10-Q 1 a0630201810q.htm EMCF 06.30.18 10-Q Document


 
 
 
 
 

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 June 30, 2018
 
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 2,271,139 at August 9, 2018.
 
 
 
 
 





EMCLAIRE FINANCIAL CORP
 
INDEX TO QUARTERLY REPORT ON FORM 10-Q
  
 
 
 
 
 
Item 1.
 
 
 
 
 
Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017
 
 
 
 
Consolidated Statements of Net Income for the three and six months ended June 30, 2018 and 2017
 
 
 
 
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2018 and 2017
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017
 
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2018 and 2017
 
 
 
 
 
 
 
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 June 30, 2018 and December 31, 2017
(Dollar amounts in thousands, except share and per share data)
 
June 30,
2018
 
December 31,
2017
Assets
 

 
 

 
 
 
 
Cash and due from banks
$
2,648

 
$
3,072

Interest earning deposits with banks
27,928

 
11,302

Cash and cash equivalents
30,576

 
14,374

Securities - available for sale
99,886

 
99,350

Securities - equity investments
474

 
1,817

Loans held for sale

 
504

Loans receivable, net of allowance for loan losses of $6,118 and $6,127
587,258

 
577,234

Federal bank stocks, at cost
4,403

 
4,662

Bank-owned life insurance
11,890

 
11,724

Accrued interest receivable
2,250

 
2,217

Premises and equipment, net
17,768

 
18,010

Goodwill
10,288

 
10,288

Core deposit intangible, net
345

 
481

Prepaid expenses and other assets
10,181

 
9,423

 
 
 
 
Total Assets
$
775,319

 
$
750,084

 
 
 
 
Liabilities and Stockholders' Equity
 

 
 

 
 
 
 
Liabilities:
 

 
 

Deposits:
 

 
 

Non-interest bearing
$
129,301

 
$
126,263

Interest bearing
556,250

 
528,380

Total deposits
685,551

 
654,643

Short-term borrowed funds
2,050

 
2,500

Long-term borrowed funds
18,000

 
23,500

Accrued interest payable
410

 
413

Accrued expenses and other liabilities
9,815

 
9,937

 
 
 
 
Total Liabilities
715,826

 
690,993

 
 
 
 
Commitments and Contingent Liabilities

 

 
 
 
 
Stockholders' Equity:


 


Common stock, $1.25 par value, 12,000,000 shares authorized; 2,373,156 and 2,373,156 shares issued; 2,271,139 and 2,271,139 shares outstanding, respectively
2,966

 
2,966

Additional paid-in capital
31,181

 
31,031

Treasury stock, at cost; 102,017 shares
(2,114
)
 
(2,114
)
Retained earnings
34,416

 
32,726

Accumulated other comprehensive loss
(6,956
)
 
(5,518
)
 
 
 
 
Total Stockholders' Equity
59,493

 
59,091

 
 
 
 
Total Liabilities and Stockholders' Equity
$
775,319

 
$
750,084



 See accompanying notes to consolidated financial statements.

1





Emclaire Financial Corp
Consolidated Statements of Net Income (Unaudited)
For the three and six months ended June 30, 2018 and 2017
(Dollar amounts in thousands, except share and per share data) 
 
For the three months ended June 30,
 
For the six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Interest and dividend income:
 

 
 

 
 

 
 

Loans receivable, including fees
$
6,678

 
$
5,801

 
$
13,015

 
$
11,367

Securities:
 

 
 

 
 

 
 

Taxable
439

 
392

 
847

 
787

Exempt from federal income tax
141

 
140

 
293

 
283

Federal bank stocks
93

 
61

 
157

 
115

Interest earning deposits with banks
83

 
38

 
117

 
53

Total interest and dividend income
7,434

 
6,432

 
14,429

 
12,605

 
 
 
 
 
 
 
 
Interest expense:
 

 
 

 
 

 
 

