UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 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 November 7, 2015, the registrant had 2,851,812 shares of $0.20 (par) Common Stock outstanding.

 

ENB FINANCIAL CORP

INDEX TO FORM 10-Q

September 30, 2015

 

 

Part I – FINANCIAL INFORMATION
Item 1.	Financial Statements
Consolidated Balance Sheets at September 30, 2015 and 2014 and December 31, 2014 (Unaudited)		3
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2015 and 2014 (Unaudited)		4
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2015 and 2014 (Unaudited)		5
Consolidated Statements of Cash Flows for the Nine Months Ended September 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	34-70
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	71-75
Item 4.	Controls and Procedures	76
Part II – OTHER INFORMATION		77
Item 1.	Legal Proceedings	77
Item 1A.	Risk Factors	77
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	77
Item 3.	Defaults Upon Senior Securities	77
Item 4.	Mine Safety Disclosures	77
Item 5.	Other Information	77
Item 6.	Exhibits	78
SIGNATURE PAGE		79
EXHIBIT INDEX		80

 

 

Part I - Financial Information

Item 1. Financial Statements

 

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

 

		September 30,				December 31,				September 30,
		2015				2014				2014
		$				$				$
ASSETS
Cash and due from banks			15,668				16,727				13,003
Interest-bearing deposits in other banks			24,139				26,685				31,076
Total cash and cash equivalents			39,807				43,412				44,079
Securities available for sale (at fair value)			278,470				295,822				301,297
Loans held for sale			1,020				506				257
Loans (net of unearned income)			495,039				471,168				457,873
Less: Allowance for loan losses			7,106				7,141				6,968
Net loans			487,933				464,027				450,905
Premises and equipment			21,953				22,447				22,693
Regulatory stock			4,296				3,227				4,184
Bank owned life insurance			23,659				20,603				20,406
Other assets			7,128				7,164				6,970
Total assets			864,266				857,208				850,791
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing			208,678				210,444				188,391
Interest-bearing			484,011				489,207				498,953
Total deposits			692,689				699,651				687,344
Short-term borrowings			9,951				—				7,260
Long-term debt			64,594				62,300				62,300
Other liabilities			2,269				2,490				2,465
Total liabilities			769,503				764,441				759,369
Stockholders' equity:
Common stock, par value $0.20;
Shares:  Authorized 12,000,000
Issued 2,869,557 and Outstanding 2,854,312
(Issued 2,869,557 and Outstanding 2,856,836 as of 12/31/14)
(Issued 2,869,557 and Outstanding  2,857,415 as of 9/30/14)			574				574				574
Capital surplus			4,392				4,375				4,368
Retained earnings			89,804				87,200				86,169
Accumulated other comprehensive income, net of tax			475				1,002				666
Less: Treasury stock cost on 15,245 shares (12,721 shares
as of 12/31/14 and 12,142 shares as of 9/30/14)			(482	)			(384	)			(355	)
Total stockholders' equity			94,763				92,767				91,422
Total liabilities and stockholders' equity			864,266				857,208				850,791

 

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 September 30,								Nine Months ended September 30,
		2015				2014				2015				2014
		$				$				$				$
Interest and dividend income:
Interest and fees on loans			5,060				4,848				15,035				14,444
Interest on securities available for sale
Taxable			761				944				2,566				3,166
Tax-exempt			843				827				2,413				2,547
Interest on deposits at other banks			18				17				51				44
Dividend income			79				60				286				192
Total interest and dividend income			6,761				6,696				20,351				20,393
Interest expense:
Interest on deposits			614				777				1,898				2,343
Interest on borrowings			314				378				995				1,246
Total interest expense			928				1,155				2,893				3,589
Net interest income			5,833				5,541				17,458				16,804
Provision (credit) for loan losses			(150	)			—				150				(300	)
Net interest income after provision (credit) for loan losses			5,983				5,541				17,308				17,104
Other income:
Trust and investment services income			250				309				921				959
Service fees			533				507				1,419				1,321
Commissions			520				507				1,488				1,467
Gains on securities transactions, net			529				624				1,690				1,891
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			226				120				615				250
Earnings on bank-owned life insurance			196				163				530				477
Other income			88				45				274				280
Total other income			2,342				2,275				6,937				6,623
Operating expenses:
Salaries and employee benefits			3,679				3,517				11,055				10,428
Occupancy			508				476				1,586				1,451
Equipment			283				287				849				815
Advertising & marketing			96				95				412				350
Computer software & data processing			407				393				1,165				1,188
Shares tax			195				170				586				536
Professional services			322				311				1,077				991
Other expense			600				518				1,697				1,595
Total operating expenses			6,090				5,767				18,427				17,354
Income before income taxes			2,235				2,049				5,818				6,373
Provision for federal income taxes			382				337				903				1,083
Net income			1,853				1,712				4,915				5,290
Earnings per share of common stock			0.65				0.60				1.72				1.85
Cash dividends paid per share			0.27				0.27				0.81				0.80
Weighted average shares outstanding			2,851,893				2,857,225				2,853,823				2,855,417

