XOTC:ENBP Quarterly Report 10-Q Filing - 6/30/2012

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended  June 30, 2012

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 ý          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 ý          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 ý

 

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

Yes o          No ý

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of August 8, 2012, the registrant had 2,853,759 shares of $0.20 (par) Common Stock outstanding.

 

ENB FINANCIAL CORP

INDEX TO FORM 10-Q

June 30, 2012

 

Part I – FINANCIAL INFORMATION
	Item 1.	Financial Statements
	Consolidated Balance Sheets at June 30, 2012 and 2011 and December 31, 2011 (Unaudited)		3
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2012 and 2011 (Unaudited)		4
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2011 (Unaudited)		5
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 (Unaudited)		6
	Notes to the Unaudited Consolidated Interim Financial Statements		7-28
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29-60
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	61-64
	Item 4.	Controls and Procedures	65
Part II – OTHER INFORMATION			66
	Item 1.	Legal Proceedings	66
	Item 1A.	Risk Factors	66
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66
	Item 3.	Defaults Upon Senior Securities	66
	Item 4.	Mine Safety Disclosures	66
	Item 5.	Other Information	66
	Item 6.	Exhibits	67
SIGNATURE PAGE			68
EXHIBIT INDEX			69

 

 

PART I.     FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

ENB Financial Corp

Consolidated Balance Sheets (Unaudited)

 

(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)		June 30,				December 31,				June 30,
		2012				2011				2011
		$				$				$
ASSETS
Cash and due from banks			10,245				12,511				10,335
Intererest-bearing deposits in other banks			25,115				19,375				28,237
Total cash and cash equivalents			35,360				31,886				38,572
Securities available for sale (at fair value)			294,146				284,011				265,637
Loans held for sale			186				1,926				253
Loans (net of unearned income)			402,350				412,638				409,002
Less: Allowance for loan losses			7,877				8,480				7,801
Net loans			394,473				404,158				401,201
Premises and equipment			21,247				21,366				20,523
Regulatory stock			4,168				4,148				4,242
Bank owned life insurance			18,844				16,552				16,213
Other assets			8,208				7,099				7,933
Total assets			776,632				771,146				754,574
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing			146,036				149,510				137,928
Interest-bearing			468,593				456,168				455,561
Total deposits			614,629				605,678				593,489
Long-term debt			73,000				73,000				79,000
Accounts payable for security purchases not yet settled			—				6,964				—
Other liabilities			2,851				3,033				3,157
Total liabilities			690,480				688,675				675,646
Stockholders' equity:
Common stock, par value $0.20;
Shares:  Authorized 12,000,000
Issued 2,869,557 and Outstanding 2,855,933
(Issued 2,869,557 and Outstanding 2,858,831 as of 12-31-11)
(Issued 2,869,557 and Outstanding 2,860,877 as of 6-30-11)			574				574				574
Capital surplus			4,304				4,304				4,315
Retained earnings			76,365				73,632				71,404
Accumulated other comprehensive income, net of tax			5,242				4,221				2,847
Less: Treasury stock shares at cost 13,624 (10,726 shares
as of 12-31-11 and 8,680 shares as of 6-30-11)			(333	)			(260	)			(212	)
Total stockholders' equity			86,152				82,471				78,928
Total liabilities and stockholders' equity			776,632				771,146				754,574

 

 

ENB Financial Corp

Consolidated Statements of Income (Unaudited)

Periods Ended June 30, 2012 and 2011

 