Deposits
1,102

 
749

 
2,093

 
1,452

Borrowed funds
141

 
318

 
299

 
632

Total interest expense
1,243

 
1,067

 
2,392

 
2,084

 
 
 
 
 
 
 
 
Net interest income
6,191

 
5,365

 
12,037

 
10,521

Provision for loan losses
300

 
201

 
680

 
363

 
 
 
 
 
 
 
 
Net interest income after provision for loan losses
5,891

 
5,164

 
11,357

 
10,158

 
 
 
 
 
 
 
 
Noninterest income:
 

 
 

 
 

 
 

Fees and service charges
463

 
435

 
900

 
842

Net realized gain (loss) on sales of securities
(2
)
 
350

 
(31
)
 
350

Net gain on sales of loans
2

 
124

 
24

 
130

Other-than-temporary impairment loss

 
(508
)
 

 
(508
)
Earnings on bank-owned life insurance
103

 
101

 
206

 
202

Other
483

 
366

 
848

 
707

Total noninterest income
1,049

 
868

 
1,947

 
1,723

 
 
 
 
 
 
 
 
Noninterest expense:
 

 
 

 
 

 
 

Compensation and employee benefits
2,521

 
2,347

 
4,974

 
4,670

Premises and equipment
758

 
726

 
1,528

 
1,484

Intangible asset amortization
68

 
59

 
136

 
119

Professional fees
254

 
216

 
470

 
417

Federal deposit insurance
151

 
102

 
288

 
210

Acquisition costs
358

 
106

 
358

 
107

Other
1,135

 
1,121

 
2,227

 
2,291

Total noninterest expense
5,245

 
4,677

 
9,981

 
9,298

 
 
 
 
 
 
 
 
Income before provision for income taxes
1,695

 
1,355

 
3,323

 
2,583

Provision for income taxes
282

 
314

 
548

 
586

 
 
 
 
 
 
 
 
Net income
$
1,413

 
$
1,041

 
$
2,775

 
$
1,997

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.62

 
$
0.48

 
$
1.22

 
$
0.93

Diluted earnings per common share
0.62

 
0.48

 
1.21

 
$
0.92

 
 
 
 
 
 
 
 
Average common shares outstanding - basic
2,271,139

 
2,164,747

 
2,271,139

 
2,158,587

Average common shares outstanding - diluted
2,288,229

 
2,182,761

 
2,286,802

 
2,175,523


 See accompanying notes to consolidated financial statements.

2



Emclaire Financial Corp
Consolidated Statements of Comprehensive Income (Unaudited)
For the three and six months ended June 30, 2018 and 2017
(Dollar amounts in thousands)
 
 
For the three months ended June 30,
 
For the six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
1,413

 
$
1,041

 
$
2,775

 
$
1,997

 
 
 
 
 
 
 
 
Other comprehensive income
 

 
 

 
 

 
 

Unrealized gains (losses) on securities available for sale:
 

 
 

 
 

 
 

Unrealized holding gain (loss) arising during the period
(301
)
 
15

 
(1,615
)
 
406

Reclassification adjustment for (gains) losses included in net income
2

 
(350
)
 
31

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

 
508

 

 
508

 
(299
)
 
173

 
(1,584
)
 
564

Tax effect
63

 
(59
)
 
333

 
(192
)
 
 
 
 
 
 
 
 
Net of tax
(236
)
 
114

 
(1,251
)
 
372

 
 
 
 
 
 
 
 
Comprehensive income
$
1,177

 
$
1,155

 
$
1,524

 
$
2,369

 
See accompanying notes to consolidated financial statements.

