| | § | operations | § | consolidation | • operations | § | securities | § | reserves• consolidation | • securities | § | risk management | § | dividends• reserves | • risk management | § | consumer compliance | § | branches• dividends | • consumer compliance | §• branches | • mergers | mergers | § | • capital adequacy |
Annually, theThe Bank is examined periodically by the Pennsylvania Department of Banking and/orand Securities and the FDIC. The last examination was conducted by the Pennsylvania Department of Banking as of June 30, 2012.
The Company’s website address is http://www.bankatfidelity.com. The Company makes available through this website the annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports as soon as reasonably practical after filing with the SEC. You may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements and other information about the Company at http://www.sec.gov. The Company’s accounting policies and procedures are designed to comply with accounting principles generally accepted in the United States of America (GAAP). Refer to “Critical Accounting Policies,” which are incorporated by reference in Part II, Item 7.
ITEM 1A:RISK FACTORS An investment in the Company’s common stock is subject to risks inherent to the Company’s business. The material risks and uncertainties that management believes affect the Company 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 the Company. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Company’s business operations. This report is qualified in its entirety by these risk factors. If any of the following risks actually occur, the Company’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of the Company’s common stock could decline significantly, and you could lose all or part of your investment. Risks Related to the Company’s Business
The Company’s business is subject to interest rate risk and variations in interest rates may negatively affect its financial performance. Changes in the interest rate environment may reduce profits. The Company’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities. As prevailing interest rates change, net interest spreads are affected by the difference between the maturities and re-pricing characteristics of interest-earning assets and interest-bearing liabilities. In addition, loan volume and yields are affected by market interest rates on loans, and rising interest rates generally are associated with a lower volume of loan originations. An increase in the general level of interest rates may also adversely affect the ability of certain borrowers to pay the interest on and principal of their obligations. Accordingly, changes in levels of market interest rates could materially adversely affect the Company’s net interest spread, asset quality, loan origination volume and overall profitability.
The Company is subject to lending risk. There are inherent risks associated with the Company’s lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where the Company operates as well as those across the Commonwealth of Pennsylvania and the United States. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans. The Company is also subject to various laws and regulations that affect its lending activities. Failure to comply with applicable laws and regulations could subject the Company to regulatory enforcement action that could result in the assessment of significant civil money penalties against the Company. Commercial, commercial real estate and real estate construction loans are generally viewed as having more risk of default than residential real estate loans or consumer loans. These types of loans are also typically larger than residential real estate loans and consumer loans. Because these loans generally have larger balances than residential real estate loans and consumer loans, the deterioration of one or a few of these loans could cause a significant increase in non-performing loans. An increase in non-performing loans could result in a net loss of earnings from these loans, an increase in the provision for possible loan losses and an increase in loan charge-offs, all of which could have a material adverse effect on the Company’s financial condition and results of operations.
The Company’s allowance for possible loan losses may be insufficient. The Company maintains an allowance for possible loan losses, which is a reserve established through a provision for possible loan losses charged to expense, that represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for possible loan losses inherently involves a high degree of subjectivity and requires the Company 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 the Company’s control, may require an increase in the allowance for possible loan losses. In addition, bank regulatory agencies periodically review the Company’s allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on
judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for possible loan losses, the Company will need additional provisions to increase the allowance for possible loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and capital and may have a material adverse effect on the Company’s financial condition and results of operations. If we conclude that the decline in value of any of our investment securities is other-than-temporary, we will be required to write down the credit-related portion of the impairment of that security through a charge to earnings. We review our investment securities portfolio at each quarter-end reporting period to determine whether the fair value is below the current carrying value. When the fair value of any of our investment securities has declined below its carrying value, we are required to assess whether the decline is other-than-temporary. If we conclude that the decline is other-than-temporary, we will be required to write down the credit-related portion of the impairment of that security through a charge to earnings. The Basel III capital requirements may require us to maintain higher levels of capital, which could reduce our profitability. Basel III targets higher levels of base capital, certain capital buffers and a migration toward common equity as the key source of regulatory capital. Although the new capital requirements are phased in over the next decade and may change substantially before final implementation, Basel III signals a growing effort by domestic and international bank regulatory agencies to require financial institutions, including depository institutions, to maintain higher levels of capital. The direction of the Basel III implementation activities or other regulatory viewpoints could require additional capital to support our business risk profile prior to final implementation of the Basel III standards. If the Company and the Bank are required to maintain higher levels of capital, the Company and the Bank may have fewer opportunities to invest capital into interest-earning assets, which could limit the profitable business operations available to the Company and the Bank and adversely impact our financial condition and results of operations. The Company may need or be compelled to raise additional capital in the future, but that capital may not be available when it is needed and on terms favorable to current shareholders. Federal banking regulators require the Company and Bank to maintain adequate levels of capital to support their operations. These capital levels are determined and dictated by law, regulation and banking regulatory agencies. In addition, capital levels are also determined by the Company’s management and board of directors based on capital levels that they believe are necessary to support the Company’s business operations. The Company is evaluating its present and future capital requirements and needs, is developing a comprehensive capital plan and is analyzing capital raising alternatives, methods and options. Even if the Company succeeds in meeting the current regulatory capital requirements, the Company may need to raise additional capital in the near future to support possible loan losses during future periods or to meet future regulatory capital requirements. Further, the Company’s regulators may require it to increase its capital levels. If the Company raises capital through the issuance of additional shares of its common stock or other securities, it would likely dilute the ownership interests of current investors and would likely dilute the per-share book value and earnings per share of its common stock. Furthermore, it may have an adverse impact on the Company’s stock price. New investors may also have rights, preferences and privileges senior to the Company’s current shareholders, which may adversely impact its current shareholders. The Company’s ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside its control, and on its financial performance. Accordingly, the Company cannot assure you of its ability to raise additional capital on terms and time frames acceptable to it or to raise additional capital at all. If the Company cannot raise additional capital in sufficient amounts when needed, its ability to comply with regulatory capital requirements could be materially impaired. Additionally, the inability to raise capital in sufficient amounts may adversely affect the Company’s operations, financial condition and results of operations.
If we conclude that the decline in value of any of our investment securities is other-than-temporary, we will be required to write down the credit-related portion of the impairment of that security through a charge to earnings.
We review our investment securities portfolio at each quarter-end reporting period to determine whether the fair value is below the current carrying value. When the fair value of any of our investment securities has declined below its carrying value, we are required to assess whether the decline is other-than-temporary. If we conclude that the decline is other-than-temporary, we will be required to write down the credit-related portion of the impairment of that security through a charge to earnings. As of December 31, 2012, the book value of the Company’s pooled trust preferred securities was $6.3 million with an estimated fair value of $1.8 million. Changes in the expected cash flows of these securities and/or prolonged price declines have resulted and may result in our concluding in future periods that there is additional impairment of these securities that is other-than-temporary, which would require a charge to earnings for the portion of the impairment that is deemed to be credit-related. Due to the complexity of the calculations and assumptions used in determining whether an asset, such as pooled trust preferred securities, is impaired, the impairment disclosed may not accurately reflect the actual impairment in the future.
The Basel III capital requirements may require us to maintain higher levels of capital, which could reduce our profitability.
If adopted as proposed, Basel III targets higher levels of base capital, certain capital buffers and a migration toward common equity as the key source of regulatory capital. Although the new capital requirements are phased in over the next decade and my change substantially before final implementation, Basel III signals a growing effort by domestic and international bank regulatory agencies to require financial institutions, including depository institutions, to maintain higher levels of capital. The direction of the Basel III implementation activities or other regulatory viewpoints could require additional capital to support our business risk profile prior to final implementation of the Basel III standards. If the Company and the Bank are required to maintain higher levels of capital, the Company and the Bank may have fewer opportunities to invest capital into interest-earning assets, which could limit the profitable business operations available to the Company and the Bank and adversely impact our financial condition and results of operations.
The Company is subject to environmental liability risk associated with lending activities. A significant portion of the Company’s loan portfolio is secured by real property. During the ordinary course of business, the Company may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Company may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Company to incur substantial expense and may materially reduce the affected property’s value or limit the Company’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Company’s exposure to environmental liability. Although the Company has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on the Company’s financial condition and results of operations.
The Company’s profitability depends significantly on economic conditions in the Commonwealth of Pennsylvania and the local region in which it conducts business. The Company’s success depends primarily on the general economic conditions of the Commonwealth of Pennsylvania and the specific local markets in which the Company operates. Unlike larger national or other regional banks that are more geographically diversified, the Company provides banking and financial services to customers primarily in Lackawanna and Luzerne Counties in Northeastern Pennsylvania. The local economic conditions in these areas have a significant impact on the demand for the Company’s products and services as well as the ability of the Company’s customers to repay loans, the value of the collateral securing loans and the stability of the Company’s deposit funding sources. A significant decline in general economic conditions caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other international or domestic occurrences, unemployment, changes in securities markets or other factors could impact these local economic conditions and, in turn, have a material adverse effect on the Company’s financial condition and results of operations.
There is no assurance that the Company will be able to successfully compete with others for business. The Company competes for loans, deposits and investment dollars with numerous regional and national banks and other community banking institutions, as well as other kinds of financial institutions and enterprises, such as securities firms, insurance companies, savings associations, credit unions, mortgage brokers and private lenders. Many competitors have substantially greater resources than the Company does, and operate under less stringent regulatory environments. The differences in resources and regulations may make it more difficult for the Company to compete profitably, reduce the rates that it can earn on loans and on its investments, increase the rates it must offer on deposits and other funds, and adversely affect its overall financial condition and earnings.
The Company is subject to extensive government regulation and supervision. The Company, primarily through the Bank, is subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect the Company’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. Federal or commonwealth regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect the Company in substantial and unpredictable ways. Such changes could subject the Company to additional costs, limit the types of financial services and products the Company may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on the Company’s business, financial condition and results of operations. While the Company has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.
The Company’s controls and procedures may fail or be circumvented. Management regularly reviews and updates the Company’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Company’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company’s business, results of operations and financial condition.
New lines of business or new products and services may subject the Company to additional risks. From time-to-time, the Company may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services the Company may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of the Company’s system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on the Company’s business, results of operations and financial condition.
The Company’s future acquisitions could dilute your ownership and may cause it to become more susceptible to adverse economic events. The Company may use its common stock to acquire other companies or make investments in banks and other complementary businesses in the future. The Company may issue additional shares of common stock to pay for future acquisitions, which would dilute your ownership interest in the Company. Future business acquisitions could be material to the Company, and the degree of success achieved in acquiring and integrating these businesses into the Company could have a material effect on the
value of the Company’s common stock. In addition, any acquisition could require it to use substantial cash or other liquid assets or to incur debt. In those events, it could become more susceptible to economic downturns and competitive pressures.
The Company may not be able to attract and retain skilled people. The Company’s success depends, in large part, on its ability to attract and retain key people. Competition for the best people in most activities engaged in by the Company can be intense and the Company may not be able to hire people or to retain them. The unexpected loss of services of one or more of the Company’s key personnel could have a material adverse impact on the Company’s business because of their skills, knowledge of the Company’s market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.
The Company’s information systems may experience an interruption or breach in security. The Company relies heavily on communications and information systems to conduct its business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company’s customer relationship management, general ledger, deposit, loan and other systems. The Company has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, however there can be no assurance that any such failures, interruptions or security breaches will not occuroccur. The occurrence of any failures, interruptions or security breaches of the Company’s information systems could damage the Company’s reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose the Company to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company’s financial condition and results of operations.
The Company continually encounters technological change. The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Company’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Company’s operations. Many of the Company’s competitors have substantially greater resources to invest in technological improvements. The Company may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on the Company’s business and, in turn, the Company’s financial condition and results of operations.
The operations of our business, including our interaction with customers, are increasingly done via electronic means, and this has increased our risks related to cyber security. We are exposed to the risk of cyber-attacks in the normal course of business. In general, cyber incidents can result from deliberate attacks or unintentional events. We have observed an increased level of attention in the industry focused on cyber-attacks that include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. To combat against these attacks, policies and procedures are in place to prevent or limit the effect of the possible security breach of our information systems and we have insurance against some cyber-risks and attacks. While we have not incurred any material losses related to cyber-attacks, nor are we aware of any specific or threatened cyber-incidents as of the date of this report, we may incur substantial costs and suffer other negative consequences if we fall victim to successful cyber-attacks. Such negative consequences could include remediation costs that may include liability for stolen assets or information and repairing system damage that may have been caused; deploying additional personnel and protection technologies, training employees, and engaging third party experts and consultants; lost revenues resulting from unauthorized use of proprietary information or the failure to retain or attract customers following an attack; litigation; and reputational damage adversely affecting customer or investor confidence.
The Company is subject to claims and litigation pertaining to fiduciary responsibility. From time-to-time, customers make claims and take legal action pertaining to the Company’s performance of its fiduciary responsibilities. Whether customer claims and legal action related to the Company’s performance of its fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to the Company, they may result in significant financial liability and/or adversely affect the market perception of the Company and its products and services as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations.
Pennsylvania Business Corporation Law and various anti-takeover provisions under our articles and bylaws could impede the takeover of the Company. Various Pennsylvania laws affecting business corporations may have the effect of discouraging offers to acquire the Company, even if the acquisition would be advantageous to shareholders. In addition, we have various anti-takeover measures in place under our articles of incorporation and bylaws, including a supermajority vote requirement for mergers, a staggered board of directors, and the absence of cumulative voting. Any one or more of these measures may impede the
takeover of the Company without the approval of our board of directors and may prevent our shareholders from taking part in a transaction in which they could realize a premium over the current market price of our common stock.
The Company is a holding company and relies on dividends from its banking subsidiary for substantially all of its revenue and its ability to make dividends, distributions, and other payments. As a bank holding company, the Company’s ability to pay dividends depends primarily on its receipt of dividends from its subsidiary bank. Dividend payments from the bank are subject to legal and regulatory limitations, generally based on net profits and retained earnings, imposed by bank regulatory agencies. The ability of the bank to pay dividends is also subject to profitability, financial condition, regulatory capital requirements, capital expenditures and other cash flow requirements. There is no assurance that the bank will be able to pay dividends in the future or that the Company will generate cash flow to pay dividends in the future. The Company’s failure to pay dividends on its common stock may have a material adverse effect on the market price of its common stock.
The Company’s banking subsidiary may be required to pay higher FDIC insurance premiums or special assessments which may adversely affect its earnings. Poor economic conditions and the resulting bank failures have increased the costs of the FDIC and depleted its deposit insurance fund. Additional bank failures may prompt the FDIC to increase its premiums or to issue special assessments. The Company generally is unable to control the amount of premiums or special assessments that its subsidiary is required to pay for FDIC insurance. Any future changes in the calculation or assessment of FDIC insurance premiums may have a material adverse effect on our results of operations, financial condition, and our ability to continue to pay dividends on our common stock at the current rate or at all.
Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact the Company’s business. Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on the Company’s ability to conduct business. Such events could affect the stability of the Company’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Company to incur additional expenses. Severe weather or natural disasters, acts of war or terrorism or other adverse external events may occur in the future. Although management has established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations. The increasing use of social media platforms presents new risks and challenges and our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could materially adversely impact our business. There has been a marked increase in the use of social media platforms, including weblogs (blogs), social media websites, and other forms of Internet-based communications which allow individuals access to a broad audience of consumers and other interested persons. Social media practices in the banking industry are evolving, which creates uncertainty and risk of noncompliance with regulations applicable to our business. Consumers value readily available information concerning businesses and their goods and services and often act on such information without further investigation and without regard to its accuracy. Many social media platforms immediately publish the content their subscribers and participants post, often without filters or checks on accuracy of the content posted. Information posted on such platforms at any time may be adverse to our interests and/or may be inaccurate. The dissemination of information online could harm our business, prospects, financial condition, and results of operations, regardless of the information’s accuracy. The harm may be immediate without affording us an opportunity for redress or correction. Other risks associated with the use of social media include improper disclosure of proprietary information, negative comments about our business, exposure of personally identifiable information, fraud, out-of-date information, and improper use by employees and customers. The inappropriate use of social media by our customers or employees could result in negative consequences including remediation costs including training for employees, additional regulatory scrutiny and possible regulatory penalties, litigation or negative publicity that could damage our reputation adversely affecting customer or investor confidence. Risks Associated with the Company’s Common Stock
The Company’s stock price can be volatile. Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. The Company’s stock price can fluctuate significantly in response to a variety of factors including, among other things: Actual or anticipated variations in quarterly results of operations. Recommendations by securities analysts. Operating and stock price performance of other companies that investors deem comparable to the Company.
Table Of Contents | · | Actual or anticipated variations in quarterly results of operations. |
| · | Recommendations by securities analysts. |
| · | Operating and stock price performance of other companies that investors deem comparable to the Company. |
| · | News reports relating to trends, concerns and other issues in the financial services industry. |
| · | Perceptions in the marketplace regarding the Company and/or its competitors. |
| · | New technology used, or services offered, by competitors. |
| · | Significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Company or its competitors. |
| · | Failure to integrate acquisitions or realize anticipated benefits from acquisitions. |
| · | Changes in government regulations. |
| · | Geopolitical conditions such as acts or threats of terrorism or military conflicts. |
News reports relating to trends, concerns and other issues in the financial services industry. Perceptions in the marketplace regarding the Company and/or its competitors. New technology used, or services offered, by competitors. Significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Company or its competitors. Failure to integrate acquisitions or realize anticipated benefits from acquisitions. Changes in government regulations. Geopolitical conditions such as acts or threats of terrorism or military conflicts. General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause the Company’s stock price to decrease regardless of operating results.
The trading volume in the Company’s common stock is less than that of other larger financial services companies. The Company’s common stock is listed for trading on the over-the-counter bulletin board and the trading volume in its common stock is less than that of other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of the Company’s common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which the Company has no control. Given the lower trading volume of the Company’s common stock, significant sales of the Company’s common stock, or the expectation of these sales, could cause the Company’s stock price to fall. Risks Associated with the Company’s Industry
Future governmental regulation and legislation could limit the Company’s future growth. The Company is a registered bank holding company, and its subsidiary bank is a depository institution whose deposits are insured by the FDIC. As a result, the Company is subject to various regulations and examinations by various regulatory authorities. In general, statutes establish the corporate governance and eligible business activities for the Company, certain acquisition and merger restrictions, limitations on inter-company transactions such as loans and dividends, capital adequacy requirements, requirements for anti-money laundering programs and other compliance matters, among other regulations. The Company is extensively regulated under federal and state banking laws and regulations that are intended primarily for the protection of depositors, federal deposit insurance funds and the banking system as a whole. Compliance with these statutes and regulations is important to the Company’s ability to engage in new activities and consummate additional acquisitions. In addition, the Company is subject to changes in federal and state tax laws as well as changes in banking and credit regulations, accounting principles and governmental economic and monetary policies. The Company cannot predict whether any of these changes may adversely and materially affect it. Federal and state banking regulators also possess broad powers to take supervisory actions as they deem appropriate. These supervisory actions may result in higher capital requirements, higher insurance premiums and limitations on the Company’s activities that could have a material adverse effect on its business and profitability. While these statutes are generally designed to minimize potential loss to depositors and the FDIC insurance funds, they do not eliminate risk, and compliance with such statutes increases the Company’s expense, requires management’s attention and can be a disadvantage from a competitive standpoint with respect to non-regulated competitors.
The earnings of financial services companies are significantly affected by general business and economic conditions. The Company’s operations and profitability are impacted by general business and economic conditions in the United States and abroad. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and finance, and the strength of the U.S. economy and the local economies in which the Company operates, all of which are beyond the Company’s control. Deterioration in economic conditions could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values and a decrease in demand for the Company’s products and services, among other things, any of which could have a material adverse impact on the Company’s financial condition and results of operations.
Financial services companies depend on the accuracy and completeness of information about customers and counterparties. In deciding whether to extend credit or enter into other transactions, the Company may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information. The Company may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse impact on the Company’s business and, in turn, the Company’s financial condition and results of operations.
Consumers may decide not to use banks to complete their financial transactions. Technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts or mutual funds. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on the Company’s financial condition and results of operations.
Future Downgrades of the United States Government may adversely affect the Company. In August 2011, Standard & Poor’s downgraded the United States’ credit rating from AAA to AA+, and there are indications that Moody’s or Fitch Ratings also may downgrade the United States’ credit ratings in the future. Standard & Poor’s also downgraded the credit rating of the Federal Home Loan Bank System, a government-sponsored enterprise in which the Company invests and from which the Company receives a line of credit, from AAA to AA+. Furthermore, the credit rating of other entities, such as state and local governments, may be downgraded as a consequence of the downgrading of the United States’ credit rating. The impact that these credit rating downgrades may have on the national and local economy and on the Company’s financial condition and results of operation is uncertain and may adversely affect the Company and its business.
The regulatory environment for the financial services is being significantly impacted by financial regulatory reform initiatives in the United States and elsewhere, including Dodd-Frank and regulations promulgated to implement it. Dodd-Frank, which was signed into law on July 21, 2010, comprehensively reforms the regulation of financial institutions, products and services. Dodd-Frank requires various federal regulatory agencies to implement numerous rules and regulations. Because the federal agencies are granted broad discretion in drafting these rules and regulations, many of the details and such of the impact of Dodd-Frank may not be known for many months or years. While much of how the Dodd-Frank and other financial industry reforms will change our current business operations depends on the specific regulatory reforms and interpretations, many of which have yet to be released or finalized, it is clear that the reforms, both under Dodd-Frank and otherwise, will have a significant effect on our entire industry. Although Dodd-Frank and other reforms will affect a number of the areas in which we do business, it is not clear at this time the full extent of the adjustments that will be required and the extent to which we will be able to adjust our businesses in response to the requirements. Although it is difficult to predict the magnitude and extent of these effects at this stage, we believe compliance with Dodd-Frank and implementing its regulations and initiatives will negatively impact revenue and increase the cost of doing business, both in terms of transition expenses and on an ongoing basis, and it may also limit our ability to pursue certain business opportunities.
ITEM 1B: UNRESOLVED STAFF COMMENTS None
ITEM 2: PROPERTIES As of December 31, 2012,2015, the Company operated 11 full-service banking offices, of which six were owned and five were leased. None of the lessors of the properties leased by the Company are affiliated with the Company and all of the properties are located in the Commonwealth of Pennsylvania. The Company is headquartered at its owner-occupied main branch located on the corner of Blakely and Drinker Streets in Dunmore, PA. We believe each of our facilities is suitable and adequate to meet our current operational needs. The following table provides information with respect to the principal properties from which the Bank conducts business: | | | | | | | | | | Location | | Owned / leased* | | Type of use | | Full service | | Drive-thru | | ATM | Drinker & Blakely Streets, Dunmore,, PA | | Owned | | Main Branch(1) (2) | | x | | x | | x | | | | | | | | | | | | | | | | | | | | | | | 111 Green Ridge St.St., Scranton,, PA | | Leased | | Green Ridge Branch(2) | | x | | x | | x | | | | | | | | | | | | | | | | | | | | | | | 1311 Morgan Hwy., Clarks Summit, PA | | Leased | | Abington Branch(3) | | x | | x | | x | | | | | | | | | | | | | | | | | | | | | | | 1232 Keystone Industrial Park Rd., Dunmore,, PA | | Owned | | Keystone Industrial Park Branch | | x | | x | | x | | | | | | | | | | | | 338 North Washington Ave. , Scranton, PA | | Owned | | Financial Center Branch(4)(3) | | x | | | | x | | | | | | | | | | | | | | | | | | | | | | | 4010 Birney Ave., Moosic, PA | | Owned | | Moosic Branch | | x | | x | | x | | | | | | | | | | | | 801 Wyoming Ave.
| | | | | | | | | | | 225 Kennedy Blvd., West Pittston, PA
| | Leased | | West Pittston Branch | | x | | x | | x | | | | | | | | | | | | 1598 Main St.,
Peckville, PA
| | Leased | | Peckville Branch | | x | | x | | x | | | | | | | | | | | | 1598 Main St., Peckville, PA | | Leased | | Peckville Branch | | x | | x | | x | | | | | | | | | | | | 247 Wyoming Ave., Kingston,, PA | | Owned | | Kingston Branch | | x | | x | | x | | | | | | | | | | | | 511 Scranton-Carbondale Hwy. , Eynon, PA | | Leased | | Eynon Branch(4) | | x | | x | | x | | | | | | | | | | | | | | | | | | | | | | | 400 S. Main St.St., Scranton,, PA | | Owned | | West Scranton Branch Branch(2) | | x | | x | | x |
*All of the owned properties are free of encumbrances. At the Green Ridge St., Scranton branch office and Pittston branch office, the Company leases the land from an unrelated third party, however the building isbuildings are the Company’s own capital improvement. | (1) | | (1) Executive and administrative, commercial and consumer lending, trust and asset management services are located at the Main Branch.
|
| (2) | | This office has two automated teller machines (ATMs). |
| (3) | | Executive, mortgage and consumer lending, finance, operations and a full-service call center are located in this building. A portion of the building is leased to a non-related entity. During the first quarter of 2016, the lessee vacated the property. |
| (4) | | This branch is expected to close during the first quarter of 2016. Customers will be transferred to the Peckville office. |
As of December 31, 2015, the Bank maintained three free standing 24-hour ATMs located at the Main Branch.following locations: (2) This office has two automated teller machines (ATMs).
(3) In addition, there is a banking facility located in the Clarks Summit State Hospital. The office is leased from the hospital under a lease-for-service-provided agreement with service limited to employees and patients of the hospital.
(4) Executive, mortgage lending, finance, operations and a full-service call center are located in this building. A portion of the building is leased to a non-related entity.
The Bank maintains one free-standing 24-hour ATM located at the Shoppes at Montage, 1035 Shoppes Blvd., Moosic, PA.
| · | | The Shoppes at Montage, 1035 Shoppes Blvd., Moosic, PA; |
| · | | Mountain Plaza Shopping Mall, 307 Moosic St., Scranton, PA; |
| · | | Antonio’s Pizza, 45 Luzerne St., West Pittston, PA. |
Foreclosed assets held-for-sale includesinclude other real estate owned. Of the twelveowned (ORE). The Company had fourteen ORE properties owned, eleven were either listed or pending listing for sale with local realtors.as of December 31, 2015, which stemmed from thirteen unrelated borrowers. Upon possession, foreclosed properties are recorded on the Company’s balance sheet at the lower of cost or fair value. For a further discussion of ORE properties, see “Foreclosed assets held-for-sale”, located in the comparison of financial condition section of managements’ discussion and analysis.
ITEM 3: LEGAL PROCEEDINGS The nature of the Company’s business generates some litigation involving matters arising in the ordinary course of business. However, in the opinion of the Company after consulting with legal counsel, no legal proceedings are pending, which, if determined adversely to the Company or the Bank, would have a material effect on the Company’s undivided profits or
financial condition.condition or results of operations. No legal proceedings are pending other than ordinary routine litigation incidental to the business of the Company and the Bank. In addition, to management’s knowledge, no governmental authorities have initiated or contemplated any material legal actions against the Company or the Bank.
ITEM 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 The common stock of the Company is traded on the over-the-counter bulletin board under the symbol “FDBC.” Shareholders requesting information about the Company’s common stock may contact: Salvatore R. DeFrancesco, Jr., Treasurer Fidelity D & D Bancorp, Inc. Blakely and Drinker Streets Dunmore,, PA 18512 (570) 342-8281 The following table lists the quarterly cash dividends paid per share and the range of high and low bid prices for the Company’s common stock based on information obtained from on-line published sources. Such over-the-counter prices do not include retail mark-ups, markdowns or commissions: | | | | | | | | | | | | | | | | | | | | | | | | | | 2012 | | | 2011 | | 2015 | | 2014 | | | | | Prices | | Dividends | | Prices | | Dividends | | Prices | | Dividends | | Prices | | Dividends | | | | | High | | Low | | paid | | High | | Low | | paid | | High | | Low | | paid | | High | | Low | | paid | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1st Quarter | | $ | 26.25 | | | $ | 19.99 | | | $ | 0.25 | | | $ | 20.50 | | | $ | 18.25 | | | $ | 0.25 | | $ | 36.40 | | $ | 32.00 | | $ | 0.25 | | $ | 28.16 | | $ | 25.81 | | $ | 0.25 | | | 2nd Quarter | | $ | 26.25 | | | $ | 20.25 | | | $ | 0.25 | | | $ | 19.60 | | | $ | 18.35 | | | $ | 0.25 | | $ | 36.00 | | $ | 33.31 | | $ | 0.27 | | $ | 28.50 | | $ | 26.00 | | $ | 0.25 | | | 3rd Quarter | | $ | 25.00 | | | $ | 20.05 | | | $ | 0.25 | | | $ | 20.80 | | | $ | 16.00 | | | $ | 0.25 | | $ | 35.00 | | $ | 32.00 | | $ | 0.27 | | $ | 32.00 | | $ | 27.65 | | $ | 0.25 | | | 4th Quarter | | $ | 22.00 | | | $ | 20.00 | | | $ | 0.25 | | | $ | 21.75 | | | $ | 17.05 | | | $ | 0.25 | | $ | 38.25 | | $ | 33.53 | | $ | 0.37 | * | $ | 36.00 | | $ | 30.15 | | $ | 0.35 | * |
*Includes a regular quarterly cash dividend of $0.27 and $0.25 for the fourth quarters of 2015 and 2014, respectively and a special cash dividend of $0.10 during both periods. Dividends are determined and declared by the Board of Directors of the Company. The Company expects to continue to pay cash dividends in the future; however, future dividends are dependent upon earnings, financial condition, capital strength and other factors of the Company. For a further discussion of regulatory capital requirements see Note 14,15, “Regulatory Matters,” contained within the notes to the consolidated financial statements, incorporated by reference in Part II, Item 8. The Company has establishedoffers a dividend reinvestment plan (DRP) for its shareholders. The planDRP provides shareholders with a convenient and economical method of investing cash dividends payable on their common stock and the opportunity to make voluntary optional cash payments to purchase additional shares of the Company’s common stock. Participants pay no brokerage commissions or service charges when they acquire additional shares of common stock through the plan.DRP. The administrator may purchase shares directly from the Company, in the open market, in negotiated transactions with third parties or using a combination of these methods. The Company had approximately 1,3041,402 shareholders at December 31, 20122015 and 1,3001,401 shareholders as of February 28, 2013.29, 2016. The number of shareholders is the actual number of individual shareholders of record. Each security depository is considered a single shareholder for purposes of determining the approximate number of shareholders.
Securities authorized for issuance under equity compensation plans The following table summarizes the Company’s equity compensation plans as of December 31, 20122015 that have been approved and not approved by Fidelity D&D Bancorp, Inc. shareholders: | | | | | | | | | (a) | | (b) | | (c) | | (a) | (b) | (c) | | 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)) | | Equity compensation plans approved by security holders: | | | | | | | | | | | | | | | | | | 2000 Independent Director Stock Option Plan | | | 15,000 | | | $ | 28.90 | | | | - | | 11,500 | $ | 28.90 | - | | 2000 Stock Incentive Plan | | | 4,500 | | | $ | 28.01 | | | | - | | 4,000 | $ | 27.90 | - | | 2002 Employee Stock Purchase Plan | | | 4,256 | | | $ | 18.35 | | | | 82,967 | | 3,695 | $ | 30.06 | 70,541 | | 2012 Omnibus Stock Incentive Plan | | | 151 | | | $ | 21.50 | | | | 499,849 | | 8,840 | $ | 28.50 | 487,996 | | 2012 Director Stock Incentive Plan | | | - | | | $ | - | | | | 500,000 | | 3,200 | $ | 32.25 | 486,800 | | Equity compensation plans not approved by security holders: | | | - | | | $ | - | | | | - | | | Equity compensation plans not approved by security holders - none | | - | | - | - | | Total | | | 23,907 | | | $ | 26.81 | | | | 1,082,816 | | 31,235 | $ | 29.14 | 1,045,337 |
Performance graph
Performance graph The following graph and table compare the cumulative total shareholder return on the Company’s common stock against the cumulative total return of the NASDAQ Composite and the SNL index of greater than $500 million in-asset banks traded on the OTC-BB and Pink Sheet (the SNL index) for the period of five fiscal years commencing January 1, 2008,2011, and ending December 31, 2012.2015. As of December 31, 2012,2015, the SNL index consisted of 147146 banks. A listing of the banks that comprise the index can be found on the Company’s website at www.bankatfidelity.com and then clicking on, Investor Relations, Fidelity D & D Bancorp Stock, Stock Information, List of all companies in The SNL U.S. Bank Pink > $500M link at bottom of page. The graph illustrates the cumulative investment return to shareholders, based on the assumption that a $100 investment was made on December 31, 2007,2010, in each of: the Company’s common stock, the NASDAQ Composite and the SNL index. All cumulative total returns are computed assuming the reinvestment of dividends into the applicable securities. The shareholder return shown on the graph and table below is not necessarily indicative of future performance: 
| | | | | | | | | | Period Ending | | Index | 12/31/10 | 12/31/11 | 12/31/12 | 12/31/13 | 12/31/14 | 12/31/15 | | Fidelity D & D Bancorp, Inc. | 100.00 | 107.79 | 111.66 | 150.76 | 195.07 | 210.85 | | NASDAQ Composite | 100.00 | 99.21 | 116.82 | 163.75 | 188.03 | 201.40 | | SNL Bank Pink > $500M | 100.00 | 98.32 | 108.42 | 131.77 | 154.48 | 171.37 |
| | | Period Ending | | | Index | | 12/31/07 | | | 12/31/08 | | | 12/31/09 | | | 12/31/10 | | | 12/31/11 | | | 12/31/12 | | | Fidelity D & D Bancorp, Inc. | | | 100.00 | | | | 96.44 | | | | 59.29 | | | | 82.54 | | | | 88.97 | | | | 92.16 | | | NASDAQ Composite | | | 100.00 | | | | 60.02 | | | | 87.24 | | | | 103.08 | | | | 102.26 | | | | 120.42 | | | SNL Bank Pink > $500M | | | 100.00 | | | | 72.56 | | | | 62.04 | | | | 65.54 | | | | 64.43 | | | | 71.06 | |
ITEM 6:SELECTED FINANCIAL DATA Set forth below are our selected consolidated financial and other data. This financial data is derived in part from, and should be read in conjunction with the consolidated financial statements and notes thereto included in Part II, Item 8 of this report: | (dollars in thousands except per share data) | | | | | | | | | | | | | | | | | Balance sheet data: | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | | | Total assets | | $ | 601,525 | | | $ | 606,742 | | | $ | 561,673 | | | $ | 556,017 | | | $ | 575,719 | | | Total investment securities | | | 100,730 | | | | 108,543 | | | | 83,431 | | | | 76,530 | | | | 84,188 | | | Net loans | | | 424,584 | | | | 398,186 | | | | 407,903 | | | | 423,124 | | | | 436,207 | | | Loans held-for-sale | | | 10,545 | | | | 4,537 | | | | 213 | | | | 1,221 | | | | 84 | | | Total deposits | | | 514,660 | | | | 515,802 | | | | 482,448 | | | | 458,994 | | | | 433,312 | | | Short-term borrowings | | | 8,056 | | | | 9,507 | | | | 8,548 | | | | 16,533 | | | | 38,130 | | | Long-term debt | | | 16,000 | | | | 21,000 | | | | 21,000 | | | | 32,000 | | | | 52,000 | | | Total shareholders' equity | | | 58,946 | | | | 53,624 | | | | 46,774 | | | | 45,675 | | | | 48,961 | | | | | | | | | | | | | | | | | | | | | | | | | Operating data for the year ended: | | | | | | | | | | | | | | | | | | | | | | Total interest income | | $ | 23,994 | | | $ | 25,603 | | | $ | 27,580 | | | $ | 29,909 | | | $ | 33,961 | | | Total interest expense | | | 3,354 | | | | 4,761 | | | | 6,827 | | | | 10,797 | | | | 14,684 | | | Net interest income | | | 20,640 | | | | 20,842 | | | | 20,753 | | | | 19,112 | | | | 19,277 | | | Provision for loan losses | | | 3,250 | | | | 1,800 | | | | 2,085 | | | | 5,050 | | | | 940 | | | | | | | | | | | | | | | | | | | | | | | | | Net interest income after provision for loan losses | | | 17,390 | | | | 19,042 | | | | 18,668 | | | | 14,062 | | | | 18,337 | | | Other-than-temporary impairment | | | (136 | ) | | | (246 | ) | | | (11,836 | ) | | | (3,300 | ) | | | (436 | ) | | Other income | | | 7,645 | | | | 5,938 | | | | 5,424 | | | | 5,461 | | | | 5,014 | | | Other operating expense | | | 18,438 | | | | 18,044 | | | | 18,017 | | | | 19,241 | | | | 18,210 | | | | | | | | | | | | | | | | | | | | | | | | | Income (loss) before income taxes | | | 6,461 | | | | 6,690 | | | | (5,761 | ) | | | (3,018 | ) | | | 4,705 | | | Provision (credit) for income taxes | | | 1,559 | | | | 1,645 | | | | (2,557 | ) | | | (1,618 | ) | | | 1,069 | | | Net income (loss) | | $ | 4,902 | | | $ | 5,045 | | | $ | (3,204 | ) | | $ | (1,400 | ) | | $ | 3,636 | | | | | | | | | | | | | | | | | | | | | | | | | Per share data: | | | | | | | | | | | | | | | | | | | | | | Net income (loss) per share, basic | | $ | 2.14 | | | $ | 2.28 | | | $ | (1.50 | ) | | $ | (0.67 | ) | | $ | 1.76 | | | Net income (loss) per share, diluted | | $ | 2.14 | | | $ | 2.28 | | | $ | (1.50 | ) | | $ | (0.67 | ) | | $ | 1.76 | | | Dividends declared | | $ | 2,283 | | | $ | 2,210 | | | $ | 2,137 | | | $ | 2,078 | | | $ | 2,069 | | | Dividends per share | | $ | 1.00 | | | $ | 1.00 | | | $ | 1.00 | | | $ | 1.00 | | | $ | 1.00 | | | Book value per share | | $ | 25.37 | | | $ | 23.78 | | | $ | 21.48 | | | $ | 21.69 | | | $ | 23.73 | | | Weighted-average shares outstanding | | | 2,286,233 | | | | 2,213,631 | | | | 2,141,323 | | | | 2,080,507 | | | | 2,068,851 | | | Shares outstanding | | | 2,323,248 | | | | 2,254,542 | | | | 2,178,028 | | | | 2,105,860 | | | | 2,062,927 | | | | | | | | | | | | | | | | | | | | | | | | | Ratios: | | | | | | | | | | | | | | | | | | | | | | Return on average assets | | | 0.81 | % | | | 0.85 | % | | | -0.55 | % | | | -0.25 | % | | | 0.62 | % | | Return on average equity | | | 8.62 | % | | | 10.01 | % | | | -6.69 | % | | | -2.91 | % | | | 6.81 | % | | Net interest margin | | | 3.80 | % | | | 3.89 | % | | | 3.89 | % | | | 3.71 | % | | | 3.60 | % | | Efficiency ratio | | | 63.40 | % | | | 65.47 | % | | | 65.38 | % | | | 72.51 | % | | | 72.98 | % | | Expense ratio | | | 1.78 | % | | | 2.04 | % | | | 2.07 | % | | | 2.37 | % | | | 2.25 | % | | Allowance for loan losses to loans | | | 2.02 | % | | | 1.97 | % | | | 1.90 | % | | | 1.75 | % | | | 1.08 | % | | Dividend payout ratio | | | 46.56 | % | | | 43.80 | % | | | N/M* | | | | N/M* | | | | 56.90 | % | | Equity to assets | | | 9.80 | % | | | 8.84 | % | | | 8.33 | % | | | 8.21 | % | | | 8.50 | % | | Equity to deposits | | | 11.45 | % | | | 10.40 | % | | | 9.70 | % | | | 9.95 | % | | | 11.30 | % |
| | | | | | | | | | | | | | | | | | | | | | (dollars in thousands except per share data) | | | | | | | | | | | | | | | | | | | | | | Balance sheet data: | 2015 | 2014 | 2013 | 2012 | 2011 | Total assets | $ | 729,358 | $ | 676,485 | $ | 623,825 | $ | 601,525 | $ | 606,742 | Total investment securities | | 125,232 | | 97,896 | | 97,423 | | 100,730 | | 108,543 | Net loans and leases | | 546,682 | | 506,327 | | 469,216 | | 424,584 | | 398,186 | Loans held-for-sale | | 1,421 | | 1,161 | | 917 | | 10,545 | | 4,537 | Total deposits | | 620,675 | | 586,944 | | 529,698 | | 514,660 | | 515,802 | Short-term borrowings | | 28,204 | | 3,969 | | 8,642 | | 8,056 | | 9,507 | Long-term debt | | - | | 10,000 | | 16,000 | | 16,000 | | 21,000 | Total shareholders' equity | | 76,351 | | 72,219 | | 66,060 | | 58,946 | | 53,624 | | | | | | | | | | | | Operating data for the year ended: | | | | | | | | | | | Total interest income | $ | 26,014 | $ | 24,844 | $ | 23,853 | $ | 23,994 | $ | 25,603 | Total interest expense | | 2,529 | | 2,917 | | 2,968 | | 3,354 | | 4,761 | Net interest income | | 23,485 | | 21,927 | | 20,885 | | 20,640 | | 20,842 | Provision for loan losses | | 1,075 | | 1,060 | | 2,550 | | 3,250 | | 1,800 | Net interest income after provision for loan losses | | 22,410 | | 20,867 | | 18,335 | | 17,390 | | 19,042 | Other-than-temporary impairment | | - | | - | | - | | (136) | | (246) | Other income | | 7,533 | | 7,354 | | 10,541 | | 7,788 | | 5,946 | Other operating expense | | 21,022 | | 19,703 | | 19,119 | | 18,581 | | 18,052 | Income before income taxes | | 8,921 | | 8,518 | | 9,757 | | 6,461 | | 6,690 | Provision for income taxes | | 1,818 | | 2,166 | | 2,635 | | 1,559 | | 1,645 | Net income | $ | 7,103 | $ | 6,352 | $ | 7,122 | $ | 4,902 | $ | 5,045 | | | | | | | | | | | | Per share data: | | | | | | | | | | | Net income per share, basic | $ | 2.91 | $ | 2.63 | $ | 3.03 | $ | 2.14 | $ | 2.28 | Net income per share, diluted | $ | 2.90 | $ | 2.62 | $ | 3.02 | $ | 2.14 | $ | 2.28 | Dividends declared | $ | 2,844 | $ | 2,667 | $ | 2,602 | $ | 2,283 | $ | 2,210 | Dividends per share | $ | 1.16 | $ | 1.10 | $ | 1.10 | $ | 1.00 | $ | 1.00 | Book value per share | $ | 31.25 | $ | 29.75 | $ | 27.62 | $ | 25.37 | $ | 23.78 | Weighted-average shares outstanding | | 2,439,124 | | 2,412,962 | | 2,353,056 | | 2,286,233 | | 2,213,631 | Shares outstanding | | 2,443,405 | | 2,427,767 | | 2,391,617 | | 2,323,248 | | 2,254,542 | | | | | | | | | | | | Ratios: | | | | | | | | | | | Return on average assets | | 1.00% | | 0.96% | | 1.15% | | 0.81% | | 0.85% | Return on average equity | | 9.55% | | 9.12% | | 11.70% | | 8.62% | | 10.01% | Net interest margin | | 3.70% | | 3.75% | | 3.80% | | 3.80% | | 3.89% | Efficiency ratio | | 64.40% | | 64.88% | | 64.99% | | 63.40% | | 65.47% | Expense ratio | | 1.86% | | 1.89% | | 1.87% | | 1.78% | | 2.04% | Allowance for loan losses to loans | | 1.71% | | 1.78% | | 1.87% | | 2.07% | | 2.00% | Dividend payout ratio | | 40.04% | | 41.99% | | 36.54% | | 46.56% | | 43.80% | Equity to assets | | 10.47% | | 10.68% | | 10.59% | | 9.80% | | 8.84% | Equity to deposits | | 12.30% | | 12.30% | | 12.47% | | 11.45% | | 10.40% |
* The result of this calculation is not meaningful.
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATION Critical accounting policies The presentation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect many of the reported amounts and disclosures. Actual results could differ from these estimates. A material estimate that is particularly susceptible to significant change relates to the determination of the allowance for loan losses. Management believes that the allowance for loan losses at December 31, 20122015 is adequate and reasonable. Given the subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make different assumptions and could, therefore, calculate a materially different allowance value. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in the future. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize adjustments to the allowance based on their judgment of information available to them at the time of their examination. Another material estimate is the calculation of fair values of the Company’s investment securities. Except for the Company’s investment in corporate bonds, consistingFair values of pooled trust preferred securities, fair values on the other investment securities are determined by pricespricing provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions. For the pooled trust preferred securities, management is unable to obtain readily attainable and realistic pricing from market traders due to a lack of active market participants and therefore management has determined the market for these securities to be inactive. In order to determine the fair value of the pooled trust preferred securities, management relied on the use of an income valuation approach (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs, the results of which are more representative of fair value than the market approach valuation technique used for the other investment securities. Based on experience, management is aware that estimated fair values of investment securities tend to vary among valuation services. Accordingly, when selling investment securities, price quotes may be obtained from more than one source. As described in Notes 1 and 34 of the consolidated financial statements, incorporated by reference in Part II, Item 8, the majorityall of the Company’s investment securities are classified as available-for-sale (AFS). AFS securities are carried at fair value on the consolidated balance sheets, with unrealized gains and losses, net of income tax, reported separately within shareholders’ equity as a component of accumulated other comprehensive income (loss) (OCI)(AOCI). The fair value of residential mortgage loans, classified as held-for-sale (HFS), is obtained from the Federal National Mortgage Association (FNMA) or the Federal Home Loan Bank (FHLB). Generally, the market to which the Company sells residential mortgages it originates for sale is restricted and price quotes from other sources are not typically obtained.On occasion, the Company may transfer loans from the loan portfolio to loans HFS. Under these rare circumstances, pricing may be obtained from other entities and the loans are transferred at the lower of cost or market value and simultaneously sold. For a further discussion on the accounting treatment of HFS loans, see the section entitled “Loans held-for-sale,” contained within this management’s discussion and analysis. As of December 31, 2012 and 2011, loans classified as HFS consisted of residential mortgages. All significant accounting policies are contained in Note 1, “Nature of Operations and Summary of Significant Accounting Policies”, within the notes to consolidated financial statements and incorporated by reference in Part II, Item 8. The following discussion and analysis presents the significant changes in the financial condition and in the results of operations of the Company as of December 31, 20122015 and December 31, 20112014 and for each of the years then ended. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Part II, Item 8 of this report. Comparison of Financial Condition as of December 31, 20122015 and 20112014 and Results of Operations for each of the Years then Ended Executive Summary Financial Condition
Overview
Nationally, the unemployment rate felldeclined from 8.5%5.6% at December 31, 20112014 to 7.8%5.0% at December 31, 2012, its2015, remaining at the lowest level in four years. While the unemployment rate has been declining nationally, thesince 2008. The unemployment rate in the Scranton-Wilkes-Barre Metropolitan Statistical Area (local) rosedipped in December 2015 to 9.4%its lowest level since before the recession. According to the U.S. Bureau of Labor Statistics, the local unemployment rate at December 31, 2012,2015 was 4.6%, a decline of 0.9 percentage point increasepoints from 8.5%5.5% at December 31, 2011.2014. Both the labor force and employment increased to bring down the unemployment rate which is a good sign. The number of people looking for work has risen faster than job growth which led tomedian home values in the increase, however, more people are working today thanregion declined 0.5% from a year ago, and there are more who have entered the workforce –according to Zillow, an indicator that previously idle people are optimistic they will find work. The Scranton Metropolitan housing andonline database advertising firm providing access to its real estate marketssearch engines to various media outlets, values are expected to remain softthe same within the next year. We believe market conditions are slowly improving in our region. In light of these expectations, we will continue to monitor the economic climate in our region and scrutinize growth prospects with median home values increasing less than 2%credit quality as a principal consideration. During 2015, our assets grew by 8% from year-end 2011. Sustaining high levelsdeposit growth and retained net earnings, both of unemployment and the prolonged weaknesswhich were used to fund growth in the local housingloan and real estate markets may negatively impact the performance and condition of the Company’s loan portfolio. During 2012, the Companysecurities portfolios. Short-term borrowings were used available cash to fund loan growth.The Company made progress in improving asset quality during 2012, reducing non-performing assets by $4.1 million, or 19% from year-end 2011, representing less than 3% of total assets. We will continue working toward further improving asset quality through 2013, with the recovery rate of the local economy playing a contributing role in strengthening the Company’s balance sheet. Management expects non-performing assetspay-off high cost long-term debt. In 2016, we expect to continue to grow all facets of loans, however concentrated mostly within the commercial and consumer portfolios with funding provided by deposit growth. We expect to grow the investment portfolio weighted heavier in mortgage-backed securities - an interest rate risk strategy in the event rates continue to rise. The cash flow from these securities will provide liquidity to reinvest in higher yielding assets. Funding will be provided from cash on hand, deposits, short-term borrowings and operations.
Non-performing assets represented 1.76% of total assets as of December 31, 2015, up from 1.18% at the prior year end. Although non-performing assets increased during 2015, it was mostly due to the movement of one large commercial real
estate loan to non-accrual status. For 2016, we expect to improve asset quality including a decline during 2013, but may remain elevated as we workin non-accrual loans and when necessary expeditiously control the ownership and subsequent disposition of foreclosed assets thereby minimizing the high cost and losses associated with property ownership. We generated $7.1 million in net income in 2015, up $0.7 million from $6.4 million in 2014. In 2015, our larger and better positioned balance sheet contributed to the success of our earnings performance combined with the payoff of high-costing long-term debt. The 2016 focus is to manage net interest income after years of a sustained low interest rate environment through credit issues.a slowly rising rate environment that began in December 2015 by maintaining a reasonable spread. The Company is also planning on implementing changes to deposit fees throughout 2016 to offset higher non-interest expenses. From a financial condition and performance perspective, our mission for 2016 will focus on continuingbe to continue to strengthen its capitalour capital position from sound financial performance while working onstrategic growth oriented objectives, implement creative marketing and revenue enhancing strategies, grow and cultivate more of our business services and to improve credit risk at tolerable levels thereby improving overall asset quality. Finally, we will be closing our Eynon branch during the first quarter of 2016. Since the service area of the Peckville branch covers much of Eynon’s service area, there was an opportunity to realize an improved cost structure with minimal disruption to Eynon’s customers. The cost savings will be reallocated to help expand our branch network into Luzerne County where we see growth opportunities for all lines of business. WithFor the expectation of continuingnear-term, we expect to continue to operate in a low, but slowly-rising interest rate environment.. A rising rate environment positions the Company to improve its net interest income performance, but will continue to pressure the interest-rate yield and margin. Though we expect interest rates to rise, we anticipate net interest margin to continue to decline slightly in 2013.2016. The Federal Open Market Committee (FOMC) has not adjusted the short-term federal funds rate upwardup 25 basis points during December 2015. The move represented the first hike in rates by the FOMC in nearly a decade and expectations are that thefor short-term rates will remainto rise gradually throughout 2016, potentially pressuring deposit rate pricing. The treasury yield curve is expected to undergo a bearish flattening over the forecast horizon. Growth in all loan sectors at historicprudent loan pricing coupled with low levels beyond 2014. Low interest rates help reduce funding costs, however, over a prolonged period of time, the effect can be unfavorable to resetting adjustable and floating-rate asset yields, re-financed and new long-term fixed-rate assets and deployment of cash generated from interest-sensitive asset prepayments – all of which pressureshould help maintain an acceptable interest rate margins. The shape of the interest rate yield curve continued to be positively sloped throughout 2012 but continued to flatten in the mid- to long-term ranges thereby requiring lower yielding, long-term assets to be funded by short-term financing such as transactional deposits, thereby reducing interest-rate spreadmargin during 2016 and margin. This operating environment puts added stress on all financial institutions, particularly community banks. The management team of the Company is prepared to address these issues and will implement strategies to bolster non-interest income, contain non-interest expense growth and employ strict lending underwriting standards to help reduce credit costs. These measures should help mitigate the negative impact of the low interest rate environment and help strengthen the Company’s capital position.beyond.
Financial Condition Consolidated assets decreased $5.2increased $52.9 million, or 1%8%, to $601.5$729.4 million as of December 31, 20122015 from $606.7$676.5 million at December 31, 2011.2014. The decrease was fromincrease in assets occurred predominantly in the loan portfolio and to a $5.0 million payoff of a long-term FHLB advance, a declinelesser extent the investment portfolio utilizing available cash balances along with growth in deposits of $1.1$33.7 million – mostly interest-bearing money market accounts and certificates of deposit, offset by $2.6$4.3 million in retained earnings, net of dividends declared. Short-term borrowings were used to fund the payoff of $10.0 million in long-term debt with the balance providing additional capital stock outstandingfunding for the loan and a $1.3 million improvement in other comprehensive income/loss (OCI). investment portfolios. The following table is a comparison of condensed balance sheet data as of December 31: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Assets: | | 2012 | | | % | | 2011 | | % | | 2010 | | % | | 2015 | | % | | 2014 | | % | | 2013 | | % | | Cash and cash equivalents | | $ | 21,846 | | | | 3.6 | % | | $ | 52,165 | | | | 8.6 | % | | $ | 22,967 | | | | 4.1 | % | $ | 12,277 | | 1.7 | % | | $ | 25,851 | | 3.8 | % | | $ | 13,218 | | 2.1 | % | | Investment securities | | | 100,730 | | | | 16.7 | | | | 108,543 | | | | 17.9 | | | | 83,431 | | | | 14.9 | | | 125,232 | | 17.2 | | | | 97,896 | | 14.5 | | | 97,423 | | 15.6 | | | Federal Home Loan Bank Stock | | | 2,624 | | | | 0.4 | | | | 3,699 | | | | 0.6 | | | | 4,542 | | | | 0.8 | | | Federal Home Loan Bank stock | | | 2,120 | | 0.3 | | | | 1,306 | | 0.2 | | | 2,640 | | 0.4 | | | Loans and leases, net | | | 435,129 | | | | 72.3 | | | | 402,723 | | | | 66.4 | | | | 408,116 | | | | 72.7 | | | 548,103 | | 75.1 | | | | 507,488 | | 75.0 | | | 470,133 | | 75.4 | | | Bank premises and equipment | | | 14,127 | | | | 2.3 | | | | 13,575 | | | | 2.2 | | | | 14,764 | | | | 2.6 | | | 16,723 | | 2.3 | | | | 14,846 | | 2.2 | | | 13,602 | | 2.2 | | | Life insurance cash surrender value | | | 10,065 | | | | 1.7 | | | | 9,740 | | | | 1.6 | | | | 9,425 | | | | 1.7 | | | 11,082 | | 1.5 | | | | 10,741 | | 1.6 | | | 10,402 | | 1.7 | | | Other assets | | | 17,004 | | | | 3.0 | | | | 16,297 | | | | 2.7 | | | | 18,428 | | | | 3.2 | | | 13,821 | | 1.9 | | | | 18,357 | | 2.7 | | | 16,407 | | 2.6 | | | Total assets | | $ | 601,525 | | | | 100.0 | % | | $ | 606,742 | | | | 100.0 | % | | $ | 561,673 | | | | 100.0 | % | $ | 729,358 | | 100.0 | % | | $ | 676,485 | | 100.0 | % | | $ | 623,825 | | 100.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total deposits | | $ | 514,660 | | | | 85.6 | % | | $ | 515,802 | | | | 85.0 | % | | $ | 482,448 | | | | 85.9 | % | $ | 620,675 | | 85.0 | % | | $ | 586,944 | | 86.7 | % | | $ | 529,698 | | 84.9 | % | | Short-term borrowings | | | 8,056 | | | | 1.3 | | | | 9,507 | | | | 1.6 | | | | 8,548 | | | | 1.5 | | | 28,204 | | 3.9 | | | | 3,969 | | 0.6 | | | 8,642 | | 1.4 | | | Long-term debt | | | 16,000 | | | | 2.7 | | | | 21,000 | | | | 3.5 | | | | 21,000 | | | | 3.7 | | | - | | - | | | | 10,000 | | 1.5 | | | 16,000 | | 2.6 | | | Other liabilities | | | 3,863 | | | | 0.6 | | | | 6,809 | | | | 1.1 | | | | 2,903 | | | | 0.6 | | | 4,128 | | 0.6 | | | | 3,353 | | 0.5 | | | 3,425 | | 0.5 | | | Total liabilities | | | 542,579 | | | | 90.2 | | | | 553,118 | | | | 91.2 | | | | 514,899 | | | | 91.7 | | | 653,007 | | 89.5 | | | | 604,266 | | 89.3 | | | 557,765 | | 89.4 | | | Shareholders' equity | | | 58,946 | | | | 9.8 | | | | 53,624 | | | | 8.8 | | | | 46,774 | | | | 8.3 | | | 76,351 | | 10.5 | | | | 72,219 | | 10.7 | | | 66,060 | | 10.6 | | | Total liabilities and shareholders' equity | | $ | 601,525 | | | | 100.0 | % | | $ | 606,742 | | | | 100.0 | % | | $ | 561,673 | | | | 100.0 | % | $ | 729,358 | | 100.0 | % | | $ | 676,485 | | 100.0 | % | | $ | 623,825 | | 100.0 | % |
A comparison of net changes in selected balance sheet categories as of December 31, are as follows: | | | | | | | | | Earning | | | | | | | | | | | | Short-term | | | | | | Other | | | | | | (dollars in thousands) | | Assets | | | % | | | assets* | | | % | | | Deposits | | | % | | | borrowings | | | % | | | borrowings | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2012 | | $ | (5,217 | ) | | | (1 | ) | | $ | (1,690 | ) | | | (0 | ) | | $ | (1,142 | ) | | | (0 | ) | | $ | (1,451 | ) | | | (15 | ) | | $ | (5,000 | ) | | | (24 | ) | | 2011 | | | 45,069 | | | | 8 | | | | 37,257 | | | | 7 | | | | 33,354 | | | | 7 | | | | 959 | | | | 11 | | | | - | | | | - | | | 2010 | | | 5,656 | | | | 1 | | | | 7,352 | | | | 1 | | | | 23,453 | | | | 5 | | | | (7,985 | ) | | | (48 | ) | | | (11,000 | ) | | | (34 | ) | | 2009 | | | (19,702 | ) | | | (3 | ) | | | (26,475 | ) | | | (5 | ) | | | 25,683 | | | | 6 | | | | (21,597 | ) | | | (57 | ) | | | (20,000 | ) | | | (38 | ) | | 2008 | | | (11,694 | ) | | | (2 | ) | | | (22,809 | ) | | | (4 | ) | | | 7,604 | | | | 2 | | | | (1,527 | ) | | | (4 | ) | | | (10,709 | ) | | | (17 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Earning | | | | | | | | | Short-term | | | | Other | | | (dollars in thousands) | Assets | | % | | assets* | | % | | Deposits | | % | | borrowings | | % | | borrowings | | % | | | | | | | | | | | | | | | | | | | | | | | | | | 2015 | $ | 52,873 | | 8 | | $ | 50,304 | | 8 | | $ | 33,731 | | 6 | | $ | 24,235 | | 611 | | $ | (10,000) | | (100) | 2014 | | 52,660 | | 8 | | | 52,213 | | 9 | | | 57,246 | | 11 | | | (4,673) | | (54) | | | (6,000) | | (38) | 2013 | | 22,300 | | 4 | | | 30,087 | | 6 | | | 15,038 | | 3 | | | 586 | | 7 | | | - | | - | 2012 | | (5,217) | | (1) | | | (1,690) | | - | | | (1,142) | | - | | | (1,451) | | (15) | | | (5,000) | | (24) | 2011 | | 45,069 | | 8 | | | 37,257 | | 7 | | | 33,354 | | 7 | | | 959 | | 11 | | | - | | - | | | | | | | | | | | | | | | | | | | | | | | | | |
* Earning assets exclude: loans and securities placed on non-accrual status. Funds Provided:
Deposits The Company is a community based commercial depository financial institution, member FDIC, which offers a variety of deposit products with varying ranges of interest rates and terms. Generally, deposits are obtained from consumers, businesses and public entities within the communities that surround the Company’s 11 branch offices and all deposits are insured by the FDIC up to the full extent permitted by law. Deposit products includeconsist of transaction accounts such as:including: savings; clubs; interest-bearing checking (NOW);checking; money market and non-interest bearing checking (DDA). The Company also offers short- and long-term deposit accounts such astime deposits or certificates of deposit. Certificates of deposit or(CDs). CDs are deposits with stated maturities which can range from seven days to ten years. TheCash flow offrom deposits is influenced by economic conditions, changes in the interest rate environment, pricing and competition. To determine interest rates on its deposit products, the Company considers local competition, spreads to earning-asset yields, liquidity position and rates charged for alternative sources of funding such as short-term borrowings and long-term FHLB advances. The following table represents the components of total deposits as of December 31: | | | | | | | | | | | | | | | | | | | | | | | | | | | 2012 | | | 2011 | | 2015 | 2014 | | (dollars in thousands) | | Amount | | % | | Amount | | % | | Amount | | % | Amount | | % | | | | | | | | | | | | | | | | | | | | | | | Money market | | $ | 76,571 | | | | 14.9 | % | | $ | 107,675 | | | | 20.9 | % | $ | 125,433 | | 20.2 | % | $ | 118,653 | | 20.3 | % | | Interest-bearing checking | | | 87,981 | | | | 17.1 | | | | 79,127 | | | | 15.3 | | | 132,598 | | 21.4 | | | 124,009 | | 21.1 | | | Savings and clubs | | | 107,447 | | | | 20.8 | | | | 107,500 | | | | 20.9 | | | 115,668 | | 18.6 | | | 110,282 | | 18.8 | | | Certificates of deposit | | | 116,626 | | | | 22.7 | | | | 125,345 | | | | 24.3 | | | 104,202 | | 16.8 | | | 104,630 | | 17.8 | | | Total interest-bearing | | | 388,625 | | | | 75.5 | | | | 419,647 | | | | 81.4 | | | 477,901 | | 77.0 | | | 457,574 | | 78.0 | | | Non-interest bearing | | | 126,035 | | | | 24.5 | | | | 96,155 | | | | 18.6 | | | 142,774 | | 23.0 | | | 129,370 | | 22.0 | | | Total deposits | | $ | 514,660 | | | | 100.0 | % | | $ | 515,802 | | | | 100.0 | % | $ | 620,675 | | 100.0 | % | $ | 586,944 | | 100.0 | % |
Compared toTotal deposits increased $33.7 million, or 6%, from $586.9 million at December 31, 2011, total2014 to $620.6 million at December 31, 2015. Growth in transaction accounts of $34.2 million, or 7%, offset a slight decline in CDs. The Company has had success in executing on its model of developing new and strengthening existing relationships and offering periodic deposit promotions. Money market deposits fell $1.1increased in part due to promotions which granted higher rates for a specific amount of time. The promotional events create opportunities to cross-sell all of the banks financial products and provides communication channels for establishing trust and financial service relationships thereby creating a stronger bond with existing customers and creating bonds with potential customers. The Company will continue to execute on its relationship development strategy, explore the demographics within its marketplace and develop creative programs for its customers. The Company’s focus of building a relationship of trust with its customers brought a few large deposits into the bank during 2015. Although these deposits fluctuate depending on customer needs, the Company plans to continue to form these types of relationships with customers in order to grow the deposit base to fund loan growth and pay down overnight borrowings. The Company expects moderate asset growth in 2016 funded primarily by growth in transactional deposits.
The market interest rate profile continues to be low with intermediate and long-term market rates falling below the 2013 levels. Customers’ appetite for long-term deposit products continues to be non-existent with a sustaining preference for non-maturing transaction deposits. The Company’s portfolio of CDs continues to decrease; having declined $0.4 million, or less than 1%, from year-end 2014. However, the Company took in $10 million in CDs from one public entity during 2015 so the year ended December 31, 2012.run-off was much larger. The decrease stems from declines in: money market accounts, $31.1 million;Company expects CDs $8.7 million; savings and clubs, $0.1 million; partially offset by growthto continue to decline in interest-bearing checking, $8.9 million, and non-interest bearing deposits, $29.9 million. Generally, deposits are obtained from consumers, businesses and2016. The Company’s relationship strategy resulted in a successful bid for a large public entities withinCD account, but otherwise the communities that surround the Company’s 11 branch offices and all deposits are insured by the FDIC up to the full extent permitted by law. The low interest rate environment continues to causehas basically enticed customers to seek short-term alternativesvacate the CD marketplace. If rates continue to rise, demand for their deposits. Balances of certificates of deposit declined $8.7 million, or 7%, in 2012.CDs may also increase thereby possibly increasing funding costs. The Company continueswill continue to experience a shift toward transactional accounts which have increased $7.6 million, or 2%, in 2012. This pattern will most likely continue until interest rates beginpursue strategies to rise. The significant decrease in money market deposit accounts was due to some of the Company’s larger depositors who have re-deployed their cash balances. Additionally, the expiration of money market promotions resulted in decreases to money market levels as some of these deposits shifted into savingsgrow and DDAs. The increase in non-interest bearing and interest-bearing checking deposits was due to the Company focusing on a new checking account campaign targeting the acquisition of newretain retail and business households alongcustomers
including the development of creative CD campaigns with continued salesan emphasis on deepening and broadening existing and deepening existing business and retail relationships with operational checking accounts. The gathering of core deposits continues to be a challenge and a primary objective for both retail and businesscreating new relationships. The continued low interest rate environment has resulted in a wide-spread preference for customers to place their money in non-maturing transaction accounts rather than to renew maturing CDs. Balances in CDs continue to decline due to an unattractive rate environment for long-term fixed-rate deposit products coupled with a desire to keep money liquid. When market rates do rise, the Company will focus on and promote CD gathering strategies that will strive to increase time deposits while maintaining its low-costing deposit foundation. Until then, the Company may, from time-to-time promote mid- to long-term CDs to help reduce the future negative impact rising interest rates could potentially have on interest expense, but at the same time attentive of the current needs of our retail and business customers.
