Quarterly Report




 
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q  
(Mark One )
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2017
 
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________ to _____________
 
Commission File Number: 001-34527
 
EMCLAIRE FINANCIAL CORP
(Exact name of registrant as specified in its charter)
 
Pennsylvania
25-1606091
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
 
 
612 Main Street, Emlenton, Pennsylvania
16373
(Address of principal executive offices)
(Zip Code)
(844) 767-2311
(Registrant’s telephone number)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x  No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x

Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                            Yes ¨ No x
 
The number of shares outstanding of the Registrant’s common stock was 2,264,389 at November 12, 2017.
 
 
 
 
 





EMCLAIRE FINANCIAL CORP
 
INDEX TO QUARTERLY REPORT ON FORM 10-Q
  
 
 
 
 
 
Item 1.
 
 
 
 
 
Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016
 
 
 
 
Consolidated Statements of Net Income for the three and nine months ended September 30, 2017 and 2016
 
 
 
 
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016
 
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2017 and 2016
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 







PART I - FINANCIAL INFORMATION

Item 1. Interim Financial Statements

Emclaire Financial Corp
Consolidated Balance Sheets (Unaudited)
As of September 30, 2017 and December 31, 2016
(Dollar amounts in thousands, except share and per share data)
 
September 30,
2017
 
December 31,
2016
Assets
 

 
 

 
 
 
 
Cash and due from banks
$
3,216

 
$
2,758

Interest earning deposits with banks
37,040

 
14,810

Cash and cash equivalents
40,256

 
17,568

Securities available for sale
101,301

 
101,560

Loans held for sale

 
68

Loans receivable, net of allowance for loan losses of $5,940 and $5,545
574,736

 
515,435

Federal bank stocks, at cost
4,906

 
4,861

Bank-owned life insurance
11,639

 
11,390

Accrued interest receivable
2,228

 
1,815

Premises and equipment, net
18,405

 
18,282

Goodwill
10,288

 
10,288

Core deposit intangible, net
550

 
560

Prepaid expenses and other assets
9,631

 
10,308

 
 
 
 
Total Assets
$
773,940

 
$
692,135

 
 
 
 
Liabilities and Stockholders' Equity
 

 
 

 
 
 
 
Liabilities:
 

 
 

Deposits:
 

 
 

Non-interest bearing
$
129,870

 
$
123,717

Interest bearing
532,682

 
461,223

Total deposits
662,552

 
584,940

Short-term borrowed funds
2,500

 
9,500

Long-term borrowed funds
38,750

 
34,500

Accrued interest payable
399

 
239

Accrued expenses and other liabilities
9,986

 
8,883

 
 
 
 
Total Liabilities
714,187

 
638,062

 
 
 
 
Commitments and Contingent Liabilities

 

 
 
 
 
Stockholders' Equity:


 


Common stock, $1.25 par value, 12,000,000 shares authorized; 2,366,406 and 2,254,375 shares issued; 2,264,389 and 2,152,358 shares outstanding, respectively
2,958

 
2,818

Additional paid-in capital
30,974

 
27,900

Treasury stock, at cost; 102,017 shares
(2,114
)
 
(2,114
)
Retained earnings
31,901

 
29,960

Accumulated other comprehensive loss
(3,966
)
 
(4,491
)
 
 
 
 
Total Stockholders' Equity
59,753

 
54,073

 
 
 
 
Total Liabilities and Stockholders' Equity
$
773,940

 
$
692,135



 See accompanying notes to consolidated financial statements.

1





Emclaire Financial Corp
Consolidated Statements of Net Income (Unaudited)
For the three and nine months ended September 30, 2017 and 2016
(Dollar amounts in thousands, except share and per share data) 
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Interest and dividend income:
 

 
 

 
 

 
 

Loans receivable, including fees
$
5,966

 
$
5,444

 
$
17,333

 
$
15,331

Securities:
 

 
 

 
 

 
 

Taxable
421

 
396

 
1,208

 
1,270

Exempt from federal income tax
134

 
157

 
418

 
473

Federal bank stocks
64

 
49

 
179

 
135

Interest earning deposits with banks
98

 
48

 
151

 
110

Total interest and dividend income
6,683

 
6,094

 
19,289

 
17,319

 
 
