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, 2015

OR

 

o 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 x         No o

 

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 x         No o

 

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  o	Accelerated filer  o
Non-accelerated filer  o   (Do not check if a smaller reporting company)	Smaller reporting company  x

 

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

Yes o         No x

 

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 7, 2015, the registrant had 2,854,302 shares of $0.20 (par) Common Stock outstanding.

 

ENB FINANCIAL CORP

INDEX TO FORM 10-Q

June 30, 2015

 

 

Part I – FINANCIAL INFORMATION
	Item 1.	Financial Statements
	Consolidated Balance Sheets at June 30, 2015 and 2014 and December 31, 2014 (Unaudited)		3
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2015 and 2014 (Unaudited)		4
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2015 and 2014 (Unaudited)		5
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014 (Unaudited)		6
	Notes to the Unaudited Consolidated Interim Financial Statements		7-33
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34-67
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	68-72
	Item 4.	Controls and Procedures	73
Part II – OTHER INFORMATION			74
	Item 1.	Legal Proceedings	74
	Item 1A.	Risk Factors	74
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	74
	Item 3.	Defaults Upon Senior Securities	74
	Item 4.	Mine Safety Disclosures	74
	Item 5.	Other Information	74
	Item 6.	Exhibits	75
SIGNATURE PAGE			76
EXHIBIT INDEX			77

 

 

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

 

		June 30,				December 31,				June 30,
		2015				2014				2014
		$				$				$
ASSETS
Cash and due from banks			12,497				16,727				14,663
Interest-bearing deposits in other banks			24,469				26,685				30,358
Total cash and cash equivalents			36,966				43,412				45,021
Securities available for sale (at fair value)			296,059				295,822				307,797
Loans held for sale			1,294				506				108
Loans (net of unearned income)			484,803				471,168				448,150
Less: Allowance for loan losses			7,249				7,141				6,968
Net loans			477,554				464,027				441,182
Premises and equipment			22,045				22,447				22,606
Regulatory stock			4,037				3,227				4,034
Bank owned life insurance			23,449				20,603				20,239
Other assets			8,284				7,164				9,475
Total assets			869,688				857,208				850,462
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing			207,826				210,444				183,149
Interest-bearing			494,724				489,207				500,552
Total deposits			702,550				699,651				683,701
Short-term borrowings			4,930				—				5,410
Long-term debt			67,094				62,300				69,150
Other liabilities			2,408				2,490				2,586
Total liabilities			776,982				764,441				760,847
Stockholders' equity:
Common stock, par value $0.20;
Shares:  Authorized 12,000,000
Issued 2,869,557 and Outstanding 2,853,869
(Issued 2,869,557 and Outstanding 2,856,836 as of 12/31/14)
(Issued 2,869,557 and Outstanding  2,856,993 as of 6/30/14)			574				574				574
Capital surplus			4,388				4,375				4,361
Retained earnings			88,721				87,200				85,229
Accumulated other comprehensive income (loss), net of tax			(481	)			1,002				(189	)
Less: Treasury stock cost on 15,688 shares (12,721 shares
as of 12/31/14 and 12,564 shares as of 6/30/14)			(496	)			(384	)			(360	)
Total stockholders' equity			92,706				92,767				89,615
Total liabilities and stockholders' equity			869,688				857,208				850,462

 

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,
		2015				2014				2015				2014
		$				$				$				$
Interest and dividend income:
Interest and fees on loans			5,026				4,817				9,975				9,596
Interest on securities available for sale
Taxable			804				1,063				1,804				2,222
Tax-exempt			805				849				1,571				1,720
Interest on deposits at other banks			19				19				33				27
Dividend income			64				77				207				132
Total interest and dividend income			6,718				6,825				13,590				13,697
Interest expense:
Interest on deposits			610				777				1,284				1,566
Interest on borrowings			341				440				681				868
Total interest expense			951				1,217				1,965				2,434
Net interest income			5,767				5,608				11,625				11,263
Provision (credit) for loan losses			100				(100	)			300				(300	)
Net interest income after provision (credit) for loan losses			5,667				5,708				11,325				11,563
Other income:
Trust and investment services income			316				285				671				650
Service fees			485				424				886				814
Commissions			503				494				968				960
Gains on securities transactions, net			600				582				1,161				1,267
Impairment losses on securities:
Impairment gains on investment securities			—				—				—				15
Non-credit related losses on securities not expected
to be sold in other comprehensive income before tax			—				—				—				(37	)
Net impairment losses on investment securities			—				—				—				(22	)
Gains on sale of mortgages			236				92				389				130
Earnings on bank-owned life insurance			174				159				334				314
Other income			80				132				186				235
Total other income			2,394				2,168				4,595				4,348
Operating expenses:
Salaries and employee benefits			3,674				3,481				7,376				6,911
Occupancy			524				459				1,078				975
Equipment			298				268				566				528
Advertising & marketing			161				125				317				255
Computer software & data processing			384				396				758				795
Shares tax			195				183				391				366
Professional services			437				353				754				680
Other expense			514				524				1,097				1,077
Total operating expenses			6,187				5,789				12,337				11,587
Income before income taxes			1,874				2,087				3,583				4,324
Provision for federal income taxes			278				347				521				746
Net income			1,596				1,740				3,062				3,578
Earnings per share of common stock			0.56				0.61				1.07				1.25
Cash dividends paid per share			0.27				0.27				0.54				0.53
Weighted average shares outstanding			2,852,353				2,854,878				2,854,804				2,854,498

 