The Company uses the Certificate of Deposit Account Registry Service (CDARS) reciprocal program to obtain FDIC insurance protection for customers who have large deposits that at times may exceed the FDIC maximum amount of $250,000.$250,000 per person. In the CDARS program, deposits with varying terms and interest rates, originated in the Company’s own markets, are exchanged for deposits of other financial institutions that are members in the CDARS network. By placing thesethe deposits in other participating institutions, the deposits of our customers are fully insured by the FDIC. In return for deposits placed with network institutions, the Company receives from network institutions deposits that are approximately equal in amount and are comprised of terms similar to those placed for our customers. Deposits the Company receives, or reciprocal deposits, from other institutions are considered brokered deposits by regulatory definitions. As of December 31, 20122015 and 2011,2014, CDARS represented $10.2$3.4 million, or 1%, and $11.0$7.7 million, respectively, or 2%1%, respectively, of total deposits. The maturity distribution of certificates of deposit at December 31, 20122015 is as follows: | | | | | | | | | | | | | | | | | | | | | More than | | More than | | More | | | | | | | More than | | More than | | More | | | | | | | Three months | | three months | | six months to | | than twelve | | | | Three months | | three months | | six months to | | than twelve | | | | | (dollars in thousands) | | or less | | to six months | | twelve months | | months | | Total | | or less | | to six months | | twelve months | | months | | Total | | CDs of $100,000 or more | | $ | 5,533 | | | $ | 3,167 | | | $ | 10,333 | | | $ | 22,812 | | | $ | 41,845 | | $ | 5,354 | | $ | 8,470 | | $ | 18,443 | | $ | 18,513 | | $ | 50,780 | CDARS | | | 2,306 | | | 1,120 | | | - | | | - | | | 3,426 | Total CDs of $100,000 or more | | | 7,660 | | | 9,590 | | | 18,443 | | | 18,513 | | | 54,206 | | CDs of less than $100,000 | | | 10,358 | | | | 6,348 | | | | 17,649 | | | | 30,180 | | | | 64,535 | | | 9,142 | | | 7,741 | | | 10,247 | | | 22,866 | | | 49,996 | | CDARS | | | 735 | | | | 3,005 | | | | 4,250 | | | | 2,256 | | | | 10,246 | | | | Total CDs | | $ | 16,626 | | | $ | 12,520 | | | $ | 32,232 | | | $ | 55,248 | | | $ | 116,626 | | $ | 16,802 | | $ | 17,331 | | $ | 28,690 | | $ | 41,379 | | $ | 104,202 |
Including CDARS, approximately 53%60% of the CDs, with a weighted-average interest rate of 0.87%0.70%, are scheduled to mature in 20132016 and an additional 23%16%, with a weighted-average interest rate of 1.33%0.84%, are scheduled to mature in 2014.2017. Renewing CDs may re-price to lower or higher market rates depending on the rate on the maturing CD, the pace and direction of interest rate movements, the shape of the yield curve, competition, the rate profile of the maturing accounts and depositor preference for alternative, non-term products. In this current low interest rate environment, aAs noted, the widespread preference has beencontinues for customers with maturing CDs to hold their deposits in readily available transaction accounts. When interest rates beginThe Company does not expect significant CD growth during 2016, but will continue to rise,develop CD promotional programs when the Company expects CDsdeems that it is economically feasible to trend back toward historical levels.
Short-term borrowings
In addition to deposits, other funding sources available todo so or when demand exists. As with all promotions, the Company will consider the needs of the customers and simultaneously be mindful of the liquidity levels and the interest rate sensitivity exposure of the Company.
Short-term borrowings Borrowings are short-term borrowings consisting of overnight funds andused as a complement to deposit generation as an alternative funding source whereby the Company will borrow under customer repurchase agreements in the local market, short-term advances from the Federal Home Loan Bank of Pittsburgh (FHLB)FHLB and the Federal Reserve Bank Discount Window, fed funds purchased fromother correspondent banks and repurchase agreements with businesses and public entities. The Company uses overnight and short-term funding for asset growth deposit run-off, loan demand and other short-term liquidity needs. Because of the liquidity position during 2012 the Company did not have the need for short-term overnight borrowings. Overnight borrowings and repurchase agreements are The components of short-term borrowings on the consolidated balance sheets.are as follows: | | | | | | | | As of December 31, | (dollars in thousands) | | 2015 | | | 2014 | | | | | | | Overnight borrowings | $ | 22,289 | | $ | - | Securities sold under repurchase agreements | | 5,915 | | | 3,969 | Total | $ | 28,204 | | $ | 3,969 | | | | | | |
Repurchase agreements are non-insured interest-bearing liabilities that have a perfected security interest in qualified investments of the Company. TheCompany as required by the FDIC Depositor Protection Act of 2009 requires banks to provide a perfected security interest to the purchasers of uninsured repurchase agreements.2009. Repurchase agreements are offered through a sweep product. A sweep account is designed to ensure that on a daily basis, an attached DDA is adequately funded and excess funds are transferred, or swept, into an interest-bearing overnight repurchase agreement account. Due to the constant inflow and outflow of funds of the sweep product, their balances tend to be somewhat volatile, similar to a DDA. Customer liquidity is the typical cause for variances in repurchase agreements,agreements. In addition, short-term borrowings may include overnight balances which the Company may require to fund daily liquidity needs such as deposit and repurchase agreement cash outflow, loan demand and operations. Short-term borrowings increased $24.2 million during 2012 decreased $1.52015. These borrowings were used to pay off $10.0 million or 15%,in long-term debt during the second quarter and also replaced declining balances is public deposits stemming from year-end December 31, 2011.the Pennsylvania state budget impasse holding back state funding during the fourth quarter. Information with respect to the Company’s short-term borrowing’s maximum and average outstanding balances and interest rates are contained in Note 8, “Short-term Borrowings,” of the notes to consolidated financial statements incorporated by reference in Part II, Item 8.
Long-term debt As of December 31, 2012 and 2011,2014, long-term debt consisted of borrowingsa single advance from the FHLB of $16.0$10.0 million and $21.0 million, at weighted-average ratesbearing an interest rate of 5.26% and 4.87%, respectively. The 2012 weighted-average rate was 87 basis points abovescheduled to mature in 2016. At the tax-equivalent yieldend of 4.39% earned from the Company’s portfoliosecond quarter of average interest-earning assets for the year ended December 31, 2012. The interest rate on the $16.0 million balance of a single long-term advance is currently fixed until 2016, but is structured to adjust quarterly should market interest rates increase beyond the issue’s strike rate. In the event underlying market rates drift above the rate currently paid on this borrowing, the fixed-rate would convert to a floating-rate and at that juncture, the Company would have the option to repay or renegotiate the converted rate. Significant prepayment penalties are attached to the borrowing and prepaying the high-cost debt is considered only when the Company concludes that it is economically feasible to do so. Determination to prepay is assessed frequently, however, prepayment is more likely to occur at a time that is closer to the advance’s maturity date. In February 2012,2015, the Company paid off $5.0 million ofthe long-term debt, due to its outstanding long-term debthigh interest rate relative to other available borrowing sources, and incurred a $0.6 million prepayment fee of $0.2fee. The pay-off was funded with short-term borrowings and for 2016 will reduce interest expense from long-term debt by approximately $0.4 million. The advance carried an interest rate of 3.61% and was scheduled to mature in the fourth quarter of 2013. The Company used proceeds from the sale of AFS securities and cash on-hand to fund the payoff. As of December 31, 2012,2015, the Company had the ability to borrow an additional $128.2$186.4 million from the FHLB. Accrued interest payable and other liabilities
The $2.9 million decrease in other liabilities was caused by a $3.7 million participated loan which was paid off on the last business day of December 2011and was subsequently distributed to participant banks in January 2012. This was offset by a $0.5 million security purchase obligation that was recorded in December 2012 for a January 2013 settlement and also higher real estate escrow balances.
Funds Deployed:
Investment Securities The Company’s investment policy is designed to complement its lending activities, provide monthly cash flow, manage interest rate sensitivity and generate a favorable return above earnings from cash holdings without incurring undueexcessive interest rate and credit risk and managewhile managing liquidity at acceptable levels. In establishing investment strategies, the Company considers its business, growth strategies or restructuring plans, the economic environment, the interest rate sensitivity position, the types of securities in its portfolio, permissible purchases, credit quality, maturity and re-pricing terms, call or average-life intervals and investment concentrations. The Company’s policy prescribes permissible investment categories that meet the policy standards and management is responsible for structuring and executing the specific investment purchases within these policy parameters. Management buys and sells investment securities from time-to-time depending on market conditions, business trends, liquidity needs, capital levels and structuring strategies. Investment security purchases provide a way to quickly invest excess liquidity in order to generate additional earnings. The Company generally earns a positive interest spread by assuming interest rate risk and using deposits or borrowings to purchase securities with longer maturities. At the time of purchase, management classifies investment securities into one of three categories: trading, available-for-sale (AFS) or held-to-maturity (HTM). To date, management has not purchased any securities for trading purposes. Most of the securities purchasedthe Company purchases are classified as AFS even though there is no immediate intent to sell them. The AFS designation affords management the flexibility to sell securities and position the balance sheet in response to capital levels, liquidity needs or changes in market conditions. Securities AFS are carried at their net fair values invalue on the consolidated balance sheets with an adjustment tounrealized gains and losses, net of deferred income taxes, reported separately within shareholders’ equity net of tax, as a component of accumulated other comprehensive income (loss)(AOCI). As of December 31, 2012, AFS debt and equity securities were recorded with a combined unrealized net gain of $0.4 million. Investment securitiesSecurities designated as HTM are carried at amortized cost and represent debt securities that the Company has the ability and intent to hold until maturity and are carried at amortized cost. As of December 31, 2012 and December 31, 2011, the aggregate fair value of securities HTM exceeded their respective aggregate amortized cost by $31 thousand and $42 thousand, respectively. maturity. As of December 31, 2012,2015, the carrying value of total investment securities amounted to $100.7$125.2 million, or 17% of total assets, compared to $108.5$97.9 million, or 18%14% of total assets, at December 31, 2011. During 2012, the amortized cost declined by approximately $9.8 million from the amortized cost as of December 31, 2011. Cash inflow from bond calls, maturities, prepayments, scheduled monthly pay downs and sale proceeds were redeployed into the Company’s loan portfolio, which currently offers a better return than can be obtained in the capital markets, and to pay off $5.0 million in long-term FHLB advances.2014. On December 31, 2012, approximately 50%2015, 55% of the carrying value of the investment portfolio was comprised of U.S. Government Sponsored Enterprise residential mortgage-backed securities (MBS – GSE residential or mortgage-backed securities) that amortize and provide monthly cash flow. Theflow that the Company expects to continue tocan use this cash source to fundfor reinvestment, loan growth, facility expansion,demand, unexpected deposit outflow, operations and then grow the investment portfolio. State and municipal subdivisions,facility expansion or operations. Investment securities were comprised mainly of general obligation bonds, Agency Government Sponsored Enterprise (Agency – GSE) securities and pooled trust preferred securities comprised 30%, 18% and 2%, respectively, of the investment portfolio at December 31, 2012. A comparison of total investmentAFS securities as of December 31, follows:
| | | 2012 | | | 2011 | | | (dollars in thousands) | | Amount | | | % | | | Amount | | | % | | | | | | | | | | | | | | | | | MBS - GSE residential | | $ | 50,842 | | | | 50.5 | % | | $ | 50,606 | | | | 46.6 | % | | State & municipal subdivisions | | | 29,857 | | | | 29.6 | | | | 30,159 | | | | 27.8 | | | Agency - GSE | | | 17,740 | | | | 17.6 | | | | 25,873 | | | | 23.8 | | | Pooled trust preferred securities | | | 1,825 | | | | 1.8 | | | | 1,466 | | | | 1.4 | | | Equity securities - financial services | | | 466 | | | | 0.5 | | | | 439 | | | | 0.4 | | | Total | | $ | 100,730 | | | | 100.0 | % | | $ | 108,543 | | | | 100.0 | % |
2015. The distribution of debtAFS securities by stated maturity and tax-equivalent yield at December 31, 2012 are as follows: | | | | | | | | | More than | | | More than | | | More than | | | | | | | | | | | One year or less | | | one year to five years | | | five years to ten years | | | ten years | | | Total | | | (dollars in thousands) | | $ | | | % | | | $ | | | % | | | $ | | | % | | | $ | | | % | | | $ | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | MBS - GSE residential | | $ | - | | | | - | % | | $ | 49 | | | | 6.01 | % | | $ | 21,993 | | | | 1.75 | % | | $ | 28,800 | | | | 2.77 | % | | $ | 50,842 | | | | 2.33 | % | | State & municipal subdivisions | | | - | | | | - | | | | - | | | | - | | | | 1,387 | | | | 6.02 | | | | 28,470 | | | | 6.11 | | | | 29,857 | | | | 6.11 | | | Agency – GSE | | | 3,533 | | | | 0.55 | | | | 13,179 | | | | 1.32 | | | | 1,028 | | | | 3.55 | | | | - | | | | - | | | | 17,740 | | | | 1.30 | | | Pooled trust preferred securities | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,825 | | | | 2.26 | | | | 1,825 | | | | 2.26 | | | Total debt securities | | $ | 3,533 | | | | 0.55 | % | | $ | 13,228 | | | | 1.34 | % | | $ | 24,408 | | | | 2.05 | % | | $ | 59,095 | | | | 4.16 | % | | $ | 100,264 | | | | 3.16 | % |
In the above table, the book yields on state & municipal subdivisions were adjusted to a tax-equivalent basis using the corporate federal tax rate of 34%. In addition, average yields on securities AFS are based on amortized cost and do not reflect unrealized gains or losses.
The uncertainty that has existed in the capital markets continues to impact the determination of fair values of the Company’s investment portfolio. The total fair value of the investment portfolio was recorded atwith a net unrealized gain of $0.4$3.3 million as of December 31, 20122015 compared to a net unrealized lossgain of $1.7$4.1 million as of December 31, 2011.2014, or a net reduction of $0.8 million during 2015. The pooled trust preferred securities (PreTSL) portfolio was recorded at an unrealized loss of $4.5 million as of December 31, 2012, a $0.6 million improvement from the $5.1 million unrealized loss recorded as of December 31, 2011. The remainderdirection and magnitude of the change in value of the Company’s investment portfolio was recorded at a net unrealized gainis attributable to the direction and magnitude of $4.9 million, an improvementthe change in interest rates along the treasury yield curve. Generally, the values of $1.5 million from the amount recorded as of December 31, 2011. Management believes fair value changes within the portfolio are due primarily to changesdebt securities move in the interest rates. Futureopposite direction of the changes in interest rates. As interest rates along the treasury yield curve fall, especially at the intermediate and long end, the values of debt securities tend to increase. Whether or not the value of the Company’s investment portfolio will continue to exceed its amortized cost will be largely dependent on the direction and magnitude of interest rate environment will likely impactmovements and the fairduration of the debt securities within the Company’s investment portfolio. When interest rates rise, the market values of the Company’s investments, positively or negatively. When rates are low or declining, bond values tenddebt securities portfolio could be subject to improve. Conversely, when rates are high or rising, bond values tend to decline at which time unrealized losses may again prevail. With respect to the unrealized losses in the PreTSL portfolio, instability in the capital markets, limited and disorderly trading activity and illiquid conditions are the principle causes of a sustained period of eroded fairmarket value and not changes in interest rates nor deterioration in the creditworthiness of the issuers.
declines. Quarterly, management performs a review of the investment portfolio to determine the causes of declines in the fair value of each security. The Company uses inputs provided by independent third parties to determine the fair value of its investment securities portfolio. Inputs provided by the third parties are reviewed and corroborated by management. Evaluations of the causes of the unrealized losses are performed to determine whether impairment exists and whether the impairment is temporary or other-than-temporary. Considerations such as the Company’s intent and ability to hold the securities to maturity, recoverability of the invested amounts over the intended holding period, the length of time and the severity in pricing decline below cost, the interest rate environment, the receipt of amounts contractually due and whether or not there is an active market for the securities, for example, are applied, along with an analysis of the financial condition of the issuer for management to make a realistic judgment of the probability that the Company will be unable to collect all amounts (principal and interest) due in determining whether a security is other-than-temporarily impaired. If a decline in value is deemed to be other-than-temporary, the amortized cost of the security is reduced by the credit impairment amount and a corresponding charge to current earnings is recognized. If atDuring the time of sale, call or maturityyears ended December 31, 2015 and 2014, the proceeds exceed the security’s amortized cost, previous creditCompany did not incur other-than-temporary impairment charges may be fullyfrom its investment securities portfolio. During 2015, the carrying value of total investments increased $27.3 million, or partially recovered.28%. The Company attempts to maintain a well-diversified and proportionate investment portfolio that is structured to complement the strategic direction of the
Company. Its growth typically supplements the lending activities but also considers the current and forecasted economic conditions, the Company’s liquidity needs and interest rate risk profile. At the end of 2014, the Company began to restructure its investment portfolio by selling mortgage-backed securities with the longest duration and lowest coupon rates as well as intermediate term agency bonds. The proceeds were used to reduce the Company’s long-term debt with the balance retained in cash that was reinvested along with available cash holdings during the first half of 2015. The Company expects to grow the portfolio and increase its relative size with a bias toward mortgage-backed securities. If rates rise, the strategy will provide a good source of cash flow to reinvest into higher yielding interest-sensitive assets. A comparison of total investment securities as of December 31 follows: | | | | | | | | | | | | | | | | | | | | | | | 2015 | 2014 | (dollars in thousands) | Amount | | % | Amount | | % | | | | | | | | | | | | MBS - GSE residential | $ | 69,415 | | 55.4 | % | $ | 45,870 | | 46.9 | % | State & municipal subdivisions | | 36,885 | | 29.5 | | | 37,033 | | 37.8 | | Agency - GSE | | 18,386 | | 14.7 | | | 14,398 | | 14.7 | | Equity securities - financial services | | 546 | | 0.4 | | | 595 | | 0.6 | | Total | $ | 125,232 | | 100.0 | % | $ | 97,896 | | 100.0 | % |
The Company owns 13 tranches of PreTSLs. As of December 31, 2012, the market for these securities and other issues of PreTSLs remained inactive. The inactivity was evidenced first by a significant widening2015, there were no investments from any one issuer with an aggregate book value that exceeded 10% of the bid-ask spread in the brokered markets in which PreTSLs trade, thenCompany’s stockholders’ equity.
The distribution of debt securities by a significant decrease in the volume of trades relative to historical levels. There has not been a new PreTSL issue since 2007. Newly imposed restrictions for institutions to qualifystated maturity and receive favorable capital treatment have lessened the likelihood of new issues coming to market. Theretax-equivalent yield at December 31, 2015 are currently very few market participants who are willing and/or able to transact for these securities. The Company has determined that the volume of trading activity in PreTSLs is minor, restricted mostly to speculative hedge fund traders, transacted on a bid basis and can take as long as weeks to fill orders and for the transactions to settle. Therefore, the Company has concluded that the market for these securities to be inactive where pricing quotes are sparse, incorporate large illiquidity premiums, and exist with dislocation between spreads and default activity resulting in difficulties in assessing relative observable market inputs to determine fair value. To determine PreTSL valuations, the Company uses an independent third party that employsMoody’s Wall Street Analytics. Therefore, in lieu of a market-quote approach to determine fair value of the PreTSL portfolio, a fair value “Level 3” modeled income approach is utilized. The income approach maximizes the use of observable inputs and minimizes the use of unobservable inputs and is more representative of fair value than the market-quote approach in markets that are inactive. Core assumption categories are: probability of default; loss given defaults; industry-wide correlations, discount rate and structural behavior. Discounted cash flows are modeled via Monte Carlo simulation to determine the orderly liquidation value as an indication of fair value of all tranches of each PreTSL.follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | More than | | More than | | More than | | | | | | | One year or less | | one year to five years | | five years to ten years | | ten years | | Total | (dollars in thousands) | $ | % | | $ | % | | $ | % | | $ | % | | $ | % | | | | | | | | | | | | | | | | | | | | | | | | | | MBS - GSE residential | $ | - | - | % | | $ | 1,130 | 4.06 | % | | $ | 8,129 | 2.98 | % | | $ | 60,156 | 2.36 | % | | $ | 69,415 | 2.46 | % | State & municipal subdivisions | | - | - | | | | - | - | | | | 1,833 | 5.94 | | | | 35,052 | 5.41 | | | | 36,885 | 5.44 | | Agency - GSE | | 2,016 | 0.48 | | | | 15,338 | 1.46 | | | | 1,032 | 3.45 | | | | - | - | | | | 18,386 | 1.46 | | Total debt securities | $ | 2,016 | 0.48 | % | | $ | 16,468 | 1.63 | % | | $ | 10,994 | 3.49 | % | | $ | 95,208 | 3.44 | % | | $ | 124,686 | 3.15 | % | | | | | | | | | | | | | | | | | | | | | | | | | |
ForIn the year ended December 31, 2012,above table, the Company engagedbook yields on state & municipal subdivisions were adjusted to a structured finance products specialist firm to analyzetax-equivalent basis using the sevencorporate federal tax rate of 34%. In addition, average yields on securities (eight tranches) in the portfolio that have anAFS are based on amortized cost basis. The analysis establishes a base of fundamental cash flow values to determine whether the Company will receive all of its principal and interest. One security (PreTSL XXVII) was deemed to have a high probability of receiving all principal and interest payments and thus impairment was considered temporary. The firm applied the following steps and assumptions to the remaining six securities to arrive at a single best estimate of cash flow that is used as a basis to determine the presence of OTTI: do not reflect unrealized gains or losses.
| o | Data about the transaction structure, as defined in the offering indenture and the underlying collateral, was collected; |
| o | The credit quality of the collateral was estimated using issuer specific probability of default for each security. Deferral of interest payments are treated as defaults. Once an issuer defaults, the potential for the tendency is correlated among other issuers. The loss given default, or the amount of cash lost to the investor is assumed to be 100% with no recovery of principal and no prepayments; |
| o | The analysis uses a Monte Carlo simulation framework to simulate the time-to-default on a portfolio of obligors based on individual obligor default probabilities and inter-obligor correlations; |
| o | Cash flow modeling was performed using the output from the simulation engine to arrive at the single best estimate of cash flow for each tranche; |
| o | Present value techniques as prescribed in the accounting guidance are used to determine the expected cash flows of each of the tranches. The present value technique for one of the OTTI securities is based upon a discount rate determined at the time of acquisition. For the other six OTTI securities, the discount rate used in the present value calculation is the yield to accrete beneficial interest; |
| o | The present value results are then compared to the present value cash flow results from the immediately prior measurement date. An adverse change in estimated cash flow from the previous measurement date is indicative of credit related OTTI. If the present value of the cash flow is less than the amortized cost basis, the difference is charged to current earnings as an impairment loss on investment securities. |
The results of the OTTI analysis (refer to Note 3, “Investment securities”, within the notes to the consolidated financial statements for a complete description of the analysis performed) determined as of and for the year ended December 31, 2012, the estimated value, based on the expected discounted cash flow, of two PreTSLs: IX and XVIII was insufficient to recover the amortized cost basis, and therefore experienced credit-related OTTI in the amount of $0.1 million for the year ended December 31, 2012 (all of which occurred in the first two quarters of 2012) compared to $0.2 million for the year ended December 31, 2011. Credit-related OTTI is charged to current earnings as a component of other income in the consolidated statements of income. Future analyses could yield results that may be indicative of further impairment and may therefore require additional write-downs and corresponding credit related OTTI charges to current earnings.
Federal Home Loan Bank Stock Investment in FHLBFederal Home Loan Bank (FHLB) stock is required for membership in the organization and is carried at cost since there is no market value available. The amount the Company is required to invest is dependent upon the relative size of outstanding borrowings the Company has with the FHLB. The Company was not required to purchase FHLB stock during 2012 and 2011.of Pittsburgh. Excess stock is typically repurchased from the Company at par if the amount of borrowings decline to a predetermined level. In addition, the Company typically earns a return or dividend based on the amount invested. In order to preserve its capital, in 2008The dividends received from the FHLB declared a suspension ontotaled $123 thousand and $90 thousand for the redemption of its stockyears ended December 31, 2015 and ceased payment of quarterly2014, respectively. The dividends until such time it becomes prudent to reinstate either or both. In 2010, the FHLB announced a partial lifting of the stock redemption provision of the suspension. Since then,were higher in 2015 because the Company has been able to periodically redeem its shares. Also, in all four quarters of 2012, the FHLB declared cash dividends –received a $57 thousand one-time special dividend during the first since the 2008 suspension. Future redemptions and dividend payments will be predicated on the financial performance and health of the FHLB. Management believes that the FHLB will continue to be a primary source of wholesale liquidity for both short- and long-term funding and has concluded that its investmentquarter. The balance in FHLB stock was $2.1 million and $1.3 million as of December 31, 2015 and 2014, respectively. Loans and leases Relationship managers continued the progression from being transaction focused to developing a mutually profitable full banking relationship. The Company is cognizant of its marketplace, the character of retail and business clients and prospects, having developed products and services that are not other than temporarily impaired. There can be no assurance that future negative changesonly intended to benefit clients and the bank, but also the community which is important for success. The Company’s service partners are experienced, trained and dedicated in order to achieve the Company’s mission of being a trusted financial advisor. The loan portfolio has experienced controlled quality growth for 2015 with the expectation for 2016 projecting modest growth in the overall portfolio. This growth is predicated upon, but not limited to, the financial condition of the FHLB may not require the Company to recognize an impairment charge with respect to such holdings. The Company will continue to monitor the financial condition of the FHLB and assess its future ability to resume normal dividend payments and stock redemption activities.
Loans
Developing and deepening relationships by providing credit and non-credit products has been the primary focus for 2012.The Company continues to originate, in its primary market, commercial and industrial (C&I), commercial real estate (CRE), residential mortgages, consumer, home equity and construction loans. The volume of originations continues to be dependent upon customer demand as well as current and anticipatedlocal economy, interest rate levels. Based onenvironment and how these factors will impact the current and projected economy, we continue our strategy of remaining conservative while assisting our customers and impacting our local economy in a positive manner. The Company’s efforts continue in keeping risk exposure at a manageable level, utilize loan participations (sharing loans with other financial institutions to reduce exposure) and various guaranty programs to provide customers and prospective customers with needed credit while at the same time reducing risk.
demand for credit. Net of loan participations, in 20122015 the Company originated $26.9$28.7 million of commercial and industrial loans and $23.7$11.1 million of commercial real estate loans compared to $30.9$24.4 million and $9.6$15.1 million, respectively, in 2011.2014. Also, during 2012,2015, the Company originated $31.7$61.9 million of residential real estate loans for portfolio retention and $22.5$25.0 million of consumer loans, compared to $19.1$53.7 million and $19.1$33.0 million, respectively, in 2011.2014. Included in mortgage loans were $9.5$10.9 million of residential real estate construction lines in 20122015 and $4.3$11.0 million in 2011.2014. In addition for 2012,2015, the Company had net originations of lines of credit in the amounts of $22.1$50.7 million for commercial borrowers and $9.4$17.5 million in home equity and other consumer lines of credit. The Company has been designated by the Small Business Administration (SBA) as a preferred lender. This designation provides the Company with an advantage and an opportunity to provide additional credit facilities to our business community. During 2012 and continuing into 2013, the Bank has been investing in software, training and personnel to administer the SBA lending program. With SBA guaranteed loans, the Company has the ability to originate an SBA loan within the community and sell the guaranteed portion in a secondary market and receive a premium representing gain on sale.
Commercial and industrial and commercial real estate TheCompared to year-end 2014, the commercial and industrial (C&I) loan portfolio decreased $3.3increased $22.4 million, or 28%, from $80.3 million to $102.7 million and the commercial real estate (CRE) loan portfolio increased $5.4 million, or 3%, from $196.5 million to $201.9 million as of December 31, 2015. This growth can be attributed to several factors including, customer retention, additional managerial relationship building efforts and marketing efforts to attract new relationships. We anticipate a 4.85% growth in the commercial loan portfolio during 2016. The Company will remain focused on a teamwork approach, utilizing the knowledge of our relationship managers and branch personnel to grow existing relationships and targeting new prospects.
Consumer The consumer loan portfolio grew $5.5 million, or 5%, from $68.4$109.5 million at December 31, 20112014 to $65.1$115.0 million at December 31, 2012. During 2012,2015. Growth in the Bank had largeportfolio was accelerated by seasonal home equity line of credit pay offs in this categorycampaigns combined with consistent demand from automobile loans and leases. Auto loan and lease growth was the result of approximately $13 million. The largest was an unexpected payoff of $6 million, while others were due to the sale of businesses or terms and conditions that were offered elsewhere and were not acceptable to our Company.focus on maintaining relationships with auto dealers. Commercial real estate
Residential The commercial real estateresidential loan portfolio increased $7.7grew $7.6 million, or 5%6%, from $165.5$129.5 million at December 31, 20112014 to $173.2 million as of December 31, 2012. There was a multitude of worthy credit facilities provided during 2012. In order to mitigate risk associated with commercial real estate we continue to obtain current real estate appraisals which are reviewed by a third party, use prudence in establishing and regulating loan-to-value analysis including the impact of rate increases, vacancy, historical and projected cash flow, liquidity and where appropriate guarantee of principles who have acceptable credit scores. The increase was spread among all of the classes of commercial real estate loans. Consumer loans
The consumer loan portfolio increased slightly by $2.3 million, or 2.6%, from $88.2$137.1 million at December 31, 20112015. The held to $90.5maturity portfolio grew $7.8 million, or 7%, from $119.2 million at December 31, 2012. Within the portfolio was an increase in auto loan activity through the Company’s dealer loan program partially offset by a decrease in home equity installment loans. The increase was the result of efforts in business development and the decrease attributed2014 to home equity installment loan payoffs from mortgage refinances. These trends are currently expected to continue.
Residential
The residential portfolio increased $20.5 million, or 24.4%, from $84.2$127.0 million at December 31, 20112015. The held to $104.7 million at December 31, 2012. This increase was primarily attributedmaturity loan portfolio grew due to a mortgage loan modification program and retaining a portionincremental new loan originations throughout the year. The majority of mortgages in-house with maturities of 15modifications were 20 years or less. During the fourth quarter of 2012, the Company began a new mortgageless in maturity to customers with high credit quality, documented payment history, and strong loan modification program with the focus on retaining mortgage loans with maturities of 10 years or less. The program attributed to slight growth in the residential loan portfolio in 2012 and is anticipated to contribute slight growth in 2013.
value profiles. A comparison of domestic loans and related percentage of gross loans, at December 31, for the five previous periods is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2012 | | | 2011 | | 2010 | | 2009 | | 2015 | | 2014 | | 2013 | | 2012 | | 2011 | | (dollars in thousands) | | Amount | | % | | Amount | | % | | Amount | | % | | Amount | | % | | Amount | | % | | Amount | | % | | Amount | | % | | Amount | | % | | Amount | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial and industrial | | $ | 65,110 | | | | 15.0 | % | | $ | 68,372 | | | | 16.8 | % | | $ | 85,129 | | | | 20.5 | % | | $ | 77,071 | | | | 17.9 | % | $ | 102,653 | | 18.4 | % | | $ | 80,301 | | 15.6 | % | | $ | 74,551 | | 15.6 | % | | $ | 65,110 | | 15.0 | % | | $ | 68,372 | | 16.8 | % | | Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-owner occupied | | | 81,998 | | | | 18.9 | | | | 79,475 | | | | 19.6 | | | | 87,355 | | | | 21.0 | | | | 99,397 | | | | 23.1 | | | 95,745 | | 17.2 | | | | 94,771 | | 18.4 | | | | 89,255 | | 18.7 | | | | 81,998 | | 18.9 | | | | 79,475 | | 19.6 | | | Owner occupied | | | 80,509 | | | | 18.6 | | | | 76,611 | | | | 18.9 | | | | 69,338 | | | | 16.7 | | | | 79,013 | | | | 18.3 | | | 101,652 | | 18.3 | | | | 95,780 | | 18.5 | | | | 86,294 | | 18.0 | | | | 80,509 | | 18.6 | | | | 76,611 | | 18.9 | | | Construction | | | 10,679 | | | | 2.5 | | | | 9,387 | | | | 2.3 | | | | 12,501 | | | | 3.0 | | | | 11,078 | | | | 2.6 | | | 4,481 | | 0.8 | | | | 5,911 | | 1.1 | | | | 10,765 | | 2.2 | | | | 10,679 | | 2.5 | | | | 9,387 | | 2.3 | | | Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Home equity installment | | | 32,828 | | | | 7.6 | | | | 36,390 | | | | 9.0 | | | | 40,089 | | | | 9.6 | | | | 48,177 | | | | 11.2 | | | 30,935 | | 5.6 | | | | 32,819 | | 6.4 | | | | 34,480 | | 7.2 | | | | 32,828 | | 7.6 | | | | 36,390 | | 9.0 | | | Home equity line of credit | | | 34,169 | | | | 7.9 | | | | 32,486 | | | | 8.0 | | | | 29,185 | | | | 7.0 | | | | 21,851 | | | | 5.1 | | | 48,060 | | 8.7 | | | | 42,188 | | 8.2 | | | | 36,836 | | 7.7 | | | | 34,169 | | 7.9 | | | | 32,486 | | 8.0 | | | Auto | | | 17,411 | | | | 4.0 | | | | 13,539 | | | | 3.3 | | | | 10,734 | | | | 2.6 | | | | 9,857 | | | | 2.3 | | | Auto and leases | | | 29,758 | | 5.3 | | | | 27,972 | | 5.4 | | | | 22,261 | | 4.7 | | | | 17,411 | | 4.0 | | | | 13,539 | | 3.3 | | | Other | | | 6,139 | | | | 1.4 | | | | 5,833 | | | | 1.4 | | | | 7,165 | | | | 1.7 | | | | 5,760 | | | | 1.3 | | | 6,208 | | 1.1 | | | | 6,501 | | 1.3 | | | | 5,205 | | 1.1 | | | | 6,139 | | 1.4 | | | | 5,833 | | 1.4 | | | Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Real estate | | | 96,765 | | | | 22.3 | | | | 80,091 | | | | 19.7 | | | | 68,160 | | | | 16.4 | | | | 70,958 | | | | 16.5 | | | 126,992 | | 22.8 | | | | 119,154 | | 23.1 | | | | 110,365 | | 23.1 | | | | 96,765 | | 22.3 | | | | 80,091 | | 19.7 | | | Construction | | | 7,948 | | | | 1.8 | | | | 4,110 | | | | 1.0 | | | | 6,145 | | | | 1.5 | | | | 7,535 | | | | 1.7 | | | 10,060 | | 1.8 | | | | 10,298 | | 2.0 | | | | 8,188 | | 1.7 | | | | 7,948 | | 1.8 | | | | 4,110 | | 1.0 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gross loans | | | 433,556 | | | | 100.0 | % | | | 406,294 | | | | 100.0 | % | | | 415,801 | | | | 100.0 | % | | | 430,697 | | | | 100.0 | % | | 556,544 | | 100.0 | % | | | 515,695 | | 100.0 | % | | | 478,200 | | 100.0 | % | | | 433,556 | | 100.0 | % | | | 406,294 | | 100.0 | % | | Less: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Allowance for loan losses | | | (8,972 | ) | | | | | | | (8,108 | ) | | | | | | | (7,898 | ) | | | | | | | (7,573 | ) | | | | | | (9,527) | | | | | | (9,173) | | | | | | (8,928) | | | | | | (8,972) | | | | | | (8,108) | | | | Unearned lease revenue | | | (335) | | | | | | (195) | | | | | | (56) | | | | | | - | | | | | | - | | | | | Net loans | | $ | 424,584 | | | | | | | $ | 398,186 | | | | | | | $ | 407,903 | | | | | | | $ | 423,124 | | | | | | $ | 546,682 | | | | | $ | 506,327 | | | | | $ | 469,216 | | | | | $ | 424,584 | | | | | $ | 398,186 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans held-for-sale | | $ | 10,545 | | | | | | | $ | 4,537 | | | | | | | $ | 213 | | | | | | | $ | 1,221 | | | | | | $ | 1,421 | | | | | $ | 1,161 | | | | | $ | 917 | | | | | $ | 10,545 | | | | | $ | 4,537 | | | |
| | | 2008 | | | (dollars in thousands) | | Amount | | | % | | | | | | | | | | | Commercial and industrial | | $ | 80,708 | | | | 18.3 | % | | Real estate: | | | | | | | | | | Commercial | | | 164,772 | | | | 37.4 | | | Residential | | | 98,510 | | | | 22.3 | | | Construction | | | 11,427 | | | | 2.6 | | | Consumer | | | 85,091 | | | | 19.3 | | | Direct financing leases | | | 444 | | | | 0.1 | | | Gross loans | | | 440,952 | | | | 100.0 | % | | Less: | | | | | | | | | | Allowance for loan losses | | | (4,745 | ) | | | | | | Net loans | | $ | 436,207 | | | | | | | | | | | | | | | | | Loans held-for-sale | | $ | 84 | | | | | |
The following table sets forth the maturity distribution of select components of the loan portfolio at December 31, 2012.2015. Excluded from the table are residential real estate and consumer loans: | | | | | | | | | | | | | | | More than | | | | | | | | | More than | | | | | | | | One year | | one year to | | More than | | | | One year | | one year to | | More than | | | | (dollars in thousands) | | or less | | five years | | five years | | Total | | or less | | five years | | five years | | Total | | Commercial and industrial | | $ | 23,638 | | | $ | 18,583 | | | $ | 22,889 | | | $ | 65,110 | | $ | 30,170 | | $ | 26,079 | | $ | 46,404 | | $ | 102,653 | | Commercial real estate | | | 35,763 | | | | 83,211 | | | | 43,533 | | | | 162,507 | | | 37,615 | | | 90,288 | | | 69,494 | | | 197,397 | | Commercial real estate construction | | | 10,679 | | | | - | | | | - | | | | 10,679 | | | | Residential real estate construction | | | 7,948 | | | | - | | | | - | | | | 7,948 | | | Commercial real estate construction * | | | 4,481 | | | - | | | - | | | 4,481 | Residential real estate construction * | | | 10,060 | | | - | | | - | | | 10,060 | | Total | | $ | 78,028 | | | $ | 101,794 | | | $ | 66,422 | | | $ | 246,244 | | $ | 82,326 | | $ | 116,367 | | $ | 115,898 | | $ | 314,591 |
Both*In the table above, both residential and commercial real estateCRE construction loans are included in the one-yearone year or less category since, by their nature, these loans are converted into residential and CRE loans within one year from the date the real estate construction loan was consummated. Upon conversion, the residential and CRE loans would normally mature after five years.
The following table sets forth the greater than one-year sensitivity changes intotal amount of C&I and CRE loans due after one year which have predetermined interest rates for commercial(fixed) and CRE loansfloating or adjustable interest rates (variable) as of December 31, 2012:2015: | | | One to five | | | More than | | | | | | (dollars in thousands) | | years | | | five years | | | Total | | | | | | | | | | | | | | Fixed interest rate | | $ | 11,860 | | | $ | 26,544 | | | $ | 38,404 | | | Variable interest rate | | | 99,088 | | | | 57,490 | | | | 156,578 | | | Total | | $ | 110,948 | | | $ | 84,034 | | | $ | 194,982 | |
| | | | | | | | | | One to five | | More than | | | | (dollars in thousands) | years | | five years | | Total | | | | | | | | | | Fixed interest rate | $ | 16,880 | | $ | 28,280 | | $ | 45,160 | Variable interest rate | | 99,487 | | | 87,618 | | | 187,105 | Total | $ | 116,367 | | $ | 115,898 | | $ | 232,265 |
Non-refundable fees and costs associated with all loan originations are deferred. Using either the principal reductioninterest method or straight-line amortization, the deferral is released as credits or charges to loan interest income over the life of the loan. There are no concentrations of loans to a number of borrowers engaged in similar industries exceeding 10% of total loans that are not otherwise disclosed as a category in the tables above. There are no concentrations of loans that, if resulted in a loss, would have a material adverse effect on the business of the Company. The Company’s loan portfolio does not have a material concentration within a single industry or group of related industries that is vulnerable to the risk of a near-term severe negative business impact. As of December 31, 2015, approximately 76% of the total loan portfolio was secured by real estate, down slightly from 78% as of December 31, 2014. The Company considers this segment concentration to be normal. The banking industry is affected by general economic conditions including, among other things, the effects of real estate values. The Company’s credit function strives to mitigate the negative impact of economic conditions by maintaining strict underwriting principles for all loan types and ensuring mortgage lending adheres to standards of secondary market compliance.
Loans held-for-sale Upon origination, most residential mortgages and certain small business administrationSmall Business Administration (SBA) guaranteed loans aremay be classified as HFS.held-for-sale (HFS). In the event of market rate increases, fixed-rate loans and loans not immediately scheduled to re-price would no longer produce yields consistent with the current market. In low interest rate environments, the Company would be exposed to prepayment risk and, as rates on adjustable-rate loans decrease, interest income would be negatively affected. Consideration is given to the Company’s current liquidity position and projected future liquidity needs. To better manage prepayment and interest rate risk, loans that meet these conditions may be classified as HFS. Occasionally, residential mortgage and/or other nonmortgage loans may be transferred from the loan portfolio to HFS. The carrying value of loans HFS is atbased on the lower of cost or estimated fair value. If the fair values of these loans decline below their original cost, the difference is written down and charged to current earnings. Subsequent appreciation in the portfolio is credited to current earnings but only to the extent of previous write-downs. Loans HFS asAs of December 31, 2012 were $10.5 million which approximates fair value compared to $4.5 million, respectively, at December 31, 2011. During 2012, the Company originated $85.3 million2015 and 2014, loans HFS consisted of residential mortgages HFS, compared to $45.1with carrying amounts of $1.4 million in 2011. The increase in volume in 2012 was a function ofand $1.2 million, respectively, which approximated their fair values. During the sustaining low mortgage interest rate environment which bolstered refinancing of existing home debt. During 2012,year ended December 31, 2015, residential mortgage loans with principal balances of $82.8$47.3 million were sold into the secondary market and the Company recognized net gains of approximately $1.7$1.0 million, compared to $46.1$35.1 million and $0.7$0.6 million, respectively during 2011. The Company expectsthe year ended December 31, 2014. An increase in residential mortgage origination activities caused the increase in gains from loan originations from refinancing activitysales in 2015 compared to recede during 2013. There are fewer seasoned mortgages that have not been refinanced at least once during this prolonged economic cycle and2014. During 2015, the attraction to refinance again is expected to retreat.
Company also recognized net gains of $0.2 million on the sale of nonmortgage loans. The Company retains mortgage servicing rights (MSRs) on loans sold into the secondary market. MSRs are retained so that the Company can foster personal relationships with its loyal customer base. At December 31, 20122015 and 2011,2014, the servicing portfolio balance of sold residential mortgage loans was $214.7$269.5 million and $193.5$256.8 million, respectively.
Allowance for loan losses Management evaluates the credit quality of the Company’s loan portfolio and performs a formal review of the adequacy of the allowance for loan losses (the allowance) on a quarterly basis. The allowance reflects management’s best estimate of the amount of credit losses in the loan portfolio. Management’s judgment is based on the evaluation of individual loans, past experience, the assessment of current economic conditions and other relevant factors including the amounts and timing of cash flows expected to be received on impaired loans. Those estimates may be susceptible to significant change. The provision for loan losses represents the amount necessary to maintain an appropriate allowance. Loan losses are charged directly against the allowance when loans are deemed to be uncollectible. Recoveries from previously charged-off loans are added to the allowance when received. Management applies two primary components during the loan review process to determine proper allowance levels. The two components are a specific loan loss allocation for loans that are deemed impaired and a general loan loss allocation for those loans not specifically allocated. The methodology to analyze the adequacy of the allowance for loan losses is as follows: •identification of specific impaired loans by loan category; •calculation of specific allowances where required for the impaired loans based on collateral and other objective and quantifiable evidence; •determination of loans with similar credit characteristics within each class of the loan portfolio segment and eliminating the impaired loans; •application of historical loss percentages (two-year(trailing twelve-quarter average) to pools to determine the allowance allocation; •application of qualitative factor adjustment percentages to historical losses for trends or changes in the loan portfolio, and/or current economic conditions. AllocationThrough December 31, 2015, allocation of the allowance for different categories of loans is based on the methodology as explained above. A key element of the methodology to determine the allowance is the Company’s credit risk evaluation process, which includes credit risk grading of individual commercial loans. Commercial loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or reaffirmed. The credit risk grades may be changed at any time management feelsdetermines an upgrade or downgrade may be warranted. The credit risk grades for the commercial loan portfolio are taken into account in the reserve methodology and loss factors are applied based upon the credit risk grades. The loss factors applied are based upon the Company’s historical experience as well as what management believes to be best practices and within common industry standards. Historical experience reveals there is a direct correlation between the credit risk grades and loan charge-offs. The changes in allocations in the commercial loan portfolio from period-to-period are based upon the credit risk grading system and from periodic reviews of the loan portfolio.
In order to substantiate flat reserve allocations for certain risk ratings on a recurring basis, management analyzed historical loss experience in those risk rating pools. Management considered peer or industry averages in support of flat rates. However, the lack of consistency in those allowance methodologies rendered flat rate correlation to be inapplicable. As a result, commencing on January 1, 2015 and going forward, the Bank applied the following updates to the Allowance for Loan and Lease Losses calculation: | · | | Pass-5 rated loans are included in the loan pools that do not include impaired loans. The Bank reasoned that Pass-5 rated loans did not present any substantive difference in historic loss experience than loans of similar or less risk. Previously, Pass-5 rated loans carried a flat 2% reserve allocation. The impact of this change reduced the reserve requirement by about $175 thousand. |
| · | | Special Mention – 6 rated loans were changed from a flat 5% reserve allocation. Management evaluated historical losses for 6 rated loans based on the greater of either the three (3) year moving average of historical loss experience in the 6 rated loan category OR an adjusted charge-off method. In the adjusted charge-off method, the bank categorized any charge-off for any commercial loan in terms of what the risk rating on that charge-off (or charge-down) was in the same period 2 years prior. Such loans were compared against the appropriate pool of loans by assigning the charged-off loan in the appropriate pool in the current period depending upon its risk rating 2 years prior. Each pool was then calculated for each commercial loan type to develop a relative percentage. These relative percentages were quantified in rolling 12 quarter averages and applied against the appropriate risk rating class. However, since Special Mention – 6 rated loans are by nature a transitional grade of risk rating, the actual losses incurred in this risk rating class was near 0%. Therefore, management applied a loss factor that, in its opinion, fairly represents the actual risk of loss from loans so rated. The impact of this change reduced the reserve requirement by about $23 thousand. |
| · | | Substandard – 7 rated loans were changed from a flat 15% reserve allocation to pools that are based on historical losses. Going forward, expected loss percentages will be based on the greater of either the three (3) year moving average of historical loss experience in the 7 rated loan category OR an adjusted charge-off method. In the adjusted |
charge-off method, the bank categorized any charge-off for any commercial loan in terms of what the risk rating on that charge-off (or charge-down) was in the same period 2 years prior. Such loans were compared against the appropriate pool of loans by assigning the charged-off loan in the appropriate pool in the current period depending upon its risk rating 2 years prior. Each pool was then calculated for each commercial loan type to develop a relative percentage. These relative percentages were quantified in rolling 12 quarter averages and applied against the appropriate risk rating class. The impact of this change reduced the reserve requirement by about $421 thousand. |
| · | | Qualitative factors will be universally applied to all loans in all loan pools. Previously, this was not done for Special Mention - 6 rated and Substandard – 7 rated loans. The impact of this change increased the reserve requirement by about $93 thousand. |
Each quarter, management performs an assessment of the allowance and the provision for loan losses. The Company’s Special Assets Committee meets formally on a quarterly basis, or more frequently if necessary,monthly and the applicable lenders discuss each relationship under review and reach a consensus on the appropriate estimated loss amount, if applicable, based on current accounting guidelines.guidance. The Special Assets Committee’s focus is on ensuring the pertinent facts are considered andregarding not only loans considered for specific reserves, but also the reserve amounts pursuant to the accounting principles are reasonable.collectability of loans that may be past due. The assessment process also includes the review of all loans on a non-accruing basisnon-accrual status as well as a review of certain loans to which the lenders or the Company’s Credit Administration function have assigned a criticized or classified risk rating. TotalNet charge-offs net of recoveries, for 2012 were $2.4$0.7 million compared to $1.6 million in 2011. Commercial and industrial loans recorded a net charge off of $0.2 million during 2012, as opposed to a net recovery of $0.3$0.8 million for 2011. Consumerthe years ended December 31, 2015 and 2014, respectively. During the period ended December 31, 2015, no specific loan netclass significantly underperformed as charge-offs were taken across a variety of $0.7 million were recorded during 2012 versus $0.6 million of net charge-offs during 2011. There were $1.3 million ofconsumer, commercial and commercial real estate net charge-offs during 2012 versus $0.7 million recorded in 2011. Lower appraisal valuations made necessary the increased amount of commercial real estate charge-offs. Residential real estate net charge-offs totaled $0.2 million for 2012 versus $0.6 million for 2011.loans. For a discussion on the provision for loan losses, see the “Provision for loan losses,” located in the results of operations section of management’s discussion and analysis contained herein.
The allowance for loan losses was $9.0$9.5 million atas of December 31, 20122015 and $8.1$9.2 million atas of December 31, 2011.2014. Management believes that the current balance in the allowance for loan losses of $9.0 million is sufficient to withstand the identified potential credit quality issues that may arise and others unidentified but inherent to the portfolio. Potential problem loans are those where there is known information that leads management to believe repayment of principal and/or interest is in jeopardy and the loans are currently neither on non-accrual status nor past due 90 days or more. Given continuing pressure on property values and the generally uncertain economic backdrop, thereThere could be additional instances which become identified in future periods that may require additional charge-offs and/or increases to the allowance.allowance due to continued sluggishness in the economy and pressure on property values. In contrast, an abrupt significant increase in the U.S. Prime lending rate could adversely impact the debt service capacity of existing borrowers' ability to repay.
Table Of Contents The following table sets forth the activity in the allowance for loan losses and certain key ratios for the periods indicated: | (dollars in thousands) | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | | | | | | | | | | | | | | | | | | | | Balance at beginning of period | | $ | 8,108 | | | $ | 7,898 | | | $ | 7,574 | | | $ | 4,745 | | | $ | 4,824 | | | | | | | | | | | | | | | | | | | | | | | | | Charge-offs: | | | | | | | | | | | | | | | | | | | | | | Commercial and industrial | | | 185 | | | | 128 | | | | 452 | | | | 983 | | | | 168 | | | Commercial real estate | | | 1,335 | | | | 699 | | | | 892 | | | | 844 | | | | 565 | | | Consumer | | | 737 | | | | 654 | | | | 463 | | | | 433 | | | | 351 | | | Residential | | | 231 | | | | 577 | | | | 2 | | | | 9 | | | | 45 | | | Total | | | 2,488 | | | | 2,058 | | | | 1,809 | | | | 2,269 | | | | 1,129 | | | | | | | | | | | | | | | | | | | | | | | | | Recoveries: | | | | | | | | | | | | | | | | | | | | | | Commercial and industrial | | | 26 | | | | 407 | | | | 4 | | | | 35 | | | | 61 | | | Commercial real estate | | | 46 | | | | 37 | | | | 3 | | | | 2 | | | | 18 | | | Consumer | | | 30 | | | �� | 17 | | | | 39 | | | | 11 | | | | 31 | | | Residential | | | - | | | | 7 | | | | 2 | | | | - | | | | - | | | Total | | | 102 | | | | 468 | | | | 48 | | | | 48 | | | | 110 | | | Net charge-offs | | | 2,386 | | | | 1,590 | | | | 1,761 | | | | 2,221 | | | | 1,019 | | | Provision for loan losses | | | 3,250 | | | | 1,800 | | | | 2,085 | | | | 5,050 | | | | 940 | | | Balance at end of period | | $ | 8,972 | | | $ | 8,108 | | | $ | 7,898 | | | $ | 7,574 | | | $ | 4,745 | | | | | | | | | | | | | | | | | | | | | | | | | Net charge-offs to average total loans outstanding | | | 0.56 | % | | | 0.39 | % | | | 0.41 | % | | | 0.51 | % | | | 0.24 | % | | Allowance for loan losses to net charge-offs | | | 3.76 | x | | | 5.10 | x | | | 4.48 | x | | | 3.41 | x | | | 4.66 | x | | Allowance for loan losses to total loans | | | 2.02 | % | | | 1.97 | % | | | 1.90 | % | | | 1.75 | % | | | 1.08 | % | | Loans 30 - 89 days past due and accruing | | $ | 2,920 | | | $ | 4,358 | | | $ | 2,611 | | | $ | 5,173 | | | $ | 1,858 | | | Loans 90 days or more past due and accruing | | $ | 1,723 | | | $ | 265 | | | $ | 289 | | | $ | 555 | | | $ | 604 | | | Non-accrual loans | | $ | 12,121 | | | $ | 13,962 | | | $ | 9,969 | | | $ | 12,329 | | | $ | 3,493 | | | Allowance for loan losses to loans 90 days or more past due and accruing | | | 5.21 | x | | | 30.55 | x | | | 27.36 | x | | | 13.65 | x | | | 7.85 | x | | Allowance for loan losses to non-accrual loans | | | 0.74 | x | | | 0.58 | x | | | 0.79 | x | | | 0.61 | x | | | 1.36 | x | | Allowance for loan losses to non-performing loans | | | 0.65 | x | | | 0.57 | x | | | 0.77 | x | | | 0.59 | x | | | 1.16 | x | | Average total loans | | $ | 426,636 | | | $ | 411,839 | | | $ | 427,464 | | | $ | 432,642 | | | $ | 420,834 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (dollars in thousands) | 2015 | 2014 | 2013 | 2012 | | 2011 | | | | | | | | | | | | | | | | | | Balance at beginning of period | $ | 9,173 | | $ | 8,928 | | $ | 8,972 | | $ | 8,108 | | $ | 7,898 | | | | | | | | | | | | | | | | | | Charge-offs: | | | | | | | | | | | | | | | | Commercial and industrial | | (25) | | | (309) | | | (56) | | | (185) | | | (128) | | Commercial real estate | | (432) | | | (239) | | | (2,091) | | | (1,335) | | | (699) | | Consumer | | (437) | | | (361) | | | (400) | | | (737) | | | (654) | | Residential | | (15) | | | (93) | | | (218) | | | (231) | | | (577) | | Total | | (909) | | | (1,002) | | | (2,765) | | | (2,488) | | | (2,058) | | | | | | | | | | | | | | | | | | Recoveries: | | | | | | | | | | | | | | | | Commercial and industrial | | 47 | | | 32 | | | 30 | | | 26 | | | 407 | | Commercial real estate | | 18 | | | 91 | | | 30 | | | 46 | | | 37 | | Consumer | | 95 | | | 30 | | | 110 | | | 30 | | | 17 | | Residential | | 28 | | | 34 | | | 1 | | | - | | | 7 | | Total | | 188 | | | 187 | | | 171 | | | 102 | | | 468 | | Net charge-offs | | (721) | | | (815) | | | (2,594) | | | (2,386) | | | (1,590) | | Provision for loan losses | | 1,075 | | | 1,060 | | | 2,550 | | | 3,250 | | | 1,800 | | Balance at end of period | $ | 9,527 | | $ | 9,173 | | $ | 8,928 | | $ | 8,972 | | $ | 8,108 | | | | | | | | | | | | | | | | | | Allowance for loan losses to total loans | | 1.71 | % | | 1.78 | % | | 1.87 | % | | 2.07 | % | | 2.00 | % | Net charge-offs to average total loans outstanding | | 0.13 | % | | 0.16 | % | | 0.56 | % | | 0.56 | % | | 0.39 | % | Average total loans | $ | 534,903 | | $ | 495,758 | | $ | 461,539 | | $ | 426,636 | | $ | 411,839 | | Loans 30 - 89 days past due and accruing | $ | 3,707 | | $ | 3,932 | | $ | 5,268 | | $ | 2,920 | | $ | 4,358 | | Loans 90 days or more past due and accruing | $ | 356 | | $ | 1,060 | | $ | 155 | | $ | 1,723 | | $ | 265 | | Non-accrual loans | $ | 9,003 | | $ | 4,215 | | $ | 5,668 | | $ | 12,121 | | $ | 13,962 | | Allowance for loan losses to loans 90 days or more past due and accruing | | 26.76 | x | | 8.65 | x | | 57.60 | x | | 5.21 | x | | 30.55 | x | Allowance for loan losses to non-accrual loans | | 1.06 | x | | 2.18 | x | | 1.58 | x | | 0.74 | x | | 0.58 | x | Allowance for loan losses to non-performing loans | | 1.02 | x | | 1.74 | x | | 1.53 | x | | 0.65 | x | | 0.57 | x | | | | | | | | | | | | | | | | |
The allowance for loan losses can generally absorb losses throughout the loan portfolio. However, in some instances an allocation is made for specific loans or groups of loans. Allocation of the allowance for loan losses for different categories of loans is based on the methodology used by the Company, as previously explained. The changes in the allocations from year-to-yearperiod-to-period are based upon year-endquarter-end reviews of the loan portfolio. Allocation of the allowance among major categories of loans for the past five years, as well as the percentage of loans in each category to total loans, is summarized in the following table. This table should not be interpreted as an indication that charge-offs in future periods will occur in these amounts or proportions, or that the allocation indicates future charge-off trends. When present, the portion of the allowance designated as unallocated is within the Company’s guidelines.guidelines: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2015 | | 2014 | | 2013 | | 2012 | | 2011 | | | | | Category | | | | | Category | | | | | Category | | | | | Category | | | | | Category | | | | | % of | | | | | % of | | | | | % of | | | | | % of | | | | | % of | (dollars in thousands) | Allowance | | Loans | | Allowance | | Loans | | Allowance | | Loans | | Allowance | | Loans | | Allowance | | Loans | Category | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial real estate | $ | 5,014 | | 36 | % | | $ | 4,672 | | 38 | % | | $ | 4,253 | | 39 | % | | $ | 4,908 | | 40 | % | | $ | 3,979 | | 41 | % | Commercial and industrial | | 1,336 | | 18 | | | | 1,052 | | 16 | | | | 944 | | 15 | | | | 922 | | 15 | | | | 1,221 | | 17 | | Consumer | | 1,533 | | 21 | | | | 1,519 | | 21 | | | | 1,482 | | 21 | | | | 1,639 | | 21 | | | | 1,435 | | 22 | | Residential real estate | | 1,407 | | 25 | | | | 1,316 | | 25 | | | | 1,613 | | 25 | | | | 1,503 | | 24 | | | | 1,051 | | 20 | | Unallocated | | 237 | | - | | | | 614 | | - | | | | 636 | | - | | | | - | | - | | | | 422 | | - | | Total | $ | 9,527 | | 100 | % | | $ | 9,173 | | 100 | % | | $ | 8,928 | | 100 | % | | $ | 8,972 | | 100 | % | | $ | 8,108 | | 100 | % |
Table Of Contents | (dollars in thousands) | | 2012 | | | % | | | 2011 | | | % | | | 2010 | | | % | | | 2009 | | | % | | | Category | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial real estate | | $ | 4,908 | | | | 54.6 | % | | $ | 3,979 | | | | 49.1 | % | | $ | 4,238 | | | | 53.7 | % | | $ | 4,314 | | | | 56.9 | % | | Commercial and industrial | | | 922 | | | | 10.3 | | | | 1,221 | | | | 15.1 | | | | 1,368 | | | | 17.3 | | | | 1,406 | | | | 18.6 | | | Consumer | | | 1,639 | | | | 18.3 | | | | 1,435 | | | | 17.7 | | | | 1,249 | | | | 15.8 | | | | 1,253 | | | | 16.5 | | | Residential real estate | | | 1,503 | | | | 16.8 | | | | 1,051 | | | | 13.0 | | | | 863 | | | | 10.9 | | | | 505 | | | | 6.7 | | | Unallocated | | | - | | | | - | | | | 422 | | | | 5.1 | | | | 180 | | | | 2.3 | | | | 96 | | | | 1.3 | | | Total | | $ | 8,972 | | | | 100.0 | % | | $ | 8,108 | | | | 100.0 | % | | $ | 7,898 | | | | 100.0 | % | | $ | 7,574 | | | | 100.0 | % |
| �� | | 2008 | | | % | | | Category | | | | | | | | | | Real estate: | | | | | | | | | | Commercial | | $ | 1,931 | | | | 40.7 | % | | Residential | | | 711 | | | | 15.0 | | | Construction | | | 67 | | | | 1.4 | | | Commercial and industrial | | | 930 | | | | 19.6 | | | Consumer | | | 973 | | | | 20.5 | | | Direct financing leases | | | 7 | | | | 0.1 | | | Unallocated | | | 126 | | | | 2.7 | | | Total | | $ | 4,745 | | | | 100.0 | % |
The allocation of the allowance for the commercial loan portfolio, which is comprised of commercial real estate and commercial and industrial loans, accounted for approximately 65%66.6%, or $5.8$6.4 million, of the total allowance for loan losses at December 31, 2012.2015, which represents a 4.2 percentage point increase from December 31, 2014. The increase in the commercial real estate and commercial and industrial allocation reflects information recently obtained onfrom December 31, 2014 to December 31, 2015 was mostly related to the collateral valueaddition of a participated, non-accrual loan as more fully described in Note 20, “Subsequent Event”, within the notes to consolidated financial statements and incorporated by reference in Part II, Item 8. The increase in the residentialone large commercial non-owner occupied real estate allocation at December 31, 2012 resulted fromloan into the increase in loans outstanding, as well as qualitative factor adjustments made due to the stagnant economy. Collateral values were prudently calculated to provide a conservative and realistic value supporting these loans. The Company uses information from its ongoing review process as well as appraisals from independent third parties and other current market information to support the valuations.non-accrual category. The allocation to the consumer categoryand mortgage categories of loans is adequate compared to the actual two-year historical net charge-offs and qualitative adjustments. The unallocated amount represents the portion of the allowance not specifically identified with a loan or groups of loans. Management provided the amount to support growth in the loan portfolio and reinforce the allowance for identified and potential credit risks that still exist from an uncertain local economic climate.
