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 8-03 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 six- and three-month periods ended June 30, 2017 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, 2016. For purposes of comparability, certain prior period amounts have been reclassified
to conform to the 2017 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.
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. There were no common stock equivalents at June 30, 2017 or June
30, 2016.
The following tables set forth the calculation
of basic and diluted earnings per common share for the six- and three-month periods ended June 30, 2017 and 2016:
|
|
Six months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
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
|
|
$
|
4,289
|
|
|
|
|
|
|
|
|
|
|
$
|
3,575
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
(765
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
3,524
|
|
|
|
6,796
|
|
|
$
|
0.52
|
|
|
$
|
2,450
|
|
|
|
6,259
|
|
|
$
|
0.39
|
|
|
|
Three months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
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
|
|
$
|
2,309
|
|
|
|
|
|
|
|
|
|
|
$
|
1,704
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
(225
|
)
|
|
|
|
|
|
|
|
|
|
|
(450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
2,084
|
|
|
|
7,062
|
|
|
$
|
0.30
|
|
|
$
|
1,254
|
|
|
|
6,264
|
|
|
$
|
0.20
|
|
Note 3 – Net Gains
The following table summarizes
the gain/(loss) activity for the six- and three-month periods ended June 30, 2017 and 2016:
|
|
Six months ended
|
|
|
Three months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net gains/(losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains
|
|
$
|
52
|
|
|
$
|
415
|
|
|
$
|
44
|
|
|
$
|
138
|
|
Realized losses
|
|
|
(69
|
)
|
|
|
(188
|
)
|
|
|
(52
|
)
|
|
|
(117
|
)
|
Gain on sale of consumer loans
|
|
|
32
|
|
|
|
48
|
|
|
|
17
|
|
|
|
36
|
|
(Loss)/gain on disposal of fixed assets
|
|
|
(1
|
)
|
|
|
5
|
|
|
|
0
|
|
|
|
7
|
|
Net gains
|
|
$
|
14
|
|
|
$
|
280
|
|
|
$
|
9
|
|
|
$
|
64
|
|
Note 4 – Cash and Cash Equivalents
Cash and due from banks,
which represents vault cash in the retail offices and invested cash balances at the Federal Reserve and other correspondent banks,
is carried at cost which approximates fair value.
|
|
June 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Cash and due from banks, weighted average interest rate of 0.60% (at June 30, 2017)
|
|
$
|
71,405
|
|
|
$
|
60,707
|
|
Interest bearing deposits
in banks, which represent funds invested at a correspondent bank, are carried at cost which approximates fair value and, as of
June 30, 2017 and December 31, 2016, consisted of daily funds invested at the Federal Home Loan Bank (“FHLB”) of Atlanta
and Merchants and Traders (“M&T”).
|
|
June 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
FHLB daily investments, interest rate of 0.97% (at June 30, 2017)
|
|
$
|
543
|
|
|
$
|
1,590
|
|
M&T daily investments, interest rate of 0.15% (at June 30, 2017)
|
|
|
1,014
|
|
|
|
1,013
|
|
|
|
$
|
1,557
|
|
|
$
|
2,603
|
|
Note 5 – 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.
The following table shows a comparison of amortized
cost and fair values of investment securities at June 30, 2017 and December 31, 2016:
(in thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
OTTI in AOCL
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
25,000
|
|
|
$
|
0
|
|
|
$
|
576
|
|
|
$
|
24,424
|
|
|
$
|
0
|
|
Commercial mortgage-backed agencies
|
|
|
42,854
|
|
|
|
7
|
|
|
|
518
|
|
|
|
42,343
|
|
|
|
0
|
|
Collateralized mortgage obligations
|
|
|
29,416
|
|
|
|
5
|
|
|
|
400
|
|
|
|
29,021
|
|
|
|
0
|
|
Obligations of states and political subdivisions
|
|
|
18,714
|
|
|
|
419
|
|
|
|
70
|
|
|
|
19,063
|
|
|
|
0
|
|
Collateralized debt obligations
|
|
|
19,762
|
|
|
|
0
|
|
|
|
5,415
|
|
|
|
14,347
|
|
|
|
(3,908
|
)
|
Total available for sale
|
|
$
|
135,746
|
|
|
$
|
431
|
|
|
$
|
6,979
|
|
|
$
|
129,198
|
|
|
$
|
(3,908
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
15,806
|
|
|
$
|
574
|
|
|
$
|
0
|
|
|
$
|
16,380
|
|
|
$
|
0
|
|
Residential mortgage-backed agencies
|
|
|
52,064
|
|
|
|
181
|
|
|
|
385
|
|
|
|
51,860
|
|
|
|
0
|
|
Commercial mortgage-backed agencies
|
|
|
17,437
|
|
|
|
410
|
|
|
|
0
|
|
|
|
17,847
|
|
|
|
0
|
|
Collateralized mortgage obligations
|
|
|
4,537
|
|
|
|
0
|
|
|
|
61
|
|
|
|
4,476
|
|
|
|
0
|
|
Obligations of states and political subdivisions
|
|
|
8,510
|
|
|
|
1,301
|
|
|
|
9
|
|
|
|
9,802
|
|
|
|
0
|
|
Total held to maturity
|
|
$
|
98,354
|
|
|
$
|
2,466
|
|
|
$
|
455
|
|
|
$
|
100,365
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
25,000
|
|
|
$
|
0
|
|
|
$
|
747
|
|
|
$
|
24,253
|
|
|
$
|
0
|
|
Commercial mortgage-backed agencies
|
|
|
52,978
|
|
|
|
1
|
|
|
|
757
|
|
|
|
52,222
|
|
|
|
0
|
|
Collateralized mortgage obligations
|
|
|
19,953
|
|
|
|
13
|
|
|
|
399
|
|
|
|
19,567
|
|
|
|
0
|
|
Obligations of states and political subdivisions
|
|
|
23,700
|
|
|
|
255
|
|
|
|
251
|
|
|
|
23,704
|
|
|
|
0
|
|
Collateralized debt obligations
|
|
|
27,930
|
|
|
|
0
|
|
|
|
7,676
|
|
|
|
20,254
|
|
|
|
(3,961
|
)
|
Total available for sale
|
|
$
|
149,561
|
|
|
$
|
269
|
|
|
$
|
9,830
|
|
|
$
|
140,000
|
|
|
$
|
(3,961
|
)
|
Held to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
15,738
|
|
|
$
|
512
|
|
|
$
|
0
|
|
|
$
|
16,250
|
|
|
$
|
0
|
|
Residential mortgage-backed agencies
|
|
|
50,384
|
|
|
|
160
|
|
|
|
279
|
|
|
|
50,265
|
|
|
|
0
|
|
Commercial mortgage-backed agencies
|
|
|
17,584
|
|
|
|
248
|
|
|
|
0
|
|
|
|
17,832
|
|
|
|
0
|
|
Collateralized mortgage obligations
|
|
|
4,833
|
|
|
|
0
|
|
|
|
149
|
|
|
|
4,684
|
|
|
|
0
|
|
Obligations of states and political subdivisions
|
|
|
8,630
|
|
|
|
490
|
|
|
|
170
|
|
|
|
8,950
|
|
|
|
0
|
|
Total held to maturity
|
|
$
|
97,169
|
|
|
$
|
1,410
|
|
|
$
|
598
|
|
|
$
|
97,981
|
|
|
$
|
0
|
|
Proceeds from sales of
available for sale securities and the realized gains and losses are as follows:
|
|
Six months ended
|
|
|
Three months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Proceeds
|
|
$
|
18,530
|
|
|
$
|
25,591
|
|
|
$
|
14,700
|
|
|
$
|
14,820
|
|
Realized gains
|
|
|
52
|
|
|
|
415
|
|
|
|
44
|
|
|
|
138
|
|
Realized losses
|
|
|
69
|
|
|
|
188
|
|
|
|
52
|
|
|
|
117
|
|
The following table shows
the Corporation’s investment securities with gross unrealized losses and fair values at June 30, 2017 and December 31, 2016,
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
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
24,424
|
|
|
$
|
576
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Commercial mortgage-backed agencies
|
|
|
22,827
|
|
|
|
187
|
|
|
|
9,801
|
|
|
|
331
|
|
Collateralized mortgage obligations
|
|
|
24,556
|
|
|
|
346
|
|
|
|
3,707
|
|
|
|
54
|
|
Obligations of states and political subdivisions
|
|
|
2,090
|
|
|
|
20
|
|
|
|
2,795
|
|
|
|
50
|
|
Collateralized debt obligations
|
|
|
0
|
|
|
|
0
|
|
|
|
14,347
|
|
|
|
5,415
|
|
Total available for sale
|
|
$
|
73,897
|
|
|
$
|
1,129
|
|
|
$
|
30,650
|
|
|
$
|
5,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed agencies
|
|
$
|
24,580
|
|
|
$
|
283
|
|
|
$
|
3,781
|
|
|
$
|
102
|
|
Collateralized mortgage obligations
|
|
|
4,476
|
|
|
|
61
|
|
|
|
0
|
|
|
|
0
|
|
Obligations of states and political subdivisions
|
|
|
2,376
|
|
|
|
9
|
|
|
|
0
|
|
|
|
0
|
|
Total held to maturity
|
|
$
|
31,432
|
|
|
$
|
353
|
|
|
$
|
3,781
|
|
|
$
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
24,253
|
|
|
$
|
747
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Commercial mortgage-backed agencies
|
|
|
51,604
|
|
|
|
757
|
|
|
|
0
|
|
|
|
0
|
|
Collateralized mortgage obligations
|
|
|
14,706
|
|
|
|
399
|
|
|
|
0
|
|
|
|
0
|
|
Obligations of states and political subdivisions
|
|
|
8,079
|
|
|
|
160
|
|
|
|
2,934
|
|
|
|
91
|
|
Collateralized debt obligations
|
|
|
0
|
|
|
|
0
|
|
|
|
20,254
|
|
|
|
7,676
|
|
Total available for sale
|
|
$
|
98,642
|
|
|
$
|
2,063
|
|
|
$
|
23,188
|
|
|
$
|
7,767
|
|
Held to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed agencies
|
|
$
|
20,899
|
|
|
$
|
279
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Commercial mortgage-backed agencies
|
|
|
4,684
|
|
|
|
149
|
|
|
|
0
|
|
|
|
0
|
|
Obligations of states and political subdivisions
|
|
|
2,335
|
|
|
|
170
|
|
|
|
0
|
|
|
|
0
|
|
Total held to maturity
|
|
$
|
27,918
|
|
|
$
|
598
|
|
|
$
|
0
|
|
|
$
|
0
|
|
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
”.
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. Based on management’s review of the assumptions and results of the third-party
review, it believes that the valuations are adequate at June 30, 2017.
U.S. Government Agencies
– Available for Sale
– There were four U.S. government agencies in an unrealized loss position for less than 12
months as of June 30, 2017. The securities are of investment grade and the Corporation does not intend to sell them, and it is
not more than likely than not that the Corporation will be required to sell them before recovery of their amortized cost basis,
which may be at maturity. Accordingly, management does not consider these investments to be other-than-temporarily impaired at
June 30, 2017. There were no U.S. government agency investments in an unrealized loss position for more than 12 months as of June
30, 2017.
Commercial Mortgage-Backed
Agencies – Available for Sale
– There were five commercial mortgage-backed agencies in an unrealized loss position
for less than 12 months as of June 30, 2017. There were two commercial mortgage-backed agencies in an unrealized loss position
for more than 12 months as of June 30, 2017. The securities are of the highest investment grade and the Corporation has the intent
and ability to hold the investments to maturity. Accordingly, management does not consider these investments to be other-than-temporarily
impaired at June 30, 2017.
Collateralized Mortgage
Obligations – Available for Sale
– There were four collateralized mortgage obligations in an unrealized loss position
for less than 12 months as of June 30, 2017. There was one collateralized mortgage obligation in an unrealized loss position for
more than 12 months as of June 30, 2017. The securities are of the highest investment grade and the Corporation has the intent
and ability to hold the investments to maturity. Accordingly, management does not consider these investments to be other-than-temporarily
impaired at June 30, 2017.
Obligations of State
and Political Subdivisions – Available for Sale
– There were three obligations of state and political subdivisions
that have been in an unrealized loss position for less than 12 months and two securities that have been in an unrealized loss position
for 12 months or more at June 30, 2017. These investments are of investment grade as determined by the major rating agencies and
management reviews the ratings of the underlying issuers and performs an in-depth credit analysis on the securities. Management
believes that this portfolio is well-diversified throughout the United States, and all bonds continue to perform according to their
contractual terms. The Corporation does not intend to sell these investments and it is not more likely than not that the Corporation
will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity. Accordingly,
management does not consider these investments to be other-than-temporarily impaired at June 30, 2017.
Collateralized Debt
Obligations – Available for Sale
- The $5.4 million in unrealized losses greater than 12 months at June 30, 2017 relates
to 10 pooled trust preferred securities that are included in the CDO portfolio. See Note 9 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 six months of 2017. The unrealized losses on the remaining securities in the portfolio are primarily
attributable to continued depression in marketability, liquidity and the current economic environment.
U.S. Government Agencies
– Held to Maturity
– There were no U.S. government agencies in an unrealized loss position as of June 30, 2017.
Residential Mortgage-Backed
Agencies – Held to Maturity
- Nineteen residential mortgage-backed agencies have been in an unrealized loss position
for less than 12 months as of June 30, 2017. There were three mortgage-backed agency investments in an unrealized loss position
for more than 12 months as of June 30, 2017. The securities are of the highest investment grade and the Corporation has the intent
and ability to hold the investments to maturity. Accordingly, management does not consider these investments to be other-than-temporarily
impaired at June 30, 2017.
Commercial Mortgage-Backed
Agencies – Held to Maturity
- There were no collateralized mortgage-backed agency investments in an unrealized loss position
as of June 30, 2017.
Collateralized Mortgage
Obligations – Held to Maturity
– There was one collateralized mortgage obligation in an unrealized loss position
for less than 12 months as of June 30, 2017. The security is of the highest investment grade and the Corporation has the intent
and ability to hold the investment to maturity. Accordingly, management does not consider this investment to be other-than-temporarily
impaired at June 30, 2017. There were no collateralized mortgage obligations in a loss position for more than 12 months as of June
30, 2017.
