UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

ý

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

 

For the quarterly period ended June 30, 2014

OR

 

¨

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

 

For the transition period from __________________________ to __________________________

 

 

ENB Financial Corp

(Exact name of registrant as specified in its charter)

 

Pennsylvania		000-53297		51-0661129
(State or Other Jurisdiction of Incorporation)		(Commission File Number)		(IRS Employer Identification No)
31 E. Main St., Ephrata, PA		17522-0457
(Address of principal executive offices)		(Zip Code)

 

Registrant’s telephone number, including area code             (717) 733-4181              

 

Former name, former address, and former fiscal year, if changed since last report                  Not Applicable                    

 

 

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 ý               No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date 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 ý               No ¨

 

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

Large Accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨   (Do not check if a smaller reporting company)	Smaller reporting company  ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨              No ý

 

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. As of August 1, 2014, the registrant had 2,857,426 shares of $0.20 (par) Common Stock outstanding.

 

ENB FINANCIAL CORP

INDEX TO FORM 10-Q

June 30, 2014

 

 

Part I – FINANCIAL INFORMATION
	Item 1.	Financial Statements
	Consolidated Balance Sheets at June 30, 2014 and 2013 and December 31, 2013 (Unaudited)		3
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2014 and 2013 (Unaudited)		4
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2014 and 2013 (Unaudited)		5
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013 (Unaudited)		6
	Notes to the Unaudited Consolidated Interim Financial Statements		7-32
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33-64
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	65-69
	Item 4.	Controls and Procedures	70
Part II – OTHER INFORMATION			71
	Item 1.	Legal Proceedings	71
	Item 1A.	Risk Factors	71
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71
	Item 3.	Defaults Upon Senior Securities	71
	Item 4.	Mine Safety Disclosures	71
	Item 5.	Other Information	71
	Item 6.	Exhibits	72
SIGNATURE PAGE			73
EXHIBIT INDEX			74

 

 

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

 

		June 30,				December 31,				June 30,
		2014				2013				2013
		$				$				$
ASSETS
Cash and due from banks			14,663				15,596				13,492
Interest-bearing deposits in other banks			30,358				8,981				28,144
Total cash and cash equivalents			45,021				24,577				41,636
Securities available for sale (at fair value)			307,797				300,328				305,442
Loans held for sale			108				59				280
Loans (net of unearned income)			448,150				438,220				418,545
Less: Allowance for loan losses			6,968				7,219				7,273
Net loans			441,182				431,001				411,272
Premises and equipment			22,606				23,012				21,527
Regulatory stock			4,034				3,660				3,853
Bank owned life insurance			20,239				19,911				19,552
Other assets			9,475				9,708				8,786
Total assets			850,462				812,256				812,348
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing			183,149				173,070				168,967
Interest-bearing			500,552				483,556				481,741
Total deposits			683,701				656,626				650,708
Short-term borrowings			5,410				3,900				—
Long-term debt			69,150				65,000				68,000
Accounts payable for security purchases not yet settled			—				—				6,859
Other liabilities			2,586				2,954				2,682
Total liabilities			760,847				728,480				728,249
Stockholders' equity:
Common stock, par value $0.20;
Shares:  Authorized 12,000,000
Issued 2,869,557 and Outstanding 2,856,993
(Issued 2,869,557 and Outstanding 2,856,026 as of 12-31-13)
(Issued 2,869,557 and Outstanding  2,851,472 as of 6-30-13)			574				574				574
Capital surplus			4,361				4,353				4,337
Retained earnings			85,229				83,165				80,767
Accumulated other comprehensive loss, net of tax			(189	)			(3,940	)			(1,083	)
Less: Treasury stock cost on 12,564 shares (13,531 shares
as of 12-31-13 and 18,085 shares as of 6-30-13)			(360	)			(376	)			(496	)
Total stockholders' equity			89,615				83,776				84,099
Total liabilities and stockholders' equity			850,462				812,256				812,348

 

See Notes to the Unaudited Consolidated Interim Financial Statements

 

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

 