Non-performing assets The Company defines non-performing assets as accruing loans past due 90 days or more, non-accrual loans, troubled debt restructured loans (TDRs), other real estate owned (ORE), and repossessed assets. At December 31, 2015, non-performing assets and non-accrual investment securities. Asrepresented 1.76% of total assets compared with 1.18% as of December 31, 2012,2014. This was a result of an increase in non-accrual loans and TDRs. This increase was offset by a decrease in past due loans over 90-days and accruing and a decrease in ORE. Most of the non-performing assets represented 2.94% of total assets reduced from 3.58% at December 31, 2011, mainly resulting fromloans are collateralized, thereby mitigating the reduction of TDR’s during 2012. Company’s potential for loss. The following table sets forth non-performing assets at December 31: | (dollars in thousands) | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | | | | | | | | | | | | | | | | | | | | Loans past due 90 days or more and accruing | | $ | 1,723 | | | $ | 265 | | | $ | 289 | | | $ | 555 | | | $ | 604 | | | Non-accrual loans * | | | 12,121 | | | | 13,962 | | | | 9,969 | | | | 12,329 | | | | 3,493 | | | Total non-performing loans | | | 13,844 | | | | 14,227 | | | | 10,258 | | | | 12,884 | | | | 4,097 | | | Troubled debt restructurings | | | 1,103 | | | | 5,314 | | | | 783 | | | | - | | | | - | | | Other real estate owned and repossessed assets | | | 1,607 | | | | 1,169 | | | | 1,261 | | | | 887 | | | | 1,451 | | | Non-accrual securities | | | 1,132 | | | | 1,038 | | | | 1,091 | | | | 583 | | | | - | | | Total non-performing assets | | $ | 17,686 | | | $ | 21,748 | | | $ | 13,393 | | | $ | 14,354 | | | $ | 5,548 | | | | | | | | | | | | | | | | | | | | | | | | | Total loans, including loans held-for-sale | | $ | 444,101 | | | $ | 410,831 | | | $ | 416,014 | | | $ | 431,918 | | | $ | 441,036 | | | Total assets | | $ | 601,525 | | | $ | 606,742 | | | $ | 561,673 | | | $ | 556,017 | | | $ | 575,719 | | | Non-accrual loans to total loans | | | 2.73 | % | | | 3.40 | % | | | 2.40 | % | | | 2.85 | % | | | 0.79 | % | | Non-performing loans to total loans | | | 3.12 | % | | | 3.46 | % | | | 2.47 | % | | | 2.98 | % | | | 0.93 | % | | Non-performing assets to total assets | | | 2.94 | % | | | 3.58 | % | | | 2.38 | % | | | 2.58 | % | | | 0.96 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (dollars in thousands) | 2015 | | 2014 | | 2013 | | 2012 | | 2011 | | | | | | | | | | | | | | | | Loans past due 90 days or more and accruing | $ | 356 | | $ | 1,060 | | $ | 155 | | $ | 1,723 | | $ | 265 | Non-accrual loans * | | 9,003 | | | 4,215 | | | 5,668 | | | 12,121 | | | 13,962 | Total non-performing loans | | 9,359 | | | 5,275 | | | 5,823 | | | 13,844 | | | 14,227 | Troubled debt restructurings | | 2,423 | | | 753 | | | 1,045 | | | 1,103 | | | 5,314 | Other real estate owned and repossessed assets | | 1,074 | | | 1,972 | | | 2,086 | | | 1,607 | | | 1,169 | Non-accrual securities | | - | | | - | | | - | | | 1,132 | | | 1,038 | Total non-performing assets | $ | 12,856 | | $ | 8,000 | | $ | 8,954 | | $ | 17,686 | | $ | 21,748 | | | | | | | | | | | | | | | | Total loans, including loans held-for-sale | $ | 557,630 | | $ | 516,661 | | $ | 479,061 | | $ | 444,101 | | $ | 410,831 | Total assets | $ | 729,358 | | $ | 676,485 | | $ | 623,825 | | $ | 601,525 | | $ | 606,742 | Non-accrual loans to total loans | | 1.61% | | | 0.82% | | | 1.18% | | | 2.73% | | | 3.40% | Non-performing loans to total loans | | 1.68% | | | 1.02% | | | 1.22% | | | 3.12% | | | 3.46% | Non-performing assets to total assets | | 1.76% | | | 1.18% | | | 1.44% | | | 2.94% | | | 3.58% |
*In the table above, the amount includes non-accrual TDRs of $0.9 million, $1.0 million, $1.1 million and $1.4 million as of December 31,2014, 2013, 2012 and 2011.2011, respectively. There were no non- accrualnon-accrual TDRs as of December 31, 2010, 2009 and 2008. The composition of non-performing loans as of December 31, 2012 is as follows:
| | | Gross | | | Past due 90 | | | Non- | | | Total non- | | | % of | | | | | loan | | | days or more | | | accrual | | | performing | | | gross | | | (dollars in thousands) | | balances | | | and still accruing | | | loans | | | loans | | | loans | | | Commercial and industrial | | $ | 65,110 | | | $ | 236 | | | $ | 18 | | | $ | 254 | | | | 0.39 | % | | | | | | | | | | | | | | | | | | | | | | | | Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | Non-owner occupied | | | 81,998 | | | | - | | | | 1,884 | | | | 1,884 | | | | 2.30 | % | | Owner occupied | | | 80,509 | | | | 408 | | | | 5,031 | | | | 5,439 | | | | 6.76 | % | | Construction | | | 10,679 | | | | - | | | | 1,123 | | | | 1,123 | | | | 10.52 | % | | | | | | | | | | | | | | | | | | | | | | | | Consumer: | | | | | | | | | | | | | | | | | | | | | | Home equity installment | | | 32,828 | | | | 19 | | | | 1,306 | | | | 1,325 | | | | 4.04 | % | | Home equity line of credit | | | 34,169 | | | | - | | | | 381 | | | | 381 | | | | 1.12 | % | | Auto | | | 17,411 | | | | 16 | | | | - | | | | 16 | | | | 0.09 | % | | Other | | | 6,139 | | | | 17 | | | | 48 | | | | 65 | | | | 1.06 | % | | | | | | | | | | | | | | | | | | | | | | | | Residential: | | | | | | | | | | | | | | | | | | | | | | Real estate | | | 96,765 | | | | 1,027 | | | | 2,330 | | | | 3,357 | | | | 3.47 | % | | Construction | | | 7,948 | | | | - | | | | - | | | | - | | | | - | | | Loans held-for-sale | | | 10,545 | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 444,101 | | | $ | 1,723 | | | $ | 12,121 | | | $ | 13,844 | | | | 3.12 | % |
2015. In the review of loans for both delinquency and collateral sufficiency, management concluded that there were a number of loans that lacked the ability to repay in accordance with contractual terms. The decision to place loans on non-accrual status is made on an individual basis after considering factors pertaining to each specific loan. Generally, commercial loans are placed on non-accrual status when management has determined that payment of all contractual principal and interest is in doubt or the loan is past due 90 days or more as to principal and interest, unless well-secured and in the process of collection. Consumer loans secured by residential real estate and residential mortgage loans are placed on non-accrual status at 120 days past due as to principal and interest, and unsecured consumer loans are charged-off when the loan is 90 days or more past due as to principal and interest. Uncollected interest income accrued on all loans placed on non-accrual is reversed and charged to interest income. The non-performing assets for the period were comprised of non-accruing commercial loans, non-accruing real estate loans, non-accrual consumer loans, troubled debt restructurings, non-accrual securities, ORE and other repossessed assets. Most of the loans are collateralized, thereby mitigating the Company’s potential for loss. At December 31, 2012, $1.1 million of corporate bonds consisting of pooled trust preferred securities were on non-accrual status compared to $1.0 million at December 31, 2011. For a further discussion on the Company’s securities portfolio, see Note 3, “Investment securities”, within the notes to the consolidated financial statements and the section entitled “Investments”, contained within this management’s discussion and analysis section.
Non-performing loans, decreased from $14.2 million on December 31, 2011 to $13.8 million at December 31, 2012. At December 31, 2011, thewhich consists of accruing loans that are over 90 days past due portion was $0.3as well as all non-accrual loans, increased $4.1 million, and was comprisedor 77%, from $5.3 million at December 31, 2014 to $9.4 million at December 31, 2015. This increase is related mostly to the preemptive addition of three loans ranging from $47 thousandone large commercial non-owner occupied loan to $0.2 million, and the non-accrual loan portion numbered 74 loans ranging from $3 thousand to $3.4 million.category of non-performing loans. At December 31, 2012, there were seventeen2015, the portion of accruing loans that was over 90 days past due totaled $0.4 million and consisted of eight loans to sixteenseven unrelated borrowers aggregating $1.7 million in the over 90 day category ranging from less than $1 thousand to $0.6$0.2 million. OfAt December 31, 2014, the seventeenportion of accruing loans past duethat was over 90 days nine loans, aggregating $1.0past due totaled $1.1 million were residential mortgages to unrelated borrowers. Of these nine loans, sevenand consisted of them (aggregating $0.9 million) made payments prior to year-end and future payments are expected to continue. In addition, twoeleven loans to one borrower were secured commercial loans aggregating $0.6seven unrelated borrowers ranging from $2 thousand to $0.4 million. Three payments were received just after the year-end, bringing these loans to near current status. The higher amount of loans past due 90 days was mostly from a $0.8 million rise in past due residential real estate loans and a $0.4 million increase in owner-occupied commercial loans. These increases are characteristic of the state of the economy. The Company seeks payments from all past due customers through an aggressive customer communication process. A past due loan will be placed on non-accrual at the 90-day90 day point when it is deemed that a customer is non-responsive and uncooperative to collection efforts. Of the $1.7 million outstanding at December 31, 2012, approximately one commercial loan of approximately $0.1 million was subsequently re-classified to non-accrual status. At December 31, 2012,2014, there were 6546 loans to 5741 unrelated borrowers ranging from less than $1 thousand to $3.2$0.9 million in the non-accrual category. The net declineAt December 31, 2015, there were 51 loans to 46 unrelated borrowers on non-accrual ranging from less than $1 thousand to $5.1 million. At December 31, 2014, non-accrual loans totaled $4.2 million compared with $9.0 million at December 31, 2015, an increase of $4.8 million. Non-accrual loans increased during the period ending December 31, 2015 for the year resulted from a combination of charge offs, transfersfollowing reasons: $7.5 million in new non-accrual loans plus capitalized expenditures on these loans were
added; $0.9 million were paid down or paid off; $0.6 million were charged off; $0.5 million were transferred to ORE, $0.1 million was moved back to accrual status and repayments, partially offset by additions to non-accrual loans.$0.6 million were sold in the secondary market. The composition of non-performing loans as of December 31, 2015 is as follows: | | | | | | | | | | | | | | | | | | | | | | | Gross | Past due 90 | Non- | Total non- | | % of | | loan | days or more | accrual | performing | | gross | (dollars in thousands) | balances | and still accruing | loans | loans | | loans | Commercial and industrial | $ | 102,653 | $ | 12 | $ | 30 | $ | 42 | | 0.04% | Commercial real estate: | | | | | | | | | | | Non-owner occupied | | 95,745 | | 283 | | 6,193 | | 6,476 | | 6.76% | Owner occupied | | 101,652 | | - | | 988 | | 988 | | 0.97% | Construction | | 4,481 | | - | | 226 | | 226 | | 5.04% | Consumer: | | | | | | | | | | | Home equity installment | | 30,935 | | - | | 167 | | 167 | | 0.54% | Home equity line of credit | | 48,060 | | - | | 512 | | 512 | | 1.07% | Auto loans and leases * | | 29,423 | | 31 | | 45 | | 76 | | 0.26% | Other | | 6,208 | | 30 | | 6 | | 36 | | 0.58% | Residential: | | | | | | | | | | | Real estate | | 126,992 | | - | | 836 | | 836 | | 0.66% | Construction | | 10,060 | | - | | - | | - | | - | Loans held-for-sale | | 1,421 | | - | | - | | - | | - | | | | | | | | | | | | Total | $ | 557,630 | $ | 356 | $ | 9,003 | $ | 9,359 | | 1.68% |
*Net of unearned lease revenue of $0.3 million. Payments received from non-accrual loans are recognized on a cash method. Payments are first applied to the outstanding principal balance, then to the recovery of any charged-off loan amounts. Any excess is treated as a recovery of interest income. If the non-accrual loans that were outstanding as of December 31, 2015 had been performing in accordance with their original terms, the Company would have recognized interest income with respect to such loans of $159 thousand. The Company, on a regular basis, reviews changes to loans to determine if they meet the definition of a TDR. TDR loansTDRs arise when a borrower experiences financial difficulty and the Company grants a concession that it would not otherwise grant based on current underwriting standards in order to maximize the Company’s recovery. TDR loansTDRs aggregated $2.2$2.4 million at December 31, 2012 which consisted2015, an increase of $1.1$0.8 million, of accruing commercial real estate loans, $1.1from $1.6 million of non-accrual commercial real estate loans and $42 thousand of accruing commercial & industrial loans. Atat December 31, 2011, TDR2014, due to the addition of five loans aggregated $6.7 million which consisted of $5.3 million of accruing commercial real estate loans, $1.4 million of non-accrual commercial real estate loans(4 CRE and $44 thousand of accruing commercial & industrial loans. 1 C&I) from 3 unrelated borrowers being classified as TDRs throughout the year. The following tables set forth the activity in accruing and non-accruing TDRs as of the period indicated: As of and for the year ended December 31, 2012
| | | | | | | | | | | | | | | | | | | | | | | | As of and for the year ended December 31, 2015 | | | | | | | | | | | Accruing | | Non-accruing | | | | | Commercial & | | Commercial | | Commercial | | | (dollars in thousands) | industrial | | real estate | | real estate | | Total | | | | | | | | | | | | | Troubled Debt Restructures: | | | | | | | | | | | | Beginning balance | $ | 25 | | $ | 728 | | $ | 875 | | $ | 1,628 | Additions | | 500 | | | 1,267 | | | - | | | 1,767 | Sold | | - | | | - | | | (604) | | | (604) | Pay downs / payoffs | | - | | | (97) | | | (71) | | | (168) | Charge offs | | - | | | - | | | (200) | | | (200) | Ending balance | $ | 525 | | $ | 1,898 | | $ | - | | $ | 2,423 |
Table Of Contents | | | Accruing | | | Non-accruing | | | | | | | | Commercial & | | | Commercial | | | Commercial | | | | | | (dollars in thousands) | | industrial | | | real estate | | | real estate | | | Total | | | | | | | | | | | | | | | | | Troubled Debt Restructures: | | | | | | | | | | | | | | | | | | Beginning balance | | $ | 44 | | | $ | 5,270 | | | $ | 1,395 | | | $ | 6,709 | | | New TDRs | | | - | | | | - | | | | - | | | | - | | | Pay downs / payoffs | | | 2 | | | | 4,998 | | | | 129 | | | | 5,129 | | | Advance on balance | | | - | | | | 789 | | | | - | | | | 789 | | | Charge offs | | | - | | | | - | | | | 200 | | | | 200 | | | Ending balance | | $ | 42 | | | $ | 1,061 | | | $ | 1,066 | | | $ | 2,169 | |
As of and for the year ended December 31, 2011
| | | | | | | | | | | | | | | | | | | | As of and for the year ended December 31, 2014 | | | | | | | | | | | | | Accruing | | Non-accruing | | | | Accruing | | Non-accruing | | | | | | | Commercial & | | Commercial | | Commercial | | | | Commercial & | | Commercial | | Commercial | | | | (dollars in thousands) | | industrial | | real estate | | real estate | | Total | | industrial | | real estate | | real estate | | Total | | | | | | | | | | | | | | | | | | | | | Troubled Debt Restructures: | | | | | | | | | | | | | | | | | | | | | | | | | | Beginning balance | | $ | 25 | | | $ | 758 | | | $ | - | | | $ | 783 | | $ | 35 | | $ | 1,010 | | $ | 967 | | $ | 2,012 | | New TDRs | | | 19 | | | | 5,011 | | | | 1,476 | | | | 6,506 | | | Advance on balance | | | - | | 1 | | 1 | | 2 | | Pay downs / payoffs | | | - | | | | 2 | | | | 6 | | | | 8 | | | (10) | | (283) | | (93) | | (386) | | From TDR to performing status | | | - | | | | 499 | | | | - | | | | 499 | | | | Advance on balance | | | - | | | | 2 | | | | - | | | | 2 | | | | Charge offs | | | - | | | | - | | | | 75 | | | | 75 | | | | Ending balance | | $ | 44 | | | $ | 5,270 | | | $ | 1,395 | | | $ | 6,709 | | $ | 25 | | $ | 728 | | $ | 875 | | $ | 1,628 |
If applicable, a TDR loan classified as non-accrual would require a minimum of six months of payments before consideration for a return to accrual status. Concessions made to borrowers typically involve an extensionThe concessions granted consisted of the loan’s maturity datetemporary interest-only payments or a changereduction in the loan’s amortization period.rate of interest to a below-market rate for a contractual period of time. The Company believes concessions have been made in the best interests of the borrower and the Company. The Company has not reduced interest rates or forgiven principal with respect to these loans. If loans characterized as a TDR perform according to the restructured terms for a satisfactory period of time, the TDR designation may be removed in a new calendar year if the loan yields a market rate of interest. Foreclosedassets held-for-sale At December 31, 2012, the non-accrual loansForeclosed assets held-for-sale aggregated $12.1 million as compared to $14.0$1.1 million at December 31, 2011. The net decrease in the level of non-accrual loans during the period ending December 31, 2012 occurred as follows: additions to the non-accrual loan component of the non-performing assets totaling $4.5 million were made during the year; these were offset by reductions or payoffs of2015 and $2.0 million, charge-offs of $2.2 million, $1.8 million of transfers to ORE and $0.4 million of loans that returned to performing status. Loans past due 90 days or more and accruing were $1.7 million at December 31, 2012 and $0.3 million at December 31, 2011. The ratio of non-performing loans to total loans was 3.12% at December 31, 2012 compared to 3.46% at December 31, 2011.
Payments received on non-accrual loans are recognized on a cash method. Payments are first applied against the outstanding principal balance, then to the recovery of any charged-off loan amounts. Any excess is treated as a recovery of interest income. During 2011, the Company collected approximately $77 thousand of interest income recognized on the cash basis. There was $20 thousand in interest income recognized on the cash basis in 2012. If the non-accrual loans that were outstanding as of December 31, 2012 had been performing in accordance with their original terms, the Company would have recognized interest income with respect to such loans of $0.6 million for the period ended December 31, 2012.
Bank premises and equipment, net
Net of depreciation, bank premises and equipment increased $0.6 million, or 4%, in 2012. The increase is primarily attributable to the purchase of the Company’s Moosic and Kingston branches, vehicle replacements, telecommunication, and other system-related upgrades. Prior to the acquisition of the Moosic and Kingston branches, the Company leased these offices from unrelated third parties under terms of operating leases that extended to 2019 and 2028, respectively.
Foreclosedassets held-for-sale
Foreclosed assets held-for-sale aggregated $1.6 million at December 31, 2012 and $1.2 million at December 31, 2011.2014. The following table sets forth the activity in theORE component of foreclosed assets held-for-sale:
| | | | | | | | | | | | | | | | | | | | 2012 | | | 2011 | | 2015 | | 2014 | | (dollars in thousands) | | Amount | | | # | | | Amount | | | # | | Amount | # | | Amount | # | | | | | | | | | | | | | | | | | | | | | Balance at beginning of period | | $ | 1,169 | | | | 6 | | | $ | 1,261 | | | | 5 | | $ | 1,961 | 12 | | $ | 2,078 | 15 | | | | | | | | | | | | | | | | | | | | | | | | | | | Additions | | | 1,778 | | | | 14 | | | | 819 | | | | 4 | | | 466 | 10 | | | 1,109 | 7 | | Paydowns | | | (92 | ) | | | | | | | (45 | ) | | | | | | Pay downs | | | (1) | | | | (5) | | | Write downs | | | (86 | ) | | | | | | | (66 | ) | | | | | | (37) | | | | (155) | | | Sold | | | (1,169 | ) | | | (8 | ) | | | (800 | ) | | | (3 | ) | | (1,315) | (8) | | | (1,066) | (10) | | | | | | | | | | | | | | | | | | | | | Balance at end of period | | $ | 1,600 | | | | 12 | | | $ | 1,169 | | | | 6 | | $ | 1,074 | 14 | | $ | 1,961 | 12 |
As of December 31, 2015, ORE consisted of fourteen properties from thirteen unrelated borrowers totaling $1.1 million. Six of these properties ($0.4 million) were added in 2015; three were added in 2014 ($0.1 million); two were added in 2013 ($0.2 million); two were added in 2012 the ORE balance consisted of: nine properties totaling $0.8 million from 2012 additions; two properties aggregating $0.2 million acquired($0.3 million); and one was added in 2011 and one property acquired in 2010 for $0.6 million. Of($0.1 million). In addition, of the twelve OREfourteen properties, as of December 31, 2012, which stemmed from eleven unrelated borrowers, elevennine ($0.8 million) were either listed for sale or pendingawaiting listing, with local realtors and one property waswhile the remaining properties (five totaling $0.3 million) are either in the process of eviction. In addition, as of December 31, 2012, foreclosed assets held-for-sale included one other repossessed asset, an automobile in the amount of $6 thousand. litigation, awaiting closing, have disposition plans or are undergoing renovations. There were no other repossessed assets held-for-sale at December 31, 2011.2015. At December 31, 2014, other repossessed assets consisted of an automobile with a book value of $11 thousand which was sold during 2015. During the first quarter of 2013, the Company obtained information that may require a significant addition to ORE properties during 2013. For a further discussion on this event see Note 20, “Subsequent Event”, within the notes to consolidated financial statements and incorporated by reference in Part II, Item 8.
Cash surrender value of bank owned life insurance The Company maintains bank owned life insurance (BOLI) for a chosen group of employees at the time of purchase, namely its officers, where the Company is the owner and sole beneficiary of the policies. BOLI is classified as a non-interest earning asset. Increases in the cash surrender value are recorded as components of non-interest income. The BOLI is profitable from the appreciation of the cash surrender values of the pool of insurance and its tax-free advantage to the Company. This profitability is used to offset a portion of current and future employee benefit costs. The BOLI can be liquidated if necessary with associated tax costs. However, the Company intends to hold this pool of insurance, because it provides income that enhances the Company’s capital position. Therefore, the Company has not provided for deferred income taxes on the earnings from the increase in cash surrender value. Premises and equipment Net of depreciation, premises and equipment increased $1.9 million during 2015. The increase was due to the opening of a new branch and renovations to an existing branch which were completed during the second quarter of 2015. Other assets The $3.8 million decrease in other assets was due mostly to a $4.3 million decline in the net deferred tax assets due to an income tax refund and a $1.7 million decrease in construction in process due to the opening of a new branch during the
second quarter of 2015. These items were partially offset by $2.1 million in higher residual values associated with recording new automobile leases, net of lease disposals. Results of Operation
Earnings Summary The Company’s earnings depend primarily on net interest income. Net interest income is the difference between interest income and interest expense. Interest income is generated from yields earned on interest-earning assets, which consist principally of loans and investment securities. Interest expense is incurred from rates paid on interest-bearing liabilities, which consist of deposits and borrowings. Net interest income is determined by the Company’s interest rate spread (the difference between the yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Interest rate spread is significantly impacted by: changes in interest rates and market yield curves and their related impact on cash flows; the composition and characteristics of interest-earning assets and interest-bearing liabilities; differences in the maturity and re-pricing characteristics of assets compared to the maturity and re-pricing characteristics of the liabilities that fund them and by the competition in the marketplace. The Company’s earnings are also affected by the level of its non-interest income and expenses and by the provisions for loan losses and income taxes. Non-interest income consists ofof: service charges on the Company’s loan and deposit products,products; interchange fees,fees; trust and asset management service fees,fees; increases in the cash surrender value of the bank owned life insurance and from net gains or losses from sales of loans securities and foreclosed assets held-for-sale, the write-down to market value of foreclosed properties held-for-sale and from credit-related other-than-temporary impairment (OTTI) charges from investment securities. Non-interest expense consists ofof: compensation and related employee benefit expenses, occupancy, equipment,costs; occupancy; equipment; data processing,processing; advertising marketing,and marketing; FDIC insurance premiums,premiums; professional fees,fees; loan collection,collection; net other real estate owned (ORE) expenses,expenses; supplies and other operating overhead.
Overview For the year ended December 31, 2012,2015, the Company producedgenerated net income of $4.9$7.1 million, or $2.14$2.90 per diluted share, compared to $5.0$6.4 million, or $2.28$2.62 per diluted share, for the year ended December 31, 2011.2014. For the year ended December 31, 2012,2015, the Company produced $1.6 million higher net interest income compared to the year ended December 31, 2014. The increase in net interest income combined with higher non-interest income was enough to offset a $1.3 million rise in non-interest expenses. Net income was boosted higher by a reduction in the amount required to fund the income tax provision in 2015 compared to 2014. For the year ended December 31, 2015, ROA and ROE were 1.00% and 9.55%, respectively, compared to 0.96% and 9.12% for the same period in 2014. The increase in ROA and ROE was caused by higher net income during 2015. Net interest income and interest sensitive assets / liabilities Net interest income increased $1.6 million, or 7%, from $21.9 million for the year ended December 31, 2014 to $23.5 million for the year ended December 31, 2015, with higher interest income and lower interest expense combining for the net increase. Total average interest-earning assets increased $52.1 million and helped offset the negative impact of a fifteen basis point net reduction in their yields resulting in $1.2 million of growth in interest income. In the loan portfolio, the Company experienced average balance growth of $39.1 million, which had the effect of producing $1.1 million of interest income, more than offsetting the $0.6 million negative impact of a 13 basis point lower yield earned thereon. Though all loan portfolios showed more interest income from growth, the mortgage loan portfolio had the most accretive impact due to the Company’s returnmortgage modification program. This program offered mortgage customers, both secondary-market compliant and held for portfolio, shorter-termed loans with current interest rates for a flat fee. Higher average balances of municipal and mortgage-backed securities produced $0.1 million in additional interest income from investments despite lower yields. On the liability side, total interest-bearing liabilities grew $40.3 million on average assets (ROA)but a thirteen basis point decline in the average rates paid offset the impact of this growth. The reduction in average rate paid is due to the $10 million payoff of long- term debt carrying an interest rate of 5.26% during the second quarter of 2015 which reduced interest expense from borrowings by $0.6 million. This decrease was partially offset by an increase of $0.2 million in interest expense paid on deposits due to higher average balances. Interest expense from interest-bearing transaction deposits increased $0.3 million mostly due to higher average balances from successful relationship-building efforts, promotions, cross-selling, transfers from unpopular certificates of deposit, or CDs, and return on average shareholders’ equity (ROE) were 0.81%contractual and 8.62% comparednegotiated rates. The increase in interest expense from transaction deposits was partially offset by a $0.1 million decline in interest expense from CDs due to 0.85%lower rates paid. The fully-taxable equivalent (FTE) net interest rate spread and 10.01%,margin decreased by two and five basis points, respectively for the year ended December 31, 2011. Non-interest related2015 compared to the year ended December 31, 2014. The decrease in the spread was due to the yields on interest-earning assets declining faster than the rates paid on interest-bearing liabilities. Though net interest income improved by $1.6 million, net interest margin declined due to lower yields earned on a higher average balance of interest-earning assets which was not fully offset by the reduction in interest expense. The overall cost of funds, which includes the impact of non-interest bearing deposits, declined ten basis points for the year ended December 31, 2015 compared to the same period in 2014. The principal reason for the decrease was the payoff of long-term debt.
During 2016, the Company expects to operate in a gradually increasing interest rate environment. A rate environment with rising long-term interest rates positions the Company to improve its interest income performance from new and maturing long-term earning assets. Until there is a sustained period of yield curve steepening, with rates rising more sharply at the long end, the interest rate margin may continue to experience compression. However for 2016, the Company anticipates net interest income to improve as growth in interest-earning assets would help mitigate an adverse impact of rate movements. The Federal Open Market Committee (FOMC) adjusted the short-term federal funds rate upward in December 2015, but it had a minimal effect on rates paid on funding sources. Continued growth in the loan portfolios complemented with investment security growth is the Company’s strategy for 2016, and when coupled with a proactive approach to deposit cost setting strategies should help grow net interest income and contain the interest rate margin at acceptable levels. The Company’s cost of interest-bearing liabilities was 51 basis points for the year ended December 31, 2015 or thirteen basis points lower than the cost for the year ended December 31, 2014. The decline in the rate paid on borrowings was the reason for the reduction. Other than retaining maturing long-term CDs, further reductions in deposit rates from the current historic low levels would have an insignificant cost-savings impact. Interest rates along the treasury yield curve have been volatile with stability existing only at the short end. Competition could pressure banks to increase deposit rates. On the asset side, the prime interest rate, the benchmark rate that banks use as a base rate for adjustable rate loans, began to rise at the end of 2015. If rates continue to rise in 2016, the effect could pressure net interest income if short-term rates rise more rapidly than longer-term interest rates, thereby compressing the interest rate spread. To help mitigate the impact of the imminent change to the economic landscape, the Company has successfully developed and will continue to strengthen its association with existing customers, develop new business relationships, generate new loan volumes, and retain and generate higher levels of average non-interest bearing deposit balances. Strategically deploying no- and low-cost deposits into interest earning-assets is an effective margin-preserving strategy that the Company expects to continue to pursue and expand to help stabilize net interest margin. The Company’s Asset Liability Management (ALM) team meets regularly to discuss among other things, interest rate risk and when deemed necessary adjusts interest rates. ALM also discusses revenue generated from residential lending, interchange fess, trust services, transactions producing security gains and lower OTTI charges partially offsetenhancing strategies to help combat the potential for a modest decline in net interest income,income. The Company’s marketing department, together with ALM, lenders and deposit gatherers, continue to develop prudent strategies that will grow the cost incurredloan portfolio and accumulate low-cost deposits to improve credit quality, necessitating the need to reinforce the allowance for loans losses by increasing the provision for loan losses, more ORE related expenses due to a higher volume of foreclosure activity, higher marketing expenses, salary and employee benefit costs and to a non-recurring fee incurred to reduce high-costing long-term debt. The decline in ROA was caused by slightly lower ($0.1 million) net income and increased average assets while the decline in ROE was caused mostly by a larger level of average shareholders’ equity, strengthened by improvement in other comprehensive income (OCI) - most of the improvement occurring in the first quarter of 2012.
Net interest income
performance. The following table that follows sets forth a comparison of average balances of assets and liabilities and their related net tax equivalent yields and rates for the years indicated:
| (dollars in thousands) | | 2012 | | | 2011 | | | 2010 | | | | | Average | | | | | | Yield / | | | Average | | | | | | Yield / | | | Average | | | | | | Yield / | | | Assets | | balance | | | Interest | | | rate | | | balance | | | Interest | | | rate | | | balance | | | Interest | | | rate | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest-earning assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest-bearing deposits | | $ | 25,637 | | | $ | 65 | | | | 0.25 | % | | $ | 39,699 | | | $ | 101 | | | | 0.25 | % | | $ | 25,701 | | | $ | 65 | | | | 0.25 | % | | Investments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Agency – GSE | | | 24,399 | | | | 267 | | | | 1.09 | | | | 23,863 | | | | 420 | | | | 1.76 | | | | 23,872 | | | | 856 | | | | 3.58 | | | MBS - GSE residential | | | 50,857 | | | | 677 | | | | 1.33 | | | | 42,719 | | | | 908 | | | | 2.13 | | | | 26,216 | | | | 786 | | | | 3.00 | | | State and municipal | | | 27,649 | | | | 1,820 | | | | 6.58 | | | | 27,075 | | | | 1,799 | | | | 6.65 | | | | 23,100 | | | | 1,543 | | | | 6.68 | | | Other | | | 9,947 | | | | 81 | | | | 0.81 | | | | 11,835 | | | | 72 | | | | 0.60 | | | | 22,984 | | | | 218 | | | | 0.95 | | | Total investments | | | 112,852 | | | | 2,845 | | | | 2.52 | | | | 105,492 | | | | 3,199 | | | | 3.03 | | | | 96,172 | | | | 3,403 | | | | 3.54 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial | | | 236,922 | | | | 12,289 | | | | 5.19 | | | | 248,836 | | | | 13,745 | | | | 5.52 | | | | 265,193 | | | | 15,200 | | | | 5.73 | | | Consumer | | | 56,417 | | | | 3,725 | | | | 6.60 | | | | 56,013 | | | | 3,947 | | | | 7.05 | | | | 61,050 | | | | 4,329 | | | | 7.09 | | | Residential real estate | | | 133,297 | | | | 5,922 | | | | 4.44 | | | | 106,748 | | | | 5,449 | | | | 5.10 | | | | 100,894 | | | | 5,375 | | | | 5.33 | | | Direct financing leases | | | - | | | | - | | | | - | | | | 242 | | | | 15 | | | | 6.05 | | | | 327 | | | | 20 | | | | 6.10 | | | Total loans | | | 426,636 | | | | 21,936 | | | | 5.14 | | | | 411,839 | | | | 23,156 | | | | 5.62 | | | | 427,464 | | | | 24,924 | | | | 5.83 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Federal funds sold | | | 577 | | | | 1 | | | | 0.26 | | | | 290 | | | | 1 | | | | 0.25 | | | | 5,812 | | | | 14 | | | | 0.24 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total interest-earning assets | | | 565,702 | | | | 24,847 | | | | 4.39 | % | | | 557,320 | | | | 26,457 | | | | 4.75 | % | | | 555,149 | | | | 28,406 | | | | 5.12 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-interest earning assets | | | 42,784 | | | | | | | | | | | | 39,007 | | | | | | | | | | | | 32,405 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Assets | | $ | 608,486 | | | | | | | | | | | $ | 596,327 | | | | | | | | | | | $ | 587,554 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities and shareholders' equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest-bearing liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Savings | | $ | 107,401 | | | $ | 231 | | | | 0.22 | % | | $ | 110,818 | | | $ | 501 | | | | 0.45 | % | | $ | 99,638 | | | $ | 854 | | | | 0.86 | % | | Interest-bearing checking | | | 82,487 | | | | 113 | | | | 0.14 | | | | 68,174 | | | | 123 | | | | 0.18 | | | | 76,178 | | | | 190 | | | | 0.25 | | | MMDA | | | 95,385 | | | | 504 | | | | 0.53 | | | | 92,790 | | | | 551 | | | | 0.59 | | | | 82,676 | | | | 640 | | | | 0.77 | | | CDs < $100,000 | | | 78,348 | | | | 969 | | | | 1.24 | | | | 87,401 | | | | 1,416 | | | | 1.62 | | | | 92,734 | | | | 1,777 | | | | 1.92 | | | CDs > $100,000 | | | 41,763 | | | | 620 | | | | 1.49 | | | | 45,787 | | | | 1,076 | | | | 2.35 | | | | 52,691 | | | | 1,610 | | | | 3.05 | | | Clubs | | | 1,563 | | | | 2 | | | | 0.16 | | | | 1,598 | | | | 5 | | | | 0.30 | | | | 1,602 | | | | 8 | | | | 0.51 | | | Total interest-bearing deposits | | | 406,947 | | | | 2,439 | | | | 0.60 | | | | 406,568 | | | | 3,672 | | | | 0.90 | | | | 405,519 | | | | 5,079 | | | | 1.25 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Repurchase agreements | | | 13,027 | | | | 33 | | | | 0.25 | | | | 11,939 | | | | 52 | | | | 0.44 | | | | 12,692 | | | | 89 | | | | 0.70 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Borrowed funds | | | 16,768 | | | | 882 | | | | 5.26 | | | | 21,692 | | | | 1,037 | | | | 4.78 | | | | 41,131 | | | | 1,660 | | | | 4.03 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total interest-bearing liabilities | | | 436,742 | | | | 3,354 | | | | 0.77 | % | | | 440,199 | | | | 4,761 | | | | 1.08 | % | | | 459,342 | | | | 6,828 | | | | 1.49 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-interest bearing deposits | | | 111,458 | | | | | | | | | | | | 102,440 | | | | | | | | | | | | 76,707 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-interest bearing liabilities | | | 3,390 | | | | | | | | | | | | 3,290 | | | | | | | | | | | | 3,627 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total liabilities | | | 551,590 | | | | | | | | | | | | 545,929 | | | | | | | | | | | | 539,676 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Shareholders' equity | | | 56,896 | | | | | | | | | | | | 50,398 | | | | | | | | | | | | 47,878 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total liabilities and shareholders' equity | | $ | 608,486 | | | | | | | | | | | $ | 596,327 | | | | | | | | | | | $ | 587,554 | | | | | | | | | | | Net interest income | | | | | | $ | 21,493 | | | | | | | | | | | $ | 21,696 | | | | | | | | | | | $ | 21,578 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net interest spread | | | | | | | | | | | 3.62 | % | | | | | | | | | | | 3.67 | % | | | | | | | | | | | 3.63 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net interest margin | | | | | | | | | | | 3.80 | % | | | | | | | | | | | 3.89 | % | | | | | | | | | | | 3.89 | % |
Inindicated. Within the preceding table, interest income was adjusted to a tax-equivalent basis, using the corporate federal tax rate of 34% to recognize the income from tax-exempt interest-earning assets as if the interest was taxable. This treatment allows a uniform comparison among yields on interest-earning assets. Loans include loans HFS and non-accrual loans but exclude the allowance for loan losses. Net deferred loan cost amortization of $0.2$0.4 million in 20122015, and 2011 and $0.1$0.3 million in 2010,2014 and 2013, respectively, are included in interest income from loans. Securities include non-accrual securities. Average balances are based on amortized cost and do not reflect net unrealized gains or losses. Net interest margin is calculated by dividing net interest incomeincome-FTE by total average interest-earning assets. Cost of funds includes the effect of average non-interest bearing deposits as a funding source:
| | | | | | | | | | | | | | | | | | | | | | | | | | | (dollars in thousands) | 2015 | | 2014 | | 2013 | | | Average | | | | Yield / | | Average | | | | Yield / | | Average | | | | | Yield / | Assets | balance | | Interest | | rate | | balance | | Interest | | rate | | balance | | Interest | | rate | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest-earning assets | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest-bearing deposits | $ | 9,961 | | $ | 26 | | 0.27 | % | | $ | 10,074 | | $ | 26 | | 0.26 | % | | $ | 7,650 | | $ | 22 | | 0.29 | % | Investments: | | | | | | | | | | | | | | | | | | | | | | | | | | | Agency - GSE | | 17,779 | | | 227 | | 1.27 | | | | 16,321 | | | 233 | | 1.43 | | | | 16,077 | | | 151 | | 0.94 | | MBS - GSE residential | | 63,964 | | | 953 | | 1.49 | | | | 52,903 | | | 855 | | 1.62 | | | | 49,238 | | | 582 | | 1.18 | | State and municipal (nontaxable) | | 35,370 | | | 2,040 | | 5.77 | | | | 33,839 | | | 2,011 | | 5.94 | | | | 29,777 | | | 1,838 | | 6.17 | | Other | | 1,687 | | | 150 | | 8.89 | | | | 2,571 | | | 120 | | 4.67 | | | | 9,041 | | | 90 | | 1.00 | | Total investments | | 118,800 | | | 3,370 | | 2.84 | | | | 105,634 | | | 3,219 | | 3.05 | | | | 104,133 | | | 2,661 | | 2.56 | | Loans and leases: | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial and commercial real estate (taxable) | | 264,127 | | | 11,844 | | 4.48 | | | | 251,922 | | | 11,604 | | 4.61 | | | | 235,986 | | | 11,566 | | 4.90 | | Commercial and commercial real estate (nontaxable) | | 22,199 | | | 992 | | 4.47 | | | | 15,810 | | | 816 | | 5.16 | | | | 13,013 | | | 718 | | 5.52 | | Consumer | | 67,623 | | | 3,760 | | 5.56 | | | | 65,460 | | | 3,661 | | 5.59 | | | | 58,593 | | | 3,504 | | 5.98 | | Residential real estate | | 180,954 | | | 7,106 | | 3.93 | | | | 162,566 | | | 6,534 | | 4.02 | | | | 153,947 | | | 6,274 | | 4.08 | | Total loans and leases | | 534,903 | | | 23,702 | | 4.43 | | | | 495,758 | | | 22,615 | | 4.56 | | | | 461,539 | | | 22,062 | | 4.78 | | Federal funds sold | | 103 | | | - | | 0.26 | | | | 221 | | | 1 | | 0.26 | | | | 195 | | | - | | 0.25 | | Total interest-earning assets | | 663,767 | | | 27,098 | | 4.08 | % | | | 611,687 | | | 25,861 | | 4.23 | % | | | 573,517 | | | 24,745 | | 4.31 | % | Non-interest earning assets | | 49,075 | | | | | | | | | 49,172 | | | | | | | | | 45,255 | | | | | | | Total assets | $ | 712,842 | | | | | | | | $ | 660,859 | | | | | | | | $ | 618,772 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities and shareholders' equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest-bearing liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | Savings | $ | 113,394 | | $ | 200 | | 0.18 | % | | $ | 111,676 | | $ | 216 | | 0.19 | % | | $ | 108,850 | | $ | 224 | | 0.21 | % | Interest-bearing checking | | 131,004 | | | 315 | | 0.24 | | | | 107,063 | | | 196 | | 0.18 | | | | 87,230 | | | 123 | | 0.14 | | MMDA | | 121,921 | | | 764 | | 0.63 | | | | 97,162 | | | 568 | | 0.58 | | | | 81,598 | | | 443 | | 0.54 | | CDs < $100,000 | | 59,804 | | | 464 | | 0.78 | | | | 66,871 | | | 603 | | 0.90 | | | | 75,729 | | | 779 | | 1.03 | | CDs > $100,000 | | 48,039 | | | 490 | | 1.02 | | | | 41,130 | | | 450 | | 1.09 | | | | 41,422 | | | 509 | | 1.23 | | Clubs | | 1,692 | | | 3 | | 0.19 | | | | 1,615 | | | 3 | | 0.16 | | | | 1,583 | | | 3 | | 0.16 | | Total interest-bearing deposits | | 475,854 | | | 2,236 | | 0.47 | | | | 425,517 | | | 2,036 | | 0.48 | | | | 396,412 | | | 2,081 | | 0.52 | | Repurchase agreements | | 10,268 | | | 18 | | 0.17 | | | | 11,349 | | | 21 | | 0.18 | | | | 11,629 | | | 22 | | 0.19 | | Borrowed funds | | 9,618 | | | 275 | | 2.87 | | | | 18,600 | | | 860 | | 4.62 | | | | 19,895 | | | 865 | | 4.35 | | Total interest-bearing liabilities | | 495,740 | | | 2,529 | | 0.51 | % | | | 455,466 | | | 2,917 | | 0.64 | % | | | 427,936 | | | 2,968 | | 0.69 | % | Non-interest bearing deposits | | 138,388 | | | | | | | | | 131,691 | | | | | | | | | 126,149 | | | | | | | Non-interest bearing liabilities | | 4,306 | | | | | | | | | 4,075 | | | | | | | | | 3,802 | | | | | | | Total liabilities | | 638,434 | | | | | | | | | 591,232 | | | | | | | | | 557,887 | | | | | | | Shareholders' equity | | 74,408 | | | | | | | | | 69,627 | | | | | | | | | 60,885 | | | | | | | Total liabilities and shareholders' equity | $ | 712,842 | | | | | | | | $ | 660,859 | | | | | | | | $ | 618,772 | | | | | | | Net interest income | | | | $ | 24,569 | | | | | | | | $ | 22,944 | | | | | | | | $ | 21,777 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net interest spread | | | | | | | 3.57 | % | | | | | | | | 3.59 | % | | | | | | | | 3.62 | % | Net interest margin | | | | | | | 3.70 | % | | | | | | | | 3.75 | % | | | | | | | | 3.80 | % | Cost of funds | | | | | | | 0.40 | % | | | | | | | | 0.50 | % | | | | | | | | 0.54 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Changes in net interest income are a function of both changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities. The following table presents the extent to which changes in interest rates and changes in volumes of interest-earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (1) the changes attributable to changes in volume (changes in volume multiplied by the prior period rate), (2) the changes attributable to changes in interest rates (changes in rates multiplied by prior period volume) and (3) the net change. The combined effect of changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate. Tax-exempt income was not converted to a tax-equivalent basis on the rate/volume analysis:
| | | Years ended December 31, | | | (dollars in thousands) | | 2012 compared to 2011 | | | 2011 compared to 2010 | | | | | Increase (decrease) due to | | | | | Volume | | | Rate | | | Total | | | Volume | | | Rate | | | Total | | | Interest income: | | | | | | | | | | | | | | | | | | | | | | | | | | Loans and leases: | | | | | | | | | | | | | | | | | | | | | | | | | | Residential real estate | | $ | 1,240 | | | $ | (767 | ) | | $ | 473 | | | $ | 304 | | | $ | (230 | ) | | $ | 74 | | | Commercial and CRE | | | (629 | ) | | | (819 | ) | | | (1,448 | ) | | | (849 | ) | | | (543 | ) | | | (1,392 | ) | | Consumer | | | 11 | | | | (244 | ) | | | (233 | ) | | | (361 | ) | | | (24 | ) | | | (385 | ) | | Total loans and leases | | | 622 | | | | (1,830 | ) | | | (1,208 | ) | | | (906 | ) | | | (797 | ) | | | (1,703 | ) | | Investment securities, interest-bearing deposits and | | | | | | | | | | | | | | | | | | | | | | | | | | Federal funds sold | | | (115 | ) | | | (286 | ) | | | (401 | ) | | | 380 | | | | (654 | ) | | | (274 | ) | | Total interest income | | | 507 | | | | (2,116 | ) | | | (1,609 | ) | | | (526 | ) | | | (1,451 | ) | | | (1,977 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest expense: | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | Certificates of deposit greater than $100,000 | | | (88 | ) | | | (368 | ) | | | (456 | ) | | | (193 | ) | | | (340 | ) | | | (533 | ) | | Other | | | (110 | ) | | | (667 | ) | | | (777 | ) | | | 76 | | | | (949 | ) | | | (873 | ) | | Total deposits | | | (198 | ) | | | (1,035 | ) | | | (1,233 | ) | | | (117 | ) | | | (1,289 | ) | | | (1,406 | ) | | Other interest-bearing liabilities | | | (120 | ) | | | (54 | ) | | | (174 | ) | | | (654 | ) | | | (6 | ) | | | (660 | ) | | Total interest expense | | | (318 | ) | | | (1,089 | ) | | | (1,407 | ) | | | (771 | ) | | | (1,295 | ) | | | (2,066 | ) | | Net interest income | | $ | 825 | | | $ | (1,027 | ) | | $ | (202 | ) | | $ | 245 | | | $ | (156 | ) | | $ | 89 | |
The FOMC has not adjusted the short-term federal funds rate which has remained near zero percent during 2012 and 2011. The federal funds rate is a benchmark rate typically used to borrow or invest overnight funds among banks. In addition, at 3.25%, the national prime interest rate remained constant throughout 2012 - at the same level as 2011. National prime is a benchmark rate banks use to set rates on various lending and other interest-earning products. Competition for deposits and lending in the Company’s local market is extremely aggressive. Operating in a very low interest rate environment over an extended period of time has and will continue to challenge financial institutions vying for traditional banking products. Generally, core profitability for community banks is the ability to fund long-term interest-earning assets with shorter term interest-bearing liabilities, thereby earning an interest-rate spread. Done conservatively and within acceptable policy guidelines, banks can typically undertake this interest rate risk, earn an acceptable interest-rate spread and interest rate margin. Having been operating in a low interest rate environment for several years, however, has created challenges because most financial institutions have lowered their funding costs to record low levels. Originating, maturing and renewing earning-assets are pricing at record low rates and this pricing is currently outpacing the decline in pricing of funding sources. As a result, margin has and could continue to contract. In 2012, the Company’s net interest margin, like other banks, declined due principally to the impact of the prolonged low interest rate environment. The Company’s cost of funds is at record low levels, and prospectively there is very little room for additional downward adjustment. As such, the Company may be unable to continue to reduce its funding rates as quickly as the yields from interest-earning assets continue to adjust downward. Accordingly, the Company’s net interest margin may continue to contract. This phenomenon will force institutions to seek other revenue-enhancing means, such as fee-generating and other non-interest related revenue products and relationships. Going forward, the Company will develop revenue-enhancing strategies and position the balance sheet so that when rates rise, net interest income will not be unduly threatened. Positioning may include a diversification of fixed and variable rate products including: minimize fixed-rate asset growth or originate them at short durations, hold qualifying mortgage loans of relatively shorter duration in portfolio, when necessary, purchase short- to mid-term investments and vigilantly lengthen deposit liabilities.Table Of Contents
| Years ended December 31, | (dollars in thousands) | 2015 compared to 2014 | | 2014 compared to 2013 | | Increase (decrease) due to | | Volume | | Rate | | Total | | Volume | | Rate | | Total | Interest income: | | | | | | | | | | | | | | | | | | Interest-bearing deposits | $ | - | | $ | - | | $ | - | | $ | 6 | | $ | (2) | | $ | 4 | Investments: | | | | | | | | | | | | | | | | | | Agency - GSE | | 20 | | | (26) | | | (6) | | | 3 | | | 80 | | | 83 | MBS - GSE residential | | 168 | | | (70) | | | 98 | | | 46 | | | 227 | | | 273 | State and municipal | | 57 | | | (36) | | | 21 | | | 157 | | | (74) | | | 83 | Other | | (48) | | | 80 | | | 31 | | | (95) | | | 124 | | | 29 | Total investments | | 196 | | | (53) | | | 144 | | | 111 | | | 357 | | | 468 | Loans and leases: | | | | | | | | | | | | | | | | | | Residential real estate | | 726 | | | (154) | | | 572 | | | 347 | | | (87) | | | 260 | Commercial and CRE | | 831 | | | (475) | | | 356 | | | 875 | | | (773) | | | 102 | Consumer | | 119 | | | (20) | | | 99 | | | 393 | | | (236) | | | 157 | Total loans and leases | | 1,676 | | | (649) | | | 1,027 | | | 1,615 | | | (1,096) | | | 519 | Federal funds sold | | (1) | | | - | | | (1) | | | - | | | - | | | - | Total interest income | | 1,872 | | | (702) | | | 1,170 | | | 1,732 | | | (741) | | | 991 | | | | | | | | | | | | | | | | | | | Interest expense: | | | | | | | | | | | | | | | | | | Deposits: | | | | | | | | | | | | | | | | | | Savings | | 3 | | | (19) | | | (16) | | | 6 | | | (14) | | | (8) | Interest-bearing checking | | 48 | | | 72 | | | 120 | | | 32 | | | 42 | | | 74 | Money market | | 149 | | | 46 | | | 195 | | | 89 | | | 35 | | | 124 | Certificates of deposit less than $100,000 | | (60) | | | (79) | | | (139) | | | (86) | | | (90) | | | (176) | Certificates of deposit greater than $100,000 | | 70 | | | (31) | | | 39 | | | (4) | | | (55) | | | (59) | Clubs | | 0 | | | 1 | | | 1 | | | - | | | - | | | - | Total deposits | | 210 | | | (10) | | | 200 | | | 37 | | | (82) | | | (45) | Repurchase agreements | | (2) | | | (1) | | | (3) | | | - | | | (1) | | | (1) | Borrowed funds | | (327) | | | (258) | | | (585) | | | (198) | | | 193 | | | (5) | Total interest expense | | (119) | | | (269) | | | (388) | | | (161) | | | 110 | | | (51) | Net interest income | $ | 1,991 | | $ | (433) | | $ | 1,558 | | $ | 1,893 | | $ | (851) | | $ | 1,042 |
The Company’s overall cost of funds, which includes the effect of adding non-interest bearing DDA balances as a no-cost funding source has declined 27 basis points, from 0.88% to 0.61%, for the year ended December 31, 2011 and 2012, respectively. Similar to the rate paid on interest-bearing liabilities, the cost of funds had declined steadily over the past several years. The likelihood of significant downward rate adjustments is moot. The yield on earning-assets declined 36 basis points from 2011 to 2012 and similarly has been declining steadily over the past several years and the speed of decline is outpacing deposit rate reductions. If market rates along with national prime remain at current levels, pay downs and maturities of fixed-rate and re-pricing adjustable rate assets will continue to price downward. These two factors, at the current volume levels, will pressure margins in 2013 and possibly longer depending on the duration of the current interest rate environment and how effectively the Company can strengthen and position its balance sheet to prepare for a rising rate environment that is inevitable.
Interest expense decreased $1.4 million, or 30%, from $4.7 million in 2011 to $3.3 million in 2012. Though the Company recorded a $0.4 million net increase in average interest-bearing deposits, interest expense on deposits declined $1.2 million in 2012 compared to 2011 caused by a 30 basis point decline on average rates paid. The 30 basis point decline equates to approximately $1.0 million of the reduction in interest expense. Interest expense on borrowed funds declined $0.2 million during 2012. The lower interest from borrowings was from the $5.0 million reduction in long-term debt during 2012. The advance with the FHLB carried an interest rate of 3.61%.
The resulting performance of the mix of the Company’s interest-sensitive assets and liabilities and the impact of market rates in 2012, combined with pay-off of high-cost long-term debt, caused net interest income to decrease $0.2 million, or less than 1%, compared to 2011. On a tax-equivalent basis, the net interest rate spread decreased five basis points from 3.67% to 3.62% and the tax-equivalent margin decreased nine basis points from 3.89% in 2011 to 3.80% in 2012.
Provision for loan losses The provision for loan losses represents the necessary amount to charge against current earnings, the purpose of which is to increase the allowance for loan losses (the allowance) to a level that represents management’s best estimate of known and inherent losses in the Company’s loan portfolio. Loans determined to be uncollectible are charged off against the allowance for loan losses.allowance. The required amount of the provision for loan losses, based upon the adequate level of the allowance, for loan losses, is subject to the ongoing analysis of the loan portfolio. The Company’s Special Assets Committee meets periodically to review problem loans. The committee is comprised of management, including the senior loan officer, the chief risk officer,credit administration officers, loan officers, loan workout officers and collection personnel. The committee reports quarterly to the Credit Administration Committee of the Boardboard of Directors. directors. Management continuously reviews the risks inherent in the loan portfolio. Specific factors used to evaluate the adequacy of the loan loss provision during the formal process include: •specific loans that could have loss potential; •levels of and trends in delinquencies and non-accrual loans; •levels of and trends in charge-offs and recoveries; •trends in volume and terms of loans; •changes in risk selection and underwriting standards; •changes in lending policies, procedures and practices; •experience, ability and depth of lending management; •national and local economic trends and conditions; and •changes in credit concentrations.
For the years ended December 31, 2015 and 2014, the Company recorded a provision for loan losses of $3.3$1.1 million were madeeach period, respectively. During 2015, the Company identified $1.7 million in several new TDRs and $4.1 million in additional non-performing loans. Except for $0.2 million of provision provided for one large non-accrual loan, collateral securing these impaired loans was considered sufficient to cover their respective net active principal balances. Further, the year ended December 31, 2012 as comparedCompany improved its reserve methodology in 2015 to $1.8better align loss estimates with actual historical data. Since the Company’s loss history has trended down in recent years, this offset the need for additional reserves that may otherwise have been required from a $40.4 million for the December 31, 2011 year. Thenet increase in the total 2015 loan portfolio. Consequently, provision during the 12 months ended December 31, 2012, resulted from the effect of the charge offs on historical loss allocations, increased provisionsexpense remained constant at $1.1 million for historical loss percentages, increased qualitative factor adjustments for current economic conditionsboth 2015 and providing $0.8 million of additional specific loan loss reserves for a participated non-accrual commercial real estate loan up to a newly determined estimated loss.2014, respectively. For a further discussion on this event see Note 20, “Subsequent Event”, within the notes to consolidated financial statements and incorporated by reference in Part II, Item 8. For a further discussion on the allowance for loan losses, see “Allowance for loan losses” underlosses,” located in the caption “Comparisoncomparison of financial condition at December 31, 2012section of management’s discussion and December 31, 2011” above.analysis contained herein.
Other income (loss) For the year ended December 31, 2012, the Company recorded net other (non-interest)2015, non-interest income ofamounted to $7.5 million, an increase of $1.8a $0.2 million, or 32%2%, increase compared to non-interest income of $5.7$7.3 million recorded during the year ended December 31, 2011.2014. The improvementincrease in 2012 was principally from increased gains from the sales of mortgage and SBA loans of $1.0 million. A higher volume of residential mortgage lending activity helped boostcaused an additional $0.5 million in gains from saleson the sale of loans at December 31, 2015 compared to the same period of 2014. Trust income and interchange fees also generate$0.2contributed a combined $0.1 million to the increase. Partially offsetting these items was $0.5 million fewer gains on the sale of investment securities. The company sold securities at the end of 2014 and used the proceeds to pay off $6.0 million of incremental residential mortgage loan service fees. Supplementing the improvement in 2012 included: $0.3 million more in securities gains; $0.2 million more fees from growth in the trust department; $0.1 million of higher interchange fees and a lower amount, or $0.1 million, of OTTI charges incurred from impaired pooled trust preferred securities. These items were partially offset by net losses on sales and charges for write-downs on foreclosed assets of $160 thousand during 2012 compared to $20 thousand during 2011.long-term debt.
Other operating expenses For the year ended December 31, 2012,2015, total other operating expenses increased $0.4$1.3 million, or 2%7%, compared to the year ended December 31, 2011.2014. Salary and employee benefits increased $0.3contributed the most to the increase rising $0.6 million, or 4%6%, duein 2015 compared to a larger work force,2014. The basis of the increase includes annual merit increases, staff additions, including the hiring of a chief operatingan executive officer during the second quarter of 2015, hiring new management level positions, replacing an existing management position, higher recognized employee incentives and an increase in group insurance from higher claims accruals. Premises and equipment increased during the implementationperiod by $0.1 million, or 3%. Additional depreciation expense caused this increase due to assets placed in service for the new branch which opened during the second quarter of normal merit increases of salaries2015. Advertising and market benefit increases. Compared to 2011, the average number of full-time equivalent employees increased from 159 to 162 in 2012. Themarketing experienced a $0.2 million, or 5%16%, decrease in premises and equipment wasincrease due to lower depreciationa grand opening and re-opening celebration for 2 branches as well as a cash bonus associated with checking/savings summer and fall campaigns. There was also $0.1 million more in donations made to educational improvement programs in 2015. Professional services were up $0.3 million, or 19%, during 2015 compared to 2014 due to the implementing of an enterprise risk management program, an architectural design study completed in 2015 and higher audit expense stemmingdue to a trust audit and additional compliance review services. Data processing and communications expense increased $0.2 million during 2015 compared to 2014 because of fees incurred from fully depreciated furniture and equipment. In addition,outsourcing the Company’s data processing. The Company also incurred $0.1 million more long-term debt prepayment fees in 2015 than 2014. The Company paid off $10.0 million of long-term debt in 2015 compared to a pay down of $6.0 million during 2014. During 2015, the Company incurred less$81 thousand in losses on the reacquisition of previously sold loans that were not recognized in 2014. Offsetting these items, other real estate owned (ORE) expense related to facility upkeep, utilities and had lower lease expenses, the latter associated with the acquisition of the two previously leased branch offices. These items were partially offset by higher equipment maintenance from implementing the mobile banking technology at the end of 2011 and higher software maintenance costs. The primary reasons that advertising and marketing expenses increased by $0.2decreased $0.1 million or 18%, were expenses for a branding campaign designed to build additional business relationships, higher expense associated with giveaways at all of the Company’s branch offices and the cost incurred for promotional items in conjunction with this year’s checking account campaign. A changeduring 2015 compared to the FDIC insurance assessment,same period in the third quarter of 2011, has resulted in a lower base upon which the assessment is determined which resulted in a $0.1 million, or 18%, decline in the current year’s charge compared to 2011. The increase in2014. ORE expenses of $63 thousand, or 59%, wasexpense decreased mostly due to higher balances of and morea few subsequent write-downs taken on ORE properties on average, during 2012 compared to 2011. The $0.1 million, or 7%, increase in other expense category was caused mostly by a non-recurring prepayment fee of $0.2 million from the payoff of the $5.0 million, 3.61%, FHLB advance in the first quarter of 2012. 2014. The ratios of non-interest expense less non-interest income to average assets, known as the expense ratio, at December 31, 20122015 and 20112014 were 1.78%1.86% and 2.04%1.89%, respectively. The expense ratio, which excludes OTTI and other securities transactions and nonrecurringnon-recurring expenses, declined or improveddecreased due mostly to a higher level of non-interest earnings primarily from mortgage banking activity, relatively stable operating expenses and to a much lesser extent, a larger average balance sheet. During the first quarter of 2013, the Company granted, from its stock-based compensation plans, a total of 15,000 restricted shares to its board of directors, senior officers and other key employees. On the date of grant, the value of the Company’s common stock was $21.20 per share. The grants will vest over periods of two years for the board of directors and four years for senior officers and other key employees. The Company expects to recognize compensation expense of approximately $0.3 million over the vesting period which will beginassets during the first quarter of 2013. Share-based compensation expense is included as a component of salaries and employee benefits in the consolidated statements of income. For a further discussion of the Company’s stock compensation plans, see Note 9, “Stock Plans,” contained within the notesyear ended December 31, 2015 compared to the consolidated financial statements, incorporated by reference in Part II, Item 8.year ended December 31, 2014 which were able to absorb the higher expenses.
During the first quarter of 2013, the Company obtained information that may require a significant addition to ORE properties during 2013. If acquired, the Company will incur ownership related expenses of approximately $0.6 million annually, until sold. For a further discussion on this event see Note 20, “Subsequent Event”, within the notes to consolidated financial statements and incorporated by reference in Part II, Item 8.
Provision for income taxes The Company’s effective income tax rate approximated 24.1%20.4% in 20122015 and 24.6% 2011.25.4% in 2014. The difference between the effective rate and the enacted statutory corporate rate of 34% is due mostly to the effect of tax exempt income in relation to the level of pre-tax income. In 2015, the Company had a higher amount of tax exempt income and a higher amount of pre-tax income subject to the 34% statutory income tax rate compared to the year ended December 31, 2014. The provision for income taxes decreased $0.4 million, or 16%, from $2.2 million at December 31, 2014 to $1.8 million at December 31, 2015. During an audit by the Internal Revenue Service, management discovered additional tax basis on trust preferred securities that were sold during 2013 that was inadvertently omitted from the basis reported on the 2013 tax return. After the basis was corrected, the tax loss that was realized during 2013 and carried back to the 2011 and 2012 tax returns increased. An audit adjustment was made which resulted in recording a $0.4 million credit for income taxes during the second quarter of 2015. This adjustment coupled with a lower effective tax rate for 2015 from additional expenses reducing the level of pre-tax income caused the lower provision for income taxes. Comparison of Financial Condition as of December 31, 20112014 and 20102013 and Results of Operations for each of the Years then Ended Executive Summary Nationally, the unemployment rate declined from 6.7% at December 31, 2013 to 5.6% at December 31, 2014, remaining at the lowest level since 2008. The unemployment rate in the Scranton-Wilkes-Barre Metropolitan Statistical Area (local)
started to align with the national rate at the end of 2014 after lagging behind for years. According to the U.S. Bureau of Labor Statistics, the local unemployment rate at December 31, 2014 was 5.6%, a decline of 2.1 percentage points from 7.7% at December 31, 2013. However, during the same period, the local labor force declined by more than 1%. Although there were more jobs at the end of 2014 compared to the same 2013 period, the sizeable decline in the workforce had a greater impact in driving the unemployment rate downward. During 2014, our assets grew by more than 8% from deposit growth and retained net earnings, both of which were used to fund growth in the loan portfolio, pay down high costing long-term debt and fund facility construction projects. We continued to improve asset quality, reducing non-performing assets by nearly 11% including a 9% reduction in non-performing loans. Non-performing assets represented 1.18% of total assets as of December 31, 2014, down from 1.44% at the prior year end. We generated $6.4 million in net income in 2014, down from $7.1 million in 2013. However, our 2013 earnings benefited from a $1.9 million after tax gain from the sale of our impaired pooled trust preferred securities portfolio. In 2014 our larger and stronger balance sheet with improved asset quality contributed to the success of our earnings performance. Financial Condition
Overview
Consolidated assets increased $45.1$52.7 million, or 8%, during the year ended December 31, 2011 to $606.7 million. The increase was principally the result of increased deposits of $33.4 million, or 7% more than 2010 and increased shareholders’ equity of $6.9 million, or 15% above 2010. The increase in shareholders' equity was fueled by $5.0 million of net income less the $2.2 million of cash dividends declared, which increased retained earnings by $2.8 million.
Funds Provided:
Deposits
Total deposits increased $33.4 million, or 7%, during 2011 to $515.8 million. The increase stemmed from growth in money market accounts of $28.1 million, NOW accounts of $11.6 million, non-interest bearing DDAs of $10.4 million and savings and clubs of $1.7 million, partially offset by an $18.3 million decline in CDs.
Short-term borrowings
Because of the liquidity position during 2011 the Company did not have the need for short-term overnight borrowings. Customer liquidity requirements are the typical cause for variances in repurchase agreements, which during 2011 increased $2.0 million, or 26%, from $7.5 million at December 31, 2010 to $9.5$676.5 million as of December 31, 2011.
Long-term debt
The weighted-average rate in effect on funds borrowed2014 from $623.8 million at December 31, 20112013. The increase in assets occurred predominantly in the loan portfolios funded by growth in deposits of $57.2 million, $3.7 million in earnings, net of dividends declared, and 2010$0.8 million infused from the Company’s dividend reinvestment and employee stock purchase plans. Deposit growth was 4.87%.also used to fund the pay down of $6.0 million in long-term debt, fund construction projects and reduce short-term borrowings with the balance held in cash for future use.
Funds Provided: Deposits Total deposits increased $57.2 million, or 11%, from $529.7 million at December 31, 2013 to $586.9 million at December 31, 2014. Growth in transaction accounts of $66.3 million, or 16%, offset declines in CDs. The 2011 weighted-averageincrease in transaction accounts was driven by an increase of $29.2 million in public deposits from negotiated contracts on interest bearing and non-interest-bearing checking accounts. Success in deposit gathering strategies including periodic promotions and business relationship development helped boost money market accounts for both retail and business customers. The market interest rate profile continued to be low with intermediate and long-term market rates falling below the 2013 levels. Customers’ appetite for long-term deposit products continued to be non-existent with a sustaining preference for non-maturing transaction deposits. The Company’s portfolio of CDs continued to decrease; having declined $9.1 million, or 8%, from year-end 2013. The Company had a minor amount of success with its CD promotions but the low rate environment basically enticed customers to vacate the CD marketplace. As of December 31, 2014 and 2013, CDARS represented $7.7 million, or 1%, and $10.3 million, or 2%, respectively, of total deposits. Long-term debt As of December 31, 2014 and 2013, long-term debt consisted of a single advance from the FHLB of $10.0 million and $16.0 million, respectively, bearing an interest rate of 5.26% and scheduled to mature in 2016. The rate on the advance was 12103 basis points above the tax-equivalent yield of 4.75%4.23% earned from the Company’s portfolio of average interest-earning assets for the year ended December 31, 2011. Interest rates2014 creating a drag on the $21.0 million balances of two long-term advances had been fixed until 2013 and 2016, but were structured to adjust quarterly should marketnet interest rates increase beyond the issues’ original or strike rates. margin. In February 2012,December 2014, the Company paid off $5.0down $6.0 million of its outstanding long-term debt and incurred a prepayment fee of $0.2$0.5 million. The advance carried antransaction was funded with deposit growth and for 2015 reduced interest rate of 3.61% and was scheduled to mature in the fourth quarter of 2013.expense from long-term debt by approximately $0.3 million. As of December 31, 2011,2014, the Company had the ability to borrow an additional $105.6$181.5 million from the FHLB.
