| | 27,531 |
| 53,469 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 165 |
| | 53,634 |
|
| Non-owner occupied residential | 47,706 |
| | 109 |
| | 0 |
| | 0 |
| | 109 |
| | 1,500 |
| | 49,315 |
| 77,454 |
| | 145 |
| | 0 |
| | 0 |
| | 145 |
| | 381 |
| | 77,980 |
|
| Acquisition and development: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 1-4 family residential construction | 5,924 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 5,924 |
| 11,238 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 492 |
| | 11,730 |
|
| Commercial and land development | 24,114 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 123 |
| | 24,237 |
| 19,226 |
| | 25 |
| | 0 |
| | 0 |
| | 25 |
| | 0 |
| | 19,251 |
|
| Commercial and industrial | 46,558 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 2,437 |
| | 48,995 |
| 115,312 |
| | 1 |
| | 0 |
| | 0 |
| | 1 |
| | 350 |
| | 115,663 |
|
| Municipal | 61,191 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 61,191 |
| 42,065 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 42,065 |
|
| Residential mortgage: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| First lien | 120,806 |
| | 776 |
| | 400 |
| | 0 |
| | 1,176 |
| | 4,509 |
| | 126,491 |
| 155,387 |
| | 3,333 |
| | 1,055 |
| | 0 |
| | 4,388 |
| | 2,734 |
| | 162,509 |
|
| Home equity – term | 20,640 |
| | 135 |
| | 0 |
| | 0 |
| | 135 |
| | 70 |
| | 20,845 |
| 11,753 |
| | 9 |
| | 0 |
| | 0 |
| | 9 |
| | 22 |
| | 11,784 |
|
| Home equity – lines of credit | 88,745 |
| | 142 |
| | 0 |
| | 0 |
| | 142 |
| | 479 |
| | 89,366 |
| 131,208 |
| | 474 |
| | 72 |
| | 0 |
| | 546 |
| | 438 |
| | 132,192 |
|
| Installment and other loans | 5,815 |
| | 41 |
| | 9 |
| | 0 |
| | 50 |
| | 26 |
| | 5,891 |
| 21,749 |
| | 141 |
| | 1 |
| | 0 |
| | 142 |
| | 11 |
| | 21,902 |
|
| | $ | 688,902 |
| | $ | 1,203 |
| | $ | 409 |
| | $ | 0 |
| | $ | 1,612 |
| | $ | 14,432 |
| | $ | 704,946 |
| $ | 994,892 |
| | $ | 4,132 |
| | $ | 1,145 |
| | $ | 0 |
| | $ | 5,277 |
| | $ | 9,843 |
| | $ | 1,010,012 |
|
| December 31, 2013 | | | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | | | | |
| Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Owner-occupied | $ | 106,078 |
| | $ | 742 |
| | $ | 108 |
| | $ | 0 |
| | $ | 850 |
| | $ | 4,362 |
| | $ | 111,290 |
| $ | 111,225 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 1,070 |
| | $ | 112,295 |
|
| Non-owner occupied | 132,913 |
| | 191 |
| | 0 |
| | 0 |
| | 191 |
| | 2,849 |
| | 135,953 |
| 205,622 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 736 |
| | 206,358 |
|
| Multi-family | 22,560 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 322 |
| | 22,882 |
| 47,482 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 199 |
| | 47,681 |
|
| Non-owner occupied residential | 50,554 |
| | 225 |
| | 0 |
| | 0 |
| | 225 |
| | 4,493 |
| | 55,272 |
| 62,081 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 452 |
| | 62,533 |
|
| Acquisition and development: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 1-4 family residential construction | 3,338 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 3,338 |
| 4,548 |
| | 115 |
| | 0 |
| | 0 |
| | 115 |
| | 0 |
| | 4,663 |
|
| Commercial and land development | 17,289 |
| | 45 |
| | 0 |
| | 0 |
| | 45 |
| | 2,106 |
| | 19,440 |
| 26,084 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 1 |
| | 26,085 |
|
| Commercial and industrial | 31,111 |
| | 334 |
| | 0 |
| | 0 |
| | 334 |
| | 2,001 |
| | 33,446 |
| 87,871 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 594 |
| | 88,465 |
|
| Municipal | 60,996 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 60,996 |
| 53,741 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 53,741 |
|
| Residential mortgage: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| First lien | 119,845 |
| | 1,380 |
| | 577 |
| | 0 |
| | 1,957 |
| | 2,926 |
| | 124,728 |
| 135,499 |
| | 628 |
| | 328 |
| | 0 |
| | 956 |
| | 3,396 |
| | 139,851 |
|
| Home equity – term | 19,966 |
| | 56 |
| | 2 |
| | 0 |
| | 58 |
| | 107 |
| | 20,131 |
| 14,155 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 93 |
| | 14,248 |
|
| Home equity – lines of credit | 76,982 |
| | 214 |
| | 0 |
| | 0 |
| | 214 |
| | 181 |
| | 77,377 |
| 119,733 |
| | 125 |
| | 0 |
| | 0 |
| | 125 |
| | 495 |
| | 120,353 |
|
| Installment and other loans | 6,095 |
| | 77 |
| | 12 |
| | 0 |
| | 89 |
| | 0 |
| | 6,184 |
| 7,090 |
| | 20 |
| | 2 |
| | 0 |
| | 22 |
| | 6 |
| | 7,118 |
|
| | $ | 647,727 |
| | $ | 3,264 |
| | $ | 699 |
| | $ | 0 |
| | $ | 3,963 |
| | $ | 19,347 |
| | $ | 671,037 |
| $ | 875,131 |
| | $ | 888 |
| | $ | 330 |
| | $ | 0 |
| | $ | 1,218 |
| | $ | 7,042 |
| | $ | 883,391 |
|
The Company maintains the allowance for loan lossesits ALL at a level believedmanagement believes adequate by management for probable incurred credit losses inherent in the portfolio.losses. The allowanceALL is established and maintained through a provision for loan losses charged to earnings. Quarterly, management assesses the adequacy of the allowance for loan lossesALL utilizing a defined methodology which considers specific credit evaluation of impaired loans as discussed above, past loan loss historical experience, and qualitative factors. Management believes theits approach properly addresses the requirements of ASC Section 310-10-35relevant accounting guidance for loans individually identified as impaired and ASC Subtopic 450-20 for loans collectively evaluated for impairment, and other bank regulatory guidance.
In connection with its quarterly evaluation of the adequacy of the allowance for loan losses,ALL, management continually reviews its methodology to determine if it continues to properly addressaddresses the current risk in the loan portfolio. For each loan class, presented above, general allowances based on quantitative factors, principally historical loss trends, are provided for loans that are collectively evaluated for impairment, which is based on quantitative factors, principally historical loss trends for the respective loan class, adjusted for qualitative factors. In addition, an additionalimpairment. An adjustment to the historical loss factors is made to accountmay be incorporated for delinquency and other potential risk not elsewhere defined within the Allowance for Loan and Lease LossALL methodology.
The look back period for historical losses is 12 quarters, weighted one-half for the most recent four quarters, and one quarter for each of the two previous four quarter periods in order to appropriately capture the loss history in the loan segment. Management considers current economic and real estate conditions, and the trends in historical charge-off percentages that resulted from applying partial charge-offs to impaired loans, and the impact of distressed loan sales during the year in determining the look back period.
In addition to thethis quantitative analysis, adjustments to the reserveALL requirements are allocated on loans collectively evaluated for impairment based on additional qualitative factors. As of December 31, 2014, and 2013 the qualitative factors, used by management to adjust the historical loss percentage to the anticipated loss allocation, which may range from a minus 150 basis points to a positive 150 basis points per factor, include:including:
Nature and Volume of Loans – Loanincluding loan growth in the current and subsequent quarters based on the Bank’sCompany’s targeted growth and strategic plan, coupled with the types of loans booked based on risk management and credit culture, andculture; the number of exceptions to loan policy; and supervisory loan to value exceptions etc.exceptions.
Concentrations of Credit and Changes within Credit Concentrations – Factors considered includeincluding the Bank’scomposition of the Company’s overall portfolio makeup and management's evaluation related to concentration risk management and the inherent risk associated with the concentrations identified.
Underwriting Standards and Recovery Practices – Factors considered includeincluding changes to underwriting standards and perceived impact on anticipated losses,losses; trends in the number of exceptions to loan policy; supervisory loan to value exceptions; and administration of loan recovery practices.
Delinquency Trends – Factors considered include theincluding delinquency percentages noted in the portfolio relative to economic conditions,conditions; severity of the delinquencies,delinquencies; and whether the ratios are trending upwards or downwards.
Classified Loans Trends – Factors considered include theincluding internal loan ratings of the portfolio, theportfolio; severity of the ratings, andratings; whether the loan segment’s ratings show a more favorable or less favorable trend,trend; and underlying market conditions and its impact on the collateral values securing the loans.
Experience, Ability and Depth of Management/Lending staff – Factors considered includeincluding the years’ experience of senior and middle management and the lending staff andstaff; turnover of the staff,staff; and instances of repeat criticisms of ratings.
Quality of Loan Review – Factors includeincluding the years of experience of the loan review staff,staff; in-house versus outsourced provider of review,review; turnover of staff and the perceived quality of their work in relation to other external information.
National and Local Economic Conditions – Ratios and factors considered includeincluding trends in the consumer price index, (CPI), unemployment rates, the housing price index, housing statistics compared to the prior year, bankruptcy rates, regulatory and legal environment risks and competition.
ActivityThe following table presents activity in the allowance for loan lossesALL for the years ended December 31, 2014, 20132017, 2016 and 2012 is as follows:2015.
| | | | Commercial | | Consumer | | | | | Commercial | | Consumer | | | | |
| (Dollars in thousands) | Commercial Real Estate | | Acquisition and Development | | Commercial and Industrial | | Municipal | | Total | | Residential Mortgage | | Installment and Other | | Total | | Unallocated | | Total | Commercial Real Estate | | Acquisition and Development | | Commercial and Industrial | | Municipal | | Total | | Residential Mortgage | | Installment and Other | | Total | | Unallocated | | Total |
| December 31, 2014 | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | | | | | | | | | | | |
| Balance, beginning of year | $ | 13,215 |
| | $ | 670 |
| | $ | 864 |
| | $ | 244 |
| | $ | 14,993 |
| | $ | 3,780 |
| | $ | 124 |
| | $ | 3,904 |
| | $ | 2,068 |
| | $ | 20,965 |
| $ | 7,530 |
| | $ | 580 |
| | $ | 1,074 |
| | $ | 54 |
| | $ | 9,238 |
| | $ | 2,979 |
| | $ | 144 |
| | $ | 3,123 |
| | $ | 414 |
| | $ | 12,775 |
|
| Provision for loan losses | (1,674 | ) | | 92 |
| | (554 | ) | | (61 | ) | | (2,197 | ) | | (960 | ) | | 107 |
| | (853 | ) | | (850 | ) | | (3,900 | ) | 38 |
| | (167 | ) | | 333 |
| | 30 |
| | 234 |
| | 531 |
| | 174 |
| | 705 |
| | 61 |
| | 1,000 |
|
| Charge-offs | (2,637 | ) | | (70 | ) | | (270 | ) | | 0 |
| | (2,977 | ) | | (587 | ) | | (177 | ) | | (764 | ) | | 0 |
| | (3,741 | ) | (835 | ) | | 0 |
| | (85 | ) | | 0 |
| | (920 | ) | | (180 | ) | | (166 | ) | | (346 | ) | | 0 |
| | (1,266 | ) |
| Recoveries | 558 |
| | 5 |
| | 766 |
| | 0 |
| | 1,329 |
| | 29 |
| | 65 |
| | 94 |
| | 0 |
| | 1,423 |
| 30 |
| | 4 |
| | 124 |
| | 0 |
| | 158 |
| | 70 |
| | 59 |
| | 129 |
| | 0 |
| | 287 |
|
| Balance, end of year | $ | 9,462 |
| | $ | 697 |
| | $ | 806 |
| | $ | 183 |
| | $ | 11,148 |
| | $ | 2,262 |
| | $ | 119 |
| | $ | 2,381 |
| | $ | 1,218 |
| | $ | 14,747 |
| $ | 6,763 |
| | $ | 417 |
| | $ | 1,446 |
| | $ | 84 |
| | $ | 8,710 |
| | $ | 3,400 |
| | $ | 211 |
| | $ | 3,611 |
| | $ | 475 |
| | $ | 12,796 |
|
| December 31, 2013 | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | | | | | | | | | | |
| Balance, beginning of year | $ | 13,719 |
| | $ | 3,502 |
| | $ | 1,635 |
| | $ | 223 |
| | $ | 19,079 |
| | $ | 2,275 |
| | $ | 85 |
| | $ | 2,360 |
| | $ | 1,727 |
| | $ | 23,166 |
| $ | 7,883 |
| | $ | 850 |
| | $ | 1,012 |
| | $ | 58 |
| | $ | 9,803 |
| | $ | 2,870 |
| | $ | 121 |
| | $ | 2,991 |
| | $ | 774 |
| | $ | 13,568 |
|
| Provision for loan losses | 4,109 |
| | (6,087 | ) | | (3,478 | ) | | 21 |
| | (5,435 | ) | | 1,845 |
| | 99 |
| | 1,944 |
| | 341 |
| | (3,150 | ) | 107 |
| | (270 | ) | | 129 |
| | (4 | ) | | (38 | ) | | 532 |
| | 116 |
| | 648 |
| | (360 | ) | | 250 |
|
| Charge-offs | (4,767 | ) | | (193 | ) | | (132 | ) | | 0 |
| | (5,092 | ) | | (491 | ) | | (144 | ) | | (635 | ) | | 0 |
| | (5,727 | ) | (872 | ) | | 0 |
| | (79 | ) | | 0 |
| | (951 | ) | | (577 | ) | | (194 | ) | | (771 | ) | | 0 |
| | (1,722 | ) |
| Recoveries | 154 |
| | 3,448 |
| | 2,839 |
| | 0 |
| | 6,441 |
| | 151 |
| | 84 |
| | 235 |
| | 0 |
| | 6,676 |
| 412 |
| | 0 |
| | 12 |
| | 0 |
| | 424 |
| | 154 |
| | 101 |
| | 255 |
| | 0 |
| | 679 |
|
| Balance, end of year | $ | 13,215 |
| | $ | 670 |
| | $ | 864 |
| | $ | 244 |
| | $ | 14,993 |
| | $ | 3,780 |
| | $ | 124 |
| | $ | 3,904 |
| | $ | 2,068 |
| | $ | 20,965 |
| $ | 7,530 |
| | $ | 580 |
| | $ | 1,074 |
| | $ | 54 |
| | $ | 9,238 |
| | $ | 2,979 |
| | $ | 144 |
| | $ | 3,123 |
| | $ | 414 |
| | $ | 12,775 |
|
| December 31, 2012 | | | | | | | | | | | | | | | | | | | | |
| December 31, 2015 | | | | | | | | | | | | | | | | | | | | |
| Balance, beginning of year | $ | 29,559 |
| | $ | 9,708 |
| | $ | 1,085 |
| | $ | 789 |
| | $ | 41,141 |
| | $ | 933 |
| | $ | 75 |
| | $ | 1,008 |
| | $ | 1,566 |
| | $ | 43,715 |
| $ | 9,462 |
| | $ | 697 |
| | $ | 806 |
| | $ | 183 |
| | $ | 11,148 |
| | $ | 2,262 |
| | $ | 119 |
| | $ | 2,381 |
| | $ | 1,218 |
| | $ | 14,747 |
|
| Provision for loan losses | 34,681 |
| | 9,408 |
| | 1,879 |
| | (566 | ) | | 45,402 |
| | 2,602 |
| | 135 |
| | 2,737 |
| | 161 |
| | 48,300 |
| (1,020 | ) | | (440 | ) | | 249 |
| | (125 | ) | | (1,336 | ) | | 1,122 |
| | 55 |
| | 1,177 |
| | (444 | ) | | (603 | ) |
| Charge-offs | (53,492 | ) | | (17,721 | ) | | (1,624 | ) | | 0 |
| | (72,837 | ) | | (1,279 | ) | | (143 | ) | | (1,422 | ) | | 0 |
| | (74,259 | ) | (711 | ) | | (22 | ) | | (115 | ) | | 0 |
| | (848 | ) | | (592 | ) | | (62 | ) | | (654 | ) | | 0 |
| | (1,502 | ) |
