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Section 1: 10-Q (10-Q)

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 FORM 10-Q

 

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2019

 

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: 0-15536

 

CODORUS VALLEY BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Pennsylvania  23-2428543
 (State or other jurisdiction of incorporation or organization)  (I.R.S. Employer Identification No.)

 

 

105 Leader Heights Road, P.O. Box 2887, York, Pennsylvania 17405
(Address of principal executive offices) (Zip code)

 

717-747-1519

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year,

if changed since the last report.)

 

 

 

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

Title of each class Trading Symbol Name of each exchange on which
registered
Common Stock, $2.50 par value CVLY NASDAQ Global Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter 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☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes☒   No ☐

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 ☒
    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 ☒

 

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. On July 25, 2019, 9,413,333 shares of common stock, par value $2.50, were outstanding.

 

 

- 1 -

 

Codorus Valley Bancorp, Inc.

Form 10-Q Index

 

 

PART I – FINANCIAL INFORMATION Page #
     
Item 1. Financial statements (unaudited):  
  Consolidated balance sheets 3
  Consolidated statements of income 4
  Consolidated statements of comprehensive income 5
  Consolidated statements of cash flows 6
  Consolidated statements of changes in shareholders’ equity 7
  Notes to consolidated financial statements 8
     
Item 2. Management’s discussion and analysis of financial condition and results of operations 41
     
Item 3. Quantitative and qualitative disclosures about market risk 65
     
Item 4. Controls and procedures 67
     
PART II – OTHER INFORMATION  
     
Item 1. Legal proceedings 67
     
Item 1A. Risk factors 67
     
Item 2. Unregistered sales of equity securities and use of proceeds 67
     
Item 3. Defaults upon senior securities 68
     
Item 4. Mine safety disclosures 68
     
Item 5. Other information 68
     
Item 6. Exhibits 69
     
SIGNATURES   70

 

- 2 -

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Codorus Valley Bancorp, Inc.

Consolidated Balance Sheets

 

   (Unaudited)   
   June 30,  December 31,
(dollars in thousands, except per share data)  2019  2018
Assets          
Interest bearing deposits with banks  $106,510   $69,103 
Cash and due from banks   20,070    27,679 
Total cash and cash equivalents   126,580    96,782 
Securities, available-for-sale   153,914    149,593 
Restricted investment in bank stocks, at cost   4,551    5,922 
Loans held for sale   8,631    4,127 
Loans (net of deferred fees of $3,552 - 2019 and $3,722 - 2018)   1,473,878    1,485,680 
Less-allowance for loan losses   (21,174)   (19,144)
Net loans   1,452,704    1,466,536 
Premises and equipment, net   26,977    24,724 
Operating leases right-of-use assets   2,563    0 
Goodwill   2,301    2,301 
Other assets   64,134    57,495 
Total assets  $1,842,355   $1,807,480 
           
Liabilities          
Deposits          
Noninterest bearing  $264,297   $252,777 
Interest bearing   1,268,798    1,242,503 
Total deposits   1,533,095    1,495,280 
Short-term borrowings   9,986    7,022 
Long-term debt   96,769    115,310 
Operating leases liabilities   2,742    0 
Other liabilities   12,243    11,122 
Total liabilities   1,654,835    1,628,734 
           
Shareholders’ equity          
Preferred stock, par value $2.50 per share;          
1,000,000 shares authorized;  0 shares issued and outstanding   0    0 
Common stock, par value $2.50 per share; 30,000,000 shares authorized;          
shares issued: 9,461,918 at June 30, 2019 and 9,451,547 at December 31, 2018; and shares outstanding: 9,437,233 at June 30, 2019 and 9,451,547 at December 31, 2018   23,655    23,629 
Additional paid-in capital   134,943    134,506 
Retained earnings   28,563    22,837 
Accumulated other comprehensive income (loss)   892    (2,226)
Treasury stock, at cost; 24,685 shares at June 30, 2019   (533)   0 
Total shareholders’ equity   187,520    178,746 
Total liabilities and shareholders’ equity  $1,842,355   $1,807,480 

 

See accompanying notes.

 

- 3 -

 

Codorus Valley Bancorp, Inc.

Consolidated Statements of Income

Unaudited

 

   Three months ended  Six months ended
   June 30,  June 30,
(dollars in thousands, except per share data)  2019  2018  2019  2018
Interest income                    
Loans, including fees  $19,974   $18,646   $39,484   $36,143 
Investment securities:                    
Taxable   744    568    1,420    1,134 
Tax-exempt   171    275    380    556 
Dividends   88    95    207    218 
Other   558    250    920    376 
Total interest income   21,535    19,834    42,411    38,427 
                     
Interest expense                    
Deposits   4,616    3,070    9,236    5,702 
Federal funds purchased and other short-term borrowings   11    18    20    33 
Long-term debt   665    667    1,381    1,268 
Total interest expense   5,292    3,755    10,637    7,003 
Net interest income   16,243    16,079    31,774    31,424 
Provision for loan losses   1,200    300    2,250    500 
Net interest income after provision for loan losses   15,043    15,779    29,524    30,924 
                     
Noninterest income                    
Trust and investment services fees   881    781    1,721    1,571 
Income from mutual fund, annuity and insurance sales   296    237    531    551 
Service charges on deposit accounts   1,208    1,195    2,366    2,298 
Income from bank owned life insurance   292    241    659    482 
Other income   645    531    1,054    857 
Gain on sales of loans held for sale   319    558    537    1,001 
Gain (loss) on sales of securities   1    0    (3)   0 
Total noninterest income   3,642    3,543    6,865    6,760 
                     
Noninterest expense                    
Personnel   7,391    6,884    15,097    14,696 
Occupancy of premises, net   900    825    1,863    1,696 
Furniture and equipment   775    747    1,547    1,561 
Postage, stationery and supplies   175    192    359    364 
Professional and legal   222    143    331    323 
Marketing   374    419    723    827 
FDIC insurance   223    136    460    304 
Debit card processing   317    296    640    584 
Charitable donations   134    164    979    1,673 
Telecommunications   130    144    256    381 
External data processing   616    537    1,172    984 
Foreclosed real estate including provision for losses   47    11    134    20 
Other   1,200    1,125    1,504    1,467 
Total noninterest expense   12,504    11,623    25,065    24,880 
Income before income taxes   6,181    7,699    11,324    12,804 
Provision for income taxes   1,322    1,645    2,374    2,667 
Net income  $4,859   $6,054   $8,950   $10,137 
Net income per share, basic  $0.51   $0.65   $0.95   $1.08 
Net income per share, diluted  $0.51   $0.64   $0.94   $1.07 

 

See accompanying notes.

 

- 4 -

 

Codorus Valley Bancorp, Inc.

Consolidated Statements of Comprehensive Income

Unaudited

 

   Three months ended
   June 30,
(dollars in thousands)  2019  2018
Net income  $4,859   $6,054 
Other comprehensive income (loss):          
Securities available for sale:          
Net unrealized holding gains (losses) arising during the period          
(net of tax expense (benefit) of $457 and $(110), respectively)   1,720    (412)
Reclassification adjustment for gains included in net income          
(net of tax benefit of $0 and $0, respectively) (a) (b)   (1)   0 
Net unrealized gains (losses)   1,719    (412)
Comprehensive income  $6,578   $5,642 

 

   Six months ended
   June 30,
(dollars in thousands)  2019  2018
Net income  $8,950   $10,137 
Other comprehensive income (loss):          
Securities available for sale:          
Net unrealized holding gains (losses) arising during the period          
(net of tax expense (benefit) of $828 and ($585), respectively)   3,116    (2,200)
Reclassification adjustment for losses included in net income          
(net of tax benefit of $1 and $0, respectively) (a) (b)   2    0 
Net unrealized gains (losses)   3,118    (2,200)
Comprehensive income  $12,068   $7,937 

 

(a)Amounts are included in net gain on sales of securities on the Consolidated Statements of Income within noninterest income.

(b)Income tax amounts are included in the provision for income taxes on the Consolidated Statements of Income.

 

See accompanying notes.

 

- 5 -

 

Codorus Valley Bancorp, Inc.

