Company Quick10K Filing
Quick10K
First United
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$18.58 7 $132
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-16 Shareholder Vote
8-K 2019-05-16 Regulation FD, Exhibits
8-K 2019-04-30 Other Events
8-K 2019-04-09 Earnings, Exhibits
8-K 2019-03-11 Earnings, Exhibits
8-K 2019-02-01 Exhibits
8-K 2018-12-19 Other Events, Exhibits
8-K 2018-09-26 Other Events, Exhibits
8-K 2018-08-08 Earnings, Exhibits
8-K 2018-06-20 Other Events, Exhibits
8-K 2018-05-17 Officers, Shareholder Vote, Exhibits
8-K 2018-05-09 Earnings, Exhibits
8-K 2018-03-09 Earnings, Exhibits
8-K 2018-01-02 Other Events
PAYX Paychex 30,300
INTL Intl Fcstone 717
AXTI AXT 217
PDEX Pro Dex 74
CIDM Cinedigm 66
ISIG Insignia Systems 14
DDDR DD's Deluxe Rod Holder 0
RDC Rowan Companies 0
ZENO Zenosense 0
WLKR Walker Innovation 0
FUNC 2019-03-31
Part I. Financial Information
Item 1. Financial Statements
Note 1 - Basis of Presentation
Note 2 - Earnings per Common Share
Note 3 - Net Gains
Note 4 - Investments
Note 5 - Loans and Related Allowance for Loan Losses
Note 6 - Other Real Estate Owned
Note 7 - Fair Value of Financial Instruments
Note 8 - Accumulated Other Comprehensive Loss
Note 9 - Leases
Note 10 -Borrowed Funds
Note 11 - Employee Benefit Plans
Note 12 - Equity Compensation Plan Information
Note 13 - Letters of Credit and Off Balance Sheet Liabilities
Note 14 - Derivative Financial Instruments
Note 15 - Assets and Liabilities Subject To Enforceable Master Netting Arrangements
Note 16 - Adoption of New Accounting Standards and Effects of New Accounting Pronouncements
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Item 4.Controls and Procedures
Part II. Other Information
Item 1.Legal Proceedings
Item 1A.Risk Factors
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.Defaults Upon Senior Securities
Item 4.Mine Safety Disclosures
Item 5.Other Information
Item 6.Exhibits
EX-31.1 tv520839_ex31-1.htm
EX-31.2 tv520839_ex31-2.htm
EX-32 tv520839_ex32.htm

First United Earnings 2019-03-31

FUNC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tv520839_10q.htm FORM 10-Q

 

 

  

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For quarterly period ended March 31, 2019

 

¨TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

For the transition period from _______________ to ________________

 

Commission file number 0-14237

 

First United Corporation

(Exact name of registrant as specified in its charter)

 

Maryland   52-1380770
(State or other jurisdiction of   (I. R. S. Employer Identification No.)
incorporation or organization)    

 

19 South Second Street, Oakland, Maryland   21550-0009
(Address of principal executive offices)   (Zip Code)

 

(800) 470-4356

(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbols Name of each exchange on which registered
Common Stock FUNC Nasdaq Stock Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨

 

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

 

Large accelerated filer ¨ Accelerated filer þ
Non-accelerated filer ¨ Smaller reporting company þ
Emerging growth company ¨  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 7,088,987 shares of common stock, par value $.01 per share, as of April 30, 2019.

 

 

 

 

 

 

INDEX TO QUARTERLY REPORT

FIRST UNITED CORPORATION

 

  Page
PART I.  FINANCIAL INFORMATION 3
     
Item 1. Financial Statements (unaudited) 3
     
  Consolidated Statement of Financial Condition – March 31, 2019 and December 31, 2018 3
     
  Consolidated Statement of Operations - for the three months ended March 31, 2019 and 2018 4
     
    Consolidated Statement of Comprehensive Income – for the three months ended March 31, 2019 and 2018 5
     
  Consolidated Statement of Changes in Shareholders’ Equity - for three months ended March 31, 2019 and 2018 6
     
  Consolidated Statement of Cash Flows - for the three months ended March 31, 2019 and 2018 7
     
  Notes to Consolidated Financial Statements 8
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 42
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 63
     
Item 4. Controls and Procedures 63
     
PART II. OTHER INFORMATION 64
     
Item 1. Legal Proceedings 64
     
Item 1A. Risk Factors 64
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 64
     
Item 3. Defaults upon Senior Securities 64
     
Item 4. Mine Safety Disclosures 64
     
Item 5. Other Information 64
     
Item 6. Exhibits 64
     
SIGNATURES 65

 

 2 

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

FIRST UNITED CORPORATION

Consolidated Statement of Financial Condition

(In thousands, except per share data)

 

   March 31,   December 31, 
   2019   2018 
   (Unaudited) 
Assets          
Cash and due from banks  $53,112   $22,187 
Interest bearing deposits in banks   892    1,354 
Cash and cash equivalents   54,004    23,541 
Investment securities – available for sale (at fair value)   136,514    137,641 
Investment securities – held to maturity (fair value $97,364 at March 31, 2019 and $93,760 at December 31, 2018)         95,538               94,010    
Restricted investment in bank stock, at cost   4,373    5,394 
Loans   1,004,618    1,007,714 
Allowance for loan losses   (11,548)   (11,047)
Net loans   993,070    996,667 
Premises and equipment, net   37,616    37,855 
Goodwill and other intangible assets, net   11,004    11,004 
Bank owned life insurance   43,620    43,317 
Deferred tax assets   6,835    7,844 
Other real estate owned   6,167    6,598 
Operating lease right-of-use asset   2,665    0 
Accrued interest receivable and other assets   25,495    20,645 
Total Assets  $1,416,901   $1,384,516 
           
Liabilities and Shareholders’ Equity          
Liabilities:          
Non-interest bearing deposits  $288,213   $262,250 
Interest bearing deposits   842,399    805,277 
Total deposits   1,130,612    1,067,527 
           
Short-term borrowings   39,695    77,707 
Long-term borrowings   100,929    100,929 
Operating lease liability   3,250    0 
Accrued interest payable and other liabilities   19,377    20,649 
Dividends payable   639    638 
Total Liabilities   1,294,502    1,267,450 
           
Shareholders’ Equity:          
Common Stock – par value $.01 per share; Authorized 25,000 shares; issued and outstanding 7,089 shares at March 31, 2019 and 7,087 at December 31, 2018   71   71  
Surplus   32,027    31,921 
Retained earnings   111,989    109,477 
Accumulated other comprehensive loss   (21,688)   (24,403)
Total Shareholders’ Equity   122,399    117,066 
Total Liabilities and Shareholders’ Equity  $1,416,901   $1,384,516 

 

See accompanying notes to the consolidated financial statements

 

 3 

 

 

FIRST UNITED CORPORATION

Consolidated Statement of Operations

(In thousands, except per share data)

 

   Three months ended 
   March 31, 
   2019   2018 
   (Unaudited) 
Interest income          
Interest and fees on loans  $12,190   $10,481 
Interest on investment securities          
Taxable   1,467    1,447 
Exempt from federal income tax   280    238 
Total investment income   1,747    1,685 
Other   135    196 
Total interest income   14,072    12,362 
Interest expense          
Interest on deposits   1,771    856 
Interest on short-term borrowings   103    30 
Interest on long-term borrowings   852    894 
Total interest expense   2,726    1,780 
Net interest income   11,346    10,582 
Provision for loan losses   349    447 
Net interest income after provision for loan losses   10,997    10,135 
Other operating income          
Net gains   14    34 
Service charges on deposit accounts   519    563 
Other service charges   208    229 
Trust department   1,715    1,664 
Debit card income   600    553 
Bank owned life insurance   303    299 
Brokerage commissions   238    245 
Other   124    123 
Total other income   3,707    3,676 
Total other operating income   3,721    3,710 
Other operating expenses          
Salaries and employee benefits   6,218    5,808 
FDIC premiums   111    133 
Equipment   883    683 
Occupancy   712    638 
Data processing   941    932 
Professional services   204    336 
Contract labor   156    176 
Line rentals   217    211 
Other real estate owned   143    385 
Other   1,105    1,389 
Total other operating expenses   10,690    10,691 
Income before income tax expense   4,028    3,154 
Provision for income tax expense   877    648 
Net Income  $3,151   $2,506 
Basic and diluted net income per common share  $0.44   $0.35 
Weighted average number of basic and diluted shares outstanding   7,088    7,067 
Dividends declared per common share  $0.09   $0.09 