Funds Deployed:
Investments
Investment Securities As of December 31, 2011, AFS debt securities were recorded with an unrealized net loss of $1.8 million while equity securities were recorded with an unrealized gain of $0.1 million. As of December 31, 2011 and December 31, 2010, the aggregate fair value of securities HTM exceeded their respective aggregate amortized cost by $42 thousand and $48 thousand, respectively. As of December 31, 2011,2014, the carrying value of investment securities totaled $108.5amounted to $97.9 million, or 18%14% of total assets, compared to $83.4$97.4 million, or 15%16% of total assets, at December 31, 2010.2013.
Investment securities were comprised of AFS securities as of December 31, 2014. The AFS securities were recorded with a net unrealized gain of $4.2 million as of December 31, 2014 compared to a net unrealized gain of $1.9 million as of December 31, 2013, or a net improvement of $2.3 million during 2014. During the years ended December 31, 2014 and 2013, the Company did not incur other-than-temporary impairment charges from its investment securities portfolio. During 2014, the carrying value of total investments increased $0.5 million, or less than 1%.
The tax-equivalent yield ondistribution of debt securities by stated maturity dateand tax-equivalent yield at December 31, 2011 is2014 were as follows: | | | One year | | | One through | | | Five through | | | More than | | | | | | | | or less | | | five years | | | ten years | | | ten years | | | Total | | | Agency – GSE | | | - | % | | | 6.10 | % | | | 1.98 | % | | | 3.30 | % | | | 2.77 | % | | MBS - GSE residential | | | - | | | | - | | | | 5.46 | | | | 6.14 | | | | 6.12 | | | State & municipal subdivisions | | | - | | | | 1.15 | | | | 3.53 | | | | 5.41 | | | | 1.60 | | | Pooled trust preferred securities | | | - | | | | - | | | | - | | | | 2.19 | | | | 2.19 | | | Total debt securities | | | - | % | | | 1.15 | % | | | 2.31 | % | | | 4.43 | % | | | 3.33 | % |
Excluding the $5.1 million and $5.4 million net unrealized loss positions of the pooled trust preferred securities (PreTSLs) portfolio as of December 31, 2011 and 2010, respectively, the remaining net unrealized loss of $0.4 million in 2010 turned positive into a $3.4 million net unrealized gain as of December 31, 2011.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | More than | | More than | | More than | | | | | | | One year or less | | one year to five years | | five years to ten years | | ten years | | Total | (dollars in thousands) | $ | % | | $ | % | | $ | % | | $ | % | | $ | % | | | | | | | | | | | | | | | | | | | | | | | | | | MBS - GSE residential | $ | - | - | % | | $ | - | - | % | | $ | 15,337 | 2.48 | % | | $ | 30,533 | 2.18 | % | | $ | 45,870 | 2.28 | % | State & municipal subdivisions | | 1,000 | 1.64 | �� | | | - | - | | | | 1,891 | 5.77 | | | | 34,142 | 5.73 | | | | 37,033 | 5.62 | | Agency - GSE | | - | - | | | | 12,318 | 1.26 | | | | 2,080 | 2.93 | | | | - | - | | | | 14,398 | 1.50 | | Total debt securities | $ | 1,000 | 1.64 | % | | $ | 12,318 | 1.26 | % | | $ | 19,308 | 2.83 | % | | $ | 64,675 | 4.02 | % | | $ | 97,301 | 3.39 | % |
The Company determined that as ofLoans and for the year ended December 31, 2011, the estimated value, based on the expected discounted cash flow, of three PreTSLs: IV, XIX and XXIV was insufficient to recover the amortized cost basis, and therefore had experienced credit-related impairment of $0.2 million for the year ended December 31, 2011 compared to $11.8 million of credit OTTI in 2010.
Loans
leases Net of loan participations, in 20112014 the Company originated $30.9$24.4 million of commercial and industrial loans and $9.6$15.1 million of commercial real estate loans compared to $26.0$22.6 million and $12.0$14.0 million, respectively, in 2010.2013. Also, during 2011,2014, the Company originated $19.1$21.1 million of residential real estate loans for portfolio retention and $19.1$33.1 million of consumer loans, compared to $13.7$19.1 million and $16.0$30.7 million, respectively, in 2010.2013. Included in mortgage loans were $4.3$10.7 million of residential real estate construction lines in 20112014 and $4.7$9.1 million in 2010.2013. In addition for 2011,2014, the Company had net originations of lines of credit in the amounts of $24.8$34.3 million for commercial borrowers and $10.4$14.9 million in home equity and other consumer lines of credit. Commercial and industrial and commercial real estate The C&ICompared to year-end 2013, the commercial and industrial (C&I) loan portfolio decreased $16.7increased $5.7 million, or 19.7%8%, from $85.1$74.6 million at December 31, 2010 to $68.4$80.3 million at December 31, 2011. The portfolio decline was the result of pay-offs and the continuing efforts to participate new and existingcommercial real estate (CRE) loan relationships. The continuing economic recession both nationally and locally, as well as the difficulty for business customers’ ability to adhere to the Company’s underwriting policies and procedures also played a factor in considering demand for new credit.
Commercial real estate
The CRE portfolio declined $3.7increased $10.2 million, or 2.2%5%, from $169.2$186.3 million at December 31, 2010 to $165.5$196.5 million as of December 31, 2011. The major factor that contributed to2014. Our sales management program, knowledgeable and dedicated team of relationship managers and cash management specialists, along with the declinestrong support of back office partners resulted in a steady growth in the CREcommercial loan portfolio revolved around a depressed local commercial real estate market.over four years increasing $22.5 million or 9%, from $254.3 million in 2010 to $276.8 million in 2014.
Residential
Consumer The residentialconsumer loan portfolio increased $9.9by $10.7 million, or 13.3%11%, from $74.3$98.8 million at December 31, 20102013 to $84.2$109.5 million at December 31, 2011.2014. The increase in this portfolio was primarily dueattributable to a mortgage loan modification program, afforded onlyincreased auto loans and leases and to high quality customers, and selectively maintaining in-house (not selling to the secondary market) FNMA qualifying fixed-rate mortgages up to a 15-year term. Through the mortgage modification program, the Company took advantage of the low interest rate environment and, in most cases, adjusted the term to 15 years or less which allowed the Company to keep these quality loans in-house. Consumer loans
Consumer loans as in prior years saw an increase of $1.1 million, or 1.2%, from $87.2 million at December 31, 2010 to $88.3 million at December 31, 2011. While the consumer portfolio remained relatively stable during 2011, there was fluctuation in a few classes within this segment. Home Equity installment loans saw a decrease of $3.7 million, which was almost entirely offset by a $3.3 million increase in home equity lines of credit. Throughout 2014, the Company’s strategy of building on its existing relationships with automobile dealerships for loans and leases enabled the Company to grow that segment. Late in the third quarter and into the fourth quarter, the Company conducted a successful seasonal home equity loan campaign. Success in both areas accounted for the consumer loan growth for 2014.
Residential The Company attributes this fluctuationresidential loan portfolio grew $10.9 million, or 9%, from $118.6 million at December 31, 2013 to $129.5 million at December 31, 2014. Incremental originations, primarily within the scope of the Company’s residential mortgage loan modification program targeting loans of relatively short duration – 15 years or less, had reasonable success in light of contravening market factors including a volatile mortgage loan interest rate environment. As of December 31, 2014, approximately 78% of the total loan portfolio to home equity installment loan pay-offswas secured by real estate, down slightly from mortgage refinancing and by promotions during 2011 that featured home equity lines of credit with a floating rate that was tied to the national prime rate index. Loans held-for-sale
Loans HFS79% as of December 31, 2011 were $4.5 million which approximated fair value compared to $0.2 million, respectively, at2013.
Loans held-for-sale As of December 31, 2010. During 2011, the Company originated $45.1 million2014 and 2013, loans HFS consisted of residential mortgages HFS, compared to $55.9with carrying amounts of $1.2 million in 2010. The high volume in both years was a function ofand $0.9 million, respectively, which approximated their fair values. During the sustaining low interest rate environment which bolstered refinancing of existing home debt, albeit tempering in 2011. During 2011,year ended December 31, 2014, residential mortgage loans with principal balances of $46.1$35.1 million were sold into the secondary market and the Company recognized net gains of approximately $0.7$0.6 million, compared to $61.3$83.5 million and $0.8$1.4 million, respectively during 2010. the year ended December 31, 2013. A decline in residential mortgage origination, refinance and modification to loans HFS caused the decrease in gains from loan sales in 2014 compared to 2013. At December 31, 20112014 and 2010,2013, the servicing portfolio balance of sold residential mortgage loans was $193.5$256.8 million and $188.6$250.2 million, respectively.
Allowance for loan losses TotalNet charge-offs net of recoveries, for 2011the year ended December 31, 2014 were $1.6$0.8 million compared to $1.8 million in 2010. Commercial and industrial loans recorded a net recovery of $0.3 million during 2011, as opposed to net charge-offs of $0.4$2.6 million for 2010.the year ended December 31, 2013, an improvement of $1.8 million. The Company realizedyear-over-year improvement was the result of improved overall credit quality. During the year ended December 31, 2014, no specific loan class significantly underperformed as charge-offs were taken across a $0.4 million recovery in the fourth quartervariety of 2011 on a previously charged-off loan which lead to the net recovery. Consumer loan net charge-offs of $0.6 million were recorded during 2011 versus $0.4 million of net charge-offs during 2010. There were $0.7 million ofconsumer, residential and commercial real estate net charge-offs during 2011 versus $0.9 million recorded in 2010. Residential real estate net charge-offs totaled $0.6 million for 2011. There were no residential real estate net charge-offs for 2010.loans.
The allowance for loan losses was $8.1$9.2 million atas of December 31, 2011, an increase2014, $8.9 million as of $0.2 million from December 31, 2010. The increase in the allowance was primarily driven by increased historical loss percentages applied to the loan pools in the allowance calculation. 2013 and $9.0 million as of December 31, 2012. The allocation of the allowance for the commercial loan portfolio, which is comprised of commercial real estate loans and commercial and industrial loans, accounted for approximately 64%62.4%, or $5.2$5.7 million, of the total allowance for loan losses at December 31, 2011. Collateral values were prudently calculated2014, which represented a 4.2 percentage point increase from December 31, 2013. The increase in the commercial real estate and commercial and industrial allocation from December 31, 2013 to provideDecember 31, 2014 was mostly related to growth in that portion of the loan portfolio during the year. Non-performing assets At December 31, 2014, non-performing assets represented 1.18% of total assets compared with 1.44% as of December 31, 2013. The improvement resulted from a conservativesignificant reduction in non-performing loans and realistic value supporting these loans. The Company used information from its ongoing review processa reduction in troubled debt restructurings. Non-performing loans, which consists of accruing loans that are over 90 days past due as well as appraisals from independent third parties and other current market information to support the valuations. The allocations to the other categories ofall non-accrual loans, are adequate compared to the actual two-year historical net charge-offs and qualitative adjustments. The 2011unallocated balance of $0.4 million resulted from the receipt of a $0.3 million recovery right at the year end. Approximately $1.5decreased $0.5 million, or 19%9%, of the allowance was allocatedfrom $5.8 million at December 31, 2013 to specifically identified impaired loans.
Non-performing assets
$5.3 million at December 31, 2014. As of December 31, 2011, non-performing assets represented 3.58%2013, the portion of total assets compared to 2.38% at December 31, 2010. The non-performing assets for the period were comprised of non-accruing commercialaccruing loans non-accruing real estate loans, troubled debt restructurings, non-accrual securities and ORE. Most of the loans were collateralized, thereby mitigating the Company’s potential for loss. At December 31, 2011, $1.0 million of corporate bonds consisting of pooled trust preferred securities were on non-accrual status compared to $1.1 million at December 31, 2010. Non-performing loans increased from $10.3 million on December 31, 2010 to $14.2 million at December 31, 2011. At December 31, 2011, thethat was over 90 daydays past due portion was $0.3 million and was comprised of three loans ranging from $47 thousand tototaled $0.2 million and the non-accrual loan portion numbered 74consisted of four loans to four unrelated borrowers, ranging from $3$7 thousand to $3.4$0.1 million. At December 31, 2010,2014, the portion of accruing loans that was over 90 days past due totaled $1.1 million and consisted of eleven loans to seven unrelated borrowers ranging from $2 thousand to $0.4 million.
At December 31, 2013, there were eight47 loans aggregating $0.3 million in the over 90 day categoryto 37 unrelated borrowers ranging from $200 to $0.3 million and 65 loans ranging from $3less than $1 thousand to $1.8$1.0 million in the non-accrual category. The rise in the non-performingAt December 31, 2014 there were 46 loans in 2011 was primarily a result of a borrowerto 41 unrelated borrowers on non-accrual ranging from less than $1 thousand to $0.9 million. At December 31, 2014, non-accrual loans totaled $4.2 million compared with two loans aggregating $3.4 million that failed to make required payments and the loans were placed in non-accruing status. TDR loans aggregated $6.7$5.7 million at December 31, 2011 which consisted2013, a decrease of $5.3 million of accruing commercial real estate$1.5 million. Non-accrual loans $1.4 million of non-accrual commercial real estate loans, and $44 thousand of accruing commercial loans. At December 31, 2010 TDRs aggregated $0.8 million most all of which were accruing commercial real estate loans. During the 2011 fiscal year, $0.5 million of TDR’s were removed from TDR status based upon performance. Additions were made to TDRs aggregating $6.5 million duringthe twelve month period ending December 31, 2011. In addition, during 2011, additional changes to the level of TDR’s occurred as follows; one loan was reduced by a charge-off of $75 thousand to its fair value, and two loans were reduced by payments aggregating $8 thousand.
At December 31, 2011, the non-accrual loans aggregated $14.0 million as compared to $10.0 million at December 31, 2010. The net increase in the level of non-accrual loansdecreased during the period ending December 31, 2011 occurred as follows: additions to2014 for the following reasons: $2.8 million in new non-accrual loan component of the non-performing assets totaling $9.7loans plus capitalized expenditures on these loans were added; $1.2 million were made during the year. Thesepaid down or paid off; $0.7 million were offset by reductions or payoffs of $2.0charged off; $1.2 million charge-offs of $1.7 million, $0.8 million of transferswere transferred to ORE and $1.2ORE; $0.2 million of loans thatwere returned to performing status. Loans past due 90 days or more and accruingIn addition, $1.0 million of non-accrual loans were $0.3 million at December 31, 2011, or marginally less than the amount as of December 31, 2010. The ratio of non-performingtransferred from loans to total loans was 3.46% at December 31, 2011premises and 2.47% at December 31, 2010. As of December 31, 2011, non-performing assets represented 3.58% of total assets compared to 2.38% at December 31, 2010.equipment.
During 2011, the Company collected approximately $77 thousand of interest income recognized on the cash basis. If the non-accrual loans that were outstanding as of December 31, 20112014 had been performing in accordance with their original terms, the Company would have recognized interest income with respect to such loans of $0.6$176 thousand.
TDRs aggregated $1.6 million at December 31, 2014, a decrease from $2.0 million at December 31, 2013, the result of payoffs during 2014. Foreclosedassets held-for-sale Foreclosed assets held-for-sale aggregated $2.0 million at December 31, 2014 and $2.1 million at December 31, 2013. As of December 31, 2014, ORE consisted of twelve properties from eleven unrelated borrowers totaling $2.0 million. Six of these properties ($1.0 million) were added in 2014; two were added in 2013 ($0.2 million); two were added in 2012 ($0.3 million); one was added in 2011 ($0.2 million) and one was added in 2010 ($0.3 million). In addition, of the twelve properties, seven ($1.2 million) were listed for sale, while the remaining properties (five with approximately $0.8 million in total) were in litigation, awaiting closing and disposition plans or undergoing eviction proceedings. Other repossessed assets held-for-sale included an automobile with a book value of $11 thousand at December 31, 2014. At December 31, 2013, other repossessed assets consisted of an automobile with a book value of $8 thousand which was sold during 2014. Premises and equipment Net of depreciation, premises and equipment increased $1.2 million during 2014. During the 2014 first quarter, the Company received through foreclosure the deed that secured the collateral for a non-owner occupied commercial real estate loan that was on non-accrual status. The loan, in the amount $1.0 million, was transferred from loans to foreclosed assets held-for-sale and then to bank premises. Other assets The $2.1 million increase in other assets was due mostly to progress payments on facility remodeling and branch relocation, residual values associated with recording new automobile leases, net of lease disposals, normal cyclical changes to prepaid expenses, amounts due from borrowers for their loan escrow accounts, partially offset by income tax refunds and a decline in the net deferred tax asset. Results of Operations Overview For the year ended December 31, 2011. Bank premises and equipment, net
Net of accumulated depreciation, premises and equipment decreased $1.2 million, or 8%, during 2011. The Company purchased premises and equipment or transferred assets from construction in process, a component of other assets in the consolidated balance sheet, of approximately $0.3 million during 2011 compared to $1.0 million in 2010. In 2011, additions to accumulated depreciation of $1.5 million were the primary cause of the decrease.
Foreclosedassets held-for-sale
ORE was $1.2 million at December 31, 2011 consisting of six properties which stemmed from unrelated borrowers, all of which were listed for sale with realtors. Three properties totaling $0.3 million were added during 2011 with the remaining $0.9 million in three properties, one of-which is a commercial property, stemming from 2010. As of December 31, 2010, ORE consisted of five properties at an aggregate value of $1.3 million.
Other assets
Other assets decreased $1.9 million, or 13%, to $13.0 million as of December 31, 2011 from $14.9 million at December 31, 2010. The decrease was caused by a $1.4 million decrease in the net deferred tax asset principally from the $4.1 million improvement in the market values of the Company’s AFS securities portfolio
Results of Operations
Earnings Summary
For the year ended 2011,2014, the Company generated net income of $5.0$6.4 million, or $2.28$2.62 per diluted share, compared to the incurred net loss of $3.2$7.1 million, or $1.50$3.02 per diluted share, for the year ended December 31, 2010.2013. The 2013 earnings included a $1.9 million after tax gain from the sale of the Company’s entire portfolio of pooled trust preferred securities. In 2014, other
operating expenses included a $0.3 million after tax prepayment fee from the early pay down of a portion of long-term debt. For the year ended December 31, 2011,2014, the Company produced $1.0 million higher net interest income and had $1.5 million lower provisions for loan losses, compared to the year ended December 31, 2013. In addition to the lower gains from securities, gains recognized from the sales of residential mortgage loans declined $0.7 million from a less robust mortgage origination market. For the year ended December 31, 2014, ROA and ROE were 0.96% and 9.12%, respectively, compared to 1.15% and 11.70% for the same period in 2013. The decrease in ROA and ROE was caused by a combination of lower net income and higher average assets and average shareholders’ equity. The higher amount of net income in 2013, from the sale of the pooled trust preferred securities portfolio, and the improved market value from the securities AFS portfolio caused the higher shareholders’ equity. Net interest income and interest sensitive assets / liabilities Net interest income increased $1.0 million, or 5%, from $20.9 million for the year ended December 31, 2013 to $21.9 million for the year ended December 31, 2014, with higher interest income and lower interest expense combining for the net increase. Total average interest-earning assets increased $38.2 million and helped offset the negative impact of an eight basis point net reduction in their yields resulting in $1.0 million of growth in interest income. In the loan portfolio, the Company experienced growth of $34.2 million, on average, and had the effect of producing $1.6 million of interest income, more than offsetting the negative impact of a 22 basis point lower yield earned thereon, or $1.1 million. Though all loan portfolios showed growth in interest income from average growth, the mortgage loan portfolio had the most accretive impact from the Company’s return“originate-and-hold” strategy of shorter-termed secondary-market compliant mortgages held for portfolio. The increase in interest income was also driven by a 49 basis point increase in the yields earned on a $1.5 million larger average investment securities portfolio producing interest income growth of $0.5 million. Total interest-bearing liabilities grew $27.5 million on average assets (ROA)but a five basis point decline in the average rates paid offset the impact of the growth from interest-bearing deposits. Interest expense from interest-bearing transaction deposits increased $190 thousand mostly due to higher average balances from successful relationship-building efforts, promotions, cross-selling, transfers from unpopular certificates of deposit, or CDs, and returncontractual and negotiated rates. The increase in average deposits, was fully offset by a four basis point decline on average shareholders’ equity (ROE) were 0.85%rates paid due to a 12 basis point decline on rates paid on CDs. The lower rates paid on CDs in conjunction with a $9.2 million decline in their average balances resulted in a $235 thousand decrease in interest expense from time deposits. The fully-taxable equivalent (FTE) net interest rate spread and 10.01% compared to -0.55%margin decreased by three and -6.69%,five basis points, respectively for the year ended December 31, 2010.2014 compared to the year ended December 31, 2013. The credit-related other-than-temporary impairment (OTTI) chargedecrease in the Company’s pooled trust preferred securities portfolio amountedspread was due to $0.2the yields on interest-earning assets declining faster than the rates paid on interest-bearing liabilities. Though net interest income improved by $1.0 million, comparednet interest margin declined due to $11.8 million in 2010, fromlower yields earned on a higher average balance of interest-earning assets which was not fully offset by the stabilization in credit quality of the remaining performing collateral banks within each pool. This significant reduction in OTTI was the primary cause of the positive earnings, ROA and ROE. Net interest income
Like 2010, the interest rate yield curve remained positively sloped but at uniquely low levels.expense. The FOMC had not adjusted the short-term federal funds rate which remained near zero percent during 2010 and 2011. Similarly, at 3.25%, the national prime interest rate remained constant throughout 2011 as it did during all of 2010. National prime is a benchmark rate banks use to set rates on various lending and other interest-earning products. Operating in a very low interest rate environment during 2011 continued to challenge financial institutions. In the second half of 2011, the Company had begun to feel the negative attributes of the prolonged low interest rate environment. The Company’s cost of funds, though at record low levels, had little room for additional downward adjustment.
The Company’s overall cost of funds, which includes the effectimpact of non-interest bearing DDA balances as a no-cost funding source declined 39 basis points, from 1.27% to 0.88%, for the years ended December 31, 2010 and 2011, respectively. This decline was in contrast to the 83 basis point decline experienced in 2010. The yield on earning-assets declined 37 basis points from 2010 to 2011.
The decrease in the Treasury yields and other capital market rates, which began five years ago, had an unfavorable impact on the Company’s total 2011 investment portfolio yield. Total interest income declined 7%, or $2.0 million, from $27.6 million in 2010 to $25.6 million in 2011.
Interest expense decreased $2.1 million, or 30%, from $6.8 million in 2010 to $4.7 million in 2011. Though the Company recorded a $1.1 million net increase in average interest-bearing deposits, interest expense on deposits, declined $1.4 million in 2011 compared to 2010 caused by a 35 basis point decline on rates paid. Interest expense on borrowed funds declined $0.6 million during 2011. The lower interest from borrowings was from the $11.0 million reduction in long-term debt during the latter part of 2010. The 2010 advance with the FHLB carried an interest rate of 5.59%.
The resulting performance that the mix of the Company’s interest-sensitive assets and liabilities and the impact the yield curve slope had during 2011, combined with non-renewal and early pay-off of high-costing long-term debt, caused net interest income to approximate the same level as in 2010. On a tax-equivalent basis, the net interest rate spread increased four basis points from 3.63% to 3.67% and the tax-equivalent margin remained stable at 3.89% in 2010 and 2011.
Provision for loan losses
Provisions for loan losses of $1.8 million were made for the year ended December 31, 2011 as2014 compared to $2.1 millionthe same period in 2013. The higher average balance of non-interest bearing deposits was the principal reason for the decline in the cost of funds.
The Company’s cost of interest-bearing liabilities was 64 basis points for the year ended December 31, 2010 year.2014 or five basis points lower than the cost for the year ended December 31, 2013. Provision for loan losses For the twelve months ended December 31, 2014, the Company recorded provisions for loan losses of $1.1 million, a $1.5 million decrease, compared to $2.6 million of provisions recorded during the twelve months ended December 31, 2013. Management was able to reduce the provision expense in 2014 because of improved credit quality as evidenced by a reduction in non-performing loans. Although the volume of loans increased during the twelve months ended December 31, 2014, in 2013 the portfolio contained some large commercial loans during which time, specific reserves were provided. Those loans were no longer present in 2014. Non-performing loans declined from $5.8 million as of December 31, 2013 to $5.3 million as of December 31, 2014, a $0.5 million decrease. The $1.1 million provision expense through December 31, 2014 was made to support loan growth in the period, protect against inherent losses that exist in the portfolio and reinforce the allowance for the potential credit risks that still exist from an uncertain local economic climate. The allowance for loan losses was $8.1$9.2 million as of December 31, 20112014 compared to $7.9$8.9 million as of December 31, 2010. Deterioration in overall asset quality primarily occurred from a $3.4 million single, well-collateralized owner-occupied commercial real estate loan relationship placed on non-accrual status in the 2011 fourth quarter. Because of this loan's collateral coverage level, the required provision for loan loss was not significant. This plus the receipt of $0.4 million in recoveries lowered the level of provision for loan loss during the period.2013.
Other income (loss) For the year ended December 31, 2011, the Company recorded net other (non-interest)2014, non-interest income of $5.7amounted to $7.4 million, a $3.1 million, or 30%, decrease compared to a non-interest loss of $6.4$10.5 million recorded during the year ended December 31, 2010. In 2011, a non-cash other-than-temporary impairment (OTTI) charge2013. There were $2.6 million less gains recognized from sales of $0.2 million was recognizedinvestment securities in 2014 compared to $11.82013. Security gains in 2013 included $2.9 million recognized forof net gains from the sale of the entire portfolio of pooled trust preferred securities. In addition, the high volume of residential loan refinance activity, molded by the prevailing low interest rate environment, continued to abate as many existing mortgage holders as well as new home owners had taken advantage of this rare economic event. Accordingly, the volume of residential loans sold into the secondary market declined resulting in a $0.8 million decline in gains from their sales in the year ended December 31, 2010. The OTTI charges were related2014 compared to the Company’s investmentsame 2013 period. In conjunction with the decline in pooled trust preferred securities. The carrying valuesmortgage activity were lower mortgage
service charges of approximately $0.2 million. Partially offsetting these securities were written down to their fair values as management deemed the impairment to be other-than-temporary. Excluding the OTTI charges in 2011 and 2010, other non-interest income increased $0.5 million in 2011. Continued success in financial services and trust activities as well as moreitems were: higher net servicing fees from previously sold loans, interchange fees, appreciated value of the Company’s BOLI, fees for providing trust services, automobile lease acquisition fees and other core non-interest revenue-generating activities were only partially offset by lower levels of service charges on deposits.rental income.
Other operating expenses For the year ended December 31, 2011,2014, total other (non-interest)operating expenses remained relatively unchanged at $18.0increased $0.6 million, or 3%, compared to 2010. Though salarythe year ended December 31, 2013. Salary and employee benefits decreased $0.2increased $0.5 million, or 2%5%, the 2010 amount included $0.4 million in one-time severance and termination payouts. Excluding the one-time termination payout event, salary and benefits increased $0.2 million.2014 compared to 2013. The increase stemmed from select staff replacements at higher salary levels early in 2014, the filling of a senior level position at the beginning of the second quarter of 2014 that was duevacant for most of 2013, annual merit increases, one-time salary increases awarded to employees in the normal course of performance management, higher incentiverecognized employee incentives and an increase in group insurance costs. The average number of full-time equivalent (FTE) employeesfrom a spike in fourth quarter self-insured claims and higher costs to administer the group insurance plan. Premises and equipment increased during the period by $0.1 million, or 4%. New technology, core system maintenance increases and the extreme winter weather conditions in 2014 all required additional expenditures for the twelve months ended December 31, 2011 was 159equipment and facility maintenance compared to 166 average FTEs during the twelve months ended December 31, 2010.2013. The $0.2Company incurred a $0.5 million or 6%, increase in premises and equipment was predominately caused by higher lease expenses in the current year compared to 2010. The 2010 figure included a required downward adjustment to lease obligations upon the execution of a renegotiated branch facility lease agreement. In addition, higher utility costs, expenses associated with facilities and equipment maintenance addedexpense related to the increasepay down of $6.0 million of its long-term advance with the FHLB in premises and equipment expenses. Loan collection and ORE expenses increased $72 thousand, or 11%, due to the increased level of non-performing loans for which expensesDecember 2014. There were incurred. The $0.2 million, or 28%, declineno prepayment fees incurred in FDIC insurance premiums was caused by the initial application of the new assessment calculation.2013. The $0.1 million, or 11%5%, declineincrease in advertising and marketing during the year ended December 31, 2014 compared to the same 2013 period was essentially caused by a timing difference in educational contributions, partially offset by lower spending for multi-media Company branding and the non-recurring naturecommunity initiative project in 2013 that did not recur in 2014. Professional services were up $0.1 million, or 5%, during 2014 compared to 2013 due to a single over-accrual adjustment having the effect of lowering the 2013 expenses and additional professional services for corporate related legal fees for services performed in 2014 compared to 2013. Offsetting these items, other real estate owned (ORE) expense decreased $0.3 million, or 43%, during 2014 compared to the same period in 2013. ORE expense decreased largely due to smaller property write downs to fair value and shorter holding periods for ORE properties in 2014 compared to 2013. Lower loan-to-value and greater market appeal reduced average holding periods and shorter holding periods in turn reduced carrying costs incurredon ORE properties in 2010. 2014 compared to 2013. Collection expense decreased by $0.3 million, or 57%, in 2014 because the Company required less legal services from outside attorneys in resolving problem loans than was required in 2013. A lower assessment rate caused the FDIC insurance premium to decrease $0.1 million, or 23%, during the year ended December 31, 2014 compared to the same 2013 period. The ratios of non-interest expense less non-interest income to average assets, known as the industry’s expense ratio, at December 31, 20112014 and 20102013 were 2.04%1.89% and 2.07%1.87%, respectively. The expense ratio, which excludes OTTIother-than-temporary impairment and other securities transactions declinedand non-recurring expenses, increased due mostly to improveda lower level of non-interest earnings, stable operating expenses and a higher average balance sheet.income from fewer gains recognized from the sales of mortgage loans during the year ended December 31, 2014 compared to the the year ended December 31, 2013.
Provision for income taxes AThe Company’s effective income tax rate approximated 25.4% in 2014 and 27.0% in 2013. The difference between the effective rate and the enacted statutory corporate rate of 34% is due mostly to the effect of tax exempt income in relation to the level of pre-tax gain in 2011income. In 2014, the Company had a higher amount of tax exempt income and a lower amount of pre-tax income subject to the 34% statutory income tax rate compared to a pre-tax loss in 2010 was the cause of a tax provision in the current year compared to a tax credit in 2010.ended December 31, 2013..
Off-Balance Sheet Arrangements and Contractual Obligations The Company is a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the financing needs of its customers and in connection with the overall interest rate management strategy. These instruments involve, to a varying degree, elements of credit, interest rate and liquidity risk. In accordance with GAAP, these instruments are either not recorded in the consolidated financial statements or are recorded in amounts that differ from the notional amounts. Such instruments primarily include lending commitments and lease obligations. Lending commitments include commitments to originate loans and commitments to fund unused lines of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. In addition to lending commitments, the Company has contractual obligations related to operating lease commitments. Operating lease commitments are obligations under various non-cancelable operating leases on buildings and land used for office space and banking purposes.
The following table presents, as of December 31, 2012,2015, the Company’s significant determinable contractual obligations and significant commitments by payment date. The payment amounts represent those amounts contractually due to the recipient, excluding interest: | | | | | | Over one | | | Over three | | | | | | | | | | | One year | | | year through | | | years through | | | Over | | | | | | (dollars in thousands) | | or less | | | three years | | | five years | | | five years | | | Total | | | Contractual obligations: | | | | | | | | | | | | | | | | | | | | | | Certificates of deposit(1) | | $ | 61,378 | | | $ | 45,695 | | | $ | 6,787 | | | $ | 2,766 | | | $ | 116,626 | | | Long-term debt | | | - | | | | - | | | | 16,000 | | | | - | | | | 16,000 | | | Repurchase agreements | | | 8,056 | | | | - | | | | - | | | | - | | | | 8,056 | | | Operating leases | | | 278 | | | | 365 | | | | 363 | | | | 2,882 | | | | 3,888 | | | Commitments: | | | | | | | | | | | | | | | | | | | | | | Letters of credit | | | 3,015 | | | | 5,012 | | | | - | | | | 617 | | | | 8,644 | | | Loan commitments(2) | | | 35,232 | | | | - | | | | - | | | | - | | | | 35,232 | | | Total | | $ | 107,959 | | | $ | 51,072 | | | $ | 23,150 | | | $ | 6,265 | | | $ | 188,446 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Over one | | Over three | | | | | | | | One year | | year through | | years through | | Over | | | | (dollars in thousands) | or less | | three years | | five years | | five years | | Total | Contractual obligations: | | | | | | | | | | | | | | | Certificates of deposit (1) | $ | 62,823 | | $ | 23,527 | | $ | 16,551 | | $ | 1,301 | | $ | 104,202 | Short-term borrowings | | 28,204 | | | - | | | - | | | - | | | 28,204 | Operating leases | | 248 | | | 499 | | | 496 | | | 3,932 | | | 5,175 | Commitments: | | | | | | | | | | | | | | | Letters of credit | | 2,694 | | | 5,124 | | | - | | | 360 | | | 8,178 | Loan commitments (2) | | 26,959 | | | - | | | - | | | - | | | 26,959 | Total | $ | 120,928 | | $ | 29,150 | | $ | 17,047 | | $ | 5,593 | | $ | 172,718 |
| (1) | | Includes certificates in the CDARS program. |
| (2) | | Available credit to borrowers in the amount of $65.7$82.7 million is excluded from the above table since, by its nature, the borrowers may not have the need for additional funding, and, therefore, the credit may or may not be disbursed by the Company. |
Related Party Transactions Information with respect to related parties is contained in Note 15,16, “Related Party Transactions”, within the notes to the consolidated financial statements, and incorporated by reference in Part II, Item 8.
Impact of Accounting Standards and Interpretations Information with respect to the impact of accounting standards is contained in Note 18,19, “Recent Accounting Pronouncements”, within the notes to the consolidated financial statements, and incorporated by reference in Part II, Item 8.
Impact of Inflation and Changing Prices The consolidated financial statements and notes thereto presented herein have been prepared in accordance with U.S. GAAP, which requires the measurement of the Company’s financial condition and results of operations in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial businesses, most all of the Company’s assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation as interest rates do not necessarily move in the same direction or, to the same extent, as the price of goods and services.
Capital Resources The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, asset risk-weightings and other factors. Under these guidelines, assets and certain off-balance sheet items are assigned to broad risk categories, each with prescribed risk-weightings.The appropriate risk-weighting, pursuant to regulatory guidelines, require an increase in the weights applied to securities that are rated below investment grade, thereby inflating the total risk-weighted assets.weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and certain off-balance sheet items. The guidelines require all banks and bank holding companies to maintain a minimum ratio of total risk-based capital to total risk-weighted assets (Total Risk Adjusted Capital) of 8%, including Tier I common equity to total risk-weighted assets (Tier I Common Equity) of 4.5%, Tier I capital to total risk-weighted assets (Tier I Capital) of 4%6% and Tier I capital to average total assets (Leverage Ratio) of at least 4%. The Company’s Total Risk Adjusted Capital Ratio was 13.5%15.0%, Tier I Common Equity was 13.7%, Tier I Capital Ratio was 12.2%13.7% and Leverage Ratio was 9.7%10.2% as of December 31, 2012.2015. Additional information with respect to capital requirements is contained in Note 14,15, “Regulatory Matters”, within the notes to the consolidated financial statements, and incorporated by reference in Part II, Item 8. During the year-endedyear ended December 31, 2012,2015, total shareholders' equity increased $5.3$4.1 million, or 10%6%, due principally from the $4.9$7.1 million in net income added into retained earnings and the $1.3 million, after-tax improvement in the net unrealized gain (loss) position in the Company’s investment portfolio.earnings. Capital was further enhanced by $1.3$0.1 million from investments in the Company’s common stock via the Employee Stock Purchase (ESPP) and Dividend Reinvestment Plans.$0.3 million from stock options exercised and stock-based compensation expense from the ESPP and unvested restricted stock. These items were partially offset by the $2.3$0.5 million, after tax reduction in the net unrealized gain position in the Company’s investment portfolio and $2.8 million of
cash dividends declared on the Company’s common stock. The Company’s dividend payout ratio, defined as the rate at which current earnings is paid to shareholders, was 40% for the year ended December 31, 2015. The balance of earnings is retained to further strengthen the Company’s capital position. The Company’s sources (uses) of capital during the previous five years are indicated below:
| | | | | | Cash | | | | | | DRP | | | Purchase of | | | Changes in | | | Capital | | | | | Net | | | dividends | | | Earnings | | | and ESPP | | | treasury | | | OCI and | | | retained | | | (dollars in thousands) | | income (loss) | | | declared | | | (used) retained | | | infusion | | | stock | | | other changes | | | (used) | | | 2012 | | $ | 4,902 | | | $ | (2,283 | ) | | $ | 2,619 | | | $ | 1,342 | | | $ | - | | | $ | 1,361 | | | $ | 5,322 | | | 2011 | | | 5,045 | | | | (2,210 | ) | | | 2,835 | | | | 1,284 | | | | - | | | | 2,731 | | | | 6,850 | | | 2010 | | | (3,204 | ) | | | (2,137 | ) | | | (5,341 | ) | | | 1,056 | | | | - | | | | 5,384 | | | | 1,099 | | | 2009 | | | (1,400 | ) | | | (2,078 | ) | | | (3,478 | ) | | | 864 | | | | (57 | ) | | | (615 | ) | | | (3,286 | ) | | 2008 | | | 3,636 | | | | (2,069 | ) | | | 1,567 | | | | 132 | | | | (430 | ) | | | (7,499 | ) | | | (6,230 | ) |
| | | | | | | | | | | | | | | | | | | | | | Cash | | | | | DRP | | Changes in | | | | Net | | dividends | | Earnings | | and ESPP | | AOCI and | | Capital | (dollars in thousands) | income | | declared | | retained | | infusion | | other changes | | retained | 2015 | $ | 7,103 | | $ | (2,844) | | $ | 4,259 | | $ | 102 | | $ | (229) | | $ | 4,132 | 2014 | | 6,352 | | | (2,667) | | | 3,685 | | | 763 | | | 1,711 | | | 6,159 | 2013 | | 7,122 | | | (2,602) | | | 4,520 | | | 1,479 | | | 1,115 | | | 7,114 | 2012 | | 4,902 | | | (2,283) | | | 2,619 | | | 1,342 | | | 1,361 | | | 5,322 | 2011 | | 5,045 | | | (2,210) | | | 2,835 | | | 1,284 | | | 2,731 | | | 6,850 |
As of December 31, 2012,2015, the Company reported a net unrealized gain position of $0.2$2.2 million, net of tax, from the securities AFS portfolio compared to a net unrealized lossgain of $1.1$2.7 million as of December 31, 2011. Net of principal write-downs of the Company’s investments in pooled trust preferred securities, the Company’s unrealized loss position continued to improve in 2012. During the past several years, the prolonged economic slump has created uncertainty and illiquidity in the financial and capital markets and has had a sizable negative impact on thefair value estimates for securities in banks’ investment portfolios.2014. The decline during 2015 was from all security types. Management believes that volatilitychanges in fair value of the Company’s securities isare due to changes in interest rates and liquidity complications in the financial markets and to a lesser extent to the deteriorationnot in the creditworthiness of the issuers. When,Generally, when U.S. Treasury rates begin to rise, investment securities’ pricing will declinedeclines and fair values of investment securities will also decline. Bond prices move inverselyWhile volatility has existed in the yield curve within the past twelve months, a rising rate environment is inevitable and during the period of rising rates, the Company expects pricing in the bond portfolio to the movement of interest rates. Nonetheless, theredecline. There is no assurance that future realized and unrealized losses will not be recognized from the Company’s portfolio of investment securities. To help maintain a healthy capital position, the Company expects to continue tocan issue stock to participants in the DRP and ESPP plans. These twoThe DRP affords the Company the option to acquire shares in open market purchases and/or issue shares directly from the Company to plan participants. During 2015, the Company purchased all of the shares in the open market to fulfill the needs of the DRP. Both the DRP and the ESPP plans have been a consistent source of capital from the Company’s loyal employees and shareholders and their participation in these plans will continue to help strengthen the Company’s balance sheet. SinceBeginning in 2009, the Company’s board of directors havehad allowed a benefit to ourits loyal shareholders as a discount on the purchase price for shares issued directly from the Company through the DRP. AsDRP and voluntary cash feature. During the first quarter of 2014, the DRP was amended to discontinue a portion of the discount on the voluntary cash feature as the board of directors had determined that the Company’s capital position rises above prudent levels, the board of directors may discontinue this discount. achieved sufficient levels. See the section entitled “Supervision and Regulation”, below for a discussion on the recent enactment of theJumpstart Our Business Startups Act, commonly known as the JOBS Act for highlights aimed at facilitating capital raising by smaller companies and banks and bank holding companies and the proposed regulatory capital changes that would revise bankand other recent enactments, including a summary of the recently issued federal banking agencies final rules to implement the Basel III regulatory capital requirementsreforms and changes required by the risk-weighted asset rules.Dodd-Frank Act.
Liquidity Liquidity management ensures that adequate funds will be available to meet customers’ needs for borrowings, deposit withdrawals and maturities, facility expansion and normal operating expenses of the Company.expenses. Sources of liquidity are cash and cash equivalents, asset maturities and pay-downs within one year, loans HFS, and investments AFS, growth of core deposits and repurchase agreements, utilization of borrowing capacities from the FHLB, correspondent banks, CDARs, the FRBDiscount Window of the Federal Reserve Bank of Philadelphia (FRB) and proceeds from the issuance of capital stock. Though regularly scheduled investment and loan payments are dependable sources of daily liquidity, sales of both loans HFS and investments AFS, deposit activity and investment and loan prepayments are significantly influenced by general economic conditions andincluding the interest rate environment. During low and declining interest rate environments, prepayments from interest-sensitive assets tend to accelerate and provide significant liquidity that can be used to invest in other interest-earning assets but at lower market rates. Conversely, in periods of high or rising interest rates, prepayments from interest-sensitive assets tend to decelerate causing prepayment cash flowflows from mortgage loans and mortgage-backed securities to decrease. Rising interest rates may also cause deposit inflow to accelerate but priced at higher market interest rates.rates or could also cause deposit outflow due to higher rates offered by the Company’s competition for similar products. The Company closely monitors activity in the capital markets and takes appropriate action to ensure that the liquidity levels are adequate for funding, investing and operating activities. The Company utilizes aCompany’s contingency funding plan (CFP) that sets a framework for handling liquidity issues in the event circumstances arise which the Company deems to be less than normal. To accomplish this, theThe Company established guidelines for identifying, measuring, monitoring and managing the resolution of potentially serious liquidity crises. The Company’s CFP outlines required monitoring tools, acceptable alternative funding sources and required actions during various liquidity scenarios. Thus, the Company has implemented a proactive means for the measurement and resolution for handling potentially significant adverse liquidity issues.conditions. At least quarterly, the CFP monitoring tools, current liquidity position and monthly projected liquidity sources and uses are presented and reviewed by the Company’s ALCO.Asset/Liability Committee. As of December 31, 20122015, the Company had not experienced any adverse liquidity issues that would give rise to its inability to raise liquidity in an emergency situation.
During the year ended December 31, 2012,2015, the Company used approximately $30.3$13.6 million of cash. During thisthe period, the Company’s operations provided approximately $4.5$15.7 million mostly from $20.7$25.1 million of net cash inflow from the components of net interest income, a $3.2 million income tax refund in the second quarter of 2015 and $2.2 million in proceeds of loans HFS over originations; partially offset by approximately $12.3 million of net non-interest overhead, $3.7expense/income related payments of $12.2 million, remitted to area banks from the late 2011 payoff$0.4 million of a participated loan, $2.2 million in estimated income tax payments and $1.5a $2.1 million of net originations of loans HFS. Liquidity generatedincrease in the residual value from operations, proceedsthe Company’s automobile leasing activities. Cash inflow from security salesinterest-earning assets, growth in deposits and cash on handshort-term borrowings were used to fund loan growth, replace maturing and cash runoff of investment securities, reduce long-term debt and net dividend payments. The growth in the loan portfolio payoffoccurred in all sectors and the Company expects to continue growth in the loan portfolio sectors during 2016 funded by deposit growth. The seasonal nature of $5.0 million in long-term debt, net dividend paymentsdeposits from municipalities and fund facility upgrades. The balanceother public funding sources requires the Company to be prepared for the inherent volatility and the unpredictable timing of remaining cash at December 31, 2012 willoutflow from this customer base. Accordingly, the use of short-term overnight borrowings could be retained and used to grow interest-earning assets, facility upgrades and provide forfulfill funding gap needs. The CFP is a tool to help the unpredictable behavior of deposit cash outflow. Company ensure that alternative funding sources are available to meet its liquidity needs. As of December 31, 2012,2015, the Company maintained $21.8$12.3 million in cash and cash equivalents and $111.0$126.7 million of investments AFS and loans HFS. Also as of December 31, 2012,2015, the Company had approximately $128.2$186.4 million available to borrow from the FHLB, $21.0 million from correspondent banks, $21.4$30.6 million from the Discount Window of the Federal Reserve Bank of PhiladelphiaFRB and $30.8$36.5 million from the CDARS program. The combined total of $334.2$413.5 million represented 56%57% of total assets at December 31, 2012.2015. Management believes this level of liquidity to be strong and adequate to support current operations. For a discussion on the Company’s significant determinable contractual obligations and significant commitments, see “Off-Balance Sheet Arrangements and Contractual Obligations,” above.
Management of interest rate risk and market risk analysis The adequacy and effectiveness of an institution’s interest rate risk management process and the level of its exposures are critical factors in the regulatory evaluation of an institution’s sensitivity to changes in interest rates and capital adequacy. Management believes the Company’s interest rate risk measurement framework is sound and provides an effective means to measure, monitor, analyze, identify and control interest rate risk in the balance sheet. The Company is subject to the interest rate risks inherent in its lending, investing and financing activities. Fluctuations of interest rates will impact interest income and interest expense along with affecting market values of all interest-earning assets and interest-bearing liabilities, except for those assets or liabilities with a short term remaining to maturity. Interest rate risk management is an integral part of the asset/liability management process. The Company has instituted certain procedures and policy guidelines to manage the interest rate risk position. Those internal policies enable the Company to react to changes in market rates to protect net interest income from significant fluctuations. The primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on net interest income along with creating an asset/liability structure that maximizes earnings.
Asset/Liability ManagementManagement. . One major objective of the Company when managing the rate sensitivity of its assets and liabilities is to stabilize net interest income. The management of and authority to assume interest rate risk is the responsibility of the Company’s Asset/Liability Committee (ALCO), which is comprised of senior management and members of the board of directors. ALCO meets quarterly to monitor the relationship of interest sensitive assets to interest sensitive liabilities. The process to review interest rate risk is a regular part of managing the Company. Consistent policies and practices of measuring and reporting interest rate risk exposure, particularly regarding the treatment of non-contractual assets and liabilities, are in effect. In addition, there is an annual process to review the interest rate risk policy with the board of directors which includes limits on the impact to earnings from shifts in interest rates.
Interest Rate Risk Measurement.Interest rate risk is monitored through the use of three complementary measures: static gap analysis, earnings at risk simulation and economic value at risk simulation. While each of the interest rate risk measurements has limitations, collectively, they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Company and the distribution of risk along the yield curve, the level of risk through time and the amount of exposure to changes in certain interest rate relationships.
Static Gap. The ratio between assets and liabilities re-pricing in specific time intervals is referred to as an interest rate sensitivity gap. Interest rate sensitivity gaps can be managed to take advantage of the slope of the yield curve as well as forecasted changes in the level of interest rate changes. To manage this interest rate sensitivity gap position, an asset/liability model commonly known as cumulative gap analysis is used to monitor the difference in the volume of the Company’s interest sensitive assets and liabilities that mature or re-price within given time intervals. A positive gap (asset sensitive) indicates that more assets will re-price during a given period compared to liabilities, while a negative gap (liability sensitive) hasindicates the opposite effect. The Company employs computerized net interest income simulation modeling to assist in quantifying interest rate risk exposure. This process measures and quantifies the impact on net interest income through varying interest rate changes and balance sheet compositions. The use of this model assists the ALCO to gauge the effects of the interest rate changes on interest-sensitive assets and liabilities in order to determine what impact these rate changes will have upon the net interest spread. At December 31, 20122015, the Company maintained a one-year cumulative gap of positive (asset sensitive) $90.0$36.4 million, or 15%5%, of
total assets. The effect of this positive gap position provided a mismatch of assets and liabilities which may expose the Company to interest rate risk during periods of falling interest rates. Conversely, in an increasing interest rate environment, net interest income could be positively impacted because more assets than liabilities will re-price upward during the one-year period. Certain shortcomings are inherent in the method of analysis discussed above and presented in the next table. Although certain assets and liabilities may have similar maturities or periods of re-pricing, they may react in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early withdrawal levels may deviate significantly from those assumed in calculating the table.table amounts. The ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase. The following table reflects the re-pricing of the balance sheet or “gap” position at December 31, 2012:2015: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | More than | | More than | | | | | | | | More than three | More than | | | | | | | | | Three months | | three months to | | one year | | More than | | | | Three months | months to | one year | More than | | | | | (dollars in thousands) | | or less | | twelve months | | to three years | | three years | | Total | | or less | twelve months | to three years | three years | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 9,209 | | | $ | - | | | $ | - | | | $ | 12,637 | | | $ | 21,846 | | $ | 22 | | $ | - | | $ | - | | $ | 12,255 | | $ | 12,277 | | Investment securities(1)(2) | | | 7,927 | | | | 13,100 | | | | 29,894 | | | | 52,433 | | | | 103,354 | | | 4,293 | | 14,738 | | 31,791 | | 76,530 | | 127,352 | | Loans(2) | | | 165,036 | | | | 70,061 | | | | 128,422 | | | | 71,610 | | | | 435,129 | | | Loans and leases(2) | | | 194,404 | | 84,422 | | 134,466 | | 134,811 | | 548,103 | | Fixed and other assets | | | - | | | | 10,065 | | | | - | | | | 31,131 | | | | 41,196 | | | - | | 11,082 | | - | | 30,544 | | 41,626 | | Total assets | | $ | 182,172 | | | $ | 93,226 | | | $ | 158,316 | | | $ | 167,811 | | | $ | 601,525 | | $ | 198,719 | | $ | 110,242 | | $ | 166,257 | | $ | 254,140 | | $ | 729,358 | | Total cumulative assets | | $ | 182,172 | | | $ | 275,398 | | | $ | 433,714 | | | $ | 601,525 | | | | | | $ | 198,719 | | $ | 308,961 | | $ | 475,218 | | $ | 729,358 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-interest-bearing transaction deposits(3) | | $ | - | | | $ | 12,616 | | | $ | 34,634 | | | $ | 78,785 | | | $ | 126,035 | | $ | - | | $ | 14,292 | | $ | 39,234 | | $ | 89,248 | | $ | 142,774 | | Interest-bearing transaction deposits(3) | | | 87,146 | | | | 16,210 | | | | 114,766 | | | | 53,877 | | | | 271,999 | | | 147,083 | | 20,136 | | 138,212 | | 68,268 | | 373,699 | | Certificates of deposit | | | 16,626 | | | | 44,752 | | | | 45,695 | | | | 9,553 | | | | 116,626 | | | 16,802 | | 46,021 | | 23,527 | | 17,852 | | 104,202 | | Repurchase agreements | | | 8,056 | | | | - | | | | - | | | | - | | | | 8,056 | | | 5,915 | | - | | - | | - | | 5,915 | | Long-term debt | | | - | | | | - | | | | - | | | | 16,000 | | | | 16,000 | | | Short-term borrowings | | | 22,289 | | - | | - | | - | | 22,289 | | Other liabilities | | | - | | | | - | | | | - | | | | 3,863 | | | | 3,863 | | | - | | - | | - | | 4,128 | | 4,128 | | Total liabilities | | $ | 111,828 | | | $ | 73,578 | | | $ | 195,095 | | | $ | 162,078 | | | $ | 542,579 | | $ | 192,089 | | $ | 80,449 | | $ | 200,973 | | $ | 179,496 | | $ | 653,007 | | Total cumulative liabilities | | $ | 111,828 | | | $ | 185,406 | | | $ | 380,501 | | | $ | 542,579 | | | | | | $ | 192,089 | | $ | 272,538 | | $ | 473,511 | | $ | 653,007 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest sensitivity gap | | $ | 70,344 | | | $ | 19,648 | | | $ | (36,779 | ) | | $ | 5,733 | | | | | | $ | 6,630 | | $ | 29,793 | | $ | (34,716) | | $ | 74,644 | | | | Cumulative gap | | $ | 70,344 | | | $ | 89,992 | | | $ | 53,213 | | | $ | 58,946 | | | | | | $ | 6,630 | | $ | 36,423 | | $ | 1,707 | | $ | 76,351 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cumulative gap to total assets | | | 11.7 | % | | | 15.0 | % | | | 8.8 | % | | | 9.8 | % | | | | | | 0.9% | | 5.0% | | 0.2% | | 10.5% | | |
| (1) | | Includes FHLB stock and the net unrealized gains/losses on available-for-sale securities. |
| (2) | | Investments and loans are included in the earlier of the period in which interest rates were next scheduled to adjust or the period in which they are due. In addition, loans were included in the periods in which they are scheduled to be repaid based on scheduled amortization. For amortizing loans and MBS – GSE residential, annual prepayment rates are assumed reflecting historical experience as well as management’s knowledge and experience of its loan products. |
| (3) | | The Company’s demand and savings accounts were generally subject to immediate withdrawal. However, management considers a certain amount of such accounts to be core accounts having significantly longer effective maturities based on the retention experiences of such deposits in changing interest rate environments. The effective maturities presented are the recommended maturity distribution limits for non-maturing deposits based on historical deposit studies. |
Earnings at Risk and Economic Value at Risk Simulations. The Company recognizes that more sophisticated tools exist for measuring the interest rate risk in the balance sheet that extend beyond static re-pricing gap analysis. Although it will continue to measure its re-pricing gap position, the Company utilizes additional modeling for identifying and measuring the interest rate risk in the overall balance sheet. The ALCO is responsible for focusing on “earnings at risk” and “economic value at risk”, and how both relate to the risk-based capital position when analyzing the interest rate risk.
Earnings at Risk. An earnings at risk simulation measures the change in net interest income and net income should interest rates rise and fall. The simulation recognizes that not all assets and liabilities re-price one-for-one with market rates (e.g., savings rate). The ALCO looks at “earnings at risk” to determine income changes from a base case scenario under an increase and decrease of 200 basis points in interest rate simulation models.
Economic Value at Risk.An earnings at risk simulation measures the short-term risk in the balance sheet. Economic value (or portfolio equity) at risk measures the long-term risk by finding the net present value of the future cash flows from the Company’s existing assets and liabilities. The ALCO examines this ratio quarterly utilizing an increase and decrease of 200 basis points in interest rate simulation models. The ALCO recognizes that, in some instances, this ratio may contradict the “earnings at risk” ratio. The following table illustrates the simulated impact of an immediate 200 basis points upward or downward movement in interest rates on net interest income, net income and the change in the economic value (portfolio equity). This analysis assumed that interest-earning asset and interest-bearing liability levels at December 31, 20122015 remained constant. The impact of the rate movements was developed by simulating the effect of the rate change over a twelve-month period from the December 31, 20122015 levels: | | | | | | | | | | | % change | | Rates +200 | Rates -200 | Earnings at risk: | | | | | Net interest income | 2.9 | % | (2.1) | % | Net income | 8.2 | | (5.3) | | Economic value at risk: | | | | | Economic value of equity | (7.6) | | (22.3) | | Economic value of equity as a percent of total assets | (1.1) | | (3.1) | |
| | | % change | | | | | Rates +200 | | | Rates -200 | | | Earnings at risk: | | | | | | | | | | Net interest income | | | 7.3 | % | | | (3.6 | )% | | Net income | | | 22.1 | | | | (10.6 | ) | | Economic value at risk: | | | | | | | | | | Economic value of equity | | | (7.8 | ) | | | (3.5 | ) | | Economic value of equity as a percent of total assets | | | (0.8 | ) | | | (0.4 | ) |
Economic value has the most meaning when viewed within the context of risk-based capital. Therefore, the economic value may normally change beyond the Company’s policy guideline for a short period of time as long as the risk-based capital ratio (after adjusting for the excess equity exposure) is greater than 10%. At December 31, 2012,2015, the Company’s risk-based capital ratio was 13.5%15.0%. The table below summarizes estimated changes in net interest income over a twelve-month period beginning January 1, 2013,2016, under alternate interest rate scenarios using the income simulation model described above: | | | | | | | | | | | | | | | | | | | | | Net interest | | $ | | % | | Net interest | | $ | | % | | (dollars in thousands) | | income | | variance | | variance | | income | | variance | | variance | | Simulated change in interest rates | | | | | | | | | | | | | | | | | | | | | +200 basis points | | $ | 21,735 | | | $ | 1,483 | | | | 7.3 | % | $ | 25,241 | | $ | 707 | | 2.9 | % | | +100 basis points | | | 20,883 | | | | 631 | | | | 3.1 | | | 24,803 | | 269 | | 1.1 | | | Flat rate | | | 20,252 | | | | - | | | | - | | | 24,534 | | - | | - | | | -100 basis points | | | 19,862 | | | | (390 | ) | | | (1.9 | ) | | 24,279 | | (255) | | (1.0) | | | -200 basis points | | | 19,528 | | | | (724 | ) | | | (3.6 | ) | | 24,016 | | (518) | | (2.1) | |
Simulation models require assumptions about certain categories of assets and liabilities. The models schedule existing assets and liabilities by their contractual maturity, estimated likely call date or earliest re-pricing opportunity. MBS – GSE residential securities and amortizing loans are scheduled based on their anticipated cash flow including estimated prepayments. For investment securities, the Company uses a third-party service to provide cash flow estimates in the various rate environments. Savings, money market and interest-bearing checking accounts do not have stated maturities or re-pricing terms and can be withdrawn or re-price at any time. This may impact the margin if more expensive alternative sources of deposits are required to fund loans or deposit runoff. Management projects the re-pricing characteristics of these accounts based on historical performance and assumptions that it believes reflect their rate sensitivity. The model reinvests all maturities, repayments and prepayments for each type of asset or liability into the same product for a new like term at current product interest rates. As a result, the mix of interest-earning assets and interest bearing-liabilities is held constant.
Supervision and Regulation The following is a brief summary of the regulatory environment in which the Company and the Bank operate and is not designed to be a complete discussion of all statutes and regulations affecting such operations, including those statutes and regulations specifically mentioned herein. Changes in the laws and regulations applicable to the Company and the Bank can affect the operating environment in substantial and unpredictable ways. We cannot accurately predict whether legislation will ultimately be enacted, and if enacted, the ultimate effect that legislation or implementing regulations would have on our financial condition or results of operations. While banking regulations are material to the operations of the Company and the Bank, it should be noted that supervision, regulation and examination of the Company and the Bank are intended primarily for the protection of depositors, not shareholders.
Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act (SOX), also known as the “Public Company Accounting Reform and Investor Protection Act,” was established in 2002 and introduced major changes to the regulation of financial practice. SOX represents a comprehensive revision of laws affecting corporate governance, accounting obligations, and corporate reporting. SOX is applicable to all companies with equity or debt securities that are either registered, or file reports under the Securities Exchange Act of 1934. In particular, SOX establishes: (i) requirements for audit committees, including independence, expertise, and responsibilities; (ii) additional responsibilities regarding financial statements for the Principal Executive Officer and Principal Financial Officer of the reporting company; (iii) standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and its directors and executive officers; and (v) increased civil and criminal penalties for violations of the securities laws. Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) The FDICIA established five different levels of capitalization of financial institutions, with “prompt corrective actions” and significant operational restrictions imposed on institutions that are capital deficient under the categories. The five categories are: | · | | significantly undercapitalized, and |
| · | | critically undercapitalized. |
To be considered well capitalized, an institution must have a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 8%, a leverage capital ratio of at least 5%, and must not be subject to any order or directive requiring the institution to improve its capital level. An institution falls within the adequately capitalized category if it has a total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 6%, and a leverage capital ratio of at least 4%. Institutions with lower capital levels are deemed to be undercapitalized, significantly undercapitalized or critically undercapitalized, depending on their actual capital levels. In addition, the appropriate federal regulatory agency may downgrade an institution to the next lower capital category upon a determination that the institution is in an unsafe or unsound condition, or is engaged in an unsafe or unsound practice. Institutions are required under the FDICIA to closely monitor their capital levels and to notify their appropriate regulatory agency of any basis for a change in capital category. Regulatory oversight of an institution becomes more stringent with each lower capital category, with certain “prompt corrective actions” imposed depending on the level of capital deficiency. Recent Legislation and Rulemaking Regulatory Capital Changes In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. The phase-in period for community banking organizations began on January 1, 2015, while larger institutions (generally those with assets of $250 billion or more) began compliance on January 1, 2014. The final rules call for the following capital requirements: | · | | A minimum ratio of common tier 1 capital to risk-weighted assets of 4.5%. |
| · | | A minimum ratio of tier 1 capital to risk-weighted assets of 6%. |
| · | | A minimum ratio of total capital to risk-weighted assets of 8% (no change from current rule). |
| · | | A minimum leverage ratio of 4%. |
In addition, the final rules established a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations. If a banking organization fails to hold capital above the minimum capital ratios and the capital conservation buffer, it will be subject to certain restrictions on capital distributions and discretionary bonus payments. The phase-in period for the capital conservation and countercyclical capital buffers for all banking organizations began on January 1, 2016. Under the proposed rules, accumulated other comprehensive income (AOCI) would have been included in a banking organization’s common equity tier 1 capital. The final rules allow community banks to make a one-time election not to include these additional components of AOCI in regulatory capital and instead use the existing treatment under the general risk-based capital rules that excludes most AOCI components from regulatory capital. The Company made the opt-out election in the first call report or FR Y-9 series report that was filed after the financial institution became subject to the final rule. The final rules permanently grandfather non-qualifying capital instruments (such as trust preferred securities and cumulative perpetual preferred stock) issued before May 19, 2010 for inclusion in the tier 1 capital of banking organizations with total consolidated assets less than $15 billion as of December 31, 2009 and banking organizations that were mutual holding companies as of May 19, 2010.
The proposed rules would have modified the risk-weight framework applicable to residential mortgage exposures to require banking organizations to divide residential mortgage exposures into two categories in order to determine the applicable risk weight. In response to commenter concerns about the burden of calculating the risk weights and the potential negative effect on credit availability, the final rules do not adopt the proposed risk weights but retain the current risk weights for mortgage exposures under the general risk-based capital rules. Consistent with the Dodd-Frank Act, the new rules replace the ratings-based approach to securitization exposures, which is based on external credit ratings, with the simplified supervisory formula approach in order to determine the appropriate risk weights for these exposures. Alternatively, banking organizations may use the existing gross-up approach to assign securitization exposures to a risk weight category or choose to assign such exposures a 1,250 percent risk weight. Under the new rules, mortgage servicing assets (MSAs) and certain deferred tax assets (DTAs) are subject to stricter limitations than those applicable under the current general risk-based capital rule. The new rules also increase the risk weights for past-due loans, certain commercial real estate loans, and some equity exposures, and makes selected other changes in risk weights and credit conversion factors. As noted above the phase-in period for the Company began on January 1, 2015. The new rules will not have a material impact on the Company’s capital, operations, liquidity and earnings. JOBS Act On April 5,In 2012, President Obama signed the Jumpstart Our Business Startups Act (the “JOBS Act”) intobecame law. The JOBS Act is aimed at facilitating capital raising by smaller companies and banks and bank holding companies by implementing the following changes:
| · | | raising the threshold requiring registration under the Securities Exchange Act of 1934 (the "Exchange Act") for banks and bank holdings companies from 500 to 2,000 holders of record; |
| · | | raising the threshold for triggering deregistration under the Exchange Act for banks and bank holding companies from 300 to 1,200 holders of record; |
| · | | raising the limit for Regulation A offerings from $5 million to $50 million per year and exempting some Regulation A offerings from state blue sky laws; |
| · | | permitting advertising and general solicitation in Rule 506 and Rule 144A offerings; |
| · | | allowing private companies to use "crowdfunding" to raise up to $1 million in any 12-month period, subject to certain conditions; and |
| · | | creating a new category of issuer, called an "Emerging Growth Company," for companies with less than $1 billion in annual gross revenue, which will benefit from certain changes that reduce the cost and burden of carrying out an equity IPO and complying with public company reporting obligations for up to five years. |
While the JOBS Act is not expected to have any immediate application to the Company, management will continue to monitor the implementation rules for potential effects which might benefit the Company. Proposed Regulatory Capital Changes
In June 2012, the Federal Reserve Bank, the FDIC and the OCC issued proposed rules that would revise bank regulatory capital requirements and the risk-weighted asset rules. These rules represent the most extensive changes to bank capital requirements in the recent past. The rules will extend large parts of a regulatory capital administration to all U.S. banks and their holding companies, other than the smallest bank holding companies (generally, those with under $500 million in consolidated assets). The implementation of the rules has been delayed several times and it is uncertain when they will go into effect at this time. Below is a summary:
Summary of proposed rules for capital
| · | Revise the definition of regulatory capital components and related calculations, which would include conservative guidelines for determining whether an instrument could qualify as regulatory capital; |
| · | Add common equity tier 1 capital as a new regulatory capital component; |
| · | Increase the minimum tier 1 capital ratio requirement; |
| · | Create a capital conservation buffer that would limit payment of capital distributions and certain discretionary bonus payments to executive officers if the institution does not hold enough common equity tier 1 capital; |
| · | Provide for a transition period for several aspects of the rule; and |
| · | Incorporate the new and revised regulatory capital requirements into the Prompt Corrective Action rules. |
Summary of proposed rules for risk-weighted assets
The proposal would expand the number of risk-weighted categories and increase the required capital for certain categories of assets, including higher-risk residential mortgages and higher-risk construction real estate loans. In addition, the rule would:
| · | revise risk weights for residential mortgages based on LTV ratios and certain loan characteristics, assigning risk weights between 35% and 200%; |
| · | increase capital requirements for past-due loans from 100% to 150% and set the risk weight for high volatility commercial real estate loans at 150%; and |
| · | revise the risk-weighted percentage for unused commitments with an original maturity of one year or less from 0% to 20% unless the commitment is unconditionally cancelable by the bank. |
The risk-weighted asset rule will apply to all U.S. banks and savings banks and almost all of their holding companies, although smaller, “non-complex” banking organizations will not need to comply with some of the rule’s requirements. The Company is in the process of assessing the impact of these proposed changes on the regulatory ratios of the Company and the Bank and on the capital, operations, liquidity and earnings of the Company and Bank.