 

See Notes to the Unaudited Consolidated Interim Financial Statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(DOLLARS IN THOUSANDS)

 

		Three Months ended September 30,								Nine Months ended September 30,
		2015				2014				2015				2014
		$				$				$				$
Net income			1,853				1,712				4,915				5,290
Other comprehensive income (loss), 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 arising during the period			1,978				1,919				892				8,833
Income tax effect			(673	)			(652	)			(303	)			(3,004	)
			1,305				1,267				589				5,829
Gains recognized in earnings			(529	)			(624	)			(1,690	)			(1,891	)
Income tax effect			180				212				574				643
			(349	)			(412	)			(1,116	)			(1,248	)
Unrealized holding gains (losses) on securities available for sale not
other-than-temporarily impaired, net of tax			956				855				(527	)			4,581
Other comprehensive income (loss), net of tax			956				855				(527	)			4,606
Comprehensive Income			2,809				2,567				4,388				9,896

 

See Notes to the Unaudited Consolidated Interim Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)		Nine Months Ended September 30,
		2015				2014
		$				$
Cash flows from operating activities:
Net income			4,915				5,290
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of securities premiums and discounts and loan fees			4,429				3,726
Decrease in interest receivable			196				208
Decrease in interest payable			(90	)			(100	)
Provision (credit) for loan losses			150				(300	)
Gains on securities transactions, net			(1,690	)			(1,891	)
Impairment losses on securities			—				22
Gains on sale of mortgages			(615	)			(250	)
Loans originated for sale			(19,927	)			(8,867	)
Proceeds from sales of loans			20,028				8,919
Earnings on bank-owned life insurance			(530	)			(477	)
Loss on sale of other real estate owned			30				23
Depreciation of premises and equipment and amortization of software			1,160				1,086
Deferred income tax			285				480
Other assets and other liabilities, net			(276	)			(663	)
Net cash provided by operating activities			8,065				7,206
Cash flows from investing activities:
Securities available for sale:
Proceeds from maturities, calls, and repayments			37,005				24,173
Proceeds from sales			123,335				99,348
Purchases			(146,374	)			(119,273	)
Proceeds from sale of other real estate owned			176				48
Purchase of regulatory bank stock			(1,288	)			(890	)
Redemptions of regulatory bank stock			219				366
Purchase of bank-owned life insurance			(2,526	)			(18	)
Net increase in loans			(24,346	)			(19,755	)
Purchases of premises and equipment			(588	)			(691	)
Purchase of computer software			(174	)			(140	)
Net cash used for investing activities			(14,561	)			(16,832	)
Cash flows from financing activities:
Net increase in demand, NOW, and savings accounts			7,346				33,356
Net decrease in time deposits			(14,308	)			(2,638	)
Net increase in short-term borrowings			9,951				3,360
Proceeds from long-term debt			12,794				13,800
Repayments of long-term debt			(10,500	)			(16,500	)
Dividends paid			(2,311	)			(2,286	)
Treasury stock sold			392				374
Treasury stock purchased			(473	)			(338	)
Net cash provided by financing activities			2,891				29,128
Increase (decrease) in cash and cash equivalents			(3,605	)			19,502
Cash and cash equivalents at beginning of period			43,412				24,577
Cash and cash equivalents at end of period			39,807				44,079
Supplemental disclosures of cash flow information:
Interest paid			2,982				3,689
Income taxes paid			640				300
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			(800	)			6,979

 

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 third quarter of 2015, is reporting on the results of operations and financial condition of ENB Financial Corp.