 

See accompanying notes to the consolidated financial statements

 

 4 

 

 

FIRST UNITED CORPORATION

Consolidated Statement of Comprehensive Income

(In thousands)

 

   Three months ended 
   March 31, 
   2019   2018 
Comprehensive Income (in thousands)  (Unaudited) 
Net Income  $3,151   $2,506 
           
Other comprehensive income, net of tax and reclassification adjustments:          
Net unrealized (losses)/gains on investments with OTTI   (80)   645 
           
Net unrealized gains/(losses) on all other AFS securities   905    (1,078)
           
Net unrealized gains on HTM securities   55    45 
           
Net unrealized (losses)/gains on cash flow hedges   (315)   443 
           
Net unrealized gains on pension   2,129    736 
           
Net unrealized gains on SERP   21    29 
           
Other comprehensive income, net of tax   2,715    820 
           
Comprehensive income  $5,866   $3,326 

 

See accompanying notes to the consolidated financial statements

 

 5 

 

 

FIRST UNITED CORPORATION

Consolidated Statement of Changes in Shareholders’ Equity

(In thousands)

 

   Common
Stock
   Surplus   Retained
Earnings
   Accumulated
Other
Comprehensive
Loss
   Total
Shareholders'
Equity
 
Balance at January 1, 2019  $71   $31,921   $109,477   $(24,403)  $117,066 
                          
Net income             3,151         3,151 
Other comprehensive income                  2,715    2,715 
Stock based compensation        67              67 
Common stock issued        39              39 
Common stock dividend declared - $.09 per share             (639)        (639)
                          
Balance at March 31, 2019  $71   $32,027   $111,989   $(21,688)  $122,399 

 

   Common
Stock
   Surplus   Retained
Earnings
   Accumulated
Other
Comprehensive
Loss
   Total
Shareholders'
Equity
 
Balance at January 1, 2018  $71   $31,553   $101,359   $(24,593)  $108,390 
                          
Net income             2,506         2,506 
Other comprehensive income                  820    820 
Stock based compensation        53              53 
Common stock dividend declared - $.09 per share             (635)        (635)
                          
Balance at March 31, 2018  $71   $31,606   $103,230   $(23,773)  $111,134 

 

See accompanying notes to the consolidated financial statements

 

 6 

 

 

FIRST UNITED CORPORATION

Consolidated Statement of Cash Flows

(In thousands)

 

   Three months ended 
   March 31, 
   2019   2018 
   (Unaudited) 
Operating activities          
Net income  $3,151   $2,506 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   349    447 
Depreciation   756    548 
Stock compensation   67    53 
Gains on sales of other real estate owned   (30)   (20)
Write-downs of other real estate owned   117    295 
Originations of loans held for sale   (2,630)   (5,137)
Proceeds from sale of loans held for sale   2,627    5,330 
Gains from sale of loans held for sale   (20)   (43)
Net amortization of investment securities discounts and premiums- AFS   3    8 
Net (accretion)/amortization of investment securities discounts and premiums- HTM   (12)   28 
Losses on sales/calls of investment securities – available-for-sale   6    9 
Earnings on bank owned life insurance   (303)   (299)
Amortization of deferred loan fees   (141)   (156)
Amortization of operating lease right-of-use asset   65    0 
Increase in accrued interest receivable and other assets   (1,824)   (799)
Increase in deferred tax benefit   (1)   (512)
Decrease in operating lease liability   (67)   0 
(Decrease)/increase in accrued interest payable and other liabilities   (1,116)   967 
Net cash provided by operating activities   997    3,225 
           
Investing activities          
Proceeds from maturities/calls of investment securities available-for-sale   2,249    1,659 
Proceeds from maturities/calls of investment securities held-to-maturity   1,238    1,726 
Purchases of investment securities available-for-sale   0    (1,405)
Purchases of investment securities held-to-maturity   (2,754)   0 
Proceeds from sales of other real estate owned   859    470 
Net decrease/(increase) in FHLB stock   1,021    (148)
Net decrease/(increase) in loans   2,897    (19,868)
Purchases of loans   0    (25,168)
Purchases of premises and equipment   (517)   (2,220)
Net cash provided by/(used in) investing activities   4,993    (44,954)
           
Financing activities          
Net increase/(decrease) in deposits   63,085    (21,527)
Proceeds from sale of common stock   39    0 
Cash dividends on common stock   (639)   (635)
Net (decrease)/increase in short-term borrowings   (38,012)   6,365 
Payments on long-term borrowings   0    (5,000)
Net cash provided by/(used in) financing activities   24,473    (20,797)
Increase/(decrease) in cash and cash equivalents   30,463    (62,526)
Cash and cash equivalents at beginning of the year   23,541    83,752 
Cash and cash equivalents at end of period  $54,004   $21,226 
           
Supplemental information          
Interest paid  $2,691   $1,737 
Taxes paid  $100   $0 
Non-cash investing activities:          
Transfers from loans to other real estate owned  $515   $118 
Initial recognition of operating lease right-of-use assets  $2,730   $0 
Initial recognition of operating lease liabilities  $3,317   $0 

 

See accompanying notes to the consolidated financial statements

 

 7 

 

 

FIRST UNITED CORPORATION

NoteS to Consolidated Financial Statements (UNAUDITED)

 

Note 1 – Basis of Presentation

 

The accompanying unaudited consolidated financial statements of First United Corporation and its consolidated subsidiaries, including First United Bank & Trust (the “Bank”), have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, as required by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 270, Interim Reporting, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required for annual financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring items, have been included. Operating results for the three-month period ended March 31, 2019 are not necessarily indicative of the results that may be expected for the full year or for any future interim period. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2018. For purposes of comparability, certain prior period amounts have been reclassified to conform to the 2019 presentation. Such reclassifications had no impact on net income or equity.

 

As used in these notes, the term “the Corporation” refers to First United Corporation and, unless the context clearly requires otherwise, its consolidated subsidiaries.

 

The Corporation has evaluated events and transactions occurring subsequent to the statement of financial condition date of March 31, 2019 for items that should potentially be recognized or disclosed in these financial statements.

 

Note 2 – Earnings Per Common Share

 

Basic earnings per common share is derived by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period and does not include the effect of any potentially dilutive common stock equivalents. Diluted earnings per share is derived by dividing net income available to common shareholders by the weighted-average number of shares outstanding, adjusted for the dilutive effect of outstanding common stock equivalents. No common stock equivalents were outstanding at March 31, 2019.

 

The following tables set forth the calculation of basic and diluted earnings per common share for the three-month periods ended March 31, 2019 and 2018:

 

   Three months ended March 31, 
   2019   2018 
       Average   Per Share       Average   Per Share 
(in thousands, except for per share amount)  Income   Shares   Amount   Income   Shares   Amount 
Basic and Diluted Earnings Per Share:                              
Net income  $3,151    7,088   $0.44   $2,506    7,067   $0.35 

 

 8 

 

 

Note 3 – Net Gains

 

The following table summarizes the gain/(loss) activity for the three-month periods ended March 31, 2019 and 2018:

 

   Three months ended 
   March 31, 
(in thousands)  2019   2018 
Net gains/(losses):          
Available-for-sale securities:          
Realized losses   (6)   (9)
Gains on sale of consumer loans   20    43 
Net gains:  $14   $34 

 

Note 4 – Investments

 

The investment portfolio is classified and accounted for based on the guidance of ASC Topic 320, Investments – Debt and Equity Securities.