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,
		2015				2014				2015				2014
		$				$				$				$
Net income			1,596				1,740				3,062				3,578
Other comprehensive income, net of tax:
Net change in unrealized gains:
Other-than-temporarily impaired securities available for sale:
Gains arising during the period			—				—				—				15
Income tax effect			—				—				—				(5	)
			—				—				—				10
Losses recognized in earnings			—				—				—				22
Income tax effect			—				—				—				(7	)
			—				—				—				15
Unrealized holding gains on other-than-temporarily impaired
securities available for sale, net of tax			—				—				—				25
Securities available for sale not other-than-temporarily impaired:
Unrealized gains (losses) arising during the period			(3,403	)			2,972				(1,086	)			6,912
Income tax effect			1,157				(1,010	)			369				(2,350	)
			(2,246	)			1,962				(717	)			4,562
Gains recognized in earnings			(600	)			(582	)			(1,161	)			(1,267	)
Income tax effect			204				198				395				431
			(396	)			(384	)			(766	)			(836	)
Unrealized holding gains (losses) on securities available for sale not
other-than-temporarily impaired, net of tax			(2,642	)			1,578				(1,483	)			3,726
Other comprehensive income (loss), net of tax			(2,642	)			1,578				(1,483	)			3,751
Comprehensive Income (Loss)			(1,046	)			3,318				1,579				7,329

 

See Notes to the Unaudited Consolidated Interim Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(DOLLARS IN THOUSANDS)

 

		Six Months Ended June 30,
		2015				2014
		$				$
Cash flows from operating activities:
Net income			3,062				3,578
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of securities premiums and discounts and loan fees			2,844				2,268
Increase in interest receivable			(15	)			(161	)
Decrease in interest payable			(64	)			(14	)
Provision (credit) for loan losses			300				(300	)
Gains on securities transactions, net			(1,161	)			(1,267	)
Impairment losses on securities			—				22
Gains on sale of mortgages			(389	)			(130	)
Loans originated for sale			(12,961	)			(4,266	)
Proceeds from sales of loans			12,562				4,347
Earnings on bank-owned life insurance			(334	)			(314	)
(Gain)/Loss on sale of other real estate owned			20				(9	)
Depreciation of premises and equipment and amortization of software			765				719
Deferred income tax			(50	)			309
Other assets and other liabilities, net			(220	)			(2,127	)
Net cash provided by operating activities			4,359				2,655
Cash flows from investing activities:
Securities available for sale:
Proceeds from maturities, calls, and repayments			31,750				14,613
Proceeds from sales			76,539				69,513
Purchases			(112,363	)			(86,877	)
Proceeds from sale of other real estate owned			122				48
Purchase of regulatory bank stock			(942	)			(685	)
Redemptions of regulatory bank stock			132				311
Purchase of bank-owned life insurance			(2,512	)			(14	)
Net increase in loans			(14,059	)			(9,995	)
Purchases of premises and equipment			(316	)			(261	)
Purchase of computer software			(139	)			(109	)
Net cash used for investing activities			(21,788	)			(13,456	)
Cash flows from financing activities:
Net increase in demand, NOW, and savings accounts			10,953				27,329
Net decrease in time deposits			(8,054	)			(254	)
Net increase in short-term borrowings			4,930				1,510
Proceeds from long-term debt			12,794				9,150
Repayments of long-term debt			(8,000	)			(5,000	)
Dividends paid			(1,541	)			(1,514	)
Treasury stock sold			257				239
Treasury stock purchased			(356	)			(215	)
Net cash provided by financing activities			10,983				31,245
Increase (decrease) in cash and cash equivalents			(6,446	)			20,444
Cash and cash equivalents at beginning of period			43,412				24,577
Cash and cash equivalents at end of period			36,966				45,021
Supplemental disclosures of cash flow information:
Interest paid			2,029				2,448
Income taxes paid			445				250
Supplemental disclosure of non-cash investing and financing activities:
Net transfer of other real estate owned from loans			137				56
Fair value adjustments for securities available for sale			(2,249	)			5,683

 

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 2015, 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, 2015, are not necessarily indicative of the results that may be expected for the year ended December 31, 2015. 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, 2014.

 

 

2.	Securities Available for Sale

 

The amortized cost and fair value of securities held at June 30, 2015 and December 31, 2014, are as follows:

 

						Gross				Gross
(DOLLARS IN THOUSANDS)		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
		$				$				$				$
June 30, 2015
U.S. government agencies			34,568				5				(306	)			34,267
U.S. agency mortgage-backed securities			39,263				119				(323	)			39,059
U.S. agency collateralized mortgage obligations			60,728				341				(669	)			60,400
Corporate bonds			60,684				77				(452	)			60,309
Obligations of states and political subdivisions			96,028				1,637				(1,188	)			96,477
Total debt securities			291,271				2,179				(2,938	)			290,512
Marketable equity securities			5,517				34				(4	)			5,547
Total securities available for sale			296,788				2,213				(2,942	)			296,059
December 31, 2014
U.S. government agencies			46,577				110				(528	)			46,159
U.S. agency mortgage-backed securities			37,946				138				(134	)			37,950
U.S. agency collateralized mortgage obligations			48,690				55				(679	)			48,066
Corporate bonds			65,274				145				(311	)			65,108
Obligations of states and political subdivisions			90,628				2,961				(258	)			93,331
Total debt securities			289,115				3,409				(1,910	)			290,614
Marketable equity securities			5,189				19				—				5,208
Total securities available for sale			294,304				3,428				(1,910	)			295,822

The amortized cost and fair value of debt securities available for sale at June 30, 2015, 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			21,498				21,431
Due after one year through five years			105,917				105,402
Due after five years through ten years			73,700				73,439
Due after ten years			90,156				90,240
Total debt securities			291,271				290,512

 

Securities available for sale with a par value of $73,680,000 and $75,013,000 at June 30, 2015, and December 31, 2014, respectively, were pledged or restricted for public funds, borrowings, or other purposes as required by law. The fair value of these pledged securities was $78,488,000 at June 30, 2015, and $78,269,000 at December 31, 2014.