 
 
 
 
 
 
Interest expense:
 

 
 

 
 

 
 

Deposits
824

 
781

 
2,276

 
2,091

Borrowed funds
322

 
308

 
954

 
847

Total interest expense
1,146

 
1,089

 
3,230

 
2,938

 
 
 
 
 
 
 
 
Net interest income
5,537

 
5,005

 
16,059

 
14,381

Provision for loan losses
270

 
168

 
633

 
470

 
 
 
 
 
 
 
 
Net interest income after provision for loan losses
5,267

 
4,837

 
15,426

 
13,911

 
 
 
 
 
 
 
 
Noninterest income:
 

 
 

 
 

 
 

Fees and service charges
448

 
433

 
1,290

 
1,164

Net gain on sales of available for sale securities

 

 
350

 
83

Net gain on sales of loans
46

 
121

 
176

 
121

Other-than-temporary impairment loss

 

 
(508
)
 

Earnings on bank-owned life insurance
103

 
101

 
305

 
299

Gain on bargain purchase
1,307

 

 
1,307

 

Other
370

 
357

 
1,076

 
1,067

Total noninterest income
2,274

 
1,012

 
3,996

 
2,734

 
 
 
 
 
 
 
 
Noninterest expense:
 

 
 

 
 

 
 

Compensation and employee benefits
2,288

 
2,259

 
6,957

 
6,484

Premises and equipment
718

 
732

 
2,203

 
2,110

Intangible asset amortization
58

 
60

 
177

 
165

Professional fees
157

 
172

 
575

 
545

Federal deposit insurance
115

 
123

 
325

 
305

Acquisition costs
963

 

 
1,069

 
401

Other
1,143

 
1,148

 
3,434

 
2,965

Total noninterest expense
5,442

 
4,494

 
14,740

 
12,975

 
 
 
 
 
 
 
 
Income before provision for income taxes
2,099

 
1,355

 
4,682

 
3,670

Provision for income taxes
392

 
297

 
978

 
880

 
 
 
 
 
 
 
 
Net income
$
1,707

 
$
1,058

 
$
3,704

 
$
2,790

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.77

 
$
0.49

 
$
1.70

 
$
1.30

Diluted earnings per common share
0.77

 
0.49

 
1.69

 
$
1.29

 
 
 
 
 
 
 
 
Average common shares outstanding - basic
2,204,949

 
2,146,308

 
2,174,210

 
2,145,761

Average common shares outstanding - diluted
2,220,420

 
2,158,273

 
2,190,647

 
2,155,902


 See accompanying notes to consolidated financial statements.

2



Emclaire Financial Corp
Consolidated Statements of Comprehensive Income (Unaudited)
For the three and nine months ended September 30, 2017 and 2016
(Dollar amounts in thousands)
 
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
1,707

 
$
1,058

 
$
3,704

 
$
2,790

 
 
 
 
 
 
 
 
Other comprehensive income
 

 
 

 
 

 
 

Unrealized gains on securities:
 

 
 

 
 

 
 

Unrealized holding gain arising during the period
232

 
(271
)
 
638

 
1,760

Reclassification adjustment for gains included in net income

 

 
(350
)
 
(83
)
Reclassification adjustment for other than temporary impairment losses included in net income

 

 
508

 

 
232

 
(271
)
 
796

 
1,677

Tax effect
(79
)
 
92

 
(271
)
 
(570
)
 
 
 
 
 
 
 
 
Net of tax
153

 
(179
)
 
525

 
1,107

 
 
 
 
 
 
 
 
Comprehensive income
$
1,860

 
$
879

 
$
4,229

 
$
3,897

 
See accompanying notes to consolidated financial statements.

