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 March 31, 2018

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

Yes 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 May 1, 2018, the registrant had 2,853,479 shares of $0.20 (par) Common Stock outstanding.

 

ENB FINANCIAL CORP

INDEX TO FORM 10-Q

March 31, 2018

 

 

Part I – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets at March 31, 2018 and 2017 and December 31, 2017 (Unaudited)	3
	Consolidated Statements of Income for the Three Months Ended March 31, 2018 and 2017 (Unaudited)	4
	Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2018 and 2017 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017 (Unaudited)	6
	Notes to the Unaudited Consolidated Interim Financial Statements	7-32
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33-65
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	66-71
Item 4.	Controls and Procedures	72
Part II – OTHER INFORMATION		73
Item 1.	Legal Proceedings	73
Item 1A.	Risk Factors	73
Item 2.	Unregistered Sales of Equity Securities  and Use of Proceeds	73
Item 3.	Defaults Upon Senior Securities	73
Item 4.	Mine Safety Disclosures	73
Item 5.	Other Information	73
Item 6.	Exhibits	74
SIGNATURE PAGE		75

 

Part I - Financial Information

Item 1. Financial Statements

 

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

     

		March 31,				December 31,				March 31,
		2018				2017				2017
		$				$				$
ASSETS
Cash and due from banks			12,733				21,867				16,161
Interest-bearing deposits in other banks			24,986				31,206				43,127
Total cash and cash equivalents			37,719				53,073				59,288
Securities available for sale (at fair value)			311,128				319,661				315,176
Equity securities (at fair value)			5,775				—				—
Loans held for sale			2,640				2,892				3,127
Loans (net of unearned income)			609,515				597,553				572,876
Less: Allowance for loan losses			8,083				8,240				7,672
Net loans			601,432				589,313				565,204
Premises and equipment			25,835				25,687				23,881
Regulatory stock			6,194				5,794				5,455
Bank owned life insurance			27,525				27,814				24,856
Other assets			12,061				9,388				10,836
Total assets			1,030,309				1,033,622				1,007,823
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing			305,832				314,917				287,799
Interest-bearing			550,367				551,560				547,831
Total deposits			856,199				866,477				835,630
Short-term borrowings			5,622				—				14,774
Long-term debt			68,511				65,850				58,819
Other liabilities			2,443				1,536				2,188
Total liabilities			932,775				933,863				911,411
Stockholders' equity:
Common stock, par value $0.20;
Shares:  Authorized 12,000,000
Issued 2,869,557 and Outstanding  2,853,479 as of 3/31/18
Issued 2,869,557 and Outstanding 2,849,823 as of 12/31/17
Issued 2,869,557 and Outstanding  2,853,741 as of 3/31/17			574				574				574
Capital surplus			4,419				4,415				4,411
Retained earnings			99,623				98,629				96,504
Accumulated other comprehensive loss net of tax			(6,541	)			(3,195	)			(4,559	)
Less: Treasury stock cost on 16,078 shares as of 3/31/18
19,734 shares as of 12/31/17 and 15,816 shares as of 3/31/17			(541	)			(664	)			(518	)
Total stockholders' equity			97,534				99,759				96,412
Total liabilities and stockholders' equity			1,030,309				1,033,622				1,007,823

 

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 March 31,
		2018				2017
		$				$
Interest and dividend income:
Interest and fees on loans			6,398				5,832
Interest on securities available for sale
Taxable			1,100				888
Tax-exempt			760				1,120
Interest on deposits at other banks			112				54
Dividend income			154				88
Total interest and dividend income			8,524				7,982
Interest expense:
Interest on deposits			479				467
Interest on borrowings			295				235
Total interest expense			774				702
Net interest income			7,750				7,280
Provision for loan losses			190				90
Net interest income after provision for loan losses			7,560				7,190
Other income:
Trust and investment services income			554				482
Service fees			661				562
Commissions			584				547
Gains on sale of debt securities, net			34				140
Gains on equity securities, net			31				—
Gains on sale of mortgages			235				355
Earnings on bank-owned life insurance			1,099				173
Other income			182				153
Total other income			3,380				2,412
Operating expenses:
Salaries and employee benefits			4,960				4,719
Occupancy			663				599
Equipment			288				282
Advertising & marketing			232				237
Computer software & data processing			545				530
Shares tax			215				215
Professional services			433				389
Other expense			548				547
Total operating expenses			7,884				7,518
Income before income taxes			3,056				2,084
Provision for federal income taxes			235				257
Net income			2,821				1,827
Earnings per share of common stock			0.99				0.64
Cash dividends paid per share			0.28				0.28
Weighted average shares outstanding			2,850,146				2,850,689

 

See Notes to the Unaudited Consolidated Interim Financial Statements      

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(DOLLARS IN THOUSANDS)

 

		Three Months ended March 31,
		2018				2017
		$				$
Net income			2,821				1,827
Other comprehensive income (loss), net of tax:
Securities available for sale not other-than-temporarily impaired:
Unrealized gains (losses) arising during the period			(3,399	)			633
Income tax effect			714				(215	)
			(2,685	)			418
Gains on sale of debt securities recognized in earnings			(34	)			(140	)
Income tax effect			7				48
			(27	)			(92	)
Other comprehensive income (loss), net of tax			(2,712	)			326
Comprehensive Income (Loss)			109				2,153

 

See Notes to the Unaudited Consolidated Interim Financial Statements        

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

     

(DOLLARS IN THOUSANDS)		Three Months Ended March 31,
		2018				2017
		$				$
Cash flows from operating activities:
Net income			2,821				1,827
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of securities premiums and discounts and loan fees			1,057				1,015
Decrease in interest receivable			180				508
Increase (decrease) in interest payable			22				(2	)
Provision for loan losses			190				90
Gains on sale of debt securities, net			(34	)			(140	)
Gains on equity securities, net			(31	)			—
Gains on sale of mortgages			(235	)			(355	)
Loans originated for sale			(6,980	)			(5,221	)
Proceeds from sales of loans			7,467				5,001
Earnings on bank-owned life insurance			(1,099	)			(173	)
Depreciation of premises and equipment and amortization of software			406				406
Deferred income tax			(229	)			55
Other assets and other liabilities, net			339				(343	)
Net cash provided by operating activities			3,874				2,668
Cash flows from investing activities:
Securities available for sale:
Proceeds from maturities, calls, and repayments			4,897				5,391
Proceeds from sales			8,986				13,687
Purchases			(17,100	)			(26,416	)
Purchase of regulatory bank stock			(1,088	)			(873	)
Redemptions of regulatory bank stock			688				790
Purchase of bank-owned life insurance			24				—
Net increase in loans			(12,423	)			(1,397	)
Purchases of premises and equipment, net			(510	)			(1,657	)
Purchase of computer software			(36	)			(3	)
Net cash used for investing activities			(16,562	)			(10,478	)
Cash flows from financing activities:
Net increase (decrease) in demand, NOW, and savings accounts			(7,872	)			21,789
Net decrease in time deposits			(2,406	)			(3,650	)
Net increase in short-term borrowings			5,622				6,445
Proceeds from long-term debt			7,661				5,062
Repayments of long-term debt			(5,000	)			(7,500	)
Dividends paid			(798	)			(798	)
Proceeds from sale of treasury stock			127				118
Net cash (used in) provided by financing activities			(2,666	)			21,466
Increase (decrease) in cash and cash equivalents			(15,354	)			13,656
Cash and cash equivalents at beginning of period			53,073				45,632
Cash and cash equivalents at end of period			37,719				59,288
Supplemental disclosures of cash flow information:
Interest paid			752				704
Income taxes paid			—				—
Supplemental disclosure of non-cash investing and financing activities:
Fair value adjustments for securities available for sale			5,097				493

 

See Notes to the Unaudited Consolidated Interim Financial Statements  

  

1.       Summary of Significant Accounting Policies

 

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 first quarter of 2018, is reporting on the results of operations and financial condition of ENB Financial Corp.

 

Operating results for the three months ended March 31, 2018, are not necessarily indicative of the results that may be expected for the year ended December 31, 2018. 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, 2017.

 

Revenue from Contracts with Customers

 

The Company records revenue from contracts with customers in accordance with Accounting Standards Topic 606, Revenue from Contracts with Customers (Topic 606). Under Topic 606, the Corporation must identify contracts with customers, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when the Corporation satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

 

The Corporation’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. The Corporation has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. The Corporation generally fully satisfies its performance obligations on its contracts with customers as

services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

 

Financial Instruments

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.