 

Operating results for the three and nine months ended September 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 September 30, 2015, and December 31, 2014, are as follows:

 

						Gross				Gross
(DOLLARS IN THOUSANDS)		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
		$				$				$				$
September 30, 2015
U.S. government agencies			25,420				57				(45	)			25,432
U.S. agency mortgage-backed securities			38,392				48				(248	)			38,192
U.S. agency collateralized mortgage obligations			47,810				375				(309	)			47,876
Corporate bonds			60,542				104				(267	)			60,379
Obligations of states and political subdivisions			100,046				1,800				(805	)			101,041
Total debt securities			272,210				2,384				(1,674	)			272,920
Marketable equity securities			5,540				20				(10	)			5,550
Total securities available for sale			277,750				2,404				(1,684	)			278,470
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 September 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			19,693				19,683
Due after one year through five years			102,007				101,831
Due after five years through ten years			58,519				58,855
Due after ten years			91,991				92,551
Total debt securities			272,210				272,920

 

Securities available for sale with a par value of $67,960,000 and $75,013,000 at September 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 $72,939,000 at September 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 September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
		$				$				$				$
Proceeds from sales			46,797				29,834				123,335				99,304
Gross realized gains			531				825				1,784				2,576
Gross realized losses			2				201				94				685

 

 

SUMMARY OF GAINS AND LOSSES ON SECURITIES AVAILABLE FOR SALE

(DOLLARS IN THOUSANDS)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
		$				$				$				$
Gross realized gains			531				825				1,784				2,576
Gross realized losses			2				201				94				685
Impairment on securities			—				—				—				22
Total gross realized losses			2				201				94				707
Net gains on securities			529				624				1,690				1,869

 

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 September 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 September 30, 2015
U.S. government agencies			996				(4	)			3,974				(41	)			4,970				(45	)
U.S. agency mortgage-backed securities			17,917				(156	)			2,481				(92	)			20,398				(248	)
U.S. agency collateralized mortgage obligations			15,768				(197	)			6,080				(112	)			21,848				(309	)
Corporate bonds			32,648				(249	)			5,173				(18	)			37,821				(267	)
Obligations of states & political subdivisions			36,148				(600	)			8,291				(205	)			44,439				(805	)
Total debt securities			103,477				(1,206	)			25,999				(468	)			129,476				(1,674	)
Marketable equity securities			172				(10	)			—				—				172				(10	)
Total temporarily impaired securities			103,649				(1,216	)			25,999				(468	)			129,648				(1,684	)
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 112 positions that were carrying unrealized losses as of September 30, 2015. In the equity security portfolio there were four positions that were carrying unrealized losses as of September 30, 2015. There were no instruments considered to be other-than-temporarily impaired at September 30, 2015.

 

The Corporation evaluates both equity and fixed maturity positions for OTTI at least on a quarterly basis, and more frequently when economic and market concerns warrant such evaluation. Management follows a practice of evaluating for impairment any security identified as carrying unrealized losses of greater than 10%. As of September 30, 2015, no securities, debt or equity, were carrying unrealized losses of greater than 10%. Management will also evaluate for impairment securities with unrealized losses of greater than 5%, but under 10%, that have been carrying unrealized losses for an extended period of time. Management would also conduct impairment analysis on any debt security that began passing through actual credit losses, or based on projected future cash flows, was expected to do so in the future. There are no securities held as of September 30, 2015, that management believes would incur future credit losses.

 

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 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 September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
		$				$				$				$
Beginning balance			—				—				—				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	)
Ending balance			—				—				—				—

 

 

With the sale of the remaining PCMO portfolio during the second quarter of 2014, there are no remaining impairment balances in subsequent periods.