3





Emclaire Financial Corp
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the nine months ended September 30, 2017 and 2016
(Dollar amounts in thousands)
 
For the nine months ended September 30,
 
2017
 
2016
Cash flows from operating activities
 

 
 

Net income
$
3,704

 
$
2,790

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
864

 
835

Provision for loan losses
633

 
470

Amortization of premiums, net
367

 
300

Amortization of intangible assets and mortgage servicing rights
213

 
179

Impairment loss on security recognized in earnings
508

 

Realized gains on sales of available for sale securities, net
(350
)
 
(83
)
Net gains on sales of loans
(176
)
 
(121
)
Net gains on foreclosed real estate
(10
)
 
(17
)
Gain on bargain purchase
(1,307
)
 

Loss on sale of premises and equipment

 
10

Loans originated for sale
(4,266
)
 
(1,101
)
Proceeds from the sale of loans originated for sale
4,418

 
1,078

Stock compensation expense
164

 
154

Increase in bank-owned life insurance, net
(249
)
 
(248
)
Increase in accrued interest receivable
(310
)
 
(234
)
(Increase) decrease in prepaid expenses and other assets
1,265

 
(271
)
Increase in accrued interest payable
154

 
28

Increase (decrease) in accrued expenses and other liabilities
1,095

 
(465
)
Net cash provided by operating activities
6,717

 
3,304

 
 
 
 
Cash flows from investing activities
 

 
 

Loan originations and principal collections, net
(43,771
)
 
(8,071
)
Purchase of residential mortgage loans

 
(6,911
)
Proceeds from sales of loans held for sale previously classified as portfolio loans
1,817

 
1,944

Available for sale securities:
 

 
 

     Sales
18,195

 
6,118

     Maturities, repayments and calls
7,818

 
15,478

     Purchases
(25,163
)
 
(9,270
)
Net cash (received) paid for acquisition
2,517

 
(3,309
)
Redemption (purchase) of federal bank stocks
(34
)
 
1,364

Proceeds from the sale of foreclosed real estate
144

 
215

Purchases of premises and equipment
(279
)
 
(1,943
)
Net cash used in investing activities
(38,756
)
 
(4,385
)
 
 
 
 
Cash flows from financing activities
 

 
 

Net increase in deposits
57,864

 
30,013

Repayments on long-term debt
(750
)
 
(5,250
)
Proceeds from other long-term debt
5,000

 
5,000

Net change in short-term borrowings
(7,000
)
 
(11,750
)
Proceeds from exercise of stock options
1,376

 

Dividends paid
(1,763
)
 
(1,674
)
Net cash provided by financing activities
54,727

 
16,339

 
 
 
 
Increase in cash and cash equivalents
22,688

 
15,258

Cash and cash equivalents at beginning of period
17,568

 
11,546

Cash and cash equivalents at end of period
$
40,256

 
$
26,804

 
 
 
 
Supplemental information:
 

 
 

Interest paid
$
3,070

 
$
2,881

Income taxes paid
875

 
600

 
 
 
 
Supplemental noncash disclosure:
 

 
 

Transfers from loans to foreclosed real estate
272

 
218

Transfers from portfolio loans to loans held for sale
1,725

 
1,859

See accompanying notes to consolidated financial statements.

4



Emclaire Financial Corp
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
For the three and nine months ended September 30, 2017 and 2016
(Dollar amounts in thousands, except per share data)
 
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Balance at beginning of period
$
56,647

 
$
54,851

 
$
54,073

 
$
52,839

 
 
 
 
 
 
 
 
Net income
1,707

 
1,058

 
3,704

 
2,790

 
 
 
 
 
 
 
 
Other comprehensive income (loss)
153

 
(179
)
 
525

 
1,107

 
 
 
 
 
 
 
 
Stock compensation expense
55

 
44

 
164

 
154

 
 
 
 
 
 
 
 
Dividends declared on common stock
(596
)
 
(558
)
 
(1,763
)
 
(1,674
)
 
 
 
 
 
 
 
 
Exercise of stock options (53,586 shares)
113

 

 
1,376

 

 
 
 
 
 
 
 
 
Issuance of common stock (58,445 shares)
1,674

 

 
1,674

 

 
 
 
 
 
 
 
 
Balance at end of period
$
59,753

 
$
55,216

 
$
59,753

 
$
55,216

 
 
 
 
 
 
 
 
Cash dividend per common share
$
0.27

 
$
0.26

 
$
0.81

 
$
0.78

 
See accompanying notes to consolidated financial statements.