| Recoveries | 2,971 |
| | 2,107 |
| | 295 |
| | 0 |
| | 5,373 |
| | 19 |
| | 18 |
| | 37 |
| | 0 |
| | 5,410 |
| 152 |
| | 615 |
| | 72 |
| | 0 |
| | 839 |
| | 78 |
| | 9 |
| | 87 |
| | 0 |
| | 926 |
|
| Balance, end of year | $ | 13,719 |
| | $ | 3,502 |
| | $ | 1,635 |
| | $ | 223 |
| | $ | 19,079 |
| | $ | 2,275 |
| | $ | 85 |
| | $ | 2,360 |
| | $ | 1,727 |
| | $ | 23,166 |
| $ | 7,883 |
| | $ | 850 |
| | $ | 1,012 |
| | $ | 58 |
| | $ | 9,803 |
| | $ | 2,870 |
| | $ | 121 |
| | $ | 2,991 |
| | $ | 774 |
| | $ | 13,568 |
|
The following table summarizes the ending loan balancebalances individually evaluated for impairment based upon loan segment, as well as the related allowance for loanALL loss allocation for each at December 31, 20142017 and 2013:2016:
| | | | Commercial | | Consumer | | | | | Commercial | | Consumer | | | | |
| (Dollars in thousands) | Commercial Real Estate | | Acquisition and Development | | Commercial and Industrial | | Municipal | | Total | | Residential Mortgage | | Installment and Other | | Total | | Unallocated | | Total | Commercial Real Estate | | Acquisition and Development | | Commercial and Industrial | | Municipal | | Total | | Residential Mortgage | | Installment and Other | | Total | | Unallocated | | Total |
| December 31, 2014 | | | | | | | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | | | | | | | |
| Loans allocated by: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Individually evaluated for impairment | $ | 6,788 |
| | $ | 410 |
| | $ | 2,437 |
| | $ | 0 |
| | $ | 9,635 |
| | $ | 5,871 |
| | $ | 26 |
| | $ | 5,897 |
| | $ | 0 |
| | $ | 15,532 |
| $ | 5,848 |
| | $ | 492 |
| | $ | 350 |
| | $ | 0 |
| | $ | 6,690 |
| | $ | 4,325 |
| | $ | 11 |
| | $ | 4,336 |
| | $ | 0 |
| | $ | 11,026 |
|
| Collectively evaluated for impairment | 315,218 |
| | 29,751 |
| | 46,558 |
| | 61,191 |
| | 452,718 |
| | 230,831 |
| | 5,865 |
| | 236,696 |
| | 0 |
| | 689,414 |
| 487,068 |
| | 30,489 |
| | 115,313 |
| | 42,065 |
| | 674,935 |
| | 302,160 |
| | 21,891 |
| | 324,051 |
| | 0 |
| | 998,986 |
|
| | $ | 322,006 |
| | $ | 30,161 |
| | $ | 48,995 |
| | $ | 61,191 |
| | $ | 462,353 |
| | $ | 236,702 |
| | $ | 5,891 |
| | $ | 242,593 |
| | $ | 0 |
| | $ | 704,946 |
| $ | 492,916 |
| | $ | 30,981 |
| | $ | 115,663 |
| | $ | 42,065 |
| | $ | 681,625 |
| | $ | 306,485 |
| | $ | 21,902 |
| | $ | 328,387 |
| | $ | 0 |
| | $ | 1,010,012 |
|
| Allowance for loan losses allocated by: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Individually evaluated for impairment | $ | 2 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 2 |
| | $ | 173 |
| | $ | 13 |
| | $ | 186 |
| | $ | 0 |
| | $ | 188 |
| $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 42 |
| | $ | 9 |
| | $ | 51 |
| | $ | 0 |
| | $ | 51 |
|
| Collectively evaluated for impairment | 9,460 |
| | 697 |
| | 806 |
| | 183 |
| | 11,146 |
| | 2,089 |
| | 106 |
| | 2,195 |
| | 1,218 |
| | 14,559 |
| 6,763 |
| | 417 |
| | 1,446 |
| | 84 |
| | 8,710 |
| | 3,358 |
| | 202 |
| | 3,560 |
| | 475 |
| | 12,745 |
|
| | $ | 9,462 |
| | $ | 697 |
| | $ | 806 |
| | $ | 183 |
| | $ | 11,148 |
| | $ | 2,262 |
| | $ | 119 |
| | $ | 2,381 |
| | $ | 1,218 |
| | $ | 14,747 |
| $ | 6,763 |
| | $ | 417 |
| | $ | 1,446 |
| | $ | 84 |
| | $ | 8,710 |
| | $ | 3,400 |
| | $ | 211 |
| | $ | 3,611 |
| | $ | 475 |
| | $ | 12,796 |
|
| December 31, 2013 | | | | | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | | | | | | |
| Loans allocated by: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Individually evaluated for impairment | $ | 16,494 |
| | $ | 3,177 |
| | $ | 2,001 |
| | $ | 0 |
| | $ | 21,672 |
| | $ | 3,663 |
| | $ | 0 |
| | $ | 3,663 |
| | $ | 0 |
| | $ | 25,335 |
| $ | 2,457 |
| | $ | 1 |
| | $ | 594 |
| | $ | 0 |
| | $ | 3,052 |
| | $ | 4,915 |
| | $ | 6 |
| | $ | 4,921 |
| | $ | 0 |
| | $ | 7,973 |
|
| Collectively evaluated for impairment | 308,903 |
| | 19,601 |
| | 31,445 |
| | 60,996 |
| | 420,945 |
| | 218,573 |
| | 6,184 |
| | 224,757 |
| | 0 |
| | 645,702 |
| 426,410 |
| | 30,747 |
| | 87,871 |
| | 53,741 |
| | 598,769 |
| | 269,537 |
| | 7,112 |
| | 276,649 |
| | 0 |
| | 875,418 |
|
| | $ | 325,397 |
| | $ | 22,778 |
| | $ | 33,446 |
| | $ | 60,996 |
| | $ | 442,617 |
| | $ | 222,236 |
| | $ | 6,184 |
| | $ | 228,420 |
| | $ | 0 |
| | $ | 671,037 |
| $ | 428,867 |
| | $ | 30,748 |
| | $ | 88,465 |
| | $ | 53,741 |
| | $ | 601,821 |
| | $ | 274,452 |
| | $ | 7,118 |
| | $ | 281,570 |
| | $ | 0 |
| | $ | 883,391 |
|
| Allowance for loan losses allocated by: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Individually evaluated for impairment | $ | 552 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 552 |
| | $ | 61 |
| | $ | 0 |
| | $ | 61 |
| | $ | 0 |
| | $ | 613 |
| $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 43 |
| | $ | 0 |
| | $ | 43 |
| | $ | 0 |
| | $ | 43 |
|
| Collectively evaluated for impairment | 12,663 |
| | 670 |
| | 864 |
| | 244 |
| | 14,441 |
| | 3,719 |
| | 124 |
| | 3,843 |
| | 2,068 |
| | 20,352 |
| 7,530 |
| | 580 |
| | 1,074 |
| | 54 |
| | 9,238 |
| | 2,936 |
| | 144 |
| | 3,080 |
| | 414 |
| | 12,732 |
|
| | $ | 13,215 |
| | $ | 670 |
| | $ | 864 |
| | $ | 244 |
| | $ | 14,993 |
| | $ | 3,780 |
| | $ | 124 |
| | $ | 3,904 |
| | $ | 2,068 |
| | $ | 20,965 |
| $ | 7,530 |
| | $ | 580 |
| | $ | 1,074 |
| | $ | 54 |
| | $ | 9,238 |
| | $ | 2,979 |
| | $ | 144 |
| | $ | 3,123 |
| | $ | 414 |
| | $ | 12,775 |
|
During the year ended December 31, 2014,2016, the Company sold six notesone note of classified loan relationships with an aggregate carrying balance of $5,407,000$5,946,000 to a third parties, which netted the Company $5,743,000 in cash proceeds.party. Cash proceeds totaled $5,100,000. The $846,000 difference between the carrying balances of the notesnote sold and the cash received or $336,000, was recorded as a net recoverycharge-off to the allowance for loan losses.ALL.
During the year ended December 31, 2013, the Company sold eight notes of classified loan relationships with an aggregate carrying balance of $2,576,000 to third parties, which netted the Company $2,439,000 in cash proceeds. The difference between the carrying balances of the notes sold and the cash received, or $137,000, was recorded as a net charge off to the allowance for loan losses.
During the year ended December 31, 2012, the Company sold nearly 240 notes of classified loan relationships with an aggregate carrying balance of $73,820,000 to third parties, which netted the Company $51,753,000 in cash proceeds. The difference between the carrying balances of the notes sold and the cash received, or $22,067,000, was recorded as a charge to the allowance for loan losses.
NOTE 5. LOANS TO RELATED PARTIES
The Company has granted loans to theCertain directors and executive officers and directors of the Company, including their immediate families and its subsidiarycompanies in which they have a direct or indirect material interest, were indebted to the Bank. The Company considers these loans to be within the normal course of business. The Company relies on the directors and toexecutive officers for the identification of their associates.
The aggregate dollar amount of thesefollowing table presents activity in loans was $1,849,000 at December 31, 2014, and $549,000 at December 31, 2013. During 2014, $1,815,000 of new loans were granted and repayments totaled $515,000.to related parties during 2017.
|
| | | |
| (Dollars in thousands) | |
| | |
| Balance, beginning of year | $ | 677 |
|
| New loans | 311 |
|
| Repayments | (315 | ) |
| Balance, end of year | $ | 673 |
|
NOTE 6. PREMISES AND EQUIPMENT
A summary of bankThe following table summarizes premises and equipment at December 31 is as follows:31.
| | | (Dollars in thousands) | 2014 | | 2013 | 2017 | | 2016 |
| | | | | | | |
| Land | $ | 5,182 |
| | $ | 5,182 |
| $ | 7,664 |
| | $ | 7,717 |
|
| Buildings and improvements | 23,333 |
| | 23,289 |
| 31,154 |
| | 30,626 |
|
| Leasehold improvements | 511 |
| | 507 |
| 2,482 |
| | 1,719 |
|
| Furniture and equipment | 22,799 |
| | 22,247 |
| 22,023 |
| | 21,032 |
|
| Construction in progress | 140 |
| | 259 |
| 89 |
| | 68 |
|
| | 51,965 |
| | 51,484 |
| 63,412 |
| | 61,162 |
|
| Less accumulated depreciation and amortization | 27,165 |
| | 25,043 |
| 28,603 |
| | 26,291 |
|
| | $ | 24,800 |
| | $ | 26,441 |
| $ | 34,809 |
| | $ | 34,871 |
|
Depreciation expense amounted to $2,459,000, $2,208,000,totaled $2,650,000, $2,311,000, and $2,004,000$2,310,000 for the years ended December 31, 2014, 20132017, 2016 and 2012.2015.
During 2016, $5,600,000 of premises and equipment, predominantly furniture and equipment, was identified as retired from active use. The Company recorded a loss of $147,000 in connection with this retirement.
The Company leases land and building space associated with certain branch offices, remote automated teller machines, and certain equipment under operating lease agreements which expire at various times through 2024. Total rent2027. Rent expense charged to operations in connection with these leases was $427,000, $307,000totaled $639,000, $601,000 and $259,000$435,000 for the years ended December 31, 2014, 20132017, 2016 and 2012.2015.
The totalfollowing table summarizes minimum rental commitments under operating leases with maturities in excess of one year at December 31, 2014 are as follows:2017.
| | | Due in the Years Ending December 31 | |
| Due in Years Ending December 31 | | Due in Years Ending December 31 |
| (Dollars in thousands) | | |
| 2015 | $ | 398 |
| |
| 2016 | 310 |
| |
| 2017 | 172 |
| |
| 2018 | 124 |
| $ | 574 |
|
| 2019 | 63 |
| 528 |
|
| 2020 | | 496 |
|
| 2021 | | 334 |
|
| 2022 | | 230 |
|
| Thereafter | 120 |
| 474 |
|
| | $ | 1,187 |
| $ | 2,636 |
|
NOTE 7. INTANGIBLE ASSETS
The following table shows the components of identifiable intangible assets at December 31:
|
| | | | | | | | | | | |
| (Dollars in thousands) | Gross Amount | | Accumulated Amortization | | Net Amount |
| December 31, 2014 | | | | | |
| Deposit premiums | $ | 2,348 |
| | $ | 2,126 |
| | $ | 222 |
|
| Customer list | 581 |
| | 389 |
| | 192 |
|
| | $ | 2,929 |
| | $ | 2,515 |
| | $ | 414 |
|
| December 31, 2013 | | | | | |
| Deposit premiums | $ | 2,348 |
| | $ | 1,957 |
| | $ | 391 |
|
| Customer list | 581 |
| | 350 |
| | 231 |
|
| | $ | 2,929 |
| | $ | 2,307 |
| | $ | 622 |
|
Amortization expense was $208,000, $210,000 and $209,000 for the years ended December 31, 2014, 2013 and 2012, respectively.
The estimated aggregate amortization expense for the next five years is as follows:
|
| | | |
| Years Ending December 31, |
| (Dollars in thousands) | |
| 2015 | $ | 205 |
|
| 2016 | 94 |
|
| 2017 | 39 |
|
| 2018 | 39 |
|
| 2019 | 25 |
|
| Thereafter | 12 |
|
| | $ | 414 |
|
NOTE 8. INCOME TAXES
The Company files income tax returns in the U.S. federal jurisdiction, and the Commonwealth of Pennsylvania. The Bank also files an income tax return inPennsylvania and the State of Maryland. The Company is no longer subject to U.S. federal, state or local income tax examination by tax authorities for years before 2011.2014.
The components of federalfollowing table summarizes income tax expense for the years ended December 31 are summarized as follows:31.
|
| | | | | | | | | | | |
| (Dollars in thousands) | 2014 | | 2013 | | 2012 |
| Current year provision (benefit): | | | | | |
| Federal | $ | 81 |
| | $ | 60 |
| | $ | (12,383 | ) |
| State | 10 |
| | (266 | ) | | (46 | ) |
| | 91 |
| | (206 | ) | | (12,429 | ) |
| Deferred tax expense (benefit) | | | | | |
| Federal | 2,723 |
| | 1,253 |
| | 143 |
|
| State | 18 |
| | 18 |
| | 6 |
|
| | 2,741 |
| | 1,271 |
| | 149 |
|
| Change in valuation allowance on deferred taxes | (18,964 | ) | | (1,271 | ) | | 20,235 |
|
| Net federal income tax expense (benefit) | $ | (16,132 | ) | | $ | (206 | ) | | $ | 7,955 |
|
|
| | | | | | | | | | | |
| (Dollars in thousands) | 2017 | | 2016 | | 2015 |
| Current expense | $ | 1,260 |
| | $ | 1,498 |
| | $ | 837 |
|
| Deferred expense (benefit) | 443 |
| | (232 | ) | | 797 |
|
| Expense due to enactment of federal tax reform legislation | 2,635 |
| | 0 |
| | 0 |
|
| Income tax expense | $ | 4,338 |
| | $ | 1,266 |
| | $ | 1,634 |
|
A reconciliation ofThe following table reconciles the effective applicable income tax rate to the statutory federal statutory rate for the years ended December 31, is as follows:31.
|
| | | | | | | | |
| | 2014 | | 2013 | | 2012 |
| Statutory federal tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
| Increase/(decrease) resulting from: | | | | | |
| State taxes, net of federal benefit | 0.1 | % | | (1.8 | )% | | 0.1 | % |
| Tax exempt interest income | (7.3 | )% | | (11.9 | )% | | 4.8 | % |
| Valuation allowance on deferred tax assets | (145.8 | )% | | (13.0 | )% | | (66.4 | )% |
| Earnings from life insurance | (2.6 | )% | | (3.4 | )% | | 1.2 | % |
| Disallowed interest | 0.2 | % | | 0.3 | % | | (0.1 | )% |
| Low-income housing credits | (3.7 | )% | | (2.2 | )% | | 0.0 | % |
| Benefit of operating loss carryforward | 0.0 | % | | (3.8 | )% | | 0.0 | % |
| Other | 0.1 | % | | (1.3 | )% | | (0.7 | )% |
| Effective income tax rate | (124.0 | )% | | (2.1 | )% | | (26.1 | )% |
|
| | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | | | | | |
| Statutory federal tax rate | 34.0 | % | | 34.0 | % | | 35.0 | % |
| Increase (decrease) resulting from: | | | | | |
| Tax exempt interest income | (13.0 | )% | | (16.0 | )% | | (11.3 | )% |
| Earnings from life insurance | (2.4 | )% | | (4.7 | )% | | (3.8 | )% |
| Disallowed interest expense | 1.0 | % | | 1.0 | % | | 0.4 | % |
| Low-income housing credits and related expense | (4.6 | )% | | (7.2 | )% | | (5.0 | )% |
| Regulatory settlement | 0.0 | % | | 4.3 | % | | 0.0 | % |
| Change in statutory federal tax rate | 0.0 | % | | 2.3 | % | | 0.0 | % |
| Expense due to enactment of federal tax reform legislation | 21.2 | % | | 0.0 | % | | 0.0 | % |
| Other | (1.3 | )% | | 2.3 | % | | 1.9 | % |
| Effective income tax rate | 34.9 | % | | 16.0 | % | | 17.2 | % |
The provision for income taxes includes $677,000, $116,000 and $1,688,000 of applicable incomeIncome tax expense includes $405,000, $483,000 and $673,000 related to net security gains for the years ended December 31, 2014, 2013,2017, 2016, and 2012.2015.