 

ASU 2016-01 was effective for the Corporation on January 1, 2018, and resulted in separate classification of equity securities previously included in available for sale securities on the consolidated balance sheets with changes in the fair value of the equity securities captured in the consolidated statements of income. See Note 3 – Securities for disclosures related to equity securities. Adoption of the standard also resulted in the use of an exit price rather than an entrance price to determine the fair value of loans not measured at fair value on a non-recurring basis in the consolidated balance sheets. See Note 5 – Fair Value Presentation for further information regarding the valuation of these loans. 

 

Nonrefundable Fees and Other Costs

 

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle. Upon adoption on January 1, 2018, the Corporation made a one-time cumulative effect adjustment from accumulated other comprehensive income to retained earnings of $1.7 million. The net effect was a decrease to retained earnings.

 

Reporting Comprehensive Income

 

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220), to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. Upon adoption in February 2018, the Corporation made a one-time cumulative effect adjustment from accumulated other comprehensive income to retained earnings of $634,000. The net effect was an increase to retained earnings.

 

2.       Securities Available for Sale

 

The amortized cost, gross unrealized gains and losses, and fair value of securities held at March 31, 2018,

and December 31, 2017, are as follows:        

 

						Gross				Gross
(DOLLARS IN THOUSANDS)			Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
		$				$				$				$
March 31, 2018
U.S. government agencies			35,095				—				(1,295	)			33,800
U.S. agency mortgage-backed securities			50,414				—				(1,808	)			48,606
U.S. agency collateralized mortgage obligations			60,496				23				(1,674	)			58,845
Corporate bonds			61,169				3				(1,497	)			59,675
Obligations of states and political subdivisions			112,234				191				(2,223	)			110,202
Total debt securities available for sale			319,408				217				(8,497	)			311,128
December 31, 2017
U.S. government agencies			35,101				—				(749	)			34,352
U.S. agency mortgage-backed securities			52,981				8				(916	)			52,073
U.S. agency collateralized mortgage obligations			55,493				46				(898	)			54,641
Corporate bonds			61,334				24				(589	)			60,769
Obligations of states and political subdivisions			114,047				243				(2,047	)			112,243
Total debt securities			318,956				321				(5,199	)			314,078
Equity securities			5,547				36				—				5,583
Total securities available for sale			324,503				357				(5,199	)			319,661

The amortized cost and fair value of debt securities available for sale at March 31, 2018, 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			15,461				15,070
Due after one year through five years			127,801				124,270
Due after five years through ten years			62,512				60,491
Due after ten years			113,634				111,297
Total debt securities			319,408				311,128

 

 

Securities available for sale with a par value of $63,004,000 and $64,580,000 at March 31, 2018, and December 31, 2017, respectively, were pledged or restricted for public funds, borrowings, or other purposes as required by law. The fair value of these pledged securities was $63,368,000 at March 31, 2018, and $66,157,000 at December 31, 2017.

 

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 March 31,
		2018				2017
		$				$
Proceeds from sales			8,986				13,687
Gross realized gains			52				172
Gross realized losses			18				32

 

Management evaluates all of the Corporation’s securities for other than temporary impairment (OTTI) on a periodic basis. No securities in the portfolio had other-than-temporary impairment recorded in the first three months of 2018 or 2017.

 

Information pertaining to securities with gross unrealized losses at March 31, 2018, and December 31, 2017, 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 March 31, 2018
U.S. government agencies			9,799				(201	)			24,001				(1,094	)			33,800				(1,295	)
U.S. agency mortgage-backed securities			14,012				(310	)			34,594				(1,498	)			48,606				(1,808	)
U.S. agency collateralized mortgage obligations			28,377				(669	)			20,249				(1,005	)			48,626				(1,674	)
Corporate bonds			41,936				(916	)			14,716				(581	)			56,652				(1,497	)
Obligations of states & political subdivisions			32,222				(513	)			52,816				(1,710	)			85,038				(2,223	)
Total temporarily impaired securities			126,346				(2,609	)			146,376				(5,888	)			272,722				(8,497	)
As of December 31, 2017
U.S. government agencies			9,941				(59	)			24,411				(690	)			34,352				(749	)
U.S. agency mortgage-backed securities			10,326				(78	)			37,123				(838	)			47,449				(916	)
U.S. agency collateralized mortgage obligations			29,551				(280	)			20,980				(618	)			50,531				(898	)
Corporate bonds			38,543				(282	)			15,019				(307	)			53,562				(589	)
Obligations of states & political subdivisions			15,188				(142	)			68,278				(1,905	)			83,466				(2,047	)
Total temporarily impaired securities			103,549				(841	)			165,811				(4,358	)			269,360				(5,199	)

 

 

In the debt security portfolio there were 188 positions that were carrying unrealized losses as of March 31, 2018. There were no instruments considered to be other-than-temporarily impaired at March 31, 2018.

 

The Corporation evaluates both equity and fixed maturity positions for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic and market concerns warrant such evaluation. U.S. generally accepted accounting principles provide for the bifurcation of OTTI into two categories: (a) the amount of the total OTTI related to a decrease in cash flows expected to be collected from the debt security (the credit loss), which is recognized in earnings, and (b) the amount of total OTTI related to all other factors, which is recognized, net of taxes, as a component of accumulated other comprehensive income.

 

3.       Equity Securities

 

The following table summarizes the amortized cost, gross unrealized gains and losses, and fair value of equity securities held at March 31, 2018.

 

						Gross				Gross
(DOLLARS IN THOUSANDS)		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
		$				$				$				$
March 31, 2018
CRA-qualified mutual funds			5,310				—				—				5,310
Bank stocks			430				41				(6	)			465
Total equity securities			5,740				41				(6	)			5,775

 

As of January 1, 2018, the Corporation adopted ASU 2016-01, resulting in the reclassification of equity securities from available-for-sale.

 

The following table presents the net gains and losses on the Corporation’s equity investments recognized in earnings during the quarter ended March 31, 2018, and the portion of unrealized gains and losses for the period that relates to equity investments held as of March 31, 2018.

 

NET GAINS AND LOSSES ON EQUITY INVESTMENTS RECOGNIZED IN EARNINGS

(DOLLARS IN THOUSANDS)

		March 31,
		2018
		$
Net gains (losses)  recognized in equity securities during the period			31
Less:  Net gains (losses) realized on the sale of equity securities during the period			—
Unrealized gains (losses) recognized in equity securities held at reporting date			31

4.        Loans and Allowance for Loan Losses

 

The following table presents the Corporation’s loan portfolio by category of loans as of March 31, 2018, and December 31, 2017:

 

LOAN PORTFOLIO

(DOLLARS IN THOUSANDS)        

 

		March 31,				December 31,
		2018				2017
		$				$
Commercial real estate
Commercial mortgages			90,049				90,072
Agriculture mortgages			151,436				152,050
Construction			19,700				18,670
Total commercial real estate			261,185				260,792
Consumer real estate (a)
1-4 family residential mortgages			184,556				176,971
Home equity loans			10,588				11,181
Home equity lines of credit			60,846				61,104
Total consumer real estate			255,990				249,256
Commercial and industrial
Commercial and industrial			46,917				41,426
Tax-free loans			20,794				20,722
Agriculture loans			18,189				18,794
Total commercial and industrial			85,900				80,942
Consumer			5,129				5,320
Gross loans prior to deferred fees			608,204				596,310
Less:
Deferred loan costs, net			1,311				1,243
Allowance for loan losses			(8,083	)			(8,240	)
Total net loans			601,432				589,313

 

(a)	Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets,  totaled $103,458,000 and $98,262,000 as of March 31, 2018, and December 31, 2017, 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 March 31, 2018 and December 31, 2017. 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     

 

March 31, 2018		Commercial Mortgages				Agriculture Mortgages				Construction				Commercial and Industrial				Tax-free Loans				Agriculture Loans				Total
		$				$				$				$				$				$				$
Grade:
Pass			86,680				142,964				18,161				44,241				20,588				17,237				329,871
Special Mention			198				3,836				539				602				206				248				5,629
Substandard			3,171				4,636				1,000				2,074				—				704				11,585
Doubtful			—				—				—				—				—				—				—
Loss			—				—				—				—				—				—				—
Total			90,049				151,436				19,700				46,917				20,794				18,189				347,085

 

December 31, 2017		Commercial Mortgages				Agriculture Mortgages				Construction				Commercial and Industrial				Tax-free Loans				Agriculture Loans				Total
		$				$				$				$				$				$				$
Grade:
Pass			86,259				143,037				17,670				37,947				20,514				17,798				323,225
Special Mention			160				3,873				—				1,015				208				270				5,526
Substandard			3,653				5,140				1,000				2,464				—				726				12,983
Doubtful			—				—				—				—				—				—				—
Loss			—				—				—				—				—				—				—
Total			90,072				152,050				18,670				41,426				20,722				18,794				341,734