 

The amortized cost of debt securities classified as available-for-sale is adjusted for the amortization of premiums to the first call date, if applicable, or to maturity, and for the accretion of discounts to maturity, or, in the case of mortgage-backed securities, over the estimated life of the security. Such amortization and accretion is included in interest income from investments. Interest and dividends are included in interest income from investments. Gains and losses on the sale of securities are recorded using the specific identification method.

 

 9 

 

 

The following table shows a comparison of amortized cost and fair values of investment securities at March 31, 2019 and December 31, 2018:

 

(in thousands)  Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair Value   OTTI in AOCL 
March 31, 2019                         
Available for Sale:                         
U.S. government agencies  $30,000   $0   $536   $29,464   $0 
Commercial mortgage-backed agencies   38,141    0    1,165    36,976    0 
Collateralized mortgage obligations   35,564    0    559    35,005    0 
Obligations of states and political subdivisions   19,798    213    94    19,917    0 
Collateralized debt obligations   18,362    0    3,210    15,152    (2,075)
Total available for sale  $141,865   $213   $5,564   $136,514   $(2,075)
                          
Held to Maturity:                         
U.S. government agencies  $16,054   $401   $0   $16,455   $0 
Residential mortgage-backed agencies   45,312    15    667    44,660    0 
Commercial mortgage-backed agencies   15,745    213    0    15,958    0 
Collateralized mortgage obligations   3,753    0    62    3,691    0 
Obligations of states and political subdivisions   14,674    1,974    48    16,600    0 
Total held to maturity  $95,538   $2,603   $777   $97,364   $0 
                          
December 31, 2018                         
Available for Sale:                         
U.S. government agencies  $30,000   $0   $974   $29,026   $0 
Commercial mortgage-backed agencies   39,013    0    1,261    37,752    0 
Collateralized mortgage obligations   36,669    0    965    35,704    0 
Obligations of states and political subdivisions   20,083    132    333    19,882    0 
Collateralized debt obligations   18,358    0    3,081    15,277    (1,966)
Total available for sale  $144,123   $132   $6,614   $137,641   $(1,966)
Held to Maturity:                         
U.S. government agencies  $16,017   $120   $0   $16,137   $0 
Residential mortgage-backed agencies   46,491    6    1,287    45,210    0 
Commercial mortgage-backed agencies   15,821    75    68    15,828    0 
Collateralized mortgage obligations   3,761    0    156    3,605    0 
Obligations of states and political subdivisions   11,920    1,156    96    12,980    0 
Total held to maturity  $94,010   $1,357   $1,607   $93,760   $0 

 

Proceeds from sales/calls of available for sale securities and the realized gains and losses are as follows:

 

   Three months ended 
   March 31, 
(in thousands)  2019   2018 
Proceeds  $260   $235 
Realized gains   0    0 
Realized losses   6    9 

 

 10 

 

 

The following table shows the Corporation’s investment securities with gross unrealized losses and fair values at March 31, 2019 and December 31, 2018, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position:

 

 

   Less than 12 months       12 months or more     
(in thousands)  Fair Value   Unrealized
Losses
   Number of
Investments
   Fair Value   Unrealized
Losses
   Number of
Investments
 
March 31, 2019                        
Available for Sale:                              
U.S. government agencies  $0   $0    0   $29,464   $536    5 
Commercial mortgage-backed agencies   0    0    0    36,976    1,165    8 
Collateralized mortgage obligations   171    1    1    34,834    558    8 
Obligations of states and political subdivisions   115    1    1    5,278    93    4 
Collateralized debt obligations   5,949    478    4    9,201    2,732    5 
Total available for sale  $6,235   $480    6   $115,753   $5,084    30 
                               
Held to Maturity:                              
Residential mortgage-backed agencies   3,623    15    2    36,833    652    26 
Collateralized mortgage obligations   0    0    0    3,691    62    1 
Obligations of states and political subdivisions   2,247    48    1    0    0    0 
Total held to maturity  $5,870   $63    3   $40,524   $714    27 

 

                                                             
December 31, 2018                              
Available for Sale:                              
U.S. government agencies  $0   $0    0   $29,026   $974    5 
Commercial mortgage-backed agencies   0    0    0    37,752    1,261    8 
Collateralized mortgage obligations   232    1    1    35,472    964    8 
Obligations of states and political subdivisions   3,310    48    5    11,068    285    8 
Collateralized debt obligations   5,987    438    4    9,290    2,643    5 
Total available for sale  $9,529   $487    10   $122,608   $6,127    34 
Held to Maturity:                              
Residential mortgage-backed agencies  $3,605   $51    2   $41,448   $1,236    29 
Commercial mortgage-backed agencies   0    0    0    7,656    68    1 
Collateralized mortgage obligations   0    0    0    3,605    156    1 
Obligations of states and political subdivisions   0    0    0    2,199    96    1 
Total held to maturity  $3,605   $51    2   $54,908   $1,556    32 

 

Management systematically evaluates securities for impairment on a quarterly basis. Based upon application of accounting guidance for subsequent measurement in ASC Topic 320 (ASC Section 320-10-35), management assesses whether (a) the Corporation has the intent to sell a security being evaluated and (b) it is more likely than not that the Corporation will be required to sell the security prior to its anticipated recovery. If neither applies, then declines in the fair values of securities below their cost that are considered other-than-temporary declines are split into two components. The first is the loss attributable to declining credit quality. Credit losses are recognized in earnings as realized losses in the period in which the impairment determination is made. The second component consists of all other losses, which are recognized in other comprehensive loss. In estimating other than temporary impairment (“OTTI”) losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) adverse conditions specifically related to the security, an industry, or a geographic area, (3) the historic and implied volatility of the fair value of the security, (4) changes in the rating of the security by a rating agency, (5) recoveries or additional declines in fair value subsequent to the balance sheet date, (6) failure of the issuer of the security to make scheduled interest or principal payments, and (7) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future. Management also monitors cash flow projections for securities that are considered beneficial interests under the guidance of ASC Subtopic 325-40, Investments – Other – Beneficial Interests in Securitized Financial Assets, (ASC Section 325-40-35). Further discussion about the evaluation of securities for impairment can be found in Item 2 of Part I of this report under the heading “Investment Securities”.

 

 11 

 

 

Management believes that the valuation of certain securities is a critical accounting policy that requires significant estimates in preparation of the Corporation’s consolidated financial statements. Management utilizes an independent third party to prepare both the impairment valuations and fair value determinations for the Corporation’s collateralized debt obligation (“CDO”) portfolio consisting of pooled trust preferred securities. See Note 7 for a discussion of the methodology used by management to determine the fair values of these securities. Based upon a review of credit quality and the cash flow tests performed by the independent third party, management determined that there were no securities that had credit-related non-cash OTTI charges during the first three months of 2019.

 

The Corporation does not believe that the investment securities that were in an unrealized loss position at March 31, 2019 represent an other-than-temporary impairment. The Corporation does not intend to sell nor is it anticipated that it would be required to sell any of its impaired investment securities at a loss.