		Three Months ended June 30,								Six Months ended June 30,
		2014				2013				2014				2013
		$				$				$				$
Interest and dividend income:
Interest and fees on loans			4,817				4,702				9,596				9,458
Interest on securities available for sale
Taxable			1,063				903				2,222				1,782
Tax-exempt			849				956				1,720				1,927
Interest on deposits at other banks			19				20				27				38
Dividend income			77				28				132				57
Total interest and dividend income			6,825				6,609				13,697				13,262
Interest expense:
Interest on deposits			777				891				1,566				1,798
Interest on borrowings			440				457				868				980
Total interest expense			1,217				1,348				2,434				2,778
Net interest income			5,608				5,261				11,263				10,484
Credit for loan losses			(100	)			(100	)			(300	)			(150	)
Net interest income after credit for loan losses			5,708				5,361				11,563				10,634
Other income:
Trust and investment services income			285				290				650				610
Service fees			424				427				814				839
Commissions			494				507				960				976
Gains on securities transactions, net			582				741				1,267				1,679
Impairment losses on securities:
Impairment gains on investment securities			—				—				15				39
Non-credit related losses on securities not expected
to be sold in other comprehensive income before tax			—				(93	)			(37	)			(152	)
Net impairment losses on investment securities			—				(93	)			(22	)			(113	)
Gains on sale of mortgages			92				90				130				188
Earnings on bank-owned life insurance			159				160				314				318
Other income			132				107				235				235
Total other income			2,168				2,229				4,348				4,732
Operating expenses:
Salaries and employee benefits			3,481				3,184				6,911				6,352
Occupancy			459				416				975				841
Equipment			268				249				528				468
Advertising & marketing			125				141				255				239
Computer software & data processing			396				404				795				807
Shares tax			183				215				366				429
Professional services			353				346				680				628
Other expense			524				521				1,077				1,088
Total operating expenses			5,789				5,476				11,587				10,852
Income before income taxes			2,087				2,114				4,324				4,514
Provision for federal income taxes			347				292				746				684
Net income			1,740				1,822				3,578				3,830
Earnings per share of common stock			0.61				0.64				1.25				1.34
Cash dividends paid per share			0.27				0.26				0.53				0.52
Weighted average shares outstanding			2,854,878				2,852,534				2,854,498				2,851,948

 

See Notes to the Unaudited Consolidated Interim Financial Statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(DOLLARS IN THOUSANDS)

 

		Three Months ended June 30,								Six Months ended June 30,
		2014				2013				2014				2013
		$				$				$				$
Net income			1,740				1,822				3,578				3,830
Other comprehensive income (loss), net of tax:
Net change in unrealized gains (losses):
Other-than-temporarily impaired securities available for sale:
Gains arising during the period			—				—				15				39
Income tax effect			—				—				(5	)			(13	)
			—				—				10				26
Losses recognized in earnings			—				93				22				113
Income tax effect			—				(32	)			(7	)			(39	)
			—				61				15				74
Unrealized holding gains on other-than-temporarily impaired
securities available for sale, net of tax			—				61				25				100
Securities available for sale not other-than-temporarily impaired:
Gains (losses) arising during the period			2,972				(9,091	)			6,912				(10,209	)
Income tax effect			(1,010	)			3,091				(2,350	)			3,471
			1,962				(6,000	)			4,562				(6,738	)
Gains recognized in earnings			(582	)			(741	)			(1,267	)			(1,679	)
Income tax effect			198				252				431				571
			(384	)			(489	)			(836	)			(1,108	)
Unrealized holding gains (losses) on securities available for sale not
other-than-temporarily impaired, net of tax			1,578				(6,489	)			3,726				(7,846	)
Other comprehensive income (loss), net of tax			1,578				(6,428	)			3,751				(7,746	)
Comprehensive Income (Loss)			3,318				(4,606	)			7,329				(3,916	)

 

See Notes to the Unaudited Consolidated Interim Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(DOLLARS IN THOUSANDS)

 