Obligations of State
and Political Subdivisions – Held to Maturity
–There was one obligation of state and political subdivisions that
has been in an unrealized loss for less than 12 months. This bond is a Tax Increment Fund (TIF) bond. Management performs an in-depth
credit analysis on this security. The Corporation has the intent and ability to hold the investment to maturity. Accordingly,
management does not consider this investment to be other-than-temporarily impaired at June 30, 2017. No obligations of state and
political subdivisions securities have been in an unrealized loss position for more than 12 months as of June 30, 2017.
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 six- and three-month periods
ended June 30, 2017 and 2016:
|
|
Six months ended June 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Balance of credit-related OTTI at January 1
|
|
$
|
3,124
|
|
|
$
|
3,133
|
|
Decreases for previously recognized credit-related OTTI due to transfer
|
|
|
0
|
|
|
|
(3,045
|
)
|
Additions for decreases in cash flows expected to be collected
|
|
|
0
|
|
|
|
33
|
|
Reduction for increases in cash flows expected to be collected
|
|
|
(57
|
)
|
|
|
(5
|
)
|
Balance of credit-related OTTI at June 30
|
|
$
|
3,067
|
|
|
$
|
116
|
|
|
|
Three months ended June 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Balance of credit-related OTTI at April 1
|
|
$
|
3,122
|
|
|
$
|
3,097
|
|
Decreases for previously recognized credit-related OTTI due to transfer
|
|
|
0
|
|
|
|
(3,045
|
)
|
Additions for decreases in cash flows expected to be collected
|
|
|
0
|
|
|
|
66
|
|
Reduction for increases in cash flows expected to be collected
|
|
|
(55
|
)
|
|
|
(2
|
)
|
Balance of credit-related OTTI at June 30
|
|
$
|
3,067
|
|
|
$
|
116
|
|
The amortized cost and estimated fair value
of securities by contractual maturity at June 30, 2017 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.
|
|
June 30, 2017
|
|
(in thousands)
|
|
Amortized Cost
|
|
|
Fair Value
|
|
Contractual Maturity
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
Due after one year through five years
|
|
$
|
10,657
|
|
|
$
|
10,544
|
|
Due after five years through ten years
|
|
|
18,268
|
|
|
|
17,872
|
|
Due after ten years
|
|
|
34,551
|
|
|
|
29,418
|
|
|
|
|
63,476
|
|
|
|
57,834
|
|
Commercial mortgage-backed agencies
|
|
|
42,854
|
|
|
|
42,343
|
|
Collateralized mortgage obligations
|
|
|
29,416
|
|
|
|
29,021
|
|
Total available for sale
|
|
$
|
135,746
|
|
|
$
|
129,198
|
|
Held to Maturity:
|
|
|
|
|
|
|
|
|
Due after five years through ten years
|
|
$
|
15,806
|
|
|
$
|
16,380
|
|
Due after ten years
|
|
|
8,510
|
|
|
|
9,802
|
|
|
|
|
24,316
|
|
|
|
26,182
|
|
Residential mortgage-backed agencies
|
|
$
|
52,064
|
|
|
$
|
51,860
|
|
Commercial mortgage-backed agencies
|
|
|
17,437
|
|
|
|
17,847
|
|
Collateralized mortgage obligations
|
|
|
4,537
|
|
|
|
4,476
|
|
Total held to maturity
|
|
$
|
98,354
|
|
|
$
|
100,365
|
|
Note 6 – Restricted Investment in Bank Stock
Restricted stock, which
represents required investments in the common stock of the FHLB of Atlanta, Atlantic Community Bankers Bank (“ACBB”)
and Community Bankers Bank (“CBB”), is carried at cost
and
is considered a long-term investment
.
Management evaluates the
restricted stock for impairment in accordance with ASC Industry Topic 942,
Financial Services – Depository and Lending-
(ASC
Section 942-325-35). Management’s evaluation of potential
impairment is based on management’s a
ssessment of the ultimate recoverability of the cost of the restricted stock
rather than by recognizing temporary declines in value.
The determination
of whether a decline affects the ultimate recoverability is influenced by criteria such as (a) the significance of the decline
in net assets of the issuing bank as compared to the capital stock amount for that bank and the length of time this situation has
persisted, (b) commitments by the issuing bank to make payments required by law or regulation and the level of such payments in
relation to the operating performance of that bank, and (c) the impact of legislative and regulatory changes on institutions and,
accordingly, on the customer base of the issuing bank.
Management has evaluated the restricted stock for impairment and
believes that no impairment charge is necessary as of June 30, 2017.
The Corporation recognizes
dividends received on its restricted stock investments on a cash basis. For the six months ended June 30, 2017, dividends of $126,489
were recognized in earnings. For the comparable period of 2016, dividends of $137,176 were recognized in earnings. For the three
months ended June 30, 2017, dividends of $59,270 were recognized in earnings. For the comparable period of 2016, dividends of $69,417
were recognized in earnings.
Note 7 – Loans and
Related Allowance for Loan Losses
The following table summarizes
the primary segments of the loan portfolio at June 30, 2017 and December 31, 2016:
(in thousands)
|
|
Commercial
Real Estate
|
|
|
Acquisition and
Development
|
|
|
Commercial
and
Industrial
|
|
|
Residential
Mortgage
|
|
|
Consumer
|
|
|
Total
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
12,713
|
|
|
$
|
2,380
|
|
|
$
|
290
|
|
|
$
|
3,959
|
|
|
$
|
0
|
|
|
$
|
19,342
|
|
Collectively evaluated for impairment
|
|
$
|
270,861
|
|
|
$
|
109,298
|
|
|
$
|
73,401
|
|
|
$
|
399,239
|
|
|
$
|
23,814
|
|
|
$
|
876,613
|
|
Total loans
|
|
$
|
283,574
|
|
|
$
|
111,678
|
|
|
$
|
73,691
|
|
|
$
|
403,198
|
|
|
$
|
23,814
|
|
|
$
|
895,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
17,210
|
|
|
$
|
2,525
|
|
|
$
|
290
|
|
|
$
|
3,975
|
|
|
$
|
0
|
|
|
$
|
24,000
|
|
Collectively evaluated for impairment
|
|
$
|
280,749
|
|
|
$
|
101,757
|
|
|
$
|
72,056
|
|
|
$
|
389,441
|
|
|
$
|
23,923
|
|
|
$
|
867,926
|
|
Total loans
|
|
$
|
297,959
|
|
|
$
|
104,282
|
|
|
$
|
72,346
|
|
|
$
|
393,416
|
|
|
$
|
23,923
|
|
|
$
|
891,926
|
|
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.
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.
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 June 30, 2017 and December 31, 2016:
(in thousands)
|
|
Pass
|
|
|
Special Mention
|
|
|
Substandard
|
|
|
Total
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non owner-occupied
|
|
$
|
134,768
|
|
|
$
|
9,050
|
|
|
$
|
9,204
|
|
|
$
|
153,022
|
|
All other CRE
|
|
|
115,692
|
|
|
|
3,779
|
|
|
|
11,081
|
|
|
|
130,552
|
|
Acquisition and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential construction
|
|
|
16,309
|
|
|
|
0
|
|
|
|
0
|
|
|
|
16,309
|
|
All other A&D
|
|
|
94,128
|
|
|
|
59
|
|
|
|
1,182
|
|
|
|
95,369
|
|
Commercial and industrial
|
|
|
72,190
|
|
|
|
42
|
|
|
|
1,459
|
|
|
|
73,691
|
|
Residential mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage - term
|
|
|
320,448
|
|
|
|
0
|
|
|
|
7,261
|
|
|
|
327,709
|
|
Residential mortgage - home equity
|
|
|
73,713
|
|
|
|
0
|
|
|
|
1,776
|
|
|
|
75,489
|
|
Consumer
|
|
|
23,703
|
|
|
|
0
|
|
|
|
111
|
|
|
|
23,814
|
|
Total
|
|
$
|
850,951
|
|
|
$
|
12,930
|
|
|
$
|
32,074
|
|
|
$
|
895,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non owner-occupied
|
|
$
|
137,181
|
|
|
$
|
10,620
|
|
|
$
|
9,357
|
|
|
$
|
157,158
|
|
All other CRE
|
|
|
125,720
|
|
|
|
3,121
|
|
|
|
11,960
|
|
|
|
140,801
|
|
Acquisition and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential construction
|
|
|
15,845
|
|
|
|
0
|
|
|
|
0
|
|
|
|
15,845
|
|
All other A&D
|
|
|
87,135
|
|
|
|
65
|
|
|
|
1,237
|
|
|
|
88,437
|
|
Commercial and industrial
|
|
|
70,613
|
|
|
|
593
|
|
|
|
1,140
|
|
|
|
72,346
|
|
Residential mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage - term
|
|
|
308,734
|
|
|
|
113
|
|
|
|
7,618
|
|
|
|
316,465
|
|
Residential mortgage - home equity
|
|
|
75,710
|
|
|
|
0
|
|
|
|
1,241
|
|
|
|
76,951
|
|
Consumer
|
|
|
23,794
|
|
|
|
0
|
|
|
|
129
|
|
|
|
23,923
|
|
Total
|
|
$
|
844,732
|
|
|
$
|
14,512
|
|
|
$
|
32,682
|
|
|
$
|
891,926
|
|
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.
The following table presents
the classes of the loan portfolio summarized by the aging categories of performing loans and non-accrual loans at June 30, 2017
and December 31, 2016:
(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
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non owner-occupied
|
|
$
|
146,350
|
|
|
$
|
1,601
|
|
|
$
|
71
|
|
|
$
|
0
|
|
|
$
|
1,672
|
|
|
$
|
5,000
|
|
|
$
|
153,022
|
|
All other CRE
|
|
|
127,764
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,788
|
|
|
|
130,552
|
|
Acquisition and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential construction
|
|
|
16,309
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
16,309
|
|
All other A&D
|
|
|
95,173
|
|
|
|
0
|
|
|
|
65
|
|
|
|
91
|
|
|
|
156
|
|
|
|
40
|
|
|
|
95,369
|
|
Commercial and industrial
|
|
|
73,682
|
|
|
|
0
|
|
|
|
1
|
|
|
|
8
|
|
|
|
9
|
|
|
|
0
|
|
|
|
73,691
|
|
Residential mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage - term
|
|
|
323,351
|
|
|
|
271
|
|
|
|
2,104
|
|
|
|
581
|
|
|
|
2,956
|
|
|
|
1,402
|
|
|
|
327,709
|
|
Residential mortgage - home equity
|
|
|
74,167
|
|
|
|
429
|
|
|
|
135
|
|
|
|
516
|
|
|
|
1,080
|
|
|
|
242
|
|
|
|
75,489
|
|
Consumer
|
|
|
23,634
|
|
|
|
104
|
|
|
|
56
|
|
|
|
20
|
|
|
|
180
|
|
|
|
0
|
|
|
|
23,814
|
|
Total
|
|
$
|
880,430
|
|
|
$
|
2,405
|
|
|
$
|
2,432
|
|
|
$
|
1,216
|
|
|
$
|
6,053
|
|
|
$
|
9,472
|
|
|
$
|
895,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non owner-occupied
|
|
$
|
150,595
|
|
|
$
|
182
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
182
|
|
|
$
|
6,381
|
|
|
$
|
157,158
|
|
All other CRE
|
|
|
134,931
|
|
|
|
40
|
|
|
|
0
|
|
|
|
0
|
|
|
|
40
|
|
|
|
5,830
|
|
|
|
140,801
|
|
Acquisition and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential construction
|
|
|
15,845
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
15,845
|
|
All other A&D
|
|
|
88,353
|
|
|
|
0
|
|
|
|
39
|
|
|
|
0
|
|
|
|
39
|
|
|
|
45
|
|
|
|
88,437
|
|
Commercial and industrial
|
|
|
72,324
|
|
|
|
9
|
|
|
|
2
|
|
|
|
11
|
|
|
|
22
|
|
|
|
0
|
|
|
|
72,346
|
|
Residential mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage - term
|
|
|
310,721
|
|
|
|
517
|
|
|
|
3,376
|
|
|
|
312
|
|
|
|
4,205
|
|
|
|
1,539
|
|
|
|
316,465
|
|
Residential mortgage - home equity
|
|
|
75,558
|
|
|
|
974
|
|
|
|
198
|
|
|
|
70
|
|
|
|
1,242
|
|
|
|
151
|
|
|
|
76,951
|
|
Consumer
|
|
|
23,662
|
|
|
|
186
|
|
|
|
48
|
|
|
|
27
|
|
|
|
261
|
|
|
|
0
|
|
|
|
23,923
|
|
Total
|
|
$
|
871,989
|
|
|
$
|
1,908
|
|
|
$
|
3,663
|
|
|
$
|
420
|
|
|
$
|
5,991
|
|
|
$
|
13,946
|
|
|
$
|
891,926
|
|
Non-accrual loans totaled
$9.5 million at June 30, 2017, compared to $13.9 million at December 31, 2016. The decrease in non-accrual balances at June 30,
2017 was primarily due to charge-offs of $2.9 million and the movement of $.8 million to other real estate owned (“OREO”).
Non-accrual loans that have been subject to a partial charge-off totaled $5.5 million at June 30, 2017, compared to $11.1 million
at December 31, 2016. Loans secured by 1-4 family residential real estate properties in the process of foreclosure were $.3 million
at June 30, 2017 and $.5 million at December 31, 2016.
Accruing loans past due
30 days or more increased very slightly to .68% of the loan portfolio at June 30, 2017, compared to .67% at December 31, 2016.
The slight increase for the first six months of 2017 was due primarily to increases in the past due loans in the residential mortgage
and home equity portfolios.
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.
