Attached files
file | filename |
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EX-32.2 - EX-32.2 - ENB Financial Corp | ex32-2.htm |
EX-32.1 - EX-32.1 - ENB Financial Corp | ex32-1.htm |
EX-31.2 - EX-31.2 - ENB Financial Corp | ex31-2.htm |
EX-31.1 - EX-31.1 - ENB Financial Corp | ex31-1.htm |
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 June 30, 2018
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________________ to _________________________
ENB Financial Corp
(Exact name of registrant as specified in its charter)
Pennsylvania | 000-53297 | 51-0661129 |
(State or Other Jurisdiction of Incorporation) | (Commission File Number) | (IRS Employer Identification No) |
31 E. Main St., Ephrata, PA | 17522-0457 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (717) 733-4181
Former name, former address, and former fiscal year, if changed since last report Not Applicable
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | o | Accelerated filer | o | |
Non-accelerated filer | o | (Do not check if a smaller reporting company) | ||
Smaller reporting company | x | |||
Emerging growth company | o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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 August 1, 2018, the registrant had 2,857,704 shares of $0.20 (par) Common Stock outstanding.
1
ENB FINANCIAL CORP
June 30, 2018
2
ENB FINANCIAL CORP
Part I - Financial Information
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
June 30, | December 31, | June 30, | ||||||||||
2018 | 2017 | 2017 | ||||||||||
$ | $ | $ | ||||||||||
ASSETS | ||||||||||||
Cash and due from banks | 20,016 | 21,867 | 17,759 | |||||||||
Interest-bearing deposits in other banks | 24,083 | 31,206 | 38,704 | |||||||||
Total cash and cash equivalents | 44,099 | 53,073 | 56,463 | |||||||||
Securities available for sale (at fair value) | 307,253 | 314,078 | 311,214 | |||||||||
Equity securities (at fair value) | 5,737 | 5,583 | 5,574 | |||||||||
Loans held for sale | 2,436 | 2,892 | 3,819 | |||||||||
Loans (net of unearned income) | 628,218 | 597,553 | 578,111 | |||||||||
Less: Allowance for loan losses | 8,171 | 8,240 | 7,802 | |||||||||
Net loans | 620,047 | 589,313 | 570,309 | |||||||||
Premises and equipment | 25,814 | 25,687 | 23,904 | |||||||||
Regulatory stock | 6,263 | 5,794 | 5,487 | |||||||||
Bank owned life insurance | 27,693 | 27,814 | 25,007 | |||||||||
Other assets | 10,544 | 9,388 | 10,023 | |||||||||
Total assets | 1,049,886 | 1,033,622 | 1,011,800 | |||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||
Liabilities: | ||||||||||||
Deposits: | ||||||||||||
Noninterest-bearing | 326,296 | 314,917 | 295,900 | |||||||||
Interest-bearing | 551,773 | 551,560 | 545,068 | |||||||||
Total deposits | 878,069 | 866,477 | 840,968 | |||||||||
Short-term borrowings | 2,738 | — | 4,157 | |||||||||
Long-term debt | 68,361 | 65,850 | 64,904 | |||||||||
Other liabilities | 1,975 | 1,536 | 1,604 | |||||||||
Total liabilities | 951,143 | 933,863 | 911,633 | |||||||||
Stockholders' equity: | ||||||||||||
Common stock, par value $0.20; | ||||||||||||
Shares: Authorized 12,000,000 | ||||||||||||
Issued 2,869,557 and Outstanding 2,857,704 as of 6/30/18 | ||||||||||||
Issued 2,869,557 and Outstanding 2,849,823 as of 12/31/17 | ||||||||||||
Issued 2,869,557 and Outstanding 2,853,203 as of 6/30/17 | 574 | 574 | 574 | |||||||||
Capital surplus | 4,424 | 4,415 | 4,414 | |||||||||
Retained earnings | 100,922 | 98,629 | 97,578 | |||||||||
Accumulated other comprehensive loss net of tax | (6,778 | ) | (3,195 | ) | (1,852 | ) | ||||||
Less: Treasury stock cost on 11,853 shares as of 6/30/18 | ||||||||||||
19,734 shares as of 12/31/17 and 16,354 shares as of 6/30/17 | (399 | ) | (664 | ) | (547 | ) | ||||||
Total stockholders' equity | 98,743 | 99,759 | 100,167 | |||||||||
Total liabilities and stockholders' equity | 1,049,886 | 1,033,622 | 1,011,800 |
See Notes to the Unaudited Consolidated Interim Financial Statements
3
ENB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Three Months ended June 30, | Six Months ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
$ | $ | $ | $ | |||||||||||||
Interest and dividend income: | ||||||||||||||||
Interest and fees on loans | 6,704 | 5,984 | 13,102 | 11,816 | ||||||||||||
Interest on securities available for sale | ||||||||||||||||
Taxable | 1,186 | 933 | 2,287 | 1,820 | ||||||||||||
Tax-exempt | 736 | 1,110 | 1,495 | 2,231 | ||||||||||||
Interest on deposits at other banks | 135 | 92 | 247 | 146 | ||||||||||||
Dividend income | 136 | 94 | 290 | 182 | ||||||||||||
Total interest and dividend income | 8,897 | 8,213 | 17,421 | 16,195 | ||||||||||||
Interest expense: | ||||||||||||||||
Interest on deposits | 512 | 482 | 991 | 949 | ||||||||||||
Interest on borrowings | 330 | 249 | 625 | 484 | ||||||||||||
Total interest expense | 842 | 731 | 1,616 | 1,433 | ||||||||||||
Net interest income | 8,055 | 7,482 | 15,805 | 14,762 | ||||||||||||
Provision for loan losses | 90 | 120 | 280 | 210 | ||||||||||||
Net interest income after provision for loan losses | 7,965 | 7,362 | 15,525 | 14,552 | ||||||||||||
Other income: | ||||||||||||||||
Trust and investment services income | 474 | 426 | 1,028 | 908 | ||||||||||||
Service fees | 837 | 684 | 1,498 | 1,246 | ||||||||||||
Commissions | 657 | 584 | 1,241 | 1,131 | ||||||||||||
Gains/(losses) on the sale of debt securities, net | (62 | ) | 107 | (28 | ) | 247 | ||||||||||
Gains on equity securities, net | 16 | — | 47 | — | ||||||||||||
Gains on sale of mortgages | 352 | 437 | 587 | 792 | ||||||||||||
Earnings on bank-owned life insurance | 192 | 171 | 1,291 | 344 | ||||||||||||
Other income | 162 | 103 | 344 | 256 | ||||||||||||
Total other income | 2,628 | 2,512 | 6,008 | 4,924 | ||||||||||||
Operating expenses: | ||||||||||||||||
Salaries and employee benefits | 5,221 | 4,811 | 10,181 | 9,530 | ||||||||||||
Occupancy | 602 | 605 | 1,265 | 1,204 | ||||||||||||
Equipment | 291 | 297 | 579 | 579 | ||||||||||||
Advertising & marketing | 205 | 160 | 437 | 396 | ||||||||||||
Computer software & data processing | 574 | 549 | 1,118 | 1,079 | ||||||||||||
Shares tax | 229 | 215 | 443 | 430 | ||||||||||||
Professional services | 505 | 495 | 938 | 884 | ||||||||||||
Other expense | 540 | 583 | 1,090 | 1,131 | ||||||||||||
Total operating expenses | 8,167 | 7,715 | 16,051 | 15,233 | ||||||||||||
Income before income taxes | 2,426 | 2,159 | 5,482 | 4,243 | ||||||||||||
Provision for federal income taxes | 300 | 287 | 535 | 544 | ||||||||||||
Net income | 2,126 | 1,872 | 4,947 | 3,699 | ||||||||||||
Earnings per share of common stock | 0.74 | 0.66 | 1.73 | 1.30 | ||||||||||||
Cash dividends paid per share | 0.29 | 0.28 | 0.57 | 0.56 | ||||||||||||
Weighted average shares outstanding | 2,853,795 | 2,850,377 | 2,851,981 | 2,850,532 |
See Notes to the Unaudited Consolidated Interim Financial Statements
4
ENB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS)
Three Months ended June 30, | Six Months ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
$ | $ | $ | $ | |||||||||||||
Net income | 2,126 | 1,872 | 4,947 | 3,699 | ||||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Securities available for sale not other-than-temporarily impaired: | ||||||||||||||||
Unrealized gains (losses) arising during the period | (362 | ) | 4,208 | (3,730 | ) | 4,842 | ||||||||||
Income tax effect | 76 | (1,430 | ) | 759 | (1,646 | ) | ||||||||||
(286 | ) | 2,778 | (2,971 | ) | 3,196 | |||||||||||
Loss / (Gain) on sale of debt securities recognized in earnings | 62 | (107 | ) | 28 | (247 | ) | ||||||||||
Income tax effect | (13 | ) | 36 | (6 | ) | 84 | ||||||||||
49 | (71 | ) | 22 | (163 | ) | |||||||||||
Other comprehensive income (loss), net of tax | (237 | ) | 2,707 | (2,949 | ) | 3,033 | ||||||||||
Comprehensive Income | 1,889 | 4,579 | 1,998 | 6,732 |
See Notes to the Unaudited Consolidated Interim Financial Statements
5
ENB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS) | Six Months Ended June 30, | |||||||
2018 | 2017 | |||||||
$ | $ | |||||||
Cash flows from operating activities: | ||||||||
Net income | 4,947 | 3,699 | ||||||
Adjustments to reconcile net income to net cash | ||||||||
provided by operating activities: | ||||||||
Net amortization of securities premiums and discounts and loan fees | 2,050 | 1,989 | ||||||
Decrease (increase) in interest receivable | (36 | ) | 117 | |||||
Increase (decrease) in interest payable | 26 | (1 | ) | |||||
Provision for loan losses | 280 | 210 | ||||||
(Gain) loss on sale of debt securities, net | 28 | (247 | ) | |||||
Gain on equity securities, net | (47 | ) | — | |||||
Gain on sale of mortgages | (587 | ) | (792 | ) | ||||
Loans originated for sale | (16,557 | ) | (15,755 | ) | ||||
Proceeds from sales of loans | 17,600 | 15,280 | ||||||
Earnings on bank-owned life insurance | (1,291 | ) | (344 | ) | ||||
Depreciation of premises and equipment and amortization of software | 816 | 808 | ||||||
Deferred income tax | (21 | ) | (29 | ) | ||||
Other assets and other liabilities, net | 1,434 | (1,017 | ) | |||||
Net cash provided by operating activities | 8,642 | 3,918 | ||||||
Cash flows from investing activities: | ||||||||
Securities available for sale: | ||||||||
Proceeds from maturities, calls, and repayments | 8,946 | 9,704 | ||||||
Proceeds from sales | 32,235 | 40,085 | ||||||
Purchases | (41,702 | ) | (55,390 | ) | ||||
Purchase of regulatory bank stock | (1,398 | ) | (1,590 | ) | ||||
Redemptions of regulatory bank stock | 929 | 1,475 | ||||||
Purchase of bank-owned life insurance | 48 | — | ||||||
Net increase in loans | (31,250 | ) | (6,737 | ) | ||||
Purchases of premises and equipment, net | (857 | ) | (2,024 | ) | ||||
Purchase of computer software | (57 | ) | (58 | ) | ||||
Net cash used for investing activities | (33,106 | ) | (14,535 | ) | ||||
Cash flows from financing activities: | ||||||||
Net increase in demand, NOW, and savings accounts | 18,857 | 29,905 | ||||||
Net decrease in time deposits | (7,265 | ) | (6,428 | ) | ||||
Net increase (decrease) in short-term borrowings | 2,738 | (4,172 | ) | |||||
Proceeds from long-term debt | 11,661 | 11,147 | ||||||
Repayments of long-term debt | (9,150 | ) | (7,500 | ) | ||||
Dividends paid | (1,625 | ) | (1,596 | ) | ||||
Proceeds from sale of treasury stock | 274 | 270 | ||||||
Treasury stock purchased | — | (178 | ) | |||||
Net cash provided by financing activities | 15,490 | 21,448 | ||||||
Increase (decrease) in cash and cash equivalents | (8,974 | ) | 10,831 | |||||
Cash and cash equivalents at beginning of period | 53,073 | 45,632 | ||||||
Cash and cash equivalents at end of period | 44,099 | 56,463 | ||||||
Supplemental disclosures of cash flow information: | ||||||||
Interest paid | 1,590 | 1,434 | ||||||
Income taxes paid | 250 | 1,100 | ||||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||
Fair value adjustments for securities available for sale | 3,730 | (4,595 | ) |
See Notes to the Unaudited Consolidated Interim Financial Statements
6
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and to general practices within the banking industry. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all significant adjustments considered necessary for fair presentation have been included. Certain items previously reported have been reclassified to conform to the current period’s reporting format. Such reclassifications did not affect net income or stockholders’ equity.