On December 22, 2017, federal tax reform legislation, commonly referred to as the Tax Cuts and Jobs Act of 2017 (the "Tax Act"), was enacted. Among other things, the Tax Act reduced the Company's statutory federal tax rate from 34% to 21% effective January 1, 2018. As a result, we were required to remeasure, through income tax expense, certain deferred tax assets and liabilities using the enacted rate at which we expect them to be recovered or settled. The componentsremeasurement of theour net deferred tax asset resulted in additional federal deferred tax expense of $2,635,000, which is included in othertotal tax expense for 2017. Also on December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provided guidance on accounting for the tax effects of the Tax Act. SAB 118 provided for a measurement period that should not extend beyond one year from the Tax Act's enactment date for companies to complete the accounting under ASC 740, Income Taxes. In remeasuring our net deferred tax asset, we estimated the income in 2017 for our limited partnership investments in affordable housing real estate partnerships and interest income on nonperforming loans. Any adjustment between our estimates and the actual amounts determined during the measurement period are not expected to have a material impact to the consolidated financial statements.
The Company's deferred tax assets related to low-income housing credit and alternative minimum tax credit carryforwards were not impacted by the change in statutory tax rate, as they are treated as payments on future federal income taxes due and are not subject to remeasurement. However, the Tax Act did change alternative minimum tax credit carryforwards to be refundable credits. To reflect this change, the Company reclassed its alternative minimum tax credit carryforwards, totaling $5,343,000 at December 31, are2017, from deferred tax assets to other assets in the consolidated balance sheets.
There were no penalties or interest related to income taxes recorded in the income statement for the years ended December 31, 2017, 2016 and 2015 and no amounts accrued for penalties as follows:of December 31, 2017 and 2016.
The following table summarizes deferred tax assets and liabilities at December 31.
| | | (Dollars in thousands) | 2014 | | 2013 | 2017 | | 2016 |
| Deferred tax assets: | | | | | | |
| Allowance for loan losses | $ | 5,424 |
| | $ | 7,776 |
| $ | 2,919 |
| | $ | 4,725 |
|
| Deferred compensation | 528 |
| | 510 |
| 355 |
| | 545 |
|
| Retirement plans and salary continuation | 1,695 |
| | 1,585 |
| 1,301 |
| | 1,942 |
|
| Share-based compensation | 102 |
| | 191 |
| 597 |
| | 583 |
|
| Off balance sheet commitment reserves | 205 |
| | 204 |
| |
| Off-balance sheet reserves | | 207 |
| | 313 |
|
| Nonaccrual loan interest | 210 |
| | 341 |
| 258 |
| | 370 |
|
| Net unrealized losses on securities available for sale | 0 |
| | 2,592 |
| 0 |
| | 600 |
|
| Goodwill | 154 |
| | 184 |
| 39 |
| | 92 |
|
| Bonus accrual | 396 |
| | 0 |
| 25 |
| | 236 |
|
| Low income housing credit carryforward | 1,322 |
| | 1,022 |
| |
| Low-income housing credit carryforward | | 2,313 |
| | 1,983 |
|
| Alternative minimum tax credit carryforward | 1,291 |
| | 664 |
| 0 |
| | 4,048 |
|
| Charitable contribution carryforward | 209 |
| | 333 |
| |
| Net operating loss carryforward | 6,606 |
| | 8,169 |
| 0 |
| | 2,520 |
|
| Other | 237 |
| | 178 |
| 390 |
| | 479 |
|
| Total deferred tax assets | 18,379 |
| | 23,749 |
| 8,404 |
| | 18,436 |
|
| Valuation allowance | 0 |
| | (18,964 | ) | |
| | 18,379 |
| | 4,785 |
| |
| Deferred tax liabilities: | | | | | | |
| Depreciation | 955 |
| | 1,116 |
| 488 |
| | 771 |
|
| Net unrealized gains on securities available for sale | 848 |
| | 0 |
| 757 |
| | 0 |
|
| Mortgage servicing rights | 606 |
| | 582 |
| 536 |
| | 777 |
|
| Purchase accounting adjustments | 421 |
| | 495 |
| 251 |
| | 435 |
|
| Other | 174 |
| | 0 |
| 122 |
| | 195 |
|
| Total deferred tax liabilities | 3,004 |
| | 2,193 |
| 2,154 |
| | 2,178 |
|
| Net deferred tax asset | $ | 15,375 |
| | $ | 2,592 |
| |
| Net deferred tax asset, included in Other Assets | | $ | 6,250 |
| | $ | 16,258 |
|
As ofAt December 31, 2014,2017, the Company has charitable contribution, low-income housing and net operating losscredit carryforwards that expire through 2019, 2034, and 2032, respectively.
In assessing whether or not some or all of our deferred2037. Deferred tax assetassets are recognized for these carryforwards because the benefit is more likely than not to be realized in the future, management considers all positive and negative evidence, including projected future taxable income, tax planning strategies and recent financial operating results. Based upon our evaluation of both positive and negative evidence, a full valuation on the net deferred tax assets was established as of September 30, 2012. Specifically, it was felt that the negative evidence, which included recent cumulative history of operating losses, deterioration in asset quality and resulting impact on profitability, and that we had exhausted our carryback availability, outweighed the positive evidence, and the reserve was established.realized.
Each subsequent quarter-end, the Company continued to weigh both positive and negative evidence and re-analyzed its position that a valuation allowance was required. At December 31, 2014, management noted the Company’s profitable operations over the past nine quarters, improvements in asset quality, strengthened capital position, reduced regulatory risk, as well as improvement in economic conditions. Based on this analysis, management determined that a full valuation allowance was no longer necessary, and the full amount was recaptured as of December 31, 2014. The ultimate realization of deferred tax assets is dependent upon existence, or generation, of taxable income in the periods when those temporary differences and net operating loss and credit carryforwards are deductible. Management considered projected future taxable income, length of time needed for carryforwards to reverse, available tax planning strategies, and other factors in making its assessment that it was more likely than not the net deferred tax assets would be realized, and recaptured the full valuation allowance at December 31, 2014.
NOTE 9.8. RETIREMENT PLANS
The Company maintains a 401(k) profit-sharing plan for those employees who meet the plan's eligibility requirements set forth inrequirements. Substantially all of the plan.Company’s employees are covered by the plan, which contains limited match or safe harbor provisions. Employer contributions to the plan are based on the performance of the Company and are at the discretion of the Bank’s Board of Directors. The plan contains limited match or safe harbor provisions. Substantially all of the Company’s employees are covered by the planEmployer contribution expense totaled $432,000, $334,000 and the contributions charged to operations were $357,000, $311,000 and $315,000$361,000 for the years ended December 31, 2014, 2013,2017, 2016, and 2012.2015.
The Company has a deferred compensation arrangementagreements with certain present and former directors, whereby a director or his beneficiaries will receive a monthly retirement benefit beginning at age 65. The arrangement is funded by an amount of life insurance on the participating director, which is calculated to meet the Company’s obligations under the compensation agreement. The cash value of the life insurance policies is an unrestricted asset of the Company. The estimated present value of future benefits to be paid which is included in other liabilities, amounted to $125,000totaled $94,000 and $133,000$105,000 at December 31, 20142017 and 2013. Total annual expense2016. Expense for this deferred compensation plan was $13,000, $1,000totaled $11,000, $12,000 and $12,000 for the years ended December 31, 2014, 20132017, 2016, and 2012.2015.
The Company also has supplemental discretionary deferred compensation plans for directors and executive officers. The plans are funded annually with director fees and salary reductions which are either placed in a trust account invested by the Company’s Orrstown Financial AdvisorsBank’s OFA division or recognized as a liability. The trust account balance was $1,385,000totaled $1,571,000 and $1,325,000$1,483,000 at December 31, 20142017 and 2013, respectively,2016 and is included in other assets on the balance sheets, offset by other liabilities in the same amount. Total amounts contributed toExpense for these plans were $25,000,totaled $10,000, $15,000 and $30,000, for the years ended December 31, 2014, 2013,2017, 2016, and 2012.2015.
In addition, the Company has threetwo supplemental retirement and salary continuation plans for directors and executive officers. These plans are funded with single premium life insurance on the plan participants. The cash value of the life insurance
policies is an unrestricted asset of the Company. The estimated present value of future benefits to be paid totaled $4,844,000$6,109,000 and $4,527,000$5,662,000 at December 31, 20142017 and 2013, which is included in other liabilities. Total annual expense2016. Expense for these plans amounted to $575,000, $549,000totaled $739,000, $727,000 and $566,000,$626,000, for the years ended December 31, 2014, 2013,2017, 2016, and 2012.2015.
The Company has promised a continuation of life insurance coverage to certain persons post-retirement. GAAP requires the recording of post-retirement costs and a liability equal to the present value of the cost of post retirement insurance during the insured employee’s term of service. The estimated present value of future benefits to be paid totaled $670,000$937,000 and $566,000$860,000 at December 31, 20142017 and 2013 which is included in other liabilities. Total annual expense2016. Expense for this plan amounted to $104,000, $42,000totaled $77,000, $61,000 and $43,000$129,000 for the years ended December 31, 2014, 20132017, 2016, and 2012.2015.
Life insurance policy cash values and trust account balances, and estimated present values of future benefits and deferred compensation liabilities, noted above are included in other assets and other liabilities, respectively, on the consolidated balance sheets.
NOTE 10. SHARE BASED9. SHARE-BASED COMPENSATION PLANS
The Company maintains share-based compensation plans theunder its shareholder-approved 2011 Plan. The purpose of whichthe share-based compensation plans is to provide officers, employees, and non-employee members of the boardBoard of directorsDirectors of the Company and the Bank, with additional incentive to further the success of the Company. In May 2011, the shareholders of the Company approved the 2011 Orrstown Financial Services, Inc. Incentive Stock Plan (the “Plan”). Under the Plan, 381,920 shares of the common stock of the Company were reserved to be issued. As ofAt December 31, 2014, 223,7882017, 82,277 shares were available to be issued under the Plan.issued.
IncentiveThe 2011 Plan incentive awards under the Plan may consist of grants of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, deferred stock units and performance shares. All employees of the Company and its present or future subsidiaries, and members of the boardBoard of directorsDirectors of the Company or any subsidiary of the Company, are eligible to participate in the 2011 Plan. The 2011 Plan allows for the Compensation Committee of the Board of Directors to determine the type of incentive to be awarded, its term, manner of exercise, vesting of awards and restrictions on shares. Generally, awards are nonqualified under the IRS code,IRC, unless the awards are deemed to be incentive awards to employees at the Compensation Committee’s discretion.
A roll forwardThe following table presents a summary of the Company’s nonvested restricted shares activity for 2017.
|
| | | | | | |
| | Shares | | Weighted Average Grant Date Fair Value |
| | | | |
| Nonvested shares, beginning of year | 227,337 |
| | $ | 16.88 |
|
| Granted | 67,753 |
| | 22.52 |
|
| Forfeited | (13,079 | ) | | 18.36 |
|
| Vested | (13,600 | ) | | 17.95 |
|
| Nonvested shares, end of year | 268,411 |
| | $ | 18.18 |
|
The following table presents restricted shares compensation expense, with tax benefit information, and fair value of shares vested for the yearyears ended December 31, 2014 is presented below:2017, 2016, and 2015.
|
| | | | | | |
| | Shares | | Weighted Average Exercise Price |
| | | | |
| Nonvested shares, beginning of year | 5,000 |
| | $ | 10.43 |
|
| Granted | 150,500 |
| | 15.69 |
|
| Nonvested shares, at end of year | 155,500 |
| | $ | 15.52 |
|
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| (Dollars in thousands) | 2017 | | 2016 | | 2015 |
| | | | | | |
| Restricted share award expense | $ | 1,369 |
| | $ | 941 |
| | $ | 732 |
|
| Restricted share award tax benefit | 465 |
| | 320 |
| | 256 |
|
| Fair value of shares vested | 303 |
| | 237 |
| | 43 |
|
ForAt December 31, 2014,2017 and 2013, $178,000 and $17,000 was recognized as expense on the restricted stock awards, with tax benefits recorded of $62,000 and $6,000 for the respective year. As of December 31, 2014 and 2013, the2016, unrecognized compensation expense related to the stockshare awards were $1,982,000,totaled $2,035,000, and $35,000.$2,169,000. The unrecognized compensation expense at December 31, 2017 is expected to be recognized over a weighted-average period of 4.51.8 years.
A roll forward
The following table presents a summary of the Company’s outstanding stock options activity for the year ended December 31, 2014 is presented below:2017.
| | | | Shares | | Weighted Average Exercise Price | Shares | | Weighted Average Exercise Price |
| | | | | | | |
| Outstanding at beginning of year | 206,063 |
| | $ | 32.20 |
| |
| Outstanding, beginning of year | | 80,370 |
| | $ | 27.37 |
|
| Forfeited | (22,706 | ) | | 31.38 |
| (1,300 | ) | | 21.14 |
|
| Expired | (35,164 | ) | | 37.00 |
| (19,487 | ) | | 32.33 |
|
| Options outstanding and exercisable, at year end | 148,193 |
| | $ | 31.18 |
| |
| Options outstanding and exercisable, end of year | | 59,583 |
| | $ | 25.89 |
|
The exercise price of each option equals the market price of the Company’s stock on the date of grant and andate. An option’s maximum term is ten years. All options are fully vested upon issuance. InformationThe following table presents information pertaining to options outstanding and exercisable at December 31, 2014 is as follows:2017.
| | Range of Exercise Prices | | Number Outstanding | | Weighted Average Remaining Contractual Life (Years) | | Weighted Average Exercise Price | | Number Outstanding and Exercisable | | Weighted Average Remaining Contractual Life (Years) | | Weighted Average Exercise Price |
| | | | | | | | | |
| $21.14 - $24.99 | | 41,853 |
| | 5.34 | | $ | 21.42 |
| | 33,699 |
| | 2.36 | | $ | 21.49 |
|
| $25.00 - $29.99 | | 2,792 |
| | 5.25 | | 25.76 |
| | 2,792 |
| | 2.25 | | 25.76 |
|
| $30.00 - $34.99 | | 44,950 |
| | 2.76 | | 31.26 |
| | 15,744 |
| | 0.47 | | 30.10 |
|
| $35.00 - $39.99 | | 29,147 |
| | 2.30 | | 36.54 |
| |
| $40.00 - $40.14 | | 29,451 |
| | 0.47 | | 40.14 |
| |
| $21.14 - $40.14 | | 148,193 |
| | 2.99 | | $ | 31.18 |
| |
| $35.00 - $37.59 | | | 7,348 |
| | 1.52 | | 37.08 |
|
| $21.14 - $37.59 | | | 59,583 |
| | 1.75 | | $ | 25.89 |
|
The options outstandingOutstanding and exercisable options had noan intrinsic value of $127,000 at December 31, 20142017 and 2013 as each exercise price exceeded the market value.$39,000 at December 31, 2016.
The Company also maintains an employee stock purchase plan in order to provide employees of the Company and its subsidiaries an opportunity to purchase stock of the Company. Under the plan, eligibleCompany common stock. Eligible employees may purchase shares in an amount that does not exceed 10% of their annual salary at the lower of 95% (85% prior to August 31, 2014) of the fair market value of the shares on the semi-annual offering date, or related purchase date. The Company reserved 350,000 shares of its common stock after making adjustments for stock dividends and a stock split, to be issued under the employee stock purchase plan. As ofAt December 31, 2014, 198,6432017, 179,372 shares were available to be issued under the plan. Employees purchased 6,707, 21,609 and 23,062 shares at a weighted average price of $14.88, $11.52 and $7.63 per share in 2014, 2013 and 2012. Compensation expense recognized onissued.
The following table presents information for the employee stock purchase plan totaled $12,000, $112,000, and $0 for the years ended December 31, 2014, 20132017, 2016 and 2012, with tax benefits recorded of $4,000, $39,000, and $0 recorded for the respective years.2015.