3





Emclaire Financial Corp
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the six months ended June 30, 2018 and 2017
(Dollar amounts in thousands)
 
For the six months ended June 30,
 
2018
 
2017
Cash flows from operating activities
 

 
 

Net income
$
2,775

 
$
1,997

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

 
 

Depreciation and amortization
574

 
578

Provision for loan losses
680

 
363

Amortization of premiums, net
223

 
174

Amortization of intangible assets and mortgage servicing rights
162

 
143

Impairment loss on security recognized in earnings

 
508

Realized (gains) losses on sales of securities, net
31

 
(350
)
Net gains on sales of loans
(24
)
 
(130
)
Net loss on foreclosed real estate
44

 

Gain on sale of premises and equipment
(25
)
 

Loans originated for sale
(2,038
)
 
(3,265
)
Proceeds from the sale of loans originated for sale
2,566

 
3,371

Write-down of foreclosed real estate
11

 

Stock compensation expense
150

 
110

Increase in bank-owned life insurance, net
(166
)
 
(165
)
Increase in accrued interest receivable
(33
)
 
(12
)
(Increase) decrease in prepaid expenses and other assets
(159
)
 
332

Increase (decrease) in accrued interest payable
(3
)
 
120

Increase (decrease) in accrued expenses and other liabilities
(122
)
 
302

Net cash provided by operating activities
4,646

 
4,076

 
 
 
 
Cash flows from investing activities
 

 
 

Loan originations and principal collections, net
(11,427
)
 
(32,600
)
Proceeds from sales of loans held for sale previously classified as portfolio loans

 
1,817

Securities:
 

 
 

     Sales
6,795

 
18,195

     Maturities, repayments and calls
4,810

 
5,850

     Purchases
(12,555
)
 
(21,939
)
Redemption of federal bank stocks
259

 
(1
)
Proceeds from the sale of bank premises and equipment
155

 

Proceeds from the sale of foreclosed real estate
165

 
124

Purchases of premises and equipment
(332
)
 
(204
)
Net cash used in investing activities
(12,130
)
 
(28,758
)
 
 
 
 
Cash flows from financing activities
 

 
 

Net increase in deposits
30,908

 
44,234

Repayments on long-term debt
(5,500
)
 
(500
)
Proceeds from other long-term debt

 
5,000

Net change in short-term borrowings
(450
)
 
(7,000
)
Proceeds from exercise of stock options

 
1,263

Dividends paid
(1,272
)
 
(1,168
)
Net cash provided by financing activities
23,686

 
41,829

 
 
 
 
Increase in cash and cash equivalents
16,202

 
17,147

Cash and cash equivalents at beginning of period
14,374

 
17,568

Cash and cash equivalents at end of period
$
30,576

 
$
34,715

 
 
 
 
Supplemental information:
 

 
 

Interest paid
$
2,395

 
$
1,964

Income taxes paid
420

 
575

 
 
 
 
Supplemental noncash disclosure:
 

 
 

Transfers from loans to foreclosed real estate
526

 
39

Transfers from portfolio loans to loans held for sale

 
1,725


See accompanying notes to consolidated financial statements.

4



Emclaire Financial Corp
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
For the six months ended June 30, 2018 and 2017
(Dollar amounts in thousands, except per share data)
 
 
Common
Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders'
Equity
Balance at January 1, 2017
$
2,818

 
$
27,900

 
$
(2,114
)
 
$
29,960

 
$
(4,491
)
 
$
54,073

Net income
 
 
 
 
 
 
1,997

 
 
 
1,997

Other comprehensive income
 
 
 
 
 
 
 
 
372

 
372

Stock compensation expense
 
 
110

 
 
 
 
 
 
 
110

Exercise of stock options (48,586 shares), including tax benefit

 
1,263

 
 
 
 
 
 
 
1,263

Cash dividends declared on common stock ($0.54 per share)
 
 
 
 
 
 
(1,168
)
 
 
 
(1,168
)
Balance at June 30, 2017
$
2,818

 
$
29,273

 
$
(2,114
)
 
$
30,789

 
$
(4,119
)
 
$
56,647

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018, as previously presented
$
2,966