 

Proceeds from active sales of 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 SECURITIES AVAILABLE FOR SALE
(DOLLARS IN THOUSANDS)
		Three Months Ended June 30,								Six Months Ended June 30,
		2015				2014				2015				2014
		$				$				$				$
Proceeds from sales			36,304				28,253				76,539				69,513
Gross realized gains			644				777				1,253				1,751
Gross realized losses			44				195				92				484

 

 

SUMMARY OF GAINS AND LOSSES ON SECURITIES AVAILABLE FOR SALE
(DOLLARS IN THOUSANDS)
		Three Months Ended June 30,								Six Months Ended June 30,
		2015				2014				2015				2014
		$				$				$				$
Gross realized gains			644				777				1,253				1,751
Gross realized losses			44				195				92				484
Impairment on securities			—				—				—				22
Total gross realized losses			44				195				92				506
Net gains on securities			600				582				1,161				1,245

 

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 or 2015.

 

Information pertaining to securities with gross unrealized losses at June 30, 2015, and December 31, 2014, 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, 2015
U.S. government agencies			18,060				(196	)			3,905				(110	)			21,965				(306	)
U.S. agency mortgage-backed securities			17,914				(216	)			2,683				(107	)			20,597				(323	)
U.S. agency collateralized mortgage obligations			22,198				(458	)			8,935				(211	)			31,133				(669	)
Corporate bonds			35,675				(424	)			3,181				(28	)			38,856				(452	)
Obligations of states & political subdivisions			34,360				(934	)			8,499				(254	)			42,859				(1,188	)
Total debt securities			128,207				(2,228	)			27,203				(710	)			155,410				(2,938	)
Marketable equity securities			107				(4	)			—				—				107				(4	)
Total temporarily impaired securities			128,314				(2,232	)			27,203				(710	)			155,517				(2,942	)
As of December 31, 2014
U.S. government agencies			9,676				(30	)			19,689				(498	)			29,365				(528	)
U.S. agency mortgage-backed securities			7,412				(18	)			5,412				(116	)			12,824				(134	)
U.S. agency collateralized mortgage obligations			25,314				(403	)			11,222				(276	)			36,536				(679	)
Corporate bonds			33,413				(227	)			9,855				(84	)			43,268				(311	)
Obligations of states & political subdivisions			2,710				(29	)			16,720				(229	)			19,430				(258	)
Total temporarily impaired securities			78,525				(707	)			62,898				(1,203	)			141,423				(1,910	)

 

In the debt security portfolio there were 122 positions that were carrying unrealized losses as of June 30, 2015. In the equity security portfolio there were three positions that were carrying unrealized losses as of June 30, 2015. There were no instruments considered to be other-than-temporarily impaired at June 30, 2015.

 

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, on the PCMO securities held which had impairment taken in the year. There were no impairment charges in 2015 since all of the PCMO securities were sold during 2014. In 2014, there was one PCMO that had impairment taken during the first quarter prior to the sale of the remaining PCMO portfolio. The values shown below are after the Corporation recorded year-to-date impairment charges of $22,000 through June 30, 2014. The $22,000 was deemed to be a credit loss and was the amount that management expected the principal losses would be by the time the securities matured. 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, 2015.

 

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	)

   

 

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,
		2015				2014				2015				2014
		$				$				$				$
Beginning balance			—				1,170				—				1,148
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			—				—				—				22
Sale of debt securities with previously recognized impairment			—				(1,170	)			—				(1,170	)
Ending balance			—				—				—				—

 

 

With the sale of the remaining PCMO portfolio during the second quarter of 2014, there are no remaining impairment balances as of June 30, 2015.

 

3.	Loans and Allowance for Loan Losses

 

The following table presents the Corporation’s loan portfolio by category of loans as of June 30, 2015, and December 31, 2014:

 

LOAN PORTFOLIO

(DOLLARS IN THOUSANDS)  

 

		June 30,				December 31,
		2015				2014
		$				$
Commercial real estate
Commercial mortgages			95,009				95,914
Agriculture mortgages			150,380				140,322
Construction			7,823				7,387
Total commercial real estate			253,212				243,623
Consumer real estate (a)
1-4 family residential mortgages			122,642				123,395
Home equity loans			12,007				12,563
Home equity lines of credit			30,482				27,308
Total consumer real estate			165,131				163,266
Commercial and industrial
Commercial and industrial			33,046				31,998
Tax-free loans			12,843				11,806
Agriculture loans			16,455				16,496
Total commercial and industrial			62,344				60,300
Consumer			3,606				3,517
Gross loans prior to deferred fees			484,293				470,706
Less:
Deferred loan costs, net			(510	)			(462	)
Allowance for loan losses			7,249				7,141
Total net loans			477,554				464,027

 