5



Emclaire Financial Corp
Notes to Consolidated Financial Statements (Unaudited)

1.
Nature of Operations and Basis of Presentation

Emclaire Financial Corp (the Corporation) is a Pennsylvania corporation and the holding company of The Farmers National Bank of Emlenton (the Bank) and Emclaire Settlement Services, LLC (the Title Company). The Corporation provides a variety of financial services to individuals and businesses through its offices in Western Pennsylvania. Its primary deposit products are checking, savings and term certificate accounts and its primary lending products are residential and commercial mortgages, commercial business loans and consumer loans.
 
The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiaries, the Bank and the Title Company. All significant intercompany transactions and balances have been eliminated in preparing the consolidated financial statements.
 
The accompanying unaudited consolidated financial statements for the interim periods include all adjustments, consisting of normal recurring accruals, which are necessary, in the opinion of management, to fairly reflect the Corporation’s consolidated financial position and results of operations. Additionally, these consolidated financial statements for the interim periods have been prepared in accordance with instructions for the Securities and Exchange Commission’s (SEC’s) Form 10-Q and Article 10 of Regulation S-X and therefore do not include all information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America (GAAP). For further information, refer to the audited consolidated financial statements and footnotes thereto for the year ended December 31, 2016 , as contained in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC.
 
The balance sheet at December 31, 2016 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial statements.
 
The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The results of operations for interim quarterly or year-to-date periods are not necessarily indicative of the results that may be expected for the entire year or any other period. Certain amounts previously reported may have been reclassified to conform to the current year’s financial statement presentation.

2.
Mergers and Acquisitions

On September 30, 2017, the Corporation completed the acquisition of Northern Hancock Bank & Trust Co. (Northern Hancock) in accordance with the terms of the Agreement and Plan of Merger, dated as of May 4, 2017, in exchange for 54,445 shares of common stock valued at $1.7 million and $22,000 in cash. The acquisition expanded the Corporation’s franchise into a new market and increased the Corporation’s consolidated total assets, loans and deposits.
 
The assets and liabilities of Northern Hancock were recorded on the Corporation’s consolidated balance sheet at their estimated fair value as of September 30, 2017.





6



2.
Mergers and Acquisitions (continued)
 
The following table summarizes the estimated fair value of the assets acquired, liabilities assumed and consideration transferred in connection with the acquisition:
 
(Dollar amounts in thousands)
 
 
 
Assets acquired:
 

Cash and cash equivalents
$
2,539

Loans receivable
18,480

Federal bank stocks
11

Accrued interest receivable
103

Premises and equipment
708

Core deposit intangible
167

Prepaid expenses and other assets
757

Total assets acquired
22,765

 
 

Liabilities assumed:
 

Deposits
19,748

Accrued interest payable
6

Accrued expenses and other liabilities
8

Total liabilities assumed
19,762

 
 

Identifiable net assets acquired
3,003

 
 
Consideration paid:
 
Cash
22

Common stock
1,674

Total consideration
1,696

 
 
Gain on bargain purchase
$
1,307

 
 
 
In connection with the acquisition, the Corporation recognized approximately $1.3 million of bargain purchase gain and a $167,000 core deposit intangible. The core deposit intangible will be amortized over a weighted average estimated life of eight years using the double declining balance method. Core deposit intangible expense is expected to be $11,000 for 2017 and is projected for the succeeding four years beginning 2018 to be $40,000 , $30,000 , $22,000 and $17,000 per year, respectively, and $47,000 in total for years after 2021. The bargain purchase gain of $1.3 million , recorded at the date of acquisition, represents the amount by which the acquisition-date fair value of the net identifiable assets acquired exceeded the fair value of the consideration transferred.

While the Corporation believes that the accounting for the acquisition is complete, the fair value of the acquired assets and liabilities noted in the table may change during the provisional period, which may last up to twelve months subsequent to the acquisition date. The Corporation may obtain additional information to refine the valuation of the acquired assets and liabilities and adjust the recorded fair value, although such adjustments are not expected to be significant.