		Three Months								Six Months
		2012				2011				2012				2011
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)		$				$				$				$
Interest and dividend income:
Interest and fees on loans			5,071				5,444				10,261				10,885
Interest on securities available for sale
Taxable			1,159				1,607				2,359				3,107
Tax-exempt			892				836				1,787				1,698
Interest on deposits at other banks			20				13				36				18
Dividend income			26				31				55				66
Total interest and dividend income			7,168				7,931				14,498				15,774
Interest expense:
Interest on deposits			1,082				1,301				2,210				2,735
Interest on long-term debt			543				791				1,156				1,553
Total interest expense			1,625				2,092				3,366				4,288
Net interest income			5,543				5,839				11,132				11,486
Provision (credit) for loan losses			(350	)			450				(600	)			900
Net interest income after provision/(credit) for loan losses			5,893				5,389				11,732				10,586
Other income:
Trust and investment services income			270				316				568				594
Service fees			437				455				866				885
Commissions			486				482				964				907
Gains on securities transactions, net			230				593				661				1,077
Impairment losses on securities:
Impairment losses on investment securities			—				(491	)			(55	)			(894	)
Non-credit related (gains) losses on securities not expected
to be sold in other comprehensive income before tax			—				419				(31	)			675
Net impairment losses on investment securities			—				(72	)			(86	)			(219	)
Gains on sale of mortgages			63				26				131				80
Losses on sale of loans			—				(263	)			—				(263	)
Earnings on bank owned life insurance			183				147				598				293
Other income			64				66				196				176
Total other income			1,733				1,750				3,898				3,530
Operating expenses:
Salaries and employee benefits			3,079				2,810				6,306				5,662
Occupancy			414				396				841				807
Equipment			227				202				436				398
Advertising & marketing			134				94				220				165
Computer software & data processing			402				392				798				777
Bank shares tax			202				208				416				416
Professional services			308				386				588				687
FDIC insurance			89				123				180				345
Other expense			407				373				909				733
Total operating expenses			5,262				4,984				10,694				9,990
Income before income taxes			2,364				2,155				4,936				4,126
Provision for federal income taxes			393				303				776				577
Net income			1,971				1,852				4,160				3,549
Earnings per share of common stock			0.69				0.65				1.46				1.24
Cash dividends paid per share			0.25				0.24				0.50				0.48
Weighted average shares outstanding			2,856,060				2,858,564				2,855,976				2,857,170

 

 

ENB Financial Corp

Consolidated Statements of Comprehensive Income (Unaudited)

Periods Ended June 30, 2012 and 2011

  

		Three Months								Six Months
		2012				2011				2012				2011
(DOLLARS IN THOUSANDS)		$				$				$				$
Net income			1,971				1,852				4,160				3,549
Other comprehensive (income) loss, net of tax:
Net change in unrealized (gains) losses:
Other-than-temporarily impaired securities available for sale:
Gains (losses) arising during the quarter			—				(491	)			31				(894	)
Income tax effect			—				167				(11	)			304
			—				(324	)			20				(590	)
Losses recognized in earnings			—				72				86				219
Income tax effect			—				(24	)			(29	)			(75	)
			—				48				57				144
Unrealized holding gains (losses) on other-than-temporarily impaired
securities available for sale, net of tax			—				(276	)			77				(446	)
Securities available for sale not other-than-temporarily impaired:
Gains arising during the period			1,727				4,395				2,091				5,397
Income tax effect			(587	)			(1,494	)			(711	)			(1,835	)
			1,140				2,901				1,380				3,562
Gains recognized in earnings			(230	)			(593	)			(661	)			(1,077	)
Income tax effect			78				201				225				366
			(152	)			(392	)			(436	)			(711	)
Unrealized holding (losses) gains on securities available for sale not
other-than-temporarily impaired, net of tax			988				2,509				944				2,851
Other comprehensive income			988				2,233				1,021				2,405
Comprehensive Income			2,959				4,085				5,181				5,954

 

 

 

ENB Financial Corp

Consolidated Statements of Cash Flows (Unaudited)

 