Dodd-Frank Wall Street Reform and Consumer Protection Act. In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) became law. Dodd-Frank is intended to effect a fundamental restructuring of federal banking regulation. Among other things, Dodd-Frank creates a new Financial Stability Oversight Council to identify systemic risks in the financial system and gives federal regulators new authority to take control of and liquidate financial firms. Dodd-Frank additionally creates a new independent federal regulator to administer federal consumer protection laws. Dodd-Frank is expected to have a significant impact on our business operations as its provisions take effect. It is difficult to predict at this time what specific impact Dodd-Frank and the yet to be written implementing rules and regulations will have on community banks. However,Overtime, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense. Among the provisions that are likely to affect us and the community banking industry are the following:
Holding Company Capital Requirements. Dodd-Frank requires the Federal Reserve to apply consolidated capital requirements to bank holding companies that are no less stringent than those currently applied to depository institutions. Under these standards, pooled trust preferred securities will be excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by a bank holding company with less than $15 billion in assets. Dodd-Frank additionally requires that bank regulators issue countercyclical capital requirements so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness.
Deposit Insurance.Dodd-Frank permanently increases the maximum deposit insurance amount for banks, savings institutions and credit unions to $250,000 per depositor, and extended unlimited deposit insurance to non-interest bearing transaction accounts through December 31, 2012. Dodd-Frank also broadens the base for FDIC insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution. Dodd-Frank requires the FDIC to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by 2020 and eliminates the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds. Dodd-Frank also eliminated the federal statutory prohibition against the payment of interest on business checking accounts.
Corporate Governance. Dodd-Frank requires publicly traded companies to give shareholders a non-binding vote on executive compensation at least every three years, a non-binding vote regarding the frequency of the vote on executive compensation at least every six years, and a non-binding vote on “golden parachute” payments in connection with approvals of mergers and acquisitions unless previously voted on by shareholders. The SEC has finalized the rules implementing these requirements. Additionally, Dodd-Frank directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the company is publicly traded. Dodd-Frank also gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.
Prohibition Against Charter Conversions of Troubled Institutions. Dodd-Frank prohibits a depository institution from converting from a state to federal charter or vice versa while it is the subject of a cease and desist order or other formal enforcement action or a memorandum of understanding with respect to a significant supervisory matter unless the appropriate federal banking agency gives notice of the conversion to the federal or state authority that issued the enforcement action and that agency does not object within 30 days. The notice must include a plan to address the significant supervisory matter. The converting institution must also file a copy of the conversion application with its current federal regulator which must notify the resulting federalregulatorfederalregulator of any ongoing supervisory or investigative proceedings that are likely to result in an enforcement action and provide access to all supervisory and investigative information relating thereto.
Interstate Branching. Dodd-Frank authorizes national and state banks to establish branches in other states to the same extent as a bank chartered by that state would be permitted. Previously, banks could only establish branches in other states if the host state expressly permitted out-of-state banks to establish branches in that state. Accordingly, banks will be able to enter new markets more freely.
Limits on Interstate Acquisitions and Mergers.Dodd-Frank precludes a bank holding company from engaging in an interstate acquisition – the acquisition of a bank outside its home state – unless the bank holding company is both well capitalized and well managed. Furthermore, a bank may not engage in an interstate merger with another bank headquartered in another state unless the surviving institution will be well capitalized and well managed. The previous standard in both cases was adequately capitalized and adequately managed.
Limits on Interchange Fees. Dodd-Frank amends the Electronic Fund Transfer Act to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer. The interchange rules became effective on October 1, 2011.
Consumer Financial Protection Bureau. Dodd-Frank creates a new, independent federal agency called the Consumer Financial Protection Bureau (CFPB), which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. The CFPB will havehas examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions are subject to rules promulgated by the CFPB but will continue to be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. Dodd-Frank authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower’s ability to repay. In addition, Dodd-Frank will allow borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB. Dodd-Frank permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations. In summary, the Dodd-Frank Act provides for sweeping financial regulatory reform and may have the effect of increasing the cost of doing business, limiting or expanding permissible activities and affect the competitive balance between banks and other financial intermediaries. While many of the provisions of the Dodd-Frank Act do not impact the existing business of the Company, the extension of FDIC insurance to all non-interest bearing deposit accounts and the repeal of prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts, will likely increase deposit funding costs paid by the Company in order to retain and grow deposits. In addition, the limitations imposed on the assessment of interchange fees have reduced the Company’s ability to set revenue pricing on debit and credit card transactions. Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry as a whole. The Company will continue to monitor legislative developments and assess their potential impact on our business.
Table Of Contents Future Federal and State Legislation and Rulemaking From time-to-time, various types of federal and state legislation have been proposed that could result in additional regulations and restrictions on the business of the Company and the Bank. We cannot predict whether legislation will be adopted, or if adopted, how the new laws would affect our business. As a consequence, we are susceptible to legislation that may increase the cost of doing business. Management believes that the effect of any current legislative proposals on the liquidity, capital resources and the results of operations of the Company and the Bank will be minimal. It is possible that there will be regulatory proposals which, if implemented, could have a material effect upon our liquidity, capital resources and results of operations. In addition, the general cost of compliance with numerous federal and state laws does have, and in the future may have, a negative impact on our results of operations. As with other banks, the status of the financial services industry can affect the Bank. Consolidations of institutions are expected to continue as the financial services industry seeks greater efficiencies and market share. Bank management believes that such consolidations may enhance the Bank’s competitive position as a community bank.
Future Outlook Economic growth remains questionable, unemployment remains elevatedThe Company is highly impacted by local economic factors that could influence the performance and home valuesstrength of our loan portfolios. Though the national economy is improving, the local operating environment continues to be challenging. Though short-term interest rates have been at or near historic lows, we expect them to continue to remain soft. Withslowly rise in 2016. Today, long-term rates are at levels below those observed at year-end 2013. During 2016, the flattening of the U.S. Treasury yield curve remainingappears to be more probable, further pressuring earning spreads. Though the interest rate curve is positively sloped, these two factors pressure interest-rate margin. The national prime rate has held steady at 3.25% for seven years and had finally been increased during December 2015. The employment statistics in our region have improved in the fourth quarter of 2015 with the local unemployment rate falling to pre-recession levels. In our region, softness persists in the residential housing market with the median home value 0.5% lower than the end of 2014 and competition for business and retail loans and deposits is fierce. We believe market conditions are slowly improving but relatively lowwe will continue to monitor the economic climate in our region, scrutinize growth prospects and interest rates expectedproactively observe existing credits for early warning signs of risk deterioration.
In addition to remain at historic low levels over the near-term,challenging economic environment, regulatory oversight has changed significantly in recent years. As described in more detail in the operating environment for financial institutions will remain challenging. “supervision and regulation” section above, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. The rules revise the quantity and quality of required minimum risk-based and leverage capital requirements and revise the calculation of risk-weighted assets. The Company is prepared to face the challenges ahead. Further improvement in asset quality will concentrate oncontinue and will stabilize. Our conservative approach to loan underwriting will help improve and keep non-performing asset levels at bay. The Company expects to overcome the relative flattening of the positively sloped yield curve by cautiously growing the loan portfolio while increasing low-costing core deposits by expandingbalance sheet to enhance financial performance. We will grow all lending portfolios in both the business and deepening relationships, particularly through theretail sectors using growth in commercial banking relationships. This will include growth in businessmarket-place low costing deposits that offer increased opportunities to extend our company’s brand to our business community that ultimately will broaden avenues for future profitability. In addition, the positive effect of our efforts in improving asset quality, shoring up capital and exploring alternative revenue generating initiatives should help mitigate the negative impact of the low interest rate environment and allow us to managestabilize net interest margin at acceptable levels in 2013 and beyond.to enhance revenue performance.
ItemITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by 7A is set forth at Item 7, under “Liquidity” and “Management of interest rate risk and market risk analysis,” contained within management’s discussion and analysis of financial condition and results of operations and incorporated herein by reference.
ItemITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders Fidelity D & D Bancorp, Inc.: We have audited the accompanying consolidated balance sheetsConsolidated Balance Sheet of Fidelity D & D Bancorp, Inc. and Subsidiary (the Company) as of December 31, 2012 and 20112015 and the related consolidated statementsStatements of income, comprehensive income, changesIncome, Comprehensive Income, Changes in shareholders’ equityShareholders’ Equity and cash flowsCash Flows for each of the years in the three-year period ended December 31, 2012.year then ended. These financial statementsConsolidated Financial Statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.audit. We conducted our auditsaudit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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 Fidelity D & D Bancorp, Inc. and Subsidiary as of December 31, 2015, and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles. /s/ RSM US LLP Blue Bell, Pennsylvania March 15, 2016
Report of Independent Registered Public Accounting Firm Board of Directors and Shareholders Fidelity D & D Bancorp, Inc.: We have audited the accompanying consolidated balance sheet of Fidelity D & D Bancorp, Inc. and Subsidiary (the "Company") as of December 31, 2014 and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated 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 Fidelity D & D Bancorp, Inc. and Subsidiary as of December 31, 2012 and 2011,2014, and the results of theirits operations and theirits cash flows for each of the years in the three-yeartwo-year period ended December 31, 20122014, in conformity with accounting principles generally accepted in the United States of America. /s/ ParenteBeard LLC | | ParenteBeard LLC | | Wilkes-Barre, Pennsylvania | | March 26, 2013 | |
/s/ Baker Tilly Virchow Krause, LLP Wilkes-Barre, Pennsylvania March 17, 2015
Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
| | | As of December 31, | | | (dollars in thousands) | | 2012 | | | 2011 | | | | | | | | | | | Assets: | | | | | | | | | | Cash and due from banks | | $ | 12,657 | | | $ | 15,158 | | | Interest-bearing deposits with financial institutions | | | 9,189 | | | | 37,007 | | | | | | | | | | | | | Total cash and cash equivalents | | | 21,846 | | | | 52,165 | | | | | | | | | | | | | Available-for-sale securities | | | 100,441 | | | | 108,154 | | | Held-to-maturity securities | | | 289 | | | | 389 | | | Federal Home Loan Bank stock | | | 2,624 | | | | 3,699 | | | Loans, net (allowance for loan losses of $8,972 in 2012; $8,108 in 2011) | | | 424,584 | | | | 398,186 | | | Loans held-for-sale (fair value $10,824 in 2012, $4,661 in 2011) | | | 10,545 | | | | 4,537 | | | Foreclosed assets held-for-sale | | | 1,607 | | | | 1,169 | | | Bank premises and equipment, net | | | 14,127 | | | | 13,575 | | | Cash surrender value of bank owned life insurance | | | 10,065 | | | | 9,740 | | | Accrued interest receivable | | | 1,985 | | | | 2,082 | | | Other assets | | | 13,412 | | | | 13,046 | | | | | | | | | | | | | Total assets | | $ | 601,525 | | | $ | 606,742 | | | | | | | | | | | | | Liabilities: | | | | | | | | | | Deposits: | | | | | | | | | | Interest-bearing | | $ | 388,625 | | | $ | 419,647 | | | Non-interest-bearing | | | 126,035 | | | | 96,155 | | | | | | | | | | | | | Total deposits | | | 514,660 | | | | 515,802 | | | | | | | | | | | | | Accrued interest payable and other liabilities | | | 3,863 | | | | 6,809 | | | Short-term borrowings | | | 8,056 | | | | 9,507 | | | Long-term debt | | | 16,000 | | | | 21,000 | | | | | | | | | | | | | Total liabilities | | | 542,579 | | | | 553,118 | | | | | | | | | | | | | Shareholders' equity: | | | | | | | | | | Preferred stock authorized 5,000,000 shares with no par value; none issued | | | - | | | | - | | | Capital stock, no par value (10,000,000 shares authorized; shares issued and outstanding; 2,323,248 in 2012; and 2,254,542 in 2011) | | | 23,711 | | | | 22,354 | | | Retained earnings | | | 34,999 | | | | 32,380 | | | Accumulated other comprehensive income (loss) | | | 236 | | | | (1,110 | ) | | | | | | | | | | | | Total shareholders' equity | | | 58,946 | | | | 53,624 | | | | | | | | | | | | | Total liabilities and shareholders' equity | | $ | 601,525 | | | $ | 606,742 | |
See notes to consolidated financial statements
| | | | | | | Fidelity D & D Bancorp, Inc. and Subsidiary | | | | | | | Consolidated Balance Sheets | | | | | | | | | | As of December 31, | (dollars in thousands) | | 2015 | | 2014 | Assets: | | | | | | | Cash and due from banks | | $ | 12,259 | | $ | 11,808 | Interest-bearing deposits with financial institutions | | | 18 | | | 14,043 | Total cash and cash equivalents | | | 12,277 | | | 25,851 | Available-for-sale securities | | | 125,232 | | | 97,896 | Federal Home Loan Bank stock | | | 2,120 | | | 1,306 | Loans and leases, net (allowance for loan losses of | | | | | | | $9,527 in 2015; $9,173 in 2014) | | | 546,682 | | | 506,327 | Loans held-for-sale (fair value $1,444 in 2015, $1,186 in 2014) | | | 1,421 | | | 1,161 | Foreclosed assets held-for-sale | | | 1,074 | | | 1,972 | Bank premises and equipment, net | | | 16,723 | | | 14,846 | Cash surrender value of bank owned life insurance | | | 11,082 | | | 10,741 | Accrued interest receivable | | | 2,210 | | | 2,086 | Other assets | | | 10,537 | | | 14,299 | Total assets | | $ | 729,358 | | $ | 676,485 | Liabilities: | | | | | | | Deposits: | | | | | | | Interest-bearing | | $ | 477,901 | | $ | 457,574 | Non-interest-bearing | | | 142,774 | | | 129,370 | Total deposits | | | 620,675 | | | 586,944 | Accrued interest payable and other liabilities | | | 4,128 | | | 3,353 | Short-term borrowings | | | 28,204 | | | 3,969 | Long-term debt | | | - | | | 10,000 | Total liabilities | | | 653,007 | | | 604,266 | Shareholders' equity: | | | | | | | Preferred stock authorized 5,000,000 shares with no par value; none issued | | | - | | | - | Capital stock, no par value (10,000,000 shares authorized; shares issued and outstanding; 2,443,405 in 2015; and 2,427,767 in 2014) | | | 26,700 | | | 26,272 | Retained earnings | | | 47,463 | | | 43,204 | Accumulated other comprehensive income | | | 2,188 | | | 2,743 | Total shareholders' equity | | | 76,351 | | | 72,219 | Total liabilities and shareholders' equity | | $ | 729,358 | | $ | 676,485 | | | | | | | | See notes to consolidated financial statements | | | | | | |
| | | | | | | | | | Fidelity D & D Bancorp, Inc. and Subsidiary | | | | | | | | | | Consolidated Statements of Income | | | | | | | | | | | | | | | | (dollars in thousands except per share data) | | 2015 | | 2014 | | 2013 | Interest income: | | | | | | | | | | Loans and leases: | | | | | | | | | | Taxable | | $ | 22,710 | | $ | 21,799 | | $ | 21,344 | Nontaxable | | | 654 | | | 538 | | | 474 | Interest-bearing deposits with financial institutions | | | 26 | | | 26 | | | 22 | Investment securities: | | | | | | | | | | U.S. government agency and corporations | | | 1,180 | | | 1,088 | | | 732 | States and political subdivisions (nontaxable) | | | 1,301 | | | 1,280 | | | 1,197 | Other securities | | | 143 | | | 112 | | | 83 | Federal funds sold | | | - | | | 1 | | | 1 | Total interest income | | | 26,014 | | | 24,844 | | | 23,853 | Interest expense: | | | | | | | | | | Deposits | | | 2,236 | | | 2,036 | | | 2,081 | Securities sold under repurchase agreements | | | 18 | | | 21 | | | 22 | Other short-term borrowings and other | | | 20 | | | 8 | | | 12 | Long-term debt | | | 255 | | | 852 | | | 853 | Total interest expense | | | 2,529 | | | 2,917 | | | 2,968 | Net interest income | | | 23,485 | | | 21,927 | | | 20,885 | Provision for loan losses | | | 1,075 | | | 1,060 | | | 2,550 | Net interest income after provision for loan losses | | | 22,410 | | | 20,867 | | | 18,335 | Other income: | | | | | | | | | | Service charges on deposit accounts | | | 1,688 | | | 1,778 | | | 1,863 | Interchange fees | | | 1,375 | | | 1,324 | | | 1,222 | Fees from trust fiduciary activities | | | 739 | | | 674 | | | 630 | Fees from financial services | | | 504 | | | 545 | | | 558 | Service charges on loans | | | 809 | | | 750 | | | 899 | Fees and other revenue | | | 832 | | | 741 | | | 472 | Earnings on bank-owned life insurance | | | 342 | | | 339 | | | 337 | Gain (loss) on sale or disposal of: | | | | | | | | | | Loans | | | 1,191 | | | 645 | | | 1,402 | Investment securities | | | 80 | | | 599 | | | 3,168 | Premises and equipment | | | (27) | | | (41) | | | (10) | Total other income | | | 7,533 | | | 7,354 | | | 10,541 | Other expenses: | | | | | | | | | | Salaries and employee benefits | | | 10,476 | | | 9,877 | | | 9,363 | Premises and equipment | | | 3,590 | | | 3,501 | | | 3,352 | Advertising and marketing | | | 1,482 | | | 1,279 | | | 1,223 | Professional services | | | 1,631 | | | 1,368 | | | 1,303 | FDIC assessment | | | 397 | | | 358 | | | 464 | Loan collection | | | 160 | | | 224 | | | 514 | Other real estate owned | | | 205 | | | 344 | | | 603 | Office supplies and postage | | | 434 | | | 461 | | | 461 | Automated transaction processing | | | 615 | | | 627 | | | 590 | FHLB prepayment fee | | | 570 | | | 457 | | | - | Data processing and communication | | | 582 | | | 402 | | | 378 | Other | | | 880 | | | 805 | | | 868 | Total other expenses | | | 21,022 | | | 19,703 | | | 19,119 | Income before income taxes | | | 8,921 | | | 8,518 | | | 9,757 | Provision for income taxes | | | 1,818 | | | 2,166 | | | 2,635 | Net income | | $ | 7,103 | | $ | 6,352 | | $ | 7,122 | Per share data: | | | | | | | | | | Net income - basic | | $ | 2.91 | | $ | 2.63 | | $ | 3.03 | Net income - diluted | | $ | 2.90 | | $ | 2.62 | | $ | 3.02 | Dividends | | $ | 1.16 | | $ | 1.10 | | $ | 1.10 | | | | | | | | | | | See notes to consolidated financial statements | | | | | | | | | |
Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
(dollars in thousands except per share data)53
Table Of Contents | | | Years ended December 31, | | | | | 2012 | | | 2011 | | | 2010 | | | | | | | | | | | | | | Interest income: | | | | | | | | | | | | | | Loans: | | | | | | | | | | | | | | Taxable | | $ | 21,237 | | | $ | 22,420 | | | $ | 23,997 | | | Nontaxable | | | 462 | | | | 486 | | | | 612 | | | Interest-bearing deposits with financial institutions | | | 65 | | | | 101 | | | | 65 | | | Investment securities: | | | | | | | | | | | | | | U.S. government agency and corporations | | | 944 | | | | 1,328 | | | | 1,642 | | | States and political subdivisions (nontaxable) | | | 1,212 | | | | 1,203 | | | | 1,039 | | | Other securities | | | 73 | | | | 64 | | | | 211 | | | Federal funds sold | | | 1 | | | | 1 | | | | 14 | | | | | | | | | | | | | | | | | Total interest income | | | 23,994 | | | | 25,603 | | | | 27,580 | | | | | | | | | | | | | | | | | Interest expense: | | | | | | | | | | | | | | Deposits | | | 2,439 | | | | 3,672 | | | | 5,078 | | | Securities sold under repurchase agreements | | | 32 | | | | 52 | | | | 89 | | | Other short-term borrowings and other | | | 1 | | | | 1 | | | | 2 | | | Long-term debt | | | 882 | | | | 1,036 | | | | 1,658 | | | | | | | | | | | | | | | | | Total interest expense | | | 3,354 | | | | 4,761 | | | | 6,827 | | | | | | | | | | | | | | | | | Net interest income | | | 20,640 | | | | 20,842 | | | | 20,753 | | | | | | | | | | | | | | | | | Provision for loan losses | | | 3,250 | | | | 1,800 | | | | 2,085 | | | | | | | | | | | | | | | | | Net interest income after provision for loan losses | | | 17,390 | | | | 19,042 | | | | 18,668 | | | | | | | | | | | | | | | | | Other income (loss): | | | | | | | | | | | | | | Service charges on deposit accounts | | | 1,787 | | | | 1,777 | | | | 1,886 | | | Interchange fees | | | 1,090 | | | | 972 | | | | 815 | | | Fees from trust fiduciary activities | | | 611 | | | | 420 | | | | 348 | | | Fees from financial services | | | 519 | | | | 556 | | | | 343 | | | Service charges on loans | | | 1,022 | | | | 721 | | | | 710 | | | Fees and other revenue | | | 374 | | | | 337 | | | | 309 | | | Earnings on bank-owned life insurance | | | 325 | | | | 315 | | | | 308 | | | Gain (loss) on sale, recovery, or disposal of: | | | | | | | | | | | | | | Loans | | | 1,766 | | | | 799 | | | | 798 | | | Investment securities | | | 328 | | | | 63 | | | | 2 | | | Premises and equipment | | | (17 | ) | | | (2 | ) | | | (24 | ) | | Foreclosed assets held-for-sale | | | (74 | ) | | | 46 | | | | 58 | | | Write-down of foreclosed assets held-for-sale | | | (86 | ) | | | (66 | ) | | | (129 | ) | | Impairment losses on investment securities: | | | | | | | | | | | | | | Other-than-temporary impairment on investment securities | | | (259 | ) | | | (519 | ) | | | (15,375 | ) | | Non-credit-related losses on investment securities not expected to be sold (recognized in other comprehensive income (loss)) | | | 123 | | | | 273 | | | | 3,539 | | | Net impairment losses on investment securities recognized in earnings | | | (136 | ) | | | (246 | ) | | | (11,836 | ) | | Total other income (loss) | | | 7,509 | | | | 5,692 | | | | (6,412 | ) | | | | | | | | | | | | | | | | Other expenses: | | | | | | | | | | | | | | Salaries and employee benefits | | | 9,104 | | | | 8,786 | | | | 9,001 | | | Premises and equipment | | | 3,448 | | | | 3,633 | | | | 3,427 | | | Advertising and marketing | | | 1,179 | | | | 1,003 | | | | 1,124 | | | Professional services | | | 1,305 | | | | 1,289 | | | | 1,168 | | | FDIC assessment | | | 505 | | | | 617 | | | | 859 | | | Loan collection | | | 609 | | | | 610 | | | | 498 | | | Other real estate owned | | | 170 | | | | 107 | | | | 147 | | | Office supplies and postage | | | 429 | | | | 426 | | | | 433 | | | Other | | | 1,689 | | | | 1,573 | | | | 1,360 | | | | | | | | | | | | | | | | | Total other expenses | | | 18,438 | | | | 18,044 | | | | 18,017 | | | | | | | | | | | | | | | | | Income (loss) before income taxes | | | 6,461 | | | | 6,690 | | | | (5,761 | ) | | | | | | | | | | | | | | | | Provision (credit) for income taxes | | | 1,559 | | | | 1,645 | | | | (2,557 | ) | | | | | | | | | | | | | | | | Net income (loss) | | $ | 4,902 | | | $ | 5,045 | | | $ | (3,204 | ) | | | | | | | | | | | | | | | | Per share data: | | | | | | | | | | | | | | Net income (loss) - basic | | $ | 2.14 | | | $ | 2.28 | | | $ | (1.50 | ) | | Net income (loss) - diluted | | $ | 2.14 | | | $ | 2.28 | | | $ | (1.50 | ) | | Dividends | | $ | 1.00 | | | $ | 1.00 | | | $ | 1.00 | |
See notes to consolidated financial statements
| | | | | | | | | | | | | | | | | | | | Fidelity D & D Bancorp, Inc. and Subsidiary | | | | | | | | | | Consolidated Statements of Comprehensive Income | | | | | | | Years ended December 31, | (dollars in thousands) | | 2015 | | 2014 | | 2013 | | | | | | | | | | | Net income | | $ | 7,103 | | $ | 6,352 | | $ | 7,122 | | | | | | | | | | | Other comprehensive income (loss), before tax: | | | | | | | | | | Unrealized holding (loss) gain on available-for-sale securities | | | (761) | | | 2,878 | | | (946) | Reclassification adjustment for net gains realized in income | | | (80) | | | (599) | | | (63) | Net unrealized (loss) gain | | | (841) | | | 2,279 | | | (1,009) | Tax effect | | | 286 | | | (775) | | | 343 | Unrealized (loss) gain, net of tax | | | (555) | | | 1,504 | | | (666) | Non-credit-related impairment gain on investment securities not expected to be sold | | | - | | | - | | | 5,634 | Reclassification adjustment for net gains realized in income | | | - | | | - | | | (3,105) | Net non-credit-related impairment gain on investment securities | | | - | | | - | | | 2,529 | Tax effect | | | - | | | - | | | (860) | Non-credit-related impairment gain on investment securities, net of tax | | | - | | | - | | | 1,669 | Other comprehensive (loss) income, net of tax | | | (555) | | | 1,504 | | | 1,003 | Total comprehensive income, net of tax | | $ | 6,548 | | $ | 7,856 | | $ | 8,125 | | | | | | | | | | | See notes to consolidated financial statements | | | | | | | | | |
Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income54
Table Of Contents | | | Years ended December 31, | | | (dollars in thousands) | | 2012 | | | 2011 | | | 2010 | | | | | | | | | | | | | | Net income (loss) | | $ | 4,902 | | | $ | 5,045 | | | $ | (3,204 | ) | | | | | | | | | | | | | | | | Other comprehensive income, before tax: | | | | | | | | | | | | | | Unrealized holding gains on available-for-sale securities | | | 1,860 | | | | 3,872 | | | | 6,764 | | | Reclassification adjustment for gains realized in income | | | (328 | ) | | | (63 | ) | | | (2 | ) | | Net unrealized gains | | | 1,532 | | | | 3,809 | | | | 6,762 | | | Tax effect | | | (521 | ) | | | (1,295 | ) | | | (2,299 | ) | | Unrealized gains, net of tax | | | 1,011 | | | | 2,514 | | | | 4,463 | | | Non-credit-related impairment gains on investment securities not expected to be sold | | | 507 | | | | 292 | | | | 1,385 | | | Tax effect | | | (172 | ) | | | (99 | ) | | | (471 | ) | | Net non-credit-related impairment gains on investment securities | | | 335 | | | | 193 | | | | 914 | | | Other comprehensive income, net of tax | | | 1,346 | | | | 2,707 | | | | 5,377 | | | Total comprehensive income, net of tax | | $ | 6,248 | | | $ | 7,752 | | | $ | 2,173 | |
See notes to consolidated financial statements
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fidelity D & D Bancorp, Inc. and Subsidiary | | | | | | | | | | | | | Consolidated Statements of Changes in Shareholders' Equity | | | | | | | | | | | | | Years ended December 31, 2015, 2014 and 2013 | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | other | | | | | Capital stock | | Retained | | comprehensive | | | | (dollars in thousands) | Shares | | Amount | | earnings | | income | | Total | Balance, December 31, 2012 | | 2,323,248 | | $ | 23,711 | | $ | 34,999 | | $ | 236 | | $ | 58,946 | Net income | | | | | | | | 7,122 | | | | | | 7,122 | Other comprehensive income | | | | | | | | | | | 1,003 | | | 1,003 | Issuance of common stock through Employee Stock Purchase Plan | | 4,256 | | | 78 | | | | | | | | | 78 | Issuance of common stock through Dividend Reinvestment Plan | | 63,979 | | | 1,401 | | | | | | | | | 1,401 | Issuance of common stock from vested restricted share grants through stock compensation plans | | 134 | | | | | | | | | | | | | Stock-based compensation expense | | | | | 112 | | | | | | | | | 112 | Cash dividends declared | | | | | | | | (2,602) | | | | | | (2,602) | Balance, December 31, 2013 | | 2,391,617 | | $ | 25,302 | | $ | 39,519 | | $ | 1,239 | | $ | 66,060 | Net income | | | | | | | | 6,352 | | | | | | 6,352 | Other comprehensive income | | | | | | | | | | | 1,504 | | | 1,504 | Issuance of common stock through Employee Stock Purchase Plan | | 4,373 | | | 80 | | | | | | | | | 80 | Issuance of common stock through Dividend Reinvestment Plan | | 26,527 | | | 683 | | | | | | | | | 683 | Issuance of common stock from vested restricted share grants through stock compensation plans | | 5,250 | | | | | | | | | | | | | Stock-based compensation expense | | | | | 207 | | | | | | | | | 207 | Cash dividends declared | | | | | | | | (2,667) | | | | | | (2,667) | Balance, December 31, 2014 | | 2,427,767 | | $ | 26,272 | | $ | 43,204 | | $ | 2,743 | | $ | 72,219 | Net income | | | | | | | | 7,103 | | | | | | 7,103 | Other comprehensive loss | | | | | | | | | | | (555) | | | (555) | Issuance of common stock through Employee Stock Purchase Plan | | 4,358 | | | 102 | | | | | | | | | 102 | Issuance of common stock from vested restricted share grants through stock compensation plans | | 7,780 | | | | | | | | | | | | | Issuance of common stock through exercise of stock options | | 3,500 | | | 101 | | | | | | | | | 101 | Stock-based compensation expense | | | | | 225 | | | | | | | | | 225 | Cash dividends declared | | | | | | | | (2,844) | | | | | | (2,844) | Balance, December 31, 2015 | | 2,443,405 | | $ | 26,700 | | $ | 47,463 | | $ | 2,188 | | $ | 76,351 | | | | | | | | | | | | | | | | See notes to consolidated financial statements | | | | | | | | | | | | |
Fidelity D & D Bancorp, Inc. and Subsidiary | Consolidated Statements of Changes in Shareholders' Equity | Years ended December 31, 2012, 2011 and 2010 |
| | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | other | | | | | | | | Capital stock | | | Retained | | | comprehensive | | | | | | (dollars in thousands) | | Shares | | | Amount | | | earnings | | | income (loss) | | | Total | | | Balance, December 31, 2009 | | | 2,105,860 | | | $ | 19,983 | | | $ | 34,886 | | | $ | (9,194 | ) | | $ | 45,675 | | | Net loss | | | | | | | | | | | (3,204 | ) | | | | | | | (3,204 | ) | | Other comprehensive income | | | | | | | | | | | | | | | 5,377 | | | | 5,377 | | | Issuance of common stock through Employee Stock Purchase Plan | | | 4,754 | | | | 67 | | | | | | | | | | | | 67 | | | Issuance of common stock through Dividend Reinvestment Plan | | | 67,414 | | | | 989 | | | | | | | | | | | | 989 | | | Stock-based compensation expense | | | | | | | 7 | | | | | | | | | | | | 7 | | | Cash dividends declared | | | | | | | | | | | (2,137 | ) | | | | | | | (2,137 | ) | | Balance, December 31, 2010 | | | 2,178,028 | | | $ | 21,046 | | | $ | 29,545 | | | $ | (3,817 | ) | | $ | 46,774 | | | Net income | | | | | | | | | | | 5,045 | | | | | | | | 5,045 | | | Other comprehensive income | | | | | | | | | | | | | | | 2,707 | | | | 2,707 | | | Issuance of common stock through Employee Stock Purchase Plan | | | 4,801 | | | | 67 | | | | | | | | | | | | 67 | | | Issuance of common stock through Dividend Reinvestment Plan | | | 71,713 | | | | 1,217 | | | | | | | | | | | | 1,217 | | | Stock-based compensation expense | | | | | | | 24 | | | | | | | | | | | | 24 | | | Cash dividends declared | | | | | | | | | | | (2,210 | ) | | | | | | | (2,210 | ) | | Balance, December 31, 2011 | | | 2,254,542 | | | $ | 22,354 | | | $ | 32,380 | | | $ | (1,110 | ) | | $ | 53,624 | | | Net income | | | | | | | | | | | 4,902 | | | | | | | | 4,902 | | | Other comprehensive income | | | | | | | | | | | | | | | 1,346 | | | | 1,346 | | | Issuance of common stock through Employee Stock Purchase Plan | | | 3,874 | | | | 67 | | | | | | | | | | | | 67 | | | Issuance of common stock through Dividend Reinvestment Plan | | | 64,832 | | | | 1,275 | | | | | | | | | | | | 1,275 | | | Stock-based compensation expense | | | | | | | 15 | | | | | | | | | | | | 15 | | | Cash dividends declared | | | | | | | | | | | (2,283 | ) | | | | | | | (2,283 | ) | | Balance, December 31, 2012 | | | 2,323,248 | | | $ | 23,711 | | | $ | 34,999 | | | $ | 236 | | | $ | 58,946 | |
See notes to consolidated financial statements
| | | | | | | | | | | | | | | | | | | | Fidelity D & D Bancorp, Inc. and Subsidiary | | | | | | | | | | Consolidated Statements of Cash Flows | | | | | | | | | | | | Years ended December 31, | (dollars in thousands) | | 2015 | | 2014 | | 2013 | | | | | | | | | | | Cash flows from operating activities: | | | | | | | | | | Net income | | $ | 7,103 | | $ | 6,352 | | $ | 7,122 | Adjustments to reconcile net income to net cash provided by | | | | | | | | | | operating activities: | | | | | | | | | | Depreciation, amortization and accretion | | | 3,566 | | | 3,137 | | | 3,323 | Provision for loan losses | | | 1,075 | | | 1,060 | | | 2,550 | Deferred income tax expense | | | 1,645 | | | 156 | | | 6,166 | Stock-based compensation expense | | | 225 | | | 207 | | | 112 | Proceeds from sale of loans held-for-sale | | | 48,356 | | | 35,248 | | | 83,928 | Originations of loans held-for-sale | | | (46,131) | | | (35,058) | | | (70,436) | Earnings from bank-owned life insurance | | | (342) | | | (339) | | | (337) | Net gain from sales of loans | | | (1,191) | | | (645) | | | (1,402) | Net gain from sales of investment securities | | | (80) | | | (599) | | | (2,979) | Net loss from sale and write-down of foreclosed assets held-for-sale | | | 45 | | | 103 | | | 418 | Net loss from disposal of equipment | | | 27 | | | 42 | | | 10 | Change in: | | | | | | | | | | Accrued interest receivable | | | (124) | | | (17) | | | (89) | Other assets | | | 776 | | | (1,677) | | | (4,928) | Accrued interest payable and other liabilities | | | 775 | | | (72) | | | (398) | Net cash provided by operating activities | | | 15,725 | | | 7,898 | | | 23,060 | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | Held-to-maturity securities: | | | | | | | | | | Proceeds from sales | | | - | | | 187 | | | - | Proceeds from maturities, calls and principal pay-downs | | | - | | | 3 | | | 112 | Available-for-sale securities: | | | | | | | | | | Proceeds from sales | | | 15,431 | | | 20,939 | | | 17,651 | Proceeds from maturities, calls and principal pay-downs | | | 20,233 | | | 13,611 | | | 25,684 | Purchases | | | (65,421) | | | (33,639) | | | (37,109) | (Increase) decrease in FHLB stock | | | (814) | | | 1,334 | | | (16) | Net increase in loans and leases | | | (43,885) | | | (40,547) | | | (52,956) | Acquisition of bank premises and equipment | | | (1,596) | | | (2,970) | | | (1,038) | Proceeds from sale of bank premises and equipment | | | 52 | | | - | | | - | Proceeds from sale of foreclosed assets held-for-sale | | | 1,376 | | | 1,149 | | | 1,483 | Net cash used in investing activities | | | (74,624) | | | (39,933) | | | (46,189) | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | Net increase in deposits | | | 33,731 | | | 57,245 | | | 15,038 | Net increase (decrease) in short-term borrowings | | | 24,235 | | | (4,673) | | | 586 | Repayment of long-term debt | | | (10,000) | | | (6,000) | | | - | Proceeds from employee stock purchase plan participants | | | 102 | | | 80 | | | 78 | Exercise of stock options | | | 101 | | | - | | | - | Dividends paid, net of dividends reinvested | | | (2,844) | | | (2,088) | | | (1,596) | Proceeds from dividend reinvestment plan participants | | | - | | | 104 | | | 395 | Net cash provided by financing activities | | | 45,325 | | | 44,668 | | | 14,501 | Net (decrease) increase in cash and cash equivalents | | | (13,574) | | | 12,633 | | | (8,628) | Cash and cash equivalents, beginning | | | 25,851 | | | 13,218 | | | 21,846 | | | | | | | | | | | Cash and cash equivalents, ending | | $ | 12,277 | | $ | 25,851 | | $ | 13,218 | | | | | | | | | | | See notes to consolidated financial statements | | | | | | | | | |
Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows56
Table Of Contents | | | Years ended December 31, | | | (dollars in thousands) | | 2012 | | | 2011 | | | 2010 | | | | | | | | | | | | | | Cash flows from operating activities: | | | | | | | | | | | | | | Net income (loss) | | $ | 4,902 | | | $ | 5,045 | | | $ | (3,204 | ) | | Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | | | | | Depreciation, amortization and accretion | | | 3,473 | | | | 3,242 | | | | 2,327 | | | Provision for loan losses | | | 3,250 | | | | 1,800 | | | | 2,085 | | | Deferred income tax benefit | | | (452 | ) | | | (115 | ) | | | (4,123 | ) | | Stock-based compensation expense | | | 15 | | | | 24 | | | | 7 | | | Proceeds from sale of loans held-for-sale | | | 83,766 | | | | 46,359 | | | | 61,566 | | | Originations of loans held-for-sale | | | (85,293 | ) | | | (45,096 | ) | | | (55,928 | ) | | Write-down of foreclosed assets held-for-sale | | | 86 | | | | 66 | | | | 129 | | | Earnings on bank-owned life insurance | | | (325 | ) | | | (315 | ) | | | (308 | ) | | Net gain from sales of loans | | | (1,766 | ) | | | (799 | ) | | | (798 | ) | | Net gain from sales of investment securities | | | (251 | ) | | | (49 | ) | | | (2 | ) | | Net loss (gain) from sales of foreclosed assets held-for-sale | | | 74 | | | | (46 | ) | | | (58 | ) | | Loss on disposal of equipment | | | 17 | | | | 2 | | | | 24 | | | Other-than-temporary impairment on securities | | | 136 | | | | 246 | | | | 11,836 | | | Change in: | | | | | | | | | | | | | | Accrued interest receivable | | | 69 | | | | 130 | | | | (73 | ) | | Other assets | | | (297 | ) | | | 591 | | | | 784 | | | Accrued interest payable and other liabilities | | | (2,860 | ) | | | 3,996 | | | | 125 | | | | | | | | | | | | | | | | | Net cash provided by operating activities | | | 4,544 | | | | 15,081 | | | | 14,389 | | | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | | Held-to-maturity securities: | | | | | | | | | | | | | | Proceeds from maturities, calls and principal pay-downs | | | 100 | | | | 101 | | | | 218 | | | Available-for-sale securities: | | | | | | | | | | | | | | Proceeds from sales | | | 3,571 | | | | 2,757 | | | | 153 | | | Proceeds from maturities, calls and principal pay-downs | | | 32,542 | | | | 30,722 | | | | 40,563 | | | Purchases | | | (27,751 | ) | | | (55,964 | ) | | | (51,703 | ) | | Decrease in FHLB stock | | | 1,076 | | | | 843 | | | | 239 | | | Net (increase) decrease in loans | | | (34,955 | ) | | | 1,798 | | | | 7,701 | | | Acquisition of bank premises and equipment | | | (1,979 | ) | | | (418 | ) | | | (880 | ) | | Proceeds from sale of foreclosed assets held-for-sale | | | 1,067 | | | | 891 | | | | 571 | | | | | | | | | | | | | | | | | Net cash used by investing activities | | | (26,329 | ) | | | (19,270 | ) | | | (3,138 | ) | | | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | | Net (decrease) increase in deposits | | | (1,142 | ) | | | 33,354 | | | | 23,454 | | | Net (decrease) increase in short-term borrowings | | | (1,452 | ) | | | 959 | | | | (7,985 | ) | | Repayments of long-term debt | | | (5,000 | ) | | | - | | | | (11,000 | ) | | Proceeds from employee stock purchase plan participants | | | 67 | | | | 67 | | | | 67 | | | Dividends paid, net of dividends reinvested | | | (1,493 | ) | | | (1,478 | ) | | | (1,453 | ) | | Proceeds from dividend reinvestment plan participants | | | 486 | | | | 485 | | | | 305 | | | | | | | | | | | | | | | | | Net cash (used in) provided by financing activities | | | (8,534 | ) | | | 33,387 | | | | 3,388 | | | | | | | | | | | | | | | | | Net (decrease) increase in cash and cash equivalents | | | (30,319 | ) | | | 29,198 | | | | 14,639 | | | | | | | | | | | | | | | | | Cash and cash equivalents, beginning | | | 52,165 | | | | 22,967 | | | | 8,328 | | | | | | | | | | | | | | | | | Cash and cash equivalents, ending | | $ | 21,846 | | | $ | 52,165 | | | $ | 22,967 | |
See notes to consolidated financial statements
FIDELITY D & D BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | 1.NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Fidelity D & D Bancorp, Inc. and its wholly-owned subsidiary, The Fidelity Deposit and Discount Bank (the Bank) (collectively, the Company). All significant inter-company balances and transactions have been eliminated in consolidation. NATURE OF OPERATIONS The Company provides a full range of banking, trust and financial services to individuals, small businesses and corporate customers. Its primary market areas are Lackawanna and Luzerne Counties, Pennsylvania. The Company's primary deposit products are demand deposits and interest-bearing time and savings accounts. It offers a full array of loan products to meet the needs of retail and commercial customers. The Company is subject to regulation by the Federal Deposit Insurance Corporation (FDIC) and the Pennsylvania Department of Banking. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, the valuation of investment securities, the determination and the amount of impairment in the securities portfolios and the related realization of the deferred tax assets related to the allowance for loan losses, other-than-temporary impairment on and valuations of investment securities. In connection with the determination of the allowance for loan losses, management generally obtains independent appraisals for significant properties. While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Company to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans may change materially in the near-term. However, the amount of the change that is reasonably possible cannot be estimated. The Company’s investment securities are comprised of a variety of financial instruments. The fair values of the securities are subject to various risks including changes in the interest rate environment and general economic conditions including illiquid conditions in the capital markets. Due to the increased level of these risks and their potential impact on the fair values of the securities, it is possible that the amounts reported in the accompanying financial statements could materially change in the near-term including changes caused by other-than-temporary impairment, the recovery of which may not occur until maturity. Credit-relatednear-term. Any credit-related impairment is included as a component of non-interest income in the consolidated income statements while non-credit-related impairment is charged to other comprehensive income, net of tax. SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK The Company originates commercial, consumer, and mortgage loans to customers primarily located in Lackawanna and Luzerne Counties of Pennsylvania. Although the Company has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent on the economic sector in which the Company operates. The loan portfolio does not have any significant concentrations from one industry or customer. HELD-TO-MATURITY SECURITIES Debt securities, for which the Company has the positive intent and ability to hold to maturity, are reported at cost. Premiums and discounts are amortized or accreted, as a component of interest income over the life of the related security as an adjustment to yield using the interest method. The Company did not have any held-to-maturity securities at December 31, 2015 or 2014. TRADING SECURITIES Debt and equity securities held principally for resale in the near-term, or trading securities, are recorded at their fair values. Unrealized gains and losses are included in other income. The Company did not have any investment securities held for trading purposes during 2012, 20112015, 2014 or 2010.2013.
AVAILABLE-FOR-SALE SECURITIES Available-for-sale (AFS) securities consist of debt and equity securities classified as neither held-to-maturity securities nor trading securities and are reported at fair value. Premiums and discounts are amortized or accreted as a component of interest income over the life of the related security as an adjustment to yield using the interest method. Unrealized holding gains and losses, including non-credit-related other-than-temporary impairment (OTTI), on AFS securities are reported as a separate component of shareholders’ equity, net of deferred income taxes, until realized. The net unrealized holding gains and losses are a component of accumulated other comprehensive (loss) income. Gains and losses from sales of securities AFS are determined using the specific identification method. Credit-related OTTI is recorded as a reduction of the amortized cost of the impaired security. Net gains and losses from sales and recoveries of securities and credit-related OTTI are recorded as components of other income in the consolidated statements of income. FEDERAL HOME LOAN BANK STOCK The Company, is a member of the Federal Home Loan Bank system, and as such is required to maintain an investment in capital stock of the Federal Home Loan Bank of Pittsburgh (FHLB). The amount the Company is required to invest is dependent upon the relative size of outstanding borrowings the Company has with the FHLB. The Company was not required to purchase FHLB stock during 2012 and 2011. Based on redemption provisions of the FHLB, the stock has no quoted market value and is carried at cost. LOANS Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at face value, net of unamortized loan fees and costs and the allowance for loan losses. Interest on residential real estate loans is recorded based on principal pay downs on an actual days basis. Commercial loan interest is accrued on the principal balance on an actual days basis. Interest on consumer loans is determined using the simple interest method. Generally, loans are placed on non-accrual status when principal or interest is past due 90 days or more. When a loan is placed on non-accrual status, all interest previously accrued but not collected is charged against current earnings. Any payments received on non-accrual loans are applied, first to the outstanding loan amounts, then to the recovery of any charged-off loan amounts. Any excess is treated as a recovery of lost interest. A modification of a loan constitutes a troubled debt restructuring (TDR) when a borrower is experiencing financial difficulty and the Company grants a concession that it would not otherwise grant based on current underwriting standards. Regardless of the type of concession, when modifying a loan forgiveness of principal is rarely granted. MORTGAGE BANKING OPERATIONS AND MORTGAGE SERVICING RIGHTS The Company sells one-to-four family residential mortgage loans on a serving retained basis. On a loan sold where servicing was retained, the Company determines at the time of sale the value of the retained servicing rights, which represents the present value of the differential between the contractual servicing fee and adequate compensation, defined as the fee a sub-servicer would require to assume the role of servicer, after considering the estimated effects of prepayments. If material, a portion of the gain on the sale of the loan is recognized as due to the value of the servicing rights, and a mortgage servicing asset is recorded. Commitments to sell one-to-four family residential mortgage loans are made primarily during the period between the intent to proceed and the closing of the mortgage loan. The timing of making these sale commitments is dependent upon the timing of the borrower’s election to lock-in the mortgage interest rate and fees prior to loan closing. Most of these sales commitments are made on a best-efforts basis whereby the Company is only obligated to sell the mortgage if mortgage loan is approved and closed by the Company. Commitments to fund mortgage loans (rate lock commitments) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives. Fair values of these derivatives are estimated based on changes in mortgage interest rates from the date the interest rate on the loan is locked. The Company enters into forward commitments for the future delivery of mortgage loans when interest rate locks are entered into, in order to hedge the change in interest rates resulting from its commitments to fund the loans. Changes in the fair values of these derivatives are included in gains or losses on sales of loans. The fair value of these derivative instruments was not significant at December 31, 2015 and 2014. Servicing assets are reported in other assets and amortized in proportion to and over the period during which estimated servicing income will be received. Servicing loans for others consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors, and processing foreclosures. Loan servicing income is recorded when earned and represents servicing fees from investors and certain charges collected from borrowers, such as late payment fees. The Company has fiduciary responsibility for related escrow and custodial funds. Servicing assets are recognized as separate assets when rights are acquired through the sale of financial assets. For sales of mortgage loans originated by the Company, a portion of the cost of originating the loan is allocated to the servicing retained right based on fair value. Capitalized servicing rights are amortized into interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Remaining servicing rights are charged against income upon payoff of the loan. Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal and are recorded as income when earned.
LOANS HELD-FOR-SALE Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. Unrealized gains are recognized but only to the extent of previous write-downs. AUTOMOBILE LEASING Financing of automobiles, provided to customers under lease arrangements of varying terms, are accounted for as direct finance leases. Interest on automobile direct finance leasing is determined using the interest method. Generally, the interest method is used to arrive at a level effective yield over the life of the lease. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established through a provision for loan losses. The allowance represents an amount which, in management’s judgment, will be adequate to absorb losses on existing loans that may become uncollectible. Management’s judgment in determining the adequacy of the allowance is based on evaluations of the collectability of the loans. These evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, current economic conditions that may affect the borrower’s ability to pay, collateral value, overall portfolio quality and review of specific loans for impairment. Management applies two primary components during the loan review process to determine proper allowance levels; a specific loan loss allocation for loans that are deemed impaired; and a general loan loss allocation for those loans not specifically allocated based on historical charge-off history and qualitative factor adjustments for trends or changes in the loan portfolio. Delinquencies, changes in lending policespolicies and local economic conditions are some of the items used for the qualitative factor adjustments. Loans considered uncollectible are charged against the allowance. Recoveries on loans previously charged off are added to the allowance. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments in accordance with the contractual terms of the loan. Factors considered in determining impairment include payment status, collateral value and the probability of collecting payments when due. The significance of payment delays and/or shortfalls is determined on a case by case basis. All circumstances surrounding the loan are taken into account. Such factors include the length of the delinquency, the underlying reasons and the borrower’s prior payment record. Impairment is measured on these loans on a loan-by-loan basis. Impaired loans include non-accrual loans, troubled debt restructurings (TDRs) and other loans deemed to be impaired based on the aforementioned factors. The risk characteristics of each of the identified portfolio segments are as follows: Commercial and industrial loans (C&I): C&I loans are primarily based on the identified historic and/or the projected cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of the borrower, however, do fluctuate based on changes in the company’sCompany’s internal and external environment including management, human and capital resources, economic conditions, competition and regulation. Most C&I loans are secured by business assets being financed such as equipment, accounts receivable, and/or inventory and generally incorporate a secured or unsecured personal guarantee. Unsecured loans may be made on a short-term basis. The ability of the borrower to collect amounts due from its customers may be affected by its customers’ economic and financial condition. Commercial real estate loans:Commercial real estate loans are made to finance the purchase of real estate, refinance existing obligations and/or to provide capital. These commercial real estate loans are generally secured by first lien security interests in the real estate as well as assignment of leases and rents. The real estate may include apartments, hotels, retail stores or plazas and healthcare facilities whether they are owner or non-owner occupied. These loans are typically originated in amounts of no more than 80% of the appraised value of the property. ConsumersConsumer loans: The Company offers home equity installment loans and lines of credit. Risks associated with loans secured by residential properties are generally lower than commercial real estate loans and include general economic risks, such as the strength of the job market, employment stability and the strength of the housing market. Since most loans are secured by a primary or secondary residence, the borrower’s continued employment is considered the greatest risk to repayment. The Company also offers a variety of loans to individuals for personal and household purposes. These loans are generally considered to have greater risk than mortgages on real estate because they may be unsecured, or if they are secured, the value of the collateral may be difficult to assess and more likely to decrease in value than real estate.
Residential mortgage loans:Residential mortgages are secured by a first lien position of the borrower’s residential real estate. These loans have varying loan rates depending on the financial condition of the borrower and the loan to value ratio. Residential mortgages have terms up to thirty years with amortizations varying from 10 to 30 years. The majority of the loans are underwritten byaccording to FNMA and/or FHLB standards. TRANSFER 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: the assets have been isolated from the Company—put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership; 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 the
Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.assets, other than through a cleanup call. LOAN FEES AND COSTS Nonrefundable loan origination fees and certain direct loan origination costs are recognized as a component of interest income over the life of the related loans as an adjustment to yield. The unamortized balance of the deferred fees and costs are included as components of the loan balances to which they relate. BANK PREMISES AND EQUIPMENT Land is carried at cost. Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the term of the lease or the estimated useful lives of the improved property. Rent expense is recognized on the straight-line method over the term of the lease. BANK OWNED LIFE INSURANCE The Company maintains bank owned life insurance (BOLI) for a chosen group of employees, at the time of purchase, namely its officers where the Company is the owner and sole beneficiary of the policies. The earnings from the BOLI are recognized as a component of other income in the consolidated statements of income. The BOLI is an asset that can be liquidated, if necessary, with tax consequences. However, the Company intends to hold these policies and, accordingly, the Company has not provided for deferred income taxes on the earnings from the increase in the cash surrender value. FORECLOSED ASSETS HELD-FOR-SALE Foreclosed assets held-for-sale are carried at the lower of cost or fair value less cost to sell. Losses from the acquisition of property in full and partial satisfaction of debt are treated as credit losses. Routine holding costs, are included in other operating expenses. Generally,gains and losses from sales, write-downs for subsequent declines in value and any rental income received are recognized net, as a component of other incomereal estate owned expense in the consolidated statements of income. Gains or losses are recorded when the properties are sold. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets, including bank premises and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment is indicated by that review, the asset is written down to its estimated fair value through a charge to non-interest expense. STOCK OPTIONS PLANS The Company has two stock-based compensation plans. The Company accounts for these plans under the recognition and measurement accounting principles, which requires the cost of share-based payment transactions be recognized in the financial statements. The stockstock-based compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees’ service period, generally defined as the vesting period. Compensation cost is recognized on a straight-line basis over the requisite service period forperiod. When granting stock options, the entire award. The Company uses the Black-Sholes option pricing model to estimate thedetermine their estimated fair value on the date of stock option grants. grant. TRUST AND FINANCIAL SERVICE FEES Trust and financial service fees are recorded on the cash basis, which is not materially different from the accrual basis. ADVERTISING COSTS Advertising costs are charged to expense as incurred. LEGAL AND PROFESSIONAL EXPENSES Generally, the Company recognizes legal and professional fees as incurred and are included as a component of professional services expense in the consolidated statements of income. Legal costs incurred that are associated with the collection of outstanding amounts due from delinquent borrowers are included as a component of loan collection expense in the consolidated statements of income. In the event of litigation proceedings brought about by an employee or third party against the Company, expenses for damages will be accrued if the likelihood of the outcome against the Company is probable, the amount can be reasonably estimated and the amount would have a material impact on the financial results of the Company. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of short-term financial instruments, as listed below, approximates their fair value. These instruments generally have limited credit exposure, no stated or short-term maturities, carry interest rates that approximate market and generally are recorded at amounts that are payable on demand :
| · | Cash and cash equivalents; |
| · | Non-interest bearing deposit accounts; |
| · | Savings, NOW and money market accounts; |
| · | Short-term borrowings and |
Securities: With the exception of pooled trust preferred securities, fair values on investment securities are determined by prices provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions. The fair values of pooled trust preferred securities are determined based on a present value technique (income valuation).
FHLB stock: The Company considers the fair value of FHLB stock is equal to its carrying value or cost since there is no market value available and investments in and transactions for the stock are restricted and limited to the FHLB and its member-banks.
Loans: The fair value of loans is estimated by the net present value of the future expected cash flows discounted at current offering rates for similar loans. Current offering rates consider, among other things, credit risk. The carrying value that fair value is compared to is net of the allowance for loan losses and since there is significant judgment included in evaluating credit quality, loans are classified within Level 3 of the fair value hierarchy.
Loans held-for-sale: The fair value of loans held-for-sale is estimated using rates currently offered for similar loans and is typically obtained from the Federal National Mortgage Association (FNMA) or the Federal Home Loan Bank of Pittsburgh (FHLB).
Certificates of deposit:The fair value of certificates of deposit are based on discounted cash flows using rates which approximate market rates for deposits of similar maturities.
Long-term debt: Fair value is estimated using the rates currently offered for similar borrowings.