		Six Months Ended June 30,
		2014				2013
		$				$
Cash flows from operating activities:
Net income			3,578				3,830
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of securities premiums and discounts and loan fees			2,268				2,112
Increase in interest receivable			(161	)			(217	)
Decrease in interest payable			(14	)			(58	)
Credit for loan losses			(300	)			(150	)
Gains on securities transactions, net			(1,267	)			(1,679	)
Impairment losses on securities			22				113
Gains on sale of mortgages			(130	)			(188	)
Loans originated for sale			(4,266	)			(9,134	)
Proceeds from sales of loans			4,347				9,810
Earnings on bank-owned life insurance			(314	)			(318	)
Gain on sale of other real estate owned			(9	)			—
Depreciation of premises and equipment and amortization of software			719				657
Deferred income tax			309				(148	)
Other assets and other liabilities, net			(2,127	)			841
Net cash provided by operating activities			2,655				5,471
Cash flows from investing activities:
Securities available for sale:
Proceeds from maturities, calls, and repayments			14,613				30,906
Proceeds from sales			69,513				35,174
Purchases			(86,877	)			(71,300	)
Purchase of other real estate owned			(56	)			—
Proceeds from sale of other real estate owned			48				—
Purchase of regulatory bank stock			(685	)			(230	)
Redemptions of regulatory bank stock			311				525
Purchase of bank-owned life insurance			(14	)			(18	)
Net increase in loans			(9,939	)			(4,313	)
Purchases of premises and equipment			(261	)			(1,246	)
Purchase of computer software			(109	)			(40	)
Net cash used for investing activities			(13,456	)			(10,542	)
Cash flows from financing activities:
Net increase in demand, NOW, and savings accounts			27,329				20,034
Net decrease in time deposits			(254	)			(2,487	)
Net increase in short-term borrowings			1,510				—
Proceeds from long-term debt			9,150				5,000
Repayments of long-term debt			(5,000	)			(10,000	)
Dividends paid			(1,514	)			(1,484	)
Treasury stock sold			239				238
Treasury stock purchased			(215	)			(254	)
Net cash provided by financing activities			31,245				11,047
Increase in cash and cash equivalents			20,444				5,976
Cash and cash equivalents at beginning of period			24,577				35,660
Cash and cash equivalents at end of period			45,021				41,636
Supplemental disclosures of cash flow information:
Interest paid			2,448				2,836
Income taxes paid			250				750
Supplemental disclosure of non-cash investing and financing activities:
Securities purchased not yet settled			—				6,859
Net transfer of other real estate owned from loans			56				—
Fair value adjustments for securities available for sale			5,683				(11,736	)

 

See Notes to the Unaudited Consolidated Interim Financial Statements

1.	Basis of Presentation

 

The accompanying unaudited consolidated interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and to general practices within the banking industry. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all significant adjustments considered necessary for fair presentation have been included. Certain items previously reported have been reclassified to conform to the current period’s reporting format. Such reclassifications did not affect net income or stockholders’ equity.

 

ENB Financial Corp (“the Corporation”) is the bank holding company for its wholly-owned subsidiary Ephrata National Bank (the “Bank”). This Form 10-Q, for the second quarter of 2014, is reporting on the results of operations and financial condition of ENB Financial Corp.

 

Operating results for the three and six months ended June 30, 2014, are not necessarily indicative of the results that may be expected for the year ended December 31, 2014. For further information, refer to the consolidated financial statements and footnotes thereto included in ENB Financial Corp’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

 

2.	Securities Available for Sale

 

The amortized cost and fair value of securities held at June 30, 2014, and December 31, 2013, are as follows:

 

						Gross				Gross
(DOLLARS IN THOUSANDS)		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
		$				$				$				$
June 30, 2014
U.S. government agencies			38,865				56				(983	)			37,938
U.S. agency mortgage-backed securities			55,849				593				(249	)			56,193
U.S. agency collateralized mortgage obligations			58,697				110				(738	)			58,069
Corporate bonds			46,996				240				(224	)			47,012
Obligations of states and political subdivisions			102,358				2,102				(1,201	)			103,259
Total debt securities			302,765				3,101				(3,395	)			302,471
Marketable equity securities			5,318				8				—				5,326
Total securities available for sale			308,083				3,109				(3,395	)			307,797
December 31, 2013
U.S. government agencies			41,671				148				(2,152	)			39,667
U.S. agency mortgage-backed securities			52,502				101				(680	)			51,923
U.S. agency collateralized mortgage obligations			42,465				161				(938	)			41,688
Private collateralized mortgage obligations			4,135				44				(138	)			4,041
Corporate bonds			56,437				430				(673	)			56,194
Obligations of states and political subdivisions			103,936				1,057				(3,349	)			101,644
Total debt securities			301,146				1,941				(7,930	)			295,157
Marketable equity securities			5,151				20				—				5,171
Total securities available for sale			306,297				1,961				(7,930	)			300,328

The amortized cost and fair value of debt securities available for sale at June 30, 2014, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities due to certain call or prepayment provisions.

 

CONTRACTUAL MATURITY OF DEBT SECURITIES

(DOLLARS IN THOUSANDS)

 

		Amortized
		Cost				Fair Value
		$				$
Due in one year or less			29,155				29,204
Due after one year through five years			105,716				105,395
Due after five years through ten years			120,871				119,887
Due after ten years			47,023				47,985
Total debt securities			302,765				302,471

 

Securities available for sale with a par value of $89,203,000 and $86,392,000 at June 30, 2014, and December 31, 2013, respectively, were pledged or restricted for public funds, borrowings, or other purposes as required by law. The fair value of these pledged securities was $92,591,000 at June 30, 2014, and $86,993,000 at December 31, 2013.