(DOLLARS IN THOUSANDS)		Six Months Ended June 30,
		2012				2011
		$				$
Cash flows from operating activities:
Net income			4,160				3,549
Adjustments to reconcile net income to net cash
(used for) provided by operating activities:
Net amortization of securities premiums and discounts and loan fees			1,599				866
Increase in interest receivable			(182	)			(12	)
Decrease in interest payable			(149	)			(150	)
Provision (credit) for loan losses			(600	)			900
Gains on securities transactions, net			(661	)			(1,077	)
Impairment losses on securities			86				219
Losses on the sale of student loans			—				263
Gains on sale of mortgages			(131	)			(80	)
Loans originated for sale			(6,730	)			(5,452	)
Proceeds from sales of loans			8,601				6,050
Earnings on bank-owned life insurance			(598	)			(293	)
Depreciation of premises and equipment and amortization of software			668				677
Deferred income tax			296				(20	)
Decrease in prepaid federal deposit insurance			157				315
Decrease in accounts payable for securities purchased not yet settled			(6,964	)			—
Other assets and other liabilities, net			(1,905	)			(176	)
Net cash (used for) provided by operating activities			(2,353	)			5,579
Cash flows from investing activities:
Securities available for sale:
Proceeds from maturities, calls, and repayments			43,839				28,470
Proceeds from sales			22,904				45,988
Purchases			(76,357	)			(77,324	)
Purchase of other real estate owned			(112	)			—
Purchase of regulatory bank stock			(20	)			—
Redemptions of regulatory bank stock			—				438
Purchase of bank-owned life insurance			(2,520	)			(29	)
Proceeds from bank-owned life insurance			826				—
Proceeds from sale of student loans			—				7,981
Net decrease (increase) in loans			10,268				(2,239	)
Purchases of premises and equipment			(437	)			(568	)
Purchase of computer software			(15	)			(86	)
Net cash (used for) provided by investing activities			(1,624	)			2,631
Cash flows from financing activities:
Net increase in demand, NOW, and savings accounts			6,895				12,358
Net increase (decrease) in time deposits			2,056				(14,463	)
Proceeds from long-term debt			15,000				7,500
Repayments of long-term debt			(15,000	)			(3,000	)
Dividends paid			(1,427	)			(1,371	)
Treasury stock sold			208				231
Treasury stock purchased			(281	)			(119	)
Net cash provided by financing activities			7,451				1,136
Increase in cash and cash equivalents			3,474				9,346
Cash and cash equivalents at beginning of period			31,886				29,226
Cash and cash equivalents at end of period			35,360				38,572
Supplemental disclosures of cash flow information:
Interest paid			3,515				4,438
Income taxes paid			595				690
Supplemental disclosure of non-cash investing and financing activities:
Net transfer of other real estate owned held for sale from loans			20				—
Fair value adjustments for securities available for sale			1,548				3,644

ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

 

1.       Basis of Presentation

 

The accompanying unaudited consolidated 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 2012, 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, 2012, are not necessarily indicative of the results that may be expected for the year ended December 31, 2012. 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, 2011.

 

2.       Securities Available for Sale

 

The amortized cost and fair value of securities held at June 30, 2012, and December 31, 2011, are as follows:

 

						Gross				Gross
(DOLLARS IN THOUSANDS)		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
		$				$				$				$
June 30, 2012
U.S. government agencies			36,589				1,888				—				38,477
U.S. agency mortgage-backed securities			56,143				1,053				(49	)			57,147
U.S. agency collateralized mortgage obligations			48,981				393				(265	)			49,109
Private collateralized mortgage obligations			6,594				67				(924	)			5,737
Corporate bonds			42,479				465				(205	)			42,739
Obligations of states and political subdivisions			91,418				5,729				(160	)			96,987
Total debt securities			282,204				9,595				(1,603	)			290,196
Marketable equity securities			4,000				—				(50	)			3,950
Total securities available for sale			286,204				9,595				(1,653	)			294,146
December 31, 2011
U.S. government agencies			44,669				1,959				(14	)			46,614
U.S. agency mortgage-backed securities			54,264				874				(9	)			55,129
U.S. agency collateralized mortgage obligations			55,908				462				(321	)			56,049
Private collateralized mortgage obligations			8,251				25				(1,051	)			7,225
Corporate bonds			25,579				230				(511	)			25,298
Obligations of states and political subdivisions			84,945				4,852				(52	)			89,745
Total debt securities			273,616				8,402				(1,958	)			280,060
Marketable equity securities			4,000				—				(49	)			3,951
Total securities available for sale			277,616				8,402				(2,007	)			284,011

 

 

The amortized cost and fair value of debt securities available for sale at June 30, 2012, 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			36,510				36,758
Due after one year through five years			108,845				110,414
Due after five years through ten years			63,556				65,457
Due after ten years			73,293				77,567
Total debt securities			282,204				290,196

   

Securities available for sale with a par value of $79,703,000 and $73,049,000 at June 30, 2012, and December 31, 2011, respectively, were pledged or restricted for public funds, borrowings, or other purposes as required by law. The fair value of these pledged securities was $84,994,000 at June 30, 2012, and $77,874,000 at December 31, 2011.