Consolidated Statements of Cash Flows

Unaudited

 

   Six months ended
   June 30,
(dollars in thousands)  2019  2018
Cash flows from operating activities          
Net income  $8,950   $10,137 
Adjustments to reconcile net income to net cash provided by operations:          
Depreciation/amortization   1,309    1,183 
Net amortization of premiums on securities   132    234 
Amortization of deferred loan origination fees and costs   (630)   (916)
Amortization of operating lease right of use assets   334    0 
Provision for loan losses   2,250    500 
Increase in bank owned life insurance   (659)   (482)
Originations of mortgage loans held for sale   (16,807)   (20,064)
Originations of SBA loans held for sale   (5,430)   (8,546)
Proceeds from sales of mortgage loans held for sale   15,835    20,390 
Proceeds from sales of SBA loans held for sale   2,311    7,948 
Gain on sales of mortgage loans held for sale   (355)   (485)
Gain on sales of SBA loans held for sale   (182)   (516)
Gain on disposal of premises and equipment   (15)   (11)
Loss on sales of securities, available-for-sale   3    0 
Loss on sales of foreclosed real estate   3    1 
Stock-based compensation   253    332 
Decrease in interest receivable   334    96 
(Increase) decrease in other assets   (476)   441 
Increase in interest payable   47    125 
Increase in other liabilities   1,087    3,506 
Net cash provided by operating activities   8,294    13,873 
Cash flows from investing activities          
Purchases of securities, available-for-sale   (21,669)   (6,578)
Maturities, repayments and calls of securities, available-for-sale   11,386    12,053 
Sales of securities, available-for-sale   9,777    0 
Net decrease (increase) in restricted investment in bank stock   1,371    (211)
Net decrease (increase) in loans made to customers   12,212    (65,350)
Purchases of premises and equipment   (2,270)   (1,075)
Investment in bank owned life insurance   (6,600)   0 
Proceeds from sales of foreclosed real estate   16    114 
Net cash provided by (used in) investing activities   4,223    (61,047)
Cash flows from financing activities          
Net (decrease) increase in demand and savings deposits   (18,729)   50,277 
Net increase in time deposits   56,544    8,040 
Net increase (decrease) increase in short-term borrowings   2,964    (7,531)
Proceeds from issuance of long-term debt   0    30,000 
Repayment of long-term debt   (20,000)   (25,000)
Cash dividends paid to shareholders   (3,025)   (2,764)
Treasury stock reissued   88    0 
Treasury stock purchased   (762)   0 
Issuance of stock   201    649 
Net cash provided by financing activities   17,281    53,671 
Net increase in cash and cash equivalents   29,798    6,497 
Cash and cash equivalents at beginning of year   96,782    79,524 
Cash and cash equivalents at end of period  $126,580   $86,021 

 

See accompanying notes.

 

- 6 -

 

Codorus Valley Bancorp, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

Unaudited

               Accumulated      
         Additional     Other      
   Preferred  Common  Paid-in  Retained  Comprehensive  Treasury   
(dollars in thousands, except per share data)  Stock  Stock  Capital  Earnings  (Loss) Income  Stock  Total
                      
Balance, January 1, 2019  $0   $23,629   $134,506   $22,837   $(2,226)  $0   $178,746 
Net income                  4,091              4,091 
Other comprehensive income, net of tax                       1,399         1,399 
Cash dividends  ($0.160 per share)                  (1,512)             (1,512)
Adoption of ASC topic 842 (leases)                  (199)             (199)
Stock-based compensation             135                   135 
Forfeiture of restricted stock and withheld shares             2              (4)   (2)
Issuance and reissuance of stock:                                   
6,646 shares under the dividend reinvestment and stock purchase plan        17    132                   149 
                                    
Balance, March 31, 2019  $0   $23,646   $134,775   $25,217   $(827)  $(4)  $182,807 
                                    
Balance, April 1, 2019  $0   $23,646   $134,775   $25,217   $(827)  $(4)  $182,807 
Net income                  4,859              4,859 
Other comprehensive income, net of tax                       1,719         1,719 
Cash dividends  ($0.160 per share)                  (1,513)             (1,513)
Stock-based compensation             118                   118 
Forfeiture of restricted stock and withheld shares             5              (5)   0 
Repurchased stock - 35,600 shares                            (762)   (762)
Issuance and reissuance of stock:                                   
6,605 shares under the dividend reinvestment  and stock purchase plan        9    128              9    146 
4,221 shares under the stock option plan             (69)             88    19 
6,694 shares under employee stock purchase plan             (14)             141    127 
                                    
Balance, June 30, 2019  $0   $23,655   $134,943   $28,563   $892   $(533)  $187,520 
                                    
Balance, January 1, 2018  $0   $22,265   $120,052   $22,860   $(958)  $0   $164,219 
Net income                  4,083              4,083 
Other comprehensive loss, net of tax                       (1,788)        (1,788)
Cash dividends ($0.148 per share, adjusted)                  (1,381)             (1,381)
Stock-based compensation             230                   230 
Forfeiture of restricted stock and withheld shares                            (63)   (63)
Issuance and reissuance of stock:                                   
5,518 shares under the dividend reinvestment and stock purchase plan        9    76              57    142 
13,736 shares under the stock option plan        34    205                   239 
1,816 shares of stock-based compensation awards        4    (4)                  0 
                                    
Balance, March 31, 2018  $0   $22,312   $120,559   $25,562   $(2,746)  $(6)  $165,681 
                                    
Balance, April 1, 2018  $0   $22,312   $120,559   $25,562   $(2,746)  $(6)  $165,681 
Net income                  6,054              6,054 
Other comprehensive loss, net of tax                       (412)        (412)
Cash dividends ($0.148 per share, adjusted)                  (1,383)             (1,383)
Stock-based compensation             102                   102 
Forfeiture of restricted stock             5              (7)   (2)
Issuance and reissuance of stock:                                   
4,585 shares under the dividend reinvestment  and stock purchase plan        11    122                   133 
11,624 shares under the stock option plan        28    45              9    82 
5,125 shares under employee stock purchase plan        9    105              4    118 
                                    
Balance, June 30, 2018  $0   $22,360   $120,938   $30,233   $(3,158)  $0   $170,373 

 

See accompanying notes.

 

- 7 -

 

Note 1—Summary of Significant Accounting Policies

 

Nature of Operations and Basis of Presentation

The accompanying consolidated balance sheet at December 31, 2018 has been derived from audited financial statements, and the unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Form 10-Q, and FASB Accounting Standards Codification (ASC) 270. Accordingly, the interim financial statements do not include all of the financial information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the interim consolidated financial statements include all adjustments necessary to present fairly the financial condition and results of operations for the reported periods, and all such adjustments are of a normal and recurring nature.

 

Codorus Valley Bancorp, Inc. (“Corporation” or “Codorus Valley”) is a one-bank holding company headquartered in York, Pennsylvania that provides a full range of banking services through its subsidiary, PeoplesBank, A Codorus Valley Company (“PeoplesBank” or “Bank”). PeoplesBank operates three wholly-owned subsidiaries as of June 30, 2019. Codorus Valley Financial Advisors, Inc. d/b/a PeoplesWealth Advisors, which sells nondeposit investment products in Pennsylvania; SYC Settlement Services, Inc., which provides real estate settlement services and Codorus Valley Financial Advisors, Inc. d/b/a PeoplesWealth Advisors, which sells nondeposit investment products in Maryland. In addition, PeoplesBank may periodically create nonbank subsidiaries for the purpose of temporarily holding foreclosed properties pending the liquidation of these properties. PeoplesBank operates under a state charter and is subject to regulation by the Pennsylvania Department of Banking and Securities, and the Federal Deposit Insurance Corporation. The Corporation is subject to regulation by the Federal Reserve Board and the Pennsylvania Department of Banking and Securities.

 

The consolidated financial statements include the accounts of Codorus Valley and its wholly-owned bank subsidiary, PeoplesBank, and a wholly-owned nonbank subsidiary, SYC Realty Company, Inc. SYC Realty was inactive during the period ended June 30, 2019. The accounts of CVB Statutory Trust No. 1 and No. 2 are not included in the consolidated financial statements as discussed in Note 7—Short-Term Borrowings and Long-Term Debt. All significant intercompany account balances and transactions have been eliminated in consolidation. The accounting and reporting policies of Codorus Valley and subsidiaries conform to accounting principles generally accepted in the United States of America and have been followed on a consistent basis.

 

These consolidated statements should be read in conjunction with the notes to the audited consolidated financial statements contained in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

The results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the full year.

 

In accordance with FASB ASC 855, the Corporation evaluated the events and transactions that occurred after the balance sheet date of June 30, 2019 and through the date these consolidated financial statements were issued, for items of potential recognition or disclosure.