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| (Dollars in thousands except share information) | 2017 | | 2016 | | 2015 |
| | | | | | |
| Shares purchased | 6,632 |
| | 6,334 |
| | 6,305 |
|
| Weighted average price of shares purchased | $ | 20.57 |
| | $ | 16.64 |
| | $ | 15.83 |
|
| Compensation expense recognized | 17 |
| | 17 |
| | 8 |
|
| Tax benefits | 6 |
| | 6 |
| | 3 |
|
The Company uses a combination of issuingissues new shares or treasury shares, to meet stock compensation exercises depending on market conditions.conditions, in its share-based compensation plans.
NOTE 11.10. DEPOSITS
The composition offollowing table summarizes deposits by type at December 31 is as follows:
31.
|
| | | | | | | |
| | 2014 | | 2013 |
| (Dollars in thousands) | | | |
| Non-interest bearing | $ | 116,302 |
| | $ | 116,371 |
|
| Now and money market | 503,818 |
| | 486,440 |
|
| Savings | 86,351 |
| | 79,663 |
|
| Time – less than $100,000 | 128,065 |
| | 183,344 |
|
| Time – greater than $100,000 | 115,168 |
| | 134,572 |
|
| Total | $ | 949,704 |
| | $ | 1,000,390 |
|
|
| | | | | | | |
| | 2017 | | 2016 |
| (Dollars in thousands) | | | |
| Noninterest-bearing | $ | 162,343 |
| | $ | 150,747 |
|
| NOW and money market | 687,936 |
| | 613,232 |
|
| Savings | 95,148 |
| | 91,706 |
|
| Time (less than $250,000) | 252,200 |
| | 277,899 |
|
| Time ($250,000 or more) | 21,888 |
| | 18,868 |
|
| Total | $ | 1,219,515 |
| | $ | 1,152,452 |
|
The following table summarizes scheduled maturities of time deposits for the years ending December 31 are as follows:
31.
| | | (Dollars in thousands) | | |
| 2015 | $ | 174,597 |
| |
| 2016 | 35,610 |
| |
| 2017 | 19,531 |
| |
| 2018 | 3,644 |
| $ | 107,765 |
|
| 2019 | 5,897 |
| 88,028 |
|
| 2020 | | 71,149 |
|
| 2021 | | 4,547 |
|
| 2022 | | 1,722 |
|
| Thereafter | 3,954 |
| 877 |
|
| | $ | 243,233 |
| $ | 274,088 |
|
Brokered time deposits totaled $17,108,000$96,368,000 and $53,196,000$85,994,000 at December 31, 20142017 and 2013.2016. Management continues to evaluateevaluates brokered deposits as a funding option, and considerstaking into consideration regulatory views on such deposits as non-core funding sources. Time deposits that meet or exceed the FDIC limit of $250,000 at December 31, 2014 were $36,463,000.2017 totaled $21,888,000.
The Company accepts deposits of the officers and directors of the Company and the Bank on the same terms, including interest rates, as those prevailing at the time for comparable transactions with unrelated persons. The aggregate dollar amount of depositsDeposits of officers and directors and their related interests totaled $5,036,000$3,723,000 and $550,000$2,826,000 at December 31, 20142017 and 2013, respectively.2016.
NOTE 12.11. SHORT-TERM BORROWINGS
The Company has several short-term borrowings available to it,borrowing capability, including short-term borrowings from the FHLB, federal funds purchased and the FRB discount window.
Information concerningThe following table summarizes the use of these short-term borrowings as ofat and for the years ended December 31, is summarized as follows:31.
| | | (Dollars in thousands) | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| | | | | | | | | | | |
| Balance at year end | $ | 65,000 |
| | $ | 50,000 |
| | $ | 0 |
| |
| Balance at year-end | | $ | 50,000 |
| | $ | 52,000 |
| | $ | 60,000 |
|
| Weighted average interest rate at year-end | 0.36 | % | | 0.28 | % | | 0.00 | % | 1.21 | % | | 0.76 | % | | 0.53 | % |
| Average balance during the year | $ | 32,736 |
| | $ | 10,540 |
| | $ | 11,509 |
| $ | 54,610 |
| | $ | 17,841 |
| | $ | 55,106 |
|
| Average interest rate during the year | 0.34 | % | | 0.31 | % | | 0.40 | % | 1.08 | % | | 0.61 | % | | 0.43 | % |
| Maximum month-end balance during the year | $ | 65,000 |
| | $ | 50,000 |
| | $ | 20,000 |
| $ | 72,000 |
| | $ | 52,000 |
| | $ | 83,500 |
|
In addition, the Company has repurchase agreements with certain of its deposit customers. The Company is required to hold U.S. Treasury, or U.S. Agency or U.S. Government Sponsored EnterpriseGSE securities to be held as underlying securities for Repurchase Agreements. Information concerningThe following table summarizes the use of securities sold under agreements to repurchase at and for the years ended December 31 is summarized as follows:31.
| | | (Dollars in thousands) | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| | | | | | | | | | | |
| Balance at year end | $ | 21,742 |
| | $ | 9,032 |
| | $ | 9,650 |
| |
| Balance at year-end | | $ | 43,576 |
| | $ | 35,864 |
| | $ | 29,156 |
|
| Weighted average interest rate at year-end | 0.20 | % | | 0.20 | % | | 0.24 | % | 0.56 | % | | 0.20 | % | | 0.20 | % |
| Average balance during the year | $ | 19,186 |
| | $ | 13,772 |
| | $ | 19,072 |
| $ | 43,205 |
| | $ | 38,546 |
| | $ | 30,156 |
|
| Average interest rate during the year | 0.20 | % | | 0.20 | % | | 0.38 | % | 0.45 | % | | 0.20 | % | | 0.20 | % |
| Maximum month-end balance during the year | $ | 32,861 |
| | $ | 19,105 |
| | $ | 33,752 |
| $ | 55,270 |
| | $ | 52,693 |
| | $ | 37,558 |
|
| Fair value of securities underlying the agreements at year-end | 38,337 |
| | 52,024 |
| | 72,717 |
| 53,485 |
| | 56,201 |
| | 35,470 |
|
Federal funds purchased and securities sold under agreements to repurchase generally mature within one day from the transaction date.
NOTE 13.12. LONG-TERM DEBT
At December 31, the Company’s long-term debt consisted of the following:
| | | | Amount | | Weighted Average rate | Amount | | Weighted Average rate |
| (Dollars in thousands) | 2014 | | 2013 | | 2014 | | 2013 | 2017 | | 2016 | | 2017 | | 2016 |
| FHLB fixed rate advances maturing: | | | | | | | | | | | | | | |
| 2014 | $ | 0 |
| | $ | 10,000 |
| | 0.00 | % | | 0.87 | % | |
| 2015 | 10,000 |
| | 0 |
| | 0.35 | % | | 0.00 | % | |
| 2017 | | $ | 0 |
| | $ | 20,000 |
| | 0.00 | % | | 1.00 | % |
| 2019 | | 40,000 |
| | 0 |
| | 1.86 | % | | 0.00 | % |
| 2020 | 350 |
| | 350 |
| | 7.40 | % | | 7.40 | % | 40,350 |
| | 350 |
| | 1.76 | % | | 7.40 | % |
| | 10,350 |
| | 10,350 |
| | 0.59 | % | | 1.09 | % | 80,350 |
| | 20,350 |
| | 1.81 | % | | 1.11 | % |
| FHLB amortizing advance requiring monthly principal and interest payments, maturing: | | | | | | | | | | | | | | |
| 2014 | 0 |
| | 963 |
| | 0.00 | % | | 4.86 | % | |
| 2025 | 4,462 |
| | 4,764 |
| | 4.74 | % | | 4.74 | % | 3,465 |
| | 3,813 |
| | 4.74 | % | | 4.74 | % |
| | 4,462 |
| | 5,727 |
| | 4.74 | % | | 4.76 | % | |
| Total FHLB Advances | $ | 14,812 |
| | $ | 16,077 |
| | 1.84 | % | | 2.40 | % | $ | 83,815 |
| | $ | 24,163 |
| | 1.93 | % | | 1.68 | % |
Except for amortizing loans,advances, interest only is paid on a quarterly basis.
The following table summarizes the aggregate amount of future principal payments required on these borrowings at December 31, 2014 is as follows:2017:
| | Years Ending December 31, | | (Dollars in thousands) | | |
| 2015 | $ | 10,317 |
| |
| 2016 | 332 |
| |
| 2017 | 348 |
| |
| 2018 | 365 |
| $ | 365 |
|
| 2019 | 383 |
| 40,382 |
|
| 2020 | | 40,751 |
|
| 2021 | | 421 |
|
| 2022 | | 441 |
|
| Thereafter | 3,067 |
| 1,455 |
|
| | $ | 14,812 |
| $ | 83,815 |
|
The Bank is a member of the FHLB of Pittsburgh and as such, can take advantage ofhas available the FHLB program of overnight and term advances. Under terms of a blanket collateral agreement for advances, lines and letters of credit from the FHLB, are
collateralized by first mortgage loans and securities. Collateralcollateral for all outstanding advances, lines and letters of credit consisted of certain securities, 1-4 family mortgage loans and other real estate secured loans totaling $526,683,000$517,257,000 at December 31, 2014.2017. The Bank had additional availability of $278,002,000$381,892,000 at the FHLB on
December 31, 20142017 based on its qualifying collateral.collateral, net of short-term borrowings and long-term debt detailed above, and non-deposit letters of credit totaling $1,550,000 at December 31, 2017.
The Bank has available unsecured lines of credit, with interest based on the daily Federal Funds rate, with two correspondent banks totaling $30,000,000, at December 31, 2014.2017. The linesCompany also has a $5,000,000 unsecured line of credit, are unsecured andwith a bank, at the prime rate is based on the daily Federal Funds rate.of interest, at December 31, 2017. There were no borrowings under these lines of credit at December 31, 20142017 and 2013.2016.
The Company has $150,000 in letters of credit outstanding with the FHLB in favor of third parties utilized for general banking purposes.
NOTE 14.13. SHAREHOLDERS’ EQUITY AND REGULATORY CAPITAL
The Company maintains a stockholder dividend reinvestment and stock purchase plan. Under the plan, shareholders may purchase additional shares of the Company’s common stock at the prevailing market prices with reinvestment dividends and voluntary cash payments. The Company reserved 1,045,000 shares of its common stock to be issued under the dividend reinvestment and stock purchase plan. As ofAt December 31, 2014,2017, approximately 663,000665,000 shares were available to be issued under the plan.
On January 8, 2013,19, 2016, the Company filed a shelf registration statement on Form S-3 with the SEC that provides for up to an aggregate of $80,000,000,$100,000,000, through the sale of common stock, preferred stock, warrants, debt securities, and warrants.units. To date, the Company has not issued any securities under this shelf registration.registration statement.
The Company (on a consolidated basis)Banks and the Bankbank holding companies are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial statements. Under capitalCapital adequacy guidelines and, the regulatory frameworkadditionally for banks, prompt corrective action the Company and the Bank must meet specific guidelines thatregulations, involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capitalCapital amounts and classificationclassifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Under the regulators about components, risk weightings,Basel Committee on Banking Supervision's capital guidelines for U.S. Banks ("Basel III rules"), the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The required capital conservation buffer for the Company was 0.625% for 2016 and other factors. Although applicable to the Bank, prompt corrective action provisions are1.25% for 2017, and will be 1.875% for 2018 and 2.50% for 2019 under phase-in rules. The net unrealized gain or loss on available for sale securities is not applicable to bank holding companies, including financial holding companies.
Quantitative measures established by regulators to ensure capital adequacy requireincluded in computing regulatory capital. Management believes the Company and the Bank to maintain minimum amounts and ratios (as set forth in the following table) of total and Tier 1 capital (as defined in regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2014 and 2013, the Company and the Bank meetmet all applicable capital adequacy requirements to which they are subject.
As ofat December 31, 20142017 .
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At December 31, 2017 and 2016, the most recent notification from the Federal Deposit Insurance Corporationregulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since thethat notification that management believes have changed the Bank’sBank's category.
The Companyfollowing table presents capital amounts and the Bank’s actual capital ratios as ofat December 31, 20142017 and December 31, 2013 are also presented in the table.2016.
|
| | | | | | | | | | | | | | | | | | | | |
| | Actual | | Minimum Capital Requirement | | Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions |
| (Dollars in thousands) | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| December 31, 2014 | | | | | | | | | | | |
| Total capital to risk weighted assets | | | | | | | | | | | |
| Orrstown Financial Services, Inc. | $ | 119,713 |
| | 16.8 | % | | $ | 56,859 |
| | 8.0 | % | | n/a |
| | n/a |
|
| Orrstown Bank | 118,540 |
| | 16.7 | % | | 56,835 |
| | 8.0 | % | | $ | 71,043 |
| | 10.0 | % |
| Tier 1 capital to risk weighted assets | | | | | | | | | | | |
| Orrstown Financial Services, Inc. | 110,750 |
| | 15.6 | % | | 28,429 |
| | 4.0 | % | | n/a |
| | n/a |
|
| Orrstown Bank | 109,581 |
| | 15.4 | % | | 28,417 |
| | 4.0 | % | | 42,626 |
| | 6.0 | % |
| Tier 1 capital to average assets | | | | | | | | | | | |
| Orrstown Financial Services, Inc. | 110,750 |
| | 9.5 | % | | 46,496 |
| | 4.0 | % | | n/a |
| | n/a |
|
| Orrstown Bank | 109,581 |
| | 9.4 | % | | 46,518 |
| | 4.0 | % | | 58,148 |
| | 5.0 | % |
| December 31, 2013 | | | | | | | | | | | |
| Total capital to risk weighted assets | | | | | | | | | | | |
| Orrstown Financial Services, Inc. | $ | 104,637 |
| | 15.0 | % | | $ | 55,926 |
| | 8.0 | % | | n/a |
| | n/a |
|
| Orrstown Bank | 102,806 |
| | 14.7 | % | | 55,893 |
| | 8.0 | % | | $ | 69,866 |
| | 10.0 | % |
| Tier 1 capital to risk weighted assets | | | | | | | | | | | |
| Orrstown Financial Services, Inc. | 95,741 |
| | 13.7 | % | | 27,963 |
| | 4.0 | % | | n/a |
| | n/a |
|
| Orrstown Bank | 93,915 |
| | 13.4 | % | | 27,947 |
| | 4.0 | % | | 41,920 |
| | 6.0 | % |
| Tier 1 capital to average assets | | | | | | | | | | | |
| Orrstown Financial Services, Inc. | 95,741 |
| | 8.1 | % | | 47,058 |
| | 4.0 | % | | n/a |
| | n/a |
|
| Orrstown Bank | 93,915 |
| | 8.0 | % | | 47,077 |
| | 4.0 | % | | 58,846 |
| | 5.0 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | Actual | | For Capital Adequacy Purposes (includes applicable capital conservation buffer) | | To Be Well Capitalized Under Prompt Corrective Action Regulations |
| (Dollars in thousands) | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| December 31, 2017 | | | | | | | | | | | |
| Total Capital to risk weighted assets | | | | | | | | | | | |
| Consolidated | $ | 152,386 |
| | 13.3 | % | | $ | 106,040 |
| | 9.250 | % | | n/a |
| | n/a |
|
| Bank | 148,997 |
| | 13.0 | % | | 105,747 |
| | 9.250 | % | | $ | 114,321 |
| | 10.0 | % |
| Tier 1 Capital to risk weighted assets | | | | | | | | | | | |
| Consolidated | 138,774 |
| | 12.1 | % | | 83,112 |
| | 7.250 | % | | n/a |
| | n/a |
|
| Bank | 135,385 |
| | 11.8 | % | | 82,883 |
| | 7.250 | % | | 91,457 |
| | 8.0 | % |
| Common Tier 1 (CET1) to risk weighted assets | | | | | | | | | | | |
| Consolidated | 138,774 |
| | 12.1 | % | | 65,917 |
| | 5.750 | % | | n/a |
| | n/a |
|
| Bank | 135,385 |
| | 11.8 | % | | 65,734 |
| | 5.750 | % | | 74,308 |
| | 6.5 | % |
| Tier 1 Capital to average assets | | | | | | | | | | | |
| Consolidated | 138,774 |
| | 8.9 | % | | 62,042 |
| | 4.0 | % | | n/a |
| | n/a |
|
| Bank | 135,385 |
| | 8.7 | % | | 62,066 |
| | 4.0 | % | | 77,582 |
| | 5.0 | % |
| December 31, 2016 | | | | | | | | | | | |
| Total Capital to risk weighted assets | | | | | | | | | | | |
| Consolidated | $ | 139,033 |
| | 14.6 | % | | $ | 82,391 |
| | 8.625 | % | | n/a |
| | n/a |
|
| Bank | 126,408 |
| | 13.2 | % | | 82,328 |
| | 8.625 | % | | $ | 95,453 |
| | 10.0 | % |
| Tier 1 Capital to risk weighted assets | | | | | | | | | | | |
| Consolidated | 127,033 |
| | 13.3 | % | | 63,286 |
| | 6.625 | % | | n/a |
| | n/a |
|
| Bank | 114,417 |
| | 12.0 | % | | 63,238 |
| | 6.625 | % | | 76,363 |
| | 8.0 | % |
| Common Tier 1 (CET1) to risk weighted assets | | | | | | | | | | | |
| Consolidated | 127,033 |
| | 13.3 | % | | 48,957 |
| | 5.125 | % | | n/a |
| | n/a |
|
| Bank | 114,417 |
| | 12.0 | % | | 48,920 |
| | 5.125 | % | | 62,045 |
| | 6.5 | % |
| Tier 1 Capital to average assets | | | | | | | | | | | |
| Consolidated | 127,033 |
| | 9.3 | % | | 54,453 |
| | 4.0 | % | | n/a |
| | n/a |
|
| Bank | 114,417 |
| | 8.4 | % | | 54,500 |
| | 4.0 | % | | 68,126 |
| | 5.0 | % |
In September 2015, the Board of Directors of the Company authorized a share repurchase program under which the Company may repurchase up to 5% of the Company's outstanding shares of common stock, or approximately 416,000 shares, in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. When and if appropriate, repurchases may be made in open market or privately negotiated transactions, depending on market conditions, regulatory requirements and other corporate considerations, as determined by management. Share repurchases may not occur and may be discontinued at any time. At December 31, 2017, 82,725 shares had been repurchased under the program at a total cost of $1,438,000, or $17.38 per share.