The following table summarizes
the primary segments of the ALL at June 30, 2017 and December 31, 2016, 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
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
187
|
|
|
$
|
36
|
|
|
$
|
0
|
|
|
$
|
86
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
309
|
|
Collectively evaluated for
impairment
|
|
$
|
3,462
|
|
|
$
|
1,164
|
|
|
$
|
836
|
|
|
$
|
3,459
|
|
|
$
|
192
|
|
|
$
|
500
|
|
|
$
|
9,613
|
|
Total ALL
|
|
$
|
3,649
|
|
|
$
|
1,200
|
|
|
$
|
836
|
|
|
$
|
3,545
|
|
|
$
|
192
|
|
|
$
|
500
|
|
|
$
|
9,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
177
|
|
|
$
|
40
|
|
|
$
|
0
|
|
|
$
|
43
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
260
|
|
Collectively evaluated for
impairment
|
|
$
|
3,736
|
|
|
$
|
831
|
|
|
$
|
858
|
|
|
$
|
3,545
|
|
|
$
|
188
|
|
|
$
|
500
|
|
|
$
|
9,658
|
|
Total ALL
|
|
$
|
3,913
|
|
|
$
|
871
|
|
|
$
|
858
|
|
|
$
|
3,588
|
|
|
$
|
188
|
|
|
$
|
500
|
|
|
$
|
9,918
|
|
Management uses the following
methodology for determining impairment on consumer and commercial loans. All nonaccrual loans and all loans designated as “troubled
debt restructures” (TDRs) are considered to be impaired. Additionally, an impairment evaluation is performed on any account
that meets either of the following criteria: (a) commercial loans that (1) are risk-rated substandard and (2) have a balance of
at least $500,000; and (b) commercial loans that are (1) part of a relationship having an amount of $750,000 or more and (2) at
least 60 days past-due. For those loans that are not classified as nonaccrual or troubled debt restructures, a judgment is made
as to the likelihood that contractual principal and interest will be collected. Loans are considered to be impaired when, based
on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment
include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.
Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration
all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the
borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Once the determination
has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured
by comparing the recorded investment in the loan to the fair value of the loan using one of three methods: (a) the present value
of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price;
or (c) the fair value of the collateral less selling costs. The method is selected on a loan-by-loan basis, with management primarily
utilizing the fair value of collateral method. A valuation grid for impaired loans is used to determine when or how collateral
values are to be updated based on size and collateral dependency for commercial loans and foreclosure status for consumer loans.
If an updated appraisal has not been received and reviewed in time for the determination of estimated fair value at quarter (or
year) end, or if the appraisal is found to be deficient following the Corporation’s internal appraisal review process and
re-ordered, then the estimated fair value of the collateral is determined by adjusting the existing appraisal by the appropriate
percentage from an internally prepared appraisal discount grid. This grid considers the age of a third party appraisal and the
geographic region where the collateral is located. The discount rates in the appraisal discount grid are updated periodically to
reflect the most current knowledge that management has available, including the results of current appraisals. A specific allocation
of the ALL is recorded if there is any deficiency in collateral value determined by comparing the estimated fair value to the recorded
investment of the loan. When updated appraisals are received and reviewed, adjustments are made to the specific allocation as needed.
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.
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 necessary at June 30, 2017 and December 31, 2016:
|
|
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
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non owner-occupied
|
|
$
|
129
|
|
|
$
|
20
|
|
|
$
|
5,249
|
|
|
$
|
5,378
|
|
|
$
|
10,531
|
|
All other CRE
|
|
|
432
|
|
|
|
167
|
|
|
|
6,903
|
|
|
|
7,335
|
|
|
|
7,948
|
|
Acquisition and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential construction
|
|
|
0
|
|
|
|
0
|
|
|
|
582
|
|
|
|
582
|
|
|
|
582
|
|
All other A&D
|
|
|
242
|
|
|
|
36
|
|
|
|
1,556
|
|
|
|
1,798
|
|
|
|
2,072
|
|
Commercial and industrial
|
|
|
0
|
|
|
|
0
|
|
|
|
290
|
|
|
|
290
|
|
|
|
2,504
|
|
Residential mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage - term
|
|
|
769
|
|
|
|
81
|
|
|
|
2,948
|
|
|
|
3,717
|
|
|
|
4,028
|
|
Residential mortgage – home equity
|
|
|
68
|
|
|
|
5
|
|
|
|
174
|
|
|
|
242
|
|
|
|
242
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total impaired loans
|
|
$
|
1,640
|
|
|
$
|
309
|
|
|
$
|
17,702
|
|
|
$
|
19,342
|
|
|
$
|
27,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non owner-occupied
|
|
$
|
131
|
|
|
$
|
23
|
|
|
$
|
6,635
|
|
|
$
|
6,766
|
|
|
$
|
9,372
|
|
All other CRE
|
|
|
432
|
|
|
|
154
|
|
|
|
10,012
|
|
|
|
10,444
|
|
|
|
11,057
|
|
Acquisition and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential construction
|
|
|
0
|
|
|
|
0
|
|
|
|
582
|
|
|
|
582
|
|
|
|
628
|
|
All other A&D
|
|
|
245
|
|
|
|
40
|
|
|
|
1,698
|
|
|
|
1,943
|
|
|
|
2,213
|
|
Commercial and industrial
|
|
|
0
|
|
|
|
0
|
|
|
|
290
|
|
|
|
290
|
|
|
|
2,504
|
|
Residential mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage - term
|
|
|
61
|
|
|
|
43
|
|
|
|
3,763
|
|
|
|
3,824
|
|
|
|
4,249
|
|
Residential mortgage – home equity
|
|
|
0
|
|
|
|
0
|
|
|
|
151
|
|
|
|
151
|
|
|
|
168
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total impaired loans
|
|
$
|
869
|
|
|
$
|
260
|
|
|
$
|
23,131
|
|
|
$
|
24,000
|
|
|
$
|
30,191
|
|
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.
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 six- and three-month periods ended June 30, 2017 and 2016:
(in thousands)
|
|
Commercial
Real Estate
|
|
|
Acquisition
and
Development
|
|
|
Commercial
and Industrial
|
|
|
Residential
Mortgage
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
ALL balance at January 1, 2017
|
|
$
|
3,913
|
|
|
$
|
871
|
|
|
$
|
858
|
|
|
$
|
3,588
|
|
|
$
|
188
|
|
|
$
|
500
|
|
|
$
|
9,918
|
|
Charge-offs
|
|
|
(2,745
|
)
|
|
|
(18
|
)
|
|
|
(33
|
)
|
|
|
(236
|
)
|
|
|
(143
|
)
|
|
|
0
|
|
|
|
(3,175
|
)
|
Recoveries
|
|
|
63
|
|
|
|
188
|
|
|
|
1,651
|
|
|
|
253
|
|
|
|
116
|
|
|
|
0
|
|
|
|
2,271
|
|
Provision
|
|
|
2,418
|
|
|
|
159
|
|
|
|
(1,640
|
)
|
|
|
(60
|
)
|
|
|
31
|
|
|
|
0
|
|
|
|
908
|
|
ALL balance at June 30, 2017
|
|
$
|
3,649
|
|
|
$
|
1,200
|
|
|
$
|
836
|
|
|
$
|
3,545
|
|
|
$
|
192
|
|
|
$
|
500
|
|
|
$
|
9,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALL balance at January 1, 2016
|
|
$
|
2,580
|
|
|
$
|
4,129
|
|
|
$
|
722
|
|
|
$
|
3,785
|
|
|
$
|
206
|
|
|
$
|
500
|
|
|
$
|
11,922
|
|
Charge-offs
|
|
|
(2,009
|
)
|
|
|
(78
|
)
|
|
|
(259
|
)
|
|
|
(216
|
)
|
|
|
(140
|
)
|
|
|
0
|
|
|
|
(2,702
|
)
|
Recoveries
|
|
|
93
|
|
|
|
1,282
|
|
|
|
38
|
|
|
|
54
|
|
|
|
77
|
|
|
|
0
|
|
|
|
1,544
|
|
Provision
|
|
|
3,741
|
|
|
|
(2,215
|
)
|
|
|
236
|
|
|
|
100
|
|
|
|
52
|
|
|
|
0
|
|
|
|
1,914
|
|
ALL balance at June 30, 2016
|
|
$
|
4,405
|
|
|
$
|
3,118
|
|
|
$
|
737
|
|
|
$
|
3,723
|
|
|
$
|
195
|
|
|
$
|
500
|
|
|
$
|
12,678
|
|
(in thousands)
|
|
Commercial
Real Estate
|
|
|
Acquisition
and
Development
|
|
|
Commercial
and Industrial
|
|
|
Residential
Mortgage
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
ALL balance at April 1, 2017
|
|
$
|
5,567
|
|
|
$
|
883
|
|
|
$
|
936
|
|
|
$
|
3,502
|
|
|
$
|
195
|
|
|
$
|
500
|
|
|
$
|
11,583
|
|
Charge-offs
|
|
|
(2,316
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
(88
|
)
|
|
|
(59
|
)
|
|
|
0
|
|
|
|
(2,463
|
)
|
Recoveries
|
|
|
58
|
|
|
|
177
|
|
|
|
196
|
|
|
|
33
|
|
|
|
39
|
|
|
|
0
|
|
|
|
503
|
|
Provision
|
|
|
340
|
|
|
|
140
|
|
|
|
(296
|
)
|
|
|
98
|
|
|
|
17
|
|
|
|
0
|
|
|
|
299
|
|
ALL balance at June 30, 2017
|
|
$
|
3,649
|
|
|
$
|
1,200
|
|
|
$
|
836
|
|
|
$
|
3,545
|
|
|
$
|
192
|
|
|
$
|
500
|
|
|
$
|
9,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALL balance at April 1, 2016
|
|
$
|
3,300
|
|
|
$
|
3,747
|
|
|
$
|
758
|
|
|
$
|
3,759
|
|
|
$
|
192
|
|
|
$
|
500
|
|
|
$
|
12,256
|
|
Charge-offs
|
|
|
(1,798
|
)
|
|
|
(78
|
)
|
|
|
(206
|
)
|
|
|
(126
|
)
|
|
|
(56
|
)
|
|
|
0
|
|
|
|
(2,264
|
)
|
Recoveries
|
|
|
93
|
|
|
|
1,182
|
|
|
|
8
|
|
|
|
22
|
|
|
|
35
|
|
|
|
0
|
|
|
|
1,340
|
|
Provision
|
|
|
2,810
|
|
|
|
(1,733
|
)
|
|
|
177
|
|
|
|
68
|
|
|
|
24
|
|
|
|
0
|
|
|
|
1,346
|
|
ALL balance at June 30, 2016
|
|
$
|
4,405
|
|
|
$
|
3,118
|
|
|
$
|
737
|
|
|
$
|
3,723
|
|
|
$
|
195
|
|
|
$
|
500
|
|
|
$
|
12,678
|
|
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.
The following table presents
the average recorded investment in impaired loans by class and related interest income recognized for the periods indicated:
|
|
Six months ended
|
|
|
Six months ended
|
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
(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
|
|
$
|
6,037
|
|
|
$
|
12
|
|
|
$
|
0
|
|
|
$
|
4,513
|
|
|
$
|
47
|
|
|
$
|
0
|
|
All other CRE
|
|
|
8,658
|
|
|
|
105
|
|
|
|
0
|
|
|
|
12,692
|
|
|
|
80
|
|
|
|
4
|
|
Acquisition and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential construction
|
|
|
582
|
|
|
|
12
|
|
|
|
0
|
|
|
|
661
|
|
|
|
15
|
|
|
|
0
|
|
All other A&D
|
|
|
1,860
|
|
|
|
45
|
|
|
|
0
|
|
|
|
3,257
|
|
|
|
48
|
|
|
|
0
|
|
Commercial and industrial
|
|
|
290
|
|
|
|
6
|
|
|
|
0
|
|
|
|
1,106
|
|
|
|
19
|
|
|
|
0
|
|
Residential mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage - term
|
|
|
3,918
|
|
|
|
66
|
|
|
|
7
|
|
|
|
4,695
|
|
|
|
78
|
|
|
|
4
|
|
Residential mortgage – home equity
|
|
|
230
|
|
|
|
0
|
|
|
|
0
|
|
|
|
324
|
|
|
|
0
|
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
$
|
21,575
|
|
|
$
|
246
|
|
|
$
|
7
|
|
|
$
|
27,248
|
|
|
$
|
287
|
|
|
$
|
8
|
|
|
|
Three months ended
|
|
|
Three months ended
|
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
(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
|
|
$
|
5,672
|
|
|
$
|
6
|
|
|
$
|
0
|
|
|
$
|
5,916
|
|
|
$
|
41
|
|
|
$
|
0
|
|
All other CRE
|
|
|
7,766
|
|
|
|
52
|
|
|
|
0
|
|
|
|
12,568
|
|
|
|
43
|
|
|
|
4
|
|
Acquisition and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential construction
|
|
|
582
|
|
|
|
6
|
|
|
|
0
|
|
|
|
641
|
|
|
|
7
|
|
|
|
0
|
|
All other A&D
|
|
|
1,818
|
|
|
|
22
|
|
|
|
0
|
|
|
|
2,988
|
|
|
|
24
|
|
|
|
0
|
|
Commercial and industrial
|
|
|
290
|
|
|
|
3
|
|
|
|
0
|
|
|
|
1,121
|
|
|
|
10
|
|
|
|
0
|
|
Residential mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage - term
|
|
|
3,860
|
|
|
|
33
|
|
|
|
7
|
|
|
|
4,885
|
|
|
|
39
|
|
|
|
0
|
|
Residential mortgage – home equity
|
|
|
269
|
|
|
|
0
|
|
|
|
0
|
|
|
|
348
|
|
|
|
0
|
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
$
|
20,257
|
|
|
$
|
122
|
|
|
$
|
7
|
|
|
$
|
28,467
|
|
|
$
|
164
|
|
|
$
|
4
|
|
In
the normal course of business, the Bank modifies loan terms for various reasons. These reasons may include as a retention strategy,
remaining competitive in the current interest rate environment, and re-amortizing or extending a loan term to better match the
loan’s payment stream with the borrower’s cash flows
.
A modified
loan is considered to be a troubled debt restructuring (“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 only offered for that time
period. Where possible, the Bank obtains additional collateral and/or secondary payment sources at the time of the restructure
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.
