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, 2016          

OR

 

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

 

For the transition period from ______________________________ to ______________________________

 

 

ENB Financial Corp

(Exact name of registrant as specified in its charter)

 

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

 

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

 

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

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x           No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)

Yes x           No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

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

Yes o           No x

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of May 4, 2016, the registrant had 2,851,394 shares of $0.20 (par) Common Stock outstanding.

 

ENB FINANCIAL CORP

INDEX TO FORM 10-Q

March 31, 2016

 

Part I – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets at March 31, 2016 and 2015 and December 31, 2015 (Unaudited)	3
	Consolidated Statements of Income for the Three Months Ended March 31, 2016 and 2015 (Unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2016 and 2015 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015 (Unaudited)	6
	Notes to the Unaudited Consolidated Interim Financial Statements	7-33
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34-64
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	65-70
Item 4.	Controls and Procedures	71
Part II – OTHER INFORMATION		72
Item 1.	Legal Proceedings	72
Item 1A.	Risk Factors	72
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	72
Item 3.	Defaults Upon Senior Securities	72
Item 4.	Mine Safety Disclosures	72
Item 5.	Other Information	72
Item 6.	Exhibits	73
SIGNATURE PAGE		74
EXHIBIT INDEX		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,
		2016				2015				2015
		$				$				$
ASSETS
Cash and due from banks			11,989				15,426				13,423
Interest-bearing deposits in other banks			28,689				28,801				26,933
Total cash and cash equivalents			40,678				44,227				40,356
Securities available for sale (at fair value)			287,270				289,423				292,808
Loans held for sale			804				1,126				648
Loans (net of unearned income)			544,784				520,283				482,626
Less: Allowance for loan losses			7,040				7,078				7,140
Net loans			537,744				513,205				475,486
Premises and equipment			21,466				21,696				22,305
Regulatory stock			4,675				4,314				3,595
Bank owned life insurance			24,082				23,869				20,765
Other assets			8,102				7,741				6,752
Total assets			924,821				905,601				862,715
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing			243,647				236,214				205,830
Interest-bearing			506,084				503,848				489,777
Total deposits			749,731				740,062				695,607
Short-term borrowings			11,467				8,736				4,930
Long-term debt			64,883				59,594				65,548
Other liabilities			1,866				2,107				2,024
Total liabilities			827,947				810,499				768,109
Stockholders' equity:
Common stock, par value $0.20;
Shares:  Authorized 12,000,000
Issued 2,869,557 and Outstanding 2,851,394
(Issued 2,869,557 and Outstanding 2,849,524 as of 12/31/15)
(Issued 2,869,557 and Outstanding  2,856,413 as of 3/31/15)			574				574				574
Capital surplus			4,395				4,395				4,383
Retained earnings			92,172				91,029				87,895
Accumulated other comprehensive income (loss) net of tax			318				(252	)			2,161
Less: Treasury stock cost on 18,163 shares (20,033 shares
as of 12-31-15 and 13,144 shares as of 3-31-15)			(585	)			(644	)			(407	)
Total stockholders' equity			96,874				95,102				94,606
Total liabilities and stockholders' equity			924,821				905,601				862,715

 

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,
		2016				2015
		$				$
Interest and dividend income:
Interest and fees on loans			5,439				4,949
Interest on securities available for sale
Taxable			473				1,000
Tax-exempt			867				766
Interest on deposits at other banks			26				14
Dividend income			81				143
Total interest and dividend income			6,886				6,872
Interest expense:
Interest on deposits			546				674
Interest on borrowings			265				340
Total interest expense			811				1,014
Net interest income			6,075				5,858
Provision (credit) for loan losses			(50	)			200
Net interest income after provision (credit) for loan losses			6,125				5,658
Other income:
Trust and investment services income			387				355
Service fees			478				401
Commissions			515				465
Gains on securities transactions, net			728				561
Gains on sale of mortgages			155				153
Earnings on bank-owned life insurance			194				160
Other income			194				106
Total other income			2,651				2,201
Operating expenses:
Salaries and employee benefits			3,971				3,702
Occupancy			514				554
Equipment			263				268
Advertising & marketing			135				155
Computer software & data processing			420				374
Shares tax			227				195
Professional services			377				318
Other expense			575				584
Total operating expenses			6,482				6,150
Income before income taxes			2,294				1,709
Provision for federal income taxes			382				243
Net income			1,912				1,466
Earnings per share of common stock			0.67				0.51
Cash dividends paid per share			0.27				0.27
Weighted average shares outstanding			2,849,954				2,857,282

 

See Notes to the Unaudited Consolidated Interim Financial Statements      

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(DOLLARS IN THOUSANDS)

 

		Three Months ended March 31,
		2016				2015
		$				$
Net income			1,912				1,466
Other comprehensive income, net of tax:
Securities available for sale not other-than-temporarily impaired:
Unrealized gains arising during the period			1,591				2,317
Income tax effect			(541	)			(788	)
			1,050				1,529
Gains recognized in earnings			(728	)			(561	)
Income tax effect			248				191
			(480	)			(370	)
Other comprehensive income, net of tax			570				1,159
Comprehensive Income			2,482				2,625

 

See Notes to the Unaudited Consolidated Interim Financial Statements  

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)		Three Months Ended March 31,
		2016				2015
		$				$
Cash flows from operating activities:
Net income			1,912				1,466
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of securities premiums and discounts and loan fees			1,758				1,327
Decrease in interest receivable			105				336
Decrease in interest payable			(13	)			(47	)
Provision (credit) for loan losses			(50	)			200
Gains on securities transactions, net			(728	)			(561	)
Gains on sale of mortgages			(155	)			(153	)
Loans originated for sale			(5,120	)			(5,139	)
Proceeds from sales of loans			5,597				5,150
Earnings on bank-owned life insurance			(194	)			(160	)
Loss on sale of other real estate owned			—				21
Depreciation of premises and equipment and amortization of software			404				378
Deferred income tax			238				25
Other assets and other liabilities, net			(1,076	)			(885	)
Net cash provided by operating activities			2,678				1,958
Cash flows from investing activities:
Securities available for sale:
Proceeds from maturities, calls, and repayments			19,915				16,564
Proceeds from sales			48,099				40,235
Purchases			(65,953	)			(52,754	)
Proceeds from sale of other real estate owned			—				77
Purchase of regulatory bank stock			(670	)			(491	)
Redemptions of regulatory bank stock			309				123
Purchase of bank-owned life insurance			(19	)			(2	)
Net increase in loans			(24,564	)			(11,837	)
Purchases of premises and equipment, net			(129	)			(215	)
Purchase of computer software			(194	)			(62	)
Net cash used for investing activities			(23,206	)			(8,362	)
Cash flows from financing activities:
Net increase (decrease) in demand, NOW, and savings accounts			20,881				(1,187	)
Net decrease in time deposits			(11,212	)			(2,857	)
Net increase in short-term borrowings			2,731				4,930
Proceeds from long-term debt			10,289				6,248
Repayments of long-term debt			(5,000	)			(3,000	)
Dividends paid			(769	)			(771	)
Treasury stock sold			124				130
Treasury stock purchased			(65	)			(145	)
Net cash provided by financing activities			16,979				3,348
Decrease in cash and cash equivalents			(3,549	)			(3,056	)
Cash and cash equivalents at beginning of period			44,227				43,412
Cash and cash equivalents at end of period			40,678				40,356
Supplemental disclosures of cash flow information:
Interest paid			823				1,061
Income taxes paid			625				250
Supplemental disclosure of non-cash investing and financing activities:
Net transfer of other real estate owned from loans			—				137
Fair value adjustments for securities available for sale			863				1,756

 

See Notes to the Unaudited Consolidated Interim Financial Statements

1.