 

The following tables present a cumulative roll-forward of the amount of non-cash OTTI charges related to credit losses which have been recognized in earnings for the trust preferred securities in the CDO portfolio held and not intended to be sold for the three-month periods ended March 31, 2019 and 2018:

 

   Three months ended March 31, 
(in thousands)  2019   2018 
Balance of credit-related OTTI at January 1  $2,646   $2,958 
Reduction for increases in cash flows expected to be collected   (49)   (55)
Balance of credit-related OTTI at March 31  $2,597   $2,903 

 

 12 

 

 

The amortized cost and estimated fair value of securities by contractual maturity at March 31, 2019 are shown in the following table. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   March 31, 2019 
(in thousands)  Amortized Cost   Fair Value 
Contractual Maturity          
Available for Sale:          
Due in one year or less  $227   $228 
Due after one year through five years   16,768    16,614 
Due after five years through ten years   21,799    21,388 
Due after ten years   29,366    26,303 
    68,160    64,533 
Commercial mortgage-backed agencies   38,141    36,976 
Collateralized mortgage obligations   35,564    35,005 
Total available for sale  $141,865   $136,514 
Held to Maturity:          
Due after one year through five years  $8,363   $8,556 
Due after five years through ten years   7,691    7,899 
Due after ten years   14,674    16,600 
    30,728    33,055 
Residential mortgage-backed agencies   45,312    44,660 
Commercial mortgage-backed agencies   15,745    15,958 
Collateralized mortgage obligations   3,753    3,691 
Total held to maturity  $95,538   $97,364 

 

Note 5 – Loans and Related Allowance for Loan Losses

 

The following table summarizes the primary segments of the loan portfolio at March 31, 2019 and December 31, 2018:

 

(in thousands)  Commercial
Real Estate
   Acquisition and
Development
   Commercial
and Industrial
   Residential
Mortgage
   Consumer   Total 
March 31, 2019                              
                               
Individually evaluated for impairment  $4,351   $8,013   $27   $3,943   $24   $16,358 
Collectively evaluated for impairment  $295,115   $115,313   $109,392   $434,664   $33,776   $988,260 
Total loans  $299,466   $123,326   $109,419   $438,607   $33,800   $1,004,618 
                               
December 31, 2018                              
                               
Individually evaluated for impairment  $5,239   $693   $17   $4,616   $10   $10,575 
Collectively evaluated for impairment  $301,682   $117,667   $111,449   $432,291   $34,050   $997,139 
Total loans  $306,921   $118,360   $111,466   $436,907   $34,060   $1,007,714 

 

The segments of the Bank’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The commercial real estate (“CRE”) loan segment is then segregated into two classes. Non-owner occupied CRE loans, which include loans secured by non-owner occupied, non-farm, and nonresidential properties, generally have a greater risk profile than all other CRE loans, which include loans secured by farmland, multifamily structures and owner-occupied commercial structures. The acquisition and development (“A&D”) loan segment is segregated into two classes. One-to-four family residential construction loans are generally made to individuals for the acquisition of and/or construction on a lot or lots on which a residential dwelling is to be built. All other A&D loans are generally made to developers or investors for the purpose of acquiring, developing and constructing residential or commercial structures. A&D loans have a higher risk profile because the ultimate buyer, once development is completed, is generally not known at the time of the loan is made. The commercial and industrial (“C&I”) loan segment consists of loans made for the purpose of financing the activities of commercial customers. The residential mortgage loan segment is segregated into two classes: amortizing term loans, which are primarily first lien loans and home equity lines of credit, which are generally second liens. The consumer loan segment consists primarily of installment loans (direct and indirect) and overdraft lines of credit connected with customer deposit accounts.

 

 13 

 

 

Management uses a 10-point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a substandard classification. Loans in the substandard category have well-defined weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. The portion of a specific allocation of the allowance for loan losses that management believes is associated with a pending event that could trigger loss in the short-term will be classified in the Doubtful category. Any portion of a loan that has been charged off is placed in the Loss category.

 

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Bank’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in the commercial segments at origination and on an ongoing basis. The Bank’s experienced Credit Quality and Loan Review Departments perform an annual review of all commercial relationships of $500,000 or greater. Confirmation of the appropriate risk grade is included as part of the review process on an ongoing basis. The Credit Quality and Loan Review Departments continually review and assess loans within the portfolio. In addition, the Bank engages an external consultant to conduct loan reviews on at least an annual basis. Generally, the external consultant reviews commercial relationships greater than $1,000,000 and/or criticized non-consumer loans greater than $500,000. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

 

 14 

 

 

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention and Substandard within the internal risk rating system at March 31, 2019 and December 31, 2018:

 

(in thousands)  Pass   Special Mention   Substandard   Total 
March 31, 2019                    
Commercial real estate                    
Non owner-occupied  $138,286   $7,553   $2,285   $148,124 
All other CRE   144,863    1,738    4,741    151,342 
Acquisition and development                    
1-4 family residential construction   13,949    0    0    13,949 
All other A&D   101,567    0    7,810    109,377 
Commercial and industrial   105,428    0    3,991    109,419 
Residential mortgage                    
Residential mortgage - term   362,573    0    4,444    367,017 
Residential mortgage - home equity   70,154    142    1,294    71,590 
Consumer   33,694    4    102    33,800 
Total  $970,514   $9,437   $24,667   $1,004,618 
                     
December 31, 2018                    
Commercial real estate                    
Non owner-occupied  $145,260   $2,904   $2,348   $150,512 
All other CRE   149,076    1,752    5,581    156,409 
Acquisition and development                    
1-4 family residential construction   16,003    0    0    16,003 
All other A&D   94,428    7,378    551    102,357 
Commercial and industrial   107,174    3,703    589    111,466 
Residential mortgage                    
Residential mortgage - term   359,305    0    4,703    364,008 
Residential mortgage - home equity   71,666    143    1,090    72,899 
Consumer   33,952    4    104    34,060 
Total  $976,864   $15,884   $14,966   $1,007,714 

 

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. A loan is considered to be past due when a payment remains unpaid 30 days past its contractual due date. For all loan segments, the accrual of interest is discontinued when principal or interest is delinquent for 90 days or more unless the loan is well-secured and in the process of collection. All non-accrual loans are considered to be impaired. Interest payments received on non-accrual loans are applied as a reduction of the loan principal balance. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. The Corporation’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.

 

 15 

 

 

The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and non-accrual loans at March 31, 2019 and December 31, 2018:

 

(in thousands)  Current   30-59 Days
Past Due
   60-89 Days
Past Due
   90 Days+
Past Due
   Total Past
Due and
Accruing
   Non-Accrual   Total Loans 
March 31, 2019                                   
Commercial real estate                                   
Non owner-occupied  $147,980   $0   $0   $0   $0   $144   $148,124 
All other CRE   149,687    127    26    0    153    1,502    151,342 
Acquisition and development                                   
1-4 family residential construction   13,834    115    0    0    115    0    13,949 
All other A&D   101,644    258    0    0    258    7,475    109,377 
Commercial and industrial   108,266    1,116    10    0    1,126    27    109,419 
Residential mortgage                                   
Residential mortgage - term   363,383    1,887    271    8    2,166    1,468    367,017 
Residential mortgage - home equity   70,040    527    100    0    627    923    71,590 
Consumer   33,556    172    48    0    220    24    33,800 
Total  $988,390   $4,202   $455   $8   $4,665   $11,563   $1,004,618 
                                    
December 31, 2018                                   
Commercial real estate                                   
Non owner-occupied  $150,339   $0   $0   $0   $0   $173   $150,512 
All other CRE   153,977    464    0    0    464    1,968    156,409 
Acquisition and development                                   
1-4 family residential construction   16,003    0    0    0    0    0    16,003 
All other A&D   94,540    197    7,411    62    7,670    147    102,357 
Commercial and industrial   111,436    29    1    0    30    0    111,466 
Residential mortgage                                   
Residential mortgage - term   360,073    302    1,359    363    2,024    1,911    364,008 
Residential mortgage - home equity   71,611    461    114    0    575    713    72,899 
Consumer   33,832    140    73    5    218    10    34,060 
Total  $991,811   $1,593   $8,958   $430   $10,981   $4,922   $1,007,714 

 

Non-accrual loans totaled $11.6 million at March 31, 2019, compared to $4.9 million at December 31, 2018. The increase in non-accrual balances at March 31, 2019 was primarily due to entering a forbearance agreement with one large A&D loan totaling $7.0 million during the quarter. At December 31, 2018, it was expected that this loan would be paid off by a prospective buyer. In first quarter of 2019, the buyer declined to pursue the transaction and, subsequently, the Company entered into a forbearance agreement and placed the loan on non-accrual. Non-accrual loans that have been subject to partial charge-offs totaled $.2 million at March 31, 2019, compared to $.3 million at December 31, 2018. Loans secured by 1-4 family residential real estate properties in the process of foreclosure were $.1 million at March 31, 2019 and $.3 million at December 31, 2018.

