UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2020

OR

 

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

 

For the transition period from________________________________ to ________________________________

 

ENB Financial Corp

(Exact name of registrant as specified in its charter)

 

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

 

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

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
None.		N/A		N/A

 

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 ☒          No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 ☒          No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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	☐	Accelerated filer	☐
	Non-accelerated filer	☒	Smaller reporting company	☒
			Emerging growth company	☐

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 ☐          No ☒

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 1, 2020, the registrant had 5,556,413 shares of $0.10 (par) Common Stock outstanding.

 

ENB FINANCIAL CORP

INDEX TO FORM 10-Q

September 30, 2020

 

 

Part I – FINANCIAL INFORMATION
	Item 1.	Financial Statements
	Consolidated Balance Sheets at September 30, 2020 and 2019, and December 31, 2019 (Unaudited)		3
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2020 and 2019 (Unaudited)		4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2020 and 2019 (Unaudited)		5
	Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019 (Unaudited)		6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 (Unaudited)		7
	Notes to the Unaudited Consolidated Interim Financial Statements		8-34
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35-70
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	71-76
	Item 4.	Controls and Procedures	77
Part II – OTHER INFORMATION			78
	Item 1.	Legal Proceedings	78
	Item 1A.	Risk Factors	78
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	79
	Item 3.	Defaults upon Senior Securities	79
	Item 4.	Mine Safety Disclosures	79
	Item 5.	Other Information	79
	Item 6.	Exhibits	80
SIGNATURE PAGE			81

 

 

Part I - Financial Information

Item 1. Financial Statements

 

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

 

		September 30,				December 31,				September 30,
		2020				2019				2019
		$				$				$
ASSETS
Cash and due from banks			19,979				24,304				23,856
Interest-bearing deposits in other banks			24,347				16,749				17,334
Total cash and cash equivalents			44,326				41,053				41,190
Securities available for sale (at fair value)			360,029				308,097				298,983
Equity securities (at fair value)			6,854				6,708				6,108
Loans held for sale			5,008				2,342				1,578
Loans (net of unearned income)			843,177				753,618				738,104
Less: Allowance for loan losses			11,996				9,447				9,474
Net loans			831,181				744,171				728,630
Premises and equipment			24,696				25,033				25,247
Regulatory stock			6,525				7,291				7,200
Bank owned life insurance			29,418				28,818				28,610
Other assets			8,964				8,237				8,452
Total assets			1,317,001				1,171,750				1,145,998
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing			465,247				363,857				347,929
Interest-bearing			661,574				610,231				599,062
Total deposits			1,126,821				974,088				946,991
Short-term borrowings			1,500				200				—
Long-term debt			60,010				77,872				79,989
Other liabilities			3,362				2,902				3,381
Total liabilities			1,191,693				1,055,062				1,030,361
Stockholders' equity:
Common stock, par value $0.10
Shares:  Authorized 24,000,000
Issued 5,739,114 and Outstanding 5,566,413 as of 9/30/20,
5,640,742 as of 12/31/19, and 5,677,161 as of 9/30/19			574				574				574
Capital surplus			4,456				4,482				4,471
Retained earnings			117,960				111,944				110,067
Accumulated other comprehensive income			5,756				1,600				1,685
Less: Treasury stock cost on 172,700 shares as of 9/30/20, 98,372 as of 12/31/19,
and 61,953 as of 9/30/19			(3,438	)			(1,912	)			(1,160	)
Total stockholders' equity			125,308				116,688				115,637
Total liabilities and stockholders' equity			1,317,001				1,171,750				1,145,998

 

See Notes to the Unaudited Consolidated Interim Financial Statements

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

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

 

		Three Months ended September 30,								Nine Months ended September 30,
		2020				2019				2020				2019
		$				$				$				$
Interest and dividend income:
Interest and fees on loans			8,617				8,501				25,705				24,833
Interest on securities available for sale
Taxable			920				1,179				3,207				3,696
Tax-exempt			690				605				1,899				1,860
Interest on deposits at other banks			31				128				112				294
Dividend income			129				177				419				531
Total interest and dividend income			10,387				10,590				31,342				31,214
Interest expense:
Interest on deposits			430				889				1,782				2,626
Interest on borrowings			415				412				1,333				1,158
Total interest expense			845				1,301				3,115				3,784
Net interest income			9,542				9,289				28,227				27,430
Provision for loan losses			1,250				630				2,575				840
Net interest income after provision for loan losses			8,292				8,659				25,652				26,590
Other income:
Trust and investment services income			442				538				1,480				1,580
Service fees			701				701				2,015				2,024
Commissions			781				734				2,116				2,145
Gains on the sale of debt securities, net			55				42				704				229
Gains (losses) on equity securities, net			(54	)			7				(279	)			51
Gains on sale of mortgages			2,081				606				4,312				1,370
Earnings on bank-owned life insurance			209				186				620				543
Other income			159				129				241				307
Total other income			4,374				2,943				11,209				8,249
Operating expenses:
Salaries and employee benefits			5,860				5,227				16,522				15,520
Occupancy			598				605				1,805				1,825
Equipment			298				297				904				871
Advertising & marketing			184				205				676				621
Computer software & data processing			835				620				2,309				1,886
Shares tax			239				233				718				698
Professional services			549				448				1,679				1,479
Other expense			635				493				1,939				1,727
Total operating expenses			9,198				8,128				26,552				24,627
Income before income taxes			3,468				3,474				10,309				10,212
Provision for federal income taxes			533				550				1,610				1,596
Net income			2,935				2,924				8,699				8,616
Earnings per share of common stock			0.53				0.51				1.56				1.51
Cash dividends paid per share			0.160				0.155				0.480				0.460
Weighted average shares outstanding			5,564,158				5,685,679				5,591,027				5,690,788