(a)	Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets, totaled $26,631,000 and $16,670,000 as of June 30, 2015, and December 31, 2014, 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, 2015 and December 31, 2014. 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, 2015		Commercial Mortgages				Agriculture Mortgages				Construction				Commercial and Industrial				Tax-free Loans				Agriculture Loans				Total
		$				$				$				$				$				$				$
Grade:
Pass			88,461				147,490				6,535				32,117				10,396				16,271				301,270
Special Mention			908				858				—				56				2,447				27				4,296
Substandard			5,640				2,032				1,288				873				—				157				9,990
Doubtful			—				—				—				—				—				—				—
Loss			—				—				—				—				—				—				—
Total			95,009				150,380				7,823				33,046				12,843				16,455				315,556

 

December 31, 2014		Commercial Mortgages				Agriculture Mortgages				Construction				Commercial and Industrial				Tax-free Loans				Agriculture Loans				Total
		$				$				$				$				$				$				$
Grade:
Pass			82,478				135,298				5,350				31,006				11,806				16,255				282,193
Special Mention			2,649				3,237				—				29				—				29				5,944
Substandard			10,787				1,787				2,037				963				—				212				15,786
Doubtful			—				—				—				—				—				—				—
Loss			—				—				—				—				—				—				—
Total			95,914				140,322				7,387				31,998				11,806				16,496				303,923

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, 2015 and December 31, 2014:

 

CONSUMER CREDIT EXPOSURE

CREDIT RISK PROFILE BY PAYMENT PERFORMANCE

(DOLLARS IN THOUSANDS)  

 

June 30, 2015		1-4 Family Residential Mortgages				Home Equity Loans				Home Equity Lines of Credit				Consumer				Total
Payment performance:		$				$				$				$				$
Performing			122,255				12,007				30,482				3,603				168,347
Non-performing			387				—				—				3				390
Total			122,642				12,007				30,482				3,606				168,737

 

December 31, 2014		1-4 Family Residential Mortgages				Home Equity Loans				Home Equity Lines of Credit				Consumer				Total
Payment performance:		$				$				$				$				$
Performing			123,023				12,551				27,308				3,517				166,399
Non-performing			372				12				—				—				384
Total			123,395				12,563				27,308				3,517				166,783

 

The following tables present an age analysis of the Corporation’s past due loans, segregated by loan portfolio class, as of June 30, 2015 and December 31, 2014:

 

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, 2015		Past Due				Past Due				Days				Due				Current				Receivable				Accruing
		$				$				$				$				$				$				$
Commercial real estate
Commercial mortgages			130				181				—				311				94,698				95,009				—
Agriculture mortgages			—				—				—				—				150,380				150,380				—
Construction			—				—				—				—				7,823				7,823				—
Consumer real estate
1-4 family residential mortgages			817				33				387				1,237				121,405				122,642				387
Home equity loans			46				—				—				46				11,961				12,007				—
Home equity lines of credit			—				—				—				—				30,482				30,482				—
Commercial and industrial
Commercial and industrial			18				—				56				74				32,972				33,046				—
Tax-free loans			—				—				—				—				12,843				12,843				—
Agriculture loans			—				—				—				—				16,455				16,455				—
Consumer			12				17				3				32				3,574				3,606				3
Total			1,023				231				446				1,700				482,593				484,293				390

 

																										Loans
										Greater																Receivable >
		30-59 Days				60-89 Days				than 90				Total Past								Total Loans				90 Days and
December 31, 2014		Past Due				Past Due				Days				Due				Current				Receivable				Accruing
		$				$				$				$				$				$				$
Commercial real estate
Commercial mortgages			—				189				266				455				95,459				95,914				—
Agriculture mortgages			—				—				—				—				140,322				140,322				—
Construction			—				—				—				—				7,387				7,387				—
Consumer real estate
1-4 family residential mortgages			665				349				372				1,386				122,009				123,395				372
Home equity loans			78				14				12				104				12,459				12,563				12
Home equity lines of credit			13				—				—				13				27,295				27,308				—
Commercial and industrial
Commercial and industrial			21				73				—				94				31,904				31,998				—
Tax-free loans			—				—				—				—				11,806				11,806				—
Agriculture loans			—				—				—				—				16,496				16,496				—
Consumer			23				1				—				24				3,493				3,517				—
Total			800				626				650				2,076				468,630				470,706				384

The following table presents nonaccrual loans by classes of the loan portfolio as of June 30, 2015 and December 31, 2014:

 

NONACCRUAL LOANS BY LOAN CLASS

(DOLLARS IN THOUSANDS)    

 

		June 30,				December 31,
		2015				2014
		$				$
Commercial real estate
Commercial mortgages			465				894
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			56				73
Tax-free loans			—				—
Agriculture loans			—				—
Consumer			—				—
Total			521				967

 

As of June 30, 2015 and December 31, 2014, 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, 2015 and June 30, 2014, is as follows:

 

IMPAIRED LOANS

(DOLLARS IN THOUSANDS)    

 

		Three months ended June 30,								Six months ended June 30,
		2015				2014				2015				2014
		$				$				$				$
Average recorded balance of impaired loans			1,920				2,580				2,043				2,617
Interest income recognized on impaired loans			21				27				45				55

 

 

Interest income on impaired loans would have increased by approximately $6,000 and $13,000 for the three and six months ended June 30, 2015, compared to $10,000 and $22,000 for the three and six months ended June 30, 2014, had these loans performed in accordance with their original terms.