INCOME TAXES Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The benefit of a tax position is recognized on the financial statements in the period during which, based on all available evidence, management believes it is more-likely-than-not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that
is more than 50% likely of being realized upon settlement with the applicable taxing authority. For tax positions not meeting the more likely than not threshold, no tax benefit is recorded. Under the more likely than not threshold guidelines, the Company believes no significant uncertain tax positions exist, either individually or in the aggregate, that would give rise to the non-recognition of an existing tax benefit. The Company had no material unrecognized tax benefits or accrued interest and penalties for the years ended December 31, 2015, 2014 or 2013, respectively. COMPREHENSIVE INCOME (LOSS) Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the stockholders’ equity section of the consolidated balance sheets, such items, along with net income, are components of comprehensive income (loss). CASH FLOWS For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and interest-bearing deposits with financial institutions. For the years ended December 31, 2012, 2011,2015, 2014, and 2010,2013, the Company paid interest of $3.5$2.5 million, $4.9$2.9 million and $7.1$3.0 million, respectively. For the years ended December 31, 2012, 2011,2015, 2014, and 2010,2013, the Company paid income taxes of $2.2$0.4 million, $1.6$1.7 million and $1.0$1.3 million, respectively. For the years ended December 31, 2015, 2014 and 2013, the Company had a net change in unrealized (losses) gains on available for sale securities of ($0.8 million), $2.3 million and $1.5 million, respectively. Transfers from loans to foreclosed assets held-for-sale amounted to $1.8$0.6 million, $0.8$1.2 million and $1.1$2.4 million in 2012, 2011,2015, 2014, and 2010,2013, respectively. Transfers from loans to loans held-for-sale amounted to $3.6$2.1 million, $5.3$0.2 million and $4.4$3.7 million in 2012, 20112015, 2014 and 2010,2013, respectively. During 2014, transfers from loans to bank premises and equipment amounted to $1.0 million. There were no transfers from loans to bank premises and equipment in 2015 or 2013. Expenditures for construction in process, a component of other assets in the consolidated balance sheets, are included in acquisition of premises and equipment. RECLASSIFICATION ADJUSTMENTS Certain reclassifications have been made to the 20112013 and 20102014 financial statements to conform to the 2012 presentation.2015 presentation with no impact on total equity or net income. 2.CASH The Company is required by the Federal Reserve Bank to maintain average reserve balances based on a percentage of deposits. The amounts of those reserve requirements on December 31, 20122015 and 20112014 were $1.0 million, and $0.8 million, respectively. respectively, for both years. Deposits with any one financial institution are insured up to $250,000. From time-to-time, the Company may maintain cash and cash equivalents with certain other financial institutions in excess of the insured amount. 3.ACCUMULATED OTHER COMPREHENSIVE INCOME The following tables illustrate the changes in accumulated other comprehensive income by component and the details about the components of accumulated other comprehensive income as of and for the periods indicated: | | | | | | | | | | | | As of and for the year ended December 31, 2015 | | | | | | | | Unrealized gains | | | | | on available-for- | | | | (dollars in thousands) | sale securities | | Total | Beginning balance | $ | 2,743 | | $ | 2,743 | | | | | | | Other comprehensive loss before reclassifications, net of tax | | (502) | | | (502) | Amounts reclassified from accumulated other comprehensive income, net of tax | | (53) | | | (53) | Net current-period other comprehensive loss | | (555) | | | (555) | Ending balance | $ | 2,188 | | $ | 2,188 |
| | | | | | As of and for the year ended December 31, 2014 | | | | | | | | Unrealized gains | | | | | on available-for- | | | | (dollars in thousands) | sale securities | | Total | Beginning balance | $ | 1,239 | | $ | 1,239 | | | | | | | Other comprehensive income before reclassifications, net of tax | | 1,899 | | | 1,899 | Amounts reclassified from accumulated other comprehensive income, net of tax | | (395) | | | (395) | Net current-period other comprehensive income | | 1,504 | | | 1,504 | Ending balance | $ | 2,743 | | $ | 2,743 |
| | | | | | | | | | | | | | | | Details about accumulated other | | | | | | | | comprehensive income components | Amount reclassified from accumulated | | Affected line item in the statement | (dollars in thousands) | other comprehensive income | | where net income is presented | | Years ended | | | | December 31, | | | | 2015 | | 2014 | | | | | | | | | | | Unrealized gains on AFS securities | $ | 80 | | $ | 599 | | Gain on sale of investment securities | | | (27) | | | (204) | | Provision for income taxes | Total reclassifications for the period | $ | 53 | | $ | 395 | | Net income |
3. 4.INVESTMENT SECURITIES
Agency – Government-sponsored enterprise (GSE) and MBS - GSE residential Agency – GSE and MBS – GSE residential securities consist of short- to long-term notes issued by Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA), Federal Home Loan Bank (FHLB) and Government National Mortgage Association (GNMA). These securities have interest rates that are fixed and adjustable, have varying short- to long-term maturity dates and have contractual cash flows guaranteed by the U.S. government or agencies of the U.S. government. Obligations of states and political subdivisions The municipal securities are bank qualified or bank eligible, general obligation and revenue bonds rated as investment grade by various credit rating agencies and have fixed rates of interest with mid- to long-term maturities. Fair values of these securities are highly driven by interest rates. Management performs ongoing credit quality reviews on these issues. Amortized cost and fair value of investment securities as of the period indicated are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | Gross | | Gross | | | | | | | Gross | | Gross | | | | | | | Amortized | | unrealized | | unrealized | | Fair | | | Amortized | | unrealized | | unrealized | | Fair | | (dollars in thousands) | | cost | | gains | | losses | | value | | | cost | | gains | | losses | | value | | December 31, 2012 | | | | | | | | | | | | | | | | | | | Held-to-maturity securities: | | | | �� | | | | | | | | | | | | | | | MBS - GSE residential | | $ | 289 | | | $ | 31 | | | $ | - | | | $ | 320 | | | | | | | | | | | | | | | | | | | | | | December 31, 2015 | | | | | | | | | | | | | | Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | | | | | | | Agency - GSE | | $ | 17,651 | | | $ | 102 | | | $ | 13 | | | $ | 17,740 | | | $ | 18,374 | | $ | 36 | | $ | (24) | | $ | 18,386 | | Obligations of states and political subdivisions | | | 26,979 | | | | 2,879 | | | | 1 | | | | 29,857 | | | 34,599 | | 2,310 | | (24) | | 36,885 | | Corporate bonds: | | | | | | | | | | | | | | | | | | | Pooled trust preferred securities | | | 6,323 | | | | 185 | | | | 4,683 | | | | 1,825 | | | | MBS - GSE residential | | | 48,836 | | | | 1,761 | | | | 44 | | | | 50,553 | | | 68,648 | | 1,066 | | (299) | | 69,415 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total debt securities | | | 99,789 | | | | 4,927 | | | | 4,741 | | | | 99,975 | | | 121,621 | | 3,412 | | (347) | | 124,686 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity securities - financial services | | | 295 | | | | 171 | | | | - | | | | 466 | | | 295 | | 251 | | - | | 546 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total available-for-sale securities | | $ | 100,084 | | | $ | 5,098 | | | $ | 4,741 | | | $ | 100,441 | | | $ | 121,916 | | $ | 3,663 | | $ | (347) | | $ | 125,232 |
| | | | | | Gross | | | Gross | | | | | | | | Amortized | | | unrealized | | | unrealized | | | Fair | | | (dollars in thousands) | | cost | | | gains | | | losses | | | value | | | December 31, 2011 | | | | | | | | | | | | | | | | | | Held-to-maturity securities: | | | | | | | | | | | | | | | | | | MBS - GSE residential | | $ | 389 | | | $ | 42 | | | $ | - | | | $ | 431 | | | | | | | | | | | | | | | | | | | | | Available-for-sale securities: | | | | | | | | | | | | | | | | | | Agency - GSE | | $ | 25,773 | | | $ | 108 | | | $ | 8 | | | $ | 25,873 | | | Obligations of states and political subdivisions | | | 28,402 | | | | 1,937 | | | | 180 | | | | 30,159 | | | Corporate bonds: | | | | | | | | | | | | | | | | | | Pooled trust preferred securities | | | 6,574 | | | | 123 | | | | 5,231 | | | | 1,466 | | | MBS - GSE residential | | | 48,792 | | | | 1,482 | | | | 57 | | | | 50,217 | | | | | | | | | | | | | | | | | | | | | Total debt securities | | | 109,541 | | | | 3,650 | | | | 5,476 | | | | 107,715 | | | | | | | | | | | | | | | | | | | | | Equity securities - financial services | | | 295 | | | | 144 | | | | - | | | | 439 | | | | | | | | | | | | | | | | | | | | | Total available-for-sale securities | | $ | 109,836 | | | $ | 3,794 | | | $ | 5,476 | | | $ | 108,154 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gross | | Gross | | | | | | Amortized | | unrealized | | unrealized | | Fair | (dollars in thousands) | | cost | | gains | | losses | | value | December 31, 2014 | | | | | | | | | | | | | Available-for-sale securities: | | | | | | | | | | | | | Agency - GSE | | $ | 14,380 | | $ | 29 | | $ | (11) | | $ | 14,398 | Obligations of states and political subdivisions | | | 34,609 | | | 2,444 | | | (20) | | | 37,033 | MBS - GSE residential | | | 44,455 | | | 1,438 | | | (23) | | | 45,870 | | | | | | | | | | | | | | Total debt securities | | | 93,444 | | | 3,911 | | | (54) | | | 97,301 | | | | | | | | | | | | | | Equity securities - financial services | | | 295 | | | 300 | | | - | | | 595 | | | | | | | | | | | | | | Total available-for-sale securities | | $ | 93,739 | | $ | 4,211 | | $ | (54) | | $ | 97,896 |
Some of the Company’s debt securities are pledged to secure trust funds, public deposits, repurchase agreements, other short-term borrowings, FHLB advances, Federal Reserve Bank of Philadelphia Discount Window borrowings and certain other deposits as required by law. The amortized cost and fair value of debt securities at December 31, 20122015 by contractual maturity are shown below: | | | | | | | | | | | | | | | Amortized | | Fair | | | Amortized | | Fair | | (dollars in thousands) | | cost | | value | | | cost | | value | | Held-to-maturity securities: | | | | | | | | | | | MBS - GSE residential | | $ | 289 | | | $ | 320 | | | | | | | | | | | | | | | Available-for-sale securities: | | | | | | | | | | | | | | | Debt securities: | | | | | | | | | | | | | | | Due in one year or less | | $ | 3,525 | | | $ | 3,533 | | | $ | 2,018 | | $ | 2,016 | | Due after one year through five years | | | 13,101 | | | | 13,179 | | | | 15,321 | | 15,338 | | Due after five years through ten years | | | 2,219 | | | | 2,416 | | | | 2,670 | | 2,865 | | Due after ten years | | | 32,108 | | | | 30,294 | | | | 32,964 | | 35,052 | | | | | | | | | | | | | | | | | Total debt securities | | | 50,953 | | | | 49,422 | | | | 52,973 | | 55,271 | | | | | | | | | | | | | | | | | MBS - GSE residential | | | 48,836 | | | | 50,553 | | | | 68,648 | | 69,415 | | | | | | | | | | | | | | | | | Total available-for-sale debt securities | | $ | 99,789 | | | $ | 99,975 | | | $ | 121,621 | | $ | 124,686 |
Actual maturities will differ from contractual maturities because issuers and borrowers may have the right to call or repay obligations with or without call or prepayment penalty. Agency – GSE and municipal securities are included based on their original stated maturity. MBS – GSE residential, which are based on weighted-average lives and subject to monthly principal pay-downs, are listed in total. Most of the securities have fixed rates or have predetermined scheduled rate changes and many have call features that allow the issuer to call the security at par before its stated maturity without penalty. Gross realized gains and losses from sales, determined using specific identification, and recoveries of previously charged-off pooled trust preferred (PreTSL) securities for the periods indicated were as follows: | | | December 31, | | | (dollars in thousands) | | 2012 | | | 2011 | | | 2010 | | | | | | | | | | | | | | Gross realized gain | | $ | 251 | | | $ | 58 | | | $ | 2 | | | Recovery of previously charged-off PreTSLs | | | 77 | | | | 13 | | | | - | | | Gross realized loss | | | - | | | | (8 | ) | | | - | | | Net gain | | $ | 328 | | | $ | 63 | | | $ | 2 | |
| | | | | | | | | | December 31, | (dollars in thousands) | 2015 | | 2014 | | 2013 | | | | | | | | | | Gross realized gain | $ | 137 | | $ | 603 | | $ | 4,314 | Gross realized loss | | (57) | | | (4) | | | (1,335) | Recovery of previously charged-off PreTSLs | | - | | | - | | | 189 | Net gain | $ | 80 | | $ | 599 | | $ | 3,168 | | | | | | | | | |
The following table presents the fair value and gross unrealized losses of investments aggregated by investment type, the length of time and the number of securities that have been in a continuous unrealized loss position as of the period indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Less than 12 months | | More than 12 months | | Total | | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | (dollars in thousands) | | value | | losses | | value | | losses | | value | | losses | | | | | | | | | | | | | | | | | | | | December 31, 2015 | | | | | | | | | | | | | | | | | | | Agency - GSE | | $ | 8,156 | | $ | (24) | | $ | - | | $ | - | | $ | 8,156 | | $ | (24) | Obligations of states and political subdivisions | | | 3,656 | | | (20) | | | 485 | | | (4) | | | 4,141 | | | (24) | MBS - GSE residential | | | 36,899 | | | (299) | | | - | | | - | | | 36,899 | | | (299) | Total | | $ | 48,711 | | $ | (343) | | $ | 485 | | $ | (4) | | $ | 49,196 | | $ | (347) | Number of securities | | | 32 | | | | | | 1 | | | | | | 33 | | | | | | | | | | | | | | | | | | | | | | | December 31, 2014 | | | | | | | | | | | | | | | | | | | Agency - GSE | | $ | 4,100 | | $ | (11) | | $ | 1,024 | | $ | - | | $ | 5,124 | | $ | (11) | Obligations of states and political subdivisions | | | 1,767 | | | (11) | | | 670 | | | (9) | | | 2,437 | | | (20) | MBS - GSE residential | | | 3,761 | | | (23) | | | - | | | - | | | 3,761 | | | (23) | Total | | $ | 9,628 | | $ | (45) | | $ | 1,694 | | $ | (9) | | $ | 11,322 | | $ | (54) | Number of securities | | | 9 | | | | | | 3 | | | | | | 12 | | | | | | | | | | | | | | | | | | | | | | |
| | | Less than 12 months | | | More than 12 months | | | Total | | | | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | (dollars in thousands) | | value | | | losses | | | value | | | losses | | | value | | | losses | | | | | | | | | | | | | | | | | | | | | | | December 31, 2012 | | | | | | | | | | | | | | | | | | | | | | | | | | Agency - GSE | | $ | 1,017 | | | $ | 13 | | | $ | - | | | $ | - | | | $ | 1,017 | | | $ | 13 | | | Obligations of states and political subdivisions | | | 281 | | | | 1 | | | | - | | | | - | | | | 281 | | | | 1 | | | Corporate bonds: | | | | | | | | | | | | | | | | | | | | | | | | | | Pooled trust preferred securities | | | - | | | | - | | | | 1,639 | | | | 4,683 | | | | 1,639 | | | | 4,683 | | | MBS - GSE residential | | | 6,214 | | | | 44 | | | | - | | | | - | | | | 6,214 | | | | 44 | | | Total temporarily impaired securities | | $ | 7,512 | | | $ | 58 | | | $ | 1,639 | | | $ | 4,683 | | | $ | 9,151 | | | $ | 4,741 | | | Number of securities | | | 5 | | | | | | | | 8 | | | | | | | | 13 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2011 | | | | | | | | | | | | | | | | | | | | | | | | | | Agency - GSE | | $ | 4,011 | | | $ | 8 | | | $ | - | | | $ | - | | | $ | 4,011 | | | $ | 8 | | | Obligations of states and political subdivisions | | | - | | | | - | | | | 941 | | | | 180 | | | | 941 | | | | 180 | | | Corporate bonds: | | | | | | | | | | | | | | | | | | | | | | | | | | Pooled trust preferred securities | | | - | | | | - | | | | 1,343 | | | | 5,231 | | | | 1,343 | | | | 5,231 | | | MBS - GSE residential | | | 6,126 | | | | 57 | | | | - | | | | - | | | | 6,126 | | | | 57 | | | Total securities Total temporarily impaired securities | | $ | 10,137 | | | $ | 65 | | | $ | 2,284 | | | $ | 5,411 | | | $ | 12,421 | | | $ | 5,476 | | | Number of securities | | | 7 | | | | | | | | 9 | | | | | | | | 16 | | | | | |
Most of theThe Company had thirty-three securities in an unrealized loss position at December 31, 2015, including eight agency securities, twenty mortgage-backed securities and five municipal securities. The severity of these unrealized losses based on their underlying cost basis were as follows at December 31, 2015: 0.30% for agencies; 0.80% for MBS - GSE; and 0.59% for the investment portfoliomunicipals. In addition, only one of these securities have fixed rates or have predetermined scheduledbeen in an unrealized loss position in excess of 12 months. The changes in the prices on these securities are the result of interest rate changes,movement and many have call features that allow the issuer to call the security at par before its stated maturity, without penalty. are temporary in nature.
Management believes the cause of the unrealized losses is related to changes in interest rates, instability in the capital markets or the limited trading activity due to illiquid conditions in the debt market and is not directly related to credit quality. Management Quarterly, management conducts a formal review of investment securities on a quarterly basis for the presence of other-than-temporary impairment (OTTI). The accounting guidance related to OTTI requires the Company to assess whether OTTI is present when the fair value of a debt security is less than its amortized cost as of the balance sheet date. Under those circumstances, OTTI is considered to have occurred if: (1) the entity has intent to sell the security; (2) more likely than not the entity will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost.
The accounting guidance requires that credit-related OTTI be recognized in earnings while non-credit-related OTTI on securities not expected to be sold be recognized in other comprehensive income (loss) (OCI). Non-credit-related OTTI is based on other factors affecting market value, including illiquidity. Presentation of OTTI is made in the consolidated statements of income on a gross basis with an offset for the amount of non-credit-related OTTI recognized in OCI. The Company’s OTTI evaluation process also follows the guidance set forth in topics related to debt and equity securities. The guidance set forth in the pronouncements require the Company to take into consideration current market conditions, fair value in relationship to cost, extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, current analysts’ evaluations, all available information relevant to the collectability of debt securities, the ability and intent to hold investments until a recovery of fair value which may be to maturity and other factors when evaluating for the existence of OTTI. The guidance requires that credit-related OTTI be recognized as a realized loss through earnings when there has been an adverse change in the holder’s expected cash flows such that the full amount (principal and interest) will probably not be received. This requirement is consistent with the impairment model in the guidance for accounting for debt and equity securities. For all security types, as of December 31, 2012,2015, the Company applied the criteria provided in the recognition and presentation guidance related to OTTI. That is, management has no intent to sell the securities and no conditions were identified by management that more likely than not would require the Company to sell the securities before recovery of their amortized cost basis. The results indicated there was no presence of OTTI in the Company’s portfolios of Agency – Government Sponsored Enterprise (GSE), Mortgage-backed securities (MBS) – GSE residential and Obligations of states and political subdivisions. Agency - GSE and MBS - GSE residential
Agency – GSE and MBS – GSE residential securities consist of short- and medium-term notes issued by Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA), Federal Home Loan Bank (FHLB), Federal Farm Credit Bank (FFCB) and Government National Mortgage Association (GNMA). These securities have interest rates that are fixed- and adjustable-rate issues, have varying short- to mid-term maturity dates and have contractual cash flows guaranteed by the U.S. government or agencies of the U.S. government.
Obligations of states and political subdivisions
The municipal securities are bank qualified or bank eligible, general obligation and revenue bonds rated as investment grade by various credit rating agencies and have fixed rates of interest with mid- to long-term maturities. Fair values of these securities are highly driven by interest rates. Management performs ongoing credit quality reviews on these issues.
security portfolio. In the above security types,addition, management believes the change in fair value is attributable to changes in interest rates and those instruments with unrealized losses were not caused by deterioration of credit quality. Accordingly, as of December 31, 2012, recognition of OTTI on these securities was unnecessary. Pooled trust preferred securities
A Pooled Trust Preferred Collateralized Debt Obligation (CDO) is a type of investment security collateralized by trust preferred securities (TPS) issued by banks, insurance companies and real estate investment trusts. The primary collateral type is a TPS issued by a bank. A TPS is a hybrid security that consists of both debt and equity characteristics which includes the ability of the issuer to voluntarily defer interest payments for up to 20 consecutive quarters. A TPS is considered a junior security in the capital structure of the issuer.
There are various investment classes or tranches issued by the CDO. The most senior tranche has the lowest yield but the most protection from credit losses. Conversely, the most junior tranche has the highest yield but the most exposure to risk of credit loss. Junior tranches are subordinate to senior tranches and losses are generally allocated from the lowest tranche with the equity component holding the most risk of credit loss and then subordinate tranches in reverse order up to the most senior tranche. The allocation of losses is defined in the indenture when the CDO was formed.
Unrealized losses in the pooled trust preferred securities (PreTSLs) are caused mainly by: (1) collateral deterioration due to bank failures and credit concerns across the banking sector; (2) widening of credit spreads and (3) illiquidity in the market. The Company’s review of its portfolio of pooled trust preferred securities determined that in 2012credit-related OTTI be recorded on two holdings, both of which are contained in the Company’s AFS securities portfolio, from credit quality downgrades on the underlying collateral, including the collateral of four banks deferring interest payments within these two securities and one bank fully redeeming which removes all future earnings cash flow.
The following table summarizes the amount of credit-related OTTI recognized in earnings during the periods indicated:
| | | Years ended December 31, | | | (dollars in thousands) | | 2012 | | | 2011 | | | 2010 | | | Pooled trust preferred securities: | | | | | | | | | | | | | | PreTSL IV, Mezzanine | | $ | - | | | $ | 35 | | | $ | 163 | | | PreTSL V, Mezzanine | | | - | | | | - | | | | 122 | | | PreTSL VII, Mezzanine | | | - | | | | - | | | | 409 | | | PreTSL IX, B1, B3 | | | 18 | | | | - | | | | 1,061 | | | PreTSL XI, B3 | | | - | | | | - | | | | 1,273 | | | PreTSL XV, B1 | | | - | | | | - | | | | 1,359 | | | PreTSL XVI, C | | | - | | | | - | | | | 1,290 | | | PreTSL XVII, C | | | - | | | | - | | | | 1,014 | | | PreTSL XVIII, C | | | 118 | | | | - | | | | 736 | | | PreTSL XIX, C | | | - | | | | 136 | | | | 2,124 | | | PreTSL XXIV, B1 | | | - | | | | 75 | | | | 1,778 | | | PreTSL XXV, C1 | | | - | | | | - | | | | 507 | | | Total | | $ | 136 | | | $ | 246 | | | $ | 11,836 | |
The following table is a tabular roll-forward of the cumulative amount of credit-related OTTI recognized in earnings:
| | | Year ended December 31, 2012 | | | (dollars in thousands) | | HTM | | | AFS | | | Total | | | Beginning balance of credit-related OTTI | | $ | - | | | $ | (15,280 | ) | | $ | (15,280 | ) | | Additions for credit-related OTTI not previously recognized | | | - | | | | - | | | | - | | | Additional credit-related OTTI previously recognized when there is no intent to sell before recovery of amortized cost basis | | | - | | | | (136 | ) | | | (136 | ) | | Ending balance of credit-related OTTI | | $ | - | | | $ | (15,416 | ) | | $ | (15,416 | ) |
To determine credit-related OTTI, the Company analyzes the collateral of each individual tranche within each of the 13 individual pools in the Company’s portfolio of PreTSLs. The Company engaged a third party structured finance firm to: review the underlying collateral of each PreTSL; research trustee reports to update relevant data and credit ratings of the underlying collateral; project default rates and cash flows of the collateral and simulate 10,000 Monte Carlo time-to-default scenarios, performed quarterly to arrive at the single best estimate of future cash flow for each tranche.
The sub-topics of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 320 provide the scope, steps and accounting guidance for impairment: 1) determine whether an investment is impaired; 2) evaluate whether impairment is other-than-temporary; then 3) recognition of OTTI. The guidance in ASC 320 retains and emphasizes the objective of OTTI assessment and the related disclosure requirements by aligning the OTTI methodology for certain securitizations. ASC 325 provides a scope exception for investments that were considered of high credit quality (i.e. rated “AA” or higher) at the time of acquisition. The application of the guidance contained in ASC 320 is used for two investments considered of high credit quality and ASC 325 is used for the remaining eleven securities. In summary, the quarterly evaluations indicated there was a significant adverse change in cash flows in two of the thirteen securities, thereby signifying the likelihood of the Company not being able to recover its principal. As a result, $0.1 million of credit related OTTI was recorded during the year ended December 31, 2012 all of which pertained to the first half of 2012.
The guidance prescribed in ASC 320 is used for investments that, upon purchase, were rated of high credit quality, “AA” or higher, by a nationally recognized statistical rating organization. The Company has two PreTSLs (XXIV and XXVII) that were of high credit quality, “AA” rated, upon acquisition. PreTSL XXVII evaluation proved a high probability that the Company will be able to collect all amounts due, both principal and interest, by maturity and thus, determined the impairment is temporary. PreTSL XXIV was evaluated under ASC 320 to determine if the Company expects to recover the remaining amortized cost basis and whether OTTI is deemed to have occurred. An adverse change or short-fall in the expected cash flows compared to the amortized cost would be recorded as credit-related OTTI. To assess the likelihood of recoverability, the present value of the best estimate of future cash flows is compared to the amortized cost. In this situation, the discount rate used was the interest rate implicit in the security at the date of acquisition. The application of the guidance on this security did not result in an adverse change in cash flows when compared to the last measurements and therefore, no credit related OTTI was recorded during 2012.
The remaining eleven PreTSLs were rated “A” by a nationally recognized statistical rating organization at the date of acquisition and as such are considered beneficial interests of securitized financial assets. For these securities, the Company applies the guidance of ASC 325. Under this and other relevant guidance, if the fair value is below amortized cost and the present value of the best estimate of future cash flows declines significantly, evidencing a probable material adverse change in cash flows since the last measurement date, credit-related OTTI is deemed to exist and written down to the determined present value through a charge to current earnings. The discount rate used under ASC 325 is the yield to accrete beneficial interest, which is representative of the resulting interest from the total gross estimated future cash flows less the current amortized cost. In applying this guidance to the remaining securities, PreTSLs IX and XVIII measured an adverse change in cash flows and credit related OTTI of $18 thousand and $0.1 million, respectively, was recorded in 2012 all of which, as noted above, pertained to cash flow analyses performed during the two quarters in the first half of 2012.
The following table is the composition of the Company’s pooled trust preferred securities on non-accrual status as of the period indicated:
| | | As of December 31, | | | (dollars in thousands) | | 2012 | | | 2011 | | | | | Book | | | Fair | | | Book | | | Fair | | | Deal | | Class | | value | | | value | | | value | | | value | | | Pre TSL V | | Mezzanine | | $ | - | | | $ | 27 | | | $ | - | | | $ | 25 | | | Pre TSL VII | | Mezzanine | | | - | | | | 125 | | | | - | | | | 79 | | | Pre TSL IX | | B-1,B-3 | | | 1,507 | | | | 630 | | | | 1,605 | | | | 529 | | | Pre TSL XI | | B-3 | | | 1,053 | | | | 305 | | | | 1,119 | | | | 357 | | | Pre TSL XV | | B-1 | | | - | | | | 33 | | | | - | | | | 20 | | | Pre TSL XVIII | | C | | | 167 | | | | - | | | | 285 | | | | 5 | | | Pre TSL XIX | | C | | | 316 | | | | - | | | | 316 | | | | 8 | | | Pre TSL XXIV | | B-1 | | | 407 | | | | 12 | | | | 407 | | | | 15 | | | | | | | $ | 3,450 | | | $ | 1,132 | | | $ | 3,732 | | | $ | 1,038 | |
The securities included in the above table have experienced impairment of principal and interest was “paid-in-kind”. When these two conditions exist, the security is placed on non-accrual status.
The following table provides additional information with respect to the Company’s pooled trust preferred securities as of December 31, 2012:
| (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Current | | | | | Actual | | | | | | Excess | | Effective | | | | | | | | | | | | | | | | | number | | | | | deferrals | | | | | | subordination(2) | | subordination(3) | | | | | | | | | | | | | | | | | of | | | | | and defaults | | | | | | as a % of | | as a % of | | | | | | | | | | | | | | | Moody's / | | banks / | | Actual | | | as a % of | | | | | | current | | current | | | | | | Book | | | Fair | | | Unrealized | | | Fitch | | insurance | | deferrals | | | current | | | Excess | | | performing | | performing | | Deal | | Class | | value | | | value | | | gain (loss) | | | ratings(1) | | companies | | and defaults | | | collateral | | | subordination | | | collateral | | collateral | | Pre TSL IV | | Mezzanine | | $ | 412 | | | $ | 408 | | | $ | (4 | ) | | Caa2 / CCC | | 6/- | | $ | 18,000 | | | | 27.1 | | | $ | 10,313 | | | 19.9 | | 36.6 | | Pre TSL V | | Mezzanine | | | - | | | | 27 | | | | 27 | | | C / D | | 3/- | | | 28,950 | | | | 100.0 | | | | None | | | N/A | | N/A | | Pre TSL VII | | Mezzanine | | | - | | | | 125 | | | | 125 | | | Ca / C | | 16/- | | | 91,000 | | | | 48.9 | | | | None | | | N/A | | N/A | | Pre TSL IX | | B-1,B-3 | | | 1,507 | | | | 630 | | | | (877 | ) | | Ca / C | | 46/- | | | 101,280 | | | | 25.5 | | | | None | | | N/A | | 6.8 | | Pre TSL XI | | B-3 | | | 1,053 | | | | 305 | | | | (748 | ) | | Ca / C | | 62/- | | | 185,280 | | | | 32.3 | | | | None | | | N/A | | N/A | | Pre TSL XV | | B-1 | | | - | | | | 33 | | | | 33 | | | C / C | | 63 / 7 | | | 181,200 | | | | 33.4 | | | | None | | | N/A | | N/A | | Pre TSL XVI | | C | | | - | | | | - | | | | - | | | C / C | | 49 / 7 | | | 246,010 | | | | 43.0 | | | | None | | | N/A | | N/A | | Pre TSL XVII | | C | | | - | | | | - | | | | - | | | C / C | | 50 / 6 | | | 177,670 | | | | 37.6 | | | | None | | | N/A | | N/A | | Pre TSL XVIII | | C | | | 167 | | | | - | | | | (167 | ) | | Ca / C | | 66 / 13 | | | 199,520 | | | | 30.3 | | | | None | | | N/A | | N/A | | Pre TSL XIX | | C | | | 316 | | | | - | | | | (316 | ) | | C / C | | 53 / 14 | | | 172,100 | | | | 26.9 | | | | None | | | N/A | | N/A | | Pre TSL XXIV | | B-1 | | | 407 | | | | 12 | | | | (395 | ) | | Ca / CC | | 77 / 11 | | | 357,500 | | | | 35.8 | | | | None | | | N/A | | 13.3 | | Pre TSL XXV | | C-1 | | | - | | | | - | | | | - | | | C / C | | 64/ 8 | | | 272,000 | | | | 34.3 | | | | None | | | N/A | | N/A | | Pre TSL XXVII | | B | | | 2,461 | | | | 285 | | | | (2,176 | ) | | Ca / CC | | 41 / 7 | | | 86,800 | | | | 27.1 | | | | 1,035 | | | 0.4 | | 26.7 | | | | | | $ | 6,323 | | | $ | 1,825 | | | $ | (4,498 | ) | | | | | | | | | | | | | | | | | | | | |
(1) All ratings have been updated through December 31, 2012.
(2) Excess subordination represents the excess (if any) of the amount of performing collateral over the given class of bonds.rates.
(3) Effective subordination represents the estimated percentage of the performing collateral that would need to defer or default at the next payment in order to trigger a loss of principal or interest. This differs from excess subordination in that it considers the effect of excess interest earned on the performing collateral.64
Table Of Contents 5.LOANS AND LEASES The classifications of loans and leases at December 31, 20122015 and 20112014 are summarized as follows: | | | | | | | | | As of December 31, | | | | | (dollars in thousands) | | 2012 | | | 2011 | | 2015 | | 2014 | | | | | | | | | | | | | Commercial and industrial | | $ | 65,110 | | | $ | 68,372 | | $ | 102,653 | | $ | 80,301 | | Commercial real estate: | | | | | | | | | | | | | | Non-owner occupied | | | 81,998 | | | | 79,475 | | | 95,745 | | 94,771 | | Owner occupied | | | 80,509 | | | | 76,611 | | | 101,652 | | 95,780 | | Construction | | | 10,679 | | | | 9,387 | | | 4,481 | | 5,911 | | Consumer: | | | | | | | | | | | | | | Home equity installment | | | 32,828 | | | | 36,390 | | | 30,935 | | 32,819 | | Home equity line of credit | | | 34,169 | | | | 32,486 | | | 48,060 | | 42,188 | | Auto | | | 17,411 | | | | 13,539 | | | Auto loans and leases | | | 29,758 | | 27,972 | | Other | | | 6,139 | | | | 5,833 | | | 6,208 | | 6,501 | | Residential: | | | | | | | | | | | | | | Real estate | | | 96,765 | | | | 80,091 | | | 126,992 | | 119,154 | | Construction | | | 7,948 | | | | 4,110 | | | 10,060 | | 10,298 | | | | | | | | | | | | | Total | | | 433,556 | | | | 406,294 | | | 556,544 | | 515,695 | | Less: | | | | | | | | | | | | | | Allowance for loan losses | | | (8,972 | ) | | | (8,108 | ) | | (9,527) | | (9,173) | Unearned lease revenue | | | (335) | | (195) | | | | | | | | | | | | | | | | Loans, net | | $ | 424,584 | | | $ | 398,186 | | | Loans and leases, net | | $ | 546,682 | | $ | 506,327 |
Net deferred loan costs of $1.0$1.5 million and $0.8$1.4 million have been added toincluded in the carrying values of loans at December 31, 20122015 and 2011,2014, respectively. Unearned lease revenue represents the difference between the lessor’s investment in the property and the gross investment in the lease. Unearned revenue is accrued over the life of the lease using the effective interest method. The Company services real estate loans for investors in the secondary mortgage market which are not included in the accompanying consolidated balance sheets. The approximate amount of mortgages serviced amounted to $214.7 million and $193.5$269.5 million as of December 31, 20122015 and 2011. The Company utilizes an external independent loan review firm that reviews and validates the credit risk program on at least an annual basis. Results of these reviews are presented to management and the Board of Directors. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.
Non-accrual loans
The decision to place loans on non-accrual status is made on an individual basis after considering factors pertaining to each specific loan. Commercial and industrial and commercial real estate loans are placed on non-accrual status when management has determined that payment of all contractual principal and interest is in doubt or the loan is past due 90 days or more as to principal and interest, unless well-secured and in the process of collection. Consumer loans secured by real estate and residential mortgage loans are placed on non-accrual status at 120 days past due as to principal and interest and unsecured consumer loans are charged off when the loan is 90 days or more past due as to principal and interest.
Non-accrual loans, segregated by class, at December 31, were as follows:
| | | As of December 31, | | | (dollars in thousands) | | 2012 | | | 2011 | | | | | | | | | | | Commercial and industrial | | $ | 18 | | | $ | 458 | | | | | | | | | | | | | Commercial real estate: | | | | | | | | | | | | | | | | | | | | Non-owner occupied | | | 1,884 | | | | 2,406 | | | Owner occupied | | | 5,031 | | | | 6,288 | | | Construction | | | 1,123 | | | | 656 | | | | | | | | | | | | | Consumer: | | | | | | | | | | | | | | | | | | | | Home equity installment | | | 1,306 | | | | 1,017 | | | Home equity line of credit | | | 381 | | | | 730 | | | Other | | | 48 | | | | - | | | | | | | | | | | | | Residential: | | | | | | | | | | | | | | | | | | | | Real estate | | | 2,330 | | | | 2,329 | | | Construction | | | - | | | | 78 | | | | | | | | | | | | | Total | | $ | 12,121 | | | $ | 13,962 | |
Troubled Debt Restructuring
A modification of a loan constitutes a troubled debt restructuring (TDR) when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company offers various types of concessions when modifying a loan, however, forgiveness of principal is rarely granted. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. Commercial real estate and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only payment period. Residential mortgage loans modified in a TDR are primarily comprised of loans where monthly payments are lowered to accommodate the borrowers’ financial needs for an extended period of time. After the lowered monthly payment period ends, the borrower would revert back to paying principal and interest per the original terms with the maturity date adjusted accordingly. Home equity and automobile loan modifications are typically not made and therefore standard modification terms do not exist for loans of this type.
Loans modified in a TDR may or may not be placed on non-accrual status. As of December 31, 2012, total TDRs amounted to $2.2$256.8 million of which $1.1 million were on non-accrual status. As of December 31, 2011, total TDRs amounted to $6.7 million of which $1.4 million were on non-accrual status. The majority of the $4.5 million reduction in TDRs is the result of a loan of $1.8 million which was repaid upon the sale of the underlying collateral by the borrower. The proceeds of which were used to repay the loan. The sale of the underlying collateral and subsequent repayment of the loan did not result in an adverse impact to the Company. A second loan of $2.4 million to a related borrower which had been a TDR was repaid with the proceeds of a new loan by the Bank on conventional loan terms and conditions. Partial charge-offs may be taken against the outstanding loan balance of TDRs, but only in rare instances. As a result, loans modified in a TDR for the Company may have the financial effect of increasing the specific allowance for loan losses associated with the loan. The Company considers all TDRs to be impaired loans. An allowance for impaired loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the loan’s observable market price. If the loan is collateral dependent, the estimated fair value of the collateral, less any selling costs, is used to establish the allowance. Management exercises significant judgment in developing these estimates. There were no loans modified in a TDR during the three and twelve months ended December 31, 2012.
Loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance or partial charge offs may be taken to further write-down the carrying value of the loan.
Past due loans
Loans are considered past due when the contractual principal and/or interest is not received by the due date. An aging analysis of past due loans, segregated by class of loans, as of the period indicated is as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | Recorded | | | | | | | | | | | Past due | | | | | | | | | Total | | | investment past | | | | | 30 - 59 Days | | | 60 - 89 Days | | | 90 days | | | Total | | | | | | loans | | | due ≥ 90 days | | | December 31, 2012 | | past due | | | past due | | | or more * | | | past due | | | Current | | | receivables | | | and accruing | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial and industrial | | $ | 676 | | | $ | 15 | | | $ | 254 | | | $ | 945 | | | $ | 64,165 | | | $ | 65,110 | | | $ | 236 | | | Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-owner occupied | | | - | | | | 141 | | | | 1,884 | | | | 2,025 | | | | 79,973 | | | | 81,998 | | | | - | | | Owner occupied | | | 208 | | | | 282 | | | | 5,439 | | | | 5,929 | | | | 74,580 | | | | 80,509 | | | | 408 | | | Construction | | | - | | | | - | | | | 1,123 | | | | 1,123 | | | | 9,556 | | | | 10,679 | | | | - | | | Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Home equity installment | | | 216 | | | | 132 | | | | 1,325 | | | | 1,673 | | | | 31,155 | | | | 32,828 | | | | 19 | | | Home equity line of credit | | | - | | | | 66 | | | | 381 | | | | 447 | | | | 33,722 | | | | 34,169 | | | | - | | | Auto | | | 459 | | | | 30 | | | | 16 | | | | 505 | | | | 16,906 | | | | 17,411 | | | | 16 | | | Other | | | 48 | | | | 4 | | | | 65 | | | | 117 | | | | 6,022 | | | | 6,139 | | | | 17 | | | Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Real estate | | | 99 | | | | 544 | | | | 3,357 | | | | 4,000 | | | | 92,765 | | | | 96,765 | | | | 1,027 | | | Construction | | | - | | | | - | | | | - | | | | - | | | | 7,948 | | | | 7,948 | | | | - | | | Total | | $ | 1,706 | | | $ | 1,214 | | | $ | 13,844 | | | $ | 16,764 | | | $ | 416,792 | | | $ | 433,556 | | | $ | 1,723 | |
* Includes $12.1 millionof non-accrual loans.
| | | | | | | | | | | | | | | | | | | | | Recorded | | | | | | | | | | | Past due | | | | | | | | | Total | | | investment past | | | | | 30 - 59 Days | | | 60 - 89 Days | | | 90 days | | | Total | | | | | | loans | | | due ≥ 90 days | | | December 31, 2011 | | past due | | | past due | | | or more * | | | past due | | | Current | | | receivables | | | and accruing | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial and industrial | | $ | 61 | | | $ | 20 | | | $ | 458 | | | $ | 539 | | | $ | 67,833 | | | $ | 68,372 | | | $ | - | | | Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-owner occupied | | | 1,802 | | | | 386 | | | | 2,406 | | | | 4,594 | | | | 74,881 | | | | 79,475 | | | | - | | | Owner occupied | | | 134 | | | | 71 | | | | 6,288 | | | | 6,493 | | | | 70,118 | | | | 76,611 | | | | - | | | Construction | | | - | | | | - | | | | 656 | | | | 656 | | | | 8,731 | | | | 9,387 | | | | - | | | Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Home equity installment | | | 450 | | | | 161 | | | | 1,017 | | | | 1,628 | | | | 34,762 | | | | 36,390 | | | | - | | | Home equity line of credit | | | 11 | | | | - | | | | 730 | | | | 741 | | | | 31,745 | | | | 32,486 | | | | - | | | Auto | | | 437 | | | | 181 | | | | - | | | | 618 | | | | 12,921 | | | | 13,539 | | | | - | | | Other | | | 19 | | | | 11 | | | | - | | | | 30 | | | | 5,803 | | | | 5,833 | | | | - | | | Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Real estate | | | 297 | | | | 317 | | | | 2,594 | | | | 3,208 | | | | 76,883 | | | | 80,091 | | | | 265 | | | Construction | | | - | | | | - | | | | 78 | | | | 78 | | | | 4,032 | | | | 4,110 | | | | - | | | Total | | $ | 3,211 | | | $ | 1,147 | | | $ | 14,227 | | | $ | 18,585 | | | $ | 387,709 | | | $ | 406,294 | | | $ | 265 | |
* Includes $14.0 million of non-accrual loans.
Impaired loans
A loan is considered impaired when, based on current information and events; it is probable that the Company will be unable to collect the scheduled payments in accordance with the contractual terms of the loan. Factors considered in determining impairment include payment status, collateral value and the probability of collecting payments when due. The significance of payment delays and/or shortfalls is determined on a case-by-case basis. All circumstances surrounding the loan are taken into account. Such factors include the length of the delinquency, the underlying reasons and the borrower’s prior payment record. Impairment is measured on these loans on a loan-by-loan basis. Impaired loans may include non-accrual loans, TDRs and other loans deemed to be impaired based on the aforementioned factors. As of December 31, 2012 and 2011, impaired loans consisted of non-accrual loans and TDRs.
At December 31, 2012, impaired loans consisted of accruing TDRs totaling $1.1 million and $12.1 million of non-accrual loans. The non-accrual total, as of December 31, 2012, includes $1.12014. Mortgage servicing rights amounted to $1.2 million of non-accruing TDRs. At December 31, 2011, impaired loans consisted of accruing TDRs totaling $5.3and $1.0 million in addition to the $14.0 million of non-accrual loans. The non-accrual total, as of December 31, 2011, included $1.4 million of non-accruing TDRs. Payments received on non-accrual loans are recognized on a cash basis. Payments are first applied against the outstanding principal balance, then to the recovery of any charged-off amounts. Any excess is treated as a recovery of interest income.2015 and 2014, respectively.
Impaired loans, segregated by class, as of the period indicated are detailed below:
| | | | | | Recorded | | | Recorded | | | | | | | | | | | | | | | Cash basis | | | | | Unpaid | | | investment | | | investment | | | Total | | | | | | Average | | | Interest | | | interest | | | | | principal | | | with | | | with no | | | recorded | | | Related | | | recorded | | | income | | | income | | | (dollars in thousands) | | balance | | | allowance | | | allowance | | | investment | | | allowance | | | investment | | | recognized | | | recognized | | | December 31, 2012 | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial & industrial | | $ | 52 | | | $ | 8 | | | $ | 52 | | | $ | 60 | | | $ | 4 | | | $ | 275 | | | $ | 4 | | | $ | - | | | Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-owner occupied | | | 2,431 | | | | 957 | | | | 1,420 | | | | 2,377 | | | | 233 | | | | 4,172 | | | | 152 | | | | 20 | | | Owner occupied | | | 5,940 | | | | 4,500 | | | | 1,099 | | | | 5,599 | | | | 1,230 | | | | 7,292 | | | | 121 | | | | - | | | Construction | | | 1,123 | | | | 210 | | | | 913 | | | | 1,123 | | | | 194 | | | | 941 | | | | - | | | | - | | | Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Home equity installment | | | 1,480 | | | | 524 | | | | 782 | | | | 1,306 | | | | 38 | | | | 1,023 | | | | - | | | | - | | | Home equity line of credit | | | 435 | | | | 144 | | | | 237 | | | | 381 | | | | 31 | | | | 482 | | | | - | | | | - | | | Auto | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1 | | | | - | | | | - | | | Other | | | 102 | | | | 16 | | | | 32 | | | | 48 | | | | 8 | | | | 36 | | | | - | | | | - | | | Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Real Estate | | | 2,688 | | | | 564 | | | | 1,766 | | | | 2,330 | | | | 76 | | | | 2,342 | | | | 17 | | | | - | | | Construction | | | - | | | | - | | | | - | | | | - | | | | - | | | | 44 | | | | - | | | | - | | | Total | | $ | 14,251 | | | $ | 6,923 | | | $ | 6,301 | | | $ | 13,224 | | | $ | 1,814 | | | $ | 16,608 | | | $ | 294 | | | $ | 20 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Recorded | | | Recorded | | | | | | | | | | | | | | | Cash basis | | | | | Unpaid | | | investment | | | investment | | | Total | | | | | | Average | | | Interest | | | interest | | | | | principal | | | with | | | with no | | | recorded | | | Related | | | recorded | | | income | | | income | | | (dollars in thousands) | | balance | | | allowance | | | allowance | | | investment | | | allowance | | | investment | | | recognized | | | recognized | | | December 31, 2011 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial & industrial | | $ | 549 | | | $ | 322 | | | $ | 179 | | | $ | 501 | | | $ | 63 | | | $ | 355 | | | $ | 2 | | | $ | - | | | Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-owner occupied | | | 5,434 | | | | 3,144 | | | | 2,176 | | | | 5,320 | | | | 301 | | | | 3,026 | | | | 53 | | | | - | | | Owner occupied | | | 8,538 | | | | 5,730 | | | | 2,915 | | | | 8,645 | | | | 792 | | | | 4,953 | | | | 108 | | | | 14 | | | Construction | | | 656 | | | | 656 | | | | - | | | | 656 | | | | 152 | | | | 375 | | | | - | | | | - | | | Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Home equity installment | | | 1,050 | | | | 395 | | | | 622 | | | | 1,017 | | | | 88 | | | | 751 | | | | 6 | | | | 3 | | | Home equity line of credit | | | 730 | | | | 229 | | | | 501 | | | | 730 | | | | 55 | | | | 488 | | | | 2 | | | | 1 | | | Auto | | | - | | | | - | | | | - | | | | - | | | | - | | | | 3 | | | | - | | | | - | | | Other | | | - | | | | - | | | | - | | | | - | | | | - | | | | 12 | | | | - | | | | - | | | Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Real Estate | | | 2,619 | | | | 1,083 | | | | 1,246 | | | | 2,329 | | | | 84 | | | | 2,867 | | | | 155 | | | | 59 | | | Construction | | | 94 | | | | 78 | | | | - | | | | 78 | | | | - | | | | 91 | | | | - | | | | - | | | Total | | $ | 19,670 | | | $ | 11,637 | | | $ | 7,639 | | | $ | 19,276 | | | $ | 1,535 | | | $ | 12,921 | | | $ | 326 | | | $ | 77 | |
Credit Quality Indicators
Commercial and industrial and commercial real estate
The Company utilizes a loan grading system and assigns a credit risk grade to its loans in the commercial and industrial and commercial real estate portfolios. The grading system provides a means to measure portfolio quality and aids in the monitoring of the credit quality of the overall loan portfolio. The credit risk grades are arrived at using a risk rating matrix to assign a grade to each of the loans in the commercial and industrial and commercial real estate portfolios.
The following is a description of each risk rating category the Company uses to classify each of its commercial and industrial and commercial real estate loans:
Pass
Loans in this category have an acceptable level of risk and are graded in a range of one to five. Secured loans generally have good collateral coverage. Current financial statements reflect acceptable balance sheet ratios, sales and earnings trends. Management is considered to be good, and there is some depth existing. Payment experience on the loans has been good with minor or no delinquency experience. Loans with a grade of one are of the highest quality in the range. Those graded five are of marginally acceptable quality.
Special Mention
Loans in this category are graded a six and may be protected but are potentially weak. They constitute a credit risk to the Company, but have not yet reached the point of adverse classification. Some of the following conditions may exist: little or no collateral coverage; lack of current financial information; delinquency problems; highly leveraged; available financial information reflects poor balance sheet ratios and profit and loss statements reflect uncertain trends; and document exceptions. Cash flow may not be sufficient to support total debt service requirements. Loans in this category should not remain on the listresponsible for an inordinate period of time (no more than one year) and then the loan should be passed or classified appropriately.
Substandard
Loans in this category are graded a seven and have a well-defined weakness which may jeopardize the ultimate collectability of the debt. The collateral pledged may be lacking in quality or quantity. Financial statements may indicate insufficient cash flow to service the debt; and/or do not reflect a sound net worth. The payment history indicates chronic delinquency problems. Management is considered to be weak. There is a distinct possibility that the Company may sustain a loss. All loans on non-accrual are rated substandard. Loans 90days or more past due unless otherwise fully supported should be classified substandard. Also, borrowers that are bankrupt are substandard.
Doubtful
Loans in this category are graded an eight and have a better than 50% possibility of the Company sustaining a loss, but the loss cannot be determined because of specific reasonable factors which may strengthen credit in the near-term. Many of the weaknesses present in a substandard loan exist. Liquidation of collateral, if any, is likely. Any loan graded lower than an eight is considered to be uncollectible and charged-off.
Consumer and Residential
The consumer and residential loan segments are regarded as homogeneous loan pools and as such are not risk rated. For these portfolios, the Company utilizes payment activity, history and recency of payment. Non-performing loans are considered to be loans past due 90 days or more and accruing and non-accrual loans. All loans not classified as non-performing are considered performing.
The following table presents loans, segregated by class, categorized into the appropriate credit quality indicator category as of the period indicated:
Commercial credit exposure
Credit risk profile by creditworthiness category
| | | | | | | | | Commercial real estate - | | | Commercial real estate - | | | Commercial real estate - | | | | | Commercial and industrial | | | non-owner occupied | | | owner occupied | | | construction | | | (dollars in thousands) | | 12/31/2012 | | | 12/31/2011 | | | 12/31/2012 | | | 12/31/2011 | | | 12/31/2012 | | | 12/31/2011 | | | 12/31/2012 | | | 12/31/2011 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pass | | $ | 61,821 | | | $ | 64,064 | | | $ | 72,738 | | | $ | 65,819 | | | $ | 73,922 | | | $ | 66,298 | | | $ | 8,094 | | | $ | 6,911 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Special mention | | | 2,221 | | | | 2,953 | | | | 3,520 | | | | 5,681 | | | | 222 | | | | 1,627 | | | | 1,422 | | | | 1,246 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Substandard | | | 1,068 | | | | 1,355 | | | | 5,740 | | | | 7,975 | | | | 6,365 | | | | 8,686 | | | | 1,163 | | | | 1,230 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 65,110 | | | $ | 68,372 | | | $ | 81,998 | | | $ | 79,475 | | | $ | 80,509 | | | $ | 76,611 | | | $ | 10,679 | | | $ | 9,387 | |
Consumer credit exposure
Credit risk profile based on payment activity
| | | Home equity installment | | | Home equity line of credit | | | Auto | | | Other | | | (dollars in thousands) | | 12/31/2012 | | | 12/31/2011 | | | 12/31/2012 | | | 12/31/2011 | | | 12/31/2012 | | | 12/31/2011 | | | 12/31/2012 | | | 12/31/2011 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Performing | | $ | 31,503 | | | $ | 35,373 | | | $ | 33,788 | | | $ | 31,756 | | | $ | 17,395 | | | $ | 13,539 | | | $ | 6,074 | | | $ | 5,833 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-performing | | | 1,325 | | | | 1,017 | | | | 381 | | | | 730 | | | | 16 | | | | - | | | | 65 | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 32,828 | | | $ | 36,390 | | | $ | 34,169 | | | $ | 32,486 | | | $ | 17,411 | | | $ | 13,539 | | | $ | 6,139 | | | $ | 5,833 | |
Mortgage lending credit exposure
Credit risk profile based on payment activity
| | | Residential real estate | | | Residential construction | | | (dollars in thousands) | | 12/31/2012 | | | 12/31/2011 | | | 12/31/2012 | | | 12/31/2011 | | | | | | | | | | | | | | | | | Performing | | $ | 93,408 | | | $ | 77,497 | | | $ | 7,948 | | | $ | 4,032 | | | | | | | | | | | | | | | | | | | | | Non-performing | | | 3,357 | | | | 2,594 | | | | - | | | | 78 | | | | | | | | | | | | | | | | | | | | | Total | | $ | 96,765 | | | $ | 80,091 | | | $ | 7,948 | | | $ | 4,110 | |
Allowance for loan losses
Management continually evaluates the credit quality of the Company’s loan portfolio and performs a formal review of the adequacy of the allowance for loan losses (the allowance) on a quarterly basis. The allowance reflects management’s best estimate of the amount of credit losses in the loan portfolio. Management’s judgment is based on the evaluation of individual loans, past experience, the assessment of current economic conditions and other relevant factors including the amounts and timing of cash flows expected to be received on impaired loans. Those estimates may be susceptible to significant change. Loan losses are charged directly against the allowance when loans are deemed to be uncollectible. Recoveries from previously charged-off loans are added to the allowance when received.
Management applies two primary components during the loan review process to determine proper allowance levels. The two components are a specific loan loss allocation for loans that are deemed impaired and a general loan loss allocation for those loans not specifically allocated. The methodology to analyze the adequacy of the allowance for loan losses is as follows:
| § | identification of specific impaired loans by loan category; |
| § | specific loans that are not impaired, but have an identified potential for loss; |
| § | calculation of specific allowances where required for the impaired loans based on collateral and other objective and quantifiable evidence; |
| § | determination of loans with similar credit characteristics within each class of the loan portfolio segment and eliminating the impaired loans; |
| § | application of historical loss percentages (two-year average) to pools to determine the allowance allocation; |
| § | application of qualitative factor adjustment percentages to historical losses for trends or changes in the loan portfolio. Qualitative factor adjustments include: |
| o | levels of and trends in delinquencies and non-accrual loans; |
| o | levels of and trends in charge-offs and recoveries; |
| o | trends in volume and terms of loans; |
| o | changes in risk selection and underwriting standards; |
| o | changes in lending policies, procedures and practices; |
| o | experience, ability and depth of lending management; |
| o | national and local economic trends and conditions; and |
| o | changes in credit concentrations. |
Allocation of the allowance for different categories of loans is based on the methodology as explained above. A key element of the methodology to determine the allowance isconducting the Company’s credit risk evaluation process, which includes credit risk grading of individual commercial and industrial and commercial real estate loans. Commercial and industrial and commercial real estate loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or reaffirmed as the case may be. The credit risk grades may be changed at any time management feels an upgrade or downgrade may be warranted. The Company utilizes an external independent loan review firm that reviews and validates the credit risk gradesprogram on at least an annual basis. Results of these reviews are presented to management and the board of directors. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.
Non-accrual loans The decision to place loans on non-accrual status is made on an individual basis after considering factors pertaining to each specific loan. Commercial and industrial (C&I) and commercial real estate (CRE) loans are placed on non-accrual status when management has determined that payment of all contractual principal and interest is in doubt or the loan is past due 90 days or more as to principal and interest, unless well-secured and in the process of collection. Consumer loans secured by real estate and residential mortgage loans are placed on non-accrual status at 120 days past due as to principal and interest and unsecured consumer loans are charged-off when the loan is 90 days or more past due as to principal and interest. The Company considers all non-accrual loans to be impaired loans.
Non-accrual loans, segregated by class, at December 31, were as follows: | | | | | | | | (dollars in thousands) | 2015 | | 2014 | | | | | | | Commercial and industrial | $ | 30 | | $ | 27 | Commercial real estate: | | | | | | Non-owner occupied | | 6,193 | | | 620 | Owner occupied | | 988 | | | 2,013 | Construction | | 226 | | | 256 | Consumer: | | | | | | Home equity installment | | 167 | | | 312 | Home equity line of credit | | 512 | | | 417 | Auto loans and leases | | 45 | | | 1 | Other | | 6 | | | 20 | Residential: | | | | | | Real estate | | 836 | | | 549 | Total | $ | 9,003 | | $ | 4,215 |
Troubled Debt Restructuring A modification of a loan constitutes a troubled debt restructuring (TDR) when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company considers all TDRs to be impaired loans. The Company offers various types of concessions when modifying a loan, however, forgiveness of principal is rarely granted. C&I loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. CRE loans modified in a TDR can involve reducing the interest rate for the commercialremaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Commercial real estate construction loans modified in a TDR may also involve extending the interest-only payment period. Residential mortgage loans modified in a TDR are primarily comprised of loans where monthly payments are lowered to accommodate the borrowers’ financial needs for an extended period of time. After the lowered monthly payment period ends, the borrower would revert back to paying principal and interest pursuant to the original terms with the maturity date adjusted accordingly. Consumer loan modifications are typically not granted and therefore standard modification terms do not exist for loans of this type. Loans modified in a TDR may or may not be placed on non-accrual status. As of December 31, 2015, total TDRs amounted to $2.4 million (consisting of 7 CRE loans and 2 C&I loans to 5 unrelated borrowers), with none of these loans on non-accrual status, compared to $1.6 million (consisting of 4 CRE loans and 1 C&I loan to 3 unrelated borrowers) and $0.9 million, respectively, as of December 31, 2014. During the third quarter of 2015, the TDR on non-accrual status was transferred from the loan portfolio to loans held-for-sale. This loan was sold in the fourth quarter of 2015. Of the TDRs outstanding as of December 31, 2015 and 2014, when modified, the concessions granted consisted of temporary interest-only payments or a reduction in the rate of interest to a below-market rate for a contractual period of time. Other than the TDR that was on non-accrual status, the TDRs were performing in accordance with their modified terms. The following presents by class, information related to loans modified in a TDR: | | | | | | | | | Loans modified as TDRs for the: | (dollars in thousands) | | Twelve months ended December 31, 2015 | | | | | | | | | | | | Recorded | | Increase in | | | Number | | investment | | allowance | | | of | | (as of | | (as of | | | contracts | | period end) | | period end) | Commercial and industrial | | 1 | $ | 500 | $ | 331 | Commercial real estate - owner occupied | | 4 | | 1,181 | | 316 | Total | | 5 | $ | 1,681 | $ | 647 | | | | | | | |
In the above table, the period end balances are inclusive of all partial pay downs and charge-offs since the modification date. Loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. All of the loans in the table were modified as TDRs prior to the fourth quarter of 2015. All of the modifications in 2015 stemmed from extensions of the maturity date. There were no loans modified as a TDR within the previous twelve months that subsequently defaulted during the twelve months ended December 31, 2015 and 2014, respectively.
The allowance for loan losses (allowance) may be increased, adjustments may be made in the allocation of the allowance or partial charge-offs may be taken to further write-down the carrying value of the loan. An allowance for impaired loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the loan’s observable market price. If the loan is collateral dependent, the estimated fair value of the collateral is used to establish the allowance. As of December 31, 2015 and 2014, the allowance for impaired loans that have been modified in a TDR was $0.7 million and $17 thousand, respectively. Past due loans Loans are considered past due when the contractual principal and/or interest is not received by the due date. An aging analysis of past due loans, segregated by class of loans, as of the period indicated is as follows (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Recorded | | | | | | | | Past due | | | | | | | | | | investment past | | 30 - 59 Days | | 60 - 89 Days | | 90 days | | Total | | | | | Total | | due ≥ 90 days | December 31, 2015 | past due | | past due | | or more (1) | | past due | | Current | | loans (3) | | and accruing | | | | | | | | | | | | | | | | | | | | | | Commercial and industrial | $ | 38 | | $ | 32 | | $ | 42 | | $ | 112 | | $ | 102,541 | | $ | 102,653 | | $ | 12 | Commercial real estate: | | | | | | | | | | | | | | | | | | | | | Non-owner occupied | | 549 | | | 1,282 | | | 6,476 | | | 8,307 | | | 87,438 | | | 95,745 | | | 283 | Owner occupied | | - | | | 85 | | | 988 | | | 1,073 | | | 100,579 | | | 101,652 | | | - | Construction | | - | | | - | | | 226 | | | 226 | | | 4,255 | | | 4,481 | | | - | Consumer: | | | | | | | | | | | | | | | | | | | | | Home equity installment | | 189 | | | 92 | | | 167 | | | 448 | | | 30,487 | | | 30,935 | | | - | Home equity line of credit | | 109 | | | 650 | | | 512 | | | 1,271 | | | 46,789 | | | 48,060 | | | - | Auto loans and leases | | 394 | | | 44 | | | 76 | | | 514 | | | 28,909 | | | 29,423 | (2) | | 31 | Other | | 66 | | | - | | | 36 | | | 102 | | | 6,106 | | | 6,208 | | | 30 | Residential: | | | | | | | | | | | | | | | | | | | | | Real estate | | 46 | | | 131 | | | 836 | | | 1,013 | | | 125,979 | | | 126,992 | | | - | Construction | | - | | | - | | | - | | | - | | | 10,060 | | | 10,060 | | | - | Total | $ | 1,391 | | $ | 2,316 | | $ | 9,359 | | $ | 13,066 | | $ | 543,143 | | $ | 556,209 | | $ | 356 |
(1) Includes $9.0 million of non-accrual loans. (2) Net of unearned lease revenue of $0.3 million. (3) Includes net deferred loan costs of $1.5 million. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Recorded | | | | | | | | Past due | | | | | | | | | | investment past | | 30 - 59 Days | | 60 - 89 Days | | 90 days | | Total | | | | | Total | | due ≥ 90 days | December 31, 2014 | past due | | past due | | or more (1) | | past due | | Current | | loans (3) | | and accruing | | | | | | | | | | | | | | | | | | | | | | Commercial and industrial | $ | 34 | | $ | 76 | | $ | 55 | | $ | 165 | | $ | 80,136 | | $ | 80,301 | | $ | 28 | Commercial real estate: | | | | | | | | | | | | | | | | | | | | | Non-owner occupied | | 624 | | | 126 | | | 719 | | | 1,469 | | | 93,302 | | | 94,771 | | | 99 | Owner occupied | | 366 | | | 292 | | | 2,113 | | | 2,771 | | | 93,009 | | | 95,780 | | | 100 | Construction | | - | | | - | | | 256 | | | 256 | | | 5,655 | | | 5,911 | | | - | Consumer: | | | | | | | | | | | | | | | | | | | | | Home equity installment | | 170 | | | 142 | | | 767 | | | 1,079 | | | 31,740 | | | 32,819 | | | 455 | Home equity line of credit | | 13 | | | - | | | 417 | | | 430 | | | 41,758 | | | 42,188 | | | - | Auto loans and leases | | 545 | | | 111 | | | 16 | | | 672 | | | 27,105 | | | 27,777 | (2) | | 15 | Other | | 38 | | | 147 | | | 40 | | | 225 | | | 6,276 | | | 6,501 | | | 20 | Residential: | | | | | | | | | | | | | | | | | | | | | Real estate | | 700 | | | 548 | | | 892 | | | 2,140 | | | 117,014 | | | 119,154 | | | 343 | Construction | | - | | | - | | | - | | | - | | | 10,298 | | | 10,298 | | | - | Total | $ | 2,490 | | $ | 1,442 | | $ | 5,275 | | $ | 9,207 | | $ | 506,293 | | $ | 515,500 | | $ | 1,060 |
(1) Includes $4.2 million of non-accrual loans. (2) Net of unearned lease revenue of $0.2 million. (3) Includes net deferred loan costs of $1.4 million. Impaired loans A loan is considered impaired when, based on current information and events; it is probable that the Company will be unable to collect the scheduled payments in accordance with the contractual terms of the loan. Factors considered in determining impairment include payment status, collateral value and the probability of collecting payments when due. The significance of payment delays and/or shortfalls is determined on a case-by-case basis. All circumstances surrounding the loan are taken into account. Such factors include the length of the delinquency, the underlying reasons and the borrower’s prior payment record. Impairment is measured on these loans on a loan-by-loan basis. Impaired loans include non-accrual loans, TDRs and other loans deemed to be impaired based on the aforementioned factors.
At December 31, 2015, impaired loans consisted of accruing TDRs totaling $2.4 million, $9.0 million of non-accrual loans and a $1.2 million accruing loan. At December 31, 2014, impaired loans consisted of accruing TDRs totaling $0.7 million, $4.2 million of non-accrual loans and a $1.2 million accruing loan. As of December 31, 2015, the non-accrual loans did not include any TDRs compared with one TDR with a $0.9 million balance as of December 31, 2014. Payments received from non-accruing impaired loans are first applied against the outstanding principal balance, then to the recovery of any charged-off amounts. Any excess is treated as a recovery of interest income. Payments received from accruing impaired loans are applied to principal and interest, as contractually agreed upon. Impaired loans, segregated by class, as of the period indicated are detailed below: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Recorded | | Recorded | | | | | | | | | | | | | | Cash basis | | Unpaid | | investment | | investment | | Total | | | | | Average | | Interest | | interest | | principal | | with | | with no | | recorded | | Related | | recorded | | income | | income | (dollars in thousands) | balance | | allowance | | allowance | | investment | | allowance | | investment | | recognized | | recognized | December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | | | Commercial and industrial | $ | 555 | | $ | 500 | | $ | 55 | | $ | 555 | | $ | 331 | | $ | 511 | | $ | 22 | | $ | 1 | Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | Non-owner occupied | | 7,960 | | | 7,209 | | | 630 | | | 7,839 | | | 1,237 | | | 2,755 | | | 95 | | | - | Owner occupied | | 2,588 | | | 922 | | | 1,505 | | | 2,427 | | | 337 | | | 2,705 | | | 67 | | | - | Construction | | 422 | | | - | | | 226 | | | 226 | | | - | | | 241 | | | - | | | - | Consumer: | | | | | | | | | | | | | | | | | | | | | | | | Home equity installment | | 230 | | | - | | | 167 | | | 167 | | | - | | | 239 | | | 2 | | | - | Home equity line of credit | | 607 | | | 28 | | | 484 | | | 512 | | | 1 | | | 472 | | | 1 | | | - | Auto loans and leases | | 47 | | | 43 | | | 2 | | | 45 | | | 7 | | | 25 | | | 2 | | | - | Other | | 6 | | | 6 | | | - | | | 6 | | | 1 | | | 12 | | | 2 | | | - | Residential: | | | | | | | | | | | | | | | | | | | | | | | | Real estate | | 891 | | | 433 | | | 403 | | | 836 | | | 95 | | | 629 | | | 7 | | | - | Construction | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | Total | | 13,306 | | | 9,141 | | | 3,472 | | | 12,613 | | | 2,009 | | | 7,589 | | | 198 | | | 1 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Recorded | | Recorded | | | | | | | | | | | | | | Cash basis | | Unpaid | | investment | | investment | | Total | | | | | Average | | Interest | | interest | | principal | | with | | with no | | recorded | | Related | | recorded | | income | | income | (dollars in thousands) | balance | | allowance | | allowance | | investment | | allowance | | investment | | recognized | | recognized | December 31, 2014 | | | | | | | | | | | | | | | | | | | | | | | | Commercial and industrial | $ | 326 | | $ | - | | $ | 52 | | $ | 52 | | $ | - | | $ | 67 | | $ | 1 | | $ | - | Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | Non-owner occupied | | 2,494 | | | 1,949 | | | 355 | | | 2,304 | | | 547 | | | 1,557 | | | 27 | | | - | Owner occupied | | 2,375 | | | 447 | | | 1,825 | | | 2,272 | | | 87 | | | 1,996 | | | 15 | | | - | Construction | | 350 | | | - | | | 256 | | | 256 | | | - | | | 342 | | | - | | | - | Consumer: | | | | | | | | | | | | | | | | | | | | | | | | Home equity installment | | 466 | | | - | | | 312 | | | 312 | | | - | | | 358 | | | 11 | | | - | Home equity line of credit | | 469 | | | 128 | | | 289 | | | 417 | | | 1 | | | 382 | | | 20 | | | - | Auto | | 1 | | | - | | | 1 | | | 1 | | | - | | | 2 | | | - | | | - | Other | | 33 | | | - | | | 20 | | | 20 | | | - | | | 22 | | | - | | | - | Residential: | | | | | | | | | | | | | | | | | | | | | | | | Real estate | | 612 | | | 304 | | | 245 | | | 549 | | | 35 | | | 762 | | | 7 | | | - | Construction | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | Total | $ | 7,126 | | $ | 2,828 | | $ | 3,355 | | $ | 6,183 | | $ | 670 | | $ | 5,488 | | $ | 81 | | $ | - |
The average recorded investment for the year ended December 31, 2013 was $9.2 million. There was also interest income recognized of $0.2 million and cash basis interest income recognized of $78 thousand. Credit Quality Indicators Commercial and industrial and commercial real estate The Company utilizes a loan grading system and assigns a credit risk grade to its loans in the C&I and CRE portfolios. The grading system provides a means to measure portfolio quality and aids in the monitoring of the credit quality of the overall loan portfolio. The credit risk grades are arrived at using a risk rating matrix to assign a grade to each of the loans in the C&I and CRE portfolios.
The following is a description of each risk rating category the Company uses to classify each of its C&I and CRE loans: Pass Loans in this category have an acceptable level of risk and are graded in a range of one to five. Secured loans generally have good collateral coverage. Current financial statements reflect acceptable balance sheet ratios, sales and earnings trends. Management is considered to be competent, and a reasonable succession plan is evident. Payment experience on the loans has been good with minor or no delinquency experience. Loans with a grade of one are of the highest quality in the range. Those graded five are of marginally acceptable quality. Special Mention Loans in this category are graded a six and may be protected but are potentially weak. They constitute a credit risk to the Company, but have not yet reached the point of adverse classification. Some of the following conditions may exist: little or no collateral coverage; lack of current financial information; delinquency problems; highly leveraged; available financial information reflects poor balance sheet ratios and profit and loss statements reflect uncertain trends; and document exceptions. Cash flow may not be sufficient to support total debt service requirements. Substandard Loans in this category are graded a seven and have a well-defined weakness which may jeopardize the ultimate collectability of the debt. The collateral pledged may be lacking in quality or quantity. Financial statements may indicate insufficient cash flow to service the debt; and/or do not reflect a sound net worth. The payment history indicates chronic delinquency problems. Management is considered to be weak. There is a distinct possibility that the Company may sustain a loss. All loans on non-accrual are rated substandard. Other loans that are included in the substandard category can be accruing, as well as loans that are current or past due. Loans 90 days or more past due, unless otherwise fully supported, are classified substandard. Also, borrowers that are bankrupt or have loans categorized as TDRs can be graded substandard. Doubtful Loans in this category are graded an eight and have a better than 50% possibility of the Company sustaining a loss, but the loss cannot be determined because of specific reasonable factors which may strengthen credit in the near-term. Many of the weaknesses present in a substandard loan exist. Liquidation of collateral, if any, is likely. Any loan graded lower than an eight is considered to be uncollectible and charged-off. Consumer and residential The consumer and residential loan segments are regarded as homogeneous loan pools and as such are not risk rated. For these portfolios, the Company utilizes payment activity, history and recency of payment in assessing performance. Non-performing loans are considered to be loans past due 90 days or more and accruing and non-accrual loans. All loans not classified as non-performing are considered performing. The following table presents loans including $1.5 million and $1.4 million of deferred costs, segregated by class, categorized into the appropriate credit quality indicator category as of December 31, 2015 and 2014, respectively: Commercial credit exposure Credit risk profile by creditworthiness category | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial real estate - | | Commercial real estate - | | Commercial real estate - | | Commercial and industrial | | non-owner occupied | | owner occupied | | construction | (dollars in thousands) | 12/31/2015 | | 12/31/2014 | | 12/31/2015 | | 12/31/2014 | | 12/31/2015 | | 12/31/2014 | | 12/31/2015 | | 12/31/2014 | | | | | | | | | | | | | | | | | | | | | | | | | Pass | $ | 101,342 | | $ | 76,904 | | $ | 82,152 | | $ | 83,443 | | $ | 96,401 | | $ | 88,523 | | $ | 4,255 | | $ | 5,153 | Special mention | | 189 | | | 2,202 | | | 1,480 | | | 3,611 | | | 657 | | | 2,933 | | | - | | | 502 | Substandard | | 1,122 | | | 1,195 | | | 12,113 | | | 7,717 | | | 4,594 | | | 4,324 | | | 226 | | | 256 | Doubtful | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | Total | $ | 102,653 | | $ | 80,301 | | $ | 95,745 | | $ | 94,771 | | $ | 101,652 | | $ | 95,780 | | $ | 4,481 | | $ | 5,911 |
Consumer credit exposure Credit risk profile based on payment activity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Home equity installment | | Home equity line of credit | | Auto loans and leases | | Other | (dollars in thousands) | 12/31/2015 | | 12/31/2014 | | 12/31/2015 | | 12/31/2014 | | 12/31/2015 | | 12/31/2014 | | 12/31/2015 | | 12/31/2014 | | | | | | | | | | | | | | | | | | | | | | | | | Performing | $ | 30,768 | | $ | 32,052 | | $ | 47,548 | | $ | 41,771 | | $ | 29,347 | | $ | 27,761 | | $ | 6,172 | | $ | 6,461 | Non-performing | | 167 | | | 767 | | | 512 | | | 417 | | | 76 | | | 16 | | | 36 | | | 40 | Total | $ | 30,935 | | $ | 32,819 | | $ | 48,060 | | $ | 42,188 | | $ | 29,423 | (1) | $ | 27,777 | (2) | $ | 6,208 | | $ | 6,501 |
(1)Net of unearned lease revenue of $0.3 million. (2) Net of unearned lease revenue of $0.2 million.