ENB Financial Corp (“the Corporation”) is the bank holding company for its wholly-owned subsidiary Ephrata National Bank (the “Bank”). This Form 10-Q, for the second quarter of 2018, is reporting on the results of operations and financial condition of ENB Financial Corp.
Operating results for the six months ended June 30, 2018, are not necessarily indicative of the results that may be expected for the year ended December 31, 2018. For further information, refer to the consolidated financial statements and footnotes thereto included in ENB Financial Corp’s Annual Report on Form 10-K for the year ended December 31, 2017.
Revenue from Contracts with Customers
The Company records revenue from contracts with customers in accordance with Accounting Standards Topic 606, Revenue from Contracts with Customers (Topic 606). Under Topic 606, the Corporation must identify contracts with customers, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when the Corporation satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.
The Corporation’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. The Corporation has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. The Corporation generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.
Financial Instruments
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.
7
ASU 2016-01 was effective for the Corporation on January 1, 2018, and resulted in separate classification of equity securities previously included in available for sale securities on the consolidated balance sheets with changes in the fair value of the equity securities captured in the consolidated statements of income. See Note 3 – Securities for disclosures related to equity securities. Adoption of the standard also resulted in the use of an exit price rather than an entrance price to determine the fair value of loans not measured at fair value on a non-recurring basis in the consolidated balance sheets. See Note 5 – Fair Value Presentation for further information regarding the valuation of these loans.
Nonrefundable Fees and Other Costs
In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle. Upon adoption on January 1, 2018, the Corporation made a one-time cumulative effect adjustment from accumulated other comprehensive income to retained earnings of $1.7 million. The net effect was a decrease to retained earnings.
Reporting Comprehensive Income
In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220), to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. Upon adoption in February 2018, the Corporation made a one-time cumulative effect adjustment from accumulated other comprehensive income to retained earnings of $634,000. The net effect was an increase to retained earnings.
8
2. Securities Available for Sale
The amortized cost, gross unrealized gains and losses, and fair value of securities held at June 30, 2018, and December 31, 2017, are as follows:
Gross | Gross | ||||||||||||||||
(DOLLARS IN THOUSANDS) | Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | ||||||||||||||
$ | $ | $ | $ | ||||||||||||||
June 30, 2018 | |||||||||||||||||
U.S. government agencies | 35,089 | — | (1,390 | ) | 33,699 | ||||||||||||
U.S. agency mortgage-backed securities | 48,039 | — | (1,936 | ) | 46,103 | ||||||||||||
U.S. agency collateralized mortgage obligations | 58,120 | 19 | (1,868 | ) | 56,271 | ||||||||||||
Asset-backed securities | 7,768 | — | (32 | ) | 7,736 | ||||||||||||
Corporate bonds | 62,929 | 5 | (1,582 | ) | 61,352 | ||||||||||||
Obligations of states and political subdivisions | 103,888 | 105 | (1,901 | ) | 102,092 | ||||||||||||
Total debt securities available for sale | 315,833 | 129 | (8,709 | ) | 307,253 | ||||||||||||
December 31, 2017 | |||||||||||||||||
U.S. government agencies | 35,101 | — | (749 | ) | 34,352 | ||||||||||||
U.S. agency mortgage-backed securities | 52,981 | 8 | (916 | ) | 52,073 | ||||||||||||
U.S. agency collateralized mortgage obligations | 55,493 | 46 | (898 | ) | 54,641 | ||||||||||||
Corporate bonds | 61,334 | 24 | (589 | ) | 60,769 | ||||||||||||
Obligations of states and political subdivisions | 114,047 | 243 | (2,047 | ) | 112,243 | ||||||||||||
Total debt securities | 318,956 | 321 | (5,199 | ) | 314,078 | ||||||||||||
Equity securities | 5,547 | 36 | — | 5,583 | |||||||||||||
Total securities available for sale | 324,503 | 357 | (5,199 | ) | 319,661 |
The amortized cost and fair value of debt securities available for sale at June 30, 2018, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities due to certain call or prepayment provisions.
CONTRACTUAL MATURITY OF DEBT SECURITIES | ||||||||
(DOLLARS IN THOUSANDS) | ||||||||
Amortized | ||||||||
Cost | Fair Value | |||||||
$ | $ | |||||||
Due in one year or less | 13,125 | 12,726 | ||||||
Due after one year through five years | 131,284 | 127,386 | ||||||
Due after five years through ten years | 54,955 | 52,891 | ||||||
Due after ten years | 116,469 | 114,250 | ||||||
Total debt securities | 315,833 | 307,253 |
Securities available for sale with a par value of $65,568,000 and $64,580,000 at June 30, 2018, and December 31, 2017, respectively, were pledged or restricted for public funds, borrowings, or other purposes as required by law. The fair value of these pledged securities was $65,500,000 at June 30, 2018, and $66,157,000 at December 31, 2017.
9
Proceeds from active sales of securities available for sale, along with the associated gross realized gains and gross realized losses, are shown below. Realized gains and losses are computed on the basis of specific identification.
PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE
(DOLLARS IN THOUSANDS)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
$ | $ | $ | $ | |||||||||||||
Proceeds from sales | 23,660 | 26,398 | 32,235 | 40,085 | ||||||||||||
Gross realized gains | 58 | 216 | 109 | 388 | ||||||||||||
Gross realized losses | 120 | 109 | 137 | 141 |
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 six months of 2018 or 2017.
Information pertaining to securities with gross unrealized losses at June 30, 2018, and December 31, 2017, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:
TEMPORARY IMPAIRMENTS OF SECURITIES
(DOLLARS IN THOUSANDS)
Less than 12 months | More than 12 months | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
$ | $ | $ | $ | $ | $ | |||||||||||||||||||
As of June 30, 2018 | ||||||||||||||||||||||||
U.S. government agencies | 9,768 | (232 | ) | 23,931 | (1,158 | ) | 33,699 | (1,390 | ) | |||||||||||||||
U.S. agency mortgage-backed securities | 13,266 | (372 | ) | 32,837 | (1,564 | ) | 46,103 | (1,936 | ) | |||||||||||||||
U.S. agency collateralized mortgage obligations | 28,434 | (783 | ) | 19,773 | (1,085 | ) | 48,207 | (1,868 | ) | |||||||||||||||
Asset-backed securities | 7,736 | (32 | ) | — | — | 7,736 | (32 | ) | ||||||||||||||||
Corporate bonds | 41,687 | (893 | ) | 16,641 | (689 | ) | 58,328 | (1,582 | ) | |||||||||||||||
Obligations of states & political subdivisions | 31,739 | (420 | ) | 53,149 | (1,481 | ) | 84,888 | (1,901 | ) | |||||||||||||||
Total temporarily impaired securities | 132,630 | (2,732 | ) | 146,331 | (5,977 | ) | 278,961 | (8,709 | ) | |||||||||||||||
As of December 31, 2017 | ||||||||||||||||||||||||
U.S. government agencies | 9,941 | (59 | ) | 24,411 | (690 | ) | 34,352 | (749 | ) | |||||||||||||||
U.S. agency mortgage-backed securities | 10,326 | (78 | ) | 37,123 | (838 | ) | 47,449 | (916 | ) | |||||||||||||||
U.S. agency collateralized mortgage obligations | 29,551 | (280 | ) | 20,980 | (618 | ) | 50,531 | (898 | ) | |||||||||||||||
Corporate bonds | 38,543 | (282 | ) | 15,019 | (307 | ) | 53,562 | (589 | ) | |||||||||||||||
Obligations of states & political subdivisions | 15,188 | (142 | ) | 68,278 | (1,905 | ) | 83,466 | (2,047 | ) | |||||||||||||||
Total temporarily impaired securities | 103,549 | (841 | ) | 165,811 | (4,358 | ) | 269,360 | (5,199 | ) |
In the debt security portfolio there were 190 positions that were carrying unrealized losses as of June 30, 2018. There were no instruments considered to be other-than-temporarily impaired at June 30, 2018.