 

During the six months ended June 30, 2015 and 2014, 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 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, 2015, December 31, 2014, and June 30, 2014:

 

IMPAIRED LOAN ANALYSIS

(DOLLARS IN THOUSANDS)  

 

June 30, 2015		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		$				$				$				$				$
With no related allowance recorded:
Commercial real estate
Commercial mortgages			465				1,038				—				607				—
Agriculture mortgages			1,360				1,360				—				1,375				43
Construction			—				—				—				—				—
Total commercial real estate			1,825				2,398				—				1,982				43
Commercial and industrial
Commercial and industrial			56				62				—				61				2
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			56				62				—				61				2
Total with no related allowance			1,881				2,460				—				2,043				45
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			465				1,038				—				607				—
Agriculture mortgages			1,360				1,360				—				1,375				43
Construction			—				—				—				—				—
Total commercial real estate			1,825				2,398				—				1,982				43
Commercial and industrial
Commercial and industrial			56				62				—				61				2
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			56				62				—				61				2
Total			1,881				2,460				—				2,043				45

IMPAIRED LOAN ANALYSIS

(DOLLARS IN THOUSANDS)  

 

December 31, 2014		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		$				$				$				$				$
With no related allowance recorded:
Commercial real estate
Commercial mortgages			745				931				—				931				—
Agriculture mortgages			1,391				1,391				—				1,539				104
Construction			—				—				—				—				—
Total commercial real estate			2,136				2,322				—				2,470				104
Commercial and industrial
Commercial and industrial			73				73				—				86				6
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			73				73				—				86				6
Total with no related allowance			2,209				2,395				—				2,556				110
With an allowance recorded:
Commercial real estate
Commercial mortgages			149				264				1				68				—
Agriculture mortgages			—				—				—				—				—
Construction			—				—				—				—				—
Total commercial real estate			149				264				1				68				—
Commercial and industrial
Commercial and industrial			—				—				—				—				—
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			—				—				—				—				—
Total with a related allowance			149				264				1				68				—
Total by loan class:
Commercial real estate
Commercial mortgages			894				1,195				1				999				—
Agriculture mortgages			1,391				1,391				—				1,539				104
Construction			—				—				—				—				—
Total commercial real estate			2,285				2,586				1				2,538				104
Commercial and industrial
Commercial and industrial			73				73				—				86				6
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			73				73				—				86				6
Total			2,358				2,659				1				2,624				110

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

 

The following table details activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2015:

 

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, 2014			3,834				1,367				1,301				66				573				7,141
Charge-offs			(272	)			—				—				(1	)			—				(273	)
Recoveries			2				—				70				—				—				72
Provision			623				(283	)			(147	)			(11	)			18				200
Balance - March 31, 2015			4,187				1,084				1,224				54				591				7,140
Charge-offs			—				—				(2	)			(3	)			—				(5	)
Recoveries			1				—				11				2				—				14
Provision			(29	)			(20	)			157				22				(30	)			100
Ending Balance - June 30, 2015			4,159				1,064				1,390				75				561				7,249

 

During the six months ended June 30, 2015, provision expense was recorded for the commercial real estate segment with minimal provisions or credit provisions recorded in all other loan categories. There were $272,000 of commercial real estate loan charge-offs during the first quarter of 2015, which increased the historical loss rates and ultimately resulted in a higher required reserve amount for the commercial real estate category. Qualitative factors have been shifting, with more factors declining than increasing. The consumer real estate area had declines in five of nine qualitative factors resulting in a lower required provision. To a lesser degree, the historic loss experience on commercial and industrial loans has been very favorable with more recoveries than charge-offs and two qualitative factors were reduced, resulting in a lower required provision. The consumer loan area saw three qualitative factors reduced with one increased, resulting in a lower required provision on a much smaller loan amount. The higher commercial real estate loan charge-offs and loan growth during the first quarter of 2015 overshadowed the reduction in provisions in the other areas, resulting in a higher total provision required through June 30, 2015.

 

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 ratio, 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 had 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 tables present the balance in the allowance for credit losses and the recorded investment in loans receivable by portfolio segment based on impairment method as of June 30, 2015 and December 31, 2014:

 

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)

             

As of June 30, 2015:		Commercial Real Estate				Consumer Real Estate				Commercial and Industrial				Consumer				Unallocated				Total
		$				$				$				$				$				$
Allowance for credit losses:
Ending balance: individually evaluated
for impairment			—				—				—				—				—				—
Ending balance: collectively evaluated
for impairment			4,159				1,064				1,390				75				561				7,249
Loans receivable:
Ending balance			253,212				165,131				62,344				3,606								484,293
Ending balance: individually evaluated
for impairment			1,825				—				56				—								1,881
Ending balance: collectively evaluated
for impairment			251,387				165,131				62,288				3,606								482,412

 

 

As of December 31, 2014:		Commercial Real Estate				Consumer Real Estate				Commercial and Industrial				Consumer				Unallocated				Total
		$				$				$				$				$				$
Allowance for credit losses:
Ending balance: individually evaluated
for impairment			1				—				—				—				—				1
Ending balance: collectively evaluated
for impairment			3,833				1,367				1,301				66				573				7,140
Loans receivable:
Ending balance			243,623				163,266				60,300				3,517								470,706
Ending balance: individually evaluated
for impairment			2,285				—				73				—								2,358
Ending balance: collectively evaluated
for impairment			241,338				163,266				60,227				3,517								468,348

4. Fair Value Presentation

 

U.S. generally accepted accounting principles establish a hierarchal disclosure framework associated with the level of observable pricing utilized in measuring assets and liabilities at fair value. The three broad levels defined by the hierarchy are as follows:

 

Level I:

Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

 

Level II:

Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.