3.	Loans and Allowance for Loan Losses

 

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

 

LOAN PORTFOLIO

(DOLLARS IN THOUSANDS)  

 

		September 30,				December 31,
		2015				2014
		$				$
Commercial real estate
Commercial mortgages			90,740				95,914
Agriculture mortgages			152,015				140,322
Construction			8,963				7,387
Total commercial real estate			251,718				243,623
Consumer real estate (a)
1-4 family residential mortgages			127,716				123,395
Home equity loans			11,857				12,563
Home equity lines of credit			34,476				27,308
Total consumer real estate			174,049				163,266
Commercial and industrial
Commercial and industrial			35,848				31,998
Tax-free loans			12,613				11,806
Agriculture loans			16,705				16,496
Total commercial and industrial			65,166				60,300
Consumer			3,498				3,517
Gross loans prior to deferred fees			494,431				470,706
Less:
Deferred loan costs, net			(608	)			(462	)
Allowance for loan losses			7,106				7,141
Total net loans			487,933				464,027

 

(a)	Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets, totaled $32,537,000 and $16,670,000 as of September 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 September 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)

 

September 30, 2015		Commercial Mortgages				Agriculture Mortgages				Construction				Commercial and Industrial				Tax-free Loans				Agriculture Loans				Total
		$				$				$				$				$				$				$
Grade:
Pass			83,212				148,865				7,790				34,928				12,613				16,348				303,756
Special Mention			1,031				1,144				—				48				—				31				2,254
Substandard			6,497				2,006				1,173				872				—				326				10,874
Doubtful			—				—				—				—				—				—				—
Loss			—				—				—				—				—				—				—
Total			90,740				152,015				8,963				35,848				12,613				16,705				316,884

 

 

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 September 30, 2015 and December 31, 2014:

 

CONSUMER CREDIT EXPOSURE

CREDIT RISK PROFILE BY PAYMENT PERFORMANCE

(DOLLARS IN THOUSANDS)

 

September 30, 2015		1-4 Family Residential Mortgages				Home Equity Loans				Home Equity Lines of Credit				Consumer				Total
Payment performance:		$				$				$				$				$
Performing			127,308				11,857				34,476				3,488				177,129
Non-performing			408				—				—				10				418
Total			127,716				11,857				34,476				3,498				177,547

 

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 September 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
September 30, 2015		Past Due				Past Due				Days				Due				Current				Receivable				Accruing
		$				$				$				$				$				$				$
Commercial real estate
Commercial mortgages			272				—				—				272				90,468				90,740				—
Agriculture mortgages			—				—				—				—				152,015				152,015				—
Construction			—				—				—				—				8,963				8,963				—
Consumer real estate
1-4 family residential mortgages			953				167				408				1,528				126,188				127,716				408
Home equity loans			27				—				—				27				11,830				11,857				—
Home equity lines of credit			47				12				—				59				34,417				34,476				—
Commercial and industrial
Commercial and industrial			15				56				—				71				35,777				35,848				—
Tax-free loans			—				—				—				—				12,613				12,613				—
Agriculture loans			—				—				—				—				16,705				16,705				—
Consumer			17				10				10				37				3,461				3,498				10
Total			1,331				245				418				1,994				492,437				494,431				418

 

																										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 September 30, 2015 and December 31, 2014:

 

NONACCRUAL LOANS BY LOAN CLASS

(DOLLARS IN THOUSANDS)  

 

		September 30,				December 31,
		2015				2014
		$				$
Commercial real estate
Commercial mortgages			423				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			46				73
Tax-free loans			—				—
Agriculture loans			—				—
Consumer			—				—
Total			469				967

 

As of September 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 nine months ended September 30, 2015 and September 30, 2014, is as follows:

 

IMPAIRED LOANS

(DOLLARS IN THOUSANDS)  

 

		Three months ended September 30,								Nine months ended September 30,
		2015				2014				2015				2014
		$				$				$				$
Average recorded balance of impaired loans			1,820				2,534				1,997				2,589
Interest income recognized on impaired loans			23				27				68				81

 

Interest income on impaired loans would have increased by approximately $3,000 and $17,000 for the three and nine months ended September 30, 2015, compared to $9,000 and $32,000 for the three and nine months ended September 30, 2014, had these loans performed in accordance with their original terms.