 
$
31,031

 
$
(2,114
)
 
$
32,726

 
$
(5,518
)
 
$
59,091

Cumulative effect of change in accounting principle for marketable equity securities, net of tax
 
 
 
 
 
 
187

 
(187
)
 

Balance at January 1, 2018, as adjusted
2,966

 
31,031

 
(2,114
)
 
32,913

 
(5,705
)
 
59,091

Net income
 
 
 
 
 
 
2,775

 
 
 
2,775

Other comprehensive loss
 
 
 
 
 
 
 
 
(1,251
)
 
(1,251
)
Stock compensation expense
 
 
150

 
 
 
 
 
 
 
150

Cash dividends declared on common stock ($0.56 per share)
 
 
 
 
 
 
(1,272
)
 
 
 
(1,272
)
Balance at June 30, 2018
$
2,966

 
$
31,181

 
$
(2,114
)
 
$
34,416

 
$
(6,956
)
 
$
59,493






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 and northern West Virginia. 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, 2017, as contained in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC.
 
The balance sheet at December 31, 2017 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 May 25, 2018, the Corporation and Community First Bancorp (Community First) announced that they have entered into an Agreement and Plan of Merger providing for the acquisition of Community First by the Corporation. Community First is the holding company for Community First Bank, a Pennsylvania bank headquartered in Reynoldsville, Pennsylvania and operates two offices located in Clarion County, Pennsylvania and two offices located in Jefferson County, Pennsylvania.

Under the terms of the merger agreement, Community First will merge into the Corporation and shareholders of Community First will receive 1.2008 shares of the Corporation's common stock and $6.95 in cash for each share of common stock of Community First or approximately $16.3 million in common stock and $2.6 million in cash in the aggregate. The merger is expected to be completed in the fourth quarter of 2018, subject to the satisfaction of customary closing conditions, including regulatory approval and the approval of the shareholders of Community First.


6



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 June 30,
 
For the six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Earnings per common share - basic
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Net income
$
1,413

 
$
1,041

 
$
2,775

 
$
1,997

 
 
 
 
 
 
 
 
Average common shares outstanding
2,271,139

 
2,164,747

 
2,271,139

 
2,158,587

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.62

 
$
0.48

 
$
1.22

 
$
0.93

 
 
 
 
 
 
 
 
Earnings per common share - diluted
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Net income
$
1,413

 
$
1,041

 
$
2,775

 
$
1,997

 
 
 
 
 
 
 
 
Average common shares outstanding
2,271,139

 
2,164,747

 
2,271,139

 
2,158,587

Add: Dilutive effects of assumed issuance of restricted stock and exercise of stock options
17,090

 
18,014

 
15,663

 
16,936

 
 
 
 
 
 
 
 
Average shares and dilutive potential common shares
2,288,229

 
2,182,761

 
2,286,802

 
2,175,523

 
 
 
 
 
 
 
 
Diluted earnings per common share
$
0.62

 
$
0.48

 
$
1.21

 
$
0.92

 
 
 
 
 
 
 
 


7



4.
Securities

Equity Securities

The Corporation held equity securities with fair values of $474,000 and $1.8 million at June 30, 2018 and December 31, 2017, respectively. Beginning January 1, 2018, with the adoption of ASU 2016-01, changes in the fair value of these securities are included in other income on the consolidated statements of net income as opposed to accumulated other comprehensive loss on the consolidated balance sheets. During the three and six months ended June 30, 2018, the Corporation recognized a gain of $67,000 and $62,000, respectively, on the equity securities held at June 30, 2018. During the three and six months ended June 30, 2018, the Corporation sold $266,000 and $1.2 million of equity securities, respectively, with a realized net loss of $2,000 and $25,000, respectively.

