UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended March 31, 2021

OR

 

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

 

For the transition period from________________________________ to ________________________________

 

ENB Financial Corp

(Exact name of registrant as specified in its charter)

 

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

 

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

 

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

 

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

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒          No ☐

 

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

Yes ☒          No ☐

 

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

	Large accelerated filer	☐	Accelerated filer	☐
	Non-accelerated filer	☒	Smaller reporting company	☒
			Emerging growth company	☐

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

 

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

Yes ☐          No ☒

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of May 1, 2021, the registrant had 5,566,566 shares of $0.10 (par) Common Stock outstanding.

 

ENB FINANCIAL CORP

INDEX TO FORM 10-Q

March 31, 2021

 

 

Part I – FINANCIAL INFORMATION
	Item 1.	Financial Statements
	Consolidated Balance Sheets at March 31, 2021 and 2020, and December 31, 2020 (Unaudited)
			3
	Consolidated Statements of Income for the Three Months Ended March 31, 2021 and 2020 (Unaudited)
			4
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2021 and 2020 (Unaudited)
			5
	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2021 and 2020 (Unaudited)		6
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020 (Unaudited)		7
	Notes to the Unaudited Consolidated Interim Financial Statements		8-32
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33-63
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	64-69
	Item 4.	Controls and Procedures	70
Part II – OTHER INFORMATION			71
	Item 1.	Legal Proceedings	71
	Item 1A.	Risk Factors	71
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71
	Item 3.	Defaults upon Senior Securities	71
	Item 4.	Mine Safety Disclosures	71
	Item 5.	Other Information	71
	Item 6.	Exhibits	72
SIGNATURE PAGE			73

 

ENB FINANCIAL CORP

 

Part I - Financial Information

Item 1. Financial Statements

 

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

 

		March 31,				December 31,				March 31,
		2021				2020				2020
		$				$				$
ASSETS
Cash and due from banks			19,366				21,665				14,346
Interest-bearing deposits in other banks			69,248				73,274				9,066
Total cash and cash equivalents			88,614				94,939				23,412
Securities available for sale (at fair value)			531,600				476,428				320,568
Equity securities (at fair value)			7,217				7,105				6,640
Loans held for sale			2,018				3,029				2,419
Loans (net of unearned income)			841,934				823,370				764,120
Less: Allowance for credit losses			12,690				12,327				9,803
Net loans			829,244				811,043				754,317
Premises and equipment			24,742				24,760				25,044
Regulatory stock			6,160				6,107				7,222
Bank owned life insurance			29,833				29,646				29,012
Other assets			12,461				9,256				9,362
Total assets			1,531,889				1,462,313				1,177,996
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing			580,003				534,853				363,766
Interest-bearing			745,384				717,958				619,086
Total deposits			1,325,387				1,252,811				982,852
Short-term borrowings			—				—				3,500
Long-term debt			52,792				54,790				71,531
Subordinated debt			19,620				19,601				—
Other liabilities			5,269				4,895				3,607
Total liabilities			1,403,068				1,332,097				1,061,490
Stockholders' equity:
Common stock, par value $0.10
Shares:  Authorized 24,000,000
Issued 5,739,114 and Outstanding  5,566,566 as of  3/31/21,
5,566,230 as of 12/31/20, and 5,598,501 as of 3/31/20			574				574				574
Capital surplus			4,460				4,444				4,476
Retained earnings			124,285				120,670				113,207
Accumulated other comprehensive income net of tax			2,924				7,958				1,103
Less: Treasury stock cost on 172,548 shares as of 3/31/21, 172,884 as of 12/31/20,
and 140,613 as of 3/31/20			(3,422	)			(3,430	)			(2,854	)
Total stockholders' equity			128,821				130,216				116,506
Total liabilities and stockholders' equity			1,531,889				1,462,313				1,177,996

 

See Notes to the Unaudited Consolidated Interim Financial Statements

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

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

 

		Three Months ended March 31,
		2021				2020
		$				$
Interest and dividend income:
Interest and fees on loans			8,385				8,452
Interest on securities available for sale
Taxable			1,079				1,221
Tax-exempt			952				566
Interest on deposits at other banks			22				60
Dividend income			92				188
Total interest and dividend income			10,530				10,487
Interest expense:
Interest on deposits			314				809
Interest on borrowings			537				462
Total interest expense			851				1,271
Net interest income			9,679				9,216
Provision for loan losses			375				350
Net interest income after provision for loan losses			9,304				8,866
Other income:
Trust and investment services income			670				622
Service fees			614				679
Commissions			864				686
Gains on the sale of debt securities, net			87				282
Gains (losses) on equity securities, net			248				(230	)
Gains on sale of mortgages			1,930				541
Earnings on bank-owned life insurance			216				206
Other income (loss)			689				(19	)
Total other income			5,318				2,767
Operating expenses:
Salaries and employee benefits			5,699				5,696
Occupancy			683				591
Equipment			267				290
Advertising & marketing			190				274
Computer software & data processing			1,098				706
Shares tax			280				239
Professional services			439				623
Other expense			531				691
Total operating expenses			9,187				9,110
Income before income taxes			5,435				2,523
Provision for federal income taxes			931				358
Net income			4,504				2,165
Earnings per share of common stock			0.81				0.38
Weighted average shares outstanding			5,561,603				5,627,257

 

See Notes to the Unaudited Consolidated Interim Financial Statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)

(DOLLARS IN THOUSANDS)

 

		Three Months ended March 31,
		2021				2020
		$				$
Net income			4,504				2,165
Other comprehensive loss, net of tax:
Securities available for sale not other-than-temporarily impaired:
Unrealized losses arising during the period			(6,282	)			(349	)
Income tax effect			1,317				75
			(4,965	)			(274	)
Gains recognized in earnings			(87	)			(282	)
Income tax effect			18				59
			(69	)			(223	)
Other comprehensive loss, net of tax			(5,034	)			(497	)
Comprehensive (loss) income			(530	)			1,668

 

See Notes to the Unaudited Consolidated Interim Financial Statements  

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

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

 

														Accumulated
														Other								Total
		Common				Capital				Retained				Comprehensive				Treasury				Stockholders'
		Stock				Surplus				Earnings				Income (Loss)				Stock				Equity
		$				$				$				$				$				$
Balances, December 31, 2019			574				4,482				111,944				1,600				(1,912	)			116,688
Net income			—				—				2,165				—				—				2,165
Other comprehensive loss net of tax			—				—				—				(497	)			—				(497	)
Treasury stock purchased - 49,911 shares			—				—				—				—				(1,098	)			(1,098	)
Treasury stock issued - 7,670 shares			—				(6	)			—				—				156				150
Cash dividends paid, $0.16 per share			—				—				(902	)			—				—				(902	)
Balances, March 31, 2020			574				4,476				113,207				1,103				(2,854	)			116,506
Balances, December 31, 2020			574				4,444				120,670				7,958				(3,430	)			130,216
Net income			—				—				4,504				—				—				4,504
Other comprehensive loss net of tax			—				—				—				(5,034	)			—				(5,034	)
Treasury stock purchased - 7,600 shares			—				—				—				—				(149	)			(149	)
Treasury stock issued - 7,936 shares			—				16				—				—				157				173
Cash dividends paid, $0.16 per share			—				—				(889	)			—				—				(889	)
Balances, March 31, 2021			574				4,460				124,285				2,924				(3,422	)			128,821

 