 

Proceeds from active sales of debt securities available for sale, along with the associated gross realized gains and gross realized losses, are shown below. Realized gains and losses are computed on the basis of specific identification.

 

PROCEEDS FROM SALES OF DEBT SECURITIES AVAILABLE FOR SALE

(DOLLARS IN THOUSANDS)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
		$				$				$				$
Proceeds from sales			28,209				14,891				69,470				35,174
Gross realized gains			759				752				1,733				1,702
Gross realized losses			195				11				484				23

 

SUMMARY OF GAINS AND LOSSES ON DEBT SECURITIES AVAILABLE FOR SALE

(DOLLARS IN THOUSANDS)          

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
		$				$				$				$
Gross realized gains			759				752				1,733				1,702
Gross realized losses			195				11				484				23
Impairment on securities			—				93				22				113
Total gross realized losses			195				104				506				136
Net gains on securities			564				648				1,227				1,566

 

The bottom portion of the above table shows the net gains on security transactions, including any impairment taken on securities held by the Corporation. The net gain or loss from security transactions is also reflected on the Corporation’s Consolidated Statements of Income and Consolidated Statements of Cash Flows.

 

Management evaluates all of the Corporation’s securities for other than temporary impairment (OTTI) on a periodic basis. Prior to June 30, 2014, the Corporation had a small number of private collateralized mortgage obligations (PCMOs) of which all but one had impairment recorded at some point in the past. During the second quarter of 2014, the three PCMOs remaining in the Corporation’s securities portfolio were sold. No other securities in the portfolio had other-than-temporary impairment recorded in 2014.

Information pertaining to securities with gross unrealized losses at June 30, 2014, and December 31, 2013, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

 

TEMPORARY IMPAIRMENTS OF SECURITIES

(DOLLARS IN THOUSANDS)

 

		Less than 12 months								More than 12 months								Total
						Gross								Gross								Gross
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		$				$				$				$				$				$
As of June 30, 2014
U.S. government agencies			5,734				(15	)			19,221				(968	)			24,955				(983	)
U.S. agency mortgage-backed securities			3,309				(27	)			8,008				(222	)			11,317				(249	)
U.S. agency collateralized mortgage obligations			30,649				(391	)			11,208				(347	)			41,857				(738	)
Corporate bonds			12,623				(75	)			7,649				(149	)			20,272				(224	)
Obligations of states & political subdivisions			10,403				(97	)			34,418				(1,104	)			44,821				(1,201	)
Total temporarily impaired securities			62,718				(605	)			80,504				(2,790	)			143,222				(3,395	)
As of December 31, 2013
U.S. government agencies			33,043				(1,735	)			3,603				(417	)			36,646				(2,152	)
U.S. agency mortgage-backed securities			31,810				(659	)			4,938				(21	)			36,748				(680	)
U.S. agency collateralized mortgage obligations			28,138				(938	)			—				—				28,138				(938	)
Private collateralized mortgage obligations			1,384				(59	)			1,790				(79	)			3,174				(138	)
Corporate bonds			32,349				(664	)			2,010				(9	)			34,359				(673	)
Obligations of states & political subdivisions			58,920				(2,778	)			8,950				(571	)			67,870				(3,349	)
Total temporarily impaired securities			185,644				(6,833	)			21,291				(1,097	)			206,935				(7,930	)

 

There were no equity securities that were considered temporarily impaired at June 30, 2014, or December 31, 2013. In the debt security portfolio, there are 119 positions that were considered temporarily impaired at June 30, 2014. There were no instruments considered to be other-than-temporarily impaired at June 30, 2014.

 

The Corporation evaluates both equity and fixed maturity positions for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic and market concerns warrant such evaluation. U.S. generally accepted accounting principles provide for the bifurcation of OTTI into two categories: (a) the amount of the total OTTI related to a decrease in cash flows expected to be collected from the debt security (the credit loss), which is recognized in earnings, and (b) the amount of total OTTI related to all other factors, which is recognized, net of taxes, as a component of accumulated other comprehensive income. This accounting treatment was only applicable to two of the Corporation’s PCMOs in the first quarter of 2014, but both of those securities were sold in the second quarter of 2014, resulting in no further impairment charges.