The following tables present
the volume and recorded investment at the 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
|
|
Six months ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
1
|
|
|
|
244
|
|
|
|
0
|
|
|
|
0
|
|
Commercial and industrial
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Residential mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage – term
|
|
|
0
|
|
|
|
0
|
|
|
|
1
|
|
|
|
259
|
|
|
|
0
|
|
|
|
0
|
|
Residential mortgage – home equity
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
|
0
|
|
|
$
|
0
|
|
|
|
2
|
|
|
$
|
503
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
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 June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
0
|
|
|
|
0
|
|
Commercial and industrial
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Residential mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage – term
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Residential mortgage – home equity
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
During the six months ended
June 30, 2017, there were no new TDRs, but two existing TDRs that had reached their original modification maturity were re-modified.
These re-modifications did not impact the ALL. During the six months ended June 30, 2017, there were no payment defaults.
During the three months
ended June 30, 2017, there were no new TDRs. In addition, no existing TDR that had reached its original modification maturity was
re-modified. During the three months ended June 30, 2017, there were no payment defaults.
|
|
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
|
|
Six months ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non owner-occupied
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
All other CRE
|
|
|
0
|
|
|
|
0
|
|
|
|
1
|
|
|
|
203
|
|
|
|
0
|
|
|
|
0
|
|
Acquisition and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential construction
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
All other A&D
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Commercial and industrial
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1
|
|
|
|
486
|
|
Residential mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage – term
|
|
|
1
|
|
|
|
54
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1
|
|
|
|
72
|
|
Residential mortgage – home equity
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
|
1
|
|
|
$
|
54
|
|
|
|
1
|
|
|
$
|
203
|
|
|
|
2
|
|
|
$
|
558
|
|
|
|
Temporary Rate
|
|
|
|
|
|
Modification of Payment
|
|
|
|
Modification
|
|
|
Extension of Maturity
|
|
|
and Other Terms
|
|
|
|
Number of
|
|
|
Recorded
|
|
|
Number of
|
|
|
Recorded
|
|
|
Number of
|
|
|
Recorded
|
|
(in thousands)
|
|
Contracts
|
|
|
Investment
|
|
|
Contracts
|
|
|
Investment
|
|
|
Contracts
|
|
|
Investment
|
|
Three Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
0
|
|
|
|
0
|
|
Commercial and industrial
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Residential mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage – term
|
|
|
1
|
|
|
|
54
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Residential mortgage – home equity
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
|
1
|
|
|
$
|
54
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
During the six months ended
June 30, 2016, there were three new TDRs. In addition, one existing TDR that had reached its original modification maturity was
re-modified. A $2,873 reduction of the ALL resulted from a change to the impairment evaluation of three loans, from being evaluated
collectively to being evaluated individually. During the six months ended June 30, 2016, there were no payment defaults.
During the three months
ended June 30, 2016, there was one new TDR. A $486 reduction to the ALL resulted from a change to the impairment evaluation of
the loan, from being evaluated collectively to being evaluated individually. During the three months ended June 30, 2016, there
were no payment defaults.
Note 8 – Other Real Estate Owned
The following table presents the components
of OREO at June 30, 2017 and December 31, 2016:
(in thousands)
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Commercial real estate
|
|
$
|
4,683
|
|
|
$
|
3,779
|
|
Acquisition and development
|
|
|
5,621
|
|
|
|
5,944
|
|
Commercial and industrial
|
|
|
24
|
|
|
|
24
|
|
Residential mortgage
|
|
|
1,228
|
|
|
|
1,163
|
|
Total OREO
|
|
$
|
11,556
|
|
|
$
|
10,910
|
|
The following table presents the activity in
the OREO valuation allowance for the six- and three-month periods ended June 30, 2017 and 2016:
|
|
For the Six Months Ended
|
|
|
For the Three Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Balance beginning of period
|
|
$
|
3,535
|
|
|
$
|
4,430
|
|
|
$
|
3,316
|
|
|
$
|
3,824
|
|
Fair value write-down
|
|
|
93
|
|
|
|
97
|
|
|
|
23
|
|
|
|
88
|
|
Sales of OREO
|
|
|
(396
|
)
|
|
|
(928
|
)
|
|
|
(107
|
)
|
|
|
(313
|
)
|
Balance at end of period
|
|
$
|
3,232
|
|
|
$
|
3,599
|
|
|
$
|
3,232
|
|
|
$
|
3,599
|
|
The following table presents the components
of OREO expenses, net, for the six- and three-month periods ended June 30, 2017 and 2016:
|
|
For the Six Months Ended
|
|
|
For the Three Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Gains on real estate, net
|
|
$
|
(74
|
)
|
|
$
|
(131
|
)
|
|
$
|
(44
|
)
|
|
$
|
(64
|
)
|
Fair value write-down, net
|
|
|
93
|
|
|
|
97
|
|
|
|
23
|
|
|
|
88
|
|
Expenses, net
|
|
|
279
|
|
|
|
343
|
|
|
|
110
|
|
|
|
174
|
|
Rental and other income
|
|
|
(86
|
)
|
|
|
(59
|
)
|
|
|
(51
|
)
|
|
|
(32
|
)
|
Total OREO expense, net
|
|
$
|
212
|
|
|
$
|
250
|
|
|
$
|
38
|
|
|
$
|
166
|
|
Note 9 – 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.
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 June 30, 2017 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 June 30, 2017, the U.S. Government agencies, residential and commercial mortgage-backed
securities, collateralized mortgage obligations, and state and political subdivisions 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 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 June 30, 2017, the Corporation owned 10 pooled trust preferred securities with an amortized cost of
$19.8 million and a fair value of $14.3 million. The market for these securities at June 30, 2017 is not active and 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 June 30, 2017, (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.
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 June 30, 2017.
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.
For Level 3 assets and
liabilities measured at fair value on a recurring and non-recurring basis as of June 30, 2017 and December 31, 2016, the significant
unobservable inputs used in the fair value measurements were as follows:
(in thousands)
|
|
Fair Value at
June 30, 2017
|
|
|
Valuation Technique
|
|
Significant
Unobservable Inputs
|
|
Significant
Unobservable Input
Value
|
Recurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities – available for sale
|
|
$
|
14,347
|
|
|
Discounted Cash Flow
|
|
Discount Rate
|
|
LIBOR+ 5.50%
|
|
|
|
|
|
|
|
|
|
|
|
Non-recurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans
|
|
$
|
4,691
|
|
|
Market Comparable Properties
|
|
Marketability Discount
|
|
10.0% - 34.2%
(1)
(weighted avg 11.0%)
|
|
|
|
|
|
|
|
|
|
|
|
Other Real Estate Owned
|
|
$
|
1,009
|
|
|
Market Comparable Properties
|
|
Marketability Discount
|
|
15%
|
(in thousands)
|
|
Fair Value at
December 31,
2016
|
|
|
Valuation Technique
|
|
Significant
Unobservable Inputs
|
|
Significant
Unobservable Input
Value
|
Recurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities – available for sale
|
|
$
|
20,254
|
|
|
Discounted Cash Flow
|
|
Discount Rate
|
|
Range of LIBOR+ 4.5% to 5.5%
|
|
|
|
|
|
|
|
|
|
|
|
Non-recurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans
|
|
$
|
14,537
|
|
|
Market Comparable Properties
|
|
Marketability Discount
|
|
4.6% - 31.0%
(1)
(weighted avg 6.5%)
|
|
|
|
|
|
|
|
|
|
|
|
Other Real Estate Owned
|
|
$
|
1,201
|
|
|
Market Comparable Properties
|
|
Marketability Discount
|
|
15%
|
NOTE:
|
(1)
|
Range would include discounts taken since appraisal and estimated values
|
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
June 30, 2017 and December 31, 2016 are as follows:
|
|
|
|
|
Fair Value Measurements at June 30, 2017
Using
|
|
|
|
Assets
Measured at
Fair Value
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
(in thousands)
|
|
06/30/2017
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Recurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
24,424
|
|
|
|
|
|
|
$
|
24,424
|
|
|
|
|
|
Commercial mortgage-backed agencies
|
|
$
|
42,343
|
|
|
|
|
|
|
$
|
42,343
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
$
|
29,021
|
|
|
|
|
|
|
$
|
29,021
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
19,063
|
|
|
|
|
|
|
$
|
19,063
|
|
|
|
|
|
Collateralized debt obligations
|
|
$
|
14,347
|
|
|
|
|
|
|
|
|
|
|
$
|
14,347
|
|
Financial Derivatives
|
|
$
|
537
|
|
|
|
|
|
|
$
|
537
|
|
|
$
|
|
|
Non-recurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
4,691
|
|
|
|
|
|
|
|
|
|
|
$
|
4,691
|
|
Other real estate owned
|
|
$
|
1,009
|
|
|
|
|
|
|
|
|
|
|
$
|
1,009
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2016
Using
|
|
|
|
Assets
Measured at
Fair Value
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
(in thousands)
|
|
12/31/2016
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Recurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
24,253
|
|
|
|
|
|
|
$
|
24,253
|
|
|
|
|
|
Commercial mortgage-backed agencies
|
|
$
|
52,222
|
|
|
|
|
|
|
$
|
52,222
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
$
|
19,567
|
|
|
|
|
|
|
$
|
19,567
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
23,704
|
|
|
|
|
|
|
$
|
23,704
|
|
|
|
|
|
Collateralized debt obligations
|
|
$
|
20,254
|
|
|
|
|
|
|
|
|
|
|
$
|
20,254
|
|
Financial Derivative
|
|
$
|
700
|
|
|
|
|
|
|
|
700
|
|
|
$
|
|
|
Non-recurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
14,537
|
|
|
|
|
|
|
|
|
|
|
$
|
14,537
|
|
Other real estate owned
|
|
$
|
1,201
|
|
|
|
|
|
|
|
|
|
|
$
|
1,201
|
|
There were no transfers of assets between any
of the fair value hierarchy for the six-month periods ended June 30, 2017 or 2016.
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 six- and three-month periods ended June 30, 2017 and 2016:
|
|
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
|
|
(In thousands)
|
|
Investment Securities
Available for Sale
|
|
|
|
|
Beginning balance January 1, 2017
|
|
$
|
20,254
|
|
|
|
|
|
Total losses realized/unrealized:
|
|
|
|
|
|
|
|
|
Included in other comprehensive income
|
|
|
(5,907
|
)
|
|
|
|
|
Ending balance June 30, 2017
|
|
$
|
14,347
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
|
|
(in thousands)
|
|
Investment Securities
Available for Sale
|
|
|
Cash Flow Hedge
|
|
Beginning balance January 1, 2016
|
|
$
|
22,211
|
|
|
$
|
(66
|
)
|
Total (losses)/gains realized/unrealized:
|
|
|
|
|
|
|
|
|
Included in other comprehensive loss
|
|
|
(1,981
|
)
|
|
|
66
|
|
Ending balance June 30, 2016
|
|
$
|
20,230
|
|
|
$
|
0
|
|
|
|
Fair Value Measurement Using Significant
Unobservable Inputs (Level 3)
|
|
(in thousands)
|
|
Investment Securities
Available for Sale
|
|
|
Cash Flow Hedge
|
|
Beginning balance April 1, 2017
|
|
$
|
20,357
|
|
|
$
|
|
|
Total losses realized/unrealized:
|
|
|
|
|
|
|
|
|
Included in other comprehensive income
|
|
|
(6,010
|
)
|
|
|
|
|
Ending balance June 30, 2017
|
|
$
|
14,347
|
|
|
$
|
|
|
|
|
Fair Value Measurement Using Significant
Unobservable Inputs (Level 3)
|
|
(in thousands)
|
|
Investment Securities
Available for Sale
|
|
|
Cash Flow Hedge
|
|
Beginning balance April 1, 2016
|
|
$
|
19,532
|
|
|
$
|
(33
|
)
|
Total gains realized/unrealized:
|
|
|
|
|
|
|
|
|
Included in other comprehensive income
|
|
|
698
|
|
|
|
33
|
|
Ending balance June 30, 2016
|
|
$
|
20,230
|
|
|
$
|
0
|
|
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 six- or three- month periods ended June 30, 2017 and 2016.
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.
The following methods and
assumptions were used by the Corporation to estimate its fair value disclosures for financial instruments:
Cash and due from
banks:
The carrying amounts as reported in the statement of financial condition for cash and due from banks approximate
their fair values.
Interest bearing
deposits in banks:
The carrying amount of interest bearing deposits approximates their fair values.
Securities held to
maturity:
Investments in debt securities classified as held to maturity are measured subsequently at amortized cost
in the statement of financial position.
Restricted investment
in bank stock:
The carrying value of stock issued by the FHLB of Atlanta, ACBB and CBB approximates fair value based on
the redemption provisions of the stock.
Loans (excluding
impaired loans with specific loss allowances):
For variable-rate loans that re-price frequently or “in one year or
less”, and with no significant change in credit risk, fair values are based on carrying values. Fair values for fixed-rate
loans that do not re-price frequently are estimated using a discounted cash flow calculation that applies current market interest
rates being offered on the various loan products.
Deposits:
The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and certain types of money market
accounts, etc.) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts).
Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest
rates currently being offered on the various certificates of deposit to the cash flow stream.
Borrowed funds:
The fair value of the Bank’s FHLB borrowings and junior subordinated debt is calculated based on the discounted value of
contractual cash flows, using rates currently existing for borrowings with similar remaining maturities. The carrying amounts of
federal funds purchased and securities sold under agreements to repurchase approximate their fair values.
Accrued interest:
The carrying amount of accrued interest receivable and payable approximates their fair values.
Off-balance-sheet
financial instruments:
In the normal course of business, the Bank makes commitments to extend credit and issues standby
letters of credit. The Bank expects most of these commitments to expire without being drawn upon; therefore, the commitment amounts
do not necessarily represent future cash requirements. Due to the uncertainty of cash flows and difficulty in the predicting the
timing of such cash flows, fair values were not estimated for these instruments.