 

Level III:

Assets and liabilities that have little to no observable pricing as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

 

The following tables present the assets reported on the consolidated balance sheets at their fair value as of June 30, 2015, and December 31, 2014, by level within the fair value hierarchy. As required by U.S. generally accepted accounting principles, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

 

Fair Value Measurements:

 

ASSETS MEASURED ON A RECURRING BASIS

(DOLLARS IN THOUSANDS)  

 

		June 30, 2015
		Level I				Level II				Level III				Total
		$				$				$				$
U.S. government agencies			—				34,267				—				34,267
U.S. agency mortgage-backed securities			—				39,059				—				39,059
U.S. agency collateralized mortgage obligations			—				60,400				—				60,400
Corporate bonds			—				60,309				—				60,309
Obligations of states & political subdivisions			—				96,477				—				96,477
Marketable equity securities			5,547				—				—				5,547
Total securities			5,547				290,512				—				296,059

 

On June 30, 2015, the Corporation held no securities valued using level III inputs. All of the Corporation’s debt instruments were valued using level II inputs, where quoted prices are available and observable, but not necessarily quotes on identical securities traded in active markets on a daily basis. The Corporation’s CRA fund investments and bank stocks are fair valued utilizing level I inputs because the funds have their own quoted prices in an active market. As of June 30, 2015, the CRA fund investments had a $5,000,000 book and fair market value and the bank stock portfolio had a book value of $517,000, and fair market value of $547,000.

Fair Value Measurements:

ASSETS MEASURED ON A RECURRING BASIS

(DOLLARS IN THOUSANDS)  

 

		December 31, 2014
		Level I				Level II				Level III				Total
		$				$				$				$
U.S. government agencies			—				46,159				—				46,159
U.S. agency mortgage-backed securities			—				37,950				—				37,950
U.S. agency collateralized mortgage obligations			—				48,066				—				48,066
Corporate bonds			—				65,108				—				65,108
Obligations of states & political subdivisions			—				93,331				—				93,331
Marketable equity securities			5,208				—				—				5,208
Total securities			5,208				290,614				—				295,822

 

On December 31, 2014, the Corporation held no securities valued using level III inputs. All of the Corporation’s debt instruments were valued using level II inputs, where quoted prices are available and observable but not necessarily quotes on identical securities traded in active markets on a daily basis. As of December 31, 2014, the Corporation’s CRA fund investments had a book and fair market value of $5,000,000 and the bank stock portfolio had a book value of $189,000 and a market value of $208,000 utilizing level I pricing.

 

Financial instruments are considered level III when their values are determined using pricing models, discounted cash flow methodologies, or similar techniques, and at least one significant model assumption or input is unobservable. In addition to these unobservable inputs, the valuation models for level III financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly. Level III financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. There were no level III securities as of June 30, 2015 or December 31, 2014.

 

The following tables present the assets measured on a nonrecurring basis on the Consolidated Balance Sheets at their fair value as of June 30, 2015 and December 31, 2014, by level within the fair value hierarchy:

 

ASSETS MEASURED ON A NONRECURRING BASIS

(Dollars in Thousands)

		June 30, 2015
		Level I $				Level II $				Level III $				Total $
Assets:
Impaired Loans			—				—				1,881				1,881
OREO			—				—				64				64
Total			—				—				1,945				1,945

 

 

		December 31, 2014
		Level I $				Level II $				Level III $				Total $
Assets:
Impaired Loans			—				—				2,357				2,357
OREO			—				—				69				69
Total			—				—				2,426				2,426

 

The Corporation had a total of $1,881,000 of impaired loans as of June 30, 2015, with no specific allocation against these loans and $2,358,000 of impaired loans as of December 31, 2014, with $1,000 of specifically allocated allowance against these loans. The value of impaired loans is generally determined through independent appraisals of the underlying collateral.

Other real estate owned (OREO) is measured at fair value, less estimated costs to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management. The Corporation’s OREO balance consisted of one residential property that was classified as OREO as of June 30, 2015, and a different residential property that was classified as OREO as of December 31, 2014, and sold prior to June 30, 2015. Management has estimated the current value of the OREO property held at June 30, 2015, at $64,000 utilizing level III pricing. Income and expenses from operations and changes in valuation allowance are included in the net expenses from OREO.

 

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis for which the Corporation has utilized level III inputs to determine fair value:

 

QUANTITATIVE INFORMATION ABOUT LEVEL III FAIR VALUE MEASUREMENTS

(DOLLARS IN THOUSANDS)  

 

		June 30, 2015
		Fair Value				Valuation		Unobservable		Range
		Estimate				Techniques		Input		(Weighted Avg)
Impaired loans			1,881			Appraisal of		Appraisal		-20% (-20%)
						collateral (1)		adjustments (2)
								Liquidation		-10% (-10%)
								expenses (2)
OREO			64			Appraisal of		Appraisal
						collateral (1),(3)		adjustments (2)		-40% (-40%)
								Liquidation
								expenses (2)		-1% (-1%)

 

 

		December 31, 2014
		Fair Value				Valuation		Unobservable		Range
		Estimate				Techniques		Input		(Weighted Avg)
Impaired loans			2,357			Appraisal of		Appraisal		-20% (-20%)
						collateral (1)		adjustments (2)
								Liquidation		-10% (-10%)
								expenses (2)
OREO			69			Appraisal of		Appraisal
						collateral (1),(3)		adjustments (2)		-40% (-40%)
								Liquidation
								expenses (2)		-1% (-1%)

 

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level III inputs which are not identifiable.