Mortgage lending credit exposure Credit risk profile based on payment activity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Residential real estate | | | Residential construction | (dollars in thousands) | | | | | | | | | 12/31/2015 | | 12/31/2014 | | 12/31/2015 | | 12/31/2014 | | | | | | | | | | | | | | | | | | | | | | | | | Performing | | | | | | | | | | | | | $ | 126,156 | | $ | 118,262 | | $ | 10,060 | | $ | 10,298 | Non-performing | | | | | | | | | | | | | | 836 | | | 892 | | | - | | | - | Total | | | | | | | | | | | | | $ | 126,992 | | $ | 119,154 | | $ | 10,060 | | $ | 10,298 |
Allowance for loan losses Management continually evaluates the credit quality of the Company’s loan portfolio and performs a formal review of the adequacy of the allowance on a quarterly basis. The allowance reflects management’s best estimate of the amount of credit losses in the loan portfolio. Management’s judgment is based on the evaluation of individual loans, past experience, the assessment of current economic conditions and other relevant factors including the amounts and timing of cash flows expected to be received on impaired loans. Those estimates may be susceptible to significant change. Loan losses are charged directly against the allowance when loans are deemed to be uncollectible. Recoveries from previously charged-off loans are added to the allowance when received. Management applies two primary components during the loan review process to determine proper allowance levels. The two components are a specific loan loss allocation for loans that are deemed impaired and a general loan loss allocation for those loans not specifically allocated. The methodology to analyze the adequacy of the allowance for loan losses is as follows: | § | | identification of specific impaired loans by loan category; |
| § | | identification of specific loans that are not impaired, but have an identified potential for loss; |
| § | | calculation of specific allowances where required for the impaired loans based on collateral and other objective and quantifiable evidence; |
| § | | determination of loans with similar credit characteristics within each class of the loan portfolio segment and eliminating the impaired loans; |
| § | | application of historical loss percentages (trailing twelve-quarter average) to pools to determine the allowance allocation; |
| § | | application of qualitative factor adjustment percentages to historical losses for trends or changes in the loan portfolio. |
| § | | Qualitative factor adjustments include: |
| o | | levels of and trends in delinquencies and non-accrual loans; |
| o | | levels of and trends in charge-offs and recoveries; |
| o | | trends in volume and terms of loans; |
| o | | changes in risk selection and underwriting standards; |
| o | | changes in lending policies, procedures and practices; |
| o | | experience, ability and depth of lending management; |
| o | | national and local economic trends and conditions; and |
| o | | changes in credit concentrations. |
Allocation of the allowance for different categories of loans is based on the methodology as explained above. A key element of the methodology to determine the allowance is the Company’s credit risk evaluation process, which includes credit risk grading of individual C&I and CRE loans. C&I and CRE loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or reaffirmed as the case may be. The credit risk grades may be changed at any time management feels an upgrade or downgrade may be warranted. The credit risk grades for the C&I and CRE loan portfolios are taken into account in the reserve methodology and loss factors are applied based upon the credit risk grades. The loss factors applied are based upon the Company’s historical experience as well as what we believe to be best practices and common industry standards. Historical experience reveals there is a direct correlation between the credit risk grades and loan charge-offs. The changes in allocations in the commercialC&I and industrial and commercial real estateCRE loan portfolio from period to period are based upon the credit risk grading system and from periodic reviews of the loan portfolio. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies. Each quarter, management performs an assessment of the allowance for loan losses.allowance. The Company’s Special Assets Committee meets quarterlymonthly and the applicable lenders discuss each relationship under review and reach a consensus on the appropriate estimated loss amount, if applicable, based on current accounting guidance. The Special Assets Committee’s focus is on ensuring the pertinent facts are considered andregarding not only loans considered for specific reserves, but also the reserve amounts pursuant to the accounting principles are reasonable.collectability of loans that may be past due in payment. The assessment process also includes the review of all loans on a non-accruing basis as well as
a review of certain loans to which the lenders or the Company’s Credit Administration function have assigned a criticized or classified risk rating. In 2012, the Company did not change its policy or methodology in calculating the allowance for loan losses from the policy or methodology used in 2011. The Company’s policy is to charge offcharge-off unsecured consumer loans when they become 90 days or more past due as to principal and interest. In the other portfolio segments, amounts are charged offcharged-off at the point in time when the Company deems the balance, or a portion thereof, to be uncollectible. Information related to the change in the allowance for loan losses and the Company’s recorded investment in loans by portfolio segment as of the period indicated is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of and for the year ended December 31, 2015 | | | | | | | | | | | | | | | | | Commercial & | | Commercial | | | | | Residential | | | | | | | (dollars in thousands) | industrial | | real estate | | Consumer | | real estate | | Unallocated | | Total | Allowance for Loan Losses: | | | | | | | | | | | | | | | | | | Beginning balance | $ | 1,052 | | $ | 4,672 | | $ | 1,519 | | $ | 1,316 | | $ | 614 | | $ | 9,173 | Charge-offs | | (25) | | | (432) | | | (437) | | | (15) | | | - | | | (909) | Recoveries | | 47 | | | 18 | | | 95 | | | 28 | | | - | | | 188 | Provision | | 262 | | | 756 | | | 356 | | | 78 | | | (377) | | | 1,075 | Ending balance | $ | 1,336 | | $ | 5,014 | | $ | 1,533 | | $ | 1,407 | | $ | 237 | | $ | 9,527 | Ending balance: individually evaluated for impairment | $ | 331 | | $ | 1,574 | | $ | 9 | | $ | 95 | | $ | - | | $ | 2,009 | Ending balance: collectively evaluated for impairment | $ | 1,005 | | $ | 3,440 | | $ | 1,524 | | $ | 1,312 | | $ | 237 | | $ | 7,518 | Loans Receivables: | | | | | | | | | | | | | | | | | | Ending balance (2) | $ | 102,653 | | $ | 201,878 | | $ | 114,626 | (1) | $ | 137,052 | | $ | - | | $ | 556,209 | Ending balance: individually evaluated for impairment | $ | 555 | | $ | 10,492 | | $ | 730 | | $ | 836 | | $ | - | | $ | 12,613 | Ending balance: collectively evaluated for impairment | $ | 102,098 | | $ | 191,386 | | $ | 113,896 | | $ | 136,216 | | $ | - | | $ | 543,596 |
(1) Net of unearned lease revenue of $0.3 million. (2) Includes $1.5 million of net deferred loan costs. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of and for the year ended December 31, 2014 | | | | | | | | | | | | | | | | | | | Commercial & | | Commercial | | | | Residential | | | | | | | (dollars in thousands) | industrial | | real estate | | Consumer | | real estate | | Unallocated | | Total | Allowance for Loan Losses: | | | | | | | | | | | | | | | | | | Beginning balance | $ | 944 | | $ | 4,253 | | $ | 1,482 | | $ | 1,613 | | $ | 636 | | $ | 8,928 | Charge-offs | | (309) | | | (239) | | | (361) | | | (93) | | | - | | | (1,002) | Recoveries | | 32 | | | 91 | | | 30 | | | 34 | | | - | | | 187 | Provision | | 385 | | | 567 | | | 368 | | | (238) | | | (22) | | | 1,060 | Ending balance | $ | 1,052 | | $ | 4,672 | | $ | 1,519 | | $ | 1,316 | | $ | 614 | | $ | 9,173 | Ending balance: individually evaluated for impairment | $ | - | | $ | 634 | | $ | 1 | | $ | 35 | | $ | - | | $ | 670 | Ending balance: collectively evaluated for impairment | $ | 1,052 | | $ | 4,038 | | $ | 1,518 | | $ | 1,281 | | $ | 614 | | $ | 8,503 | Loans Receivables: | | | | | | | | | | | | | | | | | | Ending balance (2) | $ | 80,301 | | $ | 196,462 | | $ | 109,285 | (1) | $ | 129,452 | | $ | - | | $ | 515,500 | Ending balance: individually evaluated for impairment | $ | 52 | | $ | 4,832 | | $ | 750 | | $ | 549 | | $ | - | | $ | 6,183 | Ending balance: collectively evaluated for impairment | $ | 80,249 | | $ | 191,630 | | $ | 108,535 | | $ | 128,903 | | $ | - | | $ | 509,317 |
(1) Net of unearned lease revenue of $0.2 million. (2) Includes $1.4 million of net deferred loan costs. | | | | | | | | | | | | | | | | | | As of and for the year ended December 31, 2013 | | | | | | | | | | | | | | | | | | | Commercial & | | Commercial | | | | Residential | | | | | | | (dollars in thousands) | industrial | | real estate | | Consumer | | real estate | | Unallocated | | Total | Allowance for Loan Losses: | | | | | | | | | | | | | | | | | | Beginning balance | $ | 922 | | $ | 4,908 | | $ | 1,639 | | $ | 1,503 | | $ | - | | $ | 8,972 | Charge-offs | | (56) | | | (2,091) | | | (400) | | | (218) | | | - | | | (2,765) | Recoveries | | 30 | | | 30 | | | 110 | | | 1 | | | - | | | 171 | Provision | | 48 | | | 1,406 | | | 133 | | | 327 | | | 636 | | | 2,550 | Ending balance | $ | 944 | | $ | 4,253 | | $ | 1,482 | | $ | 1,613 | | $ | 636 | | $ | 8,928 |
| As of and for the year ended December 31, 2012 | | | | | | | | | | | | | | | | | | | | | | Commercial & | | | Commercial | | | | | | Residential | | | | | | | | | (dollars in thousands) | | industrial | | | real estate | | | Consumer | | | real estate | | | Unallocated | | | Total | | | | | | | | | | | | | | | | | | | | | | | Allowance for Loan Losses: | | | | | | | | | | | | | | | | | | | | | | | | | | Beginning balance | | $ | 1,221 | | | $ | 3,979 | | | $ | 1,435 | | | $ | 1,051 | | | $ | 422 | | | $ | 8,108 | | | Charge-offs | | | 185 | | | | 1,335 | | | | 737 | | | | 231 | | | | - | | | | 2,488 | | | Recoveries | | | 26 | | | | 46 | | | | 30 | | | | - | | | | - | | | | 102 | | | Provision | | | (140 | ) | | | 2,218 | | | | 911 | | | | 683 | | | | (422 | ) | | | 3,250 | | | Ending balance | | $ | 922 | | | $ | 4,908 | | | $ | 1,639 | | | $ | 1,503 | | | $ | - | | | $ | 8,972 | | | Ending balance: individually evaluated for impairment | | $ | 4 | | | $ | 1,657 | | | $ | 77 | | | $ | 76 | | | | | | | $ | 1,814 | | | Ending balance: collectively evaluated for impairment | | $ | 918 | | | $ | 3,251 | | | $ | 1,562 | | | $ | 1,427 | | | | | | | $ | 7,158 | | | Loans Receivables: | | | | | | | | | | | | | | | | | | | | | | | | | | Ending balance | | $ | 65,110 | | | $ | 173,186 | | | $ | 90,547 | | | $ | 104,713 | | | | | | | $ | 433,556 | | | Ending balance: individually evaluated for impairment | | $ | 60 | | | $ | 9,099 | | | $ | 1,735 | | | $ | 2,330 | | | | | | | $ | 13,224 | | | Ending balance: collectively evaluated for impairment | | $ | 65,050 | | | $ | 164,087 | | | $ | 88,812 | | | $ | 102,383 | | | | | | | $ | 420,332 | |
| As of and for the year ended December 31, 2011 | | | | | | | | | | | | | | | | | | | Commercial & | | | Commercial | | | | | | Residential | | | | | | | | | (dollars in thousands) | | industrial | | | real estate | | | Consumer | | | real estate | | | Unallocated | | | Total | | | | | | | | | | | | | | | | | | | | | | | Allowance for Loan Losses: | | | | | | | | | | | | | | | | | | | | | | | | | | Beginning balance | | $ | 1,368 | | | $ | 4,239 | | | $ | 1,248 | | | $ | 863 | | | $ | 180 | | | $ | 7,898 | | | Charge-offs | | | 128 | | | | 699 | | | | 654 | | | | 577 | | | | - | | | | 2,058 | | | Recoveries | | | 407 | | | | 37 | | | | 17 | | | | 7 | | | | - | | | | 468 | | | Provision | | | (426 | ) | | | 402 | | | | 824 | | | | 758 | | | | 242 | | | | 1,800 | | | Ending balance | | $ | 1,221 | | | $ | 3,979 | | | $ | 1,435 | | | $ | 1,051 | | | $ | 422 | | | $ | 8,108 | | | Ending balance: individually evaluated for impairment | | $ | 63 | | | $ | 1,245 | | | $ | 143 | | | $ | 84 | | | | | | | $ | 1,535 | | | Ending balance: collectively evaluated for impairment | | $ | 1,158 | | | $ | 2,734 | | | $ | 1,292 | | | $ | 967 | | | | | | | $ | 6,151 | | | Loans Receivables: | | | | | | | | | | | | | | | | | | | | | | | | | | Ending balance | | $ | 68,372 | | | $ | 165,473 | | | $ | 88,248 | | | $ | 84,201 | | | | | | | $ | 406,294 | | | Ending balance: individually evaluated for impairment | | $ | 501 | | | $ | 14,621 | | | $ | 1,747 | | | $ | 2,407 | | | | | | | $ | 19,276 | | | Ending balance: collectively evaluated for impairment | | $ | 67,871 | | | $ | 150,852 | | | $ | 86,501 | | | $ | 81,794 | | | | | | | $ | 387,018 | |
| 5. | BANK PREMISES AND EQUIPMENT |
6.BANK PREMISES AND EQUIPMENT Components of bank premises and equipment are summarized as follows: | | | | | | | | | As of December 31, | | | As of December 31, | | (dollars in thousands) | | 2012 | | | 2011 | | 2015 | | 2014 | | | | | | | | | | | | | Land | | $ | 2,463 | | | $ | 2,242 | | $ | 2,865 | | $ | 2,775 | | Bank premises | | | 11,497 | | | | 9,576 | | | 13,023 | | | 12,955 | | Furniture, fixtures and equipment | | | 9,620 | | | | 9,809 | | | 9,659 | | | 10,012 | | Leasehold improvements | | | 4,168 | | | | 5,110 | | | 5,985 | | | 4,005 | | | | | | | | | | | | | | | | | Total | | | 27,748 | | | | 26,737 | | | 31,532 | | | 29,747 | | | | | | | | | | | | | | | | | Less accumulated depreciation and amortization | | | (13,621 | ) | | | (13,162 | ) | | (14,809) | | | (14,901) | | | | | | | | | | | | | | | | | Bank premises and equipment, net | | $ | 14,127 | | | $ | 13,575 | | $ | 16,723 | | $ | 14,846 |
Depreciation expense, which includes amortization of leasehold improvements, was $1.3 million, for the year ended December 31, 2012$1.2 million and $1.5$1.2 million for each of the years ended December 31, 20112015, 2014 and 2010.2013. The estimated useful life was 40 years for bank premises, 3 to 7 years for furniture and fixtures and for leasehold improvements was the term of the lease. TheIn 2015, the Company leasesleased its Green Ridge, West Pittston, Peckville, Clarks Summit and Eynon branches and the former Scranton branch under the terms of operating leases. In 2014, the Company leased all of the aforementioned branches in addition to West Pittston and the former Scranton branch. Rental expense was $0.3 million, in 2012, $0.4$0.2 million in 2011 and $0.3 million in 2010.2015, 2014 and 2013. The future minimum lease payments for the Company’s branch network as of December 31, 20122015 are as follows:
| | | | | (dollars in thousands) | | Amount | | Amount | | 2013 | | $ | 278 | | | | 2014 | | | 188 | | | | 2015 | | | 177 | | | | | | | | 2016 | | | 181 | | $ | 248 | | 2017 | | | 182 | | | 249 | | 2018 and thereafter | | | 2,882 | | | 2018 | | | 250 | 2019 | | | 251 | 2020 | | | 245 | 2021 and thereafter | | | 3,932 | | | | | | Total | | $ | 3,888 | | $ | 5,175 |
During 2012,2015, the Company purchasedrelocated its Moosic and Kingston branches from unaffiliated third parties for $0.5 million and $0.7 million, respectively.West Pittston branch to a newly constructed building in Pittston. The facilities were previously leased under termsEynon branch will close during the first quarter of operating leases that extended through 2019 and 2028, respectively. As a result2016, but the Company expects to make lease payments until the end of the purchases,lease term in 2020. During the 2014 first quarter, the Company is no longer obligatedreceived through foreclosure the deed that secured the collateral for $1.4a non-owner occupied commercial real estate loan that was on non-accrual status. The loan, in the amount $1.0 million, was transferred from loans to foreclosed assets held-for-sale and then to bank premises. Currently the building has a tenant under a lease agreement expiring in future minimum lease payments related to the two branches. During 2009,2018, but the Company closed its Wyoming Ave., Scranton branch but continuesexpects to pay monthly lease payments under an operating lease agreement that expires in 2014. To help offsetuse the expense related to the former Scranton branch, the Company receives rental income under a sublease agreement from an unrelated financial institution.property for future facility expansion. 7.DEPOSITS The scheduled maturities of certificates of deposit including certificates reciprocated in the Certificate of Deposit Account Registry Service (CDARS) program as of December 31, 2012 are2015 were as follows: | | | | | | | | (dollars in thousands) | | Amount | | Percent | | Amount | | Percent | | 2013 | | $ | 61,378 | | | | 52.6 | % | | | 2014 | | | 26,645 | | | | 22.9 | | | | 2015 | | | 19,050 | | | | 16.3 | | | | 2016 | | | 3,199 | | | | 2.7 | | $ | 62,823 | | 60.3 | % | | 2017 | | | 3,588 | | | | 3.1 | | | 16,952 | | 16.3 | | | 2018 and thereafter | | | 2,766 | | | | 2.4 | | | 2018 | | | 6,575 | | 6.3 | | 2019 | | | 7,456 | | 7.2 | | 2020 | | | 9,095 | | 8.7 | | 2021 and thereafter | | | 1,301 | | 1.2 | | | | | | | | | | Total | | $ | 116,626 | | | | 100.0 | % | $ | 104,202 | | 100.0 | % |
Excluding $10.2
Including $3.4 million and $7.7 million of CDARS deposits, certificates of deposit of $100,000 or more aggregated $41.8$54.2 million and $41.9$50.7 million as of December 31, 20122015 and 2011,2014, respectively. CertificatesIncluding CDARS, certificates of deposit of $250,000 or more aggregated $16.2$31.7 million and $13.6$26.8 million at December 31, 20122015 and 2011,2014, respectively. As of December 31, 2012,2015, investment securities with a combined fair value of $98.5$124.7 million and letters of credit with a notional value of $0.3 million were available to be pledged as qualifying collateral to secure public deposits and trust funds. The Company required $32.0$85.5 million of the qualifying collateral to secure such deposits as of December 31, 20122015 and the balance of $66.5$39.2 million was available for other pledging needs. 8.SHORT-TERM BORROWINGS The components of short-term borrowings are summarized as follows: | | | | | | | | As of December 31, | (dollars in thousands) | | 2015 | | | 2014 | | | | | | | Overnight borrowings | $ | 22,289 | | $ | - | Securities sold under repurchase agreements | | 5,915 | | | 3,969 | Total | $ | 28,204 | | $ | 3,969 | | | | | | |
Short-term borrowings consisted of securities sold under agreements to repurchase, or repurchase agreements, in the amount of $8.1 million and $9.5 million as of December 31, 2012 and 2011, respectively.
The maximum and average amounts of short-term borrowings outstanding and related interest rates as of the periods indicated are as follows: | | | | | | | | | | | | | | | Maximum | | | | Weighted- | | | | Maximum | | | | | Weighted- | | | | | | outstanding | | | | average | | | | outstanding | | | | | average | | | | | | at any | | Average | | rate during | | Rate at | | at any | | Average | | rate during | Rate at | | (dollars in thousands) | | month end | | outstanding | | the year | | year-end | | month end | | outstanding | | the year | year-end | | December 31, 2012 | | | | | | | | | | | December 31, 2015 | | | | | | | | | | | | Overnight borrowings | | $ | 27,236 | | $ | 4,823 | | 0.39 | % | 0.48 | % | Repurchase agreements | | | 20,684 | | | 10,268 | | 0.17 | | 0.15 | | | | | | | | | | | | | | Total | | $ | 47,920 | | $ | 15,091 | | | | | | | | | | | | | | | | | | December 31, 2014 | | | | | | | | | | | | Overnight borrowings | | $ | 13,694 | | $ | 2,628 | | 0.31 | % | 0.00 | % | Repurchase agreements | | | 22,972 | | | 11,349 | | 0.18 | | 0.15 | | | | | | | | | | | | | | Total | | $ | 36,666 | | $ | 13,977 | | | | | | | | | | | | | | | | | | December 31, 2013 | | | | | | | | | | | | | Overnight borrowings | | $ | - | | | $ | 55 | | | | 0.41 | % | | | 0.00 | % | $ | 10,544 | | $ | 3,893 | | 0.29 | % | 0.27 | % | | Repurchase agreements | | | 20,721 | | | | 13,027 | | | | 0.25 | | | | 0.27 | | | 21,653 | | | 11,629 | | 0.19 | | 0.14 | | | Total | | $ | 20,721 | | | $ | 13,082 | | | | | | | | | | $ | 32,197 | | $ | 15,522 | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2011 | | | | | | | | | | | | | | | | | | | Repurchase agreements | | $ | 20,912 | | | $ | 11,939 | | | | 0.44 | % | | | 0.26 | % | | | Demand note, U.S. Treasury | | | 1,000 | | | | 685 | | | | 0.00 | | | | 0.00 | | | | Total | | $ | 21,912 | | | $ | 12,624 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2010 | | | | | | | | | | | | | | | | | | | Overnight borrowings | | $ | - | | | $ | 108 | | | | 0.17 | % | | | 0.00 | % | | | Repurchase agreements | | | 20,965 | | | | 12,692 | | | | 0.70 | | | | 0.28 | | | | Demand note, U.S. Treasury | | | 1,089 | | | | 610 | | | | 0.00 | | | | 0.00 | | | | FHLB Advance | | | 9,500 | | | | 9,370 | | | | 0.59 | | | | 0.00 | | | | Total | | $ | 31,554 | | | $ | 22,780 | | | | | | | | | | |
Overnight borrowings may include Fed funds purchased from correspondent banks, open repurchase agreements with the FHLB and borrowings at the Discount Window from the Federal Reserve Bank of Philadelphia (FRB). RepurchaseSecurities sold under agreements to repurchase, or repurchase agreements, are non-insured interest-bearing liabilities that have a perfected security interest in qualified investment securities of the Company. Repurchase agreements are reflected at the amount of cash received in connection with the transaction. The carrying value of the underlying qualified investment securities was approximately $24.4$14.2 million and $20.9$19.0 million at December 31, 20122015 and 2011,2014, respectively. The Company may be required to provide additional collateral based on the balance of the repurchase agreement and the fair value of the underlying securities. When outstanding, the U. S. Treasury demand note is generally repaid within 1 to 90 days. At December 31, 2012,2015, the Company had approximately $128.2$186.4 million available to borrow from the FHLB, $21.0 million from correspondent banks and approximately $21.4$30.6 million that it could borrow at the FRB.
9.LONG-TERM DEBT Prior to the pay-off of long-term debt consistsduring the second quarter of outstanding advances2015, the borrowing consisted of a single advance from the FHLB of $16.0 million asthat was scheduled to mature in 2016. As of December 31, 2012 and $21.0 million as of December 31, 2011.2014, the balance was $10.0 million. The advances are secured by blanket liens on all real estate and commercial and industrial loans withdebt was a combined weighted valuation for collateral purposes of $148.7 million as of September 30, 2012convertible-select instrument that was the qualifying collateral in effect as of December 31, 2012. In addition, the Company voluntarily pledged approximately $2.1 million of mortgage-backed securities representing mortgages guaranteed by FNMA and FHLMC. The maturity and weighted-average interestcarried a 5.26% fixed rate of long-term debt as of the periods indicated is as follows:
| | | As of December 31, | | | | | 2012 | | | 2011 | | | (dollars in thousands) | | Amount | | | Rate | | | Amount | | | Rate | | | | | | | | | | | | | | | | | 2013 | | $ | - | | | | - | % | | $ | 5,000 | | | | 3.61 | % | | 2016 | | | 16,000 | | | | 5.26 | | | | 16,000 | | | | 5.26 | | | Total | | $ | 16,000 | | | | 5.26 | % | | $ | 21,000 | | | | 4.87 | % |
Long-term debt outstanding as of December 31, 2012 and 2011consisted of a convertible select FHLB advances that have fixed interest rates but may adjust quarterly should market rates increase beyond the issues’ original strike rate.interest. Significant prepayment fees were attached to the borrowings areborrowing as a deterrent from paying off the high-cost advances. However, in the event the underlying market rates rise above the rates currently paid on the borrowings, the FHLB rate will convert to a floating-rate instrument and the Company would have the option to repay or renegotiate the converted advance. In February 2012, the Company paid off the $5.0 million, 3.61% advance that was scheduled to mature in the fourth quarter of 2013. The Company incurred a prepayment feefees of $0.2$0.6 million on the early payoff.and $0.5 million as of December 31, 2015 and 2014, respectively.
10.STOCK PLANS The Company has two stock-based compensation plans (the stock compensation plans) from which it can grant stock-based compensation awards, and applies the fair value method of accounting for stock-based compensation provided under current accounting guidance. The guidelines require the cost of share-based payment transactions (including those with employees and non-employees) be recognized in the financial statements. The Company’s stock compensation plans were shareholder-approved and permit the grant of share-based compensation awards to its employees and directors. The Company believes that the stock-based compensation plans will advance the development, growth and financial condition of the Company by providing incentives through participation in the appreciation in the value of the Company’s common stock ofstock. In return, the Company hopes to secure, retain and motivate the employees and directors who may beare responsible for the operation and for the management of the affairs of the Company and to secure, retain and motivate the members of the Company’s board of directors, therebyby aligning the interest of its employees and directors with the interest of its shareholders. In the stock compensation plans, employees and directors are eligible to be awarded stock-based compensation grants which can consist of stock options (qualified and non-qualified), stock appreciation rights (SARs) orand restricted stock. At the 2012 annual shareholders’ meeting, held on May 1, 2012, the Company’s shareholders of the Company approved and the Company adopted the 2012 Omnibus Stock Incentive Plan and the 2012 Director Stock Incentive Plan (collectively, the 2012 stock incentive plans). The 2012 stock incentive plans have replaced both the expired 2000 Independent Directors Stock Option Plan and the 2000 Stock Incentive Plan (collectively, the 2000 stock incentive plans), both which expired in 2011.. Unless terminated by the Company’s board of directors, the 2012 stock incentive plans shallwill expire on, and no optionsstock-based awards shall be granted after the tenth anniversary – or in the year 2022.Previously issued and currently outstanding options under the 2000 stock incentive plans may be exercised pursuant to the terms In each of the stock option plans existing at the time of grant. However, the outstanding options under the 2000 stock incentive plans may be cancelled and replaced with grants under the 2012 stock incentive plans. In the 2012 Omnibus Stock Incentive Plan,plans, the Company has reserved 500,000 shares of its no-par common stock for issuance under the plan. In June 2012, thefuture issuance. The Company granted one share of restricted stock to each of its qualifying employees, or a total of 151 shares. The shares will vest one-year from the date of grant and the Company has projected a forfeiture rate of 28%. On the date of grant, the value of the Company’s common stock was $21.50 per share and share-based compensation expense of $2 thousand was recognized. Typically, the Company recognizes the share-based compensation expense over the requisite service or vesting period, however due to immaterialityperiod.
The following table summarizes the Company has chosen to recognize allweighted-average fair value and vesting of restricted stock grants awarded during 2015, 2014 and 2013 under the 2012 stock incentive plans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2015 | | 2014 | | 2013 | | | | Weighted- | | | | Weighted- | | | | Weighted- | | | | average | | | | average | | | | average | | Shares | | grant date | | Shares | | grant date | | Shares | | grant date | | granted | | fair value | | granted | | fair value | | granted | | fair value | | | | | | | | | | | | | | | | Director plan | 3,200 | (1) | $ | 32.25 | | 2,000 | (1) | $ | 27.00 | | 8,000 | (2) | $ | 21.20 | Omnibus plan | 3,300 | (3) | | 32.25 | | 2,120 | (3) | | 27.00 | | 6,000 | (3) | | 21.20 | Omnibus plan | 50 | (1) | | 32.50 | | | | | | | | | | | Omnibus plan | 1,400 | (3) | | 34.25 | | | | | | | | | | | Total | 7,950 | | $ | 32.60 | | 4,120 | | $ | 27.00 | | 14,000 | | $ | 21.20 |
(1) Vest after 1 year (2) Vest after 2 years – 50% each year (3) Vest after 4 years – 25% each year A summary of the expense in the current period. Share-based compensation expense is included as a component of salaries and employee benefits in the consolidated statements of income. There were no stock-based awards granted to employees under anystatus of the Company’s restricted stock compensation plansgrants as of and changes during the periods indicated are presented in 2011 or 2010.the following table: | | | | | | | | | | | | | 2012 Stock incentive plans | | Director | | Omnibus | | Total | Balance at December 31, 2012 | - | | - | | - | Granted | 8,000 | | 6,000 | | 14,000 | Forfeited | - | | (1,000) | | (1,000) | Balance at December 31, 2013 | 8,000 | | 5,000 | | 13,000 | Granted | 2,000 | | 2,120 | | 4,120 | Vested | (4,000) | | (1,250) | | (5,250) | Balance at December 31, 2014 | 6,000 | | 5,870 | | 11,870 | Granted | 3,200 | | 4,750 | | 7,950 | Vested | (6,000) | | (1,780) | | (7,780) | Balance at December 31, 2015 | 3,200 | | 8,840 | | 12,040 | | | | | | |
InFor restricted stock, intrinsic value represents the 2012 Director Stock Incentive Plan,closing price of the Company has reserved 500,000 sharesunderlying stock at the end of its no-par common stock for issuance under the plan. For the year endedperiod. As of December 31, 2012, no stock-based awards were granted to2015, the Company’s directors. In addition, there were no stock-based awards granted to directors under anyintrinsic value of the Company’s restricted stock compensationunder the Director and Omnibus plans in 2011 and 2010.
was $34.50 per share. A summary of the status of the Company’s stock option plans as of and changes during the periods indicated are presented in the following table: | | | | | | | | | Weighted- | | | | | | | | Weighted- | | | average | | | | | | | | average | | | remaining | | | | | | | | exercise | | | contractual | | | | | Options | | | price | | | term (years) | | | Outstanding and exercisable, December 31, 2009 | | | 37,590 | | | $ | 30.29 | | | | 5.6 | | | Granted | | | - | | | | - | | | | | | | Exercised | | | - | | | | - | | | | | | | Forfeited | | | (10,610 | ) | | | 30.82 | | | | | | | Outstanding and exercisable, December 31, 2010 | | | 26,980 | | | | 30.08 | | | | 5.2 | | | Granted | | | - | | | | - | | | | | | | Exercised | | | - | | | | - | | | | | | | Forfeited | | | (3,190 | ) | | | 33.18 | | | | | | | Outstanding and exercisable, December 31, 2011 | | | 23,790 | | | | 29.67 | | | | 4.9 | | | Granted | | | - | | | | - | | | | | | | Exercised | | | - | | | | - | | | | | | | Forfeited | | | (4,290 | ) | | | 34.09 | | | | | | | | | | | | | | | | | | | | | Outstanding and exercisable, December 31, 2012 | | | 19,500 | | | $ | 28.69 | | | | 5.0 | |
| | | | | | | | | | | | | | | | Options | | Weighted-average exercise price | | Weighted-average remaining contractual term (years) | Outstanding and exercisable, December 31, 2012 | | 19,500 | $ | 28.69 | | 5.0 | Granted | | - | | - | | | Exercised | | - | | - | | | Forfeited | | - | | - | | | Outstanding and exercisable, December 31, 2013 | | 19,500 | | 28.69 | | 4.0 | Granted | | - | | - | | | Exercised | | - | | - | | | Forfeited | | (500) | | 28.90 | | | Outstanding and exercisable, December 31, 2014 | | 19,000 | | 28.69 | | 3.0 | Granted | | - | | - | | | Exercised | | (3,500) | | 28.90 | | | Forfeited | | - | | - | | | Outstanding and exercisable, December 31, 2015 | | 15,500 | $ | 28.64 | | 2.0 | | | | | | | |
In the above table, the weighted-average exercise price includes options with exercise prices ranging from $26.05 to $34.09. $28.90. As of December 31, 2012, 20112015, 2014 and 2010, no2013, the intrinsic value existed because the strike price of allfor outstanding stock options with market prices that exceeded their strike price amounted to $90,800, $81,900 and $450, respectively. The Company has not issued stock options since 2008. Share-based compensation expense is included as a component of salaries and employee benefits in the consolidated statements of income. The following tables illustrate stock-based compensation expense recognized during the years ended December 31, 2015, 2014 and 2013 and the unrecognized stock-based compensation expense as of December 31, 2015: | | | | | | | | | | | | | | | | | | Years ended December 31, | | | | (dollars in thousands) | | 2015 | | 2014 | | 2013 | Stock-based compensation expense: | | | | | | | | | | Director stock incentive plan | | $ | 106 | | $ | 134 | | $ | 78 | Omnibus stock incentive plan | | | 74 | | | 40 | | | 24 | Directors stock option plan* | | | 1 | | | - | | | - | Total stock-based compensation expense | | $ | 181 | | $ | 174 | | $ | 102 |
*During 2015, two directors exercised their stock options at a market price ofabove their estimated fair value. Stock-based compensation expense was recorded for the Company’s stock.additional fair value. | | | | | | | | As of | | | | (dollars in thousands) | December 31, 2015 | | | Unrecognized stock-based compensation expense: | | | | | | | Director plan | | $ | 9 | | | | Omnibus plan | | | 182 | | | | Total unrecognized stock-based compensation expense | | $ | 191 | | | |
The unrecognized stock-based compensation expense as of December 31, 2015 will be recognized ratably over the periods ended January 2016 and May 2019 for the Director Plan and the Omnibus Plan, respectively. In addition to the two2012 stock optionincentive plans, the Company established the 2002 Employee Stock Purchase Plan (the ESPP) and reserved 110,000 shares of its un-issued capital stock for issuance under the plan. The ESPP was designed to promote broad-based employee ownership of the Company’s stock and to motivate employees to improve job performance and enhance the financial results of the Company. Under the ESPP, participation is voluntary whereby employees use automatic payroll withholdings to purchase the Company’s capital stock at a discounted price based on the fair market value of the capital stock as measured on either the commencement or termination dates, as defined. AtAs of December 31, 2012, 25,700 2015, 38,687
shares have been issued under the ESPP. The ESPP is considered a compensatory plan and is required to comply with the provisions of current accounting guidance. Therefore, theThe Company recognizes compensation expense on its ESPP on the date the shares are purchased. For the years ended December 31, 2012, 20112015, 2014 and 2010,2013, compensation expense related to the ESPP approximated $12$44 thousand, $24$33 thousand and $7$10 thousand, respectively, and is included as a component of salaries and employee benefits in the consolidated statements of income. The Company also established the dividend reinvestment plan (the DRP) for its shareholders. The DRP is designed to avail the Company’s stock at no transactional cost to its shareholders. Cash dividends paid to shareholders who are enrolled in the DRP plus voluntary cash deposits received arecan be used to purchase shares eithershares; directly from the Company, from shares that become available in the open market or from the Company’s previously acquired treasury stock.in negotiated transactions with third parties. The Company has reserved 500,000 shares of its un-issued capital stock for issuance under the DRP. Until further notice and action of the Company’s Board of Directors, additionalBeginning in 2009, shares of stock purchased directly from the Company via dividends paid through the DRP are issuedwere purchased at 90% of the fair market value as of the investment date.purchase date, as defined in the plan. Shares purchased from the open market were purchased at 100% of the fair market value on the purchase date, as defined in the plan. During the first quarter of 2014, the board of directors amended the DRP to eliminate the 10% purchase price discount to fair market on shares purchased directly from the Company with optional cash payments. As of December 31, 2012,2015, there were 496,394405,888 shares available for future issuance. 11.INCOME TAXES Pursuant to the accounting guidelines related to income taxes, the Company has evaluated its material tax positions as of December 31, 20122015 and 2011.2014. Under the “more-likely-than-not” threshold guidelines, the Company believes no significant uncertain tax positions exist, either individually or in the aggregate, that would give rise to the non-recognition of an existing tax benefit. In periods subsequent to December 31, 2012,2015, determinations of potentially adverse material tax positions will be evaluated to determine whether an uncertain tax position may have previously existed or has been originated. In the event an adverse tax position is determined to exist, penalty and interest will be accrued, in accordance with the Internal Revenue Service (IRS) guidelines, and will be recorded as a component of other expenses in the Company’s consolidated statements of income. As of December 31, 2012,2015, there were no unrecognized tax benefits that, if recognized, would significantly affect the Company’s effective tax rate. Also, there were no penalties and interest recognized in the consolidated statements of income in 2012, 20112015, 2014 and 20102013 as a result of management’s evaluation of whether an uncertain tax position may exist nor does the Company foresee a change in its material tax positions that would give rise to the non-recognition of an existing tax benefit during the forthcoming twelve months. Tax returns filed with the Internal Revenue ServiceIRS are subject to review by law under a three-year statute of limitations. The Company has not received notification from the IRS regarding adverse tax issues from tax returns filed for tax years 2015, 2014 or 2013. For federal income tax purposes, in 2013 the Company generated a net operating loss (NOL). The NOL position occurred because the Company disposed of its non-accruing and underperforming portfolio of pooled trust preferred securities in 2013. Generally, the credit impairment losses that had been incurred within the portfolio from inception and the related uncollected accrued interest were able to be deducted on the 2013 federal income tax return resulting in the NOL. The NOL was carried back to the two immediately preceding years. By carrying back the NOL, the Company was able to obtain a refund of income taxes paid in 2012 2011 or 2010. and 2011. The following temporary differences gave rise to the net deferred tax asset,liability, a component of other assets in the consolidated balance sheets, as of the periods indicated: | | | As of December 31, | | | (dollars in thousands) | | 2012 | | | 2011 | | | Deferred tax assets: | | | | | | | | | | Other-than-temporary impairment on available-for-sale securities | | $ | 5,212 | | | $ | 5,192 | | | Allowance for loan losses | | | 3,051 | | | | 2,757 | | | Unrealized losses on available-for-sale securities | | | - | | | | 572 | | | Deferred interest from non-accrual assets | | | 979 | | | | 653 | | | Stock-based compensation | | | 37 | | | | 46 | | | Retirement settlement reserve | | | - | | | | 6 | | | Other | | | 133 | | | | 120 | | | Total | | | 9,412 | | | | 9,346 | | | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | | Depreciation | | | (464 | ) | | | (504 | ) | | Loan fees and costs | | | (1,070 | ) | | | (879 | ) | | Unrealized gains on available-for-sale securities | | | (121 | ) | | | - | | | Other | | | (304 | ) | | | (269 | ) | | Total | | | (1,959 | ) | | | (1,652 | ) | | Deferred tax asset, net | | $ | 7,453 | | | $ | 7,694 | |
| | | | | | | As of December 31, | (dollars in thousands) | 2015 | | 2014 | Deferred tax assets: | | | | | | Allowance for loan losses | $ | 3,239 | | $ | 3,119 | Deferred interest from non-accrual assets | | 376 | | | 415 | Other | | 281 | | | 321 | Total | | 3,896 | | | 3,855 | | | | | | | Deferred tax liabilities: | | | | | | Net unrealized gains on available-for-sale securities | | (1,127) | | | (1,413) | Loan fees and costs | | (1,434) | | | (1,400) | Automobile leasing | | (2,019) | | | (463) | Depreciation | | (357) | | | (367) | Mortgage loan servicing rights | | (410) | | | (342) | Other | | (69) | | | (31) | Total | | (5,416) | | | (4,016) | Deferred tax liability, net | $ | (1,520) | | $ | (161) |
The components of the total provision (credit) for income taxes for the years indicated are as follows: | | | | | | | | | | | | Years ended December 31, | | Years ended December 31, | | (dollars in thousands) | | 2012 | | | 2011 | | 2010 | | 2015 | | 2014 | | 2013 | | | | | | | | | | | Current | | $ | 2,011 | | | $ | 1,760 | | | $ | 1,566 | | $ | 173 | | $ | 2,010 | | $ | (3,531) | | Deferred | | | (452 | ) | | | (115 | ) | | | (4,123 | ) | | 1,645 | | 156 | | | 6,166 | | Total provision (credit) for income taxes | | $ | 1,559 | | | $ | 1,645 | | | $ | (2,557 | ) | | Total provision for income taxes | | $ | 1,818 | | $ | 2,166 | | $ | 2,635 |
The reconciliation between the expected statutory income tax and the actual provision (credit) for income taxes is as follows: | | | Years ended December 31, | | | (dollars in thousands) | | 2012 | | | 2011 | | | 2010 | | | Expected provision (credit) at the statutory rate | | $ | 2,197 | | | $ | 2,275 | | | $ | (1,959 | ) | | Tax-exempt income | | | (563 | ) | | | (563 | ) | | | (545 | ) | | Bank owned life insurance | | | (111 | ) | | | (107 | ) | | | (105 | ) | | Low income housing credits | | | (10 | ) | | | (10 | ) | | | - | | | Nondeductible interest expense | | | 16 | | | | 21 | | | | 31 | | | Nondeductible other expenses and other, net | | | 30 | | | | 29 | | | | 21 | | | Actual provision (credit) for income taxes | | $ | 1,559 | | | $ | 1,645 | | | $ | (2,557 | ) |
| | | | | | | | | | Years ended December 31, | | | | | | | | | | (dollars in thousands) | 2015 | | 2014 | | 2013 | Expected provision at the statutory rate | $ | 3,033 | | $ | 2,896 | | $ | 3,317 | Tax-exempt income | | (715) | | | (671) | | | (589) | Bank owned life insurance | | (116) | | | (115) | | | (114) | Low income housing credits | | - | | | - | | | (10) | Nondeductible interest expense | | 14 | | | 16 | | | 14 | Nondeductible other expenses and other, net | | 41 | | | 40 | | | 17 | Tax credits | | (439) | | | - | | | - | Actual provision for income taxes | $ | 1,818 | | $ | 2,166 | | $ | 2,635 |
12.RETIREMENT PLAN The Company has a defined contribution profit sharing 401(k) plan covering substantially all of its employees. The plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). Contributions to the plan approximated $0.4 million, $0.3 million and $0.3 million in 2012, 2011and 2010.2015, 2014 and 2013. | 12. | FAIR VALUE MEASUREMENTS |
13.FAIR VALUE MEASUREMENTS The accounting guidelines establish a framework for measuring and disclosing information about fair value measurements. The guidelines of fair value reporting instituted a valuation hierarchy for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows: Level 1 -inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 -inputs are quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; Level 3 -inputs are unobservable and are based on the Company’s own assumptions to measure assets and liabilities at fair value. Level 3 pricing for securities may also include unobservable inputs based upon broker-traded transactions. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The Company uses fair value to measure certain assets and, if necessary, liabilities on a recurring basis when fair value is the primary measure for accounting. Thus, the Company uses fair value for AFS securities. Fair value is used on a non-recurring basis to measure certain assets when adjusting carrying values to market values, such as impaired loans, and other real estate owned.owned (ORE) and other repossessed assets.
The following table represents the carrying amount and estimated fair value of the Company’s financial instruments: | | | | | | December 31, 2012 | | | December 31, 2011 | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2015 | | December 31, 2015 | | | | | | | Quoted prices | | Significant | | Significant | | | | | | | | | | Quoted prices | | Significant | | Significant | | | | | | | in active | | other | | other | | | | | | | | | | in active | | other | | other | | | | Carrying | | Estimated | | | markets | | observable inputs | | unobservable inputs | | | Carrying | | Estimated | | Carrying | | Estimated | | markets | | observable inputs | | unobservable inputs | | (dollars in thousands) | | amount | | fair value | | | (Level 1) | | | (Level 2) | | | (Level 3) | | | amount | | fair value | | amount | | fair value | | (Level 1) | | (Level 2) | | (Level 3) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 21,846 | | | $ | 21,846 | | | $ | 21,846 | | | $ | - | | | $ | - | | | $ | 52,165 | | | $ | 52,165 | | $ | 12,277 | | $ | 12,277 | | $ | 12,277 | | $ | - | | $ | - | | Held-to-maturity securities | | | 289 | | | | 320 | | | | - | | | | 320 | | | | - | | | | 389 | | | | 431 | | | | Available-for-sale securities | | | 100,441 | | | | 100,441 | | | | 466 | | | | 98,150 | | | | 1,825 | | | | 108,154 | | | | 108,154 | | | 125,232 | | 125,232 | | 546 | | 124,686 | | - | | FHLB Stock | | | 2,624 | | | | 2,624 | | | | - | | | | - | | | | - | | | | 3,699 | | | | 3,699 | | | | Loans, net | | | 424,584 | | | | 430,861 | | | | - | | | | - | | | | 430,861 | | | | 398,186 | | | | 400,100 | | | FHLB stock | | | 2,120 | | 2,120 | | - | | 2,120 | | - | Loans and leases, net | | | 546,682 | | 545,523 | | - | | - | | 545,523 | | Loans held-for-sale | | | 10,545 | | | | 10,824 | | | | - | | | | 10,824 | | | | - | | | | 4,537 | | | | 4,661 | | | 1,421 | | 1,444 | | - | | 1,444 | | - | | Accrued interest | | | 1,985 | | | | 1,985 | | | | - | | | | 1,985 | | | | - | | | | 2,082 | | | | 2,082 | | | Accrued interest receivable | | | 2,210 | | 2,210 | | - | | 2,210 | | - | Financial liabilities: | | | | | | | | | | | | Deposits with no stated maturities | | | 516,473 | | 516,473 | | - | | 516,473 | | - | Time deposits | | | 104,202 | | 103,403 | | - | | 103,403 | | - | Short-term borrowings | | | 28,204 | | 28,204 | | - | | 28,204 | | - | Accrued interest payable | | | 189 | | 189 | | - | | 189 | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposit liabilities | | | 514,660 | | | | 515,869 | | | | - | | | | 515,869 | | | | - | | | | 515,802 | | | | 517,293 | | | | Short-term borrowings | | | 8,056 | | | | 8,056 | | | | - | | | | 8,056 | | | | - | | | | 9,507 | | | | 9,507 | | | | Long-term debt | | | 16,000 | | | | 18,691 | | | | - | | | | 18,691 | | | | - | | | | 21,000 | | | | 24,272 | | | | Accrued interest | | | 195 | | | | 195 | | | | - | | | | 195 | | | | - | | | | 293 | | | | 293 | | |
Prior to the fourth quarter
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2014 | | | | | | | | Quoted prices | | Significant | | Significant | | | | | | | | in active | | other | | other | | Carrying | | Estimated | | markets | | observable inputs | | unobservable inputs | (dollars in thousands) | amount | | fair value | | (Level 1) | | (Level 2) | | (Level 3) | | | | | | | | | | | | | | | | Financial assets: | | | | | | | | | | | | | | | Cash and cash equivalents | $ | 25,851 | | $ | 25,851 | | $ | 25,851 | | $ | - | | $ | - | Available-for-sale securities | | 97,896 | | | 97,896 | | | 595 | | | 97,301 | | | - | FHLB stock | | 1,306 | | | 1,306 | | | - | | | 1,306 | | | - | Loans and leases, net | | 506,327 | | | 505,387 | | | - | | | - | | | 505,387 | Loans held-for-sale | | 1,161 | | | 1,186 | | | - | | | 1,186 | | | - | Accrued interest receivable | | 2,086 | | | 2,086 | | | - | | | 2,086 | | | - | Financial liabilities: | | | | | | | | | | | | | | | Deposits with no stated maturities | | 482,314 | | | 482,314 | | | - | | | 482,314 | | | - | Time deposits | | 104,630 | | | 104,442 | | | | | | 104,442 | | | - | Short-term borrowings | | 3,969 | | | 3,969 | | | - | | | 3,969 | | | - | Long-term debt | | 10,000 | | | 10,758 | | | - | | | 10,758 | | | - | Accrued interest payable | | 151 | | | 151 | | | - | | | 151 | | | - | | | | | | | | | | | | | | | |
The carrying value of 2012, the Company considered fair value for non-maturing deposits, short-term borrowings and accrued interestfinancial instruments, as Level 1. Beginning in the fourth quarter of 2012, the Company transferred these fair these items to Level 2 as management has concluded there is no active market for inputs to determinelisted below, approximates their fair value. These instruments generally have limited credit exposure, no stated or short-term maturities, carry interest rates that approximate market and generally are recorded at amounts that are payable on demand : 79 | · | | Cash and cash equivalents; |
| · | | Non-interest bearing deposit accounts; |
| · | | Savings, interest-bearing checking and money market accounts and |
Securities: Fair values on investment securities are determined by prices provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions. Loans and leases: The fair value of loans is estimated by the net present value of the future expected cash flows discounted at current offering rates for similar loans. Current offering rates consider, among other things, credit risk. The carrying value that fair value is compared to is net of the allowance for loan losses and since there is significant judgment included in evaluating credit quality, loans are classified within Level 3 of the fair value hierarchy.
Loans held-for-sale: The fair value of loans held-for-sale is estimated using rates currently offered for similar loans and is typically obtained from the Federal National Mortgage Association (FNMA) or the Federal Home Loan Bank of Pittsburgh (FHLB). Certificates of deposit: The fair value of certificates of deposit are based on discounted cash flows using rates which approximate market rates for deposits of similar maturities. Long-term debt: Fair value is estimated using the rates currently offered for similar borrowings. The following tables illustrate the financial instruments measured at fair value on a recurring basis segregated by hierarchy fair value levels as of the periodperiods indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Quoted prices | | | | | | | | | | | in active | | Significant other | | Significant other | | Total carrying value | | markets | | observable inputs | | unobservable inputs | (dollars in thousands) | December 31, 2015 | | (Level 1) | | (Level 2) | | (Level 3) | Available-for-sale securities: | | | | | | | | | | | | Agency - GSE | $ | 18,386 | | $ | - | | $ | 18,386 | | $ | - | Obligations of states and political subdivisions | | 36,885 | | | - | | | 36,885 | | | - | MBS - GSE residential | | 69,415 | | | - | | | 69,415 | | | - | Equity securities - financial services | | 546 | | | 546 | | | - | | | - | Total available-for-sale securities | $ | 125,232 | | $ | 546 | | $ | 124,686 | | $ | - |
| | | | | | Quoted prices | | | | | | | | | | | | | | in active | | | Significant other | | | Significant other | | | | | Total carrying value | | | markets | | | observable inputs | | | unobservable inputs | | | (dollars in thousands) | | December 31, 2012 | | | (Level 1) | | | (Level 2) | | | (Level 3) | | | Available-for-sale securities: | | | | | | | | | | | | | | | | | | Agency - GSE | | $ | 17,740 | | | $ | - | | | $ | 17,740 | | | $ | - | | | Obligations of states and political subdivisions | | | 29,857 | | | | - | | | | 29,857 | | | | - | | | Corporate bonds: | | | | | | | | | | | | | | | | | | Pooled trust preferred securities | | | 1,825 | | | | - | | | | - | | | | 1,825 | | | MBS - GSE residential | | | 50,553 | | | | - | | | | 50,553 | | | | - | | | Equity securities - financial services | | | 466 | | | | 466 | | | | - | | | | - | | | Total available-for-sale securities | | $ | 100,441 | | | $ | 466 | | | $ | 98,150 | | | $ | 1,825 | |
| | | | | | | | | | | | | | | | | | | | | | | | | Quoted prices | | | | | | | | | Quoted prices | | | | | | | | | | in active | | Significant other | | Significant other | | | | | in active | | Significant other | | Significant other | | | | Total carrying value | | markets | | observable inputs | | unobservable inputs | | Total carrying value | | markets | | observable inputs | | unobservable inputs | | (dollars in thousands) | | December 31, 2011 | | (Level 1) | | (Level 2) | | (Level 3) | | December 31, 2014 | | (Level 1) | | (Level 2) | | (Level 3) | | Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | | | | | | | Agency - GSE | | $ | 25,873 | | | $ | - | | | $ | 25,873 | | | $ | - | | $ | 14,398 | | $ | - | | $ | 14,398 | | $ | - | | Obligations of states and political subdivisions | | | 30,159 | | | | - | | | | 30,159 | | | | - | | | 37,033 | | - | | 37,033 | | - | | Corporate bonds: | | | | | | | | | | | | | | | | | | | Pooled trust preferred securities | | | 1,466 | | | | - | | | | - | | | | 1,466 | | | | MBS - GSE residential | | | 50,217 | | | | - | | | | 50,217 | | | | - | | | 45,870 | | - | | 45,870 | | - | | Equity securities - financial services | | | 439 | | | | 439 | | | | - | | | | - | | | 595 | | 595 | | - | | - | | Total available-for-sale securities | | $ | 108,154 | | | $ | 439 | | | $ | 106,249 | | | $ | 1,466 | | $ | 97,896 | | $ | 595 | | $ | 97,301 | | $ | - |
Equity securities in the AFS portfolio are measured at fair value using quoted market prices for identical assets and are classified within Level 1 of the valuation hierarchy. Other than the Company’s investment in corporate bonds, consisting of pooled trust preferred securities, other debtDebt securities in the AFS portfolio are measured at fair value using market quotations provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions. Assets classified as Level 2 use valuation techniques that are common to bond valuations. That is, in active markets whereby bonds of similar characteristics frequently trade, quotes for similar assets are obtained. For the yearyears ended December 31, 2012,2015 and 2014, there were no transfers to or from Level 1 and Level 2 fair value measurements for financial assets measured on a recurring basis. The Company’s pooled trust preferred securities include both observable and unobservable inputs to determine fair value and, therefore, are considered Level 3 inputs. The accounting pronouncement related to fair value measurement provides guidance on estimating fair value when the volume and level of activity for an asset or liability have significantly decreased in relation to normal market activity such as is the case with the Company’s investment in pooled trust preferred securities.
The following table presents and summarizes quantitative information about assets measured at fair value on a recurring basis whereby the Company uses Level 3 inputs to determine fair value:
| | | Quantitative information about Level 3 fair value measurements as of December 31, 2012: | | | | | Fair | | | Valuation | | Unobservable | | Input | | | (dollars in thousands) | | value | | | technique | | input | | utilized | | | Available-for-sale securities: | | | | | | | | | | | | | | Pooled trust preferred securities | | $ | 1,825 | | | discounted cash | | - structural behavior; | | | issuer specific | | | | | | | | | flow | | - estimated probability of default | | | 4.11% - 4.17 | % | | | | | | | | | | - correlation analysis among issuers | | | 50% - 30 | % | | | | | | | | | | - loss given default rate | | | 100 | % | | | | | | | | | | - prepayment rate | | | 0 | % | | | | | | | | | | - recovery rate | | | 0 | % | | | | | | | | | | - credit adjusted cash flow discount rate | | | 0% - 36.3 | % |
The Company owns 13 issues of $22.3 million, original par value, pooled trust preferred securities. As of December 31, 2012, the amortized cost and fair values amounted to $6.3 million and $1.8 million, respectively. The market for these securities is inactive –There were no new issues since late 2007, financial institutions with less than $10 billion in assets qualify for new issue Tier 1 capital treatment which further limits the already low probability of a new issue coming to market, trading is sparse and consummated mostly by speculative hedge funds. Observable pricing market inputs such as broker models, S&P pricing based on interpolated available market activity and Bloomberg fair value models for corporate issues are available, however, such inputs to be used as indicators of fair value would require significant adjustments. Therefore, management has determined that a fair value modeled income approach (discounted cash flow) is more representative of fair value than the market approach. This technique strives to maximize the use of observable inputs and minimizes the use of unobservable inputs. The Company uses the Moody’s Wall Street Analytics methodology of valuation and analysis of collateralized “TruPS”, and their proprietary software to help analyze and value the Company’s pooled trust preferred securities portfolio. The major unobservable input assumptions used in the cash flow analysis include:
| · | Credit quality estimated using issuer specific probability of default; |
| · | Correlation analysis or the potential for the tendency of companies to default once other companies in the same industry default: 50% for same industry and 30% for across industries; |
| · | Loss given default or cash lost to investor. Assumed to be 100% with no recovery: |
| · | Cash flows were forecast for the underlying collateral and applied to each tranche to determine the resulting distribution among securities, capturing the credit risk element of the collateral, and to determine the estimated fundamental value of the security. No prepayments are assumed and the tranche coupon rate is used as the discount rate; and |
| · | Finally, the orderly liquid exit values (OLEV) are calculated for valuation purposes. The OLEV estimates a new issuance spread as if the market was both liquid and active utilizing the current risk profile of the security and regression analysis across a large sample of tranches based on historical data. The discount rates determined on an overall basis ranged from 0% to 36% as of December 31, 2012 and are applied to the fundamental cash flow value (as determined above) of the security to determine fair value. |
The following table illustrates the changes in Level 3 financial instruments measured at fair value on a recurring basis as of and for the periods indicated:
| | | As of and for the year ended December 31, | | | (dollars in thousands) | | 2012 | | | 2011 | | | | | | | | | | | Balance at beginning of period | | $ | 1,466 | | | $ | 1,453 | | | Realized losses in earnings | | | (136 | ) | | | (246 | ) | | Unrealized gains (losses) in OCI: | | | | | | | | | | Gains | | | 739 | | | | 624 | | | Losses | | | (129 | ) | | | (312 | ) | | Pay down / settlement | | | (146 | ) | | | (79 | ) | | Interest paid in kind | | | 28 | | | | 23 | | | Accretion | | | 3 | | | | 3 | | | Balance at end of period | | $ | 1,825 | | | $ | 1,466 | |
ending December 31, 2015 and 2014, respectively. The following table illustrates the financial instruments measured at fair value on a non-recurring basis segregated by hierarchy fair value levels as of the periods indicated: | (dollars in thousands) | | | | | | | | | | Quoted prices in | | Significant other | | Significant other | | | | | | | | | | | | | | | | Total carrying value | | active markets | | observable inputs | | unobservable inputs | | | | | | | | | | | | | | | | at December 31, 2012 | | (Level 1) | | (Level 2) | | (Level 3) | | | | | Quoted prices in | | Significant other | | Significant other | | | | | | | | | | | | Total carrying value | | active markets | | observable inputs | | unobservable inputs | (dollars in thousands) | | at December 31, 2015 | | (Level 1) | | (Level 2) | | (Level 3) | | | | | | | | | | | | | | | Impaired loans | | $ | 5,109 | | | $ | - | | | $ | - | | | $ | 5,109 | | $ | 7,132 | | $ | - | | $ | - | | $ | 7,132 | | Other real estate owned | | | 1,448 | | | | - | | | | - | | | | 1,448 | | | 903 | | | - | | | - | | | 903 | | Other repossessed assets | | | 6 | | | | - | | | | - | | | | 6 | | | | Total | | $ | 6,563 | | | $ | - | | | $ | - | | | $ | 6,563 | | $ | 8,035 | | $ | - | | $ | - | | $ | 8,035 |
| (dollars in thousands) | | | | | | | | | | Quoted prices in | | | Significant other | | | Significant other | | | | | Total carrying value | | | active markets | | | observable inputs | | | unobservable inputs | | | | | at December 31, 2011 | | | (Level 1) | | | (Level 2) | | | (Level 3) | | | | | | | | | | | | | | | | | Impaired loans | | $ | 10,102 | | | $ | - | | | $ | - | | | $ | 10,102 | | | Other real estate owned | | | 902 | | | | - | | | | - | | | | 902 | | | Total | | $ | 11,004 | | | $ | - | | | $ | - | | | $ | 11,004 | |
| | | | | | | | | | | | | | | | Quoted prices in | | Significant other | | Significant other | | Total carrying value | | active markets | | observable inputs | | unobservable inputs | (dollars in thousands) | at December 31, 2014 | | (Level 1) | | (Level 2) | | (Level 3) | | | | | | | | | | | | | Impaired loans | $ | 2,158 | | $ | - | | $ | - | | $ | 2,158 | Other real estate owned | | 1,506 | | | - | | | - | | | 1,506 | Total | $ | 3,664 | | $ | - | | $ | - | | $ | 3,664 |
From time-to-time, the Company may be required to record at fair value financial instruments on a non-recurring basis, such as impaired loans, and other real estate owned (ORE)ORE and other repossessed assets. These non-recurring fair value adjustments involve the application of lower-of-cost-or-market accounting on write downs of individual assets. The following describes valuation methodologies used for financial instruments measured at fair value on a non-recurring basis. A loan is considered impaired when, based upon current information and events; it is probable that the Company will be unable to collect all scheduled payments in accordance with the contractual terms of the loan. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves, a component of the allowance for loan losses, and as such are carried at the lower of net recorded investment or the estimated fair value.
Estimates of fair value of the collateral are determined based on a variety of information, including available valuations from certified appraisers for similar assets, present value of discounted cash flows and inputs that are estimated based on commonly used and generally accepted industry liquidation advance rates and estimates and assumptions developed by management. For other real estate owned, fair value is generally Valuation techniques for impaired loans are typically determined through independent appraisals of the underlying properties which generallycollateral or may be determined through present value of discounted cash flows. Both techniques include various Level 3 inputs which are not identifiable. The appraisals may be adjusted by management for qualitative reasons and estimated liquidation expenses. Management’s assumptions may include consideration of location and occupancy of the property and current economic conditions. Subsequently, as these properties are actively marketed, the estimated fair values may be periodically adjusted through incremental subsequent write-downs to reflect decreases in estimated values resulting from sales price observations and the impact of changing economic and market conditions. At December 31, 2012 to account for the aforementioned factors, adjustments to the appraisal values for other real estate owned ranged from -16.72% to -94.74% (weighted average -34.89%). For other repossessed assets, consisting of one automobile as of December 31, 2012, the Company refers to the National Automobile Dealers Association (NADA) guide to determine a vehicle’s fair value. There were no other repossessed assets at December 31, 2011. Valuation techniques for impaired loans are generally determined through independent appraisals of the underlying collateral which generally include various Level 3 inputs which are not identifiable. The appraisalsvaluation technique may be adjusted by management for estimated liquidation expenses and qualitative factors such as economic conditions. If real estate is not the primary source of repayment, present value of discounted cash flows and estimates using generally accepted industry liquidation advance rates are utilized. Theand other factors may be utilized to determine fair value.
At December 31, 2015 and 2014, the range of liquidation expenses and other appraisalvaluation adjustments of theapplied to impaired loans atranged from -4.92% to -50.00% and from -19.96% to -42.41% respectively. The weighted-average of liquidation expenses and other valuation adjustments applied to impaired loans amounted to -27.84% and -27.26% as of December 31, 2012 was -2.3% to -64.40 % (weighted-average -35.54%).2015 and 2014, respectively. Due to the multitude of assumptions, many of which are subjective in nature, and the varying inputs and techniques used by appraisers,to determine fair value, the Company recognizes that valuations could differ across a wide spectrum of valuation techniques employed and accordingly,employed. Accordingly, fair value estimates for impaired loans are classified as Level 3. For ORE, fair value is generally determined through independent appraisals of the underlying properties which generally include various Level 3 inputs which are not identifiable. Appraisals form the basis for determining the net realizable value from these properties. Net realizable value is the result of the appraised value less certain costs or discounts associated with liquidation which occurs in the normal course of business. Management’s assumptions may include consideration of the location and occupancy of the property, along with current economic conditions. Subsequently, as these properties are actively marketed, the estimated fair values may be periodically adjusted through incremental subsequent write-downs. These write-downs usually reflect decreases in estimated values resulting from sales price observations as well as changing economic and market conditions. At December 31, 2015 and 2014, the discounts applied to the appraised values of ORE ranged from -15.90% to -99.00% and from -19.00% to -99.00%, respectively. As of December 31, 2015 and 2014, the weighted-average of discount to the appraisal values of ORE amounted to -37.64% and -27.23%, respectively. Financial Instruments with Off-Balance Sheet Risk The Company is a 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 standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of the Company’s involvement in particular classes of financial instruments. Because of the nature of these instruments, the fair values of these off-balance sheet items are not material.