See Notes to the Unaudited Consolidated Interim Financial Statements  

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)		Three Months Ended March 31,
		2021				2020
		$				$
Cash flows from operating activities:
Net income			4,504				2,165
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of securities premiums and discounts and loan fees			771				845
Amortization of operating leases right-of-use assets			45				44
Increase in interest receivable			(565	)			(24	)
Increase (decrease) in interest payable			176				(36	)
Provision for loan losses			375				350
Gains on sale of debt securities, net			(87	)			(282	)
(Gain) loss on equity securities, net			(248	)			230
Gains on sale of mortgages			(1,930	)			(541	)
Loans originated for sale			(29,884	)			(14,037	)
Proceeds from sales of loans			32,825				14,501
Earnings on bank-owned life insurance			(216	)			(206	)
Depreciation of premises and equipment and amortization of software			376				384
Deferred income tax			(30	)			(143	)
Amortization of deferred fees on subordinated debt			19				—
Other assets and other liabilities, net			(999	)			(145	)
Net cash provided by operating activities			5,132				3,105
Cash flows from investing activities:
Securities available for sale:
Proceeds from maturities, calls, and repayments			20,943				24,372
Proceeds from sales			50,341				27,409
Purchases			(133,849	)			(65,490	)
Equity securities:
Proceeds from sales			428				—
Purchases			(292	)			—
Purchase of regulatory bank stock			(400	)			(570	)
Redemptions of regulatory bank stock			347				639
Net increase in loans			(18,238	)			(10,614	)
Purchases of premises and equipment, net			(311	)			(364	)
Purchase of computer software			(139	)			(1	)
Net cash used for investing activities			(81,170	)			(24,619	)
Cash flows from financing activities:
Net increase in demand, NOW, and savings accounts			72,511				11,968
Net increase (decrease) in time deposits			65				(3,204	)
Net increase in short-term borrowings			—				3,300
Proceeds from long-term debt			—				10,000
Repayments of long-term debt			(1,998	)			(16,341	)
Dividends paid			(889	)			(902	)
Proceeds from sale of treasury stock			173				150
Treasury stock purchased			(149	)			(1,098	)
Net cash provided by financing activities			69,713				3,873
Decrease in cash and cash equivalents			(6,325	)			(17,641	)
Cash and cash equivalents at beginning of period			94,939				41,053
Cash and cash equivalents at end of period			88,614				23,412
Supplemental disclosures of cash flow information:
Interest paid			675				1,307
Income taxes paid			—				—
Supplemental disclosure of non-cash investing and financing activities:
Fair value adjustments for securities available for sale			(6,369	)			(629	)

 

See Notes to the Unaudited Consolidated Interim Financial Statements

1.       Summary of Significant Accounting Policies

 

Basis of Presentation

 

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

 

ENB Financial Corp (“the Corporation”) is the bank holding company for its wholly-owned subsidiary Ephrata National Bank (the “Bank”). This Form 10-Q, for the first quarter of 2021, is reporting on the results of operations and financial condition of ENB Financial Corp.

 

Operating results for the three months ended March 31, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. 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, 2020.

 

Revenue from Contracts with Customers

 

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

 

The Corporation’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. The Corporation has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. The Corporation generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

2.       Securities Available for Sale

 

The amortized cost, gross unrealized gains and losses, and fair value of securities held at March 31, 2021,

and December 31, 2020, are as follows:        

 

						Gross				Gross
(DOLLARS IN THOUSANDS)		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
		$				$				$				$
March 31, 2021
U.S. government agencies			29,623				119				(562	)			29,180
U.S. agency mortgage-backed securities			67,875				1,194				(486	)			68,583
U.S. agency collateralized mortgage obligations			40,214				651				(79	)			40,786
Asset-backed securities			96,592				707				(299	)			97,000
Corporate bonds			66,376				841				(73	)			67,144
Obligations of states and political subdivisions			227,217				4,237				(2,547	)			228,907
Total securities available for sale			527,897				7,749				(4,046	)			531,600
December 31, 2020
U.S. government agencies			54,224				144				(7	)			54,361
U.S. agency mortgage-backed securities			69,777				1,441				(166	)			71,052
U.S. agency collateralized mortgage obligations			34,449				640				(54	)			35,035
Asset-backed securities			60,387				433				(345	)			60,475
Corporate bonds			60,387				1,348				(12	)			61,723
Obligations of states and political subdivisions			187,132				6,727				(77	)			193,782
Total securities available for sale			466,356				10,733				(661	)			476,428

 

The amortized cost and fair value of securities available for sale at March 31, 2021, 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			39,983				40,532
Due after one year through five years			108,819				111,055
Due after five years through ten years			100,881				100,704
Due after ten years			278,214				279,309
Total debt securities			527,897				531,600

 

Securities available for sale with a par value of $86,896,000 and $86,849,000 at March 31, 2021, and December 31, 2020, respectively, were pledged or restricted for public funds, borrowings, or other purposes as required by law. The fair value of these pledged securities was $90,400,000 at March 31, 2021, and $91,666,000 at December 31, 2020.

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

 

PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE

(DOLLARS IN THOUSANDS)

 

		Three Months Ended March 31,
		2021				2020
		$				$
Proceeds from sales			50,341				27,409
Gross realized gains			141				297
Gross realized losses			(54	)			(15	)

 

Management evaluates all of the Corporation’s securities for other-than-temporary impairment (OTTI) on a periodic basis. No securities in the portfolio had other-than-temporary impairment recorded in the first three months of 2021 or 2020.

 

Information pertaining to securities with gross unrealized losses at March 31, 2021, and December 31, 2020, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

 

TEMPORARY IMPAIRMENTS OF SECURITIES

(DOLLARS IN THOUSANDS)  

		Less than 12 months								More than 12 months								Total
						Gross								Gross								Gross
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		$				$				$				$				$				$
As of March 31, 2021
U.S. government agencies			23,848				(562	)			—				—				23,848				(562	)
U.S. agency mortgage-backed securities			26,442				(479	)			588				(7	)			27,030				(486	)
U.S. agency collateralized mortgage obligations			8,038				(63	)			2,969				(16	)			11,007				(79	)
Asset-backed securities			36,047				(179	)			10,669				(120	)			46,716				(299	)
Corporate bonds			14,137				(73	)			—				—				14,137				(73	)
Obligations of states & political subdivisions			105,959				(2,547	)			—				—				105,959				(2,547	)
Total temporarily impaired securities			214,471				(3,903	)			14,226				(143	)			228,697				(4,046	)
As of December 31, 2020
U.S. government agencies			42,988				(7	)			—				—				42,988				(7	)
U.S. agency mortgage-backed securities			15,995				(157	)			2,221				(9	)			18,216				(166	)
U.S. agency collateralized mortgage obligations			12,933				(54	)			—				—				12,933				(54	)
Asset-backed securities			8,465				(20	)			18,080				(325	)			26,545				(345	)
Corporate bonds			—				—				3,016				(12	)			3,016				(12	)
Obligations of states & political subdivisions			15,666				(77	)			—				—				15,666				(77	)
Total temporarily impaired securities			96,047				(315	)			23,317				(346	)			119,364				(661	)

 

In the debt security portfolio there were 110 positions that were carrying unrealized losses as of March 31, 2021. There were no instruments considered to be other-than-temporarily impaired at March 31, 2021.

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 March 31, 2021 and December 31, 2020.