 

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)
		Six Months Ended June 30,
		2012				2011
		$				$
Proceeds from sales			22,904				45,988
Gross realized gains			729				1,252
Gross realized losses			68				175

 

  

SUMMARY OF GAINS AND LOSSES ON SECURITIES AVAILABLE FOR SALE
(DOLLARS IN THOUSANDS)
		Six Months Ended June 30,
		2012				2011
		$				$
Gross realized gains			729				1,252
Gross realized losses			68				175
Impairment on securities			86				219
Total gross realized losses			154				394
Net gains on securities			575				858

 

The bottom portion of the above chart shows the net gains on security transactions, including any impairment taken on securities held by the Corporation. Unlike the sale of a security, impairment is a write-down of the book value of the security which produces a loss and does not provide any proceeds. 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. As of June 30, 2012, no impairment was needed on any of the Corporation’s securities; however, three private collateralized mortgage obligations (PCMOs) were being held that had experienced prior impairment. Analysis of these three securities as of June 30, 2012, based on the projected future cash flows, including prepayment speeds, delinquencies, foreclosures, and the severity of losses, did not indicate a need to take additional impairment. While there was no security impairment recorded in the second quarter of 2012, in the first quarter of 2012, $86,000 of impairment was recorded on two PCMO securities considered to be other than temporarily impaired. Impairment was taken on four PCMO securities in the second quarter of 2011 that amounted to $72,000 and year-to-date impairment on these securities as of June 30, 2011, was $219,000. One of the four PCMOs that experienced impairment in 2011 was sold in May 2012, leaving only three PCMOs that had experienced impairment. Information pertaining to securities with gross unrealized losses at June 30, 2012, and December 31, 2011, 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, 2012
U.S. government agencies			—				—				—				—				—				—
U.S. agency mortgage-backed securities			11,458				(49	)			—				—				11,458				(49	)
U.S. agency collateralized mortgage obligations			22,377				(258	)			2,873				(7	)			25,250				(265	)
Private collateralized mortgage obligations			—				—				4,588				(924	)			4,588				(924	)
Corporate bonds			15,167				(150	)			2,979				(55	)			18,146				(205	)
Obligations of states & political subdivisions			9,811				(135	)			1,825				(25	)			11,636				(160	)
Total debt securities			58,813				(592	)			12,265				(1,011	)			71,078				(1,603	)
Marketable equity securities			—				—				950				(50	)			950				(50	)
Total temporarily impaired securities			58,813				(592	)			13,215				(1,061	)			72,028				(1,653	)
As of December 31, 2011
U.S. government agencies			5,995				(14	)			—				—				5,995				(14	)
U.S. agency mortgage-backed securities			4,998				(9	)			—				—				4,998				(9	)
U.S. agency collateralized mortgage obligations			23,631				(321	)			—				—				23,631				(321	)
Private collateralized mortgage obligations			—				—				4,919				(1,051	)			4,919				(1,051	)
Corporate bonds			12,392				(497	)			491				(14	)			12,883				(511	)
Obligations of states & political subdivisions			2,767				(17	)			2,977				(35	)			5,744				(52	)
Total debt securities			49,783				(858	)			8,387				(1,100	)			58,170				(1,958	)
Marketable equity securities			—				—				951				(49	)			951				(49	)
Total temporarily impaired securities			49,783				(858	)			9,338				(1,149	)			59,121				(2,007	)

 

In the debt security portfolio, there are 56 positions that were considered temporarily impaired at June 30, 2012. Based on analysis conducted as of June 30, 2012, no securities indicated impairment and therefore no securities were considered other-than-temporarily impaired.

 

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. The Corporation adopted a provision of U.S. generally accepted accounting principles which provides 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. The adoption of this provision was only applicable to four of the Corporation’s PCMOs since these were the only instruments management deemed to be other-than-temporarily impaired and have experienced some impairment.

 

 

A cumulative total of $1,143,000 of impairment has been recorded on the three impaired PCMO securities currently held, plus the PCMO that was sold in May 2012. Impairment of $340,000 was first recorded in 2009 on two of these securities. Additional impairment was recorded in 2010 for a total of $393,000 on the same two PCMO securities. During 2011, there was an additional $324,000 of impairment recorded on the three PCMO securities, currently identified as other than temporarily impaired, plus the impaired PCMO that was sold in May 2012. In the first quarter of 2012, an additional $86,000 of impairment was recorded on two of the PCMO securities. There was no impairment recorded in the second quarter of 2012.