10
The Corporation evaluates fixed maturity positions for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic and market concerns warrant such evaluation. U.S. generally accepted accounting principles provide for the bifurcation of OTTI into two categories: (a) the amount of the total OTTI related to a decrease in cash flows expected to be collected from the debt security (the credit loss), which is recognized in earnings, and (b) the amount of total OTTI related to all other factors, which is recognized, net of taxes, as a component of accumulated other comprehensive income.
3. Equity Securities
The following table summarizes the amortized cost, gross unrealized gains and losses, and fair value of equity securities held at June 30, 2018.
Gross | Gross | |||||||||||||||
(DOLLARS IN THOUSANDS) | Amortized | Unrealized | Unrealized | Fair | ||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
$ | $ | $ | $ | |||||||||||||
June 30, 2018 | ||||||||||||||||
CRA-qualified mutual funds | 5,341 | — | — | 5,341 | ||||||||||||
Bank stocks | 368 | 30 | (2 | ) | 396 | |||||||||||
Total equity securities | 5,709 | 30 | (2 | ) | 5,737 |
As of January 1, 2018, the Corporation adopted ASU 2016-01, resulting in the reclassification of equity securities from available-for-sale.
The following table presents the net gains and losses on the Corporation’s equity investments recognized in earnings during the quarter and year-to-date periods ended June 30, 2018, and the portion of unrealized gains and losses for the periods that relates to equity investments held as of June 30, 2018.
NET GAINS AND LOSSES ON EQUITY INVESTMENTS RECOGNIZED IN EARNINGS
(DOLLARS IN THOUSANDS)
Three Months Ended | Six Months Ended | |||||||
June 30, 2018 | June 30, 2018 | |||||||
$ | $ | |||||||
Net gains (losses) recognized in equity securities during the period | (14 | ) | 17 | |||||
Less: Net gains (losses) realized on the sale of equity securities during the period | 30 | 30 | ||||||
Unrealized gains (losses) recognized in equity securities held at reporting date | 16 | 47 |
11
4. Loans and Allowance for Loan Losses
The following table presents the Corporation’s loan portfolio by category of loans as of June 30, 2018, and December 31, 2017:
LOAN PORTFOLIO
(DOLLARS IN THOUSANDS)
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
$ | $ | |||||||
Commercial real estate | ||||||||
Commercial mortgages | 91,556 | 90,072 | ||||||
Agriculture mortgages | 153,034 | 152,050 | ||||||
Construction | 18,217 | 18,670 | ||||||
Total commercial real estate | 262,807 | 260,792 | ||||||
Consumer real estate (a) | ||||||||
1-4 family residential mortgages | 193,154 | 176,971 | ||||||
Home equity loans | 10,184 | 11,181 | ||||||
Home equity lines of credit | 62,936 | 61,104 | ||||||
Total consumer real estate | 266,274 | 249,256 | ||||||
Commercial and industrial | ||||||||
Commercial and industrial | 47,517 | 41,426 | ||||||
Tax-free loans | 21,770 | 20,722 | ||||||
Agriculture loans | 18,209 | 18,794 | ||||||
Total commercial and industrial | 87,496 | 80,942 | ||||||
Consumer | 10,215 | 5,320 | ||||||
Gross loans prior to deferred fees | 626,792 | 596,310 | ||||||
Less: | ||||||||
Deferred loan costs, net | 1,426 | 1,243 | ||||||
Allowance for loan losses | (8,171 | ) | (8,240 | ) | ||||
Total net loans | 620,047 | 589,313 |
(a) | Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets, totaled $108,907,000 and $98,262,000 as of June 30, 2018, and December 31, 2017, respectively. |
The Corporation grades commercial credits differently than consumer credits. The following tables represent all of the Corporation’s commercial credit exposures by internally assigned grades as of June 30, 2018 and December 31, 2017. The grading analysis estimates the capability of the borrower to repay the contractual obligations under the loan agreements as scheduled. The Corporation's internal commercial credit risk grading system is based on experiences with similarly graded loans.
The Corporation's internally assigned grades for commercial credits are as follows:
· | Pass – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral. |
· | Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected. |
· | Substandard – loans that have a well-defined weakness based on objective evidence and characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. |
12
· | Doubtful – loans classified as doubtful have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances. |
· | Loss – loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted. |
COMMERCIAL CREDIT EXPOSURE
CREDIT RISK PROFILE BY INTERNALLY ASSIGNED GRADE
(DOLLARS IN THOUSANDS)
June 30, 2018 | Commercial Mortgages | Agriculture Mortgages | Construction | Commercial and Industrial | Tax-free Loans | Agriculture Loans | Total | |||||||||||||||||||||
$ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Grade: | ||||||||||||||||||||||||||||
Pass | 88,902 | 142,476 | 16,682 | 45,616 | 21,566 | 17,193 | 332,435 | |||||||||||||||||||||
Special Mention | 271 | 4,027 | 535 | 567 | 204 | 361 | 5,965 | |||||||||||||||||||||
Substandard | 2,383 | 6,531 | 1,000 | 1,334 | — | 655 | 11,903 | |||||||||||||||||||||
Doubtful | — | — | — | — | — | — | — | |||||||||||||||||||||
Loss | — | — | — | — | — | — | — | |||||||||||||||||||||
Total | 91,556 | 153,034 | 18,217 | 47,517 | 21,770 | 18,209 | 350,303 | |||||||||||||||||||||
December 31, 2017 | Commercial Mortgages | Agriculture Mortgages | Construction | Commercial and Industrial | Tax-free Loans | Agriculture Loans | Total | |||||||||||||||||||||
$ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Grade: | ||||||||||||||||||||||||||||
Pass | 86,259 | 143,037 | 17,670 | 37,947 | 20,514 | 17,798 | 323,225 | |||||||||||||||||||||
Special Mention | 160 | 3,873 | — | 1,015 | 208 | 270 | 5,526 | |||||||||||||||||||||
Substandard | 3,653 | 5,140 | 1,000 | 2,464 | — | 726 | 12,983 | |||||||||||||||||||||
Doubtful | — | — | — | — | — | — | — | |||||||||||||||||||||
Loss | — | — | — | — | — | — | — | |||||||||||||||||||||
Total | 90,072 | 152,050 | 18,670 | 41,426 | 20,722 | 18,794 | 341,734 |
13
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 June 30, 2018 and December 31, 2017:
CONSUMER CREDIT EXPOSURE
CREDIT RISK PROFILE BY PAYMENT PERFORMANCE
(DOLLARS IN THOUSANDS)
June 30, 2018 | 1-4 Family Residential Mortgages | Home Equity Loans | Home Equity Lines of Credit | Consumer | Total | |||||||||||||||
Payment performance: | $ | $ | $ | $ | $ | |||||||||||||||
Performing | 192,321 | 10,184 | 62,769 | 10,193 | 275,467 | |||||||||||||||
Non-performing | 833 | — | 167 | 22 | 1,022 | |||||||||||||||
Total | 193,154 | 10,184 | 62,936 | 10,215 | 276,489 | |||||||||||||||
December 31, 2017 | 1-4 Family Residential Mortgages | Home Equity Loans | Home Equity Lines of Credit | Consumer | Total | |||||||||||||||
Payment performance: | $ | $ | $ | $ | $ | |||||||||||||||
Performing | 176,576 | 11,181 | 61,074 | 5,305 | 254,136 | |||||||||||||||
Non-performing | 395 | — | 30 | 15 | 440 | |||||||||||||||
Total | 176,971 | 11,181 | 61,104 | 5,320 | 254,576 |
14
The following tables present an age analysis of the Corporation’s past due loans, segregated by loan portfolio class, as of June 30, 2018 and December 31, 2017:
AGING OF LOANS RECEIVABLE
(DOLLARS IN THOUSANDS)
Loans | ||||||||||||||||||||||||||||
Greater | Receivable > | |||||||||||||||||||||||||||
30-59 Days | 60-89 Days | than 90 | Total Past | Total Loans | 90 Days and | |||||||||||||||||||||||
June 30, 2018 | Past Due | Past Due | Days | Due | Current | Receivable | Accruing | |||||||||||||||||||||
$ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||||||||||
Commercial mortgages | — | — | 255 | 255 | 91,301 | 91,556 | — | |||||||||||||||||||||
Agriculture mortgages | 263 | — | — | 263 | 152,771 | 153,034 | — | |||||||||||||||||||||
Construction | — | — | — | — | 18,217 | 18,217 | — | |||||||||||||||||||||
Consumer real estate | ||||||||||||||||||||||||||||
1-4 family residential mortgages | 183 | 96 | 318 | 597 | 192,557 | 193,154 | 318 | |||||||||||||||||||||
Home equity loans | 45 | — | — | 45 | 10,139 | 10,184 | — | |||||||||||||||||||||
Home equity lines of credit | — | — | 29 | 29 | 62,907 | 62,936 | 29 | |||||||||||||||||||||
Commercial and industrial | ||||||||||||||||||||||||||||
Commercial and industrial | 30 | — | — | 30 | 47,487 | 47,517 | — | |||||||||||||||||||||
Tax-free loans | — | — | — | — | 21,770 | 21,770 | — | |||||||||||||||||||||
Agriculture loans | 10 | 135 | — | 145 | 18,064 | 18,209 | — | |||||||||||||||||||||
Consumer | 17 | — | 2 | 19 | 10,196 | 10,215 | 2 | |||||||||||||||||||||
Total | 548 | 231 | 604 | 1,383 | 625,409 | 626,792 | 349 |
Loans | ||||||||||||||||||||||||||||
Greater | Receivable > | |||||||||||||||||||||||||||
30-59 Days | 60-89 Days | than 90 | Total Past | Total Loans | 90 Days and | |||||||||||||||||||||||
December 31, 2017 | Past Due | Past Due | Days | Due | Current | Receivable | Accruing | |||||||||||||||||||||
$ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||||||||||
Commercial mortgages | — | — | 372 | 372 | 89,700 | 90,072 | — | |||||||||||||||||||||
Agriculture mortgages | — | — | — | — | 152,050 | 152,050 | — | |||||||||||||||||||||
Construction | — | — | — | — | 18,670 | 18,670 | — | |||||||||||||||||||||
Consumer real estate | ||||||||||||||||||||||||||||
1-4 family residential mortgages | 533 | 248 | 395 | 1,176 | 175,795 | 176,971 | 395 | |||||||||||||||||||||
Home equity loans | 40 | — | — | 40 | 11,141 | 11,181 | — | |||||||||||||||||||||
Home equity lines of credit | — | — | 30 | 30 | 61,074 | 61,104 | 30 | |||||||||||||||||||||
Commercial and industrial | ||||||||||||||||||||||||||||
Commercial and industrial | 65 | 109 | — | 174 | 41,252 | 41,426 | — | |||||||||||||||||||||
Tax-free loans | — | — | — | — | 20,722 | 20,722 | — | |||||||||||||||||||||
Agriculture loans | — | — | — | — | 18,794 | 18,794 | — | |||||||||||||||||||||