 

- 8 -

 

 

Loans

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances less amounts charged off, net of an allowance for loan losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Generally, loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) over the contractual life of the loan. The loans receivable portfolio is segmented into commercial and consumer loans. Commercial loans consist of the following industry classes: builder & developer, commercial real estate investor, residential real estate investor, hotel/motel, wholesale & retail, agriculture, manufacturing and all other. Consumer loans consist of the following classes: residential mortgage, home equity and all other.

 

Generally, for all classes of loans receivable, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan may be currently performing. A past due loan may remain on accrual status if it is in the process of collection and well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans, including impaired loans, generally is either applied against principal or reported as interest income, according to the Corporation’s judgment as to the collectability of principal. Generally, nonaccrual loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, generally six months, and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments.

 

Allowance for Loan Losses

The allowance for loan losses represents the Corporation’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectable are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. While the Corporation attributes a portion of the allowance to individual loans and groups of loans that it evaluates and determines to be impaired, the allowance is available to cover all charge-offs that arise from the loan portfolio.

 

The allowance for loan losses is maintained at a level considered by management to be adequate to provide for losses that can be reasonably anticipated. The Corporation performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

 

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired, generally nonaccrual loans and troubled debt restructurings. For loans that are classified as impaired, an allowance is established when the collateral value (or discounted cash flows or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class, including commercial loans not considered impaired, as well as smaller balance homogeneous loans such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these classes of loans, adjusted for qualitative (environmental) risk factors. Historical loss rates are based on a two year rolling average of net charge-offs. Qualitative risk factors that supplement historical losses in the evaluation of loan pools are shown below. Each factor is assigned a value to reflect improving, stable or declining conditions based on the Corporation’s best judgment using relevant information available at the time of the evaluation.

 

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Changes in national and local economies and business conditions

Changes in the value of collateral for collateral dependent loans

Changes in the level of concentrations of credit

Changes in the volume and severity of classified and past due loans

Changes in the nature and volume of the portfolio

Changes in collection, charge-off, and recovery procedures

Changes in underwriting standards and loan terms

Changes in the quality of the loan review system

Changes in the experience/ability of lending management and key lending staff

Regulatory and legal regulations that could affect the level of credit losses

Other pertinent environmental factors

 

The unallocated component is maintained to cover uncertainties that could affect the Corporation’s estimate of probable losses. For example, increasing credit risks and uncertainties, not yet reflected in current leading indicators, associated with prolonged low economic growth, or recessionary business conditions for certain industries or the broad economy, or the erosion of real estate values, represent risk factors, the occurrence of any or all of which can adversely affect a borrowers’ ability to service their loans.

 

As disclosed in Note 4—Loans, the Corporation engages in commercial and consumer lending. Loans are made within the Corporation’s primary market area and surrounding areas, and include the purchase of whole loan or participation interests in loans from other financial institutions. Commercial loans, which pose the greatest risk of loss to the Corporation, whether originated or purchased, are generally secured by real estate. Within the broad commercial loan segment, the builder & developer and commercial real estate investor loan classes generally present a higher level of risk than other commercial loan classifications. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income producing properties, unstable real estate prices and the dependency upon successful construction and sale or operation of the real estate project. Within the consumer loan segment, junior (i.e., second) liens present a higher risk to the Corporation because economic and housing market conditions can adversely affect the underlying value of the collateral, which could render the Corporation under-secured or unsecured. In addition, economic and housing market conditions can adversely affect the ability of some borrowers to service their debt.

 

A loan is considered impaired when, based on current information and events, it is probable that the Corporation 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 in determining impairment include payment status and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. The Corporation 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. Loans that are deemed impaired are evaluated for impairment loss based on the net realizable value of the collateral, as applicable. Loans that are not collateral dependent will rely on the present value of expected future cash flows discounted at the loan’s effective interest rate to determine impairment loss. Large groups of smaller balance homogeneous loans such as residential mortgage loans, home equity loans and other consumer loans are collectively evaluated for impairment, unless they are classified as impaired.

 

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An allowance for loan losses is established for an impaired commercial loan if its carrying value exceeds its estimated fair value. For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals of the underlying collateral. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the most recent appraisal and the condition of the property. Appraisals are generally discounted to provide for selling costs and other factors to determine an estimate of the net realizable value of the property. For commercial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets. In instances when specific consumer related loans become impaired, they may be partially or fully charged off, which eliminates the need for a specific allowance.

 

Loans whose terms are modified are classified as troubled debt restructurings if the Corporation grants borrowers experiencing financial difficulties concessions that it would not otherwise consider. Concessions granted under a troubled debt restructuring may involve an interest rate that is below the market rate given the associated credit risk of the loan or an extension of a loan’s stated maturity date. Loans classified as troubled debt restructurings are designated as impaired. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for a reasonable period of time, generally six consecutive months after modification and future payments are reasonably assured.

 

Banking regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses and may require the Corporation to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to the Corporation. Based on an analysis of the loan portfolio, the Corporation believes that the level of the allowance for loan losses at June 30, 2019 is adequate.

 

Foreclosed Real Estate

Foreclosed real estate, included in other assets, is comprised of property acquired through a foreclosure proceeding or property that is acquired through in-substance foreclosure. Foreclosed real estate is initially recorded at fair value minus estimated costs to sell at the date of foreclosure, establishing a new cost basis. Any difference between the carrying value and the new cost basis is charged against the allowance for loan losses. Appraisals, obtained from an independent third party, are generally used to determine fair value. After foreclosure, management reviews valuations at least quarterly and adjusts the asset to the lower of cost or fair value minus estimated costs to sell through a valuation allowance or a write-down. Costs related to the improvement of foreclosed real estate are generally capitalized until the real estate reaches a saleable condition subject to fair value limitations. Revenue and expense from operations and changes in the valuation allowance are included in noninterest expense. When a foreclosed real estate asset is ultimately sold, any gain or loss on the sale is included in the income statement as a component of noninterest expense. At June 30, 2019 there was $1,711,000 of foreclosed real estate, none of which was residential real estate. Included within loans receivable as of June 30, 2019 was a recorded investment of $255,000 of consumer mortgage loans secured by residential real estate properties, for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction.

 

Mortgage Servicing Rights

The mortgage servicing rights (MSRs) associated with the sold loans are included in other assets on the consolidated balance sheets at an amount equal to the estimated fair value of the contractual rights to service the mortgage loans. The MSR asset is amortized as a reduction to servicing income. The MSR asset is evaluated periodically for impairment and carried at the lower of amortized cost or fair value. A third party calculates fair value by discounting the estimated cash flows from servicing income using a rate consistent with the risk associated with these assets and an expected life commensurate with the expected life of the underlying loans. In the event that the amortized cost of the MSR asset exceeds the fair value of the asset, a valuation allowance would be established through a charge against servicing income. Subsequent fair value evaluations may determine that impairment has been reduced or eliminated, in which case the valuation allowance would be reduced through a credit to earnings. At June 30, 2019, the balance of residential mortgage loans serviced for third parties was $109,822,000 compared to $98,852,000 at December 31, 2018.

 

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   Three months ended   Six months ended 
   June 30,   June 30, 
(dollars in thousands)  2019   2018   2019   2018 
Amortized cost:                    
Balance at beginning of period  $922   $715   $925   $672 
Originations of mortgage servicing rights   74    125    124    193 
Amortization expense   (47)   (32)   (83)   (57)
Valuation allowance   (44)   0    (61)   0 
Balance at end of period  $905   $808   $905   $808 

 

Goodwill and Core Deposit Intangible Assets

Goodwill arising from acquisitions is not amortized, but is subject to an annual impairment test. This test consists of a qualitative analysis. If the Corporation determines events or circumstances indicate that it is more likely than not that goodwill is impaired, a quantitative analysis must be completed. Analyses may also be performed between annual tests. Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions, and selecting an appropriate control premium. The Corporation completes its annual goodwill impairment test on October 1st of each year. Based upon a qualitative analysis of goodwill, the Corporation concluded that the amount of recorded goodwill was not impaired as of October 1, 2018.

 

Core deposit intangibles represent the value assigned to demand, interest checking, money market, and savings accounts acquired as part of an acquisition. The core deposit intangible value represents the future economic benefit of potential cost savings from acquiring core deposits as part of an acquisition compared to the cost of alternative funding sources and the alternative cost to grow a similar core deposit base. The core deposit intangible asset resulting from the merger with Madison Bancorp, Inc. was determined to have a definite life and is being amortized using the sum of the years’ digits method over ten years. All intangible assets must be evaluated for impairment if certain events or changes in circumstances occur. Any impairment write-downs would be recognized as expense on the consolidated statements of income.