 

(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.  The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

 

(3) Includes qualitative adjustments by management and estimated liquidation expenses.

Interim Disclosures about Fair Value of Financial Instruments

 

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

 

Cash and Cash Equivalents

For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

 

Securities Available for Sale

Management utilizes quoted market pricing for the fair value of the Corporation's securities that are available for sale, if available. If a quoted market rate is not available, fair value is estimated using quoted market prices for similar securities.

 

Regulatory Stock

Regulatory stock is valued at a stable dollar price, which is the price used to purchase or liquidate shares; therefore, the carrying amount is a reasonable estimate of fair value.

 

Loans Held for Sale

Loans held for sale are individual loans for which the Corporation has a firm sales commitment; therefore, the carrying value is a reasonable estimate of the fair value.

 

Loans

The fair value of fixed and variable rate loans is estimated by discounting back the scheduled future cash flows of the particular loan product, using the market interest rates of comparable loan products in the Corporation’s greater market area, with the same general structure, comparable credit ratings, and for the same remaining maturities.

 

Accrued Interest Receivable

The carrying amount of accrued interest receivable is a reasonable estimate of fair value.

 

Bank Owned Life Insurance

Fair value is equal to the cash surrender value of the life insurance policies.

 

Deposits

The fair value of non-interest bearing demand deposit accounts and interest bearing demand, savings, and money market deposit accounts is based on the amount payable on demand at the reporting date. The fair value of fixed-maturity time deposits is estimated by discounting back the expected cash flows of the time deposit using market interest rates from the Corporation’s greater market area currently offered for similar time deposits with similar remaining maturities.

 

Borrowings

The fair value of a term borrowing is estimated by comparing the rate currently offered for the same type of borrowing instrument with a matching remaining term.

 

Accrued Interest Payable

The carrying amount of accrued interest payable is a reasonable estimate of fair value.

 

Firm Commitments to Extend Credit, Lines of Credit, and Open Letters of Credit

These financial instruments are generally not subject to sale and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment or letter of credit, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment, using fees currently charged to enter into similar agreements with similar credit risk, is not considered material for disclosure purposes. The contractual amounts of unfunded commitments are presented in Note 6.

 

Fair Value of Financial Instruments

 

The carrying amounts and estimated fair values of the Corporation's financial instruments at June 30, 2015 and December 31, 2014, are summarized as follows:

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

(DOLLARS IN THOUSANDS)

 

		June 30, 2015
										Quoted Prices in
										Active Markets				Significant Other				Significant
										for Identical				Observable				Unobservable
		Carrying								Assets				Inputs				Inputs
		Amount				Fair Value				(Level 1)				(Level II)				(Level III)
		$				$				$				$				$
Financial Assets:
Cash and cash equivalents			36,966				36,966				36,966				—				—
Securities available for sale			296,059				296,059				5,547				290,512				—
Regulatory stock			4,037				4,037				4,037				—				—
Loans held for sale			1,294				1,294				1,294				—				—
Loans, net of allowance			477,554				482,248				—				—				482,248
Accrued interest receivable			3,721				3,721				3,721				—				—
Bank owned life insurance			23,449				23,449				23,449				—				—
Financial Liabilities:
Demand deposits			207,826				207,826				207,826				—				—
Interest-bearing demand deposits			10,446				10,446				10,446				—				—
NOW accounts			80,571				80,571				80,571				—				—
Money market deposit accounts			67,843				67,843				67,843				—				—
Savings accounts			142,350				142,350				142,350				—				—
Time deposits			193,514				194,695				—				—				194,695
Total deposits			702,550				703,731				509,036				—				194,695
Short-term borrowings			4,930				4,930				4,930				—				—
Long-term debt			67,094				67,671				—				—				67,671
Accrued interest payable			522				522				522				—				—

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

(DOLLARS IN THOUSANDS)

 

		December 31, 2014
										Quoted Prices in
										Active Markets				Significant Other				Significant
										for Identical				Observable				Unobservable
		Carrying								Assets				Inputs				Inputs
		Amount				Fair Value				(Level 1)				(Level II)				(Level III)
		$				$				$				$				$
Financial Assets:
Cash and cash equivalents			43,412				43,412				43,412				—				—
Securities available for sale			295,822				295,822				5,208				290,614				—
Regulatory stock			3,227				3,227				3,227				—				—
Loans held for sale			506				506				506				—				—
Loans, net of allowance			464,027				463,197				—				—				463,197
Accrued interest receivable			3,706				3,706				3,706				—				—
Bank owned life insurance			20,603				20,603				20,603				—				—
Financial Liabilities:
Demand deposits			210,444				210,444				210,444				—				—
Interest-bearing demand deposits			14,039				14,039				14,039				—				—
NOW accounts			72,951				72,951				72,951				—				—
Money market deposit accounts			69,442				69,442				69,442				—				—
Savings accounts			131,206				131,206				131,206				—				—
Time deposits			201,569				203,787				—				—				203,787
Total deposits			699,651				701,869				498,082				—				203,787
Long-term debt			62,300				63,058				—				—				63,058
Accrued interest payable			586				586				586				—				—

 

 

6.	Commitments and Contingent Liabilities

 

In order to meet the financing needs of its customers in the normal course of business, the Corporation makes various commitments that are not reflected in the accompanying consolidated financial statements. These commitments include firm commitments to extend credit, unused lines of credit, and open letters of credit. As of June 30, 2015, firm loan commitments were $33.9 million, unused lines of credit were $155.1 million, and open letters of credit were $10.9 million. The total of these commitments was $199.9 million, which represents the Corporation’s exposure to credit loss in the event of nonperformance by its customers with respect to these financial instruments. The actual credit losses that may arise from these commitments are expected to compare favorably with the Corporation’s loan loss experience on its loan portfolio taken as a whole. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for balance sheet financial instruments.

