The bank you keep for life.

Transcription

1 The bank you keep for life Annual Report

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3 table of contents Letter from the President Statistical Information Independent Auditors Report... 3 Consolidated Balance Sheets... 5 Consolidated Statements of Income... 6 Consolidated Statements of Comprehensive Income... 7 Consolidated Statements of Changes in Stockholders Equity Consolidated Statements of Cash Flows

4 Letter from the President Dear Shareholders, I am pleased to report Mifflinburg Bancorp, Inc. had another outstanding year in Net income rose 24.7% to $4.93 million compared to $3.95 million in 2017 due primarily to the decrease in the federal tax rate from 34% to 21%. We also achieved growth of 5.2% in net interest income even as short term rates rose, flattening the yield curve and increasing our cost of funds. Our earnings per share of $2.63 increased 24.6% from $2.11 in These numbers are adjusted for the 2 for 1 stock split this past year which doubled our shares outstanding to 1,871,392. We also achieved a return on average assets of 1.13% in 2018, as compared to 0.93% in 2017, which included a one-time adjustment for a deferred tax asset with the change in the new tax rate. Return on average equity increased to 11.37% in 2018, as compared to 9.45% in Our total assets grew 3.3% to $438 million with available-for-sale debt securities increasing from $73 million in 2017 to $88 million in As the credit market softened this year, we invested deposit growth in US treasury and agency bonds and tax free municipal bonds. Total deposits and repurchase agreements increased 3.9% year over year to $365 million. We also took advantage of our earnings growth this year and rebalanced a portion of our investment portfolio, taking net investment security losses of $295,000 on lower yielding bonds and reinvesting the funds into higher yielding securities, enhancing future earnings. Our asset quality is not to be overlooked. Delinquent loans to total loans was a mere 0.54% at the end of This ratio is outstanding and demonstrates the care we take in considering the best solutions for our customers, while being mindful of the bank s assets. With the implementation of Accounting Standard Update (ASU) , related to changes in fair value of equity securities being captured in the income statement, we made the decision to liquidate the majority of our marketable equity securities portfolio. The new standard brought about uncertain volatility to our earnings, which we believe would not be a true reflection of the company s overall performance. In the summer we purchased a vacant bank office in Selinsgrove. This capital investment was not in our short term plans, but we are extremely grateful for the opportunity. The office is in a very desirable and convenient location. Fortunately, the building was in move-in condition, and we were able to open for business shortly after the purchase date. Our market presence is continuing to expand as we have started the process to enter the Milton area with a full service office, breaking ground in The new year is expected to bring about a new economic cycle which will create new challenges for us. Our strategy is to continue the course of steady growth in areas that will complement and enhance our customer base through accessible and convenient products and services, making us the bank you keep for life. Sincerely, Jeffrey J. Kapsar President & CEO 1

5 EARNINGS PER SHARE NET INCOME $2.75 $2.63 $4,950 $4,928 $2.50 $4,450 $2.25 $2.00 $2.00 $2.06 $2.12 $2.11 $3,950 $3,960 $4,063 $4,183 $3,952 $1.75 $3,450 $ $2, DIVIDEND PAYOUT HISTORY RETURN ON AVERAGE EQUITY $0.93 $0.98 $1.03 $1.10 $ % 11.00% 10.00% 9.00% 10.18% 9.90% 9.66% 9.45% 11.37% % % % RETURN ON AVERAGE ASSETS TOTAL ASSETS 1.20% 1.10% 1.00% 1.09% 1.07% 1.05% 0.93% 1.13% $450,000 $430,000 $410,000 $390,000 $370,000 $377,959 $387,596 $407,144 $424,553 $438, % $350, % $330,000 $310, % $290,000 $270, % $250,

6 Independent Auditors Report To the Board of Directors and Stockholders of Mifflinburg Bancorp, Inc. We have audited the accompanying consolidated financial statements of Mifflinburg Bancorp, Inc. and its subsidiary, which comprise the consolidated balance sheets as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, changes in stockholders equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Baker Tilly Virchow Krause, LLP trading as Baker Tilly is a member of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities Baker Tilly Virchow Krause, LLP 3

7 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mifflinburg Bancorp, Inc. and its subsidiary as of December 31, 2018 and 2017, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Williamsport, Pennsylvania March 11,

8 Consolidated Balance Sheets (in thousands, except share and per share data) December 31, Assets Cash and due from banks $ 3,835 $ 5,463 Interest-bearing demand deposits 1, Federal funds sold 2,139 1,514 Total cash and cash equivalents 7,483 7,871 Interest-bearing time deposits 17,957 18,969 Debt securities available-for-sale 88,468 73,297 Marketable equity securities 472 3,082 Investments in restricted stock, at cost 1,413 1,551 Loans held for sale Loans 304, ,727 Allowance for loan losses (3,944) (3,983) Net loans 300, ,744 Premises and equipment, net 8,380 7,505 Accrued interest receivable 1,163 1,037 Foreclosed assets held for sale - 48 Bank owned life insurance 10,462 10,222 Net deferred tax asset Other assets 1,064 1,441 Total Assets $ 438,377 $ 424,553 Liabilities and Stockholders' Equity Liabilities Deposits: Noninterest-bearing $ 54,263 $ 54,557 Interest-bearing 289, ,170 Total deposits 343, ,727 Repurchase agreements 20,898 11,154 Federal Home Loan Bank advances 24,633 27,314 Accrued interest payable Other liabilities 3,854 3,791 Total Liabilities 393, ,518 Stockholders' Equity Common stock, par value $1.00 per share; authorized 5,000,000 shares; issued 2,160,000 shares; outstanding 1,871,392 and 1,872,502 shares at December 31, 2018 and 2017, respectively 2,160 1,080 Capital surplus 1,779 2,810 Retained earnings 48,143 44,833 Accumulated other comprehensive (loss) income (340) 416 Treasury stock at cost: 2018: 288,608 shares; 2017: 287,498 shares (7,182) (7,104) Total Stockholders' Equity 44,560 42,035 Total Liabilities and Stockholders' Equity $ 438,377 $ 424,553 See accompanying notes to consolidated financial statements. 5

9 Consolidated Statements of Income (in thousands, except per share data) Years Ended December 31, Interest and Dividend Income Interest and fees on loans $ 14,045 $ 13,057 Interest-bearing deposits in banks Federal funds sold Securities: Taxable Exempt from federal income tax 1,239 1,086 Dividends Total Interest and Dividend Income 16,512 15,050 Interest Expense Deposits 2,875 2,054 Federal Home Loan Bank advances Other borrowings 9 13 Total Interest Expense 3,465 2,645 Net interest income 13,047 12,405 Provision for Loan Losses Net Interest Income after Provision for Loan Losses 12,822 12,155 Other Income Service charges on deposit accounts ATM fees and debit card income Mortgage banking activities Trust department income Commissions from investment product sales Net investment securities (losses) gains (295) 51 Earnings on bank owned life insurance Other Total Other Income 1,747 1,876 Other Expenses Salaries and employee benefits 5,334 4,964 Net occupancy and equipment expense Data processing fees State shares tax FDIC deposit insurance Other 1,541 1,355 Total Other Expenses 8,795 8,127 Income before income taxes 5,774 5,904 Income Taxes 846 1,952 Net Income $ 4,928 $ 3,952 Earnings Per Share $ 2.63 $ 2.11 See accompanying notes to consolidated financial statements. 6

10 Consolidated Statements of Comprehensive Income (in thousands) Years Ended December 31, Net Income $ 4,928 $ 3,952 Other Comprehensive (Loss) Income Unrealized holding (losses) gains on available-for-sale securities, net of income taxes of $(104) and $230, respectively (390) 447 Reclassification adjustment for loss (gain) on sale of available-for-sale securities realized in net income, net of income taxes $44 and $(17), respectively (a) (b) 165 (34) Other comprehensive (loss) income (225) 413 Total Comprehensive Income $ 4,703 $ 4,365 (a) (b) Amounts are included in net investment securities (losses) gains on the consolidated statements of income as a separate element of other income. Income tax amounts are included in income taxes on the consolidated statements of income. See accompanying notes to consolidated financial statements. 7