The notional amount of the Company’s financial instruments with off-balance sheet risk was as follows: | | | | | | | | | December 31, | | December 31, | | (dollars in thousands) | | 2012 | | | 2011 | | | 2015 | | | 2014 | | Off-balance sheet financial instruments: | | | | | | | | | | | | | | Commitments to extend credit | | $ | 100,930 | | | $ | 78,983 | | $ | 109,628 | | $ | 92,146 | | Standby letters of credit | | | 8,644 | | | | 9,134 | | | 8,178 | | 6,872 |
Commitments to Extend Credit and Standby Letters of Credit The Company’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit 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 sheet instruments. Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. The Company evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by the Company on extension of credit, is based on management’s credit assessment of the customer. Financial standby letters of credit are conditional commitments issued by the Company to guarantee performance of a customer to a third party. Those guarantees are issued primarily to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The Company’s performance under the guarantee is required upon presentation by the beneficiary of the financial standby letter of credit. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company was not required to recognize any liability in connection with the issuance of these financial standby letters of credit. The following table summarizes outstanding financial letters of credit as of December 31, 2012:2015: | | | | | | | | | | | | | | | More than | | | | | | | | | More than | | | | | | | | | Less than | | one year to | | Over five | | | | Less than | | one year to | | Over five | | | | (dollars in thousands) | | one year | | five years | | years | | Total | | one year | | five years | | years | | Total | | Secured by: | | | | | | | | | | | | | | | | | | | | | | | | | | Collateral | | $ | 1,903 | | | $ | 5,001 | | | $ | 617 | | | $ | 7,521 | | $ | 1,658 | | $ | 5,055 | | $ | 360 | | $ | 7,073 | | Bank lines of credit | | | 517 | | | | - | | | | - | | | | 517 | | | 800 | | 18 | | - | | 818 | | | | | 2,420 | | | | 5,001 | | | | 617 | | | | 8,038 | | | 2,458 | | 5,073 | | 360 | | 7,891 | | Unsecured | | | 595 | | | | 11 | | | | - | | | | 606 | | | 236 | | 51 | | - | | 287 | | Total | | $ | 3,015 | | | $ | 5,012 | | | $ | 617 | | | $ | 8,644 | | $ | 2,694 | | $ | 5,124 | | $ | 360 | | $ | 8,178 |
The Company has not incurred losses on its commitments in 2012, 20112015, 2014 or 2010.2013. 14.EARNINGS PER SHARE Basic earnings (loss) per share (EPS) is computed by dividing net income (loss) available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed in the same manner as basic EPS but also reflects the potential dilution that could occur from the grant of stock-based compensation awards. The Company maintains two active share-based compensation plans that may generate additional potentially dilutive common shares. For granted and unexercised stock options, dilution would occur if Company-issued stock options were exercised and converted into common stock. Since the average share market pricesAs of the Company’s commonyears ended December 31, 2015 and 2014, there were 2,265 and 115 potentially dilutive shares related to issued and unexercised stock during 2012, 2011 and 2010, were below the strike prices of all unexercised outstanding options, thereoptions. There were no potentially dilutive shares outstanding in any of the reportable periods related to stock options.options during 2013. For restricted stock, dilution occurs based onwould occur from the Company’s previously granted but unvested numbershares. There were 4,975, 5,425, and 4,674 potentially dilutive shares related to unvested restricted share grants as of shares granted or 151 shares atthe years ended December 31, 2012. There were no restricted stock grants in 2011 or 2010.2015, 2014 and 2013, respectively. In the computation of diluted EPS, the Company uses the treasury stock method to determine the dilutive effect of its granted but unexercised stock options and unvested restricted stock. Under the treasury stock method, the assumed proceeds, as defined, received from shares issued in a hypothetical stock option exercise or restricted stock grant, are assumed to be used to purchase treasury stock.Pursuant to the accounting guidance for earnings per share, proceeds Proceeds include: proceedsamounts received from the exercise of outstanding stock options; compensation cost for future service that the Company has not yet recognized;recognized in earnings; and any “windfall”windfall tax benefits that would be credited directly to shareholders’ equity when the grant generates a tax deduction (or a reduction in proceeds if there is a charge to equity). The Company does not consider awards from share-based grants in the computation of basic EPS.
Table Of Contents The following table illustrates the data used in computing basic and diluted EPS for the years indicated: | | | | | | | | | | | | | | | | | | | Year ended December 31, | | Years ended December 31, | | | | 2012 | | | 2011 | | 2010 | | 2015 | | 2014 | | 2013 | | (dollars in thousands except per share data) | | | | | | | | | | | | | | | Basic EPS: | | | | | | | | | | | | | | | | | | | | Net income (loss) available to common shareholders | | $ | 4,902 | | | $ | 5,045 | | | $ | (3,204 | ) | | | | | | | | | | | | | | | | | Net income available to common shareholders | | $ | 7,103 | | $ | 6,352 | | $ | 7,122 | | Weighted-average common shares outstanding | | | 2,286,233 | | | | 2,213,631 | | | | 2,141,323 | | | 2,439,124 | | 2,412,962 | | 2,353,056 | | Basic EPS | | $ | 2.14 | | | $ | 2.28 | | | $ | (1.50 | ) | $ | 2.91 | | $ | 2.63 | | $ | 3.03 | | | | | | | | | | | | | | | | | | | | | | Diluted EPS: | | | | | | | | | | | | | | | | | | | | Net income (loss) available to common shareholders | | $ | 4,902 | | | $ | 5,045 | | | $ | (3,204 | ) | | | | | | | | | | | | | | | | | Net income available to common shareholders | | $ | 7,103 | | $ | 6,352 | | $ | 7,122 | | Weighted-average common shares outstanding | | | 2,286,233 | | | | 2,213,631 | | | | 2,141,323 | | | 2,439,124 | | 2,412,962 | | 2,353,056 | | Potentially dilutive common shares | | | 151 | | | | - | | | | - | | | 7,240 | | 5,540 | | 4,674 | | Weighted-average common and potentially dilutive shares outstanding | | | 2,286,384 | | | | 2,213,631 | | | | 2,141,323 | | | 2,446,364 | | 2,418,502 | | 2,357,730 | | Diluted EPS | | $ | 2.14 | | | $ | 2.28 | | | $ | (1.50 | ) | $ | 2.90 | | $ | 2.62 | | $ | 3.02 |
15.REGULATORY MATTERS The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Under these guidelines, assets and certain off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets. The appropriate risk-weighting pursuant to regulatory guidelines, requires a gross-up in the risk-weighting of securities that are rated below investment grade, thus significantly inflating the total risk-weighted assets. This requirement had an adverse impact on the total capital and Tier I capital ratios in both 2012 and 2011. The guidelines require all banks and bank holding companies to maintain a minimum ratio of total risk-based capital to total risk-weighted assets (Total Risk Adjusted Capital) of 8%, including Tier I common equity to total risk-weighted assets (Tier I Common Equity) of 4.5%, Tier I capital to total risk-weighted assets (Tier I Capital) of 4%6% and Tier I capital to average total assets (Leverage Ratio) of at least 4%. As of December 31, 20122015 and 2011,2014, the Company and the Bank exceeded all capital adequacy requirements to which it was subject. To be categorized as well capitalized,In July 2013, the federal bank regulatory agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. Under the final rules, which became effective for the Company on January 1, 2015 and are subject to a phase-in period through January 1, 2019, minimum requirements increased for both the quantity and quality of capital held by the Company. The rules require all banks and bank holding companies to maintain a new common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, raise the minimum ratio of Tier 1 capital to risk-weighted assets (Tier I capital) from 4.0% to 6.0%, require a minimum ratio of total risk-based capital to total risk-weighted assets (Total Risk Based Capital) of 8.0%, and require a minimum Tier I capital to average total assets (Leverage Ratio) of 4.0%. A new capital conservation buffer, comprised of common equity Tier I capital, is also established above the regulatory minimum capital requirements. The rule increases the minimum Tier 1 capital to risk-based assets requirement with a capital conservation buffer to 8.5% by 2019 and increases the minimum total capital requirement with a capital conservation buffer to 10.5% by 2019 and assigns higher risk-weightings to certain assets: certain past due and commercial real estate loans and some equity exposures.
The following table reflects the actual and required capital and the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leveragerelated capital ratios as set forth inof the following table. The Company’s and the Bank’s actual capital amounts and ratios are also presented in the table.periods indicated. No amounts were deducted from capital for interest-rate risk in either 20122015 or 2011.2014. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | To be well capitalized | | | | | | For capital | under prompt corrective | | Actual | adequacy purposes | action provisions | (dollars in thousands) | Amount | | Ratio | Amount | Ratio | Amount | Ratio | As of December 31, 2015: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total capital (to risk-weighted assets) | | | | | | | | | | | | | | | Consolidated | $ | 81,074 | | 15.0% | ≥ | $ | 43,278 | ≥ | 8.0% | | | N/A | | N/A | Bank | $ | 80,547 | | 14.9% | ≥ | $ | 43,306 | ≥ | 8.0% | ≥ | $ | 54,132 | ≥ | 10.0% | | | | | | | | | | | | | | | | Tier 1 common equity (to risk-weighted assets) | | | | | | | | | | | | | | | Consolidated | $ | 74,163 | | 13.7% | ≥ | $ | 24,344 | ≥ | 4.5% | | | N/A | | N/A | Bank | $ | 73,744 | | 13.6% | ≥ | $ | 24,360 | ≥ | 4.5% | ≥ | $ | 35,186 | ≥ | 6.5% | | | | | | | | | | | | | | | | Tier I capital (to risk-weighted assets) | | | | | | | | | | | | | | | Consolidated | $ | 74,163 | | 13.7% | ≥ | $ | 43,723 | ≥ | 6.0% | | | N/A | | N/A | Bank | $ | 73,744 | | 13.6% | ≥ | $ | 43,635 | ≥ | 6.0% | ≥ | $ | 58,180 | ≥ | 8.0% | | | | | | | | | | | | | | | | Tier I capital (to average assets) | | | | | | | | | | | | | | | Consolidated | $ | 74,163 | | 10.2% | ≥ | $ | 29,149 | ≥ | 4.0% | | | N/A | | N/A | Bank | $ | 73,744 | | 10.1% | ≥ | $ | 29,090 | ≥ | 4.0% | ≥ | $ | 36,362 | ≥ | 5.0% | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2014: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total capital (to risk-weighted assets) | | | | | | | | | | | | | | | Consolidated | $ | 75,756 | | 15.3% | ≥ | $ | 39,730 | ≥ | 8.0% | | | N/A | | N/A | Bank | $ | 75,230 | | 15.2% | ≥ | $ | 39,728 | ≥ | 8.0% | ≥ | $ | 49,660 | ≥ | 10.0% | | | | | | | | | | | | | | | | Tier I capital (to risk-weighted assets) | | | | | | | | | | | | | | | Consolidated | $ | 69,376 | | 14.0% | ≥ | $ | 19,865 | ≥ | 4.0% | | | N/A | | N/A | Bank | $ | 68,985 | | 13.9% | ≥ | $ | 19,864 | ≥ | 4.0% | ≥ | $ | 29,796 | ≥ | 6.0% | | | | | | | | | | | | | | | | Tier I capital (to average assets) | | | | | | | | | | | | | | | Consolidated | $ | 69,376 | | 10.0% | ≥ | $ | 27,679 | ≥ | 4.0% | | | N/A | | N/A | Bank | $ | 68,985 | | 10.0% | ≥ | $ | 27,658 | ≥ | 4.0% | ≥ | $ | 34,573 | ≥ | 5.0% |
| | | | | | | | | | | | | | | To be well capitalized | | | | | | | | | | | For capital | | | under prompt corrective | | | | | Actual | | | adequacy purposes | | | action provisions | | | (dollars in thousands) | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | | | As of December 31, 2012: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total capital (to risk-weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | | | Consolidated | | $ | 64,042 | | | | 13.5 | % | | | ≥ $37,929 | | | | ≥ 8.0 | % | | | N/A | | | | N/A | | | Bank | | $ | 63,856 | | | | 13.5 | % | | | ≥ $37,918 | | | | ≥ 8.0 | % | | | ≥ $47,398 | | | | ≥ 10.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | Tier I capital (to risk-weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | | | Consolidated | | $ | 57,999 | | | | 12.2 | % | | | ≥ $18,965 | | | | ≥ 4.0 | % | | | N/A | | | | N/A | | | Bank | | $ | 57,893 | | | | 12.2 | % | | | ≥ $18,959 | | | | ≥ 4.0 | % | | | ≥ $28,439 | | | | ≥ 6.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | Tier I capital (to average assets) | | | | | | | | | | | | | | | | | | | | | | | | | | Consolidated | | $ | 57,999 | | | | 9.7 | % | | | ≥ $24,060 | | | | ≥ 4.0 | % | | | N/A | | | | N/A | | | Bank | | $ | 57,893 | | | | 9.6 | % | | | ≥ $24,042 | | | | ≥ 4.0 | % | | | ≥ $30,053 | | | | ≥ 5.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2011: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total capital (to risk-weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | | | Consolidated | | $ | 58,612 | | | | 13.0 | % | | | ≥ $36,153 | | | | ≥ 8.0 | % | | | N/A | | | | N/A | | | Bank | | $ | 58,403 | | | | 12.9 | % | | | ≥ $36,141 | | | | ≥ 8.0 | % | | | ≥ $45,176 | | | | ≥ 10.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | Tier I capital (to risk-weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | | | Consolidated | | $ | 52,867 | | | | 11.7 | % | | | ≥ $18,077 | | | | ≥ 4.0 | % | | | N/A | | | | N/A | | | Bank | | $ | 52,725 | | | | 11.7 | % | | | ≥ $18,070 | | | | ≥ 4.0 | % | | | ≥ $27,106 | | | | ≥ 6.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | Tier I capital (to average assets) | | | | | | | | | | | | | | | | | | | | | | | | | | Consolidated | | $ | 52,867 | | | | 8.7 | % | | | ≥ $24,347 | | | | ≥ 4.0 | % | | | N/A | | | | N/A | | | Bank | | $ | 52,725 | | | | 8.7 | % | | | ≥ $24,331 | | | | ≥ 4.0 | % | | | ≥ $30,414 | | | | ≥ 5.0 | % |
The Bank can pay dividends to the Company equal to the Bank’s retained earnings which approximated $49.7$64.9 million at December 31, 2012.2015. However, such dividends are limited due to the capital requirements discussed above. | 15. | RELATED PARTY TRANSACTIONS |
16.RELATED PARTY TRANSACTIONS During the ordinary course of business, loans are made to executive officers, directors, greater than 5% shareholders and associates of such persons. These transactions are executed on substantially the same terms and at the rates prevailing at the time for comparable transactions with others. These loans do not involve more than the normal risk of collectability or present other unfavorable features. A summary of loan activity with officers, directors, associates of such persons and shareholders who own more than 5% of the Company’s outstanding shares is as follows: | | | | | | | | | | | Years ended December 31, | | Years ended December 31, | | (dollars in thousands) | | 2012 | | | 2011 | | 2010 | | 2015 | | 2014 | | 2013 | | Balance, beginning | | $ | 1,875 | | | $ | 2,143 | | | $ | 6,829 | | $ | 4,924 | | $ | 4,739 | | $ | 4,629 | | Additions | | | 1,735 | | | | 804 | | | | 1,030 | | | 5,672 | | 2,213 | | 1,954 | | Collections | | | (885 | ) | | | (1,072 | ) | | | (5,716 | ) | | (3,613) | | (2,028) | | (1,844) | | | | | | | | | | | | | | | | | | | | | | Balance, ending | | $ | 2,725 | | | $ | 1,875 | | | $ | 2,143 | | $ | 6,983 | | $ | 4,924 | | $ | 4,739 |
Aggregate loans to directors and associates exceeding 2.5% of shareholders’ equity included in the table above are as follows: | | | Years ended December 31, | | | (dollars in thousands) | | 2012 | | | 2011 | | | 2010 | | | Number of persons | | | 1 | | | | 1 | | | | 1 | | | Balance, beginning | | $ | 1,544 | | | $ | 1,866 | | | $ | 6,605 | | | Additions | | | 618 | | | | 39 | | | | 706 | | | Collections | | | (365 | ) | | | (361 | ) | | | (5,445 | ) | | | | | | | | | | | | | | | | Balance, ending | | $ | 1,797 | | | $ | 1,544 | | | $ | 1,866 | |
| | | | | | | | | | Years ended December 31, | (dollars in thousands) | 2015 | | 2014 | | 2013 | Number of persons | | 1 | | | 1 | | | 1 | Balance, beginning | $ | 1,644 | | $ | 1,883 | | $ | 2,105 | Additions | | 2,620 | | | 1,184 | | | 816 | Collections | | (1,785) | | | (1,423) | | | (1,038) | | | | | | | | | | Balance, ending | $ | 2,479 | | $ | 1,644 | | $ | 1,883 |
As of December 31, 2012, 20112015, 2014 and 2010,2013, deposits from executive officers, directors and associates of such persons approximated $11.7$12.9 million, $10.7$13.7 million and $8.5$11.1 million, respectively. | 16. | QUARTERLY FINANCIAL INFORMATION (UNAUDITED) |
17.QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a summary of quarterly results of operations for the years indicated: | | | | | | | | | | | | | | | | 2012 | | 2015 | | | | First | | Second | | Third | | Fourth | | | | First | | Second | | Third | | Fourth | | | | (dollars in thousands except per share data) | | quarter | | quarter | | quarter | | quarter | | Total | | quarter | | quarter | | quarter | | quarter | | Total | | Interest income | | $ | 6,052 | | | $ | 5,991 | | | $ | 5,974 | | | $ | 5,977 | | | $ | 23,994 | | $ | 6,304 | | $ | 6,438 | | $ | 6,612 | | $ | 6,660 | | $ | 26,014 | | Interest expense | | | (938 | ) | | | (838 | ) | | | (804 | ) | | | (774 | ) | | | (3,354 | ) | | (697) | | (647) | | (580) | | | (605) | | (2,529) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net interest income | | | 5,114 | | | | 5,153 | | | | 5,170 | | | | 5,203 | | | | 20,640 | | | 5,607 | | 5,791 | | 6,032 | | | 6,055 | | 23,485 | | Provision for loan losses | | | (700 | ) | | | (600 | ) | | | (700 | ) | | | (1,250 | ) | | | (3,250 | ) | | (150) | | (150) | | (200) | | | (575) | | (1,075) | | Gain on sale of investment securities | | | 254 | | | | 7 | | | | 3 | | | | 64 | | | | 328 | | | 2 | | 16 | | 8 | | | 54 | | 80 | | Other-than-temporary impairment | | | (105 | ) | | | (31 | ) | | | - | | | | - | | | | (136 | ) | | | Other income | | | 1,802 | | | | 1,896 | | | | 1,865 | | | | 1,754 | | | | 7,317 | | | 1,748 | | 1,817 | | 2,015 | | | 1,873 | | 7,453 | | Other expenses | | | (4,713 | ) | | | (4,678 | ) | | | (4,453 | ) | | | (4,594 | ) | | | (18,438 | ) | | (5,087) | | (5,744) | | (5,239) | | | (4,952) | | (21,022) | | Income before taxes | | | 1,652 | | | | 1,747 | | | | 1,885 | | | | 1,177 | | | | 6,461 | | | 2,120 | | 1,730 | | 2,616 | | | 2,455 | | 8,921 | | Provision for income taxes | | | (395 | ) | | | (430 | ) | | | (486 | ) | | | (248 | ) | | | (1,559 | ) | | (Provision) credit for income taxes | | | (547) | | 50 | | (687) | | | (634) | | (1,818) | | Net income | | $ | 1,257 | | | $ | 1,317 | | | $ | 1,399 | | | $ | 929 | | | $ | 4,902 | | $ | 1,573 | | $ | 1,780 | | $ | 1,929 | | $ | 1,821 | | $ | 7,103 | | Net income per share | | $ | 0.56 | | | $ | 0.57 | | | $ | 0.61 | | | $ | 0.40 | | | $ | 2.14 | | | Net income per share - basic | | $ | 0.65 | | $ | 0.73 | | $ | 0.79 | | $ | 0.74 | | $ | 2.91 | Net income per share - diluted | | $ | 0.64 | | $ | 0.73 | | $ | 0.79 | | $ | 0.74 | | $ | 2.90 |
| | | 2011 | | | | | First | | | Second | | | Third | | | Fourth | | | | | | (dollars in thousands except per share data) | | quarter | | | quarter | | | quarter | | | quarter | | | Total | | | Interest income | | $ | 6,550 | | | $ | 6,597 | | | $ | 6,376 | | | $ | 6,080 | | | $ | 25,603 | | | Interest expense | | | (1,316 | ) | | | (1,279 | ) | | | (1,128 | ) | | | (1,038 | ) | | | (4,761 | ) | | | | | | | | | | | | | | | | | | | | | | | | Net interest income | | | 5,234 | | | | 5,318 | | | | 5,248 | | | | 5,042 | | | | 20,842 | | | Provision for loan losses | | | (475 | ) | | | (375 | ) | | | (500 | ) | | | (450 | ) | | | (1,800 | ) | | Gain on sale of investment securities | | | 1 | | | | 15 | | | | 13 | | | | 34 | | | | 63 | | | Other-than-temporary impairment | | | (75 | ) | | | - | | | | (5 | ) | | | (166 | ) | | | (246 | ) | | Other income | | | 1,412 | | | | 1,383 | | | | 1,464 | | | | 1,616 | | | | 5,875 | | | Other expenses | | | (4,490 | ) | | | (4,621 | ) | | | (4,444 | ) | | | (4,489 | ) | | | (18,044 | ) | | Income before taxes | | | 1,607 | | | | 1,720 | | | | 1,776 | | | | 1,587 | | | | 6,690 | | | Provision for income taxes | | | (380 | ) | | | (431 | ) | | | (449 | ) | | | (385 | ) | | | (1,645 | ) | | Net income | | $ | 1,227 | | | $ | 1,289 | | | $ | 1,327 | | | $ | 1,202 | | | $ | 5,045 | | | Net income per share | | $ | 0.56 | | | $ | 0.59 | | | $ | 0.59 | | | $ | 0.54 | | | $ | 2.28 | |
| | | 2010 | | | | | First | | | Second | | | Third | | | Fourth | | | | | | (dollars in thousands except per share data) | | quarter | | | quarter | | | quarter | | | quarter | | | Total | | | Interest income | | $ | 7,041 | | | $ | 6,970 | | | $ | 6,954 | | | $ | 6,615 | | | $ | 27,580 | | | Interest expense | | | (1,882 | ) | | | (1,753 | ) | | | (1,681 | ) | | | (1,511 | ) | | | (6,827 | ) | | | | | | | | | | | | | | | | | | | | | | | | Net interest income | | | 5,159 | | | | 5,217 | | | | 5,273 | | | | 5,104 | | | | 20,753 | | | Provision for loan losses | | | (575 | ) | | | (300 | ) | | | (375 | ) | | | (835 | ) | | | (2,085 | ) | | Gain on sale of investment securities | | | - | | | | - | | | | - | | | | 2 | | | | 2 | | | Other-than-temporary impairment | | | (79 | ) | | | (676 | ) | | | (1,749 | ) | | | (9,332 | ) | | | (11,836 | ) | | Other income | | | 1,225 | | | | 1,316 | | | | 1,479 | | | | 1,402 | | | | 5,422 | | | Other expenses | | | (5,105 | ) | | | (4,694 | ) | | | (4,318 | ) | | | (3,900 | ) | | | (18,017 | ) | | Income (loss) before taxes | | | 625 | | | | 863 | | | | 310 | | | | (7,559 | ) | | | (5,761 | ) | | (Provision) credit for income taxes | | | (69 | ) | | | (144 | ) | | | 45 | | | | 2,725 | | | | 2,557 | | | Net income (loss) | | $ | 556 | | | $ | 719 | | | $ | 355 | | | $ | (4,834 | ) | | $ | (3,204 | ) | | Net income (loss) per share | | $ | 0.26 | | | $ | 0.34 | | | $ | 0.16 | | | $ | (2.26 | ) | | $ | (1.50 | ) |
| | | | | | | | | | | | | | | | 2014 | | First | | Second | | Third | | Fourth | | | | (dollars in thousands except per share data) | quarter | | quarter | | quarter | | quarter | | Total | Interest income | $ | 6,002 | | $ | 6,145 | | $ | 6,295 | | $ | 6,402 | | $ | 24,844 | Interest expense | | (707) | | | (721) | | | (730) | | | (759) | | | (2,917) | | | | | | | | | | | | | | | | Net interest income | | 5,295 | | | 5,424 | | | 5,565 | | | 5,643 | | | 21,927 | Provision for loan losses | | (300) | | | (300) | | | (210) | | | (250) | | | (1,060) | Gain on sale of investment securities | | 207 | | | 94 | | | - | | | 298 | | | 599 | Other income | | 1,531 | | | 1,727 | | | 1,748 | | | 1,749 | | | 6,755 | Other expenses | | (4,785) | | | (4,761) | | | (4,910) | | | (5,247) | | | (19,703) | Income before taxes | | 1,948 | | | 2,184 | | | 2,193 | | | 2,193 | | | 8,518 | Provision for income taxes | | (492) | | | (557) | | | (562) | | | (555) | | | (2,166) | Net income | $ | 1,456 | | $ | 1,627 | | $ | 1,631 | | $ | 1,638 | | $ | 6,352 | Net income per share - basic | $ | 0.61 | | $ | 0.67 | | $ | 0.68 | | $ | 0.67 | | $ | 2.63 | Net income per share - diluted | $ | 0.61 | | $ | 0.67 | | $ | 0.67 | | $ | 0.67 | | $ | 2.62 |
| | | | | | | | | | | | | | | | 2013 | | First | | Second | | Third | | Fourth | | | | (dollars in thousands except per share data) | quarter | | quarter | | quarter | | quarter | | Total | Interest income | $ | 5,968 | | $ | 5,912 | | $ | 5,954 | | $ | 6,019 | | $ | 23,853 | Interest expense | | (735) | | | (732) | | | (748) | | | (753) | | | (2,968) | | | | | | | | | | | | | | | | Net interest income | | 5,233 | | | 5,180 | | | 5,206 | | | 5,266 | | | 20,885 | Provision for loan losses | | (550) | | | (600) | | | (450) | | | (950) | | | (2,550) | Gain on sale and recovery of investment securities | | 119 | | | 9 | | | 138 | | | 2,902 | | | 3,168 | Other income | | 1,949 | | | 2,042 | | | 1,770 | | | 1,612 | | | 7,373 | Other expenses | | (4,880) | | | (4,606) | | | (4,644) | | | (4,989) | | | (19,119) | Income before taxes | | 1,871 | | | 2,025 | | | 2,020 | | | 3,841 | | | 9,757 | Provision for income taxes | | (477) | | | (512) | | | (515) | | | (1,131) | | | (2,635) | Net income | $ | 1,394 | | $ | 1,513 | | $ | 1,505 | | $ | 2,710 | | $ | 7,122 | Net income per share - basic | $ | 0.60 | | $ | 0.64 | | $ | 0.64 | | $ | 1.15 | | $ | 3.03 | Net income per share - diluted | $ | 0.60 | | $ | 0.64 | | $ | 0.64 | | $ | 1.14 | | $ | 3.02 |
18.CONTINGENCIES The nature of the Company’s business generates litigation involving matters arising in the ordinary course of business. However, in the opinion of management of the Company after consulting with the Company’s legal counsel, no legal proceedings are pending, which, if determined adversely to the Company or the Bank, would have a material effect on the Company’s shareholders’ equity or results of operations. No legal proceedings are pending other than ordinary routine litigation incident to the business of the Company and the Bank. In addition, to management’s knowledge, no government authorities have initiated or contemplated any material legal actions against the Company or the Bank. | 18. | RECENT ACCOUNTING PRONOUNCEMENTS |
19.RECENT ACCOUNTING PRONOUNCEMENTS In 2011,an exposure draft issued in the fourth quarter of 2012, the Financial Accounting Standards Board (FASB) issued,proposed changes to the accounting guidance related to the impairment of financial assets and the recognition of credit losses. The FASB proposal would require financial institutions to reserve for losses for the duration of the credit exposure as opposed to reserving for probable losses. The new methodology would be known as the “current expected credit losses” (CECL) methodology. The FASB is currently in 2012the process of re-deliberating significant issues raised through feedback received from comment letters and outreach activities. Among other things, the guidance in the proposed update regarding an entity’s estimate of expected credit losses will be clarified as follows: | · | | An entity should revert to a historical average loss experience for the future periods beyond which the entity is able to make or obtain reasonable and supportable forecasts; |
| · | | An entity should consider all contractual cash flows over the life of the related financial assets; |
| · | | When determining the contractual cash flows and the life of the related financial assets: |
| o | | An entity should consider expected prepayments; |
| o | | An entity should not consider expected extensions, renewals, and modifications unless the entity reasonably expects that it will execute a troubled debt restructuring with a borrower; |
| · | | An entity’s estimate of expected credit losses should always reflect the risk of loss, even when that risk is remote. However, an entity would not be required to recognize a loss on a financial asset in which the risk of nonpayment is greater than zero yet the amount of loss would be zero; |
| · | | In addition to using a discounted cash flow model to estimate expected credit losses, an entity would not be prohibited from developing an estimate of credit losses using loss-rate methods, probability-of-default methods or a provision matrix using loss factors; |
| · | | The final guidance on expected credit losses will include implementation guidance describing the factors that an entity should consider to adjust historical loss experience for current conditions and reasonable and supportable forecast. |
FASB expects to issue this proposed accounting standard update in the first quarter of 2016 with implementation beginning in the fiscal year following December 15, 2018 for public companies. Upon adoption, the change in this accounting guidance could result in an increase in the Company's allowance for loan losses and require the Company adopted,to record loan losses more rapidly. Upon final issuance of the standard, the Company will be able to better evaluate the potential impact of this new standard on its consolidated financial statements. In August 2014, the FASB issued an accounting standard update (ASU 2014-14) related to Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This update amends existing Fair Value Measurements, to bring U.S. GAAP for fair value measurements in line with International Accounting Standards.to; Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40) Classification of Certain Government-Guaranteed Mortgage Loans upon
Foreclosure. The update clarifies existing guidance for items such as:requires that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the applicationfollowing conditions are met: (1) The loan has a government guarantee that is not separable from the loan before foreclosure; (2) At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; (3) At the time of foreclosure, any amount of the highest and best use concept to non-financial assets and liabilities;claim that is determined on the application of fair value measurement to financial instruments classified in a reporting entity’s stockholder’s equity; and disclosure requirements regarding quantitative information about unobservable inputs used in the fair value measurements of Level 3 assets. The guidance also creates an exception to existing guidance for entities which carry financial instruments within a portfolio or group, under which the entity is now permitted to base the price used for fair valuation upon a price that would be received to sell the net asset position or transfer a net liability position in an orderly transaction. The guidance also allows for the application of premiums and discounts in a fair value measurement if the financial instrument is categorized in Level 2 or 3basis of the fair value hierarchy. It also contains new disclosure requirements regardingof the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in the update are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014. The Company adopted this accounting standard during the first quarter of 2015 and it did not have a material impact on its consolidated financial statements. In June 2014, the FASB issued ASU 2014-12, Compensation – Stock Compensation (Topic 718) Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, an amendment to the stock compensation accounting guidance to clarify that a performance target that affects vesting of a share-based payment and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value amounts categorized as level 3of the award. Compensation cost should be recognized in the fair value hierarchy such as: disclosure ofperiod in which it becomes probable that the valuation process used; effects ofperformance target will be achieved and relationships between unobservable inputs; usage of non-financial assetsshould represent the compensation cost attributable to the period(s) for purposes other than their highest and best use when that iswhich the basis of the disclosed fair value; and categorization by level of items disclosed at fair value, but not measured at fair value for financial statement purposes. For public entities, this updaterequisite service has already been rendered. This amendment is effective for annual reporting periods, including interim andperiods within those annual periods, beginning after December 15, 2011. The2015. Early adoption is permitted. Entities may apply the amendments in this update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new accounting guidance didor modified awards thereafter. The Company does not expect this amendment to have ana material impact on the Company’sits consolidated financial statements. In June, 2011,May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an accountingamount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP: identify the contract(s) with a customer; identify the performance obligations in the contract; determine the transaction price; allocate the transaction price to the performance obligations in the contract; recognize revenue when (or as) the entity satisfies a performance obligation. The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The Company is evaluating the impact of the adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined the method by which it will adopt the standard effective in the first quarter of 2018. In January 2014, the FASB issued ASU 2014-04 related to; Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40) Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The update relatedapplies to Presentationall creditors who obtain physical possession of Comprehensive Income.residential real estate property collateralizing a consumer mortgage loan in satisfaction of a receivable. The provisions ofamendments in this update amendclarify when an in-substance repossession or foreclosure occurs and requires disclosure of both (1) the accounting topicamount of foreclosed residential real estate property held by a creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to facilitate the continued alignment of U.S. GAAP with International Accounting Standards. The update prohibits the presentationlocal requirements of the components of comprehensive incomeapplicable jurisdiction. The amendments in the statement of stockholder’s equity. Reporting entities are allowed to present either: a statement of comprehensive income, which reports both net income and other comprehensive income; or separate, but consecutive, statements of net income and other comprehensive income. Under previous GAAP, all three presentations were acceptable. Regardless of the presentation selected, the reporting entity is required to present all reclassifications between other comprehensive and net income on the face of the new statement or statements. For public entities, the provisions of this update are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2011.15, 2014. The Company has opted to presentadopted this accounting standard during the first quarter of 2015 and it did not have a separate statement of comprehensive income. In December 2011, FASB issued an accounting update related to, Presentation of Comprehensive Income, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income. In order to defer only those changes in the June 2011 update that relate to the presentation of reclassification adjustments, the paragraphs in this update supersede certain pending paragraphs in the original update. The amendments were made to allow the FASB time to re-deliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities are required to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before the June 2011 update. All other requirements are not affected by this update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. The provisions of December 2011 update had nomaterial impact on the Company’sits consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01 related to Financial Instruments - Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities. The update applies to all entities that hold financial assets or owe financial liabilities. The amendments in this update make targeted improvements to U.S. GAAP as follows: 87 | · | | Require equity investments to be measured at fair value with changes in fair value recognized in net income; |
| · | | Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; |
| · | | Require public business entities to use the exit price notion when measuring fair value of financial instruments for disclosure purposes; |
| · | | Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset; |
| · | | Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities |
The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is evaluating the impact of the adoption of ASU 2016-01 on its consolidated financial statements, but does not expect it to have a significant impact. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 requires the recognition of a right-of-use asset and related lease liability by lessees for leases classified as operating leases under GAAP. The amendments in this update are effective for the Company for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of theamendments in this update are permitted. A modified retroactive approach must be applied for leases existing at, or entered into after, the beginning of the earliest comparative period. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements. 20.PARENT COMPANY ONLY The following is the condensed financial information for Fidelity D & D Bancorp, Inc. on a parent company only basis as of and for the years indicated: | | | | | | | Condensed Balance Sheets | | As of December 31, | | As of December 31, | | (dollars in thousands) | | 2012 | | | 2011 | | 2015 | | 2014 | | Assets: | | | | | | | | | | | | | | Cash | | $ | 2 | | | $ | 2 | | $ | 190 | | $ | 164 | | Investment in subsidiary | | | 58,577 | | | | 53,253 | | | 75,767 | | 71,631 | | Securities available-for-sale | | | 466 | | | | 439 | | | 545 | | 594 | | Other assets | | | - | | | | - | | | 64 | | 36 | | Total | | $ | 59,045 | | | $ | 53,694 | | $ | 76,566 | | $ | 72,425 | | | | | | | | | | | | | | | | Liabilities and shareholders' equity: | | | | | | | | | | | | | | Liabilities | | $ | 99 | | | $ | 70 | | $ | 215 | | $ | 206 | | Capital stock and retained earnings | | | 58,710 | | | | 54,734 | | | 74,163 | | 69,476 | | Accumulated other comprehensive income | | | 236 | | | | (1,110 | ) | | 2,188 | | 2,743 | | Total | | $ | 59,045 | | | $ | 53,694 | | $ | 76,566 | | $ | 72,425 |
| Condensed Income Statements | | Years ended December 31, | | | (dollars in thousands) | | 2012 | | | 2011 | | | 2010 | | | Income: | | | | | | | | | | | | | | Equity in undistributed earnings (loss) of subsidiary | | $ | 3,996 | | | $ | 4,184 | | | $ | (4,246 | ) | | Dividends from subsidiary | | | 1,131 | | | | 1,043 | | | | 1,206 | | | Gain on sale of investment securities | | | - | | | | 27 | | | | - | | | Other income | | | 20 | | | | 19 | | | | 17 | | | | | | | | | | | | | | | | | Total income (loss) | | | 5,147 | | | | 5,273 | | | | (3,023 | ) | | | | | | | | | | | | | | | | Operating expenses | | | 347 | | | | 317 | | | | 268 | | | | | | | | | | | | | | | | | Income (loss) before taxes | | | 4,800 | | | | 4,956 | | | | (3,291 | ) | | | | | | | | | | | | | | | | Credit for income taxes | | | 102 | | | | 89 | | | | 87 | | | | | | | | | | | | | | | | | Net income (loss) | | $ | 4,902 | | | $ | 5,045 | | | $ | (3,204 | ) |
| Statements of Comprehensive Income | | Years ended December 31, | | | (dollars in thousands) | | 2012 | | | 2011 | | | 2010 | | | Bancorp net loss | | $ | (225 | ) | | $ | (183 | ) | | $ | (164 | ) | | Equity in net income (loss) of subsidiary | | | 5,127 | | | | 5,228 | | | | (3,040 | ) | | Net income (loss) | | | 4,902 | | | | 5,045 | | | | (3,204 | ) | | | | | | | | | | | | | | | | Other comprehensive income, before tax: | | | | | | | | | | | | | | Unrealized holding gains on available-for-sale securities | | | 27 | | | | 17 | | | | 47 | | | Reclassification adjustment for gains realized in income | | | - | | | | (27 | ) | | | - | | | Net unrealized gains (losses) | | | 27 | | | | (10 | ) | | | 47 | | | Tax effect | | | (9 | ) | | | 3 | | | | (16 | ) | | Unrealized gain (loss), net of tax | | | 18 | | | | (7 | ) | | | 31 | | | Equity in other comprehensive income of subsidiariy | | | 1,328 | | | | 2,714 | | | | 5,346 | | | Other comprehensive income, net of tax | | | 1,346 | | | | 2,707 | | | | 5,377 | | | Total comprehensive income, net of tax | | $ | 6,248 | | | $ | 7,752 | | | $ | 2,173 | |
| | | | | | | | | Condensed Income Statements | Years ended December 31, | (dollars in thousands) | 2015 | | 2014 | | 2013 | Income: | | | | | | | | | Equity in undistributed earnings of subsidiary | $ | 4,659 | | $ | 4,458 | | $ | 6,173 | Dividends from subsidiary | | 2,844 | | | 2,242 | | | 1,190 | Other income | | 20 | | | 22 | | | 20 | Total income | | 7,523 | | | 6,722 | | | 7,383 | Operating expenses | | 610 | | | 539 | | | 388 | Income before taxes | | 6,913 | | | 6,183 | | | 6,995 | Credit for income taxes | | 190 | | | 169 | | | 127 | Net income | $ | 7,103 | | $ | 6,352 | | $ | 7,122 |
| Condensed Statements of Cash Flows | | Years ended December 31, | | | (dollars in thousands) | | 2012 | | | 2011 | | | 2010 | | | Cash flows from operating activities: | | | | | | | | | | | | | | Net income (loss) | | $ | 4,902 | | | $ | 5,045 | | | $ | (3,204 | ) | | Adjustments to reconcile net (loss) income to net cash used in operations: | | | | | | | | | | | | | | Equity in (earnings) loss of subsidiary | | | (5,127 | ) | | | (5,228 | ) | | | 3,040 | | | Stock-based compensation expense | | | 15 | | | | 24 | | | | 7 | | | Gain on sale of investment securities | | | - | | | | (27 | ) | | | - | | | Changes in other assets and liabilities, net | | | 20 | | | | 14 | | | | (14 | ) | | Net cash used in operating activities | | | (190 | ) | | | (172 | ) | | | (171 | ) | | | | | | | | | | | | | | | | Cash flows provided by investing activities: | | | | | | | | | | | | | | Dividends received from subsidiary | | | 1,131 | | | | 1,043 | | | | 1,207 | | | Proceeds from sales of investment securities | | | - | | | | 55 | | | | - | | | Net cash provided by investing activities | | | 1,131 | | | | 1,098 | | | | 1,207 | | | | | | | | | | | | | | | | | Cash flows used in financing activities: | | | | | | | | | | | | | | Dividends paid, net of dividend reinvestment | | | (1,493 | ) | | | (1,478 | ) | | | (1,453 | ) | | Cash contributions from dividend reinvestment plan | | | 486 | | | | 485 | | | | 305 | | | Withholdings to purchase capital stock | | | 67 | | | | 67 | | | | 67 | | | Net cash used in financing activities | | | (941 | ) | | | (926 | ) | | | (1,081 | ) | | Net decrease in cash | | | - | | | | - | | | | (45 | ) | | | | | | | | | | | | | | | | Cash, beginning | | | 2 | | | | 2 | | | | 47 | | | | | | | | | | | | | | | | | Cash, ending | | $ | 2 | | | $ | 2 | | | $ | 2 | |
In 2013, information became available which confirmed that the collateral value used in the initial impairment analysis of a non-accrual commercial real estate loan at December 31, 2012 was overestimated. As a result, the Company updated its impairment analysis for this loan and determined an additional $0.6 million provision for loan losses in 2012 was warranted. As of December 31, 2012, the Company had established a specific loan loss reserve against this credit in the amount of $1.2 million, reserving for the potential loss. In the event the property value further declines, additional losses may be recognized in 2013 at which time additional provision for loan loss and potential charge-offs may occur. In the event a payoff settlement fails to occur, the Company will most likely be required to acquire and retain the property as ORE, until sold. If the Company is required to take ownership, the Company estimates its share of the annual carrying costs to approximate $0.6 million.
| | | | | | | | | Statements of Comprehensive Income | Years ended December 31, | (dollars in thousands) | 2015 | | 2014 | | 2013 | Bancorp net loss | $ | (400) | | $ | (348) | | $ | (241) | Equity in net income of subsidiary | | 7,503 | | | 6,700 | | | 7,363 | Net income | | 7,103 | | | 6,352 | | | 7,122 | | | | | | | | | | Other comprehensive (loss) income, before tax: | | | | | | | | | Unrealized holding (losses) gains on available-for-sale securities | | (49) | | | 71 | | | 58 | Reclassification adjustment for gains realized in income | | - | | | - | | | - | Net unrealized (losses) gains | | (49) | | | 71 | | | 58 | Tax effect | | 17 | | | (24) | | | (20) | Unrealized (loss) gain, net of tax | | (32) | | | 47 | | | 38 | Equity in other comprehensive (loss) income of subsidiary | | (523) | | | 1,457 | | | 965 | Other comprehensive (loss) income, net of tax | | (555) | | | 1,504 | | | 1,003 | Total comprehensive income, net of tax | $ | 6,548 | | $ | 7,856 | | $ | 8,125 |
| | | | | | | | | Condensed Statements of Cash Flows | Years ended December 31, | (dollars in thousands) | 2015 | | 2014 | | 2013 | Cash flows from operating activities: | | | | | | | | | Net income | $ | 7,103 | | $ | 6,352 | | $ | 7,122 | Adjustments to reconcile net income to net cash used in operations: | | | | | | | | | Equity in earnings of subsidiary | | (7,503) | | | (6,700) | | | (7,363) | Stock-based compensation expense | | 225 | | | 207 | | | 112 | Changes in other assets and liabilities, net | | (2) | | | (35) | | | 62 | Net cash used in operating activities | | (177) | | | (176) | | | (67) | | | | | | | | | | Cash flows provided by investing activities: | | | | | | | | | Dividends received from subsidiary | | 2,844 | | | 2,242 | | | 1,190 | Net cash provided by investing activities | | 2,844 | | | 2,242 | | | 1,190 | | | | | | | | | | Cash flows used in financing activities: | | | | | | | | | Dividends paid, net of dividend reinvestment | | (2,844) | | | (2,088) | | | (1,596) | Cash contributions from dividend reinvestment plan | | - | | | 104 | | | 395 | Exercise of stock options | | 101 | | | - | | | - | Withholdings to purchase capital stock | | 102 | | | 80 | | | 78 | Net cash used in financing activities | | (2,641) | | | (1,904) | | | (1,123) | Net change in cash | | 26 | | | 162 | | | - | | | | | | | | | | Cash, beginning | | 164 | | | 2 | | | 2 | | | | | | | | | | Cash, ending | $ | 190 | | $ | 164 | | $ | 2 |
Item
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On April 21, 2015, the Audit Committee of Fidelity D&D Bancorp Inc. (the “Company”) through a formal proposal process, engaged RSM US LLP (“RSM”), formerly McGladrey LLP (“McGladrey”), to serve as its independent registered public accounting firm for the year ended December 31, 2015. On April 21, 2015, the Audit Committee dismissed Baker Tilly Virchow Krause LLP (“Baker Tilly”) as the Company’s independent registered public accounting firm. None.Prior to engaging RSM, the Company did not consult with RSM regarding the application of accounting principles to a specific completed or contemplated transaction or regarding the type of audit opinions that might be rendered by RSM on the Company’s financial statements, and RSM did not provide any written or oral advice that was an important factor considered by the Company in reaching a decision as to any such accounting, auditing or financial reporting issue.
The report of independent registered public accounting firm of Baker Tilly regarding the Company’s financial statements for the fiscal years ended December 31, 2014 and 2013 did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. ItemDuring the years ended December 31, 2014 and 2013, and during the interim period from the end of the most recently completed fiscal year through April 21, 2015, the date of termination, there were no disagreements with Baker Tilly on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of Baker Tilly would have caused it to make reference to such disagreement in its reports.
The Company provided Baker Tilly with a copy of the above disclosures prior to filing a Current Report on Form 8-K with the Securities and Exchange Commission and requested that Baker Tilly furnish the Company with a letter addressed to the Securities and Exchange Commission stating whether it agrees with above statements and, if it does not agree, the respects in which it does not agree. A copy of the letter, dated April 22, 2015, is filed as Exhibit 16 (which is incorporated by reference herein) to the Current Report on Form 8-K. ITEM 9A: CONTROLS AND PROCEDURES As of the end of the period covered by this Annual Report on Form 10-K, an evaluation was carried out by the Company’s management, with the participation of its President and Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on such evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports the Company files or furnishes under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations, and are effective. The Company made no changes in its internal controls over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect, these controls during the last fiscal quarter ended December 31, 2012. 2015. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, provides smaller companies and debt-only issuers with a permanent exemption from the Sarbanes-Oxley internal control audit requirements. Without this exemption, these companies would have been required to comply with the internal control audit requirements for fiscal years ended on or after June 15, 2010. The permanent exemption applies to entities that are commonly referred to as non-accelerated filers and smaller reporting companies, such as the Company. Generally speaking, a non-accelerated filer and a smaller reporting company have public float, or market capitalization of less than $75.0 million. The permanent exemption applies only to the Sarbanes-Oxley internal control audit requirements. Non-accelerated filers and smaller reporting companies are still required to disclose management's assessment of the effectiveness of internal control over financial reporting. Management’s Report on Internal Control Over Financial Reporting Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s President and Chief Executive Officer and the Chief Financial Officer, and implemented in conjunction with management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for external purposes in accordance with generallyaccepted accounting principles. There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal control can provide only reasonable
assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012.2015. This assessment was based on criteria for effective internal control over financial reporting described in “Internal Control – Integrated Framework,” (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management determined that, as of December 31, 2012,2015, the Company maintained effective internal control over financial reporting. This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report.
ItemITEM 9B:OTHER INFORMATION
None None.
PART III
ItemITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required in this item is incorporated by reference herein to the information presented in the Company’s definitive Proxy Statement for its 20132016 Annual Meeting of Shareholders to be filed with the SEC.
Section 16(a) Beneficial Ownership Reporting Compliance The information required in this item is incorporated by reference herein to the information presented in the Company’s definitive Proxy Statement for its 20132016 Annual Meeting of Shareholders to be filed with the SEC.
Code of Ethics Pursuant to Item 406 of Regulation S-K, the Company adopted a written code of ethics that applies to our directors, officers and employees, including our chief executive officer and chief financial officer, which is available on our website at http://www.bankatfidelity.com through the Investor Relations link and then under the headings “Other Information”, “Governance Documents.” In addition, copies of our code of ethics will be provided to shareholders upon written request to Fidelity D & D Bancorp, Inc., Blakely and Drinker Streets, Dunmore, PA 18512 at no charge.
ItemITEM 11: EXECUTIVE COMPENSATION
The information required in this item is incorporated by reference herein to the information presented in the Company’s definitive Proxy Statement for its 20132016 annual meeting of shareholders to be filed with the SEC.
ItemITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND RELATED STOCKHOLDER MATTERS
The information required in this item is incorporated by reference herein to the information presented in the Company’s definitive Proxy Statement for its 20132016 annual meeting of shareholders to be filed with the SEC.
ItemITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required in this item is set forth in Footnote No. 1516 “Related Party Transactions”, of Part II, Item 8 “Financial Statements and Supplementary Data”, and the information required by Item 407(a) of Regulation S-K is incorporated by reference herein to the information presented in the Company’s definitive Proxy Statement for its 20132016 annual meeting of shareholders to be filed with the SEC.
ItemITEM 14:PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference herein, to the information presented in the Company’s definitive Proxy Statement for its 20132016 annual meeting of shareholders to be filed with the SEC.
PART IV
ItemITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements - The following financial statements are included by reference in Part II, Item 8 hereof: | | Report of Independent Registered Public Accounting Firm | | Consolidated Balance Sheets | | Consolidated Statements of Income | | Consolidated Statements of Comprehensive Income | | Consolidated Statements of Changes in Shareholders’ Equity | | Consolidated Statements of Cash Flows | | Notes to Consolidated Financial Statements |
(2) Financial Statement Schedules Financial Statement Schedules are omitted because the required information is either not applicable, the data is not significant or the required information is shown in the respective financial statements or in the notes thereto or elsewhere herein.
(3) Exhibits The following exhibits are filed herewith or incorporated by reference as a part of this Form 10-K:
3(i) Amended and Restated Articles of Incorporation of Registrant.Incorporated by reference to Annex B of the Proxy Statement/Prospectus included in Registrant’s Amendment 4 to its Registration Statement No. 333-90273 on Form S-4, filed with the SEC on April 6, 2000.
3(ii) Amended and Restated Bylaws of Registrant.Incorporated by reference to Exhibit 3(ii) to Registrant’s Form 8-K filed with the SEC on November 21, 2007. *10.1 1998 Independent Directors Stock Option Plan of The Fidelity Deposit and Discount Bank, as assumed by Registrant. Incorporated by reference to Exhibit 10.1 to Registrant’s Registration Statement No. 333-90273 on Form S-4, filed with the SEC on November 3, 1999.
*10.2 1998 Stock Incentive Plan of The Fidelity Deposit and Discount Bank, as assumed by Registrant. Incorporated by reference to Exhibit 10.2 of Registrant’s Registration Statement No. 333-90273 on Form S-4, filed with the SEC on November 3, 1999.
*10.3 Registrant’s 2012 Dividend Reinvestment and Stock Repurchase Plan. Incorporated by reference to Exhibit 4.1 to Registrant’s Registration Statement No. 333-183216 on Form S-3 filed with the SEC on August 10, 2012.
2012 as amended February 3, 2014. *10.410.2 Registrant’s 2000 Independent Directors Stock Option Plan.Incorporated by reference to Exhibit 4.3 to Registrant’s Registration Statement No. 333-64356 on Form S-8 filed with the SEC on July 2, 2001. *10.510.3 Amendment, dated October 2, 2007, to the Registrant’s 2000 Independent Directors Stock Option Plan.Incorporated by reference to Exhibit 10.2 to Registrant’s Form 8-K filed with the SEC on October 4, 2007. *10.610.4 Registrant’s 2000 Stock Incentive Plan.Incorporated by reference to Exhibit 4.4 to Registrant’s Registration Statement No. 333-64356 on Form S-8 filed with the SEC on July 2, 2001. *10.710.5 Amendment, dated October 2, 2007, to the Registrant’s 2000 Stock Incentive Plan.Incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K filed with the SEC on October 4, 2007. *10.810.6 Registrant’s 2002 Employee Stock Purchase Plan.Incorporated by reference to Appendix A to Definitive proxy Statement filed with the SEC on March 28, 2002. *10.910.7 Change of Control Agreement with Salvatore R. DeFrancesco, Registrant and The Fidelity Deposit and Discount Bank, dated March 21, 2006.Incorporated by reference to Exhibit 99.2 to Registrant’s Current Report on Form 8-K filed with the SEC on March 27, 2006. *10.1010.8 Amended and Restated Executive Employment Agreement between Fidelity D & D Bancorp, Inc., The Fidelity Deposit and Discount Bank and Daniel J. Santaniello, dated March 23, 2011.Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the SEC on March 29, 2011. *10.1110.9 Amended and Restated Executive Employment Agreement between Fidelity D & D Bancorp, Inc., The Fidelity Deposit and Discount Bankand Timothy P. O’Brien, dated March 23, 2011.Incorporated by reference to Exhibit 99.2 to Registrant’s Current Report on Form 8-K filed with the SEC on March 29, 2011. *10.12 Change in Control and Severance Agreement between Fidelity D & D Bancorp, Inc., The Fidelity Deposit and Discount Bankand John T. Piszak, dated March 23, 2011.Incorporated by reference to Exhibit 99.3 to Registrant’s Current Report on Form 8-K filed with the SEC on March 29, 2011.
*10.1310.10 2012 Omnibus Stock Incentive Plan.Incorporated by reference to Appendix A to Registrant’s Definitive Proxy Statement filed with the SEC on March 30, 2012.
*10.1410.11 2012 Director Stock Incentive Plan.Incorporated by reference to Appendix B to Registrant’s Definitive Proxy Statement filed with the SEC on March 30, 2012.
*10.1510.12 Change in Control and Severance Agreement between Fidelity D & D Bancorp, Inc.,the Registrant, The Fidelity Deposit and Discount Bankand RaymondEugene J. Fox,Walsh, dated January 14, 2013.June 26, 2015.Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the SEC on January 14, 2013. June 29, 2015. 11 Statement regarding computation of earnings per share.Included herein in Note 1314 “Earnings per Share”, contained within the notes to consolidated financial statements, and incorporated herein by reference.
12 Statement regarding computation of ratios.Included herein in Item 6, “Selected Financial Data.”
13 Annual Report to Shareholders.Incorporated by reference to the 20122015 Annual Report to Shareholders filed with the SEC on Form ARS.
14 Code of Ethics. Incorporated by reference to the 2003 Annual Report to Shareholders on Form 10-K filed with the SEC on March 29, 2004.
21 Subsidiaries of the Registrant.Registrant, filed herewith.
2323.1 Consent of Independent Registered Public Accounting Firm.RSM US LLP, filed herewith.
23.2 Consent of Baker Tilly Virchow Krause LLP, filed herewith. 31.1 Rule 13a-14(a) Certification of Principal Executive Officer, filed herewith.
31.2 Rule 13a-14(a) Certification of Principal Financial Officer, filed herewith.
32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
101 Interactive data files:The following, from Fidelity D&D Bancorp, Inc.’s. Annual Report on Form 10-K for the year ended December 31, 2012,2015, is formatted in XBRL (eXtensible Business Reporting Language): Consolidated Balance Sheets as of December 31, 20122015 and 2011;2014; Consolidated Statements of Income for the years ended December 31, 2012, 20112015, 2014 and 2010;2013; Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 20112015, 2014 and 2010;2013; Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2012, 20112015, 2014 and 2010; and2013; Consolidated Statements of Cash Flows for the years ended December 31, 2012, 20112015, 2014 and 2010.**2013 and the Notes to the Consolidated Financial Statements. (b)The exhibits required to be filed by this Item are listed under Item 15(a) 3, above. | (b) | The exhibits required to be filed by this Item are listed under Item 15(a) 3, above. |
(c)Not applicable. _________________________ * Management contract or compensatory plan or arrangement. ** Pursuant to Rule 406T of Regulation S-T, the interactive data files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
Table Of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | | | FIDELITY D & D BANCORP, INC. | | | (Registrant) | | | | | | | | Date: March 26, 201315, 2016 | By: | /s/s/ Daniel J. Santaniello | | | | Daniel J. Santaniello, | | | President and Chief Executive Officer | | | | | | | Date: March 26, 201315, 2016 | By: | /s/Salvatore R. DeFrancesco, Jr. | | | | Salvatore R. DeFrancesco, Jr., | | | Treasurer and Chief Financial Officer |
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacities and on the dates indicated. | DATE | | | | | DATE | | By: | /s/Daniel j. Santaniello | | March 26, 2013 | | By: | /s/ Daniel J. Santaniello | | March 15, 2016 | | | Daniel J. Santaniello, President and Chief | | | | Executive Officer | | | | | | By: | /s/Salvatore R. DeFrancesco, Jr. | | March 26, 201315, 2016 | | | Salvatore R. DeFrancesco, Jr., Treasurer | | | | and Chief Financial Officer | | | | | | By: | /s/ Patrick J. Dempsey | | March 26, 201315, 2016 | | | Patrick J. Dempsey, Chairman of the | | | | Board of Directors and Director | | | | | | | | By: | /s/John T. Cognetti | | March 26, 201315, 2016 | | | John T. Cognetti, Secretary and Director | | | | | | By: | /s/Michael J. McDonald | | March 26, 201315, 2016 | | | Michael J. McDonald, Vice Chairman | | | | of the Board of Directors and Director | | | | | | By: | | | | | | David L. Tressler, Director | | | | | | By: | /s/Mary E. McDonald | | March 26, 201315, 2016 | | | Mary E. McDonald, Assistant Secretary and Director | | | | | | By: | /s/Brian J. Cali | | March 26, 201315, 2016 | | | Brian J. Cali, Director | | | | | | | | By: | /s/Kristin Dempsey O’Donnell | | March 26, 2013 | 15, 2016 | | Kristin Dempsey O’Donnell, Director | | | | | | | | By: | /s/ Richard Lettieri | | | March 15, 2016 | | Richard Lettieri, Director | | |
Exhibit Index | | Page | | | Page | Exhibit Index | | | | 3(i) Amended and Restated Articles of Incorporation of Registrant.Incorporated by reference to Annex B of the Proxy Statement/Prospectus included in Registrant’s Amendment 4 to its Registration Statement No. 333-90273 on Form S-4, filed with the SEC on April 6, 2000. | | * | | | | 3(ii) Amended and Restated Bylaws of Registrant.Incorporated by reference to Exhibit 3(ii) to Registrant’s Form 8-K filed with the SEC on November 21, 2007. | | * | | | | 10.1 1998 Independent Directors Stock Option Plan of The Fidelity Deposit and Discount Bank, as assumed by Registrant.Incorporated by reference to Exhibit 10.1 to Registrant’s Registration Statement No. 333-90273 on Form S-4, filed with the SEC on November 3, 1999. | | * | | | | 10.2 1998 Stock Incentive Plan of The Fidelity Deposit and Discount Bank, as assumed by Registrant.Incorporated by reference to Exhibit 10.2 of Registrant’s Registration Statement No. 333-90273 on Form S-4, filed with the SEC on November 3, 1999. | | * | | | | 10.3 Registrant’s Dividend Reinvestment and Stock Repurchase Plan. Incorporated by reference to Exhibit 4.1 to Registrant’s Registration Statement No. 333-183216 on Form S-3 filed with the SEC on August 10, 2012.2012 as amended on February 3, 2014. | | * | | | | 10.410.2 Registrant’s 2000 Independent Directors Stock Option Plan.Incorporated by reference to Exhibit 4.3 to Registrant’s Registration Statement No. 333-64356 on Form S-8 filed with the SEC on July 2, 2001.
| | * | | | | 10.510.3 Amendment, dated October 2, 2007, to the Registrant’s 2000 Independent Directors Stock Option Plan. Incorporated by reference to Exhibit 10.2 to Registrant’s Form 8-K filed with the SEC on October 4, 2007.
| | * | | | | 10.610.4 Registrant’s 2000 Stock Incentive Plan.Incorporated by reference to Exhibit 4.4 to Registrant’s Registration Statement No. 333-64356 on Form S-8 filed with the SEC on July 2, 2001.
| | * | | | | 10.710.5 Amendment, dated October 2, 2007, to the Registrant’s 2000 Stock Incentive Plan. Incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K filed with the SEC on October 4, 2007.
| | * | | | | 10.810.6 Registrant’s 2002 Employee Stock Purchase Plan.Incorporated by reference to Appendix A to Registrant’s Definitive Proxy Statement filed with the SEC on March 28, 2002.
| | * | | | | 10.910.7 Change of Control Agreement with Salvatore R. DeFrancesco, Registrant and The Fidelity Deposit and Discount Bank, dated March 21, 2006.Incorporated by reference to Exhibit 99.2 to Registrant’s Current Report on Form 8-K filed with the SEC on March 27, 2006.
| | * | | | | 10.1010.8 Amended and Restated Executive Employment Agreement between Fidelity D & D Bancorp, Inc., The Fidelity Deposit and Discount Bank and Daniel J. Santaniello, dated March 23, 2011. Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the SEC on March 29, 2011.
| | * | | | | 10.1110.9 Amended and Restated Executive Employment Agreement between Fidelity D & D Bancorp, Inc., The Fidelity Deposit and Discount Bankand Timothy P. O’Brien, dated March 23, 2011. Incorporated by reference to Exhibit 99.2 to Registrant’s Current Report on Form 8-K filed with the SEC on March 29, 2011.
| | * | | | | 10.12 Change in Control and Severance Agreement between Fidelity D & D Bancorp, Inc., The Fidelity Deposit and Discount Bankand John T. Piszak, dated March 23, 2011. Incorporated by reference to Exhibit 99.3 to Registrant’s Current Report on Form 8-K filed with the SEC on March 29, 2011.
| | * | | | | 10.1310.10 2012 Omnibus Stock Incentive Plan. Incorporated by reference to Appendix A to Registrant’s Definitive Proxy Statement filed with the SEC on March 30, 2012. | | * | | | | 10.1410.11 2012 Director Stock Incentive Plan. Incorporated by reference to Appendix B to Registrant’s Definitive Proxy Statement filed with the SEC on March 30, 2012.
| | * |
| 10.1510.12 Change in Control and Severance Agreement between Fidelity D & D Bancorp, Inc.,the Registrant, The Fidelity Deposit and Discount Bankand RaymondEugene J. Fox,Walsh, dated January 14, 2013. June 26, 2015.Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the SEC on January 14, 2013.June 29, 2015.
| * |
| * | | | | 11 Statement regarding computation of earnings per share. IIncludedncluded herein Note 13,14, “Earnings per Share”, contained within the Notes to Consolidated Financial Statements, and incorporated herein by reference. | | 8381 | | | | 12 Statement regarding computation of ratios.Included herein in Item 6, “Selected Financial Data”. | | 16 | | | | 13 Annual Report to Shareholders.Incorporated by reference to the 20122015 Annual Report to Shareholders filed with the SEC on Form ARS. | | * | | | | 14 Code of Ethics.Incorporated by reference to the 2003 Annual Report to Shareholders on Form 10-K filed with the SEC on March 29, 2004. | | * | | | | 21 Subsidiaries of the Registrant. Registrant, filed herewith. | | 98 | | | | 2323.1 Consent of Independent Registered Public Accounting Firm. RSM US LLP, filed herewith. | | 99 | | | | 23.2 Consent of Baker Tilly Virchow Krause LLP, filed herewith. | | | | 31.1 Rule 13a-14(a) Certification of Principal Executive Officer.Officer, filed herewith. | | 100 | | | | 31.2 Rule 13a-14(a) Certification of Principal Financial Officer. Officer, filed herewith. | | 101 | | | | 32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 2002, filed herewith. | | 102 | | | | 32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 2002, filed herewith. | | 102 | | | | 101 Interactive data files:The following, from Fidelity D&D Bancorp, Inc.’s. Annual Report on Form 10-K for the year ended December 31, 2012,2015, is formatted in XBRL (eXtensible Business Reporting Language): Consolidated Balance Sheets as of December 31, 20122015 and 2011;2014; Consolidated Statements of Income for the years ended December 31, 2012, 20112015, 2014 and 2010;2013; Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 20112015, 2014 and 2010;2013; Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2012, 20112015, 2014 and 2010; and 2013; Consolidated Statements of Cash Flows for the years ended December 31, 2012, 20112015, 2014 and 2010.2013 and the Notes to the Consolidated Financial Statements. | | |
____________________________ *Incorporated by Reference
|
|
|
|