 

Accruing loans past due 30 days or more decreased to .46% of the loan portfolio at March 31, 2019, compared to 1.09% at December 31, 2018. The decrease for the first three months of 2019 was primarily due to the movement of one large A&D loan to non-accrual in the first quarter 2019.

 

An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.

 

The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35, Receivables-Overall-Subsequent Measurement, for loans individually evaluated for impairment and ASC Subtopic 450-20, Contingencies-Loss Contingencies, for loans collectively evaluated for impairment, as well as the Interagency Policy Statement on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the two components represents the allocated portion of the Bank’s ALL. In the second quarter of 2015, management determined that it would be prudent to establish an unallocated portion of the ALL to protect the Bank from other risks associated with the loan portfolio that may not be specifically identifiable.

 

 16 

 

 

The following table summarizes the primary segments of the ALL at March 31, 2019 and December 31, 2018, segregated by the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment:

 

(in thousands)  Commercial
Real Estate
   Acquisition
and
Development
   Commercial
and
Industrial
   Residential
Mortgage
   Consumer   Unallocated   Total 
March 31, 2019                                   
                                    
Individually evaluated for impairment  $12   $720   $0   $71   $4   $0   $807 
Collectively evaluated for impairment  $2,763   $1,618   $1,125   $4,426   $309   $500   $10,741 
Total ALL  $2,775   $2,338   $1,125   $4,497   $313   $500   $11,548 
                                    
December 31, 2018                                   
                                    
Individually evaluated for impairment  $13   $25   $0   $106   $0   $0   $144 
Collectively evaluated for impairment  $2,767   $1,696   $1,187   $4,438   $315   $500   $10,903 
Total ALL  $2,780   $1,721   $1,187   $4,544   $315   $500   $11,047 

 

The evaluation of the need and amount of a specific allocation of the ALL and whether a loan can be removed from impairment status is made on a quarterly basis.

 

 17 

 

 

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not required at March 31, 2019 and December 31, 2018:

 

   Impaired Loans with Specific
Allowance
   Impaired Loans
with No Specific
Allowance
   Total Impaired Loans 
(in thousands)  Recorded
Investment
   Related
Allowances
   Recorded
Investment
   Recorded
Investment
   Unpaid
Principal
Balance
 
March 31, 2019                         
Commercial real estate                         
Non owner-occupied  $120   $12   $144   $264   $8,458 
All other CRE   0    0    4,087    4,087    4,087 
Acquisition and development                         
1-4 family residential construction   0    0    310    310    310 
All other A&D   7,666    720    37    7,703    7,774 
Commercial and industrial   0    0    27    27    2,241 
Residential mortgage                         
Residential mortgage - term   1,219    62    1,802    3,021    3,244 
Residential mortgage – home equity   171    9    751    922    935 
Consumer   15    4    9    24    24 
Total impaired loans  $9,191   $807   $7,167   $16,358   $27,073 
                          
December 31, 2018                         
Commercial real estate                         
Non owner-occupied  $121   $13   $173   $294   $8,488 
All other CRE   0    0    4,945    4,945    4,945 
Acquisition and development                         
1-4 family residential construction   0    0    316    316    316 
All other A&D   230    25    147    377    525 
Commercial and industrial   0    0    17    17    2,231 
Residential mortgage                         
Residential mortgage - term   993    106    2,910    3,903    4,130 
Residential mortgage – home equity   0    0    713    713    726 
Consumer   0    0    10    10    10 
Total impaired loans  $1,344   $144   $9,231   $10,575   $21,371 

 

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors.

 

The classes described above, which are based on the Federal call code assigned to each loan, provide the starting point for the ALL analysis. Management tracks the historical net charge-off activity (full and partial charge-offs, net of full and partial recoveries) at the call code level. A historical charge-off factor is calculated utilizing a defined number of consecutive historical quarters. Consumer pools currently utilize a rolling 12 quarters, while Commercial pools currently utilize a rolling eight quarters.

 

“Pass” rated credits are segregated from “Criticized” credits for the application of qualitative factors. “Pass” pools for commercial and residential real estate are further segmented based upon the geographic location of the underlying collateral. There are seven geographic regions utilized – six that represent the Bank’s lending footprint and a seventh for all out-of-market credits. Different economic environments and resultant credit risks exist in each region that are acknowledged in the assignment of qualitative factors. Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management and subject to additional qualitative factors.

 

 18 

 

 

Management supplements the historical charge-off factor with a number of additional qualitative factors that are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors, which are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources, are: (a) national and local economic trends and conditions; (b) levels of and trends in delinquency rates and non-accrual loans; (c) trends in volumes and terms of loans; (d) effects of changes in lending policies; (e) experience, ability, and depth of lending staff; (f) value of underlying collateral; and (g) concentrations of credit from a loan type, industry and/or geographic standpoint.

 

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL. Residential mortgage and consumer loans are charged off after they are 120 days contractually past due. All other loans are charged off based on an evaluation of the facts and circumstances of each individual loan. When the Bank believes that its ability to collect is solely dependent on the liquidation of the collateral, a full or partial charge-off is recorded promptly to bring the recorded investment to an amount that the Bank believes is supported by an ability to collect on the collateral. The circumstances that may impact the Bank’s decision to charge-off all or a portion of a loan include default or non-payment by the borrower, scheduled foreclosure actions, and/or prioritization of the Bank’s claim in bankruptcy. There may be circumstances where, due to pending events, the Bank will place a specific allocation of the ALL on a loan for which a partial charge-off has been previously recognized. This specific allocation may be either charged off or removed depending upon the outcome of the pending event. Full or partial charge-offs are not recovered until full principal and interest on the loan have been collected, even if a subsequent appraisal supports a higher value. Loans with partial charge-offs generally remain in non-accrual status. Both full and partial charge-offs reduce the recorded investment of the loan and the ALL and are considered to be charge-offs for purposes of all credit loss metrics and trends, including the historical rolling charge-off rates used in the determination of the ALL.

 

The following tables present the activity in the ALL for the three-month periods ended March 31, 2019 and 2018:

 

(in thousands)  Commercial
Real Estate
   Acquisition
and
Development
   Commercial and
Industrial
   Residential
Mortgage
   Consumer   Unallocated   Total 
ALL balance at January 1, 2019  $2,780   $1,721   $1,187   $4,544   $315   $500   $11,047 
Charge-offs   0    (29)   0    (12)   (68)   0    (109)
Recoveries   29    12    51    108    61    0    261 
Provision   (34)   634    (113)   (143)   5    0    349 
ALL balance at March 31, 2019  $2,775   $2,338   $1,125   $4,497   $313   $500   $11,548 
                                    
ALL balance at January 1, 2018  $3,699   $1,257   $869   $3,444   $203   $500   $9,972 
Charge-offs   0    (91)   0    (154)   (68)   0    (313)
Recoveries   59    214    18    38    35    0    364 
Provision   218    (220)   (27)   350    126    0    447 
ALL balance at March 31, 2018  $3,976   $1,160   $860   $3,678   $296   $500   $10,470 

 

The ALL is based on estimates, and actual losses may vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.