11 Consolidated Statements of Changes in Stockholders Equity (in thousands, except share and per share data) Common Stock Capital Surplus Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Balance, January 1, 2017 $ 1,080 $ 2,773 $ 42,934 $ 3 $ (4,127) $ 42,663 Net income - - 3, ,952 Other comprehensive income, net of income taxes Purchase of 100,000 shares of treasury stock (3,125) (3,125) Sale of 6,000 shares of treasury stock Cash dividends declared ($1.10 per share) - - (2,053) - - (2,053) Balance, December 31, ,080 2,810 44, (7,104) 42,035 Net income - - 4, ,928 Other comprehensive loss, net of income taxes (225) - (225) Impact of adoption of accounting standard (1) - - (82) Impact of adoption of accounting standard (2) (613) - - Stock split, two-for-one 1,080 (1,080) Purchase of 7,110 shares of treasury stock (228) (228) Sale of 6,000 shares of treasury stock Cash dividends declared ($1.15 per share) - - (2,149) - - (2,149) Balance, December 31, 2018 $ 2,160 $ 1,779 $ 48,143 $ (340) $ (7,182) $ 44,560 (1) Represents the impact of adopting Accounting Standards Update (ASU) effective January 1, See Note 1 to the consolidated financial statements for more information. (2) Represents the impact of adopting ASU effective January 1, See Note 1 to the consolidated financial statements for more information. See accompanying notes to consolidated financial statements. 8

12 Consolidated Statements of Cash Flows (in thousands) Years Ended December 31, Cash Flows from Operating Activities Net income $ 4,928 $ 3,952 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Net amortization of discounts and premiums on securities Deferred income tax (benefit) expense (83) 563 Provision for loan losses Increase in accrued interest receivable (126) (66) Increase in accrued interest payable Net (gain) loss on sale of foreclosed real estate (87) 17 Increase in cash surrender value of bank owned life insurance (240) (249) Realized gain on sale of securities, net (407) (51) Unrealized loss on marketable equity securities Gain on disposition of premises and equipment (3) (3) Origination of loans held for sale (8,432) (5,394) Proceeds from loans sold 8,488 5,613 Gain on sale of loans (306) (219) Other assets and liabilities, net 442 (101) Net Cash Provided by Operating Activities 5,651 4,975 Cash Flows from Investing Activities Debt securities available-for-sale: Purchases (44,817) (17,442) Proceeds from paydowns, maturities and calls 26,224 14,993 Proceeds from sales 2,856 1,896 Marketable equity securities: Purchases (461) (876) Proceeds from sales 2, Net increase in loans (2,353) (13,729) Proceeds from sale of foreclosed assets Decrease of interest-bearing time deposits 1, Decrease (increase) in restricted stock 138 (156) Proceeds from disposition of premises and equipment 3 3 Purchases of premises and equipment (1,253) (563) Net Cash Used in Investing Activities (14,996) (14,113) Cash Flows from Financing Activities Net increase in deposits 4,073 12,153 Proceeds from Federal Home Loan Bank advances 4,000 5,500 Repayment of Federal Home Loan Bank advances (6,681) (5,179) Net increase in repurchase agreements 9,744 5,453 Purchase of treasury stock (228) (3,125) Sale of treasury stock Dividends paid on common stock (2,149) (2,053) Net Cash Provided by Financing Activities 8,957 12,934 Net (decrease) increase in cash and cash equivalents (388) 3,796 Cash and Cash Equivalents, Beginning of Year 7,871 4,075 Cash and Cash Equivalents, End of Year $ 7,483 $ 7,871 Supplementary Cash Flows Information Interest paid $ 3,365 $ 2,580 Income taxes paid $ 990 $ 1,360 Transfer of loans to foreclosed real estate $ 536 $ 217 See accompanying notes to consolidated financial statements. 9

13 1. Description of Business and Summary of Significant Accounting Policies Mifflinburg Bancorp, Inc. (the Company) is a Pennsylvania Corporation organized as the holding company of Mifflinburg Bank and Trust Company (the Bank). The Bank is a state chartered commercial bank located in Mifflinburg, Pennsylvania, whose principal sources of revenues are derived from its commercial, mortgage, residential real estate, and consumer loan financing as well as a variety of deposit services provided to customers serviced by its seven offices. Milestone Insurance Services, LLC (Milestone) was formed in 2003 and is a wholly-owned subsidiary of the Bank. Milestone is licensed to sell title insurance. The Company is supervised by the Board of Governors of the Federal Reserve System while the Bank is subject to regulation and supervision by the Federal Deposit Insurance Company and the Pennsylvania Department of Banking and Securities. A summary of significant accounting and reporting policies applied in the presentation of the accompanying consolidated financial statements follows. Basis of Presentation The accounting policies followed by the Company and the Bank and the methods of applying these policies conform with accounting principles generally accepted in the United States of America and with general practices within the banking industry. Use of Estimates In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and require disclosure of contingent assets and liabilities as of the date of the consolidated balance sheets and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the evaluation of other-than-temporary impairment of securities available-for-sale and the valuation of deferred income tax assets. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and the Bank (including the accounts of Milestone), its wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated. The entire business of the Company is managed as one operating segment. Subsequent Events The Company has evaluated events and transactions occurring subsequent to the balance sheet date of December 31, 2018 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through March 11, 2019, the date these consolidated financial statements were available to be issued. Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, the Company defines cash equivalents as cash and due from banks, interest-bearing demand deposits and federal funds sold. Federal funds are generally sold for one day periods. 10

14 Interest-Bearing Time Deposits Interest-bearing time deposits have original maturities in excess of one year and are carried at cost. Debt Securities Available-For-Sale Debt securities classified as available-for-sale are carried at fair value with unrealized gains and losses net of the related tax effects reflected as a separate component of stockholders' equity. Securities classified as available-for-sale are those debt securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Premium amortization and discount accretion are recorded using the interest method over each security's expected life. The Company follows current accounting guidance related to recognition and presentation of other-than-temporary impairment. The guidance specifies that if the Company does not have the intent to sell a debt security prior to recovery and it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss. When the Company does not intend to sell the security, and it is more likely than not the Company will not have to sell the security before the recovery of its cost basis, it will recognize the credit component of an other-thantemporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. The Company has not recognized any other-than-temporary impairment losses in the years ended December 31, 2018 or Realized gains and losses on sales of securities represent the differences between net proceeds and cost determined on the average cost method for equity securities and the specific identification method for all other securities. Marketable Equity Securities Marketable equity securities are carried at fair value with unrealized gains and losses included in net income. Investments in Restricted Stock Investments in restricted stock represent required investments in the common stock of correspondent banks and consist of common stock of the Federal Home Loan Bank of Pittsburgh (FHLB) of $1,368,000 and $1,506,000 at December 31, 2018 and 2017, respectively, and other correspondent banks of $45,000 as of December 31, 2018 and As a member of the FHLB, the Bank is required to maintain an investment in FHLB restricted stock based on mortgage loans, advances and other criteria. As no active market exists for this stock, it is carried at cost. All FHLB stock is pledged as collateral for FHLB advances. The Company evaluated its holding of FHLB stock for impairment and deemed the stock to not be impaired at December 31, 2018 and In making this determination, management concluded that recovery of total outstanding par value, which equals the carrying value, is expected. The decision was based upon review of financial information the FHLB has made publically available. 11