On March 22, 2012,January 24, 2018, the Company and the Bank entered intoBoard declared a Written Agreement with the Federal Reserve Bankcash dividend of Philadelphia (the “Written Agreement”) and the Bank entered into a Consent Order with the Pennsylvania Department of Banking, now the Pennsylvania Department of Banking and Securities (“PDB”). On April 21, 2014, the PDB terminated its Consent Order,$0.12 per common share, which was replaced with a Memorandum of Understanding (“MOU”) by and between the Bank and the PDB. Onpaid on February 6, 2015, the Bank was released from the MOU, thereby terminating all enforcement actions imposed on the Bank by the PDB.9, 2018.
Pursuant to the Written Agreement, the Company and the Bank agreed to, among other things: (i) adopt and implement a plan, acceptable to the Federal Reserve Bank, to strengthen oversight of management and operations; (ii) adopt and implement a plan, acceptable to the Federal Reserve Bank, to reduce the Bank’s interest in criticized and classified assets; (iii) adopt a plan, acceptable to the Federal Reserve Bank, to strengthen the Bank’s credit risk management practices; (iv) adopt and implement a program, acceptable to the Federal Reserve Bank, for the maintenance of an adequate allowance for loan and lease losses; (v) adopt and implement a written plan, acceptable to the Federal Reserve Bank, to maintain sufficient capital on a consolidated basis for the Company and on a stand-alone basis for the Bank; and (vi) revise the Bank’s loan underwriting and credit administration policies. The Bank and the Company also agreed not to declare or pay any dividend without prior approval from the Federal Reserve Bank, and the Company agreed not to incur or increase debt or to redeem any outstanding shares without prior Federal Reserve Bank approval.
The Company and the Bank have developed and continue to implement strategies and action plans with the intention of meeting the requirements of the Written Agreement. As part of its efforts on complying with the terms of the Written Agreement, the Bank has filed a capital plan with the Federal Reserve Bank.
The Written Agreement will continue until terminated by the Federal Reserve Bank.
NOTE 15.14. RESTRICTIONS ON DIVIDENDS, LOANS AND ADVANCES
Federal and state bankingThe Parent Company's principal source of funds for dividend payments is dividends received from the Bank. Banking regulations place certain restrictions on dividends paid and loans or advances made bylimit the Bank to the Company. Further, regulatory mandates may impose more stringent restrictions on the extentamount of dividends that may be paid byfrom the Bank to the Company. As theParent Company is a bank holding company (that has elected status as a financial holding company with the Boardwithout prior approval of Governors of the Federal Reserve System),regulatory agencies. Accordingly, at December 31, 2017, $15,875,000 was available for dividend distribution from the Bank may not declare a dividend to the Parent Company if the results of such dividend would drop the Bank below the minimum capital required in order to be classified as “well capitalized.” The Bank has also agreed with its regulators that it will not declare or pay any dividends without prior regulatory approval.2018.
In October 2011, the Company announced it had discontinued its quarterly dividend. Due to the regulatory restrictions included in the Written Agreement, the Company is restricted from paying any dividends or repurchasing any stock without prior regulatory approval.
Under current FRBFederal Reserve regulations, the Bank is limited in the amount it may lend to the amounts it may loanParent Company and its nonbank subsidiary. Loans to its affiliates, including the Company. Covered transactions, including loans, with a single affiliate may not exceed 10% of the Bank’s total capital plus its excess allowance for loan losses,, and the aggregate of all covered transactions withloans to all affiliates may not exceed 20%, of the Bank’s subsidiarybank’s capital stock, surplus, and surplusundivided profits, plus the ALL (as defined by regulation). Loans from the Bank to nonbank affiliates, including the Parent Company, are also required to be collateralized according to regulatory guidelines. At December 31, 2014,2017, the maximum amount the Bank has available to loan nonbank affiliates was $14,900,000. At December 31, 2017, there were no loans from the Company is approximately $12,481,000.Bank to any nonbank affiliate, including the Parent Company.
NOTE 16.15. EARNINGS PER SHARE
Earnings (loss) per share for the years ended December 31, were as follows:
|
| | | | | | | | | | | |
| (In thousands, except per share data) | 2014 | | 2013 | | 2012 |
| | | | | | |
| Net income (loss) | $ | 29,142 |
| | $ | 10,004 |
| | $ | (38,454 | ) |
| Weighted average shares outstanding | 8,110 |
| | 8,093 |
| | 8,066 |
|
| Impact of common stock equivalents | 6 |
| | 0 |
| | 0 |
|
| Weighted average shares outstanding (diluted) | 8,116 |
| | 8,093 |
| | 8,066 |
|
| Per share information: | | | | | |
| Basic earnings (loss) per share | $ | 3.59 |
| | $ | 1.24 |
| | $ | (4.77 | ) |
| Diluted earnings (loss) per share | 3.59 |
| | 1.24 |
| | (4.77 | ) |
|
| | | | | | | | | | | |
| (In thousands, except per share data) | 2017 | | 2016 | | 2015 |
| | | | | | |
| Net income | $ | 8,090 |
| | $ | 6,628 |
| | $ | 7,874 |
|
| Weighted average shares outstanding - basic | 8,070 |
| | 8,059 |
| | 8,107 |
|
| Dilutive effect of share-based compensation | 156 |
| | 86 |
| | 35 |
|
| Weighted average shares outstanding - diluted | 8,226 |
| | 8,145 |
| | 8,142 |
|
| Per share information: | | | | | |
| Basic earnings per share | $ | 1.00 |
| | $ | 0.82 |
| | $ | 0.97 |
|
| Diluted earnings per share | 0.98 |
| | 0.81 |
| | 0.97 |
|
StockAverage outstanding stock options of 178,000, 207,00042,000, 90,000 and 274,000109,000 for the years ended December 31, 2014, 20132017, 2016 and 2012 have been excluded from diluted2015 were not included in the computation of earnings per share calculations, as their exercise would have been anti-dilutive, asbecause the effect was antidilutive, due to the exercise price exceededexceeding the average market price or the Company wasprice. The dilutive effect of share-based compensation in a net loss for the period. The common stock equivalents in 2014 are relatedeach year above relates principally to restricted stock awards.
NOTE 17.16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEETOFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance-sheetoff-balance sheet risk in the normal course of business to meet the financialfinancing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheeton-balance sheet instruments. The following table presents these contract, or notional, amounts.
| | | | Contract or Notional Amount | December 31, |
| (Dollars in thousands) | 2014 | | 2013 | 2017 | | 2016 |
| Commitments to fund: | | | | | | |
| Revolving, open ended home equity loans | $ | 100,897 |
| | $ | 86,253 |
| |
| Home equity lines of credit | | $ | 139,281 |
| | $ | 126,811 |
|
| 1-4 family residential construction loans | 2,463 |
| | 2,657 |
| 11,420 |
| | 7,820 |
|
| Commercial real estate, construction and land development loans | 11,682 |
| | 2,961 |
| 44,592 |
| | 43,830 |
|
| Commercial, industrial and other loans | 71,483 |
| | 45,629 |
| 145,394 |
| | 111,884 |
|
| Standby letters of credit | 7,309 |
| | 6,267 |
| 12,273 |
| | 7,097 |
|
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 many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based
on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, equipment, residential real estate, and income-producing commercial properties.
Standby letters of credit and financial guarantees written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company holds collateral supporting those commitments when deemed necessary by management. The current amount of liability, as ofat December 31, 20142017 and 2013,2016, for guarantees under standby letters of credit issued was not material.
The Company currently maintains a reserve, in other liabilities totaling $485,000 and $529,000 at December 31, 2014 and 2013based on historical loss experience of the related loan class, for off-balance sheet credit exposures that currently are not funded, based on historical loss experience of the related loan class. For the year endedin other liabilities. This reserve totaled $816,000 and $784,000 at December 31, 2014, 20132017 and 2012, ($44,000), ($54,000) and $(199,000) was charged to other noninterest expense2016. The following table presents the net amount expensed (recovered) for this exposure.off-balance sheet credit exposures reserve.
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (Dollars in thousands) | 2017 | | 2016 | | 2015 |
| | | | | | |
| Off-balance sheet credit exposures expense (recovery) | $ | 32 |
| | $ | 312 |
| | $ | (13 | ) |
The Company has soldsells loans to the Federal Home Loan BankFHLB of Chicago as part of its Mortgage Partnership Finance Program (“MPF Program”).Program. Under the terms of the MPF Program, there is limited recourse back to the Company for loans that do not perform in accordance with the terms of the loan agreement. Each loan that is sold under the program is “credit enhanced” such that the individual loan’s rating is raised to “AA,a minimum “BBB,” as determined by the Federal Home Loan BankFHLB of Chicago. The total outstanding balance ofOutstanding loans sold under the MPF Program was $51,773,000totaled $31,977,000 and $61,862,000$35,678,000 at December 31, 20142017 and 2013,2016, with limited recourse back to the Company on these loans of $8,508,000$1,135,000 and $8,508,000 at December 31, 2014 and 2013.$1,029,000, respectively. Many of the loans sold under the MPF Program have primary mortgage insurance, which reduces the Company’s overall exposure. ForThe net amount expensed or recovered for the years ended December 31, 2014, 2013, and 2012, the CompanyCompany's estimate of losses under its recourse exposure for loans foreclosed, or is in the process of foreclosing on loans sold underforeclosure, is recorded in other expenses. The following table presents the MPF program, withnet amounts expensed.
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (Dollars in thousands) | 2017 | | 2016 | | 2015 |
| | | | | | |
| MPF program recourse loss expense | $ | 25 |
| | $ | 18 |
| | $ | 127 |
|
NOTE 17. FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a resulting charge of $71,000, $20,000 and $22,000 to other expenses representing an estimate of the Company’s losses under its recourse exposure.
NOTE 18. FAIR VALUE DISCLOSURES
The Company meets the requirements for disclosure of fair value information about financial instruments, whether or not recognizedliability (exit price) in the balance sheet. In cases where quotedprincipal or most advantageous market prices are not available, fair values are basedfor the asset or liability in an orderly transaction between market participants on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments.measurement date. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
Fair value measurements under GAAP defines fair value, describes a framework for measuring fair value and requires disclosures about fair value measurements by establishing a three-level hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to valuation techniques that employ unobservable inputs (Level 3). IfThe three levels of the fair value hierarchy are :
Level 1 – quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access at the measurement date.
Level 2 – significant other observable inputs other than Level 1 prices such as prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – at least one significant unobservable input that reflects a company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.
In instances in which multiple levels of inputs are used to measure the assets or liabilities fall within different levels of thefair value, hierarchy the classification is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the asset or liability. Classificationsignificance of assets and liabilities within the hierarchy considers the markets in which the assets and liabilities are traded and the reliability and transparency of the assumptions used to determine fair value.
The three levels are defined as follows: Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market for the asset or liability, for substantially the full term of the financial instrument. Level 3 – the valuation methodology is derived from model-based techniques in which at least one significanta particular input is unobservable to the fair value measurement in its entirety requires judgment, and based onconsiders factors specific to the Company’s ownasset or liability.
The Company used the following methods and significant assumptions about market participants’ assumptions.
Following is a description of the valuation methodologies usedto estimate fair value for instruments measured on a recurring basis at estimated fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:basis:
Securities
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, securities are classified within Level 2 and fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. All of the Company’s securities are classified as available for sale.
The Company had no fair value liabilities measured on a recurring basis at December 31, 20142017 or 2013. A summary of2016. The following table summarizes assets at December 31, 2014 and 2013, measured at estimated fair value on a recurring basis were as follows:
at December 31, 2017 and December 31, 2016.
|
| | | | | | | | | | | | | | | |
| (Dollars in Thousands) | Level 1 | | Level 2 | | Level 3 | | Total Fair Value Measurements |
| December 31, 2014 | | | | | | | |
| Securities available for sale: | | | | | | | |
| U.S. Government Agencies | $ | 0 |
| | $ | 23,958 |
| | $ | 0 |
| | $ | 23,958 |
|
| States and political subdivisions | 0 |
| | 52,401 |
| | 0 |
| | 52,401 |
|
| GSE residential mortgage-backed securities | 0 |
| | 175,596 |
| | 0 |
| | 175,596 |
|
| GSE residential collateralized mortgage obligations (CMOs) | 0 |
| | 58,705 |
| | 0 |
| | 58,705 |
|
| GSE commercial CMOs | 0 |
| | 65,472 |
| | 0 |
| | 65,472 |
|
| Total debt securities | 0 |
| | 376,132 |
| | 0 |
| | 376,132 |
|
| Equity securities – financial services | 0 |
| | 67 |
| | 0 |
| | 67 |
|
| Total securities | $ | 0 |
| | $ | 376,199 |
| | $ | 0 |
| | $ | 376,199 |
|
| December 31, 2013 | | | | | | | |
| Securities available for sale: | | | | | | | |
| U.S. Government Agencies | $ | 0 |
| | $ | 25,451 |
| | $ | 0 |
| | $ | 25,451 |
|
| U.S. Government Sponsored Enterprises (GSE) | 0 |
| | 13,714 |
| | 0 |
| | 13,714 |
|
| States and political subdivisions | 0 |
| | 71,544 |
| | 0 |
| | 71,544 |
|
| GSE residential mortgage-backed securities | 0 |
| | 198,619 |
| | 0 |
| | 198,619 |
|
| GSE residential collateralized mortgage obligations (CMOs) | 0 |
| | 40,532 |
| | 0 |
| | 40,532 |
|
| GSE commercial CMOs | 0 |
| | 57,014 |
| | 0 |
| | 57,014 |
|
| Total debt securities | 0 |
| | 406,874 |
| | 0 |
| | 406,874 |
|
| Equity securities – financial services | 0 |
| | 69 |
| | 0 |
| | 69 |
|
| Total securities | $ | 0 |
| | $ | 406,943 |
| | $ | 0 |
| | $ | 406,943 |
|
|
| | | | | | | | | | | | | | | |
| (Dollars in Thousands) | Level 1 | | Level 2 | | Level 3 | | Total Fair Value Measurements |
| December 31, 2017 | | | | | | | |
| AFS Securities: | | | | | | | |
| States and political subdivisions | $ | 0 |
| | $ | 159,458 |
| | $ | 0 |
| | $ | 159,458 |
|
| GSE residential MBSs | 0 |
| | 49,530 |
| | 0 |
| | 49,530 |
|
| GSE residential CMOs | 0 |
| | 111,119 |
| | 0 |
| | 111,119 |
|
| Private label residential CMOs | 0 |
| | 1,003 |
| | 0 |
| | 1,003 |
|
| Private label commercial CMOs | 0 |
| | 7,653 |
| | 0 |
| | 7,653 |
|
| Asset-backed | 0 |
| | 86,431 |
| | 0 |
| | 86,431 |
|
| Total debt securities | 0 |
| | 415,194 |
| | 0 |
| | 415,194 |
|
| Equity securities | 0 |
| | 114 |
| | 0 |
| | 114 |
|
| Totals | $ | 0 |
| | $ | 415,308 |
| | $ | 0 |
| | $ | 415,308 |
|
| December 31, 2016 | | | | | | | |
| AFS Securities: | | | | | | | |
| U.S. Government Agencies | $ | 0 |
| | $ | 39,592 |
| | $ | 0 |
| | $ | 39,592 |
|
| States and political subdivisions | 0 |
| | 164,282 |
| | 0 |
| | 164,282 |
|
| GSE residential MBSs | 0 |
| | 116,944 |
| | 0 |
| | 116,944 |
|
| GSE residential CMOs | 0 |
| | 69,383 |
| | 0 |
| | 69,383 |
|
| GSE commercial CMOs | 0 |
| | 4,856 |
| | 0 |
| | 4,856 |
|
| Private label residential CMOs | 0 |
| | 5,006 |
| | 0 |
| | 5,006 |
|
| Total debt securities | 0 |
| | 400,063 |
| | 0 |
| | 400,063 |
|
| Equity securities | 0 |
| | 91 |
| | 0 |
| | 91 |
|
| Totals | $ | 0 |
| | $ | 400,154 |
| | $ | 0 |
| | $ | 400,154 |
|
Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP.basis. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.