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:
|
|
June 30, 2017
|
|
|
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
|
|
$
|
71,405
|
|
|
$
|
71,405
|
|
|
$
|
71,405
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits in banks
|
|
|
1,557
|
|
|
|
1,557
|
|
|
|
1,557
|
|
|
|
|
|
|
|
|
|
Investment securities - AFS
|
|
|
129,198
|
|
|
|
129,198
|
|
|
|
|
|
|
$
|
114,851
|
|
|
$
|
14,347
|
|
Investment securities - HTM
|
|
|
98,354
|
|
|
|
100,365
|
|
|
|
|
|
|
|
90,563
|
|
|
|
9,802
|
|
Restricted bank stock
|
|
|
5,204
|
|
|
|
5,204
|
|
|
|
|
|
|
|
5,204
|
|
|
|
|
|
Loans, net
|
|
|
886,033
|
|
|
|
891,251
|
|
|
|
|
|
|
|
|
|
|
|
891,251
|
|
Financial derivatives
|
|
|
537
|
|
|
|
537
|
|
|
|
|
|
|
|
537
|
|
|
|
|
|
Accrued interest receivable
|
|
|
3,495
|
|
|
|
3,495
|
|
|
|
|
|
|
|
3,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits – non-maturity
|
|
|
803,745
|
|
|
|
803,745
|
|
|
|
|
|
|
|
803,745
|
|
|
|
|
|
Deposits – time deposits
|
|
|
233,967
|
|
|
|
239,043
|
|
|
|
|
|
|
|
239,043
|
|
|
|
|
|
Short-term borrowed funds
|
|
|
25,224
|
|
|
|
25,224
|
|
|
|
|
|
|
|
25,224
|
|
|
|
|
|
Long-term borrowed funds
|
|
|
120,929
|
|
|
|
122,046
|
|
|
|
|
|
|
|
122,046
|
|
|
|
|
|
Accrued interest payable
|
|
|
428
|
|
|
|
428
|
|
|
|
|
|
|
|
428
|
|
|
|
|
|
Off balance sheet financial instruments
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
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
|
|
$
|
60,707
|
|
|
$
|
60,707
|
|
|
$
|
60,707
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits in banks
|
|
|
2,603
|
|
|
|
2,603
|
|
|
|
2,603
|
|
|
|
|
|
|
|
|
|
Investment securities - AFS
|
|
|
140,000
|
|
|
|
140,000
|
|
|
|
|
|
|
$
|
119,746
|
|
|
$
|
20,254
|
|
Investment securities - HTM
|
|
|
97,169
|
|
|
|
97,981
|
|
|
|
|
|
|
|
89,031
|
|
|
|
8,950
|
|
Restricted bank stock
|
|
|
5,209
|
|
|
|
5,209
|
|
|
|
|
|
|
|
5,209
|
|
|
|
|
|
Loans, net
|
|
|
882,008
|
|
|
|
886,712
|
|
|
|
|
|
|
|
|
|
|
|
886,712
|
|
Financial derivative
|
|
|
700
|
|
|
|
700
|
|
|
|
|
|
|
|
700
|
|
|
|
|
|
Accrued interest receivable
|
|
|
3,862
|
|
|
|
3,862
|
|
|
|
|
|
|
|
3,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits- non-maturity
|
|
|
773,119
|
|
|
|
773,119
|
|
|
|
|
|
|
|
773,119
|
|
|
|
|
|
Deposits- time deposits
|
|
|
241,110
|
|
|
|
245,762
|
|
|
|
|
|
|
|
245,762
|
|
|
|
|
|
Short-term borrowed funds
|
|
|
36,000
|
|
|
|
36,000
|
|
|
|
|
|
|
|
36,000
|
|
|
|
|
|
Long-term borrowed funds
|
|
|
131,737
|
|
|
|
133,397
|
|
|
|
|
|
|
|
133,397
|
|
|
|
|
|
Accrued interest payable
|
|
|
380
|
|
|
|
380
|
|
|
|
|
|
|
|
380
|
|
|
|
|
|
Off balance sheet financial instruments
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Loans are measured using a discounted cash flow
method. The significant unobservable inputs used in the Level 3 fair value measurements of the Corporation’s loans included
in the tables above are calculated based on the Corporation’s internal new volume rate.
Note 10 – 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, 2016 and the three-month
periods ended March 31, 2017 and June 30, 2017:
(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, 2016
|
|
$
|
(1,942
|
)
|
|
$
|
(2,024
|
)
|
|
$
|
(1,971
|
)
|
|
$
|
(39
|
)
|
|
$
|
(12,663
|
)
|
|
$
|
(305
|
)
|
|
$
|
(18,944
|
)
|
Other comprehensive income/(loss) before reclassifications
|
|
|
(421
|
)
|
|
|
(929
|
)
|
|
|
0
|
|
|
|
461
|
|
|
|
(2,086
|
)
|
|
|
(466
|
)
|
|
|
(3,441
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
(5
|
)
|
|
|
(265
|
)
|
|
|
617
|
|
|
|
0
|
|
|
|
517
|
|
|
|
56
|
|
|
|
920
|
|
Balance - December 31, 2016
|
|
$
|
(2,368
|
)
|
|
$
|
(3,218
|
)
|
|
$
|
(1,354
|
)
|
|
$
|
422
|
|
|
$
|
(14,232
|
)
|
|
$
|
(715
|
)
|
|
$
|
(21,465
|
)
|
Other comprehensive income before reclassifications
|
|
|
100
|
|
|
|
73
|
|
|
|
0
|
|
|
|
52
|
|
|
|
32
|
|
|
|
0
|
|
|
|
257
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
(2
|
)
|
|
|
5
|
|
|
|
61
|
|
|
|
0
|
|
|
|
162
|
|
|
|
22
|
|
|
|
248
|
|
Balance – March 31, 2017
|
|
$
|
(2,270
|
)
|
|
$
|
(3,140
|
)
|
|
$
|
(1,293
|
)
|
|
$
|
474
|
|
|
$
|
(14,038
|
)
|
|
$
|
(693
|
)
|
|
$
|
(20,960
|
)
|
Other comprehensive income/(loss) before reclassifications
|
|
|
(32
|
)
|
|
|
1,698
|
|
|
|
0
|
|
|
|
(150
|
)
|
|
|
(158
|
)
|
|
|
0
|
|
|
|
1,358
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
(34
|
)
|
|
|
10
|
|
|
|
43
|
|
|
|
0
|
|
|
|
160
|
|
|
|
21
|
|
|
|
200
|
|
Balance – June 30, 2017
|
|
$
|
(2,336
|
)
|
|
$
|
(1,432
|
)
|
|
$
|
(1,250
|
)
|
|
$
|
324
|
|
|
$
|
(14,036
|
)
|
|
$
|
(672
|
)
|
|
$
|
(19,402
|
)
|
The following tables present
the components of comprehensive income for the six- and three-month periods ended June 30, 2017 and 2016:
Components of Comprehensive Income (in thousands)
|
|
Before Tax
Amount
|
|
|
Tax (Expense)
Benefit
|
|
|
Net
|
|
For the six months ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale (AFS) securities with OTTI:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains
|
|
$
|
110
|
|
|
$
|
(44
|
)
|
|
$
|
66
|
|
Less: accretable yield recognized in income
|
|
|
57
|
|
|
|
(23
|
)
|
|
|
34
|
|
Net unrealized gains on investments with OTTI
|
|
|
53
|
|
|
|
(21
|
)
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities – all other:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains
|
|
|
2,954
|
|
|
|
(1,178
|
)
|
|
|
1,776
|
|
Less: losses recognized in income
|
|
|
(17
|
)
|
|
|
7
|
|
|
|
(10
|
)
|
Net unrealized gains on all other AFS securities
|
|
|
2,971
|
|
|
|
(1,185
|
)
|
|
|
1,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Less: amortization recognized in income
|
|
|
(172
|
)
|
|
|
68
|
|
|
|
(104
|
)
|
Net unrealized gains on HTM securities
|
|
|
172
|
|
|
|
(68
|
)
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses
|
|
|
(163
|
)
|
|
|
65
|
|
|
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net actuarial loss
|
|
|
(208
|
)
|
|
|
82
|
|
|
|
(126
|
)
|
Less: amortization of unrecognized loss
|
|
|
(528
|
)
|
|
|
210
|
|
|
|
(318
|
)
|
Less: amortization of transition asset
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Less: amortization of prior service costs
|
|
|
(6
|
)
|
|
|
2
|
|
|
|
(4
|
)
|
Net pension plan liability adjustment
|
|
|
326
|
|
|
|
(130
|
)
|
|
|
196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SERP:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net actuarial loss
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Less: amortization of unrecognized loss
|
|
|
(73
|
)
|
|
|
29
|
|
|
|
(44
|
)
|
Less: amortization of prior service costs
|
|
|
1
|
|
|
|
0
|
|
|
|
1
|
|
Net SERP liability adjustment
|
|
|
72
|
|
|
|
(29
|
)
|
|
|
43
|
|
Other comprehensive income
|
|
$
|
3,431
|
|
|
$
|
(1,368
|
)
|
|
$
|
2,063
|
|
Components of Comprehensive Income (in thousands)
|
|
Before Tax
Amount
|
|
|
Tax (Expense)
Benefit
|
|
|
Net
|
|
For the six months ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale (AFS) securities with OTTI:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains
|
|
$
|
333
|
|
|
$
|
(133
|
)
|
|
$
|
200
|
|
Less: accretable yield recognized in income
|
|
|
5
|
|
|
|
(2
|
)
|
|
|
3
|
|
Net unrealized gains on investments with OTTI
|
|
|
328
|
|
|
|
(131
|
)
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities – all other:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains
|
|
|
647
|
|
|
|
(258
|
)
|
|
|
389
|
|
Less: gains recognized in income
|
|
|
227
|
|
|
|
(91
|
)
|
|
|
136
|
|
Net unrealized gains on all other AFS securities
|
|
|
420
|
|
|
|
(167
|
)
|
|
|
253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Less: amortization recognized in income
|
|
|
(608
|
)
|
|
|
243
|
|
|
|
(365
|
)
|
Net unrealized gains on HTM securities
|
|
|
608
|
|
|
|
(243
|
)
|
|
|
365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses
|
|
|
(1,060
|
)
|
|
|
423
|
|
|
|
(637
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net actuarial loss
|
|
|
(921
|
)
|
|
|
368
|
|
|
|
(553
|
)
|
Less: amortization of unrecognized loss
|
|
|
(424
|
)
|
|
|
170
|
|
|
|
(254
|
)
|
Less: amortization of transition asset
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Less: amortization of prior service costs
|
|
|
(6
|
)
|
|
|
2
|
|
|
|
(4
|
)
|
Net pension plan liability adjustment
|
|
|
(491
|
)
|
|
|
196
|
|
|
|
(295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SERP:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net actuarial loss
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Less: amortization of unrecognized loss
|
|
|
(39
|
)
|
|
|
15
|
|
|
|
(24
|
)
|
Less: amortization of prior service costs
|
|
|
(10
|
)
|
|
|
4
|
|
|
|
(6
|
)
|
Net SERP liability adjustment
|
|
|
49
|
|
|
|
(19
|
)
|
|
|
30
|
|
Other comprehensive loss
|
|
$
|
(146
|
)
|
|
$
|
59
|
|
|
$
|
(87
|
)
|
Components of Comprehensive Income (in thousands)
|
|
Before Tax
Amount
|
|
|
Tax (Expense)
Benefit
|
|
|
Net
|
|
For the three months ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale (AFS) securities with OTTI:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses
|
|
$
|
(56
|
)
|
|
$
|
23
|
|
|
$
|
(33
|
)
|
Less: accretable yield recognized in income
|
|
|
55
|
|
|
|
(22
|
)
|
|
|
33
|
|
Net unrealized losses on investments with OTTI
|
|
|
(111
|
)
|
|
|
45
|
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities – all other:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains
|
|
|
2,832
|
|
|
|
(1,129
|
)
|
|
|
1,703
|
|
Less: Losses recognized in income
|
|
|
(8
|
)
|
|
|
3
|
|
|
|
(5
|
)
|
Net unrealized gains on all other AFS securities
|
|
|
2,840
|
|
|
|
(1,132
|
)
|
|
|
1,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Less: amortization recognized in income
|
|
|
(71
|
)
|
|
|
28
|
|
|
|
(43
|
)
|
Net unrealized gains on HTM securities
|
|
|
71
|
|
|
|
(28
|
)
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses
|
|
|
(249
|
)
|
|
|
99
|
|
|
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net actuarial loss
|
|
|
(261
|
)
|
|
|
103
|
|
|
|
(158
|
)
|
Less: amortization of unrecognized loss
|
|
|
(264
|
)
|
|
|
105
|
|
|
|
(159
|
)
|
Less: amortization of transition asset
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Less: amortization of prior service costs
|
|
|
(3
|
)
|
|
|
2
|
|
|
|
(1
|
)
|
Net pension plan liability adjustment
|
|
|
6
|
|
|
|
(4
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SERP:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net actuarial loss
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Less: amortization of unrecognized loss
|
|
|
(36
|
)
|
|
|
15
|
|
|
|
(21
|
)
|
Less: amortization of prior service costs
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Net SERP liability adjustment
|
|
|
36
|
|
|
|
(15
|
)
|
|
|
21
|
|
Other comprehensive income
|
|
$
|
2,593
|
|
|
$
|
(1,035
|
)
|
|
$
|
1,558
|
|
Components of Comprehensive Income (in thousands)
|
|
Before Tax
Amount
|
|
|
Tax (Expense)
Benefit
|
|
|
Net
|
|
For the three months ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale (AFS) securities with OTTI:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains
|
|
$
|
1,829
|
|
|
$
|
(730
|
)
|
|
$
|
1,099
|
|
Less: accretable yield recognized in income
|
|
|
(31
|
)
|
|
|
12
|
|
|
|
(19
|
)
|
Net unrealized gains on investments with OTTI
|
|
|
1,860
|
|
|
|
(742
|
)
|
|
|
1,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities – all other:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses
|
|
|
(282
|
)
|
|
|
113
|
|
|
|
(169
|
)
|
Less: gains recognized in income
|
|
|
21
|
|
|
|
(9
|
)
|
|
|
12
|
|
Net unrealized losses on all other AFS securities
|
|
|
(303
|
)
|
|
|
122
|
|
|
|
(181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Less: amortization recognized in income
|
|
|
(371
|
)
|
|
|
149
|
|
|
|
(222
|
)
|
Net unrealized gains on HTM securities
|
|
|
371
|
|
|
|
(149
|
)
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses
|
|
|
(509
|
)
|
|
|
203
|
|
|
|
(306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net actuarial loss
|
|
|
(350
|
)
|
|
|
140
|
|
|
|
(210
|
)
|
Less: amortization of unrecognized loss
|
|
|
(212
|
)
|
|
|
85
|
|
|
|
(127
|
)
|
Less: amortization of transition asset