 

See Notes to the Unaudited Consolidated Interim Financial Statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(DOLLARS IN THOUSANDS)

 

		Three Months ended September 30,								Nine Months Ended September 30,
		2020				2019				2020				2019
		$				$				$				$
Net income			2,935				2,924				8,699				8,616
Other comprehensive income, net of tax:
Securities available for sale not other-than-temporarily impaired:
Unrealized gains arising during the period			1,616				1,798				5,962				9,549
Income tax effect			(339	)			(378	)			(1,250	)			(2,005	)
			1,277				1,420				4,712				7,544
Gains recognized in earnings			(55	)			(42	)			(704	)			(229	)
Income tax effect			12				9				148				48
			(43	)			(33	)			(556	)			(181	)
Other comprehensive income, net of tax			1,234				1,387				4,156				7,363
Comprehensive Income			4,169				4,311				12,855				15,979

 

See Notes to the Unaudited Consolidated Interim Financial Statements

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

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

 

														Accumulated
														Other								Total
		Common				Capital				Retained				Comprehensive				Treasury				Stockholders'
		Stock				Surplus				Earnings				Income (Loss)				Stock				Equity
		$				$				$				$				$				$
Balances, December 31, 2018			574				4,435				104,067				(5,678	)			(596	)			102,802
Net income			—				—				2,603				—				—				2,603
Other comprehensive income net of tax			—				—				—				2,489				—				2,489
Treasury stock purchased - 18,800 shares			—				—				—				—				(330	)			(330	)
Treasury stock issued - 8,188 shares			—				3				—				—				143				146
Cash dividends paid, $0.15 per share			—				—				(852	)			—				—				(852	)
Balances, March 31, 2019			574				4,438				105,818				(3,189	)			(783	)			106,858
Net income			—				—				3,089				—				—				3,089
Other comprehensive income net of tax			—				—				—				3,487				—				3,487
Treasury stock purchased - 29,366 shares			—				—				—				—				(204	)			(204	)
Treasury stock issued - 16,686 shares			—				16				—				—				151				167
Cash dividends paid, $0.155 per share			—				—				(883	)			—				—				(883	)
Balances, June 30, 2019			574				4,454				108,024				298				(836	)			112,514
Net income			—				—				2,924				—				—				2,924
Other comprehensive income net of tax			—				—				—				1,387				—				1,387
Treasury stock purchased - 22,400 shares			—				—				—				—				(457	)			(457	)
Treasury stock issued - 7,177 shares			—				17				—				—				133				150
Cash dividends paid, $0.155 per share			—				—				(881	)			—				—				(881	)
Balances, September 30, 2019			574				4,471				110,067				1,685				(1,160	)			115,637
Balances, December 31, 2019			574				4,482				111,944				1,600				(1,912	)			116,688
Net income			—				—				2,165				—				—				2,165
Other comprehensive loss net of tax			—				—				—				(497	)			—				(497	)
Treasury stock purchased - 49,911 shares			—				—				—				—				(1,098	)			(1,098	)
Treasury stock issued - 7,670 shares			—				(6	)			—				—				156				150
Cash dividends paid, $0.16 per share			—				—				(902	)			—				—				(902	)
Balances, March 31, 2020			574				4,476				113,207				1,103				(2,854	)			116,506
Net income			—				—				3,599				—				—				3,599
Other comprehensive income net of tax			—				—				—				3,419				—				3,419
Treasury stock purchased - 32,966 shares			—				—				—				—				(627	)			(627	)
Treasury stock issued - 8,354 shares			—				(10	)			—				—				167				157
Cash dividends paid, $0.16 per share			—				—				(892	)			—				—				(892	)
Balances, June 30, 2020			574				4,466				115,914				4,522				(3,314	)			122,162
Net income			—				—				2,935				—				—				2,935
Other comprehensive income net of tax			—				—				—				1,234				—				1,234
Treasury stock purchased - 16,526 shares			—				—				—				—				(304	)			(304	)
Treasury stock issued - 9,050 shares			—				(10	)			—				—				180				170
Cash dividends paid, $0.16 per share			—				—				(889	)			—				—				(889	)
Balances, September 30, 2020			574				4,456				117,960				5,756				(3,438	)			125,308

 