 

						Gross				Gross
(DOLLARS IN THOUSANDS)		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
		$				$				$				$
March 31, 2021
CRA-qualified mutual funds			6,190				—				—				6,190
Bank stocks			927				108				(8	)			1,027
Total equity securities			7,117				108				(8	)			7,217

 

						Gross				Gross
(DOLLARS IN THOUSANDS)		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
		$				$				$				$
December 31, 2020
CRA-qualified mutual funds			6,176				—				—				6,176
Bank stocks			982				53				(106	)			929
Total equity securities			7,158				53				(106	)			7,105

 

The following table presents the net gains and losses on the Corporation’s equity investments recognized in earnings during the three months ended March 31, 2021 and 2020, and the portion of unrealized gains and losses for the period that relates to equity investments held as of March 31, 2021 and 2020.

 

NET GAINS AND LOSSES ON EQUITY INVESTMENTS RECOGNIZED IN EARNINGS

(DOLLARS IN THOUSANDS)  

 

		Three Months Ended
		March 31,
		2021				2020
		$				$
Net gains (losses) recognized in equity securities during the period			248				(230	)
Less:  Net gains realized on the sale of equity securities during the period			95				—
Unrealized gains (losses) recognized in equity securities held at reporting date			153				(230	)

4.        Loans and Allowance for Credit Losses

 

The following table presents the Corporation’s loan portfolio by category of loans as of March 31, 2021, and December 31, 2020:

 

LOAN PORTFOLIO

(DOLLARS IN THOUSANDS)  

 

		March 31,				December 31,
		2021				2020
		$				$
Commercial real estate
Commercial mortgages			144,939				142,698
Agriculture mortgages			178,070				176,005
Construction			21,317				23,441
Total commercial real estate			344,326				342,144
Consumer real estate (a)
1-4 family residential mortgages			265,127				263,569
Home equity loans			10,614				10,708
Home equity lines of credit			70,898				71,290
Total consumer real estate			346,639				345,567
Commercial and industrial
Commercial and industrial			111,036				97,896
Tax-free loans			16,233				10,949
Agriculture loans			18,466				20,365
Total commercial and industrial			145,735				129,210
Consumer			4,827				5,155
Gross loans prior to deferred fees			841,527				822,076
Deferred loan costs, net			407				1,294
Allowance for credit losses			(12,690	)			(12,327	)
Total net loans			829,244				811,043

 

(a)	Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets, totaled $253,527,000 and $235,437,000 as of March 31, 2021, and December 31, 2020, respectively.

 

The largest movement within the Corporation’s loan portfolio since December 31, 2020 was the growth in the commercial and industrial loan sector, which experienced a $13.1 million, or 13.4% increase. This was a direct result of the Small Business Administration’s Paycheck Protection Program (PPP) established as part of the CARES Act passed in March 2020, to provide relief to small businesses from the impact of COVID-19. The Corporation began making these loans in early April 2020, but many of the original PPP loans had been forgiven as of December 31, 2020. Beginning in early 2021, another round of PPP funding was approved and the Corporation had again begun making loans under this program. The majority of these new loans have been written with a five-year term, however management expects the vast majority of these loans to be forgiven by the SBA, or paid off by the borrower, prior to maturity of the loan. As a result, management expects the commercial and industrial loan balances to decline by December 31, 2021 with further declines during 2022.

 

The Corporation grades commercial credits differently than consumer credits. The following tables represent all of the Corporation’s commercial credit exposures by internally assigned grades as of March 31, 2021 and December 31, 2020. The grading analysis estimates the capability of the borrower to repay the contractual obligations under the loan agreements as scheduled. The Corporation's internal commercial credit risk grading system is based on experiences with similarly graded loans.

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

COMMERCIAL CREDIT EXPOSURE

CREDIT RISK PROFILE BY INTERNALLY ASSIGNED GRADE

(DOLLARS IN THOUSANDS)

 

March 31, 2021		Commercial Mortgages				Agriculture Mortgages				Construction				Commercial and Industrial				Tax-free Loans				Agriculture Loans				Total
		$				$				$				$				$				$				$
Grade:
Pass			134,318				169,690				15,787				100,413				16,233				17,359				453,800
Special Mention			5,437				—				5,530				6,540				—				85				17,592
Substandard			5,184				8,380				—				4,083				—				1,022				18,669
Doubtful			—				—				—				—				—				—				—
Loss			—				—				—				—				—				—				—
Total			144,939				178,070				21,317				111,036				16,233				18,466				490,061

 

December 31, 2020		Commercial Mortgages				Agriculture Mortgages				Construction				Commercial and Industrial				Tax-free Loans				Agriculture Loans				Total
		$				$				$				$				$				$				$
Grade:
Pass			133,853				166,102				21,142				87,767				10,949				18,586				438,399
Special Mention			3,683				1,651				2,299				5,592				—				774				13,999
Substandard			5,162				8,252				—				4,537				—				1,005				18,956
Doubtful			—				—				—				—				—				—				—
Loss			—				—				—				—				—				—				—
Total			142,698				176,005				23,441				97,896				10,949				20,365				471,354

 

Substandard loans decreased by $287,000, or 1.5%, while special mention loans have increased by $3,593,000, or 25.7%, from December 31, 2020 to March 31, 2021. Substandard loans decreased from $19.0 million to $18.7 million from December 31, 2020, to March 31, 2021 while special mention loans increased from $14.0 million to $17.6 million during this same period. The loan areas that experienced material changes in special mention were commercial mortgages and construction loans. Under commercial mortgages, one $1.5 million loan was transferred to special mention due to COVID-19 negatively impacting business operations. This was the primary reason for the increase in special mention loans as well as other smaller loan relationships that were downgraded during the first quarter of 2021.

For consumer loans, the Corporation evaluates credit quality based on whether the loan is considered performing or non-performing. Non-performing loans consist of those loans greater than 90 days delinquent and nonaccrual loans. The following tables present the balances of consumer loans by classes of the loan portfolio based on payment performance as of March 31, 2021 and December 31, 2020:

 

CONSUMER CREDIT EXPOSURE

CREDIT RISK PROFILE BY PAYMENT PERFORMANCE

(DOLLARS IN THOUSANDS)  

 

March 31, 2021		1-4 Family Residential Mortgages				Home Equity Loans				Home Equity Lines of Credit				Consumer				Total
Payment performance:		$				$				$				$				$
Performing			264,943				10,614				70,898				4,814				351,269
Non-performing			184				—				—				13				197
Total			265,127				10,614				70,898				4,827				351,466

 

December 31, 2020		1-4 Family Residential Mortgages				Home Equity Loans				Home Equity Lines of Credit				Consumer				Total
Payment performance:		$				$				$				$				$
Performing			262,185				10,708				71,267				5,141				349,301
Non-performing			1,384				—				23				14				1,421
Total			263,569				10,708				71,290				5,155				350,722

 

The following tables present an age analysis of the Corporation’s past due loans, segregated by loan portfolio class, as of March 31, 2021 and December 31, 2020:

 

AGING OF LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)

 