The fair value of loans was estimated using discounted contractual cash flows. The book balance of the loans at the time of the acquisition was $18.5 million before considering Northern Hancocks’s allowance for loan losses, which was not carried over. The fair value disclosed above reflects a credit-related adjustment of $(566,000) and an adjustment for other factors of $537,000 . Loans evidencing credit deterioration since origination (purchased credit impaired loans) included in loans receivable were immaterial.
 




7



2.
Mergers and Acquisitions (continued)
 
For the three months ended September 30, 2017, costs related to the acquisition totaled $963,000 including system conversion costs, contract termination fees, legal fees, employee severance costs, accounting and auditing fees and other costs of $344,000 , $279,000 , $108,000 , $108,000 , $46,000 and $78,000 , respectively. For the nine months ended September 30, 2017, costs related to the acquisition totaled $1.1 million including system conversion costs, contract termination fees, legal fees, employee severance costs, accounting and auditing fees and other costs of $344,000 , $279,000 , $200,000 , $108,000 , $55,000 and $84,000 , respectively. These costs were recognized in noninterest expense as incurred.

3.
Earnings per Common Share

Basic earnings per common share (EPS) excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS includes the dilutive effect of additional potential common shares for assumed issuance of restricted stock and shares issued under stock options.

The factors used in the Corporation’s earnings per common share computation follow:
 
(Dollar amounts in thousands, except for per share amounts)
For the three months ended September 30,
 
For the nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Earnings per common share - basic
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Net income
$
1,707

 
$
1,058

 
$
3,704

 
$
2,790

 
 
 
 
 
 
 
 
Average common shares outstanding
2,204,949

 
2,146,308

 
2,174,210

 
2,145,761

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.77

 
$
0.49

 
$
1.70

 
$
1.30

 
 
 
 
 
 
 
 
Earnings per common share - diluted
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Net income
$
1,707

 
$
1,058

 
$
3,704

 
$
2,790

 
 
 
 
 
 
 
 
Average common shares outstanding
2,204,949

 
2,146,308

 
2,174,210

 
2,145,761

Add: Dilutive effects of assumed issuance of restricted stock and exercise of stock options
15,471

 
11,965

 
16,437

 
10,141

 
 
 
 
 
 
 
 
Average shares and dilutive potential common shares
2,220,420

 
2,158,273

 
2,190,647

 
2,155,902

 
 
 
 
 
 
 
 
Diluted earnings per common share
$
0.77

 
$
0.49

 
$
1.69

 
$
1.29

 
 
 
 
 
 
 
 
Stock options not considered in computing earnings per share because they were antidilutive

 
57,000

 

 
57,000

 
 
 
 
 
 
 
 


8



4.
Securities

The following table summarizes the Corporation’s securities as of September 30, 2017 and December 31, 2016 :
 
(Dollar amounts in thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Available for sale:
 

 
 

 
 

 
 

September 30, 2017:
 

 
 

 
 

 
 

U.S. Treasury and federal agency
$
4,543

 
$

 
$
(29
)
 
$
4,514

U.S. government sponsored entities and agencies
14,147

 
12

 
(119
)
 
14,040

U.S. agency mortgage-backed securities: residential
21,615

 
45

 
(55
)
 
21,605

U.S. agency collateralized mortgage obligations: residential
23,516

 
36

 
(559
)
 
22,993

State and political subdivisions
26,621

 
140

 
(54
)
 
26,707

Corporate debt securities
9,510

 
37

 
(18
)
 
9,529

Equity securities
1,580

 
339

 
(6
)
 
1,913

 
$
101,532

 
$
609

 
$
(840
)
 
$
101,301

December 31, 2016:
 

 
 

 
 

 
 

U.S. Treasury and federal agency
4,550

 

 
(50
)
 
4,500

U.S. government sponsored entities and agencies
9,186

 

 
(188
)
 
8,998

U.S. agency mortgage-backed securities: residential
25,790

 
32

 
(196
)
 
25,626

U.S. agency collateralized mortgage obligations: residential
25,367

 
23

 
(684
)
 
24,706

State and political subdivisions
27,853

 
17

 
(262
)
 
27,608

Corporate debt securities
8,012

 
5

 
(85
)
 
7,932

Equity securities
1,829

 
373

 
(12
)
 
2,190

 
$
102,587

 
$
450

 
$
(1,477
)
 
$
101,560

 
 
 
 
 
 
 
 
 
The following table summarizes scheduled maturities of the Corporation’s debt securities as of September 30, 2017 . Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities and collateralized mortgage obligations are not due at a single maturity and are shown separately.
 