See Notes to the Unaudited Consolidated Interim Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)		Nine Months Ended September 30,
		2020				2019
		$				$
Cash flows from operating activities:
Net income			8,699				8,616
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of securities premiums and discounts and loan fees			2,173				2,592
Amortization of operating leases right-of-use assets			134				131
Increase in interest receivable			(586	)			(76	)
(Decrease) increase in interest payable			(162	)			119
Provision for loan losses			2,575				840
Gains on the sale of debt securities, net			(704	)			(229	)
Loss (gain) on equity securities, net			279				(51	)
Gains on sale of mortgages			(4,312	)			(1,370	)
Loans originated for sale			(101,044	)			(35,657	)
Proceeds from sales of loans			102,690				36,878
Earnings on bank-owned life insurance			(620	)			(543	)
Depreciation of premises and equipment and amortization of software			1,137				1,171
Deferred income tax			(586	)			(416	)
Other assets and other liabilities, net			(111	)			828
Net cash provided by operating activities			9,562				12,833
Cash flows from investing activities:
Securities available for sale:
Proceeds from maturities, calls, and repayments			51,451				20,908
Proceeds from sales			50,819				35,818
Purchases			(150,728	)			(54,437	)
Equity securities
Proceeds from sales			—				168
Purchases			(425	)			(163	)
Purchase of regulatory bank stock			(1,225	)			(2,749	)
Redemptions of regulatory bank stock			1,991				1,897
Net increase in loans			(89,270	)			(44,441	)
Purchases of premises and equipment, net			(705	)			(787	)
Purchase of computer software			(133	)			(68	)
Net cash used for investing activities			(138,225	)			(43,854	)
Cash flows from financing activities:
Net increase in demand, NOW, and savings accounts			165,296				23,701
Net (decrease) increase in time deposits			(12,563	)			3,556
Net increase (decrease) in short-term borrowings			1,300				(7,870	)
Proceeds from long-term debt			12,984				24,723
Repayments of long-term debt			(30,846	)			(10,120	)
Dividends paid			(2,683	)			(2,616	)
Proceeds from sale of treasury stock			477				463
Treasury stock purchased			(2,029	)			(991	)
Net cash provided by financing activities			131,936				30,846
Increase in cash and cash equivalents			3,273				(175	)
Cash and cash equivalents at beginning of period			41,053				41,365
Cash and cash equivalents at end of period			44,326				41,190
Supplemental disclosures of cash flow information:
Interest paid			3,277				3,664
Income taxes paid			2,225				1,300
Supplemental disclosure of non-cash investing and financing activities:
Fair value adjustments for securities available for sale			(5,258	)			(9,320	)
Initial recognition of operating right-of-use assets			—				1,075
Initial recognition of operating lease liabilities			—				1,075

 

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 third quarter of 2020, is reporting on the results of operations and financial condition of ENB Financial Corp.

 

Operating results for the three and nine months ended September 30, 2020, are not necessarily indicative of the results that may be expected for the year ended December 31, 2020. 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, 2019.

 

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.

2.       Securities Available for Sale 

 

The amortized cost, gross unrealized gains and losses, and fair value of securities held at September 30, 2020, and December 31, 2019, are as follows:

 

						Gross				Gross
(DOLLARS IN THOUSANDS)		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
		$				$				$				$
September 30, 2020
U.S. government agencies			8,216				157				—				8,373
U.S. agency mortgage-backed securities			64,263				1,492				(91	)			65,664
U.S. agency collateralized mortgage obligations			40,236				758				(89	)			40,905
Asset-backed securities			41,892				82				(921	)			41,053
Corporate bonds			59,436				1,308				(30	)			60,714
Obligations of states and political subdivisions			138,701				4,889				(270	)			143,320
Total securities available for sale			352,744				8,686				(1,401	)			360,029
December 31, 2019
U.S. government agencies			32,621				31				(28	)			32,624
U.S. agency mortgage-backed securities			48,859				215				(448	)			48,626
U.S. agency collateralized mortgage obligations			60,124				323				(194	)			60,253
Asset-backed securities			23,646				7				(391	)			23,262
Corporate bonds			54,604				316				(40	)			54,880
Obligations of states and political subdivisions			86,216				2,245				(9	)			88,452
Total securities available for sale			306,070				3,137				(1,110	)			308,097

 

The amortized cost and fair value of securities available for sale at September 30, 2020, 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			47,256				47,804
Due after one year through five years			103,969				106,143
Due after five years through ten years			49,683				50,428
Due after ten years			151,836				155,654
Total debt securities			352,744				360,029

 

Securities available for sale with a par value of $80,235,000 and $66,712,000 at September 30, 2020, and December 31, 2019, respectively, were pledged or restricted for public funds, borrowings, or other purposes as required by law. The fair value of these pledged securities was $85,331,000 at September 30, 2020, and $68,732,000 at December 31, 2019.

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

 

PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE
(DOLLARS IN THOUSANDS)
		Three Months Ended September 30,								Nine Months Ended September 30,
		2020				2019				2020				2019
		$				$				$				$
Proceeds from sales			7,001				7,169				50,819				35,818
Gross realized gains			64				43				730				261
Gross realized losses			(9	)			(1	)			(26	)			(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 nine months of 2020 or 2019.

 

Information pertaining to securities with gross unrealized losses at September 30, 2020, and December 31, 2019, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

 

TEMPORARY IMPAIRMENTS OF SECURITIES

(DOLLARS IN THOUSANDS)  

		Less than 12 months								More than 12 months								Total
						Gross								Gross								Gross
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		$				$				$				$				$				$
As of September 30, 2020
U.S. government agencies			—				—				—				—				—				—
U.S. agency mortgage-backed securities			10,586				(75	)			2,561				(16	)			13,147				(91	)
U.S. agency collateralized mortgage obligations			14,940				(89	)			—				—				14,940				(89	)
Asset-backed securities			13,031				(257	)			16,749				(664	)			29,780				(921	)
Corporate bonds			—				—				3,001				(30	)			3,001				(30	)
Obligations of states & political subdivisions			22,673				(270	)			—				—				22,673				(270	)
Total temporarily impaired securities			61,230				(691	)			22,311				(710	)			83,541				(1,401	)
As of December 31, 2019
U.S. government agencies			1,222				(3	)			15,971				(25	)			17,193				(28	)
U.S. agency mortgage-backed securities			5,040				(32	)			24,027				(416	)			29,067				(448	)
U.S. agency collateralized mortgage obligations			17,457				(50	)			17,512				(144	)			34,969				(194	)
Asset-backed securities			10,278				(169	)			9,126				(222	)			19,404				(391	)
Corporate bonds			2,562				(4	)			13,041				(36	)			15,603				(40	)
Obligations of states & political subdivisions			2,642				(9	)			—				—				2,642				(9	)
Total temporarily impaired securities			39,201				(267	)			79,677				(843	)			118,878				(1,110	)

 

In the debt security portfolio there were 49 positions that were carrying unrealized losses as of September 30, 2020. There were no instruments considered to be other-than-temporarily impaired at September 30, 2020.