																										Loans
										Greater																Receivable >
		30-59 Days				60-89 Days				than 90				Total Past								Total Loans				90 Days and
March 31, 2021		Past Due				Past Due				Days				Due				Current				Receivable				Accruing
		$				$				$				$				$				$				$
Commercial real estate
Commercial mortgages			—				—				192				192				144,747				144,939				—
Agriculture mortgages			245				—				—				245				177,825				178,070				—
Construction			—				—				—				—				21,317				21,317				—
Consumer real estate
1-4 family residential mortgages			1,351				174				184				1,709				263,418				265,127				139
Home equity loans			—				—				—				—				10,614				10,614				—
Home equity lines of credit			—				—				—				—				70,898				70,898				—
Commercial and industrial
Commercial and industrial			14				—				444				458				110,578				111,036				—
Tax-free loans			—				—				—				—				16,233				16,233				—
Agriculture loans			6				—				—				6				18,460				18,466				—
Consumer			8				1				13				22				4,805				4,827				13
Total			1,624				175				833				2,632				838,895				841,527				152

 

AGING OF LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)

																										Loans
										Greater																Receivable >
		30-59 Days				60-89 Days				than 90				Total Past								Total Loans				90 Days and
December 31, 2020		Past Due				Past Due				Days				Due				Current				Receivable				Accruing
		$				$				$				$				$				$				$
Commercial real estate
Commercial mortgages			—				—				208				208				142,490				142,698				—
Agriculture mortgages			—				—				—				—				176,005				176,005				—
Construction			—				—				—				—				23,441				23,441				—
Consumer real estate
1-4 family residential mortgages			618				—				1,384				2,002				261,567				263,569				1,336
Home equity loans			1				—				—				1				10,707				10,708				—
Home equity lines of credit			—				—				23				23				71,267				71,290				23
Commercial and industrial
Commercial and industrial			—				—				469				469				97,427				97,896				—
Tax-free loans			—				—				—				—				10,949				10,949				—
Agriculture loans			42				—				—				42				20,323				20,365				—
Consumer			23				3				14				40				5,115				5,155				14
Total			684				3				2,098				2,785				819,291				822,076				1,373

The following table presents nonaccrual loans by classes of the loan portfolio as of March 31, 2021 and December 31, 2020:

 

NONACCRUAL LOANS BY LOAN CLASS

(DOLLARS IN THOUSANDS)  

 

		March 31,				December 31,
		2021				2020
		$				$
Commercial real estate
Commercial mortgages			192				208
Agriculture mortgages			—				—
Construction			—				—
Consumer real estate
1-4 family residential mortgages			45				48
Home equity loans			—				—
Home equity lines of credit			—				—
Commercial and industrial
Commercial and industrial			444				469
Tax-free loans			—				—
Agriculture loans			—				—
Consumer			—				—
Total			681				725

 

As of March 31, 2021 and December 31, 2020, all of the Corporation’s commercial loans on nonaccrual status were also considered impaired. Information with respect to impaired loans for the three months ended March 31, 2021 and March 31, 2020, is as follows:

 

IMPAIRED LOANS

(DOLLARS IN THOUSANDS)

		Three Months Ended March 31,
		2021				2020
		$				$
Average recorded balance of impaired loans			5,739				3,937
Interest income recognized on impaired loans			66				35

 

 

No loan modifications were made during the first quarter of 2021 that would be considered a troubled debt restructuring (TDR). There was one loan modification made during the third quarter of 2020 that would be considered a TDR. One $3.6 million loan was restructured to provide relief to the commercial borrower by reducing the interest rate, providing a six-month interest only period, and extending the amortization period by an additional nine years. In addition to this TDR, deferments of principal related to the impact of COVID-19 did occur beginning in late March 2020, however these modifications are not considered a TDR under the revised COVID-19 regulatory guidance. There was one loan modification that occurred during the first quarter of 2019, constituting a TDR. A modification of the payment terms to a loan customer are considered a TDR if a concession was made to a borrower that is experiencing financial difficulty. A concession is generally defined as more favorable payment or credit terms granted to a borrower in an effort to improve the likelihood of the lender collecting principal in its entirety. Concessions usually are in the form of interest only for a period of time, or a lower interest rate offered in an effort to enable the borrower to continue to make normally scheduled payments. Included in the impaired loan portfolio are three loans to unrelated borrowers that are being reported as TDRs. The balance of these three TDR loans was $5,018,000 as of March 31, 2021. None of these TDR loans are non-accrual.

The following tables summarize information regarding impaired loans by loan portfolio class as of March 31, 2021 and December 31, 2020, and for the three months ended March 31, 2021, and the twelve months ended December 31, 2020:

 

IMPAIRED LOAN ANALYSIS
(DOLLARS IN THOUSANDS)
March 31, 2021		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		$				$				$				$				$
With no related allowance recorded:
Commercial real estate
Commercial mortgages			238				274				—				253				8
Agriculture mortgages			796				796				—				802				10
Construction			—				—				—				—				—
Total commercial real estate			1,034				1,070				—				1,055				18
Commercial and industrial
Commercial and industrial			444				484				—				455				6
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			444				484				—				455				6
Total with no related allowance			1,478				1,554				—				1,510				24
With an allowance recorded:
Commercial real estate
Commercial mortgages			3,570				3,570				1,099				3,578				42
Agriculture mortgages			651				651				14				651				—
Construction			—				—				—				—				—
Total commercial real estate			4,221				4,221				1,113				4,229				42
Commercial and industrial
Commercial and industrial			—				—				—				—				—
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			—				—				—				—				—
Total with a related allowance			4,221				4,221				1,113				4,229				42
Total by loan class:
Commercial real estate
Commercial mortgages			3,808				3,844				1,099				3,831				50
Agriculture mortgages			1,447				1,447				14				1,453				10
Construction			—				—				—				—				—
Total commercial real estate			5,255				5,291				1,113				5,284				60
Commercial and industrial
Commercial and industrial			444				484				—				455				6
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			444				484				—				455				6
Total			5,699				5,775				1,113				5,739				66

 

IMPAIRED LOAN ANALYSIS
(DOLLARS IN THOUSANDS)
December 31, 2020		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		$				$				$				$				$
With no related allowance recorded:
Commercial real estate
Commercial mortgages			256				318				—				798				—
Agriculture mortgages			806				835				—				1,170				46
Construction			—				—				—				—				—
Total commercial real estate			1,062				1,153				—				1,968				46
Commercial and industrial
Commercial and industrial			469				504				—				513				23
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			469				504				—				513				23
Total with no related allowance			1,531				1,657				—				2,481				69
With an allowance recorded:
Commercial real estate
Commercial mortgages			3,581				3,581				1,110				1,468				57
Agriculture mortgages			651				651				21				679				34
Construction			—				—				—				—				—
Total commercial real estate			4,232				4,232				1,131				2,147				91
Commercial and industrial
Commercial and industrial			—				—				—				—				—
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			—				—				—				—				—
Total with a related allowance			4,232				4,232				1,131				2,147				91
Total by loan class:
Commercial real estate
Commercial mortgages			3,837				3,899				1,110				2,266				57
Agriculture mortgages			1,457				1,486				21				1,849				80
Construction			—				—				—				—				—
Total commercial real estate			5,294				5,385				1,131				4,115				137
Commercial and industrial
Commercial and industrial			469				504				—				513				23
Tax-free loans			—				—				—				—				—
Agriculture loans			—				—				—				—				—
Total commercial and industrial			469				504				—				513				23
Total			5,763				5,889				1,131				4,628				160

The following table details activity in the allowance for credit losses by portfolio segment for the three months ended March 31, 2021:

 

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, 2020			6,329				3,449				1,972				52				525				12,327
Charge-offs			—				—				—				(14	)			—				(14	)
Recoveries			—				—				1				1				—				2
Provision			173				(41	)			(15	)			20				238				375
Balance - March 31, 2021			6,502				3,408				1,958				59				763				12,690

 

During the three months ended March 31, 2021, management charged off $14,000 in loans while recovering $2,000 and added $375,000 to the provision. The unallocated portion of the allowance increased from 4.3% of total reserves as of December 31, 2020, to 6.0% as of March 31, 2021. Management monitors the unallocated portion of the allowance with a desire to maintain it at approximately 5% over the long term, with a requirement of it not to exceed 10%.