Basis of Presentation

 

The accompanying unaudited consolidated interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and to general practices within the banking industry. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all significant adjustments considered necessary for fair presentation have been included. Certain items previously reported have been reclassified to conform to the current period’s reporting format. Such reclassifications did not affect net income or stockholders’ equity.

 

ENB Financial Corp (“the Corporation”) is the bank holding company for its wholly-owned subsidiary Ephrata National Bank (the “Bank”). This Form 10-Q, for the first quarter of 2016, is reporting on the results of operations and financial condition of ENB Financial Corp.

 

Operating results for the three months ended March 31, 2016, are not necessarily indicative of the results that may be expected for the year ended December 31, 2016. 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, 2015.

 

 

2.

Securities Available for Sale

 

The amortized cost, gross unrealized gains and losses, and fair value of securities held at March 31, 2016, and December 31, 2015, are as follows:    

 

						Gross				Gross
(DOLLARS IN THOUSANDS)		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
		$				$				$				$
March 31, 2016
U.S. government agencies			21,673				26				(11	)			21,688
U.S. agency mortgage-backed securities			50,494				91				(233	)			50,352
U.S. agency collateralized mortgage obligations			44,227				292				(442	)			44,077
Corporate bonds			62,025				84				(294	)			61,815
Obligations of states and political subdivisions			102,615				1,459				(476	)			103,598
Total debt securities			281,034				1,952				(1,456	)			281,530
Marketable equity securities			5,755				13				(28	)			5,740
Total securities available for sale			286,789				1,965				(1,484	)			287,270
December 31, 2015
U.S. government agencies			29,829				3				(141	)			29,691
U.S. agency mortgage-backed securities			42,288				39				(347	)			41,980
U.S. agency collateralized mortgage obligations			48,140				125				(934	)			47,331
Corporate bonds			63,825				29				(549	)			63,305
Obligations of states and political subdivisions			100,208				1,780				(405	)			101,583
Total debt securities			284,290				1,976				(2,376	)			283,890
Marketable equity securities			5,515				23				(5	)			5,533
Total securities available for sale			289,805				1,999				(2,381	)			289,423

 

The amortized cost and fair value of debt securities available for sale at March 31, 2016, 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			24,146				24,043
Due after one year through five years			107,792				107,535
Due after five years through ten years			51,160				51,409
Due after ten years			97,936				98,543
Total debt securities			281,034				281,530

 

Securities available for sale with a par value of $54,499,000 and $60,295,000 at March 31, 2016, and December 31, 2015, respectively, were pledged or restricted for public funds, borrowings, or other purposes as required by law. The fair value of these pledged securities was $58,252,000 at March 31, 2016, and $65,137,000 at December 31, 2015.

 

Proceeds from active sales of debt 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,
		2016				2015
		$				$
Proceeds from sales			48,099				40,235
Gross realized gains			730				607
Gross realized losses			2				46

 

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 quarter of 2016 or 2015.

 

Information pertaining to securities with gross unrealized losses at March 31, 2016, and December 31, 2015, 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, 2016
U.S. government agencies			4,994				(6	)			1,994				(5	)			6,988				(11	)
U.S. agency mortgage-backed securities			31,293				(144	)			2,986				(89	)			34,279				(233	)
U.S. agency collateralized mortgage obligations			15,510				(426	)			2,041				(16	)			17,551				(442	)
Corporate bonds			25,978				(198	)			9,601				(96	)			35,579				(294	)
Obligations of states & political subdivisions			22,415				(204	)			15,641				(272	)			38,056				(476	)
Total debt securities			100,190				(978	)			32,263				(478	)			132,453				(1,456	)
Marketable equity securities			364				(28	)			—				—				364				(28	)
Total temporarily impaired securities			100,554				(1,006	)			32,263				(478	)			132,817				(1,484	)
As of December 31, 2015
U.S. government agencies			24,968				(106	)			1,965				(35	)			26,933				(141	)
U.S. agency mortgage-backed securities			24,613				(235	)			4,827				(112	)			29,440				(347	)
U.S. agency collateralized mortgage obligations			26,563				(827	)			4,652				(107	)			31,215				(934	)
Corporate bonds			50,530				(532	)			2,002				(17	)			52,532				(549	)
Obligations of states & political subdivisions			21,913				(252	)			7,435				(153	)			29,348				(405	)
Total debt securities			148,587				(1,952	)			20,881				(424	)			169,468				(2,376	)
Marketable equity securities			142				(5	)			—				—				142				(5	)
Total temporarily impaired securities			148,729				(1,957	)			20,881				(424	)			169,610				(2,381	)

 

In the debt security portfolio, there are 103 positions that were carrying unrealized losses as of March 31, 2016. There were no instruments considered to be other-than-temporarily impaired at March 31, 2016.

 

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.

 

As part of management’s normal monthly securities review, instruments are examined for known or expected calls that would impact the value of the bonds by causing accelerated amortization. If a security was purchased at a high premium, or dollar price above par, the remaining premium has to be amortized on a straight line basis to the known call date. Calls can occur in a majority of the securities the Corporation purchases but they are dependent on the structure of the instrument, and can also be dependent on certain conditions. The Corporation experienced a clean-up call on a Ginnie Mae U.S. agency mortgage backed security in the fourth quarter of 2015, which required $385,000 of remaining premium to be amortized. Subsequent to this event, all other high coupon and/or high premium U.S. agency mortgage backed securities and collateralized mortgage obligations were reviewed to determine if there was any other current material exposure to clean-up call provisions. No other securities were identified with impending clean-up calls.

 

On March 15, 2016, management was made aware of a regulatory call provision on a CoBank bond held by the Corporation. CoBank is a sub U.S. agency and cooperative of the Farm Credit Association (FCA), a U.S. government sponsored enterprise (GSE). The bond is classified as a corporate bond for disclosure purposes. The regulatory call was not anticipated and the high coupon bond was purchased at a high premium. The call required accelerated amortization to the April 15, 2016 call date, resulting in an additional $430,000 of first quarter amortization. This regulatory call specifically involved the CoBank issue maturing on April 16, 2018. At the time, the Corporation owned $4.4 million par of the CoBank issue with a book value of $4.9 million.