 

The Corporation evaluates 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 September 30, 2020 and December 31, 2019.

 

						Gross				Gross
(DOLLARS IN THOUSANDS)		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
		$				$				$				$
September 30, 2020
CRA-qualified mutual funds			6,162				—				—				6,162
Bank stocks			947				—				(255	)			692
Total equity securities			7,109				—				(255	)			6,854

 

 

						Gross				Gross
(DOLLARS IN THOUSANDS)		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
		$				$				$				$
December 31, 2019
CRA-qualified mutual funds			6,071				—				—				6,071
Bank stocks			614				26				(3	)			637
Total equity securities			6,685				26				(3	)			6,708

 

The following table presents the net gains and losses on the Corporation’s equity investments recognized in earnings during the three and nine months ended September 30, 2020 and 2019, and the portion of unrealized gains and losses for the period that relates to equity investments held as of September 30, 2020 and 2019.

 

NET GAINS AND LOSSES ON EQUITY INVESTMENTS RECOGNIZED IN EARNINGS

(DOLLARS IN THOUSANDS)    

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2020				2019				2020				2019
		$				$				$				$
Net gains (losses) recognized in equity securities during the period			(54	)			(9	)			(279	)			35
Less:  Net gains realized on the sale of equity securities during the period			—				16				—				16
Unrealized gains (losses) recognized in equity securities held at reporting date			(54	)			7				(279	)			51

 

 

4.        Loans and Allowance for Loan Losses

 

The following table presents the Corporation’s loan portfolio by category of loans as of September 30, 2020, and December 31, 2019:

 

LOAN PORTFOLIO
(DOLLARS IN THOUSANDS)
		September 30,				December 31,
		2020				2019
		$				$
Commercial real estate
Commercial mortgages			136,125				120,212
Agriculture mortgages			174,150				175,367
Construction			22,380				16,209
Total commercial real estate			332,655				311,788
Consumer real estate (a)
1-4 family residential mortgages			260,465				258,676
Home equity loans			10,788				9,770
Home equity lines of credit			68,368				70,809
Total consumer real estate			339,621				339,255
Commercial and industrial
Commercial and industrial			128,414				58,019
Tax-free loans			16,423				16,388
Agriculture loans			20,494				20,804
Total commercial and industrial			165,331				95,211
Consumer			5,190				5,416
Gross loans prior to deferred fees			842,797				751,670
Deferred loan costs, net			380				1,948
Allowance for loan losses			(11,996	)			(9,447	)
Total net loans			831,181				744,171

 

(a)	Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets, totaled $217,812,000 and $154,577,000 as of September 30, 2020, and December 31, 2019, respectively.

 

The largest movement within the Corporation’s loan portfolio since December 31, 2019 was the sharp growth in the commercial and industrial loan sector, which experienced a $70.1 million, or 73.6% increase. This was a direct result of the Small Business Administration’s new Paycheck Protection Program (PPP) established as part of the CARES Act passed in March 2020, to provide relief to small businesses from the impact of COVID-19. The Corporation began making these loans in early April 2020, and by September 30, 2020 had $77.7 million in PPP loan balances. The majority of these loans have been written with a two-year term, however management expects the vast majority of these loans to be forgiven by the SBA, or paid off by the borrower, prior to maturity of the loan. As a result, management expects the commercial and industrial loan balances to decline by December 31, 2020 with further declines during 2021.

 

The Corporation grades commercial credits differently than consumer credits. The following tables represent all of the Corporation’s commercial credit exposures by internally assigned grades as of September 30, 2020 and December 31, 2019. The grading analysis estimates the capability of the borrower to repay the contractual obligations under the loan agreements as scheduled. The Corporation's internal commercial credit risk grading system is based on experiences with similarly graded loans.

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

COMMERCIAL CREDIT EXPOSURE

CREDIT RISK PROFILE BY INTERNALLY ASSIGNED GRADE

(DOLLARS IN THOUSANDS)

 

September 30, 2020		Commercial Mortgages				Agriculture Mortgages				Construction				Commercial and Industrial				Tax-free Loans				Agriculture Loans				Total
		$				$				$				$				$				$				$
Grade:
Pass			126,713				160,772				20,884				117,506				16,423				18,646				460,944
Special Mention			3,500				2,630				1,496				5,779				—				826				14,231
Substandard			5,912				10,748				—				5,129				—				1,022				22,811
Doubtful			—				—				—				—				—				—				—
Loss			—				—				—				—				—				—				—
Total			136,125				174,150				22,380				128,414				16,423				20,494				497,986

 

 

December 31, 2019		Commercial Mortgages				Agriculture Mortgages				Construction				Commercial and Industrial				Tax-free Loans				Agriculture Loans				Total
		$				$				$				$				$				$				$
Grade:
Pass			117,875				158,896				16,209				52,028				16,388				18,530				379,926
Special Mention			827				4,546				—				618				—				939				6,930
Substandard			1,510				11,925				—				5,293				—				1,335				20,063
Doubtful			—				—				—				80				—				—				80
Loss			—				—				—				—				—				—				—
Total			120,212				175,367				16,209				58,019				16,388				20,804				406,999

 

 

Substandard loans increased by $2,748,000, or 13.7%, while special mention loans have increased by $7,301,000, or 105.4%, from December 31, 2019 to September 30, 2020. Substandard loans increased from $20.1 million to $22.8 million from December 31, 2019, to September 30, 2020 while special mention loans increased from $6.9 million to $14.2 million during this same period. The loan areas that experienced material changes in special mention and substandard loans were commercial and industrial and commercial mortgages. Under commercial and industrial loans, one $3.5 million non-profit loan and another $1.5 million hotel loan to unrelated borrowers were transferred to special mention, along with a number of smaller loan relationships. During the third quarter of 2020, a bowling alley with a $3.6 million mortgage was downgraded from special mention to substandard. A total of sixteen loans were downgraded to substandard in the third quarter of 2020, twelve of which were downgraded from special mention.