 

The impairment on the PCMOs is a result of a deterioration of expected cash flows on these securities due to higher projected credit losses than the amount of credit protection carried by these securities. Specifically, the foreclosure and severity rates have been running at levels where expected principal losses are in excess of the remaining credit protection on these instruments. The projected principal losses are based on prepayment speeds that are equal to or slower than the actual last twelve-month prepayment speeds the particular securities have experienced. Every quarter, management evaluates third-party reporting that shows projected principal losses based on various prepayment speed and severity rate scenarios. Based on the assumption that all loans over 60 days delinquent will 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 additional impairment on two PCMOs in the first quarter of 2012, with no impairment necessary in the second quarter.

 

The following tables reflect the book value, market value, and unrealized loss as of June 30, 2012 and 2011, on the PCMO securities held which had impairment taken in each respective year. The values shown are after the Corporation recorded year-to-date impairment charges of $86,000 through June 30, 2012, and $219,000 through June 30, 2011. The $86,000 and $219,000 are deemed to be credit losses and are the amounts that management expects the principal losses will be by the time these securities mature. The remaining $555,000 and $1,195,000 of unrealized losses are deemed to be market value losses that are considered temporary.

 

SECURITY IMPAIRMENT CHARGES
(DOLLARS IN THOUSANDS)
		As of June 30, 2012
		Book				Market				Unrealized				Impairment
		Value				Value				Loss				Charge
		$				$				$				$
Private collateralized mortgage obligations			3,749				3,194				(555	)			(86	)

 

		As of June 30, 2011
		Book				Market				Unrealized				Impairment
		Value				Value				Loss				Charge
		$				$				$				$
Private collateralized mortgage obligations			7,914				6,719				(1,195	)			(219	)

 

 

The following table provides a cumulative roll forward of credit losses recognized in earnings for debt securities held and not intended to be sold:

  

CREDIT LOSSES RECOGNIZED IN EARNINGS ON DEBT SECURITIES
(DOLLARS IN THOUSANDS)		Three Months Ended June 30,								Six Months Ended June 30,
		2012				2011				2012				2011
		$				$				$				$
Beginning balance			1,143				879				1,057				732
Credit losses on debt securities for which other-than-
temporary impairment has not been previously recognized			—				72				—				219
Additional credit losses on debt securities for which other-
than-temporary impairment was previously recognized			—				—				86				—
Ending balance			1,143				951				1,143				951

 

Recent market conditions throughout the financial sector have made the evaluation regarding the possible impairment of PCMOs difficult to fully determine given the volatility of their pricing, based not only on interest rate changes, but on collateral uncertainty as well. The Corporation’s mortgage-backed securities (MBS) and collateralized mortgage obligations (CMO) holdings are backed by the U.S. government, and therefore, experience significantly less volatility and uncertainty than the PCMO securities. The Corporation has not experienced any impairment on U.S. government MBS or CMO securities and does not expect impairment in the future on these instruments. The Corporation’s PCMO holdings make up a minority of the total MBS, CMO, and PCMO securities held. As of June 30, 2012, on an amortized cost basis, PCMOs accounted for 5.9% of the Corporation’s total MBS, CMO, and PCMO holdings, compared to 7.0% as of December 31, 2011. As of June 30, 2012, four PCMOs were held with one of the four rated AAA by either Moody’s or S&P. The remaining three securities were rated below investment grade. Impairment charges, as detailed above, were taken on two of these securities in the first quarter of 2012, with no impairment taken in the second quarter of 2012.