 

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 March 31, 2018 and December 31, 2017:

 

CONSUMER CREDIT EXPOSURE

CREDIT RISK PROFILE BY PAYMENT PERFORMANCE

(DOLLARS IN THOUSANDS)          

 

March 31, 2018		1-4 Family Residential Mortgages				Home Equity Loans				Home Equity Lines of Credit				Consumer				Total
Payment performance:		$				$				$				$				$
Performing			183,937				10,588				60,817				5,123				260,465
Non-performing			1,142				140				29				26				1,337
Total			185,079				10,728				60,846				5,149				261,802

 

December 31, 2017		1-4 Family Residential Mortgages				Home Equity Loans				Home Equity Lines of Credit				Consumer				Total
Payment performance:		$				$				$				$				$
Performing			176,576				11,181				61,074				5,305				254,136
Non-performing			395				—				30				15				440
Total			176,971				11,181				61,104				5,320				254,576

The following tables present an age analysis of the Corporation’s past due loans, segregated by loan portfolio class, as of March 31, 2018 and December 31, 2017:

 

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
March 31, 2018		Past Due				Past Due				Days				Due				Current				Receivable				Accruing
		$				$				$				$				$				$				$
Commercial real estate
Commercial mortgages			—				—				298				298				89,751				90,049				244
Agriculture mortgages			—				—				—				—				151,436				151,436				—
Construction			—				—				—				—				19,700				19,700				—
Consumer real estate
1-4 family residential mortgages			1,725				24				619				2,368				182,188				184,556				619
Home equity loans			53				—				—				53				10,535				10,588				—
Home equity lines of credit			—				—				29				29				60,817				60,846				29
Commercial and industrial
Commercial and industrial			13				—				—				13				46,904				46,917				—
Tax-free loans			—				—				—				—				20,794				20,794				—
Agriculture loans			227				—				—				227				17,962				18,189				—
Consumer			3				4				6				13				5,116				5,129				6
Total			2,021				28				952				3,001				605,203				608,204				898

 

																										Loans
										Greater																Receivable >
		30-59 Days				60-89 Days				than 90				Total Past								Total Loans				90 Days and
December 31, 2017		Past Due				Past Due				Days				Due				Current				Receivable				Accruing
		$				$				$				$				$				$				$
Commercial real estate
Commercial mortgages			—				—				372				372				89,700				90,072				—
Agriculture mortgages			—				—				—				—				152,050				152,050				—
Construction			—				—				—				—				18,670				18,670				—
Consumer real estate
1-4 family residential mortgages			533				248				395				1,176				175,795				176,971				395
Home equity loans			40				—				—				40				11,141				11,181				—
Home equity lines of credit			—				—				30				30				61,074				61,104				30
Commercial and industrial
Commercial and industrial			65				109				—				174				41,252				41,426				—
Tax-free loans			—				—				—				—				20,722				20,722				—
Agriculture loans			—				—				—				—				18,794				18,794				—
Consumer			8				3				15				26				5,294				5,320				15
Total			646				360				812				1,818				594,492				596,310				440

 

The following table presents nonaccrual loans by classes of the loan portfolio as of March 31, 2018 and December 31, 2017:

 

NONACCRUAL LOANS BY LOAN CLASS

(DOLLARS IN THOUSANDS)  

 

		March 31,				December 31,
		2018				2017
		$				$
Commercial real estate
Commercial mortgages			192				393
Agriculture mortgages			—				—
Construction			—				—
Consumer real estate
1-4 family residential mortgages			523				—
Home equity loans			140				—
Home equity lines of credit			—				—
Commercial and industrial
Commercial and industrial			—				—
Tax-free loans			—				—
Agriculture loans			—				—
Consumer			20				—
Total			875				393

 

As of March 31, 2018 and December 31, 2017, all of the Corporation’s commercial loans on nonaccrual status were also considered impaired. Information with respect to impaired loans for the three months ended March 31, 2018 and March 31, 2017, is as follows:

 

IMPAIRED LOANS

(DOLLARS IN THOUSANDS)      

 

		Three months ended March 31,
		2018				2017
		$				$
Average recorded balance of impaired loans			1,836				1,958
Interest income recognized on impaired loans			20				14

 

 

There were no loan modifications made during the three months ended March 31, 2018 causing a loan to be considered a troubled debt restructuring (TDR). However, there was a loan modification made during the three months ended March 31, 2017, that constituted a TDR. A TDR is a loan where management has granted a concession to a borrower that is experiencing financial difficulty. 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 loan classified as a TDR during the three months ended March 31, 2017, was an agricultural loan with a principal balance at March 31, 2018, of $227,000. The concession initially granted to the borrower during the first quarter of 2017 was an interest-only period initially running for three months to March 31, 2017. However, on March 31, 2017, that deferral period was extended for an additional three months, causing management to classify the loan as a TDR. The concession period ended June 30, 2017. Subsequent to June 30, 2017, the borrower resumed normal principal and interest payments as of July 2017.

 

The following tables summarize information regarding impaired loans by loan portfolio class as of March 31, 2018, December 31, 2017, and March 31, 2017:

 

IMPAIRED LOAN ANALYSIS
(DOLLARS IN THOUSANDS)
March 31, 2018		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		$				$				$				$				$
With no related allowance recorded:
Commercial real estate
Commercial mortgages			369				895				—				340				3
Agriculture mortgages			1,156				1,156				—				1,164				13
Construction			—				—				—				—				—
Total commercial real estate			1,525				2,051				—				1,504				16
Commercial and industrial
Commercial and industrial			—				—				—				—				—
Tax-free loans			—				—				—				—				—
Agriculture loans			227				227				—				237				3
Total commercial and industrial			227				227				—				237				3
Total with no related allowance			1,752				2,278				—				1,741				19
With an allowance recorded:
Commercial real estate
Commercial mortgages			505				507				63				95				1
Agriculture mortgages			—				—				—				—				—
Construction			—				—				—				—				—
Total commercial real estate			505				507				63				95				1
Commercial and industrial
Commercial and industrial			—				—				—				—				—
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			—				—				—				—				—
Total with a related allowance			505				507				63				95				1
Total by loan class:
Commercial real estate
Commercial mortgages			874				1,402				63				435				4
Agriculture mortgages			1,156				1,156				—				1,164				13
Construction			—				—				—				—				—
Total commercial real estate			2,030				2,558				63				1,599				17
Commercial and industrial
Commercial and industrial			—				—				—				—				—
Tax-free loans			—				—				—				—				—
Agriculture loans			227				227				—				237				3
Total commercial and industrial			227				227				—				237				3
Total			2,257				2,785				63				1,836				20

 

IMPAIRED LOAN ANALYSIS

(DOLLARS IN THOUSANDS)    

 

December 31, 2017		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		$				$				$				$				$
With no related allowance recorded:
Commercial real estate
Commercial mortgages			393				690				—				585				4
Agriculture mortgages			1,174				1,174				—				1,210				54
Construction			—				—				—				—				—
Total commercial real estate			1,567				1,864				—				1,795				58
Commercial and industrial
Commercial and industrial			—				—				—				—				—
Tax-free loans			—				—				—				—				—
Agriculture loans			245				245				—				163				7
Total commercial and industrial			245				245				—				163				7
Total with no related allowance			1,812				2,109				—				1,958				65
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			393				690				—				585				4
Agriculture mortgages			1,174				1,174				—				1,210				54
Construction			—				—				—				—				—
Total commercial real estate			1,567				1,864				—				1,795				58
Commercial and industrial
Commercial and industrial			—				—				—				—				—
Tax-free loans			—				—				—				—				—
Agriculture loans			245				245				—				163				7
Total commercial and industrial			245				245				—				163				7
Total			1,812				2,109				—				1,958				65

 

IMPAIRED LOAN ANALYSIS
(DOLLARS IN THOUSANDS)
March 31, 2017		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		$				$				$				$				$
With no related allowance recorded:
Commercial real estate
Commercial mortgages			760				857				—				644				3
Agriculture mortgages			1,229				1,229				—				1,238				11
Construction			—				—				—				—				—
Total commercial real estate			1,989				2,086				—				1,882				14
Commercial and industrial
Commercial and industrial			75				75				—				75				—
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			75				75				—				75				—
Total with no related allowance			2,064				2,161				—				1,957				14
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			760				857				—				644				3
Agriculture mortgages			1,229				1,229				—				1,238				11
Construction			—				—				—				—				—
Total commercial real estate			1,989				2,086				—				1,882				14
Commercial and industrial
Commercial and industrial			75				75				—				75				—
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			75				75				—				75				—
Total			2,064				2,161				—				1,957				14

 

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2018:

 

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, 2017			3,863				2,052				1,829				98				398				8,240
Charge-offs			(224	)			—				(110	)			(18	)			—				(352	)
Recoveries			—				—				4				1				—				5
Provision			408				137				(422	)			(9	)			76				190
Balance - March 31, 2018			4,047				2,189				1,301				72				474				8,083

 

During the three months ended March 31, 2018, provision expenses were recorded for the commercial real estate and consumer real estate segments with credit provisions recorded for the commercial and industrial and consumer loan segments. The increase in the allowance for commercial real estate loans was primarily a result of higher levels of charge-offs in the first three months of 2018. The increase in the amount of the allowance for loan losses allocated to the consumer real estate segment was primarily a result of growth in the residential real estate portfolio during the three months ended March 31, 2018.