Consumer | 8 | 3 | 15 | 26 | 5,294 | 5,320 | 15 | |||||||||||||||||||||
Total | 646 | 360 | 812 | 1,818 | 594,492 | 596,310 | 440 |
15
The following table presents nonaccrual loans by classes of the loan portfolio as of June 30, 2018 and December 31, 2017:
NONACCRUAL LOANS BY LOAN CLASS
(DOLLARS IN THOUSANDS)
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
$ | $ | |||||||
Commercial real estate | ||||||||
Commercial mortgages | 391 | 393 | ||||||
Agriculture mortgages | — | — | ||||||
Construction | — | — | ||||||
Consumer real estate | ||||||||
1-4 family residential mortgages | 515 | — | ||||||
Home equity loans | 138 | — | ||||||
Home equity lines of credit | — | — | ||||||
Commercial and industrial | ||||||||
Commercial and industrial | — | — | ||||||
Tax-free loans | — | — | ||||||
Agriculture loans | — | — | ||||||
Consumer | 20 | — | ||||||
Total | 1,064 | 393 |
As of June 30, 2018 and December 31, 2017, all of the Corporation’s commercial loans on nonaccrual status were also considered impaired. Information with respect to impaired loans for the three and six months ended June 30, 2018 and June 30, 2017, is as follows:
IMPAIRED LOANS | ||||||||||||||||
(DOLLARS IN THOUSANDS) | ||||||||||||||||
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
$ | $ | $ | $ | |||||||||||||
Average recorded balance of impaired loans | 2,201 | 2,060 | 2,045 | 2,103 | ||||||||||||
Interest income recognized on impaired loans | 15 | 19 | 31 | 32 |
There were no loan modifications made during the six months ended June 30, 2018 causing a loan to be considered a troubled debt restructuring (TDR). However, there was a loan modification made during the six months ended June 30, 2017, that constituted a TDR. A TDR is a loan where management has granted a concession to a borrower that is experiencing financial difficulty. A concession is generally defined as more favorable payment or credit terms granted to a borrower in an effort to improve the likelihood of the lender collecting principal in its entirety. Concessions usually are in the form of interest only for a period of time, or a lower interest rate offered in an effort to enable the borrower to continue to make normally scheduled payments. The loan classified as a TDR during the three months ended March 31, 2017, was an agricultural loan with a principal balance at June 30, 2018, of $209,000. The concession initially granted to the borrower during the first quarter of 2017 was an interest-only period initially running for three months to March 31, 2017. However, on March 31, 2017, that deferral period was extended for an additional three months, causing management to classify the loan as a TDR. The concession period ended June 30, 2017. Subsequent to June 30, 2017, the borrower resumed normal principal and interest payments as of July 2017.
16
The following tables summarize information regarding impaired loans by loan portfolio class as of June 30, 2018, December 31, 2017, and June 30, 2017:
IMPAIRED LOAN ANALYSIS | ||||||||||||||||||||
(DOLLARS IN THOUSANDS) | ||||||||||||||||||||
June 30, 2018 | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
$ | $ | $ | $ | $ | ||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||
Commercial mortgages | 906 | 1,441 | — | 632 | — | |||||||||||||||
Agriculture mortgages | 893 | 893 | — | 1,082 | 26 | |||||||||||||||
Construction | — | — | — | — | — | |||||||||||||||
Total commercial real estate | 1,799 | 2,334 | — | 1,714 | 26 | |||||||||||||||
Commercial and industrial | ||||||||||||||||||||
Commercial and industrial | — | — | — | — | — | |||||||||||||||
Tax-free loans | — | — | — | — | — | |||||||||||||||
Agriculture loans | — | — | — | — | — | |||||||||||||||
Total commercial and industrial | — | — | — | — | — | |||||||||||||||
Total with no related allowance | 1,799 | 2,334 | — | 1,714 | 26 | |||||||||||||||
With an allowance recorded: | ||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||
Commercial mortgages | 157 | 161 | 71 | 103 | — | |||||||||||||||
Agriculture mortgages | — | — | — | — | — | |||||||||||||||
Construction | — | — | — | — | — | |||||||||||||||
Total commercial real estate | 157 | 161 | 71 | 103 | — | |||||||||||||||
Commercial and industrial | ||||||||||||||||||||
Commercial and industrial | — | — | — | — | — | |||||||||||||||
Tax-free loans | — | — | — | — | — | |||||||||||||||
Agriculture loans | 209 | 209 | 8 | 228 | 5 | |||||||||||||||
Total commercial and industrial | 209 | 209 | 8 | 228 | 5 | |||||||||||||||
Total with a related allowance | 366 | 370 | 79 | 331 | 5 | |||||||||||||||
Total by loan class: | ||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||
Commercial mortgages | 1,063 | 1,602 | 71 | 735 | — | |||||||||||||||
Agriculture mortgages | 893 | 893 | — | 1,082 | 26 | |||||||||||||||
Construction | — | — | — | — | — | |||||||||||||||
Total commercial real estate | 1,956 | 2,495 | 71 | 1,817 | 26 | |||||||||||||||
Commercial and industrial | ||||||||||||||||||||
Commercial and industrial | — | — | — | — | — | |||||||||||||||
Tax-free loans | — | — | — | — | — | |||||||||||||||
Agriculture loans | 209 | 209 | 8 | 228 | 5 | |||||||||||||||
Total commercial and industrial | 209 | 209 | 8 | 228 | 5 | |||||||||||||||
Total | 2,165 | 2,704 | 79 | 2,045 | 31 |
17
IMPAIRED LOAN ANALYSIS | ||||||||||||||||||||
(DOLLARS IN THOUSANDS) | ||||||||||||||||||||
December 31, 2017 | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
$ | $ | $ | $ | $ | ||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||
Commercial mortgages | 393 | 690 | — | 585 | 4 | |||||||||||||||
Agriculture mortgages | 1,174 | 1,174 | — | 1,210 | 54 | |||||||||||||||
Construction | — | — | — | — | — | |||||||||||||||
Total commercial real estate | 1,567 | 1,864 | — | 1,795 | 58 | |||||||||||||||
Commercial and industrial | ||||||||||||||||||||
Commercial and industrial | — | — | — | — | — | |||||||||||||||
Tax-free loans | — | — | — | — | — | |||||||||||||||
Agriculture loans | 245 | 245 | — | 163 | 7 | |||||||||||||||
Total commercial and industrial | 245 | 245 | — | 163 | 7 | |||||||||||||||
Total with no related allowance | 1,812 | 2,109 | — | 1,958 | 65 | |||||||||||||||
With an allowance recorded: | ||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||
Commercial mortgages | — | — | — | — | — | |||||||||||||||
Agriculture mortgages | — | — | — | — | — | |||||||||||||||
Construction | — | — | — | — | — | |||||||||||||||
Total commercial real estate | — | — | — | — | — | |||||||||||||||
Commercial and industrial | ||||||||||||||||||||
Commercial and industrial | — | — | — | — | — | |||||||||||||||
Tax-free loans | — | — | — | — | — | |||||||||||||||
Agriculture loans | — | — | — | — | — | |||||||||||||||
Total commercial and industrial | — | — | — | — | — | |||||||||||||||
Total with a related allowance | — | — | — | — | — | |||||||||||||||
Total by loan class: | ||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||
Commercial mortgages | 393 | 690 | — | 585 | 4 | |||||||||||||||
Agriculture mortgages | 1,174 | 1,174 | — | 1,210 | 54 | |||||||||||||||
Construction | — | — | — | — | — | |||||||||||||||
Total commercial real estate | 1,567 | 1,864 | — | 1,795 | 58 | |||||||||||||||
Commercial and industrial | ||||||||||||||||||||
Commercial and industrial | — | — | — | — | — | |||||||||||||||
Tax-free loans | — | — | — | — | — | |||||||||||||||
Agriculture loans | 245 | 245 | — | 163 | 7 | |||||||||||||||
Total commercial and industrial | 245 | 245 | — | 163 | 7 | |||||||||||||||
Total | 1,812 | 2,109 | — | 1,958 | 65 |
18
IMPAIRED LOAN ANALYSIS | ||||||||||||||||||||
(DOLLARS IN THOUSANDS) | ||||||||||||||||||||
June 30, 2017 | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
$ | $ | $ | $ | $ | ||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||
Commercial mortgages | 578 | 675 | — | 677 | 4 | |||||||||||||||
Agriculture mortgages | 1,211 | 1,211 | — | 1,229 | 26 | |||||||||||||||
Construction | — | — | — | — | — | |||||||||||||||
Total commercial real estate | 1,789 | 1,886 | — | 1,906 | 30 | |||||||||||||||
Commercial and industrial | ||||||||||||||||||||
Commercial and industrial | 75 | 75 | — | 75 | — | |||||||||||||||
Tax-free loans | — | — | — | — | — | |||||||||||||||
Agriculture loans | 281 | 281 | — | 122 | 2 | |||||||||||||||
Total commercial and industrial | 356 | 356 | — | 197 | 2 | |||||||||||||||
Total with no related allowance | 2,145 | 2,242 | — | 2,103 | 32 | |||||||||||||||
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 | 578 | 675 | — | 677 | 4 | |||||||||||||||
Agriculture mortgages | 1,211 | 1,211 | — | 1,229 | 26 | |||||||||||||||
Construction | — | — | — | — | — | |||||||||||||||
Total commercial real estate | 1,789 | 1,886 | — | 1,906 | 30 | |||||||||||||||
Commercial and industrial | ||||||||||||||||||||
Commercial and industrial | 75 | 75 | — | 75 | — | |||||||||||||||
Tax-free loans | — | — | — | — | — | |||||||||||||||
Agriculture loans | 281 | 281 | — | 122 | 2 | |||||||||||||||
Total commercial and industrial | 356 | 356 | — | 197 | 2 | |||||||||||||||
Total | 2,145 | 2,242 | — | 2,103 | 32 |
19
The following table details activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2018:
ALLOWANCE FOR CREDIT LOSSES
(DOLLARS IN THOUSANDS)
Commercial Real Estate | Consumer Real Estate | Commercial and Industrial | Consumer | Unallocated | Total | |||||||||||||||||||
$ | $ | $ | $ | $ | $ | |||||||||||||||||||
Allowance for credit losses: | ||||||||||||||||||||||||
Beginning balance - December 31, 2017 | 3,863 | 2,052 | 1,829 | 98 | 398 | 8,240 | ||||||||||||||||||
Charge-offs | (224 | ) | — | (110 | ) | (18 | ) | — | (352 | ) | ||||||||||||||
Recoveries | — | — | 4 | 1 | — | 5 | ||||||||||||||||||
Provision | 408 | 137 | (422 | ) | (9 | ) | 76 | 190 | ||||||||||||||||
Balance - March 31, 2018 | 4,047 | 2,189 | 1,301 | 72 | 474 | 8,083 | ||||||||||||||||||