  

Management conducts impairment analysis on a quarterly basis and currently plans to continue to hold these securities as cash flow analysis performed under severe stress testing does not indicate a need to take further impairment on the bonds that are considered impaired. The unrealized loss position of all of the Corporation’s PCMOs has improved since December 31, 2011. The PCMO net unrealized losses stood at $1.0 million as of December 31, 2011, and improved to an $857,000 net unrealized loss as of June 30, 2012. One of the four PCMOs is carrying an unrealized gain. Management has concluded that, as of June 30, 2012, the unrealized losses outlined in the above table represent temporary declines. Management currently does not intend to sell these securities as a result of unrealized holding losses carried and impairment taken, and does not believe it will be required to sell these securities before recovery of their cost basis, which may be at maturity. While management does not intend to sell these securities related to their impairment, it is standard practice to sell off smaller MBS, CMO, and PCMO instruments once normal principal payments have reduced the size of the security to less than $1 million. This is done to reduce the administrative costs and improve the efficiency of the entire portfolio. One previously impaired PCMO instrument was sold in the second quarter of 2012 with proceeds of $1,051,000 at a minimal loss of $8,000. Management will continue to monitor the remaining PCMO instruments, one of which will be below $1 million of book value in the third quarter of 2012.

 

3.       Loans and Allowance for Loan Losses

 

The following tables present the Corporation’s loan portfolio by category of loans as of June 30, 2012, and December 31, 2011.

 

LOAN PORTFOLIO
(DOLLARS IN THOUSANDS)
		June 30,				December 31,
		2012				2011
		$				$
Commercial real estate
Commercial mortgages			86,028				95,347
Agriculture mortgages			73,879				73,287
Construction			20,035				18,957
Total commercial real estate			179,942				187,591
Consumer real estate (a)
1-4 family residential mortgages			134,340				133,959
Home equity loans			13,579				14,687
Home equity lines of credit			15,292				15,004
Total consumer real estate			163,211				163,650
Commercial and industrial
Commercial and industrial			25,387				25,913
Tax-free loans			18,727				19,072
Agriculture loans			11,449				12,884
Total commercial and industrial			55,563				57,869
Consumer			3,614				3,590
Total loans receivable			402,330				412,700
Less:
Deferred loan fees (costs), net			(20	)			62
Allowance for loan losses			7,877				8,480
Total net loans			394,473				404,158

 

(a)

Real estate loans serviced for Fannie Mae, which are not included in the Consolidated Balance Sheets, totaled $7,736,000 and $8,904,000 as of June 30, 2012 and December 31, 2011, 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, 2012, and December 31, 2011. The grading analysis estimates the capability of the borrower to repay the contractual obligations under the loan agreements as scheduled or at all. 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, 2012		Commercial Mortgages				Agriculture Mortgages				Construction				Commercial and Industrial				Tax-free Loans				Agriculture Loans				Total
		$				$				$				$				$				$				$
Grade:
Pass			71,334				68,781				14,445				21,684				18,485				10,485				205,214
Special Mention			3,812				858				1,051				671				—				104				6,496
Substandard			10,882				4,240				4,539				3,032				242				860				23,795
Doubtful			—				—				—				—				—				—				—
Loss			—				—				—				—				—				—				—
Total			86,028				73,879				20,035				25,387				18,727				11,449				235,505

 

December 31, 2011		Commercial Mortgages				Agriculture Mortgages				Construction				Commercial and Industrial				Tax-free Loans				Agriculture Loans				Total
		$				$				$				$				$				$				$
Grade:
Pass			76,532				67,235				13,869				21,561				19,072				11,943				210,212
Special Mention			3,872				773				132				1,173				—				65				6,015
Substandard			14,943				5,279				4,956				3,179				—				876				29,233
Doubtful			—				—				—				—				—				—				—
Loss			—				—				—				—				—				—				—
Total			95,347				73,287				18,957				25,913				19,072				12,884				245,460

 

 

 

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 non-accrual loans. The following tables present the balances of consumer loans by classes of the loan portfolio based on payment performance as of June 30, 2012, and December 31, 2011:

 

CONSUMER CREDIT EXPOSURE
CREDIT RISK PROFILE BY PAYMENT PERFORMANCE
(DOLLARS IN THOUSANDS)
June 30, 2012		1-4 Family Residential Mortgages				Home Equity Loans				Home Equity Lines of Credit				Consumer				Total
Payment performance:		$				$				$				$				$
Performing			134,148				13,436				15,292				3,614				166,490
Non-performing			192				143				—				—				335
Total			134,340				13,579				15,292				3,614				166,825

 

December 31, 2011		1-4 Family Residential Mortgages				Home Equity Loans				Home Equity Lines of Credit				Consumer				Total
Payment performance:		$				$				$				$				$
Performing			133,643				14,541				15,004				3,590				166,778
Non-performing			316				146				—				—				462
Total			133,959				14,687				15,004				3,590				167,240