 

At June 30, 2019, the Corporation does not have any indicators of potential impairment of either goodwill or core deposit intangibles.

 

Revenue from Contracts with Customers

Revenue from contracts with customers that are required to be recognized under FASB ASC Topic 606 - Revenue from Contracts with Customers (ASC 606) is measured based on consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. The Corporation recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer.

 

The majority of the Corporation’s revenue-generating transactions are not within the scope of ASC 606, including revenue generated from financial instruments, such as our loans, letters of credit, derivatives and investment securities, as well as revenue related to our mortgage servicing activities, as these activities are subject to other U.S. Generally Accepted Accounting Principles (GAAP) discussed elsewhere within our disclosures. Descriptions of our revenue-generating activities that are within the scope of ASC 606, which are presented in our consolidated statements of income as components of non-interest income are as follows:

 

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Trust and investment service fees – The Corporation provides trust, investment management custody and irrevocable life insurance trust services to customers. Such services are rendered in accordance with the underlying contracts for which fees are earned. The Corporation’s performance obligations are generally satisfied, and the related revenue recognized, over the period in which the service is provided. Payment for services rendered is primarily received in the following month.

 

Income from mutual fund, annuity and insurance sales – The Corporation sells mutual funds, annuity and insurance products to its customers. The Corporation’s performance obligation is met upon the signing of the product agreement and, in certain cases, a time component may exist when the customer has the right to rescind the agreement with or without penalty. The Corporation recognizes revenues upon delivery of the product or service unless there is a time component in which case revenues are recognized utilizing the expected value method. Payment for services rendered is primarily received in the following month.

 

Service charges on deposits accounts – These represent general service fees for monthly account maintenance and activity- or transaction based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Other service charges include revenue from processing wire transfers, cashier’s checks and other services. Revenue is recognized when the performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to the customers’ accounts.

 

Other noninterest income – The Corporation evaluated individual components of other noninterest income, such as credit card merchant fees, credit and gift card fees and ATM fees. Debit card income is primarily comprised of interchange fees earned whenever the Corporation’s debit cards are processed through payment networks, such as Visa. Credit and gift card income is realized through a third party provider who issues cards as private label in the Corporation’s name. ATM fees are primarily generated when a non-Corporation cardholder uses a Corporation ATM. The income is primarily comprised as a percentage of interchange fees earned whenever the issuer’s card is processed through card payment networks, such as Visa or Pulse. Merchant services income is realized through a third party service provider who is contracted by the Corporation under a referral arrangement. Such fees represent fees charged to merchants to process their debit card transactions. The Corporation’s performance obligation for these fees are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received within a one to three day lag or in the following month.

 

Per Share Data

All per share computations include the effect of stock dividends distributed. The computation of net income per share is provided in the table below.

 

   Three months ended   Six months ended 
   June 30,   June 30, 
(in thousands, except per share data)  2019   2018   2019   2018 
Net income  $4,859   $6,054   $8,950   $10,137 
                     
Weighted average shares outstanding (basic)   9,454    8,932    9,454    8,923 
Effect of dilutive stock options   62    103    64    92 
Weighted average shares outstanding (diluted)   9,516    9,035    9,518    9,015 
                     
Basic earnings per share  $0.51   $0.65   $0.95   $1.08 
Diluted earnings per share  $0.51   $0.64   $0.94   $1.07 
                     
Anti-dilutive stock options excluded from the computation of earnings per share   30    14    30    14 

 

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Comprehensive Income

Accounting principles generally accepted in the United States require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the shareholders’ equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

 

Cash Flow Information

For purposes of the statements of cash flows, the Corporation considers interest bearing deposits with banks, cash and due from banks, and federal funds sold to be cash and cash equivalents.

 

Supplemental cash flow information is provided in the table below.

 

   Six months ended 
   June 30, 
(dollars in thousands)  2019   2018 
Cash paid during the period for:        
Income taxes  $2,450   $900 
Interest  $10,590   $6,878 
           
Noncash investing  and financing activities:          
Transfer of loans to foreclosed real estate  $0   $92 
Initial recognition of financing lease right-of-use assets  $1,358   $0 
Initial recognition of financing lease liabilities  $1,480   $0 
Initial recognition of operating lease right-of-use assets  $2,958   $0 
Initial recognition of operating lease liabilities  $3,035   $0 
Increase in other liabilities for purchase of securities settling after quarter end  $0   $4,369 

 

Recent Accounting Pronouncements

 

Pronouncements Adopted in 2019

 

In February 2016, the FASB issued ASU 2016-02, Leases and in July 2018 issued ASU 2018-10 and ASU 2018-11, Codification Improvements to Topic 842, Leases. From the lessee’s perspective, the new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for a lessees. From the lessor’s perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing lease. If the lessor doesn’t convey risks and rewards or control, an operating lease results.  The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Corporation adopted the new standard effective January 1, 2019, which resulted in an increase in assets to recognize the present value of the lease obligations (right-of-use assets) with a corresponding increase in liabilities as discussed in Note 8-Leases. The adoption did not have an overall material impact on the Corporation’s consolidated financial statements of income.

 

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In July 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting. This standard expands the scope of Topic 718, Compensation – Stock Compensation to include share-based payment transactions for acquiring goods and services from nonemployees. This standard requires application of Topic 718 to nonemployee awards for specific guidance on inputs to an option pricing model and the attribution of costs (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments in the Update are effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Corporation adopted the new standard on January 1, 2019 and the adoption of this standard did not have a material impact on the Corporation’s consolidated financial statements.

 

Pronouncements Not Yet Effective

 

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350). This standard simplifies the test for goodwill impairment by eliminating the requirement to calculate the implied fair value of goodwill, which currently is Step 2 of the goodwill impairment test. Instead, the goodwill impairment test will consist of a single quantitative step comparing the fair value of the reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The new standard is effective for annual and any interim goodwill impairment tests in reporting periods beginning after December 15, 2019. Early adoption is permitted. The Corporation intends to adopt this standard effective with its January 1, 2020 goodwill impairment test and the adoption of this standard is not expected to have a material impact on its consolidated financial statements based on current circumstances.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). This standard adds a new Topic 326 which requires companies to measure and record impairment on financial instruments at the time of origination using the expected credit loss (CECL) model. The CECL model calculates impairment based on historical experience, current conditions, and reasonable and supportable forecasts, and reflects the organization’s current estimate of all expected credit losses over the contractual term of its financial assets. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018. In July 2019, the FASB voted to propose a deferral of the effective date for smaller reporting companies (SRC), as defined by the SEC. If approved, the Corporation would consider the options of early adoption or delaying its implementation. In the meantime, the Corporation is continuing its existing implementation plan, having established a Corporation-wide implementation team, selected a vendor partner and model. The team is in the process of finalizing the development and documenting of the processes, controls, policies and disclosure requirements in preparation for performing a full parallel run. The Corporation expects the provisions of ASU No. 2016-13 to impact the Corporation’s consolidated financial statements, in particular, the level of the reserve for credit losses. The Corporation is continuing to evaluate the extent of the potential impact and expects that portfolio composition and economic conditions at the time of adoption will be a factor.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement. The amendments in this update modify the disclosure requirements in Topic 820, Fair Value Measurement. The following disclosure requirements were removed: the amount of and reasons for transfers between Level 1 and Level 2, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. The following disclosure requirements were modified: for investments in certain entities that calculate net asset value, and entity is required to disclose the timing of liquidation of investee’s assets and the amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The following disclosure requirements were added: the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The update is effective for fiscal years beginning after December 15, 2019. The Corporation is currently evaluating the impact of the adoption of this update on its disclosures.

 

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In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20). The amendments in this update remove disclosures that are no longer considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. The update is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Corporation is currently evaluating the impact of the adoption of this update on its disclosures.

 

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software. This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with those incurred to develop or obtain internal-use software. This standard requires application of Subtopic 350-40 to determine which costs to implement the service contract would be capitalized as an asset and which costs would be expensed. The amendments in the Update are effective for the years beginning after December 15, 2019. The Corporation is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements.