 

Subsequent to March 31, 2016, but prior to the filing of this Form 10-Q, management became aware of an AgriBank bond call. AgriBank is another cooperative of the FCA. The Corporation owns $6.4 million par of the AgriBank issue maturing on July 15, 2019, with a book value of $7.7 million. AgriBank went public with this call on April 26, 2016, stating they intend to call the bonds on July 15, 2016. As a result of this par call notice, management has accelerated the amortization of the remaining $1.3 million of premium on the AgriBank bond, beginning in April and running until the call date of July 15, 2016. After July 15, 2016, the Corporation will no longer hold any sub U.S. Agency debt of FCA or any other U.S. GSE. Note 8 to the Corporation’s Consolidated Financial Statements addresses this subsequent event.

 

 

3.	Loans and Allowance for Loan Losses

 

The following table presents the Corporation’s loan portfolio by category of loans as of March 31, 2016, and December 31, 2015:

 

LOAN PORTFOLIO

(DOLLARS IN THOUSANDS)  

		March 31,				December 31,
		2016				2015
		$				$
Commercial real estate
Commercial mortgages			88,997				87,613
Agriculture mortgages			165,211				158,321
Construction			21,354				14,966
Total commercial real estate			275,562				260,900
Consumer real estate (a)
1-4 family residential mortgages			136,307				133,538
Home equity loans			10,423				10,288
Home equity lines of credit			40,571				37,374
Total consumer real estate			187,301				181,200
Commercial and industrial
Commercial and industrial			40,431				36,189
Tax-free loans			18,929				19,083
Agriculture loans			18,087				18,305
Total commercial and industrial			77,447				73,577
Consumer			3,725				3,892
Gross loans prior to deferred fees			544,035				519,569
Less:
Deferred loan costs, net			(749	)			(714	)
Allowance for loan losses			7,040				7,078
Total net loans			537,744				513,205

 

(a)	Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets,totaled $41,282,000 and $38,024,000 as of March 31, 2016, and December 31, 2015, 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, 2016 and December 31, 2015. 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, 2016		Commercial Mortgages				Agriculture Mortgages				Construction				Commercial and Industrial				Tax-free Loans				Agriculture Loans				Total
		$				$				$				$				$				$				$
Grade:
Pass			82,796				161,452				20,239				39,418				18,929				17,604				340,438
Special Mention			508				1,154				—				39				—				250				1,951
Substandard			5,693				2,605				1,115				974				—				233				10,620
Doubtful			—				—				—				—				—				—				—
Loss			—				—				—				—				—				—				—
Total			88,997				165,211				21,354				40,431				18,929				18,087				353,009

 

December 31, 2015		Commercial Mortgages				Agriculture Mortgages				Construction				Commercial and Industrial				Tax-free Loans				Agriculture Loans				Total
		$				$				$				$				$				$				$
Grade:
Pass			81,865				154,507				13,822				35,416				19,083				17,860				322,553
Special Mention			511				623				—				—				—				125				1,259
Substandard			5,237				3,191				1,144				773				—				320				10,665
Doubtful			—				—				—				—				—				—				—
Loss			—				—				—				—				—				—				—
Total			87,613				158,321				14,966				36,189				19,083				18,305				334,477

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, 2016 and December 31, 2015:

 

CONSUMER CREDIT EXPOSURE

CREDIT RISK PROFILE BY PAYMENT PERFORMANCE

(DOLLARS IN THOUSANDS)  

 

March 31, 2016		1-4 Family Residential Mortgages				Home Equity Loans				Home Equity Lines of Credit				Consumer				Total
Payment performance:		$				$				$				$				$
Performing			135,999				10,423				40,548				3,722				190,692
Non-performing			308				—				23				3				334
Total			136,307				10,423				40,571				3,725				191,026

 

December 31, 2015		1-4 Family Residential Mortgages				Home Equity Loans				Home Equity Lines of Credit				Consumer				Total
Payment performance:		$				$				$				$				$
Performing			133,220				10,278				37,327				3,889				184,714
Non-performing			318				10				47				3				378
Total			133,538				10,288				37,374				3,892				185,092

 

The following tables present an age analysis of the Corporation’s past due loans, segregated by loan portfolio class, as of March 31, 2016 and December 31, 2015:

 

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, 2016		Past Due				Past Due				Days				Due				Current				Receivable				Accruing
		$				$				$				$				$				$				$
Commercial real estate
Commercial mortgages			275				594				—				869				88,128				88,997				—
Agriculture mortgages			—				—				—				—				165,211				165,211				—
Construction			—				—				—				—				21,354				21,354				—
Consumer real estate
1-4 family residential mortgages			733				—				308				1,041				135,266				136,307				308
Home equity loans			17				56				—				73				10,350				10,423				—
Home equity lines of credit			—				—				23				23				40,548				40,571				23
Commercial and industrial
Commercial and industrial			35				—				—				35				40,396				40,431				—
Tax-free loans			—				—				—				—				18,929				18,929				—
Agriculture loans			15				—				—				15				18,072				18,087				—
Consumer			18				17				3				38				3,687				3,725				3
Total			1,093				667				334				2,094				541,941				544,035				334

 

																										Loans
										Greater																Receivable >
		30-59 Days				60-89 Days				than 90				Total Past								Total Loans				90 Days and
December 31, 2015		Past Due				Past Due				Days				Due				Current				Receivable				Accruing
		$				$				$				$				$				$				$
Commercial real estate
Commercial mortgages			—				601				—				601				87,012				87,613				—
Agriculture mortgages			—				—				—				—				158,321				158,321				—
Construction			—				—				—				—				14,966				14,966				—
Consumer real estate
1-4 family residential mortgages			1,264				123				318				1,705				131,833				133,538				318
Home equity loans			27				59				10				96				10,192				10,288				10
Home equity lines of credit			35				—				47				82				37,292				37,374				47
Commercial and industrial
Commercial and industrial			20				9				—				29				36,160				36,189				—
Tax-free loans			—				—				—				—				19,083				19,083				—
Agriculture loans			—				—				—				—				18,305				18,305				—
Consumer			17				17				3				37				3,855				3,892				3
Total			1,363				809				378				2,550				517,019				519,569				378

 

The following table presents nonaccrual loans by classes of the loan portfolio as of March 31, 2016 and December 31, 2015:

 

NONACCRUAL LOANS BY LOAN CLASS

(DOLLARS IN THOUSANDS)  

 

		March 31,				December 31,
		2016				2015
		$				$
Commercial real estate
Commercial mortgages			337				380
Agriculture mortgages			—				—
Construction			—				—
Consumer real estate
1-4 family residential mortgages			—				—
Home equity loans			—				—
Home equity lines of credit			—				—
Commercial and industrial
Commercial and industrial			—				—
Tax-free loans			—				—
Agriculture loans			—				—
Consumer			—				—
Total			337				380

 

As of March 31, 2016 and December 31, 2015, 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, 2016 and March 31, 2015, is as follows:

 

IMPAIRED LOANS

(DOLLARS IN THOUSANDS)  

 

		Three months ended March 31,
		2016				2015
		$				$
Average recorded balance of impaired loans			1,672				2,111
Interest income recognized on impaired loans			14				24

 

Interest income on impaired loans would have increased by approximately $4,000 for the three months ended March 31, 2016, compared to $7,000 for the three months ended March 31, 2015, had these loans performed in accordance with their original terms.