 

 

The following tables present an age analysis of the Corporation’s past due loans, segregated by loan portfolio class, as of June 30, 2012, and December 31, 2011:

  

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, 2012		Past Due				Past Due				Days				Due				Current				Receivable				Accruing
		$				$				$				$				$				$				$
Commercial real estate
Commercial mortgages			229				—				—				229				85,799				86,028				—
Agriculture mortgages			—				—				—				—				73,879				73,879				—
Construction			—				—				—				—				20,035				20,035				—
Consumer real estate
1-4 family residential mortgages			—				107				—				107				134,233				134,340				—
Home equity loans			48				—				—				48				13,531				13,579				—
Home equity lines of credit			36				—				—				36				15,256				15,292				—
Commercial and industrial
Commercial and industrial			1				—				101				102				25,285				25,387				—
Tax-free loans			—				—				—				—				18,727				18,727				—
Agriculture loans			—				—				—				—				11,449				11,449				—
Consumer			5				—				—				5				3,609				3,614				—
Total			319				107				101				527				401,803				402,330				—

 

 

																										Loans
										Greater																Receivable >
		30-59 Days				60-89 Days				than 90				Total Past								Total Loans				90 Days and
December 31, 2011		Past Due				Past Due				Days				Due				Current				Receivable				Accruing
		$				$				$				$				$				$				$
Commercial real estate
Commercial mortgages			390				—				—				390				94,957				95,347				—
Agriculture mortgages			—				—				—				—				73,287				73,287				—
Construction			132				—				—				132				18,825				18,957				—
Consumer real estate
1-4 family residential mortgages			1,684				140				107				1,931				132,028				133,959				107
Home equity loans			79				101				—				180				14,507				14,687				—
Home equity lines of credit			—				15				—				15				14,989				15,004				—
Commercial and industrial
Commercial and industrial			49				—				101				150				25,763				25,913				—
Tax-free loans			—				—				—				—				19,072				19,072				—
Agriculture loans			—				—				—				—				12,884				12,884				—
Consumer			18				5				—				23				3,567				3,590				—
Total			2,352				261				208				2,821				409,879				412,700				107

 

The following table presents nonaccrual loans by classes of the loan portfolio as of June 30, 2012, and December 31, 2011:

 

NONACCRUAL LOANS BY LOAN CLASS
(DOLLARS IN THOUSANDS)
		June 30,				December 31,
		2012				2011
		$				$
Commercial real estate
Commercial mortgages			1,158				1,265
Agriculture mortgages			—				—
Construction			—				—
Consumer real estate
1-4 family residential mortgages			192				209
Home equity loans			143				146
Home equity lines of credit			—				—
Commercial and industrial
Commercial and industrial			156				242
Tax-free loans			—				—
Agriculture loans			—				—
Consumer			—				—
Total			1,649				1,862

 

As of June 30, 2012, and December 31, 2011, all of the Corporation’s loans on nonaccrual status were also considered impaired. Information with respect to impaired loans for the six months ended June 30, 2012, and June 30, 2011, is as follows:

 

IMPAIRED LOANS
(DOLLARS IN THOUSANDS)
		Three months ended June 30,								Six months ended June 30,
		2012				2011				2012				2011
		$				$				$				$
Impaired loans:
Average recorded balance of impaired loans			3,325				3,714				3,394				4,300
Interest income recognized on impaired loans			27				32				56				60

 

Interest income on impaired loans would have increased by approximately $30,000 and $61,000 for the three and six months ended June 30, 2012, and $33,000 and $81,000 for the three and six months ended June 30, 2011, had these loans performed in accordance with their original terms.