 

 19 

 

 

The following table presents the average recorded investment in impaired loans by class and related interest income recognized for the periods indicated:

 

   Three months ended   Three months ended 
   March 31, 2019   March 31, 2018 
(in thousands)  Average
investment
   Interest
income
recognized on
an accrual
basis
   Interest
income
recognized on
a cash basis
   Average
investment
   Interest
income
recognized on
an accrual
basis
   Interest
income
recognized on
a cash basis
 
Commercial real estate                              
Non owner-occupied  $280   $3   $0   $2,660   $4   $66 
All other CRE   4,516    38    0    5,142    49    56 
Acquisition and development                              
1-4 family residential construction   313    5    0    527    6    0 
All other A&D   4,040    3    0    426    3    0 
Commercial and industrial   22    0    0    493    5    0 
Residential mortgage                              
Residential mortgage - term   3,462    28    8    3,595    32    0 
Residential mortgage – home equity   818    0    0    627    0    7 
Consumer   17    0    0    28    0    0 
Total  $13,468   $77   $8   $13,498   $99   $129 

 

The Bank modifies loan terms in the normal course of business. Among other reasons, modifications might be made in an effort to retain the loan relationship, to remain competitive in the current interest rate environment and/or to re-amortize or extend the loan’s term to better match the loan’s payment stream with the borrower’s cash flow. A modified loan is considered to be a TDR when the Bank has determined that the borrower is troubled (i.e., experiencing financial difficulties). The Bank evaluates the probability that the borrower will be in payment default on any of its debt obligations in the foreseeable future without modification. To make this determination, the Bank performs a global financial review of the borrower and loan guarantors to assess their current ability to meet their financial obligations.

 

When the Bank restructures a loan to a troubled borrower, the loan terms (i.e., interest rate, payment amount, amortization period, and/or maturity date) are modified in such a way as to enable the borrower to cover the modified debt service payments based on current financials and cash flow adequacy. If a borrower’s hardship is thought to be temporary, then modified terms are offered only for that time period. Where possible, the Bank obtains additional collateral and/or secondary payment sources at the time the loan is restructured in order to put the Bank in the best possible position if the borrower is not able to meet the modified terms. To date, the Bank has not forgiven any principal as a restructuring concession. The Bank will not offer modified terms if it believes that modifying the loan terms will only delay an inevitable permanent default.

 

All loans designated as TDRs are considered impaired loans and may be in either accruing or non-accruing status. The Bank’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition. Accordingly, the accrual of interest is discontinued when principal or interest is delinquent for 90 days or more unless the loan is well-secured and in the process of collection. If the loan was accruing at the time of the modification, then it continues to be in accruing status subsequent to the modification. Non-accrual TDRs may return to accruing status when there has been sufficient payment performance for a period of at least six months. TDRs are considered to be in payment default if, subsequent to modification, the loans are transferred to non-accrual status or to foreclosure. Loans may be removed from being reported as a TDR in the calendar year following the modification if the interest rate at the time of modification was consistent with the interest rate for a loan with comparable credit risk and the loan has performed according to its modified terms for at least six months.

 

The volume and type of TDR activity is considered in the assessment of the local economic trends’ qualitative factor used in the determination of the ALL for loans that are evaluated collectively for impairment.

 

 20 

 

 

There were 14 loans totaling $4.2 million and 16 loans totaling $4.9 million that were classified as TDRs at March 31, 2019 and December 31, 2018, respectively. The following tables present the volume and recorded investment at that time of modification of TDRs by class and type of modification that occurred during the periods indicated:

 

   Temporary Rate
Modification
   Extension of Maturity   Modification of Payment
and Other Terms
 
(in thousands)  Number of
Contracts
   Recorded
Investment
   Number of
Contracts
   Recorded
Investment
   Number of
Contracts
   Recorded
Investment
 
Three months ended March 31, 2019                              
Commercial real estate                              
Non owner-occupied   0   $0    0   $0    0   $0 
All other CRE   0    0    0    0    0    0 
Acquisition and development                              
1-4 family residential construction   0    0    0    0    0    0 
All other A&D   0    0    0    0    1    227 
Commercial and industrial   0    0    0    0    0    0 
Residential mortgage                              
Residential mortgage – term   0    0    0    0    1    243 
Residential mortgage – home equity   0    0    0    0    0    0 
Consumer   0    0    0    0    0    0 
Total   0   $0    0   $0    2   $470 

 

During the three months ended March 31, 2019, there were no new TDRs but two existing TDRs that had reached their modification maturity dates were re-modified. These re-modifications did not impact the ALL. During the three months ended March 31, 2019, there were no payment defaults.

 

During the three months ended March 31, 2018, there were no new TDRs, no modifications on existing TDRs and no payment defaults.

 

 21 

 

 

Note 6 - Other Real Estate Owned

 

The following table presents the components of other real estate owned (“OREO”) at March 31, 2019 and December 31, 2018:

 

(in thousands)  March 31, 2019   December 31, 2018 
Commercial real estate  $2,083   $2,599 
Acquisition and development   3,137    3,218 
Commercial and industrial   0    24 
Residential mortgage   947    757 
Total OREO  $6,167   $6,598 

 

The following table presents the activity in the OREO valuation allowance for the three-month periods ended March 31, 2019 and 2018:

 

   For the Three months Ended 
   March 31, 
(in thousands)  2019   2018 
Balance beginning of period  $1,988   $2,740 
Fair value write-down   117    295 
Sales of OREO   (739)   (124)
Balance at end of period  $1,366   $2,911 

 

The following table presents the components of OREO expenses, net, for the three-month periods ended March 31, 2019 and 2018:

 

   For the Three months Ended 
   March 31, 
(in thousands)  2019   2018 
Gains on real estate, net  $(30)  $(20)
Fair value write-down, net   117    295 
Expenses, net   75    148 
Rental and other income   (19)   (38)
Total OREO expense, net  $143   $385 

 

Note 7 – Fair Value of Financial Instruments

 

The Corporation complies with the guidance of ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements required under other accounting pronouncements. The Corporation also follows the guidance on matters relating to all financial instruments found in ASC Subtopic 825-10, Financial Instruments – Overall.

 

Fair value is defined as the price to sell an asset or to transfer a liability in an orderly transaction between willing market participants as of the measurement date. Fair value is best determined by values quoted through active trading markets. Active trading markets are characterized by numerous transactions of similar financial instruments between willing buyers and willing sellers. Because no active trading market exists for various types of financial instruments, many of the fair values disclosed were derived using present value discounted cash flows or other valuation techniques described below. As a result, the Corporation’s ability to actually realize these derived values cannot be assumed.

 

 22 

 

 

The Corporation measures fair values based on the fair value hierarchy established in ASC Paragraph 820-10-35-37. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of inputs that may be used to measure fair value under the hierarchy are as follows:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets and liabilities. This level is the most reliable source of valuation.

 

Level 2: Quoted prices that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability. Level 2 inputs include inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates). It also includes inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs). Several sources are utilized for valuing these assets, including a contracted valuation service, Standard & Poor’s (“S&P”) evaluations and pricing services, and other valuation matrices.

 

Level 3: Prices or valuation techniques that require inputs that are both significant to the valuation assumptions and not readily observable in the market (i.e. supported with little or no market activity). Level 3 instruments are valued based on the best available data, some of which is internally developed, and consider risk premiums that a market participant would require.

 

The level established within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Transfers in and out of Level 1, 2 or 3 are recorded at fair value at the beginning of the reporting period.

 

Management believes that the Corporation’s valuation techniques are appropriate and consistent with the techniques used by other market participants. However, the use of different methodologies and assumptions could result in a different estimate of fair values at the reporting date. The valuation techniques used by the Corporation to measure, on a recurring and non-recurring basis, the fair value of assets as of March 31, 2019 are discussed in the paragraphs that follow.

 

Investments – The investment portfolio is classified and accounted for based on the guidance of ASC Topic 320, Investments – Debt and Equity Securities.

 

The fair value of investments is determined using a market approach. As of March 31, 2019, the U.S. Government agencies, residential and commercial mortgage-backed securities, collateralized mortgage obligations, and state and political subdivisions bonds, excluding the TIF bonds, segments are classified as Level 2 within the valuation hierarchy. Their fair values were determined based upon market-corroborated inputs and valuation matrices, which were obtained through third party data service providers or securities brokers through which the Corporation has historically transacted both purchases and sales of investment securities. The TIF bonds are classified as Level 3 within the valuation hierarchy as they are not openly traded.