Special mention loans within agriculture declined from $5.5 million to $3.5 million; one farm customer with $1.8 million in outstanding loans was upgraded from special mention to a pass rating, while another customer with $754,000 in outstanding balances was downgraded from a pass rating to special mention.

 

For consumer loans, the Corporation evaluates credit quality based on whether the loan is considered performing or non-performing. Non-performing loans consist of those loans greater than 90 days delinquent and nonaccrual loans. The following tables present the balances of consumer loans by classes of the loan portfolio based on payment performance as of September 30, 2020 and December 31, 2019:

 

CONSUMER CREDIT EXPOSURE

CREDIT RISK PROFILE BY PAYMENT PERFORMANCE

(DOLLARS IN THOUSANDS)          

 

September 30, 2020		1-4 Family Residential Mortgages				Home Equity Loans				Home Equity Lines of Credit				Consumer				Total
Payment performance:		$				$				$				$				$
Performing			259,710				10,696				68,358				5,182				343,946
Non-performing			755				92				10				8				865
Total			260,465				10,788				68,368				5,190				344,811

 

 

December 31, 2019		1-4 Family Residentia l Mortgages				Home Equity Loans				Home Equity Lines of Credit				Consumer				Total
Payment performance:		$				$				$				$				$
Performing			257,374				9,678				70,799				5,412				343,263
Non-performing			1,302				92				10				4				1,408
Total			258,676				9,770				70,809				5,416				344,671

 

The following tables present an age analysis of the Corporation’s past due loans, segregated by loan portfolio class, as of September 30, 2020 and December 31, 2019:

 

AGING OF LOANS RECEIVABLE
(DOLLARS IN THOUSANDS)
																										Loans
										Greater																Receivable >
		30-59 Days				60-89 Days				than 90				Total Past								Total Loans				90 Days and
September 30, 2020		Past Due				Past Due				Days				Due				Current				Receivable				Accruing
		$				$				$				$				$				$				$
Commercial real estate
Commercial mortgages			—				—				210				210				135,915				136,125				—
Agriculture mortgages			532				—				—				532				173,618				174,150				—
Construction			—				—				—				—				22,380				22,380				—
Consumer real estate
1-4 family residential mortgages			1,080				—				755				1,835				258,630				260,465				266
Home equity loans			—				—				92				92				10,696				10,788				—
Home equity lines of credit			68				—				10				78				68,290				68,368				10
Commercial and industrial
Commercial and industrial			102				—				495				597				127,817				128,414				—
Tax-free loans			—				—				—				—				16,423				16,423				—
Agriculture loans			32				—				—				32				20,462				20,494				—
Consumer			14				9				8				31				5,159				5,190				8
Total			1,828				9				1,570				3,407				839,390				842,797				284

 

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
December 31, 2019		Past Due				Past Due				Days				Due				Current				Receivable				Accruing
		$				$				$				$				$				$				$
Commercial real estate
Commercial mortgages			—				—				228				228				119,984				120,212				—
Agriculture mortgages			962				—				1,070				2,032				173,335				175,367				—
Construction			—				—				—				—				16,209				16,209				—
Consumer real estate
1-4 family residential mortgages			2,254				161				1,302				3,717				254,959				258,676				807
Home equity loans			52				—				92				144				9,626				9,770				—
Home equity lines of credit			43				—				10				53				70,756				70,809				10
Commercial and industrial
Commercial and industrial			68				—				538				606				57,413				58,019				—
Tax-free loans			—				—				—				—				16,388				16,388				—
Agriculture loans			2				—				—				2				20,802				20,804				—
Consumer			14				12				4				30				5,386				5,416				4
Total			3,395				173				3,244				6,812				744,858				751,670				821

The following table presents nonaccrual loans by classes of the loan portfolio as of September 30, 2020 and December 31, 2019:

 

NONACCRUAL LOANS BY LOAN CLASS
(DOLLARS IN THOUSANDS)
		September 30,				December 31,
		2020				2019
		$				$
Commercial real estate
Commercial mortgages			210				228
Agriculture mortgages			—				1,070
Construction			—				—
Consumer real estate
1-4 family residential mortgages			489				495
Home equity loans			92				92
Home equity lines of credit			—				—
Commercial and industrial
Commercial and industrial			495				538
Tax-free loans			—				—
Agriculture loans			—				—
Consumer			—				—
Total			1,286				2,423

 

As of September 30, 2020 and December 31, 2019, all of the Corporation’s commercial loans on nonaccrual status were also considered impaired. Information with respect to impaired loans for the three and nine months ended September 30, 2020 and September 30, 2019, is as follows:

 

		Three Months Ended September 30,								Nine months ended September 30,
		2020				2019				2020				2019
		$				$				$				$
Average recorded balance of impaired loans			5,060				3,721				4,062				3,278
Interest income recognized on impaired loans			31				11				72				32

 

There was one loan modification made during the third quarter of 2020 that would be considered a troubled debt restructuring (TDR). One $3.6 million loan was restructured to provide relief to the commercial borrower by reducing the interest rate, providing a six-month interest only period, and extending the amortization period by an additional nine years. In addition to this TDR, deferments of principal related to the impact of COVID-19 did occur beginning in late March 2020, however these modifications are not considered a TDR under the revised COVID-19 regulatory guidance. There was one loan modification that occurred during the first quarter of 2019, constituting a TDR. A modification of the payment terms to a loan customer are considered a TDR if a concession was made 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.