The prior impairment on the PCMOs was a result of a deterioration of expected cash flows on those securities due to higher projected credit losses than the amount of credit protection carried by those securities. Specifically, the foreclosure and severity rates had been running at levels where expected principal losses were in excess of the remaining credit protection on those instruments. The projected principal losses were based on prepayment speeds that were equal to or slower than the actual last twelve-month prepayment speeds the particular securities had experienced. Every quarter prior to the second quarter of 2014, management evaluated third-party reporting that showed projected principal losses based on various prepayment speed and severity rate scenarios. Based on the assumption that all loans over 60 days delinquent would default and at a severity rate equal to or above that previously experienced, and based on historical and expected prepayment speeds, management determined that it was appropriate to take an additional $22,000 of impairment on one PCMO in the first quarter of 2014. Because all of the remaining PCMOs were sold in the second quarter of 2014, no further impairment was recorded on these bonds in 2014 and future impairment analysis will cease for this segment since it was completely sold off.

 

The following tables reflect the amortized cost, market value, and unrealized loss as of June 30, 2014 and 2013, on the PCMO securities held which had impairment taken in each respective year. In 2014, there was one PCMO that had impairment taken during the first quarter prior to the sale of the remaining PCMO portfolio. In 2013, there were three PCMOs that had impairment taken in the year-to-date period. The values shown below are after the Corporation recorded year-to-date impairment charges of $22,000 through June 30, 2014, and $113,000 through June 30, 2013. The $22,000 and $113,000 are deemed to be credit losses and are the amounts that management expects the principal losses would be by the time these securities mature. The remaining $288,000 of unrealized losses as of June 30, 2013, was deemed to be market value losses that were considered temporary. Because all of the remaining PCMO securities were sold during the second quarter of 2014, there are no temporary market value losses remaining at June 30, 2014.

 

SECURITY IMPAIRMENT CHARGES

(DOLLARS IN THOUSANDS)

 

		As of June 30, 2014
		Book				Market				Unrealized				Impairment
		Value				Value				Loss				Charge
		$				$				$				$
Impaired private collateralized mortgage obligations			—				—				—				(22	)

 

		As of June 30, 2013
		Book				Market				Unrealized				Impairment
		Value				Value				Loss				Charge
		$				$				$				$
Impaired private collateralized mortgage obligations			4,675				4,387				(288	)			(113	)

 

The following table provides a cumulative roll forward of credit losses recognized in earnings for debt securities held:

 

CREDIT LOSSES RECOGNIZED IN EARNINGS ON DEBT SECURITIES

(DOLLARS IN THOUSANDS)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
		$				$				$				$
Beginning balance			1,170				997				1,148				977
Credit losses on debt securities for which other-than-
temporary impairment has not been previously recognized			—				—				—				—
Additional credit losses on debt securities for which other-
than-temporary impairment was previously recognized			—				93				22				113
Sale of debt securities with previously recognized impairment			(1,170	)			—				(1,170	)			—
Ending balance			—				1,090				—				1,090

 

With the sale of the remaining PCMO portfolio during the second quarter of 2014, there are no remaining impairment balances as of June 30, 2014.

3.	Loans and Allowance for Loan Losses

 

The following table presents the Corporation’s loan portfolio by category of loans as of June 30, 2014, and December 31, 2013.

 

LOAN PORTFOLIO

(DOLLARS IN THOUSANDS)

 

		June 30,				December 31,
		2014				2013
		$				$
Commercial real estate
Commercial mortgages			95,354				97,243
Agriculture mortgages			129,751				114,533
Construction			8,507				9,399
Total commercial real estate			233,612				221,175
Consumer real estate (a)
1-4 family residential mortgages			123,039				127,253
Home equity loans			9,994				10,889
Home equity lines of credit			24,158				21,097
Total consumer real estate			157,191				159,239
Commercial and industrial
Commercial and industrial			27,891				28,719
Tax-free loans			12,573				10,622
Agriculture loans			12,757				14,054
Total commercial and industrial			53,221				53,395
Consumer			3,723				4,063
Gross loans prior to deferred fees			447,747				437,872
Less:
Deferred loan costs, net			(403	)			(348	)
Allowance for loan losses			6,968				7,219
Total net loans			441,182				431,001

 

(a)	Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets, totaled $8,138,000 and $4,866,000 as of June 30, 2014, and December 31, 2013, respectively.

 

The Corporation grades commercial credits differently than consumer credits. The following tables represent all of the Corporation’s commercial credit exposures by internally assigned grades as of June 30, 2014 and December 31, 2013. The grading analysis estimates the capability of the borrower to repay the contractual obligations under the loan agreements as scheduled. The Corporation's internal commercial credit risk grading system is based on experiences with similarly graded loans.