 

During the nine months ended September 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 September 30, 2015, December 31, 2014, and September 30, 2014:

 

IMPAIRED LOAN ANALYSIS

(DOLLARS IN THOUSANDS)

 

September 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			423				995				—				572				—
Agriculture mortgages			1,345				1,345				—				1,367				65
Construction			—				—				—				—				—
Total commercial real estate			1,768				2,340				—				1,939				65
Commercial and industrial
Commercial and industrial			46				53				—				58				3
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			46				53				—				58				3
Total with no related allowance			1,814				2,393				—				1,997				68
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			423				995				—				572				—
Agriculture mortgages			1,345				1,345				—				1,367				65
Construction			—				—				—				—				—
Total commercial real estate			1,768				2,340				—				1,939				65
Commercial and industrial
Commercial and industrial			46				53				—				58				3
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			46				53				—				58				3
Total			1,814				2,393				—				1,997				68

 

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)  

 

September 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			1,289				1,386				—				924				—
Agriculture mortgages			1,556				1,556				—				1,574				81
Construction			—				—				—				—				—
Total commercial real estate			2,845				2,942				—				2,498				81
Commercial and industrial
Commercial and industrial			76				76				—				91				—
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			76				76				—				91				—
Total with no related allowance			2,921				3,018				—				2,589				81
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			1,289				1,386				—				924				—
Agriculture mortgages			1,556				1,556				—				1,574				81
Construction			—				—				—				—				—
Total commercial real estate			2,845				2,942				—				2,498				81
Commercial and industrial
Commercial and industrial			76				76				—				91				—
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			76				76				—				91				—
Total			2,921				3,018				—				2,589				81

 

The following table details activity in the allowance for loan losses by portfolio segment for the nine months ended September 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
Charge-offs			—				—				—				(4	)			—				(4	)
Recoveries			—				—				10				1				—				11
Provision			(63	)			94				(195	)			(26	)			40				(150	)
Ending Balance - September 30, 2015			4,096				1,158				1,205				46				601				7,106

 

During the nine months ended September 30, 2015, provision expense was recorded for the commercial real estate segment with 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 as of March 31, 2015. However, since the first quarter, charge-offs have been at a minimum, economic conditions continue to improve, and the qualitative factors impacting commercial real estate have declined, resulting in a lower allocation. The majority of the Corporation’s total allowance is devoted to commercial real estate as this is the largest element of the portfolio and generally carries a higher element of credit risk. With charge-offs and recoveries running at minimal levels for the second and third quarters of 2015, it has been the qualitative factor movements that have been primarily responsible for adjusting the allocations shown above for the four main loan categories.

 

Management evaluates nine qualitative factors that impact the allocations for the four major loan groups shown above. The accumulation of all nine qualitative factors results in a total, which is then added to the historical loss ratio to arrive at an adjusted loss percentage. The balances in each loan sector are than multiplied by the adjusted loss percentage to arrive at the allocation or provision shown above. All of the nine qualitative factors that management considers had declined from December 31, 2014 to September 30, 2015. While some factors increased, the majority of the factors declined throughout the year. The only area that experienced an increase in provision for the third quarter of 2015 was consumer real estate. Consumer real estate includes residential real estate loans including mortgages and both fixed and variable rate home equity loans. Management continues to grow the residential mortgage program and has expanded the product offerings. Home equity options have been enhanced with the Homeline home equity line of credit, causing an increase in those loans. All of the loan categories outside of commercial real estate ended September 30, 2015 with a lower allowance than at December 31, 2014, primarily due to lower qualitative factors, but also influenced by the loan growth in these areas.

The following table details activity in the allowance for loan losses by portfolio segment for the nine months ended September 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
Charge-offs			—				—				(12	)			(2	)			—				(14	)
Recoveries			—				—				14				—				—				14
Provision			159				(34	)			(74	)			3				(54	)			—
Ending Balance - September 30, 2014			3,567				1,412				1,291				81				617				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 nine months ended September 30, 2014, credit provisions were recorded for the commercial real estate, commercial and industrial, and consumer loan categories while there was a small provision expense required for the consumer real estate loan category. There were no commercial loan charge-offs during the first nine months of 2014, which reduced the historical loss rates and ultimately resulted in a lower required reserve amount for the commercial loan categories. Qualitative factors were shifting throughout the first nine months of 2014, with some increasing and some decreasing, but overall, qualitative factors across the board were declining. Conversely, factors in the allowance calculation related to consumer real estate were increased in the first nine months 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 September 30, 2015 and December 31, 2014:

 

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)

 

As of September 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			4,096				1,158				1,205				46				601				7,106
Loans receivable:
Ending balance			251,718				174,049				65,166				3,498								494,431
Ending balance: individually evaluated
for impairment			1,768				—				46				—								1,814
Ending balance: collectively evaluated
for impairment			249,950				174,049				65,120				3,498								492,617

 

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 September 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)  

 

		September 30, 2015
		Level I				Level II				Level III				Total
		$				$				$				$
U.S. government agencies			—				25,432				—				25,432
U.S. agency mortgage-backed securities			—				38,192				—				38,192
U.S. agency collateralized mortgage obligations			—				47,876				—				47,876
Corporate bonds			—				60,379				—				60,379
Obligations of states & political subdivisions			—				101,041				—				101,041
Marketable equity securities			5,550				—				—				5,550
Total securities			5,550				272,920				—				278,470

 

On September 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 September 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 $540,000, and fair market value of $550,000.