15 Mortgage Banking Mortgage loans originated and intended for sale in the secondary market at the time of origination are carried at the lower of aggregate cost or estimated fair value, as determined by aggregate outstanding commitments from investors or current investor yield requirements. All sales are made without recourse. Loans are generally sold with the mortgage servicing rights retained by the Company; the mortgage service rights are recognized as assets upon the sale. See further information for accounting for these assets under Mortgage Servicing Rights. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold. Loans Receivable Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Company is generally amortizing these amounts over the contractual life of the loan. The loans receivable portfolio is segmented into commercial and consumer loans. Commercial loans consist of the following classes: commercial (including commercial, agricultural and state and municipal), and commercial real estate (including commercial, construction and land development and farmland). Consumer loans consist of the following classes: residential mortgage, home equity, consumer automobile and other consumer. For all classes of loans receivable, the accrual of interest is generally discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans including impaired loans generally is either applied against principal or reported as interest income, according to management's judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments. 12

16 Allowance for Loan Losses The allowance for loan losses (allowance) represents management's estimate of losses inherent in the loan portfolio as of the consolidated balance sheet date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Nonresidential consumer loans are generally charged off no later than 120 days past due on a contractual basis, earlier in the event of bankruptcy, or if there is an amount deemed uncollectible. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Company's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include: 1. Lending policies and procedures, including underwriting standards and collection, chargeoff, and recovery practices. 2. National, regional, and local economic and business conditions as well as the condition of various market segments. 3. Nature and volume of the portfolio and terms of loans. 4. Experience, ability, and depth of lending management and staff. 5. Volume and severity of past due, classified and nonaccrual loans as well as and other loan modifications. 6. Quality of the Company's loan review system, and the degree of oversight by the Company's Board of Directors. 7. Existence and effect of any concentrations of credit and changes in the level of such concentrations. 8. Other factors, such as trends in loan ratings, loan mix, and subprime loans as a percentage to total loans. 13

17 Each factor is assigned a value to reflect improving, stable or declining conditions based on management's best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance calculation. Commercial lending, including commercial real estate loans generally present a higher level of risk than residential mortgage loans. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income producing properties and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by commercial and industrial real estate is typically dependent upon the successful operation of the related real estate project or business. If the cash flow from the project is reduced, the borrower's ability to repay the loan may be impaired. Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles. Home equity loans also entail greater risk than residential mortgage loans due to being in a junior lien position. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial loans and commercial real estate loans by either the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the Company's impaired loans are measured based on the estimated fair value of the loan's collateral. 14

18 For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values may be discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property. For commercial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower's financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual residential mortgage loans, home equity loans and other consumer loans for impairment disclosures, unless such loans are the subject of a troubled debt restructuring agreement. Loans whose terms are modified are classified as troubled debt restructurings if the Company grants such borrowers concessions for economic or legal reasons and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary or permanent reduction in interest rate, a modified rate that is below the market rate given the associated credit risk, an extension of a loan's stated maturity date or payment modifications to better match the timing of cash flows due under the restructured terms with the cash flows from the borrowers operations. Loan modifications are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for a reasonable period of time, generally six consecutive months after modification. Loans classified as troubled debt restructurings are designated as impaired. The Company identifies loans for potential restructure primarily through direct communication with the borrower and evaluation of the borrower s financial statements, revenue projections, tax returns, and credit reports. Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions, and negative trends may result in a payment default in the near future. 15

19 The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower's overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial and commercial real estate loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans classified as special mention have potential weaknesses that deserve management's close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass. In addition, Federal and State regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management's comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate at December 31, Foreclosed Assets Held For Sale Foreclosed assets held for sale consist of real estate acquired in settlement of foreclosed loans and is initially recorded at fair value less estimated costs to sell at the time of transfer from loans to foreclosed, establishing a new cost basis. Subsequent to the transfer, foreclosed is carried at the lower of the adjusted cost or fair value less costs to sell. Additional write-downs are charged against operating expenses. Costs related to the acquisition and holding of foreclosed are charged to operations when incurred. The fair value of real estate acquired through foreclosure is generally determined by reference to an outside appraisal. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Repairs and maintenance expenditures are expensed as incurred. The costs of major additions and improvements are capitalized. When premises or equipment are retired or sold, the remaining cost and accumulated depreciation are removed from the accounts and any gain or loss is credited or charged to income. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the assets. Premises and equipment are reviewed by management at least annually for potential impairment and whenever events or circumstances indicate that carrying amounts may not be recoverable. 16

20 Bank Owned Life Insurance The Bank invests in bank owned life insurance (BOLI) as a source of funding for employee and director benefit expenses. BOLI involves the purchasing of life insurance by the Bank on a chosen group of employees and directors. The Bank is the owner and beneficiary of the policies. This life insurance investment is carried at the cash surrender value of the underlying policies. Income from the increase in the cash surrender value of the policies is included with other income on the statement of income. The policies can be liquidated, if necessary, with tax costs associated. However, the Company intends to hold these policies and accordingly, the Company has not provided for deferred income taxes on the earnings from the increase in cash surrender value. The Company accounts for certain benefit plans under Accounting Standards Codification (ASC) Topic 715 Compensation Retirement Benefits. This pronouncement requires recognition of a liability for postretirement benefits provided through an endorsed split-dollar life insurance arrangement. The liability for post-retirement benefits under these arrangements was $347,000 and $361,000 at December 31, 2018 and 2017, respectively. Income in the years ended December 31, 2018 and 2017 was $14,000 and $10,000, respectively. Mortgage Servicing Rights Mortgage servicing rights are recognized as assets upon the sale of a mortgage loan. A portion of the cost of the loan is allocated to the servicing right based upon relative fair value. Servicing rights are reported in other assets and are amortized over the estimated period of future servicing income to be received on the underlying mortgage loans. The carrying amount of mortgage servicing rights was $272,000 and $255,000 at December 31, 2018 and 2017, respectively. Any related amortization expense is netted against loan servicing fee income and is reflected in the income statement in other income. Amortization expense was $24,000 and $26,000 for the years ended December 31, 2018 and 2017, respectively. Servicing rights are evaluated for impairment based upon estimated fair value as compared to unamortized book value. The Company retains the servicing rights on certain mortgage loans sold to the FHLB and Fannie Mae and receives mortgage banking fee income based upon the principal balance outstanding. Total loans serviced for the FHLB and Fannie Mae amounted to $54,918,000 and $51,622,000 at December 31, 2018 and 2017, respectively. These mortgage loans sold and serviced by the Company are not reflected in the Company s consolidated balance sheets. Transfers of Financial Assets Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Advertising Expenses Advertising costs are expensed as incurred and totaled $169,000 in 2018 and $128,000 in

21 Income Taxes Current income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in certain deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company accounts for uncertain tax positions if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management's judgment. The Company recognizes interest and penalties on income taxes as a component of income tax expense. Stock Split On May 24, 2018, the Company s board of directors declared a two-for-one stock split, effected in the form of a stock dividend, on shares of the Company s common stock. Each shareholder of record on July 31, 2018 received on additional share for each share of common stock then held. The stock was issued thereafter. The Company retained the current par value of $1.00 per share for all common stock. All references in the financial statements to the number of shares outstanding and per-share amounts of the Company s common stock have been restated to reflect the effect of the stock split for all periods presented. Shareholders equity reflects the stock split by reclassifying from Capital surplus to Common stock an amount equal to the par value of the additional shares arising from the split. Earnings Per Share The Company does not have any common stock equivalents and, therefore, presents only basic earnings per share, which represents net income divided by the weighted average shares outstanding during the period. The weighted average shares outstanding during 2018 and 2017 were 1,871,174 and 1,871,450, respectively. 18