 

Delinquency rates among the Corporation’s loan pools remain low but have increased to 0.56% of total loans, compared to 0.46% of total loans as of March 31, 2017. Additionally, charge-offs for the three months ended March 31, 2018, were $352,000 compared to only $11,000 for the three months ended March 31, 2017. However, classified loans experienced a decrease in the first three months of 2018. The Corporation’s classified loans were $21.5 million as of March 31, 2017, but had declined to $16.1 million as of March 31, 2018. Currently, the agricultural lending sector remains under stress due to weak milk and egg prices impacting farmers. Outside of this, the health of the Corporation’s commercial real estate and commercial and industrial borrowers is generally stable with no material trends related to certain types of industries. Commercial borrowers that have exposure to agriculture are subject to more financial stress in the current environment. Qualitative factors regarding trends in the loan portfolio as well as national and local economic conditions and external factors such as competition, legal and regulatory were increased for several loan pools in the first quarter of 2018 while several factors related to experience, ability, and depth of lending management and other areas declined for the first quarter of 2018. The increases in charge-offs and growth in the loan portfolio caused management to record provision expense of $190,000 through March 31, 2018.

 

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2017:

 

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, 2016			3,795				1,652				1,552				82				481				7,562
Charge-offs			—				—				(7	)			(4	)			—				(11	)
Recoveries			—				20				9				2				—				31
Provision			(275	)			163				95				3				104				90
Balance - March 31, 2017			3,520				1,835				1,649				83				585				7,672

 

During the three months ended March 31, 2017, a credit provision was recorded for the commercial real estate segment with provision expense recorded in all other loan categories. For the entire portfolio, $90,000 of additional provision expense was recorded for the first three months of 2017. Delinquency rates among most loan pools remained very low with the total amount of delinquent loans lower on March 31, 2017 than on December 31, 2016. The Corporation received $20,000 more recoveries than charge-offs for the three months ended March 31, 2017. These favorable results acted to offset higher levels of classified loans and non-accruals resulting in $90,000 of additional provision being sufficient to cover projected losses inherent in the loan portfolio and still retain a sufficient unallocated portion of the allowance. Changes in qualitative factors were minimal during the first quarter and the provision expense recorded was primarily the result of higher levels of classified loans.  

 

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 March 31, 2018 and December 31, 2017:

 

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)

 

As of March 31, 2018:		Commercial Real Estate				Consumer Real Estate				Commercial and Industrial				Consumer				Unallocated				Total
		$				$				$				$				$				$
Allowance for credit losses:
Ending balance: individually evaluated
for impairment			63				—				—				—				—				63
Ending balance: collectively evaluated
for impairment			3,984				2,189				1,301				72				474				8,020
Loans receivable:
Ending balance			261,185				255,990				85,900				5,129								608,204
Ending balance: individually evaluated
for impairment			2,030				—				227				—								2,257
Ending balance: collectively evaluated
for impairment			259,155				255,990				85,673				5,129								605,947

 

As of December 31, 2017:		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			3,863				2,052				1,829				98				398				8,240
Loans receivable:
Ending balance			260,792				249,256				80,942				5,320								596,310
Ending balance: individually evaluated
for impairment			1,567				—				245				—								1,812
Ending balance: collectively evaluated
for impairment			259,225				249,256				80,697				5,320								594,498

  

5. 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 provide the fair market value for assets required to be measured and reported at fair value on a recurring basis on the Consolidated Balance Sheets as of March 31, 2018, and December 31, 2017, 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.

 

 

ASSETS MEASURED ON A RECURRING BASIS

(DOLLARS IN THOUSANDS)      

 

		March 31, 2018
		Level I				Level II				Level III				Total
		$				$				$				$
U.S. government agencies			—				33,800				—				33,800
U.S. agency mortgage-backed securities			—				48,606				—				48,606
U.S. agency collateralized mortgage obligations			—				58,845				—				58,845
Corporate bonds			—				59,675				—				59,675
Obligations of states & political subdivisions			—				110,202				—				110,202
Equity securities			5,775				—				—				5,775
Total securities			5,775				311,128				—				316,903

 

On March 31, 2018, 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 March 31, 2018, the CRA fund investments had a $5,310,000 book and fair market value and the bank stock portfolio had a book value of $430,000, and fair market value of $465,000.

 

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.

ASSETS MEASURED ON A RECURRING BASIS

(DOLLARS IN THOUSANDS)        

 

		December 31, 2017
		Level I				Level II				Level III				Total
		$				$				$				$
U.S. government agencies			—				34,352				—				34,352
U.S. agency mortgage-backed securities			—				52,073				—				52,073
U.S. agency collateralized mortgage obligations			—				54,641				—				54,641
Corporate bonds			—				60,769				—				60,769
Obligations of states & political subdivisions			—				112,243				—				112,243
Equity securities			5,583				—				—				5,583
Total securities			5,583				314,078				—				319,661

 

On December 31, 2017, 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 December 31, 2017, the CRA fund investments had a $5,280,000 book and market value and the bank stocks had a book value of $267,000 and a market value of $303,000.

 

The following tables provide the fair value for each class of assets required to be measured and reported at fair value on a nonrecurring basis on the Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017, by level within the fair value hierarchy:

 

ASSETS MEASURED ON A NONRECURRING BASIS

(Dollars in Thousands)

		March 31, 2018
		Level I $				Level II $				Level III $				Total $
Assets:
Impaired Loans			—				—				2,194				2,194
Total			—				—				2,194				2,194

 

 

		December 31, 2017
		Level I $				Level II $				Level III $				Total $
Assets:
Impaired Loans			—				—				1,812				1,812
Total			—				—				1,812				1,812

 

The Corporation had a total of $2,257,000 of impaired loans as of March 31, 2018, with $63,000 of specific allocation against these loans and $1,812,000 of impaired loans as of December 31, 2017, with no specific allocation against these loans. The value of impaired loans is generally determined through independent appraisals of the underlying collateral.

 

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)          

 

	March 31, 2018
	Fair Value	Valuation	Unobservable	Range
	Estimate	Techniques	Input	(Weighted Avg)
Impaired loans	2,194	Appraisal of	Appraisal	-20% (-20%)
		collateral (1)	adjustments (2)
			Liquidation	-10% (-10%)
			expenses (2)

 

	December 31, 2017
	Fair Value	Valuation	Unobservable	Range
	Estimate	Techniques	Input	(Weighted Avg)
Impaired loans	1,812	Appraisal of	Appraisal	-20% (-20%)
		collateral (1)	adjustments (2)
			Liquidation	-10% (-10%)
			expenses (2)

 

 

(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.        