 

Note 2-Securities

 

A summary of securities available-for-sale at June 30, 2019 and December 31, 2018 is provided below. The securities available-for-sale portfolio is generally comprised of high quality debt instruments, principally obligations of the United States government or agencies thereof and investments in the obligations of states and municipalities. The majority of municipal bonds in the portfolio are general obligation bonds, which can draw upon multiple sources of revenue, including taxes, for payment. Only a few bonds are revenue bonds, which are dependent upon a single revenue stream for payment, but they are for critical services such as water and sewer. In many cases, municipal debt issues are insured or, in the case of school districts of selected states, backed by specific loss reserves. At June 30, 2019, while 87 percent of the fair value of the municipal bond portfolio was concentrated in the Commonwealth of Pennsylvania, the portfolio was intentionally distributed to limit exposure with the largest issuer at $2.3 million.

 

   Amortized   Gross Unrealized   Fair 
(dollars in thousands)  Cost   Gains   Losses   Value 
June 30, 2019                
  Debt securities:                    
U.S. Treasury notes  $19,796   $115   $(174)  $19,737 
U.S. agency   16,000    0    (249)   15,751 
U.S. agency mortgage-backed, residential   88,678    1,286    (96)   89,868 
State and municipal   28,310    252    (4)   28,558 
Total debt securities  $152,784   $1,653   $(523)  $153,914 
December 31, 2018                    
  Debt securities:                    
U.S. Treasury notes  $19,780   $29   $(806)  $19,003 
U.S. agency   16,000    0    (937)   15,063 
U.S. agency mortgage-backed, residential   75,446    102    (993)   74,555 
State and municipal   41,184    85    (297)   40,972 
Total debt securities  $152,410   $216   $(3,033)  $149,593 

 

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The amortized cost and estimated fair value of debt securities at June 30, 2019 by contractual maturity are shown below. Actual maturities may differ from contractual maturities if call options on select debt issues are exercised in the future. Mortgage-backed securities are included in the maturity categories based on average expected life. 

       
   Available-for-sale
   Amortized    Fair  
(dollars in thousands)  Cost    Value  
Due in one year or less  $2,678   $2,684 
Due after one year through five years   99,880    100,501 
Due after five years through ten years   44,667    44,787 
Due after ten years   5,559    5,942 
Total debt securities  $152,784   $153,914 

 

Gross realized gains and losses on sales of securities available-for-sale are shown below. Realized gains and losses are computed on the basis of specific identification of the adjusted cost of each security and are shown net as a separate line item in the income statement. 

             
   Three months ended  Six months ended
   June 30,  June 30,
(dollars in thousands)  2019    2018    2019    2018  
Realized gains  $11   $0   $14   $0 
Realized losses   (10)   0    (17)   0 
Net gains (losses)  $1   $0   $(3)  $0 

 

Investment securities having a carrying value of $133,668,000 and $123,088,000 on June 30, 2019 and December 31, 2018, respectively, were pledged to secure public and trust deposits, repurchase agreements and other short-term borrowings.

 

The table below shows gross unrealized losses and fair value, aggregated by investment category and length of time, for securities that have been in a continuous unrealized loss position, at June 30, 2019 and December 31, 2018. 

                                     
   Less than 12 months   12 months or more   Total 
   Number of   Fair   Unrealized   Number of   Fair   Unrealized   Number of   Fair   Unrealized 
(dollars in thousands)  Securities   Value   Losses   Securities   Value   Losses   Securities   Value   Losses 
June 30, 2019                                    
Debt securities:                                             
U.S. Treasury notes   0   $0   $0    2   $9,801   $(174)   2   $9,801   $(174)
U.S. agency   0    0    0    4    15,751    (249)   4    15,751    (249)
U.S. agency mortgage-backed, residential   7    9,031    (21)   6    6,655    (75)   13    15,686    (96)
State and municipal   0    0    0    3    1,171    (4)   3    1,171    (4)
Total temporarily impaired debt securities, available-for-sale   7   $9,031   $(21)   15   $33,378   $(502)   22   $42,409   $(523)
December 31, 2018                                             
Debt securities:                                             
U.S. Treasury notes   0   $0   $0    3   $13,980   $(806)   3   $13,980   $(806)
U.S. agency   0    0    0    4    15,063    (937)   4    15,063    (937)
U.S. agency mortgage-backed, residential   8    4,878    (14)   39    51,137    (979)   47    56,015    (993)
State and municipal   15    6,707    (11)   36    20,287    (286)   51    26,994    (297)
Total temporarily impaired debt securities, available-for-sale   23   $11,585   $(25)   82   $100,467   $(3,008)   105   $112,052   $(3,033)

 

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Securities available-for-sale are analyzed quarterly for possible other-than-temporary impairment. The analysis considers, among other factors: 1) whether the Corporation has the intent to sell its securities prior to market recovery or maturity; 2) whether it is more likely than not that the Corporation will be required to sell its securities prior to market recovery or maturity; 3) default rates/history by security type; 4) third-party securities ratings; 5) third-party guarantees; 6) subordination; 7) payment delinquencies; 8) nature of the issuer; and 9) current financial news.

 

The Corporation believes that unrealized losses at June 30, 2019 were primarily the result of changes in market interest rates and that the Corporation has the ability to hold these investments for a time necessary to recover the amortized cost. Through June 30, 2019 the Corporation has collected all interest and principal on its investment securities as scheduled. The Corporation believes that collection of the contractual principal and interest is probable and, therefore, all impairment is considered to be temporary.

 

Note 3—Restricted Investment in Bank Stocks

 

Restricted stock, which represents required investments in the common stock of correspondent banks, is carried at cost and, as of June 30, 2019 and December 31, 2018, consisted primarily of the common stock of the Federal Home Loan Bank of Pittsburgh (“FHLBP”) and, to a lesser degree, Atlantic Community Bancshares, Inc. (“ACBI”), the parent company of Atlantic Community Bankers Bank (“ACBB”). Under the FHLBP’s Capital Plan member banks, including PeoplesBank, are required to maintain a minimum stock investment. The FHLBP uses a formula to determine the minimum stock investment, which is based on the volume of loans outstanding, unused borrowing capacity and other factors.

 

The FHLBP paid dividends during the periods ended June 30, 2019 and 2018. The FHLBP restricts the repurchase of the excess capital stock of member banks. The amount of excess capital stock that can be repurchased from any member is currently the lesser of five percent of the member’s total capital stock outstanding or its excess capital stock outstanding.

 

Management evaluates the restricted stock for impairment in accordance with FASB ASC Topic 942. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. Using the FHLBP as an example, the determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as: (1) the significance of the decline in net assets of the FHLBP as compared to the capital stock amount for the FHLBP and the length of time this situation has persisted; (2) commitments by the FHLBP to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLBP; and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLBP. Management believes no impairment charge was necessary related to the restricted stock during the periods ended June 30, 2019 and 2018.

 

 - 18 -

 

 

Note 4—Loans

 

Loan Portfolio Composition

 

The table below provides the composition of the loan portfolio at June 30, 2019 and December 31, 2018. The portfolio is comprised of two segments, commercial and consumer loans. The commercial loan segment is disaggregated by industry class which allows the Corporation to monitor risk and performance. Those industries representing the largest dollar investment and most risk are listed separately. The “Other” commercial loans category is comprised of various industries. The consumer related segment is comprised of residential mortgages, home equity and other consumer loans. The Corporation has not engaged in sub-prime residential mortgage originations. 

                       
   June 30,    % Total    December 31,    % Total  
(dollars in thousands)  2019    Loans    2018    Loans  
Builder & developer  $153,983    10.4   $154,977    10.4 
Commercial real estate investor   204,581    13.9    210,501    14.2 
Residential real estate investor   230,162    15.6    231,118    15.6 
Hotel/Motel   80,788    5.5    77,480    5.2 
Wholesale & retail   111,724    7.6    117,280    7.9 
Manufacturing   89,657    6.1    80,075    5.4 
Agriculture   64,367    4.4    65,540    4.4 
Other   331,527    22.4    342,839    23.0 
Total commercial related loans   1,266,789    85.9    1,279,810    86.1 
Residential mortgages   87,849    6.0    83,977    5.7 
Home equity   97,303    6.6    98,019    6.6 
Other   21,937    1.5    23,874    1.6 
Total consumer related loans   207,089    14.1    205,870    13.9 
Total loans  $1,473,878    100.0   $1,485,680    100.0 

 

Loan Risk Ratings

 

The Corporation’s internal risk rating system follows regulatory guidance as to risk classifications and definitions. Every approved loan is assigned a risk rating. Generally, risk ratings for commercial related loans and residential mortgages held for investment are determined by a formal evaluation of risk factors performed by the Corporation’s underwriting staff. For consumer loans, and commercial loans up to $500,000, the Corporation uses third-party credit scoring software models for risk rating purposes. The loan portfolio is monitored on a continuous basis by loan officers, loan review personnel and senior management. Adjustments of loan risk ratings are generally performed by the Special Asset Committee (the ‘Committee’), which includes senior management. The Committee, which typically meets at least quarterly, makes changes, as appropriate, to risk ratings when it becomes aware of credit events such as payment delinquency, cessation of a business or project, bankruptcy or death of the borrower, or changes in collateral value. In addition to review by the Committee, existing loans are monitored by the primary loan officer and loan review to determine if any changes, upward or downward, in risk ratings are appropriate. Primary loan officers and loan review may downgrade existing loans, except to non-accrual status. Only the Committee, Executive Chairman or President/CEO may upgrade a loan that is classified.