22 Treasury Stock The acquisition of treasury stock is recorded under the cost method. The subsequent disposition or sale of the treasury stock is recorded using the average cost method. Off-Balance Sheet Financial Instruments In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit and letters of credit. Such financial instruments are recorded on the consolidated balance sheets as they are funded. Comprehensive Income Accounting principles generally accepted in the United States of America require that recognized revenue, expenses, gains, and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on debt securities available-for-sale, are reported as a separate component of the equity section of the balance sheet, such items, along with net income are components of comprehensive income and reflected in the consolidated statements of comprehensive income. The only other comprehensive income (loss) item that the Company presently has is unrealized gains or losses on debt securities available-for-sale. Trust Assets Assets held by the Bank in a fiduciary or agency capacity for its customers are not included in the consolidated financial statements since such items are not assets of the Company. Trust income is recorded on a cash basis, which is not materially different from the accrual basis. Trust assets under management as of December 31, 2018 and 2017 totaled $28 and $34 million, respectively. Reclassifications Certain amounts in prior year s consolidated financial statements are reclassified when necessary to conform to the current year s presentation. Such reclassifications, if any, had no impact on stockholders equity or net income. Recent Accounting Standards On January 1, 2018, the Company adopted ASU , Revenue from Contracts with Customers, and all subsequent amendments to the ASU (collectively ASC 606 ) which (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as OREO. The majority of the Company s revenue comes from interest income, including loans and securities, which are outside the scope of ASC 606. The Company s services that fall within the scope of ASC 606 are presented within other income on the consolidated statements of income and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of ASC 606 include deposit related fees and services charges, interchange fees and surcharges, and income from trust and broker dealer services. ASC 606 did not result in a change to the accounting for any in-scope revenue streams; as such, no cumulative 19

23 effect adjustment was recorded. New disclosures required by the ASU are included in Note 16 Revenue Recognition. On January 1, 2018, the Company adopted ASU , Financial Instruments-Overall (Subtopic ): Recognition and Measurement of Financial Assets and Financial Liabilities, which amended the guidance on the classification and measurement of financial instruments. Adoption of ASU resulted in: (1) separate classification of marketable equity securities previously included in investment securities available-for-sale on the consolidated balance sheets, (2) changes the fair value of the equity securities being captured in the consolidated statements of income and (3) an increase in retained earnings and corresponding decrease in accumulated other comprehensive loss of $613,000 at January 1, 2018 for the after-tax impact of the change in accounting for the unrealized gain on the equity securities. Adoption of the standard also resulted in the use of an exit price to determine the fair value of financial instruments not measured at fair value in the consolidated balance sheets. For more information about fair value disclosures refer to Note 15, Fair Value Measurements. On January 1, 2018, the Company adopted ASU , Income Statement Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU provides financial statement preparers with an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) are recorded. The Company elected to early adopt this standard update, effective January 1, Adoption resulted in a reclassification between retained earnings and accumulated other comprehensive loss of $82,000 at January 1, 2018, which is included in the consolidated statements of changes in stockholders equity. In February 2016, the FASB issued ASU , Leases (Topic 842), and subsequently issued other ASUs amending Topic 842. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. Specifically, a lessee should recognize on the balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee would be permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities. Topic 842 would not significantly change the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee from current U.S. GAAP; however, the principal change from current U.S. GAAP is that lease assets and liabilities arising from operating leases would be recognized on the balance sheet. Topic 842 provides several other changes or clarifications to existing U.S. GAAP, and will require qualitative disclosures, along with quantitative disclosures, so that financial statement users can understand more about the nature of an entity s leasing activities. In transition, Topic 842 provides that lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, including optional practical expedients. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous U.S. GAAP unless the lease is modified, except that lessees will be required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous U.S. GAAP. Topic 842 will become effective for the Company for Due to the fact that the Company has very few lease arrangements, the adoption of this ASU and subsequent amendments, will not have a material impact on its consolidated financial position or results of operation. 20

24 In June 2016, the FASB issued ASU , Financial Instruments-Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments. This ASU will result in significant changes in the Company s accounting for credit losses related to loans receivable and investment securities. A summary of significant provisions of this ASU is as follows: The ASU requires that a financial asset (or a group of financial assets) measured at amortized cost basis be presented, net of a valuation allowance for credit losses, at an amount expected to be collected on the financial asset(s), and that the income statement include the measurement of credit losses for newly recognized financial assets as well as changes in expected losses on previously recognized financial assets. The provisions of this ASU require measurement of expected credit losses based on relevant information including past events, historical experience, current conditions, and reasonable and supportive forecasts that affect the collectability of the asset. The provisions of this ASU differ from current U.S. GAAP in that current U.S. GAAP generally delays recognition of the full amount of credit losses until the loss is probable of occurring. The amendments in the Update retain many of the disclosure requirements related to credit quality in current U.S. GAAP, updated to reflect the change from an incurred loss methodology to an expected credit loss methodology. In addition, the Update requires that disclosure of credit quality indicators in relation to the amortized cost of financing receivables, a current requirement, be further disaggregated by year of origination. This ASU requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down, and limits the amount of the allowance for credit losses to the amount by which the fair value is below amortized cost. For purchased available-for-sale securities with a more-than-insignificant amount of credit deterioration since origination, the ASU requires an allowance be determined in a manner similar to other available-for-sale debt securities; however, the initial allowance would be added to the purchase price, with only subsequent changes in the allowance recorded in credit loss expense, and interest income recognized at the effective rate excluding the discount embedded in the purchase price related to estimated credit losses at acquisition. This ASU will be effective for the Company in Earlier adoption is permitted beginning in The Company will record the effect of implementing this ASU through a cumulative-effect adjustment through retained earnings as of the beginning of the reporting period in which Topic 326 is effective. The Company is in the early stages of evaluating the potential impact of adopting this amendment. In March 2017, the FASB issued ASU , Receivables Nonrefundable Fees and Other Costs (Subtopic ), Premium Amortization on Purchased Callable Debt Securities. This Update will shorten the amortization period for certain callable debt securities held at a premium. Under current U.S. GAAP, entities generally amortize the premium over the contractual life of the instrument. This Update requires the premium be amortized to the earliest call date. Discounts will continue to be amortized to maturity. This ASU will become effective for the Company for 2019, and the impact of adoption is not expected to be significant. 21

25 In August 2018, the FASB issued ASU , Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which modifies disclosure requirements on fair value measurements. This ASU removes requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair measurements. ASU clarifies that disclosure regarding measurement uncertainty is intended to communicate information about the uncertainty in measurement as of the reporting date. ASU adds certain disclosure requirements, including disclosure of changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this ASU are effective for the Company beginning in The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair measurements and the narrative description of measurement uncertainty should be applied prospectively, while all other amendments should be applied retrospectively for all periods presented. The Company does not expect adoption of this ASU to have a material impact on its consolidated financial position or results of operations. 22

26 2. Securities The amortized cost and fair value of debt securities available-for-sale are as follows at December 31 (in thousands): Amortized Cost Gross Unrealized Gains Gross Gross Unrealized Fair Amortized Unrealized Losses Value Cost Gains Gross Unrealized Losses Fair Value U.S. Treasury securities $ 8,465 $ 1 $ (1) $ 8,465 $ - $ - $ - $ - U.S. government agencies 26, (70) 26,687 11,465 3 (76) 11,392 Taxable state and municipal (3) (3) 803 Tax exempt state and municipal 48, (513) 48,580 54, (354) 54,115 U.S. government sponsored enterprise mortgagebacked securities 2, (19) 2,202 4, (58) 4,743 Corporate securities 1, (1) 1,962 2, (1) 2,244 Total debt securities available-for-sale $ 88,898 $ 177 $ (607) $ 88,468 $ 73,442 $ 347 $ (492) $ 73,297 The amortized cost and estimated fair value of debt securities available-for-sale at December 31, 2018, by expected maturity for mortgage-backed securities and debt securities with call features and by contractual maturity for all other securities, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands). Amortized Cost Fair Value Due in one year or less $ 33,790 $ 33,759 Due after one year through five years 35,416 35,281 Due after five years through ten years 15,221 15,005 Due after ten years 4,471 4,423 Total $ 88,898 $ 88,468 23