Debt Securities - Available for Sale

The following table summarizes the Corporation’s debt securities as of June 30, 2018 and December 31, 2017:
 
(Dollar amounts in thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
June 30, 2018:
 

 
 

 
 

 
 

U.S. Treasury and federal agency
$
4,536

 
$

 
$
(125
)
 
$
4,411

U.S. government sponsored entities and agencies
21,007

 
20

 
(437
)
 
20,590

U.S. agency mortgage-backed securities: residential
23,236

 

 
(692
)
 
22,544

U.S. agency collateralized mortgage obligations: residential
21,168

 
32

 
(946
)
 
20,254

State and political subdivisions
25,112

 
12

 
(464
)
 
24,660

Corporate debt securities
7,507

 
6

 
(86
)
 
7,427

 
$
102,566

 
$
70

 
$
(2,750
)
 
$
99,886

December 31, 2017:
 

 
 

 
 

 
 

U.S. Treasury and federal agency
4,541

 

 
(69
)
 
4,472

U.S. government sponsored entities and agencies
14,136

 
2

 
(212
)
 
13,926

U.S. agency mortgage-backed securities: residential
20,904

 
7

 
(153
)
 
20,758

U.S. agency collateralized mortgage obligations: residential
22,607

 
25

 
(708
)
 
21,924

State and political subdivisions
29,249

 
87

 
(96
)
 
29,240

Corporate debt securities
9,009

 
38

 
(17
)
 
9,030

 
$
100,446

 
$
159

 
$
(1,255
)
 
$
99,350

 
 
 
 
 
 
 
 
 
The following table summarizes scheduled maturities of the Corporation’s debt securities as of June 30, 2018. 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
$
3,120

 
$
3,108

Due after one year through five years
34,277

 
33,640

Due after five through ten years
18,018

 
17,672

Due after ten years
2,747

 
2,668

Mortgage-backed securities: residential
23,236

 
22,544

Collateralized mortgage obligations: residential
21,168

 
20,254

 
$
102,566

 
$
99,886

 
 
 
 
 

8



4.
Securities (continued)

Information pertaining to debt securities with gross unrealized losses at June 30, 2018 and December 31, 2017, 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
June 30, 2018:
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury and federal agency
 
$

 
$

 
$
4,411

 
$
(125
)
 
$
4,411

 
$
(125
)
U.S. government sponsored entities and agencies
 
5,838

 
(154
)
 
8,840

 
(283
)
 
14,678

 
(437
)
U.S. agency mortgage-backed securities: residential
 
16,542

 
(455
)
 
6,002

 
(237
)
 
22,544

 
(692
)
U.S. agency collateralized mortgage obligations: residential
 
1,700

 
(6
)
 
16,724

 
(940
)
 
18,424

 
(946
)
State and political subdivisions
 
16,528

 
(367
)
 
3,364

 
(97
)
 
19,892

 
(464
)
Corporate debt securities
 
2,935

 
(69
)
 
486

 
(17
)
 
3,421

 
(86
)
 
 
$
43,543

 
$
(1,051
)
 
$
39,827

 
$
(1,699
)
 
$
83,370

 
$
(2,750
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017:
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury and federal agency
 
$

 
$

 
$
4,472

 
$
(69
)
 
$
4,472

 
$
(69
)
U.S. government sponsored entities and agencies
 
3,447

 
(42
)
 
8,975

 
(170
)
 
12,422

 
(212
)
U.S. agency mortgage-backed securities: residential
 
9,659

 
(48
)
 
6,581

 
(105
)
 
16,240

 
(153
)
U.S. agency collateralized mortgage obligations: residential
 
954

 
(16
)
 
19,147

 
(692
)
 
20,101

 
(708
)
State and political subdivisions
 
10,510

 
(60
)
 
3,487

 
(36
)
 
13,997

 
(96
)
Corporate debt securities
 
2,992

 
(16
)
 
999

 
(1
)
 
3,991

 
(17
)
 
 
$
27,562

 
$
(182
)
 
$
43,661

 
$
(1,073
)
 
$
71,223

 
$
(1,255
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains/losses on sales of securities for the three and six months ended June 30 were as follows:
(Dollar amounts in thousands)
For the three months
ended June 30,
 
For the six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Proceeds
$
264

 
$
18,195

 
$
6,795

 
$
18,195

Gains (losses)
(2
)
 
350

 
(31
)
 
350

Tax (benefit) provision related to gains

 
119

 
(6
)
 
119

 
 
 
 
 
 
 
 
 
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.
 