 

The Corporation's internally assigned grades for commercial credits are as follows:

 

·

Pass – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.

 

·

Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.

 

·

Substandard – loans that have a well-defined weakness based on objective evidence and characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected.

·

Doubtful – loans classified as doubtful have all the weaknesses inherent in a substandard asset.  In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

 

·

Loss – loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted.

 

COMMERCIAL CREDIT EXPOSURE

CREDIT RISK PROFILE BY INTERNALLY ASSIGNED GRADE

(DOLLARS IN THOUSANDS)

 

June 30, 2014		Commercial Mortgages				Agriculture Mortgages				Construction				Commercial and Industrial				Tax-free Loans				Agriculture Loans				Total
		$				$				$				$				$				$				$
Grade:
Pass			84,690				125,996				6,142				26,578				12,573				12,201				268,180
Special Mention			4,415				1,266				—				211				—				350				6,242
Substandard			6,249				2,489				2,365				1,102				—				206				12,411
Doubtful			—				—				—				—				—				—				—
Loss			—				—				—				—				—				—				—
Total			95,354				129,751				8,507				27,891				12,573				12,757				286,833

 

December 31, 2013		Commercial Mortgages				Agriculture Mortgages				Construction				Commercial and Industrial				Tax-free Loans				Agriculture Loans				Total
		$				$				$				$				$				$				$
Grade:
Pass			85,683				112,253				7,402				27,082				10,390				13,425				256,235
Special Mention			4,996				—				—				213				—				293				5,502
Substandard			6,564				2,280				1,997				1,424				232				336				12,833
Doubtful			—				—				—				—				—				—				—
Loss			—				—				—				—				—				—				—
Total			97,243				114,533				9,399				28,719				10,622				14,054				274,570

 

For consumer loans, the Corporation evaluates credit quality based on whether the loan is considered performing or non-performing. Non-performing loans consist of those loans greater than 90 days delinquent and nonaccrual loans. The following tables present the balances of consumer loans by classes of the loan portfolio based on payment performance as of June 30, 2014 and December 31, 2013:

CONSUMER CREDIT EXPOSURE

CREDIT RISK PROFILE BY PAYMENT PERFORMANCE

(DOLLARS IN THOUSANDS)

 

June 30, 2014		1-4 Family Residential Mortgages				Home Equity Loans				Home Equity Lines of Credit				Consumer				Total
Payment performance:		$				$				$				$				$
Performing			122,757				9,994				24,158				3,723				160,632
Non-performing			282				—				—				—				282
Total			123,039				9,994				24,158				3,723				160,914

 

December 31, 2013		1-4 Family Residential Mortgages				Home Equity Loans				Home Equity Lines of Credit				Consumer				Total
Payment performance:		$				$				$				$				$
Performing			127,039				10,889				21,097				4,046				163,071
Non-performing			214				—				—				17				231
Total			127,253				10,889				21,097				4,063				163,302

 

The following tables present an age analysis of the Corporation’s past due loans, segregated by loan portfolio class, as of June 30, 2014 and December 31, 2013:

 

AGING OF LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)

 

																										Loans
										Greater																Receivable >
		30-59 Days				60-89 Days				than 90				Total Past								Total Loans				90 Days and
June 30, 2014		Past Due				Past Due				Days				Due				Current				Receivable				Accruing
		$				$				$				$				$				$				$
Commercial real estate
Commercial mortgages			—				197				—				197				95,157				95,354				—
Agriculture mortgages			62				—				—				62				129,689				129,751				—
Construction			—				—				—				—				8,507				8,507				—
Consumer real estate
1-4 family residential mortgages			921				122				282				1,325				121,714				123,039				282
Home equity loans			18				—				—				18				9,976				9,994				—
Home equity lines of credit			13				—				—				13				24,145				24,158				—
Commercial and industrial
Commercial and industrial			40				—				12				52				27,839				27,891				—
Tax-free loans			—				—				—				—				12,573				12,573				—
Agriculture loans			—				—				—				—				12,757				12,757				—
Consumer			3				5				—				8				3,715				3,723				—
Total			1,057				324				294				1,675				446,072				447,747				282

 

 

 