 

In the first quarter of 2019, a loan modification was made on a $718,000 agricultural mortgage which moved the timing of the annual principal payment and changed interest payments from monthly to annually. The farmer had suffered a fire loss in late 2018 impacting one year’s harvest. The principal and interest payment due date was reset to November 15, 2019, when it was paid. No other loans were modified during 2019 or 2020.

 

Included in the impaired loan portfolio are three loans to unrelated borrowers that are being reported as TDRs. The balance of these three TDR loans was $1,932,000 as of September 30, 2020. One of these TDR loans with a balance of $439,000 is also on nonaccrual and is included under 1-4 family residential mortgages shown in the nonaccrual table above. For both of these TDR loans the borrowers have a history of being delinquent. Management will continue to report these loans as TDR loans until they have been paid off or charged off.

The following tables summarize information regarding impaired loans by loan portfolio class as of September 30, 2020, and for the nine months ended September 30, 2020, and as of December 31, 2019:

 

IMPAIRED LOAN ANALYSIS
(DOLLARS IN THOUSANDS)
September 30, 2020		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		$				$				$				$				$
With no related allowance recorded:
Commercial real estate
Commercial mortgages			699				752				—				716				—
Agriculture mortgages			1,492				1,521				—				1,972				41
Construction			—				—				—				—				—
Total commercial real estate			2,191				2,273				—				2,688				41
Commercial and industrial
Commercial and industrial			495				523				—				524				17
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			495				523				—				524				17
Total with no related allowance			2,686				2,796				—				3,212				58
With an allowance recorded:
Commercial real estate
Commercial mortgages			3,673				3,681				1,138				850				15
Agriculture mortgages			—				—				—				—				—
Construction			—				—				—				—				—
Total commercial real estate			3,673				3,681				1,138				850				15
Commercial and industrial
Commercial and industrial			—				—				—				—				—
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			—				—				—				—				—
Total with a related allowance			3,673				3,681				1,138				850				15
Total by loan class:
Commercial real estate
Commercial mortgages			4,372				4,433				1,138				1,566				15
Agriculture mortgages			1,492				1,521				—				1,972				41
Construction			—				—				—				—				—
Total commercial real estate			5,864				5,954				1,138				3,538				56
Commercial and industrial
Commercial and industrial			495				523				—				524				17
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			495				523				—				524				17
Total			6,359				6,477				1,138				4,062				73

 

IMPAIRED LOAN ANALYSIS
(DOLLARS IN THOUSANDS)
December 31, 2019		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		$				$				$				$				$
With no related allowance recorded:
Commercial real estate
Commercial mortgages			724				765				—				859				—
Agriculture mortgages			1,912				1,928				—				1,903				43
Construction			—				—				—				—				—
Total commercial real estate			2,636				2,693				—				2,762				43
Commercial and industrial
Commercial and industrial			—				—				—				—				—
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			—				—				—				—				—
Total with no related allowance			2,636				2,693				—				2,762				43
With an allowance recorded:
Commercial real estate
Commercial mortgages			92				100				49				93				—
Agriculture mortgages			718				718				60				760				—
Construction			—				—				—				—				—
Total commercial real estate			810				818				109				853				—
Commercial and industrial
Commercial and industrial			538				549				80				261				—
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			538				549				80				261				—
Total with a related allowance			1,348				1,367				189				1,114				—
Total by loan class:
Commercial real estate
Commercial mortgages			816				865				49				952				—
Agriculture mortgages			2,630				2,646				60				2,663				43
Construction			—				—				—				—				—
Total commercial real estate			3,446				3,511				109				3,615				43
Commercial and industrial
Commercial and industrial			538				549				80				261				—
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			538				549				80				261				—
Total			3,984				4,060				189				3,876				43

The following table details activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2020:

 

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, 2019			4,319				2,855				1,784				41				448				9,447
Charge-offs			—				—				—				(6	)			—				(6	)
Recoveries			11				—				1				—				—				12
Provision			252				296				171				21				(390	)			350
Balance - March 31, 2020			4,582				3,151				1,956				56				58				9,803
Charge-offs			—				—				—				(10	)			—				(10	)
Recoveries			—				—				1				1				—				2
Provision			356				146				175				5				293				975
Ending Balance - June 30, 2020			4,938				3,297				2,132				52				351				10,770
Charge-offs			—				—				(23	)			(3	)			—				(26	)
Recoveries			—				—				1				1				—				2
Provision			1,289				75				(18	)			4				(100	)			1,250
Balance - September 30, 2020			6,227				3,372				2,092				54				251				11,996

 

During the nine months ended September 30, 2020, management charged off $42,000 in loans while recovering $16,000 and added $2,575,000 to the provision. The unallocated portion of the allowance decreased from 4.7% of total reserves as of December 31, 2019, to 2.1% as of September 30, 2020. Management monitors the unallocated portion of the allowance with a desire to maintain it at approximately 5% over the long term, with a requirement of it not to exceed 10%.

 

During the nine months ended September 30, 2020, net provision expense was recorded for all sectors. The higher provision in the commercial real estate sector was due to a specific allocation of $1.1 million for a customer with ongoing business concerns. The higher provisions across the other categories were primarily caused by increasing the qualitative factors across all industry lines to various degrees as a result of the impact and effect from COVID-19 and the declining economic conditions. There were minimal charge-offs and recoveries recorded during the nine months ended September 30, 2020, so the provision expense was primarily related to the specific allocation as well as the change in economic conditions and potential for credit declines moving forward. The total amount of substandard loans at the end of the third quarter of 2020 was slightly higher resulting in slightly more provision expense.