 

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 September 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 September 30, 2015 and December 31, 2014, by level within the fair value hierarchy:

 

ASSETS MEASURED ON A NONRECURRING BASIS

(Dollars in Thousands)

		September 30, 2015
		Level I $				Level II $				Level III $				Total $
Assets:
Impaired Loans			—				—				1,814				1,814
OREO			—				—				—				—
Total			—				—				1,814				1,814

 

 

		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 $1,814,000 of impaired loans as of September 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 had no OREO properties as of September 30, 2015, and had one residential property that was classified as OREO as of December 31, 2014. 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)  

 

		September 30, 2015
		Fair Value				Valuation		Unobservable		Range
		Estimate				Techniques		Input		(Weighted Avg)
Impaired loans			1,814			Appraisal of		Appraisal		-20% (-20%)
						collateral (1)		adjustments (2)
								Liquidation		-10% (-10%)
								expenses (2)

 

		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.  

5. 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 September 30, 2015 and December 31, 2014, are summarized as follows:

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

(DOLLARS IN THOUSANDS)

 

		September 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			39,807				39,807				39,807				—				—
Securities available for sale			278,470				278,470				5,550				272,920				—
Regulatory stock			4,296				4,296				4,296				—				—
Loans held for sale			1,020				1,020				1,020				—				—
Loans, net of allowance			487,933				485,783				—				—				485,783
Accrued interest receivable			3,510				3,510				3,510				—				—
Bank owned life insurance			23,659				23,659				23,659				—				—
Financial Liabilities:
Demand deposits			208,678				208,678				208,678				—				—
Interest-bearing demand deposits			14,270				14,270				14,270				—				—
NOW accounts			69,439				69,439				69,439				—				—
Money market deposit accounts			71,091				71,091				71,091				—				—
Savings accounts			141,950				141,950				141,950				—				—
Time deposits			187,261				189,248				—				—				189,248
Total deposits			692,689				694,676				505,428				—				189,248
Short-term borrowings			9,951				9,951				9,951				—				—
Long-term debt			64,594				65,232				—				—				65,232
Accrued interest payable			496				496				496				—				—

 

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 September 30, 2015, firm loan commitments were $46.9 million, unused lines of credit were $154.2 million, and open letters of credit were $11.3 million. The total of these commitments was $212.4 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 nine months ended September 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	)
Other comprehensive income before reclassifications			1,305
Amount reclassified from accumulated other comprehensive income			(349	)
Period change			956
Balance at September 30, 2015			475
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	)
Other comprehensive income before reclassifications			1,267
Amount reclassified from accumulated other comprehensive income			(412	)
Period change			855
Balance at September 30, 2014			666

 

(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 September 30,
		2015				2014				Affected Line Item in the
		$				$				Statements of Income
Securities available-for-sale:
Net securities gains reclassified into earnings			529				624			Gains on securities transactions, net
Related income tax expense			(180	)			(212	)		Provision for federal income taxes
Net effect on accumulated other comprehensive
income for the period			349				412

 

(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 Nine Months
		Ended September 30,
		2015				2014				Affected Line Item in the
		$				$				Statements of Income
Securities available-for-sale:
Net securities gains reclassified into earnings			1,690				1,891			Gains on securities transactions, net
Related income tax expense			(574	)			(643	)		Provision for federal income taxes
Net effect on accumulated other comprehensive
income for the period			1,116				1,248
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			1,116				1,233

 

(1) Amounts in parentheses indicate debits.  