																										Loans
										Greater																Receivable >
		30-59 Days				60-89 Days				than 90				Total Past								Total Loans				90 Days and
December 31, 2013		Past Due				Past Due				Days				Due				Current				Receivable				Accruing
		$				$				$				$				$				$				$
Commercial real estate
Commercial mortgages			—				205				—				205				97,038				97,243				—
Agriculture mortgages			69				—				—				69				114,464				114,533				—
Construction			—				—				—				—				9,399				9,399				—
Consumer real estate
1-4 family residential mortgages			1,089				401				214				1,704				125,549				127,253				214
Home equity loans			57				—				—				57				10,832				10,889				—
Home equity lines of credit			15				13				—				28				21,069				21,097				—
Commercial and industrial
Commercial and industrial			20				—				—				20				28,699				28,719				—
Tax-free loans			—				—				—				—				10,622				10,622				—
Agriculture loans			—				—				—				—				14,054				14,054				—
Consumer			10				13				17				40				4,023				4,063				17
Total			1,260				632				231				2,123				435,749				437,872				231

The following table presents nonaccrual loans by classes of the loan portfolio as of June 30, 2014 and December 31, 2013:

 

NONACCRUAL LOANS BY LOAN CLASS

(DOLLARS IN THOUSANDS)  

 

		June 30,				December 31,
		2014				2013
		$				$
Commercial real estate
Commercial mortgages			888				992
Agriculture mortgages			—				—
Construction			—				—
Consumer real estate
1-4 family residential mortgages			—				—
Home equity loans			—				—
Home equity lines of credit			—				—
Commercial and industrial
Commercial and industrial			81				109
Tax-free loans			—				—
Agriculture loans			—				—
Consumer			—				—
Total			969				1,101

 

As of June 30, 2014 and December 31, 2013, all of the Corporation’s commercial loans on nonaccrual status were also considered impaired. Information with respect to impaired loans for the three and six months ended June 30, 2014 and June 30, 2013, is as follows:

 

IMPAIRED LOANS

(DOLLARS IN THOUSANDS)

 

		Three months ended June 30,								Six months ended June 30,
		2014				2013				2014				2013
		$				$				$				$
Average recorded balance of impaired loans			2,580				2,843				2,617				2,866
Interest income recognized on impaired loans			27				28				55				56

 

Interest income on impaired loans would have increased by approximately $10,000 and $22,000 for the three and six months ended June 30, 2014, respectively, compared to $21,000 and $42,000 for the three and six months ended June 30, 2013, had these loans performed in accordance with their original terms.

 

During the six months ended June 30, 2014 and 2013, there were no loan modifications made that would cause a loan to be considered a troubled debt restructuring (TDR). A TDR is a loan where management has granted a concession to the borrower from the original terms. A concession is generally granted in order to improve the financial condition of the borrower and improve the likelihood of full collection by the lender. A concession is generally defined as more favorable payment or credit terms granted to a borrower in an effort to improve the likelihood of the lender collecting principal in its entirety. Concessions usually are in the form of interest only for a period of time, or a lower interest rate offered in an effort to enable the borrower to continue to make normally scheduled payments.

The following tables summarize information in regards to impaired loans by loan portfolio class as of June 30, 2014, December 31, 2013, and June 30, 2013:

 

IMPAIRED LOAN ANALYSIS

(DOLLARS IN THOUSANDS)  

 

June 30, 2014		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		$				$				$				$				$
With no related allowance recorded:
Commercial real estate
Commercial mortgages			888				985				—				940				—
Agriculture mortgages			1,569				1,569				—				1,580				55
Construction			—				—				—				—				—
Total commercial real estate			2,457				2,554				—				2,520				55
Commercial and industrial
Commercial and industrial			81				81				—				97				—
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			81				81				—				97				—
Total with no related allowance			2,538				2,635				—				2,617				55
With an allowance recorded:
Commercial real estate
Commercial mortgages			—				—				—				—				—
Agriculture mortgages			—				—				—				—				—
Construction			—				—				—				—				—
Total commercial real estate			—				—				—				—				—
Commercial and industrial
Commercial and industrial			—				—				—				—				—
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			—				—				—				—				—
Total with a related allowance			—				—				—				—				—
Total by loan class:
Commercial real estate
Commercial mortgages			888				985				—				940				—
Agriculture mortgages			1,569				1,569				—				1,580				55
Construction			—				—				—				—				—
Total commercial real estate			2,457				2,554				—				2,520				55
Commercial and industrial
Commercial and industrial			81				81				—				97				—
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			81				81				—				97				—
Total			2,538				2,635				—				2,617				55

IMPAIRED LOAN ANALYSIS

(DOLLARS IN THOUSANDS)  

 