(Dollar amounts in thousands)
Available for sale
 
Amortized
Cost
 
Fair
Value
Due in one year or less
$
2,852

 
$
2,851

Due after one year through five years
26,440

 
26,380

Due after five through ten years
11,860

 
11,899

Due after ten years
13,669

 
13,660

Mortgage-backed securities: residential
21,615

 
21,605

Collateralized mortgage obligations: residential
23,516

 
22,993

 
$
99,952

 
$
99,388

 
 
 
 
 

9



4.
Securities (continued)

Information pertaining to securities with gross unrealized losses at September 30, 2017 and December 31, 2016 , aggregated by investment category and length of time that individual securities have been in a continuous loss position are included in the table below:

(Dollar amounts in thousands)
 
Less than 12 Months
 
12 Months or More
 
Total
Description of Securities
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
September 30, 2017:
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury and federal agency
 
$
4,514

 
$
(29
)
 
$

 
$

 
$
4,514

 
$
(29
)
U.S. government sponsored entities and agencies
 
9,049

 
(111
)
 
1,992

 
(8
)
 
11,041

 
(119
)
U.S. agency mortgage-backed securities: residential
 
6,873

 
(55
)
 

 

 
6,873

 
(55
)
U.S. agency collateralized mortgage obligations: residential
 
5,229

 
(82
)
 
15,928

 
(477
)
 
21,157

 
(559
)
State and political subdivisions
 
5,098

 
(39
)
 
1,646

 
(15
)
 
6,744

 
(54
)
Corporate debt securities
 
2,986

 
(18
)
 

 

 
2,986

 
(18
)
Equity securities
 

 

 
244

 
(6
)
 
244

 
(6
)
 
 
$
33,749

 
$
(334
)
 
$
19,810

 
$
(506
)
 
$
53,559

 
$
(840
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016:
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury and federal agency
 
$
4,500

 
$
(50
)
 
$

 
$

 
$
4,500

 
$
(50
)
U.S. government sponsored entities and agencies
 
8,998

 
(188
)
 

 

 
8,998

 
(188
)
U.S. agency mortgage-backed securities: residential
 
23,279

 
(196
)
 

 

 
23,279

 
(196
)
U.S. agency collateralized mortgage obligations: residential
 
13,568

 
(438
)
 
9,317

 
(246
)
 
22,885

 
(684
)
State and political subdivisions
 
21,924

 
(262
)
 

 

 
21,924

 
(262
)
Corporate debt securities
 
3,927

 
(85
)
 

 

 
3,927

 
(85
)
Equity securities
 

 

 
237

 
(12
)
 
237

 
(12
)
 
 
$
76,196

 
$
(1,219
)
 
$
9,554

 
$
(258
)
 
$
85,750

 
$
(1,477
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains on sales of available for sale securities for the three and nine months ended September 30 were as follows:
(Dollar amounts in thousands)
For the three months
ended September 30,
 
For the nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Proceeds
$

 
$

 
$
18,195

 
$
6,118

Gains

 

 
350

 
83

Tax provision related to gains

 

 
119

 
28

 
 
 
 
 
 
 
 
 
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic, market or other conditions warrant such evaluation. Consideration is given to: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions and (4) whether the Corporation has the intent to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the Corporation intends to sell an impaired security, or if it is more likely than not the Corporation will be required to sell the security before its anticipated recovery, the Corporation records an other-than-temporary loss in an amount equal to the entire difference between fair value and amortized cost. Otherwise, only the credit portion of the estimated loss on debt securities is recognized in earnings, with the other portion of the loss recognized in other comprehensive income. For equity securities determined to be other-than-temporarily impaired, the entire amount of impairment is recognized through earnings.
 