 

 

8. Recently Issued Accounting Standards

 

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 2014-12, 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 2014-15, 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 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 accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this Update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30), as part of its initiative to reduce complexity in accounting standards. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In April 2015, the FASB issued ASU 2015-04, Compensation-Retirement Benefits (Topic 715), as part of its initiative to reduce complexity in accounting standards. For an entity with a fiscal year-end that does not coincide with a month-end, the amendments in this Update provide a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity's fiscal year-end and apply that practical expedient consistently from year to year. The practical expedient should be applied consistently to all plans if an entity has more than one plan. The amendments in this Update are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Earlier application is permitted. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In April 2015, the FASB issued ASU 2015-05, Intangible – Goodwill and Other Internal Use Software (Topic 350-40), as part of its initiative to reduce complexity in accounting standards. This guidance will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The amendments in this Update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. For public business entities, the Board decided that the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. For all other entities, the amendments will be effective for annual periods beginning after December 15, 2015, and interim periods in annual periods beginning after December 15, 2016. Early adoption is permitted for all entities. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In April 2015, the FASB issued ASU 2015-06, Earnings Per Share (Topic 260): Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions. Topic 260, Earnings Per Share, contains guidance that addresses master limited partnerships that originated from Emerging Issues Task Force (EITF) Issue No. 07-4, Application of the Two-Class Method under FASB Statement No. 128 to Master Limited Partnerships. Under Topic 260, master limited partnerships apply the two-class method of calculating earnings per unit because the general partner, limited partners, and incentive distribution rights holders each participate differently in the distribution of available cash in accordance with the contractual rights contained in the partnership agreement. The amendments in this Update specify that for purposes of calculating historical earnings per unit under the two-class method, the earnings (losses) of a transferred business before the date of a dropdown transaction should be allocated entirely to the general partner. In that circumstance, the previously reported earnings per unit of the limited partners (which is typically the earnings per unit measure presented in the financial statements) would not change as a result of the dropdown transaction. Qualitative disclosures about how the rights to the earnings (losses) differ before and after the dropdown transaction occurs for purposes of computing earnings per unit under the two-class method also are required. The amendments in this Update are effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Earlier application is permitted. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). The Update applies to reporting entities that elect to measure the fair value of an investment using the net asset value per share (or its equivalent) practical expedient. Under the amendments in this Update, investments for which fair value is measured at net asset value per share (or its equivalent) using the practical expedient should not be categorized in the fair value hierarchy. Removing those investments from the fair value hierarchy not only eliminates the diversity in practice resulting from the way in which investments measured at net asset value per share (or its equivalent) with future redemption dates are classified, but also ensures that all investments categorized in the fair value hierarchy are classified using a consistent approach. Investments that calculate net asset value per share (or its equivalent), but for which the practical expedient is not applied will continue to be included in the fair value hierarchy. A reporting entity should continue to disclose information on investments for which fair value is measured at net asset value (or its equivalent) as a practical expedient to help users understand the nature and risks of the investments and whether the investments, if sold, are probable of being sold at amounts different from net asset value. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. A reporting entity should apply the amendments retrospectively to all periods presented. The retrospective approach requires that an investment for which fair value is measured using the net asset value per share practical expedient be removed from the fair value hierarchy in all periods presented in an entity's financial statements. Earlier application is permitted. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In May 2015, the FASB issued ASU 2015-08, Business Combinations - Pushdown Accounting - Amendment to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115. This ASU was issued to amend various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No. 115. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In May 2015, the FASB issued ASU 2015-09, Financial Services-Insurance (Topic 944) - Disclosure about Short-Duration Contracts. The amendments apply to all insurance entities that issue short-duration contracts as defined in Topic 944, Financial Services-Insurance. The amendments require insurance entities to disclose for annual reporting periods certain information about the liability for unpaid claims and claim adjustment expenses. The amendments also require insurance entities to disclose information about significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effects on the financial statements. Additionally, the amendments require insurance entities to disclose for annual and interim reporting periods a rollforward of the liability for unpaid claims and claim adjustment expenses, described in Topic 944. For health insurance claims, the amendments require the disclosure of the total of incurred-but-not-reported liabilities plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses. For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. For all other entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within annual periods beginning after December 15, 2017. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements. The amendments in this Update represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Transition guidance varies based on the amendments in this Update. The amendments in this Update that require transition guidance are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. All other amendments will be effective upon the issuance of this Update. This Update is not expected to have a significant impact on the Corporation’s financial statements.