 

During the three months ended March 31, 2021, net provision expense was recorded for the commercial real estate sector as well as the consumer sector with credit provisions recorded for the consumer real estate and commercial and industrial sectors. The higher provision in the commercial real estate sector was due to growth in this portfolio of loans since December 31, 2020, as well as an increase in the qualitative factor related to the trends in the nature and volume of this sector. There were minimal charge-offs and recoveries recorded during the three months ended March 31, 2021, so the provision expense was primarily related to an increase in loan balances as well as slightly higher unallocated portion of the allowance.

 

As of March 31, 2021, the Corporation’s total delinquencies were 0.31%, a decline from 0.34% at December 31, 2020. The Corporation’s total delinquencies continue to compare favorably to the national uniform bank performance group, which was at 1.31% as of December 31, 2020.

 

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

 

The following table details activity in the allowance for credit losses by portfolio segment for the three months ended March 31, 2020:

 

ALLOWANCE FOR CREDIT LOSSES

(DOLLARS IN THOUSANDS)

		Commercial Real Estate				Consumer Real Estate				Commercial and Industrial				Consumer				Unallocated				Total
		$				$				$				$				$				$
Allowance for credit losses:
Beginning balance - December 31, 2019			4,319				2,855				1,784				41				448				9,447
Charge-offs			—				—				—				(6	)			—				(6	)
Recoveries			11				—				1				—				—				12
Provision			252				296				171				21				(390	)			350
Balance - March 31, 2020			4,582				3,151				1,956				56				58				9,803

 

During the three months ended March 31, 2020, management charged off $6,000 in loans while recovering $12,000 and added $350,000 to the provision. The unallocated portion of the allowance decreased from 4.7% of total reserves as of December 31, 2019, to 0.6% as of March 31, 2020.

 

During the three months ended March 31, 2020, net provision expense was recorded for all sectors. The higher provision was primarily caused by increasing the qualitative factors across all industry lines to various degrees as a result of the impact from COVID-19. A qualitative factor was increased for business loans specifically related to the special federal governmental lending programs developed as a result of COVID-19. There were minimal charge-offs and recoveries recorded during the three months ended March 31, 2020, so the provision expense was primarily related to this change in economic conditions and potential for credit declines moving forward. The total amount of substandard loans at the end of the first quarter of 2020 was slightly higher resulting in slightly more provision expense.

 

As of March 31, 2020, the Corporation’s total delinquencies were 0.67%, a decline from 0.91% at December 31, 2019.

The Corporation reduced one qualitative factor for residential mortgages in the first quarter of 2020; this factor had been increased in the fourth quarter of 2019 because of higher delinquency. However, mortgage loan delinquency declined in the first quarter of 2020.  Delinquency among agriculture loans, excluding loans to dairy farmers, has continued to increase, and ended at 2.32% at March 31, 2020. A total of six agriculture loans were delinquent at this time.

 

The following tables present the balance in the allowance for credit losses and the recorded investment in loans receivable by portfolio segment based on impairment method as of March 31, 2021 and December 31, 2020:

 

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)

 

As of March 31, 2021:		Commercial Real Estate				Consumer Real Estate				Commercial and Industrial				Consumer				Unallocated				Total
		$				$				$				$				$				$
Allowance for credit losses:
Ending balance: individually evaluated
for impairment			1,113				—				—				—				—				1,113
Ending balance: collectively evaluated
for impairment			5,389				3,408				1,958				59				763				11,577
Loans receivable:
Ending balance			344,326				346,639				145,735				4,827								841,527
Ending balance: individually evaluated
for impairment			5,255				—				444				—								5,699
Ending balance: collectively evaluated
for impairment			339,071				346,639				145,291				4,827								835,828

 

 

As of December 31, 2020:		Commercial Real Estate				Consumer Real Estate				Commercial and Industrial				Consumer				Unallocated				Total
		$				$				$				$				$				$
Allowance for credit losses:
Ending balance: individually evaluated
for impairment			1,131				—				—				—				—				1,131
Ending balance: collectively evaluated
for impairment			5,198				3,449				1,972				52				525				11,196
Loans receivable:
Ending balance			342,144				345,567				129,210				5,155								822,076
Ending balance: individually evaluated
for impairment			5,294				—				469				—								5,763
Ending balance: collectively evaluated
for impairment			336,850				345,567				128,741				5,155								816,313

 

5. Fair Value Presentation

 

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

 

Level I:

Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

 

Level II:

Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.

 

Level III:

Assets and liabilities that have little to no observable pricing as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

 

The following tables provide the fair market value for assets required to be measured and reported at fair value on a recurring basis on the Consolidated Balance Sheets as of March 31, 2021, and December 31, 2020, by level within the fair value hierarchy. As required by U.S. generally accepted accounting principles, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

ASSETS MEASURED ON A RECURRING BASIS

(DOLLARS IN THOUSANDS)  

		March 31, 2021
		Level I				Level II				Level III				Total
		$				$				$				$
U.S. government agencies			—				29,180				—				29,180
U.S. agency mortgage-backed securities			—				68,583				—				68,583
U.S. agency collateralized mortgage obligations			—				40,786				—				40,786
Asset-backed securities			—				97,000				—				97,000
Corporate bonds			—				67,144				—				67,144
Obligations of states & political subdivisions			—				228,907				—				228,907
Equity securities			7,217				—				—				7,217
Total securities			7,217				531,600				—				538,817

 

 

On March 31, 2021, the Corporation held no securities valued using level III inputs. All of the Corporation’s debt instruments were valued using level II inputs, where quoted prices are available and observable, but not necessarily quotes on identical securities traded in active markets on a daily basis. The Corporation’s CRA fund investments and bank stocks are fair valued utilizing level I inputs because the funds have their own quoted prices in an active market. As of March 31, 2021, the CRA fund investments had a $6,190,000 book and fair market value and the bank stock portfolio had a book value of $927,000, and fair market value of $1,027,000.

 

Financial instruments are considered level III when their values are determined using pricing models, discounted cash flow methodologies, or similar techniques, and at least one significant model assumption or input is unobservable. In addition to these unobservable inputs, the valuation models for level III financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly. Level III financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.

 

ASSETS MEASURED ON A RECURRING BASIS

(DOLLARS IN THOUSANDS)  

 

		December 31, 2020
		Level I				Level II				Level III				Total
		$				$				$				$
U.S. government agencies			—				54,361				—				54,361
U.S. agency mortgage-backed securities			—				71,052				—				71,052
U.S. agency collateralized mortgage obligations			—				35,035				—				35,035
Asset-backed securities			—				60,475				—				60,475
Corporate bonds			—				61,723				—				61,723
Obligations of states & political subdivisions			—				193,782				—				193,782
Equity securities			7,105				—				—				7,105
Total securities			7,105				476,428				—				483,533

 

On December 31, 2020, the Corporation held no securities valued using level III inputs. All of the Corporation’s debt instruments were valued using level II inputs, where quoted prices are available and observable but not necessarily quotes on identical securities traded in active markets on a daily basis. The Corporation’s CRA fund investments and bank stocks are fair valued utilizing level I inputs because the funds have their own quoted prices in an active market. As of December 31, 2020, the CRA fund investments had a $6,176,000 book and market value and the bank stocks had a book value of $982,000 and a market value of $929,000.