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Less: amortization of prior service costs
|
|
|
(3
|
)
|
|
|
2
|
|
|
|
(1
|
)
|
Net pension plan liability adjustment
|
|
|
(135
|
)
|
|
|
53
|
|
|
|
(82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SERP:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net actuarial loss
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Less: amortization of unrecognized gain
|
|
|
(20
|
)
|
|
|
7
|
|
|
|
(13
|
)
|
Less: amortization of prior service costs
|
|
|
(5
|
)
|
|
|
3
|
|
|
|
(2
|
)
|
Net SERP liability adjustment
|
|
|
25
|
|
|
|
(10
|
)
|
|
|
15
|
|
Other comprehensive income
|
|
$
|
1,309
|
|
|
$
|
(523
|
)
|
|
$
|
786
|
|
The following table presents the details of
amount reclassified from accumulated other comprehensive loss for the six- and three-month periods ended June 30, 2017 and 2016:
Amounts Reclassified from Accumulated Other
Comprehensive Loss (in thousands)
|
|
For the Six
months ended
June 30, 2017
|
|
|
For the Six
months ended
June 30, 2016
|
|
|
Affected Line Item in the
Statement Where Net Income is
Presented
|
Unrealized gains on investment securities with OTTI:
|
|
|
|
|
|
|
|
|
|
|
Accretable yield
|
|
$
|
57
|
|
|
$
|
5
|
|
|
Interest income on taxable investment securities
|
Taxes
|
|
|
(23
|
)
|
|
|
(2
|
)
|
|
Tax expense
|
|
|
$
|
34
|
|
|
$
|
3
|
|
|
Net of tax
|
Unrealized gains and losses on available for sale investment securities - all others:
|
|
|
|
|
|
|
|
|
|
|
(Losses)/gains on sales
|
|
$
|
(17
|
)
|
|
$
|
227
|
|
|
Net gains
|
Taxes
|
|
|
7
|
|
|
|
(91
|
)
|
|
Tax benefit/(expense)
|
|
|
$
|
(10
|
)
|
|
$
|
136
|
|
|
Net of tax
|
Unrealized losses on held to maturity securities:
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
$
|
(172
|
)
|
|
$
|
(608
|
)
|
|
Interest income on taxable investment securities
|
Taxes
|
|
|
68
|
|
|
|
243
|
|
|
Tax benefit
|
|
|
$
|
(104
|
)
|
|
$
|
(365
|
)
|
|
Net of tax
|
Net pension plan liability adjustment:
|
|
|
|
|
|
|
|
|
|
|
Amortization of unrecognized loss
|
|
$
|
(528
|
)
|
|
|
(424
|
)
|
|
Salaries and employee benefits
|
Amortization of transition asset
|
|
|
0
|
|
|
|
0
|
|
|
Salaries and employee benefits
|
Amortization of prior service costs
|
|
|
(6
|
)
|
|
|
(6
|
)
|
|
Salaries and employee benefits
|
Taxes
|
|
|
212
|
|
|
|
172
|
|
|
Tax benefit
|
|
|
$
|
(322
|
)
|
|
$
|
(258
|
)
|
|
Net of tax
|
Net SERP liability adjustment:
|
|
|
|
|
|
|
|
|
|
|
Amortization of unrecognized loss
|
|
$
|
(73
|
)
|
|
|
(39
|
)
|
|
Salaries and employee benefits
|
Amortization of prior service costs
|
|
|
1
|
|
|
|
(10
|
)
|
|
Salaries and employee benefits
|
Taxes
|
|
|
29
|
|
|
|
19
|
|
|
Tax benefit
|
|
|
$
|
(43
|
)
|
|
$
|
(30
|
)
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
(445
|
)
|
|
$
|
(514
|
)
|
|
Net of tax
|
Amounts Reclassified from Accumulated Other
Comprehensive Loss (in thousands)
|
|
For the Three
months ended
June 30, 2017
|
|
|
For the Three
months ended
June 30, 2016
|
|
|
Affected Line Item in the
Statement Where Net Income is
Presented
|
Unrealized gains and losses on investment securities with OTTI:
|
|
|
|
|
|
|
|
|
|
|
Accretable Yield
|
|
$
|
55
|
|
|
$
|
(31
|
)
|
|
Interest income on taxable investment securities
|
Taxes
|
|
|
(22
|
)
|
|
|
12
|
|
|
Tax (expense)/benefit
|
|
|
$
|
33
|
|
|
$
|
(19
|
)
|
|
Net of tax
|
Unrealized gains and losses on available for sale investment securities - all others:
|
|
|
|
|
|
|
|
|
|
|
(Losses)/gains on sales
|
|
$
|
(8
|
)
|
|
$
|
21
|
|
|
Net gains
|
Taxes
|
|
|
3
|
|
|
|
(9
|
)
|
|
Tax benefit/(expense)
|
|
|
$
|
(5
|
)
|
|
$
|
12
|
|
|
Net of tax
|
Unrealized losses on held to maturity securities:
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
$
|
(71
|
)
|
|
$
|
(371
|
)
|
|
Interest income on taxable investment securities
|
Taxes
|
|
|
28
|
|
|
|
149
|
|
|
Tax benefit
|
|
|
$
|
(43
|
)
|
|
$
|
(222
|
)
|
|
Net of tax
|
Net pension plan liability adjustment:
|
|
|
|
|
|
|
|
|
|
|
Amortization of unrecognized loss
|
|
$
|
(264
|
)
|
|
|
(212
|
)
|
|
Salaries and employee benefits
|
Amortization of transition asset
|
|
|
0
|
|
|
|
0
|
|
|
Salaries and employee benefits
|
Amortization of prior service costs
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
Salaries and employee benefits
|
Taxes
|
|
|
107
|
|
|
|
87
|
|
|
Tax benefit
|
|
|
$
|
(160
|
)
|
|
$
|
(128
|
)
|
|
Net of tax
|
Net SERP liability adjustment:
|
|
|
|
|
|
|
|
|
|
|
Amortization of unrecognized loss
|
|
$
|
(36
|
)
|
|
|
(20
|
)
|
|
Salaries and employee benefits
|
Amortization of prior service costs
|
|
|
0
|
|
|
|
(5
|
)
|
|
Salaries and employee benefits
|
Taxes
|
|
|
15
|
|
|
|
10
|
|
|
Tax benefit
|
|
|
$
|
(21
|
)
|
|
$
|
(15
|
)
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
(196
|
)
|
|
$
|
(372
|
)
|
|
Net of tax
|
Note 11 – Junior Subordinated Debentures and Restrictions
on Dividends
First United Corporation
is the parent company to three statutory trust subsidiaries - First United Statutory Trust I and First United Statutory Trust II,
both of which are Connecticut statutory trusts (“Trust I” and “Trust II”, respectively), and First United
Statutory Trust III, a Delaware statutory trust (“Trust III” and, together with Trust I and Trust II, the “Trusts”).
The Trusts were formed for the purposes of selling preferred securities to investors and using the proceeds to purchase junior
subordinated debentures from First United Corporation (“TPS Debentures”) that would qualify as regulatory capital.
In March 2004, Trust I
and Trust II issued preferred securities with an aggregate liquidation amount of $30.0 million to third-party investors and issued
common equity with an aggregate liquidation amount of $.9 million to First United Corporation. Trust I and Trust II used the proceeds
of these offerings to purchase an equal amount of TPS Debentures, as follows:
$20.6 million
—floating rate payable quarterly
based on three-month LIBOR plus 275 basis points (4.02% at June 30, 2017), maturing in 2034, became redeemable five years after
issuance at First United Corporation’s option.
$10.3 million
—floating rate payable quarterly
based on three-month LIBOR plus 275 basis points (4.02% at June 30, 2017) maturing in 2034, became redeemable five years after
issuance at First United Corporation’s option.
In December 2009, Trust
III issued 9.875% fixed-rate preferred securities with an aggregate liquidation amount of approximately $7.0 million to private
investors and issued common securities to First United Corporation with an aggregate liquidation amount of approximately $.2 million.
Trust III used the proceeds of the offering to purchase approximately $7.2 million of 9.875% fixed-rate TPS Debentures. Interest
on these TPS Debentures was payable quarterly, and the TPS Debentures were scheduled to mature in 2040 but were redeemable five
years after issuance at First United Corporation’s option.
In January 2010, Trust
III issued an additional $3.5 million of 9.875% fixed-rate preferred securities to private investors and issued common securities
to First United Corporation with an aggregate liquidation amount of $.1 million. Trust III used the proceeds of the offering to
purchase $3.6 million of 9.875% fixed-rate TPS Debentures. Interest on these TPS Debentures was payable quarterly, and the TPS
Debentures were scheduled to mature in 2040 but were redeemable five years after issuance at First United Corporation’s option.
In March 2017, the Corporation
repaid all of the outstanding TPS Debentures issued to and held by Trust III, and Trust III in turn redeemed all of its outstanding
securities from its security holders. The $10.8 million repayment was consummated following the Corporation’s common stock
rights offering that closed on March 20, 2017. See Note 19 for further details on the rights offering.
The TPS Debentures issued
to each of the Trusts represent the sole assets of that Trust, and payments of the TPS Debentures by First United Corporation are
the only sources of cash flow for the Trust. First United Corporation has the right, without triggering a default, to defer interest
on all of the TPS Debentures for up to 20 quarterly periods, in which case distributions on the preferred securities will also
be deferred. Should this occur, First United Corporation may not pay dividends or distributions on, or repurchase, redeem or acquire
any shares of its capital stock.
Note 12 – Preferred Stock
On January 30, 2009, pursuant
to the Troubled Asset Repurchase Program Capital Purchase Program adopted by the Treasury, First United Corporation issued to the
Treasury 30,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, having no par value, (the “Series
A Preferred Stock”), and a Warrant to purchase 326,323 shares of common stock at an exercise price of $13.79 per share, for
an aggregate consideration of $30 million. The proceeds from this transaction qualify as Tier 1 capital and the Warrant qualified
as tangible common equity.
On December 4, 2014, the
Treasury sold all of its shares of Series A Preferred Stock to third-party investors. On May 26, 2015, First United Corporation
repurchased the warrant from the Treasury for $120,786, which is included in other expense. The warrant was canceled and as a result
of the repurchase, the Treasury has no remaining equity investment in First United Corporation.
On February 14, 2016, First
United Corporation redeemed 10,000 shares of the Series A Preferred Stock, having an aggregate liquidation amount of $10.0 million,
on a pro rata basis from each of the holders.
On March 21, 2017, an additional
10,000 shares of the Series A Preferred Stock, having an aggregate liquidation amount of $10.0 million were redeemed, on a pro
rata basis from each of the holders.
The terms of the Series
A Preferred Stock call for the payment, if declared by the Corporation’s Board of Directors, of cash dividends on February
15
th
, May 15
th
, August 15
th
and November 15
th
of each year. The holders of the Series
A Preferred Stock are entitled to receive, if and when declared by the Board of Directors, out of assets legally available for
payment, cumulative cash dividends at a rate per annum of 9% per share of Series A Preferred Stock on a liquidation amount of $1,000
per share with respect to each dividend period from and after February 15, 2014. Under the terms of the Series A Preferred Stock,
First United Corporation may, at its option and after consulting with the Reserve Bank, redeem shares of Series A Preferred Stock,
in whole or in part, at any time and from time to time, for cash at a per share amount equal to the sum of the liquidation preference
per share plus any accrued and unpaid dividends to but excluding the redemption date.
Note 13 – Borrowed Funds
The following is a summary of short-term borrowings
with original maturities of less than one year:
(Dollars in thousands)
|
|
Six months ended June 30,
2017
|
|
|
Year ended December 31,
2016
|
|
Securities sold under agreements to repurchase:
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
$
|
25,224
|
|
|
$
|
36,000
|
|
Weighted average interest rate at end of period
|
|
|
0.13
|
%
|
|
|
0.16
|
%
|
Maximum amount outstanding as of any month end
|
|
$
|
35,269
|
|
|
$
|
39,456
|
|
Average amount outstanding
|
|
$
|
25,224
|
|
|
$
|
30,899
|
|
Approximate weighted average rate during the period
|
|
|
0.10
|
%
|
|
|
0.19
|
%
|
At June 30, 2017, the repurchase agreements
were secured by $42.5 million in investment securities issued by government related agencies. A minimum of 102% of fair value is
pledged against account balances.
The following is a summary of long-term borrowings
with original maturities exceeding one year:
|
|
June 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
FHLB advances, bearing fixed interest at rates ranging from 1.54% to 3.69% at June 30, 2017
|
|
$
|
90,000
|
|
|
$
|
90,007
|
|
Junior subordinated debt, bearing variable interest rate of 4.02% at June 30, 2017
|
|
|
30,929
|
|
|
|
30,929
|
|
Junior subordinated debt, bearing fixed interest rate of 0.00% at June 30, 2017
|
|
|
0
|
|
|
|
10,801
|
|
Total long-term debt
|
|
$
|
120,929
|
|
|
$
|
131,737
|
|
At June 30, 2017, the long-term FHLB advances
were secured by $177.0 million in loans.