 

7.	Accumulated Other Comprehensive Income (Loss)

 

The activity in accumulated other comprehensive income (loss) for the three and six months ended June 30, 2015 and 2014 is as follows:

 

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (1) (2)

(DOLLARS IN THOUSANDS)  

 

		Unrealized
		Gains (Losses)
		on Securities
		Available-for-Sale
		$
Balance at December 31, 2014			1,002
Other comprehensive income before reclassifications			1,529
Amount reclassified from accumulated other comprehensive income			(370	)
Period change			1,159
Balance at March 31, 2015			2,161
Other comprehensive loss before reclassifications			(2,246	)
Amount reclassified from accumulated other comprehensive loss			(396	)
Period change			(2,642	)
Balance at June 30, 2015			(481	)
Balance at December 31, 2013			(3,940	)
Other comprehensive income before reclassifications			2,610
Amount reclassified from accumulated other comprehensive income			(437	)
Period change			2,173
Balance at March 31, 2014			(1,767	)
Other comprehensive income before reclassifications			1,962
Amount reclassified from accumulated other comprehensive income			(384	)
Period change			1,578
Balance at June 30, 2014			(189	)

 

(1)	All amounts are net of tax.  Related income tax expense or benefit is calculated using a Federal income  tax rate of 34%.

(2)	Amounts in parentheses indicate debits.

DETAILS ABOUT ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) COMPONENTS (1)

(DOLLARS IN THOUSANDS)      

 

		Amount Reclassified from
		Accumulated Other Comprehensive
		Income (Loss)
		For the Three Months
		Ended June 30,
		2015				2014				Affected Line Item in the
		$				$				Statements of Income
Securities available-for-sale:
Net securities gains reclassified into earnings			600				582			Gains on securities transactions, net
Related income tax expense			(204	)			(198	)		Provision for federal income taxes
Net effect on accumulated other comprehensive
income for the period			396				384

 

(1) Amounts in parentheses indicate debits.      

 

DETAILS ABOUT ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) COMPONENTS (1)

(DOLLARS IN THOUSANDS)      

 

		Amount Reclassified from
		Accumulated Other Comprehensive
		Income (Loss)
		For the Six Months
		Ended June 30,
		2015				2014				Affected Line Item in the
		$				$				Statements of Income
Securities available-for-sale:
Net securities gains reclassified into earnings			1,161				1,267			Gains on securities transactions, net
Related income tax expense			(395	)			(431	)		Provision for federal income taxes
Net effect on accumulated other comprehensive
income for the period			766				836
Net impairment losses reclassified into earnings			—				(22	)		Net impairment losses on investment securities
Related income tax expense			—				7			Provision for federal income taxes
Net effect on accumulated other comprehensive
income for the period			—				(15	)
Total reclassifications for the period			766				821

 

(1) Amounts in parentheses indicate debits.  

 

 

8. Recently Issued Accounting Standards

 

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-01, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. The amendments in this Update permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments in this Update should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this Update are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. This Update did not have a significant impact on the Corporation’s financial statements.

 

In January 2014, the FASB issued ASU 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments in this Update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity can elect to adopt the amendments in this Update using either a modified retrospective transition method or a prospective transition method. This Update did not have a significant impact on the Corporation’s financial statements.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Corporation is evaluating the effect of adopting this new accounting Update.

 

In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The amendments in this Update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. For repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. The amendments also require enhanced disclosures. The accounting changes in this Update are effective for the first interim or annual period beginning after December 15, 2014. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application is prohibited. The disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The disclosures are not required to be presented for comparative periods before the effective date. This Update did not have a significant impact on the Corporation’s financial statements.

 

In June 2014, the FASB issued ASU 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments when the Terms of an Award Provide that a Performance Target Could Be Achieved After the Requisite Service Period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Entities may apply the amendments in this Update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this Update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In August 2014, the FASB issued ASU 2014-14, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40). The amendments in this Update require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure, (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. This Update did not have a significant impact on the Corporation’s financial statements.

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements -Going Concern (Subtopic 205-40). The amendments in this Update provide guidance in accounting principles generally accepted in the United States of America about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (a consensus of the FASB Emerging Issues Task Force). This ASU clarifies how current U.S. GAAP should be interpreted in subjectively evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Public business entities are required to implement the new requirements in fiscal years and interim periods within those fiscal years beginning after December 15, 2015. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In November 2014, the FASB issued ASU 2014-17, Business Combinations (Topic 805): Pushdown Accounting. The amendments in this Update apply to the separate financial statements of an acquired entity and its subsidiaries that are a business or nonprofit activity (either public or nonpublic) upon the occurrence of an event in which an acquirer (an individual or an entity) obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. If pushdown accounting is not applied in the reporting period in which the change-in-control event occurs, an acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting period to the acquired entity's most recent change-in-control event. The amendments in this Update are effective on November 18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In January 2015, the FASB issued ASU 2015-01, Income Statement –Extraordinary and Unusual Items, as part of its initiative to reduce complexity in accounting standards. This Update eliminates from GAAP the concept of extraordinary items. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810). The amendments in this Update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accord