 

The following tables provide the fair value for each class of assets required to be measured and reported at fair value on a nonrecurring basis on the Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020, by level within the fair value hierarchy:

 

ASSETS MEASURED ON A NONRECURRING BASIS

(Dollars in Thousands)

 

		March 31, 2021
		Level I				Level II				Level III				Total
		$				$				$				$
Assets:
Impaired Loans		$	—			$	—			$	4,586			$	4,586
Total		$	—			$	—			$	4,586			$	4,586

 

 

		December 31, 2020
		Level I				Level II				Level III				Total
		$				$				$				$
Assets:
Impaired Loans		$	—			$	—			$	4,632			$	4,632
Total		$	—			$	—			$	4,632			$	4,632

 

The Corporation had a total of $5,699,000 of impaired loans as of March 31, 2021, with $1,113,000 of specific allocation against these loans and $5,763,000 of impaired loans as of December 31, 2020, with $1,131,000 of specific allocation against these loans. The value of impaired loans is generally determined through independent appraisals of the underlying collateral.

 

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis for which the Corporation has utilized level III inputs to determine fair value:

QUANTITATIVE INFORMATION ABOUT LEVEL III FAIR VALUE MEASUREMENTS
(DOLLARS IN THOUSANDS)
	March 31, 2021
	Fair Value	Valuation	Unobservable	Range
	Estimate	Techniques	Input	(Weighted Avg)
Impaired loans	4,586	Appraisal of	Appraisal	-20% (-20%)
		collateral (1)	adjustments (2)
			Liquidation	-10% (-10%)
			expenses (2)

 

	December 31, 2020
	Fair Value	Valuation	Unobservable	Range
	Estimate	Techniques	Input	(Weighted Avg)
Impaired loans	4,632	Appraisal of	Appraisal	-20% (-20%)
		collateral (1)	adjustments (2)
			Liquidation	-10% (-10%)
			expenses (2)

 

 

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level III inputs which are not identifiable.

(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.  The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.    

The following table provides the carrying amount for each class of assets and liabilities and the fair value for certain financial instruments that are not required to be measured or reported at fair value on the Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020:

  

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

(DOLLARS IN THOUSANDS)

 

		March 31, 2021
										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			88,614				88,614				88,614				—				—
Regulatory stock			6,160				6,160				6,160				—				—
Loans held for sale			2,018				2,018				2,018				—				—
Loans, net of allowance			829,244				844,405				—				—				844,405
Mortgage servicing assets			1,314				1,779				—				—				1,779
Accrued interest receivable			5,111				5,111				5,111				—				—
Bank owned life insurance			29,833				29,833				29,833				—				—
Financial Liabilities:
Demand deposits			580,003				580,003				580,003				—				—
Interest-bearing demand deposits			46,509				46,509				46,509				—				—
NOW accounts			125,101				125,101				125,101				—				—
Money market deposit accounts			151,297				151,297				151,297				—				—
Savings accounts			303,324				303,324				303,324				—				—
Time deposits			119,153				120,299				—				—				120,299
Total deposits			1,325,387				1,326,533				1,206,234				—				120,299
Long-term debt			52,792				50,452				—				—				50,452
Subordinated debt			19,620				19,157				—				—				19,157
Accrued interest payable			496				496				496				—				—

 

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

(DOLLARS IN THOUSANDS)

 

		December 31, 2020
										Quoted Prices in
										Active Markets				Significant Other				Significant
										for Identical				Observable				Unobservable
		Carrying								Assets				Inputs				Inputs
		Amount				Fair Value				(Level 1)				(Level II)				(Level III)
		$				$				$				$				$
Financial Assets:
Cash and cash equivalents			94,939				94,939				94,939				—				—
Regulatory stock			6,107				6,107				6,107				—				—
Loans held for sale			3,029				3,029				3,029				—				—
Loans, net of allowance			811,043				829,902				—				—				829,902
Mortgage servicing assets			1,076				1,083				—				—				1,083
Accrued interest receivable			4,546				4,546				4,546				—				—
Bank owned life insurance			29,646				29,646				29,646				—				—
Financial Liabilities:
Demand deposits			534,853				534,853				534,853				—				—
Interest-bearing demand deposits			47,092				47,092				47,092				—				—
NOW accounts			137,279				137,279				137,279				—				—
Money market deposit accounts			140,113				140,113				140,113				—				—
Savings accounts			274,386				274,386				274,386				—				—
Time deposits			119,088				121,470				—				—				121,470
Total deposits			1,252,811				1,255,193				1,133,723				—				121,470
Long-term debt			54,790				51,800				—				—				51,800
Subordinated debt			19,601				19,601				—				—				19,601
Accrued interest payable			320				320				320				—				—

 

 

7.       Commitments and Contingent Liabilities

 

In order to meet the financing needs of its customers in the normal course of business, the Corporation makes various commitments that are not reflected in the accompanying consolidated financial statements. These commitments include firm commitments to extend credit, unused lines of credit, and open letters of credit. As of March 31, 2021, firm loan commitments were $95.5 million, unused lines of credit were $334.0 million, and open letters of credit were $9.7 million. The total of these commitments was $439.2 million, which represents the Corporation’s exposure to credit loss in the event of nonperformance by its customers with respect to these financial instruments. The actual credit losses that may arise from these commitments are expected to compare favorably with the Corporation’s loan loss experience on its loan portfolio taken as a whole. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for balance sheet financial instruments.

8. Accumulated Other Comprehensive Income (Loss)

 

The activity in accumulated other comprehensive income (loss) for the three months ended March 31, 2021 and 2020

is as follows:

 

ACCUMULATED OTHER COMPREHENSIVE INCOME (1) (2)

(DOLLARS IN THOUSANDS)  

		Unrealized
		Gains (Losses)
		on Securities
		Available-for-Sale
		$
Balance at December 31, 2020			7,958
Other comprehensive loss before reclassifications			(4,965	)
Amount reclassified from accumulated other comprehensive income (loss)			(69	)
Period change			(5,034	)
Balance at March 31, 2021			2,924
Balance at December 31, 2019			1,600
Other comprehensive loss before reclassifications			(274	)
Amount reclassified from accumulated other comprehensive income (loss)			(223	)
Period change			(497	)
Balance at March 31, 2020			1,103

 

(1) All amounts are net of tax.  Related income tax expense or benefit is calculated using a Federal income tax rate of 21%.

(2) Amounts in parentheses indicate debits.  

 

 

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

(DOLLARS IN THOUSANDS)    

 

		Amount Reclassified from
		Accumulated Other Comprehensive
		Income (Loss)
		For the Three Months
		Ended March 31,
		2021				2020				Affected Line Item in the
		$				$				Consolidated Statements of Income
Securities available-for-sale:
Net securities gains,			87				282			Gains on the sale of
reclassified into earnings										debt securities, net
Related income tax expense			(18	)			(59	)		Provision for federal income taxes
Net effect on accumulated other comprehensive
income (loss) for the period			69				223

 

 

9. Leases

 

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. The Corporation accounts for all lease agreements in accordance with ASC Topic 842. For the Corporation, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Corporation is the lessee.