27 The following table shows the Company's debt securities available-for-sale gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31 (in thousands): December 31, 2018 Less than 12 Months 12 Months or Longer Total Unrealized Unrealized Fair Value Losses Fair Value Losses Fair Value Unrealized Losses U.S. treasury securities $ 6,973 $ 1 $ - $ - $ 6,973 $ 1 U.S. government agencies 13, , , Taxable state and municipal Tax-exempt state and municipal 7, , , U.S. government sponsored enterprise mortgage-backed securities , , Corporate securities Total debt securities available-for-sale $ 28,552 $ 49 $ 26,937 $ 558 $ 55,489 $ 607 December 31, 2017 Less than 12 Months 12 Months or Longer Total Unrealized Unrealized Fair Value Losses Fair Value Losses Fair Value Unrealized Losses U.S. government agencies $ 3,284 $ 15 $ 7,662 $ 61 $ 10,946 $ 76 Taxable state and municipal Tax-exempt state and municipal 16, , , U.S. government sponsored enterprise mortgage-backed securities 1, , , Corporate securities Total debt securities available-for-sale $ 22,848 $ 167 $ 16,664 $ 325 $ 39,512 $ 492 At December 31, 2018, the $49,000 unrealized loss (less than 12 months) was attributed to 58 different securities. The $558,000 unrealized loss (12 months or more) was attributed to 69 different securities. None of the unrealized losses are individually significant. Management believes, based upon an evaluation of the issuers of the debt securities, that the unrealized losses on debt securities were the result of fluctuations in market interest rates subsequent to purchase and not a result of credit risk. Management has the intent and ability to hold investments and does not believe it will have to sell the securities until the earlier of maturity or market price recovery, accordingly, no debt securities are deemed to be other-than-temporarily impaired. 24

28 Below is a summary of gross gains and gross losses realized on the sale of securities for the years ended December 31 (in thousands): Gross gains $ 635 $ 106 Gross losses (228) (55) Net gains $ 407 $ 51 Securities with a carrying value of $72,980,000 and $60,688,000 at December 31, 2018 and 2017, respectively, were pledged to secure public deposits and for other purposes as required by law. Beginning January 1, 2018, upon the adoption of ASU , equity securities with a readily determinable fair value are stated at fair value with realized and unrealized gains and losses reported in income. For periods prior to January 1, 2018, equity securities were classified as available-for-sale at fair value with unrealized gains and losses reported as a separate component of AOCI, net of tax. Equity securities without readily determinable fair values are recorded at cost less impairment, if any. As of December 31, 2018 and December 31, 2017, the Company had $472,000 and $3,082,000, respectively, in marketable equity securities recorded at fair value. At December 31, 2017, net unrealized gains net of tax of $613,000 had been recognized in AOCI. On January 1, 2018, these unrealized gains and losses were reclassified out of AOCI and into retained earnings with subsequent changes in fair value being recognized in net income. The following is a summary of unrealized and realized gains and losses recognized in net income on marketable equity securities during the twelve months ended December 31, 2018 and 2017 (in thousands): 2018 Net change in the unrealized gains and losses recognized during the period on marketable equity securities $ (702) Add: Net realized gains recognized on equity marketable securities sold during the period 616 Net loss recognized in net income during the period on marketable equity securities still held at the reporting date $ (86) The Company's marketable equity securities with unrealized losses are comprised of one common stock in financial industry. The Company has established different parameters for evaluating equity securities for other-than-temporary impairment. These parameters include, but are not limited to, the length of time in an unrealized loss position and the amount of the unrealized loss. At December 31, 2018, no equity securities are deemed to be other-than-temporarily impaired. 25

29 3. Loans Major categories of loans are summarized as follows as of December 31 (in thousands): Commercial $ 60,885 $ 58,388 Commercial real estate 135, ,015 Residential mortgage 91,264 95,696 Home equity 4,549 4,683 Consumer, automobile 10,476 13,055 Consumer, other 1,670 2, , ,030 Less: net deferred loan fees (261) (303) Total loans net of deferred loan fees 304, ,727 Less: allowance for loan losses (3,944) (3,983) Net Loans $ 300,336 $ 298,744 In the normal course of business, loans are extended to directors, executive officers, and their affiliates. A summary of loan activity for those directors, executive officers, and their affiliates is as follows (in thousands): December 31, 2017 New Loans Repayments December 31, 2018 $ 3,120 $ 2,361 $ (2,114) $ 3,367 December 31, 2016 New Loans Repayments December 31, 2017 $ 3,401 $ 1,891 $ (2,172) $ 3,120 The Bank grants commercial, residential, and personal loans to customers primarily in Union, Centre, and Snyder Counties, Pennsylvania. Although the Bank has a diversified loan portfolio, a significant portion of its debtors' ability to honor their contracts is dependent on the economic conditions within this region. Additionally, approximately 19% of the Bank's loans at December 31, 2018 and 2017, respectively, are to individuals and Corporations in the agricultural business. The Bank has entered into a best efforts agreement to sell residential mortgages to the Federal Home Loan Bank of Pittsburgh. The maximum to be sold under the agreement is $75 million, and $48 million has been sold under this agreement as of December 31,

30 4. Allowance for Loan Losses The following table presents the classes of loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of December 31 (in thousands): December 31, 2018 Pass Special Mention Substandard Doubtful Loss Total Commercial $ 58,904 $ 1,951 $ 30 $ - $ - $ 60,885 Commercial real estate 129,389 1,348 4, ,697 Residential mortgage 90, ,264 Home equity 4, ,549 Consumer, automobile 10, ,476 Consumer, other 1, ,670 Total $ 294,770 $ 3,999 $ 5,772 $ - $ - $ 304,541 December 31, 2017 Pass Special Mention Substandard Doubtful Loss Total Commercial $ 56,211 $ 2,177 $ - $ - $ - $ 58,388 Commercial real estate 122,404 2,864 2, ,015 Residential mortgage 95, ,696 Home equity 4, ,683 Consumer, automobile 13, ,055 Consumer, other 2, ,193 Total $ 293,483 $ 5,350 $ 3,330 $ 867 $ - $ 303,030 The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status and nonaccrual as of December 31 (in thousands): December 31, Days Past Due Greater than 90 Days and Accruing Nonaccrual Total Past Due and Nonaccrual Current Total Loans Receivables Commercial $ 222 $ 7 $ 34 $ 263 $ 60,622 $ 60,885 Commercial real estate , ,697 Residential mortgage ,349 91,264 Home equity ,479 4,549 Consumer, automobile ,811 10,476 Consumer, other ,626 1,670 Total $ 1,392 $ 183 $ 749 $ 2,324 $ 302,217 $ 304,541 27

31 December 31, Days Past Due Greater than 90 Days and Accruing Nonaccrual Total Past Due and Nonaccrual Current Total Loans Receivables Commercial $ 20 $ 10 $ - $ 30 $ 58,358 $ 58,388 Commercial real estate , ,015 Residential mortgage ,981 95,696 Home equity ,620 4,683 Consumer, automobile ,285 13,055 Consumer, other ,157 2,193 Total $ 1,123 $ 150 $ 1,107 $ 2,380 $ 300,650 $ 303,030 The following tables summarize the activity in the allowance for loan losses by loan class for the years ended December 31, 2018 and 2017 and information in regards to the allowance for loan losses and the recorded investment in loans receivable by loan class as of December 31, 2018 and 2017 (in thousands): December 31, 2018 Beginning Balance Charge-offs Recoveries Provisions Ending Balance Commercial $ 582 $ (1) $ 1 $ (42) $ 540 Commercial real estate 2, ,141 Residential mortgage 934 (14) 2 (69) 853 Home equity (4) 40 Consumer, automobile 212 (258) Consumer, other 30 (15) Unallocated Total $ 3,983 $ (288) $ 24 $ 225 $ 3,944 December 31, 2017 Beginning Balance Charge-offs Recoveries Provisions Ending Balance Commercial $ 564 $ - $ 6 $ 12 $ 582 Commercial real estate 1, ,107 Residential mortgage 924 (30) Home equity Consumer, automobile 246 (224) Consumer, other 33 (33) Unallocated (133) 74 Total $ 3,946 $ (287) $ 74 $ 250 $ 3,983 28