 

During the three months ended March 31, 2016 and 2015, there were no loan modifications made that would cause a loan to be considered a troubled debt restructuring (TDR). A TDR is a loan where management has granted a concession to the borrower from the original terms. A concession is generally granted in order to improve the financial condition of the borrower and improve the likelihood of full collection by the lender. A concession is generally defined as more favorable payment or credit terms granted to a borrower in an effort to improve the likelihood of the lender collecting principal in its entirety. Concessions usually are in the form of interest only for a period of time, or a lower interest rate offered in an effort to enable the borrower to continue to make normally scheduled payments.

 

The following tables summarize information in regards to impaired loans by loan portfolio class as of March 31, 2016, December 31, 2015, and March 31, 2015:

 

IMPAIRED LOAN ANALYSIS
(DOLLARS IN THOUSANDS)
March 31, 2016		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		$				$				$				$				$
With no related allowance recorded:
Commercial real estate
Commercial mortgages			337				434				—				358				—
Agriculture mortgages			1,304				1,304				—				1,314				14
Construction			—				—				—				—				—
Total commercial real estate			1,641				1,738				—				1,672				14
Commercial and industrial
Commercial and industrial			—				—				—				—				—
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			—				—				—				—				—
Total with no related allowance			1,641				1,738				—				1,672				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			337				434				—				358				—
Agriculture mortgages			1,304				1,304				—				1,314				14
Construction			—				—				—				—				—
Total commercial real estate			1,641				1,738				—				1,672				14
Commercial and industrial
Commercial and industrial			—				—				—				—				—
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			—				—				—				—				—
Total			1,641				1,738				—				1,672				14

IMPAIRED LOAN ANALYSIS
(DOLLARS IN THOUSANDS)
December 31, 2015		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		$				$				$				$				$
With no related allowance recorded:
Commercial real estate
Commercial mortgages			380				952				—				544				—
Agriculture mortgages			1,325				1,325				—				1,359				83
Construction			—				—				—				—				—
Total commercial real estate			1,705				2,277				—				1,903				83
Commercial and industrial
Commercial and industrial			—				49				—				54				3
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			—				49				—				54				3
Total with no related allowance			1,705				2,326				—				1,957				86
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			380				952				—				544				—
Agriculture mortgages			1,325				1,325				—				1,359				83
Construction			—				—				—				—				—
Total commercial real estate			1,705				2,277				—				1,903				83
Commercial and industrial
Commercial and industrial			—				49				—				54				3
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			—				49				—				54				3
Total			1,705				2,326				—				1,957				86

IMPAIRED LOAN ANALYSIS
(DOLLARS IN THOUSANDS)
March 31, 2015		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		$				$				$				$				$
With no related allowance recorded:
Commercial real estate
Commercial mortgages			585				1,157				—				665				—
Agriculture mortgages			1,372				1,372				—				1,383				23
Construction			—				—				—				—				—
Total commercial real estate			1,957				2,529				—				2,048				23
Commercial and industrial
Commercial and industrial			60				67				—				63				1
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			60				67				—				63				1
Total with no related allowance			2,017				2,596				—				2,111				24
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			585				1,157				—				665				—
Agriculture mortgages			1,372				1,372				—				1,383				23
Construction			—				—				—				—				—
Total commercial real estate			1,957				2,529				—				2,048				23
Commercial and industrial
Commercial and industrial			60				67				—				63				1
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			60				67				—				63				1
Total			2,017				2,596				—				2,111				24

 

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2016:

 

ALLOWANCE FOR CREDIT LOSSES

(DOLLARS IN THOUSANDS)

		Commercial Real Estate				Consumer Real Estate				Commercial and Industrial				Consumer				Unallocated				Total
		$				$				$				$				$				$
Beginning balance - December 31, 2015			3,831				1,403				1,314				62				468				7,078
Charge-offs			—				—				(4	)			(12	)			—				(16	)
Recoveries			—				10				16				2				—				28
Provision			(303	)			(45	)			47				15				236				(50	)
Balance - March 31, 2016			3,528				1,368				1,373				67				704				7,040

 

During the first quarter of 2016, credit provisions were recorded for the commercial real estate and consumer real estate segments with provision expenses recorded in all other loan categories. Delinquency rates in the real estate secured segment of loans are extremely low requiring fewer reserves. Qualitative factors continue to shift, with net declines in non-dairy agriculture and home equity loans. Our three-year historical loss rate continues to decline in our business mortgage pool, as the twelve-month charge-off rate fell from 4.43% of loans in the fourth quarter of 2015, to 2.69% of loans in the first quarter of 2016. A substantial paydown of a substandard loan with potential impairment also supported a reduced allowance balance, despite an increase in loan balances.

 

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2015:

 

ALLOWANCE FOR CREDIT LOSSES

(DOLLARS IN THOUSANDS)

 

		Commercial Real Estate				Consumer Real Estate				Commercial and Industrial				Consumer				Unallocated				Total
		$				$				$				$				$				$
Beginning balance - December 31, 2014			3,834				1,367				1,301				66				573				7,141
Charge-offs			(272	)			—				—				(1	)			—				(273	)
Recoveries			2				—				70				—				—				72
Provision			623				(283	)			(147	)			(11	)			18				200
Balance - March 31, 2015			4,187				1,084				1,224				54				591				7,140

 

During the first quarter of 2015, provision expense was recorded for the commercial real estate segment with credit provisions recorded in all other loan categories. There were $272,000 of commercial real estate loan charge-offs during the first quarter of 2015, which increased the historical loss rates and ultimately resulted in a higher required reserve amount for the commercial real estate category. The higher commercial loan charge-offs and loan growth during the first quarter of 2015 overshadowed the reduction in provisions in the other areas, resulting in $200,000 of provision expense.

 

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, 2016 and December 31, 2015:

 

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)            

As of March 31, 2016:		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			3,528				1,368				1,373				67				704				7,040
Loans receivable:
Ending balance			275,562				187,301				77,447				3,725								544,035
Ending balance: individually evaluated
for impairment			1,641				—				—				—								1,641
Ending balance: collectively evaluated
for impairment			273,921				187,301				77,447				3,725								542,394

 

As of December 31, 2015:		Commercial Real Estate				Consumer Real Estate				Commercial and Industrial				Consumer				Unallocated				Total
		$				$				$				$				$				$
Allowance for credit losses:
Ending balance: individually evaluated
for impairment			—				—				—				—				—				—
Ending balance: collectively evaluated
for impairment			3,831				1,403				1,314				62				468				7,078
Loans receivable:
Ending balance			260,900				181,200				73,577				3,892								519,569
Ending balance: individually evaluated
for impairment			1,705				—				—				—								1,705
Ending balance: collectively evaluated
for impairment			259,195				181,200				73,577				3,892								517,864

4. Fair Value Presentation

 

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

 

Level I:	Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level II:	Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date.  The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.
Level III:	Assets and liabilities that have little to no observable pricing as of the reported date.  These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

The following tables present the assets reported on the Consolidated Balance Sheets at their fair value as of March 31, 2016, and December 31, 2015, by level within the fair value hierarchy. As required by U.S. generally accepted accounting principles, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

 

Fair Value Measurements:

ASSETS MEASURED ON A RECURRING BASIS

(DOLLARS IN THOUSANDS)  

		March 31, 2016
		Level I				Level II				Level III				Total
		$				$				$				$
U.S. government agencies			—				21,688				—				21,688
U.S. agency mortgage-backed securities			—				50,352				—				50,352
U.S. agency collateralized mortgage obligations			—				44,077				—				44,077
Corporate bonds			—				61,815				—				61,815
Obligations of states & political subdivisions			—				103,598				—				103,598
Marketable equity securities			5,740				—				—				5,740
Total securities			5,740				281,530				—				287,270

 

On March 31, 2016, 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, 2016, the CRA fund investments had a $5,000,000 book and fair market value and the bank stock portfolio had a book value of $755,000, and fair market value of $740,000.