Charge-offs | — | — | — | (8 | ) | — | (8 | ) | ||||||||||||||||
Recoveries | — | — | 2 | 4 | — | 6 | ||||||||||||||||||
Provision | (43 | ) | (7 | ) | (21 | ) | 63 | 98 | 90 | |||||||||||||||
Ending Balance - June 30, 2018 | 4,004 | 2,182 | 1,282 | 131 | 572 | 8,171 |
During the six months ended June 30, 2018, provision expenses were recorded for the commercial real estate, consumer real estate, and consumer segments with a credit provision recorded for the commercial and industrial segment. The increase in the allowance for commercial real estate loans was primarily a result of higher levels of charge-offs in the first six months of 2018. The increase in the amount of the allowance for loan losses allocated to the consumer real estate and consumer segment was primarily a result of growth in these portfolios during the six months ended June 30, 2018. The decrease in commercial and industrial loans from December 31, 2017 to June 30, 2018, was caused by a qualitative factor change across the portfolio and also by the declining level of substandard commercial and industrial loans. The qualitative factors were adjusted across the loan portfolio to better reflect the forward risk in each portfolio. Commercial and consumer real estate carried heavier risk factors, while commercial and industrial was adjusted down. While commercial and industrial did have charge-offs in the first quarter of 2018, they were relative to the size of the allowance and sufficiently covered with prior provisions. There was no commercial and industrial charge-offs in the second quarter of 2018, as well as the commercial and consumer real estate areas. Meanwhile, the amount of commercial and industrial loans rated substandard, declined from $3.2 million on December 31, 2017, to $2.8 million as of March 31, 2018, and to $2.0 million as of June 30, 2018. While the balances of commercial and industrial loans increased moderately from December 31, 2017 to June 30, 2018, the required allowance and related provision for these loans is influenced more heavily by the amount of classified loans.
Delinquency rates among the Corporation’s loan pools remain low and made up 0.35% of total loans as of June 30 2018, compared to 0.31% of total loans as of December 31, 2017. Charge-offs for the six months ended June 30, 2018, were $360,000, however $352,000 of the charge-offs came in the first quarter of 2018, with second quarter 2018 charge-offs being a very low $8,000. Classified loans continued to decline in the first six months of 2018, from $16.6 million on December 31, 2017, to $16.0 million as of June 30, 2018. Classified loans were significantly higher at $25.6 million as of June 30, 2017. Currently, the agricultural lending sector remains under stress due to weak milk and egg prices impacting farmers. Outside of this, the health of the Corporation’s commercial real estate and commercial and industrial borrowers is generally stable with no material trends related to certain types of industries. Commercial borrowers that have exposure to agriculture are subject to more financial stress in the current environment. Qualitative factors regarding trends in the loan portfolio as well as national and local economic conditions and external factors such as competition, legal and regulatory were increased for several loan pools in the first six months of 2018 while several factors related to experience, ability, and depth of lending management and other areas declined for the same time period. The increases in charge-offs and growth in the loan portfolio caused management to record provision expense of $280,000 through June 30, 2018.
20
The following table details activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2017:
ALLOWANCE FOR CREDIT LOSSES
(DOLLARS IN THOUSANDS)
Commercial Real Estate | Consumer Real Estate | Commercial and Industrial | Consumer | Unallocated | Total | |||||||||||||||||||
$ | $ | $ | $ | $ | $ | |||||||||||||||||||
Allowance for credit losses: | ||||||||||||||||||||||||
Beginning balance - December 31, 2016 | 3,795 | 1,652 | 1,552 | 82 | 481 | 7,562 | ||||||||||||||||||
Charge-offs | — | — | (7 | ) | (4 | ) | — | (11 | ) | |||||||||||||||
Recoveries | — | 20 | 9 | 2 | — | 31 | ||||||||||||||||||
Provision | (275 | ) | 163 | 95 | 3 | 104 | 90 | |||||||||||||||||
Balance - March 31, 2017 | 3,520 | 1,835 | 1,649 | 83 | 585 | 7,672 | ||||||||||||||||||
Charge-offs | — | — | — | (3 | ) | — | (3 | ) | ||||||||||||||||
Recoveries | — | — | 10 | 3 | — | 13 | ||||||||||||||||||
Provision | 208 | 83 | (42 | ) | 36 | (165 | ) | 120 | ||||||||||||||||
Balance - June 30, 2017 | 3,728 | 1,918 | 1,617 | 119 | 420 | 7,802 |
During the six months ended June 30, 2017, provision expenses were recorded for the consumer real estate, commercial and industrial, and consumer loan segments, with a credit provision recorded in the commercial real estate loan category. The decrease in the amount of allowance for loan losses allocated to commercial real estate was primarily due to a material drop in commercial real estate loans over the first six months of 2017. As of December 31, 2016, 50.2% of the Corporation’s allowance for loan losses was allocated to commercial real estate loans, which consisted of 48.2% of all loans. As of June 30, 2017, 47.8 % of the allowance was allocated to commercial real estate loans which consisted of 45.0% of total loans.
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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 June 30, 2018 and December 31, 2017:
ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE
(DOLLARS IN THOUSANDS)
As of June 30, 2018: | Commercial Real Estate | Consumer Real Estate | Commercial and Industrial | Consumer | Unallocated | Total | ||||||||||||||||||
$ | $ | $ | $ | $ | $ | |||||||||||||||||||
Allowance for credit losses: | ||||||||||||||||||||||||
Ending balance: individually evaluated | ||||||||||||||||||||||||
for impairment | 71 | — | 8 | — | — | 79 | ||||||||||||||||||
Ending balance: collectively evaluated | ||||||||||||||||||||||||
for impairment | 3,933 | 2,182 | 1,274 | 131 | 572 | 8,092 | ||||||||||||||||||
Loans receivable: | ||||||||||||||||||||||||
Ending balance | 262,807 | 266,274 | 87,496 | 10,215 | 626,792 | |||||||||||||||||||
Ending balance: individually evaluated | ||||||||||||||||||||||||
for impairment | 1,956 | — | 209 | — | 2,165 | |||||||||||||||||||
Ending balance: collectively evaluated | ||||||||||||||||||||||||
for impairment | 260,851 | 266,274 | 87,287 | 10,215 | 624,627 | |||||||||||||||||||
As of December 31, 2017: | Commercial Real Estate | Consumer Real Estate | Commercial and Industrial | Consumer | Unallocated | Total | ||||||||||||||||||
$ | $ | $ | $ | $ | $ | |||||||||||||||||||
Allowance for credit losses: | ||||||||||||||||||||||||
Ending balance: individually evaluated | ||||||||||||||||||||||||
for impairment | — | — | — | — | — | — | ||||||||||||||||||
Ending balance: collectively evaluated | ||||||||||||||||||||||||
for impairment | 3,863 | 2,052 | 1,829 | 98 | 398 | 8,240 | ||||||||||||||||||
Loans receivable: | ||||||||||||||||||||||||
Ending balance | 260,792 | 249,256 | 80,942 | 5,320 | 596,310 | |||||||||||||||||||
Ending balance: individually evaluated | ||||||||||||||||||||||||
for impairment | 1,567 | — | 245 | — | 1,812 | |||||||||||||||||||
Ending balance: collectively evaluated | ||||||||||||||||||||||||
for impairment | 259,225 | 249,256 | 80,697 | 5,320 | 594,498 |
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5. Fair Value Presentation
U.S. generally accepted accounting principles establish a hierarchal disclosure framework associated with the level of observable pricing utilized in measuring assets and liabilities at fair value. The three broad levels defined by the hierarchy are as follows:
Level I: | Quoted prices are available in active markets for identical assets or liabilities as of the reported date. | |
Level II: | Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed. | |
Level III: | Assets and liabilities that have little to no observable pricing as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. |
The following tables provide the fair market value for assets required to be measured and reported at fair value on a recurring basis on the Consolidated Balance Sheets as of June 30, 2018, and December 31, 2017, by level within the fair value hierarchy. As required by U.S. generally accepted accounting principles, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
ASSETS MEASURED ON A RECURRING BASIS
(DOLLARS IN THOUSANDS)
June 30, 2018 | ||||||||||||||||
Level I | Level II | Level III | Total | |||||||||||||
$ | $ | $ | $ | |||||||||||||
U.S. government agencies | — | 33,699 | — | 33,699 | ||||||||||||
U.S. agency mortgage-backed securities | — | 46,103 | — | 46,103 | ||||||||||||
U.S. agency collateralized mortgage obligations | — | 56,271 | — | 56,271 | ||||||||||||
Asset-backed securities | — | 7,736 | — | 7,736 | ||||||||||||
Corporate bonds | — | 61,352 | — | 61,352 | ||||||||||||
Obligations of states & political subdivisions | — | 102,092 | — | 102,092 | ||||||||||||
Equity securities | 5,737 | — | — | 5,737 | ||||||||||||
Total securities | 5,737 | 307,253 | — | 312,990 |
On June 30, 2018, the Corporation held no securities valued using level III inputs. All of the Corporation’s debt instruments were valued using level II inputs, where quoted prices are available and observable, but not necessarily quotes on identical securities traded in active markets on a daily basis. The Corporation’s CRA fund investments and bank stocks are fair valued utilizing level I inputs because the funds have their own quoted prices in an active market. As of June 30, 2018, the CRA fund investments had a $5,341,000 book and fair market value and the bank stock portfolio had a book value of $368,000, and fair market value of $396,000.