The following table provides the carrying amount for each class of assets and liabilities and the fair value for certain financial instruments that are not required to be measured or reported at fair value on the Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017:

 

FINANCIAL INSTRUMENTS NOT REQUIRED TO BE MEASURED OR REPORTED AT FAIR VALUE

(DOLLARS IN THOUSANDS)

               

		March 31, 2018
										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			37,719				37,719				37,719				—				—
Regulatory stock			6,194				6,194				6,194				—				—
Loans held for sale			2,640				2,640				2,640				—				—
Loans, net of allowance			601,432				612,969				—				—				612,969
Mortgage servicing assets			717				876				—				—				876
Accrued interest receivable			3,504				3,504				3,504				—				—
Bank owned life insurance			27,525				27,525				27,525				—				—
Financial Liabilities:
Demand deposits			305,832				305,832				305,832				—				—
Interest-bearing demand deposits			19,764				19,764				19,764				—				—
NOW accounts			85,307				85,307				85,307				—				—
Money market deposit accounts			101,088				101,088				101,088				—				—
Savings accounts			197,205				197,205				197,205				—				—
Time deposits			147,003				147,726				—				—				147,726
Total deposits			856,199				856,922				709,196				—				147,726
Short-term borrowings			5,622				5,622				5,622				—				—
Long-term debt			68,511				68,524				—				—				68,524
Accrued interest payable			407				407				407				—				—

 

FINANCIAL INSTRUMENTS NOT REQUIRED TO BE MEASURED OR REPORTED AT FAIR VALUE

(DOLLARS IN THOUSANDS)

 

		December 31, 2017
										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			53,073				53,073				53,073				—				—
Regulatory stock			5,794				5,794				5,794				—				—
Loans held for sale			2,892				2,892				2,892				—				—
Loans, net of allowance			589,313				590,415				—				—				590,415
Mortgage servicing assets			661				751				—				—				751
Accrued interest receivable			3,684				3,684				3,684				—				—
Bank owned life insurance			27,814				27,814				27,814				—				—
Financial Liabilities:
Demand deposits			314,917				314,917				314,917				—				—
Interest-bearing demand deposits			20,230				20,230				20,230				—				—
NOW accounts			86,758				86,758				86,758				—				—
Money market deposit accounts			105,994				105,994				105,994				—				—
Savings accounts			189,169				189,169				189,169				—				—
Time deposits			149,409				150,165				—				—				150,165
Total deposits			866,477				867,233				717,068				—				150,165
Long-term debt			65,850				65,850				—				—				65,850
Accrued interest payable			385				385				385				—				—

 

 

7.       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 March 31, 2018, firm loan commitments were $37.3 million, unused lines of credit were $222.6 million, and open letters of credit were $11.6 million. The total of these commitments was $271.5 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.

 

8. Accumulated Other Comprehensive Loss

 

The activity in accumulated other comprehensive loss for the three months ended March 31, 2018 and 2017 is as follows:

 

ACCUMULATED OTHER COMPREHENSIVE LOSS (1) (2)

(DOLLARS IN THOUSANDS)  

 

		Unrealized
		Gains (Losses)
		on Securities
		Available-for-Sale
		$
Balance at December 31, 2017			(3,195	)
Other comprehensive loss before reclassifications			(2,685	)
Amount reclassified from accumulated other comprehensive loss			(27	)
Reclassification of certain income tax effects from accumulated other comprehensive income (loss)			(634	)
Period change			(3,346	)
Balance at March 31, 2018			(6,541	)
Balance at December 31, 2016			(4,885	)
Other comprehensive income before reclassifications			418
Amount reclassified from accumulated other comprehensive loss			(92	)
Period change			326
Balance at March 31, 2017			(4,559	)

 

(1) All amounts are net of tax.  Related income tax expense or benefit is calculated using a Federal income tax rate of 21% for 2018 periods and 34% for 2017 periods.

(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 March 31,
		2018				2017				Affected Line Item in the
		$				$				Consolidated Statements of Income
Securities available-for-sale:
Net securities gains reclassified into earnings			34				140			Gains on securities transactions, net
Related income tax expense			(7	)			(48	)		Provision for federal income taxes
Net effect on accumulated other comprehensive
loss for the period			27				92

 

 

9. Recently Issued Accounting Standards

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet.  A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term.  A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Corporation is currently assessing the practical expedients it may elect at adoption, but does not anticipate the amendments will have a significant impact on the financial statements. Based on the Corporation’s preliminary analysis of its current portfolio, the impact to the Corporation’s balance sheet is estimated to result in less than a 1 percent increase in assets and liabilities. The Corporation also anticipates additional disclosures to be provided at adoption.

 

In March 2016, the FASB issued ASU 2016-04, Liabilities – Extinguishments of Liabilities (Subtopic 405-20). The standard provides that liabilities related to the sale of prepaid stored-value products within the scope of this Update are financial liabilities. The amendments in the Update provide a narrow-scope exception to the guidance in Subtopic 405-20 to require that breakage for those liabilities be accounted for consistent with the breakage guidance in Topic 606. The amendments in this Update are effective for public business entities, certain not-for-profit entities, and certain employee benefit plans for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Earlier application is permitted, including adoption in an interim period. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing diversity in practice. Among these include recognizing cash payments for debt prepayment or debt extinguishment as cash outflows for financing activities; cash proceeds received from the settlement of insurance claims should be classified on the basis of the related insurance coverage; and cash proceeds received from the settlement of bank-owned life insurance policies should be classified as cash inflows from investing activities while the cash payments for premiums on bank-owned policies may be classified as cash outflows for investing activities, operating activities, or a combination of investing and operating activities. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Corporation is currently evaluating the impact the adoption of the standard will have on the Corporation’s statement of cash flows.

 

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740), which requires recognition of current and deferred income taxes resulting from an intra-entity transfer of any asset (excluding inventory) when the transfer occurs. Consequently, the amendments in this Update eliminate the exception for an intra-entity transfer of an asset other than inventory. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those annual reporting periods. For all other entities, the amendments are effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual periods beginning after December 15, 2019. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. That is, earlier adoption should be in the first interim period if an entity issues interim financial statements. The amendments in this Update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In October 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), which requires that a statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in this Update should be applied using a retrospective transition method to each period presented. The Corporation is currently evaluating the impact the adoption of the standard will have on the Corporation’s statement of cash flows.

 

In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. This Update, among others things, clarifies that guarantee fees within the scope of Topic 460, Guarantees, (other than product or service warranties) are not within the scope of Topic 606. The effective date and transition requirements for ASU 2016-20 are the same as the effective date and transition requirements for the new revenue recognition guidance. For public entities with a calendar year-end, the new guidance is effective in the quarter and year beginning January 1, 2018. For all other entities with a calendar year-end, the new guidance is effective in the year ending December 31, 2019, and interim periods in 2020. The Corporation is currently evaluating the impact the adoption of the standard will have on the Corporation’s financial position or results of operations.

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business, which provides a more robust framework to use in determining when a set of assets and activities (collectively referred to as a “set”) is a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. Public business entities should apply the amendments in this Update to annual periods beginning after December 15, 2017, including interim periods within those periods. All other entities should apply the amendments to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The amendments in this Update should be applied prospectively on or after the effective date. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. All other entities, including not-for-profit entities, that are adopting the amendments in this Update should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In February 2017, the FASB issued ASU 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20). The amendments in this Update clarify what constitutes a financial asset within the scope of Subtopic 610-20. The amendments also clarify that entities should identify each distinct nonfinancial asset or in substance nonfinancial asset that is promised to a counterparty and to derecognize each asset when the counterparty obtains control. There is also additional guidance provided for partial sales of a nonfinancial asset and when derecognition, and the related gain or loss, should be recognized. The amendments in this Update are effective at the same time as the amendments in Update 2014-09. Therefore, for public entities, the amendments are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. For all other entities, the amendments in this Update are effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In February 2017, the FASB issued ASU 2017-06, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), and Health and Welfare Benefit Plans (Topic 965). This Update relates primarily to the reporting by an employee benefit plan for its interest in a master trust, which is a trust for which a regulated financial institution serves as a trustee or custodian and in which assets of more than one plan sponsored by a single employer or by a group of employers under common control are held. For each master trust in which a plan holds an interest, the amendments in this Update require a plan's interest in that master trust and any change in that interest to be presented in separate line items in the statement of net assets available for benefits and in the statement of changes in net assets available for benefits, respectively. The amendments in this Update remove the requirement to disclose the percentage interest in the master trust for plans with divided interests and require that all plans disclose the dollar amount of their interest in each of those general types of investments, which supplements the existing requirement to disclose the master trusts balances in each general type of investments. There are also increased disclosure requirements for investments in master trusts. The amendments in this Update are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715). The amendments in this Update require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost as defined in paragraphs 715-30-35-4 and 715-60-35-9 are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments in this Update are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. For other entities, the amendments in this Update are effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The amendments in this Update should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The Corporation is currently evaluating the impact the adoption of the standard will have on the Corporation’s financial position or results of operations.