 

 - 19 -

 

 

The Corporation uses ten risk ratings to grade commercial loans. The first seven ratings, representing the lowest risk, are combined and given a “pass” rating. A pass rating is a satisfactory credit rating, which applies to a loan that is expected to perform in accordance with the loan agreement and has a low probability of loss. A loan rated “special mention” has a potential weakness which may, if not corrected, weaken the loan or inadequately protect the Corporation’s position at some future date. A loan rated “substandard” is inadequately protected by the current net worth or paying capacity of the borrower, or of the collateral pledged. A “substandard” loan has a well-defined weakness or weaknesses that could jeopardize liquidation of the loan, which exposes the Corporation to loss if the deficiencies are not corrected. When circumstances indicate that collection of the loan is doubtful, the loan is risk-rated “nonaccrual,” the accrual of interest income is discontinued, and any unpaid interest previously credited to income is reversed. The table below does not include the regulatory classification of “doubtful,” nor does it include the regulatory classification of “loss”, because the Corporation promptly charges off loan losses.

 

The table below presents a summary of loan risk ratings by loan class at June 30, 2019 and December 31, 2018. 

                                    
(dollars in thousands)  Pass    Special
Mention
   Substandard    Nonaccrual    Total  
June 30, 2019                         
Builder & developer  $150,034   $2,711   $270   $968   $153,983 
Commercial real estate investor   198,144    3,817    2,390    230    204,581 
Residential real estate investor   218,832    6,448    218    4,664    230,162 
Hotel/Motel   80,788    0    0    0    80,788 
Wholesale & retail   91,593    8,628    4,271    7,232    111,724 
Manufacturing   78,897    8,260    1,155    1,345    89,657 
Agriculture   60,718    750    2,251    648    64,367 
Other   298,163    10,722    13,985    8,657    331,527 
Total commercial related loans   1,177,169    41,336    24,540    23,744    1,266,789 
Residential mortgage   87,231    422    75    121    87,849 
Home equity   96,709    63    0    531    97,303 
Other   21,670    0    7    260    21,937 
Total consumer related loans   205,610    485    82    912    207,089 
Total loans  $1,382,779   $41,821   $24,622   $24,656   $1,473,878 
                          
December 31, 2018                         
Builder & developer  $152,188   $1,604   $411   $774   $154,977 
Commercial real estate investor   204,141    1,808    4,317    235    210,501 
Residential real estate investor   222,227    3,597    235    5,059    231,118 
Hotel/Motel   77,480    0    0    0    77,480 
Wholesale & retail   94,726    9,973    4,952    7,629    117,280 
Manufacturing   72,058    4,991    1,302    1,724    80,075 
Agriculture   61,636    3,244    0    660    65,540 
Other   318,940    7,760    12,689    3,450    342,839 
Total commercial related loans   1,203,396    32,977    23,906    19,531    1,279,810 
Residential mortgage   83,305    7    82    583    83,977 
Home equity   97,395    13    0    611    98,019 
Other   23,601    1    9    263    23,874 
Total consumer related loans   204,301    21    91    1,457    205,870 
Total loans  $1,407,697   $32,998   $23,997   $20,988   $1,485,680 

 

 - 20 -

 

 

Impaired Loans

 

The table below presents a summary of impaired loans at June 30, 2019 and December 31, 2018. As of June 30, 2019, generally, impaired loans are all loans risk rated nonaccrual or classified as troubled debt restructuring. As of December 31, 2018, generally, impaired loans are certain loans risk rated substandard and all loans risk rated nonaccrual or classified as troubled debt restructurings. An allowance is established for individual loans that are commercial related where the Corporation has doubt as to full recovery of the outstanding principal balance. Typically, impaired consumer related loans are partially or fully charged-off eliminating the need for specific allowance. The recorded investment represents outstanding unpaid principal loan balances adjusted for payments collected on a non-cash basis and charge-offs. 

                             
   With No Allowance   With A Related Allowance   Total 
   Recorded   Unpaid   Recorded   Unpaid   Related   Recorded   Unpaid 
(dollars in thousands)  Investment   Principal   Investment   Principal   Allowance   Investment   Principal 
June 30, 2019                            
Builder & developer  $1,192   $1,347   $0   $0   $0   $1,192   $1,347 
Commercial real estate investor   2,620    2,620    0    0    0    2,620    2,620 
Residential real estate investor   403    407    4,261    4,338    1,218    4,664    4,745 
Hotel/Motel   0    0    0    0    0    0    0 
Wholesale & retail   244    244    7,232    7,571    2,461    7,476    7,815 
Manufacturing   15    15    1,330    1,400    539    1,345    1,415 
Agriculture   648    652    0    0    0    648    652 
Other commercial   1,948    1,954    6,709    6,738    2,383    8,657    8,692 
Total impaired commercial related loans   7,070    7,239    19,532    20,047    6,601    26,602    27,286 
Residential mortgage   121    121    0    0    0    121    121 
Home equity   531    531    0    0    0    531    531 
Other consumer   260    262    0    0    0    260    262 
Total impaired consumer related loans   912    914    0    0    0    912    914 
Total impaired loans  $7,982   $8,153   $19,532   $20,047   $6,601   $27,514   $28,200 
                                    
December 31, 2018                                   
Builder & developer  $1,047   $1,318   $138   $138   $51   $1,185   $1,456 
Commercial real estate investor   4,552    4,552    0    0    0    4,552    4,552 
Residential real estate investor   909    909    4,385    4,385    1,218    5,294    5,294 
Hotel/Motel   0    0    0    0    0    0    0 
Wholesale & retail   5,200    5,200    7,629    7,629    757    12,829    12,829 
Manufacturing   1,320    1,320    1,706    1,706    539    3,026    3,026 
Agriculture   660    660    0    0    0    660    660 
Other commercial   13,245    13,245    2,894    2,894    1,114    16,139    16,139 
Total impaired commercial related loans   26,933    27,204    16,752    16,752    3,679    43,685    43,956 
Residential mortgage   665    689    0    0    0    665    689 
Home equity   611    611    0    0    0    611    611 
Other consumer   272    272    0    0    0    272    272 
Total impaired consumer related loans   1,548    1,572    0    0    0    1,548    1,572 
Total impaired loans  $28,481   $28,776   $16,752   $16,752   $3,679   $45,233   $45,528 

 

 - 21 -

 

 

The table below presents a summary of average impaired loans and related interest income that was included in net income for the three and six months ended June 30, 2019 and 2018. 

                         
   With No Related Allowance   With A Related Allowance   Total 
   Average   Total   Average   Total   Average   Total 
   Recorded   Interest   Recorded   Interest   Recorded   Interest 
(dollars in thousands)  Investment   Income   Investment   Income   Investment   Income 
Three months ended June 30, 2019                        
Builder & developer  $1,196   $14   $0   $0   $1,196   $14 
Commercial real estate investor   2,644    34    0    0    2,644    34 
Residential real estate investor   362    6    4,283    0    4,645    6 
Hotel/Motel   0    0    0    0    0    0 
Wholesale & retail   245    3    7,204    0    7,449    3 
Manufacturing   16    4    1,454    0    1,470    4 
Agriculture   652    20    0    0    652    20 
Other commercial   1,953    0    6,778    0    8,731    0 
Total impaired commercial related loans   7,068    81    19,719    0    26,787    81 
Residential mortgage   276    3    0    0    276    3 
Home equity   564    5    0    0    564    5 
Other consumer   271    5    0    0    271    5 
Total impaired consumer related loans   1,111    13    0    0    1,111    13 
Total impaired loans  $8,179   $94   $19,719   $0   $27,898   $94 
                               