10



4.
Securities (continued)

There was one equity security in an unrealized loss position for more than 12 months as of September 30, 2017 . Equity securities owned by the Corporation consist of common stock of various financial service providers. This investment security is in an unrealized loss position as a result of the illiquid nature of the stock. The Corporation does not invest in these securities with the intent to sell them for a profit in the near term. For investments in equity securities, in addition to the general factors mentioned above for determining whether the decline in market value is other-than-temporary, the analysis of whether an equity security is other-than-temporarily impaired includes a review of the profitability, capital adequacy and other relevant information available to determine the financial position and near term prospects of each issuer. The results of analyzing the aforementioned metrics and financial fundamentals suggest recovery of amortized cost in the near future. Based on that evaluation, and given that the Corporation’s current intention is not to sell any impaired security and it is more likely than not it will not be required to sell this security before the recovery of its amortized cost basis, the Corporation does not consider the equity security with an unrealized loss as of September 30, 2017 to be other-than-temporarily impaired.
 
During the quarter ended June 30, 2017, management determined that an other-than-temporary impairment existed on a corporate debt security due to deterioration in the credit quality of the issuer that would likely result in the non-collection of contractual principal and interest. This security was written down to its fair market value and the resulting impairment loss of $508,000 was recognized in earnings during the quarter ended June 30, 2017.

After recognizing the aforementioned impairment, there were 69 debt securities in an unrealized loss position as of September 30, 2017 , of which 24 were in an unrealized loss position for more than 12 months. Of these 69 securities, 25 were government-backed collateralized mortgage obligations, 17 were state and political subdivision securities, 10 were U.S. government sponsored entity and agency securities, 6 were corporate securities, 6 were mortgage-backed securities and 5 were U.S. Treasury securities. The unrealized losses associated with these securities were not due to the deterioration in the credit quality of the issuer that would likely result in the non-collection of contractual principal and interest, but rather have been caused by a rise in interest rates from the time the securities were purchased. Based on that evaluation and other general considerations, and given that the Corporation’s current intention is not to sell any impaired securities and it is more likely than not it will not be required to sell these securities before the recovery of its amortized cost basis, the Corporation does not consider these debt securities with unrealized losses as of September 30, 2017 to be other-than-temporarily impaired.

5.
Loans Receivable and Related Allowance for Loan Losses

The Corporation’s loans receivable as of the respective dates are summarized as follows:
(Dollar amounts in thousands)
September 30,
2017
 
December 31,
2016
Mortgage loans on real estate:
 

 
 

Residential first mortgages
$
226,946

 
$
198,167

Home equity loans and lines of credit
91,602

 
91,359

Commercial real estate
192,123

 
166,994

 
510,671

 
456,520

Other loans:
 

 
 

Commercial business
60,394

 
57,788

Consumer
9,611

 
6,672

 
70,005

 
64,460

 
 
 
 
Total loans, gross
580,676

 
520,980

 
 
 
 
Less allowance for loan losses
5,940

 
5,545

 
 
 
 
Total loans, net
$
574,736

 
$
515,435

 
 
 
 
 
During the nine months ended September 30, 2017, the Corporation sold $1.1 million of residential mortgage loans and a $590,000 commercial mortgage loan that were previously classified as held for investment.

Included in total loans above are net deferred costs of $1.5 million and $1.3 million at September 30, 2017 and December 31, 2016 , respectively.
 

11



5.
Loans Receivable and Related Allowance for Loan Losses (continued)

An allowance for loan losses (ALL) is maintained to absorb probable incurred 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 nonperforming loans.
 
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.

The allowance for loan losses 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.
 
At September 30, 2017 , there was no allowance for loan losses allocated to loans acquired in the April 2016 acquisition of United American Savings Bank or the September 2017 acquisition of Northern Hancock.
 