 

Fair Value Measurements:

 

ASSETS MEASURED ON A RECURRING BASIS

(DOLLARS IN THOUSANDS)        

		December 31, 2015
		Level I				Level II				Level III				Total
		$				$				$				$
U.S. government agencies			—				29,691				—				29,691
U.S. agency mortgage-backed securities			—				41,980				—				41,980
U.S. agency collateralized mortgage obligations			—				47,331				—				47,331
Corporate bonds			—				63,305				—				63,305
Obligations of states & political subdivisions			—				101,583				—				101,583
Marketable equity securities			5,533				—				—				5,533
Total securities			5,533				283,890				—				289,423

 

On December 31, 2015, the Corporation held no securities valued using level III inputs. All of the Corporation’s debt instruments were valued using level II inputs, where quoted prices are available and observable but not necessarily quotes on identical securities traded in active markets on a daily basis. As of December 31, 2015, the Corporation’s CRA fund investments had a book and fair market value of $5,000,000 and the bank stock portfolio had a book value of $515,000 and a market value of $533,000 utilizing level I pricing.

 

Financial instruments are considered level III when their values are determined using pricing models, discounted cash flow methodologies, or similar techniques, and at least one significant model assumption or input is unobservable. In addition to these unobservable inputs, the valuation models for level III financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly. Level III financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. There were no level III securities as of March 31, 2016 or December 31, 2015.

 

The following tables present the assets measured on a nonrecurring basis on the Consolidated Balance Sheets at their fair value as of March 31, 2016 and December 31, 2015, by level within the fair value hierarchy:

 

ASSETS MEASURED ON A NONRECURRING BASIS

(Dollars in Thousands)

		March 31, 2016
		Level I $				Level II $				Level III $				Total $
Assets:
Impaired Loans			—				—				1,641				1,641
Total			—				—				1,641				1,641

 

 

		December 31, 2015
		Level I $				Level II $				Level III $				Total $
Assets:
Impaired Loans			—				—				1,705				1,705
Total			—				—				1,705				1,705

 

The Corporation had a total of $1,641,000 of impaired loans as of March 31, 2016, with no specific allocation against these loans and $1,705,000 of impaired loans as of December 31, 2015, 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, 2016
	Fair Value	Valuation	Unobservable	Range
	Estimate	Techniques	Input	(Weighted Avg)
Impaired loans	1,641	Appraisal of	Appraisal	-20% (-20%)
		collateral (1)	adjustments (2)
			Liquidation	-10% (-10%)
			expenses (2)

 

	December 31, 2015
	Fair Value	Valuation	Unobservable	Range
	Estimate	Techniques	Input	(Weighted Avg)
Impaired loans	1,705	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.

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

 

 

5.

Interim Disclosures about Fair Value of Financial Instruments

 

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

 

Cash and Cash Equivalents

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

 

Securities Available for Sale

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

 

Regulatory Stock

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

 

Loans Held for Sale

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

 

Loans

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

Accrued Interest Receivable

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

 

Bank Owned Life Insurance

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

 

Deposits

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

 

Borrowings

The carrying amount of short-term borrowing is a reasonable estimate of fair value. The fair value of long-term borrowing is estimated by comparing the rate currently offered for the same type of borrowing instrument with a matching remaining term.

 

Accrued Interest Payable

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

 

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

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

 

Fair Value of Financial Instruments

 

The carrying amounts and estimated fair values of the Corporation's financial instruments at March 31, 2016 and December 31, 2015, are summarized as follows:

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

(DOLLARS IN THOUSANDS)

		March 31, 2016
										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			40,678				40,678				40,678				—				—
Securities available for sale			287,270				287,270				5,740				281,530				—
Regulatory stock			4,675				4,675				4,675				—				—
Loans held for sale			804				804				804				—				—
Loans, net of allowance			537,744				532,772				—				—				532,772
Accrued interest receivable			3,495				3,495				3,495				—				—
Bank owned life insurance			24,082				24,082				24,082				—				—
Financial Liabilities:
Demand deposits			243,647				243,647				243,647				—				—
Interest-bearing demand deposits			12,467				12,467				12,467				—				—
NOW accounts			76,865				76,865				76,865				—				—
Money market deposit accounts			87,647				87,647				87,647				—				—
Savings accounts			159,213				159,213				159,213				—				—
Time deposits			169,892				171,185				—				—				171,185
Total deposits			749,731				751,024				579,839				—				171,185
Short-term borrowings			11,467				11,467				11,467				—				—
Long-term debt			64,883				65,593				—				—				65,593
Accrued interest payable			443				443				443				—				—

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

(DOLLARS IN THOUSANDS)

 

		December 31, 2015
										Quoted Prices in
										Active Markets				Significant Other				Significant
										for Identical				Observable				Unobservable
		Carrying								Assets				Inputs				Inputs
		Amount				Fair Value				(Level 1)				(Level II)				(Level III)
		$				$				$				$				$
Financial Assets:
Cash and cash equivalents			44,227				44,227				44,227				—				—
Securities available for sale			289,423				289,423				5,533				283,890				—
Regulatory stock			4,314				4,314				4,314				—				—
Loans held for sale			1,126				1,126				1,126				—				—
Loans, net of allowance			513,205				512,481				—				—				512,481
Accrued interest receivable			3,600				3,600				3,600				—				—
Bank owned life insurance			23,869				23,869				23,869				—				—
Financial Liabilities:
Demand deposits			236,214				236,214				236,214				—				—
Interest-bearing demand deposits			14,737				14,737				14,737				—				—
NOW accounts			77,180				77,180				77,180				—				—
Money market deposit accounts			82,507				82,507				82,507				—				—
Savings accounts			148,320				148,320				148,320				—				—
Time deposits			181,104				182,887				—				—				182,887
Total deposits			740,062				741,845				558,958				—				182,887
Short-term borrowings			8,736				8,736				8,736				—				—
Long-term debt			59,594				59,805				—				—				59,805
Accrued interest payable			456				456				456				—				—

 

6.	Commitments and Contingent Liabilities

 

In order to meet the financing needs of its customers in the normal course of business, the Corporation makes various commitments that are not reflected in the accompanying consolidated financial statements. These commitments include firm commitments to extend credit, unused lines of credit, and open letters of credit. As of March 31, 2016, firm loan commitments were $54.9 million, unused lines of credit were $162.1 million, and open letters of credit were $11.8 million. The total of these commitments was $228.8 million, which represents the Corporation’s exposure to credit loss in the event of nonperformance by its customers with respect to these financial instruments. The actual credit losses that may arise from these commitments are expected to compare favorably with the Corporation’s loan loss experience on its loan portfolio taken as a whole. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for balance sheet financial instruments.