Three months ended June 30, 2018                              
Builder & developer  $2,291   $5   $0   $0   $2,291   $5 
Commercial real estate investor   5,817    78    0    0    5,817    78 
Residential real estate investor   1,582    10    0    0    1,582    10 
Hotel/Motel   0    0    0    0    0    0 
Wholesale & retail   6,501    90    0    0    6,501    90 
Manufacturing   3,557    92    0    0    3,557    92 
Agriculture   367    0    0    0    367    0 
Other commercial   1,045    16    0    0    1,045    16 
Total impaired commercial related loans   21,160    291    0    0    21,160    291 
Residential mortgage   257    1    0    0    257    1 
Home equity   511    18    0    0    511    18 
Other consumer   229    8    0    0    229    8 
Total impaired consumer related loans   997    27    0    0    997    27 
Total impaired loans  $22,157   $318   $0   $0   $22,157   $318 

 

 - 22 -

 

 

                         
   With No Related Allowance   With A Related Allowance   Total 
   Average   Total   Average   Total   Average   Total 
   Recorded   Interest   Recorded   Interest   Recorded   Interest 
(dollars in thousands)  Investment   Income   Investment   Income   Investment   Income 
Six months ended June 30, 2019                        
Builder & developer  $1,147   $28   $45   $0   $1,192   $28 
Commercial real estate investor   3,280    68    0    0    3,280    68 
Residential real estate investor   544    11    4,318    0    4,862    11 
Hotel/Motel   0    0    0    0    0    0 
Wholesale & retail   1,897    6    7,346    0    9,243    6 
Manufacturing   451    9    1,538    0    1,989    9 
Agriculture   654    33    0    0    654    33 
Other commercial   5,717    0    5,483    0    11,200    0 
Total impaired commercial related loans   13,690    155    18,730    0    32,420    155 
Residential mortgage   406    9    0    0    406    9 
Home equity   579    11    0    0    579    11 
Other consumer   271    9    0    0    271    9 
Total impaired consumer related loans   1,256    29    0    0    1,256    29 
Total impaired loans  $14,946   $184   $18,730   $0   $33,676   $184 
                               
Six months ended June 30, 2018                              
Builder & developer  $2,418   $11   $0   $0   $2,418   $11 
Commercial real estate investor   5,406    142    0    0    5,406    142 
Residential real estate investor   1,458    25    0    0    1,458    25 
Hotel/Motel   0    0    0    0    0    0 
Wholesale & retail   6,972    190    0    0    6,972    190 
Manufacturing   3,652    183    0    0    3,652    183 
Agriculture   350    1    0    0    350    1 
Other commercial   1,002    31    0    0    1,002    31 
Total impaired commercial related loans   21,258    583    0    0    21,258    583 
Residential mortgage   253    1    0    0    253    1 
Home equity   491    22    0    0    491    22 
Other consumer   231    18    0    0    231    18 
Total impaired consumer related loans   975    41    0    0    975    41 
Total impaired loans  $22,233   $624   $0   $0   $22,233   $624 

 

 - 23 -

 

 

Past Due and Nonaccrual

 

The performance and credit quality of the loan portfolio is also monitored by using an aging schedule that shows the length of time a loan is past due. The table below presents a summary of past due loans, nonaccrual loans and current loans by loan segment and class at June 30, 2019 and December 31, 2018. 

                             
           ≥ 90 Days                 
   30-59   60-89   Past Due       Total Past         
   Days   Days   and       Due and       Total 
(dollars in thousands)  Past Due   Past Due   Accruing   Nonaccrual   Nonaccrual   Current   Loans 
June 30, 2019                                   
Builder & developer  $177   $0   $147   $968   $1,292   $152,691   $153,983 
Commercial real estate investor   0    0    0    230    230    204,351    204,581 
Residential real estate investor   393    0    114    4,664    5,171    224,991    230,162 
Hotel/Motel   0    0    0    0    0    80,788    80,788 
Wholesale & retail   1,828    0    88    7,232    9,148    102,576    111,724 
Manufacturing   438    0    0    1,345    1,783    87,874    89,657 
Agriculture   96    1,336    0    648    2,080    62,287    64,367 
Other   8,946    932    50    8,657    18,585    312,942    331,527 
Total commercial related loans   11,878    2,268    399    23,744    38,289    1,228,500    1,266,789 
Residential mortgage   214    18    105    121    458    87,391    87,849 
Home equity   173    69    0    531    773    96,530    97,303 
Other   347    16    7    260    630    21,307    21,937 
Total consumer related loans   734    103    112    912    1,861    205,228    207,089 
Total loans  $12,612   $2,371   $511   $24,656   $40,150   $1,433,728   $1,473,878 
                                    
December 31, 2018                                   
Builder & developer  $159   $547   $43   $774   $1,523   $153,454   $154,977 
Commercial real estate investor   0    0    1,828    235    2,063    208,438    210,501 
Residential real estate investor   244    812    0    5,059    6,115    225,003    231,118 
Hotel/Motel   0    0    0    0    0    77,480    77,480 
Wholesale & retail   0    0    97    7,629    7,726    109,554    117,280 
Manufacturing   0    0    0    1,724    1,724    78,351    80,075 
Agriculture   0    0    0    660    660    64,880    65,540 
Other   4,877    0    0    3,450    8,327    334,512    342,839 
Total commercial related loans   5,280    1,359    1,968    19,531    28,138    1,251,672    1,279,810 
Residential mortgage   0    10    66    583    659    83,318    83,977 
Home equity   206    94    0    611    911    97,108    98,019 
Other   263    2    94    263    622    23,252    23,874 
Total consumer related loans   469    106    160    1,457    2,192    203,678    205,870 
Total loans  $5,749   $1,465   $2,128   $20,988   $30,330   $1,455,350   $1,485,680 

 

 - 24 -

 

 

Troubled Debt Restructurings

 

Loans classified as troubled debt restructurings (TDRs) are designated impaired and arise when the Corporation grants borrowers experiencing financial difficulties concessions that it would not otherwise consider. Concessions granted with respect to these loans generally involve an extension of the maturity date or a below market interest rate relative to new debt with similar credit risk. Generally, these loans are secured by real estate. If repayment of the loan is determined to be collateral dependent, the loan is evaluated for impairment loss based on the fair value of the collateral. For loans that are not collateral dependent, the present value of expected future cash flows, discounted at the loan’s original effective interest rate, is used to determine any impairment loss. A nonaccrual TDR represents a nonaccrual loan, as previously defined, which includes an economic concession. Nonaccrual TDRs are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive payments after the modification and future principal and interest payments are reasonably assured. In contrast, an accruing TDR represents a loan that, at the time of the modification, has a demonstrated history of payments and management believes that future loan payments are reasonably assured under the modified terms.

 

The table below shows loans whose terms have been modified under TDRs during the three and six months ended June 30, 2019 and 2018. There were no impairment losses recognized on these TDRs. There were no defaults during the six months ended June 30, 2019 for TDRs entered into during the previous 12 month period. 

                 
   Modifications 
       Pre-Modification   Post-Modification     
   Number   Outstanding   Outstanding   Recorded 
   of   Recorded   Recorded   Investment 
(dollars in thousands)  Contracts   Investments   Investments   at Period End 
Three months ended:                
                 
June 30, 2019                    
None                    
                     
June 30, 2018                    
Commercial related loans accruing   1   $150   $150   $139 
                     
Six months ended:                    
                     
June 30, 2019                    
Commercial related loans accruing   1   $63   $63   $59 
                     
June 30, 2018                    
Commercial related loans accruing   1   $150   $150   $139 

 

 - 25 -

 

 

NOTE 5 – Allowance for Loan Losses

 

The table below shows the activity in and the composition of the allowance for loan losses by loan segment and class detail as of and for the three and six months ended June 30, 2019 and 2018. 