The Company used the following describes the valuation techniques used by the Companymethods and significant assumptions to measure certain financial assets recorded atestimate fair value on a nonrecurring basis in thefor these financial statements:assets.
Impaired Loans
Loans are designated as impaired when, in the judgment of management and based on current information and events, it is probable that all amounts due, according to the contractual terms of the loan agreement, will not be collected. The measurement of loss associated with impaired loans for all loan classes can be based on either the observable market price of the loan, the fair value of the collateral, or discounted cash flows based on a market rate of interest for performing troubled debt restructurings.TDRs. For collateral collateral-
dependent loans, fair value is measured based on the value of the collateral securing the loan, less estimated costs to sell. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The value of the real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction, or if management adjusts the appraisal value, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal, if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3). For discounted cash flow impairment measurement on residential mortgage loans, the Company discounts cash flows on a particular credit, utilizing a market rate of interest that adequately reflects the terms and conditions of the note, and the credit risk associated with it. Impaired loans with an allocation to the allowance for loan lossesALL are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statementstatements of operations.income. Specific allocations to the allowanceALL or partial charge-offs totaled $2,266,000 and $1,967,000 at December 31, 2017 and 2016. Changes in the fair value of impaired loans for those still held at December 31 considered in the determination as to the provision for loan losses, or partial charge-offs were $4,352,000totaled $867,000, $268,000 and $3,238,000 at$888,000 for the years ended December 31, 20142017, 2016, and 2013.2015.
Foreclosed Real Estate
Other real estateOREO property acquired through foreclosure is initially recorded at the fair value of the property at the transfer date less estimated selling cost. Subsequently, other real estate ownedOREO is carried at the lower of its carrying value or the fair value less estimated selling cost. Fair value is usually determined based upon an independent third-party appraisal of the property or occasionally upon a recent sales offer. Specific charges to value the real estate ownedOREO at the lower of cost or fair value on properties held at December 31, 20142017 and 2013 was $581,0002016 were $0 and $411,000.
A summary of assetsforeclosed real estate for those still held at December 31 charged to OREO totaled $0, $43,000, and $32,000 for the years ending December 31, 2017, 2016, and 2015.
The following table summarizes assets measured at fair value on a nonrecurring basis is as follows:at December 31, 2017 and December 31, 2016.
| | | (Dollars in thousands) | Level 1 | | Level 2 | | Level 3 | | Total Fair Value Measurements | Level 1 | | Level 2 | | Level 3 | | Total Fair Value Measurements |
| December 31, 2014 | | | | | | | | |
| December 31, 2017 | | | | | | | | |
| Impaired Loans | | | | | | | | | | | | | | |
| Commercial real estate: | | | | | | | | | | | | | | |
| Owner-occupied | $ | 0 |
| | $ | 0 |
| | $ | 1,228 |
| | $ | 1,228 |
| $ | 0 |
| | $ | 0 |
| | $ | 430 |
| | $ | 430 |
|
| Non-owner occupied | 0 |
| | 0 |
| | 192 |
| | 192 |
| 0 |
| | 0 |
| | 4,066 |
| | 4,066 |
|
| Multi-family | 0 |
| | 0 |
| | 92 |
| | 92 |
| 0 |
| | 0 |
| | 165 |
| | 165 |
|
| Non-owner occupied residential | 0 |
| | 0 |
| | 937 |
| | 937 |
| 0 |
| | 0 |
| | 344 |
| | 344 |
|
| Acquisition and development: | | | | | | | | |
| Commercial and land development | 0 |
| | 0 |
| | 117 |
| | 117 |
| |
| Commercial and industrial | 0 |
| | 0 |
| | 29 |
| | 29 |
| 0 |
| | 0 |
| | 53 |
| | 53 |
|
| Residential mortgage: | | | | | | | | | | | | | | |
| First lien | 0 |
| | 0 |
| | 2,022 |
| | 2,022 |
| 0 |
| | 0 |
| | 1,951 |
| | 1,951 |
|
| Home equity - Lines of credit | 0 |
| | 0 |
| | 229 |
| | 229 |
| |
| Home equity - lines of credit | | 0 |
| | 0 |
| | 161 |
| | 161 |
|
| Installment and other loans | 0 |
| | 0 |
| | 13 |
| | 13 |
| 0 |
| | 0 |
| | 3 |
| | 3 |
|
| Total impaired loans | $ | 0 |
| | $ | 0 |
| | $ | 4,859 |
| | $ | 4,859 |
| $ | 0 |
| | $ | 0 |
| | $ | 7,173 |
| | $ | 7,173 |
|
| | | | | | | | | |
| Foreclosed real estate | | | | | | | | |
| Residential | $ | 0 |
| | $ | 0 |
| | $ | 217 |
| | $ | 217 |
| |
| Commercial and land development | 0 |
| | 0 |
| | 569 |
| | 569 |
| |
| Total foreclosed real estate | $ | 0 |
| | $ | 0 |
| | $ | 786 |
| | $ | 786 |
| |
| December 31, 2013 | | | | | | | | |
| December 31, 2016 | | | | | | | | |
| Impaired loans | | | | | | | | | | | | | | |
| Commercial real estate: | | | | | | | | | | | | | | |
| Owner-occupied | $ | 0 |
| | $ | 0 |
| | $ | 1,031 |
| | $ | 1,031 |
| $ | 0 |
| | $ | 0 |
| | $ | 777 |
| | $ | 777 |
|
| Non-owner occupied | 0 |
| | 0 |
| | 694 |
| | 694 |
| 0 |
| | 0 |
| | 736 |
| | 736 |
|
| Multi-family | 0 |
| | 0 |
| | 322 |
| | 322 |
| 0 |
| | 0 |
| | 199 |
| | 199 |
|
| Non-owner occupied residential | 0 |
| | 0 |
| | 1,662 |
| | 1,662 |
| 0 |
| | 0 |
| | 409 |
| | 409 |
|
| Acquisition and development: | | | | | | | | | | | | | | |
| Commercial and land development | 0 |
| | 0 |
| | 51 |
| | 51 |
| 0 |
| | 0 |
| | 1 |
| | 1 |
|
| Commercial and industrial | 0 |
| | 0 |
| | 592 |
| | 592 |
| 0 |
| | 0 |
| | 66 |
| | 66 |
|
| Residential mortgage: | | | | | | | | | | | | | | |
| First lien | 0 |
| | 0 |
| | 599 |
| | 599 |
| 0 |
| | 0 |
| | 1,994 |
| | 1,994 |
|
| Home equity - lines of credit | | 0 |
| | 0 |
| | 162 |
| | 162 |
|
| Installment and other loans | | 0 |
| | 0 |
| | 6 |
| | 6 |
|
| Total impaired loans | $ | 0 |
| | $ | 0 |
| | $ | 4,951 |
| | $ | 4,951 |
| $ | 0 |
| | $ | 0 |
| | $ | 4,350 |
| | $ | 4,350 |
|
| | | | | | | | | | | | | | | |
| Foreclosed real estate | | | | | | | | | | | | | | |
| Residential | $ | 0 |
| | $ | 0 |
| | $ | 208 |
| | $ | 208 |
| $ | 0 |
| | $ | 0 |
| | $ | 88 |
| | $ | 88 |
|
| Commercial and land development | 0 |
| | 0 |
| | 350 |
| | 350 |
| |
| Total foreclosed real estate | $ | 0 |
| | $ | 0 |
| | $ | 558 |
| | $ | 558 |
| |
The following table presents additional qualitative information about assets measured on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:value.
| | | | Fair Value Estimate | | Valuation Techniques | | Unobservable Input | | Range | Fair Value
Estimate | | Valuation Techniques | | Unobservable Input | | Range |
| December 31, 2014 | | | |
| December 31, 2017 | | | |
| Impaired loans | | $ | 7,173 |
| | Appraisal of collateral | | Management adjustments on appraisals for property type and recent activity | | 7% - 75% discount |
| | | | | - Management adjustments for liquidation expenses | | 0% - 20% discount |
| December 31, 2016 | | | |
| Impaired loans | $ | 4,859 |
| | Appraisal of collateral | | Management adjustments on appraisals for property type and recent activity | | 0% - 30% discount | $ | 4,350 |
| | Appraisal of collateral | | Management adjustments on appraisals for property type and recent activity | | 10% - 75% discount |
| | | | Management adjustments for liquidation expenses | | 5% - 10% discount | | | - Management adjustments for liquidation expenses | | 0% - 41% discount |
| Foreclosed real estate | 786 |
| | Appraisal of collateral | | Management adjustments on appraisals for property type and recent activity | | 0% - 5% discount | 88 |
| | Appraisal of collateral | | Management adjustments on appraisals for property type and recent activity | | 13% - 17% discount |
| | | | Management adjustments for liquidation expenses | | 6% - 18% discount | | | - Management adjustments for liquidation expenses | | 10% - 18% discount |
| December 31, 2013 | | | |
| Impaired loans | $ | 4,951 |
| | Appraisal of collateral | | Management adjustments on appraisals for property type and recent activity | | 0% - 30% discount | |
| | | | Management adjustments for liquidation expenses | | 5% - 10% discount | |
| Foreclosed real estate | 558 |
| | Appraisal of collateral | | Management adjustments on appraisals for property type and recent activity | | 0% - 30% discount | |
| | | | Management adjustments for liquidation expenses | | 5% - 10% discount | |
Fair values of financial instruments
In addition to those disclosed above, the Company used the following methods and significant assumptions were used byto estimate fair value for the Company in estimating fair values of financial instruments as disclosed herein:indicated instruments:
Cash and Due from Banks and Interest BearingInterest-Bearing Deposits with Banks
The carrying amounts of cash and due from banks and interest bearinginterest-bearing deposits with banks approximate their fair value.
Loans Held for Sale
Loans held for saleLHFS are carried at the lower of cost or fair value. These loans typically consist of one-to-four family residential loans originated for sale ininto the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale.
Loans Receivable
For variable-ratevariable rate loans that reprice frequently and have no significant change in credit risk, fair values arevalue is based on carrying values.value. Fair valuesvalue for fixed rate loans areis estimated using discounted cash flow analyses, using interest rates currently being offered in the market for loans with similar terms to borrowers of similar credit quality.
Restricted Investments in Bank Stocks
These investments are carried at cost. The Company is required to maintain minimum investment balances in these stocks, which are not actively traded and therefore have no readily determinable market value.
Mortgage Servicing RightsDeposits
The fair value of mortgage servicing rights is estimated based on a valuation model that calculates the present value of estimated future net servicing income.
Deposits
The fair values disclosed for demand deposits are,is, by definition, equal to the amount payable on demand at the reporting date (that is, theirthe carrying amounts)amount). The carrying amountsamount of variable-rate,variable rate, fixed-term money market accounts and certificates of deposit approximate theirapproximates fair valuesvalue at the reporting date. Fair valuesvalue for fixed-ratefixed rate certificates of deposits and IRAs are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market to a schedule of aggregated expected maturities on time deposits.
Short-Term Borrowings
The carrying amounts of federal funds purchased,purchased; borrowings under Repurchase Agreements,Agreements; and other short-term borrowings maturing within 90 days approximate theirapproximates fair values.value. Fair valuesvalue of other short-term borrowings areis estimated using discounted cash flow analysesanalysis based on the Company’s current borrowing rates for similar types of borrowing arrangements.
Long-Term Debt
The fairFair value of the Company’s fixed rate long-term borrowings is estimated using a discounted cash flow analysis based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements. The carrying amounts of variable-ratevariable rate long-term borrowings approximate theirapproximates fair valuesvalue at the reporting date.
Accrued Interest
The carrying amounts of accrued interest receivable and payable approximate their fair values.value.
Off-Balance-SheetOff-Balance Sheet Instruments
The Company generally does not charge commitment fees. Fees for standby letters of credit and other off-balance-sheetoff-balance sheet instruments are not significant.
The following table presents estimated fair values of the Company’s financial instruments were as follows at December 31:31.