7.	Accumulated Other Comprehensive Income (Loss)

 

The activity in accumulated other comprehensive income (loss) for the three months ended March 31, 2016 and 2015 is as follows:

 

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

(DOLLARS IN THOUSANDS)  

 

		Unrealized
		Gains (Losses)
		on Securities
		Available-for-Sale
		$
Balance at December 31, 2015			(252	)
Other comprehensive income before reclassifications			1,050
Amount reclassified from accumulated other comprehensive income			(480	)
Period change			570
Balance at March 31, 2016			318
Balance at December 31, 2014			1,002
Other comprehensive loss before reclassifications			1,529
Amount reclassified from accumulated other comprehensive loss			(370	)
Period change			1,159
Balance at March 31, 2015			2,161

 

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

(2)	Amounts in parentheses indicate debits.

 

 

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

(DOLLARS IN THOUSANDS)      

 

	Amount Reclassified from
	Accumulated Other Comprehensive
	Income (Loss)
	For the Three Months
	Ended March 31,
	2016	2015	Affected Line Item in the
	$	$	Consolidated Statements of Income
Securities available-for-sale:
Net securities gains reclassified into earnings	728	561	Gains on securities transactions, net
Related income tax expense	(248)	(191)	Provision for federal income taxes
Net effect on accumulated other comprehensive
income for the period	480	370
(1) Amounts in parentheses indicate debits.

  

8.	Subsequent Event

 

Subsequent to March 31, 2016, but prior to the filing of this Form 10-Q report, the Corporation was made aware on April 26, 2016, of AgriBank’s intention to conduct a regulatory par call on their 9.125% Notes maturing July 15, 2019, with the call date as of July 15, 2016. AgriBank is a farm Credit System Bank, regulated by the Farm Credit Administration (FCA), a U.S. government sponsored enterprise (GSE).

 

The Corporation owns $6.4 million par of the AgriBank issue maturing on July 15, 2019, with a book value of $7.7 million. As a result of this par call notice, management has accelerated the amortization of the remaining $1.3 million of premium on the AgriBank bond, beginning in April 2016 and running until the call date of July 15, 2016. After July 15, 2016, the Corporation will no longer hold any sub-U.S. Agency debt of FCA or any other U.S. GSE.

 

The AgriBank action is very similar to the CoBank regulatory par call that was announced on March 11, 2016, with a call date of April 15, 2016. As a result of the CoBank regulatory par call, management recorded $430,000 of accelerated amortization in the first quarter of 2016, with an additional $70,000 to be recorded in the first fifteen days of April. This first quarter event was discussed previously in the Notes to the Corporation’s Consolidated Financial Statements.

 

Both CoBank and AgriBank are co-operatives of the FCA. The FCA has four such co-operatives. Debt issued by these co-operatives of the FCA is considered sub U.S. agency debt. The debt carries single A credit ratings similar to other investment grade rated corporate bonds and therefore is reflected in the corporate bond sector of the Corporation’s securities portfolio. The only sub-U.S agency debt the Corporation purchased was CoBank and AgriBank debt. The Corporation does not own any other sub-U.S. agency debt of either the FCA or any other U.S. GSE.

 

The Corporation, as well as a vast majority of the CoBank and AgriBank bondholders, purchased these high coupon instruments at significant premiums subsequent to their issue date. These large premiums were being amortized on a straight-line basis to the maturity date of the bond. When an unexpected regulatory call occurs, the holder is forced to amortize all remaining premium to the new call date. This causes a significant amount of accelerated amortization, which will cause a negative yield on the security given a sufficiently high premium. The higher amortization reduces the income generated from the securities portfolio and diminishes the Corporation’s net interest income and net interest margin.

 

Management and the investment community were not anticipating these first-time regulatory calls, which require an extraordinary event to occur before a call can be conducted. These two regulatory calls have been justified by both CoBank and AgriBank declaring that a regulatory event has occurred as a result of capital phase-ins from the Basel III capital accord, with these changes being sufficient to exercise a regulatory call provision. In both the CoBank and AgriBank matters investors, including the Corporation, have contested the ability of both CoBank and AgriBank to conduct these regulatory calls. Presently, management is exploring all avenues of action, including litigation, and cannot make any prediction or conclusion as to the outcome of any negotiations and/or litigation in connection with these matters.

 

9.	Recently Issued Accounting Standards

 

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

 

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

 

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

 

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

 

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

 

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810). The amendments in this Update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this Update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

In August 2015, the FASB issued ASU 2015-14, Revenue from Contract with Customers (Topic 606). The amendments in this Update defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Corporation is evaluating the effect of adopting this new accounting Update.

 

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805). The amendments in this Update require that an acquirer recognizes adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this Update require that the acquirer record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this Update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this Update apply to all entities that present a classified statement of financial position. For public business entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The amendments in this Update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

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 an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (g) 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 (h) 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. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. All entities that are not public business entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. 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 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. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

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 March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815). The amendments in this Update apply to all reporting entities for which there is a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815. The standards in this Update clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. An entity has an option to apply the amendments in this Update on either a prospective basis or a modified retrospective basis. Early adoption 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 March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815). The amendments apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. The amendments in this update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt host. An entity performing the assessment under the amendments in this Update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For entities other than public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Early adoption 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 March 2016, the FASB issued ASU 2016-07, Investments – Equity Method and Joint Ventures (Topic 323). The Update affects all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments in this Update eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments in this Update require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606). The amendments in this Update affect entities with transactions included within the scope of Topic 606, which includes entities that enter into contracts with customers to transfer goods or services (that are an output of the entity’s ordinary activities) in exchange for consideration. The amendments in this update do not change the core principle of the guidance in Topic 606; they simply clarify the implementation guidance on principal versus agent considerations. The amendments in this Update are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements of Update 2014-09. ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. 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 March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718). The amendments in this Update affect all entities that issue share-based payment awards to their employees. The standards in this Update provide simplification for several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as with equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. In addition to those simplifications, the amendments eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. This should not result in a change in practice because the guidance that is being superseded was never effective. For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any entity in any interim or annual period. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606). The amendments in this Update affect entities with transactions included within the scope of Topic 606, which includes entities that enter into contracts with customers to transfer goods or services in exchange for consideration. The amendments in this Update do not change the core principle for revenue recognition in Topic 606. Instead, the amendments provide (1) more detailed guidance in a few areas and (2) additional implementation guidance and examples based on feedback the FASB received from its stakeholders. The amendments are expected to reduce the degree of judgment necessary to comply with Topic 606, which the FASB expects will reduce the potential for diversity arising in practice and reduce the cost and complexity of applying the guidance. The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09). ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. 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 2015 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 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 $1,912,000 for the three-month period ended March 31, 2016, a 30.4% increase, over the $1,466,000 earned during the same period in 2015. The earnings per share, basic and diluted, were $0.67 for the three months ended March 31, 2016, compared to $0.51 for the same period in 2015.