9



4.
Securities (continued)
 
There were 120 debt securities in an unrealized loss position as of June 30, 2018, of which 53 were in an unrealized loss position for more than 12 months. Of these 53 securities, 24 were government-backed collateralized mortgage obligations, nine were state and political subdivision securities, eight were U.S. government sponsored entity and agency securities, six were mortgage-backed securities, five were U.S. Treasury securities and one was a corporate security. 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 June 30, 2018 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)
June 30,
2018
 
December 31,
2017
Mortgage loans on real estate:
 

 
 

Residential first mortgages
$
230,504

 
$
221,823

Home equity loans and lines of credit
100,454

 
99,940

Commercial real estate
198,602

 
193,068

 
529,560

 
514,831

Other loans:
 

 
 

Commercial business
54,693

 
58,941

Consumer
9,123

 
9,589

 
63,816

 
68,530

 
 
 
 
Total loans, gross
593,376

 
583,361

 
 
 
 
Less allowance for loan losses
6,118

 
6,127

 
 
 
 
Total loans, net
$
587,258

 
$
577,234

 
 
 
 
 
Included in total loans above are net deferred costs of $1.8 million and $1.5 million at June 30, 2018 and December 31, 2017, respectively.

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 June 30, 2018, 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 Bank and Trust Co.





10



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 June 30, 2018:
 

 
 

 
 

 
 

 
 

 
 

Allowance for loan losses:
 

 
 

 
 

 
 

 
 

 
 

Beginning Balance
$
1,919

 
$
651

 
$
2,751

 
$
560

 
$
54

 
$
5,935

Charge-offs

 
(63
)
 
(33
)
 

 
(51
)
 
(147
)
Recoveries

 
10

 
16

 
1

 
3

 
30

Provision
114

 
52

 
148

 
(62
)
 
48

 
300

 
 
 
 
 
 
 
 
 
 
 
 
Ending Balance
$
2,033

 
$
650

 
$
2,882

 
$
499

 
$
54

 
$
6,118

 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2018:
 

 
 

 
 

 
 

 
 

 
 

Allowance for loan losses:
 

 
 

 
 

 
 

 
 

 
 

Beginning Balance
$
2,090

 
$
646

 
$
2,753

 
$
585

 
$
53

 
$
6,127

Charge-offs
(61
)
 
(83
)
 
(418
)
 

 
(170
)
 
(732
)
Recoveries
3

 
11

 
18

 
2

 
9

 
43

Provision
1

 
76

 
529

 
(88
)
 
162

 
680

 
 
 
 
 
 
 
 
 
 
 
 
Ending Balance
$
2,033

 
$
650

 
$
2,882

 
$
499

 
$
54

 
$
6,118

 
 
 
 
 
 
 
 
 
 
 
 
At June 30, 2018:
 

 
 

 
 

 
 

 
 

 
 

Ending ALL balance attributable to loans:
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
7

 
$

 
$

 
$

 
$

 
$
7

Acquired loans collectively evaluated for impairment

 

 

 

 

 

Originated loans collectively evaluated for impairment
2,026

 
650

 
2,882

 
499

 
54

 
6,111

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
2,033

 
$
650

 
$
2,882

 
$
499

 
$
54

 
$
6,118

 
 
 
 
 
 
 
 
 
 
 
 