The contractual maturities of all long-term
borrowings are as follows:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
(in thousands)
|
|
Fixed Rate
|
|
|
Floating Rate
|
|
|
Total
|
|
|
Total
|
|
Due in 2018
|
|
$
|
20,000
|
|
|
$
|
0
|
|
|
$
|
20,000
|
|
|
$
|
20,000
|
|
Due in 2019
|
|
|
20,000
|
|
|
|
0
|
|
|
|
20,000
|
|
|
|
20,000
|
|
Due in 2020
|
|
|
30,000
|
|
|
|
0
|
|
|
|
30,000
|
|
|
|
30,000
|
|
Due in 2021
|
|
|
20,000
|
|
|
|
0
|
|
|
|
20,000
|
|
|
|
20,000
|
|
Thereafter
|
|
|
0
|
|
|
|
30,929
|
|
|
|
30,929
|
|
|
|
41,737
|
|
Total long-term debt
|
|
$
|
90,000
|
|
|
$
|
30,929
|
|
|
$
|
120,929
|
|
|
$
|
131,737
|
|
Note 14 – Employee Benefit Plans
The following tables present
the components of the net periodic pension plan cost for First United Corporation’s Defined Benefit Pension Plan (the “Pension
Plan”) and the Bank’s Supplemental Executive Retirement Plan (“SERP”) for the periods indicated:
Pension
|
|
For the Six months ended
|
|
|
For the Three months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Service cost
|
|
$
|
140
|
|
|
$
|
152
|
|
|
$
|
70
|
|
|
$
|
76
|
|
Interest cost
|
|
|
825
|
|
|
|
870
|
|
|
|
412
|
|
|
|
435
|
|
Expected return on assets
|
|
|
(1,502
|
)
|
|
|
(1,381
|
)
|
|
|
(751
|
)
|
|
|
(708
|
)
|
Amortization of transition asset
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Amortization of net actuarial loss
|
|
|
528
|
|
|
|
424
|
|
|
|
264
|
|
|
|
212
|
|
Amortization of prior service cost
|
|
|
6
|
|
|
|
6
|
|
|
|
3
|
|
|
|
3
|
|
Net pension (credit)/expense included in employee benefits
|
|
$
|
(3
|
)
|
|
$
|
71
|
|
|
$
|
(2
|
)
|
|
$
|
18
|
|
SERP
|
|
For the Six months ended
|
|
|
For the Three months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Service cost
|
|
$
|
52
|
|
|
$
|
49
|
|
|
$
|
26
|
|
|
$
|
24
|
|
Interest cost
|
|
|
144
|
|
|
|
125
|
|
|
|
72
|
|
|
|
63
|
|
Amortization of recognized loss
|
|
|
73
|
|
|
|
39
|
|
|
|
36
|
|
|
|
20
|
|
Amortization of prior service cost
|
|
|
(1
|
)
|
|
|
10
|
|
|
|
0
|
|
|
|
5
|
|
Net SERP expense included in employee benefits
|
|
$
|
268
|
|
|
$
|
223
|
|
|
$
|
134
|
|
|
$
|
112
|
|
The Pension Plan is a noncontributory
defined benefit pension plan covers our employees who were hired prior to the freeze and others who were grandfathered into the
plan. The benefits are based on years of service and the employees’ compensation during the last five years of employment.
Effective April 30, 2010,
the Pension Plan was amended, resulting in a “soft freeze”, the effect of which prohibits new entrants into the plan
and ceases crediting of additional years of service after that date. Effective January 1, 2013, the Pension Plan was amended to
unfreeze it for those employees for whom the sum of (a) their ages, at their closest birthday, plus (b) years of service for vesting
purposes equals 80 or greater. The “soft freeze” continues to apply to all other plan participants. Pension benefits
for these participants are managed through discretionary contributions to the First United Corporation 401(k) Profit Sharing Plan
(the “401(k) Plan”).
The Bank established the
SERP in 2001 as an unfunded supplemental executive retirement plan. The SERP is available only to a select group of management
or highly compensated employees to provide supplemental retirement benefits in excess of limits imposed on qualified plans by federal
tax law. Concurrent with the establishment of the SERP, the Bank acquired Bank Owned Life Insurance (“BOLI”) policies
on the senior management personnel and officers of the Bank. The benefits resulting from the favorable tax treatment accorded the
earnings on the BOLI policies are intended to provide a source of funds for the future payment of the SERP benefits as well as
other employee benefit costs.
The benefit obligation
activity for both the Pension Plan and SERP was calculated using an actuarial measurement date of January 1. Plan assets and the
benefit obligations were calculated using an actuarial measurement date of December 31.
The Corporation will assess
the need for future annual contributions to the pension plan based upon its funded status and an evaluation of the future benefits
to be provided thereunder. A contribution of $3.0 million was made to the pension plan during the first quarter of 2017. The Corporation
expects to fund the annual projected benefit payments for the SERP from operations.
On January 9, 2015,
the Corporation and members of management who do not participate in the SERP entered into participation agreements under the Deferred
Compensation Plan, each styled as a SERP Alternative Participation Agreement (the “Participation Agreement”).
Pursuant to each Participation Agreement, the Corporation agreed, for each Plan Year (as defined in the Deferred Compensation Plan)
in which it determines that it has been Profitable (as defined in the Participation Agreement), to make a discretionary contribution
to the participant’s Employer Account in an amount equal to 15% of the participant’s base salary level for such Plan
Year, with the first Plan Year being the year ending December 31, 2015. The Participation Agreement provides that the participant
will become 100% vested in the amount maintained in his or her Employer Account upon the earliest to occur of the following events:
(a) Normal Retirement (as defined in the Participation Agreement); (b) Separation from Service (as defined in the Participation
Agreement) following a Change of Control (as defined in the Deferred Compensation Plan) and subsequent Triggering Event (as defined
in the Participation Agreement); (c) Separation from Service due to a Disability (as defined in the Participation Agreement); (d)
with respect to a particular award of Employer Contribution Credits, the participant’s completion of two consecutive Years
of Service (as defined in the Participation Agreement) immediately following the Plan Year for which such award was made; or (e)
death. Notwithstanding the foregoing, however, a participant will lose entitlement to the amount maintained in his or
her Employer Account in the event employment is terminated for Cause (as defined in the Participation Agreement). In addition,
the Participation Agreement conditions entitlement to the amounts held in the Employer Account on the participant (1) refraining
from engaging in Competitive Employment (as defined in the Participation Agreement) for three years following his or her Separation
from Service, (2) refraining from injurious disclosure of confidential information concerning the Corporation, and (3) remaining
available, at the Corporation’s reasonable request, to provide at least six hours of transition services per month for 12
months following his or her Separation from Service (except in the case of death or Disability), except that only item (2) will
apply in the event of a Separation from Service following a Change of Control and subsequent Triggering Event.
In January 2016, the
Board of Directors of First United Corporation approved a discretionary contribution in the amount of $63,500 for two employees.
Expense for the first six months of 2017 and 2016 for the Participation Agreement was $15,885. Expense for the second quarter of
2017 and 2016 was $7,943. In January 2017, the Board of Directors of First United Corporation approved a discretionary contribution
in the amount of $112,708 for four employees. Expense for the first six months of 2017 for the Participation Agreement was $28,177
and $14,089 for the second quarter of 2017.
Note 15 – Equity Compensation Plan Information
At the 2007 Annual
Meeting of Shareholders, First United Corporation’s shareholders approved the First United Corporation Omnibus Equity Compensation
Plan (the “Omnibus Plan”), which authorizes the issuance of up to 185,000 shares of common stock pursuant to the grant
of stock options, stock appreciation rights, stock awards, stock units, performance units, dividend equivalents, and other stock-based
awards to employees or directors.
On June 18, 2008, the
Board of Directors of First United Corporation adopted a Long-Term Incentive Program (the “LTIP”). This program was
adopted as a sub-plan of the Omnibus Plan to reward participants for increasing shareholder value, align executive interests with
those of shareholders, and serve as a retention tool for key executives. Under the LTIP, participants are granted shares of restricted
common stock of First United Corporation. The amount of an award is based on a specified percentage of the participant’s
salary as of the date of grant. These shares will vest if the Corporation meets or exceeds certain performance thresholds.
The Corporation complies
with the provisions of ASC Topic 718,
Compensation
-
Stock Compensation
, in measuring and disclosing stock compensation
cost. The measurement objective in ASC Paragraph 718-10-30-6 requires public companies to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant date fair value of the award. The cost is recognized
in expense over the period in which an employee is required to provide service in exchange for the award (the vesting period).
Stock-based awards
were made to non-employee directors in May 2017 pursuant to First United Corporation’s director compensation policy. Each
director receives an annual retainer of 1,000 shares of First United Corporation common stock, plus $10,000 to be paid, at the
director’s election, in cash or additional shares of common stock. In 2017, a total of 14,795 fully-vested shares of common
stock were issued to directors, which had a fair market value of $14.48. Director stock compensation expense was $85,282 for the
six months ended June 30, 2017 and $72,641 for the six months ended June 30, 2016. Stock compensation expense for the three months
ended June 30, 2017 was $48,099 and $36,752 for the three months ended June 30, 2016.
Note 16 – Letters of Credit and Off Balance Sheet Liabilities
The Corporation does
not issue any guarantees that would require liability recognition or disclosure other than the standby letters of credit issued
by the Bank. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer
to a third party. Generally, the Bank’s letters of credit are issued with expiration dates within one year. The
credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
The Bank generally holds collateral and/or personal guarantees supporting these commitments. The Bank had $1.8
million of outstanding standby letters of credit each of at June 30 2017 and $1.6 million at December 31, 2016. Management believes
that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the
potential amount of future payment required by the letters of credit. Management does not believe that the amount of the
liability associated with guarantees under standby letters of credit outstanding at June 30, 2017 and December 31, 2016 is material.
Note 17 – Derivative Financial Instruments
As a part of managing
interest rate risk, the Bank entered into interest rate swap agreements to modify the re-pricing characteristics of certain interest-bearing
liabilities. The Corporation has designated these interest rate swap agreements as cash flow hedges under the guidance of ASC Subtopic
815-30,
Derivatives and Hedging – Cash Flow Hedges
. Cash flow hedges have the effective portion of changes in the
fair value of the derivative, net of taxes, recorded in net accumulated other comprehensive income.
In July 2009, the Corporation
entered into three interest rate swap contracts totaling $20.0 million notional amount, hedging future cash flows associated with
floating rate trust preferred debt. The final contract matured on June 17, 2016, ending the agreement.
In March 2016, the
Corporation entered into four new interest rate swap contracts totaling $30.0 million notional amount, hedging future cash flows
associated with floating rate trust preferred debt. These contracts are a three-year $5.0 million contract maturing June 17, 2019,
a five-year $5.0 million contract maturing March 17, 2021, a seven-year $5.0 million contract maturing March 17, 2023 and a 10-year
$15.0 million contract maturing March 17, 2026.
The fair value of the
interest rate swap contracts was $.5 million and $.7 million at June 30, 2017 and December 31, 2016, respectively.
For the six months
ended June 30, 2017, the Corporation recorded a decrease in the value of the derivatives of $163 thousand and the related deferred
tax of $65 thousand in net accumulated other comprehensive loss to reflect the effective portion of cash flow hedges. ASC Subtopic
815-30 requires this amount to be reclassified to earnings if the hedge becomes ineffective or is terminated. There was no hedge
ineffectiveness recorded for the six months ending June 30, 2017. The Corporation does not expect any losses relating to these
hedges to be reclassified into earnings within the next 12 months.
Interest rate swap
agreements are entered into with counterparties that meet established credit standards and the Corporation believes that the credit
risk inherent in these contracts is not significant as of June 30, 2017.
The table below discloses
the impact of derivative financial instruments on the Corporation’s Consolidated Financial Statements for the six- and three-
months ended June 30, 2017 and 2016.
Derivative in Cash Flow Hedging
Relationships
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Amount of gain or (loss)
recognized in OCI on
derivative (effective
portion)
|
|
|
Amount of gain or (loss)
reclassified from accumulated
OCI into income (effective
portion)
(a)
|
|
|
Amount of gain or (loss)
recognized in income or
derivative (ineffective
portion and amount
excluded from
effectiveness testing)
(b)
|
|
Interest rate contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
$
|
(98
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
June 30, 2016
|
|
|
(637
|
)
|
|
|
0
|
|
|
|
0
|
|
Three months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
$
|
(150
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
June 30, 2016
|
|
|
(306
|
)
|
|
|
0
|
|
|
|
0
|
|
Notes:
(a) Reported as interest expense
(b) Reported as other income
Note 18 – Variable Interest Entities (VIE)
As noted in Note 11,
First United Corporation created the Trusts for the purposes of raising regulatory capital through the sale of mandatorily redeemable
preferred capital securities to third party investors and common equity interests to First United Corporation. The Trusts are considered
Variable Interest Entities (“VIEs”), but are not consolidated because First United Corporation is not the primary beneficiary
of the Trusts. At June 30, 2017, the Corporation reported all of the $30.9 million of TPS Debentures issued to Trust I and Trust
II as long-term borrowings and it reported its $.9 million equity interest in those Trusts as “Other Assets”.
In November 2009, the
Bank became a 99.99% limited partner in Liberty Mews Limited Partnership (“Liberty Mews”), a Maryland limited partnership
formed for the purpose of acquiring, developing and operating low-income housing units in Garrett County, Maryland. The Partnership
was financed with a total of $10.6 million of funding, including a $6.1 million equity contribution from the Bank as the limited
partner. Liberty Mews used the proceeds from these sources to purchase the land and construct a 36-unit low income housing rental
complex at a total cost of $10.6 million. The total assets of Liberty Mews were approximately $8.7 million at June 30, 2017 and
$8.8 million at December 31, 2016.
As of December 31,
2011, the Bank had made contributions to Liberty Mews totaling $6.1 million. The project was completed in June 2011, and the Bank
is entitled to $8.4 million in federal investment tax credits over a 10-year period as long as certain qualifying hurdles are maintained.
The Bank will also receive the benefit of tax operating losses from Liberty Mews to the extent of its capital contribution. The
investment in Liberty Mews assists the Bank in achieving its community reinvestment initiatives.
Because Liberty Mews
is considered to be a VIE, management performed an analysis to determine whether its involvement with the Partnership would lead
it to determine that it must consolidate Liberty Mews. In performing its analysis, management evaluated the risks creating the
variability in the Partnership and identified which activities most significantly impact the VIE’s economic performance.
Finally, it examined each of the variable interest holders to determine which, if any, of the holders was the primary beneficiary
based on their power to direct the most significant activities and their obligation to absorb potentially significant losses of
Liberty Mews.
The Bank, as a limited
partner, generally has no voting rights. The Bank is not in any way involved in the daily management of Liberty Mews and has no
other rights that provide it with the power to direct the activities that most significantly impact Liberty Mews’s economic
performance, which are to develop and operate the housing project in such a manner that complies with specific tax credit guidelines.