The following tables summarize information in regards to impaired loans by loan portfolio class as of June 30, 2012, and December 31, 2011:

 

IMPAIRED LOAN ANALYSIS
(DOLLARS IN THOUSANDS)
June 30, 2012		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		$				$				$				$				$
With no related allowance recorded:
Commercial real estate
Commercial mortgages			442				442				—				456				—
Agriculture mortgages			1,639				1,639				—				1,649				55
Construction			—				—				—				—				—
Total commercial real estate			2,081				2,081				—				2,105				55
Commercial and industrial
Commercial and industrial			156				197				—				191				1
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			156				197				—				191				1
Total with no related allowance			2,237				2,278				—				2,296				56
With an allowance recorded:
Commercial real estate
Commercial mortgages			1,051				1,148				68				1,098				—
Agriculture mortgages			—				—				—				—				—
Construction			—				—				—				—				—
Total commercial real estate			1,051				1,148				68				1,098				—
Commercial and industrial
Commercial and industrial			—				—				—				—				—
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			—				—				—				—				—
Total with a related allowance			1,051				1,148				68				1,098				—
Total by loan class:
Commercial real estate
Commercial mortgages			1,493				1,590				68				1,554				—
Agriculture mortgages			1,639				1,639				—				1,649				55
Construction			—				—				—				—				—
Total commercial real estate			3,132				3,229				68				3,203				55
Commercial and industrial
Commercial and industrial			156				197				—				191				1
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			156				197				—				191				1
Total			3,288				3,426				68				3,394				56

 

 

IMPAIRED LOAN ANALYSIS
(DOLLARS IN THOUSANDS)
December 31, 2011		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		$				$				$				$				$
With no related allowance recorded:
Commercial real estate
Commercial mortgages			473				473				—				641				—
Agriculture mortgages			1,658				1,658				—				1,667				119
Construction			—				67				—				44				—
Total commercial real estate			2,131				2,198				—				2,352				119
Commercial and industrial
Commercial and industrial			137				137				—				226				—
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			137				137				—				226				—
Total with no related allowance			2,268				2,335				—				2,578				119
With an allowance recorded:
Commercial real estate
Commercial mortgages			1,147				1,244				140				1,245				—
Agriculture mortgages			—				—				—				—				—
Construction			—				—				—				—				—
Total commercial real estate			1,147				1,244				140				1,245				—
Commercial and industrial
Commercial and industrial			105				105				61				71				—
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			105				105				61				71				—
Total with a related allowance			1,252				1,349				201				1,316				—
Total by loan class:
Commercial real estate
Commercial mortgages			1,620				1,717				140				1,886				—
Agriculture mortgages			1,658				1,658				—				1,667				119
Construction			—				67				—				44				—
Total commercial real estate			3,278				3,442				140				3,597				119
Commercial and industrial
Commercial and industrial			242				242				61				297				—
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			242				242				61				297				—
Total			3,520				3,684				201				3,894				119

 

 

The following tables detail activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2012, and June 30, 2011:

 

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, 2011			3,441				1,424				2,825				61				729				8,480
Charge-offs			—				—				42				5				—				47
Recoveries			—				—				20				5				—				25
Provision			(371	)			(103	)			214				(6	)			16				(250	)(1)
Balance - March 31, 2012			3,070				1,321				3,017				55				745				8,208
Charge-offs			—				—				5				2				—				7
Recoveries			—				—				23				3				—				26
Provision			41				96				(434	)			4				(57	)			(350	)(1)
Ending Balance - June 30, 2012			3,111				1,417				2,601				60				688				7,877

 

(1)	The Corporation recognized a $250,000 credit provision in the first quarter of 2012, and a $350,000 credit provision in the second quarter of 2012, as a result of lower levels of non-performing and delinquent loans, minimum charge-offs, and a decline in loan balances.

   

		Commercial Real Estate				Consumer Real Estate				Commercial and Industrial				Consumer				Unallocated				Total
		$				$				$				$				$				$
Allowance for credit losses:
Beginning balance - December 31, 2010			2,605				1,254				2,816				75				382				7,132
Charge-offs			97				13				30				9				—				149
Recoveries			—				2				145				3				—				150
Provision			527				39				(165	)			—				49				450
Balance - March 31, 2011			3,035				1,282				2,766				69				431				7,583
Charge-offs			—				1				285				1				—				287
Recoveries			—				(2	)			55				2				—				55
Provision			167				(7	)			396				(11	)			(95	)			450
Ending Balance - June 30, 2011			3,202				1,272				2,932				59				336				7,801

 

 

 

 

The following tables present, by portfolio segment, the recorded investment in loans at June 30, 2012, and December 31, 2011.

 

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)

Commercial Real Estate

Consumer Real Estate

Commercial and Industrial

Consumer

Unallocated

Total

$

$

$

$

$

$

June 30, 2012