 

As of September 30, 2020, the Corporation’s total delinquencies were 0.40%, a decline from 0.91% at December 31, 2019. The Corporation’s total delinquencies continue to compare favorably to the national uniform bank performance group, which was at 1.05% as of December 31, 2019.

 

Outside of the above measurements and indicators, management continues to utilize nine qualitative factors to continually refine the potential credit risks across the Corporation’s various loan types.  In addition, the loan portfolio is sectored out into nine different categories to evaluate these qualitative factors.   A total score of the qualitative factors for each loan sector is calculated to utilize in the allowance for loan loss calculation.  The agricultural dairy sector carries the highest level of qualitative factors due to the long-term weakness in milk prices. While the dairy market has improved recently, COVID-19 initially caused a sharp decline in milk prices.

The following table details activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2019:

 

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, 2018			4,296				2,408				1,428				102				432				8,666
Charge-offs			—				—				—				(17	)			—				(17	)
Recoveries			44				—				13				—				—				57
Provision			148				(140	)			128				16				28				180
Balance - March 31, 2019			4,488				2,268				1,569				101				460				8,886
Charge-offs			—				—				—				(6	)			—				(6	)
Recoveries			43				—				1				3				—				47
Provision			(114	)			122				(204	)			(22	)			248				30
Balance - June 30, 2019			4,417				2,390				1,366				76				708				8,957
Charge-offs			(122	)			—				(63	)			(3	)			—				(188	)
Recoveries			41				1				33				—				—				75
Provision			229				156				740				(19	)			(476	)			630
Ending Balance - September 30, 2019			4,565				2,547				2,076				54				232				9,474

 

During the nine months ended September 30, 2019, management charged off $211,000 in loans while recovering $179,000 and added $840,000 to the provision. The unallocated portion of the allowance decreased from 5.3% of total reserves as of December 31, 2018, to 2.5% as of September 30, 2019, after being higher at the end of the first and second quarters. Management monitors the unallocated portion of the allowance with a desire to maintain it at approximately 5% or less, with a requirement of it not exceeding 10%.

 

During the nine months ended September 30, 2019, net provision expense was recorded for all sectors except consumer, which had a net credit provision. In the third quarter of 2019, management recorded charge-offs in commercial real estate and the C&I sector, unlike in the first two quarters of 2019. This also pushed up the historic loss rate and caused higher allocations in the third quarter for those sectors. The total amount of substandard and special mention loans at the end of the second and third quarters of 2019 were similar for commercial mortgages, but agricultural mortgages increased for both special mention and substandard loans, requiring more provision. The Corporation’s commercial and industrial allocation for credit losses was increased by $740,000 in the third quarter of 2019, primarily due to the classification of one $547,000 loan to doubtful status, which caused a specific provision for the same amount. This C&I loan customer is current as to payment of interest on a commercial line of credit but the line has not revolved for several years. The Corporation does have a general UCC filing against all business assets but the majority of their inventory assets are already covered by a purchase money security interest of the manufacturer. Management will continue to classify the loan as doubtful until it can be determined that sufficient collateral exists to cover the loan, or sustainable principal payments can be made on the line.

The following tables present the balance in the allowance for credit losses and the recorded investment in loans receivable by portfolio segment based on impairment method as of September 30, 2020 and December 31, 2019:

 

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)

 

As of September 30, 2020:		Commercial Real Estate				Consumer Real Estate				Commercial and Industrial				Consumer				Unallocated				Total
		$				$				$				$				$				$
Allowance for credit losses:
Ending balance: individually evaluated
for impairment			1,138				—				—				—				—				1,138
Ending balance: collectively evaluated
for impairment			5,089				3,372				2,092				54				251				10,858
Loans receivable:
Ending balance			332,655				339,621				165,331				5,190								842,797
Ending balance: individually evaluated
for impairment			5,864				—				495				—								6,359
Ending balance: collectively evaluated
for impairment			326,791				339,621				164,836				5,190								836,438

 

As of December 31, 2019:		Commercial Real Estate				Consumer Real Estate				Commercial and Industrial				Consumer				Unallocated				Total
		$				$				$				$				$				$
Allowance for credit losses:
Ending balance: individually evaluated
for impairment			109				—				80				—				—				189
Ending balance: collectively evaluated
for impairment			4,210				2,855				1,704				41				448				9,258
Loans receivable:
Ending balance			311,788				339,255				95,211				5,416								751,670
Ending balance: individually evaluated
for impairment			3,446				—				538				—								3,984
Ending balance: collectively evaluated
for impairment			308,342				339,255				94,673				5,416								747,686

 

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 September 30, 2020, and December 31, 2019, 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)  

		September 30, 2020
		Level I				Level II				Level III				Total
		$				$				$				$
U.S. government agencies			—				8,373				—				8,373
U.S. agency mortgage-backed securities			—				65,664				—				65,664
U.S. agency collateralized mortgage obligations			—				40,905				—				40,905
Asset-backed securities			—				41,053				—				41,053
Corporate bonds			—				60,714				—				60,714
Obligations of states & political subdivisions			—				143,320				—				143,320
Equity securities			6,854				—				—				6,854
Total securities			6,854				360,029				—				366,883

 

 

On September 30, 2020, the Corporation held no securities valued using level III inputs. All of the Corporation’s debt instruments were valued using level II inputs, where quoted prices are available and observable, but not necessarily quotes on identical securities traded in active markets on a daily basis. The Corporation’s CRA fund investments and bank stocks are fair valued utilizing level I inputs because the funds have their own quoted prices in an active market. As of September 30, 2020, the CRA fund investments had a $6,162,000 book and fair market value and the bank stock portfolio had a book value of $947,000, and fair market value of $692,000.