 

All of these leases in which the Corporation is the lessee are comprised of real estate property for branches and office space with terms extending through 2026. All of the Corporation’s leases are classified as operating leases, and therefore, were previously not recognized on the Corporation’s Consolidated Balance Sheets. In accordance with Topic 842, operating lease agreements are required to be recognized on the Consolidated Balance Sheets as a right-of use (“ROU”) asset and a corresponding lease liability.

 

The following table represents the Consolidated Balance Sheet classification of the Corporation’s ROU assets and lease liabilities.

 

Lease Consolidated Balance Sheets Classification
(Dollars in Thousands)		Classification		March 31, 2021				December 31, 2020
Lease Right-of-Use Assets
Operating lease right-of use assets		Other Assets		$	683				728
Lease Liabilities
Operating lease liabilties		Other Liabilities		$	695				740

 

 

The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to determine the present value of the minimum lease payments. The Corporation’s lease agreements often include one or more options to renew at the Corporation’s discretion. If at lease inception, the Corporation considers the exercising of a renewal option to be reasonably certain, the Corporation will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As the rate is rarely determinable, the Corporation utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used.

 

		March 31, 2021				December 31, 2020
Weighted-average remaining lease term
Operating leases			4.2 years				4.4 years
Weighted-average discount rate
Operating leases			3.11%				3.11%

 

The following table represents lease costs and other lease information. As the Corporation elected, for all classes of underlying assets, not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance and utilities.

 

Future minimum payments for operating leases with initial or remaining terms of one year or more as of March 31, 2021 were as follows:

 

Lease Payment Schedule
(Dollars in Thousands)		Operating Leases
Twelve Months Ended:
March 31, 2022		$	206
March 31, 2023			155
March 31, 2024			154
March 31, 2025			155
March 31, 2026			61
Thereafter			12
Total Future Minimum Lease Payments			743
Amounts Representing Interests			(48	)
Present Value of Net Future Minimum Lease Payments		$	695

10. Risks and Uncertainties

 

COVID-19 Update

 

The following table provides information with respect to our commercial loans by type at March 31, 2021.

 

At Risk

 

(Dollars in Thousands)		#				$				$				%
		Number				Total				Principal				of Total
		of				Loan				Balance				Loan
Loan Type		Loans				Exposure				of Loans				Balance
Lessors of Nonresidential Buildings			162				80,435				72,980				8.67%
Lessors of Residential Buildings			207				42,041				37,301				4.43%
Specialized Freight			29				16,441				12,090				1.44%
Residential Remodelers			94				10,533				3,916				0.47%
New Single Family Housing Construction			50				8,190				3,721				0.44%
Passenger Car Leasing			154				9,749				9,730				1.16%
Hotels			13				7,436				6,512				0.77%
Religious Organizations			34				7,468				6,368				0.76%
Car Washes			7				6,345				6,184				0.73%
Concrete & Structural Contrators			21				5,522				3,647				0.43%
Other			67				14,991				8,122				0.96%
Totals			838				209,151				170,571				20.23%

 

 

The Corporation has a diversified commercial loan portfolio that is consistent with the diversified economies of Lancaster, Lebanon and Berks Counties in Pennsylvania, the Corporation’s market area. The above chart is focused on loan types that are commonly known to be at risk or negatively impacted by the COVID-19 pandemic and its effects. The Corporation’s largest exposure to at risk loan types are loans on leased commercial property and loans on residential investment properties. The Corporation has a relatively low exposure to the hospitality industry, including restaurants. Single loan type exposures falling under the other category do not exceed 0.5% of total loans and include loan types such as site preparation contractors, fuel dealers, and recreational centers. The above levels of exposure to these at risk loan types have not had significant movements from 2020 to 2021. Management does not expect any significant movements in these exposures going forward.

 

Paycheck Protection Program (PPP)

 

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, providing over $2 trillion in economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration (SBA) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (PPP). As a qualified SBA lender, the Corporation was authorized to originate PPP loans.

 

In terms of qualifying for a PPP loan, an eligible business could apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly payroll costs; or (2) $10 million. The PPP loans have the following terms: (a) an interest rate of 1.0%, (b) a two-year or five-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the PPP loan, including any accrued interest, is eligible to be reduced by the amount of loan forgiveness available under the PPP, provided the employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses such as utilities.

 

In the initial CARES Act, $349 billion of funds were made available for PPP loans. This amount was fully exhausted prior to the end of April. Congress then passed an additional allocation of funds for the PPP loans, allowing a second round of applications to begin. The Corporation generated PPP loans under this initial plan in the amount of approximately $78 million. In the first quarter of 2021, the SBA made another round of PPP funding available and the Corporation made additional loans to qualifying small businesses. Additionally, some of the original PPP loans became eligible for forgiveness. As a result of the forgiveness of some of the original PPP loans and the initiation of additional PPP loans, the total balance of PPP loans at March 31, 2021, was $58.1 million. Management’s focus has been to serve the customers and market area that the Corporation serves.

In accordance with the SBA terms and conditions on these PPP loans, as of March 31, 2021, the Corporation received approximately $5.1 million in fees associated with the processing of these loans. All fee income is being deferred over the expected life of each PPP loan. The initial batch of the PPP loans carried a stated maturity of two years. In later batches of PPP loans the maturity can be five years, however the majority of the Corporation’s PPP loans carry a two-year maturity. When a PPP loan is paid off or forgiven, the remaining fee amount is taken into income. The Corporation expects there to be few loans that are on the books until the stated maturity dates.

 

COVID-19 Loan Forbearance Programs

 

As of March 31, 2021, over 330 of the Corporation’s customers had requested payment deferrals, or payments of interest only, on loans originally totaling over $65 million at the time of deferment. These loans now have a current balance of $52.0 million, or 6.2% of the total loan portfolio as of March 31, 2021. The current balance of these loans was $54.6 million as of December 31, 2020. In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings (TDRs) unless the borrower was previously experiencing financial difficulty. In addition, the risk-rating on COVID-19 modified loans did not change, and these loans will not be considered past due until after the deferral period is over and scheduled payments resume. The credit quality of these loans will be reevaluated after the deferral period ends.

 

Of the $52.0 million of current loan balances with payments being deferred, $41.7 million, or 80.3%, were in the form of commercial or agricultural loan deferments, with the vast majority of these commercial loan deferrals. The remaining loan deferments consisted of $10.1 million of residential mortgage deferrals and $162,000 of consumer loan deferrals. The vast majority of the COVID-19 loan payment deferrals were for a 90-day period. As of March 31, 2021 the Corporation had eight commercial loans remaining on deferment totaling $4.6 million. It is expected that all of these loans will return to normal payments during the second quarter of 2021.

 

As of March 31, 2021, the Corporation’s delinquent and non-performing levels were not yet materially impacted by the weaker economic conditions brought on by COVID-19. However, the Corporation did experience a sharp increase in the amount of impaired loans during the second half of 2020. Impaired loans grew from $3.9 million as of March 31, 2020 to $5.7 million as of March 31, 2021, a $1.8 million increase. This increase was solely due to a $3.6 million loan to one commercial borrower being classified as both impaired and a troubled debt restructuring. This borrower continues to perform according to restructured terms. Partially offsetting this additional impaired loan, other impaired loans paid off or paid down resulting in the lower level of increase.

 

Due to the severity and length of this economic interruption, management does anticipate that the levels of delinquencies and non-performing loans could rise in 2021. The significance of the credit deterioration will depend on the length of time local business operations are curtailed, or limited, and the amount of time it takes for consumer confidence to rebuild and engage into increased purchasing activities. Management has already significantly increased the Corporation’s provision for loan losses in 2020, as qualitative factors have been increased based on predicted prolonged economic weakness, which is expected to impact more and more borrowers.