 

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718), which affects any entity that changes the terms or conditions of a share-based payment award.  This Update amends the definition of modification by qualifying that modification accounting does not apply to changes to outstanding share-based payment awards that do not affect the total fair value, vesting requirements, or equity/liability classification of the awards.  The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied prospectively to an award modified on or after the adoption date. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In May 2017, the FASB issued ASU 2017-10, Service Concession Arrangements (Topic 853), which applies to the accounting by operating entities for service concession arrangements within the scope of Topic 853. The amendments in this Update clarify that the grantor (government), rather than the third-party drivers, is the customer of the operation services in all cases for service concession arrangements within the scope of Topic 853. For an entity that has not adopted Topic 606 before the issuance of this Update, the effective date and transition requirements for the amendments in this Update generally are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by ASU 2014-09, Revenue from Contracts with Customers (Topic 606)). ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, deferred the effective date of Update 2014-09 by one year. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivative and Hedging (Topic 815). The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down-round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down-round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down-round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down-round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down- round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Accounting Standards Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in Part I of this Update should be applied either retrospectively to outstanding financial instruments with a down-round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first fiscal year and interim period(s) in which the pending content that links to this paragraph is effective or retrospectively to outstanding financial instruments with a down-round feature for each prior reporting period presented in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10. The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 850), the objective of which is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, the amendments in this Update make certain targeted improvements to simplify the application and disclosure of the hedge accounting guidance in current general accepted accounting principles. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. Early application is permitted in any period after issuance. For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the amendments in this Update. The amended presentation and disclosure guidance is required only prospectively. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments. The SEC Observer said that the SEC staff would not object if entities that are considered public business entities only because their financial statements or financial information is required to be included in another entity’s SEC filing use the effective dates for private companies when they adopt ASC 606, Revenue from Contracts with Customers, and ASC 842, Leases. The Update also supersedes certain SEC paragraphs in the Codification related to previous SEC staff announcements and moves other paragraphs, upon adoption of ASC 606 or ASC 842. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842), which provides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current lease guidance in Topic 840. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date the entity adopts Topic 842; otherwise, an entity should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in ASU 2016-02. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10), to clarify certain aspects of the guidance issued in ASU 2016-01. (1) An entity measuring an equity security using the measurement alternative may change its measurement approach to a fair value method in accordance with Topic 820, Fair Value Measurement, through an irrevocable election that would apply to that security and all identical or similar investments of the same issuer. Once an entity makes this election, the entity should measure all future purchases of identical or similar investments of the same issuer using a fair value method in accordance with Topic 820. (2) Adjustments made under the measurement alternative are intended to reflect the fair value of the security as of the date that the observable transaction for a similar security took place. (3) Remeasuring the entire value of forward contracts and purchased options is required when observable transactions occur on the underlying equity securities. (4) When the fair value option is elected for a financial liability, the guidance in paragraph 825-10- 45-5 should be applied, regardless of whether the fair value option was elected under either Subtopic 815-15, Derivatives and Hedging—Embedded Derivatives, or 825-10, Financial Instruments—Overall. (5) Financial liabilities for which the fair value option is elected, the amount of change in fair value that relates to the instrument specific credit risk should first be measured in the currency of denomination when presented separately from the total change in fair value of the financial liability. Then, both components of the change in the fair value of the liability should be remeasured into the functional currency of the reporting entity using end-of-period spot rates. (6) The prospective transition approach for equity securities without a readily determinable fair value in the amendments in Update 2016-01 is meant only for instances in which the measurement alternative is applied. An insurance entity subject to the guidance in Topic 944, Financial Services— Insurance, should apply a prospective transition method when applying the amendments related to equity securities without readily determinable fair values. An insurance entity should apply the selected prospective transition method consistently to the entity’s entire population of equity securities for which the measurement alternative is elected. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, are not required to adopt these amendments until the interim period beginning after June 15, 2018, and public business entities with fiscal years beginning between June 15, 2018, and December 15, 2018, are not required to adopt these amendments before adopting the amendments in Update 2016-01. For all other entities, the effective date is the same as the effective date in Update 2016-01. All entities may early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they have adopted Update 2016-01. The Corporation is currently evaluating the impact the adoption of the standard will have on the Corporation’s financial position or results of operations.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis represents management’s view of the financial condition and results of operations of the Corporation. This discussion and analysis should be read in conjunction with the consolidated financial statements and other financial schedules included in this quarterly report, and in conjunction with the 2017 Annual Report to Shareholders of the Corporation. The financial condition and results of operations presented are not indicative of future performance.

 

Forward-Looking Statements

 

The U.S. Private Securities Litigation Reform Act of 1995 provides safe harbor in regards to the inclusion of forward-looking statements in this document and documents incorporated by reference. Forward-looking statements pertain to possible or assumed future results that are made using current information. These forward-looking statements are generally identified when terms such as: “believe,” “estimate,” “anticipate,” “expect,” “project,” “forecast,” and other similar wordings are used. The readers of this report should take into consideration that these forward-looking statements represent management’s expectations as to future forecasts of financial performance, or the likelihood that certain events will or will not occur. Due to the very nature of estimates or predications, these forward-looking statements should not be construed to be indicative of actual future results. Additionally, management may change estimates of future performance, or the likelihood of future events, as additional information is obtained. This document may also address targets, guidelines, or strategic goals that management is striving to reach but may not be indicative of actual results.

 

Readers should note that many factors affect this forward-looking information, some of which are discussed elsewhere in this document and in the documents that are incorporated by reference into this document. These factors include, but are not limited to, the following:

 

·

National and local economic conditions

·

Effects of slow economic conditions or prolonged economic weakness, specifically the effect on loan customers to repay loans

·

Health of the housing market

·

Real estate valuations and its impact on the loan portfolio

·

Interest rate and monetary policies of the Federal Reserve Board

·

Volatility of the securities markets including the valuation of securities

·

Future actions or inactions of the United States government, including a failure to increase the government debt limit or a prolonged shutdown of the federal government

·

Political changes and their impact on new laws and regulations

·

Competitive forces

·

Impact of mergers and acquisition activity in the local market and the effects thereof

·

Potential impact from continually evolving cybersecurity and other technological risks and attacks, including additional costs, reputational damage, regulatory penalties, and financial losses

·

Changes in customer behavior impacting deposit levels and loan demand

·

Changes in accounting principles, policies, or guidelines as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standards setters

·

Ineffective business strategy due to current or future market and competitive conditions

·

Management’s ability to manage credit risk, liquidity risk, interest rate risk, and fair value risk

·

Operation, legal, and reputation risk

·

Results of the regulatory examination and supervision process

·

The impact of new laws and regulations, including the impact of the Tax Cuts and Jobs Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the regulations issued thereunder

·

Possible impacts of the capital and liquidity requirements of the Basel III standards and other regulatory pronouncements, regulations and rules

·

Disruptions due to flooding, severe weather, or other natural disasters

·

The risk that our analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful

 

Readers should be aware if any of the above factors change significantly, the statements regarding future performance could also change materially. The safe harbor provision provides that the Corporation is not required to publicly update or revise forward-looking statements to reflect events or circumstances that arise after the date of this report. Readers should review any changes in risk factors in documents filed by the Corporation periodically with the Securities and Exchange Commission, including Item 1A of Part II of this Quarterly Report on Form 10-Q, Annual Reports on Form 10-K, and Current Reports on Form 8-K.

 

Results of Operations

 

Overview

The Corporation recorded net income of $2,821,000 for the first quarter of 2018, a 54.4% increase over the $1,827,000 earned in the first quarter of 2017. The increase in the Corporation’s 2018 earnings was caused primarily by insurance proceeds from a bank owned life insurance (BOLI) policy. The Corporation purchased and is the beneficiary of all BOLI life insurance policies taken out on select officers. Due to the death of a participant during the first quarter of 2018, the Corporation recorded BOLI income of $913,000. This net death benefit caused an increase in the Corporation’s first quarter 2018 earnings. The Corporation also experienced growth in net interest income (NII) for the three-month period ended March 31, 2018, largely driven by the Federal Reserve rate increases which have positively impacted the yield on earning assets. Earnings per share, basic and diluted, were $0.99 for the three months ended March 31, 2018, compared to $0.64 for the same period in 2017.

 

The Corporation’s NII increased by $470,000, or 6.5%, for the three months ended March 31, 2018, compared to the same period in 2017. The increase in NII primarily resulted from an increase in interest and fees on loans of $566,000, or 9.7%, partially offset by a nominal decrease in interest on securities and dividend income. The Corporation’s interest expense increased by $72,000, or 10.3% for the three months ended March 31, 2018, primarily the result of increased costs on borrowings with much smaller increases in deposit interest expense.