As a limited partner, there is no recourse to the Bank by the creditors of Liberty Mews. The tax credits that result from the Bank’s
investment in Liberty Mews are generally subject to recapture should the partnership fail to comply with the applicable government
regulations. The Bank has not provided any financial or other support to Liberty Mews beyond its required capital contributions
and does not anticipate providing such support in the future. Management currently believes that no material losses are probable
as a result of the Bank’s investment in Liberty Mews.
On the basis of management’s
analysis, the general partner is deemed to be the primary beneficiary of Liberty Mews. Because the Bank is not the primary beneficiary,
Liberty Mews has not been included in the Corporation’s consolidated financial statements.
The Corporation accounts
for the Bank’s investment in Liberty Mews utilizing the effective yield method under guidance that applies specifically to
investments in limited partnerships that operate qualified affordable housing projects. Under the effective yield method, the investor
recognizes tax credits as they are allocated and amortizes the initial cost of the investment to provide a constant effective yield
over the period that tax credits are allocated to the investor. The effective yield is the internal rate of return on the investment,
based on the cost of the investment and the guaranteed tax credits allocated to the investor. The tax credit allocated, net of
the amortization of the investment in the limited partnership, is recognized in the income statement as a component of income taxes
attributable to continuing operations.
The Corporation’s
tax expense for the six months ended June 30, 2017 was approximately $.2 million lower as a result of the impact of the tax credits
and the tax losses relating to the partnership.
At June 30, 2017 and
December 31, 2016, the Corporation included its total investment in Liberty Mews in “Other Assets” in its Consolidated
Statement of Financial Condition. As of June 30, 2017, the Bank’s commitment in Liberty Mews was fully funded. The following
table presents details of the Bank’s involvement with Liberty Mews at the dates indicated:
|
|
June 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Investment in LIHTC Partnership
|
|
|
|
|
|
|
|
|
Carrying amount on Balance Sheet of:
|
|
|
|
|
|
|
|
|
Investment (Other Assets)
|
|
$
|
2,897
|
|
|
$
|
3,223
|
|
Maximum exposure to loss
|
|
|
2,897
|
|
|
|
3,223
|
|
Note 19 – Common Stock Rights Offering
On March 20, 2017,
First United Corporation completed a common stock rights offering to existing shareholders in which it sold an aggregate of 783,626
shares of common stock at a subscription price of $11.93 per share, resulting in aggregate gross proceeds of approximately $9.4
million (the “Rights Offering”). Net proceeds from the Rights Offering amounted to approximately $9.2 million, reflecting
$144,667 in offering-related expenses. The Corporation used the proceeds to partially offset the redemption of $10.0 million of
the Corporation’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, and the repayment of $10.8 million of junior
subordinated debentures held by Trust III, both of which were completed in March 2017.
Note 20 – Assets and Liabilities
Subject to Enforceable Master Netting Arrangements
Interest Rate
Swap Agreements (“Swap Agreements”)
The Corporation has
entered into interest rate swap agreements to modify the re-pricing characteristics of certain interest-bearing liabilities as
a part of managing interest rate risk. The swap agreements have been designated as cash flow hedges, and accordingly, the fair
value of the interest rate swap contracts is reported in Other Liabilities on the Consolidated Statement of Financial Condition.
The swap agreements were entered into with a third party financial institution. The Corporation is party to master netting arrangements
with its financial institution counterparty; however, the Corporation does not offset assets and liabilities under these arrangements
for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all swap
agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral, in the form of
cash and investment securities, are pledged by the Corporation as the counterparty with net liability positions in accordance with
contract thresholds. See Note 17 to the Consolidated Financial Statements for more information.
Securities Sold
Under Agreements to Repurchase (“Repurchase Agreements”)
The Bank enters into
agreements under which it sells interests in U.S. securities to certain customers subject to an obligation to repurchase, and on
the part of the customers to resell, such interests. Under these arrangements, the Bank may transfer legal control over the assets
but still retain effective control through an agreement that both entitles and obligates the Bank to repurchase the assets. As
a result, these repurchase agreements are accounted for as collateralized financing arrangements (i.e. secured borrowings) and
not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability
in the Consolidated Statement of Condition, while the securities underlying the repurchase agreements remain in the respective
investment securities asset accounts. There is no offsetting or netting of the investment securities assets with the repurchase
agreement liabilities. In addition, as the Bank does not enter into reverse repurchase agreements, there is no such offsetting
to be done with the repurchase agreements. The right of setoff for a repurchase agreement resembles a secured borrowing, whereby
the collateral would be used to settle the fair value of the repurchase agreement should the Bank be in default (i.e. fails to
repurchase the U.S. securities on the maturity date of the agreement). The investment security collateral, maintained at 102% of
the borrowing, is held by a third party financial institution in the counterparty’s custodial account.
The following table
presents the liabilities subject to an enforceable master netting arrangement or repurchase agreements at June 30, 2017 and December
31, 2016.
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in
the Statement of Condition
|
|
|
|
|
(In thousands)
|
|
Gross
Amounts of
Recognized
Liabilities
|
|
|
Gross Amounts
Offset in the
Statement of
Condition
|
|
|
Net Amounts of
Liabilities
Presented in the
Statement of
Condition
|
|
|
Financial
Instruments
|
|
|
Cash Collateral
Pledged
|
|
|
Net
Amount
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap Agreements
|
|
$
|
(537
|
)
|
|
$
|
0
|
|
|
$
|
(537
|
)
|
|
$
|
537
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase Agreements
|
|
$
|
25,224
|
|
|
$
|
0
|
|
|
$
|
25,224
|
|
|
$
|
(25,224
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap Agreements
|
|
$
|
(700
|
)
|
|
$
|
0
|
|
|
$
|
(700
|
)
|
|
$
|
700
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase Agreements
|
|
$
|
36,000
|
|
|
$
|
0
|
|
|
$
|
36,000
|
|
|
$
|
(36,000
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
Note 21 – Adoption of New Accounting
Standards and Effects of New Accounting Pronouncements
In March 2017, the
FASB issued Accounting Standards Update (“ASU”) 2017-08,
Receivables- Nonrefundable Fees and Other Costs (Subtopic
310-20): Premium Amortization on Purchases Callable Debt Securities.
ASU 2017-08 amends guidance on the amortization period
of premiums on certain purchases callable debt securities. The amendments shorten the amortization period of premiums on certain
purchases callable debt securities to the earliest call date. ASU 2017-08 is effective for public business entities that are SEC
filers for annual periods beginning after December 15, 2018, and interim periods within those annual periods, for public entities
that are not SEC filers for annual periods beginning after December 15, 2019 and for all other entities for annual periods beginning
after December 15, 2020 with early adoption permitted. The Corporation is evaluating the provisions of ASU 2017-08 but believes
that its adoption will not have a material impact on the Corporation’s financial condition or results of operations.
In March 2017, the
FASB issued Accounting Standards Update (“ASU”) 2017-07,
Compensation – Retirement Benefits (Topic 715): Improving
the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
. ASU 2017-07 requires an entity
to present net periodic pension cost and net periodic postretirement benefit cost as a net amount that may be capitalized as part
of an asset when appropriate. ASU 2017-07 is effective for public business entities that are SEC filers for annual periods beginning
after December 15, 2017, and interim periods within those annual periods, for public entities that are not SEC filers for annual
periods beginning after December 15, 2018 and for all other entities for annual periods beginning after December 15, 2019 with
early adoption permitted. The Corporation is evaluating the provisions of ASU 2017-07 but believes that its adoption will not have
a material impact on the Corporation’s financial condition or results of operations.
In January 2017, the
FASB issued Accounting Standards Update (“ASU”) 2017-04,
Intangibles- Goodwill and Other (Topic 350): Simplifying
the Test for Goodwill Impairment.
ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating step 2 from
the goodwill impairment test. Instead, if “the carrying amount of a reporting unit exceeds its fair value, an impairment
loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting
unit.” The ASU does not change the qualitative assessment, however, it removes the requirements for any reporting unit with
a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform step
2 of the goodwill impairment test. ASU 2017-04 is effective for public business entities that are SEC filers for annual periods
beginning after December 15, 2019, and interim periods within those annual periods, for public entities that are not SEC filers
for annual periods beginning after December 15, 2020 and for all other entities for annual periods beginning after December 15,
2021 with early adoption permitted. The Corporation is evaluating the provisions of ASU 2017-04 but believes that its adoption
will not have a material impact on the Corporation’s financial condition or results of operations.
In August 2016, the
FASB issued Accounting Standards Update (“ASU”) 2016-15,
Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments
. ASU 2016-15 addresses the following eight specific cash flow issues: (a) debt prepayment
or debt extinguishment costs; (b) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates
that are insignificant in relation to the effective interest rate of the borrowing; (c) contingent consideration payments made
after a business combination; (d) proceeds from the settlement of insurance claims; (e) proceeds from the settlement of corporate-owned
life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); (f) distributions received from equity
method investees; (g) beneficial interests in securitization transactions; and separately identifiable cash flows and application
of the predominance principle. The amendments in this Update apply to all entities, including both business entities and not-for-profit
entities that are required to present a statement of cash flows under Topic 230. ASU 2016-15 is effective for public business entities
for annual periods beginning after December 15, 2017, and interim periods within those annual periods, and for all other entities
for annual periods beginning after December 15, 2018 and interim periods within annual periods beginning after December 15, 2019
with early adoption permitted. The Corporation is evaluating the provisions of ASU 2016-15 but believes that its adoption will
not have a material impact on the Corporation’s financial condition or results of operations.
In June 2016, the FASB
issued ASU 2016-13,
Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
.
ASU 2016-13 introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments.
It also modifies the impairment model for available-for-sale (“AFS”) debt securities and provides for a simplified
accounting model for purchases financial assets with credit deterioration since their origination. The new model referred to as
current expected credit losses (“CECL”) model, will apply to: (a) financial assets subject to credit losses and measured
at amortized cost, and (b) certain off-balance sheet credit exposures. This includes loans, held to maturity debt securities, loan
commitments, financial guarantees and net investments in leases as well as reinsurance and trade receivables. The estimate of expected
credit losses (“ECL”) should consider historical information, current information, and supportable forecasts, including
estimates of prepayments. ASU 2016-13 is effective for public business entities for annual periods beginning after December 15,
2019, and interim periods within those annual periods, and for all other entities for annual periods beginning after December 15,
2020 and interim periods within annual periods beginning after December 15, 2018 with early adoption permitted. Management currently
intends to adopt the guidance on January 1, 2020 and is assessing the impact of this guidance on the Corporation’s financial
condition and results of operations. Management has formed a focus group consisting of multiple members from areas including credit,
finance, and information systems. The focus group is evaluating the requirements of the new standard and the impact it will have
on our processes. The Corporation is still in the process of determining the impact on the Corporation’s financial condition
or results of operations.
In March 2016, the
FASB issued ASU 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
.
ASU 2016-09 introduces amendments intended to simplify the accounting for stock compensation. ASU 2016-09 requires all excess tax
benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement. The tax effects of exercised
or vested awards should be treated as discrete items in the reporting period in which they occur. An entity should also recognize
excess tax benefits, and assess the need for a valuation allowance, regardless of whether the benefit reduces taxes payable in
the current period. The ASU also requires excess tax benefits be classified along with other income tax cash flows as an operating
activity in the statement of cash flows. ASU 2016-09 is effective for public business entities for annual periods beginning after
December 15, 2016, and interim periods within those annual periods, and for all other entities for annual periods beginning after
December 15, 2017 and interim periods within annual periods beginning after December 15, 2018 with early adoption permitted. The
Corporation is evaluating the provisions of ASU 2016-09, but believes that its adoption will not have a material impact on the
Corporation’s financial condition or results of operations.
In February 2016, the
FASB issued ASU 2016-02,
Leases (Topic 842)
. ASU 2016-02 is intended to improve financial reporting about leasing transactions
by requiring organizations that lease assets – referred to as “lessees” – to recognize on the balance sheet
the assets and liabilities for the rights and obligations created by those leases. Under the new guidance, a lessee will be required
to recognize assets and liabilities related to certain operating leases on the balance sheet. The amendments will require disclosures
to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising
from leases. ASU 2016-02 applies to all public business entities for annual and interim periods after December 15, 2018, and for
all other entities for annual periods beginning after December 15, 2019 and interim periods beginning after December 15, 2020 with
early adoption permitted. Management is currently assessing the impact of the new guidance but expects to report higher assets
and liabilities as a result of including additional leases on the consolidated balance sheet.
In January 2016, the
FASB issued ASU 2016-01,
Financial Instruments – Overall (Subtopic 825-10).
The update requires all equity investments
to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under
equity method of accounting or those that result in consolidation of the investee). The update also requires an entity to present
separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change
in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the
fair value option for financial instruments. In addition, the update eliminates the requirement to disclose the fair value of financial
instruments measured at amortized cost for entities that are not public business entities and the requirement for to disclose the
methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments
measure at amortized cost on the balance sheet for public entities. For public business entities, the amendments are effective
for annual periods beginning after December 15, 2017, including interim periods within the annual period, and for all other entities,
effective for annual periods beginning after December 15, 2018 and interim periods within annual periods beginning after December
15, 2019. Early application is permitted. The Corporation is evaluating the provisions of ASU 2016-01, but believes that its adoption
will not have a material impact on the Corporation’s financial condition or results of operations.
In May 2014, the FASB
issued ASU 2014-09,
Revenue from Contracts with Customers,
which establishes a comprehensive revenue recognition standard
for virtually all industries under U.S. GAAP, including those that previously followed industry-specific guidance such as the real
estate, construction and software industries. ASU 2014-09 specifies that an entity shall recognize revenue when, or as, the entity
satisfies a performance obligation by transferring a promised good or service (i.e. an asset) to a customer. An asset is transferred
when, or as, the customer obtains control of the asset. Entities are required to disclose qualitative and quantitative information
on the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
ASU
2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Because the guidance
does not apply to revenue associated with financial instruments, including loans and securities, the new guidance is not expected
to have a material impact on the components of the consolidated statement of income related to financial instruments, including
securities gains/losses and interest income. However, we do believe the new standard will result in new disclosure requirements.
The Corporation is currently evaluating this guidance on other components of non-interest income such as service charges, payment
processing fees, trust services fees, and brokerage services fees. The new guidance is not expected to have a
material impact
on the
Corporation
’s financial condition or results of operations.