Financial instruments are considered level III when their values are determined using pricing models, discounted cash flow methodologies, or similar techniques, and at least one significant model assumption or input is unobservable. In addition to these unobservable inputs, the valuation models for level III financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly. Level III financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.
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ASSETS MEASURED ON A RECURRING BASIS | ||||||||||||||||
(DOLLARS IN THOUSANDS) | ||||||||||||||||
December 31, 2017 | ||||||||||||||||
Level I | Level II | Level III | Total | |||||||||||||
$ | $ | $ | $ | |||||||||||||
U.S. government agencies | — | 34,352 | — | 34,352 | ||||||||||||
U.S. agency mortgage-backed securities | — | 52,073 | — | 52,073 | ||||||||||||
U.S. agency collateralized mortgage obligations | — | 54,641 | — | 54,641 | ||||||||||||
Corporate bonds | — | 60,769 | — | 60,769 | ||||||||||||
Obligations of states & political subdivisions | — | 112,243 | — | 112,243 | ||||||||||||
Equity securities | 5,583 | — | — | 5,583 | ||||||||||||
Total securities | 5,583 | 314,078 | — | 319,661 |
On December 31, 2017, the Corporation held no securities valued using level III inputs. All of the Corporation’s debt instruments were valued using level II inputs, where quoted prices are available and observable but not necessarily quotes on identical securities traded in active markets on a daily basis. The Corporation’s CRA fund investments and bank stocks are fair valued utilizing level I inputs because the funds have their own quoted prices in an active market. As of December 31, 2017, the CRA fund investments had a $5,280,000 book and market value and the bank stocks had a book value of $267,000 and a market value of $303,000.
The following tables provide the fair value for each class of assets required to be measured and reported at fair value on a nonrecurring basis on the Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017, by level within the fair value hierarchy:
ASSETS MEASURED ON A NONRECURRING BASIS
(Dollars in Thousands)
June 30, 2018 | ||||||||||||||||
Level I $ | Level II $ | Level III $ | Total $ | |||||||||||||
Assets: | ||||||||||||||||
Impaired Loans | — | — | 2,086 | 2,086 | ||||||||||||
Total | — | — | 2,086 | 2,086 |
December 31, 2017 | ||||||||||||||||
Level I $ | Level II $ | Level III $ | Total $ | |||||||||||||
Assets: | ||||||||||||||||
Impaired Loans | — | — | 1,812 | 1,812 | ||||||||||||
Total | — | — | 1,812 | 1,812 |
The Corporation had a total of $2,165,000 of impaired loans as of June 30, 2018, with $79,000 of specific allocation against these loans and $1,812,000 of impaired loans as of December 31, 2017, with no specific allocation against these loans. The value of impaired loans is generally determined through independent appraisals of the underlying collateral.
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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) | |||||
June 30, 2018 | |||||
Fair Value | Valuation | Unobservable | Range | ||
Estimate | Techniques | Input | (Weighted Avg) | ||
Impaired loans | 2,086 | Appraisal of | Appraisal | -20% (-20%) | |
collateral (1) | adjustments (2) | ||||
Liquidation | -10% (-10%) | ||||
expenses (2) | |||||
December 31, 2017 | |||||
Fair Value | Valuation | Unobservable | Range | ||
Estimate | Techniques | Input | (Weighted Avg) | ||
Impaired loans | 1,812 | Appraisal of | Appraisal | -20% (-20%) | |
collateral (1) | adjustments (2) | ||||
Liquidation | -10% (-10%) | ||||
expenses (2) |
(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level III inputs which are not identifiable.
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.
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The following table provides the carrying amount for each class of assets and liabilities and the fair value for certain financial instruments that are not required to be measured or reported at fair value on the Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017:
FINANCIAL INSTRUMENTS NOT REQUIRED TO BE MEASURED OR REPORTED AT FAIR VALUE
(DOLLARS IN THOUSANDS)
June 30, 2018 | ||||||||||||||||||||
Quoted Prices in | ||||||||||||||||||||
Active Markets | Significant Other | Significant | ||||||||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||||||
Carrying | Assets | Inputs | Inputs | |||||||||||||||||
Amount | Fair Value | (Level 1) | (Level II) | (Level III) | ||||||||||||||||
$ | $ | $ | $ | $ | ||||||||||||||||
Financial Assets: | ||||||||||||||||||||
Cash and cash equivalents | 44,099 | 44,099 | 44,099 | — | — | |||||||||||||||
Regulatory stock | 6,263 | 6,263 | 6,263 | — | — | |||||||||||||||
Loans held for sale | 2,436 | 2,436 | 2,436 | — | — | |||||||||||||||
Loans, net of allowance | 620,047 | 618,249 | — | — | 618,249 | |||||||||||||||
Mortgage servicing assets | 758 | 867 | — | — | 867 | |||||||||||||||
Accrued interest receivable | 3,720 | 3,720 | 3,720 | — | — | |||||||||||||||
Bank owned life insurance | 27,693 | 27,693 | 27,693 | — | — | |||||||||||||||
Financial Liabilities: | ||||||||||||||||||||
Demand deposits | 326,296 | 326,296 | 326,296 | — | — | |||||||||||||||
Interest-bearing demand deposits | 19,068 | 19,068 | 19,068 | — | — | |||||||||||||||
NOW accounts | 87,611 | 87,611 | 87,611 | — | — | |||||||||||||||
Money market deposit accounts | 102,418 | 102,418 | 102,418 | — | — | |||||||||||||||
Savings accounts | 200,532 | 200,532 | 200,532 | — | — | |||||||||||||||
Time deposits | 142,144 | 142,318 | — | — | 142,318 | |||||||||||||||
Total deposits | 878,069 | 878,243 | 735,925 | — | 142,318 | |||||||||||||||
Short-term borrowings | 2,738 | 2,738 | 2,738 | — | — | |||||||||||||||
Long-term debt | 68,361 | 68,390 | — | — | 68,390 | |||||||||||||||
Accrued interest payable | 411 | 411 | 411 | — | — |
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FINANCIAL INSTRUMENTS NOT REQUIRED TO BE MEASURED OR REPORTED AT FAIR VALUE
(DOLLARS IN THOUSANDS)
December 31, 2017 | ||||||||||||||||||||
Quoted Prices in | ||||||||||||||||||||
Active Markets | Significant Other | Significant | ||||||||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||||||
Carrying | Assets | Inputs | Inputs | |||||||||||||||||
Amount | Fair Value | (Level 1) | (Level II) | (Level III) | ||||||||||||||||
$ | $ | $ | $ | $ | ||||||||||||||||
Financial Assets: | ||||||||||||||||||||
Cash and cash equivalents | 53,073 | 53,073 | 53,073 | — | — | |||||||||||||||
Regulatory stock | 5,794 | 5,794 | 5,794 | — | — | |||||||||||||||
Loans held for sale | 2,892 | 2,892 | 2,892 | — | — | |||||||||||||||
Loans, net of allowance | 589,313 | 590,415 | — | — | 590,415 | |||||||||||||||
Mortgage servicing assets | 661 | 751 | — | — | 751 | |||||||||||||||
Accrued interest receivable | 3,684 | 3,684 | 3,684 | — | — | |||||||||||||||
Bank owned life insurance | 27,814 | 27,814 | 27,814 | — | — | |||||||||||||||
Financial Liabilities: | ||||||||||||||||||||
Demand deposits | 314,917 | 314,917 | 314,917 | — | — | |||||||||||||||
Interest-bearing demand deposits | 20,230 | 20,230 | 20,230 | — | — | |||||||||||||||
NOW accounts | 86,758 | 86,758 | 86,758 | — | — | |||||||||||||||
Money market deposit accounts | 105,994 | 105,994 | 105,994 | — | — | |||||||||||||||
Savings accounts | 189,169 | 189,169 | 189,169 | — | — | |||||||||||||||
Time deposits | 149,409 | 150,165 | — | — | 150,165 | |||||||||||||||
Total deposits | 866,477 | 867,233 | 717,068 | — | 150,165 | |||||||||||||||
Long-term debt | 65,850 | 65,850 | — | — | 65,850 | |||||||||||||||
Accrued interest payable | 385 | 385 | 385 | — | — |
7. Commitments and Contingent Liabilities
In order to meet the financing needs of its customers in the normal course of business, the Corporation makes various commitments that are not reflected in the accompanying consolidated financial statements. These commitments include firm commitments to extend credit, unused lines of credit, and open letters of credit. As of June 30, 2018, firm loan commitments were $59.1 million, unused lines of credit were $234.0 million, and open letters of credit were $11.7 million. The total of these commitments was $304.8 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.