 

The Corporation recorded $190,000 of provision expense in the first quarter of 2018, compared to $90,000 for the first quarter of 2017, causing a $100,000 decrease in income in the first quarter of 2018 compared to 2017. The increase in provision expense was largely driven by higher levels of charged-off loans as well as an increase in impaired loans requiring a specific allocation of $63,000. The gains from the sale of debt securities were $34,000 for the three months ended March 31, 2018, compared to $140,000 for the same period in 2017, representing a decrease of $106,000, or 75.7%. Market interest rates were lower in 2017, making it more conducive to achieving gains from the sale of securities. The gain on the sale of mortgages decreased by $120,000, or 33.8%, for the three-month period ended March 31, 2018, compared to the prior year’s period. Both mortgage production and margins realized on sold mortgages were higher in the first three months of 2017 compared to 2018. Total operating expenses increased $366,000, or 4.9%, for the three months ended March 31, 2018, compared to the same period in 2017.

 

The financial services industry uses two primary performance measurements to gauge performance: return on average assets (ROA) and return on average equity (ROE). ROA measures how efficiently a bank generates income based on the amount of assets or size of a company. ROE measures the efficiency of a company in generating income based on the amount of equity or capital utilized. The latter measurement typically receives more attention from shareholders. The ROA and ROE increased for the three months ended March 31, 2018, compared to the same period in the prior year, due to higher earnings as a result of the additional BOLI income recorded in the first quarter of 2018.

 

Key Ratios		Three Months Ended
		March 31,
		2018				2017
Return on Average Assets			1.12	%			0.75	%
Return on Average Equity			11.72	%			7.81	%

 

The results of the Corporation’s operations are best explained by addressing, in further detail, the five major sections of the income statement, which are as follows:

 

·

Net interest income

·

Provision for loan losses

·

Other income

·

Operating expenses

·

Provision for income taxes

 

The following discussion analyzes each of these five components.

 

Net Interest Income

 

Net interest income (NII) represents the largest portion of the Corporation’s operating income. In the first three months of 2018, NII generated 69.6% of the Corporation’s gross revenue stream, which consists of net interest income and non-interest income, compared to 75.1% in the first three months of 2017. The lower NII as a percentage of gross revenue was primarily caused by the BOLI income recorded in the first quarter of 2018 that resulted in much higher non-interest income when compared to the prior year. The overall performance of the Corporation is highly dependent on the changes in net interest income since it comprises such a significant portion of operating income. Without the impact of the BOLI income, the Corporation’s NII would have accounted for 75.9% of the gross revenue stream for the first three months of 2018.

 

The following table shows a summary analysis of net interest income on a fully taxable equivalent (FTE) basis. For analytical purposes and throughout this discussion, yields, rates, and measurements such as NII, net interest spread, and net yield on interest earning assets are presented on an FTE basis. The FTE net interest income shown in both tables below will exceed the NII reported on the consolidated statements of income, which is not shown on an FTE basis. The amount of FTE adjustment totaled $455,000 for the three months ended March 31, 2018, compared to $606,000 for the same period in 2017.

 

NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
		Three Months Ended
		March 31 ,
		2018				2017
		$				$
Total interest income			8,524				7,982
Total interest expense			774				702
Net interest income			7,750				7,280
Tax equivalent adjustment			455				606
Net interest income (fully taxable equivalent)			8,205				7,886

 

NII is the difference between interest income earned on assets and interest expense incurred on liabilities. Accordingly, two factors affect net interest income:

 

·

The rates earned on interest earning assets and paid on interest bearing liabilities

·

The average balance of interest earning assets and interest bearing liabilities

 

The Federal funds rate, the Prime rate, the shape of the U.S. Treasury curve, and other wholesale funding curves, all affect NII. The Federal Reserve controls the Federal funds rate, which is one of a number of tools available to the Federal Reserve to conduct monetary policy. The Federal funds rate, and guidance on when the rate might be changed, is often the focal point of discussion regarding the direction of interest rates. Until December 16, 2015, the Federal funds rate had not changed since December 16, 2008, a period of seven years. On December 16, 2015, the Federal funds rate was increased 25 basis points to 0.50%, from 0.25%. On December 14, 2016, one year later, the Federal funds rate was increased 25 basis points to 0.75%. During 2017, the Federal funds rate was increased three times so that the rate was 1.50% as of December 31, 2017. In March of 2018, the Federal Reserve again increased the Federal funds rate by 25 basis points so that the rate was 1.75% as of March 31, 2018. Prior to December of 2015, the period of seven years with extremely low and unchanged overnight rates was the lowest and longest in U.S. history. The impact has been a lower net interest margin to the Corporation and generally across the financial industry. The Federal Reserve rate increases resulted in higher short-term U.S. Treasury rates, but the long-term rates initially decreased, resulting in a flattening of the yield curve. Long-term rates like the ten-year U.S. Treasury were 201 basis points under the 4.75% Prime rate as of March 31, 2018. It appears that the general conditions of a flatter yield curve with low long-term U.S. Treasury rates, significantly below the Prime rate, will continue for the remainder of 2018. Management anticipates the next 0.25% Federal Reserve rate increase could occur in the second quarter of 2018. It remains to be seen whether mid and long-term U.S. Treasury rates will also increase to the same degree that the Federal Reserve will move the overnight Federal funds rate. If they do not, the yield curve would further flatten making it more difficult for the Corporation to increase asset yield.

 

The Prime rate is generally used by commercial banks to extend variable rate loans to business and commercial customers. For many years, the Prime rate has been set at 300 basis points, or 3.00% higher, than the Federal funds rate and typically moves when the Federal funds rate changes. As such, the Prime rate increased from 3.25% prior to December 2015, to 4.75% as of March 31, 2018, following the six Federal Reserve rate moves that began in December 2015. The Corporation’s Prime-based loans, including home equity lines of credit and some variable rate commercial loans reprice a day after the Federal Reserve rate movement.

 

As a result of the Federal Reserve rate increases, the Corporation’s NII on a tax equivalent basis began to increase in 2017 with the Corporation’s quarterly margin increasing to 3.47% for the fourth quarter of 2017. The margin decreased slightly in the first quarter of 2018 to 3.43% primarily as a result of lower tax-equivalent yields on the Corporation’s municipal securities which were negatively impacted by the lower Corporate tax rate. The Corporation’s NII on a tax-equivalent basis increased for the first three months of 2018 by $319,000, or 4.0%, over the same period in 2017. Management’s asset liability sensitivity measurements continue to show a benefit to both margin and NII given further Federal Reserve rate increases. Actual results over the past two years have confirmed the asset sensitivity of the Corporation’s balance sheet. Management expects that any additional Federal Reserve rate increases in 2018 would further improve both margin and NII, although to a slightly lesser degree because the cost on deposits and borrowings will begin to increase more rapidly.

 

The extended extremely low Federal funds rate had enabled management to reduce the cost of funds on overnight borrowings and allowed lower interest rates paid on deposits, initially reducing the Corporation’s interest expense. However, in the first quarter of 2018, this trend reversed with slight increases in both deposit and borrowings interest expense as the cost to replace maturing borrowings increased and rates paid on deposits increased slightly. It was only after the third 25-basis point Fed rate increase in March of 2017 that the Corporation raised some deposit rates minimally which resulted in slightly higher interest expense in the first quarter of 2018 compared to the prior year. While the low Prime rate reduced the yield on the Corporation’s loans for many years, the rate increases through March of 2018 did act to boost interest income. With a higher Prime rate and elevated Treasury rates, higher asset yields should be possible throughout the remainder of 2018. The increasing number of Federal Reserve rate moves assists the Corporation in growing NII and margin because of the variable rate portion of the loan portfolio which resets every time the Prime rate changes. The magnitude of increase in NII and NIM may slow down during the remainder of 2018 if deposit rates are increased.

 

Security yields will generally fluctuate more rapidly than loan yields based on changes to the U.S. Treasury rates and yield curve. With higher Treasury rates in the first three months of 2018 compared to the same period in 2017, security reinvestment has been occurring at slightly higher yields and amortization has slowed resulting in higher yields. However, yields on the Corporation’s municipal bonds have decreased due to the change in the corporate tax rate, making tax-free yields less attractive than they were in prior years. Management has added variable rate securities and has reduced the municipal bond holdings in an effort to improve the rates-up performance of the securities portfolio.

 

The Corporation’s loan yield has begun to increase as the variable rate portion of the loan portfolio is repricing higher with each Federal Reserve rate movement. The vast majority of the Corporation’s commercial Prime-based loans are priced at the Prime rate, currently at 4.75%. The pricing for the most typical five-year fixed rate commercial loans is currently very similar to the Prime rate. Previously, any increases in variable rate loans acted to bring down overall loan yield. Now with the rates being very similar, it is beneficial to the Corporation to grow the variable rate loans in a period of rising rates. An element of the Corporation’s Prime-based commercial loans is priced above the Prime rate based on the level of credit risk of the borrower. Management does price a portion of consumer variable rate loans above the Prime rate, which also helps to improve loan yield. Both commercial and consumer Prime-based pricing continues to be driven largely by local competition.