 

The primary reasons for the increase in earnings were an increase in net interest income, a decrease in the provision for loan loss expense, and an increase in other income. Net interest income increased by $217,000, or 3.7%, for the three months ended March 31, 2016, compared to the same period in 2015. The Corporation recorded a credit provision for loan losses of $50,000 for the three months ended March 31, 2016, compared to provision expense of $200,000 for the three months ended March 31, 2015, representing an increase in income of $250,000. Low levels of delinquent, non-performing, and classified loans, as well as a net recovery position in the first quarter of 2016, resulted in the need to reduce the allowance for loan losses by recording a credit provision. The allowance as a percentage of total loans was 1.29% as of March 31, 2016, compared to 1.48% as of March 31, 2015. More detail is provided in the Provision for Loan Losses section that follows and the Allowance for Loan Losses section under Financial Condition.

 

Other operating income increased by $450,000, or 20.4%, for the first quarter of 2016 compared to the prior year. This increase was driven by an increase in security gains as well as smaller increases in other categories of other income. Net gains on securities increased by $167,000, or 29.8%, for the three-month period ended March 31, 2016, compared to the same period in 2015. More detail is provided under the Other Income and Operating Expense sections under Results of Operations.

 

Partially offsetting the increased income mentioned above, operating expenses increased by $332,000, or 5.4%, for the three months ended March 31, 2016, compared to the same period in the prior year. Personnel costs increased by $269,000, or 7.3%, due to new staff positions as well as higher benefit costs associated with new and existing staff.

 

The Corporation’s net interest income for the three months ended March 31, 2016, increased from the same period in 2015. Net interest income was $6,075,000 for the first quarter of 2016, compared to $5,858,000 for the same quarter in 2015, a $217,000, or 3.7% increase. The Corporation’s net interest margin was 3.09% for the first quarter of 2016, compared to 3.13% for the first quarter of 2015. Net interest margin did increase by twelve basis points on a sequential basis from 2.97% in the fourth quarter of 2015.

 

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-month period ended March 31, 2016, compared to the same period in the prior year due to the increase in the Corporation’s income.

 

Key Ratios		Three Months Ended
		March 31,
		2016				2015
Return on Average Assets			0.84%				0.69%
Return on Average Equity			8.01%				6.38%

 

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 2016, NII generated 69.6% of the Corporation’s gross revenue stream, which consists of net interest income and non-interest income, compared to 72.7% in the first three months of 2015. 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.

 

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 $511,000 for the three months ended March 31, 2016, compared to $438,000 for the same period in 2015.

 

NET INTEREST INCOME

(DOLLARS IN THOUSANDS)  

 

		Three Months Ended
		March 31,
		2016				2015
		$				$
Total interest income			6,886				6,872
Total interest expense			811				1,014
Net interest income			6,075				5,858
Tax equivalent adjustment			511				438
Net interest income (fully taxable equivalent)			6,586				6,296

 

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. On December 16, 2015, the Federal funds rate was increased 25 basis points to 0.50%, from 0.25%. This period of seven years with extremely low and unchanged overnight rates was the lowest and longest in U.S. history. The impact has been lower margin to the Corporation and generally across the financial industry. The increase in December resulted in higher short-term U.S. Treasury rates, but the long-term rates have actually decreased since the Federal Reserve’s decision to increase rates, resulting in a flattening of the yield curve. This low rate environment continued during the first quarter of 2016, and it appears it will continue through the second quarter, although there is a possibility that the Federal Reserve could increase overnight rates again later in 2016.

 

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% to 3.50% on December 16, 2015. Depending on the loan instrument, the Corporation’s Prime-based loans would reprice either a day after the Federal Reserve rate movement or after a 45-day notification period. Commercial rates generally reprice the next business day while some consumer loans require the 45-day notification period.

 

The fact that the Federal funds rate and the Prime rate had remained at these very low levels for seven years and only increased by 25 basis points in December of 2015 had made it difficult to grow the NII of the Corporation as the net interest margin has declined. During the first quarter of 2016, the Corporation was able to grow interest earning assets fast enough to offset the decline in margin resulting in higher NII compared to the previous year’s first quarter. For the three months ended March 31, 2016, NII on a tax equivalent basis increased by $290,000, or 4.6%, but the Corporation’s margin still showed a decline from 3.13% in 2015, to 3.09% in 2016. This is typical in a prolonged low rate environment when additional savings on interest expense are limited, while yields on the Corporation’s longer assets continue to reprice to lower levels. This causes a decline in the Corporation’s margin, but the impact of the decrease in margin can be offset by sufficient increases in interest earning assets, causing an increase in NII. Factoring out $430,000 of accelerated amortization caused by an unexpected regulatory par call on the Corporation’s CoBank sub-U.S. Agency that was recorded during the first quarter of 2016, the Corporation’s NIM would have been 3.29%, a significant increase of 16 basis points over the 3.13% NIM achieved in the first quarter of 2015.

 

The extended extremely low short-term rates have enabled management to reduce the cost of funds on borrowings and allowed lower interest rates paid on deposits, reducing the Corporation’s interest expense, while the increase in the Prime rate in December of 2015 has increased the yield on the Corporation’s Prime-based loans. However, in this environment the Corporation’s fixed rate loans and securities have generally repriced to lower rates as they mature or reach the end of their fixed rate period. This has occurred over the past seven years and continues to cause lower yields on the Corporation’s assets. Due to the increasing number of variable rate loans in the Corporation’s loan portfolio, the 25 basis point increase in the Prime rate at the end of 2015 did cause higher NII in the first quarter of 2016, and if the Fed increases rates again in the latter part of 2016, NII will see another increase.

 

Security yields fluctuate more rapidly than loan yields based primarily on the changes to the U.S. Treasury rates and yield curve. With lower U.S. Treasury rates on average in the first quarter of 2016 compared to 2015, most of the security reinvesting was occurring at lower rates. As the volume of securities sold at gains continued at a higher level, this also resulted in more reinvestment at lower rates. Management did generally direct a large portion of the security sale proceeds into loan growth particularly in the fourth quarter of 2015 and the first quarter of 2016 when loan growth was significant. The Corporation’s loan yield has continued to decline slightly as new loans are going on at among the lowest loan rates of this interest rate cycle. Partially offsetting these lower rates on new loans, the increased rate on Prime-based loans is having a positive impact on yield. Management does price above the Prime rate on variable rate loans, which helps with loan yield, however, these rates on average are still lower than the typical fixed rate loan. 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. Additionally, certain variable-rate consumer loans are priced above Prime. Prime-based pricing continues to be driven largely by local competition.