27
8. Accumulated Other Comprehensive Loss
The activity in accumulated other comprehensive loss for the six months ended June 30, 2018 and 2017 is as follows:
ACCUMULATED OTHER COMPREHENSIVE LOSS (1) (2)
(DOLLARS IN THOUSANDS)
Unrealized | ||||
Gains (Losses) | ||||
on Securities | ||||
Available-for-Sale | ||||
$ | ||||
Balance at December 31, 2017 | (3,195 | ) | ||
Other comprehensive loss before reclassifications | (2,685 | ) | ||
Amount reclassified from accumulated other comprehensive loss | (27 | ) | ||
Reclassification of certain income tax effects from accumulated other comprehensive income (loss) | (634 | ) | ||
Period change | (3,346 | ) | ||
Balance at March 31, 2018 | (6,541 | ) | ||
Other comprehensive loss before reclassifications | (286 | ) | ||
Amount reclassified from accumulated other comprehensive loss | 49 | |||
Period change | (237 | ) | ||
Balance at June 30, 2018 | (6,778 | ) | ||
Balance at December 31, 2016 | (4,885 | ) | ||
Other comprehensive income before reclassifications | 418 | |||
Amount reclassified from accumulated other comprehensive loss | (92 | ) | ||
Period change | 326 | |||
Balance at March 31, 2017 | (4,559 | ) | ||
Other comprehensive income before reclassifications | 2,778 | |||
Amount reclassified from accumulated other comprehensive loss | (71 | ) | ||
Period change | 2,707 | |||
Balance at June 30, 2017 | (1,852 | ) |
(1) All amounts are net of tax. Related income tax expense or benefit is calculated using a Federal income tax rate of 21% for 2018 periods and 34% for 2017 periods.
(2) Amounts in parentheses indicate debits.
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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 June 30, | |||
2018 | 2017 | Affected Line Item in the | |
$ | $ | Consolidated Statements of Income | |
Securities available-for-sale: | |||
Net securities gains (losses) reclassified into earnings | (62) | 107 | Gains (losses) on securities transactions, net |
Related income tax expense | 13 | (36) | Provision for federal income taxes |
Net effect on accumulated other comprehensive | |||
income for the period | (49) | 71 | |
(1) Amounts in parentheses indicate debits. | |||
Amount Reclassified from | |||
Accumulated Other Comprehensive | |||
Income (Loss) | |||
For the Six Months | |||
Ended June 30, | |||
2018 | 2017 | Affected Line Item in the | |
$ | $ | Consolidated Statements of Income | |
Securities available-for-sale: | |||
Net securities gains (losses) reclassified into earnings | 28 | 247 | Gains (losses) on securities transactions, net |
Related income tax expense | (6) | (84) | Provision for federal income taxes |
Net effect on accumulated other comprehensive | |||
income for the period | 22 | 163 | |
(1) Amounts in parentheses indicate debits. |
9. Recently Issued Accounting Standards
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Corporation is currently assessing the practical expedients it may elect at adoption, but does not anticipate the amendments will have a significant impact on the financial statements. Based on the Corporation’s preliminary analysis of its current portfolio, the impact to the Corporation’s balance sheet is estimated to result in less than a 1 percent increase in assets and liabilities. This Update is not expected to have a significant impact on the Corporation’s financial statements.
29
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.
In February 2017, the FASB issued ASU 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20). The amendments in this Update clarify what constitutes a financial asset within the scope of Subtopic 610-20. The amendments also clarify that entities should identify each distinct nonfinancial asset or in substance nonfinancial asset that is promised to a counterparty and to derecognize each asset when the counterparty obtains control. There is also additional guidance provided for partial sales of a nonfinancial asset and when derecognition, and the related gain or loss, should be recognized. The amendments in this Update are effective at the same time as the amendments in Update 2014-09. Therefore, for public entities, the amendments are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. For all other entities, the amendments in this Update are effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. This Update is not expected to have a significant impact on the Corporation’s financial statements.
In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715). The amendments in this Update require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost as defined in paragraphs 715-30-35-4 and 715-60-35-9 are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments in this Update are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. For other entities, the amendments in this Update are effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The amendments in this Update should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. This Update is not expected to have a significant impact on the Corporation’s financial statements.
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In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718), which affects any entity that changes the terms or conditions of a share-based payment award. This Update amends the definition of modification by qualifying that modification accounting does not apply to changes to outstanding share-based payment awards that do not affect the total fair value, vesting requirements, or equity/liability classification of the awards. The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied prospectively to an award modified on or after the adoption date. This Update is not expected to have a significant impact on the Corporation’s financial statements.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivative and Hedging (Topic 815). The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down-round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down-round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down-round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down-round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down- round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Accounting Standards Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in Part I of this Update should be applied either retrospectively to outstanding financial instruments with a down-round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first fiscal year and interim period(s) in which the pending content that links to this paragraph is effective or retrospectively to outstanding financial instruments with a down-round feature for each prior reporting period presented in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10. The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect. This Update is not expected to have a significant impact on the Corporation’s financial statements.
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In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842), which provides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current lease guidance in Topic 840. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date the entity adopts Topic 842; otherwise, an entity should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in ASU 2016-02. This Update is not expected to have a significant impact on the Corporation’s financial statements.
In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10), to clarify certain aspects of the guidance issued in ASU 2016-01. (1) An entity measuring an equity security using the measurement alternative may change its measurement approach to a fair value method in accordance with Topic 820, Fair Value Measurement, through an irrevocable election that would apply to that security and all identical or similar investments of the same issuer. Once an entity makes this election, the entity should measure all future purchases of identical or similar investments of the same issuer using a fair value method in accordance with Topic 820. (2) Adjustments made under the measurement alternative are intended to reflect the fair value of the security as of the date that the observable transaction for a similar security took place. (3) Remeasuring the entire value of forward contracts and purchased options is required when observable transactions occur on the underlying equity securities. (4) When the fair value option is elected for a financial liability, the guidance in paragraph 825-10- 45-5 should be applied, regardless of whether the fair value option was elected under either Subtopic 815-15, Derivatives and Hedging—Embedded Derivatives, or 825-10, Financial Instruments—Overall. (5) Financial liabilities for which the fair value option is elected, the amount of change in fair value that relates to the instrument specific credit risk should first be measured in the currency of denomination when presented separately from the total change in fair value of the financial liability. Then, both components of the change in the fair value of the liability should be remeasured into the functional currency of the reporting entity using end-of-period spot rates. (6) The prospective transition approach for equity securities without a readily determinable fair value in the amendments in Update 2016-01 is meant only for instances in which the measurement alternative is applied. An insurance entity subject to the guidance in Topic 944, Financial Services— Insurance, should apply a prospective transition method when applying the amendments related to equity securities without readily determinable fair values. An insurance entity should apply the selected prospective transition method consistently to the entity’s entire population of equity securities for which the measurement alternative is elected. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, are not required to adopt these amendments until the interim period beginning after June 15, 2018, and public business entities with fiscal years beginning between June 15, 2018, and December 15, 2018, are not required to adopt these amendments before adopting the amendments in Update 2016-01. For all other entities, the effective date is the same as the effective date in Update 2016-01. All entities may early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they have adopted Update 2016-01. This Update is not expected to have a significant impact on the Corporation’s financial statements.
ASU 2018-04, Investments – Debt Securities (Topic 320) and Regulated Operations (Topic 980) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273, ASU 2018-04 supersedes various SEC paragraphs and adds an SEC paragraph pursuant to the issuance of Staff Accounting Bulletin No. 117. This Update is not expected to have a significant impact on the Corporation’s financial statements.
ASU 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 118, amends the Accounting Standards Codification to incorporate various SEC paragraphs pursuant to the issuance of SAB 118. SAB 118 addresses the application of generally accepted accounting principles in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act.
ASU 2018-06, Codification Improvements to Topic 942, Financial Services-Depository and Lending, amends the guidance in Subtopic 942-740, Financial Services-Depository and Lending-Income Taxes, that is related to Circular 202 because that guidance has been rescinded by the Office of the Comptroller of the Currency (OCC) and no longer is relevant. This Update is not expected to have a significant impact on the Corporation’s financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718), which simplified the accounting for nonemployee share-based payment transactions. The amendments in this update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments in this Update improve the following areas of nonemployee share-based payment accounting; (a) the overall measurement objective, (b) the measurement date, (c) awards with performance conditions, (d) classification reassessment of certain equity-classified awards, (e) calculated value (nonpublic entities only), and (f) intrinsic value (nonpublic entities only). The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. This Update is not expected to have a significant impact on the Corporation’s financial statements.
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ASU 2018-09, Codification Improvements, represents changes to clarify, correct errors in, or make minor improvements to the Codification. The amendments make the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments do not require transition guidance and will be effective upon issuance of this ASU. However, many of the amendments in this ASU do have transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities. This Update is not expected to have a significant impact on the Corporation’s financial statements.
ASU 2018-10, Codification Improvements to Topic 842, Leases, represents changes to clarify, correct errors in, or make minor improvements to the Codification. The amendments in this ASU affect the amendments in ASU 2016-02, which are not yet effective, but for which early adoption upon issuance is permitted. For entities that early adopted Topic 842, the amendments are effective upon issuance of this ASU, and the transition requirements are the same as those in Topic 842. For entities that have not adopted Topic 842, the effective date and transition requirements will be the same as the effective date and transition requirements in Topic 842. This Update is not expected to have a significant impact on the Corporation’s financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis represents management’s view of the financial condition and results of operations of the Corporation. This discussion and analysis should be read in conjunction with the consolidated financial statements and other financial schedules included in this quarterly report, and in conjunction with the 2017 Annual Report to Shareholders of the Corporation. The financial condition and results of operations presented are not indicative of future performance.