12




5.
Loans Receivable and Related Allowance for Loan Losses (continued)

The following table details activity in the ALL and the recorded investment by portfolio segment based on impairment method:
(Dollar amounts in thousands)
Residential
Mortgages
 
Home
Equity
& Lines
of Credit
 
Commercial
Real Estate
 
Commercial
Business
 
Consumer
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2017:
 

 
 

 
 

 
 

 
 

 
 

Allowance for loan losses:
 

 
 

 
 

 
 

 
 

 
 

Beginning Balance
$
1,994

 
$
639

 
$
2,460

 
$
621

 
$
53

 
$
5,767

Charge-offs
(2
)
 
(33
)
 
(36
)
 
(4
)
 
(26
)
 
(101
)
Recoveries

 
1

 
2

 

 
1

 
4

Provision
46

 
20

 
200

 
(21
)
 
25

 
270

 
 
 
 
 
 
 
 
 
 
 
 
Ending Balance
$
2,038

 
$
627

 
$
2,626

 
$
596

 
$
53

 
$
5,940

 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2017:
 

 
 

 
 

 
 

 
 

 
 

Allowance for loan losses:
 

 
 

 
 

 
 

 
 

 
 

Beginning Balance
$
1,846

 
$
633

 
$
2,314

 
$
700

 
$
52

 
$
5,545

Charge-offs
(38
)
 
(44
)
 
(126
)
 
(14
)
 
(53
)
 
(275
)
Recoveries

 
21

 
6

 

 
10

 
37

Provision
230

 
17

 
432

 
(90
)
 
44

 
633

 
 
 
 
 
 
 
 
 
 
 
 
Ending Balance
$
2,038

 
$
627

 
$
2,626

 
$
596

 
$
53

 
$
5,940

 
 
 
 
 
 
 
 
 
 
 
 
At September 30, 2017:
 

 
 

 
 

 
 

 
 

 
 

Ending ALL balance attributable to loans:
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
8

 
$

 
$

 
$

 
$

 
$
8

Acquired loans collectively evaluated for impairment

 

 

 

 

 

Originated loans collectively evaluated for impairment
2,030

 
627

 
2,626

 
596

 
53

 
5,932

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
2,038

 
$
627

 
$
2,626

 
$
596

 
$
53

 
$
5,940

 
 
 
 
 
 
 
 
 
 
 
 
Total loans:
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
433

 
$

 
$
939

 
$
585

 
$

 
$
1,957

Acquired loans collectively evaluated for impairment
28,792

 
3,697

 
28,916

 
2,390

 
2,382

 
66,177

Originated loans collectively evaluated for impairment
197,721

 
87,905

 
162,268

 
57,419

 
7,229

 
512,542

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
226,946

 
$
91,602

 
$
192,123

 
$
60,394

 
$
9,611

 
$
580,676

 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2016:
 

 
 

 
 

 
 

 
 

 
 

Ending ALL balance attributable to loans:
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
19

 
$

 
$
95

 
$
6

 
$

 
$
120

Acquired loans collectively evaluated for impairment

 

 

 

 

 

Originated loans collectively evaluated for impairment
1,827

 
633

 
2,219

 
694

 
52

 
5,425

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
1,846

 
$
633

 
$
2,314

 
$
700

 
$
52

 
$
5,545

 
 
 
 
 
 
 
 
 
 
 
 
Total loans:
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
135

 
$

 
$
1,014

 
$
684

 
$

 
$
1,833

Acquired loans collectively evaluated for impairment
25,024

 
5,225

 
27,492

 
1,182

 
13

 
58,936

Originated loans collectively evaluated for impairment
173,008

 
86,134

 
138,488

 
55,922

 
6,659

 
460,211

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
198,167

 
$
91,359

 
$
166,994

 
$
57,788

 
$
6,672

 
$
520,980

 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2016:
 

 
 

 
 

 
 

 
 

 
 

Allowance for loan losses:
 

 
 

 
 

 
 

 
 

 
 

Beginning Balance
$
1,696

 
$
645

 
$
2,118

 
$
920

 
$
52

 
$
5,431

Charge-offs
(22
)
 
(19
)
 
(11
)
 
(11
)
 
(31
)
 
(94
)
Recoveries

 
1

 
2

 

 
6

 
9

Provision
58

 
(1
)
 
10

 
75

 
26

 
168

 
 
 
 
 
 
 
 
 
 
 
 
Ending Balance
$
1,732

 
$
626

 
$
2,119

 
$