| | | (Dollars in thousands) | Carrying Amount | | Fair Value | | Level 1 | | Level 2 | | Level 3 | Carrying Amount | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| December 31, 2014 | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | |
| Financial Assets | | | | | | | | | | | | | | | | | | |
| Cash and due from banks | $ | 18,174 |
| | $ | 18,174 |
| | $ | 18,174 |
| | $ | 0 |
| | $ | 0 |
| $ | 21,734 |
| | $ | 21,734 |
| | $ | 21,734 |
| | $ | 0 |
| | $ | 0 |
|
| Interest bearing deposits with banks | 13,235 |
| | 13,235 |
| | 13,235 |
| | 0 |
| | 0 |
| |
| Interest-bearing deposits with banks | | 8,073 |
| | 8,073 |
| | 8,073 |
| | 0 |
| | 0 |
|
| Restricted investments in bank stock | 8,350 |
| | n/a |
| | n/a |
| | n/a |
| | n/a |
| 9,997 |
| | n/a |
| | n/a |
| | n/a |
| | n/a |
|
| Securities available for sale | 376,199 |
| | 376,199 |
| | 0 |
| | 376,199 |
| | 0 |
| 415,308 |
| | 415,308 |
| | 0 |
| | 415,308 |
| | 0 |
|
| Loans held for sale | 3,159 |
| | 3,249 |
| | 0 |
| | 3,249 |
| | 0 |
| 6,089 |
| | 6,272 |
| | 0 |
| | 6,272 |
| | 0 |
|
| Loans, net of allowance for loan losses | 690,199 |
| | 697,506 |
| | 0 |
| | 0 |
| | 697,506 |
| 997,216 |
| | 994,617 |
| | 0 |
| | 0 |
| | 994,617 |
|
| Accrued interest receivable | 3,097 |
| | 3,097 |
| | 0 |
| | 1,593 |
| | 1,504 |
| 5,048 |
| | 5,048 |
| | 0 |
| | 2,580 |
| | 2,468 |
|
| Mortgage servicing rights | 2,684 |
| | 2,785 |
| | 0 |
| | 0 |
| | 2,785 |
| |
| Financial Liabilities | | | | | | | | | | | | | | | | | | |
| Deposits | 949,704 |
| | 950,667 |
| | 0 |
| | 950,667 |
| | 0 |
| 1,219,515 |
| | 1,213,288 |
| | 0 |
| | 1,213,288 |
| | 0 |
|
| Short-term borrowings | 86,742 |
| | 86,742 |
| | 0 |
| | 86,742 |
| | 0 |
| 93,576 |
| | 93,576 |
| | 0 |
| | 93,576 |
| | 0 |
|
| Long-term debt | 14,812 |
| | 15,610 |
| | 0 |
| | 15,610 |
| | 0 |
| 83,815 |
| | 83,949 |
| | 0 |
| | 83,949 |
| | 0 |
|
| Accrued interest payable | 273 |
| | 273 |
| | 0 |
| | 273 |
| | 0 |
| 495 |
| | 495 |
| | 0 |
| | 495 |
| | 0 |
|
| Off-balance sheet instruments | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| December 31, 2013 | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | |
| Financial Assets | | | | | | | | | | | | | | | | | | |
| Cash and due from banks | $ | 12,995 |
| | $ | 12,995 |
| | $ | 12,995 |
| | $ | 0 |
| | $ | 0 |
| $ | 16,072 |
| | $ | 16,072 |
| | $ | 16,072 |
| | $ | 0 |
| | $ | 0 |
|
| Interest bearing deposits with banks | 24,565 |
| | 24,565 |
| | 24,565 |
| | 0 |
| | 0 |
| |
| Interest-bearing deposits with banks | | 14,201 |
| | 14,201 |
| | 14,201 |
| | 0 |
| | 0 |
|
| Restricted investments in bank stock | 9,921 |
| | n/a |
| | n/a |
| | n/a |
| | n/a |
| 7,970 |
| | n/a |
| | n/a |
| | n/a |
| | n/a |
|
| Securities available for sale | 406,943 |
| | 406,943 |
| | 0 |
| | 406,943 |
| | 0 |
| 400,154 |
| | 400,154 |
| | 0 |
| | 400,154 |
| | 0 |
|
| Loans held for sale | 1,936 |
| | 1,936 |
| | 0 |
| | 1,936 |
| | 0 |
| 2,768 |
| | 2,843 |
| | 0 |
| | 2,843 |
| | 0 |
|
| Loans, net of allowance for loan losses | 650,072 |
| | 655,122 |
| | 0 |
| | 0 |
| | 655,122 |
| 870,616 |
| | 870,470 |
| | 0 |
| | 0 |
| | 870,470 |
|
| Accrued interest receivable | 3,400 |
| | 3,400 |
| | 0 |
| | 1,902 |
| | 1,498 |
| 4,672 |
| | 4,672 |
| | 0 |
| | 2,643 |
| | 2,029 |
|
| Mortgage servicing rights | 2,806 |
| | 3,090 |
| | 0 |
| | 0 |
| | 3,090 |
| |
| Financial Liabilities | | | | | | | | | | | | | | | | | | |
| Deposits | 1,000,390 |
| | 1,002,235 |
| | 0 |
| | 1,002,235 |
| | 0 |
| 1,152,452 |
| | 1,149,727 |
| | 0 |
| | 1,149,727 |
| | 0 |
|
| Short-term borrowings | 59,032 |
| | 59,032 |
| | 0 |
| | 59,032 |
| | 0 |
| 87,864 |
| | 87,864 |
| | 0 |
| | 87,864 |
| | 0 |
|
| Long-term debt | 16,077 |
| | 16,645 |
| | 0 |
| | 16,645 |
| | 0 |
| 24,163 |
| | 24,966 |
| | 0 |
| | 24,966 |
| | 0 |
|
| Accrued interest payable | 333 |
| | 333 |
| | 0 |
| | 333 |
| | 0 |
| 437 |
| | 437 |
| | 0 |
| | 437 |
| | 0 |
|
| Off-balance sheet instruments | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
NOTE 19.18. ORRSTOWN FINANCIAL SERVICES, INC. (PARENT COMPANY ONLY) CONDENSED FINANCIAL INFORMATION
The following are the condensed balance sheets, statements of income, statement of comprehensive income (loss) and statements of cash flows for the parent company, as of or for the years ended December 31:
Condensed Balance SheetSheets
| | | | | | | December 31, |
| (Dollars in thousands) | 2014 | | 2013 | 2017 | | 2016 |
| Assets | | | | | | |
| Cash in Orrstown Bank | $ | 389 |
| | $ | 1,504 |
| $ | 703 |
| | $ | 10,263 |
|
| Deposits with other banks | | 214 |
| | 307 |
|
| Total cash | | 917 |
| | 10,570 |
|
| Securities available for sale | 67 |
| | 69 |
| 114 |
| | 91 |
|
| Investment in Orrstown Bank | 126,084 |
| | 89,601 |
| 140,429 |
| | 121,362 |
|
| Other assets | 797 |
| | 369 |
| 3,953 |
| | 3,519 |
|
| Total assets | $ | 127,337 |
| | $ | 91,543 |
| $ | 145,413 |
| | $ | 135,542 |
|
| | | | | | | |
| Liabilities | $ | 72 |
| | $ | 104 |
| $ | 648 |
| | $ | 683 |
|
| Shareholders’ Equity | | | | | | |
| Common stock | 430 |
| | 422 |
| 435 |
| | 437 |
|
| Additional paid-in capital | 123,392 |
| | 123,105 |
| 125,458 |
| | 124,935 |
|
| Retained earnings | 1,887 |
| | (27,255 | ) | 16,042 |
| | 11,669 |
|
| Accumulated other comprehensive income | 1,576 |
| | (4,813 | ) | |
| Accumulated other comprehensive income (loss) | | 2,845 |
| | (1,165 | ) |
| Treasury stock | (20 | ) | | (20 | ) | (15 | ) | | (1,017 | ) |
| Total shareholders’ equity | 127,265 |
| | 91,439 |
| 144,765 |
| | 134,859 |
|
| Total liabilities and shareholders’ equity | $ | 127,337 |
| | $ | 91,543 |
| $ | 145,413 |
| | $ | 135,542 |
|
Condensed Statements of OperationsIncome
| | | | | | | | | For the Years Ended December 31, |
| (Dollars in thousands) | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Income | | | | | | | | | | |
| Dividends from subsidiaries | | $ | 0 |
| | $ | 2,200 |
| | $ | 17,900 |
|
| Other interest and dividend income | $ | 2 |
| | $ | 5 |
| | $ | 28 |
| 15 |
| | 38 |
| | 3 |
|
| Other income | 70 |
| | 46 |
| | 58 |
| 61 |
| | 62 |
| | 35 |
|
| Gains (losses) on sale of securities | 0 |
| | 0 |
| | (101 | ) | |
| Total income (loss) | 72 |
| | 51 |
| | (15 | ) | |
| Total income | | 76 |
| | 2,300 |
| | 17,938 |
|
| Expenses | | | | | | | | | | |
| Share-based compensation | 17 |
| | 129 |
| | 23 |
| 247 |
| | 216 |
| | 135 |
|
| Management fee to Bank | 277 |
| | 173 |
| | 34 |
| 501 |
| | 504 |
| | 500 |
|
| Other expenses | 1,042 |
| | 1,241 |
| | 1,142 |
| 1,116 |
| | 2,152 |
| | 1,720 |
|
| Total expenses | 1,336 |
| | 1,543 |
| | 1,199 |
| 1,864 |
| | 2,872 |
| | 2,355 |
|
| Income (loss) before income taxes and equity (loss) in undistributed income (loss) of subsidiary | (1,264 | ) | | (1,492 | ) | | (1,214 | ) | |
| Income (loss) before income tax benefit and equity in undistributed income (distributions in excess of income) of subsidiaries | | (1,788 | ) | | (572 | ) | | 15,583 |
|
| Income tax benefit | (474 | ) | | (477 | ) | | (247 | ) | (596 | ) | | (606 | ) | | (831 | ) |
| Income (loss) before equity in undistributed income (loss) of subsidiary | (790 | ) | | (1,015 | ) | | (967 | ) | |
| Equity in undistributed income (loss) of bank subsidiary | 29,932 |
| | 11,019 |
| | (37,487 | ) | |
| Net income (loss) | $ | 29,142 |
| | $ | 10,004 |
| | $ | (38,454 | ) | |
| Income (loss) before equity in undistributed income (distributions in excess of income) of subsidiaries | | (1,192 | ) | | 34 |
| | 16,414 |
|
| Equity in undistributed income (distributions in excess of income) of subsidiaries | | 9,282 |
| | 6,594 |
| | (8,540 | ) |
| Net income | | $ | 8,090 |
| | $ | 6,628 |
| | $ | 7,874 |
|
Statements of Comprehensive Income (Loss)
|
| | | | | | | | | | | |
| (Dollars in thousands) | 2014 | | 2013 | | 2012 |
| | | | | | |
| Income (loss) before equity in undistributed income (loss) of subsidiary | $ | (790 | ) | | $ | (1,015 | ) | | $ | (967 | ) |
| Unrealized holding gains (losses) on securities available for sale arising during the period, net of tax | (1 | ) | | 0 |
| | 41 |
|
| Reclassification adjustment for (gains) losses realized in net income (loss), net of tax | 0 |
| | 0 |
| | 66 |
|
| Total other comprehensive income (loss) | (1 | ) | | 0 |
| | 107 |
|
| Comprehensive income (loss) before equity in undistributed income (loss) and other comprehensive income of subsidiary | (791 | ) | | (1,015 | ) | | (860 | ) |
| Equity in undistributed income (loss) and other comprehensive income of subsidiary | 36,322 |
| | 4,378 |
| | (39,855 | ) |
| Total comprehensive income (loss) | $ | 35,531 |
| | $ | 3,363 |
| | $ | (40,715 | ) |
Condensed Statements of Cash Flows
|
| | | | | | | | | | | |
| (Dollars in thousands) | 2014 | | 2013 | | 2012 |
| Cash flows from operating activities: | | | | | |
| Net income (loss) | $ | 29,142 |
| | $ | 10,004 |
| | $ | (38,454 | ) |
| Adjustments to reconcile net income (loss) to cash used in operating activities: | | | | | |
| Deferred income taxes | (25 | ) | | 0 |
| | 0 |
|
| Gains on affiliate dissolution | (54 | ) | | 0 |
| | 0 |
|
| Losses on sale of investment securities | 0 |
| | 0 |
| | 101 |
|
| Equity in undistributed (income) loss of bank subsidiary | (29,932 | ) | | (11,019 | ) | | 37,487 |
|
| Share-based compensation | 17 |
| | 129 |
| | 23 |
|
| Net change in other liabilities | (26 | ) | | 62 |
| | 35 |
|
| Other, net | (270 | ) | | (182 | ) | | 210 |
|
| Net cash used in operating activities | (1,148 | ) | | (1,006 | ) | | (598 | ) |
| Cash flows from investing activities: | | | | | |
| Sales of securities available for sale | 0 |
| | 0 |
| | 1,109 |
|
| Maturities of available for sale securities | 0 |
| | 0 |
| | 1,895 |
|
| Investment in bank subsidiary | (161 | ) | | 0 |
| | (4,000 | ) |
| Other | 89 |
| | 0 |
| | 0 |
|
| Net cash used in investing activities | (72 | ) | | 0 |
| | (996 | ) |
| Cash flows from financing activities: | | | | | |
| Dividends paid | 0 |
| | 0 |
| | 0 |
|
| Proceeds from issuance of common stock | 105 |
| | 253 |
| | 189 |
|
| Net cash provided by financing activities | 105 |
| | 253 |
| | 189 |
|
| Net decrease in cash | (1,115 | ) | | (753 | ) | | (1,405 | ) |
| Cash, beginning balance | 1,504 |
| | 2,257 |
| | 3,662 |
|
| Cash, ending balance | $ | 389 |
| | $ | 1,504 |
| | $ | 2,257 |
|
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| (Dollars in thousands) | 2017 | | 2016 | | 2015 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 8,090 |
| | $ | 6,628 |
| | $ | 7,874 |
|
| Adjustments to reconcile net income to cash provided by (used in) operating activities: | | | | | |
| Deferred income taxes | 16 |
| | 4 |
| | (53 | ) |
| Equity in (undistributed income) distributions in excess of income of subsidiaries | (9,282 | ) | | (6,594 | ) | | 8,540 |
|
| Share-based compensation | 247 |
| | 216 |
| | 135 |
|
| Net change in other liabilities | (35 | ) | | (6 | ) | | 17 |
|
| Other, net | (377 | ) | | (849 | ) | | (712 | ) |
| Net cash provided by (used in) operating activities | (1,341 | ) | | (601 | ) | | 15,801 |
|
| Cash flows from investing activities: | | | | | |
| Capital contributed to subsidiaries | (6,100 | ) | | 0 |
| | 0 |
|
| Other, net | 0 |
| | (500 | ) | | 0 |
|
| Net cash used in investing activities | (6,100 | ) | | (500 | ) | | 0 |
|
| Cash flows from financing activities: | | | | | |
| Dividends paid | (3,488 | ) | | (2,898 | ) | | (1,822 | ) |
| Proceeds from issuance of common stock | 1,276 |
| | 847 |
| | 794 |
|
| Payments to repurchase common stock | 0 |
| | (631 | ) | | (809 | ) |
| Net cash used in financing activities | (2,212 | ) | | (2,682 | ) | | (1,837 | ) |
| Net increase (decrease) in cash | (9,653 | ) | | (3,783 | ) | | 13,964 |
|
| Cash, beginning | 10,570 |
| | 14,353 |
| | 389 |
|
| Cash, ending | $ | 917 |
| | $ | 10,570 |
| | $ | 14,353 |
|
NOTE 20 –19. CONTINGENCIES
The nature of the Company’s business generates a certain amount of litigation involving matters arising out of the ordinary course of business. Except as described below, in the opinion of management, there are no legal proceedings that might have a material effect on the results of operations, liquidity, or the financial position of the Company at this time.
On May 25, 2012, Southeastern Pennsylvania Transportation Authority (“SEPTA”)SEPTA filed a putative class action complaint in the United StatesU.S. District Court for the Middle District of Pennsylvania against the Company, the Bank and certain current and former directors and executive officers (collectively, the “Defendants”). The complaint alleges, among other things, that (i) in connection with the Company’s Registration Statement on Form S-3 dated February 23, 2010 and its Prospectus Supplement dated March 23, 2010, and (ii) during the purported class period of March 24, 2010 through October 27, 2011, the Company issued materially false and misleading statements regarding the Company’s lending practices and financial results, including misleading statements concerning the stringent nature of the Bank’s credit practices and underwriting standards, the quality of its loan portfolio, and the intended use of the proceeds from the Company’s March 2010 public offering of common stock. The complaint asserts claims under Sections 11, 12(a) and 15 of the Securities Act of 1933, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and seeks class certification, unspecified money damages, interest, costs, fees and equitable or injunctive relief. Under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), motions for appointment of Lead Plaintiff in this case were due by July 24, 2012. SEPTA was the sole movant and the Court appointed SEPTA Lead Plaintiff on August 20, 2012.
Pursuant to the PSLRA and the Court’s September 27, 2012 Order, SEPTA was given until October 26, 2012 to file an amended complaint and the Defendants until December 7, 2012 to file a motion to dismiss the amended complaint. SEPTA’s opposition to the Defendant’s motion to dismiss was originally due January 11, 2013. Under the PSLRA, discovery and all other proceedings in the case arewere stayed pending the Court’s ruling on the motion to dismiss. The September 27, 2012 Order specified that if the motion to dismiss were denied, the Court would schedule a conference to address discovery and the filing of a motion for class certification. On October 26, 2012, SEPTA filed an unopposed motion for enlargement of time to file its amended complaint in order to permit the parties and new defendants to be named in the amended complaint time to discuss plaintiff’s claims and defendants’ defenses. On October 26, 2012, the Court granted SEPTA’s motion, mooting its September
27, 2012 scheduling Order, and requiring SEPTA to file its amended complaint on or before January 16, 2013 or otherwise advise the Court of circumstances that require a further enlargement of time. On January 14, 2013, the Court granted SEPTA’s second unopposed motion for enlargement of time to file an amended complaint on or before March 22, 2013.
On March 4, 2013, SEPTA filed an amended complaint. The amended complaint expands the list of defendants in the action to include the Company’s independent registered public accounting firm and the underwriters of the Company’s March 2010 public offering of common stock. In addition, among other things, the amended complaint extends the purported 1934 Exchange Act class period from March 15, 2010 through April 5, 2012.
Pursuant to the Court’s March 28, 2013 Second Scheduling Order, on May 28, 2013 all defendants filed their motions to dismiss the amended complaint, and on July 22, 2013 SEPTA filed its “omnibus” opposition to all of the defendants’ motions to dismiss. On August 23, 2013, all defendants filed reply briefs in further support of their motions to dismiss. On December 5, 2013, the Court ordered oral argument on the Orrstown Defendants’ motion to dismiss the amended complaint to be heard on February 7, 2014. Oral argument on the pending motions to dismiss SEPTA’s amended complaint was held on April 29, 2014. A decision from the court on the motions to dismiss is pending.
The Second Scheduling Order staysstayed all discovery in the case pending the outcome of the motions to dismiss, and informsinformed the parties that, if required, a telephonic conference to address discovery and the filing of SEPTA’s motion for class certification willwould be scheduled after the Court’s ruling on the motions to dismiss.
On April 10, 2015, pursuant to Court order, all parties filed supplemental briefs addressing the impact of the U.S. Supreme Court’s March 24, 2015 decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund on defendants’ motions to dismiss the amended complaint.