32 Allowance for Loan Losses Loans Receivable Ending Balance December 31, 2018 Ending Balance December 31, 2018 Individually Evaluated Collectively Evaluated Total Individually Evaluated Collectively Evaluated Total Commercial $ - $ 540 $ 540 $ 30 $ 60,855 $ 60,885 Commercial real estate 899 1,242 2,141 5, , ,697 Residential mortgage ,612 91,264 Home equity ,549 4,549 Consumer, automobile ,476 10,476 Consumer, other ,670 1,670 Unallocated Total $ 920 $ 3,024 $ 3,944 $ 5,791 $ 298,750 $ 304,541 Allowance for Loan Losses Loans Receivable Ending Balance December 31, 2017 Ending Balance December 31, 2017 Individually Evaluated Collectively Evaluated Total Individually Evaluated Collectively Evaluated Total Commercial $ - $ 582 $ 582 $ - $ 58,388 $ 58,388 Commercial real estate 882 1,225 2,107 6, , ,015 Residential mortgage ,696 95,696 Home equity ,683 4,683 Consumer, automobile ,055 13,055 Consumer, other ,193 2,193 Unallocated Total $ 882 $ 3,101 $ 3,983 $ 6,449 $ 296,581 $ 303,030 The following table summarizes information in regards to impaired loans by loan portfolio class as of December 31, 2018 and 2017 (in thousands). December 31, 2018 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial $ 30 $ 30 - $ 34 $ 2 Commercial real estate Residential mortgage With an allowance recorded: Commercial real estate 4,612 4, , Residential mortgage Total: Commercial Commercial real estate 5,109 5, , Residential mortgage $ 652 $ 652 $ 21 $ 652 $ 39 29

33 December 31, 2017 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial real estate $ 4,742 $ 4,971 $ - $ 4,362 $ 240 With an allowance recorded: Commercial real estate 1,707 1, , Total: Commercial real estate $ 6,449 $ 6,678 $ 882 $ 6,110 $ 328 The loan portfolio also includes certain loans that have been modified in a troubled debt restructuring (TDR), where economic concessions have been granted to borrowers who have experienced or expected to experience financial difficulties. These concessions typically result from loss mitigation activities and could include reductions in interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower s sustained repayment performance for a reasonable period, generally six months. TDRs at December 31, 2018 and 2017 were $2,591,000 and $2,958,000, respectively. Accruing and non-accruing TDRs were $2,572,000 and $19,000 at December 31, 2018 and $2,958,000 and $0 at December 31, $771,000 and $882,000 in specific reserves has been established for TDRs as of December 31, 2018 and 2017, respectively. The Company was not committed to lend additional funds to any loan classified as a TDR at December 31, 2018 and A summary of TDRs that occurred during 2018 and 2017 is as follows (in thousands): Commercial: Number of Loans Post- Modification recorded Number of Investment Loans Post- Modification recorded Investment Extended maturity date and reduced monthly payment - $ - 1 $ 22 Interest rate and monthly payment reduction Commercial real estate: Extended maturity date and reduced monthly payment ,125 Residential mortgage: Extended maturity date and reduced monthly payment Total 1 $ $ 1,251 30

34 There were no differences between the outstanding contractual amounts and the recorded investments in receivables from TDRs that occurred in 2018 and For 2018 and 2017, there were no defaults on loans for which modifications considered to be TDRs were entered into within the previous 12 months. At December 31, 2018 and 2017, the carrying amount of foreclosed residential real estate properties held as a result of obtaining physical possession (included in Foreclosed asset held for sale) was $0. At December 31, 2018 there are no loans in the process of foreclosure. At December 31, 2017 there was one residential real estate loan totaling $101,000 in the process of foreclosure. 5. Premises and Equipment Major classifications of premises and equipment are summarized as follows at December 31 (in thousands): December 31, Land $ 2,526 $ 1,678 Construction in process Buildings 8,758 8,079 Furniture and fixtures 3,369 3,188 Automobiles Total 14,824 13,591 Less accumulated depreciation (6,444) (6,086) Net $ 8,380 $ 7,505 Total depreciation expense was $378,000 and $372,000 for the years ended December 31, 2018 and 2017, respectively. One Bank branch is leased under an operating lease. Rental expense for the lease was $12,000 for the years ended December 31, 2018 and Future minimum lease payments are $12,000 annually through 12/31/2023, for a total of $60,

35 6. Deposits Aggregate time deposits in denominations of $250,000 or more were $22,757,000 and $23,334,000 at December 31, 2018 and 2017, respectively. A summary of the maturity of time deposits as of December 31, 2018 is as follows (in thousands): Year Ending December 31, 2019 $ 56, , , , Total $ 102,582 As of December 31, 2018 and 2017, deposits from related parties total $3,608,000 and $2,710,000, respectively. 7. Securities Sold Under Agreements to Repurchase The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, these repurchase agreements are accounted for as collateralized financing agreements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability in the Company s consolidated balance sheets, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts. In other words, there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. The following table presents the liabilities subject to an enforceable master netting arrangement or repurchase agreements as of December 31, 2018 and 2017 (dollars in thousands): December 31, 2018 Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Balance Sheets Net Amounts of Liabilities Presented in the Balance Sheets Gross Amounts Not Offset in the Balance Sheets Financial Instruments Cash Collateral Pledged Net Amount Repurchase agreements: Commercial customers (a) $ 20,898 $ - $ 20,898 $ 20,898 $ - $ - 32

36 December 31, 2017 Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Balance Sheets Net Amounts of Liabilities Presented in the Balance Sheets Gross Amounts Not Offset in the Balance Sheets Financial Instruments Cash Collateral Pledged Net Amount Repurchase agreements: Commercial customers (a) $ 11,154 $ - $ 11,154 $ 11,154 $ - $ - (a) As of December 31, 2018 and 2017, the fair value of securities pledged in connection with repurchase agreements was $20,900 and $11,190, respectively. 8. Federal Funds Purchased The Company had no federal funds purchased as of December 31, 2018 and The Bank maintains a federal funds borrowing agreement with Atlantic Community Bankers Bank with an available borrowing capacity of $8 million. This agreement is subject to annual renewal, incurs no service charges, and is unsecured. 9. Federal Home Loan Bank Advances The Bank maintains a borrowing agreement with the FHLB of Pittsburgh with an available funding capacity of approximately $124 million as of December 31, This agreement is subject to annual renewal, incurs no service charges, and is secured by FHLB stock and a blanket security agreement on outstanding residential mortgage loans. Federal Home Loan Bank advances consist of separate loans with the Federal Home Loan Bank of Pittsburgh as of December 31 as follows (dollars in thousands): Amount Weighted Average Rate Amount Weighted Average Rate FHLB fixed-rate advances maturing: 2018 $ - - % $ 6, % , , , , , , , , , Total $ 24,633 $ 27,314 33

37 10. Income Taxes The provision for income taxes consists of the following (in thousands): Year Ended December 31, Current tax expense $ 929 $ 1,389 Deferred tax (benefit) expense (83) 563 Total Provision $ 846 $ 1,952 The tax effects of deductible and taxable temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31 are as follows (in thousands): December 31, Deferred tax assets: Allowance for loan losses $ 776 $ 784 Deferred compensation Net unrealized gains on securities 90 - Total 1,342 1,260 Deferred tax liabilities: Net unrealized losses on securities Premises and equipment Deferred loan origination fees, net Other Total Net Deferred Tax Asset $ 929 $ 786 A reconciliation between the expected statutory income tax rate of 21% and 34% for the years ended December 31, 2018 and 2017, respectively, and the effective income tax rate on income before income taxes is as follows (dollars in thousands): Amount Percentage Amount Percentage Provision at statutory rate $ 1, % $ 2, % Tax-exempt interest (319) (5.5) (489) (8.3) Nondeductible interest expense Bank owned life insurance (51) (0.9) (85) (1.4) Effect of tax rate change Other, net (18) (0.3) Applicable Income Taxes and Effective Rates $ % $ 1, % 34