                     
    Allowance for Loan Losses 
    April 1, 2019                   June 30, 2019 
(dollars in thousands)   Balance    Charge-offs    Recoveries    Provision    Balance 
Builder & developer  $2,967   $0   $0   $(259)  $2,708 
Commercial real estate investor   2,652    0    0    (84)   2,568 
Residential real estate investor   4,010    0    3    (125)   3,888 
Hotel/Motel   799    0    0    (53)   746 
Wholesale & retail   1,801    0    0    1,681    3,482 
Manufacturing   1,266    0    0    89    1,355 
Agriculture   578    0    0    (22)   556 
Other commercial   5,185    0    0    (40)   5,145 
Total commercial related loans   19,258    0    3    1,187    20,448 
Residential mortgage   132    0    0    5    137 
Home equity   195    (97)   1    173    272 
Other consumer   199    (30)   16    (25)   160 
Total consumer related loans   526    (127)   17    153    569 
Unallocated   297    0    0    (140)   157 
Total  $20,081   $(127)  $20   $1,200   $21,174 
                     
    Allowance for Loan Losses 
    April 1, 2018                   June 30, 2018 
(dollars in thousands)   Balance    Charge-offs    Recoveries    Provision    Balance 
Builder & developer  $2,977   $0   $0   $(78)  $2,899 
Commercial real estate investor   2,788    0    0    (93)   2,695 
Residential real estate investor   2,539    (1)   71    (185)   2,424 
Hotel/Motel   759    0    0    5    764 
Wholesale & retail   925    0    1    12    938 
Manufacturing   542    0    0    103    645 
Agriculture   449    0    0    22    471 
Other commercial   2,715    0    0    240    2,955 
Total commercial related loans   13,694    (1)   72    26    13,791 
Residential mortgage   114    (10)   1    9    114 
Home equity   204    0    0    (1)   203 
Other consumer   152    (88)   7    121    192 
Total consumer related loans   470    (98)   8    129    509 
Unallocated   2,702    0    0    145    2,847 
Total  $16,866   $(99)  $80   $300   $17,147 

 

 - 26 -

 

 

                     
    Allowance for Loan Losses 
    January 1, 2019                   June 30, 2019 
(dollars in thousands)   Balance    Charge-offs    Recoveries    Provision    Balance 
Builder & developer  $2,835   $0   $0   $(127)  $2,708 
Commercial real estate investor   2,636    0    0    (68)   2,568 
Residential real estate investor   3,945    0    6    (63)   3,888 
Hotel/Motel   732    0    0    14    746 
Wholesale & retail   1,813    0    0    1,669    3,482 
Manufacturing   1,287    0    0    68    1,355 
Agriculture   579    0    0    (23)   556 
Other commercial   4,063    (46)   0    1,128    5,145 
Total commercial related loans   17,890    (46)   6    2,598    20,448 
Residential mortgage   126    0    0    11    137 
Home equity   265    (117)   2    122    272 
Other consumer   144    (90)   25    81    160 
Total consumer related loans   535    (207)   27    214    569 
Unallocated   719    0    0    (562)   157 
Total  $19,144   $(253)  $33   $2,250   $21,174 
                     
    Allowance for Loan Losses 
    January 1, 2018                   June 30, 2018 
(dollars in thousands)   Balance    Charge-offs    Recoveries    Provision    Balance 
Builder & developer  $3,388   $0   $18   $(507)  $2,899 
Commercial real estate investor   3,013    0    0    (318)   2,695 
Residential real estate investor   2,505    (1)   74    (154)   2,424 
Hotel/Motel   637    0    0    127    764 
Wholesale & retail   909    0    2    27    938 
Manufacturing   592    0    0    53    645 
Agriculture   431    0    0    40    471 
Other commercial   2,643    0    0    312    2,955 
Total commercial related loans   14,118    (1)   94    (420)   13,791 
Residential mortgage   108    (10)   1    15    114 
Home equity   217    0    0    (14)   203 
Other consumer   66    (136)   10    252    192 
Total consumer related loans   391    (146)   11    253    509 
Unallocated   2,180    0    0    667    2,847 
Total  $16,689   $(147)  $105   $500   $17,147 

 

 - 27 -

 

 

The table below shows the allowance amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for June 30, 2019, December 31, 2018 and June 30, 2018.

                   
   Allowance for Loan Losses  Loans
   Individually  Collectively     Individually  Collectively   
   Evaluated For  Evaluated For     Evaluated For  Evaluated For   
(dollars in thousands)  Impairment  Impairment  Balance  Impairment  Impairment  Balance
June 30, 2019                              
Builder & developer  $0   $2,708   $2,708   $1,192   $152,791   $153,983 
Commercial real estate investor   0    2,568    2,568    2,620    201,961    204,581 
Residential real estate investor   1,218    2,670    3,888    4,664    225,498    230,162 
Hotel/Motel   0    746    746    0    80,788    80,788 
Wholesale & retail   2,461    1,021    3,482    7,476    104,248    111,724 
Manufacturing   539    816    1,355    1,345    88,312    89,657 
Agriculture   0    556    556    648    63,719    64,367 
Other commercial   2,383    2,762    5,145    8,657    322,870    331,527 
Total commercial related   6,601    13,847    20,448    26,602    1,240,187    1,266,789 
Residential mortgage   0    137    137    121    87,728    87,849 
Home equity   0    272    272    531    96,772    97,303 
Other consumer   0    160    160    260    21,677    21,937 
Total consumer related   0    569    569    912    206,177    207,089 
Unallocated   0    157    157    0    0    0 
Total  $6,601   $14,573   $21,174   $27,514   $1,446,364   $1,473,878 

                   
December 31, 2018                  
Builder & developer  $51   $2,784   $2,835   $1,185   $153,792   $154,977 
Commercial real estate investor   0    2,636    2,636    4,552    205,949    210,501 
Residential real estate investor   1,218    2,727    3,945    5,294    225,824    231,118 
Hotel/Motel   0    732    732    0    77,480    77,480 
Wholesale & retail   757    1,056    1,813    12,829    104,451    117,280 
Manufacturing   539    748    1,287    3,026    77,049    80,075 
Agriculture   0    579    579    660    64,880    65,540 
Other commercial   1,114    2,949    4,063    16,139    326,700    342,839 
Total commercial related   3,679    14,211    17,890    43,685    1,236,125    1,279,810 
Residential mortgage   0    126    126    665    83,312    83,977 
Home equity   0    265    265    611    97,408    98,019 
Other consumer   0    144    144    272    23,602    23,874 
Total consumer related   0    535    535    1,548    204,322    205,870 
Unallocated   0    719    719    0    0    0 
Total  $3,679   $15,465   $19,144   $45,233   $1,440,447   $1,485,680 

                   
June 30, 2018                  
Builder & developer  $0   $2,899   $2,899   $2,283   $158,247   $160,530 
Commercial real estate investor   0    2,695    2,695    7,114    219,104    226,218 
Residential real estate investor   0    2,424    2,424    1,641    230,400    232,041 
Hotel/Motel   0    764    764    0    75,531    75,531 
Wholesale & retail   0    938    938    6,730    98,093    104,823 
Manufacturing   0    645    645    3,450    76,000    79,450 
Agriculture   0    471    471    294    65,182    65,476 
Other commercial   0    2,955    2,955    960    320,316    321,276 
Total commercial related   0    13,791    13,791    22,472    1,242,873    1,265,345 
Residential mortgage   0    114    114    238    80,155    80,393 
Home equity   0    203    203    565    96,369    96,934 
Other consumer   0    192    192    225    22,999    23,224 
Total consumer related   0    509    509    1,028    199,523    200,551 
Unallocated   0    2,847    2,847    0    0    0 
Total  $0   $17,147   $17,147   $23,500   $1,442,396   $1,465,896 

 

- 28 -

 

 

Note 6—Deposits

 

The composition of deposits as of June 30, 2019 and December 31, 2018 is shown below. The aggregate amount of demand deposit overdrafts that were reclassified as loans is $63,000 at June 30, 2019, compared to $116,000 at December 31, 2018.

         
   June 30,   December 31, 
(dollars in thousands)  2019   2018 
Noninterest bearing demand  $264,297   $252,777 
Interest bearing demand   162,519    156,858 
Money market   499,182    535,454 
Savings   85,777    85,415 
Time deposits less than $100   292,607    271,794 
Time deposits $100 to $250   168,263    144,866 
Time deposits $250 or more   60,450    48,116 
Total deposits  $1,533,095   $1,495,280 

 

Note 7—Short-Term Borrowings and Long-Term Debt

 

Short-term borrowings consist of securities sold under agreements to repurchase, federal funds purchased and other borrowings. At June 30, 2019, the balance of securities sold under agreements to repurchase was $9,986,000 compared to $7,022,000 at December 31, 2018. At June 30, 2019 and December 31, 2018, there were no other short-term borrowings.

 

The following table presents a summary of long-term debt as of June 30, 2019 and December 31, 2018. PeoplesBank’s long-term debt obligations to the FHLBP are fixed rate instruments. Under terms of a blanket collateral agreement with the FHLBP, the obligations are secured by FHLBP stock and PeoplesBank qualifying loan receivables, principally real estate secured loans.

         
   June 30,   December 31, 
(dollars in thousands)  2019