On June 22, 2015, in a 96-page Memorandum, the Court dismissed without prejudice SEPTA’s amended complaint against all defendants, finding that SEPTA failed to state a claim under either the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. The matter is currently progressing throughCourt ordered that, within 30 days, SEPTA either seek leave to amend its amended complaint, accompanied by the legal process.proposed amendment, or file a notice of its intention to stand on the amended complaint.
On July 22, 2015, SEPTA filed a motion for leave to amend under Local Rule 15.1, and attached a copy of its proposed second amended complaint to its motion. Many of the allegations of the proposed second amended complaint are essentially the same or similar to the allegations of the dismissed amended complaint. The proposed second amended complaint also alleges that the Orrstown Defendants believedid not publicly disclose certain alleged failures of internal controls over loan underwriting, risk management, and financial reporting during the period 2009 to 2012, in violation of the federal securities laws. On February 8, 2016, the Court granted SEPTA’s motion for leave to amend and SEPTA filed its second amended complaint that same day.
On February 25, 2016, the Court issued a scheduling Order directing: all defendants to file any motions to dismiss by March 18, 2016; SEPTA to file an omnibus opposition to defendants’ motions to dismiss by April 8, 2016; and all defendants to file reply briefs in support of their motions to dismiss by April 22, 2016. Defendants timely filed their motions to dismiss the second amended complaint and the parties filed their briefs in accordance with the Court-ordered schedule, above. The February 25, 2016 Order stays all discovery and other deadlines in the case (including the filing of SEPTA’s motion for class certification) pending the outcome of the motions to dismiss.
The allegations of SEPTA’s proposed second amended complaint disclosed the existence of a confidential, non-public, fact-finding inquiry regarding the Company being conducted by the Commission. As disclosed in the Company’s Form 8-K filed on September 27, 2016, on that date the Company entered into a settlement agreement with the Commission resolving the investigation of accounting and related matters at the Company for the periods ended June 30, 2010, to December 31, 2011. As part of the settlement of the Commission’s administrative proceedings and pursuant to the cease-and-desist order, without admitting or denying the Commission’s findings, the Company, its Chief Executive Officer, its former Chief Financial Officer, its former Executive Vice President and Chief Credit Officer, and its Chief Accounting Officer, agreed to pay civil money penalties to the Commission. The Company agreed to pay a civil money penalty of $1,000,000. The Company had previously established a reserve for that amount which was expensed in the second fiscal quarter of 2016. In the settlement agreement with the Commission, the Company also agreed to cease and desist from committing or causing any violations and any future violations of Securities Act Sections 17(a)(2) and 17(a)(3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B), and Rules 12b-20, 13a-1 and 13a-13 promulgated thereunder.
On September 27, 2016, the Orrstown Defendants filed with the Court a Notice of Subsequent Event in Further Support of their Motion to Dismiss the Second Amended Complaint, regarding the settlement with the SEC. The Notice attached a copy of the SEC’s cease-and-desist order and briefly described what the Company believed were the most salient terms of the neither-admit-nor-deny settlement. On September 29, 2016, SEPTA filed a Response to the Notice, in which SEPTA argued that the settlement with the SEC did not support dismissal of the second amended complaint.
On December 7, 2016, the Court issued an Order and Memorandum granting in part and denying in part defendants’ motions to dismiss SEPTA’s second amended complaint. The Court granted the motions to dismiss the Securities Act claims against all defendants, and granted the motions to dismiss the Exchange Act section 10(b) and Rule 10b-5 claims against all defendants except Orrstown Financial Services, Inc., Orrstown Bank, Thomas R. Quinn, Jr., Bradley S. Everly, and Jeffrey W. Embly. The Court also denied the motions to dismiss the Exchange Act section 20(a) claims against Quinn, Everly, and Embly.
On January 31, 2017, the Court entered a Case Management Order establishing the schedule for the litigation and, on August 15, 2017, it entered a revised Order that, among other things, set the following deadlines: all fact discovery closes on March 1, 2018, and SEPTA’s motion for class certification is due the same day; expert merits discovery closes May 30, 2018; summary judgment motions are due by June 26, 2018; the mandatory pretrial and settlement conference is set for December 11, 2018; and trial is scheduled to begin on January 7, 2019.
Document discovery has begun in the case and is ongoing. To date, one deposition, of a non-party, has been concluded.
On December 15, 2017, the Orrstown Defendants and SEPTA exchanged expert reports in opposition to and in support of class certification, respectively. On January 15, 2018, the parties exchanged expert rebuttal reports. SEPTA’s motion for class certification was due March 1, 2018, with the Orrstown Defendants’ opposition due April 2, 2018, and SEPTA’s reply due April 23, 2018.
On February 9, 2018, SEPTA filed a Status Report and Request for a Telephonic Status Conference asking the Court to convene a conference to discuss the status of discovery in the case and possible revisions to the case schedule. On February 12, 2018, the Orrstown Defendants filed their status report to provide the Court with a summary of document discovery in the case to date. On February 27, 2018, SEPTA filed an unopposed motion for a continuance of the existing case deadlines pending a status conference with the Court or the issuance of a revised case schedule. On February 28, 2018, the Court issued an Order continuing all case management deadlines until further order of the Court.
The Company believes that the allegations in theof SEPTA’s second amended complaint are without merit and intendintends to vigorously defend themselves vigorouslyitself against those claims. Considering that no ruling has been made on the motions to dismiss, discovery in the proceeding remains stayed and class certification has not been granted, itIt is not possible at this time to estimate reasonably possible losses, or even a range of reasonably possible losses, at this time in connection with SEPTA's putative class action complaint.
ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On June 16, 2014, the Company dismissed Smith Elliott Kearns & Company, LLC as the Company’s independent registered public accounting firm and engaged Crowe Horwath LLP as the Company’s new independent registered public accounting firm. The appointment of Crowe Horwath LLP and the dismissal of Smith Elliott Kearns & Company, LLC were approved by the Audit Committee of the Company’s Board of Directors. The financial statements for the fiscal years ended December 31, 2013 and 2012 were audited by Smith Elliott Kearns & Company, LLC. The reports of Smith Elliott Kearns & Company, LLC on the Company’s consolidated financial statements for the fiscal years ended December 31, 2013 and 2012 did not contain an adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles. During the Company’s two most recent fiscal years and the subsequent interim period preceding the dismissal of Smith Elliott Kearns & Company, LLC, there were no disagreements or reportable events between the Company and Smith Elliott Kearns & Company, LLC on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of Smith Elliott Kearns & Company, LLC, would have caused them to make a reference to the subject matter of the disagreements or reportable events in connection with their reports.None.
ITEM 9A – CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have evaluatedBased on the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under theevaluation required by Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2014. Based on such evaluation, such officers have concluded thatRules 13a-15(b) and 15d-15(b), the Company’s disclosure controls and procedures were designed and functioning effectively, as of December 31, 2014, to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to ourCompany's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of disclosure controls and procedures, as appropriate to allow timely decisions regarding disclosure.
(a) Management’s Report on Internal Control Over Financial Reporting
Management’s Report on Internal Control Over Financial Reporting fordefined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e), at December 31, 2014, is included in Item 8 of this Form 10-K2017. Based on that evaluation, the Chief Executive Officer and is incorporated by reference into this Item 9A. The audit report ofChief Financial Officer concluded that the registered public accounting firm on internal control over financial reporting is included in Item 8 of this 10-K reportdisclosure controls and is incorporated by reference into this Item 9A.
(b) Changes in Internal Controls Over Financial Reporting:
During the three months endedprocedures were effective at December 31, 2014, there were2017. There have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.reporting during the fourth quarter of 2017.
Management's Report on Internal Controls Over Financial Reporting is included in Part II, Item 8, "Financial Statements and Supplementary Data." The effectiveness of the Company's internal control over financial reporting at December 31, 2017 has been audited by Crowe Horwath LLP, an independent registered public accounting firm, as stated in the Report of Independent Registered Public Accounting Firm appearing in Part II, Item 8, "Financial Statements and Supplementary Data."
ITEM 9B – OTHER INFORMATION
The Company had no other events that should have been disclosed on Form 8-K that were not already disclosed on such forms.None.
PART III
ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The Company has adopted a code of ethics that applies to all senior financial officers (including its chief executive officer, chief financial officer, chief accounting officer, and any person performing similar functions). The Company’sYou can find a copy of the Code of Ethics for Senior Financial Officers is available on the Bank’sby visiting our website at http://www.orrstown.com. Any and following the links to “Investor Relations” and “Governance Documents.” A copy of the Code of Ethics for Senior Financial Officers may also be obtained, free of charge, by written request to Orrstown Financial Services, Inc., 77 East King Street, PO Box 250, Shippensburg, Pennsylvania 17257, Attention: Secretary. The Company intends to disclose any amendments to or waivers tofrom a provision of the Company’s Code of Ethics for Senior Financial Officers will be posted to the website in a timely manner.
All other information required by Item 10 is incorporated by reference from the Company’s definitive proxy statement for the 20152018 Annual Meeting of Shareholders filed pursuant to Regulation 14A, under Section 16(a) Beneficial Ownership Reporting Compliance and Proposal 1 – Election of Directors – Biographical Summaries of Nominees and Directors; Information About Executive Officers; Involvement in Certain Legal Proceedings; and Proposal 1 – Election of Directors – Nomination of Directors, and Board Structure, Committees and Meeting Attendance.
ITEM 11 – EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the Company’s definitive proxy statement for the 20152018 Annual Meeting of Shareholders filed pursuant to Regulation 14A, under Proposal 1 – Election of Directors – Compensation of Directors, Compensation Discussion and Analysis, Compensation Committee Report, Executive Compensation Tables, Potential Payments Upon Termination or Change in Control and Compensation Committee Interlocks and Insider Participation.
ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information as ofThe following table presents equity compensation plan information at December 31, 20142017.
| | | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted- average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| | (a) | | (b) | | (c) | (a) | | (b) | | (c) |
| | | | | | | | | | | |
| Equity compensation plan approved by security holders | 129,608 |
| | $ | 31.35 |
| | 260,797 |
| 49,595 |
| | $ | 25.70 |
| | 82,277 |
|
| Equity compensation plan not approved by security holders (1) | 18,885 |
| | 30.08 |
| | 0 |
| 9,988 |
| | 26.81 |
| | 0 |
|
| Total | 148,493 |
| | $ | 31.19 |
| | 260,797 |
| 59,583 |
| | $ | 25.89 |
| | 82,277 |
|
| |
| (1) | Awards from the Non-Employee Director Stock Option Plan of 2000. Certain options granted remain outstanding from this plan, however no additional options will be granted under this plan. |
All other information required by Item 12 is incorporated, by reference, from the Company’s definitive proxy statement for the 20152018 Annual Meeting of Shareholders filed pursuant to Regulation 14A, under Share Ownership of Certain Beneficial Owners and Management.
ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is incorporated by reference from the Company’s definitive proxy statement for the 20152018 Annual Meeting of Shareholders filed pursuant to Regulation 14A, under Proposal 1 – Election of Directors – Director Independence, and Transactions with Related Persons, Promoters and Certain Control Persons.
ITEM 14 – PRINCIPAL ACCOUNTANTACCOUNTING FEES AND SERVICES
The information required by Item 14 is incorporated by reference from the Company’s definitive proxy statement for the 20152018 Annual Meeting of Shareholders filed pursuant to Regulation 14A, under Proposal 3 – Ratification of the Audit Committee’s Selection of Crowe Horwath LLP as the Company’s Independent Registered Public Accounting Firm for the Fiscal Year Ending December 31, 20152018 – Relationship with Independent Registered Public Accounting Firm.
PART IV
ITEM 15 – EXHIBITS, AND FINANCIAL STATEMENT SCHEDULES
| |
| (a) | The following documents are filed as part of this report: |
(1) – Financial Statements
Consolidated financial statements of the Company and its subsidiarysubsidiaries required in response to this Item are incorporated by reference from Item 8 of this report.
(2) – Financial Statement Schedules
All financial statement schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
(3) – Exhibits
|
| | |
| 3.1 | | |
| | |
| 3.2 | | |
| | |
| 4.1 | | |
| | |
| 10.1(a) | | |
| | |
| 10.1(b) | | |
| | |
| 10.1(c) | | |
| | |
| 10.1(d) | | |
| | |
| 10.1(e) | | |
| | |
| 10.1(f) | | |
| | |
| 10.1(g) | | |
| |
| 10.1(h) | | |
| | |
| 10.2(a) | | |
| | |
| 10.2(b) | | |
| | |
| 10.2(c) | | |
| | |
| 10.2(d) | | |
| | |
| 10.3 | | |
| | |
| 10.4(a) | | |
| | |
| 10.4(b) | | |
|
| | |
| 10.4(c) | | |
| | |
| 10.4(d) | | |
| | |
| 10.4(e) | | |
| | |
| 10.4(f) | | |
| | |
| 10.4(g) | | |
| | |
| 10.4(h) | | |
|
| | |
| 10.5 | | |
| | |
| 10.6 | | |
| | |
| 10.7 | | |
| | |
| 10.8 | | |
| | |
10.910.9(a) | | Executive |
| | |
| 10.9(b) | | |
| | |
| 10.9(c) | | |
| | |
| 10.9(d) | | |
| | |
| 10.9(e) | | |
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| 10.9(f) | | |
| |
| 10.9(g) | | |
| | |
| 10.10 | | |
| | |
| 10.11 | | |
| | |
| 10.12(a) | | |
| | |
| 10.12(b) | | |
| |
10.13 | | Agreement by and between Orrstown Financial Services, Inc., Orrstown Bank and the Federal Reserve Bank of Philadelphia dated March 22, 2012, incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed March 22, 2012. |
| | |
| 10.14 | | |
| | |
| 14 | | Code of Ethics Policy for Senior Financial Officers posted on Registrant’s website. |
| | |
| 21 | | |
| | |
| 23.1 | | |
| |
23.2 | | Consent of Smith Elliott Kearns & Company, LLC, Independent Registered Public Accounting Firm |
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| 31.1 | | |
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| 31.2 | | |
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| 101.LAB | | XBRL Taxonomy Extension Label Linkbase |
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| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase |
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| 101.INS | | XBRL Instance Document |
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| 101.SCH | | XBRL Taxonomy Extension Schema |
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| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase |
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| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase |
All other exhibits for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
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| (b) | Exhibits – The exhibits to this Form 10-K begin after the signature page. |
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| (c) | Financial statement schedules – None required. |
ITEM 16 – FORM 10-K SUMMARY
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
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| | | ORRSTOWN FINANCIAL SERVICES, INC. (Registrant) |
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Dated: March 12, 20159, 2018 | | By: | /s/ Thomas R. Quinn, Jr. |
| | | | Thomas R. Quinn, Jr., President and Chief Executive Officer |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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| Signature | | Title | | Date |
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| /s/ Thomas R. Quinn, Jr. | | President and Chief Executive Officer (Principal Executive Officer) and Director | | March 12, 20159, 2018 |
| Thomas R. Quinn, Jr. | | | | |
| /s/ David P. Boyle | | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | | March 12, 2015 |
David P. Boyle | | | | |
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/s/ Douglas P. Barton | | Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) | | March 12, 20159, 2018 |
DouglasDavid P. BartonBoyle | | | | |
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| /s/ Joel R. Zullinger | | Chairman of the Board and Director | | March 12, 20159, 2018 |
| Joel R. Zullinger | | | | |
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| /s/ Jeffrey W. Coy | | Vice Chairman of the Board and Director | | March 12, 20159, 2018 |
| Jeffrey W. Coy | | | | |
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| /s/ Dr. Anthony F. Ceddia | | Secretary of the Board and Director | | March 12, 20159, 2018 |
| Dr. Anthony F. Ceddia | | | | |
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| /s/ Cindy J. Joiner | | Director | | March 9, 2018 |
| Cindy J. Joiner | | | | |
| | | | |
| /s/ Mark K. Keller | | Director | | March 12, 20159, 2018 |
| Mark K. Keller | | | | |
| | | |
| /s/ Thomas D. Longenecker | | Director | | March 9, 2018 |
| Thomas D. Longenecker | | | | |
| | | | |
| /s/ Andrea Pugh | | Director | | March 12, 20159, 2018 |
| Andrea Pugh | | | | |
| | | |
| /s/ Gregory A. Rosenberry | | Director | | March 12, 20159, 2018 |
| Gregory A. Rosenberry | | | | |
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| /s/ Eric A. Segal | | Director | | March 12, 20159, 2018 |
| Eric A. Segal | | | | |
| | | |
| /s/ Glenn W. Snoke | | Director | | March 12, 20159, 2018 |
| Glenn W. Snoke | | | | |
| | | |
| /s/ Floyd E. Stoner | | Director | | March 12, 20159, 2018 |
| Floyd E. Stoner | | | | |