38 In 2017, the Company recognized a reduction in the carrying value of the net deferred tax asset of $486,000 as result of the December 2017 enactment of a reduction in the federal corporate income tax rate to 21% effective January 1, 2018, from the 34% statutory tax rate in effect throughout Employee Benefits Plans Section 401(k) Plan The Bank sponsors a contributory defined contribution Section 401(k) plan covering substantially all employees who have completed one year of service, have worked 1,000 hours and have attained age twenty-one. The plan permits employees to make pretax contributions which are matched by the Bank up to four percent of the employee's compensation. The Bank's contributions were $127,000 and $113,000 in 2018 and 2017, respectively. Contributions made by the Bank vest immediately. The Bank has a profit sharing employer contribution component to the 401(k) Plan. The profit sharing employer contribution is made at the discretion of management and the Board of Directors based upon current year earnings. The Bank's contributions were $50,000 and $32,000 in 2018 and 2017, respectively. Contributions made by the Bank vest ratably beginning after the second year of service and are fully vested after an employee completes six years of service. Employee Stock Option Plan The Bank sponsors an Employee Stock Option Plan (ESOP) covering substantially all employees who have completed one year of service, have worked 1,000 hours and have attained age twenty-one. Contributions to the plan are permitted based upon management s discretion. The Bank's contributions were $198,000 and $185,000 in 2018 and 2017, respectively. Contributions made by the Bank vest ratably beginning after the second year of service and are fully vested after an employee completes six years of service. The number of shares held by the plan were 84,896 and 78,896 at December 31, 2018 and 2017, respectively. All shares are allocated to participants. Deferred Directors' Compensation The Bank maintains deferred compensation plans with directors through which the payments of the directors' fees are deferred. The future liability of these agreements, which is payable in ten annual installments, was financed through the purchase of life insurance contracts. The present value of the future liability of the plans at December 31, 2018 and 2017 was $1,133,000 and $1,194,000, respectively, and is included in other liabilities in the consolidated balance sheets. The related expenses amounted to $70,000 and $69,000 for the years ended 2018 and 2017, respectively. 35

39 Bank Owned Life Insurance The Bank holds bank-owned life insurance (BOLI) with a cash value of $10,462,000 and $10,222,000 at December 31, 2018 and 2017, respectively. The Plan provides that the Bank and the Executives share in the rights to the death benefits of bank owned split-dollar life insurance policies (the "BOLI Policies") and provides for additional compensation to the executives and directors, equal to any income tax consequences related to the Supplemental Plan until retirement. The amount of the BOLI Policies has been calculated so that the projected increases in their cash surrender value will substantially offset the Bank's expense related to the Supplemental Plans. In addition, the BOLI Policies are intended to provide the directors with $100,000 of supplemental life insurance and the executive officers with supplemental life insurance equal to three times salary. Neither the insurance company nor the Company has guaranteed any minimum cash value. The cash surrender value increased by $240,000 and $249,000 in 2018 and 2017, respectively. Supplemental Retirement Plans The Bank has an unfunded, non-qualified supplemental executive retirement plan (SERP) for certain key executives. The SERP is designed to provide certain executives, upon attaining age 65, with projected annual distributions. The liability of the SERP at December 31, 2018 and 2017 was $1,090,000 and $1,031,000, respectively, and is included in other liabilities in the consolidated balance sheets. The related expense amounted to $111,000 and $113,000 for the years ended December 31, 2018 and 2017, respectively. The Bank offsets the cost of these plans through the purchase of bank-owned life insurance as noted above. 12. Regulatory Matters Cash and Due from Banks Included in cash and due from banks are required reserves of $548,000 and $550,000 at December 31, 2018 and 2017, respectively, required by the Federal Reserve Bank. The required reserves are computed by applying prescribed ratios to the various classes of average deposit accounts. The reserves are held in the form of cash. Deposits with correspondent financial institutions are insured up to $250,000 per institution. The Company maintains cash and cash equivalents with certain correspondent financial institutions in excess of the insured amount. Regulatory Capital Requirements The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. The final rules implementing BASEL Committee on Banking Supervisor s Capital Guidance for U.S. banks (BASEL III rules) became effective for the Company on January 1, 2015, with full compliance with all of the requirements being phased in over a multi-year schedule and fully phased in by January 1, Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measurement of its assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgements about components, risk weighting and other factors. 36

40 Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth on the follow table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets. Tier 1 capital to average assets, and common equity Tier 1 capital to risk-weighted assets. Management believes, as of December 31, 2018, that the Bank meets all capital adequacy requirements to which it is subject. The Federal Reserve Bank has established capital guidelines for bank holding companies. These guidelines allow small bank holding companies, as defined, an exemption from regulatory capital requirements. Mifflinburg Bancorp, Inc. meets the eligibility criteria and is exempt from all regulatory capital requirements. The following table reflects the Bank's capital ratios at December 31 (dollars in thousands): December 31, 2018 Actual For Capital Adequacy Purposes Minimum Capital Adequacy with Capital Buffer To be Well Capitalized under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio Amount Ratio Total capital (to riskweighted assets) $ 45, % $ 26, % $ 32, % $ 32, % Common equity tier 1 capital (to riskweighted assets) $ 41, % $ 14, % $ 20, % $ 21, % Tier 1 capital (to riskweighted assets) $ 41, % $ 19, % $ 25, % $ 26, % Tier 1 capital (to average assets) $ 41, % $ 17, % N/A N/A $ 22, % December 31, 2017 Actual For Capital Adequacy Purposes Minimum Capital Adequacy with Capital Buffer To be Well Capitalized under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio Amount Ratio Total capital (to riskweighted assets) $ 42, % $ 23, % $ 27, % $ 29, % Common equity tier 1 capital (to riskweighted assets) $ 38, % $ 13, % $ 17, % $ 19, % Tier 1 capital (to riskweighted assets) $ 38, % $ 17, % $ 21, % $ 23, % Tier 1 capital (to average assets) $ 38, % $ 16, % N/A N/A $ 21, % Dividends Banking regulations limit the amount of dividends that may be paid by the Bank to the Company without prior regulatory approval and are subject to the minimum capital ratio requirements noted above. 37

41 13. Commitments and Standby Letters of Credit In the normal course of business, the Bank makes various commitments which are not reflected in the accompanying consolidated financial statements. The Bank offers such products to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve to varying degrees elements of credit, interest rate, or liquidity risk in excess of the amount recognized in the consolidated balance sheet. The Bank's maximum exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank on extension of credit is based on management's credit assessment of the counterparty. Financial instruments whose contract amounts represent credit risk at December 31 are as follows (in thousands): December 31, Commitments to extend credit $ 41,748 $ 55,948 Standby letters of credit 1,367 1,199 Commitments to extend credit are legally binding agreements to lend to customers as long as there are no violations of the agreements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. Outstanding letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The majority of these standby letters of credit expire within the next twelve months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Bank requires collateral supporting these letters of credit as deemed necessary. The current amount of the liability as of December 31, 2018 and 2017 for guarantees under standby letters of credit is not material. 38

42 14. Parent Company Statements The following is condensed financial information for Mifflinburg Bancorp Inc. on a parent company only basis (in thousands): Condensed Balance Sheets December 31, Assets: Cash and cash equivalents $ 890 $ 386 Investment in subsidiaries 41,381 38,756 Debt securities available-for-sale 1,996 - Marketable equity securities 472 3,081 Total Assets $ 44,739 $ 42,223 Liabilities and Stockholders Equity: Other liabilities $ 123 $ 25 Deferred tax liability Stockholders equity 44,560 42,035 Total Liabilities and Stockholders Equity $ 44,739 $ 42,223 Condensed Income Statements December 31, Income: Equity in undistributed earnings of subsidiaries $ 2,826 $ 1,740 Dividends from subsidiaries 2,149 2,053 Dividend income Net investment security (losses) gains (68) 70 Total Income 4,968 3,948 Operating expenses Income before income taxes 4,894 3,876 Income tax benefit (34) (76) Net Income $ 4,928 $ 3,952 39