 

Mid-term and long-term interest rates on average were higher in the first quarter of 2018 compared to 2017. The average rate of the 10-year U.S. Treasury was 2.76% in the first three months of 2018 compared to 2.45% in the first three months of 2017, and it stood at 2.74% on March 31, 2018, compared to 2.22% on March 31, 2017. The slope of the yield curve has been compressed throughout 2017 and through the first three months of 2018, with a difference of 99 basis points between the Fed Funds rate of 1.75% and the 10-year U.S. Treasury as of March 31, 2018, compared to 140 basis points as of March 31, 2017. The slope of the yield curve has fluctuated many times in the past two years with the 10-year U.S. Treasury yield as high as 2.94% in the first quarter of 2018 and 2.62% in the first quarter of 2017, and as low as 2.44% in 2018, and 2.31% in 2017.

 

While the Corporation’s overall cost of funds remained low and did not increase throughout 2017, there were slight increases in the first quarter of 2018 due to higher interest expense on both deposits and borrowings, with the vast majority of the increase coming from the borrowing side. Deposit interest rates are still very low and have not been increased significantly since 2017, although savings on longer term time deposits that are maturing are no longer being achieved. It is anticipated that interest rates on interest bearing core deposits will need to be increased during 2018 as the Federal Reserve continues to raise the short-term interest rates. Borrowing costs, and the wholesale borrowing curves that they are based on, generally follow the direction and slope of the U.S. Treasury curve. However, these curves can be quicker to rise and slower to fall as the providers of these funds seek to protect themselves from rate movements. The Corporation refinanced the majority of borrowings at higher rates in 2017 and 2018 as lower-priced borrowings matured with no ability to refinance at lower rates, so the yield on borrowings increased during 2017 and continued to do so moving into 2018.

 

Management currently anticipates that the overnight interest rate and Prime rate will remain at the current levels until June of 2018 with the possibility of two additional 0.25% Federal Reserve rate increases in the remainder of 2018. It is likely that mid and long-term U.S. Treasury rates will increase slowly throughout the year, being driven higher due to expected additional Federal Reserve rate movements. This would allow management to achieve higher earnings on new higher yielding securities and allow for the ability to price new loans at higher market rates. However, it is also possible that even after a Federal Reserve rate increase, the yield curve could flatten, making it more difficult for management to lend out or reinvest at higher interest rates out further on the yield curve. Additionally, any further Federal Reserve rate increases would have a greater effect on the repricing of the Corporation’s liabilities as the cost of money increases and more marketplace competition returns. Management anticipates that more deposit rate increases will need to be made to remain competitive in the market while maturing borrowings would also reprice to higher rates.

 

The following table provides an analysis of year-to-date changes in net interest income by distinguishing what changes were a result of average balance increases or decreases and what changes were a result of interest rate increases or decreases.

 

RATE/VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME

(TAXABLE EQUIVALENT BASIS, DOLLARS IN THOUSANDS)

 

		Three Months Ended March 31,
		2018 vs. 2017
		Increase (Decrease)
		Due To Change In
										Net
		Average				Interest				Increase
		Balances				Rates				(Decrease)
		$				$				$
INTEREST INCOME
Interest on deposits at other banks			—				59				59
Securities available for sale:
Taxable			98				123				221
Tax-exempt			(199	)			(338	)			(537	)
Total securities			(101	)			(215	)			(316	)
Loans			325				265				590
Regulatory stock			8				50				58
Total interest income			232				159				391
INTEREST EXPENSE
Deposits:
Demand deposits			4				25				29
Savings deposits			1				—				1
Time deposits			(27	)			9				(18	)
Total deposits			(22	)			34				12
Borrowings:
Total borrowings			(3	)			63				60
Total interest expense			(25	)			97				72
NET INTEREST INCOME			257				62				319

 

 

During the first three months of 2018, the Corporation’s NII on an FTE basis increased by $319,000, a 4.0% increase over the same period in 2017. Total interest income on an FTE basis for the three months ended March 31, 2018, increased $391,000, or 4.6%, from 2017, while interest expense increased $72,000, or 10.3%, for the three months ended March 31, 2018, compared to the same period in 2017. The FTE interest income from the securities portfolio decreased by $316,000, or 12.2%, while loan interest income increased $590,000, or 10.0%. During the first quarter of 2018, additional loan volume caused by loan growth added $325,000 to net interest income, and the higher yields caused a $265,000 increase, resulting in a total increase of $590,000. Lower balances in the securities portfolio caused a decrease of $101,000 in net interest income, while lower yields on securities caused a $215,000 decrease, resulting in a total decrease of $316,000. The Corporation sold a number of municipal bonds at the end of 2017 reducing the balance of the securities portfolio and the change in the corporate tax rate caused a decline in yield on the remaining portfolio of municipal bonds.

 

The average balance of interest bearing liabilities increased by 1.2% during the three months ended March 31, 2018, compared to the prior year driven by slight growth in deposit balances. The slightly higher cost on deposit accounts resulted in a slight increase in interest expense although the shift between time deposit balances and demand and savings accounts partially offset this increase. Higher interest rates on all deposit groups except savings deposits caused a $34,000 increase in interest expense while lower balances of higher cost deposits contributed to savings of $22,000 on deposit costs resulting in a total increase of $12,000.

 

Out of all the Corporation’s deposit types, interest-bearing demand deposits reprice the most rapidly, as nearly all accounts are immediately affected by rate changes. Time deposit balances decreased resulting in a $27,000 reduction to expense, and time deposits repricing to higher interest rates increased interest expense by $9,000, causing a net total reduction of $18,000 in time deposit interest expense. Even with the low rate environment, the Corporation was successful in increasing balances of other deposit types.

The average balance of outstanding borrowings decreased by $1.2 million, or 1.7%, from March 31, 2017, to March 31, 2018. The decrease in total borrowings reduced interest expense by $3,000. The higher market interest rates increased interest expense by $63,000, as long-term borrowings at lower interest rates matured and were replaced with new advances at higher rates. The aggregate of these amounts was an increase in interest expense of $60,000 related to total borrowings.

 

The following table shows a more detailed analysis of net interest income on an FTE basis with all the major elements of the Corporation’s balance sheet, which consists of interest earning and non-interest earning assets and interest bearing and non-interest bearing liabilities. Additionally, the analysis provides the net interest spread and the net yield on interest earning assets. The net interest spread is the difference between the yield on interest earning assets and the interest rate paid on interest bearing liabilities. The net interest spread has the deficiency of not giving credit for the non-interest bearing funds and capital used to fund a portion of the total interest earning assets. For this reason, management emphasizes the net yield on interest earning assets, also referred to as the net interest margin (NIM). The NIM is calculated by dividing net interest income on an FTE basis into total average interest earning assets. The NIM is generally the benchmark used by analysts to measure how efficiently a bank generates NII.

 

 

 

 

COMPARATIVE AVERAGE BALANCE SHEETS AND NET INTEREST INCOME

(DOLLARS IN THOUSANDS)  

 

		For the Three Months Ended March 31,
		2018												2017
										(c)												(c)
		Average								Annualized				Average								Annualized
		Balance				Interest				Yield/Rate				Balance				Interest				Yield/Rate
		$				$				%				$				$				%
ASSETS
Interest earning assets:
Federal funds sold and interest
on deposits at other banks			23,220				113				1.97				23,387				54				0.92
Securities available for sale:
Taxable			210,769				1,134				2.15				191,403				913				1.91
Tax-exempt			113,258				1,135				4.01				130,175				1,672				5.14
Total securities (d)			324,027				2,269				2.80				321,578				2,585				3.22
Loans (a)			606,110				6,476				4.29				575,169				5,886				4.09
Regulatory stock			6,031				121				8.03				5,445				63				4.63
Total interest earning assets			959,388				8,979				3.76				925,579				8,588				3.72
Non-interest earning assets (d)			66,044												59,724
Total assets			1,025,432												985,303
LIABILITIES &
STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Demand deposits			212,920				102				0.19				203,064				73				0.15
Savings deposits			191,520				24				0.05				181,189				23				0.05
Time deposits			148,714				353				0.96				160,040				371				0.94
Borrowed funds			72,630				295				1.65				73,879				235				1.29
Total interest bearing liabilities			6