Forward-Looking Statements
The U.S. Private Securities Litigation Reform Act of 1995 provides safe harbor in regards to the inclusion of forward-looking statements in this document and documents incorporated by reference. Forward-looking statements pertain to possible or assumed future results that are made using current information. These forward-looking statements are generally identified when terms such as: “believe,” “estimate,” “anticipate,” “expect,” “project,” “forecast,” and other similar wordings are used. The readers of this report should take into consideration that these forward-looking statements represent management’s expectations as to future forecasts of financial performance, or the likelihood that certain events will or will not occur. Due to the very nature of estimates or predications, these forward-looking statements should not be construed to be indicative of actual future results. Additionally, management may change estimates of future performance, or the likelihood of future events, as additional information is obtained. This document may also address targets, guidelines, or strategic goals that management is striving to reach but may not be indicative of actual results.
Readers should note that many factors affect this forward-looking information, some of which are discussed elsewhere in this document and in the documents that are incorporated by reference into this document. These factors include, but are not limited to, the following:
· | National and local economic conditions |
· | Effects of slow economic conditions or prolonged economic weakness, specifically the effect on loan customers to repay loans |
· | Health of the housing market |
· | Real estate valuations and its impact on the loan portfolio |
· | Interest rate and monetary policies of the Federal Reserve Board |
· | Volatility of the securities markets including the valuation of securities |
· | Future actions or inactions of the United States government, including a failure to increase the government debt limit or a prolonged shutdown of the federal government |
· | Political changes and their impact on new laws and regulations |
· | Competitive forces |
· | Impact of mergers and acquisition activity in the local market and the effects thereof |
· | Potential impact from continually evolving cybersecurity and other technological risks and attacks, including additional costs, reputational damage, regulatory penalties, and financial losses |
· | Changes in customer behavior impacting deposit levels and loan demand |
· | Changes in accounting principles, policies, or guidelines as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standards setters |
· | Ineffective business strategy due to current or future market and competitive conditions |
· | Management’s ability to manage credit risk, liquidity risk, interest rate risk, and fair value risk |
· | Operation, legal, and reputation risk |
· | Results of the regulatory examination and supervision process |
· | The impact of new laws and regulations, including the impact of the 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 |
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Readers should be aware if any of the above factors change significantly, the statements regarding future performance could also change materially. The safe harbor provision provides that the Corporation is not required to publicly update or revise forward-looking statements to reflect events or circumstances that arise after the date of this report. Readers should review any changes in risk factors in documents filed by the Corporation periodically with the Securities and Exchange Commission, including Item 1A of Part II of this Quarterly Report on Form 10-Q, Annual Reports on Form 10-K, and Current Reports on Form 8-K.
Results of Operations
Overview
The Corporation recorded net income of $2,126,000 and $4,947,000 for the three and six-month periods ended June 30, 2018, a 13.6% and 33.7% increase respectively, from the $1,872,000 and $3,699,000 earned during the same periods in 2017. The earnings per share, basic and diluted, were $0.74 and $1.73 for the three and six months ended June 30, 2018, compared to $0.66 and $1.30 for the same periods in 2017. The increase in the Corporation’s 2018 earnings was caused primarily by insurance proceeds from a bank owned life insurance (BOLI) policy. The Corporation purchased and is the beneficiary of all BOLI life insurance policies taken out on select officers. Due to the death of a participant during the first quarter of 2018, the Corporation recorded BOLI income of $913,000. This net death benefit caused an increase in the Corporation’s 2018 earnings. The Corporation also experienced growth in net interest income (NII) for the six-month period ended June 30, 2018, largely driven by the Federal Reserve rate increases which have positively impacted the yield on earning assets.
The Corporation’s NII increased by $573,000, or 7.7%, and $1,043,000, or 7.1%, for the three and six months ended June 30, 2018, compared to the same periods in 2017. The increase in NII primarily resulted from an increase in interest and fees on loans of $720,000, or 12.0%, and $1,286,000, or 10.9%, for the three and six-month periods ended June 30, 2018. The increase in NII was partially offset by an increase in interest expense. The Corporation’s interest expense on deposits and borrowings increased by $111,000, or 15.2%, and $183,000, or 12.8%, for the three and six-month periods ended June 30, 2018, compared to 2017.
The Corporation recorded $30,000 less provision expense in the second quarter of 2018 compared to the same quarter of 2017, with $90,000 of provision compared to $120,000 of provision for the second quarter of 2017. However, for the six-month period ended June 30, 2018, the Corporation recorded $70,000 additional provision expense, with $280,000 of provision expense compared to $210,000 in the same period of 2017. The losses from the sale of securities were $46,000 for the three months ended June 30, 2018, compared to gains of $19,000 for the six months ended June 30, 2018, compared to gains of $107,000 and $247,000 for the same periods in 2017. Market interest rates were lower in 2017, making it more conducive to achieving gains from the sale of debt and equity securities. The gain on the sale of mortgages decreased by $85,000, or 19.5%, and $205,000, or 25.9%, for the three and six-month periods ended June 30, 2018, compared to the prior year’s periods. Margins made on sold mortgages were lower in the first six months of 2018 compared to 2017 primarily causing the decrease in gain income. Total operating expenses increased $452,000, or 5.9%, and $818,000, or 5.4%, for the three and six months ended June 30, 2018, compared to the same periods in 2017.
The financial services industry uses two primary performance measurements to gauge performance: return on average assets (ROA) and return on average equity (ROE). ROA measures how efficiently a bank generates income based on the amount of assets or size of a company. ROE measures the efficiency of a company in generating income based on the amount of equity or capital utilized. The latter measurement typically receives more attention from shareholders. The ROA and ROE increased for the three and six months ended June 30, 2018, compared to the same periods in the prior year due primarily to higher earnings.
Key Ratios | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Return on Average Assets | 0.82% | 0.75% | 0.97% | 0.75% | ||||||||||||
Return on Average Equity | 8.80% | 7.69% | 10.25% | 7.75% |
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:
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· | 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 six months of 2018, NII generated 72.5% of the Corporation’s gross revenue stream, which consists of net interest income and non-interest income, compared to 75.0% in the first six months of 2017. 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 $432,000 and $898,000 for the three and six months ended June 30, 2018, compared to $604,000 and $1,211,000 for the same periods in 2017.
NET INTEREST INCOME | ||||||||||||||||
(DOLLARS IN THOUSANDS) | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
$ | $ | $ | $ | |||||||||||||
Total interest income | 8,897 | 8,214 | 17,421 | 16,195 | ||||||||||||
Total interest expense | 842 | 731 | 1,616 | 1,433 | ||||||||||||
Net interest income | 8,055 | 7,483 | 15,805 | 14,762 | ||||||||||||
Tax equivalent adjustment | 432 | 604 | 898 | 1,211 | ||||||||||||
Net interest income (fully taxable equivalent) | 8,487 | 8,087 | 16,703 | 15,973 |
NII is the difference between interest income earned on assets and interest expense incurred on liabilities. Accordingly, two factors affect net interest income:
· | The rates earned on interest earning assets and paid on interest bearing liabilities |
· | The average balance of interest earning assets and interest bearing liabilities |
The Federal funds rate, the Prime rate, the shape of the U.S. Treasury curve, and other wholesale funding curves, all affect NII. The Federal Reserve controls the Federal funds rate, which is one of a number of tools available to the Federal Reserve to conduct monetary policy. The Federal funds rate, and guidance on when the rate might be changed, is often the focal point of discussion regarding the direction of interest rates. Until December 16, 2015, the Federal funds rate had not changed since December 16, 2008, a period of seven years. On December 16, 2015, the Federal funds rate was increased 25 basis points to 0.50%, from 0.25%. On December 14, 2016, one year later, the Federal funds rate was increased 25 basis points to 0.75%. During 2017, the Federal funds rate was increased three times so that the rate was 1.50% as of December 31, 2017. In March and June of 2018, the Federal Reserve again increased the Federal funds rate by 25 basis points so that the rate was 2.00% as of June 30, 2018. Prior to December of 2015, the period of seven years with extremely low and unchanged overnight rates was the lowest and longest in U.S. history. The impact has been a lower net interest margin to the Corporation and generally across the financial industry. The Federal Reserve rate increases resulted in higher short-term U.S. Treasury rates, but the long-term rates initially decreased, resulting in a flattening of the yield curve. Long-term rates like the ten-year U.S. Treasury were 215 basis points under the 5.00% Prime rate as of June 30, 2018. It appears that the general conditions of a flatter yield curve with low long-term U.S. Treasury rates, significantly below the Prime rate, will continue for the remainder of 2018. Management anticipates the next 0.25% Federal Reserve rate increase could occur in the third quarter of 2018. It remains to be seen whether mid and long-term U.S. Treasury rates will also increase to the same degree that the Federal Reserve will move the overnight Federal funds rate. If they do not, the yield curve would further flatten making it more difficult for the Corporation to increase asset yield.
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The Prime rate is generally used by commercial banks to extend variable rate loans to business and commercial customers. For many years, the Prime rate has been set at 300 basis points, or 3.00% higher, than the Federal funds rate and typically moves when the Federal funds rate changes. As such, the Prime rate increased from 3.25% prior to December 2015, to 5.00% as of June 30, 2018, following the seven Federal Reserve rate moves that began in December 2015. The Corporation’s Prime-based loans, including home equity lines of credit and some variable rate commercial loans reprice a day after the Federal Reserve rate movement.
As a result of the Federal Reserve rate increases, the Corporation’s NII on a tax equivalent basis began to increase in 2017, with the Corporation’s quarterly margin increasing to 3.47% for the fourth quarter of 2017. The