43 Condensed Statements of Cash Flows December 31, Cash Flows From Operating Activities: Net income $ 4,928 $ 3,952 Equity in undistributed earnings of subsidiaries (2,826) (1,740) Net investment securities losses (gains) 68 (70) Equity in distributed earnings of subsidiaries 26 3,127 Other, net (59) (78) Net Cash Provided By Operating Activities 2,137 5,191 Cash Flows From Investing Activities: Security purchases (6,227) (876) Proceeds from security sales 6, Net Cash Provided By (Used In) Investing Activities 546 (36) Cash Flows From Financing Activities: Acquisition of treasury stock (228) (3,125) Sale of treasury stock Dividends paid (2,149) (2,053) Net Cash Used In Financing Activities (2,179) (4,993) Net Increase in Cash and Cash Equivalents Cash and Cash Equivalents, Beginning of Year Cash and Cash Equivalents, End of Year $ 890 $ Fair Value Measurements Management uses its best judgment in estimating the fair value of the Company's financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end. ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. Additional guidance is provided on determining when the volume and level of activity for the asset or liability has significantly decreased. The standard also includes guidance on identifying circumstances when a transaction may not be considered orderly. 40

44 Fair value measurement guidance establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2 - Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability. Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity). An asset's or liability's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2018 and 2017 are as follows (in thousands): December 31, 2018 Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Securities available-for-sale: U.S. Treasury securities $ 8,465 $ - $ 8,465 $ U.S. government agencies 26,687-26,687 - Taxable state and municipal Tax-exempt state and municipal 48,580-45,580 - U.S. government sponsored enterprise mortgage-backed securities 2,202-2,202 - Corporate securities 1,962-1,962 - Total Debt Securities Availablefor-Sale $ 88,468 $ - $ 88,468 $ - Marketable equity securities $ 472 $ 472 $ - $ - 41

45 December 31, 2017 Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Securities available-for-sale: U.S. government agencies $ 11,392 $ - $ 11,392 $ - Taxable state and municipal Tax-exempt state and municipal 54,115-54,115 - U.S. government sponsored enterprise mortgage-backed securities 4,743-4,743 - Corporate securities 2,244-2,244 - Total Debt Securities Availablefor-Sale $ 73,297 $ - $ 73,297 $ - Marketable equity securities $ 3,082 $ 3,082 $ - $ - For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2018 and 2017 are as follows (in thousands): December 31, 2018 Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Impaired loans, net 3, ,921 Total Non-Recurring Fair Value Measure $ 3,921 $ - $ - $ 3,921 December 31, 2017 Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Impaired loans, net Foreclosed assets held for sale Total Non-Recurring Fair Value Measure $ 873 $ - $ - $

46 The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Level 3 inputs were utilized to determine fair value at December 31, 2018 and 2017 (in thousands): December 31, 2018 Fair Value Valuation Technique Unobservable Input Range (Weighted Average) Impaired loans, net $ 3,921 Appraisal of collateral Appraisal adjustments Liquidation expenses 0-80% (28)% 0-10% (9)% December 31, 2017 Fair Value Valuation Technique Unobservable Input Range (Weighted Average) Impaired loans, net $ 825 Appraisal of collateral Foreclosed assets held for sale $ 48 Appraisal of collateral Appraisal adjustments Liquidation expenses Appraisal adjustments Liquidation expenses 0-80% (45)% 0-5% (3)% 0-80% (22)% 0-10% (7)% The Company had no financial liabilities measured at fair value on a nonrecurring basis as of December 31, 2018 or The following information should not be interpreted as an estimate of the fair value of the entire Company since the fair value calculation is only provided for a limited portion of the Company's assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company's disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company's financial instruments carried at fair value at December 31, 2018 and Debt Securities Available-for-Sale and Marketable Equity Securities (Carried at Fair Value) The fair value of debt securities available-for-sale and marketable equity securities are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted prices. 43

47 Impaired Loans (Generally Carried at Fair Value) Loans for which the Company has measured impairment are generally based on the fair value of the loan's collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consisted of the loan balances of $4,841,000 less specific allowances of $920,000 as of December 31, The fair value consisted of the loan balances of $1,707,000 less specific allowances of $882,000 as of December 31, The estimated fair values (in thousands) of the Company's financial instruments were as follows at December 31, 2018 and December 31, 2018 Carrying Value Fair Value Level 1 Level 2 Level 3 Financial assets: Cash and cash equivalents $ 7,483 $ 7,483 $ 7,483 $ - $ - Interest-bearing time deposits 17,957 17,799-17,799 - Debt securities available-for-sale 88,468 88,468-88,468 - Marketable equity securities Investments in restricted stock 1,413 1,413-1,413 - Net loans 300, , ,873 Accrued interest receivable 1,163 1,163-1,163 - Mortgage servicing rights Financial liabilities: Deposits 343, , ,392 - Repurchase agreements 20,898 20,898-20,898 - FHLB advances 24,633 24,252-24,252 - Accrued interest payable Off-balance sheet financial instruments: Commitments to extend credit and letters of credit December 31, 2017 Carrying Value Fair Value Level 1 Level 2 Level 3 Financial assets: Cash and cash equivalents $ 7,871 $ 7,871 $ 7,871 $ - $ - Interest-bearing time deposits 18,969 18,908-18,908 - Debt securities available-for-sale 73,297 73,297-73,297 - Marketable equity securities 3,082 3,082 3, Investments in restricted stock 1,551 1,551-1,551 - Net loans 298, , ,244 Accrued interest receivable 1,037 1,037-1,037 - Mortgage servicing rights Financial liabilities: Deposits 339, , ,916 - Repurchase agreements 11,154 11,154-11,154 - FHLB advances 27,314 26,960-26,960 - Accrued interest payable Off-balance sheet financial instruments: Commitments to extend credit and letters of credit

48 16. Revenue Recognition As disclosed in Note 1, as of January 1, 2018, the Company adopted ASU Revenue from Contracts with Customers - Topic 606 and all subsequent ASUs that modified ASC 606. The Company has elected to apply the ASU and all related ASUs using the modified retrospective implementation method. The implementation of the guidance had no material impact on the measurement or recognition of revenue of prior periods, however, additional disclosures have been added in accordance with the ASU. Additional disclosures related to the Company s largest sources of other income within the consolidated statements of income that are subject to ASC 606 are as follows: Deposits related fees and service charges Service charges and fees on deposits consist of fees related to monthly fees for various retail and business checking accounts, automated teller machine ( ATM ) fees (charged for withdrawals by our deposit customers from other bank ATMs) and insufficient funds fees ( NSF ) (which are charged when customers overdraw their accounts beyond available funds). All deposit liabilities are considered to have one-day terms and therefore related fees are recognized in income at the time when the services are provided to the customers. The Company elected to adopt practical expedient related to incremental costs of obtaining deposit contracts. As such, any costs associated with acquiring the deposits, except for certificate of deposits ( CDs ) with maturities in excess of one year, are recognized as an expense within the non-interest expense in the consolidated statements of income when incurred as the amortization period of the deposit liabilities that otherwise would have been recognized is one year or less. Interchange Fees and Surcharges Interchange fees are related to the acceptance and settlement of debit card transactions, both point-of-sale and ATM, to cover operating costs and risks associated with the approval and settlement of the transactions. Interchange fees vary by type of transaction and each merchant sector. Revenue recognized from interchange fees is included in other income on the consolidated statements of income. A surcharge is assessed for use of the Company s ATMs by non-customers. All interchange fees and surcharges are recognized as received on a daily basis for the prior business day s transactions. All expenses related to the settlement of debit card transactions (both point-of-sale and ATM) are recognized on a monthly basis and included in other expense on the consolidated statements of income. 17. Subsequent Event On February 21, 2019, the Company entered into a Trust Transition Agreement whereby it has decided to discontinue providing fiduciary and other representative services ( Trust/Agency Services ) and, in connection therewith, desires to transition to another financial institution and such financial institution desires to assume, all of the Company s rights and obligations related to the Company s Trust/Agency Services accounts. 45

49 Year At a Glance