Total loans:
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
408

 
$
7

 
$
43

 
$
39

 
$

 
$
497

Acquired loans collectively evaluated for impairment
18,501

 
10,203

 
24,247

 
2,173

 
1,307

 
56,431

Originated loans collectively evaluated for impairment
211,595

 
90,244

 
174,312

 
52,481

 
7,816

 
536,448

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
230,504

 
$
100,454

 
$
198,602

 
$
54,693

 
$
9,123

 
$
593,376

 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2017:
 

 
 

 
 

 
 

 
 

 
 

Ending ALL balance attributable to loans:
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
7

 
$

 
$

 
$

 
$

 
$
7

Acquired loans collectively evaluated for impairment

 

 

 

 

 

Originated loans collectively evaluated for impairment
2,083

 
646

 
2,753

 
585

 
53

 
6,120

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
2,090

 
$
646

 
$
2,753

 
$
585

 
$
53

 
$
6,127

 
 
 
 
 
 
 
 
 
 
 
 
Total loans:
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
425

 
$
8

 
$
914

 
$
569

 
$

 
$
1,916

Acquired loans collectively evaluated for impairment
20,300

 
10,873

 
27,404

 
1,451

 
2,893

 
62,921

Originated loans collectively evaluated for impairment
201,098

 
89,059

 
164,750

 
56,921

 
6,696

 
518,524

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
221,823

 
$
99,940

 
$
193,068

 
$
58,941

 
$
9,589

 
$
583,361

 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2017:
 

 
 

 
 

 
 

 
 

 
 

Allowance for loan losses:
 

 
 

 
 

 
 

 
 

 
 

Beginning Balance
$
1,956

 
$
648

 
$
2,449

 
$
583

 
$
52

 
$
5,688

Charge-offs
(10
)
 
(10
)
 
(90
)
 
(10
)
 
(8
)
 
(128
)
Recoveries

 
1

 
2

 

 
3

 
6

Provision
48

 

 
99

 
48

 
6

 
201

 
 
 
 
 
 
 
 
 
 
 
 
Ending Balance
$
1,994

 
$
639

 
$
2,460

 
$
621

 
$
53

 
$
5,767

 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2017:
 

 
 

 
 

 
 

 
 

 
 

Allowance for loan losses:
 

 
 

 
 

 
 

 
 

 
 

Beginning Balance
$
1,846

 
$
633

 
$
2,314

 
$
700

 
$
52

 
$
5,545

Charge-offs
(36
)
 
(11
)
 
(90
)
 
(10
)
 
(27
)
 
(174
)
Recoveries

 
20

 
4

 

 
9

 
33

Provision
184

 
(3
)
 
232

 
(69
)
 
19

 
363

 
 
 
 
 
 
 
 
 
 
 
 
Ending Balance
$
1,994

 
$
639

 
$
2,460

 
$
621

 
$
53

 
$
5,767

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

11



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

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of June 30, 2018:
 
(Dollar amounts in thousands)
 
 
 
 
 
 
 
 
 
Impaired Loans with Specific Allowance
 
As of June 30, 2018
 
For the three months ended June 30, 2018
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest Income
Recognized
in Period
 
Cash Basis
Interest
Recognized
in Period
Residential first mortgages
$
74

 
$
74

 
$
7

 
$
75

 
$
1

 
$
1

Home equity and lines of credit
7

 
7

 

 
8

 

 

Commercial real estate

 

 

 

 

 

Commercial business

 

 

 

 

 

Consumer

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
81

 
$
81

 
$
7

 
$
83

 
$
1

 
$
1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the six months ended June 30, 2018
 
 
 
 
 
 
 
Average
Recorded
Investment
 
Interest Income
Recognized
in Period
 
Cash Basis
Interest
Recognized
in Period
Residential first mortgages
 
 
 
 
 
 
$
75

 
$
2

 
$
2

Home equity and lines of credit
 
 
 
 
 
 
7

 

 

Commercial real estate