 

 

11. Recently Issued Accounting Standards

 

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. 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. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We expect to recognize a one-time cumulative-effect adjustment to the allowance for credit 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 November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments ‒ Credit Losses, which, in addition to addressing other matters, ASU 2018-19 clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. The effective date and transition requirements for ASU 2018-19 are the same as those in ASU 2016-13. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses, Topic 326, which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for the applying the fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted ASU 2016-13, the effective dates and transition requirements are the same as those in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-05 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted once ASU 2016-13 has been adopted On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.  The final ASU is expected to be issued in mid-November. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. The effective dates in this Update are the same as those applicable for ASU 2019-10. The Corporation qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

 

In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments. This ASU was issued to improve and clarify various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. The ASU includes seven issues that describe the areas of improvement and the related amendments to GAAP; they are intended to make the standards easier to understand and apply and to eliminate inconsistencies, and they are narrow in scope and are not expected to significantly change practice for most entities. Among its provisions, the ASU clarifies that all entities, other than public business entities that elected the fair value option, are required to provide certain fair value disclosures under ASC 825, Financial Instruments, in both interim and annual financial statements. It also clarifies that the contractual term of a net investment in a lease under Topic 842 should be the contractual term used to measure expected credit losses under Topic 326. Amendments related to ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is not permitted before an entity’s adoption of ASU 2016-01. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Amendments related to ASU 2016-13 for entities that have adopted that guidance are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Other amendments are effective upon issuance of this ASU. The Corporation is currently evaluating the impact the adoption of the standard will have on the Corporation’s financial position or results of operations.

In January 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. It is too early to predict whether a new rate index replacement and the adoption of the ASU will have a material impact on the Corporation’s financial statements.

 

In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity.  This ASU removes from U.S. GAAP the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, entities will not separately present in equity an embedded conversion feature in such debt. Instead, they will account for a convertible debt instrument wholly as debt, and for convertible preferred stock wholly as preferred stock (i.e., as a single unit of account), unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC 815 or (2) a convertible debt instrument was issued at a substantial premium.  This ASU requires entities to provide expanded disclosures about the terms and features of convertible instruments, how the instruments have been reported in the entity’s financial statements, and information about events, conditions, and circumstances that can affect how to assess the amount or timing of an entity’s future cash flows related to those instruments. The amendments in this ASU are effective for public business entities that are not smaller reporting companies, for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years.  For all other entities, this ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The guidance may be early adopted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs, which clarifies that, for each reporting period, an entity should reevaluate whether a callable debt security is within the scope of ASC 310-20-35-33. For public business entities, ASU 2020-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application is not permitted. For all other entities, ASU 2020-08 is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), which provides optional temporary guidance for entities transitioning away from the London Interbank Offered Rate (LIBOR) and other interbank offered rates (IBORs) to new references rates so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions within Topic 848. ASU 2021-01 clarifies that the derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. ASU 2021-01 is effective immediately for all entities. Entities may elect to apply the amendments on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. The amendments in this update do not apply to contract modifications made, as well as new hedging relationships entered into, after December 31, 2022, and to existing hedging relationships evaluated for effectiveness for periods after December 31, 2022, except for certain hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

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 2020 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 economic conditions particularly with regard to the negative impact of severe, wide-ranging and continuing disruptions caused by the spread of coronavirus (COVID-19) and government and business responses thereto, 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, a prolonged shutdown of the federal government, increase in taxes or regulations, or increasing debt balances

·

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

·

Possible changes to the capital and liquidity requirements and other regulatory pronouncements, regulations and rules

·

Large scale global disruptions such as pandemics, terrorism, trade wars, and armed conflict.

·

Local 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

·

Business and competitive disruptions caused by new market and industry entrants

 

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 first quarter of 2021 was positively impacted by a number of items resulting in very strong financial results. The COVID-19 pandemic continues to impact customer behavior and balance sheet growth, but there has not been significant negative impacts on earnings or credit. Customers have adapted to changes in behavior and the Corporation continues to seek ways to manage the structure of the balance sheet to ensure positive financial results now and in future time periods.

 

The Corporation recorded net income of $4,504,000 for the three-month period ended March 31, 2021, a $2,339,000, or 108.0% increase, from the $2,165,000 earned during the same period in 2020. The earnings per share, basic and diluted, were $0.81 for the three months ended March 31, 2021, compared to $0.38 for the same period in 2020, a 113.2% increase. The increase in the Corporation’s 2021 earnings was caused primarily by growth in gains on mortgages sold, other income, and net interest income.

 

The gains from the sale of mortgages were $1,930,000 for the three months ended March 31, 2021, compared to gains of $541,000 for the first quarter of 2020, an increase of $1,389,000, or 256.7%. The volume of mortgages sold was higher during the first three months of 2021 compared to the same period in the prior year. This volume has been driven by low market rates, which has caused an increase in refinancing activity over the course of the past year. Additionally, margins received on sold mortgages have been at higher levels supporting this higher level of gains. Gains on securities in total increased by $283,000, or 544.2%, for the three months ended March 31, 2021, compared to the same period in the prior year primarly driven by gains on equity securities sold as well as unrealized gains on equity securities recorded in income due to the increased market values of bank stocks as of March 31, 2021. Outside of mortgage and security gains, other non-interest income increased by $879,000, or 40.4% for the first quarter of 2021, due to many positive trends such as higher trust income, higher commissions on debit card interchange fees, and lower mortgage servicing asset amortization.

 

The Corporation’s NII increased by $463,000, or 5.0%, for the three months ended March 31, 2021, compared to the same period in 2020. The increase in NII primarily resulted from an increase in interest on securities available for sale of $244,000, or 13.7%, for the three-month period ended March 31, 2021, as well as a decrease in interest expense on deposits and borrowings of $420,000, or 33.0%. The low interest rate environment has caused a rapid decline in asset yield, but also a decline in the cost of funds, which has resulted in these much lower levels of interest expense.

 

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 quarter-to-date period ended March 31, 2021, compared to the same period in the prior year, due to much higher earnings in the first quarter of 2021 compared to 2020.

 

 

Key Ratios			Three Months Ended
			March 31,
			2021	2020
Return on Average Assets			1.24%	0.74%
Return on Average Equity			14.03%	7.42%

 

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

 

·

Net interest income

·

Provision for loan losses

·

Other income

·

Operating expenses

·

Provision for income taxes

 

The following discussion analyzes each of these five components.

 

Net Interest Income

 

NII represents the largest portion of the Corporation’s operating income. In the first three months of 2021, NII generated 64.5% of the Corporation’s revenue stream, which consists of net interest income and non-interest income, compared to 76.9% in the first three months of 2020. This significant decrease is a result of much higher levels of non-interest income primarily driven by mortgage gains in the first quarter of 2021 which made up 12.9% of the Corporation’s revenue stream, compared to only 4.5% in the first quarter of 2020. However, 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 $268,000 for the three months ended March 31, 2021, compared to $166,000 for the same period in 2020.

 

NET INTEREST INCOME

(DOLLARS IN THOUSANDS)    

		Three Months Ended
		March 31,
		2021				2020
		$				$
Total interest income			10,530				10,487
Total interest expense			851				1,271
Net interest income			9,679				9,216