 

The CDO segment, which consists of pooled trust preferred securities issued by banks, thrifts and insurance companies, is classified as Level 3 within the valuation hierarchy. At March 31, 2019, the Corporation owned nine pooled trust preferred securities with an amortized cost of $18.4 million and a fair value of $15.2 million. As of March 31, 2019, the market for these securities is not active and the markets for similar securities are also not active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which these securities trade and then by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive, as few CDOs have been issued since 2007. There are currently very few market participants who are willing to effect transactions in these securities. The market values for these securities or any securities other than those issued or guaranteed by the U.S. Department of the Treasury (the “Treasury”) are depressed relative to historical levels. Therefore, in the current market, a low market price for a particular bond may only provide evidence of stress in the credit markets in general rather than being an indicator of credit problems with a particular issue. Given the conditions in the current debt markets and the absence of observable transactions in the secondary and new issue markets, management has determined that (a) the few observable transactions and market quotations that are available are not reliable for the purpose of obtaining fair value at March 31, 2019, (b) an income valuation approach technique (i.e. present value) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than a market approach, and (c) the CDO segment is appropriately classified within Level 3 of the valuation hierarchy because management determined that significant adjustments were required to determine fair value at the measurement date.

 

 23 

 

 

Management relies on an independent third party to prepare both the evaluations of OTTI as well as the fair value determinations for its CDO portfolio. Management believes that the valuations are adequately reflected at March 31, 2019.

 

The approach used by the third party to determine fair value involved several steps, which included detailed credit and structural evaluation of each piece of collateral in each bond, projection of default, recovery and prepayment/amortization probabilities for each piece of collateral in the bond, and discounted cash flow modeling. The discount rate methodology used by the third party combines a baseline current market yield for comparable corporate and structured credit products with adjustments based on evaluations of the differences found in structure and risks associated with actual and projected credit performance of each CDO being valued.  Currently, the only active and liquid trading market that exists is for stand-alone trust preferred securities, with a limited market for highly-rated CDO securities that are more senior in the capital structure than the securities in the CDO portfolio.  Therefore, adjustments to the baseline discount rate are also made to reflect the additional leverage found in structured instruments.

 

Derivative financial instruments (Cash flow hedge) – The Corporation’s open derivative positions are interest rate swap agreements. Those classified as Level 2 open derivative positions are valued using externally developed pricing models based on observable market inputs provided by a third party and validated by management. The Corporation has considered counterparty credit risk in the valuation of its interest rate swap assets.

 

Impaired loans – Loans included in the table below are those that are considered impaired with a specific allocation or with a partial charge-off, based upon the guidance of the loan impairment subsection of the Receivables Topic, ASC Section 310-10-35, under which the Corporation has measured impairment generally based on the fair value of the loan’s collateral. Fair value consists of the loan balance less its valuation allowance and is generally determined based on independent third-party appraisals of the collateral or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements.

 

Other real estate owned – OREO included in the table below are considered impaired with specific write-downs. Fair value of other real estate owned is based on independent third-party appraisals of the properties. These values were determined based on the sales prices of similar properties in the approximate geographic area. These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements.

 

 24 

 

 

For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis as of March 31, 2019 and December 31, 2018, the significant unobservable inputs used in the fair value measurements were as follows:

 

(in thousands)  Fair Value at
March 31, 2019
   Valuation Technique  Significant
Unobservable Inputs
  Significant
Unobservable Input
Value
Recurring:              
               
Investment Securities – available for sale  $15,152   Discounted Cash Flow  Discount Rate  Range of LIBOR+ 4.50%
               
Non-recurring:              
               
Impaired Loans  $8,087   Market Comparable Properties  Marketability Discount  10.0% - 15.0% (1)
(weighted avg 12.8%)
               
Other Real Estate Owned  $786   Market Comparable Properties  Marketability Discount  10.0% - 15.0% (1)
(weighted avg 14.6%)

 

(in thousands)  Fair Value at
December 31,
2018
   Valuation Technique  Significant
Unobservable Inputs
  Significant
Unobservable Input
Value
Recurring:              
               
Investment Securities – available for sale  $15,277   Discounted Cash Flow  Discount Rate  Range of LIBOR+ 4.50%
               
Non-recurring:              
               
Impaired Loans  $1,316   Market Comparable Properties  Marketability Discount  10.0% - 15.0% (1)
(weighted avg 12.8%)
               
Other Real Estate Owned  $2,707   Market Comparable Properties  Marketability Discount  10.0% - 15.0% (1)
(weighted avg 13.5%)

 

NOTE:

(1)Range would include discounts taken since appraisal and estimated values

 

 25 

 

 

For assets measured at fair value on a recurring and non-recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2019 and December 31, 2018 are as follows:

 

       Fair Value Measurements at March 31, 2019
Using
 
   Assets
Measured at
Fair Value
   Quoted Prices
in Active
Markets for
Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
(in thousands)  03/31/2019   (Level 1)   (Level 2)   (Level 3) 
Recurring:                    
Investment securities available-for-sale:                    
U.S. government agencies  $29,464       $29,464      
Commercial mortgage-backed agencies  $36,976        $36,976      
Collateralized mortgage obligations  $35,005        $35,005      
Obligations of states and political subdivisions  $19,917        $19,917      
Collateralized debt obligations  $15,152             $15,152 
Financial Derivatives  $612        $612      
Non-recurring:                    
Impaired loans  $8,087             $8,087 
Other real estate owned  $786             $786 

 

 

       Fair Value Measurements at December 31, 2018
Using
 
   Assets
Measured at
Fair Value
   Quoted Prices
in Active
Markets for
Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
(in thousands)  12/31/2018   (Level 1)   (Level 2)   (Level 3) 
Recurring:                    
Investment securities available-for-sale:                    
U.S. government agencies  $29,026       $29,026      
Commercial mortgage-backed agencies  $37,752        $37,752      
Collateralized mortgage obligations  $35,704        $35,704      
Obligations of states and political subdivisions  $19,882        $19,882      
Collateralized debt obligations  $15,277             $15,277 
Financial Derivative  $1,043        $1,043      
Non-recurring:                    
Impaired loans  $1,316             $1,316 
Other real estate owned  $2,707             $2,707 

 

There were no transfers of assets between any of the fair value hierarchy for the three-month periods ended March 31, 2019 or 2018.

 

 26 

 

 

The following tables show a reconciliation of the beginning and ending balances for fair valued assets measured on a recurring basis using Level 3 significant unobservable inputs for the three-month periods ended March 31, 2019 and 2018:

 

   Fair Value Measurements Using
Significant Unobservable Inputs (Level 3)
 
(in thousands)  Investment Securities Available for Sale 
Beginning balance January 1, 2019  $15,277 
Total losses realized/unrealized:     
Included in other comprehensive income   (125)
Ending balance March 31, 2019  $15,152 

 

   Fair Value Measurements Using
Significant Unobservable Inputs (Level 3)
 
(in thousands)  Investment Securities Available for Sale 
Beginning balance January 1, 2018  $14,920 
Total gains realized/unrealized:     
Included in other comprehensive income   1,057 
Ending balance March 31, 2018  $15,977 

 

Gains (realized and unrealized) included in earnings for the periods identified above are reported in the Consolidated Statement of Operations in Other Operating Income. There were no gains or losses included in earnings attributable to the change in realized/unrealized gains or losses related to the assets for the three-month periods ended March 31, 2019 and 2018.

 

The disclosed fair values may vary significantly between institutions based on the estimates and assumptions used in the various valuation methodologies. The derived fair values are subjective in nature and involve uncertainties and significant judgment. Therefore, they cannot be determined with precision. Changes in the assumptions could significantly impact the derived estimates of fair value. Disclosure of non-financial assets such as buildings as well as certain financial instruments such as leases is not required. Accordingly, the aggregate fair values presented do not represent the underlying value of the Corporation.