 

Mid-term and long-term interest rates on average were slightly lower in the first quarter of 2016 compared to 2015. The average rate of the 10-year U.S. Treasury was 1.91% in the first quarter of 2016 compared to 1.97% in the first quarter of 2015, but it stood at 1.78% on March 31, 2016, compared to 1.94% at March 31, 2015. The slope of the yield curve was already compressed, but with the Fed rate increase in December of 2015, there was even less slope between the short end and long end of the curve. There was only a difference of 128 basis points between overnight rates and the 10-year U.S. Treasury as of March 31, 2016, compared to 169 basis points as of March 31, 2015. With a flatter yield curve and lower mid and long-term interest rates, management was not able to increase loan rates to improve yield although the 25 basis point increase in the Prime rate did act to increase the yield on Prime-based variable rate loans. Additionally, with lower rates, security amortization increased and yields on new purchases were low resulting in a lower overall securities yield. As a result, the Corporation’s asset yield continued to decline.

 

While it is becoming increasingly difficult to achieve savings on the Corporation’s overall cost of funds, management was still achieving savings on select long-term CDs and repricing FHLB borrowings in the first quarter of 2016. It is not anticipated that interest rates on interest bearing core deposits can be reduced further in 2016 as these rates have already been reduced significantly over the course of the past few years. While CD rate reductions are also limited, there are still small savings to be achieved in CDs repricing down from higher rates five years ago. 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 was able to refinance most borrowings at lower rates in 2015 and in the first quarter of 2016. Management expects this trend to continue to a lesser degree during the remainder of 2016 based on the current rates on the instruments maturing.

 

Management currently anticipates that the overnight interest rate and Prime rate will remain at the current levels through the first half of 2016 with the possibility of at least one small rate increase in the second half of the year. It is likely that the mid and long-term Treasury rates could increase throughout the course of the year in anticipation of additional Federal Reserve rate movements. This would allow management to achieve higher earnings on assets if the opportunity for higher yielding securities and the ability to price new loans at higher market rates occurred. If the Federal Reserve would act to increase overnight rates, it is also possible that the yield curve could flatten more, making it more difficult for management to lend out or reinvest at higher interest rates out further on the yield curve. Additionally, with another Federal Reserve rate increase in 2016, management would expect to have to increase deposit rates to remain competitive in the market.

 

Generally, a flatter yield curve is not conducive to increasing net interest margin and net interest income. However, the Corporation has benefited from a gradual increase in the amount of variable rate loans. Over 30% of the Corporation’s loans are variable rate, which would reprice to a higher rate based on the Prime rate with any Federal Reserve increase. Higher amounts of variable rate loans would help in the event of a flatter yield curve but would likely not be sufficient alone to offset higher funding costs if short-term rates were to increase materially, therefore a lower margin would occur.

 

The Corporation’s margin was 3.09% for the first quarter of 2016, a four basis-point decline from the 3.13% for the first quarter of 2015. On a sequential basis, margin did improve from the 2.97% for the fourth quarter of 2015. There were two non-recurring accelerated amortization events on unrelated bonds that impacted the fourth quarter 2015 margin as well as the first quarter 2016 margin. Without these events, NIM would have been 3.16% for the fourth quarter of 2015, and 3.29% for the first quarter of 2016.

 

In the fourth quarter of 2015, interest income was reduced by $385,000 because of an unexpected clean up call issued on a GNMA CMO security. The security had paid down to below 2% of the original par value allowing the trustee of the issuer to call the security. In the past these calls were not exercised, but one trustee, U.S. Bancorp, has exercised these calls with respect to GNMA securities. The corporation owned the security at a significant premium with $385,000 of premium required to be amortized to the November 20, 2015 call date. In the first quarter of 2016, CoBank, a farm Credit System Bank, regulated by the FCA, a U.S. GSE, announced on March 11, 2016, they were prematurely calling their 7.875% notes maturing April 16, 2018, on April 15, 2016, using an extra ordinary redemption provision. CoBank based their call on a regulatory event occurring. This event caught the investment community by surprise as the holders viewed the instruments as not generally callable and this marked the first instance that such a call was conducted on these securities. This call required that the Corporation accelerate the amortization on these bonds causing an additional $430,000 of amortization in March of 2016 with another $70,000 falling in the first fifteen days of April 2016.

 

Subsequent to March 31, 2016, but prior to the filing of this Form 10-Q Report, the Corporation was made aware on April 26, 2016 of AgriBank’s intention to conduct a regulatory par call on their 9.125% Notes maturing on July 15, 2019, with the call date of July 15, 2016. Similar to CoBank, AgriBank is a co-operative of the FCA. The Corporation owns $6.4 million par value of the AgriBank issue maturing on July 15, 2019, with a book value of $7.7 million. As a result of this par call notice, management has accelerated amortization of the remaining $1.3 million of premium on the AgriBank bond, beginning in April 2016, and running until the call date of July 15, 2016. This regulatory call will effectively cause the Corporation to take $1.2 million more amortization than it would have previously to the July 15, 2016 call date, with about $1,020,000 of negative impact to the second quarter, and about $170,000 of negative impact to the third quarter. Therefore, the Corporation’s second quarter net interest income and margin will be negatively impacted to a significant degree, whereas the third quarter will have a relatively smaller negative impact.

 

The sequential improvement of the Corporation’s margin from the fourth quarter of 2015 to the first quarter of 2016 was aided by the increase in the Prime rate, which had a positive impact on variable-rate loans. Although loan growth is occurring, it has been a challenge to increase loan pricing to the point where it is contributing to an increase in overall asset yield. As cost of funds savings become harder to achieve, the only way to materially increase net interest margin going forward will be through increases in asset yield. Any significant improvement in asset yields would be dependent on either additional Prime rate increases or on mid-term and longer-term market interest rates increasing. This would assist with increased loan pricing and higher securities yields as a result of reduced amortization and higher yields being available at the time of purchase.

 

As shown on the table that follows, interest income, on an FTE basis for the quarter ended March 31, 2016, increased by $87,000, or 1.2%, and interest expense decreased by $203,000, or 20.0%, compared to the same period in 2015, resulting in a $290,000 increase in net interest income on an FTE basis.

 

The following table shows a more detailed analysis of net interest income on an FTE basis shown 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,
		2016												2015
										(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			19,127				26				0.55				20,155				14				0.29
Securities available for sale:
Taxable			192,712				496				1.03				210,254				1,018				1.94
Tax-exempt			102,371				1,299				5.08				91,029				1,147				5.04
Total securities (d)			295,083				1,795				2.43				301,283				2,165				2.87
Loans (a)			534,226				5,517				4.14				479,177				5,005				4.19
Regulatory stock			4,644				59				5.08				3,471				126				14.52
Total interest earning assets			853,080				7,397				3.47				804,086				7,310				3.65
Non-interest earning assets (d)			59,950												57,140
Total assets			913,030												861,226
LIABILITIES &
STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Demand deposits			176,288				65				0.15				157,754				70				0.18
Savings deposits			153,203				20				0.05				135,264				18				0.05
Time deposits			175,065				461				1.06				198,802				586				1.20
Borrowed funds			78,531				265				1.36				72,556				340				1.90
Total interest bearing liabilities			583,087				811				0.56				564,376				1,014				0.73
Non-interest bearing liabilities:
Demand deposits			231,048												200,747
Other			2,920												2,858
Total liabilities			817,055												767,981
Stockholders' equity			95,975