 

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, 2019
		Level I				Level II				Level III				Total
		$				$				$				$
U.S. government agencies			—				32,624				—				32,624
U.S. agency mortgage-backed securities			—				48,626				—				48,626
U.S. agency collateralized mortgage obligations			—				60,253				—				60,253
Asset-backed securities			—				23,262				—				23,262
Corporate bonds			—				54,880				—				54,880
Obligations of states & political subdivisions			—				88,452				—				88,452
Equity securities			6,708				—				—				6,708
Total securities			6,708				308,097				—				314,805

 

On December 31, 2019, 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, 2019, the CRA fund investments had a $6,071,000 book and market value and the bank stocks had a book value of $614,000 and a market value of $637,000.

 

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 September 30, 2020 and December 31, 2019, by level within the fair value hierarchy:

 

ASSETS MEASURED ON A NONRECURRING BASIS

(Dollars in Thousands)

 

		September 30, 2020
		Level I				Level II				Level III				Total
		$				$				$				$
Assets:
Impaired Loans		$	—			$	—			$	5,221			$	5,221
Total		$	—			$	—			$	5,221			$	5,221

 

		December 31, 2019
		Level I				Level II				Level III				Total
		$				$				$				$
Assets:
Impaired Loans		$	—			$	—			$	3,795			$	3,795
Total		$	—			$	—			$	3,795			$	3,795

 

The Corporation had a total of $6,359,000 of impaired loans as of September 30, 2020, with $1,138,000 of specific allocation against these loans and $3,984,000 of impaired loans as of December 31, 2019, with $189,000 of 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)      

 

	September 30, 2020
	Fair Value	Valuation	Unobservable	Range
	Estimate	Techniques	Input	(Weighted Avg)
Impaired loans	5,221	Appraisal of	Appraisal	-20% (-20%)
		collateral (1)	adjustments (2)
			Liquidation	-10% (-10%)
			expenses (2)

 

 

	December 31, 2019
	Fair Value	Valuation	Unobservable	Range
	Estimate	Techniques	Input	(Weighted Avg)
Impaired loans	3,795	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 September 30, 2020 and December 31, 2019:

 

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

(DOLLARS IN THOUSANDS)

		September 30, 2020
										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			44,326				44,326				44,326				—				—
Regulatory stock			6,525				6,525				6,525				—				—
Loans held for sale			5,008				5,008				5,008				—				—
Loans, net of allowance			831,181				839,427				—				—				839,427
Mortgage servicing assets			1,041				1,058				—				—				1,058
Accrued interest receivable			4,354				4,354				4,354				—				—
Bank owned life insurance			29,418				29,418				29,418				—				—
Financial Liabilities:
Demand deposits			465,247				465,247				465,247				—				—
Interest-bearing demand deposits			45,503				45,503				45,503				—				—
NOW accounts			111,849				111,849				111,849				—				—
Money market deposit accounts			125,665				125,665				125,665				—				—
Savings accounts			255,936				255,936				255,936				—				—
Time deposits			122,621				125,225				—				—				125,225
Total deposits			1,126,821				1,129,425				1,004,200				—				125,225
Short-term borrowings			1,500				1,500				1,500				—				—
Long-term debt			60,010				56,759				—				—				56,759
Accrued interest payable			359				359				359				—				—

 

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

(DOLLARS IN THOUSANDS)

		December 31, 2019
										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			41,053				41,053				41,053				—				—
Regulatory stock			7,291				7,291				7,291				—				—
Loans held for sale			2,342				2,342				2,342				—				—
Loans, net of allowance			744,171				759,011				—				—				759,011
Mortgage servicing assets			892				1,049				—				—				1,049
Accrued interest receivable			3,768				3,768				3,768				—				—
Bank owned life insurance			28,818				28,818				28,818				—				—
Financial Liabilities:
Demand deposits			363,857				363,857				363,857				—				—
Interest-bearing demand deposits			25,171				25,171				25,171				—				—
NOW accounts			96,941				96,941				96,941				—				—
Money market deposit accounts			141,649				141,649				141,649				—				—
Savings accounts			211,285				211,285				211,285				—				—
Time deposits			135,185				136,781				—				—				136,781
Total deposits			974,088				975,684				838,903				—				136,781
Short-term borrowings			200				200				200				—				—
Long-term debt			77,872				76,825				—				—				76,825
Accrued interest payable			521				521				521				—				—

 

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 September 30, 2020, firm loan commitments were $60.9 million, unused lines of credit were $319.0 million, and open letters of credit were $9.1 million. The total of these commitments was $389.0 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 Income (Loss)

 

The activity in accumulated other comprehensive income for the nine months ended September 30, 2020 and 2019 is as follows:

 

ACCUMULATED OTHER COMPREHENSIVE INCOME (1) (2)

(DOLLARS IN THOUSANDS)  

 

		Unrealized
		Gains (Losses)
		on Securities
		Available-for-Sale
		$
Balance at December 31, 2019			1,600
Other comprehensive loss before reclassifications			(274	)
Amount reclassified from accumulated other comprehensive income			(223	)
Period change			(497	)
Balance at March 31, 2020			1,103
Other comprehensive income before reclassifications			3,709
Amount reclassified from accumulated other comprehensive income			(290	)
P