 

 27 

 

 

The following tables present fair value information about financial instruments, whether or not recognized in the Consolidated Statement of Financial Condition, for which it is practicable to estimate that value. The actual carrying amounts and estimated fair values of the Corporation’s financial instruments that are included in the Consolidated Statement of Financial Condition are as follows:

 

   March 31, 2019   Fair Value Measurements 
   Carrying   Fair   Quoted Prices in
Active Markets for
Identical Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
(in thousands)  Amount   Value   (Level 1)   (Level 2)   (Level 3) 
Financial Assets:                         
Cash and due from banks  $53,112   $53,112   $53,112           
Interest bearing deposits in banks   892    892    892           
Investment securities - AFS   136,514    136,514        $121,362   $15,152 
Investment securities - HTM   95,538    97,364         80,764    16,600 
Restricted bank stock   4,373    4,373         4,373      
Loans, net   993,070    971,274              971,274 
Financial derivatives   612    612         612      
Accrued interest receivable   4,268    4,268         4,268      
                          
Financial Liabilities:                         
Deposits – non-maturity   874,296    874,296         874,296      
Deposits – time deposits   256,316    257,122         257,122      
Short-term borrowed funds   39,695    39,695         39,695      
Long-term borrowed funds   100,929    102,508         102,508      
Accrued interest payable   490    490         490      
Off balance sheet financial instruments   0    0    0           

 

 28 

 

 

   December 31, 2018   Fair Value Measurements 
   Carrying   Fair   Quoted Prices in
Active Markets for
Identical Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
(in thousands)  Amount   Value   (Level 1)   (Level 2)   (Level 3) 
Financial Assets:                         
Cash and due from banks  $22,187   $22,187   $22,187           
Interest bearing deposits in banks   1,354    1,354    1,354           
Investment securities - AFS   137,641    137,641        $122,364   $15,277 
Investment securities - HTM   94,010    93,760         80,780    12,980 
Restricted bank stock   5,394    5,394         5,394      
Loans, net   996,667    967,198              967,198 
Financial derivative   1,043    1,043         1,043      
Accrued interest receivable   4,175    4,175         4,175      
                          
Financial Liabilities:                         
Deposits- non-maturity   815,858    815,858         815,858      
Deposits- time deposits   251,669    252,146         252,146      
Short-term borrowed funds   77,707    77,707         77,707      
Long-term borrowed funds   100,929    102,590         102,590      
Accrued interest payable   455    455         455      
Off balance sheet financial instruments   0    0    0           

 

 29 

 

 

Note 8 – Accumulated Other Comprehensive Loss

 

The following table presents the changes in each component of accumulated other comprehensive loss for the 12 months ended December 31, 2018 and the three-month period ended March 31, 2019:

 

(in thousands)  Investment
securities-
with OTTI
AFS
   Investment
securities-
all other
AFS
   Investment
securities-
HTM
   Cash Flow
Hedge
   Pension
Plan
   SERP   Total 
Accumulated OCL, net:                                   
Balance – January 1, 2018  $(2,939)  $(2,979)  $(1,347)  $582   $(17,066)  $(844)  $(24,593)
Other comprehensive income/(loss) before reclassifications   1,194    (540)   0    191    (1,833)   202    (786)
Amounts reclassified from accumulated other comprehensive loss   (154)   (82)   216    0    882    114    976 
Balance – December 31, 2018  $(1,899)  $(3,601)  $(1,131)  $773   $(18,017)  $(528)  $(24,403)
Other comprehensive income/(loss) before reclassifications   (44)   901    0    (315)   1,933    0    2,475 
Amounts reclassified from accumulated other comprehensive loss   (36)   4    55    0    196    21    240 
Balance - March 31, 2019  $(1,979)  $(2,696)  $(1,076)  $458   $(15,888)  $(507)  $(21,688)

 

 30 

 

 

The following tables present the components of other comprehensive income/(loss) for the three-month periods ended March 31, 2019 and 2018:

 

Components of Other Comprehensive Income (in thousands)  Before Tax
Amount
   Tax (Expense)
Benefit
   Net 
For the three months ended March 31, 2019               
Available for sale (AFS) securities with OTTI:               
Unrealized holding losses  $(60)  $16   $(44)
Less:  accretable yield recognized in income   49    (13)   36 
Net unrealized losses on investments with OTTI   (109)   29    (80)
                
Available for sale securities – all other:               
Unrealized holding gains   1,236    (335)   901 
Less:  losses recognized in income   (6)   2    (4)
Net unrealized gains on all other AFS securities   1,242    (337)   905 
                
Held to maturity securities:               
Unrealized holding gains   0    0    0 
Less:  amortization recognized in income   (75)   20    (55)
Net unrealized gains on HTM securities   75    (20)   55 
                
Cash flow hedges:               
Unrealized holding losses   (432)   117    (315)
                
Pension Plan:               
Unrealized net actuarial gain   2,652    (719)   1,933 
Less: amortization of unrecognized loss   (269)   73    (196)
Net pension plan liability adjustment   2,921    (792)   2,129 
                
SERP:               
Unrealized net actuarial loss   0    0    0 
Less: amortization of unrecognized loss   (29)   7    (22)
Less: amortization of prior service costs   1    0    1 
Net SERP liability adjustment   28    (7)   21 
Other comprehensive income  $3,725   $(1,010)  $2,715 

 

 31 

 

 

Components of Other Comprehensive Income (in thousands)  Before Tax
Amount
   Tax (Expense)
Benefit
   Net 
For the three months ended March 31, 2018               
Available for sale (AFS) securities with OTTI:               
Unrealized holding gains  $939   $(254)  $685 
Less:  accretable yield recognized in income   55    (15)   40 
Net unrealized gains on investments with OTTI   884    (239)   645 
                
Available for sale securities – all other:               
Unrealized holding losses   (1,487)   402    (1,085)
Less:  losses recognized in income   (9)   2    (7)
Net unrealized losses on all other AFS securities   (1,478)   400    (1,078)
                
Held to maturity securities:               
Unrealized holding gains   0    0    0 
Less:  amortization recognized in income   (76)   31    (45)
Net unrealized gains on HTM securities   76    (31)   45 
                
Cash flow hedges:               
Unrealized holding gains   607    (164)   443 
                
Pension Plan:               
Unrealized net actuarial gain   707    (191)   516 
Less: amortization of unrecognized loss   (300)   81    (219)
Less: amortization of prior service costs   (2)   1    (1)
Net pension plan liability adjustment   1,009    (273)   736 
                
SERP:               
Unrealized net actuarial loss   0    0    0 
Less: amortization of unrecognized loss   (41)   11    (30)
Less: amortization of prior service costs   1    0    1 
Net SERP liability adjustment   40    (11)   29 
Other comprehensive income  $1,138   $(318)  $820 

 

 32 

 

 

The following table presents the details of amount reclassified from accumulated other comprehensive loss for the three-month periods ended March 31, 2019 and 2018:

 

Amounts Reclassified from Accumulated Other
Comprehensive Loss (in thousands)
  For the three
months ended
March 31, 2019
   For the three
months ended
March 31, 2018
   Affected Line Item in the
Statement Where Net Income is
Presented
Net unrealized gains on investment securities with OTTI:             
Accretable yield   49    55   Interest income on taxable investment securities
Taxes   (13)   (15)  Provision for income tax expense
   $36   $40   Net of tax
Net unrealized losses on available for sale investment securities - all others:             
Losses on calls  $(6)  $(9)  Net gains
Taxes   2    2   Provision for income tax expense
   $(4)  $(7)  Net of tax
Net unrealized losses on held to maturity securities:             
Amortization  $(75)  $(76)  Interest income on taxable investment securities
Taxes   20    31   Provision for income tax expense
   $(55)  $(45)