December 31, 2013		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		$				$				$				$				$
With no related allowance recorded:
Commercial real estate
Commercial mortgages			992				1,088				—				1,119				1
Agriculture mortgages			1,592				1,592				—				1,609				112
Construction			—				—				—				—				—
Total commercial real estate			2,584				2,680				—				2,728				113
Commercial and industrial
Commercial and industrial			109				109				—				99
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			109				109				—				99				—
Total with no related allowance			2,693				2,789				—				2,827				113
With an allowance recorded:
Commercial real estate
Commercial mortgages			—				—				—				—				—
Agriculture mortgages			—				—				—				—				—
Construction			—				—				—				—				—
Total commercial real estate			—				—				—				—				—
Commercial and industrial
Commercial and industrial			—				—				—				—				—
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			—				—				—				—				—
Total with a related allowance			—				—				—				—				—
Total by loan class:
Commercial real estate
Commercial mortgages			992				1,088				—				1,119				1
Agriculture mortgages			1,592				1,592				—				1,609				112
Construction			—				—				—				—				—
Total commercial real estate			2,584				2,680				—				2,728				113
Commercial and industrial
Commercial and industrial			109				109				—				99				—
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			109				109				—				99				—
Total			2,693				2,789				—				2,827				113

IMPAIRED LOAN ANALYSIS

(DOLLARS IN THOUSANDS)

 

June 30, 2013		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		$				$				$				$				$
With no related allowance recorded:
Commercial real estate
Commercial mortgages			1,105				1,202				—				1,164				—
Agriculture mortgages			1,607				1,607				—				1,618				56
Construction			—				—				—				—				—
Total commercial real estate			2,712				2,809				—				2,782				56
Commercial and industrial
Commercial and industrial			45				45				—				49				—
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			45				45				—				49				—
Total with no related allowance			2,757				2,854				—				2,831				56
With an allowance recorded:
Commercial real estate
Commercial mortgages			20				20				2				20				—
Agriculture mortgages			—				—				—				—				—
Construction			—				—				—				—				—
Total commercial real estate			20				20				2				20				—
Commercial and industrial
Commercial and industrial			105				105				11				15				—
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			105				105				11				15				—
Total with a related allowance			125				125				13				35				—
Total by loan class:
Commercial real estate
Commercial mortgages			1,125				1,222				2				1,184				—
Agriculture mortgages			1,607				1,607				—				1,618				56
Construction			—				—				—				—				—
Total commercial real estate			2,732				2,829				2				2,802				56
Commercial and industrial
Commercial and industrial			150				150				11				64				—
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			150				150				11				64				—
Total			2,882				2,979				13				2,866				56

The following table details activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2014:

 

ALLOWANCE FOR CREDIT LOSSES

(DOLLARS IN THOUSANDS)  

 

		Commercial Real Estate				Consumer Real Estate				Commercial and Industrial				Consumer				Unallocated				Total
		$				$				$				$				$				$
Allowance for credit losses:
Beginning balance - December 31, 2013			3,657				1,346				1,416				102				698				7,219
Charge-offs			—				—				—				(15	)			—				(15	)
Recoveries			4				5				43				—				—				52
Provision			(150	)			51				(117	)			17				(1	)			(200	)(1)
Balance - March 31, 2014			3,511				1,402				1,342				104				697				7,056
Charge-offs			—				—				—				—				—				—
Recoveries			3				—				9				—				—				12
Provision			(106	)			44				12				(24	)			(26	)			(100	)(1)
Ending Balance - June 30, 2014			3,408				1,446				1,363				80				671				6,968

 

(1)

The Corporation recognized a $200,000 credit provision in the first quarter of 2014 and a $100,000 credit provision in the second quarter of 2014 as a result of lower levels of substandard loans, and continued low levels of total classified loans, impaired loans, non-accrual loans, recoveries in excess of charge-offs, continuing declines in historic loss ratios, and improving qualitative factors.

 

During the six months ended June 30, 2014, credit provisions were recorded for the commercial real estate, commercial and industrial, and consumer loan categories while there was provision expense required for the consumer real estate loan category. There have been no commercial loan charge-offs during the past year, which reduced the historical loss rates and ultimately resulted in a lower required reserve amount for the commercial loan categories. Qualitative factors have been shifting, with some increasing and some decreasing, but overall, qualitative factors across the board have been declining. Conversely, factors in the allowance calculation related to consumer real estate were increased in the first half of 2014 as a result of the mortgage initiative and focus on increasing volume in this area.

The following table details activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2013:

 

ALLOWANCE FOR CREDIT LOSSES

(DOLLARS IN THOUSANDS)

 

Commercial Real Estate

Consumer Real Estate

Commercial and Industrial

Consumer

Unallocated

Total

$

$

$

$

$

$

Allowance for credit losses: